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28-02-2025
- Business
- Yahoo
Q4 2024 Tutor Perini Corp Earnings Call
Jorge Casado; Vice President, Investor Relations and Corporate Communications; Tutor Perini Corp Gary Smalley; Chief Executive Officer and President; Tutor Perini Corp Ronald Tutor; Executive Chairman; Tutor Perini Corp Ryan Soroka; Chief Financial Officer, Senior Vice President; Tutor Perini Corp Adam Thalhimer; Analyst; Thompson Davis & Company Michael Dudas; Analyst; Vertical Research Partners Operator Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation fourth quarter 2024 earnings conference call. My name is Stacey, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.(Operator Instructions)I would now like to turn the conference over to your host for today, Mr. Jorge Casado, Vice President of Investor relations. Please go ahead. Jorge Casado Hello everyone, and thank you for joining us. With us today are Gary Smalley, CEO and President; Ron Tutor, Executive Chairman; and Ryan Saroka, Executive Vice President and we discuss our results, I will remind everyone that during this call we will be making forward-looking statements which are based on management's current assessment of existing trends and information. There is an inherent risk that our actual results could differ materially. You can find disclosures about risk factors that could contribute to such differences in our Form 10-K which we are filing company assumes no obligation to update forward-looking statements whether due to new information, future events, or otherwise, other than as required by you. And with that, I will turn the call over to Gary Smalley. Gary Smalley Thanks, Jorge. Hello, everyone, and thank you all for joining us. First, let me begin by saying thank you to everyone who reached out to us during the recent wildfires in Los appreciate your support and concern. While our operations were not impacted, a few of our employees unfortunately lost their homes to the fires and are now dealing with the challenges of relocating and scale of destruction in some areas of LA was truly devastating and unprecedented, and our hearts go out to everyone who has been and continues to be are committed to assisting our local community in the recovery and expect to participate in some of the debris removal activities that are just getting started.I'm pleased to be presenting to you for the first time in my new role as CEO, but it is important to me that I begin by recognizing the extraordinary contributions of Ron Tutor, not just to Tutor Perini, but also to the entire engineering and construction industry. Ron is certainly an icon, really a legend in the industry. He has passionately given it his all every day for more than 61 years. He has been leading our I'd like to congratulate Ron on an extraordinary career and express my gratitude for his leadership, mentorship, discipline, and commitment to excellence as he transitions into his executive Chairman role. I've learned a lot over the last decade by working closely with Ron, so the transition to CEO has been as smooth as you can imagine. I'm grateful that we will continue to have Ron with us for the rest of this year and next year as Executive we've already gotten this question numerous times, let me summarize what Ron's primary focus will be as Executive Chairman. First, he will continue to provide guidance and advice regarding the resolution of the shrinking list of our remaining legacy Ron will continue to review the cost estimates and provide his input as to the bidding strategy for the major projects that we will be bidding over the next couple of years. That will give us the luxury of additional scrutiny and advice from the perspective of someone who has pretty much seen it Ron is currently helping drive the set up of the major projects that we have already been awarded over the last several months. The importance of proper project setup of these mega projects cannot be understated because it is the first key step toward the successful execution of this will comment more on this shortly. And lastly, Ron will continue to serve as an advisor and sounding board to me and my leadership team as the company begins the next chapter of what should be unprecedented earnings growth and operational I discuss our results, I'd like to briefly share with you some of my priorities as Tutor Perini's new CEO. Certainly one of my key priorities is the importance of our human capital and specifically making sure that we continue to attract and retain the best talent in our work on some of the largest and most complex projects in the United States, and this is why we need the best of the best working for us and quite frankly, why we have been able to attract the quality of employees that we want Tutor Perini to be the employer of choice in the construction industry. Another important priority, of course, is returning the company to profitability. Our record backlog, which I will discuss more in a moment, should provide us with a solid foundation for a profitable multi-year stream of growing revenue and earnings beginning in 2025, followed by far superior performance in '26 and ' achieve consistent profitability, we will closely manage project execution and performance against our cost budgets while enhancing our project risk management capabilities. We will also continue to focus on resolving our remaining legacy disputes as expeditiously as possible while still delivering outcomes that are in the best interests of the company and our priority is a sustained focus on cash generation. Our record backlog will also help in this regard as our elevated earnings from project execution are converted into cash. And our continued focus on negotiating improved and fair contractual terms should help reduce the likelihood of protracted disputes that have hindered historical cash generation at it's important to me that we set earnings goals that are ambitious yet reasonable, that we consistently achieve and sometimes even exceed our guidance. I realize that we have not had a good track record of achieving. Of achieving our guidance over the past couple of years, but it is important to note that a lot of the causes of our earnings challenges in recent periods are behind we are confident in our ability to more accurately forecast, given this lower risk of earnings volatility going forward. Another important priority deals with making optimal capital allocation decisions that are best for the company. And that will ultimately create long term value for our as we build up excess cash from continued cash generation, we will look at returning capital to shareholders, and we'll also be looking to refinance our senior note sometime next year after the two year non-callable period has passed. We're also focused on finding ways where we can leverage technology, including artificial intelligence, to help us better plan, track, and execute construction industry has historically been less forward-looking than other industries when it comes to technology, but we are exploring available solutions and will continue to identify and make investments that can improve our operations and you can tell, all my priorities are intended to significantly increase short and long term value to our shareholders while maintaining Tutor Perini as the preminent leader of our given recent market concerns regarding the Trump administration's scrutiny of federal spending and implementation of new tariffs, it is important to point out that we do not, repeat, do not anticipate any significant impacts to our business related to these a funding perspective, we do not see the risk of any of our major projects being canceled, delayed, or defunded at this time. Some of our major projects are state or local funded or are a combination of state and local funding. The ones with federal money in whole or in part have funding that has already been committed and or the projects are strategically important to the United terms of potential tariffs, we frequently buy out materials such as steel and concrete, as well as large equipment items like tunnel boring machines at the onset of projects which mitigates the risk of future equipment and commodity price addition, many of our contracts have buy American provisions to promote the use of domestic products, and many have allowances or escalation clauses that can protect us from certain unforeseen cost increases, including those associated with new now to our financials, we had another year of largely mixed results in 2024 as we settled or otherwise resolved various legacy disputes. With that said, our record cash generation, enormous debt pay down, record backlog, and double digit revenue growth all represent significant improvements over with cash, as we had anticipated and previously communicated, we closed the year with extremely strong operating cash flow, generating $330 million of cash in the fourth quarter alone and $504 million for the full year of was our third consecutive year of record operating cash flow, shattering the prior year's record by approximately $200 million. Our operating cash flow for just the fourth quarter of 2024 alone exceeded our previous record for annual operating cash flow for the full year of we announced last week, we have continued to strengthen our balance sheet by utilizing our record cash to substantially lower our debt. We have now paid off our term loan term loan B in its entirety and have exceeded the pace of our debt reduction commitments. Specifically, we have reduced our total debt by $477 million or 52% since the end of finished 2024 with the new all-time record backlog of $18.7 billion which grew an amazing 84% year-over-year. Backlog grew 33% in the fourth quarter alone, far exceeding the previous record of $14 billion that we just sent last book to burn ratio for the fourth quarter was an almost unheard of 5.4 times, and an impressive 3 times for the full year. Also, the civil, building, and specialty contractor segments all ended the year with backlog that exceeded each of their previous record revenue, we achieved 12% growth in 2024. Of course this is a positive, but it's just a drop in the bucket compared to what we foresee for revenue growth for future years beginning in 2025 as the newer projects in our record backlogs start to contribute more meaningfully to we also made excellent progress during 2024 in resolving various legacy you will see in our Forum 10-K, our 2024 operating income was negatively impacted by a net total of $347 billion due to various adverse legal judgments or decisions throughout the year and charges that resulted from the expedited settlement or