Good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2024 Earnings Conference Call. Today's call is being recorded. Please go ahead.

Thank you, Lois, and good morning. I'd like to welcome everyone to our second quarter 2024 earnings call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Jay Malave, our Financial Officer. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We've posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Jim.

Thanks, Maria. Good morning, everyone, and thank you for joining us on our second quarter 2024 earnings call. Over the past few months, Lockheed Martin's people, systems and platforms have again demonstrated their ability to enhance security in Eastern Europe, the Red Sea, and the Middle East. From the PAC-3's critical role in air defense to the Aegis Combat System with AI augmentation to the F-35 with its advanced sensor and data management capabilities, our company has made major contributions to Allied and Partner defense. We continue to demonstrate the impact of our 21st Century security strategy by harnessing the latest digital technologies to continuously improve mission effectiveness, strengthening and scaling the defense production system, and expanding industrial cooperation among our allies and partners. Consequently, demand for our defense technology solutions remains robust, with a backlog of nearly $160 billion, greater than two times our annual revenue. Our strong performance so far in 2024 extends beyond the backlog, giving us confidence to raise our 2024 full-year outlook for sales, segment operating profit and EPS. In the second quarter, sales increased 9% year-over-year and 5% sequentially, reflecting growth in all four of our business segments. The supply chain continues to improve, and defense outlays also continue to increase. Our focus on operational execution helped us achieve segment operating margins of 11.3%, up 20 basis points compared to last year's second quarter, and free cash flow of more than $1.5 billion, an increase both year-over-year and sequentially. Jay and Maria will talk more about the specifics of the quarterly results in a moment, but suffice it to say, we are pleased with our financial performance and momentum so far in 2024. I'm especially happy to report the progress we have made on the F-35 program. As announced last week, we began deliveries of the first Technology Refresh 3 configured F-35 aircraft to the US government. The TR-3 upgrade and further Block 4 enhancements represent a critical evolution in capability, and their full development remains a top priority for us. These and further software updates over the life of the program will ensure that the F-35 remains an effective deterrent to aggression and the cornerstone of Joint All-Domain operations now and decades into the future. We continue to produce at a rate of 156 aircraft per year and expect to deliver 75 to 100 aircraft in the second half of 2024. Over 95% of TR-3 capabilities are currently being flight-tested, and we look forward to delivering full TR-3 combat capability to the customer. In addition, we expect deliveries of F-35 aircraft to exceed production for the next few years. Jay will talk about the financial aspects of our current status in a moment. Continued close collaboration with the joint program office, or JPO as known, and across our industry partners has been and will be essential to meet and exceed expectations of this critical national defense program in a timely and cost-effective manner. I met with my F-35 industry CEO colleagues in Fort Worth recently to set plans for enhancing the cooperation on our software and hardware and test integration processes, among other initiatives to increase speed and efficiency in the program. The TR-3 hardware and software provide a significant upgrade in computing power that enables major improvements in capability to our airmen, sailors and marines, as well as to our partner and allied nations. International customers continue to recognize the superior capabilities of this, the most advanced fighter aircraft in the world, as a key component in the DoD's Joint All-Domain architecture. On the international front, Israel announced a third squad of F-35As, increasing their fleet by 50%. Greece is in the final stages of discussions with the U.S. government to procure the F-35, and we continue to see interest from Romania as well as a potential new customer. Beyond the F-35, as the quarterback of Joint All-Domain operations, our ongoing collaboration with the U.S. military during major exercises with deployed operational units exemplifies our commitment and ability to enhance readiness and integrate capabilities across all of our customers' missions and priorities. In June, new advanced capabilities from across Lockheed Martin contributed to the tenth iteration of U.S. Indo-Pacific Command's Valiant Shield exercise. During this exercise, there were several significant milestones demonstrating how we continually improve our forces' capabilities and enhance our deterrence posture. One example is that we successfully integrated digital command and control capabilities with the Indo-Pacific Command's Joint Fires network, enhancing real-time decision-making for commanders and operational agility for the forces. Our operational planning data fusion engine was employed to coordinate joint operations using live real-time data, producing actual tasking orders at combat-relevant speed. In addition, the U.S. Army tested our Precision Strike Missile, or PrSM, against a moving maritime target in the Pacific Ocean. This next-generation missile enables further improved range and precision to deter potential adversaries from even greater distances. According to the Army, this test is a significant step in the PrSM program's progress. We've also moved toward realizing the 21st Century Security Joint All-Domain vision with the signing of a landmark agreement with Australia's Department of Defense to build their future joint air battle management system, known as Project AIR6500 Phase 1. As we've discussed before, this system will provide the Australian defense force with leading-edge integrated air and missile defense capability using next-generation technologies to combat high-speed threats and establish Australia's integrated air and missile defense as one of the most highly advanced in the world. We also continue to demonstrate 21st Century security in other innovative ways. In May, our Skunk Works Tactical Artificial Intelligence team successfully executed their second set of flight tests with the University of Iowa’s Operator Performance Laboratory. RAI flew an L29 jet aircraft by means of heading, speed and altitude commands sent directly to the onboard autopilot then to the plane's flight controls. This test has shown our AI team can rapidly develop, iterate and integrate artificial intelligence technology for autonomous flight operations. We're also making great progress in another leading-edge defense tech initiative, hypersonic strike, which is a critical element of deterrence in today's world. As announced by the Department of Defense in June, the US Navy and US Army completed an end-to-end all-up ground flight test of a common missile, core to the Navy's conventional prompt strike or CPS and the Army's long-range hypersonic weapons programs. The test marked a major step forward for the nation's development of hypersonic systems by Lockheed Martin. Pivoting to the supply chain, we continue to explore opportunities to drive our concept of anti-fragility across the global defense industrial base. For example, we recently signed a collaborative memorandum of understanding with Ryan Mittal to work together on land, air, and naval opportunities. One of our first initiatives is the new Global Mobile Artillery Rocket System or GMARS, which is a highly interoperable two-pod launcher system intended to fire the MLRS-based munitions. Combining these combat-proven systems will help address the growing demand for long-range rocket capabilities in Europe and elsewhere. On our PAC-3 program, international collaboration remains strong as well, including development of indigenous capabilities with the opening of a PAC-3 MSE launch tube production line in Poland, as well as a memorandum of understanding with Grupo Oesía in Spain to provide an opportunity to manufacture factory MSE parts for worldwide customers. Spain and the United States also formalized an agreement for Spain to purchase PAC-3 MSE missiles and related support, making Spain PAC-3's 16th partner nation. I'd also like to briefly discuss the latest status of the US defense budget. The House approved their version of the FY '25 defense appropriations. So the focus now shifts to the Senate where the process continues before the reconciliation phase later this year. We believe our portfolio is well aligned to current and future customer mission priorities, including air superiority with the F-35 and CH-53K and Black Hawk or UH-60M. Our integrated air and missile defense with PAC-3 and NGI, hypersonics with CPS and LRHW, I just mentioned a minute ago, and tactical strike weapons and munitions with JASSM, LRASM, PrSM, JAVELIN and GIMLERS. Ultimately, we look forward to the conclusion of the USG appropriations process and the continued utilization of the existing supplemental funding. On the international front, I was encouraged by conversations I had at the recent NATO Summit a few weeks ago in Washington. International partners and allies remain steadfast in their pursuit of elevated defense spending to strengthen the overall integrated deterrence posture of the alliance, given the tragic and ongoing conflict in Ukraine. I'll now turn it over to Jay for award highlights and additional commentary on our financial results.

Thanks, Jim. Similar to last quarter, I'll provide an overview of consolidated financials and touch on a handful of operational items before handing off to Maria, who will cover business area financials and then I'll come back to discuss the updated outlook. Starting on chart 4. The positive momentum we had to begin the year continued into the second quarter with sales up 9% to over $18 billion, led by RMS and MFC. As Jim mentioned, throughput remained strong reflecting an improving supply chain and internal operating cadence. Segment operating profit of $2 billion was up 10% year-over-year, and consolidated margins were 11.3%. With all four business areas achieving double-digit return on sales, the first time since the third quarter of 2022. Net favorable profit adjustments in the quarter were higher than the prior year and were 21% of segment operating profit, driving the stronger margins. GAAP earnings per share of $6.85 increased 3% year-over-year, driven by higher profit and lower share count, partially offset by severance impairment charges at RMS and Sikorsky, higher interest expense and lower pension income. On the new business front, we recorded over $17 billion of orders in the second quarter for a book-to-bill ratio just below one. We generated $1.5 billion of free cash flow in the quarter, bringing our year-to-date total to just under $2.8 billion, and we continue to make the necessary investments in innovation and infrastructure to position the company and our customers for future success with $405 million in research and development and $370 million in capital expenditures in the second quarter. Finally, we returned over 100% of our free cash flow to shareholders via share repurchases and dividends. Now, I'll touch on a few business activities in more detail. The order strength continued at MFC with a book-to-bill over two in the quarter, led by the $4 billion-plus Army award spanning multiyear PAC-3 delivery requirements and supporting our production ramp projections. Poland officials signed a letter of acceptance to purchase 400 JASSM ERs, the largest international order in program history, providing another ally with the latest generation JASSM variant. At Sikorsky, its platforms remain in high demand as the US State Department announced approval for four foreign military sales of Black Hawk to Austria, Brazil and Sweden. This opens the door to the potential sale of 36 Black Hawks, adding 12 helicopters each to each country's existing Black Hawk fleet. In addition, the government of Greece signed a letter of offer and acceptance for 35 UH-60M BLACK HAWK helicopters. These upgraded aircraft will support the Hellenic Ministry of Defense's ongoing modernization. It will serve as a dependable multi-role helicopter with unmatched interoperability to support vital national and allied security missions. In the space domain, late last month, NASA selected Lockheed Martin to develop and build the nation's next-generation weather satellite constellation for NOAA known as Geostationary Extended Observations, or GeoXO. This award builds on our prior work with environmental sensing technologies, which recently culminated with the launch of GOES-U, which will leverage advanced instruments and rapid updates to provide crucial data for weather forecasting, severe storm tracking and climate monitoring. Let me stop here and hand it over to Maria to get into the business area of financial detail.

Thanks, Jay. Today, I'll discuss second quarter year-over-year results for the business areas, starting with Aeronautics on Chart 5. Second quarter sales at Aero were up 6% year-over-year. The increase was primarily due to higher volumes across F-35 and the continued production ramp on the F-16 program. Segment operating profit increased 5% with higher volume and favorable mix being offset by lower profit booking rate adjustments. Regarding aircraft deliveries, we resumed F-35 deliveries in Q3, as Jim shared, and we've delivered our 1,000 F-35s. On F-16, we delivered four in the second quarter and are targeting around 20 for the year. For 130J, we delivered five in the quarter, reaching a milestone of 2,700 deliveries of this critical tactical airlifter and expect around 20 deliveries for this year. Turning to Missiles and Fire Control on Chart 6. MFC had another strong quarter with sales up 13% from the prior year, driven by production ramps on a handful of our precision fires programs within the tactical and strike missile segment, primarily Guided Multiple Launch Rocket System, GMLRS, and Long Range Anti-Ship Missile, LRASM. Segment operating profit increased 21% year-over-year due to higher profit booking rate adjustments led by the PAC-3 and Apache programs. Margins returned to 14.5%, which is more in line with historical rates. MFC backlog reached a record level of almost $35 billion in Q2, supported by continued global demand for several of our missile ammunition programs. Key awards included the PAC-3 award that Jay mentioned as well as $1.3 billion in combined awards for launchers, including HIMARS, and M270 upgrades and a $500 million follow-on production contract for JAGM and HELLFIRE to support U.S. and international customers. On the delivery front, I'll highlight a few of the key program quantities in the quarter. We delivered 100 PAC-3 interceptors, more than 2,000 GMLRS rockets, over 2,700 HELLFIRE missiles and 11 HIMARS systems. Shifting to rotary mission systems on Chart 7. Sales increased 17% in the quarter to over $4.5 billion, primarily driven by higher volume at integrated warfare systems and sensors on radar and laser programs as well as the Canadian Surface Combatant program. Sikorsky programs also saw higher volume led by BLACK HAWK and CH-53K. Also of note in the quarter, we delivered five S-70 helicopters to international customers, which resulted in about $115 million of revenue on a passage of title POT basis. Operating profit increased 9% year-over-year due to higher volume, partially offset by lower profit booking rate adjustments. Now, for a brief summary of helicopter deliveries. In addition to the five S-70 helicopters I mentioned, Sikorsky delivered five Black Hawks, four combat rescue helicopters, and one VH-92 Presidential helicopter in the quarter. On the delivery front, a few of the key program quantities in the second quarter, we evaluated the operational readiness of our systems and I will, sorry about that. Let's go to space. Finally, with space on Chart 8. Sales increased 1% year-over-year. The growth was driven by higher volume on strategic and missile defense programs, primarily hypersonics and Fleet Ballistic Missile, FBM. Partially offsetting this growth was lower volume on classified programs and Orion. Operating profit increased 11% compared to Q2 2023, driven by favorable mix and higher profit booking rate adjustments. Now, I'll turn it back over to Jay to wrap-up prepared remarks.

All right. Thanks Maria and let's shift over to the outlook on Chart 9. Given our strong year-to-date performance, sustained backlog position, and improving visibility into key programs, we're raising our expectations for Lockheed Martin's 2024 financial outlook for sales, segment operating profit, and earnings per share. We're increasing sales by $1.75 billion at the midpoint and tightening the range to $70.5 billion to $71.5 billion. The new midpoint reflects solid 5% growth from 2023 with increases across all four business areas. We're also increasing segment operating profit expectation based on the higher sales with the new range of $7.35 billion to $7.5 billion and anticipate consolidated segment operating profit margins to remain at 10.5%. Business area margins remained consistent with our prior guidance at Aero and MFC, while RMS is down about 50 basis points at the midpoint and space is up 40 basis points at the midpoint. The RMS reduction is driven by Sikorsky as the business faces continued cost pressure and absorption headwinds, the impact of which have exceeded benefits from its cost reduction programs. Conversely, space is benefiting from solid performance and proactive reduction efforts. Moving to earnings per share on Chart 11. We're increasing the midpoint by $0.35 to $26.35 with a range of $26.10 to $26.60 for the full year. Primary drivers of the change are shown on this chart with increases coming from incremental profit of $0.49 and other below-the-line items of $0.13. Partially offsetting those items are the RMS charges totaling $0.29 from the severance actions and the asset write-downs taken in the second quarter. As Jim mentioned, we're encouraged by the F-35 delivery restart and continuous progress being made towards delivering full combat capability. We're holding our free cash flow expectation in the range of $6 billion to $6.3 billion, which absorbs a potential unfavorable impact from longer deferrals of final F-35 delivery payments. This is made possible by proactive actions taken across the company to offset these potential headwinds. On the cash deployment side, we still expect over $3 billion of IR&D and capital investments, while the dividend, along with the expected $4 billion of share repurchases, maintains attractive shareholder returns. Lastly, on backlog, we continue to expect backlog to grow in 2024 even with the higher sales outlook, which provides a line of sight to future growth. Before I wrap, I'd like to highlight a few other key assumptions regarding the updated outlook. First, we expect F-35 18/19 to be awarded this year, maintaining program funding and continuity. Second, we continue to expect $325 million of losses on the MFC classified program, of which $100 million has been recognized year-to-date. And third, this outlook does not assume any pension contributions in 2024. So in summary on Chart 12, our solid first half results give us confidence in raising the full year outlook for sales, profit and EPS, while holding the cash flow outlook, reflecting our ongoing efforts to deliver predictable and improving operating and financial performance as is expected of us. It all starts with a relentless focus on executing to our programmatic commitments and delivering critical 21st Century security mission capabilities where we strive to continuously improve. To that end, we are investing in our people, processes, and systems through the 1LMX transformation, with the goal of unlocking step changes in efficiency, velocity, and program execution that delivers security capabilities ahead of ready speeds to our customers. And we're confident that these management priorities and actions convert to a compelling long-term value proposition for customers and shareholders alike. With that, Lois, let's open up the call for Q&A.

Thank you. The first question comes from Kristine Liwag from Morgan Stanley. Please go ahead.

Hi, Jim, Jay and Maria. Release from Farnborough, the F-16 is flying in the background right now. So apologies for the noise in the background.

Let's call it the sound of freedom, Christine, it's good.

I mean, it's a crazy or beautiful aircraft here. So the delivery guidance for the F-35 in the second half of this year is still fairly wide. Can you talk about the scenarios where there are lower and upper? What would have to happen for you to hit the lower or upper end of the range? And also, with production at 156 per year, when should delivery and production catch up for the program?

So Kristine, I'll start by emphasizing that our primary focus for the unwind and deliveries is on safety and quality. With that foundation, we have the capability to add already identified resources, including test pilots, maintenance teams, as well as software and hardware engineers, to complete the necessary flight tests to reach the higher end of our target range. However, we will address any potential issues, such as weather or pilot crew rest concerns. I believe we have the resources in place that should allow us to achieve the higher end of the range.

Yes. To reiterate, we expect deliveries to be between 75 and 110. With less than six months remaining, this is a broad range. In the coming months, we will gain clearer insights into the induction and flow of aircraft entering the test and production cycle, including those that are currently parked and those coming from production. As we gather this information, we will be better positioned to assess delivery requirements for the year. It will take us a few months to fully understand this process. Our plans are solid, but we need to execute them effectively. Regarding the future and reducing our backlog of aircraft, we aim for deliveries of 12 to 18 aircraft per month to gradually decrease the backlog, which will take several years. We have already made progress; since restarting, we have delivered 10 aircraft, six with the TR-3 configuration and four with the TR-2 configuration. We believe this is a strong start, but we need to closely monitor the operations of integrating aircraft from two different production flows into our flight test process. We'll refine this further later in the year.

Thank you. The next question is from Cai von Rumohr from TD Cowen. Please go ahead.

Thank you. I believe you mentioned that next year, you will deliver more F-35s than you will produce, and that you receive $7 million for each delivery. Can you explain what will happen to accrued revenues next year, especially with higher deliveries? I assume that the final delivery payment will be additional, even though the work itself should remain steady under POC. Additionally, what will be the cash flow impact? I understand there is a deferral of some payments, but if it is indeed $7 million, that could significantly enhance cash flow.

First of all, as Jim mentioned, restarting delivery was an important first step towards delivering the fully combat-capable aircraft. The withholding of the final delivery payment is a timing issue, and we are working with the customer to finalize the terms of those payments. We are making excellent progress, but it would be premature to provide details as it is still under negotiation. You will see timing benefits over the next few years as we deliver, but we still need to finalize this agreement with the customer. Regarding revenue, I wouldn't expect much of an incremental benefit. We continue to build at a rate of 156 and are seeing slightly higher production this year, but it should remain fairly stable. While there will be some incremental test activity that increases our percent complete, I don't see it being significant. We expect growth in F-35 to mostly come from sustainment in the coming year and beyond. It's also important to note that we are facing some headwinds with funnel delivery payments in 2024, but we are maintaining our outlook by leveraging better performance in our other areas. We will see timing benefits downstream, but we need to ensure the delivery schedule is in order. To clarify the last question, we are targeting 12 to 18 months for fully delivering the parked aircraft, and we will learn the process in the coming months to provide better guidance on that.

Thanks so much.

Thank you. Our next question is from Scott Deuschle from Deutsche Bank. Please go ahead.

Hey, good morning.

Good morning.

Jay, you've been seeing some nice momentum on revenue, and now you're seeing some of it on margins as well. I guess at what point do you think you'll be ready to start talking about maybe a better medium-term free cash flow per share growth outlook in this mid-single-digit rate you've been talking about for a while? Do you just need to let these pension headwinds next year and see a bit more growth acceleration? And then you're there. Just curious for how you're thinking about that?

Yes. No, I appreciate the question. We've said over the last few months and really the last year or so that our goal has been to increase absolute free cash flow in the low single-digit clip, and then that augmented with share repurchase would get us to a mid-single-digit free cash flow per share expectation. That remains the outlook. We'll go through our multiyear forecast over the next few months here, we'll be able to give you a better update in the October timeframe. I think given the fact that we're at a higher level in 2024 is a positive, and we continue to expect to grow in 2025 off this higher baseline. So, that in and of itself should result in a higher cash flow baseline as well. But there's a lot of work to be done between now and then. And so I would like to have the benefit of going through that in more detail, and we'll update that to you at least preliminarily in October.

That’s great. Thank you.

Thank you. The next question is from Gavin Parsons from UBS. Please go ahead.

Thanks. Good morning.

Good morning.

Maybe sticking on revenue. You guys have talked about supply chain kind of being a bottleneck, is the upside more on the demand front or on the unlocking of the supply chain side? And if latter, can you just talk a little bit more about the supply chain and what you expect going forward in the second half, because I think the second half a lot less growth?

I believe it's a mix of both factors. We concluded 2023 with a $160 billion backlog, setting a new record. As we reached the second quarter, our backlog was at $158 billion, slightly lower than the record, but we experienced significantly higher sales than anticipated in the first half of the year. As I mentioned in my prepared comments, we expect the backlog to grow by the end of this year, which will provide us with greater visibility for growth in 2025 and beyond. We have a very positive outlook regarding the backlog situation. In terms of the supply chain, we are seeing improvements, including better on-time delivery, and a decrease in parts shortages. However, there are still challenges in specific areas, especially as we ramp up major programs. We are actively implementing various initiatives, including some insourcing and dual sourcing where appropriate. Additionally, we are assigning personnel for on-site support at our suppliers, and we are also considering product redesigns. Overall, we are seeing an improvement in the supply chain, which enhances our confidence in sustained growth moving forward.

And Gavin, I just want to give you some qualitative background on the demand side. Our strategy includes driving the latest digital technologies through an open architecture, standard-based system to the DoD. By doing that and making our product services platforms compliant or in line with those future concepts, we're starting to see that already. We're demonstrating, whether it's exercises or in real conflicts like the Red Sea, doing things like over-the-air updates to the AEGIS system, which is decades old, but it can be improved quickly now just like when you download overnight on your Tesla. We can execute a download overnight over the air on the AEGIS radar and combat control system and double, triple the effectiveness against things like low-flying drones and cruise missiles. So we're implementing those improvements now, and that is showing promise.

Great. Appreciate the detail.

Thank you. Our next question is from Pete Skibitski from Alembic Global. Please go ahead.

Hey, good morning, guys. On missiles and fire control, if you think about what was appropriate in the 2024 baseline budget and the Ukraine supplemental, how much order flow is still to come there for you guys at MFC? And also, just if we think about the growth cadence there, you talked about $750 million a year in the past, you're going to be well above that this year. So I'm just wondering if that cadence is going to come back into play in 2025 on a higher baseline. Thanks.

Sure, there is still a lot of potential for orders at MFC. The book-to-bill ratio for the quarter was over 2%, and we anticipate more orders by the end of the year, especially in JASSM/LRASM during the second half. There are also opportunities under supplemental that can help continue to increase their backlog. We previously mentioned $750 million, but you're correct that they will exceed that this year. We expect ongoing growth next year, and they will continue to be the fastest-growing segment within Lockheed Martin for the next three to five years, which is very promising. Much of this growth is already reflected in the backlog, but there is still a lot more potential to add to it. It's crucial for us to ensure that we can meet demand and scale up all these programs to align with our customers' needs. The team is fully committed to achieving this, and the results are showing with higher sales this year. We remain focused and dedicated to delivering. The demand is strong both domestically and internationally at MFC, and they will be a major contributor to Lockheed Martin's growth over the next three to five years.

And Pete, it's Jim. Again, from a qualitative perspective, I tell our teams and our executives internally we're in the aerospace and defense industry, but we're in the deterrence business. So if you step back and say what contributes to deterrence, particularly from an MFC perspective? Anyone that has watched a Clint Eastwood movie knows that if we run out of ammunition, we're in a lot of trouble. Part of deterrence is showing that you have enough ammunition stocks to prevail and sustain your operations against an aggressor. The second part is demonstrating your ability to produce at a rate and the capability to ramp that rate quickly. And the third piece is the ability to produce and repair MFC and other products in the local theater and not have to bring them all the way back to the US. That's really the overall strategy behind what Jay was talking about.

Appreciate it, guys.

Thank you.

The next question is from Seth Seifman from JPMorgan. Please go ahead.

Hey. Thanks very much and good morning. Probably just a quick one. Sorry about the background noise here. Just a quick one and kind of big picture. I think, Jay, you've said in the past that there was good potential for growth to be at least as strong as 2024 and 2025 and good potential for that growth rate to accelerate. Is that still the case off of the higher revenue base and a higher growth rate here in 2024?

It's a good question, Seth. As I mentioned earlier, we're currently working on our multiyear outlook, which includes 2025, over the next few months. I can tell you that the visibility we have in our backlog supports another year similar to 2024. We also need to ensure that our operational capability can deliver that. This represents a significant change over a two-year period for some of the ramp programs we're managing. Additionally, we are still navigating some programs that are aiming to reach their ramp rates.

Our next question is from Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, guys. Thank you. Maybe if we could talk about profitability. If we look at first half profitability of 10.7, second half implied in the low 10s. Can you walk through some of the moving pieces, maybe in terms of supply chain productivity, I know volumes are lower and how we think about the exit rate for the year?

The second half of the year will see significant program losses at MFC that we need to account for. We recorded around $100 million year-to-date, and we anticipate approximately another $225 million in the second half, which will pressure margins. Additionally, while we had strong profit adjustments in the first half, we expect that to slow in the latter part of the year due to program timing and risk retirements, which are not linear and follow different stages of a program's lifecycle. Nevertheless, we feel confident about our trajectory. We have stated that 2024 will likely be a low point for net margins, but we expect gradual improvement over the next few years, and we remain optimistic about that.

Thank you.

All right.

Thank you. The next question is from Ken Herbert from RBC Capital Markets. Please go ahead.

Yes. Hi. Good morning. I just wanted to see and apologies if I missed this, but can you comment on your view of NGAD, and how you're thinking about that now moving forward? And what we might be thinking about in terms of the next catalyst for you on this particular program?

Sure, Ken. It's Jim here. When it comes to the NGAD program, we're not authorized to discuss the details, so you'd need to reach out to the U.S. government for insights on that. However, I can share what we're doing to prepare for the next-generation combat aircraft. Since 2021, we've launched four high-tech facilities equipped with the necessary security clearances to produce components for NGAD. One facility is in Florida, another in California at Skunk Works, and we have additional locations in Alabama and two in Georgia. These accredited facilities are operational ahead of demand, and we're actively working on programs and products within that classified capability space. We've got the facilities ready to go, and we have skilled personnel in Skunk Works, Marietta, Fort Worth, and other locations who are capable of designing, testing, and building components for NGAD using our advanced engineering technologies, like digital twins. Lockheed Martin is fully prepared to produce, design, and build. We're making sure we are equipped to meet the needs of the Air Force and the Navy. That's about all we can disclose at this time, but I want to assure you that we are competitive and ready to respond if the government initiates a real competition; we are ready to deliver.

Thank you. And the next question comes from the line of Rob Spingarn from Melius Research. Please go ahead.

Hey, good afternoon, or I guess it's still morning. But I wanted to ask you about F-35 and congrats on the resumption of deliveries. But when we think about TR-3 and on the production side of the equation, how is the supply chain in terms of being able to supply enough material and integrated core processors on time for you to maintain the 156 per year? So as the mix goes more toward all TR-3, how well prepared is the supply chain for that?

We organized a meeting in Fort Worth about a month ago with the CEOs of several key companies contributing to our efforts. We emphasized the importance of not only the core processor but also numerous other components from these companies that need to sustain or boost their production rates and upgrade their equipment. The suppliers are aware of our needs and plans, and we have achieved a level of integration in test planning and design across different companies that is better than ever. Suppliers have assured us they will meet demand, and we will monitor their progress closely, even placing our people with them when necessary to ensure this is achieved. We have gathered all major suppliers, and they comprehend the demand and quality standards we require, along with our enhanced integration strategy for testing and development moving forward.

And Jim, just following on to that, how do we think about the cadence for retrofitting from TR-2 to TR-3?

You’re correct, Rob, this initiative is aimed at backward integration. The US government will establish a schedule for TR-3. The timing and investment rates will be determined by them. Over time, a significant number of TR-2 aircraft that were originally built will be converted, which will include some hardware and software upgrades.

Is this the kind of thing you expect to be talking about soon? Or this is a few years out, should we focus on new production aircraft for now, TR-3?

Yes. So again, this is a US government policy decision, so it's better to request that kind of commentary from them, Rob. But we're, again, ready to do it at the rate that we expect their government will come at us with.

Great. Thanks so much.

Thank you.

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

Hey, good morning everyone.

Good morning.

Jay, could you provide us with an update on cash flow, pension contributions, and CAS recovery for at least 2025? If you have additional insights beyond that, it would be appreciated. Also, could you explain how you plan to increase absolute dollar free cash flow in 2025, considering the pension challenges and how that relates to the growth rate of segment EBIT?

Yes. So on CAS recovery, this year, we're a little bit under, say, $1.7 billion. We expect that to step down by about $100 million and probably stay at that level for the next few years after that. As far as absolute free cash flow in terms of the buildup and components to being able to continue to grow, yes, we've talked about pension being a headwind. We're estimating it to be in the range of about $1 billion. The areas we expect to drive cash flow growth would be continued earnings growth as you discussed; net income growth, in addition to some of these benefits and the timing on the F-35. We've talked also about just working capital in general. And even when you exclude F-35, what we're looking at and going after is our contract asset. If you look here in the second quarter, that was a nearly $14 billion balance that we had net represented in a range and I'll put that in terms of efficiency around 70, 72 days of sales running through the balance at the moment. Since 2020 or so, that's grown from about 55 days. So there's an element of there kind of the F-35 and what we've gone through over the past couple of years here, but there's also been growth outside of the F-35 that represents a lot of opportunity for us to convert into faster billings at a level that we've been able to demonstrate in the past. And that's what we focused on all of the business areas in terms of driving that on a multiyear basis back down to what we've been able to demonstrate. The next thing I'll say, so besides working capital and contract assets, the biggest opportunity is the reduction of payments related to tax R&D capitalization. So we'll get in the range, I'd say, about $150 million of benefit just through lower payments there. When you bring all these things together, we think that they generate a path to overcome what we're seeing in the pension and drive us to this target of low single digits. It's not easy. It's not a slam dunk, but we've got a path to be able to do it, and that's what we're driving today to be able to deliver next year and beyond.

Thank you. The next question is from the line of Peter Arment from Baird. Please go ahead.

Thanks. Good morning, everyone, Jim, Jay. Could you provide some insight on MFC's upcoming production ramp over the next few years? How does this relate to the collaborative agreements with Ryan Mittal, the PAC-3 production starting in Poland, and the agreement in Spain mentioned by Jim? Can you update us on the PAC-3 growth and expansion outlook, as well as the growth rates for HIMARS and JASSM? Thanks.

A lot of these agreements are part of the requirements for industrial cooperation in countries like Poland, Germany, and Australia. They help us build our backlog and drive demand. Specifically for the PAC-3, we expect to reach $550 million in 2025, increasing to $650 million by 2027. These orders and partnerships allow us to produce and deliver at these rates. It's not just PAC-3; we're also increasing GMLRS production from 10,000 to 14,000, Javelin from 2,000 to around 4,000, and JASSM and LRASM from approximately 700 a year to 1,100 a year. All these orders and customer engagements, both domestically and internationally, support our goal of achieving these production rates. They help fill the backlog needed to generate those sales, and we're on track to achieve that.

The next question comes from the line of Jason Gursky from Citi Research. Please go ahead.

Good morning everybody. Jim, I wanted to just throw a big picture one at you, and maybe have you kind of wrap all of this together and kind of what you're seeing both in the near and in the long-term? And maybe just get your sense of maybe with a few more quarters here of hindsight, some of the lessons learned from the conflict in Ukraine. What you at Lockheed have learned from that whether you're investing in any new areas as a result of that? And kind of the feedback loop that you're getting from your customer both here in the United States, as well as from some of our allied nations as well. Are we seeing a development of a new set of requirements and investment areas? Kind of where are you spending and how are you going about doing it? Just a big picture, here we are in the middle of 2024, what have we learned from Ukraine? And what are we doing?

So Jason, I would say that there are a wide range of lessons from the Ukraine conflict, unfortunately, as it is, but there's learning from it. One is that traditional systems, if you will, like Javelin, at the initial invasion, made a significant contribution to the initial defense of Ukraine because it was a classic armor attack and armor-supported infantry attack, meaning there were armored vehicles that were spearheading the drive to Kiev. When those vehicles got out in front of their support system, the Javelin, for example, made a tremendous difference in stopping that attack short. So, you have a traditional system that's designed for traditional land warfare that was highly effective. Now, there's jamming both ways, electronic warfare, and cyber, and it's like I tell my teams like your high school wrestling coach that for every move, there's a counter-move. So, if you jam GPS, we tweak the system, either the satellite or the receiver or have an alternative form of navigation or targeting, and we react to that. So, on one hand, traditional systems are still effective. On the other hand, you have to be able to adapt quickly. I'd say that was the main lesson there. Another one, similar situation, PAC-3, again, decades in service. And now there's a hypersonic missile threat from Russia, which was launched on a number of occasions. I think all those occasions, none of those missiles were successfully reaching their target because the PAC-3 was modified to be able to address the hypersonic missile threat. And then we'll go to the other side of the issue, which is that drones became a more important element of land warfare than it had been before, and in sea warfare, Ukrainians used autonomous sea vehicles with significant extent and success and also drones and unmanned aerial vehicles, too. So, this isn't the first time. Those kinds of systems have been used in prior conflicts, including in the Middle East and the counterterrorism wars. But the Ukrainians took it to a new level, literally sinking capital ships with unmanned aerial systems. So, there are lessons there too. That's something our company is quite involved with is classified, whether it's kinetic or surveillance, unmanned aerial systems, and we're learning from those too. We're working with drones as small as the ones a marine can unpack from a backpack and launch by hand, to aircraft-sized drones, if you will. So, we're involved in that game, and we did take the lessons from the Ukraine war. Traditional systems are still essential at bulk and scale. And secondly, they have to be much more adaptable than they ever had to be before. And that kind of supports our digital technology effort and campaign to say, let's use those best digital technologies to make those legacy systems better and better all the time, not wait for a conflict to force us to do that.

Great. Hey Lois, I think we've come to the top of the hour. So, I'll turn it back over to Jim for some final thoughts.

Thanks, Maria. So, before we close, I'd like to thank our Lockheed Martin team for their dedicated efforts in advancing our customers' missions and propelling our solid results this quarter, as you heard from Jay. Our capabilities are recognized around the world as the best in defense tech, and that is thanks to our employees' hard work, dedication, and commitment to continued innovation. With 21st Century security technologies, our robust backlog, and focus on transforming our operations through an internal digital transformation program, our company has a strong foundation for growth for years to come. So, I look forward to speaking with you again on our next call in October, and Lois, that concludes our call for today.

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