Lockheed Martin Corporation (NYSE:LMT) Q1 2024 Earnings Call Transcript

Lockheed Martin Corporation (NYSE:LMT) Q1 2024 Earnings Call Transcript April 23, 2024

Lockheed Martin Corporation beats earnings expectations. Reported EPS is $6.39, expectations were $5.8. Lockheed Martin Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome everyone to the Lockheed Martin First Quarter 2024 Earnings Results Conference Call. Today’s call is being recorded. [Operator Instructions]. At this time for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Treasurer and Investor Relations. Please go ahead.

Maria Ricciardone: Thank you, Lois, and good morning. I’d like to welcome everyone to our first quarter 2024 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 facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see 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 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: Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2024 earnings call. I’d like to begin today’s discussion with a brief overview of our quarterly financial results, the state of the U.S. Department of Defense budget, status updates on some key programs, and recent advancements made to support our vision of 21st Century security that integrates the latest digital technologies. Then Jay and Maria will provide more detailed information about quarterly highlights and financials. The increasingly unstable geopolitical environment in the world today makes it essential for industry and government to strengthen our nation’s capabilities to deter and defend against further aggressive behavior against the U.S. and our allies.

We here at Lockheed Martin are continuing to invest heavily to improve our design and production capabilities, while actively partnering with leading companies inside and outside the A&D industry to incorporate a wide range of technologies. As a result, we delivered robust revenue growth across the company, and we maintained a robust backlog of $159 billion, reflecting alignment between our advanced technology solutions and our customers’ key missions and priorities. These first quarter results reinforce our confidence in our ability to achieve the full year financial expectations we shared in the most recent earnings call. Moreover, the approved FY2024 defense budget reflected many positives for Lockheed Martin, consistent with national defense strategy priorities too.

Highlights include robust funding for munitions multi-year procurement, continued investment in hypersonics and classified activities, and ongoing support for programs such as Black Hawk, CH-53K heavy lift helicopter, the fleet ballistic missile, C-130, and F-35. There were also additions to the original budget submission, including F-35 aircraft, C-130, and combat rescue helicopters. The initial budget request for FY2025, while still very early in the process, continues support of many of these same major programs, including the F-35, CH-53K, UH-60M and others. In addition to emphasis on advanced munitions programs such as JASSM, LRASM, PrSM, Javelin, Daimler, and PAC-3, as well as hypersonic conventional prompt strike and the long range hypersonic weapon.

In addition to that, next-generation interceptor is getting support, which I’ll address more in a moment. In this week, funding of $95 billion for Ukraine, Israel and Indo-Pacific security supplementals passed the House and is currently under consideration in the Senate. We expect FY2025 Presidential Budget request and additive supplemental funding will provide a strong underpinning for future growth over the next several years for our company, giving us further confidence in our long range plan. While demand for these key programs remains elevated, it is also essential that our program performance in terms of quality, safety, cost and schedule gets and stays at the highest level. On our most significant programs, I, Jay, and my senior executive team are personally and directly involved.

On F-35, we remain focused on program execution in terms of concurrent development, production and sustainment, and we are bringing all relevant resources across our company and collaborating closely with our customers and suppliers to fully implement the TR-3 capabilities that everybody is looking forward to getting. These capabilities based on the new core processor, data storage unit, and pilot display will ensure that the F-35 is not only the most capable and effective fighter aircraft in the world, but it will also further advance its abilities to act as the air domain quarterback of joint all domain operations for the U.S. and its allies. We’re encouraged by the solid progress made over the last few months towards resuming deliveries, including improvement in aircraft mission system capabilities and system stability as we advance from prior software versions towards a combat training capable configuration.

