Lockheed Martin Corp

NYSE:LMT

Earnings Call Transcript 2023-Q1

[Operator]

Good day and welcome everyone to the Lockheed Martin First Quarter 2023 Earnings Results Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone Lee, Vice President of Investor Relations. Please go ahead.

[Maria Ricciardone Lee, Vice President of Investor Relations]

Thank you, Lois, and good morning. I'd like to welcome everyone to Lockheed Martin’s first quarter 2023 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Jay Malave, our Chief Financial Officer.

Statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our 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.

We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts.

With that, I'd like to turn the call over to Jim.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2023 earnings call. I'd like to begin today with a few highlights from the quarter, as well as an overview of the Presidential Budget Request and then Jay will discuss our financial results and full-year 2023 outlook in detail.

We had a solid start to the year with first quarter sales of $15.1 billion led by 16% year-over-year growth at space. Segment operating margin was 11.1% led by MFC at 15.8%. Free cash flow grew 11% to $1.3 billion and combined with the lower share count contributed to a strong free cash flow for share growth year-over-year. We remain on track to meet our financial expectations for the full-year and the return to growth in 2024 as we laid out in January.

In terms of capital deployment, we returned $1.3 billion or 101% of our free cash flow to shareholders in the quarter. We remain focused on our long-term strategy of growing free cash flow per share and continue to plan to deliver approximately 110% of our free cash flow to stockholders in 2023 through dividends and buybacks.

Turning to the budget. The administration released preliminary details of the FY ‘24 President's Budget Request or PBR in early March. This budget proposal reflects a heightened emphasis on defense and security cooperation with allies. The FY ‘24 DoD budget request is $842 billion an increase of $25 billion or 3% over the FY ‘23 enacted funding. The near peer threats posed by China and the Russian invasion of Ukraine is driving the national defense strategy and has created added demand for Lockheed Martin's advanced effective solutions.

Key highlights include the procurement of 83 F-35 aircraft continued expansion in classified programs and an increase in requested funding for munitions. The PBR also includes facilitation investment and advanced funding for long lead time parts in support of multi-year procurement of JASSM and LRASM. We're also engaged with DoD on multi-year procurement proposals for PAC-3 MSE and guided multiple launch rocket systems. These proposals are subject to congressional approval during course of the FY ’24 defense authorization and appropriations process.

The PBR also includes continued investments in key technology development efforts such as conventional prompt strike, long range Hypersonic weapon, next generation interceptor, Hypersonic defense, bomb defense system and other space programs. Furthermore, key technology areas aligned with Lockheed Martin investment priorities received increased funding to include microelectronics, 5G technologies and joint all domain operations. We are encouraged by this initial request and look forward to its progression through the authorization and appropriations process. We also anticipate heightened emphasis on national security prioritization from Congress, supplemental spending requests including Ukraine and elevated demand from allies and partners.

Turning to the F-35 program, the 83 F-35 Lightning II aircraft included in the PBR signaled strong support from the services and the administration. Moreover, the Canadian government's January announcement that it will procure 88 F-35s marks another milestone in continued international demand for the aircraft. As to production, deliveries of F-35 engines which are government furnished equipment resumed in February. And then flight operations and deliveries resumed in March.

However, we do expect a fraction of total expected 2023 deliveries to be impacted later this year, due to both software maturation related to Technology Refresh 3 or TR3 and hardware delivery timing. However, we anticipate little to no revenue impact from any potential delivery delay and therefore no material adverse effect on our 2023 P&L. Jay will provide some more color on this in a moment.

Also at Aeronautics, the first Greenville built F-16 Block 70 took flight and was delivered to Bahrain. In addition to the Bahrain customer six countries have selected Block 70 or 72 aircraft and Jordan and Bulgaria have signed letters of agreement for additional jets. Further related to the F-16 in the quarter, while I was at the U.S.-India CEO form in March, I had the privilege to announce the memorandum of understanding with the Tata Lockheed Martin Aero Structure Limited joint venture to produce F-16 wing structures in India demonstrating our commitment to India as an industry partner and customer, while bolstering our supply chain.

Turning to Hypersonics, it is encouraging to see the continued investment outlined in the PBR for the conventional prompt strike weapon system or CPS. As it begins integration and testing for Zumwalt Class Ships recognizing our advancements in this critical technology. In February, the U.S. Navy awarded Lockheed Martin an initial contract for CPS, the first sea based hypersonic strike capability for the United States. Enabling long range missile flight at speeds greater than Mach 5. First delivery is expected by the mid-2020s.

Regarding our Air launch rapid response weapon also known as Aero, we are continuing testing of the system at hypersonic speeds in order to advance technical maturation of the missile and the glide body and to ensure the final product is safe, reliable and supportive of our customers' missions and future plans.

In January, we also completed the second flight test of hypersonic air breathing weapons concept also known as Hawk in partnership with DARPA and the Air Force Research Lab. We accomplished all the test objectives during the second flight test, including affordable rapid development and performance requirements. And in late March, the U.S. Navy announced its support of the hypersonic air launched offensive anti surface strike weapon or HALO. Lockheed Martin was down selected and awarded a contract for the first step to fielding a critical capability over the next decade and begin the design and development of a carrier based air breathing hypersonic strike capability for the Navy's fleet.

