Good day, everyone, and welcome to the Lockheed Martin Fourth Quarter and Full Year 2022 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 Lee, Vice President of Investor Relations. Please go ahead..

Thank you, John, and good morning. I'd like to welcome everyone to our fourth quarter and full year 2022 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 fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements.

Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments.

These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Jim..

programs of record, hypersonics, classified activities and new awards. With regard to programs of record, there were several important developments in key signature programs in our fourth quarter.

On the F-35, the definitization of Lots 15 through 17, as I mentioned a minute ago, included the first F-35 aircraft to be produced for Belgium, Finland and Poland. We received authorization to procure long lead items for Lot 18 F-35 aircraft for the U.S. Air Force, Marine Corps, Navy and U.S. allies as well.

We also formally welcomed Germany, the ninth foreign military sales country, to the F-35 Lightning II program. And earlier in January, Canada officially became an F-35 operator as the country selected the aircraft to replace its aging fighter fleet. We continue to expect deliveries of the F-35 to ramp to 156 by 2025.

Despite the temporary pause in flight operations and corresponding suspension of engine deliveries that began in December and resulted in the delivery of just 141 F-35s in 2022, seven shy of our expectation of 148 before the engine issue was discovered. Also in the quarter, the U.S.

Navy authorized the CH-53K King Stallion heavy-lift helicopter to enter full rate production and then its deployment phase. This important milestone allows the program to proceed beyond low-rate initial production. And this achievement attests to our long-standing partnership with the U.S.

Marine Corps and instills confidence and stability in Sikorsky's diverse domestic supply chain. In addition, at Sikorsky, international demand for the Black Hawk remains strong. Last week, the Australian Army announced it will acquire 40 UH-60M Black Hawk helicopters to replace its current multi-role helicopter fleet.

Deliveries are expected to begin for Australia this year. Further, the Lockheed Martin built Orion exploration class spacecraft launched on NASA's ARTEMIS 1 and completed a 25-day flight test, slashing down off the coast of California.

This successful mission takes us one step closer to the first woman and first person of color setting foot on the moon. On its journey, Orion traveled more than 1.4 million miles through deep space and surpassed records for total distance.

It traveled 270,000 miles from home and the farthest distance from earth by a spacecraft designed to carry humans. We look forward to the next stages of the program with seven additional missions under contract. Turning to hypersonics. In December, Lockheed Martin Missiles and Fire Control and the U.S.

Air Force successfully conducted a hypersonic-boosted flight test of the Air-Launched Rapid Response Weapon. This was the first launch of a full prototype operational missile, meeting all its objectives for the test, including reaching speeds of greater than 5 times the speed of sound.

With regard to classified programs, we achieved successful milestones across multiple business areas in 2022 and grew 5% year-over-year. We continue to expect growth in classified that will outpace the rest of the portfolio over the next several years.

And finally, at new awards, Lockheed Martin's Next-Generation Interceptor, or NGI, continues to make progress. In late October, we announced the delivery of the first NGI flight software package to the Missile Defense Agency, providing the framework of software development tools, process workflows, scripts and environments.

The delivery was ahead of schedule and is a critical step on the path for flight testing and fielding. This program remains a focused competition for Lockheed Martin with the first NGI forecast for delivery in 2027. With regard to the Future Long Range Assault Aircraft, or FLRAA, competition, we were disappointed in the U.S. Army's decision.

And upon review, we determined a formal protest by Sikorsky on behalf of Team Defiant to be the best course of action. We continue to believe that Defiant X with its increased speed, range, manoeuvrability and survivability is the transformational and most cost-effective aircraft that best meets the selection criteria for this competition.

Sikorsky remains one of two competitors for the other component of the Future Vertical Lift initiative that's called the Future Attack Reconnaissance Aircraft, or FARA, which is currently expected to be awarded in 2025. The first RatorX-competitive prototype is over 90% complete and has more than 65% of its acceptance testers already done.

Sikorsky is the only company with a representative FARA technology demonstrator aircraft. I saw it fly down at West Palm Beach a few months ago. It's amazing, the S97 RAIDER, which has completed more than 110 flight hours. In November, Norway became the first international customer for our new TPY-4 radar.

It's the first software-defined radar that outperforms in target detection, mission diversity and transportability. Norway is going to receive eight of Lockheed Martin's TPY-4 radar with options for three additional radar.

Finally, backlog ended 2022 at $150 billion with book-to-bill of 1.2 times and increases in every business area across Lockheed Martin. This strong demand signal bodes well for future growth over the longer term for our company.

So, these four pillars will guide us as we face a challenging geopolitical environment and apply growth and integrated capabilities mindset to everything we do here. As conflict continues in Ukraine, unfortunately, and projected global threats require coordinated efforts to protect the U.S.

and our allied territories, ongoing progress in our 21st Century Security vision will enable the acceleration of advanced capabilities to defer these threats and drive effective Joint All Domain Operations for our military service customers.

