James D. 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 2023 earnings call. I'll begin today with a few key strategic and operational highlights, and then Jay will discuss our quarterly financial results and full year 2023 outlook.
Starting on Page 3 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 book-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 $0.35 to a revised expectation of between $27 to $27.20 per share. We are confident in our ability to achieve these higher expectations and returned to growth sooner than previously anticipated.
Turning to the state of the defense budget, the outcome of the debt ceiling negotiations preserved topline defense spending at the President's budget request for FY '24. It also stipulated defense budget growth in FY '25, while allowing for additional support through supplemental funding. The embedded 3% growth and the proposed FY '24 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 FY 2024 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 is 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 and the Technology Refresh 2 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 3 or TR-3 configuration and hardware delivery timing. Our current view is we expect to deliver a 100 to a 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 air 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 predominant fighter for many decades into the future. Meanwhile, we are continuing a 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 80th year 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+ SR-71 to pioneering stealth aircraft and beyond by advancing hypersonic, artificial intelligence and other revolutionary technologies.
Skunk Works continues to create exciting piece 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 play at the supersonic boom, and lead someday perhaps to supersonic commercial flights overland. This elegant and amazing airplane is advancing a pace towards its first test fly. And our company's pioneering spirit is looked 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 were evergreens 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 this Sikorsky culture today and throughout Lockheed Martin. Sikorsky signature product line the UH-60 Black Hawk family of military helicopters also perseverance around the world. The US State Department is approved of 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 the PAC-3 missile segment enhancement or MSC interceptor from a German-modified launcher. This flight test was the last step before delivering PAC-3 MSE to Germany later this year. We also entered into an agreement with Rheinmetall Defence 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 expand 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 HIMARS 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 the preferred bidder for Project 9102, as 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 Cislunar 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-35. 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 joint all domain command and control interoperability and our company's vision for 21st Century Security. The result of this demonstration will help shape future JADC2 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 showcase 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 GlobalFoundries CEO, Tom Caulfield and Senate Majority Leader, Schumer to announce a collaboration that will advance US semiconductor manufacturing and strength and resiliency within America's supply chain. This partnership enables us to more quickly and affordably produced 21st Century Security Technologies that increased deterrence for the United States and its allies.
Alongside Senate, 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 GlobalFoundries, as we expand our critical manufacturing line in New York and with our semiconductor -- 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.
