Good day, and welcome everyone to the Lockheed Martin First 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 Kirchner, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Ali, and good morning, everyone. I'd like to welcome you to our Q1 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. Statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ.
Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. We have posted charts on our website today that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Marilyn.
Thanks, Jerry. Good morning, everyone, and thank you for joining us on the call today. Before I begin, I want to offer congratulations to our Lockheed Martin team for their outstanding performance that enabled the achievement of strong first quarter operational and financial results while operating in a dynamic and challenging environment. Their focus and efforts have our corporation poised for continued success in delivering solutions to customers and value to shareholders. While Bruce will cover the financials in more detail later on in the call, I would highlight some noteworthy Financial performance in the quarter that included growth in earnings per share to $2.33 15% above last year's Q1 level Expansion of segment operating margin to 12.1 percent, achieving an increase of 20 basis points above last year's level and generation of $2,100,000,000 in cash from operations.
Our continued strong cash flow is key to our cash deployment strategy to generate value to shareholders through share repurchases and dividend payments. In the Q1, we repurchased over 5,000,000 shares of stock for approximately $460,000,000 and paid slightly under $400,000,000 in dividends. These combined Cash deployment actions returned over $830,000,000 to shareholders in the quarter. We continue to execute our strategy through solid performance
on our corporate business
and by winning key competitive and follow on awards to extend our franchise programs. We also expanded our international business activities and continued our measured pursuit and exploration into adjacent new businesses. Let me begin with a brief summary of our key order bookings in the quarter. Noteworthy awards included Aeronautics receipt of an IDIQ award On the F-twenty two program for a 10 year fleet modernization and extension under the Raptor Enhanced Development and Integration Program with a potential value of almost $7,000,000,000 and LRIP 8 long lead funds for 29 new F-thirty 5 aircraft to the U. S.
Government. Additionally, we were awarded funds for long lead acquisition of 4 F-thirty 5 aircraft for Japan. Mission Systems and Training received $700,000,000 for 2 additional Littoral Combat Ships, Increasing our LCS work backlog to 6 vessels. And our Aegis team successfully won a competitive award for the Combat Systems Engineering Agent Program. This award extends our multi decade legacy and leadership on this important missile defense system.
Finally, our Space Systems team won a long lead contract to begin construction of 2 additional spacecraft on the SBIRS military satellite program for the U. S. Air Force. This award brings our backlog to 4 spacecraft And on this critical national program that provides worldwide early warning detection of ballistic missile launches. These new awards and our backlog of future work are direct indicators of the close alignment of our portfolio of products with customer strategic priorities and requirements and serve as a foundation for the future.
Turning to operational performance, Our five business areas continue to execute with exceptional focus and skill in providing critical services and products to customers. While the quarter contained numerous accomplishments, I would like to highlight 2 notable successes and provide a brief update on F-thirty 5 key events. First, as part of the national strategy to pivot to the Asia Pacific region, our Littoral combat ship, the USS Freedom, began its deployment to Southeast Asia. We are extremely proud to have our ship chosen to do the inaugural deployment of LCS Class vessels to Southeast Asia. It is a testament to the maturity and capabilities of our innovative multi mission ship And we look forward to her contributions to the 7th fleet.
While visiting leaders at Pacific Command this quarter, I had the opportunity to go onboard Freedom While she was docked in Pearl Harbor en route to Southeast Asia, the pride of the crew in their ship and her capabilities was inspirational and only serves to reinforce our critical role to provide these revolutionary warships to the Navy. The next key operational achievement was accomplished by our Space Systems business with their successful launch of the 2nd silver satellite for the U. S. Air Force. I had the privilege to be at the launch site in Florida in March with our customer to watch the event.
This satellite joins the currently deployed SBIRS space and expands the constellation of early warning missile detection satellites. In this era of increasing proliferation of ballistic missile threats From Rogue Nations, SBIRS provides vital intelligence and defense warning to our country and allies. We are honored to be providing these critical national to our country and look forward to delivering the remaining 4 satellites in our backlog. Moving to F-thirty 5, Key accomplishments in the quarter were deployment of CTOL aircraft to Nellis Air Force Base for operational testing and evaluation and completion of the 1st operational mission conducted by Air Force pilots the 1st operational short takeoff vertical landing at Marine Corps Air Station successful completion of the 3 year wing flutter testing program on the CITOL version with clean results and the 1st nighttime vertical landing of a Stovall aircraft at Patuxent River Naval Air Station. These accomplishments highlight the increasing maturity of the program.
We are providing increasing levels of aircraft capability and performance to the multiple service branches to enable expansion of pilot training and operational evaluation of this revolutionary platform. I'd like to now turn to the status of DoD budgets. Since we last spoke in January, the President signed into law The Consolidated and Further Continuing Appropriations Act of 2013. This act extended funding for the operations of all federal agencies through September 30, 2013. It included full year appropriations for defense, military construction and Veterans Affairs.
This continuing resolution will fund all other government agencies at last year's levels. With the approved FY2013 DoD appropriations of $527,000,000,000 our key programs continue to be supported and funded under the full year appropriation. Examples of that support were seen with the appropriations increasing C-130J procurement to 16 aircraft from the previously planned level of 7 And funding of almost $400,000,000 for the continuation of the MEADS program. However, funding appropriated through this act remains subject to the automatic budget cuts outlined under sequestration. We are encouraged by recent alternative budget Proposals offered by various members of Congress to modify or eliminate the level of DoD budget reductions required under current sequestration.
