Lockheed Martin's October raise lifts cash guidance far more than profit guidance

Lockheed Martin raised its outlook for this year in October, and most of what moved is cash. The midpoint of its free cash flow guidance, cash from operations less capital spending, rose $800 million from the July range. The midpoint for business segment operating profit, the company's measure of what its four divisions earn before corporate costs, rose $25 million. Capital spending guidance kept the same midpoint, so the extra cash is expected to come from operations.

The chief financial officer, Evan Scott, put the cash improvement down to collections, working capital and a continuing benefit from tax guidance the IRS issued earlier in the year. Profit is a different matter, because the divisions are pulling in opposite directions. Missiles and Fire Control, the munitions business, supplied $877 million of the company's sales growth last quarter. Its profit guidance went up by almost as much as the guidance for Aeronautics, which builds the F-35 fighter, came down: a cut of $105 million at the midpoint. Rotary and Mission Systems and Space added the rest.

The Aeronautics cut traces to the F-35. In July the top of that division's sales range included a bump that depended on the next production lot being awarded this year. Mark Kvasnak, who runs investor relations, said: "With this revised outlook, we shift that assumption to 2027." Scott said a Lot 20 sale this year would add to every metric because none of it is in the guidance. Lockheed is still negotiating the production contracts for Lot 20 and later lots, and last quarter its costs on the Lot 20 advance contract began to run past the authorization and funding in place; without more, the company said, its results, cash flows and financial condition will suffer in future periods. Chief executive James Taiclet welcomed a multiyear F-35 announcement, but the release still describes the lot contracts as under negotiation.

Munitions is adding sales without yet adding to its margin. The division's operating margin was 14.0% last quarter, barely changed from a year earlier. Its multiyear award for Patriot interceptors accounts for $52.5 billion of what the company called a record backlog, or orders in hand. The terms under those long-term agreements are still being settled. Scott said: "What is left to work is the finalization on the profit terms and on the schedule itself".

Most of this year's cash is already in. Free cash flow for the first nine months was $5.6 billion, higher than in the same period a year earlier. Taking the October midpoint, the fourth quarter needs about $2.3 billion, calculated from the reported nine months, which is less than the $2.8 billion of a year ago. Capital spending explains much of that: spending in the first nine months has run behind the pace the full-year guidance implies, so the guidance assumes heavier spending at the end of the year.

For 2027, Taiclet gave an early view: high single-digit revenue growth. The cash picture he described is less generous. A pension contribution of more than $1 billion is required next year, though the company has not decided whether to pre-fund it this year; Taiclet said that decision will come before year-end. He expects the tax benefit to be smaller than this year's. For a holder, the October guidance says most of this year's free cash flow is already in, unless the company chooses to pre-fund next year's pension. The profit outlook rests on munitions offsetting an F-35 program whose next lot award the company now assumes will come in 2027, and whose current advance contract is, for now, running ahead of its funding.