Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Okay. Hello, and good morning, everybody. This is Noah Poponak, the aerospace and defense equity research analyst at Goldman Sachs. Thanks so much for joining us here at the industrials and materials conference. Out of the aerospace and defense sector, we're going to start a session here with Lockheed Martin. With us, from the company, is Ken Possenriede, the CFO. I also have Greg Gardner, from Investor Relations, who's worked with us to get this going. So Lockheed team. Thank you so much for being with us. I think Ken has a quick disclosure slide he wants to read through, and then we're going to jump into some questions that I have for Ken, and I'm able to field questions from the audience through the webcast link here. If you have any, just send them in through that. Thanks very much.

Thank you, Noah. It's Ken. Glad to be here. I hope you're safe. Hope your family is safe. And for those out in the audience, I hope you're safe. We're going to beat this thing. So as Noah said, I do have a disclosure to make. So if you could -- if you have it up on your screen, just click on the second page. That's our forward-looking statement. So statements that I'll make today that are not historical facts. They're going to be considered forward-looking statements, and I'll be making them pursuant to the safe harbor provisions of the federal securities law. And actual results, they may differ materially from those projected in the forward-looking statements. Please see today's -- or see our latest 10-K that was recently filed for a description of some of those factors that may cause actual results to differ materially from those in the forward-looking statements. So thank you for that. And Noah, over to you.

Okay. Thanks so much. So I thought we'd start from the top down with the things happening in the macro, things happening with the defense budget and then move into your business segments, the specific programs that move the business, then we can talk maybe margins, balance sheet and cash flow after that.

Sounds good.

So yes. So starting with the defense budget, there is certainly a discussion starting to percolate in the industry. Hey, if the U.S. government is having to spend what it's spending right now from a stimulus perspective to combat the economic impacts of the coronavirus, shouldn't defense investors start to be concerned that a few years down the road, when they'll need to then go through another budget balancing exercise and couldn't defense be a bill payer in that? There's another side of the coronavirus, second order effect discussion, which is increased tension in relations with China. And certainly, you look at statements from the Pentagon and over the past several years, and it seems like what China has done from a military perspective has been a big, if not maybe the biggest, driver of growth in the defense budget over the last several years. So I know Lockheed is really close to the hill. You guys are usually pretty on top of these things. So what are you hearing and seeing from that perspective as those 2 things play out moving forward?

