Lockheed Martin Corporation

Good day and welcome everyone to the Lockheed Martin first quarter 2026 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 Mark Kavaznik, Vice President, Investor Relations. Please go ahead.

Thank you, Sarah, and good morning. I'd like to welcome everyone to our first quarter 2026 earnings conference call. Joining me today on the call are Jim Taklett, our chairman, president, and chief executive officer, and Evan Scott, our chief financial officer. Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal security laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockie Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We've posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the investor relations link to view and follow the charts. With that, I'd like to turn the call over to Jim.

Thanks, Mark. Good morning, and thank you to everyone on the line for joining us on our first quarter 2026 earnings call. First, I'd like to highlight this week's breaking news on a recent win for our aeronautics business. Just this past Monday, Lockheed Martin signed a $1.5 billion contract with the Peruvian Air Force for 12 Block 70 F-16 fighters, with an opportunity for a second squadron of an additional 12 aircraft. This is the first F-16 direct commercial sale contract in decades and broadens our footprint in the modernizing Latin American region. This was a collaborative partnership with the U.S. government, and we continue to work with the Peruvian government in executing on its sovereign acquisition process. Overall, we reported solid results for the quarter as demand for our premier defense technologies and space exploration capabilities remains high. This elevated demand is supported by the highly effective performance of our platforms and systems that has again been demonstrated during this first quarter. The Artemis II crew and the dedicated teams at NASA completed their historical mission in a near-flawless flight and recovery using our Orion spacecraft. Artemis launched on April 1st, carrying four astronauts on a 10-day mission around the moon, the first crewed spaceflight beyond low Earth orbit since 1972, and the farthest humans have ever traveled from Earth. The Orion spacecraft served as the crew transport and habitation module throughout the entire mission, traveling thousands of miles beyond the moon before safely splashing down in the Pacific Ocean. Orion is the only vehicle capable of traveling into deep space and back while safeguarding human life. It will enable future Artemis missions and ultimately exploration of the Moon, Mars, and beyond. We are now assembling Orion for Artemis III, IV, and V, cementing Lockheed Martin's role in sustained deep space discovery. While Artemis II reflects what's possible at the edge of human space exploration, It also underscores that Lockheed Martin's portfolio is delivering extraordinary capabilities in the most demanding conditions, both on Earth and in space. Additionally, Lockheed Martin platforms have performed extremely well in very demanding missions during recent U.S. and allied operations in active conflict zones. The F-22 Raptor and the F-35 Lightning establish air superiority when called upon. our C2BMC and Aegis systems, combined with THAAD and PAC-3 interceptors, delivered layered air and missile defense of civilian infrastructure and populations, military bases, and ships at sea. Moreover, the Black Hawk Combat Rescue Helicopter and C-130 aircraft supported successful combat search and rescue operations in extremely difficult conditions in hostile territories. The operational relevance of these systems has direct implications for our business. In the weeks following PRISM's first use in active operations, we announced plans to quadruple production to meet accelerated demand. This is in addition to the commercially inspired long-term agreements we already entered into with the Pentagon to rapidly expand the production capacity for PAC-3 and THAAD interceptors by 3X and 4X respectively. In light of these multi-year framework agreements, we are in the process of construction and or modernization of more than 20 facilities across several states dedicated to achieving these greatly expanded rates of production of these sophisticated munitions. These investments are expected to support thousands of skilled manufacturing jobs across our defense industrial base, provide accretive investment opportunities for our suppliers, and enable the addition of second and third sources within our supply chain to enhance the resiliency of our production system. For its part, the F-35 also continues to execute critical missions, delivering fifth generation air-to-air and air-to-ground capabilities unmatched by any other aircraft. The platform's combination of stealth, advanced sensors, and AI-assisted targeting enables pilots to operate with decisive advantage. In the first quarter, we secured a new F-35 production contract for long lead items, and the initial presidential budget request includes increased F-35 quantities. Rotary wing capability is proving equally valuable, with the family of Blackhawks supporting critical search and rescue, personnel insertion, and resupply missions. We are also far down the road in converting the Blackhawk to both pilot-optional and fully autonomous operations, to capitalize on its range, payload, and survivability in contested environments. These examples are testaments to our strategic focus on mission execution and our commitment to discipline investment to drive 21st century digital and physical technology into tried and true major platforms. This initiative is designed to provide our customers with the most capable, integrated, and reliable systems that can be quickly assimilated into existing force structures, training programs, and logistical infrastructure. The urgency of the current operational environment coupled with the strong performance of franchise Lockheed Martin systems has also spurred the rapid progression of initiatives that were already underway with our customers on long-term production commitments. We recently announced a $4.8 billion contract to further accelerate production for PAC-3, a tangible example of how we partner with our customers and advance from novel framework to contract to continue increasing the scale and speed at which we can deliver. The long-term demand inherent in the munitions agreements allow us to confidently expand our investments, boost internal capabilities with robotics, and strengthen supply chain resilience, in turn delivering long-term shareholder value to Lockheed Martin's shareholders. Chart 3 outlines our collaborative approach with the U.S. government to address these urgent requirements and illustrates how acquisition transformation is enabling us to accelerate and expand production. These munitions agreements provide risk mitigation for industry and efficiency and speed for government, a combination that benefits customers and shareholders alike. We also remain committed to advancing emerging technologies. Since launching the Lockheed Martin Venture Fund, we have backed more than 120 companies, with many now serving as Lockheed suppliers. In the past two years, we've added 25 new companies and are expanding the fund's capacity to a billion dollars, more than double its formal size. Our expertise in innovation and scaling to production at scale enables us to serve as trusted partners for the next generation of solutions from startup, and other new entrants to the industry. Building on this momentum, earlier this week we announced a further strategic investment in Fordham Technologies to bring to market a fully integrated end-to-end turnkey counter UAS solution which seamlessly fuses detection, control, identification, and mitigation capabilities into a single commercially available offering. This partnership will accelerate Fordham's ability to scale production. will also incorporate its products into our deployment-ready integration with Lockheed Martin's Sanctum counter-UAS ecosystem. This is just the latest example of reinforcing our commitment to invest in innovative technologies that deliver rapid, reliable solutions for new threats. Our commitment to developing advanced capabilities is consistent with the budget environment, where there continues to be broad support for national defense initiatives. The administration's priorities, accelerating munitions production, strengthening integrated air and missile defense, advancing next-generation aircraft, expanding space capabilities, and preserving long-range precision strike, are reflected in this budget request. These priorities are all well aligned with our already longstanding initiatives and product sets. The Department of War's budget rollout that was released on Tuesday reflects continued strong demand for our core franchise programs. At a broader level, the administration's prioritization of defense industrial-based investment and modernization spending provide the constructive backdrop as we execute against our significant backlog. We are well positioned. Our strategy has taken hold, our solutions are in high demand, and we remain confident in our full-year guidance for 2026. Before turning it over to Evan, I'll cover our top focus areas for the year. With that significant backlog and demand continuing to grow, enhancing and accelerating execution is imperative for us. Packed reproduction is already up more than 60% from just two years ago, and we remain focused on converting demand in a long-term growth while executing with discipline in a dynamic environment. Next is innovation. a key feature of our 21st century security vision encompassing AI solutions for enterprise efficiency, digital thread integration, model-based engineering to accelerate our program timelines, and a commitment to open systems architectures that allow us and our partners to rapidly integrate new technology from us or others and continuously enhance capabilities, thereby strengthening deterrence. Third, our partnerships are in full alignment with the department's acquisition transformation strategy. This is enabling a government industry model that we have long advocated for and under which we were the first to sign a multi-year agreement. International demand also remains robust as budgets expand and allies and partners across the globe continue to seek out our superior systems and capabilities. Finally, our people are the foundation of everything we do. Tens of thousands of workers develop, build, and sustain our systems, and we're deliberately growing this workforce by investing in training pipelines, collaborating with community colleges and technical schools, and creating long-term manufacturing careers. Our new Munitions Acceleration Center that we're building in Camden, Arkansas, exemplifies this effort, serving both as a production facility and a development hub for the next generation of defense talent that will use the latest in AI and robotics to do their jobs. Now I'll turn the call over to Evan to walk us through the Q1 financial results and outlook.

