Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

I guess we can get started. Okay. Great. I'm Doug Harned, Bernstein's aerospace and defense analyst. And it's really great to have back with us today now in person Jim Taiclet, Lockheed Martin's Chairman and CEO. And also with us is Jay Malave, the Chief Financial Officer. I think to start off, Jay, you want to say a couple words.

Yes. A couple of words. Thank you, Doug. And just on behalf of the 114,000 employees of Lockheed Martin, we're so excited to be here. We're happy to be here, excited. Just a couple of comments about today's discussion. It will include forward-looking statements. Those statements are subject to risks and uncertainties. More information, comprehensive review and discussion of those risks and uncertainties are included in our 10-Ks and 10-Q filings. So Doug, take it away.

Yes. So I'm going to start this. We'll do a fireside chat format. I think as you know that if you want to submit a question, you can do it in the Pigeonhole app there. But I think to start off with, I mean, Jim, you're coming up on your 2-year anniversary as CEO. Maybe you could tell us what you've seen over the 2 years. What surprises have you seen leading Lockheed Martin? What are the challenges you see today?

Sure, Doug. I mean I've been on the Board for a couple of years before that. So I had a really good overview of the company as a Board member and Director. But the surprises that came about, first of all, the COVID pandemic. No one saw that coming. Coincided with -- basically the day of my announcement was the day the lockdown started. So Marillyn and I did a transition period about 2 or 3 months, and I started in June of 2020. So that made it a little more complex and interesting of an entry. But what I was really proud to be part of was the response of the company to that. We had employees that whether they're online or engineering or staff that never missed a day of work all the way through the COVID pandemic because they had to be in the plant or they had to be in a classified space so they had to be at a space control room that they physically had to go to. Then the other half of the organization started working from home in literally a day's notice or 2. And our IT team got them up and running. And again, we didn't miss a beat there. So I was really proud of how the new -- my new organization responded, and that was the credit of Frank St. John, the COO, and all the business area leads and everybody getting together and making it happen. The second, and unfortunate, surprise was the invasion of Ukraine by Russia. One of the reasons I accepted the invitation of my fellow directors to come into management was that I was concerned that if we didn't accelerate 21st century technology, the defense enterprise, that we might have a less effective deterrent going forward to situations like this. And unfortunately, the Russian administration decided to act. We've been able to be supportive as a company in a country for the U.S. to assist Ukraine in this. But that was something else that I was hoping wouldn't happen and didn't anticipate, was an actual land invasion in Europe of great power into another independent country.

Well, if you look, I would say, more internally in Lockheed Martin, like what did you -- once you became the CEO and you started to -- I'm sure you've got more and more windows than you perhaps had on the Board.

Sure.

What did you discover that might have been sort of additional opportunities for the company or maybe some things that could be difficulties you needed to deal with?

Sure. So I think the opportunity, which was huge for us and is huge for us, is the capability of this company. There's 60,000 engineers and scientists in Lockheed Martin, 60,000. The brainpower is unfathomable. The capabilities in manufacturing and technology development, software development are incredible. The place where I thought we could do something maybe a little different was to coalesce those capabilities from these 4 business units that we still have in a way that was much more integrated across those business units and that could actually deliver upon this notion that we call 21st Century Security, which means take the most effective sensor, manage data, process and apply AI across platforms and across what our customers call domains, which is space, land, sea, air, undersea, cyber, et cetera, and really network the platforms and capabilities that our company and others have to accelerate our deterrent effect and be able to prevent war more effectively going forward by using those networking technologies and those 21st century digital skills that we develop, but more importantly, that the commercial industries have developed even faster. So we're trying to leverage those, too. So the scope and scale of the capability of Lockheed Martin, I was really impressed with and learned a lot more about, and I'm still learning.

You mentioned the Russian invasion of Ukraine. And how have you seen that in terms of what I would call first direct impact? I know you're one of the makers of Javelins. I mean is this something that you expect to see -- should we expect near-term benefits on the top line? Or is it more something that it kind of changes the tenor in a sense of how we think about defense longer term?

