Good morning everyone and welcome everyone to the Lockheed Martin Second Quarter 2023 Earnings Results Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would now like to turn the call over to Maria Ricciardone Lee, Vice President of Investor Relations. Please go ahead.

Thank you, Lois, and good morning. I’d like to welcome everyone to our second quarter 2023 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Jay Malave, our Chief Financial Officer. Statements made in today’s call that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see today’s press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today’s call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I’d like to turn the call over to Jim.

Thanks, Maria. Good morning, everyone, and thank you for joining us on our second quarter 2023 earnings call. I’d begin today with a few key strategic and operational highlights and then Jay will discuss our quarterly financial results and full-year 2023 outlook. Starting on page 3 of this slide our Q2 financial results were strong, with sales of $16.7 billion up 8% year-over-year and double-digit growth at both aeronautics and space. Backlog reached a record level of $158 billion, up $8 billion from year-end resulting from a book-to-bill of $1.7 in the quarter. Orders included an approximately $8 billion option of [Indiscernible] for the 126 F-35 for production lot 17 as well as significant awards to ramp up emissions [Ph] at MSC. This highest ever backlog gives us visibility into multiyear sales of our key programs and enables our suppliers to be better positioned to meet growing demand. Segment operating profit of $1.9 million in the quarter reflected an operating margin of 11.1%. Free cash flow was $771 million and we remain committed to advancing technology and expanding production capacity. So in Q2, we invested $356 million of company funded R&D and $329 million of capital expenditures to address our customer’s needs and requirements. Meanwhile, we returned almost two times free cash flow to the shareholders. Given the strong results in the first half of this year, we are raising and narrowing our full year 2023 financial outlook. For sales we’re raising the midpoint of our range by $1 billion to revise expectation of between $66.25 billion to $66.75 billion and free EPS we are raising the midpoint of our range by $0.35, to revise the expectation of between $27 to $27.20 per share. We are confident in our ability to achieve these higher expectations and return to growth sooner…

Thanks, Jim, and good morning, everyone. Today, I’ll walk you through our consolidated results and business area performance for the second quarter of 2023. I’ll also provide an update to our full year guidance. As I describe our results, please follow along with the web charts we have posted with our earnings released today. Beginning at chart 4, let’s take a closer look at second quarter results with consolidated sales and segment operating profit. Second quarter sales increased 8% year-over-year driven by aeronautics and space, both with double digit growth in the quarter. This growth partly benefited from last year’s $325 million impact from unrecognized F-35. sales. Excluding that benefit sales were up 6% year-over-year, with Arrow still up 12%. Segment operating profit was up 5% year-over-year, driven by the sales growth, which more than offset lower net favorable profit adjustments aligned to risk retirement timing. As expected, segment margins are 11.1%. Moving to earnings per share, on chart 5, on an adjusted basis, EPS was up 6.5% driven by higher profit and a lower share count partially offset by increased interest expense. Moving to cash flow on chart 6, we generated $771 million of free cash flow in the quarter with nearly $330 million of capital expenditures. On a year-over-year basis, our free cash flow included $330 million of higher tax payments from the R&D capitalization legislation. Once again, dividends and share repurchases exceeded free cash flow in the quarter, demonstrating our commitment to shareholder returns. For the first half of 2023, we returned almost $2.8 billion or 137% of free cash flow through dividends and share repurchases. In the quarter we issued $2 billion of debt across three tranches for a weighted coupon of 4.8%. We had intended to raise the debt early in 2024 to support share…

Thank you, ladies and gentlemen. [Operator Instructions] And that first question comes from Robert Spingarn from Melius Research. Please go ahead.

Hi, good morning.

Good morning.

So, Jim and Jay, you both talked a bit about the strong backlog expansion at MFC and how that helps the second half of this year, perhaps a bit earlier than expected. I wanted to see if you could get into a little more color on how that drives 24 and beyond. And how sustainable this is? And then lastly, Jay, can the rising volumes on some of these legacy programs mitigate that margin pressure from the classified work at MFC?

Sure, if you look at where we are, and maybe take us back to I think it was the fourth quarter call in January. I was asked about our outlook for 2024 growth and at the time, what I said was to expect a low single digit growth. And I think that that’s just right now we’re going to park there, although that’ll be on a higher base here in 2023 because 2023 is better. But we still need to go through and get a feel for what the site supply chain performance clearly with the backlog? It's not a question of demand; it’ll be a question of supply. And we need to go through that analysis over the next few months. And determine to what extent our growth outlook will change, if anything from this baseline of low single digit. And so if anything, what I would say the backlog gives us a lot of confidence that we are going to return to growth. The demand signal itself would indicate a higher rate than low single digit. But we need to wait and watch the supplies part of it to make sure that that can catch up to that demand. As far as the margin profile at MFC, we do expect there to be continued pressure over the next number of years. I would agree that some of the upside that we’ve seen in this incremental demand are from higher margin products and should provide some level of mitigation, but we will really get a feel for exactly what that means until again, as we go through this over the next few months as we understand specifically, what type what contribution each of these different programs will have in 2024 and beyond and what their timing will be and what that mixed benefit may be.

And Rob, I can give you some long-term context here. So first, from a process perspective with the U.S. government. There’s multiyear procurement authority now for a whole set of sort of Lockheed Martin products, and I’ll just run through them really quick. It’s joint air ground missile, HIMARS, ATACMS, which is a longer range GMLRS for the HIMARS. PAC-3 MSC, the GMLRS itself, which is the you, get the HIMARS primary munition, Javelin, and LRASM and JASSM. So all of those programs have multiyear procurement authorities. And so far the GMLRS PAC-3 LRASM and JASSM are in pursuit of multiyear contracts with us currently already. And then, if you look at the corpus, the Ukraine supplemental, and what they’re targeted for, the overall amount has been $62 billion in four bills, the DoD regarding the Ukraine support, about two thirds of that or 44 billion is for the purpose of restoring the Presidential drawdown, for the train to security assistance initiative, essentially meaning the restocking of U.S. munitions. Now a lot of those munitions are going to be upgraded from what was in the stockpile, to the capability that we can produce today. So that’s another motivation for the U.S. to go through with that. And we’ve kind of derived at about 7 billion of those funds can be allocated at some of that Lockheed Martin programs that I just talked about. So there are significant long-term upside opportunities for our MFC business. And as Jay said, they’re fairly high margin and there’s increasing international demand for a lot of those products too. So I think it’s a really good long-term foundation for growth for the company.

Thanks very much.

Thank you. The next question is from Matt Akers from Wells Fargo. Please go ahead.

Yes. Hey, good morning, guys. Thanks for the question. I wanted to follow up on the commentary on Tech Refresh 3. Can you just touch on the cash impact of that? How big was that, how were you able to offset that and kind of hold this year’s guidance? And then I guess is it fair to assume sort of additional deliveries above the 150 level for 2024 and sort of cash and benefits associated with that next year?

Yes Matt so the impact on a per aircraft basis, around $7 million per aircraft. So if you go to, when we came into the year we were expecting between our range was 147 to 153. So you go for the midpoint there off for 150. 30 aircraft would be a $210 million impact and all the way down to 100 would be 50, about 350. So you’re talking between 200 and $350 million impact to this year. As I mentioned, we’re diligently working to manage that and offset it with tailwinds elsewhere in the portfolio. And to your point, to the extent that that does slip into next year, it’s really a matter of timing. So yes, it would as we deliver aircraft, to for those who slip into next year will recover those remaining payments that are upon acceptance of the aircraft in 2024.

Yes, and just as a kind of to, again put it all in context, we can actually deliver more than 156 aircraft in 2024, because the factory is going to be producing at the rate of 156. So there’s some carryover, we might actually deliver more in 2024, then what the on-going run rate will be because the factory will still be performing, right while those aircraft are waiting to be accepted. I just want to make sure that everybody knows what we’re applying to this problem to make sure that we minimize it. And this is the same conversation that I’m having with the senior seniors in military and civilian roles in government. So first of all, we are not suppliers are applying all the needed resources to this, it’s a top priority for our company and few others as well. We’re running extra shifts, and we’re deploying subject matter experts into other companies or suppliers, operations to make sure this stays on track, flight test programs on schedule. And we’ve got the sufficient pilots, both in the company and in the Department of Defense, for acceptance, as we move forward on all of that. And then finally, the purpose of the flight test program is to base continuously narrow the funnel of testing of all the aircraft functions and mission capabilities in a really methodical fashion sort of narrowing a funnel. And so we’re just moving through that and methodical way. Our latest estimate is that’ll all be completed by the end of the fourth quarter this year. Could it move a little bit into early 2024? Yes, it could. But we think we’re on track to really get all the dimensions of resources, commitment, and schedule to give that option for the December delivery everything we can.

