Lockheed Martin Aktie

Good morning, everyone. I'm Kristine Liwag, Morgan Stanley's Head of Aerospace and Defense Equity Research. I'm very excited to host our next panel with Lockheed Martin.

Before we get started, I'll have to read this. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

So for our next panel, definitely very excited to welcome Jim Taiclet, CEO of Lockheed Martin; and Evan Scott, CFO. So welcome, Jim and Scott -- Jim and Evan.

Good morning.

Great. So maybe just to kick off, Jim, this has been a question from a lot of investors, which is about the technology insertion in the battlefield, right? We've seen sovereign customers needing more equipment sooner. We've seen the proliferation of low-cost autonomous systems being pretty effective in the battlefield.

And then at the same time, you also see -- and maybe this is the part where investors don't see as much, there's also more need for high-end types of solutions. So can you talk about where Lockheed's role is in this environment? How do you counter some of these lower-cost autonomous systems, and how do we keep prepared? And what is the environment for these high-end threat environment, too? And where does your company fit?

Sure. Well, I'm glad you started it off, Kristine, this morning with technology. And good morning to all of you here. Thanks for coming today. And I'm, first of all, going to be, as the ex-Air Force pilot, very proud to say that U.S. government and us speaking of technology, just announced this morning the long-term multiyear agreement for the Joint Advanced Tactical Missile, which is an air-to-air missile that's more advanced next generation, if you will, will change the deterrent posture that we can provide. And the JATM, as it's called, AIM-260, is going to be produced, but it's not even in full-rate production yet. And the U.S. government has already agreed with us to a long-term multiyear contract to deliver it. That's how good this technology is.

Our role in this entire changing ecosystem, I believe, is to take the Lockheed Martin systems integration heritage. We make the most advanced systems like the JATM I just described, F-35, Trident missile, Patriot PAC-3 MSE. These are highly complex, very high-capability devices and products and platforms. We've got a history of almost 100 years of being able to do that. We have the DNA. We have the muscle. And with the way that warfare is evolving, we're taking that muscle, we've been working on this for about 3 or 4 years, and going from the systems integration lead to the mission integration lead.

And what's the mission? Well, let's talk about products first, and then we can evolve to the mission. The product is air-to-air combat, air superiority. That's 1 of the 12 missions that we designed to. And with JATM, for example, what we've done is we've integrated the most advanced next-generation air-to-air missile with the most advanced fighter aircraft, F-35 and F-22. We did that mission integration because now, our app, if you will, or the Air Force's app or the Marines and Navy, their app is not like Google Maps to just have navigation to show you where to go next and how to turn your car. Their apps are shooting down other airplanes and protecting yourself.

So we can do the systems integration, JATM, into F-35, for example, seamlessly, that's in our muscle memory. But what we can do as a mission systems integrator is match those two complex systems together and then match them with digital technologies that allow the mission, through a mission technology road map, to keep advancing capability. If there's a new missile, that's great, it's a step function up. If there's a new airplane, it's great, it's a step function up. But every 3 to 6 months, we're also using digital technologies to create more capability.

And the real centerpiece for Lockheed Martin is to be able to do systems integration into a mission integration package with new technologies. And new entrant products and those from Northrop Grumman or Boeing Defense, that's our sweet spot is full mission integration, and we've been practicing that for, call it, 4 years with these mission technology road maps.

Our goal is to work with our customers, the users, to create decisive military advantage at a theater level scale. That is really the core mission of Lockheed Martin. And so that's what we do. The key thing on the high-end platforms and systems and the low-cost counter-UAS systems, for example, is that you've got to have, for certain mission subsets, the high-end system.

So just to talk about in missile defense for a moment, the PAC-3 MSE and THAAD, expensive high-end, super capable missiles, they can hit long-range ballistic missiles, they can also target hypersonic missiles and everything below that. The trade-off of using a PAC-3 missile for a Shahed drone is not a good one economically. And so we know that there's other ways we should be able to deal with drones.

And so the drone solutions we've come up with, the newer technologies using some start-ups as suppliers actually, some of our venture investments with suppliers or solutions to the mission road map, we've come up with 2 or 3 systems now that we can integrate into that air defense missile defense. And that will create deterrence, which is really what our product is. Our product is deterrence. It's not a PAC-3 missile. It's not simply an F-35. It's creating deterrence against great power conflict, which is a very valuable service. So that's our role is to be the mission integrator using our systems integration capabilities and the high-end products that we actually do make.

So Jim, maybe taking a step back, I think right now in the U.S., we have the lowest number of veterans in the population. So could we just -- can you just provide a little bit more color regarding what people see in the media? For example, you look at Ukraine, it's effectively drone and trench warfare, which I think was not what people thought what warfare in 2026 looks like.

But also what you just mentioned right now, you talked about decisive capabilities in the theater level. I mean, that's very different from a drone/trench warfare. Can you just expand on the difference a little bit? Because I do think that on the high-end capability of Lockheed, maybe investors are underappreciating what that means to be relevant in a great power type event.

I think the starting place for the Ukraine stalemate essentially, trench warfare is that neither side has been able to create air superiority in a level that we just described. If either side, Russia or Ukraine, had complete command of the air, this drone/trench warfare may not have developed. It wouldn't have had time to develop, and we would be in a different situation.

But you do have to have both. You have to have the high-end control of the air. And also, you have to be able to counter these new autonomous relatively low-cost attack weapons is what they are. That may not necessarily be what we will emphasize. What we will emphasize is the much more complex mission of counter-UAS. Almost anyone can build with Chinese parts generally, and that's how the Russians and the Ukrainians are doing it. With Chinese parts, you can build a drone that can drop hand grenade in a trench. Almost anyone could do that in their garage.

But when it comes to seeking out that drone, identifying it and destroying it en masse, hundreds or thousands, that is a much tougher mission set. So again, the offensive drone warfare is an easier technical problem, frankly, than counter-UAS. And so what we've been doing, building this muscle of mission technology road map, assessing evolving kind of threats or new weapons that are put into play like in Ukraine and actually also in Iran now. We're able to quickly motivate our engineers to design to the mission, not design to an RFP only.

So that's where the 2 systems -- the counter-UAS systems that we're scaling now came from. They came not from a lengthy RFP from the U.S. government, they came from us with our experts, many of them ex-military and ex-intelligence community veterans coming in, building those technology road maps and saying, we have to be able to do this. And there's no RFP from the government. They haven't really thought through the technical solutions yet, or maybe they're going in a different direction.

What we do with our mission technology road map, say what do we have right now, like on the shelf and deployed, by the way? Because if it's deployed, it can be used quickly. So some of the things that we have on the shelf or actually the Army does, Hellfire missiles. We built tens of thousands of those a year. There are more tens of thousands of those in the stockpiles across all our allies in the United States.

And so we kind of unleashed our engineers with these mission technology road maps. These are day job, which is respond to RFPs, then design to those. But a lot of their time now is built on figuring out what the next thing is going to be, maybe even before the U.S. government puts a request for information out about it, and offer them solutions. That's the new Lockheed Martin. We're not just waiting for RFPs. We are, but that's not all we do. Right?

Now we're looking at our own mission technology road maps and saying, what's the next thing is going to be needed? And how can we scale it to a theater level? When I say theater, I don't mean like a movie theater, I'm talking about the Pacific Ocean, okay?

Big theater.

Europe. Yes. That's right. The Middle East. So how do you scale something that is -- if it's a really cool science project and you can't scale it and you can't teach in 15 minutes, a high school graduate Marine to use it, it's interesting, but it's not effective. What we're doing is effective at that level.

And so what did we take? We took the Hellfire missile, which is a helicopter-carried missile that goes from air to ground. It was designed to hit tanks and things in the Cold War. And our people use digital technology, new software, a new integration package into an existing launcher architecture and an existing missile. And we changed it from an air-to-ground missile off the helicopter to a ground-to-air missile to hit these drones.

And we've been testing that out at Yuma and other places with the military, and it works. Of course, it works because the pieces already exist, we just repurposed them. And so a mission technology road map says, I got Hellfires, I've got a launch architecture. It's already deployed with the U.S. Army and many others. How can I repurpose this for this new threat that came out? And that's an example of it.

And I'll give you the other example because it's actually more esoteric. The Grizzly, which is this ground-to-air missile technology that we developed, has to be tied into a command and control system, which is, again, another strong point of Lockheed Martin. So the command and control system has to identify the many -- it can be hundreds of drones, as I said. It has to make sure that they're enemy, it has to make sure that they're nefarious. And then it has to do what's called target-weapons matching. I got 100 weapons, I got 200 targets. What are the best combinations to eliminate that large threat?

And that system has to then cue a weapon. Now these things are not toys. They are explosive devices with rocket motors in them to go ahead and will be launched, track and hit a couple of hundred drones. And so that, again, is a differentiable technology capability that we have and others have in our space, if you will. Yes, I'm sure. Boeing Defense has a similar version. We know Northrop does and others. But we have a pretty advanced one ourselves.

And we tied that Hellfire missile and a new mission into that command and control system that we evolved for counter-UAS. And then we added another device, which our guys -- our folks invented, which, at our request, like, okay, how do we -- we've got a missile solution. We need a directed energy solution to match with that, to accomplish the mission and take it another step forward.

And so our engineering team developed our own UAS, which is probably about as big as a large dining room table, weighs a few hundred pounds, and it's got the 4 rotors. It takes off vertically. And on top of this is LiDAR, radar, infrared, a bunch of sensors and a box. And that box is a high-power microwave, that this device will tie to the same Sanctum command and control system. I've got 200 targets, 100 are going to get hit by the Hellfire missiles I have at my disposal. There's still another 100. That Sanctum system will parse out which of those targets goes to the kinetic solution, which is the missile, and which goes to the electromagnetic solution, which is microwave.

And it will then assign this drone to go to those other additional threats, fly beside them, make sure with all the sensors that identifies it as an enemy drone, zap it with the high-power microwave. That zap fries the electronics inside the drone. The drone just fails. It can do that 50 times on 1 battery charge, and it goes back for a battery charge. So if you have 10 of these and you have 20 Grizzly launchers, you can deal with 200 drones coming at you, much more effectively than anybody can today.

Now you've also got the solutions of F-16 firing air-to-air missiles, other solutions. And the layered defense that we are creating with our mission technology road map will be, I think, will be the force protection solution for the U.S. government for bases, for THAAD missile batteries and things like that. But 1 little product or 1 little piece of this from a startup can't do this alone. Someone's got to mission integrate it. And this example that I just gave you of Sanctum uses a radar not made by the great Lockheed Martin that does Aegis and all the TPY radars. It was from a start-up we invested in called Fortem. We use Fortem radars because they are very transportable, light and resilient. And so you can get a couple of pickup trucks, put a Fortem radar on it, put a Grizzly in the back of the other truck.

And you can go out and protect forward operating base, a stadium, something like that.

And that's the way we're thinking now as a company. I mean, it literally took 3 or 4 years to drive the Z-axis to big old Lockheed Martin and the 4 business areas. But that's how we think now, that's how we operate. That's how we plan. And that's how we allocate our R&D. And you might have noticed, our R&D budget has gone up significantly and as our CapEx budget because we are now investing our cash flow -- part of our cash flows into all these opportunities that no 1 is thinking like this. I'd like to think we are.

So that's how all this technology does come together. And the real match is, again, as an ex-Air Force pilot, I know that you need the big platforms for 3 things: range, payload and survivability. So that's the F-35. That's the F-47 coming down from Boeing. That's the F-16, the F-15. You've got to have those big platforms because they have the range to get to the target.

Now we're talking high end again. Range to get to the target, the payload, like the B-2 could carry a 2,000-pound weapon, put it down an air shaft and blow up a nuclear facility in Iran. It took us 32 hours to get there and back for the airplane. That's the kind of platform you need to do the high-end missions, but if it should be heavily complemented with networking with lower-cost systems and with new entrant systems that not necessarily coming from the big prime contractors.

And so our goal is to welcome the venture firms. And we have our own venture fund actually to help them. We welcome in new entrants like Fortem. And then the other example I'd give you because changing this company to be more of a commercial technology company at least think that way, is another alliance we have with a company called Saildrone. Saildrone's, again, start up, but it's been around a few years. They can actually build autonomous ships that, guess what, they're really interesting because they work.

But what they need is they need payload. They need something to put on the ship to make a theater level effect or deterrent against armed conflict. What are those things? They are weapons. And so we teamed up with Saildrone, their autonomous ocean vehicle, 1 they have, 1 they're developing. And on the first one, I guess that we're going to put the Grizzly system.

So we're going to put the Grizzly system and the Sanctum command-and-control arrangement on these autonomy ships that we don't make and that General Dynamics doesn't make. Or BAE.

This is a company that came out of literally nowhere that we can now use to improve the deterrent posture in the Pacific Ocean or elsewhere. And they could have done it on their own. We didn't have a ready-now product. So we married up with them, and we are deploying and testing the Grizzlies now with them. And then we're going to put something called a Mark 70 launcher, which can take much bigger missiles and put it on a Saildrone ship. And that's what we have. That's how we have to act now.

And that's why Lockheed Martin, I think will differentiate itself over some period of time. And these long-term agreements that we're putting in place, starting with munitions, including the one I just described this morning, and could go to any other system that we make where the government agrees there's long-term demand. So we want to change the whole industry, which will allow for more creativity, more advanced development by us and hopefully by everybody in our sector and also, over time, expanded margins.

Because these framework agreements are designed to allow industry, if it gets successfully get the cost down, to have expanded margins.

The system we live in today, for the most part, the annual budgeting and recontracting system -- something when I came from commercial telecom back to this arena, I was reminded that if we take cost out of a program next year, our revenue and margins are going to go down. So why would you invest $10 million in a new robotic system to make your Patriot missile cheaper if you're just going to have to renegotiate your revenue margin down. With the framework agreements, that doesn't happen.

And what we agreed to do, by the way, with them is if we get above a certain margin expansion, which we all -- we keep all of it, then we're going to do some -- there's a profit-sharing algorithm or formula that some of it will get back to the government and reinvested in the program. So this is much more of a commercial technology approach, flywheel, if you will, to actually make our industry better and stronger and higher margin, which allows us to invest more and the government to invest more. And we'll have a more effective national defense with that.

And I think this country will demonstrate -- this country and this company will demonstrate that is a better way to run the national defense enterprise and the relationship between industry and government. And guess what it will do, it will open the doors for a lot of other companies to come in, whether they're start-ups or new entrants or high-tech companies, we have partnerships with Verizon for 5G, which we're developing a really cool project, which I don't talk about now, but it's really cool with them and their 5G network.

We have alignment with NVIDIA since I think 2017 on AI. Same with IBM, we're doing quantum, we just opened another lab together in Switzerland to work on quantum. So we're working with all kinds of companies across many industries now. We want to bring that big tent to our national defense. We have a more effective national defense and we can have higher margins. So that's what this really is all about.

That's very helpful, Jim. That's a very comprehensive view. And I think that's an underappreciated view of your role because sometimes if the investors think, "Oh, you're just old Lockheed," and it seems like there's a lot of invigoration happening with the company.

I'll give you 1 other little story about this is how we're different. So we -- I said, took the straight jackets off our engineers for some of their time and energy. And Evan and I and Frank St. John, the COO, we go to factories kind of almost every week, I think 1 of us are there, so -- or all of us are there. We do our executive team meetings at factories every month.

So when I go to 1 of the plants, there's a lot of them, but I go, well, show us something we haven't seen before that's not in the LRP or a long-range plan or not on contract yet. What are you guys working on here. And so we went to Orlando, Florida, we have a missile fire control plant there. And very proud looking, most of the young people were at the end. And this was the -- show me something we don't know about yet. And that's where we first saw -- this was about 9 months ago, 6 months ago. Saw Grizzly, it was there with the missiles in it. And we saw the Sanctum, mean looking kind of microwave killing machine.

And I just looked at both of them. I go, these tested positively in the field with the customer, and they said, yes to both. These things actually work. And I said, build 1,000 of each of them right now, and we'll figure out how to either sell to the U.S. government or somebody else or lease them out. This is the right technology solution. This is scaleable, and we're going to have a couple of hundred of these Grizzlies ready to deploy by the end of the year. That's not the old Lockheed Martin all think.

Well, you know, Jim, I think that kind of dovetails into my next question. It seems like, look, the U.S. government, the Department of War wants speed, scale, agility, commercial terms on some of these technology. So for these examples that you've highlighted, it's really clear that you're moving in the same direction with them. So can you share with us how do you think about further alignment and where you are in your journey for Lockheed to be fully aligned to this type of new business model?

I'll let Evan speak to the financial outcomes that we were hoping and expecting to come from all this. But there's leadership now in the Pentagon at the very top even that has true commercial investing and operating experience. And that team and we have complete alignment on how to change this relationship between government and industry.

And you can go back to 2020 when I came off the Board at my colleague's invitation. I was on the Board of Directors and can come in to manage the amazing management team we have. In 2020, I did an interview with CSIS with Dr. Hamre, and I talked about all of this stuff. And out in the world, Deputy Secretary Feinberg was running his hedge fund, they have and haven't had had for years investments in defense space. Look, probably looking at the same issue the same way. And the fact that both of us now are somehow here allowed us to negotiate that first PAC-3 MSE multiyear agreement. That was his team in mine with us there for much of it, figuring out these -- they call them heads of agreement, it's basically a framework or a major term sheet on how to do commercial-type contracting between the U.S. government and the aerospace and defense industry.

And so the leadership is there to seize the moment, so to speak. We've been practicing for this for 5 or 6 years from now, and we're really welcoming it. Now the prior administration did get some multiyear munitions contracts through with us, which was great. But with this kind of new breed coming into the Pentagon leadership, and the need, frankly, to really scale up given the situation in Europe and also now in the Middle East, the moment was right, the people were right and the energy was there to do it.

And we do need Congress to come in for the full funding of the whole 7 years, if you will. But they've already been doing 2 or 3 years so far on some of the programs we have under these long-term agreements. I do think Congress will see the value of this and the protections that we put in for the government and the upside they put in for industry, and I think they will get there.

The budget process is going on now. That isn't -- that is important as the theme. The theme is to have a more effective defense industry, if you will, and more effective national defense, using the old cost base yearly system for -- especially for programs that you know are going to go on for years is suboptimal, heavily suboptimal. And now I think that the universe of people that care about these issues are starting to say, okay, this is a better way to do this. And let's get on with it. And they are getting on with it.

And again, we announced yet another of these agreements this morning on something that's not even public yet. It's been developed with us and the Air Force for years, but it's not even full rate production. So this is the -- I think this is the tide where it's going, and we're going to continue to lead it because we have very big programs with very long cycles. Long -- many multi-multiyear programs of record, whether it's F-35 or Trident missile or other things like that. We can make this industry government arrangement, much more efficient, much more effective, especially given the threat environment.

And last thing I'll say because I'm a lapsed engineer too. So I'm not flying planes anymore. And I really was an engineer, but I have a degree, enough to get you in trouble. But this is a big engineering problem that the country has. They got escalating threat. We have an escalating threat. And you pick your spot, China, North Korea, Iran, Russia, very dedicated to competing with us, I'll say. And then we have technology moving faster than it ever has in human history, both in physical and digital worlds. And then you got more or less a fixed resource defense budget, so to speak. I know there's -- is it $1.15 billion, is it $1.5 billion. It can't get infinite. It's not going to double or triple. So the threats trip -- doubling and tripling the speed of technology development is doubling or tripling. But the resource is the same. And the only way to close that engineering equation is to change the system that you operate under. And that's what we've been trying to do for the last 4 or 5 years.

Yes, on the financial side. So now with the announcement this morning, we can disclose that we have signed 4 HOAs with the Department of War, PAC-3 and THAAD, which both have UCAs. In 2Q, we reported the full backlog of 7 years for THAAD. We'll do the same in 3Q for PAC-3. PrSM, we've talked about award next year. And we'll let the customer pace the timing of the JATM HOA. But clearly, as Jim mentioned, we're very excited about partnering here.

But the upside of this business model is just very clear for every party. Certainly from the Pentagon and the Warfighter, they're now getting guaranteed of delivery in a lot of cases at a much higher volume so that they can have a surety of their long-term mission planning. From a taxpayer perspective, now you've got stable prices for a very long-term basis, when in the past, we've seen impacts of inflation.

And for us, it really allows for a long-term production planning or resource allocation. We've talked about 20 new facilities that are either new or significant additions. You can only make that kind of commitment to long-term facility planning with these long-term agreements that we partner with the customer. So really, it's a win all the way around.

For, of course, for our shareholders, now you've got that true clarity in our long-term revenue while we're seeing the fastest-growing part of our business, is the highest margin part of our business. So very positive.

So maybe, Evan, just following up on maybe for 2026, right? Revenue for the first half of the year looks good. Free cash flow was also good and even raised them at the 2Q earnings call. But you had some margin pressure in the first half of the year. How should we think about the second half of the year margins?

Yes. So margins for 2026, we expect to be in line with our guide. Now Q3 may not have the same number of risk retirements that Q2 or Q4 had. So you may see some lumpiness as we get to our guided margins. And if you look at our margins, it's sort of a mix of some of the headwinds from some of those programs that we talked about that create a dilutive effect across our business areas.

But underlying, there's very strong performance in our core programs. So as we trace through the roll-off of those dilutive programs, we see long-term margin opportunity, like Jim mentioned, because the core performance of our programs have been very, very strong. Almost very quietly, F-35 production is 1 of the highest performing programs in our whole portfolio. And that's going to create real long-term opportunity.

Space, just very strong performance. We -- and they're doing without the benefit of ULA equity earnings. And so as we see that return to flight, we'll have some margin uplift. MFC, we talked about a little bit of dilutive pressure as we scale up, but long term, very long margin opportunity. In Aeronautics, as we deliver out the current lots of F-16 and C-130, that core performance is really strong. And then RMS, as we build out the current lots of Sikorsky, get into the multi lots of 53K, we see a lot of margin opportunity because the core RMS is performing very, very strongly when you look at the ground radar business and the C2 business that Jim talked about earlier.

Great. Now maybe diving a little bit deeper to some of the things you said, Jim. The threat environment is not abating. In fact, it's getting worse. We have finite resources. So on the finite resources part, we've got -- we're operating in a continuing resolution environment. The fiscal year '27 budget is still uncertain.

How do you operate a business where speed, agility is paramount to national security, but there's a disconnect in terms of the threat environment and the visibility into the budget as some of these haven't really fully translate into definitive agreements or funding? How do you think about that?

So the timing of when a budget gets approved or a CR gets released or those kind of legislative calendar type things do not affect our overall business that much because of our backlog, almost all of 2017 revenue is already funded. In other words, the money in the "bank" or in the treasury or essentially almost all of our 2017 expected revenue.

What it does slow you down on is deploying innovation. And when I say you, I don't mean Lockheed Martin, I mean the entire enterprise. So the -- our government official counterparts in the administration and in the Pentagon, they are working that problem hard because they want innovation faster, and they're trying to convince we agree, our legislators and senators, that the cost of delays in the budget process slow them down from getting better and introducing innovation faster.

At the same time, our existing programs are going to get -- they're already funded. The backlog will be applied -- those funds will be applied to the backlog in 2017 and into 2018, in some cases and beyond that. So our base business is in pretty good shape, I would say, even if the CR is -- pick how many months you think it's going to go. But we will continue to innovate and be ready. And when the funds get released for the new start program, because new starts and additive elements to existing programs, those are the things that actually do get delayed. We'll be ready to go and scale.

Like I said, we know -- I know we could probably build 5,000 of these Grizzly launchers, and they're all going to sell. They might not sell in the next quarter, but in the next 3 years, again, we can make thousands of these things. They work, they're effective. The threat is rising. There's no efficient way to do it. This is the most efficient way to do it from a kinetic standpoint. Those are going to sell.

We are not afraid to -- and by the way, when you talk about low cost, these systems I'm telling you about, they're in the tens of thousands of dollars, not the tens of billions of dollars per item. So we can manage the cash flows on those kind of innovative programs because their basic cost is not that much and the development cost isn't even that much. So this is something I think we can manage, the timing of budget releases and such.

Super helpful. And then you guys have called out $8 billion to $9 billion of capital investment through 2030 to support increased munition production. When you think about the puts and takes here, how should we think about the financial impact where you've got this CapEx investment, or some of them, not necessarily CapEx, but other parts of investment. How do we think about this translating into accelerated revenue growth, multiyear? How do we think about margin trajectory for the enterprise, and also ultimately, free cash flow?

Yes. So if you think about the $8 billion to $9 billion, the largest piece of it will go where you'd probably expect the capacity, the new facilities, the new tooling to really ramp up capacity. There are 2 other key elements to that, that are important. One is the obsolescence planning to ensure that we don't have any obsolescence items that pop up maybe into year 5 that would slow us down and then building additional capacity and second sources at that mid-tier level.

The true resiliency in a production line that prevents any kind of stops because once we're on, we're on with a set schedule at a set price, and we're off to the races. So this upfront investment ensures not only a production scaling, but production resiliency. And the nice thing about the $8 billion to $9 billion, that is just at the Lockheed Martin level. That cascades down to our next tier suppliers, and this is unlocking true investment, the true scale of production across the whole industry.

From a financial standpoint, the nice thing is we have the cash neutrality treatment as part of these HOAs. So we're able to protect the cash flow out in the near term as we convert to deliveries to start seeing cash flow accretive. And it's turning into revenue right away because we are off to the races despite them being UCAs, we have the full authorization for the 7 years on PAC-3 and THAAD. So we've begun as fast as we can to scale. So you'll see the revenue side of that immediately in our business.

Yes. That's right. And just going back to first principles on these agreements, the ones that were cited a minute ago by Evan, we're tripling the volume of annual PAC-3 production, tripling it. We're quadrupling the THAAD production. So those are just 2 examples of, wow, this is -- these are major business increases. There's not like 20% more than last year. These are -- we're saying by the end of 2017, we'll have built 2,000 next year. I mean, that's the rise here.

When it also comes to PAC-3, there is significant international demand. And right now, the U.S. government is parsing out as they always do for foreign military sales, who gets what? Well, if we've got them coming out the end of the factory, that whole demand is going to be able to absorb it. So we're actually targeting more than 2,000 a year because the 2,000 doesn't count the Navy putting PAC-3 MSEs on ships using our Aegis system, which is happening, starting to happen for real now. It doesn't count all that latent external international demand either.

So we expect more than tripling per year, and we just got to get there operationally, and it does take time. But this munitions will ramp up, as we call it, will change the -- basically the apportionment of revenue of the entire company of Lockheed Martin. So to the good. Other things are going to continue to grow, too, but this munitions ramp-up is significant.

The other thing that I want to reference that Evan alluded to is our supply chain is almost always the constricting issue. It's not Lockheed Martin labor, it's not Lockheed Martin process or factory space or anything like that. We can put together anything at almost any volume if we have all the parts. And those middle-tier suppliers, they are almost always no offense to problem. Some of our competitive mates are sometimes the problem, too. We won't identify those.

But our supply chain is our biggest risk factor in production scaling. And so what I try to remind my government colleagues is, remember, you've got Northrop and General Dynamics, et cetera, et cetera, Lockheed Martin. Major portions of our business, 50%, 75%, 80%, 90% are defense, and through you, the Pentagon leadership. All of our suppliers, maybe it's 5%, 10%, if you're lucky. They're making capital allocation decisions and employment decisions.

And when they get a 7-year subcontract from us, like the scales fall from their eyes, they go, okay, I got 7 years of triple production of my part that's going to go into those Patriot missiles. I'm going to invest in that. Right now, because I got the best credit in the world backed up by an investment-grade OEM. I now am comfortable putting that $10 million into some automation that I was never going to do before, small part of my business, annual contract. I wasn't going to do it. Now we'll do it. I think this flywheel effect here is going to be very good.

So maybe I'm with the interest of time, like Jim, 1 last question for you. What big problem are you spending most of your time on right now?

Making sure that we can drive autonomy and AI appropriately and effectively into all those mission technology road maps. I'm in the factory a lot with the gang, but I'm also out at technology conferences. I have a lot of relationships from my prior company.

And they all want to contribute. I mean, literally, the CEOs want to contribute to what we're doing. We have the access to some of the best technology in the world that's completely outside the A&D space. And us optimizing that and making bets like our Vectis, which is -- we're designing and building a CCA. It's as big as an F-35. Remember, range, payload, survivability. It's got stealth. It can carry significant amounts of weapons. It can go quite far.

Smaller ones are interesting. But if you want to go penetrate the PRC, you need to have F-22s F-35s, B-2s and B-21s and these things. Something like the Vectis. And by using the best AI that we can get a hold of, the best autonomy software that we can partner or write ourselves, which we are doing and integrating into the F-35 at Vectis like, as we speak, I think we can really be the leader here.

Well, great. Well, thank you very much, Jim. Thank you very much, Evan. This concludes the presentation on Lockheed Martin.

Thank you.

Good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2026 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Mark Kvasnak, Vice President, Investor Relations. Please go ahead.

Thank you, Sarah, and good morning. I'd like to welcome everyone to our second quarter 2026 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Evan Scott, our Chief Financial Officer. Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements.

Please see Lockheed Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We posted slides on our website today that we plan to address during the call to supplement our comments. These slides also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the slides. And with that, I'll turn the call over to Jim.

Thanks, Mark. Good morning, and thank you to everyone on the line for joining our second quarter 2026 earnings call. As you saw in our press release, Lockheed Martin's second quarter results were strong. Our backlog reached a new all-time high, now $230 billion. We generated nearly $3 billion in free cash flow. We accelerated our revenue growth and turned in higher earnings per share. Consequently, we are raising our 2026 guidance, reflecting our confidence that our strategy is gaining momentum, and we will continue to produce sustained profitable growth over the next few years.

While these achievements stem from robust customer demand, they were enabled by strategic decisions we made well before this demand materialized. For the past several years, we've been increasing munitions capacity ahead of contracted demand. We've been pioneering comprehensive open architecture technology initiatives well before they became the standard practice, and we established a manufacturing footprint in allied countries prior to the rise of co-production requirements.

By embedding our core 21st Century Security principles, rapid data-driven decision-making, resilient supply chains and interoperable AI-enabled systems, we ensured our solutions would be ready for the changing threat landscape that we see today. To deter armed conflict and prevail when it occurs, U.S. and allied Armed Forces turn to the partners that already have combat proven systems. Also critical is the ability to scale up production, deployment and sustainment worldwide.

Those strengths of Lockheed Martin have contributed tremendously to this quarter's performance. As you can see this most clearly in second quarter contract activity, in late June, the Missile Defense Agency awarded a 7-year contract for $35 billion to quadruple production of THAAD interceptors, marking the next of the munitions frameworks to transition to a contract. Alongside THAAD, the Army awarded a GMLRS production contract at $3 billion, covering the current version and its newly developed successor, which will have twice the range from the same launcher. We also secured a HIMARS award valued at up to $1.1 billion for the U.S. Army, Marine Corps and up to 5 allied nations.

Stepping back, these awards are less about any single program than about what were they building in aggregate. Together, they strengthen the nation's production base, adding resilience along with more manufacturing capacity, more sources of supply and greater surge capability, all at a time when these very attributes have become a strategic imperative for the country. And the quarter's success story was not about munitions alone. It spanned the full spectrum of our business with new awards and accomplishments achieved across the board.

The U.S. Space Force selected us as one of the awardees to develop space-based interceptor prototypes under Golden Dome with capability demonstration expected by 2028. We also signed a $2.3 billion radar contract, supporting the growth projections we've been making related to our radar business. Following a series of successful flight tests, we continue to make progress on the critical hypersonic weapons program, Conventional Prompt Strike. Cumulative contract modifications totaling $1.4 billion on this Joint Army and Navy program, will drive more rapid development and demonstration of the sea-based hypersonic strike weapon system.

We also announced the next-generation glide-body demonstration, which is a new hypersonic glide body that's more affordable, scalable and flexible. Our team's operational execution hit its stride this quarter as we fulfilled key delivery and technical obligations throughout the portfolio. We resumed deliveries for the F-16 and increased output of C-130 aircraft. Two F-16s and 7 C-130s were delivered to customers this quarter. We also delivered the second shipset of our SPY-7 radar equipment for Japan's new missile defense destroyers, on scheduled delivery for a program central to the key ally's Homeland Defense in Japan.

In May, at White Sands Missile Range, the QuadStar seeker completed its flight test as part of the next-generation short-range interceptor competition, validating some key risk reduction milestones for the Army's Stinger replacement on a very compressed 6-month schedule. Building on that success, in June, we announced the advancement of the PrSM Increment 4 missile, which cleared a critical technical gate and confirmed the system's extended range while still preserving capability and compatibility with existing HIMARS.

While we execute in our engineering centers and factories, we're also innovating with a lot of purpose and speed. We're not waiting on orders or contracts to close evident mission gaps for our military services and those of our allies. In early June at Yuma Proving Ground, our Sanctum counter UAS solution, anti-drone system, utilizing our GRIZZLY Containerized Launcher went from concept to successful live fire testing in under 45 days, built not by inventing something brand new, but by connecting what we already had, a combat-proven battle manager, radar, a launcher and JAGM missiles, the successor to the Hellfire, operating as one integrated system for a brand-new mission.

4 elements, 3 of them ours and 1 from a partner that we invested in through Lockheed Martin Ventures. That same logic, building on established battle-tested solutions instead of starting from scratch guides the Navy's decision to integrate the PAC-3 missile into the Aegis combat system. This move adds a new intercept capability to surface ships for the Navy. Though the PAC-3 was originally designed for air defense with a different radar and launch architecture, the Navy's acquisition taps our truly unique integration expertise.

Our engineers were able to merge the missile's inherent guidance mechanism with our Aegis fire control system into a single fleet fieldable solution. This will enable the U.S. Navy to deploy this new capability on its existing ships relatively rapidly. We've demonstrated this system's integration discipline across our new Sanctum counter UAS system and every missile Aegis has fielded for more than 40 years. We are also extending this forward-thinking approach to partnering with some of America's greatest manufacturing leaders as evidenced by our recent collaboration with General Motors Defense.

Our joint objective with GM is to explore applying the automotive industry's high-rate manufacturing and supply chain expertise to defense production. We hope this effort will provide us more access to the speed and scale of America's commercial industrial base to help significantly accelerate output as demand grows. Now behind every one of our achievements this quarter is a steady long-term commitment to the physical backbone of the company, new factories, advanced automation and state-of-the-art tooling and robotics. We enhanced that infrastructure with strategic partnerships among the nation's leading technology and manufacturing firms, and we now embed artificial intelligence capabilities directly into our production lines.

AI-driven analytics optimize equipment performance, for example. We have predictive maintenance algorithms that reduce our downtime and machine learning-guided quality checks that streamline the inspection process. Also, as our design and manufacturing systems evolve, we are deliberately growing and diversifying our access to capital investment and critical workforce skills through international partners via expanded co-production and regional sustainment programs.

These efforts have the benefit of placing manufacturing, overhaul and repair capabilities where U.S. forces are deployed overseas and where our allied forces operate. Overall, our approach is financially disciplined while perhaps less risk-averse than may have historically been the case. Each co-production initiative is a purposeful investment with a clear view of the expected returns that each will generate once contracts materialize. Our strategy to make our production operations more resilient and scalable, integrate the latest 21st Century technologies into existing and new systems and expand our international production, is underpinned by a very strong balance sheet.

Our robust cash generation and access to capital supported by our strong credit rating can fuel billions of dollars of planned investment and a portfolio of new and expanding facilities across the United States and beyond. This quarter alone, we held the opening of a Missile Assembly building in Courtland, Alabama, the future home of the next-generation interceptor program and a critical hub for integrated air and defense work on programs such as that.

In May, we broke ground on a new Munitions Production Center in Troy, Alabama, adding 87,000 square feet of production space to support THAAD interceptors and future NGI work. We also continue to make progress on our new production facility in Titusville, Florida, which will support critical development of the Trident II missile. Our pace of disciplined investment for growth has continued since the end of the quarter. In the span of a few weeks, we signed an agreement to acquire Ultra Maritime. This acquisition will enhance our advanced undersea sensing and autonomous sea drone capabilities, a domain where there is growing demand.

At the NATO Summit, we signed a memorandum of understanding with Rheinmetall toward the first European center of excellence for ATACMS production, and we welcome the commitment of the United States, Germany, the Netherlands, Poland and Sweden to explore a dedicated PAC-3 missile facility in Europe for maintenance, putting allied capability closer to allied needs. Last month, Secretary Hegseth highlighted the success of the first milestone test of Golden Dome for America, noting that Lockheed Martin's directed energy laser weapon had cued, targeted and eliminated a full spectrum of incoming threats, which is a true milestone achievement.

Just 2 weeks later, the U.S. government awarded us a joint laser weapon system contract to develop a containerized 500-kilowatt laser. This will be the highest power laser ever packaged in a transportable container and is a cornerstone of the next-generation cruise missile and drone defense architecture. This win didn't happen overnight. It builds on our long-standing laser weapons experience and years of investment in these technologies, confirming its readiness for actual field deployment.

Lastly, just a few days ago, we secured a $1.6 billion F-35 spare parts award, the largest such contract in F-35 history, reinforcing the Department of War's heightened focus on keeping the world's premier fighter fleet operational. Our upfront investment in spare parts and consumables has now been translated into immediate inventory that can be shipped to customers the moment their need arises. The quarter's announcements are driven by 3 deliberate actions.

First, we are investing at home, expanding manufacturing capacity to meet today's demand cycle. Second, we are partnering with allies, positioning the capabilities where they're needed the most. And third, we are advancing technology from directed energy and autonomy to integrated cross-domain systems. The result of these efforts is a deterrence posture that protects our nation and our allies underpinned by a business that grows stronger each time it delivers. Now I'll turn the call over to Evan and Mark to talk through the financials.

Thank you, Jim. Good morning, everyone. I'll begin with an overview of our consolidated results, which, as Jim said, were strong both operationally and financially. I'll then cover our increased full year 2026 guidance before handing it over to Mark to discuss segment-level details. As you can see on Slide 3, the second quarter was record-setting for our backlog, which now totals $230 billion, an increase of roughly $64 billion versus second quarter of 2025. We recorded a second quarter book-to-bill ratio of 3.2:1.

The backlog increase includes $65 billion of orders realized during the quarter, the largest being the multiyear THAAD contract as well as new radar awards within RMS and strategic wins in space. This deep book of contracts will fuel our sales growth for years to come, and we saw this top line acceleration begin to show up in the second quarter. We recorded sales of $20.1 billion, a $1.9 billion, 11% increase over the same period last year. This growth was primarily driven by accelerating munition programs in MFC and further supported by all other segments, including strong performance in F-35 production in Aeronautics, the MIC2 portfolio in RMS and the strategic and missile defense programs in space. The year-over-year comparison also benefits from the absence of unfavorable adjustments we took in the second quarter of 2025. Excluding those adjustments, we grew sales 7% year-over-year.

The performance exceeded our sales expectations in the second quarter, giving us confidence in a stronger 2026 trajectory that we'll discuss shortly. The second quarter segment operating margin was 10.8% as profit climbed to $2.2 billion and earnings per share rose to $7.94, both posting marked improvements from the prior year. These gains mostly reflect the absence of unfavorable profit adjustments recorded in the second quarter of 2025.

Free cash flow rose by $3 billion, moving from a negative $150 million in the same period in the prior year to a positive $2.9 billion this quarter. The largest contributors include the favorable timing of customer receipts, which accelerated cash inflows and lower tax payments. We restored the temporary dip in free cash flow that resulted from the ERP rollout last quarter, reflecting the effectiveness of the planned recovery we outlined earlier this year.

During the quarter, we invested $876 million in capital assets and research and development. This included production capacity upgrades, next-generation munition facilities and AI-enabled autonomous manufacturing infrastructure. We also funded new Sanctum counter UAS solutions, autonomous weapon systems and AI-driven analytics that improve mission planning and real-time decision-making across our portfolio. Building on disciplined capital allocation, sustained cash flow generation and focused R&D, we strengthened our competitive edge. We are poised to convert our financial strength into growth-driven transactions.

The upcoming Ultra Maritime acquisition made possible by our robust balance sheet and strong cash flows exemplifies how we are leveraging this flexibility to pursue strategic inorganic expansion. The underlying strength of our fundamentals enabled us to fund increased investments to add capacity and meet the demand that Jim outlined earlier while returning $796 million to shareholders through dividends in the second quarter, showing that we can invest for growth and deliver tangible shareholder value at the same time.

Turning to Slide 4. I'm pleased to report that we are raising our outlook across every key metric. Building on the momentum we generated in Q2, we now expect total sales of $79.75 billion to $81.75 billion, representing an 8% year-over-year increase at the midpoint, up from the prior 5% guidance. This uplift is driven primarily by higher volume on F-35 production in aero, radars and RMS. Correspondingly, we are increasing our segment operating profit target to now $8.5 billion to $8.7 billion. This revised outlook reinforces 2 important growth dynamics.

First is that our growth is clearly accelerating. Through the first half of this year, we grew sales at mid-single-digit pace year-over-year. Our revised outlook pegs our second half 2026 growth rate in the high single digits and perhaps even the low double digits, a year-over-year increase of between 7% and 12% as compared to the second half of 2025. Secondly, is that this accelerating growth is broad-based. Every segment at Lockheed Martin will grow faster in the back half of 2026 on both the top and bottom lines.

MFC is clearly leading the way for our growth. But as we've described, our entire portfolio is accelerating, and we've reinforced that with this higher sales and segment operating profit outlook. Our free cash flow outlook is increasing, too. As I began to signal last quarter, we now expect a range of $7 billion to $7.2 billion. This improvement includes the favorable corporate alternative minimum tax IRS guidance we highlighted earlier this year. We're also confident that stronger working capital dynamics will improve our cash conversion cycles.

We remain dynamic and disciplined in our capital allocation decisions, continually weighing the most value-enhancing approaches for deployment. Earnings per share is now projected at $29.95 to $30.65, driven by higher year-to-date profits and lower effective tax rate. We are also updating our capital expenditure guidance to a range of $2 billion to $2.4 billion, reflecting efficiencies realized in MFC's munitions build-out.

Expanding munitions capacity as quickly as possible is our top priority, and our teams are relentlessly pursuing the most efficient ways to do so. Our framework agreements and related awards remain cash neutral, so these efficiencies are well aligned with our customers' objectives. Now I will turn the call over to Mark, who will cover the segments in more detail.

Thanks, Evan. My segment-level comments will focus on our updated increased full year 2026 sales and profit outlook and the key drivers for the accelerated growth we expect to realize across all 4 segments in the second half of this year. Starting with Aeronautics on Slide 5. We now project Aero to deliver full year 2026 sales of $31.7 billion to $32.7 billion, driven by strong F-35 production and sustainment volumes.

The higher sales volume pushes the profit outlook up to between $3 billion and $3.08 billion. Margins are pegged modestly lower than our prior guidance as we scale up new contracts in F-35 production, expand sustainment work and absorb the F-16 and C-130 challenges we realized in Q1. Excluding the favorable comparison impacts created by the prior year losses, Aero has posted low single-digit year-over-year sales growth through the first half of 2026. Our updated outlook accelerates Aero's growth rate to the mid-single digits for the second half of this year.

The top end of Aero's updated sales range implies an even stronger second half growth rate could be realized, driven by a bump in sales that is dependent on timing of awards for the next lot of F-35 production.

Moving to Missiles & Fire Control on Slide 6. MFC had very strong growth in the second quarter. Sales were up 19% and profit was up 24% year-over-year, fueling a raise to our full year outlook as the cadence of munitions production continues to accelerate. MFC's sales range has been adjusted to $16.5 billion to $16.9 billion, lifting the low end of our prior guidance. And the profit range is now $2.3 billion to $2.35 billion, reflecting continued mid-teens margin performance.

Through the first half of 2026, MFC has grown sales 14% year-over-year. And at this updated outlook level, the second half 2026 growth rate will be even faster.

Next is Rotary & Mission Systems on Slide 7. At RMS, the new radar awards Jim and Evan mentioned give us confidence to increase the full year sales outlook to between $17.7 billion and $18.1 billion. The profit outlook at RMS is also raised and is now between $1.86 billion and $1.89 billion, keeping margins steady relative to the prior outlook. RMS sales during the first 6 months of 2026 were relatively comparable to the same period last year. Our updated full year outlook indicates RMS will accelerate to a mid-single-digit year-over-year growth rate in the second half, driven by the higher radar volumes and continued production ramps at Sikorsky.

Wrapping up with Space on Slide 8. In the second quarter, Space grew sales 6% and profits 2% year-over-year. We now anticipate 2026 sales of between $13.85 billion and $14.05 billion, supported by key wins on the Next-Generation Interceptor, Fleet Ballistic Missile and several classified National Security programs. The Space full year profit outlook was lowered to between $1.34 billion and $1.38 billion due to reduced ULA equity earnings because of the ongoing technical investigation of the Vulcan launch anomaly experienced earlier this year. Growth rates at Space will follow the same trend as each of the other segments.

The second half of 2026 will be stronger than the first half. At this updated outlook level, the mid-single-digit year-over-year sales growth that Space posted in the first half will step up to the high single digits in the back half. So the takeaway is this. Our raised guidance is broad-based. Every segment has updated higher 2026 full year sales outlooks and 3 out of 4 segments have higher profit outlooks. On a year-over-year basis, every segment will grow faster in the second half of 2026, continuing the acceleration we posted in Q2. Evan, now back to you.

Thanks, Mark. Overall, the second quarter delivered very solid performance, highlighted by historic backlog and accelerating top line and strong free cash flow, paving the way for sustainable growth and confirming that our strategy and execution are strengthening the fundamentals of the business. We remain confident that our proven and expanding capabilities will continue to be in high demand and that our execution will drive strong performance throughout the remainder of 2026 and beyond. And now we'll open the call for questions.

[Operator Instructions] Your first question comes from Scott Deuschle with Deutsche Bank.

Jim, between PAC-3 ACE, MORFIUS, Sanctum and some of these other new products you've announced recently, it seems like Lockheed is now moving pretty quickly in terms of responding to how warfare is changing. But I was wondering if you could just speak to what type of time line the business is working to in terms of the manufacturing scale-up for those solutions and also if you're willing to deploy CapEx for those scale-ups ahead of formal awards?

I'd start by answering your question with this. We've been working a mindset change at this company for the past 5 years. And our aspiration is not just to be the largest defense prime contractor, but it's to be America's clear leader in the Defense Technology segment. And the way to get there is to be able and show that we can deliver decisive military advantage to drive deterrence to armed conflict on behalf of our government and our allies.

The way we've been going about that is to build mission technology road maps that just don't wait for the next order. They predict with a lot of informed relationships with our customer base, what they're going to need and in some cases, before it's evident and gets through their acquisition system to come up with an RFP. So we are building those technology road maps and investing based on our confidence in the ability to make good choices on deciding or predicting what the armed forces are going to need. There's a couple of ways to get into that. One is target weapons matching, right?

So for the various threats that come about or that we're aware of or the military has to face, what is the best weapon to defeat that target. And so to just take the example you raised, the PAC-3 ACE. We use PAC-3 missiles or our military uses PAC-3 missiles for a wide range -- the MSE missile for a wide range of targets. It has more capability than some of those targets require at a higher cost.

So we just went ahead and said, we know we need a PAC-3 missile that maybe not as expensive and not as sophisticated and how can [Audio Gap] 2/3 of the capability of the PAC-3 MSE for, call it, half the price or maybe even 1/3 of the price. And that's target weapons matching. So the PAC-3 MSE can hit long-range, high-speed almost intercontinental ballistic missiles. It can also defeat hypersonic missiles, and that's been demonstrated in Europe that maneuver in the end state.

But we need a lower capability, lower cost PAC-3 missile for short-range ballistic missiles and for cruise missiles and drones. And so we just went ahead without an RFP or RFI or anything like that to figure out how to solve that target weapons matching problem in an environment of economic equivalents, right? So we want to get an economic match cost-to-cost and also the target weapons match for capability.

And that's the way we're running the company now. That's -- again, not only the largest contractor, so to speak, when a contract comes, we compete for it, we win it. But how do we be the clear leader in the Defense Technology segment to benefit our National Defense. That's the mindset change we have. So yes, we are investing in the manufacturing and design capabilities before the orders come in. And I think that's the right way to run the company, Scott.

Your next question comes from Scott Mikus with Melius Research.

Jim, I have a high-level question for you. You've long advocated for the Pentagon to adopt a more commercial acquisition model and a lot of the new defense entrants are pushing for the same but Lockheed funded development of the C-130J with its own capital in the past. And that program initially earned commercial-like margins before the Pentagon ended up reversing its commercial designation. So how confident are you that the current administration's push towards a commercial acquisition system will be durable rather than reversed by a future administration?

So Scott, this is exactly why the landmark multiyear munitions commercial framework agreements are so critical because the DoW team in place today under Secretary, Hegseth; and Deputy Secretary, Feinberg as well and their teams, under that leadership, we believe they share our view that to fully engage U.S. industry more broadly in supporting the National Defense that they and we must embrace commercially inspired long-term enforceable agreements and contracts that can't be changed at the whim of the government, just like the C-130 without compensating the industry players, and it could be a new entrant, it could be a startup, it could be Lockheed Martin, it could be RTX.

We need the confidence to act as we would act in a commercial environment to make investments to solve these National Defense problems. So I think this is the leadership team in government that can actually leapfrog what's ever gone on before when it comes to commercial-type agreements. and include the biggest prime contractors in that, that are willing to step up and as the prior question suggested, invest ahead of time, think ahead of time and put development effort into non-ordered, noncontracted systems that we think as industry with our partners are going to be important for the future.

So those agreements will have to stand the test of time as circumstances, budgets and political leadership is going to change over time. And so again, with I think the administration's leadership in place today, we will establish with them survivable long-term contracts that will allow industry to act on a more commercial basis. That's where I think we're at today. And we don't plan to ever put ourselves in a risk position where we don't have that confidence in the contract that we didn't have for the C-130. We're not doing that anymore. We're not taking that kind of risk without a counterparty that's willing to work on a commercial basis right along with us.

Your next question comes from John Godyn with Citi.

Jim, Evan, we're looking at a record backlog. So the demand indications, the demand signals say revenue is accelerating. Needless to say, the stock price over the last few months suggests a lot of concern about that. I was hoping that you could just reflect on that and maybe give people confidence in the revenue growth outlook from here, the possibility of accelerating revenue growth and hopefully comment a little bit on international as well as something that might lend confidence to that.

Yes, I'll start off and maybe let Evan speak a little bit more about some of the individual programs. But just take the F-35, for example. There's long-term demand for that aircraft, both in the U.S. government and among our allies. It's the only in-production fifth-generation fighter in the free world, which means we have to keep building it, and there'll be demand for it as time goes on.

If you just look at the Far East theater, the PACOM command area, the Chinese are building literally hundreds of F-35 type aircraft. I'd like to argue that they're not as capable, but they are building a high rate fifth-generation aircraft to apply to that theater at a pace which we hope to continue to stay competitive with, let me say. The intent of the Department of War in this budget cycle was 85 aircraft for the United States alone. The balance of the 156 per year would be then allocated to our allies and partners overseas.

Now Congress has to work with the administration to figure out how to budget and fund that. But that aircraft, whether it's this budget cycle, the next one, 5 years from now, is going to be in high demand. We feel really confident that the 156 per year production rate will be sustained for quite some time. And the toing and froing of the political budget cycles will not in the long or medium term or even in the short term, I think, really adversely affect what the country needs and what our allies need to defend themselves in sadly an increasingly sort of dangerous world. So Evan, do you want to add to that?

Yes, I think that sounds right on. And in terms of the stock price, and I do think given the newness of what we're seeing here with the way to acquire these munitions, I mean, there's some learning that's going to happen, I think, as investors continue to understand it better. I think we'll continue to gain confidence as we convert these agreements to real contracts as we saw in THAAD this quarter, and we're intending in the second half of the year to also get a multiyear on PAC-3.

So as we continue to have the contracts add to the backlog and be able to get better line of sight to the near-term multiyear revenue growth profile, I think we'll see that more translate. But this quarter, I think, is a great example of that, and we're seeing good response so far.

Your next question comes from Gautam Khanna with TD Cowen.

I was wondering if you could comment on risks within the business. In the past, you've talked about a couple of classified programs at Aero and Missiles & Fire Control. Maybe an update to the extent you can provide one on those programs and if there are any milestones or meaningful things that we should be looking for on those programs in particular, over the next couple of quarters? And then more broadly, if you could just talk about risk across the portfolio.

Sure. So a couple of things to note here. If you look at the 2 big programs that you talked about on the classified side, the last adjustment we took on the MFC side was in 4Q of 2024 and on Aeronautics side in 2Q of 2025. In both cases, we set new baselines, and we've established that we can continue to hit those. They're both aggressive. We've got a lot of technical work to do, but we're making great progress and have shown stability in our ability to execute. I think if you look broader across the portfolio, the thing to look for is the amount of scale across the portfolio.

So for instance, in RMS, there are 4 Sikorsky platforms that are all delivering more this year compared to last year. In the case of 53K, we could be talking 2x deliveries this year versus last year and potentially doubling again next year. In Aeronautics, F-16 and C-130 all deliver more this year versus last year. And in MFC, there's a total of 10 munitions that are delivering more this year versus last year. So we are in a scaling mode right now. I think the thing to look for is resilience, right?

Two things, can we scale and can we be resilient? And the F-16, which although we took charges earlier this year, is a great example of that. One of the things that we continuously demonstrate is that our platforms, we continue to iterate and evolve them and improve them. So an F-16 today is very different from an F-16 when we started production. And so a new variant that we had a flight test this year didn't quite meet our expectations of what we expect for us and our customers.

So we did a redesign, got the redesign complete, redid flight test and began deliveries again on F-16. That's the resilience you should look for, for us to scale because if you look particularly in the munitions, the scaling is just on the front end and is broad-based, but we have line of sight to be able to achieve that.

Your next question comes from Sheila Kahyaoglu with Jefferies.

I guess can we talk about just the discussion today on supply-demand signals that you're continuing to invest in '26 and for years to come. How do we think about just the CapEx efficiencies that you're seeing and how we think about '27 and how the customer funding looks as we think about level of investments this year and going forward?

Yes, I'll start on the CapEx and the investment. A few things to note here. One, while we did reduce our capital expenditures for the year, there's a couple of things to note. One, a part of that is driven by just timing. So for instance, on the MFC side, there's a facility we intended to buy that we instead decided to lease for a year and buy next year due to tax efficiencies. But the other thing that's really interesting to note there, it's one of the first true early returns of the partnerships that we've experienced with the Department of War and the [indiscernible] team, where we partnered to really look at the most efficient, fast way to scale these munitions, which is why we would say we're ahead of progress of schedule to scale and doing it more efficiently.

But our commitment to invest a total between $8 billion to $9 billion of capital in munition scaling is unchanged. So you're going to see us continue to be in a growth and investment mode over the next few years. What's important when you look at the free cash flow is that we can pair it with the kind of free cash flow generation that we experienced this quarter, and that's due to a number of things. One, some improvements we're seeing in working capital and the very nature of these deals that Jim mentioned that are critical for the munition scaling that allow favorable cash treatment while we do self-investment on the capacity.

And from a broader perspective, you kind of put all this together, just staying on the munitions for just a minute. We and our government, customer leadership would be happy to trade lower cost per input and CapEx for speed. If we can do something faster and spend less CapEx, I think that's great for everybody. So we had an initial prediction of $8 billion to $9 billion. And so for one example, again, using all the cards in the deck, if you ever go down to our factory in Camden, Arkansas, you'll see that about 1/3 of it today is used for the PrSM missile, which is next-generation, highly automated, AI informed.

The production line looks like the robotic production line that you think about for auto factories and such, where there's a few people running automated machines and robots vis-a-vis the ATACMS line, which is about 2/3 of that building, which was designed decades ago. We didn't have all these automated technologies. We didn't have AI to be able to control the robotics and learn from experience. And there's a lot more people over there, and it takes up a lot more space and we're basically partnering with Rheinmetall, as you heard, to move that ATACMS line into factory space in Germany, where the customer base largely is now and expand the PrSM line without building another building for it.

So that's a trade everyone should be happy with. We've got international partner that's going to provide floor space, factory space, talent that we need and investment that we don't have to then put in. That's just one example of how do you get the most efficiency when the demand is going up at the rate it is. And just one note on the framework agreements. Remember, we're being asked to triple PAC-3 MSE production, quadruple THAAD production and scale up PrSM production faster than we ever thought we would.

And all those things are happening because we're using every card in the deck to get that, we call it the ramp in this space here, the ramp rate as high as we can, as fast as we can, as efficiently as we can. And that's how we're going about this. And the government is giving us a lot more flexibility than they traditionally would have done on the requirements and other facets that they traditionally provide that we can be faster. That's what I hear from the Deputy Secretary every time we get together and beyond, faster, faster, faster. And so we're using all the cards in the deck to be as efficient as we can as we try to go faster.

Your next question comes from Rob Stallard with Vertical.

Evan, a question for you. On the new THAAD missile contract, how do you expect the initial margins on this contract to compare versus historical missile contracts?

Sure, Rob. We expect it to be consistent with our historic munitions production margins. I think generally speaking, with these big ramps and when we have very large growth, there can be a little bit of near-term dilution just based on the long nature of the programs and the fact that we tend to step up our profit booking rate over time as we take risk reduction milestones and make deliveries. So while there could be some near-term dilution, I think long term, we would expect this to match our traditionally very strong margins in MFC with a goal to increase versus historical margins in MFC.

Your next question comes from Matt Akers with BNP Paribas.

I wanted to follow up on Rob's question actually on just kind of longer-term margin outlook at MFC. As you just mentioned, I think you said some of the earlier phases of these contracts could be not as strong margins and they improve over time. But this was the best quarter we've seen in a while at MFC. Is there scope for that to continue to improve? And should we think about improving into 2027?

I think what you're seeing this year is what we should generally expect to see in the future, which is MFC margins in kind of the high 13s, low 14s, which is what we've managed to do when we're really hitting our ramps and hitting our marks, which we've been doing here pretty consistently on the MFC side. So we are in the process of converting these framework agreements to true long-term multiyear programs and contracts, and there are still some ongoing negotiations that will be impactful to this.

But we're well aligned with our customer on the way to do that to incentivize cost and schedule performance, which means we expect to have an aggressive schedule ramp as part of our contract, and we're going to have to meet that. We expect that there is going to be some profit share if we can truly take cost out of this business, which we're incentivized to do by the long nature of the program. That's one of the key values of it. So we would still think about near-term dilution in the 20 to 30 basis points over the next few years with a goal to get to higher than historic margins on MFC. So for next year, I think, generally speaking, this year is a good reflection within 20 to 30 basis points.

Yes, Matt, this is Jim. There's something really important embedded in what Evan just went through. Traditional government accounting, CAS -- let's call it cost accounting -- system-based accounting in the federal acquisition regulation, reprices even fixed price contracts if the cost to the vendor goes down. So putting it -- let's say, we put $10 million into new robotics in Camden and our cost per unit was $100,000 before and it went down to $90,000.

Well, we get repriced down 10%. And who would invest $10 million to get their price down 10% and bleed out all of that benefit. And that's the issue with our industry is essentially that accounting system. What the framework agreements do is take that away. In other words, as Evan suggested, if we get efficiencies while we ramp up our product line, we get to keep in our own profitability. Now we have to do it, we have to perform. But we keep our own profitability to ourselves instead of give it back every year on the re-cost analysis that the government tends to do in traditional contracts.

That enables us to make these investments upfront and have actually a fixed price for the customer with an escalator. They know what they're getting. And at some point, if we're able to hit the top mark of our fully retained margin expansion, we will share it with the government as was implied by Evan. But we get to keep a significant ramp up in profitability to industry if we can perform. And then there's a point where we get to where we share ratably with the government, those future benefits.

We don't give them all back. We give a portion of them back. And I think that's eminently fair to both the U.S. government and taxpayer, and it will motivate industry to just get better and faster and actually hit these ramp-up requests that we're getting.

Your next question comes from Kristine Liwag with Morgan Stanley.

Jim, you called out how the GRIZZLY counter UAS demonstrator went from concept to test fire in just 45 days by leveraging existing systems and rapidly integrating proven technologies. 45 days is pretty impressive for what you delivered. So can you size the revenue opportunity that you can tackle on with this new development approach and how you see your potential market share for incremental programs evolve with this faster turnaround?

Sure, Kristine. It's Jim. I'll start and maybe Evan can speak to the financial opportunity set here. GRIZZLY and also another system that we have called MORFIUS those were developed by kind of Skunk Works type groups in our MFC business, right, with cooperation and collaboration with the other business areas, which is, again, something relatively new for us in those kinds of advanced development programs as we call them.

So we made a visit -- my executive team. We hold many of our executive team meetings every "monthly" meetings at sites. So we're in Board meetings, too, by the way, Syracuse, New York, we had a Board meeting, executive meeting as we build the radars. A couple of -- a few months ago, we had one of the executive meetings at our Orlando facility, which is an MFC facility in Central Florida, which is quite extensive. There's a big development team there and there's manufacturing there. And that's the kind of place like Skunk Works in California for the Aeronautics group where you can actually figure out things that are new and novel and get ahead of demand and all those aspirations that we have.

So it was quite a mix of young and more experienced people. They showed us 2 things. They showed us a prototype GRIZZLY, which includes the sort of the advanced Hellfire, which is now called JAGM, something we make tens of thousands a year for the Army. The Army has tens of thousands more in their stockpiles. This is not a limited munition, for example. And it's not expensive either.

It's made us volume, as I said. And containerization is one of our big themes in development now, which is we ought to be able to move stuff and put it on a ship or the back of a truck or pick it up with a helicopter and move it because the threats are getting much more dispersed, if you will, with the drones and cruise missiles and things that are coming out now. And we have to have defensive systems that can protect air bases or stadiums or whatever that are containerized, meaning we can move them and just set them up some place and they're going to work.

So there are 2 teams that had displays for us. One was the GRIZZLY team. And they showed us that they could invent a containerized launcher, kind of looks like a 4-pack of IPA beer, you can buy at the store. And the Hellfires were in there. They connected it to a command and control system through what we call Sanctum. And by the way, the provider of the Sanctum radar is not necessarily our RMS business. It's one of our venture -- of Lockheed Martin venture companies called Fortem.

They have a small transportable radar, which goes right along with the concept. So we matched something we had from a venture's company we invested in, MFC, most mass-produced missile we have and repurposed the whole thing to shoot down drones. And then we went a 50-feet down the factory floor to the next demonstration, and they had what we call MORFIUS, which is this big quadcopter about the size of a dining room table, and it has a box on top, which is a high-power microwave.

And the teams of the, again, eager developers working with the manufacturing folks at MFC, like literally built this device and kind of the garage almost, if you will, and showed it, and we asked about the testing and Frank St. John and I were there and we're asking about the testing, how the testing working, what's the success rate and all of that. And it's pretty high. So they said, yes, we can get up using AI, let this drone take off on its own.

We preprogrammed the bad drones, what they look like, both from a radar signature or a LiDAR signature and also electronic warfare type signatures. And if you -- if the drone sees one, you don't need a person involved. It just goes over, flies next to it like a formation flight in an airplane and then turns on the high-power microwave and drives the electronics of the drone. And it goes and does that up to 50x on one battery charge and then it goes back for recharge. And I just said to both teams, build 1,000 of these.

Evan is like, I was having a little bit of a [ palpitation. ] And we'll figure out of each of them, and we'll figure out how to deploy them with the Army or the Marines or whoever is going to go special forces. Write us a contract first, we'll have them available. And if they don't sell here, we develop them on our own. We'll try to get exportability really quick, and we'll go sell them somewhere else. So that's the mentality we have now. And then there's so many young people. We have 60,000-plus engineers and scientists. When they get the straight jacket pulled off of them and say, go invent something that has the range, payload, survivability and economic equivalence to a threat that's really happening and really killing people in places, then how do we -- they then unleash their animal spirit, so to speak, and they come up with this stuff.

So we just prefunded it. We said, let's build them, let's go test them. We kind of went on a roadshow with the Army and the other services, and they're now on the range with us demonstrating these things. And we'll get an order, I think, someday. And if it's not from the U.S., it will be somewhere else. So that's how we get from concept to delivery in 45 days. Sorry, that was a long explanation. But it's changing the way the company operates, the mindset of it and really unleashing the technical talent we have, the partnerships we have and the massive manufacturing capability that we have to solve these issues and try to deter award win it if we have to.

Absolutely. And from a financial standpoint, I mean, a couple of things to note here. One, I mean, you are seeing a culture changeover, right? We've always been optimized around very closely aligning and anticipating our customer needs. But now you see us not being paced by programs of record, being able to anticipate that and see where the budget and the needs are going, and we have the financial firepower to be able to make these investments.

So what that translates to from a financial forecast perspective is that the financial forecast numbers we've talked about here are based on our traditional programs. What we're talking about investing in would be incremental to that. We don't see this as taking the place of those products. We see that as supplementing and adding additional capabilities and resilience to the customers' capabilities. So we see this as a potential upside for us, and we have the financial firepower to be able to make these investments.

Your next question comes from Gavin Parsons with UBS.

I just want to follow up on an earlier question on the frameworks, and I appreciate all the detail, but I wanted to make sure I understand whether anything changes operationally or financially when you firm up the UCAS into true multiyears and then what the long poles in the tent are to fully finalizing that?

Sure. So the UCAS are really key because they allow us to get going at full speed. And in that they're multiyear UCAS, we can optimize around a 7-year production run and get our suppliers aligned to that, gives us a funding allocation and it gives us the cash terms to allow us to protect the upfront investment. So it's really critical. As we transition these UCAS to full-year production, there'll be a few things that we'll need to cement.

One, we will need to finalize the actual delivery schedules in great detail out to the 7 years. And finalize the actual profit mechanisms. We know enough from the HOAs to have pretty good line of sight to be able to forecast that today. But the convert to multiyear procurements will be key to fully lock those down in the contract. But with the UCAS, we have all we need for now to be able to go at full speed and get our suppliers aligned and to waste no time in ramping up to meet the need.

Sarah, this is Mark. We're coming up on time. So I'm going to turn the call back over to Jim for his final thoughts.

Yes. Thanks, Mark. I just want to close by recognizing the people who make this performance possible. First, our employees and the thousands of suppliers who alongside of us are investing, innovating and expanding their capacity. So thank you to everyone that's actually participating in all of this. Their commitment and our employees and our teammates' commitments are strengthening America's defense industrial base every day, and it needs to get better. Most importantly, I'd like to thank the men and women of the U.S. military and our allies who are operating and sustaining our systems around the world in dangerous places.

And everything we do is guided by a simple standard for the soldiers and sailors and marines and guardians and airmen out there, deliver reliable mission-ready capabilities and equipments when they need it, so that they can do their mission and come back safely as well as our partners at NASA, who continue to push the boundaries of space exploration as well. So that's a responsibility that motivates our team every day. You could see, I think, some of the energy that we have just on this call about really trying to make this a much better Aerospace & Defense industry and really lead the elevation of deterrence to armed conflict that our government has access to. So thank you, and we'll see you next quarter.

This concludes today's conference call. Thank you for joining. You may now disconnect.

Good morning. I'm Doug Harned, Bernstein's Global Aerospace and Defense analyst. And thrilled to have with us again, Jim Taiclet, Chairman and CEO of Lockheed Martin; also Evan Scott, CFO.

And to start off with, I think, Evan, you've got a few words you're going to say, right?

Yes, please. Statements made today that are not historical facts are considered forward-looking statements that are made pursuant to the safe harbor provision of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. Thank you.

Okay. Great. To start off with, obviously, there's a lot going on in the world right now that's relevant to defense sector. Maybe, Jim, you could talk about what you're looking at right now as kind of the opportunities and challenges for Lockheed Martin.

Sure, Doug, and good morning, everyone. Look, the opportunity set for us is significant. And I think the most important development over the last couple of years has been that our original strategy that we started in 2020, what we call 21st Century Security, is actually being proven the right strategy from world events that have been occurring and also the U.S. government policy that's now in place with the administration.

And so as a reminder, the 3 kind of tenets of our strategy are, first of all, to build resilience and scalability into the production system, which we're being asked to do again, and we're ready to do it.

The second piece is driving 21st century digital and physical technologies into mission sets that emphasize our core platforms, the kind of platforms like F-35 or Patriot missile or Aegis System, which is widely deployed by U.S. and allied militaries already, can have the payload, range and survivability to fight in a modern warfare at theater scale and drive new technologies into those platforms and come up with new platforms and connectivity to augment those.

Some of those are, for example, the Black Hawk helicopter, again, fully autonomous now. The Army has purchased 2 of those to figure out how to use them in combat operations. That will extend, we think, the life of the Black Hawk into the future, for example.

The third big tenet of our strategy is to diversify our operations, especially for sustainment globally so that we can operate and manufacture or repair in the theaters of operations where our U.S. forces are deployed and where our allies live. That also encourages more allied procurement of our systems if they have a part in producing those systems or maintaining them.

So those 3 tenets of our strategy give me a lot of optimism because we've been getting ready for this game for 5 years, and we are already. So that's the optimistic part.

The challenges are with such a vast and complex operation, maintaining and driving operational discipline and operational excellence through this vast company, with a lot of leading-edge technology that's never been done before and then operationalizing that at scale. So I just -- I want to grab this list from my office because I can't memorize it, so I'm going to have to go through it.

These are the places that I have been, the operational locations in the last 12 months. And the purpose of these visits is not just me necessarily. Often, it's our whole executive team. We will go to the factories and the engineering centers to drive that operational discipline and excellence and emphasize it and try to spread best practices across our various divisions and sites.

So the list includes: Littleton, Colorado; Amendola Air Base, Italy; Fort Worth, Texas, 4 times; Camden, Arkansas, twice; Marietta, Georgia, Palmdale, California, twice; Orlando, Florida, once; Sunnyvale, California; Weeze, Germany, it's a joint venture we have with Rheinmetall; Ramstein Air Base where we have 4 deployed teams; Riviera Beach, Florida, where we do undersea; Valley Forge, PA, where we do classified work for our space business; and Troy, Alabama.

So we are very focused in our executive team and even our Board on operational execution. That's the challenge is how are we going to get all this done, triple PAC-3 production, quadruple THAAD production, increase the mission-capable rate of the F-35 to where we all want it, we're going to have to have outstanding operations, and that is largely what our team is focused on.

Now one of the things, a backdrop of all of this has been the President's budget proposal of $1.5 trillion. Now we have a long way to go to see exactly how all that plays out. There's a lot in that, that benefits Lockheed Martin. But how do you think about this in terms of the things that are beneficial to you, but also how this process is going to evolve and when we can get to something that can lead to kind of contractual certainty?

Yes. So on one hand, we have no ability to affect the political process and the budgeting process. But the reality of our situation is everything that's going through our factories today is from a prior budget. That's where the funding has come from. So there's really hardly any 2027 budget requirements for what's going on this year, let's call it. So current production rates, current financial forecasts aren't affected, whether these budget issues get delayed or implemented on time, et cetera.

The second thing is our international business is 30% of the company, a whole different schedule, So that's going to continue to come through. And then we also have our ability to sort of keep things going with our own funds. We're doing a lot of forward investments so that when budgets do get approved, we can strike quickly. We're ready to go, we can then book the revenue.

So those 3 elements, Doug, give me confidence that whether the budget is delayed, there's a CR, they split the $1.5 trillion into 2 or 3 pieces, we, because of the demand for our systems, their proven ability in combat operations and the scale that is required, we are going to have plenty of upside, if you will, based on the direction of the U.S. government irrespective in a way of the actual schedule and process of the budget.

Yes. I wonder also related to this, with the war in Iran and also the war in Ukraine, where we've seen heavy usage of tactical missiles, interceptors as well as sort of high op tempo for F-35s, I mean, how has this most recent conflict impacted Lockheed?

It may have contributed to, but didn't cause the interest in the U.S. government Department of Defense that's currently in place, the leadership, to try to move towards more commercial contracting models.

Because the goal is that we both share, and this is something we've been advocating for, I think, for like the last 5 years pretty heavily is if we run the defense enterprise more like a commercial business where we have long-term contracts that we can have assurance that we can invest upfront, the performance is better, the scalability is faster, we can get the capital markets involved in constructive ways, and we can actually be higher performing industry, not just company, but industry with our whole supply chain, that will be a better outcome.

And some of these recent conflicts and the fact that the usage of certain munitions, for example, has been higher than some of the war gaming in the past would lead you to project, that's motivating the U.S. government leadership now to say, let's really look hard at these commercial business models and these framework agreements that we initiated with the department and then RTX was to follow with some of their systems, that is opening the door wide open to a new way of doing business with the government that I think will make us more effective.

So I think that is the outcome of what's going on in the world, so to speak, is it's re-motivating both the administration and even Congress to look at multiyear commercial-type procurement activities from the department to industry, broadly speaking.

Now related to the policies of this administration, one question that I get a lot, and I'm sure you do as well, is when you look at a lot of changes, asymmetric warfare, low-cost drones, counter-UAS, all of these new things and new entrants pursuing those as well. How do you think about that in the context of where you're headed?

So the context we always use and we have used since I came to the company was in terms of mission sets, right? So if you think of the tech industry or the telecom industry, which is where I spent the 20 years before this role, was we have a service. One would be, I use Google Maps, as an example, a mapping service that will go on a cell phone, right?

So every 3 to 6 weeks, we hope to do it every 3 to 6 months, some input to that service is better. So either the handset is better, the Apple iPhone, whatever, the software is better because Google increases the accuracy of its algorithm, the firmware that the company has put out to improve the interface between the hardware and the software that they use, these are always happening constantly.

And if we look at a mission or a service for the Department of Defense, when I was in the Air Force, one of the missions was air superiority, meaning our service is shooting down other airplanes without getting shot down ourselves. That's our service. That's what we're trying to make better all the time.

And so how do we use software, firmware and hardware improvements to make that service better and better. And that falls right into deterrence theory where if our Air Force and our Navy and our Army and Marines and our Space Force is increasingly effective, that's a deterrent to armed conflict because potential adversaries really can't understand how good we'll be in those missions.

So that's how we frame everything in our company. We have 13 of these missions that we are looking for software, firmware and hardware improvements constantly using digital and physical technology. So that's how we frame these kinds of things.

And so when it comes to, let's say, a mission of ground warfare, right, small drones are very effective for that. They are not effective for air superiority, they are not effective necessarily for deep precision strike beyond a certain range. So we need to figure out how to use the small first-person view drone or the wired drones within a mission context.

The other piece that we're going to use is F-35s, right? So F-35 can actually feed data into a command and control system for small drones, that's the kill chain or the linkage that we want to create. How do we have the major platforms that can operate with superior capability feed into these less capable devices that are doing mission sets that are adjacent to what we normally do? So that's part of what we're doing.

So we have a command and control system that our teams are developing called Sanctum. That takes inputs from all kinds of sensors, including space, aerial, ground, et cetera, cyber, fusing them, then controlling drones of open architecture, any type, anybody can make them, including us, and that command and control system will incorporate and fuse the data from the current systems so that those new drones can be more effective.

So that's kind of one example of how do we play in an arena where we may not make the $20,000, $1,500 first-person drone, but we can make that drone way more effective in our mission.

Now I want to jump to your highest growth business right now, Missiles and Fire Control. And as you commented, with the war in Iran, Golden Dome, we've seen a whole number of things that have all led to increases in demand here.

Now you talked about -- you mentioned the frameworks that you're working on for THAAD, for PAC-3. Can you talk about sort of where that stands today and a little bit about how that's evolved because those frameworks were discussed well before we even got into this Iran conflict. So how are you looking at that growth now?

So I'll turn it over to Evan for a second on kind of the financial projection piece of it. But we do have to get this right the first time and Patriot is one of the first out of the gate, THAAD is another, a couple of RTX programs.

So we have to go from kind of a term sheet and it's a very thorough term sheet, like 12, 13-page term sheet. We have to go from that to something called undefinitized contract action with the government, which enables us to start actually spending money legally in a way that will be committed to by the government.

So the undefinitized contract or UCA in the terminology that the Pentagon folks use, that launches the fleet, so to speak. We can tell our suppliers, here, I got a 7-year contract on a UCA, I can novate that to you, and now they can start spending as well and have confidence to do that.

Then there's a definitized contract that comes at the end of this process, where there are specific commitments, quarter by quarter, month by month, very complex, multi dozen or not 100-page agreements. That's to come.

So where are we at on Patriot? So January, we signed the framework agreement with the department. About a month or so ago or a couple of weeks ago, everybody signed off on the UCA, undefinitized contract. That's where you saw like I think it was $4.5 billion, right, Evan, of award.

So that award is for the early part of the 7-year program. Appropriations are required to go through Congress to get the full contract. So hopefully, again, depending on this budget schedule, that full up contract for 7 years could be in place as early as the next 2 or 3 months.

Yes. And to add to that, I agree with how Jim talked about it here. And the UCA is a great example of our customer partnering with us. And to your point about the increased rhythm that we need to have given the events of the world, the UCA shows that the customer wants to be able to make it available for us to keep making progress on scaling this production even ahead of the multiyear procurement.

So between that UCA and our own sizable investment we're making, we're ensuring that we're not losing pace to the scaling that's going to be required, not just on Patriot, but also THAAD and others.

PrSM, too, right?

Certainly, PrSM. I think when we talk about multiyear procurements, our profile assumes a PAC-3, Patriot and THAAD awards this year and a PrSM award next year, but all 3 have framework agreements that give us confidence that these are going to be future multiyear procurements.

So if I think about this in terms of how we've historically seen appropriations done, which annual process, how do you get confidence that, say, 5 years from now, geopolitics may have changed, the administration will have changed, how would you imagine these -- the contractual arrangements supporting high volumes 5 years from now?

So we asked for 3 or 4 provisions in the framework agreements that are actually very similar to telecom development -- network development arrangements with wireless carriers, which is what we did in my last company.

One was, and it came from the government side first, an annual escalator based on an index for the industry over the 7 years on the fixed price. So fixed price isn't just a number. It escalates every year based on some kind of inflation index, a relevant inflation index. So that was one thing that we all agreed to, government and industry.

The second thing was that for the major suppliers, they would also agree to a similar framework and that they would then fund their own nonrecurring expense as we will do. And that was also agreed to by government and government is helping negotiate those framework agreements and then subcontracts literally with our major suppliers.

When it comes to medium and small suppliers, we're going to work with each of them to help them scale up, and we're also going to -- and have been connecting those medium and smaller suppliers with the ops of strategic capital in the Pentagon, which will help finance them.

We're also sending a list of the top 20 medium and small suppliers for PAC-3 and THAAD to other financial market players to say, look, these suppliers are going to have, we think, a 7-year agreement with us to the U.S. government. Very financeable now. When they were a medium-sized company in Des Moines, Iowa, you never heard of, they had 1-year contracts, maybe not so financeable. So we're trying to get the capital markets involved, both government and nongovernment. So we got that provision.

The third piece was a reach-back clause, which said, let's say, and we all hope this is true, that our deterrence is more effective, all the conflicts resolve and perhaps someday, there's less demand for some of these products, and politically, the government wants to change the terms of these contracts. So whatever industry invested expecting 7 years, if it's only 5, there's a reach-back provision for what we invested.

If the government decides, "Hey, I was going to order 2,000 Patriots a year. I'll need 1,000 now." Same provision applies. So whatever changes in terms down the road affect the initial investment thesis that we all use to make our investments, there's a recovery provision for that.

So we got those 3 provisions through. And that made the closure, and there's one more that I think Evan wants to talk about, one more that we asked for on top of the 3, is that our cash flow projection as a company needed to be protected for investors. So while we may invest more upfront in CapEx and nonrecurring engineering and things like that, that the government would help -- need to help us by scheduling their payments for the actual missiles to coincide with our upfront investments.

In other words, just prepay, they're going to buy all these missiles anyway, prepay some of that cost to them, revenue to us in alignment with our own original cash flow projections, so that our investors would not be degraded by us agreeing to these long-term agreements.

And just one last thing I'll add is when you look at Patriot specifically, we see enough international demand, where we have strong conviction that we're going to sell the number of PAC-3s that we produce in any given year. And of course, when the government buys from us, they are able to pull the international demand with their own demand to make sure that they're sufficient to meet their demand requirements that are going to be based in this framework agreement. So I wouldn't think that either us or the government would see this as a risk of changed priorities partly due to that reason.

Yes. There's a huge line of international customers for especially the PAC-3 and THAAD that we'll be happy to move up in the line over the next...

You've talked about, I think, mid-teens top line growth, if you look at the next 5 years for Missiles and Fire Control. Does that -- is that all tied into your assumptions on these frameworks all getting completed as we kind of understand them today? Is that correct?

That's correct. I think the mid-teens has some opportunity to grow a little bit just based on the timing of when these procurements, the multiyear procurement contracts are signed. Also, if there happens to be other contracts or platforms, that could get the same kind of treatment. So just based on, I think, what we've talked about today in terms of framework agreements, that gives us confidence to that mid-teens with a little bit of upward pressure based on the timing of those agreements being signed.

And then as you look at this growth, as I said earlier, these frameworks were constructed before this war took off. So I would suggest that there's even a higher level of demand today than there was back in February, say. So -- or beginning of February. If that's the case, is it possible to go still higher? Or what constrains you? Because when we look at this, you kind of say, this demand is huge. Can you take in the next 3 years rate up? Or is this really more an extension of backlog?

Yes, I think that's the right question to ask. The way we're thinking about it is we've been partnering with the government to increase PAC-3 production by 3x. And so our goal right now is to get everything in place to make that happen.

And then at that point, once we've got a conviction between ourselves and our government and our supply chain that we can get there, and we are very close to that point here in the process, then it might be an opportunity to look at, is there additional scaling that makes sense based on the demand function. I think right now, our goal is to match the current framework agreement that's in place while we look at potential further scaling.

Okay. Great. If we go to Aeronautics now. So F-35, still the biggest program in the company, I think still around 30% of revenues. How do you look at the growth for F-35 now, given that I think you're going to be staying at this 156 rate for a while, but you've got sustainment, upgrades? How should we think about that growth rate?

So from an F-35 production, low single-digit growth rate probably makes sense as we go through, and I agree with the expectation of a stable production rate. There could be some changes on that just based on the timing of when we sign the lots and the pricing contained in those lots, additional capability that gets developed and pushed to platforms. So it can vary a little bit.

Development also probably in the low single digits. Sustainment really is the growth driver in F-35. So think of high single digits with maybe a little bit of opportunity above that in the near term. And part of the reason that you see that is our recognition that sustainment has probably been underfunded historically. And so the government realizes that's a key element of air power is to increase the availability of the jets that they have in addition to buying additional jets.

So we'll see sustainment growth increase as they've funded additional sustainment. We've also made our own investment in sustainment to expedite the path to higher availability levels with the F-35. So that's a big growth area for us.

Yes. I mean, in the session right before this, John Plant talked about F-35 from an aftermarket standpoint for them, and said, that, that aftermarket growth is higher than one would expect simply from the fleet size.

That's right.

Is that -- that's what you see as well as actually doing the service work.

That's exactly the way to think about it. So to the point, each delivered jet will need to be sustained, but there's also probably some work for the existing fleet just to get a higher spare part availability level. So that's a big investment focus for us and a big budget priority for the customer.

Now one of the things that has been challenging, and we've talked about this multiple times, has been the Tech Refresh 3 that you've worked through and then heading into Block 4, which has been pushed out in time. Can you talk about these upgrades? How Tech Refresh 3 has evolved and the next step here?

Yes. So TR-3 or Technical Refresh 3 for the F-35 is basically, it's a new server, right? So heavily upgraded core processor we call it in this industry, but it's basically the server for the airplane. There's a pilot image generator for the cockpit screen, which comes along with this and then a storage unit that allows you to store much more data on the aircraft.

So all of that hardware is completely finished with development. It's being scaled in production by L3Harris to meet the production rate of the airplane. And so from a hardware perspective, we're in really good shape. The firmware is stable now with the jet, that's the second piece, and then the actual software loads that integrate all the edge devices, so to speak, into the aircraft's brain.

Those are being -- that software is being kind of upgraded as we go and will always be upgraded because it will be new subsystems and then they're going to have to do another software drop, just like if you have a Tesla, you get a software drop every couple of weeks or whatever. That's going to continue.

So TR-3, to us, from a hardware, firmware perspective, is complete and in production. The software upgrades are in process. How that relates to Block 4 is that if you want to have more systems on the aircraft in terms of what kind of air-to-air and air-to-ground weapons can you support, you needed that bigger brain and the cockpit systems driver and more storage to actually add more types of missiles.

And ultimately engine, too, right?

Potentially, right? And so that's where the Block 4 comes in. What is the schedule of adding additional missiles to the airplane, we'll call it? What is the schedule of adding better sensors to the airplane? And the most critical sensor is the radar in the nose of the airplane.

So all of those subsystems are made by other of our competi-mate companies. And we don't need to go through the list. Some of them are not on the original schedule, I'll say. One of them, which is a critical one, is a government-furnished equipment just like the engine.

So now there's a key sensor, this government-furnished equipment and the government is managing that. Our other subsystems we're managing and the engine is managed by RTX, Pratt & Whitney. So we build the airplane and deliver it or have it ready to accept the engine and the radar, that's when we're done, so to speak.

So what we're doing with the government in cooperation with our teammates on this program is we're saying, okay, where are we really at with each of these sensor upgrades, where are we really at with engine production. There happened to be a strike last year, I think, at Middletown, where there was a delay in some of the F-35 engine production. So now that's a little bit edgy.

And we've gotten together as a really integrated team with the government to really put that Block 4 schedule together. There is and has been over the years conversation about is a new technology engine sensible for the F-35, affordable, et cetera. That's a different topic. It's not in Block 4, but it's a separate line of discussion between us, RTX and the government, which is not adjudicated yet.

But for Block 4, as it's been described, we are basically reprogramming with the government to get much of that sensor technology as fast as we can and as many airplanes as we can. That's what we're doing now. I'd say that's very collaborative. It's not completed yet, but it doesn't necessarily affect our ability to generate revenue and cash flow with the F-35.

But would it be correct to say, once Block 4 really comes in, in full, that should be a revenue benefit for you all, right? I mean...

Yes, because a lot of the subsystems are not GFE and they come through our revenue line as well, and you got a more capable airplane. And we have to deal with again, inflation and other things that we negotiate with the government. So the unit price because it's a more capable airplane will advance along with the inflationary issues that come with it.

Now I mean, going to some of the older programs, C-130J, F-16, you're continuing to see good international demand. There's more money for C-130s in the President's budget. But you also had some issues in the first quarter on those programs. Can you talk about what happened there?

Yes. I can talk about the design and manufacturing issues and Evan can give you kind of layout of the financial impact of that. So when we went to Marietta with our full team, we've learned about some obsolescent issues.

Obsolescence in our industry means I used to use this radio that was designed and built in the '90s. That radio is no longer going to be built anymore. We have to integrate a new radio into the entire aircraft system and connect it with all the existing subsystems and other systems that are outside the airplane.

We underestimated the degree of difficulty of doing that. And radio is just an example. There's a lot going on here in the obsolescence space. So that meant more rework in the factory and flight and discovery, as we call it, in flight test, okay, this didn't really connect to that other system, so we got to make a change. And that delayed the delivery of some of the C-130s, right?

When it came to F-16, it was more of a new configuration because for the aircraft that are being produced today for the 2 customers that are out there, they -- the government agreed with them to put some new subsystems on the F-16. Integrating those new subsystems, again, took longer and had more discovery issues.

Discovery meaning basically, we're going to flight test something or test it in the lab, and we think it's going to work, but let's just make sure. And sometimes you have to do a software upgrade or the firmware doesn't match or whatever it is, and you got to do some rework.

That was the issue in F-16 largely. It is new subsystems, took a little bit longer to integrate than we thought. That delays the whole delivery and manufacturing process, and Evan can talk a little bit about the charges we took and where we think we're at.

Yes. And additionally, I'll add obsolescence is something that we're talking about constantly, particularly for long-standing production programs. It's just part of maintaining those programs. We do it all the time internally. We don't talk about as much externally because typically, it just goes as planned.

This is a case where that didn't happen on C-130. So we took a charge on C-130. You can imagine a flight line with a lot of C-130s there waiting to be sold off. We've now resumed deliveries on C-130 and look to get that program back on track as we close out the year.

On F-16, as Jim mentioned, the design issue that was caught in flight test, we've since resolved that issue, the rework that has to come without sequence work when there's a design issue caught in flight test drove that charge. We've now completed that design work, and now we're going through the normal checkout process that comes with an F-16. So we should resume deliveries, I would say, measured in weeks, not months at this point.

Okay. So this is -- I have the memory back to when the Block 60s were sold to UAE and you had some similar kinds of problem. Those were much more extensive. And so you're saying this is -- you've pretty much resolved the issues and can begin delivering soon.

Yes. So Block 60 and 70 was a much more significant installation of new subsystems, new generation subsystems. This is a more modest turn at the same wheel -- of the same wheel. But I could tell you because I've flown the F-16 with the test pilots a few times, it's still world-class air-to-air fighter and it does the air-to-ground mission, too.

So those countries that are not necessarily releasable for F-35 yet, F-16 is still a lead in, especially if they were countries that had legacy Russian platforms. And those pilots and those units need to go from a whole different -- like cockpit set up, for example, and a whole different way of managing the jet and doing formations, et cetera, to the Western way.

And the F-16 is a much more sort of smooth way to go, make that transition because, for among other reasons, the F-35 is a single seat aircraft. There are no 2-seat trainers. And so you have to be able to fly Western cockpit, Western tactics, Western formation flying before you step into an F-35, frankly. And so if you're a pilot training and your prior experiences as a jet pilot is not in Western cockpit, you pretty much have to...

Yes. If we go over to space, clearly, a very high priority, high-growth area. It's true in this budget, it's true in several budgets. And as I look at what -- I can't see all of your portfolio there, but you've had -- it's really the largest player in this arena, but you have this mix of big legacy programs. Some of those are coming down. And then you've got a strong role in the tracking layer and the SDA program, some of the new gen. How should we think about the revenue outlook given the blend of mature and new?

So I'll give this to Evan to go through the kind of the projections. But one of the things you mentioned was the tracking layer. So this is small satellites that are low earth orbit that are proliferating. There's lots of them. And let's say, 5 years ago, everybody looked at Lockheed Martin, oh, they make big satellites in geosynchronous orbit, they're out of this. We're one of the leaders in small sats now for military usage.

That means the company can evolve and pivot when it needs to, when the mission changes or the technology is available, we can do that. And that will apply in sort of the autonomous warfare space, too. I'd love to spend about 15 or 20 minutes going through the kind of devices that we are inventing and developing now that are being tested in conjunction with actual real customers like SOCOM, et cetera, that will, I think, be important in that space as well.

So I just wanted to highlight the fact that you've touched on space and the tracking layer and all this of small sats. 5 years ago, nobody thought this company could participate in that because of our legacy. The legacy is helpful because then we've got that baseline experience, the scale -- the production system, the customer confidence, the ability to integrate with other systems that are benefits, not degraders to us being able to pivot.

Yes. And when we won that first SDA transport layer, we did it as one of the only competitors, I guess, the only competitor that did not have an organic small sat capability, which we now have with Terran Orbital. So to Jim's point, we've now evolved to be a leader in small satellite production.

If you look at the broader space growth profile, the pacing item is what we call our strategic missile defense business at space. So that includes the Fleet Ballistic Missile Trident program, which is going through another recapitalization and the large growth curve right now. We've made a lot of investment to support that growth.

You've also got the NGI, Next Generation Interceptor, very exciting program going through development with a plan to produce and scale. And then that's also where we have our Navy and Army-based Hypersonics programs in that business. So that's the pacing growth item in space.

The national strategic space, which includes a lot of the big satellite and small satellite programs, including a lot of the key classified work, which is a growth and performance driver for us, it's sort of mid-single digits.

And then commercial civil is an exciting area for us, but it's probably low single digit, very low single-digit growth rate for us. So all in all, space is a mid-single-digit growth and remains our second fastest-growing business area overall.

And what is the time line now for NGI?

So we're continuing to go through development, I would say, through much of this decade. There's some potential timing opportunities depending on how we want to partner with our customer to accelerate some capabilities. So we're working through that with them and that will be at their discretion in terms of the actual fielding date.

And just related to that, but also going back to the Missiles and Fire Control discussion, which is when you look at solid rocket motors as a critical element here, I know that had been problematic for you and for others if we go back a couple of years ago. You're working through a JV with GD to produce your own, I think, PAC-3. Can you talk a little bit about where the solid rocket motor universe stands today to enable what you're doing across all of these programs?

So Aerojet Rocketdyne is a significant position as is Northrop Grumman. So one other example is Northrop Grumman is qualifying to be a PAC-3 solid rocket motor provider. That's a second source for us there. If we can get General Dynamics through GMLRS as the kind of the more simple motor and then advance them to PAC-3, then we'd have 3 sources for solid rocket.

That's what you would prefer?

We would prefer 2 to 3 for every major component. We can't get there with every major component, but even some very sophisticated, either we will start building ourselves with our own R&D or we will find another partner willing to do it like we -- the General Dynamics arrangement that we have is a really good example, which is we don't have the production facility for solid rocket motors, which is very bespoke, I'll call it, okay?

But we can design and integrate the design into our systems. So we did the design, GD is going to do the production, and we're matching up our skill sets, which is great. We want to do that more and more. And that could be with start-ups, it could be with midsized companies, et cetera.

So we are open to really partnering with any level of industry to make our mission capability better, whether it's supply chain resilience or it's adding digital technology or it's doing something international to give us diversity of sources, for example. We're way more open to that, I think, than the company has ever been, and we're actually executing on a lot of that.

Going over to RMS. So Sikorsky, how should we view growth there? I see Black Hawk is still out there and still it's going to be a while for MV-75. But -- so how should we think about the growth profile first for Sikorsky?

The pacing item there is going to be the CH-53K heavy-lift helicopter, which is going to double production probably this year and next year is our pace. So that's going to continue to scale revenue really through the end of the decade and continue to deliver through that based on the large multi-year procurement contract that we just signed.

Black Hawk will be a growth driver this year. That revenue growth will continue -- will start to stable out probably next year and then come off maybe slightly in the out years depending on the future state of multiyear production possibilities there as we're continuing to partner with the customer.

In the meantime, we're encouraged to see budget prioritization for Black Hawk modernization as there are some really exciting capabilities that are potential for the Black Hawk platform. And then we see some other platforms for Sikorsky that also become very relevant like the MH-60 Romeo and Sierra. So that's sort of the pacing item for Sikorsky this year.

I think if you look at the non-Sikorsky parts of RMS that are interesting to watch, the ground-based radar is one of the most exciting parts there, particularly with the Golden Dome mission becoming online. We're very well positioned with our ground-based radars with a variety of capabilities, including those that are transportable and may be most relevant to a Golden Dome mission to protect the home front.

And then you also see that as our center of excellence for our C2 capabilities. So Jim mentioned before about the low-cost, attritable drones, which isn't our natural kind of capability there, but the ability to sort of network all those drones together and then make them work collaboratively with our platforms is a capability we bring and that's important coming out of RMS.

Yes. And there's a very good example of this is Sanctum command and control system I mentioned earlier to do drone control, command and control. That's out of the RMS business we have. The effectors for this now today are we're shooting down -- everybody's kind of making the point, shooting down a $25,000 Shahed drone with a multimillion-dollar missile, That's a bad match. We shouldn't be doing that.

So we're not just sitting here waiting and saying, well, that's a bad economic match. What we did is we said, okay, what is a relatively cheap, highly scaled existing product or system that we could use to shoot down a $25,000 or $30,000 drone with a pretty good, almost even financial economic trade-off. And that is the Hellfire missile.

The Hellfire missile is in the tens of thousands of production, in storage and used by United States Army and its allies. It's generally an air-to-ground. In fact, it's designed as an air-to-ground missile generally out of helicopters. So we got creative in the company and said, okay, how can we use the cheapest guided missile we have that could shoot it -- that's big enough to shoot a Shahed drone down and get this economic trade-off fixed.

So what we did was we used digital technology to change the guidance system for the Hellfire missile from air-to-ground to ground-to-air. And then we -- our team invented kind of -- it's a 4-pack. So think about a 6-pack of beer that you would carry. It's a 4-pack of these Hellfire JAGM missiles they're called now that are relatively easy to produce, quite cheap compared to, say, a Patriot missile.

And we can put this 4-pack and the command and control system on the deck of a ship, we could put it on the back of a truck, we could put it at the edge of an air base, we could put it next to a THAAD radar. And while you've got 4 shots relatively very cheap that you can now shoot these Shahed drones.

So -- and we've got some other systems we're developing, too, that are meant to match the economics of these drones in a counter-UAS system, which is the RMS brain will control the MFC missile that's already deployed and used and familiar with militaries all over the world. They have to learn something new, train 1,000 people, get a supply chain, a logistics chain for this new thing.

These are Hellfires. They're everywhere. And we just -- instead of tacking them on to -- under the wing of a Boeing Apache aircraft, we're putting it in the 4-pack and using it for a different mission. That's 21st Century Security. That's the concept is how do you match the scalability, the usability and the new technology in a way that you're solving these mission problems and not just selling stuff to the government.

Yes. And just to add to that because I think it is really key. When we talk about the MFC growth profile, this would be a potential accelerant to that, the Hellfire, the JAGM missile. And to Jim's point, that's joint air-to-ground missile. That's the way it's been designed. So the idea of innovating it for a completely different mission. And very notably, these are one of the few munitions at MFC that have excess capacity today. So we could very quickly ramp up there, also has potential pertinent with the Saildrone acquisition we did as a potential platform as well.

Right. And that's, again, being an innovative thinker, there's a start-up called Saildrone, they make autonomous ships. We don't do that. They do it already. They're pretty good at it, and they don't want any weapons.

So we put a Mark 41 launcher on -- integrated into the ship, which then integrates into the whole command and control system of the U.S. Navy, and now they can use it to actually deter adversaries instead of just maybe a sensor or a mine layer or something like that. So this is the way this company is thinking now.

It's taken a couple of years to get it embedded everywhere. But that's why we do these trips to the different factories together because that way, we can see -- first of all, help the operation that's existing there and also learn from it to scale and team up with whether it's Skunk Works and RMS or whatever to do these mission solutions that will be efficient and effective.

So if we put all this together and we look at this year, so you're guiding to $6.5 billion to $6.8 billion in free cash flow, down a little bit from last year. What factors could take that higher or lower this year?

A couple of things could drive it. One of the headwinds is both years, last year and this year, benefit from tax law changes. Last year, based on our current profile, a little bit more than this year. But as we work through the very latest changes we saw specifically to the CAMT, that has the potential to push our cash flow to the higher end of our range, and we'll continue to evaluate that.

And we'll use the next earnings call as an opportunity to potentially relook at that if it's appropriate. Also, the timing of these multiyear procurements of when they get signed and the Lot 20 F-35 are all drivers that could help us potentially increase cash as we look through it.

Well, I guess to wrap up, Jim, like when you look at this year, where are you going to focus your time?

So trying to continue to integrate the very best of U.S. and allied technology into the missions that we're doing. So we have high-level discussions with the NVIDIAs of the world, their leadership, OpenAI, Google. We're figuring out with Rheinmetall how to build hardware in Germany, for example.

We're going to have -- find more European partners because, guess what, Europe has realized that they need to have more of industrial base themselves. We already have the designs. We already have the manufacturing know-how. We can team up with companies in Europe, for example, or Japan is another, Australia is another. So it's really like building out an ecosystem where the Lockheed Martin legacy of intellectual property can be scaled on a global basis to deter war.

So that's one of my primary areas. And the other one, as I said, is just being on top of the operational execution all the time and being at the sites and learning from the people on the floor, learning from the local management. And where I first saw this Grizzly 4 pack of Hellfire missiles was that we went to an MFC factory and they were making it kind of on the side in the garage somewhere, and they go isn't this cool, and I'm like, yes, let's make 1,000 of them, right?

So let's just get on with this. We'll figure out the appropriations process someday, but we need to be fast and we need to scale up quickly. And we need to give the military services things they know how to use and already have that can do much, much more effective mission capability at a reasonable cost. So between operations and innovation, that's where I'm spending my time.

Well, great. Well, thank you very much, Evan and Jim. This has been great. All right.

Thank you.

Good day, and welcome, everyone, to the Lockheed Martin First Quarter 2026 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Investor Relations. Please go ahead.

Thank you, Sarah, and good morning. I'd like to welcome everyone to our first quarter 2026 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Evan Scott, our Chief Financial Officer.

Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Jim.

Thanks, Mark. Good morning, and thank you to everyone on the line for joining us on our first quarter 2026 earnings call. First, I'd like to highlight this week's breaking news on a recent win for our Aeronautics business. Just this past Monday, Lockheed Martin signed a $1.5 billion contract with the Peruvian Air Force for 12 Block 70 F-16 fighters with an opportunity for a second squadron of an additional 12 aircraft. This is the first F-16 direct commercial sale contract in decades and broadens our footprint in the modernizing Latin American region. This was a collaborative partnership with the U.S. government, and we continue to work with the Peruvian government in executing on its sovereign acquisition process.

Overall, we reported solid results for the quarter as demand for our premier Defense Technologies and space exploration capabilities remains high. This elevated demand is supported by the highly effective performance of our platforms and systems that has again been demonstrated during this first quarter. Artemis 2 crew and the dedicated teams at NASA completed their historical mission and a near flawless flight and recovery using our Orion spacecraft. Artemis launched on April 1, carrying 4 astronauts on a 10-day mission around the Moon.

The first crude space flight beyond low earth orbit since 1972, and the farthest humans have ever traveled from earth. The Orion spacecraft served as the crew transport and habitation module throughout the entire mission, traveling thousands of miles beyond the moon before safely splashing down in the Pacific Ocean. Orion is the only vehicle capable of traveling into deep and back while safeguarding human life. It will enable future Artemis missions and ultimately, exploration of the moon, Mars and beyond. We are now assembling Orion for Artemis 3, 4 and 5, cementing Lockheed Martin's role in sustained deep space discovery. While Artemis 2 reflects what's possible at the edge of human space exploration, it also underscores that Lockheed Martin's portfolio is delivering extraordinary capabilities in the most demanding conditions both on earth and in space.

Additionally, Lockheed Martin platforms have performed extremely well in very demanding missions during recent U.S. and allied operations and active conflict zones. The F-22 Raptor and the F-35 Lightning established air superiority when called upon. Our C2 BMC and [indiscernible] systems combined with FAD and PAC-3 interceptors, delivered layered air and missile defense in infrastructure and populations, military bases and ships at seed. Moreover, the Black Hawk combat rescue helicopter and C-130 aircraft supported successful combat search and rescue operations and extremely difficult conditions in hostile territory. The operational relevance of these systems has direct implications for our business. In the weeks following Prism's first use in active operations, we announced plans to quadruple production to meet accelerated demand.

This is in addition to the commercially inspired long-term agreements we already entered into with the Pentagon to rapidly expand the production capacity for PAC-3 and THAAD interceptors by 3x and 4x, respectively. In light of these multiyear framework agreements, we are in the process of construction and/or modernization of more than 20 facilities across several states dedicated to achieving these great expanded reduction rates of production of these sophisticated munitions. These investments are expected to support thousands of skilled manufacturing jobs across our defense industrial base, provide accretive investment opportunities for our suppliers and enable the addition of second and third sources within our supply chain to enhance the resiliency of our production system.

For its part, the F-35 also continues to execute critical missions, delivering fifth-generation air-to-air and air-to-ground capabilities unmatched by any other aircraft. The platform's combination of Stealth advanced sensors and AI-assisted targeting enables pilots to operate with decisive advantage. In the first quarter, we secured a new F-35 production contract for long lead items and the initial presidential budget request includes increased F-35 quantities. Rotary wing capability is proving equally valuable with a family of Black Hawk supporting critical search and rescue personnel insertion and resupply missions. We are also far down the road in converting the Black Hawk to both pilot optional and fully autonomous operations to capitalize on its range payload and survivability in contested environments. These examples are testaments to our strategic focus on mission execution and our commitment to disciplined investment to drive 21st century digital and physical technology into tried and true major platforms.

This initiative is designed to provide our customers with the most capable integrated and reliable systems that can be quickly assimilated into existing force structures, training programs and logistical infrastructure. The urgency of the current operational environment, coupled with the strong performance of franchise Lockheed Martin Systems has also spurred the rapid progression of initiatives that were already underway with our customers on long-term production commitments. We recently announced a $4.8 billion contract to further accelerate production for PAC-3.

A tangible example of how we partner with our customers and advance from novel framework to contract to continue increasing the scale and speed at which we can deliver. The long-term demand inherent in the munitions agreements allow us to confidently expand our investments, boost internal capabilities with robotics, and strengthen supply chain resilience, in turn, delivering long-term shareholder value to Lockheed Martin's shareholders.

Chart 3 outlines our collaborative approach with the U.S. government to address these urgent requirements and illustrates how acquisition transformation is enabling us to accelerate and expand production. These munitions agreements provide risk mitigation for industry and efficiency and speed for government a combination that benefits customers and shareholders alike. We also remain committed to advancing emerging technologies.

Since launching the Lockheed Martins Venture Fund, we have backed more than 120 companies with many now serving as Lockheed suppliers. In the past 2 years, we've added 25 new companies and are expanding the fund's capacity to $1 billion, more than double its formal size. Our expertise and innovation and scaling the production at scale enables us to serve as trusted partners for the next generation of solutions from startup and other new entrants to the industry. Building on this momentum, earlier this week, we announced a further strategic investment in [indiscernible] technologies to bring to market a fully integrated end-to-end turnkey counter UAS solution, which seamlessly uses detection, control, identification and mitigation capabilities into a single commercially available offering. This partnership will accelerate Fortum's ability to scale production. We'll also incorporate its products into our deployment-ready integration with Lockheed Martin's Sanctum counter UAS ecosystem.

This is just the latest example of reinforcing our commitment to invest in innovative technologies that deliver rapid reliable solutions for new threats. Our commitment to developing advanced capabilities is consistent with the budget environment where there continues to be broad support for national defense initiatives. The administration's priorities, accelerating munitions production, strengthening integrated air and missile defense, advancing next-generation aircraft, expanding space capabilities and preserving long-range for [indiscernible] strike are reflected in this budget request. These priorities are all well aligned with our already long-standing initiatives and product sets.

The Department Awards budget rollout that was released on Tuesday, reflects continued strong demand for our core franchise programs. At a broader level, the administration's prioritization of defense industrial base investment and modernization spending provides a constructive backdrop as we execute against our significant backlog. We are well positioned. Our strategy is taking hold. Our solutions are in high demand, and we remain confident in our full year guidance for 2026. Before turning it over to Evan, I'll cover our top focus areas for the year.

With that significant backlog and demand continuing to grow, enhancing and accelerating execution is imperative for us. Factory production is already up more than 60% from just 2 years ago. and we remain focused on converting demand and long-term growth while executing with discipline in a dynamic environment. Next is innovation. A key feature of our 21st Century security vision encompassing AI solutions for enterprise efficiency, digital threat integration, model-based engineering to accelerate our program time lines and a commitment to open systems architectures that allow us and our partners to rapidly integrate new technology from us or others and continuously enhance capabilities, thereby strengthening deterrence.

Third, our partnerships are in full alignment with the department's acquisition transformation strategy. This is enabling a government industry model that we have long advocated for and under which we were the first to sign a multiyear agreement. International demand also remains robust as budgets expand and allies and partners across the globe continue to seek out our superior systems and capabilities.

Finally, our people are the foundation of everything we do. Tens of thousands of workers develop, build and sustain our systems, and we're deliberately growing this workforce by investing in training pipelines collaborating with community colleges and technical schools and creating long-term manufacturing careers. Our new munitions acceleration center that we're building in Camden, Arkansas exemplifies this effort serving both as a production facility and a development hub for the next generation of defense talent that will use the latest in AI and robotics to do their jobs. Now I'll turn the call over to Evan to walk us through the Q1 financial results and outlook.

Thank you, Jim. Good morning, everyone, and thank you for joining us. I'll now walk through our consolidated financials and touch on some additional highlights from the quarter include few words, a status update on the munitions agreements before handing it off to Mark, who will discuss the quarterly financials by business area, and then I'll come back to discuss the detail on our 2026 outlook.

Starting on Chart 4. First quarter sales were $18 billion, in line with the first quarter of 2025. We saw strong growth on missile programs within MFC and and on strategic missiles within space, offset by lower volume at Aeronautics, primarily related to the life cycle on classified programs and an RMS on Sikorsky heavy lift programs due to timing of material receipts. First quarter 2026 sales were impacted due to the shortened fiscal period compared to the prior year, we expect sales to grow in the second quarter and throughout the remainder of the year, supporting our full year growth outlook.

Next, segment operating profit amounted to $1.8 billion, a decline versus the first quarter of 2025, primarily due to nonrecurring events in the prior year related to program milestones and completions at Aeronautics, Space and RMS. First quarter 2026 results also reflect unfavorable performance adjustments at Aeronautics associated with F-16 and C-130.

Design and development delays temporarily impacted F-16. On C-130, integration challenges and supplier constraints, which occurred early in 2025, persisted into the first quarter of 2026. The C-130 deliveries have resumed with 4 aircraft delivered as of today, keeping us on track for our full year targets. Earnings per share of $6.44 decreased 12% primarily driven by lower profit and mark-to-market losses due to changes in the fair value of investments and liabilities for deferred compensation plans. This was partially offset by benefits from a more favorable FAS/CAS pension adjustment.

Shifting to new business, MFC was awarded $7 billion in orders for PAC-3 contracts. This includes 1 award for $2.2 billion from the first quarter of 2026 and a $4.8 billion fully funded undefinitized PAC-3 contract we signed earlier this month, advancing the first of the [indiscernible] ramp production agreements we announced earlier this year. These awards underscore the sustained and growing demand for our missile defense capabilities.

Lockheed Martin's commitment to the mission and the government's dedication to partnering on the rapid scale-up of this capability. We are partnering with the Department of War to definitize all multiyear munition acceleration agreements, and we will continue to provide updates as we progress. At Aeronautics, we secured a $700 million contract to procure long-lead materials for F-35 lots 20 and 21 for our international program partners. A further signal that Allied nations are continuing their commitment to the F-35 program as the aircraft consistently proves itself in live combat.

At space, we secured an $890 million contract for our Fleet Holistic Missile capabilities, a program that provides sea-based nuclear deterrents and one that Lockheed Martin has served as a prime contractor for more than 70 years. And at RMS, we were awarded a $365 million contract for Aegis Blistic Missile Defense. The Aegis weapon system is a proven command and control solution that links sensor and effector assets across all domains from undersea to space, showcasing how Lockheed Martin connects established and innovative technologies to enhance homeland defense capabilities. They're adaptable for missions like Golden Dome.

Moving to free cash flow. We reported use of $291 million in the quarter. The negative cash was largely driven by working capital timing, including impacts from the implementation of a new ERP system in one of our business areas. The impact of this system upgrade was anticipated and we expect that the effect will be resolved by the second quarter. Our full year cash guidance remains, and as in past years, higher cash flow is projected to be weighted towards the latter half of the year.

Additionally, earlier in the quarter, the IRS issued favorable guidance regarding the corporate alternative minimum tax. This strengthens our confidence in reaching the upper end of our cash flow range. In the quarter, we paid $816 million in dividends and retired $1 billion of long-term debt. We remain committed to our dynamic and disciplined capital allocation prioritizing a strong balance sheet while investing for the long term.

In the first quarter, we invested $511 million in capital expenditures and $458 million for research and development. an approximately 15% increase over the prior year first quarter. I will now turn it over to Mark to walk through the business area results.

Thanks, Evan. Starting with Aeronautics at [indiscernible] First quarter sales in Aero decreased 1% year-over-year, primarily driven by life cycle timing and classified programs, losses recognized on the F-16 program and lower production volume. This was partially offset by increased volume on F-35 sustainment. Segment operating profit decreased 14% compared to the prior year related to unfavorable profit adjustments on F-16 and C-130 programs and the absence of favorable profit adjustments on classified programs that occurred in the first quarter of 2025.

These impacts were partially offset by favorable profit adjustments on the F-35 program. The image on the right depicts an F-35, refueling from a KC-130, underscoring Aeronautics role and delivering integrated air power to the U.S. and its allies. In the first quarter, we were awarded a $462 million contract to expand support of the Royal Canadian Air Force's fleet of C-130Js.

Turning to Missiles and Fire Control on Chart 6. Sales at MFC in the quarter increased 8% from the prior year, driven by higher volume from production ramps on existing PAC-3 tactical strike missile programs, including JASSM, LRASM and PRISM. Segment operating profit increased 8% year-over-year, primarily from the higher sales volume.

On the right, you can see a photo of a [indiscernible], equipped with Precision Strike Missile, or PRISM. In the first quarter, we successfully completed the first flight test of our PRISM increment to demonstrating its ability to engage moving targets. Shifting to Rotary and Mission Systems on Chart 7. Sales at RMS decreased 8% year-over-year in the quarter, primarily from lower production volume of both RADAR programs and at Sikorsky.

Operating profit in the first quarter decreased 19% compared to the prior year. driven by unfavorable preadjustments at Sikorsky programs and on the absence of a cost recovery from an intellectual property license arrangement that occurred last year. In the first quarter, we delivered the very first UH-60 MX, Black Hawk helicopter to the U.S. Army. The UH-60MX includes a fully integrated Matrix autonomy suite, enabling optionally piloted flight and supporting the Army's pursuit of open architecture, mission supported autonomy.

On Chart 8, we'll conclude the business area discussion with space. Sales increased 7% year-over-year in the first quarter, primarily driven by higher sales volume on strategic and missile defense programs, including the Fleet Ballistic Missile and next-generation interceptor. Operating profit decreased 26% compared to the prior year, primarily due to the absence of a benefit from completion of a commercial civil space program, partially offset by higher sale volume on the programs I previously described. Now I'll turn it back over to Evan.

Thanks, Mark. Shifting to Chart 9. Our 2026 financial outlook remains consistent with the expectations we shared in January including mid-single-digit sales growth, profit of $8.4 billion to $8.7 billion and free cash flow range of $6.5 billion to $6.8 billion. Our free cash flow guide continues to assume between $2.5 billion and $2.8 billion of capital expenditures in support of production ramps and key strategic growth opportunities. It is also important to note that we expect margins to improve over the course of the year, with gains anticipated in the second half of 2026 as production milestones are achieved and risks are retired. We remain focused on disciplined operational execution, scaling production and delivering at speed to meet the urgency of this moment. Now we'll open up the line for Q&A.

[Operator Instructions] Your first question comes from Kristine Liwag of Morgan Stanley.

Maybe Jim and Evan and Mark, I want to focus on the F-35, the company's largest program. It was very encouraging to see the Pentagon request 855 in the fiscal year '27 budget up from 47% last year. And you've also called out the funding for sustainment. I was wondering, can you reorient us on where we are in the program, the F-35 role in Modern Warfare and your outlook for production and sustainment.

First off, I'll say that the performance of the F-35 and active operations over the last 6 months has been really definitive proof that the aircraft is standing alone around the world and its ability to do both really advanced air-to-air emissions and achieve our superiority alongside F-22s and also air-to-ground missions. And so in the midnight hammer operation, for example, when the nuclear capabilities of Iran were damaged significantly. That mission was enabled by the scoring of the bombers, V2 bombers by F-22 and F-35, it couldn't have happened, I don't think, without them safely. And part of that mission was to air the ground side of sort which enabled both U.S. and Israeli F-35s to essentially obviate the air defense system and very [indiscernible] defense system of Iran. So this is quite evident now with that and other missions that the F-35 is uniquely capable as a fifth generation platform. It's the only one in the free world in current production right now. And so therefore, the net from the U.S. government is solidified, as you said, and also the interest in the airplane from our allied customers is also heightened as well. So I think it's basically proven itself as the dominant modern fighter aircraft through its performance. The second piece of it, Kristine, is -- and I think both our allies and us have discovered this in the European and Middle East theater is that F-35 is basically a flying command post, where it can ingest sensor data from the aircraft, organize it, declassify it necessary and pass it off without any pilot intervention into the command and control system for multiple services and multiple allies, that information gets digested and then other platforms can actually act on in other crews and capabilities can be applied to these threats that the F-35Cs when it's in flight. And so there have been missions where an individual pilot or a for ship of airplanes does 3 or 4 missions over a couple of hours and those missions can include Combat Air Patrol, protecting other airplanes. It could include close air support protecting truths on the ground that are friendly. And it can also include the sort of surveillance and data fusion mission that I also described. And there have been some examples of missions that have gone on 3 or 4 hours with the aircraft, multiple are fuelings and again, the single pilot or the formation can execute all 3 of those missions even when all the munitions are expanded. So I do think that this aircraft has -- we always do it, but internally, but that it is superior to every other airplane in the world right now that we faced at least. So I think that's the position of the aircraft.

Your next question comes from Rich Safran with Seaport Research Partners.

I thought you could give some additional color on Aeronautics and RMS results. Some of this was a difficult comp, but I wanted to know if you could maybe give some more color on your opening remarks and discuss what drove the adverse profit adjustments on the F-16 at Sikorsky and also on the F-35 that offset.

Yes, I'm happy to take that, Rich. Starting in F-16, we have a new configuration that's being delivered as part of the Taiwan and Morocco production run. So we ran into some issues during the flight test causing some rework, which delayed deliveries. So the combined cost of the rework and schedule extension ran through our program estimate. Unfortunately, we're back on track with a successful flight test and plan to deliver -- begin deliveries of the first aircraft as soon as this week. So we're right back on track on that program and, of course, celebrating the good news on Peru. But the team is very focused on the execution, and we're off to a good start this quarter. I think one of the positive points, as you pointed out here is the F-35 production margins. That's accretive to overall aero margins. We've seen some real strength in performance on our deliveries that you've seen as well as our cost performance. So I think that's looking good. RMS we had some cost growth on some of the programs there and a lot of material timing that we expect to be just sort of a quarterly anomaly as well as sort of a difficult compare to last year Q1 as we had several onetime profit events that make it a tough compare. If you look at just the quarter in context with comparing quarter-over-quarter, all those onetime charges across 3 BAs accounted for about $190 million of sales and about $240 million of profit. So when you sort of net that out, we see the Q1 is on track we expect to see successive sales and margin growth throughout the year with strength to get to our total year guidance. Thank you.

Your next question comes from Seth Seifman with JPMorgan.

I wonder if you could talk a little bit about the the multiyear contracts that you're looking to sign in Missiles and Fire Control, and obviously, a lot of important opportunity there for the company. But can you also help us think a little bit about the risk side? Are you signing up and committing to reach these significantly higher production rates in the out years? And how do we think about what the financial downside could be for the company if these rates aren't reached?

So as far as the tripling or quadrupling of production rates, that's going to have to be a team effort in the U.S. government and us and our major suppliers certainly have all locked arms on how to get that done. So for example, if you look at the PAC-3 system, we're the OEM and the integrator of course, for the missile itself, but we rely on L3Harris for solid rocket motors and we rely on Boeing for seekers. Both of those companies have publicly stepped up to meet the same level of commitment as we are to invest in that scaling within their companies. Those are just 2 examples. But I would say essentially what the government, we and our major suppliers have agreed to is to -- we'll go ahead and fund the NRE on the 7-year framework agreements. And as a result of that, we can focus on the small and medium suppliers and helping them scale up as well while our large teammates in the industry will handle their own nonrecurring costs. And that's all been agreed upon between the U.S. government, those companies and Lockheed Martin. With respect to our small and medium suppliers, we've got a lot of interest in getting financial help for them to do the scaling. Part of that's going to come from the open strategic capital inside the Department of War. They've got a pretty big balance sheet and they're going to use that to help equity with equity and debt instrument investments in the small and medium supply base to encourage and enable all of this. We are having the confidence now to add second and third sources in that small and medium supply base and even in some of the larger subsystems, if you will, because we have a 7-year agreement, so the nonrecurring costs to stand up those second and third sources now makes sense. So I think this is a very well risk-managed arrangement. And if you kind of go back to the slide very quickly, there was some real constructive engagement, I'll say, between the U.S. government, and I can only speak for Lockheed Martin here. But some of those engagement elements really enabled us to go to a more commercial-like business model for major weapon systems. It really hasn't been done before. And that's because the leadership of the department at this point is willing to engage in topics such as risk mitigation. And some of the ways that we've done that with the government is for our commitment to do nonrecurring cost, capital expense investment, et cetera, to reach these new levels of production. We have basically a 7-year commitment and if you will, a recovery element to these agreements that says if for whatever reason the government decides the production rate won't be as high in years 5, 6, whatever or there's a change in Congress that changes the nature of how this agreement can be actually appropriated, I'll say, then there are kind of reach back or clawback mechanisms for making the company holds. So I'm just again speaking for Lockheed Martin. There's clawback arrangements with the government then the agreements and will be in the contracts to make sure that we're whole. And if there's a change in government policy or a reduction in the production rate that they request down the road, we will not be harmed by that. Another element is, again, this notion of our major suppliers being asked and stepping up to their own NRE. So we don't have to make that investment with any risk whatsoever. And then the third thing is that we requested and made arrangements for two important elements, which are very similar to the way we build telecom networks in my last industry, which is inflation index base escalator. So fixed price to start with inflation-based escalator for the 7-year period that's based on an index for the industry. And then secondly, kind of cash flow neutral approach, which means if we were doing our contracting for Patriot the old way, our cash flow would be x, it wasn't going to be X minus anything. And so we were going to get and will get under these agreements, advanced payments from the government to make this program for -- and all of these long-term agreements, cash flow neutral for the OEM and for Lockheed Martin in our case. So -- that's what we've negotiated as far as risk management. I think it's quite really solid, frankly, that we protected the company and also enabled the company, we think, with our supply chain to actually make good on these ramp-ups.

And just one additional context as well. In addition to the key contract provisions that were negotiated the highest levels of this company and at the Pentagon. If you look at the operational, it is true that we're going to have an aggressive ramp schedule. As Jim said, we're back to back with our suppliers. What's also notable is the support that we've gotten from the Department of War, which is to say they have pulled in some of the true industry experts from our industry and others, both at our facility and our suppliers to say, if there is a best practice out there, we're going to put it to use. It doesn't have to be invented here to make sure we scale these milestones. So it is all hands on deck in the best possible way.

Your next question comes from Scott Deuschle with Deutsche Bank.

Jim, can you share an update on the classified program in Aeronautics, including how risk is trending on the program? And then are you seeing any willingness from the government to provide additional funding to support your efforts to keep that program on track?

Yes. Given the classified nature of the program you're referring to in aeronautics, what I can say is, and it was, I guess, evident from our release, there were no charges taken on the program of interest here in the first quarter. We have increased the scrutiny on that program. And actually, again, the higher levels of operating executives in this company is now overseeing that program. We do think we have a path through the flight test and other parts of this program. that have sufficient coverage, I'll call it, in our financials right now to hopefully not experience any additional write-downs of the program. But it is complex. It is cutting-edge literally, and there's still some risk there, but we think we've got it well managed. On the government side, there's really strong interest in this program at very high levels in the department. And they seem -- again, see, I can't speak for them, but very, very committed to carrying through with this program. and carrying through the success for it. And therefore, there's ongoing discussions with them on making sure that the contract is structured in a way that the company and the industry can be successful in delivering this. At the same time, the government will get what's asked for and what it's going to pay for. So I would say that from my perspective and what I can share on this call, I feel better about that program than I have probably since I got here 6 years ago.

Your next question comes from Scott Mikus with Melius Research.

We saw Northrop reached an agreement on B-21 production to accelerate, which gives them the opportunity to improve the economics on the program. Given the strong demand for missiles and munitions, is there an opportunity to reach an agreement with the customer to accelerate production of the classified missile program at MFC that could yield some better economics for Lockheed.

So given the unclassified nature of what you're referring to, I think I can put it in a similar context. The demand from the customer for that capability is heightened. It's something that will make a difference. I would suggest as any large classified program would and our abilities to accomplish emissions that it will be applicable for -- so that is increased. The interest in the customer of getting this field is increased, I would say, over the last year or 2. Secondly, the program, again, of interest is similar as to the last one you all asked about. There were no charges taken in the first quarter. Again, that's the only thing we could kind of say about that. And again, we have put risk mitigation on that program similar to the aeronautics program level. So I do think we have it covered with oversight of some of the best and highest level experts in our company on a recurring basis. Having said all that, there is interest and again, the product accelerating and expanding production potentially and there's conversations about that with government. There's nothing different about that system other than its level of classification vis-a-vis PRISM or Patriot, et cetera. It's an MFC volume missile program, which could be subject to a similar contracting approach if the government decides to do that. And so they all have to stop.

And just one last piece of context to support that as well. We last took a charge there in 4Q of 2024, and there has been no change in estimate since then. So we've struck a baseline and continue to hold that while we look for additional opportunity.

Your next question comes from Ken Herbert with RBC Capital Markets.

I wanted to ask a question on free cash flow. Significant use in the first quarter, I think, as expected, step up in working capital. I wanted to just verify this was F-35 or if there's anything else to call out on that in the first quarter? And then second, as you think about the full year guide, how should we think about the cadence here in the second quarter and in the second half of the year to hit the full year guide on the free cash?

Yes. So I think in the first quarter, a few things going on there. One, as we disclosed, we've got an ERP or billing system transformation at 1 of our business areas that occurred to close the year last year. So we went through that process this quarter and expect to be back on track in the second quarter. It's notable, of course, that we drill very hard to surge and collections to close out the prior year knowing that this was in front of us. That's what positions us to make the additional contribution to our pension, which helped derisk our cash flow this year. F-35 continues to make progress as we progress on deliveries, we'll have more opportunities for cash liquidations. I think as you look throughout the year and the pace of our deliveries and program milestones, we're going to continue to see cash increase throughout the year, it's going to be back-end loaded, not unlike previous years, but I think we've demonstrated our ability to close the year strong and hit our cash flow guide. And then with the support that we've gotten from the tax policy, which helps enable and incentivize investment in American manufacturing, that gives us additional confidence to hit the top end of our range this year.

Your next question comes from Gautam Khanna with TD Cowen.

Was wondering if you could comment on the pinch points in ramping MFC capacity. I know you guys have the JV you're building with GD on solid rocket motors and just wanted to see like how quickly can missile capacity actually be raised? And if you're throwing even more money at it, can it be pulled forward more substantially than maybe what people are thinking.

So the goal is to sort of have a ratable increase from our current levels of production, which is last year 650 Patriot missiles per year up to 2,000. And that's going to take 3 to 4 years depending on supply chain and other considerations, but we really do think we can get it done in 3 to 4 years. the supply chain improvements that we're pursuing, the General Dynamics slacked Martin teaming on solid rocket motors, also Northrop Grumman is looking at expanding a solid rocket motor business potentially into Patriot. And there's some commitments there that we think will bear some fruit. The other pinch point. So I think we've got solid rocket motors, I don't want to say covered, but we've got a lot of interest in it. You may have heard that L3Harris is spinning out its SRM business to -- and also have support from the U.S. government to finance and fund their expansion, which they've already announced where it's going to be and how it's going to happen. So that's a good sign. Secondly, Northrop's commitment is a good sign. Thirdly, General Dynamics partnership with us is another good sign as far as SRM, pinch point risk, I guess, I'd call it. The second area is the seeker for the Patriot. And Boeing is similarly made a public commitment and one to the government that says, hey, we're going to invest in that seeker business. We're going to get to the volumes that we're asking -- you're asking us for. And they've actually been improving as well over the last year or 2 [indiscernible] to deliver on this very complex component. So those are the 2 biggest I guess, risk areas, there'll be a handful of others in the mid to small business supply chain. We will have -- and the government -- as Evan just said, we'll have assistance provided to those companies. And we're looking for capital markets providers in addition to the government of strategic capital to to provide ready and efficient financing for these medium and small companies, given that they're going to have a 7-year subcontract to Lockheed Martin, who has a 7-year contract with the U.S. government, a pretty good credit line there. So I think that we're going to be able to manage those pinch points, but those are the main ones.

Your next question comes from Ron Epstein with Bank of America.

Just circling back on some of your comments you brought up in your prepared remarks about how you're deploying AI in the enterprise and in some of the weapon systems. How are you broadly thinking about that? Are you developing pools herself as lucky trying to develop its own large language model or are you using outside stuff? Just kind of broadly thinking about your AI strategy and what you're doing there?

Yes. Thanks, Ron. So there's only 2 dimensions to artificial intelligence adoption in Lockheed Martin. One is the in-house business systems, production system, ERP supply chain management, all those kind of in-house critical activities. We're applying artificial intelligence there, everything to the closing process, right, to contract and bid provisions to respond to our customers. Every place that you can imagine, AI could be helpful, defect management and discovery, those kinds of things in the factory supply chain breakdowns. Those kinds of things, we are using -- utilizing AI to make all those business processes better for us. The second thing that we're doing and alluded to earlier is we are introducing AI into our products and services where it makes sense to do that. But under a rubric of of an ethical standard that is adopted from the Department of Defense's rubric. So we're introducing AI into target recognition into battle management, command and control, [indiscernible] as it's called things like that, places where you've got a lot of data. If you can fuse it, bring intelligence to it quickly and provide commanders and pilots options. That's basically the way we're driving AI into our mission solutions, if you will. All of this is within what we call the Lockheed Martin Artificial Intelligence Center. So we made a decision with our then really a chief engine here. We have another [indiscernible] today, but her predecessor when I first joined the company 5, 6 years ago, said, hey, I want to stand up a single AI center for all of Lockheed Martin instead of having each business do it or something like that and consolidate the GPUs, consolidate the infrastructure make sure that we have a totally wold system that can operate at the classified level and has no connection to the external Internet so that we don't have cyber and other risks in that regard. And also, we have our own data sets. We don't use any data from outside the company or outside the customer that's provided to us. So we have this internalized AI center, but we utilize external models for it. So there's a range of AI models. Many of them are incredibly well known, and we have access to those on a token basis or otherwise that we run in our AI center on our own GPUs on our own infrastructure that's cyber secure and hacking secure. So that's how we do it. There's been a pretty significant investment over these last 5 or 6 years into that. And I actually think that we may have a best-in-breed AI center, at least in our industry. So we're not building basic artificial intelligence models. We're using others, but we're applying them to our internal business operations and to our product set. I think, in pretty aggressive and useful impactful ways.

Your next question comes from John Godin with Citigroup.

Jim, I wanted to just ask about the evolving landscape a tremendous amount of new issues, new entrants. What is that impacting the competition for talent? How is that impacting contracting and maybe offensively, you had some comments in your prepared remarks about how it might be impacting the opportunity to make investments or strategic partnerships. I'd love to just kind of get your take broadly.

So we welcome competition. We welcome what we like to call other people's money and other people's talent into this endeavor with us or in competition with us for that matter. So this traditional defense industrial base needs to be expanded. And we've been working for years to expand it with some of the major tech companies and telecom companies out there like when we publicly stated these before, Verizon IBM, Microsoft, NVIDIA, et cetera. At the same time, it may be less visible. We've been investing in this sort of startup and new entrant space ourselves. We've done some acquisitions of relatively early-stage companies internally into Lockheed Martin. But in many cases, I'd say in most, we can be an investor through our venture group, have a [indiscernible] get access to the technology and figure out how to incorporate it again into our products and systems in ways that will benefit our investment that we have, the company we invest in and will accelerate our capability and again, using other people's money and other people's talent with these businesses, things maybe that we don't have the bandwidth or the personnel to do. So I think it's a positive development both for the National Defense Enterprise of the government and our industry together and for our company, and we're embracing this. We have another entity called Lockheed Martin [indiscernible], where we can do medium-sized joint ventures or co-investments. We're doing that in the wildfire fighting space that we've announced before, for example, through kind of an all entity, if you will. So we are eager to get access to and collaborate with small, medium, new entrant companies, et cetera. We have -- we're a subcontractor [indiscernible] some cases, frankly. So we view these companies across the board as just other suppliers in the term of this industry's [indiscernible], right? So Same thing with Northrop, Same thing with Boeing Defense. We partner with them sometimes. We compete against them sometimes. This industry is used to that and is comfortable with that, and so are we. Our goal is to get the best technology and get access to it through whatever vehicle we need to deliver on a mission technology road map for our customer, right? So if our goal is how do we have the best air-to-hair compact capability in the U.S. Air Force, for example, we want to take the platforms we have we want to introduce AI from the best available source. We've actually are working with the Air Force now at Edwards Air Force Base, which is a test pilot school. There within autonomous F-16 that's working tactics that will be more survivable where even a piloted aircraft when it's in a dogfight or has to do a really hard turn on a missile can take over and optimize that response in the fight, so to speak. So we want to advance these mission capabilities with our platforms or networking with others, frankly. And we want to get these these resources into those mission sets. And we're not very proprietary about where they come from, frankly. So how does that affect our talent management I would say that we have excellent retention rates. It's about half of general industry as far as losing folks on a voluntary basis. We're at like 4-ish percent broad industries like 8% to 10% turnover. So we have pretty solid retention, but there are some places like AI data scientists and others where it's competitive, and we have compensation plans that we think can meet the moment on that and keep the key people we need to. And the third thing I'll say on talent is people that come to Lockheed Martin want to come here for a reason, and that reason often has to do with either their prior military service, their families, where they grew up or whatever it is, that gives them some connection with these missions. Like this air defense mission we're talking about is so important. And the situation in the Middle East would be far, far different if the Patriot and the FAD and the Aegis systems weren't employed and others from other of our competitors and partners, but people will get drawn to that mission and they tend to stick around if that's why they came here. The contracting side, we had a meeting with about 30 of our key people yesterday in Arlington in our office there. And I said the same thing to them. This is a golden opportunity right now based on who's in government, their experience, their willingness to change the demand that they have for what we do and our partners in our industry do. We can move the contracting system from this far cost -- federal acquisition regulation based, cost-based Truth negotiation act burden that we've all had and move it more towards a commercial contracting system, which is exactly the agreement we have in these frameworks with the Department of War right now. This is the time to do that. I would say the new entrants and the venture-backed companies are constructive on this. They're helping us and the government get out of our traditions and into a more agile contracting scenario. We will -- we embrace that. And then as far as investments, if you get the contracting right, you can keep the talent, we'll have better ROI on our investments going forward, and we'll have better risk management, too. So -- and again, we can partner and offload certain kinds of technologies or certain kind of physical investments that someone else is better off making than we are. So I'm encouraged by all of this in the evolving landscape as you asked. And I think we're positioned to take a good advantage for our company and for the the U.S. government and our allies based on this more available resource out there for us.

It's Mark. We're coming up on time. We'll take 1 more question.

Your next question comes from David Strauss with Wells Fargo.

One quick clarification question and then a question around cash flow and working [indiscernible] CapEx. Clarification question would be around what your growth rate would have been ex the work week comparison if you had the same number of work weeks this quarter. And then on the cash flow side, Evan, wondering what what exactly you baked in for working capital this year to kind of recover your higher CapEx investment in the cash burn profile on the aero and MFC classified programs, what we're looking at this year and then maybe looking out beyond that?

Sure. So I think of the shorter week or shorter time period of this quarter being kind of in the few hundreds of millions of dollars of revenue thereabouts. So we'll get that extra time back in 4Q, just so we're all tracking to the same calendar there. With respect to the cash burn on our classified programs, I'd still think of that as kind of the $500 million to $700-ish million a year for this year and next year, and then we expect to see a pretty sizable drawdown on that cash draw depending on how that goes. And the last question was CapEx. Yes. So from a CapEx perspective, a key part of the tenant, as Jim mentioned, is sort of cash flow protection as we make sizable investments ahead of scaling. So if you think about the $1 billion increase year-over-year on CapEx we've had. I think about half of that tied to these agreements that have this kind of cash flow protection. So that's what we have assumed in our guidance now to have the offset there as we invest in capital scale rapidly for the future.

Okay. Thanks again, everybody, for joining us. So in the first quarter of 2026, Lockheed Martin, our products and systems proved themselves again and again, in conflict situations and outer space literally. Our backlog is resilient, our investments in capacity, digital transformation and people are going to position us to deliver on the commitments we've made to you and to our customers.

Lastly, and this is really important. We want to thank the service members who have put themselves out there and executing these missions with skill, dedication and courage and that's why many of us work at this company is to help them get their missions done and come back safely. So thanks to all of you for joining us, and we'll be back in touch with you next quarter. Thanks.

This concludes today's conference call. Thank you for joining. You may now disconnect.

Thank you, everybody, for joining us. We're very excited to have the CEO and CFO of Lockheed Martin. Jim, Evan, thank you for joining us today. Truly appreciate it. I know you guys wanted to talk or mention the safe harbor. And then maybe make some prepared remarks, and then we'll jump into the questions.

Great. Thank you for that. So briefly, statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of the federal security laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements.

Jim, please take it away. We'd love any remarks.

Good afternoon, everybody. Thanks, John. We're making great progress and getting really great traction on all three of our major strategic initiatives that we've had in place over the last 5 years.

The first one is strengthening the resilience and the scalability of the defense production system, leading the way on that. And we've made some real milestones recently worth mentioning. One is we launched the first instance in one of our businesses of a new ERP system that is going to take us into the -- literally, the electronic age, everywhere from design through engineering to production to sustainment on a digital thread. That's being implemented right now. We started this about 3 or 4 years ago with a $6 billion effort over 8 years, and we're probably 60% of the way through that now.

So that is in place. That's going to allow us to be faster, more efficient and with less quality concerns along the way. Another example is that we've entered into with the U.S. government, two framework agreements as we call them, to bring more commercial practices to major defense programs. And I think these are actually very much groundbreaking initiatives here with the government in place today. We got to get those programs to congressional approval, but we're all confident that that's going to happen.

What this does is it takes the defense production system from 1 or 2 year time contracts that make it really tough to drive our supply chain in these cases, 7-year contracts with commitments and protections for industry along the way that will allow all of us, us and our suppliers and our cohorts as the major primes, to act more like commercial businesses, make more upfront investments with high confidence, make investments early in improvements on, again, production and sustainment and other ways that we can actually scale our profitability as well.

And so we're basically cutting off the constraints of the federal acquisition regulation, the way it's been applied to these kind of programs and moving into an era of commercial level agreements for the industry, which will actually, I think, make us more effective for our government customer and make us more profitable and scalable and resilient as companies for our shareholders. So that's one area where I think we made really great progress recently.

The second one is driving digital technology into defense missions. And when it comes to that kind of initiative, it's important to be able to have and contribute a decisive military advantage at a theater or a high scale level to really make a difference in national security missions. So for example, we're driving autonomy and AI into real defense missions like air superiority, where we showed that we can actually today and have today taken an F-22 production aircraft integrated some new technology into it with AI and autonomy controls that we've developed internally and our own R&D and controlled an actual working drone and create a drone wing man out of that today.

We can do that now. And if we can scale it on F-22s and F-35s, which is our plans and whether it's existing or new collaborative combat aircraft, like we demonstrated already, then we will be able to bring major improvements to the air superiority mission for the U.S. Department of War. Another, I think, great example of this is we have a fully autonomous Black Hawk helicopter, actually more than one, which we can do missions such as wildfire fighting, search and rescue, contested logistics to the frontline and air evacuation of wounded soldiers without putting crews at risk, without having to worry about crew rest or downtime and actually doing it safer than if you had crews.

So we're bringing autonomy and AI to real scalable missions. And the way you have to do that is to have the range, payload and survivability to operate in a really heavily contested environment to be able to prevent and deter those situations from happening. The third area is we focused on is growing our international business, and we've done that on two dimensions. One is our international sales are indeed growing faster than our domestic sales. We have a deployed force around the world is trying to bring the best of our technology to our allies. We're getting good support from the U.S. government in doing that. And also, we've scaled up our co-production and teaming on an industrial basis with some of our most important allies.

We set up in Australia, a guided weapons installation with our Australian partners and industry. I just visited in Vesa, Germany production facility for center bodies of F-35s at Rheinmetall, and we just keep doing these co-production and co sustainment arrangements that actually feed back into international sales. So on all three of these big strategic dimensions, I think we're making excellent progress. And I'm very optimistic about the future for this company and really for our industry.

That's fantastic. There's a lot to dig into there. And it's also on the back of a very strong quarter. Evan, do you mind kind of recapping some of the momentum in the quarter?

Absolutely. Yes, the performance last year, the deliveries, everything we've done and the investments have set us up for a very strong year. So our total year guide continues to look strong and right in line with what we guided to in the earnings call. There are a few peculiarities in the first quarter this year. I just wanted to highlight that make it an unusual compared to last year. Last year, 1Q, we had some big nonrecurring events that drove up margins and revenue. And then this year, there's less weeks. So compare year-over-year, it's a bit of a tough compare on sales and margins.

And then on cash flow, to Jim's point about our digital transformation, we're onboarding a new billing system, 1 of our units. And as any of these billing transformations that we've seen that usually drive some timing. Typically, our sales this quarter might get collected in the quarters to follow, all contained within the year. The full year cash guide continues to look right on, but we might have a negative free cash flow in the first quarter as a result.

Okay. Got it. Maybe we could get back to some of the bullish big picture themes, Jim, we've had this moniker of mega trends. All of these like missile defense space, all of these themes that are really driving a tremendous amount of growth across defense. I'd love to just kick it off and get your reaction to that. And maybe you could talk us through Lockheed's exposure to some of these big picture themes and the ones you're most excited about?

Sure. So we look at the world in terms of missions. I mean, I came from a technology and telecom background over the last 20 years or so before I joined the management team here at Lockheed Martin. And what we try to do in that industry is improve the service level of our offering, whether it's telecommunications or remote mapping, et cetera. Throughput of data through data centers. You're always trying to use hardware, firmware and software on a continuing basis to improve the level of service. Our services, if you will, in the aerospace and defense industry are things like air superiority.

And the mission at the end of the day is to shoot down other aircraft while not being shut down yourself. And so that's where some of these notions of how do we drive digital technology into the superiority mission while producing the best products in the world, the best hardware in the world and then augmenting that hardware every 3 to 6 months with better firmware like TR3, it took a little while to get it out there, but it's better firmware. It enables that hardware to do more in connecting to software apps and networks outside the jet. And then that then enables that those software apps and networks they have their own improvements.

They continue to roll on top of the better hardware, the better firmware, the better software. Then when you get a new aircraft like a Block IV version of F-35 out into the fleet, it's actually starting from a higher position as far as its ability to contribute to that mission. Same with surface warfare, for example, right? Control the sea lanes is very important. We've experienced that in the Red Sea, for example, where the Aegis combat system is sort of tried and true, radar, brand and control for ship defense. We encountered is the U.S. Navy and its merchant shippers that the Red Sea was being basically constrained by Houthi cruise missiles and slow flying drones that the EIS originally was not designed to detect.

So what we did was we used our AI center in the United States, did overnight downloads of tracking data every night, ran it through the AI data fusion engine that we had and then over the air, using Starlink actually, got updates to the software overnight, which helped enable the Navy to stay in and defend the Red CC-link. So that's the kind of example in that mission. And then another one, which you kind of touched on was about 12 of these. I won't do all 12, but let's just pick integrated air and missile defense, which is Golden Dome. That is integrated air and missile defense.

And the portions there that we are actually quite involved in and will be quite involved in under Golden Dome is the space-based sensing and tracking with satellites and geosynchronous, mid and then low orbit. We're involved in all those areas. Integrating that then with ground-based radars like LRDR, it's a long-range discriminating radar. It's not as big as a house. It's as big as a stadium. There's one up in Alaska right now that we turned on.

That will improve the ground-up radar to improve the air missile defense mission, a great piece of hardware, but integrated them with the satellite data and then a fusion engine into something called C2-VMC, which is the command and control system, for missile defense that the United States uses. And then that integrates with aircraft and other radars, et cetera. And at the end of the day, if you really have to exercise this mission and a missile is coming at the United States or it's coming at Al Udeid Air Base in Qatar, that's when the PAC-3 missile, that THAAD missile, the next-generation interceptor for long-range ballistic missiles, where we're all involved in those systems will come into effect.

And so we are essentially in every element of golden Dome, which at the end of the day, again, is the air and missile defense mission. And we're going to continue to use hardware improvements firmware improvements and then the connectivity through the network to apps and software to get better and better at that mission. And I think that will really be constructive to the notion of Golden Dome. Where you're rolling it out over a period of years. to defend the United States. And by the way, that applicability would be for Western Europe as well. It would be for Japan as well.

And so this will be a scalable, repeatable mission set that we have as our company, it turns out most of the major ingredients, if you will.

Yes. There's a lot to follow up there. And definitely want to spend some time talking about how those flow through the different segments. But before we do, we've been asking one question of all of the primes, which is just a reaction of Trump's executive order and the performance reviews, what do you expect to come from those reviews?

So we welcome the focus on performance of the industry, accountability for us, but also what's come with that is, again, flexibility and an understanding if we have an escalating threat which we have, very rapid technology development and digital and physical technology in the 21st century, which is the fastest rate in human history and a -- not unlimited defense resource budget that the only way to actually solve that engineering equation is for the government to also change how it does business.

And so both of these things are happening now, an industry, it's our responsibility to step up to that higher demand, faster time lines, quicker technology insertion, the inclusion of digital technology into these missions. That's our job, and we need to get better at it as an industry. And so we're welcoming that opportunity in that challenge in a way. I think our company is as professional as any, as capable and as skilled as any. And so we should be able to take advantage of the situation to improve ourselves and improve our performance for shareholders, too.

Got it. Maybe we can step through some of the segments. Aeronautics, just to kick it off. We can't talk about Aeronautics without talking about the F-35, I'd love just an update on the F-35.

Yes. So very strong deliveries last year, record deliveries for us. We see production continuing on at the traditional rate we've seen about 156 a year. and deliveries to likely mirror that. Low single-digit growth on production and some of that is due to lot 20 being awarded next year. If you look at our results historically, when we sign contracts, it typically comes with revenue and some of the costs that we're building doesn't turn to revenue until that contract signed.

So that is why you see maybe a little lower growth in that 35 production, F-35 sustainment is pacing the growth we could even see approaching double-digit growth on F-35 sustainment. That, of course, continues not only as we're delivering planes, but we've seen some budget uplift on the sustainment mission. And we've -- we're looking to prefund that with some investment we've committed to as we and our customers are very well aligned in F-35 readiness. We see growth in Aeronox classified. That, of course, is dilutive in the near term. and that is one of the top drivers there as well as we see some submissions building on that side.

And from a kind of a strategic arc of the F-35, we're about 1,200, 1,300 aircraft built and deployed out of about 3,500 program of record, so about 1/3 of the way through the program. And F-35 as a contributor to the air dominance and then this the air strike mission, meaning air-to-ground attack mission that has both of those. We are going to do a couple of things in the strategic arc of the aircraft itself within that mission set.

The first is we're modernizing based on the block the TR3 firmware what's called Block 4 hardware upgrades, so component upgrades. So this could be inclusive of engine upgrade replacement. It could include sensors like radars and distributed apertures. It will include communications beyond line of sight, et cetera. So all of those components, it's called the Block 4 hardware enhancement. At the same time, we've already got the firmware enhancement in place and the compute capability that we needed to do all of those improvements in sensors and systems on the jet now being produced. The next phase is going to be a commitment that I made to the U.S. government leadership, which was we think we can take a lot of our sixth generation skunkworks R&D, and port it into the F-35 right subsequent or alongside of this Block 4 improvement of subsystems.

And so what we're talking about now is coatings for the aircraft. The geometry and the coatings of the air inlets and the exhaust of the engine. The notion of centers that we develop for and GAD that we can then port over into the F-35. And so during the next, again, 20 to 30 years of production there will be continuous improvements like we talked about for the Air Domino's mission, which will be delivered through that vehicle.

And so at the end of the day, we will have highly capable aircraft that are getting improved all along the life cycle. And also, as Evan said, to have better essentially for an airline beyond time take off rate, we call it a mission-capable rate while we do that. And so that will increase the way I describe it to our senior government customers is we want to maximize the air combat power of the United States over, call it, a 20- to 30-year arc of time in the most resource-efficient way.

And to do that, we have this pathway for F-35 that will basically be the linchpin of this strategy. It's also complemented by F '22, which we're upgrading kind of quietly with the Air Force, but it's going to be upgrading along the way, just the same. NGAD will kind of join it in a few years, which is the Boeing production. And we'll have fourth generation planes that are enabled like F-15s and F-16s and F-18s to do their missions because of the capabilities of the F-35 and the F-22 to clear the air space.

The F-35, as a reminder, is the only production fifth-generation stealth aircraft in the free world. So this is a critical program for the United States and its allies. And again, there could be some innovative contracting methodologies that we could come to agreement with the U.S. government and our allied customers. to actually make the program perform even better.

Yes. And you mentioned it's a pivotal program for many of our allies as well. Can you talk a little bit about international demand for F-35 for the year?

So there's significant international participation. So there's 19 other countries that fly the F-35 or have ordered it. One of the biggest benefits of F-35, especially in Europe and everywhere is the interoperability of the data system. So the sensor data across F-35 seamlessly and without any pilot input is shared with other F-35s in the formation or even beyond line of sight and we're integrating satellite connections and others into this so that the F-35 is not only the most capable fighter plane, it's also the most capable aerial command and control and data networking node on essentially a 5G Internet of Things system.

And so that allows the U.S. its allies to interface data and bring mission planning down to the command center integrating all of those aircraft data in a seamless way. And we're actually then taking those sensor data, sensor data sets. And some of those targets will be assigned in the F-35 and maybe in the formation you're in with 48 planes. Some could be signed to another formation and some could be sent to the command post and connected to a high Mars launcher to hit a certain target that the F-35Cs with a ground-based missile.

And so what we're trying to do with all of this is to create a deterrent effect to any potential adversary to say we don't know how good the U.S. and its allies are going to be at defending themselves. So we're going to wait another day and see if we think we can have enough confidence to act. And our goal is to move those goalposts out every 3 to 6 months on every mission set, using all that technology so that we can -- we're in the aerospace and defense industry, I'll say, but we're in the business of deterrence. So we want to advance deterrents using these mission capability road maps with the best hardware, the best firmware, the best software, the best network that anyone has in the world and the U.S. will be the one that has it along with our allies.

Yes. Fantastic. Maybe we could switch gears a little bit to MFC. On the last earnings call, you talked about unprecedented demand for munitions, for critical munitions. We saw a year-over-year growth rate in MFC of high teens, 18% in the earlier remarks, you mentioned how there's multiyear visibility on some of these programs now. Can we connect the dots and just talk about what the multiyear revenue growth profile might look like for MFC?

Absolutely. So even before we considered these new framework deals, we were in a growth trajectory in MFC, growing double digits here as we're still scaling several of our munitions ongoing with the framework agreement signed positioning us for multiyear procurement signatures, we could see double-digit growth for the next -- through the end of the decade and likely beyond, potentially as high as the mid-teens in some years. So it is giving us long-term visibility to growth, highly -- potentially profitable accretive growth for -- through the end of the decade.

Got it. Very helpful. And maybe we can talk a little bit more about the framework agreements, and you've talked about how they need to be definitized. Maybe help us understand what the outlook looks like from here for converting them to actual sales.

And now that we have the framework agreement in place, the good news is that we can utilize these same agreements with some of our key suppliers in partnership with the Department of War. So that's the process we're in today, talking with our suppliers to get that aligned so that they also can have that 7-year visibility and make their corresponding investments to see the capacity across the industry. So we're working through that process now. We like to have both PAC-3 and THAAD signed in the first half of the year, which will allow us to start incurring some revenue this year and seeing the growth long term.

The good news with this agreement, I think the framework is very fair for us. It creates incredible opportunity for us to invest and to really transform these production lines into something very different at the end of these 7 years. And we're very proud of the production capability we have today, but what we're going to have through the course of this contract by what enables is going to be something that takes it to the next level.

Yes. One of the questions that I get a lot is the margin profile of MFC as all of this is happening. And I think you guys flagged that there might be a little bit of dilution out of the gate, 20, 30 bps, if I remember correctly. And then MFC margins could make new highs. Do you mind just digging into that a little bit elaborating on what's going on there?

Sure. So the way that we do our profit recognition is we typically increase our profit rate over time through the life of a contract. As we make progress on risk burndowns, make deliveries, we'll increase that profit rate. So on the front end of the contract, we're booking at a slightly less profit. And since this is a 7-year contract, you can see why it might take a few years for it to reach the expected end margins on the actual reported margins. So that's why we signaled maybe a 20 to 30 basis point dilution at the MFC level.

Of course, at the Lockheed Martin level, it's still accretive when you look at Lockheed Martin margins. And then long term, there's an opportunity to drive margins higher than traditional MFC margins. The way these contracts are established are to give us every opportunity to be successful because we're aligned with the Department of War that both of us want to be able to invest capabilities, to take cost out, transform and as rapidly as possible, give capability of the war fighter. So all the elements are there for us to increase margins and be successful here.

Yes. definitely aligned with the Department of War. We've also seen other structures to try to enhanced alignment with the Department of ore. What LHX is doing with Missile Solutions is a good example. I'm just kind of curious, you arrived at a different approach. Maybe you could just help us understand what alternatives you looked at? Did you consider a structure like LHX, pros and cons? Any color you're willing to offer?

I would say we did not consider any kind of structure like L3 Harris went through with their -- because basically solid rocket motor business, which was Aerojet Rocketdyne, which we actually publicly made a bid to purchase ourselves about 5 or 6 years ago now when I got to the company. That wasn't approved by antitrust. It was approved for LHX and they didn't have I guess, apparently the resource to manage the scaling themselves. We do. And if we were have had HRD inside of our company, we would just be doing.

We have the scale and scope and the financial wherewithal to do exactly what we're talking about to deliver that growth path with internal investment and our own balance sheet, our own cash flow. And so we're committing to do that without having to joint venture spin-off, sell off part of the company.

Yes. Okay. Great. Maybe we can change gears a little bit to RMS. When I talk to investors by comparison, RMS is viewed as a little less exciting than everything that's going on in MFC and space. but people might be getting it wrong. Maybe you can just kind of give us a sense of the outlook for RMS from here.

Yes. There's a lot in RMS that we're excited about. We're currently in a growth trajectory for Sikorsky as we ramp up production on the 5300 helicopter. We continue to see some growth on Blackhawk helicopter as well. And then some of the elements that Jim mentioned, I think, are very important. When you look at terms of autonomy, C2 and the Golden Dome mission, which could very likely have components of ground-based radars, potentially even directed energy laser capabilities for defense and smaller scales.

So we're excited about the autonomy investment and where RMS can go in a lot of cases, be the glue of those platforms, which is part of the value of Lockheed Martin. We have the ability to tie our platforms together in a cross-domain manner and RMS is the center point of that.

Yes. And part of the autonomy push and the AI push is taking a legacy platform that has the range payload and survivability in many cases to actually do real-world missions at scale in a battlefield environment. Well, the Black Hawk can live forever in a way because even though it's a legacy design, if the operation or the mission can be done by the U.S. Army, for example, without having to commit the human resource of all the pilots and all the crew rest and all the life support systems and all the search and rescue that you have to have if you've got human pilots doing missions, some of them you're going to want human pilots, what it has to do with lethal force or really highly sensitive missions like in Venezuela.

You're going to want to have human pilots involved in that in human crews. But if you're doing something like an era evacuation from a hot landing zone, and you don't want to put the crew at risk, but you really want to go rescue that person that got injured one of your soldiers and get them back to the field hospital, you're going to be able to use that legacy Black Hawk to do something at lower cost and risk that you can do with even any new platform necessarily that you can build. So part of the goal of our autonomy and digital push is to make our legacy platforms as long-lived and is important and is valuable from a perspective of capability versus cost as we can.

So Blackhawk, F-35, we put pods on F-6 teams that enable a lot of this capability, data networking and sensors that we invented many years after the F-16 was launched or even the latest version of Block 70, we put on a pod underneath it, and now that pod can connect to the F-35 datalink system. And therefore, now your fourth generation plane was designed in the '70s I actually tried to get out of pilot training in 1986, but didn't get it, but I got a net. But that age of an aircraft design can be on the modern battlefield and be effective. And so that's the push for digital technology from AI for autonomy and our company is in large part to make our big platform hardware more long-lived and more effective and more valuable.

Yes. Before we move on to space, just on RMS, I wanted to take the temperature on performance trends in general. There have been a couple of charges and just whatever you're willing to update.

Yes. So on our two international helicopter programs, first on the Turkey helicopter program, we've made great progress there with our partner, TAI and restructuring that agreement to something that is -- that works for both parties which is excellent. TAI has been a very long-term partner and customer for us. So this gives us a strong framework to continue to partner with them since Turkiye is a key part of the European Security Solution. On Canada helicopter, we continue to work that with the customer. We've delivered all the aircraft and now we're in the process of just looking at ways to restructure that contract going forward.

Across the business, I'd say generally pleased with the performance on the 53,000. We didn't quite reach the ramp rates we'd like in 2025. So 2026, that will be a big focus for us to drive the ramp of 53,000 and get the performance that we expect out of that aircraft.

Okay. Great. Jim, I wanted to go back to Golden Dome and space. You're obviously so excited about it. You mentioned it in the earlier remarks. Can we just double-click on that?

Sure. So there's some classified space that will -- we expect to be a big part of Golden Dome based on the government's public statements. Secondly, this PAC-3 and THAAD, and I expect, again, there will be more systems rolling out from the Lockheed Martin and the Department of War in this vein. Part of the ramp to 2,000 PAC-3s a year may include Golden Dome.

It may be on top of it. We don't know yet. But our ability under these framework agreements to scale up production faster than we could under the old cost-based federal acquisition regulation system is going to benefit Golden Dome in its deployment. And I think bring much of that business to the suppliers, not just Lockheed Martin, but those of us that have proven we can do this kind of hard science in space or from ground to air or ground to space or have resilient radars that can take out the jamming in the clutter and the electromagnetic battlefield that you have and still see the target.

And if we can act like a commercial company because we can now, we will be able to compete with all of that legacy intellectual property and manufacturability. These things are not easy to make and the testing that goes into them. They're explosive warheads on these devices. And just alone managing that, using systems, safety systems, et cetera, there's art and science to those kinds of capabilities. So we are getting kind of our handcuffs taken off a bit to act late commercial companies. I think this is a real breakthrough for our industry. Our cohorts are signing up as well. Our suppliers are signing up as well.

I think it's going to be constructive to them also. And if Golden Dome is going to be rolled out, it's going to have -- the industry is going to have to work differently and we're set up now to do that. So coincidentally, this particular administration has put out some big targets for munitions production for a homeland defense integrated air missile defense system that's never been considered before, but they're also doing enabling steps that makes industry more capable of delivering. And there'll be new entrants and there'll be commercial tech companies that are involved, and that will be really great.

But again, you have to have the hardware the scale hardware, the firmware and the software and the networking capability to do these kinds of missions. And they are no fail missions. These devices have to work when they're called upon. We want to send out our soldiers and sailors and marines and guardians with a high, high, high probability of getting them back safely after conducting these dangerous missions, and we want a big tent of all of Marshall in kind of all of the U.S. industry. But these large companies that have been in this business for decades, they have to -- I think, have to be part of the solution.

If you want to have, again, decisive military advantage at a theater scale that deters a major power from taking an aggressive action. That's what it's going to take. It's going to take the start-up, it's going to take the new entrant. It's going to take the big tech companies, and I know there's always some controversy about who's in and who's out on the big tech companies. but we're working with a number of them like NVIDIA and Verizon and IBM together to pipeline some of their tech and some start-ups, tech into the missions that we want to do.

And I'll give you one really quick example because I think it's kind of cool and interesting. There's a relatively small company called Saildrone. And what Saildrone does is build autonomous ships. And the ships are not 400 feet long, they're like 100 feet off, but they don't need any people on them. The issue was they didn't have any weapons on them either. So they're interesting, you could put sensors and they could float around and maybe you could have some kind of self-destruct mechanisms and things like that on there. But we teamed up with Saildrone and said, look, if you really want to make an effective ship that can have a decisive military advantage at a cheaper cost than a DDG, some kind of destroyer, cruiser or something that's going to have 800 people on it and all the systems that you need for the 800 people in a smaller form factor, that's harder to see. You need to put a Mark 41 missile launcher on it.

And then you could put missiles into this ship send it out, you have to have a reliable command and control system that can't be cyber hack because you know what that missile being shot with no people on the ship in the wrong direction or the opposite direction. And if you can put that system together, with -- we don't make autonomous ships of this size. But this company does. They don't make and can't ever probably get to Mark 41 launcher equivalent, which has been tested over decades with the U.S. government and found to be safe for a whole range of weapons.

We got married on this issue, and now we're going to deploy a really effective drone ship together that can make if it's bought in large enough numbers, a decisive military advantage in like the Pacific theater. And that's how industry should start working together better.

Yes. I think I have time for one more question. I'll wrap a couple into one, but I wanted to make sure we had a chance to talk about the CapEx outlook versus capital returns to investors. And obviously, there's some complexity there. But maybe you could just talk about funding all the organic growth versus returning capital. How do you think about it?

The same way we have -- certainly, since I've been here and probably before that, which is a disciplined and dynamic capital allocation program depending on the circumstances at that time, right? We have a lot of growth opportunity and request and demand in front of us that will underwrite on a risk-adjusted return basis. more capital expense investment. It will justify more R&D expenditure. It will justify accelerating this digital transformation because we'll get better benefits quicker with more demand. And so there are more investment opportunities than we've had in years that can be underwritten on a risk-adjusted ROI basis to benefit the shareholder. And that's our first priority. And it always has been, actually.

And of course, we're going to then allocate a capital -- remain capital in ways that are most appropriate for that time. And so you haven't seen us change anything material yet in that regard. And we do things like share repurchase on an opportunistic manner. We always have. Right now, we've got a lot more opportunity on accretive growth as Evan was outlining. Than we have in a long, long time. So we'll keep every quarter making those capital allocation decisions based on the circumstances and the contracts we win and what gets definitized and what the schedules are. That's what you can expect from us is kind of more of the same.

Yes. It sounds like the dividend is intact though.

We're going to -- every quarter, we're going to assess all the inputs, and we'll make our capital allocation decision between us, yes.

Okay. Excellent. Well, we've run out of time here. This is a great conversation. Thank you for joining us. Jim, Evan, really appreciate it. Thank you for the time.

Good day, and welcome, everyone, to the Lockheed Martin Fourth Quarter and Full Year 2025 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions]

At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Treasurer and Investor Relations. Please go ahead.

Thanks, Sara. Good morning, everyone. I'd like to welcome you to our Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Evan Scott, our Chief Financial Officer.

Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements.

We posted charts on the website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts.

With that, I'll turn the call over to Jim.

Thanks, Maria. Good morning, everyone, and thank you for joining us on our fourth quarter and full year 2025 earnings call. As you saw in our press release this morning, 2025 marked unprecedented demand for Lockheed Martin's industry-leading defense technologies. We finished the year with a record high backlog of $194 billion, about 2.5x annual sales, and delivered 6% year-over-year sales growth. We also generated free cash flow of $6.9 billion, which was above our prior expectation and after we prefunded our pension at almost $900 million. We also made a significant $3.5 billion investment in capital and independent research and development in support of transformative innovation and increased production capacity.

This strong financial performance is a direct result of our team's relentless focus on operational execution. Some examples of this from 2025, including delivering 191 F-35 fighter jets, 620 PAC-3 MSE interceptors, both record numbers. We also pioneered over-the-air updates to the Aegis Weapon System for real-time battlefield advantages using AI and successfully launched GPS III in Tranche 1 Transport Layer satellites to strengthen national security architectures and space. This is what you can expect from Lockheed Martin, continued significant investment to advance technology development and produce proven major weapon systems at ever greater scale.

We built on this momentum with a powerful start to 2026. Lockheed Martin products once again proved critical to the U.S. military's most demanding missions. The recent Operation Absolute Result included F-35 and F-22 fighter jets, our RQ-170 Sentinel Stealth drones and Sikorsky Black Hawk helicopters, which helped ensure mission success while bringing the men and women of our armed forces home safely.

In addition, we worked closely with the Department of War leadership to reach the landmark 7-year framework agreement for PAC-3 MSE interceptors that we together announced earlier in January. This groundbreaking agreement was just the first step in bringing commercial business practices to large-scale production within the defense industrial base. And progress continues as we just announced this morning a similar framework agreement for the THAAD interceptor along with additional systems from our industry colleagues also being discussed this week.

As the first implementation of such a long-term multiyear agreement, the PAC-3 MFC will increase annual production capacity from approximately 600 to 2,000 per year. That's more than tripling the production rate to support U.S. forces, allies and partner nations in today's increasingly unsettled geopolitical environment. These types of agreements fully support the Department of War's Acquisition Transformation Strategy, and we look forward to continuing our partnership with the U.S. government to definitize the contract and unleash a renewed era of innovation, accountability and execution across the defense industrial base.

In fact, I am in Camden, Arkansas today which is where we build PAC-3 MSE missiles and other munitions. Lockheed Martin has produced more than 700,000 missiles and rockets here in Camden. We've been steadily increasing PAC-3 MSE production since 2023, more than 60% over the last 2 years alone. And the progress we've already made will give us the critical head start in ramping up to 2,000 per year.

And further, we intend to make a multibillion dollar investment to accelerate munition production over the next 3 years, including building facilities across 5 states, such as in Camden, Arkansas, with a brand-new munitions acceleration center facility breaking ground today. I was also recently in Fort Worth with Secretary of War, Pete Hegseth, visiting the F-35 production line as part of his Arsenal of Freedom Industry Tour. The visit underscores Lockheed Martin's role in driving Acquisition Transformation and delivering critical capabilities to the U.S. and its allies.

Our mile-long Fort Worth facility employees more than 19,000 people, and over 1,900 suppliers across the United States contribute to the F-35 supply chain, providing skilled jobs to many thousands more Americans nationwide. Together, these talented Lockheed Martin and supplier employees enable an F-35 production rate that is 5x faster than any other allied fighter currently in production, highlighting the program's scale and maturity.

With regard to our 2026 financial outlook, we expect year-over-year sales growth to be approximately 5% at the midpoint, with the year-over-year reported segment operating profit growth to be more than 25%. Free cash flow is anticipated to be in the range of $6.5 billion to $6.8 billion, which is well above our prior expectations and includes a year-over-year increase in investment of about 35%, with capital and independent research and development approaching $5 billion in 2026, which is a step-function increase in internal investment.

Given the size and scope of Lockheed Martin, in 2026, we will continue our disciplined and dynamic approach to capital allocation, enabling this step-function increase in internal investment to fund capacity and growth. Evan will provide more detail on our 2026 outlook in a moment.

Turning to our programs and highlights. First, on the F-35, and during the fourth quarter, we delivered 48 F-35 aircraft, bringing total deliveries in 2025, as I said, to 191, beating our own expectations. As noted earlier, Lockheed Martin ended the year with record backlog, and the largest awards in the quarter were with the F-35 program. We definitized Lots 18 and 19 contract with the Department of War's Joint Program Office. We were awarded the fiscal year '26 air vehicle sustainment contract. And we received a contract modification in support of Lots 20 and 21 production aircraft. These awards totaled over $15 billion and reinforce the continued demand for the most advanced fighter jet by both domestic and global customers.

For example, in October, Belgium's first F-35 aircraft stationed in country arrived at Florence Air Base, marking the F-35 official incorporation into the Belgian Air Force. In December, senior U.S. and Finnish officials gathered at our Fort Worth facility to celebrate the rollout of Finland's first F-35.

In 2026, we will make further investments in the program to advance position as the world's most capable multi-role fighter with a focus on making further progress on Block 4 capability improvements. We've also committed to an additional $1 billion of strategic internal investments for the F-35 with an emphasis on the aircraft sustainment system to improve mission-capable rates across the fleet. This is an absolute priority for us and one we are working closely with the Department of War on.

Also at Aeronautics, we are making investments in the most advanced technologies such as unmanned systems. At Lockheed Martin's Skunk Works with industry partners in the U.S. Air Force, we together demonstrated the capability to control a drone wingman from the cockpit of an F-22, the first time ever that a fifth-generation fighter showed the ability to control an uncrewed vehicle in flight together.

Further at Skunk Works and in partnership with NASA, we successfully completed the first flight of the experimental X-59 aircraft in October. This is a revolutionary quiet subsonic aircraft designed to pave the way for faster commercial air travel even over land.

At MFC, we continued to experience unprecedented demand across many critical munitions. We were awarded a contract for 31 THAAD interceptors and secured the largest production contract to date for the Infrared Search and Track IRST21 Block 2 pod system. This brings fifth-generation sensors and data links to fourth-generation aircraft.

At RMS, in November, Secretary Hegseth remotely piloted an autonomous Black Hawk from DARPA headquarters. This AI-enabled unmanned helicopter technology will enable critical missions such as contested logistics, air evacuation and even wildfire fighting without putting pilots and air crews at risk.

And speaking of amazing technology, we successfully used the shipboard laser system, Lockheed Martin's HELIOS, to knock an incoming UAV right out of sky. The HELIOS weapon system successfully neutralized 4 drone threats in a U.S. Navy operated counter-UAS zone demonstration at sea, showcasing an opportunity to eliminate drone attacks using lasers and saving U.S. allied air defense missiles for more advanced threats.

This development of laser weapon systems is just one example of Lockheed Martin's support of the Homeland Defense mission, including Golden Dome for America. We also continue to collaborate with government and industry in our prototyping environment at our Center for Innovation in Virginia to support the command and control aspects of Golden Dome. We're also, as mentioned earlier, making substantial investments to rapidly increase production capacity across missiles, sensor suites, battle management systems and satellites, as well as the rapid development of space-based interceptors that will be directly relevant to achieving the overall objective for Golden Dome.

Also in the quarter, the Space Development Agency awarded Lockheed Martin Space a contract for 18 satellites for its Tranche 3 Tracking Layer Constellation with a potential value of more than $1 billion. These satellites will provide next-generation middle tracking capabilities for the SDA's proliferated war fighter space architecture.

Finally, on the U.S. defense budget, as the FY '26 appropriations process unfolds amid this dynamic geopolitical environment, there continues to be broad support for national defense initiatives from the administration, the Department of War and Congress. Lockheed Martin's core programs remain fundamental to defense priorities, such as PAC-3 missiles for Homeland Security and for security as well: the F-35 fighter jet air dominance, the CH-53K heavy-lift helicopter for contested logistics and the Fleet Ballistic Missile for the nuclear triad.

We remain fully focused on converting our backlog and partnering with our U.S. customers as well across defense and commercial industry to deliver the systems and solutions necessary for global security and deterrence and to keep our soldiers, sailors, airmen and guardians safe in doing their missions.

I'll now turn it over to Evan before we take your questions.

Thank you, Jim, and good morning, everyone. Today, I'll provide an overview of our consolidated financial results for the fourth quarter and full year, then hand off to Maria who will cover business [ story ] details, and I'll come back at the end to discuss the outlook.

2025 was a transformative year for Lockheed Martin. Backlog grew $17.3 billion or 17% and included significant awards for key programs such as F-35, PAC-3, JASSM, LRASM and CH-53K, providing better visibility through the end of the decade. We generated over $9 billion of underlying operating cash flow, before making $860 million of discretionary pension contributions. And we took the necessary steps to reduce risk on Aeronautics and Sikorsky programs in the second quarter, positioning these programs to deliver much needed capabilities to our customers.

Moving to Chart 4. Fourth quarter consolidated sales were $20.3 billion, up 9%, with strong year-over-year growth coming from all 4 business areas as our core programs continue to build momentum and the much anticipated growth inflection begins to take shape.

Next, segment operating profit of $2.1 billion in the quarter was up considerably year-over-year due to the charges on the Aeronautics and MFC classified programs in the fourth quarter of last year. Segment operating profit margins were 10.1% in the quarter. As we expected, program milestone timing and life cycles led to a light quarter of favorable profit rate adjustments.

We generated $5.80 of earnings per share in the quarter, which included a noncash nonoperating charge of $479 million related to the follow-on pension transaction, partially offset by $109 million benefit due to the favorable resolution of tax accounting issues. On a year-over-year basis, EPS was up significantly due to the prior year charges.

Shifting to cash. We generated $2.8 billion of free cash flow in the fourth quarter as we continued to rapidly deliver capabilities to customers, achieving operational milestones that triggered strong cash receipts.

Moving to Chart 5 and the full year. Sales of $75 billion were up 6%, driven by strong growth in Missiles and Fire Control, Aeronautics and Space. Segment operating profit of $6.7 billion grew approximately 11% year-over-year. Recall, both periods included significant charges. On a normalized basis, segment operating profit grew in line with sales.

Regarding new business, the company recorded over $65 billion in orders during the second half of the year, bringing the full year book-to-bill to 1.2, resulting in a record backlog of $194 billion to end of '25, the fourth consecutive year of backlog growth. This demonstrates the resilient global demand for Lockheed Martin's capabilities.

Our earnings per share was $21.49 in 2025, down 4% from the prior year. While our sales growth and slightly higher reported margins drove segment profits higher, this was more than offset by below-the-line items, including increased interest expense, a higher tax rate and higher operating FAS/CAS expense.

Shifting to cash. The strong fourth quarter collections exceeded our prior expectations, helping us to deliver over $6.9 billion of free cash flow in 2025. And we reinvested $3.6 billion back into the business to drive innovation into our solutions and more rapidly scaled technologies for our customers.

Now I'll turn it over to Maria.

Thanks, Evan. Starting with Aeronautics on Chart 6. Fourth quarter sales at Aero increased 6% year-over-year, primarily driven by higher sales on classified programs due to the absence of losses recognized in Q4 of 2024. Higher volume and favorable contract mix for the F-35 program also contributed to the increase. Adjusting for the impacts of the classified program charges and the C5 contract resolution benefit in last year's fourth quarter, the adjusted sales growth at Aero was approximately 4% year-over-year. in the quarter.

Segment operating profit increased 80% compared to Q4 2024, driven by higher profit booking rate adjustments due to the absence of classified [ reach-forward ] losses recognized in last year's fourth quarter. Higher sales volume in Q4 of 2025 also contributed to the year-over-year increase. Adjusting for the classified charges and the C5 claim resolution benefit in Q4 of last year, Aero operating profit year-over-year increased slightly in the quarter.

For the full year, sales increased 6% to $30.3 billion, driven by higher F-35 production and sustainment volume, partially offset by lower volume on classified programs. Full year segment operating profit at Aero decreased 17%, driven by lower profit booking rate adjustments related to the classified program reach-forward losses and unfavorable profit adjustments on C-130 in 2025. This was partially offset by the higher sales volume. Adjusted for the classified program losses in both years, Aero segment operating profit growth was 4% in 2025.

Aero segment operating profit margin was 6.9% for full year 2025. Adjusted for the classified program losses, Aero segment operating profit margin was 9.9%.

The photo to the right depicts the successfully completed first flight of the X-59 quiet supersonic aircraft, as Jim previously mentioned.

Turning to Missiles and Fire Control, Chart 7. Sales at MFC in the quarter increased 18% from the prior year, driven by higher volumes from production ramps for precision fires programs and existing PAC-3 contracts. Segment operating profit in Q4 increased by $1.3 billion year-over-year to $535 million, primarily from the absence of the loss recognized on a classified program in the fourth quarter of 2024. The higher sales volume also contributed to the increase.

For the full year, MFC sales increased by 14% to $14.5 billion due to production ramps on JASSM, LRASM and precision fires programs as well as existing PAC-3 contracts. Full year segment operating profit increased by $1.6 billion year-over-year, primarily driven by the absence of the $1.4 billion loss recognized on a classified program in 2024 as well as the higher sales volume. MFC's segment operating profit margin for the full year 2025 was 13.8%. You can see on the right the photo of a High-Mobility Artillery Rocket System mobile rocket launcher, HiMARS. On November 5, we delivered the 750th HiMARS.

Shifting to Rotary and Mission Systems on Chart 8. Sales at RMS increased 8% year-over-year in the quarter, primarily from higher volume and Integrated Warfare Systems and Sensors, IWSS, radar programs and River Class Destroyer, formerly known as Canadian Surface Combatant. Higher production volume on Sikorsky Black Hawk program also contributed to the increase.

Operating profit in the fourth quarter decreased 9% year-over-year, mainly due to unfavorable profit adjustments on Black Hawk programs and the absence of a benefit from an intellectual property license arrangement that occurred in the fourth quarter of 2024. This decrease was partially offset by the higher sales volume.

For the full year, sales at RMS were comparable to 2024 at $17.3 billion. 2025 sales increased from higher production volume on Black Hawk programs at Sikorsky and the higher volume on the River Class Destroyer and radar programs at IWSS. These increases were offset by charges on the Canadian Maritime Helicopter Program, CMHP, and the Turkish Utility Helicopter Program, TUHP, that were recognized in the second quarter, as well as lower volume for various training, logistics and simulation programs.

Operating profit at RMS decreased 31% for the year driven by a $610 million decreased profit booking rate adjustments, primarily due to the losses recognized on CMHP and TUHP in the second quarter. This decrease was partially offset by the absence of an unfavorable profit adjustment on Seahawk programs in 2024. Adjusting for the CMHP and TUHP program losses in 2025, RMS operating profit grew 3% year-over-year.

RMS segment operating profit margin was 7.6% for full year 2025. Adjusted for the CMHP and TUHP program losses, RMS segment operating profit margin was 11.3%. The photo on this page represents the fully autonomous Black Hawk helicopter, Seahawk.

On Chart 9, we'll conclude the business area discussion with Space. Sales increased 8% year-over-year in the fourth quarter, primarily driven by higher sales volume on strategic and missile defense programs, including the Next-Generation Interceptor, NGI, and Fleet Ballistic Missile, FBM, programs as well as higher volume for the Transport Layer and Orion programs.

Operating profit decreased 4% compared to Q4 2024 due to lower equity earnings from United Launch Alliance, ULA, partially offset by the higher sales volume.

Turning to the full year. Sales increased 4% to $13 billion, driven by higher volume on NGI, FBM and Orion programs, partially offset by a decrease for national security space programs due to program life cycle in the Overhead Persistent Infrared, OPIR, missions. Operating profit increased 10% to $1.3 billion in 2025, primarily resulting from favorable at-complete performance on certain commercial civil space programs during the first half of the year as well as the higher overall sales volume. The increase was partially offset by lower ULA equity earnings.

Space's segment operating profit margin for the full year 2025 was 10.3%. To the right on this page is a photo of the Space Development Agency Tranche 3 Tracking Layer Constellation, which, as Jim previously mentioned, was awarded to Lockheed Martin in the fourth quarter.

Now I'll turn it back over to Evan.

Thanks, Maria. Turning to Chart 10 and our 2026 outlook. We expect to carry momentum from the second half of 2025 into this year. It's worth noting that we continue to make progress on our digital transformation having recently completed the first migration of a [ business area ] to an upgraded enterprise resource planning system to start the year. We expect this internal investment will unlock speed and drive efficiencies across the enterprise, helping us to maintain cost and schedule for customers and create value for shareholders.

In 2026, we are forecasting sales to be in the range of $77.5 billion to $80 billion, up $3.7 billion at the midpoint, implying a solid 5% organic growth year-over-year. Segment operating profit is anticipated to be in the range of $8.425 billion to $8.675 billion, resulting in a midpoint margin of 10.9%.

Before moving to EPS, I'll briefly step through on the business area dynamics. First, Aeronautics, we expect low single-digit overall growth in 2026, with Skunk Works and F-35 sustainment leading the way, each with potential for double-digit growth year-over-year. F-35 production will see a slight lift due to lot mix and pricing with the production rate holding steady at 156 aircraft per year. We expect deliveries to be in line with the production rate this year. Aero margins of 9.8% at the midpoint reflect the dilutive nature of the growth in Skunk Works and from F-35 sustainment.

At MFC, we estimate the ongoing missile production ramps to drive 14% year-over-year sales growth at the midpoint, with margins expected to remain consistent with 2025 levels.

Next, at RMS, we anticipate overall sales to grow in the low single-digit range, with higher growth coming from Sikorsky driven by the CH-53K and Black Hawk programs, partially offset by program timing and life cycle headwinds on several radar and training programs. RMS margins at 10.5% at the midpoint include impacts due to portfolio mix and program life cycles.

And finally, Space is projected to grow approximately 5% year-over-year at the midpoint, with strong growth expected on Fleet Ballistic Missile, NGI and hypersonic programs within the Strategic and Missile Defense Systems portion of the business, as well as solid growth from space tracking and communication missions due to the Space Development Agency's Transport and Tracking Layer programs. Space margins at the midpoint are slightly above 10% and include higher equity earnings related to ULA.

Back to the consolidated level. On earnings per share, we project a range of $29.35 to $30.25. The midpoint range is over $8 higher than 2025, primarily due to the aforementioned program and pension-related charges accounting for approximately $7 of the year-over-year improvement. The remaining upside comes from higher volume and a higher net FAS/CAS pension adjustment, partially offset by nonoperating related expenses, namely a higher tax rate.

Wrapping up with cash. Our free cash flow guidance is $6.5 billion to $6.8 billion. That estimate includes between $2.5 billion and $2.8 billion of capital expenditures as we are planning to increase our investment to support production ramps and other strategic growth opportunities. Included in this range is the initial portion of the multibillion-dollar investment for MFC's missile ramps. We expect investment will continue to be elevated going forward to meet customer demand for our munitions and the acceleration of production for these programs provides line of sight to a compound annual growth rate for MFC sales of at least double digit through the end of the decade.

Our one final item for awareness is the quarterly cadence for 2026. With 2024 and 2025, we had 13 weeks in every quarter. This year, there are 12 weeks in Q1 and 14 weeks in Q4, with the second and third quarters both at 13 weeks. Consistent with prior years, I expect the majority of our cash to come in the second half of the year.

In summary, we're excited about the future for Lockheed Martin, and we are investing in numerous projects with the objective to improve the speed and capabilities of our company, whether that's towards innovative product development, improving internal operations or accelerating production capacity. Our goal is to create unmatched technologies to support our customers' most critical missions, execute the record backlog entrusted us on time and within budget. And in doing so, we will generate favorable outcomes that deliver value for all stakeholders.

Sara, let's open up the call for Q&A. .

[Operator Instructions] Your first question comes from Scott Mikus with Melius Research.

I wanted to ask on capital deployment. You have a big step-up in CapEx for this year, and it seems like that's going to persist for the next few years. So are you changing your overall capital deployment strategy of returning 100% of free cash flow to shareholders following the President's executive orders? And if so, should investors expect that to be a new normal? And how might vertical integration factor into capital deployment going forward?

Scott, it's Jim. We're going to continue to use a disciplined and dynamic capital allocation process that we've been using for years. There's some differences this year, which is the introduction of long-term contracts, which I do think will be extended and expanded by the Department of War, which creates stable growth opportunities for companies like us, that the ROIs will exceed our cost of capital, and therefore, we should invest in those stable growth opportunities over much longer terms than we've ever enjoyed before. So the process remains the same, but the conditions have changed on the availability of accretive investments that we can make in our company.

The second area is R&D, and we are making inroads in a number of areas that, again, we believe, with the new approach for Acquisition Transformation in the government, we will be able to prove ourselves by making R&D investments and building prototypes even at a greater rate than we ever have before. And I'll give you just a couple of examples of that. You saw one already, the autonomous Black Hawk helicopter, that's real. I mean it's live. You can control it from a tablet, command post or inside the aircraft, but -- with all the controls and all the intelligence to fly using AI, you don't need a pilot in there. So we are doing this on our own R&D budget.

Another example is [ The Comet ], which is a low-cost, high capability cruise missile design that we're creating ourselves, because we do think there's going to be upside opportunity in that arena as the cost per unit will be attractive. And then finally, as far as the drone wingman, which we know how to actually control from F-22s and F-35 and the design -- product to do that. We're building our own prototypes of the drone wingmen, CCA, if you will, again, on our own R&D budget, because we think we will have the best product, we will get the scaled orders and we can connect them and can show and have shown that we can connect our design of the CCA to a fifth-generation aircraft that actually flies today, and that that's a scalable opportunity for us.

So there'll be better and longer-term CapEx opportunities. There are more creative and open field R&D opportunities for us. And as you mentioned, with the vertical integration opportunity that may come throughout this administration and perhaps the next, we have been active in exploring and even attempting some mergers and acquisitions during the last 5 years. One that was publicized wasn't approved by a different administration. So we're going to keep our powder dry for those opportunities too because they will be accretive as well.

So what we can say today is we're going to continue to use our disciplined and dynamic approach based on the conditions that we experienced in that period of time. And we're going to allocate our capital that way.

The next question comes from Rich Safran with Seaport Research.

I have I think they're quick 2-part question on figures. First, regarding the 2 missile framework deals for PAC-3 and THAAD, what's the timing of a multiyear there? And how are you thinking about MFC margin potential over the long term? Second part, the F-35 has been mostly bought in annual increments and -- for the most part. Should we be expecting a multiyear for the F-35? And how are you thinking about program quantities there?

Rich, as far as the multiyear missile agreements, they're frameworks, they are committed and purposeful by both sides, industry and government. There's a couple of the steps that the government needs to take. One is to definitize the contract, and to do that, they need to have an appropriations that is approved. So they're working through and we will work with them on the definitized contract, and already are actually, but all those steps do need to be completed. The timing on that will be up to the congressional budget cycle. We expect both of those programs to be up and running under the framework agreement with appropriations by this year, 2026. That's our expectation.

On F-35, we have been publicly advocating for a few years on multiyear sustainment potential for aircraft like the F-35. There's no reason whatsoever that -- whether it's production, modernization and sustainment that those activities couldn't be wrapped into a multiyear framework just like we've done for the missile systems. Some additional complexity there given the nature of the program. But there's no reason we couldn't get to the goal line should the government be interested in pursuing any or all of those elements of the F-35.

And I'll address your question, Rich, on the MFC margins. So we, in our guidance this year, have contemplated the PAC-3 and THAAD multiyear agreements getting awarded this year, with initial sales starting this year. So I think, first of all, it's encouraging to see margins holding despite growth beginning this year. I think as you know, the way we do our profit recognition is we start typically at a lower profit recognition point on a program and build it up over time as we make progress on deliveries and risk reduction. So think of this as a 7-year program that will step up over time.

What that would mean for MFC margins in the coming years is some possible dilution, but probably no more than 20 to 30 basis points at max, but that's going to then create over time, opportunity to exceed MFC margins beyond where they have historically been with the opportunity to perform that is presented to us with these multiyear agreements.

Yes. And that margin pressure, because of the start-up nature of this production ramping, will be in an environment where sales should be double-digit growth in MFC and maybe even mid-teens sales growth in MFC. We'll take that trade. And then the margins will be, as Evan just said, will catch up. This is a very, very good arrangement for Lockheed Martin.

The next question comes from Kristine Liwag with Morgan Stanley.

Jim, thank you for your earlier comments on R&D and capital purity. There's been growing interest in disruptive defense technologies, and large established companies are often discussed and valued differently than newer entrants in this space. How do you think about technology disruption? Are there areas where you still see yourself as lightspeed ahead of industry? And how do you view your role within the broader defense innovation ecosystem?

Kristine, we address disruptive technology opportunities literally every day in every business area we have. And so I'll just give you a couple. And by the way, with the geopolitical environment that faces the United States today, we need to marshal all resources in American industry. So it could be the start-up community, it's the midsized companies, it's the new entrants, if you will, it's the capital markets. And the major aerospace and defense companies have to have a large role in this because you've got to have the infrastructure, you got to have the workforce. You have to have the cyber capability. You have to have the deployability around the world of anything you develop in the national defense arena in the United States.

So we are all involved at every level in every BA in disruptive technology. And I'll just give you a couple of examples, start at the highest level, if you will, in Space. We've already announced that we're building an operable space-based interceptor that we want to fly in space by 2028 that would be part of Golden Dome potentially that can actually incorporate our technology of how to hit, as my chief engineer says, a bullet with a bullet in space, do it from space. That guidance technology, the ability to build the fins, the actuators, the electronics to actually make that happen, we know in this company how to do. We also know how to build satellites and also low-orbit satellites, we just described on the tracking layer where we have a $1 billion contract to do military hardened low-orbit satellites already. So for us, it's a matter of being creative and combining our capabilities within Lockheed Martin and outside of Lockheed Martin, right?

So if you -- if any initiative in the space doesn't have military theater level scalability, it's interesting, but it will not be decisive. We are in the business of decisive military advantage. And so I'll give you another example. And this is teaming with a new entrant. The company is called Saildrone. Many of you have heard of that, distributed naval vehicle surface company. Pretty advanced, very well run, excellent base product. But it will be interesting to have surface ship drones sailing around the Pacific. But to make them decisive in deterring potential aggressor's action, they're going to have to be armed and they're going to have to be effectively armed with a reliable kind of weapon, frankly. And we're doing that with Saildrone. We've actually innovated ourselves and took a JAGAN, which is a joint air-to-ground missile, so generally fired from a helicopter, for example. We've taken this air-to-ground missile, we've reconfigured it to be a ground-to-ground missile or surface-to-surface missile if you're on the ocean.

That we did ourselves. We've built and invented a quad launcher that will take 4 of these JAGANs and be able to fire them, not at a vertical angle but at a 45-degree angle, which is also new to that system. And we're installing them as partners with Saildrone on their autonomous ships. Now you've got something that can affect the deterrence equation of a potential adversary.

And these are the kinds of things that we innovate on. How do we combine our own capabilities that I just described in space? And another example, how do we combine our capabilities with a proven product that the Navy actually knows how to use and has supply chain for and has a repair system for already that we introduce onto a new vehicle that no one's ever had before, which would be the Saildrone autonomous shipping. So we're all out disruptive technology. Some we'll do on our own. Some we'll do it our aerospace and defense kind of prime partners. Some we'll do in smaller and more novel companies.

The next question comes from Doug Harned with Bernstein.

I want to go back to Missiles and Fire Control and a couple of things around the PAC-3 and the THAAD deals. I mean this is clearly very good in terms of allowing you to plan for the long term and long-term growth. But if I put this into kind of the context of history, first, appropriations are still done annually in Congress and there are periods of time, and you all saw this back kind of in the 2015 time frame when there was huge growing demand for missiles, and then things changed and that all collapsed. And so how do you get comfortable about that 7-year ramp, that the support will be there? And if I can extend it a little bit, do you see the opportunities on some of the other MFC programs that you have underway to do a similar thing?

Doug, Jim here. Yes, traditionally, there's annual appropriations. The administration is striving to modify that. They've already got authorization for a range of effectors or missiles through Congress, part of the process, not the complete process. But it's already been introduced and it's advancing on a 7-year basis for, I think, it's 4 or 5 specific missile systems, including THAAD and PAC-3. So that's the first confidence builder.

The second one is that the agreements that we have struck, and we were the path finder in these framework agreements, others may sign on to something similar. But in our agreements, we had ensured with the department, as I alluded to earlier, that if there is a change in the procurement strategy along the way during the 7 years, there are make-whole provisions that will bring our company back to sort of the same ROI cash flow perspective as we would normally have had in a single year appropriation. So there is a remediation element to, and a strong remediation element, to make whole if the procurement strategy changes.

The next question comes from Rob Stallard with Vertical Research.

Jim, a question for you following up from Scott's question early on. I just wanted to clarify, will you be holding the buyback and dividend this year and going forward? Or is it coming down?

We will be evaluating all of our capital deployment options as time progresses. We'll announce those decisions as they occur, publicly as required and as has been our practice. So we will be continuing to operate in a dynamic way. It's actually more dynamic than ever these days. And the opportunity set is much greater along the lines that I've already described. So Rob, we will disclose when we can what our actions are as the months progress through '26 and beyond.

The next question comes from Gautam Khanna with TD Cowen.

I was wondering if you could give us a quick refresher on how the Aero classified program is performing. And also, Evan, if you could just speak to 2027 pension requirements given where things sit today.

So on the Aero classified program, this is Jim speaking, as a reminder, this is a very complex design and system integration activity. And risk is going to remain over the next few years as we progress through more key phases of the program, which is progressing well. However, to note, there were no additional charges reported on this program in the fourth quarter and we continue to proactively monitor and manage potential risks with our highest level of executives personally involved in this now. And we will keep such a close eye in the program that we should be able to identify any other potential risk and opportunities even to drive better outcomes on a much more timely basis.

So that's where the program stands today. We're very confident in it. We're very confident in the team that we have in the field now to execute it, and it's being monitored monthly as never before.

And I'll address the pension. And it's important to note when it comes to free cash flow, I think you've seen in 2025 and now in 2026, I think we've done a very good job with a lot of focus to convert working capital to operating cash. So between the 2 years, you do see a significant uplift in operational cash. What that meant in 2025, of course, is that we had ability to prefund the required 2026 pension in full such that there's no required this year to your question. That requirement does come back in starting in 2027 of at least $1 billion, depending on how we look in terms of pension performance this year.

I think with the strong cash flow that we're seeing this year, we'll continue to be opportunistic as we have in prior years. If we could drive free cash flow to such a way again this year, there may be an opportunity to prefund 2027 required pension as well. So we'll continue to stay focused on that and advise as we make progress.

The next question comes from Myles Walton with Wolfe Research.

Jim, on last quarter's call, I think we talked about R&D and CapEx as a percent of sales. And at the time, you didn't see a need for that to rise materially. But obviously, that's changed here in the release. I think I understand the CapEx side for capacity build-out, but what changed specifically in terms of opportunity set? Was it [ SBIRS ] or something else, that drove the change in R&D as a percent of sales? And are these new numbers the new norms going forward or would they go higher?

So what's changed, Myles, is the department's very transparent interest in advanced technology development and to support advanced technology development. As the defense budget rises and the Congress and the administration work together to decide exactly what those numbers are. But as it rises, there will be more opportunity for companies like ours to engage in more R&D type prototype activities.

