Good day and welcome everyone to the Lockheed Martin Fourth Quarter and Year-End 2023 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Treasurer and Investor Relations. Please go ahead.

Thank you, Luis and good morning. I'd like to welcome everyone to our fourth quarter and full-year 2023 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; Jay Malave, our Chief Financial Officer. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We posted the 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 fourth quarter and full-year 2023 earnings call. In 2023, the 122,000 men and women of Lockheed Martin, working closely with our customers, made excellent progress advancing our 21st Century security strategy and delivered strong financial results for our shareholders. Turning to Chart 3. Robust demand for our broad portfolio of aircraft, helicopters, satellites, radar systems and other products, services and advanced digital technologies boosted backlog to a record $161 billion. Full-year sales of $67.6 billion increased 2% year-over-year and came in stronger than anticipated, as did earnings per share of $27.55. To position the company to take full advantage of these future growth opportunities, we invested more than $3 billion across research and development and capital in 2023. We generated $6.2 billion of free cash flow, as expected, which resulted in year-over-year free cash flow per share percentage growth in the mid-single digits. We returned approximately 145% of free cash flow to shareholders, over $9 billion through dividends and share repurchases combined. Our expectation for Lockheed Martin's 2024 financial outlook includes low single-digit growth in sales off of the higher 2023 base and a range of $6 billion to $6.3 billion of free cash flow. Our ongoing dividend and expectation for $4 billion of share repurchases will sustain our focus on returns to shareholders in 2024. We also plan to further advance our vision for 21st Century security in the year as we believe that it is our responsibility at Lockheed Martin to bring the best of U.S. and allied technology and industrial capability to help maintain an effective deterrent to armed conflict and to provide our armed forces with the capabilities to win should we need to. First, we work closely with our supply chain to apply anti-fragility measures and increased resilience. Through teaming arrangements to expand sources of supply and by making strategic investments in startups with cutting-edge technologies. For example, we are collaborating with a supplier in which we have a minority investment, to accelerate our additive manufacturing progress, reducing material and process dependencies and complex thermal management applications such as heat exchangers. We also stood up a wholly owned subsidiary called ForwardEdge ASIC to work with major semiconductor fabs to design and manufacture the cutting-edge microprocessors that we need. Second, we led the industry to broaden and strengthen the defense industrial base by making significant progress with our commercial technology collaborators to bring their innovations into the service and national defense. For example, in the fourth quarter, Lockheed Martin worked together with a team, including Intel, Verizon, Microsoft, Juniper Networks, Keysight and Radisys to successfully demonstrate a secure, resilient, hybrid 5G and military datalink network in a live field demonstration in Colorado. Our 5G.MIL unified network solutions performed as a tactical and commercial multi-node hybrid network for integrating land, air and space operations. Together, we demonstrated absolutely cutting-edge system capabilities, performance and operation for customers in a field setting by combining the best of our technology with those of our commercial teammates. Third, we deepened relationships internationally with partners and allies to ensure that the U.S. can drive maximum interoperability in both industry and in military operations. We are making progress towards a mission-centric approach that uses the latest digital technologies to network aircraft, satellites, command centers and other key elements together to vastly improve their effectiveness and deterrent value across our U.S. and allied customers. One example from 2023 is work with Australia to develop Phase 1 of AIR6500, which is a joint battle management system and the first of its kind in terms of situational awareness and interoperability. This increases collaboration with trusted allies and partners can also help reduce the fragility and increase the capacity of the defense production system. Last week, Lockheed Martin was awarded the guided weapons production capability Risk Reduction Activity contract, which will provide a mechanism for swift knowledge and technology transfer and serve as a pathway to manufacturing our suite of guided munitions in Australia with their workforce and with contributions from their society and their economy. Turning briefly now to the status of the U.S. defense budget. The current proposed agreement being discussed with the administration in Congress would support an $886 billion top line budget, 3% higher than 2023. We will continue to monitor the status of the U.S. budget process and strongly believe that Lockheed Martin programs will continue to be well supported as the process unfolds. I'll now review a few notable highlights from our operations. Starting with Aeronautics and the F-35. We delivered 18 F-35 aircraft in the Technology Refresh 2 or TR-2 configuration in the fourth quarter, bringing the 2023 total to 98. We are making continued progress towards delivering the first TR-3 configured aircraft. Today, over 90% of the TR-3 functionality is currently in flight