Good morning everyone and welcome to the Lockheed Martin Second Quarter 2023 Earnings Results Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would now like to turn the call over to Maria Ricciardone Lee, Vice President of Investor Relations. Please go ahead.

Thank you, Lois, and good morning. I’d like to welcome everyone to our second quarter 2023 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 laws. 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 www.lockheedmartin.com 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.

Thanks, Maria. Good morning, everyone, and thank you for joining us on our second quarter 2023 earnings call. I’d begin today with a few key strategic and operational highlights, and then Jay will discuss our quarterly financial results and full-year 2023 outlook. Starting on page 3 of this slide, our Q2 financial results were strong, with sales of $16.7 billion, up 8% year-over-year and double-digit growth at both aeronautics and space. Backlog reached a record level of $158 billion, up $8 billion from year-end as a result of a book-to-bill of 1.7 in the quarter. Orders included an approximately $8 billion option for the 126 F-35 for production lot 17, as well as significant awards to ramp up missions at MSC. This highest ever backlog gives us visibility into multiyear sales of our key programs and enables our suppliers to be better positioned to meet growing demand. Segment operating profit of $1.9 billion in the quarter reflected an operating margin of 11.1%. Free cash flow was $771 million, and we remain committed to advancing technology and expanding production capacity. So in Q2, we invested $356 million of company-funded R&D and $329 million of capital expenditures to address our customers’ needs and requirements. Meanwhile, we returned almost two times free cash flow to the shareholders. Given the strong results in the first half of this year, we are raising and narrowing our full-year 2023 financial outlook. For sales we’re raising the midpoint of our range by $1 billion to revise expectations of between $66.25 billion to $66.75 billion and free EPS we are raising the midpoint of our range by $0.35 to revise the expectation of between $27 to $27.20 per share. We are confident in our ability to achieve these higher expectations and return to growth sooner than previously anticipated. Turning to the state of the defense budget, the outcome of the debt ceiling negotiations preserves top line defense spending at the President’s budget request for FY 2024. It also stipulated defense budget growth in FY 2025 while allowing for additional support through supplemental funding. The embedded 3% growth in the proposed FY 2024 defense budget included funding for 83 F-35 aircraft with supplemental funding to support munitions investment that will enable us to ramp up production rates under new multiyear contracting authorities. While there are still numerous steps to reach final approval and funding for the FY 2024 budget, we’re encouraged by the strong support for our programs so far, and we look forward to the completion of committee reviews in the full appropriations process. On the F-35 program, we continue to see strengthening customer demand both domestically and internationally. The Czech Republic has expressed interest in the aircraft, and Israel has formally decided to add 25 more F-35s, expanding their fleet by 50%. We delivered 50 F-35s in the first half of 2023, all of which were delivered in the technology refresh to the TR2 configuration. During the first quarter earnings call, we indicated that we anticipated a reduction to 2023 deliveries from what we initially thought last year, due to software maturation, acceptance and certification related to TR3 configuration and hardware delivery timing. Our current view is we expect to deliver 100 to 120 F-35 aircraft in 2023. Importantly, there is no change to our longer-term delivery outlook of 156 aircraft in 2025 in the foreseeable future, and the supply chain and production system continues to execute at a rate to support these future delivery targets. Our team remains fully dedicated to delivering the first TR3 aircraft in 2023. We have completed 58 flight tests on four different aircraft in the TR3 configuration, including a successful flight test for the most recent software release that happened in May. That software update brought in the next set of critical capabilities, such as upgraded data links, a new electro-optical targeting system, and radar. In the coming weeks and months, we will begin testing multi-shift missions, sensor fusion, and additional weapons among other capabilities as part of the next software release. TR3 significantly updates core processing power and memory capacity, as well as modernizes the computational core of the F-35 to enable block four capabilities. It is a significant hardware and software upgrade that will greatly enhance the mission capability of the aircraft, which is on track to be the free world’s predominant fighter for many decades into the future. Meanwhile, we are continuing the long tradition of leading the development of the next generation of military aviation, both with piloted and unpiloted aircraft and our Skunk Works operation in California's high desert. Skunk Works just celebrated its 80th anniversary in June. That’s 80 years of pushing the innovation envelope from the X-1 aircraft that flew in the 1950s and continues to fly today, to the Mach three plus SR-71 to pioneering stealth aircraft, and beyond by advancing hypersonic, artificial intelligence, and other revolutionary technologies. Skunk Works continues to create exciting feats of engineering and goes beyond the edge of known science for our customers. A prime example is our partnership with NASA