Good day, and welcome everyone to the Lockheed Martin Second Quarter 20 13 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, Suneet, and good morning. I'd like to welcome everyone to our Q2 2013 earnings conference call. Joining me today on the call are Marilyn Huson, our Chief Executive eighteen. Welcome, everyone, to the Lockheed Martin Second Quarter 20 eighteen 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 nineteen. Some of the factors that may cause actual results to vary materially from anticipated results. We have posted charts on our web nineteen. Today that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin.com eighteen.
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, Gerdie. Good morning, everyone, and thank you for joining us on the call today. Before I begin, I want to offer my nineteen. Congratulations to our Lockheed Martin team for their continuing outstanding performance and the achievement of strong second quarter financial and operational results. As we continue to operate in a dynamic and challenging environment, their efforts and focus eighteen.
Our corporation poised for continued success in delivering value to shareholders and solutions to customers. Eighteen. While Bruce will cover the financials in more detail later, I'll highlight some key financial achievements in the quarter that included eighteen. Growing earnings per share to $2.64 11% above last year's 2nd quarter level. Expanding segment nineteen.
Operating margin to a record level of 13.4 percent and achieving an increase of 110 basis points above last year's level And generating over $600,000,000 in cash from operations after making $750,000,000 in pension contributions. 18. Our continued strong cash flow is foundational to our cash deployment strategy to generate value to shareholders through share repurchases and dividend repayments eighteen dividend payments. In the Q2, we repurchased 4,500,000 shares of our stock more than double the 2,200,000 shares we've 2019. We deployed $465,000,000 for share repurchases this quarter And paid slightly over $370,000,000 in dividends.
Through the first half of twenty thirteen, We returned over $1,600,000,000 or approximately 70% of our free cash flow to shareholders through dividends and share repurchases. Overall, I would characterize the 2nd quarter financial performance as broad based across all business areas with results exceeding our expectations. This strong performance enabled us to increase our 2013 financial guidance for operating profit, 18 Earnings Per Share and Cash From Operations. Bruce will cover some of the specific drivers for the improved performance in his briefing. Before discussing other achievements this quarter, I'd like to outline the status of DoD budgets.
Since we last spoke in April, nineteen. Not much has changed in the budget environment. FY 'thirteen DoD budget appropriations have been enacted and incorporate eighteen. The $37,000,000,000 in budget reductions required under sequestration. While some budget reduction actions are being implemented by the government, 18.
They have yet to implement most of the acquired spending cuts. To date, we have seen minimal impact to our portfolio of programs with nineteen. Actions taken primarily limited to our shorter cycle business. Customers are continuing to determine how they will implement the cuts nineteen mandated by sequestration, which they are required to do before the end of the fiscal year on September 30. And we are working closely with them as
eighteen. As I explore a host of potential scenarios.
For FY 'fourteen, congressional deliberations on the budget are continuing. Eighteen. The President's proposed baseline defense budget remains at $526,000,000,000 without inclusion of the $52,000,000,000 dollars in sequestration budget reductions that went into effect in March 2013. The Department of Defense has finalized its strategic management review 2019 that reexamines policy and program priorities to account for the sequestration imposed cuts. This review will be used to aid DoD And continuing to formulate decisions on post sequestration program budgets for 2013 2014.
Eighteen. While future budget levels remain uncertain, the strategic need and support of a number of our key programs
6 months such as
the F-thirty 5 Joint Strike Fighter, Missile Defense Systems, Littoral Combat Ship and C-130J remains intact. 18. We will continue to work with customers and respond to changes as required when budget positions are finalized by the government. Turning to the operational performance. Our five business areas continue to execute with exceptional focus and skill
nineteen and providing
critical products and services to customers. Of the numerous accomplishments in the quarter, I'd like to highlight our continued success in missile defense activities, nineteen. Provide a status of our expanding international work and finish with an update on the F-thirty 5 Joint Strike Fighter program. First, with the growing threat of ballistic missile proliferation, the need for proven reliable interceptor systems nineteen. Our portfolio of interceptor systems consisting of Aegis, eighteen.
Patriot, THAAD and MEADS will provide layered coverage intended to defeat missile threats posed by rogue nations. This quarter, our Patriot III missile conducted a ripple fire test that successfully intercepted and destroyed 2 different targets 6 at White Sands Missile Range. This test was the first time a multi target engagement was performed against 16, both a ballistic missile target and a cruise missile target. And its success provided a clear demonstration of the design maturity and increasing capabilities of the PAC-three configuration. In addition to the Patriot test events, our 2nd generation Aegis ballistic missile system 6.6% successfully launched and guided a missile to engage and destroy a separating short range ballistic missile target.
Nineteen. We will now begin the Q1 of 2019.
We will
now begin the Q1 of 2019. This approach will combine a land based Aegis Ashore site in Romania with a traditional Aegis system aboard Navy ships to provide unique missile defense protection on the continent. Eighteen. These multiple successful launch events demonstrate the accuracy, robustness and nineteen. Technological advances we are incorporating into our missile defense products.
These advances will ensure nineteen. We can provide defensive systems to customers that can respond to an ever evolving threat. With customers depending on these systems in their times of need, eighteen. It is an honor and responsibility to provide affordable and proven systems for our nation and allies. The next area I want to highlight eighteen.
It is a continued expansion of our international business portfolio. This quarter, we secured new awards and made deliveries to new customers nineteen as we extended our international presence. New awards were received across multiple business areas and consisted of Aeronautics received 18 additional F-sixteen aircraft for Iraq. This award now extends the F-sixteen production line in Fort Worth, Texas well into 2017. Mission Systems and Training secured new work for Japan to upgrade Aegis Multi Mission Signal eighteen.
