Lockheed Martin Corporation

Good morning, everyone, and welcome to the Lockheed Martin Second Quarter 2023 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would now like to turn the call over to Maria Richard-Ong Lee, Vice President of Investor Relations. Please go ahead.

Thank you, Lois, and good morning. I'd like to welcome everyone to our Second Quarter 2023 earnings conference call. Joining me today on the call are Jim Taglett, 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've 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 .lakeedmartin.com and click on the Investor Relations link to view and follow the charts. 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 second quarter of 2023 earnings call. I'll begin today with a few key strategic and operational highlights, and then Jay will discuss our quarterly financial results in full year 2023 outlook. Starting on page three of the slides, our Q2 financial results were strong, with sales of $16.7 billion, up 8% year over year, and double-digit growth at both aeronautics and space. Backlog reached a record level of $158 billion, up $8 billion from year end, resulting from a -to-bill of 1.7 in the quarter. Orders included an approximately $8 billion option, award for the 126 F-35s for production lot 17, as well as significant awards to ramp up munitions at MFC. This highest ever backlog gives us visibility into multi-year sales of our key programs, and enables our suppliers to be better positioned to meet growing demand. Segment operating profit of $1.9 billion in the quarter reflected an operating margin of 11.1%. Free cash flow was $771 million, and we remain committed to advancing technology and expanding production capacity. So in Q2, we invested $356 million of company-funded R&D and $329 million of capital expenditures to address our customers' needs and requirements. Meanwhile, we returned almost two times free cash flow to you, the shareholders. Given the strong results in the first half of this year, we are raising and narrowing our full-year 2023 financial outlook. For sales, we are raising the midpoint of our range by $1 billion, to a revised expectation of between $66.25 billion to $66.75 billion. And for EPS, we are raising the midpoint of our range by 35 cents, to a revised expectation of between $27 to $27.20 per share. We are confident in our ability to achieve these higher expectations and return to growth sooner than previously anticipated. Turning to the state of the defense budget, the outcome of the debt ceiling negotiations preserved top-line defense spending at the President's budget request for FY24. It also stipulated defense budget growth in FY25 while allowing for additional support through supplemental funding. The embedded 3% growth in the proposed FY24 defense budget included funding for 83 F-35 aircraft. With supplemental funding to support munitions investment that will enable us to ramp up production rates under new multi-year contracting authorities. While there are still numerous steps to reach final approval and funding for the FY24 budget, we're encouraged by the strong support for our program so far, and we look forward to the completion of committee reviews and the full appropriations process. On the F-35 program, we continue to see strengthening customer demand both domestically and internationally. The Czech Republic has expressed interest in the aircraft, and Israel has formally decided to add 25 more F-35s, expanding their fleet by 50%. We delivered 50 F-35s in the first half of 2023, all of which were delivered in the Technology Refresh II or TR-2 configuration. During the first quarter earnings call, we indicated that an anticipated reduction to 2023 deliveries from what we initially thought last year due to software maturation, acceptance and certification related to the Technology Refresh III or TR-3 configuration and hardware delivery timing. Our current view is we expect to deliver 100 to 120 F-35 aircraft in 2023. Importantly, there is no change to our longer term delivery outlook of 156 aircraft in 2025 in the foreseeable future. And the supply chain and production system continues to execute at a rate to support these future year delivery targets. Our team remains fully dedicated to delivering the first TR-3 aircraft in 2023. We have completed 58 flight tests on four different aircraft in the TR-3 configuration, including a successful flight test for the most recent software release that happened in May. That software update brought in the next set of critical capabilities, such as upgraded data links, the new electro-optical targeting system and radar. In the coming weeks and months, we will begin testing multi-ship missions, sensor fusion and additional weapons among other capabilities as part of the next software release. TR-3 significantly updates core processing power and memory capacity, as well as modernizes the computational core of the F-35 to enable Block IV capabilities. It is a significant hardware and software upgrade that will greatly enhance the mission capability of the aircraft, which is on track to be the free world's predominant fighter for many decades into the future. Meanwhile, we are continuing the long tradition of leading the development of the next generation of military aviation, and this time with both piloted and unpiloted aircraft at our Skunk Works operation in California's high desert. Skunk Works just celebrated its 83rd anniversary in June. That's 80 years of pushing the innovation envelope from the U-2 in the 1950s that continues to fly today to the Mach 3 Plus SR-71, to pioneering stealth aircraft and beyond by advancing hypersonic, artificial intelligence and other revolutionary technologies. Skunk Works continues to create exciting feats of engineering and goes beyond the edge of known science for our customers. A prime example today