The Lockheed Martin Third Quarter 2023 Earnings Results Conference Call has begun with Maria Ricciardone Lee, Vice President of Investor Relations, welcoming everyone. She introduces Jim Taiclet, Chairman, President, and CEO, and Jay Malave, CFO. The call will include forward-looking statements and they have posted charts on their website. Jim Taiclet thanks everyone for joining and mentions the ongoing conflict and their dedication to supporting the US government's efforts.

In the third quarter, Lockheed Martin reported a 2% increase in sales and a historically high backlog of $156 million. They also had strong earnings per share and free cash flow, which allowed them to return 100% of free cash flow to shareholders through dividends and share repurchases. The company reaffirmed their financial outlook for 2023 and will provide expectations for 2024 in January. The global threat landscape and the current continuing resolution in the government are factors that may impact the future U.S. defense budget. However, Lockheed Martin's portfolio is well-positioned to serve both domestic and international customers.

In the third quarter, 30 F-35 aircraft were delivered, bringing the year-to-date total to 80. The company expects to deliver a total of 97 aircraft this year, all in the TR2 configuration. They are producing at a rate of 156 per year and are working on finalizing TR3 software development. The first TR3 configured aircraft is expected to be delivered between April and June of 2024. The F-35's technological capabilities continue to generate interest both domestically and internationally, with Denmark receiving their first four locally based aircraft in September.

Denmark, the Czech Republic, South Korea, and Israel have all recently chosen to purchase F-35 aircraft from Lockheed Martin. Australia has also selected Lockheed Martin to lead a program that will revolutionize military operations worldwide by connecting systems and platforms across multiple domains. Lockheed Martin has also won contracts for battle management and command and control systems, as well as a contract for systems engineering and software integration for the U.S. Navy and Coast Guard.

Lockheed Martin is working on developing 21st century security technologies to improve interoperability between their product lines. This includes the 5G.MIL hybrid base station, which allows for real-time updates to a simulated missile in-flight. They have also demonstrated an AI commanded jamming capability and successfully tested a prototype radio for the PAC-3 MSC missile. This will enable the integration of the PAC-3 missile onto U.S. Navy warships and has sparked international interest.

Lockheed Martin has had a successful quarter, with significant growth in partnerships and contracts in both their RMS and Space businesses. They have signed a letter of offer and acceptance with Poland for 644 PAC-3 MSCs and won a $2.7 billion contract for 35 CH-53K helicopters. Their space program has also seen growth, with a $1.2 billion contract for the Navy's Trident II D5 life extension and the successful return of NASA's first ever sample from an asteroid. The NGI program also passed a digital preliminary design review and is ready to move into the detailed design phase.

In the third quarter of 2023, the OSIRIS-REx spacecraft successfully released a capsule containing material from the carbon-rich asteroid Bennu. This will provide valuable information about the origins of life on Earth and the formation of planets. Jay Malave, the company's spokesperson, provided an update on the company's financial results for the quarter, reporting a 2% increase in sales and a 6% decrease in segment operating profit. However, free cash flow was strong and the company returned 99% of it to shareholders.

In the third quarter, the Board approved a 5% increase in the quarterly dividend and an additional $6 billion in share repurchase authorization. Aeronautics sales decreased 5% due to lower F-35 volume, but development and sustainment saw growth. F-16 program remains strong with international interest and a backlog of 126 aircraft. Missiles and Fire Control saw a 4% increase in sales and operating profit due to higher sales volumes on munitions programs.

The Missile and Space Systems division of Lockheed Martin has a strong backlog and is seeing high demand for its products from allied nations. The Rotary and Mission Systems division also saw growth in the quarter, driven by higher volume on certain programs and the $2.7 billion CH-53K contract. The Space division also saw growth, with sales increasing 8% and a backlog of over $30 billion, including an $800 million contract for the Transport Layer program.

In 2023, the company expects to deliver more linear results and increase share repurchase authorization. They anticipate returning 150% of their free cash flow to shareholders and repurchasing 13% of their current market cap. They also expect mid-single-digit free cash flow per share growth and low single-digit sales growth in 2024, with variability in segment margins due to the timing of impacts from a classified program.

The paragraph discusses Lockheed Martin's free cash flow and their focus on maintaining their full year outlook while increasing planned share repurchases. They also mention their 21st Century security strategy and their collaboration with international partners. The call then opens up for Q&A, with the first question asking for clarification on the F-35 situation and its potential impact on revenue, earnings, and cash flow.

In this paragraph, Jay Malave discusses the timing and variability of sales and profits, stating that they are not impacted much. He also mentions that the risk retirements are dependent on the successful completion of the test program, which may limit the ability to take profit adjustments on a Lot 15 to 17 program. However, he expects higher profitability on this contract lot than the prior one. In response to a question about the impact of classified missile program at MFC on next year's margins, Jay states that it has been a headwind and will continue to be so. The timing of recognition of losses on the program depends on performance and the probability of an option being exercised.

The timing and impact of the classified program is uncertain, but it could potentially lead to a 25-50 basis points decrease in margins next year. The company expects the underlying business to remain flat in 2024, including recurring margins and profit rate adjustments. The program is important for the country and the company, and they are working through the schedule and performance to ensure its success. They will provide updates on its progress.

George Shapiro asked about the F-35 program, specifically the balance between sustainment revenue and production in the quarter and the high decremental margin on production. He also asked about the implication for the 14% margin in the fourth quarter for RMS, given relatively flat revenues.

Jay Malave discusses two main topics in this paragraph. First, he talks about the expected increase in profitability for RMS due to higher profit adjustments and mix benefits from program deliveries. He also mentions the sales performance of the F-35, with production down and development and sustainment up. The second topic is the recent updated guidance from the IRS regarding Section 174, which supports their position of deducting costs associated with cost plus contracts. David Strauss also asks about their thoughts on pension given higher discount rates and weak asset returns.

In paragraph 16, the speaker discusses their approach to treating a certain cost as a sale rather than an R&D activity, and how the draft language aligns with their approach. They also mention upcoming changes in their pension income and contributions, but assure that it will not limit their ability to continue their cash deployment strategies. In the following question, the speaker is asked to elaborate on a comment made in the prepared remarks.

The speaker discusses the potential impact of a government shutdown on the company's buyback activity in the fourth quarter, stating that they would likely defer the buyback until the budget is clarified. They believe the shutdown will be short-lived and will not have a significant impact on the company's operations. However, a shutdown could limit the company's ability to do new starts and could result in self-funding for programs, which could affect share repurchase.

Rob Stallard asks Jim and Jay about the sustainability of returning more than 100% of free cash flow to shareholders in light of ongoing budget uncertainty and increased pension funding. Jay responds by explaining the company's current outlook for returning cash to shareholders and how it will likely revert back to 100% of free cash flow in the future. Richard Safran then asks about the 2024 bookings and opportunities in both classified and unclassified sectors if an optimistic budget scenario unfolds.

Jay Malave and Richard Safran discuss the potential for continued growth in backlog and orders in the upcoming years. They mention potential award decisions in the classified sector, orders for MFC, and the F-35 program. They also mention their proposal for a performance-based logistics program and their confidence in getting it under contract in the first half of next year. Sheila Kahyaoglu asks about the company's low single-digit growth and 11% margins, and Jay Malave explains that not much has changed and they have been discussing this for some time.

The company has experienced some fluctuations in margins and free cash flow due to potential changes in the classified program, but still expects to see mid-single-digit growth. The company is also preparing for potential changes in the global threat environment and the rapid evolution of technology, investing in advanced technologies to integrate into their platforms and make them more compelling.

The speaker discusses three key aspects of their international defense strategy, including international cooperation and interoperability. They also mention megatrends that will provide opportunities for the company in the long term. The next question asks about the company's free cash flow and their plans to seek out additional suppliers of solid rocket motors. The speaker explains that their goal is to bring antifragility into their supply chain and partner with the DoD, starting with a dual source for GMLRS and expanding to other systems. This is an ongoing objective for the company.

The speaker discusses a long-term plan to strengthen their supply chain and involve multiple companies in their industry. They mention negotiations with a potential partner and the potential for additional participants in the future. The speaker also clarifies that there is a potential risk of 25 to 50 basis points on margins for the next year. Another speaker discusses their vision for digital services revenue, starting with trusted and reliable mission systems engineering for defense programs.

The company is using its core technology to expand into other programs, such as AIR6500, which is currently worth billions of dollars. They plan to add other technologies for networking and connecting platforms to provide mission solutions for the DoD. The combination of digital and physical technologies will advance mission capabilities every three to six months. The company expects margins to be flat next year, with the MFC program potentially causing a drag.

Noah Poponak asks about margins and Jay Malave discusses the MFC margin for the next year and the cause of the concentrated losses. Malave explains that the company decided not to pursue a fixed price development program due to risk, but the classified program was cost-plus. The production low rate initial production lots were priced aggressively, leading to headwinds. Malave is confident that the company can deliver accretive NPV in the long term. Each program is evaluated on its own risk profile.

The speaker mentions the possibility of a supplemental for Taiwan and how it would impact the company's revenue. They also discuss the approach they are taking in terms of risk management for future programs. A question is asked about the company's current and potential revenue in Taiwan, as well as an update on the margin profile of their international business.

The speaker discusses the potential for future business opportunities in Taiwan, including the ongoing F-16 program and a comprehensive defensive approach. He also mentions the possibility of supplementals being provided to Taiwan in light of rising tensions. The speaker also addresses the question of international margins, stating that while historically they have been higher than domestic margins, future opportunities may be limited due to foreign military sales contracting.

Jim Taiclet thanks the employees for their dedication and mentions the company's focus on delivering value to shareholders through free cash flow and dividends. He also mentions the company's efforts to expand the business. The call concludes and the operator thanks the participants for using AT&T Event Conference.

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