Good, strong voice anyway. Terrific. Thank you. So, supply chain, been a problem for you, problem for the industry. What are you seeing there, and, you know, and how are you doing with your plan to set up a third solid rocket motor source?
So supply chain, I'd say in general, Cai, you know, I'll go back to fourth quarter, and I'll come back to what we're seeing thus far in the first quarter. You know, in the fourth quarter, we did see incremental sales, which was incremental throughput, which largely was on the back of supply chain, so we saw some better performance there. And I would say 2023, in general, was better than 2022, on time, from an on-time delivery perspective. As you look at January results, that came in a little bit better as well. We've seen some improvement, and so it gives us, you know, some optimism that we are starting to turn the corner further.
Again, it's only one month, so one month doesn't make a year, but I'm encouraged by what I saw. There's still some gaps. You know, I have to acknowledge that there's still some areas where we're still challenged. You mentioned, you know, solid rocket motors as an area. That's still an area of a gap for us. As far as, you know, Jim has made some comments in terms of seeking other sources, and we just believe that given the demand cycle, there just needs to be more capacity in the industry, and so we're pursuing other opportunities. We do have, you know, I think, a good contract with the current suppliers, and we rely on them, and we'll continue to be reliant on them.
But we also believe that there also needs to be some more supply into the system.
Another issue has been labor availability, both how easy is it to hire new folks, and secondly, how is your retention rate? Is your attrition rate going down?
So for us, in 2023, it got a lot better. We were able to hire pretty much all of our critical skills. We went, at the end of 2022, essentially critical skills, and I'd say like software engineering, cyber engineering, those types of skill sets, we were red across the board in all of our four segments. As we got into mid-year of 2023 and towards the end of the year, those all turned to green. We have fulfilled pretty much all of our requirements there. Our attrition rates also came down pretty substantially in 2023, and we're in a good place. We are, you know, below 5% in overall attrition rate in the company, which I think is pretty strong, not only in the industry, but across industrials.
Got it. So F-35, that's, I guess, your key watch program. What are the key bottlenecks to getting TR-3 approved, and, you know, how do you feel about the potential to start deliveries by mid-year?
Yeah, I mean, we have to, you know, essentially prove out the software. And just maybe give you an update on where we were from our earnings call in January, for the fourth quarter earnings call. Since that time, about two weeks ago, we had started a flight testing with new software release. And so thus far, for that release, we had system stability improvements, some video capability provided, as well as weapons capability. So incremental capability that was provided in that release, as well as improving system stability, and we are seeing the results of that. It's been in flight test. We are seeing improved stability, particularly system stability, for that. Simultaneously, we're going through... We still have faults that we're working through root cause and corrective actions that we have to correct. We're working those.
We're burning them down. We've made some pretty good progress on that as well. We also are lab testing the software that I would refer to as the deliverable software release, by which we would expect the customer to start accepting aircraft. That is in lab testing today, and right now, our schedule is to begin flight testing of that either at the end of March or beginning of April. So all of that schedule would keep us on a path towards a June acceptance. But as you know, there's still many of unknowns. We're flight testing, we're lab testing.
The lab testing itself encompasses over 20,000 test points, so there's still learnings to be made, and that's why we've talked about, you know, a June target, but it could go into the third quarter, and we still expect that to be the case.
You have a shot at June?
We do. We still have a shot, but, you know, we have to continue to burn down that we're seeing-
Right
... currently.
Right.
The surfacing of new issues have to be resolved pretty quickly, in order and able to hit that.
If it does slip into June, at what point do we have to start to worry that you might have to slow production down, despite the fact demand is terrific?
You know, on the production side, if we feel particularly TR-3 hardware deliveries aren't keeping pace with the 156 rate-
Right
... we'd have to think about that, and that would be sometime, you know, probably in the third quarter, late in the third quarter, where we'd have to revisit the production rate.
Got it. And so with the disruption of slow deliveries in the first half, accelerated in the second half, does that put more pressure on the F-35 margins this year?
When you look at Aerospace guidance from 2023 over 2022, there is, you see, margin contraction. Last year, Aeronautics was about 10.3%. This year, our guide is 9.9%-10%. In that is lower total margins on F-35.
Mm-hmm.
That's because we are not expecting any meaningful, positive, or favorable profit adjustments on that program for 2023 or 2024. So that means it'll be lower in 2024 than it is in 2023, which the overall profitability of the program will be lower. What I would say is, if you look at this on a production lot by production lot perspective. So you see where we ended our profitability in Lot 12 through 14 versus where we're booking today on Lot 12, on Lot 15 through 17, we're actually already at a higher profit rate, so we're performing better on that program. But we have to, you know, we have to work through the risks that we're dealing with on the TR-3, on the software program, as well as getting ourselves back up to production.
And so it just wasn't prudent for us to assume that we'd be able to take favorable profit adjustments in 2024 until we start retiring these risks that we have in front of us.
Right. But normally, if my recollection, when I look at your numbers, it's kind of weird because there's a big component of positive adjustments-
Correct.
under a normal circumstance.
Correct. That's right. And it's lower this year, the favorability.
Turning to the classified missile program, you know, that's your other key watch item. When in 2040 do you assume? And I think you've mentioned it's 25-50 basis points on total company margins, depending on what happens with the two LRIP options. When do you expect them to be exercised during the year?
Based on our visibility right now, you know, the best I can say is one in the first half and one in the second half.
Okay.
There's still some milestones that have to be met before the options can be exercised, and we have to work through that process. And, you know, given it's a classified program, can't really get into much of the detail there. So that's our visibility at the moment in terms of the recognition events.
Got it. So I think you've said, you know, obviously, if you do one, you're taking EAC, but there are five options. And if you think about, like, the B-21, Northrop, basically on the first option, they're taking the expected loss on all five. You know, you're, I guess, handling it, thinking right now of handling it a little bit differently. What's the chance, you know, you might take the same option, and what would you have to see to kind of do that?
Yeah, it's possible. It's just they're all based on, you know, the facts and circumstances of those contracts and the program and the status of the program. For us to do that, it would. And that, what I mean by that is recording all of them all at once is the probability of all five exercises taking place becomes pretty probable and high. And so first, you have to get through these performance milestones that we're getting through. You have to have visibility to funding. You have to see a customer commitment to the program over that longer period of time. And so, as you know, you know, it's harder to see farther out.
Right.
But it is possible. You know, it's possible that the facts and circumstances could coalesce, that we decide that they all should be recognized together, and that could happen as early as this year.
Got it.
But we just need the passage of time and events and facts to take place.
Essentially, it's positive because you're only gonna do it if the outlook for the program, demand for the program, funding of the program is there.
Right.
Essentially, that's not necessarily a bad thing.
Correct.
Turning to your opportunities, foreign sales potential looks like it's really terrific. You know, the notification of this huge Turkish F-16 potential order, 40 F-35s for Greece. When might those be finalized? And, you know, the Turkish number looks huge. I can't remember. I know that they're updating some planes, too, but how big could those sales be? When might we see them?
Yeah, the, you know, you're talking, God, over $20 billion. I mean, big numbers on the F-16, and that would be for 40 aircraft, new. There is some opportunity to improve existing, their existing fleet. You know, I would expect us to... Probably, the earliest would be either late this year or early next year-
Mm.
-where we would get on contract for that. I think, for in Greece's case, it's probably sometime next year as well on, on the F-35s. That comes on the heels of, you know, other customers like the Czech Republic for 24 aircraft. You know, I think we've talked about Canada for 88 aircraft, 35 aircraft with Germany. So demand cycle internationally on F-35 is very strong. And, and the F-16 on Turkey, that's a nice boost for the program, where our backlog before that is around 125, 124 aircraft.
Right.
This would boost it by another 40, which we think is good for the program and good for our customers, clearly.
Now, how much... I mean, that's certainly a huge number for Turkey. How much of that is in-country work versus work that gets done here?
Yeah, I can't give you a percentage, Cai-
Right
... but there's a fair amount of work that they do, they would do-
Mm-hmm
... from a final assembly standpoint-
Mm-hmm
... in country. They already have that capability.
Right.
It's something that they've done before-
Right
We would expect to continue that in the future.
Got it. So also good foreign order potential at MFC and RMS. Maybe talk to us about, you know, what are some of the potentials you see as potential orders in those two?
Sure. Let me just maybe start with MFC. You know, we've heard about the demand and things like HIMARS and GMLRS, JASSM, LRASM, PAC-3. And I think for internationally, you know, HIMARS, GMLRS, Javelin, and PAC-3 are the biggest international drivers, and we're having conversations and discussions with a lot of foreign countries. A lot of these sales go through Foreign Military Sales, so we sell directly to the U.S., and they.
Right
... would actually sell and transfer to these foreign governments. But even beyond that, there's countries like Australia, where we're dealing with to provide, you know, really indigenous in-country capability for manufacturing some of these systems like GMLRS, and provide the capability for their own requirements, as well as other exporting capabilities as well. Countries like Poland, Germany, we've had dialogue with, with similar capabilities. HIMARS is one that we've had discussions, and they call it HOMARS in Poland, but a number of different countries that are looking for this capability, on a longer term. And so we think that bodes well for the long-term demand of the program, that it's not just a few year-
Mm
... type of production run to have these capabilities set up in country, for a longer run.
... Got it. And RMS?
RMS, you know, very successful on battle management systems. AIR6500 was a big win, Australia was a big win for us, and you think about that in the context, we've heard a lot about JADC2 Joint All-Domain Command and Control, and this is a system and systems that we'll be providing. And so it's not just the Lockheed Martin systems, there's systems from other providers as well. But he'll be able to improve situational awareness for the Australian defense network, and do it, and also other countries. We've got Defense of Guam, which is a U.S. program, but in INDOPACOM, we've worked with other countries as well in terms of providing these JADC2 or what they refer to as also multi-domain operations type of systems.
The Black Hawk is always, you know, a hot seller, and we've had a number of conversations going on with different countries on selling the international Black Hawk. You look at others in... You know, Aegis is another one.
Mm.
The battle management system for the navies. We've got a number of countries that are under contract for that, and we continue to have, you know, potential. There's a training program in Canada that we were down selected with and partnered with another company to provide a pilot training there. And so the international demand cycle has been pretty high across the portfolio.
Right. Right. So what about potential new program down selects? I mean, we read about NGAD, CCA, F/A-XX, possibly NGI. You know, what can you tell me about?
Well, for those that are classified, I can't really tell you much.
Right.
Uh-
Right. No, no, I accept that.
But what I can tell you is that we expect some down selects this year in classified and, you know, we think we're in the running for some of these classified programs, some of it is Skunk Works. There are others, you know, NGI is one that's out there. We weren't really planning for an NGI down select until probably 2025. And so we'll see what happens there. We know that with budget pressures, it's possible that could always be an early down select.
Mm-hmm.
But right now, our planning has been on 2025. We completed our preliminary design review milestone in September of last year, and we're performing quite well with that. So we continue to have dialogue with the customer on that program. Again, that'll be a competition for the next year or so, we expect.
Right
... anyway. So there's some large, large programs. That's a large program, large programs really in classified, particularly in Aeronautics. And that's really much I can talk about there.
That's, that's-
That's where the big ones are.
I mean, it looks like there's, you know, lots of opportunity there in terms of orders. Where could the book-to-bill be? I think you said it should be over one this year, but I mean, could it be one, five? Could it be two? I mean-
Yeah, I don't know about one, five, but we... You know, last year, we ended, in 2023, we ended our backlog with almost $161 billion, which is a record for us.
Mm.
That was up substantially off $150 billion in 2022 at the end of 2022. So strong growth there. We've got a line of sight, I think, to moderating growth in the backlog, maybe around $5 billion, so maybe up to 165-ish-
Mm-hmm
is the way to think about that. And that's coming off, though, you know, we delivered growth a year early in 2023 from a sales perspective. We expect stronger growth here in 2024, and that'll continue to grow. You know, just a great line of sight to growth in 2025 and beyond. For us, it's really converting now where all the elements of growth move with the sales.
Right.
So 2023, profit didn't grow. 2024, right now, we don't have profit growing. 2025, we do expect profit growth, at least in line with sales, and that'll, that'll get us on the flywheel with all elements of growth, congruent, or at least in, in, in coupled with the sales growth.
But you're so you're talking about, like, the Turkey buy, the Greek F-35s, I mean, they might not get booked this year, but if they don't get booked this year, they probably would get booked next year. So should we really think about 2024, 2025 as one period, in which case, you know, there should be a normal progression upward in terms of a backlog?
Yes. I think it's fair to say we still have a line of sight to continued growth in 2025 in the backlog as well. For the reasons you mentioned, those pretty large opportunities are in front of us, in addition to just continued demand, particularly at MFC. And then things like Lot 18, Lot 19, F-35 negotiations, all of that, you know, when you bring those all together-
Mm
... there's a clear line of sight to continue to grow the backlog.
Right. So I thought, you know, fourth quarter call was good. Jim talked about, you know, DoD's monopsony power and your decision, you know, to bid more selectively. But so I guess the question I'd have is, when did you make the change? Are there bids that you made before the change that still have risks that we may not have see yet? And as we think about some of the classified opportunities, are they on a safe... are they on a basis where, you know, there's minimum fixed price, LRIP risk, or, you know, to win the big ones, do you still have to kind of take on some pretty big risk?
You know, I and our approach, to be honest, big and small, we're taking the same approach. It was just to look at it prudently. And, you know, when you think about this, you know, if you've got a program, you, we've had a mix of things over the last probably, let's say, five years, that have come to surface. There have been elements of fixed price development programs, which are pretty sizable material-
Right
... that have caused the companies, including us, we've had a program-
Right
... at Aeronautics, where we had to deal with, or you had cost plus development with fixed price LRIPS, which were that were priced pretty competitively to win those. And I think that, you know, we took the we've taken the approach that, and Jim has been very, very clear with our management team, there's no must-wins, no matter the size of it, and the economics need to work for us. And so, you know, what I would say is the way we're bidding these things is kinda middle of the road. We're not being overly conservative, we're not being overly aggressive on these things.
So, you know, historically, if you go back, Cai, you would think, you know, in a, on the development phase, kinda low to mid-single digit type of margin on an LRIP type of same thing, because you're getting up and you won't really see higher margin till, till full rate production. That's the way that we're thinking about that, and that's the way we're pretty much bidding those types of things.
Right. So are there any other programs that maybe you bid before you kind of decided we should, you know, be a little bit more careful, that are sort of in the watch category, that you're nervous about, that could come-- I mean, like the classified missile program kinda came out, people didn't really expect it? Or do you feel it's relatively safe in terms of the-
Yeah, I think, you know, we've mentioned that we've got five programs that we mentioned on our 10-K, and I'll maybe run through them quickly.
Right.
The Aeronautics, the classified program in Aeronautics, which has fixed price development to it-
Mm.
... that's always a watch item for us.
Mm.
You know, we took a $225 million charge in 2021. We added a little bit to it in 2022. We continue to monitor that one pretty closely. There's always possibility that a risk can surface there because it is fixed price development. The next one is Sikorsky, and those are, you know, those are just completely different. They're not things that we're entered into. These are, you know, these were inherited o-
Right.
Essentially-
MP
... CMHP contract is one, it was an onerous contract we inherited-
Right
... as part of the acquisition. We have to work through that. We're in the process of trying to... You know, we've come to a place where the existing contractual framework doesn't work for either our customer or for us.
Mm.
We're trying to see if we can find a win-win path-
Mm
... to negotiate a better place for that contract. To the extent that we're not, that could trigger a contract loss there.
Mm-hmm.
On the Turkey Utility Helicopter Program, that one is where, you know, we had basically we're delivering on that contract, and we had the expiration of licenses. And because of some of the issues between the United States and Turkey, we got caught up in that. And so there's certain capabilities that we cannot deliver because we no longer have the export license for that. So it's more of an event that was outside of our control, and what we're trying to do is work with our customer to see if we can, you know, arrive at a restructured contract that reflects the realities of where we are today. Again, to the extent that we're unable to do that, that can trigger a contract loss there, or a contract charge.
The LRDR, the Long-Range Discriminating Radar at RMS, you know, we've got some testing that we've got to get through in this first quarter. We get through that, then we're on a clear path there. And so, I think we've gone beyond the exposure on that program. And so, and then the last one is the MFC program. That one is really a function of, again, that we talked about that a little bit before in terms of just the probability of the incurrence of losses there and the timing of the losses.
Right.
So that's it. You know, I'm not aware of any other contracts that are below the surface there that would cause any material issues. You know, we watched some of the space ones because the early ones we've got a few fixed price development contracts, and we keep an eye on that, but they're performing quite well-
Okay
... on the, on those contracts. And so, you look at, you know, Space's performance last year, and they had a pretty strong profit adjustment year, year over year. They had, they had year growth in their profit adjustments. That helped them offset the headwind they dealt with ULA. And so the performance there has been pretty good, including fixed price development.
So I would have a... I guess the next question was gonna be on the SDA tracking satellites and the transport. I mean, Northrop said, "Oh, we didn't..." You know, Northrop was there initially, and then they didn't make the cut on Tranche 2, and they said, "Well, you know, the price was a little bit tight for the risk." But you guys think you're okay?
Yeah, you know, when I kinda talked to you know, the way we look at these things, and you look at a contract for the... I'll talk the Tracking Layer.
Right.
About a $900 million contract.
Mm.
Less than 25% of that is development works. Talking in the range of $200 million or so, a little bit over $200 million of development work. That, so in and of itself is, you know, it's defined the fixed price development. But we've got a high commonality with the satellite vehicle that we're using for SDA Transport Layer-
Mm-hmm
... vehicles. And so we feel very comfortable there. A lot of that development work's gotten beyond us. We've got a, the payload provider has a high, technology readiness level, so the maturity level on the payload, we're comfortable with. There's always risk for integration, because this is gonna be a different system. It's an ISR system, missile tracking, warning versus communication, which is what Transport Layer is.
Right.
There's always an integration risk.
Mm.
But that's what we do.
Mm.
That's our wheelhouse.
Yeah.
So when you combine our systems integration capability, you combine that we already have most of the satellite vehicle fully designed.
Mm.
We've got what we think is a pretty good maturity level on the payload, and we have the level of expertise in missile tracking and warning.
Right, right.
It all comes together for us, and we think that we're very well positioned. The team is also taught the learnings that we've had on SBA- on SDA Transport Layer-
Right, right
... we're able to transfer here. So I think, you know, the pricing and the scope of work-
Mm-hmm
... that's within that pricing, works for us.
One of my thoughts is, the good thing about LEOs, or at least one of the aspects of LEOs, is that they don't last 15 years.
Right.
Like the big ones, they last three, four years, something like that.
Right.
... Is this likely to be a business where if you're kind of on Tranche 2, when we go to Tranche 3, you're probably gonna make the cut because it has commonality, or is that doesn't matter?
You know what? I think the customer's done a good job of really changing some of the requirements and changing some of the capabilities-
Mm-hmm.
of each Tranche.
Right.
So I think they've done a good job of making sure they can have an expanded supply chain-
Mm.
and supply base there. So I don't know that, you know, being successful on three certainly helps you on four.
Right, right.
I would say that because you've got-
The satellite bus.
Right, you've already got something in production. But I think the customer views it, if you were on zero, one, or two, you probably are equally capable as being on four as well. And that's the way I view it, so I don't think we take anything for granted there. And so I, you know, I think that, yeah, does it position us well? I don't know, you know, how well it would be versus some of the other players-
Right. Right
-on zero, one, or two.
Right.
Or on one.
So one of the things Jim talked about that I found fascinating on the, on the call was using commercial technology to create mission-centric digital solutions with interoperability like AIR 6500, where you can command higher margins, where it's a little more proprietary, you have a little more control. Where are you in that process?
Well, I'd say we're in the early innings, at least from a... What I'd say is, I'd say middle innings in terms of technology development and the partnerships. You know, we've got partnerships with these companies, companies like Microsoft, Intel, a number of these companies, where things like edge computing or our connectivity capabilities, companies like Verizon, and I think the maturity for purposes of defense applications, the technology anyway, has progressed pretty well with them. I'd say in terms of, you know, to your point, in terms of contracting and turning that to commercial priced type of contracts, very early innings. I think early on, you would probably see more traditional defense-type contracts in these areas.
And some of it, you know, kind of converts over to some of the, what we're seeing in these JADC2 programs, which are your traditional type of, defense contracting. So I think that the commercial, commercialization-
Mm-hmm
... is a lag. The technology development is pretty far along.
So I guess my experience following the industry is when they get to a period where all the contractors are losing money 'cause they've been too stiff on contracting, for whatever reason, at some point they say, "Ooh, we ought to change this." Are you seeing any signs that the Air Force, who I view as like the-
Yeah, I have.
I think-
I mean, I've seen, I definitely have seen that. I think that... you know, there was a comment by one of the acquisition officials last week that, you know, part of this was the defense industry's bidding practices, too, which I think is accurate.
Mm.
You know, no one held a gun to our head-
Right
... and said, "Go bid aggressively." But I you know, in some of the trends that we've seen in some of the RFPs, we are seeing, you know, those types of proposals or request for proposals that are commensurate with the risk that's associated with it.
Mm-hmm.
And what I mean by that is, if there's a fair amount of technology development that's not really mature, it's cost plus. It's not like they're asking us to go, "You know, you need to sign up for a fixed price for something that is really hasn't been fully developed yet." So we're seeing that. You know, on you are still seeing that, like us to provide proposals on LRIPS, but again, that's on us to be disciplined and take a prudent approach to how we bid those. And so, you know, that's how we're approaching, as I mentioned before. And I do think that they, you know, have. The services are trying to make it a level playing field and trying to make sure that they select the best technology.
And so you look at also the evaluation criteria. It's not... You know, for a period, we went to this path where everyone treated it like a LPTA, lowest price technically acceptable, even though they were high technology types of proposals. The evaluation criteria are very different. They want to see technology, they want to see the schedule, and then pricing is a factor, but it's below the technology readiness. So I do see a trend more towards what you're saying, more kind of commensurate with the level of risk that's associated with the program.
Got it. Got it. So, sort of an unrelated question, but on SDA and all of that, I mean, at one point, I think Terran was one of your suppliers, and it looks like they have financial issues. Is that a problem for you?
So far, it's not been. They are a supplier to us on the SDA Transport Layer.
Mm-hmm.
They would also most likely be a supplier to us on the Tracking Layer as well.
Mm.
We have a good, a very good relationship with them, and, you know, we monitor their financial, you know, wellbeing quite closely. We stay in contact with them, so I don't really see any issues.
Okay
... at the moment, with them.
You said, you know, 24 segment margins, 10.6%, and hope to get back to 11% in several years-
Mm
... increments, 10-20 basis points per year. Kind of as I see it, why not a bigger jump in 2025? You got F-35 hopefully turning that corner. F-16, you know, used to be very solidly profitable, should do well. Classified missile issues, theoretically, are kind of behind us. And you did say 2025 should be up, but, any chance it could be more than that, or how should we think about that?
Yeah, it's possible. For the, you know, the reasons you mentioned are all potential upsides, no, no question about it. You know, there are some mixed realities that we're dealing with.
Mm.
We are seeing some high growth in classified areas.
Mm-hmm.
Those typically do come with lower margins. It's just-
Mm
... that's just a contract mix issue. There are some contracts that we also have to deal through and cycle through on some of the inflation issues. It'll hit us a little bit more in 2025 than it is in 2024 because of the timing of the contract and when we'll start incurring costs on some of these contracts. But having said that, it's possible. It is possible that we can do better than 10-20 points in 2025. You know, we're in February 2024. Let me get through 2024-
Mm-hmm.
deliver my commitments here, as we get through midyear and we start getting a better view on 2025, I'll be able to kinda give a better update there.
But so if you have high growth in new classified contracts, that's good. I mean, it's lower margin, but absolute profit-
Absolutely, I agree with you.
Should be moving up-
Yes
Okay, great. And so you look at flattish cash flow this year, modest upside in 2025. What are the key swings, and maybe how big do you think, you know, 1 74, if they change it, could be?
Yeah, let me... I'll start with that, and I'll circle back to free cash flow. You know, in the 174, if it is changed this year, that would be a benefit to us by about $2 billion.
Okay.
We would. Although we would probably not seek a refund, what we would do is probably just short pay our payments this year.
Right.
So we would see that over two years, probably, you know, maybe around $1.3 billion of benefit in 2024, and then a balance of $700 billion in, or $700 million in 2025-
Right
-is the way that would profile out. Now, you know, putting that aside and just kind of baseline on where we are, if you look at our free cash flow this year-
Yeah
We've got a guidance of $6 billion-$6.3 billion.
Right.
