Lockheed hit by $2B in charges on 2 classified programs

WASHINGTON — Higher than expected engineering costs and other difficulties forced Lockheed Martin to book $2 billion in losses on two classified programs in 2024, with a $1.7 billion hit occurring in the final quarter of the year, the company said in results today.

The world’s largest defense contractor recorded total year end losses of $1.4 billion on a classified program in its missiles and fire control (MFC) portfolio as well as a $555 million overrun on a program in its aeronautics division, Lockheed said in a news release. Of that sum, the MFC program logged a $1.3 billion charge in the fourth quarter, with the aeronautics program incurring a $410 million charge during the same period.

The MFC program losses stem from a contract where Lockheed can be reimbursed for costs during the initial phase of the program, but where follow-on contract options are locked under a fixed-price deal that holds Lockheed responsible for paying costs above a certain threshold. Lockheed estimates that all options exercised over the “next several years” would be performed at a loss to the company, with the first $100 million charge occurring in the first quarter of 2024.

“During the fourth quarter of 2024, the company again assessed the likelihood that additional options may be exercised and now believe it is probable that all options will be exercised based on performance to date, future requirements of the program, discussions with the customer and suppliers, and anticipated customer funding, among other factors, resulting in the recognition of additional losses,” Lockheed said in a release.

When Lockheed executives first disclosed the hit to the MFC program in April, CEO Jim Taiclet characterized the program as a long-running franchise that will deliver a strong return on investment after going through a period of teething pains, while Chief Financial Officer Jay Malave said the effort was expected to become profitable on an annual basis around the 2028 timeframe.

Meanwhile, Lockheed described the impacted aeronautics program as a fixed-price incentive fee contract involving “highly complex design and systems integration.” The company conducted a review of the program due to undisclosed near-term milestones and trends experienced in the fourth quarter, and recorded losses based on “higher projected costs in engineering and integration activities that are necessary to achieve those forthcoming milestones,” it said.

During an earnings call this morning, Malave laid out a list of process changes aimed at drilling down on some of the challenges faced by the classified aeronautics changes, which include implementing a continuous monitoring process to track the program’s technical milestones, adding technical resources and experts to the team in areas where there is elevated risk, and adding new automated testing procedures to speed up the finding and fixing of issues. 

“All those things taken together, give us confidence that we have significantly derisked this program and significantly reduced the risk of future charges on this,” Malave said. 

Beyond the classified programs, Taiclet said Lockheed looks forward to working with the Trump administration, particularly on streamlining acquisition processes and inducing innovation. He gave a particular shout out to the Elon Musk-led Department of Government Efficiency (DOGE), echoing the sentiments of top executives from L3Harris and General Atomics, who recently sent letters to Musk suggesting potential reforms. 

“We see DOGE [the Department of Government Efficiency] as an opportunity to make great progress in all these areas, and we will continue to share ideas and do our part to support efforts to eliminate unnecessary regulatory hurdles while working to increase efficiency in our own internal operations,” Taiclet said. 

Lockheed is making “excellent progress” on the F-35’s Technology Refresh 3 (TR-3), Malave said, referring to an update to the aircraft’s computing systems needed to field future mission system upgrades. However, the company still needs to complete some mission system integration work and improve the stability of the equipment, and although the company will meet “some milestones” this year, Malave would not go as far as to say the upgrade package will meet full combat capability this year as previously planned. 

“We’re targeting as much as possible this year. But I think for purposes of financial modeling, we would expect, you know, this to bleed into 2026,” he said, adding that “ultimately, the declaration of full combat capability is one that is left with our customer.” 

The company expects to definitize its F-35 Lot 18 contract with the Pentagon in the first half of the year, with Lot 19 to follow by the end of 2015, Malave said.

Because of the classified program losses, Lockheed’s target earnings per share for 2024 amounted to $22.31. It recorded $5.3 billion in free cash flow for 2024. Net sales increased 5% to $71 billion.

The company expects net sales of about $73.7 billion to $74.7 billion in 2025, with a free cash flow target of around $6.6 billion to $6.8 billion.

Updated on 1/28/25 at 1:55 pm to add information from Lockheed Martin’s earnings call.