Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Lockheed Martin Corp (LMT, Financial) reported a 9% year-over-year increase in sales for Q2 2024, reflecting growth across all four business segments.
- The company raised its full-year 2024 outlook for sales, segment operating profit, and EPS due to strong performance and momentum.
- Lockheed Martin Corp (LMT) achieved segment operating margins of 11.3%, up 20 basis points compared to last year's second quarter.
- The backlog remains robust at nearly $160 billion, more than two times the annual revenue, indicating strong demand for defense technology solutions.
- The company began deliveries of the first TR-3-configured F-35 aircraft to the US government, marking significant progress in the F-35 program.
Negative Points
- Lockheed Martin Corp (LMT) faces continued cost pressure and absorption headwinds in its Sikorsky business, impacting RMS margins.
- The company recorded $100 million in losses year-to-date on an MFC classified program and expects an additional $225 million in the second half of the year.
- GAAP earnings per share increased only 3% year-over-year, impacted by severance and impairment charges at RMS and Sikorsky, higher interest expense, and lower pension income.
- The delivery guidance for the F-35 in the second half of the year remains wide, indicating potential uncertainties in meeting the higher end of the range.
- The supply chain, while improving, still presents challenges, particularly in ramping up major programs to meet demand.
Q & A Highlights
Q: On the delivery guidance for the F-35 in the second half of this year, what would have to happen for you to hit the lower or upper end of the range?
A: (James Taiclet, CEO) We have the ability to add resources like test pilots and engineers to get the flight tests done. However, we will prioritize safety and quality. We should have the resources to reach the higher end of the range, but factors like weather and crew rest will be accommodated. (Jay Malave, CFO) We expect anywhere between 75 to 110 deliveries. Over the next few months, we'll get better insights into the induction and flow of aircraft, which will help us assess the delivery requirements for the year.
Q: Next year, you mentioned delivering more F-35s than you will produce. What happens to accrued revenues and the cash flow impact?
A: (Jay Malave, CFO) Restarting delivery was important for delivering fully combat-capable aircraft. We are working with the customer to finalize the terms of final delivery payments. There will be a timing benefit over the next few years as we deliver. We don't expect much incremental revenue benefit; production should remain stable. We are holding our outlook despite headwinds from final delivery payments.
Q: At what point will you be ready to discuss a better medium-term free cash flow per share growth outlook?
A: (Jay Malave, CFO) Our goal has been to increase absolute free cash flow in the low single-digit range, augmented by share repurchases to achieve mid-single-digit growth. Given the higher level in 2024, we expect to grow in 2025 off this higher baseline. We will provide a better update in October.
Q: Is the upside more on the demand front or on unlocking the supply chain side?
A: (Jay Malave, CFO) It's a combination of both. We ended 2023 with a record backlog of $160 billion and expect it to grow. We are seeing improvement in the supply chain, but there are still areas where we need to ramp up. (James Taiclet, CEO) Our strategy includes driving digital technologies and open architecture standards to pull through our products and services. We are already implementing these technologies, which should continue to drive demand.
Q: How much order flow is still to come from the '24 baseline budget and Ukraine supplemental for MFC?
A: (Jay Malave, CFO) There is still plenty of runway in orders at MFC. We expect additional orders in the second half, particularly in JASSM and LRASM. MFC will be a significant source of growth for Lockheed Martin for the next three to five years. (James Taiclet, CEO) MFC plays a huge role in deterrence by ensuring we have enough stocks and can ramp up production quickly.
Q: Can you walk through the moving pieces affecting profitability in the second half of the year?
A: (Jay Malave, CFO) The most significant factor is the program loss at MFC, with about $225 million expected in the second half. Profit adjustments will also slow down due to the timing of risk retirements. We feel comfortable with our outlook and expect margins to improve gradually over the next few years.
Q: Can you comment on your view of NGAD and how you're preparing for the next-generation aircraft program?
A: (James Taiclet, CEO) We are not authorized to speak to the details of NGAD, but we are preparing by investing in high-tech facilities and leveraging our digital transformation capabilities. We are ready to produce and compete in this space if and when the government initiates a competition.
Q: How is the supply chain in terms of being able to supply enough material and integrated core processors for the F-35 TR-3?
A: (James Taiclet, CEO) We have communicated the importance of maintaining or increasing production rates to our major suppliers. They understand the demand and quality levels needed. We will continue to monitor and support them to ensure they meet our requirements.
Q: What are some of the lessons learned from the conflict in Ukraine, and how are you applying them?
A: (James Taiclet, CEO) Traditional systems like Javelin and PAC-3 have proven effective. We need to ensure these systems are adaptable. Drones and unmanned systems have become more important, and we are involved in developing these technologies. We are using digital technologies to continuously improve our legacy systems.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
