Release Date: October 22, 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 record backlog of over $165 billion, indicating strong demand across all business areas.
- The company achieved a book-to-bill ratio of 1.3, driven by significant orders for precision and air defense munitions.
- Free cash flow for the quarter was $2.1 billion, supporting a 5% increase in the quarterly dividend to $3.30, marking the 22nd consecutive year of dividend increases.
- Lockheed Martin Corp (LMT) delivered 48 F-35 aircraft in the quarter and expects to deliver between 90 to 110 aircraft in 2024, with a strong future outlook for the F-35 program.
- The company is heavily investing in autonomy, AI, and digital technologies, demonstrating successful AI-driven teaming scenarios with drones and ground vehicles.
Negative Points
- Sales in the Aeronautics segment declined 3% year over year due to delays in F-35 Lot 18/19 contract negotiations.
- The company faces challenges with the F-35 Tech Refresh 3, with only 95% of combat capabilities validated, affecting delivery schedules.
- Lockheed Martin Corp (LMT) recorded incremental risk on a classified aeronautics program, resulting in additional losses.
- The company is experiencing pension headwinds, with plans to address these through working capital improvements and potential debt issuance.
- The ongoing Lot 18/19 negotiations for the F-35 program are impacting cash flow, as the government cannot make payments until the contract is finalized.
Q & A Highlights
Q: How is Lockheed Martin approaching the integration of AI and drones in tactical fighter systems, especially in light of the Air Force's rethink on NGAD?
A: James Taiclet, CEO, explained that Lockheed Martin is preserving its optionality based on the US government's strategy for tactical fighter deployment. The company is investing in Skunk Works to develop technologies for sixth-generation aircraft and crude-uncrude teaming. They have developed a pod for the F-35 to control CCAs and are working on flight control systems for this purpose. The focus is on maintaining volume to meet threats like the Chinese J-20 and Russian fifth-generation aircraft, while also investing in autonomy and AI for future systems.
Q: Can you provide a breakdown of the growth expectations for Lockheed Martin's segments, particularly MFC?
A: Jay Malave, CFO, stated that MFC is expected to lead growth at a high single-digit rate due to its strong backlog and visibility to incremental orders. The other business areas are expected to grow at low single-digit rates. The potential for mid-single-digit growth exists if the system can convert backlog more quickly, as demonstrated in 2024.
Q: What is the status of the MFC margin and the impact of the classified program losses?
A: Jay Malave noted that MFC's performance has improved year-to-date, excluding losses from the classified program. The segment delivered 14.4% margins in the quarter without recording losses related to the classified program. The expectation is to record additional losses in Q4, with a baseline assumption of $250 million to $300 million in losses for 2025.
Q: What are the implications of the F-35 Lot 18/19 negotiations and Tech Refresh 3 on cash flow?
A: James Taiclet explained that the TR-3 software finalization affects delivery schedules, with Release 1 being delivered now and full combat capability (Release 2) expected over 2025. The Lot 18/19 negotiation affects cash flow due to the inability to book revenue and profit until the contract is finalized. Jay Malave added that the cash impact in 2024 is estimated at $600 million, offset by working capital efficiencies, with improvements expected in 2025 as more aircraft are delivered and withholds are released.
Q: How is Lockheed Martin addressing the solid rocket motor supply chain challenges?
A: James Taiclet highlighted the partnership with General Dynamics to create a third source for solid rocket motors. Lockheed Martin will design the motors, and General Dynamics will produce them. Test articles are expected in 2025, with certification and production at rate by 2027, strengthening the defense industrial base.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
