Good morning. I'm Curtis Brunson, Executive Vice President for Strategy and Development for L-3, and I'd certainly like to welcome you to the 2012 Investor Conference. We've got a pretty good lineup for you today.
Let me start out with the Safe Harbor statement. So I'll give you a minute to take a look at that. And what I want to do is just spend a moment or 2 going through the agenda for today. We're going to start out with General Richard Cody, who's going to give you a little view of the geopolitical environment and what we're wrestling with as an industry, followed by Mike Strianese, our Chairman, President and CEO, who will take you through the company. And then what we'll do is walk you through each of the business segments, starting with AM&M and C3ISR with John McNellis. Susan Opp will finish up with the other part of the C3ISR. Then, we'll have Les Rose take you through National Security Solutions. Take a little break. Steve Kantor will then do our Electronic Systems group and Ralph will give you the financials and then we'll have a Q&A session.
So with that, I'd like to go ahead and kick off today and ask General Richard Cody to take us through the geopolitical.
Richard A. Cody
Okay. Thank you, Chris. Good morning, everybody. What I thought I do today, comes up here, is kind of take you through the world, the geopolitical world, and what it means to our customer. And I'm going to focus today on our DoD customer, as well as our partners in the international. So all of you know last year, Bob RisCassi and I hit upon that we've gone from a bipolar Cold War to a single pole with the U.S. dominant now to a multipole with an ascendant China, a resurgent Russia, as well as the fact that after 10 years of war, almost 11 years of war, there really is no one large country that has maintained global superiority in any one phase, whether it be economic, whether it be military, whether it be in the political arena, and that has created a vacuum. And so today, as you take a look across the globe, we have several flashpoints. You're very familiar with the flashpoints of Iran, through their surrogates with Syria, through Lebanese Hezbollah, through a Shia-now-dominated Iraq and their support of Syria through Iran, as well as its nuclear capability and what it means to, most importantly, Israel, as well as if they use and let export nuclear capability to their surrogates, what it means to the world.
North Korea has got a new leader. They're getting ready to launch another missile in violation of what the United Nations have told them. They're continuing to be a problem there. India and Pakistan continue. They're both nuclear countries. People forget that they've been arguing over the same piece of land for quite some time, then you throw in terrorist attacks across borders. They're still problematic. Afghanistan, Iraq -- Afghanistan is what it is. The administration says that we're going to be out of there in 2014. They're having those discussions now. That is going to create more pressure on Pakistan, as well as other neighbors. And then Iraq, we've left it to their own devices now. What we've left is the Kurdistans up -- the Kurds up in the north who's getting embroiled now with the Syria revolution. You've got the Sunnis that we left armed, and you've got the Shia-dominant in charge. In fact, the Vice President, who's a Sunni, is now in exile in Turkey. And so it's rife for a Civil War that could all be drawn in over time as the Mideast, if anybody miscalculates. And then you've got the transnational Islamic terrorists. You've got China, and China being the economic growth that they, are has always been insular about taking care of their people first. But now you're seeing things in the South China Sea, in the Philippines and Vietnam, where they're challenging the international waters in the Pacific. Russia is still a player. They've been on the sidelines on Iran. They've been a stumbling block for that, but they're trying to have a resurgence as we speak. And then you have Israel that has no land to trade. They're now squeezed between Lebanese Hezbollah with newer missiles, the Hamas with their new missiles. Iron Dome worked fine, but it only takes 2 or 3 big ones to get through and that's of course what Netenyahu and his government's now trying to deal with as they keep -- continue to look. And then across the board, there's other failed states. Of the 20 failed states in the world today, either through terrorism, governance, lack of food, lack of water, ethnic violence, of the 20, 14 of them are in Africa. And you don't hear much about Africa. You hear about the shift to the Pacific because of China and because of other problems over there. Africa has 14 of the 20 failed states right now and several others at what we call strategic crossroads. So that's kind of what the global environment looks like. And last -- well, this past January, the national security team, led by the Secretary of Defense and the President and the Chairman of the Joint Chiefs, came out with a new strategic guidance. It wasn't a national military strategy per se, but it laid down the markers of what would be a national security strategy and national military strategy. And here's what they laid out in terms of their focus, which then drives the accounts and the structure and the equipping of the military that we support. al-Qaeda rebalanced to the Asia-Pacific. They called it pivot originally, but now they've gone back and forth because they realized they can't really say pivot, that means you're turning your back on what's going on in the Mideast and other places.
Presence in and support of partner nations in the Middle East. Five revolutions in the Arab Spring now moving to an Arab Fall, and you've recently seen what's happened in Egypt. You also have the Southern Sudan. You now have Mali, as well as Jordan, which is caught in the middle of some of this in Bahrain. In Saudi Arabia, a Sunni-dominated, Sunni-led nation, staring all around them is a Shia-dominated regimes that are having revolutions. And then evolving the posture to Europe. That really means we're going to help our European NATO partners with more equipment, more FMS, and we want them to pony up more troops and any type of excursions.
Continuing on. Low cost, low footprint -- low cost, a small footprint. In other words, be laser focused with the smaller formations around the world where we can apply the appropriate type of diplomacy, defense efforts. And then the last bullet is counter-proliferation of WMD. So when you take a look at that and say, "Okay. That's what they want to do," and that goes down now to all the services. But the bottom line is here is where the United States Army, Air Force, Navy and Marine Corps are today. Each one of those dots represents their bases, the large footprints. It could be a carrier group in the Persian Gulf. We just had 2, one just steamed out of there. It could be a division that's posted someplace. But this is the U.S. presence. And with that guidance, basically, the OpTempo of the military, the U.S. military, is probably going to revert back to pre-9/11. That said, what is missing from all this is you have to understand that since 2003, when we repositioned and barracked all our forces, Army, Navy, Air Force, the Marine Corps, 90% of our fighting force is CONUS based. So to maintain those presence, you have to rotate forces further distances from the United States, from their ports, from their air bases and rotate them in and out to maintain that presence. So couple that with this pivot to Asia and the strategic requirements for the services, they're going to need more ISR to cover the distances. They need more counter anti-access and area denial, which means more electronic warfare, anti-submarine warfare capability, missile defense, not just static missile defense, but missile defense on our destroyers and cruisers.
Renewed alliances. Philippines, Thailand, India, Vietnam, these are all the ones that are getting pressured by China, New Zealand and Australia. With those renewed alliances means more rotation of forces in to help partner and build up through either FMF or FMS. Those -- so that those armies and air forces and Marines and special operating forces so that they can be more -- bring more to the fight, if you have a fight coming, versus putting a preponderance of U.S. troops. And then strengthening the U.S., South Korea, Japan based upon of the North Korean threat and the threat of China in the South China Sea. All this means that in order to do this with the tyranny of distances, there's probably going to have to be new bases. We may have to go back to Subic Bay. We may have to go -- in Singapore, we're going to base 2 of our brand-new littoral combat ships out of Singapore and create a new footprint there on a rotational basis. We're putting troops in -- or already have troops in Australia. We're going to be shipping quite a few of the Marines down to Guam. And then Vietnam has talked about reopening Cam Ranh Bay and having our ships back and forth through Cam Ranh Bay. So this shift is interesting, and everybody talks about the OpTempo. But there is a cost to all of this, and I predict that the OpTempo cost, even though the presence is going to be similar to 9/11, the OpTempo cost, because of the restationing and the reship, something is going to have to give in the budget in the out-years.
So let me drop back just for a second. I don't mean you to give you a history lesson, but the Pentagon and the National Security State Department people have written national security strategies and military strategies for years. I've been part of some of them in the late 90s and stuff. Let me tell you how this works. This was the bipolar world, 1950 to 1989, and what I did was I took actual deployments where we went and fought based upon a strategy, know this was important for us. Back then, we had a huge military. We deployed it 10 times in 40 years because of the Cold War. 1989, the wall came down, peace was about to break all over the world. 1991, we fought a fight to kick Saddam Hussein out of Kuwait and then we went to a 40% drawdown across the Army, Navy, Air Force and Marine Corps. But at the same time, here's what the world was. These are actual deployments, and this is across a spectrum of conflict. In other words, we had a national military strategy. No peer competitor. We'll resize our force. We'll resize our Air Force. We'll downsize our Navy. We'll take 5 divisions out of the United States Army. We'll downsize our Marine Corps. We'll throttle back on our acquisition and procurement, if you all remember the last supper with Bill Perry that restructured and took about $50 billion over so many years of our stuff. We've been here before, but here is what happened after all that. These are all the places we bet. So our national military strategy is interesting. It's what we want to do, but we don't control it. And when you take into the fact that we're now into a multi-polar world with no real superior country, being able to control things even in the UN and you've got all these failed states and states that are about to fail and you've got rising cost, you got rising medical, you've got natural disasters, everybody turns to the United States still and says you need to help us.
So with that as a backdrop, what I want to do now is tell you what the services are focused on based upon what they've been given since January, as well as the budget that still hasn't passed the props for FY '13. I have no budget charts for you today like I had last year, so I won't bore you with them.
So the U.S. Army. They're about 550,000. They've got that many troops deployed. On any given day, the active number is that, but the number that are being paid for on active duty is north of 650,000. Why? Because you have a lot of guard and reserves on active duty every day. You see them here in New York. They're still guarding train stations and other places, but you see them in Bosnia, you see them in Egypt and the Sinai, still there. So on any given day, across any one of the services, what their active duty strength is interesting, but they also have about 10% more on active duty from their reserve forces. Over 96,000 deployed. This is the amount of equipment that's either coming out of Kuwait or is in Afghanistan right now that has been there for 5 to 10 years fighting in the worst conditions. And you can see how many are deployed overseas. This is a CONUS-based force. And to be able to execute that footprint I showed you to go to Africa, like the Chief of Staffs said that we are now going to give a brigade to the Africom and they're going to rotate that in, that comes with costs to move them in and out because they don't have a base there. So it's going to be a rotational force as we go forward. The focus on the Army is to be trained and ready. Based upon that strategy, I would say trained and ready for what? If it's threat based, it's a little cheaper. If it's trained and ready for everything I showed you on that big chart, with all those starburst, that's much more expensive. Combat commanders, refocusing brigades and special operations and aviations to the Pacific commander, the Africa commander and the Southern commander. The network is still high priority for the Army in getting their -- what used to be the FCS network is still -- when FCS got canceled, the network itself is still alive and well, WIN-T and other programs, followed by the new ground combat vehicle and then Army aviation. The real problem for the Army, as well as the Marines, is resetting all this equipment because they haven't put any sizable reset dollars since '06 in the budget. And all that stuff is coming home and they've got to reset it. They got a 0 time. The engines, they've got a 0 time. The frames, their airframes, generators, all the equipment has to be reset back at the depots and that's going to be a challenge for them as they turn around and try to get ready for this new strategy that they've got to execute post 2014. U.S. Navy is in a similar shape except they got 40% of their fleet deployed right now. And the shift to the Pacific and the tyranny of distances and the lack of our footprint is going to cause a lot more OpTempo on our carrier battle groups, our cruisers, our destroyers, our subs and everything else as they do it. 313 ships is their goal, they don't have that. I predict they're probably going to be at 40% to 45% deployed. And this is without anything happening, none of these flashpoints happen. You know about the aircraft programs. They got a fleet life extension right now on the F/A-18. Their aircraft fleet is not as bad as what I'm going to show you for the Air Force. But they're focused on the Pacific, clearly focused on A2AD upgrade of Aegis for missile defense because that's what's required for the strategy and then a lot of work being done openly and then behind doors on submarine and counter-submarine operations. Marine Corps, as you know, they're included in the U.S. Navy budget. They've got 50,000 for [ph] deployed, that's a small force. They're under 200,000. They've been asked to downsize also by another 20,000, but they've got 50,000 for deployed right now. They're part of the Navy's presence. Every time you put a carrier battle group out there, you're going to have a mag cap afloat, so their OpTempo is going to go up. Their high priority is getting the STOVL to replace the Harrier, recapitalizing their wheeled and tracked vehicle fleet, which has been worn out. They are moving back to a ship-based, light, agile Seaforce. That's why ship-to-shore connector is a high priority for them to replace the LCAC on the East and West Coast and the amphibious combat vehicle.
They also have a high priority program for heavy lift. Their light vehicles are no longer light. They've gotten heavier because of IEDs. And in order to resupply and move and be able to do their over-the-shore operations, they need a better helicopter. And then they have the same problem that the United States Army, but it's a lesser problem in terms of numbers, but they've got to recap their fleet.
