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L-3 Communications Holdings (NYSE:LLL)

Q4 2012 Earnings Call

January 30, 2013 9:30 am ET

Executives

Eric Boyriven - Managing Director

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

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

Analysts

George Shapiro

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

Myles A. Walton - Deutsche Bank AG, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

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

Carter Copeland - Barclays Capital, Research Division

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Operator

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

Eric Boyriven

Good morning, and thanks for joining us for L-3 Communications Fourth Quarter Earnings Conference Call. With me are Michael Strianese, Chairman, President, Chief Executive Officer; and Ralph D'Ambrosio, Senior Vice President and Chief Financial Officer. After their formal remarks, management will be available to take your questions.

Please note that during this call, management will reiterate forward-looking statements that were made in the press release issued this morning. Please refer to this press release, as well as the company's SEC filings, for a more detailed description of the factors that may cause actual results to differ materially from those anticipated. Please also note that this call is being simultaneously broadcast over the Internet.

I would now like to turn the call over to Michael Strianese. Mike, please go ahead.

Michael T. Strianese

Thanks, Eric. Good morning, and thanks for joining us. We completed 2012 with a solid fourth quarter. It was characterized by strong orders, sales and cash flow in a persistent challenging environment. Despite the uncertainty throughout 2012, our employees and leadership team continued to demonstrate outstanding program performance and collaboration. I extend my thanks to everyone across L-3 for the excellent teamwork.

Overall, we remained focused on our strategy of growing market share and delivering innovation and value to all our stakeholders. We continue to increase our operational efficiencies while investing in research and development to strengthen our core businesses and broaden our customer base. We had net sales of $3.6 billion for the quarter, slightly higher than the fourth quarter of 2011. Diluted earnings per share from continuing ops were $2.25 compared to $2.21 for the same period in 2011. Last year's numbers exclude a gain from certain items.

During the quarter, we had funded orders of $3.3 billion. We ended the year with funded backlog of $10.9 billion, and that was up about 10% year-over-year. For the year, orders were up 7% over 2011, and our book to bill was 1.05x. This is a key metric that reflects the strength of our business. Our free cash flow for the quarter was approximately $450 million.

Overall, our business execution was very strong throughout 2012, and the challenging environment has been very manageable for us. We made key adjustments to our portfolio with the successful spinoff of Engility and 2 business acquisitions, KEO and the Link U.K. commercial simulation business. KEO adds submarine photonics systems and periscopes for platforms that include Virginia Class subs, a high-priority DoD program. The addition of Link U.K. extends our Simulation & Training business into the global commercial marketplace and strengthens our existing military Training & Simulation business and growth outlook.

Our business mix has also shifted to reflect the declining DoD environment and the increase in commercial and international opportunities we have. In fact, in the fourth quarter, the increase in our commercial and international business, plus our acquisitions, offset the decrease on the DoD side, which is a perfect example of our strategy in action.

In 2012, we also achieved important milestones in winning key recompetes, including contract in logistics service support at Fort Rucker, which represents about $2 billion in revenue over the next 5 years and is our largest contract in terms of annual sales. Our strategy is working. The company is strong, and we're well positioned to take advantage of new opportunities for growth.

In terms of the segments, Electronic Systems had net sales for the quarter -- their net sales increased by $62 million, which is about 4% up from the fourth quarter of 2011, mainly driven by the acquisitions. The net sales on an organic basis were up about 1%. Electronic Systems, as you know, is a very diverse, short-cycle business. We have several #1 or #2 positions across the segment, both domestically and internationally, and we're continuing to expand our market share as opportunities emerge.

In C3ISR, our net sales decreased for the quarter by $46 million or about 5%. For 2012 overall, C3ISR sales were up about 3%. That segment continues to perform very well, and we hold leadership positions across the market with solid demand in airborne ISR and network communications fostering cross-segment collaboration, which will play a key role in growing our market share in this business for the future.

In our AM&M segment, net sales for the quarter increased by 2% or $15 million over the fourth quarter of 2011. As budget pressures persist, there will be an increased focus on upgrades, lifetime extensions and reset work. These capabilities are at the core of our business, so we're well positioned for what's ahead. There are also additional international opportunities for our head-of-state work.

In our National Security Solutions business, net sales decreased 4% for the quarter. Drawdowns, better buying power initiatives and tighter budgets will present challenges for NSS during 2013. However, let's keep in mind that cyber technology is an evolving space, and we feel that this investment will yield opportunities in the future. If you look out, there are significant opportunities for us to continue to be optimistic, although guarded optimism given the budget, for this business area.

A few words about the budget environment and sequestration. I'm sure you're all focused on it. As you know, Congress has delayed the deadline for sequestration now until March 1, and what happens after that is still to be determined. March is turning out to be a month of milestones with the current fiscal '13 continuing resolution expiring later that month as well. We expect this, when added to the ongoing budget issues, will delay the fiscal '14 budget into March or April.

Our business continues to face uncertainty and challenges, as everyone else in our space. What we do know is that the prospect of sequestration remains a major concern for the nation, the defense industry and L-3. More than 2 million American jobs are at risk. Put simply, indiscriminate budget cuts would put our national security in jeopardy, threaten our industry and devastate our supplier network and the vendors that support our operations. This would impact the U.S. jobs market and weaken the overall economy. We're focused on helping our government customers. We've been coordinating with the DoD and service branches to ensure that we fully understand their requirements as sequestration looms.

