Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Aerospace and defense analyst, and it's great to again have with us Chairman and CEO of Lockheed Martin Jim Taiclet; and then Jay Malave, Lockheed Martin, CFO. I think you have maybe a couple of things to open with here.

Sure, Doug. Kind of obligatory comments, but great, good morning, everyone. Great to see everyone. Just as a reminder, that this discussion will have forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual results to vary materially from those discussed herein. Information on our risk factors included in our 10-Q and 10-K filings. So I think we're ready to go, Doug.

Great. Well, well, Jim, just to start out with, maybe you can tell us just how you're thinking about Lockheed Martin right now and what you see as the 2 or 3 biggest opportunities ahead.

Sure, Doug. And one lens to look through is the Ukraine conflict and what lessons, I think, that our customer base, both in the U.S. and among our allies are taking away from that and then how that presents opportunities for our company to try to be a pathfinder to solve some of those issues. So the first thing I think the learning came out was that our production system is insufficiently framed to ramp up production quickly when we need it as an industry and as an enterprise, including the government and the military services, so that's one observation. The utilization rates especially, if guided munitions is way higher than anyone was modeling or expecting. Secondly, the ability to quickly insert digital technology that the Ukrainians have figured out how to do as the war has progressed and they've been able to maintain their effectiveness is another really important lesson for service -- military services everywhere to try to take in, and I think, again, we're probably advantaged in that. We've been working on that issue for 2 years now, 2, 3 years now. And then thirdly, the notion of the effectiveness of allied response together. So whether it's interoperability, it's sharing intelligence, it's providing production and sustainment support as an alliance versus just an individual country, I think really has come through and the NATO line, specifically in this case, has really demonstrated that there are strength in numbers when you think about allies and partners. So those are the 3, I think, learnings that are key from the Ukraine conflict. Hopefully, it doesn't go on much longer as an active war, but that's what we're learning. First dimension of this is lined up with the first element of our key strategy, which is to drive antifragility into the production system for defense. And by that, I mean, how do we prepare to either absorb shocks like COVID to the production system and be able to deliver through those at rate and on time, which our industry did not do at 100% level during the COVID crisis. And then secondly, if we get asked as an industry to expand production or increase capacity quickly, are we set up to do that in a reasonable amount of time. And so the approach is there are and I think things that we're advantaging ourselves by leading again is pushing for multiyear contracts, long lead time supply in advance and making sure that we, instead of doubling production over, say, a 3- or 4-year period, we could double production over, say, a 6-month period if we ever get asked to again. The benefit of being one of the munitions providers that is now being asked to ramp up is there's going to be a revenue opportunity that comes with that, and we want to take advantage of it. The second arena we call 21st Century Security in our terminology, it's joint all-domain operations and the DoD terminology, that has proven to be effective in Ukraine. And what we've been trying to do at our company, and I think this is, again, an opportunity for us is for the last 2.5, 3 years, we've been collaborating with commercial technology and telecom leaders to work with us to accelerate the adoption of digital technology into national defense. We've already won a program where -- a program of record of Defense of Guam, we're actually implementing some of these things in a real program of record for the U.S. government. And we also got elected or selected to be the leader of the Joint Fires network, prototype for USINDOPACOM, which is, again, similar kind of technology fusion. And then the last piece of this, I'll talk about as an opportunity is we have a deliberate strategy now at our company to have production and sustainment deployed globally. And that's a different approach that our industry typically takes, which is we want to sell a product to a country, they have an offset obligation they want to put on industry, and we figure out how to do that. We want to have a deliberate strategy for production to increase our anti-fragility, if you will, and also sustainment so our products can be better taken care of closer to where they might be used or where they're based. So those are some areas where production system, digital technology and globalization internationalizing our operations that I think we are advantaged and we are going to lead.

Well, and I guess to think of that in the context of -- we've now got a new budget, the President's budget at least. We don't have a real budget yet, hopefully, by the end of the year. How are you thinking about that Biden budget as it relates to Lockheed Martin and then this congressional process that presumably we get through this debt ceiling issue and then we flow through the usual budget discussions over time? How does that affect Lockheed Martin?

I think we're in a real strong position at this point. Initially, the President's budget for say, F-35, for example, was the 80-plus number of aircraft for the U.S. that were in the initial President's budget, and therefore, that's the level we need. We don't need to ask for more production aircraft to fill the factory, that does fill the factory. When you add the international orders on to that, we're going to have the ability to ramp up over the next couple of years to our 156 per year goal. So on many other programs, too, there is sufficient funding in the President's budget. Again, it's not a big ask that we have to go back to Congress. So I think from the get-go for 2024 budget, Lockheed Martin was in very good shape. Now there's been the political activity going on around the debt ceiling lately. Even with that, the current agreement on the table, it's not passed all the way through yet, The Senate still got to address it, is 3% growth for 2 years in defense, where other areas of the budget are being reduced. And I think, again, that's as good an outcome as our industry or our company could ask for at this point.

Yes. I would agree. Besides F-35, the MFC munitions very well funded. You look across the portfolio, everything was essentially with the Presidential budget, what we had expected and what we were baselining in our growth assumptions. If you want to pick around the edges and something that we maybe weren't as happy with is maybe OPIR, Next Gen Geo, third satellite vehicle. We'd like to see that restored. But by -- in a big picture, everything already much landed in the Presidential budget request where we expected needed it to be.

Yes. And when you put all that together, I know you all had pushed back the growth trajectory a little bit. You're flat this year, but how should we think about that inflection happening and when we can see growth come back presumably 2024, we will start to see that.

Absolutely. We've mentioned multiple times that we believe that growth will resume in 2024, with the passing of time, we're more and more confident that, that will take place. If you recall, Doug, our backlog at the end of December of '22 was $150 billion had grown in '22 by 11%. And if you back out, the lot '15 and '16 additions to the backlog, our -- the rest of the portfolio still grew by 5%, so pretty solid growth across the portfolio that we expect to start -- to really feed the growth in 2024. The orders, particularly here in the second quarter have been solid. And we're seeing, again, particularly at MFC, those orders come in. And they're not necessarily multiyear awards, but what we're getting are multiple years of requirements in there. So some of the awards that we're seeing here for fiscal year '23 are deliveries that will take place in '25, '26. And they support the ramps at PAC-3 from 5 -- getting to 550 and ultimately 650. GMLRS going from 10,000 to 14,000 in 2025. HIMARS going from 60 to 96 capacity availability in 2025 and delivering in 2026. So everything that we're seeing is really consistent with that growth rate, and it will begin really in 2024. Sikorsky CH-53K, the deliveries of this year, we expect to deliver 4 aircraft that should jump to 9 aircraft next year. We'll see nice growth there in RMS and particularly Sikorsky on that program. And so everything, as I mentioned, really the budgets supporting that return to growth in '24.

Yes. And your space backlog is coming up, too. I want to -- I do want to go back to F-35 because you had -- you're a little slow on deliveries this year with Tech Refresh 3 issues, and I think -- I mean you just said like in a couple of years to be able to get to that 156 rate. With the international orders you've got and now with what appears to be a little bit more support on the U.S. side, does that 156 look pretty solid for, say, the next sort of 5 years or so?

I mean I'd say it looks very solid in the near term. And the question might be, is there a need or an interest by the government to expand that production capacity? That's a separate decision, but I think we can build a factory for the next number of years with the interest in the aircraft that we have now.

And in that, you've got -- so you'll have -- once you get to that 156, you're going to be pretty flat on the production side. But when you add on to that sustainment and modernization, what does that look like in terms of, say, overall growth rates for this program?

Overall, Doug, I'd say, over the next 3 to 5 years, when you -- as you mentioned, production, just to frame F-35, the entire F-35 enterprise is about $18 billion. The production element of that is about $12 billion, as you mentioned, that will be flat. When we laid out our 4 pillars of growth a few years ago, we talked about F-35 sustainment growing at a 6% clip on a 5-year CAGR. We still expect that to take place. And for that CAGR to be at 6%, it means the growth rate is going to be a little bit higher over the next few years, and we're very comfortable with that taking place. So when you put that altogether, development will be kind of flattish to maybe slightly up. When you put it all together, you're looking at probably low single-digit growth on the entire F-35 program.

Now one of the things that at least has appeared challenging to us on the sustainment side is we typically think of sustainment kind of growing with the size of the fleet, which obviously is growing, but also you've got to still bring that cost per flight hour down. How should we think of the trade-off between reducing their cost per flight hour and increasing activity base?

