Good day, and welcome everyone to the Lockheed Martin Fourth Quarter and Full Year 2013 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 Thank you, Shannon, and good afternoon, everyone. I'd like to welcome you to our Q4 2013 earnings conference call. Joining me today on the Call are Marilyn Hewson, our Chief Executive Officer and President and Bruce Tanner, our Executive Vice President and Chief Financial Officer. Statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ.
Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. We have posted charts on our website today that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin. Com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Marilyn.
Thanks, Jerry. Good afternoon, everyone and thank you for joining us on the call today. All of us here hope that your year is off to a good start. Let me begin by saying that I am extraordinarily proud of our Lockheed Martin team. We've continued to maintain focus and achieved strong program and financial performance in a challenging environment.
These efforts enabled the corporation to generate Marginal operational and financial results in 2013 and have us well positioned for 2014. While Bruce will cover the financial results in detail a little later, I want to highlight a few noteworthy 2013 financial achievements from my perspective. Starting with new business, I was particularly pleased with our continued success in securing new order bookings Markets from both domestic and international customers. These new contract awards enabled our year end 2013 backlog market to grow to a record level of almost $83,000,000,000 Even more impressively, 2013 marks the 4th consecutive year we have grown our backlog in a very challenging and competitive environment. I was also pleased that the international component of our backlog market grew to approximately $20,000,000,000 representing almost 25% of our total backlog.
This has us well positioned to achieve our stated goal of expanding international revenues to over 20% of total corporate revenues in the next few years. This backlog expansion is aided by 2 strategic differentiators. First, we continue to believe our portfolio is the best positioned in the sector market with unique and direct alignment to many of the essential programs identified by both domestic and international customers. 2nd, Mark. Our corporate wide focus on fostering and expanding customer relationships directed at how we may best support their critical needs continues to play a pivotal role in securing our new business awards for our innovative and cost effective products.
Our strong and growing backlog Mark, consisting of multiple years of prior fiscal appropriations driven by our longer cycle production programs provides strategic differentiation and
Margin of Future Work.
Another area of noteworthy achievement is our segment operating margin. Outstanding program performance resulted in segment operating margin expansion to a record level of 12.7%, Mark, an increase of 90 basis points above the 2012 level and marks the 3rd consecutive year of margin expansion. Even more importantly, this performance was broad based with all five business areas exceeding or maintaining their 2012 margin levels. Margin expansion opportunities are expected to emerge in the future as our program portfolio expands in international programs Mark's. Plus a transition from the current fifty-fifty mix of development versus production programs to a higher proportion of production work market.
As key development programs such as the F-thirty 5 Joint Strike Fighter, Littoral Combat Ship, THAAD Missile Defense System and satellite programs mature. I know our leadership team is up to the challenge of delivering on the commitments we have made to our customers with respect to these important and growing production programs. Another area where we've been successful and which remains a strategic focus is generating robust cash flow. Our ability to deliver consistently strong cash flows continues to be a differentiator for our corporation. In 2013, we generated over $4,500,000,000 in operating cash after making approximately $2,300,000,000 in pension contributions.
Our strong and increasing cash flow enables us to invest prudently in the future of the corporation in areas such as research and development and capital expenditures, while simultaneously executing our cash deployment strategy Mark's remarks. In 2013, we returned over 3 point $3,000,000,000 to shareholders through dividends and share repurchases, reflecting a return of almost 90% of our annual free cash flow to stockholders. Looking forward, our future cash flows are expected to remain strong. Cash flows will be aided by higher pension recoveries plus increasing levels of customer advances from higher international work content. Our focus on cash generation and the potential for continued strong and increasing cash flows is expected to position the corporation to differentiate us from competitors in value creation and returns to shareholders.
Looking outside the corporation, I wanted to briefly turn the status of government budgets. Since we last spoke in October, congressional budget deliberations were completed on full appropriations bills for fiscal year 2014. These efforts resulted in finalization of the detailed spending bills necessary to fund the government for the remainder of fiscal year 2014 and the President signed the bill into law last week. This law sets new spending targets for DoD and Civil Government Agencies. It restores a portion of the sequestration cuts for the next 2 fiscal years and brings a measure of near term fiscal stability market that should improve the ability of our customers and our corporation to plan for the future due to more certainty and budget planning and program funding.
Under this law, sequestration is eliminated for fiscal years 2014 2015 and replaced with reduced spending levels. The law also removed the across the board spending reduction methodology previously in place under sequestration and restored the ability for government agencies to move funds and discreetly allocate resources to higher priority areas, A critical revision that we have been seeking since the Budget Control Act was established back in 2011. DoD based budgets for fiscal year March. In 2015, we're established at approximately $500,000,000,000 per year, a level roughly flat with the fiscal year 2013. While we have not yet seen the specific budget allocations by program, we continue to believe that our portfolio of products will be well supported in a strategically focused allocation of budget resources.
These recent budget actions are a welcome first step and the creation of a more measured and strategic approach to dealing with the nation's fiscal challenges. Until sequestration is eliminated, Mark. Long term uncertainty remains. Thus, we will continue to add our voice to those seeking long term solutions to national budgetary pressures, Markets, while working to eliminate sequestration as law. Finally, I want to provide some insight into the announcement this past quarter that we will close certain of our operations principally those located in Newtown, Pennsylvania Akron, Ohio and Goodyear Arizona as well as consolidate our facility footprint at our Sunnyvale, California campus.
