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Executives

Katy Herr

David F. Melcher - Chief Executive Officer, President and Director

Peter J. Milligan - Chief Financial Officer and Senior Vice President

Analysts

Robert Stallard - RBC Capital Markets, LLC, Research Division

Greg Konrad - Jefferies & Company, Inc., Research Division

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

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

Robert Spingarn - Crédit Suisse AG, Research Division

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

Exelis (XLS) Q1 2013 Earnings Call May 3, 2013 10:00 AM ET

Operator

Welcome to the Exelis First Quarter 2013 Financial Results Conference Call and Webcast. Hosting the call today from Exelis is Ms. Katy Herr, Head of Investor Relations. Today's call is being recorded and will be available for replay beginning at 1 p.m. Eastern Standard Time. The dial-in number is (800) 585-8367 and enter pin 34434763. [Operator Instructions] It is now my pleasure to turn the floor over to Ms. Katy Herr, Katy, you may begin.

Katy Herr

Thank you, Jackie, and good morning, everyone. Thank you for joining us on our first quarter conference call. During today's call, we will reference supplemental information in the form of a presentation that you may access at www.exelisinc.com/investors.

Moving to Slide 2. Before we start, please understand that this call contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and certain factors that could cause results to differ materially from those anticipated are set forth on Slide 2 of today's presentation and in this morning's earnings release. During today's call we will discuss our financial results for the first quarter of 2013. We may refer to non-GAAP measures, which are defined and reconciled in the appendix of today's presentation and available on our website.

Joining me on the call today are Dave Melcher, Chief Executive Officer and President; and Peter Milligan, our Chief Financial Officer. As always, we encourage questions at the conclusion of our remarks.

With that said, please turn to Slide 3, and at this point, I would like to turn the call over to Dave.

David F. Melcher

Thank you, Katy, and good morning, everyone. As you've seen in our press release this morning, we delivered our first quarter in line with our expectations. Obviously, our restructuring effort weighed on the first quarter results as we forecasted during our fourth quarter 2012 call in March. As projected in the first quarter of 2013, we incurred $49 million in restructuring charges. 80% of that charge is in the C4ISR segment, and you can see the impact that it had on our income and margins. The restructuring effort is proceeding according to plan, and we expect to come in close to the high end of our restructuring range, that is above $70 million for the full year.

Orders for the quarter were just over $1 billion, down 7% compared to the first quarter of 2012. The uncertainty of the sequestration and budget debate during the first quarter had an adverse effect on orders, particularly in our short cycle businesses. I'll discuss a bit more about our orders' backlog and the dynamics of our business environment in just a minute.

Revenue for the quarter of $1.2 billion was in line with our projections. While we do not anticipate significant swings in revenue, we do expect that future quarters will show modest sequential growth. Operating income of $74 million translated to an operating margin of 6.2% for the quarter. Again, this includes the effect of restructuring, which accounts for about 400 basis points of the year-over-year difference. We do expect that the majority of the planned restructuring effort should be complete during the second quarter.

Moving to Slide 4, our book-to-bill in the quarter was 93%. Importantly, we are off to a good start in our international awards. 24% of our first quarter orders were for international customers. These awards enabled funded backlog growth of about 2% in our C4ISR segment and included a multimillion-dollar contract to provide South Korea with an advanced geostationary weather imager; a $102 million contract to provide electronic support measure suites for 2 classes of Australian warships; and multiple international orders totaling more than $40 million for communications equipment and sustainment. In addition, we were awarded our first base operations contract for the United States Navy to support their operations in Romania.

While we are pleased with the momentum in our international orders, orders for the U.S. federal government were light as the sequestration and continuing resolution delayed many acquisition decisions. We continue to see longer acquisition cycles, procurement delays even on recompete programs and shorter funding increments. The shorter funding cycle is particularly acute in the Mission Systems division, where the average funding increment has dropped across most programs with a few material contracts experiencing month-to-month funding. This trend is not indicative of the level of priority afforded these programs, rather it demonstrates the broad uncertainty across the U.S. federal government as contracting officers revert to the minimum funding thresholds.

Let's move to Slide 5. Our structuring to rightsize the business for the future competitive environment is proceeding on plan. As we previously announced, we anticipate $60 million to $70 million in restructuring charges, primarily headcount reductions and some facility closures. With $49 million in restructuring incurred in the first quarter, we are on target and we continue to expect to see the benefit of these actions reflected in our profitability in the second half of the year.

Most of you know that prior to the spinoff from ITT, the Exelis organization came together over the course of more than a decade of acquisitions, with many acquisitions come many systems, policies and business processes. As we enter our second year as a standalone firm, we are analyzing every aspect of our business for opportunities to streamline, reduce redundant systems and improve operational transparency. These are significant efforts, and we expect over the next 12 to 24 months that we will reduce facilities footprint by another 10%; implement a common shared services model for transactional services; align managerial span of control; and reengineer business processes for greater efficiency and cost reduction, allowing for appropriate investments in enterprise systems. All of these efforts are currently in process at varying stages of analysis, planning and implementation. We are working with a sense of mission and urgency as we reshape our business operations to maintain a competitive cost structure in our dynamic business environment.

