looDive Brief:

• Lockheed Martin has been facing inflationary pressures stemming from certain multi-year contracts but the company has been mitigating these pressures through cost reductions, CFO Jesus “Jay” Malave said at a conference in California Thursday. 

• Speaking alongside CEO James Taiclet at the Morgan Stanley 11th Annual Laguna conference, Malave touted what he called an “outstanding” job in offsetting inflation but conceded that inflation will persist as a challenge for the defense contractor and aerospace company.

• “I’d say the next two years are probably our most challenged from the inflation impact in our contracts,” Malave said, noting that he expects to see some improvement in 2025.

Dive Insight:

The talk came one day after the Labor Department reported that inflation sped up last month, fueled by a surge in energy prices and the 40th consecutive monthly gain in shelter costs, CFO Dive previously reported. Traders last week shrugged off the news, with most betting that the Federal Reserve will hold the federal funds rate at the current level at the end of its two day meeting this Wednesday.

At the same time, the North Bethesda, Maryland-based company remains confident in its future growth, with the Ukraine war acting as a strong tailwind for the defense contractor. 

The Pentagon recently contracted with Lockheed Martin to replenish some of its own depleted stockpiles, Bloomberg reported. Taiclet, in his talk, anticipated that his company would bring in at least $6 billion of that sum, possibly more. He added that the PAC 3 air defense missile is a good example of what will get them there. 

“When we talked back in 2021 about our four pillars of growth, PAC 3 was a program that was already going to be driving growth and now it’s bringing the ramp up to 550 deliveries per year by 2025. We’re now seeing that we can take that to 650 per year by 2027,” Taiclet said. 

Taiclet also noted that a project to upgrade F-35 fighter jets has been impacted by hardware integration delays, a product of the process’s complexity. In a filing with the Securities and Exchange Commission the company disclosed it was lowering anticipated deliveries for the year from 100-120 to 97. 

The project was meant to replace the core processor, the data storage device and the panoramic cockpit, all major hardware upgrades. Each of these hardware upgrades requires software upgrades as well as test flights, the results of which might produce more modifications, leading to more delays down the line. 

“The fact that much of the major hardware was late [in being integrated with other systems] and some sub-components to that hardware were also late, this compressed the software integration test program dramatically,” Taiclet said last week.