L-3 Communications (LLL) Earnings Report: Q4 2015 ... · We also divested climate Associates a...

CompanyName:L-3CommunicationsHoldingsIncCompanyTicker:LLLSector:IndustrialGoodsIndustry:Aerospace/Defense

EventDescription:Q42015EarningsCallMarketCapasofEventDate:8.64BPriceasofEventDate:111.98

©2014TheStreet,Inc.Al l R ightsReserved Page1of21

L-3Communications(LLL)EarningsReport:Q42015ConferenceCallTranscriptThefollowingL-3CommunicationsconferencecalltookplaceonJanuary28,2016,11:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

MahmoudSiddig;JoeleFrank;ManagingDirectorMichaelStrianesee;L-3Communications;ChairmanCEORalphDAmbrosio;L-3Communications;SeniorVicePresidentandChiefFinancialOfficer

OtherPart icipants

CaivonRumohr;CowenandCompany;AnalystRobertSpingarn;CreditSuisse;AnalystMylesWalton;DeutscheBank;AnalystSethSeifman;J.P.Morgan;AnalystRobertStallard;RoyalBankofCanada;AnalystCarterCopeland;Barclays;AnalystRichardSafran;BuckinghamResearch;AnalystHowardRubel;Jefferies;AnalystGeorgeShapiro;ShapiroResearch;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

GooddayandwelcometotheL-3Communicationsfourthquarter,fullyear2015conferencecall.Allparticipantswillbeinalistenonlymode.Shouldyouneedoperatorassistancepleasepressstarzero.Aftertoday'spresentationtherewillopportunitiestoaskquestions.Toaskaquestionyoumaypressstarthenoneonyourtouchtonephone.Towithdrawyourquestion,pleasepressthepoundkey.

Pleasenotethiseventisbeingrecorded.

IwouldliketoturntheconferenceovertoMahmoudSiddig,pleasegoahead.

MahmoudSiddig (ManagingDirector):

Thankyou.

GoodmorningandthanksforjoiningusforL-3'sfourth-quarterearningsconferencecall.

WithmeareMichaelStrianesee,ChairmanandChiefExecutiveOfficerandRalphDAmbrosioSeniorVicePresidentandChiefFinancialOfficer.

AftertheirformalremarksManagementwillbeavailabletotakeyourquestions.

Pleasenotethatduringthiscommentwillreiterateforlookingstatementsaremadeinthepressreleaseissuedthismorning.

PleaserefertothispressreleaseaswellastheCompany'sSECfilingsforamoredetaileddescriptionof




thefactorsthatmaycauseactualresultstodiffermateriallyfromthoseanticipated.

PleasealsonotethatthiscallisbeingsimultaneouslybroadcastovertheInternet.

IwouldnowliketoturnthecallovertoMikethatMichaelMichaelStrianesee.Mike,pleasegoahead.

MichaelStrianesee (ChairmanCEO):

Thankyouandgoodmorningeveryone.

Thequarterreflectedourcontinuedfocusonsuccessfullyreshapingourportfolio,expandingmargins,enhancingourmanagementTeamandreturningourtoplinetogrowth.

ThebiggestactionwasthesaleofNSSInternationalfor$550millionincash.WearepleasedwiththatpricewhichrepresentsanattractiveEBITDAmultipleweexpectthesaleofNSStoclosenextweekandhavereportedNSSasadiscontinuedoperationinourfourth-quarterandfull-yearresults.

WealsodivestedclimateAssociatesasmallsidescansonarbusinessduringthequarter.

Theseactionsreflectourcommitmenttorepositioningourportfolio;improveourfinancialperformancebyfocusingonourcoredefenseelectronicsmedicationsandISRmarkets;wherewehaveleadingpositionsandstrongtechnicaldiscriminators.

Aswecontinuetoimproveevaluatepotentialacquisitionsandfurtherdivestitures,we'retakingmarketconsiderationsmarketconditionsintoconsiderationconsistentwithbestpractices.There'sanumberofkeyfactorsthatgointoourdecision-makingprocessincludingreturnoncapitalandimprovementofL-3'scompetitorposition.

Bothwillmakeisbetterequippedtocreatevalueforshareholdersaswellascustomers.

Inthequarterinfortheyearasawhole,wehadstrongperformanceonare-competesandprogramexecutionacrossourbusiness.Iwentthankallofouremployeesaroundtheworldfortheircontributionsandfortheircontinuingsupporttodeliverthebestwehaveforcustomers.

Thesethingsareprogressingwellfromanoperationalstandpoint.ChrisKubasikisadvancingourstrategicplanandoperations.Specificallyhe'sfocusingonimprovingourmarginonorganicgrowthprofilesincoordinationwithoursegmentpresidentsastheycontinuetorestructurebusinessunits.He'sidentifyingopportunitiesforconsolidation;includingandsupplychainandbackofficeoperationshe'salsoactivelyengagedinourportfolioshapingaswell.

Wearealreadyseeingbenefitsfromourrefinedstrategy.Marginsareimprovingatanicepaceinallthreesegmentsandweanticipatethatourtoplineparticularlyorganicgrowthwillcontinuetoimprove.

Turningtoourfourth-quarterresults,wehadnetsalesof$2.9billionadecreaseof3percentyear-over-year.Netsalesfortheyearwere10$1/2billiona5percentdecreasefromlastyear.

Ourorganicgrowthofthequarterwas$40millionor1percentconsolidatedsegmentoperatingmargincameinat8.9percentforthequarterfundedorderswere$2.6billionforthefourthquarter.Andweendedtheyearwithabooktobillratioof.94.DuringthequarterandoverthispastyearwecontinuetogeneraterobustcashflowwhichhasbeenoneofL-3'slong-standingstrengthsweanticipatethiswillcontinueintothefuture.

In2015werepurchased$740millionofourstockandpaid$214millionindividendsreturninganaggregatealmost$1,000,000,000incashtoshareholdersthroughabalancemethodofcapitalallocationwemaintainedandefficientcapitalstructurewithampleliquidity.




Wealsocommittedtomaintainingourinvestmentgradecreditratingswhichiscriticaltoourshareholdervaluecreationstrategyofdividendsandsharerepurchases.

ThisdisciplinedapproachenablesustoreturncashtoshareholdersandstrengthenstheCompanybyprovidingresourcesforstrategicM&Aopportunitiesandinvestmentsingrowthareas.

BeforeIaddresskeyawardsforthequarter,I'dliketodiscussafewimportantinvestmentandportfoliointegrationinitiatives.

In2015,weinvested$269inresearchanddevelopmentandconsequentlyhaveseensomeimportantadvancesinourR&Dprogram.

Ourgrowthinvestmentsarefocusedonthreekeygoals;enhancingourproductlines,growingfuturesales,anddevelopingnewproductsandcompetitivediscriminators.

Forexample,oureffortsinphysics-basedmodelingandsimulationarenotable.Here,weleveragetechnologyfromthegamingandvisualizationindustrytodevelopL-3'sideationfacility.

