Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Our next session is with Evan Scott, the Chief Financial Officer of Lockheed Martin. So Evan, thank you.

Thanks for having me.

Great to have you here. And I think you have a statement you got to say, first, and then we can take off with that.

I appreciate it. I do. Thank you. So just starting out, statements made today that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal security law. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings, including our 2024 Form 10-K for description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. Thank you.

Cool. Yes. Thank you. So it's great to have you here. So maybe a place to start off is, how are you all thinking about the budget environment and reconciliation and what that all means and or -- what it means for Lockheed, where we could be going, that kind of thing.

Yes. We've seen a lot that's encouraging the budget. I mean, it's still obviously a fluid environment there. But we do see a lot of the administration's priorities aligning with our capabilities. And so we'll continue to watch closely as that progresses I think given our strong backlog now, the good news for us is as we just continue to execute on our backlog, that continues to be a significant focus for us as we watch the budget environment develop, and that's certainly on the domestic side. And then, of course, we see some upward strength on the international budgets as well, which is encouraging.

So maybe as a follow-on to that, there's been -- given sort of the global geopolitical environment, some questions around European defense spending flowing to the U.S. But just in recent days, there's been a ton of order activity in the Middle East. So I mean what are broadly your expectations for international, for Lockheed, maybe even for the industry, but for Lockheed in particular?

Sure. Yes. For us, I'd say we see international growing faster. Both domestic and international are considered we see as growth for us, in the LRP period. But international faster. If you look at as a percentage of backlog, it's a bigger percentage than our 2024 revenue for international. So we do see some upward strength there. And probably in all kind of the 3 major regions, we see growth. Middle East, I think, has been seen as our fastest-growing area. And I think we're seeing a lot be optimistic about based on some of the recent events that we're seeing in the announcement. So it's looking, I'd say, pretty strong in really Middle East, Europe and Asia, we see a lot of opportunity.

How do you -- and this is another question you must be bombarded with, how do you think about Golden Dome and what it means and what it could be and that sort of thing.

Yes. So this is one I have a lot of passion for just having worked a lot in my prior role. And if you think about us culturally, 1 of the things that really motivates us is supporting our customers' most important missions. And if you really think about it, there's nothing more important than protecting the homeland. So as this architecture comes together, we see our customers being very thoughtful about how to proceed. They've clearly pulsed the entire industry on ideas and capabilities. And we, of course, have support of that process. And so they, of course, will set that architecture, and then I expect it's going to move very fast. But if I had to think through what the architecture might look like, I kind of think of it in a series of layers. So you might expect to see a land layer, a sea layer, an air layer and a space layer then of course, you'd want kind of the [ see ] too in communication system to tie it all together. And so that's -- and the good news for us is we feel like we have very strong offerings in each 1 of those elements. Each 1 of those layers and the communication tied together because really, when you're looking at a mission that important, in addition to the capabilities, resilience is typically the name of the game, right? So you're going to want the multifaceted cross-domain approach I think as we anticipate the formal RFPs to come out, the request for proposals for that as that solidifies, we're doing some things to be ready. One is, of course, we want to make sure our production lines are ready for that demand and can scale. So there's some smart things we could do on the front end there. There's also just obviously a lot of dialogue that happens between potential partners, whether they're new entrants or traditional players just to make sure that if needed, we can come with a true American cross-industry approach to satisfying this mission.

Got you. How do you -- I mean, just broadly, how do you think about the new entrants? Are they a threat? Are they an opportunity? Or how do you think about it? Because when I come back to, I'll kind of get on my soapbox, you have this Skunk Works. You guys have done some amazing stuff for a long time -- period of time that maybe the current environment doesn't give you credit for, in my opinion.

That's kind, agree.

But so how do you think about the new entrants and what they mean to Lockheed and the technical stuff that you guys can bring to the table?

