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LMT $428.62  One Year Performance +19.14%
Sector Industrials Beta 0.67 ETF No EPS 17.3
Industry Aerospace & Defense Last Div 11 52W Range 324.23-479.99 Mkt Cap 113,649,451,008
IPO Since 1961-10-11 Exchange NYSE PE 24.78 Shares 265,152,002
LMT Q2 Earning Call Transcript

Date: 2022-07-19 12:25:05
Operator: And good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2022 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir. Greg Gardner: Thank you, Brad. Good morning. I'd like to welcome everyone to our second quarter 2022 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. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at 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. Jim Taiclet: Thanks Greg. Good morning, everybody, and thank you for joining us on our second quarter 2022 earnings call. I will begin today with an update on our F-35 program. Yesterday, we signed a bilateral record of negotiation with the US government, reaching agreement on the Lots 15 through 17 production contract. Through a collaborative effort with the F-35 enterprise, including the Joint Program Office, suppliers, and teammates, we have concurred on the major parameters of the program, addressing inflationary and pandemic-related issues unanticipated at the start of the negotiation process. The agreement supports our long-term objective to produce 156 aircraft a year. However, COVID impacts experienced by the F-35 enterprise have required us to modify our near-term production plan. Deliveries over the next two years are expected to remain in the 147 to 153 range of aircraft, similar to our 2022 plan, before we then achieve our 156 aircraft delivery target in 2025. We continue to anticipate annual deliveries of 156 jets beyond 2025 for the foreseeable future. I'd like to thank the entire team for the dedication and professionalism shown throughout this process and we look forward to delivering these unmatched fifth generation aircrafts for our US Air Force, Navy, and Marines, our partner countries, and our international customers. Moving to our quarterly results. Our business area operational performance was solid, delivering increased profit margins from last year's second quarter. Our new business activity and order flow were also favorable, and we continue to anticipate our backlog ending the year significantly above our 2021 levels, positioning us for longer term growth. Our sales in the quarter were $15.4 billion, lower than we expected due to the delay in contract agreement on the F-35 and supply chain impacts. We anticipate the supply chain challenges to continue for the remainder of the year and we've reduced our 2022 outlook to reflect that as well as some other items, and Jay will cover this in more detail in a few minutes. We also progressed well on our cash deployment plan, delivering over $1.1 billion to stockholders in dividends and repurchases, exceeding 100% of our free cash flow. We will continue to execute on our strategy of driving cash generation, disciplined and dynamic capital deployment, growing free cash flow per share and delivering attractive long-term total returns to you, shareholders. Turning briefly to budgets. Both the House and Senate Armed Services Committees approved their versions of the FY 2023 National Defense Authorization Act. The SASC recommended approximately a $45 billion increase to the President's request and the full House chamber passed the completed authorization bill with a $37 billion increase. While the budget process remains in its early stages, we are encouraged by the support our programs have seen with the Senate recommending additional F-35 and Black Hawk helicopters, increases over the lower-than-expected volumes that were in the initial presence request. Both the Senate markup and the House bill received strong bipartisan supporting committee with recognition of the need for greater investment to respond to increasing global security threats and the imperative of improving the readiness of our armed forces. Congress will continue the next phase of the authorization and appropriations process over the coming weeks and months. And we look forward to its timely finalization. Turning to our 21st Century Security strategy, I'd like to highlight an important example of how our signature platforms can be integrated into effective joint all-domain operations. These efforts are designed to benefit our soldiers, sailors, marines, airmen and guardians by continually upgrading their mission capabilities with the latest physical and digital world technologies. This quarter, our Rotary and Mission Systems and Missiles and Fire Control business areas partnered with the US Indo-Pacific Command in Valiant Shield 2022. This is a biannual training activity focused on integrating forces in multiple domains. Valiant Shield 2022 is a cornerstone of INDOPACOM's integrated deterrent strategy to prevent conflict in the region, and it's the largest US joint force exercise in the Western Pacific. We linked our DIAMONDShield battle management system, AEGIS Weapon System, High Mobility Artillery Rocket System or HMARS and PAC-3 missiles to successfully demonstrate integrated multi-domain operations of strategic and tactical mission levels across air, land, sea and space. During this 12-day event, our Lockheed Martin team demonstrated all domain capabilities and collaboratively engaged in experiments with INDOPACOM using artificial intelligence to enable rapid decision making in seconds or minutes compared to ours. Technical demonstrations like these are key enablers to our four-pillar growth strategy. And we will continue to demonstrate to our frontline commanders and servicemen and women in many additional exercise and real-world demonstrations to come. Moving to our four-pillar growth areas and staying with the Pacific region, RMS' Aegis Weapon System was selected to be the backbone system for the Missile Defense Agency's Defense of Guam architecture. This is a pathfinder for joint all-domain operations for the DoD and for regional integrated air and missile defense with an expected program value itself of over $1 