These decisions are part of our continued affordability initiative and follow a detailed review of our current facility's capacity and future workload projections. The important work being performed at these sites will transition to other Lockheed Martin facilities with closures of these sites to be complete by mid-twenty 15. In 2013, we reduced overhead costs, cut capital Mark. And remove 2,100,000 square feet of facility space. These new actions will reduce further facility footprint to nearly 2,500,000 square feet by nearly 2,500,000 square feet and lower overhead costs.
Although such decisions are extremely difficult because of their impact on our employees and the communities in which they live, we will continue to take proactive actions when required to address our customers' challenges and remain competitive in the marketplace. I'll now ask Bruce to go through some of the details of our 2013 financial performance and our 2014 financial guidance. And then we'll open up the line for your questions.
Thank you, Marilyn, and good afternoon, everyone. As usual, we've included web charts with our earnings release today that I'll be referencing as I go through my remarks. Let's start with Chart 3 and an overview of last year's results. Sales for the year were $45,400,000,000 a little higher than we had expected benefiting from a stronger than planned 4th quarter. Segment operating margin was a record level of 12.7 percent exceeding last year's record level by 90 basis points.
Our earnings per share from continuing operations of $9.04 exceeded $9 for the first time and included the effects of 2 special charges in the 4th quarter, which I'll discuss in more detail in a few charts. Cash from operations was also stronger than we had outlooked, Mark collections late in 2013 that had been expected in 2014. This enabled us to generate $4,500,000,000 for the year, while contributing an additional $750,000,000 in the 4th quarter to our pension plans, bringing the total amount of contributions for the year to $2,250,000,000 And finally, we ended the year with a strong quarter for quarters increasing our backlog to $82,600,000,000 the highest level in our history. So I'm pleased with a very strong year of operational performance. Chart 4 compares our sales and segment operating profit in 2013 versus 2012.
Sales were 4% lower than last year, but were slightly higher than we had guided in the 3rd quarter. Segment operating profit on the other hand was 3% higher than last year despite the lower sales level and was higher than the top of the guidance we provided in the market in the 3rd quarter driven by stronger performance at Missiles and Fire Control. Chart 5 shows our segment operating margins by of the 5 business areas compared with last year's results. Segment margins were comparable to last year's levels in 2 of our business areas and higher than last year in 3 business areas. Missiles and Fire Control continued its strong performance in 2013 with each of its lines of business Having higher margin in 2013 than in 2012.
Mission Systems and Training also had a significant improvement over 2012 due to strong overall performance and the successful resolution of contractual matters including 2 associated with the Presidential helicopter program in the year. Space Systems exceeded last year's record margin level with improved performance across the portfolio and higher equity earnings from the United Launch Alliance joint venture. Aeronautics margins were comparable to last year with improved performance from multiple lines of business helping to offset the dilutive market of additional F-thirty five volume. And IS and GS ended the year at the same margin as in 2012 It now has 12 consecutive quarters of 9% or higher margin. Chart 6 is where we'll discuss the special charges that impacted the 4th quarter.
As is our practice in the Q4, we evaluated the goodwill on the balance sheet for any impairment. And this quarter, our technical services business for missiles and fire control is found to have a lower fair value than its book value, Resulting in $195,000,000 non cash charge to earnings or $0.54 per share. This impairment reflects and ongoing reduction in the level of sales that technical services has generated in the past few years as well as lowered expectations for the future. We're experiencing a heightened level of competitive bidding and awards which seem to place less relevance on past performance and discriminating attributes and more on simply lower cost. This charge reflects our belief that this behavior will continue into the future.
We performed similar impairment tests for the remaining goodwill on the books and have no other reporting units that we believe are at risk of a goodwill charge at this time. Our other special charge in the quarter was for planned headcount reductions that affected several business areas. In November of last year, we filed an 8 ks which announced restructuring activities at Space Systems, MST and IS and GS that included $171,000,000 in severance charges or about $0.34 per share. This amount does not include facility and other related charges of about $200,000,000 that will occur in future periods. In our guidance charts coming up, I'll explain how the financial impact of the restructure is reflected in our 2014 guidance and how we expect to recover the vast majority of these costs in the future.
Moving to Chart 7, we'll review our 2013 earnings per share. We increased earnings per share by 8% on a GAAP basis And nearly 15% excluding the impact of the goodwill charge in the Q4. On pension adjusted basis and also excluding the goodwill charge, Our EPS grew to $10.49 for the year. On Chart 8, we'll discuss our cash return to shareholders in the year. Our free cash flow for the year was $3,700,000,000 reflecting $4,500,000,000 in cash from operations At about $800,000,000 in capital expenditures and with dividends of $1,500,000,000 and share repurchases of $1,800,000,000 We returned 89% of our free cash flow back to shareholders in the year.
Chart 9 shows our backlog performance for the past 5 years. We've increased backlog each year since 2,009 to the current record level of $82,600,000,000 While we said throughout the year that we thought backlog at the end of 2013 would be close to where we started the year, There were a number of large moving pieces that enabled us to reach this level. The most significant being a large order for NASA's Orion program that provides several years of funding Brilliant in the recent trend of funding annual spend plans. Our orders in the quarter were slightly more than $15,000,000,000 Meaning over $30,000,000,000 of our $45,000,000,000 or so of 2013 orders came in the second half of the year. On Chart 10, we provide some of the key assumptions embedded in our 2014 guidance.
