Good day, everyone, and welcome to the Lockheed Martin Third Quarter 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 you, Stephanie, and good morning, everyone.
I'd like to welcome you to our Q3 2013 earnings conference call. Joining me today on the call are Marillyn Hewson, our Chief Executive Officer and President and Bruce Tanner, our Executive Vice President and Chief Financial Officer. I'd like to remind you that statements made in today's call that are not historical fact are considered forward looking and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.
We have posted charts on our website today that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Marilyn.
Thanks, Jerry. Good morning, everyone, and thank you for joining us on the call today. I hope you've all had a chance to review our Q3 earnings release and financial results. The results directly illustrate The continuation of our strong operational and financial momentum and enabled us to increase our financial outlook for 2013. The focus and efforts of our Lockheed Martin team continue to position the corporation for delivery of solutions to customers and value to shareholders.
I offer my congratulations and appreciation to all of our employees and especially to those employees directly affected by the government shutdown for their outstanding achievements and performance while operating in a challenging and dynamic environment. While there were numerous financial accomplishments in the quarter that Bruce will outline in his comments, I want to offer my thoughts on key strategic achievements this quarter. From my perspective, beyond the program execution and financial results that remain exceptional, other accomplishments can be seen in 3 Key strategic areas. These areas are backlog expansion, international growth and cash generation. We have continued to describe our portfolio as the best positioned in the sector with unique and direct Alignment to many of the essential programs identified by customers as they satisfy their national security requirements.
Many of our programs have provided these solutions to customers over several decades because they are proven and they are cost effective. A direct validation of this alignment and positioning of our programs to customers' needs is visible with our achievement of Increasing levels of annual backlog for the past 3 years ending with over $82,000,000,000 in backlog at year end 2012, while operating in a challenging global and domestic economic environment. This quarter, our portfolio alignment and product offerings resulted in $15,000,000,000 in new orders and expansion of our backlog to nearly $79,000,000,000 We continue to execute on the forecast we outlined to you at the beginning of the year that our backlog expansion would resume in the 3rd quarter. Looking forward, the new business pipeline remains robust with significant domestic and international awards expected later this year on many of our legacy programs. With the establishment of a continuing resolution for fiscal year 2014 in place through January 15, We remain on the path previously outlined to you to further expand our backlog in the 4th quarter to a year end estimate of at least $80,000,000,000 Our ability to continue the expansion of our backlog is strategically important as it helps solidify our business and provide visibility into our future financial outlook.
Our strong backlog consisting of multiple years of prior fiscal Appropriations driven by our longer cycle production programs provides a level of financial stability and strategic differentiation in this era of potential government budget uncertainty. Another area within which we achieved significant strategic progress this quarter within the international business arena. As you recall, we have a stated goal to expand our international sales content to at least 20% of revenues in the next To achieve this goal, we have moved aggressively to build upon our long standing in country presence And further strengthen relationships with international countries around the world through partnerships, in country production and establishment of in country joint technology offices. All of these actions are essential to enable expansion of international work for the corporation. Financial benefits to the corporation are increased sales, cash flow and earnings contribution.
Benefits to our customers are increased factory loading and our ability to improve cost through higher production throughput. Specific events furthering our international expansion were seen across multiple business areas this quarter and included finalization of the multibillion dollar award from the United Arab Emirates for our THAAD missile defense system. This was a significant strategic event with the UAE serving as the inaugural international customer for the THAAD system. Demand for this proven system is only growing and has been expressed by numerous countries from the Asia Pacific region to the Middle East. Additionally, finalization of our Air Road 67 contracts on the F-thirty 5 program contained a growing component of international work with inclusion of new aircraft awards for Australia, Italy, Norway and the United Kingdom.
Looking forward into 2014, Japan and Israel are scheduled to finalize new orders, which would further expand our international backlog. Additional international work can be seen on the near horizon with the Netherlands announcement of its first order to procure joint strike fighters for its national defense. We look forward to providing these revolutionary aircraft to one of our key strategic partner countries. Finally, we were pleased that South Korea plans to reopen the competition for their future fighter program, potentially providing us a new customer opportunity for our 5th Generation F-thirty five Fighter and further growth in international activity. Our international work is expected to grow and helped mitigate domestic pressures in 2014 with growth visible and achievable due to our backlog of existing work.
Our international expansion is broad based, it's happening now and we feel increasingly confident about our achievement of our stated goal of at least 20% In the near future. Let me turn to cash flow. Our ability to deliver consistently strong cash flows Continues to be a strategic differentiator
for our corporation.
The importance of cash is embedded in our corporate DNA. I was pleased that we were able to again able to increase our 2013 cash flow outlook this quarter. Our strong and increasing cash flow enables us to invest prudently in the future of the corporation in areas such as capital expenditures and Research and Development, while also providing the ability to pursue our cash deployment strategy for returns to shareholders in the areas of increasing dividends and share repurchases. We continue to strongly believe in the return of value to shareholders through dividends and share repurchases. As I look forward, our future cash flows are expected to be aided by increasing levels of customer advances from growing international work and recovery of our $8,000,000,000 in prior year's pension contributions.
