Good day, and welcome everyone to the Lockheed Martin 4th Quarter and Full Year 2015 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, Karen, and good morning, everyone. I'd like to welcome you to our Q4 2015 earnings conference call. Joining me today on the call are Marilyn Houston, our Chairman, President and Chief Executive Officer and Rick 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.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, Jerry. Good morning, everyone, and thank you for joining us on the call. As today's release illustrates, We completed another quarter of solid operational accomplishments, while exceeding all of our full year financial goals, and I couldn't be more proud of our team. They remain focused on mission success for our customers and financial results for stockholders, while also supporting We have a number of significant events to discuss today. In addition to reviewing our financial and operational results, I want to provide an update on the FY 2016 DoD budget and a discussion of 2 completed strategic actions, the closure of our acquisition of Sikorsky Aircraft and our decision to separate and combine our Information Systems and Global Solutions business with Leidos and a reverse Morris Trust transaction.
Financially, 2015 was an exceptional year with achievement of multiple new high watermarks for the corporation. I was especially pleased to see the broad based domestic and international customer support for our portfolio of products. This support resulted in our achieving a record level of backlog of nearly $100,000,000,000 Excluding the acquired Sikorsky backlog, the rest of our portfolio achieved $84,000,000,000 significantly surpassing the $80,000,000,000 goal we outlined at the beginning of 2015. Our backlog has us positioned to deliver expanding sales levels and financial results as we move forward in 2016 and beyond. A second area where we achieved another high watermark was the generation of over $5,000,000,000 in cash from operations, achieving a record annual level for the corporation in this critically important area.
This cash flow is only achieved through the daily efforts and focus of our team and executing on contracts for our customers. The robust cash generation also enabled us to expand our cash return to stockholders to a record annual level of $5,000,000,000 achieved through our industry leading dividend payout level and ongoing share repurchase activity. For 2015, share repurchases We reduced the year end outstanding share count to approximately 305,000,000 shares. We are well on our way to achieve or exceed our goal to reduce outstanding shares to below $300,000,000 by the end of 2017. Overall, the corporation continued to excel in the attributes we most value: providing critical solutions to customers and returning value to stockholders.
Looking beyond 2015, our 2016 guidance outlined today results And we are pleased to report that we are focused on executing our
financial results in increased sales, earnings per share and
growing cash from operations. The guidance includes the Sikorsky financials from the recently completed acquisition and also reflects the realignment of our Information Technology and Technical Services businesses. The guidance also assumes continuation We will adjust our financial outlook later this year when the disposition of IS and GS is completed. Bruce will provide a detailed review of the guidance and assumptions in his comments and web charts. I'd like to briefly discuss the defense budget.
Since we spoke last quarter, significant uncertainty was removed with the successful completion of a bipartisan agreement of the FY 'sixteen base DoD budget. The new budget reflects an annual increase of approximately $25,000,000,000 above the previously planned budget level and is also the first increase in annual DoD budgets since 2012. The budget is a recognition of increasing global security requirements and the need to allocate additional fiscal resources to respond to the threat environment. A key element in the increased DoD budget is a double digit annual percentage increase in the investment accounts that fund new equipment procurement and research development research and development activities. This strong funding increase This will be used to address the acute need to replace aging equipment, while ensuring development of key new technologies to respond to evolving security requirements facing domestic and international customers.
As part of the budget, we were pleased to see 11 This marks the first time in the history of the F-thirty five program The aircraft were added to the baseline request, demonstrating strong support for our largest program. We believe our portfolio of products and new technologies will line up very well with essential recapitalization actions in the areas of ballistic missile defense, I'd like to now turn to the 2 strategic actions we announced back in July. First, we were proud to welcome the Sikorsky team to Lockheed Martin with the successful closure of their acquisition on November 6. Together, we will build upon a legacy of innovation and performance that has shaped the history of Aviation for more than a century. This action advances our commitment to provide customers with affordable, mission ready solutions in rotary Their inclusion will enable us to move forward with our goal to expand our business into the strategically important areas of helicopter production and sustainment.
Since the transaction closure, the combined team at Mission Systems and Training have hit the ground running. We are already seeing accelerated customer interest in both military and search and rescue opportunities as we leverage our combined scale and serve as a technology leader at the forefront of vertical lift. I'm enthusiastic about the opportunities for long term value creation of this business as we move forward in providing essential products and solutions to customers around the world. Turning to our second strategic item. As announced earlier Today, we completed the review of our Information Systems and Global Solutions businesses.
That review culminated in our decision to separate and combine Our IS and GS business with Leidos in a reverse Morris Trust transaction. We are excited about this path forward and believe this is the best strategically and will be beneficial to the shareholders of both corporations. This transaction is An important milestone in the portfolio shaping strategy we announced last July and allows us to focus on our core business in Aerospace and Defense. The combination of our proven IT and Technical Services businesses with Leidos will create a more diversified Competitor positioned for growth and future success, while unlocking value for our stockholders. This agreement aligns the IS and GS business with an industry leader in government IT and technical services and will create an enterprise capable of providing unparalleled solutions in industries ranging from National Security to Health and Life Sciences.