Processors and other equipment on their ballistic missile defense ships. Missiles and Fire Control received multiple international awards eighteen. Including an order from Saudi Arabia to provide longbow fire control radars for attack helicopters an order from Finland to provide integration support of our JASM missile and Defense fighter aircraft and an award to provide Patriot missile defense equipment to Kuwait. International deliveries in the quarter consisted of delivery of the first C-130J Super Hercules aircraft nineteen. Into a new customer set.
Tunisia becomes the 15th country to select the proven, low risk and affordable C-130J for its air fleet requirements. Expansion of international sales remains a key component of our corporate strategy eighteen. And we are on a path to grow international content from approximately 17% of total sales last year to at least 20% in the next few years. Finally, turning to the F-thirty five program. Multiple key accomplishments were achieved in the quarter and you can eighteen.
Feel the momentum accelerating throughout the program. Last month, I attended the F-thirty 5 CEO roundtable in Fort Worth chaired by Frank Kendall, nineteen. The Under Secretary of Defense for Acquisition and Logistics and a program status briefing by Lieutenant General Bogdan, the F-thirty 5 Program Executive 13. Attendees included representatives from all nine partner nations and our teammates on the F-thirty five industry team. Eighteen.
The meeting reaffirmed just how much progress the F-thirty five team has made. The customer expressed a renewed confidence in the future of the program eighteen. And there's a strong sense of partnership across the whole team. We know a lot of work still must be done and at the same time it's clear 18. The tremendous efforts of the team are paying off.
One of the key accomplishments this quarter was 16 by the Department of Defense of initial operating capability dates for all three F-thirty 5 variants: 2015 for the Stovall aircraft, 2016 for the CTOL aircraft and either late 2018 or early 2019 for the CV aircraft for the U. S. Navy. These dates reflect the confidence the customer has in the Lightning II and in our team. Our job is to execute on the program to make sure we meet these critical dates for our customers and deliver the capabilities of this aircraft to our war fighters and allies.
18. Beyond the establishment of IOC dates, the program achieved a number of key milestones in the 2nd quarter, Including the delivery of the first F-thirty five seat carrier variant to the U. S. Navy. This delivery was important nineteen.
As all three variants are now at Eglin Air Force Base Florida, where they're training pilots and maintenance personnel for this next generation fighter. Completion of high angle of attack testing by the F-35A, which is a key measure of aircraft maneuverability. Completion of the 1st vertical takeoff by an F-35B Stovall aircraft and the successful first in flight missile launch 17. Production activities continue to ramp up with delivery of 12 aircraft in the quarter 6. And we remain solidly on track to deliver at least 36 aircraft this year.
Program tempo is accelerating eighteen. And we currently have our 1 hundredth aircraft in final assembly. In the area of customer relations and contractual events, we were pleased with the Australia's reconfirmation of its plan to procure 100 CTOL Joint Strike Fighters for its national defense. We look forward to providing these revolutionary aircraft to eighteen. And operating and support costs reflected in the 2012 selected acquisition report issued by the DoD in June.
18. This was the 1st year a cost reduction was noted since program inception and we will work with the F-thirty 5 Joint Program Office to implement further nineteen. Savings measures to secure additional decreases in the total program costs. The top priority of the government and contractor team nineteen. It's to continue to cost effectively build and deliver the F-thirty five's unprecedented 5th generation capabilities to the warfighter.
Eighteen. I'll now ask Bruce to go through some of the details of our financial performance and then we'll open it up the line for questions.
Thanks, Marilyn. Good morning, everyone. Eighteen. My comments will refer to the web charts that we included in our earnings release today if you'd like to follow along. Let's start with Chart 3 and an overview of the quarter.
Sales in the quarter were $11,400,000,000 4% below our results from a year ago, but higher than our first quarter results 16. And as with the Q1, we're above our expectations. Segment operating margin was a record 13.4% 18 basis point improvement over the Q2 last year. Our earnings per share were also up significantly to $2.64 an 11 $1,000,000 increase over last year's results. We generated $623,000,000 in cash from operations well above the outlook I provided in the Q1.
We returned over $800,000,000 of cash to our shareholders including the repurchase of 4,500,000 shares for $465,000,000 eighteen. And as a result of our performance, we're increasing our outlook for operating profit, EPS and cash from operations. So we're very pleased with our results for the first half 20 year. Chart 4 shows our sales in the Q2 this year versus last year. 18.
Aeronautics sales equaled our results last year as lower quantities of F-sixteen, F-twenty two and C-one hundred and thirty aircraft were eighteen. This was offset by higher volume on F-thirty five production contracts and C-five deliveries. IS and GS sales were lower due to reduced volume eighteen. Our intelligence line of business. Missiles and Fire Control continued its strong performance with an 11% increase in sales 10, due primarily to the end of deliveries of the PTIDS program last year.
And finally, Space Systems was 13% lower than last year, nineteen. Due primarily to the delivery of 2 commercial satellites in the Q2 of last year and none this year. Moving to Chart 5 and our segment operating results. Eighteen. Despite our sales being down 4%, operating profit was up 4%, driven by the significant improvement in operating margin of 16.4%.
Again this quarter we had strong program execution across all of our business areas as we'll show on the next chart. Eighteen. Chart 6 shows our segment operating margins by business area. 3 of our 5 business areas increased operating margin compared to the Q2 of last year 6. With MST having the largest increase due to the settlement of certain contractual matters and better performance in our training and logistics business.
