Lockheed Martin (LMT) warns the Department of Defense (DoD) is increasingly pursuing rapid development and acquisition of new technologies through rapid acquisition pathways and procedures via other transaction authority agreements (OTAs). OTAs are exempt from many traditional procurement laws and are used for research, prototype development and follow on production for a successful prototype.

In its 2020 10-K, Lockheed warns non-traditional defense contractors are increasingly winning business due to OTAs:

“The conditions to award OTAs include, in certain instances, that a significant portion of the work under the OTA is performed by a non-traditional defense contractor or that a portion of the cost of the protype project is funded by non-governmental sources.”

In new language, Lockheed warns that it may not be able to adapt to the DoD’s rapid acquisition process:

“...we may lose strategic new business opportunities in high-growth areas and our future performance and results could be adversely affected. Shorter life-cycle technologies rather than large platforms could also make our existing portfolio less competitive in the future.”

Lockheed says OTAs represent less than 2% of its backlog but warns the DoD has increased the frequency of use and size of OTAs and the company expects the trend to continue in the future. Later in the 10-K, Lockheed implies it must undergo a digital transformation if it is to win business against non-traditional, more nimble new competitors:

“If emerging competitors can offer faster or lower cost services and products at equivalent or even reduced capabilities, then we may lose new business opportunities or contract recompetes, which could adversely affect our future results. Our success in competing and remaining cost-competitive may depend on our ability to adopt and integrate new digital manufacturing and operating technologies and tools into our product lifecycles and processes.”

While it appears Lockheed is not benefiting from OTAs, the company doesn’t like how current contracts are structured either. Lockheed has argued the DoD’s fixed-price contracting requirement is inappropriate and may cause the company not to bid on projects. The latest 10-K adds the following language:

“In addition, given the customer’s emphasis on cost, even if we effectively manage program life-cycle and sustainment costs and meet customer affordability targets, the customer may elect to recompete programs at the end of existing contracts, which may result in a lost business opportunity.”

Lockheed also suggests even when it is best qualified to win a particular project, it might not be awarded the winning bid as the DoD prefers to maintain a larger base of contractors. New language in this year’s 10-K suggests Lockheed may have already lost a contract in this manner:

“The U.S. Government also may not award us large competitive contracts that we otherwise might have won in an effort to maintain a broader industrial base.”

In 2020, 74% of Lockheed Martin’s revenue came from the federal government, up from 71% the year prior. With a new administration in place, Lockheed warns that a shift in federal spending priorities may negatively impact the company. New language in the company’s latest 10-K details the risk:

“Shifting funding priorities, including COVID-19 related spending, or federal budget compromises, could also result in reductions in overall defense spending which could adversely impact our business.”

The company also added language suggesting it may become costlier to comply with procurement regulations:

“In addition, costs to comply with new government regulations can increase our costs, reduce our margins and affect our competitiveness.”

International sales accounted for 25% of Lockheed’s sales in 2020. One third of those sales were purchased by the U.S. government on behalf of international customers. Lockheed suggests those sales— where the U.S. is the intermediary— are increasingly at risk. The warning follows the new administration’s announcement halting foreign weapons sales to the Gulf region.

Direct international sales are also at risk. The latest 10-K discloses that Lockheed’s relationship with China may be fraying:

“On July 14, 2020 and again on October 26, 2020, the People’s Republic of China (China) announced it may impose sanctions against Lockheed Martin in response to Congressional Notifications of potential Foreign Military Sales to Taiwan.”