Flight testing of this configuration is now underway and we’re on a path we expect to be on with regard to maturing the system with approximately 95% of TR-3 capabilities in this flight test program. The test results to-date support our expected timeline of delivering the first TR-3 combat training capable aircraft in the third quarter and then transition to a fully combat capable aircraft in 2025. As planned, there will be continual software updates to support further capability insertions over the Block 4 program and beyond. While there were no final deliveries of F-35 jets in the first quarter, we’re maintaining our production rate and continue to expect an aircraft delivery range for 2024 between 75 and 110, which requires timely receipt of the necessary hardware from TR-3 suppliers along the way.

The F-35’s advanced combat and interoperability capabilities continue to create strong demand for the aircraft internationally too. In the quarter, the Czech Republic became the 18th nation to join the F-35 global team with a signed letter of offer and acceptance, making it official its intent to procure 24 F-35s. In addition, the U.S. State Department approved a potential foreign military sale to Greece for up to 40 F-35s. And Singapore announced its intent to purchase eight F-35As to complement the 12 F-35Bs to which it has already previously committed. Also in the lower air domain, while we’re disappointed in the cancellation of the Future Attack Reconnaissance Aircraft program or FARA, Sikorsky remains committed to delivering innovative and reliable aviation capabilities to our domestic and global customers.

With a strong foundation of more than $20 billion in backlog, bolstered by expected and funded growth in the heavy lift CH-53K helicopter program, Sikorsky’s multi-year outlook is stable. We’re also encouraged by the army’s renewed commitment to Black Hawk production and modernization, as well as our ability to address mission gaps with capability upgrades that leverage Lockheed Martin’s broad portfolio of solutions in the lower air domain, things such as autonomy, AI, et cetera. Turning now to missile defense missions, which given recent world events are becoming more critical than ever. We continue to lead the industry. Last week, the missile defense agency or MDA selected Lockheed Martin to deliver the new homeland missile defense capability for the United States, which is called the next-generation interceptor or NGI.

As the MDA’s NGI prime contractor, Lockheed Martin will provide the most modern, reliable and technically advanced interceptor in the history of this system. This program was a 1LMX that’s our digital transformation worn digital program meaning we embrace model-based engineering, digital tools, processes and technologies from the very, very start of this program. Now, as it continues on its path to the critical design review, integration with broader weapons system and flight tests, I’m proud of the Lockheed Martin team that enabled all of this. We were MDA’s early down select before it was even on their schedule because we’re so far in front to get this essential homeland defense capability off to a fast start. Earlier this quarter, the Long Range Discrimination Radar or LRDR, completed final acceptance and was officially handed over to the Missile Defense Agency in preparation for an operational capability baseline decision.

And what that means is final transition to active service for that radar to help defend the country. The LRDR is a cutting edge national asset providing the benefits of both low and high frequency radars to search, track, and discriminate incoming missiles with an open system approach, enabling the customer to add incremental capabilities such as hypersonic defense. This is located up in Alaska, in the prime location, where we can sense early what any attack might look like and respond to it. What that really does, though, is create an elevated deterrence to any kind of attack like that. So it’s really great to have LRDR about ready to go online. Now, both NGI and LRDR will be critical elements within the overall homeland defense mission, and they’re going to be integrated into the broader defense architecture with a battle management system that we call command control, battle management and communications, or as the military calls it, C2BMC.

So that’s the system that’s going to be used to integrate the radars, the missiles, and allow us to defend the country. In April, Lockheed Martin was selected for a potential 10-year, $4 billion follow-on C2BMC next-generation contract with the MDA, demonstrating again our leadership position and battle management systems for homeland defense. Under this contract, we’ll continue to modernize and expand the system’s capabilities to enhance global integration, improve space domain awareness, and optimize sensor connectivity and data fusion to levels never done before. All of which will create the most complete picture of these incoming threats as I just spoke about a minute ago. Separately, we also continue to advance our 21st Century security solution through collaboration with strategic commercial partners across the tech, telecom, microprocessor, and other industries to support the national defense.

