Lockheed Martin (NYSE:LMT) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.

This content is powered by Benzinga APIs. For comprehensive financial data and transcripts, visit https://www.benzinga.com/apis/.

The full earnings call is available at https://edge.media-server.com/mmc/p/k8rv9ajf/

Watch the full earnings call below:

Summary

Lockheed Martin reported a strong second quarter 2026, with a record backlog of $230 billion and nearly $3 billion in free cash flow, leading to an increased full-year guidance.

The company secured significant contracts, including a $35 billion THAAD interceptor contract and a $3 billion GMLRS contract, emphasizing its strategic focus on munitions capacity and open architecture technology.

Future outlook includes accelerated revenue growth, with sales expected to reach $79.75 billion to $81.75 billion, driven by strong demand in munitions and F-35 production.

Operational highlights include resumed deliveries of the F-16 and increased C-130 output, and the development of new technologies such as the Grizzly counter-UAS solution.

Management emphasized a shift towards proactive investment in technology and manufacturing, leveraging partnerships and AI to enhance production efficiency and scalability.

Full Transcript

OPERATOR

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 Kovasnik, Vice President, Investor Relations. Please go ahead.

Mark Kovasnik, Vice President, Investor Relations

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

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

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

Jim Taiclet, Chairman, President & CEO

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

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

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

Those strengths of Lockheed Martin have contributed tremendously to this quarter's performance, as you can see most clearly in second quarter contract activity. In late June, the Missile Defense Agency awarded a seven-year contract for $35 billion to quadruple production of THAAD interceptors, marking the next of the munitions frameworks to transition to a contract. Alongside THAAD, the Army awarded a GMLRS production contract at $3 billion, covering the current version and its newly developed successor, which will have twice the range from the same launcher.

We also secured a HIMARS award valued at up to $1.1 billion for the U.S. Army, Marine Corps, and up to five allied nations. Stepping back, these awards are less about any single program than about what they're building in aggregate. Together they strengthen the nation's production base, adding resilience along with more manufacturing capacity, more sources of supply, and greater surge capability—all at a time when these very attributes have become a strategic imperative for the country.

And the quarter's success story was not about munitions alone. It spanned the full spectrum of our business, with new awards and accomplishments achieved across the board. The U.S. Space Force selected us as one of the awardees to develop space-based interceptor prototypes under Golden Dome, with capability demonstration expected by 2028. We also signed a $2.3 billion radar contract, supporting the growth projections we've been making related to our radar business.

Following a series of successful flight tests, we continue to make progress on the critical hypersonic weapons program. Conventional Prompt Strike cumulative contract modifications totaling $1.4 billion on this joint Army and Navy program will drive more rapid development and demonstration of this sea-based hypersonic strike weapon system. We also announced the next-generation glide body demonstration, which is a new hypersonic glide body that's more affordable, scalable, and flexible.

Our team's operational execution hit its stride this quarter as we fulfilled key delivery and technical obligations throughout the portfolio. We resumed deliveries for the F-16 and increased output of C-130 aircraft. Two F-16s and seven C-130s were delivered to customers this quarter. We also delivered the second ship set of our SPY-7 radar equipment for Japan's new missile defense destroyers—on-schedule delivery for a program central to the key ally's homeland defense in Japan.

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

While we execute in our engineering centers and factories, we're also innovating with a lot of purpose and speed. We're not waiting on orders or contracts to close evident mission gaps for our military services and those of our allies. In early June at Yuma Proving Ground, our Sanctum counter-UAS solution—anti-drone system—utilizing our Grizzly containerized launcher went from concept to successful live-fire testing in under 45 days. Built not by inventing something brand new, but by connecting what we already had: a combat-proven battle manager, radar, a launcher, and JAGM missiles—the successor to the Hellfire—operating as one integrated system for a brand-new mission. Four elements, three of them ours and one from a partner that we invested in through Lockheed Martin Ventures. That same logic—building on established, battle-tested solutions instead of starting from scratch—guides the Navy's decision to integrate the PAC-3 missile into the Aegis combat system. This move adds a new intercept capability to surface ships for the Navy. Though the PAC-3 was originally designed for air defense with a different radar and launch architecture, the Navy's acquisition taps our truly unique integration expertise.

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

Our joint objective with GM is to explore applying the automotive industry's high-rate manufacturing and supply chain expertise to defense production. We hope this effort will provide us more access to the speed and scale of America's commercial industrial base to help significantly accelerate output as demand grows. Now, behind every one of our achievements this quarter is a steady, long-term commitment to the physical backbone of the company: new factories, advanced automation, and state-of-the-art tooling and robotics.

We enhanced that infrastructure with strategic partnerships among the nation's leading technology and manufacturing firms. And we now embed artificial intelligence capabilities directly into our production lines. AI-driven analytics optimize equipment performance. For example, we have predictive maintenance algorithms that reduce our downtime and machine-learning-guided quality checks that streamline the inspection process. Also, as our design and manufacturing systems evolve, we are deliberately growing and diversifying our access to capital investment and critical workforce skills through international partners via expanded co-production and regional sustainment programs. These efforts have the benefit of placing manufacturing, overhaul, and repair capabilities where U.S. forces are deployed overseas and where our allied forces operate. Overall, our approach is financially disciplined. While perhaps less risk averse than may have historically been the case, each co-production initiative is a purposeful investment with a clear view of the expected returns that each will generate once contracts materialize.

Our strategy—to make our production operations more resilient and scalable, integrate the latest 21st Century technologies into existing and new systems, and expand our international production—is underpinned by a very strong balance sheet. Our robust cash generation and access to capital, supported by our strong credit rating, can fuel billions of dollars of planned investment in a portfolio of new and expanding facilities across the United States and beyond.

This quarter alone we held the opening of a missile assembly building in Cortland, Alabama—the future home of the Next Generation Interceptor program and a critical hub for integrated air and defense work on programs such as that. In May, we broke ground on a new munitions production center in Troy, Alabama, adding 87,000 square feet of production space to support THAAD interceptors and future NGI work. We also continue to make progress on our new production facility in Titusville, Florida, which will support critical development of the Trident II missile.

Our pace of disciplined investment for growth has continued since the end of the quarter. In the span of a few weeks we signed an agreement to acquire Ultra Maritime. This acquisition will enhance our advanced undersea sensing and autonomous sea drone capabilities—a domain where there is growing demand. At the NATO summit, we signed a memorandum of understanding with Rheinmetall toward the first European center of excellence for ATACMS production, and we welcome the commitment of the United States, Germany, the Netherlands, Poland, and Sweden to explore a dedicated PAC-3 missile facility in Europe for maintenance, putting allied capability closer to allied needs. Last month Secretary Hexsett highlighted the success of the first milestone test of Golden Dome for America, noting that Lockheed Martin's directed energy laser weapon had cued, targeted, and eliminated a full spectrum of incoming threats, which is a true milestone achievement. Just two weeks later, the U.S. government awarded us a joint laser weapon system contract to develop a containerized 500-kilowatt laser. This will be the highest-powered laser ever packaged in a transportable container and is a cornerstone of the next-generation cruise missile and drone defense architecture.

This win didn't happen overnight. It builds on our long-standing laser weapons experience and years of investment in these technologies, confirming its readiness for actual field deployment. Lastly, just a few days ago we secured a $1.6 billion F-35 spare parts award, the largest such contract in F-35 history, reinforcing the Department of Defense's heightened focus on keeping the world's premier fighter fleet operational. Our upfront investment in spare parts and consumables has now been translated into immediate inventory that can be shipped to customers the moment their need arises.

The quarter's announcements are driven by three deliberate actions. First, we are investing at home, expanding manufacturing capacity to meet today's demand cycle. Second, we are partnering with allies, positioning the capabilities where they're needed the most. And third, we are advancing technology—from directed energy and autonomy to integrated cross-domain systems. The result of these efforts is a deterrence posture that protects our nation and our allies, underpinned by a business that grows stronger each time it delivers.

Now I'll turn the call over to Evan and Mark to talk through the financials.

Evan Scott, Chief Financial Officer

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

We recorded a second-quarter book-to-bill ratio of 3.2 to 1. The backlog increase includes 65 billion of orders realized during the quarter, the largest being the multi-year THAAD contract as well as new radar awards within RMS and strategic wins in Space. This deep book of contracts will fuel our sales growth for years to come, and we saw this top-line acceleration begin to show up in the second quarter. We recorded sales of 20.1 billion, a 1.9 billion, 11% increase over the same period last year.

This growth was primarily driven by accelerating munitions programs in MFC and further supported by all other segments, including strong performance in F-35 production in Aeronautics, the MIC2 portfolio in RMS, and the strategic and missile defense programs in Space. The year-over-year comparison also benefits from the absence of unfavorable adjustments we took in the second quarter of 2025. Excluding those adjustments, we grew sales 7% year over year.

The performance exceeded our sales expectations in the second quarter, giving us confidence in a stronger 2026 trajectory that we'll discuss shortly. The second-quarter segment operating margin was 10.8% as profit climbed to 2.2 billion and earnings per share rose to $7.94, both posting marked improvements from the prior year. These gains mostly reflect the absence of unfavorable profit adjustments recorded in the second quarter of 2025. Free cash flow rose by 3 billion, moving from a negative 150 million in the same period in the prior year to a positive 2.9 billion this quarter.

The largest contributors include the favorable timing of customer receipts, which accelerated cash inflows, and lower tax payments. We restored the temporary dip in free cash flow that resulted from the ERP rollout last quarter, reflecting the effectiveness of the planned recovery we outlined earlier this year. During the quarter we invested $876 million in capital assets and research and development. This included production capacity upgrades, next-generation munition facilities, and AI-enabled autonomous manufacturing infrastructure.

We also funded new Sanctum counter-UAS solutions, autonomous weapon systems, and AI-driven analytics that improve mission planning and real-time decision-making across our portfolio. Building on disciplined capital allocation, sustained cash flow generation, and focused R&D, we strengthened our competitive edge. We are poised to convert our financial strength into growth-driven transactions. The upcoming Ultra Maritime acquisition, made possible by our robust balance sheet and strong cash flows, exemplifies how we are leveraging this flexibility to pursue strategic inorganic expansion.

The underlying strength of our fundamentals enabled us to fund increased investments to add capacity and meet the demand that Jim outlined earlier, while returning $796 million to shareholders through dividends in the second quarter, showing that we can invest for growth and deliver tangible shareholder value at the same time. Turning to slide 4, I'm pleased to report that we are raising our outlook across every key metric. Building on the momentum we generated in Q2, we now expect total sales of $79.75 billion to $81.75 billion, representing an 8% year-over-year increase at the midpoint, up from the prior 5% guidance.

This uplift is driven primarily by higher volume on F-35 production in Aero, radars in RMS, and correspondingly we are increasing our segment operating profit target to now 8.5 billion to 8.7 billion. This revised outlook reinforces two important growth dynamics. First is that our growth is clearly accelerating through the first half of this year. We grew sales at a mid-single-digit pace year over year. Our revised outlook pegs our second half 2026 growth rate in the high single digits and perhaps even the low double digits — a year-over-year increase of between 7% and 12% as compared to the second half of 2025.

Secondly is that this accelerating growth is broad based. Every segment at Lockheed Martin will grow faster in the back half of 2026 on both the top and bottom lines. MFC is clearly leading the way for our growth, but as we've described, our entire portfolio is accelerating, and we've reinforced that with this higher sales and segment operating profit outlook. Our free cash flow outlook is increasing too. As I began to signal last quarter, we now expect a range of $7 billion to $7.2 billion.

This improvement includes the favorable corporate Alternative Minimum Tax IRS guidance we highlighted earlier this year. We're also confident that stronger working capital dynamics will improve our cash conversion cycles. We remain dynamic and disciplined in our capital allocation decisions, continually weighing the most value-enhancing approaches for deployment. Earnings per share is now projected at $29.95 to $30.65, driven by higher year-to-date profits and a lower effective tax rate.

We are also updating our capital expenditure guidance to a range of 2 to 2.4 billion, reflecting efficiencies realized in MFC's munitions buildout. Expanding munitions capacity as quickly as possible is our top priority, and our teams are relentlessly pursuing the most efficient ways to do so. Our framework agreements and related awards remain cash neutral, so these efficiencies are well aligned with our customers' objectives. Now I will turn the call over to Mark, who will cover the segments in more detail.

Mark Kovasnik, Vice President, Investor Relations

Thanks, Evan. My segment-level comments will focus on our updated increased full year 2026 sales and profit outlook and the key drivers for the accelerated growth we expect to realize across all four segments in the second half of this year. Starting with Aeronautics on slide 5, we now project Aero to deliver full year 2026 sales of 31.7 to 32.7 billion, driven by strong F-35 production and sustainment volumes. The higher sales volume pushes the profit outlook up to between 3 and $3.08 billion.

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

The top end of Aero's updated sales range implies an even stronger second half growth rate could be realized, driven by a bump in sales that is dependent on timing of award for the next lot of F-35 production. Moving to Missiles and Fire Control on slide 6, MFC had very strong growth in the second quarter. Sales were up 19% and profit was up 24% year over year, fueling a raise to our full year outlook as the cadence of munitions production continues to accelerate.

MFC's sales range has been adjusted to 16.5 to 16.9 billion, lifting the low end of our prior guidance, and the profit range is now 2.3 to 2.35 billion, reflecting continued mid-teens margin performance through the first half of 2026. MFC has grown sales 14% year over year, and at this updated outlook level, the second half 2026 growth rate will be even faster. Next is Rotary and Mission Systems on slide 7. At RMS, the new radar awards Jim and Evan mentioned give us confidence to increase the full year sales outlook to between 17.7 and 18.1 billion.

The profit outlook at RMS is also raised and is now between 1.86 and 1.89 billion, keeping margins steady relative to the prior outlook. RMS sales during the first six months of 2026 were relatively comparable to the same period last year. Our updated full year outlook indicates RMS will accelerate to a mid-single-digit year-over-year growth rate in the second half, driven by the higher radar volumes and continued production ramps at Sikorsky. Wrapping up with Space on slide 8, in the second quarter, Space grew sales 6% and profits 2% year over year.

We now anticipate 2026 sales of between 13.85 and 14.05 billion, supported by key wins on the Next Generation Interceptor, Fleet Ballistic Missile, and several classified national security programs. The Space full year profit outlook was lowered to between 1.34 and 1.38 billion due to reduced ULA equity earnings because of the ongoing technical investigation of the Vulcan launch anomaly experienced earlier this year. Growth rates at Space will follow the same trend as each of the other segments.

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

Evan, now back to you.

Evan Scott, Chief Financial Officer

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

And now we'll open the call for questions.

OPERATOR

Thank you. If you would like to ask a question, please press star then one now on your touchtone phone. You will hear an annunciator 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 1.

At this time, your first question comes from Scott Duchel with Deutsche Bank. Your line is open.

Scott Duchel, Analyst at Deutsche Bank

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

Thank you.

Jim Taiclet, Chairman, President & CEO

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

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

There's a couple ways to get into that. One is target–weapons matching. Right. So for the various threats that come about or that we're aware of or the military has to face, what is the best weapon to defeat that target. And so to just take the example you raised, the PAC‑3 MSE. We use PAC‑3 missiles, or our military uses PAC‑3 missiles, for a wide range. The MSE missile for a wide range of targets, it has more capability than some of those targets require at a higher cost.

So we just went ahead and said we know we need a PAC‑3 missile that may be not as expensive and not as sophisticated. And how could two‑thirds of the capability of the PAC‑3 MSE for, call it, half the price or maybe even a third of the price, and that's target–weapons matching. So the PAC‑3 MSE can hit long‑range, high‑speed, almost intercontinental ballistic missiles. It can also defeat hypersonic missiles. And that's been demonstrated in Europe.

That maneuver in the end state. But we need a lower‑capability, lower‑cost PAC‑3 missile for short‑range ballistic missiles and for cruise missiles and drones. And so we just went ahead without an RFP or RFI or anything like that to figure out how to solve that target–weapons matching problem in an environment of economic equivalence. Right. So we want to get an economic match, cost to cost, and also the target–weapons match for capability. And that's the way we're running the company now. That's, again, not only the largest contractor, so to speak—when a contract comes, we compete for it, we win it—but how do we be the clear leader in the defense technology segment to benefit our national defense? That's the mindset change we have. So yes, we are investing in the manufacturing and design capabilities before the orders come in. And I think that's the right way to run the company.

OPERATOR

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

Scott Mikus, Analyst at Melius Research

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

Jim Taiclet, Chairman, President & CEO

So Scott, this is exactly why the landmark multi‑year munitions commercial framework agreements are so critical. Because the DoD team in place today, Under Secretary Hexseth and Deputy Secretary Feinberg as well, and their teams under that leadership, we believe they share our view that to fully engage U.S. industry more broadly in supporting the national defense, that they and we must embrace commercially inspired, long‑term, enforceable agreements and contracts that can't be changed at the whim of the government, just like the C‑130, without compensating the industry players.

