Lockheed Martin Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 18, 2022

Key Takeaways

  • Lockheed Martin delivered a 3% year-over-year sales increase to $16.6 billion in Q3, generated $2.7 billion in free cash flow, earned $6.71 per share, and grew its backlog to $140 billion, keeping full-year 2022 guidance intact.
  • The company boosted its capital return program by raising the share repurchase plan to $8 billion and increasing the dividend by 7%, targeting roughly $11 billion in total shareholder distributions in 2022.
  • For 2023, Lockheed Martin expects flat sales amid lingering supply-chain and pandemic impacts, with a return to growth in 2024 driven by programs of record, classified work, hypersonics and new awards, despite 20–30 basis points of margin pressure.
  • Lockheed Martin launched 1LM transformation (1LMX), a seven-year, multibillion-dollar program to integrate digital threads across design, production and sustainment, and plans nearly $4 billion in R&D and capital expenditures in 2023.
  • Key program achievements include Switzerland’s letter of offer for 36 F-35As and Lot 15 production contract (> $7.5 billion), the SBIRS GEO-6 satellite launch, Australian Seahawk orders, potential UAE THAAD sale and 5G-enabled helicopter and drone demonstrations.
AI Generated. May Contain Errors.
Earnings Conference Call
Lockheed Martin Q3 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good day, and welcome everyone to the Lockheed Martin Third Quarter 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 Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, John, and good morning. I'd like to welcome everyone to our Q3 2022 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer Jay Malavi, our Chief Financial Officer And Maria Richardon Lee, our new Vice President of Investor Relations. Statements made in today's call that are not historical fact are considered forward looking statements that are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward looking statements.

Speaker 1

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.

Speaker 2

Thanks, Greg. Good morning, everyone, and thank you for joining us on our Q3 2022 earnings call as we review our quarterly results, our 2022 full year outlook and our preliminary expectations for 2023. But before we begin, I'd like to welcome Maria, who I'm excited to tell you all started as our new Vice President of Investor Relations just yesterday. I'd also like to thank Greg, who announced his plan to retire at the end of the year for his more than 37 years of dedicated service at Lockheed Martin, including 5 terrific years as our Vice President of Investor Relations. It's been a pleasure to work with you, Greg,

Speaker 1

and we wish you all the best in retirement. Thank you, Jim.

Speaker 2

I'd also like to note that we continue to await U. S. Army selection for its future long range assault aircraft competition, FLORA as it is known. We'll modernize the Army's rotorcraft fleet and represent a long term franchise growth opportunity. We are confident that Defiant X The transformational aircraft that the U.

Speaker 2

S. Army is going to need to accomplish its complex missions today and well into the future, and we look forward to the Army's announcement. Lockheed Martin had a solid quarter financially with 3% increase in sales from last year's Q3 and strong operating margins and earnings per share. Our free cash flow is outstanding as we generated $2,700,000,000 in the quarter and our backlog grew nearly $5,000,000,000 closing at $140,000,000,000 We remain on track to achieve the full year outlook for all of our financial metrics that we discussed last quarter. In a few minutes, Jay will provide a detailed review of our quarterly results, updated 2022 guidance and trending information.

Speaker 2

But before he does that, I will provide a framework for our outlook and discuss our plans for delivering value to customers and shareholders over the next several years. We continue to anticipate growth over the long term, but With residual pandemic impacts and supply chain challenges continuing, we now expect to return to growth in 2024, with 2023 sales being approximately equal to our 2022 outlook. We are confident in our 4 pillars to drive growth in 2024 and beyond. Importantly, we expect to deliver solid growth in free cash flow per and expanded share repurchase program. Our Board of Directors has approved an increase to our share repurchase authorization to $14,000,000,000 You will see in Jay's charts that we're doubling our share repurchase plan outlook for this year, Increasing our outlook by $4,000,000,000 for a total expectation of $8,000,000,000 in 2022.

Speaker 2

We also announced a 7% dividend increase this quarter. So altogether, we're on track to deliver approximately $11,000,000,000 to shareholders in 2022. We are also elevating our commitment to drive long term growth through Strong independent research and development and capital expenditure funding with an expected total of nearly for $4,000,000,000 in 2023. These investments will support our customers and deliver on our 21st century A key driver of this strategy is our new 1LM transformation or as we call it 1LMX, a multibillion dollar 7 year company wide program to transform our end to end business processes and systems. OneLMX will create a model based enterprise with a fully integrated digital thread throughout the design, build and sustain product lifecycle.

Speaker 2

And as part of our ongoing corporate stewardship approach, we are conducting an internal review to identify potential in anticipation of our future growth. We are confident in long term growth as domestic and international demand for a wide range of our products and services remains strong. We will continue to actively reinvest capital into our business to meet our customers' requirements and drive organic growth. And we will use our disciplined and dynamic capital allocation process and strong balance sheet to drive attractive total returns for shareholders. Moving on, I'd like to highlight a few key accomplishments from each of our business areas, beginning with an update on our F-thirty five program.

Speaker 2

Last month, the Swiss government signed a letter of offer for the procurement of 36 F-35As. This milestone completes the government to government procurement process It was first announced in June 2021 when the Swiss Federal Council shared its selection of the F-thirty 5 for its future fighter. The signing officially makes Switzerland the 15th F-thirty 5 customer. Also in August, we The contractual authorization from the Joint Program Office enabling us to book a Lot 15 order of over $7,500,000,000 and recognize revenues and earnings from the Q2 as well as from the Q3. Our space team celebrated the Successful launch and deployment of the Space Based Infrared System GEO-six satellite, the final spacecraft in the SBIRS constellation.

