Good day, and welcome everyone to the Lockheed Martin First 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 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 Q1 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 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.
Thanks, Jerry. Good morning, everyone, and thank you for joining the call today. We're pleased to have you join us to review our Q1 results. As today's release outlined, we had another solid quarter operationally and financially. The corporation continues to deliver critical solutions and products to our customers, while also returning value to our stockholders.
I'm extraordinarily proud of the efforts and focus of our team and their significant accomplishments across the corporation. And looking at the results for the quarter, we achieved or exceeded our expectations. I'm very pleased that strong year to date financial performance across multiple business areas enables us to Increased 2015 full year guidance for 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. In addition to these solid financial results, we continue to return value to stockholders in the areas of Share repurchases and dividend payments through our cash deployment initiatives.
In the quarter, we repurchased over $600,000,000 of our shares and And remain committed to achieving the goal we outlined earlier this year to repurchase at least $2,000,000,000 of our shares in 2015, Market conditions permitting. This ongoing repurchase program enables us to progress on our related goal of reducing total outstanding share count to below 300,000,000 shares by the end of 2017. These repurchases combined with our quarterly dividend repayment We returned over $1,100,000,000 in cash to stockholders this quarter. Turning briefly to DoD budgets. In early February, the President released his proposed fiscal year 2016 base defense budget at $534,000,000,000 reflecting a request for $35,000,000,000 more than the spending limits established in the Budget Control Act.
The President Also proposed an additional $51,000,000,000 in spending for overseas contingency operations or OCO. Combined, the 2 proposed spending packages total $585,000,000,000 And if enacted, represent a significant increase in total funding for defense above prior year levels. In March, budget resolutions were passed by both houses of Congress that outlined total defense spending level Recognition of the need for greater investment in defense spending to respond to increasing global security threats, aging military assets and the imperative To improve the readiness of our armed forces. The resolutions left in place the Budget Control Act sequestration cuts to the Defense Department's base budget, while increasing funding for the OCO, OCO, Overseas Contendency Operations. This approach is intended to enable utilization of funds from the OCO to pay for other defense items outside the normally restricted war related costs specified in the OCO.
While it is too early to predict the final level of FY 2016 defense budgets, It is encouraging that the President and Congress are aligned in their recognition of the need to increase defense spending from the recent constrained levels. We look forward to finalization of congressional budget deliberations, which are expected to be completed later this year. Moving outside DoD budgets, momentum continues to build with respect to our strategy to expand international business and the success of this strategy remains a priority to me and the corporation. This past quarter, I had the opportunity to travel to multiple countries in Europe and the Middle East to participate in wide ranging discussions on our spectrum of products and services and the increasingly complex geopolitical environment, which requires proven and adaptive solutions at home and abroad. In Europe, I had the opportunity to participate in the Munich Security Conference on International Security Policy.
This meeting included extensive discussions on current and future security challenges and included attendees from more than 70 We exchanged views on defense requirements. While in the Middle East, I was able to travel to both Saudi Arabia and the United Arab Emirates, where I met with senior government leaders who discussed the current and future regional security issues they face and how we might work with them to address their requirements. These discussions reinforce my belief That our international growth strategy is sound and working. There is an acute need on the part of international customers for an increasingly wide range of our products and services as the geopolitical environment becomes more complex and less predictable. These expanding requirements further position the corporation to achieve our goal of generating at least 25% of annual sales from international customers in the next few years.
I'd like to move to the F-thirty 5 Joint Strike Fighter and provide a brief summary on the progress of the program that we are achieving and reaching key milestones and securing new business from international customers. Recent production milestone accomplishments included rollout of the first F-thirty 5A aircraft From the final assembly and checkout facility in Italy. This represents the first time an F-thirty 5 has been assembled outside the United States. It also demonstrates the ability of the Italian facility to complete these 5th generation stealth aircraft and underscores the global partnerships within the F-thirty five program. Beyond this production accomplishment, the flight test program continues to progress With completion of the 1,000 sortie at Luke Air Force Base, the 500th sortie at Nellis Air Force Base and the overall F-thirty five fleet surpassing 30,000 flight hours.
These events highlight the increasing tempo of flight operations across the country at an expanding number of sites. New business support of the program continued to grow internationally this quarter with letters of acceptance signed by Israel for 14 additional aircraft and by Turkey for 4 aircraft. Additionally, the Netherlands placed an order for its 1st batch of 8 production aircraft. These recent actions reflect the expanding commitments by international countries to secure this 5th generation aircraft for their future fighter fleets. It's noteworthy the strong future demand for the F-thirty 5 by our allies.
Almost half of the projected annual orders over the next 5 years are scheduled to be placed by international customers, demonstrating the importance of international participation on the program. Turning to the development program. We are continuing to finalize the software that will enable initial operating Mobility or IOC of the Stowall aircraft for the U. S. Marine Corps later this year and are also progressing on the software Successfully conducted initial flight test of the enhanced software that will be used to provide IOC to carrier variant aircraft.
The commencement of these flights with this software is a key element to enable us to provide this revolutionary aircraft to the U. S. Navy in 2018. Overall, the F-thirty five program is retiring development risk, increasing the production tempo and securing new contract awards as we expand our activities on the program. Before turning the call over to Bruce, I want to highlight 2 noteworthy milestones On the Aeronautics C-one hundred and thirty program, we were enormously proud to celebrate the 60th anniversary of the rollout and first flight of the inaugural production C-one hundred and thirty Hercules in April 1955.
With almost 2,500 C-130s delivered around the world to 63 countries, it remains the world's most fielded Cargo aircraft. The C-one hundred and thirty program has the sole distinction as the world's longest continuously operating military production line. Since the debut of the A Model 60 years ago, the C-one hundred and thirty has incorporated multiple model revisions, product Improvements and upgrades in its evolution to the J version produced today. This 60 year history of continuous improvement also created demand by commercial customers seeking to reconstitute their aging L100 AirLifter fleets with a new LM-one On the C5M program, a Super Galaxy aircraft recently established 45 pending new world records in airlift capabilities. And after the results are certified, we'll hold a new total of 86 aeronautics records.
Enhance the ability of the C5N to reach speeds at a faster rate than predecessor versions and enable cargo transport over longer distance between refueling. We are very proud of our upgrade actions on this airlifter as we deliver expanded strategic air mobility capabilities to war fighters. With unmatched flexibility, versatility and relevance, the C-one hundred and thirty and C-five aircraft will continue to provide essential airlift Service for our nation and international users for years to come. Turning to Mission Systems and Training. In February, we were honored participate with the Air Force at the groundbreaking ceremony at Kwajalein Atoll to mark the start of the construction for the SpaceVence radar system.
This ground based radar system will improve the way objects are tracked in orbit and increase the ability to predict and prevent space based collisions. The multiyear program will also serve as one of the drivers for future sales growth in the MST business area as we deliver this critical enhancement to our national capabilities. I'll now ask Bruce to go through the details of Q1 financial performance and our increased 2015 guidance and then we'll open
up the line for your questions. Thanks, Marilyn. Good morning, everyone. As I highlight our key financial accomplishments, please follow along with the web charts that we included with our earnings release today. Beginning with Chart 3, we have an overview of our Q1 results.
Sales for the quarter were $10,100,000,000 and this was in line with our expectations. We'll provide more color on our sales results on the next chart. Our segment operating margin was better than In the quarter at 12.9 percent and enabled us to achieve earnings per share of $2.74 We generated $957,000,000 in Cash from operations also in line with our expectations, but lower than we have historically generated in the Q1. We'll discuss the quarterly phasing of our projected cash from operations for the year in a few charts. Our cash deployment actions remain With $1,100,000,000 of cash returned to shareholders, including more than $600,000,000 in share repurchases.
And because of our operating performance in the Q1, we are increasing our full year outlook for both operating profit and earnings per share. So I think we're off to a very solid On Chart 4, we compare our Q1 sales results for 2015 with our results in Sales are lower by about 5% compared with the Q1 of last year, but as you recall, We said that this was our expectation during the January call. The lower sales level was driven primarily by 2 business areas, Missiles and Fire Control and Aeronautics. In both cases, fewer deliveries drove the reductions. PAC-three and tactical missile deliveries in Missiles and Fire Control and 3 fewer aircraft deliveries in Aeronautics.
We remain on track to achieve the sales outlook we provided at the beginning of the year. Chart 5 compares our segment operating margin that was 50 basis points lower this quarter compared with the same period last year, but remained near historically high levels. 3 of the 5 business areas had higher margins this year than in the Q1 of 2014 with Space Systems having the largest increase due to higher risk Retirement. Mission Systems and Training had a strong performance quarter, but was unable to match its near record level margin Results Conference Call. IS and GS' margin was down considerably from last year at this time, though We had expected a fairly large reduction when we provided our outlook for the year in January.
The Q1 results were lower than expected due to performance issues on an International program. Results from the rest of the IS and GS portfolio of programs were stronger than And we're able to offset much, but not all of the impacts of this program. Overall, our performance was better than expected and resulted in our increase in segment operating profit for the full year. Turning to Chart 6, we'll review our earnings per share results this quarter with our results from a year ago. Our EPS of $2.74 was $0.13 lower than the results from last year, but higher than our expectations and because of this we increased Our EPS for the year as we'll discuss in a few charts.
Chart 7 provides details into our cash deployment actions during the quarter. As we previously mentioned, we repurchased more than $600,000,000 of our shares in the quarter, more than we had planned in our initial guidance projections. And combined with dividends paid of nearly $500,000,000 we returned $1,100,000,000 of cash to our stockholders or 131 percent of our free cash flow in the quarter. We expect to have a larger amount of share repurchases in the second quarter, Utilizing the greater level of cash we have on the balance sheet as a result of the debt issuance we had in late February. On Chart 8, we discuss our updated outlook for our full year 2015 results.
We're not changing our guidance for either orders or sales At this time, the orders in the Q1 were slightly ahead of our expectations. Sales, as we mentioned earlier, were as we expected in the quarter. We are increasing our profit projections by $50,000,000 as a result of our strong performance in the Q1. We're also Our earnings per share guidance by $0.05 but there are several moving pieces that deserve more explanation and we'll provide that on the next chart. We're leaving our cash from operations guidance unchanged, but I do want to mention that our phasing this year will look different compared to our results in recent years.
We expect that our quarterly cash phasing will be significantly weighted towards the second half of the year with as much as 2 thirds of our cash coming in the last 2 quarters of the year. We expect this phasing in part because our cash collections will mirror the increased delivery rates we expect throughout the rest of the year And we anticipate reaching final agreement on a number of contracts in the second half of the year that will bring cash collections with them. Chart 9 provides a reconciliation between our prior EPS outlook and our current expectations. The increase in our segment operating profit outlook will increase our expected EPS by $0.11 per share. As we previously mentioned, our share repurchase activity in the Q1 was slightly higher than we had planned and we also had a lower level options exercised in the quarter than we were expecting.
The combination of these two items resulted in a lower average share count level our previous projections and improves our estimated EPS for the year by $0.07 We now project our full year Average share count will be just over 315,000,000 shares. Offsetting these EPS increases is the additional interest for the remainder of the year for the debt Issuance that closed in February. Netting these changes together, we now expect our EPS for the year will be $0.05 higher than we guided in January to a new range of $10.85 to $11.15 per share. On chart 10, we provide our sales Current outlook for segment operating profit compared with what we were expecting last quarter, we increased our profit outlook in 4 of our 5 business areas With Space Systems having the largest increase for the year at $30,000,000 The other three business areas were each increased by $10,000,000 to $15,000,000 And we lowered our expected full year profit for IS and GS by $20,000,000 for the reasons we previously discussed. And the net change for the company was a $50,000,000 increase in our segment operating profit outlook.
Finally, Chart 12 provides our summary of the quarter. We're off to a solid start for the year with our results either tracking to or exceeding our expectations for the Q1. We remain committed to our cash deployment actions to generate returns for our stockholders and the breadth and strength of our portfolio will enable us to achieve these results. With that, we're ready for questions. Karen?
Thank Our first question for Today comes from the line of Peter Arment from Stern AG.
Hi, yes. Good morning, Marilyn Bruce.
Good morning.
Good morning. How are you?
Bruce, could you, I guess, give us a little if you can give us a little more color on the you said the $70,000,000 adjustment or lower profit, I guess, Accrual in IS and GS in the quarter from the international program?
Sure. I'll start and if Marilyn has something to add This you will surely do so. So this is a fairly good sized international program, one of our sort of command and control that we're selling internationally. This is a pretty complex system that we were developing under IRED. And as we got into the actual Integration of the system and country that turned out to be more complicated than we originally anticipated.
We think the charge that we took And the Q1 has this effort, I'll say, sized appropriately for the remaining work to be done. But I think importantly, we also think that there is Greater market potential for this product once it's installed and is showing its capabilities. So we're optimistic there is chance for future profitable sales with this impact or with this product going forward. I think the good news in the quarter within IS and GS is there were a number of on a large program that was offset by a sort of a number of improvements across the rest of the portfolio or Maybe said differently, but for that IS and GS would have had a very strong quarter except for that one contract.
I don't have anything more to add other than to just say that the contract size is less $500,000,000 So just to keep it in perspective.
Thank you. Our next question comes from the line of Rob Spingarn from Credit Suisse.
Good morning. Hey, Rod.
Good morning.
I just wanted to follow-up on the profit side. Your margin guidance It's generally below your performance in all the segments than what you saw in the Q1, especially when you make the adjustment in IS and GS for the $70,000,000 So is there anything other than conservatism baked in there?
Well, Rob, I don't think that we've consciously tried to bake either conservatism or optimism in there. We always start every year by saying that Or at least I think I do by saying that we think we have the potential as we go throughout the year to have similar levels of Risk retirements and profit pickups through the year as we've had in prior years. This issue that hit us on the international program in IS and GS is the thing that sort of proves that that's it can sometimes go both ways So these are not just given, it's not just conservatism as we go throughout the rest of the year. As we look forward, I think the timing of risk There tend to be the back end has a few less events than we've had in the 1st part of the year. We also had in particular with Space Systems for instance, Significantly higher weighted ULA equity earnings in the Q1 as compared to the whole year.
I want to say, If you look at it on a percentage basis, probably 45% of the equity earnings for Space Systems occurred in the Q1 And the remaining 55% or so will be spread over the next 3%. So, it's just a lot of phasing. We did have a couple of Within the business areas a couple of sort of contractual or administrative settlements that happened in the Q1 that we're not expecting to materialize In the next three quarters as we sit here today.
Thank you. Our next question comes from the line of Rich Safran from Buckingham Research.
Hi, good morning.
Good morning.
Marilyn, I heard your remarks about the budget at the opening. So if we assume for just a moment that the FY 2016 budget is above the spending caps maybe closer to the request or if OCO funds are applied, I wanted to know if you had a sense of what the priorities would be for any additional funds, where there might be upside to Lockheed Martin programs. Is this the kind of thing that would impact your short cycle business at ISGS? Or is this long cycle business or maybe both?
So first of all, I
mean in terms of the budget itself, you're right. The President's base budget is significantly above the We're currently above the Budget Control Act sequestration budget caps that were out there. And But just to remind you, those limits still remain in place from FY 2016 and beyond. So it's important that Congress addressed that as they move forward. And they took a stab at it with these resolutions by increasing the OCO in order So it's we really need the President to consent to these to the OCO that they have and he wants an increase in both defense and domestic spending cuts I mean caps.
So we know that's the case. However, Back to your question about what it means for us. Certainly, F-thirty five and C-one hundred and thirty Js are important. In fact, If you look at what's come through on unfunded priorities list, there are 6 F-35Bs on coming in from the Marine Corps and another 8 F-thirty five for Cs for the Navy that are on the unfunded priorities list. So to the extent that additional Funding is found.
That's important. Moreover, on the C-one hundred and thirty, there are another 13 aircraft there and the KC-130J of another 2 aircraft. So there's and then there's a number of other Items that have additional funding in our portfolio as we go forward. I would just say that in terms of long cycle versus short cycle business, it's you hit right on it. I mean, building an aircraft, doing a long lead funding and going Through the production process, we're well over 3 years on our aircraft and when they're in development even longer than that with the F-thirty 5.
And So as we get things lined up, it's as we get funded for these, then that is A long cycle business that will be in our portfolio, will be in our backlog and that's important. A lot of things also are related to what happens with our troops and what's going And the various conflicts around the world and so we'll just have to watch how that transpires as well as to what kind of Funding that Congress and the DoD need in order to address those continuing threats.
Thank you. Our next question comes from the line of Howard Rubel from Jefferies.
Hi. Good morning, Marilyn and Bruce and Jerry. Thank you very much.
Good morning. Hi, Aaron.
Marilyn, there's been Countless headlines about all the challenges the F-thirty five faces and some of them are history that people like To dredge up and talk about things that you've already solved in terms of problems. And then there's things that you're still wrestling with every day. Can you Kind of bring us to the point where we understand how to ignore some of the bad news and how you're coping with some of these issues that still
What a great question. Thank you for that question. We are challenged with that Regularly because it is the largest program with the Department of Defense and it's a complex development program. So it's Challenging in that sense. And every year, as you know, the GAO comes out with their annual report.
There's an OT and E report that comes out annually to Congress. There are Myriad reports that are required just given the size of the program. So we take every one of those into account. We read them all. They're not always exactly right.
And I think that's just The facts of the matter, what we try to do is stay focused on performance because that's the first and foremost thing We can do to continue to keep this program on track. I would say from a status standpoint, if you look back at some The technical challenges we had early on, we've solved the landing hook, we've solved the helmet issues, the software programs are going well. So from that perspective, the program is maturing. The development program that we're moving through, we're 65% complete on that. And we're going to continue to ramp up the production.
Manufacturing is going well. Last year, we delivered 36 aircraft in 2014 and this year we're going to deliver about 45. So you can see it ramping up. We're going to as I mentioned earlier, the initial operating capability IOC for the Marine Corps is going to be happening this summer. And you've heard from The Marine Corps, they're confident.
We're also confident that they'll meet their IOC. And so from that perspective, I think the key is To not react to every media write up is going to say it's the largest program and it will reflect Back on the initial stages of the program, but if you look at since we rebaseline the program in 2010, we have been on track with our costs and our schedule performance. We have rolled out a blueprint for affordability jointly with the U. S. Government that is driving the cost down.
And by the time we move into full rate production, the cost of The F-thirty 5 will be comparable or lower than a 4th generation fighter with much more capability. So I would just encourage you to continue to watch us track through the ramp up of the production, the things we're doing to drive the cost down and as we We continue to move through the flight test program. And as each of these services declare their initial operating capability and as we continue to roll out More and more capability of the aircraft. I think that our nation and our allies are going to be very proud to have the requirements The national security requirements capabilities that this aircraft will provide for many decades to come.
Thank you. Our next question comes from the line of Cai von Rumohr from Cowen and Company.
Yes. Thank you very much. Aeronautics, help me understand, you did 11.8% margin in the Q1, with deliveries expected to get Better as we go through the year on the mature programs and yet it looks like the margin goes down. And as I read your commentary, it doesn't look Like there's anything abnormal in terms of the positive, I mean there is that $25,000,000 risk retirement. But so why don't the Aeronautics margins kind of hold near where the Q1 is for the rest of the year?
Yes. So Kyle, I'll take that one on. I think probably the biggest reason is we've got 2 things going on there. 1, We have a pretty good sized ramp, obviously on the F-thirty five program in total, as compared to the rest even with the delivery increases that You talked about, so you'll have the F-thirty five dilution effect occurring there. I think what maybe lost a little bit Your question there is C5 deliveries are expected to increase fairly significantly over the Q1 just in terms of quantities.
And that's another program that has a lower margin than the overall aeronautics program In general, and I think the combination of those 2 is what we're seeing right now offsetting the higher margin we had in the Q1. Having said that, I still think we're going to end the year at 11% or more. And I do think there are there is potential that we could do a little better than that as some of the Retirement's break a little early for us or are coming a little larger than we have in our current outlook.
Thank you. Our next question comes from the line of Ron Epstein from Bank of America Merrill Lynch.
Hey, good morning. Just a quick question for Bruce, just a couple of details. When you look at the financials, it looks like this If you add up your accounts receivables and inventories divided by sales, you're running at a little bit of a higher rate. It's 95% than you historically have at least Recent history seems like it's been more like in the 70% to 80% range. What's driving that?
What's driving that buildup in your
Yes. So a couple of things. I think if you just look at the Q1, Rod, We have a historically low AR at the end of the year as sort of the payment offices clean up everything if you will on their A lot of it has to do even with the timing of when we closed the Q1. So I think historically, You actually do see that we usually have a spike in our accounts receivable in the Q1 because of those two phenomenon. Inventory is growing a little bit.
And in part, that's one of the elements I was trying to describe in my prepared remarks that talk about some of the actual Finalizations that we're expecting in the second half of the year, we expect to have some collections associated with those as things like our billing arrangements get finalized and the performance based payments terms get finalized. And so we would expect to have some reduction in our inventory account going forward. At the end of the day, Rod, I think our the spike we see in working capital in general For all elements of working capital, not just AR and inventory, we expect that that will probably come down over the next 3 quarters of the year and probably end the year not too differently than where we started the year or ended the year 2014.
Thank you. Our next question comes from the line of Jason Gursky from Citi.
Good morning, everyone.
Good morning.
Graham, I just wanted to ask a question about missile defense in the marketplace Today in light of recent awards that have been going on internationally, can you just talk A little bit about the competitive dynamics that are going on there and what you think the opportunity that is for Lockheed with the various products that may add contribution to Patriot. Just going to update us on the market
Well, sure. I would just start by saying that there continues to be an Expanding demand from missile defense in the Asia Pacific and the Middle East for our products along the lines of the THAAD, Aegis, Aegis Assure, Patriot and potentially Meads as well. As we look at, for example, Meads, I know There was an announcement today about Raytheon winning the opportunity in Poland. But we our
Patriot, our PAC-three is part
of that system that PAC-three is part of that system that Patriot system. So it's an opportunity there for us as well. But we still have an opportunity in Poland on that Meats International was selected to participate in the technical dialogue on a short range Air and Missile Defense System called NAIRU in Poland and we expect to continue to be in that dialogue. And that's one that is The MEAD system is the only one that offers the capability to network and integrate on a variety of air and missile defense system elements, including things that are developed in And then Germany is in the midst of their evaluation to make their on their Air and Missile Defense system. And as you know, they have invested a fair amount into the Mead system along with Italy and the U.
S. And so we expect to participate in that opportunity and we hope that they will select as they move forward on their selection. Around the world though, I think there continues to be a very strong demand as you look at Aegis. It continues to be a demand for Aegis. There continues Aegis Ashore, we just stood up or in the midst of standing up our Aegis Ashore in Romania.
We'll have another one in Poland. So that opportunity in the European theater is also important. There are discussions with There's South Korea on both PAC-three and ultimately on THAAD, interest in the Middle East by a number of countries on PAC-three and THAAD. So I think that you're going to continue to see a condominium demand for our portfolio. I think we have a very strong A set of products and capabilities in that arena that's going to continue to have a demand.
Thank you. Our next question comes from the line of Noah Poponak from Goldman Sachs.
Hi. Good morning, everybody. Good morning, Noah.
Good morning.
Bruce, on the debt you raised intra quarter, it kind of looks like the interest expense you've added to Your full year earnings outlook includes interest on all of that. Is that true? And it looks like Intra quarter, you were discussing the potential to use some of that to refi. So if you do that, is there an opportunity to later reduce the interest expense for the full year? And then beyond refi, what else are you
going to do with this cash?
Yes. So good questions Noah. So I think the average Interest rate for the because we did it in 3 tranches of varying sizes, but the average Interest rate is about 3.5%. So I think to your question your first question, I think we're just taking the 3.5% With the last 10.5 months or 9.5 months whatever it is of exposure on the debt and that is What the interest calculation is for this year. Going forward, we did tee up, I think on the last not on the last call, it's a half inch a quarter to your point.
But I think in the disclosure we did for that, we described that we would potentially look at taking out Some near term debt maturities that mature in 2016. We actually had sort of 2 tranches that happened in 2016. They're worth a little less than $1,000,000,000 combined. And so we would expect that and those are one of those at least is a fairly good sized interest It has a pretty good sized interest coupon on the debt. So we would expect the interest to mitigate some in 2016 as we take out that Roughly $1,000,000,000 of debt with the proceeds.
And then the rest of it is strictly general purpose, Noah, and as I tried to tee up in the early remarks, I do think that we could use the
Thank you. Our next question comes from the line of Hunter Keay from Wolfe Research.
Good morning. Thanks for taking my question.
Good morning.
So, Marilyn, you talked a little about the you reiterated 25% international mix over the next few years. But do you feel like maybe Given an improving domestic budget environment right now that maybe that number kind of goes back to the 20% level over the next couple of years. If you Maybe consider that that 25% going higher is maybe a function of maybe worsening domestic environment budgetary conditions. If the domestic budget I mean, continues to get a little bit better than we all thought, maybe last year at this point. Is the international opportunity set still
My answer to that would be yes, absolutely. I mean our backlog today is $20,000,000,000 in international backlog at the end of 2014 and It's that's a significant backlog for us. The quality and maturity of our portfolio and that we're selling around the world is going to continue to have a demand. And as you probably know or we've talked about, I think I even said it in my remarks, over half of the orders on the F-thirty 5 are going to be to international customers In the next 5 years. So that program alone is going to continue to grow.
Earlier in my comments about missile defense, Continued strong demand for missile defense. And we expect countries besides the countries that are program record on the F-thirty 5, there are going to be others that are going to need to retire their 4th generation aircraft. So we expect other countries to want to procure the F-thirty 5. Airlift, C-130s in 72 countries and the J is going to continue to be in demand as some of those countries upgrade their airlift capability to the J. So I would Say that we are going to continue to be on a path to get to 25% over the next few years.
And at the same time, as budgets recover and defense, we'll continue to So within the U. S, I think both elements of our portfolio will continue to rise. But I do expect just And given the opportunities that we have on the international front that we'll achieve the 25%.
Thank you. Our next question comes from the line of Doug Harned from Sanford Bernstein.
Thank you. Good morning.
Good morning, Doug.
I wanted to go back to IS and GS. And I know that you've been getting more international orders, So your backlog is a larger international component and you talked about the issue you had with this one contract. Could you describe The kinds of international orders you've been winning, are these do these tend to be fixed price in nature, which in theory could give you some upside But also expose you to potentially more risk. I'm just interested in sort of how large international is becoming in IS and GS and what the opportunity and the
So Doug, let me try to give you a little color to that. So The international content in IS and GS is growing not leaps and bounds, but it's growing From a fairly small beginning, I'll say, to where now I'm just thinking off the top of my head, it's probably in the maybe 10%, Maybe a little less than that, something like 7% or 10% or so of the sales of IS and GS, maybe a little less than that even is what our international content is. But think of that as much higher than it was But think of that as much higher than it was say 3, 4 years ago. So that part of the business is growing. Almost all I'm thinking if there's an exception to that, but I'll say almost all of the international work that we're doing, not just in IS and GS, but around the whole Company is in fact firm fixed price efforts.
So there's both upside and downside risk associated with doing that. You should think of a lot of this It's sort of doing IT work for, for instance, what we're doing in Australia is not dissimilar than what we're doing with the Pentagon here in the United States, sort of aggregating a lot of the systems and Making those systems doing upgrades, making those systems perform better and doing the overall system development work for All the IT services for, in this case, the Ministry of Defense or Department of Defense in Australia. We do a lot of cyber Work internationally, we're getting that's a growing portion of the business as and that's one that we're very happy to work. I think our reputation is spreading sort of across the globe as we do work for individual countries. And in some cases, individual Firms within those countries that sort of gets word-of-mouth sales that happen elsewhere.
We also do internationally within IS and GS a Lot of airport management or air traffic management type activities. So the things that we do with our FAA business in the United States, Think of that as doing it elsewhere, but also a lot of sort of productivity sorts of things from an airport perspective internationally. So That's probably the 3 big pieces. Well, I should say there's also a little bit of Intel piece similar not dissimilar again So what we do with our Intel customers in the United States. So probably those four pieces, Doug, you should think of as what we're doing internationally within IS and GS.
And That portion is growing pretty significantly for us from a again a fairly modest start a few years ago to where it is today.
Thank you. Our next question comes from the line of Carter Copeland from Barclays.
Hey, good morning all.
Good morning. Good morning.
Just a quick clarification on that. Bruce, with that being 7% to 10% and Marilyn's comment earlier About less than $500,000,000 It would make that seem like that's probably the largest program in IS and GS on the international side. Is that correct?
Yes. It's I don't know that it's it is the largest Carter, but it's one of the largest that we have, one of probably a couple of that size. And I was looking at some data here. I think the actual number is slightly less than 10%
Great. And on the Aerospace margin front, you teed up on the prior call and during the quarter Some potential upside, you had talked about 100 basis points on the F-thirty 5 development contract and Once that sort of got the delays from last year worked their way through and also on the C5 even excluding the over and above. And I wondered you highlighted the small amount of risk retirements on F-thirty 5, but I wondered if you could just give us an update on the progress on both of those.
Yes. So, Kart, I want to correct something. I think I heard that you say, we weren't talking about development Program increases, we were talking about production.
Production, correct. Sorry.
Yes. So what you saw in the first Quarter and what we disclosed in the earnings release was one of those risk retirements that we were expecting to happen. That's actually probably one of the larger ones That will happen throughout the rest of the year. Lisa, planning wise, that's one of the reasons why the margins in the Q1 were in fact higher than what we expect for the rest of the year. So I think that's tracking to what I said earlier and what I had talked about, about a potential 100 basis point improvement in the production program year over year from 14% to 15%, I still think is doable and on track as we sit here today.
C5, We talked about that program in the past about the potential for a step up over time. I still think that's a path that we're looking at doing in the latter part of the year. And again, As you alluded to and I'll make the comment, none of this considers the potential for some entitlement actions that we have relative To the over and above work, that's that'd be separate and distinct from this. This is just sort of recognizing the that we're doing a better job of Sort of turning out the aircraft in shorter cycles and the like that are resulting in better performance on that contract for us.
Thank you. Our next question comes from the line of Myles Walton from Deutsche Bank.
Great. Thanks and good morning. The question I had on was on space and in particular the margin performance you had in the Q1. And I think You have about $125,000,000 of headwind on ULA for the rest of the year. So I get that, but it does look like Certainly the risk retirements at Orion and the government side and broadly across the portfolio are better than we've seen in a while.
So I'm just curious, you say good things follow good things. Was there a certain risk retirement related to Orion and government programs? Were you reaching kind of critical milestones? So, is the base just looking like it's probably going to be a source of continued upside for the rest of the year? Thanks.
Yes. So good question, Myles. You should think of Space Systems as having a couple of Risk rate timers that happened in the Q1. One of them is associated with the Orion vehicle. This was actually associated with the launch that we did As we sort of finalized the results of that in the Q1 of this year, we kind of trued up our booking position, if you will, for That event and that resulted in a step up associated with that event that will not repeat itself obviously in the next three quarters.
We also had some a couple of one offs in the quarter for things like some reliability Incentives that we had at least one of the contracts within Space Systems, there's not another one. And that just happened to fall in the Q1, if you will. So we got A pretty good increase associated with that reliability incentive and that also reflected part of the upper this quarter that won't happen going forward. I'll also remind you that as you said the latter three quarters of the year we have the ULA Totally different profile than what we've had last quarter. And again, as I made comments earlier, much lower equity earnings going forward as compared to the Q1.
I'll also remind you though that we do have what's left of sort of the Restructuring costs that are not been taken, but that are reflected in our operating performance and those will continue to happen in the next three quarters without of the step ups that we took in the Q1. So combined, I know there's a lot of moving pieces I just gave you there, but combined is that's While we look at the margins doing what they do in the next three quarters for Space Systems. What I will say though is Space Systems is performing very, very well right now. And so I look at that and say there is the potential for opportunity as we go forward. Every year, we do have We're performing very, very well on our government contracts in Space Systems.
There's a lot of Incentive based contracts there, where if we do well, we obviously get the margins associated with that, but the government gets the flip side
Thank you. Our next question comes from the line of Rob Stallard from RBC.
Thanks so much. Good morning.
Good morning, Rob. Bruce, I was wondering just
a quick Question on the book to bill. I'm sorry if you could comment on the various trends that you're seeing there, particularly again on the short cycle side,
Yes. So Rob maybe I'll just give you I thought that there might be a question on orders. Maybe I'll just give you sort of a little of a full overview of where we sit from an orders perspective. It has been our history. At least the last 2 years, we're going to be significantly back end weighted in our orders for the year.
And as we sit here today, it wouldn't Surprise me if there is probably 65% or so of the orders that we're expecting to have for the year will actually materialize in the And you should think of that. We've got quite a few big ticket items to sort of keep your eye on. So we've got The bomber award sometime in the summer of this year. We've got finalization of the C-one hundred and thirty J multiyear. We've got the next Production Lot 9 of the F-thirty 5 program occurring.
And with that and it's just a lot of contracts, but they add up to a lot of But they add up to a lot of dollars individually or collectively they add up to a lot of dollars just a whole lot of various F-thirty Sustainment contracts and long lead contracts for future LRIPs. And you combine that with a lot of the international Orders we're looking at for FAD and PAC-three, for instance. And you see there's some pretty big chunky sized orders Coming in the next 3 months, but more weight in the second half of the year. I didn't mention JLTV, but that's obviously another critical Strategic wins. So the big strategic items we're looking for from a competitive perspective this year are the bomber award and JLTV.
To your specific question on IS and GS, I think we're going to last year, we actually grew backlog In IS and GS, which was the first time we've done that for a while. As we look forward, I think the IS and GS orders are Probably sequentially going to grow and get close to the sales value, but probably not as much as the sales for the year. So we'll We have some reduction in our backlog in IS and GS as we close the year, in part though because we did recall we did get So many orders in 2014 were sort of multi year orders that won't be replicated if you will in 2015. Hey, just and maybe one last comment. We still think as we sit here today and we've said this for a couple of years in a row, we do think we're on track to get back Similar to where we started at the end of last year at about the $80 plus 1,000,000,000 level for total backlog for the corporation.
Thank you. Our next question comes from the line of Sam Pearlstein from Wells Fargo.
Good morning.
Good morning, guys.
Bruce, I was wondering if you could talk a little bit more. You talked about the phasing just now of the orders you've done it on the cash flow. Can you talk a little bit about Maybe the earnings as we go through the year. And then also the buyback activity, should it be fairly ratable at this 600,000,000 And related to that you mentioned the options exercise. Is there a point where we start to see the share count really move down when we get to the other Yes.
Let me try to hit all those for you Sam. So Overall margins, I think we had a bit of a spike, probably not unlike what we did last year. Frankly, as a corporation, I think we came down from a pretty high Q1 and we dropped the next three quarters. A lot of that's just the phasing and timing of when we get some of our awards and some of our incentives on the contracts across all the business areas. So I would expect Martin's to be probably lower over the next three quarters.
I think The second and third quarters will probably be similar to each other, whereas the 4th, we could have a little bit higher Margin, so think of 2nd and third probably running in the low 11s and maybe as we sit here today with the timing of our risk retirements the 4th quarter could So it'd be in sort of the high 11s going forward. That's sort of how we see it as we sit here today. And again, As I said on an earlier comment, if we pull some of those to the left or do them or do higher adjustments than we have in our plan, obviously, we could get better So the repo, second part of your question, the repo activity, we did $600,000,000 in the Q1. We would expect to do more in the Q2. If I was to predict, I'd say it's going to be maybe not twice as much As we did in the Q1, but it won't surprise me if we did as much as $1,000,000,000 or so in the second quarter.
And then I think we'll trail off maybe a little bit In the 3rd 4th, that's as we sit here today and a lot of that's based on sort of the cash that was available on the Balance sheet in the Q1 versus what we've got after the debt issuance in February that enables us to do that. That
sort of
Enhanced repos for the rest of the year. There are about 900,000 Options that were exercised in the Q1, we started the year with about a little more than $6,000,000 options outstanding. As I said earlier in the prepared remarks, we were expecting options actually to have a higher level of exercising than we experienced in the first So we're watching that closely. And last year, I think we did 3.7 3,400,000 shares that's we're kind of expecting in our guidance right now about $3,000,000 for the year. So that will be the toggle switch as to whether or not we do higher or lower than that.
The last thing I'll say on the option exercise is you asked the question about would we expect to see sort of A step function decrease. And I think the answer is yes to that, Sam. I mean, as soon as the options Had been exercised. There are no options replenishing those, if you will. So this is a diminishing Number in our dilution equation that once those $5,000,000 options that are left are exercised, they will not be Replicated by a light number of options going forward.
So in the way I usually like to describe it is every single dollar of share repurchase Spent. Once we're at that point where we no longer have options, we'll have a greater chance of actually reducing the share count
Karen, I think we've got time for one more question.
Certainly. Our final question for today comes from the line of George Shapiro from Shapiro Research.
Yes, good morning. Marillyn, I just wanted to ask your strategy in the cyber world. You obviously saw Raytheon make a big acquisition Yesterday in the commercial cyber world, you're a big player in this area. If you can just kind of lay out what your strategy is?
Sure. I'd be happy to. I mean, it is an important area for us as a company. For the past 20 years, consecutively, we've been the largest IT provider for the U. S.
Government and working for all of the cabinet agencies on a range of IT as well as cybersecurity. I like the portfolio that we have around cybersecurity. We have a multi decade track record with encryption, with Data security solutions and we've centralized all of our cybersecurity in the IS and GS organization. And so in our go to market strategy both within the U. S.
Government as well as commercial, that's where we're moving forward. We see incremental growth there. And we've rolled out and even internationally as Bruce commented earlier, we have a cybersecurity Intelligence Center in Farmbro in the U. K. We've got another one in Canberra, Australia.
We have our own here in the U. S. So it is Absolutely an important growth area for us. And I think what's key to us is that We've been doing cybersecurity long before they ever coined the term cybersecurity. So it's a very important growth area for us and one that we expect to
I think that wraps it up for the time. Let me turn it over to Marilyn for final comments.
Well, let me just conclude today. I just want to reiterate that the Corporation has had another solid quarter and is well positioned to deliver even higher value to customers and stockholders in 2015. Balance sheet will continue to prevail our corporation forward in 2015 and beyond. So thanks again for joining us today. We look forward to speaking with you in the next earnings call in July.
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 disconnect. Everyone have a good