Looking ahead, we now have a fiscal year 2013 appropriations bill and, of course, sequestration is still in effect. In addition, the President submitted a fiscal year 2014 budget, but the administration's budget does not include sequestration. It does, however, highlight the importance of maintaining our national security readiness. However, if Congress does not act to change the current sequestration mandate, approximately $50 billion in additional spending reductions will be required in 2014. The President's FY '14 budget request affirms that the administration's priorities are in alignment with our strategic growth areas of critical networks, ISR and analytics, electronic warfare and cutting-edge aerostructures, all of which are generally well supported. For example, in ISR and analytics, the request includes continued funding for the evolving enhanced night vision goggle, which is in its third iteration and will ultimately provide wireless connectivity with soldier-borne rifle sights and thus improve decisive engagement in limited visibility conditions. In addition, GPS was supported in the budget, and Exelis will deliver the navigation payload for the first GPS III satellite later this summer. We have made all the core GPS navigation payloads since the program's inception. The GPS III satellites will have stronger signal strength, better anti-jamming and spoofing capability and an ability to seamlessly communicate and interoperate with the European Galileo signal.

Looking to critical networks, we were gratified to see that the administration fully funded the buildout of the FAA's 700-station ADS-B ground radio network, which enables precision surveillance of commercial and private aircraft. In addition, our sounders and imagers for NOAH's GOES-R constellation of weather satellites continues to be well funded. Airborne electronic warfare via offensive and defensive control of the electromagnetic spectrum is at the heart of the next battle. Anti-access and aerial denial remains an administration priority as well. Importantly, the FY '14 President's budget doubles funding for the Navy's EA-18G Growler and robustly funds the next-generation jammer, which will reside on that platform. As you know, Exelis is partnered with Northrop Grumman on the next-generation jammer opportunity, which is expected to be awarded mid-year. Our Integrated Defensive Electronic Countermeasure or IDECM system for the F/A-18C/F models are also fully funded.

In addition, the administration budget continues positive momentum for the F-35 Joint Strike Fighter, requesting funding for 29 additional aircraft between the Air Force, Navy and Marines. Exelis makes the pneumatics weapons release systems, as well as composites for the fuselage on each of these aircraft.

So we're therefore gratified to see our programs and technologies supported in the administration's budget and believe that our prior 2013 guidance represents our best current estimate of this year's performance. We do expect that there may be further impact in our short-cycle businesses that could result in revenues towards the low end of the sales guidance of $5 billion to $5.1 billion. However, we expect profitability and cash flow to remain as projected, with EPS of $1.45 to $1.55 and free cash flow of at least $225 million.

With that, I'll turn the call over to Peter.

Peter J. Milligan

Thanks, Dave. Good morning, everyone. Let's turn to Slide 6 for a discussion of our segment results. Year-over-year orders in the C4ISR segment were up 5% from the first quarter of 2012, reflecting a 1.1x book-to-bill. As you heard from Dave, much of the improvement in the quarter was the result of solid international awards, including the South Korean weather imager award and the ANZAC award from Australia. Somewhat offsetting the increase was a timing delay on the next funding increment for GPS III, which we feel confident will resolve shortly. We also had lower year-over-year orders for domestic night vision goggles as the Omni VII contract wrapped up mid-year 2012 and orders on the current Omni-VII contract are not projected to achieve the same volumes.

Revenue for this segment was down 24%, primarily due to lower sales of domestic SINCGARS and night vision goggles under the Omni-VII contract. International sales of night vision and electronic warfare technologies, as well as higher sales of spiral-enhanced night vision goggles somewhat offset the decline. This segment should see sequential improvement as we move through the rest of the year. However, year-over-year, we continue to anticipate that sales in this segment will be down in the mid- to high single digits.

Profitability for the C4ISR segment was down because of volume and restructuring. About 70% of the decline is the result of $40 million of restructuring incurred during the first quarter. This segment will see another $10 million to $12 million in restructuring in the second quarter, continuing to weigh on margins but not nearly the impact of the first quarter. The second half of the year should see the benefits of the restructuring and operating margins in the mid-teens.

Let's move to Slide 7. Orders in the I&TS segment were down 17% compared to the first quarter of 2012. As expected, sequestration and budget uncertainty has impacted short-cycle businesses, resulting in slower and fewer orders in our space, ground, and range and other professional service contracts. Year-over-year revenue was down 11% in this segment. We benefited from additional work on Afghanistan and FAA programs, but as expected, we are seeing some moderation of revenue in our domestic professional engineering services and some Middle East programs. Due to the sequester, we expect to continue to see top line pressure in this segment, with full year sales down -- likely down about 10% compared to 2012.

I&TS operating income increased 6% over Q1 2012 and operating margin was 8%, 120 basis points higher than the first quarter of last year, driven by excellent program performance and productivity improvements, somewhat offset by restructuring and higher pension expense.

Let's move to Slide 8. We continue to operate in a highly uncertain market environment. As you heard from Dave, we are seeing slower contracting and tighter funding conditions. Our first quarter results met our projections. We expect improving performance as we move through the year supported by sales in backlog, solid Q1 C4ISR orders and a pipeline of international book and bill opportunities. We're taking costs out and are rewiring our business operations to enable greater agility, competitiveness and profitability. The benefits from the restructuring currently underway should manifest in our margins in the second half of the year. In the near term, I expect that the second quarter sales will increase by a few percent from the first quarter. Second quarter profitability will continue to be compressed with $10 million to $12 million of restructuring, and I do anticipate a tax rate in the range of 35% to 36%.

And with that, I'd like to open up the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Robert Stallard with RBC.

Robert Stallard - RBC Capital Markets, LLC, Research Division

I was wondering if you could kick off with the Services margin in the quarter, which you noted was down to good productivity. I was wondering your thoughts on how sustainable you think this margin could be going forward given the funding environment and also the competitive environment.

Peter J. Milligan

Yes, sure. You're right in that the first quarter was stronger than the last couple of quarters as a result of some program improvements -- performance -- contract performance improvements. But I think as we go throughout the year and we probably -- we're at -- I would assume that we should stay in that mid- to high single digits for that business. As you know, even though it's Services, we do have probably about 30% of that segment, maybe a little bit less -- 25% or so, is fixed-price work, and obviously that's a place where we've historically done well as we've taken some risks out of programs. So clearly the price pressure is there. The short cycle nature of the business is also -- pressures obviously the top line, but I do expect the margins to trend down a little bit, but I would hope for the year they're still in that again mid- to upper single-digits range.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Okay. And then secondly, on the pension front. It doesn't look like you've changed your FAS assumptions for the year. I was wondering if there had been any changes on the CAS side or in any of the metrics we might look at.

Peter J. Milligan

No I mean, normally those things would only be changed if there were some sort of a remeasurement requirement, which of course there has been none at this point. So, no, our expected return is the same. We moved it down from 9% to 8.5% as you know. And everything else is in line with our original assumptions.

Robert Stallard - RBC Capital Markets, LLC, Research Division

And then Dave, just one for you. On the restructuring side of things, things have moved downstream from where we were 3 months ago. Do you think the restructuring amount that you're expecting to spend is sufficient, or does it -- could you see it increasing from here?

David F. Melcher

It's one of those things where as you dig in and you really take a critical look at all your systems and layers of management and spans of control, you find that there are other opportunities that crop up. We're actually trying to take on a number of things of that I think are going to be important to us: A shared services organization, more global sourcing of some of the things that are important to us, and I think we're going to be able to take out not only the back office that we talked about, but perhaps a little bit more. So we're going to look for targets of opportunity that might require a little bit extra restructuring and into 2014. But I think that, that is appropriate given the environment we're in.

Peter J. Milligan

And I think also, Rob, if I can add, this is Peter, as we look now, obviously, if the volume changes are going to be very different than what we're expecting, then obviously the costs have to come out and restructuring charges are part of that. But without giving our specific view of the next couple of years, I do expect that, that the $70 million, if we're at that range this year and that's where we expect to be, is probably the high point as I look out the next couple of years. So there will be restructuring next year. As Dave mentioned, we're continuing to take out footprint. That alone obviously requires some lease termination costs and whatnot in many cases. So there will be restructuring costs next year. I don't know specifically what they'll be, but I do expect them be lower than this year. So as you move into 2014, we'll have a couple of things that are really creating some tailwinds for us because, as you know, we don't normalize our numbers at all. Everything is on a GAAP basis. So we'll have a couple of positive things moving into next year. One, I would certainly expect to be lower restructuring, and then the other, of course, would be lower pension expense. As we said 2013, on a FAS basis, is the high end -- is the high point, I'm sorry.

Operator

Your next question comes from the line of Greg Konrad with Jefferies.

Greg Konrad - Jefferies & Company, Inc., Research Division

I was hoping you could talk a little bit about the dollar value of outstanding proposals and kind of the areas of focus where you're seeing the most strength in terms of upcoming order opportunities.

David F. Melcher

Yes, Greg, great question. I think we talked about this a little bit on the last call, and I'll repeat it. We've got over $6 billion worth of proposals that are in evaluation now across the company in all the range of things that we do. Some of the things that are probably more notable that are on the horizon are some contracts for different agencies. For example, Deep Space Network is one that we've been the incumbent on. It's a joint propulsion lab contract for NASA. That one is coming up for recompete announcement sometime in the May time frame. We also are the incumbent on a contract called TAC-SWACAA that has changed its name to OMDAC-SWACA, but essentially it's the theater communications contract out of Kuwait. That also is coming up for recompete in the May time frame. We're partnered, as I said, with Northrop Grumman on the Next Generation Jammer, and we could have a decision, I think, sometime this summer on how that might go. We're also participating in some other FAA programs, and we have a number of international capture opportunities that are out there from satellite payloads to radars, to other things, night vision, airborne countermeasures, that have the opportunity to come in later this year. And then, I guess, the last big one on the service side is we have the space, ground, range contract for the Air Force that supports NASA and that is morphing into a larger contract called LISC, which is Launch Integrated Support Contract. That one could come forward here at the end of this year or perhaps in '14. It's been delayed a few times, but we're -- we got a good team for that one as well. So there are a number of big opportunities for us here in 2013.

Greg Konrad - Jefferies & Company, Inc., Research Division

And then just a quick follow-up. I think in the past, you said the big 3 was about $300 million last year and you expected that maybe in the $200 million range this year. And when I look at the numbers for this year, there was over $100 million of declines for those 3 products in the quarter. Does that kind of allude to the fact that it may be flat and -- for the remaining 3 quarters? Are there any other pressures on that part of the business?

Peter J. Milligan

Greg, this is Peter, I'll take that. You're right, $300 million was the number last year. We would assume that. I think we said at the end of the year when we gave our guidance that we expected that number to be sort of at or below $200 million and obviously that depends on a lot of different things. At this point, it's going to be below $200 million. I mean, I think, that's pretty clear to us. But the declines in Q1 obviously just mathematically can't repeat. So that is a big driver to the Q1 numbers, whether the sustainment rate ends up at $150 million or a little bit less, we'll see. But certainly we've factored some -- when you look at a guidance range like we have, that factors in some of that variability. But that's sort of the update, I think, that I give -- that I need to give you on that one.

David F. Melcher

This is Dave. I would just add that we've classically defined what were termed the big 3 as the SINCGARS orders, the domestic night vision orders and jammer orders. You can't forget that beyond that strict definition, we're in the enhanced night vision goggle program, and we are, I think, the only company that is fully certified and producing that capability for the government, and it's going to be an important one going forward. That does -- that's not counted in those kind of numbers.

Peter J. Milligan

Yes, in fact, we received an award on that SENVG contract that Dave was mentioning. That came in very, very early in the second quarter, but it was almost $50 million. So to Dave's point, clearly that -- those declines that we talked about in that legacy-type equipment does not mean that those businesses don't have very strong opportunity going forward. And also again, as Dave said, internationally, we have a number of things in the pipeline that we're optimistic about.

Operator

Your next question comes from the line of Pete Skibitski with Drexel Hamilton.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

So I'm just wondering -- since, Dave, you went through the recompetes, should we think that there's any risk to your 2013 guidance from the recompetes or would they -- if you were to lose them, what -- would they impact more so 2014?

Peter J. Milligan

I'll start on that, Pete, if that's okay. There's always definitely going to be some risk. There is some book-to-bill left in the year, no doubt. As I look at the numbers right now, we have about 50% of our sales in funded backlog for the rest of the year but on close follow-on, which is very common in our business, certainly on the service side -- K-BOSSS is a great example, some of the Afghan programs and certainly some of the programs in the professional services side -- they fund month to month. So if you look at total unfunded, which would include the close follow-on type stuff, it's over 80% of the remaining sales are in backlog. So that obviously still gives you over $500 million or so that you have to book and bill. And if some of those things were to -- we were not -- to not win, that certainly could pressure the top line no doubt. But we think we've sort of accounted for a fair amount of that risk.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Got it. And just let me throw one more out at you. I wanted to get kind of your broad thoughts on future cash flows, maybe around pension and working capital and CapEx because I think you've said your cash pension requirements are down this year. I'm wondering kind of if you see those kind of flat over the mid-term if current assumptions hold? And then kind of how you view your working capital management? I think it's been pretty good historically on an annual basis, but just wondering if you guys see with all this restructuring, any further opportunities for working capital improvements? And then the last leg being CapEx, because I think you've said in the past, ADS-B installations, when they decline, you're going to have some CapEx tailwind. So I'm just trying to get a feel for cash flow improvement opportunities.

Peter J. Milligan

Sure, I can go through all that. On the cash flow this year, our forecast is in the $160 million range or so. That's the minimum requirement. We could certainly see -- there's certainly a possibly to go beyond that depending on our other opportunities for cash or uses of cash. So there's certainly an ability for us, and we're looking at whether or not we increase that. But right now the numbers are -- that show that cash flow guidance of over 2.25, that reflects the $165 million or something that we have in there -- in the plan right now. Over the next couple of years, that number goes up, probably in the $250 million range or so. A couple of things, as you know, our pension is not unlike many others, of course, but highly subjective to interest rates and asset return. So first quarter is actually -- has been pretty good on the asset side. Last year was better than our expected return. We lowered it because we've derisked some of the assets. But still, we've performed, as all equities have, fairly well in the first quarter. So that's sort of the pension piece. On the working capital side, we had a really strong fourth quarter on cash, no doubt. We had -- so we had definitely received a bunch of receivables that were literally the last couple of days of the year. So you saw receivables leak up a little bit in Q1, payables come down. Q1 is always a tricky quarter for cash flow because you pay your bonus as a one-time. You see -- you could see the other employee benefits on the balance sheet go down dramatically. So there's a couple of things that are going on in that side. But overall cash flow, our forecast for this year remains on track. And then from a capital perspective, I think, I'll let Dave mention a couple of things.

David F. Melcher

Sure, Pete, so on the CapEx angle, we're going to get a little bit of help from the fact that we're ramping down on a few things that we've been investing in. For example, we invested in our Salt Lake City facilities for aerostructure composites here in the last couple of years. That's ramping down. We're a little bit past that now. And then also the ADS-B network, right? We've been capitalizing that network here for several years now. This is the last big year for the ADS-B network, so we're going to get a little bit of tailwind with respect to the requirements for capital going forward.

