Lockheed Martin Wins $159M Deal To Support F-35 Program

Lockheed Martin Corp.’s (NYSE:LMT) Aeronautics business division recently secured a delivery contract in relation to F-35 fighter jet. Work related to this deal is expected to be completed by February 2019.

Details of the Deal

Valued at $158.3 million, the deal was awarded by the Naval Air Systems Command, Patuxent River, Maryland. Per the terms of the agreement, the company will offer program management, nonrecurring engineering, recurring engineering, site support and touch labor services to aid the modification and retrofit activities of the delivered air systems of the F-35 Lightning II Joint Strike Fighter aircraft.

The contract will cater to the Air Force, Marine Corps, Navy, non-Department of Defense (DoD) participant, and foreign military sales (“FMS”) customers. The deal includes 48% of the work for the Air Force; 31% for the Marine Corps, 6% for the Navy, 11% for the non-DoD participants and 4% for international partners.

Fiscal 2016 aircraft procurement, fiscal 2017 aircraft procurement, fiscal 2018 aircraft procurement, non-DoD participant and FMS funds will be utilized to complete the task at Fort Worth, TX.

F-35 Attributes

Lockheed Martin’s F-35 Lightning II is a single-seat, single-engine 5th Generation fighter aircraft, which comes with an advanced stealth feature combined with enhanced fighter speed and agility, fully fused sensor information, network-enabled operations and advanced sustainment. Three variants of F-35 are set to replace five fighter jets for the U.S. Air Force, Navy and Marine Corps as well as a variety of fighter jets for at least 10 other countries.

With Lockheed Martin being the primary partner, the F-35 program has been supported by an international team of leading aerospace majors. Notably, Northrop Grumman (NYSE:NOC) rendered its expertise in carrier aircraft and low-observable stealth technology to this program, BAE Systems’ (OTC:BAESY) short takeoff and vertical landing experience, and air systems sustainment supported the jet’s combat capabilities. Moreover, Pratt & Whitney, a unit of United Technologies (NYSE:UTX) , provides F-35s with the F135 propulsion system, which is the world's most powerful fighter engine.

Recent Developments

The F-35 program is Lockheed Martin’s largest program, which generated 25% of its total net sales, as well as 64% of Aeronautics division’s net sales in 2017. Interestingly, this program has been repeatedly criticized by President Trump for being an overtly expensive project, in the recent past.

To resolve this issue, the company inked an $8.5-billion deal with Pentagon in February 2017. Per the agreement, the company will deliver 90 F-35s of the 10th Lot at a historically low rate owing to Trump's intervention or to maintain management's earlier projection of cutting down cost by 6-7%. Over the next few years, the company is likely to adopt a cost-saving initiative to lower sustainment costs for F-35 by 10%. This, in turn, will result in cost savings of $1 billion over a five-year period. In fact, we believe the latest contract win will enable the company to take a step toward in achieving its goal and allow it to provide more of these combat aircraft at an efficiently reduced rate.

Meanwhile, Lockheed Martin is enjoying steady flow of contracts from the Pentagon since reduction of its F-35 price. In July 2017, Lockheed Martin won a modification contract, worth $5.6 billion, to offer low-rate initial production of the 11th lot of F-35, while in August 2017 it won a contract worth $427million for procuring ancillary military equipment and pilot flight equipment for LRIP of the 11th Lot of F-35 jets.

Production of F-35 is expected to continue for many years given the U.S. Government’s current inventory objective of 2,456 aircraft for the Air Force, Marine Corps and Navy; commitments from the company’s eight international partners and three international customers; as well as expressions of interest from other countries. Therefore, Lockheed Martin has solid growth prospect for F-35 program, which in turn will surely boost its profit margin.

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