Good day, and welcome everyone to the Lockheed Martin First 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 Percher, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Stephanie, and good morning, everyone. I'd like to welcome you to our first Quarter 2014 Earnings Conference Call. Joining me today on the call are Marillyn Hewson, our Chairman, President and Chief Executive Officer and Bruce Tanner, our Executive Vice President and Chief Financial Officer. Statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the Safe Harbor provisions of Federal Securities Law. Actual results may differ.
Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. We have posted charts on our website today that we plan to address during the call to supplement our comments. With that, I'd like to turn the call over to Marilyn.
Thanks, Jerry. Good morning, everyone, and thank you for joining the call today. We're pleased to have you with us to review our Q1 results. As today's release details, we had an exceptionally strong quarter financially and operationally. The corporation continued to operate at a very high level in returning value to stockholders, while delivering critical solutions to our customers.
Our Lockheed Martin team delivered broad based results across the corporation and I am extraordinarily proud out of their focus and efforts. I want to highlight a few key achievements in the quarter and then Bruce will follow my remarks and cover the balance of the financial metrics in more detail. Financial results for the Q1 of 2014 were higher in almost every metric than the Q1 last year, Other than a slight decline in sales, while sales decreased in the quarter, they were better than our plan and we remain on track to achieve our full year sales guidance. Noteworthy financial accomplishments were securing new order bookings significantly above last year's level and a direct reflection of our portfolio alignment with customer requirements. This strong program alignment is essential as customers allocate resources in today's constrained budget environment.
Beyond our solid board order bookings, Net earnings and earnings per share each increased over 20%, while segment operating margin matched the high point in our corporate history at 13.4%. Through our continuous focus on cash generation, we delivered over $2,000,000,000 in Cash from operations in the quarter. Strong and growing cash generation is a hallmark of our corporation and a key differentiator and returning value to stockholders, while enabling continued investments in the future of our business. I'm very pleased that strong year financial performance enabled us to increase full year 2014 guidance for segment operating profit, Earnings per share and cash from operations. In addition to the increased guidance, we were also able to reaffirm our full year orders and And I thank everyone for their efforts.
In addition to the strong financial results, we continue to deploy our robust cash in the areas of share repurchases and dividend payments returning value to our stockholders. In the quarter, We repurchased over $1,000,000,000 of our shares, more than double the amount we expended in the same period last year. These repurchases combined with our industry leading per share dividend payments returned approximately $1,600,000,000 in cash to stockholders. Turning briefly to DoD budgets. In early March, the President released his formal fiscal year 2015 Base Defense budget at just below $500,000,000,000 This budget is flat with FY 2014 and consistent with the 2 year Bipartisan Budget Act, CAHPS, established last December.
The President also proposed adding an additional $26,000,000,000 to the 2015 DoD based budget for opportunity, growth and security initiatives. If approved, These additional funds would be used primarily to increase budgets for procurement and operations and maintenance activities. The initial outline of base budget allocation signals solid support for our portfolio of programs and we look forward to finalization of congressional budget deliberations, which are expected to be completed later this year. Moving outside VOD budgets, Momentum continues to build in efforts supporting our newly launched Lockheed Martin International Organization and international expansion strategy. This past quarter, I had the opportunity to travel to multiple countries in both Europe and the Middle East to participate in wide ranging Adaptive solutions for potential overseas customers.
While in the Middle East, I was able to tour our future Center For Innovation and Security Solutions in the UAE. This center will expand our collaboration with the UAE government, academia and local business partners in helping bring forward new technologies. Future technology applications are expected to be in areas such as cybersecurity, Integrated Air and Missile Defense and other security related areas. This center will be another link in our long standing partnership with My time in Israel enabled me to meet with the Prime Minister, Participate in the opening of the new Lockheed Martin office in Berchetta, expanding our Information Systems and Global Solutions presence And lastly, celebrate the arrival of the first Super Hercules C-130J to the Israeli fleet with its unmatched airlift capabilities. We continue to see strong and expanding international interest in our air and missile defense products, air mobility, tactical aircraft and cybersecurity.
These areas are already showing growth in our financials as we were able to expand the international content of total corporate revenues this past quarter. We remain solidly on track towards our goal of achieving at least 20% of international sales in the next year or so. I'd like to move to the F-thirty 5 Joint Strike Fighter and provide some color on the favorable progress that the program is achieving in securing domestic and international customer support and reaching key technical milestones. New business support of the program continues to grow both domestically and internationally with increased levels of annual aircraft order quantities. While the current DoD budget cap agreements for FY 2014 and FY 2015 resulted in some near term reductions and deferrals of planned Fiscal year 2014 order quantities for new aircraft are projected to increase by over 20% above prior fiscal year levels And fiscal year 2015 budget projections reflect an additional expansion of over 30% in new aircraft orders.
