Flight testing of F-35 fighters with new data upgrades is underway and aircraft with the technology refresh are expected to be delivered beginning in the third quarter, and overall this year, Lockheed Martin [LMT] still forecasts to deliver between 75 and 110 of the fifth-generation fighters, Jim Taiclet, the company’s chairman, president and CEO, said on Tuesday.
The F-35s delivered in 2024 with the Technology Refresh (TR)-3 capabilities will be in the “combat training capable configuration,” which Taiclet referred to as Release 1. The combat training capable aircraft will be delivered to the wings and squadrons to train pilots and maintainers and get the bases and infrastructure in “operational shape,” he told investors during the company’s first quarter earnings call.
F-35s with the full TR-3 capability will be delivered in 2025, he said.
“The test results today support our expected timeline of delivering the first TR3 combat training capable aircraft in the third quarter and then transition to a fully combat capable aircraft in 2025,” Taiclet said.
Meeting the delivery target depends on suppliers providing the hardware, he said.
In 2023, the company delivered 98 F-35s, all in the TR-2 configuration. The Defense Department currently is not accepting F-35 deliveries until Release 1 is proven out, which will include 95 percent of all TR-3 capabilities, Taiclet said.
In January, Taiclet said the company was shooting for TR-3 deliveries in the second quarter but noted then that the DoD would probably wait until the third quarter to accept deliveries. On Tuesday, he said the “level of complexity and executing the step function increase” associated with TR-3 is “novel or dramatic.”
The TR-3 will provide advances to onboard digital infrastructure, data processing, and the pilot user interface. Its core processing and software will create the infrastructure for the F-35 Block 4, which will allow the aircraft to carry more missiles, provide more electronic warfare capabilities, and give it greater target recognition.
DoD is considering modifying the “insertion schedule” for Block 4 capabilities, which could put pressure on profitability on the company’s Lot 15 through 17 F-35 production contract, and cash flow, Jay Malave, Lockheed Martin’s chief financial officer, said on the investor call. In the medium- and longer-term, “we’re working in coordination with our customer to make sure that we can deliver the capabilities the customer wants, but on an executable schedule,” he said. “And if we’re able to do that, then we should be able to keep the program on track from a production standpoint.”
Like other defense contractors and key programs, Lockheed Martin’s F-35 supply chain suffered during the COVID pandemic. Rob Spingarn, an aerospace and defense analyst with Melius Research, highlighted on the call that the program’s geographically dispersed supply base across the U.S. and internationally is a key reason why support for the program has remained strong in Congress and overseas. He asked Taiclet if the complex supply chain is hurting “affordability” and whether for future fighter programs the company will bring more work in-house.
Taiclet acknowledged that COVID did impact suppliers, particularly British companies that shut down during the pandemic, and that while “anti-fragility” measures will be taken for future programs the company plans to expand its “international production and sustainment partners.” Supply chain mitigation schemes will include second, and possibly third, sources and “geographic diversity,” he said.
“Having single sources outside the U.S. is probably not the best idea,” Taiclet said. “There’s an affordability issue around that too. So, we’re just have to balance everything out.”
In the first quarter, Lockheed Martin increased sales 14.1 percent to $17.2 billion from $15.1 billion a year ago, helped in large part by one extra week in the quarter and growth at all operating segments.
Net income fell 9 percent to $1.5 billion, $6.39 earnings per share (EPS) from $1.7 billion ($6.61 EPS), still handily beating consensus estimates of $5.82 EPS. Missiles and Fire Control was the only segment with lower operating profit, which was down due to a $100 million charge for an option on a classified program, and additional costs expected related to a contract claim on the HELLFIRE missile program.
The financial forecast for 2024 is unchanged, with sales pegged at between $68.5 billion and $70 billion, earnings between $25.65 and $26.35 EPS, and free cash flow between $6 billion and $6.3 billion. Free cash flow in the quarter was $1.3 billion.
Backlog at the end of the quarter stood at $159.4 billion, down less than a percent from $160.6 billion at the end of 2023.
Lockheed Martin also provided updates on the annual missile production capacity plans:
- PAC-3 production currently stands at 500 per year, going to 550 in 2025 and 650 by 2027;
- Guided Multiple Launch Rocket System is at 10,000 missiles and will be at 14,000 in 2025;
- Joint Air-to-Surface Standoff Missile/Long-Range Anti-Ship Missile stand at around 650 annually going to 1,100 by 2026; and
- High Mobility Artillery Rocket System launchers are at 72 per year, building to 96 in 2025.