Yes, that was all contemplated when we -- contemplated when we came up with a 6% annual CAGR. So we knew that we just deliver more aircraft utilization of more flight hours, that the activity itself, the core activity would be higher than a 6% rate, but that was going to be partially offset by the lower cost per hour that we've been driving. Just as a reminder, since 2015, we've reduced the cost by 50%, and so we're still driving to another 35% over the next few years on that program. So we're committed, and I think on a good path to deliver to the Joint Program Office goals for sustainment costs, at least what at Lockheed Martin contributes to that. But even with those reductions, we'll see some nice growth there.

Okay. And that's still heading to that 25,000 number. Is that right?

Correct. Yes.

Okay. Then NGAD, I know we can't talk about details of the program, but maybe you could tell us a little bit about how you're thinking about your positioning for that.

So from an investment perspective, I can't speak to that. We can't speak to the details of the actual program, although there's a couple of concepts out on the nature of the -- potential nature of the program. One is, essentially the role of the aircraft is air dominance. It's right in the name, so it's an air-to-air fighter meant to defeat enemy aircraft and as an ex fighter pilot myself, the way to design to that mission is to be able to shoot down the enemy aircraft before it even knows you're there. So if that's the mission, how are you going to accomplish it? Well, first of all, you need a high-performance stealth aircraft. On the other hand, there's a notion that you might -- we might be able to have crude-on-crude teaming with the primary aircraft to improve your ability to do that mission and survive. So crude-on-crude teaming also means you're going to have 21st Century Security capabilities of autonomy, AI, 5G level connectivity, multi-classification data distribution and multipath cloud connection at a broadband pace and broadband rate. So these are all technologies that we're working on. So first off, our Skunk Works operation is famous for stealth. Stealth is one of the key attributes of winning air-to-air, a modern air-to-air combat situation because if you can't be seen on the enemy airplanes radar until you're close enough for your missile to fire and hit it, that's how you win. So stealth, both the shape of the aircraft, the outer mold line of the aircraft and its design and the coatings that go into that, the surface coatings and the infrared coatings on the engine inlet and tailpipe are really, really critical. We invest a lot and we have the main operations concords that can deliver on those technologies. Secondly, you want to have the missile technology that will fly the farthest with the most accuracy and the strongest electronic warfare countermeasures to being deflected, if you will, and our MFC business invests heavily in that technology. And then the last point I'll make is around this 21st Century Security, we're, again, bringing in -- we think the best-of-breed performers are in all those technologies that are more digital, so the 5G distributed cloud, autonomy, et cetera, so that we can accelerate those digital technologies into capabilities like crude-on-crude teaming. So we can talk about where our management attention and our investment focuses are, and that can give you a sense of, gee, how competitive could we be at Lockheed Martin and how serious are we about an NGAD concept.

And the aircraft -- the award on the -- for the aircraft portion is supposed to be 2024 sometime. I think that's what the Air Force said 2 weeks ago. And -- but the other aspects of the system, a lot of those, I would assume will come later in terms of awards.

Potentially, they haven't commented on timing of -- I guess, you called peripheral vehicles on the NGAD concept, but you're also going to have a command-and-control system. You're going to have a comm system. It will have to be integrated in cyber secure. There's going to be a lot of aspects to NGAD that will come along, but we don't know exactly the timing of that.

Yes. And presumably, almost all of those are things that you would be looking at.

Well, from a technology front, of course. Yes. So we are very good at those technologies, and we continue to invest in those, yes.

Now going to lower technology, F-16. So F-16 has -- we've seen sort of a resurgence here. Can you comment a little bit about what that trajectory is likely to look like in terms of number of export aircraft?

Well, just kind of based on where we are today, Doug. We've got about -- we've delivered aircraft to Bahrain. We've got a backlog of 127 aircraft. There's another 20 or so behind it that we expect to come into the backlog by the end of the year. Right now, we're -- we'll deliver, say, anywhere between 5, 6, 7 aircraft this year. From a production rate standpoint, we expect to get to about 3 per month by the end of '24. And then to 4 our steady-state production rate of 4 by the end of '25. There's certainly been -- you see things in the news about F-16. It's very relevant. Our team in Aeronautics likes to refer to Block 70 aircraft as a 4.5 generation of fighter aircraft, and we believe that to be the case. And so there's certainly demand you've heard, I think, Turkey and other countries. We have to follow our customers' lead state department and so on from a policy standpoint, but we're ready to add to that backlog and deliver. We think that there's definitely some lags behind it, but we still have to work through the process.

In prior years, the F-16 had been a very attractive program from a margin standpoint for exports. Do you expect it again to be attractive? I mean, is it sort of a direct -- some direct sales, where you're going to be able to get some high margins?

Yes. I mean currently we're under IDIQ, so these are FMS. And so you're probably going to see a little bit different margin profile, plus the fact that because we moved operations from Fort Worth to Greenville, it's like starting up a brand new production line, and that's taken a little bit longer than we expected, and it's had a cost impact. So our early contracts will probably be under some pressure, and I think we'll see once we get to a steady state of production rate, we'll see profitability improve. And it will be a reasonable profitability, I would say.

I want to just kind of go back a little bit to the budget and Ukraine. So when you look at the impact of the extra money that has come in, supplemental funding that's come in related to Ukraine, can you talk about how that's benefited Lockheed Martin? And it's -- I think of this as complicated because you've got some things where we spent money on Ukraine and things will have to be replenished. Other things are sort of direct sales to Ukraine. And then there's the third category, which is just general concerns in Europe with more spending that's coming out of this conflict. So when you think of this for Lockheed Martin, how should we look at -- like what you're getting right now and how the next couple of years might be different than they would have been before?

Yes. I guess what I'll do is compare to when Jim and John Mollard had laid out the 4 pillars of growth back in '20, I think it was '21. It's certainly changed. The MFC element, the programs of record element of that, whether it's GMLRS, whether it's HIMARS, whether it's PAC-3, DX the growth expectations are substantially greater than they were then. And so between over a 5-year period, say, from '22 to '27, you're looking at probably added revenues in the range of $6 billion over that period of time, and it's probably another tail. Once you get beyond 2027 of potentially another $4 billion, you're talking $10 billion over probably a 10-year period, so pretty substantial. A lot of that, as you mentioned, Doug, is replenishment. There are other elements to it. We've got a lot of discussion with Poland. Poland is a great partner, a great customer, who's looking for capability as well as in-country production capability as well. And so those are all things that I think of both -- are adding to our growth outlook. Having said that, I do have to say that, that's -- it's offset -- more than offset the impact we had from the FLRAA loss over that same period of time, over a 5-year period, we were looking at $4 billion. So net-net, it's positive, say, $2 billion. And then once you get beyond '27, there's another $4 billion there. So it's been a significant step change really in our growth outlook, no question.

Yes. Because I mean if we go back 2 or 3 years ago, that was a period where missile budgets were coming down. It's been -- we've gone through a very high demand period and this budget started to come down, and now they're up substantially. And your backlogs have been starting to turn the corner as well. So -- but when you look at this, also, you've been able to, in the past, you had a lot of export sales here, you've been able to get these 14% plus type margins before. I mean how are you thinking about Missiles and Fire Control margins now?

Well, there's multiple facets to the MFC margin question story. The first one, and I talked about this, I think, in a few quarters now, as far as -- we've got a classified program that essentially has a negative margin to it, and so that puts pressure on our margins for the next, say, 5 years. We're seeing this in the first year. We're seeing it. Our expectation for the margin is to around 13.5%, and there's going to want to be additional pressure on that from that program. Having said that, the upside that we talked about should provide a mix benefit with those legacy margins that should provide some lift. And so we're just -- we need to work through the math over the next few months, determine what that is net-net, but that's provided at least some buffer and some mitigation to what we're seeing on that classified program. I can't say for certain that MFC can stay flat. They still probably want to trend down, but what the goal is that the total enterprise level is to hold us flat. This year, our guide for margins 11.2% and our goal is to sustain 11.2% at a total enterprise level which means the rest of the portfolio, we'll have to see some expansion if MFC wants to continue to come down. The legacy products, you're going to see them in the range of the legacy margins that you've seen there.

Okay. And so that one program is really the biggest issue here right now, but what about on the supply chain side? Has that been a major issue in Missiles and Fire Control?

Yes, we've seen some impacts there on some of our programs. I won't get to specific kind of components. But there are -- there's been issues both in small, medium and mid and large types of suppliers for various reasons. Part of it is COVID, part of it is loss of employees and replenishing employees that don't have the same level of proficiency so that they just need a learning curve they need to work out through. Some of it is an element where we've upgraded systems, these weapon systems, and so it's a new iteration of it and the ramp up to meet our requirements just taking a little bit slower in that supply chain than originally anticipated, that may have happened without regard to a COVID impact. Those things are just complicated and they're difficult and so we're dealing with multiple facets of supply chain pressures, but I think that we've gotten some stability, I'd say, over the past 6 months or so. And we're generally tracking to what we expected in -- when we laid out the financial guide this year and operationally.

Well, and -- and as far as rocket matters, I mean, Aerojet Rocketdyne, they're a big supplier to you. Has that been an issue? There's been a lot of public commentary around some of the challenges they've had.

Yes. I mean they've struggled with some of the ramp rates that we need to be at, sure. GMLRS is one that we've been challenged a little bit there, but what I can say is that they did get receive some funding for incremental CapEx and facility improvement and equipment improvement, and I know that they're focused on it. We're their largest customer. And so we're confident they'll get there. It's a question of timing.

Yes. Yes. And then still in there, I mean, I thought it was -- we all saw the PAC-3 success at taking out a Russian hypersonic missile. Can you talk about both hypersonics and hypersonic defense and how you're pursuing that right now?

Sure. I mean Hypersonics is an incredibly challenging technology on one hand, and it's also not a single definition of product -- end product. Hypersonic missiles already exist. Any ballistic missile will achieve hypersonic speed which simply is the Mach 3+. The interesting thing about a ballistic missile is it's trackable because it's parabolic arc and therefore, you can have NGI, for example, Next Generation Interceptor because you can predict even as fast as it's going, which could be Mach 8 or Mach 9, you can predict the path of ballistic missile and make an intercept on it. True hypersonic missiles and the characterization that we're talking about it means they can maneuver at the end of their flight path, which makes them incredibly difficult to intercept. It's questionable as to the maneuverability level of the Kinzhal missile that we shot down, but at least we know we can hit it. So we will continue to do the move -- counter move development of understanding how hypersonic missiles can be maneuverable and what we need to do to intercept them, so that's the hypersonic defense. On hypersonic strike side, we have a number of programs already in process with a number of these U.S. armed services, Air Force, Navy and Army to produce hypersonic strike missiles. The most advanced of the programs that's going into production let's call it, Conventional Prompt Strike. And this is a situation where the Army and Navy will utilize the same vehicle, but have launches, 1 for the ground and 1 for ships and submarines that we'll be developing for them, that's pretty far along. There's a couple more flight tests to go in the development program. And we anticipate, although it's no guarantee that, that will go into production. We also have an air launched boost glide missile, similar technology, if you will, to the boost glide on the CPS missile, but it can be launched from an aircraft. And we've demonstrated that in test, it's called ARRW. Air force is deciding whether they want to go that route or just go with an air breathing hypersonic air launch missile, which we're also developing for the Navy, for example. So all of these are in play right now. We're not exactly sure what the government is going to decide to do in all these areas, Doug, but we're participating really actively in developing technology and actually fielding systems that can do all these things.

And so if we were to think of the revenues across these hypersonic programs today and where they might be in 5 years, I mean, what are we looking at here?

It's -- today, it's just -- well, on the hypersonic strike, you're talking in the range of $1.5 billion. The growth rate isn't a huge number over the next 5 years. It really -- back to Jim's point, it's a question of where the customer wants to focus and at what volume levels they're going to want to purchase that, so it's still really an unknown for us. But I think back to Jim's point, the fact that we're positioned, whether it's boost glide or Air breather, we'll participate in whatever that growth rate actually is ultimately. On the defense side, it's -- we'll see in terms of what our capabilities are. You've got -- as you know, we get the PAC-3, we've got that. We're working on Next Gen Interceptor, all these systems and what type of role they may play in hypersonic defense still TBD, but we're pretty well positioned there as well. NGI, we go back into the 4 pillars of growth. Next Gen Interceptor was one of those pillars of growth that we're assuming in our new awards, and we're expecting a down select in 2025.

And 1 other technology here that I know you've been pretty active and it's been Directed Energy, and that may even if I believe some of the leaks even on NGAD may be an important thing. Is this significant in terms of when you look at your revenue trajectory over the next 5 years, how important is that?

It's not a huge number. It's under $1 billion today. What we did over the past 6 months actually has consolidated it operationally. It was under different -- each of our different business areas. We consolidated management responsibility for that under our RMS, rotary emission systems earlier this year. And we certainly see it, and we're developing -- you're talking 50-kilowatt all the way up to 500 kilowatts type of systems. And we were under contract, both on technology development, but we've got HELIOS, actually, we delivered one to the Navy. And so there's a number of opportunities there in play. And that could be substantial. We're not -- it's not really baked into our forward look, but it could be a substantial growth vector for us, absolutely.

Going over to Space. I mean, Space is the area we've seen by far the most growth in the budget, multiple years of 20% plus. And when we think of your Space business, it's so large, which is a good thing, but it's also that largeness comes with a lot of large legacy programs that are -- that have kind of come down. Just recently, we've really -- we've seen those backlogs start to turn up for you, and so can you talk about how we should see this sort of transition from legacy space programs over to some of the new programs that you're involved in, realizing some of this is classified and may be difficult.

Okay. So maybe take our Space segment, $11 billion business and maybe break it up a little bit. We've got our National Security Space, which is slightly above half of that, and then it's generally equally split between our strategic missile defense. That's why as Jim mentioned, hypersonics, Next Gen Interceptor, our inter Fleet Ballistic Missile programs are in that, and then the remainder is our Civil Commercial Space business predominantly Orion. Now, so security space, if you look at our performance last year, you're exactly right, Doug, so we've been a long-standing prime on Cerberus. And so you're talking in OPIR, Next Gen Geo, which are geo orbit, missile tracking defense type systems, warning systems, long program, exquisite type programs, which has been our legacy over time. Those are cycling down. If you exclude the impact of cycle down last year, our National Security Space business was up 9%. So we're participating in these new kind of, call it, proliferated constellations that are out there, whether it's classified. As you may know, we're on the transport layer for communication satellite in LEO. And there's a number of other things we've partnered with Raytheon on a missile track custody program to bid on in MEO. And so there's so many new things happening there, but we've really -- the team has done a nice job of really pivoting from being the legacy exquisite player to being more of this low-cost provider of proliferated systems. And so we've developed a midsized bus around 400. We've partnered with Terran Orbital to provide a small-sized bus which is the bus that we're using on the SDA transport communication satellite system and a number of other systems that are in classified. So I think that our team has done a really, really nice job of pivoting. What you would normally expect a slow exquisite type organization, legacy organization to have been. So our legacy is really not getting in the way of this pivot that you're seeing really in the intelligence agencies and the defense department as well. The other thing I'd say is that the team is really focused on just being a -- I want to call it a merchant supplier, but making that available to the industry. We're providing solar arrays to Terran Orbital, another programs that they're on, so here, we're a merchant supplier. In the Civil Commercial space, we are a player with Blue Origin on sustaining lunar development. We just -- that was just awarded to them a few weeks ago. We're on that team, a multiyear program for Lockheed -- multibillion-dollar program for Lockheed Martin, and again, we're a supplier to Blue Origin on that. So I think as you're seeing the industry pivot and transition, we are -- we've really rearchitected our internal processes to able to react to that, and we're seeing that.

Yes. There's a lot of agility in our Space business. Many don't anticipate that coming from us as a company, but it's happening. And the other thing that we're doing across all of Lockheed Martin is while the divisions, if you will, our business areas, as we call them, are the loci of hiring people, building factories, producing products and services. We are also cutting horizontally across all those business areas from a mission perspective. And so we're going to include as a company and our solution sets more space assets in conducting missions. So for example, this NGAD mission, well, we want to find the enemy aircraft before again, they see -- they even know that we're here. We can have space-based sensors, whether they're in low or mid or even geosynchronous orbit, feed into the data path that can give us the early warning that then allows the aircraft radar to focus on a certain part of the sky and get that signal first. So we'll be utilizing our Space business, not only in the traditional ways and the newer ways of low orbit, many vehicle redundancy, but also in ways that really no other of our peer group can do because they're not involved in all the missions that we're involved in. So we're going to include Space as not as sort of separate arena, it's going to be part and parcel of things that we do all the way through to MFC, for example.

Another example of their pivot is international. They've been essentially a U.S. intelligence DoD. They were selected -- down selected for Australia military communication satellite program called Joint Program 9102, which is -- it's another leap for them. They partnered with our RMS. There's a strong presence in Australia to go win that program. So again, there's a lot of change there for the positive and really moving at the speed at which we're seeing the industry change.

Yes. I mean, traditionally, you've had very little international work out there. You expect -- is that...

Yes. And Australia is not the only one. There's other countries right behind that as well. So yes, there's a pipeline there.

So what -- how should we think of this? I mean if we were only looking at alignment with the DoD budget in Space, we would expect everybody Space businesses to be growing at these very high rates, that's -- everybody is not growing at 25% a year. So how should we think going forward about what space can grow at since it looks like you're now just coming out of some of this legacy roll off?

Yes. Those legacy roll offs are going to still be with us for the next number of years, up to 5 years. As I mentioned, the Cerberus, Next Gen Geo and then Orion, those are 3 big programs that are going to continue to cycle down that will put a drag on the growth rate. I would expect that pivot to a higher growth rate. And so you're probably looking in the range over this period of CAGR in the range of kind of low single digit. Post 2027, that's when we should see a ramp-up and a higher growth rate.

And AHF, I mean that's kind of gone by now, right? I mean that's...

Yes, it's cycling down .

Yes. Yes. So then RMS, FLRAA, I know that was a disappointment, but I guess 2 things on it. One is you bid, I think, pretty aggressively on that, and there's been some discussion around this. But when you think of bidding on future programs, I'd even put NGAD in there, how do you think of investing in a sense, Boeing has done this very aggressively on a few programs that has not worked out very well. So how do you think about positioning in the future for wins?

Let me just speak of the FLRAA approach for 1 minute and then turn it over to Jay for how our process works on bid and proposal in general. So the FLRAA competition really had 2 different product proposals from the 2 bidders from Bell Textron was basically a fixed wing aircraft with an ability to tilt the rotor and vertically take off and land versus the Sikorsky prospect, which is a true rotorcraft. It's a helicopter, so you have a fixed wing aircraft and a helicopter. Those are 2 different products and their cost bases are also different, so that fixed wing aircraft with flight and performance parameters, it offered is a more expensive machine. Inherently more expensive machine. So to compare the 2 numbers that have been kind of tossed around out in the public sphere, isn't the right way to look at it. We bid with an ROI that we thought was within our investment criteria at Lockheed Martin on the helicopter offering in the FLRAA competition. So just setting those things up, the Army decided they really wanted more of a fixed wing performing vehicle for their evolving mission in the Pacific, I think, is really the reference point, and that was their choice. We didn't necessarily bid to dive to the bottom on our bid. Our bid was a different vehicle. So with that let me just turn it over to Jay on our process.

Yes, a follow-up -- just a little bit of a follow-on in a little bit more detail around that. We go through these, and as you'd expect in defense, you've got these position to win price, to win types of analyses and in many cases, not all cases, you know what the evaluation criteria the customer is going to evaluate and RFP on. And so you make a technical assessment of where you are relative to what you think your competitor is or competitors are and then determine what is an appropriate price point associated with that. And specifically as we went through FLRAA, to Jim's point, there was just an element of different technologies. We also had the benefit of our using our ILMX, so our digital thread tools, we're going to be fully utilized on this development program, so it would not have been a traditional development program, so that also would have brought in a lower cost relative to development program in the past for us. And then sure, there was an element of strategic pricing as well. Back to Jim's point, the economics worked. And so I mean that's the first threshold, do the economics work? And so I think that we were -- we went through it, and I think in a regimented way. Ultimately, some of the assumptions that we made relative to where the competition was going to be were off when you're talking about the gap of that magnitude, but what you do is you take from that, you learn in the spirit of continuous improvement, you build that into your database, and you use that for future bid and proposal activity. Our process is pretty, I think, well defined. I think it's pretty disciplined. We'll continue that. I don't think you should expect that Lockheed Martin is just going to be an aggressive bidder. I don't think that's -- that would be an appropriate characterization of our approach to a bid at proposals, and I think the process in and of itself will be disciplined. It won't be at the detriment of current shareholders for longer-term shareholders. It's a balanced approach.

Okay. That's very helpful to clarify that. When you look at RMS now though, you had hoped that you would win this program. You've got CH-53K, which is growing, Black Hawk kind of coming down some. How do you think of the industrial base there going forward sort of post the FLRAA loss?

There is a FLRAA competition coming up next, so that's vis-a-vis the assault aircraft, meaning take troops, move them somewhere, wham them. This aircraft will be more reconnaissance and attack, so smaller aircraft. The X2 Technology with the counter-rotating main rotors also is going to be our offering for this kind of competition, and we expect that is the right technology for maneuverability, for really low flying terrain masking, if you will, missions. So we think we have the right aircraft for the missions here as well. We expect that we'll be successful in that bid if the proposal process stays on track and on time, so we have that opportunity to refill the factory. In parallel to that, we're already proposing modernization of Black Hawk using, again, Newtonian technology upgrades, we can give a very reliable legacy platform, but also these digital technologies. And so again, if you look at what are the helicopter missions that are often performed? Some of them are fairly unsung or less known. One is air evacuation, right? So when you have an injured soldier, and you saw these in Vietnam movies, where the helicopter comes in, lands in this battle space where all this directed fires coming at you and pick up the injured soldiers and take them back. That's a really, really dangerous mission, right? And it's one that has to be done often in conflict, well, we've demonstrated that the Black Hawk can perform that mission on an unmanned basis. You don't have to put pilots at risk to do the air evac mission in a hot landing zone. Similarly, if you're just resupplying ammunition or other goods to frontline forces, you can also do that autonomously. And so we can solve mission issues with digital technology that, in this case, not just a new aircraft offering but to bolster a legacy aircraft. And our goal is every platform we have use these digital technologies to make it more attractive to do important missions for our customer, and that can be a Black Hawk or that can be some sort of NGAD development in the future. These digital technologies will actually make our platforms more attractive, sooner, we think, than our competitors' offerings could be.

So if we -- a little time left here, but I'd like to turn over to your outlook for free cash flow. If you look over the next 3 to 4 years, how are you thinking about it?

Yes. So this year, our guide is $6.2 billion for free cash flow. When you look at it with some of the investments that we're still making our CapEx is still elevated this year and over the next few years, our goal would generally be a -- probably a low single-digit growth in absolute free cash flow as a target. And when you couple that with our share repurchase program, a mid-single digit in growth in free cash flow per share. And then when you tack on our say, 2.5 dividend yield, so, assuming you can use that for a return -- shareholder return. You can get yourself to a 7% to 8% total shareholder return over that period of time. And so that's the way I think we're looking at it. We do have some things we have to work through. We expect there could be some pension contributions anywhere between $500 million to $1 billion in 2025, so we have to manage through that, but where we see opportunities is in working capital. Our -- while we do have, I think, relative to the rest of the industry, good working capital performance, relative to historical performance of Lockheed Martin has deteriorated. So we have an opportunity to bring that back to what we've historically performed to, and that will provide us some cash flow offset any type of pension headwinds.

Well, I think to wrap up here. Maybe, Jim, could you just tell us what you personally, what you're going to be focused on over the next 12 to 18 months?

So the focus areas for me are those 3 strategic initiatives, right? How do we have a more resilient or reliable defense production system. And that includes meeting with congressional leaders and others to say, here are some policies and processes that if government were to change or modify or update those, the industry could be more responsive to you. So again, the multiyear procurements, the kinds of things where we get some anti-fragility funding, so to speak, to qualify second sources or to have overseas plants that we can actually utilize if there's a big escalation of demand. So that arena, I'm personally involved in. Secondly, is this digital acceleration into the defense enterprise. We're actually really getting traction. I mentioned this Joint Fires Network, for example, where we've actually got commercial companies contributing to a defense enterprise solution using their IP and their people. And I want to get as access to as much of that as we can and be the bridge is Lockheed Martin to bring that into our customer base. One of the big areas to do that will be to establish a standards body like 3GPP has in telecom that gets the industry together with the customer base and says, okay, here are the APIs and the interface standards and the protocols and frequencies we're going to use as an industry to deliver upgraded services and products and have that -- the convening body take place. My view is that the U.S. government needs to be the convener but industry needs to be the contributor and the architect of this future system. So that's something, again, I'm personally involved in. And on the international side, I think it's really critical for us to really globalize our company like we did with American Tower. We've got a great business model. We had it then. It was very domestic. We ended up taking it all around the world. I think we need to do more of that at Lockheed Martin. We've got great technology. We've got production expertise that we can cite in different places to make our products more attractive to those international customers, sustain them better in their territory and sustain the U.S., which is deployed its equipment in those territory. So again, really internationalizing the company and driving production and sustainment offshore in a way that really helps the U.S. government too is another place I'm actually personally involved in.

Well, very good. Well, Jim and Jay, thank you very much for being here.

You're welcome, Doug. Thank you.

Appreciate it.