Q2 2025 Lockheed Martin Corp Earnings Call
Good day, and welcome everyone to the Lockheed Martin. Second quarter, 2025 earnings results conference call. Today's call is being recorded if you would like to ask a question. Please. Press star then 1. Now at this time for opening remarks and introductions, I would like to turn the call over to Maria. Richard on Vice
Maria Richard: President Treasurer and investor relations. Please go ahead.
Maria Richard: Thank you, Sarah. Good morning. I'd like to welcome everyone to our second quarter 2025 earnings conference call. Joining me today on the call are Jim Tait, our chairman president and chief executive officer and Evan, Scott, our Chief Financial Officer
Statements made in today's call that are not historical facts. Are considered forward-looking statements
Maria Richard: and are made pursuant to the safe harbor, provisions of the federal Security's law.
Maria Richard: Please access our website at www. Lucky martin.com and click on the investor relations link to view and follow the charts.
Jim Tait: With that. I'd like to turn the call over to Jim.
Jim Tait: Thanks Maria. Good morning everyone and thank you for joining us on our second quarter. 20125 earnings call.
Jim Tait: I'm going to cover 4 things today. Our quarterly results,
Jim Tait: Details of the recent effectiveness of our systems and platforms and combat operations.
Jim Tait: The current status of the budget and customer environment.
Jim Tait: And an update on the F-35 program.
The recent highly effective performance of many Mission critical. Lockheed Martin systems have resulted recently in our customers direction to accelerate the scaling of production, as well as a development of some Advanced Technologies.
Jim Tait: At the same time our ongoing program review process, identify new developments that caused us to re-evaluate the financial position on the set of major Legacy programs.
Evan Scott and his new position LED this review, which was also informed by concurrent customer inputs and negotiations.
Jim Tait: Current operational performance and future risk profiles.
Jim Tait: As a result, we are this quarter taking a number of charges to address these newly identified risks.
Jim Tait: And prepare the company to fully focus on the growth opportunity. We expect as a result of heightened interest and demand for Lockheed Martin's products and Technologies.
Jim Tait: As to our quarterly results. As you saw in our press release this morning, we reported 18 billion dollars of sales.
Jim Tait: Invested millions in infrastructure and Innovation for growth and return 1.3 billion dollars to our shareholders, in the second quarter.
Jim Tait: We also recognize losses of 1.8 billion across several Legacy programs, as a result of the deepened review process that, I just described, and also, a tax matter.
Jim Tait: The actions that we have taken this quarter, follow a multi-year concerted. Long-term efforts to improve these programs performance in light of the original contractual terms.
We are dedicated to both supporting our customers National Defense priorities, while striving to maintain our contractual commitments in an economically viable way on behalf of UR shareholders as well.
Jim Tait: We take these Financial charges very seriously and are redoubling. Our focus on program management and performance under existing contracts across the company.
Jim Tait: While also ensuring that all future contracts more robustly, assess an account for future programs and Technical risks.
Jim Tait: Starting with sorsky, Turkish utility helicopter program, or tuh.
Jim Tait: And the Canadian Maritime helicopter program cmhp in the second quarter, the leadership teams for these 2 Programs held a series of direct in-depth discussions with their respective customers and results.
Jim Tait: Recognize losses when we revised the costs and sales estimates for these programs.
Jim Tait: For tuh, we've reached the notional agreement to restructure the program, including a charge of a change of scope of work due to the impacts of US. Government sanctions on Turkish entities and persons involved in that program.
Jim Tait: For cmhp, we are focused on providing additional milk, Mission capabilities and enhancing logistical support.
Jim Tait: And extending the fleet's life. While we continue discussions to potentially restructure certain contractual terms,
Jim Tait: Turning to the classified program and Aeronautics our mission at Skunk Works. Pushes the boundaries of Science and Technology to deliver. Highly Advanced solutions to provide our customers, a step function advantage over potential adversaries.
This particular program team, discovered new insights in the quarter that required us to adjust our expected future costs on that program.
Jim Tait: And then recognize the charge for doing so.
Jim Tait: I acknowledge the losses on this classified program are significant.
Jim Tait: Again, we are taking these charges very seriously and initiated changes in program team management.
Jim Tait: And assigned experts across the company to approve, the performance and oversight of this program under a comprehensive risk, identification and corrective action plan.
This is a highly classified program that can only be described as game-changing capability for our joint us International customers.
Jim Tait: And therefore, it is critical that it be successfully fielded.
Jim Tait: Advanced system.
Jim Tait: The criticality of our work was made clear last month in a high-stakes demonstration of modern deterrence and combat readiness.
Jim Tait: Lockheed Martin's capabilities were at the center of recent US. Military operations, in the Middle East, reinforcing the company's essential role to American and Allied National Security.
Jim Tait: Pilots flying the F-35 lightning to and the F-22 Raptor stealth Fighters led the operation, providing the air dominance and defense suppression required for the bombers to reach. Iran's heart and nuclear sights.
Jim Tait: Our platforms operated essentially undetected in highly defended and contested airspace underscoring. The value of advanced stealth Superior, electronic warfare and Broadband Communications capabilities,
Jim Tait: This tactical success is a real world confirmation of Lockheed Martin's. Leading role in combat proven are power.
Jim Tait: Our capabilities were also integral to safely and 100% effectively defending American troops.
Jim Tait: When Iran retaliated with a salvo ballistic missiles on US forces stationed at LED Air Base in Qatar our Pack 3 missiles successfully intercepted the incoming threats.
Jim Tait: This engagement executed by the Patriot missile system, occurred in a region, also supported by Thad, our terminal high altitude area defense in Aegis.
These systems form a multiple layer defense Shield protecting us, strategic assets, and our Allied nations in the Middle East.
Jim Tait: This moment was 1 of several recent real world events, that validated the operational reliability of our integrated air and missile Defence portfolio and underscored its scalability and joint and Allied operations, including the ability to coordinate closely with our regional Partners like the guitar emiri Air Defense Forces.
Jim Tait: These are the exact Solutions needed to make golden dome for America, a reality.
Lucky, Martin is the emission. Integrator with ready now? Capabilities across All Phases of the missile defense mission to support this essential program.
Jim Tait: In addition to sad Pac, 3 and E is performing in combat. We also demonstrated our Readiness in the missile warning and command and control Technologies needed to make golden dome Homeland defense system. A reality
In addition and in partnership with the missile defense agency, we successfully executed a breakthrough flight test recently. The Lockheed Martin long-range discrimination, radar or lrdr.
Jim Tait: Successfully detected and tracked a representative live ballistic missile threat. The system, then integrated the data into the nda's missile defense system.
Jim Tait: Lockheed Martin is the national team lead for this missile defense. Network known as C2 BMC.
Jim Tait: We can leverage this experience as well as our expertise in space satellite reconnaissance tracking and Communications. And the Next Generation Interceptor to rapidly deliver Homeland. Defense capabilities for golden dome.
Jim Tait: Our major systems and platforms are performing, meaning very effectively in actual combat operations. And thereby contributing today to Global deterrence, these achievements reinforce their relevance in the budget process, as well as ongoing discussions with the administration.
Jim Tait: For example, the US government's focus on securing the Homeland and deterring aggressors will lead to a significant increase in munition spending over the coming years.
Jim Tait: I'll provide a few examples of that in a moment.
In addition, Cornerstone platforms. Like the F-35 and ch-53k remain, not just relevant, but essential to National Security of the United States and its allies due to their unique range, payload, and other capabilities.
As part of the FY, 26, budget request the US. Navy marked, its intent to purchase Pack 3 for the first time, an important step for Pack. 3 e disintegration
Jim Tait: This is the result of several years of internal investment at Lockheed Martin and a successful flight test last year. Moreover the US Army's requested quadrupling the production of Pack 3 missiles and we are also in discussions with the administration about scenario planning to increase the production rates of a number of other Munitions and launchers significantly and quickly.
Jim Tait: Hypersonics have also been elevated and priority.
Jim Tait: This program is a great example of the kind of Speed and Agility. We can achieve
Jim Tait: Less than a year after Lockheed Martin began rapidly, developing this program. Arrow had its first flight test,
Jim Tait: we have full confidence in the maturity and production Readiness of arrows, Hypersonic strike capabilities. And we look forward to continuing our partnership with the US Air Force to transition the program into production.
Also in the Hypersonic arena in May.
Jim Tait: The US Navy, publicized a successful end to end flight test of our conventional prompt strike or CPS missile from the Cape. Canaveral space force station this test marked, the first launch of CPS using the Navy's cold gas launch approach. That will be used in c-based Hypersonic fields.
Jim Tait: Further the US Coast Guard in its budget. Included additional, mh6 Romeo's, new shifts of Lockheed Martin, C2 systems, and c130j.
Jim Tait: And more recently in July, we reached a price agreement with the US, Navy on a 5-year. Multi-year procurement for a ch53k lots 9, through 13 and that'll be for a minimum of 85 aircraft.
The word is targeted for late in the third quarter. It was initial deliveries commencing in 2029.
Jim Tait: So, before I hand it over to Evan, I'd like to provide an update on the status of the F-35 program.
Jim Tait: We delivered at 50 aircraft in the quarter, bringing our total F-35, deliveries to 97 so far this year and a 2007. Since we resumed, deliveries last year,
We also remain on track for 170 to 100 90. Deliveries this year 2025
Jim Tait: We have completed tr3 Hardware integration and earlier this month, we released new software to the fleet, continuing our maturation and Fielding of advanced block 4 capability.
Jim Tait: This update improves the pilot interface.
Jim Tait: And provides additional weapons and electric. Electronic warfare features.
We're also continuing to see strong International demand for the F-35. The UK announced this plan to procure 12 f-35b
Jim Tait: Finally, I want to take a moment to commend the dod's. Recently announced investment in rare earth, Mining and magnet production right here in the United States.
Jim Tait: Led by Deputy defense secretary Steve Feinberg and with a strong support of Defense, secretary heg Seth and of course, president Trump. This groundbreaking public private partnership will ensure the supply of rare earth magnets needed in an f-35s cruise missiles and countless other defense and non-defense applications
Speaker Change: I'll turn it over to Evan now, to share more about our financial results. Thanks, Jim and good morning everyone. Today, I'll provide an overview of our Consolidated Financial results for the second quarter. They and hand off to Maria who will cover business Theory financials and I'll come back at the end to discuss our updated Outlook.
Speaker Change: Starting on chart 4. Second quarter sales were 18.2 billion dollars comparable, year-over-year end up sequentially from the first quarter.
Speaker Change: We saw strong growth on Mr. Programs within MFC, on F-35 production at Aeronautics and on, strategic missiles within space.
Speaker Change: Partially offset by the impact of the charges at Aeronautics and RMS more on those in a moment.
Speaker Change: Excluding the charges sales increased in the mid single-digit range, continuing the solid underlying growth from the first quarter and setting us up well to achieve our full year goal.
Speaker Change: Looking at segment operating profit of 570 million Jim mentioned, the 1.8 billion in total charges, while the operational portion of the losses hit that segment operating profit.
Speaker Change: Was 1.6 billion related to the charges at Skunk Works and score Skee with the impairment and tax item following below the line.
Speaker Change: First the aeroknox classified program as Jim mentioned, the process control and resource changes. We implemented following the fourth quarter of 2024. Along with additional performance data on the program, resulted in new insights that led us to recognize and incremental 950 million of reach for loss in the second quarter.
To provide more detail. We have experienced design integration and test challenges as well as other performance issues on this program.
Speaker Change: Those challenges and performance issues continued into 2025 and had a greater impact on scheduling costs than previously. Estimated.
Speaker Change: Integration tests and other processes to achieve the technical requirements of the program.
Speaker Change: Based on this review, an ongoing discussions with the customer and teammates.
Speaker Change: We made a significant change to our processes and testing approach resulting in a significant update to the program's schedule and cost estimates.
Speaker Change: Based on this, we believe that recognizing this incremental charge is a prudent continuation of the comprehensive corrective actions and risk. Mitigation approach we implemented at the start of the year.
Speaker Change: Which continues to demonstrate solid progress.
Speaker Change: Our continued investment in this program, reflects our ongoing confidence in its criticality for National Security. And we remain excited about the future prospects for this solution.
Speaker Change: Next on the Canadian Maritime helicopter program or cmhp.
Speaker Change: we've been in the negotiations with the Canadian government for some time now, attempting to reach a mutually beneficial solution,
Speaker Change: Based on recent conversations, the company made a decision to provide enhanced capability to upgrade the Baseline Fleet.
Speaker Change: Improving helicopter, utilization and probability of recovery as part of our flight. Our based support contract over the coming years.
These actions resulted in a company, recognizing a 570 million loss this quarter.
Speaker Change: Lastly, the Turkish utility helicopter program or to
Speaker Change: US Government sanctions on, Turkish entities and persons have affected the company's ability to perform under this program.
Speaker Change: We've been communicating with the prime contract customer regarding alternative paths.
Speaker Change: And during the second quarter, the company recognized a 95 million dollar loss reflecting, the latest status of those discussions.
Speaker Change: I recognize that these additional charges are disappointing. We have a focused team engaged with these programs, on a daily basis, actively implementing our adjusted approach and working to prevent charges like this going forward.
Speaker Change: We continue to learn. And the fact is these are important, although challenging programs and locky. Martin has a long Legacy of innovation and navigating complex issues.
We're confident over the long term that we'll be able to manage these issues, and continue extending our track record of delivering, for the customer and our shareholders.
Speaker Change: As part of our ongoing review process. And as I've stepped into the CFO role, we've added rigor to our existing program management controls and processes.
Speaker Change: Engaging subject. Matter experts from across the corporation, holding regular independent review, teams and increasing oversight. Especially in cases, where there are known technical complexities, contractual nuances, and other unique execution challenges.
Speaker Change: The Lessons Learned here are being shared to ensure our risk identification and mitigation efforts are optimized across the portfolio.
Speaker Change: Moving to earnings per share our Gap results were 1.46 in the quarter.
Speaker Change: Inclusive of the impacts from the program, losses previously. Mentioned
As well as impairment charges related to the ngad decision and a reserved for uncertain tax positions.
Speaker Change: in total, these items reduce EPS by 5.83 cents,
Speaker Change: On the tax item, the IRS now asserts that we owe 4.6 billion dollars of a of additional income tax associated with a tax accounting method. Change we made in conjunction with the ASC 606 implementation and the 2017 tax legislation.
Speaker Change: The IRS initially approved our method changes accepting our interpretation and application of the law. But later withdrew those acceptances
Speaker Change: We Stand by our tax accounting method being accurate and are pursuing remedies through the IRS independent office of appeals and if necessary through a Judicial proceeding
Speaker Change: We are accruing interest of 100 million in our income tax expense as part of our further evaluation of this matter.
Speaker Change: Moving to cash second quarter free, cash flow was the usage of 150 million.
Our operating cash flow was impacted by a few notable timing items in the quarter.
Speaker Change: first, the delay of the combined F-35 lot 1819 award created approximately 600 million of headwind within working capital,
Speaker Change: Second, we realized quarter to date Terrapin packs of approximately 100 million dollars.
Speaker Change: And lastly,
Speaker Change: Most balance due to Milestone and collection timing.
Speaker Change: Retribute. Most of these slower collections to timing and we've collected, a majority of the amount. We had expected to collect in Q2, during the first week of July.
Speaker Change: In addition, we anticipate the F-35 lot 1819 award in Q3 will liquidate a significant balance from contract assets.
Speaker Change: Finally, we returned a proximately 1.3 billion dollars to shareholders through dividends and share repurchases as part of our Dynamic and disciplined Capital deployment strategy.
Speaker Change: This is an addition to the continued reinvestment in the business that Jim detailed earlier.
Speaker Change: Now, I'll hand it over to Maria, to discuss the business of results in more detail.
Maria Richard: Thanks Evan. Okay, starting with Aeronautics on chart 5.
Speaker Change: Second quarter sales at Arrow increased 2% year-over-year to 7.4 billion dollars. The increase was primarily due to higher volumes on F-35, mainly on production contracts,
Speaker Change: And was partially offset by 360 million of lower volume from the classified program loss.
Excluding the impact of the classified program. Los sales would have been up mid single digits year-over-year.
Speaker Change: Decrease significantly year-over-year in the second quarter primarily due to the 950 million loss on a classified program.
Speaker Change: Excluding the impact of the classified program loss in both periods segment. Operating profit would have increased High single digits.
Speaker Change: Turning to missiles and Fire Control on chart 6.
Speaker Change: Sales at MFC in the quarter, increased 11% from the prior year to 3.4 billion driven by higher volume on multiple tactical and strike, missile programs, including Jazz and lzm high, Mars and prism.
Speaker Change: Segment, operating profit in Q2 improved by 6% year-over-year to 479 million driven by higher volume and favorable mix.
Speaker Change: Lower profit rate. Adjustments on Pac, 3 parties offset this growth.
Speaker Change: The photo on the right, shows a fad in addition to fads performance in combat that Jim talked about, we delivered, the eighth sad battery to the US government in the quarter.
Shipping to Rotary and mission systems on chart 7.
Speaker Change: Sales at RMS declined. 12% in the quarter to 4 billion dollars, primarily driven by the loss, impacts of 305 million related to the cmhp and two programs at sagorsky.
Speaker Change: Excluding the program loss impacts.
Speaker Change: Sales at RMS would have declined, mid single digits year-over-year, due to lower volume on Seahawk programs that supports ski. And on the Canadian surface. Combatant program at integrated Warfare systems and sensors.
Operating profit at RMS decreased significantly in the second quarter versus prior year, due to the cmhp and tohp program, losses of 665 million.
Excluding these program losses, operating profit at RMS, would have been comparable year-over-year.
Jim Tait: To the right shows, an lrdr, which recently performed a break breakthrough flight test as Jim mentioned.
Jim Tait: And on chart 8, we'll wrap up the business area discussion with space,
Jim Tait: space sales, increased 4% year-over-year due to higher volume at commercial civil space primarily on the Orion program and at strategic and missile defense
Jim Tait: driven by Next Generation Interceptor and Fleet ballistic missile programs.
Jim Tait: This growth was partially offset by a decrease at National Security space.
Jim Tait: Space operating profit, increased 5% compared to Q2 2024.
Jim Tait: This increase was driven by higher profit booking rate adjustments, primarily due to favorable performance on Commercial civil Space Program.
Equity earnings from United launch Alliance Ula were flat versus prior year.
The picture to the right is of the eighth GPS, 3, satellite, that successfully launched from Cape Canaveral space force station in Florida in May and achieved signal acquisitions.
Jim Tait: In addition, the space force ordered 2 additional GPS. 3F satellites in the quarter.
Evan Scott: Now, I'll turn it back over to Evan.
Thanks Maria. Shifting gears. I'll walk through guidance on chart 9.
Evan Scott: Impact of several items, including the aforementioned charges this quarter.
Evan Scott: Our current estimation of the Tariff impacts.
And anticipated, tax benefits from the recently, passed legislation, the 1, big beautiful, bill act.
Evan Scott: With a solid year-to-date growth and expectations for continued ramps. In the second half of the year. We are reaffirming our sales guidance of 73.75 billion to 74.75 billion
On a related note, we have line of sight to increase backlog in 2025, with a handful of significant Awards expected in the second half of the year including F-35 lot 1819.
Evan Scott: Jasmine, lzm large lot procurement Pack 3 production. Ch53k multi-year and classified space. Providing a solid foundation for sustained future growth.
Evan Scott: Segment operating profit has now expected to be in the range of 6.6 to 6.7 billion dollars with an implied, midpoint margin of 9% reflecting the 1.6 billion of program charges.
Evan Scott: We've lowered our earnings per share estimate to a range of 1.70 to 22 incorporating, the impacts from the charges impairments and tax Reserve.
Evan Scott: Turning to cash flow. We are maintaining our previously provided range of 6.6 to 6.8 billion per free cash flow in 2025. There are a few offsetting items worth discussing.
Evan Scott: First the Aeronautics. Classify program challenge is negatively, impact cash flow and that, along with the Tariff impacts combined to approximately 500 million of headwind this year.
Evan Scott: On the other hand, the administration's legislation is anticipated to provide approximately 400 to 600 million dollars in cash tax benefits.
Primarily related to R&D capitalization.
Evan Scott: The 2025 Outlook does not include a pension contribution.
Evan Scott: For wrapping it up. I'd like to take a moment to look Beyond 2025 for free cash flow specifically.
Evan Scott: previously we discussed a baseline case of low single-digit absolute free cash flow growth through 2027 with an upside case of mid single-digit growth being possible if we could unlock working Capital Improvements and offset the multi-year pension headwinds,
Evan Scott: This quarter's events and the rapidly developing opportunities are driving investment demands in the form of advancing. These complex programs accelerating capacity, and enhancing capability across our systems as a result. Our 2026 free cash. Flow could be closer to 6 billion.
Evan Scott: That said we remain confident in locky, Martin's prospects for growth and value creation and remain committed to returning Ed at least 6 billion dollars per year to shareholders through our reliable dividend and share repurchase program.
Evan Scott: Works excited about what the future has to offer. And we look forward to making progress toward our goals in the second half of the year, including continuing to execute on our strong backlog of 167 billion.
I will be partnering with Jim Frank and the rest of the leadership team to ensure we continue to drive, operational excellence, ensuring we deliver on our customer and programmatic commitments, while also generating solid Financial returns that create long-term value for our shareholders,
With that, Sarah, let's open up the call for Q&A.
Thank you. If you wish to ask a question, please press star. Then 1 on your touchtone phone, you will hear an annunciator indicating you have been placed in queue. You may remove yourself from the Queue at any time by pressing star then 1 again.
Evan Scott: We ask that you, please limit yourself to 1 question.
Evan Scott: If you're using a speaker-phone, please pick up the handset, before pressing the numbers. Once again, if you have a question, please press star then 1.
Your first question comes from Mi Walton of wolf, research. Your line is open.
Evan Scott: clarity as to how long you're under this owner risk contract,
Jim Tait: Good morning miles, it's Jim here. I'll start off and for it to Evan for more detail, but with Evan succession is the CFO role earlier this year and evidence of further program performance issues beginning to reemerge early in 2025.
Jim Tait: We reconstituted the program review team for classified Aeronautics program so we had a different team wider expertise from across the company and a higher level scr uh, higher level management as part of the scrutiny of the program.
Jim Tait: so we, uh, once
Jim Tait: We uh, put that team together.
Jim Tait: Having added additional expertise as I said from across the company. We reassessed the newly, evident trends of cost increases.
Jim Tait: And reevaluated all the program assumptions to the most detailed level of debt a level below what had been done previously.
Jim Tait: Once these assumptions and they were long-standing assumptions, were Reed. Baseline to the then current performance. The additional reach forward charge was calculated based on numerous future years of fixed price contract, commitments, unfortunately, due to the nature of the classification, we can't say how many years that is. Uh, but it is, uh,
Jim Tait: I'll say it is not Unlimited.
Jim Tait: It's to the long 2, the 2 Longleaf.
Evan Scott: New in-depth discussions were held with each of the 2 customers in the first half of 2025, as to the Future course of the contract. As you heard this feedback along with the internal program reviews of both again, led by Evan and his new role resulted in the charges that we were reporting in those 2 Programs.
Evan Scott: So I assure you that going forward, these 3 programs will continue to be monitored with a similar oversight regime.
Evan Scott: Including recurring Senior Management participation.
Evan Scott: Uh, a more robust, uh, uh, sequence and uh, tempo of a Senior Management reviews as ever before than ever before. Um, and we expect to be able to continue to reduce risk and promptly, identify emerging issues and corrective actions. If, and when they're needed.
Evan Scott: We'll also be applying this level of oversight and scrutiny to keep programs across the company.
Evan Scott: in an addition given the critical importance and customer support for these 3 particular programs, we will be and I will be actually further engaging their respective customers on opportunities to restructure these program contracts
Evan Scott: To moderate the currently identified and other potential risks.
Evan Scott: While meeting the National Security objectives of those customers.
Evan Scott: And finally, I want to reiterate the policy that was put in place at Lockheed Martin 5 years ago.
That there are no longer any must-win programs.
We will continue to ensure that every bid price proposal. And contract structure does not introduce outside or unbounded future risk. As we're seeing on these 3 programs,
Evan Scott: Evan, you want to add anything to that? Yeah, I I fully agree with that approach and um, and taking on what you've asked me to look on here. And and I would just add as well that the additional controls and rhythms that we established after 4, q gave us better insight into the challenges as they emerged. So that's the commitment to, to continue to transparency and that's what allowed us to signal in May that we were experiencing cost challenges and to have better insight as the continued program. Moved forward and note. At that same time, we signal confidence in the MFC classified program in that we have the same established discipline there.
Evan Scott: So we took the right amount of time to go through every assumption that we've got the best possible estimate to complete the multi-year process ahead of us. So I'll commit, we'll continue to be transparent as we perform on these programs actively monitoring managing those risks and think of every quarter as a burned down of risk, as we work through the development tasks on these game-changing products and
And we will keep you all updated as we go.
the next question comes from Ron Epstein of Bank of America, your line is open,
Hey ya. Good afternoon morning guys. Um so kind of 2 things here. Just just a quick follow on to Mi question because I don't think you answered it.
Right. Because there's some of this it's you know probably not all 1.8 billion has got a cash impact how much does and how should we think about that?
Speaker Change: Yeah. Hey Ron. So is Evan sort of stated in the fourth quarter review uh 2024 uh financials.
Evan Scott: when we took the first charge,
Evan Scott: we actually reset the entire way that that program is, uh, monitored. I'll say, um, and in that more, uh, rigorous monitoring system, we started to see as as Evan had signaled, uh, publicly in May, as he said, additional cost risk. Uh, there was an anomaly as we call it, uh, in the development phase, that was going to add cost and time as well. So these were and these are new discoveries that resulted in the charge that we're taking today. Uh,
Evan Scott: we didn't recognize or know that these Trends were happening until
Evan Scott: so if the year began and we started with that new monitoring system from the fourth quarter, seeing the cost rise, which we signaled,
Evan Scott: But then we have to flow it through to again multiple years.
Evan Scott: Of fixed price obligations to the government that were agreed to in 2018. So that's why you see the magnitude. Now will there be opportunity to reduce that? We hope so. Uh, part of it is potential contract restructuring. Uh, the customers aware of
Evan Scott: Uh, and will become increasingly aware after today, uh, of the cost that the that this program is putting on the company. And I think they're open to figuring out ways to make it more. Um, reasonable as I said, while keeping the National Security commitments that are that are required.
so that's the explanation like I said, take it, we take it very seriously, you know, it was
Evan Scott: You know, disconcerting to us when we started to see the cost growth after we've done the review previously. Uh, but that's the nature of something of, of, of this.
Evan Scott: Um,
Evan Scott: magical status, I would call it. Uh, we probably won't be able to talk about what that is for many years to come.
Evan Scott: But I can assure you that it's going to be in high demand for a very long time. Uh, well beyond the fixed price commitments, I would expect let's say,
Speaker Change: So I'll stop there and anything else. Yes uh sir Ron just to address the cash specifically.
Speaker Change: So we previously had assumed some cash usage on this program and our prior cash flow guidance. Uh, as of today, we're assuming a usage of 500 million dollars of cash tied to the, a classified program this year, which is baked inside of our cash guidance that we're reiterating at 6.6 to 6.8.
Jim Tait: Looking into next year, it steps down a little bit. Think of roughly 400 million dollars of cash, usage, next year, which we've factored in by giving the cash flow guidance for next year. And then it continues to step down. We have line of sight to 1 that goes positive and, uh, to Jim's point. I can't State exactly when that is, but but it's within our line of sight,
The next question comes from Rob Stallard with vertical research, your line is open.
Rob Stallard: Thanks so much. Good morning.
Rob Stallard: Good morning morning. Jim a quick question for you on the F-35 the administration's uh FY 26 requests for the dod shows, a reduction uh in what they want uh from the aircraft. And there's only if you've got any explanation as to the why the customer is saying this and then secondly, how easy is it to actually swap out any relinquished DOD Slots of that occurs, uh, with export customers. Thank you.
Rob Stallard: So Rob, you're absolutely right about the president's budget which is the first step in the actual Congressional.
Speaker Change: Uh, process of creating, uh, orders and allocating, uh, Appropriations to those orders.
Rob Stallard: and so,
Rob Stallard: Where we're at in the process now is that the house arms. Uh, but uh, Appropriations Committee
Rob Stallard: Marked up.
Rob Stallard: The 47 to 69, so the house added, uh, in Appropriations actually, right? So 22 Jets. That's the last step in their process. The Senate's, not as far along, uh, the Senate armed services committee
Rob Stallard: Historically. Um,
Rob Stallard: The Appropriations committees have the final say on numbers. So we know what the house is, uh, position is on that. We don't know yet the Senate's but uh, I would be hopeful and we certainly can't guarantee that this outcome, but I'd be hopeful that
Rob Stallard: The uh, House Appropriations Committee, Mark, might flow over to the Senate, but that's, that's a hopeful uh, you know, future, uh, we can't guarantee that.
Rob Stallard: So there will be, I think greater demand in by the end of the budget process than what was submitted initially in the president's budget.
Rob Stallard: and,
I'll add as well, you know, despite uh, just a lot of about 35 being delivered, as you mentioned, we delivered 50 this quarter and continued to deliver strong. We still have 311 in backlog as we end the second quarter and we expect to add about another 150 with Lot 19 coming up the second half of the year. So in terms of looking ahead and be able to plan for production plans, we've got a fair bit of flexibility based on the strength of our backlog today. Yeah. That. That's right. We can because we've got, you know, a couple of your lead times.
Rob Stallard: Uh, we can move International in and out.
Rob Stallard: Um and you just as you heard there plus UPS in a number of current customers.
Rob Stallard: And there's interest in others. Uh which of course I can't get into at this point but
Rob Stallard: It can be very exciting. So uh, we'll have to play all that out, but I'm confident that the F-35 production rate will still stay strong.
Sheila Coup: The next question comes from Sheila coup with Jeffrey's your line is open.
Sheila Coup: Uh, thank you. Good morning Jim and Evan. Um maybe if we could talk and Maria, maybe if we could talk about 2 items because I'm a bit confused first. If we could touch upon that 4.6 billion, tax liability commentary, what's that related to? And how would it impact free cash flow going forward? And Evan, on the 6 billion free cash flow Target for 26, down, 10% versus 25. How much of that is any forward? Losses, working, capital investment, what's the benefit from section 174? If you could clarify in any pension contribution assumed in that number,
Speaker Change: thank you.
Speaker Change: Sheila, appreciate the question. So with respect to the tax nopa that we received from the IRS, we have filed our appeal as we fundamentally disagree with the position that the IRS has taken, as we stated in the comments, they had previously signed off and agree with our interpretation as our process. Appropriately. Max.
Speaker Change: Matches, revenue and expenses.
Speaker Change: The RSS approach shows a mismatch between the 2, which is why you see such a large number. Uh, we stand by our approach and we have taken a hundred million dollar, uh, pnl charge to reference some amount of Interest as just to have some amount of liability in the books that we think is the most likely outcome. If this should see all itself, all the way through, which is to say much much less than the numbers that we're talking about here.
Speaker Change: With respect to looking forward to next year.
