Lockheed Martin Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2024

There are 15 speakers on the call.

Operator

Good day, and welcome everyone to the Lockheed Martin Second Quarter 20 21 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Maria Richard Owen, Vice President, Treasurer and Investor Relations. Please go ahead.

Speaker 1

Thank you, Lois, and good morning. I'd like to welcome everyone to our Q2 2024 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer and Jay Malave, our Chief Financial Officer. Statements made in today's call that are not historical facts 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.

Speaker 1

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 www.lockheedmartin.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.

Speaker 2

Thanks, Maria. Good morning, everyone, and thank you for joining us on our Q2 2024 earnings call. Over the past few months, Lockheed Martin's people, systems and platforms have again demonstrated their ability to enhance security in Eastern Europe, the Red Sea and the Middle East. From the PAC-three's critical role in air defense to the Aegis Combat System with AI augmentation to the F-thirty 5 with its advanced sensor and data management capabilities, our company has made major contributions to Allied and Partner Defense. We continue to demonstrate the impact of our 21st century security strategy by harnessing the latest digital technologies to continuously improve mission effectiveness, strengthening and scaling the defense production system and expanding industrial cooperation among our allies and partners.

Speaker 2

Consequently, demand for our defense technology solutions remains robust with a backlog of nearly $160,000,000,000 greater than 2 times our annual revenue. Our strong performance so far in 2024 extends beyond backlog as well, giving us confidence to raise our 2024 full year outlook for sales, segment operating profit and EPS. In the Q2, sales increased 9% year over year and 5% sequentially and reflected growth in all 4 of our business segments. The supply chain continues to improve and defense outlays also continue to increase. Our focus on operational execution helped us achieve segment operating margins of 11.3 percent, up 20 basis points compared to last year's Q2 and free cash flow of more than $1,500,000,000 an increase both year over year and sequentially.

Speaker 2

Jay and Maria will talk more about the specifics of the quarterly results in a moment, but suffice it to say, we are pleased with our financial performance and momentum so far in 2024. I'm especially happy to report the progress we have made on the F-thirty five program. As announced last week, we began deliveries of the 1st Technology Refresh 3 or TR-three configured F-thirty 5 aircraft to the U. S. Government.

Speaker 2

The TR-three upgrade and further Block IV enhancements represent a critical evolution in capability and their full development remains a top priority for us. These and further software updates over the life of the program will ensure that F-thirty five remains an effective deterrent to aggression and the cornerstone of joint all domain operations now and decades into the future. We continue to produce at a rate of 156 aircraft per year and expect to deliver 75 to 100 aircraft in the second half of twenty twenty four. Over 95% of TR-three capabilities are currently being flight tested and we look forward to delivering full TR-three combat capability to the customer. In addition, we expect deliveries of F-thirty five aircraft to exceed production for the next few years.

Speaker 2

Jay will talk about the financial aspects of our current status in a moment. Continued close collaboration with the Joint Program Office or the JPO as it's known and across partners has been and will be essential to meet and exceed expectations of this critical national defense program at a timely and cost effective manner. I met with my F-thirty five industry CEO colleagues in Fort Worth recently to set plans for enhancing the cooperation on our software and hardware and test integration processes among other initiatives to increase speed and efficiency in the program. The TR3 hardware and software provide a significant upgrade in computing power that enables major improvements in capability to our airmen, sailors and Marines, as well as to our partner and allied nations. International customers continue to recognize the superior capabilities of this, the most advanced fighter aircraft in the world and key aircraft node in the DoD's joint all domain architecture.

Speaker 2

On the international front, Israel announced a 3rd squadron of F-35As increasing their fleet by 50%. Greece is in the final stages of discussion with the U. S. Government to procure the F-thirty 5 and we continue to see interest from Romania as well as a potential new customer. Beyond the F-thirty five is the quarterback of joint all domain operations, our ongoing collaboration with the U.

Speaker 2

S. Military during major exercises with deployed operational units exemplified In June In June, new advanced capabilities from across Lockheed Martin contributed to the 10th iteration of U. S. Indo Pacific Command's Valiant Shield exercise. During this exercise, there were several significant milestones demonstrating how we are continually improving our forces capabilities and enhancing our deterrence posture.

Speaker 2

One example is that we successfully integrated digital command and control capabilities with the Indo Pacific Command's Joint Fires Network, enhancing real time decision making for commanders and operational agility for the force. Our operational planning data fusion engine was employed to coordinate joint operations using live real time data producing actual tasking orders at combat relevant speed. In another example from the same exercise, Lockheed Martin Space and Lockheed Martin Aeronautics jointly demonstrated the ability to autonomously optimize intelligence, surveillance and reconnaissance or ISR collection and enhance their imagery for quick automated target detection and classification, facilitating data delivery across a wide range of space based and airborne platforms like never before. In addition, the U. S.

Speaker 2

Army tested our precision strike missile or PRISM against the moving maritime target in the Pacific Ocean. This next generation missile enables further improved range and precision to deter potential adversaries from even greater distances. According to the Army, this test is a significant step in the PRISM program's progress. We've also moved toward realizing the 21st Century Security Joint All Domain Vision with the signing of the landmark agreement with Australia's Department of Defense to build their future joint air battle management system. They call it Project Air 6,500 Phase 1.

