Lockheed Martin (LMT) Q2 2025 Earnings Transcript

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DATE

• Tuesday, July 22, 2025, at 11 a.m. EDT

CALL PARTICIPANTS

• Chairman, President, and Chief Executive Officer — James Taiclet
• Chief Financial Officer — Evan Scott
• Vice President and Controller — Maria Ricciardone

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RISKS

• Lockheed Martin recognized $1.8 billion in total losses across legacy programs in Q2 2025, including a $950 million charge on a classified Aeronautics program, reflecting cost overruns and continuing execution risks.
• The IRS asserts a $4.6 billion additional income tax liability related to an accounting method change, and is accruing $100 million in interest expense as it contests this claim.
• Free cash flow in Q2 2025 was a usage of $150 million due to working capital headwinds, delayed F-35 Lot 18/19 awards, tariff impacts, and unusually high receivables at quarter-end.
• 2026 free cash flow is projected to decline to around $6 billion (non-GAAP), which is below the previous expectation for absolute growth, citing increased investment demands and ongoing development challenges in complex programs.

TAKEAWAYS

• Sales: $18.2 billion in second quarter sales, comparable year over year and up sequentially from the first quarter, driven by growth in Missile and Fire Control, F‑35 production, and Strategic Missiles, partially offset by charges in Aeronautics and Rotary and Mission Systems.
• Segment Operating Profit: $570 million segment operating profit for Q2 2025, including a $1.6 billion impact from Skunk Works and Sikorsky program charges; excluding charges, operational performance showed mid single‑digit sales growth and a high single‑digit increase in profit for Aeronautics.
• Program Charges: $950 million charge for a classified Aeronautics program, $570 million loss on the Canadian Maritime Helicopter Program, and $95 million on the Turkish Utility Helicopter Program, each following customer negotiations and updated risk assessments.
• GAAP EPS: $1.46 earnings per share for Q2 2025, reduced by $5.83 due to the combined effect of program losses, impairment tied to NGAD, and a tax reserve.
• Free Cash Flow: Usage of $150 million in free cash flow for the second quarter, driven by approximately $600 million in F-35 working capital headwind, $100 million in tariff impacts, and delayed collections, but most expected Q2 collections were recovered in July.
• Shareholder Returns: $1.3 billion returned via dividends and share repurchases in Q2 2025.
• F-35 Deliveries: 50 aircraft delivered in Q2 2025, totaling 97 for the year to date, with full-year deliveries targeted at 170–190 in 2025; international demand remains high and new deals announced for the United Kingdom and Belgium.
• Operating Segment Details: Aeronautics sales grew 2% year over year in Q2 2025, with an underlying mid single-digit increase excluding the classified program; Missiles and Fire Control sales rose 11%, with 6% profit growth; Rotary and Mission Systems sales fell 12% due to program losses; Space segment sales increased by 4% year over year, with profit up 5% compared to Q2 2024.
• Backlog: $167 billion backlog at Q2 2025 quarter-end, with anticipated growth in the second half of 2025 from expected awards, including F-35 lots 18/19 and PAC-3 production.
• 2025 Guidance: Sales outlook unchanged at $73.75 billion to $74.75 billion for FY2025; segment operating profit now $6.6 billion to $6.7 billion (including charges); EPS lowered to $21.70–$22.00; free cash flow maintained at $6.6 billion to $6.8 billion.
• 2026 Free Cash Flow Outlook: 2026 free cash flow is expected to be closer to $6 billion, citing program investment needs and cash headwinds from development programs.

SUMMARY

Lockheed Martin's (NYSE:LMT) quarter was defined by significant program charges, driving down operating profit, GAAP earnings per share, and 2026 free cash flow projections. The Aeronautics classified program, Canadian Maritime Helicopter Program, and Turkish Utility Helicopter Program were identified as major sources of risk, resulting in material contract loss recognitions (GAAP). Management highlighted aggressive oversight reforms and customer engagement on problematic programs but acknowledged the persistence of fixed-price risks over multiple years. The company reported robust underlying demand and showcased the combat performance of flagship systems such as F-35, PAC-3, and THAAD, supporting management’s reaffirmed full-year sales guidance of $73.75 billion to $74.75 billion and backlog growth expectations for 2025.

• Scott stated, "the IRS now asserts that we owe $4.6 billion of additional income tax associated with a tax accounting method change … We stand by our tax accounting method … pursuing remedies through the IRS Independent Office of Appeals and if necessary, through a judicial proceeding."
• Taiclet cited the "criticality" of a classified Aeronautics program and described related charges as "disconcerting to us" underscoring the depth of the challenges but emphasized, "We will continue to ensure that every bid price proposal and contract structure does not introduce outsized or unbounded future risk."
• Management expects significant backlog increases in the second half of 2025, driven by upcoming contracts across multiple programs, beyond the potential tailwinds from the Golden Dome Homeland Defense initiative, which is not yet reflected in the backlog.
• Lockheed Martin described a strong production pipeline, including completion of TR-3 hardware integration on F-35s, upcoming multiyear CH-53K contracts, and successful missile tests, reinforcing the relevance of flagship systems in both U.S. and international defense planning.

INDUSTRY GLOSSARY

• TR-3: Technical Refresh 3, a major F-35 hardware and software upgrade integrating Block 4 capabilities.
• NGAD: Next Generation Air Dominance, the U.S. Air Force's program for a sixth-generation fighter aircraft.
• Golden Dome: A proposed multi-layered missile defense architecture for the U.S. homeland, mentioned as a strategic initiative but not yet manifested in formal contracts.
• PAC-3: Patriot Advanced Capability-3, an advanced interceptor missile for air and missile defense.
• THAAD: Terminal High Altitude Area Defense, a missile defense system intended to intercept and destroy short, medium, and intermediate-range ballistic missiles.
• CH-53K: The latest variant of a heavy-lift cargo helicopter developed for the U.S. Marine Corps.
• LRDR: Long Range Discrimination Radar, a U.S. missile defense sensor developed by Lockheed Martin.
• C2BMC: Command, Control, Battle Management, and Communications, a missile defense network supporting integrated operations.
• JASSM: Joint Air-to-Surface Standoff Missile, a long-range, conventional, air-to-ground, precision-guided missile.
• LARASM: Long Range Anti-Ship Missile, a precision-guided, air-launched, anti-ship missile.
• HIMARS: High Mobility Artillery Rocket System, a lightweight mobile rocket launcher.
• PRISM: Precision Strike Missile, an Army tactical missile system.
• CPS: Conventional Prompt Strike, a U.S. Navy hypersonic weapons program.
• ULA: United Launch Alliance, a joint venture between Lockheed Martin and Boeing for space launch services.
• MH-60 Romeo: The U.S. Navy’s multi-mission maritime helicopter.
• CMHP: Canadian Maritime Helicopter Program, a Sikorsky/Lockheed Martin program for the Royal Canadian Air Force.
• TUHP: Turkish Utility Helicopter Program, a Sikorsky/Lockheed Martin military helicopter initiative for Turkey.
• F-35 Lot 18/19: Contracted production batches of the F-35 fighter jet, mentioned as forthcoming backlog drivers.
• ASC 606: Accounting Standards Codification Topic 606, governing Revenue from Contracts with Customers, referenced regarding IRS tax treatment dispute.

Full Conference Call Transcript

James Taiclet: Maria. Good morning, everyone, and thank you for joining us on our second quarter 2025 earnings call. I'm going to cover four things today: our quarterly results, details of the recent effectiveness of our systems and platforms in combat operations, the current status of the budget and customer environment, and an update on the F-35 program. The recent highly effective performance of many mission-critical Lockheed Martin systems has resulted recently in our customer's direction to accelerate the scaling of production, as well as the development of some advanced technologies. At the same time, our ongoing program review process identified new developments that caused us to reevaluate the financial position on a set of major legacy programs.

Evan Scott, in his new position, led this review, which was also informed by concurrent customer inputs and negotiations, current operational performance, and future risk profiles. As a result, we are this quarter taking a number of charges to address these newly identified risks and prepare the company to fully focus on the growth opportunity we expect as the result of heightened interest and demand for Lockheed Martin's products and technology. As to our quarterly results, as you saw in our press release this morning, we reported $18 billion of sales, invested $800 million in infrastructure and innovation for growth, and returned $1.3 billion to our shareholders in the second quarter.

We also recognized losses of $1.8 billion across several legacy programs. As a result of the deepened review process that I just described and also a tax matter. The actions that we have taken this quarter follow multiyear concerted long-term efforts to improve these programs' performance in light of the original contractual terms. We are dedicated to both supporting our customers' national defense priorities while striving to maintain our contractual commitments in an economically viable way on behalf of you, our shareholders as well.

We take these financial charges very seriously and are redoubling our focus on program management and performance under existing contracts across the company, while also ensuring that all future contracts more robustly assess and account for future program and technical risk. Starting with Sikorsky's Turkish utility helicopter program, or TUHP, and the Canadian Maritime Helicopter Program CMHP, in the second quarter, the leadership teams for these two programs held a series of direct in-depth discussions with their respective customers. And as a result, recognize losses when we revise the cost and sales estimate for these programs.

For TUHP, we've reached a notional agreement to restructure the program, including a charge of a change of scope of work due to the impacts of US government sanctions on Turkish entities and persons involved in that program. For CMHP, we are focused on providing additional mission capabilities, enhancing logistical support, and extending the fleet's life while we continue discussions to potentially restructure certain contractual terms. Turning to the classified program in aeronautics, our mission at Skunk Works pushes the boundaries of science and technology to deliver highly advanced solutions that provide our customers a step function advantage over potential adversity.

This particular program team discovered new insights in the quarter that required us to adjust our expected future costs on that program, and then recognize the charge for doing so. I acknowledge the losses on this classified program are significant. Again, we are taking these charges very seriously and have initiated changes in program team management and assigned experts across the company to approve the performance and oversight of this program under a comprehensive risk identification and corrective action plan. This is a highly classified program that can only be described as game-changing capability for our joint US and international customers. And therefore, it is critical that it be successfully fielded.

With our enhanced oversight of this program, and rapid incorporation of lessons learned, we expect to continue to reduce risk over the next few years as we move through the key milestones of this very advanced system. The criticality of our work was made clear last month in a high-stakes demonstration of modern deterrence and combat readiness. Lockheed Martin's capabilities were at the center of recent US military operations in The Middle East, reinforcing the company's essential role to American and allied national security. Pilots flying the F-35 Lightning II and the F-22 Raptor stealth fighters led the operation, providing the air dominance and defense suppression required for the bombers to reach Iran's hardened nuclear sites.

Our platforms operated essentially undetected in highly defended and contested airspace, underscoring the value of advanced stealth, superior electronic warfare, and broadband communications capability. This tactical success is a real-world confirmation of Lockheed Martin's leading role in combat-proven airpower. Our capabilities were also integral to safely and 100% effectively defending American troops. When Iran retaliated with a salvo of ballistic missiles on US forces, stationed at Al Udeid Air Base in Qatar, our PAC-3 missiles successfully intercepted the incoming threats. This engagement executed by the Patriot missile system occurred in a region also supported by THAAD, our terminal high altitude area defense, and Aegis.

These systems form a multiple-layer defense shield, protecting US strategic assets and our allied nations in the Middle East. This moment was one of several recent real-world events that validated the operational reliability of our integrated air and missile defense portfolio and underscored its scalability in joint and allied operations, including the ability to coordinate closely with our regional partners like the Qatar Amiri Air Defense Force. These are the exact solutions needed to make Golden Dome for America a reality. Lockheed Martin is the mission integrator with ReadyNow capabilities across all phases of the missile defense mission. To support this essential program.

In addition to THAAD, PAC-3, and Aegis performing in combat, we also demonstrated our readiness in the missile warning and command and control technologies needed to make Golden Dome Homeland Defense System a reality. In addition, and in partnership with the Missile Defense Agency, we successfully executed a breakthrough flight test recently. The Lockheed Martin long-range discrimination radar, LRDR, successfully detected and tracked a representative live ballistic missile threat. The system then integrated the data into the NDA's missile defense system. Lockheed Martin is the national team lead for this missile defense network known as C2BMC.

We can leverage this experience as well as our expertise in space satellite reconnaissance, tracking and communications, and the next generation interceptor to rapidly deliver homeland defense capabilities for Golden Dome. Our major systems and platforms are performing very effectively in actual combat operations and thereby contributing today to global deterrence. These achievements reinforce their relevance in the budget process as well as ongoing discussions with the administration. For example, the US government's focus on securing the homeland and deterring aggressors will lead to a significant increase in munition spending over the coming years. I'll provide a few examples of that in a moment.

In addition, cornerstone platforms like the F-35 and CH-53Ks remain not just relevant but essential to national security of The United States and its allies, due to their unique range, payload, and other capabilities. As part of the FY26 budget request, the US Navy marked its intent to purchase PAC-3 for the first time. An important step for PAC-3 Aegis integration. This is the result of several years of internal investment at Lockheed Martin and a successful flight test last year. Moreover, the US Army has requested quadrupling the production of PAC-3 missiles.

And we are also in discussions with the administration about scenario planning to increase the production rates of a number of other munitions and launchers significantly and quickly. Hypersonics have also been elevated in priority. The president's fiscal year 2026 budget request included nearly $400 million for production of the Air Launched Rapid Response Weapon or ARROW, The United States' first proven hypersonic weapon capable of being launched from an American aircraft. This program is a great example of the kind of speed and agility we can achieve. Less than a year after Lockheed Martin began rapidly developing this program, Arrow had its first flight test.

We have full confidence in the maturity and production readiness of Arrow's hypersonic strike capabilities and we look forward to continuing our partnership with the US Air Force to transition the program into production. Also in the hypersonic arena in May, the US Navy publicized a successful end-to-end flight test of our conventional prompt strike or CPS missile from the Cape Canaveral Space Force Station. This test marked the first launch of CPS using the Navy's cold gas launch approach that will be used in sea-based hypersonic field. Further, the US Coast Guard in its budget included additional MH-60 Romeo's new ships with Lockheed Martin C2 systems, and C-130J.

And more recently in July, we reached a price agreement with the US Navy on a five-year multiyear procurement for CH-53K lots nine through 13 and that'll be for a minimum of 85 aircraft. The award is targeted for late in the third quarter with initial deliveries commencing in 2020 now. So before I hand it over to Evan, I'd like to provide an update on the status of the F-35 program. We delivered 50 aircraft in the quarter, bringing our total F-35 deliveries to 97 so far this year. And at 207 since we resumed deliveries last year. We also remain on track for 170 to 190 deliveries this year 2025. We have completed TR-3 hardware integration.

Earlier this month, we released new software to the fleet continuing our maturation and fielding of advanced block four capabilities. This update improves the pilot interface, and provides additional weapons and electronic warfare features. We're also continuing to see strong international demand for the F-35. The UK announced its plan to procure 12 F-35A's as part of program of record. Belgium also announced that we'll be adding 11 aircraft to their fleet. And government officials from Denmark have expressed their intent to procure additional aircraft as well. Finally, I want to take a moment to commend the DOD's recently announced investment in rare earth mining and magnet production right here in the United States.

Led by Deputy Defense Secretary Steve Feinberg, and with the strong support of Defense Secretary Hagstadt and, of course, President Trump, this groundbreaking public-private partnership will ensure the supply of rare earth magnets needed in F-35s, cruise missiles, and countless other defense and nondefense applications. I'll turn it over to Evan now to share more about our financial results.

Evan Scott: Thanks, Jim, and good morning, everyone. Today, I'll provide an overview of our consolidated financial results for the second quarter, then hand off to Maria, who will cover business area financials, and I'll come back at the end to discuss our updated outlook. Starting on chart four, second quarter sales were $18.2 billion, comparable year over year and up sequentially from the first quarter. We saw strong growth on missile programs within MFC, an F-35 production at Aeronautics, and on strategic missiles within space. Partially offset by the impact of the charges at Aeronautics and RMS. More on those in a moment.

Excluding the charges, sales increased in the mid-single-digit range continuing the solid underlying growth from the first quarter and setting us up well to achieve our full-year goal. Looking at segment operating profit of $570 million, Jim mentioned the $1.8 billion in total charges. While the operational portion of the losses hit that segment operating profit was $1.6 billion related to the charges at Skunk Works and Sikorsky. With the impairment and tax item falling below the line. First, the Aeronautics classified program.

As Jim mentioned, the process control, and resource changes we implemented following the fourth quarter of 2024, along with additional performance data on the program, resulted in new insights that led us to recognize an incremental $950 million of reach for loss the second quarter. To provide more detail, we have experienced design, integration, and test challenges as well as other performance issues on this program. Those challenges and performance issues continued into 2025 and had a greater impact on scheduling costs than previously estimated. As a result, we performed a comprehensive review of the design, integration, test, and other processes to achieve the technical requirements of the program.

Based on this review, and ongoing discussions with the customer and teammates, we made a significant change to our processes and testing approach resulting in a significant update to the program schedule and cost estimates. Based on this, we believe that recognizing this incremental charge is a prudent continuation of the comprehensive corrective actions and risk mitigation approach implemented at the start of the year which continues to demonstrate solid progress. Our continued investment in this program reflects our ongoing confidence in its criticality for national security. And we remain excited about the future prospects for this solution. Next, on the Canadian Maritime Helicopter Program, or CMHP, we've been in negotiations with the Canadian government for some time now.

Attempting to reach a mutually beneficial solution. Based on recent conversations, the company made a decision to provide enhanced capability to upgrade the baseline fleet, improving helicopter utilization and probability of recovery as part of our flight hour-based support contract over the coming years. These actions resulted in the company recognizing a $570 million loss. This quarter. Lastly, the Turkish utility helicopter program or US government sanctions on Turkish entities and persons have affected the company's ability to perform under this program. We've been communicating with a prime contract customer regarding alternative paths. And during the second quarter, the company recognized a $95 million loss reflecting the latest status of those discussions. I recognize that these additional charges are disappointing.

We have a focused team engaged with these programs on a daily basis. Actively implementing our adjusted approach and working to prevent charges like this going forward. We continue to learn, and the fact is these are important, although challenging programs, and Lockheed Martin has a long legacy of innovation and navigating complex issues. We're confident over the long term that we'll be able to manage these issues and continue extending our track record of delivering for the customer, and our shareholders. As part of our ongoing review process, and as I've stepped into the CFO role, we've added rigor to our existing program management controls and processes.

Engaging subject matter experts from across the corporation holding regular independent review teams, and increasing oversight. Especially in cases where there are known technical complexities, contractual nuances, and other unique execution challenges. The lessons learned here are being shared to ensure our risk identification and mitigation efforts are optimized across the portfolio. Moving to earnings per share, our GAAP results were 1.46 in the quarter inclusive of the impacts from the program losses previously mentioned. As well as impairment charges related to the NGAD decision and a reserve for uncertain tax position. In total, these items reduced EPS by $5.83.

On the tax item, the IRS now asserts that we owe $4.6 billion of additional income tax associated with a tax accounting method change we made in conjunction with the ASC 606 implementation and the 2017 tax legislation. The IRS initially approved our method changes, accepting our interpretation and application of the law. But later withdrew those acceptances. We stand by our tax accounting method being accurate and are pursuing remedies through the IRS Independent Office of Appeals and if necessary, through a judicial proceeding. We are accruing interest of $100 million in our income tax expense as part of our further evaluation of this matter. Moving to cash, second quarter free cash flow was a usage of $150 million.

Our operating cash flow was impacted by a few notable timing items in the quarter. First, the delay of the combined F-35 lot eighteen nineteen award created approximately $600 million of headwind within working capital. Second, we realized quarter to date tariff impacts of approximately $100 million. And lastly, we ended Q2 with an uncharacteristically high receivables balance due to milestone and collection timing. We attribute most of these slower collections to timing and we've collected a majority of the amount we had expected to collect in Q2 during July. In addition, we anticipate the F-35 lot 1819 award in Q3 will liquidate a significant balance from contract assets.

Finally, we returned approximately $1.3 billion to shareholders through dividends and share repurchases as part of our dynamic and disciplined capital deployment strategy. This is in addition to the continued reinvestment in the business that Jim detailed earlier. Now I'll hand it over to Maria to discuss the business results in more detail.

Maria Ricciardone: Thanks, Evan. Okay. Starting with aeronautics on chart five. Second quarter sales at Aero increased 2% year over year to $7.4 billion. The increase was primarily due to higher volumes on F-35, mainly on production contracts and was partially offset by $360 million of lower volume from the classified program loss. Excluding the impact of the classified program loss, sales would have been up mid-single digits year over year. Segment operating profit decreased significantly year over year in the second quarter. Primarily due to the $950 million loss on a classified program. Excluding the impact of the classified program loss in both periods, segment operating profit would have increased high single digits.

Turning to Missiles and Fire Control on Chart six. Sales at MFC in the quarter increased 11% from the prior year, to $3.4 billion driven by higher volume on multiple tactical and strike missile programs including JASSM LARASM, HIMARS and PRISM. Segment operating profit in Q2 improved by 6% year over year to $479 million driven by higher volume and favorable mix. Lower profit rate adjustments on PAC-3 partially offset this growth. The photo on the right shows a VAD, In addition to THAAD's performance in combat that Jim talked about, we delivered the eighth THAAD battery to the U. S. Government in the quarter. Shifting to Rotary and Mission Systems on Chart seven.

Sales at RMS declined 12% in the quarter to $4 billion primarily driven by the loss impacts of $3.00 $5 million related to the CMHP and TOHP programs at Sikorsky. Excluding the program loss impacts, sales at RMS would have declined mid-single digits year over year, due to lower volume on Seahawk programs at Sikorsky and on the Canadian Surface Combatant Program at Integrated Warfare Systems and Sensors. Operating profit at RMS decreased significantly in the second quarter versus prior year due to the CMHP and TUHP program losses of $665 million. Excluding these program losses, operating profit at RMS would have been comparable year over year.

The picture to the right shows an LRDR, which recently performed a breakthrough flight test. As Jim mentioned. And on chart eight, we'll wrap up the business area discussion with space. Space sales increased 4% year over year. Due to higher volume at Commercial Civil space primarily on the Orion program and at Strategic and Missile Defense. Driven by next generation interceptor and fleet ballistic missile programs. This growth was partially offset by a decrease at National Security Space. Space operating profit increased 5% compared to Q2 2024. This increase was driven by higher profit booking rate adjustments, primarily due to favorable performance on commercial civil space program. Equity earnings from United Launch Alliance, ULA, were flat versus prior year.

The picture to the right is of the eighth GPS III satellite that successfully launched from Cape Canaveral Space Force Station in Florida in May and achieved signal acquisition. In addition, the Space Force ordered two additional GPS IIIF satellites in the quarter. Now I'll turn it back over to Evan.

Evan Scott: Thanks, Maria. Shifting gears, I'll walk through guidance on chart nine. We've updated our expectations for Lockheed Martin's 2025 financial outlook to incorporate the impact of several items, including the aforementioned charges this quarter, our current estimation of the tariff impacts, and anticipated tax benefits from the recently passed legislation the One Big Beautiful Bill Act. With a solid year-to-date growth and expectations for continued ramps in the second half of the year, we are reaffirming our sales guidance of $73.75 billion to $74.75 billion. On a related note, we have line of sight to increase backlog in 2025 with a handful of significant awards expected in the second half of the year.

Including F-35 lot eighteen nineteen, JASSM LARASM large lot procurement, PAC-3 production, CH-53K multiyear, and classified space, providing a solid foundation for sustained future growth. Segment operating profit is now expected to be in the range of $6.6 billion to $6.7 billion with an implied midpoint margin of 9%, reflecting the $1.6 billion of program charges. We've lowered our earnings per share estimate to a range of $21.70 to $22, incorporating the impacts from the charges impairments, and tax reserve. Turning to cash flow, we are maintaining our previously provided range of $6.6 to $6.8 billion for free cash flow in 2025. There are a few offsetting items worth discussing.

First, the Aeronautics Classified program challenges negatively impact cash flow and that, along with the tariff impacts, combine to $500 million of headwind this year. On the other hand, the administration's legislation is anticipated to provide approximately $400 million to $600 million in cash tax benefits, primarily related to R&D capitalization. The 2025 outlook does not include a pension contribution. Before wrapping it up, I'd like to take a moment to look beyond 2025 for free cash flow specifically. Previously, we discussed a baseline case of low single-digit absolute free cash flow growth through 2027 with an upside case of mid-single-digit growth being possible if we could unlock working capital improvements and offset the multiyear pension headwinds.

This quarter's events and the rapidly developing opportunities are driving investment demands in the form of advancing these complex programs, accelerating capacity, and enhancing capability across our systems. As a result, our 2026 free cash flow could be closer to $6 billion. That said, we remain confident in Lockheed Martin's prospects for growth and value creation. And remain committed to returning at least $6 billion per year to shareholders through our reliable dividend and share repurchase program. In summary, on chart 10, we're excited about what the future has to offer. And we look forward to making progress toward our goals in the second half of the year including continuing to execute on our strong backlog of $167 billion.

I will be partnering with Jim Frank, and the rest of the leadership team to ensure we continue to drive operational excellence. Ensuring we deliver on our customer and programmatic commitments, while also generating solid financial returns that create long-term value for our shareholders. With that, Sarah, let's open up the call for Q&A.

Operator: Thank you. You will hear an enunciator indicating you have been placed in queue. You may remove yourself from the queue at any time by pressing star then one again. We ask that you please limit yourself to one question. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star then one. Your first question comes from Myles Walton of Wolfe Research. Your line is open.

Myles Walton: Thanks. Good morning. Jim and Evan, not sure who wants to take it first, but why should investors feel at all comfortable that you've derisked the problem programs, particularly the Aero classified one? And I listened to the changes being made on process and increased attention, it sounds similar to 4Q. So I'm just trying to reconcile what's what are you doing different No. 1, why should we feel comforted that this is derisked it? And then second or thirdly, can you just give us some color clarity as to how long you're under this onerous contract?

James Taiclet: Good morning, Miles. It's Jim here. I'll start off and I'll offer it to Evan for more detail. So with Evan's succession as the CFO role earlier this year, and evidence of further program performance issues beginning to reemerge, early in 2025. We reconstituted the program review team for classified aeronautics program. So we had a different team wider expertise from across the company, and a higher level screw higher level management as part of the scrutiny. Of the program. So we once we put that team together, having added additional expertise, as I said, from across the company, we reassessed the newly evident trends of cost increases.

And reevaluated all the program assumptions to the most detailed level of depth. A level below what had been done previously. Once these assumptions, and they were long standing assumptions, assumptions, were rebaselined to the then current performance. The additional reach forward charge was calculated based on numerous future years of fixed price contract commitments. Unfortunately, due to the nature of the classification, we can't say how many years that is. But it is I'll say it is not unlimited. It's to the long to the two long trouble programs at Sikorsky, new in-depth discussions were held with each of the two customers in the 2025 as to the future course of the contracts, as you heard.

This feedback along with the internal program reviews of both again led by Evan in his new role, resulted in the charges that we're reporting in those two programs. So I assure you that going forward, these three programs will continue to be monitored with similar oversight regime including recurring senior management participation, a more robust sequence and tempo of that senior management reviews as ever before. Than ever before. And we expect to be able to continue to reduce risk and promptly identify emerging issues and corrective actions if and when they're needed. We'll also be applying this level of oversight and scrutiny to key programs across the company.

And in addition, given the critical importance and customer support for these three particular programs, we will be and I will be actually further engaging their respective customers on opportunities to restructure these program contracts to moderate the currently identified and other potential risks while meeting the national security objectives of those customers. And finally, I wanna reiterate the policy that was put in place at Lockheed Martin five years ago. That there are no longer any must win programs. We will continue to ensure that every bid price proposal and contract structure does not introduce outsized or unbounded future risk as we're seeing on these three programs. Evan, you wanna add anything to that?

Evan Scott: Yeah. I fully agree with that approach and taking on what you've asked me to look on here. And I would just add as well that the additional controls and rhythms that we established after 4Q gave us better insight into the challenges as they emerged. So that's a commitment to continue transparency, and that's what allowed us to signal in May that we were experiencing cost challenges to have better insight as the continued program move forward. And note at that same time, we signaled cost confidence in the MFC classified program in that we have the same established discipline there.

So we took the right amount of time to go through every assumption that we've got the best possible estimate to complete the multiyear process ahead of us. So I'll commit. We'll continue to be transparent. As we perform on these programs actively monitoring, managing those risks, and think of every quarter as a burn down of risk as we work through the development tasks. On these game-changing products, and we will keep you all updated as we go.

Operator: The next question comes from Ronald Epstein of Bank of America. Your line is open.

Ronald Epstein: Hey. Yeah. Good afternoon morning, guys. So kinda two things here. Just a quick follow on to Miles' question because I don't think you answered it. Why did it take a billion dollars of charges to change the way you're reviewing this thing? That's to Jim and then to Evan. Maybe you're kinda more from an accounting perspective. The $1.8 billion of charges, how do we think that flows through to cash You know, they're kinda can you do the bridge for 25? And then maybe the bridge in the 26? Right? Because there's some of this, it's know, probably not all $1.8 billion, and you got a cash impact. How much does, and how should we think about that?

James Taiclet: Yeah. Hey, Ron. So as Evan sort of stated, in the fourth quarter review, 2024 financials, when we took their first charge we actually reset the entire way that program is monitored. I'll say. And in that more rigorous monitoring system, we started to see there's a it's evidence signaled publicly in May, as he said, additional cost risk. There was an anomaly, as we call it, in the development phase. That was gonna add cost and time as well. So these were and these are new discoveries that resulted in the charge that we're taking today.

We didn't recognize or know that these trends were happening until the year began, and we started with that new monitoring system from fourth quarter, seeing the cost rise, which we signaled. But then we have to flow it through to, again, multiple years of fixed price obligations to the government that were agreed to in 2018. So that's why you see the magnitude Now will there be opportunity to reduce that? We hope so. Part of it is potential contract restructuring.

The customer's aware of and will become increasingly aware after today of the cost that the this program is putting on the company And I think they're open to figuring out ways to make it more reasonable As I said, while keeping the national security commitments that are that are required. So that's the explanation. Like I said, we take it we take it very seriously. You know, it was you know, disconcerting to us when we started to see the cost growth after we've done the review previously. But that's the nature of something of this magical status, I would call it. We probably won't be able to talk about what that is for many years to come.

But I can assure you that it's gonna be in high demand for a very long time. Well beyond the fixed price commitments I would expect, let's say. So I'll stop there. Evan, anything else?

Evan Scott: Yes. So, Ron, just to address the cash specifically, So we previously had assumed some cash usage on this program in our prior cash flow guidance. As of today, we're assuming a usage of $500 million of cash tied to the Aero classified program this year, which is baked inside of our cash guidance that we're reiterating at 6.6 to 6.8. Looking into next year, steps down a little bit. Think of roughly 400 ish million dollars of cash usage next year. Which we factored in by giving the cash flow guidance for next year.

And then it continues to step down We have line of sight to when it goes positive and Jim's point, I can't state exactly when that is, but it's within our line of sight.

Operator: The next question comes from Rob Stallard with Vertical Research.

Rob Stallard: Thanks so much. Good morning. Morning. Morning. Morning. Jim, a quick question for you on the F-35. The administration's FY26 request for the DoD shows a reduction in what they want. From the aircraft. And I was wondering if you've got any explanation as to the why the customer is saying this. And then secondly, how easy is it to actually swap out any relinquished DOD slots if that occurs? With export customers. Thank you.

James Taiclet: So, Rob, you're absolutely right about the president's budget, is the first step in the actual congressional process of creating orders and allocating appropriations to those orders. And so where we're at in the process now is that the house arms appropriations committee marked up the 47 to 69 So the house added in appropriations actually. Right? So 22 jets, that's the last step in there. Process. The senate's not as far along. The senate Armed Services Committee has marked it up to 57. So that's an increase of ten. Historically, the appropriations committees have the final say on numbers. So we know what the House is position is on that.

We don't know yet the sentence, but I would be hopeful. You know, we certainly can't guarantee this outcome but I'd be hopeful that the House Appropriations Committee marked might flow over the senate, but that's that's a hopeful you know, future. We can't guarantee that. So there will be, I think, greater demand by the end of the budget process than what was submitted initially in the president's budget. And I'll add as well, you know, despite just a lot of F-thirty five being delivered, as Jim mentioned, we delivered 50 this quarter, continue to deliver strong.

We still have three eleven in backlog as we end the second quarter and we expect to add about another 150 with lot 19 coming up the second half of the year. So in terms of looking ahead and being able to plan for production plans, we've got a fair bit of flexibility, based on the strength of our backlog today. Yeah. That's right. We can because we've got, know, a couple of your lead times, we can move international in and out. And as you as you heard, there plus ups in a number of current customers and there's interest in others. Which, of course, I can't get into at this point. But it could be very exciting.

So we'll have to play all that out, but I'm confident that the F-35 production rate will stay strong.

Operator: The next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Sheila Kahyaoglu: Thank you. Good morning, Jim and Evan. Maybe if we could talk and Maria, maybe if we could talk about two items because I'm a bit confused First, if we could touch upon the $4.6 billion tax liability commentary. What's that related to? And how would it impact free cash flow going forward? And Evan, on the $6 billion free cash flow target for '26 down 10% versus twenty five, How much of that is any forward losses, working capital investment? What's the benefit from $1.74, If you could clarify in any pension contribution assumed in that number. Thank you.

Evan Scott: Sheila, appreciate the question. So with respect to the tax NOPA that we received from the IRS, we have filed our appeal as we fundamentally disagree with the position that the IRS has taken. As we stated in the comments, they had previously signed off and agreed with our interpretation. As our process appropriately max met matches revenue and expenses, the IRS's approach shows a mismatch between the two, which is why you see such a large number. We stand by our approach.

And we have taken a $100 million p and l charge to reference some amount of interest as just to have some amount of liability in the books that we think is the most likely outcome if this should see all itself all the way through. Which is to say much, much less than the numbers that we're talking about here. With respect to looking forward to next year, a couple things there to look at. One is on the aero classified program, we see that a few $100 million of reach for charge cash impact on the MFC classified program, there's roughly 200 to $2.50 ish also in that 2026 cash flow expectation.

We see some goodness on the tax side from the new tax legislation of a of a few $100 million. And then we continue to work working capital in the meantime to continue to drive that. Those are sort of the main items right now that are assumed in there as well as some kind of nominal tariff and tear tariff timing impact as well. All sort of baked into our latest assumption. And I should add that we have assumed a $1 billion pension contribution next year. And this year, there is no pension contribution. Yeah. And Sheila, just to add something from my perspective, at the most basic level on this tax claim.

It's basically a value-added tax approach, which we don't have in this country. Where we get taxed on our revenue versus taxed on our profit. So I am incredibly confident that this will get adjudicated fairly and that reserve is appropriate for this point in time.

Operator: The next question comes from Noah Poponak with Goldman Sachs. Your line is open.

Noah Poponak: Hey, good morning, everyone. Evan, your the updated 2025 guidance implies that the in the back half, the RMS margin is in the mid tens, Aeronautics in the mid nines. And I think the total in the mid tens. Are those the run rates of those segment margins for the foreseeable future with the adjustments you've taken today? Or is there some reason those would step up next year And then can you just talk a little bit more about your review of the MFC classified program that's had charges before? Because you know, that had a little bit of an unusual treatment where there were planned charges in the future. Yeah. Good morning.

So I think with respect to margins as we look at it here, we did see some one-time step ups in the first half of the year. So we're gonna continue to look at out your margins as we go through the LRP process. We'll have more to say in the coming quarters. The goal of course is to continue to drive margins up incrementally as we see mix turn to more established production programs and that we're ramping across several of those. So we'll share more of that the coming quarters as we work through that process.

With the respect to MFC classified program, this is a program I'm very familiar with and that I worked personally in my last role. So it also has a reach for charge that we disclosed in the fourth quarter of last year. We've continued to monitor this very closely similar to how we're monitoring the aero classified program. And we've signaled throughout this quarter and continue to signal now that we've got confidence with how we're positioned with that program Also, a very important program for the warfighter that we're anxious to deliver with strong customer advocacy. Jim, anything you'd you'd add Yeah.

I'd say that NSE program, and I mentioned this before, you know, the next Air Force pilot, This is, like, another game-changing capability for The US. Really essential And even on the margins, think there is some upside in the future. Because those margins were affected by some of these one-time write-offs. Although there were some plus ups, the write-offs obviously were way higher. So there could be upside. We're not doing guidance for 2026 here, but you know, there's could be opportunity especially in MFC.

Operator: The next question comes from Peter Arment with Baird. Your line is open.

Peter Arment: Jim and Evan, you both commented on backlog and expected some growth in the back half of the year. Maybe could you comment on Golden Dome specifically? Have you quantified the opportunity for Lockheed Martin and when we would expect it to hit you know, from a from a backlog perspective, just thinking in terms of the size. And then just quickly, Evan, as we think about cash and with TR three completed, we expect to see an improvement in kind of the milestone payments for F-thirty five? Thanks.

James Taiclet: On Golden Dome, the plan on the government side isn't laid out yet. As I mentioned earlier, I think we have many, many of the essential ingredients to implement something of that nature. Especially at the scale that's being discussed. The other part I would love to talk about, but we're a little short on time, so I'll do it another day, is Counter UAS will be part of that, and we're making lots of advancements there. We don't usually come out and tap things until they're, you know, up and running and we have a customer and we're delivering.

But that's an initiative that will be part of Golden Dome that we're getting out in front of counter of UAS. And so I would love to be able to say that we have a quantifiable uptick to backlog because of Golden Dome. But there's no contracts out there. There's no bid proposals yet. And so as soon as we have them, we're gonna be all in on those and we are talking about architecture with the US government as to how you might architect and lay something like this out over time. But they haven't they haven't announced anything yet. That we can actually hang our hat on for backlog.

And to add on to that, just maybe one or two thoughts on Golden Dome. So yeah, even without that, we see the backlog really driving up to the second half of the year. I expect to end the year with a new backlog record with just very strong orders to come. And I'll just note as well, as part of the one big beautiful bill, it helps incentivize investment in US manufacturing because seeing where the demand is gonna come for Golden Dome, we see our munition our missile programs being very key to that. We're getting ourselves ready to invest in additional manufacturing capacity. And so the timing is very good. With the tax act that came through.

With respect to cash, absolutely, we expect to see a very strong cash second half of the year led by F-thirty five getting the Lot eighteen and nineteen award under contract will be a significant cash liquidation event and, that with some other awards across the portfolio should give us a very strong lift on working capital.

Operator: The next question comes from Kristine Liwag with Morgan Stanley. Your line is open.

Kristine Liwag: Great. Hey. Good morning, Jim and Evan. Maybe, you know, the F-35 Jim, you touched on the F-35's role on the operation Midnight Hammer in your prepared remarks. And we've already discussed, you know, the uncertainty in the current funding, especially with eighteen and nineteen. But taking a step back, you know, we've seen the DOD cut F-35 units in the past few years. This has been the largest procurement program for the DOD, and is generally viewed as a potential bill payer for other priorities. The B-21, on the other hand, is getting accelerated and increased funding.

Can you level set us on the F-35 as a program today Where does it fit in modern warfare, and how do you see orders materializing international customers? And, ultimately, how much of a priority is this for the DOD today?

James Taiclet: So without getting anything classified, the F-35 right now, and you've heard about one mission, that's been accomplished in Iran that was led by the F-22 and the F-35. There have been others as well that those aircraft have been heavily involved in. And not only just air and air to ground attack, but also in the orchestration of numerous other platforms, whether they be c satellite, other aircraft, fourth gen, etcetera. That this airplane can deliver. Some of the I'll call it NATO air policing missions have benefited from the F-35 in this regard and others.

So knowing what I can know I am very, very confident the F-35 is here to stay and here to stay in a big way for a long time. It's the only fifth generation fighter aircraft in production right now in the free world. Fighter aircraft, I should say. And it's proved itself in combat. So we will continue with our allies and with our US customer be delivering these aircraft. I am very, very confident, especially with my background and what we know about what's happening today. You know, I have one other thing because we did bid on end gap. Everyone knows that. We weren't selected.

But the pivot that we made is one that we're taking incredibly seriously, which is how do we create a best value bridge from today's fifth generation to sixth generation next, you know, NGAD is next generation air dominance airplane. And that's may not be fielded for quite a few years, I'll say, a number of years. How do we bridge capability there? We're gonna port a lot of our own NGAD R&D over the F-35 and potentially the F-22 as well. And striving to get 80% effectiveness of sixth generation both in stealth and other aspects. At 50% of the cost. Per unit. All in with R&D and nonrecurring.

And that's the best value option for the US government going forward. It'll be the only one I'm aware of that can actually make that bridge over, you know, call it five plus maybe even ten years.

Operator: The next question comes from Scott Micas with Melius Research. Your line is open.

Scott Micas: Good morning, Jim. On the F-35 delivery skyline and the outlook, in order to protect that program and prevent it from being say, crowded out by the F-47 CCA, or nuclear modernization does it make sense to sell the DOD the technical data rights to the F-35 as part of a broader deal to ensure DoD buys a minimum amount of units per year to sustain the production rate of one fifty six.

James Taiclet: I'm not sure that's necessary for two reasons. Scott. One is we've already provided the US government all the data that they need that we control to maintain the aircraft and all of its systems. Some of our suppliers have opted not to participate in that approach that we've taken. But we don't control or own their data. And so everything Lockheed Martin can provide to the services and the government to maintain their aircraft fleet we have provided. So that's one side of the story. And then the second is that you know, the demand for the aircraft is still gonna be there. As I said, you know, four generations aircraft are retiring.

They're also incredibly unsurvivable in the current scenario. A fourth generation aircraft couldn't have accomplished that mission that we talked about on midnight hammer. So I think the base demand is there. The intellectual property is already being provided to the extent we have the ability to do that. But it's an excellent question. I think we're in a good place on both fronts. Right. Great, Sarah. Well, we're we're approaching the top of the hour.

Maria Ricciardone: So I think that's it for Q&A. And, you know, Jim did have some closing comments. So let me hand it back to Jim.

James Taiclet: All right. Thanks, Maria. Look, all of us at Lockheed Martin fully understand that it's our responsibility to negotiate fair risk-informed contracts and to deliver on those contract commitments in terms of cost, quality, and schedule every day. Only in this can we both contribute fully to our national defense and the deterrence from our conflict, and deliver strong financial results to the shareholders. Doing both is and will be our purpose While the charges that we've taken in the second quarter have been difficult, affected our 2025 outlook, we will now be better positioned to fully deliver on our profitable growth prospects going forward. I'm confident in the many strengths that position this company for long-term success.

Our growth pipeline is strong, as you heard from Evan earlier today. Our customers are heavily reliant on us to deliver proven critical capabilities And maybe most importantly, all of our 120,000 Lockheed Martin teammates are committed to delivering results. For us. I and our management team are focused on continuing to translate this strong customer demand and our unique capabilities to deliver top-line growth get that consistent cash flow generation the shareholder value creation as a result. So I have look forward to connecting again in October. On our third quarter earnings call. So thank you, everybody. And, Sarah, that concludes our call for today.

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

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