Good day, and welcome everyone to the Lockheed Martin 4th 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, Thank you, Shannon, and
good morning, everyone. I'd like to welcome you to our Q4 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 Marilyn. Thanks, Jerry. Good morning, everyone, and 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 and 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 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 Q4, we achieved a strong 130 percent book to bill ratio for contract awards above and finished the year with a backlog of nearly $81,000,000,000 This marks the 4th consecutive year that we have maintained our backlog in excess of $80,000,000,000 Our new business success is aided by having the best positioned 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 $20,000,000,000 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 $3,900,000,000 in annual operating cash after making $2,000,000,000 in pension contributions. This strong cash generation enabled us to provide 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 $2,000,000,000 in share repurchases in 2015 and to reduce our total outstanding share count to below 300,000,000 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 3 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 $750,000,000 reflecting the 3rd 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 missions and included environmental and safety elements essential to the future of human space travel. We extraordinarily proud employees to be the prime contractor of the Orion vehicle and look forward to proving this unique exploration vehicle I'm sorry, 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-thirty 5 Joint Strike Fighter program with progress and increased production quantity and tempo. On the development program, a major milestone was accomplished with the F-thirty 5 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 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-thirty five Stovall 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 the delivery target of 36 aircraft in 2014. This was particularly noteworthy as the team was able to overcome a nearly 1 month program hold for the engine anomaly that occurred last June and still achieved annual aircraft delivery goals.
This achievement is further illustration of the program's growing stability and production ramp up. Overall, the F-thirty five 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 8 contract was completed this past quarter for 40 a significant increase in order quantity above the 32 to 36 annual aircraft awards we received during the previous 4 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 9 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-thirty 5 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 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 20 16 budget next week on February 2. The proposed DoD based 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 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 EOD 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 4th quarter and full year
Thanks, Marilyn. Good morning, everyone. I hope you're all warm and dry this stormy day. As I highlight our key financial accomplishments, please follow on 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 finished to 2014 than we were expecting when we last spoke in October. Sales for the year were $45,600,000,000 and I'll discuss that in more detail on the chart. Segment operating margin was 12.3% for the year, about in line with our expectations. And 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, but there were 2 unplanned items that had a net negative impact in the Q4 that I'll discuss in a few charts. Cash from operations was nearly $3,900,000,000 after making $2,000,000,000 in pension contributions, including $1,000,000,000 in the 4th order as we discussed at that time.
And finally, orders for the Q4 were a little higher than expected resulting in our ending backlog of 80,500,000,000 So 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 Q4, sales grew by almost 9% compared to the same period in 2013 with 4 of the 5 business areas showing strong growth in the quarter. Aeronautics growth was driven by volume increases on the F-thirty 5 production programs. Missiles and Fire Control had higher deliveries of PAC-three missiles as well as higher tactical missile deliveries.
Mission Systems and Training had higher radar volume including the start up of the Space Fence program and Space Systems grew primarily due to the Orion flight test that occurred in the Q4. Our 4th quarter performance led to full year 2014 sales achieving slight growth over the results. On Chart 5, we'll review our earnings per share for the quarter year. 4th quarter EPS was $1.32 higher than the prior year, driven primarily by 3 items. The change in the FASCAS adjustment from an expense in 2013 to income in 2014, the absence of the restructuring charges taken in 13 and a lower goodwill impairment charge in 2014 that occurred in 2013.
I'll describe the goodwill impairment charge taken in the Q4 in more detail on the next chart. For the year, EPS was more $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'll 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. And as I mentioned previously, we had 2 unplanned events that were not considered in the EPS outlook we provided last The first of which was a special charge we took for goodwill impairment in our Tech Services line of business in Missiles and Fire Control.
This charge reduced our EPS by $0.33 and this is the 2nd consecutive year we've had an impairment charge against this business And 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 and 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 $3,900,000,000 and capital expenditures of around $850,000,000 Our free cash flow for the year was a little more than $3,000,000,000 And after making dividend payments of nearly $1,800,000,000 and share repurchases of $1,900,000,000 we returned 121 percent of free cash flow in the year.
Over the last 10 years, we have made $30,000,000,000 of dividend payments and share repurchases to our shareholders or 108% of free cash flow over that same period.
On
4 years. Our backlog levels have remained above $80,000,000,000 in each of the last 4 years despite the budgetary pressures that our customers are facing. As has been the case in prior years, a stronger fourth a strong Q4 in 2014 enabled us to achieve these results. Chart 9 provides significant assumptions in our 2015 guidance. Our FASCAS adjustment for 2015 will be income of $475,000,000 $175,000,000 less than we in our trend information in October.
The largest reason for the lower adjustment was a reduction in the discount rate to 4%. You'll recall that when we remeasured our pension liabilities in the Q2 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 3 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 $15,000,000,000 in cash from operations over the next 3 years remains unchanged. Consistent with our long standing practice, our guidance does not assume an extension of the R and 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 20 14 amount. And consistent with what we discussed last quarter, We plan to make at least $2,000,000,000 in share repurchases in 2015. Turning chart 10, we provide our current outlook for 2015.
Our guidance today is consistent with what we provided in our trend information October, except for the lower FASCAS adjustment. We expect both orders and sales to be in a range from $43,500,000,000 to $45,000,000,000 and we expect our backlog to remain above $80,000,000,000 at year end for the 5th We expect our segment operating profit to be between $5,100,000,000 $5,250,000,000 Our EPS is expected to be between $10.80 per share $11.10 per share And our cash from operations is expected to be greater than $5,000,000,000 Chart 11 shows the ranges for sales and profit by our business areas. And 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 Our first question is from Jason Gursky of Citi. You may begin.
Good morning, everyone.
Good morning. Good morning, Jason.
Marilyn, I just wanted to ask you about R and D and acquisitions. You made some comments earlier about R and 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 can just provide a little bit more detail on the strategy with regard to R and D where the spending might be going and how the customer is behaving these days with regard to independent R and D versus them paying for your R and D? And Whether we ought to view the acquisitions that you've been making here of late as kind of an extension of R and D.
You're acquiring technologies that that perhaps you didn't have and where you find the growth areas and just kind of the strategy behind R and D and acquisitions going forward holistically?
Sure. Thanks for the question, Jason. Guess just first to talk a little bit about R and D and new technology. We have been increasing our R and D expenditures over the past 3 years. This year we were up For 2014, we were up another 8%.
And we're doing that because we're not going to cut back on R and 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 our company and we are a technology company and we have to continue to invest. From our customers' perspective, we do time with our customer on our R and 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. And 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.
So 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 and 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 TX competition that's coming out in 2017, we actually had teamed with South Korea to develop the T-fifty 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 towards the I think if you look back years back, we did a similar thing on the C-one hundred and thirty J, but it's just paying dividends for us in the markets that we're operating in with the C-one hundred and thirty J program where we made investments in our business along that line. Taking it on beyond that into acquisitions, yes, 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, etcetera.
The Astrotech acquisition we made in Space Launch is very much aligned with our core with services there. But then 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 Fientra 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 and A. So we'll be looking at acquisitions that are as you said able to add capability, but the 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.
Yes, good morning. Sorry if my connection is a little weak, just working remotely here. Maybe just a follow-up on Jason's question. By my calculations, you guys will you spent something like 1.5% of sales on R and D. Is that enough?
I mean, when you look at other
technology companies, they'll spend multiples of that. I mean, how do you think about that, Marilyn?
Well, I don't think you can look at the absolute dollars honestly because I think when you look at our portfolio and you look at what we've done over the years, It's not a matter of percent of sales so much as it is the efficient expenditure of R and D dollars. So 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. And 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 percent of sales. And the other thing is if you look at Things that if you look backwards, I mean, 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 Pete Skibitski of
Hey, 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 It seems like maybe $5,000,000,000 as good as it is, might even be conservative. Can you help us understand why that could be What you do?
Yes. So 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 Page. So I think the simple math would say, gee, you did $3,900,000,000 In 2014, you did $2,000,000,000 of pension contribution. It seems like it should be around $5,900,000,000 is the $5,000,000,000 I think there's kind of 2 or 3 pieces, probably 2 that drive most of that.
One is We have additional because of the $1,000,000,000 contribution we made at the end of the year, 'fourteen we're going to get actually a tax deductions worth $350,000,000 in 'fourteen that won't carry over into 2015. We also had in 'fourteen a tax refund of about $250,000,000 or so, I think was the number. So that's what $600,000,000 or so That sort of bridge from just a cash taxes, if you will, either refunds or cash out for taxes. And then the last thing, if you look at our at the level of income that we're projecting from 2014 to 2015, we're down a couple of $100,000,000 So if you just translate that Those earnings into cash that pretty much makes up the difference to about the $900,000,000 And again, I'll remind you, Pete, we keep saying we expect to be greater than $5,000,000,000 and I think that's potential is still there.
Thank you. Our next question is from Rich Safran of Buckingham Research. You may begin.
Britt, she there?
Rich, your line is open. Please check your mute button. Our next question is from Carter Copeland of Barclays. You may begin.