test, and we are further advancing the software integration to include additional aircraft and mission subsystems. While this system maturation process continues to advance, it is taking somewhat more time than we originally anticipated. A second quarter customer acceptance of delivery software remains our target. However, we now believe that the third quarter may be a more likely scenario for a TR-3 software acceptance. We are taking the time and attention to get this technology insertion right the first time because it will be absolutely worth it. The step function technological advances of TR-3 will provide our customers with the onboard digital infrastructure of data storage, data processing and pilot user interface to provide unmatched capabilities for many years to come. These include increased types of capability for air-to-air and air-to-ground munitions, advanced sensing, jamming and cybersecurity capabilities, and more accurate target recognition. To achieve this level of reliable capability for the long run, the resulting aircraft delivery range for 2024 is between 75 and 110 and requires the TR-3 hardware suppliers to keep pace with production demands both this year and in the future. Given the increasing operational capability and digital connectivity of the aircraft, international demand for the F-35 remains very strong. In December, the Republic of Korea made a decision to procure 20 additional F-35 aircraft. Also in December, we presented the first F-35A to the Belgian government, which will be one of more than 600 F-35 that will be stationed in Europe across NATO member bases by the 2030s. Aero also continued to advance the F-16 as the first European F-16 training center in Romania was inaugurated in November and a partnership with Romania and the Netherlands. This center will provide world-class training to enhance mission readiness and ensure the safety of flying and operating F-16 fighter jets. In addition, we delivered the first two Slovakian F-16 Block 70 jets in the fourth quarter. Deliveries for Slovakia totaling 14 aircraft will continue through 2025. Aero Skunk Works continues to pioneer groundbreaking innovation as well. And for a change, I can actually tell you about one. The X59 experimental supersonic aircraft built by Skunk Works and NASA Aeronautics was selected as one of Time Magazine's best inventions of 2023. The X59 is expected to transform the future of commercial supersonic flight over land by quieting the sonic boom, one of aviation's most persistent challenges. The X59 was unveiled at a rollout ceremony earlier this month and is expected to take its first flight later this year. Our MFC business continued to push technological advancements forward as well through modernization of air and missile defense and precision strike capabilities. In the fourth quarter, we delivered the first Precision Strike Missile, or PrSM, to the U.S. Army and conducted a system qualification test for an extended range Guided Multiple Launch Rocket System or GMLRS, which will extend the range of the HIMARS system that many of you are familiar with. MFC also delivered the 800th THAAD, that's a Terminal High Altitude Area Defense interceptor to the U.S. government in October. We successfully integrated the PAC-3 Patriot Missile with the U.S. Army's new air and missile defense radar system to defend against cruise missiles, tactical ballistic missiles as well as hypersonics. International demand for the PAC-3 remains strong too. This year, Switzerland and Romania each signed Letters of Offer and Acceptance for PAC-3 MFCs, marking 15 partner nations for this program. RMS also saw strong international interest in the fourth quarter. The U.S. Navy awarded Lockheed Martin contract to produce eight MH-60 Romeo SEAHAWK helicopters for the Spanish Navy and six of them for the Norwegian government as well. To date, Sikorsky has delivered 330 MH-60 Romeo aircraft to five countries, including the United States, with 67 more on order or in production for India, Greece, South Korea, Australia and now Spain and Norway. Also in the quarter, Sikorsky installed the U.S. Army's improved turbine engine on our RAIDER X, designed for the Army's Future Attack Reconnaissance Aircraft or FARA program. This final phase of the RAIDER X build brings us one step closer to completing the system that will support the Army's high-tech future missions requirements, and we anticipate the first flight of RAIDER X in late 2024. Finally, turning to space. United Launch Alliance successfully launched The Vulcan Centaur Rocket earlier in January. This launch was the first of two flights required to complete National Security Space Certification, and the second planned mission could happen as soon as April. The U.S. Air Force awarded space a nearly $1 billion contract to develop a new reentry vehicle for the Sentinel Intercontinental Ballistic Missile. The reentry vehicle or Mk21A will be mounted on top of Sentinel. The award follows a technology maturation and risk reduction contract and the ICBM recapitalization contributes to modernizing strategic deterrents and reinforcing Lockheed Martin's critical technological contributions to the nuclear triad. Last week, the Space Development Agency announced Lockheed Martin was awarded an almost $900 million contract for Tranche 2 Tracking Layer to provide 18 small satellites, 16 of those space vehicles are for missile warning and tracking and two space vehicles are for missile defense infrared sensors to be on board. The first group of nine satellites is expected to launch in April of 2027. A lot going on at Lockheed Martin, across all of our operations. And with that, I'll turn the call over to Jay and join you later for questions.

Thanks, Jim, and good morning, everyone. Today, I will recap our fourth quarter and full-year 2023 financial results and provide our initial guidance for 2024. As I describe our results, please follow along with the web charts we have posted with our earnings release today. On Chart 4, we'll start with the fourth quarter results for consolidated sales and segment operating profit. We had a better-than-expected close to the year, nearly matching last year's record fourth quarter. Sales exceeded internal expectations by close to $1 billion, with the improvement largely due to material throughput, leading to a less than 1% year-over-year decline in the quarter and a sign of improving synchronization between Lockheed Martin's demand signals and supply chain fulfillment. The strong finish led to about 2.5% sales growth for the year, which was about $2 billion stronger on an absolute basis than originally expected last January. Overall segment operating profit in the quarter was also better than expected on the higher sales volume and was down 1% year-over-year due to lower net profit adjustments and lower equity earnings. Book-to-bill was 1.15 for the year with strength across all four segments. Moving to earnings per share on Chart 5. GAAP EPS grew 2% year-over-year, with lower segment profit and higher interest expense more than offset by benefits from the lower share count and fewer mark-to-market losses. Excluding mark-to-market activity and other nonrecurring charges, adjusted EPS was up $0.11 year-over-year or 1%. For the year, adjusted EPS was $27.82, up 2% year-over-year and consistent with the sales growth. The steady improvement this year resulted in higher adjusted EPS by about $1 per share from our original expectations last January. Moving to cash flow on Chart 6. We generated $1.7 billion of free cash flow in the quarter and $6.2 billion for the full-year, helped by approximately $625 million in working capital reductions in the fourth quarter from strong and timely conversion of operational milestone achievement to billings and collections. We maintained our commitment to shareholders by returning $3.8 billion through dividends and share repurchases this quarter and over $9 billion for the year or 145% of our free cash flow. Before getting into the segments, let me pause here to put the numbers in perspective. The key takeaway is that industry growth is crystallizing based on three converging demand cycles. First, to meet support requirements of the near and midterm security environment; second, to strengthen the effectiveness of existing security platforms and systems with improved sensing, connectivity, interoperability and embedded intelligence. And lastly, to recapitalize platforms and systems that maintain technological superiority in deterrence over a longer time frame. We expect these demand trends to endure and drive requirements to closely match with Lockheed Martin's advanced technology and systems integration capabilities. The long-cycle nature of Lockheed Martin Systems has in part led to slower growth, but the 2023 results show that it is materializing as evidenced by our 7% increase in ending backlog to a record $161 billion, as well as our return to top line growth a year earlier than originally expected. We demonstrated our confidence in the company's positioning amongst these demand cycles and multi-year outlook by again delivering strong shareholder returns. Over the past two years, we have repurchased about 12% of the current market capitalization. Okay, back to the segment details and starting with Aeronautics on Chart 7. Fourth quarter sales at Aero were comparable year-over-year, with higher volume at Skunk Works and the F-16 production ramp offset by lower volume on F-35 primarily production cost timing. As expected, operating profit decreased 7% from the prior year due to lower net profit adjustments. For the year, sales were up 2% as growth in Skunk Works and F-16 more than offset a low single-digit decline on F-35. Profit declined by 1%, primarily due to lower profit adjustments. Book-to-bill for the year was 1.14, leading to 6% growth in the backlog to $60 billion, with nearly 600 aircraft across all production platforms in the backlog. Shifting to Missiles and Fire Control on Page 8. Sales in the quarter decreased 4% year-over-year, driven by lower volume on PAC-3 due to supplier cost timing, partially offset by production ramps on JASSM and LRASM. Segment operating profit decreased 12% year-over-year as expected due to the lower volume and loss recognition related to a classified program. For the year, sales decreased 1% year-over-year as growth in tactical and strike missiles were offset by program transitions at Sensors and Global Sustainment and integrated air and missile defense supplier cost timing. Operating profit was down 6% due to lower profit adjustments and the classified program loss. Book-to-bill for the year was 1.3, leading to 12% growth in backlog to $32 billion, driven by strong demand for tactical and strike missiles. Turning to Rotary and Mission Systems on Page 9. Sales declined 2% in the quarter, driven by lower volume across a handful of programs within our integrated warfare systems and sensors and training and logistics systems lines of business, partially offset by higher sales at Sikorsky from deliveries of International Blackhawks. Operating profit increased 2% mainly due to favorable contract mix within our IWSS portfolio. For the year, sales were up 1% as growth in IWSS from Radar and battle management system ramps, more than offset declines in the other lines of business. Operating profit declined 2%, primarily due to lower profit adjustments. Book-to-bill for the year was 1.14 with backlog growing 8% to $38 billion based on strong order intake on Sikorsky platforms as well as radar and battle management systems. On Chart 10, as expected, space growth moderated in the quarter with sales increasing 3% year-over-year, driven by higher volume in strategic and missile defense, primarily from Next Gen Interceptor as that program advances from its successful completion of preliminary design review towards the critical design review milestone. Operating profit increased 31% compared to 2022, driven by higher net profit adjustments across the portfolio. For the year, sales increased 9% with growth across all lines of businesses. And profit grew by 10% as benefits from higher profit adjustments and volume more than offset lower ULA equity income. Space backlog grew again in fourth quarter and remains at a solid $30 billion or almost 2.5 times sales. Now shifting to the outlook for 2024 on Page 11. Before discussing our expectations, I'd like to highlight a few key assumptions embedded within our guidance for the year. First, based on recent progress made in budget negotiations, we assume the U.S. government passes appropriations bills by March, consistent with the funding levels within the President's FY '24 budget request, equating to approximately 3% top line growth for the DoD. On F-35, as Jim stated, we're targeting between 75 to 110 deliveries commencing in the third quarter. In addition, we anticipate sufficient progress being made on the MFC classified program to result in the recognition of losses from two production lots, amounting to approximately 50 basis points of margin headwind against our consolidated results. With that framework in mind, we anticipate sales between $68.5 billion and $70 billion, with the midpoint that represents approximately 2.5% growth. At the midpoint, we expect growth in three of the four segments with MFC leading the way at 7% growth from a strong munitions backlog. At the high end, all four segments would grow. Segment operating profit is expected to be between $7.175 billion and $7.375 billion down at the midpoint as lower expected profit adjustments and the MFC classified losses more than offset volume benefits. Excluding the MFC classified program, 50 basis points impact, underlying margins in the balance of the portfolio are expected to be approximately 11%. Our net FAS/CAS pension adjustment declines around $400 million from last year to a little less than $1.7 billion for 2024 due primarily to lower FAS pension income. The pension headwind, along with lower segment profit and higher interest expense lead to lower expected EPS year-over-year to be between $25.65 and $26.35. For purposes of clarity, on Page 12, we've included an EPS walk at the midpoint of the range. Benefits from volume mix provide about $0.55, with the impact of the MFC classified program losses netting down segment operating profit to a $0.35 decline. Total FAS/CAS pension is about a $1.40 headwind with higher taxes and interest more than offset by the lower share count. Our free cash flow estimate for 2024 has ranged between $6 billion and $6.3 billion. So bringing it all together, we expect continued sales growth in 2024 off the higher 2023 base, some profit and EPS pressure based on loss recognition timing, but with continued solid cash generation and capping it off with another year of capital deployment. So in summary, on Page 13. We closed out 2023 with record backlog and positive momentum that will carry us into 2024 with a line of sight to sustained out-year growth in sales, profit and free cash flow. Of course, we will continue to invest in 1LMX as part of our strategy to ensure our people, processes and systems remain the most advanced in the industry, and we remain committed to disciplined and dynamic capital returns to shareholders. With that, Luis, let's open up the call for Q&A.