Thisuniqueprojectenablesofomissionsimulationcapturingcapabilitiesfromtheunderseatothespacedomain.Thiswillenableourcustomerstoclearlyvisualizetheeffectivenessofsystemsinananti-accessareadenialorA-280environment.

ThisisanareawereL-3isleadingintechnologydevelopmentforthismarketplace.ThisisagoodexampleoftheinnovationandthoughtleadershipwehadL-3haveembraced.

Andthere'smoretocome.We'redevelopingsmallerlighterSatcomterminalsthatmaintainahighlevelofperformance,aswellasfuturecommunicationcapabilitiesthatimprovetheprobabilityofinterceptanddetection.Wealsocontinuetoupgradeournightvisionproductsspecificallyinthedevelopmentofbulldigitalnightvisioncapability.

TheseR&Dadvancesreflectourpositionasanindustryinnovatorandopenthedoortonewsalesopportunity.Ourportfoliointegrationeffortsareproceedingbeyondourexpectations.

Forexample,intersectionsareincreasingL-3'scapabilitiesandtechnologiesbyworkinginternallywithWesCam,ourcommunicationsystemsWesandunmannedsystemsbusinessestoprovideenhancedsensorandimagerysolutionstoourcustomers.

Additionally,acombinationofCPCaviationandlinkUKissuccessfullyexpandingthatbusinessbase.WealsocompletedourMyTechacquisitionbyacquiringadvancedtechnicalmaterialsnowcalledL-3NordicATM.ATMdevelopsandmanufacturesspecializedcoaxialinwaveguideRFmicrowaveproductsandfitsinwellwithournotofmytechproductlines.

WeareperformingwellonkeyprogramsandplatformintegrationwecontinuetomakeprogresstowardsthecompletionofthefirstVIPaircraftinaworkingcloselywithourcustomer.

Now,letmeaddressafewsaywecanwinsinourdefensecommercialaviationandourexceptionalbusiness.Fromamacroperspective,theDoDbudgethasresumedgrowthandwe'veseenimprovementinourDoDorganicsalesgrowthrate.TheDoD'sthirdoffsetstrategyalsopresentsopportunitiesforL-3andwearefollowingclosely.L-3hasmanycapabilitiesthatwillenhanceourabilitytohelpourcustomersachievetheirgoalsandobjectives.

InthefourthquarterwereceivedamajorcontracttoprovideaPowerNoControlCenterorPNCCforenableddestroyers.ThisisanadvancedandeffectivepowerManagementsystemandweseenfurtheropportunitiesforexpandingitsapplicationsacrossotherU.S.Navyplatforms;includingcarriers,




amphibiousassaultships,andlateralcombatships.OurISRintegrationbusinesscontinuestoberobustandwereceivednewbusinessawardforamajorprogram,includingthe(EMars)aswellastheclassifiedprogram.

InadditionwewereselectedtoprovideUSspecialoperationscommandwiththeknockyournightvisionequipment.Wealsoreceivedadditionalfundingforawiderangeoflegacyprogramsfeaturingourmissiledefensework;forusers,(predatormissionaircrew)trainingsystems,C-130displaysforphotonicmasswork,and(great)eagleyUASwork,whichincludesourinnovativenewcompositemaintenancesystemstrainer.

AlsointhetrainingarenawereceivedacontracttoupgradeorF-18tacticalforthenewU.S.Navy.Thisawardimprovethefidelityofthetrainingequipmentandprovidesanewimmersiveexperienceforpilots.

Finally,wereceivedfollow-onfundingforbutprogramsuchasArmyfleetsupportaswellasavarietyofmodificationinsustainingprojectsincludingarivetjointamongothers.

Forcommercialaviation,thisisasectorwithstronggrowthpotentialandasevidencedbyourrecentawardswearecapitalizingonopportunitiesinincreasingourmarketshare.Ourcommercialflightsimulatorintrainingbusinesscontinuestobestrong.We'vereceivedordersfromTurkishAirlines,AirChina,SpringAirlines,andDeltaAirLinesforavarietyofsimulators.TheDeltaordersparticularnotablebecauseitexpandsourmarket.

Inaddition,oursecurityanddetectionsystemsbusinessremainssolid.AndinthefourthquarterwereceivedordersforavarietyofproductsincludingProVision,checkpointsscreeingsystems.IntheUSCapitolbuildingwealsoreceivedordersforournewClearScanAircraftBaggageScreeningSystemsfromSingapore,aswellasamaintenancecontractwiththatTSAforourexaminersystems.

Intheinternationalareadespitetheongoinglumpinessinthatmarketweremainfocusedonbuildingourbusinessandarepleasedtoreportseveraldevelopments.We'vebeenincreasingourresourcesbyaddingpersonnelandincountryofficerstosupportbusinessdevelopmentactivities.Theseeffortsarepayingoff.

We'vebeenselectedtosupplynightvisionequipmenttotheKingdomofSaudiArabia.Additionally,wereceivedsalesforourtravelingwavetoequipmentfromseveralcustomersinAsiaandChinaaswell.WesCamisalsousingwellsupplementingthatsoliddefensebusinesswithseveralinternationalawards.

IntermsofourOutlookfor2016,asyouknow,2015wasatransformativeyearforus.Aswelookaheadto16weexpecttomaintainourpositivemomentumaswedrivemarginimprovementandcontinuetorepositiontheportfolio.Ourfocusremainsconcentratedongrowingourbusinessincapturingadditionalmarketshare.Andwecontinuetomovetowardshigher-marginareaspioneerinnovativetechnologythroughtargetedR&DinvestmentsandstrengthenourcorebusinessthroughstrategicM&A.

OurapproachtoM&Aremainsthesame;weregularlymonitorandevaluateCompany'sthatmightmeaningfullycontributetothestrengthofourbusiness,pursuingaccretiveacquisitionswithstrongmarginsandhighgrowthrates.Smalleracquisitionswillbefullyintegratedintoourexistingoperationswhereverpossible.

Ourstrategyforgrowthcombinedwithourstrongbalancesheetandthoughtfulapproachtocapitalallocation,positionuswellforsuccessinthecomingyear.Withthat,letmenowturnitovertoRalphforamorein-depthlookatthefinancialsandthenwe'llbehappytotakeyourquestions.

Ralph?

RalphDAmbrosio (SeniorVicePresidentandChiefFinancialOfficer):




OK,thankyouMike.

I'lldiscusssomedetailaboutthefourth-quarterresultsandthenreviewtheupdatetoour2016guidance.

First,IwanttoremindeveryonethatwereclassifiedNSStodiscontinuedoperationsforallperiods.AsMikesaidweexpecttocompletethatsaleoverthenextweeksomycommentswillonlyconcernL-3'scontinuingoperationswhichdonotincludeNSS.

WehadsolidperformanceforthefourthquarterwithadjusteddilutedearningspersharesalesandfreecashflowcominginbetterthanourOutlook.ItwasdrivenprimarilybyhighersalesinlowertaxesduetothereenactmentoftheR&Etaxcredit.