I think the most important impact is how the world thinks about national defense for the long run now. We've been in, thankfully, a peaceful period of time. By and large, there hasn't been a great power -- direct great power conflict in decades, even maybe go back to Korean War, et cetera. There have been tragedies and hot spots and terrorism and things like that. And those are all awful. But great power conflict hadn't shown itself in many, many decades in the world. It's showing itself now, and I think the world's recognized that, especially in Europe, and that's going to translate into Asia, that autocratic governments may opt, and one has opted, to use force and cross-border invasion to achieve their goals. I think the countries in the free world don't have those intents, but we've got to defend ourselves against those that might. So I think the awareness that this is not a safe world and it's getting less safe is the main outcome of the Ukraine war for our industry and for Lockheed Martin. And Jay can give a few comments on specific programs and things that we will meet the need for. But those are fairly modest in the great scale of things. But I think what's more important is national defense is elevated as a priority around the world. But Jay, do you want to add a few things?

Doug, particularly for us, we're more of a long-cycle business. So this is something that, from a longer-term trend, we'll see benefits. From a revenue perspective, conversion, you're looking a few years out before you really see any type of impact. I think the item to look for us would be really just keying in really backlog is where you probably will see things increase first and then drive into revenue over a number of years. But to Jim's point, it's more of an elevated view and more of a priority from a national defense spending across the world now than it was before. And so we should expect a longer-term trend. Again, when you look at specific programs, there's certainly interest in missile defense, tactical missiles. We just saw the other day with President Biden with HIMARS and things like that, which is a Lockheed Martin program. F-35, there's a lot of, obviously, interest there, Germany, Canada, on top of Switzerland. And then F-16 is another one where we've got 128 aircraft in the backlog today. But again, we're starting to see renewed interest there. And we're having -- starting to have dialogue with countries that we would not have expected to have that dialogue 6 months ago.

Now with the Russian invasion of Ukraine, it was pretty coincident with the President's budget coming out. And when you look at the 2023 budget, what are your thoughts on how that sets up for Lockheed Martin?

There's an ongoing process that starts with the President's budget, Doug, obviously. But our engagements and interactions with leadership on Capitol Hill and elsewhere that have a big role in this process give us some, I think, pretty high confidence that, that budget is going to increase as it goes through the legislative process. People are handicapping what the numbers are. But I do think it's going to increase materially and also that some of our programs, which are on unfunded priority list of the services, are going to get addressed, including the F-35. So we're very confident that, that budget is going to elevate.

And then when you look around the world, I mean, you've talked about it before, but I mean -- and Jay, you just referenced potential F-35 opportunities. We've seen the German decision. When you look at Europe, if you look globally, I mean, as we think about this, in some sense, the Middle East was a booming area for defense for years for U.S. defense exports. That feels like it's come down a little bit now. But Europe is obviously a lot of new interest. How do you think about sort of Middle East, European growth, and I would put Asia in there, in terms of where your export sales can go?

Internationally -- just as a reminder, 28% of our sales are international. Of that, about 1/3 is Europe. So about 10% of our overall sales is to Europe. Again, we see the renewed interest there. And maybe just a data point. If you think about NATO spending, there's been a lot of dialogue over the last probably 5 to 10 years from really with the U.S. in terms of getting their -- increase spending to 2% of GDP. If they were to get -- elevate to GDP -- to 2% of GDP, you're talking $50 billion plus of annual increased spending from where we are today. And so that's a pretty significant opportunity. Maybe we don't get all the way, but maybe we get halfway there, but still a pretty significant opportunity. As I mentioned, there's a lot of attractiveness to our platforms as well as our integrated -- other integrated offerings that we have. And so it's unfortunate being in the circumstances, but the -- there's just upside there.

Well -- and with all the activity in Europe right now, you feel like Asia sort of gets lost in this. But clearly, China is still a very important issue from a defense standpoint. How are you seeing your market opportunities in Asia?

Well, I would say a big one is Australia. There is a lot happening there. And we talk a lot about joint all domain and JADC2 and things like that. There's a big program there called the AIR6500, which is an ABMS type of program, which is significant and intended to have follow-on opportunities for land and sea as well to it. And so we're seeing a lot of interest there. And just some of the other countries as well, we continue to see dialogue, again, just around our platforms. And there's -- I think the U.S. has been pretty specific that -- you've had the Russia event in the Russia-Ukraine situation, but they're not taking their eye off the China threat. And so we talked earlier today about defense of Guam as a program, more of a U.S. program, but there's still a significant interest and pivot to investment there.

