LOCKHEED MARTIN CORP (LMT) Q2 2026 Earnings Call Transcript

Good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2026 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mark Kvasnak, Vice President, Investor Relations. Please go ahead.

Thank you, Sarah, and good morning. I'd like to welcome everyone to our second quarter 2026 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Evan Scott, our Chief Financial Officer. Statements made today that are not historical 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'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 with that, I'll turn the call over to Jim.

Thanks, Mark. Good morning, and thank you to everyone on the line for joining our second quarter 2026 earnings call. As you saw in our press release, Lockheed Martin's second quarter results were strong. Our backlog reached a new all-time high, now $230 billion. We generated nearly $3 billion in free cash flow. We accelerated our revenue growth and turned in higher earnings per share. Consequently, we are raising our 2026 guidance, reflecting our confidence that our strategy is gaining momentum, and we will continue to produce sustained profitable growth over the next few years. While these achievements stem from robust customer demand, they were enabled by strategic decisions we made well before this demand materialized. For the past several years, we've been increasing munitions capacity ahead of contracted demand. We've been pioneering comprehensive open-architecture technology initiatives well before they became a standard practice, and we established a manufacturing footprint in allied countries prior to the rise of co-production requirements. By embedding our core 21st century security principles, rapid data-driven decision-making, resilient supply chains and interoperable AI-enabled systems, we ensured our solutions would be ready for the changing threat landscape that we see today. To deter armed conflict and prevail when it occurs, U.S. and allied armed forces have turned to the partners that already have combat-proven systems. Also critical is the ability to scale up production, deployment and sustainment worldwide. Those strengths of Lockheed Martin have contributed tremendously to this quarter's performance. As you can see most clearly in second quarter contract activity. In late June, the Missile Defense Agency awarded a seven-year contract for $35 billion to quadruple production of interceptors, marking the next of the munitions frameworks to transition to a formal contract. Alongside that, the Army awarded a production contract at $3 billion, covering the current version and its newly developed successor, which will have twice the range from the same launch. We also secured a major award valued at up to $1.1 billion for the U.S. Army, Marine Corps and up to five allied nations. Stepping back, these awards are less about any single program than about what they're building in aggregate. Together, they strengthen the nation's production base, adding resilience along with more manufacturing capacity, more sources of supply and greater surge capability, all at a time when these very attributes have become a strategic imperative for the country. The quarter's success story was not about munitions alone. It spans the full spectrum of our business with new awards and accomplishments achieved across the board. The U.S. Space Force selected us as one of the awardees to develop space-based interceptor prototypes under Golden Dome with capability demonstration expected by 2028. We also signed a $2.3 billion radar contract supporting the growth projections we've been making related to our Radar business. Following a series of successful flight tests, we continue to make progress on the critical hypersonic weapons program, Conventional Prompt Strike. Cumulative contract modifications totaling $1.4 billion on this joint Army and Navy program will drive more rapid development and demonstration of the sea-based hypersonic strike weapon system. We also announced the next-generation glide-body demonstration, which is a new hypersonic glide body that's more affordable, scalable and flexible. Our team's operational execution hit its stride this quarter as we fulfilled key delivery and technical obligations throughout the portfolio. We resumed deliveries for the F-16 and increased output of C-130 aircraft. Two F-16s and seven C-130s were delivered to customers this quarter. We also delivered the second shipset of our SPY radar equipment for Japan's new missile defense destroyers, on scheduled delivery for a program central to our key ally's homeland defense in Japan. In May at a missile range, the QuadStarSeeker completed its flight test as part of the next-generation short-range interceptor competition, validating some key risk reduction milestones for the Army Stinger replacement on a very compressed six-month schedule. Building on that success, in June, we announced the advancement of the PRISM increment for missile defense which cleared a critical technical gate and confirmed the system's extended range while still preserving capability and compatibility with existing HIMARS. While we execute in our engineering centers and factories, we're also innovating with a lot of purpose and speed. We're not waiting on orders or contracts to close when we see evident mission gaps for our military services and those of our allies. In early June at Yuma Proving Ground, our Sanctum counter-UAS solution, an anti-drone system, utilizing our Grizzly containerized launcher went from concept to successful live-fire testing in under 45 days, built not by inventing something brand new, but by connecting what we already had: a combat-proven battle manager, radar, launcher and JAGM missiles, the successor to the Hellfire operating as one integrated system for a brand-new mission. Four elements, three of them are internal and one from a partner that we invested in through Lockheed Martin Ventures. That same logic—building on established battle-tested solutions instead of starting from scratch—guided the Navy's decision to integrate the PAC-3 missile into the Aegis Combat System. This move adds a new intercept capability to surface ships for the Navy. Though the PAC-3 was originally designed for air defense with a different radar and launch architecture, the Navy's acquisition taps our truly unique integration expertise. Our engineers were able to merge the missile's inherent guidance mechanism with our Aegis fire control system into a single fleet-fieldable solution. This will enable the U.S. Navy to deploy this new capability on its existing ships relatively rapidly. We've demonstrated this systems integration discipline across our new Sanctum counter-UAS system and every missile Aegis has fielded for more than 40 years. We are also extending this forward-thinking approach to partnering with some of America's greatest manufacturing leaders as evidenced by our recent collaboration with General Motors Defense. Our joint objective with GM is to explore applying the automotive industry's high-rate manufacturing and supply chain expertise to defense production. We hope this effort will provide us more access to the speed and scale of America's commercial industrial base to help significantly accelerate output as demand grows. Now behind every one of our achievements this quarter is a steady long-term commitment to the physical backbone of the company: new factories, advanced automation and state-of-the-art tooling and robotics. We enhanced that infrastructure with strategic partnerships among the nation's leading technology and manufacturing firms, and we now embed artificial intelligence capabilities directly into our production lines. AI-driven analytics optimized equipment performance, for example. We have predictive maintenance algorithms that reduce our downtime and machine learning-guided quality checks that streamlined the inspection process. Also, as our design and manufacturing systems evolve, we are deliberately growing and diversifying our access to capital investment and critical workforce skills through international partners via expanded co-production and regional sustainment programs. These efforts have the benefit of placing manufacturing overhaul and repair capabilities where U.S. forces are deployed overseas and where our allied forces operate. Overall, our approach is financially disciplined while perhaps less risk averse than may have historically been the case. Each co-production initiative is a purposeful investment with a clear view of the expected returns that each will generate once contracts materialize. Our strategy to make our production operations more resilient and scalable, integrate the latest 21st-century technologies into existing and new systems and expand our international production is underpinned by a very strong balance sheet. Our robust cash generation and access to capital, supported by our strong credit rating can fuel billions of dollars of planned investment and a portfolio of new and expanding facilities across the United States and beyond. This quarter alone, we held the opening of a missile assembly building in Cortland, Alabama, the future home of the next-generation interceptor program and a critical hub for integrated air and missile defense work on programs such as that. In May, we broke ground on a new munitions production center in Troy, Alabama, adding 87,000 square feet of production space to support those interceptors and future NGI work. We also continue to make progress on our new production facility in Titusville, Florida, which will support critical development of the TRID 2 missile. Our pace of disciplined investment for growth has continued since the end of the quarter. In the span of a few weeks, we signed an agreement to acquire Ultra Maritime. This acquisition will enhance our advanced undersea sensing and autonomous sea drone capabilities, a domain where there is growing demand. At the NATO Summit, we signed a memorandum of understanding with Rheinmetall toward the first European Center of Excellence for munitions production. And we welcome the commitment of the United States, Germany, the Netherlands, Poland and Sweden to explore a dedicated PAC-3 missile facility in Europe for maintenance, putting allied capability closer to allied needs. Last month, Secretary Hege highlighted the success of the first milestone test of Golden Dome for America noting that Lockheed Martin's directed energy laser weapon had queued, targeted and eliminated a full spectrum of incoming threats, which is a true milestone achievement. Just two weeks later, the U.S. government awarded us a joint laser weapon system contract to develop a containerized 500-kilowatt laser. This will be the highest power laser ever packaged in a transportable container and is a cornerstone of the next-generation cruise missile and drone defense architecture. This win didn't happen overnight. It builds on our standing laser weapons experience and years of investment in these technologies confirming its readiness for actual field deployment. Lastly, just a few days ago, we secured a $1.6 billion F-35 spare parts award, the largest such contract in F-35 history, reinforcing the Department of Defense's heightened focus on keeping the world's premier fighter fleet operational. Our upfront investment in spare parts and consumables has now been translated into immediate inventory that can be shipped to customers the moment their need arises. The quarter's announcements are driven by three deliberate actions. First, we are investing at home, expanding manufacturing capacity to meet today's demand cycle. Second, we are partnering with allies, positioning the capabilities where they're needed the most. And third, we are advancing technology from directed energy and autonomy to integrated cross-domain systems. The result of these efforts is a deterrence posture that protects our nation and our allies underpinned by a business that grows stronger each time it delivers. Now I'll turn the call over to Evan and Mark who can talk through the financials.

Thank you, Jim. Good morning, everyone. I'll begin with an overview of our consolidated results, which, as Jim said, were strong both operationally and financially. I'll then cover our increased full year 2026 guidance before handing it over to Mark to discuss segment-level details. As you can see on Slide 3, the second quarter was record setting for our backlog, which now totals $230 billion, an increase of roughly $64 billion versus second quarter of 2025. We recorded a second quarter book-to-bill ratio of 3.2:1. The backlog increase includes $65 billion of orders realized during the quarter, the largest being the multiyear FAD contract as well as new radar awards within RMS and strategic wins in space. This deep book of contracts will fuel our sales growth for years to come, and we saw this top-line acceleration begin to show up in the second quarter. We recorded sales of $20.1 billion, a $1.9 billion, 11% increase over the same period last year. This growth was primarily driven by accelerating munition programs in MFC and further supported by all other segments, including strong performance in F-35 production and Aeronautics, the MIC-2 portfolio in RMS and the strategic and missile defense programs in Space. The year-over-year comparison also benefits from the absence of unfavorable adjustments we took in the second quarter of 2025. Excluding those adjustments, we grew sales 7% year-over-year. The performance exceeded our sales expectations in the second quarter, giving us confidence in a stronger 2026 trajectory that we'll discuss shortly. The second quarter segment operating margin was 10.8% as profit climbed to $2.2 billion, and earnings per share rose to $7.94, both posting meaningful improvements from the prior year. These gains mostly reflect the absence of unfavorable profit adjustments recorded in the second quarter of 2025. Free cash flow rose by $3 billion, moving from a negative $150 million in the same period in the prior year to a positive $2.9 billion this quarter. The largest contributors include the favorable timing of customer receipts, which accelerated cash inflows and lower tax payments. We restored the temporary dip in free cash flow that resulted from the ERP rollout last quarter, reflecting the effectiveness of the planned recovery we outlined earlier this year. During the quarter, we invested $876 million in capital assets and research and development. This included production capacity upgrades, next-generation mission facilities and AI-enabled autonomous manufacturing infrastructure. We also funded new sanctum counter-UAS solutions, autonomous weapon systems and AI-driven analytics that improve mission planning and real-time decision-making across our portfolio. Building on disciplined capital allocation, sustained cash flow generation and focused R&D, we strengthened our competitive edge. We are poised to convert our financial strength into growth-driven transactions. The upcoming Ultra Maritime acquisition, made possible by our robust balance sheet and strong cash flows, exemplifies how we are leveraging this flexibility to pursue strategic inorganic expansion. The underlying strength of our fundamentals enabled us to fund increased investments to add capacity and meet the demand that Jim outlined earlier, while returning $796 million to shareholders through dividends in the second quarter, showing that we can invest for growth and deliver tangible shareholder value at the same time. Turning to Slide 4. I'm pleased to report that we are raising our outlook across every key metric. Building on the momentum we generated in Q2, we now expect total sales of $79.75 billion to $81.75 billion, representing an 8% year-over-year increase at the midpoint, up from the prior 5% guidance. This uplift is driven primarily by our volume on F-35 production in Aeronautics, radars and RMS. Correspondingly, we are increasing our segment operating profit target to now $8.5 billion to $8.7 billion. This revised outlook reinforces two important growth dynamics. First, is that our growth is clearly accelerating. Through the first half of this year, we grew sales at a mid-single-digit pace year-over-year. Our revised outlook pegs our second half 2026 growth rate in the high single digits and perhaps even the low double digits, a year-over-year increase of between 7% and 12% as compared to the second half of 2025. Secondly, is that this accelerating growth is broad-based. Every segment at Lockheed Martin will grow faster in the back half of 2026 on both the top and bottom lines. MFC is clearly leading the way for our growth, but as we've described, our entire portfolio is accelerating, and we've reinforced that with this higher sales and segment operating profit outlook. Our free cash flow outlook is increasing too. As I began to signal last quarter, we now expect a range of $7 billion to $7.2 billion. This improvement includes the favorable corporate alternative minimum tax IRS guidance we highlighted earlier this year; we're also confident that stronger working capital dynamics will improve our cash conversion cycles. We remain dynamic and disciplined in our capital allocation decisions, continually weighing the most value-enhancing approaches for deployment. Earnings per share is now projected at $29.95 to $30.65, driven by higher year-to-date profits and a lower effective tax rate. We are also updating our capital expenditure guidance to a range of $2 billion to $2.4 billion reflecting efficiencies realized in MFC's munitions buildout. Expanding munitions capacity as quickly as possible is our top priority, and our teams are relentlessly pursuing the most efficient ways to do so. Our framework agreements and related awards remain cash neutral so these efficiencies are well aligned with our customers' objectives. Now I will turn the call over to Mark, who will cover the segments in more detail.

Thanks, Evan. My segment-level comments will focus on our updated increased full year 2026 sales and profit outlook and the key drivers for the accelerated growth we expect to realize across all four segments in the second half of this year. Starting with Aeronautics on Slide 5. We now project Aeronautics to deliver full year 2026 sales of $31.7 billion to $32.7 billion, driven by strong F-35 production and sustainment volumes. The higher sales volume pushes the profit outlook up to between $3 billion and $3.08 billion. Margins are pegged modestly lower than our prior guidance as we scale up new contracts in F-35 production, expand sustainment work and absorb the F-16 and C-130 challenges we realized in Q1. Excluding the favorable comparison impact created by the prior year losses Aeronautics has posted, Aeronautics has posted low single-digit year-over-year sales growth through the first half of 2026. Our updated outlook accelerates Aeronautics' growth rate to the mid-single digits for the second half of this year. The top end of Aeronautics' updated sales range implies an even stronger second half growth rate could be realized driven by a bump in sales that is dependent on timing of award for the next lot of F-35 production. Moving to Missiles and Fire Control on Slide 6. MFC had very strong growth in the second quarter. Sales were up 19%, and profit was up 24% year-over-year, fueling a raise to our full year outlook as the cadence of munitions production continues to accelerate. MFC's sales range has been adjusted to $16.5 billion to $16.9 billion, lifting the low end of our prior guidance, and the profit range is now $2.3 billion to $2.35 billion, reflecting continued mid-teens margin performance. Through the first half of 2026, MFC has grown sales 14% year-over-year. And at this updated outlook level, the second half 2026 growth rate will be even faster. Next is Rotary and Mission Systems on Slide 7. At RMS, the new radar awards Jim and Evan mentioned give us confidence to increase the full year sales outlook to between $17.7 billion and $18.1 billion. The profit outlook at RMS is also raised and is now between $1.86 billion and $1.89 billion, keeping margins steady relative to the prior outlook. RMS sales during the first six months of 2026 were relatively comparable to the same period last year. Our updated full year outlook indicates RMS will accelerate to a mid-single-digit year-over-year growth rate in the second half, driven by the higher radar volumes and continued production ramps at Sikorsky. Wrapping up with Space on Slide 8. In the second quarter, Space grew sales 6% and profits 2% year-over-year. We now anticipate 2026 sales of between $13.85 billion and $14.05 billion supported by key wins on the next-generation interceptor, fleet ballistic missile and several classified national security programs. The Space full year profit outlook was lowered to between $1.34 billion and $1.38 billion due to reduced ULA equity earnings because of the ongoing technical investigation of the Vulcan launch anomaly experienced earlier this year. Growth rates at Space will follow the same trend as each of the other segments. The second half of 2026 will be stronger than the first half. At this updated outlook level, the mid-single-digit year-over-year sales growth that Space posted in the first half will step up to the high single digits in the back half. So the takeaway is this. Our raised guidance is broad-based. Every segment has an updated higher 2026 full year sales outlook, and three out of four segments have higher profit outlooks. On a year-over-year basis, every segment will grow faster in the second half of 2026, continuing the acceleration we posted in Q2. Evan, now back to you.

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

Your first question comes from Scott Deuschle with Deutsche Bank.

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

Scott, I'd start by answering your question with this. We've been working a mindset change at this company for the past five years. And our aspiration is not just to be the largest defense prime contractor but it's to be America's clear leader in the Defense Technologies segment. And the way to get there is to be able to and show that we can deliver decisive military advantage to drive deterrence to armed conflict on behalf of our government and our allies. The way we've been going about that is to build mission technology road maps that just don't wait for the next order; they predict with a lot of informed relationships with our customer base what they're going to need — and in some cases before it's evident it gets through their acquisition system to come up with an RFP. So we are building those technology road maps and investing based on our confidence in the ability to make good choices on predicting what the armed forces are going to need. There's a couple of ways to get into that. One is target-weapons matching, right? So for the various threats that come about or that we're aware of or the military has to face, what is the best weapon to defeat that target? And so to just take the example you raised, the PAC-3 ACE reconnect — it has more capability than some of those targets require at a higher cost. So we know we need a PAC-3 missile that maybe is not as expensive and not as sophisticated — how could two-thirds of the capability cost, call it, half the price or maybe even one-third of the price. And that's target-weapons matching. So the PAC-3 MSE can hit long-range, high-speed, advanced ballistic missiles. It can also defeat certain hypersonic threats that maneuver in the endgame, but we need a lower-capability, lower-cost PAC-3 missile for short-range ballistic missiles and for cruise missiles and drones. And so we just went ahead without an RFP or RFI or anything like that to figure out how to solve that target-weapons matching problem in an environment of economic equivalents. So we want to get an economic match cost to cost and also the target-weapons match for capability. And that's the way we're running the company now. That's, again, not only to be the largest contractor when a contract comes, we compete for it, we win it, but how do we be the clear leader in the Defense Technologies segment to benefit our national defense. That's the mindset change we have. So yes, we are investing in the manufacturing and design capabilities before the orders come in. And I think that's the right way to run the company, Scott.

Your next question comes from Scott Mikus with Melius Research.

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

So Scott, this is exactly why the landmark multiyear munitions commercial framework agreements are so critical because the current team in place today under Secretary Hex and Deputy Secretary Feinberg and their teams, under that leadership we believe they share our view that the fully engaged U.S. industry, more broadly in supporting the national defense that they and we must embrace commercially inspired long-term enforceable agreements and contracts that can't be changed at the whim of the government just like the C-130 without compensating the industry players — and it could be a new entrant, it could be a startup, it could be Lockheed Martin, it could be RTX. We need the confidence to act as we would act in a commercial environment to make investments to solve these national defense problems. So I think this is the leadership team in government that can actually leapfrog what's ever gone on before when it comes to commercial-type agreements and include the biggest prime contractors that are willing to step up and, as the prior question suggested, invest ahead of time, think ahead of time and put development effort into non-ordered, non-contracted systems that we think industry and our partners are going to find important for the future. So those agreements will have to stand the test of time as circumstances, budgets and political leadership change over time. And so again, with the administration's leadership in place today, we will establish with them survivable long-term contracts that will allow industry to act on a more commercial basis. That's where I think we're at today. And we don't plan to ever put ourselves in a risk position where we don't have that confidence in the contract that we didn't have for the C-130. We're not doing that anymore. We're not taking that kind of risk without a counterparty that's willing to work on a commercial basis right along with us.

Your next question comes from John Godyn with Citi.

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

I'll start off and maybe let Evan speak a little bit more about some of the individual programs, but just take the F-35, for example. This long-term demand for that aircraft both in the U.S. government and among our allies — it's the only in-production fifth-generation fighter in the free world, which means we have to keep building it, and there'll be demand for it as time goes on. If you just look at the Indo-Pacific theater, the Chinese are building literally hundreds of F-35 type aircraft. I'd like to argue that they're not as capable, but they are building a high-rate fifth-generation aircraft to apply to that theater at a pace which we hope to continue to stay competitive with. The intent of the Department of Defense in this budget cycle was 85 aircraft for the United States alone; the balance would then be allocated to our allies and partners overseas. Now Congress has to work with the administration to figure out how to budget and fund that. But that aircraft, whether it's this budget cycle, the next one, five years from now, is going to be in high demand. We feel really confident that the production rate will be sustained for quite some time. The towing and flowing of the political budget cycles will not, in the long or medium term or even in the short term, I think, really adversely affect what the country needs and what our allies need to defend themselves in an increasingly dangerous world. Evan, do you want to add to that?

Yes, I think that sounds right on. And in terms of the stock price, I do think given the newness of what we're seeing here with the way to acquire these munitions, there's some learning that's going to happen as investors continue to understand it better. I think we'll continue to gain confidence as we convert these agreements through to contracts as we saw in FAD this quarter and we're attending in the second half of the year to also get a multiyear on PAC-3. So as we continue to have the contracts add to the backlog and be able to get better line of sight to the near-term multiyear revenue growth profile, I think we'll see that more translate. But this quarter, I think, is a great example of that, and we're seeing good response so far.

Your next question comes from Gautam Khanna with TD Cowen.

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

Sure. So a couple of things to note here. If you look at the two big programs that you talked about on the classified side, the last adjustment we took on the MFC side was in 4Q of 2024 and Aeronautics side in 2Q of 2025. In both cases, we set new baselines and we have established that we can continue to hit those. They're both aggressive, we've got a lot of technical work to do, but we're making great progress and have shown stability in our ability to execute. I think if you look broader across the portfolio, the thing to look for is the amount of scale across the portfolio. So for instance, in RMS, there are four Sikorsky platforms that are all delivering more this year compared to last year. In some cases we could be talking two-times deliveries this year versus last year and potentially doubling again next year. In Aeronautics, F-16 and C-130 all deliver more this year versus last year. And in MFC, there's a total of 10 munitions that are delivering more this year versus last year. So we are in a scaling mode right now. I think the thing to look for is resilience. Two things: can we scale and can we be resilient. The F-16, which although we took charges earlier this year is a great example of that. One of the things that we continually demonstrate is that our platforms continue to iterate and evolve and improve them. So an F-16 today is very different from an F-16 when we started production. And so a new variant that we had a flight test this year didn't quite meet our expectations of what we expect for us and our customers. So we did a redesign, got the redesign complete, redid flight test and began deliveries again on F-16. That's the resilience you should look for for us to scale because if you look particularly in the munitions, the scaling is just on the front end and is broad-based, but we have line of sight to be able to achieve that.

Your next question comes from Sheila Kahyaoglu with Jefferies.

All the clarity on the script. I guess can we talk about just the discussion today on supply-demand signals that you're continuing to invest in 2026 and for years to come. How do we think about just the CapEx efficiencies that you're seeing and how we think about 2027 and how the customer funding looks as we think about the level of investments this year and going forward?

Yes, I'll start on the CapEx and the investment. A few things to note here. One, while we did reduce our capital expenditures for the year, there's a couple of things to note. One, part of that is driven by timing. So for instance, on the MFC side, there's a facility we intended to buy that we instead decided to lease for a year and by next year due to tax efficiencies. But the other thing that's really interesting to note there, it's one of the first true early returns of the partnerships that we've experienced with the Department of Defense and the DOD team where we partnered to really look at the most efficient, fast way to scale these munitions, which is why we would say we're ahead of schedule to scale and doing it more efficiently, but our commitment to invest a total of between $8 billion to $9 billion of capital in munition scaling is unchanged. So you're going to see us continue to be in a growth and investment mode over the next few years. What's important when you look at the free cash flow is that we compare it with the kind of free cash flow generation that we experienced this quarter, and that's due to a number of things: one, some improvements we're seeing in working capital and the very nature of these deals that Jim mentioned that are critical for the mission scaling that allow favorable cash treatment while we do self-investment on the capacity.

And from a broader perspective, just staying on the munitions for a minute, we and our government customer leadership would be happy to trade lower costs for input and CapEx for speed. If we can do something faster and spend less CapEx, I think that's great for everybody. So we had an initial prediction of $8 billion to $9 billion. And so, for one example, if you ever get down to our factory in Camden, Arkansas, you'll see that about one-third of it today is used for the PRISM missile, which is next-generation, highly automated, AI-informed. The production line looks like the robotic production line that you think about for auto factories and such, where there's a few people running automated machines and robots vis-a-vis the older line, which is about two-thirds of that building, which was designed decades ago. We didn't have all these automated technologies, we didn't have AI to be able to control the robotics and learn from experience. There's a lot more people over there, and it takes up a lot more space and we're basically partnering with Rheinmetall as you heard to move that older line into factory space in Germany where the customer base largely is now and expand the PRISM line without building another building for it. That's a trade everyone should be happy with. We've got an international partner that's going to provide floor space, factory space and talent that we need and investment that we don't have to then put in. That's just one example of how you get the most efficiency when the demand is going up at the rate it is. And just one note on the framework agreements. Remember, we're being asked to triple PAC-3 MSE production, quadruple interceptor production and scale up PRISM production faster than we ever thought we would. And all those things are happening because we're using every card in the deck to get that ramp. The ramp rate is as high as we can, as fast as we can, as efficiently as we can. And that's how we're going about this. The government is giving us a lot more flexibility than they traditionally would have done on requirements and other facets that they traditionally provided. They want us to be faster. And so we're using all the cards in the deck to be as efficient as we can as we try to go faster.

Your next question comes from Robert Stallard.

Evan, a question for you. On the new FAD missile contract, how do you expect the initial margins on this contract to compare versus historical missile contracts?

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

Your next question comes from Matt Akers with BNP Paribas.

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

I think what you're seeing this year is what we should generally expect to see in the future, which is MFC margins in kind of the high 13s, low 14s, which is what we've managed to do when we're really hitting our ramps and hitting our marks, which we've been doing here pretty consistently on the MFC side. So we are in the process of converting these framework agreements to true long-term multiyear programs and contracts, and there are still some ongoing negotiations that will be impactful to this. But we're well aligned with our customer on the way to do that, to incentivize cost and schedule performance, which means we expect to have an aggressive schedule ramp as part of our contract, and we're going to have to meet that. We expect that there is going to be some profit share if we can truly take cost out of this business, which we're incentivized to do by the long nature of the program. That's one of the key values of it. So we would still think about near-term dilution in the 20 to 30 basis points over the next few years with a goal to get to higher-than-historic margins. So for next year, I think, generally speaking, this year is a good reflection within 20 to 30 basis points.

Yes, Matt, there's something really important embedded in what Evan just went through. Traditional government accounting—cost accounting system based accounting in the federal acquisition regulation—reprices fixed-price contracts if the cost to the vendor goes down. So if we put $10 million into new robotics in Camden and our cost per unit was $100,000 before and it went down to $90,000, well, we get repro-priced down 10%. Who would invest $10 million to get their price down 10% and give back all of that benefit? That's the issue with our industry under that accounting system. What the framework agreements do is take that away. In other words, as Evan suggested, if we get efficiencies while we ramp up our product line, we get to keep them. Now we have to perform, but we keep our own profitability instead of giving it back every year on the recost analysis that the government intends to do in traditional contracts. That enables us to make these investments upfront and actually have a fixed price for the customer with an escalator; they know what they're getting. And at some point, if we're able to hit the top mark of our fully retained margin expansion, we will share it with the government as was implied by Evan, but we get to keep a significant ramp-up in profitability to industry if we can perform. Then there's a point where we get to work with the government and share ratably the future benefits. We don't give them all back. We give a portion of them back. And I think that's eminently fair to both the U.S. government and the taxpayer and it will motivate industry to get better and faster and actually hit these ramp-up requests that we're getting.

Your next question comes from Kristine Liwag with Morgan Stanley.

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

Sure, Kristine. I'll start, maybe Evan can speak to the financial opportunity set here. Grizzly and also another system that we have called Morpheus were developed by skunkworks-type groups in our MFC business with cooperation and collaboration with the other business areas, which is something relatively new for us in those kinds of advanced development programs. We make regular executive site visits to our facilities, and when we went to our Orlando facility, the team showed us two things. They showed us a prototype Grizzly, which includes the JAGM, something we make tens of thousands a year for the Army. This is not a limited munition and it's not expensive; it's made at volume. Containerization is one of our big themes in development now: we ought to be able to move systems, put them on a ship or the back of a truck or pick them up with a helicopter because threats are getting more dispersed with drones and cruise missiles. We have to have defensive systems that can protect air bases or stadiums that are containerized, meaning we can move them and set them up somewhere and they'll work. The Grizzly team showed they could build a containerized launcher that holds several missiles, connect it to a command-and-control system called Sanctum, and integrate a small transportable radar from a venture company we invested in. We matched something from a ventures company we invested in with mass-produced missiles and repurposed the whole thing to shoot down drones. Then we went to another demonstration and they had Morpheus, which is a large quadcopter with a box that houses a high-power microwave. The teams built this device on site and tested it. Using AI, the drone can autonomously take off, detect preprogrammed bad drones from radar or electronic signatures, fly alongside the target and then activate the high-power microwave to disable the drone's electronics. It can do this up to 50 times on one battery charge and then return for recharge. I told the teams to build a thousand of these; Evan made a note with a little laugh, and we'll figure out the deployment and the contracts. We'll try to get exportability quickly and go sell them where needed. So that's the mentality we have now. We prefunded development, built prototypes and went on the road show with the Army and other services, and they're now on the range with us demonstrating these things. We'll get an order, I think, someday. And if it's not from the U.S., it will be somewhere else. So that's how we get from concept to delivery in 45 days. It's changing the way the company operates, the mindset of it, and really unleashing the technical talent we have, the partnerships we have and the manufacturing capability we have to solve these issues and try to deter conflict or respond quickly if necessary.

Absolutely. From a financial standpoint, a couple of things to note here. One, you are seeing a culture change; we've always been optimized around closely aligning and anticipating our customer needs. But now you see us not being paced solely by programs of record — being able to anticipate where budgets and needs are going. We have the financial firepower to be able to make these investments. So what that translates to from a financial forecast perspective is that the forecast numbers we've talked about here are based on our traditional programs. What we're talking about investing in would be incremental to that. We don't see this as taking the place of those products. We see these efforts supplementing and adding additional capabilities and resilience to the customers' capabilities. So we see this as potential upside and we have the financial firepower to make these investments.

Your next question comes from Gavin Parsons with UBS.

I just wanted to follow up on an earlier question on the frameworks, and I appreciate all the detail, but I wanted to make sure I understand whether anything changes operationally or financially when you firm up the UCSs into true multiyears. And then what the long poles in the tent are to fully finalizing that?

Sure. So the UCS frameworks are really key because they allow us to get going at full speed. In that they are multiyear-like arrangements, we can optimize around a seven-year production run and get our suppliers aligned to that, which gives us a funding allocation and the cash terms to allow us to protect the upfront investment. As we transition these frameworks to full multiyear contracts, there will be a few things that we'll need to cement. One, we will need to finalize the actual delivery schedules in great detail out to the seven years, and finalize the actual profit mechanisms. We know enough from the head-of-agreement documents to have pretty good line of sight to be able to forecast that today. But the conversion to multiyear procurements will be key to fully lock those down in the contract. With the frameworks, we have all we need for now to be able to go at full speed and get our suppliers aligned and to waste no time in ramping up to meet the need.

Sarah, we're coming up on time. So I'm going to turn the call back over to Jim for his final thoughts.

Yes. Thanks, Mark. I just want to close by recognizing the people who make this performance possible. First, our employees and the thousands of suppliers who alongside of us are investing, innovating and expanding their capacity — thank you to everyone that's actually participating in all of this. Their commitment and our employees' commitments are strengthening America's defense industrial base every day, and it needs to get better. Most importantly, I'd like to thank the men and women of the U.S. military and our allies who are operating and sustaining our systems around the world in dangerous places. Everything we do is guided by a standard for the soldiers, sailors, marines, Guardians and airmen out there: deliver reliable mission-ready capabilities and equipment when they need it so they can do their mission and come back safely, as well as our partners at NASA who continue to push the boundaries of space exploration as well. That's a responsibility that motivates our team every day. You can see some of the energy we have on this call about really trying to make this a much better aerospace and defense industry and really lead the elevation of deterrence to armed conflict that our government has access to. So thank you, and we'll see you next quarter.

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