Thank you, Jim. Good morning, everyone, and thank you for joining us. I'll now walk through our consolidated financials and touch on some additional highlights from the quarter, including keywords, a status update on the munitions agreements, before handing it off to Mark, who will discuss the quarterly financials by business area, and then I'll come back to discuss the detail on our 2026 outlook. Starting on chart four, first quarter sales were $18 billion in line with the first quarter of 2025. We saw strong growth on missile programs within MFC and on strategic missiles within space, offset by lower volume of aeronautics, primarily related to the lifecycle on classified programs, and at RMS on Sikorsky heavy lift programs due to timing of material receipts. First quarter 2026 sales were impacted due to the shortened fiscal period compared to the prior year, we expect sales to grow in the second quarter and throughout the remainder of the year, supporting our full-year growth outlook. Next, segment operating profit amounted to $1.8 billion, a decline versus the first quarter of 2025, primarily due to non-recurring events in the prior year related to program milestones and completions at aeronautics, space, and RMS. First quarter 2026 results also reflect unfavorable performance adjustments at aeronautics associated with F-16 and C-130. Design and development delays temporarily impacted F-16. On C-130, integration challenges and supplier constraints, which occurred earlier in 2025, persisted into the first quarter of 2026. C-130 deliveries have resumed, with four aircraft delivered as of today keeping us on track for our full-year targets. Earnings per share of $6.44 decreased 12%, primarily driven by lower profit and mark-to-mark losses due to changes in the fair value of investments and liabilities for deferred compensation plans. This was partially offset by benefits from a more favorable FAS-CAS pension adjustment. Shifting to new business, MFC was awarded $7 billion in orders for PAC-3 contracts. This includes one award for $2.2 billion from the first quarter of 2026 and a $4.8 billion fully funded, undefinitized PAC-3 contract we signed earlier this month, advancing the first of the munition ramp production agreements we announced earlier this year. These awards underscore the sustained and growing demand for our missile defense capabilities. Lockheed Martin's commitment to the mission, and the government's dedication to partnering on the rapid scale-up of this capability. We are partnering with the Department of War to definitize all multi-year munition acceleration agreements, and we will continue to provide updates as we progress. At Aeronautics, we secured a $700 million contract to procure long-lead materials for F-35 Lots 20 and 21 for our international program partners. a further signal that allied nations are continuing their commitment to the F-35 program as the aircraft consistently proves itself in live combat. At Space, we secured an $890 million contract for our fleet ballistic missile capabilities, a program that provides sea-based nuclear deterrence and one that Lockheed Martin has served as prime contractor for more than 70 years. And at RMS... we were awarded a $365 million contract for Aegis Ballistic Missile Defense. The Aegis Weapon System is a proven command and control solution that links sensor and effector assets across all domains, from undersea to space, showcasing how Lockheed Martin connects established and innovative technologies to enhance homeland defense capabilities. They're adaptable for missions like Golden Dome. Moving to free cash flow, We reported use of $291 million in the quarter. The negative cash was largely driven by working capital timing, including impacts from the implementation of a new ERP system in one of our business areas. The impact of this system upgrade was anticipated, and we expect that the effect will be resolved by the second quarter. Our full-year cash guidance remains, and as in past years, Higher cash flow is projected to be weighted towards the latter half of the year. Additionally, earlier in the quarter, the IRS issued favorable guidance regarding the corporate alternative minimum tax. This strengthens our confidence in reaching the upper end of our cash flow range. In the quarter, we paid $816 million in dividends and retired $1 billion of long-term debt. We remain committed to our dynamic and disciplined capital allocations. prioritizing a strong balance sheet while investing for the long term. In the first quarter, we invested $511 million in capital expenditures and $458 million for research and development, an approximately 15% increase over the prior year first quarter. I will now turn it over to Mark to walk through the business area results.

Thanks, Evan. Starting with aeronautics on chart five, First quarter sales at Arrow decreased 1% year over year, primarily driven by lifecycle timing on classified programs, losses recognized on the F-16 program, and lower production volume. This was partially offset by increased volume on F-35 sustainment. Segment operating profit decreased 14% compared to the prior year, related to unfavorable profit adjustments on F-16 and C-130 programs, and the absence of favorable profit adjustments on classified programs that occurred in the first quarter of 2025. These impacts were partially offset by favorable profit adjustments on the F-35 program. The image on the right depicts an F-35 refueling from a KC-130, underscoring aeronautics role in delivering integrated air power to the US and its allies. In the first quarter, we were awarded a $462 million contract to expand support of the Royal Canadian Air Force's fleet of C-130Js. Turning to missiles and fire control on chart six, sales of MSC in the quarter increased 8% from the prior year, driven by higher volume from production ramps on existing PAC-3 tactical strike missile programs, including JASM, LRASM, and PRISM. Segment operating profit increased 8% year-over-year, primarily from the higher sales volume. On the right, you can see a photo of a HIMARS equipped with precision strike missiles, or PRISM. In the first quarter, we successfully completed the first flight test of our PRISM Increment 2, demonstrating its ability to engage moving targets. Shifting to rotary emission systems on Chart 7. Sales at RMS decreased 8% year over year in the quarter, primarily from lower production volume on both radar programs and at Sikorsky. Operating profit in the first quarter decreased 19% compared to the prior year, driven by unfavorable profit adjustments at Sikorsky programs and on the absence of a cost recovery from an intellectual property license arrangement that occurred last year. In the first quarter, we delivered the very first UH-60MX Black Hawk helicopter to the US Army. The UH-60MX includes a fully integrated matrix autonomy suite, enabling optionally piloted flight and supporting the Army's pursuit of open architecture, mission supported autonomy. On chart eight, we'll conclude the business area discussion with space. Sales increased 7% year over year in the first quarter, primarily driven by higher sales volume on strategic and missile defense programs, including the fleet ballistic missile and next generation interceptor. Operating profit decreased 26% compared to the prior year, primarily due to the absence of a benefit from completion of a commercial civil space program, partially offset by higher sales volume on the programs I previously described. Now, I'll turn it back over to Evan.

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

Thank you. If you wish to ask a question, please press star, then 1 now on your touchtone phone. You will hear an enunciator indicating you have been placed in queue. You may remove yourself from queue at any time by pressing star, then one again. We ask that you 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 now. Your first question comes from Christine Liwag of Morgan Stanley. Your line is open.

Good morning, everyone. Maybe Jim and Evan and Mark, I want to focus on the F-35, the company's largest program. It was very encouraging to see the Pentagon request 85 F-35s in the fiscal year 27 budget, up from 47 last year. And, you know, you also called out the funding for sustainment. I was wondering, can you reorient us on where we are in the program, the F-35's role in modern warfare, and your outlook for production and sustainment? Thanks.

Yeah, good morning, Christine. Hello, everyone. First off, I'll say that the performance of the F-35 in active operations over the last six months has been really definitive proof that the aircraft is standing alone around the world in its ability to do both really advanced air-to-air missions and achieve air superiority alongside F-22s, and also air-to-ground missions. And so in the Midnight Hammer operation, for example, when the nuclear capabilities of Iran were damaged significantly, that mission was enabled by the escorting of the bombers, the B-2 bombers, by F-22s and F-35s. It couldn't have happened, I don't think, without them safely. And part of that mission was the air-to-ground side of escort, which enabled both U.S. and Israeli F-35s to essentially obviate the air defense system and very sophisticated air defense system of Iran. So this is quite evident now with that and other missions that the F-35 is uniquely capable as a fifth-generation platform. It's the only one in the free world in current production right now. And so, therefore, the demand from the U.S. government is solidified, as you said, and also the interest in the airplane from our allied customers is also heightened as well. So I think it's basically proven itself as the dominant modern fighter aircraft through its performance. The second piece of it, Christine, is, and I think both our allies and us have discovered this in the European and Middle East theater, is that the F-35 is basically a flying command post where it can ingest sensor data from the aircraft, organize it, declassify it if necessary, and pass it off without any pilot intervention into the command and control system for multiple services and multiple allies. That information gets digested and then other platforms can actually act on and other crews and capabilities can be applied to these threats that the F-35 sees when it's in flight. And so there have been missions where an individual pilot or a four-ship of airplanes does three or four missions over a couple of hours. And those missions can include, you know, combat air patrol, protecting other airplanes. It can include, you know, close air support, protecting troops on the ground that are friendly. And it can also include the sort of surveillance and data fusion mission that I also described. And there have been some examples of missions that have gone on three or four hours with the aircraft, multiple air refuelings. And again, the single pilot or the formation can execute all three of those missions, even when all the munitions are expended. I do think that this aircraft has, you know, we always knew it internally, but that it is superior to every other airplane in the world right now that we faced at least. So I think that's the position of the aircraft.

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

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

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

Your next question comes from Seth Seisman with JP Morgan. Your line is open.

Thanks very much. And morning, everyone. I wonder if you could talk a little bit about the multi-year contracts that you're looking to sign in missiles and fire control. And obviously, a lot of important opportunity there for the company. But can you also help us think a little bit about the risk side? Are you signing up and committing to reach these significantly higher targets? production rates in the out years, and how do we think about what the financial downside could be for the company if these rates aren't reached?

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

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

Your next question comes from Scott Duschel with Deutsche Bank. Your line is open.

Hi, good morning. Jim, can you share an update on the classified program in aeronautics, including how risk is trending on the program? Evan, are you seeing any willingness from the government to provide additional funding to support your efforts to keep that program on track? Thank you.

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

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

Good morning, Jim and Evan. We saw Northrop reach an agreement on B-21 production to accelerate, which gives them the opportunity to improve the economics on the program. It's given the strong demand for missiles and munitions. Is there an opportunity to reach an agreement with the customer to accelerate production of the classified missile program at MFC? that could yield some better economics for Lockheed?

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

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

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

Yeah. Hi. Good morning, Jim and Evan. I wanted to ask a question on free cash flow. significant use in the first quarter, I think, as expected. Step up in working capital. I wanted to just verify this was F35 or if there was anything else to call out on that in the first quarter. And then second, as you think about the full year guide, how should we think about the cadence here in the second quarter and in the second half of the year to hit the full year guide on the free cash? Thank you.

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

Your next question comes from Gautam Khanna with TD Cowan. Your line is open.

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

So the goal is to sort of have a rateable increase from our current levels of production, which is last year 650 Patriot missiles per year, up to 2,000. And that's going to take three to four years, depending on supply chain and other considerations. But we really do think we can get it done in three to four years. The supply chain improvements that we're pursuing, the General Dynamics, Lockheed Martin teaming on solid rocket motors. Also, Northrop Grumman is looking at expanding its solid rocket motor business potentially into Patriot. And there's some commitments there that we think will bear some fruit. The other pinch point, so I think we've got solid rocket motors, I don't want to say covered, but we've got a lot of interest in it. You may have heard that L3 Harris is spinning out its SRM business. and also has support from the U.S. government to finance and fund their expansion, which they've already announced where it's going to be and how it's going to happen. So that's a good sign. Secondly, Northrop's commitment is a good sign. Thirdly, General Dynamics' partnership with us is another good sign as far as SRM pinch point risk, I guess I'd call it. The second area is the seeker for the Patriot. And Boeing has similarly made a public commitment and one to the government that says, hey, we're going to invest in that seeker business. We're going to get to the volumes that you're asking us for. And they've actually been improving as well over the last year or two in their ability to deliver on this very complex component. So those are the two biggest, I guess, risk areas. There'll be a handful of others in the mid to late small business supply chain, we will have, and the government, as Evan just said, will have assistance provided to those companies. And we're looking for capital markets providers in addition to the government Office of Strategic Capital to provide ready and efficient financing for these medium and small companies, given that they're going to have a seven-year subcontract to Lockheed Martin, who has a seven-year contract with the U S government, pretty good credit line there. So I think that we're going to be able to manage those pinch points, but those are, those are the main ones.

Your next question comes from Ron Epstein with bank of America. Your line is open.

Yeah. Hey, good morning guys. Um, how are you? Uh, Jim, Jim, just circling back on some of your comments you brought up in your prepared remarks, uh, about how you're, um, deploying AI in the enterprise and in some of the weapon systems. How are you broadly thinking about that? Are you developing tools yourself? Is Lockheed trying to develop its own large language model? Are you using outside stuff? Just kind of broadly thinking about your AI strategy and what you're doing there.

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

Your next question comes from John Godden with Citigroup. Your line is open.

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

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

Hey, Sarah, it's Mark. We're coming up on time. We'll take one more question.

Thank you. Your next question comes from David Strauss with Wells Fargo. Your line is open.

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

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

Okay. Thanks again, everybody, for joining us. So in the first quarter of 2026, Lockheed Martin, our products and systems proved themselves again and again in conflict situations and in outer space, literally. Our backlog's resilient. Our investments in capacity, digital transformation, and people are going to position us to deliver on the commitments we've made to you and to our customers. So lastly, and this is really important, we want to thank the service members who have put themselves out there, and executed these missions with skill, dedication, and courage. And that's why many of us work at this company is to help them get their missions done and come back safely. So thanks to all of you for joining us, and we'll be back in touch with you next quarter. Thanks.

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