Lockheed Martin (LMT) Q3 2026 earnings review
Lockheed Martin's missile backlog jumps, while F-35 costs pass funding
Lockheed Martin's missile division is turning a mountain of orders into fast sales growth while fighter-jet contract delays tie up cash. Total sales rose 11% and order backlog jumped to $292 billion after a $53 billion Patriot missile award. Chief executive Jim Taiclet lifted the full-year outlook, though by our math the plan points to 2% weekly sales growth in the fourth quarter.
| Sales | $20.7B +11.3% from a year ago |
|---|---|
| Total order backlog | $292.0B +27% from last quarter |
| Missiles and Fire Control sales | $4.5B +24.2% from a year ago |
| Full-year free cash flow outlook | Raised $800M middle of the range: $7.9B |
⚖️ Verdict: 🟢 Bullish
The story got better because the missile ramp is now showing up in revenue and cash flow, not just in the order book. Finalizing the multi-year Patriot contract and raising the free cash flow target by $800 million answered doubts about second-half cash generation. One caution: costs on the F-35 Lot 20 contract passed government funding limits this quarter, helping push unbilled work up by $3.9 billion this year.
The question now is whether the missile boom can lift the whole company's growth rate into the double digits or stays diluted by slower aircraft and space divisions. If missile factories scale up and the F-35 contract clears, company growth accelerates; if F-35 funding drags on, unbilled work will eat into cash. The fourth-quarter F-35 contract decision and 2027 outlook will tell.
🐂 Bull Case
Missile Orders Pushed Backlog Near $300 Billion
Lockheed Martin has spent the year turning tentative missile production agreements with the US military into binding multi-year contracts. Following a $35 billion award for THAAD (its high-altitude missile defense system) last quarter, the company finalized its second landmark deal in the third quarter.
Total backlog — contracted orders not yet filled — jumped 27% in three months to a record $292.0 billion. That includes $52.5 billion "associated with the multi-year award to produce PAC-3 Missile Segment Enhancement (MSE) interceptors", its Patriot air-defense missiles.
- Total net new backlog: up $61.6 billion from last quarter by our math, implying $82.3 billion of gross orders (4.0 times quarterly sales)
- Missiles and Fire Control backlog: $142.5 billion, up $54.6 billion from last quarter and more than triple its $46.7 billion level at year-end
- Missiles and Fire Control sales: $4.50 billion, up 24.2% from a year ago
- Missiles and Fire Control operating margin: 14.0%, compared with 14.1% a year ago
This matters because the missile division is no longer just accumulating orders on paper. Its factory output is accelerating into the mid-20% range while holding a 14% profit margin, proving the division can scale up without giving away profitability.
What to watch: fourth-quarter Missiles and Fire Control sales. Holding growth above 20% would confirm that solid-rocket-motor suppliers are keeping pace with the new multi-year contracts.
Cash Flow Beat Prompted an $800 Million Raise
In July, the full-year outlook pointed to about $4.5 billion of free cash flow across the entire second half of 2026 by our math. Lockheed Martin generated two-thirds of that amount in the third quarter alone.
The defense contractor brought in $3.00 billion of free cash flow (14.5% of sales), even as it spent $439 million on capital expenditures and $599 million on internal research. Quarterly free cash flow dipped 10.4% from a year ago only "due to the higher customer receipts in the third quarter of 2025", when a prior F-35 contract cleared. For the first nine months, free cash flow is up 35.5% to $5.63 billion. That cash generation let management lift the full-year free cash flow target by $800 million to a midpoint of $7.9 billion while keeping capital spending unchanged.
What to watch: fourth-quarter customer advances on the new PAC-3 missile contract. Additional upfront payments would push full-year cash above the new $8.0 billion top end.
Positives this quarter didn't test
Chief executive Jim Taiclet noted that the group continues to "combine proven systems like Aegis, F-35, and Hellfire with the latest digital technologies including AI and Autonomy", alongside start-ups and commercial partners. Two standing growth initiatives received no specific financial updates in the earnings release.
- International co-production partnerships: the European ATACMS missile venture with Rheinmetall and the US manufacturing collaboration with General Motors Defense await capacity milestones on the conference call.
- Counter-drone and laser weapons: the Sanctum counter-drone system, Helios naval laser, and Golden Dome space interceptor prototypes await initial production contract values.
