Lockheed Martin Corporation (NYSE:LMT) Third Quarter 2022 Results Conference Call October 18, 2022 11:00 AMm. ET
Participating companies
Greg Gardner – Vice President, RI
Jim Taiclet – President, President and Chief Executive Officer
Jay Malave – Chief Financial Officer
Conference Call Participants
Rob Stallard – Vertical Search
Ron Epstein – Bank of America
Matt Akers-Wells Fargo
Pete Skibitski – Alambic Global Advisors
Sheila Kahyaoglu – Jefferies
Rob Spingarn – Melius Research
Cai von Rumohr – Cowen
Seth Seifman – JP Morgan
Kristine Liwag – Morgan Stanley
Peter Arment – Baird
George Shapiro – Shapiro Research
Rich Safran – Port Research Partners
Operator
Good morning and welcome to Lockheed Martin’s third quarter 2022 earnings convention call. Today’s call is recorded.
At this time, for opening remarks and presentations, I would like to turn to Mr. Greg Gardner, Vice President of Investor Relations. Please continue, sir.
Greg Gardner
Thank you John and good morning. Welcome to our third quarter 2022 earnings convention call. With me are Jim Taiclet, our president and CEO; Jay Malave, our Chief Financial Officer; and Maria Ricciardone Lee, our new Vice President of Investor Relations.
Statements made in today’s appeal that are not old facts are considered forward-looking statements made pursuant to the safe harbor provisions of the federal securities law. Actual effects may differ materially from those projected in the forward-looking statements. Please refer to today’s press release statement and our filings with the SEC for a description of some of the points that may also cause actual effects to differ materially from those of forward-looking statements. We have posted graphics on our online page today that we plan to deal with the call to supplement our comments. These charts also come with data on non-GAAP measures that can be used on today’s call.
Go to www. lockheedmartin. com and click on the Investor Relations link to view and track the charts.
With that, I’d like to pass the message on to Jim.
Jim Taiclet
Good morning everyone, and thank you for joining us in our call on the effects of the third quarter of 2022 as we review our quarterly effects, outlook for 2022, and initial expectations for 2023. But before I begin, I would like to welcome Mary. , which I am very happy to tell all of you, started as the new Vice President of Investor Relations. I would also like to thank Greg, who announced his intention to retire at the end of the year for his more than 37 years of committed service at Lockheed Martin, adding five glorious years as Vice President of Investor Relations. It’s been exciting to work with you, Greg, and we wish you a perfect retirement.
Greg Gardner
Thanks Jim
Jim Taiclet
I would also like to point out that we are still waiting for the variety of the U. S. military. The U. S. government for its long-range attack aircraft competition, FLRAA, as it’s called. We will modernize the Army’s helicopter fleet and provide a long-term expansion opportunity for the franchise. We are confident that DEFIANT X is the transformative aircraft that the U. S. military has put into the world. The U. S. will want to accomplish its complex missions now and in the future, and we look forward to the military’s announcement.
Lockheed Martin had a solid economic quarter with a 3% increase in sales compared to the third quarter of last year, as well as strong margins consistent with earnings and earnings consistent with stocks. Our loose money was exceptional as we generated $2. 7 billion in the quarter. And our order book increased by nearly $5 billion, ending at $140 billion. We remain on track to meet the full-year outlook for all of our monetary measures we discussed last quarter.
In a few minutes, Jay will provide a detailed review of our quarterly results, updated forecasts for 2022 and trend information. But before I do, I’ll provide a framework for our perspective and talk about our plans to offer prices to consumers and shareholders. In the coming years.
We continue to anticipate long-term expansion, but with the residual effects of the pandemic and demanding supply chain situations continuing, we now expect to return to expansion in 2024, with 2023 sales roughly equivalent to our 2022 outlook. We are self-employed – secure in our 4 pillars to drive expansion in 2024 and beyond. Importantly, we expect to generate solid expansion and lose money consistent with constant percentage in 2023 and beyond through a combination of company-wide charge discounts, we advance capital control and expansion consistent with acquisition program percentage.
Our Board of Directors approved increasing our percentage of buyback authority to $14 billion. You’ll see from Jay’s charts that we’re doubling our buyback percentage outlook for this year, expanding our outlook to $4 billion for an overall expectation of $8 billion in 2022. We also announced a dividend accrual of 7% this quarter. Overall, we are on track to provide approximately $11 billion to shareholders by 2022. We are also reinforcing our commitment to driving long-term expansion through strong independent research and investment of progress and capital expenditures with a projected total of nearly $4 billion by 2023.
These investments will help our consumers and realize our vision of twenty-first century security to drive cutting-edge virtual advertising technologies and defense for our country and partners. A key driving force of this strategy is our new One LM remodel, or as you call it One LMX, [ph], a seven-year, multibillion-dollar enterprise-wide program to reshape our end-to-end business processes and systems. One LMX will create a model-driven business with a virtual thread fully incorporated into the entire design, structure and sustainable product lifecycle. As part of our ongoing corporate governance technique, we are conducting an internal review to identify potential synergies between our 4 lines of business, new fee relief opportunities and an overall portfolio review to expand operational efficiencies in anticipation of long-term growth.
