Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Lockheed Martin secured the Next-Generation Interceptor (NGI) contract ahead of schedule, demonstrating their leadership in missile defense and positioning them for future growth.
- Despite challenges with the F-35 TR-3 upgrade, Lockheed Martin maintains production on track, expecting to deliver between 75 and 110 aircraft in 2024, avoiding significant disruptions to production and cash flow.
- Confidence in sustained growth into 2025 and beyond, supported by a strong backlog of $159 billion and favorable FY '24 defense budget and expected supplemental funding, which underpins future growth over the next several years.
- The F-35 program is experiencing delays and complexities with the TR-3 and Block 4 upgrades, leading to potential pressures on contract profitability and cash flow. Executives acknowledged that software integration is taking longer than predicted, and there could be pressure on contract profitability and cash flow.
- The Missiles and Fire Control segment is facing significant losses due to a classified program, with potential additional losses exceeding $1 billion. The company recorded a $100 million loss provision in Q1 and anticipates at least another $225 million in losses for the year, affecting margins and profitability.
- The complexity and scale of the F-35 supply chain has led to production issues and could be limiting the potential and affordability of the program. The company is addressing weak spots in the supply chain, such as single-source suppliers, which have caused production delays.
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Classified Program Losses
Q: What about MFC's margin guidance amid classified losses?
A: Management acknowledged that Missiles and Fire Control (MFC) margins were impacted by a $100 million loss provision recorded in the first quarter due to a classified program. They anticipate an additional $225 million in losses in the back half of the year, with potential further losses exceeding $1 billion. Despite this, they emphasize that the underlying performance of MFC is solid, and the long-term outlook for the classified program remains positive, expecting profitability around 2028. -
F-35 TR-3 Delays
Q: How will F-35 TR-3 delays affect production and revenue?
A: The F-35 program is experiencing delays in the TR-3 upgrade due to the complexity of integrating new hardware and software. The company expects to deliver combat training-capable aircraft in the third quarter, with full combat capability following in the next few months. While there could be pressure on the Lot 15 through 17 contract profitability and potential movement around in cash flow, management believes production will remain on track in 2024 and beyond, avoiding significant disruption. -
Revenue Growth Outlook
Q: How do NGI win and budget affect revenue outlook?
A: Management reported a solid start with 5% growth in the first quarter, aligning with the midpoint guidance range of 2% to 2.5%, potentially reaching the high end of 3.5%. They expressed higher confidence in continued growth, accelerating in 2024 and potentially increasing more in 2025 due to the NGI win and expected large supplemental budgets. -
NGI Win and Costs
Q: Are you confident in NGI costs and avoiding charges?
A: The company won the Next Generation Interceptor (NGI) contract ahead of schedule by leveraging their digital transformation and model-based engineering. They are performing under a cost-plus contract with low margins as expected but nothing abnormal. Management stated that the process did not require aggressive pricing, and they are confident in their cost estimates, having taken a "middle-of-the-road" approach to pricing. -
Classified Program Profitability
Q: When will the classified program become profitable?
A: Management expects the classified program in MFC to become profitable around 2028. Until then, they anticipate recording additional losses but emphasize that the long-term business case is accretive, providing strong returns above their cost of capital. -
Supply Chain and In-House Work
Q: Is supply chain complexity limiting F-35 potential?
A: Acknowledging the complexity of the F-35's broad international supply chain, management plans to mitigate future programs by diversifying suppliers and increasing in-house work. They intend to have second and maybe third sources, with geographic diversity to reduce supply chain issues experienced during events like COVID. For future programs, they aim to control more of the supply chain where feasible. -
Contract Structures Changes
Q: Any changes in contract structures from customers?
A: Management has observed changes where contract structures are more closely aligned with the requested capabilities and technology maturation. They are seeing fewer high-risk fixed-price development contracts, which previously did not work well for either party. They emphasized the importance of aligning contract formats with risk, indicating they would adjust their risk premiums accordingly. -
Vertical Lift Business Outlook
Q: How is the outlook for the vertical lift business?
A: Despite FARA being canceled, management describes the vertical lift business as stable. The CH-53K program is a pillar, with revenues expected to double between now and 2027-2028. While there will be declines in other programs, CH-53K will offset these, and they anticipate opportunities in Black Hawk modernization to maintain relevancy. -
Quarterly Revenue Guidance
Q: Will growth slow after a strong first quarter?
A: Management expects growth to slow to low single digits in the second and third quarters, with the fourth quarter being flattish to slightly down due to a strong prior year comparison. Despite a 5% normalized growth in the first quarter, they believe the company is well-positioned to meet their full-year guidance. -
C2BMC and Strategy
Q: How does C2BMC fit with mission-centric strategy?
A: Management views the C2BMC program as an example of extending existing programs to create integrated, mission-centric solutions. They aim to build "kill chains" with diverse, anti-fragile data flows to enhance missions. This approach involves open architecture systems allowing multiple routes of data flows, increasing the resilience and effectiveness of their offerings.