And we're working closely with Congress, consulting and collaborating with our industry peers and our elected officials nationwide. Along with the AIA, the Aerospace Industries Association, and its member companies, we're urging Congress to find a solution that does not result in the sequestration cuts. Secretary of Defense Panetta has supported this view, and it is our hope that his successor will also agree.

We're doing our best to protect the interests of our employees, our customers and the many suppliers and businesses that support the defense industry. As part of our strategy, our businesses are aligned to capitalize on DoD priorities. We're monitoring the situation closely so we can enact plans that will moderate sequestration's impact should it occur. The intense budget climate aside, L-3 continues to focus its business on new DoD-focused areas, including programs to support the Asia pivot, ISR, as well as unmanned systems.

In terms of some of the more significant awards and milestones during the year, let me just name a few of them. We had a good year in terms of new wins, as well as the recompetes. So from Fort Rucker to our position as a major subcontractor on the navy's new ship-to-shore connector program and our leadership role as a key supplier of sensors and advanced imaging and optical systems, customers continue to seek us out when they have a critical need. On the commercial side, we continue to extend our positions in civil aviation simulation, as well as scanning equipment and aircraft modification work for high-end commercial customers. Some of the more significant awards, I'll go through them by segment, I guess makes sense.

For Electronic Systems, first of all, we were awarded a contract to design and manufacture the next generation of large, advanced mobile power sources, or LAMPS, generators for the army. Our Warrior Systems business received an ID/IQ contract for the U.S. Army's enhanced third-generation night vision systems and spares. We were awarded a production contract for modems and SATCOM On-The-Move antennas to be used on the U.S. Army's Warfighter Information Network-Tactical or, as you know it, as the WIN-T program.

We also received a contract to supply our hybrid electric drive to the navy. This is a strategic win for our Marine Systems business area, with a potentially broad application across a variety of both military and commercial vessels. Put simply, it saves a lot of fuel and a lot of money.

In addition to more TSA orders for our ProVision systems, we received a contract to upgrade Canadian ProVision systems to the ATD, or the Automated Threat Detection configuration. International sales of ProVision are continuing with orders from the U.K., Australia, Italy and several nations in the Middle East and South America. Also, we received European Union certification of the ProVision ATD, which provides additional market opportunities for us overseas.

And our KEO business that we acquired last year has been selected to provide shipsets as part of the Universal Modular Mast program for the navy.

The C3ISR ongoing communications and data link systems work for the Predator, Global Hawk and U-2 platforms were received. Multiple orders for our tactical ROVER, full-motion video receiver and related accessories and support items, continued work in support of the U.K's. Air Seeker program.

In December, we saw the arrival at our Greenville Mission Integration facility of the second RC-135 aircraft for conversion to a Rivet Joint variant. This program is a terrific success story for us and our customer and look forward to updating you on Air Seeker later this year as we reach the key delivery milestones. We're on schedule. We're actually ahead of schedule and on budget, and we expect our customer to be delighted.

We're also continuing to demonstrate our SPYDR aircraft to both domestic and international customers. There is strong interest, virtually activity every week. We are not yet delivering, but we expect this one to go.

AM&M, we accepted the second of 2 747-8 aircraft at our Waco facility. This is a very special capability we have that perhaps one other company in the world can do. We'll be performing simultaneous mods to make these aircraft head-of-state aircraft, and that work will continue over the next year plus.

We received key contract field team and contractor logistic support awards, several of which were competitively won programs, expanding our market share in these areas. These include new business win from the air force to provide contractor logistic services for specialized pilot training and a contract field team award for EA-6B aircraft.

We also received an award for ground vehicle maintenance and logistic services at Fort Bragg. And I want to highlight that in that it's our first entry into the ground vehicle market as well. So again, expanding from the airborne logistics side down to ground vehicles. So I'm very happy with the performance there.

National Security Solutions. We have a diverse business, and we were selected for a 2-year program to provide intelligence support services to our forces in Afghanistan and, as such, also won a recompete integration contract to provide communications and public safety wireless radios to the Metropolitan Washington Airports Authority. They have a very wide aperture of work that they can perform, as evidenced by those wins. And again, as I said, we're optimistic that there's a robust pipeline, notwithstanding the constrained budget environment.

Let me address some capital allocation and acquisition points. It's been our policy to be prudent and thoughtful in our cash deployment, and our resource allocations define our commitment to shareholder value. Our long-term strategy is to maintain a balanced approach of share repurchases and dividends, as well as disciplined M&A when it makes sense.

During the fourth quarter, we repurchased $368 million of our common stock. We also paid dividends of $46 million. For 2012, total share repurchases were $872 million. We continue to believe our stock represents a very attractive value. Total dividends paid were $195 million, resulting in more than $1 billion of our cash returned to shareholders last year. That's over 100% of our free cash flow returned in the form of both dividends and share repurchases. Given the economic environment and the cyclical nature of our business, we believe that returning cash to shareholders delivers value.