AdjusteddilutedEPSexcludeslossesonbusinessdivestituresandnon-cashballoonpaymentcharges,includingthefourth-quarterballoonpaymentchargeforlogisticsolutions.

Fourth-quartersaleswerejustunder$2.9billionandgreworganicallybyonepercent.Saleswereabout$90millionabovethemidpointguidancethatweprovideddrivenbyhigherU.S.DepartmentofDefensesalesmostlyincommunicationsystems.Webelieveourfourth-quartersalesdemonstratethatthesalesgrowthrateforUSgovernmentandDoDbusinessisimprovingandweexpectitwillcontinuetoimprovethisyearin2016.

Consolidatedoperatingmarginwas50basispointsbelowwhatweanticipatedforthefourthquarterand10basispointsbelowwhatweexpectedforthefull-year2015withlowermargins,andelectronicsystems,andaerospacesystems.Theelectronicsystemsmarginwas11.3percentforthefourthquarterand11.5forthefullyearanditwasimpactedbya$20millionrefundliabilityprovisionforEOTechholographicweaponsites.Aerospacesystemsmarginswasabout15basispointslowerthanwhatweexpected,andthatwasprimarilyduetohighermaterialandlaborcostonfixed-price.perflightourclaimedourlogisticsolutionscommunicationsystemsbetterthanweexpecteddrivingisfull-yearmargin25basispointshigherthanourguidance.

Fourth-quarterfreecashflowof460millionwasalsoverysolidbringingthefull-yeartwoand829millionwhichwas19millionbetterthanweexpectedandessentiallyduetotheunexpectedreenactmentoftheR&Dtaxcredit.

Aswerecentlyhaveexplained,weinvestedsignificantamounteachyearandourneedtosustainandgrowourbusinessandthatR&DalsocreatesavaluablecashtaxasreductionfortheCompany.

Movingontothe2016comparedtoourinitialguidancethatweprovidedattheinvestorconferenceonDecember8lastmonth,our2016guidanceincludesincreasesforEPSfreecashflow,andoperatingmarginsprimarilyduetotwoitemsfirsttheR&DtaxcreditwhichwaspermanentlyreenactedbyCongress,lastmonthandsecondlypensionexpensewillbe32millionlowerthanourinitialestimate.

Thesechangeseachincreased2016EPSbyabout$.25liftingtheEPSguidancerangeatthemidpointby$.50to$7.50whichisanincreaseof9percentcomparedto2015adjusteddilutedearningspershare.

Thelowerpensionexpensealsoraisesconsolidatedoperatingmarginguidancebyabout30basispointswithcorrespondingincreasesineachofthesegmentmargins.Wemadenootherchangesto2016salesandmarginguidance.

Ourconsolidatedsalesguidanceremainsat$10,050,000,000atthemidpointfor2016guidance.With2015salescominginalittlehigherthanweexpected,our2016guidancenowassumesanorganicsalesdeclineofapproximately2.5percent.

WeexpectourUSgovernmentincludingtheDoDbusinesstobedown2percentorganicallyversus15




percent.Commercialistogrowabout8percent,andinternationalsalestodeclineabout14percentversus15percent.WithrespecttotheUSgovernmentandDoDbusiness,thefaroneoffoftheAfghanistandrawdownsalesin2016isexpectedtoreducesalesbyabout$135million,andwithoutitoursalesintheUSgovernmentandDoDmarketswouldbeaboutflatin2016.WehopetohavesomeupsidewithourUSgovernmentsalesin2016.

Weincreasedtheconsolidatedoperatingmarginguidanceto9.8percent,whichis130basispointsofanincreaseover2015,withmarginsincreasinginallthreesegments.Ourdilutedsharesareinstandingestimatestaysat$77.5millionfor2016,whichisbypercentlowerthanlastyearanditcontinuestoincludesharerepurchasesof$750millionortheyear.

Weincreaseourfreecashflowestimateby$15millionto125million.Andthatiscomprisedofthreechanges;first,theR&Dcreditabout$20millionslightlybetterworkingcapitalperformanceadds$50million.Andthenwe'reincreasingourinvestmentcapitalexpendituresby$50millionandthatleadstoincrease.

Thecashflowguidancefor2016continuestoassumeabout$100millionofpensioncontributions.Withrespecttoourcapitalallocation,inadditiontotheplannedsharerepurchasesof$750millionfor2016,cashdividendswillbeslightlyabout$200millionandweintendtorepay$300millionofdebt.

WealsoacquiredasmallmicrowavecomponentsbusinessthatMiketalkedabout,thatcloselastweekandthatwasfor$27million.AndweareintegratingthatintoourNordicMicTechDivisioninthecommunicationsystemsegment.

Afterthesecapitaldeploymentactions,weestimatethatwe'llend2016withacashbalanceofabout$325million.Ourcapitalallocationandfinancingstrategycontinuestoincludeourcommitmenttomaintainingourinvestment-graderatings.Iwanttounderscorethatwedon'tviewtheratings--theinvestment-graderatingsastransitory.

Andforthelastpointon2016guidance,weexpectourbooktobillratiotobeabout1.0.Lookingatthefirstquarterof2016;weexpectsalestobebetween$2.3and$2.4billionwithanorganicsalesdeclineofabouttwopercent,marginswillbeaboutninepercentforthefirstquarterwithEPSbetweenadollar$.50andadollar$.60,freecashflowcominginfromsomewherebetweenzeroand50millionandthebooktobillratiobetweenonepoint--between.901.0.

Sotoconclude,ourfinancialreviewL-3isinaprocessofpositivetransition.Wearefocusedonprogramperformance,expandingmarginandreturningourtoplinetoanorganicgrowthposition.Wearealsostrengtheningourbusinessportfoliotostructurallyimproveourcompetitivepositions,salesgrowthrateandmarginexpansionprofile.

Wecontinuetogeneratesolidfreecashflowandareallocatingittoincreasesharesofthevalue.Werecognizethatwehavemoreworktodo.WeknowwhatastobedoneandwelookfortoupdatingyouontheCompany'sprogressthroughouttheyear.

ThankyouandwillbegintheQ&Anow.

QUESTIONS&ANSWERS

Operator :

Thankyou.

Wewillnowbeginthequestionandanswersection.Toaskaquestion,youmaypressstaroneonyourtouchtonephone.Ifyouareusingaspeakerphone,pleasepickupyourhandsetbeforepressingthe




key.Towithdrawyourquestion,pressthepoundkey.

+++presentation

OurfirstquestioncomesfromthelineofRobertSpingarnofCreditSuisse

RobertSpingarn (Analyst-CreditSuisse):

Goodmorning.


MorningRob.


HiRob.


Morningguys.

Mike,Idon'tknowifthisistherebutwhenIlookatthethreesegments,itseemstomethattheonethat'sgivingyouthemostchallengeisaerospacesystems.WhenIthinkaboutlastyear,someoftheexecutionatWaco,theimpairmentoflogistics,andyoumentionedthesoftinternationalbookingsthereyouknowinthereleasethismorningregardstothebooktobill.