The complementary portfolios of both companies will create a diversified and balanced business mix with expanded domain expertise, Increased advantages of scale efficiencies and synergy opportunities. These benefits will be the foundation to Create value for stockholders, customers and employees. One of the important goals in our strategic evaluation of the business was to ensure that the final decision provides a good cultural fit and home for IS and GS employees. It is my belief that employee morale and opportunities for their growth are key elements in the future success of every enterprise. Over the Bruce will speak more about the financial aspects of the transaction and the projected time line for closure in his remarks.
I'd like to end my remarks with a few key operational highlights in the 4th quarter that enabled the corporation to finish the year on a very Starting with the F-thirty 5 Joint Strike Fighter, we achieved our full year delivery goal of 45 aircraft to domestic and international customers. This delivery level reflects our continuing ramp up in production on the program and is a 25% increase above prior year deliveries. For 2016, we are expecting additional expansion with planned deliveries increasing to 53 aircraft. The team also continued to retire key tasks on the F-thirty five development program as we look forward to completing remaining tasks in 2016 as the development phase winds down. Switching to the C-130J Air Lifter, multiple highlights were achieved in the quarter with delivery of the 2,500 aircraft and receipt of the Multiyear II contract that extends the production line until late 2019.
This contract was a portion of the $26,000,000,000 in total new contract awards we secured in the quarter and enabled achievement of a strong book to bill ratio for the full year of 2015. We also made progress on growing our international sales content, which grew 6% above prior year levels and expanding the international sales content to 21% of total corporate sales. I'll close by stating that 20 was an exceptional year for our corporation, and we implemented bold strategic actions to better position the business for operational and financial success. We secured record new business awards and cash generation, both essential components to future corporate success and value creation. Looking forward, I am enthusiastic about the future contributions we can provide to customers and I'll now turn the call over to Bruce to review our financial performance in more detail, outline our 2016 financial guidance, and then we'll open up the line for your questions.
Thanks, Marilyn, and good morning, As I highlight our key financial accomplishments, please follow along with the web charts that we included with our earnings release today. Let's begin with Chart 3 and an overview of our results for the year. Sales for the year were $46,100,000,000 ahead of our expectations when we spoke in the Q3, our segment operating margin was also better than expected, ending the year at 11.9% ever at $5,100,000,000 We returned $5,000,000,000 of cash to our stockholders in the year, led by repurchasing 15,200,000 shares for $3,100,000,000 and we grew our backlog significantly to almost $100,000,000,000 the integration of Sikorsky into the corporation. We'll cover all these items in more detail in the coming chart for it was an exceptional year in 2015. On Chart 4, we compare our sales and earnings per share for 2015 with our results in 2014.
Sales were about $500,000,000 higher this year than last year, including the addition of about $400,000,000 of sales from Sikorsky for the short period after the close in early November. Even without the Sikorsky sales, we were slightly higher than last year's results and better than we had expected when we spoke in October as we had higher volume in several business areas as we closed the year. Earnings per share were $0.25 higher than last year at $11.46 for the full year And we're also higher than the guidance we provided in October, driven by the increased sales volume and improved performance. On Chart 5, we'll discuss our share repurchase activity. We repurchased 15,200,000 shares in 2015 nearly 4,000,000 shares more than in 2014 and that brought our shares outstanding at year end to 305,000,000 shares.
This positions us well to achieve our goal of reducing share count below 300,000,000 shares by the end of 2017. At the end of 2015, we have around 4,000,000 unexercised options, which is a significantly lower level than we had several years ago. And the announced transaction with Leidos creates the potential to reduce share count by up to 15,000,000 shares upon closure later this year. If you'll turn to Chart 6, we'll review our cash return to stockholders in 2015. Our cash from operations, as we said earlier, was $5,100,000,000 and with about $900,000,000 in capital expenditures in the year, We had $4,200,000,000 of free cash flow.
With $1,900,000,000 in dividends Along with the $3,100,000,000 in share repurchases, we returned $5,000,000,000 to our stockholders in 2015, the highest amount in our history and this represents 120% of our free cash flow for the year. Chart 7 shows our backlog levels over the last 5 years. 2015 That's the 5th consecutive year that we've ended the year with more than $80,000,000,000 in backlog. Without the addition of Sikorsky's backlog, 2015 would have still represented the highest backlog level in our history at more than $84,000,000,000 And with Sikorsky, our backlog is nearly $100,000,000,000 On Chart 8, we discuss our outlook for 2016. We are expecting sales to be in the range of $49,500,000,000 to $51,000,000,000 and this range includes the realigned ISMGS business for the entire year as it is our practice not to incorporate adjustments such as our R and T transaction until they've been I'll provide more color on the sales ranges by business area in a couple of charts.
Our outlook for segment operating profit is a range of $4,900,000,000 to 5,050,000,000 And I'll also show you the range by business area in a couple of charts. Our FASCAS adjustment is higher than we provided on the October call, and I'll discuss the reasons The increase on the next chart. We expect our earnings per share will be between $11.45 $11.75 for the year And our outlook from cash from operations is strong again this year at $5,300,000,000 up from the $5,000,000,000 we projected in the October call. Chart 9 provides a reconciliation of the expected 2016 FASCAS Adjustment that we discussed in October compared with our current guidance. We had an actuarial update to the mortality or longevity assumptions that reduced our longevity estimates and results in a lower FAS expense and increased the FAS CAS benefit by $125,000,000 Our prior assessment assumed a discount rate of 4.25 our prior assumed excuse me, discount rate of 4.25 percent increased at year end to 4.375 percent, which resulted in a $60,000,000 improvement in the FASCAS benefit.
The actual return on our pension assets was a negative 2% rather than the 0 return we expected in October, which results in a $40,000,000 reduction in the benefit and with some minor adjustments which improved $20,000,000 we increased the FAS GAAP benefit for 2016 by $165,000,000 to $975,000,000 in total. Chart 10 provides our sales and segment operating profit outlook by business area for the year and all but aeronautics have been adjusted since we spoke in October to incorporate the addition of Sikorsky, the realignment of the Heritage IS and GS business or in the case of MST both. Overall, sales excluding Sikorsky will be roughly comparable to our level in 2015, although 2015 finished stronger than we had expected. And our Segment operating profit and margin before the incorporation of Sikorsky is right in line with where we expected it to be when we spoke in October. I want to draw your attention to MST and the incorporation of Sikorsky into that business area as we've made some significant adjustments to account for purchase accounting integration, which we'll discuss more on the next page.
Chart 11 captures the adjustments made to Sikorsky outlook for both sales and profit. Beginning with purchase accounting, the largest impact to profit is the incorporation of the non cash intangible amortization associated with the acquisition, which lowers profit by approximately $230,000,000 based on current projections, which can change as we finalize our purchase accounting analysis. And we impacted both sales and profit by what are called customer inventory rights. Essentially, this recognizes the portion of government contracts that were partially completed by Sikorsky before our port purchase and for which Lockheed Martin can only recognize the sales and profit that has occurred since our ownership. This adjustment reduces sales by production in 2015 described in our earnings release.
Cost to integrate Sikorsky into the corporation along with the Cost to complete the restructuring actions announced by Sikorsky last year before our purchase amount to another $115,000,000 reduction in profit this year. All told, these adjustments reduced sales by around $400,000,000 and profit by $375,000,000 in 2016. If you'll turn to Chart 12, we'll discuss the impacts of the transaction with Leidos that was announced this morning. Stockholders of Lockheed Martin will receive $5,000,000,000 of value for our contributed assets in a very tax efficient structure. Just to put some sizing to the tax benefits, we would have needed to sell the business for almost $7,700,000,000 to have created the same after tax value At current valuations, we would receive the $5,000,000,000 in the form of $3,200,000,000 in equity from Leidos for 50.5 percent ownership in the newly formed company and $1,800,000,000 from a special cash payment to Lockheed Martin.
An additional benefit we would anticipate is reduction in our share count of up to 15,000,000 shares. In addition, Lockheed Martin stockholders who choose to participate in the split will also benefit from the synergies created by the new company, which are expected to be $120,000,000 a year at steady state. And because this is anticipated to be a stock split off, On Chart 13, we show the expected high level impact on some of our future financial measures after the IS and GS transaction is complete compared to what those results would have otherwise been had we retained the IS and GS business. From the transaction more than offsets the lost operating profit from IS and GS. Cash from operations is also expected to be higher as the increase in Shares outstanding to be lower because of the stock split off arrangement.
And at the end of the day, we think the new organization better positions the company for long term growth. Finally, on Chart 14, we have our summary. 2015 really was an performance year, particularly given the strategic actions we undertook. We finished the year strong and we set the very solid foundation for 2016. We continue to make cash deployment actions with our stockholders in mind, and we believe that our portfolio shaping actions have us well positioned for future value creation.
With that, we're ready for your questions. Karen?
Thank Please return to the queue for any follow-up questions. Our first question for today comes from the line of Rob Stallard from RBC Capital Markets.
Thanks so much. Good morning. Good morning, Rob. I think we'd start with the F-thirty 5. Marilyn, you mentioned what your expectation was for 2016 deliveries of this aircraft.
I was wondering what the cadence might be for the future years beyond that given what we've seen in the FY 16 budget and the export markets and when you might expect this program to move on to a fixed price contract basis? Thank you.
