Executive Summary / Key Takeaways

• Lockheed Martin's record backlog of \$179 billion, driven by significant multi-year contract wins, underscores robust global demand for its advanced defense systems and provides strong revenue visibility.
• The company delivered solid financial performance in Q3 2025, with sales up 9% and segment operating profit increasing 9%, leading to an upward revision of its full-year 2025 guidance for sales, operating profit, and earnings per share.
• A strategic pivot towards "Twenty-First Century Security" leverages digital technologies and "fifth-generation-plus" upgrades for platforms like the F-35, aiming for enhanced capabilities at a lower cost, and positions the company strongly for initiatives like "Golden Dome for America."
• Despite recent program charges and an ongoing tax dispute, Lockheed Martin is proactively de-risking its portfolio and maintaining a disciplined capital allocation strategy, including a 23rd consecutive year of dividend increases and substantial share repurchases.
• Technological leadership in areas such as stealth, precision missiles, and space-based systems, combined with strategic investments in R&D and production capacity, fortifies its competitive moat and underpins long-term growth.

Lockheed Martin: Architect of Global Deterrence

Lockheed Martin Corporation stands as a global aerospace and defense titan, fundamentally engaged in the deterrence business. Founded in 1912, the company has a rich history of innovation, evolving from The Lockheed Corporation to its current form in 1995. This legacy is deeply intertwined with national security, exemplified by its 70-year support for the U.S. Navy's Fleet Ballistic Missile (FBM) program, a cornerstone of strategic deterrence.

In recent years, Lockheed Martin has embarked on a profound strategic transformation, encapsulated by its "Twenty-First Century Security Strategy." This vision transcends individual programs, focusing on integrating its vast installed base of hardware with cutting-edge digital technologies such as AI, 5G, and distributed cloud computing. The objective is to extend the life and capabilities of existing platforms like the F-16, F-35, and F-22, while seamlessly integrating new systems. This approach aims to deliver cost-effective, multi-domain solutions that provide a decisive advantage in an increasingly complex global security environment.

Technological Edge: The Foundation of Future Security

Lockheed Martin's competitive moat is built upon its differentiated technology, which consistently delivers superior performance and mission-critical reliability. The F-35 Lightning II, the company's largest program, is a prime example. Its advanced stealth, superior electronic warfare capabilities, and broadband communications enable it to operate undetected in highly defended airspace, providing air dominance and seamless interoperability for U.S. and allied forces. The F-35's Technology Refresh 3 (TR-3) upgrade, for instance, delivers a 10x increase in data processing capability over its predecessor, coupled with larger data storage and multi-path connectivity essential for 5G-level networking among diverse platforms.

Following its non-selection for the Next Generation Air Dominance (NGAD) program, Lockheed Martin pivoted strategically. It is now applying its extensive sixth-generation research and development efforts to enhance the F-35 and F-22, aiming to achieve 80% of sixth-generation capability at 50% of the unit cost. This "fifth-generation-plus" concept includes advanced and expanded weapons compatibility, improved data links, autonomous drone wingman integration, superior sensors, and the latest electronic warfare capabilities. This initiative is a testament to the company's commitment to delivering best-value solutions by leveraging existing, proven platforms with next-generation technology.

Beyond airpower, Lockheed Martin's missile systems, such as PAC-3, JASSM, LRASM, HIMARS, and PRISM, are continuously proving their effectiveness in combat operations. These systems represent decades of specialized experience and are at the "edge of known science," making them difficult to duplicate. In the space domain, the company is advancing capabilities like the Next Generation Interceptor (NGI) and the NextGen GEO missile warning system. Its LM-400 technology demonstration satellite, a mid-orbit platform, offers a compelling compromise between small satellites and more expensive geosynchronous orbit satellites, providing a bigger bus, more capability, and a longer operational life of 10+ years compared to 3-5 years for a typical small satellite. This strategic diversification across orbits caters to varied mission requirements with optimized cost and performance.

The company's R&D initiatives are highly targeted. It is reallocating independent R&D funds towards corporate-level "highlight" programs, including building operational prototypes for space-based interceptors (SBI) with a planned on-orbit demonstration by 2028, and developing "pilot optional" autonomous Black Hawk helicopters. The latter aims to repurpose existing Black Hawks with a roughly \$5 million per unit autonomy package, freeing up pilots and enhancing capabilities for contested logistics. These investments underscore Lockheed Martin's proactive approach to innovation, ensuring its products remain at the forefront of defense technology and continue to drive long-term value for investors.

A Competitive Arena: Lockheed Martin's Strategic Positioning

Lockheed Martin operates in a highly competitive global defense landscape, where its strategic positioning is defined by its technological leadership, deep customer relationships, and extensive integration capabilities. The company's primary direct competitors include Raytheon Technologies (RTX), Northrop Grumman (NOC), General Dynamics (GD), and Boeing (BA).