Howdoyoustrategicallyhowtogoabouttacklingthesegmentgettingthisthingwhereyouwantit?


Well,you'rerightRobanditcertainlyisafairquestioninmyview.

Sowearenotsatisfiedattheperformanceofaerospacefrombothmarginandordersstandpointandsales-ofcoursesalesgrowth.Thatsaid,therearestrengthsinthebusinessandwedoseeopportunitiestoimproveresults.We'veidentifiedanumberofnewprogramopportunitiesandinfactcustomershaveindicatedtheywouldliketoseeL-3asbidder.Andinfact,wecontinuetogetcertainamountsofworkofallsortsjustbecauseofthecapabilityofthatbusinessunitourunmatchedinthecountry-unmatched.Howevertheybeenthroughadifficultcycle.

Soasweanticipateinimprovingbudgetaryenvironmentsahead,webelievethattherewillbeopportunitiesthatcanleadtobettertop-linegrowthaswell.

Sointermsofallocatingresources,it'ssomethingthatI'vedeployChrisontomonitorcloselyaswellasDaveVanBuren.Theseareprogramsthatbothareveryfamiliarwith,includingwemadeseveralvisitstothebusinessunitduringthelastquarter.Andwehavealleyesfocusedongettingitimproved--gettingthat.Nowunfortunately,therearenumberofsizableinternationalcontractsthathadcompletedlastyear,someofthemalittlebitearlierthananticipatedsuchastheAirseekerprogram.Andwe'renotbackfilledifyouwillwithnewworkbecauseofaslowdowninternationally.

Sothosearesignificantprogramsthat'scausingabitofadipinthenumbers.Andthereareopportunitiesagaininternationally,tobringmoreworkinhousethereaswellasontheU.S.governmentside.SoIthinkafewmorequartersofworkonitandwewillstarttoseesomeresultsanynewworkin-house,butIbelievethatthefirststepingettingthattoturnaround.





Right.

Andso,whenyouthinkabouttheinternationalsoftness,isthereregionalcomponenttoitasyoulookforwardtoit?IstheMideastnotparticipatingasmuchastheyhaveandwherewhatregionsdoseesomeoftheopportunitiesthatareinfrontofyou?


Well,thegrowthhasbeenMideastandAsiaandyesyou'rerighttheMideasthassloweddownandAustraliaaswell.Asiacontinuestobeagrowthareaforus.OfcourseyouhavetheoilpriceissueintheMiddleEastthatisIthinkputtingabitofacrimpinspending,sincecountrieshavesurvivedwithoutsomeoftheseplatformsinthepast;whetherthey'resophisticatedISRsignals,intelligenceplatformsthatrequirenotonlytheaircraftbutgroundstations,andoperators,andprocessing,andthelike.Andthey'reverybigticketitems,sowhilewe'reseeingaslowdownwe'reseeinganuptickifyouwillinAsia.

Someofthethingswe'vebeenfocusingonispartneringinternationallywithplatformmanufacturersifyouwillorotherincountryindustrialpartnerstohelpinthatregardandit'sbeenworkingoutprettywell.WehaveafewaircraftundercontractinJapanforexamplethatwetalkedaboutlastyear,moreinKorea.Andthere'smoreIdon'twantotalkaboutforcompetitivereasonsbutweareactivelypursue--inpursuitofseveralmajorplatformtypeprogramswhereL-3willbetheprimesystemsintegratoroftypicallysophisticatedISRsystemsoncommercialtypeplatform;whichisreallywhatthisbusinesshasbeengoingoverthelastseveralyears.


OKandthenjusttofinishcutonthisyoutalkedaboutthegrowthpursuitsinthesegment;anymoreonthedivestituresorportfolioshapinghere?


Well,we'vecontinuetoevaluatealloperationsthatareleadingourobjectives.Andyouknow--andthere'sacouplewaystodealwithitwhetherit'sworkinghardertoimprovethebusinessoranoutrightdivestitureasyousawinthefourthquarter.Buttheportfolioshapingdoesremainacoreelementofourstrategywewillcontinuetofocusonourcoredefenseelectronics,medicationsandISRmarketsaswe'vebeensaying.Howeveraswecontinuetoevaluatetheportfoliowearetakingthemarketconditionsintoconsideration.

TheNSStransactiondemonstratesourcommitmenttoactingwhenweseetherightvaluationsavailable.Andwewillcontinuetobeopportunisticandwillconsidervalueenhancingopportunities.ButrightnowasyouknowthedebtmarketIguessyouwouldcallithigh-yieldorprivateequityisnotreallythereasit'sbeen,soit'scausedabitofcrimpinvaluationandwe'renotreallylookingtogivethingsaway.We'redealing-oneparticularbusinesswithwellover$1billioninsales,wheretheofferareverydisappointingintermsofnumbersthatabeendampenedaround.Iknowthoseapiecethatwasoutlastweekandwerenotinterestedinpursuingthatkindofatransactionthatisnotvalueaccretivetoshareholders.


OK,thatmakessensebackwillstayfocusedbackmakessense.


We'llstayfocused.





ThankyouMike


You'rewelcomeRob

Operator :

OurnextquestioncomesfromthelineofCaivonRumohrofCowenandCompany.

CaivonRumohr (Analyst-CowenandCompany):

Yes,thankyouverymuch.

SoMike,onRaytheon'scall,theysaid,thereChairmantheysaidwasjustintheMideast,andhesaidhe'snotseenoilasaproblemandtheyhadgoodbookingsinthefourthquarterinternationally.Theylookedforhigherbookingsthisyear.Ispartoftheissuethere,whichyouknowmaybeyouguysaresmallerandthereforecan'thavethesamekindofsalespresenceinthosecountries?Andsecondly,Ithinkyou'dmentionedacoupleofpotentialsforgrowthininternationalnextyearifyoucouldupdateusonthose?

Thankssomuch


Well,Iwouldrelateitmoretowardsthetypeofsystemthat'sbeenevaluated,notnecessarilythesizeoftheCompany'ssellingsuchasystem.Sosomethingsarejustneededmorethanothers,particularlyinthemissiledefenseareawhichisverycriticalinthatregion.

Sowehavebeenmakingprogressonareassuchasaviationtrainingandsimulation,advancedavionicsequipment,nightvisionequipment,sensorsystems,tacticalSatcom,AirborneISR;whicharethemorebiggerticketitemswheretheslippageisapparent.YouknowasprogramsagaincompletedlikeAirseekerandothersandhavenotbeenbackfilledifyouwill.Sothatgoesalsowithmulti-missiontypeaircraft,wherewehavebeenworkingonsystemswhereoneplatformcanbuildmultiplemissionsaddressingatighterbudgetaryenvironment.Thuswheresomeofthesecustomersdonotwanttolieaseparateaircraftforeverysinglemission,whetherit'sairborneISR,maritimepatrol,searchandrescueetcetera.

