Lockheed Martin Corporation ($LMT)

Okay. Good morning. I'm Doug Harned, Bernstein's Global Aerospace and Defense analyst, and thrilled to have with us, again, Jim Taiclet, Chairman and CEO of Lockheed Martin; also Evan Scott, CFO. And to start off with, I think, Evan, you've got a few words you're going to say, right?

Yes, please. Statements made today that are not historical facts are considered forward-looking statements that are made pursuant to the safe harbor provision of federal security laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. Thank you.

Okay. Great. To start off with, obviously, there's a lot going on in the world right now that's relevant to defense sector. Maybe, Jim, you could talk about what you're looking at right now as kind of the opportunities and challenges for Lockheed Martin.

Sure, Doug, and good morning, everyone. Look, the opportunity set for us is significant. And I think the most important development over the last couple of years has been that our original strategy that we started in 2020, what we call 21st Century Security, is actually being proven the right strategy from world events that have been occurring and also the U.S. government policy that's now in place with the administration. And so as a reminder, the 3 kind of tenets of our strategy are, first of all, to build resilience and scalability into the production system, which we're being asked to do again, and we're ready to do it. The second piece is driving 21st century digital and physical technologies into mission sets that emphasize our core platforms, the kind of platforms like F-35 or Patriot Missile or Aegis system, which is widely deployed by U.S. and allied militaries already. can have the payload, range and survivability to fight in a modern warfare at theater scale and drive new technologies into those platforms and come up with new platforms and connectivity to augment those. Some of those are, for example, the Black Hawk helicopter, again, fully autonomous now. The Army has purchased 2 of those to figure out how to use them in combat operations. that will extend, we think, the life of the Black Hawk into the future, for example. The third big tenet of our strategy is to diversify our operations, especially for sustainment globally so that we can operate and manufacture or repair in the theaters of operations where our U.S. forces are deployed and where our allies live. That also encourages more allied procurement of our systems if they have a part in producing those systems or maintaining them. So those 3 tenets of our strategy give me a lot of optimism because we've been getting ready for this game for 5 years, and we are already. So that's the optimistic part. The challenges are with such a vast and complex operation, maintaining and driving operational discipline and operational excellence through this vast company with a lot of leading-edge technology that's never been done before and then operationalizing that at scale. So I just -- I want to grab this list from my office because I can't memorize it, so I'm going to have to go through it. These are the places that I have been the operational locations in the last 12 months. And the purpose of these visits is not just me necessarily, often, it's our whole executive team. We will go to the factories and the engineering centers to drive that operational discipline and excellence and emphasize it and try to spread best practices across our various divisions and sites. So the list includes Lilton, Colorado, Amendola Airbase, Italy, Fort Worth, Texas, 4 times; Camden, Arkansas, twice, Marietta, Georgia, Palmdale, California, twice, Orlando, Florida once. Sunnyvale, California, Vas, Germany. It's a joint venture we have with Rheinmetall, Ramstein Airbase where we have 4 deployed teams, Riviera Beach, Florida, where we do undersea; Valley Forge PA, where we do classified work for our space business and Troy, Alabama. So we are very focused in our executive team and even our Board on operational execution. That's the challenge is, how are we going to get all this done, triple PAC-3 production, quadruple THAAD production, increase the mission-capable rate of the F-35 to where we all want it. We're going to have outstanding operations, and that is largely what our team is focused on.

Now one of the things, a backdrop of all of this has been the President's budget proposal of $1.5 trillion. Now we have a long way to go to see exactly how all that plays out. There's a lot in that, that benefits Lockheed Martin. But how do you think about this in terms of the things that are beneficial to you, but also how this process is going to evolve and when we can get to something that can lead to kind of contractual certainty?

Yes. So on one hand, we have no ability to affect the political process, the budgeting process. But the reality of our situation is everything that's going through our factories today is from a prior budget. That's where the funding has come from. So there's really hardly any 2027 budget requirements for what's going on this year, let's call it. So current production rates, current financial forecasts aren't affected, whether these budget issues get delayed or implemented on time, et cetera. The second thing is our international business is 30% of the company, a whole different schedule, but that's going to continue to come through. And then we also have our ability to sort of keep things going with our own funds. We're doing a lot of forward investments so that when budgets do get approved, we can strike quickly. We're ready to go. We can then book the revenue. So those 3 elements, Doug, give me confidence that whether the budget is delayed, there's a CR, they split the 1.5 into 2 or 3 pieces, we, because of the demand for our systems, their proven ability in combat operations and the scale that is required, we are going to have plenty of upside, if you will, based on the direction of the U.S. government irrespective in a way of the actual schedule and process of the budget.

Yes. I wonder also related to this, with the war in Iran and also the war in Ukraine, where we've seen heavy usage of tactical missiles, interceptors as well as sort of high op tempo for F-35s, I mean, how has this most recent conflict impacted Lockheed?

It may have contributed to but didn't cause the interest in the U.S. government Department of Defense that's currently in place, the leadership, to try to move towards more commercial contracting models because the goal is that we both share, and this is something we've been advocating for, I think, for like the last 5 years pretty heavily is if we run the defense enterprise more like a commercial business where we have long-term contracts that we can have assurance that we can invest upfront, the performance is better, the scalability is faster. We can get the capital markets involved in constructive ways, and we can actually be higher performing industry, not just company but industry with our whole supply chain, that will be a better outcome. And some of these recent conflicts and the fact that the usage of certain munitions, for example, has been higher than some of the war gaming in the past would lead you to project. that's motivating the U.S. government leadership now to say, let's really look hard at these commercial business models. And these framework agreements that we initiated with the department and then RTX was to follow with some of their systems, that is opening the door wide open to a new way of doing business with the government that I think will make us more effective. So I think that is the outcome of what's going on in the world, so to speak, is it's re-motivating both the administration and even Congress to look at multiyear commercial type procurement activities from the department to industry broadly speaking.

Now related to the policies of this administration, one question that I get a lot, and I'm sure you do as well, is when you look at a lot of changes, asymmetric warfare, low-cost drones, counter UAS, all of these new things and new entrants pursuing those as well. How do you think about that in the context of where you're headed?

So the context we always use and we have used since I came to the company was in terms of mission sets, right? So if you think of the tech industry or the telecom industry, which is where I spent the 20 years before this role, was we have a service. One would be I use Google Maps, as an example, a mapping service that will go on a cell phone, right? So every 3 to 6 weeks, we hope to do it every 3 to 6 months. some input to that service is better. So either the handset is better, the Apple iPhone, whatever, the software is better because Google increases the accuracy of its algorithm, the firmware that the company has put out to improve the interface between the hardware and the software that they use. These are always happening constantly. And if we look at a mission or a service for the Department of Defense, when I was in the Air Force, one of the missions was air superiority, meaning our service is shooting down other airplanes without getting shot down ourselves. That's our service. That's what we're trying to make better all the time. And so how do we use software, firmware and hardware improvements to make that service better and better. And that falls right into deterrence theory where if our Air Force and our Navy and Army and Marines and our Space Force is increasingly effective, that's a deterrent to armed conflict because potential adversaries really can't understand how good we'll be in those missions. So that's how we frame everything in our company. We have 13 of these missions that we are looking for software, firmware and hardware improvements constantly using digital and physical technology. So that's how we frame these kinds of things. And so when it comes to, let's say, a mission of ground warfare, right, small drones are very effective for that. They are not effective for air superiority, they are not effective necessarily for deep precision strike beyond a certain range. So we need to figure out how to use the small first person view drone or the wired drones within a mission context. The other piece that we're going to use is F-35s, right? So F-35 can actually feed data into a command and control system for small drones, that's the kill chain or the linkage that we want to create. How do we have the major platforms that can operate with superior capability, feed into these less capable devices that are doing mission sets that are adjacent to what we normally do. So that's part of what we're doing. So we have a command and control system that our teams are developing called Sanctum. That takes inputs from all kinds of sensors, including space, aerial, ground, et cetera, cyber, fusing them, then controlling drones of open architecture, any type, anybody can make them, including us, and that command and control system will incorporate and fuse the data from the current systems so that those new drones can be more effective. So that's kind of one example of how do we play in an arena where we may not make the $20,000, $1,500 first-person drone but we can make that drone way more effective in a mission.