One version proposes no additional budget reductions to defense budget levels, while another version proposes approximately $250,000,000,000 of reductions from Defense over the next 9 years. Adoption of either of these competing budget versions would represent a significant improvement over the current $500,000,000 in budget cuts required under sequestration. Beyond FY 'thirteen actions, The President submitted his fiscal year 2014 budget proposal earlier this month. The proposed level for the baseline FY 2014 defense budget was outlined at $526,000,000,000 a level essentially equal to the current FY 'thirteen appropriations level. Initial insight into program priorities contained in the President's FY 2014 request shows strong alignment and budget support for a number of our key Programs such as the F-thirty 5 Joint Strike Fighter, Littoral Combat Ship, Missile Defense Systems and higher quantities of C-130J Aircraft.
It should be noted that the FY 2014 proposed budget does not account for the implications of sequestration that went into effect in March 2013. The impact of on our business has been minimal to date and Bruce will provide some modeling sensitivity on our 2013 financial outlook of sequestration in FY2013. Turning to the global security environment. Rising tensions and threats on the Korean Peninsula, coupled with ongoing Conflict and instability in the Middle East only reinforce the complexity of maintaining global security. The need for Spectrum of flexible and effective products to help maintain global security is growing more acute each day.
Lockheed Martin products are foundational assets in the preservation of global security. Recent deployment of our products by the Department of Defense Into the Southeast Asia region include placing F-twenty two fighters in South Korea and deploying the THAAD missile defense system on Guam, the Littoral Combat Ship with the 7th Fleet and Aegis Missile Defense Systems. These deployments highlight the key strategic value and deterrent capabilities of our unparalleled products to National Defense. Our portfolio remains in direct alignment with this global security mission And we look forward to providing critical defense and security solutions to domestic and international customers. I want to turn briefly to our focus With the international customers this quarter, expansion of international revenues remains a key component of our corporate strategy and we are on a path to grow international sales from approximately 17% of total revenues last year to at least 20% in the next few years.
As we've outlined previously, Key drivers of that expected growth will be higher levels of international work on the F-thirty 5 with growing levels of aircraft deliveries to our partner countries, plus C-130J aircraft, F-sixteen aircraft and missile defense solutions such as THAAD and Aegis. Direct in country interaction and listening to the needs of customers are essential components to successful international relationship building. This quarter, I had the opportunity to meet with key customers in Israel, United Arab Emirates, Saudi Arabia and Italy. Discussion centered on how our corporation can help them with their diverse spectrum of security needs that range from fighter aircraft to missile defense systems to cybersecurity. While in Saudi Arabia, we inaugurated our new in country headquarters that will enable development of partnerships to create products and enhance our offerings in technology, aerospace and security sectors.
The common theme of the meetings was the universally held belief The global security environment is only becoming more complex and there is a widespread desire to utilize many of our products and leading edge solutions to solve their most critical requirements. Before I ask Bruce to give you some color and details on our financial performance, I want to close my comments by providing some insight into 3 emerging technologies and adjacent pursuits of the corporation. As we have outlined in the past, one of the new technologies we are examining is in the sustainable and alternative energy generation field through a process called Ocean Thermal Energy Conversion or OTEC. This technology uses the temperature variations of ocean depth layers to power thermal exchange equipment and generate electricity. We have created unique intellectual property and expertise in Thermal Exchange and recently signed a memorandum of understanding to utilize our intellectual property and begin exploration of the design feasibility of a plant to generate electricity on a commercial scale.
This agreement is expected to lead to a contract We'll fund our development efforts for a 10 Megawatt pilot plant anticipated to be located off the coast of Southern China. We are excited about the potential future prospects of this technology to generate clean, renewable electricity. The second adjacent market I'll give you an update on is our expanding commercial aircraft pilot training activities Using simulators from our SIEM Industries business that develops and manufactures full motion and fixed base civil aviation flight simulators for airline customers and independent pilot training centers worldwide. As a leader in commercial simulators for Boeing 737 and Airbus A320 aircraft, SEM recently extended its product line with simulators for the Airbus A330 and Boeing 767, 777 and 787 aircraft. SEM Industries' broad product offering enables us to offer a very affordable training solution to the U.
S. Air Force's next generation KC-forty six Tanker Program. These growing activities and opportunities in this area demonstrate the synergy that exists between the unique low cost commercial offerings from CIM Industries and their applications to future DoD programs. The Air Force is currently evaluating competitive bids for pilot training on the KC-forty six tanker with a decision on the winning bidder expected later this year. The 3rd new business opportunity area I'll highlight has recently emerged from our Advanced Materials Studies Group and is in the area of water purification.
We recently received a patent Perforine material, which is a molecular filtration solution designed to provide clean potable water. The Perforin membrane features holes that are 1 nanometer or less in a graphene sheet and are small enough to trap sodium, chlorine and other ions from seawater, while dramatically improving the flow through of water molecules. This flow through is 100 times better than current reverse osmosis systems, making it more effective desalination at a fraction of the cost. Access to clean drinking water is becoming more critical as the global population continues to grow. We believe that this simple and affordable solution has the potential to be a game changer for the water industry.
We are also investigating other applications for purparene such as biopharmaceutical separations and removal of chemical substances and compounds from water used in oil and gas wells. The pursuits I've highlighted today are only a few of the innovative and expanding portfolio of intellectual property and products that offer future growth prospects for the corporation. We will keep you apprised of our progress in these areas. I'll now ask Bruce to go through some of the details of our financial performance and then we'll open up the line for questions.
Bruce? Thanks, Marilyn, and 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, an overview of the quarter. Sales in the quarter were $11,100,000,000 down slightly from last year, but ahead of our expectations at the beginning of this year.
Segment operating margin was strong at 12.1%, a 20 basis point improvement over the Q1 last year. Our earnings per share were $2.33 up 15% from last year. We generated $2,100,000,000 in cash from operations and we 5,100,000 shares in the quarter. So I think we're off to a good start in 2013. Chart 4 shows our sales for the first Quarter versus Q1 of this year versus last year, aeronautics sales decreased by about 14% compared with last year.
However, this was slightly better than our expectations when we spoke in January as we had higher aircraft deliveries than planned in the quarter. Our sales in the other four business areas were also stronger than expected, particularly in Missiles and Fire Control, which also benefited from additional product deliveries and volume in the quarter. I should point out that with the implementation of sequestration delayed until March 1, we saw minimal impact to the quarter, We would expect that impact to grow as we move forward. I'll discuss sequestration in greater detail in subsequent charts. Moving to Chart 5 and our Q1 segment operating results.
Our segment operating profit was comparable to last year's level With the increase in margin offsetting the impact of lower sales in the quarter, we continue to have strong program execution and are taking appropriate cost Turning to Chart 6 and earnings per share. EPS in the quarter was 15% higher than a year ago, driven primarily by the lower pension expense as a result of our contributions at the end of last year and the benefits of the R and D tax credit. You'll remember that we mentioned on the last call that the Q1 would have the benefit of the full year 2012 credit as well as the 2013 Q1 credit You'll turn to Chart 7, we'll discuss our cash from operations in the quarter. As expected, our cash The flow in the quarter was very strong at nearly $2,100,000,000 more than $1,500,000,000 higher than the level last year. Although last year's level was reduced by roughly $500,000,000 pension contribution, we not only had strong operational performance, also had the benefit of a $540,000,000 tax refund in the quarter resulting from our pension contributions at the end of last year.
We expect that cash generated this quarter will be the highest for the year as we have both pension contributions and Tax payments planned in future quarters that did not occur in the Q1. On Chart 8, we'll discuss our cash return to shareholders. We returned over $800,000,000 to shareholders this quarter through our share repurchases and industry leading dividend yield. The level of share repurchases was almost double what we did in the Q1 last year and dividends were higher as a result of our 15% increase last September. Moving on to Chart 9, we'll discuss our updated view of the guidance we provided on the last call.
You'll recall that our January guidance Not consider the impacts of sequestration. Since then, sequestration did become effective on March 1. But as I I said earlier, its implementation had minimal impact on our performance this quarter. Unless revised by Congress, however, we would We expect to see the effect of sequestration having impact throughout the rest of this year. We tried to model these potential impacts by assuming a peanut butter spread of the reductions to our U.
S. Government business awarded with FY 'thirteen funds. Or said differently, we did not assume any flexibility on our customers' part to favor 1 program's budget over another. Using that approach, we estimate a potential 8.20 $5,000,000 impact to our sales in 2013. With the strong results of each of our 5 business areas in the Q1 though, We believe our current sales outlook remains within the guidance range we provided in January and I'll explain that in more detail on the next chart.
Chart 10 shows the methodology we used to develop our estimate of the impact of sequestration on our 2013 sales. At the midpoint of our guidance, we would expect just over 3 quarters of our sales or about $35,000,000,000 to be generated from our year end 2012 backlog. And we would expect sales to non U. S. Government customers from orders received this year to be around $2,000,000,000 or so.
Neither of these amounts is expected to be directly impacted by sequestration. However, our original estimate As we model the estimated impacts over the next three quarters, we project a reduction of around $825,000,000 in sales, primarily impacting IS and GS and MST. On Chart 11, we provide our updated guidance. Assuming the modeling from the previous chart and factoring in our better than planned results in the Q1, we now expect sales will be near the low end of our guidance range. Even with the lower sales expectation, we are maintaining our segment operating profit and cash guidance reflecting our growing confidence in our performance for the rest of 2013.
And we are maintaining our earnings per share guidance range of $8.80 to $9.10 So I'll emphasize that this range does not include restructuring charges, if any, associated with sequestration as they're unpredictable at this time. And finally, we have our summary on Chart 12. The Q1 represents a strong start to the year with better than expected sales volume and strong segment operating Profit and cash from operations. These results continue to reflect strong program execution, the proactive cost reduction measures we're taking and the strength of our portfolio. And we continue to focus on actions that create value for our customers and our shareholders.
With that, we're ready for your questions.
Please return to the queue for any follow-up questions. Our first question comes from Joe Nadeau of JPMorgan. Please go ahead.
Thanks. Good morning and good performance. Hey, John. It's Marilyn. I actually had a question for you on The extensive comments you gave on the non defense portion of your business, which is small, but seems like you're targeting quite a bit for growth.
