Good day, and welcome everyone to the Lockheed Martin Second Quarter 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. Jerry Kircher, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Cat, and good morning. I'd like to welcome everyone to our Q2 2016 earnings conference call. Joining 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 press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. 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.lockkeemartin.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, Jerry. Good morning, everyone, and thank you for joining us on the call today. We are pleased to have you with us as we review 2nd quarter results and our increased financial outlook for 2016. As today's release details, we had a very strong quarter, operationally and financially. The corporation continues to track towards another year of strong financial results, while returning value to stockholders and delivering critical solutions to customers.
I want to highlight a few key items in the quarter, including the status of the strategic transaction in which our Information Systems and Global Solutions business will be separated from Lockheed Martin and combined with Leidos. And I'll share some noteworthy operational achievements in our business areas. Turning to the summary financials. Our team continued to deliver broad based results across the corporation, The 2nd quarter numbers exceeding all of our internal plans. This strong year to date performance enabled us to increase full year 2016 guidance for sales, segment operating profit, earnings per share and cash from operations.
As a reminder, the guidance continues to assume inclusion of full year 2016 financial results from the IS and GS business. If the divestiture of IS and GS is completed in the Q3, as currently anticipated, we will revise our 2016 financial outlook during our call with you in October. Switching to IS and GS and the status of its combination with Leidos, significant progress towards transaction closure continues to be achieved. We commenced our exchange offer on Monday of last week. Also last week, The Competition and Markets Authority in the United Kingdom concluded its review, satisfying another condition to closing.
As we outlined in our press release last week, announcing the start of the exchange period, the offer provides Lockheed Martin stockholders The opportunity to exchange their shares of Lockheed Martin for shares of stock in a Lockheed Martin subsidiary, which then become Shares of Leidos common stock upon completion of the transaction. As you are aware, the combination of ISNGS with Leidos is structured as a tax efficient reverse Morse Trust transaction. We will then retire the shares of Lockheed Martin Stock Exchange, achieving a significant reduction in our outstanding share count. The transaction remains subject to customary closing conditions and closing is currently scheduled for August 16. Switching to operational highlights.
I'll start with some key accomplishments and events On the F-thirty 5 Joint Strike Fighter program. Overall, the program continues to achieve good progress across the multiple fronts of winding down development ramping up production rate and sustainment activities and securing customer support and demand. On the development program, key events this quarter included surpassing 60,000 flight hours of the F-thirty 5 fleet, demonstrating the increasing level of flight operations and maturity of the aircraft. We are also achieving increased stability in the software on the aircraft and in the ground support equipment. We continue to make strides in software development on the aircraft and in the Autonomic Logistics Information System known as ALICE that is used to maintain the F-thirty five planes.
Evidence of this progress was demonstrated last month at Mountain Home Air Base in Idaho, where F-thirty 5 fighters were deployed to a remote site to test aircraft performance and mission availability using the latest version of the maturing software. During this deployment, the aircraft successfully cleared 88 of 88 sorties while also achieving 100% on time performance of sorties. Additionally, the aircraft achieved 0 avionic shutdowns on the ground or in flight due to any software stability issues. The deployment met all of the customers' tactical objectives and proved that the aircraft can successfully operate at remote locations away from its home base. These successful series of tests are key milestones in preparation of the F-thirty five CTOL fleet to achieve initial operational capability for the U.
S. Air Force later this year. During the deployment test of the Mountain Home Base, the F-thirty 5 had the opportunity to engage with frontline legacy aircraft and performed exceptionally well in mock combat engagements. The tremendous technological leap and capabilities that the F-thirty five provides are being demonstrated on a daily basis to a growing number of domestic and international customers as the aircraft is fielded at additional sites. With the future price an F-thirty five estimated to approach the price of a legacy fighter, the unmatched capability of 5th generation stealth provided by the Joint Strike Fighter becomes even more compelling to customers as they recapitalize their fighter fleets.
Looking at the production activities on the program, progress continues to be made in ramping up the rate of production and reducing the cost of the aircraft. On production, we are on track to increase our deliveries to 53 aircraft this year and have delivered approximately 180 aircraft since program inception. In the area of cost reductions, we continue to make significant progress on our previously announced blueprint for affordability shared commitment between the government and industry. To build upon that success, we announced 2 additional cost reduction initiatives last week at Farm Bureau. The first action is a 2 year extension of our cost savings investment that is designed to achieve life cycle savings of more than $4,000,000,000 over the remaining production run of aircraft.
Additionally, we also announced an initiative over the next couple of years to reduce sustainment costs by 10%. This action is expected to achieve $1,000,000,000 in savings for the 5 year period and includes projects such as spare parts block buys and establishing Alice Regional Sustainment Centers. Turning to customer support and demand for the F-thirty 5, Key milestones this past quarter on the domestic side included revalidation to Congress by the Department of Defense of the critical and unchanged procurement requirement to replace legacy aircraft with 2,443 JSF fighters for the U. S. Air Force, Navy and Marines.