We feel very good about our future cash and the potential for continued strong and increasing cash flows that will position the corporation to differentiate from competitors. Before turning the call over to Bruce to cover financials, I wanted to briefly speak about government budgets. Last week agreement was reached to implement a continuing resolution to fund FY 2014 government expenditures through January 15, 2014. This action enabled federal agencies to return to work and eliminated the partial government shutdown. The agreement also extended the nation's debt limit authority until February 7, 2014, avoiding a default that could have occurred last week.
Additionally, Congress agreed to conduct conference committee discussions on FY 2014 budget levels and cost elements with a goal for completion of a budget agreement by December 13, 2013. These actions are a step forward As they enable resumption of full government and contractor operations during the periods outlined, a resumption of normal work is the best path forward to eliminate disruptions to operations, enable cost affordability and savings initiatives to progress and provide critical equipment and services to our customers. There is still much budget work to be done by Congress to address the debt ceiling before February 7 and determine the level of funding for the entire 2014 fiscal year before the continuing resolution expires next January. We continue to urge Congress and the administration to focus on long term solutions to confront The difficult fiscal issues facing our country and avoid a repeat of the disruption that the nation recently experienced. As part of those solutions, we also ask that they address and revise the across the board budget reduction policy required under the current sequestration law.
This non strategic allocation of budget reductions is not good for our nation or our National Security Strategy. With the closure of government fiscal year 2013, We can now determine that budget reduction actions implemented under sequestration will result in a limited impact to our portfolio of programs in 2013 with impacts seen primarily on our shorter cycle business. Our original estimate of $825,000,000 in potential reduction to revenue was significantly muted due to our large backlog of work remaining unaffected by FY 'twenty 13 budget cuts. This enabled us to refine our revenue outlook for calendar year to a new guidance value of approximately $45,000,000,000 better than we projected on our July earnings call. As we look forward into 2014, clearly there is no shortage of possible government budget outcomes.
These outcomes range From full implementation of sequestration cuts required under the Budget Control Act to less severe scenarios. These multiple scenarios are challenging to predict. However, with our anticipated strong year end backlog I spoke to earlier, Aided by growing international revenues unaffected by U. S. Government budget actions, we are expecting to see mitigation of financial impacts on our corporation.
Accordingly, we are providing initial trend analysis for 2014 that projects our revenues to be only slightly below 2013 levels. I'll now ask Bruce to
go through some
of the details of our 2013 financial performance and 2014 trend analysis and then we'll open up the line for your questions.
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. Let's start with Chart 3 and an overview of the quarter. Sales in the quarter were $11,300,000,000 Down from last year, but slightly ahead of our expectations.
Segment operating margin continued to be very strong at 12.8% And this strong performance contributed to a 16% increase in earnings per share to $2.57 from continuing operations. We generated $900,000,000 in cash from operations after a $750,000,000 pension contribution. We continue to reward our shareholders with almost $1,000,000,000 of cash returned to the repurchase of nearly 5,000,000 shares along with our quarterly dividend payment. As expected, we received $15,000,000,000 in orders in the quarter, which brings our backlog to just under $79,000,000,000 And finally, due to our operating performance, we increased our 2013 outlook for segment operating profit, earnings per share and cash from operations. Chart 4 shows our sales and segment operating margin for the Q3 this year versus last year.
Our sales were 4% lower than last year, but ahead of our expectations after sequestration was enacted. Segment operating margin increased basis points over the Q3 of last year to 12.8%, continuing the strong performance we've achieved thus far this year. We'll show the breadth of the margin improvement on Chart 5, which shows our 3rd quarter segment operating margins Improvements in missiles and fire control resulted from improved performance across a number of programs, most notably in air and missile defense programs such as PAC-three and THAAD and fire control programs such as the lantern and sniper programs. Improvements in Mission Systems and Training were also broad based with the largest Improvements coming from our radar programs. Margins in Aeronautics and IS and GS were slightly higher or comparable, While our margin in Space Systems remained strong, that was 60 basis points lower than the Q3 of last year.
Last year's results were the highest level ever in Space Systems and included significantly higher earnings from our United Launch Alliance and United Space Alliance joint ventures, The latter due to wind down activities in 2012. Turning to chart 6, we'll discuss our earnings per share. EPS from continuing operations in the quarter was 16% higher than a year ago at $2.57 per share, driven primarily by improved margins and a lower FASCAS adjustment this year. On a pension adjusted basis, our EPS $2.80 per share in the quarter. On Chart 7, we'll discuss our cash from operations in the quarter.
We continue to have excellent cash generation with $900,000,000 in the quarter. Although that is lower than last year's level, we made a $750,000,000 pension This year, while no contribution was made in the Q3 of last year. We've completed our planned funding of our pension plans in 2013 And consistent with our historical practices, we'll evaluate making additional contributions to our pension trust at year end, But only to the extent that these contributions will not impact our ability to generate $4,300,000,000 in cash from operations. Turning to Chart 8, we'll discuss our cash return to shareholders in the quarter. We returned almost $1,000,000,000 shareholders this quarter through share repurchases and dividends.
