Good day, and welcome everyone to the Lockheed Martin First Quarter 2024 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, Lois, and good morning. I'd like to welcome everyone to our first quarter 2024 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 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 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 first quarter 2024 earnings call. I'd like to begin today's discussion with a brief overview of our quarterly financial results, the state of the U.S. Department of Defense budget, status updates on some key programs, and recent advancements made to support our vision of 21st Century security that integrates the latest digital technologies. The increasingly unstable geopolitical environment in the world today makes it essential for industry and government to strengthen our nation's capabilities to deter and defend against further aggressive behavior against the U.S. and our allies. We here at Lockheed Martin are continuing to invest heavily to improve our design and production capabilities, while actively partnering with leading companies inside and outside the A&D industry to incorporate a wide range of technologies. As a result, we delivered robust revenue growth across the company, and we maintained a robust backlog of $159 billion, reflecting alignment between our advanced technology solutions and our customers' key missions and priorities. These first quarter results reinforce our confidence in our ability to achieve the full year financial expectations we shared in the most recent earnings call. Moreover, the approved FY2024 defense budget reflected many positives for Lockheed Martin, consistent with national defense strategy priorities too. Highlights include robust funding for munitions multi-year procurement, continued investment in hypersonics and classified activities, and ongoing support for programs such as Black Hawk, CH-53K heavy lift helicopter, the fleet ballistic missile, C-130, and F-35. There were also additions to the original budget submission, including F-35 aircraft, C-130, and combat rescue helicopters. The initial budget request for FY2025, while still very early in the process, continues support of many of these same major programs, including the F-35, CH-53K, UH-60M and others. We expect FY2025 Presidential Budget request and additive supplemental funding will provide a strong underpinning for future growth over the next several years for our company, giving us further confidence in our long range plan. While demand for these key programs remains elevated, it is also essential that our program performance in terms of quality, safety, cost and schedule gets and stays at the highest level. On our most significant programs, I, Jay, and my senior executive team are personally and directly involved. On F-35, we remain focused on program execution in terms of concurrent development, production and sustainment, and we are bringing all relevant resources across our company and collaborating closely with our customers and suppliers to fully implement the TR-3 capabilities that everybody is looking forward to getting. These capabilities based on the new core processor, data storage unit, and pilot display will ensure that the F-35 is not only the most capable and effective fighter aircraft in the world, but it will also further advance its abilities to act as the air domain quarterback of joint all domain operations for the U.S. and its allies. We're encouraged by the solid progress made over the last few months towards resuming deliveries, including improvements in aircraft mission system capabilities and system stability as we advance from prior software versions towards a combat training capable configuration. Flight testing of this configuration is now underway and we're on a path we expect to be on with regard to maturing the system with approximately 95% of TR-3 capabilities in this flight test program. The test results to date support our expected timeline of delivering the first TR-3 combat training capable aircraft in the third quarter and then transitioning to a fully combat capable aircraft in 2025. As planned, there will be continual software updates to support further capability insertions over the Block 4 program and beyond. While there were no final deliveries of F-35 jets in the first quarter, we're maintaining our production rate and continue to expect an aircraft delivery range for 2024 between 75 and 110, which requires timely receipt of the necessary hardware from TR-3 suppliers along the way. The F-35's advanced combat and interoperability capabilities continue to create strong demand for the aircraft internationally. In the quarter, the Czech Republic became the 18th nation to join the F-35 global team with a signed letter of offer and acceptance, making it official its intent to procure 24 F-35s. In addition, the U.S. State Department approved a potential foreign military sale to Greece for up to 40 F-35s. And Singapore announced its intent to purchase eight F-35As to complement the 12 F-35Bs to which it has already previously committed. Also in the lower air domain, while we're disappointed in the cancellation of the Future Attack Reconnaissance Aircraft program or FARA, Sikorsky remains committed to delivering innovative and reliable aviation capabilities to our domestic and global customers. With a strong foundation of more than $20 billion in backlog, bolstered by expected and funded growth in the heavy lift CH-53K helicopter program, Sikorsky’s multi-year outlook is stable. We're also encouraged by the army's renewed commitment to Black Hawk production and modernization. Turning now to missile defense missions, which, given recent world events, are becoming more critical than ever. We continue to lead the industry. Last week, the missile defense agency or MDA selected Lockheed Martin to deliver the new homeland missile defense capability for the United States, which is called the next-generation interceptor or NGI. As the MDA's NGI prime contractor, Lockheed Martin will provide the most modern, reliable and technically advanced interceptor in the history of this system. Earlier this quarter, the Long Range Discrimination Radar or LRDR, completed final acceptance and was officially handed over to the Missile Defense Agency in preparation for an operational capability baseline decision. And what that means is final transition to active service for that radar to help defend the country. The LRDR is a cutting-edge national asset providing the benefits of both low and high-frequency radars to search, track, and discriminate incoming missiles with an open system approach, enabling the customer to add incremental capabilities such as hypersonic defense. This is located up in Alaska, in the prime location, where we can sense early what any attack might look like and respond to it. What that really does, though, is create an elevated deterrence to any kind of attack like that. So it's really great to have LRDR about ready to go online. Now, both NGI and LRDR will be critical elements within the overall homeland defense mission, and they're going to be integrated into the broader defense architecture with a battle management system that we call command control, battle management and communications, or as the military calls it, C2BMC. In April, Lockheed Martin was selected for a potential 10-year, $4 billion follow-on C2BMC next-generation contract with the MDA, demonstrating again our leadership position and battle management systems for homeland defense. Under this contract, we'll continue to modernize and expand the system's capabilities to enhance global integration, improve space domain awareness, and optimize sensor connectivity and data fusion to levels never done before. All of which will create the most complete picture of these incoming threats. Separately, we also continue to advance our 21st Century security solution through collaboration with strategic commercial partners across the tech, telecom, microprocessor, and other industries to support the national defense. Citing just one example, we announced Lockheed Martin will work with Intel to support the simulated transition for Advanced Microelectronics Packaging or STAMP program for the office of the Under Secretary of Defense for Research and Engineering. This CHIPS Act related collaboration will provide a revolutionary leap in defense systems capabilities using high-performance U.S. built semiconductors. Over the next 18 months, we'll integrate our latest sensor open system architecture technology with Intel semiconductors with the intent to ultimately implement, test and complete production through the U.S. Navy's Lockheed Martin MH-60 Romeo helicopter program. I'll now turn it over to Jay for more highlights and some additional commentary on our financial results.