Okay. Thanks, Noah. Yes, a lot there. So you're right. The United States government is flowing a lot of money into the economy from a stimulus perspective, increasing deficits. I think as an American taxpayer myself, it's the right thing to do to reinvigorate things and keep things going while we're in this conundrum that's going on. But just related to us, we were fortunate -- if you think short term, we were fortunate the President submitted their FY '21 budget in February. And as everyone expected, it met the Bipartisan Budget Act of the 2019 targets. And it's generally flattish, $741 billion versus $738 billion. But I think what you really need to look at is our portfolio. And you start with our backlog and as I mentioned a couple of weeks ago on the quarter call, we ended the quarter at $144 billion of backlog. That's the seventh quarter in a row that is a record backlog number for us. You probably saw in the press, Noah, not too long ago, we got a large PAC-3 order for over $6 billion. Parts of that are a fiscal year buy. So the United States government, which are pull aheads, which is fine. And the rest of it is FMS customers, which I'll get to in a second, which is an important element of our portfolio. Probably going to take our backlog up. We're going to grow backlog this year. And if things go as we think they're going to go, we're likely going to end the year at about $150 billion of backlog, which is another record. So we're fortunate to have that going on. If you go to the largest program we have, which is roughly 28% of our sales, which is F-35. What we saw recently, in not-too-distant past, was 20 airplanes got added to the budget from the FY '20 budget submission. We've also seen other areas of support over the year. So we see that happening. And why do we see that happening? If you look at the Lot 12 through 14 prices, what we negotiated, just pick the conventional aircraft, the A variant. We got that price down below $80 million. So we think we have the price of the aircraft at a very competitive price now. Very similar to fourth generation prices. You get fifth generation capability. We've been discussing our sustainment. So you now go to, how do you sustain the aircraft? We're committed to getting the flight per hour down to $25,000 per flight hour by 2025. And the availability of aircraft to 80%. In fact, so we get out of the arduous negotiations that occur on an annual basis. We offered in a white paper, a performance-based logistics concept that has intrigued our customer, and we're working towards, hopefully, getting an RFP to submit to that and hopefully get that behind us. And that's important because all the onus will be on the supply chain, meaning Lockheed Martin and its suppliers, and we will take the risk of performing and we'll get the reward for performing. So we feel good about F-35 going forward, even with what's going on with the deficits. And if you go around the horn with other programs, pick Missiles and Fire Control, I've talked in the past about the strong demand we've had for Hellfire, GMLRS, JASSM, PAC-3, FAAD. I've talked about the buildout we have been doing from a capital standpoint. A lot of that driven by Missiles and Fire Control and we're seeing strong demand continue in the United States and our partner countries. In rotary emission systems, I'll just focus on Sikorsky. We have a strong presence there with our combat rescue helicopter. We're now getting that into production. Same with presidential helicopter, moving that out of development into production. And the CH-53 program, which is the heavy lift helicopter, still in development, but now we're focused on production and moving that forward. Last year, we settled Lot 2 and Lot 3 for 12 aircraft. This year, we're in the midst of negotiating Lot 4 for 4 aircraft, and we'll continue performing on that program and continue to move forward on production lots on that program. And then we also have keen interest internationally for the -- from Israel and Germany. And we're hopeful to get those contracts swayed in our direction. And lastly, space. Strong presence there for us classified. I don't believe, based on the threats that you mentioned, whether it's China or other potential adversaries, I don't see -- we don't see the classified portfolio diminishing. We only believe that's going to grow. You have human space flight. That might be something that the administration -- the future administration wants to take a pause on, but we have a strong presence there. We'll continue to execute and perform on. Pick the next-generation of SBIRS, OPIR, growing, performing well. So on balance, we think we're doing well. And the last point I'd make is, if you think back to 2008, when you had the financial crisis, roughly 15% of our sales were international. They're now closer to 30%. So they're double. And why do we think that's important? There's less reliance on the United States government. And if you look at where our chief customers are internationally, they're generally in hotspots. Look at the Middle East, the Kingdom of Saudi Arabia, the UAE, Israel. We believe, going forward, even with tight budgets that based on where they are from a sovereignty standpoint, their national interest is going to warrant them to continue spending on weapons and products to defend themselves. And we believe we have that portfolio to do that just for them. So I agree, they'll be a bill payer. There'll be some pieces of defense that pay for that. But I think overall, on the whole, looking at our portfolio, our backlog, we think we're pretty well positioned to wear out that blow.

Thanks, Ken. That's a lot of detail and really helpful. If I look at Lockheed Martin's growth performance through the last defense spending downturn. So 2008 to 2015, authorization is down every year. Obviously, there's a lag to outlays. But in that window, Lockheed Martin at the aggregate corporation level actually had flat or even low single-digit organic revenue growth every year, except 1 year, and that 1 year was down low single digits. Some people would say, well, hey, the F-35 was ramping. So it was all F-35. But if you actually look segment by segment, it's kind of true in most of the segments. Looking forward, if I gave you the scenario where authorization flips to being down 3%, 5 years in a row, and then eventually, outlays are down 3%, 5 years in a row. Can Lockheed Martin, in aggregate, have positive organic revenue growth, down 3% outlay environment?

I think the answer is yes. And it goes back to the backlog comment that I made earlier. So I think if defense budgets are declining, we basically can weather that out with the 100 -- end of this year, I'll speculate and say, we'll hit $150 billion of backlog. So think about we're going to do $63.2 billion of sales this year. That's basically 2.5 years of sales for us in our backlog. So I think that will help us weather things out. And I also believe you have to go back to the portfolio and look at where we're serving our customers and I think it also goes back to the point I made about 30% of our sales are international. And they're in spots where I think there is a growing demand for our products. And I'll just give one example and you may want to talk about this later, but F-16, we thought when we delivered the last Iraqi aircraft a couple of years ago, basically, F-16 got pushed out of Fort Worth, didn't have a home because, frankly, we didn't have any customers. We have -- we now have Bahrain. We now have Slovakia. We now have Bulgaria, and there's others coming. And I won't be redundant in case you want to talk about that later. But I think that will continue. And I think that's got a lot of benefits for Lockheed Martin. It's a great fourth generation aircraft, but it will also be a stepping stone for some of these countries to buy the F-35, which today, roughly 50% of our sales for F-35 come from international customers. So I do believe we can weather that downturn if it comes.

Okay. That's helpful. Well, let's step into aeronautics and -- to talk about some specific programs. So maybe just keep going on F-16 there. I mean from my bottom line question on it is just, where -- what does the production rate get back up to? And what can the annual revenue contribution get to, overtime?