Speaker Change: Uh, a couple things there to, to look at 1 is
Speaker Change: Uh, on the Aero classified program, we we see that a few hundred million dollars of reach for charge cash impact.
Speaker Change: On the MFC classified program, there's roughly 200 to 250,000. Also, in that 2026 cash flow expectation.
Speaker Change: Uh, we see some goodness on the tax side from the new tax legislation of a of a few hundred million dollars.
Speaker Change: And then we continue to work working capital in the meantime to continue to drive that.
Speaker Change: Uh those are sort of the main items right now that are assumed in there as well as some kind of nominal tariff tariff, timing impact as well. All sort of baked into our latest assumption
Speaker Change: And I should add that. We also have assumed a 1 billion dollar pension contribution next year and this year there is no pension contribution.
Rob Stallard: Yeah, and Sheila just to add something from my perspective at the most basic level on this tax plan. It's basically.
Speaker Change: A value added tax approach, which we don't have in this country where we get taxed on our Revenue versus taxed on our profits. So, I am incredibly confident that this will get adjudicated fairly. Uh, and the reserve is appropriate for this point in time.
Speaker Change: The next question comes from Noah papanack with Goldman Sachs, your line is open.
Noah papanack: Hey, good morning everyone. Um
Noah papanack: Evan, your the updated 2025 guidance. Implies that the, uh, in the back half, the RMS margin is in the mid tens Aeronautics in the mid 9s. And I think the total in the mid 10s is are those the Run rates of those segments margins for the foreseeable future with the adjustments you've taken today or or is there some reason those would step up next year? And then can you just talk a little bit more about your review of the MFC classified program? That's had charges before, because
Noah papanack: um, you know, that had a little bit of an unusual treatment where there were planned charges in the future,
Noah papanack: Yeah, good morning.
Noah papanack: So I think with respect to margins, as we look at it here, we did see some 1-time step-ups in the first half of the year.
Noah papanack: Uh, so we're going to going to continue to look at out your margins as we go through the lrp process, and we'll have more to say in the coming quarters. The goal, of course, is to continue to drive margins up incrementally as we see mix turn to more established production programs in that we're ramping across several of those. So we'll share more more of that in the coming quarters as we work through that process.
Noah papanack: With the respect to uh, MFC classified program.
Speaker Change: This is a program. I'm very familiar with and that I worked it personally in my last role, so it also has a reach for charge that we disclosed in the fourth quarter of last year, we've continued to monitor this very closely similar to how we're monitoring the aeroclass fight program.
And we've signaled throughout this quarter and continue to single now that we've got confidence with how we're positioned with that program.
Speaker Change: Uh, also, a very important program for the war fighter that we're anxious to deliver with strong customer advocacy. Do you mean anything you that
Speaker Change: Yeah, I'd say that NFC program, and I mentioned this before, you know, the next Air Force pilot, this is again another game-changing capability for the US, um, really essential and even on the margins. I think there is some, uh, upside in the future because those margins were affected by some of these 1 time. Write offs, although there were some plus us the right offs. Obviously, we're we're way higher, so there could be upside on. We're not doing guidance for 2026 here, but
Speaker Change: You know, there's there's could be opportunities, especially in MFC.
Speaker Change: Next question, comes from Peter, arment with beard, your line is open.
Speaker Change: Yeah, good morning, Jim Nevin. Um, hey uh, Jim and Evan. You both commented on on backlog and and, and the expected some growth in the back half of the year. Maybe could you comment on on Golden domes specifically have you Quantified the opportunity for Lockheed Martin and when we would expect it to hit, you know, from the from a backlog perspective uh just thinking in terms of the size and then just quickly I Evan as a as as we think about cash. And uh, with with tr3 completed um should we expect to see an improvement in kind of the Milestone payments for F-35? Thanks.
Speaker Change: On golden dome, the plan.
Speaker Change: On the government side isn't laid out yet. Uh, as I mentioned earlier, I think we have
Speaker Change: many, many of the essential ingredients, to to implement, something of that nature, especially at the scale that's being discussed.
Speaker Change: The other part I would love to talk about but we're a little short on time so I'll do another day as counter. Uas will be part of that and we're making lots of advancements there. Uh, we don't usually come out and talk things until they're, you know, up and running and we have a customer and we're delivering. But that's an initiative that will be part of golden dome that we're getting out in front of counter uas.
Speaker Change: And so, uh, I would love to be able to say that, uh, we have a, a quantifiable uh, up uptick to backlog because the golden dome, but there's no contracts out there. There's no been proposals yet. Uh, and so as soon as we have them, uh, we're going to be all in on those and we are talking about architecture, uh, with the US government as to how you might architect and, and lay something like this out over time. Uh, but they haven't, uh, they haven't announced anything yet that we can actually hang our hat on for, for a backlog.
Speaker Change: Munition, our missile programs being very key to that and we're getting ourselves ready to invest in additional manufacturing capacity. And so the timing is very good with the tax act that came through.
Speaker Change: With respect to cash. Absolutely. We expect to see a very strong cash, second half of the Year led by F-35 getting the the lot 18 and 19 award under contract will be a significant cash liquidation event. And uh that with some other Awards, the portfolio should give us a very strong lift on working capital
Speaker Change: The next question comes from Christine.
Speaker Change: ELO.
Speaker Change: With great. Um, hey, good morning, uh, Jim and Evan, maybe you know, the F-35, um, Jim, you touched on the f-35's role on the operation, midnight hammer and your prepared remarks and we've already discussed, you know, the uncertainty in the current funding especially with lot 18 and 19. But taking a step back, you know, we've seen the dod cut at 35 units in the past few years. Um this has been the largest procurement program for the dod and is generally viewed as a potential Bill, Bill payer for other priorities. The B21 and the other hand is getting accelerated and increased funding. Can you level set us on the F-35 as a program today? Where does it fit in Modern Warfare? Um and how do you see orders? Materializing for international customers and ultimately how much of a priority is
Speaker Change: This for the dod today.
so, uh, without getting anything classified, the F-35 right now, you've heard about 1 mission
Speaker Change: That's been accomplished in Iran. That was led by the F-22 and the F-35.
Speaker Change: There have been others as well that uh, those aircraft have been heavily involved in, uh, and not only uh, just are air and air to ground. Uh,
Speaker Change: Attack but also in the orchestra and numerous uh other platforms whether they be C satellite um other aircraft, fourth gen Etc that this airplane can deliver uh some of the I'll call it NATO air policing missions have benefited from the F-35 in this regard and others. So
Speaker Change: Uh, knowing what, uh, what, what I can know, I am very, very confident. The F-35 is here to stay and here to stay in a big way for a long time. It's the only fifth generation fighter aircraft in production right now in the Free World, uh, fighter aircraft. I should say, um, and it's proved itself, uh, in in, in combat. Uh, so,
We will, uh, continue with our allies and and with our Us customer to be delivering these aircraft. I am very, very confident, especially with my, my background of what we know about what's happening today.
Speaker Change: and I had 1 other thing, because
We did bid on and get everyone knows that. Uh, we weren't selected, but the pivot that we made is 1 that we're taking incredibly seriously, which is how do we create a best value Bridge?
Speaker Change: From today's fifth generation to uh, 6 generation next, you know ngad is next Generation air dominance airplane.
Speaker Change: Um, and that's may not be fielded for quite a few years. I'll say a number of years.
Speaker Change: How do we Bridge capability there? We're going to Port uh a lot of our own ngad R&D over to the F-35 and potentially the F-22 as well and striving to get 80%. Effectiveness of 6 generation both in stealth and other aspects at 50% of the cost per unit.
Speaker Change: All in with R&D and non-recurring and that's the best value option for the US government going forward. It'll be the only 1. I'm aware of that can actually make that bridge over, you know, call it 5 plus maybe even 10 years.
Speaker Change: The next question comes from Scott. Micas with Melius research, your line is open.
Speaker Change: Good morning Jim. Um, on the F-35 delivery Skyline and the Outlook in order to protect that program and prevent it from being say, crowded out by the f-47, CCA, or nuclear modernization. Does it make sense to sell the dod? The technical data rights to the F-35 as part of a broader deal to ensure that you buys a minimum amount of units per year to sustain the production rate of 156.
Um, I'm not sure that's necessary. Uh for 2 Reasons Scott 1 is
Speaker Change: To maintain the aircraft and all of its systems. Some of our suppliers have opted not to participate in. In that approach that we've taken.
Speaker Change: Um, but we don't control or own their data.
and so everything, a lot of heat Martin can provide
Speaker Change: The services and the government to maintain their aircraft Fleet.
Speaker Change: We have provided.
Speaker Change: So that's 1, 1 side of the story. And then the the second is that, um,
Speaker Change: You know, the, the demand for the aircraft.
Speaker Change: Is is still going to be there? As I said, you know, fourth generation, aircraft are retiring. They're also
incredibly unsurvivable in the current um scenario a fourth generation, aircraft couldn't have
Speaker Change: Accomplished the mission that we talked about on uh, midnight Hammer. So I think the base demand is there the uh, intellectual property is already being provided to the extent. We have the ability to do that. Uh, but it's a excellent question. Um,
Speaker Change: I think we're in a good good place on both both fronts.
Right. Great Sarah. Well, we're we're approaching the top of the hour. Um, so I think that's it for Q&A and, uh, you know, Jim did have some closing comments. So, let me hand it back to Jim. All right. Thanks Maria. Look, all of us at Lockheed Martin fully understand that it's our responsibility to negotiate Fair risk and form contracts and to deliver on.
Those contract commitments in terms of cost quality and schedule every day.
Only in this, can we both contribute fully to our National Defense and deterrence from our conflict?
Speaker Change: And deliver a strong financial results to the shareholders.
Doing both is and will be our purpose. While the charges that we've taken in the second quarter have been difficult.
Speaker Change: And have affected our 2025 Outlook.
Speaker Change: We will now be better positioned to fully deliver on our profitable growth prospects. Going forward
Speaker Change: I'm confident in the many strengths of position this company, for long term success.
Evan Scott: Our growth pipeline is strong. As you heard from Evan earlier today, our customers are heavily reliant on us to deliver proven critical capabilities.
Evan Scott: And maybe most importantly, all of our 120,000 Lockheed Martin and teammates are committed to delivering results for for us.
Evan Scott: In our management team are focused on continuing to translate the strong customer demand.
Evan Scott: And our unique capabilities to deliver Topline growth, get that consistent, cash flow generation. The shareholder of that shareholder value creation as a result,
So I look forward to connecting again in October on our third quarter earnings call. So thank you everybody.
And sir, and that concludes our call for today.
Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect