Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

I'm going to move on and -- you've heard about the F-35. You have the F-35 producer with us, Lockheed Martin, CFO, Jay Malave. Jay, welcome.

Thank you, Great to be here. .

Really appreciate it. So rather than start on the F-35, let's talk about the Ukraine. So that's changed demand prospects, particularly among the allies walk us through maybe some of your foreign order potentials that you've got?

Yes, let me just first start. I mean obligatory safe harbor. Just as a reminder, my comments in this discussion will likely include forward-looking statements and those statements and projections are subject to risks and uncertainties that could vary materially from what I talk about today. And we have information in our 10-Q and 10-K SEC filings on risk factors that could affect those -- and so getting right into your question there, Cai. And as far as upside, -- we mentioned on the first quarter -- I'm sorry, the fourth quarter call back in January that we saw about $1.5 billion of orders in 2022, that was related to kind of Ukraine in general orders. And we saw -- had a line of sight to an incremental $5 billion in that ballpark of orders. For this year, we see -- of that $5 billion, you've got a line of sight to about another $1.5 billion so far. And so we continue to have -- it's a pretty dynamic environment. You may have seen in the news, Poland is another way throughout a $10 billion number out there. Not all of that goes to Lockheed Martin, maybe half of that would be related to Lockheed Martin, and a fair amount of that was already assumed in our projections. But nonetheless, you continue to see continued demand there. And so we're pretty excited about being able to deliver that capability for global security requirements. But what I would say is that as we continue to add to the backlog, the ability to convert on that backlog is going to take a little bit of time. And the reason for that is in areas that we're seeing this demand is in areas where we're already ramping up. And so we're trying to meet that with the supply chain and all that type of -- that environment. It's going to take us a few years of really a few years to convert on that backlog. But it's certainly more significant than we had originally anticipated. -- a year ago, even 6 months ago or 3 months ago?

So when you say $5 billion potential $1.5 billion in '23. Are you just talking about missile and fire control or you?

Yes, that is mostly all missiles and fire control, yes, whether it's things like HIMARS, GMLRS are the 2 big drivers, a little bit of Javelin as well, perhaps even PAC-3 on integrated air and missile defense. So those are, I would say, the primary drivers of that demand pretty much in MFC.

Right. Are you seeing more kind of people talking about buying things so that all of a sudden in 6 to 9 months, we may see more orders?

Well, as I mentioned, where we see -- we came into the year thinking that it could be again, of that $5 billion of potential line of sight upside, we came into the year had thinking it could be maybe $500 million. Now we're thinking that it's probably going to be $1.5 billion in 2023. This is orders -- it will take some time to convert that to sales. And so yes, it could go higher than that -- this Poland news could add to that $1.5 billion really in the back half of this year. And we'll see. I mean that's a pretty complicated, I think, buying. And so it could slip into 2024 as well. But yes, I mean there certainly could be more activity in the back half of the year.

So how do we get -- if you have $10 billion sale you have $5 billion of it. If you get $1.5 billion this year. I mean how does -- I mean does that flow over 3 years in orders and then 4 years of deliveries? Or how does that work?

Yes. I would say really, 5 years of deliveries probably where we would start probably seeing that really start to hit us in probably 20 -- late '24 into '25. It just as I mentioned, it takes some time. The -- it's great to see the incremental demand, but these are areas where we were already increasing our ramp rates, our production ramp rates. And so the ability to step it up even higher. It's just going to take us a little time to do that.

So this is kind of direct as a result of Ukraine. But we're seeing requests from Ukraine for F-16s. Is there any kind of what I would call peripheral foreign demand that you're seeing that other countries in Eastern Europe are sort of warming up to buying more F-16s or buying any other products from you?

Well, yes. I mean, so you've heard the request for F-16s in Ukraine. Turkey has also indicated that they would like to purchase more as well as upgrade the existing fleet that they have. And so there's -- we've mentioned in the past that there's potential line of sight to additional orders of up to 300 aircraft or so even more than that. That is something that the process for that is -- just takes a little bit a while there. That's a state department decision as to whether or not a license would be granted, we really have to follow the government's lead on those types of systems. And the demand we see there. India is another 1 on their F-21, where there could be some opportunity there. But again, it's more of a government-to-government discussion, and then we fall behind that discussion.

