Lockheed Martin (NYSE:LMT) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Lockheed Martin reported a strong third quarter with double-digit growth in sales and profit, generating $3 billion in free cash flow and increasing backlog to $292 billion.
The company raised its full-year guidance for sales, earnings, and cash flow, driven by successful execution across its portfolio, including autonomous aircraft, missile defense, and hypersonics.
Strategic highlights include a landmark F-35 multiyear agreement, advancing the Vectis autonomous aircraft, and significant missile production contracts, indicating robust demand and strategic positioning.
The company emphasized its focus on integrating cutting-edge technology across platforms and domains to enhance defense capabilities, partnering with commercial firms to speed up delivery and innovation.
Lockheed Martin is investing heavily in expanding its manufacturing capabilities and workforce to meet rising defense demands, with a focus on munitions and next-generation technologies like AI and hypersonics.
Full Transcript
Sarah (Moderator)
Good day and welcome everyone to the Lockheed Martin Third Quarter 2026 Earnings Results Conference Call. Today’s call is being recorded. If you would like to ask a question, please press star then one. Now, at this time, for opening remarks and introductions, I would like to turn the call over to Mark Kovasnik, Vice President, Investor Relations. Please go ahead.
Mark Kovasnik (Vice President, Investor Relations)
Thank you, Sarah, and good morning. I’d like to welcome everyone to our third quarter 2026 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer, and Evan Scott, our Chief Financial Officer. Statements made today that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements.
Please see Lockheed Martin’s SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We’ve posted slides on our website today that we plan to address during the call to supplement our comments. These slides also include information regarding non-GAAP measures that may be used in today’s call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the slides and see definitions and reconciliations for non-GAAP measures. With that, I’ll turn the call over to Jim.
Jim Taiclet (Chairman, President & CEO)
Thank you, Mark. Good morning, everyone. Lockheed Martin delivered another quarter of strong program performance, growing both sales and profit by double digits, reflecting execution to the plan that we previously laid out for you. We generated $3 billion of free cash flow in the quarter and grew our backlog to another record $292 billion. The momentum in our business is accelerating, giving us confidence to raise our full year expectations for sales, earnings and cash again this quarter.
Evan will cover the specifics shortly. These results are a product of the investments we made in recent years that are now delivering across our entire portfolio. From autonomous aircraft and next generation air dominance to homeland missile defense, hypersonics and the command and control that connects it all, we are innovating faster with the best technologies available, providing integrated capabilities across every domain to answer a defense sector demand that appears permanent, resulting in a business that is resilient to any budget cycle.
Munitions are a major part of that story, but they’re far from the only engine of our growth. I also want to start by acknowledging the recent F-35 multi‑year announcement which cements its role as the free world’s key frontline fighter for years ahead and again a continuing growth engine for Lockheed Martin. This agreement solidifies the path to 850 U.S. aircraft over a 10‑year span which will be further augmented by sales to our allies, achieving a total production at 156 aircraft per year for 10 years. This landmark agreement also enables sustainment and future development to be more effective and efficient for our customers.
Staying ahead of the threat has always been our mission and today we’re doing it faster than ever. Over the last couple of quarters I’ve explained how we are transforming Lockheed Martin and this quarter proved it again, as our increased speed innovation showed up in every part of our business. At Skunk Works, the Vectis team went from first drawing to wind tunnel testing in under two months, released the first production part in eight months and have flight demonstrations scheduled for next year. This progress gave me confidence to greenlight an increase and now we will build five Vectis aircraft with our own investment. That puts us in position to offer a proven, production‑ready autonomous aircraft as our customers define their future requirements.
At MFC, our Precision Strike Missile Increment 2 went from flight tests in March and August to a $1.2 billion production contract within the same year. That compresses what has traditionally been a multi‑year path from testing to production, getting a new maritime strike capability to the Army sooner and allowing the value of our development work be realized years earlier than normal. This production award further builds on the Department of Defense’s broader investment in quadrupling PRSM production.
Our Space team recently completed a key solid rocket motor test for the Next Generation Interceptor program, keeping that program on track for fielding by 2030, strengthening the homeland missile defense and advancing a program essential to the nation’s future. And at RIMPAC, an exercise in the Pacific, our RMS team and Saildrone went from concept to a live‑fire missile launch from an unmanned surface vessel in less than six months, putting proven weapons on a commercial autonomous platform and extending Lockheed Martin’s capability onto an entirely new class of systems.
This commercial mindset throughout our company is changing how we build as well. Partnerships are becoming a key part of how we move faster and we are extending them all through our supply chain and beyond. GM Defense, for example, delivered its first PAC‑3 components to us in under one month from the initial contract. That adds capacity at a terrific supplier at a pace our traditional supply base couldn’t match on its own and is helping us deliver more interceptors sooner without an increase in our own capital investment.
And just last week we announced the expansion of our Grand Prairie, Texas manufacturing footprint to more than 735,000 square feet. The expansion includes additional capability and capacity for automation and digital manufacturing and will also bring on board a Hadrian highly automated production machine cell to supply components across our missile programs in a manufacturing‑as‑a‑service contract. The discipline that gives capability to our customers faster also strengthens our business. When we shorten the path from development to production, we accelerate the economic return on that work. When we invest ahead of requirements, we enter competitions for the next generation of programs already well positioned. And when we partner with commercial manufacturers and tech companies, we scale in a way that keeps our investment efficient as demand grows.
Delivering programs faster is only part of the equation. The greater value comes from how these capabilities work together. Our platforms are central to Lockheed Martin, but they also form a foundation for the broader role we play, one that may be unmatched in the world, and that is driving interoperability and integration across platforms and domains, giving our customers an advantage no single platform can provide on its own. This role builds on decades of mission integration experience, connecting aircraft, missiles, earth‑ and space‑based sensors and command and control into theater‑level deterrence across land, sea, air, space and cyber.
