Good day, and welcome everyone to the Lockheed Martin 4th Quarter and Full Year 2016 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Stephanie, and good morning. I'd like to welcome everyone to our Q4 2016 Earnings Conference Call. Please join me today on the call are Marillyn Hewson, our Chairman, President and Chief Executive Officer and Bruce Tanner, our Executive Vice President and Chief Financial Officer. Statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ.
Please see today's news release, our SEC filings and Chart 2 in the web charts for a description of some of the factors that may cause actual results to vary materially from anticipated results. As noted, we have posted charts on our website today that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Marilyn.
Thanks, Greg. Good morning, everyone, and thank you for joining us on the call today. All of us here hope your New Year is off to a good start. Let me begin by saying that I am extraordinarily proud of our Lockheed Martin team. Their dedication and focus enabled us to achieve outstanding program and financial performance during a dynamic year of transition, and I want to thank them for their efforts.
Our performance as a corporation allowed us to exceed all of our full year goals and has positioned us for future growth and to continue to deliver value to customers and stockholders in 2017. While Bruce will cover the financial results in detail a little later, I want to highlight a few noteworthy 2016 financial accomplishments from my perspective. 2016 was an exceptional year of achievement with all of our financial metrics exceeding our expectations and in the case of sales, earnings per share and cash from operations exceeding our previous historical high watermarks. I was especially pleased with our performance and maintaining our focus on new business wins and building backlog. We received almost $19,000,000,000 in order bookings in the 4th quarter, which resulted in our achieving a quarterly book to bill ratio of 1.4 and a year end backlog of over $96,000,000,000 This represents over $1,000,000,000 increase from 2015 year end levels and reflects the broad demand for our products from both domestic and international customers.
Significant awards included $7,200,000,000 for our F-thirty five LRIP10 undefinitized contract action agreement, a 1 point $5,000,000,000 award for PAC-three missile defense capabilities for the United States and Allied Military Forces and $1,200,000,000 from the Republic of Korea Air Force to upgrade 134 of their F-sixteen aircraft. Sorry for the interruption there. Not here in our room. Our strong and growing backlog has positioned us to deliver expanding sales levels and outstanding financial results as we move forward. Another area where we are it sounds like somebody is not on mute.
Let me just continue. Another area where we were successful was our strategic focus on cash and cash deployment. In 2016, We generated nearly $5,200,000,000 in cash from operations, reflecting the commitment and focus of our team in executing on contracts for our customers on a daily basis, and we expect to exceed our initial 3 year $15,000,000,000 commitment we originally laid out in October of 2014 by $1,000,000,000 This strong cash generation also enabled us to continue our long standing cash deployment strategy. In 2016, we returned 100% of our free cash flow to stockholders through our competitive dividend and ongoing share repurchase activity. Keeping with cash deployment, Our 2016 share repurchases exceeded $2,000,000,000 and coupled with the shares retired earlier in the year as part of our divestiture of the IS and GS business allowed us to reduce our year end outstanding share count to below our target one full year ahead of our stated goal.
These achievements reflect our ongoing commitment to perform with excellence for our customers and stockholders. Looking beyond 2016, our 2017 guidance outlined today shows that we are expecting solid organic growth and continued strong cash generation. And Bruce will provide a detailed review of the guidance and assumptions in his comments and web charts. I'd like to turn now to the status of DoD budgets. Currently, the DoD is operating under a continuing resolution through April 28 for fiscal year 2017, with funding constrained to prior FY 'sixteen levels.
While this will cause funds to be limited for certain DoD programs and likely delay expansion in others, we do not believe our 2017 sales, earnings or cash flows will be affected by this delay and receiving the full appropriations bill. We forecast that prior year's appropriation levels will support our current plans as our broad portfolio of long cycle programs remains well aligned with our customers' needs. Further support for this conclusion is that the continuing resolution also allows for a limited set of exceptions, which include the ability to additionally fund 2 of our programs: advanced procurement for a new multiyear Black Hawk helicopter contract and sufficient funding to maintain the Orion Multipurpose Crew Vehicle program launch capability and schedule. While we believe the possibility of a full year CR still exists and would not be in the nation's best interest, We are hopeful that a resolution can be reached to maintain our country's readiness and strength. Separately, the 2017 National Defense Authorization Act was signed into law last month and reflected bipartisan agreement that defense budgets should not return to amounts defined by the Budget Control Act or sequestration levels.
I am personally encouraged by that fact that there is recognition from both parties that global security threats are not decreasing and that in fact we do need to continue to put resources toward our national security and our interoperability with our allies around the world. We look forward to the upcoming submission of the new administration's budget proposal and continued congressional support for a strong defense and future recapitalization actions, both in FY 2017 and beyond. We look forward to working with the new Pentagon team as we collectively look to provide our armed forces with the capabilities needed to perform their crucial missions. I would like to continue my remarks with a few highlights from the Q4 that illustrate the continued upward momentum we have in our operational performance as we deliver daily on the commitments to our customers. Starting with the F-thirty 5 Joint Strike Fighter, We delivered 16 aircraft in the 4th quarter, including the first planes for customers beyond our original 8 partnered nations, Japan and Israel.
