Lockheed braces for new administration as Musk targets F-35

F-35 prime contractor Lockheed Martin is preparing for defense-spending changes under the incoming Trump administration, the company’s top financial officer said Tuesday.

“I would expect, over time, that there will be different priorities in this administration,” Lockheed CFO Jay Malave said at the UBS Global Industrials & Transportation Conference. “It typically happens, [that] the administration prioritizes things that maybe the prior one didn't. I think the good thing about Lockheed Martin is that we're accustomed to that. We know how to operate in that environment and how to adjust quickly.”

Elon Musk, a key adviser of President-elect Donald Trump and co-leader of an effort to cut government waste, tore into Lockheed’s F-35 program last week, calling the jet obsolete in the age of drones. Musk also tweeted a video of Chinese drones, saying “Meanwhile, some idiots are still building manned fighter jets like the F-35.”

Malave said some defense programs will feel the pinch, but the company doesn’t have much visibility into what the upcoming administration could cut. 

“With government efficiency, you could see elements of addition by subtraction, so ultimately, you could see a higher budget a request than what we've seen from the prior administration, but it could be as a result of some things either being curtailed or canceled, and other things being prioritized,” Malave said. “Until we get that visibility, it's really hard to speculate on what we'll see.”

It remains to be seen how much influence Musk will have on the F-35 program, and whether Congress will approve deep program cuts. Lockheed and the F-35 program office recently reached a handshake deal on the next two F-35 production lots—18 and 19—but that deal might not be finalized until after the new administration takes the helm.

The handshake deal is “a very positive sign,” Malave said, but the company still hasn’t obtained the undefinitized contract that would allow money to start flowing to Lockheed while final details are negotiated. The company has had to front the cash to keep the production line running as negotiations have dragged on. Prolonged negotiations kept Lockheed from collecting $700 million in the last quarter, the company said in October. And until the contract is finalized, the company’s financial results will be hit.

“We still don't have that undefinitized contract option finalized yet. So we're still working with our customer to do that, and the impacts will remain the same. If we weren't able to do that by the end of the year, you're looking at a couple billion dollars of revenue associated profit and a billion dollars plus of cash flow,” Malave said. 

Malave said he’s “bullish” the undefinitized contract will come by the end of the year.

The jets in lots 18 and 19 will be more expensive than previous lots because of inflation and new technology, Malave said, reversing the trend of declining F-35 costs.  

The company is also still reeling from a year-long F-35 delivery pause caused by problems with an upgrade package called Technology Refresh-3. Lockheed will absorb $600 million this year due to fewer deliveries and the Pentagon’s decision to withhold money from the company until the full upgrade is complete. 

The company will earn back that money “over the next few years,” Malave said, and could recover $400 million of it in 2025.