Lockheed Martin Corporation

Good day and welcome everyone to the Lockheed Martin first quarter 2023 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Maria Richardon Lee, Vice President of Investor Relations. Please go ahead.

Thank you, Lois, and good morning. I'd like to welcome everyone to Lockheed Martin's first quarter 2023 earnings conference call. Joining me today on the call are Jim Taklett, our Chairman, President, and Chief Executive Officer, and Jay Malave, our Chief Financial Officer. Statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the chart. With that, I'd like to turn the call over to Jim.

Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2023 earnings call. I'd like to begin today with a few highlights from the quarter, as well as an overview of the presidential budget request, and then Jay will discuss our financial results and full year 2023 outlook in detail. We had a solid start to the year with first quarter sales of $15.1 billion. led by 16% year-over-year growth at space. Segment operating margin was 11.1%, led by MFC at 15.8%. Free cash flow grew 11% to $1.3 billion, and combined with a lower share count, contributed to a strong free cash flow for share growth year-over-year. We remain on track to meet our financial expectations for the full year, and to return to growth in 2024 as we laid out in January. In terms of capital deployment, we returned $1.3 billion, or 101% of our free cash flow, to shareholders in the quarter. We remain focused on our long-term strategy of growing free cash flow per share and continue to plan to deliver approximately 110% of our free cash flow to stockholders in 2023 through dividends and buyback. Turning to the budget, the administration released preliminary details of the FY24 President's Budget Request, or PBR, in early March. This budget proposal reflects a heightened emphasis on defense and security cooperation with allies. The FY24 DoD budget request is $842 billion, an increase of $25 billion, or 3%, over the FY23 enacted funding. The near-peer threats posed by China and the Russian invasion of Ukraine is driving the national defense strategy and has created added demand for Lockheed Martin's advanced effective solutions. Key highlights include the procurement of 83 F-35 aircraft, continued expansion in classified programs, and an increase in requested funding for munitions. The PBR also includes facilitation investment and advanced funding for long lead time parts in support of multi-year procurement of JASM and LORASM. We're also engaged with DOD on multi-year procurement proposals for PAC-3 MSE and guided multiple launch rocket systems. These proposals are subject to congressional approval during the course of the FY24 defense authorization and appropriations process. The PBR also includes continued investments in key technology development efforts, such as conventional prompt strike, long-range hypersonic weapon, next generation interceptor, hypersonic defense, bomb defense system, and other space programs. Furthermore, key technology areas aligned with Lockheed Martin investment priorities received increased funding to include microelectronics, 5G technologies, and joint all-domain operations. We are encouraged by this initial request and look forward to its progression through the authorization and appropriations process. We also anticipate heightened emphasis on national security prioritization from Congress, supplemental spending requests including Ukraine, and elevated demand from allies and partners. Turning to the F-35 program, The 83 F-35 Lightning II aircraft included in the PBR signals strong support from the services and the administration. Moreover, the Canadian government's January announcement that it will procure 88 F-35s marks another milestone in continued international demand for the aircraft. As to production, deliveries of F-35 engines, which are government-furnished equipment, resumed in February. and then flight operations and deliveries resumed in March. However, we do expect a fraction of total expected 2023 deliveries to be impacted later this year due to both software maturation related to Technology Refresh 3, or TR3, and hardware delivery timing. However, we anticipate little to no revenue impact from any potential delivery delay, and therefore no material adverse effect on our 2023 P&L. Jay will provide some more color on this in a moment. Also at Aeronautics, the first Greenville-built F-16 Block 70 took flight and was delivered to Bahrain. In addition to the Bahrain customer, six countries have selected Block 70 or 72 aircraft, and Jordan and Bulgaria have signed letters of agreement for additional jets. Further related to the F-16 in the quarter, While I was at the U.S.-India CEO Forum in March, I had the privilege to announce the memorandum of understanding with the Tata Lockheed Martin Aerostructures Limited joint venture to produce F-16 wing structures in India, demonstrating our commitment to India as an industry partner and customer while bolstering our supply chain. Turning to hypersonics, it is encouraging to see the continued investment outlined in the PBR for the Conventional Prompt Strike Weapon System, or CPS, as it begins integration and testing for Zumwalt-class ships, recognizing our advancements in this critical technology. In February, the U.S. Navy awarded Lockheed Martin an initial contract for CPS, the first sea-based hypersonic strike capability for the United States, enabling long-range missile flight at speeds greater than Mach 5. First delivery is expected by the mid-2020s. Regarding our Air Launch Rapid Response Weapon, also known as AERO, we are continuing testing of the system at hypersonic speeds in order to advance technical maturation of the missile and the glide body and to ensure the final product is safe, reliable, and supportive of our customers' missions and future plans. In January, We also completed the second flight test of hypersonic air-breathing weapons concept, also known as HAWC, in partnership with DARPA and the Air Force Research Lab. We accomplished all the test objectives during the second flight test, including affordable rapid development and performance requirements. And in late March, the U.S. Navy announced its support of the Hypersonic Air-Launched Offensive Anti-Surface Strike Weapon, or HALO, Lockheed Martin was down-selected and awarded a contract for the first step to fielding a critical capability over the next decade and begin the design and development of a carrier-based air-breathing hypersonic strike capability for the Navy's fleet. As a company, we remain fully committed to developing hypersonic technology on accelerated timelines to meet this critical national security need and establish a solid deterrent posture in this area for the U.S. and its allies. But hypersonic solutions are just one element in our vision of 21st century security. We advanced several additional aspects of this strategy during the quarter, including announcing a memorandum of understanding with Juniper Networks to jointly develop integrated hybrid software-defined wide area network solutions and to demonstrate that with our customers in the future. This technology enables mission-aware dynamic routing, a foundational capability for resilient joint all-domain operations. This mission-aware dynamic routing shifts the movement of data and communications in real time across a mix of military and commercial infrastructure according to evolving conditions. Our solutions give customers the flexibility to rapidly adapt to maintain the flow of crucial data and information as their assets operate in contested environments. We also led simulations of technologies to the US Army, Air Force, and Navy to demonstrate the impacts of 5G communications and advanced analytics to significantly improve operations and maintenance performance for a variety of aircraft, as well as for unmanned platforms in operationally challenging environments. And at the Mobile World Congress in Barcelona, I had the opportunity to deliver a keynote address and meet with CEOs across the digital technology, mobile, and networking industries to encourage us working together to promote innovative solutions to protect our countries and advance our space exploration capabilities. Another example of our leadership in accelerating advanced 21st century technologies to improve national defense and deterrence to conflict is in the arena of directed energies. Recently, our RMS unit achieved success in our initial test of our DEMOS, high-energy laser, which verifies that the laser's optical performance meets the system's targeted design parameters. This 50-kilowatt class laser weapon system aligns with the Army's directed energy short-range air defense mission. In addition to delivering on absolutely cutting-edge technologies, demand for many of our well-known and long-time high-performing systems continues to be strong. For example, in January, the Australian government announced the purchase of 20 Lockheed Martin high-mobility artillery rocket systems, or the now-familiar HIMARS, providing the Australian Defense Force with reliable, well-proven capability. And we continue to grow our significant partnership with Australia beyond HIMARS. In February, an agreement was announced between the Australian and United States governments for a foreign military sale of of 40 UH-60M Blackhawks for the Australian Army, and deliveries are slated to begin early this year. The Blackhawk remains unmatched as an all-round, multi-role, durable military helicopter for Australia and for the 34 other countries around the globe that use it. Further, we're excited to work with the ADF and Australian industry to develop their sovereign satellite communications component otherwise known there as Joint Project 9102. The Commonwealth of Australia announced in April that Lockheed Martin was selected as the preferred bidder for JP9102. This multibillion-dollar project will provide the ADF with a robust solution for military satellite communications and defined by its versatility and its resilience. With that, I'll turn the call over to Jay and join you later for questions.

