Good day, and welcome everyone to the Lockheed Martin Third Quarter 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. Ray Kircher, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Shannon, and good morning, everyone. I'd like to welcome you to our Q3 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.
Call. 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. Call. 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 Call.
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. Call. Thank you for joining us on the call today as we review our financial results and key accomplishments in the quarter as well as provide a brief update on some of our strategic Initiatives. As today's release details, we continue to drive towards achievement of our full year goals with another quarter of solid operational and financial results.
Although we continue to face global economic challenges, these results reflect the execution across all of our businesses as the corporation continues to operate at a very strong level in returning value to stockholders while providing Critical Solutions to our customers. The daily focus and efforts of our team are the foundation of our ability to deliver broad based results across the corporation and I thank them for their ongoing contributions. Turning to our financials. Call. While Bruce will cover the results in detail later, I want to particularly highlight our continued exceptional cash generation.
This quarter, we achieved approximately Call. $1,000,000,000 in cash from operations, bringing our September year to date cash generation to over $4,000,000,000 Call. Strong cash generation is a long standing hallmark of our corporation and continues to be a differentiator as we return cash to stockholders through dividends and share repurchases, while also making appropriate investments in the business. Our strong and growing cash generation enabled by our Board of Directors enabled them to approve 2 key cash actions this past quarter. First, we increased our quarterly dividend to $1.50 per share and $6 annually.
This action represents the 12th consecutive year that our dividend rate has been increased by double digit percentages. Call. 2nd, we also increased our share repurchase authority by $2,000,000,000 bringing our total current share repurchase authority Call to almost $4,000,000,000 and providing additional flexibility to continue to make future share repurchases. Call. Beyond the Board actions, we recently completed our annual financial planning process and projections of future financial metrics.
Call. I'm excited about the robust cash generation that the plan projects going forward and our ability to implement strong actions to deploy cash back to stockholders. In light of our future projected cash flows, we are implementing a new cash deployment initiative Call in which we anticipate reducing our total outstanding share count to below 300,000,000 shares over the next 3 years. Call. Share repurchases of this magnitude coupled with our dividend payments would result in our returning Call.
Vast majority of annual free cash to stockholders over the next 3 years and continue our long standing strategy Call. While numerous mission success events were achieved across the corporation, I want to highlight 2 major events achieved by our Space Systems business. In September, Call. Our team successfully inserted the Maven Spacecraft into orbit around Mars. Space Systems constructed the spacecraft for NASA Call and also provides flight operations control of the vehicle as it surveys the upper atmosphere of Mars.
Call. These surveys will provide vital data to scientists seeking to understand how the loss of astmospheric gas to space Change the Martian climate and potentially provide valuable insight into Asthmaferi's dynamics here on earth. Call. This quarter, the inaugural spacecraft was successfully fueled at the Kennedy Space Center and is progressing towards integration with the Delta IV launch Vehicle in November. The program continues to progress and is in the final stages of preparation for its initial unmanned test flight Call scheduled later this year in December.
Orion remains an essential national asset in returning capability of manned access to space to our nation in the coming years. We are proud to be serving as the prime contractor on this program And progressing on this critical capability for NASA and our country. I'd like to briefly switch to our international activities and provide an update on noteworthy achievements in this strategically important area. Progress this quarter was seen both in new strategic partnerships and new business Awards. In the area of new international partnerships, we opened a new space technology office in the United Kingdom.
This office will expand our in country relationships with UK companies, government agencies and universities. We are looking forward to applying our 50 year heritage of Space Systems expertise to develop opportunities in environmental monitoring, space exploration, global security and SecureSpace Communications. And we also opened a new space object tracking site in Australia to construct a more detailed picture of space Debris for both government and commercial customers. This site will use electro optical technologies and will complement radar tracking systems such as the U. S.
Air Forces Space Fence program that we were awarded last quarter. Beyond our footprint expansion initiatives, New business awards from international customers this quarter included receipt of an $800,000,000 contract from the Australian Department of Defense Call to develop a centralized information processing environment. This program will significantly improve the efficiency of data delivery by consolidating the department's 280 data centers into 14. Additionally, we were very pleased that the Republic of Korea Conference finalized its formal selection of the F-thirty 5 for their fighter replacement program and have announced their intent Conference to sign the letter of offer and acceptance between the United States and Korean governments for 40 F-thirty 5 aircraft. Call.
This program is valued at nearly $7,000,000,000 for aircraft and associated support activities. Call. These recent actions and awards are representative of the growing level of activity that our international strategic initiatives are generating. Call. I'm pleased to report that we are projecting achievement of 20% of international sales content by the end of this year, Call, achieving a goal we outlined to you a few years ago.
Growth in international business content is an essential element and our ability to generate future sales for the corporation. Projected international sales growth will help offset the impact of U. S. Government budget pressures on domestic sales levels. With growing international demand expected for our products such as the F-thirty 5 Fighter and Missile Defense Systems.
I'm increasingly confident that our annual international sales content could increase to 25% or higher in the next 2 years. Before turning the call over to Bruce, I wish to note that we are very proud to have recently been named to the Dow Jones Sustainability World Index and to 2 Carbon Disclosure Project Climate Change Management Indices. We are the only U. S. Aerospace and defense Company to earn a spot on the World Index.
And our CDP awards mark the 4th consecutive year our corporation has been recognized for exceptional performance. These prestigious awards reflect our continuing pursuit of sustainable practices through innovation, transparency and sound governance. They also reflect the broad commitment of our workforce to help engineer a better tomorrow. Call. I'll now ask Bruce to go through the details of 3rd quarter and full year financial performance and our 2015 financial trend Preview, and then we'll open up the line for your questions.
Thank you, Marilyn. Good morning, everyone. As I highlight our key financial accomplishments. Please follow along with the web charts that we included in our earnings release today. Let's start with Chart 3 and an overview of the quarter.
Call. As I'm sure you're aware, shortly after the 2nd quarter earnings call, the Highway and Transportation Funding Act of 2014, or HATFA, Call was enacted. And because this legislation extended the methodology for determining discount rates used Call. For pension contributions established by the MAT 21 legislation in 2012, it will have a significant impact on our results for the quarter, the year and longer term as well. We'll describe the impact this had on the quarter below, but we'll also spend quite a bit of time in upcoming charts describing expectations, though down slightly from last year.
Segment operating profit was also as expected at $1,300,000,000 With our segment operating margin remaining strong at 12.1%. Our net earnings from continuing operations increased 5% to 888 $8,000,000 and this is where we first see the impacts of the HAFTA legislation. The effect of the legislation lowers our FASCAS income for the year Call by slightly more than $70,000,000 and requires a retroactive adjustment in the 3rd quarter amounting to $55,000,000 or 35 $1,000,000 in net earnings. Without this adjustment, net earnings would have increased by 10% to $923,000,000 Call. We'll see the remainder of the $70,000,000 adjustment hit in the 4th quarter.
Our earnings per share from continuing operations increased 7% Call to $2.76 in the quarter. And again, these results were dampened by the impacts of the HAPA legislation in the quarter, which amounted to $0.11 of earnings Per Share. Without this retroactive adjustment, our EPS in the quarter would have been $2.87 up 12% in the quarter. Call. Our cash from operations continues to be very strong with just under $1,000,000,000 generated in the quarter, stronger than we had expected.
So I think we had another solid quarter results and we're well positioned to finish the year consistent with our guidance. Call. If you'll turn to Chart 4, we'll highlight just how strong our cash from operations has been this year. Our cash generated in the quarter was almost $1,000,000,000 and this represents call, a 10% increase over our level from a year ago. And on a year to date basis, our results are even stronger With $4,100,000,000 generated in the 1st 3 quarters, up 13% over the comparable time period last year.
Call. Chart 5 shows our cash deployment actions through the Q3. With dividends to date of almost $1,300,000,000 Call. The first three quarters representing 82 percent of our free cash flow through the same time frame. And as Marilyn said in her remarks, we also increased our dividend in the quarter by 13%, the 12th consecutive year we have increased our dividend level by 10% or greater.
Call. This payout level begins with our 4th quarter dividend. On Chart 6, we'll explain the impacts of the HATCO legislation enactment in more detail. Call. As I mentioned earlier, the legislation was enacted after the July earnings release, and in simple terms, it impacts Call by extending the methodology used to determine discount rates for ERISA contributions that was put in place with the MAT 21 legislation.
That methodology was an attempt to recognize the unprecedented low interest rate environment we were experiencing, which would have required making significant Cash Contributions to Pension Plans. The impact of the MAT21 methodology decreases each year and would have phased out by 2016. Under HEFA, this methodology will now be extended, so they will begin to decrease Conference in 2018 and phase out by 2021. It has the effect of lowering CAS cost Call as well as the risk of contributions from what they otherwise would have been had MAT21 not been extended. As Call.
As you will see, the impacts of these changes are somewhat mixed. They result in reduced pension funding requirements in the near term, Call, but also lower recovery of pension contributions as it lowers our CAS costs in the near term. Call. And while lowering near term CAS cost improves our overall competitiveness and lowers the required level of customer funding, Call. It also will lower our reported earnings per share in the near term.
I'll get into more specific detail of these impacts on the next page, but overall, we think these changes Chart 7 provides more detail into how the half of changes will affect our pension recovery and funding requirements over the next 3 years, Call. And these projections are based on the underlying assumptions for our pension plan as shown on Chart 14 in our appendix web charts. Call. Focusing on the column labeled before HATFA, we were expecting to recover more than $7,000,000,000 through our CAS pricing between 2015 2017. We also would have had $3,500,000,000 in required contributions over that same period, Call, resulting in a net $3,800,000,000 in pretax pension cash recoveries.
As you can see in the column labeled after HATFA, Call. We now expect to have cash pension receipts of $5,800,000,000 while reducing our required pension contributions to $1,000,000,000 over this time period, resulting in a net $4,800,000,000 in pretax pension recoveries. As you'll see in a couple of charts, Conference. We intend to make this required $1,000,000,000 contribution in the Q4 of 2014, creating a 3 year pension funding holiday Call and allowing additional cash deployment opportunities to shareholders over the next 3 years. The bottom two bullets on the chart describe what these changes mean relative to Call.