Hey, good morning all. Marilyn, I really appreciate the comments on international post your visit, but I wondered if you might 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 I would 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-three and the like and how should we think about that?
So I'd say first off that the key areas of growth for us internationally are certainly in the missile defense area in Asia Pacific and the Middle East, as you mentioned, it's THAAD, it's Aegis, Aegis Ashore, Patriot, Potentially needs we hope to sell. In addition to that F-thirty five, I mean those are core and that's the majority of our growth in the international. It's our core business that we're growing. Now we are having some additional areas of growth and 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. But the big dollar items within our growth in the international are core business that we have C-130Js, continuing to sell F-16s, 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, Noah.
Hey, I wanted to ask about 2 bigger programs, new programs on which you're competing and just kind of get a broad update from you. Maybe On LRSB, I was specifically wondering, if you could talk about where work would theoretically be done and if capacity would need to be added? And then if there's any worthwhile update on JLTV and 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 LRSB, I can tell you that we're teamed with Boeing. We we have a very strong position on that program and pursuing it and there will be awards sometime this year and that's about all I can tell you about it. I'm sorry, but 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 and the award for that is projected again this year. We think mid year. We don't know as Our guess is as good as years as to which quarter because as we know a lot of times protests emerge and things of that nature. But in terms Of the program itself, it's a big opportunity for us. Bruce, in terms of size, I think you had Yes.
I think, Noah, I think the RFP came out and there's they're asking for various production quantities over various year sort of the stated number of vehicles is somewhere around 17,000 vehicles. And can probably do the math as well as anyone as far as what that total production program would be for. But it's you should think about it as a multibillion dollar sort of award for the initial proposal, which is the development program in the first few LRIP contracts. And then it's got potential obviously well beyond that for both additional domestic vehicles as well as the international marketplace. So this is Although the initial award that we're expecting to have happened this year hopefully without the protest pushing it out is not all that sizable.
The strategic opportunity is very great.
I could add on that one, Noah, where we're produce it. I can talk about that. So 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. US government and it was very successful and so we're excited about the opportunity on the JLTV.
Thank you. Our next question comes from Doug Harnett of Sanford 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, you look forward, we're at a point where there are prospects for a rising budget, a rising base budget certainly. But at the same time, we're seeing the end of a lot of operational activity in theater that's been going on on, is there much left and where is it? And then at the same time, how do you think about investing where there's going to be growth and not just R and D, but B and T, 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 beat on what's happening in the environments that we're operating in. And We look both in where the opportunities are relative to growth in this DoD budget as well as our focus on the international marketplace. And as we look at the sure there is a drawdown in regions where we're bringing our Warfighters home and that has some impact on things like our services business and things of that nature. But where the real opportunities for ours are to not only continue to grow with the F-thirty five program, which today represents 17% of our sales and will continue to grow to a larger 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 C-130J multiyear opportunity for the Toro Combat Ship. And as the U. S. Navy moves forward with their 52 ship buy on the small surface combatant, so going on the current Littoral Combat Ship.
Those are all areas for growth. And as we we believe that we do have portfolio. So 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.
Well, they used up a lot of aircraft and a lot of systems and vehicles in those wars and they've got to recapitalize them and 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. So that's where our R and D, our bid proposal, etcetera. On facilities, we have looked at how we take capacity out. We've taken out over 7,000,000 square feet of capacity since 2,009. But at the same time, we've opened up some new labs.
We've opened up some new areas. So 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. So 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 Sam Pearlstein of Wells Fargo. You may begin.
Good morning. I wanted to actually somewhat follow on that last question, which is that the guidance has top line down in 2015 a few percent at the midpoint. You did make some $900,000,000 worth of acquisitions. So I guess first part of it is just what is the organic sales trend in 20 But then also given budget trends, can you see positive year over year sales in 2016 at this point? And if not, what does it take to Yes, there.
Hey, Sam, I'll take that one on. So you're right. We Talked about roughly $900,000,000 in acquisitions in the year. I think the inorganic growth in the year 2014 was about little less than $250,000,000 and you should think of that growing to about $0.75 billion or so about $500,000,000 increase in inorganic growth year over year from 2014 to 2015. So 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 we're what Marilyn was talking about in her opening remarks about the potential increase in the FY And as we look at that, the interesting thing and I know I've talked to you guys about this in some of the conferences. I think the interesting thing is not necessarily what happens with FY 2016, it's what happens with the budgets beyond FY 2016, because 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 1 in FY 2017 and beyond. It doesn't make 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 beyond, we do believe we will start to see growth in FY 2016 and particularly within the aeronautics business areas where we're expecting to see growth.
