Good day. Welcome, everyone, to the Lockheed Martin second 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. Jerry Kircher, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Shannon. Good morning. I'd like to welcome everyone to our second quarter 2014 earnings conference call. Joining me today on the call are Marillyn Hewson, our Chairman, President, and Chief Executive Officer, and Bruce Tanner, our Executive Vice President and Chief Financial Officer. Statements made in today's call that are not historical fact are considered forward-looking and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. We have posted charts on our website today that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts.
With that, I'd like to turn the call over to Marillyn.
Thanks, Jerry. Good morning, everyone. Thank you for joining us today. We're pleased to have the opportunity to review our second quarter results with you. As today's release detailed, we had a strong quarter operationally and financially. All reported results exceeded our expectations, and we are progressing on achievement of our full-year financial objectives. These results reflect the execution being achieved across our businesses as the corporation operated at a very strong level in providing critical solutions to our customers while returning value to our stockholders. Our team continued to deliver broad-based results across the corporation, and I thank them for all that they do on a daily basis. Our strong year-to-date financial performance also enabled us to again increase full-year 2014 guidance for segment and consolidated operating profit, earnings per share, and cash from operations. Bruce will cover the financial results in detail later.
First, I want to congratulate our Mission Systems and Training team on their successful capture of three key new business awards this past quarter, as well as recognize our Space Systems group for their capture of a multibillion-dollar extension on an essential national security program. One of the highlights of the quarter was Mission Systems and Training's competitive win of the Space Fence program. This contract will enable our corporation to provide a critical capability to our nation for tracking more than 200,000 orbiting space objects and increase the ability to prevent collisions with space-based debris. MST was also notified of two significant helicopter new business events this quarter, with announcements from the U.S. Air Force on the Combat Search and Rescue Helicopter program award and from the Naval Air Systems Command with the award of the VXX Presidential Helicopter Replacement program.
These awards will utilize our systems engineering expertise as we provide significant capabilities on these important helicopter recapitalization programs. Our role will be to support Sikorsky, who is the prime contractor on both these programs. Turning to Space Systems, our team was able to expand a key franchise program with their receipt of additional production lots for spacecraft five and six on the Space-Based Infrared System, SBIRS. SBIRS spacecraft provide essential missile defense and warning capabilities to our nation and allies to counter the growing proliferation of offensive ballistic missiles around the world. These new awards expand our backlog of work and help position our corporation for long-term growth in core markets. In addition to the notable new business awards, we also announced two strategic acquisitions in closely aligned core business areas. To expand our portfolio of satellite launch preparation services, we acquired Astrotech Space Operations.
Their addition complements our existing capabilities in satellite design, production, and integration. We also announced the acquisition of Zeta Associates to further strengthen our national security capabilities in the areas of collection, processing, safeguarding, and dissemination of critical information for intelligence and defense communities. Closing of both of these acquisitions is expected to occur in the third quarter, and they will be managed by our Space Systems business area. I would like to move to F-35 Joint Strike Fighter and provide a summary status of the program. New business support of the program continues to grow, with announcements in this quarter from two of our cooperative partner countries to procure the F-35 for their future fighter needs. Australia announced their decision to purchase 58 additional F-35 aircraft, bringing their total current procurement level to 72 aircraft.
Turkey finalized their commitment to procure their initial buy of F-35 fighters, reflecting their confidence in the program to provide fifth-generation fighter capability to their nation. It's exciting to see expanding levels of international and domestic procurement of the aircraft as we work to deliver these revolutionary assets to our nation and allies. While we had numerous accomplishments on the development program this past quarter, we were obviously disappointed with the necessary grounding of the aircraft fleet in response to an engine fire and damage to an Air Force jet at Eglin Air Force Base on June 23rd. Subsequent engineering and safety analysis, including an inspection of the entire F-35 aircraft fleet, have been completed. Flight operations were allowed to resume last week, with some limitations until a final root cause of the engine failure and identification of any corrective actions is completed.
I'd like to turn to some of the accomplishments achieved this quarter on the development program. That included achieving over 17,000 cumulative flight hours on the program, demonstrating air-to-air combat capability, and completing the first flight test with version 3I software. Another significant accomplishment was the successful landing of a carrier variant aircraft at the maximum test speed and drop rate. This success further paves the way to conducting carrier landings at sea later this year. In the software arena, we are conducting final checkout and testing of the version 2B software and are confident of being ready for initial operating capability of the STOVL aircraft in 2015 for the U.S. Marine Corps. We are also progressing well on version 3I software that will achieve the planned IOC for the Air Force variant aircraft in 2016.