🐻 Bear Case
F-35 Costs Now Exceed Government Funding
"The sustained financial momentum across our portfolio gives us confidence to increase our outlook for sales, earnings per share and free cash flow, the second consecutive quarter we have raised our financial guidance," chief executive Jim Taiclet said. Beneath that raise, however, the company's largest program hit a contracting roadblock, and the fourth-quarter outlook slows down.
While Lockheed Martin has spent the year funding work ahead of formal contracts — and recovered $270 million on the C-130 transport plane this quarter via the "liquidation of pre-contract costs incurred in anticipation of a contract award" — the F-35 fighter jet moved the other way. The company remains in negotiations with the US government for F-35 production Lots 20 through 22. During the third quarter, its "costs incurred began to exceed the current contractual authorization and funding on the Lot 20 advance acquisition contract".
- Contract assets (unbilled work already performed): $16.90 billion, up $3.90 billion since December and up 21.1% from a year ago by our math
- F-35 deliveries: 43 jets in Q3 (down from 46 a year ago) and 94 jets in the first nine months (down from 143)
- Aeronautics backlog: $57.33 billion, up $3.0 billion from last quarter by our math, but still down $2.1 billion since December
- Implied Q4 sales growth per week: 1.5% by our math (9.3% headline growth across 14 weeks versus 13 weeks a year ago)
The company warned that without extra funding on Lot 20, its "results of operations, cash flows, and financial condition will be negatively impacted in future periods". Meanwhile, the $250 million full-year sales raise is smaller than the third-quarter expansion, leaving fourth-quarter weekly sales almost flat.
What to watch: a final agreement on F-35 Lots 20–22 before year-end. A deal would unlock the $16.9 billion of unbilled contract assets and prevent a halt in fighter payments.
Legacy Aircraft Charges Held Margins Back
Even without a repeat of last year's billion-dollar charges on classified contracts, cost overruns on older aircraft programs continue to chip away at profit margins. Consolidated operating margin slipped 0.5 percentage points from a year ago to 11.8%, because operating costs and expenses rose 0.3 percentage points of sales to 88.2% by our math, and unallocated corporate costs rose $99 million.
Inside the divisions, Aeronautics took $40 million of unfavorable profit adjustments on the F-16 fighter and another $40 million on the C-130 transport, pulling its segment margin down 0.4 percentage points to 9.0%. Rotary and Mission Systems absorbed $45 million of negative adjustments on Heavy Lift and Seahawk helicopters, which canceled out a $40 million gain from resolving a contracting dispute.
What to watch: Aeronautics operating margin in the fourth quarter. A rebound above 9.5% would show the F-16 and C-130 assembly lines have stabilized.
Risks this quarter didn't answer
Six standing operational and financial risks are tracked in the quarterly 10-Q filing or conference call rather than the earnings release, leaving their third-quarter readings open.
- Classified program losses: the release showed no new reach-forward loss line for a fifth straight quarter, but the 10-Q note will confirm whether cumulative accrued losses ($427 million in Aeronautics and $1.1 billion in Missiles) and cash burn held steady.
- Munitions supply chain and contract profit rules: the release did not detail solid-rocket-motor supply or the profit-sharing thresholds on the new PAC-3 and THAAD multi-year awards.
- United Launch Alliance (ULA) support: Space operating profit was flat at $331 million (margin down 0.4 points to 9.5%), and the 10-Q will disclose ULA equity earnings and any cash support beyond the $500 million guarantee.
- Tax dispute and shareholder lawsuits: the $4.6 billion IRS claim (with $100 million accrued) and the derivative lawsuits over past program disclosures await the 10-Q legal note.
- 2027 cash commitments: the closing date and financing for the $3.45 billion Ultra Maritime acquisition and next year's expected $1 billion-plus pension contribution were not updated.
- Canadian Maritime Helicopter Program: the status of contract restructuring talks ($585 million of contract assets at risk) awaits the 10-Q.
👓 Other Themes
Tax Deductions Helped While Buybacks Stayed at Zero
Lockheed Martin spent zero on share repurchases for a third consecutive quarter ($0 in the first nine months versus $2.25 billion a year ago), directing cash toward $2.41 billion of dividends, $1.17 billion of debt repayment, and a $5.96 billion cash balance. Separately, the effective tax rate fell from 16.5% to 15.1% on larger tax deductions for foreign-derived income (FDDEI).
