Good day, and welcome, everyone, to the Lockheed Martin First Quarter 2022 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 Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Thank you, John, and good morning. I'd like to welcome everyone to our first quarter 2022 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 law. 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.

Thanks, Greg. Good morning, everyone, and thank you for joining us on our first quarter 2022 earnings call. I'll begin today by welcoming Jay Malave to our executive management team. Many of you have worked with Jay during his two-decade-plus career in the aerospace and defense industry and know him to be an exceptional financial professional and an outstanding leader. We're excited to have Jay join our company. On a personal level, I'm extremely pleased to be working with him. I'd also like to recognize John Mollard, he's with us today for his tremendous contributions as our acting CFO. We're grateful to John for his leadership and financial acumen, and he's continued as a key member of our team, leading our treasury organization. Moving to our financials. Jay will discuss our first quarter results and 2022 outlook in detail in a few moments, but I'll begin with a brief overview. Our first quarter sales were slightly below our expectations. However, our full year 2022 outlook remains intact. We did experience some adverse impacts from the winter surge and the Omicron variant in our operations and our supply chain, but we expect these to reflect short-term timing issues. I'm proud of how our team responded to these challenges, and we remain committed to delivering all the objectives that we laid out in our January outlook. Our operational performance was solid, with our business areas delivering increased profit margins from last year's first quarter and free cash flow was ahead of our projections. We also progressed well on our cash deployment plan, executing a $2 billion accelerated share repurchase agreement during the quarter. We are well on our way to achieving our full year outlook of $4 billion in repurchases as we look to deliver over 100% of our free cash flow to stockholders over the course of the year inclusive of dividends. We will continue to execute on our long-term strategy of disciplined and dynamic capital deployment, growing free cash flow per share and thereby delivering strong long-term returns to shift to shareholders. Turning to the F-35 program. Germany recently announced their intent to procure 35 aircraft. Lockheed Martin will support our U.S. government Joint Program Office in this process, as we look to partner with Germany to provide this unique capacity and capability for its national defense. The government of Canada has also announced it will enter into the finalization phase of their procurement process with the United States government and Lockheed Martin to purchase 88 F-35 fighter jets for the Royal Canadian Air Force. Canada is one of the original eight partner countries on the F-35 program, and we're very pleased to have the opportunity to provide this unrivaled plane to strengthen Canada's national defense. The German and Canadian announcements followed similar award decisions last year from Switzerland and Finland. And these four competitive wins have the potential to add 223 F-35s to our backlog when all are finalized. All four of these recent announcements underscore that the F-35 fighter jet remains the most capable, survivable and highly connected platform in production as well as the best value available today for our war fighters. And although the initial quantity of F-35 is requested in the FY23 President's budget submission was below our expectations for lot 17 aircraft, we expect that the services adds via the unfunded priority list and increased international demand will enable us to deliver on the stabilized production profile we had previously established. With respect to the overall Department of Defense budgets, this quarter, Congress passed the fiscal year 2022 Omnibus Appropriations Act, with strong bipartisan support in both the House and Senate, and the bill was subsequently signed into law by President Biden. This legislation improved approximately $742 billion in DoD spending, an increase of nearly $40 billion over the FY21 enacted amount. The final bill resulted in increases that will benefit multiple Lockheed Martin programs over the next few years, including fully funding 85 F-35s, 21 additional C-130J transport aircraft, 10 additional Black Hawks, 2 additional CH-53K helicopters as well as increases to some of our franchise satellite and missile programs. This quarter, the President also submitted the fiscal year 2023 Defense Department budget request, the first step in the FY23 budget process. The President’s submission added an additional $30 billion to the enacted FY22 appropriations and totaled $773 billion in requested DoD funding. This initial budget submission continues the administration's emphasis on the Indo-Pacific region, it supports Ukraine and focuses on strengthening our nation’s deterrence capabilities, all initiatives that are well aligned with our portfolio and with our 21st Century security The DoD also expanded investments in important technology development efforts such as Future Vertical Lift and hypersonics. Also key elements in our multi-pillar growth strategy, and we look forward to providing our customers with innovative solutions for these and other important missions. On a related note, I'd like to take a few moments to bring you up to date on two of the four pillars in our long-term growth strategy, our programs of record and new business opportunities. As to programs of record, this quarter, our Sikorsky team received over $1 billion in orders for the CH-53K platform, one of the main contributors in our program of record growth pillar. These announcements included awards for 13 low-rate initial production lot 6 aircraft, including 4 for Israel as well as long lead time items for full rate production lot 7 helicopters. The program is performing very well and as it continues to inflection to full production, we anticipate tripling our deliveries in the next few years. We also continue to see significant opportunities across the competitive new business landscape. Beginning with our space business area, we are very excited to be awarded transport layer tranche 1, one of three prototype agreements from the Space Development Agency. The $700 million award to design and build 42 small low-earth orbit satellites as part of the initial tranche of the National Defense Space Architecture. This transport layer constellation will connect assets in space with platforms and other domains in a highly capable mesh network environment for joint all-domain operations. And it's an outstanding example of 5G.MIL enabled JADO technology, maturing into a program of record. This award built on our current Tranche 0 contract that will deliver 10 space vehicles later this year, and we look forward to continuing our support to the SDA and the development of our country's next-generation space architecture. Continuing with competitive new business activity, in March, our Sikorsky team delivered our final updated prime proposal to the U.S. Army in response to their future long-range assault aircraft solicitation. Several weeks ago, we flew our DEFIANT aircraft 700 nautical miles from West Palm Beach to Nashville to be displayed at the Annual Army Aviation Association of America Conference. That was completing a 7-hour mission that further demonstrated the capabilities and the maturity of this remarkable rotorcraft. We believe our DEFIANT offering is the most mission-capable platform available, one that will provide our soldiers with transformational capabilities and unparalleled maneuverability, and we're excited to offer this unique solution in support of our armed forces. Before I hand the call over to Jay, I'd like to take a moment to express my sincere sympathy for those affected by the Russian government's unprovoked invasion of Ukraine. The conflict has resulted in devastating impact to the Ukrainian people and heightened security threats for the European continent. While we hope that this conflict is resolved peacefully soon, Lockheed Martin is taking steps to help address the resultant humanitarian crisis through multiple partners. These include committing aid to the Polish Red Cross, Project HOPE, USO and others to provide assistance to refugees, and we will continue to support ongoing relief efforts in Eastern Europe. With that, I'll turn the call over to Jay and join you later to answer your questions.