to develop and build the X-59, the prototype that will quiet the supersonic boom and lead someday, perhaps, to supersonic commercial flights over land. This elegant and amazing airplane is advancing at a pace towards its first test flight. And our company’s pioneering spirit has lived even longer in the world of rotorcraft and helicopters. At the Paris Air Show, Sikorsky celebrated its 100th anniversary. Yes, 100 years ago, Igor founded Sikorsky Aero Engineering Company on a chicken farm in Long Island, New York, with a small team of engineers and craftsmen, many of whom were immigrants like himself who fled the Russian Revolution. In 1939, he brought his dream to reality when he piloted the first practical helicopter, the VS-300, as it left the ground for all 10 seconds. His passion for innovation and perseverance to achieve his vision carry on in the Sikorsky culture today and throughout Lockheed Martin. Sikorsky's signature product line, the H-60 Black Hawk family of military helicopters, also perseveres around the world. The U.S. State Department has approved a possible foreign military sale to Norway for 6 MH-60 Romeo multi-mission helicopters and related equipment, and Spain signed a letter of offer and acceptance for 8 MH-60R Seahawk aircraft as well. We achieved several milestones in the quarter in support of other NATO allies. The German Air Force successfully launched a PAC-3 missiles segment enhancement or MSC interceptor from a German-modified launcher. This flight test was the last step before delivering PAC-3 MSC to Germany later this year. We also entered into an agreement with Rheinmetall Defence to collaborate on a unique rocket artillery system to be produced in Germany. Earlier in July, Rheinmetall selected a site in Germany to build a factory to manufacture F-35A center fuselages. This partnership, first announced in February between Lockheed Martin, Northrop Grumman, and Rheinmetall, expands supply chain capacity for the F-35. Production is expected to start with our new German partner in 2025. In addition, our relationship with Poland continues to progress, with the first F-35 Lightning II for the Polish Air Force formally entering production and the initial shipment of HIMARS launchers to Poland. The U.S. State Department also approved the multibillion-dollar potential foreign military sale to Poland for PAC-3 with modernized sensors and components. Our partnership with Australia continues to advance as well. In April, as mentioned on our last earnings call, the Commonwealth of Australia selected Lockheed Martin as a preferred bidder for Project 9102, a sovereign military satellite communication system for the Australian Defence Force. We’re excited at the prospect of deepening our relationship with a diverse team of Australian companies and helping establish Victoria as the engineering and technical hub for Australian Defence. Also in space, Lockheed Martin will be taking on a major role in Blue Origin’s national team to develop and demonstrate a human lunar landing system for the Artemis program. Our Space Operations will be building humanity’s first Cislunar Transporter, which will enable recurring astronaut expeditions to the moon surface and back from NASA’s gateway space station. Finally, we continue to advance our integrated 21st-century security digital technology architecture during the quarter. In May, as part of the U.S. Indo-Pacific Command’s joint fires network, we successfully demonstrated Digital Command Control to synchronize joint all-domain operations during the Northern Edge exercise near Alaska. The exercise demonstrated the ability to successfully integrate with both Lockheed Martin and third-party platforms and aircraft, including F-35s. The system performed C-2 functions across all the military services, all levels of operation, and across multiple domains from space to air to surface. This is the first time Joint Force synchronization has been demonstrated at this scale. It was a major milestone for all joint all-domain command and control interoperability and our company’s vision for 21st-century security. The results of this demonstration will help shape future JADC2 capabilities and continue Igor Sikorsky and Skunk Works’ pioneering legacy into the digital world. Also, as part of the Northern Edge exercise, the Lockheed Martin aeronautics and RMS teams demonstrated the first use of artificial intelligence capabilities on a stocker unmanned aircraft system for recognition and tracking of ships at sea. This capability showcases the value of using relatively cheap drones to greatly enhance the capability and improve the survivability of much more valuable manned aircraft and ships. All these types of digital technology enhancements require reliable access to advanced semiconductors. In support of this crucial priority, I recently had the opportunity to join Global Foundries CEO Tom Caulfield and Senate Majority Leader Schumer to announce a collaboration that will advance U.S. semiconductor manufacturing and strengthen resiliency within America's supply chain. This partnership enables us to more quickly and affordably produce 21st-century security technologies that increase deterrence for the United States and its allies. Alongside Senator Schumer and other leaders in industry, Congress, and the administration, we remain strongly supportive of the bipartisan CHIPS and Science Act signed into law last year. The Lockheed Martin team will work closely with Global Foundries as we expand our critical manufacturing line in New York and with our other semiconductor and tech industry partners across the country to ensure access to made-in-America microelectronics for our platforms and systems. With that, I’ll turn the call over to Jay and join you later for questions.

Thanks, Jim, and good morning, everyone. Today, I’ll walk you through our consolidated results and business area performance for the second quarter of 2023. I’ll also provide an update to our full-year guidance. As I describe our results, please follow along with the web charts we have posted with our earnings release today. Beginning at chart 4, let’s take a closer look at second-quarter results with consolidated sales and segment operating profit. Second quarter sales increased 8% year-over-year driven by aeronautics and space, both with double-digit growth in the quarter. This growth partly benefited from last year’s $325 million impact from unrecognized F-35 sales. Excluding that benefit, sales were up 6% year-over-year, with Aeronautics still up 12%. Segment operating profit was up 5% year-over-year, driven by the sales growth, which more than offset lower net favorable profit adjustments aligned to risk retirement timing. As expected, segment margins are 11.1%. Moving to earnings per share, on chart 5, on an adjusted basis, EPS was up 6.5% driven by higher profit and a lower share count, partially offset by increased interest expense. Moving to cash flow on chart 6, we generated $771 million of free cash flow in the quarter with nearly $330 million of capital expenditures. On a year-over-year basis, our free cash flow included $330 million of higher tax payments from the R&D capitalization legislation. Once again, dividends and share repurchases exceeded free cash flow in the quarter, demonstrating our commitment to shareholder returns. For the first half of 2023, we returned almost $2.8 billion or 137% of free cash flow through dividends and share repurchases. In the quarter, we issued $2 billion of debt across three tranches for a weighted coupon of 4.8%. We had intended to raise the debt early in 2024 to support share repurchases but accelerated the issuance to give us flexibility in coverage going into the debt ceiling negotiations. Now let’s turn over to the moving to the segment results. Starting with Aeronautics on chart 7, second-quarter sales at Aeronautics increased $1 billion driven by higher volume on the F-35, C-130, and classified programs. On F-35, we saw strong year-over-year growth in production and sustainment with some of the favorability due to the previously mentioned impact in the second quarter of 2022 to the Lot 15 to 17 funding timing. Excluding that benefit, Aeronautics was up 12%. Operating profit increased 17% over the prior year based on the higher sales. As Jim mentioned, we were pleased that the joint program office exercised the next option, Lot 17 on the F-35 contract in the quarter. F-35 backlog now stands at 421 aircraft at the end of the quarter and offers longer-term clarity for our production operations and provides stability to our supply chain partners. Looking at missiles and fire control on page 8, sales were comparable to last year as higher sales volume on tactical strike missile programs were offset by lower volume within integrated air and missile defense. As expected, segment operating profit and margins were down year-over-year, driven by lower net profit adjustments. MFC increased the backlog by $6.5 billion in the second quarter reflecting a record $9 billion of orders in the quarter and a 3.3 book-to-bill ratio. The orders increases were broad-based across several of our key programs, including PAC-3, GMLRS, HIMARS, JASSM, LRASM, and Javelin. At Rotary and Mission Systems on page 9, sales declined 3% in the quarter driven by lower volume on Black Hawk as the program continues to transition from multi-year nine to multi-year 10. This decline was partially offset by favorable volume across several radar programs within integrated warfare systems and sensors. Operating profit decreased slightly due to lower sales volume and net profit adjustments, partially offset by higher equity earnings. There were a few significant offsetting items that drove net profit adjustments down $40 million year-over-year. We recorded an unfavorable adjustment of $100 million in the Canadian maritime helicopter program due to updated forecasts, partially offset by a $65 million benefit on an International Airborne Surveillance Program. Turning to chart 10. In our space business area, sales increased 12% year-over-year, driven by continued development activity on a Next-Gen Interceptor and classified programs, with additional upside coming from Orion. Operating profit increased 15%, and margins were up 30 basis points driven by the increased volume and higher equity earnings from United Launch Alliance year-over-year. Now shifting to the outlook for 2023 on page 11. For the full year, we’ve increased our sales, segment operating profit, and earnings per share outlook while also tightening the ranges based on our strong year-to-date performance. At a consolidated level, sales are up $1 billion at the midpoint to $66.5 billion, allowing us to return to growth in 2023 earlier than previously anticipated, and segment operating profit is up $45 million at the midpoint to $7.35 billion. At the business area level, we’ve increased Aeronautics' outlook for sales by $250 million, with profit of $25 million based on higher volume on F-35 sustainment and classified work at Skunk Works. As we’ve mentioned previously, we expect minimal impact on our cost throughput in 2023 as a result of the lower F-35 aircraft deliveries. While we expect there to be some pressure on cash collections, we are driving offset opportunities to make up any shortfalls. At Space, we’re raising the sales midpoint by $750 million on higher development volume and the profit midpoint by $20 million, as the benefit from higher sales is partially offset by a lower ULA earnings outlook. Lastly, we’re maintaining our free cash flow guidance at or above $6.2 billion and remain committed to $4 billion of share repurchases with $2.7 billion in the back half of the year. We continue to expect that these repurchases, along with dividends, will generate a return of more than 100% of our free cash flow to shareholders for the year. Looking at the 2023 earnings per share expectation changes on page 12, we’ve increased the EPS midpoint by $0.35, with the largest portion $0.14 coming from improved business area profit. We expect $0.11 benefit from a lower share count, and we also expect a $0.06 benefit from a lower tax rate to 15% or about 20 basis points. The remaining $0.04 comes from a mix of miscellaneous offsetting items. Finally, on page 13, to summarize and close out our comments, our first-half results were strong, driving our return to growth a year earlier than anticipated, leading to the increased outlook for sales, profit, and EPS. Our backlog gives us confidence in our expected growth acceleration in 2024 and beyond. In addition, we remain committed to rewarding shareholders through industry-leading dividends and robust share repurchases. Finally, we continue to focus on our strategic initiatives—21st century security and 1LMX—in order to transform our business and extend our industry leadership while delivering consistent and reliable shareholder returns. With that, Lois, let’s open up the call for Q&A.