You bet. So yes, I rattled off 3 countries. So the first one, Bahrain, is for 16 aircraft. We should be -- so we're building the airplane in Greenville, South Carolina. That's where our production line is. We will deliver that first airplane in 2021. Then I believe in 2022, we'll deliver 8 aircraft. Right behind Bahrain is Slovakia for 14 aircraft. And then right behind Slovakia is Bulgaria for 8 aircraft. And we have a variety of other countries out there that are either imminently going to make an order or we're in discussions. And so there's -- we have a North African country that's keenly interested in purchasing the aircraft, and it could be upwards of 25. Indonesia, we're having conversations with Indonesia now regarding the F-16. UAE is interested in upgrading their current aircraft and also buying new ones. The Philippines could be upwards of 12. Croatia is interested. And then the 2 big ones, Taiwan, which is actually in our order plan for 66 aircraft and then we're pursuing India where we've committed -- we branded it the F-21, which is specifically tailored for the Indian Air Force and the Indian pilot, teamed with Tata, where we'll build the initial dozen or so aircraft in Greenville and then move the production line to India and build the aircraft in India. So just sticking with Greenville, in the foreseeable future, we'll ramp up to a little more than one a month. But these countries that I rattled off and with some modest capital to expand the line in Greenville, we could get up to 3, 4 a year. So you could see us delivering later in this decade, say, in 2027, we could be upwards to 3, 4 a month, which is exciting.

Okay. Yes. That's pretty amazing to see the reinvigoration of the product line there. And then on the F-35, always a lot of investor debate around when the growth rate peaks out there. Maybe just give us -- remind us, deliveries this year, where you currently think deliveries peak? And then on the sustainment side, how much growth and how many years of growth on the sustainment side?

Sure. So right. Right now, what we've stated in 2020, our plan is to deliver 140 aircraft. The only thing I'll caution you on is recall for those that listened to our earnings call -- first quarter earnings call, we are likely seeing supplier delay, supplier impact due to COVID. And we are now assessing that and looking at our own production line regarding the viability, the likelihood of delivering 140 aircraft this year. We're still in the throes of doing that negotiation. But that was the main reason why we took our guidance down for the year in the April call by $375 million. That was all aeronautics, and it was all F-35. But right now, we're still looking at delivering 140 this year. It's roughly 160 next year, and then we'll get up to about 170 in 2022. And we're building out capacity at Fort Worth and at our FACOs in Italy and Japan to get up to about 180 aircraft. As I mentioned before, we are pleased. Our customer is pleased with the price point we got to. I'm talking specifically for the A variant, below $80 million a copy. There is keen interest across the globe for this airplane. We have the partner countries that are still committed to the aircraft. In fact, the one partner country that did not buy any airplanes was Canada. We're in the midst of putting a proposal in, in a competition for 88 aircraft, I believe it is, for Canada. We feel good about that. That will offset some of the Turkish aircraft since they are no longer on the program able to buy airplanes. Our FMS customers, we have a few of them right now. Israel is using the product, frankly, more than anybody else. I think what we see is they're keen to buy more airplanes. Japan put their money where their mouth is last year and ordered an additional 105 aircraft. And some of those B variants that take them up to 147 to be the second largest buyer of the airplane. Korea is in for 40 right now, interest there to purchase more. Belgium was our latest FMS customer, 34 airplanes. We're in the midst of some competitions in Finland and Switzerland, which should be probably in the middle of this decade, when we'll know, a little -- probably a little earlier than that. But 2025, let's say, we'll start producing those airplanes, if we're fortunate enough to win. Spain has interest and there's other countries out there that are interested. So everyone's generally pleased with the price of the aircraft. So then it's how much is the cost to sustain the aircraft? And that's frankly where we've been focused. The Aeronautics team has done a great job of driving down the cost of sustaining the airplane. We have committed to drive the price of sustaining the airplane per flight hour to $25,000 by 2025. We're committed to get the availability of the aircraft to 80% in that time period. And in fact, what we've done is put in a white paper to initiate a performance-based payment -- sorry, performance-based logistics program concept to our customer. It's in the stages of being a white paper. And they're intrigued, and we're hopeful we'll get a RFP from them that we can then be able to perform on. So we'll see where that goes. This is a concept where we will be offering value. So we'll have an interesting negotiation with them. In terms of where sustainment is going, we think this is still an extremely strong growth area for us. So if you think about how many aircraft that are in the fleet, we're approaching 550 airplanes. And I'm going to step back a second just to talk about development and how it relates to sustainment, even though the initial design and development program is over. The customer has turned us on for what we call follow-on modernization, which is basically to help continue to upgrade the program. And there'll be a point in time where there'll be an interest by the United States government and its partner nations to cut that development technology over into aircraft that are already in the fleet. And then ones that are being built today. So if you think about sustainment, you have base activation. We've only activated about half the bases. So we have a lot more to go probably out to 2025, and that's for the bases we know of today. There's likely to be more activations in the future. If you look at the sparing that we have done, that's basically the concept I talked about of negotiating on an annual basis to get those spares. Because of the number of aircraft that are going to be in the fleet, so think about the program of record 2044, as you start ramping that up, you're going to need a lot more sparing. It's just inevitable. And that's where that PBL concept could come into play. There'll be repairing of aircraft. That's inevitable. And then we think a big driver going forward, middle of this decade and beyond, will be the modernization concept. So think about what we do with F-16s with our international customers. We'll be doing that with the United States government and its partner nations on F-35, and that will continue to grow. So we see sizable growth opportunities in sustainment.