They'relookingmorefromourexperience--frommyexperiencewithaircraftthatarerapidlyreconfigurabletomeetthemissionsothey'llhavetobuyitonceandbuymultiplesensorpackagestheycanplugin.Militarysimulationsystemsareactive,securityanddetectionsystemsisairportsareupgradedandbuilt,andantisubmarinewarfare.Sothoseareallareasweareseeingsomegrowth.AndIwouldsayisnotthere'snosobutthesalescycleiscertainlyalongerpropositionrightnow.

CaivonRumohr (Analyst-CowenandCompany):

Thankssomuch.


ThankyouCai.

Operator :

OurnextquestioncomesfromthelineofMylesWaltonofDeutscheBank.

MylesWalton (Analyst-DeutscheBank):




Goodmorning.


MoringMyles.


CouldyoucommentonwheretheincrementalCapExisgoingintermsofthestrategy?It'skindofinterestingtoseethedropthroughofthebenefitofsomeofthecashcomingandgoingbacktoreinvestinginthebusiness.Justcuriouswhereyou'reseeingthebiggestpayoff


Theincrementalinvestmentisgoinglargelyinthreeareas,Myles-ISRsystems;two,trainingandsimulation,andthree,inouradvancedprogramsbusinessarea,whichaddressestheclassifiedmarketspace


AndIguessisitasignalthatiftheyhadmorethey'dbedoingmoreinthatyou'rekindoftryingtobalancewhatyou'regeneratingintermsoffreecashflowtoinvestorsinthatthereisarealhungerinsideformoreinvestment?


Well,we'redefinitelyincreasingtheinvestmentwhereweseegoodopportunityforgrowththenextseveralyearsandit'ssimplythat,wedon'tholdbackCapExtodriveupfreecashflow.Wehaveaverybalancedapproachandwe'respendingadditionalmoneyherebecauseitmakessenseandweseeitpayingoffinthenexttwoyears


OK.

Andthen,couldyouupdateusontheHeadofStateeffortandwhereweare?Andalsonotebooktobillofone—soIguessRob'squestion,doesArrowbecomeanequalweightedcontributortothatbook-to-billin2016?

Thanks


OntheHeadofStateMyles,wemadeverygoodprogressonthatprogram.We'vecompletedaproject.Wearecurrentlyworkingwithourcustomeronsomefollow-uprequestaspartoftheirfinalinspectionprocessandweexpecttodelivertothecustomersoon.

Importantlytherehavebeennochangestoourestimatesaswepreviouslyprovidedweremainonbudget.Sowe'veallbeenveryfocusedontheprogramduetotheproblemslastyearandwe'vebroughtinadditionaltalentintermsofprogramManagementandwiththat,expertise.It'smovingalongverywellasfaraswe'reconcernedweexpecttodelivershortly.

SothatoneseemstobemovingalongRalphyouwanttotake--





Sure.

Soweexpectthebooktobillratioandelectronicsystemsandcommunicationsystemstobeslightlyabove1.0forthisyearandaerospacejustunder1.0.Andthere'salotofopportunitiessomethatMiketalkedaboutthatwe'repursuinganaerospace,andtotheextentthatwecancapitalizeonthem--thatbooktobillratioinaerospacesystemsshouldmoveto1.0.FromourseentodayIhaveajustunder1.0for2016.


OK,allrightthanks


Thankyou.

Operator :

OurnextquestionthelineofSethSeifmanfromJ.P.Morgan.

SethSeifman (Analyst-J.P.Morgan):

Thanks,goodmorning.

Iwonderifyoucouldtalkalittlebitabout-youknow,L-3wasakeyrecipientofalotoffundinginthelatepartoflastdecade--intheearlypartofthisdecadewhentheofftempowasveryhighandwe'reseeingafasterofftemponow.AndI'mwonderingifyoucouldtalkabouttheimpactofthat--Iknowwhat'sgoingonyououtlinedwashappeninginAfghanistanbuttheofftempointherestoftheMiddleEast?


Well,arepresentlywedoseesomeopportunitiesintheISRspaceaswellasinsensorsystemsandwarriorsystems.SoinmycommentaryIsaidthatwehopetohavesomeupsideinour2016salesintheDoDarea--that'spartoftheupside,Seth.


OKgreatthanksverymuch


Letmetagontothatjustwecouldrecall.Thetypesofthingsthatwereleadingintheofftempoifyouwill,wasgettingtheunmannedsystemsfielded.Sothere'salotofdatalinks,cameras,Roversystemforthetroopsontheground,nightvisionequipment,ISRcapability,etcetera.Andasthingsrampedupthatplayedintoourareasverywellandweweregrowingalongwithitandasyouknowthathassloweddown.

Now,weareseeingmoreactivitythisyearthanwehaveinthepast.Sofarbutit'sreallyhardtopegwherewe'regoingtoenterhowmuchgoingtodrivethenumbersatthispointit'salittleearlyinthecycle.


OKthankyou




Operator :

OurnextquestioncomesthelineofRobertStallardofRoyalBankofCanada.

RobertStallard (Analyst-RoyalBankofCanada):

Thankssomuchgoodmorning.


MorningRob


Mike,maybejusttofollowuponthat,RalphmentionthattheAfghansalesaredown$135millionin2016,doesthatessentiallytakethemtozero?


No,notquitezero


Itdoesn'ttakeittozeroRob.

YoumayrecallthelasttimewetalkedaboutoverexposuretoAfghanistan,weexplainedthatin2016wewereanticipatingoursaleswouldbottomsomewherebetweenthethreeand$400millionrange;whichactuallygoingtobeabout$400million.Andthat'sourguidancecontemplatesafter$135millionreductionthatItalkedabout.Andthereasonisthatitdoesn'tgotozero,isthatwedosomethingsthatIthinkthatneedtobecontinuedtobesupportedandperformedbytheUSmilitary--somespecialoperationsrelatedbutthatbusinessisnotgoingtogoaway.

Wethinkwerehittingbottomasweanticipatedthelastcoupleofyearsin2016.Ithinkthatanswersyourquestion.


Yes,soshouldbeaheadwindin2017ifyou'relookingatitthatway


Correct,Isaiditwasthefinalrunoffin16'.


Yes.

Mike,maybeafollow-upyoumentionedsomeofthethingsgoingonintheExportmarket,Iwaswonderingifyoucouldcommentonwhatyou'reseeinginEuropeandwhetherthere'sbeenanysignofimprovementandwhetherforeignexchangemightbeanissuethere?


Well,wehistoricallyhavenotbeenabigplayerintheEuropeanmarketastheytendtobeabletomeettheirownneedsonmanythingsorcompetehead-onwiththeU.S.However,thereareincreasesinbudgets,asitrelatestoUkraine,ifyouwillandcountriesinthatareaandtheNATOcountries.TherestilllimitedinvestmentratesofabouttwopercentGDP.Alotofcountriesdon'tevenmeetthat.Butagain,




withsimilarsystemsnightvision,comms,andthingsthatL-3providesthatareuniquetoL-3andarenotreadilyavailableintheoriginaloftheworld.