It is a very deliberate plan and the mission technology roadmaps we established several years ago and continue to evolve guide our development ahead of formal requests for proposals. We just don’t wait for them anymore. We’re not just building product before customers ask for it. We work alongside them to understand where their missions are headed so that we are ready with complete, proven solutions when they need them. Part of that is recognizing that our customers don’t need to choose between exquisite platforms and affordable mass.
They need both, integrated so each makes the other one more effective. We can bring them together in a way few others can. Some examples: At Valiant Shield, our RMS team used our software‑driven command and control system powered by CommandIQ and connecting long‑range missiles, integrated air and missile defense and remote targeting, drawing on commercial sector data and using AI to recommend specific target engagements. The RMS team is building on that work in Guam where we developed an AI‑enabled battle management prototype for the Guam defense system and we were selected by the Missile Defense Agency to move its missile defense modeling and simulation to the cloud.
In Australia, we were awarded an $800 million contract for the next tranche of AIR 6500, which is its Joint Air Battle Management System, demonstrating that our integration expertise is in demand from our allies as well. This is what it means to be the premier defense technology company, delivering proven platforms that work alongside autonomous systems enabled by AI and the best commercial technologies available. Lockheed Martin’s depth of experience innovating and integrating these capabilities sets us apart.
Speed gets capability into the field sooner and integration makes it much more effective. But deterrence and conflict also depend on having it at scale. Nowhere do these demands converge more than in munitions, and that is where our operating model is actually moving the fastest. Our munitions business is transforming to deliver at wartime speed and scale. That shift now extends beyond interceptors into air dominance. This quarter we signed a framework agreement with the Department of Defense to accelerate production of the Joint Advanced Tactical Missile, our next generation air dominance missile known as JATM.
This is the product of years of collaboration with the Air Force and the Navy and the kind of long‑term commitment that takes time to show its full value and enables us to further accelerate production ahead of a multi‑year contract so there’s no delay when the contract is signed. Australia has already committed to become this program’s first international customer, an early sign of demand that broadens the program’s long‑term opportunity and strengthens the case for the capacity we are building today.
Our interceptor franchises are scaling just as quickly. This quarter we signed a seven‑year contract for PAC‑3, building on the seven‑year THAAD contract signed earlier this year. Together, these awards give us and our suppliers the kind of long‑term visibility that makes bold investment possible. And we are putting it to work, adding 2 million square feet — again, 2 million square feet — of facilities to support production growth across eight sites over the next three years.
And these are in places like our munitions center in Troy, Alabama. More than half of those additions are already underway and under construction. Just as important is the workforce to match. This year alone, we are hiring and training over 3,000 new team members across MFC sites. That’s not happening by chance. Well before this ramp up began, we started building partnerships with local communities, technical schools and colleges to develop the skilled talent pipeline we knew we would need.
Those relationships are now helping us bring people on faster and preparing them to contribute from day one. These are skilled roles and good jobs and they reflect the confidence that we have in the demand ahead. Scaling production also means our suppliers need to move at the same pace. This quarter we placed new supplier contracts for both PAC‑3 and THAAD, including a $4.7 billion supply contract with L3Harris for PAC‑3 propulsion. Since the quarter closed, we also awarded Boeing a contract for $14.7 billion to triple PAC‑3 Seeker production and a $1.6 billion contract to Northrop Grumman for propulsion and other missile components. Beyond our largest partners, we are working with a much broader base.
Nearly 750 suppliers across 42 states support THAAD alone and we meet with our key suppliers regularly to keep the focus on their performance. That collaboration produces real results. Together with our suppliers, we are resolving long‑standing production bottlenecks that will enable substantially higher deliveries going forward. All of this is part of more than the $8 billion investment we are making through 2030 to modernize more than 20 facilities, expand our supply chain and grow our workforce.
It is one of the largest commitments to munitions production in our history and it is designed to sustain this production pace for years to come. And we are ahead of schedule in this expansion. As our MFC segment results demonstrate, the awards we win today do more than fill our production lines. They give stability and resources to keep investing in what follows and the next generation of capabilities that are already taking shape. So across every domain we are turning years of research and development investment into products that are ready for the field. In air and missile defense, we are extending the PAC‑3 franchise to meet both the most common and the most advanced threats. So our new PAC‑3 ACE will bring a high‑performance lower‑cost interceptor for cruise missiles and short‑range ballistic missiles. And on the other end of the spectrum, just last week we unveiled PAC‑3 EDGE, our offering for the Army’s future interceptor program which we have now been advanced to the next stage of development for.
Built on the combat‑proven PAC‑3 MSE, the EDGE pairs a new seeker from our Key Component Center of Excellence at RMS, made in Lockheed Martin, with a multi‑pulse motor to defeat hypersonic and other advanced threats at a greater range and higher altitude. Together, PAC‑3 MSE, ACE and EDGE form a family of interceptors matched to every tier of the threat and a better cost‑to‑effect performance, and counter‑drone and affordable mass. Our Morpheus X‑rotor can defeat more than 50 drones in a single flight and then be recovered, recharged and reused.
And our Kodiak containerized launcher completed its first live‑fire test less than six months after development started and that device packs up to 12 GMLRS rockets into a single container that can be deployed from air, land or sea and is highly mobile. In autonomy and AI, Skunk Works and the Air Force Test Pilot School flew the X‑62 VISTA, an F‑16 modified, through 27 AI‑controlled intercepts across eight flights with an AI agent using live data from our Legion sensor pod to intercept a real aircraft. The full integration took just three months to complete and that moves AI from simulation into the real flight environment that pilots will face. And it builds on the foundation for the autonomy that will power aircraft like Vectis and team with crewed fighters like the F‑35 and F‑22.
Within RMS, Sikorsky completed initial flight testing of the Nomad 100, its new uncrewed aircraft. And this is under a DARPA program where our Matrix Autonomy was selected to fly on all five competing aircraft in the DARPA fly‑off, including those built by other companies. That positions us as a common foundation across a growing range of platforms and not just our own, expanding our reach as uncrewed systems become fundamental to the mission. In hypersonics, with our Space segment we are investing to move from building individual weapons to building at scale. Our new modular payload delivery system uses technology that has already been flight tested and re‑architects it into a modular family of systems so the same airframe can be configured for doing long‑range strike, for missions that need a larger payload over a shorter distance, or for missile defense with minimal changes to the system.
That modular approach reduces the engineering time and cost to bring each new capability into the field. And our Long‑Range Hypersonic Weapon was fielded during an exercise, illustrating our ability to deliver ready‑now hypersonic capabilities. The breadth of our portfolio is an important differentiator that makes all this possible. Our new Key Component Product Center develops modular sensors, data links and seekers that can scale across our full portfolio, helping us move faster and at a lower cost and with more control of our supply chain. And it’s built to serve the whole company, not just a single business. So RMS is already developing technology for the missiles our MFC production produces, for example.
And increasingly we are looking beyond our borders for the next breakthroughs. We’re partnering with IBM to establish a quantum innovation hub in Switzerland. And we have dedicated $100 million of our expanded venture fund to promising companies in the UK and Europe, giving us early access to world‑class talent and emerging technology. Disciplined investment in research, development and ventures are building our position in the fastest growing parts of the defense budget including counter‑drone autonomy, hypersonics and the missile defense capabilities at the core of Golden Dome.
All of this is happening against a dynamic budget backdrop. Uncertainty around U.S. federal funding is nothing new for our industry. Our business is built to perform through it. Fiscal 2027 opened under a continuing resolution and the outcome of additional funding through reconciliation is still taking shape. The demand for our capabilities, though, is driven by the threat. It has bipartisan support and is not tied to any one bill or election. The multi‑year contract structure is built for this environment and undefinitized contract actions let production start even when appropriations will take more time.
Continuing resolutions affect timing and new starts, but they don’t change the direction of demand, and our largest franchises address the Department’s most urgent priorities, from air and missile defense to air dominance, and remain essential to their mission. This quarter showed how those pieces fit together. Speed that puts capability in our customers’ hands sooner, integration that connects it across every domain, munitions production scaling to meet urgent demand, and innovation that builds the franchises of the future are all coming together. The result is capability built from the best technology that we and our partners can bring, delivered at a pace that the current geopolitical environment demands.
And so our business is already performing at this level today with a track record of execution and the visibility, growth and cash generation to carry that momentum well into the future. Now I’ll turn the call over to Evan to go through the financials.
Evan Scott (Chief Financial Officer)
Thanks, Jim, and good morning, everyone. As you have seen, the momentum Jim just described is clearly visible in our financial results this quarter, with record demand converting into backlog and double-digit growth in both sales and profit. I’ll take you through the numbers, including our revised, raised full-year outlook. I’ll cover our consolidated performance, cash and capital deployment, as well as backlog and key awards. Mark will brief the segments in more detail before we open the call for questions.
Third quarter sales rose 11% year over year to $20.7 billion, driven by higher volume across every segment, including F-35 production and sustainment at Aeronautics; MFC munitions production ramps; new radar awards at RMS; and growth on Fleet Ballistic Missile and Next Generation Interceptor at Space. Segment operating profit was $2.2 billion, with operating margin of 10.8%, driven by volume at MFC and Aeronautics and a favorable profit adjustment in RMS upon resolution of a contracting matter.
Earnings per share were $7.97 compared to $6.95 in the prior-year period. The 15% year-over-year increase was primarily related to higher segment operating profit. Turning to cash, cash from operations was $3.4 billion in the quarter and $6.9 billion year to date. Free cash flow was $3 billion in the quarter and $5.6 billion year to date. The primary drivers this quarter were improved working capital related to customer receipts in Aeronautics on F-35, MFC, and in Space. Year to date, we have invested $1.3 billion in capital expenditures and $1.6 billion in independent research and development. The largest share of this investment is going toward munitions capacity, and it is backed by contracted demand.
Seven-year agreements on PAC-3 and THAAD give us long-term volume visibility, which underpins our confidence in the return on that capital. Beyond our own investment in capital and independent research and development, we are also working closely with suppliers and commercial partners to accelerate production across Missiles and Fire Control. Our focus is on the speed at which we deliver capability to our customers. Our capital deployment priorities remain consistent. First, we invest in the business and in the capacity and innovation that support long-term growth. Second, we return cash to shareholders.
Consistent with this, our board recently increased the quarterly dividend by $0.15 to $3.60 per share, our 24th consecutive year of dividend increases. Our balance sheet remains strong, and that gives us flexibility to invest strategically. The Ultra Maritime acquisition remains on track to close here in the fourth quarter, and we have recently cleared all regulatory approvals required to close, and we expect to fund the acquisition with cash on hand.
And our cash position allows us the capacity to consider other opportunistic investments that strengthen our portfolio and provide our shareholders with long-term growth. Our ability to invest and return cash with confidence rests on the demand we are seeing, and that dynamic manifests most clearly in our backlog. We ended the quarter with a record backlog of $292 billion, up $113 billion when compared to the third quarter of 2025, and a book-to-bill of four times. The largest contributor in the quarter was the PAC-3 seven-year contract, which brings that multi-year contract to a total value of up to $58.6 billion.
Beyond PAC-3, demand was broad-based across all four segments. Among the highlights was $4.4 billion in C-130J contracts for 34 new production aircraft serving both U.S. and international partners. We also booked awards for GMLRS, JASSM and LRASM, F-35, Black Hawk, and Fleet Ballistic Missile programs. Internationally, demand continues to grow in MFC; we were awarded a $439 million contract for production of the Army Tactical Missile System for Taiwan’s HIMARS launchers.
In RMS, we were selected to establish Australia’s combat systems integration capability for its future Virginia-class submarines, a program that will span decades. A backlog of this size and duration gives us substantial visibility into our future performance, with much of next year’s work already under contract and in progress. That provides a strong foundation for the years ahead regardless of how the near-term budgets unfold. Turning to our 2026 outlook, based on performance through the third quarter, we are raising our full-year 2026 guidance again this quarter. We now expect sales of between $80 to $82 billion, up from our previous range, representing full-year growth of approximately 8% at the midpoint. This increase reflects higher volume in MFC for the munition ramps and continued strength across our portfolio as a whole. We expect segment operating profit of between $8,575 and $8,675, also up from the prior outlook.
This reflects stronger program performance and improved execution. And we now anticipate cash from operations between $10.0 billion and $10.2 billion and free cash flow between $7.8 billion and $8.0 billion. This is the result of solid collections, improved working capital, and a benefit from continued favorability related to the IRS tax guidance we received earlier this year. Two items to keep in mind for the fourth quarter. First, our fiscal fourth quarter includes an extra week compared to the prior period last year. Second, our outlook does not yet include Ultra Maritime, which we will incorporate once the transaction closes. This was a quarter of strong execution, record backlog, and double-digit year-over-year expansion in both sales and profit. Our robust free cash flow supports investment in growth and simultaneously returning value to shareholders, reflected in a 24th consecutive annual dividend increase.
While the multi-year backlog provides clear visibility into the years ahead, our business is built to perform through budget cycles and changes in Washington, as it has many times before, and we are investing with discipline and we have confidence in the strength of our trajectory. Now Mark will provide additional detail on the segment-level performance and outlooks.
Mark Kovasnik (Vice President, Investor Relations)
Thanks, Evan. Starting with Aeronautics on slide 5, third quarter sales at Aeronautics increased 13% year over year, driven by higher F-35 volume and recovery of C-130 pre-contract costs that were liquidated upon the awards Evan mentioned. Segment operating profit increased 9% compared to the prior year, as the higher sales volume was partially offset by unfavorable profit adjustments on F-16 and C-130 programs. We now project Aeronautics to deliver full-year 2026 sales of $31.1 to $32.5 billion and profits between $2.92 and $2.95 billion, slightly lower than our July guidance, driven by revised contract award timing expectations for the next lots of F-35. As we discussed in our second quarter call, the top end of our prior guidance included a bump in sales dependent on award timing for the next lot of F-35. With this revised outlook, we shift that assumption to 2027.
We see Aeronautics’ full-year 2026 sales growth rate in the mid-single digits, between 3% and 7% year over year. Moving to Missiles and Fire Control on slide 6, MFC had another very strong quarter as the production ramps on munitions programs progress ahead of schedule. Sales and profit were both up 24% year over year in the quarter, supporting another raise to our full-year outlook. MFC’s sales range is increased to between $16.25 and $17.45 billion, and the profit range is moved up to between $2.395 and $2.425 billion. MFC is on track to grow both sales and profit about 20% year over year in 2026.
Next is Rotary and Mission Systems on slide 7. Volumes also continue to ramp at RMS. Third quarter sales in this broad portfolio were up 3% year over year, driven by radars and command-and-control programs. Segment operating profit finished up 4% year over year, benefiting from the favorable resolution of a contracting matter. On a full-year basis, we’ve made slight revisions to the outlook, tightening our range for sales and raising profit. We expect RMS 2026 sales to finish between $17.7 and $18.0 billion, growing in the low single digits year over year.
The RMS segment operating profit outlook is increased to between $1.88 and $1.9 billion. Our Space segment is summarized on slide 8. In the third quarter, Space grew sales 4% year over year, driven by Next Generation Interceptor and Fleet Ballistic Missile. Profits were comparable to third quarter 2025. Our full-year outlook for Space has improved from our prior guidance. We increased the lower end of the sales range and raised the outlook for operating profit. We anticipate 2026 sales in our Space segment will grow between 7% and 8% year over year to between $13.95 and $14.5 billion.
Full-year profit expectations are increased to between $1.38 and $1.4 billion. To be clear, the profit outlook does not include any ULA equity earnings for the fourth quarter 2026. So the takeaway is this: The growth acceleration we signaled last quarter came through. All four segments grew again in Q3, and it’s this performance across the entire portfolio that fuels another raise to our full-year 2026 outlook. Sales are guided higher, as the strength at MFC is more than enough to overcome the shift in the assumed timing of award for the next lot of F-35, and this higher top-line outlook is converting to bottom-line returns.
Our outlook for segment operating profit is also raised again, as our solid Q3 execution drives increases at three of our four segments. Sarah, let’s open the call for questions.
OPERATOR
Thank you. If you wish to ask a question, please press star then one now on your touchtone phone. You will hear an annunciator indicating you have been placed in queue. You may remove yourself from queue at any time by pressing star then one again. We ask that you limit yourself to one question. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star then one at this time.
Your first question comes from Gavin Parsons of UBS. Your line is open.
Gavin Parsons (Analyst)
Thank you. So if I could sneak in two on your prepared remarks. In the first one, you mentioned multiple growth drivers outside of MFC, and obviously there’s a lot of opportunity and excitement there, but I was hoping you could expand on that a little bit to frame the multi-year growth opportunity in the other segments. And then second, in the prepared remarks on going from concept to capability in a very short time frame, we saw a lot of those examples at AUSA, and just given Lockheed Martin is such a big organization, would love to get any more color on how you’re evolving the engineering culture internally.
Thank you.
Jim Taiclet (Chairman, President & CEO)
You bet. Yeah. Thanks, Gavin. So if you look across the portfolio, I mean, very critically, MFC now we have laid that long-term growth framework and have stated we expect mid-teens sales CAGRs over the next five years. And so that backlog is very firm as we continue to work turning additional HOAs into long-term contracts. Really across the portfolio we see similar strength at RMS. While we continue to ramp at Sikorsky, we’re seeing new strength on the radar business with key awards that are going to give us some clear line of sight to revenue growth. Space, we see a lot of strength in the national security space side, but the key driver there remains the strategic missile defense business, driven by programs like Fleet Ballistic Missile and NGI.
Over at Aeronautics, this multi-year procurement contract that we talked about gives us long-term production stability while we continue to invest in growth in other key parts of the portfolio, and you see that with some announcements in programs such as Vectis, while the Skunk Works business continues to grow as well. And the key pacing item there for growth will continue to be F-35 sustainment, where we’ve seen some really good budget support from our customer as we’ve also invested in that key capability.
That’s Jim going on to the engineering culture. That’s really a great question to explore. There’s really three parts to it. One is our origination five years ago of mission technology roadmaps, which get integrated with product roadmaps or platform roadmaps. And the concept of a mission technology roadmap is to look at whatever systems are available today, starting with Lockheed Martin systems like the Black Hawk or the F-35 or Aegis, and then figure out if, for a given mission like air superiority or surface warfare for the Navy, how do we take those existing systems, networks, protocols, data links, and create mission capability improvements every three to six months. And now and then you’ll have a step-function increase because a new platform will emerge and enter the mission set, but generally it’s going to be incremental improvements in building capacity.
Firmware integration of different supplier products like the Saildrone ships, so to speak, with our Mk 41 launcher is one example. So a mission technology roadmap is a whole different way of thinking about product development and engineering. It basically sends a Z-axis through all of Lockheed Martin and says, well, I can get a sensor from MFC that’s better than the one I have from my supplier. Let’s introduce that in the F-22 — it’s something we are doing, actually.
So those kinds of opportunities across the entire company are now capable, where it used to be, really, four divisions doing their own product development and hoping that it can be stitched together. The second part of this is significant investment in model-based engineering and production. So we’re transforming our whole production system from design to sustainment with a digital twin and digital thread so that we can use digital technology to model and test new options and opportunities and improvements without having to deal with hardware up front, and do as much testing and development as we can digitally before we actually start doing flight test and component testing.
So that’s the second one. So you have mission technology roadmaps — a whole different way of looking at this on a new dimension — and the model-based engineering and production system that we put in place. That’s what we call OneLMX, actually, internally. The third thing is increasing the R&D budget to build prototypes based on our expectations through the mission technology roadmaps before any RFI — request for information — or request for proposal comes from the government. And therefore you have opportunities like Vectis, which we could talk more about later here.
But essentially, we know what the range, payload, and survivability requirements will be for CCAs, or collaborative combat aircraft, drone wingmen, and we’re designing to our expectation of what that’s going to be based on our experience in manned fighters and also our ability to seamlessly connect the manned fighter to the CCA, given the F-22 and F-35 fleets. So those are three ways that we’re changing the engineering culture at the company.
OPERATOR
Your next question comes from Ron Epstein of Bank of America. Your line is open.
Ron Epstein (Analyst)
Yeah. Hey Jim. Thanks. Good morning everybody. Can we talk a bit more about Vectis and, you know, what that means for you guys, CCA, and then — I mean, just part of a broader question of, you know, what is going on in the Skunk Works, if you can give us a little bit of flavor for that as well.
Jim Taiclet (Chairman, President & CEO)
Well, we’ll try some flavor. I can’t give you a lot of details, Ron, but glad you asked. So look, the way we came up with the Vectis initiative internally was basically this mission technology roadmap concept. And there’s two missions that Vectis is applicable to. One is air dominance, or air-to-air combat — shooting down other airplanes while surviving yourself. And then the second mission is strike, meaning air-to-ground missions — aircraft delivering weapons from the air to the ground to hit targets like integrated air and missile defense batteries of the adversary.
So you have the air-to-air mission and the air-to-ground mission with aircraft. And with the advancements in autonomy and AI and the ability to tie manned and unmanned aircraft together digitally, we just have an expectation through our mission technology roadmap and our relationships with our customers on where this is all going and what those customers — the U.S. Marines, U.S. Navy, U.S. Air Force, and our allied air forces — are going to need.
So that’s the concept of how we came up with the idea to invest, for us, fairly heavily ahead of any RFI or RFP on Vectis, because we think we know what the end game looks like. The first, I guess, real opportunity for this will be twofold. One is there’s a CCA Increment 2 program that’s expected to come out of the U.S. Air Force in the next couple years. They’re doing Increment 1 at the moment and testing and doing some flights with those models, if you will. Increment 2, we anticipate, will have, again, larger payload, larger range, and larger survivability requirements that will go with that. So that’s our mission technology roadmap.
But the other thing we’ve done is, given our knowledge of those two missions, we’ve created internally — and I’ve been personally involved in this a little bit — what’s the optimization equation to solve for maximum air combat capability over time at the most efficient cost to the U.S. government. So that’s our objective. There’s three parts to achieving that objective, Ron, in my mind. One is modernizing the F-22, especially with sensors, distributed aperture system, data links, and beyond line-of-sight capabilities that the original F-22 didn’t have. That’ll take the F-22 to a fifth-generation-plus type of capability. Secondly, we want to make sure that the F-35, which is going to be the bulk of the air combat power, especially in air-to-ground missions, that the F-35 be stabilized as a program for a long period of time to make it more efficient and also more effective.
That’s the announcement that just came out from the Department of Defense this morning. We have kind of locked in the F-35 as the most numerous, most important fighter aircraft in the U.S. inventory for the next 10 years. So that’s part of the F-35 solution. The second part of the F-35 solution is that will now enable us to add in sixth-generation key technologies and try to get to 80% of what a sixth-generation clean-sheet aircraft would look like at 50% of that clean-sheet aircraft cost.
And that’s something we actually think we can do at Skunk Works, and we’re in the process of doing the F-22’s upgrade at Skunk Works as well, in conjunction with the U.S. military. The third part of the optimization equation for maximum combat power is the Vectis initiative on our part, meaning we think we know what that third piece has to look like, and we’re going to build that. The Vectis, we’re going to try to make sure that it’s releasable immediately to our allies. In other words, it will be designed in a way that the U.S. and/or the international allies that qualify can buy it, instead of having to do something for a U.S.-only releasability standard and then hope we can get clearance to sell it overseas later.
And so those are the three elements of our airpower strategy. That’s just one of the two of the mission roadmaps — there’s 13 of them — but that’s how we’re looking at everything we do along the lines of those mission roadmaps. And then we’re trying to optimize the combat power delivered to the U.S. and its allies in the most efficient way of doing it.
OPERATOR
Your next question comes from Noah Poponak with Goldman Sachs. Your line is open.
Noah Poponak (Analyst)
Hey, good morning, guys. Evan and Jim. I guess as the missile ramp contracting matures, it would be great to hear from you an update and a little bit more about what you’re taking on. You know, I know these have been complex negotiations and, on the one hand, when we hear more commercial, more outcomes-based, that can raise your antenna for more risk and, you know, you’re counting on a complex supply chain. On the other hand, these are fairly mature products.
So maybe it’s more upside opportunity than risk. And Evan, when I think in the past you’ve discussed cash flow neutrality, I just wanted to clarify, are you laying capital that is then covered by the customer, or is it that there’s an advance that’s covered that’s then paid back via the unit price down the road? Thank you.
Evan Scott (Chief Financial Officer)
Yeah, you got it, Noah. I’ll start with my part of this here. So, starting with the cash flow, please think of it as: we are working with the customer to show the total amount of investments we are making in the production line and the resilience of the production line, as well as our suppliers. We share that with the customer, and the customer ensures that we have the cash neutrality while we’re in the investment ramp phase. And then, when we get to ramp production, you’ve got the delivery of the products that generate the cash flow.
The customer, I think, recognizes the fact that as they have their budget assigned to them, they have flexibility in the cash terms. Flexibility has always been there. This customer has been willing to use it to help accelerate production ramps, and we’re absolutely seeing that with what we’ve seen so far this year. So I see this as a very positive thing for the industry. In terms of the actual terms, the HOAs lay out a lot of the key terms that we’ve talked about before, including cash neutrality, also the budget protections as we continue to ramp, and it gives us true insight to that long-term demand for us and our suppliers. What is left to work is the finalization on the profit terms and on the schedule itself, noting that schedule is fluid because both we and the Department are making investments — investments to scale the production — and we’re seeing that.
So that’s where we are right now. The focus is on scaling, and we all would like to get the final contract negotiated, but that’s well underway. We’re making great progress.
Jim Taiclet (Chairman, President & CEO)
No, it’s Jim here. So we entered these initiatives and proposed these long term agreements and munitions with the expectation and the goal that margins and our financial performance will be at or better than the rates that we have demonstrated under the traditional cash cost accounting system. We’re not going to enter into these agreements if we can’t get at or better financial outcomes than in the past. And so that’s what we’re all working towards in collaboration with the government is to give them a fair deal, but one where we are also being treated fairly, as the saying goes.
And to get that outcome. There were three or four really key provisions that these framework agreements do elucidate. One is there is a long term period for the agreement, so seven years for munitions, 10 in the agreement for the F-35. That allows us to act more like a commercial company and more importantly our suppliers to act like more commercial suppliers. So the performance of our supply chain, which tends to be 60% of the input to our end products, will now be unleashed, if you will, because they’ll be able to make improvements in their factory and production methods.
They’ll be able to hire people with confidence and not lay them off in a bad year of a down program. And we’ll have a better, more resilient supply chain, which actually adds cost to us if they don’t perform well. So the flow through to the supply chain on these HOA agreements is actually I think more important to in performance than our content within those programs. So that’s one reason to pursue them. The second provision that we agreed on with the government was to have an annual escalator from a year zero price which was agreed to. And the year zero price was based on the old cash system, more or less. And so we have a good starting point that’s fair to the company based on the traditional prices and margins that we’ve had. And then the escalator to account for inflation. That escalator is based on an inflation index for the industry that we’re in.
Underneath that, we will not be repriced every year if we make investments to improve our capability and our efficiency under the caf system that we used to deal with. So in the past, if we put $10 million into automation in a munitions factory, our price the next year and our profit would go down. It’s a broken system in that respect. So we’re making it a healthy system that says if we invest in quality, performance, and speed as companies and our suppliers do, we will then be able to keep the increased profitability under that fixed price escalator.
That’s the second key provision of this that gives us confidence this will be good for the company. The third was the cash flow neutrality provision that Evan described along the way. So the year to year, if we just did this under the cash system, we would have certain free cash flow or cash from operations that our investors expect. Because we entered into these agreements, we don’t want to have the first two or three years of those where we have to invest or are obligated to invest more uncovered, if you will. And so that’s where the cash flow neutrality comes in.
It protects the cash flow expectations that you’ve all had as we go through improving this entire system in the first few years. And then the fourth key provision, which is really important, is if a future administration or Congress decides to change, truncate the agreed upon HOA volumes or duration, then there will be a recovery mechanism for industry to get back the investments that they made, expecting 2,000 Patriots a year if it goes to 1,000 or if it’s a four year agreement instead of a seven year agreement. So there are these recovery provisions for investments that industry makes that are not actually needed down the road and we’ll get recovery for that.
So those are the four key provisions that give us a lot of confidence that if we can negotiate these fine points that Evan pointed out, we will go through these agreements and we’ll be super happy to have done it. But we will hold to the notion that the agreements have to be as good or better as the current way of doing business.
OPERATOR
Your next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.
Sheila Kahyaoglu (Analyst)
Thank you so much and good morning, guys. I wanted to maybe follow up on that, but ask on F-35 specifically. You know, would just be interested to see how the F-35 agreement changes the margin profile across production, sustainment and development and how you think about Aero’s ability to expand beyond the 10% margin marker. And just on Lot 20, how do we think about the signing of the agreement and timing there and the margin profile on that specific lot.
Jim Taiclet (Chairman, President & CEO)
I’ll just give some of the conceptual provisions here and Evan can speak to some of the financial effects of those. So on production, same theory applies, right? So 60ish percent of the content or more of the F-35 comes from our supply chain. Some of those suppliers are very large, as you’ve heard. You’ve heard of Northrop Grumman doing the center body, BAE in the UK doing the aft body. We want them to have product stability just as we would like to have it all the way down to the nuts and bolts suppliers that put it all together in our factory at Fort Worth.
So all those suppliers are going to have the same concept available to them of investing in their operations, to making sure they hire enough people, to improving their software systems, because those investments will be utilized and they will have a long enough ROI on those investments that they’ll be confident in making those. Their performance improvements will flow through to us. And our biggest, one of the costs is supplier late or poor quality and all the inputs that come to us in the final assembly.
So we will benefit from that. Again, everybody’s going to be under the fixed price escalation model. And we’ll all collectively, if we do well and perform well and those investments pay off that we make, we will get to retain those profits under the fixed price with escalator concept. Again, before we would have to give back with price and operating profit any improvements we invested in internally. So that is going to apply to the production system even if it stays at 156.
It will be a much healthier production system for industry and a more predictable production system for government. And I’ll get quickly. The other two big pieces of this are fleet readiness, which is really, really critical. The whole aftermarket side of this is going to enjoy the same kind of business model that we just talked about on production. And by the way, the parts will be pulled between sustainment or aftermarket and production for all of our suppliers and for us, so we can get better pricing from everybody. That’s another big piece of this.
And then on modernization, when we input new capabilities, we’ll be able to have improved and enhanced test capabilities for us and our suppliers because we can invest in those now too, without risking price reductions later. And we’ll have faster modernization as a collective because of being able to do that. So this agreement benefits the entire F-35 enterprise, we think, both for industry and for government. I’ll turn it over to Evan if you want to add more specifics there.
Evan Scott (Chief Financial Officer)
In specific to F-35 and margins, I think a couple key things are to note here. One, clearly we’re partnering with our customer on development tasks that we need to accelerate and get done. On the production side at this point, F-35 production is accretive to Aeronautics margins and Lockheed Martin margins. We’ve seen very strong performance in F-35 production, which gives us a great baseline from which to establish a 10 year multi year. When you look at Lot 20, if we do sign a Lot 20 this year, that would represent upside to effectively all our metrics this year.
It’s not counted on in our guidelines. That said, we are well underway with Lot 20 with the advanced procurement funds that we have. So production line is looking very strongly. We’ve seen great investment in sustainment with rising sales growth there as well. So the F-35 is in great shape here heading into a potential multi year.
OPERATOR
Your next question comes from Miles Walton with Wolfe Research. Your line is open.
Miles Walton (Analyst)
Thanks. Good morning. I was hoping you could touch on some of the 2027 potential moving target, moving pieces, top line margin and free cash flow, or at a minimum on the free cash flow. Evan, if you can speak to should we expect the billion dollar pension headwind contribution and then how much of this raise related to cash taxes is one off? Thanks.
Evan Scott (Chief Financial Officer)
You bet. Morning, Myles. So for 2027, consistent with last year, we’re not giving specific guidance for the following year. We’ll do that in January. However, we’re comfortable saying that we see all four segments growing next year on a top line basis with the strength of our backlog and the demand. And really when you put it all together, we see clear line of sight to high single digit revenue growth next year as a company. From a cash perspective, you’ve got the right elements there. The tax benefit is more than a single year benefit. I don’t think we’ll get as much benefit next year as we got this year, but it will be a benefit overall. So year over year represents a slight tailwind. And then you hit the other key item there, which is pension. And we’ve talked about a pension contribution in excess of a billion dollars to be required next year. We have not made a decision yet if we plan to pre fund the pension this year based on the strong operational cash we’re seeing.
That opportunity certainly may present itself, noting that we plan to close Ultra Maritime this year paid fully in cash. So that’s the other element we need to work through and then we’ll make that decision before the end of the year.
OPERATOR
Your next question comes from John Godden with Citi. Your line is open.
John Godden (Analyst)
Hey guys, thanks for taking my question. There’s a lot of program detail that’s come out of the answers to the other questions. What I wanted to focus on, Jim, if we could, is the durability of revenue growth kind of in 2028 and beyond. More and more from some of the earnings in earnings season so far, I think there’s a view that there’s growth even beyond 27. Of course, investors are still very focused and debating 27 itself. I’m not asking for guidance or anything like that, but perhaps a conceptual framework for just building comfort that even if things get a little better in 27,
Jim Taiclet (Chairman, President & CEO)
There’s sustainability and durability in that growth beyond. So given the geopolitical situation I referenced in the prepared remarks, which is frankly unfortunate for all of us, there are potential adversaries, competitors around the world to the United States that don’t seem to be backing off of their objectives and in using potentially military means to achieve those. And so you can go across the spectrum, Russia doesn’t seem to be backing off of its designs on Europe, Iran is seemingly not going anywhere as far as its goals in the Middle East to have more dominance there, and then in the South China Sea and China and the Pacific in general.
You can look at their production numbers as far as aircraft, missiles, satellites. It’s harrowing, right? So they’re not going away either. As much as I would love to have peace break out all over the world. And again, our product is not necessarily platforms, ships, radars. Our product is deterrence. We want to create deterrence from armed conflict. So given the backdrop, the only way I think it’s feasible to maintain an effective deterrent is to maintain a strong national defense.
And to maintain a strong national defense when you’ve got production rates and technology development by China, Iran and Russia at the pace that they’re all going, I think it’s going to require a sustained investment in national defense and the defense industrial base and in the products that we all produce together, including our new entrant friends and venture companies that we’re partnering with. It’s going to require that. So it’s an unfortunate geopolitical situation that I think will create this sustained demand for many, many years.
With that, I think we’ll go ahead and close the call. But before we do, I want to thank our employees and suppliers for everything they do each day. As we continue to expand our production and deliver for our customers, it’s their efforts and expertise which are critical to meeting these commitments that we talked about today. Strengthening the defense industrial base, as I just said, and building the capacity our nation and allies need to deter armed conflict or prevail, if there is one.
Our focus remains on execution at Lockheed Martin. Delivering advanced, reliable capabilities at the speed and scale needed. And we’re making significant investments, as you heard, to support that work. And we’re executing with discipline. And I do think we’re getting real results already. I also want to recognize the men and women in uniform who rely on our systems to accomplish their missions because their success is our success. We have a responsibility to deliver the most reliable, effective capabilities they need to complete their missions and return home safely to their families and friends.
So thank you to everybody joining us today. We look forward to sharing our progress with you next quarter. Bye, everyone.
OPERATOR
This concludes today’s conference call. Thank you for joining. You may now disconnect. Good day and welcome everyone to the Lockheed Martin Third Quarter 26 Earnings Results Conference Call. Today’s call is being recorded. If you would like to ask a question, please press star then one. Now at this time for opening remarks and introductions, I would like to turn the call over to Mark Kovasnik, Vice President, Investor Relations. Please go ahead.
Mark Kovasnik (Vice President, Investor Relations)
Thank you, Sarah, and good morning. I’d like to welcome everyone to our third quarter 2026 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer, and Evan Scott, our Chief Financial Officer. Statements made today that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin’s SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements.
We posted slides on our website today that we plan to address during the call to supplement our comments. These slides also include information regarding non-GAAP measures that may be used in today’s call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the slides and see definitions and reconciliations for non-GAAP measures. With that, I’ll turn the call over to Jim.
Jim Taiclet (Chairman, President & CEO)
Thank you, Mark. Good morning, everyone. Lockheed Martin delivered another quarter of strong program performance, growing both sales and profit by double digits, reflecting execution to the plan that we previously laid out for you. We generated $3 billion of free cash flow in the quarter and grew our backlog to another record $292 billion. The momentum in our business is accelerating, giving us confidence to raise our full year expectations for sales, earnings and cash again this quarter.
Evan will cover the specifics shortly. These results are a product of the investments we made in recent years that are now delivering across our entire portfolio, from autonomous aircraft and next-generation air dominance to homeland missile defense, hypersonics and the command and control that connects it all. We are innovating faster with the best technologies available, providing integrated capabilities across every domain to answer a defense sector demand that appears permanent, resulting in a business that is resilient through any budget cycle.
Munitions are a major part of that story, but they’re far from the only engine of our growth. I also want to start by acknowledging the recent F-35 multiyear announcement, which cements its role as the free world’s key frontline fighter for years ahead and, again, a continuing growth engine for Lockheed Martin. This agreement solidifies the path to 850 U.S. aircraft over a 10-year span, which will be further augmented by sales to our allies, achieving a total production at 156 aircraft per year for 10 years. This landmark agreement also enables sustainment and future development to be more effective and efficient for our customers.
Staying ahead of the threat has always been our mission, and today we’re doing it faster than ever. Over the last couple of quarters I’ve explained how we are transforming Lockheed Martin, and this quarter proved it again as our increased speed of innovation showed up in every part of our business. At Skunk Works, the Vectis team went from first drawing to wind tunnel testing in under two months, released the first production part in eight months and have flight demonstrations scheduled for next year.
This progress gave me confidence to greenlight an increase, and now we will build five Vectis aircraft with our own investment that puts us in position to operate proven, production-ready autonomous aircraft as our customers define their future requirements. At MFC, our Precision Strike Missile Increment 2 went from flight tests in March and August to a $1.2 billion production contract within the same year. That compresses what has traditionally been a multiyear path from testing to production, getting a new maritime strike capability to the Army sooner and allowing the value of our development work to be realized years earlier than normal. This production award further builds on the Department of Defense’s broader investment in quadrupling PrSM production.
Our space team recently completed a key solid rocket motor test for the Next Generation Interceptor program, keeping that program on track for fielding by 2030, strengthening the homeland missile defense and advancing a program essential to the nation’s future. And at RIMPAC, an exercise in the Pacific, our RMS team and Saildrone went from concept to a live air missile launch from an unmanned surface vessel in less than six months, putting proven weapons on a commercial autonomous platform and extending Lockheed Martin’s capability onto an entirely new class of systems.
This commercial mindset throughout our company is changing how we build as well. Partnerships are becoming a key part of how we move faster. We are extending them all through our supply chain and beyond. GM Defense, for example, delivered its first PAC-3 components to us in under one month from the initial contract. That adds capacity at a terrific supplier at a pace our traditional supply base couldn’t match on its own and is helping us deliver more interceptors sooner without an increase in our own capital investment.
And just last week we announced the expansion of our Grand Prairie, Texas manufacturing footprint to more than 735,000 square feet. The expansion includes additional capability and capacity for automation and digital manufacturing and will also bring on board a Hadrian highly automated production machine cell to supply components across our missile programs in a manufacturing-as-a-service contract. The discipline that gets capability to our customers faster also strengthens our business. When we shorten the path from development to production, we accelerate the economic return on that work. When we invest ahead of requirements, we enter competitions for the next generation of programs already well positioned. And when we partner with commercial manufacturers and tech companies, we scale in a way that keeps our investment efficient as demand grows.
Delivering programs faster is only part of the equation. The greater value comes from how these capabilities work together. Our platforms are central to Lockheed Martin, but they also form a foundation for the broader role we play, one that may be unmatched in the world, and that is driving interoperability and integration across platforms and domains to give our customers an advantage no single platform can provide on its own. This role builds on decades of mission integration experience, connecting aircraft, missiles, earth- and space-based sensors and command and control into theater-level deterrence across land, sea, air, space and cyber.
It is a very deliberate plan, and the mission technology roadmaps we established several years ago and continue to evolve guide our development ahead of formal requests for proposals. We just don’t wait for them anymore. We’re not just building product before customers ask for it. We work alongside them to understand where their missions are headed so that we are ready with complete, proven solutions when they need them. Part of that is recognizing that our customers don’t need to choose between exquisite platforms and affordable mass. They need both integrated so each makes the other one more effective. We can bring them together in a way few others can. Some examples: At Valiant Shield, our RMS team used our software-driven command and control system powered by CommandIQ and connecting long-range missiles, integrated air and missile defense and remote targeting, drawing on commercial sector data and using AI to recommend specific target engagements.
The RMS team is building on that work in Guam, where we developed an AI-enabled battle management prototype for the Guam defense system, and we were selected by the Missile Defense Agency to move its missile defense modeling and simulation to the cloud. In Australia, we were awarded an $800 million contract for the next tranche of AIR 6500, which is its Joint Air Battle Management System, demonstrating that our integration expertise is in demand from our allies as well.
This is what it means to be the premier defense technology company, delivering proven platforms that work alongside autonomous systems.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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