And really just from 2 angles, one, because as you know, this has been a tough, Tough thing for defense companies to do in the past to diversify during a downturn. So the two questions are, 1, in your approach to the market, How are you orienting the company to really to impact commercial markets, which has really Been a difficult thing for companies to do. And I just mean in the difference in the customer base relative The government, it's I guess comments there will be good. And then secondly, from a risk standpoint, What kind of capital are you putting at risk and how are you considering that going forward? Thanks.
Thanks for the question, Joe. Yes. First off, I would say that the things that you're seeing coming forward are things that we've been investing in for a number of years. As a company, we're a technology leader. We We talk about saying that we do hard stuff, we do difficult things and try to work on big Things that are affecting the global environment, the global security environment.
So we're always investing in the future in that regard. And we have 60,000 scientists and engineers that are working on things not only on our core products and services today, but also looking at ways to give our There is an advantage or look at new areas that we can help in global security needs. So even as our customer budgets decline, We're going to continue to invest in these new technologies because we think that's really important that we do that. In terms of orienting us to commercial markets, I would say that The things that we're doing right now are things that are, as I've said, we've been investing in for some time. And while it is a different customer base, they are large projects much like we do large projects across the corporation.
In terms of the risk, these are not big needle movers in the near term. We continue. We're not looking at a large cash investment. The ocean thermal energy conversion we've been working on since the 70s. We increased our investment in past 5 years, but it's Measured and disciplined investment that we make in R and D just as we do across the business.
So From that standpoint, it's a matter of not putting any capital at risk, but we do expect these to be fully funded. In fact, if you look at OTEC, that Highland plant will be fully funded by our partner as we bring our intellectual property forward In that arena, in terms of the periphery, we did a we got a patent, but we are now looking for opportunities to partner on taking that one forward. So we partner with companies in the commercial market. That's what gives us the capability to go into those new markets and that's how we'll approach them.
Our next question comes from Robert Spingarn of Credit Suisse. Please go ahead.
Good morning. Good morning.
Good morning.
Marillyn and Bruce, very nice quarter. If I could just go back to the sequester Discussion for a moment. I was going to ask Bruce, if you could give us a little bit more color on why we don't See more of an earnings or margin impact from the lower sales or is it simply that's already embedded in the range? And then more specifically, Bruce, on
your modeling discussion, you
talked about peanut buttering, the Scott, you talked about peanut buttering, the GFY13 funding that impacts this year, but what percentage of Why funding for Lockheed is beyond 2013? I would imagine with the long cycle nature of your product lines, it could be a large
Yes. So let me try to address both those questions, Rob. So why profit And cash are not necessarily impacted or why we didn't change the guidance for those two elements versus what we did do for sales. A lot of it is because of the Q1 quite honestly. And obviously, we were higher in the Q1 for sales as well.
But we had good results Pretty much across the board all five business areas beat our plan for them in terms of both sales and operating profit. I think as we look forward for the next three quarters, we do expect to see some pressures for the reasons that I described from sequestration. As I said earlier, they've not played out at this point, but we do expect them to happen in the next three quarters. As we look out for the planned risk retirements And what we accomplished in the Q1, we think those are stronger as we sit here today than maybe we thought they'd be At the start of this year and that's the reason we didn't change the profit guidance. Cash flow obviously $2,100,000,000 in the first Quarter very strong, stronger than we had expected honestly.
And that's the other reason why we think that's going to carry on through the rest This year as well. That's the reason we didn't come down off of our cash as well. I think your Second question was, so how much of the FY twenty thirteen carries over into next year? I made the comment Rob, the sales that we got from our backlog at the end of 2012 is about 77%. So think of that as new or excuse me, FY our calendar year 13 sales originating 77% of which come from the 2012 backlog.
That's not an unusual pattern for us at all. I'll say next year we would It's expected to look very similar to that. So you should think of that as probably 25 ish, maybe a little less than that percent Of our sales in 2014 will need to come from orders received in 2014 and manifest Sales in 2014. So that pattern as I look back over time has been a fairly consistent one not at all unusual for what we're
Our next question comes from Rob Stallard of the Royal Bank of Canada.
A quick question on capital deployment. Do you expect there to be more consolidation in the defense industry as we see these budget pressures playing out? And would you see Lockheed being participating in that? And also to follow on from your comments, Marilyn, about these adjacent markets, would you potentially
In terms of consolidations in the defense industry, I think As the spending contracts, we would expect that there would be more consolidation. It's just at what level And it's been communicated to us by customers. They think that at the prime level, it's about right in terms of the number of Companies that are prime, so it would probably be the 2nd, 3rd tier or below that we will see consolidation. But I certainly expect that because the economics will dictate that with the contraction of the budgets. In terms of acquisitions into broadening our acquisitions, we're going to stay into the near We prefer to do joint ventures and teaming where it makes sense.
And we'll continue to look at our acquisition strategy of the string referrals Approach and look at what will line up with the capabilities that we need in the markets that we want to move into.
Our next question comes from Doug Harned of Sanford Bernstein. Please go ahead.
Good morning.
Hi, Doug.
I'd like to understand how you're thinking about The longer term top line outlook because on one hand, if I look at the backlogs as they Played out in this quarter. I mean, as I look at it, IS and GS appeared to be the most worrisome and that obviously could get hit by sequestration. When you talk about contraction, it's in the budget, it sounds like you are looking at a shrinkage overall in your top line. And if I pair that up against The new ventures you're talking about going into, I mean, I know that OTEC and the reverse osmosis Purification programs, those were going on 15 years ago. Has are you looking at bringing those forward more as a substitute for A contraction in the defense revenues, so if something happened technologically that's caused those to leap forward and become a more prominent effort?
Thanks for the question, Doug. Just to address Where we see our growth, we do know that our core domestic defense business will flatten, potentially So what we're focused on is growing our international business. That's where we expect that to offset that and continue to grow. As I've Said in previous calls and today as well, we're currently at 17% of
our sales. We expect to
grow that to 20% Over the next few years, we'll continue to focus on where that demand is for our missile defense, our TAC air, our air mobility, a lot of our C4ISR Satellite Technologies, a whole range of products that there continues to be a strong demand for internationally. In terms of these adjacencies and some that I've talked about Today, these are not needle movers in the near term. These are really things that we believe are long term with Large applications potentially in these technologies and they are not new to the horizon for us. As I've We've been working on them for a number of years. The fact that some of them have come to fruition, we're dealing with different partners and different customers.
And so They are ones that have come about in the last few months that have come on the screen and we thought it would be appropriate to share What's happening in those, but really our growth our top line growth will be on our core and near adjacencies both domestically and internationally in the business.
Doug, I might add just a little bit. I think on your last question you asked about sort of have the Technologies sort of aligned at this point in time. And I think that's probably a fair characterization. I think they have sort of aligned here. We've been experimenting with some of the early materials that led up to the purfering Products for probably the last 7 years or so through our Advanced Materials organization.
And that's sort of what's Just come out here, I think at the end of 2012 is with a product that we think provides a sort of capability that we've described with Perforin. On the OTEC side as Marilyn said earlier, we've been doing that literally since 1970s. We actually had Highland plant in Hawaii, off the coast of Hawaii that's been working much, much smaller scale than the one we're Talking about building going forward, but we've had that operating for probably the last 5 years or so. So some of the technologies that come together, some of it's just been the ability to Scale those technologies particularly in the OTEC side of it. And so I think that's what we're seeing.
It's sort of the culmination and then coincidentally they're all sort of materializing here at the same time. Frankly, very opportune time for us because that's where we are seeing some pressure with our largest domestic customer.
Our next question comes from Jason Gursky of Citi. Please go ahead.
Good morning, everyone.
Good morning.
Hey, just a clarification question and then a more meaty one. On the adjacencies, can you talk about Where you are as a percentage of revenue today and what your targets are? And then is this a question of Potentially selling these intellectual property, right, which is the dollar tier. And then on the meaty question, Bruce, can you talk A little bit about the cadence for cash for the rest of the year, given all of the moving pieces with the pension contribution, The tax payments and then we also I think you've got the DoD moving from net pay of 15 days and 29 days. I'm just wondering if that's going to have any impact on the cadence of the cash for the rest of the year.
Yes. Jason, good question. Let me I'll answer both and we'll see if Marilyn wants to add anything to what I've come up with. So on the adjacencies, how big? You should think of that as being fairly small.
I mean literally as below 5% of our overall Sales right now, we're hoping to grow that some going forward. The biggest elements we've got right now are sort of in our energy Business as well as our cybersecurity business and those are 2 that we've talked about fairly consistently on the calls. You should think of those as again being tough, I'll say low single digits percent of the overall sales of the corporation hoping to grow those going forward. The products that Marilyn described in her prepared remarks would just add to that, but not significantly I'll say over the next 5 year period of time. We're just really trying to convey the message that we 1, we like to think that we do difficult And all these projects that we're talking about have difficult in their middle name, if nothing else.
And we think We're aligning our capabilities and the innovative capabilities of our workforce with products or with That need to be solved on a big scale and that's what we were trying to tee up for you. As far as the cadence of the cash, I'm glad you asked that. I was hoping to work that then at some point in the conversation anyway. So obviously, we're not going to do $2,000,000,000 a quarter when we're Outlooking $4,000,000,000 for the year. You should think we had no pension contributions and a tax refund in the Q1 of this Sure.
We should be over the next three quarters, we should have pension payments in the second and third. We'll actually have 2 tax payments just the way the calendar lines up in the second quarter And then the tax payments in the 3rd and 4th. So what you should see, especially in the second quarter is we'll have Cash flow down considerably. I mean, probably to the point of on a free cash flow basis, slightly better than positive we're hoping, but down Pretty significantly. And then I would expect it to grow up to the $800,000,000 $900,000,000 in the last 2 quarters or so is what the expectation is as we sit here.
You asked about the payment cycle and so forth. And I'll tell you, we've and I think the industry at writ large has seen actually pretty good performance out of the payment offices where we get the most The bulk of our collections from our customer, they've been paying typically quicker than sort of the statutory rates that have been paid In the past, what I am watching for going forward in particular, Jason, is the effects of workforce furloughs on the part of the U. S. Government and particularly as that affects our paying offices. And so you can imagine a scenario where people will be furloughed.
I think the current thinking in the government is One day for 14 weeks in the months ahead. And the question is, so is everyone paying contractors as 4 days as they are in 5, I've got to believe that's not going to be the case. I would say though that's expected to be An impact in The fiscal year and not necessarily for the calendar year because obviously the fiscal year went in September and we would expect the next calendar year not to have those sorts
Our next question comes from Rich Zaffran of Buckingham Research. Please go ahead.
Hi, good morning.
Good morning.
Wanted to ask you about book to bill. So if I did it right, looks like you had book to bill of roughly 0.6. And I think that's about what you did 1 quarter last year. So I thought maybe you could comment on expectations for book to bill this year and how you feel about full year book to bill being either one times or higher?
Yes. I'll try that one as well, Rich. So I think your math is right. It was a 0.6 Book to bill. Actually, as we look at the Q1 orders, we actually did better than we expected to do Pretty much across the board for orders for all of our business areas.
And in particular, I'll say I think that's one of the reasons why some of our short cycle businesses like IS and GS and sort of the services component of MST Actually, it fared better in sales in the Q1 is because we did actually receive slightly higher orders in the quarter than we'd expected to. Going forward, I think 2nd quarter is going to be the lowest quarter from a backlog perspective of the year and then we'd expect it to rise Thereafter, so we expect second half orders to be higher than first half and the fourth quarter to be the highest quarter Of all the quarters, if you will. And that's our typical pattern anyway. There's a couple of things I'll point to that you might Be watching out for in the Q2. We have a few high dollar items mostly within our Aeronautics business area.
So we'd expect to get The second order for close the second order for 18 aircraft for F-sixteen aircraft, I should say for Iraq, Probably get an order for a couple of C-130s from Saudi Arabia. There's a possibility we'll close on the Indian C-one hundred and thirty is second in C-one hundred and thirty buy for India for 6 aircraft. We still have 6 international aircraft on Lot 6 F-thirty 5 that have yet to be sort of fully funded via an undefinitized contractual action or EUCA that we would hope would happen in the Q2. We should get additional funding for even greater aircraft on LRIP 8 for F-thirty 5. And then switching to MST, We should be getting finalization of the MH-sixty Denmark helicopter contract And some ground radar business within MST.
So those are sort of the dollar awards that you want to watch, the high dollar awards. Strategically, there's a couple of big items as well, almost all of them within MS2 in the Q2. So the air missile defense radar, AMDR program, We expect to be awarded in the 2nd quarter as with Space Fence. This is the Sort of the space debris tracking radar, if you will, from Earth that we expect to happen in the Q2. And then lastly within MST, The KC-forty six training activity that Marilyn mentioned in her prepared remarks is also something that we would expect to domino Either late in the Q2 or early 3rd, the rest of the year we're hopeful.
Obviously, we've got some missile defense products Hack freeze and fads for a number of customers within the Middle East. And then recently if you saw some of the FMS activity just came out, we're hopeful to have Some weapons on F-fifteen's and some capabilities for helicopters with Saudi Arabia as well as the Potential to sell additional S-16s to the UAE. So whether that one will happen between now and end of the year, maybe a little bit sporty, We're focused on that and hopeful that that could occur. I should mention probably that we've also got Activities within Singapore and South Korea for the F-thirty five, again, not sure if those will happen this year or not, but they're on the Custom ones that we're watching very closely.
Our next question comes from George Shapiro of Shapiro Research. Please go ahead.
Yes. Good morning, Bruce.
Hi, George.
One just little one and then one I'll Put together, you mentioned a contractual settlement on the F-sixteen in the quarter. Could you kind of ballpark how big that was? And then my more Macro question is, if you look at historically defense outlays and track them against military contractors, Very rarely does a military contractor vary a heck of a lot from the numbers. And if you look at for 14, the outlays for procurement and R and D probably going to be down at least 10%. So I guess I ask The question, why won't your revenues be down similar to what you would expect?
Yes. So George, I'll take those. So the F-sixteen, the contractual resolution, you should think of that being in the I'm not even sure it approached But think of it in the $10 ish million range, maybe a little less than that. So not a particularly huge item, but one has been outstanding for quite a while And we're glad to have it finally settled. I literally think this is one that's probably been around.
It does have quite a few of these contractual resolutions we've had Settle in the past for probably close to a decade. So it's good to get that one behind us. As far as the outlays, you're looking at the defense outlays versus the contractor. I'll remind you again that 61% of our sales roughly last year were from the DoD. So there's a full Almost 40% is non DoD.
Obviously, the biggest component of that is the international. We do expect, as Marilyn said, to grow the international Component of our business, which would help maybe explain why we don't go down to 10% you're talking about there. And then what I would suggest, George, is that Even within that reduction in the procurement and R and D, you have to look at the individual programs within the DoD budget, Because not every program within the DoD budget is going down 10%. And it ties into the priorities of the customer and our alignment of our portfolio with those priorities. So we would expect the F-thirty 5 to grow, our air missile defense programs to grow And help to offset that.
And on the international side, obviously, as we mentioned earlier, the air missile defense components, especially growing over the next few years, it helps To offset that reduction, I think you're seeing in the in sort of the high level math that you described.
Our next question comes from Howard Rubel of Jefferies. Please go ahead.
Thank you. I want to ask more of an operational question. And For example, if we look at aeronautics, Marilyn, you are able to hold the decline, For example, in the C-one hundred and thirty to about $10,000,000 despite seeing $175,000,000 decline in revenues, which is pretty impressive Sort of action and if we look across some of the other businesses despite difficult revenue numbers, The margins were pretty darn good. Could you talk a little bit about with some detail on some of the things you're doing, whether it's headcount or floor space And because no matter what happens with the sequester, I think there's just going to be a relentless pressure on the business for a while.
Well, we're definitely focused on operational performance. So I think you characterized it well in terms of talking about it being operational because We've been not only are we driving improvement even as we reduce the rate on the C-one hundred and thirty J, we're able to hold Our position relative to profit on the program. So I think you're seeing the results of that. And at the same time, we're It's very much across our business working on reducing costs and increasing efficiencies and productivity in the business Through a lot of activities, not just operationally what's on a particular program, but all of that flows through to all of our So things that we're doing in getting out of facilities and reducing our overheads and the efficiencies that come with just Having a laser focus on cost across every element of the business is helping us to bring in better performance. Then within the C-one hundred and thirty, Jay, I mean, as it moves through its courses, you have a learning curve.
And so continuing to have productivity improvements As we continue with the rate of that program.
Howard, just an interesting little tidbit there. I know my aeronautics friends have pointed this out As we've done reviews with Maryland and the leadership team there, we've actually for the past few C-130s since we started building them at 24 aircraft a year. The hourly rate or the hours it takes to assemble that C-one hundred and thirty is we're actually Going better than we were when we were delivering 34 aircraft a year. So that's no small feat when you're on number what 4,500 aircraft Not 45, 2,500 aircraft through the line and it's this stage of the product development or product manufacturing cycle We've been able to make that. Those are real live reductions and just one of several instances that we can point to that are where we're taking the right Particularly on the manufacturing side of bringing down the product cost in line with the shrinking volume that we're seeing.
Our next question comes from Myles Walton of Deutsche Bank. Please go ahead.
Thanks. Good morning. First one is a clarification. Bruce, I think you had previously talked about $80,000,000,000 in backlog ending the year and I can't Call if that was with sequestration or without and if that number had changed? Yes.
So Miles, I think what I've tried to tee up is that We always expect that we take a downturn in the Q1, probably get further down in the second quarter. I think at the start of the year, I said we hope to get back around the $80,000,000,000 mark. That's still obviously a goal that we have, but I think it's It's going to be tougher assuming that the next three quarters are hit by sequestration. So those numbers You remember right, it was $80,000,000,000 but I'll say that's probably a tougher part as we sit here today because that did not compare the effects of sequestration. And of course, we would You would think that the orders in the fiscal year since we had more of our orders obviously coming from fiscal year 13 funds would be more significantly impacted than with sales in calendar year 2013 because less of those come from fiscal year 2013 funds.
A bigger number than the $825,000,000 of sales impact is what I would expect from an orders perspective. We're not yet at this point giving up on that and hopefully as the quarters go by, Miles will have a better idea what that looks like and we'll be able to Update that for you as we go through the year.
Our next Question comes from Cai von Rumohr of Cowen and Company. Please go ahead.
Yes. Thank you and great performance. Bruce, one of the things you highlighted was that EACs were better than expected. It was 4.70%, 35% of sales. That's substantially higher than it's been in any of the last couple of years.
Where do you expect it to be for the year? And two questions. Give us some color on the quarterly pattern as you did with the cash flow. And then where Notionally, can this number go in the future? Is it likely to come down to more normal levels?
Or is it still sustainable? Thanks so much.
You bet, Cai. So EACs, at least as I look at it, Cai, we actually were a little bit lower In terms of profit adjustments in the Q1 of this year as compared to what we did last year, so think of it still in the Sort of mid-thirty ish range, but slightly less, I think about $15,000,000 or $20,000,000 less this year versus last year. You asked for sort of the pattern going forward. We would expect to be within probably the 30 The 35% range each and every quarter going forward, probably down a little bit from last year overall. But of course the sales and the segment profit are expected to be down this year compared to last year.
So that's Probably following suit for the lower volume that you see there. Nothing really jumps out as I look at it as far as Spikiness, as we sit here today in terms of the pattern going forward that obviously changes as we do risk Retirement, we do them when we retire the risk, not when we necessarily plan to do the risk. So when I describe the pattern going forward, it's what we plan to do, but We could obviously do better or worse than that. We really don't have a reason to believe that the future necessarily going to look any differently than the past. I know that's been the subject I have a lot of writing, but it's the same methodology we've used consistently for a long, long time.
And that's been our pattern. We've kind of described that over time. I think last year was a bit odd in a couple of quarters because we had some large contractual resolutions that Jumped out that we're not in our historical levels. But going forward, what we see is still in that 30% to 35
And then you've mentioned that it was better than you expected. How much has that changed? Is that You mentioned that as a plus for the full year to offset the lower sales. Is that how much better does it look now Yes.
I don't know that I've got the numbers off the top of my head, Cai. But I would say We were not expecting to we got the benefit of both volume obviously. I mean, I think on the last call I had teed up that we were probably going to be down $1,000,000,000 year over year in the Q1. We ended up being down what about $800,000,000 We again across the board all five business areas were better in sales, better in profit. The sales obviously brought volume with volume in terms of profit on those sales.
If I had to guess a number, I would Probably offset maybe about 50 ish Plus $1,000,000 is probably what I would guess that happened earlier and somewhat higher than we'd It's Cai. That's a little bit off the top of my head. And we'll see what that looks like going forward. But again, I don't see a huge pattern shift as we go forward in the next
Our next question comes from David Strauss of UBS. Please go ahead.