Yes, I think it's a really important item. So I'll give you maybe 2 different perspectives on the way I think about it. One is, if you look back from what Jim has set out with his vision for 21st Century Security. If you go back to the original vision statement, it relies around a concept that we see the threat environment dynamic but certainly scaling higher, right? If it's going to go any direction it's most likely to go higher. Budgets will scale as well. But it's not realistic to think that budgets are going to be able to scale necessarily at the pace of the threat. And so Jim's vision is to say that there's these commercial entrants that come in and bring additional capability. They also bring different sources of funding. So it becomes sort of a capability multiplier that allows the 21st Century security vision to come forward. That's the real basis of it. So in my mind, I think Jim foresaw this several years ago. And as these new entrants come in, see them as being a key part of that overall infrastructure. I mean they have to be for it to all work. So I do think, though, to your point, and it's a fair one, there's also a competitive dynamic that we're aware of. They bring a lot of excitement, different ways of doing business. And so -- and I live this in my time at space a lot, and we were certainly starting to see it at MFC as well. With these new entrants, there'll be several, and candidly, some won't continue to scale. Some will. I think some will be potential partners, some could be customers or suppliers, and some will be competitors. But what I think is important in that whole equation is that we learn from all of them. I mean the reality is we can continue to learn. We can continue to learn different models of doing business and innovating. To your point, we have an incredible history of innovation that we're very proud of that will always be relevant to this nation and our allies. But if there are new elements we can learn by partnering or reserving, we absolutely will do that. And that's what we intend to do.

So 1 of the things that we've heard tossed around is commercial terms contracting and so on and so forth. Can Lockheed do that? I mean, the programs that you work on even viable under those kind of terms. I mean how do we think about a prime contractor in a world where there might be a little push towards commercial turns contracting.

This is definitely one that continues to evolve as we know, right, the FAR rewrite, as we're looking at it is continue to take shape. So on 1 hand, I'd say it's very welcoming for sort of 2 -- I'll say there's 2 aspects that are very welcoming to us. One is, even in our traditional contracts, which, to your point, wouldn't typically follow the commercial model, there's elements there that it can be adjusted that unlock some additional speed, right, without any loss of protection to the government or the tax buyers that are just probably smart edits to make. And with the customer really pushing on us appropriately so that says, hey, more capability sooner, what can you do Lockheed Martin. There has been a feedback process that says, these are things you can probably edit to unlock that speed. So the fact that we're now seeing that come through, I'd say, it's very encouraging because this is something we've been driving towards. I think it also allows to the point earlier about parting with commercial entrants, the FAR can be seen as intimidating, right? We have decades and decades of experience navigating it. We have probably some of the best worldwide experts on navigating it. But somebody coming in that we want to partner with that may be seen as less exciting. So this does allow more partnerships that way as well. To your point specifically about, can our products adjust to that model? I think depending on how much that model changes, I mean you could see something very commercial coming, and we think we can evolve towards that. I also think there could be products that we scale that are specifically in that model. And that might be because we started from scratch based on that or because we're developing different business models, whether it be JVs or ventures that allow for us to fit very neatly into those acquisition models. So this is something also I think we've been preparing for, for a while and have a lot of ideas on how to scale it and be effective that way.

Got you. Got you. And you mentioned JVs. So recently, there was an announcement the JV with you guys and Rheinmetall can you speak to that a little bit? And might we see more of that kind of thing going forward, particularly as Europe tries to go out there in industrial base?

We do think partnerships are a very important part of our strategy. I think, particularly in Europe right now, we're looking at potential partners. And when we look at who those players are that are very strong and align well with us, just capability-wise, culture wise, and Rheinmetall is clearly 1 of those names that stands out. And so we've signed an MOU and we intend to work together. I think we still have work to go before we're ready to announce anything kind of more broad than that. But I'm very excited about the potentials that, that could unlock for us. And yes, to your question, I do think you could see more of that. as we look at potentially scaling more with international production operations. This gives us not only a way to scale further, but it helps address supply chain resiliency, all things that fit in. And everything we do here, we do under the support of our DoD customer. Nothing like that can happen external without their support.