Now,Idon'texpectthattobeabigdriverunlessthereisamajoreventthatweretotranspireatthispointbutwecontinuetostayfocusedandwehavepartnersinparticularcountriesthatweworkwithtokeepusaheadofdevelopmentsandgetusontheirteamswerenecessaryorwhereneededismoreofawaytosayit.Soit'snotgoingtobeIwouldsaytheleaderinternationallyforuswearestillveryfocusedonMideastAsiaasbeingabiggerdriverforbusiness.


OK.,thankssomuch


Thankyou

Operator :

OurnextquestioncomesfromthelineofCarterCopelandofBarclays.

CarterCopeland (Analyst-Barclays):

Heygoodmorningguys.


GoodmorningCarter


JustacouplequickonesMike.

Iwonderifyoucouldjustexpandalittlebit?Youcommentedonthebackofficesupplychainstuff,IrealizetheseeffortsarestillearlydaysandChrisisstillexploringalotofthestuffwiththerestoftheteam.Butaretheopportunitiesyouwarecoveringatleastinitiallyfocusedinonebusinessareaversusanotheroranygranularitycangiveusthere?


It'sreallyfocusedacrosstheCompanyandunfortunatelyChrisisnotheretoday--hehadsomeprior-he'snotonthecallbutifyourquestionisforhimfeelfreetofollowupatalaterdate,

Butit'sreallyacrosstheCompany,we'reseeingthebiggestincreasesrightnowincommsystemsandelectronicsystemssegments,ifyouwill.He'salsofocusingontheISRtheaerospaceareaaswell,butit'severythingfromcompleteconsolidationofbusinessunitstoagain--asIsaidthebackofficetypethings--backofficetypeoperationsorthingsthatcouldbesharedamongbusinessareas.Andofcourse,thegoalistogetthemostbangforthebuckifyouwillintermsofbeingabletoconsolidateanddriveourmarginsevenhigher.AndthatinvolvesalotofthingsIthinkwhatmuchmoregranularityaswegetfurtheronintheyearbutwehaveveryfocusedgoalsinthisarea.AndIexpectthatwithChrisonboardatsomepointwillbeacceleratingthoseefforttobringtheminsoonerthanwehadoriginallyplannedon.


Great.




Andon--justtotakethehighyieldevaluationcommentandflipitonitshead,ImeanhistoricallyyouguyshavebeenveryacquisitiveandIknowthefocusisoncostandportfolioshaping.Rightnow,couldthatimpactonvaluationsinsomeoftheassetsthataresittinginsideprivateequity-youknow,providesomeopportunityontheacquisitionfrontthatyoumaybeweren'tthinkingaboutaquarterago?


Ihaven'tseenthatyet.Wehaven'tseenityetbutitcertainlycould.

AndwearealwayslookingforagooddealthatwillhelpimproveL-3thatfitswell,thatbringscustomerstechnologyetc,tous.Andwe'vehadsomegreatsuccesswithanumberofrecentbothontypeacquisitionsthatareprovideduswiththosenewproductsandcapabilitiesthatdrivevalueforcustomers.Andtheyarecontributingtoamarginimprovementprofile,sincetheyaredrivinghighermargins.Sowiththatinmind,we'llcontinuedownthatpathitsworkedverywellsofar,wecontinuetodosomemore.Planondoingsomemore,ifyouwill


AndalsoIthinkalotofthoseassetsareservicetypebusinesses.Soalotofthosewouldnotbeinterestedin,intermsofacquisitions,Carter


OKthat'sfair.

Andjustasafinalone,Ralph.OnthecompsystemsOutlookitlookslikethat'salittlebitworsedespitethepensiontailwindisthatamixreasonbehindthat?


Well,Isaidacceptingthepensionimprovementweupheldallthesalesandmarginguidanceunchangedsoourbiggestupsideinsalesinthefourthquartercameincommsystems

The-Isaidthatwe-acceptingthepensionimprovement,weheldallthesalesandmarginguidanceunchanged.SoourbiggestupsideinsalesinfourthquartercameinCommSystems...


OK.


Particularlyinthebroadbandcommunicationsystemsarea,whichistheCSWesbusiness,whichisdoingreallywell--rememberwehadcommissionstherecoupleyearsago?Thosehavebeenresolved.

Thebookbookingsarestrongandweseethatbeinganicegroweroverthenextseveralyears.SoatthispointI'dliketothinkthatthemarginguidanceandsalesguidanceforCommsSystemsisaconservativeandweshouldseesomeupsidethere.LikeIsaidwedidn'tchangetheOutlookwehelditconstantexceptforpension


Great,thankyougentlemen





Thankyou

Operator :

OurnextquestioncomesfromtheRichardSafranofBuckinghamResearch.

RichardSaf ran (Analyst-BuckinghamResearch):

Hi,goodmorning


GoodmorningRich


Ralph,Michael,I'malwaysinterestedinyourcommentaryondefensebudget.Sothebipartisanbudgetagreement,nowdone--thepresidentsfiscal17requestcomingout.Iwantedtogetasenseofhowyouthinkingaboutfiscal17whatyou'rehearing.Doexpectanyefforttoraisethefiscal17spendingcaps?Dothinkwecouldseeanotherdouble-digitincreaseininvestmentaccounts?Justtobeinterestedinanycommentaryhaveon17


That'salotofspeculationRichardbuthappytospeak--obviouslywhat'snewisthatwehaveatwo-yeardeal.

Whichis--greatit'shelp20mostsignificantproblems,weasanindustryhavefacedwhichlackofvisibility.Soevendirectionally,itisagoodthingbutsoyou'reaskinglittlemore.

WethinkmostofthemovenisgoingtobeintheclassifiedareaIthinksomeofthe,Sec.Kendallpointedtothataswell.TheoverseascontingencyfundOCOaccountmaygrowaswell.Asyouknowalotofthegrowthwouldbedrivenbyinternationaleventsastheyunfold.Andasyouknowthere'salotgoingonallovertheplace.

SoI'dsaymorelikelyupsidethendownsidethere.Andwe'vealsobeenlisteningverycarefullytosomeofthecommentarybythoseinthebuildingparticularly,Sec.Kendallandtheacquisitionchiefs.IntermsofthetypesofcapabilitiesorinvestmentstheyarelookingfortheyhavebeenspecificallyaskingindustrytobealittlemoreforwardleaningonR&D.Andasyou'veseenwehavebeentryingtorespondinthatwaybecausetherearethingsthatwedothatfitsomeoftherequirementstheyhaveanditwouldcertainlybegoodtostarttogrowalittlemoreorganicallyinthatspace.Sowehavebeentryingtomeetthoserequestsanddevelopmoreespeciallyintheclassifiedspacewherewearedoingverywellrightnow.

Andthat'swhyyouseenumberslikeourR&Dgrowingalittlebitandwehopethatweknowthatwillbewellspentintermsofourinvestmentsinfuturegrowth.


OKthanksforthat.

Andjustswitchingtocommercialaerospaceherefollowinguponyourcommentshearaboutcommercialaviationpotential,doyouintendonexpandingthisbusinesswithacquisitionsatsomepoint?Iknowyou'reexpectingeightpercentgrowthyear.ButIalsowanttoknowifyoucould,weseeasasustainablelong-termgrowthrateincommercial.Imeancouldweseeabove8percent?





