Good day, and 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, and good morning. I'd like to welcome everyone to our Q2 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 results to vary materially from anticipated results. We have posted charts on our website today that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Marilyn.
Thanks, Jerry. Good morning, everyone, and thank you for joining us today. We're pleased to have the opportunity to review our 2nd 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 3 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 2 significant helicopter new business events this quarter. With announcements from the U. S.
Air Force on the Combat Search and Rescue Helicopter Program 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 56 on the space based infrared system, SBIRS.
SBIRS spacecraft provides 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 2 strategic acquisitions and closely aligned core business areas. To expand our portfolio of satellite 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 to occur in the Q3 and they will be managed by our Space Systems business area.
I would like to move to F-thirty 5 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 2 of our partner countries to procure the F-thirty 5 for their future fighter needs. Australia announced their decision to purchase 58 Additional F-thirty five aircraft, bringing their total current procurement level to 72 aircraft. Additionally, Turkey finalized their commitment to procure their initial buy of F-thirty 5 Fighters, reflecting their confidence in the program to provide 5th 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 23. Subsequent engineering and safety analysis, including an inspection of the entire F-thirty 5 aircraft Fleet has been completed. Flight operations were allowed to resume last week, but with some limitations until the final root cause I'd like to turn to some of the accomplishments achieved this quarter on the development program that included achieving over 17,000 with 5 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 Stoball 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-thirty 5, I'd like to briefly outline our We 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-thirty 5 to under $80,000,000 in then year dollars by 20 2019 at a level at or below the price of 4th generation fighters. Achievement of cost reductions will enable domestic and international customers to buy a 5th generation fighter with its far more advanced Technology and capabilities as they capitalize their fighter fleets. The need to replace 4th 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 Tractors, Northrop Grumman and BAE Systems to make total combined investments of up to $170,000,000 in affordability initiatives from 2014 to 2016. Recoupment of our investments with an acceptable return is included in the agreement after achievement of reduced cost of F-thirty 5 aircraft in future years.
Our focus on cost reductions and affordability We'll be aided by this agreement as we strive to produce the F-thirty five for our customers at the lowest possible price. Beyond the F-thirty five, I was in the United Kingdom last week at the Royal International Air Tattoo at Fairford and also at the Farm Bureau International Air Show, 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 program was seen on our LM-one hundred J Commercial Air Electra Program.
The LM-one hundred J 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 2 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 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 2nd quarter financial performance and our increased 2014 guidance, And then we'll open up the line for your questions.
Chris? Thanks, Marilyn, and good morning, everyone. As I highlight our key financial Please follow along with the web charts that we included with our earnings release today. Let's start with Chart 3 and an overview of the quarter. Sales in the quarter were $11,300,000,000 down slightly from last year, but actually a little ahead of our expectations.
Segment operating profit was strong at $1,400,000,000 and this performance along with the improvement in our FASCAS pension adjustment increased net earnings by 3% and increased earnings per share to $2.76 We had a stronger cash quarter been expected generating $977,000,000 in cash from operations and we increased our full year outlook For operating profit, EPS and cash from operations. So I think we had a strong quarter and first half of the year. Turning to chart 4 and comparing our sales and segment operating profit results for the Q2 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 $100,000,000 lower than the same Last year, the last year had the benefits of contractual resolutions that were not repeated this year.
Adjusting Looking for these favorable items, our segment operating performance was comparable to last year and again was broad based across our business areas. Chart 5 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 FASCAS pension adjustment from an expense last year to income this year. On Chart 6, we'll compare our cash from operations with the Q2 of last year. Cash generated It was just under $1,000,000,000 in the quarter or 57% higher than the Q2 last year.
The strong performance in the 2nd quarter led to an increase in our outlook for the year as we'll discuss on the next chart. Chart 7 provides our current outlook compared with what we provided in the Q1. We're maintaining our orders outlook at between $41,500,000,000 $43,000,000,000 So we're actually ahead of our planned order level through the 1st 6 months. We have the large C-one hundred and thirty multiyear order planned for late in Q4. And with the size of that order, we believe it 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 $125,000,000 reflecting the strong performance to the first half of the year. With the changes we announced, excuse me, 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 $100,000,000 increase in our FASCAS pension income for the next 6 months. We increased our operating profit outlook by $225,000,000 to recognize both the segment operating profit And FASCAS 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 $100,000,000 to greater than or equal to $4,800,000,000 On Chart 8, we have our sales outlook for the year by business area, which remains unchanged. Chart 9 shows our updated guidance for segment operating profit. We increased the outlook for operating profit by 100 and $5,000,000 for Space Systems and by $20,000,000 for Aeronautics. For Space Systems, this reflects strong performance to date, along with growing confidence that 2 large delivery events planned for the second half of the year will both happen this year.
The increase in profit per anautics Recognizes the performance through the first half of the year being ahead of our expectations. Moving on to Start 10 will discuss the increase in our earnings per share guidance. The $125,000,000 increase in segment operating profit raised our outlook by $0.25 per share, while the $100,000,000 increase in SaaS cash 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 2nd 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 FASCAS 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 or as I like to say We expect lower FAS expense in the future and that would make our FAS CAS income In 2015, about twice the 2014 level and increasing the 2016 level about $500,000,000 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 $10,000,000,000 we have funded, but not yet recovered would remain intact. Recoveries in 2015 2016 are expected to be sequentially higher than 2014 And essentially keeping pace with the increases in FAS CAS income over the next 2 years.
And finally, Chart 12 provides our summary for the quarter. We're pleased with the performance of 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 share repurchases in the Q3 and this leaves us well positioned to achieve the higher outlooks that we provided today. With that, we're ready for your
Please return to the queue for any follow-up questions. Our first question is from Sam Perlstein of Wells Fargo. You may begin.
Good morning. Good
morning, Sam. Good morning.
Wondering if you could talk a little bit more about the investments you're making in terms of the F-thirty five to reduce the cost. I guess I'm wondering, does it impact your booking margin on the program because And how much is it shared amongst your partners? Because it would seem like near term, it should have a downward effect even if you can then covered on the back end. So I'm just trying to understand how the mechanics of that work.
Chris, why don't you take
that? Yes. Sam, I'll jump in there. So we're calling this the blueprint for affordability. As Marilyn 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.
And so the thought is, as Marilyn said, about $170,000,000 up to $170,000,000 spread over a couple of years. You should think that Sam is sort of proportional in terms of the investment contributions to the work share of our partners. So 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 work share that we each have there. The recovery of that is tied to achieving those cost reductions.
And as Marilyn said, we would expect to recover that investment plus an appropriate return on that investment. So 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. So 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-thirty five program. We've been working closely with the Department of Defense for the past year to come up with this agreement and it lines right up with Frank Kendall's blueprint It is Better than Life 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% to 80% of the cost reduction comes through just ramping up production.
So the numbers that I cited around bringing the cost of the aircraft down will depend 1st and foremost on that volume reduction, But at the same time, where we make these investments in cost reduction initiatives, that will be the balance of it to bring it down to a 4th generation priced aircraft by 2019 in thin year dollars. So we're very excited about And we've already got projects underway.
Thank you. Our next question is from Rob Spingarn of Credit Suisse. You may begin.
Good morning.
Good 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?
Yes. So are you talking about sort of the FASCAS income change for the next 6 months? Yes.
All of the detail you've netted the number to a positive 100,000,000,000 Yes.
So let me give you the pieces. And I should point out, Rob, what I'm going to talk through today is also going to be that you'll see the 10 Q that you'll see filed tomorrow. So we started off with an expectation of FASC has pension income of about So that comes in sort of 2 stages. We have a freezing of the salary benefit effective 1onetwenty 16 And then we have the services benefit will freeze in oneonetwenty 20 and that will be essentially a full freeze of the pension plan at that point in The results of that those amendment changes if you will is an improvement of about $435,000,000 Compared to what we otherwise would have had without that, we actually had a positive through the 1st 6 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%.
So if you just break that into 2 6 months chunks, you would have said the 1st 6 Should have been about a 4% return. We actually did better than that. And those better that better return resulted in an $85,000,000 Net improvement. The increased longevity impact for the year is about a $265,000,000 Again, about 50 bps, as I said earlier, is about $155,000,000 So hopefully, if my math is right, that walks us from the $345,000,000 to the $445,000,000 pension income and that's the net $100,000,000 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, Scott.
Thank you. Our next question is from Howard Rubel of Jefferies, you may begin.
Thank you very much. Marilyn, your focus on affordability is Notable, I think, because the Pentagon, I guess, and the Navy called out 2 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
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. And we're excited about that. And 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 So look at how they can bring innovation forward into some of their products in order to make them more affordable for the customer. So it isn't just those that happen to get a recognition from our customer, which we highly value and Appreciate, but it is across the business that we are doing this. And I know if you look back And 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 and at the same 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 of our businesses work Business areas work with the Navy. So we would seek similar recognition from other services where
Our next question is from George Shapiro of Ferro Research, you may begin.