Speaker 2

As we've discussed before, this system will provide the Australian Defence Force with leading edge integrated air and missile defense air and missile defense capability using next generation technologies to combat high speed threats and establish Australia's integrated air and missile defense as one of the most highly advanced in the world. We also continue to demonstrate 21st Century Security in other innovative ways. In May, our Skunk Works tactical artificial intelligence team successfully executed their second set of flight tests with the University of Iowa Operator Performance Laboratory. RAI flew an L-twenty 9 jet aircraft by means of heading, speed and altitude command sent directly to the onboard autopilot then to the plane's flight controls. This test has shown our AI team can rapidly develop, iterate and integrate artificial intelligence technology for autonomous flight operations.

Speaker 2

We're also making great progress in another leading edge defense tech initiative, hypersonic strike, which is a critical element of deterrence in today's world. As announced by the Department of Defense in June, the U. S. Navy and U. S.

Speaker 2

Army completed an end to end all up round flight test of the common hypersonic missile, core to the Navy's conventional prompt strike or CPS and the Army's long range hypersonic weapons programs. The test marked a major step forward for the nation's development of hypersonic systems by Lockheed Martin. Pivoting to the supply chain, we continue to explore opportunities to drive our concept of anti fragility across the global defense industrial base. For example, we recently signed a collaborative memorandum of understanding with Ryan Mittal to work together on land, air and naval opportunities. 1 of our first initiatives is the new Global Mobile Artillery Rocket System or GMARS.

Speaker 2

This is a highly interoperable 2 pod launcher system intended to fire On our PAC-three program, international collaboration remains strong as well, including development of indigenous capabilities with the opening of a PAC-three MSC Launch 2 production line in Poland, as well as a memorandum of understanding with Grupo Esha in Spain to provide an opportunity to manufacture PAC-three MSC parts for worldwide customers. Spain and the United States also formalized an agreement for Spain to purchase PAC-three MSC missiles and related support making Spain PAC-three's 16th partner nation. I'd also like to briefly discuss the latest status of the U. S. Defense budget.

Speaker 2

The House approved their version of the FY 'twenty five Defense Appropriations. So the focus now shifts to the Senate where the process continues before the reconciliation phase later this year. We believe our portfolio is well aligned to current and future customer mission priorities, including air superiority with the F-thirty 5, the CHP-fifty 3 ks and Black Hawk or UH-sixty ms, our integrated air and missile defense with PAC-three and NGI, hypersonics with CPS and the LRHW I just mentioned a minute ago, and tactical strike weapons and munitions with JASM, LRASM, PRISM, Javelin and Gimglers. Ultimately, we will look forward to conclusion of the USG appropriations process and the continued utilization of the existing supplemental funding. On the international front, I was encouraged by conversations I had at the recent NATO Summit a few weeks ago in Washington.

Speaker 2

International partners and allies remain steadfast in their pursuit of elevated defense spending to strengthen the overall integrated deterrence posture of the alliance given the tragic and ongoing conflict in Ukraine. I'll now turn it over to Jay for award highlights and additional commentary on our financial results.

Speaker 3

Thanks, Jim. Similar to last quarter, I'll provide an overview of our consolidated financials and touch on a handful of operational items before handing off to Maria, who will cover business area financials. And then I'll come back to discuss the updated outlook. Starting on Chart 4, the positive momentum we had to begin the year continued into the 2nd quarter with sales up 9% to over $18,000,000,000 led by RMS and MFC. As Jim mentioned, throughput remains strong, reflecting an improving supply chain and internal operating cadence.

Speaker 3

Segment operating profit of $2,000,000,000 was up 10% year over year and consolidated margins were 11.3% with all four business areas achieving double digit return on sales, the first time since Q3 of 2022. Net favorable profit adjustments in the quarter were higher than prior year and were 21% of segment operating profit, driving the stronger margins. GAAP earnings per share of $6.85 increased 3% year over year, driven by higher profit and lower share count, partially offset by severance and impairment charges at RMS and Sikorsky, higher interest expense and lower pension income. On a new business front, we recorded over $17,000,000,000 of orders in the 2nd quarter for a book to bill ratio just below 1. We generated $1,500,000,000 of free cash flow in the quarter, bringing our year to date total to just under $2,800,000,000 And we continue to make the necessary investments in innovation and infrastructure to position the company and our customers for future success.

Speaker 3

With $405,000,000 in research and development and $370,000,000 in capital expenditures in the 2nd quarter. Finally, we returned over 100% of our free cash flow to shareholders via share repurchases and dividends. Now I'll touch on a few business activities in more detail. The order strength continued at MFC with a book to bill over 2 in the quarter led by the $4,000,000,000 plus army award spanning multiyear PAC-three delivery requirements and supporting our production ramp projections. And Poland officials signed a letter of acceptance to purchase 400 JASM ERs, the largest international order in program history, providing another ally with the latest generation JASM variant.

Speaker 3

At Sikorsky, its platforms remain in high demand as the U. S. State Department announced approval for foreign military sales of BlackHawks to Austria, Brazil and Sweden. This opens the door to the potential sale of 36 BlackHawks adding 12 helicopters each to each country's existing Black Hawk fleet. In addition, the government of Greece signed a letter of offer and acceptance for 35 UH-sixty ms Black Hawk helicopters.

