LOCKHEED MARTIN CORP 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and notes to consolidated financial statements herein and with our Annual Report on Form 10-K for the year ended December 31, 2025 (2025 Form 10-K). BUSINESS OVERVIEW We are a global aerospace and defense technology company that builds and sustains the solutions America and its allies need to deter conflict and advance national security and scientific exploration objectives. Our four business areas – Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space – work as one company offering integrated solutions, at scale, across all warfighting domains. Our defense, space, intelligence, homeland security, information technology, and cybersecurity capabilities serve U.S. and international customers in defense, civil and commercial applications. Our principal customers are agencies of the U.S. Government and allies. During the six months ended June 28, 2026, 70% of our $38.1 billion in sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 61% from U.S. Department of War (DoW), also known as the Department of Defense under 10 U.S.C. § 111(a)), and 30% were from international customers (including foreign military sales (FMS) contracted through the U.S. Government). Global Security We operate in a complex and evolving global security environment. Conflicts or tensions in areas such as the Middle East, Europe, and the Pacific region have heightened tensions and highlighted security requirements globally, including in these regions as well as the U.S. Although these tensions and conflicts may drive interest in specific products or services as countries seek to improve their security posture, our business primarily operates on a long-cycle basis. As a result, the U.S. Government has been broadly focused on increasing industry capacity to meet long-term demand. We are working with the U.S. Government, international partners, and our supply chain with the objective of increasing capacity and enhancing our ability to scale operations to anticipated demand. We expect these efforts will enable us to deliver critical capabilities and replenish depleted U.S. and allied stockpiles, although there can be no assurance that production capacity will increase at the rate or to the extent we or our customers expect due to supply chain constraints, workforce limitations, government funding decisions, and other factors described in our risk factors. Global Economic and Geopolitical Environment Our business and financial performance are impacted by a combination of macroeconomic factors, such as inflationary pressures, impacts from technological change, and market volatility, as well as operational challenges, including supply chain delays and disruptions, and workforce challenges and labor shortfalls. These factors have contributed, and may continue to contribute, to increased costs, delays, disruptions and other performance challenges, as well as competing demands for limited resources to address such increased costs and other challenges, for our company, our suppliers and partners, and our customers. We have experienced, and continue to experience, supply chain challenges, including supplier shortages and performance issues. Although on‑time deliveries have generally been steady, pressures remain in certain areas, and we are proactively working with our suppliers to meet our contract commitments. In addition, macroeconomic conditions including elevated levels of inflation present risks for us, our suppliers and the stability of the broader defense industrial base. Supply chain challenges, including both the availability and cost of goods, may be further impacted due to the imposition of tariffs and the availability of raw materials including rare earth minerals. We continue to work to mitigate challenges caused by the supply chain or current macroeconomic environment on our business, including by deploying resources to work with our supply chain, securing materials and support by executing long-term contracts, enforcing existing contract terms, identifying alternative sources, collaborating with our customers to address industry-wide challenges, and optimizing our supply chain organization through digital transformation and workforce development. If we experience significant supply chain issues or high rates of inflation, and are unable to successfully mitigate the impact, our future profits, margins and cash flows, particularly for existing fixed-price contracts, may be adversely affected. We remain committed to our ongoing efforts to increase the efficiency of our operations and improve the cost competitiveness and affordability of our products and services, which may, in part, offset cost increases from inflation. Certain materials and component parts that go into making our products are imported into the U.S. and are subject to tariffs, sanctions, embargoes, export and import controls, and other trade restrictions. Changes in trade policies, 26 Table of Contents including tariffs and other restrictions, may affect the cost or availability of certain materials and components. While we continue to monitor these developments and pursue mitigation strategies where appropriate, excluding the near-term cash flow impact, we do not currently expect existing tariffs to have a material long-term impact on our results of operations. Through the six months ended June 28, 2026, we have received approximately $140 million in refunds related to prior tariff assessments. Significant changes in tax, trade, or other policies either in the U.S. or other countries, as well as any fluctuation in foreign exchange rates as a result of such activity, could materially increase our tax burden, the price we pay for materials and component parts, the price our customers pay, and result in delays in products received or non-delivery from our suppliers as well as impact the availability of materials (including rare earth minerals), which could materially impact our business and financial results. In addition, recent government actions relating to rare earth minerals that are used in certain of our products have raised concerns about supply availability. We are monitoring the rare earth minerals supply chain and maintaining active engagement with our suppliers as the regulatory landscape evolves. If we are unable to successfully mitigate disruptions to the availability of rare earth minerals, our future profits, margins and cash flows may be adversely affected. For additional risks to the company related to the geopolitical and economic environment, see Part I, Item 1A, “Risk Factors” of our 2025 Form 10-K. U.S. Government Budget Environment Our primary customer is the U.S. Government, from which we derived 70% of our sales during the six months ended June 28, 2026, including 61% from the DoW. Funding for U.S. Government programs is subject to a variety of factors that can affect our business, including the Administration’s budget requests and procurement priorities and policies, annual congressional budget authorization and appropriation processes, and other U.S. Government domestic and international priorities. U.S. Government spending levels, particularly defense spending, and timely funding thereof can affect our financial performance over the short and long term. The National Defense Authorization Act (NDAA) for FY 2026 was signed into law on December 18, 2025. This legislation authorizes $901 billion for national defense. On February 3, 2026, the President signed the Consolidated Appropriations Act, 2026, which provided $839.2 billion of discretionary funding for national defense through September 30, 2026, an increase of $8.4 billion over the President’s FY2026 Budget Request. Separately, the One Big Beautiful Bill Act (the Tax Act), signed into law on July 4, 2025, provides more than $150 billion of additional mandatory funding for Defense that is available through September 30, 2029. On April 3, 2026, the Administration released the FY 2027 Defense topline request. The FY 2027 proposal seeks a historic $1.5 trillion defense budget, driven by a large discretionary base request and an additional $350 billion of mandatory funding through reconciliation. It emphasizes a $760 billion weapons‑procurement and modernization effort—highlighting commitment to munitions framework deals, Golden Dome missile defense, a major shipbuilding program, and an increase in F‑35 purchases. The FY 2027 proposal is subject to Congressional appropriation, and there can be no assurance that it will be enacted at the levels proposed or that increases in authorized quantities will translate into increased orders for our programs within any particular timeframe. Despite the Administration indicating their desire for a significant increase in defense spending in FY 2027, we anticipate the federal budget, additional potential tax law changes, and regulatory environment will continue to be subject to debate and compromise shaped by, among other things, the Administration and Congress, heightened political tensions, the global security environment, inflationary pressures, and macroeconomic conditions. The result may be shifting funding priorities, which could have material impacts on defense spending broadly and our programs. Additionally, the Administration continues to take steps to evaluate government-wide and defense-specific staffing and procurement, which includes assessing mission priorities, procurement methods, program performance, and other factors and then potentially taking action based on those assessments. Those actions remain uncertain and could result in impacts to both our current and future business prospects and financial performance. See also the discussion of U.S. Government funding risks, in Part I, Item 1A, “Risk Factors” of our 2025 Form 10-K. 27 Table of Contents CONSOLIDATED RESULTS OF OPERATIONS Our operating cycle is primarily long-term and involves many types of contracts for the design, development, manufacture, integration, and sustainment of products and related activities with varying delivery schedules. Additionally, we close our books and records on the last Sunday of each month, except for the month of December, as our fiscal year ends on December 31, to align our financial closing with our business processes. Because of this, the number of weeks in a reporting quarter may vary slightly during the year and for comparable prior year periods. Consequently, the results of operations of a particular year, or year-to-year comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative results should be reviewed in this context. All per share amounts cited in these discussions are presented on a “per diluted share” basis, unless otherwise noted. Our consolidated results of operations were as follows (in millions, except per share data): Quarters Ended Six Months Ended June 28, 2026 June 29, 2025 June 28, 2026 June 29, 2025 Sales $ 20,063 $ 18,155 $ 38,084 $ 36,118 Operating costs and expenses (17,617) (17,421) (33,560) (33,061) Gross profit 2,446 734 4,524 3,057 Other income, net 33 14 18 63 Operating profit 2,479 748 4,542 3,120 Interest expense (266) (274) (535) (542) Non-service FAS pension expense (80) (99) (160) (197) Other non-operating income, net 45 42 105 72 Earnings before income taxes 2,178 417 3,952 2,453 Income tax expense (342) (75) (628) (399) Net earnings $ 1,836 $ 342 $ 3,324 $ 2,054 Diluted earnings