Earnings Call Transcript - LMT Q4 2021

Operator, Operator

Good morning, everyone, and welcome to the Lockheed Martin Fourth Quarter and Full Year 2021 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 Mr. Greg Gardner, Vice President, Investor Relations. Please go ahead, sir.

Greg Gardner, Vice President, Investor Relations

Thank you, John, and good morning. I’d like to welcome everyone to our fourth quarter and full year 2021 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President, and Chief Executive Officer; and John Mollard, our acting Chief Financial Officer. Statements made in today’s call that are not historical fact 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 have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today’s call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I’d like to turn the call over to Jim.

Jim Taiclet, Chairman, President and CEO

Thanks, Greg. Good morning, everyone. I hope you’ve had a good start to the New Year. Thank you for joining us on our fourth quarter 2021 earnings call as we review our results, key business area accomplishments, and our outlook for 2022. I’ll begin with an update regarding our proposed acquisition of Aerojet Rocketdyne Holdings. As disclosed in our earnings release this morning, we thought it highly likely that the FTC would sue to block the transaction. Since that time, we have received notification from the FTC that they have, in fact, authorized filing a lawsuit. We will review the lawsuit and evaluate all of our options. With the filing of the suit, we may elect to defend the lawsuit or terminate the merger agreement. Moving on to our financial results. In a few minutes, John will discuss our financials in detail and provide our outlook for 2022. But I first would like to begin with a few highlights from the quarter and the year. In October, after we concluded our financial planning process, we established an updated forecast for 2021, which we achieved or exceeded. We met our $67 billion sales forecast, and our segment operating profit and earnings per share both exceeded our projections. Our cash from operations was exceptionally strong, over $9.2 billion, supporting our disciplined and dynamic capital allocation process. During the year, we made significant investments in our signature platforms and systems as well as emerging technologies, all to meet the rapidly evolving challenges that our customers are facing and to support future growth for the benefit of our shareholders. Moreover, we continue reshaping and modernizing our operations to increase efficiencies and reduce costs so we can deliver affordable solutions for our customers going forward as well. During 2021, we spent $1.5 billion on independent research and development, a new high watermark for the Company. Notable areas of our IR&D efforts included hypersonics, directed energy, and artificial intelligence. We also initiated the development of mission-based technology roadmaps and advanced our 5G.MIL architecture to enable joint all-domain operations across multiple platforms, U.S. military services, and allies. These investments position the Company to meet our customers’ most critical needs well into the future. During the year, we also spent $1.5 billion on capital expenditures, focused on addressing customers’ program requirements and supporting our organic growth outlook. Significant capital projects included the introduction of three new state-of-the-art factories of the future, additional adoption of cutting-edge software and hardware solutions to enable model-based engineering throughout the Company, and the establishment of production facilities to support our key hypersonics program. During the fourth quarter, we brought many of these elements together for the opening of an intelligent advanced hypersonic strike production facility in Courtland, Alabama, supporting both our Missiles and Fire Control and Space hypersonic programs. This facility integrates critical digital transformation advancements such as robotic thermal protection capabilities into our manufacturing operations and represents our long-term investment in this critical technology. The Courtland facility joins our new spacecraft Test Assembly and Resource Center in Titusville, Florida, and our recently opened 215,000 square-foot advanced manufacturing facility in our Skunk Works organization in Palmdale, California. Together, these facilities add to our intelligent factory framework, digitally linking sites and assets across the enterprise to speed production, provide cost efficiencies, and drive future margin improvements