Good morning. Good morning. Bruce, going through your sequestration math as it relates To 2014, is there anything besides international that would offset overall revenues Potentially being down in the high single digit range. And then Marilyn, a question for you in terms of sizing the business for sequestration. You obviously Hi, Laid here, further restructuring in IS and GS.
Can you just talk about maybe broadly how you view the business Size wise headcount from a headcount perspective, if sequestration does go through in full effect? Thanks.
Yes. So David, you asked me the first part of that question. So again, what I try to tee up and I won't just simply repeat myself, but We do tend to have a very similar pattern as far as the amount of sales that we derived from backlog year over year. As we've talked in the past, our long cycle businesses Aeronautics and Space in particular get 90 plus percent Of their sales in the following year from the backlog from prior years, that goes down probably IS and GS is our lowest Business that gets in terms of the percentage of sales that are derived from previous year's backlog, but think of that as probably 65 ish percent So 35% comes from new orders turning into new sales in the year. The thing about 2014 that I think we all have Remember is so 2013 is the peanut butter or across the board cuts.
2014 with the new President's budget, there is no peanut butter cut. So they can actually cut whatever I'll say it aligns with the strategy starting in government fiscal year 2014. That's different than what we saw or what we will see in fiscal year 2013. And where I would offer up, this is sort of the proof of the pudding of whether or not your portfolio aligns to the government's strategic interest or not in terms of the DoD's Priorities, we think ours does. We think ours has more staying power in that environment than in a peanut butter environment.
And that's what I think, David, I think it's maybe not all that well understood that I think does make a difference as we look into FY 2014 versus 2013. And Marilyn?
So to address the sizing of the business for sequestration, we are going to size the businesses As we get more clarity from our customers, frankly, it's difficult to forecast. I know Bruce talked a lot about modeling, but it really was The best we could do to model what that impact would be until we get better insight on their planning For sequestration, it will be difficult to say which programs get hit and therefore which programs what kind of headcount Might be modified accordingly. So there's a lot of uncertainty here. As Bruce said though, When you look at the budget request for FY 2014, it does certainly support not only the national security strategy, but it also Very much aligns with our portfolio. We'll continue to invest in new technology.
We'll continue to drive down our costs. And I think we remain well positioned to In this environment going forward.
Okay. Ali, I think
we're coming on the line. Maybe one last question, please.
Our final question comes from Sam Pearlstein of Wells Fargo. Please go ahead.
Thank you. I'm glad I got one in. Bruce, can you kind of discuss a little bit about the sales? Before you had said sales for the quarter would be about $1,000,000,000 below. I know you came in a little bit better on aircraft deliveries, but it looks like almost across the board MS and T, M and FC, ISGS space All running ahead of what you said, you would be doing in the 10 ks in terms of the full year.
So is there a reason why There was so much front ended. And what does that mean for the progression of the different quarters? Yes. Good question, Sam. So I tried to tee that up I think with Kai when he asked the earlier question that we were higher in the first Well, we expected I see that being about $1,000,000,000 down.
We actually ended up being $200,000,000 down. So there's $800,000,000 of goodness there. Think of it as a couple of 100,000,000 within aeronautics, so probably for a couple of C-130s earlier delivered than planned. The rest of it was volume. Missiles and Fire Control was up on just a percentage basis like 13% year over year in the Q1.
Most of that was the phasing or timing of deliveries of products there. So think of it as in particular tactical missiles, JASM Missiles, the multiple launch rocket system activities there, that's earlier than planned, but not necessarily an Certainly an upper for the year as we look at this at the end of the Q1. We also saw higher volume just I'll say cost Volume from a couple of awards including within soft CLS and with the Lantern Sniper activity within missiles and fire control. Some of our short cycle business, I'll say we were very pleasantly surprised in the Q1. I mentioned earlier that we were Going to that we actually exceeded our orders expectations in the Q1 even though you were looking at that as a 0.6 Book to bill ratio that was actually slightly better than we expected.
And on our short cycle business, we think that did translate into higher sales in the quarter as well. So Not sure if that will last throughout the year. That's one of the reasons we've put the guidance out that we did. But we're pleased to have that impact in the Q1. I think some of that is because we frankly saw, I'll say a sense of urgency to get things under contract prior to the end of last year when we thought sequestration was going to start In early January, I think we experienced a similar phenomenon at the end of February when the customer thought that sequestration was going to get in effect on March 1.
A number of customers thought that obligated funds would not be subject to sequestration if obligated prior to that. I think we've got rush to kind of get those under contract. I think we're seeing the benefits of that on our short cycle businesses. So maybe just to finish off my long dialogue here. But Going forward the next few quarters, I think our sales level are going to be similar in the second and third So what we experienced in the Q1 maybe down slightly because sequestration's largest impacts at least as we look for the rest of the year are going to occur in the second And 3rd quarters because you're kind of squeezing the full government's fiscal year sequestration cuts into the last Two quarters of the fiscal year.
So for us that's the 2nd and third quarter of the calendar year. I think we'll see bigger reductions there. I do think 4th quarter will be a larger quarter, the largest quarter of the year going forward even with the potential Reductions that have yet to be announced in fiscal year 2014 from sequestration. So that's sort of how it ties up. Think of the again, the Next three quarters similar maybe a little bit down because of sequestration to the Q1 and then a pop up in the Q4.
So to wrap up, I'd like to thank you all for joining the call today and for your questions, and we look forward to speaking with you in July. Thanks.
Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.