Thank you, Jim, and good morning, everyone. I appreciate the introduction, and it's an honor to be part of the Lockheed Martin team and represent our 114,000 employees on the first quarter earnings call. Today, I will walk you through our consolidated results, business area detail and discuss our 2022 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 3 and an overview of our consolidated first quarter results. As reported in our earnings release, results were largely in line with our expectations as the first quarter was impacted by program life cycle transitions. In addition to the expected program effects, we also saw some impacts to sales timing, mostly due to the spike in COVID early in Q1. Total segment operating profit was $1.7 billion, and segment operating margin expanded 30 basis points to 11.1%. Earnings per share were $6.44, and we delivered $1.1 billion of free cash flow. We also got off to a strong start to this year's capital allocation program, with $2 billion of shares repurchased in the quarter at an average price of approximately $427 per share. Along with almost $800 million in dividends paid, we returned greater than 2 times our free cash flow to stockholders. And we remain committed to our full year outlook. Turning to consolidated sales and segment operating profit results on chart 4. Total sales declined by 8%, mostly reflecting anticipated program reductions, with about 1.5 points coming from supply chain and internal operations delays, primarily associated with the recent COVID surge. Our operations and supply chain teams did a strong job of managing this latest challenge, and we expect these timing impacts to be recovered over the course of 2022. Segment operating profit declined 5% versus last year, and our segment operating margins expanded 30 basis points to 11.1%, reflecting solid underlying performance in spite of lower net profit adjustments versus last year. Turning to segment sales on chart 5. Three of our four business areas affected by expected program life cycle timing. Space declined by approximately $450 million due to the nationalization of the Atomic Weapons Establishment program. Rotary and Mission Systems sales were also lower, driven by approximately $300 million from the delivery of an Australian pilot training program in last year's first quarter as well as other mission system program transitions and COVID-related timing impacts. And Missiles and Fire Control was lower due to supply chain delays in integrated air and missile defense, reduced sustainment revenue for special ops following the troop withdrawal from Afghanistan, and program transitions in the tactical and strike missile business. Aeronautics was flat this quarter as expected, with increased F-16 production offsetting lower volume on F-35. Moving to segment operating profit on chart 6. Operating margins were higher at space and MFC with the increase in space driven by additional ULA equity earnings, and MFC expansion from solid program performance and successful contract negotiations on an international program. Both aero and RMS margins contracted, primarily due to lower net profit adjustment, but they met or exceeded our expectations for the quarter. Overall, solid performance across the operations. Turning to earnings per share on chart 7. Our first quarter EPS of $6.44 declined by 2% and reflected the impact of decreased sales volume, mark-to-market adjustments and lower FAS/CAS income, partially offset by benefits from the increased segment operating margin, reduced share count and a lower tax rate. Shifting to first quarter cash generation and deployment on chart 8. Free cash flow of $1.1 billion was ahead of our expectations, following the very strong $3.7 billion of free cash flow generated during the fourth quarter of 2021. Cash deployment continued to drive value for our stockholders as we returned $2 billion through share repurchases, leaving approximately $2 billion on our existing authorization and outlook for 2022. Combined with nearly $800 million in dividends paid, we returned over 240% of free cash flow to shareholders this quarter. Operational cash remains solid as the business looks to grow quarter-over-quarter through the rest of 2022. Okay. Moving over to our 2022 outlook on chart 9. We remain confident in our full year outlook as we have seen improvements since the Omicron variant spike. Our first quarter sales were approximately $250 million below our expectations, which equates to less than a single day of volume, and we expect this to be fully recouped throughout 2022. For the balance of the year, we project sales of slightly below $16 billion in the second quarter, around $17 billion in the third quarter and $18 billion in the fourth quarter. As our release stated, our outlook does not include any impacts from potential debt refinance or pension liability transfer actions that are currently under evaluation. On chart 10, and we break out our segment sales and operating profit outlook. Our segment estimates for 2022 remain consistent with the guidance we provided in January, and we continue to anticipate long-term growth for all four of our business areas. It's important to note that our consolidated and aero outlooks are dependent upon reaching agreement on F-35 lots 15 through 17 here in the second quarter, as funding constraints would likely cause a timing impact to our financial results beginning this quarter. Our teams are diligently working with their Joint Program Office counterparts to achieve closure on this critical milestone and both parties are striving to finish negotiations in the near term. So, we remain confident in our full year projections. Okay. To bring it all together on chart 11. The first quarter delivered solid operational performance that was largely in line with our expectations in spite of the effects of the recent COVID spikes. Our cash generation and deployment also got off to a good start with a focus on strategic investment for growth and fulfilling our capital allocation outlook for the year. Our solid performance and our four-pillar growth strategy have us well positioned to deliver long-term shareholder value. So with that, John, let's open up the call for Q&A.

[Operator Instructions] And first, we go to line of Rob Spingarn with Melius Research. Please go ahead.

Well, good morning, Jim and Jay. It's good to see you again.

Thank you, Rob. It's great to have you covering the Company and the industry again. Welcome back.

Thank you. Jim, I wanted to ask you if we could discuss Eastern Europe a little bit more. And I know it's early, but perhaps we can expand on your earlier comments and discuss in more detail the potential impact for Lockheed. So, to start, I'm thinking of incremental demand for longer-range weapons that the U.S. is now talking about for Ukraine, but also the F-35, the F-16 and other products at MFC, both domestically and for allied nations. So, in terms of specifics, what products are most relevant? And at a higher level, how do we think about this influencing organic top line growth over time, say, the next five years, rest of the decade?

Sure, Rob. Let me just start by articulating the foundations of what we think we're facing as a company and a country and an alliance, given the circumstances. The world's clearly changed with Russia's invasion of Ukraine. A major global power has crossed a recognized international border to take territory by force. And as a result, the value of strong deterrents to war as an instrument of nation's geopolitical strategy has not been as great since the middle of the 20th century. So, here at Lockheed Martin, we're aggressively and have been aggressively positioning our company as a deterrence company. Using the F-35 and our other core platforms as pathfinders, we're developing an open architecture using 21st Century digital technologies to continually enhance the deterrent effect of our national and our Allied Defense enterprise. And we have an integrated strategy to do so. I mean, I'll talk about a couple of platforms in a minute. But it's really about the integrated strategy and its ability to enhance deterrents as we go forward, every -- not 6 to 10 years with a new platform, but while we're doing the new platforms every 6 to 12 months in parallel. So, across Lockheed Martin, we're integrating our own business areas to be able to deliver on this idea and this vision. We're also integrating our strategy as a company across the U.S. and toward its allies, so they can work together more closely and effectively over time and ultimately, across the defense and aerospace industry and commercial technology industry as well, so we can accelerate those 21st Century digital technologies that others are investing a lot of time and talent in to, like 5G, AI, distributed cloud computing, et cetera. So, it's more about the strategy and what we can deliver in total as a company and maybe as a pathfinder for our industry. So, some of the platforms you mentioned fit really well into this strategy. The F-35, for example, you led off with. My interactions with pilots and commanders and senior government officials in countries, including the U.S. and Israel, and in Europe, where the F-35 has been used in either combat or combat support operations. The feedback is the aircraft is unmatched as an aircraft, especially with its fifth-generation stealth capability and be survivable in a really hostile environment. But equally exciting to the people I’ve been getting feedback from on the front, so to speak, is the ability of the F-35 to be a core sensor and a core command node and control node in a much wider network of national defense or deterrence. And so, the sensing capability of the F-35, combined with its aspects and kind of a 5G.MIL perspective as it's got -- and we'll have even bigger but it's got the largest data storage capacity of any fighter aircraft. It's got the greatest store data processing capacity on board of any fighter aircraft that we know of. And it's also got the best connectivity and sensor suite back to the command and control network into other platforms. And that really is the essence of what we mean by 5G.MIL. So, as you see, the F-35 has already become a more important platform, I guess, I'd say post Ukraine, unfortunately. And that is with Germany, seemingly moving from one direction to another toward the F-35 for its nuclear mission, responsibilities in Europe. Also, with Canada selection, of course, they’re part of NORAD as well and the integration, both in Europe and there and even in Asia, will be enhanced with F-35, and we expect that -- again, the services are asking for more airplanes beyond the President's request as well. So, the F-35 has been called by Chief Brown as the quarterback of the U.S. Air Force future strategy because of all those capabilities I talked about. So, that's part and parcel and really kind of the lead pinnacle, so to speak, of our strategy, and it actually fits in really, really well with integrated deterrents, which is the same concept that Secretary Austin has been developing with his team. You mentioned F-16. It's a great affordable 4.5 generation airplane when you take the Block 60 and 70 avionics and you marry them up with a proven -- an aircraft like the F-16. It's an earlier and more affordable way to get our allies on board with us so that we can integrate them into our 5G.MIL system. And then, the other effectors that you talked about, long-range precision strike weapons and long-range defensive weapons like THAAD and PAC-3 are going to be probably in greater demand as we move through time. So, all those are the trends that strategy that I outlined is meant to really ensure that we can defend against what's going on in the environment of the country in alliance. But it's the future out-year revenue growth for Lockheed Martin, it's too early to say, and we're not yet in a position to attempt to quantify that. But we'll update you as we proceed forward, Rob, every quarter as to what our expectations are in the current period. But we'll also update you on where we see these trends going. But I think this is the right set of platforms and the right strategy to enhance and preserve Lockheed Martin's leadership in the defense and aerospace industry.

Next, we'll go to Sheila Kahyaoglu with Jefferies. Please go ahead.

So, can we talk about the F-35 some more, maybe what's going on with negotiations, what exactly is the hold up? And then, when we think about the fiscal '23 request of 61, how does that relate to production? And how do we think about international orders being feathered in when we think about 156 units produced overall?

Sheila, it's Jim. I'll start off and maybe turn it over to Jay for some more of the detail. But we're very confident in our ability to reach an agreement with the Joint Program Office in the U.S. government on our negotiations that are ongoing. But what's really important to us and for all of our stakeholders, including our shareholders, is that we have a clear and shared understanding of the changes in the cost environment of the aircraft that have occurred over the last 12 months or so during this negotiation. And two of the biggest cost drivers in the upward direction are inflation and COVID effects that have actually been ongoing over the past couple of years. And so, we need and feel it's very, very important to take all those costs into consideration, make sure that there's a joint agreement on what those costs are and the magnitude of those, so that we can have a successful program for everyone in lot 15 to 17. There's also, as we touched on earlier, some lower quantities that were initially projected for that lot. We're working with the U.S. government and also the -- our international partners to see if there's ways to bolster that number. But right now, what we're working with is a lower number in negotiations. So, when you add all those things together, it's incumbent upon us to make sure we get an appropriate transaction or agreement for our shareholders and for the U.S. government and for our workforce as well. So, that's what the -- I wouldn't call it a holdup. I would just say that's the reality of the situation, and we're working closely and constructively with our government customers to collect on to that cost baseline and then we'll work from there on the contract.

Jim, let me just add on a little bit. As far as the negotiation, Sheila, we're encouraged by the progress being made. There has been progress, and we're encouraged by that. As far as an acute impact, it could be $500 million plus in the quarter, which we'd expect to be timing that we would recover in the balance of the year, assuming a successful negotiation. There does remain a gap, and Jim alluded to that. The team has been working with a sense of urgency to really complete this negotiation. And again, as Jim mentioned, it's important to keep in mind that we need to reach the right agreement for our stakeholders, even if that means we have to endure some impacts in the short term. As far as the production question. I mean, we're pretty confident in the 156 three-year plan that we had laid out before from a delivery profile. As you mentioned, the international customers and these customers that Jim just mentioned in his prepared remarks, provide some level of flexibility to really shore up that production schedule. You may have seen in the unfunded priority list for the Air Force, the Navy and the Marines, there was about 19 aircraft added to that. So, when you mix that in with the international demand, we feel very comfortable in our ability to maintain a 156 production cycle over that three-year period.

Our next question is from Ron Epstein with Bank of America. Please go ahead.

In the investment community, it seems like there's this assumption. I'm just going to lay this out here and that Textron is going to win Future Vertical Lift. And I'm curious from your point of view, why you don't think that is the case? And I mean, if you could walk through for all of us on the call, the pluses and minuses of a layout like defiance got over valor? I mean you've got counter-rotating helicopters, what do you get with that that you don't get for the tilt rotor and vice versa?

Ron, it's Jim. I'm an ex Air Force Aviator, maybe I can start off and Jay can add to it if he’d like. I've experienced this pretty close hand, and I've been involved in special ops helicopters, not as a pilot, but as a partner in my prior life a long time ago. What's most important to people that have to fly helicopters into hot landing zones is maneuverability and an ability to get into close quarters, let's say, into a landing zone surrounded by trees onto a rooftop in a crowded urban environment, things like that. And I would -- because I've seen the aircraft fly, I've flown the Matrix myself, which is our tech demonstrator in S-92, up in Stratford. That is the war fighter advantage, the maneuverability of the dual rotor X technology is head and shoulders above anything you could ever do with a tilt rotor. And the second question then would be, well, what about the speed -- max speed and sort of horizontal flight, if you will, cruise. We've got our aircraft up to over 230 knots, I believe, at this point. There's probably some upside to that. And that is not the differentiator. Getting the aircraft, the 100 miles that you need to go from base to target, 2 minutes faster is irrelevant versus when you get to the target, are you going to survive and live through that mission? And that's the differential. I think if it's war fighters and commanders making this decision, the only one they can make is future vertical out of Sikorsky and Boeing. Jay, anything else to add?

No, I think that was well said. I think that's it.

Next, we'll go to Rich Safran with Seaport Research Partners. Please go ahead.

So, I recognize you don't want to get out in front of the government on this, but I thought you might comment on what the FY23 request says about growth this year and next year and your prior expectations for $8.1 billion in cash from ops for '23. I just have to believe that the request as it stands, was above the assumptions you used when you gave out your 2023 estimate. So, if they requested -- if we take a standpoint that if the request is enacted just as is. Does that alter how you're thinking about 2023 growth and your cash from ops guide?

Let me take that question first. The budget was beneficial. I think as Jim mentioned, the trends are favorable, directionally, it's moving in the right way. And again, you would expect it to be incremental from the low single-digit baseline that we had previously provided. And maybe a little bit of color you've seen in a lot of reference to integrated deterrents emphasis on all domain and interoperability. And there's quite a few things from a programmatic standpoint to be excited about things like nuclear command control and communications reentry -- future reentry vehicle systems, our TACAMO recapitalizations, Next-Gen Interceptor, Next-Gen OPIR and others. And so, directionally, as I mentioned, it feels pretty good. As Jim had mentioned, we're still compiling this, and we're going through the analysis. It's going to take us some time to work through exactly what that means from an impact. I think it's fair to say that it's beneficial. It's biased to the upside, the extent to which they'll really have to work through and at the appropriate time, we'll let you know what that is.

Our next question is from Kristine Liwag with Morgan Stanley. Please go ahead.

Maybe following up on Rob's earlier question, I understand that it's too early to provide long-term outlook with regards to Ukraine. But, can you give more color in terms of the nearest term opportunities for you? I mean, Germany has announced a $100 billion modernization of its armed forces. And as our allies step up spending for defense, how meaningful is this opportunity for you? And in addition to F-35, should there be opportunities that we should watch for in missile and missile defense?

So Kristine, this is Jim. And obviously, we're in a long-cycle business here from an authorization in the House Armed Services Committee, for example, to book of revenue -- booking of revenue at Lockheed Martin could be 12 months to 3 years, depending on the program. So, I think -- as I tried to lay out, the environment is more challenging from a security -- national security and global security perspective than it was before. That suggests that deterrence is a more valuable product than it's ever been, at least in the last 80 to 100 years, and that we feel we're really positioned well with our strategy to meet that need for national security and global security. But we can't quantify yet exactly how that's going to touch our revenue on a $66 billion base, for example. And until we get actual contracts that have order schedules and we get the funding to do the long lead time items and all of those nuances and specifics in defense contracting. So, we're not going to try to bracket what those growth numbers are going to be, because we want to keep the fidelity of our guidance process. And we give it a year at a time. I did that in my last company, too, because that's where we have real data upon which we can give you a reliable forecast.

Yes. I'll just add, Kristine, that there are conversations ongoing with our government customer, to Jim's point, and sensitivity analysis, scenario planning and things like that. And as those firm up, we'll provide clearer information to you.

Our next question is from Cai von Rumohr with Cowen and Company. Please go ahead.

So, if we could return to the F-35 contract negotiation. So, your major subcontractor took a $93 million hit because of delays related to COVID, you mentioned that COVID is an issue. I understand that LHX is still kind of working through the software, and you've been at this with the government for, what, three quarters trying to negotiate this. So, I guess, the question is, I assume you will reach an agreement. But basically, will this result in a profit hit? And secondly, if you don't reach an agreement in the second quarter, what's the incremental impact likely to be?

Kai, so at this point, we would not expect any type of profit hit based on our negotiation as it currently stands. And again, it's a dynamic discussion, but we wouldn't expect any type of charge there. Going forward, as I mentioned here, the impact would be up $500 million plus in the second quarter. To further extent, obviously, that will go up. I think that we'll probably have to revisit later in the quarter to see how things are progressing. And I think we can update accordingly then. I think let's just kind of get through the quarter. We're encouraged and really pleased with the progress we're making to date. I know it's been a long road, but there's been some significant progress that's been made. And so, we're encouraged that we can be able to close this in a relatively short period of time. If not, then we'll update you accordingly at that point in time.

Yes. And remember, during the negotiation period, we've had significant changes in the underlying cost factors of bidding for the next three lots. And again, those -- it was concurrent. So, yes, we've been going at this for a number of quarters, but that's because that cost baseline has been moving during that time, and we both have to agree on where we think it's going to end up. And so, COVID impacts was cited and inflation, which is even a more recent phenomenon, so to speak. We've got to go all the way back to our supply chain, see what the impacts are going to be, then present that to the government. They have to vet those estimates and those cost assumptions. And that's what the basis of the negotiation to follow. So, this has been longer than normal because the underlying ground has been shifting on the most important assumptions that go into the negotiation. We are going to stay with our strategy, which is constructive, which they are, and progressing negotiations on the basis of actual cost information and data that provides our shareholders a fair margin and return as well as a government attractive contract.

Next, we'll go to Seth Seifman with JP Morgan. Please go ahead.

I wanted to ask a little bit about capital deployment. And I think you mentioned kind of similar to prior guidance, but you talk about the buyback plan or capital deployment overall being dynamic. And so, the share price has changed. I think, Jay, you mentioned some potential items having to do with the pension or debt repayment. So, maybe you could talk about how you're thinking about things differently and how the dynamic aspect of that has changed versus three months ago, if at all?

I can start with the theory and turn it over to Jay for the practice. The theory I have on capital deployment is what’s some highest and best use every quarter of the dollars that are created by the company or that we could or should be borrowing from the capital markets. And the batting order for me here kind of continues from my prior experience, which is based on regression data on when we make decisions, how they turn out. And what's the best ROIC that we can expect for a given dollar of investment or a given $100 million of investment? It tends to have been in my experience in both, this and other companies that capital investments based on actual or anticipated contracts with real customers, tend to have the highest ROICs. And we've bolstered our CapEx budget and plans under John's leadership and now Jay's as well at Lockheed Martin because we've got good prospects for contracts we're winning that are going into production that we need to invest in. The other thing we've done and really stepped up our internal spending on and we expect to get good returns from is our digital transformation program which I would say really is in the major leads right now, frankly. We've got a great CIO running it. She's got a fantastic team. We have a well-thought-out plan. We have support from our Board to go do this on a multiyear basis. And it's going to make us more efficient, more competitive and higher quality products coming out of our plants. So those are -- that's the first area. Our highest ROIC tends to be in universe, so to speak. Second area I found to be most beneficial is inorganic investments, right? So, we're looking at really hard now, making investments in both, the U.S. and other countries in technologies and programs we think are going to have duration and traction. And again, some of those will be in the U.S. and some will be outside the U.S. I think you'll see us investing a little more by putting, say, let's call it, boots on -- and brick-and-mortar on the ground and other countries than we have in the past because we expect those ROIs to be pretty compelling. When it comes down to what's left, M&A tends to be the third in the batting order. That doesn't seem to be really wide open in our industry right now with the current administration. So, we're going to then look to what else can we do and it's share repurchases, the next thing in the batting order. And you've seen us step up to that as far as announcements and performance already this year. And if we've got excess capital, and we are at a reasonable leverage level, we'll go ahead and continue to buy back shares. And I'll let Jay talk about intrinsic value and how we weave that in. But we're going to put our capital to work, the cash flow we generate and what we can borrow and maybe even lever up if those opportunities with high ROICs get bigger than we thought.

Let me just add -- let me just clarify, Seth, in terms of the debt. We don't plan on delevering. It would be just refinancing what we have. And so, the existing capacity we have really doesn't change at all. The use of the cash wouldn't change either. It's just taking multi -- potentially multiple years and refinancing that in various tranches here and doing it efficiently. As far as the prioritization of our capital, I agree wholeheartedly with what Jim just laid out. And so, we're going to go through that evaluation process. Keep in mind, I've been with the Company about 2.5 months now. And so, I would just ask for a little bit of time for us to just go through this process deliberately and analytically so that we can make the best decisions. If you look at the industry, we've seen an uptick in valuations in the industry as a whole. But I would say, our stock still remains undervalued on a relative basis. And from an intrinsic value, we're just -- we're going through that whole analysis right now. Based on some of the questions you asked, really taking another look at our growth outlook in determining what that comes up from a value for the company. So, we're going to go through that. We're going to be deliberate about it and then make the best decisions from a capital deployment. The key here is that we've got plenty of flexibility and plenty of opportunity, and we won't be afraid to use it. Ultimately, what we want to do is get to sustainable growth in free cash flow per share, and that's what our objective is.

Next, we'll go to David Strauss with Barclays. Please go ahead.

So, I wanted to follow up on this, thinking about the growth outlook beyond '22. So, I think previously, you had said 2% revenue growth in '23, a little bit of acceleration beyond and that was based on $715 billion fiscal '22 budget with $245 billion in modernization that we got $740 billion and $265 billion. It sounds like F-35 you think can kind of hold in there with the plan that was in place when you talked about 2% growth. So I mean, can you quantify at all how much potential acceleration we could be looking at above and beyond that 2%? And is there anything that got worse from a program standpoint as you think about that beyond fiscal -- beyond 2022 outlook?

Thanks for the question, David. Let me just maybe put it in a little bit of context, and remind you, in Jim's comments, we are a long-cycle business. So, benefits that you may see in a particular budget year manifest themselves and get delivered from a revenue standpoint over multiple years. And the best example I can give you is the -- 2022 plus-ups. If you look at the plus-ups and the impacts to us, that was about a little bit over 2 points of growth in any given year. But the reality is the profile -- delivery profile of that revenue stream is going to be over 3 to 4 years. And so, it's going be spread over. And so, as we just had an opportunity to have this presidential budget dropped, we're in the first inning here. We need to see -- let the process play out and get a better understanding in terms of what these program increments mean to us and in what periods. And so, we're just going to need some time to really go through that. And as I mentioned before, we'll obviously keep you updated at the appropriate time, but it's just a little early to really make those calls right now.

Next, we'll go to Peter Arment with Baird. Please go ahead.

Hey. Jim, you coming into this year, you always have a kind of a long list of international pursuits in terms of potential international awards. Maybe you could just remind us some of the bigger ones that Lockheed is focused on and maybe any of the timing around that, that would be appreciated? Thanks.

Sure. Well, we've got, as you've seen, a lot of success on the F-35. We also have international F-16 interest that's increasing. CH-53K is on the table in, say, Germany, for example. So, there's an across-the-board interest in these products, THAAD and PAC-3. Middle East has got to defend itself against missiles being fired at oil and gas infrastructure and even worse for populated major cities. And so, those kind of products have high demand in that part of the world and others as well.

Peter, I'll just add -- I mean, F-35 Lot 15 to 16, orders we expect, those are -- actually, they will have some international volumes associated with those big numbers this year, and those will really move the dial. We've got Black Hawk Multi-Year X, which is a multibillion-dollar award as well. And we didn't really talk about it here in the first quarter results, but we had about a $4 billion award in our classified. And if you recall, it's one of our pillars of growth here in the first quarter. So, very excited about that program as well. And so, we're positioned pretty well for award growth for the balance of the year and heading into next year.

Next, we'll go to Matt Akers with Wells Fargo. Please go ahead.

There's a line in your release that I think is new with the outlook on potential pension risk transfer and refinancing transactions you may do as early as Q2. I was wondering if you could talk about what some of those are? And what kind of impact those might have on your results this year?

Sure, Matt. The first one is just the transfer of pension, what you've seen us do over the last few years. This is essentially matching assets and liabilities and having insurance, transferring these over to insurance companies from a liability management perspective. And so, we're contemplating doing another round of those. On the debt, it's just a matter of taking multiple years of debt and really refinancing that out just a little bit earlier than waiting for the maturities to occur in each particular year. And so, those may have some P&L impacts associated with them. Last year, we had a pretty sizable impact on the pension liability transfer I don't have that in front of me. We're still working through that right now. But just to say that those may happen here as early as in the second quarter, just to give you the heads up about that.

Next, we'll go to Pete Skibitski with Alembic Global Advisors. Please go ahead.

Jim, you touched on this, but getting back to fiscal '23 and congressional support for defense budgets. When the administration came out with its request for '23, it admitted it hadn't really taken Ukraine into account because of timing. And obviously, we saw the congressional support in '22. So, I'm wondering if you have a sense of how additive to the budget to the request that Congress may be in '23? Because it seems like there's more broader support than there was even a couple of years ago.

Sure, Pete. Look, I'd like just to go back to the environment we're in. I think it's pretty evident leadership in Congress and the key committees, of course, are well aware of this environment. And they have points of view on what the defense budget ought to look like to meet that environment, and then, the specifics underneath that. So, for me to get ahead of them at this point is really not our place. But if you look in historical terms, recent or beyond, Congress does have a point of view in these matters and tends to take their own actions because they are the authorizers and appropriators at the end of the day, and they'll have a voice. But I can't predict what that outcome is going to be in a quantitative fashion yet.

Next, we'll go to Myles Walton with UBS. Please go ahead.

If I'm correct on the profit adjustments, not related to volume, if you correct for those EACs, the underlying booking rate was about 8.4%. I think that's the highest I've ever seen for you guys in quarter. So, two questions. One, did you adjust or lift the underlying booking rates systematically, or is this more just a reflection of favorable mix happening in the quarter?

I'd say, it's a combination of both, Myles. You're pretty close to that underlying recurring margin percentage. If you think about it, last year was a pretty good size year as far as net profit positive adjustments. And as you would expect, those carry forward into higher run rate margins moving forward as you recognize revenue. And so, part of it is also mixes plays in the game as well. But I would expect what you saw in the first quarter to generally be what we'll see for the balance of the year. And so, we expect our profit adjustments to be lower year-over-year. Last year, we did about 28% of our profit. This year, in the first quarter, we did about 24%. For the full year, we're expecting that to be closer to 25%. And so -- but again, it's -- we're very comfortable with our margin outlook. We're very comfortable with our EPS outlook, and we're just seeing a little bit of a transition here with recurring versus margins versus the profit adjustments.