Peter J. Milligan

Yes, I mean, the $85 million to $95 million we're expecting for this year, Pete, probably goes down in the tens of millions of dollars next year. So that definitely gives us some free cash flow upside as we move out, and the other opportunities for reinvestment certainly.

Operator

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

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

So on the restructuring, I'm just trying to get a better feel for how much of that you think you're going to retain. You mentioned the second half of the year not only does that go away or decline significantly but you also get the benefits of that. So how much of that comes through into earnings in the second half of the year? And then, as you think forward, obviously a lot of that goes back to the customer in pricing. So do you have the estimates on how much you keep this year and, if any, how much you keep next year and so on?

Peter J. Milligan

Yes, sure. You're absolutely right, in that, on the Services side certainly, or even on the what we would call the product side or C4ISR where there's still 30% cost plus work, you are clearly lowering your rates and that's benefiting the customer and that's obviously an important thing. So part of it is just that. I think in the second half of the year, probably in the $20 million range or so, maybe a little bit higher is what you would expect in a first half or second half of the year in terms of benefit. And as you move into next year, or even probably a little bit higher than that, and as you move into next year, that let's call it $70 million charge, kind of hard to say, but I would assume that there's certainly a path to be able to retain about half of that.

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

Half of the $20 million?

Peter J. Milligan

Half of the $70 million charge.

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

Half of the -- so you see retaining $35 million?

Peter J. Milligan

Yes, something in that range, yes.

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

Okay. Because I mean, also your sales are declining and a lot of the savings here are labor savings. And so -- we really don't want to think about that, I don't think as a pure margin improvement. It's just basically -- I mean, how much of this is just keeping up with the sales decline and eliminating the labor expense that you have to, to keep up with that and how much of it is productivity improvement, I guess?

Peter J. Milligan

Yes, and there's no doubt that clearly the volume declines are -- this year are reflected in the numbers, but don't forget as we've talked about the last number of years, our product segment has seen dramatic decreases in headcount. So we have been taking down the workforce in areas in -- where the radios and goggles and the jammers have been made. And in fact, as we've said, we've closed the facility where the CREW 2.1 jammers were made. That essentially -- most of that work was done last year. I think the last piece of the charge was this year, but the majority of that has been taken in the past. We have done, I think, a fairly good job in keeping the workforce aligned with throughput. So you're right in that some of that charge clearly is reflective of volume declines this year. But certainly not all of it.

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

Okay, and that gets into my second question, which is really kind of just a bigger picture margin question. I have a tough time modeling or thinking about -- you guys obviously have your guidance for this year and we had the last couple of years in black and white. But thinking forward, in 2011, you had a pretty sharp margin improvement throughout the year in the electronics business. And then, last year, it was pretty flat. And I'm x-ing out pension, I'm x-ing out both restructuring and separation and all that. And then this year, again you're going to have, even x the restructuring, a pretty sharp pickup in the second half of the year. So we've seen 2 years, including this year, where you have a big pickup, and 1 year where you don't. How would you characterize the normal margin profile of C-4?

Peter J. Milligan

Sure, I think if you look at this year, in order for us to sort of get to where we need to be on the bottom line, we need to have sort of second half of the year margins in line with really where the margins were last year, in that mid-teens range. And you're right, in that they were relatively flat last year. But again there's a lot of changes going on in 2012 just from a mix shift perspective, and you could see a lot of costs obviously had to come out, and they did. So we would expect margins in the second half of the year to have to perform in and or around the range of where they performed in 2012. Second quarter obviously, as Dave mentioned, you see a margin that's probably in the very low double-digit range because of the restructuring. Excluding that, you start to see the margins move back to where we need them to be. So then -- so how does that happen other than just on the cost side? Clearly the restructuring benefits start to show up, right? So the expense has been booked and now as the reductions in labor take place and rental expense, et cetera, that impacts your programs -- impacts your overhead rates, impacts your programs, fixed price obviously drops, it drops to the bottom line. And then also there's a mix shift, right? So we -- the second half of this year, we are relying on a fair amount of international sales. And certainly a lot of that, much of it, is already in backlog. There's certainly some book-to-bill as we talked about. If I look at the first quarter, and I know there's some -- obviously orders are lumpy. So our orders in international were $250 million in the first quarter, and was up well over 100% from the prior year. Our sales, of course, were up -- I shouldn't say, of course, because this is -- I don't think it's in the Q, but our sales are up double digits in international in C4ISR in the first quarter. And certainly, I don't want anyone to take this comment as -- that I'm calling the bottom because I know the first quarter revenue was certainly challenging at a little bit under $0.5 billion, but it is the first quarter in the C4ISR segment that we've had a book-to-bill greater than 1 since 2010. So there are definitely are some positive signs. But I definitely don't want to mislead. There's a lot of work to be done in order to get to those margins in the second half of the year. And while we have it operationalized, still a lot of things have to get done to make sure that that's delivered.

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

Okay, that's helpful, Peter. Just one more on that if I might, just to take this -- carry it one step further. As we go into next year, you're going to be exiting in your plan in the mid-teens, maybe even a little better this -- in Q4, Q3 and Q4 this year. X-ing out the pension next year, so just forgetting about what might happen with your FAS expense, can you carry that into next year, or are you expecting some unusual mix benefits, the international, and so then, should we be looking for a margin reset going into next year?