Good morning.
Good morning.
Bruce, I wanted to pursue a
Do a little bit more in Aeronautics. I mean you basically have a lot of puts and takes there. I mean like you get $40,000,000 more F-twenty 2 Sales and pickup $35,000,000 profit. The R and D programs explained by you took the charge last year. F-thirty five sales are up $210,000,000 but no change in the profit.
So is that an issue of where you are in the LRIP program? So kind of you just explain some of those comments.
Yes. So maybe I'll just sort of hit all the moving pieces And aeronautics, George, hopefully I'll capture the intent of your question there. So collectively, I think, Let's see, we were up about 13% sales at Aeronautics, almost $450,000,000 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-thirty five program. You mentioned about $210,000,000 of that came from the production The total F-thirty five program was just under $300,000,000 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 $75,000,000 or so, really it was just one additional aircraft this year versus Last C-five a similar story, one additional aircraft and a partial it was up about $45,000,000 So 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. And as you said, the F-twenty two was about $40,000,000 Almost all that F-twenty two sales volume Resulted from the higher risk retirements on a number of programs within the F-thirty five program that were about $35,000,000 of that $40,000,000 in total. So you talked about the I think your question was the F-thirty 5 Production program up about $210,000,000 while the profit level was flat and that's right. And what that really results From George is just as you speculated.
We did have a number of higher risk retirements in the Q2 of last year that were not repeated this year. I I think that's just the phasing of when those events occurred. And it's not something that's causing a long term And 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 Gerske of Citi. You may begin.
Hey, good morning. Just wanted to ask a question On missile defense and NEADS versus Patriot,
can you
just describe a little bit on where we are today with NEADS from a revenue And if we don't get any additional deals signed there, when does that revenue stream And then maybe just talk a little bit about the competitive environment in the ads versus Patriots and how much you care either way, which direction this all goes?
Well, you take the revenue question and I'll talk
a little bit about the competitive environment. Yes. Good. You had the same thoughts I did there Marilyn. So I was trying to write those down as you were talking Jason.
So revenue stream And what's the current
What is
the level?
Yes, the current revenue level. You should think of it as fairly minimal right now. I mean, And that's primarily because the development program that has been undergoing for the better part of, I don't know, 5, 6, 7 years or so Has now sort of wound down to the end. So 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, but that's sort of the profile you should think of in terms of the revenue Profile that we're looking at.
And then so what we're always trying to do is now convert this from this program that has sort of finished the end This development into a production contract and 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 Come up in Germany and I'll let Marilyn maybe discuss the more strategic views of Mee Edge versus Patriot.
Sure. Thanks Bruce. And we are continuing me as frankly I'll just say right upfront we were disappointed. The Polish government announced That they're down selected to 2 offerings and Miez didn't make that down select Because we really believe it offers the best capability. It's the most modern mobile unit.
It's 360 degree Capability, open architecture. So it's got all of 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.
And 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 Later this year, we feel very good about how NIAZ will stack up in that competition. As I said, they've made a significant investment. They And the capabilities, so we expect that to be strong. The program itself, we as Bruce said, we're And 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 take harvest some of the technology from the ads. Also just to highlight for you, we still Benefit as well from the Patriot system because there as you saw the recent opportunity with Qatar being announced and others, we are on the Patriot system with our missile, so with the PAC-three. So 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. Hi, Doug. Good morning. Staying on this area, Missiles and Fire Control orders were lighter than normal during the quarter.
And 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? And obviously, PAC-three, THAAD, those are important parts of that. So maybe you can give us a sense of where the international And how you see that unit moving over time?
Yes. I'll take that one on Doug. I think the biggest near term international order for missile and fire control is probably the PAC-three for cutter. Marilyn mentioned that as well just a second ago. And so 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 Q3. One that may not be on your scope Doug, it's a big sized order for us and it's one that's worth discussing is About a potentially about $1,000,000,000 order for the Scout Fighting Vehicle in the U. K. This is basically Putting a new turn 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. So 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. So those are 2 of the bigger ones that we're looking at in terms of international orders. But I'll just say Just looking at the rest of the year, I mean, 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. And of course, we always have the 4th quarter Our calendar year being the Q1 of the new fiscal year and we tend to get a lot of our domestic orders in that
Our next question is from Yair Rayner of Enheimer, you may begin.
Great. Thank you. For Space Systems, you mentioned that the EBIT upside Relative to prior guidance, it's going to come from 2 deliveries now happening in the back half. Why didn't that impact the sales guidance as well?
Yes. So it's Good question, Yair. And let me just say there's probably, I'll say maybe like 3 moving pieces that are going on in the space guidance and I'll address the sales as well here. But So first and foremost, we've had better performance year to date. Some of that has come on the back of the That sort of higher to date performance is going to carry out through the rest of the year.
So that's part of the increase there. Secondly, recall, Probably in both the Q4 call of last year and the Q1 call this year, I talked about some continuing charges particularly as we're shutting down some facilities and relocating operations from those facilities elsewhere within the space systems portfolio. So 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, there's still back half loaded in the year, but the total year is Expect it to be lower than what we initially envisioned in the 2000 when we gave the guidance for 2014. And then specifically to your point on the 2 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, dollars 30,000,000 or so from the low end to the high end.
These are items that are probably at that size at least collectively, whereas the sales It's probably contained within the $300,000,000 range that we give already for the sales guidance. So 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.
Bruce, I wanted to get a capital deployment update On M and A, you guys have been kind of doing smaller things In areas of growth, others in the space have suggested M and 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 100 of 1,000,000. And then on the share repurchase, any color
Yes. So, Noah, I'll jump in a little bit on the M and A question. I'll see if Marilyn has any Maybe higher overarching thoughts than I provide, but so I think the short answer to the question, if I 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 $1,000,000,000 I think the short answer to that is it's opportunistic. It's what we see with 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 and A than we ever execute on. And that's because we don't think all of them make sense obviously.
And so 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 and getting that number. So 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 $2,600,000,000 of cash on the balance sheet. We've grown that.
I think we're what about $3,400,000,000 or so today. I think I said on the last call that we would probably Trying 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. And you can Probably solve for that number better than I can frankly, but 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. Now I'll ask and see if Marilyn has any different thoughts on the M and A question.
Not different. Bruce, I think you covered it well. I mean, we will continue to look at selective acquisition It really makes 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. And we've recently in the previous quarter, We bought Industrial Defender, which is a leading provider for cybersecurity solutions. So you can look at the things that we're buying.
And if they are they create value and they're 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, I mean, 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 Rob Stallard of RBC Capital Markets. You may begin.
Thanks so much. Good morning.
Hey, Rob. Good morning. Bruce, just A couple
of quick guidance questions. What do you expect the full year tax rate to be? And also what are the factors that you see weighing on the aeronautics margin in the Thank you.
Yes. Thanks, Rob. So I think we'll be somewhere in the think of it probably in the 32 Percent range maybe a little bit lower than that as we sit here today. The one wildcard obviously is whether or not we have the R and D tax credit And or I believe we'll ultimately get an R and D tax credit At some point in the future, whether it happens this year or we sort of had the retroactive event like happened last year, I hate to I predict that, but that's not included in the tax numbers that I just gave to you, Rob. And the second question was on aeronautics and sort of the second half Of the year.
So as we sit here today, we've actually had very good performance through the 1st 6 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 the result of probably lower planned risk retirements as we sit here today. And 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. I think there's some potential upside that we could exceed our expectations of what we have planned for those second half risk And the other piece that sort of has a negative push on margins in the second half is obviously The rising volume of the F-thirty 5 program at the lower margins than 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. Jim, 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. But the actual question is more on space where This is the 4th year in a row where you put up or you're going to put up 13% maybe better margins. It looks like there's Some conservatism left for the second half. Is this a 13% margin business on a go forward basis?
Miles, it surprised me a little bit. So space has the benefit obviously. I'm going to answer your second question first, I guess, and I'll come back to the fast cast. So space has the benefit of getting quite a significant portion of equity earnings associated with our fifty-fifty joint venture in the United Launch Alliance. So 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 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 it's a much piece of it. So that you should think of the 2 of those as adding a pretty good boost to the margins of And those have increased over the past few years over what they were say 3, 4, 5 years ago. We also had the transition in space of having A number of programs sort of in concurrent development and 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 aircraft spacecraft. So Programs like SBIRS, Advanced EHF, Mules, 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 were down production.
And you would expect to see higher margins during that performance. Also, I would say, the performance on a number Special programs activities within space has been outstanding, both from a capabilities perspective as well as the financial performance there. So Whether or not we can continue that, Miles, I think we've got a little bit of actually negative as I talked about earlier In terms of the restructuring costs that eventually will go away, you should also think though that we have about $40,000,000 a year, I think associated with the formation of ULA that is a recurring benefit that I think expires in 2016 or 2017 have lost track with. So that's associated with The gain we had on that on the contribution to form United Launch Alliance and it got spread over 10 years. Will those offset the restructuring charges going away in 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.
So I think you asked specifically what are the FAS CAS numbers. So I gave you the net at $445,000,000 CAS does not change. So that's still think of it roughly $1,600,000,000 and the FAS expense and I'm rounding some numbers here. I think FAS expense changes to about $1,150,000,000 for the year. I think that probably nets to 4 50, but that's kind of the close to the pin math.
Thank you. Our next question is from Joe Naidal of JPMorgan. You
may begin.
Good morning. I want 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? And then just secondly, maybe higher level, I think this was the 1st quarter where you had a negative profit adjustments since you started giving all that level of detail over the last 3 years. And I know you had a tough compare with the settlement of Presidential Helicopter from last year, but higher level, What's the momentum in terms of performance in this segment if it's been so good over the last couple of years?
Thanks.
Yes. So I'll try some moving pieces there, Joe. Thanks for the question. So most of the reserve for I guess, all the reserve that we took And the quarter is really associated with the training and logistics solutions part of the business. This is a part of the business that It really serves a variety of customers including the U.
S. Government, international customers as well as commercial customers. And you should think of this business at least in large part, you sort of have to have products developed and ready for the 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. And so we Establish 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 talked about this being the Q1 of sort of the negative hit there and you're right.
What I'm pleased with is we essentially even with that reserve that we established for the Training and Logistics Solutions There were sort of offsetting step ups or risk retirements that mitigated essentially to the full That reserve that was established such that the net change for the quarter over quarter was really just the change in the Actual resolutions that happened last year that didn't happen this year. So 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 So what we saw in the second half of twenty thirteen, and I always say that's sort of the current planning, the current thinking as we sit here today. So thanks for the question.
Thank you. Our next question is from John Gaiden 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. And then separately on pensions, you presented some very good detail on FASCAS 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. So 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. So 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 and we end up at the backlog level that we're hoping for, Probably 30% of that backlog could be international business. So I'll probably defer to Maryland as far Setting the new goal for the company, but I would like to think that if we haven't hit the 20%, we're real close. And I would think that they're Just by virtue of the backlog that we expect to have, we should have a higher number than that in the years to come. Now Probably the best time for us to describe that is in October when we give you trend information for next year.
And frankly, we're kind of smack in the middle 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 time frame. 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 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. And 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, and that is expected to continue. And the flip side that I like to always remind people is and I talked about this in the earlier remarks, we have this $10,000,000,000 or so of Advanced funding that is yet to be recovered. Just a year ago or so that was like $9,000,000,000 Those assets are sitting in our pension trust today and they're accruing interest at the same rate as our asset return is making.
And so one different way to think of that possibly As 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. And so I don't think it's a bad use of that cash. And as long as we can sort of continue to Satisfied 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'd just add to Bruce's comments on the international side. While we're not going to give you a specific number today, I mean, aspirationally, we are 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.
Well positioned with our portfolio for growth. F-thirty five certainly is one area because we see in the next 5 years almost 50 And for that around the world we see a lot of opportunities in the full range of our capabilities And 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. And I think that's a good thought Bruce that we come back in the fall to give them that new target. But believe me it will be about 20%.
Thank you. Our next question is from Carter Copeland of Barclays. You may begin.
Hey, good morning or almost good afternoon.
Hey, Troy.
Just a 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 and the benefits until 2016 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?
Yes. So you got your money's worth for the question Carter. So I think I'll answer your second question first. So On a FAS basis, our 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 Which is obviously more important one from because that actually determines our funding level.
We stayed about the 90% level just again is where we ended The year last year. I'm not sure I follow frankly the first part of your question Carter, but I will say that I mean I'll just go To the details that I gave and I can't remember who I have provided that to frankly, the pieces The $100,000,000 and the various components of that in terms of pension change. So there were the re measurements that we took Are affecting both service costs and actuarial losses to use the speak of the FASB in the 10 ks 10 Q disclosure. So those did affect both the service cost and the actuarial losses this year. And they affected it just for the last 6 months of the year.
So you should think of those is increasing in future years only because there will be a full year's worth of cost versus our service Benefit versus a half years for the same items there. And I think your last question had to do with how does this What I've tried to convey is that I think our recovery remains strong. And I I think I gave some insight as to what that would look like. And clearly, relative to this $10,000,000,000 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. And you're starting to See that materialize now and in the not too distant future.
Shannon, I think that's getting us on top of the hour here. Maybe Marilyn, 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 And our stockholders in 2014. So 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.