Internationally, support remains strong and growing with key events that included selection of the F-thirty 5 by the Danish Parliament as their next generation fighter with the procurement of 27 aircraft, rollout of the first F-35A for Israel at our Fort Worth facility, and the arrival of the first two F-35A fighters into the Netherlands. I was able to see firsthand the growing international interest and support of the F-thirty 5 earlier this month when I had the opportunity to attend both the Royal International Air Tattoo and Farm Bureau Air Shows in the United Kingdom. Customers and attendees were able to see up close the revolutionary capabilities of both SITOL and STOWALL F-thirty 5 aircraft at the air shows as they perform their aerial maneuvers. This marks debut of the F-thirty 5 at major international air shows demonstrating the increasing maturity and progress on the program. We're honored to partner with international F-thirty five customers to strengthen the security relationships among our nation and allies as we collectively field this next generation fighter for decades to come.
Turning to other areas in the corporation, was achieved on our Sikorsky CH-fifty 3 ks King Stallion helicopter program for the U. S. Marine Corps. The test helicopters on the development program continue to progress through a series of increasing payload lift weights to validate capabilities. Recently, the aircraft successfully lifted a 27,000 pound external load, satisfying the contractual requirement for maximum lift weight.
With more than triple the payload of the predecessor CH-53E, the new helicopter can accommodate a range of missions. The CH-53K can execute heavy lift missions more effectively and safely in day and night and all weather conditions using its modern glass Cockpit. To date, we have delivered 3 CH-fifty 3 ks helicopters on the development program that are enabling testing to move ahead and support the services goal to achieve initial operational capability planned in 2019. Providing this enhanced capability is essential to our war fighters, and the Department of Defense program of record continues to project procurement 200 CH-fifty 3 ks aircraft to replace aging legacy helicopters. The CH-fifty three ks is also generating growing interest from multiple countries, in addition to that in the United States, and offers opportunities to expand production levels beyond the quantities required on the Marine Corps program.
I will conclude my remarks by offering my congratulations to our Space Systems team for their flawless support of NASA's interplanetary mission to insert the Juno spacecraft into orbit around Jupiter. The Juno spacecraft was designed and constructed by our space personnel in Colorado and has been operated as a joint team with NASA. After launch in August 2011, the Spacecraft traveled 1,800,000,000 miles to Jupiter at speeds of up to 165,000 miles per hour for almost 5 years before successfully settling into orbit on July 4. Juno will spend nearly 2 years orbiting the planet while studying the structure, origin, atmosphere and magnetosphere of Jupiter for NASA. The successful Orbit Insertion mission exemplifies the unmatched capability of our corporation in making the impossible possible for our customers.
There were no second chances for this orbital insertion, and our spacecraft and teammates performed flawlessly in achieving mission success. Before turning the call over to Bruce, I want to offer my appreciation and thanks To our IS and GS team, their dedication and continued focus on mission execution and our customers during this extended transitional phase have been superb. With the upcoming closure of the transaction with Leidos, I am certain that the ISNGS have made the business even stronger and helped position the new enterprise to generate value for shareholders and opportunities for employees as they move forward. I'll now turn the call over to Bruce to review our financial performance and updated guidance in more detail, 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 charts that we included with our earnings release today. Let's start with Chart 3 and an overview of our results for the quarter. Sales for the quarter were $12,900,000,000 well ahead of our expectations.
Segment operating profit was also higher than expected at $1,400,000,000 resulting in earnings per share of $3.32 in the quarter And we'll discuss each of these metrics in the coming charts. We generated $1,500,000,000 in cash and return $1,000,000,000 of cash to our stockholders in the quarter. And as with last quarter, we are increasing our outlook for sales, operating profit, Earnings per share and cash from operations. All in all, we had a strong quarter and are well positioned through the first half of the year to achieve our outlook. On Chart 4, we compare our sales and segment operating profit this quarter versus the Q2 of 2015.
Sales were higher by $1,300,000,000 or 11% this year than last year, driven by the inclusion of Sikorsky and the results of MST for about $1,200,000,000 and nearly $250,000,000 in growth at aeronautics, driven by $400,000,000 higher F-thirty five volume, which more than offset 2 fewer C5 deliveries in the quarter compared to last year. Segment operating profit was $24,000,000 higher than last year with the growth coming from the volume at aeronautics and significantly higher profit in IS and GS and Space Systems. These increases more than offset the effects of purchase accounting adjustments and transaction costs associated with the acquisition of Sikorsky as well as the expected reduction of margin at Missiles and Fire Control. On Chart 5, we'll discuss our earnings per share in the quarter. Our EPS in the quarter was $3.32 which represents about a 13% increase over the EPS in the Q2 of last year.
This year benefited from strong operational performance, a higher FASCAS adjustment and a $0.04 benefit from the adoption of a new accounting standard as discussed in our earnings release. If you'll turn to Chart 6, we'll review our cash from operations in the quarter. Cash generated in the quarter was almost $1,500,000,000 $200,000,000 more than in the Q2 of last year. This is particularly noteworthy given that we expected to recover a significant amount of cash associated with the completion negotiations on F-thirty five LRIPs 9 and 10 by now. Strong cash generation in each of the other four business areas beyond aeronautics, including a large international receipt by Sikorsky helped to offset the F-thirty five shortfall.