And it could be a new entrant, it could be a startup, it could be Lockheed Martin, it could be RTX. We need the confidence to act as we would act in a commercial environment to make investments to solve these national defense problems. So I think this is the leadership team in government that can actually leapfrog whatever's gone on before when it comes to commercial‑type agreements and include the biggest prime contractors in that that are willing to step up and, as the prior question suggested, invest ahead of time, think ahead of time, and put development effort into non‑ordered, non‑contracted systems that we think as industry with our partners are going to be important for the future. So those agreements will have to stand the test of time as circumstances, budgets, and political leadership is going to change over time. And so again, with, I think, the administration's leadership in place today, we will establish with them survivable long‑term contracts that will allow industry to act on a more commercial basis. That's where I think we're at today. And we don't plan to ever put ourselves in a risk position where we don't have that confidence in the contract that we didn't have for the C‑130.

We're not doing that anymore. We're not taking that kind of risk without a counterparty that's willing to work on a commercial basis right along with us.

OPERATOR

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

John Godden, Analyst at Citi

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

Jim Taiclet, Chairman, President & CEO

I'll start off and maybe let Evan speak a little bit more about some of the individual programs. But just take the F‑35 for example. There's long‑term demand for that aircraft both in the U.S. government and among our allies. It's the only in‑production fifth‑generation fighter in the free world, which means we have to keep building it and there'll be demand for it as time goes on. If you just look at the Far East theater, the PACOM command area, the Chinese are building literally hundreds of F‑35‑type aircraft.

I'd like to argue that they're not as capable, but they are building a high‑rate fifth‑generation aircraft to apply to that theater at a pace which we hope to continue to stay competitive with. Let me say, the intent of the Department of Defense in this budget cycle was 85 aircraft for the United States alone. The balance of the 156 per year would be then allocated to our allies and partners overseas. Now Congress has to work with the administration to figure out how to budget and fund that.

But that aircraft, whether it's this budget cycle, the next one, five years from now, is going to be in high demand. We feel really confident that the 156‑per‑year production rate will be sustained for quite some time. And the to‑ing and fro‑ing of the political budget cycles will not in the long or medium term, or even in the short term, I think, really adversely affect what the country needs and what our allies need to defend themselves in, sadly, an increasingly sort of dangerous world.

So Evan, do you want to add to that?

Evan Scott, Chief Financial Officer

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

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

OPERATOR

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

Gautam Khanna, Analyst at TD Cowen

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

Thank you.

Evan Scott, Chief Financial Officer

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

I think if you look broader across the portfolio, the thing to look for is the amount of scale across the portfolio. So for instance, in RMS there are four Sikorsky platforms that are all delivering more this year compared to last year. In the case of 53K, we could be talking 2x deliveries this year versus last year and potentially doubling again next year. In Aeronautics, F‑16 and C‑130 all deliver more this year versus last year. And in MFC, there's a total of 10 munitions that are delivering more this year versus last year.

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

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

OPERATOR

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

Sheila Kahyaoglu, Analyst at Jefferies

Good morning guys and thank you so much for the time and all the clarity on the script. I guess can we talk about just the discussion today on supply–demand signals that you're continuing to invest in '26 and for years to come. How do we think about just the capex efficiencies that you're seeing and how we think about '27 and how the customer funding looks as we think about level of investments this year and going forward?

Evan Scott, Chief Financial Officer

Yeah, I'll start on the CapEx and the investment. A few things to note here. One, while we did reduce our capital expenditures for the year, there's a couple things to note. One, a part of that is driven by just timing. So for instance, on the MFC side, there's a facility we intended to buy that we instead decided to lease for a year and buy next year due to tax efficiencies. But the other thing that's really interesting to note there, it's one of the first true early returns of the partnerships that we've experienced with the Department of War and the Bond team, where we partnered to really look at the most efficient, fast way to scale these munitions. Which is why we would say we're ahead of progress or schedule to scale and doing it more efficiently. But our commitment to invest a total between 8 to 9 billion dollars of capital munition scaling is unchanged. So you're going to see us continue to be in a growth and investment mode over the next few years. What's important when you look at the free cash flow is that we can pair it with the kind of free cash flow generation that we experienced this quarter.

And that's due to a number of things. One, some improvements we're seeing in working capital and the very nature of these deals that Jim mentioned that are critical for the mission, scaling that allows favorable cash treatment while we do self investment on the capacity and from a broader

Jim Taiclet, Chairman, President & CEO

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

The production line looks like the robotic production line that you think about for auto factories and such, where there's a few people running automated machines and robots vis-à-vis the ATACMS line, which is about two-thirds of that building, which was designed decades ago. We didn't have all these automated technologies. We didn't have AI to be able to control the robotics and learn from experience. And there's a lot more people over there and it takes up a lot more space.

And we're basically partnering with Rheinmetall, as you heard, to move that ATACMS line into factory space in Germany where the customer base largely is now and expand the PRISM line without building another building for it. So that's a trade everyone should be happy with. We've got an international partner that's going to provide floor space, factory space, talent that we need, and investment that we don't have to then put in. That's just one example of how do you get the most efficiency when the demand is going up at the rate it is.

And just one note on the framework agreements. Remember, we're being asked to triple PAC-3 MSE production, quadruple THAAD production, and scale up PRISM production faster than we ever thought we would. And all those things are happening because we're using every card in the deck to get that. We call it the ramp in this space here, the ramp rate. As high as we can, as fast as we can, as efficiently as we can. And that's how we're going about this.

And the government's giving us a lot more flexibility than they traditionally would have done under requirements and other facets that they traditionally provide that we can be faster. That's what I hear from the Deputy Secretary every time we get together and beyond. Faster, faster, faster. And so we're using all the cards in the deck to be as efficient as we can, as we try to go faster.

OPERATOR

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

Rob Stallard, Analyst at Vertical Research Partners

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

Evan Scott, Chief Financial Officer

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

OPERATOR

Your next question comes from Matt Akers with BNP Paribas. Your line is open.

Matt Akers, Analyst at BNP Paribas

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

Evan Scott, Chief Financial Officer

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

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

So for next year, I think generally speaking this year is a good reflection within 20 to 30 basis points.

Jim Taiclet, Chairman, President & CEO

Yeah. Matt, this is Jim. There's something really important embedded in what Evan just went through. Traditional government accounting, CAS — it's called Cost Accounting System-based accounting in the Federal Acquisition Regulation — reprices even fixed price contracts if the cost to the vendor goes down. So putting it, let's say we put $10 million into new robotics in Camden and our cost per unit was $100,000 before and it went down to $90,000. Well, we'd get repriced down 10%. And who would invest $10 million to get their price down 10% and bleed out all of that benefit? That's the issue with our industry — is essentially that accounting system. What the framework agreements do is take that away. In other words, as Evan suggested, if we get efficiencies while we ramp up our product line, we get to keep it in our own profitability. Now we have to do it, we have to perform, but we keep our own profitability to ourselves instead of give it back every year on the recost analysis that the government tends to do in traditional contracts.

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

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

Christine Liwag, Analyst at Morgan Stanley

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

Jim Taiclet, Chairman, President & CEO

Sure. Christine, it's Jim. I'll start. Maybe Evan can speak to the financial opportunity set here. Grizzly, and also another system that we have called Morpheus, those were developed by kind of skunkworks-type groups in our MFC business, right, with cooperation and collaboration with the other business areas, which is, you know, again, something relatively new for us in those kinds of advanced development programs, as we call them. So we made a visit — my executive team, we hold many of our executive team meetings, you know, monthly meetings at sites, you know.

So we're in board meetings too, by the way. Syracuse, New York — we had a board meeting, executive meeting. That's where we build the radars. A few months ago, we had one of the executive meetings at our Orlando facility, which is an MFC facility in central Florida, which is quite extensive. There's a big development team there and there's manufacturing there. And that's the kind of place, like Skunk Works in California for the Aeronautics group, where you can actually figure out things that are new and novel and get ahead of demand and all those aspirations that we have.

It was quite a mix of young and more experienced people. They showed us two things. They showed us a prototype Grizzly which includes the sort of advanced Hellfire, which is now called JAGM something. We make tens of thousands a year for the Army. The Army has tens of thousands more in their stockpiles. This is not a limited munition, for example, and it's not expensive either. It's made its volume, as I said. And containerization is one of our big themes in development now, which is we ought to be able to move stuff and put it on a ship or the back of a truck, or pick it up with a helicopter and move it.

Because the threats are getting much more dispersed, if you will, with the drones and cruise missiles and things that are coming out now. And we have to have defensive systems that can protect air bases or stadiums or whatever that are containerized, meaning we can move them and just set them up someplace and they are going to work. So there are two teams that had displays for us. One was the Grizzly team and they showed us that they could invent a containerized launcher.

Kind of looks like a four-pack of IPA beer you could buy at the store. And the Hellfires are in there. They connected it to a command and control system through what we call Sanctum. And by the way, the provider of the Sanctum radar is not necessarily our RMS business. It's one of our Lockheed Martin Ventures companies called Fordham. They have a small transportable radar which goes right along with the concept. So we matched something we had from a Ventures company, we invested in MFC, most mass-produced missile we have and repurposed the whole thing to shoot down drones.

Then we went 50 ft down the factory floor to the next demonstration and they had what we call Morpheus, which is this big quadcopter about the size of a dining room table and it has a box on top which is a high-power microwave. And the teams of again eager developers working with the manufacturing folks at MFC literally built this device in kind of the garage almost, if you will, and showed it. And we asked about the testing, and Frank St. John and I were there and we're asking about the testing, the testing working, you know, what's the success rate and all that.

And it's pretty high. So they said, yeah, we can get up using AI, let this drone take off on its own. We pre-programmed the bad drones, what they look like, both from a radar signature or a LIDAR signature and also electronic-warfare-type signatures. And if the drone sees one, you don't need a person involved. It just goes over, flies next to it like a formation flight in an airplane and then turns on the high-power microwave and fries the electronics of the drone.

And it goes and does that up to 50 times on one battery charge and then it goes back for recharge. And I just said to both teams, build 1,000 of these. Evan's like having a little bit of palpitations and we'll figure out each of them and we'll figure out how to deploy them with the Army or the Marines or whoever's going to go—Special Forces, write us a contract first, we'll have them available and if they don't sell here, we developed them on our own, we'll try to get exportability really quick and we'll go sell them somewhere else.

So that's the mentality we have now. And then there's so many young people. We have 60,000 plus engineers and scientists. When they get the straitjacket pulled off of them and say, go invent something that has the range, payload, survivability and economic equivalence to a threat that's really happening and really killing people in places, then how do we— They then unleash their animal spirits, so to speak, and they come up with this stuff. So we just pre-funded it.

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

Evan Scott, Chief Financial Officer

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

What we're talking about investing in would be incremental to that. We don't see this as taking the place of those products. We see this supplementing and adding additional capabilities and resilience to the customer's capabilities. So we see this as potential upside for us and we have the financial firepower to be able to make these investments.

OPERATOR

Your next question comes from Gavin Parsons with UBS. Your line is open.

Gavin Parsons, Analyst at UBS

Thank you. Morning. Morning. I just wanted to follow up on an earlier question on the frameworks and I appreciate all the detail but I wanted to make sure I understand whether anything changes operationally or financially when you firm up the UCAs into true multi-years and then what the long poles in the tent are to fully finalizing that.

Evan Scott, Chief Financial Officer

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

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

Mark Kovasnik, Vice President, Investor Relations

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

Jim Taiclet, Chairman, President & CEO

Yeah, thanks Mark. Hey, I just want to close by recognizing the people who make this performance possible. First, our employees and the thousands of suppliers who alongside of us are investing, innovating and expanding their capacity. So thank you to everyone for actually participating in all of this. Their commitment and our employees and our teammates commitments are strengthening America's defense industrial base every day. And it needs to get better.

Most importantly, I'd like to thank the men and women of the U.S. military and our allies who are operating and sustaining our systems around the world in dangerous places. And everything we do is guided by a simple standard for the soldiers and sailors and Marines and Guardians and Airmen out there: deliver reliable, mission-ready capabilities and equipment when they need it so they can do their mission and come back safely. As well as our partners at NASA who continue to push the boundaries of space exploration as well.

So that's a responsibility that motivates our team every day. You can see, I think, some of the energy that we have just on this call about really trying to make this a much better aerospace and defense industry and really lead the elevation of deterrence to armed conflict that our government has access to. So thank you, and we'll see you next quarter.

OPERATOR

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

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.