We are sure to have a long-term expansion, as domestic and foreign orders require a wide diversity of our products and we remain strong. We will continue to actively reinvest capital into our business to meet our clients’ needs and drive biological expansion, and use our disciplined and dynamic capital allocation procedure and strong balance sheet to generate attractive overall returns for shareholders.
Below, I’d like to highlight some key accomplishments in each of our lines of business, starting with an update to our F-35 program. Last month, the Swiss government signed a letter of offer and acceptance for the acquisition of 36 F-35As. This step complements the government-to-government procurement procedure that was first announced in June 2021 when the Swiss Federal Council shared its F-35 variety for its long-endurance fighter. This signature officially makes Switzerland the fifteenth visitor to the F-35.
Additionally, in August, we obtained contract approval from the Office of Joint Programs, which allowed us to position a Lot 15 order of more than $7. 5 billion and revenue and earnings for the quarter and third quarter.
Our space team celebrated the successful launch and deployment of the GEO-6 Space Infrared System satellite, the latest spacecraft in the SBIRS constellation. Intelligence and consciousness collection system.
We will also continue and advance this vital project through our Next Generation Persistent Airborne Infrared Program or Next Generation OPIR, which will provide the country with even more complex and resilient missile precaution capabilities. At Rotary and Mission Systems, Sikorsky has secured an order for 12 SEAHAWK helicopters from the Australian Department of Defence. Over the past 40 years, we have delivered more than 1000 SEAHAWKs in the U. S. UU and foreign customers, with more than 50 pending.
And in Missiles and Fire Control, the State Department approved a possible sale to the United Arab Emirates of two THAAD systems, adding 96 interceptors. Lately, the UAE operates two THAAD batteries, and this opportunity would particularly strengthen its air and missile defense functions and, once completed, may be worth more than $2. 2 billion.
On the budget front, either house of Congress has complex appropriations in the Defense Department’s budgets for fiscal year 2023. We have noticed strong bipartisanship for greater investment in defense in the congressional appropriations and appropriations committees. The final bill approving those budgets has yet to pass, and the federal government is lately implementing an ongoing short-term fix for FY 23, restricting Defense Department investment to pre-fiscal year 2022 levels.
As a component of the ongoing resolution, Congress approved more spending for efforts in Ukraine to defend their country. The CR added $3 billion to investment in the Ukraine Security Assistance Initiatives, a program to supply Ukraine with equipment, weapons and military, bringing the total amount allocated to this effort to $9 billion.
In addition, the ongoing solution has earmarked $2 billion to fill U. S. stockpiles of aircraft shipped to Ukraine and to increase production of critical munitions, with an investment for a presidential fiscal authority now rising to more than $14 billion since the beginning of the year. .
The foreign network has also increased its global security, with nations around the world announcing a planned five-year investment in the defense budget of around $60 billion in total.
We continue to have discussions with consumers to expand manufacturing of various products and have submitted offers for review. While many of those contract moves are still in their infancy and would possibly take time to fully implement, we use our flagship systems and twenty-first century security technologies. Position ourselves well to face the demanding situations that arise through a resurgence of the world competition of wonderful strength.
Regarding our twenty-first century security strategy, I would like to highlight two examples of Lockheed Martin’s leadership in deterrence technologies and how our open architecture can 5G. MIL be used to function and perform effective cross-domain joint operations.
During the third trimester, Lockheed Martin and AT
Also this quarter, Lockheed Martin and Verizon flew 5G-enabled drones to securely capture and move high-speed, real-time intelligence, surveillance and reconnaissance information from aircraft and flights to geolocate simulated enemy positions. This demonstration demonstrated the functions of our hybrid base station to link advertising and army technologies, offering our military enhanced deterrence features and additional project enablement to the actual battlefield.
With that, I’ll pass the call on to Jay and check in later to answer his questions.
Jay Malavé
Thank you Jim and good morning everyone.
Today, I will provide our consolidated results, industry details, provide an update to our outlook for 2022 and some mind for 2023 and beyond. As I highlight our results, stick to the internet charts we published with our earnings report today. . Let’s start with Chart 3 and a review of our third-quarter consolidated monetary statements.
Lockheed Martin delivered strong effects for the quarter. For starters, we generated sequential sales expansion of 7% to $16. 6 billion, as expected. $6. 71, reflecting strong underlying functionality that absorbed $0. 16 of headwinds. We also increased the order book with an order-to-turnover ratio of 1. 3, thanks to the action of the F-35 Lot 15 production contract. Free cash flow was strong in the quarter at $2. 7 billion, further enabling the execution of our dynamic and disciplined money distribution strategy and a return of more than $2 billion through percentage-consistent purchases and dividends.
With respect to consolidated sales and segment operating profit effects in Figure 4. Total sales increased 3% compared to Q3 2021 with expansion in 3 of our 4 business segments. Segment operating profit increased as higher volume profits and equity profits more than offset smaller increases than last year.
Move to profits consistent with the percentage consistent in Figure 5. On a reported basis, profits consistent with consistent percentage greater than $4. 50. Including last year’s pension carry-over transaction and market value accounting, EPS higher 4%, primarily reflecting the benefits of with a source of income consistent with a source of income and less consistent with percentages. In short, forged effects that position us well to meet our commitments throughout the year.