Lockheed Martin's strength in technological integration is a key differentiator. Its F-35, for instance, offers a comprehensive, integrated system that provides superior performance in complex combat environments, contrasting with more modular approaches seen from some competitors. In missile systems, Lockheed Martin's decades of experience and advanced precision strike capabilities provide a significant advantage over rivals. While RTX competes heavily in missile defense and advanced electronics, Lockheed Martin's offerings often emphasize end-to-end solutions and sustained operational reliability. Northrop Grumman, a leader in autonomous systems and space technologies, faces Lockheed Martin in areas like satellite constellations and classified programs. Lockheed Martin's vertical integration in its Space segment, bolstered by the recent acquisition of Amentum's Rapid Solutions business, provides greater efficiency in mission support compared to Northrop Grumman's specialized focus.

Against General Dynamics, which excels in combat vehicles and shipbuilding, Lockheed Martin's advanced strike systems and multi-domain integration capabilities offer a technological edge. While General Dynamics is known for its cost efficiency in manufacturing, Lockheed Martin's focus on innovation and high-performance systems aims to provide greater overall value. In aeronautics, the competition with Boeing is evident, particularly after Lockheed Martin's bid for the F-47 (sixth-generation fighter) was not selected. However, Lockheed Martin's strategy to integrate sixth-generation technologies into the F-35 and F-22 aims to create a "best value bridge" that could rival future platforms at a significantly lower cost.

Indirect competition arises from commercial space firms like SpaceX, which offer alternative launch services, and agile AI-driven tech companies developing autonomous drones and cybersecurity tools. These firms could disrupt traditional defense markets with cheaper or more accessible solutions. However, high barriers to entry in the defense sector, including immense R&D costs, stringent regulatory approvals, and specialized technological expertise, help Lockheed Martin maintain its dominant position. Its strong brand, proprietary technology, and regulatory licenses for classified projects translate into pricing power and recurring revenue from long-term government contracts, fostering superior margins and capital efficiency.

Financial Fortitude: Performance and Prudent Capital Management

Lockheed Martin's financial performance in 2025 demonstrates a robust growth trajectory, underpinned by strong operational execution and strategic contract wins. For the third quarter ended September 28, 2025, the company reported total sales of \$18.6 billion, marking a 9% increase year-over-year. When normalized for the F-35 Lot 18-19 contract timing impact in Q3 2024, sales growth remained a solid 5%. Segment operating profit mirrored this strength, rising 9% year-over-year to \$2.0 billion, achieving a healthy 10.9% segment margin. Diluted earnings per share (EPS) for the quarter were \$6.95, an increase of \$0.15 from the prior year, driven by higher segment earnings and a reduced share count.

Year-to-date through September 28, 2025, total sales reached \$54.7 billion, up 4% from the same period in 2024. However, year-to-date segment operating profit saw a decline to \$4.7 billion, primarily due to significant program charges taken earlier in the year.

Segment-wise, Aeronautics sales in Q3 2025 grew 12% to \$7.3 billion, primarily from higher F-35 production and sustainment volume. Its operating profit increased 3% to \$682 million. Missiles and Fire Control (MFC) continued its strong momentum, with sales up 14% to \$3.6 billion and operating profit up 12% to \$510 million, driven by production ramps for programs like PAC-3 and JASSM/LRASM. Rotary and Mission Systems (RMS) reported comparable sales of \$4.4 billion, but its operating profit rose 5% to \$506 million due to favorable contract mix. Space recorded a 9% sales increase to \$3.4 billion and a notable 22% increase in operating profit to \$331 million, benefiting from favorable profit booking rate adjustments on the FBM program and higher volumes.

Lockheed Martin's liquidity remains robust, with cash and cash equivalents of \$3.5 billion as of September 28, 2025.

The company generated \$3.3 billion in free cash flow in Q3 2025, bringing the year-to-date total to over \$4.1 billion. This strong cash generation was primarily driven by working capital improvements, particularly from planned payments associated with the F-35 Lot 18 and 19 agreement, and lower cash tax payments due to the One Big Beautiful Bill Act.

The company maintains a disciplined capital allocation strategy, balancing investments in the business with returns to shareholders. In Q3 2025, Lockheed Martin returned \$1.8 billion to shareholders through dividends and share repurchases, bringing the year-to-date total to \$4.6 billion, representing 110% of free cash flow. Demonstrating confidence in its financial stability, the Board of Directors in October 2025 approved a 5% increase in the quarterly dividend and authorized an additional \$2 billion for share repurchases, increasing the total authorization to \$9.1 billion. This marks the 23rd consecutive year of dividend increases.