Got you. Got you. And maybe changing gears just a little bit, if you can speak to it there was good momentum in the first quarter. Can you speak to so far what you're seeing in the second quarter?

Sure. We're about halfway through the second quarter. And so 1 of the things I said in the earnings call is just committing to transparency. So I'll give you, from my view, kind of the real-time latest as we continue to look to close in the quarter. On 1 hand, at the earnings call, we had talked about F-35, Lot 19 being awarded in the second half of the year. We actually see that has the potential to accelerate. What our customer is telling us now is to expect Lot 18 and Lot 19 to be combined into a single award. So on the plus side, that accelerates think of roughly 150 jets of backlog potentially into the second quarter. However, the overall award now is probably going to happen later in the second quarter than if Lot 18 had been a stand-alone and Lot 18 is a cash liquidation event. So it's possible that liquidation event falls outside the quarter, putting a little bit of cash pressure on us in the second quarter which we then would come back neutral as pretty early in the third quarter with the expectation, again, Lot 18 and Lot 19 get awarded this quarter. The other element that I'm tracking very closely is just as we look at through the Aero classified program, we are seeing some additional cost pressure there that we go through a process. There's particularly a program that complex the process takes time. We want to be right on it. But I think I'm seeing some cost pressure that as we know more and that we'll update if we see any changes there.

Got you. Got you. And can you speak to, how is Missiles and Fire Control doing? I mean that has been gangbusters. I mean, you continue to see that into the second quarter?

I do -- I continue to see really strong growth at MFC. And of course, we're scaling across multiple production lines simultaneously. And so the way our supply chains have typically gone is any 1 element of that can slow you down. So what we have to do, of course, is have great visibility to that and be able to pivot quickly if we see any disruption in any element of that. That said, I think we're doing a great job with that. It continues to scale. It continues to be our fastest-growing business area and the MFC classified program is in really good shape from everything I've seen just this quarter. And of course, I worked that very closely in my prior role. And so I think that has stabilized very nicely. So all in all, I'm feeling very solid about MFC. And of course, as you look at potential international opportunities, that missile and defense portfolio is a very strong portfolio for us internationally, and I expect it will continue to be.

Got you. Got you. And from a supply chain perspective, how are things going? Maybe starting with Missiles and Fire Control, solid rocket boosters have been a challenge for everybody. How is that going? And are there any other areas that are positive or maybe challenges.

Yes. It's, I think, overall, going pretty well. I've seen in most all of these areas, our suppliers have partnered with us. So to the point, again, if there's any 1 element that's a slowdown, we partner typically, you're going to see Lockheed Martin people on the ground at those suppliers, which generally they welcome and we partner, and we work through it very quickly. So I think that has been positive. As a whole, I think we've seen pretty good performance from our suppliers this quarter. And so no major items to state today. As that progresses, particularly in 2Q, if we see any elements on suppliers that are issues, that's probably something I'll state just to give that level of transparency.

Got you. Got you. Got you. And then if we shift to Sikorsky, how is that going? And do you expect positive or negative impact from the Army realignment, right? And the Army is kind of reorganizing things. Is that good for Sikorsky or not so good for Sikorsky or is it too soon to tell?

I think that one is too soon to tell. We -- clearly, Army is leading a modernization effort and they're looking to accelerate certain capabilities I think 1 of the real strengths that Sikorsky has is a current production capability at scale, that is of highly variable, both domestically and internationally. And so I think we continue to see international demand growth for that portfolio in addition to the domestic supply -- production lines that are ramping in some areas like 53K. So I agree, it's definitely fluid. And we still are watching that closely to see how the budget plays out. And so I'll probably have more to state on that in the coming quarters.

Got you. Got you. And then how about space? How is the space business? We were just recently out at the Space Symposium and seem pretty robust out there? I mean -- so what are you guys seeing?

