On the Lockheed Martin Second Quarter 2023 Earnings Results Conference Call, Maria Ricciardone Lee welcomed everyone and introduced Jim Taiclet, the Chairman, President and Chief Executive Officer, and Jay Malave, the Chief Financial Officer. Ricciardone Lee cautioned that statements made during the call that are not historical facts are considered forward-looking statements and may differ from actual results. Taiclet began by discussing the strategic and operational highlights for the quarter, and Malave discussed the financial results and full-year 2023 outlook. Sales for the quarter were $16.7 billion, an 8% increase over the previous year, with double-digit growth in both aeronautics and space.

Lockheed Martin reported a record backlog of $158 billion in the second quarter of 2023, reflecting an operating margin of 11.1%. The company invested $356 million in R&D and $329 million in capital expenditures to meet customer needs. Lockheed Martin raised and narrowed its full-year 2023 financial outlook, expecting sales between $66.25 billion and $66.75 billion and free EPS between $27 and $27.20 per share. The proposed FY 2024 defense budget includes funding for 83 F-35 aircraft and munitions investment to support ramping up production rates.

Lockheed Martin has seen strengthening customer demand for the F-35 aircraft domestically and internationally, with the Czech Republic expressing interest and Israel adding 25 more to their fleet. They expect to deliver 100-120 F-35s in 2023, with no change to the longer term delivery outlook of 156 aircraft in 2025. They have completed 58 flight tests on four different aircraft in the TR3 configuration, and are continuing to test multi-shift missions, sensor fusion, and additional weapons for the next software release. TR3 updates core processing power and memory capacity to enable block four capabilities.

Lockheed Martin is continuing the tradition of leading the development of the next generation of military aviation, with the Skunk Works operation celebrating its 80th anniversary and Sikorsky celebrating its 100th. The X-59 prototype is being developed in partnership with NASA to quiet supersonic booms and lead to supersonic commercial flights. Skunk Works is pioneering hypersonic artificial intelligence and other revolutionary technologies, while Sikorsky is continuing the legacy of Igor Sikorsky, who founded the company on a chicken farm in Long Island, New York and piloted the first practical helicopter in 1939.

Sikorsky's H-60 Black Hawk family of military helicopters continues to be used around the world, with the U.S. State Department approving a sale to Norway and Spain signing a letter of offer and acceptance for 8 MH-60R Seahawk aircraft. Sikorsky has also achieved several milestones in the quarter in support of other NATO allies, such as a successful launch of a PAC-3 missiles segment enhancement or MSC interceptor from a German modified launcher and an agreement with Rheinmetall Defence to collaborate on a rocket artillery system. In addition, Sikorsky's relationship with Poland is progressing with the first F-35 Lightning II for the Polish Air Force entering production and the initial shipment of HIMARS launchers, and the U.S. State Department approving a potential foreign military sale to Poland for PAC-3 with modernized sensors and components. Sikorsky also continues to advance its partnership with Australia.

Lockheed Martin was selected by the Commonwealth of Australia for a military satellite communication system, and is taking on a role in Blue Origin's team to develop a human lunar landing system for the Artemis program. They are also advancing their integrated 21st century security digital technology architecture. During the Northern Edge Exercise near Alaska, they successfully demonstrated Digital Command Control to synchronize joint all domain operations. This was a major milestone for joint all domain command and control interoperability, and will help shape future JADC2 capabilities.

Jim Taiclet of Lockheed Martin recently joined Global Foundries CEO Tom Caulfield and Senate Majority Leader Schumer to announce a collaboration that will advance US semiconductor manufacturing and strengthen resiliency within America's supply chain. This partnership will enable Lockheed Martin to more quickly and affordably produce 21st century security technologies that increase deterrence for the US and its allies. Jay Malave will then provide an update on Lockheed Martin's consolidated results and business area performance for the second quarter of 2023, as well as full year guidance.

In the second quarter, sales increased 8% year-over-year due to double digit growth in the aeronautics and space sectors, while segment operating profit was up 5%. Earnings per share was up 6.5% due to higher profit and a lower share count. Free cash flow was $771 million with dividends and share repurchases exceeding free cash flow. In the quarter, $2 billion of debt was issued across three tranches for a weighted coupon of 4.8%. Aeronautics saw a $1 billion increase in sales due to higher volume on the F-35, C-130, and classified programs.

F-35 saw strong year-over-year growth in production and sustainment, with a 12% increase in operating profit. The JPO exercised the option for Lot 17 of the F-35 contract in the quarter, and the backlog now stands at 421 aircraft. Missiles and Fire Control sales were comparable to last year, but operating profit and margins were down due to lower net profit adjustments. Rotary and Mission Systems saw a 3% decline in sales due to lower volume on Black Hawk and lower net profit adjustments, but was partially offset by higher equity earnings.

The company has adjusted their outlook for 2023, increasing their sales segment operating profit and earnings per share outlook. Sales are up $1 billion to $66.5 billion, and the Arrow business area's outlook has been increased by $250 million with a profit of $25 million. The Space business area has increased their sales midpoint by $750 million and their profit midpoint by $20 million. The company is maintaining their free cash flow guidance of $6.2 billion and remain committed to $4 billion of share repurchases with $2.7 billion in the back half of the year.

The company has increased its earnings per share expectation for 2023 and attributes this to improved business area profits, lower share count, a lower tax rate, and a mix of miscellaneous items. The strong backlog expansion at MFC has given the company confidence in its expected growth acceleration in 2024 and beyond, and they remain committed to rewarding shareholders through dividends and share repurchases. In addition, the company is focusing on its strategic initiatives to transform the business and deliver consistent and reliable returns.

Jay Malave and Jim Taiclet discuss the outlook for growth in 2024 and the margin profile of MFC. Malave believes the backlog gives them confidence they will return to growth, though the demand signal indicates a higher rate than low single digit. Taiclet adds that there is multiyear procurement authority for certain Lockheed Martin products, such as joint air ground missile, HIMARS, and ATACMS.

Lockheed Martin's Missile and Fire Control (MFC) business has the potential for long-term growth due to the U.S. government's multiyear procurement authorities for PAC-3 MSC, GMLRS, Javelin, LRASM, and JASSM. The U.S. has allocated $62 billion in four bills to support Ukraine, with approximately $7 billion of those funds going towards Lockheed Martin programs. This provides a high margin, long-term foundation for growth for the MFC business. Additionally, there is increasing international demand for these products. The cash impact of Tech Refresh 3 is approximately $7 million per aircraft, and there is potential for additional deliveries and cash benefits associated with it in 2024.

Boeing is working to manage the impact of a production delay, which is estimated to range from $200 to $350 million this year, by seeking out tailwinds in other parts of their portfolio. They are also deploying extra resources to ensure that the production remains on track, and they have sufficient pilots for the acceptance of the aircraft.

Jay Malave responded to a question about the company's capacity to support their backlog growth, noting that their CapEx profile should remain elevated for the next few years. He also mentioned that working capital is a source of opportunity, and that the company is aiming to reduce the number of days they use working capital.

Jay Malave explains that the increase in revenue is due to earlier than expected ramps on various programs, including classified programs, protected communications, international security space business, as well as an NGINS [Ph] in the strategic and missile defense business. He also mentions a little bit of growth in the Next Gen OPIR Program.

In the second quarter, Lockheed Martin's outlays finally grew, resulting in the company's fastest organic revenue growth rate in a while. However, the company's updated guidance indicates that revenue will be down in the back half of the year. Jim Taiclet clarified that Lockheed Martin does not have a formal company position on engine selection or modernization, and their role is to receive engine performance data from manufacturers and translate it into aircraft performance data for their U.S. government customers.

Jay Malave states that the outlays are expected to increase in the back half of the year, though the growth will not be as significant as it was in the previous year due to some awards and sales slipping into the third quarter of 2022. Despite this, the back half of the year will still be higher than the first half, and the company will still be able to deliver growth compared to last year.

Jay Malave provides an update on the cash flow statement, noting that the company is expecting a required cash contribution of between $500 million and $1 billion in 2025. He states that the company is aiming to offset this through increased net income, cash flow, and working capital performance. He also mentions that they are hoping to achieve low single digit free cash flow growth and mid-single digit free cash flow per share growth over the long term. Finally, he states that the addition of Rheinmetall for fuselage production in 2025 is an important element in expanding production past 156 F-35s.

Jay Malave explains that the production system for the F-35 is still running on its original plan to ramp up production from 100-140 and ultimately to 156, despite the lower deliveries. He clarifies that the delay in deliveries is due to software integration testing that must be done on multiple aircraft flying together. He suggests that if the demand for the aircraft continues and the US authorizes more exports, the government and industry may go beyond the 156.

Jay Malave explains that 20-23% of the backlog growth in the second quarter was related to contracting requirements and GMLRS. He further explains that the company is aiming for multiyear contracting agreements but is not yet under any. He states that any benefits from these agreements will be passed on to the customer in terms of favorable terms and pricing, and that there will not be any margin upside.

Jay Malave discussed the expected growth rate of the company as a whole, with MFC expected to be the highest growing segment. He then discussed the 1LMX initiative, which is more than an ERP upgrade, and will help the company become more competitive and maintain their leadership in the industry. The benefits of 1LMX will be passed through to customers in the form of pricing, rather than an increase in margins.

Jay Malave answered two questions related to Lockheed Martin's potential acquisition of Aerojet Rocketdyne. He stated that the IRS has acknowledged that Section 174 is an issue that needs guidance and they are hopeful to receive guidance by the end of the year. He also mentioned that there is proposed legislation to defer the implementation of Section 174 to 2026, which they are hopeful for. Lastly, he stated that Lockheed Martin's interests in the acquisition are twofold.

Lockheed Martin is expecting around $6 billion of spending on classified aircraft programs such as NGAD, F/A-XX, and potentially replacing the U-2 with a hypersonic platform. Lockheed Martin is looking for commitments from L3Harris regarding Aerojet Rocketdyne's status as a merchant supplier, as well as improved performance from the company.

Jim Taiclet explains that the company is experiencing significant growth in their classified portfolio, with a 7% growth rate. He also explains that the company has the capability to take advantage of government spending in classified programs. He then goes on to differentiate between the different types of aircraft missions, such as reconnaissance and surveillance, air superiority, and all-purpose strike aircraft. He mentions the F-15, F-22, F-16, and F-35 as examples of these aircraft.

In the past six months, Lockheed Martin has seen an improvement in labor availability and has closed many of its key critical skill gaps. The company has also seen an improvement in wage rates. Jim Taiclet states that the company's classified business is around $8 billion and will be the second highest growth area for the company through 2027.

Jim Taiclet believes that the conflict in Ukraine has exposed weaknesses in the national defense enterprise, and that the lessons learned from the conflict will remain for many years. He believes that this will have a lasting effect on the prospects of the Missile and Fire Control (MFC) division, regardless of the duration of the conflict. Jay is then asked to provide some quantification around this.

The conflict in Ukraine has revealed that great power conflict is still a risk in the world, and NATO countries like Poland and Lithuania are taking this seriously by increasing their defense budgets. The US and its allies must demonstrate to potential adversaries that they have the stockpiles to defend themselves and that the rate of munitions usage will be supportable. This is a long-term shift in national defense strategy for the US and its Western allies. The hope is that the conflict in Ukraine will end quickly, but the demand for munitions will remain elevated for a long time.

Jim Taiclet explains that Lockheed Martin has made great progress in the last three years with their 21st century security concept and strategy of improving and increasing deterrence to conflict by accelerating the adoption of digital technologies. In addition, they are working to strengthen the defense production supply chain and expand international production and sustainment operations. They have already made investments in countries such as Australia, the U.K., Poland, and Germany. The goal is to create a more resilient defense production system and international sustainment operations that will help to deter future conflict.

Lockheed Martin's CEO thanked their employees for their hard work and dedication to national security during the pandemic, emphasizing how it has led to strong financial and operational performance in the quarter. He also thanked all participants on the call and concluded the call, with the next call scheduled for October.

This summary was generated with AI and may contain some inaccuracies.