As for money in Chart 6, we delivered our most productive over-the-counter quarter since the start of the year, with strong revenue generating $2. 7 billion in loose money this quarter while maintaining accelerated bills of $1. 1 billion to suppliers. Shareholder money deployment continues to outpace loose money so far this year, with 121% of loose money deployed in the form of dividends and consistent with percentage buybacks. Announced this quarter, we also increased our dividend by 7%, and now pay an annualized dividend of $12 consistent with the consistent percentage.
Let’s move on to segment effects and start with aeronautics in Figure 7. Third quarter sales increased 8% year-over-year, driven by increased F-35 production volume, adding to the popularity of $325 million in sales that were sustained from the Lot 15 contract action-related quarter. The accumulation in volume of our classified systems in Skunk Works also contributed to the growth. The operating source of revenue increased 6%, primarily due to higher sales volume on the F-35, partially offset through declining margins on classified systems.
Let’s turn to missiles and fire on page 8. Sales increased by 2%, mainly due to the increase in the volume of PAC-3 interceptors. The segment’s operating revenue source decreased 8% as declining earnings shifted this quarter more than offsetting the advantages of higher volumes.
At Rotary and Mission Systems on page 9, sales declined 5% year-over-year, primarily due to the decline in Black Hawk production volume at Sikorsky. Black Falcon Program.
Moving on to chart 10 in our space business segment. Sales increased 7%, driven primarily by the continued growth of the next-generation interceptor program. The operating revenue source increased 14% as a result of higher volumes as well as fair earnings at United Launch Alliance.
It is ok. Let’s move on to our updated outlook for 2022 on page 11. We have our sales direction from the last quarter, consistent earnings with constant percentage and loose cash flow. With this morning’s announcement of a $14 billion buyback authorization approved by our Board of Directors, we have increased our percentage-consistent repurchase guidance to approximately $8 billion for the year, an accumulation of $4 billion over our past expectations, reflecting our confidence in the long-term expansion outlook and price amplification consistent with creation consistent with percentage.
We expect EPS’s benefit from our additional buybacks this year to offset headwinds from the third-quarter value valuation and thus our existing EPS direction of $21. 55 for the year. Also, while our consolidated outlook hasn’t changed, we’ve had some buy and sell functions across all lines of business, and you can locate those main points in our order book charts.
In Figure 12, we present our initial framework of expectations for 2023. As we already mentioned, we remain confident in sustained expansion, driven through 4 pillars: recorded programs, classified programs, hypersonic and new awards. This is supported through portfolio accumulation through the 3rd quarter and the continuation of the expected expansion until the end of the year.
However, we expect solid sales in 2023, basically due to the conversion of overdue sales in our record order book programs, as the expected COVID recovery and supply chain shortages will be slower than expected.
In our classified businesses, we expect a year of expansion in 2023. This expansion, along with hurdles in our contract mix, will be accompanied by approximately 20 to 30 basic strain issues in the overall operating margin of the business segment, all related to our 2022 outlook.
We are convinced that through cost-cutting actions and trade synergy, we will be able to help restrain this downward tension. Most importantly, thanks to management control and competitive current capital stocks, our loose money expectations for 2023 remain unchanged despite the pressure on earnings. and margins.
Looking ahead, we are confident of the Company’s expansion and pricing prospects. Through our competitive percentage buyback plan, we expect to buy back approximately 10% of our notable percentages in the coming years. And along with sustained loose cash flow, we expect to deliver an exceptional percentage price over the long term.
It is ok. So, let’s summarize with the graph 13. La operational and monetary functionality of our business segment in the third quarter was strong, and we are broadening our shareholder return outlook. We continue to invest in cutting-edge solutions, adding advertising technologies that make our clients’ vital missions and twenty-first century security. We remain focused on strong money generation and, combined with our strong balance sheet and discipline, and competitive capital deployment strategy, enable us to deliver long-term shareholder value.
Before moving on to the question and answer session, I would also like to thank Greg Gardner for his 37 years of committed service and contributions to society. He has been an exceptional spouse and resource for all that he has supported. We wish him the best in the next phase. of his life. Greg will stay with us until the end of the year to transition to Maria Ricciardone Lee. Maria brings her investor relations experience to several companies, including UTX, where we have worked together. She is an excellent CFO and wife of ideas. , and I’m thrilled that she’s signing up for the team.
With that, John, let’s open the Q&A section.
Q&A session
Operator
[Operator Instructions] And first, we have Rob Stallard’s line with Vertical Research. Continue.
Rob Stallard
Thank you so much. Also, I’d like to wish Greg all the most productive, and welcome you, Maria, to you two again. It will happen next quarter. But he argued that classified ads will pile up but, in general, will be flat. So what will happen next year and what is causing it?
Jay Malavé
Yes. We have some program transitions, Rob. Maybe overlook some of the commercial spaces to give it some color there. When you look at aero next year, we’ll be expecting that it’s probably in diversity to be down, from solid to slightly down. And that’s because of the drop in the F-35’s production volume. We expect this to be done, even if sales or deliveries are sometimes strong. before that with long-term purchases in 2021 and 2022. Therefore, it will be an era of recovery for the aerospace industry there. So, it will be the biggest engine there, but hopefully that will be minimized when we enter 2024.