Now I want to jump to your highest growth business right now, Missiles and Fire Control. And as you commented, with the war in Iran, Golden Dome, we've seen a whole number of things that have all led to increases in demand here. Now you talked about -- you mentioned the frameworks that you're working on for THAAD, for PAC-3. Can you talk about sort of where that stands today and a little bit about how that's evolved because those frameworks were discussed well before we even got into this Iran conflict. So how are you looking at that growth now?

So I'll turn it over to Evan for a second on kind of the financial projection piece of it. But we do have to get this right the first time and Patriot is one of the first out of the gate. THAAD is another couple of RTX programs. So we have to go from kind of a term sheet and it's a very thorough term sheet, like 12, 13 page term sheet. We have to go from that to something called undefinitized contract action with the government which enables us to start actually spending money legally in a way that will be committed to by the government. So the undefinitized contract or UCA, in the terminology that the Pentagon folks use, that launches the fleet, so to speak, we can tell our suppliers here. I got a 7-year contract on a UCA, I can novate that to you, and now they can start spending as well and have confidence to do that. Then there's a definitized contract that comes at the end of this process, where there are specific commitments, quarter by quarter, month by month, very complex, multi dozen or not 100-page agreements. That's to come. So where are we at on Patriot? So January, we signed the framework agreement with the department. About a month or so ago or a couple of weeks ago, everybody signed off on the UCA undefinitized contract. That's where you saw like I think it was $4.5 billion, right, Evan, of award. So that award is for the early part of the 7-year program. Appropriations are required to go through Congress to get the full contract. So hopefully, again, depending on this budget schedule, that full up contract for 7 years could be in place as early as the next 2 or 3 months.

Yes. And to add to that, I agree with how Jim talked about it here. And the UCA is a great example of our customer partnering with us. And to your point about the increased rhythm that we need to have given the events of the world. The UCA shows that the customer wants to be able to make it available for us to keep making progress on scaling this production even ahead of the multiyear procurement. So between that UCA and our own sizable investment we're making, we're ensuring that we're not losing pace to the scaling that's going to be required, not just on Patriot, but also THAAD and others.

Prism, too, right?

Certainly, Prism. I think when we talk about multiyear procurements, our profile assumes a PAC-3, Patriot and THAAD awards this year and a Prism award next year, but all 3 have framework agreements that give us confidence that these are going to be future multiyear procurements.

So if I think about this in terms of how we've historically seen appropriations done, which annual process, how do you get confidence that, say, 5 years from now, geopolitics may have changed, the administration will have changed, how would you imagine these -- the contractual arrangements supporting high volumes 5 years from now?

So we asked for 3 or 4 provisions in the framework agreements that are actually very similar to telecom development, network development arrangements with wireless carriers, which is what we did in my last company. One was, and it came from the government side for us an annual escalator based on an index for the industry over the 7 years on the fixed price. So fixed price isn't just a number. It escalates every year based on some kind of inflation index, a relevant inflation index. So that was one thing that we all agreed to, government and industry. The second thing was that for the major suppliers, they would also agree to a similar framework and that they would then fund their own nonrecurring expense as we will do. And that was also greeted by government and governments helping negotiate those framework agreements and then subcontracts literally with our major suppliers. When it comes to medium and small suppliers, we're going to work with each of them to help them scale up and we're also going to -- and have been connecting those medium and smaller suppliers with strategic capital in the Pentagon, which will help finance them. We're also sending list of the top 20 medium and small suppliers for PAC-3 and THAAD to other financial market players to say, look, these suppliers are going to have, we think, a 7-year agreement with us to the U.S. government. Very financeable now. When they were a medium-sized company in Des Moines, Iowa, you never heard of, they had 1-year contracts, maybe not so financeable. So we're trying to get the capital markets involved, both government and nongovernment. So we got that provision. The third piece was a reach back clause, which said, let's say, and we all hope this is true, that our deterrence is more effective, all the conflicts resolve and perhaps someday, there's less demand for some of these products. And politically, the government wants to change the terms of these contracts. So whatever industry invested expecting 7 years. If it's only 5, there's a reach back provision for what we invested. If the government decides, "Hey, I was going to order 2,000 Patriots a year. I'll need 1,000 now, same provision applies. So whatever changes in terms down the road affect the initial investment thesis that we all use to make our investments, there's a recovery provision for that. So we got those 3 provisions through. And that made the closure, and there's 1 more that I think Evan wants to talk about, one more that we asked for on top of the 3, is that our cash flow projection as a company needed to be protected for investors. So while we may invest more upfront in CapEx and nonrecurring engineering and things like that, that the government would help -- need to help us by scheduling their payments for the actual missiles to coincide with our upfront investments. In other words, just prepay, they're going to buy all these missiles anyway. prepay some of that cost of them, revenue to us in alignment with our own original cash flow projections. So that our investors would not be degraded by us agreeing to these long-term agreements.

Okay. And just one last thing I'll add is when you look at Patriot specifically, we see enough international demand, where we have strong conviction that we're going to sell the number of PAC-3s that we produce in any given year. And of course, when the government buys from us, they are able to pull the international demand with their own demand to make sure that they're sufficient to meet their demand requirements that are going to be based in this framework agreement. So I wouldn't think that either us or the government would see this as a risk of changed priorities partly due to that reason.

Yes. There's a huge line of international customers for especially the PAC-3 and THAAD that we'll be happy to move up in the line over the next...

You've talked about, I think, mid-teens top line growth, if you look at the next 5 years for Missiles and Fire Control. Does that -- is that all tied into your assumptions on these frameworks all getting completed as we kind of understand them today? Is that correct?

That's correct. I think the mid-teens has some opportunity to grow a little bit just based on the timing of when these procurements -- the multiyear procurement contracts are signed. Also, if there happens to be other contracts or platforms, that could get the same kind of treatment. So just based on, I think, what we've talked about today in terms of framework agreements, that gives us confidence to that mid-teens with a little bit of upward pressure based on the timing of those agreements being signed.

And then as you look at this growth, as I said earlier, these frameworks were constructed before this war took off. So I would suggest that there's even a higher level of demand today than there was back in February, say. So -- or beginning of February. If that's the case, is it possible to go still higher? Or what constrains you? Because when we look at this, you kind of say, this demand is huge. Can you take in the next 3 years rate up? Or is this really more an extension of backlog?

Yes. I think that's the right question to ask. The way we're thinking about it is we've been partnering with the government to increase PAC-3 production by 3x. And so our goal right now is to get everything in place to make that happen. And then at that point, once we've got a conviction between ourselves and our government and our supply chain that we can get there, and we are very close to that point here in the process, then it might be an opportunity to look at, is there additional scaling that makes sense based on the demand function. I think right now, our goal is to match the current framework agreement that's in place while we look at potential further scaling.

Okay. Great. If we go to aeronautics. So F-35, still the biggest program in the company, I think still around 30% of revenues. How do you look at the growth for F-35 now, given that I think you're going to be staying at this 156 rate for a while, but you've got sustainment, upgrades? How should we think about that growth rate?

So from an F-35 production, low single-digit growth rate probably makes sense as we go through, and I agree with the expectation of a stable production rate. There could be some changes on that just based on the timing of when we sign the lots and the pricing contain those lots, additional capability that gets developed and pushed to platforms. So it can vary a little bit. Development also probably in the low single digits. Sustainment really is the growth driver in F-35. So think of high single digits with maybe a little bit of opportunity above that in the near term. And part of the reason that you see that is our recognition that sustainment has probably been underfunded historically. And so the government realizes that's a key element of air power is to increase the availability of the jets that they have in addition to buying additional jets. So we'll see sustainment growth increase as they've funded additional sustainment. We've also made our own investment in sustainment to expedite the path to higher availability levels with the F-35. So that's a big growth area for us.

Yes. I mean in the session right before this, John Plant talked about F-35 from an aftermarket standpoint for them and said, that, that aftermarket growth is higher than one would expect simply from the fleet size.

That's right.

Is that -- that's what you see as well as actually doing the service work.

That's exactly the way to think about it. So to the point, each delivered jet will need to be sustained, but there's also probably some work for the existing fleet just to get a higher spare part availability level. So that's a big investment focus for us and a big budget priority for the customer.

Now one of the things that has been challenging, and we've talked about this multiple times, has been the tech refresh 3 that you've worked through and then heading into Block IV, which has been pushed out in time. Can you talk about these upgrades? How tech has evolved in the next step here?

