Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Good morning, everyone. Welcome back to the aerospace defense track at the 2024 JPMorgan Industrials Conference. I'm Seth Seifman, the U.S. aerospace defense equity analyst. We are very grateful now and been very happy to have Lockheed Martin with us now. We have Jay Malave, CFO; we have Chris Fritz from Investor Relations. And we're going to do a little Q&A here, a little fireside chat. I'll ask some questions and we'll open it up to the audience as well. I think maybe Jay is going to start us off with a little statement here.

Yes, safe harbor statement here. The statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings, including our 2023 Form 10-K for a description of some of those factors that may cause actual results to differ materially from those in the forward-looking statements. All right. So we're good to go.

Excellent. Very good. And with that, maybe we'll dive in. I'm sure no surprise to you as usual for many years the early questions are about the F-35 company's biggest program. And so why don't you tell us a little bit about where things stand and particularly maybe starting off with TR-3.

TR-3. Okay. So TR-3, it's really pretty much the same as what we mentioned about a month ago. And so we are in lab testing as well as in flight testing, flight testing as capability. It includes any with the current flight testing is stability improvements, video capability as well as weapon systems capability that were increased incrementally there. And so we're going through the flight testing there. All other findings and the discoveries are consistent with what we expect and the time line that we've talked about, which would be targeting the restart of deliveries in either targeting June for a more likely case would be sometime in the third quarter. On the lab testing, that's where what I would refer to is our -- what we believe to be the deliverable software release, which would include things like additional video capability, radar capability and more system stability improvements. And so we're in the lab testing now. We would expect in some time that we'll start that flight testing program as well. And again, what we're seeing is pretty consistent with the time line that we laid out before.

Okay. Yes. So it seems like for -- I guess, for a couple of months now since the earnings report, certainly, that's been kind of a stable type of outlook in terms of your time line.

Yes. I mean it's been pretty stable, as I mentioned. It's -- I'd love to tell you kind of give you a date certain in a specific milestone that we can refer to. What I can tell you is the findings are consistent. But what I can't tell you is what findings or discoveries that might have between now and that time period. And so that's always an outstanding risk that we have to manage. But what I can tell you right now is what we're seeing is consistent with the time line that we laid out.

Excellent. Okay. Very good. And then with regard to production, we saw the request earlier this week and the reduction in the request for fiscal '25 versus fiscal '24 and versus what had been previously planned. I guess, I feel like we've seen this movie a little bit before, maybe about 2 years ago, and then we saw some F-35 show up on unfunded priorities list. And so -- and plus this budget, I think we all know is not going to be passed most likely until after the election. So it's a lot of stuff that could happen. But if we do take a step back and we think about the number of F-35s in the plan and we think about the lot sizes going through, I guess, 15, 16, 17, those lot sizes are below 156 aircraft. And we don't know yet the lot sizes of lots 18 and 19. That will depend to some degree on the international number, which we don't have a lot of insight into on the outside. But it would seem like we might be headed where we've got, let's say, 4 or 5 lots in a row below 156. So what's the outlook for maintaining production at that level?

Yes. Let me just go back on I mean, lot 15 to 17, while in the aggregate, they were lower when you added that to the backlog, that supported the 156 over that multiyear period. So we feel very comfortable at maintaining 156 from 15 to 17. When you look forward, say, lot 18 and 19 and you see these coming down a little bit lower, given the international backlog, we feel reasonably confident that you can still support a 156 even if the U.S. DoD would come in lower. The sweet spot for the U.S. DoD at 156 rate is starting with an 8, like the 2024 number of 83 is where you'd like it to be every year to support a 156 rate. Given the backlog on international, you can theoretically pull aircraft to fill in that gap. Now again, that's a theoretical discussion because it requires really coordination with the customer. Our customer requires their coordination with the end customers. And it also requires an evaluation and marrying up of what's deliverable on these contracts versus what's already in the production cycle. So as you know, Seth, you can't necessarily -- once you're already committed to building a C model, you can't make that an A model. And so our team has to go do that work with the joint program office to determine how they would make that work. But we see it as -- our view is that we can maintain a 156 level even at that 68 some work would have to be done to confirm that.

Right. Right. So I guess the international -- if the U.S. is starting with an 8 so the international, even there, the international numbers kind of come up from -- I guess, it's been in the 50s; some years, it's touched 60, but it's kind of been a number in the 50s. And so that's -- that international number needs to move higher just to kind of maintain that, but we've seen those orders and that's what gives you confidence?

That's right, exactly.

Okay. Okay. Excellent. And then maybe 1 more on F-35. It's just the -- you guys have talked for a little while about a PBL contract. Is that something that's still possible? And to the extent it is -- how -- is that maybe different from what you were thinking about in the past? Or how would it change what you're doing?

So we believe a PBL is the right answer for sustainment on the F-35. It kind of aligns interest. It makes it a win-win situation. We're both highly incentivized to really drive us and the customer when I say we both to drive better availability rates more component and LRU components time on wing, all of that type of behavior that's what a PBL incentivizes. Having said that, ultimately, it's a customer decision in terms of how they want to contract. And the way they've approached it is they really paused the PBL approach. And for the next few years anyway, we're looking at a transactional kind of similar to what we have been doing. So even a transaction, we can still align interest to try to make sure that we can improve availability rates and service rates for the aircraft, and that's what we'll do with our customer. We think there's still a lot of value to be had there. We still think that we can drive performance improvement and really improve service rates for our end customers working in partnership with a joint program office. But right for the short term, anyway, over the next few years, you're not going to see it through a PBL, unlikely.

Okay. Okay. So we'll continue to see. But with the fleet growing, we'll continue to see growth in that maintenance portion of that F-35.

Sure. Yes.

And it will be just in line with the fleet and flight hours and those kinds of...

Right. I mean, recall I think it was in 2021, we mentioned that we expect to sustainment to grow at a CAGR of 6%. We still expect that to be the case.

Yes. Okay. Okay. Excellent. Maybe thinking about a different part of the Aeronautics portfolio, the classified piece, which admittedly is difficult to talk about, but that work has probably doubled or so over the past 4 years. I don't know what you can tell us, but should we think about that being driven by like a small handful of programs? Should we think about that being driven by a very wide range of programs? What's kind of driven that massive growth in those...

So it's a function of both. They have a wide range, a high number of programs there. In terms of driving growth is probably a smaller population that is driving growth. And so when our outlook does assume that there would be some competitive wins in there. So it's not just kind of the run rate of what we're looking at and what we have. We do have to win some new business in there. But as you would expect, technology development, you've seen that the customers talk about what they're looking for and prioritizing technology. And for us, you think about what we are, we're the fifth gen provider, improving those technologies, be it stealth, via new mission systems, things like that. We continue to drive advancements in those areas. You talk about data fusing and processing capability. We're working that quite a bit. And so a lot of where you see the customers' technological priorities is exactly the type of work we're doing through our own internal investment but also through contracts with them.

Right. Okay. Okay. And then I guess when we think about the -- usually when we think about that part of the Aeronautics segment, it's kind of a -- it's development work, and it has a return on sales that's consistent with that level of risk. How do we think about the potential for the development work that's been driving the growth to turn into production work over the next, let's say, 2, 3, 4 years?

It will take some time, Seth. In those programs, you're probably looking at a longer development cycle. So over the next 2 to 3 years, you would probably stay, I would call it, probably in development phases. It will take a little bit longer than that to get into production. Because as you've seen, it's typical in the industry where you have development margins kind of maybe mid- to high single digit and then you get into low rate production where you're probably in the same ballpark, which is low to maybe mid to high. And then as you get into full rate production, you're getting to get learned out, you see the margins kind of creep up and it go from there and you continue to take cost out. But that is a much longer cycle in 2 to 3 years. You're talking probably 5 to 7 in that ballpark.

Yes. Yes. Okay. And then within that category, I don't know if this is something you're able to talk about, but we know it's been reported in the press that Lockheed was among 5 companies that got a contract to develop a collaborative combat aircraft. It's an area that's been a focus very much in terms of what the Air Force and Secretary Kendall are talking about. It's an area where you would think based on its capabilities and technological prowess that Lockheed would be able to make a real contribution, but also not necessarily known historically as a major unmanned provider. Is there anything you can tell us about your approach to that market, the extent to which you're doing it independently or with a partner? How it fits into that kind of 5- to 7-year profile you talked about?

Yes. It's interesting because Lockheed Martin has been around for quite some time. And you probably wouldn't necessarily equate Lockheed Martin with being more than a hardware provider. But the reality is that we're a systems integrator and a systems integrator requires a pretty sophisticated level of software capability as well. So we view ourselves as being having a broad range of capability, both hardware development and production as well as software systems development and production as well. And so we're pretty flexible. We have an, I think, approach where we can go it alone. We have the full range of capability to provide solutions to a CCA type of program. But we are open to also any type of collaboration with others as well. It could be where we provide hardware and we can collaborate on software or someone else provides hardware, and we just do the software. So we're pretty open-minded on that. We provide some command and control type of capabilities, particularly in classified areas today, which requires a high level of software capability. And so arbiter is pretty open there.

All right. Okay. Okay. And I guess, based on that, maybe you can draw the conclusion that the -- where we are in the life cycle of that, there's still a lot of work to do. What you're doing is not is at that level where there's still many options that there's still a ways to go before we're...

Yes. I mean I think what they've talked about is that there's 5 potential suppliers down-selecting anywhere between 2 to 3, I think, with the latest comments that we heard from the customer. And then from there, they would continue to do technology maturation and we'll go from there. So that will give some time to really kind of, I think, mature solutions as well as mature types of approaches.

Yes. I mean that kind of gets into a bigger question that I wanted to ask you about is there's this -- and we see a lot of studies out there about the defense department and how it needs to kind of reorient the industrial base for a different world where you've got competition with China, which has a lot of technology and a lot of scale. And to do that, the Defense Department is going to access all the great technology that's being developed in the civil world. But -- and people keep looking to that kind of tech civil silicon valley world. But should we be thinking a little bit more about some capabilities that are resident in the existing defense industrial base in companies like Lockheed Martin, whether we're talking about -- you mentioned software development or things like artificial intelligence where Lockheed and maybe some of its peers might have capabilities to bring to bear?

Yes. I think the industry as a whole has pretty good developing capability, to be honest with you, things like AI. There's been -- when I talk about or think about Lockheed Martin in general, we stood up what we referred to as our -- we call it the lake. It's a Lockheed Martin Artificial Intelligence Center, and we set that up in 2021. We've got over 2,000 engineers working on artificial intelligence over 300 projects. And when you look particularly on new capabilities, even on monetization capabilities, these technologies are being embedded in and so when I mentioned software capability that Lockheed Martin has, it includes AI capabilities as well. On the other hand, I would say that these entrants is a good thing. I mean it fosters a competition, it fosters a more innovation. So I think if -- and Jim Taiclet has been a strong proponent of really merging together commercial technologies and defense applications, which defense players to bring the best possible solutions to the defense customers. So it's something that we look forward to and we can frankly kind of embrace it. And we've had partnerships that we've talked about in the past, whether it be processing capabilities with companies like Intel, other capabilities with companies like Microsoft, networking capabilities with companies like Verizon and AT&T where we're doing exactly what the customer is kind of guiding to. And so what we have is the benefit of experience, the mission knowledge, as I told you, the broad range of capability, but to the extent that our new technologies that are being matured, we can bring those in and help mature those in an accelerated fashion. So frankly, we're excited about the potential to bring in commercial technologies into defense.

Excellent. Often, I keep asking questions, but forget to look out at the audience, but maybe we'll just take a brief pause here to see if there's any questions from the audience. Okay. Well, we'll keep going. So we talked a little bit about the Aeronautics business. Another segment that I wanted to focus on was it was missiles and fire control for -- I guess, for 2 reasons. First of all, you've told us a fair amount, and I think really prepare people for some profitability headwinds that are coming from a classified missile program. And I guess, is there any update that you can give us now in terms of when to expect the customer to exercise production lots and the impact that, that might have?

Yes. Well, I mean the timing of is based on not necessarily based on their exercise the option. It's based on our assessment of whether it's probable. Once it becomes -- we believe it's probable then we would have to recognize there is a loss in the advance of the exercise actually happening. And so we go through that there's a number of factors that we have to go through and based on just the facts and circumstances in each case, it's becoming more and more likely that we'll probably see the loss on the first 1 being exercised -- or not being exercised, but being recognized here in this quarter in the first quarter. So that would be the first one. We talked about maybe 1 in the first half, 1 in the second half. And so that's where we are. We're pretty much on track to that, and we'll see. It's also possible, and I talked about this in the past, where we can see multiple lots being exercised all at once, depending on our assessment on the probability of those being exercised. And so that could happen at any time. But right now, for the time being, what we embedded in our guide was our assessment that at least 2 lots would be probable and that we would exercise -- we would recognize those losses this year.

Right. Okay. Okay. Is there, I guess, in terms of the -- can you remind me, is it about 5 lots in total?

Yes, in that ballpark. Yes.

And so is there a point at which you say, okay, they've gone this far down. Now we say that all the lots are probable, kind of like -- I mean, the charge that Northrop took last quarter on B-21 and they said, look, all 5 lots out through 2028-or-so we're assuming that those are probable. Is it you reach a tipping point.

Yes, it's a combination of factors. It's where we're progressing on the technology, our progress, the customers' assessment of our progress our visibility or our view on the likelihood of funding being allocated over a number of years to that particular program. And as more and more of those kind of start to answer in the affirmative, then the more likely it becomes that they're going to be exercised, and therefore, we'd have to recognize the losses quicker.

Right. Okay. Okay. And so that's kind of the challenge in missiles and fire Control, but let's also talk about some of the opportunities.

Yes. You think about missiles and fire control and what we've seen, and they've got -- I'll call it, their kind of legacy programs. They've got a significant runway of growth over the next few years. And they're really going to be a growth engine. There, you see this year, last year, we ended the year a little bit over $11.2 billion in sales. We're expecting them to be around $12 billion. So $750 million of sales. And I would expect that kind of that level of growth for the next few years there. And so there's certainly going to be our growth engine, whether it's things like you hear, whether it's Javelin, things like GMLRS, HIMARS, PAC-3, JASSM and LRASM, all of those programs. In fact, there was an announcement of JASSM with the country of Poland yesterday. So there's significant both domestic and international demand for those systems. And so we see a pretty solid line of sight to growth there and MFC, we're pretty bullish on that.

Yes, no, I know that makes sense. I mean we've seen the backlog growth. I guess when we think about the combination of classified, profitability headwinds, top line growth and maybe I think what you just outlined was probably about a 7% type of top line growth range over the next few years. But with losses on the classified program, yes, I guess there's still -- net-net, we're talking about profit growth?

Absolutely. You'll see -- I think starting next year, we'll see growth -- profit growth at least in line with sales growth. So the margin compression this year that the losses will normalize starting in '25 going forward, assuming that we recognize them on annual increments. If that's the case under that scenario, their profit will grow at least in line with sales.

Right. Okay. Okay. Excellent. And then 1 of the challenges in ramping up in missiles and fire control, we know the demand is there. There's been supply chain challenges there, specifically with solid rocket motors. How is that situation evolving? How confident are you in being able to get the solid rocket motors that you would need to underpin that level of growth?

Sure. It's a good question. So when you look at it program by program, there's -- we've seen some programs move forward and progress being made and some programs where the progress hasn't been made. So we're tracking that incredibly very closely. And it's the reason why you've heard Jim Taiclet in the past talk about trying to expand our source of supply there. And it's really just to increase industry capacity as well as capability. And so -- but given where we are kind of over the short term, right now, we see it being able to keep up with this pace and it's really more of a year-by-year thing because it keeps on stepping up. And as you know, kind of I'll throw some numbers out, GMLRS, we're expecting to go from 10,000 to 14,000 over the next few years there. PAC-3, we're going up from about 400 a year to 550 starting next year and then ramping up to 650 in 2026. And so those are some key programs that are reliant on solid rocket motors that we need to keep pace. And what I can say is that we're on a path, but it's not totally locked in yet.

Right. Okay. Okay. Maybe, I guess, when we look at last year, I think the company grew the workforce by something like I wrote it down actually, about 5%-or-so. Do we think -- is that kind of focused in that Missiles and Fire Control segment in preparation for this ramp that you're talking about?

Well, it varies. Certainly, Missiles and Fire Control, as I mentioned, being the growth engine is 1 area. The classified area in Aeronautics is another. There's been some also at, say, RMS, particularly on these joint automatic and control type systems where we're ramping up headcount there as well. And so we've seen it across our business areas where program growth is driving headcount requirements. And we grew headcount 5% last year. Revenue was up 2% to a little bit almost 2.5%, and so there's a little bit of catch-up that we'll see this year. And that's why I think our headcount will probably be flattish this year because -- and we also see -- there are -- we're seeing headcount reductions in certain areas where program transitions are phasing down. And the skill set matches where we have growth, they're just not there. And so you just have to do some transitions.

That makes sense. Makes sense. Maybe turning to the RMS segment. The news we've seen that this year was the Army's decision to cancel the FARA program. But also to repurpose some of that money towards Black Hawk, which is another Sikorsky program. I guess when you think about that, how does that play out for Sikorsky? And maybe specifically, how do you think about kind of maintaining engineering and development capabilities within Sikorsky kind of absent a large new program?

If you think about maybe over the next 4 to 5 years, I mean Sikorsky's top line outside of without FARA is probably flattish to maybe slightly up. And that's really on the back of significant growth in the ramp-up on the CH-53K program. We'll also see -- we've also seen over the next few years, some growth in the MH-60 Romeo program and some solid demand near solid backlog, we're working through. And then the Black Hawk modernization will be helpful. We're having dialogues and potentially getting to another multiyear and then also just modernizing the aircraft. So that will give us some support for engineering. It's not 1 for 1 in terms of modernization capabilities, in terms of what we were going to see on FARA and that's still a work in progress in terms of what we can expect for engineering development requirements over the next 5 years-or-so. And so it's still a work in progress. But I would say kind of their outlook is kind of maybe flat to slightly up. The Black Hawk modernization with a new multiyear frankly relative to Sikorsky with FARA probably is margin accretive because of just a legacy program there and being in a 4-way production type of environment for the Black Hawk program. So I think the question here is more longer term, where does Sikorsky go from there. There are some international opportunities for X2 technology. And so that would be a case we're continuing to develop and mature that technology. And so we -- it's a work in progress for us still. But I think that -- I think the Army recognized kind of a need to maintain some dip capacity and capability and we're seeing -- hopefully, we continue down the path of a Black Hawk modernization with another multiyear.

Yes. Okay. Excellent. And then when you think about our RMS outside of Sikorsky, it's very -- think of this is kind of a very broad business, without very specific program drivers or bottom-up program drivers. So how do you think about the potential growth of that business maybe relative to the company overall, the mission systems top portion of RMS?

Yes. And so you think about RMS in the aggregate. So Sikorsky, you talked about kind of maybe flat to slight growth. And then overall, we saw -- I see probably more in the low single-digit growth for the entire portfolio of RMS. And that's really on the back of what we're seeing on a lot of these JADC2 programs that we've won, things like Air 6500 in Australia, which again, is a joint all-domain command and control system, defensive Guam system that we also won. And so when we see continued capabilities sustainment on the Aegis program, there, we won a program called SESI, which is kind of follow-on type of work on Aegis. And so a lot of these command and control systems, we're in a good position there and that will be a source of growth. The other one I'd say is on land radar systems. So we won a program in Norway last year, and we see a lot of opportunity of taking the program -- you see in our 10-K, the long-range discriminating radar that technology has spawned off other land-based systems that we're able to take and deploy and we see a lot of opportunity in that space area as well, both domestically and international. So those will be the 3 -- the 2 kind of key drivers of growth. We also kind of won some programs in our training logistics systems business, a little bit smaller. So I'd say that kind of those 3 real elements would be joint all-domain command and control type of capabilities and programs followed by radar systems and some training systems.

Okay. Okay. And when we think about that interplay with the mission systems growing faster than Sikorsky, is that a mix-accretive change?

I'd say it's fairly mutual. Yes. I mean, yes, I'd say fairly mutual.

Okay. Okay. And then the space business. I mean, space has been a very dynamic area recently where the customer has, I think, really been looking to do some things differently. How are you thinking about your space business in that context? And what are you doing in the space business to adapt to the changes in the landscape?

Yes. You think about the space industry, particularly kind of call it, intelligence and defense space. Over the last 5 years, you've seen a shift in architectures from these large exquisite type of systems, 1 or 2 bespoke-type satellite vehicles with a high technological capability, but few and vulnerable to these proliferated constellations that provide more resiliency in them and you see programs like in the SDA, whether it's communication satellites or ISR type of capability for missile warning. And so I think that we've been pretty effective in terms of that transition towards going from GEO and even MEO type of capabilities, very exquisite type of capabilities to these smaller satellite capabilities, which are just many and numerous. And so you're going from a bespoke type of thing to more of a production type of system. And so we've won 3 different programs on SDA transport layer. We just recently were announced -- were selected on a tracking layer, which is missile warning. So that now combines our communications capability with our ISR capability there. And so I think that we've transitioned well there in developing that technology. And I think that's going to be the way to come that what you see there is going to be more of a recurring revenue stream because these systems are not built like these exquisite systems where they're 15-, 20-year type of expected lives. Here, you've got 5 to 7 years. So you'll see a more frequent recap cycle, which will allow itself from more recurring revenues.

Do those recap cycles also then -- does that become an on-ramp for additional competition?

It does. I think that when you think about what these competitions have had today. Even today they're contracting for various tranches. So they're contracting for maybe 40, 50 satellite vehicles at a time with different contractors for the same capability. And so they're keeping, I think, a wide supply base for that, which I think is smart. It does build resiliency, but also maintains competitiveness there. And so you'll continue to see, I think, capable providers in a competitive environment. So the onus would be on us and the industry to make sure that we can maintain cost competitiveness. So just really the exquisites -- they'll still be exquisites. They're not going away completely, but really the architecture has moved over to this proliferated constellations.

Okay. Okay. Well, we spoke about most of the segments. And I wanted to ask a question kind of more at the corporate level about pension. And Lockheed still has a fair amount of CAS reimbursement. You've talked a lot about the profile for 2025, the upcoming required contribution. But I guess I feel like one of the things investors want to know when they're thinking about Lockheed's cash flow out in the second half of the decade is how to think about the role of pension in those cash flows, both the cash in from the government, the CAS and the contributions. And so I don't know if there's anything you can tell us that's a little bit, I guess, longer dated with regard to the pension outlook?

Yes. I think the cash contributions, there is a tail associated. So it goes beyond 2025. And we're going to approach a period where -- and we're able to continue to recover your CAS costs, we're going to have to continue to make contributions -- cash contributions. But there's various ways of dealing with that. I've talked about maintaining an expectation with the company where we'll continue to grow absolute free cash flow, at least at a low single-digit rate. And coupled with share repurchase deliver free cash flow per share at a mid-single-digit rate is our target. And so there's organic capabilities, opportunities we have to really reduce -- continue to work down our working capital asset base to free up that cash to really help fund that. The other opportunity that we have is the fact that we have a strong balance sheet. So we may find ourselves in a situation where we issue debt so we trade 1 liability for another and take some of that off the table and free up our cash requirements there as well. And so we have optionality and flexibility. It's a decision we'll make over time here, but we're laser-focused on continuing to drive that mid-single-digit free cash flow per share. So yes, there's a drag, but I think that we've got solutions that we're working on to deal with it to not let it get in the way.

Right. Okay. And then do we think about that as kind of the contributions that the company is going to make in 2025 and beyond, those will eventually be reimbursed?

Yes. I mean, right now, we still have a pre-pension payment credit. You're right. So what we're dealing with in 2025 is more actually required Arista funding, but then that enables CAS. It will increase our prepayment credits, too. But then it will quickly run light and so we'll have to continue to fund in order to get CAS recovery. So -- but as I mentioned, I think we have a path to be able to offset that.

Okay. Okay. Okay. Another CAS question, working capital is something you talked about as an opportunity throughout the company. Is there a -- too simple to reduce it down to 1 number. But is there a way that you think about it in terms of maybe where working capital should be as a percentage of sales if Lockheed is going to be growing, let's say, at a pace that's consistent with the budget and where working capital should be as a percentage of sales in that environment or even just the opportunity that you see from here?

Yes. I mean you look at today, we're around, say, 10%-ish around that ballpark. I think it certainly can come down. And you think about that you're talking in the range of -- if you convert that to turns, about 10 turns per year, which is pretty good for a defense company. But having said that, you look at -- you look specifically in our working capital, and we carry a fair amount of inventory that we probably need to be a little bit smarter about in terms of carrying that. Of course, you want to protect protection of production programs and want to make sure those don't go -- get disrupted in any way. But there's ways of dealing with that little bit smarter than we have, and so we can reduce that and unlock cash there. The other element would be on our contract assets. When you look at that asset alone, it's in excess of $12 billion. And when you look at that, from there is again being smarter in our contracting, making sure that we can line up milestone billings associated with when we spend cash. And then also making sure that our payment streams with our suppliers are aligned to the cash receipts that we're going to get. And so there's just a lot of opportunity. And once you kind of reach that those contracting, get the milestones, the cash milestones to where you think they should be, making sure you can execute to that. So that's where I see the opportunity for us operationally to make a big dent in that $12 billion balance.

Okay. Excellent. With that, I see that we are at time. And so we'll wrap it up here. But Jay, thank you very much.

Thank you, Seth. Appreciate you having Lockheed Martin here.

Yes, of course. Thank you very much. Thanks everyone.