Q4 2024 Lockheed Martin Corp Earnings Call
Good day and welcome everyone to the Lockheed Martin 4th Quarter and Full Year 2024 Earnings Results Conference Call. Today's call is being recorded. If you would like to ask a question, please press star then 1 now.
Speaker Change: Thanks, Maria Good morning, everyone and thank you for joining us on our fourth quarter and full year 2024 earnings call.
Speaker Change: As you saw in the press release. This morning, our return to growth strategy that we implemented three years ago is well on its way and remains on a strong trajectory.
Speaker Change: In 2024 sales grew 5% year over year, and our backlog of $176 billion reached yet another record demonstrating the enduring global demand for our superior scalable and reliable products and systems.
Each and every one of our four business areas saw backlog growth and ended the year with a book to bill ratio of greater than one.
Speaker Change: Okay.
Speaker Change: We fully expect these positive trends to continue in our 2025 outlook.
Speaker Change: With mid single digit growth in sales segment operating profit returning to 11% and double digit growth in free cash flow per share.
Speaker Change: Jan Maria will cover the financials in more detail, but I'd like to briefly comment on the earnings impact in the fourth quarter of two classified programs at MFC and Aeronautics respectively.
Speaker Change: Recording charges in Q4 on these two programs enabled us to de risk the financial profile of both these critical national security programs going forward as we move into their next phases.
Speaker Change: While these particular contracts were struck a number of years ago. There are no longer any must win competitions.
Speaker Change: Under today's Lockheed Martin wide bid process every proposal adheres to a stringent risk adjusted ROI regime.
This process is designed to compete aggressively for key opportunities, while also being very committed to achieving positive results. Both in the short and long term for our shareholders.
Speaker Change: At the same time, we are committed to ongoing investment in the business to further enhance our company's growth trajectory.
Speaker Change: <unk> successfully executed our return to growth initiatives over the past few years.
Speaker Change: In 2024, we invested $3 3 billion in research and development and capital to support advanced scalable technology solutions for our customers.
Speaker Change: Equally important looking forward, our investments to enhance the attractiveness and performance of our key programs and initiatives.
Speaker Change: Such as America's preeminent fifth generation fighter the F 35, and our internal digital transformation, one <unk> are expected to grow.
Speaker Change: Our financial focus remains on free cash flow and free cash flow per share.
Speaker Change: Our company continued to deploy significant free cash flow in 2024, and we've returned greater than a 100% of that free cash flow to you the shareholders.
Speaker Change: In addition to our consistent and healthy dividend, we maintain a robust share repurchase program with $3 7 billion of shares repurchased in 2024.
Speaker Change: Turning to the F 35, we delivered 62 aircraft in the quarter, bringing our total deliveries for 2024 to 110.
Speaker Change: High end of our expected range.
Speaker Change: These deliveries included aircraft that were previously part and new jets that rolled off the production line. We continue to expect deliveries will exceed the production rate over the next few years and estimate of 170 to 190 F 35 aircraft deliveries in 2025.
Speaker Change: Tier three capabilities continue to progress in flight testing, we completed qualification testing on a set of key tier three capabilities in 2024, and we're making solid progress on system performance and remaining tier III deliverables we.
Speaker Change: We expect to release additional capability this year with further upgrades to follow.
Speaker Change: In addition beyond definitive contract for lot 18 F. 35 production was awarded in December, bringing our backlog to 408 aircraft. We expect this contract will be definitive during the first half of 2025.
Speaker Change: We welcomed our 20th global customer Romania into the F 35 enterprise in November with this letter of offer and acceptance to procure 32 aircraft.
Speaker Change: The Romanian Air Force's F 30, fives will integrate with their existing F 16 fleets as well as other Allied F 30 fives.
Speaker Change: Highlighting the importance of the superior capabilities of this aircraft. Moreover, the F 35, seamless interoperability using our <unk> Dot mill architecture will be crucial in establishing and maintaining commander of the air, especially in the Indo Pacific European and middle Eastern theaters.
Speaker Change: Lockheed Martin system integration expertise across land Air Sea space and cyber are essential to continually improving many important national security missions, such as protection from air and missile attacks.
Speaker Change: In this example, our defensive bond flight experimentation mission in December successfully demonstrated the integration of multiple Lockheed Martin and other OEM products into a single combined weapons system.
Our <unk> system was successful in acquiring and tracking targets using our TP Y six radar planning and conducting the missile engagement using our aegis combat system.
Speaker Change: Then we fired the interceptor from one of our vertical launching systems and ultimately destroyed the incoming weapons.
Speaker Change: Equally important was the accelerated pace from contract award to successful completion of this flight test mission in under two years and was a direct result of leveraging prior investments and all of these proven technologies.
Speaker Change: Building on our production ready Air launched rapid response weapon or Arrow America's Hypersonic technology made another important milestone in the development of one of our most important and advanced weapon systems in December.
Speaker Change: The U S Army and U S. Navy completed a successful end to end flight test of the common hypersonic all up round. The first live fire event for the long range hypersonic weapon system.
Speaker Change: I'd like to shift gears now to the current discourse about the defense industry landscape.
Speaker Change: Much has been said about defense primes emerging startups traditional and non traditional companies.
Speaker Change: See us all working together and I think that its industry's role to help Marshall the talent and expertise in our country to provide the best possible deterrent capabilities with both physical products that the ships aircrafts and satellites as well as digital advanced technologies.
Speaker Change: We need to access the best talent financial resources and technologies from both the aerospace and defense and commercial sectors to get ahead and stay ahead.
Speaker Change: To that end on the commercial front I've long been an advocate of deepening partnerships across industries.
Speaker Change: And we have done so with companies such as Nvidia for artificial intelligence.
Meta and IBM for large language models to more efficiently generate code analyzed data and enhance business processes.
Speaker Change: Isn't for five G networks, Microsoft reclassified cloud modeling and simulation.
Speaker Change: And Intel and global foundries for advanced military hardened chips.
Speaker Change: We're also investing heavily on internal development autonomy AI and other enabling digital technologies to provide the best solutions for our customers.
Speaker Change: <unk> continues to drive the cutting edge theater level security solutions and real time live flight demonstrations, we had net 35 flying from our facility in Fort worth, Texas sharing classified data by a skunk works open system gateway through a commercial satellite communications and all the way over.
Speaker Change: Her into our Royal Air Force lab in Farnborough, UK or it was integrated into their command and control system.
Speaker Change: This achievement marks a significant step towards a future integrated defense.
Speaker Change: <unk> R. F 35 interoperability in real time with an allied <unk> system, using our <unk> Dot mill architecture.
Speaker Change: In another first our Lockheed Martin Skunk works team along with the U S Navy and general Atomics completed alive controlled flight demonstration of an <unk> system.
Speaker Change: By the.
Speaker Change: Matt Carrier Aviation mission control station, which was powered by our autonomy platform.
Speaker Change: This demonstrations of Pathfinder that helps advance the complex technology necessary to enable human machine teaming as envisioned for autonomous systems, we're doing it right now.
Speaker Change: Turning to the budget the current continuing resolution funds U S government operations through March.
Speaker Change: We look forward to working with the returning administration to continue pursuing a more agile and streamlined acquisition process that encourages speed technology innovation and broader participation.
Speaker Change: We see those as an opportunity to make great progress in all these areas.
Speaker Change: And we will continue to share ideas and do our part to support efforts to eliminate unnecessary regulatory hurdles, while working to increase efficiency in our own internal operations through our <unk> digital transformation.
Jay: Now I'll turn it over to Jay.
Jay: Thanks, Jim and good morning, everyone.
Jay: Today I'll provide an overview of our consolidated financial results for the fourth quarter and full year, then handoff to Maria who will cover business area of financials and I'll come back at the end to discuss our initial 2025 outlook.
Jay: 2024 was a solid year, our growth strategies are paying off with 5% top line growth, while also growing backlog, 10% to 176 billion.
Jay: Another year and record.
Jay: Our balanced portfolio enabled us to generate solid free cash flow and meet our deployment commitments exceeding 100%.
Jay: Finally, we took prudent derisking actions on key programs that paved the way for a solid outlook in 2025 and beyond.
Jay: Before I get into the results in more detail I'll walk you through these derisking actions.
Jay: Chart four provides two different reconciliations that detailed a full impact of these items on our full year results and their partial impact to our prior expectations.
Jay: We've also included a fourth quarter version on the same of the same chart in the appendix on slide 20.
For purposes of understanding the total impact on our full year results I'll direct your attention to the middle section of the chart.
Jay: We recorded net charges of $1 8 billion as follows $1 4 billion related to the remaining expected future losses on the MFC classified program.
Jay: And $555 million associated with the Aeronautics classified program with.
Jay: With these amounts partially offset by $155 million benefit associated with our <unk> five claim resolution.
Jay: Moving over to the right side of the chart you may recall that our last outlook October had assumed some of these net charges. So let me walk you through that as well.
Jay: Relative to our prior outlook, we recorded $1 4 billion of unplanned net charges consisting of $410 million for the Aeronautics classified program $1 $1 billion from the mass from the MFC classified program with these amounts partially offset by $70 million of unplanned benefit.
Jay: From the C. Five claims resolution.
Jay: Both reconciliations provide adjusted results to exclude the impact of these items for comparison purposes for the remainder of my prepared remarks, I will refer to the reported and adjusted amounts as shown on the left side of the chart unless otherwise noted.
Jay: Okay moving to chart five with fourth quarter results sales of $18 6 billion were down slightly year over year sales in the quarter were unfavorably impacted by having one fewer week in Q4 dollars 24 compared to Q4 of 'twenty three.
Jay: Largely offset by the F 35 lot 18 deferred revenue carryover from the third quarter.
Jay: Segment operating profit segment margins and earnings per share were all adversely impacted by the classified program charges at Aeronautics and missiles and fire control.
Jay: On an adjusted basis segment operating profit would have grown 5% year over year to $2 1 billion, resulting in segment margins of 11, 1%.
Jay: Shifting to new business, we recorded over $29 billion of orders in the fourth quarter for a book to Bill ratio of approximately one six.
Jay: Aeronautics led the way with almost $20 billion in orders driven by the F. 35 lot 18 in fiscal year 'twenty five air vehicle Sustainment contract Awards.
Jay: Both contracts will help secure the wide, reaching F 35 U S production enterprise and ensure America's military is equipped with the most advanced fighter aircraft in the world.
Jay: Free cash flow was $440 million in the quarter, including $990 million of pension pre funding to extinguish the 2025 required contributions.
Jay: Continuing with capital deployment, we further advanced strategic and technical and operational capabilities by investing over $1 $1 billion in the quarter towards independent research and development and capital expenditure projects.
Jay: Bringing full year internal investments of $3 3 billion.
Jay: We continue to provide an unmatched combination of new technology advancement that can be also fielded with speed.
Jay: So investing to deliver critical capabilities, while maintaining our commitment to shareholders by returning $1 $8 billion of free cash flow via share repurchases and dividends.
Jay: Turning to chart six and our full year 2024 results.
Jay: Sales of $71 billion grew 5% driven by improved backlog conversion, reflecting stronger throughput across the entire value chain.
Jay: Similar to the fourth quarter segment operating profit segment margins and earnings per share were impacted by the net program charges on slide four on an adjusted basis segment operating profit grew 7% year over year and adjusted segment margins were 11, 1%.
Jay: But for the book to Bill for the year was greater than one.
Jay: And the third consecutive year, we've increased backlog.
Jay: We generated $5 $3 billion of free cash flow, including the pension pre funding.
Jay: And finally, our consistent capital deployment continued in 2024, as we returned $6 8 billion to shareholders through repurchases and dividends.
Maria: Now I'll turn it over to Maria to discuss business area results.
Maria: Thanks, Jane today, I'll discuss fourth quarter and full year results to the business areas.
Maria: As Jim mentioned, you'll notice that we've included both reported GAAP and adjusted results for each business area in order to provide meaningful comparisons and a more realistic expectation of recurring operational performance.
Maria: Starting with Aeronautics on chart seven.
Maria: Fourth quarter sales at <unk> increased 5% year over year, primarily driven by higher F 35 volume on production and Sustainment contracts due to contract awards in the quarter, including the awards for the Lotte E.
Maria: The phenotype contract action and air vehicle Sustainment contract.
Maria: Partially offsetting this was lower volume at Skunkworks.
Maria: Driven by the unfavorable sales impact associated with the classified program charge.
Maria: Adjusting for the impacts of the classified program charge and the <unk> contract resolution.
Maria: Adjusted sales growth at <unk> was approximately 7% year over year in Q4 2024.
Maria: Both the reported and adjusted sales in the fourth quarter benefited from $700 million.
Maria: Of F 35 sales deferred from the third quarter.
Maria: Segment operating profit decreased 43% compared to Q4 2023.
Maria: Lower profit booking rate adjustments due to the $410 million classified program charge in the quarter were partially offset by higher sales volume and the benefit related to the <unk> claim resolution.
Maria: On an adjusted basis operating profit year over year in the quarter increased slightly.
Maria: For the full year sales increased 4% driven by higher volume across the F 35 program and the production ramp on the F 16 program, partially offset by lower volume at Skunkworks due to the sales impact related to the classified program charge.
Maria: Full year segment operating profit decreased 11% driven by the same items, we saw in the fourth quarter.
Maria: Lower profit rate adjustments, partially offset by sales volume in the <unk> claim resolution benefit.
On an adjusted basis Aeronautics full year operating profit grew by 3% equating to 10, 2% margin for the year.
Maria: Turning to missiles and fire control on chart eight.
Maria: MFC sales increased 8% year over year, driven by production ramps on joint air to surface standoff missile javelin long range anti ship missile the RASM guided multiple launch rocket system, GNL RF and Pac three.
Maria: Normalizing for the extra week in the fourth quarter of 2023, MSC sales grew 16% year over year.
Maria: Segment operating profit decreased significantly year over year in the quarter due to lower profit booking rate adjustments driven by the recognition of reach forward losses on the classified program.
Maria: Adjusting for that item segment margins were a strong 14, 8% in the quarter.
Maria: For the full year MSC sales increased double digits up 13% again due to production ramps on GNL IRS law, RASM javelin and packaging programs.
Maria: Full year segment operating profit declined $1 $1 billion year over year, Q Q1, $4 billion of classified program charges, which were partially offset by higher volume from the production ramp excluding.
Maria: Excluding the classified program charges MFC segment operating margin for the full year with a solid 14, 4%.
Maria: Shifting to rotary and mission systems on chart nine.
Maria: Sales decreased 10% in the quarter to approximately $4 3 billion pre.
Maria: Primarily driven by lower volume on Seahawks, CRH aegis and various fee six ISR program.
Maria: Normalizing for the week difference in Q4, 2023, RMS sales were down 3% year over year in the quarter.
Maria: Similar to sales operating profit was down 11% year over year due to lower profit booking rate adjustments in sales volume, partially offset by favorable contract mix.
Maria: For the full year sales increased 6% at RMS, primarily driven by higher volume on the Canadian surface combatant and laser programs within the integrated warfare systems and sensors business as well as various C. Six ISR programs and the CH 53, K ramp at Sikorsky.
Maria: Operating profit was up 3% for the year due to the higher sales volume and favorable contract mix, partially offset by lower profit booking rate adjustments.
Maria: Finally with faith on chart 10.
Maria: Sales decreased 13% year over year in the fourth quarter the reduction.
Maria: Was driven by lower volume on Nextgen, <unk> Orion and classified primarily due to program lifecycle.
Maria: Normalized for the number of weeks in the quarter year over year sales were down 6%.
Maria: Operating profit decreased 8% compared to Q4, 2023, driven by lower volume and lower profit booking rate adjustments, partially offset by higher equity earnings from United launch Alliance.
Maria: Turning to the full year sales decreased slightly driven by lower volume on the same programs as in the fourth quarter, partially offset by higher volume on the fleet ballistic missile and reentry program.
Maria: Meanwhile, operating profit increased 6% in 2024 due to favorable contract mix and higher ULA equity earnings, partially offset by lower profit booking rate adjustments.
I'd like to note the photo on page 10 in December Lockheed Martin supported the successful launch of the GPS III space vehicles, seven, which we designed and built.
Maria: This accelerated launch required complex integration and was the first to demonstrate operational agility for critical national security missions.
Maria: With that I will turn it back over to Jay to wrap up our prepared remarks, alright, Thanks, Maria turning to chart 11, and our forward expectations.
Speaker Change: Our outlook for 2025 has improved since October along with our rising value chain performance expectations. In addition to the benefit from the Derisking actions. We took in 2024 we.
Speaker Change: We anticipate sales growth of 4% to 5% on top of the 5% we delivered in 2024 weeks.
Speaker Change: We expect MFC to again lead the way with 8% growth at the midpoint as we continue to ramp production across several programs to support the strong demand for our combat proven munitions and integrated air and missile defense systems.
Speaker Change: As previously discussed operating margins returned to a 11% and free cash flow grows 9% at the midpoint from 2024 adjusted results setting up double digit growth in free cash flow per share in spite of noncash Fas pension headwind lowering EPS.
Speaker Change: I'll step through segment operating profit and EPS bridges in more detail in the following charts.
Speaker Change: Chart 12 bridges. The 2024 reported segment operating profit of $6 1 billion to the 2025 guidance midpoint of $8 5 billion.
Speaker Change: After accounting for the 2024 net charges, we expect operating profit growth from the adjusted 2024 position.
Speaker Change: The growth is primarily due to the volume drop through and partially offset by other items, mainly lower expected net profit rate adjustments.
Speaker Change: Importantly segment margins are expected to return to 11% in 2025 earlier than planned.
Speaker Change: Next on chart 13, we have a similar walk for earnings per share.
Speaker Change: Here, we expect EPS to decline slightly from the 2024 adjusted position, mainly due to non operational items, notably the Fas Cas pension adjustment adjustment as well as higher interest expense.
Speaker Change: Bringing it all together, we expect solid sales growth in 2025 after higher 2024 base operating margins at the 11% target and solid cash flow generation that enables consistent shareholder returns.
Speaker Change: So in summary on chart 14.
Speaker Change: In 2024, we delivered stronger topline growth than initially expected, reflecting an improving operating cadence.
Speaker Change: We also expanded our backlog to a new record demonstrating the strength of our unmatched capability to deliver security solutions at speed.
Speaker Change: Increasing investment to expand this capability.
Speaker Change: And we prudently de risk programs.
All the while dependent dependably generating free cash flow and deploying it as committed.
Speaker Change: Taken together these actions give us confidence to deliver a strong financial outlook for 2025.
Speaker Change: At the same time, we will continue to propel this industry forward with innovative solutions that integrate the best that commercial and military military industries can offer.
Speaker Change: And of course, we remain focused on operational execution to deliver on our commitments and create long term value for our customers and shareholders with that Sarah let's open up the call for Q&A.
Sarah: Thank you.
Sarah: To ask a question. Please press Star then one on your Touchtone phone you will hear that theater, indicating that you have been placed in Q you may remove yourself from the queue at any time by pressing Star then one at that.
Sarah: We ask that you. Please limit yourself to one question. If you are using a speakerphone. Please pick up the handset before pressing.
Sarah: Once again, if you have a question. Please press star one at this time.
Speaker Change: Your first question comes from the line of Seth.
Sarah: Simon.
Simon: Thanks, Brendon Frey policies from Jpmorgan Your line is open.
Speaker Change: No no worries. Thanks, thanks, Thanks very much.
Sarah: Everyone.
Sarah: Thanks, Good morning, I wanted to ask it.
Sarah: Jay emphasized kind of the Derisking nature of.
Sarah: The charges in Q4, and I know, maybe it's difficult to discuss because it's classified but within aeronautics all of the filing language to sort of emphasize continued risk there should we think that with within following this charge the potential for future charges. There has really come down considerably.
Sarah: <unk> and is there anything you can say about where we might be in the lifecycle of that program and when it might be able to.
Sarah: Provide some some positive returns and then thinking maybe that the answer to there might have to be a little bit circumspect. If you could just comment on the multiyear targets that you gave on the last call and how to think about those now.
Sarah: Okay. Thanks Seth.
Sarah: It was about 16 questions in that one question, but I'll take a shot at all of them.
Sarah: Just as far as the risk I would say, we significantly reduce the risk.
Sarah: Can't really get into.
Sarah: The lifecycle of the program given the classified nature of it but let me walk you through why I believe that we've significantly reduced the risk.
Sarah: As you know we had realized this risk earlier in the year, causing us to perform a more comprehensive review of current performance versus our key assumptions included in the estimate to complete.
Sarah: We evaluated the risk and opportunities and made the determination that a cost reset was warranted.
Sarah: Mount Route that we recorded in the quarter is the most conservative assessment, we've made to date.
Sarah: We've also made a number of process changes.
Sarah: Aeronautics along with our corporate staff have implemented a more continuous monitoring progress process of the progress of this program are in terms of technical.
Sarah: Milestones and added technical resources from the outside the program.
Sarah: This will enable both teams to work together to institute support measures as needed faster than before.
Sarah: We've also added technical resources and experts with experienced and the risk areas to help bolster the team and mitigate risks as they arise with.
Sarah: We've added automated testing procedures as well to accelerate test results and issue resolution should they occur.
Sarah: So all those things taken together give us confidence.
Sarah: We have significantly de risked his program and significantly reduced the risk of future charges on this as far as maybe the multiyear outlook you look at 2025 and.
Sarah: And certainly the 2025 outlook is better than what we had projected in October if you recall, we have set our baseline was low single digit with an opportunity to get to a mid single digit tiara. We believe the opportunity was realized for 2025, which gave us confidence to increase our growth outlook to 4% to 5% and that's the same type of process that will continue.
Sarah: To look at in 2006 and beyond and again, it's based on our ability to really drive throughput through the entire value chain as I mentioned before in my prepared remarks that we continue to have rising expectations are rising confidence that not only our.
Sarah: Our supply chain, but our internal operations can can move at a quicker pace, enabling the unlocking of this revenue growth.
Sarah: So our confidence is growing there.
Speaker Change: The next question comes from Rob Stallard with vertical research partners. Your line is open.
Thanks, so much good morning.
Speaker Change: Good morning.
Speaker Change: Question for Jim at the same conference Youll, taking these charges on these classified programs.
Speaker Change: It looks like the the new administration and the Department of Defense is actually getting more pro fixed price contracts in commercial terms.
Speaker Change: Are you worried that the defense industry could be taking on more risk and opening itself up for more charges in the future.
Speaker Change: Not necessarily Bob because we're going to apply this disciplined.
Speaker Change: Bid process to fixed price and cost plus contracts and if the proportion is.
Speaker Change: Moving potentially towards fixed price, we're going to use the same discipline.
Speaker Change: And.
Speaker Change: There is.
Speaker Change: Trend in this industry to be much more.
Speaker Change: Deliberate about how each company bids each company has its own strategy.
Speaker Change: Ours is something I brought over from my last.
Speaker Change: Business experience, which is adjusted risk adjusted return on investment is a key criteria and be honest about the risks upfront and price them in and if that price doesn't meet the competition Sobeit, we'll move on to other things. So I'm not concerned about that as I said I look at those as an opportunity.
Speaker Change: Because.
Speaker Change: As far back as 2021, I've been advocating for a systemic change in the way that the defense enterprise operates and Thats, meaning Congress.
Speaker Change: Executive branch Pentagon.
Speaker Change: Aerospace and defense industry commercial tech startups, we need to expand our ability as a country to get everybody involved and I welcome doses effort in the administration's effort to reduce the bureaucracy limit.
Speaker Change: The administrative burdens that the Pentagon now puts on all companies big and small that want to work with it so.
Again, I look at all of this as an opportunity and if it moves a little bit more towards fixed price proportions.
Speaker Change: Okay.
Rob Stallard: Rob the only thing I would say is we've.
Speaker Change: We've seen really to be honest more over the last probably year to 18 months a more of a contracting regime, that's more commensurate with the risk associated with the program. So those that have lower technical maturity higher risk the customer has actually been much more receptive and cognizant that those probably are not going.
Rob Stallard: To be best delivered under fixed price type of contracting regime and so you.
Rob Stallard: You may be hearing words on the one end, but I think there has been a recognition more to make sure that the risk profile is commensurate with the right level of contracting net shared both by the customer and as well as industry.
Rob Stallard: No.
Rob Stallard: It had been I think a different approach.
Rob Stallard: <unk> got a change in administration, and where that goes forward, but I would say theres been a recognition over the last 12 months to fixed price.
Rob Stallard: Contracts for immature technology really doesn't help anyone.
Speaker Change: The next question comes from Rich Safran of Seaport Research partners. Your line is open.
Speaker Change: Thanks, Jim Jaye Maria good morning.
Rich Safran: What I'd like to ask is starting with your 2025 guide for 8% growth I'd like to know if you could give us maybe a long term look at MFC in terms of growth and margins and what the potential for the businesses just kind of wondering if the <unk> rocket motor deal and how that factors into your growth and margin outlook given the <unk>.
Rich Safran: Limitations, you've had thus far thanks.
Rich Safran: <unk> for 2025, it's really more of the same we continue to see growth on on programs like Jim <unk>.
Speaker Change: Hi, Mars pad III, Jasmine lorazepam and so many of the same growth factors and drivers in 2024 are also growth drivers in 2025 that demand continues.
Speaker Change: We have projected an orders growth in 2025 things like a multiyear definitive Asian, Jasmine, the RASM, which was pretty sizable multiyear contract and.
Speaker Change: So the demand cycle, they're both domestically and international was quite strong and as we've said before that will be the growth driver for Lockheed Martin for years to come beyond 2025.
Speaker Change: And so again when you couple the backlog with the ongoing demand.
Speaker Change: We feel pretty solid again in these programs.
Speaker Change: Just as a just a solid.
Speaker Change: Back painting of the underlying demand for those.
Speaker Change: On the margins.
Speaker Change: We've talked about when you strip out the impact of the classified program. We've talked about 14%. If you look at our at the midpoint of our guide in that ballpark, we're right around 14% not necessarily as high as Maria are reported on an adjusted basis for 2024, but that's because right now we're expecting some lower net profit adjustments, but.
Speaker Change: Their underlying margins are generally in line with what our longer term expectations are and that's the way to think about MFC around 14%.
Speaker Change: The next question comes from Ken Herbert of RBC capital markets. Your line is open.
Ken Herbert: Yes, hi, good morning.
Speaker Change: Okay, Hey, Jay in the past you've talked about.
Speaker Change: Working capital and specifically the opportunity there to improve the free cash flow can you provide a little bit more on what's implied in the 25 guide for working capital improvement and has anything structurally changed now as you look at the portfolio and the opportunity is you've talked about taking days out of the ability to eventually we're continuing to do.
Speaker Change: Drive towards sort of pre pandemic levels overtime.
Speaker Change: Sure you look at I'll start with maybe 2024, we had a good year in 2024 in spite of some of the headwinds that we faced.
Speaker Change: We reduced our working capital days by a couple and were in the mid <unk> as far as the cash conversion cycle.
Speaker Change: For our outlook in 2025 whats implied in there is about one day, which essentially offsets the growth.
Speaker Change: But we're going to see from we would otherwise see in working capital. So what we're trying to do here is just prevent it from being a use of cash and have it be neutral the opportunity set obviously would be to drive beyond one day and there is still opportunity I talked about before particularly in our contract assets our unbilled receivable.
Speaker Change: There is some opportunity there as we work through on the F 35, both in production as well as Sustainment, but theres really opportunities across the portfolio of Sikorsky has a number of opportunities there on their programs as well as even even though it's the segment's space in MFC those are outstanding working capital business is on.
Speaker Change: Standalone basis, but even so there is opportunity in the contract assets. There. So I would expect in the years to come that we still have opportunity to continue to drive asset productivity, there and thats going to be part of our formula going forward as it was in 'twenty four and an outlook for 'twenty five.
Speaker Change: The next question comes from Gavin Parsons with UBS. Your line is open.
Gavin Parsons: Hey, Thanks, good morning.
Speaker Change: Good morning.
Speaker Change: Just digging a little further on the free cash flow bridges.
Speaker Change: The EBIT and EPS bridges were super helpful. In the deck, but just given a lot of moving pieces in cash flow like the F 35 inventory unwind pension contribution recovery.
Speaker Change: Cash timing, maybe I missed that one but if we could just kind of do a bridge work on cash flow that would be great.
Speaker Change: Yes, if you just start from this year adjusted cash flow of $6. One so adjusted for the pension contribution in 2024.
Speaker Change: As we mentioned that we expected anywhere around close to $1 billion of benefit on F 35, with the delivery of with higher deliveries as well as progress on the withholds.
Speaker Change: We also though as you remember in 2024, we got the benefit of significant international advances to the tune of $600 million. So partially offsetting that is <unk>.
Speaker Change: Net of impact of those two things about $400 million in that ballpark.
Speaker Change: We do expect a benefit from taxes with lower R&D capitalization as thats coming down and we expect a little bit of benefit from I'll call. It cash based net income all of that taken together takes us from six one to.
Speaker Change: $6 $7 billion midpoint. So those are the key drivers of free cash flow for 2025.
Speaker Change: The next question comes from Scott <unk> of Deutsche Bank. Your line is open.
Speaker Change: Hey, Thanks, Jay it looks like if you're guiding it looks like Youre guiding aeronautics margins down about 20 basis points year over year, and 25% if I add back those unplanned charges in the to the 2024 base.
Speaker Change: So can you talk a bit about what drives that underlying margin decline, particularly given that you are on these newer contracts for F 35.
Speaker Change: For so for F 35, we do have I am sorry, <unk> Aeronautics in total right now the outlook for their margins does assume lower net profit adjustments.
Speaker Change: That's unencumbered an apples to apples basis, so excluding the impact of the $555 million and the C. Five adjustment in 2024.
Speaker Change: Profit adjustments there are declining there is a mixed benefit but right now the net profit adjustments offset that and thats what drives margins down from 10 two to around 10%.