As a company, we remain fully committed to developing hypersonic technology on accelerated timelines to meet this critical national security need and establish a solid deterrent posture in this area for the U.S. and its allies. The hypersonic solutions are just one element in our vision of 21st Century security. We advanced several additional aspects of this strategy during the quarter, including announcing a memorandum of understanding with Juniper Networks to jointly develop integrated hybrid software defined wide area network solutions and to demonstrate that with our customers in the future.

This technology enables Mission Aware Dynamic Routing, a foundational capability for resilient joint all domain operations. This mission where dynamic routing shifts the movement of data and communications in real time across a mix of military and commercial infrastructure according to evolving conditions. Our solutions give customers the flexibility to rapidly adapt to maintain the flow of crucial data and information as their assets operate in contested environments.

We also led simulations of technologies to the U.S. Army, Air Force and Navy to demonstrate the impacts of 5G communications and advanced analytics to significantly improve operations and maintenance performance for a variety of aircraft, as well as for unmanned platforms and operationally challenging environments. And at the Mobile World Congress in Barcelona, I had the opportunity to deliver a keynote address and meet with CEOs across the digital technology, mobile and networking industries to encourage us working together to promote innovative solutions to protect our countries and advance our space exploration capabilities.

Another example of our leadership in accelerating advanced 21st Century technologies to improve national defense and deterrence to conflict is in the arena of directed energy. Recently, our RMS unit achieved success in our initial test of our demos. High energy laser, which verifies that the laser's optical performance meets the system's targeted design parameters. This 50 kilowatt class laser weapon system aligns with the Army's directed energy, short range air defense mission.

In addition to delivering on absolutely cutting edge technologies, demand for many of our well-known and long-time high performing systems continues to be strong. For example, in January, the Australian government announced the purchase of 20 Lockheed Martin high mobility artillery rocket systems or the now familiar High Mars, providing Australian defense force with a reliable, well proven capability. And we continue to grow our significant partnership with Australia beyond High Mars.

In February, an agreement was announced between the Australian and United States governments for a foreign military sale of 40 UH-60M Black Hawks for the Australian Army and deliveries are slated to begin early this year. The Black Hawk remains unmatched as an all-around, multi role durable military helicopter for Australia and for the 34 other countries around the globe that use it.

Further, we're excited to work with the ADF and Australian industry to develop their sovereign satellite communications component, otherwise known there as joint Project 9102. The Commonwealth of Australia announced in April that Lockheed Martin was selected as the preferred bidder for JP-9102. This multibillion dollar project will provide the ADF with a robust solution for military satellite communications and defined by its versatility and its resilience.

With that, I'll turn the call over to Jay and join you later for questions.

[Jay Malave, Chief Financial Officer]

Thanks Jim, and good morning, everyone. Today, I will walk you through our consolidated and business area results for the first quarter and cover our 2023 outlook. As I highlight our results, please follow along with the web charts we have posted with our earnings release today.

Let's begin with chart three and an overview of consolidated financial results. Overall, 2023 is off to a solid start, positioning us well to meet our commitments for the year. We delivered just over $15 billion in sales with $1.7 billion in segment operating profit, resulting in 11.1% segment operating margin.

Earnings per share was $6.61 and we generated $1.3 billion of free cash flow, enabling a solid shareholder return to share repurchases, and dividends. Our book-to-bill ratio for the first quarter was 0.7 as anticipated. With backlog expected to increase in the second quarter, from the upcoming order for F-35 Lot 17 production. And we continue to strategically invest in our growth strategy with $600 million of capital expenditures and independent research and development this quarter. These financial results are on track with our expectations for the year.

Taking a closer look at the quarter's results with consolidated sales and segment operating profit on chart four, first quarter sales increased year-over-year by 1% as space led the way with 16% growth. Segment operating profit was down 2% as lower ULA equity earnings and contract mix more than offset the benefits from slightly higher volume and step ups. As expected, margins contracted mostly due to the lower equity earnings from ULA.

Moving to earnings per share on chart five. GAAP earnings per share were up $0.17 or 3% over 2022. Adjusted for mark-to-market investment gains, EPS was flat. On an adjusted basis, the unfavorable year-over-year impacts from segment operating profit, interest expense and FAS/CAS pension income were offset by the lower share count.

Moving to cash flow on chart six, we generated nearly $1.3 billion of free cash flow in the quarter, including nearly $300 million of capital expenditures, as well as over $600 million of accelerated payments and continued support of the supply chain. Our cash deployment plan is on track, which we expect to accelerate throughout the year. In the quarter, we had $500 million of share repurchases and paid almost $800 million in quarterly dividends. Total cash return to shareholders in the quarter was 101% of free cash flow.

Moving to segment results and starting with Aeronautics on chart seven. First quarter sales at Aero decreased 2% year-over-year. Lower F-35 production sales were partially offset by higher F-16 and classified program volumes. Operating profit was slightly lower than prior year as the impact from lower net profit adjustments and sales volume was partially offset by favorable contract mix.

For the year, we expect F-35 deliveries to be lower than previously anticipated due to software maturation with the Tech Refresh 3 program and hardware delivery timing. We will refine the impact as the year progresses, but do not expect the change to Aero’s 2023 sales and profit ranges that we had previously communicated in January as we maintain our production cost throughput profile for the year.