per common share $ 7.94 $ 1.46 $ 14.38 $ 8.75 Certain amounts reported in other income, net, including our share of earnings or losses from equity method investees, are included in the operating profit of our business segments. Accordingly, such amounts are included in the discussion of our business segment results of operations. Sales and Operating Costs and Expenses We generate sales from the delivery of products and services to our customers. Substantially all of our contracts are accounted for using the percentage-of-completion cost-to-cost method. Under the percentage-of-completion cost-to-cost method, we record sales on contracts over time based upon our progress towards completion on a particular contract, generally using a cost-to-cost measure, as well as our estimate of the profit to be earned at completion. Operating costs and expenses, for both products and services, consist of materials, labor, subcontracting costs and an allocation of indirect costs (overhead and general and administrative), as well as the costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers. For each of our contracts, we monitor the nature and amount of costs at the contract level, which form the basis for estimating our total costs to complete the contract. Except for potential impacts to our programs resulting from supply chain disruptions, inflation, and tariffs, we have not identified any additional developing trends in operating costs and expenses for products and services that could have a material impact on our future operations. 28 Table of Contents Our consolidated sales and operating costs and expenses were as follows (in millions): Quarters Ended Six Months Ended June 28, 2026 June 29, 2025 June 28, 2026 June 29, 2025 Sales Products $ 16,783 $ 15,149 $ 31,614 $ 30,085 % of total sales 83.7 % 83.4 % 83.0 % 83.3 % Services 3,280 3,006 6,470 6,033 % of total sales 16.3 % 16.6 % 17.0 % 16.7 % Total sales $ 20,063 $ 18,155 $ 38,084 $ 36,118 Operating costs and expenses Products $ (15,063) $ (14,469) $ (28,461) $ (27,753) % of product sales 89.8 % 95.5 % 90.0 % 92.2 % Services (2,862) (3,130) (5,646) (5,770) % of service sales 87.3 % 104.1 % 87.3 % 95.6 % Impairment and other charges — (66) — (66) Other unallocated, net 308 244 547 528 Total operating costs and expenses $ (17,617) $ (17,421) $ (33,560) $ (33,061) Product Sales and Costs Product sales increased $1.6 billion, or 11%, during the quarter ended June 28, 2026, compared to the same period in 2025. This increase was due to higher product sales of approximately $650 million at Aeronautics (higher volume on F-35 production contracts and the sales impact of the 2025 reach-forward loss on a classified program); $635 million at MFC (production ramp-up on Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) programs); $185 million at RMS (higher volume on undersea combat systems programs and the River Class Destroyer program and the sales impact of the 2025 reach-forward loss on the Türkish Utility Helicopter Program (TUHP) program); and $165 million at Space (higher volume on Fleet Ballistic Missile (FBM) and Next Generation Interceptor (NGI) programs). Product costs increased $594 million, or 4%, during the quarter ended June 28, 2026, compared to the same period in 2025. Higher product costs of approximately $515 million at MFC, $165 million at RMS and $155 million at Space, partially offset by lower product costs of $240 million at Aeronautics. Product costs for all four business segments reflect the production ramp-up and higher volume as described above in “Product Sales”. Additionally, lower product costs at Aeronautics reflect the 2025 reach-forward loss on a classified program. Product sales during the six months ended June 28, 2026 increased $1.5 billion, or 5%, compared to the same period in 2025. This increase was due to higher product sales of approximately $940 million at MFC (production ramp-up on PAC-3 and THAAD programs); $405 million at Aeronautics (primarily higher volume on F-35 production contracts); and $320 million at Space (higher volume on FBM and NGI programs). Product costs during the six months ended June 28, 2026 increased $708 million, or 3%, compared to the same period in 2025. Higher product costs of approximately of $765 million at MFC and $400 million at Space were partially offset by lower product costs of $380 million at Aeronautics. Product costs for MFC, Aeronautics and Space reflect the production ramp-up and higher volume as described above in “Product Sales”. Additionally, lower product costs at Aeronautics reflect the 2025 reach-forward loss on a classified program. 29 Table of Contents Service Sales and Costs Service sales increased $274 million, or 9%, during the quarter ended June 28, 2026, compared to the same period in 2025 due to higher service sales of approximately $175 million at RMS (sales impact of the 2025 reach-forward loss on Canadian Maritime Helicopter Program (CMHP)); and $45 million at Aeronautics (higher volume on F-35 sustainment contracts, partially offset by lower volume on C-130 sustainment contracts). Service costs decreased $268 million, or 9%, during the quarter ended June 28, 2026, compared to the same period in 2025 primarily attributable to lower service costs of approximately $410 million at RMS, partially offset by higher service costs of approximately $75 million at Aeronautics as described above in “Service Sales”. Service sales during the six months ended June 28, 2026 increased $437 million, or 7%, compared to the same period in 2025. The increase was primarily attributable to higher service sales of approximately $180 million at Aeronautics (higher volume on the F-35 sustainment contracts, partially