Speaker 3

These upgraded aircraft will support the Hellenic Ministry of Defense's ongoing modernization and will serve as a dependable multirole helicopter the space domain, late last month, NASA selected Lockheed Martin to develop and build the nation's next generation weather satellite constellation for NOAA, known as Geostationary Extended Observations or GEOXO. This award builds on our prior work with environmental sensing technologies, which recently culminated with the launch of GOES U, which will leverage advanced instruments and rapid updates to provide crucial data for weather forecasting, severe storm tracking and climate monitoring. All right, let me stop here and hand it over to Maria to get into the business area financial detail.

Speaker 1

Thanks, Jay. Today, I'll discuss Q2 year over year results for the business areas, starting with Aeronautics on Chart 5. 2nd quarter sales at Aero were up 6% year over year. The increase was primarily due to higher volumes across F-thirty 5 and the continued production ramp on the F-sixteen program. Segment operating profit increased 5% with higher volume and favorable mix being offset by lower profit booking rate adjustments.

Speaker 1

Regarding aircraft deliveries, we resumed F-thirty five deliveries in Q3, as Jim shared, and we've delivered our 1,000th F-thirty 5. On F-sixteen, we delivered 4 in the second quarter and are targeting around 20 for the year. For 130J, we delivered 5 in the quarter reaching a milestone of 2,700 deliveries of this critical tactical airlifter and expect around 20 deliveries for the year. Turning to missiles and fire control on Chart 6. MFC had another strong quarter with sales up 13% from the prior year, driven by production ramps on a handful of our precision fires programs within the tactical and strike missile segment, primarily guided multiple launch rocket system, Gimglers and long range anti ship missile, LARASM.

Speaker 1

Segment operating profit increased 21% year over year due to higher profit booking rate adjustments, led by the PAC-three and Apache programs and margins returned to 14.5%, is more in line with historical rates. MFC backlog reached a record level of almost $35,000,000,000 in Q2, supported by continued global demand for several of our missile and munition programs. Key awards included the PAC-three award that Jay mentioned, as well as $1,300,000,000 in combined awards for launchers including HIMARS and M270 upgrades and a $500,000,000 follow on production contract for JAGM and Hellfire to support U. S. And international customers.

Speaker 1

On the delivery front, I'll highlight a few of the key program quantities in the quarter. We delivered 100 PAC-three interceptors, more than 2,000 Gimler's rockets, over 2,700 and 11 HIMARS systems. Shifting to rotary and mission systems on chart 7. Sales increased 17% in the quarter to over $4,500,000,000 primarily driven by higher volume at Integrated Warfare Systems and Sensors on radar and laser programs as well as the Canadian Surface Combatants Program. Sikorsky programs also saw higher volume led by Blackhawk and CH-fifty 3 ks.

Speaker 1

Also of note in the quarter, we delivered 5 S-seventy helicopters to international customers, which resulted in about $115,000,000 of revenue on a passage of title POT basis. Operating profit increased 9% year over year due to higher volume, partially offset by lower profit booking rate adjustments. Now for a brief summary of helicopter deliveries. In addition to the 5 F-seventy helicopters I mentioned, Sikorsky delivered 5 Black Hawks, 4 combat rescue helicopters and 1 VH-ninety two presidential helicopter in the quarter. On the delivery front, a few of the key program quantities in the second quarter.

Speaker 1

We yes, sorry about that. Let's go to Space. Finally, with Space on Chart 8, sales increased 1% year over year. The growth was driven by higher volume on strategic and missile defense programs, primarily hypersonics and fleet ballistic missile, FBM. Partially offsetting this growth was lower volume on classified programs and Orion.

Speaker 1

Operating profit increased 11% compared to Q2 2023, driven by favorable mix and higher profit booking rate adjustments. Now I'll turn it back over to Jay to wrap up prepared remarks.

Speaker 3

All right. Thanks, Maria. And let's shift over to the outlook on Chart 9. Given our strong year to date performance, sustained backlog position and improving visibility into key programs, we're raising our expectations for Lockheed Martin's 2024 financial outlook for sales, segment operating profit and earnings per share. We're increasing sales by $1,750,000,000 at the midpoint and tightening the range to $70,500,000,000 to $71,500,000,000 The new midpoint reflects a solid 5% growth from 2023 with increases across all four business areas.

Speaker 3

We're also increasing segment operating profit expectation based on the higher sales with a new range of $7,350,000,000 to $7,500,000,000 and anticipate consolidated segment operating profit margins to remain at 10.5%. Business area margins remain consistent with our prior guidance at Aero and MFC, while RMS is down about 50 basis points at the midpoint and space is up 40 basis points at the midpoint. The RMS reduction is driven by Sikorsky as the business faces continued cost pressure and absorption headwinds, the impact of which have exceeded benefits from its cost reduction programs. Conversely, space is benefiting from solid performance and proactive cost reduction efforts. Moving to earnings per share on chart 11, we're increasing the midpoint by $0.35 to $26.35 with a range of 26.10 to $26.60 for the full year.

