L-3 Communications Holdings, Inc. (LLL)

LLL 
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L-3 Communications Holdings (LLL)

Q4 2011 Earnings Call

January 31, 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

George D. Shapiro - Access 3:42, LLC

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

Myles A. Walton - Deutsche Bank AG, Research Division

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

Joseph Nadol - JP Morgan Chase & Co, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Carter Copeland - Barclays Capital, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Brian W. Ruttenbur - Morgan Keegan & Company, Inc., Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

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

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 L-3 Communications Holdings Inc. Earnings Conference Call. My name is Genaida and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Eric Boyriven. Please proceed.

Eric Boyriven

Good morning, and thanks for joining us for the L-3 Communications Holdings Inc. 2011 Fourth Quarter 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 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 like to turn the call over to Michael Strianese. Mike, please go ahead.

Michael T. Strianese

Thanks, Eric, and good morning, everyone. Thank you for joining us this morning for our year-end earnings call. I'd like to start by thanking our employees again delivering L-3 solid performance. Strong program execution under the leadership of our group Presidents continues to be a performance driver for us and remains a differentiator for the company.

Our GAAP earnings in the fourth quarter were $2.72 per share on a diluted basis, despite the persistent challenging economic environment. Excluding some unusual items, EPS was $2.54, which is 7% up versus the 2010 fourth quarter. Our free cash flow is also strong, generating just shy of $0.5 billion. The exact number was $498 million for the quarter. Sales for the quarter were $4 billion, led by 8% growth in C^3ISR, which partially offset headwinds in our other segments. We ended the year with sales of $15.2 billion, which is a 3% decrease when compared to 2010.

Orders were $3.2 billion for the quarter and $14.8 billion for 2011, which resulted in a book-to-bill ratio of 0.97 for the year. Our funded backlog was $10.7 billion at year end.

Overall, we returned over $1.1 billion of cash to our shareholders in 2011 through share repurchases and dividends, representing an increase overall of 13% in cash returned versus 2010. And I'll note that since inception of our share repurchase plan, we have repurchased about 45 million shares or roughly 1/3 of our outstanding stock with about 13 million of those shares coming in 2011 alone.

Our commitment to value and responsible deployment of cash extends to our investment in technology and innovation despite the budget downturn, I-red does remain a priority for us. We will continue to invest our cash in R&D and other activities to expand our business space.

Looking at the business segments. ISR had strong performance, showing solid growth on healthy customer demand. Our AM&M contract logistics support business performed well with recent competitive wins, a steadily increasing backlog and a growing market share. A difficult budget environment and lower JCA volume for AM&M were partially offset by CLS services work particularly for the army's C12 aerial surveillance aircraft. Our Electro-Optical infrared integrated sensors business experienced increased volume within the Electronic Systems segment. The troop withdrawal from Iraq and the drawdown in Afghanistan resulted in program declines that continue to impact our services business. As I said at the onset of the call, L-3's been able to demonstrate consistently strong program performance defined in part by operating more efficiently and anticipating our customer needs with innovative products and services.

That performance was recognized by the customer when our army fleet support unit received the 2011 Materiel Readiness Award from the Army Aviation Association of America. This prestigious honor is awarded to a defense contractor that has made an outstanding contributions to the material readiness of army aviation. And given the upcoming recompete, that has us very happy going into 2012.

We continue to look closely at our operations to ensure that they align well with our production requirements and help us achieve maximum efficiencies. This involves making sure that our businesses are sized appropriately and are focused upon delivering for our customers. We continue to integrate and consolidate our businesses with that goal in mind.

We're also concentrating on adding new capabilities that expand our product lines and broaden our customer base. In 2011, our acquired businesses contributed about $160 million to our net sales. A good example of our strategy to add capability and broaden our base is the recently announced acquisition of Kollmorgen Electro-Optical, which develops and manufactures specialized equipment such as submarine photonic systems and periscopes, ship fire control systems, visual landing aids and ground EO and sensor queuing systems. KEO also expands our base in the EO/IR market and strengthens our position as a mission-critical sensor systems provider.

KEO is a market leader and positioned in very high priority areas in the DoD budget, including the Virginia class submarine. It also creates a variety of technical synergies and pull through opportunities for us that enhance our offerings and situational awareness for our customers. And KEO demonstrates how we successfully execute our acquisition strategy of thoughtfully and selectively considering opportunities that offer excellent value and provide a good fit with our current mix of businesses.

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