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L 3 Communication Holdings Inc. (LLL)

December 06, 2011 8:00 am ET


John C. McNellis - Senior Vice President and President of Integrated Systems Group

Steven Kantor - Corporate Senior Vice President, President of Marine & Power Systems Group, President of Services Group and President of National Security Solutions

Robert W. RisCassi - Former Senior Vice President

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

James W. Dunn - Senior Vice President, President of Sensors & Simulation Group and Chief Operating Officer of Sensors & Simulation Group

Unknown Executive -

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

Susan D. Opp - Vice President and President of Communication Systems -West

Richard A. Cody - Senior Vice President


Unknown Analyst


Unknown Executive

Well, good morning. I'd like to welcome you to the L-3 2011 Investor Conference. First of all, I'd like to start out with the Safe Harbor statement. We will be making forward-looking statements here, so give you a chance to take a look at this.

So let me walk you through the agenda for today. What we're going to do is start out with General RisCassi, who's going to give us a little geopolitical overview, transition into General Cody, who's going to talk about the budget, kind of tie those 2 things together for us as we then work our way into our President, CEO and Chairman, Mike Strianese, who will take us through an overview of L-3. We'll then spend some time on each of the 4 segments of the business, starting with Jim Dunn with Electronics Systems; Steve Kantor will take us through Government Services; John McNelis through AM&M and a portion of our C3ISR segment; and Susan Opp will follow-up with the remainder of that C3ISR segment; and then Ralph will talk to us about the financials. We'll end up with a Q&A session and then a luncheon buffet. If you can join us, we would really appreciate that.

So with that, let's go ahead and kick it off. I'd like to introduce General Robert RisCassi.

Robert W. RisCassi

Thanks, Chris. Good morning. As in the past, we're just going to take a look at various states around the world and see how they impact the conditions that we find ourselves in today. I would really like to stand up here and say everything is just about as we left it last year at this time, but it would be absolutely lying to you because there's been significant and probably significant institutional change going on in the world.

So this is the landscape we're going to talk about, selected states, and what I'd like you to take away from this is, if you think that the grand strategy of the United States today is about right, and that grand strategy is like we talked last year, beneficial security for economic prosperity, and that may be a little bit idealistic, but that's it. And we've resourced that at a level, do you want to continue resourcing at that level or are conditions in the United States and the EU and other places going to mandate a lessening of the resources to underwrite beneficial security, and how is that going to impact it?

So what I would like to do is go over these flashpoints initially. And the first one has been in the paper, Iran, and it comes in various flavors. The conditions in the state mandate that some degree of control is put on the evolution of trade going in and out of the state. So you're going to see sanctions placed on Iraq. Now sanctions -- or on Iran. Sanctions, by its very nature, unless they're international sanction and mandated by the UN, leak significantly.

But the question here is, if you don't do sanctions, what would you suggest? If you listen to Leon Panetta at the end of -- at the beginning of this week talk about Iran, and the questions from the audience all came from -- about Iran. And his treatment of the subject is you better stay with sanctions because if you don't and you want to do something positive in that state, it will reverberate throughout the entire region, and are you prepared for that?

So the question then before the states are, do you let them continue with the development of a nuclear capability, and what does that do to the stability in the region, and how is Israel going to react if that continues? This is fundamentally different than the Israeli attack on Syria because that was done in a snap of a finger, and it was a hullabaloo for a week, and then it dissipated. This one, you need tremendous overflight rights, and the distances are significant, and the targets are significantly harder.

So before you leap in changing that equation, you need to think it through adequately. And the question is, are we resourced both from an intellectual standpoint and a capital standpoint properly to do something about this or is something covert more in our kit of capabilities?

North Korea, if you remember back in '93, '94 timeframe, Secretary Perry drew a red line in the sand. He said you will not develop nuclear weapons, and they said, right, we won't do it. Scroll forward to 2011, they have a nuclear weapon. Now why isn't this in the same parlance as Iraq? Sort of an interesting question because as Iran goes, Middle East, Southwest Asia goes. As North Korea may go, Northeast Asia goes. The fundamental difference is, the buffer is China.

So as long as China is there, the development of nuclear capability in North Korea can be, in fact, moderated to the point where it is "acceptable," if that's a decent phrase in North Korea -- in Northeast Asia. India, Pakistan, interesting both nuclear states. Pakistan's been in the paper lately, more in terms of the bombing that transpired on one of their military bases. And was it an accident, was it not an accident? What's happened is it has inflamed the rhetoric within the state to the point where it's almost an intolerable situation.

If you remember back from Ayub Khan to President Zia to Musharraf, we had pretty good relationships, all former military people that had the control of the state. We transitioned to the new government after the assassination of the former prime minister, and her husband assumes the leadership of the state. He doesn't have that finite control over the military, and General Kayani, although he is a friend and educated, I might add, at Fort Leavenworth and other places in the United States, not the prison, but the college, is in fact, a friend of the United States, but he is a nationalist.

And when this happened, it put him in a very, very difficult position. So where you are now is, though, 1 of the 2 major egresses into Afghanistan is controlled by Pakistan. And you've seen in the media the trucks backing up and the logistics portability of the troops within Afghanistan, then are metered by Pakistan. Incidentally, the other route in is controlled by Russia. So we have a very interesting dynamic that's been set up in Afghanistan vis-à-vis Pakistan and Russia.

But the issue here is nuclear weapons, and I think last year and the year before, we talked about the controllability of -- and I think I assured you that we had finite understanding of where they were, and they had a process by which they could control all of their weaponry. If you read in the paper lately, in the open press, in the white press, I'm not so sure that's a true statement.

That sets up an interesting discourse with India who also has nuclear weapons, and they are not the friendliest of states. So you have in the first 3 bullets, 4 nuclear states that are setting up a dynamic, a fragility in the areas that can cause problems unless you continually resource the understanding of what transpires in those states and makes them tick, so they don't come out of the box.

Next issue up here is Afghanistan, and I'm sure General Cody will talk a little bit about this. We're supposed to come out in 2014. We won't be out in 2014. I'll tell you as I'm standing here, there'll be some residual force left in Afghanistan after the 2014 standpoint. Trainers, yes, but I don't think we're going to walk away from 10 years of investments in that state both from lives and hard cash that we're going to leave it for the whims of the Taliban control at stake. It's a very difficult dimension, but one that has to be dealt with, and that's a resource tapped.

Iraq, I look at Iraq as good news. There's opportunities for that to become a responsible state within states. But there are a couple of issues there. One is the leadership itself, Maliki, who is in charge and by the way, he's the Prime Minister, he's the Minister of Defense, acting, and he's the Minister of Interior, acting. So he's controlling everything in the state. But he only controls that because he has Sadr on his side also. And if you look at the issues between the 2 of them, Sadr wants all Americans out, Maliki wants 3,000 to 5,000 there. And if you go to the Kurds, they want the Americans not to leave it all. So you'll have that dynamic, should we or should we not stay?

End of the month, we're supposed to all be gone. End of the month, you'll have 13,000, at least 13,000 U.S. citizens, contractors within the green zone, if you will, within Iraq, mostly security people. You'll have others there, and of course, you'll have some type of a residual force in Kuwait to respond to any issue there that may transpire.

But it could be a responsible state within the states if they can get their act together in terms of the political establishment, plus who's going to control the oil and how are they going to divvy up the oil in that state.

The Islamic nation, we're going to talk about these in a subsequent slide, but a few words on Russia, primarily because it’s in the paper. Putin ran on an un-American slate. He enjoyed going into the election as the Prime Minister, a surrogate President. 2/3 of the popular vote of the state going into that office. It looks like he's going to come out of there with probably 50%. He doesn't have the complete enjoyment of the people in the marketplace at this juncture. However, I do not think this is going to undercut his strategic imperative, which is cobbling back the states into the Soviet Union. And that's what he is all about. And if you watched him over the last year or so and watch him going forward, every move he makes, whether it's a visceral affair [ph], whether it's a pipeline or natural gas or oil pipelines, everything he does is predicated upon the controllability of the states that were lost in the -- in 1989 when the wall came down and subsequent in the early part of the 1990s.

Okay, let's look at recent nation state changes, which is dynamic in itself. If you look at Tunisia, Egypt, Libya, Yemen, Bahrain, Jordan, they have one thing in common. There is aging leadership, no succession planning that's outside the family. And therefore, they were susceptible to the process called social engineering when the word could run around their countries on displeasures, whether it's an economic displeasure, social displeasure or whatever it was.

So when it started, it spread like wildfire. Now the issue in all of these, probably from a strategic standpoint is Egypt. We did not come to Mubarak's aid when he needed it, and even though, he is the reason that we have kept peace in that area, especially as it affects Israel, so we have an issue changing leadership to whom? Islamic brotherhood, which got a majority seats, 37 seats in the election just finished. State is still controlled by the military, will be in July until they're going to step aside, and then the Islamic brotherhood is going to be the controlling entity.

It'll be interesting to see how this plays out. In other words, one, if the military lets that happen; and two, will they be moderate? Don't forget, funded by Iran, heavy Al Qaeda influence and they are not moderate, even though they ran on a moderate ticket. So the dynamic of Egypt that affects all of these states in this region is rather significant.

So if you look at this chart, and what I'm attempting to graphically show you up here is as the winds wave from east to west and west to east, there are certain elements that are resident in one [ph] of these states, and they -- even though they may be nationalistic, they affect a region. And that affect in the region calls for our attention.

Now Africa, in the past, from a strategic standpoint, if you go back and look at all of the national studies around the world and where should we be putting our emphasis and where can we afford to take the risk, this falls below the line. Africa fell below the line. Everybody recognized big population, a lot of issues, a lot of natural resources. But other than the migrant states, the Mediterranean states and Egypt, it really was not that significant as long as the Suez stayed open and as long the Red Sea stayed open, which was the access from a trade standpoint.

So as you start to cause this process to take hold of transferring thought that we can overthrow, in fact, what should we be doing in this area? Can we afford to continue to take the risk of benign neglect in this area or should we, in fact, set up some type of an establishment that controls the vitality of these states and channeling them in the right direction, and do we have the intellectual capacity to do that and the resources to do that? I would argue, no.

So we're left with this sort of bucket of fog sitting out there, and we're trying to get our arms around into our states within this state that really are key, and Egypt is one of them. And of course, the Suez and the Red Sea are the waterways that we absolutely need.

But this is to watch. The large bubble on the east of that chart is there's an agricultural reform going on in the State of Africa that bears watching because it affects the entire region, if you will, but this is another entity that's popped up on the screen.

Southwestern Asia, if you look at Afghanistan, we talked a little bit about that, Iran a little bit and Iraq. Notice the connectivity. Talk about one, you can't forget the other. Talk about 2, you can't forget the other. So there is a relationship that is set up here.

In other words, if you walk out of Afghanistan and leave it to its own entity, what happens to Pakistan? And that's not shown on this slide, but what happens to Pakistan? What's Iran going to do? Are they going to step into this? How about Iraq? So you have this fragility in this region where we've stuck our finger in the fan in Afghanistan and said we're going to make you whole, and then we're going to pull it out of the fan in 2014 in a fend-for-yourself without understanding the dynamic of the rest of the region. Very, very difficult issue to come to grips with from our State Department and from a military standpoint.

So if you look at all of these states and the connectivity, are we resourced properly from a national security standpoint, state and defense and others, to do what needs to be done diplomatically and by extension, militarily, in this region that ensures harmony in terms of beneficial security for everybody.

Pakistan and India, we talked a little bit about that. It's really, you have a mega-state in India, largest democracy, as you know, in the world, over 1 billion people. And we have Pakistan just to the east as shown on this chart, both nuclear states. One is stable, the other one is less stable, if you will. And so we're just going to have to watch and see how this plays out.

But I'll tell you this, India is watching what happens in Afghanistan and Pakistan because it is a direct affect on them. And what should our role be vis-à-vis this place? This is very, very difficult. You can't turn your back on this.

East Asia, the key I'd like to tell people in this area is Korea, Japan and Australia. They're essentially all in the same time zone. And if you looked at a large map, there's a relationship in terms of real-time data flowing back between the national command authorities in these 3 states. And that understanding is a hedge against China in this area. And China's strategic goal has been, will be, regardless of what they say in the media, is control in Northeast Asia, control in the Pacific and what follows after the Pacific.

So as we change and shift from our Eurocentric focus from the United States, are we prepared to take on China as a Pacific focus because that's what our leadership in Washington [ph] said. We're going to become an Asia nation, focused on Asia in the United States.

So as you look at this, it then becomes rather interesting. Nuclear state, North Korea; nuclear state in China; South Korea, not a nuclear state; Japan, not a nuclear state. So as you look at this dynamics, we can ill afford to do anything in lessening the troop population [ph] of Korea. So 30,000 you're going to buy there day in and day out in South Korea as that type of a hedge, plus the increase that we've just agreed to, to put Marines into Australia. So you're getting a footprint there, but it's a footprint that needs to be resourced and continually resourced in this region, a large troop population in Japan also.

China, I think we talked a little bit about this state. It becomes an enigma in some cases. You look at it, and you marvel how far they've come in such a short period of time. They do have a very good military, very well trained, and so we'll just have to watch this. And the point here is, you can ill afford not to resource whatever your geopolitical thoughts are to control their expansionism in this part of the world.

Then in the paper, if you look at the media today, Geithner in Frankfurt and then the bond deliberations both in Germany, we were talking before I got up here, what were we thinking of when we created the European Union, a United States of Europe? Because it isn’t working, and no matter how many Band-Aids you put on it, it needs a tourniquet, and that may not solve it.

So as you look at this and being a Eurocentric country for so long and shifting our focus to the Pacific or to Asia, we're going to leave this totally uncovered? And to underscore what I just said, NATO is not the NATO that you remember. NATO has lessened its troop population. Most of the states that contribute forces to the NATO establishment, if you will, are focused nationalistically, can be called upon, but they don't have a lot of wherewithal.

And just look at, although the Libyan operation came out okay, they came out okay from a flight standpoint, a tactical standpoint. But the strategic piece of that, the command and control and communications was provided by Mr. and Mrs. United States. Are we prepared to underwrite that going forward based on the TOA that's resident in the defense budget today and going forward? This is a big issue on how we treat Europe going forward, and it's not only economic.

Russia, as we talked about, Putin will, in fact, attempt to cobble the stands back into and others, Belorussia, et cetera and Georgia back into a greater Soviet Union over time. And I use it as an example on the cunningness on how well he has orchestrated some things. Just look at what he did in Georgia. Under the guise of deception, under the guise of using old equipment, he went in, took over Georgia, established what he wanted to.

Read the rest of this transcript for free on seekingalpha.com