But good M&A candidates for L-3 are also a focus, and good wins are ones that fit well with our long-term growth strategy and contribute to our ability to grow our market share and provide a good ROI. We also look for companies that present us with opportunities for collaboration among L-3's divisions and business units. That's how we'll make the most of our resources and achieve the market share growth that is central to our strategy. Our 2012 acquisitions of "KEO and Link U.K." are great examples of the strategy in action. We will continue to remain disciplined in finding and choosing companies that meet our criteria for the long term.

I'm sure you'll have some questions on what that outlook is going to be, but for now, let me turn it over to Ralph to go through the financials in some greater detail, and then I'd be happy to entertain any and all questions. So, Ralph?

Ralph G. D'Ambrosio

Thank you, Mike. I'll cover a few more details about the fourth quarter results and review the 2013 guidance update. As Mike said, overall, we had a very good fourth quarter, and results exceeded our expectations, driven by higher sales and lower taxes. And they were also underscored by very robust free cash flow.

Diluted earnings per share from continuing operations was $2.25 for the fourth quarter of 2012, which grew 2% versus the fourth quarter of 2011 after adjusting that fourth quarter for some unusual items. Overall, improvements below the operating income line, which benefited from our capital deployment, highlighted by a 7% reduction in our shares outstanding, offset a decline in operating income caused by lower margin.

Fourth quarter consolidated total sales were $3,560,000,000, up 0.5% versus the fourth quarter of 2011, and sales were almost $100 million better than we expected, with most of the upside in the C3ISR segment, driven by ISR Systems. Sales for the rest of the segments were on target with our last 2012 guidance update. With sales, we also continued to make progress on our commercial and international sales, which grew 23% to almost $100 million and represented 25% of our consolidated sales for the fourth quarter.

Fourth quarter consolidated operating margin declined 100 basis points to 10.2%. Higher pension expense reduced margin by 30 basis points and sales mix changes, mostly in Electronic Systems and C3ISR, accounted for most of the remaining change in margin. And what's happening in those 2 segments with the sales mix is twofold. First, more than half of the 2012 drop-off in Afghanistan sales occurred in the fourth quarter, and secondly, we're in the early stages of some new communication systems contracts, where margins tend to be generally lower.

We also generated free cash flow of $452 million, which resulted in full year 2012 free cash flow of $1,050,000,000, yielding an earnings to cash flow conversion of 133%. And more importantly, on a per share basis, we generated a very strong $10.76 of free cash flow for 2012.

Moving on to the 2013 guidance update. We revised the guidance to include the extension of the U.S. federal research and experimentation tax credit, which raised our EPS guidance range by $0.20, making the new range $8.15 to $8.35, which will be an increase of about 3% compared to 2012 at the midpoint.

The primary assumption that we made when we introduced our 2013 guidance last month on December 4 at the Investor Conference is unchanged, and that is that we continue to expect that the sequester cuts to the Department of Defense FY '13 budget are somehow going to be averted and do not happen and that there are also no meaningful cuts to the FY '13 defense budget. We've made no changes to our 2013 sales and margin guidance, both at the consolidated and segment levels.

For consolidated sales, we expect a decline in 2013 versus 2012 of about 4% or $500 million at the midpoint, and that's mostly due to the Afghanistan drawdown, which will reduce sales by about $400 million. And as we explained at the Investor Conference last month, most of the Afghanistan-related sales declines will occur in the Electronic Systems and C3ISR segments. The remaining $100 million of expected decline in 2013 is mostly in the NSS segment.

Our end-customer sales mix will also continue to evolve in 2013. Our guidance contemplates that the Department of Defense for the U.S. will comprise about 68% of total sales compared to 71% for 2012, and we also expect a shift to more commercial and international sales in 2013, with them comprising about 27% of total sales versus 24% for 2012.

The 2013 guidance consolidated operating margin remains at 10%, which is 30 basis points lower than 2012, with higher pension expense subtracting about 10 bps and the rest of it sales mix changes, primarily in Electronic Systems. Also recall that one of our financial objectives is to maintain consolidated margin of at least 10%. We expect segment margins next year, or in 2013 that is, to increase in C3ISR and NSS. Free cash flow guidance stays at $1,030,000,000, and that will result in a cash flow per share for 2013 exceeding $11, which will grow about 6% compared to 2012.

Mike hit the highlights about capital allocation, and our guidance continues to assume $0.5 billion of share buybacks for 2013, about $200 million of dividends and a debt repayment placeholder of $250 million. Our guidance assumes that we'll end 2013 with a cash balance of $450 million, which means that we'll have room to repurchase more shares in 2013.

A couple of points about the first quarter 2013 outlook. We expect: consolidated sales to be between $3 billion and $3.1 billion; margins should be in the high 9% range; earnings per share in the range of $1.85 to $1.95, and that includes an $0.11 benefit for the R&E tax credit extension; free cash flow of about $100 million; and the book-to-bill ratio, we expect to be about 0.9x.

A couple of concluding points. As Mike said, the current environment remains challenging, but we believe it's very manageable. While there are a lot of uncertainties, certainly more than normal, those uncertainties are generally well understood and range bound, and we're prepared to effectively and constructively address any outcome that comes to pass.

The company continues to be strong and healthy. We're doing a very good job of managing in this defense down cycle, generating solid financial performance, highlighted by our cash flow, and we're allocating and deploying our cash and capital to improve our results and to protect and increase value for our shareholders.

Well, that concludes my comment, and we'll now begin the Q&A. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of George Shapiro with Shapiro Research.

George Shapiro

Couple of questions, Ralph. How much of a revenue benefit do you get from the TSA removing the OSI scanners? And if you could maybe just break down how much of that business is now OE versus maintenance and aftermarket?

Ralph G. D'Ambrosio

We're expecting a small increase in our ProVision sales as a consequence of what you talked about. Some of those additional sales already occurred in 2012, and there'll be some more in the first half of 2013. Our ProVision sales right now are about $50 million per year. And the substantial majority of it is the equipment, with the maintenance or postdelivery work starting to grow. I think that answers that question, George.

Michael T. Strianese

Yes. Well, look, just to clarify, so there was 250 machines that you read about that would be replaced. I think 160 of them are probably in our deliveries already. And the question, George, where we don't have the clarity is are they going to replace all or not. In other words, are they going to -- are there places where they were underutilized, if they'll forgo having that piece of equipment. So there's some upside and there could be some more deliveries there as we get into the year, but we haven't seen it yet.

George Shapiro

And, Mike, since it's increasingly looking like sequestration, at least, may occur, how much of a further impact would it be to your revenues for '13?

Michael T. Strianese

Boy, I'm going to give that to Ralph, but let me just say that the -- it's like a double uncertainty here. It's the timing of it, but it's not only how -- when it occurs, it's how it occurs in terms of how it gets cascaded down to the program offices and whether there's some reprogramming amendments to priority issues, right? Because if you're going to cut every line item proportionately, it's going to give delivery problems in terms of not being able to complete systems. So there's going to have to be a wholesale reallocation for things that have to get delivered and things that we can slow down. But go ahead, Ralph. He'll give you some color on sizing it for you.

Ralph G. D'Ambrosio

Okay. George, if you recall, we covered this topic at the Q&A at our Investor Conference on December 4. And at that time, sequester was going to be happening on January 2. And the way we sized it was, based upon our top-down analysis, that if sequester occurred on January 2, it could reduce our 2013 sales guidance by approximately $0.5 billion, and it would also put some more pressure on our margins. I estimated it would be about 30 bps. And I also explained that we would take actions to quickly get our margins back to 10%. So with the American Taxpayer Relief Act that was enacted earlier this month, it did 2 things concerning sequester. First, it deferred the trigger date 2 months to March 1, and secondly, it reduced the sequester cut to the DoD budget by $10 billion from $55 billion to $45 billion. So if you factor in those 2 new data points, the estimated impact to our 2013 guidance would be less than what I explained a month ago. I can't give you any certain answer as to how much less, but it'll be somewhat smaller than what we sized it originally.

George Shapiro

Okay. And then one last one, Ralph. The book to bill ended up being 1.05x for the year, but you're still forecasting an organic decline of 4%, comparable or even worse than some of the past years. I mean, is that due to this book to bill just being longer duration, or what explains what looks like a bit of an inconsistency?

Ralph G. D'Ambrosio

Well, that's part of it. A lot of -- some of the orders that we had last year are multiyear performance-type contracts, particularly in the Aircraft Modernization and Maintenance segment on the platform system side. And secondly, if you look at our sales each year, about 55% of it converts from funded backlog. The rest, we book and ship during the calendar year. So notwithstanding the strong book to bill for 2012, we've applied some conservatism in our sales estimates for 2013, which is warranted given the environment and the uncertainties that we talked about regarding sequester and the continuing resolution for FY '13.

Operator

Your next question comes from the line of Cai Von Rumohr with Cowen & Company.

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

Yes. So as we look at your quarterly guidance here, does the C3ISR business have lower margins that get better as you go through the year? You mentioned kind of the new programs.

Ralph G. D'Ambrosio

Well, our C3ISR margin guidance at the midpoint for 2013, as you know, is at 10.5%, and I expect that we're going to have margins of above 10% in every quarter of 2013 in C3ISR.

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

Okay. Okay. And do you have a rough guess on sequester? I mean, I think most folks assume that if it's implemented, it will not be equal pain, percentage-wise, on everyone, but that DoD will have -- and OMB will have discretion. Do you have any sense if, in fact, that's the rule? Any sense as to where it might -- what it might look like?

Ralph G. D'Ambrosio

Well, right now, there's no discretion afforded under the Budget Control Act, even though we think that if sequester would happen, it would be followed by a reprogramming action that would allow and provide that discretion. That's the first point. Second point, Cai, is that the cuts to the O&M side are probably going to -- would definitely impact industry revenue sooner than the cuts to the procurement in our DT&E accounts, because of the lag and how those are appropriated and outlaid. Aside from that, we don't have any specifics. We looked at it by analyzing what portion of our DoD sales comes out of the O&M account versus the investment accounts, which we think is the correct way to assess it at this point in time.

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

And last question, you did 2 deals last year. You were kind of more active than many of your peers. As you look at 2013, are you seeing fewer deals, I mean now that we're in the new -- people don't get the tax break of doing it before the potential tax change, or are you seeing more deals? How does that look?

Michael T. Strianese

Yes, Cai, I don't think either deal that -- last year was driven by the impending change in tax rates, first of all. So there were a flurry of small things that came up in the last quarter, closer to November, December, where there were sellers, primarily individuals looking to exit before the rates change. That, obviously, is over. I haven't done this for a long time. First quarter always seems to be slower than the rest of the year as companies deal with year-end things and evaluating where they are. And companies that come to market typically come towards the end of the first quarter. The threat of the sequestration has, as you can appreciate, caused significant problems in valuing businesses since it's hard to -- in many cases, it's hard to tell who's the winners and who's the losers. If you look at what we did last year, obviously, the Training and Simulation business was kind of immune from it since it's in the commercial space, and we had a very strong conviction that the photonic mass and periscopes for the Virginia Class and other platforms were something that would be pretty safe. So when you add it all up, it's hard to value companies. I think those that don't have to sell are not going to sell until this overhang, the sequestration is removed because of the lower prices they're likely to get. And it certainly is slower than what we've seen in the past, for now. So that's what we see.

Operator

Your next question comes from the line of Myles Walton with Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

First, maybe a clarification, Ralph. The operating cash flow increased -- maybe you said this, increased slightly, offset by CapEx higher, getting to the same free cash flow. Is it a tax rate or tax benefit helping the operating cash? And then conversely, what was the CapEx increase? Obviously, it's modest.

Ralph G. D'Ambrosio

The R&E Credit is help -- is improving operating cash flow by about the same $18 million that it does on the income statement. And with respect to CapEx, we're making some very important investments in the international side of our ISR business, and that's the increase in the CapEx. And we think those investments make sense, whether there's sequester or not, given the end market that we're going after. And we've been saying for a while that we think our best opportunity for international sales is in ISR Systems, so we're putting our money where our mouth is, in that respect.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. The other clarification was you mentioned pension's 10 basis points hit to margins, I think, for '13. Did all of the underlying assumptions that you put forward in December effectively play out in terms of discount rate and asset returns?

Ralph G. D'Ambrosio

They did. We were anticipating a discount rate of 4.2%, and that's where it landed at the end of 2012. And the asset returns, we were expecting to be about 12% or slightly above it, and it came in at a little more than 13%.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. The real question is on not sequestration, per se, but behaviors that you're seeing in your customer base early in the part of this year thus far. I mean, is there anything that you can point to? Is it reflected in your 0.9 book-to-bill guidance for the first quarter? Is there any changes that are more concrete than just -- that you can share with us in terms of observations about how the contracting community may be behaving this quarter, leading up to what may or may not be sequestration?

Ralph G. D'Ambrosio

Well, we're seeing some prudence on the part of some customers on the CLS side and the IT spending side, but that's consistent with all the memos that just came out of OSD and out of the armed services chiefs, talking about the actions that they would take assuming sequester occurs. So -- and I think we've adequately covered that in our guidance already for 2013.

Operator

Your next question comes from the line of Robert Spingarn with Credit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Just, Ralph, on that last question that Myles asked on the bookings. Historically -- understanding there's all this pressure, but historically, you've had that stronger first quarter bookings, over 1.0 last couple of years. So how -- if you start at 0.9, does that benefit at all from any kind of rush to obligate funds? And then -- and would it be lower otherwise, or is that not a factor? And then how do you expect bookings to trend beyond that, to the extent that you can predict such things?

Ralph G. D'Ambrosio

Sure. So if you go back and you look at our first quarter booking trends for the last couple of years, a couple of things happened. One, we had fairly large international orders, and it was upside to what we had anticipated for 2012. And secondly, we saw some incrementally funded contracts get disproportionately funded in the first quarter, our calendar first quarter. So that's what drove the higher booking trends in the last couple of years' first quarters. We're not anticipating that to occur right now, especially the latter point, given what I just talked about and the actions that are being taken by DoD to conserve spending.

Robert Spingarn - Crédit Suisse AG, Research Division

So does that mean we're really looking at a full year meaningfully under 1.0? Because even with those international orders, in '11, you were just under one, and last year, you got a little bit over, 1.05 I think you said. So if those aren't happening again, what should the full year look like?

Ralph G. D'Ambrosio

Well, in our plan, assuming the sequester doesn't happen, and that's the assumption that we made, and we talked about that a few minutes ago, we expect our book to bill is going to be slightly above 1.0 for calendar '13. So slightly above means low-single digits above 1.0.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay.

Ralph G. D'Ambrosio

If sequester happens, it's going to be less, and that could push the bill -- the book to bill below 1.0 for the calendar year.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then just lastly, I think you'd touched on this earlier, but your margin expectations in a couple of segments go up from this year. NSS comes to mind, C4. From '12 to 13, they rise on a lower sales. And I think you might have talked about sales mix. But really, how much confidence can we have in that increase, given the revenue environment?

Ralph G. D'Ambrosio

Well, we have very high confidence in those increases at this point. In C3ISR, we know our book of contract that we're working on, and we can foresee what's going to happen. And in NSS, we continue to make overhead cost reductions, and we had a couple of charges in the second half of 2012 related to exiting a small public safety and security product line that are not going to repeat in 2013. So that's going to -- also going to help the margins in NSS.