So how far out into the future do you have to go before the models, say, the total F-35 program revenues are starting to flatten out?

I think if you're talking in total, I think it's a ways out. So I think round numbers, I don't think development, as we see it today, is going to increase. But it's not going to decline. If you asked me this 3 years ago about the wind down of SDD, I would have thought there would be very little development on the F-35 program. And it's equal to or greater to the sustainment -- or excuse me, the SDD sales we had in the past. So I don't see that declining. I see that staying where it is. Production ultimately is going to flatten out. There is no question. The debate will be, how much are the prices per aircraft going to come down with inflation and with adding in this technology? It's going to be difficult for us to lower the price of the aircraft. So I think when you're up to the 170, 180 aircraft period in the middle of this decade, you'll start to see production flatten out, just generally. But we still see sustainment growing. And one point I'd make is, not many folks understand this, but that $25,000 per flight hour that's in 2012 dollars. And I'm not suggesting that it's going to ramp up dramatically. But to get to 2025, the benchmark is in 2012 dollars. So we have to escalate that to some extent to get to current year dollars, and then ultimately, then year dollars. But I think with the modernization, the sparing that's going to be required, the continued activation and the repairing, with or without a PBL concept, I think you're going to see sustainment continue to grow.

Okay. Let's pivot over to RMS. At a high level at the segment, the growth rate has been slower than the other segments for a bit. So just big picture, when can it catch up? Is it just a matter of the large helicopter programs that you mentioned earlier, ramping up to their full rate? Or is there something else that's a big mover in the segment?

Yes. So a lot of it -- you got a couple of things going on. So let's talk -- put Sikorsky aside just for one brief second. You have a couple of things going on in what I'll call heritage RMS. We won the Sentinel program, Radar program, that is going to morph into multibillion dollars for us. So you'll see growth there. You'll see growth in the Canadian surface combatant program through the decade. It's a long program from a production cycle standpoint. Little slow -- small sales at this time, but it will ramp up and grow. You'll see growth there. Our training business, you'll continue to see growth there. And in our C6ISR business, Cyber, other things that they do there, you'll see growth there. But I do think the biggest growth engine is probably likely in Sikorsky. And you've got a couple of things going on there. Our combat rescue helicopter is now into production. It -- right now, it's over 110 aircraft. We'll see where that goes. And we'll do a little less than 10 this year, and then we'll start hitting mid-double-digit in the '22, '23 time period. You've got presidential helicopter that's now into production. So you'll start seeing some growth there. CH-53K, it's in development -- it's concurrent development and in production. Slow growth now but that'll start ramping up. You also have, as I mentioned, the international interest with the Germans and the Israelis. And if we got that, you would see some growth there. And then it's the 2 big programs that we're competing on that we just got down selected: FARA, which is the light aircraft; and FLRAA, which is the medium aircraft. We feel really good about our Radar -- S-97 Radar -- Raider, excuse me, offering for FARA. And Defiant, we feel really good about the technology that we've offered there as well for that program. And those programs for FARA, our program of record is $15 billion. And for our Defiant, for FLRAA, it's $80 billion. So that's where a lot of the big growth will come later in this decade. And if things play out, as I just described, you'll see Sikorsky over the next, say, 13 years. It'll double in size.

That's -- what kind of assumptions on future vertical lift you have to make to get to that?

We have to win one -- we need to win one of them.

Even if you win the smaller light, you could still achieve that statement?

We believe so. Yes.

Remind us when you'll have a final decision on FARA and FLRAA? And then also with the legacy Black Hawk, is there an air pocket in the middle with production on that into future vertical lift?

So FARA actually is after FLRAA. So FLRAA, we've been down selected. We're one of the 2 that's been down selected, and we will continue to -- in this competition, there'll be a single award. It's probably in the early 2024 time period. And then there's a milestone C decision in 2028. FLRAA, which is the medium lift, we just received a 12-month contract for design and risk reduction. We were one of 2. We got that a couple of weeks ago. And the plan of record is there'll be a single source selection in the early mid-2022 time frame. And then we'll deliver the first production unit that will happen around 2030. So that's raised basically where that is today. Regarding Black Hawk, so we're performing on Black Hawk this year, this multi-year 9. We're in the throes of negotiating with the customer, the multiyear 10 contract and you'll see that program continue. I mean, it's diminishing in size. It's still of some size for Sikorsky from a sales standpoint, from a contribution standpoint. You'll see that continue to perform and then ultimately wind down when these programs start kicking into production.

Great. If we hit MFC quick, obviously, a lot of moving pieces, but it's 8 quarters in a row with double-digit organic revenue growth there. Obviously, the big question we hear from investors is just with this missile demand you've seen, does that eventually decline? Is that sort of over earning? What do you say to that? And how much longer can you hold these types of growth rates at that segment?

Just looking at our long-range plan, Noah, which is generally, for us, it's this year and then a couple of years out. We still see Missiles and Fire Control is our fastest-growing business area. And I've talked about the need for capital for Lockheed Martin. This will be a record year for us. And a decent amount of that capital is going towards expanding production lines for all of our missile products. So think of the Hellfire line is going from 7,000 now to 11,000. PAC-3 is going from 250 to 500. In fact, we think we have demand to do more than 500. We're taking a pause on that. But conceivably, we could do more than 500. We're also expanding GMLRS and JASSM as well. As I mentioned earlier, we got a PAC-3 award a couple of weeks ago for north of $6 billion. So we're still seeing demand out there for the foreseeable future.

What is the duration of the planning period that you're referring to where MFC is the fastest-growing of your 4 segments?

So it would be this year plus '21, '22 and '23.

Well, okay. All right. Sort of segueing between missiles, but then also into space, hypersonics. You guys have clearly had some early successes there. Maybe just level set us on how many programs you've won at this point? And sort of -- I know they're all in development. So how do we think about how big they could be in production versus development, and why is Lockheed seemingly outperforming here?

Yes. So we continue to see hypersonics, the programs. It's a high priority for our customers. And no, what you're talking about for everybody's benefit is, this is -- these are the strike hypersonic weapons that not counter or defensive hypersonic weapons. There's really no program of record yet for the counter strike. Even though we are investing for that day to come, and we're trying to shape the market. But just on the strike hypersonics, we have -- we won 6 programs and one we just got terminated on and that's HCSW. That's the hypersonic conventional strike weapon program out of space. Customer basically told us that it had nothing to do with our performance. In fact, we were performing flawlessly, but they just started looking at, as I've stated in the past, they will start prioritizing and necking down. But we've got 5 programs. So think of that as Air-Launched Rapid Response Weapon, that's what we call ARRW. That's out of Missiles and Fire Control. We have the Long-Range Hypersonic Weapon. We have the Hypersonic Air-breathing Concept Weapon. We have the Intermediate Range Conventional Prompt Strike weapon, and we have the Tactical Boost Glide. And this year, even with HCSW being terminated, we still see sales, not quite $1 billion, but north of $900 million. And all cost-plus programs, dilutive margins, but that's okay. But we're now starting to plan for first launch, critical design reviews, where we'll start to see the customer continue to neck down. But we like our portfolio. Our customers are very pleased with the direction of our programs. And if we're fortunate to have some of these programs go into full rate production, you're likely going to see these things turn into multibillion-dollar production run. So we're pleased with that. You asked why is this occurring. I'll say, I think what we have done is we had the foresight, and I give the team credit for this. We put, basically, an integrated team together, Space, Aeronautics and Missiles and Fire Control, doing an integrated product team of one face to the customer. And frankly, the customer, in some ways, is looking at things jointly as well. DARPA, the Army, the Air Force and the Navy are coming to us as one voice as well. And I think we've done a nice job shaping things for what they want and working jointly with the customer and bringing the strength of one Lockheed Martin to solve their problems. And as I mentioned earlier, that's on the strike weapons. If you look at counter strike, we're trying to do the same thing, but this time, we'll include RMS.

Got it. We're getting close to running out of time here, but I want to make sure we touch on cash flow, because cash flows are important.

They are.

And there's -- despite how strong your cash flow has been and continues to be. There is just the investor question of its growth rate, call it, over the next 5 years because of the moving pieces of pension in particular and whether or not you can grow cash flow every year for the next 5 years or if there's going to be a down year or 2 in there. So my real question is, can you grow cash flow from operations year-over-year, every year, the next 5 years? And to the extent you don't want to answer that directly, if you could just maybe speak to the major moving pieces because I know the pension pieces are moving around as asset returns and interest rates move around.

Okay. Yes. I don't think we could go as far out as 5 years just because of the point I made earlier about our visibility from a long-range plan standpoint. But I will say this, we feel really good about cash this year. And I stated on the call, pre-COVID, we were very confident that in all likelihood, we would have taken our outlook up from our plan of record for cash from operations of $7.6 billion this year. So even with -- even if there's a concern about pension, we are not required to make a pension contribution this year. We feel good about the cash that we're deploying. We feel good about the capital that we're spending, feel good about the debt load we have. And I've mentioned earlier that we're constantly monitoring our debt, doesn't make sense for us to look at [ refiling ], doesn't make sense for us to do some kind of call-in or just a straight offering with these appealing rates. So we feel really good about this year. In fact, with what's going on with COVID, you've had the payroll tax payment forgiveness this year, that's worth $460 million to us this year, which we have to pay over the next 2 years. So think of that as $230 million next year, $230 million in 2022. The customer changed our progress payment rates from 80% to 90%. Probably saw in the press, Noah, that we've committed to flow $450 million of that to our supply chain. We've done that. We're going to continue doing that for the foreseeable future. And it's likely at the end of the year, if we're still in this COVID world or if this thing reemerges and we're in this COVID world, we will probably look at paying down accounts payable at the end of this year to give money to our vulnerable, distressed and small suppliers. Rolling into next year. So our plan for pensions was predicated on a 7% return this year. We're not seeing that today. In fact, we're seeing -- it's like negative 3% right now as we speak. If that were to stay where it is today at the end of the year, remind everybody a little bit south of $1 billion of pension contribution required in 2021. We see a headwind there of about, call it, $300 million, give or take. So even with those 2 headwinds, meaning the pension, added pension contribution, and the payroll tax from this year to next year of $230 million, we still feel good about our $7.7 billion of cash from operations and that's after the pension contribution and after the payroll tax payment. If you go out to 2022, that headwind on pension would be roughly $500 million and the payroll tax headwind is $230 million. The only point I'd make to you is recall that we talked about the R&D tax change, where today, we expense research and development costs out in 2022 based on the tax law from a few years ago. That's when it kicks in where we have to amortize our R&D expenses. And I think I talked about this in the January call. I didn't get a question on it in the April call because it didn't come up. But I talked about, with that R&D tax impact of about $1.2 billion, $1.3 billion, we'd be about $6.5 billion. It looks like based on further research, if the law were enacted literally as it's written, which means not just IRAD, but R&D contracts, the amortization impact in that year would not be $1.2 billion, it would be about $2 billion. So we would be at about $5.8 billion. Now we're working with our government affairs folks and folks on the hill to try to repeal that or at least get it to the point where it doesn't make sense for you to amortize expenses on research and development contracts, but if you want to amortize any cost, make it IRAD. And if it's IRAD, we feel comfortable with the pre $7.8 billion number we talked about. But if it's literally the full amount that has to be amortized, it's about $5.8 billion. So I know that was a lot there. But we feel good with $7.6 billion. We feel good with $7.7 billion. And pre-tax change, we feel good with $7.8 billion in 2022.

Pre-tax change, you feel good on $7.8 billion on 2022, even though it was going to have an incremental pension contribution headwind before asset returns and interest rate movements. Now that will be even larger plus the $230 million of payroll tax payback. Even with all of that, if you don't have that R&D piece, you still feel good about the $7.8 billion?

We feel good about $7.8 billion. Yes.

Okay. We have -- we've gone a little over time, so we've got to wrap it here. That was a lot of detail, really helpful. Really appreciate you guys' time and being with us. Thank you so much.

Thank you. Be healthy. Be safe.

Take care.