In MFC, we have some, just a little bit of synchronization, so program synchronization, especially in our sensor business, we expect to be solid or top-down as well. And then we expect some expansion: Low single-digit expansion in RMS and Space. And RMS will only be driven through new systems. And in Space, we have: our national security activity has declined, but we have other systems that are expanding there. So, that’s what motivates him regularly, I would say, through the activity box and the segment. one and up in others, and our balance sheet will be flat.
Operator
And next one is from Ron Epstein of Bank of America. Continue.
Ron Epstein
Jim, can you explain why you think the expansion will resume in 2024?I mean, what underlies this? And possibly one of the things I scratched my head at is that you have, what, the 15th visitor to the F-35. It looks like there will possibly be more in the next year or so. So how do we think about this resumption of expansion?And why do F-35 grades have a higher production rate than they do today?And can they also pass higher?
Jim Taiclet
Of course. So the two most important pieces of our four pillars of expansion are systems of record, and I’ll talk about some of them in a moment, and the classified ads that we have. . And the biggest morsel of all: again, recording systems will go into 3 or four very identifiable domains. One is the sustaining of the F-35s, is it rare?So with more planes in the air, there will be more overhaul, repair, spare portion support, that kind of activity, going on. And this will continue for several years. F-35 maintenance is an expansion domain.
In MFC, PAC-3 reappears. There is interest in various parts of the world, in the Middle East, Europe and Asia now, for PAC-3. Therefore, the functions of this air defense formula will be launched for the company in the coming years, adding 2024.
At the same time, in the same way, the CH-53K will particularly increase the production rate, and there is increased foreign interest there. This aircraft may have a lift capacity that far exceeds any other that has been built in history. And I think it’s going to get even more popular over time.
And the fourth of many recorded formulas that will be expanded is the fleet ballistic missile that the U. S. Navy has been able to expand to the U. S. Navy. The U. S. will necessarily renew the Trident fleet’s ballistic missile formula for the time being. And it’s a Lockheed Martin franchise that will continue to grow, starting in 2024.
On the classified ads side, 2023 is useful, but it’s not really the ramp that’s coming in 2024. So, between registered systems and classified ads, you’ll get the most out of that growth. On the F-35, the U. S. government is in charge of the F-35. The U. S. government wants to find out what its macro-level budget priorities are in the future. One of them was nuclear deterrence. And so, between the bomber program, the recapitalization of land-based missiles, and the ballistic missile fleet that I just mentioned, there will be a significant portion of the defense budget spent proportionately on nuclear revitalization. But also the traditional threats have gotten worse instead of increasing as we look ahead to the next 2 or 3, four years, and that will be a fiscal challenge for the U. S. government. U. S.
We have recommended, and I believe we would support, a solid production rate of 156 aircraft to restart until 2024, when we can return to it depending on the COVID recovery for our supply chain. And I think it’s bearable. And it takes about 80 U. S. aircraft to do that a year, with about 75 more coming from abroad.
We see the foreign call for, and it will depend on the U. S. government. The U. S. Department of Commerce checks that number 80 between the congressional committee’s authorization and appropriation processes, as well as the president’s budgets going forward. So, we hope so. We expect that because that’s the need, and that’s where we think the F-35 program will go. But again, in FY23, we may not have that full increase yet.
Jay Malavé
Just let me, maybe go up a little too, Ron. Just to increase, some of the things we see in 2023, we have headwinds decreasing as we enter 2024. Jim talked a little bit about the chain of origin. This has basically affected our registration programs. And so, those increase until 2024.
We also have some program transitions in 2023 that will also allow for a less difficult comparison as we enter 2024. So, for example, I just talked about the F-35 whose production will decrease next year. This will normalize as we enter 2024, allowing us to grow, as Jim said. We will also see an accelerated expansion of the F-16 program. As you may recall, this program has shifted to the right, but in 2024, we expect it to accelerate.
In space, as Jim mentioned, FBM, there are other systems like NGI that will continue to grow. So, we have things where we’re going down: in 2023 in the SBIRS program and even things like next-generation GEO or OPIR, again. , headwinds will diminish as we get to 2024.
Similarly, at MFC, Jim spoke about the PAC-3 program. We will also see continued expansion in classified systems. And then in RMS, as Jim said, also in CH-53K, there are also other radar systems, as well as Joint All Domain. write systems like Defense of Guam that will lead to some expansion in the coming years.
So, all those spaces and systems are the ones where we have pretty transparent visibility. They clearly assume that there is relief for an improvement in the chain of origin. There are 15 months left before the improvement we plan to happen.
Operator
The following is from Matt Akers of Wells Fargo.
Matt Akers
Greg, smart luck and smart paintings with you. I wanted to ask you about Future Vertical Lift, FLRAA, what do you hear from your consumers there about delays?And when do you think this contract may be in force?
Jim Taiclet
Matt, that’s Jim. The only thing we can say about the timing of the FLRAA resolution is what the U. S. government has done. The U. S. is posting. So we have nothing more to add to that. It’s your schedule and schedule, and we think we’ve made a wonderful offer. And also, having been around some of those helicopter pilots when I was in the Air Force, they scared me several times when I flew with them.