I mean would you expect that 28% number to change over time? Will we see more export sales represent a larger portion of your revenues?

It's possible. Yes, it's possible given what we're seeing today.

There's a question that came in here related to this in missiles because missiles, missile defense certainly have been very important export opportunities in the past. But we saw -- we've seen the pullback in missiles budgets in the U.S.. I mean it's up a little bit in -- it's up some in 2023, but it's off a lower level. When you look forward, are there some specific program opportunities we should be looking for, particularly on the export side for Missiles and Fire Control?

Well, I think it's a little early in that dialogue right now. I mean, certainly -- I think Jim mentioned before PAC-3, THAAD. We would expect there to be some interest. But again, it's just really early stages there. PAC-3 already has penetration in Europe. We're -- we have 14 countries that we export PAC-3 to. Five of those are in Europe today. THAAD has been predominantly a Middle Eastern export product. And so there's opportunity to bring that into Europe as well. But that's just -- it's just so early to discuss, but certainly, there are opportunities.

Jim, you've talked a lot about the 21st century war fighting strategy and how you're thinking about that. You've talked about your 5G.MIL effort, JADC2 overall. Perhaps you can kind of give us an overview of how you're thinking about that now. And how should we think about that ultimately driving revenues at Lockheed Martin?

Yes. And there will be a direct connect to future revenue. But it really has to start with what is the real product we're trying to deliver here, and it's deterrence. We're trying to deliver deterrence from an actor taking an aggressive move, as we've just seen in Ukraine, by, I call it moving the goalpost continually farther out to their probability of success. So if you think about Chinese, Sun-Tzu kind of historical strategic thought, the goal tends to be they don't act unless they have 90-ish percent probability of success in their calculation. So if we can keep moving the goalpost with digital technologies faster and farther in the future, that decision may never happen, and we'll have peace and safety and national security during that period. And we want to make that period as long as we can. So that's the baseline theory. Now we talked about platforms and their unit costs. They're expensive. We're using very high technology now, whether it's space, air, subsea -- subsurface sea, et cetera. How can we be more efficient in moving those goalposts under limited budgets, right? Whether it's Europe, Japan, the U.S., Australia, there are limits to the defense budgets. And I think the only way to drive increased efficiency while you're increasing your effectiveness is to accelerate the application of digital technologies into our defense enterprise. That's what 21st Century Security is really all about: how can we speed up and keep and make efficient, more efficient our defense enterprise to maintain the turns into the infinite future, hopefully. So the way that the commercial telecom and technology industry is doing this, in my -- that's my last 20 years of experience here, having come out of this industry in the '90s and over there, is that we develop 2, 3, 4 and now 5G wireless technology in a way that I'm convinced can be directly applied to the defense enterprise, right? How was it done? Open architecture standards-based constructs and a systematic way of going about creating that architecture is how it's done. And so what 5G.MIL is, it's the road map to get us to an open architecture, standards-based system where we can leverage these digital technologies, right? So that's the goal of it. The revenue benefit is -- the way to achieve this is not all at once. It's going to be incremental. And you have to start with the .MIL, which is what are the platforms and systems and communication networks we already have in defense and how can we link those in the most effective and logical way going forward. And that's what we call a technology road map. So for a mission, we want to have better air to air defense and capability in fighter jets. What we need to do is start networking the fighter jets together that we already have. And then we'll introduce NGAD into that. We'll introduce the F-18 into that. So what we're doing at Lockheed Martin is being a pathfinder to say, "Look, did you all know in the Air Force that the F-22 data link and the F-35 data link both made by Lockheed Martin aircraft are incompatible?" We made them compatible. Now those aircraft can trade data. So 5G.MIL and 21st Century Security is all about data. And it's data definition, data sensing, AI application, prioritization and then transmission to make our defense enterprise more secure. The benefit for Lockheed Martin is because we have so many of the core platforms in all of those domains, whether it's satellites or Aegis fire control systems on ships or submarines, metal management systems, and the F-35 will be the cornerstone of this, we will make our platforms compatible with this open architecture first. We'll demonstrate that we can do this, and we have, to the DoD. And then we'll get the head start, and our platforms will become more valuable and more effective pound for pound, dollar for dollar than our competitors' platforms. And that's the real benefit for revenue and ultimately for the shareholder of our strategy.

Well, let's switch over to one of those platforms, F-35. So over the last decade or so, F-35 has been kind of the single-biggest driver, I would say, for revenue growth and -- at Lockheed Martin. When you sit here today, we've seen the rate drop, I think it would be a peak rate of 156 next year. That looks like -- I mean, from our standpoint, that's sort of in there because you're already in production, the 156, and probably in the following year. But we've seen this cutback in the U.S. budget down to 61 in the '23 budget. How do you think about maintaining that 156 rate? Clearly, there's new international demand. That takes a little bit of time to negotiate and come in. So can you sort of help us think through what's that trajectory, at least on the production side, look like for you all right now?

Yes. So I mean we still feel generally comfortable with this 156 rate. And to your point, Doug, the international player in terms of bridging any gap that ultimately if there is a gap created. Just as a reminder, while they did put in for 2023 budget 61 aircraft, they also put in 19 additional aircraft in the unfunded priority list. So between that as well as optionality and flexibility on some of the international demand, we think we can hold that schedule. It becomes more tricky because when you have different customers, there's different configurations. But nonetheless, we think between that international backlog and where this will end up gives us a pretty good platform to hold that production schedule.

I mean it's not -- because it's not like these are sort of fungible airplanes either. And so what do you see? I mean I always think of it roughly kind of a 3-year lead time to cut metal on a new order. But I mean, what is it for F-35? Is it about that time frame? If Germany came tomorrow and said, "We're done." Here's -- negotiated a contract, how long would it take to deliver one?

Yes. You're talking a couple of years.

Okay. Like 2?

3.

3? Okay. Okay. Now one of the things that I think is such a big opportunity for you all is this fleet grows, sustainment grows, and you're clearly leading that effort. But can you talk about how you expect the sustainment revenues to grow when you think of the fleet growing, but at the same time, you've got to bring down those flight hour costs? How do you balance those 2? And what does it mean for growth in the program?

Yes. So that's something that we've contemplated. And I think both John and Jim discussed that last year. You take a look at what's happening, again, aircraft -- more aircraft going into service. We've reduced the cost of power by about 50% over the past 5 years. We still think there's runway to reduce it by another 35% from where we are today over the next few years. And so even with that, we believe that our long term or 5-year CAGR on sustainment revenues would be about 6% between now and 2026. And so we feel pretty good with that. As we've talked about in the past about our performance-based logistics, and we believe it's something that Sikorsky is very good at and it's done very much so in the past. We believe it's a win-win for the customer because it provides some cost certainty. It puts some of the risk on the OEM to make sure it delivers. But again, we manage that risk. We continue to drive down the cost of the sustainment and the maintenance and so end up being a win-win.

I mean where do you have to get with the customer for them to sign on to a performance-based logistics program that you are comfortable with, too? Obviously, I'm sure they'll sign up for one that slashes cost. But...

I think one of the biggest deferred opportunities, I'll call it, is for the services, which is the Department of the Navy, Department of the Air Force, the Joint Program Office, who sort of manages the F-35 program, so to speak, and industry to get together and make sure that all the costs are coming down. Because what Jay just referenced is the Lockheed Martin and our supply chain portion, that's only about 40% of the answer. The other 60%, about 10% of it is the engine, which is a government-furnished and selected equipment from Pratt & Whitney. So we want to work more closely with our engine partner to get their cost down. And a full 50% of it is government operations. It's people at Air Force bases, it's the depots that they run, it's their management overhead, so to speak, of the program. So what I've proposed and been proposing for a year now that we have an Undersecretary for Acquisition and Sustainment in place, I think we're going to get it finally. It is a joint effort to put everybody in a room that can actually address the total cost base of the program and get those other pieces down, too. And it's synergistic because if we can, as a joint team, figure out that if we preposition more spares out in the blind basis, the production -- or the flight efficiency rate will go up and the cost will go down. But gee, someone's got to invest in that inventory. Is it the government investing in that inventory? Is it us? No one -- there's no construct to make those decisions yet. So we are running, in my opinion, as an enterprise of the F-35 industry, engine and government inefficiently right now. And I think we can get significant efficiency out of the other 60% of this. And as Jay said, still grow our share of the sustainment revenue at that 6% CAGR, but bring the whole cost of the enterprise down on a total ownership basis for the government, which then makes the product more attractive again. And so -- that's what we're really trying to address here is the macro picture of sustainment while we get the growth out of our piece of it.

