L-3 Communications Holdings, Inc. (LLL)

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L-3 Communications Holdings (LLL)

Q1 2011 Earnings Call

April 21, 2011 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

Analysts

Cai Von Rumohr - Cowen and Company, LLC

Howard Rubel - Jefferies & Company, Inc.

George Shapiro - Citi

Joseph Nadol - JP Morgan Chase & Co

Robert Spingarn - Crédit Suisse AG

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the L-3 Communications First Quarter 2011 Earnings Conference Call. My name is Keisha, and I will be your operator for today. [Operator Instructions] I would now like to hand the conference over to Mr. Eric Boyriven with FD. Please proceed.

Eric Boyriven

Good morning, and thanks for joining us for L-3 Communications 2011 First 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. Also, please note that this call is being simultaneously broadcast over the Internet. I would now turn the call over to Mike Strianese. Mike, please go ahead.

Michael Strianese

Thanks, Eric. Good morning, everyone. Thanks for joining our call. Let me begin by saying that we had a good performance in the first quarter in the face of a very challenging environment and the ongoing budget uncertainty. We continue to focus on excellent execution and taking the necessary strategic steps to enhance our presence in the market, and better position us to serve the needs of our customers. We won a number of key re-competes and new awards during the quarter, and continued to perform well on our major programs. Particularly, in the current environment, it's critical that we ensure we are taking actions necessary to enhance our ability to anticipate and effectively address customer priorities and promote growth, while also optimizing the efficiency of our businesses. Along these lines, we recently streamlined our operations by consolidating the majority of our products group, with our sensors and Simulation group to establish the new Electronic Systems group, which of course is part of the Electronic Systems segment. This reorg [reorganization] will result in technology synergies and product enhancements, as well as reducing our overall operating costs.

Along with our continued outstanding performance, collaboration among our units is critical to our business strategy. We're executing well on this front, and these efforts continue to yield positive results. Our Warrior Systems business, which was formed last year after we acquired Insight has become a center of excellence with a large market share and new orders for night vision equipment, continues to be steady. We also received industry recognition when using a team -- with a team using product and integration capabilities of multiple L-3 divisions, accepted the 2011 William J. Perry award for their joint effort in project Dragon Spear, which was a Rapid Response ISR initiative. And I'd like to thank our employees for their continued focus on execution, and representing the company so well.

We spend two minutes on the budget and how we see things. First of all, there's a lot of discussion surrounding the budget. The fiscal '11 budget is $513 billion. It's a 1% or $5 billion real increase in defense spending at a time when many federal departments experience cuts of up to 18%. The fiscal '12 request is $553 billion. Most of the reductions came from areas identified by Secretary Gates as acceptable savings in his five-year $78 billion in program cuts and $100 billion in efficiencies, which won't take effect until fiscal '13. Of the 20 programs that were reduced or eliminated, no significant L-3 programs were impacted, and those efficiency savings will be reallocated to several priority areas, including ISR and equipment refurb [refurbishment] and upgrade, which are two very strong areas for us. Also, TSA funding that will support acquisition of advanced imaging technology, including our ProVision machines was not reduced. In fact, the current agreement provides for 500 additional AIT [advanced imaging technology] machines and 291 million for our EDS [Explosives Detection System] purchases and installation.

Secretary Gates has also begun a comprehensive review of the DoD budget to achieve the $400 billion in cumulative reductions by 2023 that the President has asked for. This works out to be roughly $33 billion per year, or about 6% of the total DoD budget, and will be spread out, of course, over a number of years in many areas. Any specific cuts would have to balance budgetary needs, with managing risks associated with future threats. Spending within this timeframe will undoubtedly be impacted by any leadership changes in Pentagon, and future administration changes. With Secretary Gates slated to depart this fall, the fiscal '13 budget represents the first opportunity for a strategic review of any new leader's priority efforts. Overall, our take of the situation is not as grim as some have reported, and we continue to view our operations for efficiencies that would limit the impact on L-3 and these changes.

On the financials, I'll give you a brief view. Ralph's going to take you through all the details. Our earnings were $1.95 for the quarter, up 4% compared to 2010's first quarter before the $0.10 per share charge related to the March 9 redemption of our $650 million of 5 7/8 senior subordinated notes. We continue to be very focused on taking advantage of the interest rate environment, and have almost refinanced. We have one issue left for all of our previous high yield debt with an investment grade paper, and that has significantly taken -- given a chunk out of our borrowing costs over the last two or three years.

Excluding that charge, EPS is in line with our full year 2011 projections. Sales were $3.6 billion. Orders were $3.4 billion, resulting in a book-to-bill of about $0.93 for the quarter. We expect that ratio to improve as we go through the year. Our funded backlog at the end of the quarter was approximately $11 billion. In terms of our business mix, we continue to believe we have a great balance in our portfolio. As budget shrink, my view is technology insertions on existing platforms and systems will be favored over new starts. In addition, there'll be more MRO [maintenance, repair, overhaul] required for both reset and service life extension of existing platforms, including a lot of ISR platforms. Also with potential for personnel and strength reductions from the government side, there will be occasion for an increase in demand for lower-cost contractor provided services and staff augmentation.

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