Why did free cash flow decline in the third quarter?

Free cash flow fell to $2.1 billion from $2.5 billion, primarily because of a working capital decrease. The company could not invoice or collect cash on Lots 18-19 F-35 production work until the U.S. Government provided additional contractual authorization and funding, which had not occurred by the end of Q3 2024.

What is the Lots 18-19 issue and how big is the exposure?

Lots 18-19 is an F-35 production contract still under negotiation with the U.S. Government. Costs began exceeding the advance acquisition contract value in Q3 2024, leading to about $400 million of unrecognized costs in the quarter, at least $300 million of supply chain impacts, roughly $450 million of cash not invoiced through Q3, and about $2 billion of potential termination liability to third parties (partly recoverable in a termination). Management says results could be materially affected if a final agreement is not reached.

Did Lockheed Martin change its 2024 guidance?

Yes, the company raised its 2024 outlook for net sales, segment operating profit, EPS, and free cash flow. However, the new guidance depends on receiving Lots 18-19 authorization and funding in Q4 2024, so any delay could cause results to differ materially from the outlook.

How is the company returning capital to shareholders?

In Q3 2024 Lockheed paid $749 million in dividends and repurchased 1.5 million shares for $850 million. The board added $3.0 billion to the buyback program, for a total authorization of $10.3 billion with no expiration date, and raised the quarterly dividend 5% to $3.30 per share.

Which segments drove performance, and which were weaker?

Missiles and Fire Control was the strongest performer, with sales up 8% and operating profit up 15% on GMLRS, LRASM, and PAC-3 production. Aeronautics sales fell 3% and operating profit fell 2%, largely due to Lots 18-19 delays and an $80 million classified program loss, partly offset by an $85 million favorable claim adjustment. Rotary and Mission Systems saw sales rise 6% but flat operating profit after a reach-forward loss on a radar program. Space sales were roughly flat, with operating profit up 5%.

LMT 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed October 22, 2024. Cited figures are marked; the original filing is the authoritative source.

Lockheed Martin's third quarter 2024 results (quarter ended September 29, 2024) showed modest top-line growth but a meaningful cash flow shortfall tied to the Lots 18-19 F-35 production contract dispute.

Net sales rose 1% year over year to $17.1 billion, and diluted EPS increased to $6.80^a from $6.73. Net earnings declined slightly to $1.6 billion from $1.7 billion. Free cash flow fell 18% to $2.1 billion from $2.5 billion, as cash from operations dropped to $2.4 billion from $2.9 billion.

The company attributed the decline primarily to a working capital build from the lack of U.S. Government contractual authorization and funding on Lots 18-19, which stalled invoicing. Management disclosed roughly $400 million^b of unrecognized costs in the quarter, at least $300 million of additional supply chain impacts, about $450 million of invoicing and cash prevented through the quarter, and approximately $2 billion of potential termination liability exposure. Offsetting these concerns, management raised its full-year 2024 outlook for net sales (to about $71.25 billion), segment operating profit (to about $7.475 billion), diluted EPS (to about $26.65), and free cash flow (to about $6.2 billion).

The raised guidance is explicitly premised on receiving Lots 18-19 authorization and funding in the fourth quarter of 2024, so the outlook carries execution and timing risk. Capital returns remained substantial: the board added $3.0 billion^c to the buyback authorization, bringing the total to $10.3 billion, and the quarterly dividend rose 5% to $3.30 per share, the 22nd consecutive annual increase. Record backlog of $165.7 billion, up from $160.6 billion at year-end 2023, supports the medium-term revenue outlook.

02—Key points

Key Highlights

Net sales of $17.1 billion, up 1% year over year; nine-month sales of $52.4 billion, up 8%, led by MFC (+15%) and RMS (+13%) on a year-to-date basis.
Diluted EPS of $6.80 vs. $6.73 a year ago; net earnings of $1.6 billion vs. $1.7 billion, with a 15.4% effective tax rate vs. 13.8%.
Free cash flow of $2.1 billion, down 18% from $2.5 billion, driven by working capital effects from the stalled Lots 18-19 F-35 contract funding.
Lots 18-19 impact: about $400 million of Q3 costs not recognized as revenue or profit, at least $300 million of supply chain impacts, and about $450 million of invoicing and cash withheld through Q3; management expects recovery in Q4 2024 if authorization is received.
2024 outlook raised: net sales ~$71.25B, segment operating profit ~$7.475B, EPS ~$26.65, free cash flow ~$6.2B; guidance assumes Lots 18-19 funding in Q4 2024.
Shareholder returns: $1.6 billion returned in Q3 ($749M dividends, $850M buybacks); buyback authorization raised to $10.3 billion and quarterly dividend increased 5% to $3.30.
Record backlog of $165.7 billion (up from $160.6 billion at Dec. 31, 2023), though Aeronautics backlog declined to $51.0 billion from $60.2 billion.

03—Questions

Frequently Asked Questions

Why did free cash flow decline in the third quarter?
Free cash flow fell to $2.1 billion from $2.5 billion, primarily because of a working capital decrease. The company could not invoice or collect cash on Lots 18-19 F-35 production work until the U.S. Government provided additional contractual authorization and funding, which had not occurred by the end of Q3 2024.
What is the Lots 18-19 issue and how big is the exposure?
Lots 18-19 is an F-35 production contract still under negotiation with the U.S. Government. Costs began exceeding the advance acquisition contract value in Q3 2024, leading to about $400 million of unrecognized costs in the quarter, at least $300 million of supply chain impacts, roughly $450 million of cash not invoiced through Q3, and about $2 billion of potential termination liability to third parties (partly recoverable in a termination). Management says results could be materially affected if a final agreement is not reached.
Did Lockheed Martin change its 2024 guidance?
Yes, the company raised its 2024 outlook for net sales, segment operating profit, EPS, and free cash flow. However, the new guidance depends on receiving Lots 18-19 authorization and funding in Q4 2024, so any delay could cause results to differ materially from the outlook.
How is the company returning capital to shareholders?
In Q3 2024 Lockheed paid $749 million in dividends and repurchased 1.5 million shares for $850 million. The board added $3.0 billion to the buyback program, for a total authorization of $10.3 billion with no expiration date, and raised the quarterly dividend 5% to $3.30 per share.
Which segments drove performance, and which were weaker?
Missiles and Fire Control was the strongest performer, with sales up 8% and operating profit up 15% on GMLRS, LRASM, and PAC-3 production. Aeronautics sales fell 3% and operating profit fell 2%, largely due to Lots 18-19 delays and an $80 million classified program loss, partly offset by an $85 million favorable claim adjustment. Rotary and Mission Systems saw sales rise 6% but flat operating profit after a reach-forward loss on a radar program. Space sales were roughly flat, with operating profit up 5%.

04—Continue

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