Thanks for the question, Rob. Well, as we're looking at deliveries for 2016, 53 deliveries, as I mentioned in my opening remarks, it will grow to roughly 59 or 60 in 20 17. And then by 2018, we'll be up to roughly 100 aircraft. And then beyond that, if you so if you look at over those 3 years, it's about 250 to 260 aircraft going forward. And so we really see that The program is getting much more stable as we continue to ramp up.
The LRIP 11 is
Thank you. And our next question comes from the line of Howard Rubel from Jefferies.
Thank you very much. Bruce, with all the moving parts, would it be possible for you to provide a little bit of a walk between 2015 2016, I mean, for example, you have a couple of restructuring items. Last this past year, you have a benefit of an R and D tax credit that was offset. And now in the upcoming year, It won't be offset. So you kind of have flat earnings, but the reality is there are some things that should improve as you go forward?
Yes. Thanks for the question, Howard. So you hit that this is A very complicated quarter and a very complicated outlook for 2016 because of all the moving parts you just described. We did have a restructuring event at the end of last year. You saw that.
This is in our MST business. It amounts to about $67,000,000 Think of this as sort of rightsizing that business post the integration of Sikorsky into MST. I also mentioned in the chart that shows the adjustments to Sikorsky that we're seeing some carryover, What I would call restructuring charges from the actions that were taken under Sikorsky in 2015 before our ownership that are Somewhat carrying over into 2016. Those don't quite offset each other, but it's pretty close. As you said, we had the R and D Tax credit that occurred at the end of 2015, which benefited us.
It wasn't in our outlook until it literally And then in the month of December, the good news about that is that's now becoming permanent going forward. So because it is permanent, we've also assumed that In our 2016 outlook, we had some deal closure costs that also hit 20 'fifteen, think of that as about roughly $0.09 a share or so, I think about $45,000,000 collectively for those sort of transaction costs. And then 2016 is where it gets complicated. We've got, as I said, the purchase accounting This month's for Sikorsky. The integration costs for Sikorsky, so just a lot of moving pieces there.
It's also important to note that as a result of the debt deal that we did to acquire Sikorsky, interest expense is somewhere on the About $230,000,000 or thereabouts higher than it was in 2015. So I've hit I think most of the Sort of the things are changing that are between the years. Howard, there are probably a couple I left off, but I think those are the big drivers.
Thank you. And our next question comes from the line of Hunter Keay from Wolfe Research.
Hi, good morning.
Good morning.
Bruce, can you maybe sort of follow-up on some of the math behind the Can you maybe help us get a sense for what the actual underlying revenue number is for Sikorsky in 2016 and maybe Think about helping us figure out sort of what MST margins would be on sort of a core apples to apples basis in 2016? And then maybe beyond that, Think about maybe a longer term trajectory for how you can think about getting some efficiencies out of Sikorsky and maybe a little bit of a more stable Sales environment on the oil and gas side longer term in that segment? Yes.
So all good questions, Hunter. Let's see, where should I begin? So Sikorsky, because of The adjustments that we talked about for the customer inventory rights, I don't think a lot of people necessarily had in their head that there is about a $400,000,000 reduction for Sales that occurred before our ownership, if you will, that are carrying over into 2016, but that brings the sales down and profit down from what it otherwise could have been. You should think of Sikorsky as being roughly the same size as The realigned IS and GS, they're kind of both in the $5,000,000,000 range, if you want to put it in that perspective. I think you asked about sort of apples to apples margins from MST before Considering Sikorsky, that's a little bit hard to do because as you recall and we talked about this in the opening remarks, The realignment of IS and GS really affects 4 of the 5 business areas.
So if you put it just on the basis of what I'd Called the Heritage MST business before the incorporation of the portion of IS and GS that's going into it starting this year, its margins Actually fairly comparable to what they were in 2015. The IS and GS business, so think of this as the C4 ISR business that was previously within IS and GS. That business coming into MST is a little bit of a margin Headwind, so it brings it down a little bit. And then I think you talked about the prospects For Sikorsky going forward, I think maybe the easiest way to talk about this, and I should say before I talk about We tried to capture all this. I know there's a lot that I just said, but I think we provide some pretty good insight in our schedules in the press release to show the realignment To capture all the pieces I just walked through, if that's not clear by what I just said.
So, Korsky, I think the biggest change that we're seeing from when we announced this deal is the changes in sort of the OEM Helicopter sales in the commercial marketplace, obviously driven by the oil and gas marketplace as we sit here today. So I think I had said At the July call that OEM sales for commercial helos had peaked at about roughly $1,500,000,000 This doesn't include The aftermarket sales, which I'll portion off to the side here, but just the pure helo sales is about $1,500,000,000 in 2014. And what I said at the time was we thought because of the oil and gas pressures, we thought 2016 would probably be half that number. As it turns out, our current outlook is probably half of that number. So think of that as Roughly $375,000,000 or so of commercial HELO sales in the year 2016, which and think of that also as being the highest margin products within the IS and GS portfolio.
So that's some of the pressure that we're seeing. On the flip side, Hunter, what I'll tell you is we're already seeing the benefits of some of the combination, particularly on the international military Marilyn talked about some of that in her opening remarks. And what I would characterize is sort of the paramilitary side, So think of that as things like Coast Guard, search and rescue and border patrol fleets. And those are actually we think To the plan and upside to the business cases, at least as we initially looked at that, but those prospects won't impact 2016 and won't We have much impact even in 2017 if we are successful in closing on those. And then the last thing I'd close with, Hunter, is The cash prospects going forward, we do expect to be much improved in terms of the current level of cash generated by Sikorsky Going forward over the next few years, and you should think of that primarily as the transition from development programs, where we are seeing And therefore lower cash and some different terms associated with that to pure production programs that should be sort of normal cash
Our next question comes from the line of Rich Safran from Buckingham Research.
Merrill and Bruce, a 2 part question on logistics programs. Some time ago, you had talked about assertions against For extra work done in the C5 program, these are these over and above issues. Just wanted to know if this is the year when you expect that to start to flow through and is that factored into your guide? And second, on the C-one hundred and thirty J program, congrats on the multi year and extending Production to 2019. Could you comment if you have the opportunity on that program to get to the same margins you currently have?
I'm just getting I was just looking to get a sense of how you see margins trending on the program. Thanks.
Yes. So, Rich, I'll take those 2. So we have talked about the C5 program in the past and the fact that there were some what we thought were some over and above activities that we believe created some entitlements for some adjustments. We still believe that to be the case, but we have I factor that in our guidance for 2016. I'd love to say it's going to happen this year, but I'm not sure I'm that good at predicting the future, but we do think we still have entitlement there.
So hopefully that helps with that question. On the C-one hundred and thirty Multiyear, thanks for the comment relative to getting that done. And it's good to have that program stretch out to 2019 now. You asked about do we have the same margin opportunity. I've described this in other forums where you should think of new multi years Sort of starting off at a lower initial profit recording rate than probably where we ended the current Our older multiyear and contracts on the C-one hundred and thirty program, so we'll see some, I'll say, optically lower margins From a GAAP perspective, because we're starting that program lower, but at the end of the day and sort of from an economic value perspective, We would expect the current multiyear program to have very similar economics and especially similar cash flows even From day 1 as the previous programs that we completed.
So, while a little bit of near term, I'll say EPS and margin pressure relative to what we have done on years past with prior C-one hundred and thirty deliveries, we think at the end of the day, the economics for those two programs are comparable.
Thank you. Our next question comes from the line of Cai von Rumohr from Cowen and Company.
Yes. Thank you very much and congratulations on the Leidos transaction. So You report IS and G as part of your numbers, the guide's approximately $360,000,000 of EBIT. They're saying it will be higher because they won't have the pension, the corporate overhead, the home office costs. How much of those costs, which looked like they're about 100 Cut now that if and when you kind of get rid of IS and G in that transaction?
Yes. So, Kyle, I'll take that one on. So, you should think of the discussion and what was We talked about from the Leidos point of view, this is more of an EBITDA comparison than the EBIT Numbers, the segment EBIT actually that we're showing for IS and GS. So your numbers are right as usual. Think of it as about 360 To get the EBITDA is obviously take out the depreciation and amortization.
You should think of those being collectively about $80,000,000 because we have Some level of depreciation from the capital assets there, but we also have the amortization from previous acquisitions within IS and GS. And so that gets you to what about $440,000,000 or so. The total EBITDA for this business going into Leidos, you should think of it as about in the $500,000,000 ish range and the delta to go from what I just From the original EBITDA, EBIT segment EBIT plus the depreciation and amortization, There's a lot of moving pieces to get to the top, but the biggest single one is the elimination of the pension costs. We are retaining those assets and liabilities and therefore that cost reduction is what the other benefit is to get to roughly the $500,000,000 of EBITDA for Ryerson GS
And Kai, thank you for your comments. We're really excited about the transaction. So appreciate your congratulations.
Thank you. And our next question comes from the line of George Shapiro from Shapiro Research.
Yes. Good morning.
Hi, George. I wanted to Couple of things here. With the 15,000,000 share reduction at closing, that looks like it effectively offsets the dilution And so when you go into 'seventeen with the lower shares, You'll get at least some profitability out of Sikorsky because this year it looks like maybe 0 when you include all the Amortization. So why and you're going to get some growth from the F-thirty five and you get some growth from the budget. So why won't the GAAP EPS be higher rather than what you say neutral to higher in 2017 and beyond?
Yes.
George, I think we're my fault. I probably confuse people by the words I chose to use there. I'm not trying To give you an outlook of what 2017 looks like compared to 2016, so that's not The way to view the words neutral to higher, it's what would 2017 and beyond look like now After IS and GS versus had we retained IS and GS. And the words you said are exactly what I intended, which is Back to Cai's comment, we're losing think of it as $360,000,000 of profit that you would Plus the benefits potentially of the $1,800,000,000 in cash tax free that we'll be able to Have enough share count reduction to offset the effects of that $360,000,000 or actually maybe a little more than that. And that's all we're intending.
It was not intended to say, we expect 2017 EPS to be neutral or higher. In fact, we expect 2017 to
Thank you. And our next question comes from the line of Seth Seifman from JPMorgan.
Thanks very much and good morning. Was wondering if you could talk a little bit about ULA and just quickly talk about what's in there for 2016, but then also talk about Your long term plans, it would seem that that's a market that's coming under some pressure as well as one where there's some competition. And whether there's going to be any investment required there from Lockheed Martin at any point and just your plans for that market?
Yes. So really good question, Seth. This is something obviously, it's a fifty-fifty joint venture with Boeing. So this is probably a question that was better answered from the 2 We had some good things happen recently relative to The ability to procure the Russian RD-one hundred and eighty engines and think of those as for the civil and commercial marketplace, that activity is very strong. We're We're seeing some benefits actually from the cargo the CRS.
I've lost track what the acronym stands for the crew resupply or cargo resupply mission where 2 of the 3 vehicles are currently slated to be launched by Atlas vehicles. So That's helping us. We have to kind of bridge, we think, to get to the ability to develop an American engine, if you will, to replace the RD-one hundred and eighty. Right now, it is not our expectation that that will require contributions from the parents, but that's something that we've got to work out sort of between Our partner and the U. S.
Government to ensure that, as you know and as you've read, we have had some commercial Development activity on the engine front and we're watching that closely and see how that plays out, but you should not think of this as Requiring large contributions from a developmental perspective to develop that engine going forward. I think you also asked about the earnings in 2016 maybe compared to 2017. You should think of those maybe down a little bit, but actually fairly comparable Year over year between what we had in 2015 and what we expect in 2016.
Thank you. Our next question comes from the line of Peter Arment from Stern AG.
Yes. Good morning, Marilyn, Bruce.
Thank you.
Hey, Bruce, I guess, a clarification back to Sikorsky. The long term target on the synergies was $150,000,000 when you originally announced the deal. But given some of the pressures on the energy side, some of the restructuring they announced, is that still a good number? And what's the timeline we should be thinking about that? Thanks Bruce.
Yes. So Peter, good question. That is still very much the plan and the expectation and that is the work That the MS team is doing now, last year was sort of spent in the integration mode, Bringing Sikorsky on board and making sure everything can happen from the IT services to making payroll and the like. 2016 is very much focused on creating synergies and capturing those synergies. I had said in either the July or October call, we thought we could have about $50,000,000 sort of steady state run rate that occurs probably in the 2018 timeframe.
Again, we're seeing a lot of the integration costs occurring in 2016 that's dampened that a bit. But the run rate is still what we expect. And as I've said and I think on previous calls, we would expect sort of the retained portion That run rate to go down a little bit over time as we give some portion of that back to our U. S. Government But at the same time, we expect to start getting revenue synergies from the combination, some of which I talked about earlier on terms of the international military market that will maintain that $150,000,000 synergy run rate going forward.
Thank you. And our next question comes from the line of Rob Spingarn from Credit Suisse.
Hi, good morning.
Hi, Rob.
I wanted to just take a high level look at sales. And I think you said that ex Korsky, you're kind of flattish for the year and I guess there's a 1% headwind here from IS and BS. But perhaps you could talk at a high level About what's happening in space and I guess core MST, and I guess a little bit in M FC to drive sales down in a year that the budget is inflecting, understanding that there's some lag there, But why we don't see better growth in 2016? And then one clarification, Bruce. On the 300,000,000 share count, You don't just get there by the RMT, but you're planning to continue to buy back stock with some consistency from what you did in 2015?
Yes. So I'll answer that first. So we're really, really close. I mean, it sort of depends on what you assume in terms of And we would expect again to use at least some portion of that $1,800,000,000 to make up the rest and maybe there's some more on top of that, Rob.
Okay.
Relative to I think you asked about maybe 3 of the business areas, MST, Missile and Fire Control and Space Systems for what's going on in 2016 maybe compared to 2015. I talked a little bit about this in the October call and really nothing has changed other than We've again we've moved pieces around because of the realignment of IS and GS. But at a very high level, you should think of the missile and fire control Being lower than 2015, again, we've realigned that business to remove the tech service business that was there, That's sort of the core or heritage missiles and fire control is lower, again, because we expect lower, what I would describe as in theater demand For programs like the GMLRS, the ATACMS missile, Javelin and some of the fire control programs And you should think of that as again, this is reflecting a reduction in OCO funding for some of that In theater activity, that is very quick turn business to us. So even though we're talking about the procurement accounts going up, we don't expect that to offset in 2016 Missiles and Fire Control. MST, the current outlook really makes kind of a for a hard comparison.
So it's got Sikorsky For the full year in 2016 versus less than 2 months in 2015, the heritage, I think I talked about this earlier. The Heritage MST business has slight growth, 'sixteen over 'fifteen, which reflects the continuing ramp up Some of the programs that were won in 2015, for that matter, 2014. And the realigned C4ISR business that I talked about earlier from ISNGS is expected to have sales reductions From the 2015 level for that business that are probably comparable to what is currently shown for the realigned IS and GS business in total. So that's sort of what's bringing the combined, if you will, MST without Sikorsky And then Space Systems, Space Systems is sort of a good news, bad news. A little bit lower Funding for things like Orion and the fleet ballistic missile programs, but the main reason is because of lower government satellite Activity in 2016 and 2015, that's a good news story because that says each Incremental satellite that we're selling to the U.
S. Government is costing less than the previous one. We're doing about the same volume in terms of numbers of satellites, But our programs to reduce costs are paying off and each one is subsequently cheaper and that's what we're seeing within Space Systems.
Thank you. Our next question comes from the line of Myles Walton from Deutsche Bank.
Thanks. Good morning. One quick question, Bruce, on the purchase accounting, just what the trend line looks like into 2017 2018 at Sikorsky. But on the Real question, cash flow utilization in 2016, it sounds like maybe some of this is implied to go to debt pay down or reduction otherwise It looks like you're building up your net cash balance or you could do repurchase that is well in excess of the $1,800,000,000 Obviously, that's the dividend you're getting back. It sounds Otherwise, it's a pretty wholesome debt pay down or a lot of optionality on further repurchase.
What is your thinking on that?
Yes. So Miles, you should think we have about it's not quite, but a little less than $1,000,000,000 I think it's 9.45 ish $1,000,000 of debt where the maturity is coming up this year in 2 different tranches. So we are going to pay that debt down. So think of that as about again roughly a little bit less than $1,000,000,000 use of cash. The trend on The customer lien rights that we talked about, Those are essentially through at the end of 2016.
In fact, I think they end up in the Q3 of this year. So even the 4th quarter is So the only one that will sort of carry over year over year is
Thank you. And our next question comes from the line of Ron Epstein from Bank of America Merrill Lynch.
Hey, good morning. Just maybe a big picture question for Marilyn. When we think about Sikorsky, What do you think Lockheed can do with Sikorsky that United Technologies couldn't? Like what do you guys bring to that party that it was being starved of or I mean, how do you really create a lot of value with this thing that wasn't being created before?
Well, thanks for the question, Ron. I mean, if you look at And how Sikorsky aligns with our portfolio, we've been doing business with Sikorsky for the past 40 years with the mission systems that we put in place into the So right off the bat with that opportunity, we think that we've got some opportunities in cycle time reduction and some synergies that come with that. And then in addition to that, that's our customer base. Where we sell the Korsky as the same customer base where we're selling the balance of our portfolio, It broadens our opportunity both in the domestic and international marketplace. It just gives us a broader opportunity to sell into those marketplaces.
So I see that as an opportunity. And then we have excellent expertise in doing business with the Department of Defense and with other governments around the world And the work that we do in our international business development, what we do with our government affairs here in the U. S, we believe we can make That piece of business better by bringing it into Lockheed Martin. It's an area that we bring expertise and capability in that again allows us to do that. Our customer relationships, our understanding of doing business with the U.
S. Government, our understanding of doing business around the world and is what we bring to that. We also, I think, understand government contracting to a great extent and we bring the So a lot of areas of synergy and a lot of that is represented in some other things that Bruce was talking about in terms of both Cost and revenue synergies, the run rate synergies that we have in that sense. And then, Bruce, if you want to add anything along that line? Yes.
Ron, I think
the other thing that we bring is maybe a little different focus, especially the of government contracts. At least as we looked at that, some of the terms and conditions, I think we'll do some different ones going forward, especially as they relate to cash. And so I would like to think that going forward, we'll be a stronger cash generator under our ownership than what it was previously. And in doing that, I don't think there's any sort of like difficult to do things. It's just sort of getting Then in this case being Sikorsky in parallel to what we do with all the other business within Lockheed Martin.
So we know the game plan, we know the playbook, We just have to sort of execute it with Sikorsky.
The only other thing I would add is, as I said in the past, I mean, we align Well with them in terms of focus on innovation and technology. We're always looking beyond today and that the rotary wing AREA is one that is in great demand and one that we want to continue to invest in the research and development to bring better And new innovation to those platforms.
And our next question comes from the line of Sam Pearlstein from Wells Fargo.
Good morning. Good morning. I was
wondering if you could talk a little bit about what's happening in the international markets right now. Have you seen any sort of Slow down from the Mideast and key awards to watch this year. And then Bruce, do you expect to have a relatively flat backlog or should we start to see You eat into that a little bit this year.
Well, let me just pick up on the international interest. We continue to have growing National interest for our programs, particularly in the area of missile defense and in the Middle East and Asia Pacific and even in Europe where Germany has selected The MEADS is their missile defense capability in Aegis Ashore. So that is an expanding demand. We continue to see that. With some of the current conflict in the Middle East, we're seeing some of our munitions and things of that nature that there's a continued Desire for our targeting pods and other things that they need in the current conflict.
F-thirty five, On the international front, it will continue to ramp up. There's a strong interest growth in those sales. In fact, in the next 5 years, About 50% of the orders will come from the international marketplace. And then I know that there's a lot of interest in terms of oil prices. We're not Seeing a lot of pullback on expenditures on National Security.
Certainly, oil prices affect our sale of commercial Rotary wing, but in the balance of our business, while it does put some pressure on budgets in the countries that are buying national Security assets and things that they need to protect their citizens. The choices that they're making are cutting in other areas so that they can protect their citizens. And So we're not seeing a big damper on that. There may be some things that will slip out a little bit or they might reduce the volume on the near term, but they're still going to buy with the products and capabilities and technologies they need to enable them to protect their citizens and to deal with their security issues.
Yes. So Sam, on the question relative to backlog and would it be flat, short answer is no. We would expect to see a reduction by the end of this year. And you should really think of that as coming primarily from 2 business areas. MST We'll have and when I say down, we're talking probably somewhere less than $5,000,000,000 Maybe $4,000,000,000 and probably half or so of that is MST, the bulk of which of that is for Sikorsky.
As you might expect, we're having sales that are coming out of backlog from prior year's orders that are not being replaced because of the particularly The commercial business I talked about earlier with new orders. 2nd one is space, also down pretty about half that number as well. And that's just the timing of orders. We had some very good orders in the past few years that are playing out to sales and we don't have quite the size, Including the Orion order a few years back, and we're not seeing those orders replicated that they are translating into sales as we speak here. Yes, the big orders we're watching this year, not a lot of frankly, not a lot of large competitive Orders that we're chasing this year, the biggest orders we're looking for are the sort of the follow on F-thirty five orders, in particular Lot 10 and the Finalization of Lot 9 and a lot of the ancillary contracts that go with both of those LRIPs.
So that's a big chunk of it. The biggest single international order that we're watching probably is a THAAD order with cutter. And we have Other air missile defense programs kind of scattered throughout the region, but not nearly the same size as we're seeing in Qatar. But That's the driver of the biggest international orders prospects as we see 2016.
Karen, this is Jerry. I think we've got time for one more question.
Thank you. And our final question for today comes from the line of Joe DeNardi from Stifel.
Thanks for squeezing
me in. Bruce, just on Aeronautics margins going forward, can
you just talk about given the booking rate increases you had on F-thirty 5, how dilutive to segment margins is that program and when is the inflection point for margins within that segment? And then, just directionally, how should we think about FASCAS in 2017 at this point?
Yes. So, Joe, let me try to capture those and my thoughts on that. Aeronautics margin, As I said on the October call, there's really two reasons for that that are driving them below 2015. The first One being, as I call the dilutive effects of the F-thirty five program, even though the margins on F-thirty five are increasing Year over year, they're still lower than the overall composite rate for aeronautics and that's bringing the rate down slightly. The other reason primarily was the C-one hundred and thirty impact That I think Rich was talking about relative to the sort of the conversion of older C-one hundred and thirty contracts and now booking sales under a new multi year.
Again, economically, I don't see a lot of difference between the 2. But from a sort of a GAAP reporting perspective, We'll expect to have sort of a lower starting margin on the new multiyear than the ending margin on the previous We negotiated C-one hundred and thirty contracts and those 2 are what are kind of bringing down the margins of Aeronautics in 2016 compared to 2015. I do think I think you asked about what's the prospects going forward. I think 2016 is sort of the bottom point, If that makes sense relative to the margins of Aeronautics and we would expect to see slow improvements going forward Every year primarily as we see the sort of getting to, I'll say, an ordinary production program on the F-thirty five program starts to take effect as well as the inevitable increases on C-one hundred and thirty because we're Starting off at a lower booking rate than we are right now. 2000 I think you asked about 2017 FAS CAS.
I would expect it to be and look, I always hesitate to talk about next year. There are so many moving If we were sort of current course and speed is always the way I like to describe it, we're about $975,000,000 today. It's probably in the $450,000,000 higher next year if we were to strike a line today. But obviously, a lot of things can
So let me just wrap up the call for today and summarize the year and how we're looking at the business going forward. I want to end Our team continues at a very high level even amid our bold strategic actions that we took to position the business for future growth. As we're looking into 20 16, our record backlog coupled with increasing DoD budget has the corporation positioned for a bright future of top line growth and increasing cash flows. Through the focus, dedication and integrity, we continue to deliver on our commitments to customers and stockholders. So again, thank you for joining us on the call today.
We look forward to speaking with you in our next earnings call in April. Karen, that concludes our call today.
Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now log off and disconnect. Everyone have a good day.