Conference Transcript - LMT 2026-09-17

Christine Lewag, Analyst — Morgan Stanley

Hi, good morning, everyone. I'm Christine Lewag, Morgan Stanley's Head of Aerospace and Defense Equity Research. I'm very excited to host our next panel with Lockheed Martin. Before we get started, I'll have to read this. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morgansanley.com forward slash research disclosures. If you have any questions, please reach out to your Morgan Stanley representative. So for our next panel, definitely very excited to welcome Jim Takelett, CEO of Lockheed Martin. And Evan Scott, CFO. So welcome, Jim and Evan. Morning. Great. So maybe to kick off, Jim, this has been a question from a lot of investors, which is about the technology insertion in the battlefield. We've seen sovereign customers needing more equipment sooner. We've seen the proliferation of low-cost autonomous systems being pretty effective in the battlefield. And then at the same time, you also see, and maybe this is the part where investors don't see as much, there's also more need for high-end types of solutions. So can you talk about where Lockheed's role is in this environment? How do you counter some of these lower-cost autonomous systems, and how do we keep prepared? And what is the environment for these high-end threat environments, too? And where does your company fit?

Jim Taiclet, CEO

Sure. Well, I'm glad you started off, Christine, this morning with technology. good morning to all of you here thanks for coming today and I'm first of all going to be as the next Air Force pilot very proud to say that US government and us speaking of technology just announced this morning the long-term multi-year agreement for the joint advanced tactical missile which is an air-to-air missile that's more advanced next generation if you will change the deterrent posture that we can provide. And the JATAM, as it's called, AIM-260, is going to be produced. But it's not even in full-grade production yet. And the U.S. government's already agreed with us to a long-term multi-year contract to deliver it. That's how good this technology is. Our role in this entire changing ecosystem, I believe, is to take the Lockheed Martin systems integration heritage. You know, we make the most advanced systems like the JADAM I just described, F-35, Trident Missile, Patriot Pac-3, MSC. These are highly complex, very high capability devices and products and platforms. We've gotten a history of almost 100 years of being able to do that. We have the DNA. We have the muscle. And with the way that warfare is evolving, we're taking that muscle, we've been working on this for about three or four years, and going from the systems integration lead to the mission integration lead. And what's a mission? Well, let's talk about products first, and then we can evolve to a mission. The product is air-to-air combat, air superiority. That's one of the 12 missions that we designed to. And with JATAM, for example, What we've done is we've integrated the most advanced next-generation air-to-air missile with the most advanced fighter aircraft, F-35 and F-22. We did that mission integration because now our app, if you will, or the Air Force's app or the Marines and Navy, their app is not like Google Maps to just have navigation show you where to go next and how to turn your car. Their apps are shooting down other airplanes and protecting yourself. So we can do the systems integration, JATAM into F-35, for example, seamlessly. That's in our muscle memory. But what we can do as a mission systems integrator is match those two complex systems together and then match them with digital technologies that allow the mission, through a mission technology roadmap, to keep advancing capability. If there's a new missile, that's great. It's a step function up. If there's a new airplane, it's great. It's a step function up. But every three to six months, we're also using digital technologies to create more capability. And the real centerpiece for Lockheed Martin is to be able to do systems integration into a mission integration package with new technologies and new entrant products and those from Northrop Grumman or Boeing Defense. That's our sweet spot is full mission integration, and we've been practicing that for, you know, call it four years with these mission technology roadmaps. Our goal is to work with our customers, the users, to create decisive military advantage at a theater-level scale. That is really the core mission of Lockheed Martin, and so that's what we do. The key thing on the high-end platforms and systems, and the low-cost counter-UAS systems, for example, is that you've got to have, for certain missions, subsets, the high-end system. So just to talk about air and missile defense for a moment, the PAC-3 MSC and the FAD, expensive, high-end, super-capable missiles, they can hit long-range ballistic missiles, They can also target hypersonic missiles and everything below that. The trade-off of using a PAC-3 missile for a Shahada drone is not a good one economically. And so we know that there's other ways we should be able to deal with drones. And so the drone solutions we've come up with, the newer technologies, using some startups as suppliers, actually, some of our venture investments as suppliers or solutions to the mission roadmap, we've come up with two or three systems now that we can integrate into that air defense missile defense and that will create deterrence which is really what ours our product is our product is deterrence it's not a pack three missiles it's not simply enough 35 it's creating deterrence to against great power conflict which is a very valuable service so that's our role is to be the mission integrator using our systems integration capabilities and the high-end products that we actually do make.