Outlook and Growth Catalysts: A Clear Flight Path Ahead

Lockheed Martin's outlook for 2025 reflects increased confidence and strategic clarity. The company has tightened its full-year sales guidance to a range of \$74.25 billion to \$74.75 billion, representing a 5% organic growth year-over-year at the midpoint. Segment operating profit is now expected to be between \$6.675 billion and \$6.725 billion, maintaining a midpoint margin of 9%. Earnings per share guidance has been raised to a range of \$22.15 to \$22.35, incorporating the incremental operating profit and a lower estimated full-year tax rate of approximately 16.7%. The company anticipates generating \$6.6 billion in free cash flow for 2025.

A significant growth catalyst is the "Golden Dome for America" initiative, which management views as a substantial opportunity. Lockheed Martin is well-positioned to contribute with its existing products, expertise, and production capabilities across ground-based radar sensors, missile defense systems (like PAC-3 and THAAD), and space-based assets. The company is actively developing a prototyping environment for a "Golden Dome" command and control (C2) capability, leveraging its open systems architecture to fuse existing and new C2 capabilities from seabed to space.

The company's backlog reached a new record of \$179.1 billion as of September 28, 2025, with approximately 36% expected to be recognized as revenue over the next 12 months and 61% over the next 24 months. This robust backlog provides strong revenue visibility and is fueled by major multi-year awards, including a \$9.8 billion contract for PAC-3 interceptors, a \$9.5 billion contract for JASSM/LRASM, and a \$10.9 billion multi-year contract for CH-53K King Stallion helicopters. The definitization of the F-35 Lot 18 and 19 contract, adding \$11 billion and 151 aircraft, further solidifies future revenue streams.

Looking beyond 2025, while the 2026 free cash flow outlook is projected to be closer to \$6 billion due to increased investment demands, Lockheed Martin remains committed to returning at least \$6 billion per year to shareholders through dividends and share repurchases. The company also plans to invest over \$10 billion in R&D and capital expenditures and return at least \$18 billion to shareholders through 2027. Management anticipates pension cash contributions to be net-neutral to free cash flow by 2027, with operational cash flow growth targeted to offset any potential headwinds.

Navigating Headwinds: Risks and Mitigation

Despite a strong outlook, Lockheed Martin faces several challenges. In Q2 2025, the company recognized \$1.8 billion in total losses across several legacy programs. This included a \$950 million reach-forward loss on a classified Aeronautics program due to design, integration, and test challenges, bringing cumulative losses to approximately \$1.8 billion. Additionally, the Canadian Maritime Helicopter Program (CMHP) incurred a \$570 million loss, and the Turkish Utility Helicopter Program (TUHP) a \$95 million loss, both due to revised estimates and external factors like U.S. government sanctions. Management has responded by implementing more rigorous program monitoring, assigning expert teams, and engaging with customers to potentially restructure contracts and mitigate future risks.

A significant financial risk is the Internal Revenue Service's (IRS) assertion of a \$4.6 billion additional income tax liability for 2018-2020, related to a tax accounting method change. Lockheed Martin is disputing this claim and has accrued \$100 million in interest, pursuing remedies through the IRS Independent Office of Appeals and potentially judicial proceedings. CEO James Taiclet expressed confidence in the company's position, characterizing the IRS's approach as a "value-added tax approach, which we don't have in this country."

The global economic and geopolitical environment presents ongoing challenges, including inflationary pressures, supply chain delays, and workforce issues. These factors can increase costs, particularly for existing fixed-price contracts. Tariffs have impacted cash flows by approximately \$350 million in the first nine months of 2025, although a substantial portion is expected to be recoverable. The company is proactively working with suppliers and customers to mitigate these impacts, leveraging contractual mechanisms for cost recovery on its 60% fixed-price contracts. The supply chain for rare earth minerals also remains vulnerable, but Lockheed Martin is constrained by law from using Chinese inputs and has alternative sources and sufficient inventory to meet current delivery commitments.

Furthermore, the U.S. government budget environment, subject to appropriation processes and shifting priorities, could impact program funding. While the F-35 program faces ongoing challenges related to Block 4 modernization and sustainment, strong international demand and the aircraft's combat-proven capabilities provide confidence in maintaining production rates.

Conclusion

Lockheed Martin Corporation stands as a formidable investment in a world demanding robust deterrence and advanced security solutions. The company's strategic vision, centered on its "Twenty-First Century Security Strategy," effectively leverages its unmatched technological capabilities and extensive legacy platforms with cutting-edge digital innovation. This approach not only extends the relevance and effectiveness of its core products like the F-35 but also positions it at the forefront of emerging opportunities such as the "Golden Dome for America" initiative.

Despite facing significant program charges and an ongoing tax dispute, Lockheed Martin's proactive risk management, disciplined capital allocation, and consistent shareholder returns underscore its financial resilience. The record-high backlog and strong demand for its missile, air, and space systems provide a clear trajectory for sustained growth. As global security needs intensify, Lockheed Martin's commitment to technological leadership, operational excellence, and strategic adaptability ensures its continued role as a critical partner to the U.S. and its allies, translating into compelling long-term value for discerning investors.