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Lockheed Martin Corp Earnings - Analysis & Highlights for Q4 2024
Overview
PositivesNegativesOutlook
- Operating profit YoY in Q4 increased slightly on an adjusted basis.
- The company is committed to ongoing investment in the business to enhance its growth trajectory.
- The company is confident that it has significantly de-risked its program and reduced the risk of future charges.
- The company is committed to achieving positive results, both in the short and long term for its shareholders.
- Segment operating profit decreased significantly YoY in Q4 due to lower profit booking rate adjustments driven by the recognition of reach forward losses on the classified program.
- Sales were down 6% YoY, normalized for the number of weeks in the quarter.
- Segment operating profit, segment margins, and EPS were impacted by the net program charges on slide 4.
- Sales decreased slightly, driven by lower volume on the same programs as in Q4, partially offset by higher volume on the fleet ballistic missile and reentry program.
- Full-year segment operating profit declined $1.1 billion YoY due to $1.4 billion of classified program charges.
- The company expects a benefit from taxes with lower R&D capitalization as that's coming down.
- The company expects to return to reasonable type margins outside of where it has fixed committed pricing.
- The company expects a benefit from taxes with lower R&D capitalization as that's coming down.
- The company expects to grow its investments to enhance the attractiveness and performance of its key programs and initiatives, such as America's preeminent fifth-generation fighter, the F-35, and its internal digital transformation of 1LMX.
Q&A Highlights from Lockheed Martin Corp Earnings Call Q4 2024
- Analyst asked about the potential for future charges on classified programs and the life cycle of the program.
- The company has significantly reduced the risk of future charges on classified programs by implementing a more comprehensive review of current performance, making a conservative assessment of the risk, and implementing process changes such as continuous monitoring, adding technical resources, and automated testing procedures. The company has also increased its growth outlook for 2025 to 4% to 5%, based on its ability to drive throughput through the entire value chain.
- The company has significantly reduced the risk of future charges on classified programs by implementing a more comprehensive review of current performance, making a conservative assessment of the risk, and implementing process changes such as continuous monitoring, adding technical resources, and automated testing procedures. The company has also increased its growth outlook for 2025 to 4% to 5%, based on its ability to drive throughput through the entire value chain.
- Analyst asked about the risk of defense industry companies taking on more risk and opening themselves up for more charges in the future.
- The company is not concerned about this risk because it will apply a disciplined bid process to fixed-price and cost-plus contracts. The company advocates for a systemic change in the way the defense enterprise operates, and welcomes the administration's effort to reduce bureaucracy and administrative burdens. The company has seen a more commensurate contracting regime over the last year to 18 months, with lower technical maturity and higher risk programs being delivered under a different contracting regime.
- The company is not concerned about this risk because it will apply a disciplined bid process to fixed-price and cost-plus contracts. The company advocates for a systemic change in the way the defense enterprise operates, and welcomes the administration's effort to reduce bureaucracy and administrative burdens. The company has seen a more commensurate contracting regime over the last year to 18 months, with lower technical maturity and higher risk programs being delivered under a different contracting regime.
- Analyst asked about the implications of the 2025 guidance for working capital improvement and if anything has structurally changed in the portfolio.
- Jesus Malave explained that the guidance implies a one-day improvement in working capital, which would offset the growth that the company would otherwise see. He also mentioned that the opportunity set remains for further improvement beyond one day, particularly in contract assets, unbilled receivables, and production and sustainment programs. He emphasized that the company will continue to drive asset productivity in the years to come.
- Jesus Malave explained that the guidance implies a one-day improvement in working capital, which would offset the growth that the company would otherwise see. He also mentioned that the opportunity set remains for further improvement beyond one day, particularly in contract assets, unbilled receivables, and production and sustainment programs. He emphasized that the company will continue to drive asset productivity in the years to come.
- Analyst asked about the progress of the TR-3 capability and the timeline for achieving full combat capability.
- Jesus Malave stated that the company is making excellent progress on the TR-3 capability, including submission system integration work and improving system stability. While the company is targeting milestones this year, the full combat capability declaration is ultimately left to the customer. He also mentioned that the team is working at a good pace with supplier partners on improving emission system capability and overall system stability.
- Jesus Malave stated that the company is making excellent progress on the TR-3 capability, including submission system integration work and improving system stability. While the company is targeting milestones this year, the full combat capability declaration is ultimately left to the customer. He also mentioned that the team is working at a good pace with supplier partners on improving emission system capability and overall system stability.
- Analyst asked about Lot 19 and the progress of negotiations.
- Jesus Malave clarified that Lot 19 has been negotiated in parallel with Lot 18, which is still under undefinitized contract actions. He mentioned that Lot 18 is expected to be definitized in the first half of 2023, and Lot 19 is expected to be closed in the second half of 2023, with an order in the range of $10 billion.
- Jesus Malave clarified that Lot 19 has been negotiated in parallel with Lot 18, which is still under undefinitized contract actions. He mentioned that Lot 18 is expected to be definitized in the first half of 2023, and Lot 19 is expected to be closed in the second half of 2023, with an order in the range of $10 billion.
- Analyst asked about the impact of the $400 million cash charges taken in the quarter on the Aero side and the pension funding requirement for 2026.
- Jesus Malave, CFO, stated that the Aero classified program will be a cash flow drag over the next few years, but it will not all be born in 2025. He also mentioned that the company will continue to work on improving their asset productivity to offset as much as possible on the pension. He also mentioned that the company has a strong balance sheet that gives them a lot of optionality and flexibility.
- Jesus Malave, CFO, stated that the Aero classified program will be a cash flow drag over the next few years, but it will not all be born in 2025. He also mentioned that the company will continue to work on improving their asset productivity to offset as much as possible on the pension. He also mentioned that the company has a strong balance sheet that gives them a lot of optionality and flexibility.
- Analyst asked about the opportunity to improve the profitability of the MFC program as it scales.
- Jesus Malave, CFO, stated that the pricing for the next phase of the MFC program will be open, and the company expects to return to reasonable type margins outside of the fixed pricing. He also mentioned that there will still be ramp-ups that need to be dealt with, but the margin profile will get substantially better.
- Jesus Malave, CFO, stated that the pricing for the next phase of the MFC program will be open, and the company expects to return to reasonable type margins outside of the fixed pricing. He also mentioned that there will still be ramp-ups that need to be dealt with, but the margin profile will get substantially better.
- Analyst asked about the possibility of the MFC program becoming a long-lived program based on the technology and value to the US government.
- James D. Taiclet, CEO, stated that the company expects the MFC program to be a long-lived program based on the technology and the value it provides to the US government. He also mentioned that the Air Force pilot will want this program.
- James D. Taiclet, CEO, stated that the company expects the MFC program to be a long-lived program based on the technology and the value it provides to the US government. He also mentioned that the Air Force pilot will want this program.
- Analyst asked about the company's plan to grow its backlog in 2025 and any international awards they might pursue.
- The company is focused on growing its backlog in 2025 and has a line of sight to growth, although they don't expect it to be 10%. They have several opportunities for growth, including the $10 billion order for the F-35 and Lot 19, JASSM and LRASM multiyear contracts, and international opportunities such as Türkiye's F-16 aircraft. Additionally, they have discontinued F-35 sustainment contracts and CH-53K, Lot 9 contracts, which will provide additional funding.
- The company is focused on growing its backlog in 2025 and has a line of sight to growth, although they don't expect it to be 10%. They have several opportunities for growth, including the $10 billion order for the F-35 and Lot 19, JASSM and LRASM multiyear contracts, and international opportunities such as Türkiye's F-16 aircraft. Additionally, they have discontinued F-35 sustainment contracts and CH-53K, Lot 9 contracts, which will provide additional funding.
- Analyst asked about the company's budget risk in terms of peak production volumes on key munitions in MFC and whether they need additional supplemental bills to achieve those levels.
- The company does not need additional supplemental bills to achieve peak production volumes on key munitions. They have a strong line of sight to funding for their programs, including PAC-3, GMLRS, Javelin, and HIMARS. They have already self-funded the investment associated with getting themselves to 650 on PAC-3 and recently received a contract award for incremental funding on that related to the facilitation. They are driving towards 14,000 on GMLRS, 4,000 on Javelin, and 96 on HIMARS, and view that as low risk due to the strong funding and contractual commitments.
- The company does not need additional supplemental bills to achieve peak production volumes on key munitions. They have a strong line of sight to funding for their programs, including PAC-3, GMLRS, Javelin, and HIMARS. They have already self-funded the investment associated with getting themselves to 650 on PAC-3 and recently received a contract award for incremental funding on that related to the facilitation. They are driving towards 14,000 on GMLRS, 4,000 on Javelin, and 96 on HIMARS, and view that as low risk due to the strong funding and contractual commitments.
- Analyst asked about the interplay between budget decisions in the US and strong export demand for Lockheed Martin's products.
- James D. Taiclet, the CEO of Lockheed Martin, explained that the company is confident in maintaining its 156 production level for the F-35 fighter jet, even if there are reductions in quantities in the US. He noted that the company's production capacity is higher than China's, and that the US government and international partners have strong demand for the F-35. He also highlighted the importance of maintaining a capable deterrent against major adversaries, and the company's ability to control up to eight autonomous drones from the F-35.
- James D. Taiclet, the CEO of Lockheed Martin, explained that the company is confident in maintaining its 156 production level for the F-35 fighter jet, even if there are reductions in quantities in the US. He noted that the company's production capacity is higher than China's, and that the US government and international partners have strong demand for the F-35. He also highlighted the importance of maintaining a capable deterrent against major adversaries, and the company's ability to control up to eight autonomous drones from the F-35.
- Analyst asked about changes in the supply chain and the new administration's impact on the company's multiyear framework.
- Jesus Malave, the company's Chief Financial Officer, explained that there have been improvements in the supply chain, but discrete issues still exist across the portfolio. He noted that the company is still pacing growth in certain areas, such as MFC and Sikorsky's CH-53K program. However, he expressed confidence in the company's growth outlook and the possibility of a multiyear framework in the 4% to 5% range for 2025 and beyond.
- Jesus Malave, the company's Chief Financial Officer, explained that there have been improvements in the supply chain, but discrete issues still exist across the portfolio. He noted that the company is still pacing growth in certain areas, such as MFC and Sikorsky's CH-53K program. However, he expressed confidence in the company's growth outlook and the possibility of a multiyear framework in the 4% to 5% range for 2025 and beyond.
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