These increases in projected annual aircraft order quantities are indicative of increasing aircraft maturity and growing customer demand for this revolutionary 5th generation fighter. International support of the program is also expanding and helping mitigate domestic pressures from constrained budgets. Another key new business milestone achieved this past quarter was the formal announcement by the Republic of Korea to procure the F-thirty 5 for its F X fighter acquisition program. Their decision followed a comprehensive evaluation process of competitor aircraft and makes Korea The 3rd Ford military sales country and 12th country overall to select the F-thirty 5. We look forward to supporting the discussions between the valued Ally and the U.
S. Government to formalize an agreement and add a multibillion dollar order to our backlog of future F-thirty five work. Turning to the development program. While new technical accomplishments were achieved on a daily basis, this quarter included the key completion of all flight test objectives of the carrier variant aircraft using the redesigned tailhook system. The success of the newly certified arresting hook clears the way for the aircraft to conduct sea trials for the U.
S. Navy in October and moves the carrier Initial operating capability of the Stonewall aircraft in 2015 and we are progressing on Version 3i Finally, we look forward to showcasing the F-thirty 5 that heads overseas in July to fly at the Royal International Air Tattoo and the Farnborough Air Show in the United Kingdom. This will mark the aircraft's first appearance outside the U. S. And enable a world audience to see some of the revolutionary capabilities of this next generation fighter.
Overall, The F-thirty five program is retiring development risk and increasing production tempo, while reducing program costs. Shifting the focus of my remarks to portfolio shaping, we recently completed our acquisition of Industrial Defender, a leading provider Cybersecurity solutions for industrial control systems to monitor, manage and protect critical infrastructures in such areas as electric power grids, chemical facilities and oil and gas pipelines. Industrial Defender's offerings provide cybersecurity for automation systems in operational environments and are a natural extension and strengthening of our existing IT Cybersecurity Business Suite of Solutions for domestic and international customers. This addition Before turning the call over to Bruce, I want to say that we are enormously proud to receive the 2014 Catalyst Award this past quarter as recognition of our initiatives expand opportunities for women in business. We are pleased to be the 1st aerospace and defense company to receive this award As recognition of the progress we have made in ensuring women's voices are contributing to the diverse perspectives so essential in today's competitive landscape, Embracing diversity is a business imperative of our corporation.
It drives innovation and performance And it helps create and utilize the full potential of our team's human capital. I'll now ask Bruce to go through the details
Thanks, Marilyn. 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. So let's start with Chart 3 and an overview of the quarter. Sales in the quarter were $10,700,000,000 down slightly from last year, but in line with our expectations for the start of this year.
Segment operating margin was very strong at 13.4% And this performance along with the improvement in our FASCAS pension adjustment increased earnings per share by 23% to $2.87 We generated $2,100,000,000 in cash from operations, the same amount as in the Q1 of last year and returned $1,600,000,000 to shareholders. And we increased our outlook for operating profit, EPS and cash from operations. So we're off to a good start in 2014 extending upon our strong performance from 2013. Turning to chart 4 and comparing our sales and segment operating margin results for the Q1 This year versus last year. Overall, sales were down 4% compared with last year.
But as I just noted, Segment operating margin matched our highest level ever at 13.4% and was broad based across our business areas as we'll outline on the next chart. Chart 5 shows that segment operating margins improved significantly over our results from a year ago. Leading to our increased segment operating profit outlook for the year. As expected, Aeronautics margin was Slightly lower than last year due to a change in the program mix. On Chart 6, we'll reconcile our earnings per share compared with the Q1 of last year.
EPS in the quarter was 23% higher than a year ago, driven primarily by the FASCAS adjustment improvement from an expense last year to income this year along with improved segment operating margin results we just discussed. Partially offsetting this increase was the lower volume this quarter and a substantial R and D tax credit in 2013 that was not repeated this year. If you'll turn to chart 7, we'll discuss our cash generation and deployment in the quarter. Cash generated in the quarter was very strong at $2,100,000,000 This was similar to our cash generated in the quarter of last year, but last year had nearly $350,000,000 more in tax refunds associated with pension contributions than we had this year. And with free cash flow of $2,000,000,000 and cash returned to shareholders of just under 1,600,000,000 We returned 78% of free cash flow in the quarter.
Also similar to last year, we expect that cash generated in the Q1 will be On chart 8, we'll look at our share repurchases in more detail. We repurchased 7,000,000 shares in the quarter, Significantly more than what we did in the Q1 of 2013, this more than offset shares added from option exercises, the stock match Since we began our repurchase program at the end of 2,002, we have reduced our share count by a net of approximately 31 Percent to our current level of just over 315,000,000 shares. Moving on to Chart 9, we'll discuss our updated view of the guidance for the year. We are reaffirming our guidance for both orders and sales as our Q1 results were in line with our expectations. As I mentioned earlier, sales are expected to grow sequentially throughout the year, while orders are heavily weighted towards the second half of the year and especially in the Q4, similar to what we experienced last year.
We increased our segment operating profit guidance by $75,000,000 driven by the strong performance of Missiles and Fire Control And training in the Q1. We increased our outlook for earnings per share by $0.25 and we'll describe that in more detail on the next chart. And we increased our cash from operations outlook by $100,000,000 to greater than or equal to $4,700,000,000 recognizing our strong start to the year. Chart 10 provides a reconciliation of our prior outlook for EPS compared with our new outlook. Our $75,000,000 increase in segment operating profit results in a $0.15 increase in earnings per share, While our significant repurchase activity results in a lower average share count for the year that improves earnings per share by another $0.10 As a result, our EPS guidance is now $10.50 to $10.80 per share.
Moving to Chart 11. Our 1st quarter sales performance and nearly $80,000,000,000 in backlog enabled us to reaffirm We increased our outlook for Mission Systems and Training by $45,000,000 and Missiles and Fire Control by $30,000,000 resulting in the Overall increase of $75,000,000 for the corporation. And finally, Chart 13 summarizes or provides our summary for the quarter. The Q1 represents another strong performance by the company with broad based results operationally and financially. We had very good program execution and continue Take proactive measures that benefit our customers, our employees and our stockholders.
With that, we're ready for questions. Stephanie?
Our first question comes from Robert Stallard with Bank of America. Your line is open.
Thanks so much. Good morning.
Good morning.
Bruce, I hate to kick off with pension, but I will. I was wondering if you could give us an update on what you Expect to see from the CAS side over the next say 2 to 3 years? And also what's your expectation for pension contribution? Thanks, Raj.
Yes. So Rob there's a couple of moving pieces going on with the pension discussion I'll try to Sure. In my response to your question there. So, PAS is going to increase fairly significantly over the next couple of years. And I would expect that our cash contributions to our pension trust will probably be At a level close to what we're experiencing this year and maybe drop off a little bit in the year what's that 2016, the year after next.
But importantly within the discussion of pension in the near term is we do expect to see we just had We released a new mortality table that we kind of teed up, I think a few quarters back. And we would expect to incorporate that at the next re measurement of our Pension Plans. And Elyse, as I think about the effects of that mortality table change With current assumptions for the discount rate and asset returns, if those were held constant sort of current course Speed as we usually do. We'd expect to see both FAS expense and CAS to be higher in 20 15 than it would have been without the mortality change and FAS will actually increase by a greater amount than will CAS. So that alone would result in a slight reduction of FASCAS income than what it otherwise would have been.
But you should think of this is still being significantly greater at the end of the day in 2015 than what we experienced in 2015 On an order of magnitude of maybe 2x what we're seeing in 2014. Cash on the other hand It's likely to see some near term benefit, because we have been accelerating our pension contributions as required under RISA. And so we're actually sitting pretty nicely even with the effects of the mortality table required cash contributions. Those will come in sort of later years for us. But the CAS impact, the cost accounting standards impact will be updated prior to those required Arysta Contributions.
So we'll actually get as I said a bit of a near term cash net cash benefit. I said a lot there. Hopefully that all Makes sense to you there.
Our next question comes from Joe Nadeau with JPMorgan. Your line is open.
Thanks. Good morning. My question is on the share repurchase plan. You guys have been offsetting for 2 plus years The options issuance, etcetera, in this quarter for the first time in over 2 years, you broke below that 3.19 level. I was just wondering if you could comment on, I guess, the strategy with share repurchase now.
Has it are you looking at reducing the share count going forward? Or is this just a quarterly timing issue? Thanks.
Yes. I'll try that one as well Joe. So good question. So, listen, as I think about share repurchase, I'll give you kind of a winding answer here. We've We said we're committed to offsetting share count creep by offsetting the dilutive effects in particular of option exercises.
I'll remind you that we also especially in the 1st part of the year, we also increased share count for the vesting of our restricted And all throughout the year, we make additional contributions to our 401 match in the form of Stock as well. So those numbers tend to creep up throughout the year. And what we said historically as well as this year is that we intend To offset that dilutive effect as I said, we also try to be opportunistic. We'll do the same this year. And at least as I think of the next three quarters or so, Joe, we've offset most of the effect of both well, Clearly of the option exercises that took place in the Q1 as well as the RSU vesting will continue to offset Those option exercises and the 401 matches as they occur over the next three quarters.
There is some variability that might play into how much we buyback associated with any potential Acquisitions if any that we would make in the rest of the year. So sort of depending on all the things I just described the level of option exercises, Potential acquisitions if any. We could see repos at a level that would bring cash on the balance sheet I bowed back to the level we started the year with and we started the year at about $2,600,000,000 I recognize that's not what we have reflected in our current guidance, but that's The way I'm thinking about it right now. And maybe just one final point. I think we started the year A little under $10,000,000 options available to be exercised.
We had about $2,300,000 exercised in the Q1. So if you sort of annualize that and that's an assumption on my part that that will be spread equaled over the next few quarters. We'll be at about the same level of option exercises as we were last year $9,000,000 plus and that would leave us literally at the end of this year with
Our next question comes from Myles Walton with Deutsche Bank. Your line is open.
Thanks. Good morning. Actually, two questions. Slide 1 is a clarification. MST, the implied margins for the remaining 9 months, can you give us some color around sort of why the step down, Obviously, outsized performance here in the Q1, but even that, looks like the step down in the last 9 months And the other is the C-one hundred and thirty margins.
I think they're pretty impressive in terms of the margin expansion in C-one hundred and thirty in 13. It looks like you had more margin Expansion here in the Q1, when you transition to that next multi year, is that something we have to think about a step down with? Thanks.
So I'll give a shot at that Myles and see if Marilyn has any color she wants to add to it. So MST might look a little unusual For a couple of reasons. We did have a very strong Q1 of the year from an EBIT perspective and that kind of came in 2 flavors. 1 was We had some accelerated risk retirements that were actually planned for later in the year That simply because of good performance we're accelerated into the Q1. That obviously won't be a change to the year.
But on the other hand, we actually had some just outright stronger performance than we had expected in the plan. And That's the amount if you will that we increased the full year outlook by for MST. The piece that might be missing a little bit in your thinking is recall in the January call, we talked about the restructure Cost and the phasing of some of the expenses, these are expenses for a number of things accelerated Appreciation some of the facilities movement, personnel movements and so forth, personnel relocation I should say. And we talked about that being about $80,000,000 for the year. MST was about $25,000,000 of that And Space Systems was at about $55,000,000 of that that we expected to hit EBIT.
I think I described that as about a $0.16 Hit to EPS overall had it not been for that restructure charge. And nearly all of that $25,000,000 is going to fall in the Last three quarters of the year for MST. So the same thing with space by the way. Although you didn't ask about Space, the vast majority so I think of probably of the $80,000,000 $75,000,000 or so Of that remaining restructure expense that we expect to incur in 2014 will hit the next three quarters and just about Equally spread about $25,000,000 a quarter. So that's contributing to not just the MST scenario, But the lower going forward scenario for Space Systems as well.
Now having said all that, as I look at the business areas And where we sit today versus where we expect to be at the end of the year, I do think we have some potential upside pressure Especially at MST and maybe a couple of the other business areas as well, but it's just a little too early in the quarter or A little too early in the year to recognize that goodness at this time. I'm sorry C-one hundred and thirty. I forgot that you asked about C-one hundred and thirty. So They were stronger to your point in the first quarter miles than they were last year. We had some That's associated with a couple of either completions or near completions of some contracts that To your point also our in advance of the multi year, as usual whenever we kind of get to the end of a contract As women you'll see the majority of those risk retirements take place.
I think the multi year as with all sort of The contracts we started sort of start with a new sheet of paper in terms of starting with the cost at the lower level than maybe where we had on the previous contract. Risk retirements theoretically should be tougher from that lower number to begin with. So I think your question is the right one And we'll just have to continue to see the sign of performance that we've had in the past. I'd like to think that we have with National mix going forward and the international interest and not all of those FMS sale variety that we have some potential to keep the T-one hundred and thirty program close to where we are today. But you're absolutely right that there is some pressure going into the multiyear side of things.
Our next question comes from David Strauss with UBS. Your line is open.
Good morning. Good morning, David. On F-thirty five, it looks like most of the growth that you're anticipating over the next is on the international side and Maryland, you did address Korea coming into the fall. But how do you feel about overall the stability on the international It sounds like Italy is a little wobbly. Canada is obviously revaluing things.
Just how confident are you that This backlog is pretty secure. Thanks.