Thanks, Jim, and good morning, everyone. Today, I will walk you through our consolidated and business area results for the first quarter and cover our 2023 outlook. As I highlight our results, please follow along with the web charts we have posted with our earnings released today. Let's begin with chart three and an overview of our consolidated financial results. Overall, 2023 is off to a solid start, positioning us well to meet our commitments for the year. We delivered just over $15 billion in sales with $1.7 billion in segment operating profit, resulting in 11.1% segment operating margin. Earnings per share was $6.61, and we generated $1.3 billion of free cash flow, enabling a solid shareholder return to share repurchases and dividends. Our book-to-bill ratio for the first quarter was 0.7 as anticipated, with backlog expected to increase in the second quarter from the upcoming order for F35 lot 17 production. And we continue to strategically invest in our growth strategy with $600 million of capital expenditures and independent research and development this quarter. These financial results are on track with our expectations for the year. Taking a closer look at the quarter's results with consolidated sales and segment operating profit on chart four, first quarter sales increased year-over-year by 1%. as space led the way with 16 percent growth. Segment operating profit was down 2 percent, as lower ULA equity earnings and contract mix more than offset the benefits from slightly higher volume and step-ups. As expected, margins contracted, mostly due to the lower equity earnings from ULA. Moving to earnings per share on chart five, GAAP earnings per share were up 17 cents, or 3 percent, over 2022. Adjusted for mark-to-market investment gains, EPS was flat. On an adjusted basis, the unfavorable year-over-year impacts from segment operating profit, interest expense, and FASCAS pension income were offset by the lower share count. Moving to cash flow on chart six, we generated nearly $1.3 billion of free cash flow in the quarter, including nearly $300 million of capital expenditures, as well as over $600 million of accelerated payments and continued support of the supply chain. Our cash deployment plan is on track, which we expect to accelerate throughout the year. In the quarter, we had $500 million of share repurchases and paid almost $800 million in quarterly dividends. Total cash return to shareholders in the quarter was 101% of free cash flow. Moving to segment results and starting with Aeronautics on chart seven, first quarter sales at Aero decreased 2% year over year. Lower F-35 production sales were partially offset by higher F-16 and classified program volumes. Operating profit was slightly lower than prior year, as the impact from lower net profit adjustments and sales volume was partially offset by favorable contract mix. For the year, we expect F-35 deliveries to be lower than previously anticipated due to software maturation with the Tech Refresh 3 program and hardware delivery timings. We will refine the impact as the year progresses, but do not expect a change to Arrow's 2023 sales and profit ranges that we had previously communicated in January, as we maintain our production cost throughput profile for the year. Looking at missiles and fire control on page eight, sales decreased 3%, as lower sales volume on sensors and global sustainment, as well as our tactical strike missile programs, were partially offset by growth in integrated air and missile defense. Segment operating profit was down 2%, driven by lower sales volumes and net profit adjustments, partially offset by favorable contract mix. At Rotary and Mission Systems on page 9, sales were down 1% from 2022, driven by lower volume on Blackhawk production and our C6 ISR programs. These declines were partially offset by favorable volume on radar programs in integrated warfare systems and sensors, including defense of Guam, an important growth area for RMS that was one in 2022. Operating profit decreased 14 percent due to lower sales volumes and timing of net profit adjustments. Turning to chart 10 in our space business area, sales were up 16 percent in the quarter driven by strong growth on the next-gen interceptor and classified programs, and further boosted by favorable program lifecycle timing on Orion, protected communications, and fleet ballistic missile programs. Operating profit was up 13%, driven by the increase in volume and favorable profit adjustments, partially offset by the lower equity earnings from United Launch Alliance. Okay, now shifting to the outlook for 2023 on page 11. For the year, we are reaffirming guidance for all key metrics. We continue to expect sales to be in the range of $65 to $66 billion, with segment operating margin at 11.2% at the midpoint. We also still expect to deliver free cash flow at or above $6.2 billion, while repurchasing $4 billion of outstanding shares. We believe our first quarter results position us to achieve these expectations as we continue to add orders, reprogram execution commitments, and pursue new opportunities throughout the year. All right, so let's close on page 12 to summarize the comments. As noted, first quarter represents a solid start to 2023. We reaffirm key financial metrics as previously guided and continue to expect a return to growth in 2024 and beyond with consistent free cash flow per share growth. Looking ahead, our strategic focus on 21st century security solutions aligns with expected increases to defense and security spending. With our continued discipline and focus on execution, We are on track to meet our expectations for long-term growth and value creation for our shareholders. With that, Lois, let's open up the call for Q&A.