Thank you. Our first question is from Myles Walton from Wolfe Research. Please go ahead.

Thanks. Good morning. I was hoping to lead off with Aero and F-35 in particular, in the margins, number one, that you're looking for in '24 are down about 40 basis points. Is that primarily on lower incentives as a result of the delays in delivery? And then more broadly, for the supply chain on the F-35, given the absence of deliveries, can you continue to simply build inventory, or is there a point at which you'd actually have to slow down the supply chain? Thanks.

Okay. Thanks, Myles. On the margins for F-35, what we're seeing in 2024 are lower favorable profit adjustments, and so it's really twofold. One of it is the F-35, where as we make progress on the TR-3 program as well as getting ourselves into production, it's difficult to take risk and rely on risk retirements as we're still facing this program and the progress we're making there. And so we assume that the profit adjustments slowdown in 2024 on the F-35 program. There's also some headwinds on the C-130 program, where we're seeing the effects of inflation and also some disruption related to supply chain pressures that we've had there. And so when you look at that decline year-over-year, you're talking about 30 basis points, say, half and half between C-130 and F-35. On the production cadence for F-35, yes, we feel pretty confident in where we are through the third quarter. To the extent that there were any delays beyond that, we would have to revisit our production cadence at that point in time. But right now, all signs are pointing to our production and delivery restart here in the third quarter.

Okay, thank you.

Thank you. And the next question is from the line of Scott Deuschle from Deutsche Bank. Please go ahead.

Hey, good morning.

Good morning.

Good morning, Scott.

Jay, here to ask on 2025, but at a high level, is the 10.5% total company margin guide for '24, is that the right jumping off point for thinking about '25%, or is it the 11% underlying margin, or is it the 10.8% margin you did in '23, just in terms of identifying jumping off point for thinking about '25? Thank you.

Yes, I think you do have to start at the 10.5% to jump off. And we do have a line of sight and a path to get overall back to 11%, including the absorption of these losses on the MFC classified program, but it's going to be a gradual march back up. And so I wouldn't expect it to snap back in 2025. I would expect there to be in the range of, say, 10 to 20 basis points of improvement starting in '25, and that to continue to grow at that rate until we get back up to 11.

Thank you. And your next question is from Gavin Parsons from UBS Equity Research. Please go ahead.

Hey, good morning.

Good morning.