Looking at Missiles and Fire Control on page eight, sales decreased 3% as lower sales volume on sensors and global sustainment, as well as our tactical strike missile programs were partially offset by growth in integrated air and missile defense. Segment operating profit was down 2%, driven by lower sales volumes and net profit adjustments, partially offset by favorable contract mix.

At Rotary and Mission Systems on page nine, sales were down 1% from 2022, driven by lower volume on Black Hawk production and our C6 ISR programs. These declines were partially offset by favorable volume on radar programs and integrated warfare systems and sensors. Including Defense of Guam, an important growth area for RMS that was won in 2022. Operating profit decreased 14%, due to lower sales volume and timing of net profit adjustments.

Turning to chart 10 and our space business area. Sales were up 16% in the quarter driven by strong growth on the next gen interceptor and classified programs and further boosted by favorable program lifecycle timing on Orion, protective communications, and fleet ballistic missile programs. Operating profit was up 13%, driven by the increase in volume and favorable profit adjustments partially offset by the lower equity earnings from United Launch Alliance.

Okay. Now shifting to the outlook for 2023 on page 11. For the year, we are reaffirming guidance for all key metrics. We continue to expect sales to be in the range of $65 billion to $66 billion with segment operating margin at 11.2% at the midpoint. We also still expect to deliver free cash flow at or above $6.2 billion, while repurchasing $4 billion of outstanding shares. We believe our first quarter results position us to achieve these expectations as we continue to add orders, we program execution commitments and pursue new opportunities throughout the year.

Right, so let's close on page 12 to summarize with the comments. As noted, first quarter represents a solid start to 2023. We reaffirm key financial metrics as previously guided and continue to expect a return to growth in 2024 and beyond. With consistent free cash flow per share growth. Looking ahead, our strategic focus on 21st Century Security Solutions aligns with expected increases to defense and security spending. With our continued discipline and focus on execution, we are on track to meet our expectations for long-term growth and value creation for our shareholders.

With that Lois, let's open up the call for Q&A.

[Operator]

Thank you. [Operator Instructions] Our first question will come from the line of Seth, I'm sorry Seifman from JPMorgan. Please go ahead.

[Seth Seifman, JPMorgan]

Hey, thanks very much. Good morning, everyone, I apologize and I'm losing my voice a little bit here. But Jay, I wonder if you could talk a little bit about the GAO report would indicate that Sikorsky’s bid for FLRAA was about 45% of that of Bell? And so it seems like investors are, kind of, fortunate that Sikorsky did not win that competition. And I guess what can you say to investors, you talked about some of the classified missile profitability headwinds, I know there was a charge on CH-53K, some ULA development that, kind of, the bid process is consistent with generating adequate returns on new work?

[Jay Malave, Chief Financial Officer]

Great question, Seth. Let me just say on FLRAA. We're obviously disappointed. We believe that our offering was the best technology to support the multi-mission requirements at the best value. And while we'll acknowledge that the proposal did include aggressive pricing, a significant amount of our offering included efficiencies made possible by the benefits of 1LMX. And our adoption of 1LMX model-based and digital thread enhancements significantly improved our cost competitiveness and we expect that to continue in the future. The business case itself was favorable and that's what enabled the pricing that we were able to offer.

As it relates to -- I think generally speaking, that's how we evaluate these proposals. We look at the NPV, we look at IRR, we looked at all different metrics, we look at current affordability. And as I mentioned at your conference Seth, I've said it, in a classified program at MFC, we have to take a little bit of short-term pain for some long-term gain. But the fact of the matter is the business case does provide that long-term gain for us. And so, we go through all of that as part of the management decision making, the technology that we can provide. As you would expect, we have the leverage, we have the capability of wherewithal to provide favorable pricing in outstanding technology offerings to our customer, and we don't do it at the expense of financial returns.

Let me just add, just on the CH-53K, we did have something in the press release. There was a small adjustment related to a development contract -- an older development contract, there was no adjustments taken on the forward production agreements that we're working on currently.

[Operator]

Thank you. The next question is from the line of Kristine Liwag with Morgan Stanley. Please go ahead.

[Kristine Liwag, Morgan Stanley]

Thanks, good morning, Jim and Jay. On the F-35, the talk of the performance-based logistics deal has been ongoing for some time. But it seems like it's possible you would reach a deal this year? So, could you give us an update in terms of where you stand in transitioning over to a PBL contract in the program? And then assuming that PBL meets conditions set by the 2022 NDAA, how could this impact the sustainment work and the overall program profile over the coming years?

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Thanks, Kristine. It's an excellent question. We did estimate a proposal, we are expecting that to be decided by the end of the year and awarded. And we think this is the best solution for the customer, not only over the next five years, but frankly, over the -- this is the right program for the life of the program. And what this offers is really a win-win type of solution. It enables us to utilize our proprietary modeling for material requirements to most efficiently use inventory and provide real-time availability of material to our customers as they need it.

And so, we're able to take that responsibility off their shoulders, being able to provide them the requirements when they need to maintain, obviously, the readiness levels that are necessary. And so overall, not just over the next five years, we think it's the right long-term solution for our customer. And we think again, it's just a win-win proposal for not just the joint -- the services, but also industry as a whole.

[Jay Malave, Chief Financial Officer]

And Kristine, we think we're on a path to establish a PBL with F-35 customer enterprise this year and that's what we're tracking too.

[Operator]

Thank you. The next question is from Rob Stallard from Vertical Research. Please go ahead.

[Rob Stallard, Vertical Research]

Thanks so much. Good morning.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Good morning.

[Rob Stallard, Vertical Research]

Jim or Jay, now that you actually mentioned supply chain issues or labor shortages or other things in your commentary, so I was just wondering if you could give us an update on that situation and whether things have improved?

[Jay Malave, Chief Financial Officer]

Yes, it's a good question. Rob, our visibility we’re going throughout the year, and I made a few comments -- I think the public comments in the quarter that we're looking at potentially at some shortfalls and partly that was due to the strong performance that we saw in the fourth quarter. Ultimately, the supply chain delivery, I think for the most part, there are still some pockets that we've seen particularly where it was impacting the most was at MFC and RMS, both of them had some continuing lingering issues that continue to plague us.

On-time delivery performance really didn't get any better from Q4 and really what we saw in the back half of last year. So as we expected, really going back to when we reset expectations in the second quarter of 2022, we're really not expecting any type of significant recovery to the end of the year as we go into 2024. So, essentially more of the same in the first quarter from what we saw previously.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

And Rob, it's Jim. We're on the cusp of fully implementing really best practices in supply chain across this one Lockheed Martin concept that we have now, used to be that each business unit here or business areas, we call it, did its own supply chain management. And then within programs, it was even more narrowly managed. And so, we're now bringing all the aggregate demand together for each supplier across all of Lockheed Martin from space to MFC and everything in between.

And then, we're also looking at components that programs are using in different parts of the company from mid-tier suppliers and aggregating that demand to actually synchronizing our requirements and so that we can have more and more bulk buys everything from raw materials up through mid-stage components, et cetera. So, we're implementing those, kind of, best practices that will be good for the supply base too. I don't have more reliable demand from our company in total and I think will lead -- I hope will lead the industry into that future, where we help strengthen the supply chain by our practices in addition to their improvements.

[Operator]

Thank you. The next question is from Cai von Rumohr from TD Cowen. Please go ahead.

[Cai von Rumohr, TD Cowen]

Yes, thanks so much. So, Jay, you had very strong profitability at MFC 15.8% was up and yet you talked of this classified missile program hitting, I think 50 bps to 100 bps on margins. Can you update us in terms of -- is that still what the number is given the strength in the first quarter and how far out into the future does that extend?

And then maybe more broadly, Northrop also mentioned, maybe on B-21 that they have some fixed-price exposure looking out, do you have any other programs where we should be aware of potential, you know, LRIP or fixed price options on programs out in the future?

[Jay Malave, Chief Financial Officer]

Okay, thanks, Cai for the question. Let me just address specifically MFC they had -- did have a strong quarter. If you look throughout the year, where we go from here. In the quarter, they had essentially the highest profit adjustment quarter they're going to have, and so that's going to a step-down in the balance of the year. Secondly, we will see more of an impact from the dilutive margins associated with this classified program in the back half of the year as well.

And so I would expect in a step-down in the 13% range in Q2, it will cycle down from there, we're still expecting the full-year to be in this 13.5% range really due to these two items. The step-up with profit adjustments will be lower for the balance of the year and the dilutive impact, it becomes more profound in the back half of the year.

As far as other fixed-price production programs we’re really -- that's pretty much the large one that we're tracking. We've had the program at Aeronautics, that -- we took a charge in 2021 and we continue to monitor that program, it's fixed-price development. We still have multiple years of development on that program, and so and that's one that we continue to keep an eye on. But I think, Greg Ulmer and his team are really managing that and laser-focused on driving to the customer’s requirements in meeting their schedule and doing it when the cost objectives that we have currently laid out.

Just going back to the MFC in terms of the outlook, we're going to be pressured on margins, probably for the next four to five years and predominantly from this program. It'll step up, it'll probably peak out in 2025 and then stabilize from there.

The question -- other question I've been asked on MFC is whether they can grow absolute profit and the answer to that question is yes. And so while we may see some dilutive impact to margins, we may see profit maybe be flat from one year to another. Overall, over the next four to five years, we will see profit grow at MFC. And so, those are pretty much the answers to your questions. Thank you, Cai.

[Operator]

Thank you. And the next question is from Ron Epstein from Bank of America Securities. Please go ahead.

[Ron Epstein, Bank of America Securities]

Hey, good morning, guys.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Good morning.

[Ron Epstein, Bank of America Securities]

A question for you -- maybe a bigger-picture question. Now Secretary Kendall was out without talking about NGAD and kind of restructuring that program so that more of the IP is owned by the DoD and having the constant re-competition of contractors and so on and so forth? How does that factor and how you think about that business model, does that really change anything? And I don't know if you could, kind of, speak about that?

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Ron, it's Jim. If we're constantly and have over the years, the company's history worked with government on intellectual property, management rights, et cetera. We'll continue to do that and got itself is a concept in progress, I'll call it. The government services, DoD et cetera, they are formalizing and crafting with NGAD is going to look like and then what NGAD stands for is Next-Generation Air Dominance aircraft. So, think F-15, F-22, that kind of class airplanes [Indiscernible] win air-to-air combat.

And so, there'll be a mix of -- may accrued and uncrude vehicles in that concept, that's still being formulated. We're working with government through our Skunk Works operation on what the options are there. We'll sort out the intellectual property rules as we go forward. But frankly, we're driving and advocating strongly for a more open architecture approach to the entire industry, unless proprietary standards and protocols and architectures and we just demonstrated one of those with the docking mechanism for spacecraft, which can be basically implemented on any -- a wide range of spacecraft to do future replenishment of either data fees or fuel et cetera to satellites inflate.

So those are the kinds of things we're advocating for and we will always guard and protect our intellectual property rights for the IP that we develop and we'll work with customers to create the open architecture, so that we can continue to compete effectively.

[Operator]

Thank you. The next question is from Pete Skibitski from Alembic Global Advisors. Please go ahead.

[Pete Skibitski, Alembic Global Advisors]

Hey, good morning, everyone. Jim, I was just wondering if you can add some more color on sort of where Lockheed stands with Hypersonics just in light of the changes made to Aero and your Hawk variant. Obviously, CPS looks good, I don't know how big that could be, but could you walk us through maybe where you're at today in Hypersonics and with the program changes where things could go? How big you could get? Thanks.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Sure, I'll take the construct and then offer Jay, the opportunity to, kind of, give you some scoping of where the business side of it could go and revenue growth et cetera. But Hypersonics is a -- it's a complex endeavor. You can, kind of, build a matrix in your mind, right? There's two different kinds of propulsion technologies, right? One is air breathing, so think a cruise missile type of vehicle where the -- there's atmospheric provision of oxygen going through inlet docked and it's aiding the propulsion system to continue forward.

The other technology for propulsion is called boost glide, it's more like a kind of space rocket almost, and the fact that it's got either solid fuel rocket or equivalent to that. It gets a big boost off the launch vehicle or the Launch Pad and then the vehicle ultimately separates the glide body, it's called with the warhead from the rocket and on it goes, by it's basically momentum, it's already been provided from the boost. So, everything is one whose glides another, those are the two propulsion technologies.

And then there are notions about the source of the launch, right? So, you could have ship based which is CPS, you can have land-based off of Tell vehicle, Transport Director, a launcher vehicle that the Army calls long-range hypersonic weapon or you could launch this often aircraft. And that's the matrix you have to go on your head, what proportion are we talking about and what launch platform, we're speaking about?

So, let's just go really quickly through each of those. So ground based right now, there's essentially the long range hypersonic weapon is the game in town, it’s very similar to the CPS, which is the ship-based vehicle. Its boost glide and it could be see it’s surface launch seer or ground. That is where the government is placing its bet is on that joint program CPS and long range hypersonic weapon. You pointed out that we have that contract right now or executing on that for both services.

Then when you get to Air Launched, you have the two propulsion systems, so Hawk and HALO are the air breathing, air launched vehicle, right? That the air launched vehicles have a size concern that you have to take into account. So what airplanes can carry such a product or such a weapon. The boost glide is a heavier larger vehicle, which we have been testing through the Aero program, and it's going to be a matter of what aircraft, the air force and ultimately the Navy want to use to bring the hypersonic weapons that they will have into the battle. And that's the debate and discussion that’s going on in the services.

That's the way to frame all this. Those are all government decisions. We're supporting really all of the matrix if you will at this point with either development program like Aero or production program like CPS. So I'll stop there and give Jay a chance to, kind of, give you some scope on what the growth for the company could be.

[Jay Malave, Chief Financial Officer]

Sure. It's -- today, it's about a $1.5 billion business for us in the aggregate, all of those programs that Jim mentioned. We expect that to continue to grow and be a contributor. It's one of our growth -- four growth pillars, it's not the largest because it's smaller than some of the other contributors. But it still provides healthy growth and there's upside to that related to hypersonic defense. And so when I talk about [$1.4 billion, $15 billion] (ph) going to with solid growth, it's embedded in our growth projection, it's really these weapons systems that Jim just mentioned.

[Operator]

The next question is from the line of Rich Safran from Seaport Global Securities. Please go ahead.

[Rich Safran, Seaport Global Securities]

Thank you, Jim, Jay, Maria, good morning.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Good morning.

[Rich Safran, Seaport Global Securities]

So I wanted to know if you could just expand on your opening remarks about international demand. Wanted to know if you could maybe discuss some of the timing of international award opportunities where you're seeing the most demand for what types of equipment? And finally here, are you seeing any more interest in direct commercial versus FMS in international orders that you're signing-up now? Thanks.

[Jay Malave, Chief Financial Officer]

Rich, good question on international. For us over the next five years or so, we expect international to be a significant contributor to our growth. It's embedded amongst each of our four pillars. But when you strip out international alone, you're talking high-single-digit growth there. As far as contracting most of that, particularly as you're dealing munitions is FMS, concluding it as well as F-35 program. So most of that right now that we've got embedded in our forecast, particularly on the growth side is FMS related.