Great, thank you.

Thank you. And the next question is from Peter Arment from Baird. Please go ahead.

Yes, good morning, Jim and Jay. Hey Jay, thanks for all the color on the F-35. I was wondering just regarding like when we think about all the backlog growth you have now you’ve got a pretty big step up in CapEx this year, mid-teens growth? How are we thinking about just kind of supporting the backlog? Are you expecting kind of the CapEx profile to kind of level off here? Or are you expect that to increase and maybe also related to how you’re thinking about working capital in the same context? Thanks.

Yes, on CapEx, I would definitely expect it to increase in the back half of the year. We’re still holding our forecast of $1.95 billion for the year. And we’re going to that’s going to essentially stay elevated for the next few years. So a lot of that is investment in capacity and production capability, as Jim mentioned in his prepared remarks. And so we expect that to return kind of remained fairly level. On the working capital side, that for us is a is a source of opportunity. We expect that to really to what we’re trying to do is take it back down to what we performed, from a day’s perspective over the past, say 2020 2021, and some period of 2022. And so, while we’re increasing volumes, you would expect working capital to increase as well. We believe there’s efficiency opportunities to perform at levels we’ve been able to perform in the past and make that at a minimum, not a use of cash. And if we’re fully successful, make it a source of cash in spite of growth. And so that’s our view, particularly the back half of the year as well as over the next few years.

Appreciate that. Thanks Jay.

Thank you. And our next question is from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, Jim and Jay. Thank you. So maybe just some space given it drove your guidance raise. You know what drove the improved outlook, you called out 700 million of higher revenues related to development in space. Can you just give us a little bit of color there was that competitive win or any more detail on what was driving that?

Yes, it’s just in many cases Sheila it’s earlier than anticipated ramps on some of the programs. So the first half, we ran higher than we expected. And we were expecting to run at those levels in the back half of the year. This includes classified programs, also protected communications, international security space business, as well as an NGINS [Ph] in our strategic and missile defense business within space. We’ve also had a little bit of growth in the Next Gen OPIR Program. And so all of those together, really drove the increase versus where we were coming into the year. And much of that we’ve really realized in the first half of the year with a little bit to come in the back half, but we had already planned ramping up those programs in the back half.

Okay, great. Thank you.

You’re welcome.

Thank you. The next question is from Rich Safran from Seaport Research Partners. Please go ahead.

Jim, Jay, Maria. Good morning. So there’s been a lot of press around the F-35. And an engine upgrade both during and after Paris. I just want to know if you could clarify your remarks a bit discuss where you stand on the new engine program. But also, I’d like to know what this kind of means for Lockheed and for the F-35. In general, since the engine as I thought was government furnished equipment.

You’re absolutely right, Rich. This is Jim here. It’s government first equipments, a decision of the U.S. government as to what engine is selected for every block of aircraft and what modernization program goes along with that engine. So Lockheed Martin’s role and responsibility in this is simply to receive the engine performance data from the manufacturers, and their anticipated performance improvements, whether it’s a modernization or replacement option for the future. And then we translate that data to aircraft performance data and information that we then supply to our U.S. government customers. And then we are available to answer questions for their decision making process. So we’re not involved in that decision making process. And therefore, Lockheed Martin does not have a formal company position on engine selection or modernization. We implement that this U.S. government decision. And that’s what we’re doing now. So that is very clearly our role and responsibility. And anything outside of that is not an official company position.

Thanks. Got it.

Thank you. The next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Hi, good morning, everyone.

Morning.

Jay. We’ve talked about this dynamic where the outlays have lagged the authorization. In the second quarter, outlays finally grew a decent amount, your revenue then grew at the fastest rate in a while organically year-over-year. I know in the back half, you have tougher comps. But the updated guidance and the revenue would have to be down in the back half organically. So I guess I’m curious to hear you talk about is the outlay to authorization gap going to keep closing, is supply chain or whatever else was impacting that resolved? And are you building guidance assuming that continues to close? Or would that create upside if it were to play out that way?

We think no, the outlays will continue to increase it is just a function of us, we always have a back half is still higher than the first half. And that’s still the case here. When you look at our overall sales in the back half sequentially versus the first half, it’s about a billion dollars higher. And a lot of that is in aeronautics is going to be driving that. And so I would expect the outlays to continue to increase on an absolute basis over that period of time. The compares, it’s a function where our this year sales are more level loaded than they were last year. So we yes, we are having will have a step up and sales. But it won’t be as significant as it was a year later, or sorry, to last year. And part of that is if you recall last year, we had the $325 million in the second quarter that slipped into the third quarter in 2022. We also had a late award on the F-35 program that we weren’t anticipating in the fourth quarter. We were expecting that in the first quarter. And we’re able to convert pre contract inventory to sales immediately in the quarter. And so when you combine those that in of itself last year was about $500 million So when you normalize those for those things on much of a memorial level load here in 2023 versus 2022, it drives you to this. The compare just is going to be more difficult because on a year-over-year basis last year in the fourth quarter, partly for these reasons, we had 7% growth in the fourth quarter. So we won’t see that we will see the back half of the year organically declined, relative to the from a year-over-year perspective, but again, still putting us in a position to deliver growth a year earlier than we expected. It’s also just a function of our program timing. Yes, it’s still higher, but just we’re just not at the at the ramp up rate that we had in 2022.

Got it. And Jay pension on the cash flow statement, I think it’s been a bit since you’ve updated the beyond 2023 contribution and cash recovery. Could you give us updated numbers for that?

Sure. For cash for cash contributions, we’re right now we’re anticipating that we would have a required cash contribution in 2025, anywhere between $500 million to $1 billion. As I noted earlier in the call, our objective is to really offset that really through three things. More net income, cash base net income and contribution. We’re going to see a tailwind in terms of dissipation of the R&D capitalization headwinds that we’ve seen. And it will also be driving working capital performance to a higher productivity level. So we can offset that our goal over this period of time is to continue to deliver a low single digit free cash flow growth on an absolute basis. And that combined with our share repurchase program, should result in a mid-single digit free cash flow per share growth. So that’s our objective, not over the next few years, really over a longer period of time as well. But that’s really where we stand right now on pension contributions, and how we’re planning for it.

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

Thanks. Back in April, the DoD said the center fuselage production was the limiter to higher production on the F-35 above 156 per year. So with Rheinmetall, excuse me, now it’s signed up for fuselage is starting in 2025. Can you talk about the upside towards the end of the decade above the 156 level as Rheinmetall steps up to maybe 10% capacity?

Well, that’s one important element miles of being able to expand past 156. But there are a lot of other elements that would have to be essentially funded between our suppliers, ourselves and the U.S. government to build the rate in the entire supply chain above the 156 level that we’ve all agreed on so far with the government. So if the demand continues for the aircraft, which it seems to be re-joining [Ph] continuously, and the U.S. authorizes export of the aircraft to either more countries or more in more in more numbers to existing countries, there might be a business case for the government and industry to go beyond the 156. The Rheinmetall center fuselage expansion will definitely be constructive to that, let’s say.

And just a clarification, despite the lower deliveries, you haven’t slowed the production system on the F-35 on this TR3 issue, correct?

No, we haven’t. So the whole production system, especially the long lead time parts, are tracking through the supply chain, as if we’re, going on our ramp up of between, 100, mean 140s, and ultimately to 156. The deliveries will be that of their delays, if there are delays of aircraft will be fully completed aircraft on the ramp waiting for not just not even the software load. But the confirmation that the software load they have for TR3 passed all the flight test points. And that’s really what they’ll be caught waiting for. There won’t be a production lag. There’ll be just a delivery lag based on the completion of the software integration testing that has to be done in the air on not only on the aircraft, but among numerous aircraft flying together at the same time. That’s they’ll be waiting for.

Thank you.

Thank you. Our next question is from the line of Ken Herbert from RBC Capital Markets. Please go ahead.

Yes, hi, good morning, Jim and Jay. A two part question, if I could on the back hog. Is there any well, can you first help us understand how much of the backlog growth is maybe directly Ukraine related and is there any risk to this based on either sort of timing of the war or funding ultimately, going to allied partners and put in place for the obviously for the restocking. And then as part of the long-term agreement, you have in place on munitions and around a lot of this, how should we think about the potential margin positive margin impact from these longer term agreements?

Let me Ken go to the with the backlog, much of the backlog particularly here, what we saw in the second quarter, were 20%, only 23 contracting requirements. There was something there was also GMLRS, which, which also included some 24 requirements. But, as Jim mentioned, we’re working towards multiyear contracting, but are not yet under any multiyear contracting agreements yet. And so, what we put into the backlog is pretty high confidence, it’s going to convert to sales. And so we’re continue to do it. As Jim mentioned, having a dialogue with a customer to the dry multiyear requirements beyond that. As far as the marginal in terms of long-term agreements, we essentially, many cases will enter into agreements with our supply chain, with over that period of time of these requirements, so we’ll go back to back with our customer. So as we enter into agreements with our customer, that will cover multi years, we will also get into contracts with our suppliers for those same multi year. So any benefits that we get from that probably is going to drop through to our customer in favorable terms and pricing. So I wouldn’t expect there to be any type of margin upside from where we are today. So I would expect consistent margins from those. But again, those are pretty solid.

Great, thanks, Jay.

Thank you.

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

Good morning, everybody. Jay, Jim, give you an opportunity to maybe offer up some comments on the other segments. Jay you’ve talked a little bit about low single digits, expectation and MFC. I mean if you could walk us through the other segments as we move out into 2024 and beyond and kind of your baseline assumptions for those at this point. And then also, maybe talk a little bit about margins, you made some comments during the quarter about the 1LMX initiative that you have going on, particularly around supply chain, and consolidating your purchasing and maybe getting some better purchasing power and pricing, and just kind of how that's informing your outlook for margins in the future.

Okay, so just start with the growth rates and 24 and beyond. Just to make sure, I was clear, when I said low single digit, I meant for the entire company, total consolidated sales. MFC should be significantly better than that. And we would expect them to be our highest growth segment. And I’ll go from there. The others will see some growth from the remainders, but really, the driver will be MFC over the next few years, given this demand, incremental demand that we’ve seen. On 1LMX, on the margins, we’ve been, this is a initiative for us, which is very significant, it’s more than an ERP upgrade. It’s our engineering tools, product lifecycle tools, it’s our manufacturing execution system tools, it’s our customer relationship management tools, our HR system tools, and it’s intended to make or make us a more competitive company. Many of those benefits that we’re going to obtain, we will pass those through in pricing and our forward pricing rates to our customer. And so we won’t necessarily see some more our margin benefit from it. But it will make us more competitive to capture more business and stay in front of the industry and maintain our leadership. And so that’s the way we’re approaching 1LMX and a really more of a financial view of it.

So fair to say then, that margin outcomes will depend largely on mix going forward between development work and fixed.

Yes, that’s I would say that’s, that’s accurate. The mix will definitely be a factor in, in future margins.

Okay, thanks.

Thank you.

Thank you. Our next question is from David Strauss from Barclays. Please go ahead.

Thanks, good morning.

Good morning, David.

Once we get an update on your position on section 174, see if anything’s changed there, based on feedback you might have gotten from any of the tax authorities. And then the second one, Aerojet Lockheed L-3s potential acquisition there of Aerojet I think recently you’ve been out to with some comments around just reviewing whether LHX has been able to or where they are in terms of being able to satisfy your concerns around that deal. Thanks.

Sure. I’ll take the sections 174 question. In over the past, I’d say probably six months, the IRS has acknowledged that this is an issue they need to provide guidance to, we’re hopeful that we’ll see some guidance by the end of the year from them related to our position, there’s been no change in our position there. And so, what we eagerly await any type of guidance that they may have and still feel confident in the position that we’ve taken. And I’ve laid out in the past of why we’ve taken our position that we have today. There has been some legislation proposed that could defer the implementation of section 174 to 2026, it would be retroactive to 2022. So we’ve we’re optimistic, of course, we believe that it should be repealed. But at least a deferral would be a good start. And so we'll monitor that legislation. Obviously, we’re supportive of that. And we’ll see how it works through Congress. And then when it comes to Aerojet Rocketdyne, we have two interests and only two. And those are the reliable access to propulsion, especially solid rocket motors is critical of critical importance to the entire aerospace and defense industry. And so the two sided benefit that we need to preserve of Aerojet Rocketdyne’s current structure is that it’s a merchant supplier of propulsion to the industry. And that means it treats all of the -- I’ll call them prime contractors for the end products, the OEMs equally. And that’s what we feel we need to preserve, even if AJRD goes into the ownership hands of another company. Secondly, the performance of AJRD has been improving, but it needs to get significantly better nonetheless. And so whether it’s on its own or part of another company, it’s really important that resources be applied to AJRD’s operations, so that it becomes a more capable supplier for on time, deliveries, quality, etcetera. So those are our two interests, maintaining the merchant supplier status, and also having higher performance of the operations of that company. So we have not received any commitments from L3Harris at this time, that would assure us that they are going to keep AJRD as a merchant supplier. And that’s the one thing we really are looking for.

Right, thank you. That’s very helpful.

You’re welcome.

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

Yes, hey, good morning guys. Maybe a broader big picture question here. As we as we look out to the fiscal 2024 budget, and what so what was in fiscal 2023? And the trajectory, maybe even, fiscal 2025. And 2024, it looks like there's going to be maybe 6 billion or so of spending on classified aircraft programs, everything from NGAD, F/A-XX. Now there’s been chatter about replacing U-2 with the hypersonic platform. I know you’re limited in what you can say, but can you just give us a feel for what kind of what that means for Lockheed Martin? How you think about it? And as outsiders kind of model this and think about it, how would you guide us to think about it?

Well, I’d start with there Ron is that, we’re got and our experiencing significant growth in our classified portfolio already. It’s a bright spot for the company. I think recently, we’ve been when we aggregate all of our classified programs together sort of a 7% growth rate. So it is a place where because of Skunk Works, our space operations, some segments of RMS and MSC even where we have significant talent and capability to work in those kinds of really advanced spaces. I’d basically said in the prepared remarks, there are areas of this company where we are endeavoring to move into areas beyond known science to address what our customers kind of challenges are that they are facing. And so we have the capability to take advantage of a larger classified program growth rate on the part of government spending if that’s what happens. So we’re in good shape to do that. There are missions that you need to differentiate though when it comes to aircraft, right. There’s the reconnaissance and surveillance mission, right, which can a lot of it can be done with unmanned system. And that’s one of the strengths of Skunk Works for example. So that mission we have a real strength in unmanned surveillance ISR systems are called. Then you’ve got the air superiority type of aircraft, right? So you can think about F-15, for example, F-22. NGAD is the next generation air dominance aircraft that is classified. It’s the Air Force recently said that there is competition. Now beginning for that are in train for that air dominance aircraft that it was very old aircraft. And then there’s the kind of all-purpose strike aircraft, right, so that's F-16, F-35. Those kind of airplanes, again, where we have the advantage in F-35 is volume, right. We’ve got the committed volume for the strike mission. And basically all three variants, right, so it’s Air Force, which is a land base, long runway solution, it’s for the Marines, which is the B model, which is a land base, short runway, so a solution [Indiscernible] take-off and landing or carrier take-off or landing solution. And then you’ve got the C-model, which is the pure Navy, big carrier, tail hook type of landing aircraft. So the capacity for the strike mission, can and will be pursued through the F-35 and large part for the near future. So those are the ways to think about aircraft. So the classified programs are going to be largely in air superiority and ISR for the most part, and then there’s the bomber mission, which is largely going to be carried out by the B-21 Going forward. So hopefully, that’s a bit helpful to your question there.

And just running. Overall, the over the entire portfolio, the classified business for us is around $8 billion. And if you recall, we talked about it being one of the four pillars of our growth projection all the way through 2027. And our highest probably will be our programs of record, given what we’ve seen, particularly with MFC. But that will be our second highest grow or anywhere between mid to high single digit growth through 2027.

Got it? All right. Thank you.

You’re welcome.

And the next question comes from the line of Pete Skibitski from Alembic Global Advisors. Please go ahead.

Yes, good morning. Can you can you just talk about labor availability and cost, just incrementally from last quarter. Has hiring become easier, just in terms of hiring people? And then also wage rates? Have you seen improvement there? Thanks.

Yes, so we’ve actually, over the past six months, our labor availability has improved significantly. We have closed a lot of our key critical skill gaps over this period of time. And that partly has enabled the sales growth, the incremental sales growth that we’ve seen here in our change outlook, because part of that is just our own internal labor. And so we’re in a much better position than we were even six months ago. We’ve seen some lower attrition rates, as well as better hiring rates as well. And so we’re fairly confident that that will stick and that also bodes well for the rest of the industry, particularly supply chain. So we’re encouraged by that.

Okay, that’s great. Appreciate the color.

Thank you. Our next question is from Doug Harned from Bernstein. Please go ahead.