Any trigger milestones like if Biden decides to send some Fs or to allow allies to send F-16s to Ukraine that will.

Yes, I just wish I can give you a specific date by which I...

Do not update but those are the kind of milestones around which should of greater demand. So for and refresh my memory, it's about 30% of -- about 30 -- that's right. Any thoughts about where that's going to go? Is that percent going to be moving up the next couple of years? .

Absolutely, it will grow. We see just in international, that growing over the next 3 to 5 years by a high single-digit rate.

So it should grow as a percent of the total. .

Well, that's the growth rate, but the percent in total, I don't know what that will equate to, but it's 35% plus probably in terms of what that means in terms of the absolute, but yes, that's a certain area. Besides Europe, Australia is another one, there is significant demand. We're competing currently for a program called AIR6500, which is a total really joint all command and control type of system for the Australian courses. We were successful in defense of Guam, which is the U.S., but it's kind of into Paycom. There's also opportunities in Japan as well. And so it's not just Europe, there's -- Asia and Australia is a big 1 as well.

Got it. So -- what about space and directed energy, you're on transport layer on, I think you missed out on the tracking layer, what's your potential on these and kind of those other LEO systems?

Sure. So space transport layer as a communication system for STA, we're right now in the process of under contract for Tranche 0 and delivering on that. We are due to deliver 10 satellites on that. We expect those to launch midyear of this year. The follow-on tranche 1 is another $42 million satellites. And then when we get into tranche 2, it could be even double of that. So a lot of opportunity there as they build out that constellation for STA transport layer. As far as tracking, I think it's important to remember, we have the systems in GEO. So SBIRS OPIR, we're operating, and we delivered our final satellite vehicle for SBIRS but we're also now we've got 3 vehicles, space vehicles for OPIR that we'll be delivering over the next few years. And then we partnered with Raytheon Technologies on a MEO missile warning and tracking system. And so we're going to be competing on that. We're excited about that opportunity. And then when you think just about national security space in general, we've got a number of classified programs which are pretty substantial, which will drive growth in our space segment as well. Obviously, you can't talk about those, but pretty strong demand for those, important missions, and those will drive growth in that segment. .

Got it. I can't go without asking you about Florida. So you've protested. I don't know what you can tell us, but can you give us any color in terms of like what were you saying in terms of we should have had another shot or we should have wanted?

Yes. I think it boils down to KAI, is that what we saw based on the information that we had is an inconsistent application of the valuation criteria that simply stated. And that really is the basis of the protest. The GAO, Government Accountability Office, GAO will have 100 days to make an evaluation and a recommendation on where you go from there. And we don't take these things lightly. Lockheed Martin does not protest a lot of our record of protests very low. And so if we didn't feel we had a basis for it, we would not have found the protest. .

Got it. And do you expect that it will basically go to 400 days.

Yes, I think it will.

Got it. Okay. And -- so the execution side, what are you seeing in terms of supply chain, labor availability inflation?

Supply chain is still a step forward and a step back, Cai, the best way I would describe it. And I'll take maybe the fourth quarter and the first quarter of '23, as an example. In the fourth quarter, we overdelivered to our expectations in sales and really almost got exactly back to the original guidance we had provided back in January of '21 or '22. And part of that was just getting on contract, but part of it was better supply chain performance in the fourth quarter. As we looked at our forecast now in the first quarter, we saw that taking a step back. And so we've got some calendarization pressure in the first quarter. Part of it is program schedules, part of it is supply chain pressures there. So we're not out of the woods. It's still touch and go. And we've got a calendarization issue a little bit here in 2023. We feel confident for the full year guide that we provided, but the first quarter is going to be a little bit bumpy, partly due to supply chain. .

Got it. And what about inflation? What's -- are you able to sort of.

Yes. And let me, I guess, break apart inflation into 2 areas: 1 being labor inflation, our internal labor and the other 1 being in the supply chain. And just maybe taking a step back, when you look at our revenue exposure, almost 40% of our revenue exposure is cost plus. So that generally just flows through. The other 60% is some form of fixed price. And on those, in many cases, we go back to back with our suppliers. So our current contracts on the material escalation, we have fixed price from our suppliers. So we're not really -- we've got some level of insulation against that. Where we did see impacts in 2022 is in our labor inflation because we, in a few areas, on critical skill sets, we did midyear raises for either attraction or retention of employees, and then when we did the merit cycle here, the cycle for 2023, it was higher than what we had originally anticipated in our base contracts,going forward in our EACs. but I would say that Lockheed or has got a pretty strong cost reduction program. And so we essentially mitigated most of that headwind through our cost reduction program. And I think -- and so we've been able to manage that, I think, fairly well. Where I see it kind of being more of an issue going forward, is as we look into new awards because now we're seeing suppliers that are unwilling to provide multiyear fixed pricing. They want some type of escalation clauses tied to it and rightfully so. I mean, it's hard to criticize that type of request. And so the dialogue we're having with our customer is that we're looking for that to flow through. It's in an area where we're unable to get a contractor, a subcontractor on a fixed price for whatever the reason it may be, we're looking for the trade-off on our contract with our customer to flow through any type of escalation clause. And so there's been dialogue with they're receptive to it. Of course, they're going to drive because their job is to drive the best result for the U.S. taxpayer, which is what they should be doing. But ultimately, they understand that we're in an environment where we've had material inflation on material escalation. And we're trying to do it so no one gets harmed.

So if you look across the industry, I mean, as you're aware, Northrop's 10-K, they indicated that the B-21 where they've been telling everybody, execution was good that they have the potential or a loss of over $1 billion on 5 lots. And so do you have any long-term contracts that are firm fixed where we should be nervous that this 1 might come back and create a problem?

So yes. So I would say that we do have production options on contracts where we've got a particular 1 -- in the first quarter call, we talked about MFC's margins where they were declining. They did 14.5% in 2022, and we're around 13.7% in 2023. And then there's further pressure there from that. That's fundamentally due to option -- production option pricing on a classified program that we have. And so we're going to see continued pressure there, which is kind of a -- it's a known entity there. And so I've been talking about that their margins will want to go step down another 50 to 100 basis points from where we are in 2023. Now we'll see what the mix benefit of this incremental demand is and whether or not that dampens that headwind, and we'll have to go through that planning cycle as we do during the summer, and we'll have a better feel for what those estimates are. When we talk about -- start thinking about 2024 in our October call. But there's certainly pressure there, which is due to a production program that has a challenged pricing in it. And we're going from a low-margin kind of development contract to essentially a negative margin production for a period of time. And so that's what's driving MFC's margins to want to continue to slide.

That's a classified program?

Classified program. And so we'll go through that. I mean our job as a management team is to see what we can do to offset that, try to mitigate those, and that's what we'll go through over the next few months to see what we can do with that over the next few years. And so that's the context when I've talked about in the past and just still get some continued margin pressure beyond '23. It's really there is where we're seeing it.

Mainly an MFC?

Right.

Okay. And then you've talked about you and Northrop are talking about digital transformation in your case, 1 Lockheed Martin, where are you in this journey? And what impact do you think this could have on your profitability?

Yes. Let me describe our program because it is an all-encompassing program. It is -- it starts with engineering design systems. So it's embracing and proliferating digital threat and digital twin engineering. It extends to our ERP. It extends to our manufacturing execution systems, it also extends to our human resource management systems. So this is a broad -- it's not like we're just updating an ERP system. We're going end-to-end all the way from development, all the way to sustainment of life cycle of our program, updating all of our systems. Where we've got a head start over the past few years is really on the engineering development side, where we've had a program adoption of the digital thread and digital twin of systems. We've got -- we ended 2022 with about 112 programs that have now adopted on this method of design. And the whole intent of doing that is being able to compress our design schedules and the efficiencies that you get from that are you get better visibility. As you're designing, you're able to see a digital twin, what the hardware is a digital replica of that hardware. So you can understand -- better understand dependencies you can better understand form, fit and function on components that you're designing and that should not maybe necessarily eliminate, but significantly reduce rework in the engineering cycle and the design cycle. What that ultimately will culminate to us, for us is just a more competitive company. And so we see that's going towards as being a really a ticket to play in the future. These are the type of design cycles that we're going to have to operate under a tighter design cycle, delivering a capability earlier to our customer and doing it such a way that's affordable and it reduces risk for both us as well as the customer. And so it's not necessarily a margin play per se, but we will see cost reduction, but it will make us a more competitive company.

And it's predominantly, I would guess, on newer programs as opposed to other ......

Yes, legacy programs will have the previous product life cycle management systems. You can't really disconnect those because of where they originated.

Right . So -- you talked of the pillar -- the 4 pillars of growth, programs of record, hypersonics, classified new awards. Walk us through maybe the relative growth we should think about for each of those relative trends?

Yes. When you look at our 4 pillars of growth, it's about almost $20 billion to $18 billion to $19 billion bucket of sales. And our biggest ones there are our programs of record, just to select the programs of record are around $8.5 billion to $9 billion of that $18 billion to $19 billion of sales. We see that growing at a high single digit clip. And the reason for that is the demand cycle as well as we've pushed some of these schedules to the right. And so when you talk about things like CH-53K, PAC-3, fleet listing missile and our space business and F-35 is a sustainment -- all of those, we feel very comfortable that ring to grow because we have the visibility to the programs of record there. And then you tack on what we've seen now in some of these legacy MFC programs is going to drive that growth rate to the higher end of the high single digit number. The next 1 is classified. Classified again is about an $8 billion portfolio for us all in. And whether it's an arrow, whether it's in space or an MFC, we see some pretty significant growth there. It's probably closer to maybe in the mid-single-digit range. between this is over -- these are 5-year CAGRs that I'm talking about. And so those are the 2 biggest drivers that we'll see in those 3 business areas really fundamentally driving that; Hypersonics is another one. We've talked about that. That growth rate is a little bit lower than the other 2, but that will contribute to growth. And then last 1 is new awards. In new awards, we just talked about FLRAA assuming that, that the decision holds, we still have next-gen interceptor is a big program for us. There's far behind that, which is what we expect to down select in 2025. And those are 2. And then we have an international missile integrated air and missile defense system that is pretty sizable in the Middle East that we expected that we can win that as well. So when you put those all together, that $18 billion -- $18 billion to $19 billion portfolio of sales. We expect that to grow in the mid-single digit growth -- I'm sorry, high single-digit growth area that will drive us in fuel us for the next few years.

So the international air missile defense. That's a sale of a existing equipment or a new program?

It would be a new program. New capability for us, yes.

New capability. Okay. And so all told, I think what are the downers? I mean, certainly, C-130J looks like it's going flat to down. F-16, which I think was looking down is now moving up. Talk about -- the other...

Well, if you -- yes, if you go run a portfolio, if you look at -- if I start with [ ARRW ], I mean, production end of 35% is actually down this year flat to up next year. But in the grand scheme, it just -- it's flat. When you think about that, production is a $12 billion portfolio in and of itself, just F-35 production. So it's a big number. As you mentioned, F-16 is growing. We -- we've got a first delivery here in the first quarter on the F-16 aircraft. We'll ramp that rate up. We have about 20 aircraft in WIP today, and so that will continue to grow over the next few years for us. C-130, yes, when we delivered, I think it was 24 last year, that will drop to about 20% between now and 2027. So we'll see a little bit of pressure there, but it's not dropping all that significantly. And so [ ARRW ] will have, I think, a stable portfolio to slightly up over the next 5 years. MFC is where we've talked a lot about we had ramping programs and we talked about things like PAC-3 and some of these other areas of demand, whether they be GMLRS -- are other areas that we're growing. They'll continue to grow over. And so we see a solid mid-single-digit growth rate there over the next 5 years. RMS, yes, they had the flow we'll see what happens with there. But they still -- Sikorsky still has enduring Hawk or what we would call it. We still think there's opportunity for further deliveries and further extension of the Black Hawk program there. And then you've got far in '25. And then there's also international opportunities, both in the Black Hawk an international Black Hawk as well as some of our X2 technology there at Sikorsky. And then when you go outside of Sikorsky, this is where our battle management systems are our joint all-domain command and control systems are Aegis. So we see a lot of opportunity there when we talk about joint all-domain operations for them to provide both domestic and international systems and be a driver of growth. We also have some new radar systems. Jim announced in his prepared remarks on the fourth quarter call, our TPY system with Norway. And so I think there's pretty good -- we feel pretty good there and kind of maybe low to mid-single digit there, growth rate at RMS. And then finally, it's space. Space is dealing with some -- there's some -- the programs that we've had in the past, we've just been fundamentally great programs for SBIRS, OPRs, as I mentioned before, those are going to want to trend back down. Orion, even though we have production contracts that will want to normalize as well. And so while they've got solid growth in national security space. They've got a little bit of overhang from these 2 programs. It will limit their growth a little bit. So I'd say probably low single digits there in that ballpark.

Now RMS what's the growth look like if you don't win FLRAA? What difference does FLRAA made?

Well, I mean, FLRAA, I would say where we are right now, given what we know, we're probably looking at a low single-digit growth rate without FLRAA.

Without FLRAA. And mid-singles, if you do get for -- because basically, if you lose FLRAA, you get the mission systems on the V2A there correct.

Yes. But the contribution of sale is nowhere near what the overall -- but yes, we get some work, yes.

Right. Okay. And so -- as we look out, should we see acceleration in your growth, 24%, 25%, I would assume sequentially.

Absolutely -- you should I'm sorry.

both years. I mean

Yes, we should certainly -- this year, our guide in 2023 was for sales to be down roughly 1% lots to down. Well I expect us to resume growth of 2024, right now, I think the starting point for that would be a low single-digit growth rate, and then we'll go from there. Again, we have to go through our planning cycle during the summer. We'll get much better visibility to all the things that are going on, as we mentioned earlier, related to kind of Ukraine demand, Poland and see what that means. It's really a question of when those opportunities can convert into sales.

Right, right. So on the cost side, what about hiring. Hiring has been an issue. I think a lot of -- a number of people are talking about, well, attrition is starting to come down. Talk to us about kind of your hiring?

Yes. I think that certainly, attrition, I think is, so far, we're seeing some indications that's better. Hiring is still a challenge. I mean some of these critical skill sets that we're looking for, particularly software engineering remains a challenge for us, particularly in the defense environment and aerospace. And so we've been working that and it's, I would say, the indications are it's better, but it's -- we haven't really seen, we haven't turned a corner and flooded and look at our headcount last year, we grew by 2,000 heads. A lot of that is in the critical skill sets. We have demand though for higher than that. And so we're still -- it's a very competitive marketplace for those critical skill sets, and we still haven't seen the labor market really loosen up there?

But so if attrition is down, I did say attrition is down a little bit. So if attrition is down. I know some of the other guys have said, "Well, Mike actually had Parsons and they said that their wage growth this year is less than last year because they had to pay to keep some folks. Do you think the rate of wage growth is basically flattening out?

I don't know. If you think about -- if you kind of use almost like a 3% as a benchmark historical, I don't know that we'll slip exactly right back to 3% as we think about 2024 planning. We were higher than that for our 2023 planning. And we still got a number of months before we kind of think about what that's really going to be. But I'm not sure that it dips right back to 3 for 2024 planning -- it may step down, but not exactly back to what it had been last 10 years.

Right, right. So F-35, you've had some issues, the engine problem that's really Pratt's problem. I mean, Tier 3 software delays. Where are you on those? And when do they think you'll be resolved? And what impact more importantly, does it have on your revenues and your profit accrual and what sort of risk?

So for Tier 3, we certainly -- we've got a number of software drops that are happening over the next few months into the test program. And so we have to do -- we've done in our doing lab testing. They will also go into flight testing. We believe that we're still on track for the cut-in of TR 3 capability. So that would be hardware and software for the back half of this year in Lot 15. So that's our objective. That's our target. We remain on track and it's tight. The program itself has had, as you know, has been delayed. And so there always could be some type of learning between now and then, but right now, we're on track.

Got it. Okay. And the engine issue, I assume that's basically Pratt's issue. You're still building planes. So that should have relatively little impact.

Yes. Yes. I mean I think that we will see a cash flow impact this quarter because it affects our ability to deliver aircraft to our final customer. And so there is a final payment that's tied to aircraft delivery that are going to fall outside the quarter that we'll see some pressure here. It's timing in the year and knock on what we believe that they're on track to complete their root cause cut of action investigation and get us back on good....

So I guess we'll hear with the budget drop, whether we get a new engine for the F-35 or whether we go with a derivative, does it matter to you in terms of your financial performance on the program that 1 might be more difficult than the other?

Well, so right, you've got these 2 different solutions, either upgrade or a brand-new engine. I think either require -- or has some level of risk to them. I don't know what that cost trade-off is with the joint program offsets. That's a decision that they make because they have all that information and all that data. And I'm sure that they'll make the best 1 they think for the program. What we've done is provided what we believe is necessary for cooling requirements. For this new hardware that's being cut in these capabilities as well as the thrust requirements. And we've given them technical data as far as the trade-offs, but ultimately, it's their decision there. We would prefer, I think, to the lowest risk solution so that you don't have to deal with delays and things like that. But again, it's really the performance requirement that's important as well. And so I think there's going to be trade-offs at the joint -- going to have to make with their service customers. There, again, we give them the requirements and that is their call at the end of the day.

Right. So I guess, still going to156 -- and you get there when 25?

25.

25 Now. I think the last time we talked -- I had been thinking there would be a pickup in revenues, but the -- what is the revenue profile between here and...

The interesting thing is when you think about deliveries, so this year, we're assuming that this issue gets behind us, will be between 147 and 153. It's kind of the same range that we provided for next year as well. We talked about that, I think, in the summer. And then we get to 156 in 2025 there. And so -- the interesting thing there is, though, when you go back 2 to 3 years, we were -- when you think of talk about a lead time, you're talking multiple years, 2 to 3 years, you have to order materials start bringing it in and all that type of stuff. We are operating under assumption that the program volumes could be as high as 170 aircraft. And so we were running a production ordering system and material ordering system at that level of demand. And as we settle it back in at 156, there's a level that we have to essentially allow the delivery schedule to catch up to that inventory bill, and so you're seeing lumpiness in sales this year, our production sales will be down about 5% because of that phenomenon. It will be flat to slightly up next year as we kind of normalize this. And so I think over the next few years, it will normalize back on once we get kind of on track with this 156, but we're kind of coming down this kind of inventory reduction cycle will, and that's what's causing the sales lumpiness.

But if you have inventory burn off this year for next year, does that mean that 25, you're kind of -- everything is back in sync. And so as the rate go -- delivery rate goes up at the sales also should pick up in '25? Or is it still...

It may be a little bit in '24. I think it will be marginal. You're not -- I don't think we'll see a big step-up in sales on the production on F-35 production.

Got it. and then I think we just had the F-35 CEO, and I think you're talking about going from 48 depots to 71. I think it was by 26%, 27%. What sort of a growth does the growth rate for sustainment kind of accelerate here flatten out? Or how should we think?

Well, it's interesting -- that's right. We have this thing called just separate contract is called site activation and hardware, which is predominantly for these depots. And -- it's been a little bit slower than we originally had planned. I think if you go back a year, what we've said is our F-35 sustainment on a 5-year CAGR would grow around 6%, we still believe that to be the case. And while you do see, as General Schmidt talked about, higher depot and in stocking inventory and those types of things. At the same time, we're also taking cost out, so reducing the cost of sustainment. And so you've got the growth with the higher -- with a growing fleet. You got depot requirements and partially offsetting that is you've got better cost performance. And so we're proud of that. I mean we've got big targets that we've been assigned to deliver, and we believe that we are delivering our piece of those reductions. And so that you've got just counterbalancing and counterbalances it intuitively don't say, well, should it be growing high single digit or even 10% plus there you've got the reductions associated with cost reduction would try to back down.

When you talk of 6%, is that kind of every year is 5 to 7, it's a average any big -- there's no big lumpiness or is there?

I don't -- no, I don't see any type of huge lumpiness now.

Got it. And so I think you indicated that EACs as a percent of EBIT should be about 25% this year, flat with '22. This ratio has been trending down over the past couple of years. To what extent is inflation eating into the cushion you have in your accrual rates?

It's a good question, and it goes back a little bit to what we said -- what we were talking about before, Cai, is -- on the material side on our existing contracts, we really haven't seen that much impact on existing contracts. It's really been we'd have to assume or we put in higher labor escalation for our internal labor into our contracts. We've been doing that over the past year. What I'd say is Lockheed Martin has a very good cost reduction program. And we really have offset those impacts in there. So it's not where we've necessarily reduced our management reserve buffers. Yes, sure. That's happened in certain cases. But I think our cost reduction performance has helped us really offset a lot of the headwind that we've seen. And so I think that on existing contracts, where we've performed quite well, and we've been able to manage this well, and I get credit to our operations and our programs teams from being able to do that, anticipated and deal with it and manage it and drive our cost reduction programs higher. And so I think overall, we've been managing that -- what I would say is that 25% is probably a good equilibrium. This is probably where we'll be around that ballpark this year in 2023 as well. And what I would say about that as well is that is it where seeing as our recurring margins are increasing. And this is just really more of a function of program life cycles. As these programs mature, you just are running at a higher recurring rate, just kind of call it more learned out -- and so your opportunity for EAC benefits has come down, but you're operating at a higher margin rate to begin with. And so as you see, we do have margin pressure, but margin pressure is not due to that. Margin pressure is due to these production options, I talked about, it's more of kind of a contract mix issue that we have to work throughout.