Peter J. Milligan

Yes, it's really hard to say at this point. We're certainly working that real hard. We're looking at sort of early versions of our strategic plan, of course, and then really pulling that into an operating plan. Again, a couple of tailwinds, as I mentioned before. Pension as you said and -- which is a moderate benefit year-over-year. We've been seeing these big increases, right, so that's a help. And obviously lower restructuring, we think we'll see lower restructuring expenses next year. So those are 2 things that help. Is this in the short term in the 2014, a mid-teens margin business? There's a lot of work to be done to get there. That's going to be a challenge. But certainly, I think, there's a path to be able to have the margins as a company certainly in that double-digit range. That's something we want to strive for.

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

Okay, and then just one more quick one. You guys in the past have occasionally given us your CAS in black and white. I don't see it here in any of the press release slides or the 10-Q. Your FAS expense was 26. Was your CAS 26, or was it a little bit less than that?

Peter J. Milligan

I don't know if it's exactly 26, Joe. I know it's the same for the year. So those numbers are trued up at some point. I don't have them in front of me, but they're awfully close to that.

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

And you expect -- so for the year, we're expecting basically a net 0?

Peter J. Milligan

Yes, sir.

Operator

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

Robert Spingarn - Crédit Suisse AG, Research Division

I'm here, Ross is with me as well, and I think may have 1 or 2. But I wanted to start by going back to the big 3, Peter, which I suppose now should be called the small 3. And in that note -- on that note, maybe rather than talking about how big they are at present, I think, it might be useful to talk about what you'd earn this year or maybe on a full year basis without them at all.

Peter J. Milligan

What we would earn without them, unfortunately, then sort of, specifically talks about the margins on those, which is something we don't want to give. But I can tell you that if you look at the overall margin that we're expecting in the C4ISR side, as I just mentioned to Joe, you certainly have to be in that low double-digit range, all-in with restructuring. Clearly, the margins on those programs at their peak were significantly higher than that. Now as we get down to the last elements of it, as you've recoined the small 3, they're certainly not nearly as high, but above the average margin in that segment.

Robert Spingarn - Crédit Suisse AG, Research Division

Of course, my point is there's not that much left there, period.

Peter J. Milligan

And that's a great point, and that is one that I -- that we think about clearly. Most of the declines, obviously, on the top line are behind us and the same exact thing on the bottom line. There is no doubt about it. And what we're left with there is some interesting opportunities, and I think Dave's alluded to some on the comp side. On the night vision side, you obviously have -- there's an Omni VIII contract where there's continuing procurement there, the enhanced night vision goggle. And then literally -- not literally, but I mean, a lot of opportunities internationally, some of which we'll hope to talk more about throughout the year because I think we're getting close to a couple of nice awards there. So that's the way I look at it.

Robert Spingarn - Crédit Suisse AG, Research Division

And then just expanding this a little bit horizontally, because when we talk to people about this issue and sort of the war cliff, mission Systems gets brought up a lot. Maybe could you try to frame the short cycle and war exposure in Mission Systems? It's unrelated to the big or the small 3, so we can have a sense of what the downside is there. I suspect it's largely on the domestic side.

David F. Melcher

Yes, well Mission Systems has an interesting mix of contracts and capabilities. As a company, we're about 8% of revenues that are tied to OCO, most of which is in Mission Systems. They have some rather large contracts over in Kuwait. For example, the K-BOSSS contract for the base operations and support of Camp Arifjan; the TAC-SWACAA contract that I mentioned, which is up for recompete this summer; and the APS-5 contract, which is the prepositioned stocks. And then they have 2 contracts in Afghanistan for support of the Afghan military. In addition to that, they do have a number of domestic contracts at bases like Fort Benning and Rucker and Vandenberg and Maxwell and other locations like that. In general, they're experiencing the pressure that all short-cycle businesses are experiencing right now as a result of sequestration threats and fears and pulling back the levers that the government can easily pull back, which is O&M funding. But you just saw, I think, an effort on the part of the DoD administration to do a big reprogramming and guess where they're putting money back into? O&M funding and OCO funding in order to support the war effort. So some of the I'll call them temporary pressures in that business could be alleviated here in the remainder of '13 as the government funds what it has to fund, which is the ongoing war effort. Now as you go forward, you have to look at those contracts and say, "Okay, what's the durability of them?" Well, those in Kuwait have great durability because that power projection platform is not going anywhere; it's going to be there for a long time ago and people will compete for a share of those contracts, and so that competitive environment will be alive and well. For the work over in Afghanistan, I believe it's solid through '14. We'll really have to wait and see what does the combatant commander believe is required after '14. What does that translate to in terms of U.S. aide or support for the Afghans, because unlike Iraq, they don't have a domestic oil industry in order to support their economy. They're going to be dependent on U.S. aide. I believe that there could be some extension of even those kinds of contracts beyond '14, if it's in support of the Afghan military and security forces. But it will probably be recompeted and again, that will be an item for everybody to go after as well. So it is a pressurized environment, but there are still other opportunities out there. And for a business like Mission Systems, it is going to come down to how cost effective can they be. Can their cost structure and their rate support going in competitively for pressurized margins and still winning? And that's the game that we're all in right now.

Robert Spingarn - Crédit Suisse AG, Research Division

So maybe we can put a couple, that's very helpful. I want ask a couple specific questions there. So you said 8% of the total company, so we're talking about something in the neighborhood of what $400 million in revenues? And the Kuwait piece, how do we think about the part of that, that could go away if the war ends and there's no more Afghanistan activity; you keep Kuwait, but you lose Afghanistan?

David F. Melcher

Well, as I think I tried to allude to earlier, I don't believe Kuwait goes away.

Robert Spingarn - Crédit Suisse AG, Research Division

That's what I'm saying. You keep Kuwait, and so what is $400 million turn into if Afghanistan is -- I'm trying to frame the bottom here and what the downside is, and then perhaps given the margin profile in this business, you could give us a sense of what the downside is.

David F. Melcher

Yes, I happen to be -- there have been a lot of alarm bells that people have clanged with respect to OCO funding, that it was going to go to $50 million then $25 million, and then it's going to go to 0. I happen to be in the camp that believes OCO funding remains as long as we have servicemen and women deployed. They're going to be supported by the government and with supplemental funding because the base does not accommodate war-related requirements. So I believe some OCO is going to still be there over the course of the next several years. I don't think it's going to go to 0. And even if the share of OCO funding of a place like Kuwait goes down because it must, then it's going to begin to get picked up in the base. This is one of the dilemmas that the Services, in particular the Army, have right now with respect to things like depos, right? How do you continue to fund the depos, some of which had some supplemental funding helping them. And now if that goes away, it's got to be absorbed out of the base. So I think that transition will happen, and it will happen a bit painfully. But at the end of the day, that function and capability has to be there. So it will be funded somehow.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay, and then just a larger question on sequestration, I know you talked about -- you've embedded some expectation what you think will happen. When you think about sequestration, though, from a 10% type of cut to the base budget -- so we're not talking about OCO anymore here -- Peter, in your guidance, how might a just straight 10% cut if it should happen, given that it's already law , how would that change what you've framed and -- or would it be primarily a 2014 event?

Peter J. Milligan

It would impact 2013 somewhat. Obviously, I know people have tried to turn it into sort of a mathematical equation. I can't do that. But I can tell you that it would have an impact. As Dave said, even now as we sit here, we see lower end of the range. Does it got below the lower end of the range? Probably. What does it mean for '14? Clearly, hard to say at this point. Is it a couple hundred million, dollars or so? Sure. But we spent a lot of time looking at it, but it's just really hard to come up with too many specifics.

David F. Melcher

I think -- this is Dave, if I could. We're really looking for some hints on prioritization out of the DoD. The Secretary of Defense did not put too many hints in the FY '14 budget because they didn't basically account for sequestration. But they are doing a strategic capability management review, which is ongoing now and will be completed in about the May, June time frame. And I think that's where you're going to begin to see the prioritization of what comes out in order to meet sequestration numbers. Now as I've said many times, we're not a platform provider, but we provide capability that goes on to platforms, be they old ones being upgraded or new ones that are coming into the inventory. I think that's really where the big bucks are. It's in end strength in reducing brigades and wings and ships. And it's in cutting the end strength that's associated with those formations. So as I look at the priorities in '14, I still believe that the things that we do are very important to the effort -- the networks, the ISR and the electronic warfare. So it's a little hard for us to say that there's a mathematical equation we can use that ties to the 8% or 10% DoD. Bigger primes might do that because they're spread far enough across all those dimensions and platforms to be able to make that estimate. I think it's a little tougher for us.

Peter J. Milligan

Let me just add one last thing, Rob. I know we talked a couple of minutes ago about the domestic products. This year, if the number is somewhere around $150 million, whatever it is on those 3, you're looking at something in the low single digits of sales. And again I don't -- there's a reason, obviously, I don't want to get too specific on the profitability. But just to give you a little bit more color, I can tell you that it certainly would be well less than 10% of our profitability. So hopefully that helps.

Operator

[Operator Instructions] Your next [indiscernible] comes from the line of Bill Loomis with Stifel.

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

So just following up on sequestration. So at this point, you have not received any descoping or any specific guidance from your DoD customers or FAA or anybody else on -- related to sequestration?

David F. Melcher

I would say that no, I haven't -- there's no guidance that's been given that you could trace back to sequestration.

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

Okay, and then on international, what was international as a percent of total revenues in the quarter and what did that grow?

Peter J. Milligan

International in the first quarter, which is again primarily just on the C4ISR side, so I'll give you numbers on that piece, was about -- was $118 million, which grew about 11% from the prior year.

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

Okay, and the -- Peter, when you talked about $10 million to $12 million in restructuring, you were just talking second quarter?

Peter J. Milligan

Yes.

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

Does that mean we may see some more in the third quarter as well given the total you talked about? I'm sorry, does that mean, so we will see some restructuring in the third quarter then given the total amounts you were talking about?

Peter J. Milligan

Yes, my expectation at this point is, as you know $50 million or $49 million is behind us. Another $10 million to -- another $10 million to $12 million or so in the second quarter, and maybe $5 million or so third, and same amount in the fourth.

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

Okay, and then the tax rate, the 35% to 36%, that was for the year or the second quarter?

Peter J. Milligan

For the year.

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

Okay. Looking at the...

Peter J. Milligan

And the second quarter -- for the year and the second quarter.

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

Okay. Looking at your work, you talked about more Afghanistan work, lower Middle East programs. There was another company in the industry had a customer, did a lot of -- they do a lot of work in Afghanistan specifically. And they said the customer, although it hasn't happened yet, the customer told them to prepare for lower levels later this year. Have you had any customers tell you the same, or is it just business as usual for you in Afghanistan specifically?

David F. Melcher

I think in a couple of different places where we do particularly the O&M work, the customers have been going through what if drills, budget drills that they've been asked to do by their headquarters to look at various scenarios of what might happen with funding and what would be the impact. They're trying to gauge what would happen and what would be the impact and how much would they have to pick up contract or labor with troop labor or something like that. So those questions are being asked, but some have been asked and dropped and forgotten and on to the next thing. So I think we answer every request that the government asks of us. And there have been some requests like that.

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

Okay. And then finally on JCREW, I saw Northrup got a little task to continue work on the I1B1. Any new developments for you on that?

David F. Melcher

I1B1, we've been working on this for several years, and it remains, as you know, a developmental effort for some time now. Northrup was also working on the development of I1B1, I think, since 2009 and received another incremental funding to try and advance it. I can't give you the difference in the developmental levels of either company in terms of how far each one advanced. That's something that only the government would know. But suffice it to say, there is no FY '14 funding that we were able to discern for the production of I1B1. So it will remain a developmental contract, and we're doing our best to work with both the Navy and the Army to try and see how this transitions over for future need and adaptability. And in the meanwhile, we've continued to do things like cell jammers to the Department of State, upgrade jammers that are in the field, and we have an intention to compete on a contract that's coming out for Marine Corps jammers sometime in the next couple of weeks. And so we're keeping our feet firmly in that ground EW realm just as we do very heavily in the airborne EW realm as well.

Operator

Your final question comes from the line of Pete Skibitski with Drexel Hamilton.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Just a couple of follow-ups. I wanted to belabor the point on international a little bit more. I think your international sales were about 10% last year and now you've mentioned in the first quarter, your international orders are about 24%. So I'm just wondering in terms of -- if you see better incremental opportunities internationally and if maybe you've targeted internationally growing to maybe 12% of sales this year or 14% next year, if you can give that level of color or not?

Peter J. Milligan

I can tell you that we certainly are expecting solid revenue growth internationally this year. That's certainly within the plan or in the plan. And as you know, it comes from certainly the things that we just booked, also opportunities as I've mentioned, I think a few times this morning on radios and goggles. There's also EW equipment, tactical EW equipment that we sell internationally that we see some opportunities on. There's a couple of big radar programs that we're closing in on. So very similar to the types of things that we've sold already. But I just think we see a number of them coming in at this -- certainly in the first quarter, but a number of additional opportunities this year as well.

David F. Melcher

Yes, Pete, just, it's Dave, from the larger perspective, we certainly have had a priority on trying to do more internationally. Space payloads, we used to sell none of those internationally just a couple of years ago. Now we're finding more and more opportunities there. We're a little limited on what we could sell in night vision a couple years ago. Now, that market is more open to us, and we've worked on things like arrangements with Tata in India for both communications and night visions to try and move that ball forward. So there's a clear goal in the company to try and increase international sales. I would love to be able to do it 1% or 2% a year if that's possible, but we're working hard on it.

Peter J. Milligan

And the other thing is, and I know the numbers show this, but just to highlight it, our C4ISR segment is where 95% of the international sales occur. And that's -- this quarter, certainly, it's over 20%. It's almost 24% of our sales this quarter from international. So it is a very big piece of the base. It doesn't look as big on a total company basis because the Mission Systems business is -- even though there's contracts that are overseas, we treat those as domestic because it's for the U.S. Army. But our international is, I think, a lot bigger than some might have thought.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Okay. And last one, I wanted to ask you guys about share repurchases because it certainly seems like you have the ability to ramp up share repurchases a good amount from here if you'd like to, and I'm wondering what your thoughts are around that? Is it something that maybe you'd like to shore up the balance sheet a little more first, and maybe get a little more budget clarity before you'd consider such a move? Can you speak to that?

Peter J. Milligan

Yes, those -- the items that you mentioned that I could be considering, we certainly are considering. Those are 2 things that are -- that certainly are a big part of the decision process here. Obviously, that is a purview of the board. But before we would recommend anything, in a material way, to them different than the offset of the dilution, that's already been approved, I think I'd like to see a little bit more clarity along those 2 lines just like you said, Pete.

Operator

That was our final question. I'd like to turn the floor back over to Mr. Melcher for any additional or closing remarks.

David F. Melcher

I'd just like to say thanks to everybody for participating today. It's an interesting time that we live in, and you all live in it, too. And so we'll try and continue to be as transparent as we can with you about the things we're doing and the directions we're heading and the progress we're making on the things that we're working on in the company. So thank you, and hope you all have a good day.

Operator

Thank you. This does conclude today's conference call and webcast. Please disconnect your lines and close your webcast browser at this time, and have a wonderful day.

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