These countries represent our 9th and 10th international customers and along with South Korea show building international interest and the capabilities of this remarkable plane. In November, Luke Air Force Base welcomed the arrival of its first foreign military sale or FMS aircraft as Japan took ownership of its first F-thirty 5, where it will be used to train an elite cadre of Japanese air self defense pilots and maintainers. In December, I traveled to Israel to attend the delivery ceremony for the first pair of Adir F-thirty 5 Stealth Fighters for the Israeli Air Force. The IAF has embraced the technologies and capabilities of this 5th generation fighter and believe it will become a powerful accelerator for their entire Air Force. Also during the Q4, our F-thirty five backlog grew as we received an undefinitized contract for LRIP10, which added 90 planes to our flow.
This brings our total F-thirty five orders to date up to 373 planes. Just as significantly, Our 2016 deliveries of 46 jets brought our total deliveries to 200 aircraft at the end of 2016. We expect 2017 to be another inflection point in our production cycle as we now anticipate delivering 66 planes, an increase of over 40% from our 2016 level. As many of you know, I had the opportunity to meet with President Trump on two occasions prior to his inauguration to discuss our F-thirty 5 Joint Strike Fighter program. We, along with our partners, share his strong interest in producing this unparalleled aircraft at affordable prices for our war fighters and taxpayers.
We believe we are on this path, and I'd like to take a moment to give you a quick status of the program. At this time, I'll ask you to turn to the 3rd page in the web charts that we have provided. This chart depicts the F-thirty 5A model per unit price, which is the conventional takeoff and landing or CITOL variant. The chart also depicts the F-thirty five program order quantities. The bar graph portion of the chart shows our historical and projected orders.
You will also observe a dark descending line on the graph, which shows the per unit price of our Cetol variant in each LRIP, as notated by the axis on the right. You can see from our latest status on LRIP 9, our current F-thirty 5A is now around $100,000,000 a piece and drops below $100,000,000 for LRIP10. The LRIP10 price as currently proposed which represent a reduction of over 60% from the first LRIP 1 aircraft, and this demonstrates a learning curve as efficient as any achieved on any modern tactical fighter aircraft. The chart also includes a red dotted line, which represents the Government Program Office's annual budget estimate to Congress of the F-thirty five A unit price. This selected acquisition report or SAR is submitted annually to Congress As part of the yearly budgeting process in advance of our contract negotiations for each lot.
As you can see, We have had 8 consecutive years of achieving settlement unit prices below the internal government expectations, showing our ongoing commitment to producing this aircraft with increasing affordability. You will also see the rapid ascent and quantities on the chart. It is with this anticipated trajectory in production that we can continue to see the efficiencies in touch labor, manufacturing techniques and supply chain operations that we project will allow us to meet our stated goal of offering the Cetol version for $85,000,000 by 2019. We believe this will result in the best combination of capability and price of any aircraft ever offered, while at the same time growing valuable job opportunities for our American workforce. Turning to our Space Systems business area, I'd like to highlight another example of one of our innovative products and the benefits that can be derived from our long term commitment to technology, our customers and their missions.
In November, we successfully delivered the Lockheed Martin built GOES R satellite to Cape Canaveral Air Force Station in Florida. The spacecraft was launched on a United Launch Alliance Atlas V Rocket and placed into geostationary orbit 22,000 miles above earth as the first of 4 in a next generation weather satellite constellation. We are excited to be leading the GOES R program, a collaborative mission between NASA and NOAA, which will provide major improvements to quality, quantity and timeliness of critical weather data. This constellation will improve the detection and observations of meteorological events that directly affect public safety, protection of property and ultimately Economic Health. I'm especially pleased that the company's Advanced Technology Center in Palo Alto, California contributed key instrumentation that will fly aboard each spacecraft, including the Geo Stationary Lightning Mapper or GLM.
The GLM will take hundreds of images every second, mapping lightning activity on the earth's surface and in the atmosphere. Scientists are hoping to use data from the GLM and GOES R satellites to provide citizens and public safety officials early warning of severe storms and tornado activity. Finally, I'd like to take a moment to congratulate our Sikorsky team for delivering the 1,000th H-sixty ms Black Hawk helicopter this past quarter at a ceremony in our Connecticut facility. This version of the Black Hawk, dating back to 2,007, has been consistently enhanced with more powerful engines, improved airframe and modern avionics, and it is a key element of the Army Aviation Modernization Plan. The Blackhawk has been noted as the workhorse of Army Aviation and including the entire Blackhawk family, Sikorsky has delivered over 4,000 Blackhawk helicopters, which have flown over 9,000,000 flight hours.
We are honored to be part of this heritage and look forward to continuing this proud legacy. In closing, as I reflect back on our accomplishments over the past year, We completed our strategic actions to better align the business for operational and financial success and long term value creation. We increased sales, grew our backlog and had strong cash generation, while continuing to perform with excellence for our customers. Looking to the future, I am enthusiastic about our Corporation's broad portfolio and the growth opportunities that it provides, both domestically and Internationally. I'll now turn the call over to Bruce to review our financial performance in more detail, outline our 2017 financial guidance, and then we'll open up the line for your questions.