Thank you, and ladies and gentlemen, in the interest of time, we are limiting you to one question. Please return to the queue for any follow-up questions. At this time, we are opening our lines for questions. Please press 1, then 0 to enter the queue to ask a question, and to exit, please enter 0. one then zero. If you're on a speakerphone, please pick up your handset before pressing the number. Once again, please press one then zero at this time. Our first question will come from the line of Seth, Seth, I'm sorry, Seaman from, Seifman from JP Morgan. Please go ahead.

Hey, thanks very much. Good morning, everyone. Apologies, I'm losing my voice a little bit here. Jay, I wonder if you could talk a little bit about, you know, the GAO report would indicate that Sikorsky's bid for Flora was about 45% of that of Bell. And so it seems like investors are kind of fortunate that Sikorsky did not win that competition. And I guess what can you say to investors that You know, you talked about some of the classified missile profitability headwinds. I know there was a charge on CH-53K, some ULA development. That kind of the bid process is consistent with generating adequate returns on new work.

Great question, Seth. And let me just say on FLAR, you know, we're obviously disappointed. We believe that our offering was the best technology to support the multi-mission requirements at the best value. And while we'll acknowledge that the proposal did include aggressive pricing, a significant amount of our offering included efficiencies made possible by the benefits of 1LMX. And our adoption of 1LMX model-based and digital thread enhancements significantly improved our cost competitiveness, and we expect that to continue in the future. The business case itself was favorable, and that's what enabled the pricing that we were able to offer. As it relates to, I think generally speaking, That's how we evaluate these proposals. We look at the NPV. We look at IRR. We look at all different metrics. We look at current affordability. And as I mentioned at your conference, Seth, you know, I said that on the classified program at MFC, we have to take a little bit of short-term pain for some long-term gain. But the fact of the matter is the business case does provide that long-term gain for us. And so we go through all of that as part of the management decision-making, the technology that we can provide. As you would expect, we have the leverage, we have the capability wherewithal to provide favorable pricing and outstanding technology offerings to our customer, and we don't do it at the expense of financial returns. Let me just add, just on the CH53K, we did have something in the press release. That was a small adjustment related to a development contract, an older development contract, There was no adjustments taken on the forward production agreements that we're working on currently.

Thank you. The next question is from the line of Christine Lee Wong with Morgan Stanley. Please go ahead.

Thanks. Good morning, Jim and Jay. On the F-35, the talk of the performance-based logistics deal has been ongoing for some time, but it seems like it's possible you would reach a deal this year So could you give us an update in terms of where you stand in transitioning over to a PBL contract in the program? And then assuming that PBL meets conditions set by the 2022 NDAA, how could this impact the sustainment work and the overall program profile over the coming years?

Thanks, Christine. It's an excellent question. We did submit a proposal. We are expecting that to be decided by the end of the year. and awarded. We think this is the best solution for the customer, not only over the next five years, but frankly, this is the right program for the life of the program. And what this offers is really a win-win type of solution. It enables us to utilize our proprietary modeling for material requirements to most efficiently use inventory and and provide real-time availability of material to our customer as they need it. And so we're able to take that responsibility off their shoulders, being able to provide them the requirements when they need to maintain, obviously, the readiness levels that are necessary. And so overall, not just over the next five years, we think it's the right long-term solution for our customer. And we think, again, it's just a win-win proposal for not just the services, but also industry as a whole.

And, Christine, we think we're on a path to establish a PBL with the F-35 customer enterprise this year, and that's what we're tracking to.

Thank you. The next question is from Rob Starler from Vertical Research. Please go ahead.

Thanks so much. Good morning.

Good morning.

Jim or Jay, neither of you actually mentioned supply chain. issues or labor shortages or other things in your commentary. So I was wondering if you could give us an update on that situation and whether things have improved.

Yeah, it's a good question. You know, Rob, our visibilities were going throughout the year, and I made a few comments, public comments in the quarter that we were looking at potentially at some shortfalls. And partly that was due to the strong performance that we saw in the fourth quarter. Ultimately, the supply chain delivered, I think, for the most part. There are still some pockets that that we've seen, particularly where it was impacted the most was at MFC and RMS. Both of them had some continuing lingering issues that continue to plague us. On-time delivery performance really didn't get any better from Q4 and really what we saw in the back half of last year. So as we expected, really going back to when we reset expectations in the second quarter of 2022, we're really not expecting any type of significant recovery to the end of the year as we go into 2024. So it was essentially more of the same in the first quarter from what we saw previously.

And, Rob, it's Jim. We're on the cusp of fully implementing, you know, really best practices in supply chain across this one Lockheed Martin concept that we have now. It used to be that each business unit here, business areas we call it, did its own supply chain management, and then within programs it was even more narrowly managed. And so we're now bringing all the aggregate demand together for each supplier across all of Lockheed Martin from space to MFC and everything in between. And then we're also looking at components that programs are using in different parts of the company from mid-tier suppliers and aggregating that demand too and actually synchronizing our requirements so that we can have more bulk buys everything from raw materials up through mid-stage components, et cetera. So we're implementing those kind of best practices. That will be good for the supply base, too. They'll have more reliable demand from our company in total, and I hope we'll lead the industry into that future where we help strengthen the supply chain by our practices in addition to their improvements.

Thank you. The next question is from Kai van Roemer from TD Cowan. Please go ahead.

Yes. Thanks so much. So Jay, you had, you know, very strong profitability at MFC. 15.8% was up. And yet you talked of this classified missile program hitting, I think, 50 to 100 bits on margins. Can you update us in terms of is that still what the number is given the strength in the first quarter? And how far out into the future does that extend? And then maybe more broadly, you know, Northrop also mentioned, you know, maybe on B21 that they have some fixed price exposure looking out. Do you have any other programs where we should be aware of potential, you know, LRIP or fixed price options on programs out in the future?

Okay, thanks, Kai, for the question. Let me just... address specifically MFC, they did have a strong quarter. If you look throughout the year where we go from here, in the quarter they had essentially the highest profit adjustment quarter they're going to have. And so that's going to step down in the balance of the year. Secondly, we will see more of an impact from the dilutive margins associated with this classified program in the back half of the year as well. And so I would expect them to step down in the 13 percent range in Q2. it'll cycle down from there. We're still expecting the full year to be in this 13.5% range, really due to these two items. The step-up profit adjustments will be lower for the balance of the year, and the dilutive impact becomes more profound in the back half of the year. As far as other fixed-price production programs, that's pretty much the large one that we're tracking. We've had the the program in aeronautics that, you know, we took a charge in 2021 on. We continue to monitor that program. It's fixed price development. We still have multiple years of development on that program. And so that's one that we continue to keep an eye on. But, you know, I think Greg Ulmer and his team are really managing that and laser focused on driving to the customer's requirements and meeting their schedule and doing it within the cost objectives that we have currently laid out. Just going back to the MSC in terms of the outlook, You know, we're going to be pressured on margins probably for the next four to five years, predominantly from this program. It'll step up. It'll probably peak out in 2025 and then stabilize from there. The other question I've been asked on, you know, MFC is whether they can grow absolute profit, and the answer to that question is yes. And so, while we may see some dilutive impact to margins, we may see profit maybe be flat from one year to another. Overall, over the next four to five years, we will see profit grow at MFC. And so those are pretty much the answers to your questions. Thank you, Kai.

Thank you. And the next question is from Ron Epstein from Bank of America Securities. Please go ahead.

Hey, good morning, guys. Good morning. Question for you, maybe a bigger picture question. Secretary Kendall was out talking about NGAD and kind of restructuring that program so that more of the IP is owned by, the DOD and having this constant re-competition of contractors and so on and so forth. How does that factor into how you think about that business model? Does that really change anything? I don't know if you could kind of speak about that.