First, our FASCAS MARCAS pension adjustment provides nearly $350,000,000 of income in 2014 compared with $150,000,000 we discussed during the last call. The adjustment is higher as our asset return was higher than we anticipated in October and we also contributed an additional $750,000,000 to the Trust in the Q4. 2014 represents the first time since the financial crisis of 2,008 Markets Day, we expect to have both fast cash income and positive cash from pension as recoveries are expected to exceed contributions. Next, we've not assumed the benefits from any extension of the R and D tax credit. This is obviously a change from 2013 when we had the benefits of 2 years of credits worth over $0.20 per share.
And finally, we assumed a flat share count for the year market share repurchases offsetting the effects of new issuances and option exercises. Inherent within that assumption is over $1,000,000,000 in repurchases and as usual, we'll continue to be opportunistic for repurchase activity. Chart 11 provides our outlook for 2014. We're providing orders in our outlook this year for the first time. We always discuss our expectation for backlog during this call and thought it'd be helpful to give you our expectation for the order side of the backlog equation.
This year we're expecting orders of between 41.5 $43,000,000,000 which when compared with our sales outlook would indicate that backlog should remain above the $80,000,000,000 level this year. Similar to last year, we have several large orders, which depending on when they are closed, could impact our ending backlog level for the year. In particular, we expect to finalize a C-130J multiyear order for 79 U. S. Aircraft worth more than $5,000,000,000 in the Q4 of this year.
But should it slip to the right, it'd be difficult to achieve that $80,000,000,000 backlog amount. Sales are expected to be slightly better than we indicated in quarter as a result of the higher orders received in 2013 and the recent budget agreement. Segment profit and operating profit are expected to be market. The same this year with the FAS CAS adjustment and our other unallocated expenses offsetting each other. Margin at the midpoint of our sales and segment profit guidance is 11.7%, slightly higher than we indicated in October Mark.
And this includes the 2014 impacts of our restructuring activities, which were not included in our October trend information. Earnings per share are expected to be in the $10.25 to $10.55 range 2013 even with the cash receipts that moved into 2013 from 2014 and the restructure impacts in 2014. And we have planned contributions of $1,000,000,000 into our pension plans for the year. Chart 12 provides our sales and segment profit market guidance ranges for each of the business areas. Aeronautics is expected to grow sales up to the mid single digits over the 2013 amount as a result of the F-thirty five production growth.
In 2014, the F-thirty five program is expected to be as large or larger and any of our other four business areas. Mission Systems and Training and Missiles and Fire Control are That could be fairly comparable to their sales level in 2013, while both IS and GS and Space Systems are expected to have lower sales in 2014 than 20 2013. For segment operating profit, Aeronautics profit is expected to be higher in 2014 with slightly lower margins than in 2013. IS and GS' profit will follow the lower sales volume and missiles and fire controls profit is expected to be slightly lower in 2014 Some of the performance improvements that were achieved in the Q4 of last year have been expected to occur in 2014. Mark's Mission Systems and Training and Space Systems both deserve a little more discussion.
MST is expected to have lower margin on essentially market. Comparable sales for two reasons. First, the significant benefit from the contract resolutions associated with the Presidential helicopter program in 2013 market. We'll not repeat in 2014 and the 2014 impacts of the restructuring charges announced in November will also cause the margin to be lower. For Space Systems, we expect lower equity earnings this year compared with last year and we'll also experience the effects of the 2014 facility and other charges related to the restructuring announced in November.
Without these charges in 2014, we project that margins for MST MARC and Space Systems would be around 11% 12% respectively, in line with what we said in October. On the next chart, We'll describe these restructuring impacts in more detail. So turning to Chart 13. In addition to the $171,000,000 severance charge taken last year. We expect around $200,000,000 of facilities related charges to be recorded in segment operating results throughout 2014 2015 as we complete the consolidation activities and these impacts to profit and cash flow are included in the guidance we're providing today.
These charges reduced Space Systems and MST's 20 marketing segment operating profit by $55,000,000 $25,000,000 respectively, net of recoveries or about $0.16 of earnings per share and reduces operating cash flow by around $150,000,000 mostly as a result of severance payments, excuse me, to be made this year. We would expect a significantly lower impact to segment operating profit and operating cash flow in 2015 as we begin to see additional recovery of the restructuring charges in our contract pricing and we would expect to recover the vast majority of both the severance and Facility Related Charges in 2016 and beyond. We'll now turn to our summary on Chart 14. 2013 was a terrific year of operational performance by the company led to outstanding value increases for our shareholders and gives us a solid foundation as we begin 2014. We like where we have positioned our portfolio of products Markets and Services and we're hopeful that we'll see the benefits of greater budget stability going forward.
I think with that, Shannon, we're ready for questions.
Mark. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. In the interest of time, we are limiting you to one question. Please return to the queue for any follow-up questions. Our first question is from Doug Harned of Sanford Bernstein.
You may begin.
Thank you. Good afternoon.
Markets.
I'm interested in your discussion of the international orders. And if you could give Mark. A description of what the regional mix of your bookings has been in 2013. And then in particular, there's been a lot of strong rhetoric coming out of the Middle East market. And some has been critical of U.
S. Policies in the region. I'm interested in understanding, are you seeing a slowing and the completion of contracts there. Certainly, there's been approvals for a lot of potential sales to that region, but It appears you haven't really seen the commensurate amount of orders and I'd say that across the industry. So perhaps you could comment on that.
Doug, I'll take the first part and I think Maryland is probably better for the second half of the equation. So I'm trying to think Doug off the top of my head. I'm not sure I've got the numbers Committed to memory frankly for what it is by region. So I'll give kind of a broad brush answer there. I would say I did take a look at this.
I think 2013, we had the highest order content for international activity we've had in the history of the corporation. Markets. And as Marilyn said in her opening remarks, I think our backlog right now in terms of international versus domestic is Somewhere between 23% to 25% of our total backlog. So one of the reasons we've tried to tee up the notion that we could grow our international sales from 2017 to 2020 is because we expected to see that backlog materialize in the form of those orders as they were received. And we'll start to see, we ended the year 2013 with 17% of our sales internationally.
You'll see that number grow market is our expectation in 2014, probably not quite to the 20%, but a little bit below that is our expectation. If I was to give sort of the regional Mark split in 2014. Yes, I think it's heavily weighted towards Asia market in the Middle East, Doug. Although I don't have the split there, I know we've got a number of orders that took place in our Aeronautics business including some C-one hundred and thirty for Saudi Arabia. We had a couple of 18 aircraft for Mark Iraq for S-sixteen.
So while I don't have again the numbers committed to memory, I'm pretty certain Doug that would be heavily weighted towards Asia and the Middle East.
Doug, I'll add on to that about your question relative to U. S. Policies and is that slowing down the completion of contracts Markets and how it's affecting our ability in sales around the world. Over the past year, I mean, I've literally flown around the world to a lot of different locations market and spent a lot of time meeting with customers and listening to them. And frankly, what they're looking for is for our help.
They Face a lot of serious challenges relative to their national security and they also have a lot of citizen services that they need to conduct. And so they are talking to us about specific areas of concern and things that we can help them with. So I don't see an impact of Mark's policies on the dialogue that I'm having with them from the standpoint of our portfolio and what we can provide to them. Day. And our priority for me and for the leadership team is that we get out and we listen and we meet with them and we understand What it is that they want and need.
And frankly, we're very confident that we're well positioned for growth because of The items that Bruce talked about, but just in general our portfolio, the tactical aircraft that we have, the airlift mobility Mark. Our integrated air and missile defense, IT, cybersecurity, space situational awareness. I mean, I can walk you around our portfolio. These are the markets.
Thanks and
thanks for taking my
questions. Thank you. Our next question is from Sam Pearlstein of Wells Fargo. You may begin.
Good afternoon.
Bruce, I was wondering if
you could talk a little bit more Mark. About the cash flow, I know you mentioned receivable collections in the Q4, but
I'm just trying
to look at 13 to 14. If you have $600,000,000 more in CAS reimbursement than the contributions and you're going to make less contributions in general, Mark. Why wouldn't cash from ops be higher than the $4,600,000,000 I'm trying to think about what is actually going against you, whether it's taxes, receivables, etcetera, in 'fourteen versus
Yes. No, very, very perceptive question, Sam. So I think we had nearly an $800,000,000 use of Mark. Cash, if you will, for pensions in 2013 and with $1,600,000,000 in recoveries and $1,000,000,000 of We're looking at about a $600,000,000 of positive cash in 2014. So roughly a $1,400,000,000 I think that's the heart of your question.
Why isn't that showing up in terms of cash differential between 2013 2014? So there's A lot of moving pieces to that question. Recall in the Q4 of 2012, we made
a $2,500,000,000
Pension Contribution. The tax benefits of that pension contribution showed up in the Q1 of 2013. In the Q4 of 2013, we made a $750,000,000 pension contribution to tax benefits of Ash Grove in the Q1 of 2014. That's almost a $600 plus I think $1,000,000 swing from just a taxes paid perspective for just the pension contributions made in 12 and 13 that affected tax paid in 2013 2014 if you follow that. Secondly, we had And you've heard about this and we've disclosed this in our 10 Qs and 10 ks.
We had some withholds associated with the business systems rules for Mark Systems like Earned Value Management and some others. And almost all of the withholds associated with those market. We recovered in the year 2013 and those won't be replicated obviously in 2014. We have the LRIP V and LRIP VI contract differentitizations for F-thirty five that occurred in 2013 that brought with it sort of some cash up cash for the differentization associated with those two contracts that again will not occur in 2014. We had lower joint venture cash We're expecting lower joint venture cash in 2014 and just 2013, in part because of just lower volume, but there was also some reimbursement items The JV contributed to the Paris in 2013 that will replicate in 2014.
And finally, we've got the roughly $150,000,000 or so of restructure cash that's associated with the severance payments that we'll be making in 2014 that are higher than obviously we made in 2013. So I know that was a mouthful and it was a lot of moving pieces there, but that's sort of the lion's share if you will of why that Pension Cash Sling Doesn't Translate Necessary TO Even Higher Cash in 2014.
Thank you. Our next question is from Bill Loomis of Stifel. You may begin.
Hi, thank you. Just going back to the goodwill write down in technical services, can you tell us either what acquisition in the past that was related to or the type of work? Market. And are you seeing starting I know you didn't have any goodwill write downs in other areas, but are these trends impacting any Markets. And then just a follow on question on the $30,000,000 charge for lower of cost or market Federations, if you can explain that a little more.
Thanks.
Sure. So Bill, I'll take those as well. So the goodwill, Once you start moving some of the businesses associated with the goodwill into different reporting units in the corporation, unfortunately, you kind of lose the track market of the original business area in terms of where that goodwill resided. And those businesses have been, I'll say reorganized over the past few years, so it's very difficult to kind of pinpoint sort of the original origin of the goodwill itself. The type of businesses that this was acquired for are services businesses as the name implies, technical Think of that as a lot of in country support of the troops.