Thanks, Marilyn. Good morning, everyone. As I highlight our key financial accomplishments, please follow along with the web chart included with our earnings release today. My remarks begin on Chart 4 and an overview of our financial results for the year. Before discussing our 2016 financial results, I want to provide an understanding of the material weakness in internal controls that we described in our earnings release.
This material weakness relates to a number of deficiencies in internal control over financial reporting and is limited to Sikorsky only. While we've not discovered any material errors in the financial results included in our earnings release today, our reviews of the internal control and IT related controls over financial reporting at Sikorsky indicated a reasonable possibility
that a
material misstatement could have occurred but would not have been prevented or detected on a timely basis, which is enough to determine that a material weakness in those internal controls exists. That finding in turn triggered a more thorough review of Sikorsky's financial statements to determine whether or not that potential for a misstatement led to an actual material misstatement in our consolidated financial statements, and at this time, we have not found that to be the case. We expect to have completed our analysis Sikorsky's financial statements when we filed our Form 10 ks in February. Thereafter, the remediation process will continue as we'll have to correct and then test the remediated controls over several reporting cycles. We'll provide updates on our progress as we file our Form 10 Qs in 2017, and we expect that the remediation will be completed prior to the end of fiscal year 2017.
Moving on now to our 2016 results. Overall, we finished the year a little stronger than the outlook we provided to you in the October call. We attained the highest sales, earnings per share and cash from operations that we've ever achieved. We continued our track record of returning substantial cash to our stockholders And we grew backlog to more than $96,000,000,000 significant given the strong sales volume in the year. So overall, we're very pleased with our results for 2016 and we think this positions us well as we enter 2017.
I'll add that it's also nice for me and perhaps for you as well to have the many portfolio shaping activities that occurred during the year behind us, hopefully making it easier to both explain and follow the results of the company going forward. Turning to Chart 5, we compare our sales and earnings per share in 2016 versus 2015. Sales were nearly $7,000,000,000 higher this year compared with last year and most of that growth came from having a full year of Sikorsky performance and results of RMS 2016 versus less than 2 months in 2015 and significant organic growth in aeronautics driven by the F-thirty 5 program. Earnings per share grew by 25% over last year's level, driven by higher segment operating profit and FASCAS adjustment, The benefits of a lower tax rate and a lower share count due to share repurchases in the year and the results of the share reduction associated with the IS and GS divestiture. Within the 2016 results, we also had the benefit of recognizing the book gain resulting from obtaining a controlling interest in the U.
K. Chart 6 shows our actual cash from operations generated in 2016 and our outlook for 2017. During the October call, we discussed that our cash projection in 2016 had significant variability in it, driven by about $700,000,000 in F-thirty five collections that could have been received in either 2016 or 2017, And we sized our 2016 cash from operations at $5,000,000,000 or $5,700,000,000 We also said that if the $700,000,000 was not received in 2016, it would simply be added to our outlook for 2017, resulting in a 2 year outlook for cash from operations of greater than or equal to $10,700,000,000 As it turns out, we did not receive the $700,000,000 in collections in 2016, but we did generate $5,200,000,000 cash from operations even without those collections. And we are keeping our 2017 outlook at the $5,700,000,000 level, resulting in a 2 year outlook of greater than or equal to $10,900,000,000 or $200,000,000 more than we said in October.
If you'll
turn to Chart 7, we'll discuss the amount of cash we returned to stockholders in 2016. With our cash from operations of around $5,200,000,000 and capital expenditures of almost $1,100,000,000 our free cash flow in 2016 was a little more than 4 $100,000,000 And with $2,100,000,000 of share repurchases and $2,000,000,000 of dividends paid, We returned 100% of our free cash flow to stockholders last year. On Chart 8, you can see how our consistent focus on returning cash to our stockholders have resulted in a significant reduction in the number of shares outstanding. We reduced our shares outstanding by 36% from our peak share count level of 456,000,000 shares in 2,002, and we achieved our goal of reducing outstanding shares to below 291,000,000 shares 1 year earlier than our target date. As a reminder, we anticipate $2,000,000,000 of share repurchases in 2017.
Chart 9 provides our 2017 outlook. Our sales guidance is between $49,400,000,000 $50,600,000,000 and our segment operating profit range is between $5,015,000,000 $5,135,000,000 Our FASCAS adjustment is $880,000,000 for 20.17 and we'll discuss this in more detail on the next chart. Our earnings per share are expected to be between $12.25 $12.55 and our cash from operations is expected to be equal to or greater than $5,700,000,000 as we discussed earlier, This represents a good start to achieving the goal we established in October of generating $15,000,000,000 or more of cash operations during 2017 to 2019. On Chart 10, we compare FASCAS adjustment outlook that we provided in October with what we're providing now. In October, we expected an adjustment of $800,000,000 Since then, interest rates increased, causing our discount rate to increase to
the 4.125%
level by year end, 50 basis points higher than we projected in October. The increase in discount rate increased our FASCAS adjustment for 2017 by $240,000,000 And we lowered our outlook for the long term return on our pension assets from 8% to 7.5%, recognizing the downward pressure on the equity and fixed income asset classes in our trust. Lowering the long term return on assets lowers our FASCAS adjustment in 2017 by $160,000,000 partially offsetting the increase resulting from the higher discount rate and netting to a FASCAS adjustment of $880,000,000 for 20.17. Chart 11 provides our sales and segment operating profit outlook ranges by the 4 business areas. I recall a briefing we gave in New York City at the end of 2,006 where we said that the aeronautics business area would grow from Happened since that time, reaching $20,000,000,000 in 2017 still feels like a nice accomplishment for our aeronautics team and has enabled us to forecast 2017 revenue of $50,000,000,000 at the midpoint of our guidance.
And finally, we have our summary on Chart 12. We achieved exceptional performance in 2016. We continued our cash deployment and generated strong returns for our stockholders, and we completed our portfolio shaping actions, which we believe positions us for the continued long term value creation. With that, we're ready for your questions. Stephanie?
Thank
16.
Question. Our first question comes from Cai von Rumohr with Cowen and Company. Your line is open.
Could you basically update us in terms of where you are in your negotiations On LRIP10 and whether you intend to basically take any legal action in terms of the way the EUCA of LRIP 9 was determined. Thanks for
the question, Kai.
I'll take that on. And Bruce, if you have anything to add, you're certainly welcome. On LRIP10, we are very close to a deal as some of you may have seen in the media. I expressed that After my discussions with President Trump recently, we're very close to a deal that would allow us to Close LRIP10 in the near term. And so I expect that will be very soon.
On LRIP9, Basically, we're not under any pressure to do anything further on El Route 9 at this point. We are just going to continue to look at our options on El Route 9. Anything you want to add Bruce?
No, I think that captures it, Marilyn.
Thank you.
Our next question comes from Ron Epstein with Bank of America. Your line is open.
Yes. Hey, good morning, guys. When we think about modeling the program, the F-thirty five program as we go out Over the next several years, I mean one question I get a lot from investors is how should we think about the margin profile? I guess I guess what I'm asking is one of the fears is on Lot 10 pricing. I mean, are we going to see a margin step down or I mean, you give us a broad way to think about the margin progression of the program?
Ron, I'll take a shot at that. So the way I think of it, Ron, we've given, I think, a very consistent speech for a number of years about our expectation that the F-thirty five program We'll have sort of sequential year over year margin improvement, up to the point that probably we reach full rate production at which point it ought to look a lot like other production programs at that sort of same stage of their lifecycle. And at least as I look, and with the expectation of where I think the agreement on LRIP10 is going to come out. I don't think we would deviate from that discussion at this point in time. And just To put it in some perspective, I think of F-thirty 5 from 2016 to 2017, the margins that we're expecting in between those two years is probably Growing 90, not quite 100 basis points year over year.
And I think that's going to happen With the results that we expect to attain on the LRIP10 negotiation and thereafter I would expect that we would continue to have some margin improvement, maybe not as high a rate as we experienced from 2016 to 2017, but still have sequential increase in margin after the full rate production programs as we've talked about in the past.
Our next question comes from Rich Safran with Buckingham Research. Your line is open.
Marilyn, Bruce, Greg, good morning. I have a question on Brexit and international. So one fallout, potential fallout from Brexit is the impact on the UK defense spending. Just wondering if you've had any discussions with the British government on this topic. Do you expect much of an impact?
And on the topic of international, can you give us an On discussions you're having with the international customers, for example, how they're viewing the change administration? Are you expecting a continued step up in international demand? Is there any change in emphasis on direct versus FMS that sort of thing?
Thanks for the question, Rich. I'll just start with the Brexit question. In terms of U. K. Defense spending, I haven't had any impact input from the U.
K. MoD that they're going to move off of their strategic defense plan. They have strategy and their normal review that they will continue to spend on their defense spending. So we haven't seen any impact from that. No indication that that's going to change.
I think Just like most countries, the national security is 1st and foremost for them, and so they're going to continue to focus on that. In terms of other international customers and any reaction to the change in administration, I frankly haven't had any dialogue back from that as well. As we bring in we have an orderly transition of power in the United States of America, we have new leaders in the administration. They each have different policies they might put forward, but it hasn't impacted our demand for our international products. A lot of our growth in the international marketplace is in the F-thirty five, it's in missile defense, it's opportunities for F-sixteen and C-one hundred and thirty J, opportunities for C-four ISR, space awareness, things of that nature and that continues there continues to be a demand for those.
And as I as we Continue to move forward in dealing with our international customers. We're not seeing any retrenchment at all.
Rich, you asked about the FMS and or direct commercial sale and whether there's any discussions about potentially changing that or not. My suspicion is that's not high on anyone's agenda list at this point in time and I wouldn't expect to see Any sort of policy changes towards that. Just to put it in some perspective as we've talked about in the past, we would expect our FMS percentage of our international sales to grow and our direct commercial sale percentage of our international business to shrink over time, primarily simply because of the F-thirty five program. I mean that program is a long way from ever having the ability to sell any on a direct commercial basis and essentially all the international customers and all the growth that you're going to see from those international customers and the program going forward is And the same thing frankly is happening with our THAAD program, which is another large international grower. So That's sort of squeezing out, if you will, the actual direct commercial sale.
