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L-3 Communications Holdings (LLL)

Q2 2012 Earnings Call

July 26, 2012 11:00 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

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

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

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



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Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 L-3 Communications Holdings Earnings Conference Call. My name is Lacey, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Eric Boyriven with FTI Consulting. Please proceed.

Eric Boyriven

Good morning, and thanks for joining us for the L-3 Communications Holdings, Inc. 2012 second 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 Mike Strianese. Mike, please go ahead.

Michael T. Strianese

Thank you, Eric, and good morning, everyone. Thanks for joining us. As you've seen in the release, we had a good second quarter, which was led by strong orders that were up 4% from last year's second quarter. We wish to thank our dedicated employees and management team across the companies for really a good job. As you know, the environment continues to challenge our industry. We are responding to those challenges by creating new ways of improving operational efficiencies and tightening our focus on products and services that directly address customer priorities.

We ended the quarter with a solid funded backlog of $11.7 billion. We had net sales of $3.6 billion, which was a 6% decrease from last year's second quarter with most of that decrease coming from Government Services. Diluted earnings per share were $2.08, which was an 8% decrease compared again with the second quarter of '11, which was $2.26, but excluding certain items, notably a tax gain last year and some of the spin-off expenses for Engility this year, the EPS declined about $0.02 or 1% versus last year second quarter. Free cash flow was $223 million for the quarter and our book-to-bill ratio is 1.10.

We completed the previously announced spin-off of Engility, which positions both Engility and L-3 to better focus on their respective core competencies and pursue business opportunities that play to their strengths as well. Along with continuing to focus on program performance and follow-through, we continued to invest in R&D that's aimed at creating reliable and affordable solutions targeted at specific customer needs. In our business segments, C^3ISR continued its strong performance despite a slow contracting environment. We saw 4% increase quarter-over-quarter and net sales to $862 million. This was part -- due mainly to stronger demand from the DoD for airborne ISR, logistics support and fleet management services, as well as higher demand from foreign military customers for airborne ISR systems. Net sales in the Electronic Systems segment decreased by 3% compared to last year's second quarter, due in part to reduced army requirements for certain products and to contracts that are nearing completion. This decrease was partially offset by growth in our sensor systems business related to the Kollmorgen acquisition and in our microwave business, which had increased deliveries of SATCOM systems, which included the power devices as well.

Net sales in the AM&M segment were down about 3% compared to last year's second quarter, and that was primarily due to lower volume on the Joint Cargo Aircraft program. In terms of services, net sales declined by 20%, mostly reflecting lower demand for services due to the Iraq drawdown and U.S. Government budget reductions, which partially offset a competitive U.S. army training contract win.

In terms of M&A, we continue to closely monitor the landscape for opportunities that may present themselves, both as a result of pressures throughout the industry and sell us that just want to cash out, brought about by the prolonged and challenging economic environment we find ourselves in. I'd like to reiterate that the strategy in pursuing these opportunities remains unchanged. We continue to be thoughtful and disciplined in our approach, targeting companies that will help us grow our market positions or add new customers, strengthen our competitive profile while providing a good return for shareholders.

In terms of the Engility spin-off, as I mentioned, it was completed on July 17, and Engility is now an independent publicly traded company on the New York Stock Exchange with the ticker symbol of EGL. The spin-off demonstrates our execution strategy that is built on situational awareness and a strong sense of customer priorities. This spin-off opens up exciting opportunities for Engility as it will not be subject to the OCI issues we have and we'll be able to pursue business that is outside of our areas of strategic focus.

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