Ron, it's Jim. We're constantly and have over the years, the company's history, worked with government on intellectual property, management rights, etc., We'll continue to do that. NGAD itself is a concept in progress, I'll call it. The government services, DOD, et cetera, they are formalizing and crafting what NGAD is going to look like. And what NGAD stands for is Next Generation Air Dominance Aircraft. So think F-15, F-22, that kind of class airplane that's meant to win air combat. And so... There'll be a mix of crude and uncrued vehicles in that concept. That's still being formulated. We're working with government through our Skunk Works operation on what the options are there. We'll sort out the intellectual property rules as we go forward. But frankly, we're driving and advocating strongly for a more open architecture approach to the entire industry. and less proprietary standards and protocols and architectures. And we just demonstrated one of those with a docking mechanism for spacecraft, which can be basically implemented on a wide range of spacecraft to do future replenishment of either data fees or fuel, et cetera, to satellites in flight. So those are the kinds of things we're advocating for, and we will always guard and protect our intellectual property rights for the IP that we develop, and we'll work with customers to create the open architecture so that we can continue to compete effectively.

Thank you. The next question is from Pete Skibitsky from Allenbeck Global Advisors. Please go ahead.

Hey, good morning, everyone. Jim, I was just wondering if you could add some more color on sort of where Lockheed stands with hypersonics, just in light of the changes made to Arrow and your Hawk variant. Obviously, CPS looks good. I don't know how big that could be, but could you walk us through maybe where you're at today in hypersonics and with the program changes where things could go, how big it could get? Thanks.

Sure. I'll take the construct and then offer – Jay, the opportunity to kind of give you some scoping of where the business side of it could go and revenue growth, et cetera. But hypersonics is a complex endeavor. You can kind of build a matrix in your mind, right? There's two different kinds of propulsion technologies, right? One is air breathing. So think a cruise missile type of vehicle where there's atmospheric propulsion provision of oxygen going through an inlet duct, and it's aiding the propulsion system to continue forward. The other technology for propulsion is called boost glide. It's more like a kind of space rocket almost, and the fact that it's got, you know, either solid fuel rocket or equivalent to that, it gets a big boost off the launch vehicle or the launch pad, and then the vehicle ultimately separates the glide body, it's called, with the warhead from the rocket, and on it goes by its basically momentum. It's already been provided from the boost. So air breathing is one, boost glides another. Those are the two propulsion technologies. And then there are notions about the source of the launch, right? So You could have ship-based, which is CPS. You could have land-based off a, you know, a TEL vehicle, a transport director launcher vehicle that the Army calls a long-range hypersonic weapon. Or you could launch this off an aircraft. And that's the matrix you have to build in your head. What propulsion are we talking about and what launch platform are we speaking about? So let's just go really quickly through each of those. So ground-based, Right now, there's essentially the long-range hypersonic weapon is the game in town. It's very similar to the CPS, which is the ship-based vehicle. It's boost glide, and it's surface launch, sea or ground. That is where the government is placing its bet, is on that joint program, CPS and long-range hypersonic weapon. You pointed out that we have that contract right now. We're executing on that for both services. Then when you get to air-launched, you have the two propulsion systems. So Hawk and Halo are the air-breathing, air-launched vehicle, right? The air-launched vehicles have a size concern that you have to take into account. So what airplanes can carry such a product or such a weapon? The Boost Glide is a heavier, larger vehicle, which we have been testing through the AERO program. And it's going to be a matter of what aircraft the Air Force and ultimately the Navy want to use to bring the hypersonic weapons that they will have into the battle. And that's the debate and discussion that's going on in the services. That's the way to frame all this. Those are all government decisions. We're supporting really all the matrix, if you will, at this point with either a development program like Aero or a production program like CPS. So I'll stop there. and give Jay a chance to kind of give you some scope on what the growth for the company could mean.

Sure. You know, today it's about a $1.5 billion business for us in the aggregate, all of those programs that Jim mentioned. We expect that to continue to grow and be a contributor. It's one of our four growth pillars. It's not the largest because it's smaller than some of the other contributors, but it still provides healthy growth. And there's upside to that related to hypersonic defense. And so When I talk about 1.4 or 1.5 going to with solid growth that's embedded in our growth projection, it's really these weapon systems that Jim just mentioned.

The next question is from the line of Rich Safran from Seaport Global Securities. Please go ahead.

Thank you. Jim, Jay, Maria, good morning. Good morning. So, you know, I wanted to know if you could just expand on your opening remarks about international demand. I wanted to know if you could maybe discuss some of the timing of international award opportunities, where you're seeing the most demand for what types of equipment. And finally here, are you seeing any more interest in direct commercial versus FMS in the international orders that you're signing up now? Thanks.

Got it. Rich, a good question on international. For us, over the next five years or so, we expect international to be a significant contributor to our growth. It's embedded amongst each of our four pillars, but when you strip out international alone, you're talking high single-digit growth there. As far as contracting, most of that, particularly as you're dealing with munitions, is FMS, including as well as F-35 program. So most of that right now that we've got embedded in our forecasting, particularly on the growth side, is FMS-related. You know, we just, as Jim mentioned in his prepared remarks, we're very excited about the Australian Military Satellite Communication Program. It's a multibillion-dollar opportunity, and that really expands the international footprint of our space business, which has historically been predominantly a domestic U.S.-based business. So these opportunities continue to present themselves. There is a lot more opportunity in front of us, and that is absolutely a growth driver for us over the next five years.

