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Lockheed Martin Corp  (NYSE:LMT)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Lockheed Martin Third Quarter 2018 Earnings Results Conference Call. At this point, all the participant lines are in a listen-only mode. There will be an opportunity for your questions, instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded.

I'll turn the conference now over to Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Greg Gardner -- Vice President of Investor Relations

Thank you, John and good morning. I'd like to welcome everyone to our third quarter 2018 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 materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause results to differ materially from those in the forward-looking statements.

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.

Marillyn Hewson -- Chairman, President and Chief Executive Officer

Thanks, Greg. Good morning, everyone and welcome to our call today. As today's release illustrates, we continue to outperform the goals we set at the beginning in 2018 with another quarter of strong operational accomplishment, important new business awards and outstanding financial results. We've seen strong financial performance across the entire corporation and this performance, coupled with our improved outlook for the remainder year has resulted in us updating our guidance again this quarter.

I'm especially pleased to see our earnings and cash expectations continue to grow as we remain focused on operational performance and delivering long-term value to shareholders. Our third quarter and year-to-date financial performance and improved full-year projections are the results of the strength provided by our broad portfolio of offerings as each of our four business areas contributed to our updated 2018 financial outlook. We will discuss the financials in detail a little later on the call, but I do want to highlight two key actions that our Board of Directors took this quarter in the area of cash deployment. First, we increased the quarterly dividend by 10% to $2.20 per share or $8.80 annually, maintaining our long-standing commitment to a strong dividend.

Second, we also increased our share repurchase authority by $1 billion, bringing total repurchase authority to $3.7 billion. This level of authority provides additional flexibility to continue to return cash to stockholders through share repurchases if market conditions and our fiduciary duties permit. Together, these two actions demonstrate our continued strategy of balanced cash deployment and long-term commitment to delivering returns for our stockholders.

I'll cover performance highlights in just a moment, but I want to begin by noting several strategic new business awards that we received this quarter, which position us for long-term growth in our existing portfolio as well as affording us exciting new opportunities. In August, our Lockheed Martin Space team received an initial $2.9 billion award from the US Air Force for three next-generation missile warning satellites. These Overhead Persistent Infrared or OPIR satellites build upon our legacy SBIRS spacecraft with a modernized bus and increased survivability, delivering advanced early warning and improved resiliency. We look forward to delivering these next gen capabilities with this new opportunity.

Competitive contract of over $1.3 billion for the first two GPS Follow-On satellites. With a total estimated contract value of up to $7.2 billion or 22 new GPS III spacecraft. These new GPS space vehicles are designed to provide greater accuracy and improved anti-jamming capabilities, providing technology upgrades to ensure GPS III remains the gold standard in navigation, positioning and timing.

Moving to our Aeronautics' business area, we secured approximately $1.7 billion in orders for 22 additional C-130J transport planes. The result of increases included in 2017 and 2018 fiscal year omnibus appropriations legislation. These awards bring our C-130J backlog to 70 aircraft, another example of the enduring demand for this legendary platform.

In Missiles and Fire Control, we were very excited to be awarded the $480 million Air-Launched Rapid Response Weapon or ARRW program to provide critical design review and production readiness support for a new hypersonic weapon. The ARRW contract marks our third 2018 award in this emerging technological area and when combined with the previously announced Tactical Boost-Glide and Hypersonic Conventional Strike Weapon or HCSW programs brings the aggregate value of our 2018 hypersonic awards to over $1.5 billion. We were disappointed though at not being selected for three large competitive bids this quarter. We believe our proposals represented outstanding technical offerings at our lowest possible pricing and we matched the winning prices and been awarded the contracts we estimate that we would have incurred cumulative losses across all three programs in excess of $5 billion, an outcome that we do not feel would have been in the best interest of our stockholders or our customers.

As we conduct our Lessons Learned process, we will seek to discover any root cause issues which may lead us to alter future capture strategies. However, our objective will always be to position the corporation to perform with excellence for our customers while delivering outstanding value to our stockholders.

Our new business pipeline remains robust and our win rates remain strong. The strategic awards I noted earlier contributed to the corporation recording over $18 billion in awards during the third quarter and allowed our backlog to climb to over $109 billion, a new high watermark.

Turning briefly to the Department of Defense budget. The President signed into law the DoD 2019 fiscal year Appropriations Act last month, the first time in a decade that an appropriations bill has been enacted prior to the start of the fiscal year. The act provides approximately $617 billion of base budget funding for the nation's security and defense programs. The legislation aligns with the Bipartisan Budget Act of 2018, which provided with an additional $80 billion for national defense over two years in fiscal 2018 and fiscal 2019.

The final FY 2019 appropriations also reflect continued support for our broad portfolio as funding was increased from the presidential budget request for some of our key programs including 16 additional F-35 jets, 14 additional THAAD interceptors, eight additional C-130J aircraft, eight additional Blackhawk helicopters and two additional Littoral Combat Ships. These increases were supported by both the House and Senate Appropriations Committees and reflect strong Bipartisan support for these platforms.

Moving on, I'd like to highlight several significant milestones we achieved across the corporation during the past quarter, beginning with an update on our F-35 program. We saw four significant events take place this quarter. In September, we finalized an $11.5 billion low rate initial production or LRIP 11 contract with the Department of Defense for the production and delivery of 141 F-35 aircraft. Notably, we came to agreement on unit prices which are the lowest in program history with the F-35A, our conventional takeoff and landing or CTOL variant achieving an $89.2 million price, a 5.4% reduction from the LRIP 10 per unit amount. We remain focused on delivering the best value to our US services, international partner nations and foreign military sales customers as we continue to pursue achieving an $80 million CTOL target price.

The F-35 program also continued its maturation process as it was approved to transition into the operational test and evaluation or OTE phase in November. The Defense Department has certified the program's readiness to enter the OTE phase when the final steps being approved for full rate production. Also in September, F-35 aircraft participated in their first US combat mission as the U.S. Marine Corps F-35Bs successfully conducted an airstrike in support of Operation Freedom Sentinel ground clearance operations in Afghanistan. The Marine Corps was the first service to declare the F-35 ready for initial operational capability in 2017 and the aircraft has been deployed as part of the Essex Amphibious Ready Group, enabling enhanced stability and security from international waters and demonstrating the remarkable capabilities of this fifth generation fighter. Lastly on the F-35, we were all extremely proud to see our UK Ministry of Defence partner celebrate an F-35B performing its first carrier landing as British pilots touchdown on the HMS Queen Elizabeth in the Atlantic Ocean, laying the foundation for the future of fixed-wing aviation aboard the UK carrier fleet.

The F-35 subsequently took flight using the ship's ski-ramp platform and later performed successful night landings on the carrier, both with and without the use of night vision technology. The F-35 and the HMS Queen Elizabeth are at the beginning of a two-month developmental test process to establish the envelope for the F-35 to operate from the deck of the ship and we are very happy to be part of these landmark events.

Moving to our missiles and fire control business area, we saw strong domestic and international demand for tactical missile products this quarter as well as continued international PAC-3 support in our Air and Missile Defense Organization. In our Tactical Missiles Organization, we were awarded an FMS contract totaling over $630 million to provide Hellfire missiles to the Netherlands and Japan.

Our tactical missiles team also received a pair of awards totaling over a $0.5 billion for 42 High Mobility Artillery Rocket Systems or HIMARS launchers and associated hardware to be delivered to the U.S. Army and international customers. Earlier this quarter, U.S. and Swedish officials formalized an agreement to provide PAC-3 MSE missiles to the Government of Sweden, helping to increase the country's defensive capabilities and support interoperability with U.S. and NATO forces. Sweden will become the sixth international customer to sign an agreement for PAC-3 MSE missiles and we look forward to providing our leading-edge missile defense products in support of their national security objectives.

I'll close with our Rotary and Mission Systems business area and discuss several noteworthy achievements from our Sikorsky team. First, the Sikorsky S-97 Raider prototype helicopter demonstrated the ability to fly at speeds exceeding 200 Knots during recent flight testing at our Sikorsky Development Flight Center. The Raider aircraft incorporates our Collier Award winning X-2 technology, a suite of capabilities which include our innovative counter-rotating blade design, fly by-wire flight controls and advanced vehicle management systems to provide the critical speed and handling qualities needed by today's warfighter. The X-2 technology allows for speeds twice that of conventional helicopters and we look forward to offering this unique solution to the U.S. Army as it begins to revolutionize its aircraft fleet as part of the upcoming Future Vertical Lift program.

I would also like to congratulate the Sikorsky team on an upcoming milestone as October 30 will mark the 14th anniversary of the first Black Hawk delivery to the U.S. Army in 1978. The iconic Black Hawk helicopter has more than 10 million flight hours supporting our army customers raid missions and has played a key role in humanitarian efforts, aerial firefighting and border patrols as well. Over 4,000 Black Hawks of all types are in service worldwide. And I would like to thank the Sikorsky organization for their dedication in delivering this remarkable aircraft to our customers for the past 40 years. And we look forward to continuing this partnership for years to come.

These two significant accomplishments come at a time when we will be recognizing another key milestone. This November we will mark the third anniversary of Sikorsky Aircraft joining the Lockheed Martin family. The Sikorsky organization has expanded and strengthened our corporation's portfolio over the short time and I would like to thank the entire team for their efforts as we celebrate this important occasion.

With that I'll turn the call over to Bruce.

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Thanks, Marillyn. 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 begin with chart 3 and an overview of our results for the quarter. Once again, we exceeded our expectations for every financial metric in the quarter as we did through the first half of this year. Sales, segment operating profit and cash from operations before making our final pension contribution for the year continue to be strong. The $1.5 billion pension contribution we made in the third quarter completes the $5 billion of pension outlays that we've been discussing all year.

We continued our cash deployment actions in the quarter, returning around $800 million of cash to our shareholders through a combination of dividends and share repurchases. And we grew our backlog to a record $109 billion in the quarter with all four business areas contributing to that growth. Based on our performance in the quarter, we expect strong results for sales, segment operating profit, earnings per share and cash from operations for the full year as we'll show in a few charts. And we're pleased with how our financial results are shaping up thus far in 2018 and we'll be discussing how our performance this year is carrying over into next year when we get to our charts showing preliminary trends for 2019 later in the presentation.

Turning to chart 4, we compare our sales and segment operating profit in the third quarter of this year with last year's results. And though for comparison purposes with the third quarter of this year has 14 weeks in the accounting period while last year's third quarter had 13 weeks in the accounting period. And this situation will reverse itself in the fourth quarter when we have 13 weeks this year and will compare the 14 weeks in the fourth quarter of last year. Even without the extra week in the quarter, our results exceeded our expectations. With that background, sales grew 16% compared with the same quarter last year to $14.3 billion, continuing the momentum we had in the first two quarters, while segment operating profit increased 23% over last year's level to nearly $1.6 billion. And all four business areas contributed to the significant increases in both sales and profit in the quarter while the margin increases in the quarter were driven primarily by RMS due to improved performance in our Sikorsky and Integrated Warfare Systems And Sensors lines of businesses and by space due to improved performance in our government satellites line of business.

On chart 5, we'll discuss our earnings per share in the quarter. Our EPS of $5.14 was $1.82 or 55% higher than our results last year driven by higher sales volume, the margin improvements that I just discussed and a lower tax rate in the quarter compared to last year.

Moving on to chart 6, we provide our revised outlook for the year. With only the fourth quarter left in the year, we are providing our best point estimate of results for the entire year rather than the ranges we have provided in previous quarters. We expect sales to be around $53 billion for the year, near the top of the guidance range we provided last quarter since 6% higher than our results in 2017. At $5.8 billion, our forecasted segment operating profit will exceed the top end of our guidance range last quarter, resulting in a 10.9% margin above 70 basis points higher than last year's results.

Our FAS/CAS pension adjustment remains unchanged at a little more than $1 billion. Our earnings per share is expected to be around $17.50, also above the high end of our previous guidance range, recognizing the strong performance in our business segment operating profit as well as the lower tax rate (inaudible) lower estimates which I'll discuss further in a moment. And we are increasing our outlook for cash from operations by $100 million to be equal to or greater than $3.4 billion as we expect a large portion of our earnings increase to be billed and collected before year-end.

Chart 7 provides a reconciliation of our earnings per share outlook this quarter compared to last quarter. Operational performance is expected to drive a $0.40 increase in EPS driven by higher segment operating profit as a result of higher sales volume and margins in our business areas. Taxes and other are expected to add another $0.20 in EPS with most of that increase coming from a lower tax rate as we continue to reflect the latest understanding of the tax legislation passed last year. We now expect our full year effective tax rate to be between 13.5% and 14%. Together, these changes represent an expected $0.60 improvement from the midpoint of the EPS range we provided last quarter to a new outlook of $17.50 per share.

Chart 8 shows our new outlook for sales by business area for the year, also with point estimates for each of the business areas rather than the ranges we provided in the prior outlook. We are increasing our sales outlook by $650 million compared to the midpoint of our last guidance, expected to be near or slightly above the high end of their guidance range from last quarter, continuing the strong results we've seen so far this year.

On chart 9, we provide a similar view of our new outlook for segment operating profit by business area for the year. We are increasing our segment operating profit outlook by $150 million from the midpoint of the range we provided last quarter and our point estimate is above the high end of that range. Three of the four business areas are expected to exceed the high end of their prior range, showing the broad-base nature of our performance improvements.

On chart 10, we provide our preliminary look at our 2019 trends. We expect our 2019 sales level will grow (audio gap) sales which equates to approximately a 6% to 7% increase over the midpoint in the 2018 guidance range we provided in July.

We expect our segment operating margin will remain strong between 10.5% and 10.8%. This margin level assumes similar performance in our legacy programs in all business areas with some dilution resulting from the growing number of new start programs as the increases in our backlog levels would indicate. We also expect to have lower equity earnings associated with ULA business as a result of the number and mix of launches expected in 2019 compared with 2018.

We estimate that our cash from operations will be at least $7 billion as we've noted in previous calls and we have no planned pension contributions next year. We also plan to have at least $1 billion in share repurchases, about the same levels we expect to have in 2018, more than offsetting any planned share issuances in the year. And similar to 2018, we have a debt maturity coming due next year worth $900 million.

Moving to our FAS/CAS outlook, we expect our 2019 FAS/CAS adjustment will be approximately $1.5 billion or about $500 million higher than the adjustment for 2018. This estimate assumes a discount rate at the end of the year of 4.125% or 50 basis points above the 2018 rate. Based on our performance today, we're assuming a 1% return on our assets for the full year. And going forward, we are reducing our long-term asset return assumption by 50 basis points to 7% per year. All told, we expect to see continued strong growth into 2019 based on a mix of follow-on extensions of our legacy programs and a number of quality, new and exciting orders that demonstrate the long-term strength of our portfolio.

And finally, on chart 11, we have our summary. We've seen strong performance from all our business areas this year and I'm especially pleased with our year-to-date orders both in quantity and quality. Our full-year outlook has improved in all financial metrics and we look forward to continue the growth in 2019.

With that we're ready for your questions. John?

Questions and Answers:

Operator

Thank you. (Operator Instructions)

And first to the line of Myles Walton with UBS. Please go ahead.

Myles Walton -- UBS -- Analyst

Thanks. Good morning, guys. So quick question for you first on the margin side. So the implied mix that you're talking about, can you give us maybe convocation of how much of the growth in CAS/FAS versus fixed price? And also maybe by segments, a bit more color on where the 10 basis points to 50 basis points of headwind is coming from?