YoucouldbutImeanyou'veheardsomeoftheOEMcommentarythisquarterwherethingsseemtobetakingabitofabreather.Weareinanoperatinginacouplemarketswherethereisatrainingsimulationarea,wherethereisahugepilotdemandifyouwillbecauseofretirements.AndthenumberifyouresearchisIbelieveitwashappenmillionpilotsoverthenextcouldbe10yearsorsoandthenyouhaveouravionicsbusinesseswhichhavehistoricallydoneverywell.

Theprobleminthatspaceisthatanythingthatweretocomeonlineforsaleistypicallyveryexpensiveandhardtomakeagoodbusinesscasefor.We'velookedatseveralCompany'sovertheyearsandwhereweseesomethingthatfitswellwithwhatwedoparticularsomethingthatcouldbeconsolidatedandalotofoverheadsavedthat'susuallyrequisitetobeabletomakethosenumberswork.

Becausethey'retypicallyhighergrowthhigher-marginandotherthingsthatwewouldseeinthedefenseandtheycomeinhigherpricesasyouknowyouhavetopayalotforgrowthinthismarketplacethesedays.

Soyeswithouttogrowthebusinessandwe'dlovetogrowitthroughacquisitionsbutrightnow,we'veseenabetterdealforusbeinginvestinginourownproductsanddevelopingthingsratherthanrequiringthemrightnowandwefeelpursuethatisastrategy.

WeareonnextGENsystem.Wehaveequipmentthereandwecontinuallyatworkondevelopingmoreavionicsforthegeneralaviationmarketplacewherewecontinuetodoverywell.Andforthelargetransportthatseemstobemoreregulationdrivenwhetherit'sfornewrecorderorkeeptestsystembutwekeeparoadthatasrobustR&Dprogramthatwillhelpuswiththegrowthandshouldthedealpresentsowillcertainlybealloverit


ThanksverymuchMichael


Thankyou

Operator :

OurnextquestioncomesfromthelineofHowardRubelofJefferies

HowardRubel(Analyst-Jefferies):

Thankyouverymuch.Acoupleofthings.

RalphorMike,intheguidanceorlastyearyouhadanumberofwhatI'dcallone-offitems,andtheyrangefromseverancewhatIcallitsatisfyingsomelegalobligations.

Howdidyouthinkaboutfirsthowdidyouthinkaboutseveranceandintheupcomingyear?Orhowdidyouallowforthatandinthemargins?Andrelatedtothat,howdidyoufactorsortofthere'sclearlysomebenefitinnothavingtheseoneoffsforthisyearweareinnow


OKsowithrespecttotheseverance,weincurredabout$18millionin2015andweexpecttoincurabout$10millionin2016sosomereductionthereforsure.

Andcorrectwedidhaveafewormaybeseveralone-offitemsin2016Imean2015thatwedon'texpectto




recurin2016.Ithinkyouseethatinthemarginexpansionthatweareguidingtoendanticipating.

HappeninginallthreesegmentsasMikesaid,ourturkeywithrespecttoaerospacewe'renotsatisfiedatallwithwherethemarginsarepresentlyandthat'swhatwehavethemostworktodointermsofliftingthemargins.


Ontheotherhanditwashasquitenotablethatyouhadsaidsometimeagoitbeabletogainsomerecoveryonthefee12andyourcustomerrecognizedthatwork.

SothereisanabilitytoIguesstrackyourcostandvaluedeliveryourcustomerinactuallygetpaidforitsothere'ssomebenefitstherethat'sprobablystillyettoberecognized?


Wehavesomesmallupsidesthere.


Justtwootherthings,one,youdidalludetosortofthebalancebetweeninvestment-graderatingandI'llcallitrunningandoptimizedbalancesheet;howdoyouthinkaboutthatgoingforwardand…


I'mnotsureIwouldcallitabalance.Wesaidthatwearecommittedtomaintaininginvestmentgraderating,Howard.


Yes


WethinkwecandothatisstillgrowthebusinessandwenowarebeginningtoseethatwillstarttogrowoperatingincomeandEBITDAweexpectthattohappenin2016andmoresothereafter.Sothat'sgoingtohaveanaturaldeleveragingeffectaswell.

So..


Istheresometarget--Imeantheratingagenciesareobviouslygoingtotellyouwhattheywantbuthowdoyouthinkaboutwhereyourleverageistodayversuswhereyouneedtobetomakesurethatyoudon'tgetoryouavoidadowngrade


OKsoeachoftheratingagenciescalculateleverageslightlydifferentandtheyexplainedandthepublichowtheydoitbutifyoulookatourdebttoEBITDA,weareexpectingthatwillendthisyearatabout2.8times.

AndIthinkourtargetisthatwewantedtobeabout2.7timesorslightlyunderthatsowearetrendinginthatdirection.

Wedohavesomerequirementsexistingdebtarrangementbuttheyallowfornotaproblemintermsof




maintainingthem.Sotheinvestment-gradeversusnoninvestmentgradeisnotatrivialdecision.Imeanyoudon'tfliptheswitchback-and-forthbetweenthosepositions.

We'vebeeninvestment-gradesince2009eventhoughwe'reinvestment-gradewedohaveaveryaggressivefinancialpolicyinthatwedeploymostofourcashandwehaveagoodamountleverageonthebalancesheet.Andthat'sresponsibleintermsofdeliveringbetterreturnstoourshareholders.


I'mcomfortablewiththat.IunderstanditandIappreciateit.

AndthenfinallyInoticedatyear-endyoulandedafairlysignificantISRcontractwithacoupleofworkcoupleofG5'sor550s--thisseemtobeanewlineofbusinessorsomethingthatIhadn'tseenbefore.IsthereanythingmoreyoucanelaborateonthatintermsofwhatyouseewithsomeGlobalopportunitiesthereorelseyoucantakethatplatformandaddyourcapabilitiesback?


YesHoward,thatisthetrendinthisspace.Rightnowyou'regoingtoseemore--moreofthisIusethetermcrosscheckingbutsomethebigheavyweightISRplatformstomoreaffordablebusinessjets.Thisoneisaveryrepresentativeofthetrendinmanycountriesthathavehowthey'relookingattheirISRmissionrequirements.Andwesitwellmetspaceintermsofbeingabletodothatmissionizationworkwhich;includesracksandracksofelectronics,andthepreciseplacementofsystems,toincreasingrangeforbeingonstation,whichcouldmeanauxiliaryfueltanksinsystems,andputtinginrefuelingcapabilityandthelike,

Allofthosethingsareinourwheelhouseifyouwillandwehaveexcellentperformancetoshowforitovertheyearsanddeliveringthesesystems.Sowhencustomersthinkaboutthatcrossdeckingmodel,theycallL-3firstasI'dliketosay.Imeanwedoagoodjobpartofithastodowiththefactthatwemakealotofthesubsystemswhetherit'sdatalinksorthesensorscamerasetc.Andwe'reabletopullthroughourownproductsinthesemodelswhichalsohelpsthewholebusinessas,ifyouwill.