Thanks for the question, David. And I would say we're pretty confident. I mean, when we look at next 5 years close to half of our orders in the next 5 years will come from international customers on the F-thirty five program. Each one of these customers, our partners, they go through their process. They periodically look at their security and their defense needs.
They have to go through a decision process, but we're confident when you look at South Koreans making their formal announcement. Israel, we could potentially see additional from Israel, Australia as they move through their procurement plan. At some time in the future, we think Singapore will revisit the F-thirty five that's determined when they want to buy Canada's and their procurement process and working through that. So we feel confident that the unique capabilities of the F-thirty five is going to make it remain the best
Our next question comes from Richard Safran with Buckingham Research. Your line is open.
Thanks. Good morning, everybody. I just wanted to ask a relatively simple question here about your outlook on and your bookings guidance. So I noted that you didn't change it, I understand. But I thought maybe you could give us a bit of an update here on your booking guidance overall when you that you reported When you reported 4Q, can you tell us maybe for example what has to happen to achieve or exceed the high end of the range and just how you're looking at it now?
Yeah. So I'll throw it out, Rich. There's a lot of moving pieces. It's a simple question, but it may not be a simple answer. There's a lot of moving pieces you would expect at this point in the year from Sort of an orders or booking outlook as you described it.
So I think we were actually pleased. I know the book to bill kind of seemed a little light to some, but we were actually pleased. We actually exceeded Our estimate of what we're expecting to receive from an orders perspective in the Q1 and a lot of that frankly was international content, so we're pleased with that Well, as I look forward in the next few quarters, I would think we should probably see a similar pattern to Last year, I think we're if I was a betting person, I'd say the next two quarters will probably receive about $10,000,000,000 plus or minus Each in the next few quarters, the biggest single order in the Q2 that we're expecting is closing on the Lot 8 F-thirty five proposal, which by itself is probably worth about $3,500,000,000 There's also the FY 2014 buy for the seed product program. Think of that as $600,000,000 or So an international PAC-three for probably a 500,000,000 to 600,000,000 The FY 14 buy of the fleet ballistic missile about $500,000,000 And then several satellites including Spacecraft 7 and 8 from the GPS III program and a commercial satellite that collectively is about $1,000,000,000 a piece there or $500,000,000 in total excuse me.
So all that collectively again as we say, I think it's about $10,000,000,000 a quarter both in the second and third. And then similar to last year, we'd expect to see a Pretty good sized spike in the 4th quarter. If you just sort of back into the numbers from where we are today that's probably about and the numbers I just gave you that's probably about $16,000,000,000 or so in the Q4. The biggest single item there is the C-one hundred and thirty J multiyear Close to $5,000,000,000 but that's really when we get all of our sort of new government fiscal year orders. So that's not an unusual pattern that we would expect to see there.
We ended the Q1 like I said a little higher than we thought maybe at just below $80,000,000,000 and we still think we've got a chance to be $80,000,000,000 as we get towards the end of the year.
Our next question comes from Jason Gerstein from Citi. Your line is open.
Good morning, everyone.
Good morning, Jason.
Bruce, I've got a quick follow-up question for you and then just one quick one. On the follow-up, you talked about the impacts of the mortality tables and there being higher FAS relative to CAS As a result of the change in the mortality table, is there a way for you to quantify and consider the range, how much higher It's FAS, Mike Deane, and the CAS is a result of the change in the mortality table. And then my question is on CapEx. You came in at a run rate of only $400,000,000 for the year, which would be down significantly year on year. So I was wondering if you Talk a little bit about the trajectory of CapEx for the rest of this year, maybe the rate will exit the year and what that perhaps implies CapEx is moving up in
2016. Yes. Jason, I'll try
that one. So I should have said on the answer the first question, We probably shouldn't refer to it as a mortality table. We actually like the term longevity table. It just somehow sounds more appealing to us than we talk about mortality. So we'll start from now on calling at a longevity table.
So I did try to tee up that We see an increase in both FAS and CAS as soon as that is included in our remeasurement. I did not mean to imply that FAS will be higher than CAS. Simply the change in FAS will be higher than the change in CAS, if that makes sense. But even with that and that was the point I was trying to get to Jason. Even with that saying that Our pension income, if you will, will be lower than it otherwise will or excuse me, otherwise would have been without the mortality table.
We would We'll expect to see our FAS CAS adjustment more than double from where we are today. So where are we about 4 $35 or so $1,000,000 today. That number is and this again is my usual caveat current course and speed on the Out rate and asset return, but as we see the longevity excuse me, table impact in 2015 that number It's north of $800,000,000 So and then beyond that, Jason, that number Sort of continues to increase in the out years at least for the next couple of years beyond 2015. So as I look at CapEx in the Q1, we're almost historically low. And I wish that were not the case frankly, but it just takes a while sometimes for us to sort of break the gears loose on the CapEx.