resolution of disputed matters, as well as changes in estimates on various projects, some of which resulted in temporary impacts that will reverse themselves in the we said last quarter, a couple of these legacy disputes resulted in very unexpected and rather inexplicable legal decisions that we strongly disagree with and are expect to continue making substantial progress this year and next year in resolving and collecting on the remainder of our legacy disputes, about a dozen or so that are significant. Had it not been for the charges to earnings that reduced revenue, our revenue growth for 2024 would have been substantially more than the reported 12%, which demonstrates that our core business is growing at a healthy if not for the magnitude of all the net charges, we believe that we would have exceeded our previously provided EPS guidance for 2024. So this provides us confidence as to how our core business is performing from a profitability standpoint. It is also important to note that many of the dispute resolutions contributed to a record cash flow in Extraordinary backlog growth in 2024 was driven by $12.8 billion of new awards and contract adjustments, with the largest being the $3.76 billion Manhattan Jail project in New York, $1.66 billion City Center Guideway and Stations project in Hawaii; $1.4 billion healthcare campus project in California $1.13 billion Newark AirTrain Replacement project in New Jersey; $1.1 billion Kensico-Eastview Connection Tunnel project in New York; $479 million of additional funding for certain mass-transit projects in California; $449 million for two healthcare facility projects in California; $331 million for the initial award of the Apra Harbor Waterfront Repairs project in Guam; $229 million airport terminal connectors project at Fort Lauderdale-Hollywood International Airport in Florida; and the Company's proportionate share of the $1.3 billion Connecticut River Bridge Replacement project in new award activity to begin 2025 also continues to be impressive. We recently announced two major new awards that were both booked in the first quarter. The $1.18 billion Manhattan tunnel project in New York and $232 million for several owner approved scope options on the APRA Harbor project in Guam, which brings the total value of that project to $563 million.I'll now pass the call over to Ron, who will discuss our major bidding opportunities and the set up of our newer projects. Ronald Tutor Thanks, Gary. Our bidding pipeline, as we discussed continually, continues to be full of opportunities as we move forward in the record backlog enables us to be even more selective than previously as to which of the opportunities we will pursue and focus on bidding projects that have positive contractual terms and consistent with our operational capacities as a general contractor. We will also look at the competition as we always do for each targeted opportunities as we assess our chances of success in the project's potential the near term we are tracking various perspective projects across our businesses, including those in California, the East Coast, the Midwest, and Guam, the largest of which is the multibillion dollar Midtown bus terminal replacement in New York City for the Port Authority of New York and New Jersey, now expected to bid in potential new projects that we are following include the $3.8 billion Southeast Gateway line transit project in Southern California. The $1.8 billion South Jersey Light rail in New Jersey, as well as numerous major projects that continue to propose in Guam and the Pacific region.I would also mention that if the US government participates in the rebuilding of Ukraine after the war is over, We believe our PMSI group is extremely well positioned to participate in that effort, having had significant experience in both Iraq and Afghanistan in post-war repairs.I've been spending a significant amount of my time being sure that our new major projects are properly set up, as Gary mentioned, project setup is critical to project execution, particularly on these very large mega projects, working closely with Gary and the various operational are bringing certainty to these projects getting off to a good start, including both Brooklyn and Manhattan, the Honolulu rail project, the Kensicle Manhattan tunnel projects, the APA Harbor project, and the Newark Air Train.I'm extremely satisfied the progress to date, including certain renegotiations of contracts, purchasing of equipment, and the overall set up and mobilization associated with these mega projects. I'm more than ever convinced that the projects will be successful and they continue to execute as well as we could anticipate.I'll now hand it back to you, Gary. Gary Smalley Thank you, Ron. Let's shift gears and spend a few minutes on our outlook, guidance and what we see further down the road for the company. While our civil business is expected to continue to drive most of our future growth and profitability as it typically does. I'm also excited about the expected contributions from our building of our building segment backlog is now operating at significantly higher margins than what we have done historically. For example, our two New York jail mega projects carry margins that are consistent with large, complex building projects of a fixed price many of today's healthcare projects are larger and more technically complex than, say, traditional commercial office building projects of the past and therefore also command higher margins. So with this in mind and as a reminder to what we discussed last quarter, Rudolph and Slut, our major California building subsidiary, has various healthcare and education projects in California that are in the pre-construction phase with only a small amount of current backlog recorded for of these are rather large projects that are soon expected to advance to the construction phase, and we anticipate that we will book significant additional backlog for them in 2025 when this of them is a large hospital project in Northern California valued at nearly $1 billion for which we expect a modest amount of backlog to be booked in the second quarter, but the remainder to be booked in the third quarter. And another is a large healthcare lab building in Southern California valued at more than $500 million which is expected to be booked in the second quarter of this cash expected from the continued resolution of various legacy disputes discussed earlier combined with cash generated from normal project operations should drive strong cash flow over the next couple of years with cash generation from ongoing projects continuing to be strong even beyond guidance based on assessment of the current market and business outlook, we are expecting a return to profitability with EPS for 2025 in the range of $1.50 to $1.90 combined with double-digit revenue growth. As in prior years, our revenue and earnings are expected to be weighted more heavily to the second half of the year due to typical business seasonality that is affected by the weather. This earnings trend is expected to be even more pronounced this year due to the timing of when some of our recent new awards will start to contribute more meaningfully to operating on my earlier comments about lessons learned and the fresh approach we are taking to guidance, we have factored a more significant amount of contingency for unknown or unexpected outcomes and developments in 2025, including the lower than anticipated success rate for future project pursuits, the potential for project renewal or delays, slower ramp ups for our newer projects, settlements, and adverse legal decisions associated with the resolution of any impacts associated with tariffs that again we currently do not expect to significantly impact our results. We therefore believe that our guidance range appropriately considers all of these possibilities. We also believe that a record backlog will not only help us return to profitability in 2025, but will set the stage for significantly better results over the next several we do not typically provide formal guidance beyond the current year, but internally we do project financial results for two additional years as well. Without getting too far ahead of ourselves because the focus needs to be on delivering solid profits in 2025 and also with the understanding that there can always be unforeseen events that change expectations. Internally, we are currently conservatively projecting our EPS in both '26 and 2027 to be more than double our EPS guidance for clarify, we are not putting out guidance for '26 and '27 at this time, but I wanted to make sure that you have some idea of the magnitude of positive results that we're expecting, largely as a result of profitable work that we have already have in you. With that, I will turn the call over to Ryan to discuss our 2024 financial performance in more detail and our guidance assumptions. Ryan Soroka Thanks, Gary, and good afternoon, everyone. I will begin by discussing our results for the year, including our record operating cash, after which I'll review the fourth quarter. Then I'll provide some commentary on our balance sheet and our 2025 guidance operating cash was certainly one of the biggest highlights of 2024, as Gary mentioned, we generated a new record operating cash flow of $504 million for the year, which was up 63% compared to the previous record of $308 million for was our third straight year of record operating cash, and it was driven by approved collection activities including collections associated with payments on new and existing projects and the continued resolution of certain legacy claims and unapproved change our strong cash flow, we've done an excellent job of reducing our debt since the end of 2023, paying down $477 million or 52% of our total debt, including the full payoff of our term loan B just last expect to generate strong cash flow again in 2025, 2026, and 2027. Our cash flow should continue to be enhanced by dispute resolutions. However, we expect going forward that a larger proportion of our cash will be generated from organic operations, that is, from new and existing for 2024 was $4.3 billion up 12% compared to $3.9 billion in 2023, primarily due to increased project execution activities on certain building and civil segment projects. Civil segment revenue was $2.1 billion up 12% compared to $1.9 billion in 2023, due to a net increase in project execution activities driven by projects in California, New York, British Columbia and the Asia Pacific segment revenue was $1.6 billion up a strong 24% compared to $1.3 billion last year, primarily due to increased project execution activities on various healthcare and educational facility projects in California and the Brooklyn Jail project in New York, all of which have substantial scope of work reported a loss from construction operations of $104 million in 2024 compared to $115 million lost in 2023. Our operating income in both years was negatively impacted by net unfavorable adjustments on various projects, primarily due to changes in estimates that resulted from judgments, settlements, and resolutions of certain legacy claims and unapproved change orders. I refer you to our 10-K, which we are filing today for more segment income from construction operations for 2024 was $138 million compared to $199 million in 2023. The decrease was primarily due to a $102 million charge we took in the third quarter pertaining to an unexpected adverse arbitration decision related to a completed BRI project in California. As we mentioned last quarter, we are appealing this building segment posted a loss from construction operations of $24 million for 2024 compared to a $91 million loss in 2023. The improvement was principally due to the absence of various prior year unfavorable adjustments, as well as $27 million of profit contributions in 2024 associated with the increased revenue for the specialty contractor segment posted a loss from construction operations of $103 million in 2024 compared to a $145 million dollar loss in 2023. The improvement was primarily due to the absence of certain prior year unfavorable adjustments partially offset by certain unfavorable adjustments in 2024 on several completed G&A expense was $110 million in 2024 compared to $75 million in 2023, with the increase primarily due to higher compensation-related expenses, mainly attributable to higher share-based compensation expense. As we mentioned before, the increase in shared-based compensation expense was primarily due to a substantial increase in the company's stock price during 2024, which impacted the fair value of liability classified reported an income tax benefit of $51 million in 2024 due to our pre-tax loss for the year and an effective tax rate of 29.3% compared to a tax benefit of $55 million with an effective tax rate of 30.1% in 2023. As we return to profitability in 2025 and in future years, the net operating losses generated in the past three years will help reduce our cash outlays for future income loss attributable to Tutor Perrini for 2024 was $164 million or a loss of $3.13 per share compared to a net loss of $171 million or a loss of $3.30 per share in let's turn to the fourth quarter results, Revenue was $1.1 billion, up 5% compared to $1 billion for the fourth quarter of 2023. Civil segment revenue was $554 million up 21% compared to $459 million last segment revenue was $352 million compared to $376 million last year, especially contractor segment revenue was $161 million compared to $186 million last overall revenue improvement was due to the increased project execution activities in the civil and building segment income from construction operations was $4 million in the fourth quarter of 2024 compared to $28 million for the fourth quarter last year, with a significantly lower than normal income in the 2024 period due primarily to a temporary earnings reduction of $32 million that resulted from the successful negotiation of significant lower margin and lower risk change orders on a West Coast project. This temporary earnings reduction is expected to reverse itself over the remaining life of the building segment posted a loss from construction operations of $41 million in the fourth quarter of 2024 compared to a loss of $7 million last year, with the loss in the 2024 period mostly due to a $26 million unfavorable adjustment on a government building project in Florida that is nearing completion. The specialty contractor segment posted a loss of $20 million in the fourth quarter of 2024 compared to a loss of $24 million last loss attributable to Tutor Perini for the fourth quarter of 2024 was $79 million or a loss of $1.51 per share compared to a net loss of $48 million or a loss of $0.91 per share in last year's fourth quarter. Now I'll address the balance net debt as of December 30, 2024 was just $79 million down 85% compared to $519 million at the end of 2023. We have continued to reduce our debt in the first quarter of 2025 with the early payoff of our term loan be in its entirety just last week. All in all, we believe that our balance sheet is now healthier than it has ever been. Lastly, I'll provide some assumptions regarding our expense for 2025 is expected to be between $310 million and $320 million. Depreciation and amortization expense is anticipated to be approximately $55 million in 2025, with depreciation at $53 million and amortization at $2 million. Our substantially reduced debt level will result in a significant decrease in interest expense going expense for 2025 is expected to be approximately $55 million of which about $5 million will be non-cash. This is $34 million or 38% lower than our interest expense of $89 million in 2024, and this reduced interest expense equates to about $0.50 of incremental EPS for us in effective income tax rate for 2025 is expected to be approximately 21% to 23%. We anticipate non-controlling interest to be between $65 million and $0.75 million, significantly higher than last year due to certain large JV projects that are ramping up in 2025. We expect approximately 53 million weighted average diluted shares outstanding for capital expenditures are anticipated to be approximately $140 million to $150 million but the vast majority of the CapEx in 2025, approximately $110 million to $120 million, being project specific and owner funded for large equipment items on certain large new projects such as tunnel boring machines. Thank with that, I'll turn the call back over to Gary. Gary Smalley Thanks, Ryan. To recap, the last several quarters have been a truly impressive period of record cast generation. Significant debt paydown and unprecedented new award activity for the company. We firmly believe that we are at the dawn of a new era for Tutor record backlog of $18.7 billion has been largely built on new awards with better margins and improved contractual terms. And we believe that this backlog will drive significant double digit revenue growth and earning stability for the foreseeable future while also serving as a catalyst for continued strong cash flow as our newer projects progress through design and into construction. And on top of this, as Ryan just mentioned, we have the healthiest balance sheet we probably have ever considering all of this and the significant progress that we have made in resolving legacy disputes, it is hard not to be genuinely excited about the future of Tutor Perini. For those of you who have persevered through some of the lean times, we thank you for your patience and look forward to rewarding you with vastly improved and more reliable operating performance. Thank with that, I'll turn the call over to the operator for your questions. Operator (Operator Instructions)Adam Thalhimer, Thompson Davis & Company. Adam Thalhimer Hey, good afternoon, guys. Ronald Tutor Hi Adam. Adam Thalhimer Can you give us a little more help on how you see the cadence of the year playing out? I know you said it was an even more back half weighted than normal. Just curious if you could flesh that out a little more. Gary Smalley Yeah, sure, Adam. With respect to revenue, we expect to have quarter over quarter revenue growth as we go throughout the year, and as you would expect with our earnings, we're going to be a little lower in the first quarter than the other quarters because of seasonality reasons, but expect say single digit EPS in the first quarter. And then a substantial improvement in the second quarter and then further improvement in Q3 and Q4 as some of the newer work starts to ramp up and we get out of the bad weather. Adam Thalhimer Okay Great. And then, Adam. Gary Smalley Adam, excuse me, if I could just add that, about 2/3 of our EPS is likely to be in the second half of the year if you're looking for your models if you want a little bit more guidance here. Adam Thalhimer Perfect. And then at this point, how many legacy claims are left, and do you still think most of those are cleared up in '25? Ronald Tutor There's about a dozen left since I've been handling all our litigation, says Ron Tutor. There's about 12 to 14 left, probably 75%-80% will be cleared out in '25. That's been taken into consideration in our projection for earnings in ' other words, we established what we think is the appropriate contingencies to protect ourselves from damaging our earnings projections. Adam Thalhimer Got it. And then the last one for me, curious if you can just talk high level. About capital allocation given the much more flexible balance sheet to get even more flexible. Gary Smalley Yeah, look, Adam, we're a little early, to talk a lot of details on that. We still need to discuss with the board. We want to signal to everybody that it certainly is on the front of our minds, but as we progress through the year and we start to generate even more excess cash, we'll have some more details to share. But right now we're looking at keeping all options open and and we'll get back to you as soon as we get some finalization with the board. Ronald Tutor And to add further clarity, I'd like to add because you heard capital expenditures at $140 million to $150 million which is accurate. However, that isn't on the basis of borrowing capital and financing long-term equipment. All of that equipment is funded by the contracts themselves and paid directly to us by the owner. So in essence, when we buy $150 million worth of equipment we build those projects and those projects provide the funds, so that does not affect our cash flow even though in the traditional capital expenditure standpoint it might. Gary Smalley Yeah, so as Ryan said in the prepared comments, if we've got CapEx of $140 million to $150 million, about $110 million to $120 million of that will be purely funded by the projects and will come directly from those project buildings. Adam Thalhimer Okay. Okay, I'll turn it over. Thank you. Operator Michael Dudas, Vertical Research Partners. Michael Dudas Good afternoon, gentlemen. Gary Smalley You guys have been quite Yeah, we have Mike, thanks. Michael Dudas A Given the extraordinary growth and backlog and look and your outlook for 2025, relative to history, how much of 2025 revenues, profits, Are are are in the current backlog or near current backlog with with the orders that come in maybe the last couple of months. Is that relatively similar to other years? Is it a larger number? And as we move forward, does that number change a bit as you start to really start to ramp up on these projects in the next few years? Gary Smalley Yeah, it's largely similar to what we've seen in the past, and I wouldn't expect it to really change until probably we're into '26, and then it's going to be, a higher amount that's in backlog that's going to be. Ronald Tutor Key point of clarification is to understand that our backlog is so large there's very little anticipation of new work in those projections. The key element is we're relying on contracted and executed backlog to provide the impetus of that explosion of revenue, and with very limited circumstances are we adding revenue now only as new work may get awarded. Michael Dudas Yeah, understood. Thank you for that one. I could say with my follow-up question, how you're positioning and targeting these projects, that are on the docket for the next few months, relative to the types of terms and conditions, are they stronger and better than what you've booked over the last several quarters in some of these large projects? I assume the competition is pretty low on some of this, so. That you probably have some pretty good opportunity given your competitive advantage and you know how much capacity does Tutor look at several years given all the business that you're generating. Gary Smalley Yeah, so Mike, as we talked about with $18.7 billion in backlog, we certainly can be more selective than we have been in the past. This new work that we've been booking, it's better contractual terms than we used to have because now, we're finding that we're being treated more fairly. So, are they going to be even better contractual terms going forward? Well, we do have the, again, the flexibility of being, even more. Selective in what we pursue and how we negotiate things, but we've been so selective already. I can't say that we're going to have far improved contractual terms. We're already getting the contractual terms that we really want. Michael Dudas Understood, excellent. Thanks, Gary. Thanks, Ron. Operator Thank you. I would like to turn the floor over to Gary Smalley for closing remarks. Gary Smalley Thank you. We'll talk to you again in another quarter. Operator This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Yahoo
29-01-2025
- Business
- Yahoo
Q4 2024 Lockheed Martin Corp Earnings Call
Maria Ricciardone; Vice President of Investor Relations, Treasurer; Lockheed Martin Corp James Taiclet; Chairman of the Board, President, Chief Executive Officer; Lockheed Martin Corp Jay Malave; Chief Financial Officer; Lockheed Martin Corp Seth Seifman; Analyst; JP Morgan Rob Stallard; Analyst; Vertical Research Partners Richard Safran; Analyst; Seaport Global Securities Ken Herbert; Analyst; RBC Capital Markets Gavin Parsons; Analyst; UBS Equities Research Scott Deuschle; Analyst; Deutsche Bank Matthew Akers; Analyst; Wells Fargo Securities Myles Walton; Analyst; Wolfe Research Gautam Khanna; Analyst; TD Cowen Peter Arment; Analyst; Baird Pete Skibitski; Analyst; Alembic Global Advisors Douglas Harned; Analyst; Bernstein Michael Ciarmoli; Analyst; Truist Securities Ronald Epstein; Analyst; BofA Global Research Operator Good day and welcome, everyone, to the Lockheed Martin fourth-quarter and full-year 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, Sarah, and good morning, everyone. I'd like to welcome everyone to our fourth-quarter and full-year 2024 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President, and Chief Executive Officer; Jay Malave, our Chief Financial 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 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 and click on the Investor Relations link to view and follow the that, I'd like to turn the call over to Jim. James Taiclet Thanks, Maria. Good morning, everyone, and thank you for joining us on our fourth-quarter and full-year 2024 earnings you saw in the press release this morning, our return-to-growth strategy that we implemented three years ago is well on its way and remains on a strong trajectory. In 2024, sales grew 5% year over year, and our backlog of $176 billion reached yet another record, demonstrating the enduring global demand for our superior, scalable, and reliable products and and every one of our four business areas saw backlog growth and ended the year with a book-to-bill ratio of greater than 1. We fully expect these trends to continue in our 2025 outlook with mid-single-digit growth in sales, segment operating profit returning to 11%, and double-digit growth in free cash flow per and Maria will cover the financials in more detail, but I'd like to briefly comment on the earnings impact in the fourth quarter of two classified programs at MFC and aeronautics, prospectively. Recording charges in Q4 on these two programs enabled us to derisk the financial profile of both these critical national security programs going forward as we move into their next these particular contracts were struck a number of years ago, there are no longer any must-win competitions. Under today's Lockheed Martin-wide bid process, every proposal adheres to a stringent risk-adjusted ROI regime. This process is designed to compete aggressively for key opportunities while also being very committed to achieving positive results, both in the short and long term for our the same time, we are committed to ongoing investment in the business to further enhance our company's growth trajectory, having successfully executed our return-to-growth initiative over the past few years. In 2024, we invested $3.3 billion in research and development and capital to support advanced scalable technology solutions for our important looking forward, our investments to enhance the attractiveness and performance of our key programs and initiatives such as America's preeminent fifth-generation fighter, the F-35, and our internal digital transformation, 1LMX, are inspected to financial focus remains on free cash flow and free cash flow per share. Our company continued to deploy significant free cash flow in 2024, and we return greater than 100% of that free cash flow to you, the shareholders. In addition to our consistent and healthy dividend, we maintain a robust share repurchase program with 3.7 billion of shares repurchased in to the F-35. We delivered 62 aircrafts in the quarter, bringing our total deliveries for 2024 to 110, the high end of our expected range. These deliveries included aircraft that were previously part and new jets have rolled off the production line. We continue to expect deliveries will exceed the production rate over the next few years and estimate 170 to 190 F-35 aircraft deliveries in capabilities continue to progress in flight testing. We completed qualification testing on a set of key TR3 capabilities in 2024, and we're making solid progress on system performance and remaining TR3 deliverables. We expect to release additional capability this year was for further upgrades to addition, the undefinitized contract for Lot 18 F-35 production was awarded in December, bringing our backlog to 408 aircrafts. We expect this contract will be definitive time during the first half of welcomed our 20th global customer, Romania, into the F-35 enterprise in November for this Letter of Offer and Acceptance to procure our 32 aircraft. The Romanian Air Force's F-35 will integrate with their existing F-16 fleets as well as other allied F-35s, highlighting the importance of the superior capabilities of this the F-35's seamless interoperability using our architecture will be crucial in establishing and maintaining command of the air, especially in the end of Pacific, European, and Middle Eastern [theaters]. Lockheed Martin's system of integration expertise across land air, sea, space, and cyber are essential to continually improving many important national security missions such as protection from air and missile this example, our defensive (technical difficulty) flight experimentation mission in December successfully demonstrated the integration of multiple Lockheed Martin and other OEM products into a single combined weapons system. Our Aegis Guam system was successful in acquiring and tracking targets using our TPY-6 radar planning and conducting the missile engagement using our Aegis combat system. Then we fired the interceptor from one of our vertical launching systems and ultimately destroyed the incoming important was the accelerated pace from contact award to successful completion of this flight test mission in under two years. It was a direct result of leveraging prior investments and all these proven technologies. Building on our production-ready Air-Launched Rapid Response Weapon or ARRW, America's hypersonics technology made another important milestone in the development of one of our most important and advanced weapon systems in US Army and US Navy completed a successful end-to-end flight test of the common hypersonic (inaudible), the first live-fire event for the long-range hypersonic weapons system.I'd like to shift gears now to the current discourse about the defense industry landscape. Much has been said about defense primes, emerging startups, traditional and nontraditional companies. I see us all working together, and I think that it's industry's role to help marshal the talent and expertise in our country to provide the best possible deterrent capabilities with both physical products at the ships, aircraft, and satellites as well as digital, advanced need to access the best talent, financial resources, and technologies from both the aerospace and defense and commercial sectors to get ahead and stay ahead. To that end on the commercial front, I've long been an advocate of deepening partnerships across industries, and we have done so with companies such as NVIDIA for artificial intelligence; Meta and IBM for large language models to more efficiently generate code, analyze data, and enhance business processes; Verizon for 5G networks; Microsoft for classified cloud modeling and simulation; and Intel and GlobalFoundries for advanced military hardened also investing heavily on internal development, autonomy, AI, and other enabling digital technologies to provide the best solutions for our customers. [Skunk Works] continues to drive the cutting edge, theater-level security solutions, and real-time live flight demonstrations. We had an F-35 flying from our facility in North Fort Worth, Texas sharing classified data by a Skunk Works open-system gateway through a commercial satellite communications and all the way over into a Royal Air Force lab in Farnborough, UK. It was integrated into their command-and-control achievement