Welcome everyone to the Lockheed Martin fourth quarter and full year 2014 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, Shannon. Good morning, everyone. I'd like to welcome you to our fourth quarter 2014 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.com and click on the Investor Relations link to view and follow the charts.
With that, I'd like to turn the call over to Marillyn.
Thanks, Jerry. Good morning, everyone. Thank you for joining us on the call today. We hope that your new year is off to a great start. Let me begin by saying that I am extraordinarily proud of our Lockheed Martin team. We finished another strong year in 2014, achieving excellent financial and program performance. Our performance has the corporation well-positioned to continue to deliver value to customers and stockholders in 2015. The daily efforts of our employees are the foundation of our ability to deliver broad-based results across the corporation. I thank them for their ongoing contributions. While Bruce will cover the financial results in detail later on in the call, I want to highlight a few key achievements and strategic items from my perspective as we closed out 2014.
Starting with new business, the corporation continued to be successful in securing new order bookings for both domestic and international customers. In the fourth quarter, we achieved a strong 130% book-to-bill ratio for contract awards above sales and finished the year with a backlog of nearly $81 billion. This marks the fourth consecutive year that we have maintained our backlog in excess of $80 billion. Our new business success is aided by having the best-positioned portfolio of programs in the sector, with direct and unique alignment to many of the essential programs identified by both international and domestic customers. These factors have enabled us to build a strong backlog consisting of multiple years of longer cycle production programs and provides a strategic differentiation and financial foundation of future work.
I was also pleased that the international content of our backlog grew to more than $20 billion, representing over 25% of our total year-end backlog. The international component has us well-positioned to achieve our stated goal of expanding sales from international customers to at least 25% of total corporate sales in the next few years. This expected international growth also provides a significant benefit to our domestic customer by enabling economies of scale and additional cost leverage achieved through higher production volumes on programs across our portfolio. Strategically, our corporate-wide emphasis on fostering and expanding customer relationships and focusing on how we may best support their critical needs continues to provide a pivotal role in securing new business awards. This past quarter, I had the opportunity to expand our international relationships by traveling to the Middle East and meeting with key customers.
My activities in Abu Dhabi included participating in the opening of our Center for Innovation and Security Solutions in Masdar City, further strengthening the corporation's nearly 40-year relationship with the United Arab Emirates. I also traveled to Bahrain for discussions with high-level representatives on our products and how we can best help them satisfy their critical national security requirements. The common theme across my meetings was that all parties I spoke with reaffirmed their unwavering desire to secure the most effective solutions and products essential for national security, in spite of any volatility in world oil markets and price levels. Another strategic focus area where we have a long record of success is the generation and deployment of annual cash flows. In 2014, we generated almost $3.9 billion in annual operating cash after making $2 billion in pension contributions.
This strong cash generation enabled us to provide a return of over 120% of our annual free cash flow to stockholders in 2014. As we enter 2015, we are solidly on the cash deployment plan we outlined during the October call, where we identified our goal to make at least $2 billion in share repurchases in 2015 and to reduce our total outstanding share count to below 300 million shares by the end of 2017. Share repurchases of this magnitude, coupled with our annual dividend payments, would result in returning virtually all of our annual free cash to stockholders over the next three years. Beyond the significant returns of cash to stockholders, our increasing cash flow also enables us to invest in the future of the corporation in areas such as research and development. We continue to expand our focus and allocation of resources on next-generation technologies and products.
In 2014, we increased investments in independent research and development activities to over $750 million, reflecting the third consecutive year of significant increases in this strategically important area. We are constantly pursuing new technology-based solutions as we design and develop leap-ahead technologies to help address some of the world's most complex challenges faced by domestic and international customers. These efforts will ensure we stay at the leading edge of technology and create potential foundations for future new business and important strategic positioning. Moving to operations, one of the highlights of this past quarter was the near-flawless inaugural test flight of our Orion spacecraft. This flight successfully tested key systems of the capsule to help pave the way for future missions into deep space and capture the imagination of people around the world.
The flight successfully tested a number of technologies that are fundamental to future deep space missions and included environmental and safety elements essential to the future of human space travel. We are extraordinarily proud and pleased to be the prime contractor of the Orion vehicle and look forward to providing this unique exploration vehicle to NASA and our country for decades to come. In addition to the Orion operational achievement this past quarter, key milestones were also achieved on the F-35 Joint Strike Fighter program, with progress in developmental testing and increased production quantity and tempo. On the development program, a major milestone was accomplished with the F-35 carrier variant, successfully completing on-ship trials aboard the USS Nimitz.
The maturity and performance of the aircraft enabled achievement of 100% of the threshold test points and also included multiple successful night landings and launches during the aircraft's first test deployment at sea. Beyond the carrier test for the U.S. Navy, we are also on track to provide the capabilities of this revolutionary fighter to our armed forces, with initial operational capability of the F-35 STOVL variant for the U.S. Marine Corps later this year. In the production arena, I'm very proud of our aeronautics team as they achieved a delivery target of 36 aircraft in 2014. This was particularly noteworthy as the team was able to overcome a nearly one-month program hold for the engine anomaly that occurred last June and still achieved annual aircraft delivery goals. This achievement is a further illustration of the program's growing stability and production ramp-up.