Jay, what does the pension contribution schedule look like beyond 2024? And do you have any opportunity to pull that forward or use the balance sheet to offset that?

Yes, a good question. That's something that we've contemplated. Just where we are from a baseline perspective, zero contributions required in 2024. 2025, we're looking at in the range of about $1 billion of required contributions there. And so we're always looking at whether or not there's an opportunity to pull forward. As you mentioned, the utilization of our strong balance sheet to potentially do that. We haven't made any firm decisions on that, but that's definitely an opportunity that's under consideration for us.

Thanks.

Thank you. And our next question is from the line of Pete Skibitski from Alembic Global. Please go ahead.

Hey, good morning, guys.

Good morning.

Jim or Jay, can you give us a sense for how much the '24 guide is impacted by what looks like on the order of a six-month delay here to the government's budget and still a little bit of lack of clarity in the supplementals?

Yes, for the most part, Pete, it's not really impacted significantly. In our case, we're able to build up inventories. And then as we get the funding, we're able to take that to sales. And so for the most part, we've kept all of our processes intact. That becomes more difficult if the process extends beyond March. And that's why I was very clear in my comments that we’re dependent on this happening, that the budget getting clarity and finalization in March. Because going beyond that makes it difficult for things to get on contract and you run out of runway in the year to convert those into sales.

Okay. Appreciate it. And then anything on big awards you're expecting in '24 and maybe the timing of NGAD?

Well, just some key things that we're talking about from a sales perspective. Lot '18, '19 is a big one for the F-35 program. We also have some long lead F-35 awards that we would be expecting as well. We've got classified contracts across the portfolio. I can't really get into any beyond that. But you're talking multi-billions of dollars there that we have in our order plan for this year. There are things like PAC-3 orders, which are multiple billions of dollars there for FY '24 requirements. And also, hypersonics space, particularly on CPS is another one that can approach $2 billion. So there are a number there. As those get clicked off in the year, we'll certainly report on those and keep you appraised on the progress.

Thank you.

Thank you. The next question is from the line of Jason Gursky from Citi Research. Please go ahead.

Yes, Jay, I just want to clarify something quickly and have a question for Jim. I might have missed it, but regarding the deliveries you anticipate for the F-35 this year, especially with the acceptance on T-3 expected potentially in the third quarter, could you elaborate on the delivery schedule for the year? Will you be delivering some F-35s during the year, possibly the older version in the first half? I'm trying to gauge whether you genuinely expect to deliver between 75 to 100 aircraft in the second half of the year and what that implies for delivery potential in 2025. Could you reach 200 that year as a sort of catch-up? And for you, Jim, what are your overall expectations for bookings and book-to-bill for next year based on your current pipeline? Also, could you update us on your thoughts regarding the competitive landscape, particularly fixed price versus cost plus? How are you and the industry adjusting to the contracting environment and the demands placed on you? Are you leaning more towards less risky programs? Thank you.

Let me discuss the deliveries. We expect a small number of deliveries in the first half, but most, about 90%, are anticipated in the latter half of the year. This is the key takeaway regarding deliveries in the first half. I'll provide some additional context before passing it to Jim. For the year, we still foresee strong demand, and we expect a book-to-bill ratio above one for 2024. However, this depends on budget approvals and other factors. The outlook suggests continued growth in both orders and backlog. Regarding cost-plus contracts, it's notable that part of the margin pressure we experienced in 2023 was due to a shift in mix. The percentage of sales from cost-type contracts increased from 38% in 2022 to 41% in 2023, which led to margin pressure of about 20 basis points compared to our expectations. We are actually observing an increase in cost-plus contracts, which we believe is a positive sign for risk tolerance in stronger technological programs. Additionally, we are now applying more pricing discipline than before, ensuring a more analytical approach to pricing. We are assessing whether we capture any technological advantages and ensuring that our contracting strategies and pricing align with the associated risks. This has been our method for this year moving into 2024. Now, I'll turn it over to Jim.

Yes, certainly, Jay. Our strategy for government contracting consists of both near-term and long-term approaches. The near-term strategy closely aligns with what Jay just mentioned, focusing on balancing our pricing and risk profile. While I cannot speak for other companies, it is clear to us that we are operating in a monopsony environment, where there is primarily one buyer for the majority of our products, as well as those from Boeing Defense and Gel Dynamics. To the government's credit, they have leveraged this monopsony power, which has resulted in numerous programs facing budget overruns and schedule delays. This power can push competitors to take excessive risks regarding costs and technical delivery, leading to many issues within the industry. To address these challenges, I've been advocating that Lockheed Martin no longer engages in must-win programs. We will only bid on opportunities that present a balanced risk profile. If we don't meet our criteria, we simply won't participate, even if that means a competitor might win the bid. Our longer-term strategy involves not only delivering traditional products but also shifting towards providing capabilities, including existing and new products, particularly in digital technologies. We are actively collaborating with both large and small commercial tech companies because we want to embrace a pricing model based on the value of capabilities. The existing federal acquisition regulations hold us back, even with fixed-price contracts requiring extensive cost disclosures. We aim to transition our industry towards a more agile value-based subscription pricing model. This shift will require time and potentially legislative changes, but it is crucial for enhancing the health of the defense and aerospace sectors and attracting the significant R&D investments from commercial tech firms into the Department of Defense. However, it is currently challenging for those companies to commit resources to the DoD. Thus, while we pursue this long-term change, our near-term strategy will remain in place.