that we can discuss is our partnership with NASA to develop and build the X-59, the prototype that will quiet the supersonic boom and lead someday perhaps to supersonic commercial flights over land. This elegant and amazing airplane is advancing apace towards its first test flight. And our company's pioneering spirit has lived even longer in the world of rotorcraft and helicopters. At the Paris Air Show, Sikorsky celebrated its 100th anniversary. Yes, 100 years ago, Igor founded Sikorsky Aero Engineering Company on a chicken farm in Long Island, New York, with a small team of engineers and craftsmen, many of whom are immigrants like himself who fled the Russian Revolution. In 1939, he brought his dream to reality when he piloted the first practical helicopter, the VS-300, as it left the ground for all of 10 seconds. His passion for innovation and perseverance to achieve his vision carry on in the Sikorsky culture today and throughout Lockheed Martin. Sikorsky's signature product line, the H-60 Blackhawk family of military helicopters, also perseveres around the world. The US State Department has approved a possible foreign military sale to Norway for six MH-60 Romeo multi-mission helicopters and related equipment. And Spain signed a letter of offer and acceptance for eight MH-60R Seahawk aircraft as well. We achieved several milestones in the quarter in support of other NATO allies as well. The German Air Force successfully launched a PAC-3 missile segment enhancement or MSC interceptor from a German modified launcher. This flight test was the last step before delivering PAC-3 MSC to Germany later this year. We also entered into an agreement with Rheinmetall Defense to collaborate on a unique rocket artillery system to be produced in Germany. And earlier in July, Rheinmetall selected a site in Germany to build a factory to manufacture F-35A center fuselages. This partnership, which was first announced in February between Lockheed Martin, Northrop Grumman and Rheinmetall, expands supply chain capacity for the F-35. Production is expected to start with our new German partner in 2025. In addition, our relationship with Poland continues to progress. With the first F-35 Lightning II for the Polish Air Force formally entering production and the initial shipment of high Mars launchers to Poland. The US State Department also approved a multi-billion dollar potential foreign military sale to Poland for PAC-3 with modernized sensors and components. On top of that, our partnership with Australia continues to advance as well. In April, as mentioned on our last earnings call, the Commonwealth of Australia selected Lockheed Martin as a preferred bidder for Project 9102, a sovereign military satellite communication system for the Australian Defense Force. We're excited at the prospect of deepening our relationship with a diverse team of Australian companies and helping establish Victoria as the engineering and technical hub for Australian defense. Also at space, Lockheed Martin will be taking on a major role in Blue Origin's national team to develop and demonstrate a human lunar landing system for the Artemis program. Our space operations will be building humanity's first CIS lunar transporter, which will enable recurring astronaut expeditions to the moon's surface and back from NASA's Gateway Space Station. Finally, we continue to advance our integrated 21st century security digital technology architecture during the quarter. In May, as part of the US Indo-Pacific Command's Joint Fires Network, we successfully demonstrated digital command and control, or C2, to synchronize joint all-domain operations during the Northern Edge exercise near Alaska. The exercise demonstrated the ability to successfully integrate with both Lockheed Martin and third-party platforms and aircraft, including F-35s. The system performs C2 functions across all the military services, all levels of operation, and across multiple domains, from space to air to surface. This is the first time joint force synchronization has been demonstrated at this scale. It was a major milestone for all-domain command and control interoperability, and our company's vision for 21st century security. The results of this demonstration will help shape future JATC-2 capabilities and continue Igor Sikorsky's and Skunk Works pioneering legacy into the digital world. Also, as part of the Northern Edge exercise, the Lockheed Martin aeronautics and RMS teams demonstrated the first use of artificial intelligence capabilities on a stalker unmanned aircraft system for recognition and tracking of ships at sea. This capability showcased the value of using relatively cheap drones to greatly enhance the capability of and improve the survivability of much more valuable manned aircraft and ships. All these types of digital technology enhancements require reliable access to advanced semiconductors. In support of this crucial priority, I recently had the opportunity to join Global Foundry CEO Tom Caulfield and Senate Majority Leader Schumer to announce a collaboration that will advance U.S. semiconductor manufacturing and strengthen resiliency within America's supply chain. This partnership enables us to more quickly and affordably produce 21st century security technologies that increase deterrence for the United States and its allies. Alongside Senator Schumer and other leaders in industry, Congress and the administration, we remain strongly supportive of the Bipartisan Chips and Science Act signed into law last year. The Lockheed Martin team will work closely with Global Foundries as we expand our critical manufacturing line in New York and with our other semiconductor and tech industry partners across the country to ensure access to made in America microelectronics for our platforms and systems. With that, I'll turn the call over to Jay and join you later for questions.

