Lockheed Martin Takes $225 Million Loss on Secret Aeronautics Program

Lockheed Martin took a $225 million loss on a classified developmental aeronautics program, company officers disclosed in a July 26 second-quarter results call with reporters, but the program is moving forward, and the company expects it to enter production.

Company officers also said the unit cost of the F-35A will likely go up in the next lot contract and that the program will be “rebaselined” over the next couple years with a more stretched-out delivery schedule, and signaled a phase-out to the U-2 spyplane. They also said they expect to close out any Federal Trade Commission concerns and conclude their planned acquisition of Aerojet Rocketdyne, announced last December, by the end of this year.  

The charge on the classified program came after a May “deep dive” with government and company auditors, Lockheed Martin Chief Financial Officer Kenneth R. Possenriede said during the earnings call. About 40 percent of the cost of the secret project has already been spent, he noted, with the remainder “embedded in the new estimate to complete” the program.

Neither Possenriede nor CEO James D. Taiclet could provide many details about the project due to classification. Taiclet did refer to “all the customers”—plural—“that are going to utilize this,” suggesting multiple services will be buyers. The project is being done at Lockheed’s aeronautics division, versus its Space or Missiles and Fire Control units.

 “It will be a good program for the Lockheed Martin Corporation,” Taiclet said.

The program “we think … will be successful from a schedule and performance standpoint, and it will ultimately turn into a production program. And we also think there are additional opportunities out there;” thus, “I think … there is still a very strong business case given these associate opportunities,” Taiclet said. “We feel comfortable” with the status of the program.

Neither Taiclet nor Possenriede connected the classified project to the Next-Generation Air Dominance program, which Air Force Chief of Staff Gen. Charles Q. Brown Jr told lawmakers last month will be a multirole fighter. In response to a question, Possenriede said the company is unable to talk about its work on NGAD, except to point out that the Air Force has said the F-35 will not be cut to pay for NGAD.  

The charge caused Lockheed Martin’s earnings for the quarter to come in below expectations, and its per-share price fell three percent in the hours after the announcement.

Possenreide said a number of Lockheed Martin classified aeronautics and space programs are expected to grow and enter production.

“We see the classified portion of Lockheed Martin growing faster than the nonclassified portion,” he said. The company’s “Skunk Works” advanced development unit is going to be “a larger part of the aeronautics” business.

Taiclet said Lockheed Martin seeks to lead the industry in creating all-domain networks, starting with its own products—“the ones we control”—and making them “the leading-edge, and therefore, most attractive ways to allocate the budget in all the domains that we serve.” Lockheed Martin’s platforms will become “way more competitive, way more attractive, using the network effect to get more value for the money … irrespective of how much the top line grows.”

The goal of the U.S. military will be to build “a network effect as broadly as you can across, frankly, all the platforms out there, eventually. But we’re building a roadmap internally to Lockheed Martin because these are the platforms we can control. [We will] install, trial, demonstrate, and then produce these products. At the same time, … we’re open to collaborating with our industry partners.”

New systems “can and must have an open architecture,” he said. “This is a matter of leadership, and speed, and performance, and that’s where Lockheed Martin can take a great position going forward.”

Possenriede said the F-35 is “right now in the midst of a … production re-baselining” due to the pandemic and progress in getting the Tech Refresh 3 on Lot 15 and the Block 4 configuration in production with Lot 16. This year’s deliveries will be between 133 and 139 aircraft, he said, with specifics coming in October, after an agreement is reached with the Joint Program Office.

The plan was to build 169 F-35s in 2022, but it is “highly likely” that Lockheed Martin will build fewer, Possenriede said. “This re-baselining may take two to three years.”  

The “production plateau”—the steady-state maximum rate, which Possenriede said is probably around 170 aircraft—will be “slightly pushed out to the right, and elongated, in the next couple of years.” This will present an “opportunity” for sustainment, he said. He also said Lockheed Martin expects to respond to a government request for proposals for performance-based logistics soon.

Taiclet said Lockheed Martin has invested $500 million to date to improve F-35 sustainability costs and has “personally met with each of the service Chiefs and the Chairman” of the Joint Chiefs of Staff to build support for a “cooperative” approach to getting the costs under control.

Lockheed Martin has reduced by 40 percent the sustainment costs “that we can control,” and “we’re going to shoot for another 40 percent over the next five years,” Taiclet said. Some 60 percent is “propulsion and military/government cost,” he added.

“If we don’t have an all-in strategy, together, to address this, we’re not going to hit the goals” of getting the operating cost to $25,000 per year by 2025, Taiclet asserted.

Possenriede said he’s hopeful that Lockheed Martin will be under some kind of performance-based logistics contract for the F-35 early in 2022. But “this is not likely to be a top-line enhancement play for us. That’s probably all embedded,” or baked-in cost. He said the F-35 sustainment business will expand sharply in a few years, when more than 1,000 of the fighters will be in service worldwide.

Switzerland’s order for 36 F-35s was a “big, big win for us,” Possenriede said, and the jet is well positioned in competitions in Finland and Canada, he said.

Lockheed Martin is in negotiations on the next lots of F-35s, and Possenriede said the B and C model sticker will likely stay the same or “continue to come down the learning curve.” But the A model used by the Air Force will probably rise, he said.

“The ‘A’ variant, … due to where we are in learning, with inflation and the added capabilities that they want on the aircraft, it is likely you’ll see a … modest increase in price versus where we are today.” Lockheed Martin aeronautics Executive Vice President Gregory M. Ulmer hinted at a price increase due to inflation and capabilities growth earlier this year.

Among other Air Force programs, the F-16 international sales backlog is 128 aircraft and will “continue to grow,” Possenreide said. Taiclet said the U-2 spyplane’s “sunset” is in the “not-too-distant future,” although the Air Force has gone back and forth about whether it plans to retire or retain the U-2 beyond the middle of the 2020s. Taiclet also said that while the F-22 “sunset” is in sight, it will still get updates and modifications, though not to the degree previously thought. The Air Force recently said it plans to start phasing out the F-22 in about 2030.

Taiclet said the last issues with the Federal Trade Commission regarding the company’s acquisition of Aerojet Rocketdyne are being wrapped up and he expects it to be completed by the end of the year. Lockheed Martin has made assurances that Aerojet Rocketdyne will remain a “merchant supplier” of solid rocket motors to anyone in the industry who wants to work with the company. The government had expressed concern that Lockheed Martin would exclude competitors from using Aerojet Rocketdyne products, a problem since only one other solid rocket motors supplier exists—Northrop Grumman’s Innovation Systems, formerly Orbital ATK.