Longer-than-expected negotiations over the Pentagon’s next two batches of F-35s kept Lockheed Martin from collecting about $700 million last quarter, company officials said Tuesday.
Lockheed hasn’t been able to strike a deal for the next two production lots—18 and 19—so they’ve had to spend company cash to keep the production line running.
“As expected, aeronautics was down primarily due to delayed revenue recognition of approximately $700 million associated with the lapse in F-35 program funding as we continue to work through lot 18 negotiations,” company CFO Jay Malave told investors during a third-quarter earnings call.
Company executives have previously said that the price per jet will likely need to increase in lots 18 and 19, as inflation, the jet’s increasing complexity, and the Pentagon’s proposed cut to the planned F-35 buy are all driving costs.
Malave said he expects the contract to be awarded this year. But if negotiations extend beyond the year’s end, “we could see about 3 percent, or $2 billion of our sales shift into 2025, along with associated impacts to profit and about $1 billion of free cash flow.”
The company has to continue building the jets, even in the absence of a formal agreement, because it’s “essential” for the health of the lower-tier suppliers, CEO Jim Taiclet said.
The jet builder will also have to absorb $600 million this year after the Pentagon paused the acceptance of new jets due to delays with new technology that was supposed to be loaded onto the jet, called Technology Refresh-3. After deliveries resumed, the Pentagon said it would withhold money from the company, $5 million per jet, until the full upgrade was complete.
Lockheed will earn back some of that money as it reaches various milestones in TR-3 development, Malave said.
“As you go to 2025, we’ll deliver more aircraft, and so we will see the benefit of having delivered more aircraft, and we will also see the benefit of having incremental withholds released, I would quantify that today at around $300 to $400 million, and then that’ll then continue to flow in 2026 and beyond,” Malave said.
The jets now being delivered to the Pentagon are loaded with a “truncated version” of TR-3, which can be used for training but isn’t fully combat-ready. U.S. officials decided to start accepting the jets without the full capability, figuring that a partial capability is better than nothing. The company was originally supposed to have TR-3 ready in April 2023. And in addition to delays, the new technology is on track to run $1 billion over budget.
Lockheed executives previously said that the combat-ready TR-3 package could be ready late next spring. But the company seems to have backed away from that goal in today’s earnings call.
While Taiclet said “95 percent” of combat capabilities have been validated, the company will need to complete many more tests on the new version throughout 2025 before it’s ready for prime time.
The interim version currently being delivered doesn’t have “some of those incremental software validations that show that all combat systems and all weapons will be able to be effectively deployed…there are a lot of test points there, and those test points are going to be developed not just in the fourth quarter, but they’re going to be developed over the course of 2025 as well. Because when I say a weapon, is it an AMRAAM? Is it an AIM-9? What weapon are we talking about? There’s literally dozens of weapons, and there are multiple test points on things like distributed after system, etc. So this is a complex path to what I call release two. That’s the full up combat capability,” Taiclet said.
The company delivered 48 F-35s in the third quarter, and expects to deliver 90 to 110 in total this year. The company expects to deliver 180 jets per year over the next three years—a mix of new jets coming off the line and jets that were parked—so “cash collections will smooth out over this period of time,” Malave said.