throughout the Company. From a capital return perspective, during the quarter, we executed a $2 billion accelerated share repurchase program and thereby retired nearly 6 million shares under that agreement. This brought our total 2021 repurchase amount to over $4 billion, which when coupled with our strong dividend payments resulted in a total of $7 billion of cash returned to our shareholders during the year. We will continue to be opportunistic with share repurchases and expect to utilize our remaining $4 billion authorization in 2022. I’ll now touch briefly on the Department of Defense budgets. This quarter, Congress passed the fiscal year 2022 National Defense Authorization Act with strong bipartisan support in both the House and Senate. The NDAA policy bill was subsequently signed into law by President Biden. This legislation authorizes a $25 billion increase for the Department of Defense for a total of approximately $740 billion for defense programs and raised the investment accounts approximately 8% above the President’s originally requested amounts. Currently, the DoD is operating under a continuing resolution through February 18th for FY 2022. As Congress continues the appropriations process, we believe our programs are well supported, reflecting the fact that our portfolio is aligned with affordably delivering our customers’ national security capabilities. Now -- turning now to our growth strategy. Last quarter, we discussed our long-term expectations, which anticipate that our sales will increase by approximately 2% in 2023 with steadily increasing sales growth through 2026. As we discussed in October, the four primary areas that underpin this longer-term growth forecast are programs of record, classified activities, hypersonics, and new business awards. Expansion in our program of records is a clear key pillar of our long-term growth strategy. In this quarter, we are pleased to see two new customers select our signature programs to support their national security objectives. Last month, the government of Finland selected the F-35 Joint Strike Fighter as the winning entry in their HX Fighter Program competition, citing the aircraft’s affordability as well as its combat, reconnaissance, and survival capabilities as best suited to deliver on the HX requirements. This announcement for 64 conventional takeoff and landing stealth fighters has a potential contract value of over $9 billion and follows Switzerland’s decision to purchase 36 F-35s. These announcements highlight the momentum that is building in this program with future international opportunities in Canada and elsewhere ahead of us. Our Rotary and Mission Systems team also secured an important international opportunity this past quarter as the Israeli Air Force signed a letter of acceptance with the United States government to pursue the Sikorsky CH-53K King Stallion heavy-lift helicopter. This agreement enables the Israeli Air Force to procure 12 53Ks with the option to buy another half dozen. If fully exercised, those options could exceed $2 billion in value. Israel would then become our first international CH-53K customer as they look to replace their current fleet of legacy Sikorsky CH-53 helicopters, which have been flying for over 50 years. Another pillar of our long-term growth strategy, our classified activities, also saw momentum build in the fourth quarter. Our Space business area was awarded a contract by the U.S. Air Force to develop and classify and fly prototype RF payloads in space. Our solution leverages ongoing internal investments in our LM 400 satellite bus, providing greater mission flexibility and longer-duration orbit life. This award for initial engineering contract includes options to deliver an operational system with the potential for this to grow into a new franchise program down the road. On a final note, 2021 presented a challenging environment for both commercial and defense industries, especially in terms of continuing COVID-19 effects and supply chain impacts. Our teams in all four Lockheed Martin business areas and across our corporate functions banded together and did a tremendous job maintaining our production operations and advancing science and engineering on behalf of our customers. I’m extremely proud of the perseverance and dedication of our entire organization, and I know that as One Lockheed Martin, we’re going to drive future growth into our business and advance our vision to accelerate 21st Century Digital World Technologies into our national defense enterprise. And with that, I’ll turn the call over to John and join you later to answer your questions.

John Mollard, Acting CFO

All right. Thanks, Jim, and good morning, everyone. As I highlight our results, please follow along with the web charts we’ve included with our earnings release today. Let’s begin with chart 3 and an overview of 2021 results. Starting with sales, we recorded revenue of $67 billion, which was consistent with the guidance we provided in October. This record level of sales was made possible by an exceptionally strong fourth quarter of delivering affordable, relevant solutions to our customers. Additionally, our segment operating profit of $7.4 billion and earnings per share of $22.76 exceeded our October projections, driven by strong operational performance across the entire portfolio. We generated more than $9.2 billion in operating cash flow this year. And as we discussed last quarter, we are committed to a strategy of disciplined and dynamic capital allocation. We continue reshaping our operations and identifying ways we can increase efficiencies and reduce costs. As Jim mentioned, we invested $3 billion in research and development and capital expenditures to help our customers achieve their missions and to drive organic growth. In addition to this internal reinvestment, we repurchased over $4 billion of shares in 2021, including $2.1 billion in the fourth quarter. Combined with increased annual dividend payments of approximately $3 billion, we returned just over $7 billion to shareholders. Looking forward, our outlook for 2022 remains consistent with our October trending information as we build our foundation for growth in 2023 and beyond. Turning to chart 4, we compare our sales and segment operating profit this year with last year’s results. Sales and segment operating profit both increased 3% compared to 2020 results and represent high watermarks for the Company. Chart 5 shows our earnings per share for the year. Our full year earnings per share of $22.76 incorporates the $4.72 noncash charge associated with the $4.9 billion pension liability transfer that we completed during the third quarter. On an adjusted basis, our pre-transaction EPS of $27.48 was 12% higher than our 2020 results due to increased volume and improved segment operating margin, gains in our Lockheed Martin Ventures portfolio, increased FAS/CAS pension income, and a reduction in share count. On chart 6, we look at our full year cash generation and deployment. 2021 cash performance was outstanding as we generated over $9.2 billion in operating cash flow and $7.7 billion in free cash flow. We returned 91% of this free cash flow to our shareholders through increased share repurchases and dividends. Our remaining share repurchase authority is approximately $4 billion, and we expect to opportunistically deploy that entire amount in 2022. Moving on to chart 7 and our 2022 guidance. Consistent with our October trading information, we estimate 2022 sales at approximately $66 billion and segment operating profit of approximately $7.2 billion, resulting in a segment operating margin of 10.9%. FAS/CAS pension income is projected at $2.26 billion, which is $60 million higher than the $2.2 billion estimate we provided in October. We are projecting earnings per share of $26.70, and our estimate for 2022 cash from operations remains at greater than or equal to $8.4 billion, excluding the impacts of the R&D capitalization tax law change, which we now estimate at approximately $500 million. I should mention, there is still a possibility that legislation will be enacted that defers or repeals the requirement to capitalize R&D expenditures from a tax payment perspective, but we are including the impact of higher tax payments in our current outlook as we will be required to make these payments unless existing law is amended by legislation. On chart 8, we show our updated three-year forecast for cash generation. Our outstanding fourth quarter cash flow was driven by a tightly coordinated collections process across all business areas and functional support organizations, leading to exceptional collection results from both domestic and international customers. Partially offsetting this upside was an increase of $700 million in accelerated payments we made to our supply chain during the fourth quarter. With the emergence of the Omicron variant and surges in COVID cases, we increased total accelerated payments to over $2.2 billion at year-end in our continuing effort to mitigate supply chain risk. Our outstanding collection performance and the increase in accelerated payments to our supply chain partners resulted in our generating $9.2 billion in cash from operations and $7.7 billion in free cash flow. Over the three-year period from 2021 through 2023 and before considering the potential impacts of R&D capitalization, we now project total cash from operations of greater than or equal to $26.1 billion, which is $900 million higher than our prior estimate. This increase was driven by our fourth quarter results and our expectation that we will maintain this extremely high level of performance throughout the forecast period. Generating over $25 billion in operating cash flow after incorporating the potential $900 million impact of R&D capitalization provides significant support for our disciplined and dynamic capital allocation strategy. On chart 9, we break out our sales and segment operating profit outlook by business areas. Our estimates for the year remain consistent with the trending information we provided in October as we focus on long-term growth opportunities and building on the strong operational results we delivered in the fourth quarter. And on chart 10 to summarize, we successfully closed out 2021 with all metrics equal to or better than the guidance we provided in October, highlighted by exceptional cash generation. With our strong balance sheet and our demonstrated ability to generate high levels of operating cash flow, we are well-positioned to execute on our disciplined and dynamic capital allocation strategy for years to come. I’m excited about our opportunities in 2022 as we deliver mission capabilities for our customers and long-term value for our shareholders. And with that, John, we’re ready to begin the Q&A.

Operator, Operator

[Operator Instructions] And we’ll go to the line of Peter Arment with Baird. Please go ahead.

Peter Arment, Analyst

Jim, I figured I’d try to ask about the news of the day on the Aerojet deal. You mentioned defend or terminate on the pending transaction. Can you give us any color on the timeline that you plan to evaluate the lawsuit? And if you do choose to terminate, would you expect to redeploy those proceeds towards capital deployment, or are you preferring to pursue your M&A strategy?

Jim Taiclet, Chairman, President and CEO

So, Peter, our merger agreement with Aerojet Rocketdyne allows for a 30-day period post-filing of a lawsuit to make that decision of either defend or terminate the agreement. So, we’ll be working with our Board over the next few days and weeks to make that determination.

John Mollard, Acting CFO

And cash deployment?

Jim Taiclet, Chairman, President and CEO

Well, of course, I mean, it’s a great opportunity to speak to what John and I have been talking about here, a disciplined and dynamic capital allocation process. We basically assess all the alternative uses of capital through the lens of what’s most beneficial for the shareholder, which provides the best long-term ROI for that dollar of cash flow. We look at the array of IR&D CapEx that I just talked about. Last year, it was about $3 billion in total. We made those investments because we believe for organic or new business growth, they’ll have great ROIs and will get priority for our investment. But we don’t have an unlimited set of opportunities in either R&D or CapEx. So, it’s bounded. Then we consider inorganic growth opportunities, which could be M&A, joint ventures, etc. Opportunities for that type are not expansive right now, let’s say. This leads us to share repurchase and dividend growth, where the bulk of our funds are directed these days, as you’ve heard from John. It’s dynamic and disciplined. We look across all those opportunity sets, finding the best ROI for the shareholder down the road and allocating capital there. We won’t just sit back and let our capital grow in cash; we’ll continuously allocate it to the best uses.

Operator, Operator

Our next question is from David Strauss with Barclays Capital. Please go ahead.

David Strauss, Analyst

I wanted to ask within the guidance for this year what you’re assuming with regard to the continuing resolution. And then, Jim, you mentioned the plus-up on the authorization side. If we see that ultimately come through in terms of appropriations, what might that do to your prior guidance for 2% growth in 2023? And lastly, John, if you can comment on what changed on the R&D capitalization side, taking it down from a $2 billion impact to $500 million?

Jim Taiclet, Chairman, President and CEO

Sure. I’ll start off. It’s Jim here, then turn it over to John. It was encouraging what Congress came out with in the NDAA. From a program perspective, it was excellent for the Company; nine additional Black Hawks, two additional CH-53Ks in the NDAA, four additional C-130Js and 12 more interceptors. Beyond that, there was increased funding for some of our tactical and strike missile programs as well. So really solid across the Company. We’re assuming that the continuing resolution does get resolved at some point by September 31, 2022. The impact of that NDAA, and hopefully the defense budget appropriation coming along with it, will build the pipeline of future revenue for us. Given there are only sort of 7 or 8 months in the fiscal year left, we have most of our revenue visibility already in production orders and deliveries. John, I’ll give it back to you. Those plus-ups are longer-term value creators for us and our shareholders, not necessarily going to hit meaningfully in the next six to seven months.

John Mollard, Acting CFO

Yes. To add to the CR impact, it would take pretty much a full-year CR to have any sort of impact on our revenue as you would see. The biggest impact will be to our customers’ ability to conduct their missions, especially in program areas where requirements would see us on a growth trajectory. With a CR, you can’t grow program requirements, so absent a full-year CR, I anticipate relatively minimal impact on the forecast we’ve given. Your next question was around the change in the R&D tax payment assumption. Historically, we’ve discussed a number of $2 billion. Last quarter, it was a bit more subtle than you would have thought. We’ve changed the definition to indicate that we could see up to $2 billion. But given how close we are to 2022 without any legislative action, we refined our analysis and shared that with external advisors. We concluded that the scope of the capitalization provision was narrower than initially assumed. We’ve claimed the R&D tax credit on specific activities historically, and after discussions with our advisors, noted that the R&D tax credit framework would be relevant in establishing the scope of R&D activities that would require capitalization. As a result, we’ve updated our estimated impact to align with tax code provisions.

Operator, Operator

Our next question is from Seth Seifman with JP Morgan. Please go ahead.

Seth Seifman, Analyst

John, looking at the outlook for Aeronautics this year and the 10.5% margin rate, which if we add back the second-quarter charge to 2021, margin was well above that and above that in each of the quarters. Can you talk about what’s driving down profitability in Aeronautics this year and how you see that trending going forward beyond '22?

John Mollard, Acting CFO

Yes, good question. The two biggest, I’ll call them, dilutive impacts on margins in '22 is the growth in our classified activity in Skunk Works. These programs provide very good ROI, but the margins they attract, due to lower financial risk, will be dilutive. We expect growth in the Skunk Works operation of roughly $300 million, which will be dilutive. We also anticipate significant growth in our F-16 program. As we’re roughly a year out from first deliveries from the F-16 line with the anticipated ramp, we project revenue growth of approximately $300 million for the F-16 program. Given its position in its life cycle, we think it’s prudent to reflect conservative margins on that growth, resulting in a reduction in margins for 2022 on the F-16 program. The key to growing margins in Aeronautics longer-term will be performing on delivering the F-35 production program. This will require us to deliver on the enhanced capabilities our customers need while keeping the TR3 infrastructure upgrade and capability expansion on track. I’m confident we can achieve our internal operating metrics, which will lead to upside.

Operator, Operator

Next, we’ll go to Kristine Liwag with Morgan Stanley. Please go ahead.

Kristine Liwag, Analyst

It seems like there’s more urgency from the Pentagon in hypersonics. Can you provide an update on where your various hypersonic programs are progressing? And should we expect an acceleration from your $3 billion outlook by 2025?

Jim Taiclet, Chairman, President and CEO

Yes. Good morning, Kristine. I just returned a couple of weeks ago from opening up that Courtland facility in Alabama. Three of our marquee programs are going to be produced there. I’ll mention them briefly. It’s a complicated set of systems. But a couple to keep in mind are what the Navy calls Conventional Prompt Strike or CPS. That’s a hypersonic missile that has very good range and will be launched from submarines and destroyer-type ships. In concert with that, the Army has teamed up with the Navy for what they call the Long-Range Hypersonics Weapon program, which will use a similar missile launched from ground units through a Transporter Erector Launcher (TEL). We’ve delivered the first training unit of that TEL to the Army. These missiles will be produced in the Courtland factory over the next few years. The third product we intend to produce in the Courtland facility is for the Air Force, called the Advanced Rapid Response Weapon (ARRW), an air-launched missile that travels at hypersonic speeds. We’re currently testing those at Edwards Air Force Base on B-52 bombers as the carriers. We’re going through test events, and hope to begin production runs over the next couple of years. That’s the summary. Again, there’s more to the story, but those are the highlights: CPS, the advanced air-launched weapon, and the long-range hypersonics for the Army.

John Mollard, Acting CFO

To your question on the long-range guide, I’ll maintain the $3 billion revenue forecast for 2026. There are opportunities for growth. As Jim mentioned, operational urgencies are driving our customers to push us to go faster. Emerging activity in counter hypersonics could provide upside to that forecast. But for modeling purposes, I’m comfortable with $3 billion.

Operator, Operator

Next, we’ll go to Rich Safran with Seaport Global Securities. Please go ahead.

Rich Safran, Analyst

If it’s okay, I have two quick questions. On the supply chain issues last quarter and the accelerated $2.2 billion in payments to suppliers, I’m wondering if supply chain issues that hit you in the third quarter are now behind you. Has the risk been meaningfully reduced? You spoke of impacts anticipated for '22; has the outlook improved, and what does that mean for your guidance? Second question, if you have to abandon the Aerojet deal, would that affect your hypersonics strategy?

John Mollard, Acting CFO

Yes. Rich, I’ll take the first one, and then I’ll let Jim take the second one. As you pointed out, we accelerated more payments to our supply chain in the fourth quarter than we discussed back in October. At that time, we had $1.5 billion accelerated, and we anticipated maintaining that level through year-end. Given the global COVID situation and ongoing fragility in our supply chain, we decided that increasing the level of accelerated payments to our partners was a prudent risk mitigation strategy. To your point about meeting our marks, I give credit to our global supply chain leadership team, who’ve worked actively with all our suppliers to ensure we can meet customer requirements. This includes embedding our own Lockheed Martin personnel within their facilities to assist with their stresses. As a result, our fourth-quarter supply chain activity was in line with our October expectations, which assumes some recovery from the third quarter. However, an overhang remains on our supply chain’s ability to pivot back to normal changes. I don’t think we’re free of challenges, but we’re focused, and leadership is engaged.

Jim Taiclet, Chairman, President and CEO

In summary, we think the bow wave has passed in supply chain disruption for Lockheed Martin, but we’re still watching it closely. Not all risk is out of the system yet.

John Mollard, Acting CFO

On the hypersonic strategy, let me take Aerojet out of the discussion. For us and our customer base, basically the three largest military services in the United States, we’ve all agreed on a go-fast approach to development, which involves more risk in the development sequence—develop, test, learn, and redesign. We’re doing this collaboratively. But the more you can integrate engineering organizations, particularly for propulsion and the glide body, the better the speed and efficiency. We can manage without the propulsion provider, but we think we could gain speed and efficiency from partial vertical integration via the Aerojet acquisition. Regardless of that deal's outcome, we’ll continue managing it effectively.

Operator, Operator

And we’ll go to Rob Stallard with Vertical Research. Please go ahead.

Rob Stallard, Analyst

Jim, I was wondering if you could give us an update on the F-35 sustainment situation. There have been continued reports about this, and I’m curious if you’ve made any progress on reducing the cost per hour?

Jim Taiclet, Chairman, President and CEO

Yes, we’ve made great progress over the past year by bringing together the joint program office, key services flying the airplane, Lockheed Martin, and Pratt & Whitney. We’ve united with the shared goal of reducing cost per flight hour and improving jet readiness rates. We’ve achieved some successes, ordering long lead-time spare parts already through the system to ensure availability and timely distribution to reduce costs and improve readiness rates. We’ve also received a request for proposal for a performance-based logistics program focused on the supply chain side, which will integrate production parts planning and sustainment planning. This PBL initiative aims to address labor, supply chain, and depot dynamics. That’s a three-year PBL we hope to negotiate in the upcoming months. I believe we’re effectively moving toward a more integrated industry-customer approach to sustainment, and we’re already working on bringing the cost per hour down.

John Mollard, Acting CFO

To provide a quantitative perspective, at the end of 2021, we had 753 fielded aircraft. Based on the production plan, that number will grow to about 1,525 aircraft, indicating a 15% compound annual growth rate. The flight hour growth rate is even faster. We projected a 6% compound annual growth rate in our sustainment costs over the period. Thus, the aggressive cost-cutting strategies we’re implementing are clearly yielding positive metrics.

Jim Taiclet, Chairman, President and CEO

We’ve escalated the joint program office discussions to a five-year PBL response, so that’s our current status.

Operator, Operator

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

Doug Harned, Analyst

On the F-35, we were looking at production rates; at one time, we were looking at a peak level of about 220 per year. That’s now down to a peak level of 156 that we’re looking at, and we’ve seen some U.S. rate plans come down in budgeting. At the same time, you’ve also seen new international opportunities, with Finland being one. What risks do you see to the 156 level as a plateau, and how do you expect the mix to shift between U.S. and international over time?

John Mollard, Acting CFO

The broad pattern indicates that the U.S. program of record exceeds 2,400 aircraft, and we anticipate about 900 international aircraft, leading to a total program of over 3,300 aircraft. In evaluating that and considering Finland and Switzerland’s recent contracts, we expect to secure many international opportunities. The 156 aircraft production rate has an upside bias; we were focused on establishing a consistent production tempo to avoid production fluctuations. As a result, the 156 rate was selected to enable steady production load balancing.

Jim Taiclet, Chairman, President and CEO

Absolutely, John. It requires investment in capacity for peak production, leading to overcapacity when production decreases. For the services and JPO, it’s an optimal investment level for the government, Lockheed Martin, and our supply base. There’s an upside bias, especially if we win more international bookings. I feel there is limited downside risk and increased interest in our tech acceleration concepts, further making the F-35 critically important to our 21st-century defense capabilities.

Operator, Operator

Next, we’ll go to George Shapiro with Shapiro Research. Please go ahead.

George Shapiro, Analyst

Yes. One of the largest benefits to the cash flow this quarter was a $2 billion decline in contract assets. Could you discuss that? It doesn’t appear to be a one-time benefit, as the strong cash flow this year didn’t affect your guidance for '22 and '23. Can you comment on that? Additionally, in RMS, there are declining sales and a projected decline in margins for this year; is that primarily due to Sikorsky where government helicopter sales are decreasing and development programs like the CH-53K are ramping?

John Mollard, Acting CFO

Yes, thanks, George. I’ll address both questions. Starting with RMS, we anticipate a revenue drop of nearly $300 million in Black Hawk. That production line is typically associated with higher margins, thus causing a decline. Concurrently, there is more than $300 million growth in the CH-53K program. Given its stage, we typically employ a cautious margin estimation reflecting risk retirement events. Those developments explain the projected declines in both sales and margin. Regarding the contract assets perspective, over the last three weeks of 2021, we collected $6 billion, with two weeks exceeding $2 billion. When we provided our operating cash flow guidance in October, several significant domestic and international collection events were not included for 2021. We reassessed our outreach and made numerous process changes, resulting in collections we didn't anticipate. Consequently, while 2021 performance drove our cash inflow higher, our existing expectations for '22 and '23 remain unchanged.

Operator, Operator

Next, we go to Ron Epstein with Bank of America. Please go ahead.

Ron Epstein, Analyst

Jim, what’s your take on the adaptive cycle engines for the F-35? GE suggests this could yield a 30% range increase for the aircraft. Would this open up more market opportunities for the airplane?

Jim Taiclet, Chairman, President and CEO

I've visited both engine plants in recent months: Middletown for Pratt & Whitney and Evendale for GE. Both are investing significant resources into improving engine options. Customers might choose to enhance the current design or go for a clean sheet adaptive cycle engine design. The difference lies in the adaptive cycle engine's three-stream airflow system, as opposed to existing designs. Both vendors are pursuing this adaptive technology. It’s ultimately up to the Joint Program Office and government to choose which engine option suits their evolving threats best. If the new technology enhances range, it broadens the F-35's use case for the U.S. and allies. Such decisions will stem from threat assessments and aircraft needs; hence, it’ll be a governmental call.

Operator, Operator

Our next question is from Mike Maugeri with Wolfe Research. Please go ahead.

Mike Maugeri, Analyst

Jim, you’ve talked about higher ad spend toward 5G.MIL. Are there any indicators that 5G.MIL is starting to gain traction? Anything the investment community can measure against?

Jim Taiclet, Chairman, President and CEO

5G.MIL is designed to provide our customers with higher performance efficiency in mission delivery. We've modeled it for counter air, surface warfare, and integrated air and missile defense missions with Lockheed Martin and other OEM platforms. This new approach contrasts with traditional defense procurement practices. Typically, government officials define needs, but we are working to determine missions first and identify existing and needed platforms. This allows us to enhance mission capabilities incrementally every 6 to 12 months, rather than waiting years for new systems. In practice, success will be seen predominantly through existing platforms like the F-35. We aim to keep these capabilities evolving, while possibly licensing technologies in the future. This isn't about a singular metric; it’s an evolving contribution to ultimately drive mission success.

Operator, Operator

Next question is from Myles Walton with UBS. Please go ahead.

Myles Walton, Analyst

Jim, we're more than three years past the start of negotiations on Lot 15 for the F-35. The backlog is below where it was at the end of 2017. I understand you're incrementally funded now for Lot 15 and beyond, but why isn’t closing that contract job number one for you? Why not secure that closure as a priority?

Jim Taiclet, Chairman, President and CEO

Let me let John handle this, as he’s been involved for the entire duration.

John Mollard, Acting CFO

Yes, Myles. We’re still negotiating with the Joint Program Office on Lots 15 to 17. It’s proving to be more challenging than expected to finalize a cost baseline that incorporates our customer’s reduced aircraft orders for Lots 15 to 17 versus prior buys. We’re also debating the impact of global challenges affecting Lockheed Martin and our supply chain, including inflation and COVID-19. Both sides are committed to good faith negotiations to reach a closure since we recognize the critical importance of continuing F-35 capabilities deliveries.

Jim Taiclet, Chairman, President and CEO

We’re maintaining our stance on ensuring our shareholders receive appropriate negotiated agreements, and we are focused on achieving that.

Operator, Operator

And next, we’ll go to Noah Poponak with Goldman Sachs. Please go ahead.

Noah Poponak, Analyst

John, regarding the R&D cash tax item, I want to ensure clarity. Are you saying that you only need to incorporate IRAD into that, or that historically, where you placed R&D tax credit will also require amortization going forward? I’d like to confirm that. And Jim, on a different topic, we’re expecting the next budget request and a multi-year outlook from the Pentagon; could you spend a minute on the growth rates you expect? Given competing interests, do you see a realistic five-year framework where the '22 budget started low single-digit growth or the '22 budget ended with mid-single-digit growth?

John Mollard, Acting CFO

Yes. Noah, to clarify, the framework for what expenses ought to be capitalized for R&D activities is broader than just IR&D, but it’s narrower than historically considered. This aligns with our R&D tax credit assessment framework. So, it’s consistent with historical approaches.

Jim Taiclet, Chairman, President and CEO

Regarding the Future Year Defense Plan (FYDP), the first real year begins in 2023. It’s premature to predict percentage growth in the defense budget. However, our foundational assumption for FY22, pegged at $740 billion, will underlie growth projections for 2023. That growth will depend on administration and Congress actions. Given the evolving threat landscape, including concerns from global adversaries like North Korea, Iran, Russia, and China, there’s an urgent push for advanced national defense. The historical context suggests that we won’t passively observe these threats. I can’t provide a specific growth number yet, but there’s a clear need to respond effectively for national security.

Greg Gardner, Vice President, Investor Relations

Hey John, this is Greg. We’ve gone a little over the hour. So I think we’ve come upon the end of our call. I will turn it back over to Jim for some final thoughts.

Jim Taiclet, Chairman, President and CEO

Yes. Thanks, Greg. I’d like to conclude the call by thanking the entire Lockheed Martin community for their steadfast commitment during a really challenging year, supporting our customers and each other. We’re all working to put the pandemic hopefully behind us here in ‘22. I’m confident in our future because of the performance and innovation exhibited by our workforce; we have about 60,000 engineers and scientists striving each day to address these issues. We will continue to support our customers’ essential missions. I also appreciate our investors’ confidence in our capability to execute on our long-term free cash flow per share growth strategy. Thank you for joining us today, and we look forward to speaking with you in April. Bye, everybody.

Operator, Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.