Ifyougetononeoftheseit'snotonlytheintegrationworkbutit'spullingthroughdatalinksincamerasandthelike.ThatishowweintendtointendedthismodeltoworkbeingabletopullthroughL-3'ssystemsandsubsystemsifyouwillontheseplatforms.Butgiventheeconomicsofoperatingabusinessjetversusoutwide-bodycommercialplatformIthinkthisisatrendofthefuture.


Youmightcallthismarqueeawardsthen?


Sure


Thankyou


Thankyou


IwantedtomakeacommentalsotofollowupwithRalph'scommentontheinvestment-grade.




IfyoulookatthewayItendtothinkofitwewillalwayswanttooperatewiththefacility.IthinkisprudenttheCompany'shavebeenfacilityshouldinM&A,oranyothermatterwerecashisbeingneededinashort-term.Undertheassumptionthatyes,we'llalwayshavethatthenyougettothequestionof;wellwasadifferenceofyourinvestment-gradearenot?Yes,asyoumayknowifyourinvestment-gradeyoudon'thavetherestrictionsonpaymentofdividends,andsharerepurchases,andM&A;youhavethatquote,respectivepaymentsbasketissue.It'sreallyquestionofinvestment-gradeversusnot.Ifyoulookatitaswewanttocreditfacilityornot?Becausewewouldnotbeabletooperatewiththecashdeploymentobjectivesthatweembracewithanoninvestmentcreditfacility.Itjustwouldn'tworkforusandeverybodywouldbeunhappy,includingme.

Andso,Ithinkisnotafarstretchtokeepthatinvestment-graderatingnow.Andit'stypicallytheleverageratiothat'distheoperativeoneismorerestrictivebecauseofthewaythenumbersworkandIbelieveit'sintermsofratingagencies--Moody'sisthemorerestrictiveofthethree,ifyouwill.Sothat'stheonewherewatchingRalphhadacommentalsowegetbacktogrowthinEBITDAinmarginsthatshouldhaveanaturaldeleveragingeffectwhichwouldgiveussomemoreheadroomandwhywe'rehavingthisdiscussion.

Iwanttogiveyoumyperspectiveonwhythatisimportant


Thankyouverymuch.

Operator :

OurfinalquestioncomesfromthelineofGeorgeShapiroofShapiroresearch

GeorgeShapiro (Analyst-ShapiroResearch):

Yes,goodmorning.

Onespecificoneandthenonegeneralone.Ralph,youmentionedintheaerospacesystemsthattherewasa60basispointunfavorablecontractadjustmentthataircraftsystemsitsoundslikefromMike'scommentthatwasn'tontheHeadofStateplanecouldyoujusttelluswhereitmightbethen


Yes.HiGeorge.

Correct,thatdidnotpertaintotheHeadofStateaircraftmodificationjobs.StillontrackonlinewiththeestimatesthatwehadinthesecondquarteroflastyearthereontheHeadofStatework.

Butwehaveavarietyofotherprogramsinaircraftsystemsandtheyweresomeadjustmentsonacoupleofinternationaljobs.Andthensomeitemsatour(inaudible)operationsbutthoseareindividuallysmallitemsandaswellastheaggregate.Ithink$5millionorsonothingalarmingorparticularlyunusualthere.


AndthenyougetdeliveryoneHeadofStateaircraftthisyearandtheotheronein17


Onethisyearandtheothertwonextyear





OK.

AndthenonemoregeneraloneforyouMike.Ilookatobviouslythegoalofimprovingaerospacesystemsbutitseemslikethere'salotofheadwindsformerevenuesweredownlastyearandthey'redownthisyearanalystliketherevenuesaredeclininginprogramsareprobablyprettyprofitable.SoImeanwhatcanChrisoryoudoreallytokindofovercomethatheadwindandgetthoseaerospacemarginshigher?


Wellwealsoseethattheyarethecontractorofchoicewhenthere'sabigjobtodevelopandISRplatform.

Sosomeofthethingsthatwe'vebeendoingarethingswecouldbringfromcorporateone12wehaveorcouldbebringinmorebusinessdevelopmentfolkstotheinternationalside.Numbertwo,wearedevelopingmoreinternationalpartnershipseitherwithaircraftOEMsorwithotherequipmentsuppliersorwithotherinvestorindustrialplayers.Sowehaveaseatatthetableinthesecountriesaregoingtogoforwardwiththesystems.WearetheworldleaderinISRmannedplatformsandIbelievethatthatwillcontinuetobeamarketthatwillgrow.

Soit'salsonotoneofthemoremarginconstrainedmarketplacesbecauseagaintheseareone-of-a-kindplatformsandwearenotusuallybiddingtoalowpricewearebiddingtoatechnicalcapabilityandwearenotinterestedinlowpriceweareinterestedindevelopinganddeliveringstate-of-the-artplatformsatgoodmargins.

Soagain,IpointedtothefactthatsomesignificantinternationalworkhadbeencompletedandanewworkhadnotbeenbroughtintofillthatholeifyouwillandalsothereareundertheUSsidenewplatformsthatwillbecomingoutthathavedisplayssomeofthelifecyclesustainmentthathadhistoricallybeendoneacrossthebusiness.

Sothere'sacoupleholesthatneedtogetfilledinthisisanareawhereIwanteverybodyfocusedongettingthisbusinessareabackontrackwherefromamarginstandpointinfromagrowthstandpointtheexecutiontocontinuestobeexcellent.


OKthanksverymuchandgoodluck


Thankyou

Sowhenwrappingup,thecurrenttopoliticalenvironmentofvolatilebutpresentsnewopportunitiesbothincountrydomesticallyandinternationallyandwearewell-positionedtocapitalizeaswemovethrough2016.WecontinuetoexecuteourstrategyofstrengtheningourportfolioinvestinginbusinessesthatweknowwellandleveragingourstrongcashflowgenerationtoinvestintheCompanyandatthesametimereturncashtoshareholders.

OurinvestmentinR&Dinourmarket-leadingpositionsbecausereadytoaccommodatetheshort-termneedsoftheUSgovernmentandtoadaptandshippedaccordingtoitslonger-termthirdoiloffsetstrategyweareseeingbenefitsfromourrefinedstrategymarginsareimprovingin2016asisourtoplineandweconsiderandwewillbemovingforwardwiththeseeffortwellinto17andwe'replanningonkeepingthemarginexpansionfrontandcenterforseveralyearstocomeinuntilwearesatisfiedwithdoingthebestwecouldpossiblydoofproductasacrosstheCompany.




WerecommittedtostrategicgrowthandperformanceandandalwayswillingweretoenhancevalueforshareholderssothanksagainforjoiningusthismorningandwelookforwardtospeakingwithyouagaininApril.

Operator :

Theconferencehasnowconcluded.

Thankyouforattendingtoday'spresentation.

Youmaynowdisconnect.

END

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