Thanks, Jim, and good morning, everyone. Today I'll walk you through our consolidated results and business area performance for the second quarter of 2023. I'll also provide an update to our full year guidance. As I describe our results, please follow along with the web charts we have posted with our earnings released today. Beginning at chart four, let's take a closer look at second quarter results with consolidated sales and segment operating profit. Second quarter sales increased 8% year over year driven by aeronautics and space, both with double digit growth in the quarter. This growth partly benefited from last year's $325 million impact from unrecognized F35 sales. Excluding that benefit, sales were up 6% year over year with Aero still up 12%. Segment operating profit was up 5% year over year driven by the sales growth, which more than offset lower net favorable profit adjustments aligned to risk retirement timing. As expected, segment margins were 11.1%. Moving to earnings per share on chart five, on an adjusted basis, EPS was up 6.5%, driven by higher profit and a lower share count partially offset by increased interest expense. Moving to cash flow on chart six, we generated $771 million of free cash flow in the quarter with nearly $330 million of capital expenditures. On a year over year basis, our free cash flow included $330 million of higher tax payments from the R&D capitalization legislation. Once again, dividends and share repurchases exceeded free cash flow in the quarter, demonstrating our commitment to shareholder returns. For the first half of 2023, we've returned almost $2.8 billion, or 137% of free cash flow through dividends and share repurchases. In the quarter, we issued $2 billion of debt across three tranches for a weighted coupon of 4.8%. We had intended to raise the debt early in 2024 to support share repurchases, but accelerated the issuance to give us flexibility and coverage going into the debt ceiling negotiations. Okay, let's turn over to moving to the segment results and starting with Aeronautics on chart seven. Second quarter sales at Aero increased $1 billion, driven by higher volume on the F35, C130, and classified programs. On F35, we saw strong year over year growth in production and sustainment, with some of the favorability due to the previously mentioned impact in the second quarter of 2022 due to the lot 15 to 17 funding timing. Excluding that benefit, Aeronautics was up 12%. Operating profit increased 17% over the prior year based on the higher sales. As Jim mentioned, we were pleased that the Joint Program Office exercised the next option, let's lot 17 on the F35 contract in the quarter. F35 backlog now stands at 421 aircraft at the end of the quarter. It offers longer term clarity for our production operations and provides stability to our supply chain partners. Looking at missiles and fire control on page eight, sales were comparable to last year. It's higher sales volume on tactical strike missile programs were offset by lower volume within integrated air and missile defense. As expected, segment operating profit and margins were down year over year, driven by lower net profit adjustments. MSC increased the backlog by $6.5 billion in the second quarter, reflecting a record $9 billion of orders in the quarter and a 3.3 book to bill ratio. The orders increases were broad based across several of our key programs, including PAC-3, GMLRS, High Mars, Jazzm and Larasm, and Javelin. At rotary and mission systems on page nine, sales declined 3% in the quarter, driven by lower volume on Block Hawk, as the program continues to transition from multi-year nine to multi-year 10. This decline was partially offset by favorable volume across several radar programs within integrated warfare systems and sensors. Operating profit decreased slightly due to lower sales volume and net profit adjustments, partially offset by higher equity earnings. There were a few significant offsetting items that drove net profit adjustments down $40 million year over year. We recorded an unfavorable adjustment of $100 million on the Canadian Maritime Helicopter Program due to updated forecasts, partially offset by a $65 million benefit on an international airborne surveillance program. Turning to chart 10, in our space business area, sales were up 12% year over year, driven by continued development activity on the NextGen Interceptor and classified programs, with additional upside coming from Orion. Operating profit increased 15% and margins were up 30 basis points, driven by the increased volume and higher equity earnings from United Launch Alliance year over year. Now shifting to the outlook for 2023 on page 11, for the full year, we've increased our sales segment operating profit and earnings per share outlook, while also tightening the ranges based on our strong -to-date performance. At a consolidated levels, sales are up a billion dollars at the midpoint to $66.5 billion, allowing us to return to growth in 2023 earlier than previously anticipated. And segment operating profit is up $45 million at the midpoint to $7.35 billion. At the business area level, we've increased Aero's outlook for sales by $250 million, with profit up $25 million, based on higher volume on F-35 sustainment and classified work at Skunk Works. As we've mentioned previously, we expect minimal impact to our cost throughput in 2023 as a result of the lower F-35 aircraft deliveries. And while we expect there to be some pressure on cash collections, we are driving offset opportunities to make up any shortfalls. At Space, we're raising the sales midpoint by $750 million on higher development volume, and the profit midpoint by $20 million as the benefit from higher sales is partially offset by a lower ULA earnings outlook. Lastly, we're maintaining our free cash flow guidance at or above $6.2 billion, and remain committed to $4 billion of share repurchases, with $2.7 billion in the back half of the year. We continue to expect that these repurchases, along with dividends, will generate a return more than 100% of our free cash flow to shareholders for the year. Looking at the 2023 earnings per share expectation changes on page 12, we've increased the EPS midpoint by 35 cents, with the largest portion, 14 cents, coming from improved business area profit. We expect 11 cents benefit from a lower share count, and we also expect a six cent benefit from a lower tax rate to 15% or about 20 basis points. The remaining four cents comes from a mix of miscellaneous offsetting items. Finally, on page 13, and to summarize and close out our comments, our first task results were strong, driving our return to growth a year earlier than anticipated, and leading to the increased outlook for sales, profit, and EPS. Our backlog gives us confidence in our expected growth acceleration in 2024 and beyond. In addition, we remain committed to reward shareholders through industry-leading dividends and robust share repurchases. And finally, we continue to focus on our strategic initiatives, 21st century security and 1LMX, in order to transform our business and extend our industry leadership while delivering consistent and reliable shareholder returns. With that, Lois, let's open up the call for Q&A.

Thank you, and ladies and gentlemen, if you wish to ask a question, please press one and zero on your touchtone phone. You will hear an acknowledgement tone that you've been placed into queue, and you may remove yourself in queue at any time by repeating the one zero command. And if you're on a speakerphone, please pick up your handset before pressing the number. At the request of the host, please limit yourself to one question and re-enter the queue for any additional questions. Once again, if you have a question, please press one then zero. And one moment for our first question. And that first question comes from Robert Spindar from Milius Research. Please go ahead.

Hi, good

morning. Good morning. So, Vim and Jay, you both talked a bit about the strong backlog expansion at MFC, and how that helps the second half of this year, perhaps a bit earlier than expected. Wanted to see if you could get into a little more color on how that drives 24 and beyond, and how sustainable this is. And then lastly, Jay, can the rising volumes on some of these legacy programs mitigate that margin pressure from the classified work at MFC?

Sure. If you look at where we are, and I'll go maybe take us back to, I think it was the fourth quarter call in January. I was asked about our outlook for 2024 growth, and at the time, what I said was to expect a low single digit growth. And I think that that's just, right now we're gonna park there, although that'll be on a higher base here in 2023, because 2023 is better. But we still need to go through and get a feel for what the supply chain performance. Clearly with the backlog, it's not a question of demand. It'll be a question of supply, and we need to go through that analysis over the next few months, and determine to what extent our growth outlook will change, if anything, from this baseline of low single digit. And so if anything, what I would say, the backlog gives us a lot of confidence that we are gonna return to growth. The demand signal itself would indicate a higher rate than low single digit, but we need to wait and watch the supply part of it to make sure that that can catch up to that demand. As far as the margin profile at MFC, we do expect there to be continued pressure over the next number of years. I would agree that some of this upside that we've seen in this incremental demand are from higher margin products and should provide some level of mitigation. But we won't really get a feel for exactly what that means until, again, as we go through this over the next few months, as we understand specifically what type, what contribution each of these different programs will have in 2024 and beyond, and what their timing will be, and what that mixed benefit may be.

And Rob, I can give you some long-term context here. So first, from a process perspective with the US government, there's multi-year procurement authority now for a whole set of Sir Blockhead Martin products, and I'll just run through them really quick. It's Joint Air Ground Missile, HiMars, ATACMS, which is a longer range Gimler's for the HiMars, PAC-3 MSE, the Gimler's itself, which is the HiMars primary munition, Javelin, and Lorazum and Jazzum. So all of those programs have multi-year procurement authorities, and so far, the Gimler's, PAC-3, Lorazum, and Jazzum are in pursuit of multi-year contracts with us currently, already. And then if you look at the corpus of the Ukraine supplementals, and what they're targeted for, the overall amount has been $62 billion in four bills to the DOD regarding Ukraine support. About two-thirds of that, or 44 billion, is for the purpose of restoring the presidential drawdown for the Ukraine Security Assistance Initiative, essentially meaning the restocking of US munitions. Now, a lot of those munitions are gonna be upgraded from what was in the stockpile to the capability that we can produce today, so that's another motivation for the US to go through with that. And we've kind of derived that about $7 billion of those funds could be allocated to some of the Lockheed Martin programs that I just talked about. So there are significant long-term upside opportunities for our MFC business, and as Jay said, they're fairly high margin, and there's increasing international demand for a lot of those products, too. So I think it's a really good long-term foundation for growth for the company.

Thanks very much.

Thank you, the next question is from Matt Ager from Fargo, please go ahead.

Yeah, hey, good morning, guys. Thanks for the question. I wanted to follow up on the commentary on TechRefresh 3. Can you just touch on the cash impact of that? How big was that? How were you able to offset that and kind of hold this year's guidance? And then I guess is it fair to assume sort of additional deliveries above the 150 level for 2024 and sort of cash benefit associated with that next year?

Yeah, Matt, so the impact on a per aircraft base is around $7 million per aircraft. So if you go to, when we came into the year we were expecting between our range of 147 to 153. So you go for the midpoint there off of 150. 30 aircraft would be a $210 million impact and all the way down to 100 would be 50, about 350. So you're talking between 200 and $350 million impact to this year. As I mentioned, we're diligently working to manage that and offset it with tailwinds elsewhere in the portfolio. And to your point, to the extent that that does slip into next year, it's really a matter of timing. So yeah, it would, as we deliver aircraft, for those that slip into next year, we'll recover those remaining payments that are upon acceptance of the aircraft in 2024.

Yeah, and just as a kind of, again, put it all in context, we could actually deliver more than 156 aircraft in 2024 because the factory is gonna be producing at the rate of 156. So if there's some carryover, we might actually deliver more in 2024 than what the ongoing run rate will be because the factory will still be performing while those aircraft are waiting to be accepted. I just wanna make sure that everybody knows what we're applying to this problem to make sure that we minimize it. And this is the same conversation that I'm having with the seniors and military and civilian roles in government. So first of all, we and our suppliers are applying all the needed resources to this. It's a top priority for our company and a few others as well. We're running extra shifts and we're deploying subject matter experts into other companies or our suppliers' operations to make sure this stays on track. Flight test programs on schedule, and we've got the sufficient pilots, both in the company and in the Department of Defense for acceptance as we move forward on all that. And then finally, the purpose of the flight test program is to continuously narrow the funnel of testing of all the aircraft functions and mission capabilities in a really methodical fashion, a sort of narrowing of funnel. And so we're just moving through that in a methodical way. Our latest estimate is that'll all be completed by the end of the fourth quarter this year. Could it move a little bit into early 2024? Yeah, it could, but we think we're on track to really get all the dimensions of resources, commitment and schedule to give that option for the December delivery everything we can. Great, thank you.

Thank you, and the next question is from Peter Arment from Bayard. Please go ahead.

Yes, good morning, Jim and Jay. Hey, Jay, thanks for all the color on the F-35. I was wondering just regarding, like, when we think about all the backlog growth that you have now, you've got a pretty big step up in CAPEX this year, mid-teens growth. How are we thinking about just kind of supporting the backlog? Are you expecting kind of the CAPEX profile to kind of level off here, or do you expect that to increase and maybe also related to how you're thinking about working capital in the same context? Thanks.

Yeah, and on the CAPEX side, we definitely expect it to increase in the back half of the year. We're still holding our forecast of 1.95 billion for the year, and that's gonna essentially stay elevated for the next few years, so a lot of that is investment in capacity and production capability, as Jim mentioned in his prepared remarks. And so we expect that to kind of remain fairly level. On the working capital side, that for us is a source of opportunity. We expect that to, really, what we're trying to do is take it back down to what we performed from a day's perspective over the past, say 2020, 2021, and some period in 2022. And so while with increasing volumes, you would expect working capital to increase as well. We believe there's efficiency opportunities to perform at levels we've been able to perform in the past and make that, at a minimum, not a use of cash, and if we're fully successful, make it a source of cash in spite of growth. So that's our view, particularly in the back half of the year, as well as over the next few years.

I appreciate that, thanks, Jay.

Thank you, and our next question is from the line of Sheila Kayalu from Jeff Rees, please go ahead.

Good morning, Jim and Jay, thank you. So maybe just on space, given it drove your guidance raise, what drove the improved outlook? You called out 700 million of higher revenues related to development in space. Can you just give us a little bit of color there? Was it competitive wins or any more detail on what was driving that?

Yeah, it's just, in many cases, Sheila, it's earlier than anticipated ramps on some of the programs. So the first half, we ran higher than we expected, and we were expecting to run at those levels in the back half of the year. This includes classified programs, also protected communications, international security space business, as well as an NGI in our strategic missile defense business within space. We've also had a little bit of growth in the NextGenGEO or the OPIR program. And so all of those together really drove the increase versus where we were coming into the year. Much of that we've really realized in the first half of the year with a little bit to come in the back half, but we had already planned ramping up those programs in the back half.

Okay, great, thank you.

You're welcome.

Thank you. The next question is from Rich Safran from Seaport Research Partners. Please go ahead.

Jami, Jai, Maria, good morning. Good morning. Good morning. So there's been a lot of press around the F-35 and the engine upgrade both during and after Paris. I just want to know if you could clarify your remarks a bit, discuss where you stand on the new engine program. But also I'd like to know what this kind of means for Lockheed and for the F-35 in general, since the engine, as I thought, was government furnished equipment.

You're absolutely right, Rich. This is Jim here. It's government furnished equipment. It's a decision of the US government as to what engine is selected for every block of aircraft and what modernization program goes along with that engine. So Lockheed Martin's role and responsibility in this is simply to receive the engine performance data from the manufacturers and their anticipated performance improvements, whether it's a modernization or a replacement option for the future. And then we translate that data to aircraft performance data and information that we then supply to our US government customers. And then we are available to answer questions for their decision-making process. We were not involved in that decision-making process and therefore Lockheed Martin does not have a formal company position on engine selection or modernization. We implement the US government decision and that's what we're doing now. So that is very clearly our role and responsibility and anything outside of that is not an official company position.

Thanks.

You got it.

Thank you. The next question is from Noah Poppenack from Goldman Sachs. Please go ahead.

Hi, good morning everyone.

Good morning.

Jay, we've talked about this dynamic where the outlays have lagged the authorization in the second quarter outlays finally grew a decent amount. Your revenue then grew at the fastest rate in a while organically year over year. I know in the back half you have tougher comps but the updated guidance and the revenue would have to be down in the back half organically. So I guess I'm curious to hear you talk about is the outlay to authorization gap going to keep closing? Is supply chain or whatever else was impacting that resolved? And are you building guidance assuming that continues to close or would that create upside if it were to play out that way?

Well, I think Noah, the outlays will continue to increase. It's just a function of us. We always have a back half is still higher than the first half and that's still the case here. When you look at our overall sales in the back half sequentially versus the first half it's about a billion dollars higher. And a lot of that is in aeronautics is gonna be driving that. And so I would expect the outlays to continue to increase on an absolute basis over that period of time. The compares, it's a function where our this year sales are more level loaded than they were last year. So yes, we will have a step up in sales but it won't be as significant as it was a year later or sorry, to last year. And part of that is if you recall last year, we had the $325 million in the second quarter that slipped into the third quarter of 22. We also had a late award on the F-35 program that we weren't anticipating in the fourth quarter. We were expecting that in the first quarter and we were able to convert pre-contract inventory to sales immediately in the quarter. And so when you combine those, that in itself last year was about $500 million. So when you normalize those for those things, much of a more of a level load year in 23 versus 2022, it drives you to this. The compare just is gonna be more difficult because on a year over year basis, last year in the fourth quarter, partly for these reasons we had 7% growth in the fourth quarter. So we won't see that. We will see the back half of the organically decline relative to from a year over year perspective. But again, still putting us in a position to deliver growth a year earlier than we expected. It's also just a function of our program timing. Yes, it's still higher, but just not at the ramp up rate that we had in 22. Got it.

And Jay, pension on the cash flow statement. I think it's been a bit since you've updated the Beyond 23 contribution and CAS recovery. Could you give us updated numbers for that?

Sure, for cash contributions, right now we're anticipating that we would have a required cash contribution in 2025, anywhere between 500 million to a billion dollars. As I noted earlier in the call, our objective is to really offset that really through three things. More net income, cash-based net income contribution. We're gonna see a tailwind in terms of dissipation of the R&D capitalization headwinds that we've seen. And it will also be driving working capital performance to a higher productivity level so that we can offset that. Our goal over this period of time is to continue to deliver a low single digit free cash flow growth on an absolute basis. And that combined with our share repurchase program should result in a mid single digit free cash flow for share growth. So that's our objective, not over the next few years, really over a longer period of time as well. But that's really where we stand right now on pension contributions and how we're planning for it.

Thank you, the next question is from Miles Walton from Wolf Research, please go ahead.

Thanks, back in April the DOD said the center fuselage production was the limiter to higher production on the F35 above 156 per year. So with Rheinmetall, now it's signed up for fuselages starting in 25. Can you talk about the upside towards the end of the decade above the 156 level as Rheinmetall steps up to maybe at 10% capacity?

Well, that's one important element Miles of Bayonet Alvo to expand past 156, but there are a lot of other elements that would have to be essentially funded between our suppliers, ourselves and the US government to build the rate in the entire supply chain above the 156 level that we've all agreed on so far with the government. So if the demand continues for the aircraft, which it seems to be bergoining continuously, and the US authorizes export of the aircraft to either more countries or in more numbers to existing countries, there might be a business case for the government and industry to go beyond the 156. The Rheinmetall center fuselage expansion will definitely be constructive to that, let's say.

And just a clarification, despite the lower deliveries, you haven't slowed the production system on the F-35 on this TR-3 issue, correct?

No, we haven't. So the whole production system, especially the long lead time parts, are tracking through the supply chain as if we're going on our ramp up between 140s and ultimately to 156. The deliveries will be, if there are delays of aircraft, will be fully completed aircraft on the ramp waiting for not even the software load, but the confirmation that the software load they have for TR-3 past all the flight test points. And that's really what they'll be quote waiting for. There won't be a production lag, there'll be just a delivery lag based on the completion of the software integration testing that has to be done in the air, not only on the aircraft, but among numerous aircraft flying together at the same time. That's what they'll be waiting for.

Thank you.

Thank you, our next question is from the line of Ken Herbert from RBC Capital Markets, please go ahead.

Yeah, hi, good morning, Jim and Jay. A two part question if I could, on the backlog, is there any, can you first help us understand how much of the backlog growth is maybe directly Ukraine related and is there any risk to this based on either sort of timing of the war or funding ultimately, going to ally partners and put in place for the, obviously for the restocking. And then as part of the long-term agreements you have in place on munitions and around a lot of this, how should we think about the potential margin, positive margin impact from these longer term agreements?

Let me, can go, I'll do it with the backlog. Much of the backlog, particularly here what we saw in the second quarter, were essentially 23 contracting requirements. There was something, there was also Gimler's, which also included some 24 requirements. But as Jim mentioned, we're working towards multi-year contracting but are not yet under any multi-year contracting agreements yet. And so what we've put into the backlog is pretty high confidence it's gonna convert to sales. And so we're continuing, as Jim mentioned, having a dialogue with the customer in terms of drawing multi-year requirements beyond that. As far as the margin in terms of long-term agreements, you know, we essentially in many cases will enter into agreements with our supply chain with over that period of time of these requirements. So we'll go back to back with our customer. So as we enter into agreements with our customer that will cover multi-years, we will also get into contracts with our suppliers for those same multi-years. So any benefits that we get from that probably is gonna drop through to our customer in favorable terms and pricing. So I wouldn't expect there to be any type of margin upside from where we are today. So I would expect consistent margins from those. But again, those are pretty solid.

Great, thanks Jay.

Thank you.

Thank you, our next question is from the line of Jason Gursky from Citigroup, please go ahead.

Hey, good morning everybody. Jay, Jim, I thought I'd give you an opportunity to maybe offer up some comments on the other segments, Jay, you talked a little bit about low single digits, expectation and MFC. You could walk through the other segments as we move out into 24 and beyond and kind of your baseline assumptions for those. At this point, and then also maybe talk a little bit about margins, you made some comments during the quarter about the 1LMX initiative that you have going on, particularly around supply chain and consolidating your purchasing and maybe getting some better purchasing power and pricing and just kind of how that's informing your outlook for margins in the future.

Okay, so just on, I'll start with the growth rates in 24 and beyond. Just to make sure I was clear, when I said low single digit, I meant for the entire company total consolidated sales. MFC should be significantly better than that and we would expect them to be our highest growth segment. And I'll go from there, the others, we'll see some growth from the remainders, but really the driver will be MFC over the next few years given this incremental demand that we've seen. On 1LMX, on the margins, we've been, this is an initiative for us which is very significant. It's more than an ERP upgrade, it's our engineering tools, product lifecycle tools, it's our manufacturing execution system tools, it's our customer relationship management tools, our HR system tools. And it's intended to make us a more competitive company. Many of those benefits that we are going to obtain, we will pass those through in pricing and our forward pricing rates to our customer. And so we won't necessarily see more our margin benefit from it, but it'll make us more competitive to capture more business and stay in front of the industry and maintain our leadership. And so that's the way we're approaching 1LMX and a really more of a financial view of it.

So fair to say then that margin outcomes will depend largely on MICS going forward between development work and fixed pricing?

Sure, yeah, I would say that's accurate. MICS will definitely be a factor in future margins. Okay, thanks. Thank you.

Thank you, our next question is from David Strauss from Barclays, please go ahead.

Thanks, good morning. Good morning, David.

Wanted to get an update on your position on section 174 see if anything's changed there based on feedback you might've gotten from any of the tax authorities. And then second one, Aerojet, L3's potential acquisition there of Aerojet. I think recently you've been out with some comments around that, just your view and whether LHX has been able to or where they are in terms of being able to satisfy your concerns around that deal, thanks.

Sure, I'll take the section 174 question. Over the past, I'd say probably six months, the IRS has acknowledged that this is an issue they need to provide guidance to. We're hopeful that we'll see some guidance by the end of the year from them related to our position. There's been no change in our position there. And so, we eagerly await any type of guidance that they may have. We still feel confident in the position that we've taken and I've laid out in the past of why we've taken our position that we have today. There has been some legislation proposed that could defer the implementation of section 174 to 2026. It would be retroactive to 2022. So, we're optimistic. Of course, we believe that it should be repealed, but at least a deferral would be a good start. And so, we'll monitor that legislation. Obviously, we're supportive of that and we'll see how it works through Congress.

And then, when it comes to Aerojet Rocketdyne, we have two interests and only two. And those are the reliable access to propulsion, especially solid rocket motors, is critical importance to the entire aerospace and defense industry. And so, the two-sided benefit that we need to preserve of Aerojet Rocketdyne's current structure is that it's a merchant supplier of propulsion to the industry. And that means it treats all of the, I'll call them prime contractors for the end products, the OEMs, equally. And that's what we feel we need to preserve, even if AJRD goes into the ownership hands of another company. Secondly, the performance of AJRD has been improving, but it needs to get significantly better nonetheless. And so, whether it's on its own or part of another company, it's really important that resources be applied to AJRD's operations so that it becomes a more capable supplier for on-time deliveries, quality, et cetera. So, those are our two interests, maintaining the merchant supplier status and also having higher performance of the operations of that company. So, we have not received any commitments from L3Harris at this time that would assure us that they are going to keep AJRD as a merchant supplier, and that's the one thing we really are looking for.

Great, thank you, it's very helpful. You're welcome.

Thank you, our next question is from Ron Epstein from Bank of America Securities, please go ahead.

Yeah, hey, good morning, guys. Morning, Ron. Maybe a broader big picture question here. As we look out to the fiscal 24 budget and what was in fiscal 23 and the trajectory, maybe even to fiscal 25, and 24, it looks like there's gonna be maybe six billion or so of spending on classified aircraft programs, everything from NGAD, FAXX, there's been chatter about replacing U2 with a hypersonic platform. I know you're limited in what you can say, but can you just give us a feel for what that means for Lockheed Martin, how you think about it, and as outsiders trying to model this and think about it, how would you guide us to think about it?

What I'd start with there, Ron, is that we've got, and are experiencing significant growth in our classified portfolio already. It's a bright spot for the company. I think recently we've been, when we aggregate all of our classified programs together, it's sort of a 7% growth rate. So it is a place where, because of Skunk Works, our space operations, some segments of RMS and MFC even, where we have significant talent and capability to work in those kind of really advanced spaces. I basically said in the prepared reports, there are areas of this company where we are endeavoring to move into areas beyond known science to address what our customers' kind of challenges are that they are facing. And so we have the capability to take advantage of a larger classified program growth rate on the part of government spending, if that's what happens. So we're in good shape to do that. There are missions that you need to differentiate, though, when it comes to aircraft, right? There's the reconnaissance and surveillance mission, right? Which a lot of it can be done with unmanned systems, and that's one of the strengths of Skunk Works, for example. So that mission, we have a real strength in unmanned surveillance, ISR systems are called. Then you've got the air superiority type of aircraft, right? So you can think about F-15, for example, F-22. And GAD is the next generation air dominance aircraft. That is classified. The Air Force recently said that there is competition now beginning for that or in train for that air dominance aircraft, that air superiority aircraft. And then there's the kind of all-purpose strike aircraft, right, so that's F-16, F-35, those kind of airplanes. Again, where we have the advantage in F-35 is volume, right? We've got the committed volume for the strike mission, and basically all three variants, right? So it's Air Force, which is a land-based, long runway solution. It's for the Marines, which is the B model, which is a land-based short runway solution, or amphibious takeoff and landing, or carrier takeoff and landing solution. And then you've got the C model, which is the pure Navy, big carrier, tailhook type of landing aircraft. So the capacity for the strike mission can and will be pursued through the F-35 in large part for the near future. So those are the ways to think about aircraft. So the classified programs are gonna be largely in air superiority and ISR for the most part. And then there is the bomber mission, which is largely gonna be carried out by the B-21 going forward. So hopefully that's a bit helpful to your question there.

And just running overall over the entire portfolio, the classified business for us is around $8 billion. And if you recall, we talked about it being one of the four pillars of our growth projection all the way through 2027. And our highest probably will be our programs of record, given what we've seen particularly with MFC. But that'll be our second highest grower anywhere between mid to high single digit growth through 2027.