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Yes, thanks, Myles. I'll take that one on. I think the simplest way to understand it is is we are seeing pretty much new starts in all of our business areas and you've seen some of that in prior orders that were released and frankly some of that you haven't seen because some of that has occurred on some classified contracts in actually multiple business areas. So I won't be able to get into probably as much detail as you would like in that discussion but suffice to say that that's actually causing some of that margin pressure that we're seeing going forward as well. The largest single item that is driving the margin reduction next year though is actually our ULA equity earnings. Those are actually going to -- we expect those to be down nearly $150 million or so from this year's estimate of the equity earnings from ULA. And you should think of that as a pretty significant reduction in both the launch quantity in terms of the number of vehicles launched, but probably more importantly, a pretty significant change in the mix of those launch vehicles. We have more, for instance, Delta IV launches in 2018 than we expect to have in 2019. Those are obviously the most profitable launch vehicles in all of ULA's portfolio. So that's the biggest driver. But as I said, without going into all the various pieces, maybe I'll tell you what all, I'll try to hit just a couple of the business areas may be very quickly going into the next year, I'll give you more detail on this Myles, when we talk to you in January. But as far as the margins in aeronautics, we actually expect those to be fairly similar next year to what they are this year. And that kind of goes to the comment, I think I made in my prepared remarks where we actually do expect to have legacy programs as we're calling them have increases in margins year-over-year, but start-up activities, including by the way, I'll count the F-16 production program as a restart there we've been out of production for some three years, so that's one example of where I would cite we have production I can talk about. Other programs and some of the classified and (inaudible) contract activity that's driving us to have a kind of a flat margin going forward. Missiles and Fire Control margins probably maybe slightly lower, comparable to slightly lower than it is this year, and again the same story as within aeronautics legacy programs actually expected to have margin improvement. We're actually seeing pretty good growth in our SOF GLS contract, higher than we expected quite honestly. And you recall that contract brings lower margin than in the overall portfolio of Missiles and Fire Control. But the biggest single driver though at Missiles and Fire Control is a whole bunch of new starts and you should think of those as hypersonic programs new starts as well as a number of other programs including classified activity that's going on there that we've talked about orders being received previously on this call. RMS, right now we're looking at -- it's actually pretty comparable margin going forward. So really you should think of the first three business areas that I've talked about ARRW, Missiles and Fire Control and RMS all having comparable maybe slightly less than Missiles and Fire Control, the biggest driver as I said earlier is Space Systems, our Space and that's primarily because of the ULA equity earnings there. The rest of the portfolio is actually performing about as expected next year compared to this year.

Operator

Our next question is from David Strauss with Barclays. Please go ahead.

David Strauss -- Barclays -- Analyst

Good morning. Thanks for taking my question. I want to ask a multiple part question on F-35. It looks like F-35 in the quarter grew fairly significantly well above kind of the delivery rate growth. Can you talk about kind of how far -- in terms of the revenue growth we're seeing, how that breaks out between production (inaudible) and kind of how far ahead we are based on going from 91 deliveries this year to 130? And then last one on on your cost curve, obviously the price per LRIP is coming down like 5%, 6%. Can you talk about your cost curve, what kind of learning you're seeing from a cost perspective? Thanks.

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Yes, David, I'll take that one on as well. So, lot of parts in that question (inaudible) keep up with them. Relative to revenue growth on F-35, I think what you surmise is pretty accurate. And we did have some pretty significant growth in the quarter. I think we were double-digit, actually a little more than double-digit on F-35 in the quarter. As we look and maybe that's the heart of your question (inaudible) look like next year I think what you said relative to the ramp up from 91 to about 130 aircraft, we would expect F-35 next year to also grow probably at the double digit may be a little bit higher than that. And that's for both production and sustainment activity, David. And the one wildcard that I'll mention that really did surprise me as well as we were getting ready for this call is that actually the development activity on F-35 is going to grow at double-digit rate next year. So part of that is we had a pretty significant reduction in the older SDD contract from 2017 to 2018, but we're starting to see more and more sort of new non-core SDD development activities being added to the contract and that's actually growing, as I said earlier, that's growing the development portfolio higher than double-digit from 2018 to 2019. So it's kind of a pleasant surprise for us. The cost curve, I don't have the learning maybe Marillyn does off top of her head, I want to say, we were at the mid-80s to maybe a little bit higher percent learning curve on F-35. I think that's about right and we've been running about that level almost since the LRIP 1, David, so we're still maintaining that. At some point in time that will start to level out as we've kind (inaudible) we can out of a learning curve and that's where we need to have some potential investments to get some sort of step improvements going forward there. But at least right now sort of year-to-date and we're still -- our team today and we're still seeing that trend, think of it as mid to higher 80% learning curve is what we're experiencing on F-35. By the way, very much in line with what we've seen on other legacy production programs, if not slightly better.

Operator

Our next questions from Rob Stallard with Vertical Research. Please go ahead.

Rob Stallard -- Vertical Research -- Analyst

Thanks so much and good morning. Marillyn, just wanted to follow up on your comments regarding those programs you lost in the quarter and the potential $5 billion hit. Are you concerned that this is changing the landscape for defense contracting and the sort of low-ball bids could make your future profitability less attractive?

Marillyn Hewson -- Chairman, President and Chief Executive Officer

Well, not for us. I mean that's not the kind of -- that's not what you would expect from Lockheed Martin and that was the point in my opening remarks is that we're going to pursue good business for this Company and being able to perform at what we say we can perform to for our customers. So that's the key for us. How other competitors behave in this environment, I really can't speak to you, you have to ask them.

Rob Stallard -- Vertical Research -- Analyst

That was move from the other direction, this was potentially what the customers not expecting as they see these prices (inaudible)?

Marillyn Hewson -- Chairman, President and Chief Executive Officer

Well, we have seen -- we've talked about this in the past calls so that -- now that you made a clarification on what you're asking, we do see that affordability is a very important element for them and a lot of the best value procurements, when we know that we've got a good technology solution and it comes down to lowest cost but technically acceptable -- lowest price technically acceptable, LPTA type decision. We are assuming that's happening because we come in with a good technical solution that's good and comparable and you need all of those elements but then they just go for the lowest price and ultimately that could be the opportunity that the government is taking on affordability and they cite that, we've seen in the media that they would cite that they've gotten things at much lower than they anticipated. Bruce, anything you want to add?

Bruce Tanner -- Executive Vice President and Chief Financial Officer

The only thing I would add, Marillyin, is, Rob I think I wouldn't necessarily draw a long conclusion from three awards. I'll tell you, those were disappointing for a lot of reasons. But the fact that they were really decided all three of them on sort of LPTA basis didn't help the situation, it's not getting -- I would argue the best capabilities for the warfighter in the hands of the warfighter. What I'll say though is, I don't think that's entirely universal among all the competitions that we've seen this year and we've frankly won some competitions where we weren't the highest price. So I don't know that you can automatically, as I said, draw a conclusion that that's necessarily a change from -- on every program that's going to be competed going forward. So it's not a one size fits all, if you will.

Operator

And next question is from Jon Raviv with Citi. Please go ahead.

Jon Raviv -- Citi -- Analyst

Hey, thanks. Bruce, some of the commentary you provided on the margin, I was wondering if you can give us some perspective on sales growth including some of the single items which impacted 2018? How the reversal (inaudible) for growth to accelerate in '19?

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Yes. So as we said, we've experienced growth all throughout 2018 and we talked about that on previous calls as far as how we came out with roughly a 2% expectation. We ended up actually having 6% growth over 2017. And I think in the past I attributed that to the significant plus up in terms of the omnibus increases, many higher rate of awards in especially the first half of the year than what we were expecting to have and an earlier turn on for a lot of those awards than what historically we've seen this I think speaks to the speed concept that Secretary Mattis always talks about now is getting things to the warfighters' hands quicker. So I think that was part of the reason we're seeing in 2018 as high as we are, 2019, I'll try to do the same (audio gap) if you will. I think the highest growing business area is going to be Missiles and Fire Control. I think they're going to grow probably a little bit north of double-digit, maybe not much more than that. Next step is aeronautics, which collectively I think is probably going to grow -- probably in the high single digits, not quite a double-digit level but that's still good growth there. RMS and right now, both RMS and Space are expected to be sort of comparable to where our results were for 2018 or where they were expected to be for 2018. I think that there's a business area or two that I could point to where there may be some opportunity to get some growth beyond that and the comparable level is probably in both those. I think we had some potentially good news, for instance, on The Canadian Surface Combatant competition and depending on when that gets fully awarded, we'll go through the entire process that has the potential, I think, to create some growth going forward. So I'm watching those phases, but you should think of it Jon, as really the Aeronautics and Missile and Fire Control sort of carrying the heavy load in terms of sales growth with Space and RMS somewhat comparable expectation to where they are this year with hopefully some upside to that level.

Operator

Next question from Rich Safran with Buckingham Research. Please go ahead.

Richard Safran -- Buckingham Research -- Analyst

Marillyn, Bruce, Greg, good morning. Bruce, I think this is going to be for you and I'm going to ask you a bit of a forward-looking question here and if you feel you can't answer it, just tell me and I'll ask something else. The long-term 2018 to 2020 cash from ops guide was not in the slides. So I thought I'd ask you about that. Would you comment on your 2018 to 2020 cash from operations trends? And would you care to comment on 2021? And if you can answer it, would you include in your answer just a general discussion of major programs about what's baked into your guide and what's not?

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Yes. Thanks Rich, let me figure out how to navigate through your question there. So we've given sort of three-year numbers in the past that was -- we're actually going to talk about that probably more in the January call, but I'll give it a shot here as well. So in the past, we've said -- we had expected about $3 billion in 2018. We're ending up at about $3.4 billion, so we're pretty good beat relative to our expectations there. We still see in 2000 -- obviously 2019 we're providing the trend information of at least $7 billion. We still see $7 billion which we teed up in one of those charts that we briefed previously in 2020. And you should think of that Rich as we're actually seeing some pretty good sized working capital growth in both 2019 and 2020 associated with a lot of our new start programs. It so happened that -- it happens in a time when it's sort of fortunate for us because it happens in two years where we don't have pension contributions so we're kind of able to have nice robust cash in both 2019 and 2020, even while we're growing working capital. The fortunate thing about 2021 is that working capital starts to actually reverse itself. So we actually start to recover a lot of the working capital growth we're actually seeing in '18, '19 and '20. And at least as we sit here today, Rich and I'm not trying to give a three-year guidance number for you, but I would think that the 2021 cash ought to be fairly comparable to our cash from operations in 2019 and 2020. And that's despite the fact that we start making pension contributions at a pretty good magnitude in 2021, somewhere north of $1.05 billion or so. So you should think of that as we're recovering working capital in that time frame. We're also starting to have higher depreciation recovery in terms of cash recovered versus the capital expenditure increases we've seen in the last couple of years and we expect to see next year as well. And then lastly, simply the profit growth we're getting from the sales growth that we talked about earlier, so sort of those three things is what's giving us a pretty -- as we sit here today at least, I'll say a fairly good expectation that we can hold at the $7 billion level at least as we're looking out for the next three years or so.

Operator

Our next question is from Sam Pearlstein with Wells Fargo. Please go ahead.

Sam Pearlstein -- Wells Fargo -- Analyst

Good morning. I just want to follow up on that comment you just made about capital spending and I guess, I'm trying to just think about as we project forward, how much does it increase and when does that increase stop, and as this new facilities that go with a lot of the wins that you've seen to-date, I mean can you just characterize where that money is going?

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Yes. So, Sam I'll take that. It seems like I get this question every year and every year, it seems like I'm saying next year is sort of the peak of capital expenditures and unfortunately that's not the case now. But I would argue this is all good news. Capital expenditures next year are probably going to be $1.05 billion or more than that, slightly. So a pretty good increase from this year, at least our in our three year planning, the 2020 capital expenditures are actually higher than 2019. And then they come down actually fairly dramatically in the 2021 time frame so our free cash flow will start to look better in 2021 because of that. And most of it you've kind of nailed it Sam, think of this as the continuing ramp up of both buildings and tooling and Missiles and Fire Control to support capacity increases for weapons and air missile defense programs. So I think I've talked about in previous calls, that we're seeing significant demand to increase production rates on a number of our programs, particularly the weapons but not exclusively weapons, also air missile defense. I'd like to use the example of Hellfire, I think we're building somewhere (audio gap) the capacity numbers we're being asked to support, we're going to go up to like 11,000 per year or more. PAC-3, we've got requests that could potentially go up to 500 missiles per year. So, we're seeing some fairly good size requests in terms of additional capacity. That's the good news and the good news I guess also is that, it takes capital to support those requirements in order to support those increases that will result in growth in the out years once that capacity comes online. So, that's what's going on in Missiles and Fire Control. At Space, we're completing sort of a fairly large infrastructure support to have a brand new sort of manufacturing facility for larger satellites that would actually result in a more efficient build of those satellites as well. And that sort of starts to finalize, I think in 2019. And then finally, we actually are seeing a ramp up of both buildings and the tooling in those buildings at aeronautics primarily support our Skunk Works or ADP programs out on the West Coast. So this is where a lot of the stuff that we can't necessarily talk about is going on but it does take added infrastructure to support that going forward. That's -- and sort of three big chunks, that's the reason for the capital increases over the next couple of years. Marillyn, if there's anything else I left out?

Marillyn Hewson -- Chairman, President and Chief Executive Officer

No, you covered it, Bruce. Thank you.

Operator

And next we'll go to Doug Harned with Bernstein. Please go ahead.

Doug Harned -- Bernstein -- Analyst

Thank you. A question that I think, so I just has to be asked right now is given the political situation with Saudi Arabia, can you give us a sense of what your backlog exposure is to Saudi and to UAE and how you're thinking about the current political environment in the relationship with Saudi? How do you work with your portfolio?

Marillyn Hewson -- Chairman, President and Chief Executive Officer

Thanks for the question, Doug. I'll just first remind you and the rest of the folks on the call that most of these agreements that we have are government to government purchases. So anything that we do has to do with following strictly the regulations of the U.S. government and the way that -- including sale to Saudi Arabia. And we do business in more than 70 countries. So this is just the way we do business, generally speaking is through government to government procurement and they certainly are the ones that we've been talking about, the weapon sales we've been talking about the Saudi Arabia. We continue to make progress on the programs that we had talked about from the May of 2017 announcement way back then for example we announced this quarter that our Multi Mission Surface Combatant program with Saudi Arabia as moving forward with some additional -- an additional $450 million contract for detailed planning and design for their Multi Mission Combatant. That was already under contract. And then beyond that, we'll just work with the U.S. Government as they continue in their relationship with Saudi. In terms of the backlog ratio and the --?

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Yes, I'll take a shot at that, Doug. So I looked at this (inaudible) thinking we possibly could get a question on this during the call. We really just had as Marillyn said, the one significant order so far which was for the MMSC. So think of that as next generation LCS, if you will, a more capable ship. The largest order that we've been waiting on obviously is THAAD and that has not taken place yet, not sure when that will take place. The interesting thing about the THAAD order is while it brings a significant increase in the backlog, the resulting sales, profiting cash flow with that order are very much pushed to the right. And you should think of that Doug as -- it's because there is a dependency on the radar that has to have a technology refresh, that is actually some years out into the future. So even with the large orders, we would not have significant sales in the near term because those missiles would be arriving too soon to be supported by the actual radar that's -- that needs to be refreshed, as I said. So I think the initial operating capability in Saudi is like 2023, if I'm not mistaken. And just to give you some idea of the level, I don't have -- your question was on backlog, I don't have the exact level of backlog, but I did take a look at sales projections going forward for KSA and I think we have in 2019 about less than $1.5 billion of sales planned and I looked out into 2020, it's less than $900 million of sales. So not a huge amount of dependency on the activity even though the opportunities we've described are much larger than that obviously.

Operator

Your next questions from Peter Arment with Baird. Please go ahead.

Peter Arment -- Baird -- Analyst

Yes, good morning, Marillyn and Bruce. Maybe Bruce, just following on to that, maybe you could just update us on some of the outstanding international contracts that you're expecting maybe before the end of the year and just any levels of backlog where you see the year finishing up? Thanks.

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Following on so much international orders as fourth quarter is always the quarter where we get quite a bit of domestic orders from the U.S. Government, it's the first quarter of the fiscal year and that tends to have quite a bit going on with new funds being let there. The biggest order obviously by far is in that -- I should have said that does include international orders as well in there is the F-35 economic order quantity are blocked by -- you should think of that as about 219 aircraft comprising average 12, 13 and 14 both for U.S. aircraft, all three variants as well as a significant amount of international aircraft as well. So that's obviously the biggest single order. You should think of that as approaching $30.5 billion or so. We also expect to get the the added FY '18 , '20 aircraft that came out of FY '18 appropriations in the fourth quarter as well. And then we'll get quite a few, I'll say the normal, as I said the first quarter the fiscal year orders for things like the PAC-3 fiscal year 2019, probably another (inaudible) THAAD missiles, all the normal orders that sort of come up with that fiscal year. We're looking at actually growing backlog in large part because of the -- we actually have a record backlog as Marillyn said and as I said in the third quarter, that we expect that number will exceed $120 billion by the end of the year, primarily because of what we just talked about on the F-35 block buy, but not obviously exclusive to them. Going forward into 2019, I won't go too forward into the year, but we would expect to hopefully get the U.S. international we'd expect to see an F-16 Slovakia order next year. I think we have next year out of the 24 C-130s that we expect to get, probably about 11 will be international aircraft and six of those hopefully for Germany in that category. Let's see what else, I'm thinking out louder. That's probably enough for right now. Like I said, a lot of the other orders in other business areas are really coming from domestic sources like some Orion orders we're going to get to. I can't think what the EM stands for, that's the flight of the Orion Exploration something. We're going to get to those orders on Orion next year, so it's a pretty good sized order within our Space business. And again as I mentioned earlier, Peter, we have the potential for closing on the Canadian Surface Combatant, which is a huge program. I think that's part of the largest shipbuilding program in the world once it starts and we will be the integrator and combat system provider for that. I think the total content potentially that comes out of that is as north of $7 billion. So I wouldn't expect to get that all in one fell swoop it in order in 2019 but that would be the initial start of something that large.

Operator

Our next question is from Rajeev Lalwani with Morgan Stanley. Please go ahead.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Hi, Bruce, hi, Marillyn. Marillyn, I wanted to come back to you I guess ask you another political question. There's been some discussion recently about lower defense budgets for fiscal '20, I think it's like 5% or so of a decline. How do you interpret that? And do you have any insight as to what the base that may be using to step down from? And if it is some sort of contraction, how do you think Lockheed's position -- what are some of the risks and opportunities we should be thinking about?

Marillyn Hewson -- Chairman, President and Chief Executive Officer

Thanks for the question, Rajeev. I guess, as we look at fiscal year '20, right now the President (inaudible) future year defense program input that came out earlier this year showing an increase, a modest increase in FY '20 funding levels and we'll just have to see what's actually submitted in the Presidential Budget that doesn't come in until over the next year, we wait to see. But I just remind you it was very healthy in FY '18 and FY '19 with giving not only us but our industry counterpart to lot more visibility. And as you know, we have a long cycle business and so we've got a lot of things in motion now as we would be looking into 2020. We're always mindful of the BCA caps because they come back into play in 2020 and 2021 and we are always (inaudible) with our lawmakers to remind them they need to address that and they have been addressing that through these two-year Bipartisan Budget cap agreements that they put in place that we're hopeful they'll continue to do that because as the Secretary Mattis and the Trump Administration have highlighted, we got to continue to modernize our military. Now, I do know that the President did come out and ask all the departments across the government to look at a reduction of 5% in their spending and that's just a way to try to focus on affordability and reducing cost. We'll see how they come back with DoD because he's also been very strong about the need to focus on defense spending and modernizing our military. So we'll see how that plays out. But back to my point earlier, right now we're seeing a modest increase for FY 2020, who knows it could be even higher because of the modernization that needs to happen.

Operator

Next we move to Seth Seifman with J.P. Morgan. Please go ahead.

Seth Seifman -- J.P. Morgan. -- Analyst

Thanks very much. Good morning and good quarter. First I wanted to follow up on some of the comments you made about cash and working capital. And so first of all, if we think about bridging the cash from -- if we thought about kind of $3.5 billion or so operating cash both this year and then not having to -- no pension contributions will probably get you pretty close to $7 billion. And then your underlying operating profit growth probably another $200 million or so after tax. And then the working capital kind of takes a little bit of chunk out of that. Is that -- at least for your initial guidance, which I assume is probably you want to take account of -- be a little bit conservative but is that kind of the -- are those the big pieces in terms of how we get from last year to -- or this year to next year?

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Yes, I think you've got it pretty well nailed, Seth. I mean, the only thing I might throw out there is we'll get obviously a little bit lower tax -- cash taxes paid because of deductibility of future pension contributions that we'll be making in that time frame as well.

Operator

Next question is from Robert Spingarn with Credit Suisse. Please go ahead.

Robert Spingarn -- Credit Suisse -- Analyst

Good morning. So a couple of questions, Bruce for you. Just on the F-35, I know you talked about the learning curve and Marillyn did as well, but you did have this tremendous incremental margin in the quarter, best in three years. And if you could just talk to how that changes as that learning curve flattens, I think you were about 24%. I'm sure there were some maybe unusual things in there but if you talk a little bit about that margin trend and how we see that going forward and then separately, is there a -- with the volatility in equity markets, is there a return on assets level or underperformance that would require a return to (inaudible) contributions in '19 and '20?

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Yes, let me take the -- well, I think about your second problem here, let me take your first one there. So we did have some pretty good step ups or risk retirements as we call them on F-35 in the quarter. You should think of that as mostly I'll say getting to sort of an annual review of older production contracts that took place in the third quarter. So I think the step ups we had, the biggest ones were actually on LRIP 8 and LRIP 9. And that's just sort of taking both those programs, I think that's just sort of taking both those programs from where we had booked profit up to to-date to sort of where we expect to be at contract close out. And that happened to be in this quarter and then just given the size of those contracts and the size of the difference we had in where we were booking versus where we expect to be a completion that end up being a pretty good size risk retirement. Trend going forward, as I said on, maybe it wasn't clear but, this is one of those legacy programs that I would think we'd have the ability to do a little bit of margin improvement. Now, we actually did cross the 10% (inaudible) level in 2018 for the entire program which we've been talking about for a long, long time that that was sort of the year we were targeting and we actually got there this year. I think there might be some potential for incremental improvement going forward but I think more of the story of F-35 is just going to be the volume was sort of similar to maybe slightly improving margins going forward trend wise is the way I'd characterize it. As far as the pension funding and is the return on assets that could drive, I think at the 1% level, I think Rob that would probably drive maybe a couple hundred million dollars of funding in the 2020 time frame. We've talked previously about having zero contributions in both '19 and '20. I think we're now seeing probably a little bit of a required contribution in 2020 which by the way we did not have when we first came out with $7 billion in both those years. So I think we'll be able to offset -- more than offset that going forward and still maintain the $7 billion as we said even with the now $200 million or so of contribution.

Operator

Our next question is from Joe DeNardi with Stifel. Please go ahead.

Joe DeNardi -- Stifel -- Analyst

Yes, good morning. Marillyn, just a question from a corporate risk standpoint. I think if we were to go back several years, the expectation was that F-35 would maybe get to 20%, 25% of total sales. It seems like it's marching higher than that. I'm just wondering at what point in terms of its contribution to revenue or earnings, it would become unacceptably big just in terms of contribution to the total Company? Thank you.

Marillyn Hewson -- Chairman, President and Chief Executive Officer

Well, first of all, I don't think it growing in sales is unacceptably big to the corporation but we like to see it continue to sell all around the world as we've said, we'd like to see it go the way of the F-16 which as you know, we've sold over 4,500 aircraft around the world and we today the F-35 program, the record is around 3200. So we hope to see it continue to grow at that level. I understand your question though is that being a large element of the corporation and it really is a program that has, if you look at it, it's not a single customer, it has broad-based support. It's a global product so not only do we have the domestic customers across free services that we have today with the eight international partners and the three FMS customers and many more there are -- when they're making a decision on their fighter aircraft procurements that I think they will find the best choice is the F-35, hopefully. It's going to continue to sell and it's broad-based. So even though it is a big program relatively speaking, when you consider the customer base, I think that helps mitigate the risk. In addition to that, we're seeing a lot of, as I said in my opening remarks, we're seeing a lot of growth in all elements of our business. So every business area contributed to the growth for this quarter and for outlook for the year and we'll continue to see growth. We won a lot of new programs across the business and they will help to likewise mitigate the risk of one single program. So I feel very comfortable and I'd like to see the F-35 sales continue to grow.

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Well, John, thank you very much. We're actually a little bit past the hour. With that, I'll turn it over to Marillyn for some final thoughts.

Marillyn Hewson -- Chairman, President and Chief Executive Officer

Sure ,I'll conclude the call today. And I want to conclude just by reiterating that the Corporation had another strong quarter and we consider ourselves very well positioned to deliver growth and substantial value to our customers and our stockholders as we progress toward a successful closure of 2018 and as we look ahead into 2019. So I want to thank you all again for joining us on the call today. We look forward to speaking to you in our next earnings call in January. John, that concludes the call for today.

Operator

Thank you. And ladies and gentlemen, that does conclude the conference. You may now disconnect.

Duration: 62 minutes

Call participants:

Greg Gardner -- Vice President of Investor Relations

Marillyn Hewson -- Chairman, President and Chief Executive Officer

Bruce Tanner -- Executive Vice President and Chief Financial Officer

Myles Walton -- UBS -- Analyst

David Strauss -- Barclays -- Analyst

Rob Stallard -- Vertical Research -- Analyst

Jon Raviv -- Citi -- Analyst

Richard Safran -- Buckingham Research -- Analyst

Sam Pearlstein -- Wells Fargo -- Analyst

Doug Harned -- Bernstein -- Analyst

Peter Arment -- Baird -- Analyst

Rajeev Lalwani -- Morgan Stanley -- Analyst

Seth Seifman -- J.P. Morgan. -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Joe DeNardi -- Stifel -- Analyst

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