Jim Taiclet
Chairman, President & CEO at Lockheed Martin
So, Doug, it's Jim. I'll start off. I want to lay out the fundamental framework of the F-35 program and then I'll turn it over to Jay for some of the cash flow impacts and expectations in the financial results of that. So first of all, just to reiterate, there's a very important distinction between the F-35 production system and how we book revenue and profit on the production system versus the event of final aircraft delivery, which is a -- actually fairly small proportion of the revenue and profit that an aircraft -- F-35 aircraft generates for industry, right? So that important distinction.
Now there's two current program conditions that you touched on that affect both of these outcomes, right? So what I want to also emphasize is both of the outcomes are not necessarily economic value outcomes, they are timing-related outcomes. So there's a time value money aspect of it. But the economic value of an F-35 that's delivered out of the system is not much affected, if you will, by these two issues, but the timing is affected.
So let me just start with TR-3 software finalization. So that's one of the conditions that we're managing through with the F-35 program and how that affects the delivery schedule. So about a year and a half ago, we had conversations and I did personally about a Release 1 and a Release 2 concept. The government calls that truncation, but that's really what the concept is like we would do in tech or telecom, we're going to do a Release 1 of software. We're going to work through the discovery of that. And then when that is ready, we will be able to have an initial product. And the initial product is TR-3, which is capable of doing unit stand-up, basing operations and training at operating Air Force and Navy and Marine bases as well as our allies with the TR-3, I'll call it, again, Release 1 software in it. You can fly the jet, you can practice basic and advanced fighter maneuvers. You can deal with -- develop tactics in your squadron and you can train your maintainers on how to do this new aircraft. So if you're swapping out an F-15 squadron to F-35 squadron, the maintainers actually need to get their hands on the planes just as much as the pilots do and then make sure all the tooling and everything is working for them.
So Release 1 is what's being delivered now. That was the 48 in the third quarter. They all have released one, you can fly the jet. What it doesn't have are some of those incremental software validations that show that all combat systems and all weapons will be able to be effectively deployed because the testing program and flight test and bench test has been completed and we get a certification of reliability for that weapon, for example. There are a lot of test points there and those test points are going to be developed not just in the fourth quarter, but they're going to be developed over the course of 2025 as well because when I say a weapon, is it an AMRAM, is it an AM9? What weapon are we talking about? There's literally dozens of weapons and there are multiple test points on things like [indecipherable] after system, etc.
So this is a complex path to what I'll call Release 2, that's the full up combat capability. And as we work through those capability certifications individually, there'll be diminishing cath withholds along the way as those flight tests are completed and the certifications happen. Jay can kind of aggregate that for you in a minute. But that's how this part of the program works on a fundamental basis. So we feel that our projection of, in 2024, 90 to 110 deliveries out of that process into Release 1, in 2025 and beyond, 180 deliveries a year of F-35. Now there's going to be a mix of those coming off the line, brand-new and those that are parked. So the 180s will be a mix of those. We're working on a weekly basis right now to prioritize specific aircraft deliveries literally one at a time. There's one-go to the Dutch Air Force first and the Marine second. And whenever we reprioritize, which we're doing by the week based on the needs of the customer base, now we need to change the bill of materials, we'll do other things and parked aircraft may remain when a new aircraft may come right out to the fleet.
So the complexity of this TR-3 software definitization and release is going to take some time, but we will be able to deliver a mix of aircraft above the 156 production rate for the next few years because we'll be mixing based on what the customer is looking for. So that's one of the issues that you talked about.
The other issue is actually, I would consider completely unrelated from this. And that issue is any lot negotiation for a program such as this at the scale this program is at. So we are on a lot contractual negotiation with the U.S. government. And by we, I mean our major suppliers with us and all the way down to our smaller suppliers. Now currently, that lot negotiation is 18 and 19 and it's not completed yet. And under the federal acquisition requisite regulation, if the government does not have a formal agreement with the supplier completed, the government cannot pay for either work being done under that undefinitized contract. In fact, it's a not completed contract to be clear or pay for a product that is actually completed either. So that is where we as industry then have to prioritize keeping our production system on pace while the government by law cannot pay us.
So it's essential for the health of the lower-tier suppliers that we do that. We all kind of step-up and do it as an industry. But the prime and major subs cannot book our revenue and profit even though we're expending cost. And that's where the cash impact of the negotiation comes in. We're not going to stop the production line because it would be unwise, I'll say, until the formal agreement is signed -- we are going to keep it going until the formal agreement is signed at which time these cash payments will be releasable. So those are the two issues we're facing.
I want to say one other thing, Doug, why you've asked about this topic of F-35, this isn't just a Lockheed Martin commitment to make this program a success. It's an industry-wide commitment, and I would also add a government commitment to make it a success. I'll just give you a few of the things that we've been part of and led over the last, I'd say, two, three months. We held a CEO summit of the top-five industry partners in Fort Worth at the factory where we took an entire day just determining how we could integrate our systems, IT systems, test systems, our processes, how we develop sub-assemblies and other items that go on the jet and integrate them with the jet -- those processes and personnel moving more people between companies on either a temporary or almost semi-permanent basis to make sure we've got the best talent working on every problem.
So that's one thing that we've done. That same CEO level team followed up with the government and the meeting there was chaired by the Chief of Staff of the Air Force. The Joint Program Office leader was there, General Schmidt, the U.S. Navy and Marines had their air bosses there and that was in the Pentagon, to lay out a similar integration framework with U.S. government systems, processes and personnel that's appropriate under law and regulation. And then we had another CEO update with U.S. senior government officials and this was just two weeks ago and seven partner nation customer officials in Washington to trade a status of what we were all doing together. And in two more weeks, I'm bringing my executive team at Lockheed Martin across all the businesses and functions, we're going to gather in Fort Worth to make sure that every resource, every operational practice, every supply chain element that we can bring from across the company and certainly all the technical talent is devoted to this program. That is what we are doing to make sure this is success.
And the last thing I'll say there is that the customers need and want this -- this aircraft. That was the opinion of the U.S. government in our meeting with the chief. There are six customers since the 2020, I think these are all the competitions that we're in actually that chose the F-35 that weren't in the original partner group with the original order team. There was Switzerland, Finland, Germany, Canada, the Czech Republic and Greece and then follow-ons from partners that already have the aircraft in operation also were added: Japan, Netherlands, Republic of Korea and Israel. So the demand for the aircraft and actually the essential need for the aircraft is there. Industry is getting together with government and I think in ways that we haven't done before to really make this a success. And we've got to work our way through the lot negotiation, which is again it's a timing issue as far as payments and we got to work our way through TR-3 integration, which is a technical issue. But literally it's an all-hands on deck, not just in industry, but I'd say in government to get this -- get this all done. Jay, any --