Citing just one example, we announced Lockheed Martin will work with Intel to support the simulated transition for Advanced Microelectronics Packaging or STAMP program for the office of the Under Secretary of Defense for Research and Engineering. This CHIPS Act related collaboration will provide a revolutionary leap in defense systems capabilities using high performance U.S. built semiconductors. Over the next 18 months, we’ll integrate our latest sensor open system architecture technology with Intel semiconductors with the intent to ultimately implement, test and complete production through the U.S. Navy’s Lockheed Martin MH-60 Romeo helicopter program. I’ll now turn it over to Jay for more highlights and some additional commentary on our financial results.

Jay?

Jay Malave: Thanks, Jim. I’ll cover the consolidated results and touch on some additional highlights before handing it off to Maria, who will discuss the quarterly financials by business area, and then I’ll come back to discuss the outlook and close out the remarks. Starting with chart four, we had a strong start to the year. First quarter sales of $17.2 billion increased 14% year-over-year, led by MFC and RMS. While the results benefited from an extra calendar week compared to 2023, normalized year-over-year sales growth was a solid 5%. We saw strong labor and material throughput indicative of an improving supply chain. We’ll continue to work closely with our supply chain partners to enhance quality and performance proactively and, as needed, expand the breadth and depth of our engagement at supplier locations.

Segment operating profit of $1.7 billion was up 4% year-over-year with margins of 10.1%, and included the anticipated $100 million reach-forward loss associated with the classified missile program at MFC. Excluding this charge, Lockheed Martin segment margins were 10.7%, primarily reflecting year-over-year lower profit adjustments. GAAP earnings per share of $6.39 were down 3% as year-over-year benefits from higher profit and lower share count were more than offset by higher interest expense, lower pension income, and mark-to-market gains. Book-to-bill in the first quarter was just below one. Notably, space booked several large national security orders in the quarter, including SDA tracking layer and other significant classified awards, contributing to a book-to-bill ratio of 1.8 and record backlog of $33 billion at space.

We generated $1.3 billion of free cash flow in the quarter after investing $360 million in research and development and $380 million in capital expenditures. Share repurchases were $1 billion and we returned $780 million through our dividend. Shifting over to additional highlights in the quarter. We are pleased with the progress we are making on the F-16 program. The first three F-16 Block 70 jets varied from Greenville, South Carolina to Bahrain in March. To-date, Lockheed Martin has produced five F-16 Block 70 jets for Bahrain with additional 11 in various stages of production and testing. We also presented the first two F-16 Block 70 aircraft to Slovakia’s Deputy Prime Minister and Minister of Defense, underscoring the deepening partnership between the two countries.

In addition, the State Department notified Congress of authorization of the sale of 40 F-16s and related upgrades and support to Turkey. The latest deal builds on our long relationship and history with the Turkish Air Force. We are confident the F-16 Block 70 and Viper upgrade package provide advanced 21st Century security capabilities with affordable operating and lifecycle costs for Turkey. We also continue to upgrade our weapon systems for longer range standoff capability. In February in the U.S., the extended range ER variant of GMLRS guided multiple launch rocket system achieved success in its first operational test. The U.S. army fired two unitary warhead ER GMLRS variants with a HIMARS launcher, demonstrating precision and advancing this capability closer to production.

The U.S. army almost awarded Lockheed Martin the fourth production contract for early operating capability precision strike missiles known as PrSM. This award will allow for a significant increase in production quantities to meet army demand for long range surface missiles. And the hypersonics, following the recent end-to-end flight test, we completed the test program of the Air-launched Rapid Response Weapon or ARRW with full confidence in its revolutionary capabilities. We have demonstrated successful all up round end-to-end performance on multiple occasions. ARRW provides the U.S. with the earliest air launch fully qualified production ready supersonic solution — hypersonic solution, I’m sorry. And Lockheed Martin is prepared to quickly deliver additional tactical, operational and leave behind hypersonic strike assets that can be rapidly deployed to the U.S. military.

We also continue to advance hypersonic strike capability in the land and sea domains through the Long-Range Hypersonic Weapon and Conventional Prompt Strike programs. Both solutions have a full year milestones ahead as we progress towards operational capability. Shifting the integrated air and missile defense arena the AEGIS Weapon System successfully executed one of the most complicated ballistic missile defense tests in the first quarter. When the system tracked and intercepted a medium range ballistic missile amidst multiple decoys. The test employed the latest updates to the system and demonstrates the reliability of AEGIS to operate in a dynamic threat environment and we’re constantly evolving the AEGIS system. This quarter, we made further progress on our efforts to integrate with PAC-3 to enable an affordable, combat proven IAMD capability for maritime engagements and expand the mission capability of our systems.

I’ll pause here and let me turn it over to Maria to cover the business areas.

Maria Ricciardone: Okay. Thanks, Jay. Today, I will discuss first quarter year-over-year results for the business areas. Starting with aeronautics on chart five. First quarter sales at Aero were over $6.8 billion up 9% year-over-year, and that’s 1% normalized for the extra week in 2024. The increase was primarily due to higher volumes across F-35 and Skunk Works and the continued production ramp on the F-16 program. Segment operating profit is comparable year-over-year with higher volume being offset by lower margin development contract mix and lower net profit adjustments, mainly on the F-35. Aeronautics backlog remains at a healthy $57 billion, which includes 373 F-35s and 80 C-130Js, and 132 F-16s, supporting growth into 2025 and beyond.

Turning to Missiles and Fire Control on Chart 6, sales increased 25% from the prior year, 16% normalized for the extra week driven by production ramps on tactical and strike missile programs, primarily GMLRS, HIMARS and JASSM, LRASM. Integrated air and missile defense also saw higher volume on PAC-3 and THAAD. As expected, segment operating profit decreased 18% year-over-year, primarily due to the $100 million loss on the classified program Jay mentioned previously. Normalizing for the loss, MFC’s margins would have been 13.7%. Now, I’d like to provide a quick update on our annual production capacity plans for key programs. PAC-3 is currently at 500 missiles, growing to 550 in 2025, and 650 by 2027. GMLRS currently is at 10,000 missiles, growing to 14,000 by 2025.

JASSM, LRASM currently at about 650 missiles, growing to 1,100 by 2026, and HIMARS currently at 72 launchers, growing to 96 next year. Shifting to rotary emission systems on Chart 7. Sales increased 16% in the quarter, 8% normalized for the extra week, driven by higher volume across the entire portfolio, including radar and laser programs within integrated warfare systems and sensors, various programs within C6ISR and the CH-53K and Seahawk programs within Sikorsky. Operating profit increased 23% due to higher volume and favorable contract mix, partially offset by lower profit adjustments. Finally, with space on Chart 8, sales increased 10% year-over-year, 2% normalized for the extra week to approximately $3.3 billion. The growth was driven by higher volume on the fleet ballistic missile program and ramp ups on hypersonic and next-generation interceptor programs within strategic and missile defense, as well as higher volume on space development agency transport and tracking layer programs within national security space.

Operating profit increased 16% compared to Q1 2023, driven by higher volume and ULA equity earnings, partially offset by lower net profit adjustments, primarily on the Next-Gen OPIR program. Now, I’ll turn it back to Jay to wrap up our prepared remarks.

Jay Malave: Thanks, Maria. Let’s turn to the outlook on Chart 9. Our expectations for Lockheed Martin’s 2024 financial outlook remain unchanged from what we said in January. With the strong first quarter results positioning us well to achieve the consolidated full year outlook, we continue to expect free cash flow to be in the range of $6 billion to $6.3 billion, including over $3 billion of independent research and development and capital investments. While the dividend, along with the expected $4 billion of share repurchases, support our returns to shareholders, targeting a mid-single-digit free cash flow per share growth over the longer-term. All right. To close out and summarize on Chart 10, we’re off to a solid start in 2024 and remain laser-focused on execution to our customer and programmatic commitments while building momentum towards delivering our full year guidance.

Through our 1LMX transformation, we are reengineering our internal processes by providing the automations and capabilities needed to drive efficiency, increase velocity and enhance key captures and programs. 1LMX will enable us to combine the depth and breadth of our portfolio with the expertise and dedication of our people to drive 21st Century Security solutions for our customers and continue to create value for our shareholders. With that Lois, let’s open up the call for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question is from the line of Doug Harned from Bernstein. Please go ahead.

Doug Harned: I’d like to start to make sure we have a good understanding of the F-35 right now with TR-3. As you said, the Air Force has talked about this as well, and it looks like that timeline has moved back to some point in Q3. And there’s just been a great deal of slippage in the timeline over the last few years. Block 4 has been delayed, and the new budget has cut deliveries in 2025 and 2026, ostensibly to avoid having to do later Block 4 upgrades. Now, you’ve been able to keep production and revenues up, although deliveries and cash payments are off. But how can we get confident in the trajectory? And perhaps, Jim, maybe you could talk about what a positive or more negative scenario might look like for production and deliveries over the next two years? And what it would mean for the revenue and cash trajectory?

Jim Taiclet: Sure, Doug. So I think it’s important to understand that we’re doing, as I said earlier, concurrent development and production and then advancing the sustainment capability as well, all at the same time. Most of these complex programs go through a period of development and then a production run largely off of that design base or that engineered base of what the aircraft supposed to look like and how it’s going to perform. The F-35 is different in a sense that development has been going on since the day the program started years and years ago, and it’s going on today. Now, the good news about that is you have step function increases in capability every few years, and as a result of the F-35’s capacity to do that, the government just came out and extended the expected service life of the aircraft another decade or two, I think it was.

So this is a good thing, but it’s also an extremely difficult thing to do and even to predict schedule, right? It’s our responsibility to hold cost and schedule, but we’re — we don’t control all the variables let me just say. And that’s okay, we’re still the OEM, we’re still responsible. And so what we run into on TR-3 is just a level of complexity and executing the step function increase, that’s pretty, I’d say, novel or dramatic. What the team is doing at our company is we’re integrating a series of components, devices, software, and managing and integrating all of that. And so what’s happening now is we are ringing out all of the software through all of the new hardware and integrating it into all the aircraft other systems. And that’s taken longer than our team predicted.

The way we’re going to get at that is if you think of it as a release one and a release two, and we’ve got a lot of confidence in this stage. So release one, if you think of it that way is what we’re calling along with the U.S. government, a combat training capable aircraft, meaning we can get these jets in the hands of squadron, wing, and regional commanders so that they can start training their pilots on them and training their maintenance organizations and also getting their bases and infrastructure, spare parts, pools and everything else sort of in operational shape, if you will. Once we get the final software load for the fully combat capable version of TR-3, sometime in the next few months, then those aircraft could be deployed into actual combat operations and you’ll have the training, the maintenance, the ringing out, the operational patterns and procedures on how to actually fly the jet in combat.

So we’d like to be able to do it sooner, but this is the schedule we’re on. And I’d say for the combat training cable aircraft, we’re highly confident, based on the test results so far, that those will be deliverable in the third quarter. Jay, you want to say anything else about cash flow and —

Jay Malave: Yes, sure. Doug, I’ll just add, as Jim mentioned, this combat training capable — capability and configuration, as Jim mentioned, supports the training of the squadrons standing up to new squadrons and decreasing the amount of time of the aircraft are parked. All that, what that does is really avoids any type of significant disruption. And so what this does is really keep our production on track here in 2024 and then beyond as well. As Jim mentioned, in 2025, we’ll have further capability inserted and we’ll actually start delivering on the inserting Block 4 type of capability as well. And you may have heard, you referenced comments made from the U.S. military and they discussed a Block 4 reimagined, and what that would entail is an insertion schedule that’s really tied to an executable plan that can be provided by industry, so we can avoid these types of disruptions.

And so when you look at it in the short-term, could there be pressure on the last 15 through 17 contract profitability and potential movement around in cash flow? Yes. But I think over the longer-term and the medium-term, I think we’re working in coordination with our customer to make sure that we can deliver the capabilities the customer wants, but on an executable schedule. And if we’re able to do that, then we should be able to keep the program on track from a production standpoint.

Operator: Thank you. Our next question is from Peter Strauss from Barclays. Please go ahead. I’m sorry, David. Okay, great.

David Strauss: Good morning. Yes, thanks.

Jim Taiclet: Good morning, David.

David Strauss: Good morning. Thanks for taking the question. So since Q4, we have a 2024 budget, looks like we’re going to get a very large supplemental. You won NGI. How might all those things together change how you’re thinking about where you kind of fall in, in the revenue guide this year and the potential for revenue growth in 2025 to accelerate kind of off this low-single-digit level?

Jim Taiclet: So David, as we mentioned, for this quarter, we started off pretty solid, just on an apples-to-apples basis 5% growth in the first quarter lines up pretty well with a mid-point guidance range, which is 2% to 2.5% and the high end of that range being, say, around 3.5%. So we’re well-positioned to deliver on that expectation. It is possible somewhere to last year that we could see some upside towards the higher end of the sales guide range there. So again really good start that enables that. As we think about 2025, what you saw in the budget, what we’re seeing here in supplemental, give us higher confidence that we’ll continue to grow. We talked about growth in — starting in 2023, a year earlier than we had originally anticipated, accelerating in 2024, and then giving us more confidence that we’ll see at least a same if not more growth in 2025.

We’ll give you — it later in the year, we’ll give you a much better update in terms of what we’re seeing. But right now all this bodes well to our sustained growth in terms of what we’ve been driving to, not only in 2025, but beyond 2025 as well.

Operator: And the next question is from the line of Peter Arment from Baird. Please go ahead.

Peter Arment: On missiles from fire control, can you talk maybe about the confidence in your margins — margin guidance for the year? Just given the 1Q margin performance was certainly the lowest that we’ve seen in many years. And we know the classified losses are supposed to expect it to continue, but you’ve got kind of this reflecting top-line. I think Maria called out all the production increases and just do the losses just get smaller on the class side, or are we going to see some offsets just because of the higher volume? Maybe you just give more color on kind of your expectations on the margin performance profile going forward. Thanks.

Jay Malave: Sure. Peter, MFC was a little light because of two factors. First, as we mentioned, we did have the $100 million loss provision that we recorded. In addition to that, their profit adjustments were lighter year-over-year by about $20 million. And so that’s a function really of calendarization. We’ll see profit adjustments in throughout the rest of the year improve. And so getting us back to what we had guided to. Just as a reminder, we’re anticipating, and that was fully anticipated in our guidance for MFC, that we would have additional or could have additional losses in the back half of the year associated with this classified program. And so what our guide, what it implies from where we are today, we reported $100 million is in a range of another $225 million in the back half of the year, which would be provided for in this expectation.

Now, going beyond that, we’ve talked about this, and I’ll just deal with the question upfront in terms of can timing change? And it’s possible that we could record additional losses here in 2024 depending on other factors as the year goes on, there’s factors such as technical milestone achievement through the balance of the year, discussions with our customers, visibility to funding. So all of those factors go into the determination and whether you have to recognize a loss earlier. You’ll see coming out in our 10-Q that we’ve actually ranged the potential losses on this program, which would be in excess, additional losses in excess of $1 billion. So at least you could have an opportunity to size it. The timing of which is still to be determined.