Thank you, Jim. I will present the consolidated results and highlight some key points before passing it over to Maria, who will review the quarterly financials by business area. After her update, I will return to discuss our outlook and wrap up the remarks. To start, we had a strong beginning to the year. In the first quarter, sales reached $17.2 billion, marking a 14% increase year-over-year, driven by MFC and RMS. Although these results were aided by an additional calendar week compared to 2023, the normalized year-over-year sales growth stood at a solid 5%. We experienced robust labor and material throughput, which is a sign of an improving supply chain. The segment operating profit was $1.7 billion, reflecting a 4% year-over-year increase with margins at 10.1%, including the expected $100 million reach-forward loss related to the classified missile program at MFC. Excluding this charge, Lockheed Martin's segment margins were 10.7%, mainly due to lower profit adjustments compared to the previous year. GAAP earnings per share were $6.39, down 3%, as year-over-year benefits from higher profits and a reduced share count were overshadowed by increased interest expenses, lower pension income, and mark-to-market gains. In the first quarter, our book-to-bill ratio was just under one. Notably, the space sector secured several significant national security orders during the quarter, including the SDA tracking layer and other important classified awards, contributing to a book-to-bill ratio of 1.8 and a record backlog of $33 billion for space. We generated $1.3 billion in free cash flow this quarter after allocating $360 million to research and development and $380 million to capital expenditures. Share repurchases totaled $1 billion and we returned $780 million through dividends. In terms of highlights for the quarter, we are pleased with the advancements on the F-16 program. The first three F-16 Block 70 jets were delivered from Greenville, South Carolina to Bahrain in March. To date, we have produced five F-16 Block 70 jets for Bahrain, with an additional 11 jets in various stages of production and testing. We also showcased the first two F-16 Block 70 aircraft to Slovakia's Deputy Prime Minister and Minister of Defense, emphasizing the strengthening partnership between our countries. Additionally, the State Department informed Congress of the approval for the sale of 40 F-16s along with related upgrades and support to Turkey, furthering our longstanding relationship with the Turkish Air Force. We are confident that the F-16 Block 70 and the Viper upgrade package will offer advanced security capabilities at affordable operating and lifecycle costs for Turkey. We continue to enhance our weapon systems for extended range standoff capabilities. In February, the extended range ER variant of the GMLRS guided multiple launch rocket system successfully passed its first operational test in the U.S. The U.S. Army conducted operations with two unitary warhead ER GMLRS variants using a HIMARS launcher, showcasing precision and bringing this capability closer to production. The Army is on the verge of awarding Lockheed Martin the fourth production contract for early operating capability precision strike missiles, or PrSM, significantly boosting production to meet the demand for long-range surface missiles. Following the successful completion of end-to-end flight testing, we have full confidence in the revolutionary capabilities of the Air-launched Rapid Response Weapon or ARRW. We have demonstrated successful all-up-round end-to-end performance multiple times. ARRW provides the U.S. with a fully qualified production-ready hypersonic solution, and Lockheed Martin is prepared to promptly deliver additional tactical, operational, and sustainment hypersonic strike assets for rapid deployment to the U.S. military. We are also advancing hypersonic strike capabilities in land and sea domains through our Long-Range Hypersonic Weapon and Conventional Prompt Strike programs, with a full year of milestones ahead as we move towards operational readiness. In the integrated air and missile defense sector, the AEGIS Weapon System successfully executed a complex ballistic missile defense test in the first quarter. The system effectively tracked and intercepted a medium-range ballistic missile amid multiple decoys. This test incorporated the latest system updates and underscores AEGIS's reliability in dynamic threat environments. We continue to evolve the AEGIS system, making further strides to integrate with PAC-3 to deliver an affordable, combat-proven IAMD capability for maritime engagements and to expand our system's mission capabilities. I will pause here and now hand it over to Maria to discuss the business areas.