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

Good morning. Thank you.

Good morning.

As you look at Tech Refresh 3, this delay and then going longer, as you really want to build out the full kind of Block 4 capabilities, which continue to seem to expand. First, as Tech Refresh 3 takes longer. And then as you look toward the kind of multi-year trajectory on Block 4 implementation, how do you see delays here affecting your production rate, knowing that you've been trying to produce sort of at the full 156 type rate. But can that continue as you look at these challenges if they get more difficult?

Look Doug, it's Jim. I think we can continue at this rate. Demand from the U.S. services and our international customers, Air Forces, Navy's, et cetera, around the world is they need the aircraft, right? They've got to recapitalize the planes that they're still flying that I was trying to get when I went to pilot training in 1983, right? So this is essential that this production line keep up, it's basically the recapitalization of the Allied fighter aircraft for us is the F-35. And so I think the key to that is full transparency and realizing the reality of the situation. When you're trying to drive this much technology into an air vehicle, you've got to be honest about the schedule. What can industry do, what can the test and evaluation community handle in the various military to accept that technology and what's the supply chain capacity. And we're being brutally honest with our services and our joint program offices about what we think industry can do with us and our airplane. And industry is who makes the radar. Industry is who makes the EOT, the electrical optical system. The industry is who makes the electronic warfare suite. It's not us. So we have to be brutally honest as an industry and with our suppliers' inputs to that with the government and say what is feasible to keep the production rate up. I think that's starting to get traction. I hope it gets more traction because we cannot afford to be overoptimistic in the ability to deliver these technologies as rapidly as one might like. There are real technical and physical challenges to doing this. And our commitment to the government, meeting the service chiefs and our allies is I will tell you honestly what we think industry can do with the jet. And if you want to push it beyond that, I'll tell you what the risks are and what the cost might be to do it. But let's agree on a feasible executable plan for exactly Doug, what you talked about.

Thank you. Your next question is from Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, guys.

Good morning.

Jim, I don't want to talk about what happened in 1983, but in terms of the puts and takes for MSC, if you could just talk about the 7% top line growth you guys have what are the biggest program drivers there between missile defense and tactical, and just on the margins, you've already highlighted the 50 basis points from the classified programs. Are there any offsets? And I really appreciate your commentary about the government and how you plan to sell to them. So I was just thinking, where do you think that will manifest itself in its portfolio in your portfolio, the fact is, is it MFC? And specifically, can you give any specifics?

I'll start with the growth drivers. For MFC, you can expect tactical and strike missiles. The guided weapons, like HIMARS, JASSM, and LRASM, will continue their progression through the production ramps by 2025 and, in some cases, 2026 and 2027. This represents the largest driver of growth. Following that is Integrated Air and Missile Defense, mainly supported by PAC-3. We anticipate a significant increase in PAC-3 activity and deliveries over the next few years, aiming for 550 by 2025 and ultimately 650 by 2027. These are the two main areas within MFC that are driving growth, which shouldn’t come as a surprise.

And then when it gets to moving towards a value pricing model, Sheila. The first place that's already starting to happen is in command and control, command situational awareness, information advantages our customers would call it. So those are largely digital services, right? You've got sensors on satellites, aircraft, ships, radars out scanning the sky, infrared sensors in space looking for plumes of heat when a missile is launched, things like that. That's data, right? So how do we gather all the data from our sensors, whatever domain they happen to be in land airspace, et cetera? How do we make intelligent data fusion, and then present commanders and decision makers with options using AI and other digital services? So this will be probably the first place where we can value price because my goal is to bring in commercial technology to do that digital, digital data fusion, evaluation, AI application, et cetera. As I said a minute ago, commercial industry is investing 10x what our aerospace and defense industry could invest in these areas, and we need to take advantage of that. The only way they're going to participate in a material fashion in that industry is value pricing. They're not going to provide cost information. It's just not how their industry works. They're not delivering an airplane that you can add up all the costs that it took to make that airplane and give it to the government, so they can give you the margin on top. So these command and control systems, and they're real programs, by the way, defensive Bloom is a program like this, AIR6500 is one dimension. And also something called Joint Fires Network, which will be deployed in the Indo Paycom Command of the U.S. So this is where I think it will start. And then as we look at mission road maps that we've established and drawn out inside of Lockheed Martin, and we're now sharing and have been sharing with the U.S. services and DOD. We're looking for capability gaps where digital technology can really make a difference, right? So I'll give you one really quick one. So if we could get a direct feed from an orbiting satellite scanning a wide swath of the Pacific to find ships and actually directly provide that data link and that information to aircraft flying in the area, then those aircraft can vector towards those targets and turn on their radars and get a much more precise location and maybe even a tracking solution to sink the ship if that's what's needed. And so that's a mission gap, a capability gap that we would have in an anti-ship mission. And so how do we value price that because that's basically a data management exercise, which requires what we call 5G.MIL. It requires an artificial intelligence solution within it, and it requires the management of that data at various classifications, which is something not many companies can do besides those in our industry. So we can value price something like that. And I think it would be a capability gap that would be interesting to the Department of Defense, and they might accept value pricing, but not to take too much time on this topic. But one of the things that we're really advocating for at Lockheed Martin, and we've got some friends of the court trying to work with us on this is, how do we set up an adjacent acquisition process in the Department of Defense to its traditional acquisition process, designed and reconstituted and originated to purchase digital services versus platforms and products, which is what the traditional acquisition system is built to do. That is a heavy lift. It is very complicated. It's what I've kind of referenced earlier, where you're literally going to need an act of Congress to do this. But if we want to value price as an industry, bringing commercial partners at scale, I think the government needs to consider and actually go do this with us.

Let me just circle back, Sheila, on the margins in your question. I'll use MFC as an example in 2024. When you look at their headwind, the headwind is about 200 basis points of margin compression in the year 2024. The MSC classified program is actually accounted for 230. And so the rest of their business is actually expanding by 30 basis points. And so they're doing everything we would expect them to do in their core business. In general, across all of Lockheed Martin, the way we're approaching these headwinds is really threefold. First, we're just keeping a tight lid on overhead and indirect costs and streamlining that cost structure where the opportunities exist. The second is we're driving cost reduction in our direct cost base through supply chain optimization, factory productivity and also on 1LMX driven efficiencies. And then lastly, we talked about a little bit earlier in the call, is just making sure that we're employing pricing discipline across our bid and proposals. And so those three together will help us drive to a better result in the future and give us confidence that we'll be able to expand margins even with these headwinds.

Thank you. Your next question is from the line of Seth Seifman from JPMorgan. Please go ahead.

Thank you very much. Good morning, everyone. I have one clarification and one question. Jay, regarding the F-35, by the end of 2024, should we expect around 120 undelivered aircraft in inventory based on the production rate exceeding 150 and the deliveries you've mentioned? That’s the clarification, and this inventory will need to be managed over the next year or two. As for my question, you mentioned a segment margin expansion of 10 to 20 basis points in 2025. If we only consider one lot exercised on classified missile, that could account for about 25 basis points. The aeronautics margin seems quite low in 2024, so do you see potential for some expansion there? You also mentioned the company's efforts to support margins. Are there any other specific challenges we might not know about that could limit the margin expansion to the 10 to 20 basis points you outlined?

Yes, let me address that question first, and I will return to the F-35 later. Regarding the 2025 margins, it essentially involves one lot compared to two. However, it's important to consider the volumes within that lot versus the volumes from these initial two lots. From a gross headwind perspective, it doesn't change significantly because of the increased quantities involved. Therefore, the pressure remains, and we don't see an automatic improvement simply from transitioning from two lots to one in the following year. As for the F-35, your assessment is accurate; we are looking at anywhere between 100 to 120 undelivered aircraft in relation to the expected delivery rate of 156.

Thank you. The next question is from the line of Ron Epstein from Bank of America. Please go ahead.

I didn't catch that question.

Hey, Ron.

I'll do the question first. What are you thinking about the opportunity for the Black Hawk going forward, meaning I don't know, we've kind of heard there's some challenges on future vertical lift. And what opportunities does that open to you for the Black Hawk?

Ron, it's Jim. Look, the Black Hawk, and I've gotten a flight autonomously and by hand actually. I think has a lot of potential. There's interesting Congress for modernization of the Black Hawk. There's a huge fleet out there. And by adding some of these digital capabilities like autonomy and AI to the Black Hawk, which is a really reliable platform that's offline in units today in great numbers and across our allies. That's a real, I think, value opportunity for the Army's in-ring cores and others that use the helicopter. So I do think there's a lot of upside there. I don't want to comment on anybody else's programs or how well or not they may be doing, but this is a proven scaled vehicle with digital technology upgrades and insertion can be very, very versatile. And that can be done much more rapidly than new production of new aircraft. So I do think that there is upside there. Now the services and Congress have to agree. And to that and fund those modernizations and keep those units flying. And that will be up to them. But we are trying to provide them every opportunity to make that decision by inserting digital and other technologies like autonomy that will really make the aircraft much more capable in doing missions like air evacuation, resupply of the hot landing zone, things like that, that when you put it into the entire equation of completing a mission, it will be a good value to consider it.