We’ve got about $225 million at least embedded in our guide for the balance of the year. Going back to MFC for the year, if you really take apart their expectation, the impact of this at $325 million of losses in the year anticipated, they’re offsetting a fair amount of that in their guide. I mean, the impact of that is 270 basis points alone. And their total full year guide is down about 210. And so you’re seeing offsetting improvement within MFC, it’s not entirely one-for-one, but their underlying performance has been solid and we expect that to continue.

Jim Taiclet: And Peter, it’s Jim. I used to fly these aircraft for the USAF and I can assure you that the capability that’s being developed here at MFC in the classified program will have very, very long legs. There’s going to be many, many years, we believe, of orders to follow. So, yes, for a quarter, for the year, maybe for a couple of years, we’re going to absorb the loss provisions that Jay described. But I think if you look under the curve for the lifecycle is going to be significantly positive. And so we want to get there as efficiently as we can. This is a long run franchise program that I think the U.S. government is going to support for a very long time.

Jay Malave: Right. I think it’s important to keep that in mind that, we spend a lot of time talking about timing of losses and things like that and the magnitude of it, but we also spend a lot of time internally going through just where we are in the progress of the program as well as the business case. And I can assure you the business case is accretive to it at a above our cost of capital. And as Jim mentioned, it’s going to provide strong returns for many years to come.

Operator: Our next question is from Matt Akers from Wells Fargo. Please go ahead.

Matt Akers: Yes. Hey guys, good morning. Thanks for the question.

Jim Taiclet: Good morning.

Matt Akers: I want to ask a couple on the Next-Gen Interceptor win, I guess one just how you were able to win. I think ahead of when the original down flight was expected and also whenever there’s sort of a big contract like this, and we always get questions on potential charges because we’ve seen some of that happen in the industry. So just your confidence that you’ve got the cost there sort of size correctly.

Jim Taiclet: So the company made a beta about three years ago to say, okay, we’ve got a digital transformation program that is going to take the whole company to this model-based engineering system. And that’s all the way from requirements acceptance from the government to sustainment years and years down the road. And we spoke this before; it’s about a $6 billion, 8 to 10-year program to convert the entire company to a model-based engineering production sustainment operation. NGI was one of the pathfinder programs picked to implement this because there’s no legacy to convert, right. There’s no old blueprints to try to figure out how to make three dimensional, which is something, by the way, we are doing for C-130 and other programs right now.

But we could get off to the fast start on NGI because it was in this born digital category. Right from the proposal, we were using these digital technologies, 3D, CAD and everything else, and sharing data with the government in that fashion, and they were able to receive it. And we could thereby accelerate the schedule and contain the cost of the development and ultimately of the production too, by using these tools. There were three original players in this. One dropped out fairly early. The second was in kind of this final phase, if you will, of down select. And we were — we just ready to go and provided our proposal ahead of schedule. The other player, to my knowledge, provided a proposal also. And then the government was able to make a decision based on that.

But I think because of our speed and our ability to demonstrate manageable cost over time, we won, and kind of won early, if you will. I’ll let Jay talk more about financials, but what I can assure you is the process of this bid did not require us to dive to the bottom on cost. So Jay, do you want to take it from there?

Jay Malave: Sure. Just a — we’re currently performing already under a contract, and that contract will continue. We’ve talked about this before. We’ve completed a preliminary design review in September of 2023. And we’re on track for critical design review in 2025 and under the current contract as well as building test assets. So that will just continue under this down select. As far as pricing and costs, the current contract, because of development contracts, cost plus contract, it’s low margin as you would expect, but nothing again abnormal. As far as future bidding that we provided for future types of contracts, there were various elements or different types of contract structures that the customer asked for. We provided those to the customer, none of which was based on aggressive pricing or bidding, as Jim mentioned. We’ve talked about this in the past, and we’ve taken a middle-of-the-road approach to our pricing, and this is no different.