Got it. So cash flow conversion is expected to ease below 100% this year. When do you think you can get to back over 100%?

When you look at our cash flow over the next few years, our goal is going to be to increase our absolute cash flow and continue to reduce our share count, so we can deliver a solid free cash flow per share growth rate. Over the next few years, we will have some cash flow pressures, our CapEx is still in excess of depreciation over the next few years. We've got potential pension contribution in 2025. So we have to overcome some of those headwinds to still deliver absolute free cash flow growth, and that's our goal. I'm not sure between now and 2025, that I can tell you that we'll get right back to net income, but our goal is to actually continue to grow it is where we are.

And so 1 of the issues of cash flow has been Section 174, and you've taken a different tack, I think, on R&D, where basically you have not so paid on R&D and cost on cost plus cost-plus contracts. So when does -- and although Northrop and RTX have, how should we think about does the IRS kind of say, Lockheed, you got to pay? Or how does that get resolved?

It's a great question. Let me just maybe explain the basis of our position for a moment and then get into what we expect could happen. We view this as essentially a cost of goods sold. And it's a cost of delivering the revenue to a particular customer. We're providing engineering packages or design to an end customer. And so we don't view that as R&D. We view it as cost of sales. And that provides a certain level of symmetry to the R&D tax credit, which is viewed as in the same exact way. We don't take those types of cost and take credit for those when we're calculating for credit purposes. We have no risk because the customer is actually bearing that risk of the development. We also have -- while you do a benefit and you get some type of know-how benefit, that benefit can be transferred to any other third party because the customer owns it as well. And so we view that that's a sound basis for the position that we've taken. We've had multiple law firms validate our position. They agree with us. And so it's not something like we just decided we're going to take a position in just plant a flag. I think it was very thoughtful, very well researched and a sound basis for it. As far as where the IRS is, we believe that there could be some guidance, general guidance that goes out sometime this year, but we're not sure that they will specifically address this issue. And so it could linger beyond this year. We'll see. We've asked them if they had any thoughts of providing guidance. And we just haven't seen it. They've got a lot of priorities that they're working through. And I think so that what we may see just general guidance related to this 174 issue, not necessarily specifically addressing this issue that we're dealing with.

Got it. Got it. So -- in terms of cash deployment, you've been aggressive in stock repurchase the last couple of years. Any thoughts looking forward, those priorities change at all?

Well, we still have $10 billion remaining in our share repurchase authorization. We expect $4 billion this year. Right now, our planning assumption would be $4 billion. In 2024 and then $2 billion in 2025. And if you think about that, that's -- when you add both '23 and '24, that's about $7 billion in each year of deployment between that and the dividend, which exceeds our free cash flow estimates in both years. And so I think we've got a pretty robust and pretty healthy capital deployment plan over the next 2 years. We'll continue to re-evaluate it. When we came out with our share repurchase program in the third quarter, we went through our -- just our planning cycle during the summer. We'll do that again this summer. And I'll sit down with Chairman, have a discussion, provide them a recommendation, present something to our Board, and we'll go from there.

Got it. So this has been terrific. Any final thoughts that we should keep in mind as investors think about Lockheed Martin?

This is a pretty comprehensive discussion, kind of really appreciate your time.

Terrific job.

Thank you and it's been a great dialogue. And as I mentioned, we're pretty laser-focused on returning and resuming growth in 2024. And we're making sure that we can drive our free cash flow, as we just mentioned, to growth, continue to take down the share count and provide an adequate, and what you think is a reasonable free cash flow growth over the next few years. And between that and our industry-leading dividend, we're pretty good use to return as we really start to re-crank the flywheel on growth.

Excellent.

I appreciate everyone's time.

That was perfect.

Thank you.