L-3 Communications Holdings, Inc. (LLL)

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L-3 Communications Holdings (LLL)

Q4 2012 Earnings Call

January 30, 2013 9:30 am ET


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


George Shapiro

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Carter Copeland - Barclays Capital, Research Division

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

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



Good day, ladies and gentlemen, and welcome to the L-3 Communications Holdings Fourth Quarter Earnings Conference Call. My name is Ayisha, and I will be your operator for today. [Operator Instructions] As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Eric Boyriven of FTI Consulting. Please proceed, sir.

Eric Boyriven

Good morning, and thanks for joining us for L-3 Communications Fourth Quarter Earnings Conference Call. With me are Michael Strianese, Chairman, President, 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 would now like to turn the call over to Michael Strianese. Mike, please go ahead.

Michael T. Strianese

Thanks, Eric. Good morning, and thanks for joining us. We completed 2012 with a solid fourth quarter. It was characterized by strong orders, sales and cash flow in a persistent challenging environment. Despite the uncertainty throughout 2012, our employees and leadership team continued to demonstrate outstanding program performance and collaboration. I extend my thanks to everyone across L-3 for the excellent teamwork.

Overall, we remained focused on our strategy of growing market share and delivering innovation and value to all our stakeholders. We continue to increase our operational efficiencies while investing in research and development to strengthen our core businesses and broaden our customer base. We had net sales of $3.6 billion for the quarter, slightly higher than the fourth quarter of 2011. Diluted earnings per share from continuing ops were $2.25 compared to $2.21 for the same period in 2011. Last year's numbers exclude a gain from certain items.

During the quarter, we had funded orders of $3.3 billion. We ended the year with funded backlog of $10.9 billion, and that was up about 10% year-over-year. For the year, orders were up 7% over 2011, and our book to bill was 1.05x. This is a key metric that reflects the strength of our business. Our free cash flow for the quarter was approximately $450 million.

Overall, our business execution was very strong throughout 2012, and the challenging environment has been very manageable for us. We made key adjustments to our portfolio with the successful spinoff of Engility and 2 business acquisitions, KEO and the Link U.K. commercial simulation business. KEO adds submarine photonics systems and periscopes for platforms that include Virginia Class subs, a high-priority DoD program. The addition of Link U.K. extends our Simulation & Training business into the global commercial marketplace and strengthens our existing military Training & Simulation business and growth outlook.

Our business mix has also shifted to reflect the declining DoD environment and the increase in commercial and international opportunities we have. In fact, in the fourth quarter, the increase in our commercial and international business, plus our acquisitions, offset the decrease on the DoD side, which is a perfect example of our strategy in action.

In 2012, we also achieved important milestones in winning key recompetes, including contract in logistics service support at Fort Rucker, which represents about $2 billion in revenue over the next 5 years and is our largest contract in terms of annual sales. Our strategy is working. The company is strong, and we're well positioned to take advantage of new opportunities for growth.

In terms of the segments, Electronic Systems had net sales for the quarter -- their net sales increased by $62 million, which is about 4% up from the fourth quarter of 2011, mainly driven by the acquisitions. The net sales on an organic basis were up about 1%. Electronic Systems, as you know, is a very diverse, short-cycle business. We have several #1 or #2 positions across the segment, both domestically and internationally, and we're continuing to expand our market share as opportunities emerge.

In C3ISR, our net sales decreased for the quarter by $46 million or about 5%. For 2012 overall, C3ISR sales were up about 3%. That segment continues to perform very well, and we hold leadership positions across the market with solid demand in airborne ISR and network communications fostering cross-segment collaboration, which will play a key role in growing our market share in this business for the future.

In our AM&M segment, net sales for the quarter increased by 2% or $15 million over the fourth quarter of 2011. As budget pressures persist, there will be an increased focus on upgrades, lifetime extensions and reset work. These capabilities are at the core of our business, so we're well positioned for what's ahead. There are also additional international opportunities for our head-of-state work.

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