Feel like I'm doing a lot of neck exercises.
Yeah.
Are we on?
Okay,
We're on. All right. Good afternoon, everybody. I'm Noah Poponak. I'm the Aerospace and Defense Equity Research Analyst here at Goldman. We're going to keep moving along with our next presentation from the Aerospace and Defense sector, which is with Lockheed Martin. With me on the stage from the company is Evan Scott, who is the CFO. Evan, thank you so much for joining us.
Thank you, Noah. It's a pleasure to be here.
So Evan's going to kick off with a few things he wants to touch on, and then I have a long list of questions. We're also happy to take any questions from anyone in the audience, so we'll do that maybe halfway through. But with that, I'll turn it over to you, Evan.
Thanks again. Appreciate it. Starting with the Safe Harbor statements made today that are not historical fact or considered forward-looking statements that are made pursuant to the Safe Harbor's provisions of federal security laws, actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings for a description of some of these factors that may cause actual results to differ materially from those in the forward-looking statements. So before we get into Q&A, if it's okay, Noah, just a couple of upfront comments from my perspective. So first, we expect 2025 to be the fourth consecutive year of a book-to-bill at nexus of one. Over that time, our backlog has grown by 30% to a record of $179 billion. We set that record in the third quarter. We're on track to set a new backlog record in the fourth quarter of this year.
Clearly, some key multi-year awards that we had this prior quarter: PAC-3, CH-53K, JASSM, and LRASM. And we booked Lot 18 19, final award at the beginning of this quarter. So this gives us some good multi-year visibility and foundation for future growth. So we still have a sales guidance that implies a solid 5% growth. Second, we continue to target underlying free cash flow growth. On the deployment side, shareholder returns remain a priority for us, and we expect to return $6 billion to shareholders this year, roughly halfway between dividends and share repurchases. This marks our 23rd consecutive year of dividend increases as we continue to have industry-leading dividend yield. And then third, just a couple of quick updates on 2025 guidance. We remain unchanged for sales, segmenting operating profit, and free cash flow. And there are a couple of updates on EPS that I want to highlight.
First, as we signaled on the third quarter earnings call, we expect to complete a pension follow-on transaction, which we anticipate will result in a one-time non-operating, non-cash charge of approximately $500 million, similar to transactions we've taken in the past. And on the upside, I'm very pleased to note that our tax team recently resolved the tax accounting issues disclosed in our second quarter 10-Q. So we anticipate reversing the roughly $100 million reserve that we disclosed in the 2Q earnings call. So this resolution does not require any cash tax payments. And I'm pleased to note that in this fourth quarter, we were able to resolve all remaining tax issues with the IRS for our 2018 through 2022 audits and really appreciate the partnership with the IRS as we work through that. Lastly, comment on the shutdown. We're pleased the U.S.
Government shutdown has been resolved when we reached an agreement on November 13th. We are beginning to see a return to more normal operations for cash flow. There is significant ground to make up, though, that accrued during the shutdown. So we'll continue to make a major focus on cash collection timing with the work that we have to do to catch up and really appreciate the great partnership we see from the DFAS agency that's responsible for making the payments to all the companies in our industry. And then finally, we're poised for growth. Golden Dome, super exciting. I'm sure we may talk a little bit about that. We're ramping multiple programs at MFC, CH-53K at RMS, solid F-35 sustainment growth, and excitement around NGI, FBM at Space. So all in all, I think we've got a very strong foundation to continue to drive growth and perform on.
Excellent. Thank you so much. Maybe just two or three follow-ups from that that I didn't have on my list. But the pension transaction, can you just detail what that is? And that's separate from pre-funding pension. And where do you stand on whether or not you want to do that?
Sure. So you're right that pre-funding next year's $1 billion pension obligation is still something we're looking at considering. And so as we drive above the free cash flow targets that we've set for this year, anything above that, we would intend to pre-fund next year's pension obligation. The transaction I described in my open remarks are, in fact, separate from that. This is, for us, a normal course of business. We did a prior pension risk transfer that was what's called a buy-in, where we retained those liabilities that are separately managed. This converts that to a buyout, where we transfer formally the liabilities to an outside company. And with that, it drives an accounting adjustment that's non-cash, non-operational.
Got it. And you just reiterated cash flow guidance for the year, but you also just mentioned that coming out of the shutdown, there's some degree of uncertainty in the pace of cash flow payments as the government spools back up. So do you feel like you're tracking to, I guess, what would make you track with the low end versus the high end as we think about recovering from government shutdown, but also still thinking about being above the high end and pre-funding pension?
At this point, very much a function of timing. And so it is not atypical for us to see our cash flows back-loaded. That is a normal course of business for us. I would say this year becomes even more so than prior years. So we have line of sight to continuing to hit our number and with the potential to drive beyond that. It just requires all hands on deck to drive to the very last end of the year to collect all that cash. So it's signaling just the fact that we still have a lot of work to do to get to the number, but we have clear line of sight to do so.
Okay. Got it. Excellent. Okay. So maybe backing up a little bit on just the overall budget process. The Fiscal 27 request will be an interesting process because 26 had reconciliation. And one of the debates that we hear from investors right now is, will the 27 request use the 26 base plus reconciliation as just the new baseline for defense spending moving forward, or will it revert back to only the base without the reconciliation, which can have a pretty significant effect on the next five-year plus cumulative or what the FYDP would look like cumulatively total defense spending in that kind of multi-year window? Do you have a view or any insight into which of those is likely to happen?
As of today, I don't have a firm view on it. I'll note that I think the process is still very fluid and yet to be formally determined. What I can say is what I've seen is, first of all, a strong demand picture domestically in terms of the products that we provide and others in our industry do, as well as good alignment between our direct customer and Congress with a priority of making sure our war fighters have everything they need to perform their missions and to keep them safe. So that alignment makes me more bullish than bearish in terms of how this process would play out.
Okay. Maybe just diving into your business segments then. Starting with MFC, there's been a lot of discussion of potential significant increases in the production rates on certain products in that business. Which of yours are you evaluating or is the customer evaluating significantly increasing the production rate? Are there any that are flatter or down? And then what has to happen? Does it have to get on contract? Do they have to pre-fund it? Will you pre-fund it? And can the supply chain actually even handle all of this?
MFC is certainly our fastest growing segment and has the most opportunity to grow incrementally compared to that baseline growth based on the demand that you mentioned here. So a couple of things to think about. One is we are currently scaling multiple of our munitions and launchers as we speak today. So over the next three years, just based on the current backlog and profile, we see strong growth that's high single-digit, low double-digit in MFC just based on existing scaling that we're seeing across multiple munitions. What would it take to get beyond growth, beyond that, and continue to scale further would be an additional investment in capacity on those core munitions. And there are several, I think, that are potential opportunities for that further scaling. I think most notable PAC-3 is very highly in demand, both domestically and internationally.
It would take an actual change to the capacity, though, which I think can happen one of two ways. One, the traditional model that we have followed, which is our customer makes a direct investment into our production line and funds that capacity increase and then gives us an award against that higher capacity. That's the model we have traditionally followed. Or it would take real insight and assurance on long-term demand and support for us that would convince us to want to make an internal investment of our own to scale that product further. I think either of those two models are possible, and both would potentially drive increased capacity and upside growth at MFC. In terms of munitions that are not growing, I think as we see a shift towards more of long-range munitions, some of the short-range are maybe not scaling at that same rate.
Think of kind of the Hellfire JAGM, which are not typically scaling, but the long-range munitions as well as the defensive munitions are, I think, the biggest opportunities to scale.
Okay. It sounds like you are sold to grow high single, low double at MFC for maybe three-ish years, and then beyond that, it's a question of exactly where does demand fall in and how is it funded. Is that approximately fair?
I think that's fair based on the contracts and backlog that we have today, which is to say even that three-year growth trajectory could change and could grow further based on near-term events. But if we are looking to the ability to grow beyond those three years, it would take that external or internal stimulus to further drive capacity. That is not to rule out upside growth within the next three years.
Okay. And so when within that window of time does it need to be decided between you and the customer who's investing what to fund that next leg of growth? And maybe you could talk about some of the mathematical inputs you're having to decipher or contractual terms, I guess, you're having to decipher to do this. And maybe this is way too long of a question, but at some point, we should detour into these directives and memos that have come from Hegseth and DoD on maybe really changing the FAR overall. And I'd just love at some point to hear how Lockheed Martin is thinking about that.
Sure. I'm happy to get into.
It seems like the missile demand right now is like the right in front of you obvious place where you'll first be given the opportunity to decide how to handle this. Is that right?
I do think munitions is a potentially near-term opportunity for us. And that, of course, is completely at our customer's discretion to determine the specific quantities, if there is a change to those quantities and the timing of that. But I do think there's some potential near-term opportunities to advance that dynamic there, again, at the customer's discretion. In terms of the changing acquisition dynamic, I've seen a lot that I'm really excited about. And I'll give you just how I'm thinking about it. Number one, we are seeing the potential for acquisition models to change in a way that expects contractors to lean in, to go fast, to innovate, more so than in the past.
I view that both as an opportunity and a risk, depending on the business, which is to say those businesses who don't follow that lead, who don't get the message, who aren't willing to scale their speed, innovation, to think differently, risk being left behind. We are very intent to be the opposite of that, to be very aligned with our customer where they want to go and to be part of their solution as they work to rapidly scale capabilities to the war fighter. So for me, I view it as a real opportunity for Lockheed Martin. And it's going to require us to think differently. It's going to require us to hit with speed and to innovate and potentially partner with new entrants that bring new ways of doing business and new technologies.
Is this change from the customer primarily looking for you to invest upfront and help fund the process of moving faster? And then in exchange, you maybe have some kind of guarantee on units over some window of time. There's also been discussion of accelerating FMS that's maybe part and parcel of that. Is that mainly what they're trying to do, or is it mainly moving to more commercial terms and more fixed price and more you invent something and take it to market and see whether or not they want to buy it? Because the second bucket there, I would think, would have a lot more risk to it, whereas the former has some risk to it, but you lay the capital, they'll probably buy the product.
I think that former model that you mentioned is something that's more likely to be something that we would be interested in proceeding with, which is to say if there can be long-term demand that gives us some guarantee that our investments will be protected and that our cash flow is a strong consideration for both parties. I do think there's the opportunity to look at some different business models. What I've found so far through this process, and this is part of why I have optimism, is while there are high expectations being put on us and others in the industry, it all feels fair to me, which is to say this customer understands the dynamics that we have as a private company, the importance of shareholder value, the importance of cash timing.
And they're not looking to discount any of those factors as we consider ways of doing business maybe differently in the past. Now, it has the potential to be the added risk element of just compared to the historic where a customer may fund this capacity. That shift comes with some extra challenges, but if we navigate it the right way and continue to focus on shareholder value while partnering win-wins with our customer, I think this can be a very significant opportunity for this company.
Okay. Definitely seems like an opportunity. It's almost like you'll just have to remember to put everything in the contract.
We have a lot of folks at our company who are very astute at doing just that with many decades of experience.
Okay. So then just taking it back to MFC, do I have the right read that you'll need to make a decision on whether or not you'll move forward with that model in MFC pretty soon? If you're sold for a few years at a growth rate and then you want to keep growing at that rate or faster beyond that, somebody's going to have to decide who's funding the additional capacity, I would think, sooner than later.
I do think that we have continued scaling that happens today without any additional stimulus. But to your point, the sooner we have insight to further capacity interest, the more efficiently we can do that. So that does put some near-term pressure on just determining exactly what next steps are to your point, but that is fully on the Department of War's discretion to determine the exact timing.
Okay. Let's move to aeronautics. Maybe anything you want to highlight on F-35, but for me, the question on F-35 is what's the duration at which you can sustain the current production rate? And then once you're closer to filling the total program quantity buy, when does the production rate start to wind down? And then how does aeronautics grow long-term once F-35 production is winding down because it's uncertain for those of us from the outside what comes in behind F-35?
When I look at F-35, a couple of things make me bullish on that platform. Number one, we've really hit a good rhythm now in delivering aircraft. We started the year talking about a range of 170-190. We tightened that to 175-190. And today, I'll say between 180 and 190 as we continue to work through the delivery ramps. We also see strong support from our direct customer with a focus on the importance of air superiority. We've continued to see strong support from Congress, which also goes on the munitions side as well as on the F-35 side as a very key part of making this all work. And we've seen strong international demand both for F-35 and munitions.
When I look at those three factors, that gives me confidence that we'll continue to be able to manufacture at a 156 rate for five plus years as we see that. So I don't see near-term risk to that production rate on F-35. In terms of growth, F-35 sustainment is likely the fastest growing piece of the aeronautics platform as we continue to deliver more aircraft and now reach a threshold of a million flight hours on that platform across our multiple customers. And it's continued to show itself what it can do when tested in a very, very positive way, which I think helps create new international demand. So all that, I think, puts the F-35 in a strong position.
The growth driven by sustainment with an opportunity to perform with the new Lot 18 19 contract creates a firm fixed price basis that incentivizes us to take cost out and create margin opportunities relative to the prior lots.
Okay. That's helpful. Maybe going to RMS, what's the outlook for Black Hawk as FLRAA came to be? There was discussion of that in some way as a partial Black Hawk replacement, but it doesn't seem like Black Hawk demand has actually slowed. CH-53K, I think, is still growing for you. And what other major growth drivers or detractors do you have at RMS in the medium term?
Hawk does have some near-term growth. And with the current multi-year 10, we've got line of sight to continue production now for the next couple of years. Beyond that, we will need a follow-on multi-year production contract or enough international demand to support that platform. In the meantime, we do find that it has consistent applicability to the current and future state of war based on its versatility and its proven performance. So I do have confidence in that platform and will continue to invest with our customer to modernize it. Other growth items for RMS that are important, you mentioned CH-53K, which is very helpful to have that growth now in our backlog for the next several years on that key platform with some additional opportunities to sell it internationally.
Outside of Sikorsky, I think there's strong demand for our radar systems, both domestically and internationally, which could be very relevant for the Golden Dome mission as well. Additionally, when we look at Golden Dome for the C2 side, RMS, we expect to be the leader within our company for that. And you can look at the C2BMC award as something that demonstrates our ability to take multiple effectors, multiple capabilities cross-domain, thread them together for something that's relevant and meaningful for the war fighter. Those are the sources of growth for RMS in my mind.
Okay. And so as we work through the segments here, maybe just round it out with space. I've heard you recently say that space has maybe become a little bit of a dark horse or has some underrated growth in it. What's behind that? And I also wanted to ask you on ULA. We've had some space launch companies in this room this morning that have valuations that reflect some enthusiasm around new technology in the defense and national security landscape. Why would Boeing and Lockheed not look to monetize ULA as it seems to have been somewhat sort of moved down the priority list given the many things going on at the company?
Absolutely. So on space as a segment, I would think of that now as our second fastest growing business area. And we've seen really strong performance there, a lot of key wins, and a lot of different mission spaces. And it's been a long process that I think is really bearing fruit. We've always had our LM-2100 premier combat satellite bus. The purchase of Terran Orbital gives us a small-sat LM-50 capability, as we call it. And we've organically developed a mid-sized bus, an LM-400, that's relevant to a lot of different mission spaces. That organic and inorganic investment has positioned space to grow in several mission areas. We see missions moving to space either as a new home for certain missions or for resiliency for other domains. And we see very strong growth for our strategic missile defense aspect of space.
So think of Fleet Ballistic Missile, the Trident Missile program going through its next round of upgrade and production. NGI is a very exciting platform that's in strong demand that we continue to make progress on. And then our hypersonics programs for the Navy and the Army are part of the space portfolio and also drive that growth. So we're seeing strong performance and growth opportunity for space. On ULA specifically, we would certainly always consider opportunities there in terms of how we manage ULA business. I think it is a very key platform, though, for our customer. And so we clearly would be very diligent and intentional about any movements or changes we would make there. And at this point, that is not prudent for us, but we will always continue to look at any optionality for ULA.
Okay. If MFC is the fastest and space is the second, what's third, what's fourth? And that's referencing what window of time?
I'm thinking of it over maybe the next three-year time period, and so I think both aeronautics and RMS have growth embedded in them and additional growth opportunity depending on some international opportunities and some domestic opportunities, but I would sort of put them in the next group down together as growing, but not at the pace of space or MFC based on the growth trajectories that we have given previously. There is potential for that to change based on Golden Dome and other opportunities coming to fruition, but based on the backlog and demand forecast we have today, that's how I think of the four segments.
So on an approximately three-year basis, we should be thinking of MFC, high single, low double. Sounds like space is mid-single, low to high single, and then RMS and aeronautics are flat to low single?
I think you're directionally right. I do think space is in that mid-single kind of potential growth and maybe low single digits for the others, and MFC, for sure, high single, potentially low double-digit growth opportunity, so we'll continue to refine that. Between now and January, we should have more visibility to other ramping opportunities and Golden Dome mission potentially, which will give us better insight to truly fine-tune those growth points for you and the investors.
Okay. Great. Golden Dome. What are the ways in which you participate? And is it definitely happening? And has it been as surprising to you as it is to me that we haven't seen significantly more funded task ordering award activity to get the ball rolling?
When I look at the scale of this mission, it would make sense to me that our customers being very intentional to how they sequence this with the right leadership, which they have in place, the architecture, and a contracting strategy to be able to get the mission when they need it at the scale they need. And it's a very broad mission. I mean, it could take many decades to truly get the end game of this thing with a bias towards near-term capability for the most sensitive missions. So I think we're going to see when this customer is ready to move on it to move fast, just like we've seen them in other domains. And I'm very bullish on our ability to be a key part of very many of those missions. You think of the deterrence that we have on air missile defense.
We're the global leader in air missile defense, and I expect that will be a key part of Golden Dome. Typically, such a mission would start with a space layer, which is often your first indication of a hostile launch, and we're very well positioned in that mission. The radar business, both at sea and land, is a very key part of our business as well, and a C2 system that ties it all together is something that we do well and is a key part of our offering as well, so really, when you look across the missions here that we anticipate, we feel like we're very well positioned for it, but part of that, we think part of our value is, in addition to the capabilities we bring, we put a priority on bringing the best of breed across the industry together for this important mission.
So I expect when you see a Lockheed Martin offering, it won't necessarily be only Lockheed Martin products and services. It's going to look to bring in the very best in the industry, whether they're established players or new entrants. That's typically been our approach to hard missions like this.
Okay. When do you expect to see more specific award activity? And has there been award activity already that maybe wasn't specified as Golden Dome, but is existing product that would actually be eventually feeding into Golden Dome?
I do think there's potential synergy to other demand signals you've seen in the Golden Dome mission. However, exact timing of Golden Dome, I think, is best for the customer to state specifically their intentions. But again, I remain comfortable saying that when this customer intends to move out, we'll know it, we'll see it, it'll be fast and very impactful.
Okay. Great. On margins at the total company level, and I guess specific to MFC and aeronautics, but there's been margin volatility in the industry where it seems like the Pentagon maybe shifted some of the contract terms a little bit. There have been a few different examples of the LRIP portion of a contract having had its prices fixed in the initial bid, which I think is unique compared to history. Is that the correct read of what happened in classified missile, classified aeronautics? And how far into the future do you need to get to be beyond the window of revenue that has these risks still associated with it?