Now here is the Air Force. The Air Force has been fighting. If you remember that chart down there, there was a thing called Desert Shield, Desert Storm. When that ended, the Air Force still was in combat all the way through today. They had Northern Watch, they had Southern Watch, they had Bosnia, they had Albania, they had Kosovo and then they moved right into this fight. And they are doing it on some of the oldest fleets in the world in terms of not just age, but in terms of takeoffs and landings, in terms of engine time and everything else, and you can see up here the ages of these fleets. I don't have -- C-5A is, I think, is 52 or 53 and, David, I think we said about 45 years old. C-130, the Es, they are getting rid of those. But the bottom line is they've got to do something to this fleet, which means more reset, recapitalization while the F-35 is coming on board, the new tanker, the new family of systems bomber and then, of course, their focus on cyberspace. But this is the big bow wave for the United States Air Force. They've been at war since 1991 in terms of everything. So you can't have a discussion about what the services are doing without talking about the people who write the checks. And I only have one slide on here. We have a lame-duck session. The outcome of the election that we just had in November was somewhat status quo. Democrats retained the White House. The Democrats retained their -- the majority in the Senate and the Republicans retained the majority in the house.
You all know we got the Bush tax cuts. We've got the sequestration. We got the debt ceiling. We still don't have an approps that has been passed for '13. The NDAA authorization bill should pass the Senate today and then go to conference, but it looks more and more like we're going to continue to a CR through the year and it'll probably get extended. I don't know if they'll be able to come to anything on an Omnibus because that means it's -- they bring everything together. I don't think that's going to happen. So the timing is unclear. But if you're the services waiting to see how much money is being put in your ATM and how much is being deposited in your check books, it creates certain behavioral patterns while they're trying to -- also, let's not forget they got 69,000 troops in Afghanistan fighting. So it creates a problem for our customer, as well as everybody else. The sequestration trigger, I'm not going to game this at all, it changes every day. You heard last night the Republicans put something on the table. I don't know where it's going to go. I don't think anybody does. We all can hope, but I don't know where it's going to go.
I talked about that NDA and then, of course, the debt ceiling. One of the big things that Secretary Geithner have brought over to House Speaker Boehner was this whole package. But part of it was, "Oh, by the way, the President can now approve. He doesn't have to go back to Congress to raise the debt ceiling all the time." That's like your high school or college senior saying, "I'll just keep swiping your credit cards you gave me, Mom and Dad. I don't really care what you got in there." So that's going to be exciting to see how that all goes. Likely outcome of all this is really a coin toss. But as it goes to 3 January, there's still money in the ATMs because of the CR. They're still going to be functioning. And there's still a dirty, nasty world out there that want to do freedom-loving countries harm. And that's the dilemma that we're in.
So in summary, our customer's OpTempo is going to decline coming out of Iraq and Afghanistan. We see that. But the mitigation piece or the change for OpTempo is trying to cover the large land mass and sea mass of the Pacific, as well as Africa. Global presence, much more requirement for global ISR than focus strictly on Afghanistan and the distances require that to be rotational because we don't have Clark Air Force Base. We don't have all the other Air Force bases, so it's going to be much harder. So pre-9/11 OpTempos, plus a demand of 10 years of war on all this equipment, not just the vehicles, not just the aircraft, but all their equipment really puts a bogey out there for the services to maintain their readiness, facing this world that we're looking at and something is going to have to give. So when we have discussions in L-3 about what's this all mean and I've kind of opined companies are best positioned to deal with this and help our customer that are poised to capture content on the modernization programs that are there and then may pop up based upon events in the world, support, reset and service life extension, sustainment, is going to be big. Additional cyber intel, FMS, international. Part of our -- part of that strategy is to make the other countries' military better. And when we do there, we bring our stuff and they want our stuff. They want our Nike sneakers, they want our goggles, they want those type of things. That's what they want to be equipped with. That's what we train them on. And so being poised to capture additional FMS international because it is going to come. And then the last piece is be poised and agile enough to surge when something does happen, that starburst chart I showed you, and be able to meet the needs of our customer very similar to what happened in 2002 and 2003 and beyond.
So with that, I will turn it over to my CEO, my Chairman, my President.
Michael T. Strianese
Okay. Thanks, Rick. A lot of great story, but notwithstanding, the environment, as far as we're concerned, is manageable. We've all seen the forward-looking statement. So our vision has always been to provide innovative solutions for our customers, expand our market positions. As you know, we hold very high, #1, #2 positions in virtually all the markets we serve. We continue to perform well on our contracts with integrity and excellence, and the bottom line is increasing shareholder value. From a strategy standpoint, this business, like most businesses, excels on customer relationships. In this case, we have a very important major customer, and we believe we have excellent relationships with our customers. We expand our leading market positions, either through acquisitions or technology insertion, but we're very focused on the areas which we serve. We attract and retain great people. We had some additions this year that I'm sure you've noticed. We also attract and retrain -- and retain great board members. We've had some very good additions this year as well. We continue to focus on optimizing the business portfolio. I don't think that's a job that's ever done. We are always improving, shifting, adjusting for the future. The commercial and international marketplaces have been areas of growth for us. We're at about double-digit growth this year. We collaborate internally for additional opportunities. We've learned over the past years that, where in the past there's opportunities where we may have joined another team as a sub or not participated at all, that when we put the pieces of L-3 together, we have quite formidable capabilities to take on larger companies, et cetera. Acquisitions are -- have been and always will be part of the story, and our ethical culture is second to none. We will maintain the great culture that we've had.
In terms of 2012, just a quick at-a-glance chart, the program performance across the board has been excellent. We had never been known for big overruns and we deliver on time to our customers and that's continued, notwithstanding a pretty tough environment. Strong order book this year. We've exceeded our plan in orders with a book-to-bill in excess of 1, Ralph will go over the details. Again, we've been proactive in portfolio shaping. We completed the Engility spin-off on time as we predicted. We think it was a good move for the company going forward. At the same time, we completed 2 acquisitions, Kollmorgen Electro-Optical Systems, which adds photonic mass, Virginia class subs, an area that we think will excel under any DoD budget scenario, as well as the Link commercial simulation business in the U.K. An important milestone this year was winning the recompete at Fort Rucker. That was our largest program. So we've gotten another 5 years. It's about $2 million of revenue over the next 5 years that was critically important to us, and I'm happy to say that the protest is over. Somebody had protested that and we're beginning work under the new contract. We've been able to post gains in market share, both internationally, commercially and in certain DoD spaces. And then cash flow remains very strong. It's over $1 billion and it gives us a lot of flexibility.
For example, we are able to invest $300 million in R&D this year, that's included in the $1 billion. We've spent $350 million on acquisitions. At the same time, we repaid $500 million, $0.5 billion of debt and that was primarily out of the dividend proceeds we've got from the Engility spin-off, which scaled our debt to maintain our investment grade status. We've had our eighth annual dividend increase and are paying $195 million this year in dividends. And we are right on track to acquire $875 million -- or repurchase $875 million of our common stock, which we obviously believe presents a compelling value that we've been very focused on returning cash to shareholders. As you can see, this year, it's -- 98% of our free cash flow has been returned to shareholders in the form of dividends and share repurchases. When there's acquisitions that make sense, of course, we will remain flexible and pursue them. But right now, at this point in the cycle, I think returning cash to shareholders has been a good move for everyone and has delivered a lot of value.
For 2013, this is what we're seeing. First of all, the sales mix has been shifting over the past 3 or 4 years. And the fact that the DoD piece of the pie is declining is not solely a function of the shrinking budget. But our commercial and international has been growing at double digits. So it's a good shift for the time and also the Engility spin-off helped that model, but being about 70%, 30%, DoD versus other will probably continue slightly when we get to 65%, 35% just as the normal course of things.
What we're seeing for 2013, and we have a lot more details that will come, there's going to be a modest sales decline, a couple of points, low-single digits, as we say. But the cash generation is going to remain strong. It'll be over $1 billion again, and that will provide us the ability to continue to grow our earnings, which will also be in the low-single digits. We'll continue to monitor the portfolio, and we'll make adjustments where necessary. We'll continue to evaluate acquisition candidates in light of the shifting market dynamics, and we'll continue to build a stronger company. Better Buying Power 2.0 came out. Many of you have already heard about this from Frank Kendall at the Pentagon. If you haven't, you will. We think we are well-positioned for it. There's nothing in there that gave us any heartburn in terms of the cost savings that the Pentagon is trying to achieve. They need to do that given their fiscal environment. You've seen many companies come out recently postelection with restructurings, layoffs, et cetera. You haven't seen that with L-3 because we've always a been a lean operator, and I think we are well poised to handle anything that Better Buying Power 2.0 has to offer. In addition, we'll probably going to see a change at the Pentagon. And I'm not going to predict who's going to become the next Secretary, but whether Ash Carter stays or goes, there could additional changes in policy that we need to be flexible and react to. And I think, notwithstanding the changes, there's going to be opportunities for us to expand our market share, both in the DoD space, as well as in the commercial and international markets. But one thing is clear, the U.S. government market is going to remain challenging for the next several years.
As the pie chart show, that's about 74% of 2013 sales. I think you could have gleaned from Dick Cody's presentation there is a lot of tension between the requirements in the geopolitical world in which we are living and what we can spend on military. And it simply is not going to foot, doesn't foot, hasn't footed. An example of that is nowhere in any of the numbers is this huge reset obligation that exists. The equipment's been out for a decade now, yet it's not even programmed anywhere. So that position, the conflict between the fiscal constraints and the geopolitical, is going to have profound effects on what technologies are going to be acquired, what force multipliers will be necessary. Dick mentioned ISR. Well, yes, to cover the amount of hotspots that we have to cover, there's an unabated demand for ISR assets. At the same time, it's generating tons of intelligence data, so there's a strong demand for sense-making capabilities, that can make sense of all this a data. On top of that, you have the pivot to Asia, which is focusing more now on force projection. Looks like the Navy will get some plus ups there, antisubmarine et cetera. But it is a changing dynamic, and there are pockets of places you can go for growth. The budget cycle, the downturn started in '11, when you look at the charts. But the big question everybody is going to have here is when is it going to end? Where is it going to bottom.
We went through the Budget Control Act, the $487 billion, that kind of flattened out the curve in the out years. The investment accounts, now, the pre-sequestrations show modest single-digit declines in '10 to '13 and show it picking up growth in '14 and out. That would suggest, of course, we're going to bottom in '13. I think that the way -- Dick said it's a coin toss and I totally agree with him, but something will happen in '13. I assume something has to happen, which could push some of the reductions into '14. So what I would say is right now, our head set on this is we'll probably bottom from a revenue standpoint in '14 maybe '15 at worst. And then hopefully the growth will start picking up. It's not forever. It's a cycle. And the end is closer than it was last year, I guess, is the good news. The fiscal cliff, obviously needs to get resolved before we're really going to see the bottom, I think. In terms of the other customers in the government, the non-DoD customers, whether it's Homeland Security, Department of State, the intel community, they're also bill payers, but certainly not to the extent the DoD is. So net-net, it's uncertain, but we feel very manageable given our agility and speed in which we react to the market, and this is an area where I think we're going to -- or a time that we will still excel. In the commercial space, the foreign military markets, we've had gains this year, whether it's the P-3 aircraft, whether it's been capturing 10 more Joint Cargo Aircraft in Australia, 2 Head of State aircraft in the Middle East, et cetera. We've done pretty well at double-digit growth in this space, both commercially and military. The soft spots are in shipbuilding and the commercial SATCOM areas, and we're watching those carefully to see when they rebound or whether we need to take some other actions. I mentioned the acquisition of the TAWS commercial aircraft simulation business. It's a fabulous business. I visited it. It's right outside Gatwick airport. They are on basically every single commercial platform in the Boeing and in the Airbus family of aircraft, probably puts us at #2 globally in this business. But between the military, we have just about every fast jet except for the F-35, and we're working on it. So we feel that this was a great move to expand the company and diversify out of the DoD budget, while not getting too far away from our core. In fact, it's right in our core.
