Lockheed Martin and the Pentagon are unlikely to finalize an agreement for the next lot of F-35 stealth fighters by the end of this month, which could result in a significant $1 billion impact for the defense contractor in the current quarter, according to a senior executive at Lockheed.
“Given where we are in that negotiation, we don’t expect to complete it by the end of this quarter, and this will lead to an impact of up to about $500 million in sales and potentially about $500 million in cash flow for the quarter,” Chief Financial Officer Jay Malave stated during the Morgan Stanley Laguna conference.
Negotiations between the Pentagon’s F-35 Joint Program Office (JPO) and Lockheed have been ongoing for more than a year concerning F-35 Lots 18 and 19. Although there was initial optimism for concluding contract discussions by the end of 2023, key terms remain unresolved, extending talks into the fourth quarter, Malave noted.
Lockheed is currently seeking additional funding, as the initial budget for Lot 18 has been largely utilized, and the company has had to invest some of its own resources to ensure F-35 production continues uninterrupted before finalizing the contract.
“We’re collaborating with our Joint Program Office partners and congressional stakeholders to secure necessary funding, which may come in the form of reprogrammed funds approved by Congress, to avoid disrupting the production system,” Malave explained.
Lockheed’s latest financial projections estimate sales for this year between $70.5 billion and $71.5 billion, with an anticipated free cash flow of $6 billion to $6.3 billion in 2024.
As part of the ongoing F-35 contract negotiations, the Pentagon is evaluating pricing information submitted by Lockheed, which details the costs incurred by the aerospace giant and its supply chain. Malave acknowledged that the company continues to contend with challenges such as inflation, elevated labor costs, and prolonged lead times. The Joint Program Office has not responded to requests for comment regarding these developments.
“They must carefully review the data, ensuring it supports what we have provided to them,” he stated.
Greg Ulmer, Lockheed’s aeronautics unit president, previously indicated to Breaking Defense that unit costs for the forthcoming batch of F-35s could be further impacted by inflation and a decrease in the annual purchase rate from the U.S. military.
In addition to the challenges with contract negotiations, Lockheed anticipates an impact of up to $300 million this year due to financial withholdings by the Pentagon for F-35s being delivered without a comprehensive hardware and software upgrade known as Technology Refresh 3 (TR-3).
The Pentagon acknowledged in August that it was withholding approximately $5 million per jet. However, Malave indicated that this figure could be reduced as Lockheed meets specific milestones.
“We expect to accomplish some of those milestones this year,” he mentioned, noting that these withholdings would play a crucial role in determining Lockheed’s free cash flow for the period.