Speaker 3

Primary drivers of the change are shown on this chart with coming from incremental profit of $0.49 and other below the line items of $0.13 Partially offsetting those items are the RMS charges totaling $0.29 from the severance actions and the asset write downs taken in the 2nd quarter. As Jim mentioned, we're encouraged by the F-thirty five delivery restart and continuous progress being made towards delivering full combat capability. We're holding our free cash flow expectation in the range of $6,000,000,000 to $6,300,000,000 which absorbs a potential unfavorable impact from longer deferrals of final F-thirty five delivery payments. This is made possible by proactive actions taken across the company to offset these potential headwinds. On the cash deployment side, we still expect over $3,000,000,000 of IR and D and capital investments.

Speaker 3

While the dividend along with the expected $4,000,000,000 of share repurchases maintain attractive shareholder returns. Lastly, on backlog, we continue to expect backlog to grow in 2024 even with the higher sales outlook, which provides a line of sight to future growth. Before I wrap, I'd like to highlight a few other key assumptions regarding the updated outlook. First, we expect F-thirty five Lot 18, 2019 to be awarded this year, maintaining program funding and continuity. 2nd, we continue to expect $325,000,000 of losses on the MFC Classified program, of which $100,000,000 has been recognized year to date.

Speaker 3

And 3rd, this outlook does not assume any pension contributions in 2024. So in summary, on Chart 12, our solid first half results give us confidence in raising the full year outlook for sales profit and EPS, while holding the cash flow outlook, reflecting our ongoing efforts to deliver predictable and improving operating and financial performance as is expected of us. It all starts with relentless focus on executing to our programmatic commitments and delivering critical 21st century security mission capabilities where we strive to continuously improve. To that end, we are investing in our people, processes and systems through the 1 LMX transformation with the goal of unlocking step changes in efficiency, velocity and program execution that deliver security capabilities in ahead of ready speed to our customers. And we're confident that these management priorities and actions convert to a compelling long term value proposition for customers and shareholders alike.

Speaker 3

With that, Lois, let's open up the call for Q and A.

Speaker 4

Thank

Operator

The first question comes from the line of Christine Leewang from Morgan Stanley. Please go ahead.

Speaker 5

Hi, Jim, J. Maria. Gritti from Farm Bureau. The F-sixteen is flying in the background now. So apologies for the roar in the background.

Speaker 5

So the delivery guidance

Speaker 2

That's called the sound of freedom, Christine. Good.

Speaker 5

I mean, it's a crazy roar, beautiful aircraft here. So the delivery guidance for the F-thirty 5 in the second half of year is still fairly wide. Can you talk about the scenarios where there are lower and upper? What would have to happen for you to hit the lower or upper end of the range? And also with production at 156 per year, when should delivery and production catch up for the program?

Speaker 2

So Christine, I'll start and emphasize that we're going to do this unwind and conduct the deliveries with safety and quality is our number one priority. So just starting with that foundation, we actually have the ability to add resources which have already been identified and designated and that's test pilots, maintenance team, software and hardware engineers to get the flight test done that we need to, to be at the higher end of that range. But we want to make sure that if it's weather, if it's pilot crew rest issues anything like that we will accommodate for those. But we should we have the resources in place, I'll say, that should enable us to get to the higher end of that range, if you will.

Speaker 3

Yes. Let me just add, just to reiterate, Christine, we expect anywhere between 75 to 110. Yes, with less than 6 months left, it is a wide range. I would say over the next few months, we'll get much better insights into the induction in flow of aircraft going into the test and production cycle, really bringing aircraft that are parked as well as aircraft that are coming outside of the and from the production flow. And as we get those learnings, we'll be able to get a better assessment of what the delivery requirements will be and what we expect for the year.

Speaker 3

And so it'll take us a couple of months just make sure we get that process learned out. It's well planned, but we actually have to demonstrate it in actual practice. As far as the future in terms of reducing on the backlog of aircraft, our target is anywhere between 12 to 18 aircraft deliveries per month and really to burn down the aircraft backlog. And so that'll take us a number of years here to get through that. We've already made progress so far.

Speaker 3

Since the announcement of the restart, we've delivered 10 aircraft as of Monday yesterday, 6 with the TR3 configuration and 4 with the TR2 configuration. So we think we're off to a very good start. But again, we really need to have a just monitor the operating cadence of being able to bring aircraft from 2 different flows into one test flight test flow. And again, we'll tighten that up later on in the year.

Operator

Thank you. The next question is from Cai von Rumohr from TD Cowen. Please go ahead.

Speaker 6

Yes. Thanks so much. So I think you did say that next year you're going to deliver more F-thirty five than you will produce. And I think at one point you've mentioned that you get paid $7,000,000 upon each delivery. Walk us through, you mentioned also the deferral of some payments.

Speaker 6

So next year, what happens to accrued revenues? Because I think with higher deliveries, I assume the final delivery payment basically is incremental even though under POC, the work itself should be relatively level. And then secondly, the cash flow impact. I know that there's a deferral on the payments, but if it was really 7,000,000 dollars that's potentially a substantial cash flow plus. Thanks so much.

Speaker 3

Okay. Cai, let me just say, first of all, as Jim mentioned, restarting delivery was an important first step really towards delivering the fully combat capable aircraft. Aircraft the aircraft withhold, this final delivery payment is a timing item as you mentioned. And we're working with the customer to finalize the terms of those final delivery payments. We're making excellent progress, but it would be immature or premature to give the details of that because it remains subject to negotiation.

Speaker 3

Suffice it to say that you will see a timing benefit over the next few years as we deliver. But I think we still need to work through and finalize this agreement with the customer. As far as the revenue, I really wouldn't see expect much of an incremental benefit in terms of revenue. We continue to build at a 156 rate. We are seeing production, a little bit higher this year.

Speaker 3

But for the most part, we should expect that to be, I think, fairly stable. And yes, we'll see incremental activity in terms of test activity, which does increase penetration in a percent complete basis. But I don't really view that being all that material. And so I would just hold the production. We'll expect F-thirty 5 to grow mostly from sustainment next year and in the years to come.

Speaker 3

I think it's important to mention as well that we are the headwind on these funnel delivery payments are here in 2024. We're holding our outlook, so we're absorbing that with better performance in the rest of the portfolio. Yes, we will see the timing benefits downstream. As I mentioned before, we have to get just the whole delivery cadence straight. And I just want to make sure I had it straight in terms of the last question.

Speaker 3

We're targeting anywhere between 12 to 18 months to fully deliver, on these parked aircraft. And as I mentioned, we just need to learn out the process over the next few months here and to be able to give better guidance on

Speaker 6

that. Thanks so much.

Operator

Thank you. Our next question is from the line of Scott Ducho from Deutsche Bank. Please go ahead.

Speaker 3

Hey, good morning. Good morning.

Speaker 7

Jay, you've been seeing some nice momentum on revenue and now you're seeing some of it on margins as well. I guess at what point do you think you'll be ready to start talking about maybe a better medium term free cash flow per share growth outlook this mid single digit rate you've been talking about for

Speaker 2

a while. Do you just

Speaker 7

need to lap these pension headwinds next year and see a bit more growth acceleration and then you're there? Just curious

Speaker 8

for how

Speaker 7

you're thinking about that. Thanks.

Speaker 3

Yes. No, I appreciate the question. We've said over the last few months, really the last year or so that our goal has been to increase absolute free cash flow in the low single digit clip and then that augmented with share repurchase would get us to a mid single digit free cash flow per share expectation. That remains of the outlook. We'll go through our multi year forecast over the next few months here.

Speaker 3

We'll be able to give you a better update in the October timeframe. I think given the fact that we're at a higher level in 2024 is a positive and we continue to expect to grow in 2025 off this higher baseline. So that in and of itself should result in a higher cash flow baseline as well. But a lot of work to be done between now and then. And so I would like to have the benefit of going through that in more detail and we'll update that to you at least in preliminarily in October.

Speaker 7

That's great. Thank you. Yes.

Operator

Thank you. The next question is from Gavin Parsons from UBS. Please go ahead.

Speaker 3

Thanks. Good morning. Good morning.

Speaker 8

Maybe sticking on revenue, just you guys have talked about supply chain kind of being a bottleneck. Is the upside more on the demand front or on the unlocking of the supply chain side? And if the latter, can you just talk a little bit more about supply chain and what you expect going forward in the second half? Because I think the second half implies a lot less growth.

Speaker 3

Well, I'd say it's a combination of both. We ended the year in 2023 with $160,000,000,000 backlog, which was a record. We ended here the Q2 at $158,000,000 was slightly below where it ended at a record with significantly higher sales than we thought through the first half of the year. We expect our continue as I mentioned in my prepared remarks that we continue to expect the backlog to increase at the end of this year, which gives us more visibility into further growth in 2025 and beyond. So we're very bullish on where that stands from a backlog standpoint.

Speaker 3

As far as supply chain, we did see improvement. We are seeing continued improvement there in on time delivery. The part shortages continue to come down. Having said that, there are still areas where we're particularly where we're ramping up some of our major programs, where we still have some work to be done there. And we're still going through many of the initiatives and actions that proactive actions that we've talked about in the past, which is it's some in sourcing on some capabilities, dual sourcing where it makes sense.

Speaker 3

Also we have deployed and we continue to deploy personnel to provide on-site assistance to our suppliers. And of course, we also will continue to look at product redesign. But I'd say by and large, we are seeing an improvement in the supply chain, which also gives us confidence for that continued growth in the future.

Speaker 9

And Gavin, I'd just give you

Speaker 2

some qualitative background on demand side. Our strategy includes driving the latest digital technologies kind of through an open architecture standard based system to the DoD. And by doing that and making our product services platforms compliant or in line with those future concepts of open architecture and standards to pull through those products, services and platforms. So we're starting to see that already, and we're demonstrating whether it's exercises or in real conflict like in the Red Sea, doing things like over the air updates to the Aegis system, which is decades old. But it can be improved very quickly now, just like when you get a download overnight on your Tesla, we can do a download overnight over the air on the Aegis radar and combat control system and double, triple the effectiveness against things like low flying drones and cruise missiles.

Speaker 2

So we're actually implementing those kinds of things on a standards based architecture into our products and services today, which I expect will continue to pull them through.

Speaker 8

Great. Appreciate the detail.

Operator

Thank you. Our next question is from Pete Skibitski from Alembic Global. Please go ahead.

Speaker 10

Hey, good morning guys. Guys, on Missiles and Fire Control, if you think about what was appropriate in the 2024 baseline budget and the Ukraine supplemental, How much order flow is still to come there for you guys at M and FC? And also just if we think about the growth cadence there, you talked about $750,000,000 a year in the past, you're going to be well above that this year. So I'm just wondering if that cadence is going to come back into play in 25 on the higher baseline? Thanks.