Christine Lewag, Analyst — Morgan Stanley

So, Jim, maybe taking a step back, I think right now in the U.S. we have the lowest number of veterans in the population. So, can you just provide a little bit more color regarding what people see on the media? For example, you look at Ukraine. It's effectively drill and trench warfare, which I think is not what people thought what warfare in 2026 looked like. But also what you just mentioned right now, you talked about decisive capabilities in the theater level. I mean, That's very different from a drone trench warfare. Can you just expand on the difference a little bit? Because I do think that on the high-end capability of Lockheed, maybe investors are underappreciating what that means to be relevant in a great power type event.

Jim Taiclet, CEO

I think the starting place for the Ukraine stalemate, essentially, trench warfare, is that neither side has been able to create air superiority in a level that we just described. If either side, Russia or Ukraine, had complete command of the air, this drone trench warfare may not have developed. It wouldn't have had time to develop, and we would be in a different situation. But you do have to have both. You have to have the high-end control of the air, and also you have to be able to counter these new autonomous relatively low cost attack weapons is what they are that may not necessarily be what we will emphasize what we will emphasize is the much more complex mission of counter UAS almost anyone can build with Chinese parts generally and that's how the Russians and Ukrainians are doing it with Chinese parts you can build a drone that can drop a hand grenade in the trench Almost anyone could do that in their garage. But when it comes to seeking out that drone, identifying it and destroying it in mass, hundreds or thousands, that is a much tougher mission set. So, again, the offensive drone warfare is an easier technical problem, frankly, than counter UAS. And so what we've been doing, building this muscle of mission technology roadmap, assessing evolving kind of threats or new weapons that are put into play, like in Ukraine and actually also in Iran now, we're able to quickly motivate our engineers to design to the mission, not design to an RFP only. So that's where the two systems, the counter-UAS systems that we're scaling now, came from. They came not from a lengthy RFP from the U.S. government. They came from us with our experts, many of them ex-military and ex-intelligence community veterans, coming in, building those technology roadmaps and saying, we have to be able to do this. And there's no RFP from the government. They haven't really thought through the technical solutions yet, or maybe they're going a different direction. What we do with our mission technology roadmap is say, what do we have right now, like on the shelf and deployed, by the way? Because if it's deployed, it can be used quickly. So some of the things that we have on the shelf are, and actually the Army does, Hellfire missiles. We build tens of thousands of those a year. There are more tens of thousands of those in the stockpiles across all our allies in the United States. And so we kind of unleashed our engineers with these mission technology roadmaps. These are day jobs, which is respond to RFPs, then design to those. But a lot of their time now is built on figuring out what the next thing is going to be, maybe even before the U.S. government puts the request for information out about it, and offer them solutions. That's the new Lockheed Martin. We're not just waiting for RFPs. We are, but that's not all we do. Right now we're looking at our own mission technology roadmaps and saying what's the next thing that's going to be needed and how can we scale it to a theater level? When I say theater, I don't mean like a movie theater. I'm talking about the Pacific Ocean or Europe. Yeah, that's right, the Middle East. So how do you scale something that is a, you know, if it's a really cool science project and you can't scale it and you can't teach in 15 minutes a high school graduate Marine to use it, it's interesting but it's not effective. What we're doing is effective at that level. And so what did we take? We took the Hellfire missile, which is a helicopter-carried missile that goes from air to ground. It was designed to hit tanks and things in the Cold War. And our people used digital technology, new software, a new integration package into an existing launcher architecture and an existing missile. And we changed it from an air-to-ground missile off a helicopter to a ground-to-air missile to hit these drones. And we've been testing that out at Yuma and other places with the military, and it works. Of course it works, because the pieces already exist. We just repurpose them. And so a mission technology roadmap says, I've got hellfires. I've got a launch architecture. It's already deployed with the U.S. Army and many others. How can I repurpose this for this new threat that came out? And that's an example of it. And I'll give you the other example, because it's actually more esoteric. The Grizzly, which is this ground-to-air missile technology that we developed, has to be tied into a command-and-control system, which is, again, another strong point of Lockheed Martin. So the command-and-control system has to identify the many, it could be hundreds of drones, as I said, it has to make sure that they're enemy, it has to make sure that they're nefarious, and then it has to do what's called target weapons matching. I got 100 weapons, I got 200 targets, what are the best combinations to eliminate that large threat? And that system has to then cue a weapon. Now, these things are not toys. They are explosive devices with rocket motors in them to go ahead and be launched, track, and hit a couple hundred drones. And so that, again, is a differentiable technology capability that we have and others have in our space, if you will. I'm sure Boeing Defense has a similar version. We know Northrop does and others. But we have a pretty advanced one ourselves. And we tied that Hellfire missile and a new mission into that command and control system that we evolved for counter-UAS. And then we added another device, which our folks invented, which, at our request, we've got a missile solution. We need a directed energy solution, too, to match with that, to accomplish the mission and take it another step forward. And so our engineering team developed our own UAS, which is probably about as big as a large dining room table. It weighs a few hundred pounds, and it's got the four rotors. It takes off vertically. And on top of this is LIDAR, radar, infrared, a bunch of sensors, and a box. And in that box is a high-powered microwave that this device will tie into the same Sanctum command and control system. Now, I've got 200 targets. 100 are going to get hit by the Hellfire missiles I have at my disposal. There's still another 100. that Sanctum system will parse out which of those targets goes to the kinetic solution which is the missile and which goes to the electromagnetic solution which is microwave and it will then assign this drone to go to those other additional threats fly beside them make sure with all the sensors it identifies it as an enemy drone zap it with the high power microwave that zap fries the electronics inside the drone. The drone just fails. It can do that 50 times on one battery charge, and it goes back for a battery charge. So if you have 10 of these and you have 20 Grizzly launchers, you can deal with 200 drones coming at you much more effectively than anybody can today. Now, you've also got the solutions of F-16s, firing air-to-air missiles, other solutions, And the layered defense that we are creating with our mission technology roadmap will be, I think, will be the force protection solution for the U.S. government for bases or THAAD missile batteries and things like that. But one little product or one little piece of this from a startup can't do this alone. Someone's got it mission integrated. And this example that I just gave you of Sanctum uses a radar not made by the great Lockheed Martin that does Aegis and all the tippy radars. It was from a startup we invested in called Fordham. We use Fordham radars because they are very transportable, light, and resilient. And so you can get a couple of pickup trucks, put a Fordham radar on it, put a grizzly in the back of the other truck, and you can go out and protect a Ford operating base, a stadium, something like that. And that's the way we're thinking now as a company. I mean, it literally took three or four years to drive the Z-axis through big old Lockheed Martin and the four business areas. But that's how we think now. That's how we operate. That's how we plan. And that's how we allocate our R&D. And you might have noticed our R&D budget has gone up significantly and has our CapEx budget because we are now investing our cash flows, part of our cash flows, into all these opportunities that no one is thinking like this, but I'd like to think we are. So that's how all this technology does come together. And the real match is, you know, again, as an ex-Air Force pilot, I know that you need the big platforms for three things, range, payload, and survivability. So that's the F-35, that's the F-47 coming down from Boeing, you know, that's the F-16, the F-15. You've got to have those big platforms because they have the range to get to the target. Now we're talking high-end again. Range to get to the target, the payload, like the B-2, could carry a 2,000-pound weapon. put it down an air shaft and blow up a nuclear facility in Iran. It took us 32 hours to get there and back for the airplane. That's the kind of platform you need to do the high-end missions, but it should be heavily complemented with networking, with lower-cost systems, and with new entrance systems that are not necessarily coming from the big prime contractors. And so our goal is to welcome the venture firms in. We have our own venture fund, actually, to help them. We welcome in new entrants like Fordham. And then the other example I'll give you, because changing this company to be more of a commercial technology company, at least think that way, is another alliance we have with a company called SailDrone. SailDrone is, again, a startup, but it's been around a few years. they can actually build autonomous ships that guess what, they're really interesting because they work but what they need is they need payload they need something to put on the ship to make a theater level effect or deterrent against armed conflict what are those things? They are weapons and so we teamed up with SailDrone their autonomous ocean vehicle one they have, one they're developing And on the first one, guess what we're going to put? The Grizzly system. So we're going to put the Grizzly system and the Sanctum Community Control arrangement on these autonomous ships that we don't make and that General Dynamics doesn't make. BAE, this is a company that came out of literally nowhere that we can now use to improve the deterrent posture in the Pacific Ocean or elsewhere. And they couldn't have done it on their own. We didn't have a Ready Now product. So we married up with them, and we are deploying and testing the Grizzlies now with them. And then we're going to put something called a Mark 70 launcher, which can take a much bigger missile and put it on a sailed drone ship. And that's how we have to act now. And that's why Lockheed Martin, I think, will differentiate itself over some period of time. And these long-term agreements that we're putting in place, starting with munitions, including the one I just described this morning and could go to any other system that we make where the government agrees there's long-term demand. So we want to change the whole industry which will allow for more creativity, more advanced development by us and hopefully by everybody in our sector and also over time expanded margins because these framework agreements are designed to allow industry, if it successfully gets its cost down, to have expanded margins. The system we live in today for the most part, the annual budgeting and recontracting system, something when I came from commercial telecom back to this arena, I was reminded that if we take cost out of a program next year, our revenue and margins are going to go down. So why would you invest $10 million in a new robotic system to make your Patriot missile cheaper if you're just going to have to renegotiate your revenue margin down? With the framework agreements, that doesn't happen. And what we agreed to do, by the way, with them is if we get above a certain margin expansion, which we keep all of it, then we're going to do some, there's a profit-sharing algorithm or formula that some of it will get back to the government and reinvest it in the program. So this is much more of a commercial technology approach, flywheel, if you will, to actually make our industry better and stronger and higher margin, which allows us to invest more and the government to invest more, and we'll have more effective national defense with that. And I think this country will demonstrate, this country and this company will demonstrate that is a better way to run the national defense enterprise and the relationship between industry and government. And guess what it'll do? It'll open the doors for a lot of other companies to come in, whether they're startups or new entrants or high-tech companies. We have partnerships with Verizon for 5G, which we're developing a really cool project, which I don't have time to talk about now, but it's really cool with them and their 5G network. We have alignment with NVIDIA since, I think, 2017 on AI. Same with IBM. We're doing quantum. We just opened another out lab together in Switzerland to work on quantum. So we're working with all kinds of companies across many industries now. We want to bring that big tent to our national defense. We have a more effective national defense, and we can have higher margins. So that's what this really is all about.

