For clarity and from the most recent LM 10-K
Aeronautics is engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies. Aeronautics also has contracts with the U.S. Government for various classified programs.
MFC provides air and missile defense systems; tactical missiles and precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services; ground vehicles; and energy management solutions. MFC also has contracts with the U.S. Government for various classified programs.
Comments & answers re “Highly classified program at LM Aeronautics” as discussed on the latest quarterly call.
[JT] Turning to the Classified Program at Aeronautics, our mission at Skunk Works pushes the boundaries of science and technology to deliver highly advanced solutions that provide our customers a step-function advantage over potential adver*saries. This particular progr%am team discovered new insights in the quarter that required us to adjust our expected future costs on that program and then recognize the charge for doing so. I acknowledge the losses on this Classified Program are significant. Again, we are taking these charg!es very seriously and have initiated changes in program team management and assigned experts across the company to improve the performance and oversight of this program under a comprehensive risk identification and corrective action plan. This is a highly Classified Program that can only be described as game-changing capability for our joint US and international customers#. And therefore, it is critical that it be successfully fielded. With our enhanced oversight of this program and rapid incorporation of lessons learned, we expe^ct to continue to reduce risk over the next few years as we move through the key milestones of this very advanced system.
First, the Aeronautics Classified Program. As Jim mentioned, the process, control and resource changes we implemented following the fourth quarter of 2024, along with additional performance data on the program resulted in new insights that led us to recognize an incremental $950 million of reach-forward loss in the second quarter. To provide more detail, we have experienced desigzn, integration and test challenges as well as other performance issues on this program. Those challenges and performance issues continued into 2025 and had a greater impact on scheduling costs than previously estimated. As a result, we performed a comprehensive review of the design, integration, test and other processes to achieve the technical requirements of the program.
Based on this review and ongoing discussions with the customer and teammates, we made a significant change to our processes and testing approach, resulting in a significant update to the program's schedule and cost estimates. Based on this, we believe that recognizing this incremental charge is a prudent continuation of the comprehensive cor@rective actions and risk mitigation approach we implemented at the start of the year, which continues to demonstrate solid progress. Our continued investment in this program reflects our ongoing confidence in its criticality for national security and we remain excited about the future prospects for this solution.
with Evan's succession as the CFO role earlier this year and evidence of further program performance issues beginning to reemerge early in 2025, we've reconstituted the program review team for Classified Aeronautics program. So we had a different team, wider expexrtise from across the company and a higher-level scrut -- higher-level management as part of the scrutiny of the program. So we -- once we put that team together, having added additional expertise, as I said from across the company, we reassess the newly evident trends of cost increases and reevaluated all the program assumptions to the most detailed level of depth, a level below what had been done previously. Once these assumptions and they were long-standing assumptions were rebaselined to the then current performance, the additional reach-forward charge was calculated based on numerous future years of fixed price contract commitments.
Unfortunately, due to the nature of the clasxsification, we can't say how many years that is. But it is, I'll say it is not unlimited.
In addition, given the critical importance and customer support for these three particular programs, we will be and I will be actually further engaging their respective customers on opportunities to restructure these program contracts to moderate the currently identified and other potential risks while meeting the national security objectives of those customers.
And finally, I want to reiterate the policy that was put in place at Lockheed Martin five years ago, that there are no longer any must win programs. We will continue to ensure that every bid price proposal and contract structure does not introduce outsized or unbounded future risk as we're seeing on these three programs. Evan, do you want to add anything to that? [ES] continued transparency [is] what allowed us to signal in May that we were experiencing cost challenges and to have better insight as the continued program moved forward. And note at that same time, we signal cowst confidence in the MFC classified program and that we have the same established discipline there.
[ES] With the respect to MFC classified program. This is a program I'm very familiar with and that I worked personally in my last role. So it also has a reach-forward charge that we disclosed in the fourth quarter of last year. We've continued to monitor this very closely, similar to how we're monitoring the Aero Classified Program. And we've signaled throughout this quarter and continue to signal now sthat we've got confidence with how we're positioned with that program. Also a very important program for the Warfighter that we're anxious to deliver with strong customer advocacy. Jim, anything you'd add?
[JT] Yeah, I'd say the MFC program and I mentioned this before, the next Air Force pilot. This is again another game-changing capability for the US, really essential. And even on the margins, I think there is some upside in the future because those margins were affected by some of these one-time write-offs, although there were some plus-ups, the write-offs obviously were way higher. So there could be upside. We're not doing guidance for 2026 here, but there's -- there could be opportunity, especially in MFC.
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