I have one chart on each segment, but we have each group president that will cover it in more detail. So in terms of AM&M, our sustainment business, if you will, the fleet of aircraft and affordability is creating opportunities for us, more older things are being fixed and upgraded, lifetime extensions, as new deliveries are either delayed, stretched out, in some cases, canceled. The, I think, in the paper today, one of the headlines was about the affordability of the Presidential helicopter. I mean, I can see that getting completely canned in favor of a renovation of the existing and what types of things would we do, for example. That's not a prediction that there will be an order, but we do comm systems, we do self-protection systems, we do a host of things that would go on that platform. But if it does go forward, we have the equipment that would go on the new platform anyway. So I think we're positioned pretty well no matter what the outcome is, as an example. Globally, platform systems is gaining market share. That same condition of an aging fleet exists globally. So we've had several new international wins as well. We've got 100% market share in the P-3 SMIP program, and we're expanding our Air Force EC-130 position. The Fort Rucker I mentioned was a very key win for us this year, and the margins in this segment is stable. So you'll hear more from John McNellis on it, but still a very core business to us.
C3ISR is this strong, long-term, proprietary business that really has been driving our growth for several years. There's a solid DoD demand for airborne ISR assets, as well as network communications. We don't see any change in that space. It will take some budget hits and slow things down, but the demand in the technology is moving, and we will still be growing, although at lower single digits right now in this space. International, there's still growth as well. In particular, there's been a lot of interest in the small aircraft ISR, which is needed right now because the interest or the demand for both these small aircraft, the Liberty-type airplanes and the Rovers, for example, are declining in Afghanistan, so that would be a nice offset. We'll also hear from John McNellis on this one. We, as you know, have developed a product called SPYDR, which is an export variant of our Liberty aircraft. It's the King Air that's equipped for -- with a sensory package, a flexible package. As I like to say, it gives superior performance at a completely disruptive price point internationally. And I don't know, some of my people may be -- I am not surprised with the level of interest we're getting. I think the order book may be all -- not formal signed orders, but the interest level is over a dozen airplanes. And we haven't even had it qualified it for export yet. So I think this will take off. And we're able to bake in logistics as well. So we have the platform. We integrate it. We provide the sensors, some we buy, some we make and provide, as well as the logistic services. It's 3 of our 4 segments operating in this space. And this is the power of working and collaborating across the company. Margins are solid in this space. Notwithstanding the fact that they've been absorbing higher pension costs because of the discount rate, which is also a trend that will eventually reverse. I can't call the bottom so -- but it's approaching 0 eventually. So eventually, this has got to become a tailwind. Notwithstanding, their margins are about 10.5%, the sales will be up low-single digits.
National Security Solutions, that's the remainder of our service business after the Engility spin-off. Their sales will be declining in 2013. That's due in part to the drawdowns, less intelligence analysis, the OSD Better Buying Power initiatives and simply tighter budgets. However, I think that they've got a lot of great technology. Some of it comes from internal efforts, some of it comes from the ISR segment. We are awaiting decision on several awards in the fourth quarter, which could change the outlook for next year, but where we think it will come in with no change right now. There's one big recompete next year. That's about $200 million. Hopefully that will slip out a year, and will take that contingency away. So to look at the space, we see the bottoms -- margins bottoming in 2012. So the margins will be up next year, to about 6.5, but that's still too low. We need that to be higher. And we think that the sales will probably bottom next year in 2013.
I have an extra chart on this space to talk about cyber. I think that's an area that is widely misunderstood as to really what this means and where this is going to go and why did we retain the cyber business, which is not the only piece of NSS, but let me talk about it for a minute. First of all, it's an evolving space. The customer priorities and strategies are not even in their infancy. I mean, they are just starting to focus on, of course, the Pentagon and the intel agencies, what to do. And in addition, there's a bill in the Senate that would impose certain standards, some voluntary, some mandatory, on commercial entities for cyber. So this is just starting to get a little bit of traction. The DoD view is to defend cyberspace. Secretary Panetta said he viewed it as no different than sea, air, land and space, and that was at a dinner here on the Intrepid on October 11 that I know some of you were present for. But I thought it was an interesting talk because that question it raises is that, was he saying there could be a military response to a cyber attack? What was being referenced at that time is the attack that Iran launched on Aramco, the Saudi oil company, where they knocked out -- they killed 30,000 computers and basically stopped the business for a while. At the same time, some of the major banks here at home had disruption of service problems due to being bombarded, which Iran also owned up to. Certainly, it was reported like that in the media. So the question that Secretary raises is combine a terrorist attack with one of these cyber actions, and you're going to have cyber Pearl Harbor. And the drift of it was that there's going to be a requirement for, at a minimum, forensics. Because if you want to use the military as a deterrent for cyber, you need to do know who did it. So forgetting about blocking, that's another function. So we have capabilities in that area, but my point is that this is evolving. And again I think we have great capabilities here. The question was raised, I think I spoke last week, about scale. Our size is smaller now after the spin-off. And I will point to at least 2 or 3 contracts we've been awarded over the past several years in the $1 billion plus category, where we've beaten companies that are much larger than us, whether it was Lockheed Martin on Tetra, I guess, or IBM on a classified program, $1 billion program. So it's not a scale issue. It is a capability issue. So I want to point that out as well. And it also means we're not dragging -- not fully utilized capacity here. So I think that I'm cautiously optimistic about what we have here. On top of that, there's convergence going on between IT communication systems devices that it's going to be across many capabilities. Cyber will become an element in many contracts in terms of safeguards and other things that we might be able to provide not only to the government but to other contractors and possibly in the commercial space. I don't view this as a silver bullet business, where we'll come up with end-all solution to cyber. It's not. It's about a capability and having a quick reaction capability because the threat changes daily. One of the things we've done, and I don't want to take too much of Les' presentation away, with NSS is to sign up with Virginia Tech on a collaborative agreement. And we opened this security, cyber security center back in October in Arlington. And basically, this a way we can leverage our R&D money. Of course, we're working with Virginia Tech. We have exclusive rights to the things that are developed out of this partnership. And it's a developing realtime solutions, and we're able to bring customers in and show them these capabilities. So that's kind of the view on cyber. So I kind of preempted a question, but I wanted to get out in front of it and let you know what we see here and why we think this is an important area. The DoD spend on this is about $3 billion a year. That does not account for what's in the intel space. They're not separate programs. These are -- the work here is being put on existing vehicles or to be built into as a requirement on newer contracts. But again, this is a place where I think it's worth waiting it out.
Electronic Systems, it's our largest segment. It's a very diverse, mostly short cycle products. We have an expanding share in several areas. I -- most recently, I believe we have about 100% share on our ProVision systems in the U.S. and just about globally now, too. But whether it's our EO/IR charts or it's our simulators or it's crash recorders, et cetera, it's night vision equipment for soldiers, we're #1 or #2 positions in this entire segment. I mean, this is a solid business that has maintained very good margins, notwithstanding the pension headwind and some negative mix issues we're going to go through. It's still almost 11%. And my view long term, it should probably be closer to 13%, 14% but not going to get there next year. We had a 2 acquisitions in this segment that I talked about. There'll be more. They clearly broadened the portfolio. Again, this are #1 or #2 players as well and certainly expand our capability. Just to give a thought if you think about the photonic masts on subs. We make a lot of communication equipment also. Getting our footprint on these Virginia Class subs, an expanded footprint will allow us the opportunity to pull through other things you can put on these masts that communicates, for example, just part of the strategy.
So in summary, I think the execution has been very strong this year in what I would characterize as probably the most challenging year we've seen yet. But it's been manageable. We've gotten out in front of the cost issues and everything else. And I think it's been, again, very manageable. The technology and solutions we continue to invest in because the customers have priorities, and they still are looking for better solutions and things that we can do. We've just been staying much closer to the customers, we've been very proactive in reaching out, having meetings. We have a team down at SOCOM just last week sitting down. We're starting to do it regularly at our major customers, so that our R&D money goes in the right spots, and we could react quicker to the things that they are needing or they will need. As I said, the cycle is going to turn. The question of when is in everybody's mind. I think it's sooner than later, certainly not '13, but could be as soon as '14 before we start ticking up in low-single digits. And notwithstanding, from everything we see right now, that $1 billion cash flow is going to be there, and that provides us with a tremendous amount of flexibility to grow the company, continue to grow the dividend, to buy back more stock and to grow earnings, which is how we're bridging the slight decline in sales to an increasing bottom line. So with that, I would like to turn it over to John McNellis, and he'll take you through AM&M and ISR. We think we're well positioned, not immune to this environment.
John C. McNellis
Thank you, Mike. I'd like to begin with Aircraft Modernization and Maintenance, or AM&M. AM&M provides 19% of the sales for 2013. Those sales are delivered by 2 business areas, one, sustainment solutions comprise 54% of those sales. Sustainment solutions provides field level support to our customer's assets. The other 46% comes from platform systems, which provides structural, as well as, interior modifications to a variety of platforms. 2013 guidance at the midpoint is sales of just under $2.4 billion with a stable margin, as Mike indicated, of 9.2%. In terms of the sales mix, by customer, 76% is coming from DoD, but the real highlight here is 20% is coming from international sales. And you see on subsequent chart, we've had a number of major orders this year. That represents 2x of the sales we had in the prior year, and we see that trend continuing in this segment. In terms of AM&M overall, L-3 AM&M, it really provides our customer with a very key capability to sustain their fielded assets. And what that means is we assist our customers in keeping those assets operational, as well as operationally relevant. In terms of the capabilities that we provide, I'd call your attention to the figure at the lower right on the slide. We provide everything from field maintenance of assets, supply chain management, fleet level management, structural repairs of a variety of assets, upgrades to include avionics, as well as interiors on Head of State aircraft, as Mike referenced earlier, as well as certification for airworthiness once those modifications are complete. Our value proposition going to market is instead of doing what many of our competitors do, which is a one-size-fits-all solutions, we are able to take these sets of capabilities, which are encompassed or encapsulated within 7 of our business units and tailor those to be able to meet just unique requirements of each customer. In that regard, our customers view this as more than some people think as just another MRO shop. This is really a center of excellence for our customers, where we provide just the exact capabilities they need. We do that on a reliable basis, which has been an issue in this segment, where a low price has been a trend as a deciding factor. Many customers have been burned. We're seeing a turn in that trend to much more of a best value approach and being able to rely on us to deliver what we promised, to do so on schedule and at a good price really is a winning combination for us in this segment.
Market environment, defense budget declining represents largely an opportunity for us. I think General Cody hit that exceptionally well in terms of a variety of legacy systems that are going to be deployed in a variety of different ways, continue to require sustainment support. There is a manageable element of risk in this in terms of some of those platforms may go away. We are on a strategy to be able to move into adjacent markets not just aviation assets, which has been our forte, but moving in to ground vehicle maintenance and sustainment, as well as international customer sustainment. We are, of course, again as General Cody commented, tracking the pivot to a number of regions around the world. That in turn provides opportunities for system upgrades and sustainment. Commented earlier that the market is still cost competitive, but we are seeing a trend towards best value, where customers, first of all, look at can these people do the job for me? Are they reliable? Which is a stock in trade for us. And then let's look at price. And that's a real good operating point for us to reside in. And our advantage then lies in what I mentioned earlier, the ability to combine, in just the right way, the strengths of the various business units we have, that allowing us to have rapid turn times to get the assets back out of sustainment and into operations, and then being able to target our investments in order to improve our productivity and overall cost profile. Major growth strategies for this segment in C-130, which is a major strength of ours. Mike mentioned the EC-130, the Compass Call aircraft, is a good example of that. We see a growing market for sustainment with a large number of platforms worldwide, and we intend to pursue that on a continuing basis. I mentioned the VIP Head of State arena. We had our win of a second 747-8 upgrade, the largest 747 ever made upgrade for Head of State. We believe that gives us a great footprint moving forward in this segment. And the aero structure, always been a good business for us. But largely in the past, it's been focused on military rotary wing. We are now on a strategy to expand a bit adjacent to that area by teaming with our current as well as new OEM partners to look at commercial, as well as international platforms that they need to support on and also moving into the fixed wing arena. I mentioned earlier that we are looking to leverage the great processes, skills, capabilities that we have in the aviation arena into the ground logistics market space, as well as the related international markets. We always look for opportunity to pull through capabilities from other parts of L-3 into the solutions we provide as we sustain and upgrade platforms. And we continue to drive cost out of the business and that, that allows us to pursue a best value approach to achieve higher margins on the business.