Christine Lewag, Analyst — Morgan Stanley

That's very helpful, Jim. That's a very comprehensive view, and I think that's an underappreciated view of your role because sometimes the investors think, oh, you're just old Lockheed, and it seems like there's a lot of invigoration happening with a company.

Jim Taiclet, CEO

I'll give you one other little story about this, about how we're different. So we, as I said, took the straight jackets off our engineers for some of their time and energy. And, you know, Evan and I and Frank St. John, the CEO, you know, we go to factories kind of almost every week. I think one of us is there, or all of us are there. We do our executive team meetings at factories every month. So when I go to one of the plants, there's a lot of them, but I go, well, show us something we haven't seen before that's not in the LRP or, you know, a long-range plan or, you know, not on contract yet. What are you guys working on here? And so we went to Orlando, Florida. We have a missile and fire control plant there. And very proud-looking, mostly young people were at the end, and this was the show me something we don't know about yet. And that's where we first saw, this was about nine months ago, six months ago, saw Grizzly, it was there with the missiles in it, and we saw the Sanctum, mean-looking, you know, kind of microwave killing machine. And I just looked at both of them. I go, have these tested positively yet in the field with the customer? And they said yes to both. These things actually work. And I said, build 1,000 of each of them right now, and we'll figure out how to either sell them to the U.S. government or somebody else or lease them out. This is the right technology solution. This is scalable, and we're going to have a couple hundred of these Grizzlies ready to deploy by the end of the year. That's not the old Lockheed Martin, I don't think.

Christine Lewag, Analyst — Morgan Stanley

Well, you know, Jim, I think that that kind of dovetails into my next question. And it seems like, look, the U.S. government, the Department of War, wants speed, scale, agility, commercial terms on some of these technologies. So for these examples that you've highlighted, it's really clear that you're moving in the same direction with them. So can you share with us, you know, how do you think about further alignment and where you are in your journey for Lockheed to be fully aligned to this type of new business model?

