Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

All right. Great. Well, welcome back. Myles Walton, I'm the UBS aerospace, defense and airlines analyst here. And it's a pleasure to have with us, Jay Malave from Lockheed Martin, the Chief Financial Officer. Just as logistics, on your table, there's a QRC code. You can scan that with your phone. You type in questions anonymously or attributable, and we'll fold them into the discussion as we go along as appropriate. But I know that, Jay, you have some opening safe harbor. So...

I'll get to the obligatory safe harbor. Well, first, thank you, Myles, for having Lockheed Martin here. I'm excited to be here and represent the 114,000 employees of Lockheed Martin. A couple of comments. This presentation will include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual results to materially differ from those projected here in this presentation. We have a comprehensive discussion and analysis and review of our risk and uncertainties in our 10-K and 10-Q filings. All right. Myles, with that, let's get to your questions.

All right. Great. So I think maybe to start off, the congressional backdrop and the presidential's budget submission every day with passing, seems like the expectations are for slightly higher defense spending just because of the backdrop of the threat matrix but also the inflationary pressures that exist out there. So maybe just comment a bit on what you're seeing right now on the budgetary backdrop and in particular, the markups and the expectations over the next several weeks and months.

Yes. I mean, right now, I'm pretty focused on the unfunded priority list. If you saw that, we had a budget that was submitted at the presidential request of $773 billion, which was about a $30 billion increase over 2022. And there was another $617 billion that was included in the unfunded priorities list. We had about 19 aircraft, F-35s. That's important to us, obviously, because that would be -- what was put into budget was a step down from where we were in the '22 budget. Other items such as C-130s were included in there, 5 C-130s, 2 CH-53K aircraft, other items such as radar systems as well as additional testing for hypersonics. So there are a number of things that are relevant to Lockheed Martin that are included in that unfunded priority list which we think are important, which could help support our growth projectile -- projections going moving forward. So that's pretty -- what we're pretty focused on right now.

And I think Lockheed tried to set a table for growth expectations last fall, and that was actually before a lot of the higher budgetary expectations came into effect. So when you think about the upside since the planning of last fall, and I acknowledge that you weren't there at the time, but where would you -- from a segment basis or from a product basis, would you point us toward to think about the upsides to those projections?

Sure. And just as a frame of reference, when we provided midyear -- or midterm expectation are trending in the third quarter of last year, we pointed to about 2% growth in 2023 and it's starting to accelerate slightly from there in '24 and beyond. And it certainly was a different environment then than it is now. And there's still a lot of moving pieces to it. As we just talked about, the 2023 budget submission and what's changed. I mean first things first, we have to make sure that we have some level of more continuity on F-35 program, because that's a big swing item for us, a big significant piece of our sales. But what we saw thus far in the 2023 budget, again, CH-53 was well supported, CH-53K. Tactical missiles as well as air missile defense was also well supported. And other programs, classified programs, that were on that obviously I can't speak about what we do in the mission set there, but those were well supported as well. Also, we see moving forward on continued development on hypersonics, which we're a significant player in as well. We've got about $1.5 billion revenue exposure there today, and we expect that to double over the next 5 years. And so what we saw in the base budget was promising, provided that we're able to, again, provide some level of continuity that we're expecting on the F-35 program.

Okay. And in terms of the quarterly cadence, the industry and not just defense but other industries are facing supply chain hurdles and constraints, and that's attributing some of the back-ended nature of your year. I think $16 billion, $17 billion, $18 billion was sort of the projection for how the revenue cadence would go for the next few quarters. How is that trending versus supply side, ability to deliver your product? Is that still a good framework to think about for the year?

Yes. And let me maybe just kind of take us back to what I said in the first quarter call and kind of fast forward to where we are today. A couple of things I mentioned that our revenue would be slightly -- we expect it to be slightly below $16 billion in Q2 and then ramping up to $17 billion and $18 billion in Q3, Q4 to ultimately getting us to $66 billion for the year. I also mentioned that we were exploring or evaluating some specific nonoperating transactions, things like debt refinance, which we actually did do. We'll see a little bit of a charge there related to make-whole payments. We also talked about pension risk transfer. We expect to do that as well. That will be a sizable, probably, impact. And then we are seeing some headwinds related to mark-to-market adjustments in our LM ventures. But those are all nonoperating items, we'll clearly lay that out so you could see the impact of really the underlying operations in our business. But getting back to your core question on supply chain, what we've seen is we have seen some improvement, but I would say back to levels that were anticipated in the plan. So say, for the second quarter, it's really getting back to what they're anticipating to be. What we haven't seen is the ability to recapture what was lost to, say, at the end of last year into the beginning of this year. And that's really the key question, is when does that get recovered. It's my view thus far based on what I see that it's more of a gradual recovery. I really don't see a snapback in any 1 particular quarter. And it's possible that it could ripple out and cascade out of the year over time. And really no program or no supplier is immune from it. We're seeing it impacting large and small suppliers, and we're seeing it impact really across all of our programs. And whether it's suppliers, even internally, we had some impacts in the first quarter at Sikorsky. I think we did a good job of really trying to mitigate that. But nonetheless, we have to kind of dig out of that hole. And it's not easy to do when you're -- you have a set of labor force that you have to increase over time. Hopefully, you could reduce your indirect time, but that's a lot easier said than done. So it takes time to recover from that.

But the cadence you've set out $16 billion, $17 billion, $18 billion...

I think generally speaking...

That's not predicated on this recovery this year of lost revenue last year, or is it?

There was a little bit in there, too. But again, I think it's generally speaking, in the context of a $66 billion company, it's generally manageable. The one thing I'll also say is that -- I also mentioned in the first quarter call that if we were unable to get the Lot 15 through 17 under contract, and I'm sure we'll talk about F-35...

I'm sure we will.

We could see an incremental impact of $500 million. We're not yet under contract, so that's still out there, this possibly could impact us.

Yes. And then before we get to the sort of programs and segment specifics, inflation as a topic for industries is important, and inflation as it applies to Lockheed is important as well. As you look at it, it's accretive to the top line most likely. But what does it do to your earnings?

Yes. It's a great question. It's one that we keep an eye on weekly, monthly to make sure that we understand really what's in our backlog, our fixed price backlog. And just again, as a frame of reference, we have -- our revenue exposure, about 40% of it, is cost plus. So that typically will just -- whatever the inflation does, it will drop through to the end customer. The other 60% of our revenue exposure is fixed price. But for us, as a matter of policy, we go back to back. And so if we enter into a fixed price arrangement with our customer, we require our suppliers go into a fixed price arrangement with us. And so typically, that inflation risk is really being born lower down in the supply chain. And so we are yet to really see any type of significant impact. What I would probably expect to see is, as we respond to new requests for proposals and submit our proposals, we'll see a step change in cost and therefore pricing over time. And again, there's different ways to deal with that, whether it's escalation clauses, EPA clauses, as they're referred to in government contracting. We have to work with our customer to really drive that so that just costs doesn't get out of hand because there is a ramification in which the budget ultimately will be fixed. And so your price per unit, if that increases, it may ultimately mean your units may reduce.

All right. So let's transition to the units. And you alluded to getting to the F-35, so let's go right to it. The Lot 15 through 17 negotiations are the #1 question that I get from investors. Where are we? When do we get to the light at the end of the tunnel? It's been 3 years of negotiations, which is a long time to negotiate your largest business.

Yes. So it's a great point. It's a great question. I think, though, over that 3-year period, we've learned a lot. There have been a lot of things that have happened in terms of impacts from COVID, the disruption that's caused to not only our labor, but the labor to our supply chain and being able to understand that, quantify that and put that in terms of what that means to cost and price. Same thing with what we've seen over the last 12 months of material inflation. And so the fact that it's taken this long is probably, ultimately a good thing because we may not have been able to see these impacts had we closed on this before. Since we talked about this on the first quarter call, and we've been in a few conferences, I'd say the negotiating gap has closed substantially. There still is a gap, and it includes certain things like other terms. I'd say it's a handful of items that we're working diligently with the Joint Program Office to try to get closed. As I said earlier here, it's possible we can get it done by the end of the month, but it's possible it can slip out into the end of -- by the end of the month, too. If so, we will see an impact. But again, I think both parties are motivated to try to get something done. And we're at a point now where the differences are converging.

And just so we all know sort of how it impacts you, it's a deferred revenue because you don't have the contract to bill against. But then when the contract comes through, you'd recognize the revenue. So from a timing perspective, that's what we're looking at.

That's right. Just as a reminder, this is a percentage of completion accounting, so we would record revenue as we incur cost. But if we're under contract and don't have funding, we cannot record revenue. So we'll still keep the program on track and incur cost. But until such time we get under contract for this and get funded, we'd have to wait for that to record revenue.

Okay. Maybe just how the award would come to Lockheed. There's a lot of planes in there, Lot 15 through 17. Would it be, we have finalized negotiating price, and we have some sort of UCA to bill against and then we negotiate the details later in the year? Or is this a big bang, and we get 400 planes in backlog?

It could be either or. I mean it's possible, but it's probably more likely than not that there could be some sort of UCA, call it, interim type of agreement that enables a contract or the program to continue to move forward until such time that we get to the final definitive agreement on Lot 15 to 17. I'd expect the orders to be in year, both Lot 15 and 16 and probably 17 next year. So you're talking in the range of probably $14 billion to $15 billion of orders between Lot 15 and 16 this year.

Okay. Now to take a step back, the F-35 as a program and the profitability of it over the medium term and longer term. You've got mature programs in the fighter enterprise and the C-130 that are materially above what the Aeronautics segment are, but they're mature. And you've got the F-35, which is roughly double digits, slightly below or thereabouts, where the Aero segment is. What's the profile of margin maturity in the program?

Well, I'll talk maybe -- break it down a little bit. I think in production, you're probably going to see that low double-digit range. I don't think it will change materially in that ballpark. I think sustainment, as it becomes greater prominence on the revenue mix, that could have an accretive impact. But that's years down the line. First and foremost, we have to get the program under clear sustainment model, deliver value to the customer, continue to reduce cost. And over time, as we mature the sustainment, the operating cost, we'll -- probably could see some upside there in margin. Development margin, it's single digits, and it probably will remain that way.

Okay. All right. The other fighter enterprise, F-16, is having a resurgence. You've relocated manufacturing. But what's the status of getting those first aircraft out the door delivering? And then also, what's the cadence to get to 2 or 3 per month?

Yes. Good question. I mean on the F-16, we moved that from Fort Worth to Greenville, South Carolina. And we're in the process of really building today. We would expect us to produce aircraft next year, but not deliver them until probably 2024. And so it's going to be a slow ramp there. And it's really, really just with a new workforce relearning how to build these aircraft. And so that's been a little bit of a challenge. A, it's been difficult hiring employees, and training employees has been a little bit more challenging than we had expected. So the ramp is taking a little bit longer. As a result, we'll probably see some cost burden on our initial contract there, and we'll probably see some level of headwind this year, probably even in the second quarter, on the program. But to your point, we've got a backlog of 128 aircraft, and we see a pipeline of anywhere additional 300 to 400 aircraft there. There's a lot of interest in the aircraft. So we're motivated to get this ramp as quickly as possible so we can get to a run rate. I think an aspiration probably the next few years would be probably 3 per month and -- from where we are today.

And those margins would be probably not where they were when they were in Fort Worth and super mature, but they would be probably better than the segment?

Yes. It could be, but it's going to take us a little while to get there. Right now, with what we're seeing in terms of lower profitability, particularly in this first contract, it will take us a little while to deliver on that, learn out the whole assembly process and then get ourselves back to kind of the low teens margins that you're talking about from historically.

Okay. And the last one within Aeronautics. Last year, the company took a charge -- a larger charge on a fixed price classified program. What can you say on it? I know you reversed some of that charge through the course of last year but -- which would be an indication that performance is better than you initially thought in July. But where is that program today?

Yes. I mean it's a classified program. We took a $225 million charge last year in the second quarter. We didn't actually -- we reversed -- got beneficial EACs on other programs, not in that particular program. Right now, the program is holding in. And there's really no change to it. Again, it's a -- we talked about at the time of that being a pretty significant growth opportunity for us, and we still see that to be the case. It's a fantastic capability but one that I can't really speak about.

Short question. MSE, so as you look to the engagement that's going on with the Russia invasion of Ukraine, is this the segment that you have some potential upside in the shorter term? And how would you size that in terms of what the U.S. government is doing to send weapons, both lend lease and direct sale?

Yes. When you look at what they're doing, a lot of that is really taking their current stocks today and providing that to the Ukraine. So for us, it would be an opportunity from a replenishment standpoint. And I'll talk -- it's twofold. But first on the replenishment, that one, we're having dialogues with the customer today in terms of what types of capacity could we support, what would it take to increase capacity, what's the investment necessary. And they're really doing sensitivity analyses that enable them to make -- make the right decisions. You saw last week a discussion with HIMARS, GMLRS type of systems, with a -- which are certainly greater capability than Javelin in different type of mission set. And so it's starting to expand as far as the requirements and the opportunities. But it's something that -- it's an ongoing dialogue. It's hard to really kind of put that into numbers yet because it's still options analysis is really happening there. The other element I would say is that just there's international interest, particularly in missile defense. So we're having dialogues and things like PAC-3 systems. You may have seen Poland, very interested, and Patriot systems. And that would be a pretty significant opportunity for us. We're talking could be well over $1 billion of opportunity. And so it's a little early to understand exactly what that all means. But certainly, the interest set has grown significantly.

Can you comment on the supply or the capacity to fulfill a demand signal versus the contractual stuff and getting that all done? Is it the contractual stuff that would be the guiding, governing principle? Or is it more the capacitization?

Well, it's a function of all, really. It's -- the lend/lease comment that you made, that certainly eases some restrictions in terms of getting on contract to begin with. And so that should reduce the time to get on contract. But nonetheless, we still have to get our suppliers on contract. And then we have to -- kind of in an environment that we're in, is be able to predict when we can increase production in doing such a way -- I think it's important to keep in mind that Lockheed Martin is a little bit more of a long-cycle business. And so I think the thing to watch for us will be the backlog growth and that will convert over time to revenues.

So you're -- keying into the question, so is your backlog potentially set to go back to where it was on peak basis at MFC?

It's possible. It's certainly possible given the interest levels that we're seeing. And it may take a little bit longer than probably maybe historically in terms of converting that to revenue, but we could see some of these peak backlogs. But again, it's just so early to really make a firm determination on that.

Okay. And again, if you have questions, feel free to feed them in using the QRC code, and I'll do that. You mentioned hypersonics at some point during the conversation in your remarks. And at the beginning, when hypersonics was coming out and there were contracts everywhere, Lockheed was taking them down one at a time and really swept the field pretty nicely. ARRW was one of the bigger contracts. You had a couple of failures, but you had a recent success. So where is that program? Because it seems like that one was set up to have the quickest path to production. Is this success now paving the ground for a production contract?

We believe so. A successful test of separating from a bomber as well as achieving hypersonic speeds there. So we're very excited about that. That's in our MFC segment. And yes, I think we can expect that. As I mentioned before, in the unfunded priority list that there was a potential opportunity for more testing. So yes, that would probably be a lead program. There's also in our space business, we have Conventional Prompt Strike as well as our long-range hypersonic weapon. Those are basically the same weapon for the Army and the Navy separately. We're designing that together. We've had some success there as well. And then also in our aero business, where we've got the Hawk program, the hypersonic air-breathing weapon system, which we've also had a successful test there. And so some stream of good news for us on these programs, and we're optimistic that's going to lead shortly to some type of [ Elbit ] production.

So at that high level of hypersonics on a portfolio basis, I know it spreads across the sectors, size that today and then size it where it is 5 years from now.

Yes. So today, it's about a $1.5 billion business, and we expect between now and 2026 that would double. And so again, as I mentioned, we're pretty excited about the progress that we've made and the test results we've had over the past few months.

Okay. The transition to competition that hasn't been decided, Future Vertical Lift. It sounds like the decision maybe has gotten kicked to September, right? What's the reason for the deferral of the decision of...

I don't know exactly why they made a decision. It's probably just to make sure that they've got a fully documented, fully supportable decision when they make it. We're talking a month or 2 that they delayed it. So I don't think that's much of a big deal given the size and scope of the program and the importance of the program. We're excited about our opportunity there. The maneuverability of our aircraft, the ability to complete a mission, the time of the entire mission point-to-point is important. We believe that our aircraft best meets the requirements of the mission set. And we believe we have a compelling price offering as well on the program. It's a hybrid program. So it's -- the development piece of it is cost-plus, the program, management and other elements are fixed price. And we think that we've got a good offering that is really the right Black Hawk replacement, and we think that will be the winner ultimately.

So the contract structure to the award is fixed price -- or sorry, cost-plus for an initial lot and then...