Overall, the F-35 aircraft fleet continues to expand, with 109 production jets delivered since program inception and fleet operations now surpassing 25,000 flight hours. Customer support and funding for the program is strong and growing. Finalization of the LRIP eight contract was completed this past quarter for 43 aircraft, reflecting a significant increase in order quantity above the 32 to 36 annual aircraft awards we received during the previous four fiscal years. This new award helped bring year-end 2014 backlog of aircraft on the program to 100 planes. Looking forward, domestic and international customers' order phasing outline a planned procurement of 61 aircraft for the upcoming LRIP nine contract, further expanding the solid growth curve in aircraft quantity.
This increased rate of aircraft orders is an essential component to our ability to ramp up production levels and achieve the reduced price of the planes outlined in our Blueprint for Affordability agreement with the F-35 customer. I'd like to conclude my remarks with a brief status of government budgets. Last month, the U.S. government passed the fiscal year 2015 omnibus spending bill to finance most federal activities through the end of the current fiscal year. Passage of this bill eliminated much of the procurement uncertainty caused by operating under the prior continuing resolution constraints. Looking forward, the White House is scheduled to provide Congress a proposed fiscal year 2016 defense budget next week on February 2nd. The proposed DoD base budget is widely expected to be higher than the FY 2015 level and above the mandated sequestration caps.
The higher budget request is in response to increased global security threats and military needs. The FY 2016 proposed budget will then undergo congressional deliberations on final spending priorities and funding levels over the coming months. While the impact of a likely higher FY 2016 proposed budget on future fiscal years is unclear at this time, a higher FY 2016 spending authority could signal bipartisan recognition of the critical need to increase DoD budget levels above the currently constrained limits established by sequestration. These recent budget actions are positive steps in the creation of a more predictable and strategic approach to budget allocations while addressing the fiscal challenges we face as a nation. I'll now ask Bruce to go through the details of fourth quarter and full year 2014 financial performance, our financial outlook for 2015. Then we'll open up the line for your questions. Bruce?
Thanks, Marillyn. Good morning, everyone. I hope you're all warm and dry on this stormy day. As I highlight our key financial accomplishments, please follow along with the web charts that we provided with our earnings release today. Starting with Chart 3 and an overview of our year-end results. We had a stronger finish to 2014 than we were expecting when we last spoke in October. Sales for the year were $45.6 billion. I'll discuss that in more detail on the next chart. Segment operating margin was 12.3% for the year, about in line with our expectations. The combination of higher sales and segment operating profit drove our earnings per share to $11.21, higher than the guidance we provided in October. There were two unplanned items that had a net negative impact in the fourth quarter that I'll discuss in a few charts.
Cash from operations was nearly $3.9 billion, after making $2 billion in pension contributions, including $1 billion in the fourth quarter, as we discussed at that time. Finally, orders for the fourth quarter were a little higher than expected, resulting in our ending backlog of $80.5 billion. Overall, we had a good finish to a strong performance year. On Chart 4, we'll discuss our sales results in more detail. In the fourth quarter, sales grew by almost 9% compared to the same period in 2013, with four of the five business areas showing strong growth in the quarter. Aeronautics growth was driven by volume increases on the F-35 production programs. Missiles & Fire Control had higher deliveries of PAC-3 missiles, as well as higher tactical missile deliveries. Mission Systems & Training had higher radar volume, including the start-up of the Space Fence program.
Space Systems grew primarily due to the Orion flight test that occurred in the fourth quarter. Our fourth quarter performance led to full year 2014 sales achieving slight growth over the 2013 results. On Chart 5, we will review our earnings per share for the quarter and year. Fourth quarter EPS was $1.32 higher than the prior year, driven primarily by three items. The change in the FAS/CAS adjustment from an expense in 2013 to income in 2014, the absence of the restructuring charges taken in 2013, and a lower goodwill impairment charge in 2014 than occurred in 2013. I will describe the goodwill impairment charge taken in the fourth quarter in more detail on the next chart. For the year, EPS was more than $2 higher than in 2013, driven again primarily by the FAS/CAS adjustment change and the absence of the restructuring charge in 2014.
Turning to Chart 6, we will reconcile our actual earnings per share results with the guidance we provided in October. In October, we projected our EPS for the year to be around $11.15 per share. As I mentioned previously, we had two unplanned events that were not considered in the EPS outlook we provided last quarter. The first of which was a special charge we took for a goodwill impairment in our tech services line of business in Missiles & Fire Control. This charge reduced our EPS by $0.33, and this is the second consecutive year we have had an impairment charge against this business. Again, it reflects both the reduction in support activities in theater as well as the increased level of competition we are seeing for this business.
The second unplanned event was the passage of the R&D tax credit legislation in the quarter, which generated a $0.14 benefit to EPS. These two events lowered our outlook for EPS by $0.19, but were more than offset by the higher sales and segment operating profit in the quarter. Chart 7 provides more detail into our cash deployment actions in 2014. With cash from operations of nearly $3.9 billion and capital expenditures of around $850 million, our free cash flow for the year was a little more than $3 billion. After making dividend payments of nearly $1.8 billion and share repurchases of $1.9 billion, we returned 121% of free cash flow in the year. Over the last 10 years, we have made $30 billion of dividend payments and share repurchases to our shareholders or 108% of free cash flow over that same period.