You're right that we've seen that acquisition model come into play for us and many others in our industry in a way that adds an element of risk that generally we're just not interested in entering into any time in the near term here, which is to say we need to make sure we truly understand what we're pricing, if there's long-term pricing, and we will not commit to firm fixed price production on a product that we haven't designed yet. It's just not smart business for us to get into anymore. And candidly, I don't know that we're going to see a whole lot more of that in any case from our customer, who also understands for industry, that's not the right bet to make. In terms of time frames, there's sensitivity on exact time frames on some of these programs.
What we have shared is over the next three years, there's cash headwinds that come from these programs. Think of about $700 million a year of cash this year, next year, and the year after, roughly. That creates cash headwinds that we have to work through, as well as some margin headwinds, as with the forward-looking losses, we now are taking that revenue at zero margin, which creates a dilutive effect, particularly at MFC and aeronautics. Without getting into specific windows when it comes down, I will just say after those three years, you will see a good steady drop down of cash impact, which will create some additional opportunity for us.
Okay. And then segueing that into cash flow, what's your outlook for the company's ability to grow total free cash flow on a multi-year basis when you triangulate all these inputs?
I believe we have a line of sight to continue to get organic free cash flow growth. We know that there's some headwinds and tailwinds, particularly around pension that we've talked about. We've got no pension contribution outlook for this year, notwithstanding any pre-funding that we would choose to do, whereas next year we have $1 billion of pension. When you net for those, you see underlying free cash flow growth netting for that. Now, long term, we see the ability to translate organic growth into free cash flow, and we'll give better insight to what that long-term profile looks like here in January, but we are very focused on turning operational performance into free cash flow. In the meantime, we have not wavered from our commitment to return free cash flow to shareholders, and we continue to talk about $6 billion a year with share repurchases and dividends.
That commitment remains in place.
Okay. And so we should think of cash flow as cash flow growth as top-line growth. Margins are stable or expanding. And what's CapEx doing in that equation?
From a margin perspective, we see opportunity to drive margins higher, and we see that opportunity potentially in all of our business areas. There's no business area to look at that say that we don't have a potential to drive margin growth, so you're right, organic revenue, potential margin growth, improvements in working capital, particularly in programs where in the past we had some deliveries pile up and now are really hitting a mark. Think of F-35 where we're starting to see some working capital improvements. With respect to CapEx, we have traditionally had a little under $2 billion of CapEx. Our current growth profile is consistent with that CapEx.
What we have said on our earnings call is, if there is a significant organic growth opportunity, we would be prepared to invest to meet that opportunity if we felt comfortable that we had the long-term insight to that demand and protection for that investment in our cash flow basis. So that is to say no change right now to our capital or our growth, but those two could go together if we see a step change in growth based on some of the opportunities we talked about.
Right. That gets back to the beginning of the conversation on that new, potential changes in the model. We have maybe one or two times for one or two questions if there are any from anyone in the audience. For Evan. Don't be shy. No? Okay. Maybe just last one. There's a lot of discussion around new entrants in the business and Anduril and the world of defense tech. And to what extent are these companies a competitive threat to Lockheed Martin or partners of Lockheed Martin or just doing something completely different than Lockheed Martin?
I think there's potential for all three of those and potentially all at the same time, which is to say we will learn from the new entrants. We will learn from our traditional peers. We will partner with them in some cases and in fact already have in some domains. And in some cases, we'll compete. And it will remain to be seen exactly all the domains where that competition will be there. But we do see it as a potential partner opportunity. I think in terms of one of the threats, a key one for us is the war on talent. There's always going to be a pull for experienced professionals who have worked and operated and performed in this industry.
That I think will always be sort of a risk element for all of us as we develop key talent and then continue to rely on them for future opportunities.
Okay. All right. Well, we're out of time, so let's wrap up there. Evan, thanks so much for being with us today. This was great.
Great. Thanks so much.
All right.