In the fourth quarter, we continued to announce and expand strategic agreements with America's leading commercial digital companies, such as IBM's Red Hat, to advance artificial intelligence innovation on Lockheed Martin military platforms; and for Microsoft, with whom we're going to help power classified cloud advanced technologies for the Department of Defense.

Microsoft's latest secure framework will make Lockheed Martin the first non-government entity to independently operate inside the Microsoft Azure Government Secret Cloud, ushering in a new era of cloud opportunities for the industry. As we look ahead, demand for Lockheed Martin platforms and systems is strong in the United States and abroad.

We continue to expect 2023 sales about the same level as we discussed back in October. We also continue to expect a return to sustained top line growth in 2024 and beyond as headwinds diminish in our program mix, the supply chain continues to recover and our signature programs grow.

Free cash flow per share will remain a key focus as we maximize returns for you, our shareholders. 2022 is a year of great accomplishments for our company in the face of a lot of dynamic challenges.

The outstanding achievements of our teams resulted from real deep commitments across our business areas and better cooperation among them as well as our corporate functions to develop, produce and deliver world-class systems to our country and its allies.

Our progress this year is a testament to the dedication of our 116,000 team members and the values we all share. So with that, let me hand it off to Jay to give more color on the financials, and we'll join you later to answer your questions.

Jay?.

Thanks, Jim, and good morning, everyone. Today, I will walk you through our consolidated results for 2022, additional business area detail and offer a first full look at 2023 guidance. As I highlight our results, please follow along with the web charts we have posted with our earnings release today.

Let's begin with Chart three, an overview of our consolidated 2022 financials.

Lockheed Martin followed up a solid third quarter with a strong finish to 2022, highlighted by 7% year-over-year sales growth in the fourth quarter and effectively managed a turbulent year impacted by COVID and supply chain disruptions as well as inflation levels not seen in decades.

Besides sales, we also exceeded our expectations for segment operating profit, earnings per share and free cash flow, all while absorbing incremental headwinds tied to restructuring activities within RMS and mark-to-market losses in our investment portfolios.

We also booked record orders in 2022, resulting in 11% growth to an ending backlog of $150 billion.

In addition to our orders on F-35, we experienced a surge in new interest for our industry-leading security solutions, such as in classified programs in Space and in Missiles and Fire Control, where we booked approximately $1.5 billion in orders, reflecting increased demand to replenish U.S. stocks and enhance security positions globally.

And we delivered on our commitment to boost shareholder returns by deploying nearly $11 billion to shareholders through share repurchases and dividends while making significant investments in our businesses.

Taken together, these results demonstrate the perseverance of our dedicated employees to perform in challenging environments and support our expectations for 2023 and beyond. Taking a closer look at full year results with consolidated sales and segment operating profit on Chart four.

Sales came in higher than expected by nearly $750 million, limiting the decline to 2% year-over-year and essentially recovering to the sales guidance we had originally communicated last January.

The stronger-than-expected performance was broad-based across all four business areas and reflects strong coordination with supplier partners to drive material throughput and program schedule performance as well as some favourable award timing, which drove additional revenue.

Segment operating profit declined 2% year-over-year but also finished higher than expected by almost $50 million driven by the higher sales. Operating margins settled at 10.9%, slightly lower year-over-year and versus expectations based on lower net favourable profit adjustments. Moving to earnings per share on Chart five.

Adjusted earnings per share grew 2% for the year as the benefit from share repurchases overcame headwinds from lower segment profit and FAS/CAS pension income. Moving to cash flow on Chart six. We delivered $6.1 billion of free cash flow for the year while investing almost $1.7 billion in CapEx at a ratio of 1.4 times depreciation.

We also ended the year with nearly $1.5 billion of accelerated payments to our suppliers, maintaining our commitment to a resilient supply chain. As I noted earlier, 2022 represented a significant year of cash deployment.

In total, we returned 178% of free cash flow to shareholders in 2022, leveraging our performance and strong balance sheet while still investing for our anticipated growth trajectory in 2024 and beyond. Okay. Moving to segment results and starting with Aeronautics on Chart seven.

Full year sales grew 1% year-over-year primarily driven by increases in our classified programs, partially offset by lower F-35 production volume. Operating profit increased 2% driven by higher net favourable profit adjustments more than offsetting the impact of the lower volume. For the year, backlog at Aeronautics grew 15%.

As mentioned, Aeronautics completed the F-35 Lot 15 through 17 negotiations and secured production volumes while providing the services with a value proposition that combines the highest performance at affordable cost. Looking at Missiles and Fire Control on Page eight.

Sales decreased 3% driven primarily by lower volume on our special ops sustainment program following the Afghan withdrawal, along with lower volume on sensors programs. Segment operating profit was down 1% with lower favourable profit adjustments primarily on PAC-3. For the year, backlog increased 6% on the back of tactical missile strength.

At Rotary and Mission Systems on Page nine, sales decreased year-over-year by 4% driven primarily by a non-recurring revenue event in our training business in 2021 along with lower C6ISR and Black Hawk volume at Sikorsky.

Operating profit decreased 7%, following Sikorsky and C6ISR volume and lower favourable profit adjustments on the Black Hawk program. Backlog grew 4% in 2022, led by the Defense of Guam award, where RMS will be the lead integrator of the multi-domain air and missile defense system as well as stronger Sikorsky orders.

Turning to Chart 10 in our Space business area. Sales decreased 2% due to the 2021 renationalization of the AWE program, partially offset by growth on a Next-Generation Interceptor program and national security space.

Operating profit decreased 8% with lower net profit adjustments, partially offset by higher equity earnings from United Launch Alliance. Backlog grew 16% based on strong classified program captures and Orion orders. So all told, a strong finish to the year. So let's now shift to 2023 on Page 11.

Before introducing our expectations, I'd like to inform you of a reporting change in segment operating profit starting in 2023. We will report purchased intangible asset amortization expense in unallocated corporate expense below segment operating profit. Previously, intangible amortization was included in segment operating profit.

This change will not impact total earnings, and we believe the change provides a more accurate view of operating performance for each of our four business areas. The impact is approximately 40 basis points on our 2023 expectations, consistent with the impact in previous years.

Our 2023 financial outlook includes the impact of this change, and you can find supporting data for these adjustments in the appendices of our web charts as well as in the earnings release. Okay, let's get into the outlook for 2023. We continue to expect sales to be in the range of $65 billion to $66 billion and the midpoint is slightly below 2022.

Speaking to the timing of sales this year, we expect the first quarter to be our lowest quarter of the year, ramping up quarter-over-quarter as we did in 2022. Segment operating profit for 2023 normalized for intangible asset amortization has improved what we thought -- from what we thought in October.

And we now estimate only 10 basis points of headwind from 2022 with segment operating margins at 11.1% under our new reporting. We currently expect $2.1 billion of FAS/CAS income in 2023. It's estimated to be roughly $100 million lower in '22, excluding the impact from our pension transfer transaction.

Our earnings per share is expected to be between $26.60 and $26.90 for '23 with the year-over-year reduction to adjusted EPS primarily driven by lower segment operating profit in FAS/CAS income, partially offset by the benefit from a lower share count.

Our free cash flow estimate for 2023 is greater to or equal than $6.2 billion and assumes continued enactment of the R&D tax capitalization. This increase of $100 million to cash generation, along with our share repurchase guide of another $4 billion, highlights our continued focus on increasing free cash flow per share for our shareholders.

This projected combination of higher free cash flow and a lower share count lead to a mid-single-digit growth expectation in free cash flow per share in 2023. Okay. On Chart 20 -- on Chart 12, let's sum it all up.

We closed out 2022 with a strong finish with operating momentum and a robust backlog, which have us well positioned to resume growth in 2024 and beyond. We also placed a premium on leveraging our strong cash generation and balance sheet to increase cash returns to our shareholders with a significant increase to share repurchases.

Across all four business areas, our breadth of development, production and sustainment programs continue to drive a foundation of growth and sustained high performance. And we will work actively with our customers to meet their increasing demands and mission requirements looking ahead to the future.

Our investments for growth, value and efficiency are aligned with our strategy for technology advancement and improved synergies across Lockheed Martin. So in closing, we believe the business is well positioned for long-term growth and value creation for our shareholders. With that, John, let's open up the call for Q&A..

[Operator Instructions] And first go the line of David Strauss with Barclays. Please go ahead. .

Good morning, everyone. Thanks for taking the question. Jim, I wanted to ask you about, you highlighted the headwinds that you have in terms of your program mix in '23 is the reason for flattish sales.

Could you quantify what that number is in terms of the headwind and what programs specifically you're looking at? And then as a quick follow-up, the FY '23 budget came in, I think, a fair amount better than you were anticipating plus ops on F-35 and C-130.

How might that change what you've previously said with regard to the reacceleration in growth in 2024? Is it better than low single digit now? Thanks. .

So David, let me take the first one and then kick over the second part of your question to Jim and just really talk in the context of '23 and what's going to be different in 2024. In 2023, when you look at it, we've got continued growth in our four pillars, really the programs of record that Jim had mentioned.

But we do have some specific unique items to 2023, and I'll give you an example. For example, in aero. On the F-35, we continue to expect mid-single-digit growth in sustainment on the program. But we are expecting also a mid-single-digit decline in production as deliveries catch up to the material that we had purchased in prior years.

Similarly, on the F-16, we're going to see continued growth in production to roll out our backlog, but we are seeing a reduction in modernization and sustainment programs on the F-16.

So as those -- both of those normalize in 2023 going into 2024, they will no longer be headwinds, which will continue to allow for growth in Aeronautics, particularly in the F-35 sustainment and on F-16 production.

Similarly, like MFC, what we saw in 2022 and it carries over a little bit to 2023 is some of the areas where we see the higher demand from a production level, particularly in programs of record, things like PAC-3, it's taken us a little bit longer than we originally expected to ramp up.

And so we're going to see gradual improvement in supply chain as well as our internal operations in '23 with stronger growth in 2024. At RMS, CH-53 will double deliveries in '24 versus '23. And '23 versus '22 is pretty much flat deliveries. We also see probably some Black Hawk growth in '24 as well.

And what we're going through right now is the transition for multiyear 9 to multiyear 10 in RMS and Sikorsky specifically. So those are all things that we think will lift from '24 relative to '23, and those are headwinds that are really unique to 2023..

Yes. And as far as where the defense budget came out, David, it really aligns with our view in our company about the nature of the geopolitical threat, the need to modernize U.S.

and allied forces to continue to hopefully deter armed conflict beyond the sad and unfortunate situation in the Ukraine that's already happened and the fact that there's bipartisan support in Congress to do just that. So we've been expecting all along in our kind of long-range plan that the U.S.

government and Congress would step up to meet the reality of the global geopolitical situation. And that's exactly what played out in the budget process for FY '23. We also expect that same reality to continue to sadly exist again in the next budget cycle, which is happening even now in -- for 2024.

So we don't see the circumstances the fundamentals changing. Therefore, we also believe that the continued robustness of the defense budget is going to be a reality as well..

Just let me follow up on your last question, David, whether or not there's upside. Where we see potential increases to where we were at baseline before really is in MFC. Over the next five years, we've got revenue potential. It's around $6 billion. And that would more than offset lost revenue associated with FLRAA should that decision hold.

And so net-net, we see that there could be some upside over the next five years..

And next, we'll go to Myles Walton with Wolfe Research. Please go ahead. .

Thanks, good morning. Jim, maybe one quick one and one sort of allow you to expand a little bit. When is your expected restart of deliveries in the F-35, as a quick one? And then, obviously, there's more of a debate going on in D.C. around fiscal restraint and has been in place in the last several years.

And so I'm just curious where you think this ends up as one thing, but more importantly, what, if anything, do you do operationally to prepare yourself for whatever the outcomes are in terms of balance sheet holding back on repo or leaning forward, looking for areas where 2023 budget -- excuse me, 2024 budget might be in a continuing resolution for a full year.

Anything on that perspective from an operational perspective?.

Sure, Myles. So as far as timing and resumption of deliveries on F-35, I think it's really important to differentiate between delivery and production, right? So we are continuing production in the final assembly factories at Fort Worth and Italy and in Japan at the same pace we expected to before the mishap occurred.

We're also continuing to order and receive parts and materials from our supply chain as well. And so once an aircraft rolls out of the factory, our pilots and the DoD pilots conduct a handful of acceptance flights. That's what's kind of on hold right now is just that portion of the process.

So the vast majority of our revenue, much greater than 90% is earned when the aircraft rolls out from the plant door. So Jay can add more color on the financial perspective, if you like, a little bit later, but that's really what happens. And so as far as the timing of resumption of deliveries, we'll be notified of that when the U.S.

government and the propulsion supplier conclude their ongoing mishap investigation.

Jay, do you want to add anything to that?.

No. You got it. That's it..

Okay. And then secondly, we really can't predict the political dynamic in Congress and -- within and with the administration.

So we're going to keep our head down, stay on our plan, do our job and expect that the right thing will occur at the other end of the 2024 budget process, which is fully funding and making available that funding to the department of defense, so we can deter conflict with them and that they can acquire what they need to do that.

So that's our expectation. It's really difficult for us to lay out what we think the budget process will be given the nature of the House, Senate and the administration right now. But we expect that they are going to come together and do what's needed to defend the country and get the budget done..

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

Hi, good morning. Jay, we've talked about this dynamic where the outlays are trailing the authorization and the possibility that supply chain is intertwined in that. And that was kind of tough in the first half of the year, look to be getting better in the third quarter, but then exited the year declining.

Do you have any insight into incremental insight into what's going on there when that gets better? And to the extent that supply chain is related, your comments that you expect that to improve through '23, is that underway? You already see that happening? Or is that still just a logical anticipation of timing?.

Sure. Good question. Let me follow up. And we looked at this and tried to triangulate performance in a number of different ways. We looked at just straight piece part on-time delivery here in the fourth quarter relative to what we saw in the second and the third.

We also looked at program performance, so earn value-type metrics, and we really didn't see a meaningful change in on-time delivery or schedule performance relative to our earned value systems. But what I will say is the fourth quarter had a significant step-up in requirements.

