Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

L-3 Communications Holdings (NYSE:LLL)

Q4 2010 Earnings Call

January 27, 2011 11:00 am ET

Executives

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

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

Eric Boyriven - Investor Relations

Analysts

Robert Stallard - RBC Capital Markets, LLC

Roger Johnston - Edison Investment Research Limited

Cai Von Rumohr - Cowen and Company, LLC

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

Michael Lewis - Lazard Capital Markets LLC

George Shapiro - Citi

Ronald Epstein - BofA Merrill Lynch

Brian Ruttenbur - Morgan Keegan & Company, Inc.

Robert Spingarn - Crédit Suisse AG

Noah Poponak - Goldman Sachs Group Inc.

Myles Walton - Deutsche Bank AG

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Operator

Good day, ladies and gentlemen. Welcome to the Fourth Quarter 2010 L-3 Communications Inc. Earnings Conference Call. My name is Laticia, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Mr. Eric Boyriven of FD. Please proceed, sir.

Eric Boyriven

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

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

With these formalities out of the way, I'd like to turn the call over to Michael Strianese. Mike, please go ahead.

Michael Strianese

Thanks, Eric, and good morning, everyone. I know today's a really busy day with earnings, so thanks for listening to our call. Overall, 2010 was a good year for L-3 as we faced a lot of significant industry changes. Our business strategy is in series with the current environment, and we remain poised for success going forward. We continued several important internal initiatives to increase efficiency and streamline our operations. We've also put a lot of attention on developing L-3's collaborative culture, and now the company is broadly recognized as a full service solutions provider. I'd like to thank all of our employees for their work in 2010. There were a lot of achievements that wouldn't have been made possible without their dedication to performance and their commitment to our customers.

Here's a summary of our fourth quarter and year end results. Our earnings per share for the fourth quarter were $2.37. That's up 23% compared to 2009's fourth quarter and $8.25 for the year, which represented an 8% increase. Operating margins and cash flow remained strong. Sales were $4.3 billion, led by 13% growth on our C3ISR segment, and a 2% increase in Electronic Systems, which offset declines in Aircraft Modernization and Maintenance and Government Services.

Orders grew 4% to $4.4 billion versus the 2009 fourth quarter, resulting in a book-to-bill ratio of 1.04 for the quarter and 1.0 for the year. Our funded backlog was $11.4 billion at year end, and let me reiterate, that was funded backlog, all funded. Most, if not all, of our year end numbers are sales at $16.7 billion, orders at $15.7 billion. Orders were up 6% over last year, notwithstanding the environment, but the point is these numbers all represent yet another record year of growth for L-3, albeit, as you know, at a slower rate.

Cash flow continued to be outstanding in the fourth quarter. We exceeded our guidance for the year by $30 million, and that was after contributing an additional $50 million to our pension plan, generating a total of $1.29 billion in free cash flow for the year. Our strategy for deploying this cash has always been to take a balanced and opportunistic approach, both investing in our growth prospects and returning value to shareholders, and that continued in the fourth quarter. As you may recall from our Analyst Day, our belief that given current market conditions and valuations, our M&A strategy was focused on smaller targets that enhance our capabilities and portfolio, and that were at compelling valuations.

We completed four transactions in 2010 that we believe are excellent examples of this strategy, and each was a negotiated non-auction transaction, which L-3 paid reasonable price, all at hold, for the four companies, we spent $753 million in 2010. The last acquisition in the fourth quarter was FUNA International, which is a German company that's a leading supplier of control and safety systems, communication systems and entertainment solutions for cruise ships, ferries and mega yachts, expanding our capability to service this market from our Electronic Systems segment. FUNA is expected to generate approximately $60 million of sales in 2011, and that's before revenue synergies, which was the fundamental driver for this transaction. It was the goal to bring existing L-3 marine products to FUNA customers, as well as bringing FUNA systems into L-3's customer base, and we see very good revenue synergies going both ways on that acquisition.

As we evaluate companies in the coming year, our criteria for transactions won't change. As always, there are a number of targets that we are currently evaluating. We will continue to do so. Of course, should the right opportunity come up for a larger strategic purchase, we have the dry powder to pursue that as well. We'll continue to focus on portfolio-shaping, and expect to divest non-core businesses, and we continue to drive growth and operating efficiencies across the company.

Our strategy has always been to use our cash flow to deliver shareholder value. We achieved this through acquisition activities, stock repurchases and dividends. Our total dividends paid in 2010 were $184 million, marking our sixth consecutive yearly increase. We also repurchased 365 million of stock in the fourth quarter, bringing our total 2010 repurchases to 834 million. Given our current valuation, our confidence in our business and the M&A environment, repurchasing shares remains a very compelling use of our cash going forward. Our 2011 guidance assumes $0.5 billion of share repurchases, and as we did in 2010, we'll likely to buy back more than that.

In terms of some significant awards, there was a lot of activity in the fourth quarter. Again, the orders were $4.4 billion, so it was a long list, I'll just punch down some highlights for now. One, the C-17 TSS [training system sustainment] contract, which is our first significant program win in the wide body aircraft simulation market; the tactical unmanned area vehicle, additional funding for the TUAV; communication systems and EO/IR sensors for EMARSS, we also were a team member for that program, as well as a prime where we did not win but again, we still have our systems included, which shows the strength of our positioning; five additional Liberty aircraft expanding the fleet to 42; two army small ISR aircraft; IEDs of the pre-EMARSS aircraft that we'll put on the contract; flexible areas of balanced technology for Fast; and aerostat-based perimeter surveillance system for Bahrain; various WESCAM EO/IR sensors and target orders including the U.S. Army, Iraq, FMS program, the UK MoD, and that's for the links M9A and C3X, as well as an order from the Republic of Malta for humanitarian purposes; enhanced combat optical site heavy or ECOSH for use on crew-served weapons; MRCDL, the latest in our advanced data link technology, which enables realtime video sharing in theater; an interior modification job for Brunei for a 747 airplane; and follow-on orders continued strong as well, especially for Liberty logistics work, our EO/IR turrets; our ROVER 6 kits, Predator and Warrior UAV com systems; our ProVision systems started to get international, interest with orders for 15 machines in Canada, and 10 in Mexico; traveling wave tubes for the Commercial Space business; coms-on-the move [communications-on-the-move] products; and commercial aviation TDNs [tactical data network], that is for Delta and Virgin Airlines.

So all in all, it was a very active fourth quarter, some catching up actually on the order side. On the larger programs, JCA, 2011 orders will be somewhere between six or eight aircraft depending on funding and timing, which is still pending because of the continuing resolution authorization in Congress. We delivered four JCAs in 2010. We expect to deliver an additional seven in 2011. And there's still significant FMS opportunities. Again, we don't see any in '12, but they're in the '13 to '15 timeframe.

Project Liberty. All Liberty Phase 2 aircraft, those are aircraft 9 through 37, were delivered well ahead of schedule. Liberty aircraft have flown over 13,000 sorties, and accumulated over 55,000 hours of flight time. As a testament to our exceptional performance on the program, we achieved a 99-plus percent of CONUS mission availability rate. So this program and platform are performing very, very well. Aircraft number 38 through 42 are on the contract, and they're currently undergoing modification on-site in our facilities as we speak.

We continue to be recognized for our performance on Liberty, as we have received the second Collier Trophy nomination. As you know, this program won the 2010 Aviation Week Laureate Award. The UK Air Seeker, that's the UK Rivet Joint program, with the Nimrod replacement, if you like. It's a significant program for L-3. It's worth about $800 million over the next seven-ish years. It consists of three U.S. Air Force RC-135s to replace the UKNimrod ISR platform. The first KC-135 aircraft arrived in our Greenville facility mid-December, and we have begun modifications on it.

In addition, training efforts began this month. British aircrew personnel are undergoing training on Rivet Joint aircraft in Nebraska. This represents a new level of collaboration between the U.K. and the U.S. and an unprecedented SIGINT/airborne intelligence gathering program between our two countries.

ProVision and DAF imaging technologies, very active in the press on all these privacy issues and the like. We have completed deliveries of the ProVision to the TSA under our spring 2010 order, and this imaging equipment is now deployed in 40 airports in the U.S. Overall, our systems are performing well, and we have received favorable feedback from travelers who appreciate the speed, safety and efficiency of the system.

Advanced target recognition, automation, if you will, is the next step for advanced image technology development. It will replace the current scans with software-driven program that enables image-free automated review and detection of concealed threat items. We're currently undergoing a test and evaluation process with the TSA, and expect the new technology will be certified for use this year 2011.

The ProVision, with its auto-detect feature, has also been successfully demonstrated internationally, and has been operationally deployed for over a year at Schiphol International Airport in Amsterdam. The TSA ATR initiative will eliminate the privacy concern for travelers, since the image generated by the ProVision equipment is no longer an individual silhouette but a generic mannequin. This has the potential to reduce personnel requirements at airports. We expect to have the ProVision ATD approved, and used for technology trials in U.S. airports by this winter. We continue to believe this represents the next space and technology development with the TSA, and we expect future ProVision orders to include our ATD software. In addition, all the ProVision units in our install base can be easily upgraded to provide automatic detection, so there's an install base to be upgraded as well as new equipment.

As you know, there are a few new DoD starts. However, we continue to have new business opportunities in 2011 notwithstanding. They include a number of Liberty-like small aircraft opportunities for international customers, essentially small aircraft ISR, a few significant classified IT intelligence support programs, NASA-integrated communication services, enterprise-wide communication services management and operations, including network, voice, video, data and collaborative services. We expect the award early in the second quarter this year. Afghan technical equipment maintenance program or ATEMP to provide vehicle and equipment maintenance training to support the transition of the Afghan National Security Forces to a self-sustained operation, L-3 won this program earlier this month, U.S. Marine core logistic command support services; and a long list of others. Those are some of the highlights. As always, the timing of these awards could be impacted by protest or procurement delays, continuing resolution issues, so the numbers move around a little, but we will continue to update you on any additional developments.

I wanted to take a minute or two just to discuss the DoD budget and spending priorities. The fiscal '11 budget is under continuing resolution until til 4 with a possible extension until April. Once final, regular DoD appropriations bill passes, which we expect will be in the second quarter of 2011, the DoD will be back to focusing on the execution of its mission. On January 6, Secretary Gates announced a $553 billion budget for fiscal year '12, along with a five-year spending plan that will cut the number of troops, cancel additional programs and move some of the money saved from those measures to current and new weapon systems. He has proposed plan estimates that those reductions with other cost-cutting measures by the Pentagon and the military services will yield savings of $178 billion over a five-year period, of which $100 billion will be reapplied elsewhere in the military or re-programmed for modernization and recapitalization. So I think we can all agree that what is being proposed is not quite as bad as what some were thinking. But having said that, there are a few points I'd like to reiterate about the budget and our positioning within it.

The majority of these program cuts were big-ticket platforms. We continue to be well positioned on the surviving programs, which were not affected by reductions. The reinvestment and repositioning of the $100 billion in cost savings will likely focus on areas where L-3 provides critical technologies and solutions such as C3ISR, Intel support and counterterrorism initiatives, as well as logistics and upgrade work, possibly providing us with opportunities, and likely providing us with opportunities for additional contract wins.

For example, we expect new opportunities to maintain existing platforms as budget constraints delay the replacement cycle and drive the large-scale repair, reset and modernization of current equipment that we need to meet the requirements. An example what would be back on January 6 when Secretary Gates spoke, he talked about the cancellation of the EFP program in favor of upgrades at Bradley and Abrams. As you know, we have a significant position on Bradley upgrades, and that is kind of where we see things moving away from new perhaps, and refurbishing some of the old and doing technology insertions, which works nicely for us as those new programs.

As expected, the reduction in the overseas contingency operation matches the drawdown in Iraq and Afghanistan. However, no specific plan was announced regarding the reset of these resources. The timing is unclear, but there will be opportunities for L-3 once the reset is addressed. Related to this is the fact that roughly 50% of our DoD revenue is generated from the O&M [operations & maintenance] portion of the investment account, and this portion of the budget is expected to be more stable going forward.

The efficiency initiatives may also impact the DoD's drive to in-source. The definitions are being written by OMB [Office of Management and Budget] currently as to what can and cannot be outsourced, but there maybe reductions in government hiring. It makes it more difficult to bring services in-house, which should help the Services business. We do expect to see additional funding rationing and reprogramming to continue throughout 2011. However, the DoD will have to maintain a budget level that allows our military to address the continuing complexities and realities on the geo-political scene, and I think if you saw the news over the last few days, it gets more and more complicated. Now you have Tunisia, Egypt and Lebanon in that line as well with internal problems. So overall, L-3's broad sense of capabilities, strong program performance and quick reaction to culture position us well for DoD priorities.

In terms of our technologies, whether it's -- I didn't go through the whole list, but if you think about data links or EO/IR, airborne or a soldier systems or airborne SIGINT common systems, even aviation products, purely in detection, guidance and navigation, using simulators, our advanced systems, we. Hold very strong positions in every market that we are in, with market-leading technologies that are very sought after across numerous platforms. On top of that, we have a good Intel IT support business. We have a good foothold in our cyber classified space and of course, we are leaders in platform mission integration. As you know, from the project we have recently. We feel that in terms of our positioning, we are exactly where we'd like to be.

We updated our 2011 guidance today, raising our EPS guidance. The range for 2011 is now $8.40 to $8.55 compared to our prior guidance of $8.20 to $8.40. We still expect sales to be in the $15.7 to $15.9 range. In conclusion, by all measures, 2010 was a good year for L-3. Looking ahead, we expect an increasingly complex geopolitical environment. These factors, however, will play well into our core companies, and we think will present additional opportunities for growth.

And with that, let me hand it off to Ralph for some comments on the financials, and then we'll get to your questions. Get it, Ralph.

Ralph D'Ambrosio

Thank you, Mike. I'll highlight some trends in the fourth quarter results, review the update to our 2011 financial guidance and finish with some comments about our capital structure. As Mike said, we had a solid fourth quarter with good results. They were in line with our 2010 guidance that we updated in the third quarter earnings release, and they were highlighted with earnings per share at the high-end of our guidance, even though the R&D tax credit extension benefit was $0.04 less than we expected, and we also did better in operating margin and cash flow. Diluted earnings per share grew $0.44 or 23% to $2.37 compared to $1.93 in the 2009 fourth quarter.

The growth in EPS is driven by sales growth, margin improvement and lower interest expense, income taxes and shares outstanding. With respect to sales, fourth quarter results, consolidated sales were $4,255,000,000, up 1% versus the 2009 fourth quarter.

At the segment level, sales growth in C3ISR and Electronic Systems was offset by declines in Aircraft Modernization and Maintenance and in Government Services. Again, C3ISR sales growth led our growth at 13%, and that was driven by increases on Rover ManPacks, several UAV Communications Systems, and ISR logistics support and Fleet Management Services. In Electronic Systems, sales grew 2%, and that was driven by acquisitions. Organically, growth in Security & Detection systems and Microwave Communications was offset by declines in Marine & Power Systems, Combat Propulsion Systems and precision engagement.

Sales in Government Services decreased 3%, and that was mostly due to the continued lower subcontractor passthroughs on the Army SSES task orders of about $36 million. Additionally, classified intelligence work increases were offset by lower Afghan training work. In Aircraft Modernization and Maintenance, sales decreased 9%, and that was a due to the SOFSA contract loss, which declined $91 million. Excluding SOFSA, the segment grew 4%.

Moving on operating margin. Margin was 10.8%, up 20 basis points versus the fourth quarter of 2009, driven by margin expansion in Electronic Systems, where we had favorable contract performance, and also a $9 million profit item on the sale of a technology license, which we had included in our 2010 guidance. Additionally, margins improved in Aircraft Modernization and Maintenance, benefiting from the decrease in SOFSA sales, which had lower margins.

As expected, the fourth quarter margin was below our year-to-date September margin by about 50 basis points, and that was due to the change in sales mix that we talked about, and as expected in C3ISR and Electronic Systems, as well as low profit rates on some Government Services contracts. And as we said, at the Investor Conference, we expect those margin trends to continue into 2011.

Lastly, the fourth quarter was also impacted by about $13 million of severance charges. Free cash flow for the quarter was very strong at almost $400 million, and our full year free cash flow was almost $1.3 billion, up 5% versus 2009.

Moving on to the updated 2011 guidance. We increased our earnings per share to $8.40 to $8.55, which is up 20% at the low-end, and $0.15 at the high-end of the range. At the midpoint, the EPS guidance increased by about $0.18, and that is comprised of three items. First of all, lower pension expense is going to increase EPS by $0.18. The FUNA acquisition that we completed on December 22 adds $0.03, and all of the items reduced EPS by about $0.03. Our updated guidance has no changes to our sales guidance from the prior 2011 guidance. At the consolidated level, we're maintaining our $15.7 billion to $15.9 billion sales range. We also made no changes to the segment sales guidance.

C3ISR will again lead our growth in 2011. The key growth drivers there will be small aircraft ISR programs for the Army and for international customers, the UK Air Seeker, Rover ManPacks and again, growth on various UAV Communications Systems. The Electronic Systems segment now includes FUNA. That acquisition will add about $60 million to sales. We paid $55 million for that company. We think it's a very good acquisition. Additionally, we divested a small business in December, and that's going to subtract about $5 million from sales.

The Aircraft Modernization and Maintenance segment, sales for 2011 will continue to be impacted by SOFSA, which are going to decline by about $330 million versus 2010. And lastly, for Government Services, we're currently at the low-end of our range of $3.9 billion to $4 billion, and that includes the impact of not winning the Afghan police training contract that we talked about at the investor conference last month. I recall that was in our guidance for about $120 million. We still have a lot of upside opportunities in Government Services, but we need to weigh the outcome on those competition decisions.

Moving on to the consolidated operating margin. We raised our guidance by 20 basis points to 10.6%, and that's due to the lower pension expense. We expect the margins to be lower versus 2010 because of a changing sales mix in Electronics Systems and C3ISR. And also in 2010, in Electronic Systems, we had about $20 million of profit items on three nonrecurring items. That said, like we did in 2010, we're going to try to exceed our margin guidance, especially in C3ISR and Electronic Systems.

The tax rate stays at 35%. We maintained our free cash flow at $1,260,000,000, even though we exceeded our 2010 guidance by $30 million. A couple of items that are going to impact cash flow in 2011, and they include an expected increase of about $50 million in capital expenditures, and that's mostly to purchase a couple of properties that we're currently leasing, and we think that makes good sense to do that. And additionally, we're expecting approximately $50 million more in higher cash tax payments, and that's due to an income tax deduction recapture on the potential February 1 put of our contingent convertible debt. So if they're not put to us, we'll have some improvement on accounting cash taxes.

Finally, a quick look at the 2011 first quarter. While we expect sales to be about $3.6 billion with EPS of approximately $1.85, and that's before any potential debt retirement charges. Free cash flow should be about $150 million, and the operating margin should be approximately 10.3%. We expect the book-to-bill ratio to be about 0.90 in the first quarter. That's being impacted by the continuing resolution, and we expect the full year 2011 book-to-bill to be approximately 1.0.

On the balance sheet, we continue to have a strong balance sheet with excellent liquidity. We ended the year with about $600 million of cash, and we expect that to grow to $1.2 billion by the end of 2011. That's after repurchasing $0.5 billion of our stock and paying the dividend. As Mike said, we're going to continue to use our cash flow to increase shareholder value and to repeat what he said, in all likelihood, we're going to deploy more of our cash in 2011 even to buy back more stock or to make good business acquisitions with attractive returns on investment.

That concludes my comments. Thank you, and we'll go to the Q&A now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Rob Spingarn of Credit Suisse.

Robert Spingarn - Crédit Suisse AG

Mike, at a high level with what's going on in DoD, and since you took over the company, you've changed a number of things, I think, strategically, some subtle, some less so. Do you see a potential move more into the commercial markets, potentially looking more, for example, like a GD? And if so, would that also possibly contemplate the divestiture of a major defense business?

Michael Strianese

Well, Rob, we continually look at the mix of businesses we have in the portfolio. It was in my comments. I ran down a list, and they're all well positioned. Having said that, you can always buy things that you might want to trade out of and move into areas that represent a higher growth prospects. Having said that, we have great positions in the commercial, supporting the commercial shipbuilding area, which as you know, has been very slow for the last two years, but we're starting to see that pick up, as well as our aviation products, where we have some market-leading positions on things like our recorders, our key cast systems, as well as our standby instrumentation products, our panoramic displays. We would love to add to that portfolio and increase our footprint in that area, and that is certainly a focus for us. I would tell you that we've not planned to step too far outside the box into non-related commercial space just because that's not a strategy that we really embraced. We like to stick with what we know and what we do best, and we think we do a good job at what we do best. So it's going to be an evolutionary process. I think that trades are being made daily when we look at things as to whether we should divest versus internally consolidate and drive more efficiency, and we'll see more of that -- you saw that evident to the plan this year. We saw the license for Smart tech. We divested a smaller, an example of that would be in infrared technology vision, infrared vision technology, you have a corporate lease, a small company, but it didn't fit the consolidation that we did following the inside acquisition that was divested, and there'll be more of that honing of the portfolio as we go forward.

Robert Spingarn - Crédit Suisse AG

Are you surprised that some of the multiples we've seen being paid for certain properties?

Michael Strianese

Well, Rob, as I said, yes, of course, just like everybody is. But I'm also surprised at the number of busted auctions. I mean it's kind of the -- what happened to the middle craft here? They're either irrational prices because of either a scarcity in our proceeds growth area or there's a busted auction. I think now that there was another recent one that was yanked off the market as well.

Robert Spingarn - Crédit Suisse AG

And is there a very clear definition between the high-priced properties and the busted auctions in terms of the businesses themselves and markets?

Michael Strianese

I mean, if you want my opinion, what we're seeing is we're seeing the more pure play companies that were the two public companies that traded at high multiples where -- and that was small players in the SIGINT world, right, that had some very unique capabilities. We have some of them, and some of them, we compete with and some of them, we team with. So those drove very high multiples because as we always have been saying, C3ISR is our growth engine, and so that's why you saw those.

Robert Spingarn - Crédit Suisse AG

And some would argue, of course, that you could unlock some multiple if you had more concentrated focus in that particular business.

Michael Strianese

Yes, we could always say that and again, we continue to evaluate our portfolio for exactly those opportunities.

Robert Spingarn - Crédit Suisse AG

And then just as a follow-up probably for Ralph in Electronic Systems. I mean, you talked about a little extra income there. I think it was $20 million, and then maybe a lower margin next year, but that business has changed substantially. That probably would be the one that would be right for some commercial business. But can you give us some additional color on what drove those margins this year and why they're not a little bit more sustainable?

Ralph D'Ambrosio

In Electronic Systems, first of all, I mentioned that we had $20 million of profit on three items. They were disclosed in the earnings release today, but the biggest one was the $9 million profit from the sale of the technology license that happened in the fourth quarter. In Q3, we had a favorable contract de-scoping restructure on a huge program that added $5 million. And in the first quarter of 2010, we settled the supply agreement with a customer who had failed to achieve a certain volume level, and they had to pay us $6 million. So those $20 million of volumes are not going to occur in 2011. Secondly, we really had some excellent product mix in the EO/IR area in 2010. On the airborne side, including aerostats. So we did a lot of sales on the PTIJ program, and as you know, that program is going to decline in 2011 versus 2010, and not only for L-3, and that's part of the item as well. And then moving into next year, we're taking another reduction on the Bradley Fighting Vehicle. That's going to impact the margins. Within the Linked Training and Simulation business, we're doing more logistic support services on some simulated as opposed to modifications, and those carry lower margin. And we've also seen some pricing pressure in some of the Commercial businesses, really in the ship-building side, where there's been some aggressive actions by competitors, and we're defending our business space in some key areas. Like I said, those are very strong businesses. They have very significant discriminators, and just like we did in 2010, we were able to improve the margins. We're going to try to do that again by 2011. We're going to continue to have a very good proactive control of our cost structures. All of our group presidents and division presidents are engaged in controlling their cost structures, and frankly, they have more control over cost than they do over the revenue side, and so we're going to be very aggressive again this year and try to do better in the outlying quarters.

Robert Spingarn - Crédit Suisse AG

On that theme, Mike, just to close up here, between your four segments, the sales and the margin guidance, which area would have the most upside and then which the most downside?

Michael Strianese

That's so clear. C3ISR have the most upside, and services would have the most downside in the way we're looking at 2011. Having said that, Rob, I will tell you that the opportunities, however -- services has the most volatility right now because the number of opportunities they have, $1 billion-plus opportunities is greater than any other segment, meaning pipeline programs on which we will be bidding. So an improvement in the win rate in this area could certainly turn this into a growth area. So it is a bit of a jump on services this year, but as I've mentioned, we are focusing, redoubling our efforts even from corporate and improving the win rate and services. And that's improving the cost structure, improving their proposal writing, et cetera. So that's the sensitivity.

Operator

Your next question comes from the line of George Shapiro of Access 342.

George Shapiro - Citi

The bookings in C3ISR, I mean, in the quarter you like had 1.33x. Was there a specific program there, or is it more broad-based? And following up on your comments to Rob, Mike, did that portend that maybe C3ISR grows a little quicker?

Michael Strianese

Well, it certainly will grow a little quicker and has been the leading...

George Shapiro - Citi

I know, I mean quicker than what you've forecast?

Michael Strianese

Well, there is a lot before. Ralph, do we have anything in there? I think it was pretty much spread, you have a couple of Liberty in there.

Ralph D'Ambrosio

Mike talked about the seven additional Liberty aircraft that we booked, five for the Air Force and two for the Army. And then the bookings expense was very broad-based, and it's in all the areas I talked about being growth drivers in 2011. So it's more than a handful of UAV Communication Systems. The Rover ManPacks, we booked a significant order for our logistics support on Liberty, and we also have had good quarter growth in our TRL subsidiary in U.K, and they do force protection type of equipment there. So it really was across the segment, so with strong orders in a lot of key areas that are going to drive the growth in 2011.

Michael Strianese

Let me say it this way, George, yes, there's upside in ISR, but the types of things that drive the upside are additional deployments, other places geographically where you need to do intelligence gathering or the observation. I think three or four places popped up in the last two weeks, but a lot of these programs that resulted in upsides in the past weren't even on the piece of paper at the beginning of the year. So it's hard, it's not impossible to predict. I will tell you that in my view, the environment for additional growth in ISR at this year is right, so more upside than downside for sure.

George Shapiro - Citi

And then just on the other side, the book to bill in electronics for '10 was like 0.91, and your sales guidance looks like it implied some growth even adjusted to the acquisitions. So do we expect sales and order growth there to accelerate through the year as the continuing resolution and contract delays get resolved to meet your guidance?

Ralph D'Ambrosio

There's a couple of things going on, George. First of all, Electronic Systems, as you know, has our shorter cycle businesses. But that said, we're going to have growth in a couple of key business areas, the simulation and training and the EO/IR area, and what's happening there is we're going to convert funded backlog that was booked in 2010, in some cases before 2010, and so we have about $200 million of additional sales coming out of backlog versus 2010. So that's -- we're striving the growth in the segment there, even though we had a low book-to-bill ratio in 2010.

George Shapiro - Citi

Ralph, when you gave the government margin guidance of 8 to 82, I mean, you were talking about lower margins on recompetes, higher bidding proposals, et cetera, and yet the last two quarters here, I mean, you've been well above that. So what's actually happening in '11 to send the margins back down to your guidance level?

Ralph D'Ambrosio

Well, in '11, we're making a couple of investments in the cybersecurity area. And also in connection with the Aberdeen relocation for CECOM going from Fort Monmouth to Aberdeen. That's going to cost us about $10 million in a variety of stored-up type cost. But we're thinking it makes good sense because we see good growth areas with those types of customers. We're also focusing more on bids and proposals. It's one of the key ways we're going to hopefully improve our win rate and then book. The margin environment's been very difficult the past two years. In Government Services, there are a lot of price competition, and we're trying to baseline the margin expectations appropriately in that segment.

George Shapiro - Citi

Any change in your thinking in terms of revenues to coming down from Afghan and Iraq based on from when you gave the numbers the last time?

Michael Strianese

Those numbers seemed pretty stable at this point, George. There'll be puts and takes as we shift from hardware to sustainment, as we shift from training to turning some of the work over to the local national forces. Right now, it seems to be a push between one program and another and not anything significant in terms of a overall reduction that one might think about. So that appears to be pretty stable.

Operator

Your next question comes from the line of Ron Epstein of Bank of America Merrill Lynch.

Ronald Epstein - BofA Merrill Lynch

Mike, just a quick question for you, maybe a much bigger picture question. As you look out over the next couple of years, I mean, how do you expect the kind of the budget environment to proceed? I mean, do you think at some ways, the worst is behind us or how do you think about that?

Michael Strianese

Well, what's behind us is the worst. The worst is not as quite as bad as anybody thought about. It's very, very hard to predict because we're getting mixed signals, and let me take you through some of what you hear. I mean, just the other night, the President spoke and talked about freezes, possible reductions but excluded national security. I think that plays exactly to what we've been saying for years that while there's the desire to deal with this deficit problem, that defense has been a constant 3.5 percentage of GDP. Stock have been increasing share of the GDP over any timeline of recent. And the geopolitical environment, if you want to change the mission of the U.S. military, it's not one that is going to lend itself to the reductions, one. Number two, I mean, there's been some discussion and again, it's speculative that the cuts that Secretary Gates has put on the table run anywhere from adequate to keeping the budget makers happy to too much, that's the too much too soon. So it's very, very hard to predict since the wildcard here is what Congress is going to do and what they're going to appropriate. But having said all that, I will tell you that my view has been that there will not be anything. I'm not expecting to see any radical movement up or down, and I think the propensity is down, of course, over the next five years. And again, it's just because of the state of affairs geopolitically, in our homeland security area and in the state of the equipment that we have, being that everything is getting old. We're flying the oldest fleet of aircraft in the history of the country. Virtually all the ground vehicle programs have been restructured, canceled, pushed out. The shipbuilding has been curtailed. So there'll be either new ships needed or refurbishment of old ships depending on how much force projection we want to do. So I think we're going to have our hands full keeping the budget, getting what we want at the $550 billion level. So coming much off that number, I don't see being quite honest with you.

Ronald Epstein - BofA Merrill Lynch

And maybe one more question, another big picture question, We've talked a little bit about dispositions of businesses on the call. Have you thought much about diversifying more maybe into areas that are adjacent and commercial and growing that aspect of L-3?

Michael Strianese

Yes, well, we always work in that area, and it's not a road to fast growth. It's more evolutionary than revolutionary. So as like -- let me give you an example of this, FUNA acquisition. I mean, we've been gradually taking our equipment that was originally acquired and designed to service the United States Navy, and have moved it into a business that is more than half commercial at this point. You don't see because it's been gradually over the last number of years, but we have been doing that. FUNA is all commercial customers, and the objective there was to bring another class of customer, the mega yacht people, and et cetera into our hold, so we can -- we are a one-stop shop now, which is very unique in the business. That's one example. Other examples would be we do very well in the agency, intel [intelligence] agency, IT, enterprise systems area. We'd like to diversify that service business more outside the DoD agency area into non-DoD federal IT. The aviation products again, we've moved probably as much as we can into the commercial space without additional acquisitions in that area. Some of the products we've made moves in the past that have been limited, not at all successful, like taking the data links and try to make a wireless phone system, but for those of you who haven't been around a while, remember Prime Wave. So this has been something that's been ongoing for a long, long time. I could tell you the following. We will continue to focus on adjacent moves, where we could take the existing technology that's proprietary to L-3, and move it into commercial markets where feasible. In terms of going into places or acquiring things that are totally outside our area of expertise, the things that we just -- I don't see that as a big possibility, but we have begun to do things. I mean, it was one small step this year with Smart tech, where we sold the technology and kept it in hand on the revenue stream, and that kind of partnering with commercial partners is really what I see as the correct path for the company to take where we could -- you're getting commercial companies that have established distribution channels that we'd have to start building from ground zero, right? We have one big customer, the U.S. Government. And a lot of these commercial we need millions of customers to make a go at it. We need that distribution channel. So we are looking at partnering in those areas, and the areas we're looking at involve energy, smart grid, wind, management, batteries, electric motor propulsion. We talked about non-DoD services and a bunch of things in that. I mean, we can update you periodically on our efforts, but they won't move the needle next quarter. These are things long term for us.

Operator

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

Cai Von Rumohr - Cowen and Company, LLC

Ralph, you mentioned you singled out the $9 million benefit you had at ES, and you also mentioned $13 million of severance charges. Could you identify if there are any other kind of items like that, that weren't placed on non-recurring? And tell us of the $13 million in severance charges, essentially where did they occur, and what sort of savings do you expect in 2011?

Ralph D'Ambrosio

That $20 million was is what I can assure to be the real nonrecurring items. I talked about the changes in sales mix in the EO/IR area, and we also had some very strong sales mix in the first quarter at C3ISR at the TRL business in the U.K., where we had significant shipments of force protection, some of that's not going to be recurring. So that's another thing that I would put in the sales mix changing category. With respect to the $13 million of severance charges, in which incurred across about a dozen different businesses with the bulk of it happening in our Canadian operations, where we're consolidating support aerospace into the mass units, and then also with some aggressive actions in our navigation and guidance business area. But it was spread across a lot of different business areas, and those actions are going to improve our cost structures and help our margins and offset some of the change in sales mix that I talked about and hopefully, give us some upside in the margins, particularly in Electronic Systems area. And although I didn't say it earlier, we're probably going to have some severance charges again in 2011 as we undertake some consolidation activity in some of the key business areas. So that's what's happening there.

Cai Von Rumohr - Cowen and Company, LLC

So essentially that $13 million is split pretty much between aircraft and the products area?

Ralph D'Ambrosio

Most of it is in those two segments, but there's some in C3ISR and Government Services as well.

Cai Von Rumohr - Cowen and Company, LLC

If you could just give us a quick update in the services area. I know you had mentioned you have all these opportunities. I guess, you got one coming up at NASA, maybe update us on the status of the protest on the Afghan laws and any other larger opportunities coming up in the next three to six months?

Michael Strianese

Well, we have an intel support job that's in the classified space, Cai. That is a $1 billion-plus opportunity. I may not be able to tell you much about it. I think we're well positioned. There's the SSES contract, which is in our C2S2 business area. That'll be a $7 billion contract, Cai. However, that has multiple awardees. And so I could talk about exactly how much that's worth, should we be one of those awardees on it? We think we will. We also have the United States Marine Corps, LCSS, which is about $1 billion with multiple bidders as well. MPRI has a cease property program. It's a single awardee, $350 million. That should be a second quarter item U.S. Army has a program called the Advent Maiden. It's a single award. Its about a quarter of a billion, $250 million. It was the first quarter that slipped to the first half. NASA, you've mentioned, so those are some of the bigger ones, and there were a couple of more in the IT space that are a little further out this year that we'll update on later on once we see the solicitations, what they look like and we're going to position ourselves here as a primer, as their team member.

Cai Von Rumohr - Cowen and Company, LLC

Just a quick follow-up on the intel support $1 billion. What's the timeframe? Is that a single award contact? And is that new business?

Michael Strianese

Yes, it should be a competitive win. It's new business. Well, it's a recompete, but we are not the prime. It's a recompetes, and that's being recompeted early actually. So you can read into that as perhaps the prime is -- the current, the incumbent is not getting it done for the customer to take it out early. So we're looking at our competitive positioning on that. It's being very favorable.

Roger Johnston - Edison Investment Research Limited

So if that's $1 billion over what timeframe and when would we have the decision?

Michael Strianese

That would probably be in the second half of the year. If we're looking at five to eight years, I guess five to seven years. They start off with a long time period, but you really consume the revenue in about the first five years. And they say over $1 billion over eight years, but the reality is it will probably be consumed in five.

Operator

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

Troy Lahr - Stifel, Nicolaus & Co., Inc.

I think it was last quarter's conference call, you were talking about seeing some margin pressure on the hardware products also. Is that continuing? I mean, is that starting to pick up a little bit? Can you just talk a little bit about that?

Ralph D'Ambrosio

Yes, we had seen some aggressive pricing on a couple of contract that we compete on, and that happened in the third quarter. It hasn't picked up in the fourth quarter. If anything, it's probably we're seeing a little less of it.

Michael Strianese

Let me give you the broad view of my perspective on this whole margin issue. Again, a lot of the products, the majority of the products that we have without listing them all, but think about data link, our EO/IR products. Our aviation products, which kind of lead the company in margin security in Defense. We all have had good market positions, and we're able to maintain our margins just because of our proprietary positioning. The areas where there's been some margin pressure because of increased competitions have been services, and it's been in the more -- I'd say the less specialized more no-barrier-to-entry service areas. We're evaluating those businesses as we went through the candidates for consolidation or other actions would certainly be in that category. I was pretty clear several times about not going to levels where we're actually buying business in these areas. We're just not going to accept margins at certain levels. So it's not a bottomless pit on this margin, but it will cause changes to our business rather than accepting those large margins, whether we redeploy the capital elsewhere where the margins are more robust, or consolidate to get a lower cost structure. So I'm hoping that a lot of the margin pressures that we saw in the services space in the couple of product areas is kind of behind us.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

So really, I mean, even if you look into 2011, really not that much material margin pressure on the hardware side? Is that fair?

Michael Strianese

That's fair to say.

Ralph D'Ambrosio

What we observed in the third quarter and we won, that's factored into the guidance for 2011.

Robert Stallard - RBC Capital Markets, LLC

And then can you help me understand maybe the revenues on kind of Project Liberty and kind of how that tails off into 2011, and maybe if you don't prevail in the protest, how much EMARSS revenue you might get, maybe just kind of lumping those together in looking at the year-over-year change?

Ralph D'Ambrosio

Okay, well, I'll take the second one first because as of right now, we're not assuming any revenue on the prime contracts for EMARSS. Mike said we're doing the communication suite and some of the EO/IR sensor equipment, and that's in our guidance because we've won it. Even if one of the other protesters win it, we still have that work. And then on Liberty, we're currently expecting Liberty sales to decline about $50 million in 2011 versus 2010, and that's because they're doing less modifications simply in terms of the number of aircraft.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

But how much for that EMARSS sensor communications component be, just comparing that to the $50 million decline?

Ralph D'Ambrosio

Well, I think the prime contract had a value of about $300 million reported magnitude, and our coms and sensor work is about $50 million.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

A year?

Ralph D'Ambrosio

No, on the EMD, no replaces. It's the prime contract we're pertaining to.

Operator

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

Brian Ruttenbur - Morgan Keegan & Company, Inc.

But the whole body imagers, is that going to be delayed? I know that's a relatively small piece of your business. Do you anticipate those happening in this calendar year, or is that going to get pushed off?

Michael Strianese

Well, it's driven by the testing of the TSA of the automation feature. So whether it happens or slips a little bit, it's not going to really be a driver. I mean, we are working with TSA to get this in-field this year. There's a lot of advantages for TSA and the traveling public. One is to put this privacy issue to bed once and for all.

Brian Ruttenbur - Morgan Keegan & Company, Inc.

I'm sorry, I was referring to on the whole body imagers, there should be another $90 million where the orders is coming down this calendar year for the TSA to have 50% of the length filled with these?

Michael Strianese

Yes, but I believe those orders are holding that order pending the trial on the automated detection. They want those machines to have the automated feature in, so that's the pacing item. We think it'll make the year but again, when you're in tests like this, it's very hard -- you can always hit a bump in the road. We think it will make the year for that $90 million.

Brian Ruttenbur - Morgan Keegan & Company, Inc.

The other concern I have or question, on the continuing resolution, what happens to your numbers if we start looking at things getting pushed out to May or June?

Michael Strianese

Well, it can certainly cause some slippage in the order book from the first quarter into the second. I don't believe that given the size of our backlog, coming into the year at $11 billion of backlog, pretty much most of the first quarter revenues is rolling out in the backlog at the beginning of the year. So I don't really look at it as a revenue item, but it can start impacting orders that if they don't catch up by midyear, we'd start slipping revenue from the third into the fourth quarter. So again, it's a big timing game, and it could flip things from quarter-to-quarter. So it could give us a little quarterly volatility. Again, I'm not talking billions of dollars, but I'm talking a couple of $100 million here or there that slips, moves around on a per-program basis.

Brian Ruttenbur - Morgan Keegan & Company, Inc.

But in your opinion, even if things slip, you would still on the year, make the year the guidance that you had to just slip from the second quarter to the fourth...

Michael Strianese

Yes, I think, there was some extraordinary circumstance with this was the delayed so far out into the year, which I just don't see happening. I think we make the March budget date. If not, it'll happen by April. So I think we should be okay, and not have an impact on the year from continuing. I mean, we'll start ringing that alarm bell if it's going to happen by mid-year. I mean, you'll be hearing from us on it. We'll certainly give you an update. This is the first year this has happened. It has not affected the whole year yet for us again, so it's hard to see that happening at this point.

Operator

Your next question comes from the line of Pete Skibitski of SunTrust.

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

I just wanted to ask you about the strong book to bill in AM&M this quarter, kind of what drove that? And then maybe we haven't heard a lot in a while about Fort Rucker and CFT, maybe you could give us your revenue projections there for next year?

Ralph D'Ambrosio

Okay, so your first question was we have book to bill in the Aircraft Modernization and Maintenance segment. What drove the growth there is first of all, we won a large competition for a foreign head of state aircraft interior modification job. That was about $130 million award that happened at the end of December. And then additionally, we had some strong bookings on some of our systems field support work, including contract field services or Contract Field Teams. But the major item was that competitive win on that 747 interior modification contract. Your second question was what's happening to the contract field services sales. In 2010, they were about $360 million, and we see that declining to about $290 million. What's happening there is that we have some declines on some of our Iraq work. But overall, the systems field support logistics type work is going to increase because if you recall, we had a significant win earlier in 2010 on the Army C-12 logistic support contract, which is going to generate about $100 million of sales in 2011 versus only about $10 million in 2010.

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

Okay, that's under the CFT contracts?

Ralph D'Ambrosio

No, that's a separate contract for Army C-12 logistic support. I was just explaining to you what's offsetting that decline in CFT.

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

And is Fort Rucker kind of stable next year?

Ralph D'Ambrosio

Yes, we see Fort Rucker revenue continuing to be slightly above $400 million.

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

The Ship-to-Shore Connector program that you guys are teamed with Textron on, I think you're only going against one other team. It seems like a pretty big program. Can you tell us what your work share is on that? And if that's significant to you guys if you went out later this year?

Michael Strianese

Our work share on this is -- I can't even give you a percent now. I don't think it's a major driver for the year. It's an important program, but it's a post-2011 of that...

Ralph D'Ambrosio

They're really minimum, not a driver in...

Michael Strianese

In this year at all...

Ralph D'Ambrosio

And our plan for it is not meaningful.

Michael Strianese

I was talking about that more after the award decision on it. I don't want to give out too much information on what we're doing and things like that until this gets decided, but I would agree. What I would agree with you with is that we're on a great team, and we think we're well positioned.

Operator

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

Noah Poponak - Goldman Sachs Group Inc.

I just wanted to make sure I understand all the moving pieces in the revenue range. So it sounds like you took CNPTO and EMARSS out, and you're adding an acquisition that is clearly a smaller number than those. Is the ability to reiterate the range more just you have all the opportunities Mike listed, or where there some other unexpected wins in the quarter that are now added in?

Ralph D'Ambrosio

Well, in addition to what Mike talked about, I just mentioned that international had a state interior modification job that we won.

Noah Poponak - Goldman Sachs Group Inc.

That was previously not in the range?

Ralph D'Ambrosio

It was in the range, but we had a reduced factor value. Now that we won it, we'll probably augment to another $20 million or $25 million over and above that within our guidance. So that's one item. We also talked about the two Army ISR aircraft that we booked and C3ISR, so that's an improvement versus the last our guidance update. And we see some other international small aircraft ISR programs opportunity developing, and also some other classified Army work in that space. So those are the offsets to what we had in there on EMARSS. And then Government Services, I already said that we're at the low-end of our guidance, given the loss of that Afghan training contract.

Noah Poponak - Goldman Sachs Group Inc.

And what is the status of Linguist and Schipol these days, and are they even going by the same names anymore?

Michael Strianese

Well, Linguist is let me see, there's a new name and I'm trying to think what it is, by DLITE. It's called D-L-I-T-E. So it's Defense Language Interpretation and Translation Enterprise, and we're looking at it. We have the capability. There's going to be a business decision made by me on that one, because the margins there as well as we think, given the fact that the work is being done in a war zone where there will be casualties, likely investigations and congressional testimony and everything we went through on the first Linguist. I don't really view this as extraordinarily attractive opportunity for L-3. If the margins were extraordinary, which I doubt they will be, I don't know that we would play in this, to be honest with you. This is not something that I find terribly exciting for us. There are other opportunities I'd rather be more focused on that are exciting for us in that space. And what was the other one, it's regarding police?

Ralph D'Ambrosio

Schipol, it's now called criminal justice program support or CPJS. That's currently in source selection. There should be an award happening over the next month or so, but we don't have anything in our guidance for that.

Noah Poponak - Goldman Sachs Group Inc.

How large could that be?

Ralph D'Ambrosio

So it's going to be up -- it's a multiple award contractor. It's going to be up to over $1 billion in total contract value. Of course, all different winners.

Michael Strianese

Once they do know this -- it's very hard. You can assume you have an highlight is going to be one of the winners, but then it's hard to figure out how much of that, those task orders you win or even how big a particular task order would be. It makes the predictability revenue difficult. I guess the good news is I'm a qualified bidder. It's worth something, but I just can't tell you how much immediately. And we'd have to wait for it rolled in some of the service contracts right now.

Ralph D'Ambrosio

Frankly, Mike, I just told you what we think about.

Michael Strianese

Yes, it's on the guidance, so the effect kind of speaks for itself.

Noah Poponak - Goldman Sachs Group Inc.

And then just one other one, Mike, on the idea of price-only competitions and price sensitivity and services, you guys first started to discuss it and we're feeling that pressure. And then at your Investor Day, I believe, maybe, you started to mention that the customer, if you will, regretted at and the pendulum was swinging back the other way, but it doesn't seem to be showing up in the numbers. What is the latest feeling just on that topic in general?

Ralph D'Ambrosio

Well, it's not showing up in the numbers yet. And sort of the reason for that is because we're just starting to see in RFQs or RFPs the fact that the award criteria is going back to best value versus low price, and so that's not worked its way through the system yet. So that is the reason we made that statement. And there is some buyer's remorse on these -- I mean, you could see it why the field of companies that are beginning to compete on these price-only competitions, I could tell you it's not to watch price. It's the companies, but it's just a different field of the companies that are willing to play in this space. Some are capable and do a great job and others don't. And a customer, when they're not getting what they want because they did a price-only and they want that flexibility to do a best value where they can price in the risk of going with a smaller company and paying a lower price, and that is the change we're seeing. So we've been happy to see more best-value competitions coming out. That's why we can see that trend, but it's not -- perhaps you have to win them first.

Operator

Your next question comes from the line of Michael Lewis of Lazard Capital Markets.

Michael Lewis - Lazard Capital Markets LLC

Mike, just a follow-up on the last question, the competitive margin pressure environment. What are the negative attributes to that? Is it causing capable companies like L-3 to walk away from potential bids? And do you think, though, that we have seen the bottom of the margin, negative margin in the group, especially within your Government Services market?

Michael Strianese

Yes, I mean, I would like to think so because one, we're doing a couple of things. One, we've consolidated a little more that will bring our cost structure down. The areas where we are focusing on, whether it's cyber intel support, some of the training or augmentation work, where we are very specialized, is not under the same pressure because you don't have the same competitors, right? But you don't need competitors that have the right clearance just to do the work, or we need to see competitors that have the same talent pool that we do to do some of these training and nation-building services. So we're kind of weighting ourselves or shifting our weight more into those spaces. I don't think you'll see a complete elimination of price-only competitions, but things that are -- lend themselves to be price-only, meaning things more commodity that their only distinction is the price. But it's very hard in the professional services business if you think about anything you would do yourself that to say services where people are involved is the only discriminator is price. It's simply not the case. It depends on good training and qualifications and the management skills. So that's where I think the government's running afoul of doing price-only competitions and services, not the commodity. They're pricing it that way. We believe in providing premium services at premium prices.

Eric Boyriven

And I think the move to best value is, we're starting to see that. Let me just shift gears and ask you one more question, it has to do with the ES business. Margins were very, very strong, benefited as a result of microwave and centered training. But can you talk a little bit more about what you're seeing with regard to the simulation training area? And are you continuing to see some fundings moving to the right? And what is your overall outlook for simulation growth in calendar year '11?

Michael Strianese

Well, one thing that we're seeing in the simulation business is given the number of aircraft sales internationally in the second half of 2010, the potential for additional hardware or training services work internationally, and those would go along with the F-15, 16s and 18s that have been sold by the primes that are going under contract internationally. The C-17 that we mentioned and I think it was the fourth quarter, the end of the third, beginning of the fourth quarter last year that had resulted in higher sales in 2010. So all in all, I think we have a great market position. We certainly have the state-of-the-art product in terms of fast jet simulators, high stability, HD world product that's out there, and it sells itself when these pilots take a look at it versus what everybody else is selling. There are other potential targets that we're looking at, where we don't have a simulator on certain platforms that we like. We have I would say virtually -- we have a simulator for virtually every fast jet except the F-35 right now. So there's a potential target right there. The F-16 MTC, I would hope when the pilots see that and fly that simulator, I mean, it's the next closest thing to actually flying that, that would kind of drive a pool of that technology into the F-35 marketplace as well. So given the cost of live training versus simulated training, it's a business that I expect to see to continue to grow.

Operator

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

Myles Walton - Deutsche Bank AG

One's a little high-level. On the MC-12, Secretary Gates talked about increasing allocation of funding to that in his January 6 commentary. Do you have any sense as to the size, scale and timing of what he's kind of looking for there?

Michael Strianese

Myles, we don't. We were happy to hear the comment, but it wasn't the company, unfortunately, by a forecast from the timing or amount of any funds. I think that the value of that platform, the cost benefit of it, has proven itself in the field. And I would like to think we would see some activity midyear on funding, and we'll keep you guys up to date on it. But right now, I don't know what that exactly meant in actually in terms of the timing of additional orders for us.

Myles Walton - Deutsche Bank AG

And then kind of a high-level one, Mike. As you look to offset some of the pressure coming to your margin, and some other way you can approach this is through your supply chain and make buy decisions and some of the kind of changes that have been proposed and may be taking place selectively or reducing the award on subcontracting and maybe making the make versus buy decision more attractive. I'm just curious if you're seeing that, if that's the direction you're leaning, and then if you have the data point, you may or may not, how much of your business do you subcontract today, versus a year ago, two years ago, and where would that go on the future?

Michael Strianese

That varies by sector and areas where there's shortages in labor. For example, for classified, people who have security plans on classified work. with subcontracting because of the shortage of such people. In areas like the Project Liberty, I mean, we have a very broad team because it was a quick turn program. So there was a lot of subcontracting there, but to give you a composite number, I don't really mean anything. It depends on -- we were put under some stress this year to get the EO/IR balls out, and we had a little more subcontracting activity just to press on that supply chain to get more throughput, which we were asked directly by the DoD to accommodate kind of their request to get as many of these things fielded as possible, that was an urgent request. So a lot of it is driven more by timing issues regarding customers' requests than anything else in this space. But I'll tell you the following in terms of how we approach it. We're coming at the market with our new products from two perspectives. One of them is disruptive technology, technology that no one has that's game-changing, that represents an affordable solution to either enhance, improve or become a force multiplier for our customers. And it's also coming in with technology that's disruptive in price. And if you look at what we've done in the UAV space, with our now three classes of UAVs, the Cutlass is more expendable. The expeditionary UAS, where we have a program, we have actually two programs on record. The Cutlass is a program on record. And the potential for Mobius, I mean, those were -- the technologies aren't as disruptive as the price on those because everybody kind of has a UAV. But again, that's another perspective, so we have to come out with a technology that's one-of-a-kind and only we do, or we could take a system-of-systems like we have on our unmanned business and do it at a much lower price point. And it depends on the marketplace, and every marketplace where our product is different. So we kind of think we get the model right and we have the right analysis. You certainly haven't come into the marketplace with a good product that was priced so high that it never sold. So that would be a mistake, so we look at it from both angles and see where we need to be, and that's what we do.

Okay, well, thanks, everyone for joining us today. I'm glad to have your interest and so many great questions. The broad question is, is the worst behind us? I'd love to say absolutely. I can't say that today, but I could tell you that certainly, the budget outlook is not quite as gloom-and-doom as I think we've been worried about, all of us. And I think going forward, our focus will continue to be on our core areas and solid execution, and an environment that while challenging, it's not a surprise. We've been preparing for it for a couple of years, and there's still opportunities for growth. And notwithstanding all this, we're still showing growth in earnings in cash and sales for next year. Closing was a lower growth year for us but still, albeit, was a record. So with that, thanks, and we'll catch up with you next quarter.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: L-3 Communications Holdings' CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts