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# Lockheed Martin Corporation (LMT): Business, Risks and Management Discussion Lockheed Martin reports on a calendar fiscal year ending December 31. Interim quarters close on the last Sunday of the calendar quarter, so the third quarter of 2026 ended September 27, 2026 (prior year: September 28, 2025). Quarter lengths vary: the company's 2026 first quarter had 12 weeks against 13 in 2025, and its 2026 fourth quarter will have 14 weeks against 13. All amounts are in US dollars. --- ## Business *From the FY2025 Form 10-K, accession 0001628280-26-004195.* Lockheed Martin is a global aerospace and defense technology company. It designs, builds and sustains combat aircraft, missiles and missile-defense interceptors, helicopters, naval combat and radar systems, satellites and strategic missiles, almost entirely for governments. In 2025, 72% of its $75.0 billion in sales came from the U.S. Government (63% from the Department of War, also known as the Department of Defense), and 28% from international customers. About 77% of international sales were foreign military sales (FMS) contracted through the U.S. Government and about 23% were direct commercial sales to foreign governments. The company makes its money on long-term development, production and sustainment contracts. About 40% of 2025 sales were cost-reimbursable and the rest were fixed-price, and nearly all revenue is recognized over time on a percentage-of-completion basis. Year-end 2025 backlog was $193.6 billion ($120.2 billion funded), up from $176.0 billion a year earlier. The company reports four segments: - **Aeronautics** ($30.3 billion of 2025 sales, 6.9% operating margin) builds and sustains military aircraft: the F-35 Lightning II, C-130 Hercules, F-16 Fighting Falcon and F-22 Raptor, plus the Skunk Works advanced development and classified programs. The F-35 is the company's largest program: 27% of consolidated sales and 67% of Aeronautics sales in 2025. The U.S. Government's stated objective is to procure 2,456 aircraft, and seven international partner countries and 12 FMS customers have also committed to buy. - **Missiles and Fire Control (MFC)** ($14.5 billion, 13.8% margin) makes air and missile defense (PAC-3 and THAAD interceptors), tactical and strike missiles (GMLRS/MLRS, PrSM, JASSM, LRASM, Hellfire, JAGM, and Javelin through a joint venture with RTX), fire-control and targeting sensors (Apache, Sniper, IRST21), logistics services and hypersonic strike weapons. - **Rotary and Mission Systems (RMS)** ($17.3 billion, 7.6% margin) covers Sikorsky helicopters (Black Hawk, Seahawk, CH-53K King Stallion, Combat Rescue Helicopter), the Aegis Combat System, surface combatant ship programs (LCS, MMSC, River-Class Destroyer), C2BMC missile-defense command and control, radars, undersea combat systems, and training and simulation. Effective January 2026, the former IWSS and C6ISR lines were restructured into Sensors, Effectors & Mission Systems (SEMS) and Mission Integrated Command and Control (MIC2). Aegis and the River-Class Destroyer moved to MIC2. - **Space** ($13.0 billion, 10.3% margin) builds the Trident II D5 Fleet Ballistic Missile, Next Generation Interceptor for homeland missile defense, Next Gen OPIR missile-warning satellites, GPS III, NASA's Orion crew vehicle, Space Development Agency Transport and Tracking Layer satellites, and hypersonics. It also holds the company's 50% stake in United Launch Alliance (ULA), with Boeing owning the other 50%. In the second quarter of 2025, Space added Amentum's Rapid Solutions business, bought for $360 million in cash. **Competition and customers.** The main competitors are Boeing, General Dynamics, L3Harris, Northrop Grumman and RTX. The company says it increasingly also competes with startups and non-traditional and non-U.S. contractors. Competitors often team with each other or supply one another on other programs. International sales are subject to U.S. export controls and often require industrial-cooperation (offset) commitments. At year-end 2025, the remaining offset obligations had a notional value of about $19.9 billion, mostly running through 2044, with potential penalties estimated at about $2.2 billion. **Inputs and workforce.** Key materials include rare earth minerals, aluminum, titanium, specialty steel, carbon fiber and advanced microelectronics. Supplier shortages, extended lead times and price escalation have delayed programs and raised costs, and the company expects these dynamics to continue in 2026. At December 31, 2025 it had about 123,000 employees, including about 72,000 engineers, scientists and IT professionals. About 93% were U.S.-based and about 19% were covered by collective bargaining agreements. The company operates from 333 owned or leased locations plus 9 government-owned facilities. **Regulation.** The business is heavily regulated. Government contracts can be terminated for convenience or default, are audited by the Defense Contract Audit Agency, require cost-accounting and business-system compliance, and can be performed under undefinitized contract actions that the government may definitize on its own terms. Classified programs are part of every segment's results but cannot be described. Some fixed-price classified contracts carry higher performance risk, and the government property they use cannot be commercially insured. --- ## Risk factors *From the FY2025 Form 10-K, accession 0001628280-26-004195. The Q3 2026 Form 10-Q (accession 0001628280-26-066928) reports no material changes since the 10-K apart from a risk factor update made in Part II, Item 1A of the company's Form 10-Q for the quarter ended March 29, 2026.* The risks that matter most for the investment case: - **Dependence on U.S. defense budgets.** 72% of 2025 sales came from the U.S. Government. Continuing resolutions, shutdowns, debt-ceiling standoffs or shifting priorities can delay or cut orders, block new program starts and delay payment. Contracts are funded incrementally, so costs incurred ahead of obligated funds or definitization may never be reimbursed. - **F-35 concentration.** The F-35 was 27% of 2025 sales. Cuts or delays by the U.S., partner nations or FMS customers would hurt results. Ongoing risks include supplier performance, software development, timely contract definitization and funding, test findings, sustainment cost, inflation and competition from next-generation platforms. Modernization upgrades depend on suppliers and could slip. - **Fixed-price development and reach-forward losses.** Fixed-price development contracts, and bids that price development and fixed-price production options together, carry the risk that costs exceed revenue. When that happens the entire loss is booked when it becomes evident. The company has repeatedly taken such charges (see MD&A). Options a customer exercises may be performed at a loss. - **Procurement-policy change.** Executive Orders seek to overhaul the FAR and modernize defense acquisition, and the Department's Acquisition Transformation Strategy shifts toward longer, multi-year contract structures. A separate Executive Order could restrict dividends, share repurchases and executive pay at contractors on critical weapons contracts that fail to meet performance requirements. Bid protests, unilateral definitization, greater use of risk-shifting fixed-price structures and "other transaction authority" awards can also reduce margins or cost the company business. - **Government audits and investigations.** Contract-pricing, cost-structure and business-system audits can lead to price reductions, repayments or withheld payments. Misconduct findings can lead to fines, suspension or debarment, which would be material given the company's dependence on government work. - **Suppliers and materials.** Many components are single- or sole-sourced, and qualifying new suppliers is slow. Shortages of microelectronics, non-compliant components in the multi-tier supply chain, and rare earth supply (including U.S. sourcing bans and Chinese export controls) could disrupt deliveries. Tariffs had a cash impact of about $485 million in 2025, which the company expects to largely recover over time. - **Geopolitics and international sales.** International customers were 28% of 2025 sales. Sanctions and export restrictions can stop work, as U.S. sanctions on Türkiye's defense procurement agency have on the Türkish Utility Helicopter Program. China has sanctioned the company and some of its executives over sales to Taiwan. Higher demand from global conflicts could become lost sales if production cannot ramp quickly enough. Direct commercial sales and offset obligations carry added legal, compliance and penalty risk. - **Technology and transformation.** Results depend on winning next-generation programs (hypersonics, classified work), integrating AI and autonomy, and carrying out a costly multi-year digital business transformation. - **Workforce.** The company needs scarce cleared engineering and technical talent and competes for it with commercial technology firms. About 19% of the workforce is unionized, which carries a risk of work stoppages. - **Cyber and security threats.** Nation-state adversaries target the company and its supply chain of thousands of suppliers. National security considerations may delay public disclosure of an incident, and the related costs may not be fully insured. - **Pension, estimates and goodwill.** Defined-benefit pension expense and funding swing with interest rates and asset returns. Further group-annuity transfers can trigger non-cash settlement charges. Contract accounting rests on judgment-heavy cost estimates, and goodwill of $11.3 billion (about 19% of total assets) is subject to impairment. - **Uninsurable product liability, environment and litigation.** Product failures could cause loss of life, and insurance and indemnities may not cover the result. Environmental remediation at current and former sites, climate regulation, and pending lawsuits (see Current quarter) are further exposures. - **Capital returns not assured.** Dividends and buybacks depend on Board discretion, cash generation, Maryland law limits if equity falls into deficit, and possible restrictions under presidential Executive Orders. - **Transactions and equity investments, including ULA (added in the Q1 2026 Form 10-Q, accession 0001628280-26-026836).** Failing to complete or manage acquisitions, divestitures, equity investments and other transactions, or underperformance by acquired entities or equity investments, could harm results. The company's equity-method investment in ULA was $544 million at March 29, 2026 ($551 million at December 31, 2025). If performance challenges with the development, production or launch of ULA's Vulcan Centaur rocket hurt ULA, the company could be exposed to operating losses from the joint venture or impairment of its investment. It also expects to provide financial guarantees for ULA and may have to provide additional financial support for ULA's liquidity or operations (see Current quarter). --- ## Management's discussion: fiscal 2025 *From the FY2025 Form 10-K, accession 0001628280-26-004195.* Sales grew 6% in 2025 to $75.0 billion from $71.0 billion. Growth came from the munitions ramp at MFC (JASSM, LRASM, GMLRS and PrSM), higher F-35 production and sustainment volume, and Space programs (Fleet Ballistic Missile, Next Generation Interceptor and Orion). Program charges held profits back. Net earnings fell to $5.0 billion ($21.49 per diluted share) from $5.3 billion ($22.31), even though consolidated operating profit rose to $7.7 billion from $7.0 billion. **Program charges shaped the year.** In the second quarter of 2025 the company recognized: - $950 million of reach-forward losses on an ongoing classified Aeronautics program, a fixed-price incentive development contract with fixed-price options; - $570 million on the Canadian Maritime Helicopter Program (CMHP); - $95 million on the Türkish Utility Helicopter Program (TUHP). For the full year it also recorded $140 million of unfavorable adjustments on the C-130. These were partly offset by $130 million of favorable completion adjustments on commercial civil space programs and $90 million on a completed classified Aeronautics program. In 2024, by comparison, the main charges were $1.4 billion on a classified MFC program and $555 million on the Aeronautics classified program. Net profit-booking-rate adjustments added about $75 million to 2025 segment operating profit, against a $180 million reduction in 2024. Management warned that further losses on the Aeronautics, MFC and RMS programs are possible and could be material. **Segment results, 2025 versus 2024:** - **Aeronautics:** sales up $1.6 billion (6%) to $30.3 billion on about $1.9 billion more F-35 volume. Operating profit fell $437 million (17%) to $2.1 billion because of the higher classified-program loss, C-130 adjustments and the absence of a 2024 C-5 claim benefit. Backlog slipped to $59.4 billion on C-130 order timing. Through 2025 the company had delivered 1,293 production F-35s, with 368 aircraft in backlog. The Lot 18–19 production contract for 296 aircraft was definitized on September 29, 2025. - **MFC:** sales up $1.8 billion (14%) to $14.5 billion. Operating profit rose $1.6 billion to $2.0 billion, mainly because the 2024 classified-program loss did not recur. Backlog rose to $46.7 billion on JASSM, LRASM, PAC-3 and Apache orders. - **RMS:** sales flat at $17.3 billion. Operating profit fell $598 million (31%) to $1.3 billion on the CMHP and TUHP losses. Backlog rose to $47.7 billion on Sikorsky orders. - **Space:** sales up $550 million (4%) to $13.0 billion on Next Generation Interceptor and Fleet Ballistic Missile volume. Operating profit rose $119 million (10%) to $1.3 billion on civil space completion benefits, partly offset by $40 million less ULA equity earnings. **Below the operating line.** Non-service pension expense was $874 million, compared with $62 million of income in 2024. It included a $479 million non-cash settlement charge ($377 million after tax, $1.63 per share) from transferring $943 million of pension obligations to insurers in December 2025. Interest expense rose to $1.1 billion after note issuances in July 2025 and December 2024. The effective tax rate rose to 15.3% from 14.2%, mainly because the One Big Beautiful Bill Act reduced deductions for foreign-derived intangible income. A favorable IRS audit resolution partly offset this. **Cash and capital.** Cash from operations rose $1.6 billion to $8.6 billion, helped by working-capital timing at RMS and lower tax payments. After $1.6 billion of capital expenditures, free cash flow (cash from operations less capital expenditures, a non-GAAP measure) was $6.9 billion, up from $5.3 billion. The company issued $2.0 billion of senior notes in July 2025 (4.15% due 2028, 4.40% due 2030 and 5.00% due 2035), repaid $642 million of maturing notes, and repurchased 6.6 million shares for $3.0 billion. The Board added $2.0 billion to the buyback authorization in October 2025, leaving $8.3 billion available at year-end. Year-end cash was $4.1 billion and total debt was $21.7 billion, all fixed-rate public notes. Pension contributions were $860 million and CAS pension cost recovered through contract pricing was $1.6 billion. **Budget backdrop at the time of the 10-K.** The FY2026 National Defense Authorization Act authorized $901 billion. The One Big Beautiful Bill Act added more than $150 billion of mandatory defense funding available through September 30, 2029. --- ## Current quarter: Q3 2026 (quarter ended September 27, 2026) *From the Q3 2026 Form 10-Q, accession 0001628280-26-066928, and the earnings release furnished as Exhibit 99.1 to the Form 8-K of October 22, 2026, accession 0001628280-26-066780.* **Growth in all four segments and a step-change in backlog.** Third-quarter sales rose 11% to $20.7 billion from $18.6 billion. Net earnings rose 14% to $1.8 billion, or $7.97 per diluted share, from $1.6 billion ($6.95). Business segment operating profit (non-GAAP) rose $200 million to $2.2 billion, and consolidated operating profit rose to $2.4 billion from $2.3 billion. The effective tax rate fell to 15.1% from 16.5% on larger deductions for foreign-derived deduction-eligible income. Through nine months, sales were $58.8 billion (up 7%) and net earnings were $5.2 billion ($22.36 per share) against $3.7 billion ($15.69). The 2025 period carried the second-quarter program losses described above. Backlog reached a record $292.0 billion, up $61.6 billion in the quarter and 27% since the second quarter. The main driver was $52.5 billion from a multi-year award to produce PAC-3 MSE interceptors. MFC backlog alone was $142.5 billion, against $46.7 billion at year-end 2025. The company expects to convert about 23% of backlog to revenue over the next 12 months and about 40% over 24 months. At year-end 2025 those figures were about 37% and 60%. **Segment detail for the quarter, compared with Q3 2025:** - **Aeronautics:** sales up $958 million (13%) to $8.2 billion. The increase came from $710 million more F-35 production and sustainment volume and $270 million on the C-130 as pre-contract costs were liquidated on a contract award. These were partly offset by $130 million lower F-16 sales. Operating profit rose $61 million (9%) to $743 million, net of $40 million unfavorable adjustments each on the F-16 and C-130. The company delivered 43 F-35s in the quarter (46 a year earlier) and 94 in nine months (143), bringing the program total to 1,387. F-35 backlog was 274 aircraft. Negotiations on Lots 20 and later are unresolved. Costs on the Lot 20 advance acquisition contract began to exceed contractual authorization and funding during the quarter, and the company says results, cash flow and financial condition will suffer without more authorization and funding. - **MFC:** sales up $877 million (24%) to $4.5 billion on production ramps in PAC-3 and THAAD ($480 million) and GMLRS and PrSM ($330 million). Operating profit rose $121 million (24%) to $631 million. - **RMS:** sales up $138 million (3%) to $4.5 billion on SEMS radar volume. Operating profit rose $18 million to $524 million. A $40 million favorable contract resolution was offset by $45 million of unfavorable adjustments on the Heavy Lift (CH-53K) and Seahawk programs. - **Space:** sales up $129 million (4%) to $3.5 billion. Fleet Ballistic Missile and Next Generation Interceptor volume added $185 million, partly offset by $115 million less on the OPIR mission. Operating profit was flat at $331 million. Year to date, the company booked unfavorable profit adjustments of $170 million on the F-16 (production performance and development delays), $175 million on the C-130 (diminishing-manufacturing-source integration and delivery delays), $125 million on Heavy Lift and $95 million on Seahawk. Total net profit-booking-rate adjustments were still favorable: $375 million in the quarter and $965 million year to date. **Programs still under watch.** - Cumulative losses on the Aeronautics classified program stood at about $1.8 billion, with $394 million still accrued. - The MFC classified program stood at about $1.5 billion, with $1.0 billion accrued. The company believes the remaining loss-making options will probably be exercised. - CMHP cumulative losses were about $670 million, with $360 million accrued and about $565 million of contract assets. Restructuring talks with Canada continue and could end in termination. - At ULA, the Vulcan Centaur rocket had performance problems in the first quarter of 2026. In the third quarter Lockheed Martin agreed to guarantee up to $750 million of ULA borrowings under an amended credit agreement. It and Boeing expect to provide further financial support, and the company could incur impairment and operating losses if Vulcan Centaur underperforms. **Demand environment.** In 2026 the company signed multi-year contracts with the Department of War to raise production and speed deliveries of PAC-3 MSE and THAAD. The THAAD contract with the Missile Defense Agency, signed in the second quarter, was $35 billion, per the Q2 2026 earnings release (Form 8-K accession 0001628280-26-049277). The company also signed munitions framework agreements for PrSM and the Joint Advanced Tactical Missile (JATM), and a framework agreement for multi-year F-35 production and sustainment. On funding, the Consolidated Appropriations Act, 2026 (signed February 3, 2026) provided $839.2 billion of discretionary defense funding through September 30, 2026. The Administration's FY2027 request of April 3, 2026 seeks a $1.5 trillion defense budget, including $350 billion of reconciliation funding, with a $760 billion procurement and modernization emphasis on munitions, Golden Dome missile defense and more F-35s. A continuing resolution signed September 2, 2026 holds FY2026 levels through December 11, 2026, and full-year FY2027 appropriations remain unresolved. Through nine months the company received about $225 million of refunds on prior tariff assessments. Because of the Tax Act and Treasury Notice 2026-7, it is no longer subject to the corporate alternative minimum tax this year and expects lower federal tax payments in 2026. **Cash, balance sheet and capital allocation.** - *Cash flow.* Third-quarter cash from operations was $3.4 billion and free cash flow was $3.0 billion, against $3.7 billion and $3.3 billion a year earlier. The company attributes the decline primarily to higher customer receipts in the third quarter of 2025. The company also spent $599 million on independent R&D in the quarter. Nine-month cash from operations rose to $6.9 billion from $5.3 billion on higher customer receipts and lower tax payments. Free cash flow was $5.6 billion, against $4.2 billion. - *Balance sheet.* Contract assets grew $3.9 billion year to date, mainly on the F-35 and tactical missiles. Cash was $6.0 billion at quarter-end. Long-term debt was $20.5 billion after $1.2 billion of maturities were repaid, and no current maturities remain. Equity rose to $10.1 billion from $6.7 billion. - *Shareholder returns.* The company has repurchased no shares in 2026, with $8.3 billion of authorization remaining. It paid $2.4 billion of dividends ($10.35 per share) in nine months. - *Liquidity.* In August 2026 the company replaced its $3.0 billion 364-day revolver with a smaller $2.25 billion facility and extended its $3.0 billion five-year revolver to August 2031. That leaves $5.25 billion of committed credit, none of it drawn at quarter-end. **Pending acquisition.** In July 2026 the company signed a definitive agreement to acquire Ultra Maritime Solutions for $3.45 billion. Ultra Maritime is a global defense company specializing in undersea warfare and anti-submarine capabilities for allied navies. The deal will be funded with cash on hand, reported in RMS, and is expected to close in the fourth quarter of 2026. Guidance excludes it. **2026 outlook.** On October 22, 2026 the company raised its 2026 guidance for the second consecutive quarter. The new ranges are about $80.0–82.0 billion of sales, $30.35–30.75 of diluted EPS and $7.8–8.0 billion of free cash flow, and cash-from-operations guidance rose by $0.8 billion at both ends of the range. It kept its total FAS/CAS pension adjustment outlook at about $1.365 billion. **Litigation.** A putative securities class action is pending in the Southern District of New York. It was filed July 28, 2025 and amended January 12, 2026, covers purchasers of the company's securities from January 23, 2024 to July 21, 2025, and alleges misstatements about classified Aeronautics and MFC programs and the F-35. Related shareholder derivative complaints were filed in the District of Maryland on September 11, 2025 and May 18, 2026. The company does not expect these matters to have a material adverse effect. The long-running MTA contract dispute is still awaiting a district court decision: the MTA seeks about $190 million in damages, and the company's own action seeks about $95 million from the MTA. Environmental remediation liabilities were $644 million, against $591 million of recoverable assets. --- ## Subsequent events *From the Q3 2026 Form 10-Q, accession 0001628280-26-066928 (Note 10 – Stockholders' Equity and Note 13 – Other).* The 10-Q contains no separate subsequent-events note. It discloses the following matters after the September 27, 2026 period end: - **Dividend increase.** In October 2026 the Board authorized a fourth-quarter 2026 dividend of $3.60 per share, $0.15 more than the third-quarter dividend of $3.45. The earnings release calls this the 24th consecutive annual dividend increase. - **Ultra Maritime acquisition still pending.** The $3.45 billion cash acquisition of Ultra Maritime Solutions, agreed in July 2026, had not closed when the 10-Q was filed on October 22, 2026. It remains expected to close in the fourth quarter of 2026, with the business reporting into RMS. The 10-Q discloses no other post-period acquisitions, divestitures, financings or litigation outcomes.