Speaker 2

SBIRS has been one of our longest running signature programs, providing the Space Force with an integrated system for missile warning, Battlespace Awareness and Intelligence Gathering. We will also continue to support and advance this important mission through our next generation overhead persistent infrared or next gen OPIR program, which will deliver even more advanced and more survivable missile warning capabilities to the country. At Rotary and Mission Systems, The Sikorsky line of business secured an order for 12 Seahawk helicopters from the Australian Ministry of Defence. Over the past 40 years, we've delivered over 1,000 Seahawks to the U. S.

Speaker 2

And international customers both with more than 50 remaining in backlog. And in missile and fire control, the State Department approved a potential sale to the United Arab Emirates for 2 THAAD systems, including 96 interceptors. The UAE currently operates 2 THAAD batteries and this would significantly increase their air and missile defense capabilities and once finalized could be worth over $2,200,000,000 Turning to budgets, both chambers of Congress have advanced appropriation bills in support of fiscal year 2023 Department of Defense budgets. We have seen strong bipartisan support for increased defense funding in congressional authorization and appropriation committees. Final legislation approving these funds has yet to be passed and the federal government is currently operating under a short term continuing resolution for FY 'twenty three, limiting DoD funding to prior FY 'twenty two levels.

Speaker 2

As part of the continuing resolution, Congress did approve additional supplemental spending to support efforts in Ukraine for the defense of their country. The CR added $3,000,000,000 in funding for Ukraine's security assistance initiatives, a program to provide Equipment, weapons and military support to Ukraine, bringing the total amount appropriated for this effort to $9,000,000,000 In addition, the continuing resolution appropriated $2,000,000,000 to replenish U. S. Stocks of equipment over $14,000,000,000 since the beginning of the year. The international community has also increased their focus on global security with nations across the world having announced a planned 5 year increase in defense budget funding of approximately $60,000,000,000 in total.

Speaker 2

We continue to have discussions with customers to expand the manufacturing of multiple products and have submitted offers for consideration. While many of these contracting actions remain in the early stages and may take time to be fully implemented, we believe our signature programs and 21st Century Security Technologies have us well positioned to address the challenges presented by resurgence in global great power competition. Turning to our 21st Century security strategy, I'd like to highlight two examples of Lockheed Martin's leadership in Deterrence Technologies and how our 5 gs. Mil open architecture can be used to enhance performance and drive effective join all domain operations. During the Q3, Lockheed Martin and AT and T teamed to transfer UH-sixty Blackhawk helicopter flight and performance data from an aircraft that's flying in Connecticut to receiving location in Colorado using both an AT and T 5 gs Private Cellular Network and Lockheed Martin's 5 gs.

Speaker 2

Mil multisite pilot network. Operational performance has also improved with the efficiencies introduced by this technology shortening the total processing time of the task by nearly 85%. Also this quarter, Lockheed Martin and Verizon flew 5 gs enabled drones This demonstration showed the capabilities of our hybrid base station to bridge commercial and military technologies together, providing our service members with enhanced deterrent capabilities and further enabling the mission all the way out to the actual battlefield. With that, I will turn the call over to Jay and join you later to answer your questions.

Speaker 3

Thanks, Jim, and good morning, everyone. Today, I will walk you through our consolidated results, business area detail, provide an update to our 2022 outlook as well as offer some thoughts on 2023 and beyond. 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 3 and an overview of our consolidated Q3 financials. Lockheed Martin delivered solid results for the quarter.

Speaker 3

To start, we generated sequential sales growth of 7% to $16,600,000,000 as anticipated. Segment operating profit was $1,900,000,000 at an 11.2% margin with earnings per share of $6.71 reflecting solid underlying performance that absorbed $0.16 of mark to market headwinds. We also increased backlog with a 1.3 book to bill ratio, driven by the F-thirty 5 Production Lot 15 contract action. Free cash flow was strong in the quarter at $2,700,000,000 further enabling the execution of our disciplined and dynamic cash deployment strategy and returning over $2,000,000,000 through share repurchases and dividends. Turning to consolidated sales and segment operating profit results on Chart 4.

Speaker 3

Total sales increased 3% from the Q3 of 20 with growth in 3 of our 4 business areas. Segment operating profit was up slightly as the benefits from higher volume and equity earnings More than offset lower step ups than last year. Moving to earnings per share on Chart 5. On a reported basis, earnings per share were higher by $4.50 Adjusting for last year's pension transfer transaction And mark to market accounting, EPS grew 4%, primarily reflecting the benefits of higher operating profit and the lower share count. All in all, solid results that position us well to meet our full year commitments.

Speaker 3

Moving to cash flow on Chart 6. We delivered our strongest quarter of class flow year to date with strong collections driving $2,700,000,000 in free cash flow this quarter, while maintaining accelerated payments of $1,100,000,000 to suppliers. Shareholder cash deployment continues to exceed free cash flow year to date with 121 percent of free cash flow deployed through dividends and share repurchases. We have substantially completed our $4,000,000,000 Our original $4,000,000,000 2022 buyback target. As we announced this quarter, we also increased our dividend 7%, Now paying an annualized dividend of $12 per share.