Last year in the Q1, I think we did just north of $100,000,000 like $103,000,000 or something this year. Believe it or not, we're actually a Higher at $106,000,000 So we do expect to see just as we did last year to kind of close on the number that we include When we give our free cash guidance our free cash flow for the year, we do have some pretty good size items including Some restructured capital for the facilities movements that we talked last year or January of this year including the space Systems consolidation that have yet to play out, but those will those are bigger than maybe some of the ones we would typically have in an annual year and that is
comes from Doug Harned with Sanford Bernstein. Your line is open.
Good morning.
Good morning, Doug.
On the F-thirty five, we saw a reduction of quantities for the C model and the President's budget And there's a potential for further reductions in quantities if we see sequestration in 2016. Now I know that your pricing for the program is volume dependent, but Can you describe the impact if there's any on program margins related to the 2015 cuts? And what could happen to margins if sequestration goes into effect and we see further cuts given the way you structure these contracts?
Yes. So I'll take a shot at that Doug. So it's not inconsequential, but it's maybe not as large As you might otherwise think so, clearly we will price the Current fiscal year offering lot 8 in this case with sort of the known quantities And run those known quantities through our overhead rates, which is where some of the variability would come in from the quantity changes, So that we would capture that in sort of the instant contract that we're pricing. Where we may have a bit of pressure His prior contracts, so Lot 6 and 7 for instance would have been priced with an assumed higher quantity Of F-thirty five's going forward in Lot 8 and beyond, so sort of the overhead absorption impact of losing Those quantities of aircraft will play out and hit if you will some The performance of Lot 6 and 7, obviously, we'll try to mitigate as much of that as possible. But unfortunately, not all our overhead It's 100% variable, so some portion of the fixed cost will get spread in any event.
So And the other side of that is not so much on 6 and 7, but some of the prior aircraft and some of the other businesses with Our contracts within Aeronautics are flexibly priced cost plus in nature or fixed price incentives in nature. So there will be some sharing of those cost increases as a result of that base deterioration. I should remind you that all this has yet to play off completely because for instance the program of record which is what we tied to on the F-thirty five program. So while it would have had higher domestic quantities of aircraft than what we were pricing the previous few lots on, That program of record for instance did not include the South Korean aircraft quantities in it. So there is at least hopefully somewhat of a mitigating aspect of that in the not too distant future.
Our next
Bruce, going back to the margin conversation, I guess, the company Has realigned businesses, is doing making changes with facilities, making changes with other costs that Where the numbers are pretty large, but I guess we don't know what the starting point was. So I'm sort of curious, if there's a way to categorize How much more can still change from a cost perspective to boost margins? And then forgetting about this year, forgetting about next year, just Bigger picture, longer term, is this low 13% segment operating margin In the realistic scenario analysis of what the long term Lockheed Martin segment operating margin can be?
Okay. So let me think about that for a second. You asked a lot of detail there and I've got to get my head around it. But how much Sort of my summation how much more cost takeout potential is left. I always believe and I know Marilyn has In greenness in my thinking and probably the corporation's thinking, but we try to get to as much I've said this in the past as much of a variable cost mentality as possible.
And so a lot of that is sort of Mentally dependent. And not all of our business areas are sort of created equal in that regard. So one of the more flexible businesses we have For instance, is our short cycle IS and GS business where we have a lot of facilities that are leased in nature and not owned, not all of them by the way, but a lot of them there. So we've been able to flex pretty dramatically. If you just look back the last few years at IS and GS and look at the Unfortunate headcount reductions we've had to take, we've been able to maintain margins throughout that period with a pretty sizable reduction in our overall So that's for instance one business area that has the ability to flex to match its environment.
Some of our longer cycle businesses as you would expect like Space Systems or Aeronautics, they have a higher capital Cost content and therefore that's harder to remove. But one of the things we've been trying to do is Take a look at our total square footage and optimizing our square footage around the corporation. The moves that we just announced in November were to take out another 2,500,000 square feet on top of about 2,000,000 In square feet we've done in the past few years, so well over $4,000,000 in total. That's just sort of sizing the operations to the environment in which we operate. And I think we're good at that.
I think we're good at that across the corporation. So You never know what you have to do until you sort of hit with the predicament that the environment throws at you. So we worked it very hard. I'll also remind you that probably 2 thirds of our cost is in the supply base. So we try to get that As well under control and that's a big part of it as well.
And while we're reducing space in some areas, we're actually growing concurrently other areas, so for instance our Torrey, Alabama facility or Camden, Arkansas where we're doing some of the FAD production and some of the missile Missile and Fire Control is actually growing. So we've got this constant increasing and decreasing. I think We've become very good at that. Over the years, we've done that. So I don't think that we've reached the limit as far as what we can or cannot do in the future.
Then as far as the 13% long term, I mean given that we've hit that twice and that's the highest I would say that's a hard hurdle for us to maintain. And especially in the near term as we've talked about in the past Noah with the significant growth coming on the F-thirty 5 program at lower than the overall margin rate. That's clearly going to put pressure on our ability to achieve that. The flip side of that argument though is our international content is expected to grow over the near term. I think we'll hit close to 20% this year and we could do more than that in the next couple of years even.
So that typically would have a mitigating function, but overall I'd say it's going to be hard to maintain the 13%. That's just a level we've achieved infrequently and it'll be
Our next question comes from John Gordon with Morgan Stanley. Your line is open.
Hey, thanks for taking my question. Bruce, there's a lot of debate among investors on how to really think about these Pension tailwinds and what they mean for the stock. I was hoping to focus in a little bit on the cash part of it, The cash tailwind from prepayments for CAS harmonization and better understand how the management team thinks about it For capital allocation in the future, I guess at the extreme some would argue that a temporary tailwind should be returned to investors in I guess above normal buybacks or something of that nature. That might be too simple, but it also seems like it's too simple That a tailwind that's not going to last forever has no impact on how you think about capital allocation going forward. So I'm just curious if you could kind of focus in on that and maybe help investors understand how they should treat it for the purposes of analyzing the Docs thanks.
Yes. Well John I appreciate the question. I think it's a very well thought out question. So let me try to address everything you described there. So in years past and not this year, we've tended to whenever we give the EPS performance, we've given adjusted EPS to We understated relative to the valuation of the company and that that wasn't necessarily a good measure for our investors to be basing their valuation of the stock upon.
And so now we've got the flip situation of that where our reported Earnings are actually getting a tailwind as you said because of the FAS CAS adjustment. So what I've been trying to preach for a number of years Is that the real valuation upon which the stock should be valued is the cash flow and sort of a cash flow per share To be specific with that, so at least as we look at even with the substantial So conversion from expense to income this year, as I said I think $430 ish million or so of Added to our segment operating profit that takes us to the current outlook again of about $10.55 to $10.80 I think our free cash flow per share this year is somewhere north of $11.30 And so when I think of cash deployment in particular and I look at payout ratios from a dividend perspective or the cash available for share repurchases, I am very much focused on our sort of free cash flow per share. And I think that number grows Over the next couple of years potentially pretty significantly as we start to finally recover some of this $9,000,000,000 So that we've had pre funded into our pension trust that we've yet to recover via our billings to the government.
Now the mortality table that I just described has some longer term implications that I've I think on the opposite, as people live longer that will require additional contributions over the longer term. That should get reimbursed on our As contracts, but as I said earlier, I forgot who asked the question. In the near term that actually is an upper To cash flow, because we don't expect to have near term much of an incremental increase in our required contributions, but our CAS To our government customers, we'll reflect that mortality table change earlier. So this is That's the way I think of it, very much looking at it from sort of a free cash per share basis. And on that basis, I think we've we've got some upside from both the dividend potential as well as share repurchase potential going forward.
Our next question comes from Ron Epstein with Bank of America Merrill Lynch. Your line is open.
Hey, good morning, Bruce and Marilyn.
Hey, Ron. Good morning, Ron.
Just want to ask maybe a question on a broad question on capital allocation. So when you think about Lockheed's stock at current levels and buying it here, do you think there's other places that the corporation can invest for growth, right? Arguably buying back the shares Yes. Helps the earnings per share, but it's not really a strategy to fuel growth for the future, right? Are there other things to do?
And are you contemplating it? And can you talk about that?
Yes. I was going to give a shot. I think Marilyn may Ed, it's McCullough here as well. But so we're not this is not an idle conversation that we have. We don't automatically drop the fact that we need to be buying back shares and that's the best use of capital.
We actually do look at growth Opportunities for the corporation. We did 2 small acquisitions in the Q1 as we described. We did those because we do believe that there's growth potential in both of those acquisitions. And The other thing we try to do is invest internally. So as you think of some of our independent research and development, if you take a look over the last two years, We're up some $100,000,000 or so in just the level of IRED.