So aircraft maintenance, actually some aircraft Sure. I think about 3 quarters of this business or so is probably U. S. Army based. And as we've seen the reductions In troop drawdown in particular in Iraq and most recently in Afghanistan, the revenue volume This business has dropped off fairly dramatically.
And again, that's sort of what our expectations are going forward as well. So Let's see. I think the other question was on the well, I should back up. You asked a question about how does this translate my words now, how does this translate to other businesses? As I said in the prepared remarks, we do an annual impairment assessment at the end of every year.
And the types of contracts that are in tech services, some of those types of contracts are in other parts of the business. I think as we sit here today, as I said in my remarks, we have clearance right now and we're not at this time market. Concerned about another being at risk of a goodwill impairment going forward. And that's where the plans and expectations that we have in the long range plan that we put together every year today. So if that turns out to be different, we will revisit that next year.
And finally the $30,000,000 as far as the cost or market, we took a look at some inventory that we had on some of our contracts and just market. That is being not worth as much as we had anticipated in some of our training and logistics businesses. And I think that's a little bit reflective just the way the market market is playing out for us right there right now.
Thank you. Our next question is from Jason Gursky of Citi. You may
begin. Yes. Good afternoon. Good afternoon. Hey, guys.
Just a quick clarification from you, Bruce, on Cash. I was wondering if you went through all the puts and takes. I was wondering if you could just briefly talk about potential opportunities that you see that would lead to upside and Cash. And then Marilyn, the thrust of the question for me is on the portfolio and whether you feel Mark. You've got the right mix of portfolio companies and businesses and what your
March. So Jason, I'm assuming you're asking upsides For cash in 2014 versus say over time. I think We have probably typical planning convention, especially when we do some of our international contracts. We tend to have assumptions of maybe less advances, less positive cash flows in our planning than perhaps We actually end up negotiating. I hope that's the case again this year.
We obviously have some contracts, some fairly large contracts that we hope to definitize. I'd like to think we could get some of the billing arrangements on those contracts with slightly better terms than we have in our planning. And that's been our history frankly. I think we've been good at doing that and sort of improving our cash flow throughout the year. I think the whole organization from sort of the business side to the program management side all has that as an objective and that's something that we March.
So while not obviously embedded in the numbers, I think that's something that we look at Very earnestly at every opportunity to improve the cash terms we have going forward and I assure you we will do that throughout the rest of the year and we'll Keep you apprised of our progress in the next three quarters.
If I could just speak to portfolio, Jason, your question around do we have the right mix and what are we looking at over the next few years. I would say, if we just look at
how we built the backlog over
the last 4 years, That demonstrates the strength of our portfolio in recent years. And as you look at the situation with the domestic budget with U. S. Budget and our portfolio and the ability for our customers now to be able to focus on their priorities, I think we're well aligned. I'm very happy with our portfolio.
Market. It looks like it will be well supported in the budget and we know that we have strong demand internationally for our missile defense, for tactical aircraft, Mark. The whole range of our primary platforms that we offer, even we're looking at opportunities for the Littoral Combat Ship variant market as well as a range of services businesses within IT and cybersecurity and the Communications area. So I'm very happy with the portfolio. I think we're in very good shape for the next few years and we'll continue as we always do to assess it and adjust it as we need to.
But at this point, I think it looks very good.
Thank you. Our next question comes from Rich Staffrin of Buckingham Research. You may begin.
Thanks. Good afternoon. Securities.
Good afternoon.
I wanted to ask the capital deployment question. Look, at one point, I think you were market. Looking at possible mix shift maybe between dividends and share buybacks. For 2014, are you still remaining committed to the dividend increases. Any thought here on consideration on M and A?
Just looking for any update on how you're thinking and what is really what I'm interested in here.
Yes. Thanks, Rich. Well, I'm not quite ready Obviously to declare a dividend increase. We meet as a matter of course every September with the Board of Directors and that's when we discuss potential Mark dividend increases and that will be the pattern we do this year. So we've been obviously pretty heavy on the dividend increase The past few years, I'd like to think that we have the firepower to kind of continue to do that going forward.
When you look at the cash flow that we generated last year, look at cash flow this year and our expectations of recovery of pension contributions in particular in addition to the normal operating cash flow in Here's the comment. I think that gives us the opportunity at least to do that. So we gave guidance or embedded our guidance this year was A little over $1,000,000,000 more than $1,000,000,000 of share repurchases. That's just to offset dilution of share count. And you should think of that, I may get these numbers slightly wrong, but I know I'm pretty close here.
So we've got roughly 9,000,000 to 10,000,000 shares outstanding at the end of 2000 I should say options outstanding at the end of 2013. We had roughly 10,000,000 options exercised in the year 2013. We've kind of assumed I'll say normal matching in our 401 plan, which we do through share count matching and our executive compensation is probably another market. 3,000,000 shares or so. So it's probably about 8,000,000 and I made the number slightly wrong, but I think I'm pretty close.
8,000,000 shares, 100 and market. $50,000,000 a share, it's probably like $1,200,000,000 or so of share repurchases. We will Mark. Any share count dilution is caused by any additional options that are exercised above that level. And then as I said in my opening remarks, We will try to be opportunistic throughout the year for additional share repurchases beyond that.
On the M and A side, we're constantly Looking at that, we don't I mean, obviously, we're not going to comment on anything until we've actually closed on a deal. But that's always a possibility. I think we've been successful with the strategy we've used in the past. I don't see any student body list that would change that strategy going forward and that's probably about as much as I can say on that right now, Rich.