Speaker 3

Sure. I mean, there's still plenty of runway in orders at MFC. As I mentioned, the book to bill in the quarter was above 2 and we're still expecting additional orders at the end of the year, particularly in JASM, LIRASM in the second half here. There's still even on the supplementals, there's some opportunity there to continue to build their year and they're going to be again the highest grower within Lockheed Martin for the next 3 to 5 years. So we're pretty bullish on that.

Speaker 3

Much of that is already in the backlog, but there's still plenty more to come in terms of continuing to build that backlog. The key for us is to make sure that we can meet the demand and ramp up all these programs to our customers' requirements. And the team has been laser focused on making sure they can do that. And you're seeing the benefits of that this year with their sales coming in higher. So again, we keep our head down, continue to deliver.

Speaker 3

The demand is both domestic and international at MFC. And again, they're going to be a significant source of growth for Lockheed Martin for the next 3 to 5 years.

Speaker 2

Pete, it's Jim. Again on a qualitative perspective, I tell our teams and our executives internally, we're in the aerospace and defense industry, but we're in the deterrence business, right? So if you step back and say what contributes to deterrence from an MFC, for example, And I think anybody that's ever watched Clint Eastwood movie will know that if we run out of ammunition, you're in a lot of trouble, right? So part of deterrence is showing that A, you have enough ammunition stocks to prevail and sustain your operations from an aggressor. That's the first thing.

Speaker 2

Second thing is, you also it's helpful to demonstrate that you can produce that rate and ramp that rate quickly. That's our anti fragility program. And the 3rd piece of it is you can produce and repair MSC and other products in the local theater and not have to bring them all the way back to the U. S. To fix them or to drive that production up.

Speaker 2

That's the third part of our strategy. So everything we do is based on deterrence and strengthening that. MFC has a huge role in making sure that adversaries know that we've got enough stocks in MFC type products and we can ramp that rate and we can produce in different places and repair in different places should they act. And that's really kind of a qualitative underpinning of what Jay was talking about.

Speaker 10

Appreciate it guys.

Speaker 3

Thank you.

Operator

The next question is from Seth Seifman from JPMorgan. Please go ahead.

Speaker 11

Hey, thanks very much and good morning. Probably just a quick one. Sorry about the background noise here. Just a quick one and kind of big picture. I think, Jay, I think you've said in the past that there was good potential for growth to be at least as strong as 2024 2025 and good potential for that growth rate to accelerate.

Speaker 11

Is that still the case off of the higher revenue base and higher growth rate here in 2025?

Speaker 3

It's a good question, Seth. And as I mentioned before, we're going just going through our process to lay out our multiyear outlook, including 2025 here over the next few months.

Speaker 2

What I would tell you is that

Speaker 3

the backlog visibility that we have would support another year similar to 2024. We have to go through though and the operational the practical operational capability to deliver that is something we have to go through. And so demand is there. We have to make sure the supply can meet that as well. That's a pretty significant step change, over really a 2 year span on some of these ramp programs that we're dealing with.

Speaker 3

And as I mentioned before, we're still dealing with some programs that are still working through trying to get up to those to the ramp

Operator

rates. And our next question is from Sheila Kahyaoglu from Jefferies. Please go ahead.

Speaker 4

Good morning, guys. Thank you.

Operator

Maybe if we

Speaker 4

could talk about profitability. If we look at first half profitability of 10.7%, second half implied in the low 10s. Can you walk through some of the moving pieces, maybe in terms of supply chain productivity? I know volumes are lower and how we think about the exit rate for the year? Thank you.

Speaker 3

Yes. The second half of the year, Sheila, is I mean, the most significant would be the program loss at MFC that we have to record in the second half. So as I mentioned in my prepared remarks, we have recorded about $100,000,000 here year to date. In the second half, we expect about another $225,000,000 So that'll put pressure on margins in the back half. The second piece I'd say is that we wouldn't even though we had a very strong and solid profit adjustment first half, that slows down a little bit in the back half of the year just based on program timing, the timing of risk retirements.

Speaker 3

And so, just the risk retirements and profit adjustments are not all linear. They occur at different aspects of a program life cycle. But what I would say is, we feel comfortable with where we're headed. We've talked about 2024 being a low watermark for all net net margins and we expect it to improve gradually over the next few years and we still feel confident that can take place.

Operator

Thank you.

Speaker 2

All right.

Operator

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

Speaker 12

Yes. Hi, good morning. I just wanted

Speaker 8

to see and apologies if I

Speaker 12

missed this, but can you comment on your view of NGAD and how you're thinking about that now moving forward and what we might be thinking about in terms

Speaker 3

of the next catalyst for you on this particular program?

Speaker 2

Sure, Ken. It's Jim here. So when it comes to NGAD as a program, we're not authorized in industry to speak to the details of that. So you'd have to go to the U. S.

Speaker 2

Government to get insight into that particular program. But I can tell you what we're doing to prepare for the next generation combat aircraft. So some of those are on the investment front. Since in 2021, 2021 rather, we opened the gates on 4 high-tech facilities that have the clearance the security clearance capability to produce, n gad type components, let's call them, all right? One of them is in Florida, Skunk Works in California, opened a new major factory that I was there to see.

Speaker 2

We have it in Alabama too and Georgia. So we have these accredited facilities up and running ahead of the demand and we're working on programs and products in that classified capability space. So we've already got these facilities up and running. The other resource we have is human in Skunk Works, Marietta and in Fort Worth and other places that can design, test and build using our digital transformation engineering technologies and the digital twin, these kind of components, aircraft and others that might go into an NGAD concept. So I can just tell you that Lockheed Martin is ready to produce, we're ready to design, we're ready to build.

Speaker 2

We are in the process of making sure we're capable in the arenas that the Air Force and the Navy are going to need us to be. So that's really all we can say about that, but I can assure you that we are competitive and ready to go in this space, if and when the government pulls a trigger on a real competition and once somebody be able to produce we can do it.

Operator

Thank you. And the next question comes from the line of Rob Spingarn from Melius Research. Please go ahead.

Speaker 9

Hey, good afternoon or I guess it's still morning. But I wanted to ask you about on F-thirty five and congrats on the resumption of deliveries, but when we think about TR-three and on the production side of the equation, how is the supply chain in terms of being able to supply enough material and integrated core processors on time for you to maintain the 156 per year. So as the mix goes more toward all TR-three, how well prepared is the supply chain for that?

Speaker 2

So we got together, Rob, as I mentioned, a few minutes ago in the prepared remarks in Fort Worth about a month ago with the CEOs of half of those companies that contribute to this in a significant way. We communicated the importance of exactly what you're speaking to, which is not just a core processor, but there's a range and number of other components across all of these companies that need to maintain or increase their production rates and modernize their equipment along the way. And so that communication of those suppliers has been made. They know our plans. We're well integrated more integrated than we ever have I think when it comes to test and planning and design, iterative software across multiple companies etcetera.

Speaker 2

So we're in a position and our suppliers are telling us they will meet the demand. We will monitor them and continue to even put people in their sites when we need to, to make sure that happens. But we've got the major suppliers together and they understand the demand rate, quality level we need and a better integration plan for test and development that we have built going forward.

Speaker 9

And Jim, just following on to that, how do we think about the cadence for retrofit from TR2 to 3?

Speaker 2

So you're right, Rob, that this is designed for backward integration, if you will. There'll be a schedule that the U. S. Government comes up with for TR3. There may be it will be up to them as to the cadence, the investment rate, etcetera.

Speaker 2

But over a period of time, there will be a great number of originally built TR-two aircraft that will get converted. There's some hardware and software upgrades to that.

Speaker 9

Is this the kind of thing you expect to be talking about soon or this is a few years out we should be focusing on new production aircraft for now, TR-three?

Speaker 2

Yes. So again, this is a U. S. Government policy decision, so it's better to request that kind of commentary from them, Rob. But we're again ready to do it at the rate that we expect to that they come at us with.

Speaker 9

Great. Thanks so much.

Speaker 3

Thank you.

Operator

The next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Speaker 12

Hey, good morning everyone.

Speaker 3

Good morning.

Speaker 12

Jay, could you give us the updated, I guess if you snap the line today or just ballpark as you see it, cash flow pension contribution and CAS recovery for at least $25,000,000 And I guess if you had it and we're willing to get it beyond that would be helpful. And then I guess, can you talk through the pieces of how you grow absolute dollar free cash flow in 2025 given the pension headwind you have and how it compares to how quickly you can grow the segment EBIT?

Speaker 3

Yes. So on CAS recovery, this year we're a little bit under say $1,700,000,000 We expect that to step down by in the range of about $100,000,000 and probably stay at that level for the next few years after that. As far as absolute the buildup of the components to being able to continue to grow, yes, we've talked about our pension being a headwind. We talked about being in the range of $1,000,000,000 The areas that we expect to drive cash flow growth would be continued earnings growth as you discussed there, net income growth. In addition to some of these benefits and the timing on the F-thirty five, we've talked also about just working capital in general.

Speaker 3

And even when you put F-thirty 5 aside, what we're looking at and going after is our contract asset. If you look here in the Q2, that was a nearly $14,000,000,000 balance that we had and that's represented in a range and I'll put that in terms of efficiency around 70 days, 72 days of sales running through the balance at the moment. Since 2020 or so, that's grown from about 55 days. So there's an element of there and kind of the F-thirty 5 and what we've gone through over the past couple of years here, but there's also been growth outside of the F-thirty five that represents a lot of opportunity for us to convert into faster billings at a level that we've been able to demonstrate in the past. And that's we've been focused with on all of the business areas in terms of driving that on a multiyear basis back down to what we've been able to demonstrate.

Speaker 3

The next thing I'll say besides working capital and contract assets are being up biggest opportunity is the reduction of payments related to the tax R and D capitalization. So we'll get in the range, I'd say about $150,000,000 of benefit just through lower payments there. So when you bring all these things together, we think that they generate a path to overcome, what we're seeing in the pension and drive us to this target of low single digits. It's not easy. It's not a slam dunk, but we've got a path to be able to do that.

Speaker 3

And that's what we're driving today to be able to deliver next year and beyond.

Operator

Thank you. The next question is from the line of Peter Arment from Baird. Please go ahead.