Thank you, ladies and gentlemen. Operator instructions. And that first question comes from Robert Spingarn from Melius Research. Please go ahead.

Hi, good morning.

Good morning.

So, Jim and Jay, you both talked a bit about the strong backlog expansion at MFC and how that helps the second half of this year, perhaps a bit earlier than expected. I wanted to see if you could provide a little more color on how that drives 2024 and beyond. And how sustainable this is? And then lastly, Jay, can the rising volumes on some of these legacy programs mitigate that margin pressure from the classified work at MFC?

Sure, if you look at where we are, and maybe take us back to I think it was the fourth quarter call in January. I was asked about our outlook for 2024 growth and at the time, what I said was to expect low single-digit growth. And I think that that’s just right now, we’re going to park there, although that’ll be on a higher base here in 2023 because 2023 is better. But we still need to go through and get a feel for what the supply chain performance is. Clearly with the backlog, it's not a question of demand; it’ll be a question of supply. We need to go through that analysis over the next few months to determine to what extent our growth outlook will change, if anything from this baseline of low single-digits. If anything, what I would say the backlog gives us a lot of confidence that we are going to return to growth. The demand signal itself would indicate a higher rate than low single-digit. But we need to wait and watch the supply part of it to make sure that can catch up to that demand. As far as the margin profile at MFC, we do expect there to be continued pressure over the next number of years. I would agree that some of the upside that we’ve seen in this incremental demand comes from higher margin products and should provide some level of mitigation, but we will really get a feel for exactly what that means until again, as we go through this over the next few months as we understand specifically, what type of contribution each of these different programs will have in 2024 and beyond, what their timing will be, and what that mixed benefit may be.

And Rob, I can give you some long-term context here. First, from a process perspective with the U.S. government, there’s multiyear procurement authority now for a whole set of Lockheed Martin products, and I’ll just run through them really quick. It’s joint air-ground missile, HIMARS, ATACMS, which is a longer-range GMLRS for HIMARS, PAC-3 MSC, the GMLRS itself, which is the primary munition for HIMARS, Javelin, and LRASM and JASSM. All of these programs have multiyear procurement authorities. So far, the GMLRS, PAC-3, LRASM and JASSM are in pursuit of multiyear contracts with us currently. If you look at the corpus, the Ukraine supplemental, and what they’re targeted for, the overall amount has been $62 billion in four bills from the DoD regarding Ukraine support. About two-thirds of that, or $44 billion, is for the purpose of restoring the Presidential drawdown for the train-to-security assistance initiative, essentially meaning the restocking of U.S. munitions. Many of those munitions are going to be upgraded from what was in the stockpile to the capabilities that we can produce today. So that’s another motivation for the U.S. to go through with that. We’ve kind of derived about $7 billion of those funds can be allocated to some of the Lockheed Martin programs that I just talked about. There are significant long-term upside opportunities for our MFC business. As Jay said, they’re fairly high margin and there’s increasing international demand for a lot of those products too. So I think it’s a really good long-term foundation for growth for the company.

Thanks very much.

Thank you. The next question is from Matt Akers from Wells Fargo. Please go ahead.

Yes. Hey, good morning, guys. Thanks for the question. I wanted to follow up on the commentary on Tech Refresh 3. Can you just touch on the cash impact of that? How big was that, how were you able to offset that and kind of hold this year’s guidance? And then I guess is it fair to assume sort of additional deliveries above the 150 level for 2024 and kind of cash and benefits associated with that next year?

Yes, Matt. So the impact on a per aircraft basis is around $7 million per aircraft. Our range was 147 to 153, so the midpoint there for 150 gives a $210 million impact, and all the way down to 100 would be about a $350 million impact. So you’re talking between $200 million and $350 million impact to this year. As I mentioned, we’re diligently working to manage that and offset it with tailwinds elsewhere in the portfolio. To your point, to the extent that that does slip into next year, it’s really a matter of timing. Yes, it would, as we deliver aircraft, to those who slip into next year, we will recover those remaining payments that are upon acceptance of the aircraft in 2024.

Yes, and just as a kind of context, we can actually deliver more than 156 aircraft in 2024 because the factory is going to be producing at the rate of 156. So there’s some carryover. We might actually deliver more in 2024 than what the ongoing run rate will be because the factory will still be performing while those aircraft are waiting to be accepted. I just want to make sure that everybody knows what we’re applying to this problem to make sure that we minimize it. This is the same conversation that I’m having with the senior military and civilian roles in government. So first of all, suppliers are applying all the needed resources to this. It’s a top priority for our company and a few others as well. We’re running extra shifts, and we’re deploying subject matter experts into other companies or suppliers’ operations to make sure this stays on track, flight test programs are on schedule. We’ve got the sufficient pilots, both in the company and in the Department of Defense, for acceptance as we move forward on all of that. The purpose of the flight test program is to continuously narrow the funnel of testing of all the aircraft functions and mission capabilities in a really methodical fashion sort of narrowing a funnel. We’re just moving through that methodically. Our latest estimate is that it will all be completed by the end of the fourth quarter this year. Could it move a little bit into early 2024? Yes, it could. But we think we’re on track to really get all the dimensions of resources, commitment, and schedule to give that option for the December delivery everything we can.

Great, thank you.

Thank you. And the next question is from Peter Arment from Baird. Please go ahead.

Yes, good morning, Jim and Jay. Hey Jay, thanks for all the color on the F-35. I was wondering just regarding the backlog growth you have now, you’ve got a pretty big step up in CapEx this year, mid-teens growth? How are we thinking about just kind of supporting the backlog? Are you expecting kind of the CapEx profile to level off here? Or do you expect that to increase? And maybe also related to how you’re thinking about working capital in the same context? Thanks.

Yes, on CapEx, I would definitely expect it to increase in the back half of the year. We’re still holding our forecast of $1.95 billion for the year. That’s going to essentially stay elevated for the next few years. A lot of that is investment in capacity and production capability, as Jim mentioned in his prepared remarks. We expect that to return kind of remain fairly level. On the working capital side, that for us is a source of opportunity. We expect that to really—what we’re trying to do is take it back down to what we performed from a day’s perspective over the past, say, 2020, 2021, and some periods of 2022. While we’re increasing volumes, you would expect working capital to increase as well. We believe there are efficiency opportunities to perform at levels we’ve been able to perform in the past and to make that a minimum, not a use of cash. And if we’re fully successful, make it a source of cash in spite of growth. That’s our view, particularly in the back half of the year as well as over the next few years.

Appreciate that. Thanks, Jay.

Thank you. And our next question is from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, Jim and Jay. Thank you. So maybe just some comments on space, given it drove your guidance raise. You know what drove the improved outlook? I see you called out $700 million of higher revenues related to development in space. Can you just give us a little bit of color there? Was that a competitive win or any more detail on what was driving that?

Yes, it’s just in many cases, Sheila, it’s earlier than anticipated ramps on some of the programs. So the first half, we ran higher than we expected. We were expecting to run at those levels in the back half of the year. This includes classified programs, also protected communications, international security space business, as well as an NGINS in our strategic and missile defense business within space. We’ve also had a little bit of growth in the Next Gen OPIR Program. All of those together really drove the increase versus where we were coming into the year. Much of that we’ve really realized in the first half of the year with a little bit to come in the back half, but we had already planned on ramping up those programs in the back half.

Okay, great. Thank you.

You’re welcome.

Thank you. The next question is from Rich Safran from Seaport Research Partners. Please go ahead.

Jim, Jay, Maria. Good morning. There’s been a lot of press around the F-35 and an engine upgrade both during and after Paris. I just want to know if you could clarify your remarks a bit and discuss where you stand on the new engine program. But also, I’d like to know what this kind of means for Lockheed and for the F-35 in general since the engine was, as I thought, government-furnished equipment.

You’re absolutely right, Rich. This is Jim here. It’s government-furnished equipment, a decision of the U.S. government as to what engine is selected for every block of aircraft and what modernization program goes along with that engine. Lockheed Martin’s role and responsibility in this is simply to receive the engine performance data from the manufacturers and their anticipated performance improvements, whether it’s a modernization or replacement option for the future. We then translate that data to aircraft performance data and information that we supply to our U.S. government customers. We are available to answer questions for their decision-making process, but we’re not involved in that decision-making process. Therefore, Lockheed Martin does not have a formal company position on engine selection or modernization. We implement that U.S. government decision. That’s what we’re doing now. So that is clearly our role and responsibility, and anything outside of that is not an official company position.

Thanks. Got it.

Thank you. The next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Hi, good morning, everyone.

Morning.

Jay. We’ve talked about this dynamic where the outlays have lagged the authorization. In the second quarter, outlays finally grew a decent amount; your revenue then grew at the fastest rate in a while organically year-over-year. I know in the back half, you have tougher comps. But the updated guidance and revenue would have to be down in the back half organically. I guess I’m curious to hear you talk about is the outlay to authorization gap going to keep closing, is supply chain or whatever else was impacting that resolved? And are you building guidance assuming that continues to close? Or would that create upside if it were to play out that way?

We think no, the outlays will continue to increase; it’s just a function of us. We always have a back half that is still higher than the first half, and that’s still the case here. When you look at our overall sales in the back half sequentially versus the first half, it’s about a billion dollars higher. A lot of that in aeronautics is going to drive that. I would expect the outlays to continue to increase on an absolute basis over that period of time. The compares are a function where this year sales are more level loaded than they were last year. So we are having a step up in sales, but it won’t be as significant as it was a year later, or sorry, to last year. Part of that is, if you recall, last year we had the $325 million in the second quarter that slipped into the third quarter in 2022. We also had a late award on the F-35 program that we weren’t anticipating in the fourth quarter; we were expecting that in the first quarter. We were able to convert pre-contract inventory to sales immediately in the quarter. When you combine those that in of itself last year was about $500 million. When you normalize those for those things on much of a memorial level load here in 2023 versus 2022, it drives you to this. The compare just is going to be more difficult because last year, in the fourth quarter, partly for these reasons, we had 7% growth in the fourth quarter. We won’t see that; we will see the back half of the year organically decline relative to the year-over-year perspective, but again, still putting us in a position to deliver growth a year earlier than we expected. It’s also just a function of our program timing. Yes, it’s still higher, but just we’re just not at the ramp-up rate that we had in 2022.

Got it. And Jay on the cash flow statement, I think it’s been a bit since you’ve updated the beyond 2023 contribution and cash recovery. Could you give us updated numbers for that?

Sure. For cash contributions, we’re right now anticipating anywhere between $500 million to $1 billion required cash contributions in 2025. Our objective is to really offset that through three things: more net income, cash-based net income and contribution. We’re going to see a tailwind in terms of dissipation of the R&D capitalization headwinds that we’ve seen, and we will also drive working capital performance to a higher productivity level. We can offset that, our goal over this period of time is to continue to deliver a low single-digit free cash flow growth on an absolute basis. Combined with our share repurchase program, this should result in mid-single-digit free cash flow per share growth. That’s our objective not over the next few years but really over a longer period as well. But that’s really where we stand right now on pension contributions, and how we’re planning for it.

Thank you. The next question is from Myles Walton from Wolfe Research. Please go ahead.

Thanks. Back in April, the DoD said the center fuselage production was the limiter to higher production on the F-35 above 156 per year. With Rheinmetall now signed up for fuselages starting in 2025, can you talk about the upside towards the end of the decade above the 156 level as Rheinmetall steps up to maybe 10% capacity?

Well, that’s one important element Miles of being able to expand past 156. But there are a lot of other elements that would have to be funded between our suppliers, ourselves, and the U.S. government to build the rate in the entire supply chain above the 156 level that we’ve all agreed on so far with the government. If the demand continues for the aircraft, which it seems to be, and the U.S. authorizes export of the aircraft to either more countries or more in greater numbers to existing countries, there might be a business case for the government and industry to go beyond the 156. The Rheinmetall center fuselage expansion will definitely be constructive to that.

And just a clarification, despite the lower deliveries, you haven’t slowed the production system on the F-35 on this TR3 issue, correct?

No, we haven’t. The whole production system, especially the long lead time parts, are tracking through the supply chain as if we’re going on our ramp up of between, 100 meaning 140s, and ultimately to 156. The deliveries will be delays; if there are delays of aircraft, they will be fully completed aircraft on the ramp, waiting for not just the software load but the confirmation that the software load they have for TR3 has passed all the flight test points. That’s what they’ll be waiting for—there won’t be a production lag. There’ll just be a delivery lag based on the completion of the software integration testing that has to be done in the air on not only on the aircraft, but among numerous aircraft flying together at the same time.

Thank you.

Thank you. Our next question is from the line of Ken Herbert from RBC Capital Markets. Please go ahead.

Yes, hi, good morning, Jim and Jay. A two-part question, if I could on the backlog. Can you first help us understand how much of the backlog growth is maybe directly Ukraine-related? Is there any risk to this based on either sort of timing of the war or funding ultimately, going to allied partners and how it relates to the obviously for the restocking? As part of the long-term agreement, you have in place on munitions, how should we think about the potential positive margin impact from these longer-term agreements?

Let me Ken go to the backlog; much of the backlog particularly here, what we saw in the second quarter were 20% only 23 contracting requirements. There was something there was also GMLRS, which also included some 24 requirements. As Jim mentioned, we’re working towards multiyear contracting, but are not yet under any multiyear contracting agreements yet. What we put into the backlog is pretty high confidence, it’s going to convert to sales. We’re continuing to do it. As Jim mentioned, having a dialogue with a customer regarding multipleyear requirements beyond that. As far as the marginal impact from the long-term agreements, we essentially, in many cases, will enter into agreements with our supply chain over that period of time for these requirements, so we will go back to back with our customer. So as we enter into agreements with our customers, that will cover multi-years, we will also get into contracts with our suppliers for those same multi-year. So any benefits that we get from that will probably be dropped through to our customer in favorable terms and pricing. I wouldn’t expect there to be any type of margin upside from where we are today. So I would expect consistent margins from those, but again, those are pretty solid.

Great, thanks, Jay.

Thank you.

Thank you. Our next question is from the line of Jason Gursky from Citigroup. Please go ahead.

Good morning, everybody. Jay, Jim, give you an opportunity to maybe offer up some comments on the other segments. Jay, you’ve talked a little bit about low single digits, expectation and MFC. I mean, if you could walk us through the other segments as we move out into 2024 and beyond and kind of your baseline assumptions for those at this point. And then also, maybe talk a little bit about margins, you made some comments during the quarter about the 1LMX initiative that you have going on, particularly around supply chain, consolidating your purchasing and maybe getting some better purchasing power and pricing, and just kind of how that's informing your outlook for margins in the future.