They want to be low. They want to be maneuverable under the tree line. And I saw the FARA and FLRAA fly. They can do it. There is a video you can watch on YouTube that shows you how amazing this generation of helicopters is. And it also allows you to reach a speed of 230 to 250 knots whenever you want. Either worlds if you’re in the helicopter business as an aviator. You get an intelligent forward speed faster than ever for a classically designed helicopter thanks to our counter-rotating rotors. And it also gives you even greater maneuverability than peak classic helicopters may have provided.
So, we think it’s the most productive solution for the frontline military or some other service pilot, and it’s up to the U. S. government. U. S. See where they come from. But the time is theirs, and we cannot comment. therein.
Operator
We will then move on to Pete Skibitski with Alembic Global Advisors.
Pete Skibitski
Greg, enjoy your retirement. Jim had a consultation on missiles and fire control. I have the impression that in recent years you have had: production systems have been reduced, but you discussed this resurgence of PAC-3. And in the U. S. , the guys were pretty positive about a diversity of production systems, HIMARS, for example, is one of them because of what we saw in the documents. But if we think halfway through Missiles and Fire Control with this kind of resurgence of production systems, is there a margin of opportunity?Now that you see it, when perhaps production systems are starting to roll back from some of the hypersonic progression projects?
Jim Taiclet
So, Pete, I would say yes, legacy but still incredibly effective MFC systems have a pretty much higher margin because of the volume and learning curve that’s already slowing. Therefore, it will be a positive margin for us, if those volumes increase further. We are ahead of the curve. So, for HIMARS, GMLRS, Javelin, again, the products you see in the news those days and a few others as well. About 6 or 7 months ago, when we saw what was starting to happen in Eastern Europe, I went on a layover to some of the senior Pentagon officials and essentially brought them a letter and said, let’s start spending capacity on some of those systems, adding the ones you just mentioned. And now we have done a lot. So, for example, at HIMARS in particular, we already met with our long supply chain to plan to increase production on 96 of those games in a manner consistent with the year.
We supplemented $65 million in pre-contract financing to shorten production time. Without a contract or any other memorandum or anything from the government. We went ahead and did it because we expected it to happen. So those portions are already manufactured now.
The third thing we’ve done is decide where we can open some other fashion production facility so we can produce the products and prepare them early, and we’re educating our professional workforce on a bunch of product lines. So as orders increase and some of those products move in the next few years, we’ll have other people moving fungibly between them.
And then, the last thing we passed on to this One LMX, we first put the most productive and latest production generation into some of those product lines so that when the ramp comes, we can pivot on it faster. Some of the things we’ve done to capture some of the volume we plan to get. And we hope to get it, either from the U. S. or from the U. S. The U. S. Department of Commerce to fill stocks, as I mentioned earlier in the ready comments, and also significant interest being shown. Now you have to go ahead and get a contract, which, as we discussed on the last call, can take a few years to do all that, especially for an FMS contract. But we know it is: the call is there, and we’ve talked to senior government officials in countries who know it’s vital to them.
Jay Malavé
Alone. . . Pete, just to meet that. We expect upsell on some of the systems discussed through Jim. Most likely, this will happen in, probably from the 2020 era, given the nature of the long cycle we are in despite the fact that we have made complex financing.
The other thing I also want to mention is that where we see tension in margins next year, that’s largely due to MFC. So while we’re going to see a combination of gaining advantages related to those higher-margin systems, it’s most likely going to be more in 2024 and beyond. 2023, we will see a drop from its point this year in 2022. And the way to think about it is that in the third quarter, MFC did about 13. 5. What is implied in our consultant for the fourth quarter is the high 13. They’re going to be in that average diversity of 13, in that approximate diversity, by 2023 given some of those new increases in the systems we’ve invested in. So, we’re going to see a little bit of tension there through the company, through MFC. But then again, we’re going to see some of those combined advantages come back to us at 24 and beyond.
Operator
Then we will move on to Sheila Kahyaoglu with Jefferies. Please continue.
Sheila Kahyaoglu
Good luck, Greg. Thank you. And hello, Jim and Jay. Jay, maybe one for you, I need to ask you about the accrual in the percentage buyback authorization in dividend accumulation. Do you visualize deployment as a percentage of loose money in the future?And what were some of the assumptions made around the R tax credit?
Jay Malavé
It is ok. There are many of them. So, maybe let me start with percentage buybacks. As I discussed, Jim and I discussed it in our ready comments, we are confident in the company’s long-term customers. We saw an opportunity to magnify price creation to look at in the long run. And we haven’t seen a better time than now to start here in the fourth quarter.
The long-term profile is $4 billion here in the fourth quarter, $4 billion in 2023, $4 billion in 2024 and maybe $2 billion in 2025 as a starting point. So, that’s the profile we deserve to look forward to. On the debt side, we will finance this fourth-quarter percentage buyback program with debt issuance. Therefore, it will be around $4 billion. This will increase our interest expense next year. But again, it’s all cumulative. And so, let’s look at that.
Again, our EBITDA-based leverage ratio will put us below 1. 5 times or less. Therefore, it is still very bearable and also very attractive. With respect to the fiscal capitalization of the R
And as you know, we think it’s wise policy and we think there’s bipartisanship to cut all the disincentives that inspire innovation. So, it’s company policy. This is something we strongly advocate and will continue to defend.
Jim Taiclet
Sheila, in terms of small and medium-sized businesses marrying Lockheed Martin, we are in a position to do that. I can describe 3 tactics in which we are now in a position to marry and partner with smaller industrial, advertising or defense companies.
The first is that we’ve had LM Ventures for years, literally as an internal venture capital space for Lockheed Martin. It was originally funded at $200 million. The investments that have been made under this authority are now worth approximately $400 million. So, although we are lowering prices a bit, we have had a hundred percent recovery of that initial investment. Seeing good fortune when I joined the LM Corporate Enterprise Program A few years ago, we doubled the authorization. So, we’re looking at where to invest an additional $200 million in startups.
On the next level, I motivated the team and Jay helped us create what we can now call Lockheed Martin Evolve or LM Evolve, E-V-O-L-V-E. And what it’s about doing is going over and saying, how do we do joint ventures or business?partnerships with medium-sized companies, co-investing, etc. , either again, on the advertising side or on the grassroots side of defense advertising or on the local industry so that we can remove that from our tariff design and manage and fund in another, more creative way?
We’re on the medium-sized page, the area with LM Evolve, which is literally taking off, I’ll say. But now we have the framework, the design, and the ability to have interaction at that point of investment.
And then, third, all that’s been done over the years is to win small and medium-sized businesses with critical supply chain technologies or parts that are available. So we will continue to do so as well. So the three paths we have in position are the ones that work: LM Ventures, LM Evolve and the acquisition procedure to bring those kinds of features, or a partnership with Lockheed Martin.
Operator
And then we’ll move on to Rob Spingarn with Melius Research.
Rob Spingarn
Good luck, Greg. Jim, I wanted to ask you a high-level question, especially because of a pilot. The Air Force is facing a pilot shortage and the Navy plans to have at least 60% of the carrier’s air wings unmanned. And so, since Lockheed is so smart on manned aircraft, I wanted to ask you about drones and their positioning there and how it fits into the long-term plans of the Air Force and Navy.
Jim Taiclet
So, Rob, autonomy is one of the 14 critical technologies that we believe are imperative in the twenty-first century. And to everyone’s credit in the company, we are making an investment in Skunk Works and other parts of the business, added Sikorsky, who has been self-sufficient for more than 15 years, right?It’s not something simple to do or something simple to approve or regulate. But Lockheed Martin and Sikorsky, when it was part of UTC and afterward, had been operating autonomously for a while.
So, on the aeronautical side, I can’t say much because it’s quite classified. But we are far from the path of manned and unmanned teams. And on the January call, we hope we’ve taken some vital steps, which I can in more detail, however, we need testing done before we communicate about it. But we’re a long way off, most commonly outside of Skunk Works, as I said.
And then, on the helicopter side, if you get Aviation Week from maybe 3 or four months ago that showed a Sikorsky helicopter flying with nobody on board, right?I flew in the Matrix helicopter, we call it, which is a DARPA assignment. that’s short of Sikorsky. It has 3, and they all work, by the way. It has 3 modes. One is in manual mode, like any classic helicopter. The moment mode is assisted like a Tesla, so to speak, right?So you can take control if you want or want to replace flights instantly. And then, the third mode is fully automated.
And that: you plug the project into a trailer down or up in Stratford, Connecticut, the thing will take off, go through the project and come back and land on itself. So, it’s working in one position. And then it’s a question of when the U. S. government will be able to do so. The U. S. and the service will be able to convert those technologies into registration programs, but we are becoming in a position to do so.
Operator
Next is from Cai von Rumohr with Cowen.
Cai von Rumohr
Let me subscribe to all of you to thank you, Greg, for the wonderful paintings you have done. And Mary, welcome. So we don’t communicate about inflation. What do you see and assume about long-term inflation?And as you know, Bill LaPlante essentially warned that the Department of Defense deserves to step in to help companies because it didn’t expect the inflation point existing at the time the contracts were signed. And yet, Senator Elizabeth Warren, unsurprisingly, says it’s not a smart idea. So what do you see in inflation, and what do you see in the long term in terms of support from the Department of Defense?
Jay Malavé
Of Cai. La course, inflation is twofold: one on our own hard work front and then on what we see in the chain of origin. And for our business portfolio, a lot of our business is remote because it’s not a consistent price. And so, some of the additional cost benefits that we get, that threat doesn’t hold up at Lockheed Martin.
For the 60% of our business that is constant price, many of our contract policies, movements and implementations revolve around the continuity of our supply chain, which means that regardless of how much time we spend on our contract with our client, we have the same dedication to our supply chain during that same period. So, in many of those cases, we can’t stand that threat either. But this comes into play when we participate in new offers and proposals with our client. We’re seeing other adjustments on either the workforce and supply chain side, and that’s having a real impact on bids and proposals. This is all we have to have in front of us. And we have interaction with the customer.
As you mentioned, there’s been a slight shift in Defense Department policy regarding accepting economic value adjustments, and that’s something we continue to interact with our consumers about. In existing contracts, this depends on the availability of funds, which has been difficult to obtain. But I think in the long run it’s anything that would actually be part of our negotiations and contracts.
On the labor side, we have greater assumptions in our existing backlogs. We were able to absorb that through productivity and other reserve-of-control type actions. It is indeed a follow-up detail as we pass.