2017. Missiles and Fire Control continued to have excellent results and the increase this quarter was due to improved performance in air and missile defense programs, nineteen. Tactical Missile Programs and Fire Control Programs. Space Systems margin improved primarily 18. Due to the increased equity earnings from United Launch Alliance, reflecting the mix of launch related activities in the quarter compared with last year.
IS and GS' margin was flat relative to last year's 2nd quarter results and Aeronautics margin was down this quarter due to the absence of a favorable contractual resolution on the F-twenty two program, which occurred in the Q2 of 2012. Eighteen. Adjusting for the contractual resolution, Aeronautics margins were similar to last year. Moving on to Chart 7. Eighteen.
Our EPS grew 11% over the results from the Q2 of last year to $2.64 per share due primarily to improved operational performance. 18. And on a pension adjusted basis, our EPS was $2.87 per share. If you'll turn to Chart 8, we'll discuss our cash return 2019. We returned over $800,000,000 to shareholders in the quarter with share repurchases in excess of dividends paid.
Compared with the Q2 of last year, we repurchased more than double the amount of shares. With the increase in our stock nineteen. In the quarter, we saw a higher level of options exercised and accordingly we repurchased additional stock to mitigate share count dilution. On Slide 9, we'll look at cash return to shareholders on a year to date basis. We've had a strong year to date cash eighteen.
We had strong year to date cash from operations of $2,700,000,000 and free cash flow of over $2,400,000,000 Through the first half, we've returned almost $1,700,000,000 or nearly 70% of our free cash flow to shareholders. Eighteen. And our share repurchases of over $900,000,000 exceed the level of dividends paid thus far in the year and greatly exceed the roughly $700,000,000 seventeen. And our full year guidance at the start of the year. Moving on to Chart 10, we'll discuss our updated view of guidance for the year.
18. As was the case last quarter, we saw minimal impact to our sales in the 2nd quarter as a result of sequestration actions nineteen. And we are maintaining the sales guidance provided last quarter. On the other hand, we are increasing our outlook for segment operating profit $225,000,000 to recognize the strong performance through the first half of the year. As a result of the increase in our segment operating profit, we're also increasing eighteen.
Our outlook for earnings per share by $0.40 to a new level of $9.20 to $9.50 per share. Eighteen. And also reflecting strong performance thus far, we are increasing our cash from operations guidance by $200,000,000 To a new level of greater than or equal to $4,200,000,000 Chart 11 shows our updated segment operating profit outlook by business area. Eighteen. We're increasing our outlook in 4 of the 5 business areas.
MST's outlook is now $75,000,000 higher, $1,000,000 Missiles and Fire Controls is now $70,000,000 higher and both Aeronautics and Space are $40,000,000 higher than our guidance last quarter. 18. And turning to Chart 12, I'll summarize by noting that we're very pleased with the results for the 1st 6 months of the year and they reflect our program nineteen.
Thank you. Ladies and gentlemen, on the phone line, The first question comes from Carter Copeland from Barclays. Hi, good morning.
Just a quick question
on the order outlook. Obviously, the book to bill was about 0.8 by my calculation and it looks like eighteen. Obviously, you have a plan to have a pretty big step up there in Q3 and Q4 to hit the levels you talked about on the previous Call. You said you hadn't really still seen any impact from Sequester, but I wondered if you could give us an update on Your expectations for orders and if anything's changed since the last quarter and how that will shape up for what you're thinking about 2014? Thanks.
Eighteen. Yes. Thanks, Carter. So I'll start off by saying actually we're slightly ahead of where we thought we would be at this 20. The Q2, I tried to tee that up.
I think either the Q1 or the call at the end of the year last year. But we're actually tracking about as expected or slightly ahead of plan. Eighteen. There's several items and I'll ask if I just kind of run down the list by business area just to give you an idea of what we're expecting happen to happen over the next few quarters. So 6.
The single biggest item obviously is the closure of the Lot 6 and 7 negotiations for F-thirty 5. And when that happens 6. Carter, I mean think of the increase in orders as being somewhere in the $4,500,000,000 to $5,000,000,000 amount for just that one closure of contract negotiations, if you will. And we are expecting that to happen in the Q3. I think we're making good progress on that.
Marilyn 16. And fill in some of the details for you if you'd like at a later point in the call. We also have a number of competitive orders We're watching an MST in the Q3 including space defense and the air missile defense radar program, AMDR. Eighteen. We also have an Aegis order for the basic Aegis program.
Collectively those are about $1,000,000,000 again that we're expecting in the 3rd quarter. Eighteen. Missiles and Fire Control has both domestic and an FMS order for The THAAD program that's expected in the Q3. So think of this as the annual buy from the Army on the domestic side and one of our international customers Pagging on to that quarter. And that's I think I said worth about $1,500,000,000 in the 3rd quarter.
IS and GS as usual nineteen. This is nothing no one program individually significant, but the 3rd quarter is expected to be higher than either the second or the first. And then eighteen. As we look forward, I would expect that the Q4 as usual will be our highest quarter of the year. Now just to sort of summarize all that, I think the 3rd 6 quarter.
You should think of us probably being back at a level maybe slightly higher than where we are or where we were in the Q1. Eighteen. And if all comes as I just laid out including some of those competitions, we should end the year pretty close back at about the $80,000,000,000 level like 18. I've been talking about the past two quarters.
Thank you. Our next question comes from Rob Spingarn from Credit Suisse. 20 last call on this call from DoD on Sequester. I think about $1,000,000,000 was taken from 2013 money for F-thirty 5 And it appears to cut, I think, 5 aircraft from the Air Force and about 2 from the Navy and the Marine Corps with the remainder of the $1,000,000,000 being RDT and E. Eighteen.
So to what extent, if at all, does this impact LRIPVI and probably more likely LRIPVI negotiations? And how should we think about that, those lost 7 aircraft from the 29 aircraft originally funded in 2013?
Eighteen. Thanks for the question, Ron. First I'd say that our customer really has not come out with a definitive position on how they're going to take Into account sequestration. I know there's been a lot of speculation. I'm not going to speculate with you on what they'll come out with.
We're working closely with seventeen. They're looking at different scenarios of how they'll if they'll address it. One thing I will say is that they're very supportive of the F-thirty five And we'll just have to see how it comes out. We've seen in terms of any impact nineteen. That we might see on F-thirty five, it will be backfilled probably by international opportunities because as you can see that's where we're going to ramp up.
In fact, 6. We look over the next 5 years close to 50% of our orders will come from the international customers. So we've got to just Wait until they come forward with wait until the Department of Defense comes forward with what their plans are and then we'll adjust
accordingly. Eighteen. Ross, I might just add a little bit to what Marilyn said. I think the negotiations on 6 and 7 were clearly eighteen. Targeted to sort of keep the quantities sort of pre sequestration.
So think of the negotiations that we hope to close 18. Fairly quickly here as being the same quantities we had embedded within the fiscal years themselves not adjusted for sequestration. And I think Secretary Kendall has been pretty vocal in the press about trying to keep quantities and trying to prevent nineteen. Sort of the reopening of contracts. And so we're optimistic that that kind of plays out well for that negotiation that we're not impacted to the level that you 2019.
As Marilyn said, we're watching the FY 'fourteen budget closely, but at least as we've sort of done comparisons in particular the seventeen. There seems to be more reductions to non aircraft elements of the program than aircraft programs, which we think from 18. Sort of a build rate and bringing the overall cost profile of the program down is the right move from obviously our perspective.
So Bruce, eighteen. If I'm going to understand what you both just said, it's not so much about quantities, it's more about total dollars and these dollars don't necessarily come off of unit price, but from other areas
of the program. Yes, I think you said it just right, Rob. In fact, eighteen. I've said we had a media event this morning and I think I said in my prepared remarks that we've seen less impact from sequestration sort of writ large 6. And we expect it to through this part of the year.
And I'll say frankly from our perspective, I can't speak obviously for all the industry, but I think the Pentagon Secretary all the way up and down the Pentagon have been very prudent in the way that they've nineteen. Managed the sequestration impacts and I think they've done a very nice job doing that from an industry's perspective.
Thank you. Our next question comes from Jason Gerske from Citigroup. Good morning, everyone. Bruce, this question is for you. In the slide deck, you've got a line in there on Chart 9 that says you're on track to exceed full year cash return commitments.
You've done that on the repurchases, the 926 versus the 700,000,000 eighteen. But keeping in mind that the goal here was to keep the share count roughly flat and offset dilution. So can you just Provide a little bit more update on what exactly you mean by on track to exceed full year expectations. Is that around the share count itself? Or is that a comment more around the $900,000,000 versus the $700,000,000
Yes, probably neither actually, Jason. It's more of our eighteen. Our long standing goal is to give 50% or more of free cash flow. I'll say we pretty much get there obviously with just the dividend. So eighteen.
In truth, I was saying due to $700,000,000 plus the dividends for the year. So we've exceeded that 18. Already on a year to date basis. And I think probably embedded in your question is, so what does the outlook look nineteen. For the rest of the year and how does that expect to play out?
I've got to believe with the stock sitting where it is today and the level of 18. Options that have been exercised to date that those will continue if the stock stays where it is today. It's actually up a $1,000,000 at least the last I looked at today, which will probably continue that trend. And just to give you some perspective there, We've had 4,000,000 options exercised in the Q2 of 20 13 compared to just over $1,000,000 in the Q2 of 2012. So if that trend continues that will be obviously eighteen.
The motivation for us to continue the share repurchase is at the level we've had in the past, but that will be dependent upon us watching that option eighteen.
Our next question comes from Robert Stallard from RBC Capital Market. Thanks, Raj. Good morning.
Good morning, Raj.
Probably, send me a follow on from Jason's question. Eighteen. If you are obliged to carry on buying back stock at this sort of rate, does this jeopardize or impact on your flexibility to increase the dividend going forward?
Well, I guess you can't do that to infinity Without impacting the ability to pay dividends to back Rob. But honestly I don't think if you look at our track record 18. In terms of what we've done with dividend increases and I think eighteen. I think that's probably always the best indicator of what we'll do in the future. The one thing that's kind of interesting about where we sit from the amount of that are still outstanding and have yet to be exercised.
I want to say there's 18. About $15,000,000 15,000,000 excuse me, shares of options that are outstanding about 12.5 or so are vested and the other remainder are unvested. 18. But we've kind of weeded out if you will sort of the low dollar option amounts. 6.
So the options that are being exercised today come with option prices at the 80 plus Dollar per share for the most part. So think of the incremental difference between sort of buying back the shares to offset the dilution eighteen. And the price of the options that are being exercised is maybe less than they would have been years ago when we had some $5 optioned at the $35 $45 level. So that's helping to mitigate what you might think of in terms of the overall level of cash eighteen. Sort of required to continue the share repurchases.
And so therefore, I think we've got the flexibility to do that. We're still looking at 18. With the guidance we provided this year $4,200,000,000 our overall capital $1,000,000,000 maybe a little less. So free cash flow of $3,200,000,000 We started out, I think we've got what $2,800,000,000 on the balance eighteen as we ended the quarter. So I still think we've got the firepower to continue to do that going forward in part because of the reasons I just said with The benefits coming from those options when they are exercised.