Speaker 3

Moving to segment results and starting with Aeronautics on Chart 7. 3rd quarter sales increased 8% year over year, driven by higher F-thirty five production volume, including the recognition of 3 Increased volume in our classified programs at Skunk Works also contributed to the growth. Operating profit increased 6%, primarily following the sales volume increases on F-thirty 5, partially offset by lower margins on classified programs. Moving to Missiles and Fire Control on Page 8. Sales increased 2%, driven primarily by increased volume on PAC-three interceptors.

Speaker 3

Segment operating profit was down 8% as lower favorable profit adjustments this quarter more than offset the benefit from higher volume.

Speaker 1

At Rotary

Speaker 3

and Mission Systems on Page 9, sales decreased year over year by 5%, driven primarily by lower Blackhawk Production volume at Sikorsky. Operating profit decreased 10% following Sikorsky production volume and lower favorable profit adjustments this quarter on the Black Hawk program. Turning to Chart 10 in our Space business area. Sales were up 7%, driven primarily by the continued ramp of the next generation interceptor program. Operating profit increased 14% following the volume increase along with higher equity earnings from United Launch Alliance.

Speaker 3

Okay. Moving to our updated outlook for 2022 on page 11. We are maintaining our guidance from last quarter for sales, Earnings per share and free cash flow. With the announcement this morning of the $14,000,000,000 repurchase authorization and approved by our Board of Directors. We've increased our forecast for share buybacks to approximately $8,000,000,000 for the year, An increase of $4,000,000,000 from our prior expectation, reflecting our confidence in the long term growth outlook and amplifying per share value creation.

Speaker 3

We expect the EPS benefit from our incremental planned buybacks this year to be offset by the 3rd quarter mark to market headwinds and therefore are holding our current EPS guide of $21.55 for the year. Also while our consolidated outlook did not We did have some puts and takes between the business areas and you can find that detail in our backup charts. On Chart 12, we've laid out our preliminary framework of expectations for 2023. As we've discussed before, we remain confident in sustained growth driven by 4 pillars. Those are programs of record, classified programs, hypersonics and new awards.

Speaker 3

This is supported by the higher backlog through the Q3 and further growth expected by year end. We do anticipate flattish sales in 2023, however, primarily due to delayed sales conversion in our programs of record backlog as the expected recovery from COVID and supply chain shortages will be more gradual than previously expected. In our classified businesses, we expect another year of growth in 2023. This growth along with our contract mix headwinds Will be accompanied by pressure of approximately 20 to 30 basis points in overall company segment operating margin, all compared to our 2022 outlook. We are confident that through cost reduction and business area synergy actions, We can work to limit this downward pressure.

Speaker 3

Importantly, through management focus and aggressive working capital actions, Our expectations for 2023 free cash flow remain unchanged in spite of the top line and margin pressure. Looking forward, we are confident in the company's prospects for growth and value creation. With our aggressive share buyback plan, We anticipate repurchasing approximately 10% of our shares outstanding over the next several years. And coupled with a sustained free cash flow, We expect to deliver outstanding long term value to shareholders. Okay.

Speaker 3

So let's wrap up on Chart 13. Our business area operational and financial performance in the Q3 was solid and we are increasing our outlook for cash return to shareholders. We continue to invest in innovative solutions, including commercial technologies in support of our customers' important missions and 21st century security. Our focus remains on strong cash generation and combined with our robust balance sheet and discipline in a dynamic capital deployment strategy Allow us to deliver long term value to shareholders. Before we open up the Q and A, I would also like to thank Greg Gardner for his 37 years of dedicated service and contributions to the company.

Speaker 3

He has been an outstanding partner and resource to all that he has supported. We wish him well in the next phase of his life. Greg will remain with us through the end of the year to transition Maria Richard Owen Lee. Maria brings Investor Relations experience from multiple companies, including UTX, where we both work together. She's an excellent financial executive and thought partner, and I'm excited that she's joining the team.

Speaker 3

With that, John, let's open up the call for Q and A.

Operator

Certainly. Then 0 at this time. And first, we're in line up Rob Stallard with Vertical Research. Please go ahead.

Speaker 4

Thanks so much. Good morning.

Speaker 5

Good morning, Rob.

Speaker 4

Also, I'd say all the best to Greg and welcome, Maria. Good to work with you again. But in terms of questions, Jay, on your outlook for 2023, I know you're not going to go into a lot of detail here, full guidance going next quarter. But You mentioned that classified is going to be going up, but overall we're going to be flattish. So what's coming down next year and what's causing that?

Speaker 3

Yes. We have some program transitions, Rob. And maybe I'll just go through around some of the business areas to give you a little bit of color there. When you look at ARO next year, we expect that to probably be in the range of being down flat to down slightly. And that's on the back really of lower production volume on the F-thirty 5.

Speaker 3

We expect that to be down even though the sales or the deliveries will be generally flat. We recorded sales in advance of that with long lead procurement in 2021 2022. So it will be a period of catch up on sales for ARO there. So that's going to be the biggest driver there. We expect that to abate when we go into 2024.

Speaker 3

At MFC, we've got some just some timing, so program timing In our sensors business, we expect them to be probably flattish to down slightly as well. And then we expect some growth low single digit growth of both RMS and space. This is down, but we've got other programs that are spiking up there. And so that's generally what's driving it, I'd say, by business here and by segment. So slightly down in a few and Slightly up and others and our balance will be flat.

Operator

And our next question is from Ron Epstein with Bank of America. Please go ahead.