In terms of major awards, Fort Rucker already been mentioned. Key win, and I would say a key win for L-3 as a whole -- I can't think of a better example of teamwork that we've had this last year than the win of the Fort Rucker recompete. Two other field support programs we won. Columbus Air Force Base represents a somewhat adjacent move out of a very solid base of Navy training system, logistics support into the Air Force logistic support arena. And then as an example of the success of our strategy of moving adjacent into the ground logistics market space, we just recently won the Fort Bragg logistic support contract. Three programs listed at the bottom. All are in the upgrade platform, upgrade part of the business, and all are international. And that's indicative of the growth we're seeing in that area. Overall, 2012 orders will be at $2.8 billion. In terms of opportunities, moving forward, I think I've hit the first 3 already. Navy special mission aircraft is an area that we have been involved with for a number of years. The good news is even though those aircraft are getting long of tooth in some cases, we have the ability to sustain and extend their service life, and the chief of naval operations recently indicated that they're going to extend the use of those assets, at least, through 2018. The bottom 2 opportunities are in the area of field support. The Army aviation field maintenance program represents the army's move away from a low-priced paradigm for buying stuff to a best value paradigm, which is the space that we find we do best in and deliver best value.
And the EAGLE IDIQ program is a program we won this year that will allow us a variety of task orders that we can bid on to move into the ground logistics space even further.
Turning to C3ISR. This segment delivers 28% of the sales in 2013. 90% of that is DoD, 9% foreign, but that is a growing segment in the foreign market, particularly using the SPYDR aircraft as a marketing tool, as Mike mentioned earlier, and we'll say a little bit more about that. I'll be addressing the ISR systems component to this business at 60%. And then following me, Susan Opp will address the network and secure communications part of the business.
Guidance for 2013 is sales just under $3.6 billion with a healthy margin of 10.5%.
In terms of the system we provide, I would call your attention to the circle diagram in the lower right-hand part of this slide. We design, develop, deliver and support the upgrade of the most complex ISR systems on the planet. Our customers truly view us as a center of excellence in this area. This organization has been at this for over 60 years starting this year, so a major milestone for us. And what we do with the systems we develop are provide our customers the ability to detect or find particular targets that may be of interest, to fix to locate those targets, to track them, to determine what their intent is, target them with weapons as appropriate, engage them and then assess how that engagement has gone. Those capabilities are basically an intrinsic part of each of the systems provided by this segment. But in addition, in a true synergy play for L-3, very often, we will take the capabilities in this segment and integrate them with the offerings out of AM&M to provide our customers a total life solution for their fleets of aircraft. And that's very attractive to them in terms of having one belly button to hold accountable for their systems. It's very attractive to us because it gives us a long-term basis of collaborating with that customer, and it provides a basis for the pull-through, that I mentioned earlier, to bring capabilities from across the corporation to bear.
Our customers are as indicated on the chart. In terms of major discriminators, the way I like to describe us is we are our customers' go-to guys for their most difficult, challenging, time sensitive got-to-have requirements. And the reason they keep coming back is because we reliably deliver those capabilities on very tough schedules and on budget. In terms of the market environment, I think General Cody, as well as Mike indicated that ISR, in fact, remains a priority investment, notwithstanding the current budgetary constraints and then that a lot of that goes to the world situation, which demands quick reaction ISR capabilities as the threat changes and grows, the ISR market tends to track that as well. We are seeing a global demand to replace international maritime, as well as ISR aircraft fleets with multi-mission systems capable of a variety of functions. It could be ISR, it could be cargo carrying, it could be medevac. And we have the solution that we're going to be bringing forward I'll talk about on a subsequent slide to address that market space. And so our advantage here really lies in our outstanding past performance, our ability to deliver on a consistent basis with high quality, our ability to leverage because of our complete through-life support, our knowledge of how the platforms are being used, where the operations are going to go next and that forms our decisions on how we invest to position for growth. That allows us in turn to have great speed to market with minimal development time and to do so at a lower cost perspective.
In terms of the major growth strategies for ISR systems, we target our technology in terms of being able to ensure that our current base of programs remains operationally and mission relevant. That helps our customers, as well as continues with our position to be solid. We look to evolve those solutions such that they can be applicable to a variety of other customers and in particular, we adapt technology so that they can be used for export. One of the areas that is a growing area for us is what we call the ISR enterprise, and this was referenced earlier in a couple of the discussions. What this is about is we have the luxury of huge numbers of sensors collecting incredible volumes of data. The challenges to be able to take that data and convert it to information that is actionable and to get that data to just the right person at just the right time so they can make time-critical decisions. We have number of initiatives underway to grow in that space. Fourth, growth strategy is to maintain our leadership in affordable manned ISR solutions, both domestically and internationally. What we're addressing here as what we see in the market space is our customers, both domestic and international customers simply do not have the resources in terms of dollars or the time in terms of response to the threats to be able to go through a long development program to provide systems in this arena. What we're doing is very selectively investing in things like the SPYDR King Air 350 platform that's shown on the lower right, which is a very easily reconfigurable platform in terms of what sensors are provided, what comm systems are provided, a variety of other subsystems so that for a particular customer, we can tailor that demonstration aircraft, let them, in effect, fly before they buy. And from that customer's perspective, the solution is right off the shelf. And that's been a great success in terms of both selling enhancements to our customers, as well as selling brand-new fleets of aircraft. I mentioned there was a new initiative we have underway with the multi-mission aircraft business. We are looking starting this year and continuing into '13 to be able to take a Bombardier commercial Q400 aircraft, a much larger aircraft than the King Air 350 and be able to configure that for a variety of purposes that we believe will sell very well internationally. And finally, we continue in this business to drive cost out of the equation in order to make sure we maintain our affordable position. In terms of major awards for 2012, very solid year in the tactical or small aircraft ISR business. We had a re-competition of our Army Constant Hawk Program that we successfully won. We've had a number of new aircraft we've sold to a variety of customers, as well as upgrades, both of those representative of the success of the SPYDR strategy. And of course, with each of these, as Mike referenced, there is a whole sustainment tail that goes with it that also is a great source of revenue for the corporation. On the international large ISR aircraft front, we were fortunate to be selected for the Korea Lot 1 program to upgrade 8 of their P-3 aircraft, as well as the ongoing programs in the U.K. and with that some proprietary customers. And finally in the ISR enterprise area that I mentioned earlier, we have a couple of key strategic positions right now that are going to allow us to continue to grow and expand that business in the years ahead.
And so looking at the going forward position, we continue to see tactical ISR as a great growth area for us. First of all, leveraging the deployed fleet of some 64 aircraft we've delivered in the U.S., both in terms of sustainment ongoing, as well as upgrades to those aircraft. We've looked to 2013 to have at least one major international buyer of these kinds of aircraft. And we think we'll be able to sell at least one new country each year with another 4 to 6 aircraft each and then sustainment tail that follows. We look to have continued growth in the large ISR aircraft modernization with indicative countries as shown. The ISR enterprise, this current year, we're at $50 million. We think over the next 5 years, that's going to grow to $400 million with opportunities in the Air Force as distributed common ground station, as well as a variety of tactical exploitation, dissemination and processing programs. And finally, that multi-mission aircraft area, we think that's going to be a real growth area for us and we believe we're going to be starting with an Army program in the U.S., as well as 2 international launch customers and there's a whole long list that follows after that. So in summary, for both AM&M, as well as for ISR systems. We believe 2012 was very solid performance year. We have a number of key awards that I have talked about in brief that we think gives us a great foundation for moving forward, well positioned to grow in this market space. Within the ISR arena, international conflicts are going to continue to drive enhancements and growth associated with that. Within the AM&M area, The OpTempo, I believe, is going to shift globally as General Cody talked about, but it's still going to be there. The reset aspect is still going to come to play, which is going to drive continued sustainment opportunities. Our proven differentiators in terms of our agility, our responsiveness, as well as our cost effectiveness align incredibly well with our customer needs, and I believe the technology investments that we've made and are continuing to make will ensure that we have continued market leadership. And so with that, I'll turn it over to Susan Opp who will address Communication Systems.
Susan D. Opp
Thank you. Good morning, everybody. I'm going to talk about the 40% of this segment that John did not cover in the network and secured communications space. As you see the guidance there, $3.55 billion and good margins at 10.5%. I remain very optimistic about our piece of this segment. There's growing demand, not only domestically but also internationally. And then, of course, the need for more and more information has been driving technical evolutions of our products over the last few years. So I'm going to talk a little bit about how that affects our market space. Our business is highly, highly technical. And not as export -- not as easy to export as some other businesses you might see, which explains our footprint within the market space, almost predominantly 90% DoD, foreign government 9% and then other U.S. government classified agencies and such for the other 1%.
We have quite a center of excellence with respect to communication systems. We have a lot of engineers, as well as a lot of legacy experience with our customers. You can see the wide range of products that we provide. We sell through the prime contractors, as well as having our own prime contracts as well. And so that gives us a customer intimacy that allows us to evolve our products ahead of the market space. We've been doing this for some 50 years now and that really allows us kind of an advanced look at what these customers are needing in the next few years.
Many of our programs are fixed price, which allows us to deliver the margins that we have been asked for. But that also forces us to be highly execution focused. And so our excellent program performance, delivering the right products at the right time is something that we're known for. We try always to be ahead of not only our competition but also our primes with respect to new product offerings and then of course, we have a broad variety of loaner assets, so that if a customer wants to see it before they buy it, we can do that. And so that allows them to maybe show their customer or show their boss how the system is going to be used before they have to put money on the contract. So as I said in our market space, program execution is critical. We are seeing more requirements come from our international partners, especially as the drawdown is being looked at. Most international customers need systems that are turnkey with no development. And so we see requirements for higher TRL, technical readiness levels, meaning that all of the risks have been retired. I talked a little bit about increasing demand for bandwidth. One of the things that our missions have been requiring is a little bit of forensic information. So a lot of sensors, a lot of data storage after an event might occur, people go back and look at maybe who put the IED there or where they live or maybe who they interface with in order to figure out exactly what our next move will be. That's a good from a technology perspective because it really gives us an opportunity to increase the bandwidth that our products take care of for our customers. Of course, once you get a newly developed technology piece, transitioning it to production is very -- is also critical. And so that really takes you from the development phase to the production phase, where really the higher margins and the tougher schedules are really where we shine.
No different than the way your handheld devices operate. Our customers need all of these products to be networked. And it needs to really work seamlessly and so that's a technology nugget that my divisions are especially good at, and something that we've been working on for some time. We now have these systems fielded, and we're able to see how they work and how they reduce the timelines for our customers who figure out what's happening and then what to do about it. Wide area persistent surveillance really talks a lot about having maybe UAVs on-site in theaters where, perhaps, the manpower has been drawn down and that allows us to still have eyes everywhere that are in the area of interest while also keeping our people out of harm's way. So that's a bit of an emerging market and something that we will be well positioned for.
There's a couple of new opportunities in the classified domain that are allowing us to see -- I see a few new platforms being developed, as well as some different CONOPS with the pivot to Asia with a near peer competitor. You wind up needing a lot more technical horsepower in the products that are being developed.
So our growth strategy remains the same. We very carefully protect our core business. We have a lot of legacy positions on unmanned and manned aircraft. First thing we need to do is make sure that those customers are served, many of them are adding SATCOM to their platforms. And in some cases, we're adding optical communications as well. And so, that's our really our first tranche of that strategy. We're also able to take advantage of what the rest of L-3 is doing with John McNellis' business area, the pull through to the ISR platforms. And then also technology nuggets, we spend those off into Les Rose's cybersecurity business. So we're kind of a nestled between the 2 as a product supplier on one hand and a technology supplier on the other hand. Each division really focuses on their specific growth strategies that are really coming from interactions with their particular customers. So in pictures then, we know what the customer needs to do. We have a lot of products to pick from, some of them have been in operation for tens of years, some of them are brand new and just right off the drawing board. We kind of mixed that up with some internal research and development funding, as well as a team of developers who are able to go to the field and show how those things can be used. And all told, that really gives us some insights into what to offer to our customer once that RFP comes out.
2012 was a very good year for us, probably the best year we ever had. We’re seeing market share increases in our segment, not only in traditional kind of ISR platforms but we've gotten good traction at DARPA with respect to new, new missions. And then we've also had one of our kind of a breakthrough win in advanced AEHF, protected MILSATCOM and a new technology development. That's really kind of a testimony to 12 years of internal research and development, as well as talking to customers to be able to bring a lower cost Milstar wave form to the marketplace. Our knowledge of that particular market space comes from our legacy position on the family of Beyond Line-of-Sight Terminals (FAB-T), and we knew ahead of time that they wanted a lower cost instantiation. So that really is a good example of what we try to do in our space.
The rest of those programs that are listed are either production programs like Hawklink that puts our data links on the SH-60 helicopter fleet ship-to-shore connector. I'm sure you have heard of that. That's a littoral vehicle for the U.S. Navy that was an L-3 teamed with Textron award that happened just a few months ago. And then of course, the TACP-M full-motion video receivers, new handheld receiver, which is really kind of a ROVER takeoff, if you will. It's a smaller, lighter and much less expensive.
Our estimated 2012 order book, roughly $1.6 billion, with a book-to-bill higher than 1. What are we looking at? This top line AEHF protected communications is really the FAB-T production program. We provide 70% of the hardware on the Boeing team on that particular opportunity and we're looking to transition that to production in the next year. As I mentioned, there are a few new air and ground unmanned vehicles that are being developed, and we're in a very good position with respect to that. High-speed cryptos, that's something we have been performing on for the last 2 decades and continual evolution as the cyberspace requirements have come to the forefront.
Navy programs, mostly international and Coast Guard, have a few development opportunities, as well as some production opportunities for comms systems. I talked a lot about our advanced communication hardware, and we see those going from kind of PowerPoint to lab demos to field demonstrations to production in the next 2 or 3 years. Just like your BlackBerries and iPhones, our handheld transceivers are evolving as well, and we're taking advantage of the latest and greatest technology from the commercial market in order to reduce the cost and increase the capability for our war fighters.
With respect to space, SpaceX has contacted us to put some wideband communications on their Dragon lab capsule. They're a commercial entity and so we are able to work with them in a commercial environment, which is also allowing us to kind of see into their mission needs and open up an entirely new market space, not only for my segment but all of L-3.
So in summary, for us, program execution is the -- is job one. It's the most important part of what we do every day. But it's sitting beside our customers and making sure we know what they need next, bringing the resources to bear, both in manpower, as well as funding. I've talked about a few of the new opportunities that are at the forefront, probably the most exciting of which is the optical and multi-gigabit blinks that will be fielded in the next 12 months. Security, both in the cyberspace, as well as communications space is very important and that's really allowing us to focus across the company and you take advantage of what Les knows -- Les' group knows with respect to cyber, as well as the people that are in my particular group. Networking, always important, devices have to work everywhere in a seamless manner. And I think that we are seeing quite a lot of new opportunities, new RFPs, new demonstration opportunities that really take advantage of the new pivot to Asia with respect to electronic warfare, cyber and advanced ISR. So demand is high. We don't see a slowing at all in our segment and I think that we'll be able to protect the margins with our position in the marketplace but also our program execution.
We're going to take a break now until 10:40. We'll start up with Les Rose then. Thanks.
Okay, we're going to start up again with Les Rose.
Leslie A. Rose
So good morning. I have the opportunity to talk to you about the newest sector in L-3, National Security Solutions, officially stood up in July of this year. And focused on cybersecurity, intelligence and IT, primarily. We represent the smallest piece of L-3 at approximately 10% in 2013. If you look at it from a sales perspective, it's about 50% IT and then the balance. What I want to focus on for just a second is the 10% of cyber, which Mike covered in his presentation this morning. But cyber is foundational for everything we do in IT. So information security has been around a long time. And information security is a requirement for us to deliver quality products to all of our customers. But cyber is growing. As Mike mentioned, the government is figuring this out, it's evolving. And where that market is going it's there, $3 billion from DoD a year. But certainly, we're paying great attention to this and working the strategy to be available, ready and willing when they come to market. $1.2 billion in sales at 6.5% margin.
If you look at this from a customer's perspective, about 3/4 of our business is DoD and that's a place where we don't -- we want to diversify our portfolio, we want to increase our international business. And we've set up an organization internally to focus on that, and help us balance that more effectively. If you look at NSS at a glance, you see we have 4 lines of business. And those 4 lines of business are converging in our customers' requirements, as well as from a technological point of view. That allows us to focus on the 4 of them in unison to have better value in our investments that we make. Cyber, IT, Intel and Infrastructure. Just a little bit briefly, full spectrum cyber obviously includes defending networks. But beyond that it includes embedding, information security and everything that we do, as well as developing specific cyber contracts.
Enterprise emission information technology ranges from global, large global networks, developing, building, maintaining and sustaining them to mission-specific solutions, applications or systems. Intelligence operation, clearly, making sense of data. John mentioned it in his presentation and Mike mentioned it. Big data, we hear a lot about big data and what do we do with that? We have a high -- a large number of Intel analysts in the space today that are actually making sense of that data that's being collected, and are able to help us drive tools and systems that we need in order to make sense out of that large data. And operational infrastructure ranges from complex architectures to point solutions emissions as we go forward. I've already covered our customers in the pie chart previously. This is a little different spread of them.
Award winning services, performance in this business is paramount. We have to have highest quality services and performance of our employees. To do that, we have over 5,000 employees. You can see there, 87% of them have clearances and 80% of them are in fact, embedded in our customer space, allowing us to understand the customers' requirement and requirements as they go forward and how we can better deliver the benefits that L-3 as a whole, not just NSS.
Mentioned that products -- the quality of the products that L-3 has, typically #1 or #2 in the market space and being able to leverage that into our customers gives us a great advantage. An example of an award-winning program, the British government awarded the CDM Award to the Ministry of Defense for a program where we partnered with them to build Sky Siren, a product that came in, one of the few that came in from the Ministry of Defense, under budget, ahead of schedule and meeting all quality requirements. It was a great honor for us to receive that award with the Ministry of Defense.
Market environment and trends, John and Susan have both covered this, as well as Mike in some sense. Certainly, we have a budget reductions, we're not immune from that, but the main thing that's driving us is the model and the changing of the acquisition model that we see. As Ben mentioned low price technically acceptable and John mentioned the fact that some of his customers are going back away from that because of unsatisfactory performance and I believe that's going to continue. But we have to be prepared for that. In order to do that, we have to be right sized, to be competitive and to be the low priced.
ID/IQ vehicles, approximately 70% of what the government buys from us comes from -- is bought on ID/IQ vehicles. We set up an organization inside to handle and work with ID/IQ vehicles, and there's approximately 45 vehicles in contracts in there today and it's available for the rest of L-3 as appropriate to use to manage their vehicles. Staffing challenges for the highly cleared people, the commander of cyber command says that there's 250,000 people short in terms of what it takes to do cyber and Intel mission today. That puts great demand on us to manage our people effectively, to maintain their loyalty to L-3 so that we can in fact deliver what we need to, to our customers. But it puts a turn in the organization as you can imagine.
So the 4 lines of business. Converging, looking at -- focusing primarily on cyber, Intel and special operations forces market, which is all 3 of which are steady or growing as we go forward, combining that with the short term size, turns, so that we're positioned to win in the short term, but at the same time, making prudent investments in the long-term strategy.
So the initiatives that we have are: Develop, acquire and leverage and I'm going to talk about the 3 of these in the next 4 slides as we go forward. The most important of these, in my opinion, is leveraging L-3 and its world-class products as we go into that. Developing discriminators is about our people, developing products, solution and/or combining them with the other parts of L-3 that are already there. Susan mentioned the joint view of IRAD in the cyber area and certainly that's an example of taking advantage of that. The areas of focus are shown here: Cloud mobility primarily support enterprise emission IT. Cyber stands alone and supports the other areas at the same time. And analytics is primarily focused on the intelligence or the sense making of data. Going forward, we're going to look at cyber range, we've developed it and we're going to enhance it, so that it allows us to work not just in the defensive side, but in the exploit side as well. Software development, it's a major problem in the government today with systems that are outdated. They can't afford to maintain and sustain those and L-3 has a great reputation in developing agile software and being able to modernize those systems for our customers. Knowledge management plays in both directions, both internally for us to leverage L-3, as well as solving our customers' problems.
These are 6 examples of solutions that have been developed in 2012. I'll talk very briefly about the 2 on the right-hand side of the chart. SecUchat is the ability to take 2 Android devices and have them communicate securely with each other in the field. And as you can imagine, folks who are out on the pointy end of the spear are very interested in being able to communicate back and forth effectively. And the ViBE Browser is an example of the major threat to our networks today is from the Internet. This is an ability to isolate the Internet, allow you to browse on the Internet without putting at risk the network. So it's a great tool for those who have to be on the Internet to do their work and yet don't want to take the risk of what's associated with the rest of it. Mike mentioned the Virginia Tech relationship, the exclusive cyber relationship that we have with them. It's unique. In addition to that, we're working with NYU-Poly in terms of enabling the mobile and cloud security as part of that. What's really important here is this is where we're investing. This is how we're doing this is because acquisitions are generally, in this space, are generally high -- valued very highly and have single solution. We don't believe that's the best deployment of our resources, and we think that it's better for us to operate in this way. In addition to the academia that's shown here, is we're also partnering with others in the industry to make sure we can deliver to our customers the solutions that they need.
Finally, the third leg of this is leverage. And what I want to talk about here is how L-3 has been able to develop the solutions that are required by our customers. The first one that's up there is for Air Force Research Lab Agile Fiber Technology, it's a pure play cyber contract. There aren't many of them in the government today. We were able to win that. We are -- depending on what chart you look at, we're 6th or 7th defense contractor, and no one larger than us won this contract. So we were able to beat some very formidable folks to win this contract to be able to support the Air Force. And the way we did that was basically, Susan and John Mega -- we came together -- and Steve Kantor, we came together with solutions that we could actually deliver to that customer in a way that others couldn't do. And we got a very high rating. The next 2 are ID/IQ vehicles for the Army in the communications world.
And -- I'll skip to the third 1, GTACS basically is a $10 billion contract vehicle that we won about a month ago. Again, John and Susan and I led the charge on that in bringing L-3's strength and breadth to the marketplace. We expect to win CTS in a similar way in the first quarter of 2014. And those are ID/IQ vehicles, which will allow us to be a prime in delivering those products to the Army.
So awards in 2012, what you can see here is both ID/IQ contracts, the top left-hand corner with GTACS a $10 billion contract ceiling. We anticipate that L-3 will get $0.5 billion -- $500 million out of that contract over the life of it. So that's the conservatism that we've -- what it built-in to the plan. The others that don't have the parentheses are single awards and values as you see for L-3. Altogether, approximately $1.3 billion in orders.
And what's upcoming? Across the top line, the 5 on the top are what are submitted waiting for the government to make a decision and they represent about $1.5 billion in orders, 2 of which are ID/IQ's as you see I2S and CTS -- the other 3 are single awards and that's what we're waiting -- we believe most of this will be decided in Q4 of this year. In capture, across the bottom is an array of things in various states from Greenway for NSA to national capital region Air Force contract for the Air Force in Washington, D.C. And they're in various states, from just starting to basically getting ready to submit proposals. But together, they represent about a $14 billion pipeline that we're pursuing -- we'll pursue the next 2 years.
So in summary, current business environment does present challenges for us, but it also presents opportunities, and we're focused on the opportunities by being right-sized for the short term and being positioned for the long-term with prudent investment. That convergence, we believe, plays into our strategy in terms of how we can invest, invest wisely and get it to apply to more than one area. Penetration into the large ID/IQ vehicles, we have a play in this. As I said, 70% of the work is going through that, and we're intent on being there to get more than our share of the task orders. In technology, discriminators is a constant theme -- constant moving train and Mike mentioned this in his presentation this morning. It's not a point solution, it's not a bullet. It's something that we have to stay continuously on top of, and balance both the top and bottom line growth. Thank you very much for your time. I'll be followed by Steve Kantor with Electronic Systems.
Good morning. Kind of excited to be here today to talk to you about this sector, Electronic Systems sector. I hope to show you how the products we are doing here fit in to discussions you've heard earlier. We represent 43% of what's the 2013 projected sales. You can see in this chart that we're well diversified in these various areas. These are the subsegments we have within Electronic Systems where we have products that fit and support all of these markets. What's really unique about it is, that we're not tied to any single, large program for our future. We're well diversified with supplying as a prime, we're supplying as a customer to the primes and as primes ourselves. We see about $5.5 billion next year with a margin that's double-digit, and we intend to maintain that.
As we look across the profile, you can see here that we're about 57% government DoD and other government agencies. That gives us 43% in commercial and foreign government and we see opportunities there, again, as you've heard from others to expand in both the commercial and in the international arena.