Before leaving the F-35, I'd like to briefly outline our recently announced Blueprint for Affordability agreement with the Department of Defense on the Joint Strike Fighter program. This agreement is designed to reduce the price of a new F-35 to under $80 million in then-year dollars by 2019 at a level at or below the price of fourth-generation fighters. Achievement of cost reductions will enable domestic and international customers to buy a fifth-generation fighter with its far more advanced technology and capabilities as they capitalize their fighter fleets. The need to replace fourth-generation fighters is becoming even more acute due to the aging of the current fleet and increased strategic threats to the aircraft. The agreement calls for our corporation and key subcontractors, Northrop Grumman and BAE Systems, to make total combined investments of up to $170 million in affordability initiatives from 2014 to 2016.
Recruitment of our investments with an acceptable return is included in the agreement after achievement of reduced cost of F-35 aircraft in future years. Our focus on cost reductions and affordability will be aided by this agreement as we strive to produce the F-35 for our customers at the lowest possible price. Beyond the F-35, I was in the United Kingdom last week at the Royal International Air Tattoo at Fairford, and also at the Farnborough International Airshow, where I had the opportunity to meet with many current and potential customers. My impression from those meetings is that the demand for our portfolio of products is strong and growing. We see broad-based customer interest in areas ranging from fighter and cargo aircraft to missile defense systems, tactical missiles, C4ISR, and IT solutions.
Customers are very interested in our evolving technologies focus areas, where we are working to extend and expand the value and capabilities of our core programs. One item that I would highlight as a demonstration of our focus on providing innovative and different capabilities to an existing program was seen on our LM-100J commercial air lifter program. The LM-100J is the civil version of our proven and cost-effective C-130J Super Hercules aircraft and builds upon the legacy of the airlifter for new commercial customers. We were particularly pleased to announce that we secured a letter of intent for our new LM-100J commercial airlifter. This customer has the opportunity to purchase up to 10 aircraft, and we believe the potential demand for this airlifter will only grow in the future.
The final topic I'd like to speak briefly about is the decision we made this past quarter outlining revisions in our defined benefit pension plan for salaried employees. We took actions to freeze certain of our qualified and non-qualified defined benefit pension plans in a two-phased approach and transition the affected employees to an enhanced defined contribution retirement savings plan. Taking these actions will allow us to better manage our financial obligations at a more predictable rate, while still providing valuable retirement savings to employees. Our goal is to offer competitive benefits that align with our global security and aerospace peers, while also attracting and retaining the talent that is so vital to our success.
These changes will provide current and future employees with an employee retirement savings plan that is very competitive in the marketplace while positioning our pension expenses on a more affordable and sustainable level for the corporation. I'll now ask Bruce to go through the details of second quarter financial performance and our increased 2014 guidance. Then we'll open up the line for your questions. Bruce?
Thanks, Marillyn, good morning, everyone. As I highlight our key financial accomplishments, please follow along with the web charts that we included with our earnings release today. Let's start with chart three and an overview of the quarter. Sales in the quarter were $11.3 billion, down slightly from last year, but actually a little ahead of our expectations. Segment operating profit was strong at $1.4 billion. This performance, along with the improvement in our FAS/CAS pension adjustment, increased net earnings by 3% and increased earnings per share to $2.76. We had a stronger cash quarter than expected, generating $977 million in cash from operations. We increased our full-year outlook for operating profit, EPS, and cash from operations. I think we had a strong quarter and first half of the year.
Turning to Chart Four and comparing our sales and segment operating profit results for the second quarter of this year versus last year, sales were down slightly compared with last year, but as I just noted, this was ahead of our expectations. Segment operating profit was about $100 million lower than the same period last year, but last year had the benefits of contractual resolutions that were not repeated this year. Adjusting for these favorable items, our segment operating performance was comparable to last year. Again, was broad-based across our business areas. Chart Five shows that earnings per share increased by $0.12 or 5% over last year. EPS grew despite the lower segment operating profit due to the change in the FAS/CAS pension adjustment from an expense last year to income this year.
On Chart Six, we'll compare our cash from operations with the second quarter of last year. Cash generated was just under $1 billion in the quarter, or 57% higher than the second quarter last year. The strong performance in the second quarter led to an increase in our outlook for the year, as we'll discuss on the next chart. Chart Seven provides our current outlook compared with what we provided in the first quarter. We're maintaining our orders outlook at between $41.5 billion and $43 billion, but we're actually ahead of our planned order level through the first six months. We have the large C-130 multiyear order planned for late in the fourth quarter, and with the size of that order, we believe it's prudent to leave the order outlook unchanged. Similarly, for sales, we are tracking nicely to our current guidance.
We're increasing our outlook for segment operating profit by $125 million, reflecting the strong performance through the first half of the year. With the changes we announced this quarter to freeze our pension plan, we were required to remeasure our pension assets and benefit obligations. In addition to the freeze, the remeasurement incorporated a new longevity estimate along with a lower discount rate, and the net effect of these changes was $100 million increase in our FAS/CAS pension income for the next six months. We increased our operating profit outlook by $225 million to recognize both the segment operating profit and FAS/CAS pension income increases. We also increased our earnings per share guidance by $0.35, and we'll discuss this in more detail in a couple of charts. Finally, we increased cash from operations by $100 million to greater than or equal to $4.8 billion.
On Chart Eight, we have our sales outlook for the year by business area, which remains unchanged. Chart Nine shows our updated guidance for segment operating profit. We increased the outlook for operating profit by $105 million for Space Systems and by $20 million for Aeronautics. For Space Systems, this reflects strong performance to date, along with growing confidence that two large delivery events planned for the second half of the year will both happen this year. The increase in profit for Aeronautics recognizes the performance through the first half of the year being ahead of our expectations. Moving on to Chart 10, we'll discuss the increase in our earnings per share guidance. The $125 million increase in segment operating profit raised our outlook by $0.25 per share, while the $100 million increase in FAS/CAS pension income raised the outlook by another $0.20 per share.
In addition, we reevaluated certain tax reserve positions, resulting in an increase in tax expense in the second quarter. Netting all these changes, our new earnings per share guidance increased a total of $0.35 for the year to a new range of between $10.85 and $11.15 per share. On Chart 11, we thought it'd be helpful to describe how the pension changes we've made will affect our expectations for FAS/CAS income and pension funding and recovery over the next few years. As with all these projections, it's important to remember that they're all based on current regulations and include our June 2014 assumptions for a discount rate at 4.25%, which is 50 basis points lower than what we used at the end of last year. The projections also incorporate new longevity assumptions, our long-term asset return of 8%, and demographics holding constant.
As I like to say, current course and speed. We expect lower FAS expense in the future, that would make our FAS/CAS income in 2015 about twice the 2014 level and increasing the 2016 level about a half a billion dollars above the 2015 level. For pension funding and recovery, we would expect our contributions to the pension trust over the next few years to be similar to or lower than the 2014 level, and the future benefits associated with the roughly $10 billion we have funded, but not yet recovered, would remain intact. Recoveries in 2015 and 2016 are expected to be sequentially higher than 2014 and essentially keeping pace with the increases in FAS/CAS income over the next two years. Finally, chart 12 provides our summary for the quarter.
We're pleased with the performance through the first half of the year as it results from continued strong program execution, along with taking proactive measures and the benefits of a portfolio of programs that is second to none. We expect to resume discretionary share repurchases in the third quarter, this leaves us well positioned to achieve the higher outlooks that we provided today. With that, we're ready for your questions. Shannon?
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press the star, the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. In the interest of time, we are limiting you to one question. Please return to the queue for any follow-up questions. Our first question is from Sam Pearlstein of Wells Fargo. You may begin.
Good morning.
Morning.
Good morning.
Wondering if you could talk a little bit more about the investments you're making in terms of the F-35 to reduce the cost. I guess I'm wondering, does it impact your booking margin on the program? How much is it shared amongst your partners? It would seem like near-term it should have a downward effect, even if you can then recover it on the back-end. I'm just trying to understand how the mechanics of that work.
Bruce, why don't you take that?
Yeah. Sam, I'll jump in there. We're calling this the Blueprint for Affordability. As Marillyn said, the overall objective is to kind of put our money where our mouth is, quite frankly, because we think there are investments that could be made that will reduce the cost of the aircraft over the next few years below what it would otherwise track to. The thought is, as Marillyn said, up to $170 million spread over a couple of years. You should think of that, Sam, as sort of proportional, in terms of the investment contributions to the workshare of our partners.
Lockheed Martin, Northrop Grumman, and BAE would be expected, although it's not required because not all the investments, frankly, will fall along that line, but for planning purposes, you should expect it's kind of proportional to the workshare that we each have there. The recovery of that is tied to achieving those cost reductions. As Marillyn said, we would expect to recover that investment plus an appropriate return on that investment. Sam, to your question on booking rate impact, I don't expect this to have any negative impact on the booking rates, for those lots affected, unless we are unable to achieve the cost reductions that we are projecting in the basis for those investments. If we do what we say we can do, then you would see no impact on booking rates as a result of that.
I just want to add, though, that this really is an exciting acquisition reform type of an initiative. We think it's groundbreaking in terms of bringing this to the F-35 program. We've been working closely with the Department of Defense for the past year to come up with this agreement. It lines right up with Frank Kendall's Blueprint, his Better Buying Power 2.0, and where they've asked us to come up with innovative ways to drive down costs. As Bruce said, just volume will bring the cost down. We expect that probably 75%-80% of the cost reduction comes through just ramping up production. The numbers that I cited around bringing the cost of the aircraft down will depend first and foremost on that volume reduction.
At the same time, where we make these investments in cost reduction initiatives, that'll be the balance of it to bring it down to a fourth-generation priced aircraft by 2019 in then-year dollars. We're very excited about. We've already got projects underway.
Thank you. Our next question is from Rob Spingarn of Credit Suisse. You may begin.
Good morning.
Morning.
Morning.
Bruce, could you walk through some of the puts and takes in the pension numbers, headwinds and tailwinds? Obviously, the discount rate, we have that from the K, but the mortality and then the upside from the freeze?
Yeah. Are you talking about sort of FAS/CAS income change for the next six months?
Yeah, all of the detail. You've netted the number to a positive $100 million.
Yeah.
Right?
Yeah, let me give you the pieces. I should point out, Rob, what I'm going to talk through today is also going to be in the Q that you'll see, the 10-Q that you'll see filed tomorrow. We started off with an expectation of FAS/CAS pension income of about $345 million for the year. You should think of the design change that we are incorporating. That comes in sort of 2 stages. We have a freezing of the salary benefit, effective 01/01/2016, and then we have the services benefit will freeze in 01/01/2020, and that'll be essentially a full freeze of the pension plan at that point in time. The results of those amendment changes, if you will, is an improvement of about $435 million, compared to what we otherwise would have had without that.
We actually had a positive through the first six months of the year that we recognized when we were required to remeasure assets and benefit obligations. We did better. Our long-term assumption for the rate of return on assets is 8%. If you just break that into two six-month chunks, you would have said the first six months should have been about a 4% return. We actually did better than that. That better return resulted in an $85 million net improvement. The increased longevity impact for the year is about a $265 million negative impact to the income that would otherwise have occurred this year. The discount rate reduction, again, about 50 basis points, as I said earlier, is about $155 million.
Hopefully if my math's right, that walks us from the $345 million to the $445 million pension income, and that's the net $100 million benefit there. Does that work, Rob? I'll say yes.
Thank you. Our next question is from Cai von Rumohr of Cowen and Company. You may begin.
Yes. Thank you. I think you've just answered my question. Thanks.
Thanks, Cai.
Thank you. Our next question is from Howard Rubel of Jefferies. You may begin.
Thank you very much. Marillyn, your focus on affordability is notable, I think because the Pentagon, I guess, and the Navy called out two of your business units for getting top procurement awards. How important is that, and what does that say about how you're going to push the rest of the business units to capture those sort of achievements?
Howard, thank you for your question, and thanks for the recognition for the folks that are doing the right thing that the Navy and others have focused on our performance. We're excited about that. Frankly, affordability is a daily focus for us across the entire corporation. Every one of our business areas is tracking to drive cost out of the business and look at how they can bring innovation forward into some of their products in order to make them more affordable for the customer. It isn't just those that happen to get a recognition from our customer, which we highly value and appreciate. It is across the business that we are doing this.
I know if you look back at what we've done in terms of reducing our footprint with our square footage reductions, shutting down some of our facilities, things that we're doing across our overhead structure and our expenditures, at the same time, how we're looking at making sure that we're performing on a daily basis so that, if you look at our operational execution this quarter and for the past several quarters, I've never seen our programs performing better. We're putting out quality products on time, under budget, and meeting the commitments of our customers. The recognition that you highlighted was from the Navy, and not all our business areas work with the Navy. We would seek similar recognition from other services, where it's warranted because we are across the board working on affordability. Thanks for the question.
Thank you. Our next question is from George Shapiro of Shapiro Research. You may begin.
Good morning.
Hey, George.
Good morning.
Bruce, I wanted to pursue a little bit more in Aeronautics. You basically have a lot of puts and takes there. You get $40 million more F-22 sales and pick up $35 million profit. The R&D programs explained by, you took the charge last year. F-35 sales are up $210 million, but no change in the profit. Is that an issue of where you are in the LRIP program? Kind of you just explain some of those comments.
Yeah. Maybe I'll just sort of hit all the moving pieces in Aeronautics, George, and hopefully I'll capture the intent of your question there. Collectively, I think, let's see, we were up about 13% sales at Aeronautics, almost $450 million. About in line with what our expectations were. We said all along that we expected to have Aeronautics be really the only business area that has any significant growth to speak of. That, of course, was led by the F-35 program. You mentioned about $210 million of that came from the production program. The total F-35 program was just under $300 million, with the difference coming on SDD contract. Most of that increase on the SDD coming because we don't have the negative profit adjustment that was taken in the same quarter of last year. C-130s were up about $75 million or so.
Really, it was just one additional aircraft this year versus last. C-5, a similar story, one additional aircraft and a partial. It was up about $45 million. That is attributable to one additional aircraft, but it was partially offset because of a little bit of lower support in spares this year compared to last. As you said, the F-22 is about $40 million. Almost all that F-22 sales volume resulted from the higher risk retirements on a number of programs within the F-35 program that were about $35 million of that $40 in total. You talked about the, I think your question was the F-35 production program up about $210 million while the profit level was flat, and that's right.
What that really results from, George, is just as you speculated, we did have a number of higher risk retirements in the second quarter of last year that were not repeated this year. I think that's just the phasing of when those events occurred. It's not something that's causing a long-term concern on my part. I think we're performing actually very well in the production programs writ large as we sit here today.
Thank you. Our next question is from Jason Gursky of Citi. You may begin.
Hey, good morning. Just wanted to ask a question on missile defense and MEADS versus Patriot. Can you just describe a little bit on where we are today with MEADS from a revenue perspective? If we don't get any additional deals signed there, when does that revenue stream trail off? Then maybe just talk a little bit about the competitive environment, MEADS versus Patriot, and how much you care either way, which direction this all goes.
Bruce, you take the revenue question, and I'll talk a little bit about the competitive environment.
Good. You had the same thoughts I did there, Marillyn. I was trying to write those down as you were talking, Jason. Revenue stream and what's the current sort of flow of-
What is the revenue piece? Yeah.
Yeah. Current revenue level. You should think of it as fairly minimal right now. That's primarily because the development program that has been undergoing for the better part of, I don't know, five, six, seven years or so, has now sort of wound down to the end. The actual sales or revenue that, excuse me, is being generated by the program this year is not all that consequential. When that would fall off is sort of when the development program finishes, which is, if not close to the end of this year, maybe a little bit into early next year. That's sort of the profile you should think of in terms of the revenue profile that we're looking at. What we're obviously trying to do is now convert this from this program that has sort of finished the end of its development into a production contract.
That's what we're trying to do. That's what we're trying to do in Poland, and I think the next opportunity is probably going to come up in Germany. I'll let Marillyn maybe discuss the more strategic views of MEADS versus Patriot.
Sure. Thanks, Bruce. We are continuing MEADS. Frankly, I'll just say right up front, we're disappointed the Polish government announced that they have down selected to two offerings, and MEADS didn't make that down select. We really believe it offers the best capability. It's the most modern mobile unit. It's 360-degree capability, open architecture. It's got all the things that we think was a very good offering for the Polish government. At the same time, as you know, Italy and Germany have invested a significant amount of their funds into the program collectively with the U.S. government. The next opportunity for us is to continue to work with Germany and Italy on developing their future air and missile defense systems. Germany will be making a decision later this year. We feel very good about how MEADS will stack up in that competition.
As I said, they've made a significant investment. They understand the capabilities. We expect that to be strong. The program itself, as Bruce said, we're going to continue through the development phase on it, and we also expect that the U.S. Army will continue to review it and figure out how they can harvest some of the technology from MEADS. Also, just to highlight for you, we still benefit as well from the Patriot system because, as you saw, the recent opportunity with Qatar being announced and others, we are on the Patriot system with our missiles, so with the PAC-3. Both systems we'll have an opportunity for, but we are front and center in the marketplace with MEADS and expect that Germany and Italy will look seriously, and there are other countries as well.
Thank you. Our next question is from Doug Harned of Sanford Bernstein. You may begin.
Yes, good morning.
Hey, Doug.
Morning.
Staying on this area, missiles and fire control orders were lighter than normal during the quarter. I wonder if you could give us a sense of how you're looking at the outlook for that group in terms of order flow. Obviously, PAC-3, THAAD, those are important parts of that. Maybe you can give us a sense of where the international opportunities are and how you see that unit moving over time.
Yeah, I'll take that one on, Doug. I think the biggest near-term international order for missiles and fire control is probably the PAC-3 for Qatar. Marillyn mentioned that as well just a second ago. That's probably one that we're looking for. Hopefully, I think we had a signing ceremony in the Pentagon here in the last couple of weeks that will lead to a contract award to us, hopefully sometime in the third quarter. One that may not be on your scope, Doug, that's a big-sized order for us, and it's one that's worth discussing, is potentially about a $1 billion order for the Scout Fighting Vehicle in the U.K. This is basically putting a new turret and new capabilities on an existing fighting vehicle, combat fighting vehicle, in the U.K., and that's being operated or performed by our LM U.K. operation.
That's a fairly sizable opportunity that we're very excited about. We think that actually has some export potential even beyond the U.K. for that vehicle. Those are two of the bigger ones that we're looking at in terms of international orders. I'll just say, just looking at the rest of the year, the expectation for missile and fire controls, we'll probably get back to about the similar level of backlog is where we ended the year at 2013. Of course, we always have the fourth quarter of our calendar year being the first quarter of the new fiscal year, we tend to get a lot of our domestic orders in that quarter, I would expect that will happen again this year.
Thank you. Our next question is from Yair Reiner of Oppenheimer. You may begin.
Great. Thank you. For Space Systems, you mentioned that the EBIT upside relative to prior guidance is going to come from two deliveries now happening in the back half. Why didn't that impact the sales guidance as well?
Yeah. It's a good question, Yair, let me just say, there's probably, I'll say maybe three moving pieces that are going on in the Space guidance, I'll address the sales as well here. First and foremost, we've had better performance year-to-date. Some of that has come on the back of United Launch Alliance. That sort of higher to-date performance is going to carry out through the rest of the year. That's part of the increase there. Secondly, you recall, probably in both the fourth quarter call of last year and the first quarter call this year, I talked about some continuing restructuring charges, particularly as we're shutting down some facilities and relocating operations from those facilities elsewhere within the Space Systems portfolio.
Those charges have actually turned out to be a little lighter than we expected that they would be when we set the guidance for this year. Importantly to note, they're still back-half loaded in the year. The total year is expected to be lower than what we initially envisioned when we gave the guidance for 2014. Specifically to your point on the two launch vehicles, we probably had a little more contingency or conservatism in our profit guidance associated with those items, only because our profit guidance range is pretty narrow, frankly, for Space Systems company. I think it's about, what is it, $30 million or so from the low end to the high end. These are items that are probably of that size at least collectively. Whereas the sales is probably contained within the $300 million range that we give already for the sales guidance.
While I recognize why that could seem like a disconnect, I think it's because of the size of the ranges for sales versus the size of the ranges for earnings.
Thank you. Our next question is from Noah Poponak of Goldman Sachs. You may begin.
Hi, good morning, everyone.
Good morning.
Good morning.
Bruce, I wanted to get a capital deployment update from you. On M&A, you guys have been kind of doing smaller things in areas of growth. Others in the space have suggested M&A could pick up. I wonder if you think that's possible. What's the probability that that annual number for Lockheed moves into the billions rather than hundreds of millions? Then on the share repurchase, any color you could give on the anticipated pace at which that picks back up, since you mentioned that's going to happen.
Yeah. Noah, I'll jump in a little bit on the M&A question. I'll see if Marillyn has any maybe higher overarching thoughts than I provide. I think the short answer, the question, if I could repeat it, was sort of, you've done some smaller acquisitions, and what's the potential that we could end up with maybe more than $1 billion in a year instead of several hundred millions of dollars in a year? I think the short answer to that is it's opportunistic. It's what we see. We've always said, at least since I've been in this job, we look at a heck of a lot more opportunities for M&A than we ever execute on. That's because we don't think all of them make sense, obviously.
If we find more deals that make sense for us, both strategically, financially, and operationally, then we'll close that. There's not a certain number, if you will, that we're trying to stay below or trying to exceed in getting that number. I think historically, if you take a look at our capital deployment and our share repurchase plan, we ended the year last year at about $2.6 billion of cash on the balance sheet. We've grown that. I think we're, what, about $3.4 billion or so today. I think I said on the last call that we would probably try to get to a share repurchase level that would bring us about in line with where we ended last year with cash on the balance sheet. You can probably solve for that number better than I can, frankly.
That's probably my best indication of what the remaining expectation, at least on our part, is for share repurchases through the rest of the year. I'll ask and see if Marillyn has any different thoughts on the M&A question.
Not different, Bruce. I think you covered it well. We will continue to look at selective acquisitions that really make sense for us, and we will look at things that give us new access to markets or some unique technology or capability or things that fit with our core or that are very near to our core, just as the ones that we have done in the past quarter line up very well with our core business. We recently, in the previous quarter, we bought Industrial Defender, which is a leading provider for cybersecurity solutions. You can look at the things that we're buying, and if they create value and they strategically and operationally line up with what we want to do, then we're going to continue to look for those opportunities.
As you can tell from what Bruce has described, we have a lot of capability on our balance sheet to do what we think makes sense. We're just going to go along our normal process of assessing and determining if it's a good fit for us.
Thank you. Our next question is from Robert Stallard of RBC Capital Markets. You may begin.
Yeah. Thanks very much. Good morning.
Hey, Rob.
Morning.
Bruce, just a couple of quick guidance questions. What do you expect the full year tax rate to be? Also, what are the factors that you see weighing on the Aeronautics margin in the second half? Thank you.
Yeah. Thanks, Rob. I think we'll be somewhere in the 32% range, maybe a little bit lower than that as we sit here today. The one wild card, obviously, is whether or not we have the R&D tax credit, between now and the end of the year, and/or, while I believe we'll ultimately get an R&D tax credit at some point in the future, whether it happens this year or we sort of have the retroactive event like happened last year, I hate to predict that. That's not included in the tax numbers that I just gave to you, Rob. The second question was on Aeronautics and sort of the second half of the year. As we sit here today, we've actually had very good performance through the first six months for Aeronautics. As I said, probably repeatedly in the opening remarks, better than our expectations.
As we look today, at the guidance that we're providing, that would suggest that we're going to have lower margins in the second half of the year than the first half of the year. Not hugely lower, but that's a result of probably lower planned risk retirements as we sit here today. Think of how we are planning for those risk retirements in the future. The first half had the benefit of some of those exceeding our expectations, and I think there's some potential upside that we could exceed our expectations of what we have planned for those second-half risk retirements today. The other piece that sort of has a negative push on margins in the second half is obviously the rising volume of the F-35 program at the lower margins in the overall Aeronautics margin.
That will continue to happen in the second half of the year as well.
Thank you. Our next question is from Myles Walton of Deutsche Bank. You may begin.
Thanks. Good morning. First is just a clarification, Bruce. You gave us a ton of moving parts in the pension, but if you can just give us what the FAS and the CAS components were. The actual question is more on space, where this is the fourth year in a row where you're going to put up 13%, maybe better margins. Looks like there's even some conservatism left for the second half. Is this a 13% margin business on a go-forward basis?
Myles, it surprised me a little bit. Space has the benefit, I'm going to answer your second question first, I guess, I'll come back to the FAS/CAS. Space has the benefit of getting quite a significant portion of equity earnings associated with our 50/50 joint venture in the United Launch Alliance. The actual margins on the rest of Space's business, because we're recognizing the profit but not recognizing the sales, has a boost in the profit that's not inherent in the rest of the portfolio. We also have a joint venture in the U.K., where we're also accounting for it with equity earnings through the Atomic Weapons Establishment, although that's a much lower piece of it. You should think of the two of those as adding a pretty good boost to the margins of Space.
Those have increased over the past few years over what they were, say, three, four, or five years ago. We also had the transition in Space of having a number of programs sort of in concurrent development. Almost every single one of those programs is now in full rate production. As much as I can say full rate production for Space, which is usually small quantities of spacecraft. Programs like SBIRS, Advanced EHF, MUOS, even to a certain extent, the GPS III, we're sort of on the tail end or hopefully completed with the development of a lot of those satellites and we're now in production, you would expect to see higher margins during that performance. I'll just say the performance on a number of our special programs activities within Space has been outstanding, both from a capabilities perspective as well as the financial performance there.
Whether or not we can continue that, Myles, I think we've got a little bit of actually negative, as I talked about earlier, in terms of the restructuring cost that eventually will go away. You should also think, though, that we have about $40 million a year, I think, associated with the formation of ULA. That is a recurring benefit that I think expires in 2016 or 2017. I've lost track which. That's associated with the gain we had on the contribution to form United Launch Alliance, and it got spread over 10 years. Will those offset the restructuring charges going away and the end of sort of that recurring benefit at the end of the 10 years? That's the challenge for us and to see whether or not we can maintain that streak. I think you asked specifically what are the FAS/CAS numbers.
I gave you the net at $445 million. CAS does not change. That's still, think of it roughly, $1.6 billion, the FAS expense, I'm rounding some numbers here. I think FAS expense changes to about $1.15 billion for the year, I think that probably adds to the $450, but that's kind of close to the pin math.
Thank you. Our next question is from Joe Nadol of JPMorgan. You may begin.
Morning. Wanted to drill a little bit into the Mission Systems and Training segment. First of all, just if you could give a little color on the reserves you recorded on the programs in the quarter. Then just secondly, maybe higher level. I think this was the first quarter where you had a negative profit adjustment, since you started giving all that level of detail over the last three years. I know you had the tough compare with the settlement of Presidential Helicopter from last year, higher level, what's the momentum in terms of performance in this segment, because it's been so good over the last couple of years? Thanks.
Yeah. I'll try as the moving pieces there, Joe. Thanks for the question. Most of the reserve, or I guess all the reserve that we took in the quarter is really associated with the training and logistics solutions part of the business. This is a part of the business that really serves a variety of customers, including the U.S. government, international customers, as well as commercial customers. You should think of this business, at least in large part, you sort of have to have products developed and ready for the market in order to be able to be competitive in this marketplace, which means to me that you have to sometimes make bets in terms of sort of the configurations, the capabilities, and the quantities of these new products. We probably didn't make all the right bets here.
We established some reserves, in the case that some of the risk associated with some of the inventory that's on the balance sheet today simply doesn't find a home in the long term. You talk about this being the first quarter of sort of the negative hit there, you're right. What I'm pleased with is we, essentially, even with that reserve that we established for the training and logistics solutions business, there were sort of offsetting step-ups or risk retirements that mitigated, essentially to the full extent that reserve that was established, such that the net change for the quarter-over-quarter was really just the change in the contractual resolutions that happened last year that didn't happen this year. That's the way I think of it.
While the big reserve that was established, we also have big risk retirements that were planned in the quarter that helped to mitigate that. I will say that the second half step-ups that are planned, at least from a risk retirement perspective in the second half of the year, are probably going to be comparable to what we saw in the second half of 2013. I always say that's sort of the current planning, the current thinking as we sit here today. Thanks for the question.
Thank you. Our next question is from John Godyn of Morgan Stanley. You may begin.
Hey, thank you for taking my question. Bruce, just two clarifications, a little bit separate. First, on international revenue as a percentage, it looks like you're going to hit your 20% target this year. I'm curious if there is another target that we should be thinking about years in the future. Separately on pensions, you presented some very good detail on FAS/CAS and prepayments. One of the areas of pushback that I sometimes hear is that you do have a lot of contributions coming that will eat into what the cash windfall might look like. I was hoping that you could perhaps offer some detail on that point. Thanks.
Okay. First question, John, on the international revenue and where we are. I think I remember looking around, I think we did right at or just under 20% in the quarter. You're right, we are kind of hitting our number. The goal is clearly to be higher. One thing frame of reference-wise is, if we do what we believe we'll do from an orders perspective this year, we end up at the backlog level that we're hoping for, probably 30% of that backlog could be international business. I'll probably defer to Marillyn as far as setting the new goal for the company.
I would like to think that if we haven't hit the 20%, we're real close, I would think that just by virtue of the backlog that we expect to have, we should have a higher number than that, in the years to come. Probably the best time for us to describe that is in October when we give you trend information for next year. Frankly, we're kind of smack in the middle of our planning process right now, so I'll probably hesitate to pick the number directly until we've had a chance to take a look at that planning information and get back to you in the October timeframe. I think your second question was on the contributions coming in, is that a hit?
I tried to give you some visibility into that as far as the future contributions that we have planned, in 2015 and 2016 at least, where I said they'd either be sort of equal to or lower than the 2014 level. That's probably about as much insight as I want to give right now. I think the important part is sort of the net cash, at least as I like to think about that. Net cash is going to be increasing pretty substantially. I may have spoken in a little bit of code when I gave you that information, but hopefully you followed the information that we were providing there. That is expected to continue.
The flip side that I like to always remind people is, I talked about this in the earlier remarks, we have this $10 billion or so of advanced funding that is yet to be recovered. Just a year ago or so, that was like $9 billion. Those assets are sitting in our pension trust today, they're accruing interest at the same rate as our asset return is making. One different way to think of that possibly is we're doing a whole lot better with those assets invested in our pension trust than if they were doing nothing but sitting on the balance sheet. I don't think it's a bad use of that cash.
As long as we can sort of continue to satisfy the constituents in terms of dividends, repurchases to our shareholders, doing the investments we need to make with our customers, I think that's a good use of our overall cash deployment as we sit here today.
I'll just add to Bruce's comments on the international side. While we're not going to give you a specific number today, aspirationally, we are going to continue to grow in our international area. We're very much focused on that expansion of our business. It is where the growth opportunities are for us. We think we're extraordinarily well-positioned with our portfolio for growth. F-35 certainly is one area because we see in the next 5 years, almost 50% of the orders are going to come from the international arena. In addition to that, as we've talked about our missile defense, there's an expanding demand for that around the world. We see a lot of opportunities in the full range of our capabilities. We're going to continue to grow.
We even realigned our organization such that we have more leadership and focus and resources from an enterprise standpoint so that we can win in that marketplace. I think that's a good thought, Bruce, that we come back in the fall to give them that new target. Believe me, it'll be above 20%.
Thank you. Our next question is from Carter Copeland of Barclays. You may begin.
Hey, good morning. Almost good afternoon.
Hey, Carter.
I wondered if you could expand a little bit on this pension piece. The delta in the FAS number would most likely relate to the actuarial amortization, not service and interest cost, I would assume, since those aren't changing in the benefits until 2016 and 2020. Where does that bring the plan now that you've remeasured from a funded status on a PBO basis? And then when you look out longer term, if that's substantially lower, does that have a material impact on the longer-term CAS reimbursements you'd expect to see as these prepayment credits are then collected and then you look beyond that?
Yeah. You got your money's worth in the question, Carter.
I try my best
I think I'll answer your second question first. On a FAS basis, amazingly enough, our funded level ends up at about the same point as we ended the end of the year last year, at about 78%, with all the moving pieces. On an ERISA basis, which is obviously the more important one because that actually determines our funding level, we stayed about the 90% level, just as, again, as where we ended the year last year. I'm not sure I follow, frankly, the first part of your question, Carter, I will say that, I'll just go back to the detail that I gave, and I can't remember who I provided that to, frankly, the pieces of the $100 million and the various components of that in terms of pension change.
The remeasurements that we took are affecting both service costs and actuarial losses, to use the speak of the FASB and the 10-K and 10-Q disclosure. Those did affect both the service cost and the actuarial losses this year. They affected it just for the last six months of the year. You should think of those as increasing in future years only because there'll be a full year's worth of cost versus our service benefit versus a half a year's for the same items there. I think your last question had to do with how does this affect recovery. What I've tried to convey is that I think our recovery remains strong. I think I gave some insight as to what that would look like.
Clearly, relative to this $10 billion that we keep talking about in terms of pre-funding or funding in advance of the requirements, that is going to continue to drive our overall cash collections for the next decade or so. You're starting to see that materialize now and in the not-too-distant future. Shannon, I think that's getting us on the top of the hour here. Maybe Marillyn, some final thoughts or?
Sure. Let me wrap up. I just want to conclude today's call by reiterating that we had another excellent quarter, and we, in my view, continue to be very well-positioned to deliver even higher value to our customers and our stockholders in 2014. We want to thank you again for joining us on the call today, and we look forward to speaking to you at our next earnings call in October. Shannon, that concludes our call today.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation.