Lockheed Martin Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 18, 2023

Key Takeaways

  • Q1 2023 results: Lockheed Martin reported sales of $15.1 billion led by 16% growth in Space, an 11.1% segment operating margin, and $1.3 billion of free cash flow (+11%), returning 101% of FCF to shareholders.
  • FY24 budget request boost: The administration’s $842 billion DoD proposal (+3% yoy) prioritizes allied defense cooperation with procurement of 83 F-35s, increased munitions funding, and advanced long-lead funding for multiyear programs.
  • Hypersonic program milestones: Lockheed secured the U.S. Navy’s initial CPS contract for the first sea-based hypersonic strike capability (mid-2020s delivery) and reported key test progress on ARROW, HAWK, and HALO developments.
  • International demand strength: Highlights include the first Greenville-built F-16 Block 70 delivery to Bahrain, an MoU for F-16 wing production in India, and Australian orders for 20 HIMARS, 40 Black Hawks, and the $1 billion-plus JP9102 satcom project.
  • 2023 guidance reaffirmed: Management expects full-year sales of $65–66 billion, an 11.2% midpoint segment margin, at least $6.2 billion of free cash flow, and $4 billion in share repurchases, with growth returning in 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
Lockheed Martin Q1 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

Good day, and welcome everyone to the Lockheed Martin First Quarter 2023 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Maria Richard Owen Lee, Vice President of Investor Relations, please go ahead.

Speaker 1

Thank you, Lois, and good morning. I'd like to welcome everyone to Lockheed Martin's Q1 2023 earnings conference call. Joining me today on the call are Jim Taiclet, Our Chairman, President and Chief Executive Officer and Jay Milave, our Chief Financial Officer. Statements made in today's call that are not historical and forward looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward looking statements.

Speaker 1

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.lockymartin.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, Maria. Good morning, everyone, and thank you for joining on our Q1 2023 earnings call. I'd like to begin today with a few highlights from the quarter as well as an overview of the Presidential budget request And then Jay will discuss our financial results and full year 2023 outlook in detail. We had a solid start to the year with 1st quarter sales of $15,100,000,000 led by 16% year over year growth at Space. Segment operating margin was 11.1% led by MFC at 15.8%.

Speaker 2

Free cash flow grew 11% to $1,300,000,000 and combined with the lower share count contributed to a strong free cash flow per share growth year over year. We remain on track to meet our financial expectations for the full year and to return to growth in 2024 as we laid out in January. In terms of capital deployment, we returned $1,300,000,000 or 101 percent of our free cash flow to shareholders in the quarter. We remain focused on our long term strategy of growing free cash flow per share and continue to plan to deliver approximately 110% of our free cash flow to stockholders in 2023 through dividends and buybacks. Turning to the budget, the administration released preliminary details of the FY 2024 President's budget request or PBR in early March.

Speaker 2

This budget proposal reflects a heightened emphasis on defense and security cooperation with allies. The FY 2020 4 DoD budget request is $842,000,000,000 an increase of $25,000,000,000 or 3% over the FY 2023 enacted funding. The near peer threats posed by China and the Russian invasion of Ukraine is driving the national defense strategy and has created added demand for Lockheed Martin's advanced effective solutions. Key highlights include the procurement of 83 F-thirty 5 aircraft, continued expansion in classified programs and an increase in requested funding for munitions. The PBR also includes facilitization investment and advanced funding for long lead time parts in support of multiyear procurement of JASM and lorazm.

Speaker 2

We're also engaged with DoD on multiyear procurement proposals for PAC-three MSC and guided multiple launch rocket systems. These proposals are subject to congressional approval during the course of the FY24 defense authorization and appropriations process. The PVR also includes continued investments in key technology development efforts such as conventional prompt strike, Long range hypersonic weapon, next generation interceptor, hypersonic defense, bomb defense system and other space programs. Furthermore, key technology areas aligned with Lockheed Martin investment priorities received increased funding to include microelectronics, 5 gs Technologies and Joint All Domain Operations. We are encouraged by this initial request and look forward to its progression through the authorization and appropriations process.

Speaker 2

We also anticipate heightened emphasis on National security prioritization from Congress, supplemental spending requests including Ukraine and elevated demand from allies and partners. Turning to the F-thirty five program, the 83 F-thirty 5 Lightning II aircraft included in the PBR Signals strong support from the services and the administration. Moreover, the Canadian government's January announcement That it will procure 88 F-thirty five marks another milestone and continued international demand for the aircraft. As to production, deliveries of F-thirty five engines, which are government furnished equipment, resumed in February. And then flight operations and deliveries resumed in March.

Speaker 2

However, we do expect a fraction of total expected 2023 deliveries To be impacted later this year due to both software maturation related to Technology Refresh 3 or TR3 and hardware delivery timing. However, we anticipate little to no revenue impact from any potential delivery delay And therefore, no material adverse effect on our 2023 P and L. Jay will provide some more color on this in a moment. Also at Aeronautics, the 1st Greenville built F-sixteen Block 70 took flight and was delivered to Bahrain. In addition to the Bahrain customer, 6 countries have selected Block 70 or 72 aircraft and Jordan and Bulgaria have Sign letters of agreement for additional jets.

Speaker 2

Further related to the S-sixteen in the quarter, while I was at the U. S.-India CEO Forum in March, I have the privilege to announce the Memorandum of Understanding with the Tata Lockheed Martin Aerostructures Limited Joint Venture to produce F-sixteen wing structures in India, demonstrating our commitment to India as an industry partner and customer, while bolstering our supply chain. Turning to hypersonics, it is encouraging to see the continued investment outlined in the PBR for the conventional prompt strike weapon system or CPS as it begins integration and testing for Zumwalt class ships, recognizing our advancements in this critical technology. In February, the U. S.

Speaker 2

Navy awarded Lockheed Martin an initial contract for CPS, The first sea based hypersonic strike capability for the United States, enabling long range missile flight at speeds greater than Mach 5. First delivery is expected by the mid-2020s. Regarding our Air Launch Rapid Response Weapon also known as ARROW, We are continuing testing of the system at hypersonic speeds in order to advance technical maturation of the missile and the glide body and to ensure the final product is safe, reliable and supportive of our customers' missions and future plans. In January, we also completed the 2nd flight test of hypersonic air breathing weapons concept, also known as HAWK, in partnership with DARPA and the Air Force Research Lab. We accomplished all the test objectives during the 2nd flight test, including affordable rapid development and performance requirements.

Speaker 2

And in late March, the U. S. Navy announced its support of the Hyper Sonic Air Launched Offensive Anti Surface Strike Weapon or HALO. Lockheed Martin was down selected and awarded a contract For the first step to fielding a critical capability over the next decade and begin the design and development of a carrier based Air breathing hypersonic strike capability for the Navy's fleet. As a company, we remain fully committed and establish a solid deterrent posture in this area for the U.

Speaker 2

S. And its allies. The hypersonic solutions are just one element in our vision of 21st Century Security. We advanced several additional aspects of this strategy during the quarter, including announcing a memorandum of understanding with Juniper Networks to jointly develop integrated hybrid software defined Wide Area Network Solutions and to demonstrate that with our customers in the future. This technology enables mission aware dynamic routing, A foundational capability for resilient joint all domain operations, this mission aware dynamic routing shifts the movement of data in real time across the mix of military and commercial infrastructure according to evolving conditions.

Speaker 2

Our solutions give customers the flexibility to rapidly adapt to maintain the flow of crucial data and information as their assets operate in contested environments. We also led simulations of technologies to the U. S. Army, Air Force and Navy to demonstrate the impacts of 5 gs communications and advanced analytics to significantly improve operations and maintenance performance for a variety of aircraft as well as for unmanned forms in operationally challenging environments. And at the Mobile World Congress in Barcelona, I had the opportunity to deliver a keynote address and meet with CEOs across the digital technology, mobile and networking industries to encourage us working together to promote innovative solutions to protect our countries and advance our space exploration capabilities.

Speaker 2

Another example of our leadership in accelerating advanced 21st century technologies to improve national defense and deterrence to conflict is in the arena of directed energy. Recently, our RMS unit achieved success in our initial test of our DEEMOS, High Energy Laser, which verifies that the laser's optical performance meets the system's targeted design parameters. This 50 kilowatt class laser weapon system aligns with the Army's directed energy short range air defense mission. In addition to delivering on absolutely cutting edge technologies, demand for many of our well known and long time high performing systems continues to be strong. For example, in January, the Australian government announced the purchase of 20 Lockheed Martin High Mobility Artillery Rocket Systems or the now familiar HIMARS, providing Australian Defence Force with reliable, well proven capability.

Speaker 2

And we continue to grow our significant partnership with Australia beyond HIMARS. In February, an agreement was announced between the Australian And the United States governments for a foreign military sale of 40 UH-sixty ms BlackHawks for the Australian Army. Deliveries are slated to begin early this year. The Black Hawk remains unmatched as an all around multi role durable military helicopter for Australia and for the 34 other countries around the globe that use it. Further, we're excited to work with the ADF and Australian industry to develop their Sovereign Satellite Communications component, otherwise known there as Joint Project 9,102.

Speaker 2

The Commonwealth of Australia announced in April that Lockheed Martin was selected as the preferred bidder for JP-nine thousand one hundred and two. This multi $1,000,000,000 project will provide the ADF with a robust solution for military satellite communications and defined by its versatility and its resilience. With that, I'll turn the call over to Jay and join you later for questions.

Speaker 3

Thanks, Jim, and good morning, everyone. Today, I will walk you through our consolidated and business area results for the Q1 and cover our 2023 outlook. 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 financial results. Overall, 2023 is off to a solid start, positioning us well to meet our commitments for the year.

Speaker 3

We delivered just over $15,000,000,000 of sales with $1,700,000,000 in segment operating profit, resulting in 11.1% segment operating margin. Earnings per share was $6.61 and we generated $1,300,000,000 of free cash flow, enabling a solid shareholder return to with backlog expected to increase in the 2nd quarter from the upcoming order for F-thirty five Lot 17 production. And we continue to strategically invest in our growth strategy with $600,000,000 of capital expenditures and independent research and development These financial results are on track with our expectations for the year. Taking a closer look at the quarter's results with consolidated sales and segment operating profit on Chart 4, 1st quarter sales increased year over year by 1% as Space led the way with 16% growth. Segment operating profit was down 2% as lower ULA equity earnings and contract mix more than offset Moving to earnings per share on Chart 5.

Speaker 3

GAAP earnings per share were up $0.17 or 3% over 2022. Adjusted for mark to market investment gains, EPS was flat. On an adjusted basis, the unfavorable year over year impacts from segment operating profit, Interest expense and FASCAS pension income were offset by the lower share count. Moving to cash flow on Chart 6. We generated nearly $1,300,000,000 of free cash flow in the quarter, including nearly $300,000,000 of capital expenditures, as well as over $600,000,000 of accelerated payments and continued support of the supply chain.

Speaker 3

Our cash deployment plan is on track, which we expect to accelerate throughout the year. In the quarter, we had $500,000,000 of share repurchases and paid almost $800,000,000 in quarterly dividends. Total cash return to shareholders in the quarter was 101% of free cash flow. Moving to segment results and starting with Aeronautics on Chart 7. 1st quarter sales at aero decreased 2% year over year.

Speaker 3

Lower F-thirty five production sales were partially offset by higher F-sixteen and classified program volumes. Operating profit was slightly lower than prior year as the impact from lower net profit adjustments and sales volume was partially offset by favorable contract mix. For the year, we expect F-thirty five deliveries to be lower than previously anticipated due to software maturation with the Tech Refresh 3 program and hardware delivery timing. We will refine the impact as the year progresses, but do not expect to change to ARO's 2023 sales and profit ranges that we had previously communicated in January as we maintain our production cost throughput profile for the year. Looking at Missiles and Fire Control on Page 8, sales decreased 3% as lower sales volume on Sensors and Global Sustainment As well as our tactical strike missile programs were partially offset by growth in Integrated Air and Missile Defense.

Speaker 3

Segment operating profit was down 2% driven by lower sales volumes and net profit adjustments, partially offset by favorable contract mix. At Rotary and Mission Systems on Page 9, Sales were down 1% from 2022, driven by lower volume on Black Hawk production and our C6 ISR programs. These declines were partially offset by favorable volume on radar programs in Integrated Warfare Systems and Sensors, including Defense of Guam, an important growth area for RMS that was won in 2022. Operating profit decreased 14% due to lower sales volumes and timing of net profit adjustments. Turning to Chart 10 and our Space business area.

Speaker 3

Sales were up 16% in the quarter driven by strong growth on the Next Gen Interceptor and Classified programs and further boosted by favorable program lifecycle timing on Orion, Protected Communications and fleet ballistic missile programs. Operating profit was up 13% driven by the increase in volume and favorable profit adjustments, partially offset by the lower equity earnings from United Launch Alliance. Okay. Now shifting to the outlook for 2023 on Page 11. For the year, we are reaffirming guidance for all key metrics.

Speaker 3

We continue to expect sales to be in the range of $65,000,000,000 to $66,000,000,000 with segment operating margin at 11.2 percent at the midpoint. We also still expect to deliver free cash flow at or above $6,200,000,000 while repurchasing $4,000,000,000 of outstanding shares. We believe our Q1 results position us to achieve these expectations As we continue to add orders, reprogram execution commitments and pursue new opportunities throughout the year. So let's close on Page 12 to summarize the comments. As noted, Q1 represents a solid start to 2023.

Speaker 3

We reaffirm key financial metrics as previously guided and continue to expect a return to growth in 2024 and beyond with consistent free cash flow per share growth. Looking ahead, our strategic focus on 21st Century Security Solutions aligns with expected increases to defense and security spending. With our continued discipline and focus on execution, We are on track to meet our expectations for long term growth and value creation for our shareholders. With that, Lois, let's open up the call for Q and A.

Operator

Our first question will come from the line of Seth I'm sorry, Seifman from JPMorgan. Please go ahead.

Speaker 4

Hey, thanks very much. Good morning, everyone. Apologies, I'm losing my voice a little bit here. But Jay, I wonder if you could talk a little bit about The GAO report would indicate that Sikorsky's bid for FLARO was about 45% Of that of Bell. And so it seems like investors are kind of fortunate that Skorisky did not win that competition.

Speaker 4

And I guess what can you say to investors? You talked about some of the classified missile stability headwinds, I know there was a charge on CH-fifty 3 ks, some ULA development that kind of the bid process is Consistent with generating adequate returns on new work?

Speaker 3

Great question, Seth. And let me just say on FLAR, we're obviously Pointed. We believe that, our offering with the best technology to support the multi mission requirements at the best value. And while we'll acknowledge that the proposal did include aggressive pricing, a significant amount of our offering included efficiencies made possible by the benefits of 1LMX. And our adoption of 1LMX model based and digital thread enhancements significantly improved our cost competitiveness and we expect that The business case itself was favorable and that's what enabled the pricing that we were able to offer.

Speaker 3

As it relates I think generally speaking, that's how we evaluate these proposals. We look at the NPV, we look at IRR, we look at all different metrics, we look at And as I mentioned at your conference, Seth, I said that in the classified program at MFC, We have to take a little bit of short term pain for some long term gain. But the fact of the matter is the business case does provide that long term gain for us. And so, we go through all of that as part of the management decision making, the technology that we can provide. As you would expect, We have the leverage, we have the capability of wherewithal to provide favorable pricing and outstanding technology offerings to our customer.

Speaker 3

We don't do it at the expense of financial returns. Let me just add just on the CH-fifty 3 ks, we did have something in the press release. That was a small adjustment related to Correct. It's an older development contract. There was no adjustments taken on the forward production agreements that we're working on currently.

Operator

Thank you. The next question is from the line of Christine Lee Wong with Morgan Stanley. Please go ahead.

Speaker 5

Thanks. Good morning, Jim and Jay. On the F-thirty five, the talk of the performance based logistics deal has been ongoing for some time, But it seems like it's possible you would reach a deal this year. So could you give us an update in terms of where you stand in transitioning over to a PBL contract in the program and then assuming that PBL meets conditions set by the 2022 NDAA, How could this impact the sustainment work and the overall program profile over the coming years?

Speaker 3

Thanks, Christine. It's We did submit a proposal. We are expecting that to be decided by the end of the year and awarded. We think this is the best solution for the customer not only over the next 5 years, but frankly over This is the right program for the life of the program. And what this offers is really a win win type of solution.

Speaker 3

It enables us to do to utilize Our proprietary modeling for material requirements to most efficiently use inventory and provide real time availability of material to our customer as they need it. And so we're able to take that responsibility off their shoulders, Being able to provide them the requirements when they need to maintain obviously the readiness levels that are necessary. And so overall, not just over the next 5 years, we think it's the right long term solution for our customer. And we think again, it's just a win win proposal for not just The services, but also industry as a whole.

Speaker 2

And Christine, we think we're on a path to establish a PBL with the F-thirty five customer enterprise this year And that's what we're tracking to.

Operator

Thank you. The next

Speaker 6

Jim or Jay, neither of you actually mentioned supply chain issues or labor shortage or other things in your commentary. So I was wondering if you could give us an update On that situation and whether things have improved?

Speaker 3

Yes, it's a good question. Rob, our visibility as we're going throughout the year and I made a few comments, the public comments In the quarter that we were looking at potentially at some shortfalls. And partly that was due to the strong performance that we saw in the 4th quarter. Ultimately, the supply chain delivered, I think, for the most part. There are still some pockets that we've seen, particularly where it was impact The most was at MFC and RMS.

Speaker 3

Both of them had some continuing lingering issues that continue to plague us. The on time delivery performance really didn't get any better from Q4 and really what we saw in the back half of last year. As we expected, really going back to when we reset expectations in the Q2 of 2022, we're really not Expecting any type of significant recovery to the end of the year as we go into 2024. So it's essentially more of the same in the Q1 from what we saw previously.

Speaker 2

And Rob, it's Jim. We're on the cusp of fully implementing really best practices in supply chain across This one Lockheed Martin concept that we have now used to be that each business unit here, business areas we call it, did its own supply chain management and then within programs, it was even more narrowly managed. And so we're now bringing all the Aggregate demand together for each supplier across all of Lockheed Martin from spaced MFC and everything in between. And then we're also Looking at components that programs are using in different parts of the company from mid tier suppliers and aggregating that demand to and actually Synchronizing our requirements and so that we can have more bulk buys, everything from raw materials up through mid stage components, etcetera. So We're implementing those kind of best practices.

Speaker 2

That will be good for the supply base too. They'll have more reliable demand from our company in total. And I think we'll lead I hope we'll lead the industry into that future where we help strengthen the supply chain by our practices In addition to their improvements.

Operator

Thank you. The next question is from Kai Van Rumohr from TD Cowen, please go ahead.

Speaker 7

Yes. Thanks so much. So Jay, you had very strong Profitability at MFC 15.8 percent was up and yet you talked of this classified missile Program hitting, I think, 50 bps to 100 bps on margins. Can you update us in terms of is that still what the number is Given the strength in the Q1 and how far out into the future does that extend? And then maybe more broadly, Northrop also mentioned maybe on B-twenty one that they have some fixed price exposure looking out.

Speaker 7

Do you have any other programs where we should be aware of potential LRIP or fixed Price options on programs out in the future.

Speaker 3

Okay. Thanks, Cai for the question. Let me just address specifically MFC. They did have a strong quarter. If you look throughout the year where we go from here, in the quarter they had essentially the highest Profit adjustment quarter they're going to have.

Speaker 3

And so that's going to step down in the balance of the year. Secondly, we will see more of an impact From the dilutive margins associated with this classified program in the back half of the year as well. And so I would expect them to step down in the 13% range in Q2. It will cycle down from there. We're still expecting the full year to be in this 13.5% range really due to these two items.

Speaker 3

The step up with profit adjustments will be lower for the balance of the year and the dilutive impact, it becomes more profound in the back half of the year. As far as other fixed price production programs, we really that's pretty much Large one that we're tracking. We've had the program at Aeronautics, that we took a charge in 2021 on. We continue to monitor that program. It's fixed price development.

Speaker 3

We still have multiple years of development on that program. And so that's one that we continue to keep an eye on. But I think Greg Olimar and his team are really managing that and laser focused on driving to the customer's requirements and meeting their schedule and doing it within the cost objectives that we've currently laid out. Just going back to the MSC in terms of the outlook, we're going to be pressured on margins probably for the next 4 to 5 years on Predominantly from this program, it'll step up, it'll probably peak out in 2025 and then stabilize from there. The question other question I've been asked on MFC Whether they can grow absolute profit and the answer to that question is yes.

Speaker 3

And so while we may see some dilutive impact to margins, we may see Profit maybe be flat from 1 year to another. Overall, over the next 4 to 5 years, we will see profit grow at MFC. So those are pretty much the answers to your questions. Thank you, Cai.

Operator

Thank you. And the next question is from Ron Epstein from Bank of America Securities. Please go ahead.

Speaker 8

Hey, good morning guys.

Speaker 3

Good morning.

Speaker 8

Question for you, maybe a bigger picture question. Secretary Kendall was out talking about And then kind of restructuring that program so that more of the IPs owned by the DoD and having this Constant re competition of contractors and so on and so forth. How does that factor into how you think about That business model, does that really change anything? And I don't know if you could kind of speak about that.

Speaker 2

Ron, it's Jim. We're constantly and have over the years, the company's history worked with government on intellectual property, Management rights, etcetera, we'll continue to do that. NGAD itself is a Concept in progress, I'll call it, the government services, DoD, etcetera, they are formalizing and Crafting what the NGAD is going to look like and what NGAD stands for is Next Generation Air Dominance Aircraft. So think That kind of class airplane that's meant to win air combat. And so there'll be a mix of Crude and uncrewed vehicles in that concept, that's still being formulated.

Speaker 2

We're working with government through our Skunk Works operation On what the options are there. We'll sort out the intellectual property rules as we go forward. But frankly, we're driving and advocating strongly for a more open architecture approach to the entire industry And less proprietary standards and protocols and architectures, and we just demonstrated one of those with a docking mechanism for spacecraft, which can be basically implemented on any A wide range of spacecraft to do future replenishment of either data fees or fuel etcetera to satellites In flight. So those are the kinds of things we're advocating for and we will always guard and protect our intellectual property rights for the IP that we develop and we'll work with customers To create the open architecture so that we can continue to compete effectively.

Operator

Thank you. The next question is from Pete Skibitski from Allen Bank Global Advisors. Please go ahead.

Speaker 9

Hey, good morning, everyone. Jim, I was just wondering if you could add some more color on sort of where Lockheed stands with hypersonics, just in light of The changes made to ARO and your Hawk variant, obviously, CPS looks good. I don't know how big that could be, but Could you walk us through maybe where you're at today in hypersonics and where the program changes where things could go, how big it could get? Thanks.

Speaker 2

Sure. I'll take the construct and then offer Jay the opportunity to kind of give you some scoping of where the business side of it could go and Revenue growth etcetera. But hypersonics is a it's a complex endeavor. You Kind of build a matrix in your mind, right? There's 2 different kinds of propulsion technologies, Right.

Speaker 2

One is air breathing. So think of cruise missile type of vehicle where the there's atmospheric Provision of oxygen going through inlet duct and it's aiding the propulsion system To continue forward. The other technology for propulsion is called BoostGlide. It's more like a And a space rocket almost and the fact that it's got either solid fuel rocket or equivalent to that, it gets a big boost off of The launch vehicle or the launch pad and then the vehicle ultimately separates the glide body, it's called, with the warhead from the rocket and on it goes by its basically momentum it's already been provided from the Boost. So air breathing is 1, Boost Glide is another.

Speaker 2

Those are the 2 propulsion technologies. And then there are notions about the source of the launch, right? So you could have ship based, which is CPS. You could have land based off of The tail vehicle, a transport erector launcher vehicle that the Army calls long range hypersonic weapon or you could launch this off an aircraft. And that's the matrix you have to build in your head.

Speaker 2

What propulsion are we talking about and what launch platform are we speaking about? So let's just go really quickly through each of those. So ground based, right now there's essentially The long range hypersonic weapon is the game in town. It's very similar to the CPS, which is the ship based vehicle. It's BoostGlide and it could be surface launch, seer or ground.

Speaker 2

That is where the The government is placing its bet is on that joint program, CPS and long range hypersonic weapon. You pointed out that we have that contract right now. We're Then when you get to air launched, you have the 2 propulsion systems. So Hawk and Halo Are the air breathing, air launched vehicle, right? The air launched vehicles I have a size concern that you have to take into account.

Speaker 2

So what airplanes can carry such a product or such a weapon? The BoostGlide is a heavier, larger vehicle, which we have been testing through the aero program. And it's going to be a matter of what aircraft the Air Force And ultimately, the Navy want to use to bring the hypersonic weapons that they will have into the battle. And that's the debate and discussion that's going on in the services. That's the way to frame all this.

Speaker 2

Those are all government decisions. We're supporting really all The matrix, if you will, at this point, with either a development program like Arrow or a production program like CPS. So I'll stop there And give Jay a chance to kind of give you some scope on what the growth for the company could mean.

Speaker 3

Sure. Today, it's about $1,500,000,000 business In the aggregate, all of those programs that Jim mentioned, we expect that to continue to grow and be a contributor. It's one of our growth 4 growth pillars. It's not the largest because it's smaller than some of the other contributors, but it still provides healthy growth. And there's upside to that related to hypersonic defense.

Speaker 3

And so when I talk about 1.4 or 1.5 going to with solid growth that's embedded in our growth projection, it's really these weapon systems that Jim just

Speaker 8

mentioned.

Operator

The next question is from the line of Rich Saffron from Seaport Global Securities. Please go ahead.

Speaker 10

Thank you. Jim, J. Maria, good morning.

Speaker 2

Good morning.

Speaker 10

So I wanted to know if you could just expand on your opening remarks about international demand. Wanted to know if you could maybe discuss Some of the timing of international award opportunities, where you're seeing the most demand, for what types of equipment? And finally here, Are you seeing any more interest in direct commercial versus FMS, any international orders that you're signing up now? Thanks.

Speaker 3

Rich, good question on international. For us, over the next 5 years or so, we expect international to be A significant contributor to our growth. It's embedded amongst each of our 4 pillars. But when you strip out international loan, you're High single digit growth there. As far as contracting, most of that, particularly as you're dealing with munitions is FMS, Including it as well as F-thirty five program.

Speaker 3

So most of that, that right now that we've got embedded in our forecast, particularly in the growth side is FMS related. We just as Jim mentioned in his prepared remarks, we're very excited about the Australian military satellite communication program. That's a multibillion dollar opportunity and that really expands the international footprint of our space business, which has historically been predominantly a domestic U. S.-based business. So these opportunities continue to present themselves.

Speaker 3

There is a lot more opportunity in front of us That is absolutely a growth driver for us over the next 5 years.

Speaker 2

Yes. And I could add some more background to Jay's remarks there, you mentioned space, there's incredible amount of upside. The notion of independent For Sovereign, satellite communication for military and national defense is catching on, if you will. The UK already has a system like this, but they want to replace and upgrade that. Australia is getting into that game as well.

Speaker 2

And I think there'll be Countries in the Middle East and elsewhere that will look into these options for space. On the aero side, the F-thirty five has Been incredibly popular and I think won every competition, meaningful competition over the last few years as far as 5th generation fighter aircraft go. In addition to that F-sixteen, we can't build them fast enough. Additional orders coming in, we're going to compete in India to try to get that order as well. And it's a matter of us being able to get to the production rate that the international is demanding and requesting of us there.

Speaker 2

RMS is having a lot of success with the Seahawk helicopter for example and various versions of the Blackhawk as We mentioned Australia is part of that. Also their radar systems are becoming more exportable as we go forward And both in Europe and Asia, there's demand for those. And then at MFC, obviously, PAC-three, Javelin, Gimglers, Ultimately, potentially JASM and LARASM for some of our closer allies are going to be in the mix. So there's a wide and broad range across all of our business areas A significant international demand that we'll be seeing over the next few years. Contracting that through the FMS process does take some time.

Speaker 2

On the other hand, there are a few DCS programs and projects, but a lot of this is going to be continue to be Export controlled by the U. S. Government and they'll be largely FMS, but it's a broad range. It's going to last for many years, and we'll

Operator

The next question is from Myles Walton from Wolfe Research. Please go ahead.

Speaker 2

Thanks. Good morning. Maybe on RMS, could you talk about the driver to the expansion in the margin implied in the guidance, I guess a couple of 100 basis points implied run rate for the rest of the year. Is that something programmatic? Was there extra R and D associated with FLRAA?

Speaker 2

And also on FLARA, now that that decision is made, anything you anticipate needing to do at Sikorsky to maintain competitiveness? Thanks.

Speaker 3

So, Myles, on your first question on RMS margins, again, the Q1 was 10%. We've got a guide Of nearly 12% for the year. What happens is a little bit at the opposite of MFC. This was their lowest profit adjustment Quarter of the year, we expect that to grow based on the program schedules and the risk retirements that we've received for the balance of the year. And so that will step up.

Speaker 3

Just give you just a frame of reference. The Q1 their step ups were about 20% of their profit. For the full year, we're Expecting that to be closer to 30% for profit adjustment for the full year for RMS. So that will be a big contributor to the increase in profitability. The second element is that we have just some sales mix.

Speaker 3

We have some passive higher margin sales up in the second half of the year, which will also give a boost to their margins. And so that's fundamentally what's happening at RMS. As far as FLRARA, We had in any impacts related to Sikorsky, part of we had announced a cost Production program in the Q4 had taken a few charges about $100,000,000 of charges at Ard Mess In the Q4, about maybe half of that was related to Sikorsky and cost reduction and cost competitiveness. So we have just an interesting dynamic there that while we've got production, particularly in the Blackhawk stepping down here in 2023, it actually steps up slightly again in And then we have significant growth on the Sage fifty three program in 2024 where we're expecting to double our deliveries And so we're just dealing with a 1 year type of trough, I would say. I think the team, Stephanie Hill and her team have done a nice job Of rightsizing the cost structure for where we are today, while at the same time maintaining the capability to provide this growth in the future.

Operator

The next question is from the line of Matt Akers from Wells Fargo Securities. Please go ahead.

Speaker 11

Hey, good morning guys. Thanks for the question. I wanted to ask about Missiles and Fire Control. You made some comments in the opening remarks about Some of the multiyear procurement programs going on now, when should we think about sort of transitioning from kind of flattish sales this year? I think you talked about mid single digit Growth and then also is there any investment needed to support that in terms of capacity scaling up your business there?

Speaker 3

Yes. So when you look at it over the next 5 years at MFC, they're certainly our strongest grower. We'll lay out a little bit more As we go through our strategic planning process in the summer and we give you kind of a first look on 2024 and maybe beyond when we do that in the October call. They certainly are our strongest grower. Yes, there are capacity investments.

Speaker 3

Jim mentioned some of the funding that is being Post in the presidential budget request for facilitation investments. We have also invested our own monies in capability PAC-three is a good example And some a few other programs where we've gotten in front of funding to make sure that we can deliver to the requirements for capacity and delivery requirements that our customers are asking for. And so again, I think we've got a good beat there. We've talked about capacity levels over the next few years. These we reached some of these levels in 2025, 2026 and 2027, And that investment really between now and over the next few years is going to help enable that capacity increase in growth as well.

Speaker 2

Yes. It's Jim, Matt. I can give you some details on exactly what we're talking about here. So for PAC-three Capacity in 2022 was 450,000,000 and we're planning to make the investments and working with government to Coordinate with us on this to 550 by 2026. So just 3 years from now, we'll go from 450 to 550.

Speaker 2

And then similar with the Javelin, which has been pretty widely discussed in the past, our 2022 capacity was about 2,000 a year. And by 2026, we'll have it to 3,500 plus and ultimately we're going to get to 4,000. When it Comes to Gimglers, which is the HIMARS, munition, the original capacity last year was 10,000. We're taking that to 14,000 by 2026. So these are meaningful step ups, I guess, you could call them in capacity and we're doing those Because we think we have really strong demand for that capacity to fill it, and we're now programming Which customers go where and what point in time and working with the U.

Speaker 2

S. Government to do that along with their own So we've got a significant plan to grow the business at MFC. There's investment either through our own rates And our CapEx plan plus funds committed by the government, because we are making a pretty strong case, I think, with them To drive an anti fragility program into munitions and other Sort of high importance production facilities and production systems. We got asked to double or triple production of certain munitions And the answer came back, as you see, it's going to take 3 years to do a lot of that. We want to get the fragility out of the system.

Speaker 2

So if this ever happens again, it's 6 months instead of 3 years to get a meaningful improvement in capacity. And that's How you see the government acting now, with the long lead time parts and the facilitation and the multi years that They're now implementing.

Operator

Thank you. Your next question is from the line of Jason Gursky with Citigroup, please go ahead.

Speaker 11

Bookkeeping question for you and then Jim, a more strategic one. Bookkeeping question, Jay, what kind of book to bill do you need to have this year to support The commentary about return to growth in 2024, is the timing of those awards important? And then for Jim, I'm going to just have you double click a little bit on the evolve initiative and the announcement that you made here Recently with the Crescent organization and supporting Lunar Communications, Just kind of curious, from a big picture perspective, what kind of capital you're anticipating putting into an organization like Crescent and the capital that you're going to Putting into this evolve initiative over time.

Speaker 3

So let me just start with the book to bill question, Jason, essentially it's 1. Last year we ended the book the backlog at $150,000,000,000 This year, we're planning for that to be around the case maybe it's down $1,000,000,000 or up $1,000,000,000 But effectively a one book to bill Sets us up for the growth to resume in 2024. So we don't need to necessarily see the backlog. There is opportunity Forward to grow from where we are, and where we landed or ended in 2022. But right now, we're planning for that to be generally flattish And that's where we need to be to drive the growth resumption in 2024.

Speaker 2

And Jason, let me put The whole notion of EVOLVE and Crescent into the overall strategy of the company for you and give provide context that way. We've got 3 Main strategic initiatives at the company that we're driving. 1, I just mentioned is to take the fragility out of the production system, Not just for Lockheed Martin, but for U. S. Government and our industry.

Speaker 2

And we just described some of the ways that we're endeavoring to do that with government. And so that's the first strategy. The second one is, you've heard us talk about before 21st Century Security and that is working beyond the 5 defense And Digital Technologies International Defense. And that means we have to work at Lockheed Martin with a wider variety of companies, From the tech sector to laser guided weapons supply chain, companies that we may not We'll be doing current business with and they can be startups to Microsoft sized corporations. So we are structuring our company To be able to participate and cooperate and collaborate with that much broader range of partners to deliver this 21st Century security concept.

Speaker 2

And so Evolv is meant to complement what we already had. We have a ventures group, Lockheed Martin Ventures that deals with startups that have technology that are promising for our core business. On the other side, we have partnerships and agreements and arrangements with our big five Defense prime, so to speak, so Northrop Grumman, us and BAE, for example, worked together on the F-thirty 5 aircraft and there are many, many of those. But what we needed in the middle was something to work with midsized companies And companies in the technology sector to work with us in ways that really don't have a traditional History with companies like Lockheed Martin and our peer group. And so EVOLVE is now meant to be able to do joint ventures, co investments, commercial arrangements With midsized to large companies outside of our normal sphere, so to speak, and deliver on new capabilities for space exploration and also for National Defense.

Speaker 2

So Crescent is the business that will work with others outside of Lockheed Martin To figure out how to finance and then how to implement and how to sustain lunar services, right? Everything from Transportation on the surface to basically the Uber for the moon, if you will, at the end of the day to the communications And positioning and navigation systems that you need to have on orbit around the moon so that you can actually operate on the lunar surface with either robotics or with humans. So Creston is designed to do that. The capital that we will deploy to build that type of business We'll be more creatively sourced, right? It will not just it will not come out of the disclosure statement that goes back to the DoD or NASA into our rates, Right.

Speaker 2

It's going to be independently sourced. We may contribute. Our partners may contribute directly, but they will be outside the rate structure So that we can get the full benefit of those investments over time and also create it more creatively finance them and partner with others So that's the concept. That's why we're doing it and we intend to grow it without necessarily burdening the CapEx disclosure statement and And ramifications of that to the company.

Speaker 3

And by breaking it out of the business area, business say structure, it enables These ideas and these pursuits to really operate at a speed and agility level, it probably wouldn't otherwise be available to them working within the bureaucratic Structure that we have in our business areas with the multi all the policies and procedures that we have. And so we give them a little bit more flexibility To operate with some speed and as Jim mentioned, the ability to pursue co investment by others as well.

Operator

The next question is from the line of Scott Dussle from Credit Suisse. Please go ahead.

Speaker 12

Hey, good morning. Jay, if I were to model Q2 through Q4 Space Systems sales Based off of Q1 and just adjust for the increased number of weeks on those future reporting periods, I think that would get to around $12,800,000,000 in space segment sales for the year versus the guidance midpoint of $11,600,000 So basically 10% higher than what you've guided. So curious if you could comment on what prevents that type of upside case from happening or to ask another way what Volume headwinds are in the remainder of the year relative to the Q1? Thank you.

Speaker 3

Yes. It's a good question, Scott. And as I mentioned in my remarks, they had excellent growth from Next gen interceptor classified programs and national security space areas that you would expect. But they also had some growth and I mentioned that there was Some protected comms programs, Orion, fleet ballistic missiles, those are programs we're expecting to be a little bit more steady state. And So they just benefited from some program timing here in the quarter.

Speaker 3

And just to give you an example, protected comps was up 50% in the quarter. We're expecting that to generally be flat for the year. Orion was up 20% in the quarter. We're expecting that to generally be flat for the year. FBM was up about 20% in the quarter That was pretty much the full year's worth of growth all in the Q1.

Speaker 3

And so it's just these things all came together here in the Q1 That really caused this growth of 16%. We expect these programs I just mentioned to really normalize in the balance of the year. Will continue to see some growth on some of these other programs. I will acknowledge there probably is some upside to their sales, but it's not $1,000,000,000 You're talking anywhere between $100,000,000 to $200,000,000 Probably upside to where we are today.

Operator

The next question is from the line of George Shapiro with Shapiro Research. Please go ahead.

Speaker 13

Yes. Jay, I wanted to pursue some of these other income numbers because they were actually a big part of the Large beat this quarter relative to my expectation anyway. So if you look at the other net That's in operating income. It was $2,000,000 You kept the guide at minus $325,000,000 for the year. So what happens in the subsequent quarters?

Speaker 13

It's all negative 100 plus or is there some quarter that's abnormally high? And then, somewhat less, but other non operating income was $49,000,000 You disclosed $29,000,000 of that Was the venture stuff, what was the other $20,000,000 And I left out the $29,000,000 in the other net number, which was for deferred Compensation adjustment.

Speaker 3

Okay. Let me so George, fair question. Just you may tackle the big question the big picture In terms of what happens for the balance of the year. Just on the investment gains, obviously, we saw that in the quarter. We talked about that being $0.18 Implied because we're not changing it implies that we're reversing the balance of the year.

Speaker 3

So we'll see. We'll give that an update In the Q2, update, we're halfway through the year and make a call on that. The other element we just were speaking about a little bit in terms of our investment in LM Evolve, We have some of those investments increasing in the balance of the year as well. And then there's just residual corporate costs that we have flowing through. And so all those Things are allocated.

Speaker 3

We'll monitor those throughout the rest of the year and see whether or not again, I think we'll just make an assessment halfway through the year on where we are on those things. The extent there's upside, we'll make an update at that point in time.

Operator

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

Speaker 14

Yes. Hi, good morning. Jay or Jim, I wanted to see if you can provide a little more granularity on the TR-three and the F-thirty five program. Specifically, it seems like that program's faced ongoing delays and other headwinds in terms of adoption and implementation. But How is that impacting deliveries this year?

Speaker 14

And how do you see that timing of that getting back on track?

Speaker 2

Yes, Ken, it's Jim. In the round, We're in the very late innings of it fully implementing this Tech Refresh 3. The point of it is really critical and that is, it gives us much, much greater capability to really make the F-thirty 5 a true edge compute node in an open architecture, Internet of Things construct and system. And so the three elements of edge compute node in a 5 gs system are data storage onboard the vehicle, Data processing onboard the vehicle, multi path ability to get back to the cloud, right, defining the cloud as to whatever your Enterprises. And the TR3 upgrade provides all of that.

Speaker 2

It's a coming together A number of components, I'll call them and subcomponents, which is pretty intricate, Fairly leading edge for the aerospace industry to accomplish and it's being done. So There have been some delays in some of the hardware and software, but we're really in the very late innings of getting this all together. We're literally in flight test right Now, and will we wrap all that up by October or December, etcetera? We've got to see what the test results are And work with the government to define exactly when everybody is ready to go and implement in our production system in the factory those software loads. And that's where we're at now.

Speaker 2

So I would consider this extremely high degree of difficulty dive, and we're going to make sure that it's done right And we can produce at rate in our Block 15. So That's what we're up to and we're working closely with the joint program office to define that and make that successful. And we are seeing the demand for the aircraft both from the U. S. And international customers really kind of blossom here lately.

Speaker 2

So I think we're in good shape on the program.

Speaker 1

All right. Lois, this is Maria. I think we've come to the top of the hour. So I'm just going to quickly turn it back to Jim for any final thoughts.

Speaker 2

Thanks, Maria. As we conclude, I'd like to say thank you to our 116,000 employees here at Lockheed Martin for their commitment to providing The 21st century digital and physical technologies that will help them deter conflict and win if they have to. So thank you all again for joining us today. We look forward to speaking with you on our next earnings call in July. And Lois, that concludes our call today.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT and T teleconference service. You may now disconnect.

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