And next, we'll go to George Shapiro with Shapiro Research. Please go ahead.

Jay, if you look at your guide for the second quarter of $16 billion in revenues, it's down $1 billion, if you adjusted the first quarter for the $300 million nonrecurring benefit you had at MST, it was also down $1 billion. So, why won't the second quarter be a little better in terms of relative to last year, particularly when it seems like Omicron is somewhat going away?

That's a good question, George. Look, the second quarter would have us down around 7% year-over-year, and so we'd be down around that ballpark for the first half of the year. We're still -- while it's still a dynamic environment, I guess, is the best way to describe it. And we're still dealing -- even though we've seen significant improvement since the beginning of the year is still we're not out of the woods. And so, we're holding it there. We would still expect to have some level of impact that will clear itself up in the back half of the year. And that's really the placeholder for that second quarter number. We still are dealing with through the first half of the year, the impact of the Atomic Weapons Establishment program from the UK. And so, it's just -- year-over-year compares are tough. It is sequentially a pretty big step-up. You're talking $1 billion nearly, around that ballpark. And we think that's the right place to be for the moment. And of course, if anything changes, we'll update you accordingly.

And we'll go to Rob Stallard with Vertical Research. Please go ahead.

This might be a question for Jim. There's been a lot of discussion about whether defense in an ESG construct now looks different. I was wondering what your perspective might be on this and whether you've seen any shareholders or new shareholders are coming on to the register as things have been changing?

Sure, Rob. I mean, my personal view of this having been an aviator in military myself is that you can't really have an effective economy and protect human rights if authoritarian governments are not constrained in what they might do and how they might do it, frankly. So, I would put that national security and human security notion up equally with other ESG topics like corporate governance and global warming, climate change, which are also very important. But I'd put it in the same category. I recognize in Europe that before Ukraine occurred that that was not necessarily the trend. But, we've seen some increased interest from our international investors around the world because I think people are starting to recognize that this is not an anti-ESG industry. You could call it neutral or positive perhaps. But we're trying to maintain the conditions where people can live safe, happy, lives and the economy can flourish, especially a free market economy.

And we'll go to Doug Harned with Bernstein. Please go ahead.

Last year, you did more than $2 billion in Missiles and Fire Control in the Middle East. And certainly, the Middle East was a critical area over the course of the Trump administration in THAAD, PAC-3. But now we haven't seen as much activity. How do you see the trajectory going forward in terms of Missiles and Fire Control in the Middle East from here?

I'm not sure a regional approach is the right way to look at it. We've got demand signals for THAAD and PAC-3 from around the world because, again, countries everywhere are recognizing that, especially when you see missiles hitting hospitals and situations like that and train stations in Ukraine, that it's worthwhile to have an effective missile defense capacity in your country. So, we are getting signals that, if anything, we might have to increase capacity in certain products to meet the global demand. So, I'm not sure the regional approach is the best way to look at it. And by the way, that threat hasn't gone down either, it's getting greater instead of lesser, based on what Iran tends to do in that part of the world.

Yes. And that's kind of where I was going. Because it does seem like in Europe and Asia, there should be some real -- some strong interest there. So just trying to understand the puts and takes because as you build out -- as you complete a lot of systems in the Middle East, should we expect these other parts of the world to essentially pick up some of that, fill in any gaps there and potentially even add to growth for THAAD, PAC-3 and maybe just assure?

Without the data to quantify it, Doug, you kind of -- I'm a little bit data-driven first. I don't want to speculate on that. But directionally, it sounds something that could come about, frankly. We would expect it in a way, but to quantify it a little too soon.

Yes. I'll just add, Doug, we are planning on a multiyear up cycle on PAC-3, where this year we'll deliver around 450 units, and that's spiking up to 550. And so, it's well positioned and contemplates some of the things that you've talked about already.

John, this is Greg. I think we've come up at the top of the hour. So, I'll turn it back over to Jim for some final thoughts.

Sure. I'd like to conclude our call today by thanking the entire Lockheed Martin team, all 114,000 people strong for their contributions and dedication, especially over the last many months, where COVID reemerged in the winter, and we still had production to get done, and they did it. Our workforce has performed with the resilience under a lot of challenging circumstances for a long time. And through their ongoing efforts and commitment, our company is now positioned to deliver outstanding technology and solutions for our customers and long-term value to our shareholders. So, I want to thank you all again for joining us on the call today, and we look forward to speaking with you on our next earnings call in July.

Thanks, John. That concludes our call for today.

You're very welcome. Ladies and gentlemen, that does conclude the conference. Thank you for your participation. You may now disconnect.