By 2017, we will recover just under $5,000,000,000 of that amount. Recoveries, we would expect our cash from operations to be greater than or equal to $15,000,000,000 over the 2015 to 2017 timeframe. On Chart 8, we provide our updated outlook for 2014. Call. We're maintaining our orders outlook for the year.
While we're ahead of our orders planned for the 1st three quarters, team. We also provided our usual sales and segment operating profit outlooks by business area in the appendix to our web charts today. Call. Our FASCAS pension income is lower by about $70,000,000 as previously discussed, but we now expect our other unallocated expenses of our previous guidance at $11.15 per share, which includes the negative impact of $0.14 per HAPA. Call.
And with the additional $1,000,000,000 contribution to our pension trust this year, our cash from operations is now expected to be greater than or equal to $3,800,000,000 On Chart 9, we provide our preliminary Call. At our 2015 financial trends, we expect our 2015 sales level will decline by a low single digit rate Businesses. We expect our segment operating margin will remain strong at between 11.5% 12%. Call. Our FASCAS pension income grows to about $650,000,000 in 2015 after the effects of the HAPA legislation.
And assuming the discount rate remains at 4.25 percent at year end Call in 2014 and based on the additional $1,000,000,000 in incremental pension funding in the Q4 of 2014. Call. Again, that would allow for no required pension contributions from 2015 to 2017. Beyond 2015, with the Same assumptions for our discount rate and return on assets, we would expect FASCAS income to continue to grow to about $1,000,000,000 in 20 16 and $1,500,000,000 by 20.17. And because we are eliminating our previously planned $1,000,000,000 pension contribution in 20 team.
We anticipate increasing our share repurchases to at least $2,000,000,000 about $1,000,000,000 more than the level required to offset the amount of share creep expected Call. This will be a good start to reducing our share count level below 300,000,000 share amount within the next 3 years that Marilyn mentioned earlier. Finally, on Chart 10, we have our summary. Our Q3 and year to date performance continued to be very solid. Call.
Our results leave us well positioned to achieve the full year guidance we provided, and we continue our long standing commitment to returning cash Call to our shareholders. With that, we're ready for your questions. Shannon?
Thank you. Q. 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.
Our first question is from Carter Copeland of Barclays. You may begin.
Hey, good morning.
Good morning. Just
Call. A couple of
quick ones. Just first on the sustainment weakness you called out in Aeronautics in the quarter. I wondered if you might give us some color about call. What that related to and whether that was tied to in theater operations or something else?
Yes, I'll take that one on Carter. So the sustainment weakness scenario is really think of it as Predominantly, F-sixteen, although a little bit in our Kelly business as well. The F-sixteen, Call. You should think of a couple of things going on there. We have a couple of large international F-sixteen mod programs That are starting, but they started later than we had anticipated or they will start later in one case than we had anticipated.
Call. And while we previously kind of expected to have some existing older mod programs Sort of feather into these new Vermont programs, we now have a bit of a lowering point or a trough before we start to see the new programs pick up speed, and that's what's driving the numbers down a little bit in F-sixteen. On the other hand, for the F-twenty two program, this is a bit of good news can also be bad news in some respects. We provide Same with the F-twenty two aircraft in the field and the aircraft are actually performing better than our expectations and I believe better than the customers' expectations. Call.
And so because of that, because our readiness levels and the like are up higher than we expected them to be at this point in time, We're actually seeing a diminished level of spares requirements and other sustainment activity to support the aircraft at that level. So while that's terrific news Call. For our products, terrific news for our customer. It does result in a little bit lower sales for us in 2015 than we previously planned.
Conference. Thank you. Our next question is from Jason Gerske of Citi. You may begin.
Hey, Bruce, a question for you on the cash flow outlook over the next 3 years. You're going to do 3.8 this year, which includes roughly $2,000,000,000 in pension contributions that won't be there, in the 'fifteen through 2017 period. That would suggest on average $5,800,000,000 and yet you're guiding to On average $5,000,000,000 in cash flows, dollars 15,000,000 through $18,000,000 Can you talk a little bit about the puts and takes that are going on with cash flow
outlook. Yes, sure.
Where might we come under and where might we go over?
Yes, let me try to take a shot at that, Jason. So I Call. The back of the envelope, Matthew, did would be exactly right. Dollars 3,000,000,000 with $2,000,000,000 pension contribution, why wouldn't that equal $5,800,000,000 next Call. Sure.
The short version answer to that is think about it as primarily cash taxes. So the additional Call. $1,000,000,000 that we're contributing in 2014, think of that as about a $350,000,000 Swing that we won't get that tax deduction, if you will, in 2015 and somewhat Seems old at this point in time, but we also had a tax refund in the Q1 of this year, about $250,000,000 So Between the two of those, think of that as, what, dollars 600,000,000 ish or so. I think we've the one thing I would That may help a little bit of the discussion also is while we are saying greater than or equal to $15,000,000,000 We do expect 20 15's cash flow to start with a 5, obviously, at this point in time. But I would expect that year over year, our cash from operations would Increased over that number between 'fifteen, 'sixteen and 'seventeen.