This is our portfolio. You can see that we have electro-optical sensors across many places. This is from the war fighters, binoculars that gives them capability to look at low light level or night or infrared and recently, we've been able to mesh these products and as you've seen on some of the CNN activities, we own the night and the products that we're doing here for the warrior and for the unmanned vehicles that we talked about, give us a capability to see, detect and target various threads. Avionics and displays is very strong, we're in a lot of the military applications. We do airborne recorders as you know. We also do displays and avionics for F-16s, F-18s, Joint Strike Fighter and commercial products. System engagement, these are products that involve fuses for precision guided weapons also for controlling those weapons. Space and nav, we have space-based platform gyros that stabilize this space-based platforms, it also provide navigation, and we also do propulsion systems, large engines, transmissions for tanks and light armored vehicles. Simulation and training is a big part of what we do. This is link simulation business. We'll talk some more about that, but this is the area where we're doing military aircraft and now with the acquisition that Mike spoke of, we're doing commercial as well. Securities systems, these are the ProVision checkpoint, scanners that I'm sure you've all seen at the airports. We really take a market share in this space with our automatic detection full body scanners, but behind the scenes, we have a lot of equipments installed to do check baggage, and there was multifunction capability to detect threats and check baggage. And the key there is to process quickly and also not to have a lots of false alarms. We've got -- taken the technologies that we have and improved that capability dramatically. SATCOM terminals really are basically modems that allow the user, the soldier, to communicate through satellite communications to get a situational awareness, very strong this year in that. And maritime products, lots of equipment, power conditioning, power distribution, navigation, automation equipment across the fleet, both in the U.S. and internationally. As you've seen the markets are very similar, very strongly in the DoD. But here on our space, we're also very strong with the primes. Lockheed is a big customer, Boeing is a big customer, Northrop Grumman, Raytheon, BAE, we're in both sides, sometimes we're prime, often we're a supplier to the primes. Federal agencies such as the FAA, NOAA, there's NASA, are also customers. And a lot of the international opportunities that you've heard about. We're strong in the U.K., Australia, Middle East and Asia, Taiwan, Korea, et cetera.
So we've got a really nice broad portfolio of customers and products. So how do we discriminate ourselves and this is really exciting when you see the leading-edge technology we have, products that we're bringing to the field that nobody else has is a really a discriminator. And we've established really good customer relations by finding out what they need, developing it, bringing it to them and supporting it with high-quality and high reliability.
Very diversified. As you could see, we've got products across the landscape and that gives us a real advantage as customers' requirements shifts from, say, Afghanistan to Asia, we've got products that can meet those needs. Very exciting time. You've seen a lot of discussion about how we bring things together, both in bidding on large contracts, but also customer solutions. So here again, we're able to bring multiple sensors and systems together to provide solutions, and the more of that we do, the more added value we have. We're quite disciplined in our R&D. We really go out of our way to match our investments to what the customer needs are and Mike and Ralph really focus us to keep focused on that so the products we're delivering really have legs, and we're just not playing with the science. Aftermarket service is something that we have broadened. We have put in place abilities to worldwide support our products. This is making the cycle times faster. I think it's also key to having the infrastructure to support the reset that General Cody talked about. As that starts to happen and we have to upgrade our products and provide new products, we're going to need worldwide support to do that and an infrastructure to support it.
We've moved into the plug-and-play approach. This allows us to take on new products and backfit them into the market, so some of our equipment that we're doing today, which is much more capable, fits in the same space, plugs in and no platform changes are required. This is really helping to limit the cost for the platform upgrade to get our new products in place. We're also evolving software upgrades because a lot of the equipment today is much smaller than it used to be, and we can do algorithm upgrades in software that give additional capability to deal with new threats. And at the heart of all of these is we're quick, we're agile, we are in the customer space with our products and we can get them solutions quickly.
We've heard a lot about the market. I think we're pretty unique here in that we see lots of opportunities to grow even in the depressed DoD markets. Commercial aircraft is growing. New orders for our aircraft are at a record high. Public safety is growing. A lot of the equipment that were built and installed after 9/11 has now aged. 10 years, I think, Mike mentioned, they're a decade old equipment. We're seeing upgrades starting to come along and new mandates, particularly in Europe for new state-of-the-art equipment, which is what we have on the table. So very excited, we just won a program at Heathrow for check baggage upgrades.
We also see a lot of interest in the international and I see lots of opportunities there as we're growing. We can see that the ability to supply these products internationally is starting to open up a bit. And in fact, in some cases, we are required to change the performance slightly, but we're able to do that easily with software and gives our products an international representation. So that's a growing segment for us as well. And ISR, as you heard from Susan and from John, very strong. We continue to see that demand and special forces is another area where the demand continues regularly with new requirements and new products.
So our growth strategy is pretty simple. We've got a tremendous installed base, great customer relationships. We've got to stay on top of that. And from that, we can learn about what they need and develop new products. We need to expand our products further into the international award -- into the international arena. We are working hard to increase the amount of customer-funded R&D. We're doing that for 2 purposes. One, to get more buying power in terms of bang for the buck. Their investment plus our investment has more power, but it also really gets them committed to the program. So we're really focused on improving that. And we really believe we can continue to increase market share. As Mike said, we've had some really good growth here in terms of taking market share. And I think that's a real opportunity for L-3, that as things tighten up, we can take market share with discriminating products at cost-effective prices. And we continue to look at acquisitions. I think we're very disciplined here. We look for synergistic acquisitions that add value that allow us to grow, are reasonably priced and are accretive. Mike mentioned KEO which we bought from Colesman [ph]. This company builds periscopes for submarines, both for the U.S. and for many international navies. They've also moved in to the masts for Virginia Class, which Mike mentioned -- that's a picture of the mast, which is a photonic mast, many different sensors on that mast. That product is locked in to Virginia Class submarines. When you look at the other products we have on Virginia Class, power conditioning, power protection, communications, we're taking a bigger footprint on a very well funded long-term program. We see opportunities for the same kind of growth in the international submarine arena. So this is a very good business, well structured in terms of its backlog. They have new sensors, it's 1360 sensor that we talked about, because 360-degree Surveillance and Reconnaissance capability without having to slew the sensor. This is -- started out as a product that was going to be in a particular location. What we've been able to do is now move it to vehicles and ships, sticking on a great amount of interest. So that you can imagine you don't have to move around to look at what's going on behind you. You can see it all on a series of screens. Very powerful, very cost effective. We're getting a lot of market touch on this.
Thales sold off their commercial simulation business for aircraft. It was interesting that this company originally was part of the link that we've had linked in the U.S., which had done all the military simulators -- full flight simulators. So now we're able to move back into the commercial space. They're very well-positioned. We've got a lot of installed base, great relationships with Airbus and Boeing, also with the airlines who buy these equipment. So we see a lot of growth here internationally as they become part of L-3, but we also see the ability to move this space, this product space into the L-3 in the U.S. and we are focused on growing that business as well.
Major awards this year have been great. We see a couple of enhanced night vision and aircraft night vision systems. Very strong, multiyear ID/IQ awards for our products, multifunction displays that we've been able to sell into the commercial and military market. Hybrid electric drive, development program for ships, which is a new product. We worked on for about 5 years in the development and is now going into ships, which will save fuel. As a operator ships, and we expect that to get proliferated throughout the fleet in the next few years.
WIN-T LRIP, that's a modem for a satellite communications, completed the field testing and now got into low rate initial production, really nice growth there in the future. LAMPS is a mobile power system, next generation that we're developing. SOCOM family of terminals allows for the soldier to communicate by satellite locally and ship to shore connector, which several people mentioned is a place where we're working through the whole communications and navigation and Electronic System team with Textron for that new ship program. Those are all new programs that we have worked and won this year and have a good future.
Follow on, I talked about increased market share in baggage handling and checkpoints. Very strong sales there and the refit's ahead of us. And the MX series, those sensors that we've been delivering continues and we've got more orders for that.
So these are the future business opportunities. We see laser markers and laser range finders are a big product for us used by the special forces in the army. Future weapon sites, you see coming multifunction displays, anti submarine warfare as the threat of Asia continues and the buildup of submarines, many countries are looking for its protection. This comes in the form of sonars and towed arrays, which we manufacture for the U.S. and foreign customers. So we're seeing a growth in that area. C4N I mentioned for ship to shore connector, full-flag simulators, we see about $300 million ahead of us on that. SOCOM family of terminals for special forces and others is great. And GTACS that Wes mentioned is another place where we have the vehicle now to supply all our products quickly to customer needs.
So these again -- these items represent the growth -- I'll talk to this one quickly. This is a handheld target location device never been done before, mostly if you're trying to locate something precisely, you have to have a fixed station like a tripod that's got to be set up, and it's not movable. This product is self-contained and is handheld. So you can take it with you. You can precisely locate a target with GPS coordinates and it does communicate with things like ROVER, so we get the situational awareness, send the information back up. This is a brand-new product, happen to be looking at it along with customer and they couldn't wait to take it out to the field, which they have done. So we're building another one. But we expect to see some really dramatic orders from this. You can see some of the other thing mobile x-ray scanning is a new product that we've developed. It allows you to move the equipment around. So it's not fixed, it's not located in the building or a port, so it's actually transferred. We've been able to demonstrate that. We sold our first system to the Omanis and in the Middle East is an area where they have broad threats that are well defined around the country. We need to move the systems around and so there's a lot of orders coming there.
Vehicle recapitalization I talked in terms of reset, we were going to be building new engines, new transmissions as these vehicles return. It's cheaper to upgrade them than to build new ones, and we think there's a real opportunity there. And the 360 full view products, I think have a lots of legs in terms of future applications. So we see lots of growth initiatives starting to pay off, which will serve us well in the future.
So in summary, I think we're uniquely positioned in terms of great discriminators at the right price that really give the customers what they need. We're staying on top of that as we continue to develop new products. We see opportunities to grow, which will offset the budget constraints in the U.S. by expanding internationally and commercially. And our new business expense can be augmented by working closely with our customers and increasing our craft. So I think we're very well-positioned in this situation with the budgets. I think we have opportunities to grow and it's very exciting to be part of L-3. Thank you. I think Ralph is next.
Ralph G. D'Ambrosio
Good morning. Pleased to be here today to review the company's financial performance. The last couple of hours, we covered the macro environment, our major customers, our businesses and the strategies for our businesses. I'm going to explain to you how that translates into our financial performance, specifically for 2013. And to summarize, I think 3 main points will emerge from my review. Number one, the company is healthy. Number two, we are effectively and proactively adapting to the changing environment. And three, the company is becoming stronger.
Before I get to 2013, I'd like to quickly review on one page our accomplishments for 2012. And overall, we've had a very good year, these are the highlights. We won the Fort Rucker contract re-competition. That was our largest recompete for 2012. It was also our largest contract in terms of annual sales, and we won that keeping about L-3 prospectively is that, in 2013, and for at least for the next 5 years, we don't have any re-competitions that approach that size in terms of annual sales. We have one re-compete that could be about $200 million happening in 2013 and it looks like that could slip into 2014 as we speak. Aside from that, there is no re-competitions that we have next year that exceed $100 million in annual sales. So that's important because the key to growing and gaining market share is retaining your existing business space, and we're doing that. We've covered this morning a lot of areas where we're getting market share and we're gaining market share in most of our business areas. The company is continuing to generate robust free cash flow. It's a $1 billion and more importantly, our free cash flow per share continues to grow. We're using cash flow in a disciplined and focused manner, allocating it in ways that are geared toward increasing shareholder value, and that includes taking actions with respect to our portfolio or our businesses, which in many ways is the most difficult part of capital allocation, but we're doing a good job of it and the end result is that our company is competitively stronger and structurally more durable and that's going to -- it's manifesting in our results. On the next chart, we'll take a look at our end customer sales for 2012. As you can see, we're predominantly a U.S. Department of Defense contractor, representing about 71% of our sales in 2012 and here I've segmented the DoD business into 2 categories because the trends in those 2 categories are very differently -- very different. The smaller piece is our Iraq and Afghanistan support work. This year it's approximately $1,250,000,000, and that part of our business has been declining rapidly in connection with the drawdown from Iraq and the in-process drawdown in Afghanistan that's continuing through 2014. The rest of our DoD business is a little more than $8 billion and it's about 61% of our sales and that business is more stable. The business trends are more favorable as well. And then if you take a look, the remaining parts of our business, we're growing our commercial and our international business over 10% this year. We expect that they're going to grow again next year and the other U.S. government non-DoD business is going to continue to be about 5% of our total sales. These are the key trends that we see happening next year. And generally, the trends are very similar to what we've been experiencing in 2012 and additionally, we expect that the sequester situation and the fiscal Cliff will be resolved. Our government customers, primarily the DoD, are experiencing physical constraints, they are grappling with tighter budgets, they're implementing efficiency initiatives, trying to scratch their budget dollar to get more value for each budget dollar. I talked about the Afghanistan drawdown and that's what's going to impact our sales in 2013. Despite all that, we have several good market share opportunities across our businesses, we highlighted those of this morning. Our margins are 10%, and they're going to continue to be very solid and the robust cash flow will continue to be over $1 billion and like I said, we're going to grow our free cash flow per share.
I have one chart on the DoD top line budget trends. There's a lot of information here. But there's some important points that need to be pointed out. So this is a summary for the last 3 years and the next 5 years. The projected budgets from FY '13 to FY '17 are based upon the DoD plan that the administration submitted to Congress earlier this year in February. And if we take a look at between the base budget and the OCO budget, which is the part funds the Iraq and now mostly Afghanistan war efforts, you can see that the trends in terms of budget changes are very different. Whereas the OCO budget's declining very rapidly, the base budget, except for a decline that's anticipated per this plan in FY '13, is basically flat to growing very modestly. Now we can debate what will happen to this future based budget, and that's what sequester is all about. But even if sequester were to occur, the budget looks like it takes a step down further in FY '13 and then it begins to gradually grow after that. We'll learn more about this over the next 2 and 3 months. Another point about the base budget is that while the top line overall is flat to growing modestly if you peel the onion and look at the addressable budget, which is mostly comprised of the investment account, which is about $168 billion of that $525 billion for FY '13, the investment account, which is a good proxy for the addressable industry budget is declining by about 3% per year from FY '10 through '13 and that spills over into industry performance on a lagged basis due to the differences between budget authority, contract obligation and outlays. But it's declining about 3% and I suggest that, that's probably what's happening in the end market for adjustable DoD budget. But once you get to 2014, the budget is expected to grow in the investment account by 4% or 5% and then slowdown after that in FY '16 and '17. So I think the key takeaway here is that we are in a down cycle, but generally, the down cycle is very manageable.
Here's a look at our segment guidance for 2013 compared to 2012 and this is at the midpoint. If you look at our 4 segments, we're expecting sales declines in 3 of them with the exception of C3ISR. And if you look at Electronic Systems, we expect a decline of about a $200 million, that's due almost entirely to the Afghanistan's drawdowns, which is causing about $180 million of that reduction, and it's mostly in the EO/IR sensor systems business area, which carries our highest margins and that explains the decline in the operating margins to 10.8% next year. Additionally, there's a small impact from higher pension expense, which is 10 basis points in the electronics systems segment. With the C3ISR, while the business is only growing 1% in total, if you analyze it between the base budget and the Iraq and Afghanistan effort, the base business is growing about a $200 million next year, roughly half in the international business and half on the DoD side. And that's a being mostly offset by about $160 million decline that we expect to happen in the Afghanistan business with the small ISR aircraft declining about $100 million and the ROVER remote video terminal sales declining by about $60 million. But overall, very strong underlying growth in that segment, and we expect that is it's going to continue to be our fastest growing segment into the future.
Aircraft Modernization and Maintenance is down 4%. That's coming in -- or happening in the sustainment solutions or logistics support part of that segment, which is a little more than half of those sales next year. And what's happening there is that we're seeing a small decline in the Fort Rucker contract that I talked about earlier this year, which is roughly $35 million or $40 million, and the tail from the South West Asia CFT job, recomplete that we lost earlier this year, that would have been declining any way, given the decline and drawdown from Afghanistan.
The platform systems business is flat to growing very modestly. The margins are flat to slightly better and that's because the platforms systems margins are strong and they're offsetting a small decline in the logistics support margins.
And then lastly, network security solutions, we expect to decline by about 9% next year to $1,250,000,000. Most of that decline is coming from the DoD efficiency or Better Buying Power Initiatives, where we're seeing a lot of our business convert from a single-award to multiple-award contracts. Additionally, we have a modest decline in the OCO Iraq and Afghanistan sales here, plus some smaller pass-throughs. The margins, however, are going to grow by a little more than 50 basis points. As Mike said and we saw earlier this year, we expect the margins nesting [ph] at the bottom in 2012, and we're seeing that as we head into 2013.
Here's a quick look at our cost structure. One of the characteristics that we keep talking about when we summarize L-3 is that the business is very flexible and adaptable. Here's why. If we take a look at our cost and these are our costs and expenses off the operating income line, only 6% of our cost structure is fixed nonlabor overhead, that includes all the corporate and group losses [ph] expenses, including labor, for Mike, myself and others, plus our rent, property taxes and the intangible amortization, which is essentially a fixed cost. The rest of our cost structure is variable ultimately in one form or another, and that allows us to quickly resize our business as is necessary for changes to happen in our business volumes. So we feel very comfortable that even a sequester were to happen, we can quickly resize our business without a lot of disruption in our operations.
Here's a look at of our free cash flow. For the 2012 guidance and the details for the 2013 guidance. Key takeaways here are that we continue to have a very high conversion of our net income to our free cash flow, which is GAAP cash flow from operations less capital expenditures. And you can see the conversion exceeds 135%. It's structurally that way. We expect that that's continue to be the case into the future.
Additionally, I'm not showing you here, but if you take these free cash flow amounts and convert them into per share cash flow metrics, our cash flow in 2012 is approaching $11 per share and is going to exceed $11 per share in 2013, growing at about 7%. So the company just continues to generate an enormous amount of free cash flow. I'm not sure that we're getting credit for that, but we keep doing that, eventually we'll get credit for that performance.
Last point that I like to make here is that our CapEx is only $180 million, about $80 million to $90 million of that is maintenance-oriented, the rest of it is growth- and capability-focused, which, again, demonstrates the low fixed cost, low capital intensity nature and characteristic of our businesses. If something would happen with sequester, we could easily scale that CapEx down by a $100 million on a temporary basis, without it disrupting our businesses.
Here's a look at our cash sources and uses for the capital allocation that we've talked about this morning. We're going to continue to pay dividend and remodel the small per-share increase, consistent with what we've had the past several years. We expect that we're going to have some more debt reduction next year, but it's going to be about half of what we're doing in 2012. And when we become comfortable that we're not going to have any additional declines in our operating income, or in other words, when we become comfortable that the cycle is turning, we're quickly going to re-lever our balance sheet and stay within our investment grade credit rating, but increase the borrowings. So I expect that, that's going to happen as early as 2014.
And then, share repurchases, which is a bulk of our cash deployment. We're modeling $0.5 billion for 2013. We have the room to do a little more because we expect the year -- that we'll end the year with $400 million. And I think at that point -- at this point in time, it's prudent to have that cushion or conservatism in the cash deployment and share buyback.
Quick look at our balance sheet. Key trends here are that company has a very strong solid balance sheet. We've been declining -- reducing our leverage to maintain our investment grade credit ratings. And we have ample liquidity with over $1 billion -- with $1 billion available to us in our revolver. And as you know, we don't need that revolver to manage our business because the cash flow is positive throughout the year.
Here's our consolidated financial guidance. I covered the key metric changes versus 2012 a month ago when we reported our third quarter earnings. Just filling in some details over here. So we expect our sales to decline 3% next year, it's all due to the Afghanistan drawdown, which is about $400 million. Operating margin are going to decline 30 basis points, 10 basis points as pension. The rest is mixed due to that Afghanistan drawdown. And on that point, I'll add, is that, beyond 2013, our Afghanistan sales, which we expect to be about $150 million next year will continue to decline along with the drawdown. We think it's going to bottom somewhere in the $300 million to $400 million range by the time that we get to 2015. So we'll have some more leakage in sales after '13 but we're not going to have any disproportionately high leakage in operating margin from those sales after 2014, which is a key point going forward. And our objective is to maintain those margins at 10% respectively and try to do better. We're going to have some reduction in interest expense and no debt retirements charges. That's due to the debt repayments that we did in 2012. The tax rate creeps a little higher because we had a tax gain in 2012, relating to the close out of a federal income tax audit, that could happen again in the future if we don't project that included in the guidance for sure.
And then we expect our share count to decline by 8%, that's offsetting the decline in sales and margins. And that translates into a 3% growth in EPS at the midpoint. Free cash flow is down 1%, but like I said, the free cash flow per share is going to be over $11 per share and growing at about 7% compared it to 2012.
So to summarize, we all know the environment is challenging, but we think it's a manageable environment and we believe that we're doing an effective job of managing in this environment. While we have declines in our sales stemming from the Afghanistan drawdown, which we can't avoid, it's happening, we do have growth in our international commercial business and in our base DoD business. And it's an important -- very important priority areas. The cost structure is very flexible, I showed you that. And we'll continue to proactively rightsize or resize our businesses as necessary. And again, the key point, our cash flow is a very robust over $1 billion, with the free cash flow per share metric growing.
So, I'll end the way I began, overall, the company's healthy, we're adapting to the changing environment and were getting stronger. Thank you very much.
Michael T. Strianese
Okay. Ralph, thank you. So that's the presentation and we'd be happy to take [indiscernible].
I have a question on capital deployment. The debt shows no change in the absolute dividend payments in '13 versus '12. Can you just reconcile that math and whether or not that's just a placeholder? And then, just more broadly, how you're thinking about the balance between where you want to take the dividends versus buybacks?
Michael T. Strianese
Yes, you want to answer the forecast and entry segments?
Ralph G. D'Ambrosio
Well, what's happening is that, while we expect that we'll have a per share increase in our dividend, with the share buyback, we're shrinking our share count and that essentially causes the outlay to be almost unchanged 2013 [indiscernible].
So when we think about that 8% reduction in the share count, translating to roughly in 8% increase in the dividend. Is that -- are you guys pretty set on that or is that sort of a placeholder and you'll see what you want to decide early next year?
Michael T. Strianese
Yes. It's a placeholder every year. We work with the board, at our February meeting, as you know. We've had an increase ever every year for the last 8 years. But I think, [indiscernible] Can somebody -- can you mic me up? Yes, it's mic 7. Hello? Have you got me on here? Okay, sorry. In terms of the overall capital allocation strategy, I guess, let's think about it this way, how do we like to allocate our capital? In the way that delivers the most value to shareholders, is the simple answer. We have a dividend. We've started 8 years ago, we've increased it every year. The plan is to continue. There's also an impending change in tax policy that we're going to hear from you, the community on and consider that. But the plan, as I see it now, is to continue predictable increases, not dissimilar to what we've done in the past. The next tranche, if you will, centers between M&A as share repurchases. It's been pretty clear the way we've been leaning, we've been much heavier weighted into share repurchases. We believe that the stock represents a very compelling value. We've heard from many of you that -- the view is they prefer -- you prefer more buybacks. We've chosen the balanced approach. The dollar of dividend is a fixed dollar, however, we're buying our shares at what we believe, to be a very compelling valuation that could provide further growth in the future. And of course, we like to continue to build out the portfolio through M&A. We've been very disciplined, and not buying for the sake of buying. We're buying companies that meaningfully improve our portfolio and our market positions. And finally, all of that in the context of maintaining our investment grade rating. So you saw debt a repayment this year because we move the Engility business out and took a dividend back and we rescale the debt to meet the sizing cusps. So in terms, again, I guess, your question on the dividend, the dividend policy is unchanged and it will be reviewed and considered in the context of the environment where we are.
And then, just one other one for me. If you could address what's going on with OSI and how you see that playing out and what it means for your business?
Michael T. Strianese
Ralph G. D'Ambrosio
The news that their baggage screening business received a letter that they received from the government. I don't know if that's prevents them from competing or where that stands following that.
Michael T. Strianese
Yes, is this -- no, I understand they had an issue with the testing on their version of the ProVision. Is that -- that's the question? And they're going to be -- well, we already have a pretty heavy market share so let me just size it for you in terms of -- Europe has already banned the use of backscatter x-ray for the passenger portal, if you will. So we've been rapidly taking up that market. And Asia, I guess, they do compete with us. The U.S. we've -- $160 million was the last order, $200 million-ish order. It used to be split between the 2 of us, but that was, including the certified check baggage machines. We'll, I'm sure, sure pick up 100% of the market share there. So you're dealing with the business here that does about $300-ish million in annual sales. If it went up 50%, but I don't think we will do that this year, but it will -- it can pick up another $100 million or so, perhaps.
Mike, and Ralph, I guess, you touched on some contingency in your opening remarks, Mike, that's maybe releasing that if this comp -- if this recompete slips into 2014. And just by could you size the level of contingency you currently have in the '13 guidance, both from this particular contract, as well as any other broader contingency?
Ralph G. D'Ambrosio
Well, the potential $200 million sales contracts re-competition that I talked about is what I mentioned at least a few times this year. It's just enterprise Intel-support type job in the NSA segment. If it stays on schedule, the new contract would start October 1 of next year. So it's about $50 million of sales risk. But like I said, it looks like it could slip into next year. There's still not an RFP for it. That said, I think we've adequately factored that re-competition risk in our guidance, which we do for all segments. So it would not -- losing that and we don't expect that we will lose it, but not disrupt or impact the guidance.
And then the other question I had, maybe I'll cleanup one first -- that $250 million of debt repayment in 2013, so there's no debt recharge -- no debt charge with that?
Ralph G. D'Ambrosio
That's correct because we will be repaying that $250 million out of our contingent convertible debt, which is callable at our discretion or at will at par, as we speak.
Okay, great. And then the last one for me, Mike, you talk about $3 billion annual sales for Cyber, and I imagined the Intel side across that size, is probably roughly the same. So you talk -- you look at the market, there's 6 or 7 or more people who say they have penetration here. And you gave the NSS 10% of sales, about $160 million Cyber within there and then some in C3ISR, I'm sure. So where does this $3 billion go into in the future? And is it a real business for anybody 5 years from now or is it still going to be a sub-billion-dollar business for everybody in the market?
Michael T. Strianese
That's a good question, I swear, because the $3 billion, of course, is the DoD budget number, which is going to be very hard to find in the DoD budget. I guess they've had it spread out all over the place, probably. Yes, so in a lot of it's going to be in classified minds. So if you ask me, prove me to me that in the budget it is there, I couldn't do that. But you could take that quote from Secretary Panetta speech on October 11 on the Intrepid, that's where I got the number. So that was my source for the data. I think it's going to be incumbent upon the DoD -- Congress are on them. And if there is no standards or actions put forth. So I think this is very similar in the dynamic as to what happened post 9/11 with the Homeland Security business, where a lot of companies set up Homeland Security operations. And I challenge you to find one of them, we didn't. We've had the vision that we stayed the course within the division and grew it, and if you look at where we are, we own the market in this space either at #1 or #2. And it's a decent business, it generates double-digit margins. It's a great business, in fact. It's global and it's commercial and it diversifies us. Cyber, bit of a different animal. So it's hard to target opportunities in the classified world. So can't certainly explain them to you because can't. We know intuitively the problem exist and it's a severe problem. I think that the NSA side of the house, which is more the offensive, is going to stay in inherently government -- governmental function. If it goes on contract, this is going to be classified, you have the exploitation piece, if it's out for bid we do some level of work on it again. This is very classified work. But you have this whole sweet spot here that involves things like protection and forensics identification. Let's call it network housekeeping, it's the term I decided to use, where the growth there could -- would not only be through the DoD but could also be even in commercial spaces as well and not that we would take on the commercial market but we would flow the technology through one of the commercial service providers, whoever happens to be in the space. Very hard for me to size for you the timing of when this grow in the extent. But the money is there and the problem is there, and intuitively, I expect this to go. So we're going to stay the course on it. Not overinvest, but we're going to retain the capabilities that we have in this space. Go ahead, Cai.
Cai Von Rumohr - Cowen and Company, LLC, Research Division
Excuse me. So your plan doesn't assume sequestration. What if we have sequestration? What percent of your DoD backlog is funded backlog so it really wouldn't matter? And if they don't start addressing contracts in March, just notionally, how should we think about what that impact might be if it does happen?
Michael T. Strianese
Well, if you assume the worst case is the full bore sequestration that does occur in January 2. I guess, we can bound it as that's the worst that could happen. We have a model. Can I have Ralph? Ralph, do we have the worst case?
Ralph G. D'Ambrosio
So you asked a couple of questions there, Cai, so let me try to cover each of them. I'll take the last one first. If sequester would happen, we anticipate that we could have another $0.5 billion reduction in our sales 2013 versus this year. When you look at our sales for next year in our guidance, about 58% are coming from funded backlog, another 35% is from follow-on work that we do not need to recompete for to be awarded that business. And then there's about 70% in terms of recompetes and in new business pursuits in sales guidance for next year. And that's probably a little lower than what's been in the past. So how do I -- if sequester were to happen, it's the reason we don't expect that you see another 5% or 6% reduction in total sales, is because number one, our non-Iraq/Afghanistan business is about -- with the DoD is about 60% of our sales, which we showed you. And if sequester happens, they're going to cut the budget authority for 2013. That's not all going to translate into industry revenues in calendar '13. It's going to dribble out over several years because of the lag dynamic between budget authority and industry revenues, and in between of those, you need to obligate the contracts and then, start outlaying the funds. So that's when were revenue recognitions generally occurs. So that tends to mute or minimize the impact of the sequester cut. So that's kind of how we see it, if it happens.
Cai Von Rumohr - Cowen and Company, LLC, Research Division
So the $500 million is for the absolute worst case would look like?
Ralph G. D'Ambrosio
Well, I never want to talk about absolutes, because who knows what could happen, but that's what we see, as we expect to be the sequester at worst case.
Cai Von Rumohr - Cowen and Company, LLC, Research Division
So second question on margins. You talked about -- so after '13, things look better, maybe talk about some of the factors. For example, pension if the discount rate is stable, if you hit your expected rate of return. What should pension do? And you talked in electronics about hopefully getting at some point to 13% to 14%. What would it take to get there and what are some of the margin pluses as we think about '14?
Ralph G. D'Ambrosio
I'll take the item on pensions, Cai. So if the discount rate remains constant in the future, and we're assuming that it declines by about 80 basis points, next to 4.2% for next year when we set -- that's how set the guidance, and we stay at about that level and we achieve our asset return, which is about 8%, we should start having about a $15 million to $20 million reduction in pension expense. And that's just due to the natural actual reduction that we expect to have in our pension because we closed the pensions to new hires in 2007. So over time, our active pension employees will retire and that will reduce the pension expense. If interest rates ever increase, we would have the potential for a much larger reductions in pension expense in the future. A 25-basis-point change in the discount rate is about $15 million or $16 million in pre-tax expense or close to that. So you see the leverage that we have in pension expense if interest rates ticked higher in the future.
Michael T. Strianese
And we also had -- what is the actual discount rates for the plan right now? 5%s to high-5%s?
Ralph G. D'Ambrosio
We used a little more than 5% for 2012. And we're using 4.2% for 2013.
Michael T. Strianese
Yes, and Cai, if you look back in the old days when the discount rate was 8.75% or 9%, plans are almost fully funded. I know that it's not going to get that high anytime soon but it is a very leveraged number, as you know. So George, do you have one?
Yes. Ralph, with book-to-bill of AM&M has been like 1.25. Contract Field Teams is not much of a headwind. You won the Australian JCA contract. So how come the sales are still projected to go down?
Ralph G. D'Ambrosio
Well, because we have -- the run off [ph] from the CLS work on CFT, and the slightly lower sales on Fort Rucker. And because we have some cushion in our guidance. And I recall that normal and prudent type forecasting at this point in time.
Okay. And on the electronics margin, it was like 13% a couple of years ago, you got it projected down to 10.8%. You mentioned EO/IR is down, that's a part of it maybe, Thales is another part of it. But is there more to it? I mean, it seems like a pretty large drop.
Ralph G. D'Ambrosio
That -- there's not more to it. Those 2 items -- primarily, the reduction in the EO/IR sales from the Afghanistan ISR surge ending. So perspectively, we should have margin expansion there. I know, that's all we're working on, including Steve. And also to further elaborate on the margins, as we said, we expect that the NSS margins has bottomed or will bottom in 2012, and we showed a 50 basis point increase in of those margins respectively. And even on the logistics support work within the Aircraft Modernization and Maintenance segment, we think those margins have also bottomed. So we don't think we're going to have any pressure from those types of service competitions -- or service business in the future.
Michael T. Strianese
Yes. I think -- let me just add to that, George, which is important to note. The big drop in electronics sales as it relates to that as opposed to significant displacement in the government business because of Better Buying Power rules or anything else. So meaning it's not a structural change in how we -- in our contracts or anything, it was just simply a volume shift, that hopefully we can recover at some point. Yes, anywhere.
Michael or Ralph, if we could go back to the $500 million at risk from sequestration, have you done any analysis around if any programs have meaningful impact or possibility of cancellation. As a result, the $500 million simply your prorated portion of the cut, but as there's other analysis in the backlog, cuts in programs may result in modifications or cancellations, any thoughts around that?
Michael T. Strianese
Well, that's all I recall to make because I think you're looking at a 2-step process here with sequestration. And it depends how it's implemented because I don't think even the government has figured that out yet, whether it's at the program level or sub levels, you know what I mean, that you can go to a service, you can go programming, you can go sub-levels. And the reason for it is you can't buy 85% of the shift, so essentially, you sequestration occur, if it were to occur. And the second thing is, you'll have the reprogramming action by the Pentagon with they'll have to top up certain accounts and eliminate other ones, and try to get to that the second step is difficult. So essentially, we've been more pro rata in our approach. But having said that, we don't have -- the nature of our programs are such, that we don't have the big platform, ones that would really be all or nothing type of things or, of course, we have quantity issues that would change. But the biggest one we would've had would have been the C-27J and that was already killed in the Budget Control Act, in the $487 billion. So that item is gone. So I think we are more in a pro rata situation, any way.
And then as a follow-up, any expectation as to what might happen to EBITDA as a result? I know you had the analysis of your cost structure in the slide deck there. Just way on a bps basis, how many bps are at risk, if we see $500 million shaved out?
Ralph G. D'Ambrosio
I would -- it's probably around 30 basis points, and that's because it's simply not possible to cut all [indiscernible] cost, at the same rate as sales because they go in step functions. But we quickly resize the affected business units such that we'd be able to get back to the 10% objective in short order.
Mike, 2 questions. First, one of the things Frank Kendall talked about in Better Buying Power 2 is more emphasis on performance-based logistics. And I just wonder if you could talk about that opportunity set for the company? If you see opportunities as a result of that of push, when could they emerge? The other question is just thinking about L-3 the last couple of years, you guys have done very well picking up kind of these quick reaction capabilities, they're really kind of a wartime demand-driven need -- project Liberty, ROVER, whatever. As you pivot to Asia-Pacific, do you see your customer changing where you're not going to have that kind of pop-up need and maybe no more steady cadence on programs? Does that change the way you think about the business?
Michael T. Strianese
Yes. Well, certainly the urgent -- with UOR, as urgent operating requirements go away, we're not engaged. And one would hope that there's longer time to plan for the threats and things like that. Having said that, the whole Better Buying Power Initiative and everything that goes with it, is supposed to take cost out of the whole acquisition cycle, and being able to rapidly prototyping and get things into market quicker. It just saves money in the whole process. So I think that advantage still stays with us. As you know, Liberty, we got from contract to combat in about 8 months. I'll point to another program because it's -- a program everybody knows, which is EMARSS, which is essentially, a very similar aircraft that has not been delivered yet, as I understand it. And with it's -- is over 1 year, 2 years old? It's 2 years. I mean, it's a very stark difference in what we're capable of and that 2 years is money spending and administration and all that other. So I think that's quick reaction capability is still valuable and timely for this place we are right now in this cycle with the Pentagon. On the PBL, the performance-based logistics, I just can't make that call now. And if there's anybody else have better answer than this, to what it might do for us, John with AM&M, perhaps? Yes, here's your mic.
John C. McNellis
We hear a lot of talk about PBL, but we've yet to see a really well-formed requirements in that area. I think we're well positioned to engage that. We have a great supply chain management capability that we offer to certain of our customers. But on a PBL basis, I think that's still maturing and we're tracking it with our customer.
Michael T. Strianese
Okay. Thanks. Okay. Well, we have lunch set up in the back and we're certainly be available to chat further. And thanks very much for joining us this morning, and everybody have a great holiday season. Thank you.
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