Speaker Change: We also have.
Speaker Change: Classified growth, which is just a mix headwind there.
Speaker Change: But that's we've got some benefits from from <unk> margins as well, but bottom line again it comes back to the net profit adjustments being lower.
Speaker Change: Yeah.
Speaker Change: The next question comes from Matt Akers with Wells Fargo. Your line is open.
Matt Akers: Yeah, Hey, guys. Good morning. Thanks for the question I guess a couple on F. 35, you talked a little bit about the progress toward tech refresh three what exactly is left to get kind of a final with all the how big is that and are you assuming to get that.
Matt Akers: And within 2025, and then wondering if you could touch on what 19 and kind of how the discussions are going there.
Matt Akers: Well so on the on the tier three capability, we continue to make excellent progress there theres a number of things that we still have to complete.
Matt Akers: Submission system integration work as well as improving system stability overall, we expect that will continue throughout the year, we will meet with respect to meet some milestones this year, our targeting targeting as much as possible. This year, but I think for purposes of financial modeling we would expect.
Matt Akers: To bleed into 2026 ultimately the declaration of full combat capability is one that is left with our customer and so we will be we're coordinating with them and working with them on.
Matt Akers: On that but what I can tell you is that we're pleased with the progress we've made thus far and and the team is working at a pretty good pace here with our with our supplier partners on improving <unk> emission system capability and as well as improving overall system stability.
Matt Akers: The second part of the question was 19, so that has been negotiated.
Speaker Change: Really in parallel with a lot 18 negotiation just for clarity slide 18 is under under <unk> contract actions. So we still have to definitive data as Jim mentioned, we expect that to be done in the first half of this year and shortly thereafter in the second half of this year. We would also expect to close out on the lot 19 contract, which would be in <unk>.
Matt Akers: And in the range of about $10 billion.
Matt Akers: Yeah.
Speaker Change: The next question comes from Myles Walton of Wolfe Research. Your line is open.
Myles Walton: Thanks. Good morning, I was curious on the charges that were unplanned Jay how should we think about the cash effect of those.
Speaker Change: Obviously, the MFC part of that unplanned who were just planning on the future so I'm going to guess.
Speaker Change: There is nothing really to think about there, but on the Aero side.
Speaker Change: 400 million of cash.
Speaker Change: Charges taken in the quarter is that 400 million headwind being absorbed mostly in 2025.
Speaker Change: And then as we look to 2006 do you still have the pension funding requirement coming back about $1 billion.
Speaker Change: Yes.
Speaker Change: Just starting with.
Speaker Change: The arrow classified programs that'll be a certainly a cash flow drag over the next few years.
Speaker Change: Not all born in 2025, but but it is something that we expect over the next two to three years that we will have to liquidate that and from a cash perspective.
Speaker Change: As far as pension in 2026, we've talked about ongoing cash contribution requirements. The formula to deal with that is similar to what we saw here and we've been talking about.
Speaker Change: We had the prior discussion here and one of the questions related to working capital we're going to continue to see what we can do to drive working capital down improve our asset productivity to offset as much as possible in the pension and then as you know we've got a very strong balance sheet that gives us a lot of optionality and flexibility. So we can expect to continue to deal with pension with.
Speaker Change: With the options that we have before us.
Speaker Change: Okay.
Speaker Change: The next question comes from Barton partner with TD Cowen Your line is open.
Speaker Change: Yes. Good morning, I was wondering the MN thats the <unk>.
Speaker Change: Program that had been the charge.
Is there an opportunity on that program as we scale it.
Speaker Change: To improve the profitability.
Speaker Change: Dramatically I'm, just curious over the option period I imagine demanded.
Speaker Change: Pretty strong for that product.
Speaker Change: Don't know if the pricing may adjust favorably.
Speaker Change: At some point if you could if you could speak to that.
Speaker Change: Again, it's a classified program gautam, so theres not really all that much but I can tell you is.
Speaker Change: Outside of the fixed pricing related to this next phase that the pricing would be open and we would expect to return to reasonable type margins over over that period of time outside of where we have the fixed committed pricing.
Speaker Change: I wouldn't expect it to bounce back to MFC like margins.
Speaker Change: At that point in time to still would be kind of ramp up that you got to deal with but certainly the margin profile will get substantially better.
Speaker Change: And we expect this to be a long lived program based on the technology and the value to the U S government.
Speaker Change: Yeah.
Speaker Change: The.
Speaker Change: The next Air Force pilot I can assure you. This is something they will want.
Speaker Change: Your next question comes from the line of Peter Arment with Baird. Your line is open.
Speaker Change: Opportunities to maybe still grow your backlog your backlog is at record levels is up 10% for the year.
Speaker Change: Big drivers in MF.
Speaker Change: In space, but how are you thinking about the opportunities to grow backlog in 'twenty, five and any international kind of a.
Speaker Change: Awards that Youre kind of our pursuits that you would highlight thanks.
Speaker Change: So Peter it's Jim I'll start with the some of the public statements of the administration, which is reforming the Pentagon.
Speaker Change: <unk>.
Speaker Change: It's an opportunity there is.
Speaker Change: More long lead time orders less for agility in the system. In addition to that multiyear contracting which has been so far limited to munitions.
Speaker Change: Makes sense in a lot of other places in.
Speaker Change: And the Pentagon budget. So if some of those policy changes get implemented you might see backlog.
Speaker Change: For a company like ours accelerate.
Speaker Change: Due to multi years and longer lead time preorders.
Speaker Change: Okay, Yes.
Speaker Change: A line of sight, we do have a line of sight to growth again in 2025, I wouldn't say that.
Speaker Change: It's 10%, but we certainly have some level of growth.
Speaker Change: That we're expecting in 2025 on the backlog.
Speaker Change: About $10 billion order on the <unk>.
Speaker Change: 35 on lot 19, I talked earlier about the Jasmine will RASM multiyear that's in the range that multiple billions of dollars Theres others. There is the international opportunities as well to <unk> on the <unk>.
Speaker Change: F 16 aircraft.
Speaker Change: There's just a whole slew of opportunities. We also have just continued to F 35, sustainment contract, which will there'll be multiple billions of dollars as well.