It is a really robust portfolio. And so I think on the civil space side, clearly, there's some budget challenges there that we're working through. We did just deliver the second Orion, which is really exciting, given the future for how that will be used to advance space flight. But we do definitely see some pressure there. On the plus side, the military satellite, including some different domains than we've typically seen could continue to be a good upward lift competitive but strong demand signal. And then really where we see the biggest growth in space is on our missile defense or strategic missile defense side. So think of course, NGI, fleet ballistic missile, hypersonics that's a big part of the space portfolio, and it's definitely the fastest growing element of it, and it's got a lot of strength.

Got it. Got it. I don't know if you can speak to it. So just say you -- if you can. How is NGI going? Is that going, okay?

NGI is, I'll just say, an incredibly impressive platform. I was there at Space when we competed for and won that program. And I just remember seeing that -- and we knew it was going to be very competitive against 2 incumbents. But it was 1 of those proposals that upon reviewing it, at the time as the CFO of our Space business, I was pretty confident that was going to be a win for us. It is just such an impressive capability and the capability per the cost is just really, really good, good for the country. It is a new product, and so we'll go through its development challenges. I think with the capability that exquisite, there are always going to be trades that we can look at with our customer. So if the customer, for instance, decides speed, is a paramount I believe there's going to be things we'll be able to look at to see how can we accelerate that, if that's seen as a need-now capability, that might be something that we can continue to look at. So I think overall, it's going well. It's going to be a tremendous capability for this country. And -- but we'll keep updating if we see any movement there.

Got it. And then we haven't talked about too much that is F-35, right? So it's -- I would imagine in your role now, you're probably getting a lot of F-35 questions. How is the program doing? How should we think about production for this year? What can you say about future production, is there anything you can say around international versus domestic mix, anything like that?

Sure. F-35, I think, is a really strong position right now. So a couple of things to point out there. One is, now that we have over 1,100 delivery jets worldwide, we are gaining a lot of feedback into how this jet is performing and it is really impressive. At Lockheed Martin, we think of the pilots as almost an extended part of our family, and so protecting them and seeing them complete their missions and come back safe. There's just nothing more important to us. And getting that feedback from the pilots has been very enriching. And so we continue to get that very good feedback about how important the F-35 is on so many different dynamics in the battle space. I think in terms of production this year, we're looking solid. I expect we'll continue to see that 156 a year production rate continue. We've got line of sight for this year and the next 2 years on that. I think the deliveries are looking solid at the range we previously gave 170 to 190. We have a backlog of 361 jets in a mix, of course, of domestic and international. And as stated, we'll look to add another close to 150 or about 150 with Lot 19. So very, very strong backlog and continue to see that international demand function. So to your question, the actual mix of domestic and international. We've seen the international tick up a bit in the last few lots. And after holding steady in the [indiscernible] , we could see it come up a little bit. But that is a lever that our customer has available to them as we shape the optimal throughput of that F-35 line. So overall, I think it's looking really good. We'll continue to look at the budgets. I mean, it's -- it's no secret. That's a big number in the budget. But I do think that given the importance of air power it's 1 that will continue to be a priority.

And then on the quarterly call, Jim talked about upgrades to the aircraft to sort of next-generation capability. Is there anything else you can say about that beyond what we said in the quarter?

This is a really nice focusing vision for us as a company, right? Because if you think about our products, and if you were to look at, say, the top 10 products of this company, they look -- there's a lot in there that were the top 10 products decades previously. We have an incredible track record of continuing to innovate with our products with customer support, just to continue to be relevant and very strong factor in the battle space, F-35, maybe more than any of those products has the potential to have the longest tail in terms of being relevant to the battle space. And it's part because of the incredible aircraft it is, it's also because of the architecture allows for flexible investing of new technologies, including there's another opportunity to bring in relevant and sometimes even commercial technologies. So this jet will continue to innovate and be relevant. In terms of what Jim laid out, this gives us a very strong focusing vision for this aircraft. If the idea for us, what we're driving towards, as he said, is 80% of the capability of a sixth-gen at 50% of the cost. That gives us 2 key things we need to drive for. One is that rapid innovation of capability which is what this jet can do and will do and has done as well as cost takeout, which has got to be a critical component. When we talk to our customers at all levels, they are focused on -- very focused on getting the most capability they can get for the dollars they have available. So attacking that cost side is such a key part of that equation. Clearly, the next-gen capabilities is what people will talk about but not to be lost is the absolute critical aspect of taking cost out of that platform, which we have done, we continue to do. And if you look at some of the things we're working on, we talk about 1LMX, our big digital kind of revolution here, that continues to be a major factor as we continue to look at that production line. And so I think you will continue to see us talk about the progress on this. I know it's important. It's important to us. It's important to our customers. And in the meantime, we've got a good focusing vision as we come out with a detailed plan how to achieve that goal.