Thank you. Our next question comes from Noah Poponak from Goldman Sachs.
Hi, good morning everybody.
Good morning.
If I move to the low end of the revenue guidance range, which you've indicated What happened under sequestration for 2013, the back half of the year would experience something like an 8% Organic Revenue Decline. In that, what is your assumption for the growth rate of U. S. DoD Versus U. S.
Non DoD versus international. And then, to the extent you're willing or able Can you talk about how much different we should assume those would be in 2014, if at all?
Tell me what the last part of your question, Noah, if you would. Tell me more about what you're looking for the comparison
of 2014 to 2013. Thoughts. Basically what I'm saying is, is there any reason why we should not eighteen. Take those growth rates you've assumed in the back half of twenty thirteen and carry them forward into twenty fourteen in the scenario where sequestration is sticking.
So I think the first part of your question was, if you eighteen. Kind of squeeze for the back half of the year. It looks like we're down I think you said 8%. I think that's 16. About right.
No, I don't have that off the top of my head. I will say that as we as I said in the to answer the previous eighteen. As we look at the overall year and where we sit through the first half of the year, Our sales were ahead of expectations in the Q1. Our sales were ahead of expectations in the Q2 albeit not as much as they were in the Q1. So 6.
We're tracking better than expected to the first half. The $825,000,000 eighteen. We kind of came up with that would point towards the low end of the guidance was sort of as we used in the past sort of a parametric or eighteen. A mathematically derived number that frankly we haven't seen materialize as quickly or as much as we thought When we did that calculation. So I'm hopeful that we actually are closer towards the Maybe a little bit higher than the low end of the guidance as we sit here.
As I said earlier, we've got 1 quarter to kind of squeeze out the fiscal year 2013 impact of eighteen. Sequestration seems like a lot has to happen that quarter for that sort of mathematical modeling to come into fruition. 14. As far as the build rate going into 2014, I think we're very similar eighteen. To the situation that we were going into fiscal year 2013, in that we haven't seen truly the impacts in 2013 18 than we had expected in large part because again I think the DoD and the Pentagon has done a fairly masterful job kind of deflecting some of that.
Eighteen. It's come at the expense of operations and maintenance and some readiness issues, which are not good by any means. But in terms of the industry's perspective, I think that's been helpful. And so we're kind of going to go into 2014 similar to the way we went into 2013. And there I think the eighteen.
We're going to have a similar story as I said at the start of the year where our long cycle businesses will not see much impact even if 14 budget is set by sequestration and our short cycle businesses will have that impact. I've got to believe eighteen. The ability to continue to defer and push the sequestration impacts on O and M readiness and the like will be mitigated by 2014. 16. So I think 2014 versus 2013 will be similar to what we expected to kind of happen as we enter the year 2013 if that makes sense.
Nineteen. Our next question comes from Rich Saffron from Buckingham Research. Good morning.
Good morning.
This question is either for Marilyn or Bruce. Marilyn, on your comments regarding On the second tranche of the F-sixteen and extending the backlog out to 'seventeen now. I want to know if you could comment on other opportunities for the F-sixteen And maybe also if you could make a comment here about what you're thinking about in terms of production rates. And as long as we're on maybe legacy programs here. Maybe you could also comment on opportunities and outlook for the 130 J and production rates.
Eighteen. Sure. Thanks for the question. So on opportunities for F-sixteen as I did say with the Iraq sale that gets us out into 20 17, but we also have opportunities for the UAE potentially or other Middle East countries. We have opportunities in South America.
So our production rate today is about 13 aircraft per year eighteen. And it should continue on out through at least the 'seventeen timeframe. And then as we see additional orders come online, we would continue to stay on Whatever rate that would lend itself to. We also have F-sixteen upgrade work that we're doing today, which is good work for us as we with the 21 upgrade of F-sixteen. On the C-130J, our plan this year is to deliver 24 aircraft eighteen.
And we'll continue on that rate. We have a lot of international demand for the C-130J. And we're hopeful on Moving through the multi year opportunity with the U. S. Government, which would be up to 83 aircraft through that Opportunities in Saudi Arabia, opportunities in India.
So the C-one hundred and thirty J also has good opportunities.
Our next question comes from Joe Nadeau from JPMorgan. Very nice Margins. I have actually just 2 quick ones. One is, Bruce, you talked earlier about the backlog and what you expect to happen by the end
of the year, about $80,000,000,000
Is funded backlog, does that look at a similar profile? In other words, you were at 50 5. I think at the end of last year, do you expect that to be roughly the same? And then
the second question is just
on the F-thirty five FDD. You took another reduction, profit rate reduction in the quarter. Could you just give some color on how you think that tees you up Going forward on that contract, what has to happen to make that the last write down? Thanks.
18. Thanks, Joe. I'll try to
take both those on. So the backlog as you said and we're looking for a total backlog $1,000,000,000 or so by the end of the year. And I think we are around $55,000,000,000 or so of funded backlog. I wouldn't think 18. I think I would think that relationship will sort of hold pretty steady would be my guess.
Maybe a little 6. Higher as I think about it, because I would think we'd get full funding for a good portion of that Lot 6 and 7 negotiation. Eighteen. So that on a percentage basis it might actually be a little higher than it sits today. As far as the FCD, you're right, we did take 18.
A debook this year essentially similar to the one we took a year ago at this time frame. Eighteen. The way I would describe that Joe is in the quarter we finalized an agreement with the government, which they've been working for quite some time for the nineteen. And you should think of that as being both for the developmental the remaining developmental milestones on the contract eighteen. As well as sort of an overall measure of performance that's an incentive based measurement that will take place at the end of the contract.
Eighteen. And I'll just say that both criteria, the developmental milestones, they're linked to specific dates and accomplishments eighteen. Through the remainder of the STD period and even more so I'll say the sort of overall performance measures at the end of the nineteen. What you should think of is being tied to both schedule performance and cost performance between now and the end of the contract. Eighteen.
Both of those I would characterize as very tough criteria for us. So this is our best estimate of how we're going to 18. I'd like to say that this is well, I'll just leave it at that. I eighteen. This is our best estimate of how we perform against that criteria.
And it is a little tough maybe than what we were thinking it was when we set the numbers a year ago this time.
Our next question comes from Bill Loomis from Stifel.
Thank you. Just staying with on F-thirty five. So you talked about the reductions, the quantities, are still undecided. But from a revenue eighteen. The work you're doing, is it still running about 15%?
Do you expect that to continue? And then just as another question on IS 10GS with the backlog showing sequential decline and you had 2 big wins last year with GSM and Polar and we're still declining. When do you think we might see some stability in ISGS. Thanks.
Hey, Bill, I'll answer those. So we are at about 15% of total revenue eighteen. And for the F-thirty five program, I think that number continues to increase over the next 2 years. So eighteen. I think we were somewhere in the 13 ish or so range.
I've lost track where we were last year. So we had about a 2% increase if memory serves me right And the percentage of total F-thirty 5 versus our compared to our total sales. Eighteen. That number again I think increases going forward. And how much I'll say maybe not as much as the 16 to 2015, but still increasing between 2013 2014.
IS and GS, the sequential decline, again, nineteen. Kind of as expected. And the reversal I think that you talked about Bill, This is still a business that's very much sort of orders similar or excuse me, backlog similar to the sales level. Eighteen. For us to get there, we would expect to have a greater 4th quarter, which is the historical trend for eighteen.
And what I would expect to have happened is that we'll see from an orders perspective higher orders in both 18. The Q3 that we saw in the first two and the 4th quarter will be higher still than the 3rd quarter.
Our next question comes from Peter Arment from Bernstein. Good morning, Marilyn and Bruce.
Good morning.
Bruce, maybe this question for you or maybe Marilyn's taken. Just in general headcount levels, you guys have been out in front on reducing your overall cost base quite a bit over the last couple of years and according to my calculations looks like count has come down by about 8% during that period. I mean you're still seeing a lot of opportunities for that whether it's early retirement programs $1,000,000 or just in general mandated by the overall budgets? Thanks.
We have taken the head 18. Countdown from about 146,000 employees about 2 or 3 years ago to 116,000 now. So you're right head eighteen.
The account has been coming down.
We've taken some direct activities when we took out a number of management 18. Back when we did our voluntary separation program at that time, we then continued to adjust our business to what's happening eighteen. And our business base, so that's what a lot of what you're seeing is just a budget environment and adjusting to contractual delays or Reductions that come with that. So those are the types of actions we'll take. Now what we don't know is what sequestration will bring.
Nineteen. Certainly, if we have a significant impact on our programs from sequestration, we'll see additional reductions to that.
So we basically
size our business to the environment that we're operating in. So we basically size our business to the environment that we're operating in. We're also coming out of footprint. We've done a lot as you've probably seen to reduce our
capacity, both shutting down facilities as
well as moving out of 18. Both shutting down facilities as well as moving out of lease space into our own space and that's something that we've done for past several years. It's just the approach we take to managing our business to make sure that we get our infrastructure
6 question comes from Myles Walton from Deutsche Bank. Quick one and then one on pension. The quick one was the EACs or revisions, non related to revenue for the year. It looks like you'll come in roughly flat year on year. Is that Currently what's built into the guidance.
And then the one on pension. Bruce, if you can kind of give us
a little
color, obviously the rates moving higher here is going to help you pretty significantly if they stick around. I think on a sensitivity basis, I have it as a potentially $300,000,000 $400,000,000 help for
you for next year versus
which you previously told us. As well, can you comment on if that's changing your attitude towards cash contributions, the remaining $750,000,000 you still as Discretionary for the rest of the year. Thanks.
Thanks, Myles. So EAC revisions, I think as usual Myles your math is right. 18. We're kind of spot on maybe a slightly different a little bit down from the first half of this year compared to the first half of last eighteen. In terms of our overall EAC revisions, looking forward for the rest of this year, the second half, 16.
At least in the plan, we kind of expect that the level will be similar to a little bit higher Than where we were last year and that could obviously change as sort of risk retirements happen quicker than we planned them obviously. 18. But as we sit here today, overall, we would expect to still be I think last year we were about 34 percent overall our EAC revisions versus our total earnings. We're going to be right in that ballpark maybe a little higher 35% ish, 6% is kind of what I would expect to see. So on pension you asked about the discount eighteen.
The interest rate changes and so forth. And I'll just I'll give you a little bit of perspective. Obviously, we won't set this until The end of the year, but clearly there have been changes to rates to the first half of the year that warrant some discussion. Interest rates so far are up probably about 75 basis points. And our asset returns are 6.
So slightly positive as we sit here this year. But as you know our pension adjustments that we're talking about are much more sensitive to changes in the interest rates 16 changes in our asset return. So you did some calculations. Just to remind everyone else on the call, I I think the sensitivities that we provided in previous 10 Q and 10 ks filings are still appropriate. So eighteen.
For our discount rates every 25 basis point change is worth about $145,000,000 change in our FAS expense. Whereas for asset returns, it takes a full 100 basis points change to be about an $18,000,000 change in our FAS expense. So eighteen. Overall, if we were to set the mark today, we would expect to have a positive adjustment 2 FAST CAS. Again, if we if those results held, I'll remind you that between now and end of the year, we typically do 18.
Sort of actuarial studies that look at the current population of employees to see what has changed. And eighteen. Population as we do reductions in force, some of the dynamics of that actuarial study do actually change in terms of the composition of the workforce that Upon which that liability is built upon. One of the bigger changes that and it may not happen between now and the end of the year, but we're watching it closely as eighteen. We are expecting a new sort of standard mortality rate to come out, which I guess from the good news perspective says all of us are going to live longer.
Nineteen. Sort of from the bad news perspective, it says your liabilities are likely going to be increasing for pension because people are living longer. Eighteen. So that will have a bit of a mitigating effect on what we just described there in the numbers that you said. But again, we'll set that up.
We'll try to give you the same sort of preview if you will in the 3rd quarter call that we do typically every single year and that's when I'll give you probably a little more detail into that. As far as cash Contributions, we've actually already made in the Q3 the second tranche of the $750,000,000 6 for a total of $1,500,000,000 pension contribution. So that is done for the year. And we'll eighteen. As usual, we always evaluate whether or not the need arises to do any more towards the end of the year when we sort of see our cash eighteen.
From operations pulling out on a full year basis. We'll try to give you some insight into that Miles again when we talk again in the 3rd quarter.
Our next question comes from Howard Ruhl from Jefferies. I think this is kind of a 2 part question, half for Bruce and half for Maryland. If we look at the Outlook for you, Bruce. And we kind of split the revenue forecast and look at what you've done for segment profit increase. It would appear as if margins are going to be down almost a couple of 100 basis points in the second half versus the first half.
It looks like most of the increase in the outlook was attributable to the pickup. So maybe Marilyn, you might be able to address some of the productivity initiatives underway that have enabled you first to do as well as you have in the first half and then maybe also address why it wouldn't stay at the same rate other than that one large contract adjustment.
Eighteen. Howard, let me try to address you. You asked a pretty specific question there on segment operating margins in the second half and what's nineteen. So we did have a couple of things happen in the first half of the year, including as you saw within our MST 16 Business. A couple of contractual resolutions that were a good size.
I mean, obviously, if you look at the margins for that business, In particular, that's a record level of margin and it was obviously or maybe not obviously, but it was driven by the those contractual resolutions. Those are not eighteen. It's expected to replicate in the second half of the year. So that's one item that will bring it down first half relative to second half. 18.
Secondly, Space Systems also up a little bit first half of the year. Think of that as some of the phasing and the mix 6. Where we're seeing some of the ULA equity earnings and expect to see a little bit of a reduction in that in the second half of the year. Eighteen. So that's I think you did the math exactly right in the guidance we have, Howard.
The wildcard in all this 18. As we have a certain level of planned, I'll say, risk retirements that we expect to occur in both Q3 and Q4. And just as we had eighteen. Some benefits beyond what we were planning in the first and second quarter. If those occur as they did in the first and second eighteen.
That may be able to mitigate some of that reduction you see or you're talking about. If they don't, then we won't see that happen. It's kind of that simple. Eighteen. I'll flip the call back over to Marilyn for the, I think, the second half of your question.
I think your question about what do we see in terms of continued eighteen. I would just point to the fact that we've had we've been very proactive. As I said earlier in the last several years, I'm just getting ahead of the budget cuts nineteen. By reducing expenses and headcount. But we have very seasoned leaders that don't just manage programs, they manage their business on an ongoing basis and they have 18.
Very strong cost control discipline in the business. So we look at that and monitor nineteen. On an ongoing basis, as I said earlier, we try to keep our structure in line with the business base that we have. The other thing though that 2018. It's driving the performance of the businesses.
It's just consistent performance on the programs. Eighteen. We don't we're performing well across all of the business areas with very deliberate management of the programs and making sure 6. That we perform and meet the cost targets that those contracts drive and continue to look at ways that we nineteen. So it's just I think it's just good straight up good performance by our nineteen.
Leadership and our teams across the business in executing on the programs that they have.
Thank you. Our next question comes from Sam Bernstein from Wells Fargo. Good morning.
Good morning.
Eighteen. I wanted to ask something. Bruce, just your discussion about the options just triggered something, which is just In terms of the incentive compensation and thinking about things on a going forward basis, I know that TSR is an important metric. But if a lot of people start Cashing out of options, do you need to do something to continue to incent people on a go forward basis is kind of part 1. And part 2, the higher stock price itself.
What is that going to do for the remainder of the year in terms of the rabbi trust or any other sorts of, I guess compensation programs and the shares outstanding as a result. Yes. So Sam, I'll address the first 6. So if you've read the proxy, what you've seen happen in the past 2 years is we've actually been lowering the eighteen. Number of options that are paid not just to the senior leadership team, but to leaders leadership in general.
Eighteen. And in fact, at the start of this year, we eliminated option as a component of our executive compensation program. So All of our equity compensation going forward is either in the form of RSUs or nineteen. And so one of the things that I don't think we necessarily have a eighteen. Complete understanding amongst all of our investors is that some of the dilutive aspects that have been occurring That have been needing to be offset through share repurchases have been because of the level of option exercises.
So if you track 6. The number of outstanding options over the past few years has come down fairly significantly. And I guess it's kind of a good news, bad news. 18. As the stock price increases, we have more option exercise, which increases the dilution effect, But it also gets rid of those options at a faster clip such that going forward, I don't have this off the top of my head, but I want to say on an annual basis, 16.
We were probably providing somewhere in the 5 ish maybe 6,000,000 shares or so of options 2019 on an annual basis, more maybe more like 7,000,000 shares. And if you're just providing the same amount of executive compensation, it takes a lot Fewer shares to do that with RSUs and performance stock units. So on an annual run rate, we're going to see less thoughts dilutive opportunities if you will from our executive compensation program than we've had in years past. And quarter. That's a direct reflection of some of the conversations we've had with investors who've raised that point to us and we made that change accordingly.
Eighteen. I think your second question was the higher stock prices higher stock price in the second half of the year and its impacts on the rabbi eighteen. And really there is not an associated impact there. As I think of it eighteen. Our rabbi trust, if you can put it in, it's actually the same sorts of options that 401 opportunities are for employees and we try I'll try to match that from a liabilities perspective.
So I'll say it's more targeted to overall market performance, if you will, than directly to the Lockheed Martin stock.
Thank you. Our next question comes from Doug Barnard from Sanford Bernstein. Good morning. On Aeronautics, if you look forward, you've had about 12% Margin Levels Recently. And when you look forward, you're going through a fairly significant mix change with F-thirty 5 growing in its share of revenues.
2. But at the same time, you've got more and more sustainment coming from F-twenty 2, F-sixteen, C-one hundred and thirty nineteen. How do you see those two things playing out going forward? And should we see aeronautics margins tend to stay at the kind of levels they're at today?
So Doug, I'll try that one. We've said for quite eighteen. Thanks on time. I always sort of describe this as the algebra of this business when it comes to aeronautics margins. So eighteen.
Going forward, even though the overall F-thirty five margins are expected to increase going forward, we have a bit of mitigation eighteen. Impact there because we just lowered if you will the go forward booking rate if you want to think So that way for the SDD contract by virtue of what we did with the adjustment we took this quarter. So if you kind of Throw all those things into the mix. What I would expect to see is that the margins of Aeronautics will come down eighteen. A little bit in the future as we've predicted probably for the last 2 or 3 years simply because of the higher F-thirty five volume.
Eighteen. Even while the F-thirty 5 on a standalone basis is kind of increasing year over year, it still has a dilutive effect on the overall margins of aeronautics because eighteen. The volume that it is offsetting was higher margin C-one hundred and thirty and S-sixteen work. Just to give you a little bit of 16. I think I've been fairly consistent saying we'd like to see the F-thirty five production contract 6.
Sort of get into a double digit margin level by the time we get to full reproduction. If we just strip out the STD performance 6. From the overall F-thirty five program and focus more on the production contracts, we're we should think of this, we're kind of in the higher single digit levels 16. Today, so that program I'll say in general is kind of performing in line with our expectations. STD clearly, 18.
We don't like to have back to back adjustments like we had in the Q2 last year, the Q2 this year. So 6. That hasn't been performing from a margin perspective as well as we'd like it to. And that has a bit of a drag as I said. But I think the production programs are eighteen.
Performing pretty well, but that still is what's causing again what I call sort of the algebra effect on aeronautics margins.
6. And our final question comes from George Shapiro from Shapiro Research. Good morning.
Good morning.
Two quick ones probably for you, Bruce. Following up on an F-thirty 5. In the quarter you had commented you had a $50,000,000 increase in profit and revenues were up 175,000,000 eighteen. So could you break out how much of that was inception to date pickups versus just maybe a bit of margin improvement itself? Eighteen.
And then in the space area, you had a $50,000,000 increase in the ULA profit, which struck me as a big number. Can you just kind of just go through what Cause that and is there any way to forecast what that might be going forward? Thanks.
Yes. Jordan, I'll try to address both of those. So You're right. I think the press release identified the amounts that you talked about in terms of the $50,000,000 and the $175,000,000 Maybe the Simplest way to think of that George is sort of go into the mid single to eighteen. Upper single digit levels on the volume and on the sales volume and take everything else and assume that that's sort of the step up in the quarter.
I don't have the number off the top of my head, but it's a pretty good chunk of that overall $50,000,000 on eighteen. $175,000,000 sales increase. But again, I don't have to split it exactly in my head. Eighteen. The $50,000,000 ULA is an up for us.
One of the reasons one of the things I talked about earlier in terms of one of the reasons why the margins in 16. Space Systems Are Higher. That's a couple of things. Again, we mentioned the mix aspects within ULA. ULA nineteen.
Margins excuse me, the mix is supposed to be better this year than last year in terms of profitability of some of the launches And the volume will be up as well. So we would expect to see for the rest of the year not probably quite a comparable level 18. As the first half, but pretty close to that level in the second half. I think the thing that stuck out and the reason it's up eighteen. So much in the Q2 of this year because actually last year due to some of the opposite issues, the mix issues and the phasing within the year, eighteen.
Last year's Q2 was by far the lowest quarter of the year for ULA from an equity earnings perspective. So that made eighteen. This quarter although it is higher than it has been historically, it made the difference between Q2 last year and Q2 this year appear even greater. Eighteen.
So let me wrap up our call today by again highlighting that I believe our 2nd quarter results and increased guidance illustrate 6. The solid position and performance of the corporation to provide value to our shareholders and solutions to our customers. Even in an uncertain budget environment, eighteen. Our program portfolio, strong balance sheet, robust cash generation and the exceptional execution by our 116,000 employees nineteen. We'll continue to propel our corporation forward.
So to thank you again for your interest and for joining us on the call today. We look forward to speaking with you on our next earnings call in September. Thanks.
Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.