So we are we're trying To do what's right from a supporting our shareholders as well as supporting internal growth. I'll mention we just invested in a terrific Facility in Palo Alto in California to create a new lab for our one of our organizations out of space systems. That's sort of the forward looking piece of that business. So I think we're making those right decisions. But honestly as we look The environment right now, there's not enough of those to justify the ample cash We are throwing off right now as a very mature business and in the environment that we're in from an overall budget perspective.
And probably the last You would want us to do is to go chasing growth and overpaying for growth. So given those prospects, I think what we're doing is what most investors It would help us for us to do and we're doing that in a very thoughtful and hopefully prudent manner.
I'd just add to that As well Ron that if you look at the things that we are investing in as Bruce said we were up on our R expenditures last year. Over the past 5 years, we've invested more than $3,000,000,000 into research and development. Things like advanced materials, Advanced Manufacturing, we're doing things in autonomy and robotics. Some of the acquisitions we've made in the unmanned space, Quantum Computing, Cyber Energy, there's a lot of areas that we're continuing to invest in. And importantly, we're also continuing to invest in our current portfolio to keep it relevant.
So making sure we're listening to our customers extending the range for example on the PAC-three and THAAD and JASM and some of the key capabilities for RASM are opportunities that we look at it offering different And to the LCS to the international marketplace, we are definitely continuing to Maintain that portfolio and look for opportunities, advanced concepts and things that we can do to stay ahead of what our You saw probably the SR-seventy two that we rolled out, which was a capability we've been working on for a number of years and got ways to go yet and sort of demonstrate it, but having an intelligence surveillance reconnaissance capability with the potential for strike platform, which is very interesting. That's just one example, but one that I think makes the point that we're going to continue to do what we do as a corporation To be focused on being a technology leader because that is the value that we create for our customers.
Our next question comes from Carter Copeland with Barclays. Your line is open.
Hey, good morning. Almost afternoon all.
Good morning,
Carter. Bruce, just one clarification and then a question if I will on the longevity table as you stated it. The dynamic for 2016 2017, if you look out beyond 2015, presumably that's the same sort of impact in terms of FAS Being revised up more than CAS on a relative basis in those years similar to what you're seeing in 2015. Is that correct?
Yes, it is Carter, but I'll make hopefully the same point that I tried to make on the 2015. Even after that adjustment, we would still expect to The increasing pension income even after the longevity table is implemented From 2015 to 2016 to 2017.
Okay. And you're still expecting a pretty sizable step up to the contribution out there in I guess 2016 or 2017?
So we've got a fairly large contribution required in 2017 that we've also got a fairly large CAS recovery as we kind of get to the end of the CAS harmonization timeline there. So I would expect I'll say net net cash from our pension to actually increase over those same years that you just described.
Okay. And then with respect to the DoD or the Domestic versus the non DoD or international growth, with respect to the 4% decline this quarter, how would that have looked on a domestic versus international basis? And if you could do the same For bookings that would be helpful as well.
Yes. So I think and I'm
doing a sublet off the top
of my head Carter, but It's a discussion we had with the media earlier today. I made the point that
if you just take
a look at our DoD sales On a standalone basis, they dropped 4% from the year 2012 to the year 2013. And then we expect peer DoD sales to drop another 6% from the end of 2013 to the end of 2014. So a 10% drop year over year from 12% to 14%. What's lost in some of that discussion though is we'd actually We're actually down more than the 6% that I talked about just now because that's sort of going actuals to the end of the year Effective actuals and not recognizing what it otherwise could have been without sequestration. Hopefully that made some sense to you.
In the quarter itself, so in the non VOD or the international content specifically, we're looking Something like a 13% increase year over year in our total international sales. And that's and as guys from a total perspective, we're going from roughly 17% to right at Just a little bit below 20%. So but for the international growth, we would have seen a much larger Because the DoD is again increasing or decreasing about 4% clip. So the reason we're sort of down only The 1% or so that we're guiding towards is because of the mitigating effects of the international sales.
Stephanie, this is Jerry. I think we're coming up on the hour. Maybe I'll just turn this over to Marilyn for closing comments.
Thanks, Jerry. As we conclude today, I want to restate that the corporation had another outstanding quarter and is well positioned to deliver even higher value to stockholders and customers as we progress through 2014. Our robust cash generation, Strong backlog of domestic and international work, a solid balance sheet and the exceptional execution of our employees We'll continue to propel our corporation forward in 2014 and beyond. I'm confident in our future and because of the outstanding Innovation, performance and integrity of our workforce, we will continue to support our customers and their essential missions. Thanks again for joining us on the call today.
We look forward to speaking with you on our next earnings call in July. Stephanie, that concludes our call today.
Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.