And just -- also just keep it in context a little bit, the decisions that the Finns made, that Germany made, that Switzerland made was more of a life cycle type of cost. It wasn't just acquisition costs. And it just goes to competitiveness of the aircraft today. And so we're trying to drive it down further. But the aircraft is performing well, and sustainment costs have actually -- we're managing those well -- quite well also.

Everything we're doing, Doug, is meant to make our signature platforms more attractive and give them greater longevity. And that's overall total life cycle cost reduction, it's better networking, it's survivability, more accuracy, those kinds of things where we can make the SBIRS satellite more effective in a mission sense. That satellite is going to either get more demand or longer life cycle. And so our products are really at the core of all of our strategic initiatives at [indiscernible] level.

When you think about these performance-based logistics contracts, I mean, generally, when they're well executed, they're very good for margin. And -- but Jim, when you talk about the hurdles here that have to be overcome, I mean, what time frame should we be thinking about in terms of when we might see one?

So our goal is that FY '23 will be the last year of the single-year maintenance contracts, so to speak. And then beyond that, that we can get at least a 5-year, what this industry call performance-based logistics or in my old engine days, we call it power by the hour. We think by FY '24, which is only 1.5 years away, we should be able to have an agreement with government to get the PBL in place. But I think it's extremely important for them, for Pratt and us to get together and really jointly address that life cycle cost. Because the drawback with government contracting vis-à-vis working with airlines and commercial space in aviation is that unless we can get a 5- to 10-year revenue commitment from the government, we can't necessarily invest upfront and repair capacity or adding another supplier to get more spare parts in a more efficient manager -- manner. Industry is constrained, and I'm trying to work with the DoD to loosen the constraints to upfront invest for the needs of the services in the government. We are constrained because of these very short contract windows, Doug, whether it's for hypersonic -- this is another example I'd give you. I'm willing to invest what it would take to build another hypersonic test cell, wind tunnel so that we can accelerate our hypersonic programs, but I would need a minimum revenue commitment from 5 to 10 years to go to Wall Street and finance that effectively. I can't get the commitment. So industries -- and it's not just Lockheed Martin. The industry is willing to invest in efficiency. It's willing to invest in capacity. But the constraints of the federal acquisition regulation limit our ability to invest and get great ROIs for our investors while helping the government. So I'm trying to tilt against that windmill too, having come from commercial industry, to let them know we can help you if you loosen some of those constraints. And the PBL is an excellent example of that.

Well, if we switch over to another platform, the F-16. I mean we've seen -- I mean, Jay, you just mentioned it, resurgence in interest for the F-16. Where do you think the -- and which I find, I mean, very attractive. I mean this used to be a great high-margin export program, particularly if you can get direct sales. I mean, where should we think of this going in terms of sort of number of airplanes? What kind of time frame could we see this growth occur again?

So as I mentioned before, we have a backlog of 128 aircraft. We -- if you go back -- and Greg and I were doing some homework before, the original program of record for the F-16 was 650 aircraft. We've delivered over 4,500 aircraft. It's just been a fantastic program. We do see, again, renewed interest -- as I mentioned before, it's a little early to say exactly where and how much, but there certainly seems to be upside from where we are with the backlog today. It is going to take us a little bit of time to deliver because we did move our production capability from Fort Worth to South Carolina. And so it's going to take us a little bit of time to start delivering and ramp up to a rate that we can support. So I would expect that we'll -- full delivery is probably 2024. We'll start having completed aircraft probably sometime next year. And then we can go from there and kind of ramp up. So we're going to be a little bit of capacity constrained for a period of time, over the next year or so, and then we'll be able to ramp up. But it's hard to give you a specific aircraft number, Doug. I mean we're -- again, our business development team is -- they're receiving a lot of interest on the aircraft.

Any sense -- can you give us any sense of where those are coming from, sort of geographically?

Well, Greece is a country that has an interest there. I mean, obviously, they like F-35s. We'll see what goes there. But they already operate F-16s. They'd like to upgrade and modernize the F-16s they have today and potentially have some more there. And so just really, it's around the world.

So a fair amount in Eastern Europe and just -- for a country that's not yet kind of qualified for the F-35, if you will, also Taiwan in the Far East as well and a couple of other nations out that part of the world.

Well, questions come in here, but also the same question probably everybody does, space, a very high-growth area. We saw -- we've seen a lot of revenue growth, but it sort of flattened out at Lockheed Martin in sort of '21-'22. What's going on there? And how do you think about this because it is the highest growth part of the DoD budget right now?

Sure. Let me just first start with '22. First of all, we just have a tough compare because of the ending of the AWE program, a U.K. program. It's about $0.5 billion this year -- impact us year-over-year. If you kind of put that to the side, we're looking at probably low single-digit growth between now and the next few years. And so we see solid growth in classified. Other national defense, we see solid growth. We won the SDA Transport Layer or a player on that. And so small satellites as well as exclusives, we're playing on. We are dealing with some ramp-downs, program ramp-downs on Next Gen OPIR and in Orion. And so we just have a little bit of drag from those programs, which has taken the growth rate down a little bit. But we are, I think, participating in some of the broader growth that you're seeing, it's just that we have these specific programs that are ramping down.

I mean one of the things I find a lot of people will look at Lockheed Martin and think of it as much more of a traditional large exquisite satellite supplier. And so now -- here we are today, we've got a lot of these -- a lot of companies -- I mean, your recently -- former company, Jay, going after -- aggressively after these small sat-type markets, a lot of new entrants even. How do you think of Lockheed Martin positioned here, which seems to be a blend of the traditional and the new?

Right.

I mean I'd also add that traditional is not going away either. I mean there are some of these highly sophisticated capabilities that need to be done in the traditional way, the large satellite and geosynchronous orbit. The next sensor, basically infrared sensor for missile launches, is going to be the traditional large-scale satellite. But what we are doing at Lockheed Martin is we're adding the lower orbits now. So we've got a midsized bus for the mid-orbit. We have smaller buses that we make for the low orbit. And for the low life cycle or short life cycle small satellites, we're partnering with others that do already have scaled production in those kinds of satellites. And so one of the other things we're bringing to Lockheed Martin now, and I think Jay's commercial experience as well as mine, we are wide open to doing alliances, joint ventures, sharing agreements, teaming agreements outside of the traditional defense space. So we're working with some of the companies I used to work with in the telecom space that were working on that space layer from the terrestrial side up. We're looking at, again, the Transport Layer as an example of how do we move data, move defense data, defense and military data, among all the layers of satellite capability and sea, undersea, aircraft, et cetera. So we're creating a mesh network, which we know has to include low, medium and geosynchronous orbits. And we're figuring out the most efficient way for Lockheed Martin to lead that as part of this 5G.MIL architecture. So we're partnering with others that are more efficient in producing certain classes of small sats, for example, than we might have done before.

Because I mean it's -- this is sort of a fascinating evolution because I think if you go back a ways, even small sats, they would be done on -- new defense or intel programs would be done on a cost-plus basis. And now it seems that many of those is much -- the bus itself is much more commoditized. And so that -- you've got -- if you consider the bus, the comms, sensors, payloads and then the network as you're talking about, I mean, it totally changes the way, I think, you think about this business and the economics of it as well.

Exactly. So we're working with one potential partner that's in the high-volume production and operation of small satellites industry and customizing -- or bringing the customization that defense needs to their bus, so to speak. So their bus doesn't have electromagnetic pulse protection. It doesn't have anti-tamper and anti-spoofing chipsets in its control system. So we need those kinds of things for our defense customer. And so what we're doing is we're saying, "Okay, let's build these capabilities in for the small semi-expendable satellite to the level that needs to be and put that into your whole volume because someday, your commercial customers are going to need that, too." And so we're actually trying to be creative when we work with partners to say, "Let's leverage your volume and put in the pieces and the upgrade, so to speak, that we need for our customers, and let's just put it all in the same production line or make it easily customizable." And we're doing this, and this is publicly announced with Intel as well, on chipsets. So we're not talking about pretty sophisticated chipsets. They'll do volume, and 5% of that volume might be for defense. But what we're now doing is we're working with them on the core design to say, "How much of that defense incremental need can you design into your basic chip and your main production line? And then that other element or 2 that we need to customize, well, we'll do that with another component or with the integrated chipset that we create, and we'll add that component there." We're trying to make our componentry needs, whether it's a small sat or a chip, into -- as much as we can to the main production line of commercial and get the efficiencies there as well.

I'll just add, Doug, that we've -- so as Jim mentioned, so we're -- we've got capability in LEO, MEO and GEO now. And so it's not just exquisite GEO type of company. The second thing I'll add is that we've -- have and are continuing to investing in onboard processing as well as our own payload capability, both RF and optical as well. And so I think that over the next few years here, we'll have a pretty broad suite of incremental capability from where we are today.

And does -- did the economics change? Because if we look at this new model, in the old days, you could look at AEHF or something like that, and you could say, okay, you kind of assign an amount of revenue to that. You could have a pretty good idea what -- assuming perform well, what margins might be. When you go to this new world where you have more partnering, where you're more focused perhaps on the network and certain components, does this change the way you think about margins going forward?

It does. In a sense, it's almost really a cultural change because you have to move an organization that's been more cost-plus type of -- that's the environment that they've grown up in and delivered to their customer to being much more cost-focused and conscious and schedule-conscious to make sure they can meet it within a specific fixed price. I think that's the biggest change for us and probably the industry as well, it's really making that shift to a fixed price environment.

Well, if you can execute well on that, that's upside in margin.

Absolutely.

Yes. Go -- if we go over to Sikorsky. Can you talk about -- well, first, I just have to ask you about FLRAA and FARA. Maybe you could give us an update on how you think of the timing of that and then also your competitive position. I'm sure a lot of people are interested in that specific thing.

Well, sure. I mean the Army announced a few weeks back that they pushed the decision to September of this year. It was early like maybe July. So it just moved a little bit. I think we've mentioned that we've been pretty consistent. We're very confident in our offering. We believe in the survivability, the capability, the maneuverability of the aircraft. And its ability to meet a mission requirement in the shortest amount of time, it's just the best platform for the mission requirements that were in this RFP. And so we believe we have the right cost point for it. And we've put forward a very competitive offering. And we -- I think in the -- probably the Wall Street community views us as the dark horse, but we're very confident in our offering.

When you look at the overall mix within Rotary and Mission Systems, I mean, you've got Black Hawk kind of coming down, you've got CH-53K coming up, I think one would like to see this as a -- if you eventually evolve to a lot of fixed price production, which can give you margins, potentially like 14%-type margins, in a mature environment. I mean, right now, you're going through these transitions. You have the FLRAA and FARA, and you've got some growth and some declines. How should we think about the margin trajectory here? And what could you get to?

Right now, we're going to be heading into really a mixed headwind because the Black Hawk is a mature program, is going to be cycling, ramping down. We'll still be plenty of volume on the platform for a number of years even with FLRAA. But nonetheless, the volumes are going to be lower than what they've been. At the same time, as you mentioned, we're ramping up on the CH-53K, which is going to -- it's just early. So the margins are going to be lower there until we continue to learn that out. So it's going to be a number of years. I think you're right as far as margin upside, but it's going to take us a little while to get there. You're talking 5 years plus.

Yes. On -- let me go back to, Jim, something you were talking about at the beginning, which is the surprises and challenges around COVID. When you look at the supply chain today, I know there were a lot of challenges, and you alluded to some of them early on in this. But when you look at where you stand today, are we out of the woods yet? I mean where -- should we expect like in the next couple of quarters to be essentially back to normal in terms of these issues that everybody has faced?

Yes. And I'll turn it over to Jay for a second, but the run rate is back, right? So from, I'd call it, pre-COVID run rate to today, we've got it back where we want it to be across the business. It's that dip period, we've got to make up for that at the same time, right? So deliveries that were late like by suppliers or labor hours we couldn't charge because people couldn't come in because of quarantines or whatever, that bow wave is still kind of working through the system.

That's exactly right. It's the ripple effect of what we saw really in, call it, December, January, February time frame. We're seeing general improvement, but back to what planned production rates were to begin with. And you need to actually run higher than that to make up what was lost in those periods of time, and that's the challenge. And so the ability to really see that and recapture that in any given year, I think, is going to be a challenge. And I think it's going to be just a period of time that it's going to continue to cascade outside of 2022.

Now within this, have semiconductors specifically been a critical issue for you all? Or is that perhaps less important?

I think everybody has been impacted by it. It's been more of our supply chain for us as an integrator. And so that's been an impact that we've seen. But we've seen -- to be honest with you, we've just seen in other -- just manufacturing and some of the platform frames that are provided to us, some impacts there that is rippling through. So it's not limited to microelectronics for us.

Yes. I guess we kind of pull up here. Can you talk about -- from here, what are your expectations? You've talked about top line growth rates and these changes. Those have moved around a little bit, but can you tell us where you stand now and how we should be looking at the next 3 to 4 years in terms of the top line?

We laid out last year, and Jim has mentioned it, 2023, an expectation around 2% and then accelerating growth from there. That's still our baseline because we're still working through what all these budget changes are and what they mean to our programs. And it's going to take us a little bit of time. Again, and as I mentioned before, we're a long-cycle business. So where we'll see these benefits would be more in our backlog that will convert to revenue in a number of years later. And you're talking 2, 3 years out. So I would say the next few years is probably generally similar, maybe a little bit. We'll know that much better this summer. And when we lay out our expectations -- or training expectations for the third quarter call in October.

So I think tactically, we've got a really strong plan to get back to an inflection of growth from the last year or so. But what our strategies are really aimed toward is 5 years plus. My goal is to make sure that Lockheed Martin remains the industry leader, not just for the next 5, 10 years but for the next 50 years. And there's really 3 approaches we're taking to do that. One is -- and I'll start maybe with the more, one might think, mundane, digital transformation internally. We've got a $5 billion to $6 billion program sketched out over 10 years to basically take Lockheed Martin to what one would consider the factory of the future. Sikorsky is much of the way there already in Stratford, Connecticut. Fort Worth, our big F-35 plant, is partway there. But we've got a big program. Why is that important? Because we can drive efficiency over time by making those investments, makes our platforms lower-priced in the future, takes less reworks, shrinks the schedules. It's worth the investment, and we're doing it. And it's not going to pay off in the next 5 years. It's going to pay off in the next 5 to 15. So that's one of our major strategies, the digital transformation of the entire operation. It's very similar to what we talked about, 21st Century Security, which is this is all about the data. It's design data, requirements data, engineering data, test cell and wind tunnel data. How do we manage that data better than anybody else in our industry in production -- design and production and then ultimately to sustainment because that's where you get the long-term benefit of efficiency there, by having that data all the way from the first electric -- electronic drawing. The second major initiative we have, and it's really following the customer and trying to help pioneer them in the direction they say they want to go, and that is this 21st Century Security issue. Because the Secretary of Defense, Lloyd Austin, says his strategy for the DoD under the Biden administration is called integrated deterrence. And if you read what that means in his words, it's exactly what I talk about. So we're trying to meet the customer and actually try to guide them to where they think they need to be. They have a lot of acronyms for it, Joint All Domain Operations, integrated deterrence, JADC2, all these acronyms. They know where they want to end up, but they don't really know how to get there because they don't have industry experience and the leadership, and they certainly don't have commercial industry experience and leadership. We bring that. And also what we bring is Lockheed Martin is in the pole position to deliver on that strategy for the customer. It's got the big platform position, breadth and depth. And so our goal is to make those platforms meet their strategy before any of our peers can do it and really try to set the stage of that open architecture so we can take the lead there. Egon Durban, who's one of the most successful tech -- commercial tech industry investors around, and I asked him if I could have permission to use this in our industry. He said, "Yes, go for it." And that was the notion he feels that every vertical traditional industry is going to have one emerging leader that accelerates those 21st century digital technologies and creates that leadership position that's sustainable. That's automotive, it's mining, it's manufacturing, it's consumer goods. Who's going to be the company that takes that baton and runs with it and they're going to have the leadership position for the next 50 years? And I intend for that to be Lockheed Martin.

Well, I think we're about out of time and that's, I think, a very good place to wrap up. So good. I want to thank Jim and Jay for being here. It's been great, and thank you.

Thank you, Doug. Great to be here.

Yes. Thanks for having us.