Speaker 13

Yes, thanks. Good morning, everyone. Jim, Jay. And Jay, maybe this is just for you on the just talking about you've talked a lot about MSC's production ramp that you're going to have over the next couple of years. Just how does this all tie in with the collaborative agreements you got with Ryan Mattel now at PAC-three production opening up in Poland and I think Jim also mentioned Spain, an agreement there.

Speaker 13

Can you give us an update on PAC-three, what the growth kind of expansion looks like now? And same, I guess, on some HIMARS and JASM what some of those growth rates look like? Thanks.

Speaker 3

Sure. A lot of these agreements enable they're part of in country requirements for industrial cooperation. You mentioned Poland, Jim mentioned Germany, also Australia. And those are enablers for us to build up this backlog and drive this demand. On the PAC-three specifically, we expect to get to 550, in 2025 and then, to 650 by 2027.

Speaker 3

And so all of these orders and these partnerships that we're signing up were all enablers us to be able to produce and deliver at those rates. And it's not just PAC-three, we've talked about GMLRS going from 10,000 to 14,000. We've talked about JAVELIN going from 2,000 to about 4,000. We've talked about JASM and LORASM going from about 700 a year to 1100 a year. So all of these orders that we're seeing, all of these customer engagements that we have both domestic and international are all enablers to drive to these rates that we're building to.

Speaker 3

And so what they do is fill in the bucket to bring us that to that backlog that's necessary for us to generate those sales. And we're on track to that.

Operator

The next question comes from the line of Jason Gerske from Citi Research. Please go ahead.

Speaker 14

Yes. Good morning, everybody. Jim, I wanted to just throw a big picture one at you and maybe have you kind of wrap all of this together and kind of what you're seeing both in the near and in the long term. And maybe just get your sense of maybe with a few more quarters here of hindsight, some of the lessons learned from the conflict in Ukraine, what you at Lockheed have learned from that, whether you're kind of investing in any new areas as a result of that And kind of the feedback loop that you're getting from your customer both here in the United States as well as some of our allied nations as well. Are we seeing a development of a new set of requirements in investment areas and kind of where are you spending and how are you going about doing it?

Speaker 14

Just a big picture, what do here we are middle of 2024, what have we learned from Ukraine and what are we doing?

Speaker 2

Jason, I would say that there's a wide range of lessons from the Ukraine conflict, unfortunately, as it is, but there's learning from it. One is that traditional systems, if you will, like Javelin at the initial invasion, made a significant contribution to the initial defense of Ukraine because of the classic armor attack and armor supported infantry attack. I mean, there were armored vehicles that were spearheading the drive to Kyiv. And when those vehicles got out front of their support system that the Javelin, for example, made a tremendous difference in stopping that attack short, right? So you have a traditional system that was designed for ground land warfare, traditional land warfare if you will that was highly effective.

Speaker 2

So we did learn from that. Now there's jamming both ways. There's electronic warfare, there's cyber and it's like I tell my teams how like your high school wrestling coach said for every move there's a counter move. So if you jam GPS we tweak the system either the satellite or the receiver or have an alternative form of navigation or targeting and we react to that. So on one hand, traditional systems are still effective.

Speaker 2

On the other hand, you have to be able to adapt quickly. I'd say that was the main lesson there. Another one similar situation, PAC-three again decades in service and now there's a hypersonic missile threat from Russia, which was launched on a number of occasions. I think all of those occasions, none of those missiles were successfully reaching their target because the PAC-three was modified to be able to address the hypersonic missile threat. And then we'll go to the kind of the other side of the issue, which is drones became a more important element of land warfare than it had been before and in sea warfare actually.

Speaker 2

Ukrainians use autonomous sea vehicles to significant extent and success and also drones and unmanned aerial vehicles too. So this is not the first time. Those kinds of systems have been used in prior conflicts including in the Middle East in the counterterrorism wars if you will. But the Ukrainians took it to a new level literally sinking capital ships with unmanned aerial systems. So there were lessons there too.

Speaker 2

That's something our company is quite involved with a lot of its classified whether it's kinetic or surveillance unmanned aerial systems, but we're learning from those too. So we work with drones as small as ones that a marine can unpack from a backpack and launch by hand to aircraft sized drones if you will. So we're involved in that game and we did take the lessons from the Ukraine war. And that's traditional systems are still essential at bulk and scale. And secondly, they have to be much more adaptable than they ever had to be before.

Speaker 2

And that kind of supports our digital technology effort and campaign to say let's use those best digital technologies to make those legacy systems better and better all the time and not wait for a conflict to force us to do

Speaker 1

that. Great. Hey, Lois, I think we've come to the top of the hour. So, I'll turn it back over to Jim for some final thoughts.

Speaker 2

Thanks, Maria. So before we close, I'd like to thank our Lockheed Martin team whose dedicated efforts advanced our customers' missions and propelled our solid results this quarter as you heard from Jay. Our capabilities are recognized around the world as the best in defense tech and that is thanks to our employees' hard work, dedication and commitment to continued innovation. With 21st century security technologies I just described, our robust backlog and focus on transforming our operations to our internal digital transformation program, our company has a strong foundation for growth for years to come. So I look forward to speaking with you again on our next call in October.

Speaker 2

And Lois, that concludes our call for today.

Operator

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

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Earnings Conference Call
Lockheed Martin Q2 2024
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