Maria Ricciardone, Vice President, Treasurer, and Investor Relations, welcomes everyone to the Lockheed Martin Fourth Quarter and Year-End 2023 Earnings Results Conference Call. She introduces the speakers, Jim Taiclet, Chairman, President, and CEO, and Jay Malave, CFO. They will be discussing financial results and non-GAAP measures. Taiclet highlights the company's progress in implementing their 21st Century security strategy and delivering strong financial results for shareholders in 2023.

Lockheed Martin had a successful year in 2023, with record backlog and strong sales and earnings. They invested in research and development and returned a significant amount of free cash flow to shareholders. In 2024, they expect continued growth and plan to focus on returns to shareholders. They also have a responsibility to maintain security and are taking measures to increase resilience in their supply chain and collaborate with innovative suppliers.

Lockheed Martin has taken several steps to strengthen the defense industrial base, including establishing a subsidiary to design and manufacture advanced microprocessors and working with commercial technology collaborators to bring their innovations into the defense sector. They have also deepened relationships with international partners to improve interoperability and are working on a joint battle management system with Australia. These efforts aim to increase the effectiveness and capacity of the defense production system.

Lockheed Martin has been awarded a contract to produce guided weapons in Australia, and the U.S. defense budget is expected to support their programs. In Aeronautics, the company delivered 18 F-35 aircraft in the Technology Refresh 2 configuration and is making progress towards the TR-3 configuration. However, the TR-3 software acceptance may be delayed until the third quarter due to the complexity of the technology. This delay is necessary to ensure that the TR-3 configuration provides advanced capabilities for years to come.

The F-35 aircraft has increased capabilities in air-to-air and air-to-ground munitions, sensing, jamming, and cybersecurity. The expected delivery range for 2024 is between 75-110 aircraft, with strong international demand. Aero has also advanced the F-16, with a training center in Romania and deliveries to Slovakia. Skunk Works has developed the X59 experimental supersonic aircraft, which was named one of Time Magazine's best inventions of 2023 and is expected to revolutionize commercial supersonic flight.

In the fourth quarter, Lockheed Martin's MFC business achieved several milestones, including delivering the first PrSM and conducting system tests for an extended range GMLRS. They also delivered the 800th THAAD interceptor and successfully integrated the PAC-3 Patriot Missile with the U.S. Army's new air and missile defense radar system. International demand for PAC-3 remains strong, with 15 partner nations. In RMS, the U.S. Navy awarded a contract for MH-60 Romeo SEAHAWK helicopters for Spain and Norway. Sikorsky also installed the improved turbine engine on the RAIDER X for the Army's FARA program. In space, United Launch Alliance successfully launched The Vulcan Centaur Rocket.

In the fourth quarter of 2023, Lockheed Martin had a strong finish to the year, with sales nearly matching the previous year's record. Sales exceeded expectations by almost $1 billion, and this was largely due to improved material throughput. There was a slight decline in sales compared to the previous year, but this was due to better synchronization between demand and supply chain fulfillment.

The company had a strong finish to the year, with 2.5% sales growth and a 1% decrease in segment operating profit. Book-to-bill was 1.15 for the year and adjusted EPS was up 2% year-over-year. The company generated $1.7 billion of free cash flow in the quarter and returned $3.8 billion to shareholders through dividends and share repurchases. The key takeaway is that industry growth is happening due to three demand cycles: meeting support requirements, improving existing security platforms, and implementing better technology.

The company aims to maintain technological superiority in deterrence by investing in advanced technology and systems integration. This has led to slower growth, but the company's record backlog and return to top line growth show that it is paying off. The Aeronautics segment saw comparable sales in the fourth quarter, with higher volume in some areas offset by lower volume on the F-35. Missiles and Fire Control saw a decrease in sales and operating profit due to lower volume and loss recognition on a classified program.

In the past year, sales for the company decreased by 1% due to program transitions and supplier cost timing. However, there was a 12% growth in backlog due to strong demand for tactical and strike missiles. In the Rotary and Mission Systems division, sales declined by 2% but operating profit increased by 2% due to favorable contract mix. Space growth also moderated in the quarter with a 3% increase in sales and a 31% increase in operating profit. Overall, sales and profit increased for the year in this division.

In the fourth quarter, the space backlog increased to $30 billion and is now 2.5 times the company's sales. The company's outlook for 2024 includes assumptions of a 3% top line growth for the DoD and 75-110 F-35 deliveries. The company anticipates sales between $68.5 billion and $70 billion, with a 2.5% growth. The MFC segment is expected to lead with 7% growth. However, the company expects a decline in segment operating profit due to lower expected profit adjustments and losses from the MFC classified program. The net FAS/CAS pension adjustment is also expected to decline, resulting in lower EPS of between $25.65 and $26.35. A visual representation of the EPS walk is provided on page 12 for clarity.

In 2024, the company expects continued sales growth, but profit and EPS may be affected by the timing of loss recognition. The FAS/CAS pension will also be a headwind, but the company anticipates solid cash generation and plans for capital deployment. The company remains committed to investing in 1LMX and providing disciplined and dynamic capital returns to shareholders. The first question in the Q&A portion of the call was about the Aero and F-35 segments, specifically the margins in 2024. The company attributes the lower margins to lower favorable profit adjustments, and there is concern about the supply chain due to delays in deliveries.

The company is facing challenges with the F-35 and C-130 programs, leading to a decline in profit in 2024. They are confident in their production schedule for the F-35 through the third quarter, but any delays could impact their production cadence. The 10.5% total company margin in 2024 is the starting point for thinking about 2025, with a gradual path back to 11% due to the absorption of losses on the MFC classified program.

The speaker expects there to be a 10 to 20 basis point improvement in the company's performance starting in 2025 and continuing to grow at that rate until reaching 11. They are considering using their strong balance sheet to potentially pull forward required pension contributions in 2025. The delay in the government's budget and lack of clarity in supplementals may not significantly impact the company's 2024 guide, but could become more difficult if the process extends beyond March.

Jason Gursky asked about the expected deliveries for F-35 aircraft in 2021 and 2025. He wanted clarification on the cadence of deliveries throughout the year and whether Lockheed Martin can catch up and deliver 200 aircraft in 2025. Jay Malave mentioned that they are expecting to deliver 75 to 100 aircraft in the second half of 2021, with some deliveries potentially happening in the first half as well. They are also expecting to deliver older versions of the aircraft in the first half. He mentioned that they have a lot of orders for F-35 in 2024, including classified contracts, PAC-3 orders, and hypersonics space orders. He stated that they will report on the progress of these orders throughout the year.

Jay Malave, the CEO of a company, is discussing the expected deliveries for the upcoming year and the company's overall expectations on bookings and book-to-bill ratio. He mentions that while there will only be a handful of deliveries in the first half of the year, the majority will occur in the second half. He also mentions that the company expects strong demand and a book-to-bill ratio above one in 2024. He notes that there has been an increase in cost plus contracts, which is seen as a favorable trend for the company's risk tolerance.

The company is implementing more pricing discipline in their government contracts, ensuring that their pricing accounts for risk and technological advantages. They are also addressing the monopsony environment in the industry and the impact it has had on cost overruns and delays in programs.

The author discusses the risks and challenges faced by the defense industry, including cost overruns and schedule delays. They advocate for a near-term approach of only bidding on balanced price opportunities and collaborating with commercial tech companies to deliver capabilities. In the long-term, the author suggests a shift towards value-based subscription pricing, which would require changes in government and could make the industry healthier and attract more investment from commercial tech companies.

The speaker, Jim Taiclet, discusses the challenges of implementing the Tech Refresh 3 and expanding Block 4 capabilities in the defense department. He mentions that it may take longer than expected and could potentially affect production rates, but assures that they will continue to meet demand from customers. He emphasizes the importance of transparency and being realistic about the schedule and capabilities of the industry and military.

In the paragraph, Jim Taiclet discusses the importance of being honest about the capabilities of the company and its suppliers in delivering technologies for government programs. He emphasizes the need for a feasible and executable plan and the risks and costs associated with pushing beyond what is feasible. He also mentions the growth drivers for MSC, including missile defense and tactical programs, and the potential impact on margins from classified programs. He suggests that the focus on selling to the government may manifest in the MFC portfolio, but does not provide specific details.

MFC's growth will be driven by guided weapons and integrated air and missile defense, with a focus on PAC-3 deliveries. They are also moving towards a value pricing model, starting with digital services in command and control. Commercial technology will be used for data fusion and AI, and value pricing is necessary to attract commercial industry.

The author discusses the use of command and control systems in defense programs, such as AIR6500 and Joint Fires Network. They also mention how digital technology can fill capability gaps, such as providing direct satellite feed to aircraft for targeting ships. The author believes that their company, Lockheed Martin, can value price such capabilities and suggests that the Department of Defense may be interested in this approach.

Lockheed Martin is advocating for an adjacent acquisition process in the Department of Defense to purchase digital services, which is currently not supported by the traditional acquisition system. This is a complicated process that will require significant effort, but it is necessary to bring in commercial partners and achieve value pricing. The company is also addressing margin compression by controlling overhead costs, driving cost reduction in direct costs, and employing pricing discipline in bid and proposals.

Seth Seifman from JPMorgan asks a question about the F-35 and the potential for undelivered aircraft in inventory by the end of 2024. He also asks about potential margin expansion in 2025 and if there are any headwinds that could prevent it. Jay Malave responds that there may be 120 undelivered aircraft by the end of 2024 and that the margin expansion in 2025 may not be significant due to the volume of aircraft in the lot. He also confirms that the F-35 inventory will need to be worked out over the next year or two.

The next question is from Ron Epstein of Bank of America, who asks about the potential for the Black Hawk helicopter in light of challenges with future vertical lift. CEO Jim Taiclet responds by highlighting the potential for modernization and digital upgrades to the existing fleet of Black Hawks, which are widely used by the Army and allies. He also mentions the need for funding and support from the services and Congress in order to fully realize this potential. Another analyst, Kristine Liwag from Morgan Stanley, then asks a question.

The speaker, Kristine Liwag, asks about the company's supply chain issues and potential actions being taken to improve it. Jim Taiclet mentions plans to add a third solid rocket motor supplier, use additive manufacturing, and explore international opportunities. He also mentions the importance of increasing supplier diversity and implementing technology to make the production system more reliable.

The company is focusing on three areas of their core strategy to improve missile production. They have deployed resources to support suppliers and expect to see improvement in performance. The F-16 program is ramping up and they expect to deliver triple or quadruple the number of aircraft in 2024. Margins may improve over time as they gain more experience.

The speaker explains that margins have decreased in the past 10 years due to pressure from the customer and more aggressive bidding. However, with changes in management and a shift in business models, margins are expected to improve in the future.

The speaker discusses how the company is considering the shareholders' interests and implementing strategies to improve margins, even if it means having difficult discussions with customers. They also mention the decline in the industry over the past 10 years and the need to reverse it for a healthy future. The company has worked towards their vision of 21st Century security and maintains their values of doing what's right, respecting others, and performing with excellence. They thank everyone for joining the call and look forward to the next earnings call in April.

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