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Presentation

Lockheed Martin Corporation misses on earnings expectations. Reported EPS is $6.44 EPS, expectations were $6.74.

Operator: Good day, and welcome, everyone, to the Lockheed Martin First Quarter 2026 Earnings Results Conference Call. Today’s call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Investor Relations. Please go ahead.

Maria Lee: Thank you, Sarah, and good morning. I’d like to welcome everyone to our first quarter 2026 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Evan Scott, our Chief Financial Officer. Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal 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 posted charts on our website today that we plan to address during the call to supplement our comments.

These charts also include information regarding non-GAAP measures that may be used in today’s call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I’d like to turn the call over to Jim.

James Taiclet: Thanks, Mark. Good morning, and thank you to everyone on the line for joining us on our first quarter 2026 earnings call. First, I’d like to highlight this week’s breaking news on a recent win for our Aeronautics business. Just this past Monday, Lockheed Martin signed a $1.5 billion contract with the Peruvian Air Force for 12 Block 70 F-16 fighters with an opportunity for a second squadron of an additional 12 aircraft. This is the first F-16 direct commercial sale contract in decades and broadens our footprint in the modernizing Latin American region. This was a collaborative partnership with the U.S. government, and we continue to work with the Peruvian government in executing on its sovereign acquisition process.

Overall, we reported solid results for the quarter as demand for our premier Defense Technologies and space exploration capabilities remains high. This elevated demand is supported by the highly effective performance of our platforms and systems that has again been demonstrated during this first quarter. Artemis 2 crew and the dedicated teams at NASA completed their historical mission and a near flawless flight and recovery using our Orion spacecraft. Artemis launched on April 1, carrying 4 astronauts on a 10-day mission around the Moon. The first crude space flight beyond low earth orbit since 1972, and the farthest humans have ever traveled from earth. The Orion spacecraft served as the crew transport and habitation module throughout the entire mission, traveling thousands of miles beyond the moon before safely splashing down in the Pacific Ocean.

Orion is the only vehicle capable of traveling into deep and back while safeguarding human life. It will enable future Artemis missions and ultimately, exploration of the moon, Mars and beyond. We are now assembling Orion for Artemis 3, 4 and 5, cementing Lockheed Martin’s role in sustained deep space discovery. While Artemis 2 reflects what’s possible at the edge of human space exploration, it also underscores that Lockheed Martin’s portfolio is delivering extraordinary capabilities in the most demanding conditions both on earth and in space. Additionally, Lockheed Martin platforms have performed extremely well in very demanding missions during recent U.S. and allied operations and active conflict zones. The F-22 Raptor and the F-35 Lightning established air superiority when called upon.

Our C2 BMC and [indiscernible] systems combined with FAD and PAC-3 interceptors, delivered layered air and missile defense in infrastructure and populations, military bases and ships at seed. Moreover, the Black Hawk combat rescue helicopter and C-130 aircraft supported successful combat search and rescue operations and extremely difficult conditions in hostile territory. The operational relevance of these systems has direct implications for our business. In the weeks following Prism’s first use in active operations, we announced plans to quadruple production to meet accelerated demand. This is in addition to the commercially inspired long-term agreements we already entered into with the Pentagon to rapidly expand the production capacity for PAC-3 and THAAD interceptors by 3x and 4x, respectively.

In light of these multiyear framework agreements, we are in the process of construction and/or modernization of more than 20 facilities across several states dedicated to achieving these great expanded reduction rates of production of these sophisticated munitions. These investments are expected to support thousands of skilled manufacturing jobs across our defense industrial base, provide accretive investment opportunities for our suppliers and enable the addition of second and third sources within our supply chain to enhance the resiliency of our production system. For its part, the F-35 also continues to execute critical missions, delivering fifth-generation air-to-air and air-to-ground capabilities unmatched by any other aircraft. The platform’s combination of Stealth advanced sensors and AI-assisted targeting enables pilots to operate with decisive advantage.

In the first quarter, we secured a new F-35 production contract for long lead items and the initial presidential budget request includes increased F-35 quantities. Rotary wing capability is proving equally valuable with a family of Black Hawk supporting critical search and rescue personnel insertion and resupply missions. We are also far down the road in converting the Black Hawk to both pilot optional and fully autonomous operations to capitalize on its range payload and survivability in contested environments. These examples are testaments to our strategic focus on mission execution and our commitment to disciplined investment to drive 21st century digital and physical technology into tried and true major platforms. This initiative is designed to provide our customers with the most capable integrated and reliable systems that can be quickly assimilated into existing force structures, training programs and logistical infrastructure.

The urgency of the current operational environment, coupled with the strong performance of franchise Lockheed Martin Systems has also spurred the rapid progression of initiatives that were already underway with our customers on long-term production commitments. We recently announced a $4.8 billion contract to further accelerate production for PAC-3. A tangible example of how we partner with our customers and advance from novel framework to contract to continue increasing the scale and speed at which we can deliver. The long-term demand inherent in the munitions agreements allow us to confidently expand our investments, boost internal capabilities with robotics, and strengthen supply chain resilience, in turn, delivering long-term shareholder value to Lockheed Martin’s shareholders.

Chart 3 outlines our collaborative approach with the U.S. government to address these urgent requirements and illustrates how acquisition transformation is enabling us to accelerate and expand production. These munitions agreements provide risk mitigation for industry and efficiency and speed for government a combination that benefits customers and shareholders alike. We also remain committed to advancing emerging technologies. Since launching the Lockheed Martins Venture Fund, we have backed more than 120 companies with many now serving as Lockheed suppliers. In the past 2 years, we’ve added 25 new companies and are expanding the fund’s capacity to $1 billion, more than double its formal size. Our expertise and innovation and scaling the production at scale enables us to serve as trusted partners for the next generation of solutions from startup and other new entrants to the industry.

Building on this momentum, earlier this week, we announced a further strategic investment in [indiscernible] technologies to bring to market a fully integrated end-to-end turnkey counter UAS solution, which seamlessly uses detection, control, identification and mitigation capabilities into a single commercially available offering. This partnership will accelerate Fortum’s ability to scale production. We’ll also incorporate its products into our deployment-ready integration with Lockheed Martin’s Sanctum counter UAS ecosystem. This is just the latest example of reinforcing our commitment to invest in innovative technologies that deliver rapid reliable solutions for new threats. Our commitment to developing advanced capabilities is consistent with the budget environment where there continues to be broad support for national defense initiatives.

The administration’s priorities, accelerating munitions production, strengthening integrated air and missile defense, advancing next-generation aircraft, expanding space capabilities and preserving long-range for [indiscernible] strike are reflected in this budget request. These priorities are all well aligned with our already long-standing initiatives and product sets. The Department Awards budget rollout that was released on Tuesday, reflects continued strong demand for our core franchise programs. At a broader level, the administration’s prioritization of defense industrial base investment and modernization spending provides a constructive backdrop as we execute against our significant backlog. We are well positioned. Our strategy is taking hold.

Our solutions are in high demand, and we remain confident in our full year guidance for 2026. Before turning it over to Evan, I’ll cover our top focus areas for the year. With that significant backlog and demand continuing to grow, enhancing and accelerating execution is imperative for us. Factory production is already up more than 60% from just 2 years ago. and we remain focused on converting demand and long-term growth while executing with discipline in a dynamic environment. Next is innovation. A key feature of our 21st Century security vision encompassing AI solutions for enterprise efficiency, digital threat integration, model-based engineering to accelerate our program time lines and a commitment to open systems architectures that allow us and our partners to rapidly integrate new technology from us or others and continuously enhance capabilities, thereby strengthening deterrence.

Third, our partnerships are in full alignment with the department’s acquisition transformation strategy. This is enabling a government industry model that we have long advocated for and under which we were the first to sign a multiyear agreement. International demand also remains robust as budgets expand and allies and partners across the globe continue to seek out our superior systems and capabilities. Finally, our people are the foundation of everything we do. Tens of thousands of workers develop, build and sustain our systems, and we’re deliberately growing this workforce by investing in training pipelines collaborating with community colleges and technical schools and creating long-term manufacturing careers. Our new munitions acceleration center that we’re building in Camden, Arkansas exemplifies this effort serving both as a production facility and a development hub for the next generation of defense talent that will use the latest in AI and robotics to do their jobs.

Now I’ll turn the call over to Evan to walk us through the Q1 financial results and outlook.

Evan Scott: Thank you, Jim. Good morning, everyone, and thank you for joining us. I’ll now walk through our consolidated financials and touch on some additional highlights from the quarter include few words, a status update on the munitions agreements before handing it off to Mark, who will discuss the quarterly financials by business area, and then I’ll come back to discuss the detail on our 2026 outlook. Starting on Chart 4. First quarter sales were $18 billion, in line with the first quarter of 2025. We saw strong growth on missile programs within MFC and and on strategic missiles within space, offset by lower volume at Aeronautics, primarily related to the life cycle on classified programs and an RMS on Sikorsky heavy lift programs due to timing of material receipts.

First quarter 2026 sales were impacted due to the shortened fiscal period compared to the prior year, we expect sales to grow in the second quarter and throughout the remainder of the year, supporting our full year growth outlook. Next, segment operating profit amounted to $1.8 billion, a decline versus the first quarter of 2025, primarily due to nonrecurring events in the prior year related to program milestones and completions at Aeronautics, Space and RMS. First quarter 2026 results also reflect unfavorable performance adjustments at Aeronautics associated with F-16 and C-130. Design and development delays temporarily impacted F-16. On C-130, integration challenges and supplier constraints, which occurred early in 2025, persisted into the first quarter of 2026.

The C-130 deliveries have resumed with 4 aircraft delivered as of today, keeping us on track for our full year targets. Earnings per share of $6.44 decreased 12% primarily driven by lower profit and mark-to-market losses due to changes in the fair value of investments and liabilities for deferred compensation plans. This was partially offset by benefits from a more favorable FAS/CAS pension adjustment. Shifting to new business, MFC was awarded $7 billion in orders for PAC-3 contracts. This includes 1 award for $2.2 billion from the first quarter of 2026 and a $4.8 billion fully funded undefinitized PAC-3 contract we signed earlier this month, advancing the first of the [indiscernible] ramp production agreements we announced earlier this year.

These awards underscore the sustained and growing demand for our missile defense capabilities. Lockheed Martin’s commitment to the mission and the government’s dedication to partnering on the rapid scale-up of this capability. We are partnering with the Department of War to definitize all multiyear munition acceleration agreements, and we will continue to provide updates as we progress. At Aeronautics, we secured a $700 million contract to procure long-lead materials for F-35 lots 20 and 21 for our international program partners. A further signal that Allied nations are continuing their commitment to the F-35 program as the aircraft consistently proves itself in live combat. At space, we secured an $890 million contract for our Fleet Holistic Missile capabilities, a program that provides sea-based nuclear deterrents and one that Lockheed Martin has served as a prime contractor for more than 70 years.

And at RMS, we were awarded a $365 million contract for Aegis Blistic Missile Defense. The Aegis weapon system is a proven command and control solution that links sensor and effector assets across all domains from undersea to space, showcasing how Lockheed Martin connects established and innovative technologies to enhance homeland defense capabilities. They’re adaptable for missions like Golden Dome. Moving to free cash flow. We reported use of $291 million in the quarter. The negative cash was largely driven by working capital timing, including impacts from the implementation of a new ERP system in one of our business areas. The impact of this system upgrade was anticipated and we expect that the effect will be resolved by the second quarter.

Our full year cash guidance remains, and as in past years, higher cash flow is projected to be weighted towards the latter half of the year. Additionally, earlier in the quarter, the IRS issued favorable guidance regarding the corporate alternative minimum tax. This strengthens our confidence in reaching the upper end of our cash flow range. In the quarter, we paid $816 million in dividends and retired $1 billion of long-term debt. We remain committed to our dynamic and disciplined capital allocation prioritizing a strong balance sheet while investing for the long term. In the first quarter, we invested $511 million in capital expenditures and $458 million for research and development. an approximately 15% increase over the prior year first quarter.

I will now turn it over to Mark to walk through the business area results.

Unknown Executive: Thanks, Evan. Starting with Aeronautics at [indiscernible] First quarter sales in Aero decreased 1% year-over-year, primarily driven by life cycle timing and classified programs, losses recognized on the F-16 program and lower production volume. This was partially offset by increased volume on F-35 sustainment. Segment operating profit decreased 14% compared to the prior year related to unfavorable profit adjustments on F-16 and C-130 programs and the absence of favorable profit adjustments on classified programs that occurred in the first quarter of 2025. These impacts were partially offset by favorable profit adjustments on the F-35 program. The image on the right depicts an F-35, refueling from a KC-130, underscoring Aeronautics role and delivering integrated air power to the U.S. and its allies.

In the first quarter, we were awarded a $462 million contract to expand support of the Royal Canadian Air Force’s fleet of C-130Js. Turning to Missiles and Fire Control on Chart 6. Sales at MFC in the quarter increased 8% from the prior year, driven by higher volume from production ramps on existing PAC-3 tactical strike missile programs, including JASSM, LRASM and PRISM. Segment operating profit increased 8% year-over-year, primarily from the higher sales volume. On the right, you can see a photo of a [indiscernible], equipped with Precision Strike Missile, or PRISM. In the first quarter, we successfully completed the first flight test of our PRISM increment to demonstrating its ability to engage moving targets. Shifting to Rotary and Mission Systems on Chart 7.

Sales at RMS decreased 8% year-over-year in the quarter, primarily from lower production volume of both RADAR programs and at Sikorsky. Operating profit in the first quarter decreased 19% compared to the prior year. driven by unfavorable preadjustments at Sikorsky programs and on the absence of a cost recovery from an intellectual property license arrangement that occurred last year. In the first quarter, we delivered the very first UH-60 MX, Black Hawk helicopter to the U.S. Army. The UH-60MX includes a fully integrated Matrix autonomy suite, enabling optionally piloted flight and supporting the Army’s pursuit of open architecture, mission supported autonomy. On Chart 8, we’ll conclude the business area discussion with space. Sales increased 7% year-over-year in the first quarter, primarily driven by higher sales volume on strategic and missile defense programs, including the Fleet Ballistic Missile and next-generation interceptor.

Operating profit decreased 26% compared to the prior year, primarily due to the absence of a benefit from completion of a commercial civil space program, partially offset by higher sale volume on the programs I previously described. Now I’ll turn it back over to Evan.

Evan Scott: Thanks, Mark. Shifting to Chart 9. Our 2026 financial outlook remains consistent with the expectations we shared in January including mid-single-digit sales growth, profit of $8.4 billion to $8.7 billion and free cash flow range of $6.5 billion to $6.8 billion. Our free cash flow guide continues to assume between $2.5 billion and $2.8 billion of capital expenditures in support of production ramps and key strategic growth opportunities. It is also important to note that we expect margins to improve over the course of the year, with gains anticipated in the second half of 2026 as production milestones are achieved and risks are retired. We remain focused on disciplined operational execution, scaling production and delivering at speed to meet the urgency of this moment. Now we’ll open up the line for Q&A.

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Operator: [Operator Instructions] Your first question comes from Kristine Liwag of Morgan Stanley.

Kristine Liwag: Maybe Jim and Evan and Mark, I want to focus on the F-35, the company’s largest program. It was very encouraging to see the Pentagon request 855 in the fiscal year ’27 budget up from 47% last year. And you’ve also called out the funding for sustainment. I was wondering, can you reorient us on where we are in the program, the F-35 role in Modern Warfare and your outlook for production and sustainment.

James Taiclet: First off, I’ll say that the performance of the F-35 and active operations over the last 6 months has been really definitive proof that the aircraft is standing alone around the world and its ability to do both really advanced air-to-air emissions and achieve our superiority alongside F-22s and also air-to-ground missions. And so in the midnight hammer operation, for example, when the nuclear capabilities of Iran were damaged significantly. That mission was enabled by the scoring of the bombers, V2 bombers by F-22 and F-35, it couldn’t have happened, I don’t think, without them safely. And part of that mission was to air the ground side of sort which enabled both U.S. and Israeli F-35s to essentially obviate the air defense system and very [indiscernible] defense system of Iran.

So this is quite evident now with that and other missions that the F-35 is uniquely capable as a fifth generation platform. It’s the only one in the free world in current production right now. And so therefore, the net from the U.S. government is solidified, as you said, and also the interest in the airplane from our allied customers is also heightened as well. So I think it’s basically proven itself as the dominant modern fighter aircraft through its performance. The second piece of it, Kristine, is — and I think both our allies and us have discovered this in the European and Middle East theater is that F-35 is basically a flying command post, where it can ingest sensor data from the aircraft, organize it, declassify it necessary and pass it off without any pilot intervention into the command and control system for multiple services and multiple allies, that information gets digested and then other platforms can actually act on in other crews and capabilities can be applied to these threats that the F-35Cs when it’s in flight.

And so there have been missions where an individual pilot or a for ship of airplanes does 3 or 4 missions over a couple of hours and those missions can include Combat Air Patrol, protecting other airplanes. It could include close air support protecting truths on the ground that are friendly. And it can also include the sort of surveillance and data fusion mission that I also described. And there have been some examples of missions that have gone on 3 or 4 hours with the aircraft, multiple are fuelings and again, the single pilot or the formation can execute all 3 of those missions even when all the munitions are expanded. So I do think that this aircraft has — we always do it, but internally, but that it is superior to every other airplane in the world right now that we faced at least.

So I think that’s the position of the aircraft.

Operator: Your next question comes from Rich Safran with Seaport Research Partners.

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

James Taiclet: Yes, I’m happy to take that, Rich. Starting in F-16, we have a new configuration that’s being delivered as part of the Taiwan and Morocco production run. So we ran into some issues during the flight test causing some rework, which delayed deliveries. So the combined cost of the rework and schedule extension ran through our program estimate. Unfortunately, we’re back on track with a successful flight test and plan to deliver — begin deliveries of the first aircraft as soon as this week. So we’re right back on track on that program and, of course, celebrating the good news on Peru. But the team is very focused on the execution, and we’re off to a good start this quarter. I think one of the positive points, as you pointed out here is the F-35 production margins.

That’s accretive to overall aero margins. We’ve seen some real strength in performance on our deliveries that you’ve seen as well as our cost performance. So I think that’s looking good. RMS we had some cost growth on some of the programs there and a lot of material timing that we expect to be just sort of a quarterly anomaly as well as sort of a difficult compare to last year Q1 as we had several onetime profit events that make it a tough compare. If you look at just the quarter in context with comparing quarter-over-quarter, all those onetime charges across 3 BAs accounted for about $190 million of sales and about $240 million of profit. So when you sort of net that out, we see the Q1 is on track we expect to see successive sales and margin growth throughout the year with strength to get to our total year guidance.

Thank you.

Operator: Your next question comes from Seth Seifman with JPMorgan.

Seth Seifman: I wonder if you could talk a little bit about the the multiyear contracts that you’re looking to sign in Missiles and Fire Control, and obviously, a lot of important opportunity there for the company. But can you also help us think a little bit about the risk side? Are you signing up and committing to reach these significantly higher production rates in the out years? And how do we think about what the financial downside could be for the company if these rates aren’t reached?

James Taiclet: So as far as the tripling or quadrupling of production rates, that’s going to have to be a team effort in the U.S. government and us and our major suppliers certainly have all locked arms on how to get that done. So for example, if you look at the PAC-3 system, we’re the OEM and the integrator of course, for the missile itself, but we rely on L3Harris for solid rocket motors and we rely on Boeing for seekers. Both of those companies have publicly stepped up to meet the same level of commitment as we are to invest in that scaling within their companies. Those are just 2 examples. But I would say essentially what the government, we and our major suppliers have agreed to is to — we’ll go ahead and fund the NRE on the 7-year framework agreements.

And as a result of that, we can focus on the small and medium suppliers and helping them scale up as well while our large teammates in the industry will handle their own nonrecurring costs. And that’s all been agreed upon between the U.S. government, those companies and Lockheed Martin. With respect to our small and medium suppliers, we’ve got a lot of interest in getting financial help for them to do the scaling. Part of that’s going to come from the open strategic capital inside the Department of War. They’ve got a pretty big balance sheet and they’re going to use that to help equity with equity and debt instrument investments in the small and medium supply base to encourage and enable all of this. We are having the confidence now to add second and third sources in that small and medium supply base and even in some of the larger subsystems, if you will, because we have a 7-year agreement, so the nonrecurring costs to stand up those second and third sources now makes sense.

So I think this is a very well risk-managed arrangement. And if you kind of go back to the slide very quickly, there was some real constructive engagement, I’ll say, between the U.S. government, and I can only speak for Lockheed Martin here. But some of those engagement elements really enabled us to go to a more commercial-like business model for major weapon systems. It really hasn’t been done before. And that’s because the leadership of the department at this point is willing to engage in topics such as risk mitigation. And some of the ways that we’ve done that with the government is for our commitment to do nonrecurring cost, capital expense investment, et cetera, to reach these new levels of production. We have basically a 7-year commitment and if you will, a recovery element to these agreements that says if for whatever reason the government decides the production rate won’t be as high in years 5, 6, whatever or there’s a change in Congress that changes the nature of how this agreement can be actually appropriated, I’ll say, then there are kind of reach back or clawback mechanisms for making the company holds.

So I’m just again speaking for Lockheed Martin. There’s clawback arrangements with the government then the agreements and will be in the contracts to make sure that we’re whole. And if there’s a change in government policy or a reduction in the production rate that they request down the road, we will not be harmed by that. Another element is, again, this notion of our major suppliers being asked and stepping up to their own NRE. So we don’t have to make that investment with any risk whatsoever. And then the third thing is that we requested and made arrangements for two important elements, which are very similar to the way we build telecom networks in my last industry, which is inflation index base escalator. So fixed price to start with inflation-based escalator for the 7-year period that’s based on an index for the industry.

And then secondly, kind of cash flow neutral approach, which means if we were doing our contracting for Patriot the old way, our cash flow would be x, it wasn’t going to be X minus anything. And so we were going to get and will get under these agreements, advanced payments from the government to make this program for — and all of these long-term agreements, cash flow neutral for the OEM and for Lockheed Martin in our case. So — that’s what we’ve negotiated as far as risk management. I think it’s quite really solid, frankly, that we protected the company and also enabled the company, we think, with our supply chain to actually make good on these ramp-ups.

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

Operator: Your next question comes from Scott Deuschle with Deutsche Bank.

Scott Deuschle: Jim, can you share an update on the classified program in Aeronautics, including how risk is trending on the program? And then are you seeing any willingness from the government to provide additional funding to support your efforts to keep that program on track?

James Taiclet: Yes. Given the classified nature of the program you’re referring to in aeronautics, what I can say is, and it was, I guess, evident from our release, there were no charges taken on the program of interest here in the first quarter. We have increased the scrutiny on that program. And actually, again, the higher levels of operating executives in this company is now overseeing that program. We do think we have a path through the flight test and other parts of this program. that have sufficient coverage, I’ll call it, in our financials right now to hopefully not experience any additional write-downs of the program. But it is complex. It is cutting-edge literally, and there’s still some risk there, but we think we’ve got it well managed.

On the government side, there’s really strong interest in this program at very high levels in the department. And they seem — again, see, I can’t speak for them, but very, very committed to carrying through with this program. and carrying through the success for it. And therefore, there’s ongoing discussions with them on making sure that the contract is structured in a way that the company and the industry can be successful in delivering this. At the same time, the government will get what’s asked for and what it’s going to pay for. So I would say that from my perspective and what I can share on this call, I feel better about that program than I have probably since I got here 6 years ago.

Operator: Your next question comes from Scott Mikus with Melius Research.

Scott Mikus: We saw Northrop reached an agreement on B-21 production to accelerate, which gives them the opportunity to improve the economics on the program. Given the strong demand for missiles and munitions, is there an opportunity to reach an agreement with the customer to accelerate production of the classified missile program at MFC that could yield some better economics for Lockheed.

James Taiclet: So given the unclassified nature of what you’re referring to, I think I can put it in a similar context. The demand from the customer for that capability is heightened. It’s something that will make a difference. I would suggest as any large classified program would and our abilities to accomplish emissions that it will be applicable for — so that is increased. The interest in the customer of getting this field is increased, I would say, over the last year or 2. Secondly, the program, again, of interest is similar as to the last one you all asked about. There were no charges taken in the first quarter. Again, that’s the only thing we could kind of say about that. And again, we have put risk mitigation on that program similar to the aeronautics program level.

So I do think we have it covered with oversight of some of the best and highest level experts in our company on a recurring basis. Having said all that, there is interest and again, the product accelerating and expanding production potentially and there’s conversations about that with government. There’s nothing different about that system other than its level of classification vis-a-vis PRISM or Patriot, et cetera. It’s an MFC volume missile program, which could be subject to a similar contracting approach if the government decides to do that. And so they all have to stop.

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

Operator: Your next question comes from Ken Herbert with RBC Capital Markets.

Kenneth Herbert: I wanted to ask a question on free cash flow. Significant use in the first quarter, I think, as expected, step up in working capital. I wanted to just verify this was F-35 or if there’s anything else to call out on that in the first quarter? And then second, as you think about the full year guide, how should we think about the cadence here in the second quarter and in the second half of the year to hit the full year guide on the free cash?

Evan Scott: Yes. So I think in the first quarter, a few things going on there. One, as we disclosed, we’ve got an ERP or billing system transformation at 1 of our business areas that occurred to close the year last year. So we went through that process this quarter and expect to be back on track in the second quarter. It’s notable, of course, that we drill very hard to surge and collections to close out the prior year knowing that this was in front of us. That’s what positions us to make the additional contribution to our pension, which helped derisk our cash flow this year. F-35 continues to make progress as we progress on deliveries, we’ll have more opportunities for cash liquidations. I think as you look throughout the year and the pace of our deliveries and program milestones, we’re going to continue to see cash increase throughout the year, it’s going to be back-end loaded, not unlike previous years, but I think we’ve demonstrated our ability to close the year strong and hit our cash flow guide.

And then with the support that we’ve gotten from the tax policy, which helps enable and incentivize investment in American manufacturing, that gives us additional confidence to hit the top end of our range this year.

Operator: Your next question comes from Gautam Khanna with TD Cowen.

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

James Taiclet: So the goal is to sort of have a ratable increase from our current levels of production, which is last year 650 Patriot missiles per year up to 2,000. And that’s going to take 3 to 4 years depending on supply chain and other considerations, but we really do think we can get it done in 3 to 4 years. the supply chain improvements that we’re pursuing, the General Dynamics slacked Martin teaming on solid rocket motors, also Northrop Grumman is looking at expanding a solid rocket motor business potentially into Patriot. And there’s some commitments there that we think will bear some fruit. The other pinch point. So I think we’ve got solid rocket motors, I don’t want to say covered, but we’ve got a lot of interest in it.

You may have heard that L3Harris is spinning out its SRM business to — and also have support from the U.S. government to finance and fund their expansion, which they’ve already announced where it’s going to be and how it’s going to happen. So that’s a good sign. Secondly, Northrop’s commitment is a good sign. Thirdly, General Dynamics partnership with us is another good sign as far as SRM, pinch point risk, I guess, I’d call it. The second area is the seeker for the Patriot. And Boeing is similarly made a public commitment and one to the government that says, hey, we’re going to invest in that seeker business. We’re going to get to the volumes that we’re asking — you’re asking us for. And they’ve actually been improving as well over the last year or 2 [indiscernible] to deliver on this very complex component.

So those are the 2 biggest I guess, risk areas, there’ll be a handful of others in the mid to small business supply chain. We will have — and the government — as Evan just said, we’ll have assistance provided to those companies. And we’re looking for capital markets providers in addition to the government of strategic capital to to provide ready and efficient financing for these medium and small companies, given that they’re going to have a 7-year subcontract to Lockheed Martin, who has a 7-year contract with the U.S. government, a pretty good credit line there. So I think that we’re going to be able to manage those pinch points, but those are the main ones.

Operator: Your next question comes from Ron Epstein with Bank of America.

Ronald Epstein: Just circling back on some of your comments you brought up in your prepared remarks about how you’re deploying AI in the enterprise and in some of the weapon systems. How are you broadly thinking about that? Are you developing pools herself as lucky trying to develop its own large language model or are you using outside stuff? Just kind of broadly thinking about your AI strategy and what you’re doing there?

James Taiclet: Yes. Thanks, Ron. So there’s only 2 dimensions to artificial intelligence adoption in Lockheed Martin. One is the in-house business systems, production system, ERP supply chain management, all those kind of in-house critical activities. We’re applying artificial intelligence there, everything to the closing process, right, to contract and bid provisions to respond to our customers. Every place that you can imagine, AI could be helpful, defect management and discovery, those kinds of things in the factory supply chain breakdowns. Those kinds of things, we are using — utilizing AI to make all those business processes better for us. The second thing that we’re doing and alluded to earlier is we are introducing AI into our products and services where it makes sense to do that.

But under a rubric of of an ethical standard that is adopted from the Department of Defense’s rubric. So we’re introducing AI into target recognition into battle management, command and control, [indiscernible] as it’s called things like that, places where you’ve got a lot of data. If you can fuse it, bring intelligence to it quickly and provide commanders and pilots options. That’s basically the way we’re driving AI into our mission solutions, if you will. All of this is within what we call the Lockheed Martin Artificial Intelligence Center. So we made a decision with our then really a chief engine here. We have another [indiscernible] today, but her predecessor when I first joined the company 5, 6 years ago, said, hey, I want to stand up a single AI center for all of Lockheed Martin instead of having each business do it or something like that and consolidate the GPUs, consolidate the infrastructure make sure that we have a totally wold system that can operate at the classified level and has no connection to the external Internet so that we don’t have cyber and other risks in that regard.

And also, we have our own data sets. We don’t use any data from outside the company or outside the customer that’s provided to us. So we have this internalized AI center, but we utilize external models for it. So there’s a range of AI models. Many of them are incredibly well known, and we have access to those on a token basis or otherwise that we run in our AI center on our own GPUs on our own infrastructure that’s cyber secure and hacking secure. So that’s how we do it. There’s been a pretty significant investment over these last 5 or 6 years into that. And I actually think that we may have a best-in-breed AI center, at least in our industry. So we’re not building basic artificial intelligence models. We’re using others, but we’re applying them to our internal business operations and to our product set.

I think, in pretty aggressive and useful impactful ways.

Operator: Your next question comes from John Godin with Citigroup.

John Godyn: Jim, I wanted to just ask about the evolving landscape a tremendous amount of new issues, new entrants. What is that impacting the competition for talent? How is that impacting contracting and maybe offensively, you had some comments in your prepared remarks about how it might be impacting the opportunity to make investments or strategic partnerships. I’d love to just kind of get your take broadly.

James Taiclet: So we welcome competition. We welcome what we like to call other people’s money and other people’s talent into this endeavor with us or in competition with us for that matter. So this traditional defense industrial base needs to be expanded. And we’ve been working for years to expand it with some of the major tech companies and telecom companies out there like when we publicly stated these before, Verizon IBM, Microsoft, NVIDIA, et cetera. At the same time, it may be less visible. We’ve been investing in this sort of startup and new entrant space ourselves. We’ve done some acquisitions of relatively early-stage companies internally into Lockheed Martin. But in many cases, I’d say in most, we can be an investor through our venture group, have a [indiscernible] get access to the technology and figure out how to incorporate it again into our products and systems in ways that will benefit our investment that we have, the company we invest in and will accelerate our capability and again, using other people’s money and other people’s talent with these businesses, things maybe that we don’t have the bandwidth or the personnel to do.

So I think it’s a positive development both for the National Defense Enterprise of the government and our industry together and for our company, and we’re embracing this. We have another entity called Lockheed Martin [indiscernible], where we can do medium-sized joint ventures or co-investments. We’re doing that in the wildfire fighting space that we’ve announced before, for example, through kind of an all entity, if you will. So we are eager to get access to and collaborate with small, medium, new entrant companies, et cetera. We have — we’re a subcontractor [indiscernible] some cases, frankly. So we view these companies across the board as just other suppliers in the term of this industry’s [indiscernible], right? So Same thing with Northrop, Same thing with Boeing Defense.

We partner with them sometimes. We compete against them sometimes. This industry is used to that and is comfortable with that, and so are we. Our goal is to get the best technology and get access to it through whatever vehicle we need to deliver on a mission technology road map for our customer, right? So if our goal is how do we have the best air-to-hair compact capability in the U.S. Air Force, for example, we want to take the platforms we have we want to introduce AI from the best available source. We’ve actually are working with the Air Force now at Edwards Air Force Base, which is a test pilot school. There within autonomous F-16 that’s working tactics that will be more survivable where even a piloted aircraft when it’s in a dogfight or has to do a really hard turn on a missile can take over and optimize that response in the fight, so to speak.

So we want to advance these mission capabilities with our platforms or networking with others, frankly. And we want to get these these resources into those mission sets. And we’re not very proprietary about where they come from, frankly. So how does that affect our talent management I would say that we have excellent retention rates. It’s about half of general industry as far as losing folks on a voluntary basis. We’re at like 4-ish percent broad industries like 8% to 10% turnover. So we have pretty solid retention, but there are some places like AI data scientists and others where it’s competitive, and we have compensation plans that we think can meet the moment on that and keep the key people we need to. And the third thing I’ll say on talent is people that come to Lockheed Martin want to come here for a reason, and that reason often has to do with either their prior military service, their families, where they grew up or whatever it is, that gives them some connection with these missions.

Like this air defense mission we’re talking about is so important. And the situation in the Middle East would be far, far different if the Patriot and the FAD and the Aegis systems weren’t employed and others from other of our competitors and partners, but people will get drawn to that mission and they tend to stick around if that’s why they came here. The contracting side, we had a meeting with about 30 of our key people yesterday in Arlington in our office there. And I said the same thing to them. This is a golden opportunity right now based on who’s in government, their experience, their willingness to change the demand that they have for what we do and our partners in our industry do. We can move the contracting system from this far cost — federal acquisition regulation based, cost-based Truth negotiation act burden that we’ve all had and move it more towards a commercial contracting system, which is exactly the agreement we have in these frameworks with the Department of War right now.

This is the time to do that. I would say the new entrants and the venture-backed companies are constructive on this. They’re helping us and the government get out of our traditions and into a more agile contracting scenario. We will — we embrace that. And then as far as investments, if you get the contracting right, you can keep the talent, we’ll have better ROI on our investments going forward, and we’ll have better risk management, too. So — and again, we can partner and offload certain kinds of technologies or certain kind of physical investments that someone else is better off making than we are. So I’m encouraged by all of this in the evolving landscape as you asked. And I think we’re positioned to take a good advantage for our company and for the the U.S. government and our allies based on this more available resource out there for us.

Unknown Executive: It’s Mark. We’re coming up on time. We’ll take 1 more question.

Operator: Your next question comes from David Strauss with Wells Fargo.

David Strauss: One quick clarification question and then a question around cash flow and working [indiscernible] CapEx. Clarification question would be around what your growth rate would have been ex the work week comparison if you had the same number of work weeks this quarter. And then on the cash flow side, Evan, wondering what what exactly you baked in for working capital this year to kind of recover your higher CapEx investment in the cash burn profile on the aero and MFC classified programs, what we’re looking at this year and then maybe looking out beyond that?

Evan Scott: Sure. So I think of the shorter week or shorter time period of this quarter being kind of in the few hundreds of millions of dollars of revenue thereabouts. So we’ll get that extra time back in 4Q, just so we’re all tracking to the same calendar there. With respect to the cash burn on our classified programs, I’d still think of that as kind of the $500 million to $700-ish million a year for this year and next year, and then we expect to see a pretty sizable drawdown on that cash draw depending on how that goes. And the last question was CapEx. Yes. So from a CapEx perspective, a key part of the tenant, as Jim mentioned, is sort of cash flow protection as we make sizable investments ahead of scaling. So if you think about the $1 billion increase year-over-year on CapEx we’ve had.

I think about half of that tied to these agreements that have this kind of cash flow protection. So that’s what we have assumed in our guidance now to have the offset there as we invest in capital scale rapidly for the future.

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

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

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