The level of share repurchases was more than double what we did in the Q3 of last year and brings Bill ratio since last year. Consistent with the quarterly backlog profile we provided at the beginning of the year, our backlog grew to just $79,000,000,000 this quarter, achieving a strong book to bill ratio of 1.3. We continue to expect that backlog will increase Further in the Q4 and in the year above the $80,000,000,000 level. On Chart 10, we provide our updated guidance. As we said on the last call, the effects of sequestration were not as great this year as we'd initially modeled them to be.
And we now feel comfortable in saying our Sales for the year are anticipated to be around the $45,000,000,000 level. Reflecting our strong operational performance throughout this We're increasing our forecasted segment operating profit by $125,000,000 Partially offsetting improvements in our segment operating performance Is an increase in our unallocated expenses for severance charges related to reduction in force announced last week in our MST business area and a net increase in expenses for our deferred compensation plans. The net increase in operating earnings results in an increase earnings per share guidance of $0.20 to $9.40 to $9.70 per share. And finally, we increased our expectations for cash from operations by $100,000,000 to equal or better than $4,300,000,000 Chart 11 shows our updated outlook for both sales and segment profit by business area and ties to the guidance updates from the previous chart. On Chart 12, we provide our initial view of our expectations for 2014.
We believe sales next year will be only slightly below the 2013 level with growth in our Aeronautics business area, Offsetting reductions in our IS and GS and Space Systems business areas, while both Missiles and Fire Control and Mission Systems training are expected to be relatively comparable to their 2013 levels. And we expect our segment operating margins to be lower than this year's record level, But above the 11.5% level in total, as we experienced the dilutive effect of F-thirty 5 production growth in aeronautics as we for several quarters along with the absence of several non recurring benefits in the other business areas this year. We expect our fast cash pension adjustment will provide income of $150,000,000 in 2014 after several years of reducing our reported earnings. Our assumptions that led to the favorable adjustment are 75 basis point increase in the discount rate to 4.75%, A low single digit return on assets in 2013 and a $1,000,000,000 excuse me, dollars 1,000,000,000 in pension funding in 2014. Finally, we have our summary on Chart 13.
We've had outstanding performance all during 2013. We expect that to continue and result in We like our strategic positioning heading into the next few years. We've provided outstanding value to shareholders this year from both a total shareholder return perspective as well as with cash returned to shareholders. And while we're providing high level trend information today, We'll provide our usual detailed guidance during the January call. With that, we're ready for your questions.
Stephanie?
Our first question comes from Jason Gerske with Citi. Your line is open.
Good morning, everyone. Hi, Jim. Good morning. Good morning.
Marilyn and Bruce, I was wondering if
you could just walk us through the assumptions on your With your major programs that are embedded in your outlook for 2014, just so we have
some of the building blocks You can
kind of track progress as we go along.
Yes. Jason, I'll give you a high level view and Marilyn has something to add. I'll So on a couple of other or she can throw in a couple of topics as well. So maybe just starting with the biggest business area aeronautics, Probably the topic that you'd be curious about is the aircraft quantity changes say from this year to next year. So think of the F-thirty five quantities, we're going to finish the year probably around the 36 aircraft deliveries or so.
We expect that So grow somewhat next year to maybe 38%, maybe a couple more than that, but somewhere in that range. Our F-sixteen deliveries this year are 13 aircraft. That's Expected to grow perhaps about 15 aircraft next year. C-130Js, I think we're going to do about 24 to 20 5, there's one that's kind of on the bubble delivering this year or next year. If it happens this year, it will be 25.
Even if that happens this year, we still think we'll stay Steady at about the 24 aircraft level next year. And C5, this one is ramping up between 20 In 2014, we're going to deliver somewhere between, I'll say, 5 to as many as 8 this year. But in any event, we think we'll grow that number to 10 aircraft next year. And then the reason we're a little Hesitant on getting the numbers for 2013 is because of some of the activities that led to the D book this quarter relative to Some of the over and above work that we're experiencing in those aircraft that could cause delay in some of those deliveries this year. If I think around the other business areas, You should think we're seeing a slight reduction in quantities of some of our air missile products associated was a PAC-three program, but that's more than offset at missiles and fire control by increases in the Fed Production quantities, think of that both domestically as well as with the recently completed UAE International order.
We have no commercial satellites or commercial launches next year in our Space Systems business. We expect to have obviously no large programs that jump out on our IS and GS business area, but We expect to see a continued downward trend within ISNGS probably somewhere in the think of that as the High single digit range level between 2013 2014. So that probably covers a bunch of programs, Jason. There may
be others you want to
hear about. And So others can ask on the call when we go down to further questions.
Our next question comes from Richard Saffron with Buckingham Research. Your line is open.
Hi, good morning.
Good morning. Good morning.
I was interested, it's kind of a 2 part Question on your comments, Marilyn, at the opening and on the 4Q bookings chart on Chart 9. 1, should we kind
of infer that there's very little risk
from the government shutdown on 4Q bookings in terms of what the government's going to want to contract? And then as a second part, I found it interesting that you had enough confidence in your outlook to talk about 2014 trends. Could you discuss What's driving your confidence in your outlook just especially given where the Congress and the administration are? Thanks.
Hey, Rich. I'll give a shot at both of those And we'll see if Merrill has some color commentary to provide beyond that. So 4th quarter orders, We do feel very comfortable in stating what we said relative to expectations that we'll grow backlog between now and the end of the year. And in particular, the reason we feel that way is that there are really very few competitive awards expected to occur in the 4th quarter And we have really no reliance on sort of new start programs in the quarter either. And just as importantly, while we're operating in a continuing resolution environment, we believe all the awards that we're expecting to receive in the quarter can be awarded under the continuing resolution.
So Just to maybe name a couple of them that we expect that will lead to the year end backlog numbers we talked. The most significant Awards are occurring in our Space Systems business. So think of that as the SBIRS Spacecraft 56 Contract definitization by the end of the year, the annual in this case, the FY 2014 annual installment of the fleet ballistic We expect to receive a pretty significant contract extension on the Orion program within NASA. And then if I go so those are probably the most significant, all of which are in space. If I go to other business areas, we're expecting things like The normal sort of FY 2014 award of the C5 modernization aircraft this year, we should close Hopefully on the FY 'thirteen contract to finalize or to depinitize the C-one hundred and thirty deliveries for the U.
S. Government. And then we've got just a whole slew of sorting what I would call the numerous funding from fiscal year 2014 Funds becoming available for things like JASM's, PAC-three's, sustainment contracts across multiple business areas. So Again, we feel pretty good about all those happening. Again, not anything that I would say is in a competitive award that could be pushed Or that we could lose in the 4th quarter that would diminish those numbers.
So that gives us a really good visibility as we go into 2014 as well. I think you asked about the 2014 guidance and maybe expressed some surprise that we were At the levels we are. So maybe at a high level, I'll just talk about what we're seeing in 2014. As Marilyn said, we do That's primarily coming from the F-thirty five production program as well as the C5M delivery growth numbers that I talked about earlier. And that's offsetting reductions in, as I said, IS and GS and Space and Missiles and Fire Control and MST again are fairly comparable.
Margins, again, we expect to remain above 11.5%. And I've talked in the quarters past about what I I'd like to refer to as sort of the algebra effect of the F-thirty five where we get higher volume on the F-thirty five program at lower margins than the overall margins of aeronautics And that has the effect of lowering margins in aero overall. Missiles and Fire Control and IS and GS, I would think are going to be relatively comparable to 2013, whereas space and MST Tee, probably a little lower than where we experienced this year, but still very strong relative to recent history on those In both those business areas and this is due to a number of non recurring events, positive events that occurred in 2013. Space also has the lower equity earnings expectation in 2014 compared to 2013. So Rich, maybe just to sum up.
2014, I would say from a margin perspective looks very similar to 2013 when we began the year just without Sort of the performance improvements that we experienced throughout 2013 that we've yet to obviously experience in 2014. Maybe one last note on 2014. You should see the tax rate in 2014 increase A little bit over 2013, you'll recall we actually had 2 tranches, if you will, of R and D tax credit in the year 2013. So probably more than you want to know there, Rich, but I hope that covers your question.
Our next question comes from Doug Harned with Sanford Bernstein, your line is open.
Yes, good morning.
Good morning.
I'm interested in The trends in IS and T a little bit better. If you look and I guess I would put that in conjunction with the comments that you made around sequestration and that Sequestration, the impact this year was a little bit less than you had thought. What I'm trying to get at is, is this Largely a timing issue or has have some other things happened that has kind of strengthened the picture this year? And then how does that link to IS and T, which you've said will be weaker next year? And does it play into the civil, the defense or the intel portions of it?
So Doug, I would just say to that point, when we gave some insight earlier in the year about What we expected on the impact of sequestration, it really was looking across all of our businesses. We did recognize that our shorter cycle business like IS and GS would have A more significant near term impact, but that was just modeling that
Bruce and
his team did just to Kind of take a look at what was the outlook for the year of things that could be impacted. We have not seen that impact. And so it wasn't really just because of IS ISNGS, ISNGS is because it has a large IT infrastructure work and support in the information technology area Will has been impacted because that's an area that the government can come back on pretty readily. We do it is as I said, it is a shorter cycle business. Where we see growth there potential growth for us is in the cybersecurity arena, but it's fairly New area for us.
So we'll continue to see some offset of growth there. Luis, I don't know if you want to add some other
Yes. Maybe Doug, just I think you asked the question about where we're seeing that maybe by the LOBs with Civil Defense and Intelligence. So we're actually seeing a little bit of growth in our defense And a lot of that's because we've won going back to Maryland's Con, we've won several sort of cyber activities from competitors sort of What we refer to as playing offense, if you will, in that arena that we've been successful on. And that's one of the reasons why the defense business is growing this year over last As we look next year, there's not as many of those sorts of competitions coming up. I believe all three lines of business Civil Defense and Intelligence in next year's numbers as we sit here today, Doug, we're expecting to reduce compared to 2013.
And I think that's Just sort of the combination of 2 things. One that is what the I've always said when you're the largest provider of IT services to the federal government for 18 straight years now, I believe, that when the federal government's budget goes down, you're likely to go down as well. We expect that to happen again in 2014. And the other side of that is, I'll say we have within the numbers that I talked within the ranges that I The trend information sort of considered an ongoing sequestration level impact this year as well. So The combination of those two events is what we see happening with the NICE and GS.
I always like to close that by saying at some point, IT spending has to increase. You cannot continually reduce IT spending for the federal government expect
Our next question comes from Ron Stine with Bank of America Merrill Lynch. Your line is open. Hi, good morning. This is actually Elizabeth in for Ron today. Hi.
We've actually seen Boeing really emphasize recently their partnering for success program where they're trying to get 15% of their suppliers. And we were just wondering With all the cash that you're returning to shareholders and the DoD under so much pressure, at what point do you think the DoD tries to implement its own partnering for success and Take 15% from the defense contractors.
Well, I'll let Marilyn say from her perspective Elizabeth, I don't think we've ever stopped trying to do what we think makes sense economically and from an affordability perspective with our Supply chain. And we maybe had a little different view of this than some in that. And we think the real ability to influence The blockchain starts actually with the designs that we come up with and how we can make those more affordable to build and sustain going forward. So It's not something that we woke up overnight and realized that we had to cut the elements of our supply chain to become affordable. We're probably 2 thirds of our cost of sales today are in the supply chain.
If we are going to be affordable, it's going to have to include our Supply chain and always has and that's a focus that we do today. We have I would argue very good relationships with our Supply chain, we have annual sessions where we meet with them. Actually, Marilyn has spoken to that group En masse to show the emphasis that we place on our supply chain and expectations not just of affordability, but of quality of schedule, timeliness and the like. So this is something that we put in place for quite some time that is not a new item for us.
I would add to that Elizabeth. I think if you're asking is our Customer treating us as their supplier in a fashion that they were going to put some push on us to be more affordable, They have been. I mean that is a they have been very clear that is a top priority for them. They're dealing with very significant budget constraints and Increasing global security demand. So they're challenged and across our industry they have A press for us all to be more affordable in solutions that we provide them and how we manage our business.
It's not something that is new to us. We've been very proactive as leaders in the industry to drive down our cost and we have taken action To reduce our footprint, we have had to take some painful actions in reducing our workforce at times to adjust to the business base. We are Investing in technologies to provide them with a more affordable product, so we take the weight out or we make it overall total cost Lower. A lot of things that we're doing to support our customers' drive for affordability. And at the same time, they offer incentive provisions to get a Cost savings because it is so critically important to them.
So in some of our contracts, we have those types of incentives to Encourage us to continue to drive costs down. So as Bruce said, we manage our supply chain. It's an ongoing effort on our part To make sure that we get the best value from them in terms of cost, schedule, quality and at the same time we want to provide our customer with The most affordable solutions and the most technically capable solutions for what their needs are.
Our next question comes from Cai von Rumohr with Cowen and Company. Your line is open.
Yes. Thanks so much and great performance again.
Thank you, sir. Thank you. So I have a
2 part question. First, you talked about sales being down modestly next year. Could you talk about international? If that's growing, what sort of growth do you see in international? And what are the key drivers?
And secondly, DoD as it looks at the fiscal 2015 budget has some priority programs and some bill payer programs, potential Bill payer programs. Included in those are C-one hundred and thirty, C-five and LCS. Maybe you could comment On your thoughts as to whether those programs you think are at risk in the FY 2015 budget? Thanks.
So on the international growth side, we certainly continue to see growth in F-thirty five. In fact, over the next 5 years, close to half of the orders will be International deliveries for the F-thirty 5 as we move forward. On C-one hundred and thirty J, there continues to be a demand for the C-one hundred and thirty J And we continue to sell F-16s around the world. So we see growth in those areas. Missile Defense is another very important element for us in our international growth.
Bruce talked about that and PAC-three and Growth, Bruce talked about that and PAC-three and of course we have our operations for Aegis Ashore. And then we do see other opportunities for us as we look forward into the satellite commercial Satellite arena and cybersecurity and our IT arena for growth and the sale and international growth. On the F-fifteen priorities, you mentioned C-one hundred and thirty LCS and C-five. All of those Part of the strategic management review that was done by the U. S.
Government, they are high priority programs. And in addition to those, I think missile defense continues to be a high priority program.
The only thing I would add, Cai, is I was a little I'm surprised to hear C-one hundred and thirty mentioned in that comment. We're one of the few programs in the DoD that actually is being considered for a multi year program To buy an additional 79 aircraft for a couple of the services right now, I think that's got strong support. It obviously has Reduced our affordability aspect to it versus buying them on individual fiscal years that has I Well received by our customer and we expect that to happen. So that's one that caught my ear a little bit somewhat of a surprise when you had that discussion there.
Our next question comes from David Strauss with UBS. Your line is open.
Hey, David, are you on mute?
Hey, good morning. Hey, there. Good morning. Good morning, Marilyn. I wanted to ask you about back on sequestration.
So when you say in the release that you've assumed all impacts known associated with sequestration. Just so I'm clear that you're assuming inherently in that that Dequestration relates to fiscal 2014 comes through as we know announced another $15,000,000,000 to $20,000,000,000 Cut off of the total DoD budget. And then the last part of my question is, maybe if you could walk us Bruce, I think back in January, maybe it was in April, you put together that slide that shows us in terms of The total revenues that would be impacted by sequestration in 'thirteen are only like 20%. What does that number move to in 2014? So in other words, how much of your what proportion you think of your revenues will actually be impacted by sequestration in 2014?
Thanks.
Okay. Thank you, Dave. It's a good question. So let me give you maybe a long windy answer on the sequestration impacts for next year. I think I'll Hopefully both of your questions in this answer.
If not, again, maybe you can come back on and ask the question again. But so we still think Sequustration, how that impacts 2014 is broken up from our business area perspective into sort of the long cycle businesses and short cycle. We always refer to Aeronautics and Space for instance as long cycle businesses, but there are also large parts Missiles and Fire Control and Mission Systems and Training that are also really considered to be long cycle businesses as well. So You should think of those as in my words being relatively insulated from the effects of sequestration in FY 2014 because Most of their calendar year 2014 sales are from prior fiscal year funded activities or prior fiscal year funded backlog. That also says there's not probably as much upside if sequestration improves over what our expectations are either in those long cycle Our short cycle businesses and primary one being the IS and GS, but it also has smaller parts Missiles and Fire Control and Mission Systems and Training as well.
We've made some pretty good reductions Into the numbers that we're expecting relative to the guidance or the excuse me, the trend information we provided to the slightly less than 2013 sales, Those reductions are planned in that outlook already. And we think that pretty much captures what we think will happen under Under a lot of different scenarios that we can think of. And the reason for that is, While we say they're short cycle businesses, each one of those businesses IS and GS, the services part of MST, the services part of MST And backlog from prior year funding that's actually greater than one time sales in each case. So Though it's not as long or it's not as significant in terms of the backlog as the long cycle business, I mean there is definitely more Current year awards and current year sales going on in those business areas, it is more insulated than perhaps You might think and I think we experienced that ourselves when we try to do the modeling at the start of this year that we actually have more Insulation in my words that maybe we would otherwise thought we had at the start of the year.
There's also the aspect next year that we don't want to lose track Back to, I guess, Cai's question. We do expect international growth to occur next year both in terms of absolute dollars as well as on a percent of sales basis. So that helps to mitigate any downside we're seeing from the sequestration impact as well. And Finally, Elyse, as we've looked at it, we think there is minimal, if really any reliance on 2013 unobligated funds balance that's left outstanding at the end of the fiscal year To become 2014 sales for Lockheed Martin. So if those funds were to evaporate, if those funds were to be used to offset FY 2014, sequestration reductions, we think again we are again insulated from that aspect as well.
So Hopefully that covers the 2 questions you had there, David.
Our next question comes from Noah Poponak with Goldman Sachs. Your line is open.
Hi, good morning, everybody.
Good morning, Alan.
I guess I'm trying to figure out how to parse To me, revenue being down slightly is a positive surprise given what the budget is doing And that you're the bellwether in sense. And I hear you saying and I know that you have well positioned favorite programs. And I also hear you saying and know that it's a long cycle business. I guess I'm trying to sort of quantify or parse out How much of each of those two items it really is in 2014? Because If it's almost entirely just favored programs, that would suggest you could move back to actually growing sooner than later if sequestration is the last Cut.
Whereas if it's long if it's more being a long cycle than it is favorite programs, That would suggest you actually have several more years of not really being able to grow the top line even if sequestration is the last cut.
Yes. So interesting question, Noah. And I'll see if I can parse my answer to the way you parsed your questions. As we look into 2014, I think one of the things that may surprise some folks going forward is that We're actually probably seeing more growth in the F-thirty five program in next year and the number that we are trending towards Slightly less than $45,000,000,000 next year. Then maybe a lot of people would have expected.
Just in big numbers F-thirty 5 is going to be 15% or 16% of the sales of the corporation in 2013 And F-thirty five jointly between the development program and the production program, but all the growth coming from the production program is probably going to grow some 15% Year over year from 2013 to 2014. So that's I think that's one of those programs, that I would characterize as Both long cycle and the right priority. I think the prioritization has been demonstrated continually Throughout the past year, both domestically and internationally, with the support that we're getting on the program and obviously, by definition, I guess it's a long cycle program. I think we've got other programs of that same hill. The C-one hundred and thirty I mentioned with the multi year, the air missile defense Programs where they're both long cycle and high priority LCS is another one that I call in that category.
So I'll tell you and I'll let Marilyn opine here also on it because I know she feels strongly about this. But We've said all along, we think that we have the best portfolio in the business. We think we have the opportunity to sell That portfolio internationally which helps to mitigate or mute the impacts of the domestic reductions. And so I don't think that the Scenario you described where we would expect to see growth depending on how sequestration plays out in 2014 is unrealistic at all. Yes.
I would just agree with what Bruce has outlined for you. I mean, we've talked as you said yourself, we have a well positioned Portfolio of programs and as Bruce outlined where we see the growth opportunities in 20 14, if there is an impact from sequestration as we if there's a full impact from sequestration, We've walked through for you where the impact would be on the shorter cycle businesses. If we don't see that same significant level, we should expect to have some offset And then the longer cycle businesses we're on we do see growth, continued growth And the Air and Missile Defense and the F-thirty five and even F-sixteen upgrades and a number of other Opportunities on C-130Js internationally as well as the multiyear.
Our next question comes from Joe Nadeau with with JPMorgan. Your line is open.
Thanks. Good morning. Hi, Joe. A couple of green eyeshade type questions for you, Bruce. Just On the margins, maybe it would help if you quantified a little bit the 2 items that you say Might pressure segment margins next year.
How much pressure do you see on the F-thirty 5 becoming a bigger part of the mix? Because you're at 12.8% year to date on segment margin and it just seems like 11.5
There's a lot of room
to come in ahead of 11.5 even given some of the pressures. And the second part of that is just on MST in particular, you highlighted Radar programs as being a big driver of upside BAC adjustments in the quarter. Are you getting into a situation there where there's You could for a few quarters get some upside just given the opportunities on those contracts or is this truly do you think not sustainable? Thanks.
Thanks, Joe. So let's see. The F-thirty five In the reference to what's happening with the F-thirty five growth and its impact on aeronautics margin. First And I know you're looking at the $12,800,000 but I think if you that's where we ended the quarter, I think it's the highest quarter we've ever had in the history of the corporation. If you go to the full year, I think we're looking if you go to the midpoint of guidance, probably in the 12.3%, 12.4% range.
So I'm not going to debate whether that's going down or up relative to 11.5%, it obviously is, but it may not be from the 12.8% that you're starting from. The other thing I tried to emphasize was on the previous question was that the 11.5 that we're Talking about actually looks a lot like where we started the year 2013. I forgot what our guidance was when we started the year, but it was somewhere in 6 or 11.7 if I recall. It kind of feels like a similar level to me is where we started in 2013. Most years we have had positive performance improvements throughout the year that have enabled us to have benefits.
We don't Count on those happening every year when we provide the initial guidance, but I think our track record for most years would say that's been where we've been successful. So as I look at Aeronautics, I would expect that reduction to occur. I mean from a margin perspective 2013 versus 2014, they're going to I think if you go to the midpoint, they're probably in the 11.4 ish range. And I would think that we'll still see somewhere in the 11% Margins even with the dilutive effect of the F-thirty 5 and the C-five increases in aeronautics. The point I tried to make on the My prepared remarks was that in particular within MST, we had I believe in the Q2 that was the Highest margin in the history of MST.
We had a few contractual resolutions there that we did describe in both the press release and the Q that you should think of being $75 ish million or so. On top of that, we have had very good performance. You mentioned the radar programs. Those are very good. I think that's a business that kind of stays in the 11 ish range on a kind of a Go forward basis.
And then you didn't ask about it, but the one I mentioned previously was the Space Systems Company with the joint venture and equity earnings. We've had some high equity earnings this year really associated With some performance out of ULA next year as we saw this year? Yes. But are we planning on that with our guidance? Not at this point in time.
Space Systems, I'm very pleased with the margins there. Again, this is probably the highest year in the history of space. I think that's a business that probably stays in the 12% range going into next year. So as we sit here today, we're not at all Just pleased with where we expect the margins to go next year. And I'd say we have the same sorts of opportunities to increase those margins next year as we did this year.
Our next question comes from Robert Stallard with Royal Bank of Canada. Your line is open.
Good morning.
Good morning.
On the F-thirty 5, on the most recent contract you signed, I was wondering if you could give us Some color on how the contractual terms might have changed and how your discussions with the customer have progressed since you ended up
So let's see. Rob, I guess the first thing is we negotiated Lot 6 and 7 combined, And if you will, they're separate contracts, but we did do them essentially concurrently. And we did so in about 6 months' Time versus last time where we probably took about 18 months. So I think we're on a good path there. As far as Contractually speaking, we do have essentially a fixed price contract.
And I'd say essentially because there is a little bit of potential share Underrun there between the government and ourselves, there's no share on the overrun. So think of a fixed price in that regard. And I'm trying to think, Rob, I think off the top of my head, I think most other terms and conditions that we negotiated with Lot 5 carried over and I'm looking at Marilyn here, she was very engaged in Lot 5, carried over into Lot 6 and 7. I don't think we had Much to speak of that changed of anything there. So I'll probably leave it at that.
Yes. I agree. Thanks.
Our next question comes from Robert Spingarn with Credit Suisse. Your line is open.
Good morning, everybody. This is actually Ross Cowley in for Rob. I just wanted to touch base on the AMDR contract and specifically find out how surprised you were when the award went to Raytheon Yes. And whether how the debriefing is going, whether this is something that you could process?
Well, I'll answer that. From an AMDR standpoint, we were disappointed on the decision by the government. We did get a decrease Last week and so we're in the midst of evaluating the information, but we've had we've been engaged on the Aegis system for the Past 42 years, so we have deep understanding of that program and of the mission. So we were certainly disappointed, but we're still in the midst of valuation evaluating information that came out of the D3.
Our next question comes from Myles Walton with Deutsche Bank. Your line is open.
Thanks. Good morning. First, the cash into 2014, outside of the pension tailwind and net income, How should we think about advances, cash taxes, any of that working capital sensitivities?
Yes. So I'm trying to look up some paper I've got in front of me, Miles, in terms of advances. Typically, what we project going forward is that our advances will come down. We don't have a Huge number of direct commercial contracts planned in the 2014 timeframe that would sort of bring typical advance payments with them. Most of our International growth next year comes in the form of foreign military sales contracts.
So I wouldn't expect to see the same sorts Advances that we've had in the past with the result in Our advanced balance growing on the balance sheet there. Working capital wise, I think we're going to see some improvement There as we go through the production and we obviously have some withholds associated with the business system rule For things like the earned value management system that have been made pretty public that we expect to finalize and that will improve the working capital position associated with those. I think from a thinking or planning perspective, you should think of next year's number, I think being higher than the level of cash that we're just going to generate in 2013. I know I said in the Either in response to question or in our prepared remarks, we talked about the potential for looking in the 4th quarter Even with that, I said we would stay above the $4,300,000,000 level in 2013 and I think we'll be north of that in 2014.
And our next question comes from George Shapiro with Shapiro Research. Your line is open.
Yes. Good morning, Bruce.
Hi, George. Good morning.
The question I've got is 2 part. Last year's ending funded backlog was $55,000,000,000 versus the $82,000,000 that you quote. Given that the Funding is less assured these days. What do you figure the funded backlog will end this year? And then my second one is, I know you've given some color to try and mitigate why sales are only down a few percent Next year.
But just conceptually, I mean, you'll be down 4% to 5% this year and next year the budget's worse, the sequestration impact It's worse. So maybe a little more clarity on why you think you'll actually decline less next year than this year? Thanks.
So George, good questions as usual. So I'm doing this a little off the top of my head. U. S. Funded Backlog at the end of last year funded at the end of this year and maybe embedded in your question was don't you have more risk the difference between funded and unfunded.
I think the key distinction there is what's obligated versus necessarily what's funded. Real issue from a sequestration perspective is taking those unobligated funds and those are the ones that are really at risk. That's the reason I made the comments before about Again, why we think we have in 2014 a pretty good handle on what our revenue is going to be as we don't have that reliance On the obligated funds turning into sales in 2014. I don't particularly see an issue with the Funded backlog balance at the end of this year, I think it will be comparable on either percentage basis or an absolute basis to Where we ended last year from a percentage basis relative to the ending backlog amount. So I don't think that's an issue that I'm particularly concerned about as we sit here today.
Going forward, you asked about My paraphrase why we feel comfortable with saying we're going to be relatively comparable to the 2013 sales Even though it appears the budget is going down more, you're absolutely right with that. Going back to the question, I think Noah asked, It is a function of our portfolio. It's the things that I talked about when I described the sequestration impacts. We do expect international sales to grow both on a That is expected to grow 15%. We have other growth in particular in our missile defense products and missiles and fire control.
And so for all the reasons that I went around the horn earlier by each business area, we feel pretty good about that. I mean the Things that I would think could change that dramatically, George, from what we're expecting to see now is if sort of obligated under contract Programs were terminated or partially terminated. And if that were to happen sort of all bets are off, but that's not A scenario that we're counting on or guiding towards at all when we give our trend information for 2014. Stephanie, I think we're maybe a
minute past the hour here. So I'm going to maybe turn it back over to Marilyn for final thoughts.
Thanks, Jerry. As we conclude today, I believe our 3rd quarter results and increased guidance illustrate the solid position and performance of the corporation To provide solutions to customers and value to shareholders, in an uncertain budget environment, our strong backlog of work, our Solid balance sheet, a robust cash generation and the exceptional execution of our employees will continue to propel our corporation forward. I'm confident in our future because of the outstanding performance, innovation and integrity of our workforce as we 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 January.
Stephanie, that concludes our call today.
Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.