Yeah, and I could add some more background to Jay's remarks there. You mentioned space. There's an incredible amount of upside. The notion of independent, sovereign satellite communication for military and national defense is catching on, if you will. The U.K. already has a system like this, but they want to replace and upgrade that. Australia is getting into that. a game as well, and I think there'll be countries in the Middle East and elsewhere that will look into these options for space. On the aero side, the F-35's been incredibly popular and I think won every competition, meaningful competition over the last few years as far as fifth-generation fighter aircraft go. In addition to that, F-16, we can't build them fast enough. We have additional orders coming in. We're going to compete in India to try to get that order as well. and it's a matter of us being able to get to the production rate that the international is demanding and requesting of us there. RMS is having a lot of success with the Seahawk helicopter, for example, and various versions of the Black Hawk, as we mentioned, Australia is part of that. Also, their radar systems are becoming more exportable as we go forward, and both in Europe and Asia there's demand for those. And then at MFC, you know, obviously PAC-3 – Javelin, Gimler's, ultimately potentially Jasmine and Lorasm for some of our closer allies are going to be in the mix. So there's a wide and broad range across all of our business areas of significant international demand that we'll be seeing over the next few years. Contracting that through the MFMS process does take some time. On the other hand, there are a few DCS programs and projects, but a lot of this is going to continue to be – you know, export control by the U.S. government, and they'll be largely FMS. But it's a broad range. It's going to last for many years, and we'll continue to be, you know, updating you on other programs that start getting more international traction.

The next question is from Miles Walton from Wolf Research. Please go ahead.

Thanks, Maureen. Maybe on RMS, could you talk about the driver to the expansion in the margin implied in the guidance? I guess a couple hundred basis points implied run rate for the rest of the year. Is that something programmatic? Was there extra R&D associated with FLARA? And also on FLARA, now that that decision is made, anything you anticipate needing to do at Skorsky to maintain competitiveness?

Thanks. Sure. So, Miles, on your first question on RMS margins, you know, again, the first quarter was 10. We've got, you know, a guide of nearly 12 percent for the year. What happens is a little bit of the opposite of MFC. This was their lowest profit adjustment quarter of the year. We expect that to grow based on the program schedules and the risk retirements that we've received for the balance of the year. And so, that'll step up. Let me just give you just a frame of reference. The first quarter, their step-ups were about 20 percent of their profit. for the full year, we're expecting that to be closer to 30 percent for profit adjustment for the full year for RMS. So, that'll be a big contributor to the increase in profitability. The second element is that we have just some sales mix. We have some passes of higher margin sales in the second half of the year, which will also give a boost to their margins. And so, that's fundamentally what's happening at RMS. As far as FLARA, You know, we had, in any impacts related to Sikorsky, you know, part of, we had announced a cost reduction program in the fourth quarter, had taken a few charges, about $100 million of charges at Ard Mess in the fourth quarter. About maybe half of that was related to Sikorsky in cost reduction and cost competitiveness. And so we have just an interesting dynamic there that while we've got production particularly the Blackhawk stepping down here in 2023. It actually steps up slightly again in 2023, I'm sorry, in 2024. And then we have significant growth on the CH-53 program in 24, where we're expecting to double our deliveries on that program. And so we're just dealing with a one-year type of trough, I would say. I think the team, Stephanie Hill and her team have done a nice job of right-sizing the cost structure for where we are today. while at the same time maintaining the capability to provide this growth in the future.

The next question is from the line of Matt Akers from Wells Fargo Securities. Please go ahead.

Hey, good morning, guys. Thanks for the question. I wanted to ask about missiles and fire control. You made some comments in the opening remarks about some of the multi-year procurement programs going on now. When should we think about sort of transitioning from kind of flattish sales this year to, I think you've talked about, mid-single-digit growth? And then also, is there any investment needed to support that in terms of capacity, you know, scaling up your business there?

Yeah, so, you know, when you look again over the next five years at MFC, they're certainly our strongest grower. We'll lay out, you know, a little bit more specifics as we go through our strategic planning process in the summer. and we give you kind of a first look on 2024 and maybe beyond when we do that in the October call. But they certainly are our strongest grower. Yes, there are capacity investments. Jim mentioned some of the funding that is being proposed in the presidential budget request for facilitation investments. We have also invested our own monies in capability. PAC-3 is a good example and a few other programs where we've gotten in front of funding to make sure that we can deliver to the requirements for capacity and delivery requirements that our customer is asking for. And so, you know, again, I think we've got a good beat there. We've talked about different capacity levels over the next few years. We reached some of these levels in 25, 26, and 27, and that investment really between now and over the next few years is going to help enable that capacity increase and growth as well.

Yeah, and Jim, I can give you some details on exactly what we're talking about here. So, For PAC-3 capacity, in 2022, it was 450. And we're planning to make the investments and working with government to coordinate with us on this to 550 by 2026. So just three years from now, you know, we'll go from 450 to 550. And then similar with the Javelin, which has been, you know, pretty widely discussed in the past, you know, our 2022 capacity was about 2,000 a year. And by 2026, we'll have it to 3,500 plus. And ultimately, we're going to get to 4,000. When it comes to Gimlers, which is the HIMARS munition, the original capacity last year was 10,000. We're taking that to 14,000 by 2026. So these are meaningful step-ups, I guess you could call them, in capacity. And we're doing those because we think we have really strong demand for for that capacity to fill it. And we're now programming, you know, which customers go where and what point in time, and working with the U.S. government to do that, along with their own priorities. So we've got a significant plan to grow the business at MFC. There's investment either through our own rates and our CapEx plan, plus funds committed by the government. Because we are making a pretty strong case, I think, with them to drive an anti-fragility program into munitions and other high-importance production facilities and production systems. We got asked to double or triple production of certain munitions, and the answer came back, as you see, it's going to take three years to do a lot of that. we want to get the fragility out of the system so if this ever happens again, you know, it's six months instead of three years to get a meaningful improvement in capacity. And that's how you see the government acting now with the long lead time parts and the facilitization and the multi-years that they're now implementing.

Thank you. Your next question is from the line of Jason Gursky with Citigroup. Please go ahead.

bookkeeping question for you and then Jim, a more strategic one. Bookkeeping question, Jay, what kind of book to build do you need to have this year to support the commentary about return to growth in 24 and is the timing of those wards important? And then for Jim, I'm gonna just have you double click a little bit on the Evolve initiative and the announcement that you made here recently with the Crescent organization and supporting lunar communications. Just kind of curious from a big picture perspective, what kind of capital you're anticipating putting into an organization like Crescent and the capital that you're going to be putting into this Evolve initiative over time?

So let me just start with the book-to-bill question, Jason. Essentially, it's one. Last year, we ended the backlog at $150 billion. This year, we're planning for that to be around the case maybe it's down a billion or up a billion. But effectively, a one-book-to-bill sets us up for the growth to resume in 2024. So we don't need to necessarily see the backlog. There is opportunity for it to grow from where we are and where we landed or ended in 2022. But right now, we're planning for that to be generally flattish, and that's where we need to be to drive the growth resumption in 2024.

And, Jason, let me put the whole notion of Evolve and Crescent into context. the overall strategy of the company for you and provide context that way. We've got three main strategic initiatives at the company that we're driving. One I just mentioned is to take the fragility out of the production system, not just for Lockheed Martin, but for U.S. government and our industry. And we just described some of the ways that we're endeavoring to do that with government. And so that's the first strategy. The second one is, you've heard us talk about before, 21st century security issues. and that is working beyond the five defense primes in our supply chains to bring the latest and most advanced Newtonian and digital technologies into national defense. And that means we have to work at Lockheed Martin with a wider variety of companies, from the tech sector to laser-guided weapons supply chain, companies that we may not be doing current business with, and they can be startups to companies a Microsoft-sized corporation. So we are structuring our company to be able to participate and cooperate and collaborate with that much broader range of partners to deliver this 21st century security concept. And so Evolve is meant to complement what we already had. We have a ventures group, Lockheed Martin Ventures, that deals with startups that have technology that are promising for our core business. On the other side, we have partnerships and agreements and arrangements with our big five defense primes, so to speak. So Northrop Grumman, us, and BAE, for example, work together on the F-35 aircraft. And there are many, many of those. But what we needed in the middle was something to work with mid-sized companies and companies in the technology sector to work with us in ways that really don't have a traditional history with companies like Lockheed Martin and our peer group. And so Evolve is now meant to be able to do joint ventures, co-investments, commercial arrangements with mid-sized to large companies outside of our normal sphere, so to speak, and deliver on new capabilities for space exploration and also for national defense. So Crescent is is the business that will work with others outside of Lockheed Martin to figure out how to finance and then how to implement and how to sustain lunar services, right? Everything from transportation on the surface to basically the Uber for the moon, if you will, at the end of the day, to the communications and positioning and navigation systems that you need to have on orbit around the moon to so that you can actually operate on the lunar surface with either robotics or with humans. So Crescent's designed to do that. The capital that we will deploy to build that type of business will be more creatively sourced. It will not come out of the disclosure statement that goes back to the DOD or NASA into our rates. It's going to be independently sourced. We may contribute, our partners may contribute directly, but they will be outside the rate structure and the federal acquisition regulations so that we can get the full benefit of those investments over time and also more creatively finance them and partner with others to do that. So that's the concept. That's why we're doing it, and we intend to grow it without necessarily burdening the CapEx disclosure statement and ramifications of that to the company.

And by breaking it out of the business area, business structure, it enables these ideas and these pursuits to really operate at a speed and agility level that probably wouldn't otherwise be available to them working within the bureaucratic structure that we have in our business areas with all the policies and procedures that we have. And so we give them a little bit more flexibility to operate with some speed, and as Jim mentioned, the ability to pursue co-investment by others as well.

The next question is, From the line of Scott Duscho from Credit Suisse, please go ahead.

Hey, good morning. Jay, if I were to model Q2 through Q4 space system sales based off of Q1 and just adjust for an increased number of weeks in those future reporting periods, I think I would get to around $12.8 billion in space segment sales for the year versus the guidance midpoint of $11.6. So basically 10% higher than what you've guided. So curious if you could comment on what prevents that type of upside case from happening or to ask another way what the volume headwinds are in the remainder of the year relative to the first quarter. Thank you.

You know, it's a good question, Scott. And, you know, as I mentioned in my remarks, they had excellent growth from next-gen interceptors, classified programs, and national security space areas that you would expect. But they also had some growth, and I mentioned that there was boosted, you know, some protected comms programs, Orion, fleet ballistic missiles, those are programs we're expecting to be a little bit more steady state. And so they just benefited from some program timing here in the quarter. And just to give you an example, you know, protected comms was up 50% in the quarter. We're expecting that to generally be flat for the year. Orion was up 20% in the quarter. We're expecting that to generally be flat for the year. FBM was up about 20% in the quarter. And that was pretty much the full year's worth of growth all in the first quarter. And so it's just, you know, these things all came together here in the first quarter. that really caused this growth of 16%. We expect these programs I just mentioned to really normalize in the balance of the year. We will continue to see some growth on some of these other programs. I will acknowledge there probably is some upside to their sales, but it's not a billion dollars. You're talking anywhere between $100 to $200 million of probably upside to where we are today.

The next question is from the line of George Shapiro with Shapiro Research. Please go ahead.

Yes. Jay, I wanted to pursue some of these other income numbers because they were actually a big part of the large beat this quarter relative to my expectation anyway. So if you look at the other net that's in operating income, it was $2 million. You kept the guide at minus $3.25 for the for the year. So what happens in the subsequent quarters? It's all negative 100 plus, or is there some quarter that's abnormally high? And then somewhat less, but other non-operating income was 49 million. You disclosed 29 of that was the venture stuff. What was the other $20 million? And I left out the 29 million in the other net number, which was for deferred compensation adjustment.

Okay, let me, so George, you know, fair question. Just to tackle a big question, the big picture question in terms of what happens for the balance of the year, just on the investment gains, you know, obviously we saw that in the quarter. We talked about that being 18 cents. Implied because we're not changing, it implies that we're reversing the balance of the year. So we'll see. We'll give that an update in the second quarter, update when we're halfway through the year and make a call on that. The other element we just were speaking about a little bit in terms of our investment in LM Evolve, we have some of those investments increasing in the balance of the year as well. And then there's just residual corporate costs that we have flowing through. And so all those things are allocated. We'll monitor those throughout the rest of the year and see whether or not, again, I think we'll just make an assessment halfway through the year on where we are in those things. To the extent there's upside, we'll make an update at that point in time.

The next question is from Ken Herbert from RBC Capital Markets. Please go ahead.

Hi, good morning. Jay or Jim, I wanted to see if you can provide a little more granularity on the TR3 and the F35 program. Specifically, it seems like that program's faced ongoing delays and other headwinds in terms of adoption and implementation, but How is that impacting deliveries this year, and how do you see that timing of that getting back on track?

Yeah, Kenneth, Jim, in the round, we're in the very late innings of it fully implementing this Tech Refresh 3. The point of it is really critical, and that is it gives us much, much greater capability to really make the F-35 a true edge compute node in an open architecture Internet of Things situation. construct a system. And so the three elements of an edge compute node in a 5G system are data storage on board the vehicle, data processing on board the vehicle, multi-path ability to get back to the cloud, right? Defining the cloud as to whatever your enterprise is. And the TR3 upgrade provides all that. It's a coming together of a number of components, I'll call them, and and subcomponents, which is pretty intricate, fairly leading edge for the aerospace industry to accomplish, and it's being done. So there have been some delays in some of the hardware and software, but we're really in the very late innings of getting this all together. We're literally in flight test right now. And will we, you know, wrap all that up by October or December, et cetera? We've got to see what the test results are. and work with the government to define exactly when everybody's ready to go and implement in our production system, in the factory, those software loads. And that's where we're at now. So I would consider this extremely high degree of difficulty dive, and we're going to make sure that it's done right, and we can produce at rate, you know, in our Block 15. So That's what we're up to, and we're working closely with the Joint Program Office to define that and make that successful. And we are seeing the demand for the aircraft, both from the U.S. and international customers, really kind of blossom here lately. So I think we're in good shape on the program.

All right. Lois, this is Maria. I think we've come to the top of the hour, so I'm just going to quickly turn it back to Jim for any final thoughts.

Thanks, Maria. As we conclude, I'd like to say thank you to our 116,000 employees here at Lockheed Martin for their commitment to providing our customers the 21st century digital and physical technologies that will help them deter conflict and win if they have to. So thank you all again for joining us today. We look forward to speaking with you on our next earnings call in July. And Lois, that concludes our call today.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. And for use in AT&T teleconference service, you may now disconnect.