offset by the sales impact of lower net favorable profit adjustments on C-130 program); and $160 million at RMS (sales impact of the 2025 reach-forward loss on CMHP). Service costs during the six months ended June 28, 2026 decreased $124 million, or 2%, compared to the same period in 2025. The decrease was primarily attributable to lower service costs of $465 million at RMS, partially offset by higher service costs of approximately $210 million at Aeronautics as described above in “Service Sales”. Impairment and Other Charges During the second quarter of 2025, we recorded charges totaling $66 million ($52 million, or $0.22 per share, after-tax) primarily for the write-off of fixed assets resulting from the U.S. Air Force’s Next Generation Air Dominance (NGAD) competition and down-select decision. Other Unallocated, Net Other unallocated, net primarily includes the FAS/CAS pension operating adjustment (which represents the difference between total CAS pension cost recorded in our business segments’ results of operations and the service cost component of FAS pension expense), stock-based compensation expense, changes in the fair value of assets and liabilities for deferred compensation plans, significant severance charges, significant asset impairments, intangible asset amortization expense, and other miscellaneous corporate activities. Other unallocated, net operating expenses were $308 million and $547 million during the quarter and six months ended June 28, 2026, compared to $244 million and $528 million during the quarter and six months ended June 29, 2025. The fluctuations in other unallocated, net were primarily due to changes in fair value of net assets and liabilities for deferred compensation plans and costs associated with various corporate items, none of which were individually significant. Other Income, Net Other income, net was $33 million and $18 million during the quarter and six months ended June 28, 2026, compared to $14 million and $63 million during the quarter and six months ended June 29, 2025. Other income, net, primarily includes earnings generated by equity method investees, as well as gains or losses for acquisitions, divestitures, and other items, none of which are individually significant. Non-service FAS Pension Expense Non-service FAS pension expense was $80 million and $160 million during the quarter and six months ended June 28, 2026, compared to $99 million and $197 million during the quarter and six months ended June 29, 2025. See “Note 6 - Retirement Benefits” included in our Notes to Consolidated Financial Statements for additional information. Other Non-operating Income, net Other non-operating income, net primarily includes gains or losses related to adjustments in valuation of early-stage company investments or gains or losses upon the sale of these investments and interest income earned on cash and cash equivalents. Other non-operating income, net was $45 million and $105 million during the quarter and six months ended June 28, 2026, compared to $42 million and $72 million during the quarter and six months ended June 29, 2025. See “Note 8 - Fair Value Measurements” included in our Notes to Consolidated Financial Statements for additional information. 30 Table of Contents Income Tax Expense Our effective income tax rates were 15.7% and 15.9% for the quarter and six months ended June 28, 2026 and 18.0% and 16.3% for the quarter and six months ended June 29, 2025. The lower effective income tax rates for the quarter and six months ended June 28, 2026 were primarily attributable to lower interest expense on our uncertain tax position and the reach-forward losses recognized in 2025. The rates for all periods benefited from the tax deductions for foreign derived deduction eligible income, research and development tax credits, dividends paid to our defined contribution plans with an employee stock ownership plan feature and employee equity awards. Changes in U.S. (federal or state) or foreign tax laws and regulations, or their interpretation and application (including those with retroactive effect), could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. In addition to future changes in tax laws, the amount of net deferred tax assets will change periodically based on several factors, including the measurement of our retirement benefit obligations, actual cash contributions to our retirement benefit plans and the change in the amount or reevaluation of uncertain tax positions. On July 4, 2025, the President signed into law the One Big Beautiful Bill Act (the Tax Act). Key provisions included the permanent reinstatement of immediate expensing for domestic research expenditures, the restoration of full expensing for qualified machinery, equipment and other short-lived assets, and several modifications to existing corporate alternative minimum tax (CAMT) and international tax provisions. On February 18, 2026, the U.S. Department of Treasury issued Notice 2026-7 (the Notice) providing additional interim guidance regarding the application of the CAMT. As a result of the Tax Act and the Notice, we are no longer subject to CAMT this year and expect to make reduced federal income tax payments for 2026. We are regularly under audit or examination by tax authorities, including U.S. and foreign tax authorities (Australia, Canada, India, Italy, Japan, Poland, the United Kingdom, and other countries). The final resolution of tax audits and any related administrative reviews or litigation could result in unanticipated increases in our tax expense and changes to the timing of tax payments, which could affect profitability and cash flows for any particular reporting period. These increases or changes could have