Good day, and welcome everyone to the Lockheed Martin Portfolio Shaping Actions and Second Quarter 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 Krutcher, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Abigail, and good morning. I'd like to welcome everyone to our Q2 2015 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 Our 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. I would also note that we're extending the call duration until 12:30 today to enable adequate time for your questions on our financial results and strategic actions. With that, I'd like to turn the call over to Marilyn.
Thanks, Jerry. Good morning, everyone, and thank you all for adjusting your calendars and joining us on the call today. It's a day earlier than planned, so it's especially given the short notice we appreciate you joining us. With today's Press release outlining 2 strategic actions we are implementing to strengthen our competitive posture and position the corporation for profitable long term growth, We accelerated the call to enable timely discussion of our 2nd quarter financial results and the portfolio shaping items. Starting with our financial performance, we had a strong quarter operationally and financially with all reported results exceeding our expectations and we are progressing on achievement of full year financial objectives.
These results reflect the execution being achieved across the businesses as a corporation operated at a very strong level in providing critical solutions to customers while returning value to stockholders. The year to date financial performance also enabled us to again increase full year 2015 guidance for segment and consolidated operating profit and earnings per share. In addition to these increases to guidance, we reaffirmed our earlier outlook for full year orders, sales and cash from operations. With these strong financial results, we continue to return value to stockholders in the areas of share repurchases and dividend repayments through cash deployment initiatives. I would now like to discuss the 2 and then I'll ask Bruce to cover in more detail our 2nd quarter financial results and increased 2015 guidance.
To assist our discussion, I would ask you to turn your attention to the charts we provided on our website. Starting on Chart 4, reshaping our portfolio. The first strategic action we announced is our signing of a definitive agreement to purchase Sikorsky Aircraft. Sikorsky is a natural fit for Lockheed Martin, and it complements our broad portfolio of world class at Aerospace and Defense Products and Technologies. This action will enable us to extend our core business into the $30,000,000,000 Commencement of a strategic review of our Government IT Infrastructure Services work at Information Systems and Global solutions and of our technical services work at Missiles and Fire Controls.
The strategic review will address The changing market dynamics affecting these businesses and will help us determine how to best position them for future growth and is expected to result in a spin off or sale of the businesses. These actions continue our practice of continuously shaping the portfolio to secure the highest value creation for customers and stockholders. Turning to an overview of Sikorsky on Chart 5. Sikorsky is well known as a world leader in the Design, manufacture and support of military and commercial helicopters. Their international presence is wide ranging with operations in 20 countries and their products are used in over 40 countries.
Sikorsky's revenue composition is shown on the pie chart with 75% of their work for military customers and the remaining 25% to commercial users. With approximately 50% of their annual revenues derived from international customers, they will aid us in moving forward on our goal to Some of the important strategic benefits of this acquisition are that Sikorsky has familiar customers. This familiarity will assist the integration process through utilization of similar knowledge and interaction with common customers. They are also extraordinarily well positioned with an established brand and a robust backlog of future work. They also have a 40 year history as a frequent teammate of our Mission Systems and Training business area.
And today, we collaborate on the BH-ninety two presidential helicopter, combat rescue helicopter and the Naval MH-sixty Romeo helicopter. Their strong aftermarket business is also expected to provide a long term source of earnings to the corporation and another lever of value creation. The opportunity to access In today's historically low interest rate environment is another significant contributor to the rationale and value creation of the acquisition. Beyond the strategic benefits I outlined, another key element of the acquisition rationale is the Section 338(ten) tax election for the transaction, which is expected to provide approximately $2,000,000,000 in net present value for our corporation and stockholders. Future growth prospects of the acquisition are outlined on Chart 7.
One of the key elements of our strategic planning is to secure and extend our core defense business, and we feel confident that the addition of Sikorsky will will contribute significantly to the growth objective. As the prime contractor for multiple current development helicopter programs, such as the CH-fifty three ks, Presidential and Combat Rescue, Sikorsky is well positioned to grow as these programs transition into production scheduled in 2018. With their extensive presence around the world in over 40 countries, We see further expansion of our international operations as we will benefit from their international footprint and customer relationships. The Korske footprint in the Commercial Aviation segment is well established with extensive activities supporting the oil and gas industry. While this segment has been under recent pressure due to low oil prices, it is expected to recover in the future and add value to the corporation.
We believe these current pressures enabled us to make this acquisition at a low point in the economic cycle. All of these elements indicate significant opportunities for growth in the future and value creation potential. I'd now like to outline the transaction valuation on Chart 8. The agreement announced today outlines a purchase price of $9,000,000,000 and will be funded with a combination of new debt and available cash. It is important to note that our joint election of the 338(ten) tax benefit effectively brings the adjusted price of the transaction to slightly over $7,000,000,000 with an adjusted multiple of 10.3x EBITDA.
These metrics demonstrate that we are purchasing an active participant in one of the largest areas of DoD expenditures at an attractive price. I also want to reiterate that this transaction will not change our previously outlined plan to return cash to shareholders through dividends and stock repurchases between 2015 2017 and reducing our outstanding share count to below 300,000,000 shares by the end of 2017. An overview of synergy is shown on Chart 9. While there are multiple elements of synergy that we have identified from this transaction, the largest contribution will be from the Approximately $2,000,000,000 that we will recognize through the election of the Section 338(ten) tax treatment. In the area of Cost synergies, we expect to achieve a steady state level of around $150,000,000 annually after integration actions are completed.
In the area of revenue synergy, we see multiple opportunities by leveraging our relationships with international governments and our ability to match their security needs with the full spectrum of our security offerings. Sikorsky's products capabilities will add to our existing portfolio and enable us to offer an even broader range of solutions to international customers. Before leaving Sikorsky, I also want to offer some additional perspectives on our new team members. We have similar cultures. We have a shared passion for innovation and a commitment to supporting the men and women who defend our freedom.
Together, we will offer a stronger portfolio of helicopter and systems engineering solutions to our global customers as we accelerate the pace of new technology. At the same time, our commitment to bring the best we have to offer to our work with our helicopter manufacturers is absolutely with other helicopter manufacturers is absolutely undiminished. I am confident Sikorsky will be an excellent fit within our Mission Systems and Training business area and a strong contributor to the corporation as we move forward together. I'll now turn to Chart 10 and speak to the 2nd portfolio action we outlined today, The strategic review of IT and services work in our IS and GS and MFC business areas. Let me start by saying that we have a proud legacy as a world leading government IT services and technical services provider.
However, market dynamics and trends led us to believe that these businesses may potentially achieve greater growth, which is good for our employees and create more value for our customers and stockholders by operating outside of Lockheed Martin. The matrix shown outlines the businesses within IS and GS and MFC that comprise the strategic review as well as those that will be realigned under other existing business areas. For your reference, The businesses under strategic review are expected to generate approximately $6,000,000,000 in annual revenue this year with mid-seven percent margin. With a series of recent wins, the businesses under strategic review are well positioned to generate value Under an expected spin off or sale. As I summarize today's announcements on Chart 11, I'd like to conclude by reiterating that the 2 strategic actions we announced today represent powerful portfolio reshaping activities and provide strong opportunities for creating long term value to shareholders.
We believe there are opportunities for significant synergies and are confident that the risk of execution is low. Both of today's actions will further position the corporation for growth and value creation for investors and customers. I'll now ask Bruce to go through our Q2 financial performance and our increased 2015 guidance, And then we'll open up the line for questions.
Thanks, Marilyn. Good morning, everyone. I'll try to keep my remarks brief this morning so as to allow more time for questions during our session. And my remarks relate to the web charts addressing just the financial results for the quarter. Beginning with Chart 14, we have an overview of our 2nd quarter results.
Sales for the quarter were $11,600,000,000 and were ahead of our expectations. We'll provide more color on our sales results on the next chart. Our segment operating margin was also better than expected in the quarter at 12 percent and enabled us to achieve earnings per share of $2.94 We generated $1,300,000,000 in cash from operations, again a little better than expected and we'll also discuss this further in a few charts. Our cash deployment actions increased over the 1st quarter with $1,400,000,000 of cash returned to shareholders, including nearly 5,000,000 shares repurchased for more than $900,000,000 And with our strong operational performance, we are increasing our full year outlook for both operating profit and earnings per share. So we feel good about how we ended the first half of the year and that positions us well for the remainder of the year.
On Slide 15, we compare our 2nd quarter sales results for 2015 with our results in 2014. Sales are higher by about 3% compared with the Q2 of last year. And while most of the higher volume in the quarter was due to earlier than planned deliveries, We'll be watching this closely over the next few months to see if the higher trend continues. Chart 16 compares our segment operating margin this quarter with Q2 of 2014. Segment operating margin was 40 basis points lower this quarter compared with the same period last year.
But as I said earlier, this was higher than we had planned for the quarter and enabled us to increase our margin outlook for the year. Mission Systems and Training drove the higher than expected results with margin improving 250 basis points over the Q2 of last year. Better performance this year, combined with the absence of performance issues last year led to this improvement. Turning to Chart 17 will compare our earnings per share results this quarter with our results from a year ago. Our EPS of $2.94 was 7% higher than the results from last year and enabled us to increase our EPS for the year.
Chart 18 provides details into share repurchase activity during the quarter. As we previously mentioned, we had significantly higher share repurchases in the quarter compared with the same period last year with $937,000,000 spent. More importantly, we're $300,000,000 ahead of the year to date amount from a year ago and have reduced shares outstanding by more than 5,000,000 shares. And we are well on our way to achieving or exceeding the $2,000,000,000 repurchase target we established at beginning of the year. On Chart 19, we discuss our total cash return to stockholders for both the quarter year to date.
With the $1,400,000,000 in cash returned to stockholders in the 2nd quarter, we have returned just over $2,500,000,000 on a year to date basis. And in both the quarter year to date, we have returned 131 percent of free cash flow to our stockholders. On Chart 20, we provide our updated outlook for the year. We're leaving both orders and sales unchanged at this time. About 65% of our orders are planned for the second half of the year.
And while we think there is upside potential in our sales for the second half of the year, We will have a much better feel for both of these metrics when we get to the 3rd quarter call. We are increasing our segment profit by $75,000,000 due to our strong performance through the first half of the year. And as a result of our increase in profit, we are also increasing our earnings per share guidance by $0.15 to a new outlook of between $11 $11.30 per share. Finally, we are keeping our cash from operations We mentioned last quarter that our cash would be significantly weighted for the second half of the year. And while that is still the case, Our stronger second quarter results have reduced that difference between the first and second half of the year.
On Chart 21, we have our sales outlook by business area. Again, no change in our outlook at this time. Chart 22 shows our outlook For segment operating profit, we have a higher profit outlook in 2 of our business areas this quarter, increasing Space Systems by $45,000,000 and Mission systems and training by $30,000,000 resulting in the total outlook increase of $75,000,000 Finally, Chart 23 provides our summary of the quarter. We had a good quarter, building upon our results in the Q1 and positioning As we look forward to the rest of the year, our cash deployment actions accelerated in the quarter and we remain committed to the actions we discussed earlier this year. Our program execution was very good in the quarter and we look forward to adding to our portfolio with some strategic wins in the second half of the year.
And last but certainly not least, our decisions to acquire Sikorsky Aircraft and conduct a strategic review of our Government IT and Technical Services business Makes this quarter strong from both the tactical and strategic perspective. And with that, we're ready for your questions. Abigail?
Thank Today's call is extended by 30 minutes. However, we ask that you limit yourself to one question and return to the queue for any follow-up questions. Our first question comes from the line of David Strauss with UBS. Your line is open.
Good morning and congratulations.
Good morning, David.
Bruce, can you just give us potentially give us some more metrics that you're thinking about around Sikorsky Potential leverage as you see the deleveraging and then how you're thinking about intangible amortization and accretion from the deal as you look out?
Yes. Sure, David. Yes. So as we look to finance this deal, As Marilyn said, we expect to use some cash off the balance sheet, but also do obviously the vast majority of it in the form of debt. Currently, we're thinking that looks Somewhere around $1,000,000,000 off of the balance sheet in terms of cash used and $8,000,000,000 worth of debt.
We think just from sort of just to give you a lot of metrics maybe at once here, we think that The debt, the average coupon for the multiple maturities that we would do, including potentially a little bit of commercial paper in the mix, would be about a 3.5% Coupon, so you should think of that as somewhere in the order of $280 ish million a year of interest And on an after tax basis, something like $180,000,000 a year rounding. Intangible amortization, I think, was your other question. As we look at this right now, we're probably looking at about 3 point The biggest drivers of that intangible level and that would equate to about $250,000,000 It extends a year. So, again, think of the $180,000,000 after tax interest intangible amortization Around $215,000,000 a year. And then on the positive side, obviously, the 338H10, As Marilyn said, almost $2,000,000,000 worth of present value.
You should think of that as being about $450,000,000 a year sort of tax deduction associated with the step up in assets that equates to about 100 and $60,000,000 a year benefit going forward. And then as Marilyn said also, we're expecting somewhere in a steady state run rate of about $150,000,000 a year in additional earnings. So if you add all those up together, a lot of moving pieces there, I realize that. Your final question was sort of Accretion, when does that happen? So we our intent is to integrate this business as quickly as possible.
Marilyn said we expect to close somewhere end of 2016 or excuse me, end of 2015, early 2016. So We would expect to have the integration cost spent in large part in 2016. We want to get the integration done as quickly as possible In order to generate the synergies that come from that, so we would be GAAP dilutive, if you will, in 2016, we expect to be marginally GAAP accretive from an earnings perspective starting in 2017 and then to grow from that point forward. Yes. Just one maybe last comment On the that's okay.
Never mind. I'll leave it there and see if there's another question on it.
Thank you. Our next question comes from the line of Doug Harned with Bernstein. Your line is open.
Good morning. And it's Finbar Sheehy for Doug. Just turning to the other side of your strategic announcements this morning on the Services and IT businesses. Can you talk a little more about the criteria you'll use to decide which ones you'll keep and which ones you'll divest? And as you talk about that, you mentioned that you have the opportunity to acquire Sikorsky at the bottom of the cycle and some of these IT and to acquire Sikorsky at the bottom of the cycle and some of these IT and Services businesses have been hurt by the Budget Control Act and sequestration.
So how do you Avoid, if you like divesting these businesses at the bottom of their markets.
So just to speak to the portfolio, the way that we've gone it, we've been looking at our IT Infrastructure Services and Technical Services business for some time now and done quite a bit of Services business for some time now and done quite a bit of analysis, trying inside the corporation to figure out how we can Make it as competitive as we can. As you know, there's a lot more competitors that have come into the marketplace and our customers' Priorities are changing and what they're looking at more they're much more price sensitive. And so the elements of our business Predominantly will be in the work that we are doing for civil agencies, IT infrastructure type services. And Bob, when you think about enterprise IT services that are done for various agencies, that is the type of work that would fall into this. And then the technical services work that is in our Missiles and Power Control business.
In terms of we certainly want to create Value through this process. So what we believe is if we move it out from under the business structure in Lockheed Martin that that will allow it to thrive and grow We'll allow it to have a business structure that allows it to thrive and grow. And so we're willing to separate those businesses to create that value Going forward, we think it's a very strong business. We have a strong legacy of being the top IT provider for the U. S.
Government for the 21 years and this is a business that has strong performance and strong programs and we've had some recent wins this year And we've had some acquisitions in that business. So we think what we have is a premier asset and we think if we can Stand it up as a standalone company or if it's attractive to a buyer and we can get the right price for it, then that's the best for that business to go forward.
Thank you. Our next question comes from the line of Richard Safran with Buckingham Research. Your line is open.
Hi, good morning. Good morning. Marillyn, Bruce, I wanted To know if you think you could be a better owner and operator of Sikorsky than United Technologies was. If possible, I'd like to know how you might be looking at operating the business differently than UTX did? How you might think that might be a benefit?
Well, I'll start out first and then Bruce you can add to my comments. I think if you look at what is our core business, our Core business is doing business with governments and its platform and systems integration. So That is the predominance of our business. And I think in that sense bringing Sikorsky into our business is just a natural fit for us and it's an Ability for us to bring our strength in running programs and our government contracting and all of that expertise to the Sikorsky business. We also look forward to the opportunity to create on the international side of our business from their footprint that they have around the world and the work that they're doing in a number of countries.
So I think if you look at the potential synergies, We do think we are an excellent owner and a better owner for this business because not only did we bring our expertise, but bringing in Their footprint and their capability around the world is going to is value that we can create as well. Bruce, do you want to add something?
Just a thought, Rich, so in terms of adding value greater than the parent, this is a business that's been successful for however long It's been in business, 90 something plus years. So they obviously are a national icon in terms The capabilities that they bring to the rotary marketplace. So they do a lot of things well already. Where I think we can Create value. I mean, first off, we think this deal has pretty little execution risk from us.
I mean, I like to think of this as we're buying a portfolio of programs Versus sort of a new business model and new marketplaces and new customers that we've never dealt with before, this is all very, very familiar with us. And I like to think of this as having sort of the power and backing of a $45,000,000,000 business focused on government contracting versus one which was less focused perhaps in total than just on the piece of the Sikorsky business. I do think there are areas we can improve the business, particularly on the contracting side and maybe the focus a little bit on the cash flow side. I think in particular the international sales market is an interesting one for us where we Through the combination of our portfolios coming in and having a discussion about the security needs of our International customers, whether it's F-thirty five's, Littoral Combat Ships, now Sikorsky Helicopters is a much, much more powerful discussion than what I The current parent could have in terms of bundling products and services together to go into the international marketplace. So I think all of those really add to our ability to help us better position this business going forward.
And look, We're happy to have this business. We think it fits well into our portfolio and this is what we do and this is our core knitting.
Thank you. Our next question comes from the line of Myles Walton with Deutsche Bank. Your line is open.
Thanks. Good morning. Marilyn, Marilyn, have you had a chance to get initial feedback from the DoD and the proposed acquisition, particularly as it applies to Broader consolidation in the industrial base realizing the Army is not a huge customer proportionally to Lockheed Martin maybe that's not as much, but at the DoD level There may be some issue.
Well, as we would do on any acquisition, we contacted our customers. So I've had an opportunity to speak You see the levels in the Department of Defense and have offered to them to provide whatever additional information they need as they assess it. They have been consistent through any acquisition of this type to say that they will assess and Position of this type to say that they will assess and ask their questions and give it a detailed review. And so we stand ready to support them through that process. I do think if you look at this acquisition, we are not reducing the number of competitors at all In this segment, in the Helicopter segment.
And so in that sense, there shouldn't be a concern. And Our portfolios are very complementary. There's very little overlap between our two portfolios. So in that sense that I would expect that that would not be a concern of theirs Going forward, in terms of the services business, there are many, many competitors out in the services, IT services arena. So the fact that we are trying to position this business where it can be more competitive in that arena, I think they would view it positively.
So between those two elements, it's very positive. The other thing that I would argue is, if there's some concern about Consolidation making one entity bigger than another. When you look at these two strategic actions that we're taking, UTC has reported that they see the sales for Sikorsky to be about $6,500,000,000 This year in 2015 and the piece of business that we're looking at doing a strategic review to spend our sale is about $6,000,000,000 We may find at the end of the day that we're roughly the same size, maybe even a little smaller, maybe a little bigger, but basically roughly the same size with both of these strategic actions. So I don't think there's more concentration in Lockheed Martin in that sense.
Thank you. Our next question comes from the line of Rob Spingarn with Credit Suisse. Your line is open.
Good morning. Congratulations. Good morning.
Good morning.
Just two quick clarification questions. One on what Marilyn just spoke of. But with regard to the Part to the strategic evaluation at IT, the question there is you're talking about this as a single $6,000,000,000 business or That's my interpretation, but might you consider doing different things with different pieces selling some and spinning the other? And then for Bruce, Is the $150,000,000 in synergies net of things like profit on profit? Thanks.
So to your question, first of all, this could be there There's a number of possible scenarios. That's why we want to go through this process between now and the end of the year to really do a strategic review on what The best options, strategic options for these elements of the business. To your point, it could result in 1 or more Transaction and our key is how do we deliver more value to our customers? How do we deliver more value to our shareholders through So the strategic review is going to determine what the ultimate outcome and it could be more than one transaction.
Hey, Rob, the second part of your question, the $150,000,000 steady stake going forward, that is considered to be net of fee on fee or profit And just to give you not to confuse you perhaps, but just to give you some insight. The level of sales that we see, the overlap that would That would need to be adjusted out, if you will, once Sikorsky becomes part of the portfolio for our business that's being conducted within Mission Systems and training, you should think of that being about $150,000,000 a year. I mean, there's obviously priced business right now that That carries on for some period of time for things like our work on the combat rescue helicopter or the presidential helicopter where That wouldn't have a negative profit impact in the near term, but we would eliminate the sales obviously of that going forward. And then so think of when we get to The steady state that is net if you will of that consideration of fee on fee.
Thank you. Our next question comes from the line of Pete Skibitski with Drexel Hamilton. Your line is open.
Yes. Congrats guys on some bold moves.
Thank you. Thank you.
Guys, how do you think about the strategic fit of Sikorsky's commercial helicopter business?
Well, I think it's for us, it's a nice bid in the sense that, as I mentioned in my remarks To the outset, we it's predominantly in the oil and gas side, which is not an area that we are in. And while we've got some near term Pressure there just because of what's happened with oil prices. We see an opportunity in a few years for that to And so a real opportunity for growth there as we move forward. And then the other side would be on the commercial side would be in the sustainment. There's The commercial aircraft that are already in the base among these 40 countries that I mentioned have to be maintained and sustained.
And so that's a good strong healthy business. When you look at it from a Lockheed Martin standpoint, I mean, we sell our Products and services to heads of countries. So they buy both military and commercial platforms and systems and sustainment Activity. So I think that that is a nice fit where we bring all of that together in our customer relationships around the world.
Thank you. Our next question comes from the line of George Shapiro with Shapiro Research. Your line is open.
Yes. Bruce, I just want a little more clarification on your comment about Sikorsky. So you're saying in terms of the Profit on profit that you're getting for the programs that you're subcontractor to Sikorsky, that's about $150,000,000 Currently or that's what it's going to be?
No, George. No, George. That was revenue. Profit is a much, much smaller number.
Okay. And that's because though a lot of their programs that you subcontract to really haven't started to ramp up yet?
That's correct, George. But I'll tell you that the absolute dollars on our side don't deviate a whole lot from that number For the work that we're doing today and for the near future.
Okay. And then similar subject, Bruce, how much Subcontract work do you do for other helicopter manufacturers that might be at risk if Since they may not want to deal with a competitor.
Yes. So we do quite a bit of work, George, actually, as we sell direct to The U. S. Government, a lot of the work is not directly to the helo manufacturers themselves. So a lot of our Integration activities is actually done direct to the government as opposed To direct to the other helo manufacturers, if you will.
We have relationships with everyone Domestically and internationally in the Hilo marketplace, our intention is to maintain those relationships going forward. That's something that we would obviously have to consider relative to our discussions with the DoD as far as going forward this incorporation of the business. And that's something that we would intend to do just out of a pure economics perspective, if nothing else. But that's just the right thing for us to do going forward.
Thank you. Our next question comes from the line of Howard Ruppel with Jefferies. Your line is open.
Hi, thank you. I want to turn to the boring fix of talking about the business for a moment. Marilyn, you had a couple of nice positive Developments in terms of operations, were there some things that you could address both in space and frankly in aircraft that you brought Prepare to change the profit trajectory?
Well, just to speak To our major program, the F-thirty five, I mean, we've made really good progress over the past quarter on that program. I had the opportunity to attend the CEO conference in Norway for the F-thirty five program where all the international partners participate and it's chaired by Secretary Kendall, by Andersen, we have very strong support for the program itself. And The fact that Secretary Kendall would come out after that to discuss potential block buy for the program, which would be for at least 450 to maybe 500 aircraft from FY 2018 to FY 20, I think, was a very strong statement about the stability of the program and the outlook for the program going forward. The second thing on that is, if you've been Tracking the performance of the program and moving toward the Marine Corps initial operating capability. The Marines are have finished their operational readiness.
They're now in the midst of their assessment of their operational readiness and is on track. They appear to be on track to announce their IOC this month and we look forward to that. That's a huge milestone in this program when There is one of the the first service to come out to declare that aircraft combat ready, I think sends a strong message To everyone that this program is on track, we delivered 11 aircraft in the second quarter and we're on track to deliver 45 In 2015. And we've already gotten our long lead for LRIP10, so that's for 94 aircraft. So Program is ramping up in that sense.
I think it's well supported in the budget proposals that are out there. And so in that sense, Production is ramping up, software completion and all of those things are on track. And so that's what I would say about F-thirty five. You mentioned the space program. I mean, we're performing well on our government satellites.
Neos, for example, we just launched the 3rd Neos satellite and that program is moving forward. And then on SBIRS, You've seen the reports out that we have put forth a more Cost effective approach going forward and was greatly embraced by the U. S. Government on TIBRS and so we'll continue our path along on And then in the missile defense arena, I hope you saw that Germany has announced their intent to they've selected MEADS for their air defense system and that's a truly a strategic win for us. I mean their legacy systems are aging.
They need replacement. They went through a very thorough assessment of what system would best That their needs and they selected NEANS. And I think it sets the tone for other countries. We'll be looking at this important selection by Germany and we expect other countries to look at NAND as their choice for the most modern, the most capable Mental defense system for their countries.
Thank you. Our next question comes from the line of Joseph DeNardi with Stifel Nicolaus. Your line is open.
Hey, thanks. Good morning. Good morning. Bruce, I wonder if you could talk about the I guess it may be tough To talk about what the proceeds from the spin or the sale at this point, is that additive to the to your capital deployment plans? Or should we think about That is going towards the balance sheet.
Yes. So you're right. It is hard to predict. I mean, those are obviously 2 completely different scenarios in terms of the Cash that we would receive from that versus a spend versus a sale, spend obviously being a lot less. We've got a fairly low tax basis In that business and at least as we look at it, not unlike what UTC was probably looking at with Sikorsky, you On a low tax basis, so your ability to get cash out on a spend basis is limited from a tax free basis from a tax free perspective To what that is in terms of a tax free dividend.
So we get a lot more cash back from a sale perspective. I hate to speculate what that could be. And we'll get into further detail as we get into the later part of this year and early part of next year as far as when we sort of close on our decision as to which path we I would suspect in terms of cash deployment, the near term cash deployment would probably be paying off some of I mentioned as far as some of the debt that we're doing to do the Sikorsky deal would likely come in the form of commercial paper. We'd probably pay that off Pretty quickly and bring that down. And then the rest, Joseph, we'll wait and see what we've got and what needs we have at that time.
And as We'll try to be opportunistic in all our cash deployment actions as we always are.
Thank you. Our next question comes from the line of Peter Arment with Stern AGCRT, your line is open.
Yes. Thank you. Congratulations, Marilyn Bruce. One last Clarification, Sikorsky will that be an independent segment or are you going to have a standalone base or
will be folded in As
part of Aeronautics or one of the other segments. And then just if you could also give us, Bruce, just regarding the quarter, Marillyn mentioned you're going to be delivering 45 F-thirty 5s this year. Can you kind of give us a rundown of just kind of the planning for deliveries for this year and maybe a sneak peek of how that looks for next year? Thanks.
Sure.
In terms of Sikorsky, our intent is for For that business to report directly into Mission Systems and Training, that's our business where Dale Bennett is the Executive Vice President. So it will be a direct report, a line of business in that business. And we intend to maintain its name and its brand and so we preserve that brand identity. We think it is very strong For Sikorsky and so we'll continue forward with that. So it will be Sikorsky, Lockheed Martin Company and it will report into
Just talked about deliveries. As you said, the 45 this year, that's about what we're expecting to have for the year. I think we've delivered 19 year to date basis. So obviously that ramp rate picks up in the second half of the year. Just going down the entire portfolio, the C-one hundred and thirty, again, we've talked in the past about that being A very steady build rate of about 24 aircraft a year.
We had 10 deliveries in the first half of the year, which would obviously imply 14 in the second half. Right now, those are more weighted just for FYI purposes towards the Q4 than they are for the Q3. I'd like to think there's some potential to move some of those aircraft into the Q3 though. That's actually making our sales If we just were to profile our sales for the rest of the year, it makes our Q4 look a little bigger than I think it actually is going to be as we sit here today. C5 deliveries, we have to expect about 9 for the year.
We've had 5 on a year to date basis. So For the rest of the year, unless we pull them 1 for next year. And these aircraft are getting to be a very Good pattern from a performance perspective. We were actually earlier on the deliveries all throughout the first half of this year. So we're going to be watching that, but that's not within our current Next year, I don't have the numbers off the top of my head, Peter, but Definitely, the aircraft deliveries on F-thirty 5 are going up.
I'm sorry, let me back up for a second. I didn't talk F-sixteen, I apologize. F-sixteen, 11, 12 aircraft in the year. We did 6 in the first half
of the
year, 5, 6 in the second half. So let me maybe start with the easy ones. C-one hundred and thirty J24 next year, F-sixteen Similar levels of sales in terms of quantities next year. F-thirty five, greater than the 45 now. I don't have that number off the top of my head, but it's It's a pretty good increase, Peter, from what I've got in my memory there.
And then C5 is a very similar number to what we're seeing in 2015, Corey. Hopefully, that helps With the question there.
Thank you. Our next question comes from the line of Rob Epstein with Bank of Kamara Lynch, your line is open.
Hey, good morning guys.
Good morning.
If you could just quickly go Through if possible in a little more detail, where you expect to pick up the $150 of cost synergies? So you're going to be moving facilities? Is it just back office takeout? How are you thinking about that Bruce?
Yes. So It's a combination of probably all the things that you would think would happen in this sort of transaction. So some of the bigger The abilities that we believe get some long term synergies are in the supply chain, particularly with the overlap of the procurement Activities, especially within our Aeronautics business activities, but also within MST as well in terms of systems overlap there. So you should think of the synergies coming in the form of supply chain synergies, a little bit of facilities, Perhaps rationalization and some headcount rationalization as you would expect as well. And Collectively that adds up to more than $150,000,000 We think the $150,000,000 is sort of what sticks to the bottom line after consideration of price business And disclosing under cost and pricing data on our government business.
But the thing that interested me or that caught my attention when we looked at this business As more of it stays with us longer term, I think, because this probably has a longer tail of price business Than I would have expected before we went into this the diligence phase, I mean, about $16,000,000,000 Worth their price business, so obviously you get to keep it on that part of the business. And also the commercial and the sustainment particularly On the supply chain savings, the headcount savings and the like, obviously, those are less cost based driven in terms of pricing and more of the Synergy you get from a cost side there stay for longer as well. So that's sort of how I think of it. Those three buckets, facilities, Supply chain headcount and for the reasons I just said they stay with us for longer than you might otherwise think.
Thank you. Our next question Shin comes from the line of Hunter Keay with Wolfe Research. Your line is open.
Hi, good morning guys. Thanks for taking my question. So as we think about the evolution of Lockheed here over the next 12 months, how should we think about How IRAD will maybe move around a little bit getting rid of some of the short cycle stuff and layering in Sikorsky already in a little bit of an Upward trajectory year over year. Should we think about maybe R and D trending at or above the 2% of sales level once everything is kind of done with?
Yes. So I'll take that on, Hunter. So it's an interesting swap. Marilyn talked earlier about sort of big picture perspective, We're losing $6,000,000,000 worth of business on our IT, tech services side, which you should think of being much, much, much Significantly lower iRad intensive than the rest of the business. And this, I think, just speaks to The need for that business to have as cost efficient a structure as is possible in order to survive in the environment that we're currently operating in there.
Sikorsky operates in a much more irad intensive environment, but not Unlike what the rest of the portfolio of Lockheed Martin looks like when you exclude the IS and GS and the tech services piece. So I actually tried to do some quick math myself, Hunter. I think we get close to 2% Or so of R and D when you kind of get to the new sales level of the combined company minus that which is spun or sold and you add in The IRED for all the remaining businesses plus is of course, it's actually probably a little bit north of 2%.
Thank you. Our next question comes from the line of Robert Stallard with Royal Bank of Canada. Your line is open.
Thanks
Bruce,
you mentioned there were some franchise wins you're looking to achieve in the second half of this year. I was wondering if you could give us Update on those and which ones do you think your chance are best at?
Sure, Rob. When I talk franchise wins in the second half of the year, I'm really talking the long range strike bomber and JLTV. We're watching as are our partners, I'm quite certain Boeing watching very closely The expectation that, that will probably be decided sometime in the August, September time frame. We still like Our offering there and we feel good about that. We've had lots of discussions.
I think we're good partners for each other. We bring very, very capable collaborative skill sets to the fray. And so that's the first one that we're looking at Rob. And again, I think we like where we sit there. JLTV is the other one.
JLTV is maybe in some people's views a little bit Tougher putt because they don't necessarily associate Lockheed Martin with being in the combat vehicle business, but I think we've got a tremendous offering there. And It would put us into a new segment within the DoD that we don't have a lot of business other than sort of putting some of our weapon Systems on top of combat vehicles. This would be actually building the contract or the combat vehicle itself. So it's sort of exciting to be able to have that opportunity. Again, we think we've got a great offering.
They look different in terms of the orders this year. The bomber would be a bigger order initially. The JLTV would be a much, much smaller order initially In the current year, but both of them have very long think of it as decades long sort of production tracks once you get past the development side. In terms of just sheer dollars that we're looking for, not so much in the franchise wins, So we've got big dollars associated with primarily 2 aeronautics programs that we're needing to close and Those contracts on finally the C-one hundred and thirty J multiyear and LRAP-nine for the F-thirty five program, both those are big dollars in the Second half of the year in terms of orders, as I still sort of look out for the rest of the year even though we are liked and I know there There was an earlier question about where we are for sort of our orders from a year to date basis, but I still think we're marching towards The $80,000,000,000 that we said at the start of the year given all the puts and takes we see going forward.
Thank you. Our next question comes from the line of Cai von Rumohr with Cowen and Company. Your line is open.
Yes. Thank you and congratulations on the Sikorsky transaction. Thank you. So a question, I was surprised that you only have $150,000,000 of intercompany sales given your participation on CMH, Naval Hawk, Presidential and Combat and Rescue. So could you give us a sense as to where that number goes In the future?
And then maybe give us 2 sort of mini questions. Where what the cash Lowest Sikorsky looks like given they have a very heavy near term development mix and whether you expect to Contract liability amortization for accounting of the Canadian Maritime Helicopter. Thank you. Yes.
What a mouthful, Kai. You threw a lot in there. You got your money's worth to say the least. So yes, we're talking back to the $150,000,000 of intercompany. It's not quite intercompany yet, I'll remind you that.
But that's primarily for the combat rescue helicopter and the presidential helicopter. That's about That stays that you shouldn't think of that as this is starting off low and it's going to grow to some larger number. That's a fairly consistent number. I'm trying to do this from recall, but that's a pretty consistent number going out for every year, not just the near term, but the long term as well. I think maybe where some of the confusion is on the MH-sixty kilo that's the Romeo work that we do there.
And there we're sort of think of us as co primes on that. We do not subcontract under Sikorsky for that work. That's actually sort of 2 prime contracts. So that may be where some of the confusion is. So think of this again as CRH and the presidential helicopter are VXX And those just aren't as large maybe as people think they are in terms of our size of the business there.
Cash flow for Sikorsky, I think you hit it right. I think at least for a couple of years, you should think of them having some inventory build And by the way, I shouldn't get into disclosing going forward Sikorsky's business, but what I'm expecting to see is That is inventory build ups and working capital build ups for some of the new programs that I just talked about, both the combat rescue helicopter and the presidential helicopter. I know they've also got a loss contract on the Canadian Maritime helicopter contract, which obviously can't be strong for cash flow. So I wouldn't expect near term cash to just knock our socks off. I mean, this is a long term business.
We're not buying this business for the next 3 years. We're buying this business for the next 3 decades and that's very much the way we look at it in terms of a long term acquisition cycle for us. I think your last question was you asked about the accounting treatment on the Canadian Helicopter. We will go with the convention of Lockheed Martin and then this will all Settled out in the conforming accounting and the purchase accounting adjustments. And whatever loss we think is there will be reflected at the time Of the acquisition and that will be reflected behind us if you will and essentially 0 going forward from an accounting perspective.
I'd just add the structure that we have as we as I said, we're going to integrate the Sikorsky Business and Mission Systems and Training, but it will be a stand alone line of business. And we like that model. We like that kind of a co prime model like we have on the MH-sixty
Thank you.
Thank you. Our next question comes from the line of Sam Perlstein with Wells Fargo Securities. Your line is open.
Good morning.
Good morning.
I'm going to see if I can sneak 2 in also. But the first one is just can you Bruce, can you talk about what the cost will be to extract that $150,000,000 in savings, especially in 20 And then secondly on the IT side, I just wanted to understand what's changed? It It seems like some of the areas like commercial cyber you were still making acquisitions last year. You made healthcare IT systems made simple acquisition late last year. Is it have to do with Sikorsky that you're now looking at other parts of the portfolio?
Or did something else change about the business that forces it now? Yes. So Sam, let me try the first one and I may take a shot at the second one, but Marilyn correct me later on. So the cost to extract in 2016, I guess, If we close the deal at the end of this year, obviously, I mean, I like to think of the cost here as sort of transaction costs, integration costs, You've got the intangible amortization. You've got interest on net debt.
I think I've talked most of those, but I haven't necessarily talked the integration costs. So if the deal gets closed by the end of this year, obviously, hopefully most of the transaction costs will be behind us in 2015. Whenever it does close 2015 or 2016 that's when the bulk of the transaction cost will hit. As I said Earlier, we intend to rapidly integrate Sikorsky into our business. That would require Some acceleration made from what you're thinking in terms of the integration costs.
I don't know that we've got those totally nailed down at this point in time Sam, but You should think of those $80,000,000 $100,000,000 a year kind of level in 2016 as to just the integration costs there. Again, hopefully, that gets that behind us, gets them integrated and enables us to have the synergy impacts having that much quicker. The second question as far as the IT and what changed. It's funny. I think it's As you continually go through the process of competing for new business, even after we acquired some of the companies we Acquired, for instance SMS, some of the new competitions that SMS were competing for, we saw some different acts on the behalf of some of our customers than we had been expecting, things like splitting out parts of the contract, things like splitting out Procured costs from the contract that frankly were another sort of twist to that business going forward that It was sort of a combination over a number of years of how that business and the dynamics of that business has changed.
When Sikorsky Became available. And when we looked at that and said that's a business that's probably more down the middle of what the rest of the corporation Frankly, we didn't think again, just to reiterate what Marilyn said that we could necessarily Compete in the environment and with the sorts of expectations that customers had in the IT and Government Services business successfully and in the interest of creating value for the corporation and actually giving our Employees the greatest chance for growth in the business that they love. That's the reason for the separation. So I'd say it's not one or the other. It's probably the combination of the 2 That led to that.
The other thing I would add to that is we've looked at what we're putting under strategic review, we've looked at very closely relative to the rest So of what's in IS and GS, for example, and recognize that what we're putting under strategic review It's work that is just increasingly difficult for us to be competitive in and under our standard business model. It's not I The work that they're doing is good work for our customers. It's important work that they're doing every day, but it's just Our standard business model, it's difficult for us to compete. And we are and the commercial cyber Would be an example in what area that operates in. We are not exiting the cybersecurity business that we do for the U.
S. Government and for governments around the world. That's an important element of business. It's an element that is that we bring a value to. It's with our robust multilayer cyber defense capability and we provide some of the most advanced cybersecurity solutions.
So In that regard, we're staying in those businesses that we think really fit well with where what is This is our core market and that we can be competitive in. Much of the business that we're looking at or all the business that we're looking at putting in strategic review has become Extremely price sensitive and our customers will we may be performing at the top of the heap on the work we're But if somebody comes in with a lower price and then recompete, they'll move to a new player, a new untested And that's just the environment that we're operating in.
Thank you. Our next Question comes from the line of Seth Seifman with JPMorgan. Your line is open.
Thanks very much and good morning. As you guys have mentioned, Sikorsky is 1 and a number of key DoD programs that should support sales growth in the future. But maybe, I know this might be a little difficult to do, but if you could just lay out
kind of a back of
the envelope trajectory because you do have those new programs, but at the same You have some pressure on legacy programs and a new multiyear contract coming up on Blackhawk. So maybe the trajectory over the next few years From an earnings standpoint, where things kind of bottom out and then how the drivers come in to push that up as we head into the end of the decade?
So Seth, welcome to the call by the way.
Thank you. Thanks.
Just a couple of thoughts there from Matt and I'll probably talk more top line and say and let you figure out maybe what's happening on the bottom line there. But top line in terms valuation, the way we looked at this business, and as I mentioned before, the commercial So, helo market associated with the oil and gas industry is really not just for Sikorsky's business, but for the market writ large Has really gone down quite a bit. So from where the peak in 2014 of sales to where we expect Going forward, we think that number is going to drop. Just on the commercial sales, I don't have these numbers exactly committed to memory, but I think they did $1,500,000,000 or so worth of commercial helo work in 2014 or so. And I don't know what the expectation is in 2015 off the top of my head.
But I do know in the valuation that we put going forward, we think that number comes closer to sort of $0.75 billion Worth of business, that's our view. So you should think of that as creating some top line pressure, at least in our view, On the current level of revenue from 2016 going forward for a couple of years, and the commercial market obviously is the more Profitable market as well, so that puts pressure on the bottom line there. Where we see that starting to turn around is Some trickling of the commercial market getting better and the oil and gas market getting better, say in the late 2018, 2019 timeframe. And That's also coincidentally when we see the transition from a lot of these developmental firms into production, particularly the 53 ks. So That's when we would expect to see sort of a rebound on the other side, both from a top line as well as the bottom line.
The margin Margins will kind of sort out the way they will depending on the commercial market, but that's the way we should view that in our judgment.
Our next question comes from the line of David Strauss with UBS. Your line is now open.
Thanks for taking my question again. Bruce and Marilyn, you've talked about this With CMH, with 53 ks. Can you just talk about your comfort with the execution risk that you're taking on here? Thanks.
Well, I would say, as Bruce commented earlier, I mean, We run government programs. We run platform and systems programs across our entity. I've never seen our They're performing better in terms of how of the programs that we're operating on today. And so in that sense, similarly Sikorsky Has a long track record of success. And in new development programs, there are times when any company, The complexity of it is going to we're going to have some challenges on the front end.
But I think we bring to this strong Program management expertise and coupling that with Sikorsky's performance and their innovative Technology, that's where we think this is low risk. I mean, it is right in our core market. We know how to build. We both design and build platforms and so it fits right in our sweet Chris, do you want to add anything?
The only thing I would add, David, is this is nothing new. I mean, what I believe and I'm I'm not there on the ground obviously, but there's no technical showstoppers that we saw. This is It's just the hard core fact of going from development into production. We of all companies probably empathize with that More than anyone else on the planet probably. But you look at what we've done in our history where we are finally at on the F-thirty five program Going from development to production, where we've taken the FAD from an infant This position of trying to figure out this hit to kill air missile defense at the levels we're talking That actually work or not into where it's now production fielded facility or application.
Just taking the PAC-three missile to its next Generation with the MSC, taking satellites, MUOS, advanced DHF, SBIRS from development to production. We've got the scars. We know what this is like. So this is not a surprise to us. And look, we think when we get Sikorsky into the fold.
We have people who sort of been through this a lot of different ways who can help with that process. And we have really, really good Production people. And not to say that Sikorsky does not because we're very impressed by the production team there, but we think we have some synergies coming out there as well.
Thank you. Our next question comes from the line of Myles Walton with Deutsche Bank. Your line is open.
Thanks. Just a follow-up on the overall long, long term. You mentioned you've been over 3 decades. You're on the joint multi halo effort today with Bell and then Sikorsky is on the team with Boeing. Is there anything When the companies are combined, that's going to preclude you from being on both teams?
Or is this effectively improving your odds, obviously?
Well, our intention is to continue the relationships that we have today on those programs. We have We want to bring the best solution to our customer. We have some good partnerships that we're working on and we intend to continue those partnerships going forward.
Yes, Myles. The other thing I would add is that program, especially The future vertical lift, not JLTV, but the future vertical lift is so far out in the future. You tell me when it's Going to happen, the quantities and so forth. There's a lot of chance between now and then for people to change ideas, thoughts, requirements, etcetera. Whether that ends up being the program that we think it is today or not is anyone's guess.
And so it's hard for me to get just too excited about Where we sit today was something that's probably not going to come into full rate production for 15 or 20 years.
Thank you. Our next question comes from the line of George Shapiro with Shapiro Research. Your line is open.
Yes, Bruce, on the F-thirty 5, was there a margin pickup there? Because you mentioned You had $30,000,000 higher profit on about $280,000,000 in sales, which obviously would be a higher margin than what you're currently booking on that program.
Yes, George, there was. This is a 2nd straight quarter where we brought up the booking rates on some of our LRIP contracts, I think this is just recognizing the progression we're going through. I believe this one I'm trying to think from recall from Memory, George, I believe this was on LREF 6 and you should think of that as being associated with the completion of deliveries over this period of time. So we're starting to get a cadence there. I like to think, I mean, I think 6 is on an uptick or was on an uptick.
I think Lot 7 is also on an uptick. We need to see that cadence sort Continue going forward, but I feel really good about where we are in the production. Back to my earlier comment going from Transitioning from development programs to production, we're right there and I think we're doing pretty well on that right now.
And on the C5, Bruce, you've been booking near 0 with your Comment that delivery seems to be running a little better than expected. What's the outlook for getting better
Yes. So George, we have a planned step up in the second of the year reflecting the good performance that we've seen today. I hope that that's something that we can actually do better Then even than what we have planned in the outlook there. And I know you and I have talked specifically George about the potentiality A claim associated
with the over
and above work we have on the C5 program, that's still just to be clear, that's still not considered within anything I've talked about it to this point in time. And again, that's something we feel very, very strongly about in terms of entitlement, and we'll see how that plays out down the road, but that's not a factor in anything
Thank you. Our next question comes from the line of Ron Epstein with Bank of America Merrill Lynch. Your line is open.
Yes. Hey, Bruce. Just a real quick accounting question for you. So the $2,000,000,000 in tax savings that you guys get, Is that just straight line over 15 years?
It is. It is Robin. It's high degree of certainty because the tax benefits can be used for the combined company. Those are take them home. I mean those are benefits that are going to accrue the corporation.
Okay, great. Thanks. Yeah.
Thank you. Our next question comes from the line of Pete Skibitski with Drexel Hamilton. Your line is open.
Yes. I'm going to miss this guys. But with all the puts and takes on the Sikorsky deal, are you expecting it to be free cash flow accretive in 2016?
Yes. I think it's going to be a little bit neutral is probably the way I would describe it in 2016 is our expectation Pete. And then we probably get plenty of time to start talking about the years thereafter. But I think for near term purposes and look Obviously, some of that depends on whether it happens at the end of this year, early next year or a little bit later. But I I think if it were for the whole year, we think of it as being fairly neutral for us next year.
Okay. Got it. Thank you. You bet.
I'm showing no further At this time, I'd like to turn the call back to management for further remarks.
Okay. Thank you. Well, let me just conclude. I appreciate all of your being on the call today. And I wanted to conclude by saying we had a strong quarter of financial results and the strategic actions that we've announced are expected position the corporation to deliver even higher value to our customers and stockholders in the future.
So thanks again for joining us on today and we look forward to speaking with you in October in our next earnings call. Abigail, that concludes our call today.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.