We've actually been doing that to the level you've seen us do for the past 3 or 4 years. And we actually have an entire process that goes from scientific level of research all the way through prototypes on active shifts, Air Force, Marine bases, test ranges. We've got that process in place now and have developed over the last few years with our customers actually who trust us in these matters. And now that we see that the budget could increase in this realm, that the leadership of the research and development, staff and the Pentagon is in place, and that the commitment is to it be innovative, we are going to commit more to R&D.

The next question comes from Mike Ciarmoli with Truist Securities.

First, I think just a housekeeping. Should we expect the share count to stay flat or go down this year? And then, Jim, I was wondering if you could elaborate, maybe even tying into Myles' question, you talked about a $1 billion strategic investment on F-35 sustainment. Can you maybe give us a little bit more detail and unpack that, what the expectations are with that maybe at the direction of the government? Or any more color there would be helpful.

Yes. So the share count will be reported quarterly as always. So you see that as it comes over the course of this year. On F-35 sustainment over, I'll say, a few prior years, there was, in our opinion, some underfunding of spare parts and repair capacity in the various defense budgets previous to this administration. And we have been striving to make up for some of that ourselves with internal investment. But what we want to do is really kind of double down and, frankly, we have put $1 billion plus into spare parts and repairs already, but we're going to double down on that to make an extra effort to improve the mission-capable rates of the aircraft and kind of make up for this unfortunate spare parts and repairs deficit that's been created over the last 5, whatever years.

That's just something we'll step up and do. It does require investment. But these systems are so critical in today's world that we do feel that we are going to get benefit both financially and operationally on the performance of the aircraft for making this investment. So we're going to do it.

And I'll note that this elevated investment is, as I think it's clear, is considered within the $6.5 billion to $6.8 billion free cash flow, which is higher than our previous guidance even with these elevated investments. So I think that speaks to the underlying strong operational cash flow.

The next question comes from Gavin Parsons of UBS.

Quick clarification on cash flow first. Is there any customer support or CapEx reimbursement in your operating cash flow? And then on the PAC-3 and THAAD frameworks, could you talk a little bit more about how those are structured, maybe particularly as it relates to kind of the performance opportunity versus risk?

Yes. So with respect to cash flow and CapEx, one of the key dynamics of these multiyear agreements is that they are in no way intend to be punitive. This is a customer partnering with us to find the best, most efficient way to rapidly scale capability as the war provider. And as such, I think we're going to see some partnership with cash flow terms to make sure that we're well supported as we make these investments. So I think you are going to see an elevated working capital benefit or operational benefit to offset some of these CapEx expenditures. So that is a key part of what we're contemplating with these deals.

Yes. And then there's incentives in both the Patriot and the THAAD framework agreements for us to outperform the objectives. And so what we have agreed upon is a profit sharing above a certain robust level, I'll call it, where we start to share some of the increased profits with the U.S. government by plowing some of those increased profits back into something like I just talked about, which is additional spare parts or it's additional equipment or tooling in the factory, those kinds of things. And so there's a sort of reinvestment mechanism in a profit-sharing vehicle, if you will, for us to even better support these programs going forward on behalf of and with the government.

Great. And Sara, I think we have time for one last question as we're approaching time here.

Your last question will come from Sheila Kahyaoglu with Jefferies.

In the past, Jim, maybe you've talked about a target framework with low single-digit revenue growth in mid-single digits and 10 to 20 basis points of margin expansion. In light of what we've seen recently with PAC-3 and THAAD, double-digit growth at MFC is inevitable. So how do you think about the target growth model and maybe the segment ranking through that outside of MFC and free cash flow contribution going forward?

So Sheila, we do see upside to growth, both -- again, once we get things ramped up and margin compression out of the way. But certainly on revenues and then to follow on margins, and certainly on operating profit as well. So we do see upside there. I could turn it over briefly to Evan just to talk a little bit about each of the business areas quickly.

Yes. So underlying, I think, to Jim's point, there's a strong growth pace by MFC. Space continues to be our second fastest-growing business now as we've seen strength in the strategic missile defense business, particularly, but also in the classified space area. So I think -- and with respect to MFC, we are scaling other munitions beyond the ones that we're kind of contemplating in the multiyear agreements. So all across the board there, I think you're seeing strong revenue growth.

As we look kind of beyond, I mean, we're not ready to give multiyear frameworks at this point, but I do think you're going to continue to see upward pressure on revenue and a real intention to drive margins. And in the next couple of years, we still have some dilutive pressure of some of the programs that we took prior losses on. So as those sort of work down, there's going to be, I believe, increased margin opportunity in the out years. And as time goes, we'll give added insight into that.

All right. Well, thanks for joining our call today, everyone. 2025 was a successful year for Lockheed Martin, and we're already carrying that momentum into 2026. As the War Department continues to adopt new ways of doing business, I am more confident than ever in our company's ability to deliver both value to our military services and our allies and to our shareholders.

I'd like to thank our 121,000 Lockheed Martin teammates for their commitment and dedication to the mission. And I look forward to speaking with all of you in April for our first quarter earnings call. Sara, that concludes our call for today.

Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.

All right. Good afternoon, everybody. I'm Noah Poponak. I'm the aerospace and defense equity research analyst here at Goldman. We're going to keep moving along with our next presentation from the aerospace and defense sector, which is with Lockheed Martin. With me on the stage from the company is Evan Scott, who is the CFO. Evan, thank you so much for joining us.

Thank you, Noah. It's great pleasure to be here.

So Evan is going to kick off with a few things he wants to touch on, and then I have a long list of questions. We're also happy to take any questions from anyone in the audience. So we'll do that maybe halfway through. But with that, I'll turn it over to you, Evan. Thanks again.

I appreciate it. Starting with the safe harbor statements made today that are not historical facts are considered forward-looking statements that are made pursuant to the safe harbor provisions of federal security laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings. And for a description of some of these factors that may cause actual results to differ materially from those in the forward-looking statements. So before we get into Q&A, if it's okay, Noah, just a couple of upfront comments from my perspective.

Yes.

So first, we expect 2025 to be the fourth consecutive year of a book-to-bill in excess of 1. Over that time, our backlog has grown by 30% to a record $179 billion. We set that record in the third quarter. We're on track to set a new backlog record in fourth quarter of this year. Clearly, some key multiyear awards that we had this prior quarter, PAC-3, CH-53K, JASSM, LRASM, and we booked Lot 18, 19 final award at the beginning of this quarter. So this gives us some good multiyear visibility and foundation for future growth. So we still have a sales guidance that implies a solid 5% growth.

Second, we continue to target underlying free cash flow growth. On the deployment side, shareholder returns remain a priority for us, and we expect to return $6 billion to shareholders this year, roughly halfway between dividends and share repurchases. This marks our 23rd consecutive year of dividend increases as we continue to have industry-leading dividend yield.

And then third, just on a couple of quick updates on 2025 guidance. We remain unchanged for sales, segment operating profit and free cash flow. And there are a couple of updates on EPS that I want to highlight. First, as we signaled on the third quarter earnings call, we expect to complete a pension follow-on transaction, which we anticipate will result in a onetime nonoperating noncash charge of approximately $500 million, similar to transactions we've taken in the past. And on the upside, I'm very pleased to note that our tax team recently resolved the tax accounting issues disclosed in our 2Q, second quarter 10-Q. So we anticipate reversing the roughly $100 million reserve that we disclosed in the 2Q earnings call.

So this resolution does not require any cash tax payments. And I'm pleased to note that in this fourth quarter, we were able to resolve all remaining tax issues with the IRS for our 2018 through 2022 audits and really appreciate the partnership with IRS as we work through that.

Lastly, a comment on the shutdown. We're pleased that the U.S. government shutdown has been resolved when we reached an agreement on November 13. We are beginning to see a return to more normal operations for cash flow. There is significant ground to make up, though, that accrued during the shutdown. So we'll continue to make a major focus on cash collection timing with the work that we have to do to catch up and really appreciate the great partnership we see from the DFAS agency that's responsible for making the payments to all the companies in our industry.

And then finally, we're poised for growth. Golden Dome, super exciting. I'm sure we may talk a little bit about that. We're ramping multiple programs at MFC. CH-53K at RMS, solid F-35 sustainment growth and excitement around NGI, FBM at space. So all in all, I think we've got a very strong foundation to continue to drive growth and performance.

Excellent. Thank you so much. Maybe just 2 or 3 follow-ups from that, that I didn't have on my list. But the pension transaction, can you just detail what that is and that's separate from prefunding pension? And where do you stand on whether or not you want to do that?

Sure. So you're right that prefunding next year's $1 billion pension obligation is still something we're looking at considering. And so as we drive above the free cash flow targets that we've set for this year, anything above that, we would intend to prefund next year's pension obligation. The transaction I described in my opening remarks are, in fact, separate from that. This is, for us, normal course of business. We did a prior pension risk transfer that was what's called a buy-in, where we retain those liabilities that are separately managed. This converts that to a buyout where we transfer formally the liabilities to an outside company. And with that, it drives an accounting adjustment, that's noncash, nonoperational.

Got it. And you just reiterated cash flow guidance for the year, but you also just mentioned that coming out of the shutdown, there's some degree of uncertainty in the pace of cash flow payments as the government spools back up. So do you feel like you're tracking to -- like I guess, what would make you track to the low end versus the high end as we think about recovering from government shutdown, but also still thinking about being above the high end and prefunding pension?

At this point, very much a function of timing. And so it is not atypical for us to see our cash flows back-end loaded. That is normal course of business for us. I would say this year becomes even more so than prior years. So we have line of sight to continuing to hit our number and the potential to drive beyond that. It just requires all hands on deck to drive to the very last end of the year to collect all that cash. So it's signaling just the fact that we still have a lot of work to do to get to the number, but we have clear line of sight to do so.

Okay. Got it. Excellent. Okay. So maybe backing up a little bit on just the overall budget process. It's an interesting -- the fiscal '27 request will be an interesting process because '26 had reconciliation. And one of the debates that we hear from investors right now is, will the '27 request use the '26 base plus reconciliation is just the new baseline for defense spending moving forward? Or will it revert back to only the base without the reconciliation, which can have a pretty significant effect on the next 5-year plus cumulative or what the fight up would look like cumulatively total defense spending in that kind of multiyear window. Do you have a view or any insight into which of those is likely to happen?

As of today, I don't have a firm view on it. I'll note that I think the process is still very fluid and yet to be formally determined. What I can say is what I've seen is, first of all, strong demand picture domestically in terms of the products that we provide and others in our industry do as well as good alignment between our direct customer in Congress with a priority of making sure our war fighters had everything they need to perform their missions and to keep them safe. So that alignment gives me -- makes me more bullish than bearish in terms of how this process would play out.

Okay. Maybe just diving into your business segments then. Starting with MFC, there's been a lot of discussion of potential significant increases in the production rates on certain products in that business. Which of yours are you evaluating or is the customer evaluating significantly increasing the production rate? Are there any that are flatter or down? And then what has to happen? Does it have to get on contract? Do they have to prefund it? Will you prefund it? And can the supply chain actually even handle all of this?

MFC is certainly our fastest-growing segment and has the most opportunity to grow incrementally compared to that baseline growth based on the demand that you mentioned here. So a couple of things to think about. One is, we are currently scaling multiple of our munitions and launchers as we speak today. So over the next 3 years, just based on the current backlog and profile, we see strong growth that's high single digit, low double digit in MFC just based on existing scaling that we're seeing across multiple munitions.

What would it take to get beyond growth beyond that and continue to scale further would be an additional investment in capacity on those core munitions. And there are several, I think, that are potential opportunities for that further scaling. I think most notable PAC-3 is very highly in demand, both domestically and internationally. It would take an actual change to the capacity, though, which I think can happen 1 of 2 ways. One, the traditional model that we have followed, which is our customer makes a direct investment into our production line and funds that capacity increase and then gives us an award against that higher capacity. That's the model we have traditionally followed or it would take real insight and a surety on long-term demand and support for us that would convince us to want to make an internal investment of our own to scale that product further. I think either of those 2 models are possible and both would potentially drive increased capacity and upside growth at MFC.

In terms of munitions that are not growing, I think as we see a shift towards more of long-range munitions, some of the short range are maybe not scaling at that same rate. I think of kind of the HELLFIRE, JAGM, which are not typically scaling, but the long-range munitions as well as the defensive munitions are, I think, the biggest opportunities to scale.

Okay. It sounds like you are sold to grow high single, low double at MFC for maybe 3-ish years. And then beyond that, it's a question of exactly where is demand falling and how is it funded? Is that approximately fair?

I think that's fair based on the contracts and backlog that we have today, which is to say, even that 3-year growth trajectory could change and could grow further based on near-term events. But if we are looking to the ability to grow beyond those 3 years, it would take that external or internal stimulus to further drive capacity. That is not to roll out upside growth within the next 3 years.

Okay. And so when within that window of time, does it need to be decided between you and the customer, who's investing what to fund that next leg of growth? And maybe you could talk about some of the mathematical inputs you're having to decipher or contractual terms, I guess you're having to decipher to do this. And maybe this is way too long of a question, but at some point, we should detour into these directives and memos that have come from [indiscernible] and DOW on maybe really changing the [ FAR ] overall. And I'd just love at some point to hear how Lockheed Martin is thinking about that.

Sure. I'm happy to get into...

It seems like the missile demand right now is like the right in front of you obvious place where you'll first be given the opportunity to decide how to handle this. Is that right? Or...

I do think munitions is a potentially near-term opportunity for us. And that, of course, is completely at our customers' discretion to determine the specific quantities if there is a change to those quantities and the timing of that. But I do think there is some potential near-term opportunities to reach -- to advance that dynamic there, again, at the customer's discretion. In terms of the changing acquisition dynamic, I've seen a lot that I'm really excited about. And I'll give you just how I'm thinking about it.

Number one, we are seeing the potential for acquisition models to change in a way that expects contractors to lean in, to go fast to innovate, more so than in the past. I view that both as an opportunity and a risk depending on the business, which is to say those businesses who don't follow that lead, who don't get the message, who aren't willing to scale their speed, innovation, to think differently, risk being left behind. We are very intent to be the opposite of that, to be very aligned with our customer where they want to go and to be part of their solution as they work to rapidly scale capabilities to the war fighter.

So for me, I view it as a real opportunity for Lockheed Martin and it's going to require us to think differently. It's going to require us to hit with speed and to innovate and potentially partner with new entrants that bring new ways of doing business and new technologies.

Is this change from the customer primarily looking for you to invest upfront and help fund the process of moving faster? And then in exchange, you maybe have some kind of guarantee on units over some window of time. There's also been discussion of accelerating FMS that's maybe part and parcel of that. Is that mainly what they're trying to do? Or is it mainly moving to more commercial terms and more fixed price and more you invent something and take it to market and see whether or not they want to buy? Because those -- the second bucket there, I would think would have a lot more risk to it, whereas the former has some risk to it, but you lay the capital, they'll probably buy the product.

I think that former model that you mentioned is something that's more likely to be something that we would be interested in proceeding with, which is to say if there can be long-term demand that gives us some guarantee that our investments will be protected and then our cash flow is a strong consideration for both parties. I do think there's the opportunity to look at some different business models.

What I found so far through this process, and this is part of why I have optimism, is while there are high expectations being put on us and others in the industry, it all feels fair to me, which is to say this customer understands the dynamics that we have as a private company, the importance of shareholder value, the importance of cash timing. And they're not looking to discount any of those factors as we consider ways of doing business maybe differently in the past.

Now it has the potential to be the added risk element of just compared to the historic where a customer may fund this capacity, that shift comes with some extra challenges, but if we navigate it the right way, and continue to focus on shareholder value, while partnering win-wins with our customer, I think this can be a very significant opportunity for this company.

Okay. Definitely seems like an opportunity. It's almost like you'll just have to remember to put everything in the contract.

We have a lot of folks at our company who are very astute at doing just that with many decades of experience.

Okay. So then just taking it back to MFC, do I have the right read that you'll need to make a decision on whether or not you'll move forward with that model in MFC pretty soon? If you're sold for a few years at a growth rate and then you want to keep growing at that rate or faster beyond that, somebody is going to have to decide who's funding the additional capacity, I would think, sooner than later.

I do think that we have continued scaling that happens today without any additional stimulus. But to your point, the sooner we have insight to further capacity interest, the more efficiently we can do that. So that does put some near-term pressure on just determining exactly what next steps are, to your point, but that is fully on the Department of War's discretion to determine the exact timing.

Okay. Okay. Let's move to Aeronautics. Maybe anything you want to highlight on F-35. But for me, the question on F-35 is how -- what's the duration at which you can sustain the current production rate? And then once you're closer to filling the total program quantity buy, when does the production rates start to wind down? And then how does Aeronautics grow long term once F-35 production is winding down because it's uncertain for those of us from the outside, what comes in behind F-35.

When I look at F-35, a couple of things make me bullish on that platform. Number one, we really hit a good rhythm now in delivering aircraft. We started the year talking about a range of 170 to 190. We've tightened that to 175 to 190, and today, I'll say between 180 and 190 as we continue to work through the delivery ramps. We also see strong support from our direct customer with a focus on the importance of air superiority. We've continued to see strong support from Congress, which also goes on the munition side as well as on the F-35 side is a very key part of making this all work. And we've seen strong international demand, both for F-35 and munitions.

When I look at those 3 factors, that gives me confidence that we will continue to be able to manufacture at a 156 rate for 5-plus years as we see that. So I don't see near-term risk to that production rate on that F-35. In terms of growth, F-35 sustainment is likely the fastest-growing piece of the Aeronautics platform as we continue to deliver more aircraft and now reach a threshold of 1 million flight hours on that platform across our multiple customers and it's continued to show itself what it can do when tested in a very, very positive way, which I think helps create new international demand. So all that, I think, puts the F-35 in a strong position the growth driven by sustainment with an opportunity to perform with the new Lot 18, 19 contract creates a firm fixed price basis that incentivizes us to take cost out and create margin opportunities relative to the prior lots.

Okay. That's helpful. Maybe going to RMS. What's the outlook for Black Hawk as FLRAA came to be, there was a discussion of that in some way as a partial Black Hawk replacement, but it doesn't seem like Black Hawk demand has actually slowed. CH-53K, I think, is still growing for you. And what other major growth drivers or detractors do you have at RMS in the medium term?

Black Hawk does have some near-term growth. And with current multiyear 10, we've got line of sight to continue production now for the next couple of years. Beyond that, we will need a follow-on multiyear production contract or enough international demand to support that platform. In the meantime, we do find that it has consistent applicability to the current and future state of war based on its versatility and its proven performance. So I do have confidence in that platform, and we'll continue to invest with our customer to modernize it.

Other growth items for RMS that are important. You mentioned CH-53K, which is very helpful to have that growth now in our backlog for the next several years on that key platform with some additional opportunities to sell it internationally. Outside of Sikorsky, I think there's strong demand for our radar systems, both domestically and internationally, which could be very relevant for the Golden Dome mission as well. Additionally, when we look at Golden Dome for the C2 side, RMS we expect to be the leader in our company for that. And you can look at the C2BMC award as something that demonstrates our ability to take multiple effectors, multiple capabilities across domain, throw them together for something that's relevant and meaningful for the war fighter. Those are the sources of growth for RMS in my mind.

Okay. And so as we work through the segment here, maybe just round it out with space. I've heard you recently say that space has maybe become a little bit of a dark horse or has some underrated growth in it. What's behind that? And I also wanted to ask you on ULA. We've had some space launch companies in this room this morning that have valuations that reflect some enthusiasm around new technology in the defense and national security landscape. Why would Boeing and Lockheed not look to monetize ULA as it seems to have been somewhat a sort of move down the priority list given the many things going on in the company?

Absolutely. So on space as a segment, I would think of that now as our second fastest-growing business area. And we've seen really strong performance there. A lot of key wins in a lot of different mission spaces. And it's been a long process that I think is really bearing fruit. We've always had our LM-2100 premier combat satellite bus. The purchase of Terran Orbital gives us a small set LM-50 capability as we call it, and we've organically developed a midsized bus an LM-400 that's relevant to a lot of different mission spaces. That organic and inorganic investment has positioned space to grow in several mission areas.

We see missions moving to space, either as a new home for certain missions or for resiliency for other domains. And we see very strong growth for our strategic missile defense aspect of space. So think of Fleet Ballistic Missile, the Trident Missile Program going through its next round of upgrade and production. NGI is a very exciting platform that's in strong demand that we continue to make progress on. And then our hypersonics programs for the Navy and the Army are part of the space portfolio and also drive that growth. So we're seeing strong performance and growth opportunity for space.

On ULA specifically, we would certainly always consider opportunities there in terms of how we manage ULA business. I think it is a very key platform, though, for our customer. And so we clearly would be very diligent and intentional about any movements or changes we would make there. And at this point, that is not prudent for us. But we will always continue to look at any optionality for ULA.

Okay. If MFC is the fastest and space is the second, what's third, what's fourth, and that's referencing what window of time?

I think it over maybe the next 3-year time period. And so I think both Aeronautics and RMS have growth embedded in them and additional growth opportunity depending on some international opportunities and some domestic opportunities. But I would sort of put them in the next group down together as growing, but not at the pace of space or MFC based on the growth trajectories that we had given previously. There is a potential for that to change based on Golden Dome and other opportunities coming to fruition. But based on the backlog and demand forecast we have today, that's how I think of the 4 segments.

So on an approximately 3-year basis, we should be thinking of MFC high single, low double. It sounds like Space is mid-single to high single, and then RMS and Aeronautics are flat to low single?

I think you're directionally right. I do think Space is in that mid-signal kind of potential growth and maybe low signal single digits for the others and MFC for sure, high single, potentially low double-digit growth opportunity. So we'll continue to refine that. Between now and January, we should have more visibility to other ramping opportunities and Golden Dome mission potentially, which will give us better insight to truly fine-tune those growth points for you and the investors.

Okay. Great. Golden Dome, what are the ways in which you participate? And is it definitely happening? And has it been as surprising to you as it is to me that we haven't seen significantly more funded task ordering award activity to get the ball rolling?

When I look at the scale of this mission, it would make sense to me that our customers being very intentional to how they sequence this with the right leadership, which they have in place, the architecture and a contracting strategy to be able to get the mission when they need it at the scale they need. And it's a very broad mission. I mean it could take many decades to truly get the endgame of this thing with a bias towards near-term capability for the most sensitive missions.

So I think we're going to see when this customer is ready to move on it to move fast, just like we've seen them in other domains. And I'm very bullish on our ability to be a key part of very many of those missions. You think of the deterrents that we have on air missile defense, we're the global leader in air missile defense and I expect that will be a key part of Golden Dome. Typically, such a mission would start with a space layer, which is often your first indication of a hostile launch, and we're very well positioned in that mission.

The radar business, both at sea and land, very key part of our business as well. And the C2 system that ties it all together is something that we are -- we do well and it's a key part of our offering as well. So really, when you look across the missions here that we anticipate, we feel like we're very well positioned for it. But part of that, we think part of our value is in addition to the capabilities we bring, we put a priority on bringing the best of breed across the industry together for this important mission.

So I expect when you see a Lockheed Martin offering, it won't necessarily be only Lockheed Martin products and services, it's going to look to bring in the very best in the industry, whether they're established players or new entrants. That's typically been our approach to hard missions like this.

Okay. When do you expect to see more specific award activity? And has there been award activity already that maybe wasn't specified as Golden Dome, but is existing product that would actually be eventually feeding into Golden Dome?

I do think there's potential synergy to other demand signals you've seen in the Golden Dome mission. However, exact timing of Golden Dome, I think will -- is best for the customer to state specifically their intentions. But again, I remain comfortable saying that when this customer intends to move out, we'll know it, we'll see it, it will be fast and very impactful.

Okay. Great. On margins, at the total company level, and I guess, specific to MFC and Aeronautics, but there's been margin volatility in the industry where it seems like the Pentagon maybe shifted some of the contract terms a little bit. There have been a few different examples of the LRIP portion of a contract having had its prices fixed in the initial bid, which I think is unique compared to history. Is that the correct read of what happened in classified missile, classified aeronautics. And how far into the future do you need to get to be beyond the window of revenue that has these risks still associated with it?

You're right that we've seen that acquisition model come to play for us and many others in our industry in a way that adds an element of risk that candidly, we're just not interested in entering into any time in the near term here, which is to say we need to make sure we truly understand what we're pricing if there's long-term pricing, and we will not commit to firm fixed-price production on a product that we haven't designed yet. It's just not a smart business for us to get into anymore.

And candidly, I don't know that we're going to see a whole lot more of that in any case from our customer, who also understands for industry that's not the right bet to make. In terms of time frames, there's sensitivity on exact time frames on some of these programs. But what we have shared is over the next 3 years, there's cash headwinds that come from these programs. So think of about $700 million a year of cash this year, next year and the year after, roughly, that creates cash headwinds that we have to work through as well as some margin headwinds as -- with the forward-looking losses we now are taking that revenue at 0 margin, which creates a dilutive effect, particularly at MFC and Aeronautics. So without getting into specific windows when it comes down, I will just say after those 3 years, you will see a good steady drop down of cash impact, which will create some additional opportunity for us.

Okay. And then segueing that into cash flow, what's your outlook for the company's ability to grow total free cash flow on a multiyear basis when you triangulate all these inputs?

I believe we have line of sight to continue to get organic free cash flow growth. We know that there are some trading heads and tailwinds, particularly around pension that we've talked about. We've got no pension contribution outlook for this year, notwithstanding any prefunding that we would choose to do, whereas next year, we have $1 billion of pension. When you net for those, you see underlying free cash flow growth netting for that.

Now long term, we see the ability to translate organic growth into free cash flow, and we'll give better insight to what that long-term profile looks like here in January, but we are very focused on turning operational performance into free cash flow. In the meantime, we have not wavered from our commitment to return free cash flow to shareholders, and we continue to talk about $6 billion a year with share repurchases and dividends. That commitment remains in place.

Okay. And so we should think of cash flow as -- cash flow growth as top line growth, margins are stable or expanding. And what's CapEx doing in that equation?

From a margin perspective, we will -- we see opportunity to drive margins higher, and we see that opportunity potentially in all of our business areas. There's no business that I look at that say that we don't have a potential to drive margin growth. So you're right, organic revenue, potential margin growth, improvements in working capital particularly in programs where in the past, we had some deliveries pile up and now are really hitting a mark, think of F-35, where we're starting to see some working capital improvements.

With respect to CapEx, we have traditionally had a little under $2 billion of CapEx. Our current growth profile is consistent with that CapEx. What we have said on our earnings call is if there is a significant organic growth opportunity, we would be prepared to invest to meet that opportunity if we felt comfortable that we had the long-term insight to that demand and protection for that investment in our cash flow basis. So that is to say no change right now to our capital or our growth, but those 2 could go together if we see a step change in growth based on some of the opportunities we talked about.

Right. That gets back to the beginning of the conversation on that new potential changes in the model. We had maybe 1 or 2 -- time for 1 or 2 questions if there are any from anyone in the audience for Evan. Don't be shy. No. Okay. Maybe just last one. There's a lot of discussion around new entrants in the business and the Anduril of the world and Defense Tech. And to what extent are these companies a competitive threat to Lockheed Martin or partners of Lockheed Martin or just doing something completely different than Lockheed Martin?

I think there's potential for all 3 of those and potentially all at the same time, which is to say we will learn from the new entrants, like we will learn from our traditional peers. We will partner with them in some cases and in fact, already have in some domains, and in some cases, we'll compete. And it will remain to be seen exactly all the domains where that competition will be there. But we do see it as a potential partnering opportunity.

I think in terms of one of the threats, a key one for us is the war on talent. There's always going to be a pull for experienced professionals who have worked and operated and performed in this industry that I think will always be sort of a risk element for all of us as we develop key talent and then continue to rely on them for future opportunities.

Okay. All right. Well, we're out of time. So let's wrap up there. Evan, thanks so much for being with us today. This is great.

Great. Thanks so much.

Good day, and welcome, everyone, to the Lockheed Martin Third Quarter 2025 Earnings Results Conference Call. Today's call is being recorded.

[Operator Instructions]

At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Treasurer and Investor Relations. Please go ahead.

Thank you, Sarah, and good morning. I'd like to welcome everyone to our third quarter 2025 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Evan Scott, our Chief Financial Officer.

Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings, including our 2024 annual report on Form 10-K and subsequent quarterly reports on Form 10-Q for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts.

With that, I will turn the call over to Jim.

Thanks, Maria. Good morning, everyone, and thank you for joining us on our third quarter 2025 earnings call.

Lockheed Martin delivered strong operational and financial performance across all 4 of our business areas in the quarter. We secured a number of significant wins across a range of our marquee programs that drove our backlog to a record high of $179 billion. Our relentless attention to operational execution in every facet of our business resulted in elevated sales growth and substantial cash generation as well. Meanwhile, we're also positioning the company for what we see as even greater demand for the iconic Lockheed Martin products and systems needed by the U.S. and its allies to ensure deterrence from potential great power arm conflict.

As I have said, Lockheed Martin is in the aerospace and defense industry, but in the deterrence business. We are in active discussions with our customers in both the U.S. and abroad on scaling up development and production of the essential elements to deliver on the goal of peace through strength. These systems include air defense radars and missiles, space-based interceptors, state-of-the-art open architecture command and control systems and the world's most advanced fighter aircraft as just a few examples. In every step of the way, we remain highly focused on enhancing program performance in terms of cost, quality and schedule while reducing risk to internal production systems modernization and continuous improvement methods.

As noted, in the third quarter, we achieved record backlog of $179 billion as demand for our reliable advanced solutions remain solid. Multiyear awards on PAC-3, JASSM/LRASM and CH-53K totaled $30 billion in the quarter and provide production rate visibility into the next decade. And shortly after the conclusion of the quarter, we definitized the F-35 Lot 18 and 19 contract with the Department of War's joint program office adding $11 billion of contract value and another 151 aircraft into backlog.

Our financial results in the third quarter reflect these trends. Sales increased 9% year-over-year and a solid 5% normalized for the Lot 18, 19 impact in last year's third quarter. We generated strong free cash flow of over $3 billion in the quarter enabling our commitment to further invest in the business while simultaneously driving returns to shareholders through recurring dividends and our disciplined share repurchase program.

Earlier in October, our Board approved a 5% increase in our quarterly dividend and increased our share repurchase authorization. This marks the 23rd consecutive year of dividend increase for the company and demonstrates our continued confidence in Lockheed Martin's stable financial performance. Looking forward, we are updating our outlook for the remainder of 2025, increasing expectations for sales segment operating profit and earnings per share. We remain focused on operational performance and capitalizing on the unprecedented demand cycle to deliver mid-single-digit top line growth in 2025 while generating $6.6 billion of free cash flow. Evan will provide additional detail on the free cash flow elements and our full year outlook in his prepared remarks.

Circling back to the new business we secured this quarter. At Missiles & Fire Control, our expertise in developing and producing reliable precision strike weapons and integrated air and missile defense solutions at scale continues to be highly valued by our customers. First on PAC-3, the U.S. Army awarded Lockheed Martin a $9.8 billion contract for the production of nearly 2,000 PAC-3 MSE interceptors, and associated hardware. This marks the largest contract in MSE history and demonstrates the sustained demand for this advanced and proven interceptor from U.S. and international partners, some of which you've read is latest this week in the press. Our teams continue to proactively partner with suppliers and customers to invest in PAC-3 capabilities and production capacity to support the elevated and enduring demand we see for this critical mission, defending against ballistic, cruise, hypersonic and airborne threats.

Next, on JASSM and LRASM, we definitized a large lot procurement contract for $9.5 billion with the U.S. Air Force and Navy customers. This multiyear award supports increased production quantities of these proven cruise missile systems and helps build a more resilient industrial base. We look forward to partnering with the U.S. government to execute and deliver this long-range, highly survival and effective capability to our airmen, sailors and marines for years to come.

Moving to Rotary & Mission Systems. The U.S. Navy awarded Sikorsky a $10.9 billion multiyear contract to build up to 99 CH-53K King Stallion helicopters for the U.S. Marine Corps over 5 years. This is the largest quantity order to date for that aircraft and the largest contract award ever in RMS history. This ensures consistent deliveries of America's most powerful heavy lift helicopter into the next decade and enables long-term affordability, optimized production efficiency and stability for our supply chain. In our space portfolio, we received additional contract value and funding on the next-generation interceptor program in the quarter, helping to increase backlog for our space business to a new high of $38 billion.

With NGI, we continue to advance the program as we're progressing development and begin preparing for production. In addition, our space team secured multiple contract research and development awards this quarter. These crowd awards is their known demonstrate our ability to co-invest with the government partners and accelerate the delivery of revolutionary solutions with each crowd initiative strategically targeted to support key missions for the U.S. government.

Also of note in the quarter, the Fleet Ballistic Missile, or FBM system, conducted yet another successful flight test demonstrating its continued readiness to provide the world's most potent and survivable nuclear deterrent. This also marks 70 years of Lockheed Martin support to the U.S. Navy on this critical program. Going forward, both NGI and FBM will benefit from the internal investment we are making in new state-of-the-art facilities to enable rapid, reliable and cost-effective component production and assembly for these crucial systems. All in, these awards underscore the trust and confidence that our customers place in us and which in turn, underpins our company's long-term solid growth prospects.

Shifting gears to F-35. During the third quarter, we delivered 46 aircraft and now expect between 175 and 190 deliveries in 2025. That's essentially 1 aircraft delivery every working day of the year. Since program inception, we've delivered over 1,200 F-35 aircraft that have amassed over 1 million flight hours, providing control of the sky and seamless interoperability between U.S. and allied forces. The recent Lot 18 and 19 award reemphasizes the growing demand for the F-35, which is the world's most advanced fighter jet currently in production. Over the years to come, the U.S. and 19 international allies will continue to progress toward a planned global fleet of over 3,500 aircraft. Moreover, we finalized the $15 billion air vehicle sustainment contract with the Joint Program Office. The 4-year deal provides for aftermarket activities such as spare parts provisioning, maintenance, repair and other support services through 2028. This long-term agreement will support our key objective to improve the readiness of the aircraft fleet as it continues to expand in number and supports the revenue growth trajectory for our F-35 sustainment business.

Finally, we are also heavily committed to support the ongoing modernization and upgrade of the aircraft's capabilities, particularly the introduction of what's known as Block IV enhancements to a number of aircraft systems. At the same time, Lockheed Martin has already moved out on engineering analysis at my direction to design and bring even more advanced capabilities from our sixth generation research and development efforts that we conducted our Skunk Works operation in California. We are aspiring to enhance the relevance and capability of our fifth generation platforms, the F-35 and the F-22 to provide the greatest aggregate level of air superiority capability at the most efficient cost and the fastest deployment.

This is a total best value approach that we think will be best for the department. To that end, we are working closely with our customers to align our internal investments with their most important mission priorities for the F-35. For example, of the strategic enhancements could include advanced and expanded weapons compatibility, improved data links, autonomous drone wingmen integration, superior sensors and the latest electronic warfare capabilities.

Now turning to the budget. We're all watching Congress work through the FY '26 appropriation bills and the government shutdown. We continue to see broad support through all of this for national defense priorities given the unsettled geopolitical situation. The strength of our backlog reflects the importance of Lockheed Martin systems and deterring global conflict. We will continue to partner with the administration, Congress and our customers to provide the absolute best defense technologies as this budget process is finalized.

The Homeland Defense mission, including Golden Dome for America is one opportunity for which Lockheed Martin is ready and well positioned with existing products, expertise and production capabilities. Although details of the initiatives architecture and acquisition plan continue to take shape, the space domain is expected to play a vital role, and Lockheed Martin continues to make significant progress to advanced space-based defense.

Earlier this quarter, the first next-gen GEO, or NGG, missile warning system satellite was successfully completed. It's finished environmental testing, it's on track to provide the next level of global surveillance and detection of missile threats from space. We also submitted proposals for space-based interceptors and other emerging technologies and we're actually planning for a real on-orbit space-based interceptor demonstration by 2028. Further, led by RMS, Lockheed Martin has built a prototyping environment at our Center for Innovation in Virginia to support the collaborative development of a Golden Dome for America command and control capability.

Through a series of demonstrations, Lockheed Martin's open systems architecture is already using existing and new C2 capabilities from seabed to space. And importantly, these capabilities are not limited to our own. We have a broad team of industry partners that are participating in the prototype system development, ensuring that the U.S. government has access to the best available solution for each element of the eventual Golden Dome command and control system. At the same time, we're rapidly increasing production capacity across the missiles, sensors, battle management systems and satellite integration opportunities that will be directly relevant to achieve the overarching objective of Golden Dome, and that is to strengthen deterrence against an attack against the U.S. Homeland and if necessary, defeat it.

I'll now turn it over to Evan to share more about our financial results before we open up the call to your questions.

Thanks, Jim, and good morning, everyone. Today, I'll provide an overview of our consolidated financials and highlight a handful of operational items in the quarter before handing it off to Maria who will cover business results, and then I'll come back to discuss the updated 2025 outlook.

Starting on Chart 4. Third quarter sales were $18.6 billion, up 9% year-over-year, driven by Aeronautics, Missiles & Fire Control and space. Adjusting for the F-35 Lot 18 award timing impact on revenue in Q3 of last year, the normalized year-over-year growth was still a solid 5%. Next, segment operating profit of $2 billion was up 9% year-over-year, resulting in 10.9% segment margins. Similar to sales, adjusting for F-35, the normalized growth was 5%.

Moving to earnings per share. We generated $6.95 in the third quarter, up $0.15 year-over-year primarily driven by the higher segment earnings and lower share count, partially offset by lower total FAS/CAS pension adjustment and a higher tax rate.

Taking a closer look at taxes, while the 16.5% effective rate in the quarter was up from the prior year, it was considerably lower than our prior estimate. The primary driver of the lower rate was increased research and development credits related to prior year favorable federal income tax audit resolutions. Overall, these benefits reduced the effective tax rate this quarter with favorability expected to carry through to the full year.

As Jim mentioned, in the third quarter, we saw strong bookings across the business, totaling over $31 billion in orders, resulting in a 1.7 book-to-bill ratio. And we're off to a strong start to 4Q with the F-35 Lot 18, 19 award, additional funding associated with the PAC-3 multiyear award and the contract modification on the TRITON2 D5 [indiscernible] missile life extension.

Shifting to cash. We generated $3.3 billion of free cash flow in the third quarter, bringing our year-to-date total to over $4.1 billion. The strength in the quarter was driven by working capital improvement, mainly on the F-35 program as part of the planned payments associated with the Lot 18 and 19 agreement. Lower cash tax payments also helped as we roll through to the OPBA impacts.

Finally, looking at cash deployment in the quarter, we continue to fund organic growth and innovation efforts with approximately $900 million going to capital expenditures and internal research and development activities. In addition, we returned approximately $1.8 billion to shareholders through dividends and share repurchases, bringing the total year-to-date to $4.6 billion or 110% of free cash flow.

We remain committed to our disciplined capital allocation policy and accordingly remain committed to returning capital to shareholders. Turning to some other highlights in the quarter. At Aeronautics, in addition to the F-35 Lot 18, 19 award Jim previously mentioned, international demand for the jet remained strong, with Belgium and Denmark, both announcing intentions to expand their fleets. Belgium seeking to procure an additional 11 aircraft and Denmark expressing interest in adding 16 aircraft to their existing program of record. The steady demand from our international allies for the F-35 demonstrates the unmatched capability of the aircraft and gives us confidence in sustained long-term production.

As for the classified program at Aeronautics, we will continue to proactively monitor and manage the risks and opportunities, and there were no additional charges recorded on the program in the quarter. Within MSC, we continue to advance our international strategy. The Global Mobile Artillery Rocket System, or GMARS program, completed a major milestone, launching 2 [ GMARS ] rounds at a live fire event at a white sands missile range, validating the launchers performance and ability to integrate the MLRS Family Munitions, or MFM. This successful test demonstrates Lockheed Martin's ability to adapt to regional needs in Europe and partner to create something new. Our precision fires launcher that is interoperable with NATO assets. We expect programs like GMAR to support the long-term international growth we anticipate within MFC and across the broader portfolio through the end of the decade.

Moving to RMS and building upon Jim's comments regarding our work at the Center for Innovation related to Golden Dome, another growth prospect in the integrated and scalable C2 domain is the next-generation command and control or NGC 2 program. Lockheed Martin was awarded a prototype agreement to partner with the U.S. Army and serve as a team lead to develop a data-centric NGC 2 prototype. RMS will spearhead the collaborative effort, leveraging our C2 systems engineering and project management expertise to empower nontraditional innovators and commercial technology providers to scale their capabilities into our NGC 2 offering.

Finally, space performed very well in the quarter, meeting key milestones on FBM, classified national security space, OPIR and GPS 3. On GPS, the ninth vehicle was transported to Cape Canaveral at the end of September. And more recently, Lockheed Martin delivered our first of 21 vehicles for space development agencies, transport layer, Tranche 1 program. Successful program execution events like these have helped space once again deliver strong profit in the quarter, resulting in segment margins of 9.9%. I'll now turn it over to Maria.

Thanks, Evan. Okay. Starting with Aeronautics on Chart 5. Third quarter sales at Arrow increased 12% year-over-year to $7.3 billion. The increase was primarily due to higher volume on F-35 production and sustainment contracts as well as the absence of the $700 million impact of Lot 18, 19 contract delays in last year's third quarter. The increase was partially offset by lower volume at classified programs. Adjusting for last year's Lot 18, 19 award timing impact, sales at aero would have increased 1%. Segment operating profit increased 3% year-over-year in the third quarter to $682 million. The benefit of the profit on the higher volume was partially offset by lower profit booking rate adjustments, which included an unfavorable adjustment of $40 million on C-130 programs this quarter.

The photo to the right showcases Lockheed Martin [indiscernible], a Group 5 survivable and lethal collaborative combat aircraft with a highly capable, customizable and affordable, agile drone framework. Similar to the common multi-mission truck, this is another example of Lockheed Martin internally funding development of advanced technologies, in this case, to create autonomous air dominance force multipliers to help customers outpace threats.

Turning to Missiles & Fire Control on Chart 6. Sales at MFC in the quarter increased 14% from the prior year to $3.6 billion, driven by higher volumes due to production ramps including for multiple tactical and strike missile programs, such as JASSM/LRASM and PrSM as well as for integrated air and missile defense programs, primarily PAC-3. PAC-3 picture to the right, continues to ramp production with the program eclipsing $2 billion in sales year-to-date, which is 18% higher than last year. Segment operating profit in Q3 improved by 12% year-over-year to $510 million, driven by the profit associated with the higher volume.

Shifting to Rotary & Mission Systems on Chart 7. Sales at RMS were comparable year-over-year in the quarter at $4.4 billion, primarily driven by higher volumes on Sikorsky Black Hawk and various C6ISR programs. These increases were mostly offset by lower volume at integrated warfare systems and sensors and various training, logistics and simulation programs. Operating profit at RMS increased 5% in the third quarter versus prior year, primarily due to favorable contract mix at Sikorsky. The photo here is of the Sikorsky CH-53K King Stallion, which as previously mentioned, received the largest award in RMS history during the third quarter.

And on Chart 8, we'll conclude the business area discussion with space. Space sales increased 9% year-over-year in the third quarter due to higher volumes at strategic and missile defense, driven by FBM and NGI programs as well as that national security space. FBM picture to the right, continues to benefit from the Life Extension 2 activities with sales up 14% year-to-date and driving accretive growth for the Space segment. Space operating profit increased 22% compared to Q3 2024. This increase was driven by favorable net profit booking rate adjustments primarily on FPM as well as profit associated with the higher sales volumes. Equity earnings from United Launch Alliance, ULA, were essentially flat versus prior year. Now I'll turn it back over to Evan.

Thank you, Maria. Turning to Chart 9 and our outlook for 2025. As we approach year-end, we refined our estimates to reflect increased expectations for sales segment operating profit and earnings per share as well as clarifying our intentions on free cash flow and deployment activities. Building off the solid year-to-date growth, we're tightening the sales guidance range to $74.25 billion to $74.75 billion, up $250 million at the midpoint and implying 5% organic growth year-over-year. We now expect segment operating profit to be in the range of $6.675 billion to $6.725 billion, maintaining a midpoint margin of 9%. Business area detail can be found on Chart 14 and backup Appendix 2, but I'll touch on it briefly now. Three of the 4 business areas, Aero, MFC and Space are increasing their outlook for sales by a combined $750 million, largely based on solid year-to-date performance and improved clarity on cost timing, production ramps and throughput expectations in Q4.

Meanwhile, RMS is lowering its forecast for sales by $500 million due to lower expected cost volume and slower production ramps at Sikorsky. Profit changes are generally in line with sales. Back to the company level, on earnings per share, we are increasing our estimate to a range of $22.15 to $22.35, incorporating the $50 million of incremental segment mark operating profit as well as lower estimated full year tax rate, now estimated to be approximately 16.7%. And as our release stated, the EPS outlook excludes any noncash impacts from the conversion of pension annuity contracts that are currently under evaluation and could occur as early as the fourth quarter.

Turning to cash. we've shifted to a point estimate for our cash flow guidance this quarter. We have line of sight to solid cash generation through the end of the year and we intend to direct any incremental cash generated above the $6.6 billion free cash flow estimate for 2025 towards prefunding a portion of the required $1 billion pension contribution in 2026. Our goal is to build financial flexibility in 2026 and beyond to ensure we are best positioned to seize organic growth opportunities and create value for shareholders.

In summary, on Chart 10, as Jim said, we're excited about the prospects for Lockheed Martin. We remain laser-focused on executing our record backlog to deliver on program commitments and drive favorable outcomes that create value for our customers and shareholders. With that, Sarah, let's open up the call for Q&A.

[Operator Instructions]

Your first question comes from Doug Harned with Bernstein.

Thank you. Jim, when you look at this quarter, this quarter, margins were good and essentially a clean quarter. And when you look back over the past year, though, and certainly in the last quarter, you've had some charges, fixed price development program issues and MFC and aeronautics and RMS. How do you look at the -- when you look forward now, how do we get comfortable that those issues are behind you. What have you done across those businesses so we can get pretty confident that this growth trajectory can be executed with strong margin performance.

Yes, Doug, Look, we've taken our best approach, our best people, and we put them on these highlight programs, which have been -- if you've been reading the Qs and Ks for the last 10 years, they've been highlighted all the way through. And we're at a point where now our growth prospects are so strong that we just want to try to put every risk that we can quantify behind us in the company. Now we can't predict 100% that we've covered every risk that every flight test is going to be successful, et cetera. But we really wanted to take the lion's share of the risk, put it in place, cover it, take the charges and move on. That's the attitude. Again, can't guarantee perfection going forward. But that's been our attitude instead of like lugging these rocks behind us every quarter, the ones we knew about the helicopter programs, both of which could still do better than we're expecting. But we just wanted to take those 2 legacy risks off the table. And then when it came to MFC, that program needed to get past certain test points, if you will, it's gotten past them. We have a lot more confidence than that, and we took the charges we did because that risk had been carried all those years.

And then finally, on the Aero classified, we have basically round that program in talent and attention. We've got our Chief Engineer for the entire company now, basically, the project engineer on the P958 program along with a lot of other talent, too. So again, we rebaselined every single original assumption in that bid from 2018. And we think we've covered most of the bases that we can understand, but there's still technical risk in this. And what will come out the other side is something really amazing that we'll have lots more demand, we think, beyond the fixed-price production lets that we are taking the charges for.

So I do see a much more robust future for that program now that we've taken those charges and again, put that all behind us, but it's not 100% risk-free, let's say. But I think in the end, all in all, and I've been on top of all these programs myself to at a detailed level. This will be very good for the company and very good for the country over the next number of years.

The next question comes from Seth Seifman with JPMorgan.

Evan, in the past, on the Q3 call, the company has provided some color on expectations for the following year. I don't know if there's anything you can say at this time, but given the backlog growth, would there be any reason not to expect mid-single-digit growth next year. And also, if you can -- anything you can say about the mix and margin profile, along with the cash flow outlook for 2026 that you talked about on the last quarterly call and whether that's still the way to look at things.

Thanks for the question, Seth. So we are not changing our trending that we previously provided. But since we provided that trending, we are seeing some new opportunity emerge particularly around the munitions and Golden Dome and some others across the portfolio. Given that these items are fluid, we're going to continue to focus on them this quarter specifically, and we'll be in a much better position to give clear guidance on that in January, both on what upside to revenue that might drive and any investments that are required to unlock that revenue.

The next question comes from Ken Herbert with RBC Capital Markets.

Jim, Evan, thanks for the question. MFC revenues, you've seen really strong growth now for several quarters. As you think about the outlook for sort of a high single, low double outlook over the next few years, with the very strong demand signals you continue to pull out -- point out, could you talk about confidence in the supply chain to ramp production over the next few years, whether it be solid rocket motors, seekers, any other focus areas that are constraints today or do you see as potential risks as you look at, obviously executing to some of the major contracts you've announced?

Ken, it's Jim. We've worked with our U.S. government partners and our key suppliers on especially some of those items that you just pointed to. And I'm much more confident today than I was a year or so ago about the ability of those industry partners to step up to the kinds of rates of production increase that we're being asked to put it into play. There's been, I would say, top level interest in both the [indiscernible] provider and commitment to the government and to us to make the kind of investments that will give us confidence that they will get there.

On the solid rocket motor side, we've got really 3 providers now. Aerojet Rocketdyne, which has also stepped up with investment, Northrop Grumman made a big commitment again to investment on the SRMs and we've got a joint venture now with General Dynamics, where we will have an ability to have a third supplier to bolster those 2 in the future. So I'm much more confident about supply chain that was before. Having said that, there are a lot of parts and components in these devices, and we have to manage it every day like what blanket. We're all on top of our suppliers and we're getting better and better at looking further ahead to see where the issues might come and address some early.

Yes. And I think I'll just add. To reach a level of scale that's being contemplated, it really will take everybody operating the same direction. As Jim said, every single part needs to be on time. And that is going to take close coordination with our customer. And I think we're going to get exactly that to scale across the entire supply chain because the goal is not only to meet current delivery requirements, which we're very focused on, but to potentially scale beyond that to customers' demand and then have resiliency within those supply chains to be able to scale further as needed. And that's our big focus as we work on that this quarter.

The next question comes from Gavin Parsons of UBS.

Thinking a little bit further about the capacity investment and CapEx spend over the past few years, has pretty consistently been around 2.5% of revenue, and you've grown kind of mid-single digits. Is there a way to quantify what say 100 basis point step-up in CapEx would convert to in terms of revenue growth? Or how do you guys think about it?

I think it's a little early to make that direct correlation. I will say that the numbers you stated historically probably hold for the future based on the revenue projections we had given previously in terms of trending. To the extent that there is a significant ramp-up to that demand and top line, there will be potentially more capital investment than we have maybe seen historically to unlock that given the potential scale of the initial ramps that we're talking about. And that we'll be able to give a much better clarity on when we report in January.

The next question comes from Scott Deuschle of Deutsche Bank.

Evan, for the guidance reduction at RMS, is it CH-53K volume at Sikorsky that's trending lower than expected? Or is it Black Hawk?And then would you expect any of this year's pressure to get caught up next year, such that you ultimately get better growth in RMS next year and land in kind of the same spot?

CH-53K is the largest driver as we work to scale production. We have seen some strength in Black Hawk this particular quarter compared to last quarter. So fourth quarter needs to continue to be a scaling quarter for us and then next year for sure, across both programs. So our intention is to get production scaled and in good shape next year, and we'll be talking about that, of course, more specifically in January. But in terms of main drivers this year, I think you are thinking about it right.

This is -- Scott. This is Jim. There's one thing that I've been pushing for a few years, and it's starting to get traction on the customer side now, which is autonomous Black Hawk for contested logistics and evacuation missions, those kinds of things where we could repurpose Black Hawk over the next couple of decades with about a $5 million per unit autonomy package that can free you up from pilot risk and also from demand on pilots and keep those pilots available for the critical missions that they have to be in the cockpit for.

So basically, it's a pilot optional Black Hawk, we've demonstrated these for the last 2, 3 years. And I think there'll be some interest in the armed forces on those because that tested logistics environment is getting way worse instead of any better.

The next question comes from Rich Safran with Seaport Research Partners.

Evan, if I may, I wanted to follow up on your opening pension remarks. When we spoke in August, I brought up pension offsets and while you weren't specific, you did seem to indicate there were some options for offsetting pension headwinds. Now I understand your comments about '25 cash flow by the pension offsets. But you discuss your plans in a bit more detail and tell us if there's anything else being contemplated that could offset '26 or '27 free cash flow headwinds from pension.

Sure thing, Rich. So just a run-through of pension. So as stated this year, we're targeting to pre-fund a portion of 2026 required $1 billion of cash pension. So anything above $6.6 billion, we would look to put into prepayment of the pension just sort of baselining it. In 2025, when you look at impact to cash from pension, we benefited from pension recoveries in excess of contributions because of the prior prepayments that we made. 2026 will also benefit from recoveries in excess of contributions, but less so than 2025, and as we intend to make some contributions next year.

So the way to think about it is starting in 2027, we expect pension cash contribution to be neutral to free cash flow as pension recoveries and pension contributions should be equal on an annual basis. So while we expect that to be net neutral cash impact in it could present a headwind year-over-year compared to 2026. However, our intention is to offset any of that headwind in 2027 with growth in operational cash.

The next question comes from Pete Skibitski with Alembic.

Jim, and I been obviously, F-35 visibility has improved now, I would think, at least through the midterm with the 18 and 19 definitization in the air vehicle sustainment contract. Could you kind of tie it up for us in terms of the growth outlook on that program and any margin opportunities but also the remaining risk on the Block 4 development effort and how that might impact dynamics?

Sure, I'll start. So we ended the third quarter with a backlog of 265 jets, and that's before adding the extra $151 million that came in the first week of Q4. So we have seen strong support domestically and internationally. And so given -- presuming that the strong efficacy we've seen from lawmakers and the focus on their security from the administration that gives us confidence in maintaining the $156 a year rate.

In terms of growth for the program, the largest growth driver will be sustainment as we stand up new capabilities and deliver more jets. So that will pace overall F-35 growth on a percentage basis.

We also see some margin opportunity across F-35 as we have really hit a good groove on production, and that will continue to translate into operational results. And our top priorities are delivering out this year with a guidance of more like $175 million to $190 million and a big focus on completing Block IV development.

Yes. And with Block 4, Pete, I can speak to that. It's Jim here. And that we have with the incoming administration, the highest level of collaboration, cooperation between government, Lockheed Martin is the prime contractor on the air vehicle and our supplier partners, many of which you would know by name. So RTX is the -- sorry, RTX is a distributed aperture system. BAE is the EW system, Northrop Grumman is our partner with the government on the radars, et cetera. So we have the best collaboration we've ever had and openness with the government not only to work with us in a teamwork fashion across all of those companies and the U.S. government and the Joint Program Office, but also to remove barriers and delays on the government side, which here before hadn't been addressed that aggressively, I'll say. And so we're in a positive conversation with that -- with all the parties that are involved in this Block IV modernization program, which is really, really important, to keep everything on time to keep the production line going. So I'm confident that we will have a successful Block IV rollout and one where the government industry, including the supply chain, are collaborating in ways that we've never done before. So I'm optimistic about Block IV. It is super challenging, by the way.

Some of the technologies that are coming on to the jet and having to be integrated or complex, but I do think that it's just going to make the aircraft even more dominant than ever before. And any [indiscernible] current file, I can tell you, if you've got the best EW, the best sensor suite and the best weapons and the best radar, you're going to win, and that's what we're out for.

The next question comes from Myles Walton of Wolfe Research.

Curious on the fourth quarter implied margins of space in a low 8% range. Is there anything in particular driving that? And then Jim, you mentioned the space based on orbit prototype. Do you anticipate that to be a company-funded exercise. And if so, what kind of R&D burden are you prepared to take for something that is -- if you build it, hopefully, the next administration will buy it.

I'll start, Myles, on your question on the space margins. So really, the only notable thing there really is less risk retirements and some dilution based on mix. So the implied margin 4Q, I would not use as a necessarily a guide for ongoing into next year. It just happens to be a particularly low quarter from a risk retirement standpoint overall.

And so on SBI, we are changing the way we allocate our independent R&D at this company, Myles. And we've been evolving towards this for the last 5 years, but I think now we're basically at the mountain top here, which is the previous way that the company tended to aggregate and fund R&D was -- each of the business units would get sort of a slice of the pie, so to speak, and figure out what were the most important projects for their current or prospective pursuits, if you will and they would internally almost allocate their piece within that.

What we've done over the years is we've migrated that approach to one where it does care for the current needs, if you will, in the business areas, but an increasing proportion of the Corpus and the Corpus hasn't grown that much larger, but it hasn't increased over these years. But much of that Corpus now goes to real highlight corporate level R&D programs. So I give you a couple of them. SBI, the space-based interceptor, is one of those. We are building prototypes full up operational prototypes, not things in labs, not stuff on test stands, things that will go into space or in the air or fly across a missile range. These are real devices that will work and that can be produced at scale.

So the space-based interceptor is 1 we've been pursuing already, and that's all I can say about that. Autonomous Black Hawk, I mentioned earlier, years in the making ready to go into production. We have a production design that we are going to be building the prototype 4 and fly in a year or so. Another is this notion of sixth generation technology insertion into the F-35 and F22. How do we take the Skunkworks activities that were designed to go into NGAD and other potential opportunities, some of which are classified, and we can't talk about those either. But we developed these sixth-generation capabilities, whether it's Stealth, propulsion, inlet designs, coatings, those kinds of things in Palmdale at Skunk Works, which we can actually backward integrate into F-35 and F-22 and are doing so.

So those are a few of the kind of the big bet, home run, heavy allocation to R&D, where we are actually building prototype vehicles to demonstrate to the government perhaps alongside with the new entrants, you could look at it that way, where we can show them a working vehicle that we can produce at scale that they can rely on. We're pivoting our company's approach to that. We're going to keep answering RFPs and RFIs in the traditional way as well. But we are now in the business of self-funding prototypes at the corporate level which we can actually demonstrate real capability leapfrogs to our customers.

The next question comes from Kristine Liwag of Morgan Stanley.

First, on the F-35 lots 18 and 19. Can you talk more about the pricing and expected margin of this? It sounds like the price project from previous years was less than the rate of inflation for what you've signed. And with a firm prices into fee structure, how should we think about the margins of the slot versus the previous lots? And ultimately, what are the key milestones that would unlock that incentive fee for higher margin later down the road?

Kristine. It's important to note that with Lot 19, we are transitioning to a true firm fixed price contract relative to the FPF that we've seen previously. So that's going to give us the most opportunity to truly drive operational performance, particularly with the investments that we've made in the aircraft and overall changes to digitizing our operations. So therefore, we believe we've got some margin opportunity in Lot 19 relative to prior lots. And then additionally, as we worked through some of the challenges we saw in TR3, that clears a deck in a sense of allowing kind of a more stable baseline for us to drive performance on F-35. So without getting to specifics on the margin expectation, we do use some opportunity on F-35 going forward relative to prior results.

The next question comes from Gautam Khanna with TD Cowen.

I was curious if you could talk a little bit about some of the bigger international campaigns you're pursuing right now across the segments.

Absolutely. From an international perspective, we are looking really across the entire company. Each business area has key international pursuits. Clearly, on the ammunition side, there's strong demand for air and missile defense products and potentially new customers emerging there as well. From an RMS perspective, international Black Hawk continues to be a focus for us as well as our radar programs. from a space perspective, we are looking at international satellite opportunities with some key competitions coming up in the next year. And from an aeronautics perspective, naturally, F-35 continues to be a big focus for us as well as C-130 and F-16. Anything you'd add, Jim?

The next question comes from Rob Stallard of Vertical Research.

Thanks. Just wanted to follow up on your answer to Myles' question earlier about R&D and some of the comments you made through the call on CapEx. It does sound like we could be expecting a structural step-up in what Lockheed Martin has to invest as an individual company in either CapEx or IRAD going forward. So does this mean we need to reconsider what, say, the percentage of revenues that goes into CapEx or the percentage of revenues that goes into company-funded R&D is likely to be going forward?

Rob, we're not intending to step up the percentages of revenue on either case. What we're doing is more material allocations of that Corpus. Again, the Corpus isn't necessarily changing in a material way is not our plan. It is allocating it in a better way to compete and meet what the government's requests are these days. And so there's less traditional contracting going on in the government at the moment in some areas, not in all, saw those huge awards we were getting. But we do want to compete in a more effective way and we've been working towards this again, with the same proportions and percentages roughly of revenue allocated to R&D and CapEx. And those are the boundary conditions that we intend to stay in on both of those investment scenarios.

The next question comes from Mike Ciarmoli with Truist Securities.

Maybe just on the MFC margin. Fourth quarter, it looks like we're going to get a nice above 10% sequential step-up in growth, the margins look like it could be for the lower of the year. Is that related to the classified program? Or what's sort of the dynamic there given the volume growth growth on some of the core profitable legacy programs?

MFC margins continue to pace the overall company and be strong. We are scaling multiple munitions, as you know. And with that comes a little bit of dilution on the upfront part of that scaling, those programs still -- we expect the normal margins we would have seen on prior production programs just with the very accelerated growth, that's just creating a little bit of dilution on the front end, and we've got long-term confidence in MFC overall performance.

The next question comes from Scott Mikus with Melius Research.

I wanted to get back to Doug's question, specifically dive into the classified aeronautics program. I think the most recent disclosure in the 10-Q that a portion of the charge was related to additional phases, I presume that's some sort of fixed-price production options. Do you have those prices for those options locked in with suppliers? If not, I'm just kind of wondering what kind of inflation rate you're assuming for material and the broader supply chain?

We can't speak to exactly what each of those phases represent. But you're right that there is firm fixed price all the way through on this program and a lot of it is suppliers. So we continue to partner with our suppliers on this to make sure that we have a good line of sight to what our cost basis is there with greater than 70% negotiated to date and allowance for any growth assumed in those EACs. So this will be a program we'll continue to closely monitor and keep updated on. But with respect to suppliers, not seeing any elevated risk on that program at this point.

The next question comes from Sheila Kahyaoglu with Jefferies.

Maybe I wanted to clarify, I think it was Richard who asked on the '26 and '27 free cash flow. Can we talk about just the moving pieces of that bridge inclusive of pension and CapEx?

Absolutely. So with respect to 2025, what I want to make clear is that we are not showing any weakness in our free cash flow estimate compared to prior estimates. What we're looking to do is give more clarity on how we intend to deploy that cash at the end of the year. And so still staying within the range we gave allow for prepayment of next year's pension which is right now required -- expected to be $1 billion. So no change in 2025 to date, just more clarity on intentions. With respect to 2026, no change to our prior number that we had given. As you noted, we do expect to have additional pension contributions next year. So right now, assuming no incremental acceleration this year, you've got $1 billion penciled in for that next year. And so think of a portion of that being offset by cash earnings, which is why we will not be down the full $1 billion compared to this year with more clarity to come.

The next question comes from Peter Arment with Baird.

Jim, have you guys quantified Golden Dome in terms of -- there's $27 billion of initial funding. And obviously, there's a number that's been thrown around at $175-plus billion. But Lockheed seems like it's really well positioned across so many existing systems and have you guys quantified what you think that opportunity is? I know General [indiscernible] will be out next month with this architecture, but I think there's a lot of existing systems that are in play here and do you guys have the capacity to support it.

Yes. So Peter, the only way to quantify the potential revenue opportunity is to actually see the mission technology road map over time for Homeland Air Defense, that's not available yet. And what I mean by that is what sites with what radius and what point of time do you want to defend and from what actual threats. Until that's all laid out, we actually won't have any sense of where the budget is being allocated for to actually create the contracts with the industry to do that. Now we think that we've got a very, very significant proportion of what the logical product sets would be no matter how you lay out that architecture and what order you put in the geographies, the domains, et cetera, whether again, it's radars, it's space assets, it's ground-based missiles, et cetera. We're a very, very important player in each of those arenas. We'd love to be able to quantify and give you all ranges on this. But until that pattern is laid out and the budget allocated right along with it, we can't make an estimate of it.

All right. Great. Thanks, everybody. I think we've come to the top of the hour. So I'm just going to hand off to Jim for some final comments.

Hey, thanks, everyone, for joining our call today. In closing, our record backlog, strong sales growth and our solid operational performance give Evan and I great confidence that we're going to finish the year strong. I want to thank our 120,000 Lockheed Martin employees for continuing to deliver these effective reliable solutions that we've been talking about this morning. They keep America and our allies safe and I look forward to speaking with you again in January for our fourth quarter and full year earnings call.

This concludes today's conference call. Thank you for joining. You may now disconnect.