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Lockheed Martin Secures $1.5B Deal for F-35′s Spare Parts


Lockheed Martin Corp.’s LMT Aeronautics business segment recently clinched a modification contract for purchase of long lead material and parts related to low rate initial production (LRIP) of F-35 Lightning II air systems. Work related to this deal is scheduled to be completed by December 2018.

Details of the Deal

Valued at $1.5 billion, the contract was awarded by the Naval Air Systems Command, Patuxent River, Maryland. The deal will serve the U.S. Air Force, Marine Corps, Navy, non-U.S. Department of Defense (DoD) participants and foreign military sales (FMS) customers.

Per the modification, the long lead material and parts will be acquired for 145 of the 13th Lot of F-35 jet for the Services, non-U.S. DoD participants and FMS customers, and for 69 of the 14th Lot of the aircraft for the non-U.S. DoD participants and FMS customers.

Majority of the work will be executed in Fort Worth, TX; El Segundo, CA; Warton, United Kingdom and Orlando, FL. The deal includes 24% of the work for the Air Force; 11% for the Marine Corps, 3% for the Navy, 44% for the non-U.S. DoD participants and 18% for international partners.

Notably, fiscal 2017 advanced procurement (Navy and Air Force), fiscal 2017 aircraft procurement (Marine Corps), non-U.S. DoD participant and FMS funds will be utilized to complete the project.

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. In this regard, Northrop Grumman NOC rendered its expertise in carrier aircraft and low-observable stealth technology to this program. Also, BAE Systems’ BAESY short takeoff and vertical landing experience as well as air systems sustainment supported the jet’s combat capabilities. Moreover, Pratt & Whitney, a unit of United Technologies 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 and 64% of Aeronautics division’s revenues in 2017. Evidently, the company’s top line grew 12% in the fourth quarter at its Aeronautics segment, primarily driven by the F-35 program.

Meanwhile, Lockheed Martin enjoys a steady flow of contracts from the Pentagon each year and 2018 is also no exception. Last month, the company won a delivery contract worth $159 million for this program. In the same month, it also secured a $148 million deal for designing and development of the program to support the Israel government. Considering these contract wins, we may expect the Aeronautics unit to reflect similar solid performance in the first quarter of 2018 as well.

Moreover, 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.

Additionally, Trump recently proposed fiscal 2019 defense budget that provisions for a spending plan of $21.7 billion on Aircraft. In particular, the budget proposal hints at an increase in Lockheed Martin’s F-35 Joint Strike Fighter program and has allotted $10.7 billion for procurement of 77 F-35 Joint Strike Fighters. These developments reflect solid growth prospects for Lockheed Martin’s F-35 program, which in turn are likely to boost the company’s profit margin.

Price Performance

Shares of Lockheed Martin have rallied about 27.3% in a year compared with the broader industry’s gain of 48.1%. This underperformance might have been caused by intense competition that the company faces for its broad portfolio of products and services in domestic and international markets.

Zacks Rank

Lockheed Martin carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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