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L-3 Communications Holdings (NYSE:LLL)

Q2 2012 Earnings Call

July 26, 2012 11:00 am ET

Executives

Eric Boyriven - Managing Director

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

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

Analysts

George Shapiro

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

Myles A. Walton - Deutsche Bank AG, Research Division

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

Joseph Nadol - JP Morgan Chase & Co, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 L-3 Communications Holdings Earnings Conference Call. My name is Lacey, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Eric Boyriven with FTI Consulting. Please proceed.

Eric Boyriven

Good morning, and thanks for joining us for the L-3 Communications Holdings, Inc. 2012 second quarter conference call. With me are Michael Strianese, Chairman, President and Chief Executive Officer; and Ralph D'Ambrosio, Senior Vice President and Chief Financial Officer. After formal remarks, management will be available to take your questions.

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

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

Michael T. Strianese

Thank you, Eric, and good morning, everyone. Thanks for joining us. As you've seen in the release, we had a good second quarter, which was led by strong orders that were up 4% from last year's second quarter. We wish to thank our dedicated employees and management team across the companies for really a good job. As you know, the environment continues to challenge our industry. We are responding to those challenges by creating new ways of improving operational efficiencies and tightening our focus on products and services that directly address customer priorities.

We ended the quarter with a solid funded backlog of $11.7 billion. We had net sales of $3.6 billion, which was a 6% decrease from last year's second quarter with most of that decrease coming from Government Services. Diluted earnings per share were $2.08, which was an 8% decrease compared again with the second quarter of '11, which was $2.26, but excluding certain items, notably a tax gain last year and some of the spin-off expenses for Engility this year, the EPS declined about $0.02 or 1% versus last year's second quarter. Free cash flow was $223 million for the quarter and our book-to-bill ratio is 1.10 [ph] .

We completed the previously announced spin-off of Engility, which positions both Engility and L-3 to better focus on their respective core competencies and pursue business opportunities that play to their strengths as well. Along with continuing to focus on program performance and follow-through, we continue to invest in R&D that's aimed at creating reliable and affordable solutions targeted at specific customer needs. In our business segments, C^3ISR continued its strong performance despite a slow contracting environment. We saw a 4% increase quarter-over-quarter and net sales to $862 million. This was part -- due mainly to stronger demand from the DoD for airborne ISR, logistics support and fleet management services, as well as higher demand from foreign military customers for airborne ISR systems. Net sales in the Electronic Systems segment decreased by 3% compared to last year's second quarter, due in part to reduced army requirements for certain products and to contracts that are nearing completion. This decrease was partially offset by growth in our sensor systems business related to the Kollmorgen acquisition and in our microwave business, which had increased deliveries of SATCOM systems, which included the power devices as well.

Net sales in the AM&M segment were down about 3% compared to last year's second quarter, and that was primarily due to lower volume on the Joint Cargo Aircraft program. In terms of services, net sales declined by 20%, mostly reflecting lower demand for services due to the Iraq drawdown and U.S. Government budget reductions, which partially offset a competitive U.S. army training contract win.

In terms of M&A, we continue to closely monitor the landscape for opportunities that may present themselves, both as a result of pressures throughout the industry and sellers that just want to cash out, brought about by the prolonged and challenging economic environment we find ourselves in. I'd like to reiterate that the strategy in pursuing these opportunities remains unchanged. We continue to be thoughtful and disciplined in our approach, targeting companies that will help us grow our market positions or add new customers, strengthen our competitive profile while providing a good return for shareholders.

In terms of the Engility spin-off, as I mentioned, it was completed on July 17, and Engility is now an independent publicly traded company on the New York Stock Exchange with the ticker symbol of EGL. The spin-off demonstrates our execution strategy that is built on situational awareness and a strong sense of customer priorities. The spin-off opens up exciting opportunities for Engility as it will not be subject to the OCI issues we have and it will be able to pursue business that is outside of our areas of strategic focus.

At the same time, our National Security Solutions business will focus on cyber security, high-performance computing, encryption and IT support, all high-priority areas at the DoD and many of the Intel agencies. In terms of the DoD budget, I guess everybody is focused on sequestration. As you know, the Budget Control Act set the process in motion that will occur, and we'll be looking at significant across-the-board program reductions on January 2, 2013, unless Congress acts to change or modify it. At this point, there's not enough clarity to know if or how such cuts will be implemented. However, the Congressional Budget Office estimates cuts under sequestration to non-DoD domestic accounts at about 8%. The sequestered provisions could cut the fiscal '13 investment and O&M accounts another 12% compared to what's included in the DoD budget request for '13. So we think it's about a 12% reduction assuming everything we know now. Whatever the final numbers turn out to be, however, the sequestration will have undoubtedly, a negative impact that could be significant on the industry, and we're working to ensure that our message is reaching the leadership in Washington. Along with the other CEOs in the industry, we urged Congress to find an alternative way to resolve their budget concerns. The defense industry is united with the common goal of preserving fiscal responsibility without jeopardizing national security. We're looking to get more defining guidance on how sequestration will apply in order for us to do a more complete assessment of the full impact. We're continuing to monitor the situation closely and to plan for how best to moderate the impact.

We're also aligning our businesses for the new reality. At L-3, our business strategy is to focus on growing DoD-priority areas such as C^3ISR, EO/IR systems, cyber security, weapons systems, sustainment and counterterrorism. These are areas that, of course, we or all have strong -- we have strong positions in all these areas.

In terms of some significant awards and milestones, let me just cover a couple of them. In the ISR segment, we were competitively selected for the South Korea P-3 upgrade work, and that's for an additional 7 aircraft. We also received multiple follow-on orders for ROVER and additional funding for logistics work on Project Liberty, as well as for the missionization and sustainment on a variety of other ISR aircraft. In Electronic Systems, we are a member of the winning team led by Textron for the U.S. Navy Ship-to-Shore Connector programs, a new program, which is always good in this environment and we're anxious to get started. We received a production award for about $50 million for the Army's Enhanced Night Vision Goggle program. We're also selected by SOCOM for what's known as SDN lite to provide Special Operations Forces with global tactical SATCOM capability. This is a $0.5 billion IDIQ contract that has a 5-year period of performance. We're also awarded a $69 million contract for a U.S. Navy total [ph] rate system support facility. We received the new order totaling about $30 million from the TSA for our image-free ProVision ATD advanced personnel screening system. These are being deployed in U.S. airports right now, and we received an award to supply M935 fuses to the Marine Corps.

In AM&M, we recently announced that we won the recompete for rotary-wing aircraft maintenance and logistics at Fort Rucker, Alabama, which is a recompete win that includes a 1-year base period and 4 1-year options with an estimated contract value of about $2 billion. We also received an FMS order for 10 C-27J aircraft for Australia.

National security solutions, we are a prime contractor on the $5.6 billion Solutions for Intelligence II, multi-award IDIQ contract, which is also a recompetition win. This contract provides the professional support services to the intelligence analysis mission, warfighters, defense planners and policymakers. We've been awarded a contract to create a benefits management system for the Veterans Administration and provide healthcare information technology services to the U.S. Department of Health and Human Services. We will also provide intelligence support services for the U.S. Special Operations Command.

In terms of our capital allocation and acquisition, activities, mirroring our disciplined and thoughtful M&A strategy, we continue to take a prudent approach to deploying capital in order to maximize value for our shareholders. A key component of this strategy is returning cash to shareholders through dividends and our ongoing share repurchase program. During the quarter, we repurchased $177 million of our common stock and paid $49 million in dividends. We continue to believe that the most effective method of long-term capital allocation is a balanced program of share repurchases, dividends and a disciplined and focused approach to M&A as evidenced by a pending strategic acquisition of the Thales Civil Aircraft Simulation business. This strategy will continue to drive our performance in the current uncertain economic environment.

Ralph's going to go over the numbers and give you some more details on it. And then we'd be happy to take your questions. Go ahead, Ralph.

Ralph G. D'Ambrosio

Okay. Thank you, Mike. Good morning. I'll comment on some items about the second quarter results, primarily focusing on results for L-3 excluding Engility, and I'll also review the 2012 guidance update. First of all, the second quarter is the last quarter that we'll report our results from continuing operations including Engility. Beginning in the third quarter, Engility will be deconsolidated and presented as a discontinued operation with the same for all the prior periods. In Table E contained in today's earnings release, we provided the continuing operation results on a pro forma basis for the second quarter and the first half of this year as well.

The second quarter sales, operating margin, EPS and cash flow were in line with our expectations. Orders were better than we expected, driven by several awards including the Australian C-27J 10 aircraft award, which was not included in our prior guidance. And those awards drove a book-to-bill ratio, excluding Engility, at 1.13x. And this compares favorably to a book-to-bill for last year, excluding Engility, of 0.98. The strong orders also increased our backlog, which is up 11% versus the end of 2011, excluding Engility. Most of the backlog increase is from our international new business wins in the first half of 2012.

Diluted earnings per share, excluding Engility, was $1.92 in the second quarter, a 3% decrease compared to the second quarter of last year. The EPS results demonstrate our continued strong cash flow and disciplined capital deployment. It shows that they're able to offset the impact of EPS from lower sales and margins, as well as headwinds that we had for an $0.11 tax gain in the second quarter of 2011. Second quarter sales, excluding Engility, were $3,143,000,000 and down 3% versus the second quarter of 2011, with most of that reduction coming in the NSS segment. Operating margin, excluding Engility, declined 10 basis points to 10.6% versus 10.5% from a year ago. And most of that decline was due to higher pension expense of $7 million for the second quarter of this year.

As Mike said, we also had very strong orders. They totaled $3.9 billion, again with most of the upside coming in the platform systems business area within aircraft modernization and maintenance. The rest of the second quarter results and trends are covered in the earnings release.

With respect to the 2012 guidance update of then removing the Engility business that was spun off, our consolidated guidance was unchanged from the April 26 guidance update. The 2012 guidance for diluted EPS from continuing operations, which includes -- or I'm sorry, excludes the Engility pre-spin results is $7.70 to $7.85, unchanged from when we first introduced it on June 26, and it includes a $0.05 debt retirement charge that we'll record in the third quarter for $250 million of debt that we're repaying, with part of the proceeds from the Engility spin-off. At the midpoint, our EPS guidance is about 1% lower than it was for 2011. Sales guidance, excluding Engility, remains at $12,950,000,000 to $13,150,000,000, which is about a 1% decrease versus 2011. At the segment level, we also made no changes to our segment sales guidance for 2012. Consolidated margin is now expected to be 10.3%, expected to decline by about 70 basis points from last year with the higher pension expense causing a 30 basis point reduction.

In today's segment guidance update, we raised Electronic Systems margin and we lowered C^3ISR margin, both primarily for sales mix changes.

Our free cash flow guidance from continuing operations is $1,045,000,000, and it continues to be very robust and is about approximately $10.75 per share. With the recent competition win and the Engility spin-off, I believe that we have dramatically improved visibility in our cash flow by minimizing downside risks related to the services businesses.

With respect to the capital structure, we ended June with $481 million of cash. And as we previously disclosed, we'll use the net proceeds from the Engility spin-off of approximately $325 million to repay $250 million of debt, which is actually happening today. We're redeeming some of our 6-3/8% subordinated notes and the remaining $75 million, we'll use for share repurchases in the second half of this year. And that brings our full year expectation for share repurchases to about $875 million.

Finally, and taking a look at the third quarter, we expect sales, and this excludes Engility, to be somewhere between $3.2 billion and $3.3 billion, earnings per share between $1.80 and $1.85, which includes that $0.05 debt retirement charge. Free cash flow should be in the $250 million to $300 million range, and operating margin in the low 10% range. We expect the third quarter book-to-bill ratio to be about 0.9 and the full year book-to-bill ratio to now exceed 1.0.

That concludes my comments and we'll begin the Q&A. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of George Shapiro with Shapiro Research.

George Shapiro

Ralph, you suggested on the last call that AM&M has some upside if you won Fort Rucker, but you didn't change the sales guidance. And bookings looked like they've been pretty strong. So are you just being conservative or what's happening there?

Ralph G. D'Ambrosio

Well, George, on the first quarter earnings call, I said that if we won the Fort Rucker recompete that, that would place us at the high end of our segment guidance for sales range for Aircraft Modernization and Maintenance. And that if things went well, would have some potential to exceed that. What also happened in the quarter was that we booked the Australia C-27J order, and that's going to add somewhere between $30 million and $50 million of sales to the full year estimate for that segment. And frankly, it wasn't enough for me to raise the guidance at this point. So that's what's happening in that segment, George.

George Shapiro

Okay. And then just one other. The C^3ISR discussion, you mentioned the ROVER contract ending, can you kind of give us a size for that particular contract?

Ralph G. D'Ambrosio

Well, the ROVER contract is not ending and ROVER is a family of products. What happened is that we had lower sales in the quarter on ROVER of about $14 million. So it's not ending. It's a continuing product -- a family of products where we have almost annual updates or technology upgrades to our ROVERS. And we're up to release 6.0 right now with several other variance in the works.

George Shapiro

And Ralph, the margin guidance at C^3ISR was reduced, so you're going to see it down clearly in the second half. I mean, can you discuss a little bit more about what's behind that?

Ralph G. D'Ambrosio

Well, what we said in the earnings release is that, and what I said a moment ago, is that we have a sales mix change. It's a combination of lower product sales. I talked about ROVER already. Also this year, we have a decline in the Phoenix program, which is ending. We have a reduction in FAB-T because that's transitioning from LRIP to production. The production work is not going to start until next year, and that's part of -- the other part of the reduction in our products. And offsetting that, we've had increases in our logistics, support and fleet management work on both large and small ISR aircraft, and that type of work carries slightly lower margins.

Operator

And our next question will come from the line of Cai Von Rumohr with Cowen and Company.

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

So your Fort Rucker win, is that going to have a $400 million run rate? I think it looks like that's what the run rate is, but I thought it was going to be a little lower than that? And maybe comment on the profitability on the new contract versus the old, if you could?

Ralph G. D'Ambrosio

Okay. So our Fort Rucker sales this year are going to be about $450 million. It's the same that it was last year. And the new contract is $2 billion over 5 years. So we're going to have -- it's going to be about $400 million a year, perspectively. And what's happening is there's slightly fewer aviators going through flight training at Fort Rucker, and that's causing the reduction in the annual sales of about $50 million, perspectively. The margins on the new contract are going to be about 100 basis points lower than what they were on the old contract, not a big impact in terms of operating income or margin for the segment.

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

Got it. And then you indicated tax rate of 34.4% for the year. I -- you saw with all the calls I haven't been able to kind of back out the first quarter. What does that imply for the third and fourth quarter of the year?

Ralph G. D'Ambrosio

It implies a tax rate of -- in the high 34% range.

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

Okay. So that's what I was thinking, okay. And Fort Rucker was, I guess, are the ones we've been tracking the last big recompete. You have -- if you look out over the next 12 months, should we be aware of any other major recompetes coming up?

Ralph G. D'Ambrosio

Well, the -- when I talk about major recompetes, I define them as a contract that generates at least $100 million in sales of the company so -- annually, that is. And if you look out into next year, the only recompetition that will meet that definition is a classified Intel support job that we have in the NSS segment. That's going to be recompeted sometime toward the end of next year. If it stays on schedule, the new contract will start October 1, 2013. And frankly, that procurement [ph] strategy at the customer is still somewhat in flux. So -- if the timing could change somewhat. But if it stays on as currently scheduled, the new contract would begin October 1 of 2013. And then, we don't have major recompete risks.

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

And then on the offensive side. I mean, the C-27J to sail to Australia wasn't in the plan. Textron ended up when it was Ship-to-Shore actually happened. Could you talk about any opportunities you might have over the next 6 to 12 months of size?

Michael T. Strianese

Yes, Cai. The -- It's kind of a dicey outlook given the sequestration scenarios that we're kind of thinking about, and where we're going to end up. But needless to say, the Ship-to-Shore is a new program. We're also on a team with BAE Systems for the new trainer, which will probably get decided in the next quarter or 2. And we're a team that partnered in the host of other areas. But I mean, there's nothing large or unusual there that would be a major driver. Having done a pretty thorough review of the company, we think that the airborne ISR segment and some of the sensor systems, I've been getting a lot of international attention. We're in the late stages of getting the SPYDR aircraft qualified for export. And we are hopeful that, that will start to take off either at the end of this year or early next year, and perhaps get to a place where we would have steady production and delivery schedule. But again, that order book hasn't started yet because we're still getting it qualified for export. In Electronics, we have a number of new products, particularly in Soldier Systems with just about every single Next-Gen night vision program they have won. But again, these are new production programs and they're just in the early stages again we started. So we're hopeful that we're at a place where some of these new opportunities will be available to offset some things that might decline if we end up with a 12%-ish type cuts that could occur next year. And we're just trying to keep the balanced view on the marketplace and developing things where we are highly confident that there's a customer demand right now.

Operator

And our next question will come from the line of Myles Walton with Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

Maybe the -- first off, on the C-27J, you commented $30 million to $50 million in 2012, it would add. What does that profile look like in terms of delivering those aircrafts and the $300 million contract for the aircraft over the '13, '14 time frame?

Ralph G. D'Ambrosio

The aircraft value is $322 million. There's going to be logistics support and training that goes with it that will probably take the total value to over $0.5 billion, Myles. The deliveries are going to happen between 2014 and the early part of 2016, but work will be starting on those aircraft this year. In terms of sales profile, at this point in time, I expect that sales next year are going to be about $100 million higher than they are this year on that $30 million to $50 million that I mentioned earlier for 2012.

Myles A. Walton - Deutsche Bank AG, Research Division

Great, okay. And then Mike, on the M&A environment, can you just give us some comments there? Obviously, you're going into the second half of the year where I think a lot of people are sitting on their hands in defense M&A anyway, given the lack of clarity. Is that a similar posture that you'd echo or are you thinking it might be an opportunistic time, given there are certain companies, technologies that, regardless of the outcome, you'd want to have in your portfolio?

Michael T. Strianese

Yes, it's a little bit of both, Myles. One, I'd say on the pure defense side, there is a bit of a wait-and-see approach that both buyers and sellers are taking, right, because I would say the uncertainty that's out there with the budget is causing a pretty wide gapping of the bid-and-ask that's making it obviously difficult to close on valuations right now. On the other hand, there are technologies out there that we have targeted. But finding willing sellers is another story right now. But again, we have 2 deals under our belt this year that we're really, really happy with. Again, the Kollmorgen business is doing well and on plan, primarily driven by the Virginia Class programs. And the Thales, we expect to close by the end of the summer, the next month or so. It's tracking well as well. In terms of the pipeline, the things that are there are right now again smaller, they're tuck-in technology type plays that you'd expect us to be looking at, at all times, whether it's in the ISR space or whether it's detection capabilities or airport security, et cetera, more of the tuck-in technology that you alluded to that would be kind of good in any environment.

Operator

And our next question will come from the line of Howard Rubel with Jefferies.

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

You articulated in the release that this is Engility's part of what you want to do to reshape the enterprise. Mike, could you talk about what other things you're thinking about doing? And then, you always have that challenge of stranded costs, and how are you solving that challenge?

Michael T. Strianese

Well, we had planned on the spin-off last year around this time when we announced it. So we had -- I've been mindful for a year now about not stranding costs and have been reducing corporate budgets as well, not filling open positions. There hasn't been any layoffs there, but we basically pulled in everything we could pull in and we don't think there's any impact that's going to be of any consequence for stranded costs at this point. In terms of moving the portfolio, again as you know, lightening up on services with the Engility spin and adding a commercial business through the Thales acquisition is moving the needle more from being 85% U.S. government-dependent, 15% commercial and international to closer to 75%-25% model for this year. And I would expect, given our strategy, that trend to continue. However, how fast that needle's moving is dependent on a number of factors. One is finding suitable acquisition candidates; and two is going to be how much we're able to sustain our position on our defense programs, given the budget issue that we're facing as well. But that's the trend that we're following, and I think you'll see that coming through in the numbers.

Operator

And our next question will come from the line of Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

I was wondering if we could talk a little bit about NSS now that the spin is complete. NSS had a kind of a tough start to the year in terms of the revenue side of things. I know your guidance has remained intact, and it looks like you have a pretty decent path to get here in the second half with just a little bit of a sequential pickup. But Mike, any thoughts on how you're positioned there? And now that the spin is completed, where do you want to take that business?

Michael T. Strianese

Yes, Joe. Well, we've been doing a couple of things. One, we've beefed up the business development function there. It's a much more tightly focused group on technology-driven solutions for customers. Number two, we've been looking across the company because as you may know in this space, there's really fusion going on between cyber, IT services, communications, encryption and other things that as you can tell are going to draw from more of the product side of the house. So part of the goal there would be to get a competitive advantage where we can by including some of our proprietary products and solutions as adjuncts to the service nature of that business and to drive more penetration. It's a good-sized market so we can grow. With some cases, it's growing like cyber or counterterrorism support or things like that. In some places, it's a market share story for us where we are -- we have plenty of room to grow vis-à-vis market share. And the margins, I recognize, are lower by a handful than our composite. And we're also focused on those opportunities where the margins are more consistent with our corporate goals of double-digit margins. It's not going to go there overnight, but that is the way we want to drive that business.

Joseph Nadol - JP Morgan Chase & Co, Research Division

So services in general, is an area that has been pressure in recent years. It's picked up this year for you and for some others, and that may remain the case. But this is the half of the business or the part of the business that you chose to keep. And so when we think about 2013, 2014, I know there's -- putting the sequestration and the incremental budget cuts aside, what do you think -- and what do you think financially, directionally we can do here? Is this a business that we can maintain? Can the margins come up?

Michael T. Strianese

Well, yes, I think but what I just talked about is geared towards 2 things; one, increasing market share or being in areas where the underlying budgets are growing because there still will be growers, notwithstanding the budget, just for priority areas; and number two, yes, I mean target opportunities that are more technology solutions that are not commodity shoot-offs for services. That was the part of the underpinnings for the Engility split. That was more of a commodity-driven services business, whereas NSS is a technology or solution space business where the technical discriminators play a more significant role than they did in the Engility business. So -- and with that, those discriminators, come higher margins.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just lastly, you spent, I imagine in an ordinate amount of time completing the spin, and that's now behind you, and so you're, I hesitate to say, have -- going to have time on your hands. But I'm certain will be -- have time to think and do some more things. So is this -- can we think about this as step one, in a multistep process of realigning the company? Or is this sort of just really more of a onetime thing, and the next strategic moves are going to be much more tuck-ins and more tactical?

Michael T. Strianese

Yes, I think it's the latter. I -- first of all, I've never been accused to having too much time on my hands. I took a day off about 20 years ago and I'm still paying for it. But no, listen, we always -- we like to talk about situational awareness, and are always looking at the alignment between the marketplace and the company in terms of the pieces that we have in the portfolio, as well as how we're aligned internally of addressing those markets. So the possibility of moving some pieces around internally is always there. I can tell you, I mean I don't think the book is ever closed on adding or subtracting things that keep you more aligned with the marketplace. That's a -- just an ongoing process forever that every company should be doing, I would think. And again, it gets significantly tighter in terms of revenue pressure and the like due to budget concerns obviously, but we'll be looking to be more aggressive in our consolidation efforts. I would tell you preferably, we'd like to continue to build the company out in those areas where we are significant players and able to define our markets, whether again, it's airborne ISR or sensor systems or AM&M or what I'm going to refer to as a sustainment business is doing very, very well, as you can tell from the numbers. And that's due to some changes there and the way we were doing things and approaching the market, and it's really been a very successful story. We'd like to take that story to other business areas and really emphasize them and drive them from corporate. So -- but again, we'd really love to do more building on the portfolio at this point.

Operator

And our next question will come from the line of Robert Spingarn with Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Mike, earlier you talked about the 12% impact from sequestration. I just want to clarify, you're saying a 12% incremental to what they're already doing in the '13 budget request? Or this is L-3's view of where we end up on compromise?

Michael T. Strianese

No, I would say this is -- I mean, I could take you through a series of 15 numbers that calculates and comes to 12.2%. But we're basically doing the math. Let me give you the numbers to calculate and then I'll tell you what's in them. A cut of about $54.7 billion divided by $450 billions of funds available for sequestration, and that's how we came to 12%. And it's kind of consistent. This is a couple of different numbers floating around there in the 10% to 12% range [indiscernible].

Robert Spingarn - Crédit Suisse AG, Research Division

All right. So you're talking about the incremental to the 4.5% down we've got in the investment accounts?

Michael T. Strianese

Absolutely.

Robert Spingarn - Crédit Suisse AG, Research Division

Yes, I just wanted to clarify that. Okay. So in a situation like that, or maybe within, without, maybe there's 2 scenarios here. How do you see the 4 segments growing or I should say, declining on a relative basis? How should we think about those?

Michael T. Strianese

Well, we think about that everyday right now and...

Robert Spingarn - Crédit Suisse AG, Research Division

Well, that's why I'm asking because I know you're...

Michael T. Strianese

Here is a part of the issue that we have. As drafted, the sequestration is very prescriptive in that it's a fixed percentage across all line items. So you can do the math that way and we can apply it to every government contract we have and make certain assumptions and which would result in essentially a decrease of about 10% to 12% depending on different mixes and things like that. And of course taking out the commercial and international business, so it becomes a less number on the total. However, I don't think that's the end space because I think what would -- the second step, once you'd apply the reductions, would be a significant amount of reprogramming request that gets done and numbers get respread because some things can't get zeroed out and some things might get cut entirely. And that's the step in the process that we really don't know that well. But I can tell you the following, is that we are not on other than the C-27J, which has already been terminated. We aren't on any platforms that are really subject to, as a prime, being terminated that would be a material event for us. We just got reawarded our biggest program, which is Fort Rucker, so feel pretty comfortable there. So in terms of -- we have a lot of content on a lot of things, but no single item being that material, I would say that it should -- we should end up no worse than the composite of 10% or 12% and probably significantly better in some areas like ISR, like the sensor portions of Electronic Systems. We still see the airport security business being robust due to international demand. We see -- we believe NSS because of the areas of focus in cyber counterterrorism security IP has legs, notwithstanding the environment. So I can only offer you some guarded optimism here. Not everybody is going to be -- nobody is going to be unaffected. We're going to get affected. But I can't possibly tell you we're immune to this because of the mix issue we're not. But I think it'll be somewhat moderated by the way we're positioned.

Operator

And our next question will come from the line of Brian Ruttenbur with CRT Capital.

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

This is for Ralph, and just a quick question on -- I'm a little muddy on fourth quarter. Can you give me what your total revenue's going to be in the fourth quarter x Engility and earnings ranges, maybe revenue and earnings ranges? You gave us for third quarter, because the Engility coming out and not -- I'm just trying to figure out basically the divisional breakdown for the year?

Ralph G. D'Ambrosio

Okay. Well, given the third quarter outlook the I talked about, which is $3.2 billion to $3.3 billion in sales, our full year guidance would back into a fourth quarter sales range of somewhere between $3.4 billion to $3.5 billion approximately. And the earnings in the fourth quarter would be somewhere between $2.00 and about $2.20 per share.

Operator

And our next question will come from the line of Rob Stallard with RBC Capital Markets.

Robert Stallard - RBC Capital Markets, LLC, Research Division

I'm [indiscernible the call in late, so I'm not sure if you mentioned it, but I've a couple of questions about your nondefense activities. I was wondering if you could comment on how things have been going in the airport security business over the last quarter, whether you've seen any impact of European delays and also in the ship business?

Michael T. Strianese

Well, the international business in both those areas, let me take them one at a time. The airport security is still I'd say, mid-single digit growth rates. We -- our system has become a standard in the EU where they have decided that they will only use the millimeter wave technology. There's a lot of growth in the build-out of the airports in the Middle East and Asia, which all need the equipment more and more airports -- more and more countries rather, have been embracing our image-free millimeter wave technology as the standard. The shipbuilding, on the other hand, the weak euro has been reducing some of the sales, shipbuilding sales. The commercial space there, it's not -- it's a little lumpy. And so on some full carriers, container ships, et cetera, there still seems to be a excess capacity in the marketplace. However, if it's cruise ships or royal services ships, there's again, a steady stream but not, I wouldn't call it robust, of new building. It's a competitive space but we have a pretty comprehensive product portfolio. So that is also I would say -- we're dealing with the segment here, so the segment is kind of flattish. But you have some again, low single-digit growth on commercial; offset by some decline in the U.S. government for the segment. So those areas are both growing. And I think overall in the quarter, we probably have, across the company in all our commercial international segments, around a 7% or 8% growth. So that area of the business is growing.

Robert Stallard - RBC Capital Markets, LLC, Research Division

These 2 areas where you might think about investing for acquisition going forward in line with your plans maybe be 25% nondefense going forward?

Michael T. Strianese

The 2 we're talking about?

Robert Stallard - RBC Capital Markets, LLC, Research Division

Yes.

Michael T. Strianese

Yes.

Robert Stallard - RBC Capital Markets, LLC, Research Division

I --what's the pipeline look like? Are there any viable acquisition candidates at the moment?

Michael T. Strianese

Yes, there are. We don't like to talk about specific candidates, especially since we're very early in any stages of discussions. But types of things would be on the airport security side, additional product offerings that could be part of our portfolio of products so that we are in an airport. We just have a bigger catalog of things or technologies, whether it's software or hardware, in a sensor area that could be again incorporated into our product base to make our systems better, more effective, address a wider spectrum of threats. There seems to be some interest domestically now in moving forward on cargo. It's going to become -- it is an increasing area of focus. We have leading products in that space and we are continually looking at investing and broadening our capabilities. We believe we have some of the best products in the world in this space. In terms of the shipbuilding electronics, electronic systems for the shipbuilding industry if you will, the things we'd look at in that space would be filling the white space in our bridge-to-propeller control systems, health and welfare of the ship, things that allow owners and operators to more efficiently man and operate a ship, technologies that allow maintenance to be more performance-based rather than timing-to-build base, which is a significant cost improvement. Anything seems to get interest that is not only a technology improvement, yes, more bells and whistles, but also can drive an owner/operator's costs lower. And that has always been the focus in that space. And again, that's -- those are the things we're looking at.

Operator

And our final question will come from the line of Michael Lewis with Lazard.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Ralph, I was wondering if we could just isolate the AM&M segment here. If you look at the funded bookings that you have year-to-date, we're seeing a complete turnaround in that segment. And based on the back of the envelope including Fort Rucker, it looks like that segment should be pointing up around 5% as of right now in '13. Am I on point with those numbers?

Ralph G. D'Ambrosio

The aircraft segment?

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Yes.

Ralph G. D'Ambrosio

Yes, but we have to deal with the potential for a sequester cut, which Mike talked about. But otherwise, yes.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Yes, of course, taking into account sequestration, everything falls out. But let's assume that sequestration doesn't occur. Basically, what I'm asking is your -- the funded booking supports significant growth in AM&M and yet in the fiscal year '13 as of where we stand right now?

Ralph G. D'Ambrosio

Correct, and I talked about in response to an earlier question about what the growth or what the sales profile would be on the Australian C-27J order, which is plus $100 million in sales next year versus this year. And then if you -- we're also going to have growth on those 2 international winnings that we had in the first quarter, one being the VIP and State aircraft, and another being a SIGINT accommodation or modification job for Korea. So international business will definitely drive growth in that segment heading into next year.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

And then just a quick follow-up on the SAI contract that you said is going to be up for recompete next year, what has been your historical revenue on that again? I'm sorry I missed that.

Ralph G. D'Ambrosio

It's about $200 million per year in the NSS segment.

Operator

Ladies and gentlemen, this concludes our question-and-answer portion of today's call. I would now like to turn it back to management for concluding remarks.

Michael T. Strianese

Okay. Thank you. So the second quarter in terms of our orders and execution was a good one, and so is the first half, and we look forward to continuing solid performance for the rest of the year. We continue to work to strengthen and extend our leadership positions in the markets we serve. However, we -- you do recognize and are anticipating a challenging budget environment going forward, our employees are our most important asset. Our talented workforce and strong leadership team continues to drive our results with outstanding execution. And I believe everybody is focused on maintaining that in the second half. And finally, our flexibility and agility, we believe are key competitive discriminators that help us develop innovative solutions that meet and exceed requirements for our customers. We are doing very well across-the-board on executing, and we believe that will make us a contractor of choice in our areas of expertise. So enjoy the rest of the summer and we look forward to talking to you in the end of October. Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may all disconnect. Good day, everyone.

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