But actually direct commercial sale business isn't shrinking In absolute terms, all that much, but the percentage is reducing because of what I just described.
Our next question comes from Robert Salyard with Vertical Research. Your line is open.
Thanks, Raj. Good morning.
Hey, Ralph.
Marilyn and Bruce, your comments on the F-thirty five program essentially seem to suggest that Nothing is really changing, but in the press, we seem to see the DoD and the President taking a more aggressive stance. Is there a chance you're being too optimistic on this and the actual pricing on Lot 10 and beyond and the margin could be lower than you expect?
Let me take that on since I've been in a lot of those discussions with President Trump. Let me just kind of frame it for you. I've tried to express after those meetings some overview of the meetings themselves, but I'd just give you a little bit more color on it. And basically, President Trump Recognizes that the F-thirty five is a very large program. It's the largest program in the Department of Defense.
He wants to make sure that The American taxpayer is getting the lowest possible cost on the program. And we share we understand his concerns about affordability. We certainly share that. The meetings We've had have been very productive, very good dialogue. He asked excellent questions and he's really focused on making sure That the cost comes down on the program.
And it's not about slashing our profit. It's not about our margins when we have those discussions. It's about how do we get the cost of the aircraft down today and in the future. So I have welcomed the opportunity to talk to him because it gives me an opportunity to share with him what we have been doing In terms of bringing the cost down, as you saw in the chart that we put in our deck today, that we have been driving the cost down on the program, that we have as ourselves and our industry partners in what's called blueprint for affordability and we are moving forward on a sustainment cost reduction initiative so that we can continue to take cost out of the supply chain, to take cost out of our manufacturing and producibility and materials we use as we've moved along on this program. And as we've done that, I've also had the opportunity to share with him Things that the Department of Defense can do, and how they might buy the aircraft differently in the future that would help continue to drive the cost down.
He You welcome that discussion. The other thing that's very important that I'm happy to have had the opportunity to chat with him about is The capabilities that the F-thirty five brings to our men and women in uniform. I mean, it's basically a game changer. It brings for our country, for our military as well as for our allies around the world, unmatched capability, absolutely unmatched. And recognizing that his focus is on how do we drive the cost down aggressively.
And we I think we're That's along with our industry partners are right in line with him on doing that. We've got a lot of ideas on how we can do that in the future. In the meantime, we will continue on the current negotiations to come down that curve that you saw on the chart that we shared with you to continue to drive the cost down.
Our next question comes from Hunter Keay with Wolfe Research. Your line is open.
Thank you. Marilyn, just a follow-up to that last statement you made on the sustainment costs. Are you talking about an incremental initiative here To reduce maybe some of the sustainment spending or is there maybe an opposite way to think about that, that As you manage this program for the next 10 to 15 years for Lockheed that you can lower the unit cost, but perhaps maybe recoup some of those upfront unit cost savings for DoD with actually higher sustainment revenues for you guys further down the road. How are you thinking about that balance?
Well, first of all, what I was discussing was the sustainment cost reduction initiative. Just like on Blueprint for Affordability, which focused on production cost. We along with Norfolk Government and BAE committed some investment upfront to help With getting projects underway that will continue to drive the cost down in production, we've similarly invested upfront to support the U. S. Government in driving sustainment costs down in the near term over the next 5 years to drive that cost down.
So That was what I was referring to. Now your question about sustainment itself, I mean, we do look at these programs in terms of their overall life cycle cost, which is not just the development and production, but it's also sustainment. And our goal is that the overall cost for the program would continue to come
down. Hunter, maybe just to add one thing from my perspective and just to make sure that we're all clear on this. Sustainment is going to grow in the future. It has grown very significantly in the last few years as the Aircraft is being based at various locations around the U. S.
And soon to be internationally as well. So there's no doubt that sustainment will grow and the Lockheed Martin contribution towards that sustainment will grow into the future. This is about just doing sustainment smartly and doing it as economically as we can. But even if we do it as economically as we We're still going to see some pretty significant sustainment growth in the future.
Our next question comes from Sam Perlstein with Wells Fargo. Your line is open.
Good morning.
Q1. You can talk
a little bit about the backlog being $96,000,000,000 I was wondering if you could talk a little bit about what your expectations are for 2017 year end backlog and maybe highlight some of the key orders you are looking at. There was some international fad that didn't happen in 2016 and just You can talk a little bit about some of the key orders to watch.
Yes. So thanks, Sam. There's As we look at 2017, in all likelihood, we're probably going to see a little bit of degradation In backlog, I would think maybe a couple of $1,000,000 or so for the year. Some of that is obviously dependent on there's a couple of Fairly good sized competitive awards in 2017 that may or may not happen or may or at least may or may not happen in the year. And in fact, we may or may not win some of the proposals, if you will.
The biggest drivers we've got in terms of orders and sort of keeping the backlog level as to where it is today or a little bit less than where it is today. You should think of that the ongoing advanced funding for the F-thirty five program. So very early in the first half of this year, we should start receiving advanced funding for The LRIP 12 aircraft, which will be a pretty good size increase in terms of the absolute number of aircraft over LRIP 11. As we just talked about with Hunter, the sustainment and spares funding to support the bases around the country and the globe is going to be increased in the first half of the year. We should start seeing additional GPS Three satellite orders first half of the year and probably finalize the Hellfire order that didn't quite get finished last year And I expect that will take place early this year.
The really big orders in the year are the LRIP 11 definitization for F-thirty five. That's we are assuming in the numbers that we're going to get both LRIP10 negotiated and definitized and LRIP 11 negotiated and definitized in 2017. We've already recognized a pretty good portion of the LRIP 10 contract via the UCA that Marilyn talked about, but not so much on the LRIP 11. So a big, big Chunk of our orders in 2017 is associated with that definitization. You mentioned the international missile defense programs, I believe.
The largest one we're looking for, and again, this is the second half of the year, is the THAAD Cutter program. So the first buy of a THAAD battery for the government of Qatar is also a fairly large order in the second half. And then lastly, and I believe this is actually the 2nd largest order for the corporation in 2017, but we do expect to close on the multiyear 9 block order in the second half of this year as well.
Our next question comes from Howard Ruhl with Jefferies. Your line is open.
Thank you very much. Marilyn, you've gone through a number of Significant changes in the last 12 months and you indicated you and Bruce are going to be back to Living a little bit more with normal, but could you for a moment step back and kind of talk a little bit about, where some of the competitive advantages you And how you'd like to shape the company going forward. I mean 25% of the company is F-thirty 5, but you do have a lot of other programs and a lot of other technology opportunities.
Thanks for the question, Howard. As I Said in my prepared remarks on the front end, I think we're extremely well positioned for long term success. Yes, last There was a challenging year in terms of transitioning the divestiture of ISED and GS and really moving very far along in our integration of Sikorsky. And that I would say a great tribute to the team is that despite those major efforts that we had going on in the business, we exceeded All of our financial commitments as well as actually hit some new records. I mean, I think that's a true measure and our operational performance was outstanding in terms of how we're performing for our customers.
So I'm extremely pleased with that. In terms of strategically as we look forward, having Sikorsky as part of our Company Now, it opens up a lot of opportunities for us. We're currently in the development phase for a number of helicopter programs that are going to move into production. So as you look at the CH-fifty 3 ks, at the presidential helicopter, the work we've been doing on the Canadian Maritime helicopter program, the combat rescue helicopter that we're working, All of those programs as well as what Bruce mentioned moving continuing on with the Blackhawk and getting into the next multiyear of Blackhawk It is an excellent growth area for us that will continue to bring good cash generation and continued growth for us as a company. And then we do expect at some point the commercial business will come back.
We're at a low right now with the oil and gas prices, but it's another opportunity for growth for us and one of the elements of the company that we look forward to continuing to grow. And so Sikorsky has been a great asset that we brought into the company and I see great growth opportunities. We've talked about F-thirty 5 at length. You can see certainly it is a growth engine for our company And we continue to see growing international demand for it. So it's not just the program of record that we have with the U.
S. Government on The services that are buying the aircraft, but and the international partners that are already signed up, but many other countries are showing interest in the program. And then across the portfolio from our missile defense to the work we're doing in mission systems and training to all the elements of our fire Our space systems and satellites and spacecraft. I think if you look holistically at our portfolio. We are very strong in all of those areas and represent a leader and virtually every one of those markets.
So from a competitive advantage standpoint, I think our goal is to continue to perform with excellence on the programs that we have today and to continue to look for opportunities to keep our portfolio relevant, to continue to invest in research and development and Innovation, so that we stay on the forefront. I think innovation for us is the lifeblood of this company, What we're doing in our independent research and development, what we're providing to our current customers and what we're looking at providing for long term investments for the long term and things like hypersonics and directed energy and other things. And then as you're probably aware, we Set up a venture fund where we're also taking positions in companies that we see as another seeding of our innovation into our company. I would lastly say that from a competitive advantage standpoint, my view is that it is the talent in this company that is the competitive advantage. We have the best talent in the industry in my view from a and that in my view sets us apart.
So that coupled with the
technology and the outstanding portfolio, I think sets us very
well for continued success in portfolio, I think, sets us very well for continued success and continued growth.
Our next question comes from Myles Walton with Deutsche Bank. Your line is open.
Thanks. Marilyn, it sounds like border taxation Was discussed during your meeting yesterday with other business leaders. And I'm just curious as it applies to your own business and to the defense landscape. Do you have a sense as to A clear sense as to how this is going to impact your business and the sector? Does it sound like the President is a supporter of no tax on exports?
And could you just describe how it will impact Lockheed the way you see it today? Thanks.
