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Exelis (NYSE:XLS)

Q2 2013 Earnings Call

August 02, 2013 10:00 am ET

Executives

Katy Herr

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

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

Analysts

Howard A. Rubel - Jefferies LLC, Research Division

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

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

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

Karl Oehlschlaeger - RBC Capital Markets, LLC, Research Division

Gautam Khanna

Operator

Welcome to the Exelis Second 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 1:00 p.m. Eastern Standard Time. The dial-in number is (800) 585-8367 and enter pin 91966562. [Operator Instructions]

It is now my pleasure to turn the floor over to Ms. Katy Herr. Katy, you may begin.

Katy Herr

Thank you, and good morning, everyone. Thank you for joining us today on our second 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 second 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 this morning 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. Good morning, and thanks for joining us today. As you've seen in our press release this morning, we delivered our second quarter in line with our expectations, led by a particularly strong quarter of orders and a solid increase in funded backlog. Funded orders for the quarter were $1.4 billion, an increase of 14% compared to the second quarter of 2012. Our book-to-bill in the quarter was $1.1 billion, led by particularly strong performance in the C4ISR segment. I'll discuss a bit more about our orders backlog and new business pipeline in just a minute.

Revenue for the quarter of $1.3 billion was in line with our projections and represents a 6% quarter-over-quarter increase although a 9% decrease from the prior year. Operating income of $127 million translated to an operating margin up 10.2% for the quarter. Restructuring in the quarter accounted for just over 1 point on the margin.

As we discussed in our call last quarter, we anticipated about $10 million to $12 million in restructuring during the second quarter. We overachieved on that number a bit, coming in at $13 million, with about 75% of the charge in the C4ISR segment. We generated $90 million in free cash flow during the quarter and $8 million year-to-date. The year-over-year comparison benefits from lower pension contributions in the quarter compared to 2012 and improved collections.

Regarding the pension. In late May, we announced that all benefit accruals for the salaried retirement plan and excess pension plans will be frozen as of December 31, 2016. This proactive measure reduces our projected benefit obligation, provides our employees affected by the change of planning horizon and brings our retirement benefits in line with industry peers. The announcement triggered a remeasurement as of May 31, 2013, which contributed to an over 10% improvement in funded status of our pension plans.

Let's move to Slide 4. As mentioned previously, funded orders in the second quarter were very strong, a 14% increase over the second quarter of 2012 and a 26% quarter-over-quarter increase. The C4ISR segment led the way, with strong orders in airborne electronic warfare, including Lot 2 of the Integrated Electronic Countermeasures, or IDECM program, worth $125 million and expanded work with current customers in the aerostructures business, contributing to a roughly 10% sequential increase in funded backlog.

Also during the quarter, we were awarded 2 significant recompetes in the I&TS segment: the Operations, Maintenance and Defense of Army Communications in Southwest Asia and Central Asia contract, also known as OMDAC-SWACA, a 5-year $788 million award; and a 10-year, $435 million award supporting the Deep Space Network on behalf of NASA's Jet Propulsion Laboratory, which did not make it into our total backlog figures due to timing of contract finalization, as well as the previously mentioned IDECM program worth $125 million.

We're pleased with the momentum in orders and we're trying to keep our foot on the gas. As of early July, we had over $7.5 billion in proposals in evaluation, including over $600 million in proposals with international customers. Most of the international awards are expected in fourth quarter as the Foreign Military sales approval process has slowed a bit due to the sequester-related furloughs.

For the larger budget picture, we continue to see uncertainty and conservatism driving the federal contracting environment as the budget outlines for fiscal year 2014 and beyond are debated. In reality, not much has changed in the budget environment since our last call in the spring. We do anticipate a continuing resolution this fall commencing October 1. And as you know, the President's budget request does not include the $52 billion in sequestration budget reductions that went into effect this spring.

The Department of Defense has finalized its Strategic Choices Management Review, which will inform future priorities and funding. What we know today is this: All of our major programs were fully authorized in the working versions of the National Defense Authorization Act and the NASA Authorization Act. The majority of our defense programs have been well funded in the House and Senate Appropriations marks. For our FAA and NASA customers, ADS-B is fully funded at the FY '14 request level of $282 million and NOAH's weather satellite programs, including the Joint Polar Satellite System and the Geostationary Operational Environment Satellite R series programs are both funded and well supported, as is the James Webb Space Telescope.

In summary, we expect our program programs to be well supported, and we are working closely with our customers and they evaluate future funding scenarios.

Let's move to Slide 5. Our restructuring to rightsize the business continues. Year-to-date, we have incurred $62 million in restructuring expense. We continue to expect to see the benefit in these actions reflected in our profitability in the second half the year. However, we also see some opportunity to pull some additional restructuring into the C4ISR segment into the current fiscal year. As a result, we believe that our full year restructuring charge will be in the range of $70 million to $80 million.

We continue to restructure in certain ways in 2014. Our priorities in the coming year are to reduce our real estate footprint by another 10%, expand our common shared services model for transactional services, reduce discretionary expenses, invest in enterprise systems that will support greater visibility and efficiency in our business processes and focus our R&D funds in the strategic growth platforms, shown on the right side of the page, including critical networks, ISR and analytics, electronic warfare and composite aerostructures.

The President's FY '14 budget request affirms that the administration's priorities are in alignment with these priority platforms. We're not ready to project 2014 restructuring expenses today. However, I can say that I expect that the 2014 expense will be significantly less than our 2013 restructuring charge.

We continue to operate with a sense of mission and urgency as we reshape our business operations to maintain a competitive cost structure in this dynamic business environment and to enable these investments.

Before I turn the call over to Peter, I'd just like to highlight one more point from this morning's press release: the transition of the Exelis brand.

We are in the final steps of separating our corporate identity from that of our former parent company, ITT Corporation. Effective November 2013, which is the 2-year anniversary for us as a public company, we will remove ITT from the Exelis brand and refer to ourselves simply as Exelis. We are confident that there is strength in the Exelis brand, including the strength of our 19,000 dedicated employees, the strength of having delivered on our operations and financial commitments despite an uncertain economic environment and the strength of our conviction that our decisive actions today build a solid foundation for the future. We continue to believe that our mission-critical programs and technologies will be supported as we move into 2014, and our performance to date gives us confidence in reaffirming our 2013 guidance, with revenues towards the low end of our sales guidance of $5.0 billion to $5.1 billion. However, we expect profitability and cash flow to remain as projected, with EPS in the range 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, funded orders in the C4ISR segment were up 29% from the second quarter of 2012, reflecting a 1.3x book to bill. Much of this strength in the quarter was the result of solid airborne electronic warfare awards and new business awards in the composite aerostructures business. Revenue for the segment was down 16%, primarily due to lower sales of domestic night vision goggles, ground electronic warfare systems and commercial imagery payloads. Spare and repair work for SINCGARS radios and sales in geospatial intelligence systems somewhat offset the decline.

We expect C4ISR revenues to be down about 10% for both the third quarter and full year. This obviously implies the strong fourth quarter, which is supported by our existing backlog, and some key international orders that we expect to be booked in late third quarter or early fourth quarter.

Profitability in the quarter declined primarily due to lower volumes of legacy night vision and counter-IED jammer upgrades, as well as restructuring, which accounts about 200 basis points of the decline. We continue to expect that the second half of the year should see benefits of the restructuring incurred in the first half of the year. As a result, margins should improve sequentially through the last 2 quarters. For the full year, C4ISR margin should be between 10% and 11%.

Turning to the I&TS segment on Slide 7. Funded orders in the I&TS segment were up 2% compared to the second quarter of 2012 due to the OMDAC-SWACA recompete and strong orders in air traffic management. Year-over-year revenue was down 3% in the segment primarily due to lower revenue on Middle East programs in the Mission Systems division.

I&TS had an exceptionally profitable quarter. Operating income increased 45% over 2Q 2012 and operating margin was 11.9%, 400 basis points higher than the year ago quarter. Much of the strength was driven by net favorable contract adjustments and productivity improvements resulting from restructuring actions taken earlier in the year. Given the strong second quarter, we now expect full year I&TS segment margins to be around 9%.

Moving to Slide 8. Our solid orders in the first half of the year and positive trajectory and backlog allow us to reaffirm our full year outlook. We are pleased that the pension liability is moving in the right direction primarily due to freezing the salaried and excess retirement plans. In addition, these actions have reduced the full year pension expense by $14 million, which we expect to be mostly offset by additional restructuring we will take in the second half of the year. Full year, our pension expense is now expected to be the range of $80 million to $90 million.

As you know, our 2014 pension projections will be determined following the annual remeasurement of our plan as of the end of 2013. However, assuming no market dislocating events, I expect the FAS pension expense and liability to continue to decrease in 2014 and beyond. We still expect to contribute approximately $150 million in 2013, in line with the funding thresholds resulting from the MAP-21 legislation.

Looking ahead, we expect 2014 contributions to between $200 million and $250 million as the 24-month rolling ERISA segment rates and 25-year corridors on the MAP-21 converge. For the full year, we continue to anticipate a tax rate of about 36% to 37% and average share count between 190 million and 191 million shares.

And with, we'll turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies LLC, Research Division

To start, could you address some of the productivity -- the sustainability of the productivity improvements in the Services business, Dave?

David F. Melcher

Sure. I'd be happy to comment on that. I think everybody noticed that the margins on our Services segment were a little bit higher than normal. As Peter indicated, we expected that's going to get back to what routinely has been a more normalized margin for that segment towards the latter part of the year, in the high single digits.

Peter J. Milligan

And I think, just to add a little bit more color to that, Howard. If you think about second quarter, we had $39 million of EAC adjustments. $30 million of those were in the I&TS side. That's -- the total run rate was not sort of a typical number that we've seen, but it sort of flipped, right? Usually I've have seen a higher amount in the product side or C4ISR side, where there's more fixed-price contracts. But this quarter, we saw sort of the opposite. And we do have, by the way, a couple of important fixed-price contracts within I&TS, so we are seeing some margin adjustments there. The other thing to note, though, as you look at the rest of the year, we're sort of expecting, like I mentioned, about 9% for the full year. That is obviously better than what we thought originally. And as you go into next year, it starts to come down a little bit. We're probably -- it's still too early to get specific, but we've talked about sort of longer-term margins with that current mix shift in that business at around 6% to 8%. We'll sort of trend back, I think, to those levels. Another thing also to remember is as the revenue has been under pressure and as it continues to be under pressure on that side, most of the revenue changes are coming in the lower-margin businesses within that segment. As one of the slides I've mentioned, the reduction in revenue in the second quarter was largely driven by the Mid East programs, and that's where you find some of the lower-margin programs within the company.

Howard A. Rubel - Jefferies LLC, Research Division

And then just to follow up on that. It would seem to me that though with all of the positive items that you've had, we could have seen a little bit of a tightening of the guidance range at a minimum, and the pension is clearly a modest positive. Or is it going to be the restructuring that's going to sort of keep you where you are?

Peter J. Milligan

Yes, certainly the restructuring is a big piece of it. I think we went into the year with a pretty aggressive restructuring target. I think we sort of -- we were looking for opportunities, obviously, to make the best economic decision, and in some cases, if accelerating that expense made sense, we would look to do it. In this case, by having a lower pension expense, we were able to sort of take the benefit, if you will, of the large part of that and sort of accelerate some of the restructuring actions, which I think is sort of the right move.

Operator

Your next question comes from the line of Bill Loomis with Stifel.

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

Just on the C4ISR. So you talked about the third quarter down about 10%, and you're down 10%. Strong fourth quarter. But just running some numbers roughly, it looks like an almost $100 million sequential improvement from third to fourth. How firm are those orders? I mean, any chance of slippage, particularly on the international side?

Peter J. Milligan

Yes, sure. So Bill, let me give you a couple of thoughts on that. There's certainly a little bit of risk there, there's no doubt. We do have to see a so much stronger fourth quarter. At a high level, if you think about the second half of last year, we're sort of predicting the second half of 2013 in C4ISR to be about the same with respect to revenue. In fact we're expecting -- we're sort of -- I think the guidance sort of implies slightly lower margins than what we saw last year. So I think from that perspective, I think it's achievable. When you think about the run rate in orders, as Dave had highlighted, I think that also helps support that. But there are some -- clearly are some programs that are yet to be booked. As I mentioned earlier, we do have some late 3Q and early 4Q, what we're scheduling now or what we believe now be taking place in that time. That's sort of have to come in to get to that total the number. So there is some risk there, but we feel at this point that we are confident enough to give you those numbers that we shared this morning.

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

And then just looking at your order book and the proposals out and so forth. As we go into '14, I know you're not giving guidance for that. But how far -- of the current book of business and the proposals, how much confidence you have in the momentum in the fourth quarter kind of continuing into next year?

David F. Melcher

It's Dave. We really have tried to work on building the front end for the business and making sure that we're going after every opportunity that reasonably is available to us. And so the objective, clearly, is to try and maintain that momentum and to continue to build backlog in the business. And one of the things that I'm happy with is the amount of things that we're putting into consideration and then ultimately bidding. And so I think that the trend you're seeing hopefully is indicative of renewed and increased emphasis on the front end.

Peter J. Milligan

And the other thing, Bill, on a high level, is for us to be able to meet our target, which was a book-to-bill ratio this year of 1, we sort of need to see second half of the year orders about the same as the first half, so there's really no acceleration at all that we're predicting from current trends.

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

And just one final quick one. You talked about more international opportunities so forth. This is -- are you seeing customer buying accelerate or is this Exelis making changes in business development here?

David F. Melcher

I'd just think the opportunities are there. For us, I mean, it's in communications, it's in night vision, it's in space payloads, it's in some potential networking kinds of capability. So we're just trying to explore and exploit all the opportunities that are there. And the trend internationally is slightly positive as opposed to the U.S. domestic trend, which is why you see a lot of emphasis on it from us and others.

Peter J. Milligan

And the other thing, Bill, is if you think about the second quarter, where obviously the orders were very strong and we're extraordinarily pleased with them, it really wasn't on the backlog international, though. I mean, international orders in the second quarter were down pretty significantly, which obviously means that you had very strong domestic orders. First half the year, though, and again, it's sort of always the lumpiness of this, our international orders are up over 50%. So obviously, it's always tricky to predict some of these things and they come in, in large blocks. But so far I think sort of our best view of all the trends definitely gives us comfort with outlook.

Operator

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

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

I'm just trying to get more -- a deeper understanding of I&TS in the margins because I would think that most of your overseas work in I&TS, the stuff that maybe will steadily go away, will be cost-plus type work, and that some of the domestic programs maybe are fixed-price. And as such, with the cost takeout, I would think you'd have maybe some margin tailwind in IT&S kind of going for rows and headwinds. Am I wrong? Are the fixed-price programs more so overseas stuff?

Peter J. Milligan

No, not necessarily. I just think that you have -- in some cases, you know you have some adjustments on programs, and those adjustments don't -- you obviously can't account on them to recur. So I think that's probably the way to look at it. I mean, clearly we're going to see a second half the year that's -- well, the full year that's better. That's better than we originally thought. And there is a mix of both sides. So that has the factor in as well. But there's a couple of ways, obviously, to do better on some of these programs, even on the cost-plus side. If you performed exceptionally well, then you can -- in some cases, you'll have the change in your fee estimate, and we saw a little bit of that. So obviously, it matters. Cost matters as we continued to say, of course, and the performance obviously matters. And both of those things put you in a competitive position that you need to be in.

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

But what's the scenario -- I'm sorry. What's the scenario that gets you down to like a 6% margin as opposed to staying up towards the 8%?

Peter J. Milligan

Yes, that's 2014. 6% to 8% is a sort of a wide reach at this point, that is true. What that probably means is -- we're reading on a lot of different things. Depending on where this next number of quarters go, there's a couple of contracts, and I'm not -- I don't want to get specific on them, but there's a couple of contracts that can dilute that margin, accretive to operating income, so we like it, obviously the helping the top line. And then there's others that could be more supportive of the current margins we have and, obviously, overlying the entire field, of course, there's the sequester. So we always think we have to be thinking about what that does. The profitability competition, obviously, is not getting any easier.

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

Okay. So it's not your current backlog that could potentially get you to 6%. It would be incremental orders?

Peter J. Milligan

Yes, and the backlog in this business as you know, is significant on the unfunded side. But it churns quickly, so there's always new things that come in. And the Services business is generally more short cycle as well, so there's sometimes a quick change there.

Operator

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

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

Dave, just to start. On NextGen jammer and the EW franchise, I was just wondering if you could put into context. The franchise today, any parameters you could put on, on how big it is? And then really, obviously, most importantly, what your strategy is from here, what are you going to do with that part of the business?

David F. Melcher

Thanks for the question. With respect to the NextGen jammer, in particular, as you know, that program is currently under protest, so there isn't a whole lot that we can say specific to that program. But I'd like to express confidence in the quality and the marketability of the technologies that we have in Electronic Systems. Certainly, the exciter technology that we have for the Navy and our other customers is desired and needed. And in the electronic attack area, we continue to support the Navy's upgrades of ALQ-99, as we have for many years, and these systems are going to remain in the Navy inventory for at least the next 15 years to remain relevant against the threats. There's going to be other competitions in this arena as well that we intend to participate in. In the realm of electronic protection, we have a lot of critical placements on enduring platforms such as the F-18, F-16 and the B-1. We recently received the second full rate production award, as I mentioned, for the IDECM program, which was about $125 million. And we support international F-16 work via our ADS program in places like Poland, Oman, Chile, Pakistan and so forth. And so there's a lot of opportunities that we believe are still out there. And then related, we are taking on programs like the Australia ANZAC frigate award for $102 million, and we're on the Austal variant of the Navy's LCS program. So this is still a very solid franchise. We're a key provider of subcomponents to a lot of the larger prime efforts, and we intend to continue to invest in and support and hopefully grow that franchise.

Peter J. Milligan

And at a high-level, Joe, if you think about within our C4ISR segment, Electronic Systems is where you find the electronic warfare business, of course. And that total division is sort of in that $950 million range, give or take, and the majority of that is EW work.

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

Okay, that's helpful. And then just on the -- back to the I&TS margins and the cum adjustments. It will be helpful if you could maybe, I guess, help us with where exactly the fixed-price work is in that business? I mean, what are the contracts? I believe most of it is cost-plus, so what specifically are the fixed-price contracts in that division? And what's -- when we look out to the rest of the year, I hear you on margins not recurring as high, but often when you get a bunch of positive adjustments as contracts reach near completion, often there's a 1 or 2 quarter tail to that. So what are the opportunities there to keep this up going to the back half?

David F. Melcher

Sure. I mean, it's obviously our objective, no doubt. I would love to surprise on the upside, second half of the year, of course, and as we move into the next couple of years. But if I look at the trends over the past few years and I look at, to your point, the competitive landscape, the current backlog, what we're bidding on, that's sort of why I think we're sort of in that maybe 6% is a little low, but 7% or 8% range as we move out next year or so. As far as the fixed-price piece, there's a lot of contracts in those divisions, obviously. We don't usually get too specific on it for a lot of different reasons. But you can think about some of the air traffic management work we do, I think, as one important part of the fixed-price work, so that's one piece that is important.

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

Okay. And just finally a couple quick ones on the pension. So after remeasurement, is the deficit $1.7 billion. And how much of that now, since presumably the freezing of the plan impacted more or almost all, I would imagine, defense, your piece, as opposed to the other legacy ITT. So how much of that $1.7 billion would you characterize as Exelis or defense versus other legacy ITT companies or commercial? And then you already characterized the FAS impact. How does this impact CAS?

Peter J. Milligan

Sure, so high-level, make sure I got all of them. There's about $300 million decline, as you mentioned. That's driven the couple of different things. First is sort of the normal process throughout the year. And you would expect, even without the remeasurement, that the pension should be getting better over time, and that's obviously why we're funding it, and the requirements drive you to 100%. So there's going to be some of that that's probably 1/3 of it. Another 1/3 is specifically the freezing of the plan, give or take, and that's lowers the liability with respect to the active service component. And so when you think about that piece, that's exclusively defense. And then the other piece is the interest rate. Now the interest rate is across the entire portfolio, and that's why -- the entire liability, so that's why that interest rate benefit that we've seen as the remeasurement took place, really impacted both pieces. So not a dramatic change in the level of the total liability, if you will, that you could say is specifically attributable to defense, probably in that 55%, 60% range, in that range. As far as I think your last question, Joe, was on the expense for what period, I'm sorry?

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

Well, just CAS. How was CAS impacted by what you've done?

Peter J. Milligan

Yes, at this point, CAS doesn't change dramatically. There'd probably be a slight decline in CAS over the next number of years but not -- I don't think it -- we have to still do a lot of work on it, but I don't think it's too meaningful.

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

Okay. Peter, just to make sure I understood your answer to the prior question. So you think roughly 60% of the deficit right now is defense and 40% commercial?

Peter J. Milligan

Yes, in that range, Joe. Yes.

Operator

Your next question comes from the line of Karl Oehlschlaeger with RBC Capital Markets.

Karl Oehlschlaeger - RBC Capital Markets, LLC, Research Division

You mentioned -- you talked about investment in R&D into next year. And maybe you could talk a little bit more about how you think about R&D spending from a strategy perspective and how we should think about that level changing into next year?

David F. Melcher

We've continually tried to maintain a decent level of research and development spending, particularly on the product side of the business. And so you're going to see the focus for most of the IRAD in the company on what we have termed strategic growth platforms that you saw outlined in the briefing, certainly, in electronic warfare and critical networks and in our ISR and sensor business. We were making a lot of capital expenditures over the last couple of years in the aerostructure composites business and in support of the ADS-B network construction, so that's where the predominant of the CapEx was. But that's where the IRAD is going to reside, and we think that the rate at which we're investing and intend to invest is going to be very comparable to the rest of the industry. And that's one of the reasons we've been doing some of these programs for cost reduction and restructuring internally so that we could reinvest more into the business.

Karl Oehlschlaeger - RBC Capital Markets, LLC, Research Division

So going into next year, like how should I think about the change in R&D?

Peter J. Milligan

Well, I think at this point, it's obviously a little early. Our hope would be to be able to see investment dollars going up next year.

Operator

Your next question comes from the Gautham Khanna with Cowen and Company.

Gautam Khanna

Forgive me if you already answered this. I joined late. But can you update us on some of the composite bids you're working on and the timing and perhaps the potential size of those? And also if you could update us on the upcoming radio competitions in terms of timing and how you think you stand MNVR and kind of HMS production contracts?

David F. Melcher

First of all, on the composite side of the business we've certainly been trying to expand the work that we have with Lockheed and Sikorsky,, and we've found some good opportunities to do that. And, of course, you know that, that is a mix of both the military work, as well as commercial work that we do for commercial airliners, a little bit for the oil and gas industry and so forth. And so we expanded that facility with an intent to try and get some other commercial work, and there really is a focus there from some of the big aircraft manufacturers in line with the trends for more air travel and more need for that capability going forward. With respect to the radio programs, as you know, that whole picture has been in a little bit of flux over the course of the last couple of years. But we do expect some competitions coming up in which we'll participate, including the SRW Appliqué bid, which will be coming out this year. We're partnered with Northrop on the MNVR Vehicular Radio program. We have a very good ground-based mobile network for SATCOM, as well as other handheld SATCOM capabilities. And so we'll be trying to bring that in addition to upgrades to the SINGCARS installed base, because if you consider what's happening now with the overall budget picture, maintaining that fleet of some 0.5 million radios for the next 20 to 30 years is going to require upgrades, sustainment and maintenance, so we intend to participate in that as well. So we continue to have our hands in what we think are all the key competitions.

Peter J. Milligan

And just a quick, I can, got them on the composites, just to add -- I will add a tiny bit to what Dave said. So we have a bunch of proposals out, no doubt. And when you get on some of these jobs, they can last for many, many years. So the contract numbers may be very significant. We hope them to be. The year-over-year impact is going to be measurable, and we do expect to see solid growth here, there's no doubt. But again, we feel and we think about the thesis behind that business, as we're taking our defense sort of heritage and expanding that in a highly engineered environment. And if you think about the second quarter, we saw very strong awards within aerostructures on that defense side. We had rotor blades with Sikorsky, CH-53 with Sikorsky and couple of other things with Lockheed. So we certainly believe at this point still that the investment thesis is the right one.

Gautam Khanna

Can you elaborate on the timing of MNVR and the HMS production rebid and then can you also kind of help us with the specifics on kind of what in the commercial area you're actually bidding on in the composite space and when we might hear about those wins?

David F. Melcher

With respect to the radio picture, I think we're expecting some of these things to come out between now and the September timeframe, although there have been some delays in that, as you know, and so it's really dependent upon our customers deciding when they want to take out these proposals. And on the composite side, I really don't want to get into any particular contracts that we're bidding, but these are various structural components. They'd go on commercial airliners that are being manufactured or will be manufactured in the future. And so we're trying to get our foot in the door to expand some capabilities that would match up with the tooling that we put into the factory.

Operator

[Operator Instructions] Your next question comes from the line of Pete Skibitski with Drexel Hamilton.

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

A couple of follow-ups on I&TS. The large K-BOSSS award last night, I imagine that will give you some comfort, that kind of heading into 2014 you won't see kind of any meaningful headwind from K-BOSSS?

David F. Melcher

That was actually a $67 million extension to a contract that I think had a value of about $463 million, if I remember the number correctly. And so that's a contract that we're performing very well on. We continue to get extensions on it. When it recompetes, we expect to recompete favorably in it. And so we don't see any particular headwind there.

Peter J. Milligan

And I think to your point, Pete, any contract, incrementally funded or otherwise, that we see coming through gives us comfort, so there's no doubt about, and we will take everyone.

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

Okay. And then on ADS-B, you mentioned the budgeted amount this year. I think your revenue run rate has been well below the budgeted amount. Should I conclude that there's still some tailwind for you guys in ADS-B?

David F. Melcher

There are a lot of components, I think, that go into the aggregate funding line. But for our part, we've seen expansion of the revenues year-on-year for the ADS-B program, and it's been a good program for us. So yes, we're trying to -- we're trying to introduce other things that make that network more efficient, more capable, and we're working with our customers to do that. So I'd expect to see growth there.

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

Okay, okay. And last one, just to tie up pension, Peter, it sounds like, again, using today's kind of assumptions, that the income statement impact will steadily get better for you in terms of pension. Are you -- kind of as you look out your crystal ball, 3 to 5 years -- maybe 3 years in the future, do you think the cash needed for the pension will stay roughly stable in that range you mentioned -- I think $200 million to $250 million?

Peter J. Milligan

Sure. A couple of thoughts. The first thing is just to give a quick update on sort of -- look at the last couple of days, right? I mean, yesterday was sort of an interesting day, where assets went up at the same time the bond yields increased. That day, that's a grand slam for us, no doubt, for the pension. So we'll take more days like that, although I can't -- I don't know how many we can count on. If you were to just mark the pension, again, at the end of the year, obviously, a thousand variables, but you are looking at interest rates that were probably 50 basis points higher than they were when we marked them at the end of May. So just in a short 2 months and 50 basis points on the pensions is another, call it, $300 million on the liability. So that's all good news for us, there's no doubt. But the thing -- from a cash perspective, we have very complicated, and we'll certainly spend as much time as you want on it at some point, but the funding rules are driven by the ERISA requirements which are sort of enhanced. They're overlaid by MAP-21. So as a result of that, some of these dramatic changes to the good on the FAS side don't specifically or directly relate in the short term to the cash piece. That said, we're probably have in that range next year $200 million to $250 million. It maybe goes up a little bit in '15, probably hovers around that. But at some point, if all the models that we have hold out, and we have a lot of them, we're not making very aggressive projections for interest rates or asset returns. There's a point at which we're looking at probably 5 years out or so. That's just over. It's done, fully funded, and it's behind us. So this is by no means a $200 million to $250 million for the lifetime payment that you're going to see every year. There is absolutely an end to it.

Operator

Our final question comes from the line of Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies LLC, Research Division

I want to go back to a couple of cash questions. One, Peter, is, I think your unbilled receivables remain elevated. Could you address what you're doing there to improve collections?

Peter J. Milligan

Sure. High level, Howard, we had a couple of big items that was sort we were tracking throughout 2012 on a couple of specific contracts, all of which were collected at the end of last year. You saw sort of us sort of outperform, I guess, in some ways, our projections on cash. The unbilled moves around, right? There's no doubt. I mean, from an accounting perspective, that's cost that you've incurred but you haven't had a chance to bill it yet because the requirements under the contracts allow you to bill over a certain period of time but the accounting rules tell you to record the revenue. So those unbilled receivables are not receivables that the government is sitting on yet, so it's nothing that you can do specifically from a collections standpoint. It's just the nature of the contract. Now in most cases, the contracting terms aren't changing that much. So while you'd like to see reductions in working capital, at this point, we're probably in that low, very low double-digit range. I don't think our cash flow forecast is really requiring us to have a major change in that regard. Maybe it's sort of stays in that area. But the key thing, obviously, is that there's -- to remember, and I know everybody knows, in this space there's no credit risk, that's important. And as you look at our balance sheet right now, you can see that there's no borrowings on the commercial paper line and we're sitting on a nice cash balance. So cash flow for this year, we're staying in the same range that we were in, which is over $225 million before dividends, and we feel pretty confident in that.

Howard A. Rubel - Jefferies LLC, Research Division

Well, I mean, there's this odd mismatch. I mean, payables were down and receivables for the 6 months are up. I mean, as you go through and renew some of these contracts, or how opportunities to address them, I mean, is there a better way to match milestones with, if nothing else, your payables?

Peter J. Milligan

Sure. I mean, there's always a better way, and that's what we have to strive for, there's no doubt. And again, this is one of those things where we probably have to do a deeper analysis to share with you on what really took place in the quarter, I don't have all the moving parts in my mind at this point. I don't know, obviously. The trends that you mentioned, of course, are there. But there's nothing in any of those numbers that is sort of a concern. I don't see a spike in working capital. It's going to remain. I don't see a problem with the contract that's causing it. I just think it's sort of the flow, and in this quarter that flow shows you slightly increased inventory, slightly increased or increased receivables and decreased payables. So it all hit in the same quarter, but I don't expect that to continue.

Howard A. Rubel - Jefferies LLC, Research Division

And then you only bought back a little under $5 million worth of the stocks so far under a $100 million program. Could you sort of address or touch upon how you're thinking about further execution of that?

Peter J. Milligan

Sure. I mean, the goal is relatively straightforward in that we're trying to keep option dilution sort of to a minimum. Obviously, the stock has gone up. It's driven a little bit more of our folks leveraging that. And you certainly can't blame them. But from where we sit, where we will be expecting to buy some more back in the second half. Whether we will get that completely offset that dilution impact this year, probably unlikely. As you've heard me say at the end, our share count has leaked up a little bit. And there's just a lot of tactical reasons behind when and how you go about buying back shares. But we do expect to be able to buy some back in the second half. But we will see, as I mentioned, maybe a 1% or so, maybe a little less increase in share count this year.

Howard A. Rubel - Jefferies LLC, Research Division

And then I hate to go back to the restructuring, but I want to go back one more time. And I do want to understand that part of it is done to accommodate the lower business volumes that you have. Some of it is to make you more competitive. But then the third element should be to improve profitability. How would you sort of assign those buckets as you look out?

Peter J. Milligan

Probably roughly in the way that you mentioned them. I mean, clearly, we would love for it to all be able to get to the bottom line. It certainly won't. You have to -- you reprice every time you renegotiate a contract. Obviously, your new price points are used. If there's a still source position, obviously, the government is going to get the benefit of that, and that's okay. So the bottom line impact of our restructuring next year, we're probably looking at the $20 million range or so, maybe. But the other thing to remember also is since there are no exclusions in our numbers -- our numbers are GAAP numbers, we had an exclusion last year for a separation cost, but that's behind us, of course -- you'll see a lower pension expense, I mean, lower restructuring expense as we go into next year, just the actual expense itself. So there's a couple of tailwinds that should help us next year.

Operator

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

David F. Melcher

Well, I just the want to thank everybody for participating with us this morning. Great questions, as always. And Peter and I look forward to seeing many of you in the coming weeks and months as we get around the various investor and analyst conferences that are coming up. So thanks, again and have a great day.

Operator

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

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