💲 Other KPIs
Space revenue rose 3.8% from a year ago, slowing from 5.7% growth in the second quarter. Higher volume on the Fleet Ballistic Missile and Next Generation Interceptor programs added $185 million, which was partly offset by a $115 million decline as the overhead persistent infrared (OPIR) missile-warning satellite program wound down. Segment profit stayed flat at $331 million.
Sales in the helicopter and radar division grew 3.2% from a year ago, after rising 9.0% in the second quarter. Radar volume inside the Sensors, Effectors & Mission Systems unit contributed $140 million of growth. Operating profit rose 3.6% to $524 million, holding the division's operating margin steady at 11.6%.
Average diluted shares fell 0.6% from 232.8 million a year ago because of buybacks completed in late 2025. With share repurchases paused all year, the count crept up from 231.1 million in the first and second quarters as employee stock compensation vested, giving almost no per-share boost to third-quarter earnings.
🔮 Guidance
Raised. Both ends of the full-year sales plan moved up $250 million, putting the middle of the range at $81.0 billion, or 7.9% growth by our math. That leaves $22.21 billion of sales for the fourth quarter (+9.3% from a year ago). Because the fourth quarter has 14 weeks against 13 weeks last year, weekly sales growth slows to 1.5% by our math. Second raise this year: +$2,000M, then +$250M.
Raised. The company lifted the bottom of the range by $75 million and trimmed the top by $25 million, raising the midpoint by $25 million to $8,625 million (+27.9% from a year ago, lapping 2025's contract losses). By our math, that leaves $2,411 million for the fourth quarter (+17.2% from a year ago), or a 10.9% segment margin against 10.8% in the third quarter.
Cut. While segment profit rose $25 million at the middle of the range, the reconciliation table shows unallocated corporate expenses increasing by $50 million to ~$540 million. That lowered the consolidated operating profit midpoint by $25 million to $9,570 million (+23.8% from 2025). By our math, that implies $2,585 million in the fourth quarter (+10.9% from a year ago).
Unchanged. The net pension accounting adjustment remains at $1,365 million for the fourth straight quarter, consisting of a $1,685 million operating credit and $320 million of non-operating pension expense.
Raised. Management lifted the middle of the range by $0.25 to $30.55 (+42.2% from 2025, which carried heavy program and pension charges). By our math, that leaves $8.19 per share for the fourth quarter (+41.2% from a year ago). It is the second raise this year: +$0.50 in July, then +$0.25 in October.
Raised. The operating cash flow plan jumped $800 million at both ends to a midpoint of $10.10 billion (+18.0% from 2025). By our math, the outlook leaves $3,207 million for the fourth quarter, almost identical to the $3,219 million collected in the fourth quarter of 2025.
Unchanged at the middle of the range. The company narrowed the band around the same $2.20 billion midpoint (+33.4% from 2025). Having spent $1,268 million in the first nine months, the plan implies $932 million of capital spending in the fourth quarter by our math — more than double both the third quarter ($439 million) and last year's fourth quarter ($463 million).
Raised. With operating cash up $800 million and capital spending steady, the free cash flow target rose $800 million to a midpoint of $7.90 billion (+14.4% from 2025). By our math, that leaves $2,275 million for the fourth quarter, down 17.5% from $2,756 million a year ago because of the fourth-quarter jump in factory spending. Second raise this year: +$450M, then +$800M.
❓ Key Questions
How much F-35 Lot 20 spending is currently unfunded?
Costs on the F-35 Lot 20 contract passed government funding limits in Q3, and unbilled contract assets have climbed $3.9 billion this year to $16.9 billion. Investors need to know the monthly cash burn on Lot 20 and the deadline before deliveries or revenue recognition pause.
Why has the buyback stayed at zero with $6B cash?
Lockheed Martin generated $5.6 billion of free cash flow in nine months and ended Q3 with $5.96 billion in cash, yet bought back zero shares for a third quarter. Management has not stated whether cash is being hoarded for the $3.45 billion Ultra Maritime deal.
What are the profit rules on the $52.5B PAC-3 deal?
The new multi-year PAC-3 missile contract drove backlog to $292 billion, but management has not disclosed the cost-sharing ratio or the margin ceiling on its multi-year munitions deals.
Did accrued losses on the classified programs stay flat?
The earnings release showed no new reach-forward charges, but the 10-Q filing carries the table of accrued losses ($427 million in Aeronautics and $1.1 billion in Missiles at Q2). Investors need confirmation that cost baselines and cash burn held steady.