Got it, all right, thank you. You're

welcome.

And the next question comes from the line of Pete Skibitsky from Olympic Global Advisors, please go ahead.

Yes, good morning. Can you guys talk about labor availability and costs, just incrementally from last quarter, has hiring become easier just in terms of hiring people, and then also wage rates, have you seen improvement there? Thanks.

Yeah, so Pete, we've actually over the past six months, our labor availability has improved significantly. We have closed a lot of our key critical skill gaps over this period of time. And that partly has enabled the sales growth, the incremental sales growth that we've seen here in our change outlook, because part of that is just our own internal labor. And so we're in a much better position than we were even six months ago. We've seen some lower attrition rates as well as better hiring rates as well. And so we're fairly confident that that will stick, and that also bodes well for the rest of the industry, particularly our supply chain. So we're encouraged by that.

Okay, that's great, appreciate the call.

Thank you. Our next question is from Doug Harned from Bernstein. Please go ahead.

Good morning, thank you. I wanna go back to missiles and fire control in Ukraine for a minute, because if we think back to the early days of the Russia-Ukraine conflict, there were things like Javelin for you, there was of course Stingers. Everything looked like it would be kind of a short term need, potentially building out some capacity for replenishment of weapons. And so now we are more than a year later into this, and you've gotten some very big awards in this last quarter that appear to be related to Ukraine, either directly or other European needs. We're seeing NATO spending go up. Can you talk about how you view the opportunity in missiles and fire control for revenue and backlog ahead, depending on how things may play out in Ukraine? From if we saw the conflict come to a resolution, or if we had increasing NATO involvement, how do you think about that in your planning?

So I would say qualitatively, and maybe turn it over to Jay for some quantification around it, is that the tragedy of Ukraine has unveiled some issues and weaknesses for our national defense enterprise more broadly, right? And so I'm not convinced, Doug, that the duration of the Ukraine war, which we hope is very short, will affect our long-term prospects for MFC. But the lessons from this conflict will remain for many years, and that's what I think is most important. And the lessons are that great power conflict, first and foremost, unfortunately, is not gone from the world at this point in history. Russia's decision to invoke a major power land war on the European continent was pretty risky, and demonstrates that they may take other risks in the future to sustain its regime, or to expand its power, or whatever the case and the motivation may be. So NATO then, and when you talk to the defense ministers of countries like Poland and Lithuania, they are taking this extremely seriously, not for the short term, but for the long term. And so they are expanding their defense budgets, not because of what's going on necessarily on the ground in Ukraine right now, it's for the elevated risk that they perceive to their own countries for some foreseeable future, sadly. When it comes to the United States, the lesson, among others, of this situation in the Ukraine, unfortunately, is that the expenditure rates of munitions is much higher than most of our existing war-gaming models would imply. And therefore, there's a replenishment need for what's been used and what's been shipped to Ukraine, but beyond that is the planning, and hopefully the deterrence of future conflicts, where the US and its allies are gonna need to, first of all, demonstrate to a potential adversary that they have the stockpiles to defend themselves for a long period of time, if need be. And that the rates of munitions usage will be supportable from their stockpiles and from their industry. So we think this is a longer-term, essentially sea change in national defense strategy for the US and for our Western allies, including Japan and the Philippines and others. So we hope the conflict in Ukraine ends quickly, but the lessons and the future demand for these kind of products is gonna stay elevated for a very long time, we think.

And that appears consistent with the nature of these recent orders you've gotten that are large quantities extend over a longer period of time than one might have thought.

Great, this is Maria. I think we've come to the top of the hour here, so I'll turn it back to Jim for some final thoughts. Just

a couple things. I wanted to make sure everybody understands that we're off to what I now think is a great start after three years of launching our 21st century security concept and strategy. You know, it was really originally around proving and increasing deterrence to conflict by accelerating the adoption of digital technologies like 5G, distributed cloud, AI, international defense. And I think we're making huge progress on that. We've got a great set of partnerships with tech companies, large and small, to help us do that. And the customer's starting to adopt it. And as I talked about in the prepared remarks, we're showing it in major exercises and we're getting some actual revenue and program awards around that. But we're gonna expand that concept into two arenas based on this experience as we've had in the last three years. The first one is to build and strengthen the defense production supply chain based on some of the things Del, you just talked about. We're gonna have to have a more resilient defense production system and one that can scale quickly if we have to. And then the other dimension is to make international production and sustainment operations a part of at least Lockheed Martin's future. And you see, you hear us talk about investments in Australia, the UK, potentially Poland, Germany is new in this for us. So we're gonna continue to expand internationally to make sure we have resilient supply chain and we have sustainment operations where our customers can use them to deter future conflict around the world. So those are some of the things I think is really important for y'all to understand where we're headed. But before concluding the call, I really would like to thank all my Lockheed Martin teammates for their many important contributions to strengthening our national security and increasing deterrence. And the strong financial and operational performance that we've been experiencing in this quarter was a result of their dedication and hard work. And look, whether it's on the factory floor, classified engineering facility or customer flight line, our people showed up every day during the pandemic to do the job and they continue to show up every day to do the job to provide for national security. So I wanna thank them and also thank you all for joining us on our call today. We look forward to speaking with you on our next call in October. Lois, that concludes the call.

Thank you and ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.