Jim Taiclet, CEO

I'll let Evan speak to the financial outcomes that we were hoping expecting to come from all this but there's leadership now in the Pentagon at the very top even that has true commercial investing and operating experience and that team and we have complete alignment on how to change this relationship between government and industry and you can go back to 2020 when I came off the board at my colleague's invitation. I was on the board of directors and can come in to manage the amazing management team we have. In 2020, I did an interview with CSIS with Dr. Hamry, and I talked about all of this stuff. And out in the world, Deputy Secretary Feinberg was running his hedge fund. They have and had have for years investments in defense space, probably looking at the same issue the same way. And the fact that both of us now, or somehow here, allowed us to negotiate that first PAC-3 MSE multi-year agreement, that was his team and mine, with us there for much of it, figuring out these, they call them heads of agreement. It's basically a framework or, you know, major term sheet on how to do commercial-type contracting between the U.S. government and the aerospace and defense industry. And so the leadership is there to seize the moment, so to speak. We've been practicing for this for five or six years now, and we're really welcoming it. Now, the prior administration did get some multi-year munitions contracts through with us, which was great. But with this kind of new breed coming into the Pentagon leadership and the need, frankly, to really scale up, given the situation in Europe and also now in the Middle East, the moment was right, the people were right, and the energy was there to do it. And we do need Congress to come in for the full funding of the whole seven years, if you will, but they've already been doing two or three years so far on some of the programs we have under these long-term agreements. I do think Congress will see the value of this and the protections that we put in for the government and the upside they put in for industry, and I think they will get there. The budget process is going on now, but that isn't as important as the theme. The theme is to have a more effective defense industry, if you will, and a more effective national defense. Using the old cost-based yearly system, especially for programs that you know are going to go on for years, is suboptimal, heavily suboptimal. And now I think that the universe of people that care about these issues are starting to say, okay, this is a better way to do this, and let's get on with it. And they are getting on with it. And again, we announced yet another of these agreements this morning on something that's not even public yet. It's been developed with us and the Air Force for years, but it's not even full-rate production. So I think this is the tide where it's going, and we're going to continue to lead it because we have very big programs with very long cycles, multi-year programs of record, whether it's F-35 or Trident Missile or other things like that, we can make this industry government arrangement much more efficient, much more effective, especially given the threat environment. And the last thing I'll say because I'm a lapsed engineer too, so I'm not flying planes anymore and I really was an engineer but I have a degree, not to get you in trouble. But this is a big engineering problem that the country has. They've got escalating threat, we have an escalating threat and you pick your spot, China, North Korea, Iran, Russia, very dedicated to competing with us, I'll say. And then we have technology moving faster than it ever has in human history, both in physical and digital worlds. And then you've got more or less a fixed resource, defense budget, so to speak. I know there's, is it a billion one five? Is it a billion five? It can't get infinite. It's not going to double or triple. So the threat's doubling and tripling. The speed of technology development is doubling or tripling, but the resource is the same. And the only way to close that engineering equation is to change the system that you operate under. And that's what we've been trying to do for the last four or five years.

Evan Scott, CFO

And on the financial side, so now with the announcement this morning, we can disclose that we have signed four HOAs with the Department of War, PAC-3 and THAAD, which both have UCAs. In 2Q, we reported the full backlog of seven years for THAAD. We'll do the same in 3Q for PAC-3. PRISM, we've talked about an award next year, and we'll let the customer pace the timing of the JADMH away. But clearly, as Jim mentioned, we're very excited about partnering here. But the upside of this business model is just very clear for every party. Certainly from the Pentagon, the warfighter, they're now getting guaranteed of delivery, in a lot of cases, at a much higher volume so that they can have a surety of their long-term mission planning. From a taxpayer perspective, now you've got stable prices for a very long-term basis when in the past we've seen impacts of inflation. And for us, it really allows for long-term production planning and resource allocation. We've talked about 20 new facilities that are either new or significant additions. You can only make that kind of commitment to long-term facility planning with these long-term agreements that we partner with the customer. So really, it's a win all the way around. And, of course, for our shareholders, now you've got that true clarity in our long-term revenue while we're seeing the fastest-growing part of our business, also the highest-margin part of our business. So very positive.

Christine Lewag, Analyst — Morgan Stanley

So maybe, Evan, just following up on maybe for 2026, right? Revenue for the first half of the year looked good. Free cash flow was also good. And they've even raised them at the 2Q earnings call. But you had some margin pressure in the first half of the year. How should we think about the second half of the year margins?

Evan Scott, CFO

Yeah, so margins for 2026, we expect to be in line with our guide. Now, Q3 may not have the same number of risk retirements that Q2 or Q4 had. So you may see some lumpiness as we get to our guided margins. And if you look at our margins, it's sort of a mix of some of the headwinds from some of those programs that we talked about that create a dilutive effect across our business series. But underlying, there's very strong performance in our core programs. So as we trace through the roll-off of those dilutive programs, we see long-term margin opportunity, like Jim mentioned, because the core performance of our programs have been very, very strong. You know, you'd almost very quietly, F-35 production is one of the highest performing programs in our portfolio. And that's going to create real long-term opportunity, space, just very strong performance. And they're doing it without the benefit of ULA equity earnings. And so as we see that return to flight, we'll have some margin uplift. MFC, we talked about a little bit of dilutive pressure as we scale up, but long-term, very long margin opportunity. In aeronautics, as we deliver out the current lots of S-16 and C-130, that core performance is really strong. And then RMS, as we build out the current lots of Sikorsky, get into the multi-lots of 53K, we see a lot of margin opportunity because the core RMS is performing very, very strongly when you look at the ground radar business and the C2 business that Jim talked about earlier.

Christine Lewag, Analyst — Morgan Stanley

Great. Now, maybe diving a little bit deeper to some of the things you said, Jim. You know, the threat environment is not abating. In fact, it's getting worse. We have finite resources. So on the finite resources part, we're operating in a continued resolution environment. The fiscal year 27 budget is still uncertain. How do you operate a business where speed, agility is paramount to national security, but there's a disconnect in terms of this threatened environment and the visibility into the budget as some of these haven't really fully translated into definitive agreements or funding? How do you think about that?

Jim Taiclet, CEO

So the timing of when a budget gets approved or a CR gets released or those kind of legislative calendar type things do not affect our overall business that much because of our backlog, almost all 2017 revenue is already funded. In other words, the money's in, quote, the bank or in the treasury for essentially almost all of our 2017 expected revenue. What it does slow you down on is deploying innovation. And when I say you, I don't mean Lockheed Martin. I mean the entire enterprise. So our government official counterparts in the administration and in the Pentagon, they are working that problem hard because they want innovation faster. and they're trying to convince, you know, we agree, our legislators and senators that the cost of delays in the budget process slow them down from getting better and introducing innovation faster. At the same time, our existing programs are going to get, they're already funded. The backlog will be applied, those funds will be applied to the backlog in 2017 and into 2018 in some cases and beyond that. So our base business is in pretty good shape, I would say, even if the CR is, you know, pick how many months you think it's going to go. But we will continue to innovate and be ready, and when the funds get released for the New Start program, because New Starts and additive elements to existing programs, those are the things that actually do get delayed. We'll be ready to go in the scale. Like I said, we know. oh, I know we could probably build 5,000 of these Grizzly launchers and they're all going to sell. They might not sell in the next quarter, but in the next three years, again, we could make thousands of these things. They work. They're effective. The threat is rising. There's no efficient way to do it. This is the most efficient way to do it from a kinetic standpoint. Those are going to sell. We are not afraid to, and by the way, when you talk about low cost, these systems I'm telling you about, they're in the tens of thousands of dollars, not the tens of billions of dollars per item. So we can manage the cash flows on those kind of innovative programs because their basic cost is not that much and the development cost isn't even that much. So this is something I think we can manage, the timing of budget releases and such.

Christine Lewag, Analyst — Morgan Stanley

Super helpful. And then you guys have called out $8 billion to $9 billion of capital investment through 2030 to support increased munitions production. When you think about the puts and takes here, how should we think about the financial impact where you've got this CapEx investment, or some of them not necessarily CapEx, but other parts of investment? How do we think about this translating into accelerated revenue growth multi-year? How do we think about margin trajectory for the enterprise and also ultimately free cash flow?

Evan Scott, CFO

Yeah, so if you think about the $8 to $9 billion, the largest piece of it will go where you'd probably expect the capacity, the new facilities, the new tooling to really ramp up capacity. There are two other key elements to that, though, that are important. One is the obsolescence planning to ensure that we don't have any obsolescence items that pop up maybe into year five that would slow us down, and then building additional capacity and second sources at that mid-tier level, the true resiliency in a production line that prevents any kind of stops because once we're on, we're on with a set schedule at a set price, and we're off to the races. So this upfront investment ensures not only a production scaling, but production resiliency. And the nice thing about the $8 to $9 billion, that is just at the Lockheed Martin level. That cascades down to our next-tier suppliers, and this is unlocking true investment into the true scale of production across the whole industry. From a financial standpoint, the nice thing is we have the cash neutrality treatment as part of these HOAs. so we're able to protect the cash flow out in the near term as we convert to deliveries and start seeing cash flow accretive, and it's turning into revenue right away because we are off to the races. Despite them being UCAs, we have the full authorization for the seven years on PAC-3 and THAAD, so we've begun as fast as we can to scale. So you'll see the revenue side of that immediately in our business.

Jim Taiclet, CEO

That's right. And just going back to first principles on these agreements, the ones that were cited a minute ago by Evan were tripling the volume of annual pack 3 production tripling it were quadrupling the fad production so those are just two examples of wow these are major business they're not like 20% more than last year these are we're saying by the end of 2017 will have built 2,000 next year. I mean, that's the rise here. When it also comes to PAC-3, there is significant international demand. And right now, the U.S. government is parsing out, as they always do, for foreign military sales, who gets what. Well, if we've got them coming out the end of the factory, that whole demand is going to be able to absorb it. So we're actually targeting more than $2,000 a year because the $2,000 doesn't count the Navy putting PAC-3 MSCs on ships using our Aegis system, which is happening, starting to happen for real now. It doesn't count all that latent external international demand either. So we expect more than tripling per year, and we've just got to get there operationally, and it does take time. But this munitions ramp up, as we call it, will change basically the apportionment of revenue of the entire company of Lockheed Martin, so to the good. Other things are going to continue to grow, too, but this munitions ramp up is significant. The other thing that I want to reference that Evan alluded to is our supply chain is almost always the constricting issue. It's not Lockheed Martin labor. It's not Lockheed Martin process or factory space or anything like that. we can put together anything at almost any volume if we have all the parts. And those middle-tier suppliers, they are almost always, no offense to the problem, some of our competitors are sometimes the problem, too. We won't identify those. But, you know, our supply chain is our biggest risk factor in production scaling. And so what I try to remind my government colleagues is, remember, you know, You've got Northrop and General Dynamics, et cetera, et cetera, like E. Martin, major portions of our business, 50%, 75%, 80%, 90% are defense through you, the Pentagon leadership. All of our suppliers, maybe it's 5%, 10% if you're lucky. They're making capital allocation decisions and employment decisions, and when they get a seven-year subcontract from us, You know, like the scales fall from their eyes. They go, okay, I got seven years of triple production of my part that's going to go into those Patriot missiles. I'm going to invest in that right now because I got the best credit in the world backed up by, you know, investment grade OEM. I now am comfortable putting that $10 million into some automation that I was never going to do before, a small part of my business, annual contracts. I wasn't going to do it. Now they'll do it. I think this flywheel effect here is going to be very good.

Christine Lewag, Analyst — Morgan Stanley

So maybe with the interest of time, like Jim, one last question for you. What big problem are you spending most of your time on right now?

Jim Taiclet, CEO

Making sure that we can drive autonomy and AI appropriately and effectively into all those mission technology roadmaps. I'm in the factory a lot with the gang, but I'm also out at technology conferences. I have a lot of relationships from my prior company, and they all want to contribute. I mean, literally the CEOs want to contribute to what we're doing. We have access to some of the best technology in the world. It's completely outside the A&D space. And us optimizing that and making bets like our Vectis, which is we're designing and building a CCA. It's as big as an F-35. Remember, range, payload, survivability. It's got stealth. It can carry significant amounts of weapons. It can go quite far. Smaller ones are interesting, but if you want to go penetrate the PRC, you need to have F22s, F35s, B2s and 21s, and these things, something like the Vectis. And by using the best AI that we can get a hold of, the best autonomy software that we can partner or write ourselves, which we are doing and integrating into the F35, that Vectis, like as we speak, I think we can really be the leader here.

Christine Lewag, Analyst — Morgan Stanley

Well, great. Well, thank you very much, Jim. Thank you very much, Evan. This concludes our presentation on Lockheed Martin.

Jim Taiclet, CEO

Thank you. Thank you, everybody.