Good morning. Thank you. If I want to go back to missiles and fire control in Ukraine for a minute, because if we think back to the early days of the Russia, Ukraine conflict, there were things like Javelin for you there was of course, stingers, everything looks like it would be kind of a short term need, potentially building out some capacity for replenishment of weapons. And so now we are more than a year later into this. And you’ve gotten some very big awards in this last quarter, that appear to be related to Ukraine, either directly or other European needs. We’re seeing NATO spending go up. Can you talk about how you view the opportunity and missiles and fire control for revenue and, and backlog? I had, depending on how things may play out in Ukraine, from if we saw, the conflict come to a resolution or if we had increasing NATO involvement, how do you think about that in your planning?

So I would say qualitatively and maybe turn it over to Jay for some quantification around it is that the tragedy of Ukraine has unveiled some issues and weaknesses for our national defense enterprise more broadly, right. And so I’m not convinced Doug that the duration of the Ukraine war which we hope is very short, will affect our long-term prospects for MFC. But the lessons from this conflict will, will remain for many years. And that’s what I think is most important. And the lessons are that great power conflict, first and foremost, unfortunately, is not gone from the world at this point in history. Russia’s decision to invoke a major power land war on the European continent was pretty risky, and demonstrates that they may take other risks in the future to mate, sustain its regime or to expand its power, whatever the case, and the motivation may be. So NATO then, and when you talk to the defense ministers of countries like Poland and Lithuania, they are taking this extremely seriously, not for the short term, but for the long term. And so they are expanding their defense budgets not because of what’s going on necessarily in the on the ground in Ukraine right now. It’s for the elevated risks that they perceive to their own countries for some foreseeable future. Sadly, when it comes to the United States, the lesson, among others of this situation in Ukraine, unfortunately, is the expenditure rates of munitions is much higher than most of our existing war gaming models would imply. And therefore, there’s a replenishment need for what’s been used and what’s been shipped to Ukraine. But beyond that, is the planning and hopefully, deterrence of future conflicts where the U.S. and its allies are going to need to, first of all demonstrate to a potential adversary that they have the stockpiles, to defend themselves for a long period of time if need be. And that the rates of munitions usage will be supportable from their stockpiles and from their industry. So we think this is a longer term, essentially, sea change in national defense strategy for the U.S. and for our Western allies, including Japan and the Philippines and others. So we hope the conflict in Ukraine ends quickly. But the lessons and the future demand for these kinds of products is going to stay elevated for a very long time, we think.

And that appears consistent with the nature of these recent orders you’ve gotten that are large quantities extend over work over a longer period of time than we might have thought.

Right.

This is Maria. I think we’ve come to the top of the hour here. So I’ll turn it back to Jim for some final thoughts.

Just a couple of things. I wanted to make sure everybody understands that we’re up to what I now think is a great start after three years of launching our 21st century security, concept and strategy. It was really originally around include proving and increasing deterrence to conflict by accelerating the adoption of digital technologies like 5G, distributed cloud, AI, international defense. And I think we’re making huge progress on that. We’ve got a great set of partnerships with tech companies large and small to help us do that, and the customer starting to adopt it. And as I talked about the repair to prepared remarks, remarks, we’re showing the major exercises, and we’re getting some actual revenue and Program Awards around that. But we’re going to expand that concept into two arenas based on this experiences we’ve had in the last two or three years. The first one is to build and strengthen the defense production supply chain based on some of the things you just talked about. We’re going to have to have a more resilient defense production system and one that can scale quickly if we have to. And then the other dimension is to make international production and sustainment operations a part of at least Lockheed Martin’s future. And you see, you hear us talk about investments in Australia, the U.K., potentially, Poland, Germany is new in this for us. So we’re going to continue to expand internationally to make sure we have resilient supply chain, and we have sustainment operations where our customers can use them to deter future conflict around the world. So those are some of the things I think is really important for you all to understand where we’re headed. But before concluding the call, I really would like to thank all my Lockheed Martin teammates, for their many important contributions to strengthening our national security and increasing deterrence. And the strong financial and operational performance that we’ve been experiencing in this quarter was a result of their dedication, hard work and look, whether it’s on the factory floor or classified engineering facility or customer flight line our people showed up every day during the pandemic to do the job and they continue to show up every day to do the job to provide for national security. So I want to thank them and also thank you all for joining us on our call today. We look forward to speaking with you on our next call in October. Lois, that concludes the call.

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