Operator
Then we will move on to Seth Seifman with JP Morgan.
Seth Seifman
I echo everyone more than Greg and Maria. I will try to sneak two here very soon. Right in. . . Jay, the Wall Street Journal tells you this morning that the expansion in 2024 will be single digits. Is that right?
And then, the second one, I wonder if you can limit us with pension customers for next year, whether it’s FAS and CAS. And then think about the outlook for CAS beyond 2024 and how that remaining balance moves away in the coming years.
Jay Malavé
Of course, Seth. Yes, I think only a low number for 2024 as a benchmark is how you see it. We talked on that call today that there are upside opportunities for this baseline. Missiles and fire control is indeed an opportunity of choice. Jim talked about opportunities similar to HIMARS and other programs. So, there may be a merit to who we are today.
These are ongoing dialogues we have with our Department of Defense customers. Therefore, it is difficult to include them in a company forecast until we have a clearer picture of what will be under contract and the timing of deliveries. The one-digit baseline is the appropriate level. We’re getting more clarity and I think we’ll have a lot more clarity in January, providing our full direction for 2023 and a bigger outlook for 2024.
With regard to pensions, we expect FAS revenues to decrease. You’re talking about $50 million. On the CAS side, we expect the AQHI charge to also fall around $75 million. So, the all-inclusive FAS/CAS adjustment, we expect a decrease of around $125 million. That’s if it hits things today. As you know, at the end of the year we will have to align and formally replace them, but that’s based on what we see today. As far as CAS is concerned, we will have to answer you in 24 and more. Greg will have to talk to you again Seth about this.
Operator
The following is from Kristine Liwag of Morgan Stanley.
Kristine Liwag
Greg, congratulations and welcome, Maria. Jim and Jay, thank you for offering colors in the express headwinds in 2023. But perhaps taking a step back for a 30,000-foot view, the defense budget environment is pretty solid. We have noticed on the ’22 budget request increases to a figure of half digits. The Ukrainian army’s aid so far adds an additional 10% to the modernization budget of 22. Therefore, your invoice book also since the beginning of the year is 1. 1x. I guess you’d have any idea that those elements may have offset the express 2023 headwinds you mentioned. So, perhaps in the absence of the express systems you mentioned, do we expect the portfolio to grow above the minimum or in line with the overall Defense Department budget?
Jim Taiclet
So Kristine, good morning. I would say, first of all, that the defense budget exceeded what the president’s initial presentation spent a few months in 2023, right?Now, even if that happens, and we’re waiting for it to happen, and I just need to highlight a few systems that would most likely take advantage of those that come with the C-130 in this production and the F-35. But that hasn’t happened yet, so we won’t add it in our forecasts.
And let me take a minute to step back and re-emphasize what Jay said, to the effect that we don’t have enough real data right now at the beginning of the fourth quarter of the year to give even much more than an estimate of what the trend will be next year. So, start in 2024, let’s start with the January formal guidance. We’re not going to do anything before that. And I will tell you the 3 problems I have learned in my few years of control here, we just do not have clarity.
One is the defence budget, which you just talked about a minute ago. We don’t know what it’s going to be. In January we will know what the defense budget will be. And then at the same time what is the prestige of the orders and primary contracts that are incorporated into this budget, because as you point out again, what will be the mixture of the accumulations in the budget with respect to the origin of the contracts and order this.
And finally, we don’t necessarily have the prestige of what the fitness of the source chain will be, even in 2023, because if there’s some other COVID spike in the winter like last time, we’re going to have effects on our chain of origin. So those 3 problems really, I think, make it almost to give you very reliable trend information, which was a culture in business when the defense budget was developing between 5% and 10% per year. But that’s not the case, and there was no COVID, by the way, but that’s not the current situation.
So, we will start the next cycle without looking to give you a trend line in October. We will give you as strong a formal direction as we can in January 2024 because of all this. That said, even on products that we anticipate by completo. se is accumulating because there have been moves within the government to get there, I used the analogy that the last clutch call was not yet compromised, even in the ordering procedure and the documents that will have to succeed in us, so that we can start producing.
The way you would describe it now is that the clutch engages, but in lower gears at first, right?Then, the process began. I give a lot of credit to Dr. LaPlante and others, Andrew Hunter in the Air Force, etc. , the secretaries of the Air Force, Navy and Army departments are all committed to making that happen. But it takes time, especially for foreigners. FMS contracts and advertising sales.
So, for all those reasons, Kristine, it’s hard for us to estimate what, at this point in the cycle, which systems will gain advantage. But I’m pretty sure the F-35 and C-130 would be a lot of MFC products that we’ve already talked about. International demand for Black Hawks, in particular, is on the rise, as is that of the F-16. So I think there are a lot of living spaces where society can take advantage of a larger accumulation in the defense budget.
Jay Malavé
Oui. Et Kristine, we fully hope, as Jim mentioned, to be a part of this industry increase. You will see this in the accumulation commands. And what we’re talking about here is turning that into sales that take a little longer than expected. I think the most important thing not to forget about 2023 is that, despite a weaker outlook due to sales consistent with margin pressure, they are even still delivering the same amount of loose money that we announced to them a year ago. And our outflow outlook consistent with constant percentage has improved as a result of our percentage-consistent buyback program.
Operator
Next is by Peter Arment with Baird. Continue.
Pierre Armen
Yes. Hello everyone. Hi Jay, Jim. Can you hear me?
Jim Taiclet
Yes we can. Hello.
Pierre Armen
Congratulations, Greg. I appreciate all your efforts. Hey, Jay, maybe you did. Jim made a comment about the kind of flat aeronautics that was done on the 23rd, but then the wait becomes a bigger component of the story as we move into the 24th. Should we think about Aeronautics somehow in 2023?Is that what you’re implying at or are there other features we deserve to think about in the long run?Thank you.
Jay Malavé
Yes, I think so. I think next year they will deal with the transition component similar to adjustments to the F-35’s delivery profiles: the production contract. And again, we’re just catching up with a little bit of stock because the delivery profile component has changed. Once that subsides, this headwind, we will see at least a stabilization on the production side, resulting in an expansion for maintenance and expansion of classified systems and expansion of the F-16 program. And so, I’d be expecting them to have a great trajectory of expansion in ’24 and beyond.
Jim Taiclet
Oui. Et I would also add there, Peter, that we’re starting to get genuine traction on our kind of JADO offering, so to speak. And one of them was briefly discussed today, called Defense of Guam. And it’s the first always-well-organized primary DoD Contract that increases capacity and not just a product or a system. And what he intends to do is integrate and that is our total technique 5G. MIL. In fact, that’s why we win, I think, is the integration of existing command and control systems used across the other departments.
So the military, for example, will be provided through Northrop Grumman. We will fully integrate that into the solution and work with them to do so. And then we’ll integrate Lockheed Martin’s Aegis formula into that mix and a number of other formulas and products from a variety of OEMs. We will paint in combination for the first time in this way.
So I think it’s going to be a real pioneer for the future. And once it proves that it can be a success and that the industry wants to come together and make it happen with us, we as an industry will also see more of those opportunities until 2024 and beyond.
Operator
The following is from George Shapiro of Shapiro Research.
Jorge Shapiro
A few questions. In the Aeronautics area, Lot 16, you should not enter Q4. Jay, does that come with more sales where you’re possibly running as well?And then, a momentary question, if you look at the extra margin on the profit you provided on the F-35 and the $325 million in sales, it’s like 21%. Does this mean you have a higher margin in the F-35 program?What compensated through sustained growth?
Jay Malavé
Well, at the moment ask, George, we had a benefit adjustment in the F-35 program and the production program there. So let’s see a higher recurring margin rate there. Regarding the fourth quarter and lot 16, yes, we expect this order in the fourth quarter, as Jim mentioned, a little over $8 billion.
I wouldn’t expect aero sales to increase, adding the F-35, and that will come with the F-16. So, to answer your question, yes, it will be a component of the sales mix here in the fourth quarter.
Operator
We’ll then move on to Rich Safran with Seaport Research Partners.
Rich Saffron
Jim, Jay, Greg, Maria, hello. How are you?
Jim Taiclet
Good morning.
Rich Saffron
So, Jim, I listened to your opening remarks about the uncertainties of the chain of origin and all that. And Jay, I’m going to embarrass you a little bit here. And I hope you answer a query about the long-term money perspective. Because I think last year you gave a long-term money perspective and even added a year. So you talked long-term this morning and declared that there is not much higher trust here. Do you have enough visibility to give us a long-term money update?And if possible, can you invest that in terms of paybacks and lose money on stocks?
Jay Malavé
Well, Rich, if you think about our loose cash flow last year, and I’m leaving, a little reminder here, we said $6. 1 billion in 2023. I think it was $6. 2 billion in 2024. No I see explanation for why we can’t provide that and continue to provide that loose money flow point beyond 23 and 24. So, and our loose cash flow, again, with the percentage buyback program, will be because of what we were saying a year ago.
Again, our control is concentrated on the functioning of capital, our focus on control, the field for offering loose money will not be avoided after a year. Therefore, I am quite confident that we can continue to hand over the loose money we committed. a year ago. And again, our loose money consistent with participation, our expansion, is probably looking for the diversity of single-digit expansion in the middle of that constant period.
Greg Gardner
Hi John, I’m Greg. I think you’ve reached the pinnacle of the hour. So with that, I’m going to call Jim back.
Jim Taiclet
Of course, Greg. Gracias. Me would like to conclude by reiterating what Jay just mentioned, our commitment to delivering attractive and reliable long-term overall returns to shareholders, supported through our strong money generation and balance sheet, as well as knowing those twenty-first century responses to address the demanding global security situations our clients face in recent times.
And while some of you were present when I was at American Tower, we focused entirely on loose money through equity generation. And that was given to us through 18 years of ups and downs, the Great Recession and a few other disorders that happened along the way. It’s also the right metric for this company, and that’s why Jay and I are putting so much emphasis on it today.
We are positioning ourselves for an expected expansion inflection in the coming years, making an investment in cutting-edge technologies for our customers’ missions, as I said, and making significant buybacks to magnify price creation consistent with the constant percentage as we move forward.
So, thank you for joining us today, and we look forward to talking to all of you on our next earnings call in January. John, that ends the call. Thank you all.
Operator
Ladies and gentlemen, thank you for your participation. You can now log out.