Thanks for the question, Myles. And I guess I would Step back from his comments yesterday and what you've heard from him and his campaign is that his focus is on not having You have the advantage of producing it elsewhere. So if you take it to Lockheed Martin, I mean, we are not we produce our products in the U. S. Predominantly of our roughly 98,000 97, 98,000 employees, over 90,000 Here in the U.
S, this is where we produce our products and then we deliver them around the world. And those that are producing in other Parts of the world whether it's in the U. K. Or in Canada or Australia, the work that we might be doing there is not being Imported back into the U. S.
So I don't see that this border taxation issue affects us as a company, and I think it's more geared toward commercial companies that might decide to do the production offshore and then sell their products back into the U. S. Yes.
Maybe Miles, just to add it from my perspective. Anytime you're talking about reducing taxes on exports, we have a fairly good amount of exports and we don't frankly import A whole lot. So we would probably be a net benefitter from a tax perspective relative to if that were to happen. I think if you look at either one of the tax proposals that's sort of being tossed around, the current one you just discussed as well as the one that the House put forward later or earlier excuse me, middle part of last year or so. In virtually either one of those scenarios, Statutory rate drops pretty significantly.
And for Lockheed Martin, a U. S. Domiciled company With most of our income, as Marilyn said, coming from U. S. Locations, we don't have the sort of offshore issues that a lot of the global companies would.
And so we would be a benefitter or benefactor probably of either one of those tax policies going forward.
Our next question comes from Noah Poponak with Goldman Sachs. Your line is open.
Hey, good morning, everyone.
Good morning.
Marilyn, I
wanted to ask if you could Maybe provide a little more detail or I guess thought around the total U. S. Defense budget commentary you touched on briefly in your prepared remarks. I mean, I guess, where would you pin the actual likelihood that Sequestration is removed from DoD versus the need to have some kind of compromise where they, I guess, still I guess I'm not as sure, but still seemingly still deficit focused Congress. And if this is happening, will we see it in the 2018 request Or does the administration need another year to have it be fully their own and be prepared to do that?
Thanks for the question, Noah. I guess I will just give you my opinion because that's really all I can do at this point Pretty unpredictable as we go forward and as you indicated. My opinion is though that there It appears to be bipartisan support for eliminating sequestration. As I've said in the past, I have a lot of independent dialogues With various members of Congress, everyone I've ever spoken to is they don't think it's good policy and they want to get rid of it. So I think now with the current Congress and the new administration that it probably opens up the opportunity for really getting that And I'm very encouraged that the dialogue has been around eliminating the defense sequester, just removing it altogether.
And there's also a strong discussion around increasing defense spending because we have, for the last few years allowed With the budget caps, etcetera, we have not been investing like we need to in recapitalization and readiness And a lot of things that you hear directly from our customers, our services telling Congress and telling the new administration that they need. So we're very supportive of our defense customers and being a voice around that because we do think it's important to eliminate The sequester and the budget caps associated with it, to allow them to do to address the national security strategies and to provide the right capability for our men and women in uniform. In terms of where it might come into play, I mean, again, I'm encouraged by the There's some discussion around supplemental to the FY 2017 budget. There's some discussions around getting after this whole issue of sequester and eliminating the budget cap. So whether it's in the 2018 request It's hard for me to predict, but I think it will be near term and longer term because everyone that I speak to has Recognize and certainly President Trump has recognized that it's something that needs to go away and that we need to get on with spending the appropriate amount, Having adequate budgets to support our national security.
Our next question from Jason Gerken with Citi. Your line is open.
Good morning, everyone. Bruce, Maryland, I was wondering if you wouldn't do us a favor and walk through each of the segments, and maybe provide a little bit of color on the risks and opportunities this year relative to your official outlook.
Thanks, Jason. Bruce, well, I'll let Walk through and then if I have anything to add
on that. Yes. Let me do that. And Jason, if I don't quite capture what you're looking for, get back and shout out at me there. But Maybe just starting with Aeronautics, largest business obviously in the portfolio.
So On the sales side, we're expecting sequential growth quarter over quarter. So the Q4 will be the highest Quarter of the year, Q1 as is typical, then aeronautics will be the lowest quarter of the year. From sort of a comparison to 2016, I would expect The rate of growth or the percentage of growth over 2016 to sort of diminish a little bit as we go through the year even though the numbers will get bigger. And that's in part because we're going to see a little bit well, the F-sixteen program comes to an end In the late Q2 or early Q3, this is the last eight aircraft deliveries that we have in backlog right now. And until we get another country to buy the F-sixteen, that will be the last of those production aircraft.
That's going to be a little bit lower in the second half of the year than the first half, but still pretty significant growth quarter over quarter for aeronautics And obviously most of that driven by the F-thirty five program. I think EBIT during the year probably follows the sales volume. As we look at least right now, pretty consistent margins quarter over quarter. That obviously is dependent upon when we have timing of risk retirements occurring throughout the year. But with the planned risk retirements we have in the outlook right now, It says that the margins are fairly consistent going throughout the year.
Maybe jumping to missiles and fire control. Expect the Q1 to be maybe a little bit lower than perhaps you're expecting. Q1 is going to be quite a bit lower than the rest Of the other three quarters of the year, you should think of that as the timing of deliveries that had both and especially if you're comparing it to the Q4 of 2016, We had a lot more deliveries in the second half of twenty sixteen than we expect to see in the Q1 of 2017. And so that drop off you'll notice I think when we come out with our results at the end of the Q1. The next three quarters are quite a bit higher than the 4th quarter and they're actually pretty consistent as we look at the outlook right here for the next year or so.
Low in the Q1, next 3 much higher and the next 3 fairly consistent with each other. Similar to Aeronautics, the EBIT kind of Follows the sales volume because we do expect a fairly consistent margin between quarters in 2017. Rotary Emission Systems 2017, kind of similar to aeronautics, we do expect sequential growth quarter over quarter. Probably also EBIT tracking to sales, but we also expect that the margin quarter over quarter will So we'll see some increases as we go throughout the year within the margins within RMS. And this is A little bit of the wind down of some of the purchase accounting and intangible amortization, but the integration associated with Sikorsky as well as the timing of some of our planned risk retirements in 2017 causing that effect.
And then lastly, space in 2017 actually almost draw a straight line across The quarter is roughly $2,200,000,000 thereabouts every single quarter of the year is what we're expecting. There's no commercial launches Ore Commercial Satellites was sales that we would book upon delivery like we had in 2016. We actually had 2 commercial launches in the year and we have 0 planned for this year. So you won't kind of see the spike associated with those deliveries as we saw in 2016, so a little more EBIT again kind of follows sales volume. There's probably a little more variability And that's just really associated with the timing of equity earnings as we progress throughout the year.
So hopefully that captures it In terms of how we look at that, obviously, as we look at the year and I always give this speech at the start of, it seems like every year, that's based on the opportunities that are built into And as I always like to say, as we look at the opportunities in 2017 and compare those to what we saw in 20 16, the potential for doing better is about the same as what we saw in 2016 or for that matter 2015, but we have to make that happen in 2017 for that to come to fruition. And again, that's not in the numbers or the planning that we just talked about to you. Stephanie, I believe we have time for one more question.
Our final question comes from Robert Spingarn with Credit Suisse. Your line is open.
Good morning. Thanks for squeezing me in. Just a couple of cleanup things on F-thirty five. Marilyn, if we go back to the sustainment discussion, In your discussion in your negotiations with DoD on LRIP10 and not anything else, has there been any consideration to defer future competition for either F-thirty five sustainment or for the Block 4 subsystem upgrade work. And Bruce, how is this potential competition contemplated in your long term outlook for the aircraft?
And then the
last thing I wanted
to ask you is how important is the 450 Unit International Block Buy to the margin growth cadence that you described to Ron earlier?
Thanks for the question, Rob. I guess the first question on sustainment. Sustainment is a separate contract from the LRIP 10. So it isn't part of the discussion at all in the LRIP10 negotiations Nor would be the upgrade work for Block IV going forward.
But might they factor into any Horse trading or anything that you all are talking about?
Actually, no. We treat them separately as separate Contracts, if we look at what the sustainment contract is versus the LRIP10, I mean they're just they're separate. LRIP ten is pretty straightforward. As we look at our assessment of the cost associated with LRIP And the offer that we put forward based on the cost of the aircraft and the terms and conditions associated with that contract, It doesn't include sustainment.
Rod, let me try to I jotted down your questions. Hopefully, I captured them well. But As far as the future competition for sustainment in Block IV, if that happens and look competition The buzzword that everyone talks about these days. We're not afraid of competition. We think The legacy of performance that we've had both with the software development on the program as well as what we've done so far in sustainment and what we plan to do With as Marilyn said some of the cost reduction initiatives on sustainment, we think we're incredibly well positioned in both of those if in fact they are competed And our assumption would be that we would win those competitions and that is what's embedded in our planning, if you will.
I think you also asked about the block by and the importance The 450 aircraft potential block buy relative to margins, not so much benefit on the margins that we're Rob, as much as helping secure long term commitments from suppliers, long term planning for our own work inside our own factory such that we can hopefully get and with the benefits of sort of an economic Order quantity associated with that block buy that we can get the price of the aircraft or the cost of the aircraft down Just as what Marilyn has talked about relative to her conversations with the President, I mean that is one of the items that was addressed in those conversations is what Can we and the government do to get the cost of the aircraft down? And that is clearly one of the things that can do that. You get if you look at any sort of multiyear or block by or economic order quantity, there are always savings associated with that. The only How much are those savings? And we think we have a very good plan in place relative to the block buy to bring the cost down going forward.
But I wouldn't expect That expectation on our part of lower cost would be sort of priced in to that block buy, if you will. So I wouldn't
So with that, with our last question, let me conclude the call today. I want to end up the call by just reiterating that 2016 was Truly an extraordinary year of transition and success. And our team performed exceptionally well in all phases, strategically, operationally and financially. As we look into 2017, our strong backlog and solid portfolio have the corporation positioned for bright future of top line growth and increasing cash flows. Thank you again for joining us on the call today, and we look forward to speaking to you at our next earnings call in April.
Stephanie, that concludes our call today.
Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.