Lockheed Martin Corporation

Good day and welcome everyone to the Lockheed Martin second quarter 2025 earnings results conference call. Today's call is being recorded. If you would like to ask a question, please press star then one now. At this time for opening remarks and introductions, I would like to turn the call over to Maria Richard-Own, Vice President, Treasurer and Investor Relations. Please go ahead.

Thank you, Sarah, and good morning. I'd like to welcome everyone to our second quarter 2025 earnings conference call. Joining me today on the call are Jim Taklett, our Chairman, President, and Chief Executive Officer, and Evan Scott, our Chief Financial Officer. Statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of the federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our 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 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.lachiemartin.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, 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 have resulted recently in our customers' 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 a result of heightened interest and demand for Lockheed Martin's products and technologies. 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 multi-year 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 UR 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 risks. 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 estimates for these programs. For TUHP, we've reached a notional agreement to restructure the program, including 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 adversaries. This particular program team discovered new insights in the quarter that required us to adjust our expected future costs on that program, and then recognized 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 plans. This is a highly classified program that can only be described as game-changing capability for our joint U.S. 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 U.S. 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 operations. 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 capabilities. This tactical success was a real-world confirmation of Lockheed Martin's leading role in combat-proven air power. Our capabilities were also integral to safely and 100% effectively defending American troops. When Iran retaliated with a salvo of ballistic missiles on U.S. forces stationed at Al-Yadid Air Base in Qatar, our PAK-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-layered defense shield, protecting U.S. 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 Forces. These are the exact solutions needed to make Golden Dome for America a reality. Lockheed Martin is the mission integrator with ready now 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, or 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 U.S. government's focus on securing the homeland and deterring aggressors will lead to a significant increase in munitions 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-53K 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 U.S. 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 U.S. 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 Launch Rapid Response Weapon, or AERO, 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, AERO had its first flight test. We have full confidence in the maturity and production readiness of AERO's hypersonic strike capabilities and we look forward to continuing our partnership with the U.S. Air Force to transition the program into production. Also in the hypersonic arena, in May, the U.S. Navy publicized a successful end-to-end flight test of our conventional prom 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 fields. Further, the U.S. Coast Guard, in its budget, included additional MH-60 Romeos, new ships with Lockheed Martin C-2 systems, and C-130Js. And more recently in July, we reached a price agreement with the U.S. Navy on a five-year, multi-year procurement for CH-53K lots 9 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 2029. 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 to 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, and earlier this month, we released new software to the fleet continuing our maturation and fielding of advanced Block IV 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 plans to procure 12 F-35As as part of its program of record. Belgium also announced it will 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 Hegseth 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 non-defense applications. I'll turn it over to Evan now to share more about our financial results.

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, on 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 four-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 forward loss in 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's 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 we implemented at the start of the year, which continues to demonstrate solid progress. Our continued investment in this program reflects our ongoing confidence in its criticality for national security. and we remain excited about the future prospects for this solution. 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 TUHP, U.S. government sanctions on Turkish entities and persons have affected the company's ability to perform under this program. We've been communicating with the 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 gap 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 18-19 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 the first week of July. In addition, we anticipate the F35 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.

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 JASM-Lorasm, 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 THAAD. In addition to THAAD's performance in combat that Jim talked about, we delivered the eighth fad 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 $305 million related to the CMHP and TUHP 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 8, 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-3 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-3F satellites in the quarter. Now I'll turn it back over to Evan.

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 18-19, JASM-Lorasm Large Lot Procurement, Pac-3 Production, CH-53K Multi-Year, 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 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 per 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, combined to approximately $500 million of headwind this year. On the other hand, The administration's legislation is anticipated to provide approximately $400 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 multi-year 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.

Thank you. If you wish to ask a question, please press star then one on your touchtone phone. 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 Miles Walton of Wolf Research. Your line is open.

Thanks. Good morning. Jim and Evan, I'm not sure who wants to take it first, but why should investors feel at all comfortable that you've de-risked the problem programs, particularly the aero-classified one? When I listen to the changes being made on process and increased attention, it sounds similar to 4Q. So I'm just trying to reconcile what are you doing different? Number one, why should we feel comforted that this is de-risked? And thirdly, can you just give us some color clarity as to how long you're under this onerous contract?

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 programs. So we had a different team, wider expertise from across the company, and higher-level management as part of the scrutiny of the program. So 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 longstanding assumptions, were re-baselined 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. As to the two long travel programs at Sikorsky, new in-depth discussions were held with each of the two customers in the first half of 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 a similar oversight regime, including recurring senior management participation, a more robust sequence and tempo of senior management reviews 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 want to reiterate the policy that was put in place at Lockheed Martin five years ago, that there are no longer any must-win programs. We will continue to ensure that every bid price proposal and contract structure does not introduce outsized or unbounded future risk, as we're seeing on these three programs. Evan, you want to add anything to that?

Yeah, I fully agree with that approach and have taken 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 continued transparency, and that's what allowed us to signal in May that we were experiencing cost challenges and to have better insight as the continued program moved forward. And note at that same time, we signal 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 multi-year 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 burndown of risk as we work through the development tasks. on these game-changing products, and we will keep you all updated as we go.

The next question comes from Ron Epstein of Bank of America. Your line is open.

Hey, yeah, good afternoon, morning, guys. So, kind of 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 of charges to change the way you're reviewing this thing. That's to Jim. And then to Evan, maybe you're kind of more from an accounting perspective, 1.8 billion of charges, how do we think that flows through to cash? Can you do the bridge for 25 and then maybe the bridge into 26, right? Because there's some of this that's probably not all 1.8 billion and you've got a cash impact. How much does and how should we think about that?

Yeah, hey, Ron. So as Evan sort of stated, in the fourth quarter review, 2024 financials, when we took the first charge, we actually reset the entire way that that program is monitored, I'll say. And in that more rigorous monitoring system, we started to see, as Evan had signaled publicly in May, as he said, additional cost risks. There was an anomaly, as we call it, in the development phase that was going to add cost and time as well. So 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 So if a 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 is aware of, and will become increasingly aware after today, of the cost that 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 required. So that's the explanation. Like I said, we take it very seriously. It was disconcerting to us when we started to see the cost growth after we'd 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 going to 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?

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 Arrow 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, it steps down a little bit. Think of roughly $400-ish million 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 to Jim's point, I can't state exactly when that is, but it's within our line of sight.

The next question comes from Rob Stallard with Vertical Research. Your line is open.

Thanks so much. Good morning.

Good morning.

Good 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 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.

So, Rob, you're absolutely right about the president's budget, which 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 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 their 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 10. Historically, the appropriations committees have the final say on numbers, so we know what the House's position is on that. We don't know yet the Senate's, but I would be hopeful, and we certainly can't guarantee this outcome, but I'd be hopeful that the House Appropriations Committee mark might flow over to the Senate, but that's a hopeful thing. 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-35s being delivered, as Jim mentioned, we delivered 50 this quarter and continue to deliver strong. We still have 311 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.

That's right. Because we've got a couple of year lead times, we can move international in and out. And as you heard, there are plus-ups in a number of current customers, and there's interest in others, which is... Fortunately, I can't get into it at this point, but it can 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.

The next question comes from Sheila Kealu with Jefferies. Your line is open.

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 25, how much of that is any forward losses, working capital investment, what's the benefit from Section 174, if you could clarify, and any pension contribution assumed in that number? Thank you.

Sheila, I 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 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&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 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 of things there to look at. One is on the AERO classified program, we see that a few hundred million dollars of reach forward charge cash impact. On the MFC classified program, there's roughly 200 to 250-ish also in that 2026 cash flow expectation. We see some goodness on the tax side from the new tax legislation of a few hundred million dollars. 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 timing impact as well, all sort of baked into our latest assumption. And I should add, that we also 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 profits. So I am incredibly confident that This will get adjudicated fairly, and the reserve is appropriate for this point in time.

The next question comes from Noah Popinak with Goldman Sachs. Your line is open.

Hey, good morning, everyone. Evan, the updated 2025 guidance implies that in the back half, the RMS margin is in the mid-10s, aeronautics in the mid-9s. and I think the total in the mid-10s. 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.

Male Speaker 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 going to continue to look at out-year margins as we go through the LRP process, and 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 in that we're ramping across several of those. So we'll share more of that in the coming quarters as we work through that process. With respect to MFC classified program, this is a program I'm very familiar with in that I worked it personally in my last role. So it also has a reach forward charge that we disclosed in the fourth quarter of last year. We continue to monitor this very closely, similar to how we're monitoring the aero classified program. 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 add?

Yeah, I'd say the NSC program, and I mentioned this before, the next Air Force pilot, this is, again, another game-changing capability for the U.S., really essential program. Even on the margins, I think there is some upside in the future because those margins were affected by some of these one-time write-offs, although there were some plus-ups. The write-offs, obviously, were way higher. There could be upside. We're not doing guidance for 2026 here, but there could be opportunity, especially in MFCs.

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

Yeah, good morning, Jim and Evan. Hey, 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 from a backlog perspective, just thinking in terms of the size? And then just quickly, Evan, as we think about cash and with TR3 completed, should we expect to see an improvement in kind of the milestone payments for F-35? Thanks.

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 tout things until they're 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 UAS. And so I would love to be able to say that we have a quantifiable up 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 going to be all in on those. And we are talking about architecture with the U.S. government as to how you might architect and lay something like this out over time. But they haven't announced anything yet that we can actually hang our hat on for backlog.

And to add on to that, just give me 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 U.S. manufacturing. Because seeing where the demand is going to come for Golden Dome, we see our munition, our missile programs being very key to that. And 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-35. Getting the lot 18 and 19 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.

The next question comes from Christine Lewag with Morgan Stanley. Your line is open.

Great. Hey, good morning, Jim and Evan. Maybe, you know, the F-35. Jim, you touched on the F-35's role in the Operation Midnight Hammer and your prepared remarks. And we've already discussed the uncertainty in the current funding, especially with lot 18 and 19. But taking a step back, 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 for international customers? And ultimately, how much of a priority is this for the DOD today?

So without getting into anything classified, the F-35 right now, you've heard about one mission that's been accomplished in Iran that was led by the F-22 and the F-35s. There have been others as well that those aircraft have been heavily involved in. And not only just air-to-air and air-to-ground attack, but also in the orchestration of numerous other platforms, whether they be sea, satellite, other aircraft, fourth gen, et cetera, that this airplane can deliver. Some of the, I'll call it NATO aircraft, 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. we will continue with our allies and with our U.S. customer to be delivering these aircraft. I am very, very confident, especially with my background and what we know about what's happening today. And I'll add one other thing, because we did bid on NGAT. 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, you know, NGAD is next generation air dominance airplane. And that may not be fielded for quite a few years, I'll say, a number of years. How do we bridge capability there? We're going to port a lot of our own NGAD R&D over to 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 non-recurring. And that's the best value option for the U.S. 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 10 years.

The next question comes from Scott Mikus with Melius Research. Your line is open.

Good morning, Jim. On the F-35 delivery skyline and the outlook, in order to protect that program, 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 the DOD buys a minimum amount of units per year to sustain the production rate of 156?

I'm not sure that's necessary for two reasons, Scott. One is we've already provided the U.S. 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 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 going to be there. As I said, you know, fourth generation 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.

Great. Sarah, we're approaching the top of the hour. 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.

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 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 and have 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 the strong customer demand and our unique capabilities to deliver top-line growth, get that consistent cash flow generation, and shareholder performance. that shareholder value creation as a result. So I 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.

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