And while we expect to recover that shortfall soon, If additional funding is not received, the investment level will grow dramatically during the coming months. Turning to Chart 7, you can see the significant amount of cash to our stockholders in the quarter. With just over $1,000,000,000 returned to stockholders, evenly split between dividends and share repurchases, We returned over 80% of free cash flow in the quarter. Chart 8 provides an update to our current outlook for the year. As a result of the strong performance in the quarter and prospects for the remainder of the year, we are increasing our sales outlook by $400,000,000 and our segment operating profit outlook by $125,000,000 We'll provide additional insight into these improvements in the next two charts.
We also increased our outlook for earnings per share by $0.65 and we'll provide more detail into that increase in a few charts. And we're increasing our cash from operations outlook by $100,000,000 This obviously assumes that we receive additional F-thirty five funding as we've already discussed. And as a reminder, our guidance continues to assume the inclusion of full year 2016 financial results from the IS and GS business. Chart 9 provides the updated sales outlook by business area. We increased our sales outlook by $400,000,000 $350,000,000 in aeronautics due primarily to higher than planned F-thirty 5 volume and $50,000,000 Space Systems reflecting the stronger start to the year than we anticipated.
On Chart 10, we show the changes to our segment operating profit outlook by business area. We increased our profit outlook by $125,000,000 with $60,000,000 of that increase coming from IS and GS as a result of its strong first half performance. Aeronautics increased by $40,000,000 driven by the higher sales volume And Space Systems increased by $25,000,000 reflecting its better than planned performance to date. Moving to Chart 11, we have a reconciliation of our current earnings per share outlook compared with the Q1. The $125,000,000 increase in segment operating profit increases our outlook by $0.25 The newly adopted accounting standard for the treatment of equity based compensation that we described in our earnings release increased 2016 EPS by $0.45 This change in accounting is reflected as if it had been in place from the beginning of the year.
As a result, our year to date EPS includes a benefit of 0.37 $0.33 from the Q1 when the majority of our equity based compensation vested. The remaining 2 quarters of the year are anticipated to receive similar benefits of $0.04 per quarter, totaling to the $0.45 increase for the year. A number of minor other changes in the quarter amounted to a $0.05 reduction to EPS and combined these changes increased our EPS outlook by $0.65 for the year. On Chart 12, we have a reminder of several key financial impacts We expect when the IS and GS Reverse Morris Trust transaction closes. We'll receive a special cash payment of $1,800,000,000 At current trading prices, we would expect to reduce our common shares outstanding by about 10,000,000 shares, though this is obviously subject to change as both Lockheed Martin and Leidos stock prices fluctuate during the exchange period and we would expect to have a significant book gain when the deal closes.
In addition to the deal closure in the 3rd quarter, we expect to have a number of other significant events occur in the quarter as well. Chart 13 highlights these upcoming financial events. Obviously, the first significant event we are expecting is the IS and GS transaction closure. The year to date results of IS and GS through closure will be moved to discontinued operations as well the book gain that we discussed the prior chart. We also expect to have a net pension gain upon closure associated with the departure of IS and GS employees.
This pension gain will be reported in discontinued operations as well. Corporate costs allocated to IS and GS up to the date of will be moved from IS and GS' results and reflected as other unallocated costs in continuing operations. Importantly, there is no economic impact as a result of this cost reclassification and we'll be filing pro form a financials. Next, we expect to close on the F-thirty five, LRIP 9 and 10 contracts and recover the significant operating cash tied to those negotiations. We also expect to increase our ownership and obtain control of a joint venture within Space Systems to manage the atomic weapons establishment in the U.
K. A book gain will be recognized in our operating results upon closure of the transaction. Going Forward, we will fully consolidate AWE's financials and continue to report its operating results in our Space Systems segment. Then we expect to finalize our Sikorsky purchase accounting adjustments next quarter. And lastly, we'll provide our trend information for team, including an updated discount rate projection and its impact on our expected FASCAS adjustment.
So you can see that we anticipate a number of moving pieces in the quarter, some of which are individually significant, but collectively will be quite significant. We'll provide updated guidance for all these events during our next earnings call in October. Finally, on Chart 14, we have our summary. We had a strong quarter and that led to increases in our outlook. The IS and GS exchange offer has begun, which places us on the path closed the transaction in the middle of August and we remain focused on providing outstanding products and services to our customers and strong returns to our stockholders.
With that, we're ready for your questions.
Our first question comes from the line of Hunter Keay with Wolfe Research. Your line is open.
Thank you. Good morning, guys.
Good morning.
I realize it's maybe a
little bit early to ask this question, but can you help us think about The work statement that you have with Turkey as it relates to the F-thirty five in the context of Maybe some of the sustainment, and if you want to talk about any sort of longer term implications from some of the recent activities there as it relates to the F-thirty 5, that'd be helpful. Thanks so much.
Sure. I'll take that question. And then Bruce, if you have anything you want to add, I'd be happy for you to do that. I think if you look at Turkey, I know there's been a lot of Churn in Turkey here recently, but it still remains a very valued NATO partner for us and NATO Ally. And it's got It's an essential security partner in that region for the United States and for our allies.
So we look forward to continuing our business relationship there and across a number programs that we have, we have not seen any indication that it will impact the F-thirty five or any of their other programs. And so we'll continue to assess the situation and make sure that we'll share with you if there's any impact on our business. Their plan is to procure 100 F-thirty 5. So They're a very important partner in that program. Bruce, anything you want to add?
Yes. The only thing I would add, Hunter, is we've got a long, long history with Turkey. We've worked with them Since the pretty early days of the S-sixteen program, we've actually built S-16s in Turkey. As you know in the heart of your question, we're also doing parts of the F-thirty 5 at TUSAS Aerospace Industries in Turkey. That relationship has been successful.
As you said, it's probably early to call what the grand implications are, but they've been, as Marilyn said, a trusted partner with Lockheed Martin for quite some time and we hope that's the case in the future obviously.
Thank you. Our next question comes from the line of Pete Skibitski with Drexel Hamilton. Your line is open.
Hey, good morning guys. Nice quarter.
Thank you.
The F-thirty five, the LRAP-nine ten contract, you talked about the investment level growing dramatically in the coming months, if it doesn't get signed, I think. Can you size that for us? And what's your sense of how close you are to the contract getting signed? And Are you definitely going to cash fund it if it doesn't close?
Yes. So let me give you just a little bit of color. It's a good question, Pete. So the current level, I think we disclosed in the earnings release, we've got nearly $1,000,000,000 or so that we're funding on the program. And that's a decision that we made to do that.
For whatever reason, the U. S. Government has not decided to put funds that are authorized and appropriated to fund Lockheed Martin and our subcontractor efforts on the contracts. So we've been We made the decision at the time that we were going to not allow a stop on the program and cause on the program, particularly in our supply base, since that's where most of the work is being done at this time on the F-thirty five LRIP 9 and 10 contracts. So we've been funding that for a while.
We continue to ask for funding recovery from the U. S. Government. To this point, they've not funded us. At some point in the future because of the growth that we see over the next few months and you should think of this literally growing, Pete, in the $400,000,000 to $500,000,000 per month sorts of levels, we will not be able to sustain that.
So that if we don't either get funding through a funding mechanism such as a UK funding item or we definitize the contracts, we will not be able to continue and have that level of cash outflow As a corporation, we simply don't have that capacity. The Pentagon clearly knows that situation and I'm optimistic that we're going to get cash
Thank you. Our next question comes from the line of Rich Safran Buckingham Research. Your line is open.
Marilyn, Bruce, Jerry, good morning. Good morning, Chris. I know I usually ask a question about programs, but today I have one on pension income and cash funding requirements. Now if you would, relative to where rates were in 2015, I want to know if you could maybe discuss what you expect for 2017 for FASCAS income. Also, can you give us maybe your best estimate regarding or not you're going to have a cash contribution to pension next year, if so, how much?
Maybe you could give us a range on that. Anything you could give would be helpful.
Yes. I'll take that one, Rich. Thanks for the question. So we're probably a little early to be talking about 2017. I think it feels a little early to be talking about 2017, But I think it's a fair question given all the changes that have happened in the interest rate environment here recently, particularly after the Brexit situation.
I mean, I think What are 10 year treasuries going for? 1.4% or thereabouts. So dramatic reduction from the start of the year to now. I think we ended the year at a discount rate of about 4.38 percent or 4.375 percent. If we were to strike a line in the sand right now, it's probably 100 basis points lower than that.
You tell me whether you think it's going to increase Between now and the end of the year or not, but if it did not, every 25 basis points change And the discount rate from where we ended last year is worth about $125,000,000 delta to FAS expense. So that's a pretty significant Reduction in the FAS next year. Our asset returns, you didn't ask about those, but that's the other component in the mix. The asset returns are actually tracking Pretty nicely towards an 8% return. We've had a nice lift in the equity markets, particularly recently that have helped with that situation.
So if I were to predict, again, kind of striking the line in the sand, Our current FASCAS in 2016 is roughly, what, dollars 975,000,000 or so of income. Looking forward and just carrying those impacts into 2017 that I just described, 2017 would probably be 3 $50,000,000 maybe $400,000,000 lower than 2016, still income From FAS CAS, if you will, but not as much income as what we've been expecting and talking about previously. As to your cash Funding question, there is no impact next year at all associated with the discount rate change. I mean, ERISA is far more ERISA, which requires the funding levels for our pension trust, is far more sensitive to asset returns than the discount rate changes. FAS is sort of an instantaneous discount rate impact whereas the risk is spread over time.
So we wouldn't expect any change whatsoever in the funding requirements in 2017, still 0.
Thank you. Our next question comes from the line of Joe DeNardi with Stifel. Your line is open.
Yes, thanks. Good morning.
Bruce, I
think you talked last quarter about 2018 pension contributions and apologies for asking a question that's so far out in future. But you said that you think you can fill most or if not all of that gap. I'm wondering if you could provide a little bit more detail about Of the $1,500,000,000 in contribution, what's the cash tax benefit? And then what are some of the other areas you see as helping you guys fill that gap?
Thanks, Joe. So I actually plan to give a little more insight into the 2018 numbers Probably in the October call, but let me take a shot at it now just because you asked the question. So we have said that 2017, we talked about being the last of the 3 year what we call pension funding holiday that we announced I guess at the beginning of 2015. As Rich asked in his question about cash funding, we don't see that changing in 2017. In previous quarters, I did talk about 2018 having a required pension contribution and obviously that's still the case.
However, what I was trying to convey in the number you threw out about $1,500,000,000 It's floating around there, maybe a little bit higher now. But what I was trying to convey on previous calls and what I'll try to convey on this call is that you shouldn't think of sort of current level of operating cash dropping by the full amount of pension funding in 2018 And that's really for a couple of reasons. One is we expect to get much stronger cash flows from Sikorsky In 2018 versus what we're seeing today, we expect to have higher cash flow from F-thirty 5 than we're seeing today. And then lastly, as you described in your question, we also will get a tax benefit associated With the pension cash contribution in 2018, so think of that as sort of 65% simplistically Of the cash contribution is what will be a hit to operating cash in that year, if you will.
Thank you. Our next question comes from the line of Sam Pearlstein with Wells Fargo. Your line is open.
Good morning. Good morning. Sam. I was wondering if you could talk a little bit more philosophically just about Capital allocation and share buyback. And I know you have a target of $300,000,000 or less than $300,000,000 shares outstanding.
But just trying to think about where the stock's multiple is now and just trying to think about how you factor that into What you do with your capital and whether that makes other alternatives more attractive than repurchasing shares? Let me take a shot at that, Sam. So it's a great question As far as capital allocation plans, we still feel strongly about the dividend Capital allocations that we provided to shareholders, we have if you just look at the composition of our shareholder Base, it's probably, I don't remember, 30%, 35%. I'm looking at Jerry as I say this, 30%, 35% of our investor base is sort of income base. So that's a pretty significant element of our ownership that is driven in fact by the Dividend yield.
So that's an important aspect of capital allocation going forward. I always say that I think the best indication of what we'll do there is sort of the track record we've had in the last few years or even a decade or more relative to dividend contributions. We still have some options that have yet to be exercised. The option It's actually slowed down quite a bit. You might remember Sam you've been following us long enough.
Years ago we had a lot of dilution as a The options being exercised that level has come down quite a bit, but there's still a backlog of options out there that As those do get exercised, we will clearly do share repurchases to offset that dilution. We will do share repurchases to offset dilution from the equity compensation as well. And then from that point, Sam, as usual, this may or may not be the most satisfying answer you'll get, but As usual, it sort of depends on what's available in terms of capital allocation at that time, including other opportunities to invest in programs, acquisitions, that sort of thing. The one thing that probably doesn't make a whole lot of sense, at least at this point, is to let it just sit sort of idly on the balance sheet making us little interest as in fact it does. I'll remind you and I know you know this Sam, but The RMT transaction will reduce share count pretty significantly on its own, probably somewhere $9,000,000 $10,000,000 shares is sort of current trading.
And on top of that, we get the $1,800,000,000 special payment as I talked about. And lacking a more pressing or what's the word I'm looking for? Opportunistic. That's a good word, Marilyn. Opportunistic use of that $1,800,000,000 I would think a good chunk of that would probably go towards share repurchases.
Thank you. Our next question comes from the line of Doug Harned with Bernstein. Your line is open.
Thank you. Good morning. Good morning. I'm interested, Bruce said when you clearly had a very quarter. And you said that it was a surprise to you all, I think, that the sales and your profitability were up as high as they were.
Could you talk a little bit about that? Because if I look forward for the rest of the year, are these is the surprise you had something That suggests your ongoing performance may actually be better perhaps than you'd been expecting and the guidance change doesn't really suggest that. So I'm just wondering what you took away from the quarter and what that means for the longer term?
Yes. So it's a good question, Doug. I'm very happy with the first half of the year. And I don't know Did I use the word surprised? I'll say we were pleasantly higher than expected or higher than planned for a couple of items, including, For instance, the ULA equity earnings that we got in the quarter, some of this was sort of fortuitous in terms of the mix of Launch vehicles, also the pricing of the launch vehicles that we had in the quarter for ULA.
So for instance, we had In Atlas or excuse me, a Delta Heavy launch, which is the most expensive launch vehicle that ULA produces went off in the Q2. That helped the earnings in the Q2. Things like that, again, for the first half of the year, all helped us. You're quizzing a little bit about while that didn't necessarily translate into the full year. I'll say we kind of gave The first half performance and the outlook for the year and we definitely have the opportunities that I think you're alluding to Doug in the second half of the year, but we have to make those happen.
And sometimes things don't work out as planned. And that's probably the reason that we provided the guidance that we did. But Nothing taking away from we feel very, very good and pleased with the first half performance of the year.
Thank you. Our next question comes from the line of Myles Walton with Deutsche Bank. Your line is open.
Thanks. Maybe just to follow-up on that with a little more specificity on Aeronautics. I'm curious why the second half EBIT implied in the guidance is flat to maybe even down a touch versus the first half on higher volume. And then I think you're also recovering the restructuring expenses you had in the Q1. So is there a mix?
Is there something else maybe Bruce that you can help us Why Aeronautics isn't going to outperform that guidance?
Yes. Good question, Miles. So look, Kind of in the answer to the question from Doug, I'd like to think we have sort of, as I've said in previous calls the same sort of opportunities to have a good second half as we had in the first half. The one Probably most notable change from first half to second half is the fact that we had some F-thirty five production step ups In the first half of the year, particularly on sort of the winding down of LRIP 7 aircraft deliveries and a little bit of step up on LRIP 8 as we go into a higher ramp rate there. We don't currently have Plans for F-thirty five production step ups for the rest or for the second half of the year.
And so that's one of the things that will cause the second half of the year to look a little lighter probably in the first half of the year. And then secondly, The volume level of F-thirty five, as I alluded to in the reason for the change in our guidance for the year is really expected to be higher in the second half and that has that dilutive effect on the overall margins of aeronautics that I've talked about in the past. So Those two reasons probably both netted to F-thirty five. One was the step ups that occurred in the first half and secondly, excuse me, is just the volume in the second half.
Thank you. Our next question comes from the line of Howard Rubel with Jefferies. Your line is open.
Thank you very much. Marilyn, you put one of your top managers at Sikorsky to run the business. Could you give us Sort of a 6 month read on where you are and how it's going. I mean, it looks to me like it's A little more expensive out of the box than one would have first thought?
Well, you're right about putting one of our top There we have Dan Schultz who has run large business areas for businesses for us in the past and also is a Helicopter pilot out of the Marine Corps, so we know the business extremely well and doing a great job there. I'll tell you, I'm really excited about a couple of things, Howard, that We've seen in the past 6 months, 1st off, we're tracking to what we had planned. Well, from your perspective maybe different, but frankly we're right on plan with what we track. But what I'm excited about is some of the revenue synergies that we see just by getting the integration process well underway and getting our teams together. For example, we were I was at the Farm Bureau Air Show as I mentioned earlier And we showcased an armed Blackhawk helicopter that's taking weapon systems and sensors and things from our Missiles and Fire Control business, Combining it with the platform that's in Mission Systems and Training Sikorsky Business and showcasing that on at our chalet there in Farmboro.
And we had Tremendous amount of interest in it. A lot of customers are now following up with us on an interest there. So that's just one example. We've got Many other examples where our teams are getting together and we see a chance to do just what we thought when we purchased Sikorsky and that is to not only get the cost synergies of bringing that element into our business, but also but more importantly to get the revenue synergies and get the growth moving forward on it. So we're on track.
We've talked before in this call about our commercial deployment of Sikorsky and the oil and gas price pressures on that business, but we've been very frank about where we stand on that. And based on what our outlook was, we set for the year, we're right on track with that as well.
Hey, Marilyn or Howard, just to add maybe a little bit to what Marilyn said relative To the ARM Blackhawk only because I think it's an interesting little tidbit there. So you should think of this as essentially taking a utility helicopter platform and essentially transitioning it into an attack platform. The interesting thing from the way the design was conceived in the way it will be sold internationally especially is you can remove that capability. So within a day's time or so, the weapons packages and so forth that are put on to make this an armed platform can be removed from the helicopter And the next day it can go out and perform a mission of a utility helicopter. That's some flexibility that doesn't exist right now in the marketplace and that's something that we think is very interesting That frankly would not have happened, but for the synergy between our missiles and fire control organization, our MST organization and obviously Sikorsky now.
Thank you. Our next question comes from the line of Ron Epstein with Bank of America Merrill Lynch. Your line is open.
Hey, good morning, guys. Just maybe a quick update post Farm Bureau on what's going on with the trainer program and the timeline for that and How you expect it to go?
So on the T X program is what you're referring to, I'm presuming for the U. S. Air Force and Yes. Thank you. I guess where that stands right now is we're standing by with what we consider to be a Very good offering.
It's an excellent solution. It's low risk. It's we've got it's the T-50A in our joint venture with Korean Aerospace. It's flying right now. We've already had our first flight of our offering.
So we've taken that T-fifty with KAI and convert it into the T-50A to meet the requirements that the Air Force has outlined. And we're excited about the fact that we've Flowing it, we're demonstrating it and we think we have an excellent offering. Now the RFP appears to be slipping out. It's slipping out into the December timeframe. So I think that what I understand is that the Air Force wants to revisit what they've outlined as requirements for that capability and they will slip the RFP out some and we stand ready to support that.
But in the meantime, we are continuing to roll out our capabilities and showcase that capability. It's a big program. It's about 3 50 aircraft, so it's an opportunity for us. In our case, there is some discussion around whether or not the Air Force wants to pursue a clean sheet design or an existing design. We believe that with the tremendous gap on the training capabilities, the T-thirty eight is I don't think it's close to 50 years old or something like that.
They need to replace that aircraft. And the fact that we have a low risk aircraft that's already flying that can meet Today's requirements, we think we're offering something that would allow the U. S. Air Force to move forward on the program and meet that capability. There are other offerings out there as well that are not sheet.
And so we'd like to compete and we think we have a tremendous offering.
Thank you. Our next question comes from the line of George Shapiro with Shapiro Research. Your line is open.
Yes, Bruce, a couple of quick things. Previously you had said that with the Leidos transaction that you would buy sufficient stock to offset the dilution. Given where the stocks are now, You'd probably have to use all of the $1,800,000,000 and maybe even a touch more to offset the dilution. So is that still the intent? And then second, you took about a $30,000,000 charge it looks like on the international contract that you alluded to in the Q1 document.
And I was just wondering if you think that's the end of it. Thanks.
Thank you, George. So relative to the share count reduction and whether or not that's enough sort of offset the dilution effects of losing the IS and GS earnings or not. You're right. At the call, when we announced the deal back in January, we said that the share buyback essentially going to be enough to make that sort of neutral between the 2 years. Since that time, our stock has increased.
If I look at today, it's up almost 25% over what the number was in January. I think we were trading at around $2.10 a share the day we announced the deal. So pretty significant increase on our side, which makes It's obviously more expensive to buy back the same number of shares as we'd expected in the January call. On the other hand, the Leidos Stock price has dropped a little bit since that time. So both of those are sort of working against us from a shares perspective that will be taken out as a result of the RMT transaction.
So as we sit today, George, even with the 1.8, It's probably difficult to get exactly to neutral, but it gets a lot closer there. We still think the economics of this deal relative to all options that we looked at, an outright sale, a peer Ben, this is still the best situation for Lockheed Martin and its shareholders and we don't have regret on that. Notwithstanding the fact that to your point, we actually may see a little bit of EPS dilution as a result of the stock price movement. Think that's a little bit of a high class problem that we're experiencing right now, but nonetheless that is where we are. As to The charge we took, we did take an additional charge $30,000,000 you're right.
This is sort of the command and control business that we're looking so think of this as sort of a system that controls all sorts of air missile defense capabilities Around an entire country, including identifying friend or foes that you don't have the wrong issues with that air missile defense capability. So linking into a lot of different systems, We think we have prospects once this system is developed in other places internationally, but we've had some growing pains obviously With this and I think as we've gone through the development and early stages of this program, the customer has kind of changed some of what their expectations are. So we are in discussions with the customer right now about sort of closure of this contract. We think where it sits right now, it's pretty well positioned in terms of the charges we've taken. There's Some upside potential to that depending on where the customer wants to head.
There could be some downside. So we're kind of in the middle of that right now, George. And Obviously, we'll keep you apprised as we go through future quarters and let you know how we're performing on that contract.
Thank you. Our next question comes from the line of Rob Spingarn with Credit Suisse. Your line is open.
Hi, good morning.
Good morning, Rob.
Just going back to the F-thirty five, Bruce, you've talked about double digit margins, I think, in 2019. And in context With the 2 new initiatives that Marilyn spoke about that were announced last week, I guess it's around $430,000,000 in new cost. And clearly, both you and the government are trying to get the best deal done here on 9 Is that still the trajectory and how have margins been tracking lately?
Yes, Saurabh, That is still the objective. And I'll just a slight correction maybe on what you said. The 2 initiatives, sort of the second part of Blueprint for affordability and the sustainment activity is more like, about $420,000,000 I'll remind you this is an investment yes, I think your question was that shared and it is in fact shared between ourselves Northrop Grumman and BAE. Just as 1st Blueprint for Affordability initiative was I started to say these are investments and you expect to get returns on your investments. We're getting a return on the Blueprint for Affordability 1.
We would expect to get returns on Blueprint for Affordability 2 as well as the sustainment investment that we're making. But notwithstanding that, I still think we're on a trajectory on the F-thirty five program. And I think I said more than having the specific year relating more to when we get full rate production that we hope to get to double digit Margins by that time, I've always said at similar points in time with the program's life cycle, it ought to look like an F-sixteen program or an F-twenty two or C-one hundred and thirty, there's sort of nothing structurally that would prevent us from getting to those levels. And right now, we're sort of tracking towards that trajectory. We've not come off that at all.
Thank you. Our next question comes from the line of David Strauss with UBS. Your line is open.
Good morning. Thanks for taking my question. Sure. Bruce hate to thanks. Bruce hate to do it, but going back on Pension, I think previously you had said, FASCAS for 2017 kind of all things Staying the same discount rate hitting your assumed rate of return would be about a $450,000,000 positive relative to 20 So I wanted to clarify your answer on the prior pension question, where you talked about $350,000,000 You're talking about $350,000,000 worse off of the projected 2017 level or off of the actual 2016 level?
And then the other thing, The $1,800,000,000 that you're getting in conjunction with the closing on ICE and GS, would you potentially look at that for an early pension contribution to potentially offset some of the downside? Thanks.
Thanks, David. And that probably wasn't at my clearest when I made that reference in the Q1. I think I heard feedback as we went around in investor conferences and so forth that I think I stumbled with my answer there quite honestly. So I tried to be clear this time. Obviously, I'm still not being clear, but let me try to be as crystal clear as I can on this thing.
So FASCAS in 2016, It is about $975,000,000 or so. What I said is I would expect be between if we struck the line in the sand right now, probably $350,000,000 to $400,000,000 lower Then the 2016 FASCAS benefit in 2017, I mean to do the math that kind of translates into $625,000,000 $600 ish 1,000,000 income number, down considerably from what we were talking about in the Q1 of last year. Almost all of that because of the discount rate change in 1,000 basis or not 1,000, 100 basis points as I talked about. Importantly, back to Rich's question, it's a non cash item, Will not affect our 2017 contributions at all. And that relates to your question relative to the $800,000,000 and we would use that to fund and pre fund a pension plan.
The answer is We don't have that expectation sitting here today. And I don't think that's what we will do with the money. As I said earlier to another question, I think the more likely outcome is probably share repurchases at this point in time And we'll fund the 2018 requirement in 2018. We've already got quite honestly a fairly sizable prepayment credit balance. A fairly sizable prepayment credit balance in terms of how much we have contributed to Arista versus what we've collected from our government contracts, and we don't see the point at this time of sort of increasing that level.
Thank you. Our next question comes from the line of Cai von Rumohr with Cowen and Company. Your line is open.
Yes. Thank you very much. So in the quarter, you had a reasonable book to bill of 0.85 at IS And yet my understanding is that, that number excluded the FAA contract you got recently in the protested ISR SAR award you had in the Q2. As you look and yet you also mentioned the Australian contract had another scheduled delay. Can you update us as you look at next year, what the IS and GS, any color on where the IS and GS numbers might be?
So, Kai, I think that's probably crossing into an area where it's we're better suited To point you to the prospectus that we've got for the RMT transaction, Rather than me comment on what IS and GS sales would look like under Lockheed Martin in 2017 when that's not our expectation.
Thank you. Our next question comes from the line of Carter Copeland with Barclays. Your line is open.
Hey, good morning, Marilyn and Bruce.
Good morning, Carter.
Just a question on the F-thirty five, just to clarify and A second part, the sustainment initiative on reducing those costs, you said 10% Reduction there or $1,000,000,000 in 5 years implies clearly a very large sustainment amount, a $10,000,000,000 amount that seemed kind of large. I just Wondered if you could clarify if that was correct. And then secondly, with respect to the contract action, If you end up getting a UCA on this in the coming quarter or 2 quarters, Bruce, Is there a particular cost or margin impact to one contract outcome versus another that you're considering your guidance or in the plan, how should we think about that in terms of how that gets finalized with the customer? Thanks.
Thanks for the question, Carter. Let me just take the first one on the BLUEPRINT for affordability for sustainment. What we announced was an investment of up $250,000,000 over the next couple of years, much like we did on Blueprint for affordability for production, this time for sustainment along with BAE and Northrop Grumman. And we're targeting over that 5 year period that we would reduce sustainment cost by 10%. So that's where the $1,000,000,000 savings for that 5 year period would come from.
We've got a lot of projects that we've outlined and so it will be jointly with the U. S. Government. They will those projects, we'll implement them. And then as Bruce said earlier, we will get a return on our investment.
So I think that answers that question unless there's something more there, Bruce, that you want to add.
Nothing to that. I'll try to address the F-thirty five arrows 9 and 10. So maybe a little bit more than you want, Carter, but so there's sort of 2 ways that we could get cash recovery on this program. 1 is through what's an undefinitized contractual action or EUCA. You've heard that term obviously in the past.
We don't care, frankly, how we get the cash. If it comes under a EUCA though, EUCA gets funded essentially and allows you to bill against the EUCA with progress payments. So we would not recover as much cash under EUCA, although we would still get a significant amount of cash under EUCA funding mechanism as we would if we actually definitize the contract because under the LRIP 9 and 10, we would expect to have performance based payments and performance based payments Where we are on the contract today would actually give us greater cash recovery than with the UK. I hope that made sense. As to impact on margins and so forth, I wouldn't expect 1 or the other to have Any impact whatsoever on the margins we're negotiating.
The only sort of economic impact that we're seeing and we have raised this with the government is Depending on how long this shortfall lasts and I gave you some numbers relative to the shortfall, We could be if we choose to fund and again avoid the disruption of the particularly the supply chain on the program And the international partners on the program, if we chose to fund, we probably would have to get in Paper market, bigger than we are. And that's not something we look forward to and that's probably something that we'd have to have a conversation about what's equitable If in fact that takes place with the government. So potential for a negative on the commercial paper, but we would expect that there Potentially, it could be some consideration for that if in fact that's what happened, but that is not our plan as I said.
Kath, this is Jerry. I think we've come up on top of the hour here. So I'll turn it back over to Marilyn for final thoughts.
Thanks, Jerry. Well, as we conclude the call today, I want to wrap again by highlighting that the corporation completed an exceptional quarter, and we continue to build on our year to date momentum With an increasing DoD budget and a robust backlog, the corporation is positioned for top line growth and strong cash flows in the future. Thank you again for joining us on the call today and we look forward to speaking with you in our next earnings call in October. Cat, that concludes the call for today.
Thank you, ladies and gentlemen, for participating in today's conference. That does conclude the call. You may all disconnect. Everyone, have a great day.