L-3 Communications Holdings, Inc. Q2 2009 Earnings Call Transcript

L-3 Communications Holdings, Inc. (LLL)

Q2 2009 Earnings Call Transcript

July 23, 2009 11:00 am ET

Executives

Karen Tripp – VP of Corporate Communications

Michael Strianese – Chairman, President & CEO

Ralph D’Ambrosio – VP & CFO

Analysts

Cai von Rumohr – Cowen and Company

Robert Spingarn – Credit Suisse

Noah Poponak – Goldman Sachs

Brian Ruttenbur – Morgan Keegan

Troy Lahr – Stifel Nicolaus

Seth – JPMorgan

Chris Donaghey – SunTrust Robinson Humphrey

Myles Walton – Oppenheimer & Co.

Howard Rubel – Jefferies & Co.

Michael Lewis – BB&T Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 L-3 Communications earnings conference call. My name is Dan, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conduct a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Karen Tripp, Vice President, Corporate Communications. Please proceed.

Karen Tripp

Thank you, Dan. Good morning and welcome to the L-3 second quarter earnings conference call. With me today are Michael Strianese, Chairman, President and Chief Executive Officer and Ralph D'Ambrosio, Vice President and Chief Financial Officer. As always, after our formal presentation, we will be available to take your questions.

During this call, management will reiterate forward-looking statements that were made in the press release we issued this morning. Please refer to this press release as well as our SEC filings for a more detailed description of the factors that may cause actual results to differ materially from those anticipated.

Please note that this call will be simultaneously broadcast over the Internet. I will now turn the call over to our Chairman, President and Chief Executive Officer, Mike Strianese.

Michael Strianese

Thanks, Karen, and good morning everyone and thanks for joining us for our second quarter earnings call. I want to begin by thanking our employees for their continued hard work and dedication to our program performance and the group presidents for their outstanding leadership.

Overall, in summary, we had another good strong second quarter. Overall, we saw business trends in the second quarter that is similar to those we saw in the first quarter, specifically in Intelligence, Surveillance, and Reconnaissance, which includes Greenville, Communication Systems – West, our Electro-Optical and Infrared companies, and our microwave companies. They are doing exceptionally well, growing more than plans, and offsetting some weaknesses we did see in Government Services, and as well as declines in our commercial businesses.

Additionally, several specialized product business areas are doing very well. Namely, what’s growing are, as I mentioned, the Electro-Optical and Infrared, microwave, but not only those, propulsion systems, simulation and training, our precision engagement business, telemetry and advanced products, undersea warfare, and our marine services all showed growth during the quarter.

What was flat were security and detection systems, showing – slowing sales primarily internationally in airport security equipment and display systems. And declining, as expected, were our aviation products, and our power and control systems due to the general decline in those commercial business areas and the economic recession.

Backlog declined about $600 million in the second quarter, mostly because of the timing of some items in the order flow during the quarter, but the June backlog was $11.2 billion, which is strong, but down 3% from the beginning of the year. Our second quarter orders were $3.3 billion and our book-to-bill was 0.85, lower than we are used to, but again it was affected by the timing of items in the quarter.

Second quarter sales were $3.9 billion, which showed 6% growth and we were pleased with those results. And our earnings per share grew 16% to $1.90 a share. And if you took out the higher pension expense that we have been incurring, the earnings actually grew operationally by 21%. So, we are very pleased with the growth in earnings this quarter. And our free cash flow was a healthy $335 million, on track for our $1.2 billion target for the year.

The second quarter orders and book-to-bill again were negatively impacted by several items including timing of some orders that are going to slip into the third quarter and perhaps a little bit later a few funding cuts and contract vehicle change as well as the job protest.

We did have significant wins, however, including the data link for the (inaudible) helicopter, the Light Utility Helicopter, Electro-Optical/Infrared turret, the Prophet Enhanced program, aircrew training for the B-2, and small aircraft ISR continued to show growth.

We also had significant follow-on orders on several important legacy programs and I will name some of the bigger ones, but it’s a long list. First of all, River Joint continued to grow. UAV Communication Systems, Rover product, our Phoenix system, Compass Call aircraft, the Canadian F/A-18 program, the Royal Australian Air Force F/A-18 program, all growing, Contract Field Teams, and Fort Rucker showing growth. As I said, small aircraft ISR is growing. ISR in the classified community is growing as well - Flight School 21, AVCATT, and a handful of others.

For the second half we have a fairly robust list of outstanding bids. So, we are looking at a solid order flow. Many of them are fourth quarter, late third, fourth quarter, but the US Air Force T-1A contract logistic services recompete, we are expecting to hear on in the quarter, just under $700 million. The Army C-12 CLS program, again, about $0.5 billion in the fourth quarter. The (inaudible) homeland security, customs and border patrol logistics work, another $0.5 billion, we expect to hear that one in the third quarter. The Bradley Transmissioned Performance Based Logistics program, $350 million in the fourth quarter. And the list continues. So there still is a very robust order flow that we are expecting to see.

In terms of major recompetes, the major outstanding recompete continues to be the Special Operations Force contract, which we call JOG. As you may recall, we lost to competition back in March, but we filed a protest because we determined that there were some serious flaws in the selection process. The customer, the Special Operations Command is currently taking corrective action, which in substance is a validation of our protest. They have amended the RFP and revised proposals are due on August 6^th, so we should hear something perhaps later in the third quarter.

Earlier this year the ceiling on our current contract was increased by $200 million and our period of performance was extended out to October. The new contract is again it’s worth up to $5 billion over 10 years and it’s an important program that will likely grow because of the work that is Special Operations Forces.

In terms of the budget, fiscal ’10 budget, we have very little exposure to some of the big ticket programs that Secretary Gates is slates to be canceled. However, there were two surprise cuts in the fiscal ’10 budget, which were not discussed back at the April 6^th press conference by the Secretary, but I’ll mention to them to you. First, the smaller one was a surprise cut in funding for the Bradley Fighting Vehicle. It’s going to reduce our 2009 orders by about $50 million and sales by about $35 million.