Thanks, Jay. Today, I will discuss first quarter year-over-year results for the business areas. Starting with aeronautics on chart five. First quarter sales at Aero were over $6.8 billion up 9% year-over-year, and that's 1% normalized for the extra week in 2024. The increase was primarily due to higher volumes across F-35 and Skunk Works and the continued production ramp on the F-16 program. Segment operating profit is comparable year-over-year with higher volume being offset by lower margin development contract mix and lower net profit adjustments, mainly on the F-35. Aeronautics backlog remains at a healthy $57 billion, which includes 373 F-35s and 80 C-130Js, and 132 F-16s, supporting growth into 2025 and beyond. Turning to Missiles and Fire Control, sales increased 25% from the prior year, 16% normalized for the extra week driven by production ramps on tactical and strike missile programs, primarily GMLRS, HIMARS and JASSM, LRASM. Integrated air and missile defense also saw higher volume on PAC-3 and THAAD. As expected, segment operating profit decreased 18% year-over-year, primarily due to the $100 million loss on the classified program Jay mentioned previously. Normalizing for the loss, MFC's margins would have been 13.7%. Now, I'd like to provide a quick update on our annual production capacity plans for key programs. PAC-3 is currently at 500 missiles, growing to 550 in 2025, and 650 by 2027. GMLRS currently is at 10,000 missiles, growing to 14,000 by 2025. JASSM, LRASM currently at about 650 missiles, growing to 1,100 by 2026, and HIMARS currently at 72 launchers, growing to 96 next year. Shifting to rotary mission systems, sales increased 16% in the quarter, 8% normalized for the extra week, driven by higher volume across the entire portfolio, including radar and laser programs within integrated warfare systems and sensors, various programs within C6ISR and the CH-53K and Seahawk programs within Sikorsky. Operating profit increased 23% due to higher volume and favorable contract mix, partially offset by lower profit adjustments. Finally, with space, sales increased 10% year-over-year, 2% normalized for the extra week to approximately $3.3 billion. The growth was driven by higher volume on the fleet ballistic missile program and ramp ups on hypersonic and next-generation interceptor programs within strategic and missile defense, as well as higher volume on space development agency transport and tracking layer programs within national security space. Operating profit increased 16% compared to Q1 2023, driven by higher volume and ULA equity earnings, partially offset by lower net profit adjustments, primarily on the Next-Gen OPIR program. Now, I'll turn it back to Jay to wrap up our prepared remarks.

Thanks, Maria. Let's turn to the outlook on Chart 9. Our expectations for Lockheed Martin’s 2024 financial outlook remain unchanged from what we said in January. With the strong first quarter results positioning us well to achieve the consolidated full year outlook, we continue to expect free cash flow to be in the range of $6 billion to $6.3 billion, including over $3 billion of independent research and development and capital investments. While the dividend, along with the expected $4 billion of share repurchases, support our returns to shareholders, targeting a mid-single-digit free cash flow per share growth over the longer-term. To close out and summarize, we are off to a solid start in 2024 and remain laser-focused on execution to our customer and programmatic commitments while building momentum towards delivering our full year guidance. Through our 1LMX transformation, we are reengineering our internal processes by providing the automations and capabilities needed to drive efficiency, increase velocity, and enhance key captures and programs. 1LMX will enable us to combine the depth and breadth of our portfolio with the expertise and dedication of our people to drive 21st Century Security solutions for our customers and continue to create value for our shareholders. With that Lois, let's open up the call for Q&A.

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

I'd like to start to make sure we have a good understanding of the F-35 right now with TR-3. As you said, the Air Force has talked about this as well, and it looks like that timeline has moved back to some point in Q3. And there's just been a great deal of slippage in the timeline over the last few years. Block 4 has been delayed, and the new budget has cut deliveries in 2025 and 2026, ostensibly to avoid having to do later Block 4 upgrades. Now, you've been able to keep production and revenues up, although deliveries and cash payments are off. But how can we get confident in the trajectory? And perhaps, Jim, maybe you could talk about what a positive or more negative scenario might look like for production and deliveries over the next two years? And what it would mean for the revenue and cash trajectory?

Sure, Doug. So I think it's important to understand that we're doing, as I said earlier, concurrent development and production and then advancing the sustainment capability as well, all at the same time. Most of these complex programs go through a period of development and then a production run largely off of that design base or that engineered base of what the aircraft supposed to look like and how it's going to perform. The F-35 is different in a sense that development has been going on since the day the program started years and years ago, and it's going on today. Now, the good news about that is you have step function increases in capability every few years, and as a result of the F-35's capacity to do that, the government just came out and extended the expected service life of the aircraft another decade or two, I think it was. So this is a good thing, but it's also an extremely difficult thing to do and even to predict schedule, right? It's our responsibility to hold cost and schedule, but we don't control all the variables, let me just say. And that's okay, we're still the OEM, we're still responsible. And so what we run into on TR-3 is just a level of complexity and executing the step function increase, that's pretty novel or dramatic. What the team is doing at our company is we're integrating a series of components, devices, software, and managing and integrating all of that. And so what's happening now is we are ringing out all of the software through all of the new hardware and integrating it into all the aircraft other systems. And that's taken longer than our team predicted. The way we're going to get at that is if you think of it as a release one and a release two, and we've got a lot of confidence in this stage. So release one, if you think of it that way is what we're calling along with the U.S. government, a combat training capable aircraft, meaning we can get these jets in the hands of squadron, wing, and regional commanders so that they can start training their pilots on them and training their maintenance organizations and also getting their bases and infrastructure, spare parts, pools and everything else sort of in operational shape, if you will. Once we get the final software load for the fully combat capable version of TR-3, sometime in the next few months, then those aircraft could be deployed into actual combat operations and you'll have the training, the maintenance, the ringing out, the operational patterns and procedures on how to actually fly the jet in combat. So we'd like to be able to do it sooner, but this is the schedule we're on. And I'd say for the combat training capable aircraft, we're highly confident, based on the test results so far, that those will be deliverable in the third quarter.

Yes, Doug, I’ll add that the combat training capability and configuration, as Jim mentioned, support the training of new squadrons and reduce the amount of time the aircraft are grounded. This helps avoid significant disruptions and keeps our production on track for 2024 and beyond. In 2025, we plan to introduce further capabilities and start delivering the Block 4 features. You might have heard comments from the U.S. military about a reimagined Block 4, which would involve an insertion schedule tied to a practical plan from the industry to prevent disruptions.

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

Good morning. Yes, thanks.

Good morning, David.

Good morning. Thanks for taking the question. So since Q4, we have a 2024 budget, looks like we're going to get a very large supplemental. You won the NGI. How might all those things together change how you're thinking about where you kind of fall in, in the revenue guide this year and the potential for revenue growth in 2025 to accelerate kind of off this low-single-digit level?

So David, as we mentioned, for this quarter, we started off pretty solid, just on an apples-to-apples basis 5% growth in the first quarter lines up pretty well with a mid-point guidance range, which is 2% to 2.5% and the high end of that range being, say, around 3.5%. So we're well-positioned to deliver on that expectation. It is possible somewhere to last year that we could see some upside towards the higher end of the sales guide range there. So again, really good start that enables that. As we think about 2025, what you saw in the budget, what we're seeing here in supplemental, gives us higher confidence that we'll continue to grow. We talked about growth starting in 2023, a year earlier than we had originally anticipated, accelerating in 2024, and then giving us more confidence that we'll see at least a same if not more growth in 2025.

And the next question is from the line of Peter Arment from Baird. Please go ahead.

Can you discuss your confidence in margin guidance for the year, especially considering that the margin performance in the first quarter was the lowest we've seen in many years? We are aware that classified losses are expected to continue, but it seems like there could be some positive impact from top-line production increases. Will the losses on the classified side decrease, or will higher volumes create offsets? Could you provide more insight into your expectations for margin performance moving forward? Thank you.

Sure. Peter, MFC was a little light because of two factors. First, as we mentioned, we did have the $100 million loss provision that we recorded. In addition to that, their profit adjustments were lighter year-over-year by about $20 million. And so that's a function really of calendarization. We'll see profit adjustments throughout the rest of the year improve. And so getting us back to what we had guided to. Just as a reminder, we're anticipating, and that was fully anticipated in our guidance for MFC, that we would have additional or could have additional losses in the back half of the year associated with this classified program. And so what our guide implies from where we are today, we reported $100 million is in a range of another $225 million in the back half of the year, which would be provided for in this expectation.

And Peter, it's Jim. I used to fly these aircraft for the USAF and I can assure you that the capability that's being developed here at MFC in the classified program will have very, very long legs. There's going to be many, many years, we believe, of orders to follow. So, yes, for a quarter, for the year, maybe for a couple of years, we're going to absorb the loss provisions that Jay described. But I think if you look under the curve for the lifecycle is going to be significantly positive.

Right. I think it's important to keep that in mind, that we spend a lot of time talking about timing of losses and things like that and the magnitude of it, but we also spend a lot of time internally going through just where we are in the progress of the program as well as the business case. And I can assure you the business case is accretive to it at above our cost of capital. And as Jim mentioned, it's going to provide strong returns for many years to come.

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

Yes. Hey guys, good morning. Thanks for the question.

Good morning.

I want to ask a couple on the Next-Gen Interceptor win, I guess one just how you were able to win. I think ahead of when the original down flight was expected and also whenever there's sort of a big contract like this, we always get questions on potential charges because we've seen some of that happen in the industry. So just your confidence that you've got the cost there sort of size correctly.

So the company made a beta about three years ago to say, okay, we've got a digital transformation program that is going to take the whole company to this model-based engineering system. And that's all the way from requirements acceptance from the government to sustainment years and years down the road. NGI was one of the pathfinder programs picked to implement this because there's no legacy to convert. Right from the proposal, we were using these digital technologies, 3D, CAD and everything else, and sharing data with the government in that fashion, and they were able to receive it. And we could thereby accelerate the schedule and contain the cost of the development and ultimately of the production too, by using these tools. There were three original players in this. One dropped out fairly early. The second was in kind of this final phase, if you will, of down select. And we were just ready to go and provided our proposal ahead of schedule. The other player, to my knowledge, provided a proposal also. And then the government was able to make a decision based on that. But I think because of our speed and our ability to demonstrate manageable cost over time, we won, and kind of won early, if you will. I'll let Jay talk more about financials, but what I can assure you is the process of this bid did not require us to dive to the bottom on cost.

Sure. We are currently working under an existing contract that will continue. We have previously mentioned this. In September 2023, we completed a preliminary design review and we are on track for a critical design review in 2025, continuing under the current contract as well as developing test assets. Regarding pricing and costs, the current contract is a cost-plus arrangement, resulting in a low margin, which is expected, but there is nothing unusual about it.

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

With FARA off the table, and it looks like the flyer program has decent support, how are you thinking about the outlook for the vertical lift business? Where could we see some upside? What other competitions are out there? And how should we think about that?

Yes. This is Jim. As we move into the 21st Century, our company aims to take a broader view beyond just programmatic or vertical aspects. We are also considering the mission itself and exploring which technologies can help achieve that mission while ensuring our core platforms thrive. Our focus on the rotary business now encompasses Sikorsky as well as all of Lockheed Martin. This broader approach has allowed us to collaborate effectively with the U.S. Army, Congress, and the wider government to enhance support for the Black Hawk, even with FARA being canceled and the introduction of another vertical lift program like FLRAA, a tilt rotor design. The Black Hawk is particularly suited for specific missions in the lower air domain, not limited to rotorcraft. We aim to modernize the traditional Black Hawk with digital technology to transform it into what the Air Force terms collaborative combat aircraft. This enables connections with drones and unmanned aircraft, allowing the Black Hawk to operate autonomously for high-risk missions, controlled from a command center. Our strategy involves examining the mission to identify opportunities across Lockheed Martin, utilizing advancements in sensor fusion, AI, 5G, and space-based sensors to enhance the longevity, relevance, and efficiency of the Black Hawk, especially compared to the FARA aircraft which may not be able to fulfill certain missions. We have strong confidence in Sikorsky and its platforms, including the CH-53K and the Seahawk, which is a Black Hawk designed for maritime operations and features high-tech capabilities. We feel very positive about Sikorsky's future, supported by a backlog of $20 billion, and the potential to modernize these reliable, in-production aircraft to meet new missions through digital technology and collaboration with other parts of Lockheed Martin and our partners.

Sure. Just a couple of things, as Jim mentioned. A stable outlook is the best way to describe it. As Jim mentioned, CH-53K is really the pillar. And those revenues between now and 2027 and 2028 are going to double. And so while we will see declines in other programs such as combat rescue helicopter, some declines on Black Hawk and others, the CH-53K will really offset all of those declines.

Our next question is from Rob Spingarn from Melius Research. Please go ahead.

If we put the impact of TR-3 to the side, on the last call, you underscored the importance of the supply chain in producing F-35s at a rate of 156. And one of the things that's made the F-35 program so well supported by Congress and international countries is the breadth of the supply chain. But is the complexity and scale of the supply chain limiting the potential and affordability of the program? And on future fighter aircraft programs, whether it be NGAT or FAXX, might we expect Lockheed to do more of the work in-house, the production work in-house when compared to F-35?

It's a significant topic, Rob. Let's begin with the origin of the F-35 program, which was designed to be a wide-based Allied initiative involving seven partner nations that contributed both industrial and financial resources, reflecting its importance and complexity. We have a broad supply chain, though we've encountered challenges, particularly during COVID, which caused delivery delays from the UK due to factory shutdowns, even while our facilities remained operational. We plan to mitigate future issues and are keen to broaden our international production and sustainment partnerships. Going forward, we will implement anti-fragility strategies to enhance those initiatives. The emergence of COVID highlighted the necessity for multiple sourcing options and geographic diversity. It's clear that relying solely on single sources outside the U.S. is not ideal due to affordability concerns. We are focusing on balancing our supply chain needs, acknowledging that while we have a distributed supply chain, there are some weak points. For instance, making the glass canopy for the F-35 is highly complex and challenging, and currently, we rely on a single supplier for that component, which poses a risk. Therefore, we aim to learn from this experience, whether through domestic or international suppliers. Additionally, as you've mentioned, we are increasing our in-sourcing capabilities, and Lockheed Martin possesses leading technology. We're actively working to control as much of the supply chain as possible based on each specific program. For example, in the case of NGI at MFC, Lockheed Martin Space collaborated to ensure we produced the most critical sensor components efficiently within the company. Your point about geographical diversification of our supply chain is insightful, as we aim to establish two or three sources from different regions or companies to minimize future supply chain issues, which we have experienced with past programs like the F-35.

Next question is from Rob Stallard from Vertical Research. Please go ahead.

Jim, last quarter, you had some comments on contract structures and the way perhaps your customers have been dealing with defense industry in recent years. I was wondering if there's been any sort of resonance from your commentary and any willingness, early willingness from the customer to look at this in a fresh way.

So let me focus on digital service contracting because I think that's a really ripe opportunity area for the DoD to work with industry, not just the traditional defense fronts, if you will, but broader industry too. We want to play on a subscription basis ourselves. We want to bring in partners that will only be our suppliers on a subscription basis. So in terms of, say, 5G, connectivity services, backhaul, those kinds of things, AI, which needs constant refreshing and modeling. We will do a lot of the AI in-house, but we're not going to be possible to do all of it. We want to bring in partners. We announced a couple of them like NVIDIA and IBM. They want to work with us. So I do think we're starting to get interest inside government on how to do this. We proposed, frankly, ourselves, which will open up opportunity for a lot of other companies in different sectors, an adjacent acquisition process within the DoD for digital services alongside the traditional DoD acquisition process for largely physical goods like aircraft, ships, et cetera. There's interest in that. We haven't gotten it over the line, so to speak. But I think there's a lot of advocacy across broad industry to do that and starting to be in Congress and other places in DoD as well. Along with that, we want to drive an open architecture system so that U.S. government has a lot of diversity in its potential suppliers because we're all working off of the same standards base as far as APIs, interfaces, frequencies, use and those kinds of things and synchronize that as much as we can with commercial industry so we can use more of their IP and more of their resources and more of their people. So I think that there's a lot of opportunity here, and we're starting to get some traction on it. But it's going to take a little bit of time to get those processes and those standards bodies put in place. But we're actually on it, and we have some partners and teammates agree with those.

I'll just add, Rob, we have seen some changes where the contract structure is more closely aligned with the capability that's being requested and the assessment of the technology maturation of that capability. And so you're not seeing as many of these kind of high-risk fixed-price development contracts that really don't work well for anybody because they don't optimize a solution, and they typically end up poorly for the contractor. And so we have seen those changes. Again, they're case-by-case. But I can tell you that at least what we're seeing, particularly in the higher risk, higher technology-type risk arenas, we are seeing a shift in contracting to contracting vehicles that are just more relevant to those circumstances.

Yes. To further clarify what Jay mentioned, I find it challenging to commit to cost and price for a project that hasn't been fully developed yet, especially when it comes to fixed-price early production options. We are carefully examining every opportunity that arises in this area as a company. This ties into Jay's point about aligning what the industry can deliver with reasonable risk so that the government can successfully manage its programs without incurring significant losses or facing delays. We believe it's important to achieve that alignment.

Our next question is from George Shapiro from Shapiro Research. Please go ahead.

Yes. Good morning. A couple of quick ones for you, Jay. If the first quarter normalized growth was 5%, and even at the high end, you're looking for 3.5%. So will this be the fastest-growing quarter? And what slows down and obviously normalizing for the fourth quarter? And then, the second question is the guide for other net was $400 million. First quarter is only negative 61. So I was expecting you might lower that number for the year. And so what was the reason why you didn't lower it? Thanks.

All right, George. Thank you. On the quarterly profile for sales, as you mentioned, on a normalized basis, 5% growth here in the first quarter. I'd see it will slow down to low-single-digit in the second and third. And we're thinking that the fourth quarter probably flattish to maybe slightly down. You might recall that the fourth quarter of 2023 ended up being stronger than we were originally expecting. And so our compare in the fourth quarter of this year would be a little bit tougher. And so you're talking in second and third quarters probably 2% to 3% type of growth numbers with a flattish year-over-year in the fourth quarter. As far as other net, George, you got me there. There's probably some opportunity in there. We'll calibrate that, and we'll update the guide in the second quarter for the full year. But it's probably more prudent to just wait till we're halfway through the year and just make an assessment of the entire outlook, and we'll just leave it there.

And our next question is from Noah Poponak from Goldman Sachs. Please go ahead.

You discussed the Pentagon's terms of trade and contract structure, and you mentioned NGI as a cost-plus development. You also noted that they requested to review various contract structures. I'm curious about what they requested to see and where you arrived on those potential interim stages between development and production. Additionally, Jay, regarding the loss-making classified program in MFC, when do you anticipate that will become profitable on an annual basis? Just to clarify, is there only one program in that situation, not multiple?

Yes, that's correct, Noah, just one program. And I think right now, our outlook would say probably in 2028 is where we would expect that to flip to positive.

Yes, and Noah, the principle behind what Jay and I are speaking to here is that we want to be agnostic ultimately from a risk-adjusted basis on whatever contract format that the government would like to employ in these matters. So if it's going to be any kind of, I'll say, a highest risk would be again, fixed price production on something that's not been designed yet. We will put a high risk premium in the future and have on those kinds of requests of the government. And what's interesting is they're asking for multiple types on NGI. And that's going to give them an opportunity to see what contract risk transfer to industry is now going to cost, at least in Lockheed Martin's case because we will reply on that basis to say, if you want us to have this kind of contract, we have to have a risk premium that's significantly higher than, let's just say, a pure cost-based contract to give you the greatest contrast. And that's just the principle we're going to use from now on.

Lois, I think we have time for one more question since we're close to the top of the hour. So let's take one more, and then we'll be done.

Thank you. And next question will come from Rich Safran from Seaport Research Partners. Please go ahead.

Good morning, thank you. I have a quick two-part question regarding C2BMC. Could you talk about the P&L impact regarding timing and margins? Additionally, I would appreciate it if you could elaborate on how this aligns with your strategy for integrating mission-centric programs and what opportunities that presents.

Okay. For timing, we've been under contract. This is a follow-on for us. And what I could do, Rich is I don't recall off-hand exactly what the annual revenues are, but I got Maria follow-up on you. But this is, again, just a continuation of those activities there. And so no significant change I don't think from a revenue standpoint or margin expectation at RMS for this.

And so from the mission-centric approach, this is actually a pretty good example of that, Rich, in pulling through or extending existing programs, right? And so we're trying to show is that you can map data flows through a full mission, right, which generally includes and now cyber, by the way, upfront. So you have a cyber-track, then you have to have a sensing capability. You then have to have a way to get sensor data, whether it comes from a satellite or a submarine back into the command and control system. Along with that, you have to have targeting and tracking quality data that comes from beyond just the sensing of an object that's a target. You have to be able to track the target in a way that you can then guide a projectile to it and take it out or put a cyber-attack against it or laser or whatever the effector will be. And so the term of art for that is not pretty. It's called a kill chain. We want to put these chains together in diverse ways that are, again, anti-fragile, which means if you take out one link in that chain, you don't eliminate your ability to complete the mission. And so that's where we're looking at data flows in addition to physical flows, if you will. And so the intent is to go faster and better in that regard.

Thanks, everyone. That concludes our call for today.