billion. This architecture will defend against ballistic, cruise and hypersonic missile threats through the integration of capabilities across multiple industry products and not just Lockheed Martin. Aegis and our TPY-X radar, a derivative of our long-range discrimination radar product, will be the core systems to outpace the potential threat and expand JADO capabilities for Guam. This Guam architecture leverages existing Lockheed Martin capabilities such as Terminal High Altitude Area Defense or THAAD, PAC-3, Sentinel A4 radar and our C2BMC command and control system, highlighting the advantages of our broad portfolio and cross-business area collaboration with Missiles and Fire Control. RMS will also fully integrate future system capabilities, which may include space-based sensors, directed energy and advanced missiles in the Defense of Guam, a critical cornerstone in Western Pacific deterrence. And we'll be using an open architecture where we can tie in other prime contractors, products and systems along with ours. Staying with RMS, this quarter, the US Marine Corps approved our Sikorsky team CH-53K heavy lift helicopter, one of our key programs of record for initial operating capability. The IOC declaration validates the operational readiness of the King Stallion to forward deploy Marines across the globe and positions the Marine Corps for a full rate production decision in 2023. The 53K has a plan of record to deliver 200 domestic aircraft and a total program life cycle value expected to be approximately $50 billion. We're also excited this quarter to receive a $2.3 billion award for Sikorsky's 10th Black Hawk multiyear contract to provide 120 H60 helicopters. This contract includes options, which, if exercised, have the potential to deliver an additional 135 rotorcraft with a value of up to another $4.4 billion. Also this quarter, Missiles and Fire Control received a $1.6 billion contract award to produce THAAD interceptors for both domestic and international customers. Under this combined buy award, the THAAD team will provide both the US government and the Kingdom of Saudi Arabia with additional interceptors in support of integrated air and missile defense. Our MFC business area was also awarded a contract by the Missile Defense Agency to initiate production of the eighth fab battery. The eighth battery expands the US government's ability to field the integrated air and missile defenses and builds upon the previously delivered 7 systems, a clear demonstration of the value delivered by the signature program and defending against current and emerging threats and maintaining the turns. Before I turn the call over to Jay, I'd like to express my appreciation for the presidential visit to the Javelin manufacturing facility in Troy, Alabama, supporting the men and women who produce this remarkable product. The Ukraine conflict has been a dramatic reminder that we're in a global power competition. And we at Lockheed Martin stand ready to support our nation and its allies with advanced systems and technologies. The US alone has committed more than 5,500 Javelin missiles to Ukraine in defense of their country. And this visit spotlighted the continued need for a focus on global security and deterrence capabilities. With that, I'll turn the call over to Jay and join you later to answer your questions. Jay Malave: Thanks, Jim, and good morning, everyone. Today, I'll walk you through our consolidated results, business area detail and provide an update to our 2022 outlook. As I highlight our results, please follow along with the web charts we have posted with our earnings release today. Let's begin with Chart 3 and an overview of our consolidated second quarter financials. Operating results were largely in line with our expectations for the quarter along with non-operating impacts that we previously had highlighted. We generated sales of $15.4 billion. And as Jim noted, our revenues were affected by the delayed contract agreement for production Lots 15 to 17 on the F-35 program and supply chain impacts. Underlying performance was solid with segment operating profit of $1.7 billion and segment margin expansion of 60 basis points year-over-year to 11%. Earnings per share were $1.16, including $5.16 in nonoperational charges. And we delivered greater than $1 billion in free cash flow, while returning 107% of that amount to shareholders through share repurchases and dividends. As noted in the press release, we updated our outlook, which I'll review later in my remarks. Turning to consolidated sales and segment operating profit results on chart four. Total sales declined 9% due to anticipated program transitions and supply chain impacts across the business areas in addition to more than $300 million in revenue shortfall from the gap in F-35 funding in advance of our agreement on Lots 15 through 17. Operating profit declined 4%. And as previously mentioned, segment operating margins expanded 60 basis points to 11%, reflecting another solid -- another quarter of solid underlying performance, benefits from contract mix, as well as higher net step-ups largely due to the absence of last year's classified program charge in Aeronautics. Moving to earnings per share on chart five, we've included a reconciliation of our GAAP EPS to an adjusted or operational EPS. First, we've refinanced $2.3 billion of outstanding debt claiming maturities for the next three years and lowering our near-term exposure to interest rate risk. This impact was $0.10. In addition, we executed our latest pension transfer transaction. And as a reminder, this is our seventh such transaction to reduce long-term risk and volatility of pension trust asset returns. The impact to the quarter was $4.49, including $0.16 of tax timing that will reverse over the balance of the year. Lastly, volatile capital markets have significantly impacted asset returns and our Lockheed Martin Ventures fund and other plans. Despite the short-term volatility, our Ventures fund has delivered significant financial returns over the long term, but more importantly, has infused Lockheed Martin with emerging technologies to benefit our core business. Adjusted for these nonoperating items, our second quarter earnings per share would have been $6.32 and even higher had the F-35 funding constraint been lifted. Moving to cash flow on chart six. As you've come to expect, we delivered solid free cash flow in the quarter and accelerated payments of $1 billion to suppliers. Once again, cash deployed to shareholders exceeded free cash flow in the quarter and for the first half of 2022, we have returned 178% of free cash flow through dividends and share repurchases. Okay, moving over to segment results and starting with Aeronautics on chart seven. Second quarter revenue decreased approximately $800 million from last year. F-35 sales were down over $900 million due to supply chain impacts, the impact of the Lot 15 through 17 unrecognized sales and sustainment award timing. This was partially offset by strength in our classified area, which increased by more than $200 million this quarter, a 50% increase from the second quarter of 2021. Segment operating margin for Aero increased 180 basis points primarily due to the absence of last year's loss recorded on a large classified program. Moving to Missiles and Fire Control on page eight. Sales were lower by approximately $200 million, including the expected reduction in sustainment following the withdrawal of US troops from Afghanistan, as well as lower volume in multiple missile programs. Strong performance in tactical and strike missiles and in the missile defense PAC-3 program, as well as favorable program mix drove a 160 basis points increase in segment operating margin. At Rotary and Mission Systems on page nine, lower Black Hawk and presidential helicopter volume, along with supply chain impacts across the business area, lowered year-over-year sales by approximately $200 million. Operating profit was lower based on fewer favorable profit adjustments on Aegis and Radar programs, the impact from lower volume and changes in contract mix. Turning to chart 10 in our Space business area. Overall sales were down $350 million by a $425 -- or driven by a $425 million reduction from the renationalization of the atomic weapons establishment, which is partially offset by solid growth on a next-generation interceptor program. This will be the last quarter we'll be affected by the AWE compare. Operating profit was lower primarily due to the mix and timing of launches at United Launch Alliance as well as lower profit step-ups. Okay. Moving over to our updated outlook on page 11. Our expectations for segment operating profit and free cash flow remain unchanged despite a lower sales outlook, reflecting solid year-to-date results and management's focus on operating performance. Our expectation for full year sales have been by $750 million to approximately $65.25 billion. Three of our four business areas have been reduced due to supply chain impacts, award timing and program schedule shifts, all of which are incorporated into our new guidance. The impact of lower anticipated sales volume is expected to be offset by improved margins for the year, which is supported by our year-to-date margin performance. We are lowering the earnings per share outlook by $5.15 to reflect the impact of one-time items, such as the pension transfer, debt refinancing and year-to-date mark-to-market adjustments. It's important to note that these expectations assume that we definitize the Lot 15 through 17 contract here in the third quarter. In addition, there are no incremental mark-to-market impacts assumed for the second half of the year. Okay. Moving to Chart 12. We provided a detailed view of the changes to earnings per share for the year. The one-time pension settlement charge is now included in our outlook. And following the execution of that pension transfer, the remeasurement of our pension plans has caused us to reduce our FAS/CAS pension adjustment by $50 million. We've also incorporated the impacts of the year-to-date mark-to-market adjustments and our debt refinanced to the new estimate of approximately $21.55. On chart 13, you'll see the changes to guidance by business area. As I mentioned before, three of our four business areas have reduced sales outlooks, reflecting supply chain impact and award timing. But as noted, each business area is holding to the previous guidance for segment operating profit. We're confident that we can deliver higher operating margins, offsetting the top line headwinds with our continued focus on cost reduction, program performance and leveraging the size and scale of the enterprise. Okay. Let's wrap up on chart 14. Our operational performance in the second quarter was solid, with improved segment margins and consistent cash generation and deployment. We revised our 2022 financial outlook, incorporating headwinds, but held our commitments for segment operating profit, free cash flow and cash deployment. Now looking beyond 2022, the Lockheed Martin fundamentals remain strong. We continue to invest in support of our customers' important security missions, leveraging the breadth of our platforms and solutions. Our broad portfolio as well as the current and projected backlog underpin our future growth expectations. In addition, the outlook for domestic and international defense spending has improved and we expect to incorporate these changes over the coming months as we gain clarity on the timing of global security spending commitments and industry fulfillment. To close, our pillars of growth, financial position, focus on strong cash generation, and our disciplined and dynamic capital deployment strategy places us in an enviable position to deliver long-term value to shareholders. With that, Brad, let's open up the call for Q&A. Operator: Of course. Our first question today comes from the line of Doug Harned with Bernstein. Please go ahead. Doug Harned: Yes. Good morning. Thank you. I wanted to make sure to have a good understanding of where the F-35 stands here, and you've guided to 147 to 153 per year in the next two years and then 156 in 2025. But the Block 15 to 17 size averages it down at 125 and we assume that starts in mid-2023 in terms of deliveries. So, really two questions here. First, can you reconcile the lower block size with your production plan and also with the 2023 budget levels, which suggests some lower deliveries, at least to us, in 2025? And then second, why did DoD go to these lower block sizes? And does that have any implications for how you think about margins in these blocks? Jay Malave: Let me walk you through the reconciling item here on your first question, Doug. So, first, when we ended the second quarter, our backlog was 169 aircraft. If you assume, say, the midpoint of 2022 of our guide, let's say, 150 aircraft that says that we would be delivering about another 89 aircraft in the back half of the year. That would take our backlog down to 80 aircraft. With the 375, that puts us at 455. So, if you assume again at the midpoint for 2023 and 2024 of about 100 aircraft -- 150 aircraft, that puts you at 300. That leaves about 155 for 2025. And so maybe one short to the 156 in 2025, but pretty much right there. As far as the lower outlook, a lot of that was incorporated in our negotiation on Lot 15 to 17 in terms of the factors, we've talked about before as far as impacts from COVID, impacts in supply chain, also lower volumes and other factors. And all of that was taken into consideration in the negotiation with the Joint Program Office. The margins themselves at the end of the day, the way the contract is structured as we finalize this is there will be some level of fixed price to it and some level of incentive to it. So, we're incentivized to perform and provide delivery, to provide delivery as well as quality targets to the customer. If we can perform to our expectation in those improvements, then we wouldn't see any type of dilution to our margins today. And we're confident we can perform to those levels. Operator: And our next question comes from the line of Richard Safran from Seaport Research Partners. Please go ahead. Richard Safran: Jim, Jay, Greg good morning. How are you? Jim Taiclet: Good morning. Richard Safran: Jay, if I could, let me follow up on something you said in your closing remarks here. Actually, I have to think that your international outlook has changed quite a bit in just the past few months. I recognize you're in various stages of negotiations, but could you discuss where you're seeing the most demand come from, for what types of equipment? And importantly, would you be willing to discuss a bit on how this might affect your outlook for 2023? And your answer, maybe you could also just address if you think there could be a trend towards more commercial contracting as a result of what's going on? Thanks. Jay Malave: Sure, Richard. Yeah, let me get started on that. I think the takeaway here in the closing remarks is that -- as I mentioned, the environment has improved from where it was a year ago. And along with that, our pipeline has certainly grown. And I'll throw maybe a couple of examples to that. We've seen, I think, in the press in terms of higher demand, and we've seen new contracts on the F-35. There's also interest on the F-16 with international partners and customers. And we've talked about we've got a backlog today of 128 aircraft. We're pleased to have Germany coming to the fold -- or I'm sorry, Jordan come into the fold as well. But beyond that we've talked about a pipeline 300 to 400 additional aircraft. That pipeline has grown to about 500 aircraft, given what we've seen over the past six months, six to 12 months. And so in our Aero, in these aircraft, we see incremental opportunities. I'd say similarly in our Missiles and Fire Control, both on the air and missile defense side as well as tactical missile side, we've seen inquiries on foreign military sales. And that pipeline has grown as well, and that's in, say, the multibillion dollars of opportunity. Things like -- things that have been out there in the press, whether it's Javelin, HIMARS as well as PAC-3 opportunities. It's important to remember that in the PAC-3 we are increasing our outlook and our production schedules to begin with. And so the question is how much higher can we take it over the next number of years. As this correlates and I mentioned in my remark that we’ll gain more clarity in terms of how these things will actually manifest themselves into real contracts. The reality is today, none of it is under contract. And so we're trying to get a better understanding what the timing, of which these will come into contract and then getting a better understanding of our supply chain capability to determine when we can actually deliver. But I can say with some level of reasonable confidence is that our orders and backlog outlook over the next two years will be better than it was a year ago. But that will still take some time to convert to revenues beyond that time period. Jim Taiclet: Yeah. And just to add to that, in response to your question there, Richard, is look, the DoD is in the midst of changing gears and so are our allies, right? So at the beginning of 2022, the administration was still in the midst of a relatively benign global security environment at least relative to now. The US has largely withdrawn from its military operations after two decades of heavy presence in the Middle East. China's increasing activism in the Western Pacific, while recognized was perceived as kind of a potential concern, a watch item for the future, if you will. Europe was totally at peace, and Russian forces remained within their borders at that point in time. But if you fast forward to today, the US and its allies are actively responding to Russia's invasion of Ukraine. The Pacific is on higher alert because of the statements and actions of China recently, not to mention North Korea. The value of deterrence has never been greater really at this point now. And that shift happened over literally three or four months. What that requires is the Department of Defense to shift gears, okay? And I can tell you the clutch isn't engaged yet. And the clutch engaged means there are contracts in place. There's a demand signal out there that's clear. There's funding appropriated by the US Congress in the case of the United States. And we're producing, as Jay said, with a supply chain that's robust enough to support it. To get the clutch to engage is going to take two to three years. And that's for our allies as well because they not only have to go through their own processes internally. They then have to go through generally the foreign military sales process. And for the kinds of systems that Jay outlined, the US government is probably going to continue to insist that we mostly use the FMS process to contract with foreign -- through them to foreign governments for these kinds of equipments like F-35 and F-16 and HIMARS, et cetera. So we actually have a match to our original strategy, which was for the next couple of years, we were expecting relatively flat defense budgets in the US, not a lot of concern out in the allies. That's all changed. But we're aiming for the company and for the share count to be ready for an inflection point now again, in 2024 and beyond, the middle of the decade. This unfortunate situation in global security having deteriorated can only bolster our inflection point from where it would have been. And along with that, we're doing the integration of our signature platforms that everybody seems to want right now into that 21st Century Security fabric, which will make them, we think, even more attractive. And then we'll bring in our counterparts along onto that open architecture going forward. So I do think that it's going to take a while for the clutch to engage here, both in the US and internationally. But the demand in the situation that our customer base is facing has dramatically changed over the last three, four months. Operator: And our next question comes from the line of David Strauss with Barclays. Please go ahead. David Strauss: Thanks. Good morning. Jay Malave: Jay, I wanted to ask about the pension. So I saw you mark-to-market with the pension transfer. So $50 million worse this year, but what does that mean for -- based on where things are today, given big time negative asset returns, what are you thinking about for pension in the next couple of years relative to what you guided for prior? I think it was $2.3 billion in pension income in 2023 and $2 billion in 2024. Thanks. Jay Malave: Yes. Good question, David. This year, excluding the impact of the one-ime charges, we're $2.2 billion for the total FAS/CAS adjustment. I'll break it down. On the FAS side, interestingly, is you're right, David. The assets -- not only did we lose $4.3 billion worth of assets with the pension transfer, but the returns are lower, too. And so that will impact our returns next year. But that is essentially entirely offset by lower amortized losses associated with the pension transfer that we just took. So I would expect our pension, our total adjustment in our FAS is going to be flat. So about 400 – in 400 and change this year to be about 400 and change next year. Similarly, on CAS, we're seeing similar types of effects where next year, the CAS costs will be similar to what it was this year. That is higher than what we are anticipating it to be coming into this year for 2023. So, we'll have to evaluate whether that has any impact on the backlog of our contract, but when you look at it year-over-year, it's essentially flat. Going beyond that, we'll have to kind of update you, I think, in our October call and we give the trending data. But I can say right now for '23, essentially flat. Operator: Our next question comes from the line of Cai von Rumohr with Cowen. Please go ahead. Cai von Rumohr: Thanks so much and good ops. Jay, could you maybe update us? You mentioned supply chain issues, and you mentioned the issue in the F-16, which I guess you kind of preannounced that, that might be an issue, kind of where are you with both supply chain? What are the problems? Where are they and similarly with labor availability? Thank you. Jay Malave: Yes. Good question, Cai. Going back in the beginning of the year, everyone was impacted by the latest variant that we had. And our operations were impacted, our supply chain operations were impact – and I think our ability to recover from that has been more challenging than we had originally anticipated. We have some – we have seen some level of improvement in certain areas of not only our operations, but also our supplier operations. But we've also seen broken commitments at the same time. And so, it just caused us to reassess what this meant for the year. And so, while we do see some improvement, our ability to recover the lost time in the beginning of the year has just become too much of a challenge. And that's really the question when you go beyond '22 now, is how -- does that ripple through? As you see -- Jim mentioned, the COVID impacts on the 135 as an example, we're seeing that ripple through, through multiple years. And so that's something that we just have to continue to evaluate and take a look at what that means to '23 and beyond. As far as labor, labor has been an ongoing challenge, I think, for the industry as well as us. I think we've -- given the size and the scale of Lockheed Martin, I think that we've been able to weather it reasonably well. And as an example, on F-16, we've been able to take close to 50 employees out of a different operation, an international operation and bring it into Greenville, South Carolina to help us stand up and move quicker on the F-16 program. So, it just goes to the strength and the breadth that we have here at Lockheed Martin. But nonetheless, it's been a challenge. Our ramp on that program is taking longer than we had originally anticipated largely because of the slower ramp in hiring employees. We're pretty laser-focused on it. We have a dedicated team -- HR team that is focused on hiring people. They are very focused on a particular radius to bring those people in, and I think we're on a good track now with our new schedule. We expect to deliver aircraft next year, and then we'll get to a more strong -- more of a run rate -- full capacity run rate for Greenville in 2024. So hopefully, that answers all your questions, Cai. But again, it's been – again, supply chain has been choppy for the year. The reason why we took it -- took the expectation down is, we expect it to continue to be choppy for the remainder of the year. And we'll have to reassess it when we give our training data in terms of what it means for 2023 and beyond. Operator: And our next question comes from the line of Greg Konrad with Jefferies. Please, go ahead. Greg Konrad: Good morning. Jim Taiclet: Good morning. Greg Konrad: I was hoping maybe just to talk a little bit about Sikorsky and how you're thinking about the outlook there, given you've had some incremental CH-53Ks and finalization of the Multi-Year X for Black Hawk. When does that business return to growth? And then with that, any update on FLRAA and kind of how you're thinking about award timing there? Jay Malave: So on Sikorsky, we expect to return to growth really starting in 2023 for that business. We're expecting, as you mentioned, the FLRAA decision, which we've been told which should be coming in September. We believe that we are the best choice for that platform, and that is a pillar of our growth. If you may recall, both John Mollard and Jim Taiclet had talked about the four pillars of growth, and one of those being new awards, FLRAA was one of those programs that we have talked about. And so, we expect to see incremental growth in 2023 and beyond. And that is on the back of the CH-53K, which is a program of record as well as new awards, FLRAA being the most significant. Jim Taiclet: And the timing, we think on FLRAA or at least what the Army has stated is that, there is a decision to be announced in September of 2022. That slipped a month or two from the original plan, but we're expecting and hoping for a good news on that front when the announcement is made. Operator: And our next question comes from the line of George Shapiro with Shapiro Research. Please, go ahead. George Shapiro: Yes. I got three little questions for you, Jay. You previously said that F-35 impact from not signing 15 to 17 would be 500, now 325. So I was curious as to the difference. Second one, the classified, you mentioned, was up $210 million. Was that the same program that you took the charge last year? And the third one was, why is the space margin go down in the second half of the year when you'll have more launches, so ULA profits ought to be higher. Thanks. Jay Malave: Okay. Good questions, George. Let me maybe go backwards. On the Space margin, you're right. We do have stronger ULA launches in the back half, which will give us lift. Offsetting that is where we're seeing some margin pressure, as we have growth on new programs as well as classified programs, which are coming with pretty low margins, which are pretty dilutive. And so, that's just putting some pressure on the margin in the back half of the year. We'll keep monitoring that, but that's pretty much where we are now. On the $210 million, that was basically the absence of the charge in the classified program last year in Aero. If you recall that the charge itself was $225 million in the second quarter last year. And then on the F-35, the delta, we said that the -- coming into the quarter and throughout my remarks at various conferences, the impact could be as high as $500 million. We were able to obtain some incremental funding, some international funding in the quarter, which helped us reduce that impact to this $325 million. Operator: Our next question comes from the line of Kristine Liwag from Morgan Stanley. Please, go ahead. Kristine Liwag: Hey. Good afternoon, guys. Sorry, calling from the airshow, it might be a little choppy. But maybe back to the F-35, the Pentagon a few months ago was suggesting that the contract for Lot 15 to 17 could cover in the order of 400 aircraft versus the 375 that you have a handshake deal on. So, considering the demand from international partners, why is the total volume lower? And then also a follow-up to that is, when you think about the potential for progressional plus up and this international demand, I would assume there's some urgency from some of our partners. Is there upside to that 375? How firm is that figure? Jay Malave: It's an excellent question, Kristine. I think there could be some variability right now, but still TBD. As we mentioned -- Jim, in the opening remarks, we still need to definitize this particular agreement. We did see in the President's budget, specifically, really the 2023 budget would have had mostly impacting Lot 17 is where you see these lower reductions. They've talked about the funding constraints relative to the nuclear modernization and other items. And so that's something that we just keep monitoring. They did -- as you said, Kristine, in the unfunded priority list, wanted to add back 19 aircraft. Obviously, we're very supportive of that. And that's something that we're certainly pursuing. And we're confident there'll be something there, and it's really TBD over the next few months as Jim noted in his remarks. But there could be some upside, and we just have to let the process play out. Operator: And our next question comes from the line of Rob Spingarn with Melius Research. Please go ahead. Rob Spingarn: Good morning. Jim and Jay, there's been a lot of talk on growth here. And of course, the near-term numbers have been under pressure. But when you think about the growth components of your four pillars, can you talk about the larger pieces of opportunity there? I was maybe hoping for a bit of review on hypersonics and if you can still hit that $3 billion target? And then some of the other major programs that are going to drive growth, two -- it sounds like a couple of years from now when that -- when the clutch kicks in as you say. Jim Taiclet: So, Rob, let me start, it's Jim here, on sort of the overall strategic approach that we have and then I'll turn it over to Jay for some of the programmatic details and color. So, look we're focusing on the things we can control versus what we can't control, right? So, what we can't control right now is the level of inflation-adjusted defense budget, which, given 9%-ish inflation, is pretty flat. We can't control the duration of US government and the FMS processes, although we're advocating for those to be speeded up and streamlined. We can't control the timing of legacy programs, so sunsetting, if you will, or at least a reduction in rate volume like Black Hawk, for example. We can't control COVID virus and its effects on the supply chain and our own people. But what we can focus on is our strategic approach of running this company to maximize free cash flow per share in any circumstance, right? So, during this time of, as you pointed out, pressure on topline revenue, we've really used our dynamic capital allocation approach to -- in a slow revenue growth period to still drive by R&D and CapEx because we want to invest for the future growth, but at the same time, ramp up share repurchase and we're going to continue on that path as well. The goal then is to take down the share count in the relatively low growth period. So when the high-growth period comes about, you've got kind of a turbocharger on the investors' basis, if you will. So we think shareholder value inflection point comes mid-decade because the revenue growth we expect to ramp in, we're doing a lot on the efficiency side, something we can control over the next two, three years with our digital transformation and other cost control efforts that we've actually redoubled recently. And so we're going to continue to invest in the business, and so we can make that -- during this period so we can make that inflection point as attractive as possible for you as we expect it to come. So, with that I’ll offer it back to Jay to give you some of those four-pillar details. Jay Malave: Sure. Rob, our pillars are still intact. You mentioned hypersonics, and we're still pretty confident in our growth outlook there. And I just mentioned that our air-launched rapid response weapon program. We had two recent successful tests, one in May and one recently in July. And so we're very successful there with the capability that we continue to progress forward and where this is going. And so that's all really good news as far as our hypersonics capability and what we're providing and advancing from a technology standpoint. We've talked about our classified programs. We continue to progress there, and we continue to see the growth. I mentioned in my prepared remarks where we saw a significant growth in our Aero classified business this past quarter, and that's just one example of that being on track. We also had the third pillar of programs of record. We've talked about that we've got a ramp that's built into the PAC-3 and the question there is can that go higher and when. CH-53K, Jim mentioned the 200-plus aircraft there, and that's on track. We just as we -- as you know on our charts here, talked about the initial operating capability for the aircraft, and everything is moving forward as well there. We've talked about F-35 sustainment, a 6% CAGR between 2021 and 2026. And so those, again, remain pretty much intact. And then I just mentioned the competitive new wins. FLRAA is a big, big one. We've also got some other large programs, which are doing all the main type programs, Defense of Guam that Jim just spoke about. There's a similar type program in Australia for, called Air 6500, which is an important program for us, important program for the country. We talked about next-gen interceptor being a source of growth in the quarter. And that's something that's also in our new win category as well. And so these things are on track, and we've had this conversation about a growing pipeline. And I gave some color on that before in some of the Q&A. But again, the pipeline is growing. It just becomes a question of when that actually turns into orders and when that turns into revenue conversion. Operator: Our next question comes from the line of Peter Arment with Baird. Please go ahead. Peter Arment: Yes. Good morning Jim and Jay. Jim, you mentioned about the free cash flow per share and being able to see that inflection point. Maybe if you could just comment a little bit on your ability to just grow cash flow generation and grow the cash generation in general, when you're thinking about not only the supply chain headwinds, whether you're carrying more inventory or just in case, just your overall approach there? Do you see an opportunity for Lockheed to really increase the $8 billion plus cash from operations opportunity? Thanks. Jim Taiclet: So -- and Jay can add to this. We'll look out to the next few years with some, sort of, trending information later in the fall. So I don't want to speak to numbers. But what we can speak to is, again, the reduction in share count. We hope and expect to have ramping revenue down the road, which we should be able to convert into cash flow. So without getting into magnitudes, that's the mechanics of how we are planning for this to play out. But Jay, if you want to add more. Jay Malave: Yes. We’ve previously provided a multiyear outlook. It was generally flattish, Peter. And that was really due to our increased investment. Remember what we're doing, it's twofold. One on the investment is to get to fly -- the growth flywheel recranked, which is what we're laser-focused on. But as Jim mentioned, we're also investing on our core capability and efficiencies within our four walls. And our digital transformation is a significant investment and is a significant initiative to make sure that we can deliver efficiencies and also make ourselves more competitive. And so that is what's driving, generally, I'll call it, a flattish outlook from a free cash flow perspective. But having said that, going back to Jim's comments as far as efficiency, efficiency doesn't stop at the P&L and on the cost. We're also going to drive efficiency in our asset management, and that should be a source of better cash flow from where we are today. That's something that we have to take a look at. As Jim mentioned, we'll have to look at what that means from a trending perspective over the next few years that we'll provide in October. But the opportunity set is there for us to drive efficiency and even offset where we may have to provide buffer stock from a supply chain perspective and things like that. There's always opportunity to drive efficiency in our operations, and that's what we'll be focused on. And don't forget that we will -- we also in that talked about continuing to deliver around 100% of free cash flow to shareholders through the dividend and share repurchase. We remain committed to that, and there will be more to come as far as specifics in October. Operator: And our next question comes from the line of Seth Seifman with JPMorgan. Please go ahead. Seth Seifman: Thanks very much and good morning, everyone. Jay Malave: Good morning. Seth Seifman: So on the F-35 outlook, when we think about the 156 a year around mid-decade and beyond, how do you think about the mix there between domestic and international, given that some of the budget pressures you're talking about like nuclear modernization aren't going away? And then just kind of a couple of cleanup questions. The 375, I just want to be clear about the number there. It would seem that the international portion of that is going to be, on average, 50 or fewer per year, which is down from where it was in the prior economic or finally I just wanted to confirm that. And then also, what's the delivery expectation for 2022? Jim Taiclet: So Seth, it's Jim. The mix of priority between US and international is set by the Joint Program Office and US government. So we can't really speak to an estimate, future estimate for that. But the fact of the matter is the jets performing extremely well for the US services, the fly, and the commandos will tell you that. Navy is especially impressed because they've done actual fleet tours and exercises in the Western Pacific last year -- over the last six to 12 months and seen it in operation at scale and exercises, which we're really happy with and some of the other services, too. On the international side, you see the interest, including Germany now and others. And I think that's going to continue to increase, both in Asia and in Europe, by the way. So we're confident that the F-35 is here to stay, and we're going to drive through the program. We just can't give you an estimate of US government allocations over the next few years, that's something that they do. Jay, anything else you'd add? Jay Malave: No, that covers it. Operator: And our next question comes from the line of Matt Akers with Wells Fargo. Please go ahead. Matt Akers: Yes, hey good morning. Thanks for the question. I wonder if you could touch on Missiles and Fire Control margins, and they've been sort of running a little bit higher in the last couple of quarters. I know there was some positive adjustments in there. But if you could just kind of set our expectations of kind of what normal margins look like on that business kind of going forward? Jay Malave: Yes. Good question, Matt. Very strong performance through the first half of the year in excess of 15%. We do expect it to step back down in the second half of the year. It's primarily due to lower step-ups and some contract mix. And so, we see some just against some of the newer classified programs ramp up. And then we see just the solid performance was really somewhat of an acceleration of good performance into the first half of the year versus the second half. And so that's just going to be a natural decline there. Having said that, we did -- they are holding their profit in spite of the lower revenue outlook. And so, their margins are going up relative to what we thought coming into the year. So, we'll kind of -- we'll watch them because their performance has been solid, if anything, maybe there's a little bit of upside there. But again, it's just a function of the timing of what we see in terms of visibility to step up changes to profit rate adjustments and in the program contract mix. Operator: And our next question comes from the line of Pete Skibitski with Alembic Global. Please go ahead. Pete Skibitski: Hey good morning, everyone. Jim, I just want to maybe drill down into your thinking about how the US goes about replenishing its stocks. Obviously, in terms of your programs, you think about programs like Javelin but even bigger ticket items like HIMARS and I think maybe GMLRS. I think the US has sent over quite a few of those systems to Ukraine. So, are you guys thinking that basically, it will take until the fiscal year '24 budget is approved for the US to kind of reprogram that replenishment in and get it approved and then the orders start flowing? Is that kind of the right way to think about it? Jim Taiclet: It's too soon to tell. There are some initiatives ongoing from some of the services in the Department of Defense to put more energy behind replenishment. But that's early in their process. So, we don't have full visibility to it. We're supporting it, of course, and making sure they understand what the capacity capabilities are over the next two, three years to get up to higher volumes. But those actual decisions on timing and budgets will come from the services and the Department of Defense and through the administration. So, we can't really comment on the specifics of that. We do expect it to come, though. It's a matter of timing as I kind of outlined earlier. Greg Gardner: Well, Brad, we're coming up on the top of the hour. I think everybody who was in the queue has had a chance to ask a question. So with that, I will turn the call over to Jim for some closing remarks. Jim Taiclet: Sure. I just want to first thank all the men and women of Lockheed Martin for their dedication to our mission and their continuing commitment in spite of COVID and other stresses that all of us are facing in our personal and professional lives now. But all those stresses in spite of those, they're providing truly innovative and comprehensive mission solutions for our customers, which is really where I think our whole industry needs to go, as mission solution in addition to great exquisite platforms and effective systems. So I want to thank you all, investors, again, too, for joining us today. And we look forward to speaking to you again, as Jay said, in October for our next earnings call. So Brad, that concludes the call. Everybody, I hope to have a great rest of the week. Operator: And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Services. You may now disconnect.

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