Speaker 6

Yes. Hey, good morning, guys. Thanks for the question. Jim, can you walk through why you think growth is going to start again in 2020 I mean, what underlies that? And maybe one of the things I scratch my head on a bunch is, you've got what the 15th customer for F-thirty 5, And it looks like there might even be some more within the next year or so.

Speaker 2

So how

Speaker 6

do we think about that growth What's going to underlie that? And why are F-thirty five levels at a higher rate of production than where they are today? And could they go higher?

Speaker 2

Sure. Ryan, it's Jim here. So the two biggest pieces of our 4 pillars of growth Our programs are record and I'll speak to a few of those in a second in the classified business we have. And both of those are going to ramp up from 2023 to 20 for meaningfully we feel. And the biggest piece of all, again, the programs of record are going to come into 3 or 4 Very identifiable areas.

Speaker 2

1 is F-thirty five sustainment, right? So with more aircraft out flying, there's going to be more of overhaul, repair, spare Support those kinds of activities going on and that's going to continue over a number of years. So F-thirty five sustainment is a growth area. In MFC, the PAC-three is resurging. There's interest in the various parts of the world, the Middle East, Europe in Asia now for PAC-three.

Speaker 2

So the capabilities of that, air defense system are really going to be Kicking into gear for the company in the next couple of years, including in 2024. Along with that, similarly, the E3 ks is going to move up the production rate significantly and there's some additional international interest there. That aircraft can Do lift capability that far exceeds any other that's ever been built in history, and it's, I think, going to get even more uptake as time goes on. And the 4th among many of the programs of record that will grow is fleet ballistic missile. That the U.

Speaker 2

S. Navy is essentially going to revamp for the 2nd time the Trident fleet ballistic missiles system and that's a Lockheed Martin franchise that will continue to grow again starting in 2024. On the classified side, 2023 is helpful, but not really the ramp that will come in 2024. So Between programs of record and classifieds, you're going to get the bulk of that growth. On F-thirty five, The U.

Speaker 2

S. Government's got to kind of determine what its budget priorities are at the macro level going forward. One of those has been nuclear deterrents. And so between the bomber program, the ground based Missile recapitalization and the fleet ballistic missile that I just mentioned, there's going to be a significant amount of Defense budget proportionally spent on the nuclear revitalization, but also the conventional threats have gotten Worse instead of better. As we look forward into the next 2 or 3, 4 years and that's going to be a budget issue for the We've recommended and I think the services would support a steady production rate of 156 aircraft starting again in the 2024 timeframe when we can get back up to that based on the COVID recovery for our supply chain.

Speaker 2

And I think that's supportable and it takes about 80 U. S. Aircraft to make that happen per year with another 75 or so coming from international. We see the international demand and it's going to be up to the U. S.

Speaker 2

Government to try Support that AD number between the congressional committee processes for authorization and appropriation along with the President's budgets going forward. So we hope for that. We expect it because that's the need and that's where we think the F-thirty five program is going to go. But again, in FY 2023, we won't have that full ramp up yet.

Speaker 3

Let me just maybe add a little bit to it as well, Rod. Just to augment, some of the things that we're seeing in 2023, we've got some expected abating headwinds when we go into 2024. Jim mentioned a little bit on supply chain. That's primarily affected our programs of record. And so those should lift by the time we get to 2024.

Speaker 3

We also have a few program transitions in 2020 3, that will also allow for easier compares when we get into 2024. And so for example, I just mentioned the F-thirty 5 Production will be down next year, those will normalize when we get into 2024, which will allow for sustainment to grow, as Jim mentioned. We Also see accelerated growth in F-sixteen program. As you may recall, that program slid to the right, but in 2024, we expect that to accelerate. In space, as Jim mentioned, FBM, there are other programs such as NGI that will continue to grow.

Speaker 3

And so we've got some things where we're cycling down on 2023 On the SBIRS program and even things like next gen GEO or OPIR, again, those headwinds will abate as we get into 2024. Similarly on MFC, Jim mentioned the PAC-three program. We'll see also continued growth there in the classified programs as well. And then at RMS, as Jim mentioned also at CH-fifty 3 ks, There's also other radar programs as well as joint all domain type programs like Defense of Guam that will drive some growth in those years. So All of these areas in these programs are ones that we have pretty clear visibility to.

Speaker 3

They do assume obviously that there is abatement to an improvement in supply chain, but that's 15 months from now for improvement that we expect to occur.

Operator

Our next question is from Matt Akers with Wells Fargo. Please go ahead.

Speaker 1

Yes. Hi, thanks for the question. And Greg, best of luck and good working with you. I wanted to ask about future vertical Laura, just what you're hearing from your customer there on the delays and any indication of what's driving that and when you think that contract might be up?

Speaker 2

Matt, it's Jim. The only thing we could say about the schedule for a FLORA decision Is what the U. S. Government puts out publicly. So we don't have anything else to add to that.

Speaker 2

It's their schedule and timeline and we Helicopter pilots in my Air Force time, they actually scared the heck out of me a couple of times when I flew with them. They want to be low, they want to be maneuverable below the And I've seen the FARA and FLORA FLY. They can do it. There's a video you can look at on YouTube that shows you how amazing this helicopter technology is. And it also gets you up to like a 230 to 50 knot Forward speed when you need it.

Speaker 2

So it gives the best of both worlds. If you're in the rotorcraft business as a flyer, you get good forward speed This is faster than it's ever been for a traditionally designed helicopter because of our counter rotating rotors. And it also gives you the maneuverability even better than many of the traditional helicopters could have provided. So we think it's the best solution for the frontline Army or other service pilot and it's going to be up to U. S.

Speaker 2

Government to see where they come out on that. But The schedule is theirs and we can't really comment on it.

Operator

Next, we'll go to Pete Skibitski with Alembic Global Advisors. Please go ahead.

Speaker 7

Hey, good morning guys. Good morning. Greg, enjoy your retirement. Jim, I had a question on Missiles and Fire Control. I feel like the last few years you've had production programs have been down.

Speaker 7

You mentioned this resurgence in the PAC-three. And at AUSA, it seemed like the guys were pretty positive on a range of production programs, HIMARS for instance being one of them because of what we see in the papers. But if we think about the midterm at Missiles and Fire Control with this kind of resurgence in the production programs, Is there a margin opportunity there now that you guys are seeing, whereas maybe the production program is kind of start to shift back versus

Speaker 2

So Pete, I'd say yes. The legacy, But still extremely effective MFC programs are a fairly high margin because of the volume and the learning curve that were already down. So that will be a margin upside to us should those volumes increase further. And we've gotten ahead of this. So for HIMARS, GIMBLERS, Javelin, again the products you kind of see in the news these days and a few others as well.

Speaker 2

About 6, 7 months ago, when we saw what was beginning to happen in Eastern Europe, I went over to visit some of the senior Officials in the Pentagon basically took them a letter and said we're going to start spending on capacity for a few of these systems, including the ones you just asked about. And now we've got a lot done already. So for example, On HIMARS specifically, we've already met with our long lead supply chain to plan for Increasing production in 96 of these units a year. We advance funded ahead of contract $65,000,000 to Shortened the manufacturing lead time. That was without a contract or any other even memo or whatnot back from the government.

Speaker 2

We just went ahead and did that because we expected it to happen. So those parts are already being manufactured now. The third thing we did was we Determine where we could open up another modern manufacturing facility to be able to produce the products and got it ready early. And we're cross training our skilled workforce across a bunch of product lines. So as the demand grows and shifts Across some of these products over the next few years, we're going to have people that can kind of fungibly move between them.

Speaker 2

And then the last thing we did was going back to this 1 LMX, We're putting the best and newest manufacturing technology into some of these product lines first, so that when the ramp comes we can pivot to it quicker. So those are some of the things that we've done to actually capture some of the volume we expect to And we do expect to get it both from the U. S. To refill stocks as I mentioned earlier in the prepared remarks and also Significant interest being shown. Now it's got to go ahead and get contracted, which as we discussed last call, can take a couple of years To get all that done, especially for an FMS contract, but we know it's the demand is there and we've spoken to the senior government officials from those countries That know that this is important for them.

Speaker 3

Just Pete, just to follow-up on that. We do expect some sales There are some of these programs that Jim mentioned that is likely to be in the probably that starting in the 2024 timeframe given the long cycle nature of where we are in spite of the fact that we've done some advanced funding. The other thing I just have to also mention is that where we see the margin pressure next year, a lot of that is driven in MFC. So while we will see a mix benefit associated from these higher margin programs, that is probably more in 2024 and beyond. 2023, We'll see a step down from where they are this year in 2022.

Speaker 3

And the way to think about it is, in the 3rd quarter MFC did about 13.5. What's implied in our guide for the Q4 is high-13s. They're going to be in that mid-thirteen range in that ballpark for 2023, given some of these new increases in the programs that we've invested in. And so we'll see a little bit of pressure there across The company is really driven by MFC, but again, we'll see some of those mix benefits come back to us in 2024 and beyond.

Operator

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

Speaker 8

Thank you, and best of luck, Greg. Thank you, and good morning, Jim and Jay. Jay, one for you maybe. I want to ask about the share repurchase increase in the dividend raise. Can you talk about how you're thinking about deployment as a percentage of free cash flow going forward?

Speaker 8

And what were some of the assumptions made around the R and D tax Credit perhaps in the expected use of debt. And just maybe adjacent to that, as you think about market multiples Coming down and some of these smaller companies needing to potentially prime pair up with prime. How do you think about Thank you.

Speaker 3

Okay. There's a lot there. So let me maybe start With the share repurchase, as I mentioned both Jim and I mentioned in our prepared remarks, we're confident in long term outlook of the company. We saw this as an opportunity the value creation that we see over the long term and we saw no better time than really now to get started on that, here in the Q4. The profile to think about going forward is $4,000,000,000 here in the 4th quarter, $4,000,000,000 in 2023, dollars 4,000,000,000 in 20.24 and maybe $2,000,000,000 in 2025 as a starting point.

Speaker 3

So that's the profile we should expect it to be. As far as debt, we do are going to finance this 4th quarter Share repurchase program with the issuance of debt, so it'll be about $4,000,000,000 that will increase our interest expense next year. But again, it's all accretive. And so, we'll see that. Again, our debt leverage ratio on an EBITDA basis will put us still below at or below 1.5 times.

Speaker 3

So it's still very, supportable and also very attractive. As far as the R and D Tax capitalization, really nothing's changed at the moment. We'll see what happens as we move forward here in the Q4. First things first, we had to get through the November elections. And then, we had the expiration of the existing continuing resolution on December 16th.

Speaker 3

It's possible through legislation, therefore, new budget That we could see movement on tax extenders that would include some type of either deferral or what we would prefer or repeal of the tax capitalization policy. As you know, we believe that it's sound policy and we believe there's bipartisan support to remove any disincentives that promote innovation. And so, that's a firm policy. It's something that we're firmly behind and we'll continue to push for.

Speaker 2

Sheila, when it comes to small and midsized companies teaming up with Lockheed Martin, we're set up for that. And I can describe 3 ways in which we are ready now to pair up and team up with whether they're commercial or defense industrial based companies of smaller scale. One is that we've had for years LM Ventures like literally a VC house inside of Lockheed Martin. It's been funded at $200,000,000 level originally. The investments that have been made under that authorization are now worth about $400,000,000 So even if we mark to market a little bit lower, we had basically 100% Return on that initial investment.

Speaker 2

Seeing the success when I joined the company of the LM Ventures program Couple of years ago, we went ahead doubled the authorization. So we're looking where to invest another $200,000,000 Early stage companies. At the next level, I motivated the team and Jay helped us create what we can now call Lockheed Martin Evolve or LM Evolve, e v o l v e. And What that's meant to do is to go a step higher and say how do we do joint ventures or commercial alliances with midsized companies, Co invest, etcetera, whether again, there is a commercial side or the defense industrial base side or space Industry in ways that we can take that outside of our rate structure and manage it and and funded in a different, more creative way. So we're in the VC space with LM Ventures.

Speaker 2

We're in the midsized Space with LM evolved, which is just literally getting off the ground, I'll say, but we have the framework, the structure and the ability to engage in that Level of investment now. And then thirdly, something we've done over the years is acquire Small and medium companies with technologies or critical supply chain components that are available. So we'll continue to do that as well. So those are the 3 routes that we have in place up and running, LM Ventures, LM Evolve and the acquisition process to bring those kind of capabilities into or affiliation with Lockheed Martin.

Operator

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

Speaker 3

Good morning, Tim.

Operator

Best of luck, Greg. Jim, I want to ask you a high level question, particularly because you're a pilot. The Air Force is facing a shortage of pilots and the Navy is planning to have at least 60% of the carrier air wings uncrewed. And so given that Lockheed's so strong unmanned aircraft, I wanted to ask you about unmanned and the positioning there and how that fits into the long term plans of both the Air Force and the Navy.

Speaker 2

So Rob, autonomy is One of the 14 critical technologies that we think are essential in the 21st century. And to everyone's credit at the company, We've been investing in Skunk Works and other parts of the company, including Sikorsky, in autonomy for 15 plus years, Right. This is not an easy thing to do or an easy thing to get approved or regulated, but Lockheed Martin and Sikorsky when it was Part of ETC and thereafter had been working on autonomy for quite some time. So the aeronautics side of it, I I can't say much about because it's pretty highly classified, but we're far down the road on Crude, uncrude teaming and in the January call, we expect to have hit a couple of milestones in that, I'll be able to explain in some more detail, but we want to get the testing done before we talk about it. But we're far down the road there, mainly out of Skunk Works, as I said.

Speaker 2

And then on the rotorcraft side, If you get the Aviation Week from maybe 3 or 4 months ago, they showed a Sikorsky helicopter flying around with no people in it, Right. I've actually flown in the Matrix helicopter we call it, which is a DARPA project that's run out of Sikorsky. It has 3 and they all work by the way. It has 3 modes. 1 is manual mode just like any The second mode is sort of assisted like a Tesla, so to speak, right?

Speaker 2

So You can take over if you need to or if you want to change the flight instantly. And then the 3rd mode is fully automated. And You plug the mission in a trailer down or up at Stratford, Connecticut, the thing will take off, go do the mission and come back and So it's really working already. And then it's a matter of when is the U. S.

Speaker 2

Government and the services ready to Turn these technologies into programs of record, but we'll be ready when they are.

Operator

Our next question is from Cai von Rumohr with Cowen. Please go ahead.

Speaker 9

Yes. Let me join everybody and say thank you, Greg, for a great job done and Maria, welcome. So We haven't talked about inflation. What are you guys seeing and assuming in inflation going forward? And as you know, Bill LaPlante has basically suggested that DoD should kind of kick in to help companies because the current level of inflation was not anticipated where the contract when the contracts were signed.

Speaker 9

And yet Senator Elizabeth Warren, no big surprise, is saying that's not a good idea. So what are you seeing in inflation and what are you assuming Going forward in terms of DoD support.

Speaker 3

Sure, Cai. Inflation is 2 fold, 1 on our own labor front and then in what we see in Supply chain. For our portfolio of business is a fair amount of our business that's somewhat insulated because it's not fixed price. And so some of the cost plus benefits that we get, that risk is not held at Lockheed Martin. For the 60% of our business It is fixed price.

Speaker 3

A lot of our just contracting policies and actions and implementations revolve Going back to back with our supply chain, meaning that whatever duration of time that we commit in our contract with our customer, we have the same commitment to our supply chain to us over that same period of time. And so in many of those cases, we don't bear that risk either. But it does come into Factor as we're going into new bids and proposals with our customer, we are seeing different changes both on our labor side and in supply chain. And it has does have an impact really going forward on bidding proposals is something that we have to keep in front of us and we're having dialogues with the customer. As you mentioned, There's been a little bit of a shift in policy to DoD as far as acceptance of economic price adjustments and that's something that we do

Speaker 4

and we'll be able to take a look at the results of the year.

Speaker 3

But I think going forward, that's something that certainly would be part of our negotiations and part of our contracting. As far as labor is concerned, we have increased our assumptions in our existing backlog contracts. We've been able to absorb that through productivity and other management reserve type of actions. So we've not really seen much of an impact there, but it's certainly a watch item as we go forward.

Operator

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

Speaker 5

Hey, thanks very much. Good morning, everyone. And I would echo everyone and best to Greg and to Maria. I'm going to try and sneak 2 in here real quick. Just Jay, the Wall Street Journal has you this morning saying that growth in 2024 and should be low single digits.

Speaker 5

Is that right? Is that how we should think about it? And then the second one, I wonder if you could help us with the pension outlook for next year, both FAS and CAS, and then just thinking about the CAS outlook beyond 2024 and how that remaining balance kind of trails off in the coming years?

Speaker 3

Sure, Seth. Yes, I think low single digit for 2024 as a baseline is the way you should look at it. We talked on this call today that there are some upside opportunities to that baseline. Missiles and Fire Control is certainly a prime Jim talked about opportunities related to HIMARS and other programs. And so there could be upside from where we are today.

Speaker 3

These are ongoing dialogues we're having with our DoD customers, so it's hard to really put them into a firm forecast until we get ourselves clear picture In terms of what's going to be under contract and the timing of those deliveries. So I would say low single digit baseline is the appropriate level to be. We're getting better clarity and I think we'll have a lot more clarity come January, provide our full guidance for 2023 and a better outlook on 2024. Come down, you're talking in the range of say $50,000,000 On the cash side, we expect the cash cost to come down as well by about $75,000,000 So the FASCAS adjustment all in, we're expecting to come down by about $125,000,000 That's if we As you know, at the end of the year, we'll have to true up and formally change, but that's based on what we see today. As far as CAS is, we're going to have to get back to you in 2024 and beyond on that.

Speaker 3

Greg, we'll have to come back to you Seth on that.

Operator

Our next question is from Christine Liwak with Morgan Stanley. Please go ahead.

Speaker 10

Hey, good morning, everyone. And Greg, Congratulations and welcome, Maria. Jim and Jay, thank you for providing color on the specific headwinds in 2023. But maybe taking a step back for a 30,000 foot view, the defense budget environment is pretty robust. We saw the 'twenty two budget request up mid single digit.

Speaker 10

The Ukraine military aid so far adds another 10% to the 2022 modernization budget. So your book to bill also year to date is 1.1 times. I guess I would have thought that these items could have offset the specific 2023 headwinds you called out. So maybe, absent The specific programs you mentioned, should we expect the portfolio to grow above, below or in line with the overall DoD budget?

Speaker 2

So Christine, good morning. I would say, first of all, that the defense budget It is expected to go above and beyond what the President's original submission was a few months back in 2023, right? Now even if that happens and we do expect it to happen and I would just point out a couple of programs that probably would benefit from that and that Includes C-one hundred and thirty in that and F-thirty five production. But it hasn't happened yet, so we're not putting it into Our forecast and let me just take a minute to step back and really reemphasize what Jay said. And that we don't have enough Real information right now in the early in Q4 of the year to even give much more than an Estimate of what the trend will be next year.

Speaker 2

So starting in 2024, we're going to start During January guidance, that's formal. We're not going to do anything ahead of that. And I'll tell you the 3 issues that I've learned in my We just don't have clarity on. 1 is the defense budget, which you just raised a minute ago. We don't know what it's going to be yet.

Speaker 2

In January, we'll know what the defense budget is going to be. And then along with that, what's the status of the major orders and contracts They get put into that budget because as you're again pointing out, what's the mix of the budget increase going to be as far as what the contracts and orders come from that. And then finally, we don't necessarily have, status of what the supply chain health is going to be even in 2023 yet, because if there's another COVID spike in the winter like there was last time, we're going to have effects in our supply chain. So Those three issues really makes it, I think, almost impossible to give you Really high confidence trending information, which has been a tradition at the company when the defense budget was rising 5% to 10% a year. But that's not and there was no COVID by the way, but that's not the situation now.

Speaker 2

So we're going to start next cycle without Trying to give you a trend line in October. We'll give you a solid of a formal guidance as we can in Jan of 2024 because of all of this. Having said that, even on the products that we fully anticipate are going to get increases because there have been Actions inside of government to make it happen. I used the analogy last call of the clutch wasn't engaged yet The way I characterize it Al, is that the clutch is engaging, but into some lower gears initially, right? So the process has started.

Speaker 2

I really give Doctor. LaPlante now there's a lot of credit, Andrew Hunter in the Air Force, etcetera, the Secretaries of the Air Force Navy and Army departments are all engaged in making this happen. But it does take time to get through, Especially on international FMS contracts and commercial sales too. So for all those reasons, Christine, it's really hard for us to estimate what at this point in the cycle. What programs are really going to benefit, but I'm pretty sure that F-thirty five and C-one hundred and thirty would be in there.

Speaker 2

Many of the MFC products we've already talked about, Blackhawk demand internationally especially is ginning up and as well as F-sixteen. So I think there's a lot of significant areas where The company can benefit with an additional defense budget increase.

Speaker 3

Yes. And so, Christina, we fully expect, As Jim mentioned to participate in this industry upside, you're going to see that in the orders in the backlog and what we're talking about here is converting that to sales take I think the important thing to remember in terms of 2023 is that in spite of a lower outlook from sales perspective, even the margin pressure, We're still delivering the same amount of free cash flow that we told you a year ago. And our free cash flow per share outlook has gotten better because of our share repurchase program.

Operator

Next question is from Peter Arment with Baird. Please go ahead.

Speaker 5

Yes. Good morning, everyone. Good morning, Jay. Tim, can you hear me?

Speaker 3

Yes, we can. Good morning.

Speaker 5

Great. Yes, and congratulations, Greg. I appreciate all your effort. Jay, just maybe, you made Jim made a comment The aeronautics kind of flat to kind of slightly down in 23, but then sustainment becomes A bigger piece of the story as we get into 2024. Should we be thinking about aeronautics kind of troughing out in 2023?

Speaker 5

Is that kind of what you're implying or there are other puts and takes

Speaker 1

that we should be thinking about longer term? Thanks.

Speaker 3

No, I think so. I think next year they're dealing with some of the transition related To the changes in delivery profiles on the F-thirty 5, the production contract. And again, we're just catching up some inventory because some of the delivery has moved around. Once that abates that headwind, we're going to see at least a leveling off on the production side, which will leave the growth for sustainment And growth in classified programs and growth on the F-sixteen program. And so I would expect them in 2020 4 and beyond to have a nice growth trajectory.

Speaker 2

Yes. And I'd also add there, Peter, that we're starting to get some real traction on our sort of JADO offerings, so to speak. And one of them has And mentioned briefly today, I'll call Defense of Guam. And that's the really first Well, highly organized DoD major contract to come out That really drives the capability and not just a product or system. And what it's meant to do is integrate And this is our whole 5 gs Dot Mill approach actually, it's why we want it, I think, is that integrating Current command and control systems in use by the various services, so the Army's happens to be provided by Northrop Grumman, for example, we're going to fully incorporate that into the solution and work with them to do it.

Speaker 2

And then we're going to bring the Aegis system from Lockheed Martin into And a number of other programs and products from a range of OEMs are going to work together on this for the first time in this way. So I think this is going to be a real pathfinder for the future. And once this demonstrates that it can be a success and the industry has got to coalesce and help make it happen with us. We as an industry will see more of these opportunities in the 2024 plus timeframe too.

Operator

Our next question is from George Shapiro with Shapiro Research. Please go ahead.

Speaker 11

Yes. Good morning. A couple of questions. On the aeronautics area, LRIP 16 you're now supposed to get in Q4, Jay. Does that come with some added sales that you may be working on now as well?

Speaker 11

And then a second question, if you look at the incremental margin on the profit you provided on the F-thirty 5 and the $325,000,000 of sales, It's like 21%. Does that imply that you increased the margin on the F-thirty five program? And will that help the margin next year or is it more than offset by the growth in the sustainment?

Speaker 3

Well, on the second question, George, we did have a profit on the F-thirty five program and the production program there. So we will see moving forward a higher recurring margin rate there. As far as Q4 in Lot 16, yes, we do expect that order in the Q4, as Jim mentioned, a little bit over $8,000,000,000 I wouldn't we do expect a ramp up in sales at Arrow including F-thirty 5. I mean that will include F-sixteen. So to answer your Yes, that will certainly be part of the sales mix here in the 4th quarter.

Speaker 4

Next, we'll

Operator

go to Rich Safran with Seaport Research Partners. Please go ahead.

Speaker 12

Jim, Jay, Greg, Maria, good morning. How are you?

Speaker 3

Good morning, Hratch.

Speaker 12

So, Jim, I heard your opening remarks about uncertainties on the supply chain and all that. And Jay, I'm going to put you a little bit on the spot here, and hopefully, I'll get you to answer a long term cash flow outlook question. Because I think last year you gave a long term cash flow outlook and it even added a year. So you've been talking long term this morning and recognizing there's not a lot of high confidence here. Do you have enough visibility to give us a long term cash flow update?

Speaker 12

And if possible, could you cash that in terms of buybacks and free cash flow per share?

Speaker 1

Well,

Speaker 3

Rich, so if you think about our free cash flow last year and I'm going off a little bit off recall here, we said $6,100,000,000 in 2023, I believe it was $6,200,000,000 in 2024. I don't see any reason why we can't deliver that and continue to deliver that level of free cash flow beyond 2023 2024. So in our free cash flow again with the share repurchase program will get better than what we were saying a year ago. Again, just our management focus On working capital, our management focus, discipline and delivering free cash flow is not going to stop after 1 year. And so I'm pretty confident that We can continue to deliver the free cash flow that we committed to a year ago.

Speaker 3

And again, our free cash flow per share, our growth, You're looking probably in the range of mid single digit growth over this period of time.

Speaker 1

Hey, John, this is Greg. I think we've come up to the top of the hour. So with that, I'll turn the call back over to Jim.

Speaker 2

Sure, Greg. Thanks. I'd like to conclude today by again reinforcing what Jay just talked about, our commitment to delivering long term attractive and reliable total returns to shareholders. To meet the challenges that our customers are facing in Global Security right now. And if some of you Might have been around when I was at American Tower, we focused completely on free cash flow per share generation And that got us through 18 years of up and down cycles, the great recession and a few other issues that happened along the way.

Speaker 2

That's the right metric for this company too and that's why Jay and I are so much emphasizing it today. So we're positioning ourselves for anticipated growth inflection in the next few years, investing in innovative technologies for our customers' missions, as I said, and strong repurchases along the way to amplify the per share value creation as we go. So thanks again for joining us today and we look forward to speaking with all of you on our next earnings call in January. John, that concludes the call. Thanks, everybody.

Operator

Ladies and gentlemen, thank you for your participation. You may now disconnect.

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