The second one was the funding on the Joint Cargo Aircraft Program or JCA, which I think everybody has followed. So, for the JCA program, the Secretary has proposed reducing the buy to 38 airplanes from the existing 78 that were in the palm, and wants to transfer the program to the Air Force from the Joint Program Office.

Significant support for the Joint Cargo Aircraft remains both in the House and the Senate. The Army and National Guard want more aircraft and recently the Air Force has said that 38 aircraft would be a minimum buy. So, we are optimistic by those trends. It’s a long-term program for us and ultimately we expect more than 38 aircraft will be purchased. However, we do not expect to see that funding show up until the fiscal ’11 budget. And we are funded through our next four deliveries, which will occur during 2010.

With respect to Project Liberty, we had a press release we put out yesterday because I was anticipating there would be questions and we do have the customer requirements on confidentiality on this program. So, I refer to that press release. I’d make a few remarks on it. First of all, we have delivered the first seven airplanes, which was phase one of the project to the Air Force. Those deliveries were ahead of the contract delivery dates. We will modify a total of 37 MC-12W aircraft for the Air Force. And we look forward to continuing to apply L-3’s experience to other small aircraft ISR applications.

In terms of new programs on the horizon, we have Aerial Common Sensor, which is the replacement program for the Army’s Guardrail and air reconnaissance low [ph] ISR fleets. The Army recently restructured ACS to focus on today’s fight with some mission redefinition towards irregular warfare and will require a turbo prop versus a business jet. The RFP is expected by the end of the year. We expect to see 23 systems required to be fielded by 2017. We’ve entered into a formal teaming agreement with Northrop Grumman, and we are very happy with the solution that we are working on.

In terms of the UK, you may recall, there was a program called Felix [ph] that we won last year as a prime. The Ministry of Defense in the UK has requested a US Air Force River Joint to replace the Nimrod as a FMS replacement. The FMS program will provide three UK River Joint aircraft plus ground systems and training equipment. The aircraft will be taken from the US Air Force’s KC-135 tanker inventory and Boeing will structurally modify and convert them to the RJ configuration. Logistics and sustainment will be provided under a separate agreement.

Our scope of course is the ISR and mission data systems installation, logistic services and sustainment with an estimated value of over $700 million and probably approaching $1 billion over the next several years. We have many industry partners in the UK that are on our team. The current status is we expect approval by the end of this year with a contract award in the first quarter of 2010 and a first aircraft delivery in 2013. Last aircraft will be slated for about 2016.

We view this having a high probability of occurring, but let me emphasize it’s not a done deal because, as you’ve read, the UK is facing significant funding issues and there are political issues, jobs issues facing this program. But every indication that we have is the platform and capability is badly needed and that we expect this program to go forward.

Inside the Company, in terms of operations, in terms of consolidation, we continue to work on consolidating areas that we believe have merit and this quarter, actually last week, we announced internally – there hasn’t been an external release – that we would form a new group called the Communication Systems Group that would bring together Communication Systems-East and –West. And that will be headed by Susan Opp, who is our President of our Communication Systems-West Group.

We believe that there is a very compelling story to bring those businesses and capabilities together. They both operate in ISR space. And similar electronic systems assembly and tests. There is capacity that we can utilize in the Kandan [ph] facility to absorb some of the exploding work flow that’s happening in Salt Lake City, and it’s just a very tight [ph] story and will make the Group much stronger operating together than separately.

We continue to consolidate our Canadian facilities, particularly the SPAR facilities are being rolled into the Military Aircraft Solutions facilities and thereabout.

In terms of capital deployment and acquisitions, we repurchased $70 million of stock in the second quarter. We have $450 million of share repurchases included in our 2009 guidance. Our remaining authorization at the end of the quarter was about $630 million. So, we have the appropriate level of authorization to react to market conditions and we can take that up or take it down if we need to depending on M&A activity.

And speaking of M&A, we continue to evaluate several companies. As you know we have been cautious on valuations due to the lower multiples that public defense companies have been trading at. As we go through the companies where we find compelling stories that are good fits, we’ll continue to pursue them. But right now we haven’t closed anything this year, as you know.

We ended June – we ended the quarter with just under $900 million of cash. Our 2009 guidance assumes we end 2009 with more than $1.4 billion of cash even after repurchasing our $450 million of stock. Depending on conditions in the credit markets, we could decide to repay the $650 million term loan instead of refinancing it. It’s our option because we have such a strong cash position and we intend to pursue the best terms we can as we continue to grow the Company, keep our flexibility, and increase value.

Overall, though, our balance sheet is very strong and our liquidity is strong. We have no requirements for any external financing at this time. We had no divestiture activity this quarter. We still are looking at, again, because of the market conditions, we have some smaller operations that we would consider. Divesting one of them is in a process, but nothing that I would term material or worth further comment.

For 2009, for our outlook, we’ve updated the guidance today increasing the low-end of our earnings per share to $7.25 a share in the high end to $7.35. Depending on how we deploy our excess cash this year, can give us more earnings upside. We expect to see our sales come in at $15.5 billion to $15.7 billion for the year, which would be up about 5%, if you took the mid-point.

So, that’s a summary overview of how we did this quarter and Ralph is going to give you some more color and financial detail and then we’ll go to some Q&A. Go ahead, Ralph.

Ralph D’Ambrosio

Okay. Thank you, Mike. I’ll comment on some key point about our quarterly results and the update to our 2009 guidance. First of all, as you know, our 2008 second quarter included three items, which aggregated a net earnings per share gain of $0.57. So, my commentary is going to exclude the impact of those unusual items in 2Q of 2008.