Speaker Change: CH 53 K.
Speaker Change: <unk> nine is another one will be negotiating this year, which is well above a $1 billion. So there is still an excellent line of sight to continue to grow this backlog, but as you know we're also focused on making sure that we can accelerate.
Speaker Change: Accelerate the speed of our throughput and drive that backlog conversion faster.
Speaker Change: The next question comes from Pete Dubicki with Alembic Global your line is open.
Pete Dubicki: Hey, good morning, guys.
Speaker Change: Good morning.
Pete Dubicki: Jim or Joe just to follow up on MFC.
Pete Dubicki: As you guys think about what Dod's signaling to you in terms of.
Pete Dubicki: The peak production volumes on the key munitions and MFC do.
Pete Dubicki: Do you guys need additional supplemental bills too.
Pete Dubicki: To get to those levels and sustain those levels or do you already have kind of funding line of sight from the Ukraine supplemental and maybe what's in the 25 baseline budget, maybe 26 baseline.
Pete Dubicki: Wanted to get a sense of budget risk there in terms of what.
Pete Dubicki: Your peak rates are you assuming.
Pete Dubicki: Yes, it's really not dependent on additional supplemental I mean, a lot of this is.
Pete Dubicki: A lot of the capacity is going to committed <unk> contracted with our customer.
Pete Dubicki: We just and I'll run through a couple of programs we had always been.
Pete Dubicki: Under contract to get to $5 50 on the pad III program at 2025, we initially self funded the investment associated with getting ourselves of $6 50 impact three we recently received a contract award for incremental funding on that related to the facilitation.
Pete Dubicki: We are driving towards 14000 on <unk>.
Pete Dubicki: We've been driving as Jim has mentioned in the past to 4000 on javelin.
Pete Dubicki: 96 on high Mars, and again to line of sight to those and the funding that's been allocated to those is quite strong much of which is under contract already.
Pete Dubicki: We view that as fairly low risk.
Pete Dubicki: At the moment.
Pete Dubicki: Yeah.
Pete Dubicki: The next question comes from John Kernan of Bernstein. Your line is open.
John Kernan: Good morning, Thank you.
Speaker Change: Hey, Doug.
On the F 35.
Speaker Change: There's been some noise as the new administration has come in about about the F 35.
Speaker Change: But if I put all of that aside.
Speaker Change: During the first Trump administration in each of the budgets F 35 volumes were.
Speaker Change: Seem to be a view that we didn't need as many.
Speaker Change: Congress of course added some back.
Speaker Change: When you look forward, you're looking at a it's still a.
Speaker Change: 156 per year production rate for a while.
Speaker Change: How do you think about the interplay of.
Speaker Change: Budget decisions in the U S with what has been some very strong export demand in other words, if we should see some reductions in quantities in the U S are.
Speaker Change: Are you still very confident youre going to be able to continue with that 156 level.
Speaker Change: Doug It's Jim I'll start off and say, yes, I am confident of the 156 and I think it will come from strong demand from the us government and from our International partners and one reason for that is.
Speaker Change: Basically part of the turns theory is that you have to have the capability.
Speaker Change: To make the adversary reconsider.
Speaker Change: And adverse action against you and China based on open source reporting has.
Speaker Change: Has increased production of.
Speaker Change: The J 'twenty, which I don't believe.
Speaker Change: Just sort of personally that it's equivalent to the F 35, but it is the fifth generation airplane to.
Speaker Change: Over 100 units a year.
Speaker Change: We're doing 156, we're ahead of them.
Speaker Change: If there was a dramatic change and even U S.
Speaker Change: The U S order book and production.
Speaker Change: Might be a signal that would be adverse to maintaining an effective deterrent to them.
Speaker Change: Similar with munitions right I mean, everybody is a dirty Harry movie year, Clint Eastwood movie knows of when you run out of ammunition Youre highly highly vulnerable and that supports some of the conversation Jay was just having so my view is that there are some very capable people coming into the administration they understand deterrent.
Speaker Change: <unk> the last thing I think this.
Speaker Change: President administration would want us to create a period of vulnerability with any of our major adversaries in the next few years. So I feel really confident about F 35 production and the other thing I'll add is that we can already control out of an F 35.
Speaker Change: Up to eight autonomous drones.
Speaker Change: We've shown this as secretary of the Air Force a few months ago, it's publicly public knowledge.
Speaker Change: There is some classified things that we're doing in the same arena if you will.
Speaker Change: To be able to drive manned unmanned teaming off the F 35, and the F 22, and the reason we're starting with the F. 35 is because of tier three tier three gives the F 35 to three things.
Speaker Change: You need for an effective.
Speaker Change: Five node in the <unk> Internet of things system, which is what we're talking about those three capabilities our.
Speaker Change: Data processing with our core processors, but tenex.
Speaker Change: From the from the prior data storage, we have a large storage larger storage unit.
Speaker Change: And <unk>.
Speaker Change: A multi path connection back to the cloud as you defined the cloud ours as Dod.
Speaker Change: Classified but those are the three technical elements you need to have to be able to drive <unk> level connectivity among nodes in our network like this and that's what we have to build.
Speaker Change: F 35, and we're upgrading F. 'twenty two in the same way we will have.
Speaker Change: At least one and often more orders of magnitude capability in those digital arenas then.
Speaker Change: Fourth generation fighter Jets, we have and so the capabilities alone that the F 35 can bring to an integrated fight with drones and manned aircraft.
Speaker Change: Is unique.
Speaker Change: Doug I'll just also add that just maybe one data point here is that the.
Speaker Change: The age of the existing fleet is beyond 25 years, and so that is necessitating a recapitalization with the F 35, and so there is a certain reality that is going to require the demand of the F 35 to bring the age of the existing fleet back down.
Speaker Change: And then the last thing I'll say is that there is.
Speaker Change: Based on again open source reporting.
Speaker Change: The experience of the Israeli Air Force.
Speaker Change: Against the Iranian Air Defense system, which they took out in one night with what they characterize this fifth generation aircraft.
Speaker Change: And you can match up what's in their inventory.
Speaker Change: With no losses that.
Speaker Change: That would clear the way for a fourth Gen aircraft drones to come in and devastate that country, if the Israelis decided to do so.
Speaker Change: That's the kind of impact that the high end.
Speaker Change: Platforms have especially if you can network.
Speaker Change: Satellite imagery autonomous vehicle drone imagery.
Speaker Change: In a command and control speed that.
Speaker Change: But no one else can muster you can have that kind of lopsided victory and that's another reason I think the F 35 is going to demonstrate its value here through.
Speaker Change: Through these rally experience.
Speaker Change: The next question comes from Michael <unk> with <unk> Securities. Your line is open.
Speaker Change: Hey, good morning, guys. Thanks for taking the questions.
Speaker Change: Maybe Jim or Jay could you give a little bit more color on on supply chain I know the general update had been the demand signals, we're pointing to mid single digit and any changes with that under the New administration and then just given supply chain and you do administration should we think about that multiyear kind of framework being.
Speaker Change: Now firmly in mid single digits for both revenue and cash flow.
Speaker Change: Okay.
Speaker Change: It's a good question, let me just answer your question kind of supply chain operations. We have seen improvement we saw improvement certainly in 2024, and we are at levels where.
Speaker Change: They are approached and in certain cases have exceeded.
Speaker Change: What they were pre Covid, having said that there are still discrete.
Speaker Change: Issues that we're dealing with across the portfolio I think MFC is a good example, who've done an outstanding job of managing a number of supply chain issues, but yet they still are there and so the way we have.
Speaker Change: A solid growth outlook, there and a strong growth growth outlook. There they are still being paid to certain extent.
Speaker Change: Let go Bose across much of the portfolio Sikorsky is another one <unk> 53, K has been hampered and while we have seen improvement it's still not to the level, where we need to be operating at from a contractual standpoint.
Speaker Change: If we continue to see though what we have seen to ensure I would feel a lot more confident in our multi year outlook. It is more and it's 4% to 5% range like we're guiding for for 2025, I think that we need to just go through a little bit more of the passage of time as we go through midway through this year, we get a better outlook on how 2025 are shaping up and how that informs <unk>.
Speaker Change: 26, we'll be able to give you a clearer.
Speaker Change: A clear view a longer term, but at the moment for encouraged by what we're seeing and surely we've seen it here in 2025, and we're starting to gain confidence as I mentioned before that it can continue in 'twenty six.
Speaker Change: Sarah Let's take one more question I think we're approaching the top of the hour and then after this question will hand off to Jim for closing comments and one more question. Please.
Ron Epstein: The last question will come from Ron Epstein of Bank of America. Your line is open.
Speaker Change: Okay.
Speaker Change: Thanks, guys for the question.
Speaker Change: Maybe just kind of a two parter.
Speaker Change: The first part is I think maybe.
Speaker Change: When when they discuss iron over the U S isn't that.
Speaker Change: The contract that you guys already one or am I thinking about that wrong.
Speaker Change: That way the NGA.
Brian Jim: Brian Jim here.
Brian Jim: It will be an integral part of us of a more comprehensive solution to homeland defense and what the administration has laid out is a defense of the homeland against multiple set of.
Brian Jim: Attack options for any adversary one of them is as you say Intercontinental Intercontinental ballistic missile attack.
Brian Jim: That is something that the NCI is specifically designed to accomplish but then there is also a hypersonic attack we have a hybrid.
Brian Jim: Hyper saw counter hypersonic effort in this company, knowing that we're going to need to be able to do that and by the way to do it you're going to need AI and you can need high speed data transmission and you're going to have multi sensors and multi domain to do it. So that's the second one a third one is cruise missiles right.
Brian Jim: We've shown that we for example, we can shoot down cruise missiles with lasers now and that can be part of the solution and then maybe the lowest level.
Speaker Change: Adversary would be a cheap in country.
Speaker Change: UAS UAV attack, a drone attack on a public place.
Speaker Change: Or an air force base or some other.
Speaker Change: U S located facility your asset and Thats another set of technologies, which is counter UAS and we haven't heard back from this administration yet on this topic, but we.
Speaker Change: We offered.
Speaker Change: The prior administration at the sector level to organize our national team on counter UAS, because I think we have some pretty good technologies, we want to add a lot more from some mid and large companies do have the relevant technologies as well. So I might have ran out of time on your second part of your first question.
Speaker Change: That's what I think of when I consider what iron dome would have to look like he got it. So it's a broader thing and just sort of.
Just call it missile defense.
Yes, Theres a public statement by the U S government.
Speaker Change: Outlines a lot.
Speaker Change: And then if I can squeak in one last one.
Speaker Change: We Gotta go.
Speaker Change: What are you thinking about Denmark as an important F 35 international customer.
Speaker Change: There is a lot of rhetoric in the press around the U S. One in Greenland.
Speaker Change: Do you think about that.
Speaker Change: Mixing that up with them being an important customer and what message that might send to other customers.
Speaker Change: But these are policy issues by the U S government completely out of our Fairview.
Speaker Change: So I'll just leave that there.
Speaker Change: The demand for the aircraft is we've talked about keeps building, especially in international customers.
Speaker Change: And really that's all I.
Speaker Change: Comment on on a policy matters such as this.
Speaker Change: Alright, Thank you Maria for managing all of the questions before we close I want to thank the Lockheed Martin workforce for constantly pushing the boundaries of innovation to help our country and our allies accomplish their missions and maintain our ability to provide a strong deterrent to arm conflict and if we must.
Speaker Change: Defeat any enemy that of taxes and the Air Force, we saw that fly Fi and win as.
Speaker Change: As we did in this first term we look forward to a very productive working relationship with President Trump.
Speaker Change: His team and the new Congress to strengthen our national defense.
Speaker Change: We share a commitment to achieving peace through strength and we're focused on delivering the best mission critical defense technology in the world.
Speaker Change: And at the greatest value to the American taxpayer.
Speaker Change: So with that we'll wrap up the call. Thank you everybody that joined today and we'll see you in April on our first quarter call.
Speaker Change: This concludes today's conference call. Thank you for joining you may now disconnect.
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