Lockheed Martin Corporation Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Record Backlog and Deliveries: 2025 marked unprecedented demand, ending with a record backlog of $194 billion and 6% year-over-year sales growth. Delivered 191 F-35 fighter jets and 120 PAC-3 MSC interceptors, both record numbers.
• Investments and Innovation: Made a $3.5 billion investment in capital and independent research and development. Pioneered over-the-air updates to the Aegis weapon system, launched GPS III and Tranche 1 transport layer satellites. In 2026, expect $5 billion in capital and independent research and development, with a focus on F-35 sustainment and missile production ramps.
• Framework Agreements: Reached a seven-year framework agreement for PAC-3 MSE interceptors and a similar framework agreement for the THAAD interceptor. These agreements aim to bring commercial business practices to large-scale production in the defense industrial base.
• Technology Advancements: Demonstrated control of a drone wingman from an F-22, completed the first flight of the experimental X-59 aircraft, and successfully used the Helios shipboard laser system to neutralize drone threats. Developed AI-enabled unmanned Black Hawk helicopter technology.

Segment Performance

• Aeronautics: Fourth-quarter sales increased 6% year-over-year, primarily driven by higher sales on classified programs and F-35. Full-year sales rose 6% to $30.3 billion. Segment operating profit in the fourth quarter increased 80% year-over-year, but full-year segment operating profit decreased 17% due to classified program reach forward losses and unfavorable profit adjustments on C-130. Adjusted for classified program losses, Aero's segment operating profit margin was 9.9% for the full year 2025.
• Missiles and Fire Control (MFC): Q4 sales increased 18% from the prior year, driven by higher volumes from production ramps for precision fires programs and existing PAC-3 contracts. Full-year sales increased 14% to $14.5 billion due to production ramps on JASSM, LRASM, and Precision Fires programs. Full-year segment operating profit increased by $1.6 billion year-over-year, with a margin of 13.8% for 2025.
• Rotary and Mission Systems (RMS): Q4 sales increased 8% year-over-year, primarily from higher volume at Integrated Warfare Systems and Sensors, radar programs, and River Class Destroyer. Operating profit in the fourth quarter decreased 9% year-over-year. Full-year sales were comparable to 2024 at $17.3 billion, but operating profit decreased 31% due to charges on the Canadian Maritime Helicopter Program and Turkish Utility Helicopter Program. Adjusted for those program losses, RMS operating profit grew 3% year-over-year, with a margin of 11.3% for full-year 2025.
• Space: Q4 sales increased 8% year-over-year, driven by higher sales volume on strategic and missile defense programs. Full-year sales increased 4% to $13 billion, with operating profit increasing 10% due to favorable at-complete performance on certain commercial civil space programs. Segment operating profit margin was 10.3% for full-year 2025.

Guidance

• 2026 Sales: Forecasted to be in the range of $77.05 to $80 billion, up $3.7 billion at the midpoint, with 5% organic growth year-over-year.
• Segment Operating Profit: Anticipated to be in the range of $8.425 to $8.675 billion, resulting in a midpoint margin of 10.9%.
• EPS: Projected range of $29.35 to $30.25, with the midpoint over $8 higher than 2025 due to program pension-related charges and higher volume.
• Free Cash Flow: Guidance of $6.5 billion to $6.8 billion, including $2.5 billion to $2.8 billion in capital expenditures to support production ramps.

Risks

• Geopolitical Uncertainties: Dynamic geopolitical environment could impact defense budget appropriations and program execution.
• Program Execution Risks: Complex programs like Aero's classified programs and RMS's Canadian Maritime Helicopter Program carry risks that need close monitoring.
• Pension Requirements: Future pension funding requirements could impact free cash flow, though proactive prefunding efforts are in place.

Question and Answer

Q: Good morning, Jim and Evan. Wanted to ask on capital deployment. You have the big step up in CapEx for this year, and it seems like that's gonna persist for the next few years. So are you changing your overall capital deployment strategy of returning 100% free cash flow to shareholders following the president's executive orders? And if so, should investors expect that to be a new normal? And how might vertical integration factor into capital deployment going forward?

A: Yeah. Good morning, Scott. It's Jim. We're gonna continue to use a disciplined and dynamic capital allocation process that we've been using for years. There's differences this year, which is the introduction of these long-term contracts, which I do think will be extended and expanded by the Department of War, which creates stable growth opportunities for companies like us. That the ROIs will exceed our cost of capital, and therefore, we should invest in those stable growth opportunities over much longer terms than we've ever enjoyed before. So the process remains the same, but the conditions have changed. On the availability of accretive investments that we can make in our company. The second area is R&D. And we are making inroads in a number of areas that, again, we believe with the new approach for acquisition transformation in the government, we will be able to prove ourselves by making R&D investments and building prototypes even at a greater rate than we ever have before.

Q: Thanks. Good morning, everybody. It's okay. I have, I think, a quick two-part question on multi-years. First, regarding the two missile framework deals for PAC-3 and THAAD, what's the timing of a multiyear there? And how are you thinking about MFC margin potential, you know, over the long term? Second part, the F-35 has been mostly bought in annual increments, and for the most part. Should we be expecting a multiyear for the F-35? And how are you thinking about program quantities there?

A: Rich, as far as the multiyear missile agreements, their frameworks, they are committed and purposeful by both sides, industry and government. There's a couple of steps that government needs to take. One is to definitize the and to do that, they need to have an appropriations that is approved. So they're working through and we will work through them on the definitized contract and RDR, actually, but all those steps do need to get be completed. The timing on that will be up to the congressional budget cycle. We expect both of those programs to be up and running under the framework agreement with appropriations by, you know, by this year, 2026, that's our expectation. On F-35, we have been publicly advocating for a few years on multi-year sustainment potential for aircraft like the F-35. There's no reason whatsoever that whether it's production, modernization, and sustainment, those activities couldn't be wrapped into a multiyear framework just like we've done for the missile systems. Some additional complexity there given the nature of the program. But there's no reason we couldn't get to the goal line should the government be interested in pursuing any of or all of those elements of the F-35. And I'll address your question, Rich, on the MFC margins. So we, in our guidance this year, have contemplated the PAC-3 and THAAD multiyear agreements getting awarded this year with initial sales starting this year. So I think, first of all, it's encouraging to see margins holding despite growth beginning this year. I think as you know, the way we do our profit recognition is we start typically at a lower profit recognition point on a program and build it up over time as we make progress on deliveries and risk. So think of this as a seven-year program that will step up over time. What that would mean for MFC margins in the coming years is some possible dilution, but probably no more than 20 to 30 basis points at max. But that's gonna then create over time an opportunity to exceed MFC margins beyond where they have historically been with the opportunity to perform that is presented to us with these multiyear agreements. Yeah. And that margin pressure because of the start-up nature of this production ramping will be in an environment where sales should be double-digit growth in MFC and maybe even mid-teens sales growth in MFC? We'll take that trade, and then margins will, as Evan just said, will catch up. This is a very, very good arrangement for Lockheed Martin.