洛克希德·馬丁 (LMT) 2014 Q4 法說會逐字稿

Good day, and welcome, everyone, to the Lockheed Martin fourth quarter and full year 2014 earnings result 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, Shannon, and good morning, everyone.

I'd like to welcome you to our fourth quarter 2014 earnings conference call.

Joining me today on the call are Marillyn Hewson, our Chairman, President and Chief Executive Officer, and Bruce Tanner, our Executive Vice President and Chief Financial Officer.

Statements made in today's call that are not historical fact are considered forward-looking statements, and are made pursuant to the Safe Harbor provisions of Federal Securities Law.

Actual results may differ.

Please see today's press release, and our SEC filings, for a description of some of the factors that may cause actual results to vary materially from anticipated results.

We have posted charts on our website today that we plan to address during the call to supplement our comments.

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 Marillyn.

Thanks, Jerry.

Good morning, everyone, and thank you for joining us on the call today.

We hope that your New Year is off to a great start.

Let me begin by saying that I am extraordinarily proud of our Lockheed Martin team.

We finished another strong year in 2014, achieving excellent financial and program performance.

Our performance has the corporation well positioned to continue to deliver value to customers and stockholders in 2015.

The daily efforts of our employees are the foundation of our ability to deliver broad-based results across the Corporation, and I thank them for their ongoing contributions.

While Bruce will cover the financial results in detail later on in the call, I'm going to highlight a few key achievements and strategic items from my perspective as we closed out 2014.

Starting with new business, the Corporation continued to be successful in securing new order bookings for both domestic and international customers.

In the fourth quarter, we achieved a strong 130% book-to-bill ratio for contract awards above sales, and finished the year with a backlog of nearly $81 billion.

This marks the fourth consecutive year that we have maintained our backlog in excess of $80 billion.

Our new business success is aided by having the best-positioned portfolio programs in the sector, with direct and unique alignment to many of the essential programs identified by both international and domestic customers.

These factors have enabled us to build a strong backlog, consisting of multiple years of longer cycle production programs, and provides a strategic differentiation and financial foundation of future work.

I was also pleased that the international content of our backlog grew to more than $20 billion, representing over 25% of our total year-end backlog.

The international component has us well-positioned to achieve our stated goal of expanding sales from international customers to at least 25% of total corporate sales in the next few years.

This expected international growth also provides a significant benefit to our domestic customer, by enabling economies of scale and additional cost leverage, achieved through higher production volumes on programs across our portfolio.

Strategically, our corporate-wide emphasis on fostering and expanding customer relationships, and focusing on how we may best support their critical needs, continues to provide a pivotal role in securing new business awards.

This past quarter, I had the opportunity to expand our international relationships by traveling to the Middle East and meeting with key customers.

My activities in Abu Dhabi included participating in the opening of our Center for Innovation and Security Solutions in Masdar City, further strengthening the Corporation's nearly 40-year relationship with the United Arab Emirates.

I also traveled to Bahrain for discussions with high-level representatives on our products, and how we can best help them satisfy their critical national security requirements.

The common theme across my meetings was that all parties I spoke with reaffirmed their unwavering desire to secure the most effective solutions and products essential for national security, in spite of any volatility in world oil markets and price levels.

Another strategic focus area where we have a long record of success is the generation and deployment of annual cash flows.

In 2014, we generated almost $3.9 billion in annual operating cash, after making $2 billion in pension contributions.

This strong cash generation enabled us to provide a return of over 120% of our annual free cash flow to stockholders in 2014.

As we enter 2015, we are solidly on the cash deployment plan we outlined during the October call, where we identified our goal to make at least $2 billion in share repurchases in 2015, and to reduce our total outstanding share count to below 300 million shares by the end of 2017.

Share repurchases of this magnitude, coupled with our annual dividend payments, would result in returning virtually all of our annual free cash to stockholders over the next three years.

Beyond the significant returns of cash to stockholders, our increasing cash flow also enables us to invest in the future of the Corporation, in areas such as research and development.

We continue to expand our focus and allocation of resources on next-generation technologies and products.

In 2014, we increased investments in independent research and development activities to over $750 million, reflecting the third consecutive year of significant increases in this strategically important area.

We are constantly pursuing new technology-based solutions as we design and develop leap-ahead technologies to help address some of the world's most complex challenges faced by domestic and international customers.

These efforts will ensure that we stay at the leading edge of technology, and create potential foundations for future new business and important strategic positioning.

Moving to operations, one of the highlights of this past quarter was the near-flawless inaugural test flight of the Orion spacecraft.

This flight successfully tested key systems of the capsule to help pave the way for future missions into deep space, and capture the imagination of people around the world.

The flight successfully tested a number of technologies that are fundamental to future deep space missions, and included environmental and safety elements essential to the future of human space travel.

We are extraordinarily proud and pleased to be the prime contractor of the Orion vehicle, and look forward to proving this unique exploration vehicle -- I'm sorry -- forward to providing this unique exploration vehicle to NASA and our country for decades to come.

In addition to the Orion operational achievement this past quarter, key milestones were also achieved on the F-35 Joint Strike Fighter program, with progress and developmental testing and increased production quantity and tempo.

On the development program, a major milestone was accomplished with the F-35 carrier variant, successfully completing on-ship trials aboard the USS Nimitz.

The maturity and performance of the aircraft enabled achievement of 100% of the threshold test points, and also included multiple successful night landings and launches during the aircraft's first test deployment at sea.

Beyond the carrier test for the US Navy, we are also on track to provide the capabilities of this revolutionary fighter to our Armed Forces, with initial operational capability of the F-35 STOVL variant for the US Marine Corps later this year.

In the production arena, I am very proud of our Aeronautics team, as they achieved the delivery target of 36 aircraft in 2014.

This was particularly noteworthy, as the team was able to overcome a nearly one-month program hold for the engine anomaly that occurred last June, and still achieved annual aircraft delivery goals.

This achievement is further illustration of the program's growing stability and production ramp up.

Overall, the F-35 aircraft fleet continues to expand, with 109 production jets delivered since program inception, and fleet operations now surpassing 25,000 flight hours.

Customer support and funding for the program is strong and growing.

Finalization of the LRIP 8 contract was completed this past quarter, for 43 aircraft, reflecting a significant increase in order quantity above the 32 to 36 annual aircraft awards we received during the previous four fiscal years.

This new award helped bring year end 2014 backlog of aircraft on the program to 100 planes.

Looking forward, domestic and international customers, order phasing, outline of plant procurement of 61 aircraft for the upcoming LRIP 9 contract, further expanding the solid growth curve in aircraft quantity.

This increased rate of aircraft orders is an essential component to our ability to ramp up production levels and achieve the reduced price of the planes outlined in our blueprint for affordability agreement with the F-35 customer.

I would like to conclude my remarks with a brief status of government budgets.

Last month, the US government passed the FY15 omnibus spending bill to finance most federal activities through the end of the current fiscal year.

Passage of this bill eliminated much of the procurement uncertainty caused by operating under the prior continuing resolution constraints.

Looking forward, the White House is scheduled to provide Congress a proposed FY16 defense budget next week, on February 2. The proposed DoD-based budget is widely expected to be higher than the FY15 level, and above the mandated sequestration caps.

The higher budget request is in response to increased global security threats and military needs.

The FY16 proposed budget will then undergo congressional deliberations on final spending priorities and funding levels over the coming months.

While the impact of the likely higher FY16 proposed budget on future fiscal years is unclear at this time, a higher FY16 spending authority could signal bipartisan recognition of the critical need to increase DoD budget levels above the currently constrained limits established by sequestration.

These recent budget actions are positive steps in the creation of a more predictable and strategic approach to budget allocations, while addressing the fiscal challenges we face as a nation.

I will now ask Bruce to go through the details of fourth-quarter and full-year 2014 financial performance, our financial outlook for 2015, and then we will open up the line for your questions.

Bruce?

Thanks, Marillyn.

Good morning everyone.

I hope you are all warm and dry on this stormy day.

As I highlight our key financial accomplishments, please follow along with web charts that we provided with our earnings release today.

Starting with chart 3 and an overview of our year-end results, we had a stronger finish to 2014 than we were expecting when we last spoke in October.

Sales for the year were $45.6 billion, and I will discuss that in more detail on the next chart.

Segment operating margin was 12.3% for the year, about in line with our expectations, and the combination of higher sales and segment operating profit drove our earnings per share to $11.21.

Higher than the guidance we provided in October, but there were two unplanned items that had a net negative impact in the fourth quarter that I will discuss in a few charts.

Cash from operations was nearly $3.9 billion, after making $2 billion in pension contributions, including $1 billion in the fourth quarter, as we discussed at that time.

And finally, orders for the fourth quarter were a little higher than expected, resulting in our ending backlog of $80.5 billion.

So overall, we had a good finish to a strong performance year.

On chart 4, we will discuss our sales results in more detail.

In the fourth quarter, sales grew by almost 9% compared to the same period in 2013, with four of the five business areas showing strong growth in the quarter.

Aeronautics growth was driven by a volume increases on the F-35 production programs.

Missiles and fire control had higher deliveries of PAC-3 missiles, as well as higher tactical missile deliveries.

Mission systems and training had higher radar volume, including the startup of the Space Fence program.

And space systems grew, primarily due to the Orion flight test that occurred in the fourth quarter.

Our fourth-quarter performance led to full-year 2014 sales, achieving slight growth over the 2013 results.

On chart 5, we will review our earnings per share for the quarter and year.

Fourth-quarter EPS was $1.32 higher than the prior year, driven primarily by three items.

The change in the FAS/CAS adjustment from an expense in 2013 to income in 2014, the absence of restructuring charges taken in 2013, and a lower goodwill impairment charge in 2014 that occurred in 2013.

I will describe the goodwill impairment charge taken in the fourth quarter in more detail on the next chart.

For the year, EPS with more than $2 higher than in 2013, driven, again, primarily by the FAS/CAS adjustment change and the absence of the restructuring charge in 2014.

Turning to chart 6, we will reconcile our actual earnings per share results with the guidance we provided in October.

In October, we projected our EPS for the year to be around $11.15 per share.

And as I mentioned previously, we had two unplanned events that were not considered EPS outlook we provided last quarter.

The first of which was a special charge we took for a goodwill impairment in our tech services line of business in missiles and fire control.

The charge reduced our EPS by $0.33, and this is the second consecutive year we've had an impairment charge against this business.

And again, it reflects both the reduction in support activities in theater, as well as the increased level of competition we are seeing for this business.

The second unplanned event was the passage of the R&D tax credit legislation in the quarter, which generated a $0.14 benefit to EPS.

These two events lowered our outlook for EPS by $0.19, but were more than offset by the higher sales and segment operating profit in the quarter.

Chart 7 provides more detail into our cash deployment actions in 2014.

With cash from operations of nearly $3.9 billion, and capital expenditures of around $850 million, our free cash flow for the year was a little more than $3 billion.

And after making dividend payments of nearly $1.8 billion, and share repurchases of $1.9 billion, we returned 121% of free cash flow in the year.

Over the last 10 years, we have made $30 billion of dividend payments and share repurchases to our shareholders, or 108% of free cash flow, over that same period.

On chart 8, we show our backlog results over the last four years.

Our backlog levels have remained above $80 billion in each of the last four years, despite the budgetary pressures that our customers are facing.

As has been the case in prior years, a stronger fourth -- a strong fourth quarter in 2014 enabled us to achieve these results.

Chart 9 provides significant assumptions in our 2015 guidance.

Our FAS/CAS adjustment for 2015 will be income of $475 million, $175 million less than we anticipated in our trend information in October.

The largest reason for the lower adjustment was a reduction in the discount rate to 4%.

You will recall that when we re-measured our pension liabilities in the second quarter of 2014 as a result of our plan changes, we reduced the discount rate to 4.25%.

Since then, interest rates have continued to drop, resulting in the lower discount rate at year-end.

Asset returns in 2014 of 6%, rather than 8% assumed in October, make up the remainder of the lower income outlook.

While affecting GAAP EPS, these pension changes do not create the need for any additional cash contribution over the next three years.

As I noted in the October call, we do not expect to make pension contributions from 2015 through 2017, and our expectations of generating more than $15 billion in cash from operations over the next three years remains unchanged.

Consistent with our longstanding practice, our guidance does not assume an extension of the R&D tax credit until legislation is enacted.

If legislation similar to what was enacted in 2014 is passed in 2015, we would expect the EPS benefit to be comparable to the 2014 amount.

And consistent with what we discussed last quarter, we plan to make at least $2 billion in share repurchases in 2015.

Turning to chart 10, we provide our current outlook for 2015.

Our guidance today is consistent with what we provided in our trend information in October, except for the lower FAS/CAS adjustment.

We expect both orders and sales to be in a range from $43.5 billion to $45 billion, and we expect our backlog to remain above $80 billion at year-end for the fifth consecutive year.

We expect our segment operating profit to be between $5.1 billion and $5.25 billion.

Our EPS is expected to be between $10.80 per share and $11.10 per share.

And our cash from operations is expected to be greater than $5 billion.

Chart 11 shows the ranges for sales and profit by our business areas.

And finally, chart 12 is our summary.

2014 was a strong year, both operationally and financially.

We're confident that our portfolio has us well positioned for the future, and we remain focused on the cash deployment actions that our shareholders expect.

With that, we are ready for your questions.

Shannon?

(Operator Instructions)

Jason Gursky, Citi.

Marillyn, I just wanted to ask you about R&D and acquisitions.

You made some comments earlier about R&D, and investing in next-generation technologies.

And then it also appears, net of disposals, that you spent the most on acquisitions this year that you have since 2006.

I wonder if you could just provide a little bit more detail on the strategy with regard to R&D?

Where the spending might be going?

And how the customer is behaving these days, with regard to independent R&D versus them paying for your R&D?

And whether we ought to view the acquisitions that you have been making here of late as an extension of R&D?

You're acquiring technologies that perhaps you didn't have?

And where you find the growth areas, and just the strategy behind R&D and the acquisitions going forward, holistically?

Sure.

First to talk a little bit about R&D and new technology, we have been increasing our R&D expenditures over the past three years.

This year, we were up.

For 2014, we were up another 8%.

And we are doing that because we're not going to cut back on R&D, even though our sales are not growing at the same trajectory they have, maybe, for the past decade or so, because it is really the lifeblood of our Company.

And we are technology company, and we have to continue to invest.

From our customers' perspective, we do spend time with our customer on our R&D plans.

A lot of credit to Secretary Kendall in bringing us into the Pentagon to talk about our top IRAD expenditures, and areas to make that sure we are well aligned with what the priorities are for the Department of Defense.

And moreover, as we look at our customers around the world, we are looking at, how do we invest in research and development that will allow us to secure new business, and to grow our current business?

Beyond that, we are a long-cycle business, so we're constantly looking at how we can continue to invest for the long term, as well.

So it is a balance of both of those areas, to make sure that we're looking at things that would be giving our allies and our customers an advantage over their adversaries for the long-term.

In terms of how we address R&D and cooperative research and development, we look at both of those elements as being an important part of investment, but we also are doing things that are beyond IRAD investment.

For example, we use other avenues to develop next-generation products and solutions.

If you look at what we are doing on US Air Force's TX competition that is coming out in 2017, we actually had teamed with the -- South Korea to develop the T-50 supersonic trainer for their Air Force under an offset program.

And we are able to take that investment that we made in an offset program and point it toward the TX competition.

So that is a great example of where you might not necessarily see it in the value of an R&D investment that we are making those investments.

I think if you look back, years back, we did a similar thing on the C-130J, which is just paying dividends for us in the markets that we're operating in with the C-130J program, where we made investments in our Business along that line.

Taking it beyond that into acquisitions, yes, we did more historically than we have done this year in 2014.

There were areas that we're continuing to penetrate into our core, such as our Zeta Associates acquisition, and that being a very much aligned with our core.

Some areas, such as the healthcare IT arena and systems made simple, is an area that is a part of our IT work with the US government, where we have been, frankly, for the past 20 years, the top supplier of IT support.

And this is an opportunity for us to bring more to markets like the VA, medical, DoD medical, et cetera.

The Astrotech acquisition we made in space launch is very much aligned with our core with services there.

But then, we are also looking at areas to bring in additional capability to the Corporation in places where we want to take our core into new markets.

Like BEONTRA, with the IT work we are doing in airports, and things along that line.

What I will say is that, as we have said, we have a very strong cash deployment plan that we're going to follow, but we also are generating cash, and we also have a lot financing capability as a Company.

But that debt capacity allows us to have the flexibility as we see additional opportunities for acquisition that make sense for us that allow us to continue to invest in M&A.

So we will be looking at acquisitions that are, as you said, able to add capability, but also ones that open up new markets for us that are closely aligned to our core capabilities.

Ron Epstein, Bank of America.

Maybe just a follow-up on Jason's question.

By my calculations, you will -- you spent something like 1.5% of sales on R&D.

Is that enough?

When you look at other technology companies, they will spend multiples of that.

How do you think about that, Marillyn?

I don't think you can look at the absolute dollars, honestly.

Because I think, when you look at our portfolio, and you look at what we have done over the years, it's not a matter of percent of sales so much as it is the efficient expenditure of R&D dollars.

So we made choices in things such as JLTV, the joint light tactical vehicle, which was a large opportunity that we are pursuing that hopefully, the award later this year will bring to us, an opportunity that is a significant new growth market for us.

And that started with an acquisition some years ago that brought some technology in, and then we built on that technology.

So it's not just the dollar level on a percent of sales.

And the other thing is, if you look at things that, if you look backwards, I don't think we have missed anything.

In terms of our portfolio, and things that we have won because we haven't invested in research and development, for the long-term.

Pete Skibitski, Drexel Hamilton.

Maybe one for Bruce.

Bruce, I was wondering if you could help us -- again, maybe update us, like you did in the last quarter, on the cash from option bridge from 2014 to 2015?

Just because it looked like maybe cash taxes were a little higher than expected in 2014.

You've got, obviously, zero pension cash needs in 2015.

It seems like maybe $5 billion, as good as it is, might even be conservative.

Can you help us understand why that could be -- what you do?

Yes, so Pete, let me try -- I tried to give some of this in the October call, but I think it's probably worth repeating, just to make sure everyone is on the same page.

So I think the simple math would say, gee, you did $3.9 billion in 2014, you did $2 billion of pension contributions.

It seems like you should be around $5.9 billion versus the $5 billion.

I think there is two or three pieces -- probably two that drive most of that.

One is, we have additional -- because of the $1 billion contribution made at the end of the year, 2014, we are going to get, actually, a tax deduction that's worth about $350 million in 2014 that won't carry over into 2015.

We also had, in 2014, a tax refund of about $0.25 billion, so $250,000-ish or so, I think was the number.

So that is, what?

$600 million or so, that bridge from just a cash taxes, if you will, either refunds or cash out for taxes.

And then the last thing, if you just look at our -- at the level of income that we are projecting for 2014 to 2015 we're down a couple hundred million dollars.

So if you just translate that -- those earnings into cash, that pretty much makes up the difference, about the $900 million.

And again, I will remind you, Pete, we keep saying we are expecting to be a little greater than $5 billion, and I think that potential is still there.

Rich Safran, Buckingham Research

Rich?

You there?

Rich, your line is open.

Please check your mute button.

Shannon, let's move to the next one.

Carter Copeland, Barclays.

Marillyn, I really appreciate the comments on international post the -- post your visit.

But I wondered if you might give us a little bit more color about how you think about how much of your business is those core strategic capabilities that you are delivering to those customers?

Versus the stuff that I -- is perhaps more support-oriented, or perhaps commoditized in some way?

If -- is there a way to rack and stack your international business and say, this portion applies to the key capabilities like that in PAC-3 and the like?

And how should we think about that?

So I would say, first off, that the key areas of growth for us internationally are certainly in the missile defense area in Asia-Pacific and the Middle East, just as you mentioned.

It's THAAD, it's Aegis, Aegis Ashore, Patriot, potentially MEADS, we hope to sell.

In addition to that, F-35.

Those are core, and that is the majority of our growth in the international.

It's our core business that we are growing.

Now, we are -- we are having some additional areas of growth in things like Cyber, which is an expansion of work that we have been doing for years for the US government, that we are able to grow into other areas, our IT work.

But the big dollar items within our growth in the international are core business that we have.

C-130Js, continue to fill F-16s, the air and missile defense, the UK turret for the Scout vehicle and for Warrior, things of that nature.

Hopefully that answers your question, Carter.

Noah Poponak, Goldman Sachs.

Wanted to ask about two bigger programs -- new programs on which you are competing, and just get a broad update from you.

Maybe on LRS-B, I was specifically wondering if you could talk about where work would theoretically be done, and if capacity would need to be added?

And then, if there is any worthwhile update on JLTV?

And on that one, if you could potentially size what that could ultimately be for the Company, if there was a win?

Thanks.

First of all, on LRS-B, I can tell you that we're teamed with Boeing.

We think we have a very strong position on that program and pursuing it, and there will be award sometime this year.

And that is about all I can tell you about it.

I'm sorry, but that is about all I can say.

In regard to JLTV, it is a very significant opportunity for us.

The RFP is out, our proposals are due early in February, and the award for that is projected, again, this year.

We think mid-year.

We don't know.

Our guess is as good as yours, as to which quarter, because as we know, a lot of times protests emerge, and things of that nature.

But in terms of the program itself, it is a big opportunity for us.

Bruce, in terms of size, I think you --

Yes, I think, Noah, the -- I think the RFPK mount, and there is -- they are asking for various production quantities over various years.

The stated number of vehicles is somewhere around 17,000 vehicles.

And you can probably do the math as well as anyone, as far as what that total production program would be for.

But it's -- you should think of that as a multi-billion-dollar award for the initial proposal, which is the development program and the first few LRIP contracts.

And then it has got potential, obviously, well beyond that, for additional domestic vehicles, as well as the international marketplace.

So this is -- although the initial award that we are expecting to have happen this year, hopefully, without protest pushing it out, is not all that sizable.

The strategic opportunity is very great.

I could add, on that one, Noah, where we are going to produce it.

I can talk about that.

So it is in Camden, Arkansas.

We have a facility there where, just this past year, we went through the production review with the US government, and it was very successful.

And so we are excited about the opportunity on the JLTV.

Doug Harned, Sanford C. Bernstein.

I am interested in your thoughts around how you work with the changing budget?

And by that I mean, if you look forward, we are at a point where there are prospects for a rising budget, a rising base budget, certainly.

But at the same time, we're seeing the end of a lot of operational activity in theater that has been going on for many years.

So when you look at this, how do you think about your exposure to some of the con ops that have been going on?

Is there much left?

And where is it?

And then at the same time, how do you think about investing where there's going to be growth?

And not just R&D, but BMT, potentially facilities.

How do you manage this transition?

I would say that we spend a lot of time on our strategic planning as a Company, and keep a bead on what is happening in the environments that we are operating in.

And we look both in where the opportunity are relative to growth in this DoD budget as well as our focus on the international marketplace.

And as we look at the -- sure, there is a draw-down in regions where we are bringing our war fighters home, and that has some impact on things like our services business and things of that nature.

But where the real opportunities for ours are is to not only to continue to grow with the F-35 program, which today represents 17% of our sales, and will continue to grow to a larger percentage in 2015 and beyond.

The -- as we just talked about, the joint light tactical vehicle, JLTV, is a big opportunity for us.

We are looking forward to C-130J multi-year opportunity, littoral combat ship.

And as the US Navy moves forward with their 52-ship buy on the small surface combatant, so going beyond the current littoral combat ship, those are all areas for growth.

And as we -- we believe that we do have the strongest portfolio.

So we are constantly looking at, as the US government determines where they have to re-capitalize, they can't sit still, either, even though, in this current time frame, maybe the situation, in terms of a war environment, is not as high.

They used up a lot of aircraft, and a lot of systems and vehicles, in those wars, and they have got to re-capitalize them.

And we believe we are well-positioned to take advantage of that because we are continuing to focus on providing greater capability and new technology, and taking advantage of that advanced technology.

So that is where our R&D, our bid proposal, et cetera.

On facilities, we have looked at how we take capacity out.

We have taken out over 7 million square feet of capacity since 2009.

But at the same time, we have opened up some new labs.

We've opened up some new areas.

So, I think what we try to do is adjust our capacity to not only the business space, but to the areas where we need to invest to continue to grow as a business.

So I think we do a good job of assessing the changes in the environment that we are operating in.

And we adjust our facilities, our investments, and our pursuit of acquisitions in research and development funding accordingly.

Sam Pearlstein, Wells Fargo.

I wanted to actually somewhat follow up on that last question, which is that the guidance has top line down in 2015 a few percent at the midpoint.

You did make some $900 million worth of acquisitions.

So first part of it is what is the organic sales trend in 2015?

But then also, given budget trends, can you see positive year-over-year sales in 2016 at this point?

And if not, what does it take to get there?

Sam, I will take that one on.

So you are right, we talked about a roughly $90 million in acquisitions in the year.

I think the inorganic growth in the year 2014 was about a little less than $250 million.

And you should think of that growing to about $0.750 billion or so, about $0.5 billion increase in organic growth, year over year, from 2014 to 2015.

So that is where we see that playing out there.

I think it's important to note that our planning for 2015, and what we have talked about up to this point is all based on the current budget control act, without consideration of what we're -- what Marillyn was talking about in her opening remarks, about the potential increase in the FY16 budget.

And as we look at that, the interesting thing -- and I know I have talked to you about this in some of the investor conferences-- I think the interesting thing is not necessarily what happens with FY16; it's what happens with the budgets beyond FY16.

Because if you just get the spike in FY16, and then you go back down to the budget control act, you really go back down to levels that cause an aberration in 2016.

And then you are back to square one in FY17 and beyond.

It doesn't make a whole lot of sense, from a strategic planning perspective.

I will say, even with that scenario, though -- and again, we don't have either the spike in FY16 in our planning outlook, nor do we have anything at FY17 and beyond.

We do believe we will start to see growth in FY16, and particularly within the Aeronautics business areas, where we are expecting to see growth.

And I will say, as I sit here today, Sam, I feel pretty comfortable, actually, saying we are going to see some growth, organic growth, starting in FY16 or 2016, above the 2015 levels.

And at least our planning, Sam, for years beyond 2016, assumes that that growth continues.

So we're sitting -- actually looking forward to that, with the potential for, hopefully, some good news coming out of the President's budget process in the not-too-distant future.

Rob Stallard, Royal Bank of Canada.

It's Steve Cahall on for Rob Stallard.

Marillyn, I was wondering if I could follow up on Carter's question, and your comments about visiting the region last year?

You've made a lot of investments there, between what you mentioned at Masdar, as well as AMMROC.

Is your sense, in talking to your customers there, that the current energy price is going to have any impact on the pace at which export contracts could be awarded, in the medium-term?

We're really not seeing any pullback on their expenditures on national security because that -- in terms of their priorities, that is very important.

And it's true that, for a lot of our key countries, that is an important source of revenue for them.

But when you look at countries like the kingdom of Saudi Arabia and, UAE, Qatar and others, they have a very substantial government reserves.

And so, what they are looking at -- as long as the prices don't stay down for a long, extended time, which we -- none of us know how that will play out.

But we have not seen anything that would impact our portfolio, and what we bring.

So no change so far in their critical needs.

They still have -- still operate in dangerous neighborhoods, and they still have needs for missile defense and tactical aircraft, and a range of communication systems.

Perhaps there may be some pressure on some of our less priority programs, such as IT upgrades, or services, or things of that nature.

But in terms of the big-ticket items, and the items that I am having a dialogue with them about, it has not come up.

I think they're very much focused on their highest priority requirements, and those happen to be the things that we can bring to them as we move forward.

David Strauss, UBS.

One thing specifically at the F-35 program, it looks like last year, you had about an $800 million increase in sales, but no increase in profit, related to the production program.

Can you talk about what you've got baked into your numbers this year, in terms of any EBIT increase out of the production program?

And then, as a second question, Bruce, can you talk about the advance line?

I think it was like about a $500 million drag.

Can you just talk about the outlook for advances from here?

Yes.

So David, I think your math is pretty accurate.

We were a little bit flat.

I'm just looking at some numbers here, in terms of the production firm.

We actually had an overall profit -- actually, let me just take a peek here.

Overall profit actually was up slightly on the F-35 program in total.

The production program, and that is primarily because of the lack of the SBD write-off that we took in 2013.

But the production program was fairly flat, in terms of total profit dollars.

And actually, the margin was down.

I think that is the point that you're poking at.

We had some step-ups on the production, early LRIP contracts in 2013.

We had some planned step-ups in 2014, some of which we took, but not all of which that we had planned did we take in 2014.

So those got pushed off to the right.

And that caused the situation that you are describing in 2014.

As we look forward to 2015, I'm still expecting -- and I know we've talked about this as recently as the investor conference we had in Fort Worth.

I'm still expecting 100 basis points or more improvement in the F-35 production program margins between 2014 and 2015.

And we are hopeful that trend will continue, at least year-over-year sequential increase, in the margins on the production program in years thereafter.

But the biggest spike we're expecting is between 2014 and 2015.

And I think a big reason for that, David, we closed the year pretty strong, from a production perspective, on the F-35 program.

We had a month -- almost a two-month delay in production activities, or at least the delivery at the aircraft, because of the engine anomaly that occurred in 2014, yet we made all 36 aircraft deliveries.

We actually had a chance to exceed the number.

So I think, as we closed out the year, things were looking and feeling better on the production program than, say, when we started the year.

And I am hopeful that trend will continue into 2015.

And that is what we are banking on with that margin increase.

On the customer advances, I think the actual burn is about -- we are expecting it to go down about another couple hundred million dollars or so.

You are right, it was down about $0.5 billion from 2013 to 2014.

Some of that is simply the nature of -- we are actually seeing a little bit of conversion from -- I think we have talked about this -- from some of our direct commercial sales contracts to more and more FMS contracts that tend to get negotiated concurrently with the US government buys.

We're seeing that, for instance, on the F-35 program with aircraft.

And we are seeing that also on a lot of our missile programs, be they Hellfire missiles, JASSMs, PAC-3 and the like.

So a lot of historical -- and this is just, in large part, due to the customer change.

But a large part because of the F-35 growth, which is all going to be FMS in the near term.

We are seeing some burn-down of the legacy direct commercial sales.

It's not being replaced by new commercial sales down payments, in part because those are, in fact, FMS contracts.

Kind of a long-winded answer to that question, David.

I hope that made sense for you.

Joe DeNardi, Stifel.

Another on the F-35, if you could just talk about what caused some of those step-ups to get pushed out of 2014?

And how the budget outlook for that program, which seems to be improving, plays into how you think about the margin profile improving on the production side?

So Joe, I will take that one, as well.

So we always go through, at every year, thinking that there is a planned level of bookings rates.

And especially on programs that are early in their life cycle, as is the F-35.

And in 2014, we had planned to have some increases on the production program.

And again, for the reasons that I described to David, some of that was simply -- in the early part of the year, it made no sense whatsoever to have margin increases when we were actually sitting idle, because of the engine anomaly.

And that did cause some disruption, overall, to the performance, at about the first half of the year, leaking into the second half of the year.

And so, that caused some of those increases to get pushed out, just as I described.

That is the reason I was making the point.

I think where we ended the year was a good point for us on the production programs.

And that does give us the confidence that 2015, you will see those step-ups made.

And that is the reason for the margin improvement that I talked about with Dave.

And again, our expectation is a little bit spiky from 2014 to 2015, in terms of a pretty good size jump in the margins on the production program.

But thereafter, we continue to expect that margin to increase year over year, as we go through the production program.

Joe Nadol, JPMorgan.

So on Aeronautics, ex F-35, I was wondering, Bruce, if you might give a little bit of an update.

Obviously, we had our meeting a couple of months ago in Fort Worth.

But just a little update on what you're -- where you stand on deliveries this year for -- specifically for F-16 and C-130?

And then key pursuits, a little bit about the multi-year, in particular on the C-130 side?

Thanks.

So let me give you a -- maybe, again, a long-winded answer to the question.

So F-16 deliveries, I think we've teed this up in the past.

We are going to drop -- I think I teed this up in the October call.

We had about 17 -- not about.

We had 17 aircraft deliveries for the F-16 program in 2014.

We are building about one a month, you should think of it.

So we are looking at about 11 or 12 deliveries, probably, in 2015.

I think the current contract schedule would subsist 11 aircraft there.

On the C-130, we are at a pretty steady build rate.

Between years, those we did 24 aircraft in 2014.

We would expect to do 24 aircraft in 2015, as well.

And that's -- again, that is the expectation.

That is a good build rate.

In fact, we're -- we'd prefer to build at that steady rate, as opposed to having spikes that would cause us to have a little bit of disruption.

We would rather build at that steady rate.

And with the backlog that we have in the program, we were able to do that.

C-130 multi-year, so we've got, I will say, some partial funding on that at the end of 2014.

And we expect to close the rest of that, the balance of that, in 2015.

But the value is not as large as it was, say, last year, because we got a little bit of funding at the end of the year.

It was partial funding, on a fiscal year basis, towards that multi-year.

Joe, maybe inherent in the question -- I'm sorry, I didn't talk about the F-35 program.

So we did 36 aircraft deliveries in 2014.

That number is going to increase, probably in the 40, maybe a couple more than that.

We are actually working with the joint program office later in the month of February to finalize the production delivery plans.

And we do that because it actually does require resources on both sides, both the government resource, as well as the Company resources, to do that.

So we will have a better idea, a more definitive idea, of the F-35 deliveries next -- probably next time we talk to you in April.

But I would expect that it will be somewhere in the -- again, the 40, maybe a couple more than that, as we sit here today.

And then the last aircraft program for the Aeronautics business area, we delivered C-5s in 2014.

We expect that number to go up to nine deliveries.

And I think we stayed about that level, probably until the program winds down, through the last delivery of the C-5 modernization program.

One thing, while we're talking aircraft and deliveries and quantities, Joe, I want to make sure that everyone understands is, at least as we look at the phasing of our revenue in 2015, it's going to be a bit of an odd year.

We are very heavily weighted in the second half.

The first quarter, in particular, is very unusually low, or we expect it to be very unusually low on a compare basis, because of our delivery phasing.

And that is both associated with the Aeronautics aircraft that I just talked about.

I think the -- I think we've got two fewer F-16s in the first quarter, and two fewer C-130s both, in the first quarter of 2015, compared to the first quarter of 2014.

But combine that with the fact that missiles and fire control is going to have a pretty significant drop-off in the first quarter of deliveries of their missile programs, both tactical missiles, PAC-3s and the like.

We could see the first-quarter revenue being down as much as, say, 5% year over year, compared to the first quarter of 2014.

And then obviously, it will build from that point on, to the levels that we are seeing for the full year for 2015.

So a little bit of an unusual pattern for us.

We always have the pattern where the fourth quarter is higher than the rest, but we are starting off 2015 -- or at least the expectation, probably a little lower than we ordinarily would.

Myles Walton, Deutsche Bank.

The first one is a clarification.

I might have missed it.

But the international sales in 2014, I think the last few years have been about 17% of sales.

If you can just give that number for 2014?

And then Marillyn, as you look at the Middle East as a customer base, and you think about the threats that exist there, that is one aspect.

But the foreign-policy and what we choose to do there is another.

And just hypothetical, if the US does move more toward the normalization with Iran over the nuclear activities, does that in any way impede what you see as progress in the foreign military sales front there, from a DOS perspective?

Thanks.

First, in answer to your question, we achieved 20% of our total sales on international sales in 2014.

So we're pleased with that, and we have over $20 billion in our backlog at year end to that.

We've set a new goal to get to 25% over the next few years.

Our growing international area is an important element of our strategy and growth for the Company, and we see a lot of expanding demand for international growth.

Expanding demand on missile defense, on aircraft programs, on a range of things.

To your question about foreign policy and normalization, and things of that nature, in my discussions with our customers, that really isn't coming up.

It is very clear, to the Middle East region, that dialogue is going on.

But front and center for them are the needs that they have today, what their critical national requirements are today.

So our discussion is that -- is around those national security needs that they have, and there are certainly plenty of threats in the region.

Just the volatility, even if there may be some kind of deal done with Iran, there is volatility all around the region.

And each one of these countries believes they have got to protect their citizens.

And the things that we can bring to them help in that regard.

So similarly, that is the Middle East.

And I know that's what you asked about.

But you could take that same argument to the Asia-Pacific region, which is another growth area for us.

A lot of volatility, a lot of instability, a lot of things that are happening, both with North Korea, as well as some of the tensions between China and Japan.

And -- so in both of those regions, which are growth areas for us, we expect that there is going to continue to be opportunities for us to bring our capabilities to them.

George Shapiro, Shapiro Research.

Bruce, I was -- I noticed that all the margins that you project for 2015, in each of the sectors, are down relative to 2014.

Now aero is explainable with mix, space may be explainable with less venture income.

But can you go through why they are down in all of the other sectors?

And if you could maybe lay out what you think would be the normalized number that we'd wind up reaching, in terms of these margins?

Because it will be the second year that we will have seen them decline.

Yes, George, I will try to take a shot at -- that's a good question.

So even though you gave the answer for a couple, I will go ahead and try to hit all five business areas from my perspective, maybe from what we are seeing in 2015, and then the longer-term view.

So aeronautics in 2015, in part because of all the discussions we've had up to this point on the F-35 production program, the fact that we expect to see some increases there, 2015 is really looking fairly comparable, from a margin perspective, for Aeronautics.

Longer-term, we have talked about the fact that, as F-35 increases, even in the scenario that I described with year-over-year margin increases, those will still be lower than the composite average margin for Aeronautics, if you will.

So that will still be dilutive, because of the growth of the F-35 program.

And that is what we expect to see there, longer-term.

Missile and fire control is maybe slightly lower.

But -- than 2015, but I will say that is probably pretty comparable, when you look at it big picture-wise.

And we still think we have some of the same opportunities in 2015 as we had in 2014.

Longer term, I would expect some reduction in the higher-margin business than we've got there, particularly if we are successful, for instance, winning the joint light tactical vehicle.

You would expect us to have that program start off at a lower booking rate than some of our legacy long production programs, long production missile programs, out of missiles and fire control.

And so I would expect to see, again, longer term, some reduction in the margins in missiles and fire control from the level we experienced in 2014, and probably 2015, as well.

Mission systems and training is down slightly in 2015 compared to 2014.

You should think of that, really, primarily as a result of new program starts.

So programs like space fence, like the combat rescue helicopter, like the new Presidential helicopter.

Those are all early starts on larger programs that are actually driving a lot of the organic growth of MST there.

And that is coming with lower margins than some of their heritage production programs, just like I talked about on missiles and fire control.

There is also, within MST in 2015, some of the last of the restructuring charges that, remember, we talked about in 2013.

We took the severance charges, but there were still ongoing restructuring charges for things like facility closures and facilities rearrangements, and so forth.

There is about $29 million or so higher restructuring costs in MST in 2015 than 2014.

So that is putting a little bit of pressure there.

Longer term, I think it's going to be fairly comparable to where we end up 2015.

Maybe a little bit higher, as some of that restructuring expense goes away.

And hopefully, we start to have some increases on some of those early program starts that I talked about.

IS&GS, we teed up in the October call that we thought it would be down about 30 basis points or so from 2014 to 2015.

And I described that as about half of that just being the increased level of competition, re-competes, dis-aggregation, breaking down contracts, and so forth.

And the other half of that 30 basis points was, we changed some of the backlog within IS&GS to have a number of longer-term international programs that extend over multiple years.

A little bit different than the heritage IS&GS business.

And those were starting off, just as any new program would, with lower overall margins as a composite.

And that was the other half of the 30 basis points that we talked about.

So if you rewind back to the end of the October call, it would have said we should be looking at probably somewhere in the [8.7, 8.8] range for margins at IS&GS.

We're a little lower than that.

And all of that, George, is because of the transaction expenses associated with the acquisition we made at the end of last year for systems made simple.

So that is bringing another 30 basis points or so reduction to IS&GS's overall margins.

So while that acquisition is EPS dilutive, it is actually cash accretive in year one.

So that is something we are happy to take those charges.

And again, longer term for IS&GS is that -- as those transactions costs start to play out.

Expect to see some slight increases in the IS&GS profitability margin levels from where we are today.

In space, you talked about the ULA earnings call.

We teed that up from the October call, that the equity earnings associated with the United Launch Alliance are down pretty considerably in 2014 versus 2015.

A lot of that is just the mix of the launch vehicles we have there.

And that is driving the biggest single piece of that.

The other piece that may not be evident, again, is we also made a couple of acquisitions for data, and the satellite processing business, that we acquired last year.

Those also are bringing transaction expenses in 2015 that were not in 2014.

You should think of that as about a 20-basis point or so impact in the margins of space systems company in 2015.

And just as I described on the systems made simple, or the acquisition for IS&GS, while they are a little bit EPS dilutive in 2015, both those acquisitions are cash accretive in 2015.

So we are happy with that.

Longer-term, for space systems, I think we get back at about the 12% margin.

We were a little bit of that in 2014.

But as some of these, again, transaction expenses go down -- and as, by the way, some of the restructuring costs that we have in space systems start to wind down, I think you will see the overall margins getting back to a normal run rate with the ULA equity earnings at about the 12% level.

Shannon, this is Jerry.

I think we have run over the hour a little bit.

So I will turn it back over to Marillyn for final comments.

Sure.

Thanks, Jerry.

I just want to wrap up the call by again saying that the Corporation achieved another excellent year in 2014.

And we continue to be well positioned to deliver substantial value to our customers and our stockholders, as we move strongly into 2015.

So thanks again for joining the call today.

We look forward to speaking to you again in our next earnings call in April.

Shannon, that concludes our call today.

Ladies and gentlemen, this concludes today's conference.

Thanks for your participation, and have a wonderful day.