Okay, so just start with the growth rates and 2024 and beyond. Just to make sure, I was clear, when I said low single-digit, I meant for the entire company, total consolidated sales. MFC should be significantly better than that. We expect them to be our highest growth segment. The others will see some growth from the remainders, but really, the driver will be MFC over the next few years, given this demand, incremental demand that we’ve seen. On 1LMX, on the margins, we’ve been, this is an initiative for us that’s very significant. It’s more than an ERP upgrade. It’s our engineering tools, product lifecycle tools, it’s our manufacturing execution system tools, it’s our customer relationship management tools, our HR system tools, and it’s intended to make us a more competitive company. Many of those benefits that we’re going to obtain, we will pass those through in pricing and our forward pricing rates to our customer. We won’t necessarily see some margin benefits from it, but it will make us more competitive to capture more business and stay in front of the industry, and maintain our leadership. That’s the way we’re approaching 1LMX and a really more of a financial view of it.

So fair to say then that margin outcomes will depend largely on mix going forward between development work and fixed?

Yes, that’s I would say that’s accurate. The mix will definitely be a factor in future margins.

Okay, thanks.

Thank you.

Thank you. Our next question is from David Strauss from Barclays. Please go ahead.

Thanks, good morning.

Good morning, David.

Once we get an update on your position on section 174, see if anything’s changed there, based on feedback you might have gotten from any of the tax authorities. And then the second one, Aerojet Lockheed L-3s potential acquisition there of Aerojet. I think recently you’ve been out to with some comments around just reviewing whether LHX has been able to or where they are in terms of being able to satisfy your concerns around that deal. Thanks.

Sure. I’ll take the section 174 question. Over the past, I’d say probably six months, the IRS has acknowledged that this is an issue they need to provide guidance on. We’re hopeful that we will see some guidance by the end of the year from them related to our position. There’s been no change in our position there. We still feel confident in the position that we’ve taken. I’ve laid out in the past why we’ve taken our position that we have today. There has been some legislation proposed that could defer the implementation of section 174 to 2026, which would be retroactive to 2022. We’re optimistic, of course. We believe that it should be repealed, but at least a deferral would be a good start. We will monitor that legislation. Obviously, we’re supportive of that. We will see how it works through Congress. When it comes to Aerojet Rocketdyne, we have two interests: reliable access to propulsion, especially solid rocket motors, which is of critical importance to the entire aerospace and defense industry. The two-sided benefit that we need to preserve of Aerojet Rocketdyne’s current structure is that it’s a merchant supplier of propulsion to the industry. It treats all of the prime contractors for the end products equally. We feel this needs to be preserved even if AJRD goes into the ownership hands of another company. Secondly, the performance of AJRD has been improving but needs to get significantly better nonetheless. Whether it’s on its own or part of another company, it’s really important that resources be applied to AJRD’s operations so that it becomes a more capable supplier for on-time deliveries and quality, etcetera. So we have not received any commitments from L3Harris at this time that would assure us they are going to keep AJRD as a merchant supplier. That’s the one thing we really are looking for.

Right, thank you. That’s very helpful.

You’re welcome.

Thank you. Our next question is from Ron Epstein from Bank of America Securities. Please go ahead.

Yes, hey, good morning guys. Maybe a broader big picture question here. As we look out to the fiscal 2024 budget and what was in fiscal 2023 and the trajectory, maybe even fiscal 2025, and 2024, it looks like there’s going to be maybe $6 billion or so of spending on classified aircraft programs, everything from NGAD to F/A-XX. Now there’s been chatter about replacing U-2 with the hypersonic platform. I know you’re limited in what you can say, but can you just give us a feel for what kind of that means for Lockheed Martin? How you think about it? And as outsiders kind of model this and think about it, how would you guide us to think about it?

Well, I’d start with there Ron is that we’re experiencing significant growth in our classified portfolio already. It’s a bright spot for the company. I think recently, when we aggregate all our classified programs together, we see sort of a 7% growth rate. It’s a place where we have significant talent and capability to work in those advanced spaces, thanks to Skunk Works, our space operations, some segments of RMS and MSC. I’d basically said in the prepared remarks, there are areas of this company where we are endeavoring to move into areas beyond known science to address our customers' challenges. We have the capability to take advantage of a larger classified program growth rate on the part of government spending if that’s what happens. So we’re in good shape to do that. There are missions that you need to differentiate though when it comes to aircraft. There’s the reconnaissance and surveillance mission, which a lot of it can be done with unmanned systems. That’s one of the strengths of Skunk Works for example. So that mission we have a real strength in unmanned surveillance ISR systems. Then you’ve got the air superiority type of aircraft. You can think about F-15, F-22. NGAD is the next generation air dominance aircraft that is classified. The Air Force recently said that there is competition now beginning for that air dominance aircraft that is very much needed. As far as the all-purpose strike aircraft, right, so that’s F-16 and F-35. The capacity for the strike mission can and will be pursued through the F-35 and a large part for the near future. Those are the ways to think about aircraft. The classified programs are going to be largely in air superiority and ISR for the most part, and then there’s the bomber mission, which is largely going to be carried out by the B-21 going forward. Hopefully, that’s a bit helpful to your question there.

Overall, the entire classified business for us is around $8 billion. If you recall, we talked about it being one of the four pillars of our growth projection all the way through 2027. Our highest growth will probably be our programs of record, given what we’ve seen, particularly with MFC. But that will be our second highest growth at anywhere between mid to high single-digit growth through 2027.

Got it? All right. Thank you.

You’re welcome.

And the next question comes from the line of Pete Skibitski from Alembic Global Advisors. Please go ahead.

Yes, good morning. Can you just talk about labor availability and cost, just incrementally from last quarter? Has hiring become easier, just in terms of hiring people? And then also wage rates? Have you seen improvement there?

Yes, we’ve actually, over the past six months, our labor availability has improved significantly. We have closed a lot of our key critical skill gaps over this period of time. That partly has enabled the sales growth, the incremental sales growth that we’ve seen here in our change in outlook because part of that is just our own internal labor. We’re in a much better position than we were even six months ago. We’ve seen some lower attrition rates, as well as better hiring rates. We’re fairly confident that this will stick, and that also bodes well for the rest of the industry, particularly supply chain.

Okay, that’s great. Appreciate the color.

Thank you. Our next question is from Doug Harned from Bernstein. Please go ahead.

Good morning. Thank you. If I want to go back to missiles and fire control in Ukraine for a minute, because if we think back to the early days of the Russia, Ukraine conflict, there were things like Javelin for you; there were of course, stingers, everything looks like it would be kind of a short-term need potentially, building out some capacity for replenishment of weapons. Now we are more than a year later into this. You’ve received very big awards in this last quarter that appear to be related to Ukraine, either directly or other European needs. We’re seeing NATO spending go up. Can you talk about how you view the opportunity in missiles and fire control for revenue and backlog? Depending on how things may play out in Ukraine, how do you think about that in your planning?

I would say qualitatively and maybe turn it over to Jay for some quantification around it is that the tragedy of Ukraine has unveiled some issues and weaknesses for our national defense enterprise more broadly. I’m not convinced, Doug, that the duration of the Ukraine war, which we hope is very short, will affect our long-term prospects for MFC. But the lessons from this conflict will remain for many years. The lessons are that great power conflict, unfortunately, is not gone from the world at this point in history. Russia’s decision to invoke a major power land war on the European continent was pretty risky and demonstrates that they may take other risks in the future to maintain or expand its power. NATO is taking this extremely seriously, not just for the short term but for the long term, and they are expanding their defense budgets because of the elevated risks they perceive. The expenditure rates of munitions are much higher than most of our existing war gaming models would imply. There’s a replenishment need for what’s been used and what’s been shipped to Ukraine. Beyond that, it’s about planning and hopefully, deterrence of future conflicts, where the U.S. and its allies are going to need to demonstrate to a potential adversary that they have the stockpiles to defend themselves for a long period if needed. That being said, we think this represents a longer-term sea change in national defense strategy for the U.S. and for our Western allies, including Japan, the Philippines, and others. We hope the conflict in Ukraine ends quickly, but the lessons and the future demand for these kinds of products is going to stay elevated for a very long time, we think.

And that aligns with the nature of these recent orders you’ve gotten that are large quantities extending over work for longer periods of time than we might have thought.

Right.

This is Maria. I think we’ve come to the top of the hour here. So I’ll turn it back to Jim for some final thoughts.

Just a couple of things. I wanted to make sure everybody understands that we’re up to what I now think is a great start after three years of launching our 21st-century security concept and strategy. It was really originally around improving and increasing deterrence to conflict by accelerating the adoption of digital technologies like 5G, distributed cloud, AI, and international defense. We’re making huge progress on that. We’ve got a great set of partnerships with tech companies, large and small, to help us do that, and the customers are starting to adopt it. I talked about the major exercises and we’re getting some actual revenue and Program Awards around that. We’re going to expand that concept into two arenas based on the experiences we’ve had in the last two or three years. The first one is building and strengthening the defense production supply chain; based on some of the things you just talked about, we’re going to have to have a more resilient defense production system that can scale quickly if we have to. The other dimension is to make international production and sustainment operations a part of Lockheed Martin’s future. You see us talking about investments in Australia, the U.K., potentially Poland, and Germany. We’re going to continue to expand internationally to ensure we have a resilient supply chain and that we have sustainment operations where our customers can use them to deter future conflict around the world. Those are some of the important elements that I think are relevant for you all to understand where we’re headed. Before concluding the call, I want to thank all my Lockheed Martin teammates for their many important contributions to strengthening our national security and increasing deterrence. The strong financial and operational performance that we’ve been experiencing in this quarter was a result of their dedication and hard work. Whether it’s on the factory floor or classified engineering facility or customer flight line, our people showed up every day during the pandemic to do the job, and they continue to show up every day to do the job to provide for national security. I want to thank them and thank you all for joining us on our call today. We look forward to speaking with you on our next call in October. Lois, that concludes the call.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.