On Chart 8, we show our backlog results over the last four years. Our backlog levels have remained above $80 billion in each of the last four years, despite the budgetary pressures that our customers are facing. As has been the case in prior years, a strong fourth quarter in 2014 enabled us to achieve these results. Chart 9 provides significant assumptions in our 2015 guidance. Our FAS/CAS adjustment for 2015 will be income of $475 million, $175 million less than we anticipated in our trend information in October. The largest reason for the lower adjustment was a reduction in the discount rate to 4%. You will recall that when we remeasured our pension liabilities in the second quarter of 2014 as a result of our plan changes, we reduced the discount rate to 4.25%.
Since then, interest rates have continued to drop, resulting in the lower discount rate at year-end. Asset returns in 2014 of 6% rather than 8% assumed in October make up the remainder of the lower income outlook. While affecting GAAP EPS, these pension changes do not create the need for any additional cash contribution over the next three years. As I noted in the October call, we do not expect to make pension contributions from 2015 through 2017, and our expectations of generating more than $15 billion in cash from operations over the next three years remains unchanged. Consistent with our longstanding practice, our guidance does not assume an extension of the R&D tax credit until legislation is enacted. If legislation similar to what was enacted in 2014 is passed in 2015, we would expect the EPS benefit to be comparable to the 2014 amount.
Consistent with what we discussed last quarter, we plan to make at least $2 billion in share repurchases in 2015. Turning to Chart 10, we provide our current outlook for 2015. Our guidance today is consistent with what we provided in our trend information in October, except for the lower FAS/CAS adjustment. We expect both orders and sales to be in a range from $43.5 billion-$45 billion, and we expect our backlog to remain above $80 billion at year-end for the fifth consecutive year. We expect our segment operating profit to be between $5.1 billion-$5.25 billion. Our EPS is expected to be between $10.80 per share-$11.10 per share. Our cash from operations is expected to be greater than $5 billion. Chart 11 shows the ranges for sales and profit by our business areas. Finally, Chart 12 is our summary.
2014 was a strong year, both operationally and financially. We're confident that our portfolio has us well-positioned for the future, and we remain focused on the cash deployment actions that our shareholders expect. With that, we're ready for your questions. Shannon?
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. In the interest of time, we are limiting you to one question. Please return to the queue for any follow-up questions. We ask that you please pick up the handset before asking your question. Our first question is from Jason Gursky of Citi. You may begin.
Good morning, everyone.
Morning.
Good morning.
Marillyn, I just wanted to ask you about R&D and acquisitions. You made some comments earlier about R&D and investing in next-generation technologies, and then it also appears, net of disposals, that you spent the most on acquisitions this year that you have since 2006. I wonder if you could just provide a little bit more detail on the strategy with regard to R&D, where the spending might be going, and how the customer is behaving these days with regard to independent R&D versus them paying for your R&D. Whether we ought to view the acquisitions that you've been making here of late as kind of an extension of R&D. You're acquiring technologies that perhaps you didn't have, and where you find the growth areas and just kind of the strategy behind R&D and acquisitions going forward holistically.
Sure. Thanks for the question, Jason. I guess just first to talk a little bit about R&D and new technology. We have been increasing our R&D expenditures over the past three years. This year, for 2014, we were up another 8%. We're doing that because we're not going to cut back on R&D, even though that our sales are not growing at the same trajectory that they have maybe for the past decade or so, because it's really the lifeblood of our company, and we are a technology company, and we have to continue to invest. From our customers' perspective, we do spend time with our customer on our R&D plans.
A lot of credit to Secretary Kendall in bringing us into the Pentagon to talk about our top IRAD expenditures and areas to make sure that we're well aligned with what the priorities are for the Department of Defense. Moreover, as we look at our customers around the world, we're looking at how do we invest in research and development that will allow us to secure new business and to grow our current business. Beyond that, we're a long cycle business, so we're constantly looking at how we can continue to invest for the long term as well. It's a balance of both of those areas to make sure that we're looking at things that would be giving our allies and our customers an advantage over their adversaries for the long term.
In terms of how we address R&D and cooperative research and development, we kind of look at both of those elements as being an important part of investment, but we also are doing things that are beyond IRAD investment. For example, we use other avenues to develop next-generation products and solutions. If you look at what we're doing on the U.S. Air Force's T-X competition that's coming out in 2017, we actually had teamed with South Korea to develop the T-50 supersonic trainer for their air force under an offset program, and we're able to take that investment that we made in an offset program and point it toward the T-X competition. That's a great example of where you might not necessarily see it in the value of an R&D investment, that we're making those investments.
I think if you look back years back, we did a similar thing on the C-130J, which is paying dividends for us in the markets that we're operating in with the C-130J program, where we made investments in our business along that line.
Taking it on beyond that into acquisitions, yeah, we did more historically than we have done this year in 2014. There are areas that we're continuing to penetrate into our core, such as our Zeta Associates acquisition, and that being very much aligned with our core. Some areas such as the healthcare IT arena and Systems Made Simple is an area that is a part of our IT work with the U.S. government, where we've been, frankly, for the past 20 years, the top supplier of IT support, and this is an opportunity for us to bring more to markets like the VA medical, DoD medical, et cetera. The Astrotech acquisition we made in space launch is very much aligned with our core, with services there.
