Lockheed Martin Corporation (LMT) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reveals mixed signals: positive growth in segments like Missiles and Space, but challenges in Rotary and Mission Systems. The Q&A highlights uncertainties in the Aero Classified program, with significant charges and unclear cash flow timing. Despite optimistic guidance and shareholder returns, concerns over program risks and tax liabilities dampen sentiment. The lack of market cap data prevents precise assessment, but overall, the mixed performance and uncertainties suggest a neutral stock reaction.

Key Financial Performance

Sales $18 billion in Q2 2025, comparable year-over-year and up sequentially from Q1. Excluding charges, sales increased mid-single digits year-over-year due to growth in missile programs, F-35 production, and strategic missiles.

Segment Operating Profit $570 million in Q2 2025, significantly impacted by $1.6 billion in charges related to Skunk Works and Sikorsky programs. Excluding charges, operating profit would have increased high single digits year-over-year.

Losses $1.8 billion in Q2 2025, including $950 million for Aeronautics Classified Program, $570 million for Canadian Maritime Helicopter Program (CMHP), and $95 million for Turkish Utility Helicopter Program (TUHP). Losses were due to design, integration, test challenges, sanctions, and contractual adjustments.

Earnings Per Share (EPS) $1.46 in Q2 2025, reduced by $5.83 due to program losses, impairments, and tax reserve. Without these impacts, EPS would have been significantly higher.

Free Cash Flow Usage of $150 million in Q2 2025, impacted by delayed F-35 Lot 18-19 award ($600 million), tariff impacts ($100 million), and high receivables balance. Collections improved in early July.

Shareholder Returns $1.3 billion returned in Q2 2025 through dividends and share repurchases, reflecting a disciplined capital deployment strategy.

Aeronautics Sales $7.4 billion in Q2 2025, up 2% year-over-year due to higher F-35 production volumes, partially offset by $360 million lower volume from classified program loss.

Missiles and Fire Control Sales $3.4 billion in Q2 2025, up 11% year-over-year due to higher volumes on tactical and strike missile programs like JASSM/LRASM, HIMARS, and PrSM.

Rotary and Mission Systems Sales $4 billion in Q2 2025, down 12% year-over-year due to $305 million in losses from CMHP and TUHP programs. Excluding losses, sales would have declined mid-single digits.

Space Sales $4 billion in Q2 2025, up 4% year-over-year due to higher volumes in commercial civil space (Orion program) and strategic missile defense programs.

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Operating Highlights

F-35 Program: Delivered 50 aircraft in Q2, totaling 97 deliveries in 2025 so far. On track for 170-190 deliveries in 2025. Completed TR3 hardware integration and released new software for advanced Block 4 capabilities. Strong international demand with new orders from the U.K., Belgium, and Denmark.

Hypersonic Weapons: The Air-Launched Rapid Response Weapon (ARRW) received $400 million in the FY 2026 budget for production. The U.S. Navy successfully tested the Conventional Prompt Strike (CPS) missile, marking a milestone in sea-based hypersonic fielding.

Missile Defense Systems: PAC-3 missile production is set to quadruple. The U.S. Navy plans to purchase PAC-3 for the first time. Successful flight test of the Long-Range Discrimination Radar (LRDR) for missile defense.

International Expansion: Strong international demand for the F-35 program with new orders from the U.K., Belgium, and Denmark.

U.S. Defense Budget: Increased focus on munitions and hypersonics in the FY 2026 budget, including $400 million for ARRW production and significant increases in PAC-3 missile production.

Program Losses and Adjustments: Recognized $1.8 billion in losses across legacy programs, including $950 million for a classified Aeronautics program, $570 million for the Canadian Maritime Helicopter Program (CMHP), and $95 million for the Turkish Utility Helicopter Program (TUHP).

Operational Performance: Lockheed Martin systems demonstrated high effectiveness in recent U.S. military operations, including the F-35, F-22, PAC-3, THAAD, and Aegis systems.

Strategic Investments: Invested $800 million in infrastructure and innovation for growth. Focused on enhancing program management and oversight to mitigate future risks.

Rare Earth Supply Chain: Public-private partnership initiated to secure rare earth magnets for defense applications, including F-35s and cruise missiles.

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Risk or Challenges

Legacy Program Financial Losses: Lockheed Martin recognized $1.8 billion in losses across several legacy programs due to a deepened review process, including $950 million for a classified program, $570 million for the Canadian Maritime Helicopter Program (CMHP), and $95 million for the Turkish Utility Helicopter Program (TUHP). These losses stem from design, integration, test challenges, and U.S. government sanctions.

Program Management and Oversight: The company identified weaknesses in program management and oversight, leading to significant financial charges. Enhanced oversight and corrective action plans are being implemented to mitigate future risks.

Supply Chain and Sanctions Impact: U.S. government sanctions on Turkish entities have disrupted the Turkish Utility Helicopter Program (TUHP), resulting in financial losses and operational challenges.

Tax Dispute with IRS: The IRS asserts that Lockheed Martin owes $4.6 billion in additional income tax related to a tax accounting method change. This has led to a $100 million interest accrual and potential financial uncertainty.

Operational and Technical Challenges: Design, integration, and test challenges in classified programs have caused delays and increased costs, impacting financial performance and program schedules.

Cash Flow and Working Capital Issues: Delays in F-35 Lot 18-19 award and high receivables have created cash flow challenges, with $600 million in working capital headwinds.

Tariff Impacts: Tariffs have created approximately $100 million in financial headwinds, adding to operational costs.

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Guidance & Outlook

Revenue Expectations: Lockheed Martin reaffirmed its 2025 sales guidance of $73.75 billion to $74.75 billion, with expectations for continued growth in the second half of the year. The company anticipates significant awards in the second half of 2025, including F-35 lot 18-19, JASSM/LRASM large lot procurement, PAC-3 production, CH-53K multiyear, and classified space programs, which will contribute to sustained future growth.

Segment Operating Profit: The company expects segment operating profit to be in the range of $6.6 billion to $6.7 billion for 2025, reflecting the $1.6 billion of program charges incurred during the year.

Free Cash Flow: Lockheed Martin maintained its 2025 free cash flow guidance of $6.6 billion to $6.8 billion. However, the company noted potential headwinds in 2026, with free cash flow possibly closer to $6 billion due to investment demands in advancing complex programs, accelerating capacity, and enhancing capabilities.

F-35 Program: The company remains on track to deliver 170 to 190 F-35 aircraft in 2025. International demand for the F-35 remains strong, with additional orders from the U.K., Belgium, and Denmark. The company has completed TR3 hardware integration and released new software to the fleet, enhancing Block 4 capabilities.

Hypersonics: The U.S. President's fiscal year 2026 budget request includes nearly $400 million for the production of the Air-Launched Rapid Response Weapon (ARRW), the first proven hypersonic weapon capable of being launched from an American aircraft. The U.S. Navy also successfully tested the Conventional Prompt Strike (CPS) missile, marking progress in sea-based hypersonic fielding.

Missile Defense: The U.S. Army has requested a quadrupling of PAC-3 missile production, and the U.S. Navy plans to purchase PAC-3 for the first time. Lockheed Martin is also in discussions with the administration to significantly increase production rates of other munitions and launchers.

Rare Earth Mining and Magnet Production: The U.S. Department of Defense announced investments in rare earth mining and magnet production in the U.S., ensuring the supply of critical materials for F-35s, cruise missiles, and other defense applications.

Future Free Cash Flow Growth: Lockheed Martin anticipates low single-digit absolute free cash flow growth through 2027, with potential for mid-single-digit growth if working capital improvements are unlocked and pension headwinds are offset.

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Shareholder Return Plan

Dividends: Lockheed Martin returned $1.3 billion to shareholders in the second quarter of 2025 through dividends and share repurchases. The company remains committed to returning at least $6 billion per year to shareholders through its dividend and share repurchase program.

Share Repurchase: Lockheed Martin returned $1.3 billion to shareholders in the second quarter of 2025 through dividends and share repurchases. The company remains committed to returning at least $6 billion per year to shareholders through its dividend and share repurchase program.

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Key Q&A

Q:Why should investors feel comfortable that the problem programs, particularly the Aero Classified one, have been derisked?

A:Management has reconstituted the program review team for the classified Aeronautics program, adding expertise from across the company and increasing senior management oversight. They reassessed cost trends and re-baselined assumptions, leading to additional charges. They are engaging with customers to restructure contracts and applying similar oversight to other key programs.

Q:How long is the company under the onerous Aero Classified contract?

A:Management stated that due to the classified nature of the program, they cannot disclose the duration of the contract but assured it is not unlimited.

Q:Why did it take $1 billion of charges to change the way the Aero Classified program is reviewed?

A:The charges resulted from new discoveries of cost risks and anomalies in the development phase, which were identified after implementing a more rigorous monitoring system. These costs are tied to fixed-price obligations agreed upon in 2018.

Q:How does the $1.8 billion of charges flow through to cash in 2025 and 2026?

A:The company expects $500 million of cash usage tied to the Aero Classified Program in 2025, stepping down to $400 million in 2026. They have line of sight to when the program becomes cash positive, but the exact timing is undisclosed.

Q:Why is the administration reducing the F-35 aircraft request in FY '26?

A:Management noted that the President's budget is the first step in the congressional process. The House and Senate have proposed increases to the initial request, and management is hopeful for higher demand by the end of the budget process.

Q:How easy is it to swap out relinquished DoD slots for F-35 with export customers?

A:Management stated that they have flexibility due to a strong backlog and the ability to move international orders in and out. They are confident in maintaining a strong F-35 production rate.

Q:What is the $4.6 billion tax liability related to, and how will it impact free cash flow?

A:The tax liability stems from an IRS position that management disagrees with, as it mismatches revenue and expenses. The company has taken a $100 million P&L charge for interest but expects a much lower liability. The 2026 free cash flow target includes impacts from Aero Classified and MFC classified programs, tax benefits, and a $1 billion pension contribution.

Q:What are the expected segment margins for RMS and Aeronautics in 2025?

A:The updated 2025 guidance implies mid-10% margins for RMS and mid-9% for Aeronautics. Management aims to incrementally improve margins as production programs ramp up.

Q:What is the status of the MFC classified program?

A:The MFC classified program has had prior charges but is being closely monitored. Management expressed confidence in its current position and emphasized its importance for the warfighter.

Q:What is the outlook for the Golden Dome program and its impact on backlog?

A:There are no contracts or proposals yet for the Golden Dome program. Management is discussing architecture with the U.S. government but cannot quantify its impact on backlog at this time.

Q:Will TR3 completion improve milestone payments for the F-35?

A:Yes, management expects a strong cash flow in the second half of the year, driven by F-35 milestone payments and other awards.

Q:What is the F-35's role in modern warfare, and how does it fit into DoD priorities?

A:The F-35 is critical for modern warfare, providing capabilities like air-to-air and air-to-ground attack and orchestration of other platforms. Management is confident in its long-term demand and importance for the DoD and international customers.

Q:Does it make sense to sell the DoD the technical data rights to the F-35 to ensure production rates?

A:Management believes this is unnecessary as they have already provided the U.S. government with all the data they control for maintenance. They are confident in the F-35's demand and its role in modern warfare.

Q:Review of Unclear Management Responses

A:Management avoided directly answering how long the Aero Classified contract lasts, citing classification. They also did not provide specific timing for when the Aero Classified program would become cash positive or detailed quantification of the Golden Dome program's impact on backlog.

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Earnings Word Cloud

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