Jim Taiclet
Chairman, President and Chief Executive Officer at Lockheed Martin
Thanks, Maria. Good morning, everyone, and thank you for joining us on our second quarter 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-3's critical role in air defense, to the Aegis Combat System with AI augmentation, to the F-35 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. Consequently, demand for our defense technology solutions remains robust with a backlog of nearly $160 billion, greater than two times our annual revenue.
Our strong performance so far in 2024 extends beyond that backlog as well, giving us confidence to raise our 2024 full year outlook for sales, segment operating profit, and EPS. In the second quarter, sales increased 9% year over year and 5% sequentially and reflected growth in all four 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% of 20 basis points compared to last year's second quarter and free cash flow of more than $1.5 billion, an increase both year-over-year and sequentially. 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-35 program. As announced last week, we began deliveries of the first Technology Refresh 3, or TR-3, configured F-35 aircraft to the U.S. Government. The TR-3 upgrade and further Block 4 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 the F-35 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 2024. Over 95% of TR-3 capabilities are currently being flight tested, and we look forward to delivering full TR-3 combat capability to the customer. In addition, we expect deliveries of F-35 aircraft to exceed production for the next few years. 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 our industry partners has been and will be essential to meet and exceed expectations of this critical national defense program in a timely and cost-effective manner. I met with my F-35 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 TR-3 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. On the international front, Israel announced a third 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-35, and we continue to see interest from Romania as well as a potential new customer.
Beyond the F-35 as the quarterback of joint all-domain operations, our ongoing collaboration with the U.S. military during major exercises with deployed operational units exemplified our commitment and ability to enhance readiness and integrate capabilities across all of our customers, missions, and priorities. 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.
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. Army tested our Precision Strike Missile, or PrSM, against a 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 PrSM program's progress.
We've also moved toward realizing the 21st Century Security joint all-domain vision with the signing of a landmark agreement with Australia's Department of Defense to build their future Joint Air Battle Management System. They call it Project AIR6500 Phase 1. As we've discussed before, this system will provide the Australian Defense Force with leading-edge integrated 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. Our AI flew an L-29 jet aircraft by means of heading, speed, and altitude commands 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.
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. 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 Rheinmetall to work together on land, air, and naval opportunities. One of our first initiatives is the new Global Mobile Artillery Rocket System, or GMARS. This is a highly interoperable two-pod launcher system intended to fire the MLRS-based munitions. Combining these combat-proven systems will help address the growing demand for long-range rocket capabilities in Europe and elsewhere.
On our PAC-3 program, international collaboration remains strong as well, including development of indigenous capabilities with the opening of a PAC-3 MSE launch tube production line in Poland, as well as a memorandum of understanding with Grupo Oesia in Spain to provide an opportunity to manufacture PAC-3 MSE parts for worldwide customers. Spain and the United States also formalized an agreement for Spain to purchase PAC-3 MSE missiles and related support, making Spain PAC-3's 16th partner nation.
I'd also like to briefly discuss the latest status of the U.S. defense budget. The House approved their version of the FY '25 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-35, the CH-53K and Black Hawk, or UH-60M, our integrated air and missile defense with PAC-3 and NGI, hypersonics with CPS and the LRHW I just mentioned a minute ago, and tactical strike weapons and munitions with JASSM, LRASM, PrSM, Javelin, and GMLRS.
Ultimately, we look forward to the 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. 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.