marks a significant step towards a future-integrated defense, enhancing our F-35 interoperability in real time within an allied C2 system using our 5G dominant another first, our Lockheed Martin Skunk Works team, along with the US Navy and General Atomics, completed a live controlled flight demonstration of an uncrewed system by the Unmanned Carrier Aviation Mission Control Station, which is powered by our autonomy platform. This demonstrates us a pathfinder that helps advance the complex technology necessary to enable human-machine teaming as envisioned for autonomous systems. We're doing it right to the budget, the current continuing resolution funds US government operations through March. We look forward to working with the returning administration to continue pursuing a more agile and streamlined acquisition process that encourages speed, technology innovation, and broader see those as an opportunity to make great progress in all these areas, and we will continue to share ideas and do our part to support efforts to eliminate unnecessary regulatory hurdles while working to increase efficiency in our own internal operations through our 1LMX digital I'll turn it over to Jay. Jay Malave Thanks, Jim, and good morning, I'll provide an overview of our consolidated financial results for the fourth quarter and full year, then hand off to Maria, who will cover business area financials, and I'll come back at the end to discuss our initial 2025 outlook.2024 was a solid year. Our growth strategies are paying off with 5% top line growth while also growing backlog 10% to $176 billion, another year-end record. Our balanced portfolio enabled us to generate solid free cash flow and meet our deployment commitments exceeding 100%.Finally, we took prudent derisking actions on key programs that paved the way for a solid outlook in 2025 and beyond. Before I get into the results in more detail, I'll walk you through these de-risking actions. Chart 4 provides two different reconciliations that detailed a full impact of these items on our full-year results and their partial impact to our prior expectations. We've also included a fourth-quarter version at the same chart in the appendix on slide purposes of understanding the total impact on our full-year results, I'll direct your attention to the middle section of the chart. We recorded net charges of $1.8 billion as follows, $1.4 billion related to the remaining expected future losses on the MFC classified program, and $555 million associated with the aeronautics classified program, with these amounts partially offset by $155 million benefit associated with our C-5 claim over to the right side of the chart, you may recall that our last outlook in October had assumed some of these net charges. So let me walk you through that as well. Relative to our prior outlook, we recorded $1.4 billion of unplanned net charges, consisting of $410 million for the aeronautics classified program, $1.1 billion from the MFC classified program, with these amounts partially offset by $70 million of unplanned and benefit from the C-5 claim reconciliations provide adjusted results to exclude the impact of these items for comparison purposes. For the remainder of my prepared remarks, I will refer to the reported and adjusted amounts as shown on the left side of the chart, unless otherwise moving to chart five with fourth-quarter results. Sales of $18.6 billion were down slightly year over year. Sales in the quarter were unfavorably impacted by having one [fewer week] in Q4 '24 compared to Q4 of '23, partially offset by the F-35 Lot 18 deferred revenue carryover from the third quarter. Segment operating profit, segment margins, and earnings per share were all adversely impacted by the classified program charges at aeronautics and missiles and fire an adjusted basis, segment operating profit would have grown 5% year over year to $2.1 billion, resulting in segment margins of 11.1%. Shifting to new business, we recorded over $29 billion of orders in the fourth quarter for a book-to-bill ratio for approximately 1.6. Aeronautics led the way with almost $20 billion in orders driven by the F-35 Lot 18 and fiscal year '25 air vehicle sustainment contract contracts will help secure the wide-reaching F-35 US production enterprise and ensure America's military is equipped with the most advanced fighter aircraft in the world. Free cash flow was $440 million in the quarter, including $990 million of pension prefunding to extinguish the 2025 required with capital deployment, we further advanced strategic and technical and operational capabilities by investing over $1.1 billion in the quarter towards independent research and development and capital expenditure projects, bringing full-year internal investment of $3.3 continue to provide an unmatched combination of new technology advancement that can be also fielded with speed. So investing to deliver critical capabilities while maintaining our commitment to shareholders by returning $1.1 billion of free cash flow via share repurchases and to chart 6 in our full-year 2024 results. Sales of $71 billion grew 5%, driven by improved backlog conversion, reflecting stronger throughput across the entire value chain. Similar to the fourth quarter, segment operating profit segment margins and earnings per share were impacted by the net program charges on slide an adjusted basis, segment operating profit grew 7% year over year and adjusted segment margins were 11.1%. Book-to-bill for the year was greater than 1. In the third consecutive year, we've increased backlog. We generated $5.3 billion of free cash flow, including the pension prefunding. And finally, our consistent capital deployment continued in 2024 as we returned $6.8 billion to shareholders through repurchases and I'll turn it over to Maria to discuss business area results. Maria Ricciardone Thanks, Jay. Today, I'll discuss fourth-quarter and full-year results for the business Jay mentioned, you'll notice that we've included both reported GAAP and adjusted results for each business area in order to provide meaningful comparisons and a more realistic expectation of recurring operational with aeronautics on chart 7. Fourth-quarter sales at aero increased 5% year over year, primarily driven by higher F-35 volume on production and sustainment contracts due to contract awards in the quarter, including the awards for the Lot 18 undefinitized contract action and air vehicle sustainment offsetting this was lower volume at (inaudible), driven by the unfavorable sales impact associated with the classified program charge. Adjusting for the impacts of the classified programs charge and the C-5 contract resolution, the adjusted sales growth at aero was approximately 7% year over year in Q4 2024. Both reported and adjusted sales in the fourth quarter benefited from $700 million of F-35 sales differed from the third operating profit decreased 43% compared to Q4 2023. Lower profit booking rate adjustments due to the $410 million classified program charge in the quarter were partially offset by higher sales volume and the benefit related to the C-5 claim resolution. On an adjusted basis, operating profit year over year in the quarter increased the full year, sales increased 4% driven by higher volume across the F-35 program and the production ramp on the F-16 program, partially offset by lower volume at Skunk Works due to the sales impact related to the classified program change. Full-year segment operating profit decreased 11%, driven by the same items we saw in the fourth quarter. Lower profit rate adjustments, partially offset by sales volume and the C-5 claim resolution benefit. On an adjusted basis, aeronautics' full-year operating profit grew by 3%, equating to 10.2% margin for the to Missiles and Fire Control in chart 8, MFC sales increased 8% year over year, driven by production ramp on Joint Air-to-Surface Standoff Missile, JASSM; Long Range Anti-Ship Missile, LRASM; Guided Multiple Launch Rocket System, GMLRS; and for the extra week in the fourth quarter of 2023, MFC sales grew 16% year over year. Segment operating profit decreased significantly year over year in the quarter due to lower profit booking rate adjustments driven by the recognition of reach-forward losses on the classified program. Adjusting for that item, segment margins were a strong 14.8% in the the full year, MFC sales increased double digits, up 13%, again due to production ramps on GMLRS, LRASM, JASSM, and PAC-3 programs. Full-year segment operating profit declined $1.1 billion year over year due to $1.4 billion of classified program charges, which were partially offset by higher volume from the production ramp. Excluding the classified program charges, MFC's segment operating margin for the full year was a solid 14.4%.Shifting to Rotary and Mission Systems on chart 9, sales decreased 10% in the quarter to approximately $4.3 billion, primarily driven by lower volume on Seahawk, CRH, AEGIS, and various C6ISR programs. Normalizing for the week difference in Q4 2023, our net sales were down 3% year over year in the to sales, operating profit was down 11% year over year due to lower profit booking rate adjustments in sales volume, partially offset by favorable contract mix. For the full year, sales increased 6% in RMS, primarily driven by higher volume on the Canadian Surface Combatant and Lasers programs within the integrated warfare systems and sensors business, as well as various C6ISR programs and the CH-53K ramp at Sikorsky. Operating profit was up 3% for the year due to the higher sales volume and favorable contract mix, partially offset by lower profit booking rate with space on chart 10. Sales decreased 13% year over year in the fourth quarter. The reduction was driven by lower volume on n NextGen OPIR, Orion, and classified primarily due to program lifecycle. Normalized for the number of weeks in the quarter year over year, sales were down 6%. Operating profit decreased 8% compared to Q4 2023, driven by lower volume and lower profit booking rate adjustments, partially offset by higher equity earnings from the United Launch to the full year, sales decreased slightly, driven by lower volume on the same programs within the fourth quarter, partially offset by higher volume on the Fleet Ballistic Missile and reentry program. Meanwhile, operating profit increased 6% in 2024 due to favorable contract mix and higher ULA equity earnings, partially offset by lower profit booking rate adjustments.I'd like to note the photo on page 10. In December, Lockheed Martin supported the successful launch of the GPS III SV07, which we designed and built. This accelerated launch require a complex integration and was the first to demonstrate operational agility for critical national security that, I will turn it back over to Jay to wrap up our prepared remarks. Jay Malave Thanks, Maria. Turning to chart 11 in our forward expectations. Our outlook for 2025 has improved since October, along with our rising value chain performance expectations. In addition to the benefit from the de-risking actions we took in 2024, we anticipate sales growth of 4% to 5% on top of the 5% we delivered in 2024. We expect MFC to again lead the way with 8% growth at the midpoint as we continue to ramp production across several programs to support the strong demand for our combat-proven munitions and integrated air and missile defense previously discussed, operating margins return to 11% and free cash flow growth 9% at the midpoint from 2024 adjusted results, setting up double digit growth in free cash flow per share in spite of non-cash FAS pension headwind, lowering EPS. I'll sit through segment operating profit and EPS bridges in more detail on the following 12 bridges 2024 reported segment operating profit of $6.1 billion to the 2025 guidance midpoint of $8.15 billion. After accounting for the 2024 net charges, we expect operating profit growth from the adjusted 2024 position. The growth is primarily due to the volume dropthrough and partially offset by other items, mainly lower expected net profit rate adjustments. Importantly, segment margins are expected to return to 11% in 2025 earlier than on chart 13, we have a similar walk for earnings per share. Here, we expect EPS to decline slightly from a 2024 adjusted position, mainly due to non-operational items, notably the FAS/CAS pension adjustment as well as higher interest expense. Bringing it all together, we expect solid sales growth in 2025 of the higher 2024 base, operating margin at the 11% target and solid cash flow generation that enables consistent shareholder in summary on chart 14, in 2024, we delivered stronger top line growth than initially expected, reflecting an improving operating cadence. We also expanded our backlog to a new record, demonstrating the strength of our unmatched capability to deliver security solutions at speed while increasing investment to expand this capability. And we prudently de-risked programs, all the while dependably generating free cash flow and deploying it as together, these actions give us confidence to deliver a strong financial outlook for 2025. At the same time, we will continue to propel this industry forward with innovative solutions that integrate the best that commercial and military industries can offer. And of course, we remain focused on operational execution to deliver on our commitments and create long-term value for our customers and that, Sarah, let's open up the call for Q&A. Operator (Operator Instructions) Seth Seifman, JP Morgan. Seth Seifman Thanks very much and good morning, everyone. I wanted to ask -- Jay, you emphasized kind of the de-risking nature of the charges in Q4. And I know maybe it's difficult to discuss because it's classified. But within Aeronautics, all of the filing language has sort of emphasized continued risk there. Should we think that within -- following this charge, the potential for future charges there has really come down considerably. And is there anything you can say about where we might be in the lifecycle of that program and when it might be able to provide some positive returns?And then thinking maybe that the answer there might have to be a little bit circumspect, if you could just comment on the multiyear targets that you gave on the last call and how to think about those now. Jay Malave Okay. Thanks, Seth. There's about 16 questions in that one question, but I'll take a shot at all of as far as the risk specifically, I would say we significantly reduced the risk. I can't really get into the lifecycle of the program, given the classified nature of it. But let me walk you through why I believe that we've significantly reduced the you know, we have realized this risk earlier in the year, causing us to perform a more comprehensive review of current performance versus our key assumptions included in the estimate to complete. We evaluated the risks and opportunities and made the determination that a cost reset was amount that we recorded in the quarter is the most conservative assessment we've made to date. We've also made a number of process changes. Aeronautics, along with our corporate staff, have implemented a more continuous monitoring progress, a process of the progress of this program in terms of technical milestones and added technical resources from the outside of the will enable both teams to work together to institute support measures as needed faster than before. We've also added technical resources and experts with experienced in the risk areas to help bolster the team and mitigate risks as they arise. We've added automated testing procedures as well to accelerate test results and issue resolution should they all those things taken together give us confidence that we have significantly de-risked this program and significantly reduce the risk of future charges on this. As far as maybe the multiyear outlook, you look at 2025 and certainly, the 2025 outlook is better than what we had projected in October. If you recall, we have said our baseline was low-single digit with an opportunity to get to a mid-single we believe the opportunity was realized for 2025, which gave us confidence to increase our growth outlook to 4% to 5%, and that's the same type of process that we'll continue to look at in '26 and beyond. And again, it's based on our ability to really drive throughput through the entire value I mentioned before in my prepared remarks that we've continued to have rising expectations there and rising confidence that not only our supply chain, but our internal operations can move in a quicker pace, enabling the unlocking of this revenue growth. So our confidence is growing there. Operator Rob Stallard, Vertical Research Partners. Rob Stallard Thanks so much. Good morning. Question for Jim. At the same time as you're taking these charges on these classified programs, it looks like the new administration and the Department of Defense is actually getting more [pro] fixed price contracts and commercial terms. Are you worried that the defense industry could be taking on more risk and opening yourself up for more charges in the future? James Taiclet Not necessarily, Rob, because we're going to apply this disciplined bid process to fixed price and cost-plus contracts. And if the proportion is moving and potentially towards fixed price, we're going to use the same discipline. And there's no trend in this industry to be much more deliberate about how each company bids, each company has its own is something I brought over from my last business experience, which is risk-adjusted return on investment. It is the key criteria and be honest about the risks upfront and price them in. And if that price, it doesn't meet the competition, so be it. We'll move on to other I'm not concerned about that. As I said, I look at those as an opportunity because as far back as 2021, I have been advocating for systemic change in the way that the defense enterprise operates. And that's meaning Congress, executive branch, Pentagon, aerospace and defense industry, commercial tech, startups. We need to expand our ability as a country to get everybody involved and I welcomed (inaudible)'s effort and the administration's efforts to reduce the bureaucracy limit that the administrative burdens that the Pentagon now puts on all companies, big and small, that want to work with I look at all this is an opportunity to move a little bit more towards fixed price proportions, so be it. Jay Malave Rob, the only thing I would say is we've seen really a bunch more over the last probably a year to 18 months, a more of a contracting regime that's more commensurate with the risk associated with the programs. So those that have lower technical maturity, higher risk, the customer has actually been much more receptive and cognizant. Those probably are not going to be best delivered under fixed price type of contracting so you may be hearing words on the one hand, but I think there has been a recognition more to make sure that the risk profiles commensurate with the right level of contracting and that's shared both by the customer as well as the industry. And so it's a different approach. We'll see. We've got a change in administration and where that goes forward, but I would say there's been a recognition over the last 12 months to fixed price contracts for immature technology, really doesn't help anyone. Operator Richard Safran, Seaport Global Securities. Richard Safran Good morning. What I'd like to ask is, starting with your 2025 guidance for 8% growth, I'd like to know if you could give us maybe a long-term look at MFC in terms of growth and margins and what the potential for the business is. Just kind of wondering, you have the GD rocket motor deal and how that factors into your growth and margin outlook given the volume limitations you've had thus far? Thanks. Jay Malave From what I see for 2025, it's really more of the same. We continue to see growth on programs like GMLRS, HIMARS, PAC-3, JASSM, and LRASM. And many of the same growth factors and drivers in 2024 are also the growth drivers in 2025. That demand have projected on orders growth in 2025, things like a multi-year definitization on JASSM and LRASM, which is pretty sizable, multiyear contract and so the demand cycle there, both domestically and international was quite strong. And as we've said before, that will be the growth driver for Lockheed Martin for years to come beyond so again, when you couple the backlog with the ongoing demand, we feel pretty solid again in these programs, just as a solid back pinning of the underlying demand for the margins we've talked about when you strip out the impact of the classified program, we've talked about 14%. If you look at our -- at the midpoint of our guide in that ballpark we're right around 14%, not necessarily as high as Maria reported on an adjusted basis for 2024. But that's because right now, we're expecting some lower net profit adjustments, but their underlying margins are generally in line with what our longer-term expectations are and that's the way we should think about MFC, around 14%. Operator Ken Herbert, RBC Capital Markets. Ken Herbert Hi, good morning. Hey, Jay, in the past, you've talked about working capital and specifically the opportunity there to improve the free cash flow. Can you provide a little bit more on what's implied in the '25 guide for working capital improvement?And has anything structurally changed now as you look at the portfolio in the opportunity as you've talked about taking days out of the ability to eventually -- or continue to drive towards sort of pre-pandemic levels over time? Jay Malave Sure, I'll start with maybe 2024. We had a good year in 2024 in spite of some of the headwinds that we've faced. We reduced our working capital days by a couple, and we're in the mid-30s, as far as cash conversion cycle. For our outlook in 2025, what's implied in there is about one day, which essentially offsets the growth. Then we're going to see from -- we would otherwise see in working what we're trying to do here is prevent it from being a use of cash and have it be neutral. The opportunity set obviously would be to drive beyond one day. And there's still opportunity I talked about before, particularly in our contracted assets, our unbilled receivable. There's some opportunity there as we work through on the F-35, both in production as well as sustainment, but there's really opportunities across the has a number of opportunities there on their programs as well as even (inaudible) segments, space in MFC, those are outstanding working capital businesses on a stand-alone basis. But even so, there's opportunity in the contract assets there. So I would expect in the years to come that we still have opportunity to continue to drive asset productivity there and that's going to be part of our [forward motto] going forward as it was in '24 and our outlook for '25. Operator Gavin Parsons, UBS. Gavin Parsons Thanks, good morning. Could I just dig in a little further on the free cash flow bridges, the [EBIT] and EPS bridges as we're super helpful in the deck. But just given a lot of moving pieces and cash flow like the F-35 inventory unwind, pension contribution recovery, Lot 18, cash timing, maybe I missed that if we could just kind of do a bridge walk on cash flow, that would be great. Jay Malave If you just start from this year in adjusted cash flow of $6.1 billion. So adjusted for the pension contribution in 2024. As we mentioned, that we expected anywhere around close to $1 billion of benefit on F-35 with the delivery of -- with higher deliveries as well as progress on the withholds. We also, though -- as you remember, in 2024, we got the benefit of significant international advances to the tune of $600 partially offsetting that, as you know, it's the net impact of those two things, about $400 million in that ballpark. We do expect a benefit from taxes with lower R&D capitalization as that's coming down, and we expect a little bit of benefit from, I'll call it, cash-based net income. All that taken together takes us from $6.1 billion to $6.7 billion midpoint. So those are the key drivers of free cash flow for 2025. Operator Scott Deuschle, Deutsche Bank. Scott Deuschle Hey, thanks. Jay, it looks like if you're guiding -- looks like you're guiding aeronautics margins down about 20 basis points year over year in '25, if I add back those unplanned charges from the 2024 base. Can you talk about what drives that underlying margin decline, particularly given that you are on these newer contracts for F-35? Jay Malave So for F-35, we do have -- I'm sorry, for aeronautics in total, right now the outlook for their margins does assume lower net profit adjustments, and that's on -- I'll call it an apples-to-apples basis. So excluding the impact of the $555 million in the C-5 adjustment in 2024. Profit adjustments there are declining. There is a mix benefit. But right now, the net profit adjustments offset that and that's what drives the margins down from 10 to around also have classified growth, which is just a mix headwind there. But we've got some benefits from F-16 margins as well. But bottom line again, it comes back to the net profit just being lower. Operator Matthew Akers, Wells Fargo. Matthew Akers Hey, guys, good morning and thanks for the question. I guess a couple on F-35. You talked a little bit about the progress towards (inaudible). What exactly is left to get kind of the final withhold? How big is that? And are you assuming get that within 2025? And then wondering if you could touch on Lot 19 and kind of how the discussions are going there. Jay Malave On the TR3 capability, we continue to make excellent progress there. There's a number of things that we still have to complete, the submission system integration work as well as improving system stability overall. We expect that will continue throughout the year. We will meet -- we'd expect to meet some milestones this targeting as much as possible this year, but I think for purposes of financial modeling, we would expect this to bleed into 2026. Ultimately, the declaration of full combat capabilities, one that is left with our customer. And so we'll be coordinating with them and working with them on that. But what I can tell you is that they were pleased with the progress we've made thus far. And the team is working at a pretty good pace here with our supplier partners on improving: A, emission system capability; and as well as improving overall system the second part of the question was on Lot 19, so that has been negotiated some really in parallel with the Lot 18 negotiation. Just for clarity, Lot 18 is under undefinitized contract actions. So we still have to definitize that. As Jim mentioned, we expect that to be done in the first half of this year and then shortly thereafter in the second half of this year, we would also expect to close out on the Lot 19 contract, which would be an order and a range of about $10 billion. Operator Myles Walton, Wolfe Research. Myles Walton Thanks. Good morning. I was curious on the charges that were unplanned. Jay, how should we think about the cash effect of those and obviously, the MFC part of the unplanned charges planning in the future? So I'm going to guess there's nothing really to think about on the aero side, the $400 million of cash charges taken in the quarter, is that $400 million headwind being observed mostly in 2025? And then as we look to '26, do you still have the pension funding requirement coming back at about $1 billion? Jay Malave Yes, just starting with the aero classified program, that will be certainly a cash flow drag over the next few years. It's not all borne in 2025, but it's something that we expect over the next two to three years that we will have to liquidate that and from a cash perspective. As far as pension in 2026, we've talked about ongoing cash contribution requirements. The formula to deal with that is similar to what we saw here in what we've been talking had the prior discussion here and one of the questions related to working capital going, we're going to continue to see what we can do to drive working capital down, improve our asset productivity to offset as much as possible in the pension. And then as you know, we've got a very strong balance sheet that gives us a lot of optionality and flexibility. So we can expect to continue to deal with pension with the options that we have before us. Operator Gautam Khanna, TD Cowen. Gautam Khanna Yes, good morning. I was wondering at the MFC program that had the charge, is there an opportunity on that program as we scale it to improve the profitability dramatically? I'm just curious over the option period, I imagine demand is pretty strong for that product, and I don't know if the pricing may adjust favorably at some point. If you could speak to that. Jay Malave Again, it's a classified program, Gautam. So there's really not much -- what I can tell you is outside of the fixed pricing related to this next phase, the pricing would be open and we would expect to return to reasonable type margins over that period of time outside of where we have the fixed committed pricing. I wouldn't expect it to bounce back to MFC-like at that point in time, there still would be kind of ramp-ups that you got to deal with. But certainly, the margin profile will get substantially better. James Taiclet And we expect this to be a long-life program based on the technology and the value to the US. The next (inaudible) file, I can assure you that this is something they will want. Operator Peter Arment, Baird. Peter Arment (technical difficulty) opportunities maybe still grow your backlog? Your backlogs at record levels is up 10% for the year. Big drivers in MFC and space. But how are you thinking about the opportunities to grow backlog in '25 and any international and kind of awards that you're kind of our pursuits that you would highlight? Thanks. James Taiclet So Peter, it's Jim. And I'll start with the some of the public statements of the administration, which is reforming the Pentagon. The opportunity there is more long lead time orders, less fragility in the system. In addition to that multi-year contracting, which has been so far limited to munitions. Makes sense in a lot of other places in the Pentagon budget. So with some of those policy changes getting implemented, you might see backlog for a company like ours accelerate up due to multi years and longer lead time preorders. Jay Malave The line of sight, we do have a line of sight to growth again in 2025. I wouldn't say that it's 10%, but we certainly have some level of growth that we're expecting in 2025 on the backlog. I talked about the $10 billion order on the F-35 or Lot 19. I talked also earlier about the JASSM, LRASM multiyear, that's in the range of multiple billions of others, there's the international opportunities as well. (inaudible) on the F-16 aircraft. There's just a whole slew of opportunities. We also have just continued F-35 sustainment contract, which will be multiple billions of dollars as well. CH-53K, Lot 9 is another one will be negotiating this year, which is well above $1 billion. So there's still an excellent line of sight to continue to grow this backlog. But as you know, we're also focused on making sure that we can accelerate the speed of our throughput and drive that backlog conversion faster. Operator Pete Skibitski, Alembic Global Advisors. Pete Skibitski Hey, good morning, guys. Jim or Jay, just a follow up on M&FC, as you guys think about what DoD is signaling to you in terms of the peak production volumes on the key munitions on M&FC, do you guys need additional supplemental bills to kind of get to those levels and sustain those levels? Or do you already have kind of funding line of sight from the Ukraine supplemental and maybe what's in the '25 baseline budget, maybe '26 baseline?I just wanted to get a sense of budget risk there in terms of what your peak rates are assuming. Jay Malave It's really not dependent on additional