So at the top end, some modest growth that is, you know, we put that range in there because of the range we had, really primarily because of that 35 deliveries, and we-
Mm-hmm
... we talked about 75-110. If you go in the out year starting in 2025, we've got some pension headwinds. You know, I talked, I talked on the call about $1 billion in 2025.
Mm-hmm.
There is a tail to it, so we have to work through that. Now, you look at what the positives are, you know, if you start delivering-
Yeah
F-35s and catching up on deliveries, then you start $77 million per tail.
Right.
There should be a working capital benefit in 2025 and probably 2026 on the F-35-
Mm-hmm
-which provides some mitigation. With Section 174, the way it's drafted today, we would still see some continued tailwind there. And then there's some blocking and tackling in working capital. You know, I talked about the opportunities we have there. We've seen some growth in our contract assets and growth in days. And so our productivity has deteriorated over the last three years in contract assets, and there's opportunity to take that down, and I think that could be a source of cash for us as well and help mitigate what we're seeing on the pension side. What that all kind of adds up to is probably, you know, trying to keep our formula intact, which is low single-digit growth in absolute free cash flow.
You know, augment that with share repurchase to get us to a mid-single digit free cash flow per share.
So. Pension is basically $0 this year and then $1 billion in 2025, as you-
Right
-see in there. But any thoughts of pre-funding any of that?
Yeah, I mean, it's so we talk about that all the time. You know, a couple things here. If we do see this law change-
Mm-hmm
On Section 174, we could take that opportunity, that $1.3 billion windfall, to pre-fund our pension and get in front-
Mm-hmm
of some of that headwind. You know, there's other things that are out there that potentially could happen as well. And then, you know, there's always, I keep open the the option of using our strong balance sheet to do some pre-funding and get that behind us as well.
Got it. So, as you look at, you know, 2024, what are the couple things that could make for a better year, or what are the couple risks that could make for a worse year than you've portrayed right now?
When I look at 2024, what. And I say this, provided that we get to a budget resolution. If I said, I probably could—there's kind of similar to 2023, there could be top-line upside to where we are, where we can go to the top end of our guidance range because the backlog is there and supports it. And, and, you know, we got some pretty good performance last year in being able to convert on some of that backlog earlier than we anticipated, and I think there's opportunity for us to do that at the same. That would come with some, you know, for some profit conversion as well. And, and so that's where I see the opportunity. And you ask me where, I think that, you know, Aeronautics sometimes seems to surprise to the upside.
MFC potentially come up, come surprise to the upside as well. Space had a very strong year last year. Right now, we're basically assuming that their sales will be flat.
Mm-hmm.
There, there's probably a little bit of upside there, from a revenue standpoint. So that's where I see the upside. The other thing that we did this year coming in, and what we're doing for 2025, is we're really stepping up our game from a cost reduction standpoint. So we've set higher targets than what we typically do, internally, and that's both direct costs and indirect costs, where we're, you know, we're just not sitting here saying, "Oh, God, we gotta deal with inflation, you know, woe is me." We're trying to take that and take control of our own destiny here and trying to drive better results. So to the extent that we can make that progress, it's one thing to set goals, but you have to actually set plans and execute them.
If we can, there could be some upside in cost reduction that can give us some tailwind on profit adjustments. We'll see. But, you know, we won't know that till to the back half of the year.
Terrific. So one, I should have asked you before, but the last I heard of Section 174, the idea was they were gonna basically get rid of it, but move it out to restart it in 2026. Is your understanding that that's what they're thinking of doing?
Yes. So what happened is, right, they would... It would, you know, it would, it would reverse what would happen in, in, 2022, 2023, 2024, 2025-
Mm-hmm
and then restart it in 2026 and 2027.
Mm-hmm.
And so you get, you know, you get a temporary tailwind, and then you, for us, it would be about a $700 million impact in '2026, negative, kind of going back up that, that hill.
Mm-hmm.
Yes, that's exactly the way it's been laid out.
But then, if you do get that benefit, it's a net plus 'cause you could do some pension pre-funding-
Correct
or other things, so that gives you much more flexibility.
I agree
in terms of how things work.
Yeah, it's a net positive. I agree with that.
Excellent. Hey, this has been a great interview. Thank you so much.
Thank you, Cai.
It was great.
Appreciate it.