Supplier challenges stemming from the ongoing COVID-19 pandemic have already hit Lockheed Martin’s [LMT] Aeronautics segment, particularly with regard to the F-35 fighter program, and the company is closely monitoring supplier and government impacts to its business from the virus, company officials said on Tuesday.
The company’s supply chain is the area being watched “most closely,” Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said during a first quarter earnings call.
Lockheed Martin trimmed its sales outlook for 2020 by less than a percent, due entirely to impacts the company is expecting this year from COVID-19 on the Aeronautics segment, mainly the F-35. The company reduced the revenue outlook for the segment by $250 million to $500 million.
The supply chain impacts are due with social distancing requirements worldwide, workforce disruptions, shipping constraints, and expected impacts at Lockheed Martin’s F-35 production facility in Texas, Ken Possenriede, the company’s chief financial officer, said during the earnings call.
Assessments are ongoing to see if there will be any impacts on F-35 deliveries, he said.
Final assembly and check out facilities for the aircraft in Italy and Japan, which are two of the international partners on the F-35, were briefly shutdown but are back up and running, Possenriede and Hewson said.
Possenriede said some F-35 suppliers will be “delinquent” this month due to timing reasons, which will be worked out, but others, domestically and internationally, won’t achieve milestones mainly due to COVID-19 related issues.
The pandemic hasn’t disrupted F-35 development and so far, sustainment efforts haven’t been significantly impacted, Possenriede said. He added that under the recently passed economic stimulus package signed by President Trump, the company expects to recover costs it incurs when it can’t get sustainment work done due to the shutdown of a base, for example.
To help its suppliers worldwide cope with the impacts from the pandemic, Lockheed Martin is accelerating over $150 million in payments to small and medium-size companies, and has directed $50 million of a planned $450 million in accelerated Defense Department progress payments to its suppliers, Hewson said.
Possenriede said the company is working with the Treasury Department weekly to sort out the accelerated cash flow being sent to its suppliers.
Lockheed Martin is saving money due to travel restrictions, not sponsoring events, and not going to air shows, he said. These savings are unlikely to reach the bottom line but will go toward mitigating “disruptions” in the business, he said.
Once the virus outbreak began, Possenriede said the company began weekly tracking sessions for data collection and internal and external reporting that includes regular memos to the service acquisition executives of the military services laying out the visible impacts. There are about 600 items the company is tracking with regard to supplier and government-driven impacts, he said.
The impacts from COVID-19 are mainly risk related and include things such as travel and site restrictions, supplier shortages, and at company sites absenteeism, he said.
As for COVID-19 impacts on Lockheed Martin’s other operating segments, Possenriede said given the high-volume nature of business at Missiles and Fire control, this is the company’s next concern. The business area has been in touch with all of its suppliers and as of Monday, 10 percent of them expect an impact from the pandemic, he said.
Two suppliers closed operations, Possenriede said. For one the company is seeking a second source and for the other had an operation in Mexico that has since reopened, he said.
For now, Lockheed Martin is comfortable with the outlook at Missiles and Fire Control, he said.
At the Space, and Rotary and Mission Systems segments, the company isn’t any significant impacts. Some classified work at Space has been impacted but the segment is “doing a nice job working around that,” Possenriede said.
Rotary and Mission Systems, which is a relatively low-volume business, is also relatively unaffected. Engineering work continues although there are base and range closures that have impacted the business but again the company has found work arounds to keep business flowing, he said.
Lockheed Martin is hoping the curve from the virus begin to flatten by the end of the second quarter and in the third quarter there will be “some kind of semblance of business as usual, whatever that is, “Possenriede said.