Well, that look the development piece of it would be cost-plus. But there's elements, contract line items, that are fixed price to it. And so it's pretty logical, whereby some of the things that are in the contractors' control are fixed price, whereas the uncertainty of related development would be cost-plus.

Okay. And under an outcome where you don't win, what's the outlook for Sikorsky? With FARA still on the table and CH-53K, does Sikorsky have a growth trajectory over a 5- to 10-year period of time without FLRAA?

It does with FARA.

FARA?

Yes. I'd say, if for whatever reason, it did not -- was not awarded either program under a Future Vertical Lift, it would be generally flattish. But what's promised in that is that combat Rescue Helicopter Program gets around the program of record. And there's been a little bit of movement around that, where the program of record was 113 aircraft. So we're talking potentially at something below 100 aircraft. And so that will be a watch item. But I think the business, generally speaking, can be -- without Future Vertical, it'd be flattish.

Okay. Moving to space for a couple. You've had some interesting partnerships established with some of the new space companies. But obviously, you've got a legacy dominant position within classified or unclassified space. So as you look at where DoD money is going, it seems like you're doing the smart thing, which is playing in both of fields, the disruptive field and the legacy field. Where is the legacy money trending, growth rates? Is it being cannibalized yet by the new space, new disruptors, distributed constellations? Or is old space growing at a nice clip and it's always the disruptive space?

I think -- well, yes, I think we have a pretty strong book of business on the legacy exquisite types of systems, whether it's GPS, weather systems and other intelligence community type of systems, classified systems. But I think that growth is generally flattish. Where we see a little bit of a drag on Orion program, and that's been a long-term program for us. But again, it just based on the life cycle of the program, it's starting to cycle down. Where you're seeing the growth in space, a lot of that is in smaller-, medium-sized types of satellites, that we've expanded our product line to be able to support that. We were awarded the SDA transport layer, which is a key enabler of things like the JADC2, Joint All Domain Command Control supporting communication systems. We've also been awarded some National Defense classified programs, which we're seeing a -- I'd call it a recapitalization of capability and a capitalization of capability because you're seeing certain mission sets go from different domains into space and also augmentation of the exquisite systems with these other distributed type of constellations. And so we're playing in now -- we've got offerings across the board, whether it's in LEO, MEO or GEO with these partnerships that we talked about. ABL is another one that gives us kind of a launch capability that enables us to prove out some of these capabilities. And I'd say beyond just having the -- being the bus satellite vehicle provider, we also have been developing capability for RF payloads, optical payloads and processing on board, which is a big require, particularly these small satellites.

Is that an area where, a, you want to do M&A; and b, you'd be allowed to?

I think we're open-minded on M&A. So that -- I would say yes on the first question. On the second one, it really depends. I mean we -- a couple of headwinds that we dealt with Aerojet Rocketdyne in terms of vertical integration. Shortly thereafter, around the same time, we were dealing with a memo about concentration in the Department of Defense. Being the largest defense company in the country, obviously, that's something we have to kind of be mindful of. And so as we go through our analysis, it's more just looking at -- it's more than just looking at strategic fit, the economics of a deal. We're really making sure we're spending sufficient time and doing the antitrust due diligence on that, and we have no choice but to do that. But I will say that we're still keeping open minded on M&A.

Okay. There was a question that came in, so I'm going to reverse course a little bit on the F-35. And the 156 cadence, is it predicated on 80 this year, likelihood of higher than 80 this year? And I think they're referring to the U.S.

Right. Yes, yes. So the base presidential budget, 61 with the unfunded priority list of 19 gets us to 80. It's possible it can go back up to a 90-ish. I think we think that, that is really the right answer. And the reason why we think that's the right answer is we just -- we don't think production should be whipsawed. That's just a bad answer from a cost perspective. And if you can level load production, that is a better answer. We've heard some dialogue from the customer in terms of making sure that they have Block 4 capability on the aircraft, and that might be a reason why they go at lower volumes. But we're of the belief that you lose more by whipsawing production than you would by retrofitting aircraft. We think it's -- the economics are such that you're better keeping production stable, retrofitting and keep moving on. You're talking a month or 2 of retrofit.

And then on that topic of Block 4, give us an update on when that folds in, maybe the update on Tier 3 technology readiness through...

Tier 3 today is still in some of the capabilities, core processors and things like that are in lab testing. We expect to go into flight testing later during the summer. And then we would start delivering on the TR3 capabilities sometime around mid-next year from a production standpoint. So we right now seem to be on track.

And Tier 3 is really the hardware that enables Block 4.

It does.

So is the hurdle of the Air Force and other customers to get Block 4 capability to have the hardware in place and not have to retrofit hardware? Or is it to get the full Block 4 capability?

Well, first things first, you got to incorporate the kind of the TR-3 capabilities, get those in. And then there's, I think, other developments behind other systems that are being developed behind that, that will be dropped in. And so the first, you got to get the processing capability, the memory system capability, the panoramic cockpit display capability in first, and then those other ones will follow behind it.

Yes. And another question that came in was on the alternative engine for the F-35. And if the DoD and Congress are spending this much money on a second engine, what does that tell you about the platform longevity to put a second propulsion system in play?

Well, again, we're pretty bullish on it. You go back and we had a dialogue before about just the F-16 history or a program record of 650 turned over, turned into more than 4,500 aircraft, especially now when you've seen the most recent international demand. And these are going through very comprehensive competitions with other competing aircraft and the F-35 coming up from a performance, acquisition price, maintenance cost, operating cost, pretty competitive there. And so we're pretty bullish on it. We're not -- we've talked about 3,300-plus. I'm not going to tell you it's going to be X 1,000. I've only been here with -- for 4 months. But I will say that we're pretty bullish on the capability of the aircraft. It's unmatched, and it's a pretty solid and compelling value proposition.

Okay. The overall performance from a margin perspective of the business in the first quarter, if you strip away EACs, the core underlying margin, I think the best it's been that I've seen. And curious, what does that tell us externally? Does that tell us that you've increased booking rates and you think that the program's portfolio on average have less risk? Or is that telling me that, no, the underlying programs are just doing better?

I think it's really a combination of both. I think that the company, as we've gone through programs has felt comfortable to certain levels of risk. We've demonstrated we're going to be able to retire. So we don't necessarily need to bake those into our -- the EACs as a risk moving forward, and we can just book at a higher rate. And so by and large, it's fundamentally that. And so it's just -- it's -- we've moved the pendulum back to a little bit more just of a reasonable assumption on the margin profile. And the overall margins really haven't changed, but we just feel comfortable from a starting point where we are.

Okay. And then maybe a cleanup question on taxes and R&D capitalization rule. I know that different leaders of defense companies and broad tech companies and health care companies have been lobbying Congress to try and argue the rationality or irrationality of this particular rule. Where is the progress? What bill is being formed or can be formed from which there could be legislative reversal?

Yes. We've seen bipartisan support, and we've seen some nonbinding movement that votes on the current -- these CHIPS Act, COMPETES Act, where trying to attach that -- the repeal of the capital R&D capitalization to that, which makes a lot of sense because on the one hand, you've got a bill that's intended to increase in fund innovation and restoration of the U.S.' capability while at the same time repealing something that could be punitive towards innovation. And so it makes sense to put that together, and we believe there's support for that. But the devil's in the details in terms of how that makes it in and whether it does actually make it in. There's also a long-shot opportunity on potentially the reemergence of a Build Back Better legislation. So that originally had a repeal in there. We believe that, that will continue to have a repeal in there if we're able to get that off the ground. And then probably a plan B would be tax extender legislation at the end of the year, if we're unable to get through this legislation, something when you're talking about extension of childcare credits in addition to maybe a 1-year deferral of this capitalization. So the movement's there, the interest is there. It's getting it in the right place to be able to do that.

Okay. And maybe to stay on cash flow for a second. Again, in the fall of last year, the company, along with the growth alignment for medium-term, set free cash flow targets that were realigned. And the fourth quarter, you blew through the target that was just said. So did you really derisk those targets? It seemed like you pulled out pretty much any assumption of working capital benefit, and you got some of that in the fourth quarter. How would you frame this year and next year, which are still part of those targets?

Based on what I've seen, I'm generally comfortable with what we have. One would ask -- one of the first questions I asked when I joined the company was how can we overdeliver so much and not have an impact in one of -- in some of the subsequent years? But I've gone through it, and if you look at 22, 23, 24, we have some pretty significant capital expenditure increases. It's up this year from 1.5 last year to about 1.9 this year and it stays elevated. We're increasing our independent research and development this year about 10%. We're keeping it elevated. So the investment is there, and we also have some cash outflows related to working capital. And so when you work through that, it seems like it's fairly derisked. And I still feel pretty comfortable with what we have there. The question, we have to go through it all over again as we go through our 3-year forecasting cycle this summer. What are the new programs? What's the program mix? Do we have to invest in more programs, being head of funding type of thing based on schedules? And that's something that I won't really get a good picture until probably until late August, early September.

And I imagine the Lots 15 through 17 is another cash call on the contract and...

Right. I mean that would -- yes, that was -- if that were just really for whatever reason, extend significantly, that could be -- that could put some pressure -- definitely put pressure on cash flow.

Okay. There was a question that came in, and I'm going to take it and then I'm going to turn it into a different question. So with the need to connect the F-22 and F-35 networks, do they see a need to own a BMS and then loop in there? Would you like to define 5G.MIL and the 21st Century Warfare?

Yes. Sure. Let me -- maybe I'll take the second and come back around. 5G.MIL, to just break it up, and I'll start with .MIL first. And .MIL is just -- it's connecting. And so this F-22, you've got its own networking system. F-35's got its own networking system, you've got things out there Link 16. And what .MIL -- the concept of .MIL is just connecting these different networks together. So it's a network of networks, the ability to do that using both defense and commercial technologies to be able to do that. The 5G is just -- it's a reference of using technologies, including commercial technologies, to increase bandwidth to reduce latency and so that decisions can be made quicker, information can be passed faster to the war fighter. And so 5G.MIL is a concept of connectivity as well as doing it at today's technology speeds, if you will. And that's something that we're leading. We've developed hardware that is really kind of radio network-agnostic because it's almost like a translation type of system that enables you to bring IFDL, which is an F-22 networking system; MADL, which is an F-35 networking system; and Link 16 together, have them be able to speak together and bring them together. We call it a hybrid base station or an open system type of radio. And so we're working on that technology. We've been able to demonstrate that technology to the customer. We continue to field it and test it in different applications. And so we're very excited about what we've been able to do there, and it just makes so much sense to make sure -- when you think about, particularly an aircraft like F-35, which is multi-role, we can very well provide an ISR type of mission. That's important information that comes out of that aircraft to be fed now and throughout a more distributed network to make the best decision and the most quickest decision or whatever that is. And so -- and then you bring it into the -- in these other commercial technology when you're talking cloud and edge computing, where you can turn an aircraft into a computing node and a processing node, where it can help make decisions and process decisions quicker, where it doesn't all have to go feed back into one cloud server type of environment. And so that's what we're trying to enable through our joint all-domain operations concepts and vision, including in 5G.MIL.

So do you envision it from a customer perspective, so from a client-facing or DoD-facing perspective, to just be embedded in programs? Or to actually have overarching money specifically associated with the initiative?

Well, I think that the way we're doing it is you can have a specific program if you want. This is something that potentially you can also manage through sustainment and O&M type of money as well. And so I think we're pretty flexible in terms of the way. Jim has been very open with our customer in terms of we're willing to consider different things where we're making investment. If you can give us some type of revenue visibility and revenue assurance over a number of years, we'll make the investment in this upfront. And it's something that he's familiar with from a commercial background, I'm familiar with from a commercial background as well. And so we're just open-minded about it, but we think that what's important is bringing this capability, these upgrades to -- upgraded capability to the war fighter every 6 to 12 months rather than waiting every 3 to 5 years to really do a full-scale upgrade program. And so we're just trying to upgrade kind of, again, like you see in commercial industry where things are being upgraded every 6 to 12 months.

And maybe on that upgrade, one last one, on F-35, the path to a performance-based logistics contract where it's stable, predictable, multiyear. How far are we from getting to that point?

I think we're making progress there. We're expecting probably sometime in the first half of next year for there to be an RFP for PBL. So we think the customer has an interest in it. And there's benefits to the customer. It gives them cost certainty there. It's a very complicated MRO network because you're not only dealing with our domestic U.S.-owned depots, the contractor industry base but as well as international partners. And who does what, when and how is a pretty intricate type of planning process. And that's something we're very eager to have a dialogue with the customer, provide our input and make sure that we can provide this aircraft with the best mission capability available.

Great. Well, I don't see another one in the queue. And I'm going to thank you, Jay, for coming and being part of the conference.

Thank you, Myles. Great to be here.