Yes. So TR3 or Technical Refresh 3 for the F-35 is basically, it's a new server, right? So heavily upgraded core processor we call it in this industry, but it's basically the server for the airplane. There's a pilot image generator for the cockpit screen, which comes along with this and then a storage unit that allows you to store much more data on the aircraft. So all of that hardware is completely finished with development. It's being scaled in production by L3 Harris to meet the production rate of the airplane. And so from a hardware perspective, we're in really good shape. The firmware is stable now with the jet, that's the second piece and then the actual software loads that integrate all the edge devices, so to speak, into the aircraft's brain, Those are -- that software is being kind of upgraded as we go and will always be upgraded because there will be new subsystems and then they're going to have to do another software drop just like if you have a Tesla, you get a software drop every couple of weeks or whatever. That's going to continue. So TR3, to us, from a hardware, firmware perspective is complete and in production. The software upgrades are in process. How that relates to Block IV is that if you want to have more systems on the aircraft in terms of what kind of air-to-air and air-to-ground weapons can you support, you needed that bigger brain and the cockpit systems driver and more storage actually add more types of missile...

And ultimately engine, too, right?

Potentially, right? And so that's where the Block 4 comes in. What is the schedule of adding additional missiles to the airplane, we'll call it, what is the schedule of adding better sensors to the airplane and the most critical sensor is the radar in the nose of the airplane. So all of those subsystems are made by other of our competimate companies. And we don't need to go through the list. Some of them are not on the original schedule, I'll say, one of them, which is a critical one, is a government-furnished equipment just like the engine. So now there's a key sensor, this government-furnished equipment and the government is managing that. Our other subsystems we're managing and the engine is managed by RTX, Pratt & Whitney. So we build the airplane and deliver it or have it ready to accept the engine and the radar, that's when we're done, so to speak. So what we're doing with the government in cooperation with our teammates on this program is we're saying, okay, where are we really at with each of these sensor upgrades, where are we really at with engine production. There happened to be a strike last year, I think, at Middletown where there was a delay in some of the F-35 engine production. So now that's a little bit edgy. And we've gotten together as a really integrated team with the government to really put that Block IV schedule together. There is, again, has been over the years conversation about is a new technology engine sensible for the F-35, affordable, et cetera. That's a different topic. It's not in Block IV, but it's a separate line of discussion between us, RTX and the government which is not adjudicated yet. But for Block IV, as it's been described, we are basically reprogramming with the government is much of that sensor technology as fast as we can and as many airplanes as we can. That's what we're doing now. I'd say that's very collaborative. It's not completed yet, but it doesn't necessarily affect our ability to generate revenue and cash flow with the F-35.

But would it be correct to say, once Block 4 really comes in, in full, that should be a revenue benefit for you all, right? I mean...

Yes, because a lot of the subsystems are not GFE and they come through our revenue line as well, and you've got a more capable airplane. And we have to deal with again, inflation and other things. that we negotiate with the government. So the unit price because it's a more capable airplane will advance along with the inflationary issues that come with it.

No. I mean, going to some of the older programs, C-130J, F-16, you're continuing to see good international demand. There's more money for C-130s in the President's budget. But you also had some issues in the first quarter on those programs. Can you talk about what happened there?

I can talk about the design and manufacturing issues and Evan can give you kind of layout of the financial impact of that. So when we went to Marietta with our full team, we've learned about some obsolescent issues. Obsolescence in our industry means I used to use this radio that was designed and built in the '90s, that radio is no longer built anymore. We have to integrate a new radio into the entire aircraft system and connect it with all the existing subsystems and other systems that are outside the airplane. We underestimated the degree of difficulty of doing that. And radio is just an example. There's a lot going on here in the obsolescence space. So that meant more rework in the factory and flight in discovery, as we call it, in flight test, okay, this didn't really connect to that on the system, so we got to make a change. And that delayed the delivery of some of the C-130s, right? When it came to F-16, it was more of a new configuration because for the aircraft that are being produced today for the 2 customers that are out there, they -- the government agreed with them to put some new subsystems on the F-16. Integrating those new subsystems, again, took longer and had more discovery issues, discovery meaning so we're going to flight test something or test it in the lab. And we think it's going to work, but let's just make sure. And sometimes you have to do a software upgrade or the firmware doesn't match or whatever it is, and you've got to do some rework. That was the issue in F-16 largely. It is new subsystems, took a little bit longer to integrate than we thought. That delays the whole delivery and manufacturing process, and Evan can talk a little bit about the charges we took and where we think we're at.

Yes. And additionally, I'll add obsolescence is something that we're talking about constantly, particularly for long-standing production programs. It's just part of maintaining those programs. We do it all the time internally. We don't talk about it as much externally because typically, it just goes as planned. This is a case where that didn't happen on C-130. So we took a charge in C-130. You can imagine a flight line with a lot of C-130s there waiting to be sold off. We've now resumed deliveries on C-130 and look to get that program back on track as we close out the year. On F-16, as Jim mentioned, the design issue that was caught in flight test, we've since resolved that issue, the rework that has to come without sequence work when there's a design issue caught in flight test drove that charge. We've now completed that design work, and now we're going through the normal checkout process that comes with an F-16, so we should resume deliveries, I would say, measured in weeks, not months at this point.

Okay. So this is -- I have the memory back to when the block 60s were sold to UAE and you had some similar kinds of problem. Those were much more extensive. And so you're saying this is -- you've pretty much resolved the issues and can begin delivering.

Yes. So Block 60 and 70 was a much more significant installation of new subsystems, new generation subsystems. This is a more modest turn at the same wheel -- of the same wheel. But I could tell you because I've flown the F-16 with the test flights a few times, it's still world-class air-to-air fighter and it does the air-to-ground mission too. So those countries that are not necessarily release F-35 yet. F-16 still a lead in, especially if they were countries that had legacy Russian platforms. And those pilots and those units need to go from a whole different like cockpit set up, for example, and a whole different way of managing the jet and doing formations, et cetera, to the Western way. And the F-16 is a much more sort of smooth way to make that transition because, among other reasons, the F-35 is a single seat aircraft, there are no 2-seat trainers. And so you have to be able to fly Western cockpit, Western tactics, Western formation flying before you step into an F-35, frankly. And so if you're a pilot training and your prior experiences as a jet pilot is not in Western cockpit, you pretty much have to on to do it.

Yes. If we go over to space, clearly, a very high priority, high-growth area. That's true in this budget. It's true in several budgets. And as I look at what -- I can't see all of your portfolio there, but you've had -- it's really the largest player in this arena, but you had -- you have this mix of big legacy programs. Some of those are coming down. And then you've got a strong role in the tracking layer and so the SDA program, so the new gen. How should we think about the revenue outlook given the blend of mature and new?

So I'll give this to Evan and go through the kind of the projections. But one of the things you mentioned was the tracking layer. So it is small satellites that are in low earth orbit that are proliferating. There's lots of them. And let's say, 5 years ago, everybody looked at Lockheed Martin, they make big satellites in geosynchronous orbit. They're out of this. We're one of the leaders in small sats now for military usage. That means the company can evolve and pivot when it needs to, when the mission changes or the technology is available, we can do that. And that will apply in sort of the autonomous warfare space, too. I'd love to spend about 15 or 20 minutes going through that kind of devices that we are inventing and developing now that are being tested in conjunction with actual real customers like SOCOM, et cetera, that will I think, be important in that space as well. So I just wanted to highlight the fact that you've touched on space and the tracking layer and all this of small sats. 5 years ago, nobody thought this company could participate in that because of our legacy. The legacy is helpful because then we've got that baseline experience, the scale -- the production system the customer confidence, the ability to integrate with other systems that are benefits, not degraders to us being able to pivot.

Yes. And when we won that first SDA transport layer, we did it as one of the only competitors. I guess the only competitor that did not have an organic small sat capability, which we now have with. So to Jim's point, we've now evolved to be a leader in small satellite production. If you look at the broader space growth profile, the pacing item is what we call a strategic missile defense business at space. So that includes the fleet missile Trident program, which is going through another recapitalization and the large growth curve right now. We've made a lot of investment to support that growth. You've also got NGR, next-generation receptor, a very exciting program going through development with a plan to produce and scale. And then that's also where we have our Navy and Army based hypersonic programs in that business. So that's the pacing growth item in the space. The national strategic space, which includes a lot of the big satellite and small satellite programs, including a lot of the key classified work, which is a growth and performance driver for us, it's sort of mid-single digits. And then commercial civil is an exciting area for us, but it's probably low single digit, very low single-digit growth rate for us. So all in all, space is a mid-single-digit growth and remains our second fastest-growing business area overall.

And what is the time line now for NGI?

So we're continuing to go through development, I would say, through much of this decade. That there's some potential timing opportunities depending on how we want to partner with our customer to accelerate some capabilities. So we're working through that with them and that will be at our discretion in terms of the actual fielding date.

And just related to that, but also going back to the Missiles and Fire Control discussion, which is when you look at solid rocket motors as a critical element here, I know that had been problematic for you and for others if we go back a couple of years ago. You're working through a JV with GD to produce your own, I think, PAC-3. Can you talk a little bit about where the solid rocket motor universe stands today to enable what you're doing across all of these programs?

So Aerojet Rocketdyne is a significant position as is Northrop Grumman. So one other example is Northrop Grumman is qualifying to be a PAC-3 solid rocket motor provider. That's a second source for us there. If we can get General Dynamics through is kind of the more simple motor and then advance them to PAC-3, then we have 3 sources for solid rocket.

That's what you would prefer?

We would prefer 2 to 3 for every major component. We can't get there with every major component but even some very sophisticated, either we will start building ourselves with our own R&D or we will find another partner willing to do it like -- the General Dynamics arrangement that we have is a really good example, which is we don't have the production facility for solid rocket motors, which is very bespoke, I'll call it, okay? But we can design and integrate the design into our systems. So we did the design, GD is going to do the production, and we're matching up our skill sets, which is great. We want to do that more and more. And that could be with start-ups, it could be with midsized companies, et cetera. So we are open to really partnering with any level of industry to make our mission capability better, whether it's supply chain resilience or it's adding digital technology or it's doing something international to give us diversity of sources, for example. We're way more open to that, I think, than the company has ever been, and we're actually executing on a lot of that.

Going over to RMS. So Sikorsky. How should we view growth there? As you -- Black Hawk is still out there and still it's going to be a while for MB 75. So how should we think about the growth profile first for Sikorsky?

The pacing item there is going to be the CH-53K heavy-lift helicopter, which is going to double production probably this year and next year is our pace. So that's going to continue to scale revenue really through the end of the decade and continue to deliver through that based on the large multi-year procurement contract that we just signed. Blackhawk will be a growth driver this year. That revenue growth will continue -- will start to stable out probably next year and then come off maybe slightly in the out years, depending on the future state of multiyear production possibilities there as we're continuing to partner with the customer. In the meantime, we're encouraged to see budget prioritization for Black Hawk modernization as there are some really exciting capabilities that are potential for the Black Hawk platform. And then we see some other platforms for Sikorsky that also become very relevant like the MH-60 Romeo and Sierra. So that's sort of the pace item for Sikorsky this year. I think if you look at the non-Sikorsky parts of RMS that are interesting to watch. The ground-based radar is one of the most exciting parts there, particularly with the Golden Dome mission becoming online. We're very well positioned with our ground-based radars with a variety of capabilities, including those that are transportable and may be most relevant to a Golden Dome mission to protect the home front. And then you also see that is our center of excellence for our capabilities. So as Jim mentioned before about the low-cost drones, which isn't our natural kind of capability there, but the ability to sort of network all those drones together and then make them work collaboratively with our platforms is a capability we bring and that's important coming out of RMS.

And there's a very good example of this is Sanctum command and control system I mentioned earlier to do drone control -- command and control. That's out of the RMS business we have. The effectors for this now today are -- we're shooting down -- everybody's kind of making the point, shooting down to $25,000 Shahed drone with a multimillion-dollar missile, That's a bad match. We shouldn't be doing that. So we're not just sitting here waiting and saying, well, that's a bad economic match. What we did is we said, okay, what is a relatively cheap, highly scaled existing product or system that we could use to shoot down a $25,000 or $30,000 drone with a pretty good, almost even financial economic trade-off. And that is the Hellfire missile. The Hellfire missile is in the tens of thousands of production in storage and used by United States Army and its allies. It's generally an air to ground. In fact, it's designed as an air-to-ground missile generally up the helicopters. So we got creative in the company and said, okay, how can we use the cheapest guided missile we have that could shoot -- that is big enough to shoot the Shahed drone down and get this economic trade-off fixed. So what we did was we used digital technology to change the guidance system for the Hellfire missile from air-to-ground to ground-to-air. And then we -- our team invented kind of -- it's a 4-pack. So think about a 6-pack of beer that you would carry. It's a 4-pack of these Hellfire missiles they're called now that are relatively easy to produce, quite cheap compared to, say, a Patriot missile. And we can put this 4-pack and the command and control system on the deck of a ship. We could put it on the back of a truck, we could put it at the edge of an air base. We could put it next to THAAD radar. And while, you've got 4 shots relatively very cheap that you can now shoot these Shahed drones. So -- and we've got some other systems we're developing, too, that are meant to match the economics of these drones in a counter-UAS system, which is the RMS brain will control the MFC missile that's already deployed and used and familiar with militaries all over the world. They have to learn something new, train 1,000 people, get a supply chain, a logistics chain for this new thing. These are Hellfires. They're everywhere. And we just -- instead of tacking them on to -- under the wing of a Boeing Apache aircraft, we're putting it in the forepack and using it for a different mission. That's 21st century security. That's the concept is how do you match the scalability, the usability and the new technology in a way that you're solving these mission problems and not just selling stuff to the government.

Yes. And just to add to that because I think it is really key. When we talk about the MFC growth profile, this would be a potential accelerant to that. The Hellhire, the missile. And to Jim's point, that's joint air-to-ground missile. That's the way it's been designed. So the idea of innovating it for a completely different mission. And very notably, these are one of the few munitions at MFC that have excess capacity today. So we could very quickly ramp up there, also has potential pertinent with the CellDrone acquisition we did as a potential platform as well.

Right. And that's, again, being an innovative thinker, there's a start-up called CellDrone. They make autonomous ships. We don't do that. They do it already. They're pretty good at it, and they don't want any weapons. So we put a Mark 41 launcher on integrated into the ship, which then integrates into the whole command and control system of the U.S. Navy, and now they can use it to actually deter adversaries instead of just maybe a sensor or a mine layer or something like that. So this is the way this company is thinking now. It's taken a couple of years to get it embedded everywhere. But that's why we do these trips to the different factories together because that way, we can see, first of all, help the operation that's existing there and also learn from it to scale and team up with whether it's Skunk Works and RMS or whatever to do these mission solutions that will be efficient and effective.

So if we put all this together and we look at this year, so you're guiding to $6.5 billion to $6.8 billion in free cash flow, down a little bit from last year. What factors could take that higher or lower this year?

A couple of things could drive it. One of the headwinds is both years last year and this year benefit from tax law changes. Last year, based on our current profile, a little bit more than this year. But as we work through the very latest changes we saw specifically to the KMT, that has the potential to push our cash flow to the higher end of our range, and we'll continue to evaluate that. And we'll use the next earnings call as an opportunity to potentially relook at that if it's appropriate. Also, the timing of these multiyear procurements of when they get signed and the Lot 20 F-35 are all drivers that could help us potentially increase cash as we look through it.

Well, I guess to wrap up, Jim, like when you look at this year, where are you going to focus your time?

So trying to continue to integrate the very best of U.S. and allied technology into the missions that we're doing. So we have high-level discussions with the NVIDIAs of the world, their leadership, OpenAI, Google. We're figuring out with Rheinmetall how to build hardware in Germany, for example. We're going to have -- find more European partners because, guess what, Europe has realized that they need to have more of industrial base themselves. We already have the designs. We already have the manufacturing know-how. We can team up with companies in Europe, for example, or Japan is another. Australia is another. So it's really like building out an ecosystem where the Lockheed Martin legacy of intellectual property can be scaled on a global basis to deter war. So that's one of my primary areas. And the other one, as I said, is just being on top of the operational execution all the time and being at the sites and learning from the people on the floor, learning from the local management. And where I first saw this grizzly 4 pack of Hellfire missiles was that we went to an MFC factory and they were making it kind of on the side in the garage somewhere, and they go isn't this cool, and I'm like, yes, let's make 1,000 of them, right? So let's just get on with this. We'll figure out the appropriations process someday, but we need to be fast and we need to scale up quickly. And we need to give the military services things they know how to use and already have that can do much, much more effective mission capability at a reasonable cost. So between operations and innovation, that's where I'm spending my time.

Well, great. Well, thank you very much. Evan and Jim, this has been great. All right.

Thank you.