As Jim mentioned in his prepared remarks, we're very excited about the Australian Military Satellite Communication program, it's a multi-billion dollar opportunity and that really expands the international footprint of our space business, which has historically been predominantly a domestic U.S.-based business. So these opportunities continue to present themselves, there was a lot more opportunity in front of us and that is absolutely a growth driver for us over the next five years.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Yes. And I could add some more background to Jay's remarks there. As mentioned, space, there's like an incredible amount of upside, the notion of independent for sovereign satellite communication for military and national defense is catching on if you will. U.K. already has a system like this, but they want to replace and upgrade that. Australia is getting into that, a game as well and I think there'll be countries in the Middle-East and elsewhere that we'll look into these options for space.

On the Aero side, the F-35 is been incredibly popular and I think on every competition. Meaningful competition over the last few years as far as fifth-generation fighter aircraft go. In addition to that F-16, we can build them fast enough with additional orders coming in. We're going to compete in India to try to get that order as well and it's a matter of us being able to get to the production rate that the international is demanding and requesting of us there. RMS is having a lot of success with the SEAHAWK helicopter for example and various versions of the Black Hawk. As we mentioned, Australia as part of that. Also the radar systems are becoming more exportable as we go forward and both in Europe and Asia there is demand for those.

And then at MFC, obviously PAC-3 Javelin, GMLRS, ultimately potentially JASSM and LRASM for somewhere closer allies are going to be in the mix. So, there's a wide and broad range across all of our business areas, a significant international demand that we'll be seeing over the next few years. Contracting that through the FMS process does take some time. On the other hand, there are a few DCS programs and projects, but a lot of this is going to be -- continue to be export controlled by the U.S. government and there'll be largely FMS. But it's a broad range, it’s going to last for many years, and we'll continue to be updating you on other programs, let's start getting more international traction.

[Operator]

The next question is from Myles Walton from Wolfe Research. Please go ahead.

[Myles Walton, Wolfe Research]

Thanks, good morning. Maybe on RMS, could you talk about the driver to the expansion in the margin implied in the guidance? I guess a couple of 100 basis points implied run-rate for the rest of the year. Is that something programmatic, was there extra R&D associated with FLRAA? And also on FLRAA now that, that decision is made. Anything you anticipate needing to do at Sikorsky to maintain competitiveness? Thanks.

[Jay Malave, Chief Financial Officer]

So, Myles, on your first question on RMS margins, you know, again the first quarter was 10%. We've got a guide of nearly 12% for the year. What happens is a little bit of the opposite of MFC. This was their lowest property adjustment quarter of the year. We expect that to grow based on the program schedules and the risk retirements that we foresee for the balance of the year and so that will step-up and just give you -- just to frame a reference. The first quarter their step-ups were about 20% of their profit. For the full-year, we're expecting that to be closer to 30% for profit adjustments for the full-year for RMS. So that will be a big contributor to the increase in profitability.

The second element is that we have just some sales mix, we have some pass that attracts higher margin sales up in the second-half of the year, which will also give a boost to their margins. So that's fundamentally what's happening at RMS. As far as FLRAA, we had -- in any impacts related to Sikorsky, part of win announced a cost-reduction program in the fourth quarter had taken a few charges about $100 million of charges at RMS in the fourth quarter, about maybe half of that was related to Sikorsky and cost reduction and cost competitiveness.

And so, we have just an interesting dynamic there that while we've got production, particularly in the Black Hawk stepping down here in 2023, it actually steps up slightly again in 2023 -- I'm sorry in 2024, and then we have significant growth on the CH-53 program in ‘24 where we're expecting to double our deliveries on that program. And so, we're just dealing with a one year-type of a trough I would say. I think the team, Stephanie Hill and her team have done a nice job of rightsizing the cost structure for where we are today, while at the same time maintaining the capability to provide us growth in the future.

[Operator]

The next question is from the line of Matt Akers from Wells Fargo Securities. Please go ahead.

[Matt Akers, Wells Fargo Securities]

Hey, good morning, guys. Thanks for the question. I wanted to ask about missiles and fire control, you made some comments in the opening remarks about some of the multi-year procurement programs going on now. When should we think about, sort of, transitioning from, kind of, flattish sales this year? I think you've talked about mid-single-digit. Growth and then also was there any investment needed to support that in terms of capacity scaling up your business there?

[Jay Malave, Chief Financial Officer]

Yes. So, when you look to get over the next five years at MFC, they're certainly our strongest grower, we'll lay out a little bit more specifics as we go through our strategic planning process in the summer and we give you, kind of, a first look on 2024 and maybe beyond when we do that in the October call. But I certainly are strongest grower. Yes, there are capacity investments. Jim mentioned some of the funding that is being proposed in the Presidential budget request for facilitation investments. We've also invested our own money’s and capability PAC-3 is a good example. I mean, a few other programs where we've got in front of funding to make sure that we can deliver to the requirements for capacity and delivery requirements that our customers asking for.

And so, again, I think we've got a good beat there. We've talked about different capacity levels over the next few years. We reached some of these levels in ‘25, ‘26 and ‘27. And that investment really between now and over the next few years is going to help enable that capacity increase in growth as well.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Yes. And it's Jim, Matt. I could give you some details on exactly what we're talking about here. So for PAC-3 capacity 2022 is 450 and we're planning to make the investments and working with government to coordinate with us on this to 550 by 2026. So just three years from now, we'll go from 450 to 550. And then similar with the Javelin, which has been pretty widely discussed in the past.

Our 2022 capacity was about 2,000 a year and by 2026, we'll have 3,500 plus, and ultimately, we're going to get to 4,000. When it comes to GMLRS, which is the HIMARS munition, the original capacity last year was 10,000. We're taking that to 14,000 by 2026. So these are meaningful step-ups, I guess you could call them in capacity and we're doing those, because we think we have a really strong demand for that capacity to fill it. And we're now programing, which customers go where and what point in time and working with the U.S. government to do that with -- along with their own priorities.

So, we've got a significant plan to grow the business at MFC. There's investment either through our own rates and our CapEx plan plus funds committed by the government, because we are making a pretty strong case, I think with them to drive an anti-fragility program into munitions and other sort of high-importance production facilities and production systems. We got asked to double or triple production of certain munitions and the answer came back, as you see, it's going to take three years to do a lot of that. We want to get the fragility out of the system. So if this ever happens again, it's six months instead of three years to get a meaningful improvement in capacity and that's how you see the government acting now with the long-lead time parts in the [Indiscernible] and the multi-years that they are now implementing.

[Operator]

Thank you. Your next question is from the line of Jason Gursky with Citigroup. Please go ahead.

[Jason Gursky, Citigroup]

Book keeping question for you and then Jim, a more strategic one. Book keeping question, Jay, what kind of book-to-bill do you need to have this year to support the commentary about return to growth in ‘24 and is the timing of those awards important?

And then for Jim, I'm going to just have you double-click a little bit on the Evolve initiative and the announcement that you made here recently with the Crescent Organization and supporting later communications. Just kind of curious from a big picture perspective, what kind of capital you're anticipating, putting into an organization like Crescent and the capital that you're going to be putting into this Evolve initiative over time?

[Jay Malave, Chief Financial Officer]

So let me just start with a book-to-bill question. Jason, essentially, it's one. Last year, we ended the book -- the backlog at $150 billion. This year, we're planning for that to be around the case maybe it's down $1 billion or up $1 billion. But effectively, a one book-to-bill sets us up for the growth to resume in 2024. So, we don't need to necessarily see the backlog. There is opportunity for it to grow from where we are, and where we landed or ended in 2022. But right now, we're planning for that to be generally flattish and that's where we need to be to drive the growth resumption in 2024.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

And Jason, let me put the whole notion of Evolve and Crescent into the overall strategy that accompany for you and give provide context that way. We've got three main strategic initiatives that the company that we're driving. One I just mentioned, is just to take the fragility of the production system, not just for Lockheed Martin, but for U.S. government and our industry and we just describe some of the ways that we're endeavoring to do that with government and so, that's the first strategy.

The second one is, you've heard us talk about before 21st Century Security and that is working beyond the five defense primes in our supply chains to bring the latest and most advanced Newtonian and Digital Technologies International Defense and that means we have to work at Lockheed Martin with a wider variety of companies from the tech sector to laser-guided weapons, supply chain companies that we may not be doing current business with and they can be startups to Microsoft sized corporations.

So, we are structuring our company to be able to participate and cooperate and collaborate with that much broader range of partners to deliver this 21st Century Security concept. And so, Evolve is meant to complement what we already had. We have a ventures group, Lockheed Martin Ventures that deals with start-ups that have a type technology that are promising for our core business.

On the other side, we have partnerships and agreements and arrangements with our big five defense prime, so to speak. So, Northrop Grumman, us and BA for example work together on the F-35 aircraft and there are many, many of those. But what we needed in the middle was something to work with mid-sized companies and companies in the technology sector to work with us in ways that really don't have a traditional history with companies like Lockheed Martin, our peer group. And so, Evolve is now meant to be able to do joint ventures, co-investments, commercial arrangements with mid-sized to large companies outside of our normal sphere so to speak, and deliver on new capabilities for space exploration and also for national defense.

And so, present is the business that we’ll work with others outside of Lockheed Martin to figure out how to finance and then how to implement and how to sustain lunar service right for everything from transportation on the surface to basically the Uber for the moon, if you will at the end of the day, to the communications and positioning and navigation systems that you need to have on orbit around the moon, so that you can actually operate on the lunar surface with either robotics or with humans.

So [Indiscernible] has designed to do that. The capital that we will deploy to build that type of business will be more creatively sourced, right? It will not just -- it will not come out of the disclosure statement that goes back to the DoD or NASA into our rates, right? It's going to be independently source, we may contribute, our partners may contribute directly, but they will be outside the rate structure and the federal acquisition regulations. So that we can get the full benefit of those investments overtime, and also creative -- more creatively finance them and partner with others to do that. So that's the concept that's why we're doing it and we intend to grow it without necessarily burdening the CapEx disclosure statement and ramifications of that to the company.

[Jay Malave, Chief Financial Officer]

And by breaking it out of the business area, business says structure enables these ideas in these pursuits to really operate at a speed and agility level. It probably wouldn't otherwise be available to them working within the bureaucratic structure that we have in our business areas with the multi -- all the policies and procedures that we have. And so, we give them a little bit more flexibility to operate with some speed. And as Jim mentioned, the ability to pursue co-investment by others as well.

[Operator]

The next question is from the line of Scott Deuschle from Credit Suisse. Please go ahead.

[Scott Deuschle, Credit Suisse]

Hey, good morning. Jay, if I were to model Q2 through Q4 space systems sales based-off of Q1. And then just to adjust for increased number of weeks in those future reporting periods? And go get around $12.8 billion space segment sales for the year versus the guidance midpoint of $11.6 billion? So basically 10% higher than what you've guided. So, curious if you comment on what prevents that type of upside case from happening or to ask another way, what the volume headwinds are and the remainder of the year relative to the first quarter? Thank you.

[Jay Malave, Chief Financial Officer]

You know, it's a good question, Scott. And as I mentioned in my remarks, it's excellent growth from Next Gen Interceptor Classified programs and National Security Space, areas that you would expect. But they also had some growth and I mentioned that there was boosted, protect -- some protected comms programs Orion, fleet ballistic missiles. Those are programs we're expecting to be a little bit more steady state. And so they just were -- they just benefited from some program timing here in the quarter.

And just to give you an example, protected comms is up 50% in the quarter. We're expecting that to generally be flat for the year. Orion was up 20% in the quarter. We're expecting that to generally be flat for the year. FBM was up about 20% in the quarter and that was pretty much the full-years’ worth of growth all in the first quarter. And so just these things all came together here in the first quarter, that really caused this growth of 16%. We expect this program that I just mentioned to really normalize in the balance of the year. We will continue to see some growth on some of these other programs. I will acknowledge there probably is some upside to their sales, but it's not $1 billion that you're nearly talking anywhere between $100 million to $200 million of probably upside to where we are today.

[Operator]

Next question is from the line of George Shapiro with Shapiro Research. Please go ahead.

[George Shapiro, Shapiro Research]

Yes. Jay, I wanted to pursue some of these other income numbers, because they were actually a big part of the large beat this quarter relative to my expectation anyway. So if you look at the other net that's in operating income, it was $2 million. You kept the guide at minus $3.25 million for the year. So what happens in the subsequent quarters? It's all negative 100 plus or is there some quarter that it's abnormally high?

And then somewhat less, but other non-operating income was $49 million. You disclosed $29 million of that was the venture stuff, what was the other $20 million. And I left out the $29 million in the other net number, which was for deferred compensation adjustment.

[Jay Malave, Chief Financial Officer]

Okay. Let me -- so George, a fair question. Just to -- you may tackle a big question, the big picture question in terms of what happens for the balance of the year. Just on the investment gains, obviously we saw that in the quarter. We talked about that being $0.18 imply, because we're not changing it implies that we're reversing the balance of the year, so we'll see. We'll give that an update in the second quarter, update more halfway through the year and make a call on that.

The other element we just were speaking about a little bit in terms of our investment in LM Evolve, we have some of those investments increasing in the balance of the year as well. And then there's just residual corporate costs that we have flowing through. And so all those things are allocated. We'll monitor those throughout the rest of the year and see whether or not. Again, I think we'll just make an assessment halfway through the year on where we are those things to the extent there's upside, we'll make an update at that point in time.

[Operator]

The next question is from Ken Herbert from RBC Capital Markets. Please go ahead.

[Ken Herbert, RBC Capital Markets]

Hi, good morning. Jay or Jim, I wanted to see if you can provide a little more granularity on the TR3 and the F-35 program. Specifically, it seems like that program is faced in ongoing delays and other headwinds in terms of adoption and implementation. But how is that impacting deliveries this year and how do you see that timing of that getting back on track?

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Yes, Ken, it’s Jim. In the round, we're in the very late innings of it fully implementing this Tech Refresh 3. The point of it is really critical and that is it gives us much, much greater capability to really make the F-35 a true edge compute node in an open architecture, Internet of Things construct a system. And so the three elements of a edge compute node in a 5G system are data storage onboard, the vehicle, data processing on board the vehicle, multipath ability to get back to the cloud, right, finding the cloud as to whatever you're enterprise is.

And the TR3 upgrade provides all of that. It's coming together of a number of components I'll call them and subcomponents, which is pretty intricate, fairly leading edge for the aerospace industry to accomplish and it's being done. So there has been some delays in some of the hardware and software. But we're really in the very late innings of getting this all together. We're literally in flight test right now and will we wrap all that up by October or December or et cetera. We've got to see what the test results are. And work with the government to define exactly when everybody is ready to go and implement in our production system, in the factory, those software loads, and that's where we're at now.

So I would consider this extremely high degree of difficulty dive and we're going to make sure that it's done right. And we can prove set rate in our Block 15, so that's what we're up to and we're working closely with the joint program office to define that and make that successful. And we are seeing the demand for the aircraft both from the U.S. and international customers really, kind of, blossom here lately. So I think we're in good shape on the program.

[Maria Ricciardone Lee, Vice President of Investor Relations]

All right. Lois, this is Maria. I think we've come to the top of the hour. So I'm just going to quickly turn it back to Jim for any final thoughts.

[Jim Taiclet, Chairman, President and Chief Executive Officer]

Thanks, Maria. As we conclude, I'd like to say thank you to our 116,000 employees here at Lockheed Martin for their commitment to providing our is the 21st Century Digital and Physical Technologies that will help them deter conflict and win if they have to.

So thank you all again for joining us today. We look forward to speaking with you on our next earnings call in July. And Lois, that concludes our call today.

[Operator]

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.