Robert Spingarn - Crédit Suisse AG, Research Division

So it's mix.

Ralph G. D'Ambrosio

Yes. I gave you a long answer, but the short answer is mix, correct.

Operator

Your next question comes from the line of Howard Rubel with Jefferies.

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

Mike, could you talk a little bit about some of the synergies that you've obtained from Link and merging with the Simulation business, and maybe talk a little bit about how that's being received at the marketplace?

Michael T. Strianese

Yes. First of all, the Link U.K. businesses had a great product line that they had been working on and completing known as RealitySeven, which is a modular system that brought great efficiency to their marketplace, meaning they -- it's essentially common motion platform with a customized cockpit, depending on the platform that would sit on it, and there's much commonality in components. So that synergy is playing out in the marketplace. They have not disappointed on their performance versus the due diligence material that we had looked at. When you think about synergies across with the U.S. with our Linked military-focused business, first of all, we did not build those full-motion platforms, the hydraulics and things like that. So it no longer needs to be procured outside. We have an in-house capability now that has benefited our cost model. And there's a big bid out there that we're waiting to hear on, which is the simulator for the tanker program that we hopefully will be winning this year. But again, it's very competitive. And in terms of some of the optics, the video, full fidelity, high fidelity video, we were -- we are a leader of that in the U.S. So some of that technology can be imported over to the business in the U.K. So -- though it's not a year yet since this has been in as part of L-3, and some of the synergies are still developing, but essentially it's a positive on both the commercial and the military customers in owning these capabilities and being able to deliver at a lower price and an overall better product.

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

And then can you size SPYDR in terms of the opportunities?

Michael T. Strianese

Right now, we can only gauge the level of interest, which is significant. Small aircraft ISR went from 0 to a business that's over $800 million today, and I -- Ralph will probably have to correct me on it. And then that doesn't measure the logistics and the tail that we handled through the AM&M segment. So I'm not going to be able to put a number on it with any certainty because we have export issues that we're still working through, and we have capacity issues in terms of whether we should make the investments in more production now or wait until the orders materialize. So with that, Ralph, do we have a way we can size this at this point?

Ralph G. D'Ambrosio

We think the international SPYDR opportunities, it's several hundred millions of dollars of booking opportunities the next couple of years, which translates into annual revenues opportunity that exceeds a few hundred million dollars. it's more than $100 million per year in revenue.

Michael T. Strianese

Yes. But in terms of sizing it accurately, it's -- the timing and everything, it's very difficult to do at this point until we get our first orders and we start to build some backlog. Then we'll be very precise as to what it's going to look like. But yes, it's in the hundreds of millions. That's the way to frame it.

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

Your point, really, is you don't want to get over your tips at the moment and...

Michael T. Strianese

No. No, and it's prudent to not. But again, we've got of a lot of incoming requests for demos. This aircraft was displayed at a SOCOM exhibition out in Europe, over in Europe the last quarter, if I'm not mistaken, and the interest was really, I'd like to say, overwhelming at this point on that aircraft.

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

And then last, more of a bookkeeping issue. Where did you end the year for shares outstanding, Ralph? And then what's left on the current authorization?

Ralph G. D'Ambrosio

Okay. So -- well, our shares outstanding with respect to the income statement, so diluted shares outstanding...

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

No, I mean the balance sheet, because I can -- the income statement's there. But given the way you bought stock in the quarter, one would believe that the average is not representative of the year-end number.

Ralph G. D'Ambrosio

The end of year number is just above 90 million shares. Okay? And with respect to the share repurchase authorization, it's about $200 million remaining at the end of 2012, a little more than $200 million. So I think it's something that Mike and the board will evaluate. But when -- I expect that we'll have a new share repurchase authorization. So we don't perceive that to be an impediment to our share buybacks.

Michael T. Strianese

It shouldn't be limiting it at all.

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

No, I get it. I just wanted to do the math and...

Ralph G. D'Ambrosio

We pay attention to it, too, Howard.

Operator

Your next question comes from the line of Carter Copeland with Barclays.

Carter Copeland - Barclays Capital, Research Division

Just a couple of quick little programmatics. You called out on the release a contract field team task order competitive loss. Can you size what that was and give any color on what was behind that? Was it price, or how did that play out?

Ralph G. D'Ambrosio

Well, that is the contract field team Southwest Asia task order that we lost in the first half of 2012. Most of that work was in theater in Iraq and Afghanistan and...

Carter Copeland - Barclays Capital, Research Division

Oh, this is the continuation of the prior loss. That's all it was.

Ralph G. D'Ambrosio

Right.

Michael T. Strianese

Yes.

Ralph G. D'Ambrosio

It's the tail, which, this year, is about $100 million, of which $70 million falls into the $400 million Afghanistan reduction that I talked about.

Carter Copeland - Barclays Capital, Research Division

Okay, great. That's totally clear. One other one, on the communication systems program you've mentioned as a bit of a margin drag. And you mentioned the margins being lower. Is that because the margins are lower in total for that program, or because it's early on in a transition to a new program?

Ralph G. D'Ambrosio

It's a combination of both. We're doing some, if you want to call it, next-gen communication systems-type work. Some of it's cost reimbursable, and some of it is not. And the margins tend to be lower in the early stages on those types of contracts.

Carter Copeland - Barclays Capital, Research Division

But ultimately, the margin will also be lower than the segment average as it matures?

Ralph G. D'Ambrosio

No, I expect it'll get to at least the segment average, if not higher than the segment average.

Carter Copeland - Barclays Capital, Research Division

Okay, great. And lastly, I'm -- you may have mentioned this. I'm not sure if we caught it. But the book to bill for commercial and international for the year, where did that finish?

Ralph G. D'Ambrosio

It's above 1.0. I don't have those specific details with me right now.

Carter Copeland - Barclays Capital, Research Division

Okay. Great.

Ralph G. D'Ambrosio

It's well north of 1.0 because we expect that the commercial and international business for next year is going to grow about 7% in total, and that's what's contemplated in the guidance that we provided for 2013.

Operator

Your next question comes from the line of Joe Nadol with JPMorgan.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Want to pursue, actually, what -- an earlier question on the book to bill versus the sales outlook. Ralph, you noted that the profile is becoming longer tail, and AM&M is the prime area there, which makes sense. But when you look at your bookings by segment, they were above -- slightly above 1.0 in all the other 3 segments as well.

Ralph G. D'Ambrosio

Correct.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

So is there any other color or context you could provide, or should I just be left with the sense that you sandbagged your revenue guidance a little bit to account for the fact that there's so much uncertainty here?

Ralph G. D'Ambrosio

Well, Joe, if you -- the book to bill that we had for last year across all the segments, with the exception of NSS, which turned so quickly that it's really not a good indicator, supports sales growth. But we talked about the environment, and I said that we applied the appropriate conservative measures to it. That's what you call sandbagging, I call it good forecasting and good guidance.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

No, and I don't mean to -- I don't mean it as a negative. You've been, in the past, incredibly accurate with your forecasting so...

Ralph G. D'Ambrosio

We think it's appropriate, Joe, the way we've handled it.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Right. No, I understand, but just making sure we're not missing anything here. So okay. And then the other question is you -- Mike, you touched on behavior of the government, and, Ralph, you did as well, with reaction to some of the memos recently. But how about your -- since you -- so much of your business, compared to some of the other companies, comes from your competitors, what are they doing? What are you seeing out of them in terms of their procurement activities?

Michael T. Strianese

Well, virtually all of them, Joe, have reached out to their supply chain with the goal of trying to reduce overall cost, and this is really responsive to the Better Buying Power initiative that everybody is going through. And in some cases, we are able to cascade that to our supply chain, and in some cases, we're not. I think that -- I don't want to say that we're inflexible in that we need to maintain the highest price we can get at all times. I mean, we're trying to work and -- with our customers in terms of flexibility. There's times where we could adjust a spec that's not really meaningful but does save money by substituting a COTS for a specialized assembly and the like. So we're kind of being mindful that we'd like to be able to maintain margin, and we're focusing on the cost side of things and bringing costs in where we can. But everybody's facing the same issue, and that behavior, I think, will continue pretty much throughout the year. And these meetings are ongoing.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Right. It sounds like you have -- I mean, certainly, you've already been attacking costs and maintaining your margins as a key priority. It sounds like you have contingency plans. I mean, you haven't been talking about it maybe as some -- as much as some of the other companies, but it's clear you've been doing it. But you have contingency plans here. So if things do go the wrong way in March, it's less than a year, it sounds like -- or I don't want to put words in your mouth, but it sounds like you can react over a matter of months to make sure that you can maintain those margins. Is that...

Michael T. Strianese

Yes, well, that is certainly the goal, Joe. This is the way we've always -- this has always been our operating philosophy in terms of making sure the businesses are always sized to what the sales output looks like. A good example is we spun off Engility in the middle of the year, which -- so we lost absorption of our corporate expenses, for example, and that is -- a key element of the plan is resizing corporate without damaging anything to fit into the lower sales base. And we were able to do that, really, without a hiccup, because it was, again, cascaded down to every department within corporate. And we had to make some difficult decisions, but we did it. And I -- our entire management team buys into that. They -- that has been part of the culture. I think why you haven't heard a lot more of it from us than you might have at other companies is that we don't have cost -- a cost structure that is going to have that visible of a effect. In other words, you won't see we're laying off hundred thousands of people, because we don't have hundreds of thousands or thousands of people at corporate, for example. And we've been steadily consolidating as part of our annual goals with our business units in terms of bringing costs down. Notwithstanding all that, a severe drop, meaning full-bore sequestration, is going to be a difficult challenge. But again, we have contingency plans across the company to address it.

Operator

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Mike, I just wanted to ask you very simply, are you feeling, today, like sequestration is now more likely than you were feeling a month or 2 ago or when you spoke at the Investor Day?

Michael T. Strianese

Noah, that's a great question. I can tell you, we spoke at Rob Spingarn's conference in December, where Frank Kendall also spoke, I think at the luncheon, and I think there were some sighs of relief that maybe this would be completely avoided. I certainly don't feel as good as I felt then. The hope was that sequestration would have been resolved as part of the year-end deal that dealt with the Bush tax cuts. So my apprehension today is that I don't know what the trade is within the political environment that avoids it other than the desire -- remember, DoD is only half that story. That's a trillion dollars, of which Pentagon's going to own half of. Well, there's the other half, too, that would affect everything from NASA to Department of Transportation to Homeland Security, all the other. And given where -- I think there's some GDP numbers out this morning that's -- really were a surprise. I don't think anybody -- you can't find somebody on The Hill that says this is a good idea, believe it or not, yet it's still there. So I think the willingness to try to make it go away is there, although the ability to negotiate something is -- you got to be very skeptical on. And the change in thinking now, just personally for me, is that there's a good chance it can happen. Although I think if it happens, it gets done -- undone very quickly. So I'm still the optimist on it.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. And then -- that's helpful. And then just one other one. On international and commercial, maybe if you -- I don't know if you gave this, but if you can give the numbers on percent of the total company those ended at for 2012. And then you talked about them growing in '13 versus '12. But longer term, 3 to 5 years, is part of your thinking, strategically, for those to be really significantly larger components of the business, or not?

Ralph G. D'Ambrosio

Well, there's a couple of charts on this on our fourth quarter web charts, which is where I'm talking from. So it was 24% of total sales for 2012, commercial and international combined, and we expect it to increase to 27%. And when we talked about this topic earlier last year, Mike talked about an objective to get it over 30%, closer to 35% the next few years, and we explained how that would be an incremental, gradual process, which we believe is playing out.

Operator

Your last question comes from the line of Bill Loomis with Stifel, Nicolaus.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

You've talked about how the guidance for 2013 is -- assumes a continuing resolution for the rest of the fiscal year, but seems more is coming -- more coming out of the DoD says that the spending levels will have to be reduced under a CR. For example, Admiral McRaven said yesterday at a conference that he'd see a $1 billion cut if SOCOM stays under a CR for the year, and the Commander of Special Operations in Europe said, because he's not the African and Asian priority -- or Middle East rather, he said a 15% cut just from a -- if the CR continues. So when you're looking at your business and programs like Fort Rucker and tasks under CFT and your Special Ops ISR work, how are you viewing this in relation to the CR? At a current spending level or are you looking to come down a little bit like some what we're hearing from the DoD under a CR?

Ralph G. D'Ambrosio

Well, the assumption that we made in the guidance, Bill, is that the CR, which expires at the end of March, is not extended for the full year. I think you said extended for the full year. But the issue that you're addressing is the fact that when we take a look at the base budget for the -- what was requested for FY '13 versus what was enacted for FY '12, is that '13 requests had about a $12 billion increase in base O&M. If you're under a CR, you don't get that increase. And that's what's raised a lot of concern over the past month or so about O&M funding. But we think if the CR were to be extended, there likely would need to be some type of reprogramming action that would divert funding from investment to O&M. And that's, in fact, what some of the leadership in the DoD is anticipating would be required, because you just can't stop all this sustainment of readiness and operations on the dime.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Yes, okay. So it will be an actual passage of a like omnibus budget as opposed to just continuing a CR for the rest of the year; that's what you're assuming?

Ralph G. D'Ambrosio

Yes.

Michael T. Strianese

Okay. Well, I want to thank everybody for joining us. When we look at 2013, it's a year of change in many respects, not only in the budget area but we have a lot of new folks coming on some of the committees, the armed services committees at both the House and the Senate, as well as the appropriation committees, and we look forward to working with the new membership there.

We also have change at the Pentagon with Secretary Panetta retiring and Senator Hagel getting ready to face his confirmation hearings. We would hope that, if confirmed, he would continue to the same policy and the same outlook that Secretary Panetta has been articulating about the importance of national security and what is needed to run the Pentagon. A very bright spot that I'd like to highlight is the fact that Secretary Carter, the Deputy Secretary of Defense, has agreed to stay on, and we certainly applaud that. We've worked closely with Secretary Carter over the past 4 years. He is very willing to communicate with industry about what the requirements are and what he needs us to do. And we really, as industry, like that clarity because it helps us make our day-to-day decisions. And he understands what it is to run a company and what we face. So that's a bright spot.

2012 was a solid year for us, and we're well positioned to meet the challenges in '13. A lot of the questions that you've raised on margins and sustainability, a lot of it boils down to execution. And our confidence in the numbers is our confidence in our people, the great people we have that we think will continue a great job in executing the book of business that we entered the year with. We also need to maintain the agility and flexibility, so we could adapt should there be a significant change in the budget. And that, we're very, very focused on. In terms of customers, we continue to build lasting relationships, and we do that by delivering innovative and timely solutions and efficient solutions that really address specific needs. In terms of our market position

[Audio Gap]

1 or 2. One of the things I like to look at is job openings across the company. And believe it or not, many areas and certain particular areas, there are openings that could be as many as 1,500 in places that deal with ISR or some of the very technical network analyst positions in NSS, et cetera, et cetera. So there are pockets of growth, and we are committed to recruiting excellent folks to work within L-3. And we're well positioned to grow the commercial and international businesses that complement and support our Warfighter and protect national security as well.

So we look forward to speaking with you again in April as we talk about the first quarter, and thanks, again, for joining us.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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