Thank you. And our next question is from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

Hey, Jay, Jim, I mean, there's been discussion in the public markets about the depletion of U.S. missiles and ammunition and a potential shortage. So from your commentary today, it sounds like supply chain issues continue to linger, weighing on the company's ability to convert the demand into revenue. So can you talk more about the additional actions you're taking to improve the supply chain's ability to get products through the system? And what metrics are you monitoring? And how much upside could you see in 2024 if things improve?

I'll make a couple of comments and then ask Jay to follow. We are taking various steps to strengthen the missile production system. Specifically, we are working to establish a third solid rocket motor supplier in the United States to enhance the current supply chain, which has not been performing well. Additionally, we are utilizing additive manufacturing and engaging more diverse suppliers for the materials we require beyond solid rocket motors. We are also exploring international opportunities for equipment production, including in Australia, Poland, the U.K., Germany, and others for coproduction or joint ventures. These strategies focus on three main areas: first, implementing basic steps to enhance anti-fragility through more suppliers and diversity in our supply chain and labor pools; second, incorporating technology to create a more reliable production system; and third, leveraging international labor forces and supply chains to improve our production capabilities. We are addressing all three areas within our core company strategy as we apply them to missile production. Jay, do you have anything to add?

Yes. I'll just say over the last year, Kristine, we've deployed resources. So we haven't just sat back and waiting for improvement. Depending on the supplier, depending on the issues, we have deployed manufacturing engineering resources. We've deployed quality engineering resources and program management resources as well as, in certain cases, we've actually deployed hourly workers to support suppliers in certain cases. And so we've taken an all-hands-on-deck approach, where we've seen the issues become more significant. And we've done everything we can to support these suppliers and help them get through. I would expect that to continue where we see these bottlenecks. But as I mentioned earlier, we did see some general improvement. We are expecting that improvement to continue. And in terms of potential upside, what I would point you to is that if we're able to unlock and see a little bit better performance, that would drive to the high end of our sales profit and EPS range.

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

Hey, good morning. Thanks guys. Could you touch on F-16 real quick, just latest thoughts on the ramp rate here and also just margins on that program that compares to the segment now? And then sort of do they get better over time as you kind of come back down learning curve?

Yes. We delivered five aircraft in 2023 and expect that number to triple or possibly quadruple in 2024. The ramp-up is definitely in progress, with over 30 aircraft in work in progress as we ended the year. This indicates that our delivery and production rates are improving. However, from a profitability perspective, we've faced some challenges due to the extended timeline to reach this point, which has affected our initial contracts. As we fulfill these contracts and move on to subsequent ones, we will see profitability for the F-16 enhance over the next few years.

Your next question is from the line of George Shapiro from Shapiro Research. Please go ahead.

Yes, hello.

Hey, George.

I'm discussing a long-term perspective. Looking back ten years, MFC had margins of 18%, aeronautics had 11%, and space had 13%. Overall, we have seen a decline in all these categories, about 200 basis points compared to ten years ago. My question is whether this decline is due to fixed-price development and more aggressive bidding, and if you are now working to change that. As we look towards 2025, could we expect to see margins improve from what we anticipate in 2024, or are we looking at continued lower margins compared to what we used to see?

George, it's Jim here. I believe the situation I mentioned earlier today is what led to this. There's been margin compression throughout the industry, largely due to the customer dynamics. They have become quite adept at leveraging their position during contract negotiations. What you're witnessing is that the boards and management teams in our traditional sector are now recognizing this shift. Senior management historically hasn't been closely attached to this business model and is exploring alternative ways to operate these companies. We are considering the interests of shareholders and all the relevant factors we discussed, which should aid in improving our margins, despite the potential for some challenging conversations with certain customers. We are ready for that. However, as you noted, there has been a decline over the past decade, and this trend must reverse for the industry to thrive.

Okay. Luis, I think we're at the top of the hour. So I'm just going to turn it back over to Jim for some final thoughts.

Okay. Thanks, Maria. So over the past 12 months, again, I mentioned the people of Lockheed Martin have worked relentlessly to advance this vision we have for 21st Century security and transform our company internally, and they created produced and delivered cutting-edge capabilities that are focused on what the defense department says as its own strategy that they call integrated deterrence. And we're trying to maintain our company values along the way, and that's to do what's right, respect others and perform with excellence. And all this yields positive results for our employees at work here, our customers and our suppliers and especially our shareholders. So thanks again for joining us today, and we look forward to speaking with you on our next earnings call in April. Luis, that concludes the call. Thank you.

Thank you. And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.