supplementals. A lot of this is some -- a lot of that capacity is going to committed and or contracted with our customer. We just run through a couple of programs. We had always been under contract to get to [%550 million] in the PAC-3 program to 2025. We initially self-funded the investment associated with getting ourselves of [$650 million] on recently received a contract to work for incremental funding on that related to the facilitization. We are driving towards 14,000 on GMLRS. We've been driving, as Jim has mentioned in the past to 4,000 on Javelin, 96 on HIMARS. And again, the line of sight to those and the funding that's been allocated to those is quite strong one of which is under contract already. So we view that as fairly low risk at the moment. Operator Doug Harned, Bernstein. Douglas Harned Good morning. Thank you. On the F-35, and there's been some noise and the new administration is coming in about the F-35. If I put all of that aside, during the first Trump administration each of the budgets, F-35 volumes were cut. There seem to be a view that we didn't need as many. Congress, of course, added some back. But when you look forward, you're looking at a 156 per year production rate for a do you think about the interplay of budget decisions in the US with what has been some very strong export demand? In other words, if we should see some reductions in quantities in the US. Are you still very confident you're going to be able to continue with that more than 156 level? James Taiclet Doug, it's Jim. I'll start off and say, yes, I am confident of the 156, and I think it will come from strong demand from the US government and from our international partners. And what reason for that is basically, part of the tourist areas that you have to have the capability to make the adversary reconsider an adverse action against China based on open-source reporting has increased production of J20, which I don't believe, just so personally it's equivalent to F-35 but it is the fifth-generation airplane to over 100 units a year. We're going to do about 156, we're ahead of them. I think if there was a dramatic change and even US, the US order book and production, that might be a signal that would be adverse to maintaining an effective deterrent to similar munitions, right? I mean at (inaudible) movie or Clint Eastwood movie, when you run out of ammunition, you're highly, highly vulnerable and that supports some of the conversation Jay was just having. So my view is that there are some very capable people coming into the administration. They under standard the turn last thing I think President administration would want is to create a period of vulnerability with any of our major adversaries in the next few years. So I feel really confident about F-35 production. And the other thing I'll add is that we can already control F-35 out of eight autonomous drones. We've shown this to the Secretary of the Air Force a few months public knowledge. There's some classified things that we're doing in the same arena, if you will, to be able to drive manned unmanned teaming off the F-35 and the F-22. And the reason we're starting with the 35 is because of TR3. TR3 gives the F-35 the three things that you need for an effective of five nodea and a 5G [IoT] system, which is what we're talking about. Those three capabilities, our data processing with our core processors, Ten-X from the from the prior, it's the have a large storage at larger storage unit and a multi-pack connection back to the cloud as you defined the cloud. Ours is DoD classified, but those are three technical elements you need to have to be able to drive 5G level connectivity among nodes in a network like this. And that's what we have to build up. F-35, and we're upgrading F-22 in the same way. We'll have at least one and often more orders of magnitude capability in those digital arenas than the fourth-generation fighter jets we the capabilities alone that the F-35 can bring to an integrated fight with drones and manned aircraft is unique. Jay Malave Doug, I'll just also add that just maybe one data point here is that the age of the existing fleet is beyond 25 years. And so that is set necessitating a recapitalization with the F-35. And so this is a certain reality that is going to require the demand of the F-35 to bring the age of our existing fleet back down. James Taiclet And then the last thing I'll say is that there's -- based on, again, open-source reporting, the experience of the Israeli Air Force against the Iranian air defense system, which they took out in one night was what they characterize this fifth-generation aircraft. And you can match up what's in their inventory of with no would clear the way for fourth-gen aircraft drones to come in and devastate that country if the Israelis decided to do. So that's the kind of impact that the high end of platforms have, especially if you can network satellite imagery, autonomous vehicle drone imagery and a command-and-control speed that no one else can can have that kind of lopsided victory. And that's another reason I think that F-35 is going to demonstrate its value here, through these experiences. Operator Michael Ciarmoli, Truist Securities. Michael Ciarmoli Hey, good morning, for taking the maybe a just a bit more color on on supply chain.I know you know, the general update had been, you know, the demand signals were pointing to mid single digit and any changes with that under the new administration?And then just given the supply chain and you do administration, should we think about that multiyear kind of framework now firmly in mid single digits for both revenue and cash flow? Jay Malave On a good just to answer your question kind of supply chain have seen saw improvement certainly in 2024 and were at levels where they have approached and in certain cases have exceeded, um, what they were said that, there are still discrete on issues that we're dealing with the portfolio.I think I may have seen a good done an outstanding job of managing a number of supply chain issues, but yet they still are so the way we have a group of a solid growth outlook there and a strong growth growth outlook, there are still being paced.A certain extent in that goes across much of the portfolio is, of course, gives another one C. 53 K. on has been hampered where we have seen still not to the level that where we need to be operating from a contractual we continue to see, though what we have seen since Sure, I would see it fuel a lot more confident in a multiyear outlook that is more in is 4% to 5% range like we are guiding for for 2025.I think that we need to just go do a little bit more the passage of time as we go through midway through this year, we get a better outlook on how 2025 is shaping up and how that in Forms 2026 would be able to give you a clear, clear view of a longer at the moment, for encouraged by what we're seeing in surely, we've seen it here in 2025, and we're starting to gain confidence, as I mentioned before, that I can continue in if you take one more question, I think we're approaching it after the after this question will hand off to Jim for closing one more question, please here. Operator Ron Epstein, Bank of America. Ronald Epstein Hey, guys, for the maybe just kind of a two-parter, the first party, I think maybe when when they discuss this Iron Dome over the USMATNGI., their contract that you guys already first or am I thinking about that wrong?Because this is that what engineering, Ron Kim here, it would be an integral part of us have a more comprehensive solution to homeland what the administration has laid out is a defense homeland against some a multiple set of attack options for any of them is, as you say, Intercontinental intercontinental ballistic missile attack, that is something that the NGI. is specifically designed to then there's also hypersonic have a Hypercom hyper thought counter hypersonics effort in this company, knowing that we're going to need to be able to do that by the way to do going to need a I and you're going to be High Speed Data Tree missions and you're going to have to multiply centers and multi-domain to do that's the second one.A third one is cruise missiles, right?We've shown that we, for example, we can shoot down cruise missiles lasers now and that could be part of the then maybe the lowest level of adversary would be a cheap in-country new, a UAV attack, a drone attack on on a public place or an Air Force base or some other you at our that's another set of technologies, which is counter though we haven't heard back from this administration yet on this topic, but we offered the prior administration at the sector level to organize the national team on counter-UAS because I think we have some pretty good want to add a lot more from some mid and large companies that do have the relevant technologies as well. James Taiclet So I ran out of time on your second part of your first question, but that's what I think of what I consider what Iron Dome would have to look like.I got it was a broader thing and just sort of call it missile defense that yes, there's a public statement by the U.S. government and outlines a if I can squeeze in one last 100 and then I've got to go and how you're thinking about.I mean, Denmark is an important F-35 international customer, and there's a lot of rhetoric in the press around the U.S. market and how do you think about that?And now you're mixing that up with them being an important customer and what message that might send other these are policy issues by the US government are completely out of our for a review I'll just leave that demand for the aircraft is we've talked about keeps building, especially in international really, that's all I'd like to comment on on a policy matter you, Maria, for managing all the we close, I want to thank the Lockheed Martin workforce for constantly pushing the boundaries of innovation to help our country and our allies accomplish their missions and maintain our ability to provide a strong return to armed if we must do the feed animals that have taxes in the Air Force to call that fly fight and win as we did first term, we look forward a very productive working relationship with President Trump and his team and the new Congress to strengthen our national share our commitment to achieving piece through strength, and we're focused on delivering the best critical defense technology in the world and the greatest value to the American that will wrap up the has the joint today, and we'll see in April and our first quarter call. Operator This concludes today's conference call. Thank you for joining. You may now disconnect. Sign in to access your portfolio
