CH-53K
Leaders of Lockheed Martin, the top Pentagon provider by annual sales and a bellwether for the Western defense industry, told Wall Street on Oct. 18 that revenue will not grow again in earnest until 2024 when F-35 sustainment, PAC-3 missiles and CH-53K production should ramp up, along with classified work.
Supply chain challenges across programs of record—which are now seen persisting through 2023—as well as competing U.S. defense spending priorities are forming relative headwinds for 2023, Lockheed’s CEO and CFO say. Furthermore, clarity on F-35 production—which Lockheed suggests could be 156 a year, assuming the U.S. military orders 80—and other programs such U.S. Army helicopters may not emerge until 2024.
“We’ll give you as solid of a formal guidance as we can in January of 2024 because of all this,” CEO Jim Taiclet said. “I used the analogy last call of the clutch wasn’t engaged yet, even on the order process and paperwork that needs to come to us so we can actually start production. The way I’d characterize it now is that the clutch is engaging but into some lower gears initially.”
Preliminary 2023 guidance provided for the analyst call included “flattish” sales for 2023 from this year, as well as operating margins that are 0.2-0.3% lower. Free cash flow generated could inch up $100 million to $6.1 billion.
Taiclet, who became chief executive in June 2020 as the COVID-19 outbreak widened in the U.S., stressed that the defense market is in a new, volatile era when it comes to financial forecasting. For instance, congressional budget making is now determined much later in the process, and military orders are delayed accordingly. Additionally, there is the chance of another winter flare-up of the novel coronavirus, as has happened in the past 2 years and which significantly slowed production and restricted product deliveries.
“Those three issues really make it, I think, almost impossible to give you really high-confidence trending information, which has been a tradition at the company when the defense budget was rising 5-10% a year,” he said of last decade. “And there was no COVID, by the way, but that’s not the situation now.”
The subdued outlook was a counterpoint to third-quarter 2022 financial results, which overall were slightly better than analysts expected. Lockheed reported quarterly net sales of $16.6 billion, compared with $16 billion in the third quarter of 2021. Net earnings were $1.8 billion, or $6.71 per share, over $614 million, $2.21 per share. Cash from operations was $3.1 billion against $1.9 billion. Free cash flow was $2.7 billion over $1.6 billion.
Importantly for shareholders, Lockheed announced its corporate buyback of outstanding shares would double to $14 billion.
“After some rocky quarters, we think the third quarter shows Lockheed Martin getting back on track and delivering what investors want,” analysts at Vertical Research Partners said. “This is basically consistent execution, cash generation and cash deployment, and this was duly delivered this quarter. While the 2023 outlook is not too exciting, it takes time for the higher defense spending environment to work itself through the system–and in the meantime Lockheed is buying back a ton of stock.”
In other noteworthy comments, Taiclet expressed a preference for partnerships and teaming over mergers and acquisitions. He noted that under his tenure Lockheed has doubled its corporate venture capital (VC) fund to $400 million under Lockheed Martin Ventures. Now, it has started Lockheed Martin Evolve, which is looking at partnerships or joint ventures with midsized companies, including outside the defense sector. Lockheed also will continue to buy providers of critical supply chain parts as needed.
“We’re in the VC space with LM Ventures. We’re in the midsized space with LM Evolve, which is just literally getting off the ground,” Taiclet said. “But we have the framework, the structure and the ability to engage in that level of investment now.”
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