So we're actually feeling good about the statement of greater than or equal to $15,000,000,000
Call. Thank you. Our next question is from Rich Safran of Buckingham Research. You may begin.
Call. Hi, good morning.
Good morning. Good morning.
Let me ask you a different sort of question on cash flow here. Call. Marilyn, I heard your opening remarks and I just want to get a little specific. Previously your stated goal was to return 50% of cash to Call. I recognize that you've been doing more than that, but the $2,000,000,000 in share repurchases on the slide plus the dividend indicates now you're looking closer towards 100%, Assuming my math is correct here.
So I want to know if I'm thinking about this right and does it represent a change in your cash deployment strategy? Should we be thinking now that
Call. You're right, Rich. That's exactly how that totals up. And so we are indicating to you that we are going to be returning more cash to the shareholders over the next few years. As Bruce just outlined, we're going to have good solid cash flow.
And so we intend to be more focused as we look back, Call. We have been providing more than 50% for the last few years, but we intend to continue to do that. So we continue to expect Still expect to have strong dividends. We still and as Bruce has outlined, we're progressing toward a share level outstanding shares of 300,000,000 Bruce, do you want to add anything to that?
Yes. Rich, maybe just a couple of moving pieces that may not be readily apparent there. So we have about We'll probably end the year about 316,000,000 shares or so outstanding. And so we also have Call. At the end of the year, as we sit here today, about $6 ish million or excuse me, dollars 6,000,000 options outstanding as well that we would and our issues plus matching on our 401s and the like that will probably add another 10,000,000 shares or so.
So Call. If you just think of it in terms of what the absolute number of shares would have to be there, it's probably the 16,000,000 shares to get down to 300 plus, Call. Some of the creep that we just talked about. So at least as we look at it, we look at our operating cash flow over the next 3 years, I think your math is pretty much spot on. It does pretty much require us to do about 100% of free cash flow over the next 3 years, and that would be our intention.
Thank you. Our next question is from Noah Poponak of Goldman Sachs. You may begin.
Hi, good morning, everyone.
Good morning.
Call. Bruce, if I assume every segment except IS and GS has the same top line rate of change in 2015 versus 'fourteen as it did in 'fourteen versus 'thirteen. I would need IS and GS to be down about 10% Call. Just to get the total company down 1% and the low single digit comment suggests it could be segment that is incrementally worse than what you previously thought for 2015. And if you could just give
So let me give maybe just go around and I'll try to touch on all five business areas at least at the top line, Noah, because I think you're not quite right in In the way you did the math to complement that
number.
So I think IS and GS, if we look at 15, it will probably be down Mid single digits, maybe slightly more than that. And that's probably pretty evenly split between our civil and the defense and intelligence lines of business there. Call. And what we're seeing there is this is a portion of our portfolio that is always has been, I should I'll start with that, but always has been and seemingly has gotten increasingly competitive in nature to the point where We're even seeing some of our follow on contracts where we're the incumbent and we won the follow on contract. Those are being awarded at lower levels than the prior contract we're being We're also seeing the disaggregation of some contract opportunities into sort of multiple Call.
Elements of that contract that enable additional competition. So that's a little different environment than we had expected To be in as we're trying to forecast what 2015 would look like a year ago, Call. But that's the reality of where we are today. I think the piece that you're probably missing a little bit is Call. We're going to be down somewhat in missiles and fire control, probably more than you're expecting.
So missile and fire control, let's say, in Total is probably going to be down about a similar amount, like maybe a little bit less than IS and GS. Call. And most of that is because of we do have a pretty good sized services business within the missiles and fire control, our technical services business. And that is also experiencing the similar sort of hypercompetitive elements that we're seeing over in IS and GS, and so that's going down. We're also down slightly or expect to be down slightly in 2015 in our air missile defense This is both PAC-three and THAAD.
And that's just simply reflecting the lower quantities of missiles that were Call, if you will, kind of in the sequestration timeframe that are finally playing out in 2015. I think Aeronautics is Call. Probably and I think you've got this from right here, Knox, it's probably pretty comparable to where we'll finish 2014, although that's probably a little lower Then we had expected it to be primarily for the reasons that I described to Carter's question. I will point out that may not be clear, we are down. We always were expecting to be down in Aeronautics for F-sixteen deliveries from about 17 in 2014 to about 11 or so.
So think of that as like 1 a month of F-sixteen deliveries next year and that combined with the sustainment activity that I mentioned to Carter is the reason that we're actually seeing a flat. I'll try to make this through my before my voice quivers here. Call. We're making a flat year to year situation. What's sort of lost in all that is we have a Pretty significant reduction in SDD on the F-thirty five program, but the F-thirty five production program is growing at faster than a From 2014 to 2015.
Space is down slightly. Next year, Call. You should think of that as sort of low single digits. That's primarily because we had 2 launch vehicles that we recognized as sales for in 2014. Call.
We have no such launch vehicles in 2015. We also had slightly lower government we actually had one launch vehicle, Yes, but we also had the Orion ETF, which is yet to take place. That will take place in December of this year. So that's a higher volume for Orion as well compared to 2015. We also have lower government satellite volume expected next year, and that's partially offset The volume from our Zeta acquisition, but net net space is still down.
And then lastly, the one kind of outlier in all that discussion is MST. And we're actually expecting MST to have potentially a little bit higher sales, maybe low single digits higher than last year. And you should think of that as primarily because of the new start Call activity on some of our programs such as the Space Defense Program, the Combat Rescue Helicopter and the Presidential Helicopter. Conference.
Hopefully, I'll
give you a little more added color there
now.
Thank you. Our next question is from Joe Nadeau of JPMorgan. You may begin.
Call. I'd like to hone in on the F-thirty five. It looks like your margin on the LRIP Contracts in aggregate was down a little bit year on year for the 2nd straight quarter. I'm just wondering if you could highlight kind of what's Call. What your expectations are there?
Is there any risk reduction activity possible in Q4 and going into next year? And maybe just More qualitatively comment on what's happening. Thanks. Yes, Joe. I'll take a shot at that.
So Call. I think the primary reason that F-thirty five looks that way is we actually had some risk retirements in the year before that were not replicated in 20 2014, and we're obviously booking those now at the higher rate that resulted from those step ups in 20 Excuse me, 2013, but we have no similar level of step ups in 2014. Actually, as we look Call. At 2015, I think the F-thirty 5 production volume, in part because we do expect to make some step ups next year that we didn't have in 2014. We would actually expect to see the production volume or the production Return on sales actually increased next year as opposed to decrease.
So we're slowly getting there and Call. It's a bit of a slog to kind of go take a program as large as F-thirty 5 from a development to a low rate initial production to a full rate production to a full rate production program, but we're getting there. And those step ups depend on risk retirement events And the phasing of those things changes practically with every single lot. I am happy that we just finished all the 35 LRIP 5 deliveries and we're going to start delivering LRIP 6 aircraft this quarter.
Thank you. Our next question is from Doug Harnett of Sanford Bernstein. You may begin.
Thank you. Good morning.
Good morning, Doug.
On Missiles and Fire Control, Call. When you look at the next year and backlogs were down in this quarter, you talked about the service part of this. But if you look at the Call. So the broader business, both not service, but both the U. S.
And international since that's a big part of it. Call. Can you talk about how the backlogs look for those pieces and if you're seeing the order flow come in and the time frames that you would have expected to. Are we going to see those parts of the business up some in 2015?
Call. So just to be clear, Doug, you're talking missiles and fire control by itself and sort of the international content there?
Yes. Missiles and Fire Control, if you considered the services portion of it, the U. S. Equipment portion of it and then the international part. How are those moving in terms of orders?
And when we should see the revenues from those orders?
Call. Yes. So Doug, as I said previously, the technical services piece is definitely going down and accordingly the backlog associated with business going down. That's almost all U. S.
Dominated services, if you will. Call. The international business is expecting to increase both backlog and sales going forward. We've already got Call. In fact, hopefully, you saw there's a today's announcement, we had the turret contract for the U.
K. Scout vehicle. This is a subcontract arrangement to actually our facility in the U. K. Was awarded today that's worth about $1,000,000,000 That will be recognized as an order in the Q4.
We also had the PAC-three order for the government of Qatar That occurred in the quarter. It's already happened. That's about $500,000,000 And as we look forward, there's quite a few international Call. Air missile defense activities, those, as you can well appreciate, those tend to be lumpy and a little bit Call. It's hard to predict, but we would expect backlog at Missiles and Fire Control to grow in 'fifteen compared to 'fourteen, Call.
And we would continue to expect the international content, both in terms of sales as well as backlog, to grow from 'fourteen to 'fifteen as well.
Call. Thank you. Our next question is from Hunter Keay of Wolfe Research. You may begin.
Hi, thanks for taking my question. Bruce, I was wondering if you could kind of dive in a little bit about talking about the components of some of the margin erosion that you're to see next year at the segment level. Is this maybe parse it out for us between how much of it is sort of a pricing issue with regard to sort of mix shift, Call. Maybe the customers are negotiating some fixed price contracts that are rolling off or you're just getting some more development work or is it more of just sort of a volume driven sort of
Company. And I don't think it's as simple as either one of those, Hunter. So let me I probably should have done this when Noah asked this question, but Let me try to address that here with you. So we're guiding towards or at least the trend information that we provided. We said we'd probably come between 11.5% 12% next year.
The biggest reason for that, the biggest single reason for that is we're expecting close to about 1 $100,000,000 of lower equity earnings from our United Launch Alliance joint venture. And you should think of that as being Call. Probably about 3 or so fewer launch vehicles in 2015 compared to what was launched or what's expected to be launched Conference. And it's also the mix of those vehicles that not every launch vehicle that gets launched by United Launch Alliance The same level of profitability, it depends on which vehicle and when that vehicle is actually contracted for. So Call.
Again, because of quantities and mix changes, think of that as being about $90,000,000 lower. We're also seeing lower margin Call. Expectations back on the IS and GS from the competitive pressures that we talked about earlier on the sales discussion. So I would expect to see IS and GS margins down probably 20, 30 basis points, somewhere in that range. About half of it sort of due to competitive pressures that we that are affecting the sales as well as the bottom line there.
And probably the other half is and this is probably a little bit of a good news story. Call. The other half of margin pressure comes because we're we've won quite
a few
large international multiyear contracts. So think of this as Conference like the for the Australian Department of Defense, we're providing the IT services for them. Think of it as a number of Command and Control Programs for International Customers. And whereas the vast majority of IS and GS business tends to be very short cycled in nature, these are a A little bit more longer term contracts. And as you might expect, we'll start booking those contracts at lower profit rates, in part because they're new customers and They're longer duration contracts as well.
I also mentioned that we had about $50,000,000 of higher expenses next This year 2015 because of intangible amortization and transaction expenses associated with the deals that we are closing this year. And we also have within that $50,000,000 about $20,000,000 or so of Research and development expenses that are hitting the bottom line for our Sun Catalytics R and D efforts. This is Call. You may have read about this. This is our sort of our energy storage pre revenue kind of business that we acquired.
Call. It does require some continuing R and D expenditures. And this is a non FAR, non Call. It's about $50,000,000 higher next year than last year. Despite that, I actually went back and looked at what we provided last year at this time.
And Call. And last year for 2014, this time we were guiding towards about 11.5%. I'll say the same thing this year that I said last year, which is as I look Forward, I think we have similar levels of opportunity to do better as we did in 20 'fourteen, as we sit here looking at 2015. But we have to make those happen, and that's the reason we haven't made those happen yet, and we'll see how that progresses throughout the rest of the year.
Call. Our next question is from John Gaiden of Morgan Stanley.
Conference. There's no doubt that Lockheed has a differentiated core competence in aerospace and particularly if you assume that you win the long range strike bomber like we do. But when you Look out a few years, at a certain point, you'll have effectively tapped out of the organic growth opportunities that the Air Force, so to speak, Conference. And I wonder if you could talk a bit about how you see the shape of the company evolving in the longer term. Call.
Where do we find the growth from there? Do we start looking more closely at M and A or do we evolve more into sort of a pure cash
Well, I think as you talk about the outlook Call. For aircraft and aerospace in general, it's still very positive for us. We're going to have continued to see F-thirty 5 growth Conference. Well into the future, I mean, we often talk about how it's very similar to the F-sixteen program. Today, we have program of a record of over 3,000 aircraft and we the F-sixteen we sold something like 4,600 of them and we still have Continued demand for the F-sixteen and that's how we expect the F-thirty 5 to go.
So while there is a program of record with the U. S. Government on the number of Call of aircraft that they're going to buy. We have a lot of interested countries internationally that have yet to come online in that procurement process. A lot of partners as you know, 8 partners around the world, now 3 SMS customers with Israel, Japan Call.
And now South Korea and we expect additional customers. But some of those customers are early on and what their needs are and I expect that they will look at additional tranches of aircraft over time much as they did with the F-sixteen program. Tranches of aircraft over time much as they did with the F-sixteen program. So we'll continue to be a strong aerospace company going forward Call. And to the future, it will be a major element of our business.
Likewise, the missile defense arena is going to be a continued demand. That's There will be additional opportunities domestically, but if you look at FAD, PAC-three, Aegis, Aegis Assure, even MEADS we expect Day going forward. Another area that we are moving into and have invested significantly in and have tremendous product for is the Joint Line Tactical Vehicle, that's a big opportunity as we look forward. Littoral Combat Ship and the work that we're doing in that arena, there is interested international customers for that. In Call.
We just launched the latest LCS in Marinette Marine this past Week and we had international customers that attended that ceremony so that they could they're interested in our products. We think there'll be a demand for that as we go forward. C-130J, that aircraft continues to be in demand. We've got a solid backlog of aircraft Conference. And we expect that there will continue to be others.
And now that we've rolled out our commercial version, we expect those commercial customers that today are flying L100s to fly the L100J in the future. So that will we'll continue to look at variance of the C-130J just as we have for Call. So, Mia, I've kind of walked around some of the top products in our portfolio, but Call. As Bruce mentioned earlier, big opportunities in mission systems and components on various other platforms such Call. As the combat rescue helicopter, the presidential helicopter, the MH-sixty Romeo that we're selling around the world that we do the mission systems for, At our Mission Systems, simulation and training continues to be a strong demand for that and as Call.
Over time they'll continue to be. And as you mentioned, our teaming with Boeing on a long range strike call. We expect that we're very well positioned to win that opportunity.
Thank you. Our next question is from Rob Stallard of RBC Capital Markets. You may begin.
Thanks very much. Marilyn, a question There's been some comments out of D. C. That maybe the U. S.
Defense industry is not investing enough its own money in Call and perhaps returning too much money to shareholders. I was wondering if this is a comment that you've heard from your customer and how they might respond to your latest announcement today on the buyback?