Starting with diluted earnings per share, as Mike said, EPS grew $0.26, or 16%, to $1.90, compared to Q2 of last year. It was driven primarily by sales and margin growth despite higher pension expenses, which reduced EPS by about $0.09. Additionally, 5% lower share count accounted for about 35% of our Q2 EPS growth.

In terms of sales performance, consolidated Q2 sales grew $207 million or 5.6% to $3,929 million. Growth from acquisitions, net of divestitures was $41 million or 1% of the growth.

The C3ISR segment grew 24%, or $145 million, with ISR systems growing $110 million and networked communication systems growing $35 million. The US Military ISR surge continues to drive growth on several programs.

Sales in Government Services were down 3% in Q2, mostly due to the linguist contract, which declined by $72 million. Excluding linguist, Government Services grew 4%. And the slow growth that we have been experiencing in Government Services is in some way related to our Iraq sales, which flattened last year, and now we are seeing them decline slightly.

Within the Aircraft Modernization and Maintenance segment sales grew 6%. Growth on the US Army training helicopter flight support contract at Fort Rucker plus JOG and the US Navy P-3 modification work more than offset the decline in the contract field services sales volume that we had been anticipating.

In Specialized Products sales grew 4% despite lower volume for commercial aviation products and shipbuilding products, which together declined almost $50 million in the quarter and the ISR growth is also benefiting, as Mike said, EO/IR and microwave businesses in Specialized Products, which together grew more than 10% organically in Q2. And we are also seeing nice growth in propulsion systems and simulation and training.

Moving on to the operating margins, consolidated margin increased 10 basis points to 10.6% for Q2 2009 versus Q2 2008. Our pension expense reduced operating income by $60 million and excluding it consolidated margin would have improved by 50 basis points. Most of that increase was in the C3ISR segment, driven by significant sales growth and we also had very good overhead cost improvements and better contract performance in that segment.

Generally, we are continuing to proactively and aggressively manage and right-size our cost structures across the Company with special attention on overhead spending.

Just take a look at the Government Services margin in Q2, on the surface we had a large drop going from 11.2% to 9.5%, but that was mostly due to a quarterly anomaly because our toughest quarter-over-quarter comparison happened in Q2. And while the Government Services margins were 11.2% in Q2 of 2008, they were 9.9% for the full year 2008. And Q2 of last year benefited from some favorable contract profit adjustments. But the Q2 ‘09 margin of 9.5% in this segment is in line with our full year 2009 segment guidance.

For cash flow, 2Q free cash flow was $335 million, down $166 million from Q2 of last year. The lower cash flow is mostly due to the enormous receivable collections we had in the second quarter of 2008 and that followed the receivables increase that we had in the first quarter of 2008. Additionally, liquidations of customer advances in Q2 of this year also negatively impacted free cash flow. But overall, we had good working capital performance in Q2 of this year and our cash flow for the year is tracking to plan.

With respect to our 2009 full year guidance update, as Mike said, we increased EPS on the low end by $0.08 and on the high end by $0.03, so our new range is $7.25 to $7.35. We held our sales guidance unchanged at $15.5 billion to $15.7 billion. However, we did change segment sales guidance for C3ISR, Government Services, and Specialized Products. And I would say that on a consolidated basis we are currently closed to the low end of our guidance range than the high end.

We are going to have some tough sales comparisons in the second half, particularly in the fourth quarter. As you recall the ISR surge began in the fourth quarter of ’08. Additionally, the funding cuts and slips that Mike talked about in Q2 will have some impact in the second half. And as of now we expect to have less M&A growth in the second half compared to the first half.

On to the segments, C3ISR, we increased the sales guidance there by $100 million and that’s on the heals of a very strong first half that we had there. Within Government Services, we’ve reduced the sales guidance by $100 million primarily for three items. Number one, we expect to lose about $50 million of sales due to the Department of Defense support services insourcing initiative.

Number two, we expect sales to decline by about $65 million mostly in the second half because of reduced passthrough sales on a large Army contract. Because our existing prime contract will no longer be recompeted, our task order renewals are migrating to a different contract vehicle where L-3 is not a prime contractor and consequently because secondary subcontractors are not allowed on this new contract vehicle, we are losing our passthrough sales.

And thirdly, the US Army recruiting work, which we reduced in the first quarter because the Army was exceeding its recruiting goals was cut again recently, and we expect those sales to decline by another $10 million.

With Specialized Products, we also reduced sales guidance by $100 million. $50 million of it is due to weaker commercial aviation product sales. If you recall, on the first quarter earnings call, I said that we were at the low end of the range. If we had any further weakness in commercial, we would have to lower the Specialized Products sales guidance. Additionally, the Bradley funding cuts and the simulation device or delays that we are seeing for some DoD and foreign military sales work are also going to reduce sales in the segment by about $65 million.

But we increased our full year 2009 operating margin guidance by 10 basis points. Again, most of it is due to better performance in C3ISR. And excluding the higher pension expense for the full year versus last year, our margins, if we achieve our guidance, will expand by 40 basis points.

We also made three changes to the segment margin operating guidance. Our Free cash flow guidance remains at $1.2 billion. And finally, looking at the third quarter, we currently expect sales to be somewhere between $3.8 billion and $3.9 billion with EPS of about $1.85 and free cash flow of about $300 million.

That concludes my comments and I’ll thank you and I will turn it back to Mike.

Michael Strianese

Okay. So, we can go to the Q&A now. So—

Karen Tripp

Thanks, Dan, we’ll go to questions now.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Cai von Rumohr from Cowen and Company. Please proceed, sir.

Cai von Rumohr -- Cowen and Company

Yes. Terrific quarter. Could you give us an update on where you were with the Coast Guard recompete and what you have in your model for the year?

Michael Strianese

Yes. Forgot about it…

Ralph D’Ambrosio

Sure, well, Mike gave the updates on the – what’s happening with the recompetition and that the RFP was amended and we are going to submit our bid I guess along with others by August 6^th. In terms of the, what JOG is in our full year guidance, it’s unchanged from where it was last time. And if you recall, I said it was going to contribute about $400 million to sales and about $0.14 to EPS. So that remains unchanged. Given the timing on the recompete and the protest, it looks like we are going to have JOG for most of this year, at least for most of Q3.

Cai von Rumohr -- Cowen and Company

Okay. And I apologize because I was on another call. Could you give us some color, the book-to-bill was lower than it’s been in terms of how much of that was timing and how much of that you might catch up later on?

Ralph D’Ambrosio

Sure. So, I will give you some of the larger items. Number one is the JOG contract. And we are doing a little more than $100 million a year -- $100 million a quarter on that contract and given the status of the competition, we are running off backlog. So, orders in Q2 were below sales by $112 million pm JOG and about $200 million for the first half. So, that’s probably the biggest single item.

Another item was the timing of the JCA orders. If you recall, we booked $200 million in the first quarter of this year. We had no orders for Q2 and we had $112 million in Q2 of 2008. So, that’s another big timing item.

I talked about the change in contract vehicle on that army contract, the fact that our test orders are going to a prime and they are – what they are doing is they are dribbling out orders to us. That’s causing about $85 million reduction in orders.

Mike mentioned the slips in the simulation device business. That’s about $70 million. It pertains to AVCATT for Australia and the F-16 Pakistan contract. We are sole-sourced on those jobs. We are just waiting for the funding to be resolved.

Additionally, we had a big order in our fuse business for almost $100 million that we expected to be awarded in Q2 and it slipped into Q3. Same thing on our current year GSA production work for the examiners. We expected to book about $40 million in Q2. It slipped into Q3.

And then the downturn that we are seeing in the commercial aviation and shipbuilding products businesses is also having a negative impact on our orders in the book-to-bill. Together, orders in those two areas were down about $170 million Q2 of this year versus last year. So, those are the big items.

And the other thing that I would add and I think I commented on this on the first quarter earnings call is that last year we had an unusually high booking orders year. The book-to-bill was 1.11 and one of the comments I made was that last year we booked about $1 billion of orders that don’t convert to sales until 2010. So, that’s also impacting the order flow and the book-to-bill trend in the current year.

Cai von Rumohr -- Cowen and Company

And just last follow-up, given you have a slip, what sort of range should we look at the book-to-bill in Q3?

Michael Strianese

I will give you that one, Cai, it’s not much of a range. We are projecting the book-to-bill should come in at about one.

Cai von Rumohr -- Cowen and Company

Terrific. Thank you.

Ralph D’Ambrosio

For the year.

Michael Strianese

For the full year.

Operator

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

Robert Spingarn -- Credit Suisse

Good morning.

Michael Strianese

Good morning, Rob.

Ralph D’Ambrosio

Good morning.

Robert Spingarn -- Credit Suisse

Hi guys. A couple of questions in terms of just the revenue strength and margins in a couple of the different businesses. You’ve talked a lot about ISR, Mike, could you get into a little bit more detail of what’s specifically happening with the surge, how much did Project Liberty, for example, contribute in the quarter? And maybe a little bit more color on what Ralph was talking about as we get towards the end of the year.

Michael Strianese

Well, the – let me get the easy one first. The Liberty was about $30 million in the quarter. Again, as I said, I don’t want to get into too much on that particular program. But essentially what you are seeing in this business area is the continued focus and recognition on the value of these ISR assets (inaudible) in particular, meeting the growing troop levels in Afghanistan and the threat environment in which they are operating. And it’s everything – and it’s everything we do in this space that includes the date link products, the Rover system, EO/IR systems, antenna work, missionizing aircraft. We are seeing – I can say in general terms that small aircraft ISR is expected to be a continuing growth driver for us although the timing and amount of the orders I am not going to be able to give you too much clarity on. But we can give it to you in term – Ralph can give it to you in terms of growth rates that we are expecting and – that we plan in this space. There is continued emphasis on doing things at the DoD that Secretary has said that are relevant and you can see that in the priorities that they have been putting on the table. And given that mindset, and where we are globally in different areas of concern, I would expect to see continued emphasis in this business area.

Robert Spingarn -- Credit Suisse

How sensitive is this to the op tempo over in southwest Asia?

Michael Strianese

Well, I guess, you can take the Liberty program, it’s directly sensitive to it--

Robert Spingarn -- Credit Suisse

And more than just – it sound like a lot of it.

Michael Strianese

Well, yes, I mean it’s not – many things aren’t being built to put on a shelf. They are being built to being used. And however as platforms come up for upgrade, systems are being upgraded across the board to bring them up to the current state-of-the-art level of both technology and of the threat environment.

Robert Spingarn -- Credit Suisse

Okay. And then just switching gears, more of a 30,000-foot question, if you will, but on Government Services, you talked about insourcing, it’s a theme a lot of people are focusing on here. Could you give some sense of your long term view, both from a top line and margin perspective? And might we think that going forward margins are capped in these types of businesses. Perhaps this is a may be a 9.5% business for you?

Michael Strianese

Sure. I – so, the insourcing initiative, first of all, let me give just the background here is the Deputy Secretary of the Personnel and Readiness issued guidelines at the end of May. The objective was to insource about 33 – between 33,000 and 34,000 contract support service jobs by 2014, including about 10,000 jobs for defense acquisition work. The various components of the DoD are – have been tasked to provide their insourcing plans by the end of this month. So, when we think about that, we don’t – I mean while we do have exposure on contract support jobs, like (inaudible) work, it is not the larger part of our Government Services business. So, we – it’s not that we won't be affected. But I think we’ll be affected less than the other players in that space. But what that’s going to do, it’s going to put additional pressure on the various players in the industry and try to maintain the business space and we are expecting to see more competition and more price sensitivity. So, your assumption in that the margins are cresting [ph] in this space I think is a good one. And I think we are going to be bidding more competitively and it’s possible to shed a few points of margin here to keep the volume in place. I also think though in the context of the whole company that we have been working very hard to keep the margins growing where we can typically in the product areas now by bidding, by execution, by cost controls. And I would expect that the L-3 margins in total continue. And we-- our goal as we have talked about over the year is 20 to 30 basis points margin expansion a year. We’ll do as well as we can in that area. We’ve been pretty much maintaining that for several years now, notwithstanding we have this pension head wind, but we think that will subside and that should add back some margins some day too that would offset this. So – we believe the services business is a business that we are going to – that will continue to see growth in select areas and again we think we are operating in the right areas that will but there will be pockets of softness that we are going to see.

Robert Spingarn -- Credit Suisse

But you talked about the revenue side from the job sourcing, and of the government and the competitions some share competition, and you also mentioned margins, but on the margin side do you see any active effort at this point out of the Pentagon or some of the other agencies to bring award fees down or to bring overall cost down via margin?

Michael Strianese

No. No, we have not, although we have – and it’s not new, I mean you have heard that there would emphasis on keeping the award fees tied to performance. There has been cases that have been written about where award fees was still at the 90% plus level, yet the performance wasn’t there. So – we will take that out of Texas at our office in place we are getting award fees, we are performing very well. But, no, there has yet to be any discussion about capping, suppressing, limiting, contractors’ rates. I think that the – especially in the services area, is that the competitive forces in this space are strong enough that the market will take care of itself.

Robert Spingarn -- Credit Suisse

Okay. And just last thing on AM&M, it just seems for the last couple of years the second quarter has been a tough quarter particularly on the profit side. I think maybe you had some Korea P-3, in the conference calls you mentioned it. But what is going on there and is this a seasonal thing?

Michael Strianese

It’s not seasonal, Rob, but some of the international AM&M work – we did have the issues with the Korea P-3, but they have been completely resolved. This year’s program that we’ve taken a bit of a charge-offs, small charge was this P-3, about $5 million. Not P-3, I am sorry, C-130 program for Poland where it’s a new AM&M project that we took on know as a center wing box replacement and there was a little bit growing pain in it But we believe that it’s worth it, once we go through the growing pain on it because of the age of the global 130 fleet there will be continued requirements to do these center wing box replacements. And there is a not a lot of capability out there actually. It’s very completed work. That’s the critical structure of that airplane it being a cargo airplane. That’s where all the stress is on it. So – and it’s not the type of problem that we see as being a long term bleeder like software can be. It’s more of a metal-bending issue and more of a first time learning curve issue. So, that’s what depressed the margins a little bit this year second quarter.

Robert Spingarn -- Credit Suisse

I see. We’ll be back in the nines for the rest of the year, low nines?

Michael Strianese

Yes. That’s right.

Robert Spingarn -- Credit Suisse

Okay. Thanks for the detail, Mike.

Michael Strianese

Thank you, Rob.

Operator

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

Noah Poponak -- Goldman Sachs

Hi, good morning.

Ralph D’Ambrosio

Hi.

Noah Poponak -- Goldman Sachs

You guys mentioned that the Army is exceeding its recruiting goals ahead of pace and you can read about that in the news as well, in you view what’s the risk that hitting that ahead of pace drives a share shift from hardware faster than expected?

Michael Strianese

The personnel cost?

Noah Poponak -- Goldman Sachs

Yes.

Michael Strianese

Yes, well that’s already happening, I think. But it’s a good observation. You know the heads are being driven in we believe by the economy among other things and things that – that’s (inaudible) line is growing now faster than the hardware line anyway. And given that a bunch of card were cuts have already been put on the table and the areas, the diversification among all these programs that we have, I don’t think it’s going to be an issue for us and I don’t think it’s of the magnitude yet anyway that we think it will crowd us out in a material sense.

Noah Poponak -- Goldman Sachs

Okay. On linguist, can you update us there? The current contractor had some issues. They kind of say that those are behind them. Are you talking to the customer on this and is there some potential out there for this to be recompeted?

Michael Strianese

Yes. I believe there is a potential at the end of this year. This goes to recompete, is my view.

Noah Poponak -- Goldman Sachs

Are you having discussions with the customer and can you share any color from them or--?

Michael Strianese

I really can't other than that I think it’s kind of (inaudible) in the general community that this would likely go to an early recompete at the end of the year.

Noah Poponak -- Goldman Sachs

Okay. And one last one, just following up on the insourcing question, you mentioned you expect to be affected less than some others. Would you be willing to quantify even if it’s a large range, how much of the business is exposed and the parts that you have seen go away already is that in acquisition work or is it elsewhere?

Ralph D’Ambrosio

The parts that we’ve seen go away really are not in acquisition work. And the only thing that’s common among what we’ve seen lost is that they are small jobs, different contract types, they are different services. It just looks like they are implementing the insourcing initiative where it’s going to be easiest to apply and that’s going to be on small jobs where there aren’t a lot of heads and there isn’t a lot of risk in terms of making big moves in the workforce. So--

Noah Poponak -- Goldman Sachs

Okay. And any willingness to quantify how much of the business is exposed?

Ralph D’Ambrosio

We – Mike talked about how – seeder [ph]work is there, that’s one of the stated target areas. Seeder [ph] work for our services business is high single digits. So it’s $200 million.

Noah Poponak -- Goldman Sachs

Yes.

Ralph D’Ambrosio

I don’t think it’s conceivable that we can lose that much in insourcing. Because we do a relatively small part of the seeder [ph] work in the industry today.

Michael Strianese

No. We don’t expect to lose at all but do we get hit for 25% of it or 35% of it we are not sure because we are in kind of new ground that it’s changing constantly. And again – we are one of these crippling number, but there is a number there, not hundreds of millions, could be 50 million. May be as much as a 100, and this is something we’ll have to discuss quarterly with another community. And again we are trying to offset that in other areas, but this services area is getting very competitive. So--

Noah Poponak -- Goldman Sachs

Okay. Thank you very much for the color. Nice quarter.

Michael Strianese

Sure. Thank you.

Operator

Your next question comes from the line of Brian Ruttenbur from Morgan Keegan. Please proceed.

Brian Ruttenbur -- Morgan Keegan

Okay. Thank you very much. Can you talk about the share count what – in your guidance, what you plan the share count to be on the end of the year?

Ralph D’Ambrosio

The share count for the year is essentially where it is in – what it was in Q2.

Brian Ruttenbur -- Morgan Keegan

Okay. But you plan to--

Ralph D’Ambrosio

May a little bit higher. Around 117 million shares.

Brian Ruttenbur -- Morgan Keegan

Okay.

Ralph D’Ambrosio

Little higher than that.

Brian Ruttenbur -- Morgan Keegan

Okay. Do you actually plan to continue aggressively buy back shares?

Ralph D’Ambrosio

Well, yes, Mike said that our guidance now assumes 450 million of share repurchases. We did 301 million in the first half. So, we are going to do at least another 150 million and to echo what Mike said again unless we think – see things increase on the M&A side, even if we decide to repay our $650 million in term loans next March in full, we still will likely end up doing more share repurchases in the 450 million and that of course, as Mike said, would be an upside for this year.

Brian Ruttenbur -- Morgan Keegan

Okay. And then backlog should be flat year-over-year or should it be – when you talk about bookings being on a one-to-one basis, we should see backlog up 10% year-over-year by the end of the year? Can you give me some kind of perspective there?

Michael Strianese

One would imply that it would be flat.

Brian Ruttenbur -- Morgan Keegan

The backlog will be flat on the year, on a dollar amount basis versus 2008 levels?

Michael Strianese

Yes.

Brian Ruttenbur -- Morgan Keegan

Okay. Very good. Thank you.

Michael Strianese

(inaudible) best guess the number now is about one. Obviously we are trying to surpass that, but for now and one is going to imply flat backlog of course.

Brian Ruttenbur -- Morgan Keegan

Very good. Thanks.

Operator

Your next question comes from the line of Troy Lahr from Stifel Nicolaus. Please proceed.

Troy Lahr -- Stifel Nicolaus

Thanks. Can you help us understand as your Iraq revenue is coming down how much of that is getting offset by Afghanistan and also are you beginning to see a pickup in work done directly to the Iraqi government?

Michael Strianese

Well, the offset is certainly not one for one, but on the other hand the effect of the draw down has not been material to a share either. So it’s been – I think you are going to see that step up more next year. The direct contracting with the government of Iraq is yet to get traction. But the ground work is being laid to have a procurement apparatus in place in country by that government. So, all these moving parts have not started moving yet in a way that really can give us some meaningful insight into what that trend would be. In fact we had a – I mean the Iraq number was kind of negligible this quarter in terms of what the – kind of looking up for you. The draw down is – I don’t even see anything major here, but, yes, I will try to--

Ralph D’Ambrosio

I will give you a little more color on that. On the last call, we said that our Iraq sales 2009 were just under $1.2 billion. The Bradley funding cut that we talked about that was a surprise to us, which is going to reduce sales this year by $35 million. We had that in the Iraq latest category. So this $35 million for that. And we are also seeing less equipment fielding logistics type work related to Iraq. And that’s due to the fewer troops there. So, a number that used to round up to $1.2 billion now is rounding down to $1.1 billion by Iraq related sales. And that’s what’s in the guidance update that we provided today.

Troy Lahr -- Stifel Nicolaus

Okay. You said that the ground work is being laid, do you think it will be in place and you will start seeing these kind of next year as the troops start coming down, so you will – you have enough time?

Michael Strianese

Well it’s hard to predict where they are going to get, but I’d say this that they can't create these huge holes in terms of capabilities there. That can't happen. So, they are going to have to do something.

Troy Lahr -- Stifel Nicolaus

Okay. And then just lastly on JOG. You said they amended the RFP, can you maybe give a little color on how they amended it and do you have to bid that differently this time around?

Michael Strianese

Yes. I have to pass on those. We don’t – it’s an active procurement. I am really prohibited right now from talking about it other than to tell you there is an active procurement.

Troy Lahr -- Stifel Nicolaus

Okay. Thanks guys.

Michael Strianese

Thanks.

Operator

Your next question comes from the line of Joseph Nadol from JPMorgan. Please proceed.

Seth -- JPMorgan

Hi, good morning, Mike and Ralph. It’s Seth on the line for Joe today. Quick question, within the services business last quarter we had talked about weakness in intelligence and this quarter I believe that intelligence was a driver of growth. Has there anything changed there and can you talk about the landscape in that part of the business?

Ralph D’Ambrosio

Well I mean we have a program, providing intelligence support services to the Army, which the number of billets or heads was increased recently. So – I can't add much more than that, Seth.

Seth -- JPMorgan

Sure. Okay. That makes sense. And then can you tell us how the pension performed through the first six months?

Michael Strianese

Sure. The pension funds is – you mean the performance of the assets in the pension fund?

Seth -- JPMorgan

Yes, exactly.

Michael Strianese

Okay. Well, year-to-date we just looked at it. We were up about--

Ralph D’Ambrosio

7%.

Michael Strianese

There you go.

Seth -- JPMorgan

Great. Okay. Thank you very much guys.

Michael Strianese

Thank you.

Operator

Your next question comes from the line of Chris Donaghey from SunTrust Robinson Humphrey. Please proceed.

