Lockheed Martin builds the weapons, aircraft, missiles, and satellites that the United States and its allies use to defend themselves. The company earns money by winning long-term contracts with governments, then spending years designing, building, and supporting whatever those contracts require. Its four divisions are Aeronautics (fighter jets like the F-35 and F-22), Missiles and Fire Control (weapons like Hellfire missiles and THAAD air defense systems), Rotary and Mission Systems (Black Hawk helicopters and radar systems), and Space (satellites and ballistic missiles). In 2025, 72% of its $75.0 billion in sales came from the U.S. Government, with the rest from allied nations. The diagram below traces where the money goes.
How Lockheed Martin Makes Money
flowchart TD
A["U.S. Government and
Allied Customers"] -->|"$75.0B Revenue"| B["Four Business Segments"]
B --> C["Products: Aircraft,
Missiles, Helicopters, Satellites"]
B --> D["Services: Sustainment,
Training, Logistics Support"]
C -->|"$62.7B"| E["Operating Cash Flow
$8.6B annually"]
D -->|"$12.4B"| E
E --> F["R&D Investment and
Capacity Expansion"]
F --> G["Advanced Technologies:
AI, Autonomy, Hypersonics"]
G --> H["Enhanced Product
Capabilities and Performance"]
H --> C
F --> I["Production Scale-Up
and New Programs"]
I --> C
A -->|"New Contract Awards"| I
H --> A
Five years of financial data tell a story of steady growth in revenue paired with a troubling squeeze on margins. Revenue climbed from $67.0 billion in 2021 to $75.0 billion in 2025. That is real growth. But the gross margin, which measures how much the company keeps from each dollar of sales after direct costs, fell from 13.5% in 2021 to 9.8% in 2024 before recovering slightly to 10.2% in 2025. That drop means costs are rising faster than prices, and the gap matters a lot.
Revenue vs. Gross Margin (2021 to 2025)
Gross margin percentage each year. Revenue grew, but the share of each dollar kept after direct costs has fallen sharply since 2021.
The margin pressure comes from several places at once. Supply chains have been slow and expensive. Inflation raised material costs. And the company took large losses on contracts where the price was fixed before costs were fully known. The biggest single blow came in the second quarter of 2025, when a classified aircraft program caused a loss of $1.6 billion, dragging down the Aeronautics division's operating profit from $2.5 billion in 2024 to $2.1 billion in 2025.
What is a fixed-price contract?
On a fixed-price contract, the company agrees to deliver something for a set amount of money. If it costs more to build than expected, the company absorbs the loss. The government pays only the agreed price. These contracts are common in development programs where costs are hard to predict.
Free cash flow, the actual cash left over after paying to run and invest in the business, also declined. It was $9.2 billion in 2021 and dropped to $7.0 billion in 2024 before recovering to $8.6 billion in 2025. At the same time, net debt, meaning total debt minus cash on hand, rose from $8.1 billion in 2021 to $18.7 billion in 2025. The company has been spending more than it earns in cash, partly to expand production and partly because it took on new debt.
Net debt more than doubled in four years as production expansion and classified program losses put pressure on the balance sheet.
The one number that offers some reassurance is the backlog. At the end of 2025, the company had $193.6 billion in backlog, meaning customers have already committed to pay that amount for future work. That is more than two and a half years of revenue at the current pace. About $120.2 billion of that is fully funded, meaning the money has already been approved and set aside.
$193.6B
Total order backlog at end of 2025, up from $176.0B a year earlier
Geopolitical tensions in Europe, the Middle East, and the Pacific have pushed governments to spend more on defense. Lockheed Martin says it is actively expanding production capacity to meet that demand. The Missiles and Fire Control division, which makes weapons like JASSM and LRASM that have been heavily used in conflicts, grew sales from $11.3 billion in 2023 to $14.5 billion in 2025. That is the fastest-growing part of the business right now.
2025
crisis
Classified program delivers $1.6 billion loss
In the second quarter of 2025, Lockheed Martin recognized a large reach-forward loss on a secret aircraft development program. The company's CEO described the program as 'magical' and said it would reshape aerospace, but also acknowledged that the public will not learn what it is for years because it is classified. The loss contributed to net earnings falling from $5.3 billion in 2024 to $5.0 billion in 2025, despite higher revenue.
Now consider the specific risks documented in the company's own filings. The F-35 fighter jet alone accounts for 27% of total sales. If that program were slowed, cut, or disrupted by cost overruns or software problems, the financial impact would be immediate and severe. More than 800 software defects were reported in the F-35 in the early 2020s, and the program requires constant modernization work. A single program representing more than a quarter of revenue is a concentrated exposure.
27%
Share of total 2025 sales from the F-35 program alone
What are rare earth minerals and why do they matter here?
Rare earth minerals are a group of metals used in electronics, sensors, and precision weapons. Most of the world's supply comes from a small number of countries. Lockheed Martin uses them in many products. If access to these minerals is restricted through trade rules or geopolitical events, production could slow or costs could rise sharply.
Beyond the F-35, the company faces supply chain risks tied to rare earth minerals and critical components. Tariffs imposed in 2025 alone hit cash flows by approximately $485 million during the year. The company believes much of that will be recovered over time, but the timing is uncertain. Export restrictions also threaten the international business, which made up 28% of 2025 sales. The Turkish Utility Helicopter Program was already affected by U.S. sanctions limiting export permits. China sanctioned Lockheed Martin multiple times over weapons sales to Taiwan, adding another layer of political risk to international operations.
The company earned $8.6 billion in free cash flow in 2025 while paying interest of $1.1 billion on its debt. As net debt approaches $18.7 billion, interest costs will continue to grow, quietly reducing the cash available for everything else.
The company's entire financial model depends on the U.S. Government continuing to approve and fund large defense budgets year after year. In 2025, 63% of all sales came from the Department of Defense. Congressional budget fights, continuing resolutions, and shifting political priorities can all delay or reduce funding. The company has no meaningful ability to replace that customer base if priorities change.
63%
Share of 2025 sales from the U.S. Department of Defense
The Bet
Lockheed Martin's financial logic holds together only if U.S. defense budgets stay large and grow over time, and if the company can bring its cost structure under control on the fixed-price development contracts that have been eating into margins. The backlog of $193.6 billion locks in future revenue on paper, but the profitability of that backlog depends on executing complex programs without the kind of cost overruns that caused the $1.6 billion classified program loss in 2025. If fixed-price contracts keep producing large losses, and if Congress trims defense budgets, the revenue growth the company has achieved would not translate into the earnings and cash flow that service a $18.7 billion net debt load.
Open question
Revenue is growing, the backlog is at record levels, and geopolitical demand for Lockheed Martin's products is rising. But gross margins have been falling for four straight years, net debt has more than doubled since 2021, and a single classified program wiped out $1.6 billion in profit in one quarter without public explanation. Can Lockheed Martin recover its margins and manage its debt load while simultaneously expanding production, absorbing losses on complex classified programs, and depending on a single government customer for nearly two-thirds of its revenue?
Compiled · 10-K · FY2025
Government Contract Dependency
The company gets 72% of its sales from the U.S. Government, with 63% from the Department of Defense. If Congress cuts defense spending, delays funding, or shuts down the government, the company could lose major contracts, face payment delays, or have programs cancelled.
F-35 Program Risk
The F-35 fighter jet program is the company's largest business, representing 27% of total sales. Problems with the aircraft's performance, software, costs, or schedule, or decisions by the U.S. Government or international partners to cut spending on this program, could severely damage the company's financial performance.
Fixed-Price Contract Risk
The company takes on significant financial risk with fixed-price contracts where it receives a set payment regardless of actual costs. If production costs, technical challenges, or supply chain issues cause expenses to exceed estimates, the company absorbs the losses and sees reduced profits.
Supply Chain and Rare Earth Minerals
The company relies on suppliers for critical materials, including rare earth minerals used in many products. Global supply shortages, tariffs, trade restrictions, and single-source suppliers create risks of production delays, increased costs, and inability to meet customer delivery timelines.
International Sales and Export Controls
The company's international business (28% of sales) faces risks from U.S. export restrictions, foreign policy changes, and sanctions. For example, U.S. sanctions on Turkish entities have limited the company's ability to obtain export permits for the Turkish Utility Helicopter Program, threatening contracts and future sales opportunities.
10-K Item 1A · Risk Factors