Thank you. Our next question comes from Ron Epstein of Bank of America Merrill Lynch. You may begin.
Markets. Yes.
Hey, good afternoon. Good afternoon. Bruce, just wanted to try to better understand market. The estimate that completion, the EAC, what do you want
to call
it, March. You guys get, right? So just kind of looking historically, last year, it was almost half of your EBIT. When I look at your peer companies, you know, just general dynamics rates on Northrop, How sustainable is that? How do we think about the EACs over time?
And just if you can just give us Some more color on that. I mean, I guess what I worry about is, if that gap were to start to close, what's that mean? Why is it so high now? That kind of thing.
Yes. Well, thanks, Ron.
It's a good question. So I think if you look at our historical first off, let me comment. I think you're higher At the level of profit adjustments as a percentage of the total earnings than what we really experienced. So last year, I just looked at this not too long ago, we were Around 36% or so, I believe the total earnings segment EBIT excuse me, not total earnings, but segment EBIT was in the form of the profit adjustment. That's not sort of out of family with what we experienced on sort of a steady state basis.
I mean, if I look forward to the planned level of 2014 adjustments. It's not far off of that number. I'll tell you almost every year When we had a good year, obviously, that number grows from our initial plan. And I sure hope that that's what happens this year as well. So Mark.
I don't know exactly how to compare us with everyone else, Ron. I suspect we have different sort of philosophies as far as starting positions on booking profit on contracts. Everyone is in a different lifecycle in their own portfolio as far as whether they are way down the learning curve and have any new development or concurrent development going on that would suggest maybe starting out with a lighter booking rate. Some folks are further down selling all the international activities where you all have a pretty good idea what your product By that point in time, you can probably start off booking at a higher profit level, which would make you have lower step ups, lower profit adjustments. I think ours is more comparable to us as opposed to anyone else.
And I don't see an issue at the levels we're talking about for that diminishing going forward.
Thank you. Our next question is from Peter Arment of Stern AG. You may begin.
Question. Yes. Good afternoon, Marilyn, Bruce. Bruce, could you give us an update on kind of the skyline of how the market. F-sixteen and the C-one hundred and thirty are looking out.
Obviously, you mentioned the C-one hundred and thirty in terms of a domestic order potentially coming. But What else does it look like? You've got 2 very mature platforms here that seem to be trending down in volumes and affecting the mix shift here in margin.
Yes. Good question, Peter. So actually I think calendar year 2014, we're actually going to see an increase in the deliveries of S-16s compared to what we delivered last year. So In 2013, we delivered 13 S-16s. I would expect that we'll be north of 15, maybe Mark 2017 Aircraft Delivery in the year.
Our C-one hundred and thirty program and I should say those Deliveries will probably go back to think of it probably in the 1 per month level for a couple of years. But I think our backlog On the F-sixteen program today is through 2000 I'm trying to do this for memory of course, 'sixteen, Mark. 17, somewhere in that range. I'll get that number before the call and before we're off on the call. The C-one hundred and thirty deliveries, we did 25.
Last year, we've kind of said that the rate we'll be building the C-one hundred and thirty is at going forward is 24 a month. I'm real confident, particularly when you talk about the addition of multiyear aircraft at the levels we talked about against 79 aircraft Mark. Just the U. S. Bias in that multiyear program.
And that's going to enable us to continue with that 24 aircraft per year level for quite a while. And I just remember that I think the F-sixteen deliveries right now go up to almost the end of 2017. So And again, you should think of that as probably 1 aircraft per month for the F-sixteen and roughly 2 aircraft a month for the C-one hundred and thirty for sort of that period through that timeframe.
Thank you. Our next question is from Joe Nadeau of of JPMorgan. You may begin.
Thanks. Good afternoon. Marilyn, congratulations on a good very solid first year. My question is to you. I was wondering if you could maybe give your impressions on maybe a couple of Things you learned about the company that maybe you didn't know a year ago or your impressions after your 1st year?
And then perhaps more importantly going into your 2nd year, what are a couple of goals that you have that are specific to 2014 for Lockheed Martin that More specific than just meeting our financial goals and that sort of thing, but what you really want to get done this year.
Well, thanks for the compliment there, Joe. I mean, that's a March. So great credit goes to the entire team for what I would consider exceptional performance for the year. It has been a very strong year. And I think what we did in the past year is really positioned ourselves for continued success.
And a lot of work that the team has done has been very proactive in in strengthening our core business and our international business. We've rolled out what we call Lockheed Martin International, Mall, which is a leadership focus and resource focus at the enterprise level to grow our international business. We already do a lot of business internationally in over 70 countries, but we want to put a concerted focus on that from an enterprise view and bring the full depth and breadth and strength of our portfolio to the international marketplace. So that is something we initiated in the middle of 13 and that will be one of the imperatives that we'll be focused on as we move forward in 2014 and beyond. Another thing that we initiated in a great way, we've been on this path, but we took it to another level with our proactive steps and streamlining our operations and improving our cost structure.
And as Bruce went through, we announced several things in the Q4. We've been on that path, but we took it to another level of looking at our capacity utilization relative to what we see as market. Our workload and making sure that we remain competitive and have that competitive position as we continue to grow in the future. And then the third element that we've been focusing inside and outside the corporation on is our Mark. View of being a technology leader and our innovation.
We talk about it as innovation with purpose because it's The missions that we support in our company are what attracts people to Lockheed Martin to work in this company because we do some of the most important work in the world. But It's work that involves very interesting and complex solutions that we bring to customers, which means A lot of innovation and invention that our company does and we're going to stay focused on delivering those innovative solutions to what market. The needs of our customers today, but also as we look at what their needs are for tomorrow. So continuing to invest in research and development and continuing to keep a March climate for our workforce where they it's an innovative culture that continues to focus on that. As I said earlier, I think we've got the right portfolio in the business In terms of meeting our customers' needs, we'll constantly look at keeping that portfolio relevant, continuing to invest and the things that we think our customers are going to need.
So being that leading technology provider of doing everything from fighting cyber criminals to the 5th generation fighter that's addressing unique needs around the world. So My focus as we continue forward as a company is that we're going to continue to our strategy that has been working focused on our quarter business and deliver those innovations while at the same time maintaining a focus on affordability and streamlining Mark in our operations. The last thing I would add is that we have a strong focus on making sure that we're listening to our customers and that we are market. Actively engaged with them on an ongoing basis so that as their needs change and as they face additional complexities, whether it's budget pressures or global security challenges, That we understand what their needs are and that we're there listening to help address those needs with the products and capabilities that we can bring forward.
Thank you. Our next question is from Copeland of Barclays. You may begin.
Hey, good afternoon and good quarter.
Good afternoon. Thank you.
Marilyn, I want to ask
about something sort of bigger picture. I think you've mentioned now the quality of the portfolio. I think you mentioned it a couple of times in your prepared remarks and in your
response to several of the questions
so far. It just seems to several of the questions so far. I just seem to pick up on that as sort of a theme and I wondered If you might elaborate on that and specifically in how you think the performance differentials between you and your peers might actually play out over the coming years and how you think about balancing that fine line between what has been A pretty cost focused and affordability focused strategy to perhaps one that's more revenue focused and perhaps technology focused as you just mentioned. Mark. Is there a am I catching a sort of shift in how you're thinking about running the business relative to Maybe the way your competitors are thinking, anything to elaborate there would be helpful.
Sure. Thanks for the question. Well, I don't think you should sense a major shift in our market. I mean we have a strategy that we've been working on relative to our core business. This is where we are going to market.
As we look at what's happening in the market. It's going to be flat for the next couple of years. So we are we recognize in order for us to maintain and hopefully grow our businesses to align with where our customers are, have the budgets and have the needs for our products, which is in market. The pivot to Asia as well as in the Middle East. So a lot of the things that we offer in those regions is because that's where the demand is and actually that's where Mark.
U. S. Government services are focusing and that's a good integration where we can bring our products and capability. Relative to the portfolio. I mean, I think if you just step back and look at, let's begin with the Joint Strike Fighter, the F-thirty That's a very significant element of our portfolio.
It is one that represents 16% of our revenue in 2013 and it's going to continue to grow. We've got the 8 international partners. We have security cooperation partners with Israel and Japan.
We have other countries that
are looking at it with South Korea, with Singapore, with others that I Mark. That are interested in the Middle East that have expressed their interest. So I should see that as something that is a differentiator for us because no one else has Mark 5th generation fighter and it's a unique capability that is needed around the world. At the same time, the F-sixteen, as Bruce was talking about the backlog On the S-sixteen, there's still a strong demand for the S-sixteen around the world and there are opportunities for upgrades. We're doing the upgrades in Taiwan, opportunities in Singapore And we'll see other opportunities there.
So that piece of our business continues. Missile Defense, in that arena market with FAD, PAC-three, the Aegis systems, Meads and our opportunities for Meads, all affordable systems that have the full domain of and very strong market in terms of air and missile defense and then the whole satellite components that come with that as well. Our targeting systems with Sniper, MCAD, Arrowhead, those are also continue to be in demand around the world. Cybersecurity, C4ISR. If you just step back and look at this portfolio and the range of capabilities we have and the depth and breadth of it and experience that we have.
I really stand behind the fact I do believe we have the best portfolio, the best positioned portfolio for the needs today. And we're not going to rest on our laurels. We're going to continue to invest in that portfolio and continue to keep it relevant and market. Stay abreast of where our customers are moving and invest in technologies and things that take them forward. You've probably seen some of the things that we're looking at market.
In terms of longer range opportunities, directed energy or advanced capabilities in manufacturing Marketing Advanced Materials in the energy space. So we've got a lot of things that are more in our adjacent areas or in areas that closing our quarter adjacent that we're going to continue to invest in. But the basic core portfolio that we have is well positioned and I think well supported by the U. S. Budget and is in great demand internationally.
Carter, the only thing I might add as I was listening to Marilyn there is, I think we've got a really interesting sort of situation where the products that we are developing And that we anticipate the ability to sell in production and particularly to sell internationally are not long tenured products. We've got capabilities. We have some of those as well, obviously with C-one hundred and thirty and F-16s, but no one has sort of the current air missile defense products mark that we have in terms of Miaz, in terms of Littoral Combat Ships from a naval perspective, in terms of an F-thirty 5. So we're kind of Uniquely positioned that a lot of our products are through the developmental cycle. There will be quite a bit of time before you see new products develop There's going to be a delay in new starts with the fiscal pressures that we're facing.
And our portfolio is available now And it's sort of got the good backing of the U. S. Military behind it. And I think that's got us very uniquely positioned.
Thank you. Our next question is from Noah Poponak of Goldman Sachs. You may begin.
Hey, good afternoon, everybody.
Good afternoon, Shane.
I don't know if this is for Marilyn or Bruce or both, but Martin. It feels to me like one of the bigger debates in the space right now is if a company like Lockheed Martin Can forecast that revenues will be flat in 2014 despite all of the churn, mostly downward in the defense budget. Mark. Argument 1 is that that's largely everything you're talking about with the portfolio being differentiated versus the industry. Argument 2 is that that's almost entirely the lag effect between the decline Mark in authority in 20122013, and that there's another shoe to drop, if you will, on the top line March in 2015 2016.
And I know you're only starting to talk about 14 today officially, Mark. But I thought perhaps now that you have a 'fourteen budget and some discussion of the 'fifteen request, maybe a little more market. To the Pentagon strategy moving forward, if you could shed a little bit more light on which of those you think it is.
So, no, I'll take the first shot and Marilyn can provide some color commentary on that. It's an interesting question. I think it's one that we've talked about ourselves internally as well. And sort of the Part of your question I think is, so have we bottomed out or not? And You post 2 different scenarios there.
1 is the value of the portfolio and then sort of the lag effect of the budget authority. I do believe as Marilyn has said quite vehemently that the portfolio that portfolio that we have is a differentiator. I think that is what's enabled us to survive without having huge drops year over year. I think the part that again people are missing when we talk about the effects of sequestration where we are right now is our portfolio market. Pre sequestration would have been growing in these periods of times.
So we are seeing reductions, but the reductions are taking us back to sort of a flat scenario as opposed to taking us to a negative growth scenario. And I get the point, believe me, that our outlook for 2014 is below March 13 and 13 was below 12. But going forward from 2014, 2015, I think we're going to be Hopefully, we've hit a bottom. If not, I think we're very, very close to that between 2014, 2015. And if you just take a look at the budget agreement that was 2019 segment this past week and a half or whatever that provided the incremental benefits over a full sequestration for March fiscal year 2014 and 2015.
That essentially makes the DoD top line kind of flat. And then if you Take a look at FY 2016 under sequestration today that actually shows a slight increase over the FY 15 levels as we sit here today. So I'm I'll say cautiously optimistic we've sort of reached bottom and that we have at least for Lockheed Martin we have the opportunity to see some growth Not too distant future.
I don't have much to add to that. We have looked at it closely, of course, but this The DoD budget is something we watch closely. And so as we saw the bill get passed and looked at the outlook, I mean, basically flat for the next 2 years, but then that budget does start to increase. So when you take that coupled with our strong portfolio market. And the ability for the DoD to decide where they want to spend their money as opposed to it being across the board cut.
We think we are well positioned and allowing them to make those kinds of decisions through a non sequestration environment is how we're going to hold Well, and we will be differentiated. So I'm of the mind that we are as Bruce said, we have looked at the lot. We are at bottom or near the bottom, and we should see an increase in the next few years.
Shannon, this is Jerry. I think we're coming up in the air. Maybe one more question, then we'll turn it back to Marilyn for final thoughts.
Our next question is from Howard Ruhr of Jefferies. You may begin.
Thank you very much. Good afternoon. Marilyn, you had a chance probably to go through the 'fourteen budget in a pretty fine detail now. And if you look market. To your point, you've clearly have a lot of important foundation programs that do make Lockheed differentiated.
Could you address a little bit market. Where some of the shortfalls are versus what you'd like. And also, flat in one sense is good, but the reality is You still have some inflation, so you have to find productivity and other measures to make up for that. So really the question is Sort of where are the holes you have to fill, which are probably a couple? And then what about more productivity measures beyond what you've done?
Well, first of all, I mean, there is strong support for our programs as we've looked at it across the entire portfolio. And we've looked at Every one of our major programs to see how they hold up and I would say in large measure that we are strongly supported. The F-thirty five showed some cuts, but it appears that those are primarily in the government fund side. If you look at our multiyear order on Orion. The opportunities we have for multiyear on C-130J and it's just a matter of getting through that process.
I think we are in a good position. In terms of your comments about inflation and continuing to stay after managing our cost. We are absolutely going to do that. This is a team that understands that. This leadership team is Well experienced at that and we work it every day and we'll continue to do so.
We're not going to we've been, I think, very proactive over the last market. Several years and we recognize that that is an ongoing thing is to constantly stay abreast of what our cost positions are and streamline Mark, our business so that we can continue to be
competitive. I assure you, Howard, Marilyn is relentless when it comes to her focus on affordability I don't think that will change one iota going forward.
I don't see any weak areas. No, We're not perfect as any business is not perfect. But when we look at the breadth of our business and the ability to Bring our very talented workforce to bear with the technologies and opportunities that we have to keep our business relevant. There's no program that's out there, no major one that's excuse me, that's sunsetting. And we look at Mark.
Our production rates, they're either maintaining or they're growing across our major programs. So I think I stand by my position. We had a strong portfolio and we're going to weather this flat period and then continue to grow. So let me just wrap up for the call today. I appreciate all the questions from all of you today.
And I just want to conclude by saying again that Markets. I believe that our 2013 results mark another year of continued high performance in a challenging environment and they demonstrate that we continue to be well positioned to provide solutions to our customers and value to our shareholders. If you look at our record backlog of work, our robust cash generation, our solid balance sheet and the exceptional execution of our employees. I'm confident that it's going to continue to propel our corporation forward in 2014 and beyond. And It's really due to the integrity, the performance and the innovation of our workforce that we're going to be able to support our customers and their Essential Mission.
So thank you again for joining us on the call today. We look forward to speaking with you in our next earnings call in April. Shannon, that concludes our call today.
Thank you. Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.