And 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. And at least our planning, Sam, for years beyond 2016 assumes that that growth continues. So we're sitting actually looking forward to that with the potential for hopefully some good news coming out of the budget the President's budget
you may begin.
Thank you. Good morning. It's Steve Pay Hall on for Rob Stallard.
Good morning.
Marilyn, 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 Amrock. Is your sense in talking to your customers 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. And it's true that for a lot of our key countries, that's an important source of revenue for them. But when you look at countries like the Kingdom of Saudi Arabia, UAE, Qatar and others, they have a very substantial government reserves. And so what they're looking at as long as the prices don't stay down for a long extended time which we will none of us know how that will play out. But we have not seen anything that would impact our portfolio and what we So no change so far on their critical needs.
They still have they still operate in dangerous neighborhoods and they still have need missile defense and tactical aircraft and a range of communication 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. But 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 and 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-thirty five program, it looks like last You had about an $800,000,000 increase in sales, but no increase in profit related to the progression 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? And then as a second question, Bruce, can you talk about the Advanced line? I think it was like about a $500,000,000 drag. Can you just talk about the outlook for Advances from here?
Thanks.
So 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 front. We actually had an overall profit actually, Let me just take a peek here. Overall profit actually was up slightly on the F-thirty five program in total.
The production program and that's primarily because of the lack of the STD write off that we took in 2013. But 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 2014.
So those got pushed off to the right and that caused the situation that you're describing in 2014. As we look forward to 2015, I'm still expecting and I know we 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-thirty five program margins between 20142015 and we're hopeful that that trend will continue at least year over year sequential increase in the margins on the production program in years thereafter. But the biggest spike we're expecting is between 20142015. I think a big reason for that, David, we closed the year pretty strong from a production perspective on the F-thirty five program.
We had a month almost 2 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. So 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. And I'm hopeful that trend will continue into 2015. That's what we're banking on with that margin increase.
On the customer advances, Yes. I think the actual burn is about we're expecting it to go down about another couple of $100,000,000 or so. You're right, it was down about $1,000,000,000 from $13,000,000 to $14,000,000 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-thirty 5 program with aircraft and we're seeing that also in a lot of our missile programs, be they Hellfire missiles, JASMs, PAC-three and the like. So A lot of the historical and this is just in large part due to the customer change, but a large part because of the 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. It's not being replaced 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
Our next question is from Joe DeNardi of Stifel.
I guess just another one on the If you could just kind of talk about what caused some of those step ups to get pushed out of 20 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?
Yes. So Joe, I'll take that one as well. So 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 lifecycle as is the F-thirty 5. And in 20 14, we had planned to have some increases on the production program. And 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.
And that did cause some disruption overall to the performance at What the first half of the year is leaking into the second half of the year. And so 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 And that does give us the confidence that 2015 you will see those step ups made and that's the reason for The margin improvement that I talked about with Dave. And again, our expectation is a little bit spiky from 2014 to 2015 in of the pretty good sized jump in the margins on the production program, but 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 Joe Nadeau of JPMorgan. You may begin.
Thanks. Good morning. Hi, Jeff. Hey. So on Aeronautics XF-thirty 5, 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 what your where you stand on deliveries this year for specifically for F-sixteen and C-one hundred and thirty and then key pursuits a little bit about the multi year particular on the C-one hundred and thirty side? Thanks.
Yes. Thanks, Joe. So let me give you sort of a maybe again a long Good answer to the question. So F-sixteen 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 About 17, not about. We had 17 aircraft deliveries for the F-sixteen program in 2014. We're Building about 1 a month you should think of it. So we're looking at about 11 or 12 deliveries probably in 20 and 15. I think the current contract schedule would suggest 11 aircraft there.
On the C-one hundred and thirty, we're at a pretty steady rate between years, we did 24 aircraft in 2014. We would expect to do 24 aircraft in 2015 as well. And that's Again, that's the expectation. That's sort of a good build rate. In fact, we're we 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. And with the backlog that we have in the program, we're able to do that. C-one hundred and thirty multiyear, so we got, I'll say, some partial funding on that at the end of 20 and 2014. And we expect to close the rest of that, the balance of that in 2015. But 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, 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-thirty five. So we did 36 aircraft deliveries in 2014. That number is going to increase probably in the 40 maybe a couple more than that. We're actually working with the joint program office later in the month of February to Sort of finalize the production delivery plans and we do that because it actually does require resources on both size both the government resources as well as company resources to do that. So we'll have a better idea, more definitive idea of the F-thirty five deliveries next next time we talk to you in April, but I would expect that we'll be somewhere in again the 40 maybe a couple more than that as we sit here today.
And then the last aircraft program, I guess, for the aeronautics business area. We delivered 7 C5s In 2014, we expect that number to go up to 9 deliveries. And I think we stay at about that level Probably until the program winds down through the last delivery of the C5 modernization program. 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 It's kind of been a bit of an odd year. We're very heavily weighted in the second half.
The first quarter in particular is very unusually low. 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 2 fewer F-16s in the Q1 and 2 fewer C-130s both in the Q1 of 2015 compared to the Q1 of 2014. But combine that with the fact that missiles and fire control is going to have a pretty significant drop off in the Q1 of deliveries of their missile programs both tactical We could see the 1st quarter revenue being down as much as say 5% year over year compared to the Q1 of 2014. And then obviously, it will build from that point on to the levels that we're seeing for the full year for 2015.
So a little bit of an unusual pattern for us. We always have the pattern where quarter is higher than the rest, but we're starting off 2015, our lease expectation, probably a little lower than we ordinarily would.
Thank you. Our next question is from Myles Walton of Deutsche Bank. You may begin.
Thanks. Good morning. Good morning, Myles.
First First one is 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 14. And then Marilyn, as you look at the Middle East as kind of a customer base and you think about the threats that exist there, that's one 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. Well, first an answer to your question, we achieved 20% of our total sales on international sales in 2014. So we're pleased with that, And we have over $20,000,000,000 in our backlog at year end to that. We 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 and 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. I mean, it's Very clear to the Middle East region that that dialogue is going on. But Front and center for them are the needs that they have today, what their critical national requirements are today. So our discussion is that 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. So 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. And so 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.
Yes, Bruce, I noticed that all the margins that you project for 2015 in each of the sectors are down relative to Now, aero is explainable with mix, space may be explainable with less venture income. But can you go through why they're down in all the other sectors? And 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 will be the 2nd year that we'll have seen a decline.
George, I'll try to take a shot at that. That's a good question. So even though you kind of Gabe 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. So Aeronautics in 2015, in part because of all the discussions we've had up to this point on the F-thirty five production the fact we expect to see some increases there.
2015 is really looking fairly comparable from margin Perspective for aeronautics, longer term, we've talked about the fact that as F-thirty five increases, even in the scenario that I describe year over year margin increases, those will still be lower than the composite average margin for aeronautics, if you will. So that will still be dilutive just because growth of the F-thirty five program, that's what we expect to see there longer term. Missile and Fire Control is maybe slightly lower, but than 2015, 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 programs, long production missile programs out of missiles and fire control. And so I would expect to see, Again, longer term, some reduction in the margins in Missiles and Fire Control from the level we experienced in 2014 and probably 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. So 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. And That's coming with lower margins than some of their heritage production programs just like I talked about on missiles and fire control. There's also within MST in 2015, some of the last of the restructuring charges that remember we talked about in 20 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 $20,000,000 or so higher restructuring costs in MST in 2015 to 2014. So 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.
And hopefully we start to have some increases on some of those early program starts that I talked about. IS and GS, we teed up in the October call that we thought it'd be down about 30 basis points or so from 2014 to 20 15%. And I describe that as about half of that just being sort of the increased level of competition, recompetes, disaggregation, breaking down contracts and so forth. And the other half of that 30 basis points was we changed some of the backlog within IS to have a number of longer term international programs that extend over multiple years, a little bit different than the heritage IS and GS business. And those were starting off just as any new program with lower overall margins of the composite.
And that was sort of the other half of the 30 basis points that we talked about. So if you rewind back to the end of the October call, It would have said we should be looking at probably somewhere in the 8.7%, 8.8% range for margins at ISGS. We're a little lower than that. And 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 and GS' overall margin.
So While that acquisition is EPS dilutive, it is actually cash accretive in year 1. So that's something we're happy to take those charges. Again, longer term for IS and GS is that as those transactions costs start to play out, expect to see some slight increases in the IS and GS profitability margin levels from where we are today. And 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 20 14 versus 2015, a lot of that is just the mix of the launch vehicles we have there.
And that's driving the biggest single piece So 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. And just as I described on the Systems made simple are the acquisition price in GS. While they're a little bit EPS dilutive in 2015, both those acquisitions are cash accretive in 2015. So we're happy with that.
Longer term for Space Systems, I think we get back at about 12% margin, we're a little bit light of that in 2014. But as some of these, again, transaction expenses go down And 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 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 turn it back over to Marilyn 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 customers and our stockholders as we move strongly in 2015. So 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.