a material impact on financial condition and results of operations in such period. Net Earnings We reported net earnings of $1.8 billion ($7.94 per share) and $3.3 billion ($14.38 per share) during the quarter and six months ended June 28, 2026 and $342 million ($1.46 per share) and $2.1 billion ($8.75 per share) during the quarter and six months ended June 29, 2025. Net earnings and earnings per share for the quarter and six months ended June 28, 2026 were affected by the factors mentioned above. Earnings per share also benefited from a net decrease of approximately 3.2 million and 3.7 million weighted average common shares outstanding during the the quarter and six months ended June 28, 2026, compared to the same periods in 2025. The reduction in weighted average common shares was a result of share repurchases in the second half of 2025, but none during the quarter and six months ended June 28, 2026, partially offset by share issuances under our stock-based awards and certain defined contribution plans. 31 Table of Contents BUSINESS SEGMENT RESULTS OF OPERATIONS Our operations are organized into four business segments, which also comprise our reportable segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space. We generally organize our business segments based on the nature of products and services offered. Business segment operating profit excludes the FAS/CAS pension operating adjustment, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. Government Cost Accounting Standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance. See “Note 3 - Information on Business Segments – Unallocated Items” included in our Notes to Consolidated Financial Statements for additional information. Sales and operating profit for each of our business segments were as follows (in millions): Quarters Ended Six Months Ended June 28, 2026 June 29, 2025 June 28, 2026 June 29, 2025 Sales Aeronautics $ 8,112 $ 7,420 $ 15,065 $ 14,477 Missiles and Fire Control 4,101 3,433 7,750 6,806 Rotary and Mission Systems 4,354 3,995 8,345 8,323 Space 3,496 3,307 6,924 6,512 Total sales $ 20,063 $ 18,155 $ 38,084 $ 36,118 Operating profit Aeronautics $ 760 $ (98) $ 1,379 $ 622 Missiles and Fire Control 594 479 1,094 944 Rotary and Mission Systems 437 (172) 860 349 Space 371 362 652 741 Total business segment operating profit $ 2,162 $ 571 $ 3,985 $ 2,656 Unallocated items FAS/CAS pension operating adjustment $ 422 $ 379 $ 843 $ 758 Impairment and other charges — (66) — (66) Intangible asset amortization expense (50) (63) (100) (127) Other, net (55) (73) (186) (101) Total unallocated items 317 177 557 464 Total consolidated operating profit $ 2,479 $ 748 $ 4,542 $ 3,120 Management evaluates performance on our contracts by focusing on sales and operating profit and not by type or amount of operating expense. Consequently, our discussion of business segment performance focuses on sales and operating profit, consistent with our approach for managing the business. This approach is consistent throughout the life cycle of our contracts, as management assesses the bidding of each contract by focusing on sales and operating profit and monitors performance on our contracts in a similar manner through their completion. This method and assumptions used to evaluate contracts and recognize revenue, including the use of percentage-of-completion accounting for contracts with continuous transfer of control to the customer, are consistent with those described in our 2025 Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Additionally, for updates related to fixed-price contracts, see “Note 10 - Other” included in our Notes to Consolidated Financial Statements. Changes in sales and operating profit generally are expressed in terms of volume, contract mix, and/or performance (referred to as profit booking rate adjustments). Changes in volume refer to increases or decreases in sales or operating profit resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking rate for a particular contract. Contract mix primarily refers to changes in the ratio of contract type or life cycle (e.g., cost-type, fixed-price, development, production and/or sustainment) and other cost recoveries. 32 Table of Contents Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts, see “Note 10 - Other” included in our Notes to Consolidated Financial Statements. The following table presents the effect of our consolidated net profit booking rate adjustments on segment operating profit (in millions): Quarters Ended Six Months Ended June 28, 2026 June 29, 2025 June 28, 2026 June 29, 2025 Aeronautics $ 60 $ (730) $ 75 $ (620) Missiles and Fire Control 190 130 325 260 Rotary and Mission Systems 25 (550) 60 (465) Space 100 105 130 260 Total net adjustments to segment operating profit $ 375 $ (1,045) $ 590 $ (565) During the six months ended June 28, 2026, we recorded unfavorable profit adjustments of $125 million on the F-16 program at Aeronautics as a result of production performance and development delays, $95 million on the C-130 program at Aeronautics as a result of continued diminishing manufacturing source integration challenges and associated delivery delays, $95 million on Heavy Lift programs at RMS as a result of production performance, and $80 million on Seahawk programs at RMS as a result of production performance and schedule delays. During the quarter ended June 29, 2025, we recorded losses of $950 million on an ongoing classified program at Aeronautics, and $570 million on Canadian Maritime Helicopter Program (CMHP) and $95 million on Türkish Utility Helicopter Program (TUHP) at RMS. During the six months ended June 29, 2025, in addition to the losses above, we recorded $125 million of adjustments resulting from favorable performance upon completion on certain commercial civil space programs at Space and an $80 million favorable adjustment upon completion of a classified program at Aeronautics. There are certain programs where there is a risk of additional losses, including Aeronautics, MFC and RMS business segments. For further discussion regarding the losses recognized on these programs, including factors that could contribute to potential future losses, see “Note 10 - Other” included in our Notes to Consolidated Financial Statements. Aeronautics Summary operating results for our Aeronautics business segment were as follows (in millions): Quarters Ended Six Months Ended June 28, 2026 June 29, 2025 June 28, 2026 June 29, 2025 Sales $ 8,112 $ 7,420 $ 15,065 $ 14,477 Operating profit (loss) 760 (98) 1,379 622 Operating margin 9.4 % (1.3 %) 9.2 % 4.3 % Aeronautics’ sales during the quarter ended June 28, 2026 increased $692 million, or 9%, compared to the same period in 2025. The increase was primarily due to higher sales of $475 million on the F‑35 program as a result of higher volume on production contracts, and $360 million due to the sales impact of the reach-forward loss recognized on a classified contract in 2025. These increases were partially offset by lower sales of $120 million on F-16 and C-130 programs due to lower volume on sustainment contracts. Aeronautics’ operating profit during the quarter ended June 28, 2026 increased $858 million compared to the same period in 2025. The increase was attributable to the $950 million reach-forward loss recognized on a classified contract in 2025, and higher sales volume on F-35 production contracts. The increases were partially offset by $160 million of lower net favorable profit adjustments across the portfolio. Aeronautics’ sales during the six months ended June 28, 2026 increased $588 million , or 4%, compared to the same period in 2025. The increase was primarily due to higher sales of $795 million on the F‑35 program as a result of higher volume on production and sustainment contracts; partially offset by lower sales of $225 million on the F-16 program due to the sales impact of unfavorable profit adjustments recognized in first quarter of 2026 and lower production volume, and 33 Table of Contents $110 million on the C-130 program due to the sales impact of lower net favorable profit adjustments. Sales for classified programs were comparable as lower volume was mostly offset by the reach-forward loss recognized on a classified contract in 2025. A eronautics ’ operating profit during the six months ended June 28, 2026 increased $757 million compared to the same period in 2025. The increase was attributable to the $950 million reach-forward loss recognized on a classified contract in 2025; partially offset by $125 million of unfavorable profit adjustments on the F-16 program recognized in first quarter of 2026 and $130 million of lower net favorable profit adjustments across the portfolio. Additionally, during the quarter ended June 28, 2026 , we delivered 19 F-35 aircraft. Since the program inception through June 28, 2026, we delivered 1,344 production F-35 aircraft, including 956 F-35A variants, 250 F-35B variants and 138 F-35C variants, and our backlog as of that date was 317 aircraft. Missiles and Fire Control Summary operating results for our MFC business segment were as follows (in millions): Quarters Ended Six Months Ended June 28, 2026 June 29, 2025 June 28, 2026 June 29, 2025 Sales $ 4,101 $ 3,433 $ 7,750 $ 6,806 Operating profit 594 479 1,094 944 Operating margin 14.5 % 14.0 % 14.1 % 13.9 % MFC’s sales during the quarter ended June 28, 2026 increased $668 million, or 19%, compared to the same period in 2025. The increase was primarily attributable to higher sales of $560 million on integrated air and missile defense programs due to production ramps (PAC-3 and THAAD), and $100 million on tactical and strike missile programs due to production ramps (Precision Strike Missile (PrSM)). MFC’s operating profit during the quarter ended June 28, 2026 increased $115 million, or 24%, compared to the same period in 2025. The increase was primarily attributable to higher sales volume previously described, and $60 million due to higher net favorable profit adjustments. MFC’s sales during the six months ended June 28, 2026 increased $944 million, or 14%, compared to the same period in 2025. The increase was primarily attributable to higher sales of $750 million on integrated air and missile defense programs due to production ramps (PAC-3 and THAAD), and $175 million on tactical and strike missile programs due to production ramps (PrSM). MFC’s operating profit during the six months ended June 28, 2026 increased $150 million, or 16%, compared to the same period in 2025. The increase was primarily attributable to higher sales volume previously described, and $65 million due to higher net favorable profit adjustments. 34 Table of Contents Rotary and Mission Systems Summary operating results for our RMS business segment were as follows (in millions): Quarters Ended Six Months Ended June 28, 2026 June 29, 2025 June 28, 2026 June 29, 2025 Sales $ 4,354 $ 3,995 $ 8,345 $ 8,323 Operating profit (loss) 437 (172) 860 349 Operating margin 10.0 % (4.3 %) 10.3 % 4.2 % RMS’ sales during the quarter ended June 28, 2026 increased $359 million, or 9%, compared to the same period in 2025. The increase was attributable to higher sales of $255 million on Sikorsky helicopter programs due to the sales impact of the reach-forward loss recognized on CMHP and TUHP in 2025, and $115 million on Mission Integrated Command & Control (MIC2) programs due to higher volume on undersea combat systems programs and the River Class Destroyer program. RMS’ operating profit during the quarter ended June 28, 2026 increased $609 million compared to the same period in 2025. The increase was attributable to the $570 million reach-forward loss recognized on the CMHP program and the $95 million reach-forward loss recognized on the TUHP program in 2025. This increase was offset by unfavorable profit adjustments of $65 million on Heavy Lift and $50 million on Seahawk programs, partially offset by higher net favorable profit adjustments across the portfolio. RMS’ sales during the six months ended June 28, 2026 were comparable to the same period in 2025. Lower sales of $160 million on Sensors, Effectors & Mission Systems (SEMS) programs due to lower volume across the portfolio were mostly offset by higher sales of $145 million at Sikorsky. Higher sales at Sikorsky were due to the sales impact of the reach-forward losses recognized on CMHP and TUHP in 2025, partially offset by the sales impact of unfavorable profit adjustments recognized in 2026. RMS’ operating profit during the six months ended June 28, 2026 increased $511 million compared to the same period in 2025. The increase was attributable to the $570 million reach-forward loss recognized on the CMHP program and the $95 million reach-forward loss recognized on TUHP in 2025, partially offset by unfavorable profit adjustments of $95 million on Heavy Lift and $80 million on Seahawk programs in 2026. Space Summary operating results for our Space business segment were as follows (in millions): Quarters Ended Six Months Ended June 28, 2026 June 29, 2025 June 28, 2026 June 29, 2025 Sales $ 3,496 $ 3,307 $ 6,924 $ 6,512 Operating profit 371 362 652 741 Operating margin 10.6 % 10.9 % 9.4 % 11.4 % Space’s s a les during the quarter ended June 28, 2026 increased $189 million, or 6%, compared to the same period in 2025. The increase was primarily attributable to higher sales of $190 million on strategic and missile defense programs due to increased volume (FBM and NGI). Space’s operating profit during the quarter ended June 28, 2026 was comparable to the same period in 2025. Space’s sales during the six months ended June 28, 2026 increased $412 million, or 6%, compared to the same period in 2025. The increase was primarily attributable to higher sales of $435 million on strategic and missile defense programs due to increased volume (FBM and NGI). Space’s operating profit during the six months ended June 28, 2026 decreased $89 million, or 12%, compared to the same period in 2025. The decrease was primarily due to favorable performance at completion on certain commercial civil space programs in 2025, partially offset by higher sales volume previously described. 35 Table of Contents FINANCIAL CONDITION Liquidity and Capital Resources At June 28, 2026, we had cash and cash equivalents of $3.8 billion that was generally available to fund ordinary business operations without significant legal, regulatory or other restrictions. Our principal source of liquidity is our cash from operations and access to credit markets. Access to credit markets includes our revolving credit facilities, and the ability to issue commercial paper. We may, as conditions warrant, issue commercial paper backed by our revolving credit facility to manage the timing of cash flows. There were no borrowings outstanding under the revolving credit facilities or the commercial paper program at June 28, 2026 or December 31, 2025. Cash received from customers is our primary source of cash from operations. However, from time to time, we fund customer programs ourselves pending government appropriations or prior to contract award. See “Note 5 - Inventories” included in our Notes to Consolidated Financial Statements for additional information. If we incur costs in excess of funds obligated on the contract or in advance of a contract award, this negatively affects our cash flows, and we may be at risk for reimbursement of the excess costs. In addition, when estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is evident, which we refer to as a reach-forward loss. Typically, these reach-forward losses do not have an immediate cash flow impact, but as future costs are incurred on these contracts, these losses will negatively impact cash flows over the remaining period of performance. Increases in costs due to tariffs may impact our cash flows, as we may not be able to fully recover these costs, and even if recovery is possible, it may not occur in the same period as the incurred costs. See “Business Overview” discussion above. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. We generally bill and collect cash more frequently under cost-reimbursable contracts, which represented approximately 41% of the sales we recorded during the six months ended June 28, 2026, as we are authorized to bill as the costs are incurred. A number of our fixed-price contracts may provide for performance-based payments, which allow us to bill and collect cash as we perform on the contract as we achieve milestones. The amounts of performance-based payments and the related milestones are determined in the negotiation of each contract. The timing of such payments may differ from the timing of the costs incurred related to our contract performance, thereby affecting our cash flows. The U.S. Government has indicated that it would consider progress payments as the baseline for negotiating payment terms on fixed-price contracts, rather than performance-based payments. In contrast to negotiated performance-based payment terms, progress payment provisions correspond to a percentage of the amount of costs incurred during the performance of the contract and are invoiced regularly as costs are incurred. Our cash flows may be affected if the U.S. Government changes its payment policies. The U.S. Government from time to time withholds payments on certain of our billings based on contract terms or regulatory provisions. Ultimately, the impact of policy changes or withholding payments may delay the receipt of cash, but the cumulative amount of cash collected during the life of the contract should not vary due to these items. We seek to maintain a disciplined and dynamic cash deployment strategy to invest in our business and key technologies to provide our customers with enhanced capabilities, enhance stockholder value, and position ourselves to take advantage of new business opportunities when they arise. Consistent with that strategy, we have continued to invest in our business and technologies through capital expenditures, independent research and development, and selective business acquisitions and investments. As we implement our digital and business transformation, which includes implementation of new systems, the timing of certain of our cash flows may be temporarily impacted within a calendar year. We continue to actively manage our debt levels, including maturities and interest rates. We seek to finance our business in a manner that preserves financial flexibility while minimizing borrowing costs to the extent practicable. We review changes in financial market and economic conditions to manage the types, amounts and maturities of our indebtedness. We may at times refinance existing indebtedness, vary our mix of variable-rate and fixed-rate debt or seek alternative financing sources or arrangements for our cash and operational needs. We also actively manage our pension obligations and expect to continue to opportunistically manage our pension obligations through additional contributions at our discretion, the purchase of group annuity contracts or other actions for 36 Table of Contents portions of our outstanding defined benefit pension obligations using assets from the pension trust. See “Note 6 - Retirement Benefits” included in our Notes to Consolidated Financial Statements for additional information. The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions): Six Months Ended June 28, 2026 June 29, 2025 Cash and cash equivalents at beginning of year $ 4,121 $ 2,483 Operating activities Net earnings 3,324 2,054 Noncash adjustments 1,516 2,057 Changes in working capital (1,259) (2,454) Other, net (126) (47) Net cash provided by operating activities 3,455 1,610 Net cash used for investing activities (890) (1,145) Net cash used for financing activities (2,895) (1,655) Net change in cash and cash equivalents (330) (1,190) Cash and cash equivalents at end of period $ 3,791 $ 1,293 Operating Activities Net cash provided by operating activities during the six months ended June 28, 2026 increased $1.8 billion compared to the same period in 2025. The increase in cash from operations was primarily due to the timing of customer receipts, and lower tax payments reflecting the impact of the Tax Act and the Notice. Non-GAAP Financial Measure - Free Cash Flow Free cash flow is a non-GAAP financial measure that we define as cash from operations less capital expenditures. Our capital expenditures are comprised of equipment and facilities infrastructure and information technology (inclusive of costs for the development or purchase of internal-use software that are capitalized). We use free cash flow to evaluate our business performance and overall liquidity. While management believes that free cash flow as a non-GAAP financial measure may be useful in evaluating our financial performance, it should be considered supplemental to, and not a substitute for, financial information prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies. The following table reconciles net cash provided by operating activities to free cash flow (in millions): Six Months Ended June 28, 2026 June 29, 2025 Cash from operations $ 3,455 $ 1,610 Capital expenditures (829) (805) Free cash flow $ 2,626 $ 805 Free cash flow d uring the six months ended June 28, 2026 increased $1.8 billion compared to the same period in 2025 primarily due to operating cash flow drivers described above. Investing Activities Net cash used for investing activities duri ng the six months ended June 28, 2026 decreased $255 million compared to the same period in 2025. Capital expenditures totaled $829 million and $805 million during the six months ended June 28, 2026 and June 29, 2025. The majority of our capital expenditures are for equipment and facilities infrastructure that generally are incurred to support new and existing programs across all of our business segments. We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use software. 37 Table of Contents Financing Activities Net cash used for financing activities during t he six months ended June 28, 2026 increased $1.2 billion compared to the same period in 2025. D uri ng the six months ended June 28, 2026, we did not make any repurchase of our common stock, compared to $1.3 billion to repurchase 2.7 million shares during the same period in 2025. Also, d uri ng the six months ended June 28, 2026 and June 29, 2025, we repaid $1.2 billion and $142 million of long-term notes according to their scheduled maturities. Additionally, there were no commercial paper borrowings outstanding as of June 28, 2026, compared to net proceeds of $1.4 billion from commercial paper issuance during the same period in 2025. OTHER MATTERS Critical Accounting Policies There have been no significant changes to the critical accounting policies disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2025 Form 10-K.