Chris Donaghey -- SunTrust Robinson Humphrey

Hi, Mike, good quarter. Obviously, we are seeing aerial common sensor look more and more like a Project Liberty type of aircraft. Can you may be talk a little bit about this move towards turbo-props, do you see this as a growing market beyond now what we are seeing with ACS and Project Liberty to the extent you can talk about it? And also is there a foreign opportunity out there for this kind of aircraft?

Michael Strianese

Yes to all of the above is the simple answer, Chris. ACS is hard to discuss with any certainty, but it’s been a moving target. As you know, it started out on a biz jet platform and has migrated back to the turbo-prop and that’s the – and by the way the current Guardrail is the same platform and Liberty is not. So you can see the common thread here. I think the answer there, some of it’s going to be borne out by the mission success if you will of Liberty, which – there has been items in the public domain already about how successful these first flights have been and I think you can look those up if you are so inclined. And for a number of factors, including the mission, the cost factor, given the cost of the electronics versus the F frame and everything it’s a compelling solution to the mission to go to a turbo-prop for this. So we do see this as a continuing growth area. And regarding international opportunities we were, with our industry colleagues Paris Air Show last month, and did introduce collectively with our friends at Walker Beach [ph] who provides that platform an international version of our -- the C-12 airplane that would be ready for payloads for international customers, which got a lot of attention and there was a lot of press in fact on small aircraft ISR. There was a stream of it on it. So we – our optimistic on the future of this area and in terms of the – integrating, missionizing an airplane and really understanding the mission and what capabilities are needed and how they work together with ground stations and products like Rover, I think there is no company better positioned in this space than we are. So, I am very optimistic about that continuing to be a growth driver.

Chris Donaghey -- SunTrust Robinson Humphrey

Okay, great. And lastly, Secretary of Defense gave – made this speech in Chicago. It’s in a couple of essays and foreign affairs and naval institute proceedings, which to me seemed to foreshadowing what we are going to see out the QDR. Based on what you are doing with your DC operations are you looking at those types of things and is it adjusting your M&A approach, the types of areas that you are thinking about investing from a longer term perspective with internal research and development or is it just too far out there to look there--

Michael Strianese

No. We – our Washington office is continually monitoring the progress on QDR and the signals that we are seeing and things like the speeches that you are reading about. And it’s quite clear to us anyway that the – should be to every body – that the direction here is not the structured for the near here apparatus if you will for insurgencies, asymmetrical warfare and what is viewed as being the future conflicts that we are going to have to handle. And that is clearly where we are looking in terms of where to invest in all of the above by acquisitions and research and development that’s some of our highest priority R&D product – projects are in that space. So, absolutely we are following that.

Chris Donaghey -- SunTrust Robinson Humphrey

Okay, great. Thanks.

Operator

Your next question comes from the line of Myles Walton from Oppenheimer and Company. Please proceed.

Myles Walton -- Oppenheimer & Co.

Thanks. Good morning. A couple of quick ones for you. I think in the second quarter there was some risk to be retired on the ISR platforms in C3ISR. Did that happen, was it a positive EAC in the quarter? And could you just comment on the sustainability of the performance you are driving there?

Ralph D’Ambrosio

Sure. Hi Myles. That was the P-3 Korea program and we said that we’d retire the risk in the second half of the year. Our estimates are holding on that program. There wasn’t any change up or down on it. So, doesn’t impact margin in the quarter.

Myles Walton -- Oppenheimer & Co.

So the C3ISR [ph] margin you saw was pretty clean and just based on the cost improvements you had--?

Ralph D’Ambrosio

Yes. It’s basically – it shows you what happens when you are in a product or a hardware business and the products are scalable and you have 25% increases in volume. It’s a beautiful thing for operating margins.

Myles Walton -- Oppenheimer & Co.

And – no, I agree. I am just wondering the – and you update the guidance for the year, but it would still imply a step down in the back half.

Ralph D’Ambrosio

Yes. We did 11.8% I think in the first half and the guidance on the high end is below that for the full year and I just – for now we are taking a cautious approach. Certainly, if we continue performing the way we are performing in that segment the margins will be better than our guidance in that segment--

Myles Walton -- Oppenheimer & Co.

Okay. Okay great. And then one other one was on JCA and you mentioned it kind of affecting the future and not really the current period, but where it’s affects kind of the plan to go from say $170 million this year to $230 million next year—

Ralph D’Ambrosio

The answer is Myles if the 38 aircraft buys is sustained, we will see it impact our revenue. Won't get to 2011. It won't impact 2010 sales. The last time I talked about this we said that we thought sales would be about $250 million or so next year and then to go to about $400 million in 2011--

Myles Walton -- Oppenheimer & Co.

Is that really mix?

Ralph D’Ambrosio

We will stay at about 250-260 in 2011. So, it impacts the revenue flow after 2010.

Myles Walton -- Oppenheimer & Co.

Got it. Okay. Thanks. That’s helpful.

Operator

Your next question comes from the line of Howard Rubel from Jefferies and Company. Please proceed.

Howard Rubel -- Jefferies & Co.

Thank you very much. Mike, your caution on margins in service, is that really reflect – is that reflected in your bookings as you are turning all the contracts today?

Michael Strianese

No. It was more of a forward-looking comment. This is the way we see this space going, Howard. There is a fairly – we are not getting into details, I am not going to go through every opportunity, but there is a fairly robust pipeline of programs that are coming up and we are recognizing that we have the – we are going to be opening the aperture and as everybody is in this space and bidding more programs, possibly as prime, possibly team. And one of the factors we are considering is we are going into spaces that could be new and people are going to be coming into to our space where we have the expertise. And I just sensing that we are going to have to get more aggressive in our cost structure and we are going to have to get more aggressive in the profits we are going to be bidding, the speed at we are going to be bidding in this space in order to maintain or grow our market share. It’s – so it’s not currently in programs now but it – we’ll know more by the second half or actually this first quarter as to really what the exact impact will look like. We have pretty good insight into where our numbers are now vis-à-vis the backlog. So--

Howard Rubel -- Jefferies & Co.

Well then I mean just to push back a little bit and the concern over sort of margins decline in service in the intermediate term is a little bit conservative.

Ralph D’Ambrosio

I wouldn’t characterize it as conservative. I think it’s about right.

Howard Rubel -- Jefferies & Co.

Alright. That’s fair. Just two more things. One is in the C³I world are you finding – I mean you do have – are you finding other opportunities to take some of your airborne capabilities and apply them to other ground or what I call correlation opportunities and that market seems very attractive?

Michael Strianese

Yes. I mean we continue to be very active in several areas there. And – we – there is a couple of bids that are outstanding that we are waiting to hear on, which are third quarter discussion points. So – it’s a space that has a lot of activity in it right now.

Howard Rubel -- Jefferies & Co.

And then last on Bradley, you talked about a change. I mean I am not sure I understood where that was coming from. I know future budgets sort of point to de-emphasizing Bradley, but aren’t the current run rates for repairing and upgrading that vehicle still at a very high tempo?

Michael Strianese

Well, yes, on the surface it certainly looks that way, but I believe that there is a – there was a reallocation done somewhere and they pulled money from our work and – which didn’t make a lot of sense to us because as we are bringing more people into Afghanistan you would expect the need for more Bradley’s but right now the plan is to use the striker, as I understand it, which I don’t think it’s the final we are going to be hearing about this, but right now $50 million was pulled out of the program.

Howard Rubel -- Jefferies & Co.

Okay.

Michael Strianese

So, I think it was more of a numbers game than a requirement of capabilities required in reset, so we’ll see where that ends up.

Howard Rubel -- Jefferies & Co.

So – alright that’s something sort of what you almost call that outside we can't see it and it’s just maybe somebody is playing budget – I don’t want to say that, but I mean there is an element of budgets that’s involved.

Michael Strianese

Yes. There was a nee somewhere else and money was being harvested where –

Howard Rubel -- Jefferies & Co.

Okay.

Michael Strianese

The funding in that program is pretty healthy. So—

Howard Rubel -- Jefferies & Co.

Yes.

Michael Strianese

So maybe some easy pickings for now and the money gets restored later on, but I am not sure.

Howard Rubel -- Jefferies & Co.

That’s fair. And I appreciate it. Thank you very much, Mike.

Michael Strianese

Okay.

Operator

Your next question comes from the line of Michael Lewis from BB&T Capital Markets. Please proceed.

Michael Lewis -- BB&T Capital Markets

Thanks for taking my question. Mike, I will be interested to hear your opinion about how the new OCI potential regulations related to OCI could impact L-3 or whether your internal assessment or some of the reviews you may have done already deem that this OCI issue is really actually a non-event to L-3. Could you just talk a little bit about that?

Michael Strianese

Sure. It’s an area that we watching a lot like the rest of this community that we operate, very, very carefully, because the effects could be very significant where a relatively minor involvement in a procurement office from any number of different disciplines, whether it’s technical or management or logistics related can effectively disqualify you from being able to bid hardware. The behavioral effects of it in the industry now has been to have – I am sure we have not only experienced it in L-3, but I have hard it from some of my colleagues in the industry, we are just not bidding work that the customers are actually asking for bids on. The cost of just the potential negative effect of having an OCI issue. So, industry is reacting, but to the detriment of our customers. This has bubbled up within the DoD to some of the new players in the Pentagon that we have had direct discussions with. It is understood that there are unattended consequences here and that the OCI perception was somewhat over blown. Now whether that gets bridged into legislative language is another story. But it is viewed as being an over reaction to a problem that doesn’t really exist in the sense that it is being viewed namely that you know a contractor isn’t helping on an acquisition source selection or a – new program and somehow is picking itself to do the work. I mean that while not unheard of is an extremely rare event in this industry. So, we are plugging – it is an attempt to plug a hole that really isn’t there. And again we’ve heard stories and we’ve heard from our own customers that you guys didn’t bid why not. Well it’s because we don’t even want to have the slightest risk of losing – I mean can you imagine for L-3 to somehow jeopardize our data link sales? I mean we just – would just not – we can't tolerate that kind of risk. So, it’s – we are going to act in the extreme as well. So I mean I am optimistic that good dialog has started with the new team at the DoD and that this will be addressed in a rational manner that’s constructive to both DoD and industry who really wants to work together with the DoD and solve the perception issue. There is an issue in fact that that would closed too.

Michael Lewis -- BB&T Capital Markets

That’s very interesting. And I think that once the customer does start to feel the impact of companies like yours not bidding opportunities they will start to realize that it’s not in their best interest. One more quick question and I will get out of the way. With regard to Fort Rucker, the Secretary of Defense Gates was out there. He was commenting that there is about $500 million in new spending that will be allocated to pilots and maintenance and services like that for helicopter systems. Are you seeing any types – any of these new monies possibly flowing into Rucker yet and is there an opportunity for you to gain some market share here?

Ralph D’Ambrosio

Well, one of the comments I made about our sales growth in the Aircraft Modernization & Maintenance segment it was that this program, which I call Fort Rucker, is growing, so we are seeing more aviators go through flight training there and the program is growing for us.

Michael Lewis -- BB&T Capital Markets

Great. Thank you.

Operator

At this time there are no further question. I would like to turn the call back over to Karen Tripp for closing remarks.

Karen Tripp

Thanks, Dan. Mr. Strianese will now present his concluding remarks.

Michael Strianese

So, on balance, it was a strong quarter for us. The execution continues to be very, very good with virtually no program problems of any substance that we are worried about. We expect the trends that we are seeing now through the half to continue and we are looking forward to achieving that one to one book-to-bill and look forward to continued growth through the second half and next year. And as always, we’ll update you as things become known and we look forward to talking again in the third quarter. So, thanks for joining us.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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