L-3 Communications Holdings, Inc. (LLL)

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L-3 Communications Holdings (LLL)

Q3 2010 Earnings Call

October 28, 2010 11:00 am ET

Executives

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

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

Eric Boyriven - Investor Relations

Unidentified Analyst -

Analysts

George Shapiro - Citi

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the L-3 Communications Third Quarter 2010 Earnings Conference Call. My name is Madge, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Eric Boyriven of FD [Financial Dynamics]. Please proceed.

Eric Boyriven

Good morning, and thanks for joining us for L-3 Communications Third Quarter Earnings Conference Call. With me here are Mike Strianese, Chairman, President and CEO; 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 will now turn the call over to Mike Strianese. Mike, please go ahead.

Michael Strianese

Okay, thanks, Eric, and good morning, everyone. Thanks for joining us for our third quarter earnings call. We'll start by, of course, thanking our employees for their continued hard work and commitment to the program performance in satisfying our customers, and our Group Presidents for their continued leadership efforts.

Overall, it was a solid third quarter. Earnings were up about 11% to $2.07 a share if you adjust for the debt refinance charge of about $0.03 that we had in this year's third quarter, and also adjust the $0.22 tax gain that was in the 2009 third quarter. Operating margins and cash flow continue to be strong. Sales were a little weaker than we expected. They were $3.8 billion. However, our C3ISR businesses continue to do very well with 8% growth, which had offset declines in A&M and Electronic Systems. Our Government Services segment grew at about 1%, but that reversed the trend of declining sales that we saw in the first half.

Orders grew at about 4% to $3.5 billion in the quarter versus 2009 third quarter, resulting in a book-to-bill of 0.92. Year-to-date, however, the book-to-bill is a 0.98, a little lower than the 1 that we would have liked to have seen, but still encouraging. Our funded backlog was $10.8 billion at the end of the quarter.

In terms of significant awards, there were several. First of all, the U.S. Army C-12 logistics support contract. Also with the Army, the Enhanced Night Vision Goggle or ENVG contract. That's getting a slower start than was expected, however, because of a protest, which has now been resolved. Intelligence Support Services in Afghanistan, our Special Operating Forces Deployable Node-Lite or SDN-Lite contract. A recent win known as the Battlefield Anti-Intrusion System, or BAIS, for the U.S. Army and the Advanced Checkpoint Carry-on X-ray Screening Systems for TSA. On top of those wins, there was significant follow-on order activity as well, and it's a long list, but just to name a few, Project Liberty, our EO/IR turrets, Rover ManPacks, CF-18, Law Enforcement Professional Program, Rivet Joint work, more eXaminer work, Flight School XXI and C-12 Logistics Services, just to name a

few.

In terms of the larger programs for JCA, total orders received to date are 21 aircraft. We're expecting another eight in fiscal '11. The total Air Force buys continue to be expected to be 38 aircraft, with the final mind coming in fiscal '12. We plan to deliver four in 2010, three are already delivered. That brings the total for the program will be six. The National Guard is still projecting the need for additional aircraft, and there is a potential for a plus up in fiscal '12 and beyond. And there are also still several foreign military sale opportunities, mostly those we see slipping to 2013 and 2014 due to government fiscal pressures and the fact that most of our production is dedicated to the U.S. delivery schedule as well.

For Project Liberty, we completed delivery of all 37 aircraft to the Air Force in August, and that was on budget and ahead of the contractual schedule. We look forward to continuing to apply L-3's expertise to other small aircraft ISR applications, both within the U.S. DoD and with foreign customers. For example, we currently expect the Air Force to expand the Liberty fleet by five aircraft sometime later this year. That has slipped out from where we had expected it and probably part of the OCO request for fiscal '10. We also are currently competing as a prime, as I'm sure you know, for the U.S. Army's EMARSS program.

A few words about EMARSS, that is the Enhanced Medium Altitude Reconnaissance Surveillance System. It's an aircraft that focus on the regular warfare mission, SIGINT, COMINT, EO/IR, and communications. It is the replacement for the canceled ACS program and a possible replacement for the aging Guardrail fleet, expected to be of $1.5 billion program of record. Configuration is a small aircraft similar to the Liberty MC-12 platform. The initial buy is now anticipated to be 6 EMD aircraft, with a six aricraft LRIP option plus logistic services and is expected to further grow to at least 30 aircraft.

We expect the award decision before year end. Now that was expected at the end of September and then the end of October. So that's moved out, as I'm sure you've all read, that's a heavily-competed program of between major primes and ourselves. We think we have a good shot at it, but again, it's a heavily-competed program, and we look forward to hearing the results at the end of year.

U.K. Air Seeker, formerly known as Springtime, formerly known as HELIX and sometimes known as U.K. Rivet Joint, just all on the same page, that program has survived Britain's Strategic Defense and Security Review, and is expected to proceed. It's a significant program for L-3 worth over $800 million over seven years. It consists of three U.S. Air Force RC-135 aircraft to replace the U.K. Nimrod ISR aircraft. The first aircraft delivery to the MOD is anticipated in April 2014, and we expect to receive the first aircraft to induct it in our Greenville facility in January. We're already beginning preliminary work on long lead items and planning. But I think what's important to note here is, this is really a good example that shows, one, the importance of ISR; two, the confidence in L-3's reputation and our ability to deliver on time and on budget even during the significant budget cuts we saw in the U.K. So we are very happy that this is proceeding as scheduled. And we're currently negotiating with the MOD presently, and expect the conversion kit contract by early next year. The program will be incrementally funded over the seven-year period.

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