L-3 Communications Holdings, Inc. (LLL)

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L-3 Communications Holdings (LLL)

Q3 2012 Earnings Call

November 01, 2012 11:00 am ET

Executives

Eric Boyriven - Managing Director

Michael T. Strianese - Chairman, Chief Executive Officer, President and Member of Executive Committee

Ralph G. D'Ambrosio - Chief Financial Officer and Senior Vice President

Analysts

Amit Mehrotra - Deutsche Bank AG, Research Division

Christopher Sands - JP Morgan Chase & Co, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Kristine T. Liwag - BofA Merrill Lynch, Research Division

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Jeremy W. Devaney - BB&T Capital Markets, Research Division

Presentation

Operator

Welcome to the Q3 2012 L-3 Communications Holdings, Inc. Earnings Conference Call. My name is Yvette, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Eric Boyriven of FTI Consulting. You may begin.

Eric Boyriven

Good morning, and thanks for joining us for L-3 Communications' third quarter earnings conference call. With me are Michael Strianese, Chairman, President and Chief Executive Officer; and Ralph D'Ambrosio, Senior Vice President and Chief Financial Officer. After their formal remarks, management will be available to take your questions.

Please note that during this call, management will reiterate forward-looking statements that were made in the press release issued this morning. Please refer to this press release as well as the company's SEC filings for a more detailed description of the factors that may cause actual results to differ materially from those anticipated. Please also note that this call is being simultaneously broadcast over the Internet.

I'd now like to turn the call over to Mike Strianese. Mike, please go ahead.

Michael T. Strianese

Thanks, Eric, and good morning, everyone. Thanks for joining us today. As you know, we rescheduled this earnings call from Tuesday due to the hurricane and the aftermath of this devastating storm. We hope that everyone, our investors, analysts and their families, are safe. We have many employees who were impacted by the storm and our thoughts and prayers are with them. Just judging by the headcount this morning on the call, it's about 1/3 of what we normally get, so I gather there is continuing issues across the community.

We had a solid third quarter. We performed well in our core areas across the company. We continue to execute well on our strategy of staying agile and adaptable and remain focused on growing market share and increasing our value for the shareholders. We achieved this by delivering cost-effective solutions and maintaining our excellent customer relationships across all our business lines. Our employees and management team are doing an outstanding job of increasing efficiencies, encouraging collaboration across the business and increasing market share in several areas, at all times performing with excellence, integrity and accountability.

Net sales for the quarter were $3.3 billion. That's down slightly from the third quarter of last year. We had diluted earnings per share from continuing ops of $1.98 compared to $2.02 for the same period last year. We reported funded orders of $3.2 billion, resulting in a book-to-bill ratio of 0.99 for the quarter. Our book-to-bill for the 9 months ended September 30 was a very strong 1.09, however. Funded backlog at the end of the quarter was $11 billion. That's up 11% compared to the beginning of the year.

Free cash flow for the quarter was $309 million. Regarding the Engility business, which was spun off back in July, our third quarter and year-to-date results for all comparative periods reflect Engility as discontinued operations.

We used a portion of the $325-million cash distribution from the spin-off to retire $250 million of debt. We plan to use the remainder to repurchase outstanding shares of common stock.

We also continue to evaluate our business portfolio and have been expanding offerings on our commercial and international business areas.

During the quarter, we also completed the acquisition of the commercial aircraft simulation business of Thales Group, which we now call Link U.K. I had the opportunity to visit the business last month in the U.K. I met with many of the employees there. All I can say is it is a terrific acquisition for L-3.

For our business segments, Electronic Systems sales for the quarter were up slightly due to increased sales in Microwave Products for both military and commercial applications; Sensor Systems from our acquisition of Kollmorgen Electro-Optical and Link U.K. We also had some declines in our Marine & Power Systems business due to lower demand for commercial shipboard electronic systems and reduced shipments of tactical quiet generators for the U.S. Army.

Sales of airborne ISR systems led our C3ISR business, whose net sales for the quarter increased by about 1% compared to the third quarter of 2011. These increases were partially offset by lower sales for network communication systems.

In our AM&M segment, net sales for the quarter increased by 4% compared with the third quarter of 2011. In addition to the Fort Rucker win and our support of U.S. Navy and Air Force aircraft sustainment programs, we also had strategic business wins in the international arena, with new work in both Korea and Canada.

Net sales in our National Security Solutions business declined by 16% due to decreased demand. We were selected for a quick-response cyber program for the U.S. Air Force and received a new IT support services contract with the U.S. Department of Veteran Affairs. Additionally, we received -- we recently opened our new National Security Solutions center in conjunction with Virginia Tech. This innovative partnership provides L-3 with access to R&D facilities and exclusive licensing rights to the products and services developed there.

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