And if you adjust for the number of weeks in the fourth quarter relative to the balance of the year and you also adjust for some of these benefits that we saw in terms of award timing, our requirements in the fourth quarter stepped up sequentially by about 5%.

And I would say the entire value chain, whether it's our internal operations and the supply chain, was able to meet that increased level of requirements. So that, to me, bodes well to the future as well as expecting a gradual improvement in 2023. And I think that just provides a reasonable assumption and a reasonable basis for that assumption.

And we'll go to George Shapiro with Shapiro Research. Please go ahead. .

Yes, good morning. If you look at the F-35 program, like the incremental profit you reported was about a 16.4% rate, so I assume you stepped up the margin on the F-35. And going forward then, the slight decline that you're forecasting in the margin probably reflects sustainment growing versus production.

And a quick follow-up, the $20 million charge that you took in a classified program in aero, was that the same program that you took large charges a couple of years ago? Thanks..

Okay. So George, I can probably answer your questions with one yes, but maybe I'll provide a little bit of color there. I now take the -- you're correct, on the charge we took, that was related to the program. We continue to have some learnings there. But our team, I think, in Skunk Works is doing a great job managing that program.

And this is a development program where you see and you continue to have learnings. But in the grand scheme of things, I think we've managed that quite well. And it really hasn't -- did not impact our results. And as far as the F-35 program, we did see some benefits there.

And you're right, in the quarter, we were -- the results there were augmented not only by the volume but as well as the net profit adjustments at Aeronautics, and it was across the board. I think next year, as we think about the margin, yes, there's a little bit of a headwind there.

I think mix does play a part in it as well as right now, we're planning a little bit lower favourable profit adjustments. But for the year, in the grand scheme of Lockheed Martin, this year, we did about 25% of profit in net profit adjustments, and we would expect that to be somewhat similar for the entire company for '23.

Thanks for the question, George..

And next, we'll go to Rob Spingarn with Melius Research. Please go ahead. .

Good morning. Jim, I think everyone would agree that Lockheed's got the pole position in offensive hypersonics. Strong program portfolio there and some recent successes. What I think people might be interested in are your efforts as well in counter hypersonics as we might expect that to be a growing portion of the budget.

Can you talk about that a little bit?.

Sure. And it's largely classified, Rob.

But what I can say is many of the elements of counter hypersonics, we also have a pole position in, right? So we've got existing products that we can take the lessons learned from and a lot of the engineering and apply them to just a faster incoming target, right? So we're working on NGI, as you already heard, which is a ballistic missile.

It travels at similar speeds. We have the FAAD system, which is a sort of a high-altitude interceptor as well. And then we have PAC-3, which is a very accurate lower-level further in, if you will, defensive systems. So we've got the engineering talent. We've got the intellectual property.

And we're developing these 21st Century Security concepts like applying artificial intelligence to network systems together and process data much more quickly, which, of course, you need that to process the information coming in on a Mach 5 missile, right? So I think we have a lot of the elements that will go into the eventual counter hypersonic solutions, and we are working on many of them right now in integrating what we have and developing what we need..

Our next question is from Richard Safran with Seaport Research Partners. Please go ahead. .

Jim, Jay, Maria, good morning.

How are you?.

Good morning. Well. Thanks. .

So I wanted to ask you about the F-16 and maybe expand on the remarks you made just a few moments ago. I thought you might comment on things like U.S. and international opportunity set ahead, maybe update on the first delivery expected production rates.

And if it's at all possible, maybe touch on like what margins you're expecting on the program right now. I'm just thinking that they should be pretty decent given the move to Greenville was done to improve the cost structure on the program..

Rich, it's Jim. I'll start off quickly and hand it over to Jay for some of the background and data associated with the program. But the really great news is Block 70, which is the production article out of Greenville.

The first Greenville Block 70 test flight was this morning was successful, really great milestone for the company and for that organization in South Carolina. But there's significant demand for this aircraft. A lot of coming organically, I guess, I'll call it, from allies around the world.

Also, we're out actively marketing this jet to those countries that may not be authorized yet or maybe not have the infrastructure for F-35 at this moment but may in the future. India is one of those. I co-chair the U.S.-India CEO Forum with Secretary Raimondo.

We're going to be going over there in a month or so with a team of CEOs from across our industry and meet with theirs and try to get collaboration going. And one of the, I would say, primary opportunities in that endeavour is the F-21, which is F-16 variant specifically designed for India, for example.

So we haven't made that sale yet, but I can tell you all the way up to my level, we are out marketing F-16, and we have a lot of organic demand coming in from either existing, order customers or new ones.

Jay, anything you want to add?.

Sure. Just maybe a little bit more color. Just on top of the first flight that we had today the successful first flight, congratulations to our Aeronautics team there. We have over 20 aircraft that are currently in process in the production phase.

We will deliver anywhere between, say, 78 aircraft this year, and then that will step up significantly in 2024. And so we're on a good path that we recognize the opportunities that are in front of us.

There are a few countries that have been announced there that we're eagerly awaiting contract finalization, hopefully this year, with Jordan and Bulgaria. That's about combined about 20 aircraft. And so the demand, as Jim mentioned, is pretty significant. And we're ramping up as we speak to be able to deliver the customer requirements..

Next, we'll go to Seth Seifman with JPMorgan. Please go ahead. .

Thanks very much. Good morning, everyone. Jay, I'm sorry to waste a question on pension. But if we look at the CAS recoveries, it was about 30% of this year's cash flow. And I know there's discount rates and returns and all that stuff, but CAS tends to be much more visible than FAS on the income statement.

So can you give us a multiyear outlook for the CAS recoveries over the next few years and where the balance stood at year-end?.

Yes. I mean -- so for cash this year, as we mentioned, that will decline this year. I said about $100 million. Specifically, the CAS element will decline by about -- the recoveries by about $75 million. We'll see that decline a little bit more over the next few years as well.

And so it will come down in the range, I think, around $1.5 billion, $1.6 billion over the next few years. And so that's the best outlook we have today. As you know, these things are -- they do fluctuate and a little volatile. So we'll update that accordingly as we go and think about next year and what that means for 2025, Seth..

And next question is from Peter Arment with Baird. Please go ahead. .

Yes, thanks. Good morning, Jim, Jay. Jay, I wanted to just focus on Missiles and Fire Control. Just kind of obviously a little transition in growth this year, but profitability going to be down also looks like close to 90 basis points.

Just maybe walk us through a little bit kind of some of the puts and takes there and just thoughts about kind of margin recovery as we think about the next couple of years where we've got all this growth inflected? Thanks..

Yes. No, good question. This is something we talked a little bit on the third quarter call. We've got some new program awards, particularly in classified, that are going to put margin pressure not just next year but a few years beyond that as well. And it's really just on the early phase of these programs as we head into production.

It's just low margin, and it will take time to have those restore to margins that we've seen in the past. What I will say is that we do have the benefit of some offsetting mix with the upside that we're seeing in this business. I mentioned before a potential $6 billion over the next five years.

Those will come with more solid margins will help mitigate the reduction that we're seeing on these new programs. But there will be some pressure there that we have to deal with. And look, the MFC team has a good track record of driving out cost, driving margins.

I'm confident they'll be able to do that in the future as well, but it will take a few years to get there..

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

Good morning, everyone. Maybe switching gears to a different topic. With tighter cost of capital, we've seen valuations come down in high-growth investments.

Is this a better time for corporate VC to enter into deals on attractive terms? I mean just looking at the limitations on M&As from the FTC stance that we saw with Aerojet Rocketdyne, I mean how should we think about the importance of Lockheed Martin Ventures to access these new technologies? And could we see ventures double from here?.

Kristine, this is Jim. One of the first things I did when I came from the Board to active management was to double, as you said, to double the venture fund, right? So, it was $200 million, now it's $400 million. We're actively -- actually, very actively looking to invest that additional funding.

In the great scheme of the company, though, it's really designed to discover emerging technology that might be applicable to our strategy and to our products and systems and help kind of develop that technology in a way that it can have utilization earlier than perhaps otherwise for our industry.

So, we get the most benefit out of our venture fund in actual operations, production and development of platforms and systems. We have had a nice upturn in the valuations of those investments as well, but they're not necessarily driving the ultimate results or the ultimate growth prospect of the company, but they're indirectly doing just that..

I'll just add, Kristine, I mean it's a great point. I mean we've got a pretty tight alignment on the targets that we pursue to our technology road maps.

And these are examples like Joint All Domain Operations interoperability, autonomy, artificial intelligence and other areas that will help us drive and accelerate our internal organic capability with these new emerging technologies. And so it's a great point. There's certainly opportunity there.

As Jim mentioned, we've increased our availability of funding for that, and we're excited about those opportunities..

And next, we'll go to Scott Deuschle with Credit Suisse. Please go ahead. .

Hey, good morning. Jay, you guys have taken a bit of a different approach on this R&D tax issue than some of your peers. And I know this subject has been beaten to death already, but I'm just curious if you've had any recent conversations with the government on whether they're going to agree with the approach you've taken.

And then I guess just stepping back more broadly, you had this uncertain tax position disclosed in the 10-Q. Just kind of give us a sense for when you think that might get resolved? Thank you so much..

Sure. Good question. We remain confident in the position that we've taken. We've had really no dialogue. We are awaiting guidance from the IRS on what contracts specifically would be covered. You're right that different players have taken different positions. We remain confident in our position. We believe that the risk is a factor.

And when you are under particularly cost-type contracts, there is no risk taken by the provider of those services. Secondly, we believe the benefit is marginal because the owner or the contractor of that work is really the one that takes over that technology and can transfer it to others at any point in time.

And so we think that those are sound base and sound arguments supported by legal teams that we have in a position that we've taken. But again, it's uncertain -- and our uncertain tax position really reflects that uncertainty. So, I can't give you specific one way or the other in terms of IRS positions because we just don't know as of yet.

But I can tell you, we spent a lot of time researching this, a lot of time discussing it, deliberating it internally, and we think the position that we've come out is the right position..

And next, we'll go to Rob Stallard with Vertical Research. Please go ahead. .

Thanks so much. Good morning. Jay, a boring inflation question for you.

Are you seeing any signs that inflation is starting to ease as it works itself through your system? Or was there any mitigation for this cost inflation that is going to be flowing through from the final FY '23 budget resolution?.

Yes. Rob, inflation is something that we evaluate all the time. In many of our existing contracts, we have not really seen a significant impact, only because I mean our fixed price contracts -- our suppliers are under fixed price contracts with us.

Where we have seen is really on new proposals is where we've seen some impacts, where you've got suppliers unwilling to provide longer-term price commitments requesting what we refer to in the industry as economic price adjustments, which are escalation clauses, inflation clauses.

And those are ongoing dialogues that we have with our customers as well. And so it's still an ongoing issue. To be honest with you, on the proposal side, we really haven't seen any type of reduction there in the pressure.

It's something that we review quite often on these new proposals, and it's something that we grapple with because either you have to price in some type of inflation assumption into your proposal or you have to have some type of back-to-back agreement where you're going to have an inflation clause.

And we're getting squeezed with our customer as well as with our suppliers, and we're trying to make sure that we can accommodate both requirements here..

Our next question is from Ken Herbert with RBC Capital Markets. Please go ahead. .

Hi, good morning, Jim and Jay. Just wanted to ask a question here on the new award outlook.

Putting FARA aside, if you look at NGI, maybe NGAD and other opportunities, what's the current expectations for timing around some awards, specifically around NGI? And are there other programs out there on the new award side that could significantly move the needle as we think about sort of the potential impact into '24?.

You think about a few of these, it's something that we have -- I mean you know that the F-35, so we've got waiting for the -- we're expecting the production order on Lot 17 in 2023. We do have a large missile -- air and missile defense program -- international program. It's an important program for us this year.

And so it's probably back half of the year type of decision. That is included in our four pillars of growth when we talk about new awards. There are other programs here that are classified, really can't get into kind of the detail of those, but we expect some of those awards to be made either at the tail end of this year or into next year as well.

And in NGI, we would expect to down-select around 2025. And so there's a fair amount of markers out there in some of these programs that I just spoke between now, really in 2025, that certainly are important to us. Jim mentioned FARA. That's probably a 2025 decision as well..

Next, we'll go to Sheila Kahyaoglu with Jefferies. Please go ahead. .

Good morning. Thank you for the time, Jim and Jay. Jay, I think your margins came in a little bit better for 2023 than anticipated your guidance of about 10 bps higher.

When we think about your profitability going forward, is this sort of the expected range we should expect? And of your segments, which do you think is the biggest variable? You talked about MFC and some of the challenges there. So maybe if you could talk about that..

let's re-crank the growth cycle, get ourselves in 2024 on track to deliver the growth. As we get that flywheel turning, then we'll be able to focus and turn back around on margins and start improving margins..

Next question is from Doug Harned with Bernstein. Please go ahead. .

Good morning. Thank you. On F-35, so when you get ready to restart here, you've also though now flown the F-35 with tech refresh upgrade -- or Tech Refresh 3 upgrade.

Can you talk about how that's progressing, how Tech Refresh 3 is progressing? And how does the progress there play into your delivery plans for Lots 15 through 17? And perhaps you might also comment on, when you get the restart, you've got these airplanes that have already been produced.

Should we see those as really add-ons to 2023 deliveries?.

So Doug, let me take the first portion of your question, it's Jim, and then turn it over to Jay for the second piece on delivery numbers, et cetera. So Tech Refresh 3 is really important in a couple of dimensions.

And you're accurate in mentioning and thank you for the first flight with the TR3 upgraded hardware and software was literally just a few weeks ago. We've got more software releases to go. We're going to add capability over the next couple of months. But we expect production of TR3-capable aircraft hopefully in this -- during the course of this year.

That's our expectation. Now what that does for the customer and for us and our strategy is really kind of two major dimensions. One is for the capability of the aircraft itself. It will be able to handle more weapons. It will be able to upgrade electronic warfare capabilities. It will be able to accomplish more missions.

So the basic functionality of the aircraft alone by itself is going to be elevated significantly by the insertion of this technology. And what is this technology? It's an updated core processor. So the -- basically the server for the airplane that it carries with it is going to the next-generation upgrade.

The data storage is going to be vastly improved. And then the display is going to be modernized for the pilot, so what they see, how they interact with the jet and with other aircraft and systems around it.

So those three things, right, data processing capability and speeds, data storage capacity, and the ability to interconnect with basically a modernized interface for the pilot along with the better capabilities they're going to have to interact with other aircraft to other systems because of TR3 are all of the characteristics that you need for an edge compute node in a modern 5G Internet of Things system and architecture, right? The three things are data storage, multi-cloud connection and processing power and speed.

So we've actually killed two birds with one stone with TR3 here. On one hand, the aircraft is going to be much more capable in the kind of its traditional role.

On the second hand, it's going to be way more capable, perhaps uniquely capable, in sort of the network Internet of Things or Joint All-Domain Operations of the future, right? That's what our customer calls that.

So we have now the computing power and the capacity to serve as sort of the central aerial component of our 21st Century Security open architecture concept. And that's really the two pieces of F-35, TR3. They're super important.

One is the airplane itself; and second, its ability to network with other systems and aircraft in an IoT-based architecture open architecture.

Jay, do you want to speak to that?.

Sure. To answer the question on add-ons, that is -- will be -- that will occur but not necessarily in 2023. If you think about it right now, we're going to be introducing and cutting in new production, hardware and software on a full rate production program, which is a pretty aggressive schedule.

And so what I would expect -- and this is included in our sustainment revenue growth projections, we'll see the retrofits on the existing fleet over time. And that will probably start beginning maybe sometime in 2024 and beyond, and its part of our mid-single-digit sustainment growth on the F-35..

Next, we'll go to Matt Akers with Wells Fargo. Please go ahead. .

Good morning. Thanks for squeezing me in. I wanted to ask, I think you had mentioned some of the restocking of stuff Ukraine and you've got some orders there.

How big is that for Lockheed Martin? And how should we think about sort of the timing? And how accretive that might be the growth maybe in '24 and beyond?.

Yes. So as I mentioned in my prepared remarks, we've got about -- we had orders of about $1.5 billion. We'll start delivering on some of that in 2023, and that will carry over into 2024. We've got a line of sight to significantly more orders beyond that, that we'll see again in the outer years. And so it's still to be determined.

But what I can say is that we have had contract funding and internally funded projects to make sure we can meet higher ramp rates, whether it's HIMARS, GMLRS, PAC-3, all of those, all are opportunities from where we are today and part of the investment that our customer is making and that we are making to drive the higher ramp rates..

Yes. And Matt, it's Jim. One of the issues that this situation has illuminated with is that when you need to accelerate production in the defense enterprise for national defense, we would have liked to have been able to A, ramp up the production faster and B, bringing the revenue sooner.

So it just highlights the need, I think, and it's an urgent one, to work together with government and industry to quickly evolve the relationship between the two so that we can maintain an effective deterrent conflict as we've talked about.

So what I'm discussing with some of our senior government officials who are receptive, and there are several thought leaders in government on this now, is apply the concept of anti-fragility to the relationship between government and industry, meaning things like ensure that we have multiple reliable sources of key materials and components, right? So we have a lot of single-source components that we have to go back down into our supply chain and find out who and if they can double or triple their production of the components so we can double or triple the output of the system.

Another piece of this anti-fragility concept is to have the government invest in production capacity with us, call it, 2 standard deviations above the mean peace time production rates. So if you need to accelerate, you can quickly and start up the line or speed up the line much faster.

Another one is significant, expansion of the use of long-term and multiyear contracts so that we don't have to have a fluctuation in demand year-to-year, which sets our supply base back, again, less willing to invest because they can't predict the future.

And then finally, especially for those small and medium businesses, we're suggesting that government really take an overview of a broad overview of the oversight and compliance burdens that are on companies that participate in the defense industrial base from an audit and compliance and certified cost perspective, truth and negotiation act, things like that, while we at Lockheed Martin and other major defense funds would like to see that burden ease, it's a burden that can really prohibit other medium and small companies from working with us or working with the government to provide what it needs.

So there's a great dialogue beginning. I'm sure other companies are raising these issues too. But this issue of restocking raised an important industry issue that we're going to try to work with government to solve..

Great. John, this is Maria. I think we've come to the top of the hour here, so I'll turn it back to Jim for any last thoughts..

Great. Thanks, Maria. I'd like to conclude our call today by thanking the entire Lockheed Martin community for everything they've done in 2022 and they'll do this year and beyond.

Together, we positioned our company to continue to push the edge of the technology and advance scientific discovery to ensure our customers remain what we call ahead of ready and keep people safe around the globe. So thanks again for joining us on the call today. We look forward to speaking with you on our next call in April.

John, that concludes the call. Thanks, everybody. Have a great day..

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