And can you speak some more about 1LMX the digital platform and where that's going?

Sure. What 1LMX is a really big bet for us. And it's probably no secret why. But if you look at our company, of course, you've got 4 business areas and a corporate headquarters. But in each 1 of those business areas, you can imagine all the predecessor companies in our industry that came together to create Lockheed Martin, right? You're talking dozens of companies. And in some cases, they bring their own specific ledgers, systems. A lot of our systems are actually homegrown, which is not out of the ordinary for our industry where you have a homegrown systems. And the idea of going completely common across all the company, bring all those heritage practices systems, ledgers together into 1 seamless ledger where we operate completely seamlessly. You can move parts, material, people across any business area is really where we're going as a company, and it's underpinned by a model-based enterprise, where we're tracking parts and designs from the very beginning to the very end and sustainability all seamlessly. It's an exciting vision. It's a multiyear vision with a significant investment. But we're continuing to make progress on it. we're taking a business area by business area approach on it. And we are on track, I think, with a really good process. So this is where we need to go as a company. Jim is driving us to be digitally focused and as a culture we need to be 1LM operates seamlessly, and that's what LMX unlocks for us.

And as outsiders looking in, how can we -- are there any milestones that we would recognize that, "oh, yes, they're really going to getting there", is there anything we could look for?

I think you'll see it show up in a couple of places. One is our products, you should expect to see more and more developed in a true future state digital environment. Some of these ideas, I mean, if you look at building a product, a first-time build of a product on a production floor is a pretty darn big event in our industry, probably in any industry, right, this is the industry, I know. Now imagine if -- the folks on the floor have already built that product digitally several times before or modeled it such that the first time you're actually putting hands on real physical product, it might be the 20th time you've built this thing, right? So I think you're going to see a speed from design to scale production faster. That's 1 element. As part of our 1LMX journey, there's also a cultural element in terms of how we work together. Historically, as Lockheed Martin, that was probably an area for improvement, in terms of how we fit together the pieces. So you should expect to see more Lockheed Martin capabilities on Lockheed Martin platforms, which I think just helps us all the way through as a company. So those are some key areas that you should expect to see. And then ultimately, if we drive this efficiency and this working together, that unlocks additional budget for us, right, with that efficiency comes some affordability. So we'd like to be able to take cost out of our products and reinvest in the business with additional funds for research and development. That's the other element you should see, product generation.

So it does seem kind of if I tie together some of the things you've been talking about, 1 of the themes that has emerged is speed, right, getting things done for sure, more stuff out the door, is that coming from the customer? Is that a company goal? Is it both? I mean, where is that coming from?

It's coming from both maybe just 1 slightly different flavors that are now coming together as one, right? And so we have always viewed -- to your question about how would you see this manifest itself? The easiest way you can look before and after is speed. So we've always known that speed is going to be a key metric we judge ourselves on, on our transformation journey. So we've been driving that way for many years now. To your point of the customer, we are seeing an increased push from this customer set on speed in a couple of different flavors. There's always been, of course, the fastest you can get capability to the war fighter, the better. But now you even see an element that says what is the fastest you can get with other variables being willing to trade. I'll give you an example. We typically would design our products because they need to be able to survive in some cases, for decades in any environment, right? And when you do that, obviously, the design elements that go into that are pretty strict. But what if you have a customer, which we do that also says, hey, that's nice. I'm always going to need that. But what if I have -- what we talk about affordable mass the fastest you can go just to get mass in the battlefield. It doesn't need to survive for 20 or 30 years. The challenge for us, and this is what we're set out to do is that we have to be able to manage both those models simultaneously, right? You might see new entrants who come in and are optimized around speed. And you might see traditionals that are optimized around products that simply must work every time no fail and the last for decades. What we need to do to be successful, and this is what we're doing is have both those models working at the same time.

Yes. It makes a ton of sense. Now when we think about the unmanned realm, is that more along the speed vector or the other vector?

I think you will see elements of both. So I think as we build products now, there has to be an autonomy element factored in, which could come from a couple of different ways. It could be the platform itself or could be 1 part of a broader infrastructure. We talk about this concept of crude uncrewed teaming where we invest a lot, right? And that's, I think, a very powerful force multiplier that we see. So I -- and then when you come to unmanned probably just like manned, you have layers of products. You might have the really fast build affordable mass and you may have the more exquisite that is not so fast to get to the battlefield, but just as relevant, if not more, based on the mission.

Got it. Got it. And then we only have a couple of minutes left, but maybe 2 more I can squeak in. How are you broadly thinking about software and the business, right? I mean it does seem like there's a shift in the market between hardware and software? And how are you thinking about that broadly at Lockheed?

So traditionally, for us, we have thought of the 2 as coming together, right? You buy a platform you get the software that comes with it. Now that software will continue to innovate, and you see that, whether it's Aegis or F-35 and sometimes even over-the-air updates, just to always stay relevant and meet the current threats. I think to the point of your question, we are starting to see where those 2 can diverge, where there may be an opportunity to sell hardware. But separate from that may be a software-focused sale, and it could even be Software as a Service. So this is 1 of the business areas -- or business models that we're looking to innovate on. What are those capabilities that might be appropriate to sell as a service because it allows the customer to get that capability quicker and allows for ongoing updates apart from the platform. So that is -- we see the market going there potentially, and we plan to be ready for it.

Yes. That makes a ton of sense. And maybe a good place to end up is supply chain. How is that going right now? Are there -- are you having any particular challenges or not? I mean, broadly, how our supply chains.

I think there's a couple of areas that we're watching. One is, for us, supply chain will always be critically important. So 1 of the things that is very key to Jim's vision is that supply chain resiliency, right? We talk about anti-fragility. And so that might be looking for additional sources for those key products that we have to scale. The other element that -- there's a couple of elements that are watchlist for us. One, of course, is the tariff environment that we've talked about. And I think we continue to make progress on that in terms of insight to the costs as they incur. We set up capability to really have a real-time insight to that and partner with our customer about how best to handle those costs. So we're making progress there, and that stays fluid. The rare earth material we're watching that. I'd say the things that help us in that world, number 1, because of our long cycle supply chain, we feel we've got all we need to execute this year, number 1. And then number 2, is the fact that although we are a user of those materials, it's not near to the degree of, say, commercial automotive might. So we're a little protected there in comparison. And then thirdly, typically, when it comes time, 2 primes competing for the same supply chain materials, there can be acquisition models where we get priority given the importance of our programs. And so it's not to say it's not a risk item, I just think that we're in relatively good shape in comparison.

Got it. And then maybe if we can just unpack 1 last thing. On the tariffs, you mentioned that you're working with your customer in the best ways to handle that. Can you elaborate on that at all?

Sure. So we still see tariffs not as a cost or profit risk for us but potentially a cash timing risk. So as we incur those costs, we're going to partner with our customer on how best to work through that. And it could be contract adjustments, and sometimes those can take a little longer. They can drive cost recovery to maybe outside the year if you've got to go through kind of a formal process. What we want to partner with our customer is, are there ways to do that quicker, more efficiently and more globally to address that.

Well, Evan, thank you so much. That was a lot of fun.

Outstanding, thanks so much for your time, Ron. Great seeing you.

Yes, you bet.