Well, yes, we have heard that from our customer that a concern by Call. We lose our technological superiority in this period of time when there are budget pressures and it's a down market. I would tell you from a Lockheed Martin standpoint, Call. We have increased our R and D from last year to this year by 13%. We're going to increase another 5% this year or so And we'll continue to so we're at the highest percent of sales that we've ever been in terms of our research and development and we'll be higher in 2015.
Call. We will continue to invest. But I do think an open communication with our customer, especially in Call. The Department of Defense is really important and we are in constant dialogue with them on what areas that we want to invest in and how call. That aligns with what they see as their priorities in the future.
A lot of our products, as you know, Call. Require a lot of development on the front end such as F-thirty 5 or as we look forward to JLTV that we talked about Conference. In a variety of them. So as we come out with products, we're constantly investing. But we're investing in new technologies.
We're looking at Call. How do we help our customer get an advantage over our adversaries? We have things going on that we can't talk about on this call, but certainly there's a lot of investment Call. And new materials and new capabilities that we think our customers will need. So yes, we're hearing it.
Call. And I think from the Department of Defense standpoint, because they recognize that, I think they will in turn be looking at making sure that they invest in new Technology and we expect to participate in that opportunity. We do cooperative research and development with universities and with other government as well. So when you look at our percent of IRAD, you have to add to that the things that we're doing there and Cooperative CRAD type of things. We are a major provider to DARPA.
So the work that we do with DARPA is another example. Call. So when you total it all up, you can't just look at one number on the balance sheet. You have to take into account the type of work we do, the complexity of Call. The products that we produce and how much research and development that takes on the front end in the development phase as well as our independent research development and our work with DARPA and our CRAN.
Thank you. Our next question comes from Myles Walton of Deutsche Bank. You may begin.
Thanks. Good morning. I was hoping, Bruce, maybe you can touch on the profit adjustments not related to volume I mean, kind of what's baked into 'fifteen? It looks like maybe for this year, you'd be running somewhere 32% to 33%. And then also if you can just clarify on the sustainability of unallocated expense being at this level?
Thanks.
Yes. So I think you're about right, Miles. I don't quite have the number in my head, but we were a little bit lower in the Q4 in terms of our profit adjustments. Call. I would expect that we'd probably rebound a little bit, at least as we look at the planning for the Q4.
I mean, obviously, those can move out if we don't Sort of accomplished all the events that we hope to that result in those risk retirements. But as we look here today, we would expect to bounce back up Call. A little bit. And that was in the year at about the level you said, I mean, somewhere probably in the 33%, 34% of total profitability. I would think next This year is probably fairly comparable.
We've kind of tossed out the 30% to 35% is sort of where we expect We're a little bit higher than that last year, but that's about what we expect to be going forward. And then as far as Call. The other unallocated, I would not expect it to be quite at the level we are forecasting for this year, Conference. In part because, I mean, there's a lot of moving pieces in that as you can well appreciate. But We had some question corporate costs that got resolved in our favor during the quarter.
There was a fairly the largest piece of those moving pieces and I would not expect that to replicate in future quarters. So this is a bit of an outlier.
Call. Thank you. Our next question is from Rob Spingarn of Credit Suisse. You may begin.
Good morning, everybody. Actually Ross on for Rob. I was just hoping to get a quick update on the expected timing for the signing of Alvepate on F-thirty 5 Any other details you could provide regarding that contract?
Well, on LRP 8, we are progressing well in the negotiation. So I think that we expect to see a closure on that in the near term. It's for 43 Aircraft is what is the number of aircraft in that lot. So we'll see a larger number of aircraft in El Repay. We have Call.
So we're in it's progressing very well and we've had good discussions with our customer and we expect to include the negotiations in the near term.
Call. Thank you. Our next question is from Cai von Rumohr of Cowen and Company. You may begin.
Yes. Thanks so much. So Call. Bruce, if you could comment an aeronautical with respect to, I think you took a contract reserve in the Q3 and also maybe update us Call. The C-one hundred and thirty deliveries this year and next year given there was a slip on the F-sixteen and the implications of that F-sixteen
So actually we had 2. Call. We said there are contractual reserves that are probably better stated as sort of legal reserves. Call. One was to resolve a legal matter and the other one was sort of create a provision for a legal matter.
2 different items about Same quantity of each of them, so a total of about $30,000,000 in the quarter. I think we released that in the earnings release. C-one hundred and thirty deliveries, we do expect to end the year about 24 Call. We're going to we're in about a 24 aircraft build rate. And you could possibly have one slip here and there between years, But I don't expect that to happen in 2014.
We're tracking well to that schedule. And I would think 2015 would be a similar level Call at the 24 aircraft. And then I think your last question was on F-sixteen and what's the profitability of that. Because we're losing volume of aircraft quantities, obviously, the profit dollars associated with those aircraft year over year because of that, I mean, the aircraft quantities that are being delivered, I still think will have comparable margins And the sustainment activity, including the model work that we do, is also fairly comparable to the aircraft business that we have there. So it may not be Conference.
As self evident, when the quantity drops, the profitability also drops, so the profit the margin also drops because I don't think that's the case there.
Call. Thank you. Our next question is from George Shapiro of Shapiro Research. You may begin.
Hi, Jessica. Good morning. A couple of little ones I'll patch C5 deliveries next year and do we get any chance of getting above the 0 margin? And then on the F-thirty five, if you could break out the revenues by the different LRIPs and if there's any international Revenue starting to pick up next year?
Yes. So George, I'll take that one. So C5, we are expecting to increase the rate. You should I think we'll do probably 6, maybe a Call. 7 C5s this year.
We're actually performing well on that program. I think we grow that number to about 9 We expect the deliveries next year, so we will see some volume increases associated with that. I do think there's a chance that we'll see Call. Some profitability increases, George, on that. We're performing much better as we performed throughout 2014 toward Call.
At the end of the year than we were even at the start of the year. And assuming that trend sort of continues into 2015, I think that creates the possibility for that. I think we talked on our previous call about there's definitely some, what we call, over and above work that I think we have entitlement to that we do believe we can get reimbursed at some point in time. That has not yet played out, but we continue to believe we have Entitlement, which would allow more than what I'm talking about just through, I'll say, ordinary program performance improvements year over year. So I'm feeling better about the perm going into 'fifteen than I am than I was in the 2014.
The international revenue on the F-thirty 5, it's the quantities are growing. Call. And just roughly, I think if we were to kind of pull out a number, it's a little bit out of the top of my head, but we're probably somewhere between $1,000,000,000 or $1,500,000,000 in international revenue this year, and we would probably expect to grow that number above $2,000,000,000 of the total Call. F-thirty five revenue for next year. So it's growing at a fairly fast clip by itself.
Again, the program in In total, the production program is growing more than 10% year over year from 'fourteen to 'fifteen. So internationally, you would expect to do that as well.
Conference. Thank you. Our next question is from Sam Perlstein of Wells Fargo Securities. You may begin.
Call. Good morning, guys. It's Gary Lebowitz for Sam.
Good morning, Gary.
A couple of quick ones. Bruce, for your 3 year cash flow outlook, how should we think of capital expenditures over that period. Yes. So you should think of those as being fairly similar To the level we had in 2014, Gary, we're right at around $1,000,000,000 between PP and E capital expenditures and our capitalized software. And that's about the level we see in the future.
It could be a little less than that, Maybe a little more than that, but for planning purposes, think around about $1,000,000,000 a year. Great. And my second question, and I apologize if you addressed it already. Call. The sales outlook in space that you took up to $7,900,000,000 this year, what was behind that increase?
Yes.
So we're getting again, I think at the beginning of the year, we had probably a little more conservatism for some of the later in the year Delivery events that are going to occur, including the Orion ETF launch, which should be pretty spectacular, by the way, on December in the early part of December of this year. Call. So that's that now we feel highly confident that that's going to occur. That was one of the reasons we were probably a little more conservative with our guidance early in the year. We've also made 2 acquisitions segment.
In the year Zeta Associates, which is the larger of the 2 and Astrotech, which is a little smaller, but we're getting additional revenue from both of those as well.
Call. Shannon, this is Jerry. I think we're coming up on the hour, maybe one more question.
Our next question is from Joe DeNardi of Stifel. You may begin.
Call. Hey, good morning. Hi, Joe. Bruce, I'm wondering if you could talk about given some of the budget uncertainty, obviously, we've had over the past couple of years is I think There's more confidence that that bottoms out in 2015. Does that change the way that you think from a cash deployment perspective Kind of balancing the dividend, buyback and M and A.
And clearly, the M and A side hasn't been a big piece of it the past couple of years. Does that do you see that changing at all over the
Q2. Well, I sure hope, Joe, that we do see the bottom out in 2015. Call. We kind of teed up. We thought that was going to occur in 2014, and we were at least a year off there.
So as we look today, I think Call. We do expect that to sort of bottom out for us in 2015 and we get back to a period of growth in 2016. It's kind of what the budget would indicate. I'm watching, in particular, the FY 16 budget requests and whether or not they sort of stick within the sequestration levels Actually potentially base it more on the actual threats and the strategic direction that the DoD needs to go into. I think that's going to be Call.
An interesting one to watch. As far as the how that plays relative to our cash deployment, I don't see that Having any necessarily large impact on how we would think of cash deployment activities, I think we've given a little more insight into that by what we talked about today with the higher share that we plan over the next 3 years at least. And as I always say with the dividends, I think our track record on dividends Call. So I'll probably leave it at that and turn the call back over to Marilyn at this point.
Call. Thanks, Bruce. We'll just wrap up now. I want to thank you all for joining us on the call today and just conclude by reiterating that Corporation had another solid quarter and we continue to be well positioned to deliver substantial value to our customers and shareholders as we progress toward Conference a successful closure of 2014. So thanks again for joining us and we look forward to speaking with you again on our next earnings call in January.
Shannon, that concludes our call today.
Call. Thank you. Ladies and gentlemen, this concludes today's conference.
Thank you
for your participation and have a wonderful day. You may now disconnect.