We're also looking at areas to bring in additional capability to the corporation and places where we want to take our core into new markets, like Beontra with the IT work we're doing in airports and things along that line. What I will say is that, as we've said, we have a very strong cash deployment plan that we're going to follow, but we also are generating cash, and we also have a lot of financing capability as a company. With that debt capacity allows us to have the flexibility as we see additional opportunities for acquisition that makes sense for us, that allow us to continue to invest in M&A. We'll be looking at acquisitions that are, as you said, able to add capability, but also ones that open up new markets for us that are closely aligned to our core capabilities.
Thank you. Our next question comes from Ron Epstein of Bank of America. You may begin.
Yeah, good morning. Sorry if my connection's a little weak. Just working remotely here. Maybe just to follow up on Jason's question. By my calculations, you spent something like 1.5% of sales on R&D. Is that enough? When you look at other technology companies, they'll spend multiples of that. How do you think about that, Marillyn?
Well, I don't think you can look at the absolute dollars, honestly, because I think, when you look at our portfolio, when you look at what we've done over the years, it's not a matter of % of sales so much as it is the efficient expenditure of R&D dollars. We've made choices in things such as JLTV, the Joint Light Tactical Vehicle, which is a large opportunity that we're pursuing that hopefully the award later this year will bring to us an opportunity that is a significant new growth market for us. That started with an acquisition some years ago that brought some technology in, and then we built on that technology. It's not just the dollar level on a % of sales.
The other thing is, if you look backwards, I don't think we've missed anything in terms of our portfolio and things that we have won because we haven't invested in research and development for the long term.
Thank you. Our next question is from Peter Skibitski of Drexel Hamilton. You may begin.
Good morning, guys.
Good morning.
Maybe one for Bruce. Bruce, I was wondering if you could help us, again, maybe update us like you did in the last quarter on the cash from ops bridge from 2014 to 2015. Just because it looked like maybe cash taxes were a little higher than expected in 2014. You've got obviously zero pension cash needs in 2015. It seems like maybe $5 billion, as good as it is, might even be conservative. Can you help us understand why that could be what you do?
Pete, let me try that. I tried to give some of this in the October call, but I think it's probably worth repeating just to make sure everyone's on the same page. I think the simple math would say, gee, you did $3.9 billion in 2014. You did $2 billion of pension contributions. Seems like it should be around $5.9 billion versus the $5 billion. I think there's kind of two or three pieces, probably two, that drive most of that. One is we have additional, because of the $1 billion contribution we made at the end of the year 2014, we're going to get actually a tax deduction worth about $350 million in 2014 that won't carry over into 2015. We also had in 2014, a tax refund of about a quarter billion dollars, $250-ish or so I think was the number.
That's what, $600 million or so, sort of bridge from just the cash taxes, if you will, either refunds or cash out for taxes. Then the last thing, if you just look at the level of income that we're projecting from 2014 to 2015, we're down a couple hundred million dollars. If you just translate those earnings into cash that pretty much makes up the difference to about the $900 million. Again, I'll remind you, Pete, we keep saying we expect to be a little greater than $5 billion, and I think that potential is still there.
Thank you. Our next question is from Rich Safram of The Buckingham Research Group. You may begin.
Rich, you there?
Rich, your line is open. Please check your mute button.
Shannon, let's move to the next one.
Our next question is from Carter Copeland of Barclays. You may begin.
Hey, good morning, all.
Good morning.
Marillyn, I really appreciate the comments on international post your visit, but I wondered if you might give us a little bit more color about how you think about how much of your business is those sort of
core strategic capabilities that you're delivering to those customers versus the stuff that is perhaps more support oriented or perhaps commoditized in some way. Is there a way to kind of rack and stack your international business and say, "This portion applies to the key capabilities like THAAD and PAC-3 and the like," and how should we think about that?
I'd say, first off, that the key areas of growth for us internationally are certainly in the missile defense area in the Asia Pacific and the Middle East. Just as you mentioned, it's THAAD, it's Aegis Ashore, Patriot, potentially MEADS we hope to sell. In addition to that, F-35. Those are core, and that's the majority of our growth in the international. It's our core business that we're growing. We are having some additional areas of growth in things like cyber, which is an expansion of work that we've been doing for years for the U.S. government that we're able to grow into other areas, our IT work. The big dollar items within our growth in the international are core business that we have.
C-130Js, continue to sell F-16s, the air and missile defense, the U.K. turret for the scout vehicle and for Warrior, things of that nature. Hopefully, that answers your question, Carter.
Thank you. Our next question is from Noah Poponak of Goldman Sachs. You may begin.
Hi, good morning, everyone.
Good morning.
Good morning, Noah.
Hey, wanted to ask about two bigger programs, new programs on which you're competing, and just kind of get a broad update from you. Maybe on LRS-B, I was specifically wondering if you could talk about where work would theoretically be done and if capacity would need to be added, then if there's any worthwhile update on JLTV. On that one, if you could potentially size what that could ultimately be for the company if there was a win. Thanks.
Well, first of all, on LRS-B, I can tell you that we're teamed with Boeing. We think we have a very strong position on that program in pursuing it, there'll be award sometime this year, that's about all I can tell you about it. I'm sorry, that's about all I can say. In regard to JLTV, it's a very significant opportunity for us. The RFP is out. Our proposals are due early in February, the award for that is projected again this year, we think mid-year. We don't know. Our guess is as good as yours as to which quarter, because as we know, a lot of times protests emerge and things of that nature. In terms of the program itself, it's a big opportunity for us. Bruce, in terms of size, I think you said.
I think, Noah, the RFP came out, they're asking for various production quantities over various years. The stated number of vehicles is somewhere around 17,000 vehicles. You can probably do the math as well as anyone as far as what that total production program would be for. You should think of that as a multi-billion dollar sort of award for the initial proposal, which is the development program and the first few LRIP contracts. Then it's got potential, obviously, well beyond that for both additional domestic vehicles as well as the international marketplace. Although the initial award that we're expecting to have happen this year, hopefully, without protests pushing it out, is not all that sizable, the strategic opportunity is very great.
I could add on that one, Noah, where we're going to produce it. If you want, I can talk about that. It's in Camden, Arkansas. We have a facility there where just this past year we went through the production readiness review with the U.S. government, it was very successful, so we're excited about the opportunity on the JLTV.
Thank you. Our next question comes from Doug Harned of Sanford C. Bernstein. You may begin.
Good morning.
Hey, Doug.
Good morning.
I'm interested in your thoughts around how you work with the changing budget. By that I mean, if you look forward, we're at a point where there are prospects for a rising budget, a rising base budget, certainly. At the same time, we're seeing the end of a lot of operational activity in theater that's been going on for many years. When you look at this, how do you think about your exposure to some of the CONOPs that have been going on? Is there much less, and where is it? At the same time, how do you think about investing where there's going to be growth? Not just R&D, but B&P, potentially facilities. How do you manage this transition?
Thanks for the question, Doug. I would say that we spend a lot of time on our strategic planning as a company and keep a bead on what's happening in the environments that we're operating in. We look both in where the opportunity are relative to growth in this DoD budget, as well as you know our focus on the international marketplace. Sure there is a drawdown in regions where we're bringing our war fighters home, and that has some impact on things like our services business and things of that nature. Where the real opportunities for ours are is to not only continue to grow with the F-35 program, which today represents 17% of our sales and will continue to grow to a larger percentage in 2015 and beyond.
As we just talked about, the Joint Light Tactical Vehicle, JLTV, is a big opportunity for us. We're looking forward to a C-130J multi-year opportunity, the littoral combat ship, and as the U.S. Navy moves forward with their 52-ship buy on the small surface combatant, going beyond the current littoral combat ship. Those are all areas for growth. We believe that we do have the strongest portfolio. We are constantly looking at, as the U.S. government determines where they have to recapitalize, they can't sit still either, even though, in this current time frame, maybe the situation in terms of a war environment is not as high. They used up a lot of aircraft and a lot of systems and vehicles in those wars, and they've got to recapitalize them.
We believe we're well positioned to take advantage of that because we are continuing to focus on providing greater capability and new technology and taking advantage of that advanced technology. That's where our R&D, our bid proposal, et cetera. On facilities, we have looked at how we take capacity out. We've taken out over seven million square feet of capacity since 2009. At the same time, we've opened up some new labs, we've opened up some new areas. I think what we try to do is adjust our capacity to not only the business base, but to the areas where we need to invest to continue to grow as a business.
I think we do a good job of assessing the changes in the environment that we are operating in, and we adjust our facilities, our investments, and our pursuit of acquisitions and research and development funding accordingly.
Thank you. Our next question is from Samuel Pearlstein of Wells Fargo. You may begin.
Good morning. I wanted to actually somewhat follow up on that last question, which is that the guidance has top-line down in 2015 a few % at the midpoint. You did make some $900 million worth of acquisitions. I guess first part was just what is the organic sales trend in 2015? Also, given budget trends, can you see positive year-over-year sales in 2016 at this point? If not, what does it take to get there?
Hey, Sam, I'll take that one on. You're right. We talked about roughly $900 million in acquisitions in the year. I think the inorganic growth in the year 2014 was about a little less than $250 million. You should think of that growing to about three quarters of a billion dollars or so, about a half a billion dollar increase in inorganic growth year-over-year from 2014 to 2015. That's sort of where we see that playing out there. I think it's important to note that our planning for 2015 and what we've talked about up to this point is all based on the current Budget Control Act without consideration of what Marillyn was talking about in her opening remarks about the potential increase in the FY 2016 budget.
As we look at that, the interesting thing, and I know I've talked to you guys about this in some of the investor conferences, I think the interesting thing is not necessarily what happens with FY 2016, it's what happens with the budgets beyond FY 2016. If you just get the spike in FY 2016 and then you go back down to the Budget Control Act, you really go back down to levels that cause sort of an aberration in 2016, and then you're back to sort of square one in FY 2017 and beyond. It doesn't make a whole lot of sense from a strategic planning perspective. I'll say even with that scenario, though, again, we don't have either the spike in FY 2016 in our planning outlook, nor do we have anything in FY 2017 and beyond.
We do believe we will start to see growth in FY 2016, particularly within the Lockheed Martin Aeronautics business areas where we're expecting to see growth. I'll say, as I sit here today, Sam, I feel pretty comfortable actually saying we're going to see some growth, organic growth, starting in FY 2016 or 2016 above the 2015 level. At least our planning, Sam, for years beyond 2016 assumes that growth continues. We're sitting actually looking forward to that with the potential for hopefully some good news coming out of the President's budget process in the not-too-distant future.
Thank you. Our next question is from Robert Stallard of Royal Bank of Canada. You may begin.
Thank you. Good morning. It's Stephen Tusa on for Robert Stallard.
Good morning.
Marillyn, I was wondering if I could follow up on Carter's question and your comments about visiting the region last year. You've made a lot of investments there between what you mentioned at Masdar as well as AMMROC. Is your sense in talking to your customers there that the current energy price is going to have any impact on the pace at which export contracts could be awarded in the medium term?
Well, we're really not seeing any pullback on their expenditures on national security because that, in terms of their priority, that's very important. It's true that for a lot of our key countries, that's an important source of revenue for them. When you look at countries like the Kingdom of Saudi Arabia, UAE, Qatar, and others, they have very substantial government reserves. What they're looking at, as long as the prices don't stay down for a long extended time, which none of us know how that'll play out, we have not seen anything that would impact our portfolio and what we bring. No change so far on their critical needs. They still operate in dangerous neighborhoods, and they still have needs for missile defense and tactical aircraft and a range of communications systems.
Perhaps there may be some pressure on some of our less priority programs, such as IT upgrades or services or things of that nature. In terms of the big-ticket items and the items that I'm having the dialogue with them about, it has not come up. I think they're very much focused on their highest priority requirements, those happen to be the things that we can bring to them as we move forward.
Thank you. Our next question is from David Strauss of UBS. You may begin.
Good morning.
Good morning.
Good morning.
Looking specifically at the F-35 program, it looks like last year you had about an $800 million increase in sales, but no increase in profit related to the production program. Can you talk about what you've got baked into your numbers this year in terms of any sort of EBIT increase out of the production program? As a second question, Bruce, can you talk about the advance line? I think it was about a $500 million drag. Can you just talk about the outlook for advances from here? Thanks.
Yeah. David, I think your math is pretty accurate. We were a little bit flat. I'm just looking at some numbers here in terms of the production program. We actually had an overall profit. Actually, let me just take a peek here. Overall profit actually was up slightly on the F-35 program in total. The production program, and that's primarily because of the lack of the SDD write-off that we took in 2013. The production program was fairly flat in terms of total profit dollars, and actually the margin was down. I think that's the point that you're poking at. We had some step-ups on the production early LRIP contracts in 2013. We had some planned step-ups in 2014. Some of which we took, but not all of which that we had planned did we take in 2014. Those got pushed off to the right.
That caused the situation that you're describing in 2014. We look forward to 2015, I'm still expecting, and I know we've talked about this as recently as the investor conference we had in Fort Worth. I'm still expecting 100 basis points or more improvement in the F-35 production program margins between 2014 and 2015. We're hopeful that trend will continue at least year-over-year sequential increase in the margins on the production program in years thereafter. The biggest spike we're expecting is between 2014 and 2015. I think a big reason for that, David, we closed the year pretty strong from a production perspective on the F-35 program. We had almost a two-month delay in production activities or at least delivery of the aircraft because of the engine anomaly that occurred in 2014, yet we made all 36 aircraft deliveries.
We actually had a chance to exceed that number. I think, as we closed out the year, things were looking and feeling better on the production program than, say, when we started the year. I'm hopeful that trend will continue into 2015. That's what we're banking on with that margin increase. On the customer advances, I think the actual burn is about, we're expecting it to go down about another couple of hundred million dollars or so. You're right. It was down about a half billion dollars from 2013 to 2014. Some of that is simply the nature of, we're actually seeing a little bit of conversion from, and I think we've talked about this, from some of our direct commercial sales contracts to more and more FMS contracts that tend to get negotiated concurrently with U.S. government buys.
We're seeing that, for instance, on the F-35 program with aircraft, and we're seeing that also in a lot of our missile programs, be they Hellfire missiles, JASSM, PAC-3, and the like. A lot of the historical, and this is just in large part due to the customer change, but a large part because of the F-35 growth, which is all going to be FMS in the near term. We're seeing some burn down of sort of the legacy direct commercial sales, and it's not being replaced by new commercial sales down payments, in part because those are, in fact, FMS contracts. Kind of a long-winded answer to that question, David. Hope that made sense for you.
Thank you. Our next question is from Joe DeNardi of Stifel . You may begin.
Yeah, thanks. I guess just another one on the F-35. If you could just kind of talk about what caused some of those step-ups to get pushed out of 2014 and how the budget outlook for that program, which seems to be improving, kind of plays into how you think about the margin profile improving on the production side.
Yeah. Joe, I'll take that one as well. We always go through it at every year thinking that there is a planned level of booking rates, especially on programs that are early in their life cycle, as is the F-35. In 2014, we had planned to have some increases on the production program. Again, for the reasons that I described to David, some of that was simply in the early part of the year, it made no sense whatsoever to have margin increases when we were actually sitting idle because of the engine anomaly. That did cause some disruption overall to the performance at about the first half of the year, leaking into the second half of the year. That caused some of those increases to get pushed out, just as I described. That's the reason I was making the point.
I think where we ended the year was a good point for us on the production programs. That does give us the confidence that 2015, you will see those step-ups made. That's the reason for the margin improvement that I talked about with Dave. Again, our expectation is a little bit spiky from 2014 to 2015 in terms of a pretty good size jump in the margins on the production program. Thereafter, we continue to expect that margin to increase year-over-year as we go through the production program.
Thank you. Our next question is from Joseph Nadol of JP Morgan. You may begin.
Thanks. Good morning.
Hey, Joe.
Hey. On Aeronautics F-35, I was wondering, Bruce, if you might give a little bit of an update. Obviously, we had our meeting a couple of months ago in Fort Worth, but just a little update on where you stand on deliveries this year, specifically for F-16 and C-130, and then key pursuits, a little bit about the multi-year in particular on the C-130 side. Thanks.
Yeah, thanks, Joe. Let me give you sort of a, maybe, again, a long-winded answer to the question. F-16 deliveries, I think we've teed this up in the past. We're going to drop, I think I teed this up on the October call. We had 17 aircraft deliveries for the F-16 program in 2014. We're building about one a month, you should think of it. We're looking at about 11 or 12 deliveries probably in 2015. I think the current contract schedule would suggest 11 aircraft there. On the C-130, we're at a pretty steady build rate between years. We did 24 aircraft in 2014. We would expect to do 24 aircraft in 2015 as well. Again, that's the expectation. That's sort of a good build rate.
In fact, we'd prefer to sort of build at that steady rate as opposed to having sort of spikes that would cause us to have a little bit of disruption. We'd rather build at that steady rate. With the backlog that we have in the program, we're able to do that. C-130 multi-year, we got, I'll say some partial funding on that at the end of 2014, and we expect to close the rest of that, the balance of that, in 2015. The value is not as large as it was, say, last year, because we got a little bit of funding at the end of the year. There was sort of partial funding on a fiscal year basis towards that multi-year. Joe, maybe inherent in the question. I'm sorry, I didn't talk about the F-35 program. We did 36 aircraft deliveries in 2014.
That number's going to increase, probably in the 40, maybe a couple more than that. We're actually working with a joint program office later in the month of February to sort of finalize the production delivery plans. We do that because it actually does require resources on both sides, both the government resources as well as company resources to do that. We'll have a better idea, a more definitive idea, of the F-35 deliveries probably next time we talk to you in April. I would expect that we'll be somewhere in, again, the 40, maybe a couple more than that as we sit here today. Then the last aircraft program, I guess, for the Aeronautics business area, we delivered seven C-5s in 2014. We expect that number to go up to nine deliveries.
I think we stay at about that level probably until the program winds down through the last delivery of the C-5 modernization program. Hey, one thing, while we're talking aircraft and deliveries and quantities, Joe, I want to make sure that everyone understands is, at least as we look at sort of the phasing of our revenue in 2015, it's going to be a bit of an odd year. We're very heavily weighted in the second half. The first quarter, in particular, is very unusually low, or we expect it to be very unusually low on a compare basis because of our delivery phasing, and that's both associated with the Aeronautics aircraft that I just talked about. I think we've got two fewer F-16s in the first quarter and two fewer C-130s both in the first quarter of 2015 compared to the first quarter of 2014.
Combine that with the fact that Missiles and Fire Control is going to have a pretty significant drop off in the first quarter of deliveries of their missile programs, both tactical missiles, PAC-3s and the like. We could see the first quarter revenue being down as much as, say, 5% year-over-year compared to the first quarter of 2014. Then obviously it'll build from that point on to the levels that we're seeing for the full year for 2015. A little bit of an unusual pattern for us. We always have the pattern where the fourth quarter is higher than the rest, we're starting off 2015, or at least expectation, probably a little lower than we'd ordinarily would.
Thank you. Our next question is from Myles Walton of Deutsche Bank. You may begin.
Thanks. Good morning.
Good morning, Myles.
First of all, as a clarification, I might have missed it, but the international sales in 2014, I think the last few years have been about 17% of sales. If you can just give that number for 2014. Then, Marillyn, as you look at the Middle East as a customer base, and you think about the threats that exist there, that's one aspect. The foreign policy and what we choose to do there is another, and just hypothetical, if the U.S. does move more towards a normalization with Iran over the nuclear activities, does that in any way impede what you see as progress in the foreign military sales front there from a DOS perspective? Thanks.
Thanks, Myles. First, in answer to your question, we achieved 20% of our total sales on international sales in 2014. We're pleased with that, and we have over $20 billion in our backlog at year-end to that. We've set a new goal to get to 25% over the next few years. Our growing international area is an important element of our strategy and growth for the company, and we see a lot of expanding demand for international growth, expanding demand on missile defense, on aircraft programs, and a range of things. To your question about foreign policy and normalization and things of that nature, in my discussions with our customers, that really isn't coming up. It's very clear to the Middle East region that that dialogue is going on.
Front and center for them are the needs that they have today, what their critical national requirements are today. Our discussion is around those national security needs that they have, and there are certainly plenty of threats in the region. Just the volatility, even if there may be some kind of deal done with Iran, there is volatility all around the region, and each one of these countries believes they've got to protect their citizens, and the things that we can bring to them help in that regard. Similarly, that's the Middle East, and I know that's what you asked about, but you could take that same argument to the Asia-Pacific region, which is another growth area for us.
A lot of volatility, a lot of instability, a lot of things that are happening both with North Korea as well as some of the tensions between China and Japan. In both of those regions, which are growth areas for us, we expect that there's going to continue to be opportunities for us to bring our capabilities to them.
Thank you. Our next question is from George Shapiro of Shapiro Research. You may begin.
Bruce, I noticed that all the margins that you project for 2015 in each of the sectors are down relative to 2014. Aero's explainable with mix, Space may be explainable with less venture income. Can you go through why they're down in all the other sectors? If you could maybe lay out what you think would be kind of the normalized number that we'd wind up reaching in terms of these margins, because it'll be the second year that we'll have seen them decline.
George, I'll try to take a shot at that. It's a good question. Even though you kind of gave the answer for a couple, I'll go ahead and try to hit all five business areas from my perspective, maybe from what we're seeing in 2015 and then sort of the longer term view. Aeronautics in 2015, in part because of all the discussions we've had up to this point on the F-35 production program, the fact we expect to see some increases there. 2015 is really looking fairly comparable from a margin perspective for Aeronautics. Longer term, we've talked about the fact that as F-35 increases, even in the scenario that I described with year-over-year margin increases, those will still be lower than the composite average margin for Aeronautics, if you will. That'll still be dilutive just because of the growth of the F-35 program.
That's what we expect to see there longer term. Missiles & Fire Control is maybe slightly lower 19,015 , but I'll say that's probably pretty comparable when you look at it big picture-wise, and we still think we have some of the same opportunities in 2015 as we had in 2014. Longer term, I'd expect some reduction in the higher margin business that we've got there, particularly if we're successful, for instance, winning the Joint Light Tactical Vehicle. You would expect us to have that program start off at a lower booking rate than some of our legacy long production missile programs out of Missiles & Fire Control. I would expect to see, again, longer term, some reduction in the margins in Missiles & Fire Control from the level we experienced in 2014 and probably 2015 as well.
Mission Systems and Training is down slightly in 2015 compared to 2014. You should think of that really primarily as a result of new program starts. Programs like Space Fence, like the Combat Rescue Helicopter, like the new presidential helicopter, those are all early starts on larger programs that are actually driving a lot of the organic growth of MST there. That's coming with lower margins than some of their heritage production programs, just like I talked about on Missiles & Fire Control. There's also, within MST in 2015, some of the last of the restructuring charges that, remember we talked about in 2013, we took the severance charges, but there were still ongoing restructuring charges for things like facility closures and facilities rearrangements and so forth. There's about $20 million or so higher restructuring cost in MST in 2015 than 2014.
That's putting a little bit of pressure there. Longer term I think it's going to be fairly comparable to where we end up 2015, maybe a little bit higher as some of that restructuring expense goes away. Hopefully we start to have some increases on some of those early program starts that I talked about. IS&GS, we teed up in the October call that we thought it'd be down about 30 basis points or so from 2014 to 2015. I described that as about half of that just being sort of the increased level of competition, recompetes, disaggregation, breaking down contracts, and so forth. The other half of that 30 basis points was, we changed some of the backlog within IS&GS to have a number of longer-term international programs that extend over multiple years, a little bit different than the heritage IS&GS business.
Those were starting off, just as any new program would, with lower overall margins than the composite. That was sort of the other half of the 30 basis points that we talked about. If you rewind back to the end of the October call, it would've said we should be looking at probably somewhere in the 8.7, 8.8 range for margins at IS&GS. We're a little lower than that. All of that, George, is because of the transaction expenses associated with the acquisition we made at the end of last year for Systems Made Simple. That's bringing another 30 basis points or so reduction to IS&GS's overall margin. While that acquisition is EPS dilutive, it is actually cash accretive in year one. That's something we're happy to take those charges.
Again, longer term for IS&GS, as those transactions costs start to play out, expect to see some slight increases in the IS&GS profitability margin levels from where we are today. In space, you talked about the ULA earnings. We teed that up in the October call that the equity earnings associated with United Launch Alliance are down pretty considerably in 2014 versus 2015. A lot of that is just the mix of the launch vehicles we have there. That's driving the biggest single piece of that. The other piece that may not be evident, again, is we also made a couple of acquisitions for data and the satellite processing business that we acquired last year. Those also are bringing transaction expenses in 2015 that were not in 2014.
You should think of that as about a 20 basis point or so impact in the margins of Space Systems Company in 2015. Just as I described on the Systems Made Simple or the acquisition for IS&GS, while they're a little bit EPS dilutive in 2015, both those acquisitions are cash accretive in 2015, we're happy with that. Longer term for Space Systems, I think we get back at about the 12% margin. We're a little bit light of that in 2014. As some of these, again, transaction expenses go down, and as, by the way, some of the restructuring costs that we have in Space Systems start to wind down, I think you'll see the overall margins getting back to sort of a normal run rate with the ULA equity earnings at about the 12% level.
Shannon, this is Jerry. I think we've run over the hour a little bit, so I'll turn it back over to Marillyn for final comments.
Sure. Thanks, Jerry. I just want to wrap up the call by again saying that the corporation achieved another excellent year in 2014, and we continue to be well-positioned to deliver substantial value to our customers and our stockholders as we move strongly into 2015. Thanks again for joining the call today. We look forward to speaking to you again in our next earnings call in April. Shannon, that concludes our call today.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.