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Exelis (NYSE:XLS)

Q2 2012 Earnings Call

August 03, 2012 10:00 am ET

Executives

Katy Herr

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

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

Analysts

Joseph Nadol - JP Morgan Chase & Co, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

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

Pete Skibitski

Operator

Welcome to the Exelis Inc. Second Quarter 2012 Financial Results Conference Call and Webcast. Hosting the call today from Exelis Inc. is Ms. Katy Herr, Head of Investor Relations. Today's call is being recorded and will be available for replay beginning at 1:00 p.m. Eastern Standard Time. The dial-in number is (800) 585-8367 and enter pin, 92980247. [Operator Instructions] It is now my pleasure to turn the floor over to Ms. Katy Herr. Katy, you may begin.

Katy Herr

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

Moving to Slide 2. Before we start, please understand that this call contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, and certain factors that could cause results to differ materially from those anticipated are set forth on Slide 2 of today's presentation and in this morning's earnings release. During today's call, we will discuss our financial results for the second quarter of 2012. We may refer to non-GAAP measures, which are defined and reconciled in the appendix of today's presentation and available on our website.

Joining me on the call are Dave Melcher, Chief Executive Officer and President; and Peter Milligan, our Chief Financial Officer. As most of you are aware, yesterday morning, our financial printer mistakenly filed our final version of Form 10-Q prior to our published filing date. This was done without our permission and was in no way an error on the part of Exelis Inc. While it wasn't our plan to give everybody an additional day to come up with questions, we're always looking for ways to help you folks out and as always, we're looking forward to some great questions at the conclusion of our remarks today.

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

David F. Melcher

Thank you, Katy, and good morning, everybody. Our second quarter performance reflects solid program execution and operating efficiencies, despite continued challenges in the United States defense market. Second quarter sales came in as we had expected, and orders, adjusted operating income and adjusted operating margin were improved over the second quarter of 2011.

Looking over the first half of 2012, our solid execution provides confidence in our full year projections. As you are all aware, the U.S. budget debate continues. We've mentioned before, our 2012 guidance anticipates a continuing resolution in the fourth quarter, with the potential of sequestration still looming in January 2013. Sequestration continues to be a significant concern to the entire defense and aerospace industry and should be of concern for all Americans. If implemented as currently written, impacts will be felt in the health of the industrial base and in our ability to officially plan. But most importantly, these cuts will be felt in our national security preparedness.

With that said, we at Exelis are not standing still. We have considered a range of scenarios for the potential future environment and the defense budget. We are a business with a diverse portfolio of mission-enabling programs and a culture of continuous improvement. We have implemented significant restructuring over the last few years in response to declining surge support for the operations in Iraq and Afghanistan, and in anticipation of the down cycle in defense spending. In addition, we continue to focus on cost management and appropriate footprint reduction in anticipation of a challenging period ahead. We believe that the diversity of our portfolio will help us in our ability to weather the challenging environment. We have diversified our sales base significantly in the last several years.

The second quarter continued this trend, highlighted by our acquisition of Applied Kilovolts, a United Kingdom-based supplier of key commercial components for the high-growth medical and scientific instrumentation market. This acquisition fits very well with our power solutions business that currently serves defense and commercial customers.

During the quarter, we announced a $54 million award to provide our advanced integrated electronic warfare system to the Pakistan Air Force. We also announced significant program milestone achievements and new products for our international customers, including the delivery of an operational coastal surveillance radar system for Sweden's government, and upgrades to our Spearnet radio that improved its data transfer rate and mobility. And just last week, we announced the $24 million foreign military sale to provide the Oman Air Force with 12 airborne integrated defensive electronic warfare suites, as well as spares and support equipment.

Moving to Slide 4. We are on track with our financial and strategic expectations for 2012. Revenue and adjusted operating margins are on course to achieve our 2012 full year guidance. In fact, we see full year revenue trending towards the upper end of our guidance range, which is $5.4 billion to $5.5 billion. We continue to focus on adjusted operating margins, which benefit from lower pension expense and operational efficiencies. In early July, the President signed the Moving Ahead for Progress in the 21st Century act, or MAP-21, which includes a provision that increases the interest rates used to determine mandatory pension contribution requirements. As members of several industry consortiums, we were very active in educating lawmakers about the importance of this provision for corporations, such as ours, with significant pension liabilities.

Although the Treasury has not yet released the relevant benchmark rates, our estimates point to significant reductions of a required pre-tax pension contributions over the next few years, providing us with some financial flexibility. Peter will discuss our cash projections in more depth, but let me say that our free cash flow profile is on the right trajectory. After making significant pension contributions in the first quarter, we saw significant improvement in cash during the second quarter, which also benefited from more timely collections in our Information and Technical Services segment.

As we have consistently stated, the areas of strategic importance for the future growth of Exelis are electronic warfare, intelligence, surveillance and reconnaissance or ISR, Air Traffic Management, which is emblematic of large-scale secure networking, and aerostructure composites. Several strategic contract awards and program milestones achieved this quarter reflect continued progress in executing against our focus strategy. Notably, during the second quarter, we announced over $300 million in airborne electronic warfare contract awards, including a $238 million award from the U.S. Navy to upgrade the integrated defensive electronic countermeasures or IDECM systems for the F/A-18C through F variance. And for over 50 years, Exelis has provided space imaging systems to a diverse range of customers, including government, commercial and international entities. That legacy continues.

During the second quarter, we were proud to deliver the next generation commercial imaging system for GeoEye-2. This is clearly the most advanced commercial imaging payload ever delivered. We also had robust advancement in our Air Traffic Management business in the second quarter. We were awarded contracts to provide our Symphony OpsVue airport management solution to the Philadelphia International Airport and Metropolitan Washington Airports Authority.

We also entered into a licensing agreement with Embry-Riddle University, leveraging our ADS-B contract to provide realtime, integrated, next-generation flight tracking data for the University's academic research and analysis. We also continue to make progress in organically advancing our cyber security operations. During the quarter, we announced a contract with the Air Force Cryptologic Systems Division to deliver solid-state, self-encrypting drives that protect data in mobile applications, such as laptops and unmanned aerial vehicles. We also announced the introduction of a solution, jointly developed with the Air Force Research Laboratory, that enables the secure high-speed bi-directional transfer of data between 2 or more secure domains, accredited for operation at different classification levels.

In addition, just last week, we were pleased to announce that we were awarded a place on the Agile Cyber Technologies IDIQ contract by the Air Force Research Laboratory. This 5-year contract has the potential value of up to $300 million and will support the rapid research, development, prototyping, demonstration, evaluation and transition of cyber solutions for military program offices and the DoD operational community.

Lastly, we continue to shape our portfolio. Following the previously mentioned acquisition of Applied Kilovolts, a few weeks ago, we acquired Space Computer Corporation, just after the quarter closed. This tuck-in acquisition aligns well with our business strategy, to be the leading provider of data processing, exploitation and dissemination solutions. With this strategic investment, we'll augment our current capabilities to help customer decision-making through the collection and expedient processing of critical data.

Let's move to Slide 5. We closed the quarter with a total backlog of $10.5 billion, down about 7% from the first quarter of 2012. About $3.2 billion of our backlog is funded, which includes both product deliveries and funded options for service contracts. We have anticipated some moderation of our funded backlog, as production contracts move to sustainment levels. And our government customers changed their acquisition mode, to smaller order quantities and smaller funding increments on service contracts.

Compared to the first quarter, our second quarter backlog reflects deliveries of Band C Crew upgrades and night vision deliveries under the Omnibus VII contract and progress on the WorldView-3 satellite. Offsetting these declines were awards in electronic warfare, a $50 million contract with the U.S. Army to provide spiral enhanced night vision goggles or SENVG, and incremental funding for a weather instrument.

The Information & Technical Services segment drives our unfunded backlog, where contracts tend to be incrementally funded. I&TS unfunded backlog was $6.7 billion in the second quarter, a decline from the prior quarter, mainly due to the timing of option years exercised on several Middle East and Afghanistan programs, as well as the TAC-SWACAA feeder communications contract extension, which was received during the first quarter.

Before I turn the call over to Peter, let me just say that I'm pleased with our performance in the second quarter and in reaffirming our 2012 guidance. We continue to win new awards in areas of core strength, such as electronic warfare, and areas that represent future growth, including Air Traffic Management. Our diverse portfolio and flexible cost structure position us very well to meet future budgetary challenges.

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

Peter J. Milligan

Thanks, Dave. Good morning, everybody. Let's turn to Slide 6. Funded orders in the quarter totaled $1.2 billion, which was up 7% over the second quarter of 2011, and represented a book-to-bill ratio of 88%, which reflects higher orders in our electronic warfare, night vision and environmental monitoring businesses, partially offset by lower awards for domestic SINCGARS radios and the timing of funding on the GPS III program.

Revenue for the quarter was $1.4 billion, a 7% decrease from 2011, driven by lower sales of domestic SINCGARS radios, night vision goggles, as well as some moderation on several Middle East programs as we move towards their expected sustainment rate.

Adjusted operating margins were 10.7%, up 180 basis points compared to the prior year. This was a 12% increase in operating income, as we drove increased productivity on several key service contracts and benefited from lower year-over-year pension expense and lower discretionary expenses. Adjusted earnings were $0.46 equal to the second quarter of 2011, and reflected solid operational performance that offset pressure from interest expense, a higher tax rate and increased share count compared to the prior year.

Through June 30, we had negative free cash flow of $141 million, but this did represent an improvement of over $160 million from our position at the end of Q1. Our free cash flow reflects year-to-date qualified pension contributions of $261 million. By comparison, during the same period in 2011, we made just $9 million in contributions.

As Dave mentioned, there was a pension funding provision in the recently passed highway bill. As many of you know, the legislation gives companies flexibility in the timing of mandatory pension contributions. We expect that this provision will reduce our mandatory contributions for the remainder of 2012 by about $100 million. We anticipate equal reductions in mandatory contributions for the next number of years as well.

So the legislation provides flexibility in the near-term funding requirements. However, spending on variables, such as market conditions, investment performance and tax considerations, we may choose to fund our plan voluntarily. Keep in mind that this legislation only impacts a list [ph] of required contributions. There's no change to the FAS liability that you see on the balance sheet. In addition, due to the reduced level of contributions in 2012, we expect earnings to be -- as a result to be -- have slight pressure on earnings for the rest of the year. That said, however, we do expect to deliver free cash flow in excess of $200 million for the full year.

On Slide 7, you can see performance in the C4ISR segment continues to trend lower, as full year orders and sales moved to anticipated sustainment levels for domestic SINCGARS, night vision goggles and IED jammers. Orders were down 18% from the second quarter. However, as you heard from Dave, during the quarter, we did announce over $300 million in awards for airborne electronic warfare systems, and we received incremental funding for an environmental monitoring instrument.

Revenue for the segment was down about 9%, due to lower sales of domestic SINCGARS and night vision goggles. We did have some offset in the quarter with deliveries of Band C systems to upgrade portions of the installed base of CREW jammers. We continue to anticipate that sales in the segment will see double-digit declines through the end of the year. Profitability for the C4ISR segment was down about 30 basis points year-over-year, driven by the changing sales mix that was somewhat offset by lower discretionary and pension expenses.

Moving to slide 8. Orders in the I&TS segment were up 41%, due to additional work with non-DoD government customers and options exercised on 2 Middle East programs. Year-over-year revenue was down 6% in this segment. While we benefited from additional sales to non-DoD customers and on Afghanistan programs as we expected, we're seeing some moderation of revenue on several large Middle East programs, as they move to sustainable run rates, as we compare it to 2011. With that said, year-to-date contract extensions and options exercised, coupled with the strength of our customer relationships, give us good revenue visibility through the end of the year.

Adjusted operating income increased 82% over the prior year, to $60 million, for a margin of 7.9%, 380 basis points higher than the second quarter of last year, driven by program productivity on Afghanistan and Air Traffic Management programs.

Lastly on Slide 9. We did put up a strong first half in 2012, and that gives us confidence in reaffirming our guidance for the full year. As Dave said, I do expect to see revenue trending towards the high-end of our guidance range. For the full year, we are holding our guidance range for EPS in the prior range of $1.80 to $1.86 per share.

And then quickly, to add a little bit more color to the second half of the year, we expect earnings to be slightly stronger in the fourth quarter than the third, due to more favorable sales mix in the fourth quarter, driven largely by FMS sales. And then lastly, more than 2 quarters following our spin, I'm pleased to say that our operational and financial performance has been largely in line with our expectations.

Looking ahead, we will continue to actively manage every aspect of our cost structure, as we position for the tighter budget environment ahead. And with that, I think we'll open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

My first question is just if we could dive a little bit into the I&TS segment and into the Afghanistan and Middle East programs, specifically. There seem to be some moving parts there. Could you just maybe -- those are obviously different categories, could you maybe take each of those in turn and discuss, generally speaking where we are in terms of a run rate revenue in each of those categories and your visibility?

Peter J. Milligan

Yes, sure. We're looking at some of the big programs that we have there. As you know, Afghan, North and South, that's in the $200 million range per year. The K-BOSSS contract, which is in that sort of $350 million to $400 million range, and APS-5 is the other, sort of big program that we have there, which is in that $300 million range. And I think, Joe, as we said last year, we knew we'd see a little bit of a moderation on the top line, as we got to sort of the sustainment rate. So as you win those big contracts and you get all the folks on the ground, you see a little bit of a ramp, and now it sort of settled down to sustainment rates.

Joseph Nadol - JP Morgan Chase & Co, Research Division

And the performance adjustments that you took in the quarter on the Afghanistan side, is that a contract that was closed out? Or is that just sort of a mid-contract improvement? In other words, looking forward, is there opportunity for more?

Peter J. Milligan

Yes, so on the Afghan program, certainly it's not closed out. There has been some program improvements, as you mentioned, as we drive some productivity on that program. There's a part of that program, a large part that's fixed-price. So you get a little bit of leverage there, if you perform well, and we have. And then on the other side, we have some other improvements in some of the other businesses we have on the Air Traffic Management side.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay, and so, Peter, do you think there's more opportunities for some performance adjustments in the back half of the year in this segment?

Peter J. Milligan

Yes, I think if you look at the cume adjustments that we had last year, they were in the $140 million range. I would expect it to be down year-over-year, not dramatically, but we'll see. Obviously, we can't predict them with any certainty because it depends on as you go throughout the year and you do your EACs and see how you're performing against your current baseline. But on the first half of this year, we saw $60 million of margin adjustments, potentially in line with what we saw last year. So I would expect, though, in the second half of the year, to see some moderation in that.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay, and then just finally, you mentioned that there might be a little bit of pressure on your EPS because of the -- if you put less into the fund -- I guess, just first of all, what is your current thinking if indeed, as expected, your required contributions do go down this year. Do you think you're still going to fund at the same level? Or do you think that you'll taper down your contribution? And if you do taper it down, secondly, why is there pressure on EPS? Is it FAS income declines? Or...

Peter J. Milligan

That's exactly right. That's exactly right, Joe. And the mandatory contributions have come down. So that is definitely the case. At this point, we would expect to contribute $100 million less than we had previously anticipated. And then directionally, from an expense, from a FAS expense perspective, just notionally, if we would have put $100 million in, in the beginning of the fourth quarter, you would have full quarter of that 9% expected return from a FAS perspective that you no longer have.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay, and then looking forward, if your contributions -- you've been looking at this with -- at this, as pension being a very significant use of your cash flow from operations for the next several years. And that whole picture looks like it's changed here. So how are you now thinking about your capital deployment and your pension contributions? And if you do ratchet back on the contributions, what are you going to do with the cash?

Peter J. Milligan

Okay, so that's a great question, and the reality is, it does dramatically change our option set going forward. There's no doubt about that. We were looking at, as we've talked to you and others about, in that $350 million, a year or so, over the next number of years. That's down by $100 million, or so. I mean, that obviously depends on other variables holding up. But this interest rate stabilization is a major benefit for us because it gives us optionality. What we're go to do with that cash is going to depend now, of course, on what opportunities we see unfolding. And I think I'll let Dave comment as well.

David F. Melcher

Well, Joe, I mean, what you've seen is we've deployed a little bit of cash in terms of some acquisitions, right? We completed 2 relatively small under $25 million acquisitions in the space of the last 2 quarters. We're certainly always looking at new opportunities that continue to enhance our portfolio and our options for future business. We're paying a good dividend with a good yield and trying to return some of the value to the shareholders in that way. And then, of course, the pension is out there. So we're going to try and balance appropriate investment in the business, with returning the value to the shareholders as they would desire.

Peter J. Milligan

And then, if I could add one other quick point. I mean, the pension, obviously, we talk about it a lot and because it's an important aspect for the company. We've done a number of things on that front. So clearly, interest rate stabilization, which our company and others were pushing forward appropriately, is a big, big component. But there's other things. I mean, as you know, last year, we essentially arrested the service costs and future employees now have the option of a -- have -- don't have an option. They have the ability of an enhanced 401(k). So we've done that. And then on trust side, we've done a number of things to derisk the plan, and then of course, we put in significant contributions. All of those things are driving our pension into a much, much more manageable place than it was 12 months ago.

Joseph Nadol - JP Morgan Chase & Co, Research Division

And just finally, the 800-pound gorilla here that probably most investors listening are wondering, is does this create the opportunity to buy back some stocks?

Peter J. Milligan

Well, so right now, there's no significant buyback plan on the table. I mean, I think one of the things that I've talked about to you folks and the rating agencies, clearly, because at 8 months, as a separate company now, we wanted make sure we sort of got our legs under us from a financial perspective. This does give us some more optionality. There's no doubt about that. But at this point, it's part of the toolkit, but it's nothing that we have any sort of immediate plans on announcing.

Operator

Your next question comes from the line of Robert Stallard with Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Hey, so if we could stay on the pension side of things. I was wondering if you could update us, assuming your change in pension contributions for this year, what your FAS cash pension expense will now be? And also, if all being equal stays the same, like in terms of returns and interest rate, where you expect FAS cash to trend next year?

Peter J. Milligan

Sure. So the cash expenses are unchanged and the FAS expense could be modestly up, depending on, again, depending on the lower contribution. You're probably looking at $3 million to $4 million of additional FAS expense. So it's sort of broadly still in line with what we have talked about, $30 million to $40 million in the beginning of the year. So then, certainly trending towards the upper end of that range. And then for next year, we're still doing a lot of work on that. But I think when you look on a year-over-year basis, you probably have some pressure on FAS expense, clearly, because you have lower contributions this year, and so it would drive lower returns in the following year, and as we move into 2013, you'd see lower contributions as well if we leveraged the ability to have lower contributions under the legislation, which we certainly might. So that could put a little bit of incremental pressure on that as well.

Robert Stallard - RBC Capital Markets, LLC, Research Division

And what about the impact of the lower interest rates as well?

Peter J. Milligan

The impact of lower interest rates, on what piece? Rob, I'm sorry.

Peter J. Milligan

On the pension expense heading into next year?

Peter J. Milligan

Yes, so that's -- there's no impact -- well, there is an impact there, right, because that's a higher contribution -- I'm sorry. That's a higher calculation for your expense. It doesn't drive the cash because the cash now, the economics are driven by the legislation. But clearly, if we were to market today 50 to 75 basis points below, then you're looking at some significant pressure into next year. I don't know what the range is, probably in the $20 million range or so.

Robert Stallard - RBC Capital Markets, LLC, Research Division

And how are your returns on the plan, year-to-date, tracking relative to your targets? Targeted of rate of returns?

Peter J. Milligan

Well, the returns are so volatile that it's really sort of hard to measure, right? If we look at it today versus yesterday, it seems like it's moving around because the markets have been so volatile. The other thing is, since we have some private equity and some hedge funds, you don't get a good market view right away on that. So we'll market at the end of the year, but directionally, as a 9% return expectation, I think we are largely in line with our expectation.

Robert Stallard - RBC Capital Markets, LLC, Research Division

And on the free cash flow guidance, even though you've said your contributions are going down by $100 million, you kept your overall guidance at over $200 million. Is there something that's moved negatively in the cash flow expectation?

Peter J. Milligan

No, the reality is that you have to account for the tax benefit that you would get. And the way it works, and this gets a little bit tricky, but you also have -- and all companies I'm sure do this. You can take certain contributions that you would make on a cash basis in the following year, if you make them in a certain period of time, and you deduct it on the prior year's return. So the combination of lower payments this year and lower payments next year, sort of have a double impact in terms of what that means on a tax basis. But I think you're still looking at, from a lower contribution, you would normally see that 35% to 40%, give back on the tax side, and then lower contributions next year drive a little bit as well. But what we had previously said is that we're looking at $200 million. We're clearly, in my mind, sort of in that, at least 20% range above that. So probably on a $240 million range or maybe a little more.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Moving away from pension, Dave, I was wondering if you could comment on the speed of awards coming out of the Department of Defense at the moment. Some of your peers have talked about the customer being on a bit of a go-slow. And I wonder if you've seen similar sort of issues?

David F. Melcher

Yes -- no. We do, Rob. I think just by the nature of this year, right, the uncertainty inside the department, still a notion of a continuing resolution starting in September, but no completion of one yet. And then the looming sequestration issue, I think has caused people to be a bit more tentative. And so, where things could potentially slide a bit to the right, I think people are sliding things to the right. And so, some things are moving slower than before. Partial payments are just becoming more of a norm, in terms of service contracts and so forth. And I think having worn that hat a couple years ago, these are sort of natural responses inside the department, to be a bit conservative and hedge themselves against the uncertainty.

Robert Stallard - RBC Capital Markets, LLC, Research Division

And on the service side of the business, there's been a lot of industry commentary about some pretty tough margins. But you held in very well in the second quarter. Are you finding these sort of issues as we compete, that they're coming in with much lower operating margins than before?

David F. Melcher

Well, I think actually that's been a staple of that business climate for the last couple of years. It's not necessarily something that's new to 2012. And so we've tried to pick our targets wisely, put together bids that certainly create value in the minds of the customers that we can deliver for them, for the dollars that are being allocated. We have some fixed-price contracts. And we don't shy away from those because we think that we can do well on fixed-price contracts. So I think there it's -- there is pressure in the marketplace. There are more people competing. But as we said before, there are not that many companies, honestly, that can take on the size and scale of some of these contracts, and go from 0 employees to 5,000 employees in the space of a day. There's really an art to that. There's an art to bidding these things properly and trying to find ways to create value and protect margin.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Okay. And then maybe, just finally, I was wondering if you could update us on what the size is of your large electronic equipment program, so jammers, goggles, radios, where they stand at the moment?

Peter J. Milligan

Sure, Rob. Basically, our sort of forecast for the year is to have, from those large 3 production programs, to have revenue drop by about $300 million. And that's sort of exactly in line with what we're seeing. First half of the year, it's down about $90 million. If you look at the second quarter in C4ISR, essentially the entire revenue decline is driven by that. But you saw stability to slight growth in the portfolio on C4ISR absent that, which I think is good news. And in the second half of the year, we're expecting the remainder of that. So about $200 million or so, on a year-over-year basis, decline from those. So it's tracking almost exactly what we expected.

Operator

[Operator Instructions] Your next question comes from the line of Michael Lewis with Lazard Capital.

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

Dave, I was wondering if we can get an update on the status of JCREW I1B1, and what have you factored into your guidance from this program this year? And how should we think about it next year?

David F. Melcher

Well, the CREW 3.3 or I1B1 program, as you know, remains a developmental effort. We've pretty much run through the funding that we have for this year on that program, and the customer is currently evaluating program options for this program, which is a complex and game-changing system of systems. The needs of feeder have been addressed in many ways to include the upgrade of the CREW 2.1 and the Band C that we've been delivering to the Marine Corps, for example. So I think -- and there are other opportunities out there for some of the existing capabilities. I think our customers has to take a good look at where they want to go with this in the future. We continue to see opportunities in ground-based electronic warfare. But we're not planning for the volumes with I1B1 that we had with CREW 2.1, for example, and the low-rate production that was originally anticipated sometime this year, has clearly been pushed off to the right.

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

So if we think about the Navy component of this program, the anticipation that the Army is not receiving funding for IEWS and that there would be a chance for the Army to join this program, is this one of the reasons that we're seeing a delay? Or is there something else at work here?

David F. Melcher

Well, I think that, that debate that you're describing has been going on inside the Pentagon. The difference is, in some of the approaches between the services, trying to rationalize that in some way as we go forward, and in the case of the I1B1 program, I would expect that at some point, that program responsibility would be turned over to the Army, which is the principal consumer of the ground-based electronic warfare capability. How and when that occurs, I think, is yet to be determined by the department. And we're working with both the Army and the Navy to try and find a way forward that makes sense, to take advantage of these technologies that have been created in the best fashion. All that will be balanced with the budgetary environment and the budgetary constraints, which in many cases, are yet to unfold with respect to sequestration.

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

Okay, that's fair. And then Peter, while Kilovolts and Space Computer are relatively smaller acquisitions, just so we can track internal growth by segment, what revenue should we expect from each company over the next 12 months?

Peter J. Milligan

We're still looking at that, but you're probably looking in the range of about $20 million, or so, next year, and you'll see a piece of that in 2012.

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

Okay, so -- okay, $20 million in '12 and then would it be another...

Peter J. Milligan

No, it's a little less -- it's less than $20 million in '12. You're looking at probably $20 million, $25 million in '13, probably 1/2 of that or so in '12. Actually, Mike, let me restate that because you're talking about 2 of them, right? So together, it's about $40 million next year. I'm thinking of just the one, but you're right, because we had another one that closed in early July. About $40 million next year, and about 1/2 of that this year.

Operator

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

Pete Skibitski

I guess maybe, Peter, could you -- if I missed it, could you bifurcate for us the $47 million in cume touchups between the 2 segments?

Peter J. Milligan

I think the majority of it was in the C4ISR side. We probably had about $15 million or so, $15 million to $18 million on the I&TS side, the remainder being in C4ISR.

Pete Skibitski

Got it. Okay. And then are you expecting second half C4 margins to be stronger this year than the first half like it was last year?

Peter J. Milligan

Yes, I think -- if you look at the second half of the year, we would expect to see some increase in margins. So you come out the first half of the year at around 14.5%, or so. You're probably looking at an uptick from that, and a lot of that driven again by some of the strength in some of the FMS sales that we would expect. And then also in a business like our radar business where you see -- we've typically seen a much stronger back half of the year. You see better margins driven by the operating leverage there.

Pete Skibitski

I see. Okay. And I guess last one for anyone, can you just update us on maybe your top 2 or 3 main competitive opportunities? I know FAA, maybe a couple of other ones?

David F. Melcher

Well, yes, certainly, you mentioned one of the big ones. The DCIS contract or DataCom is one that we've been working on for several years now. We originally anticipated some award acknowledgment in the June or July timeframe. Now, it appears that's going to be August or September. But we've been through orals. We've answered rounds of questions. We continue to be actively involved in that. That's certainly important to us. We have a number of re-compete contracts coming up, certainly on the service side of the business. You know the TAC-SWACAA contract, at some point, will be re-competed, although it continues to be extended. And that keeps getting pushed, right? I propose the earlier comment. Next Generation Jammer is an important contract for us. And as you know, we're one of 4 competitors that still are competing in the developmental phase of that contract, which is an important EW capability for the future. And continuing to get more opportunities for things like volume and night vision, and things like that, are things that we certainly would love to have, even though that's a contract that's already won with SENVG. We're always looking to see what's next coming down the road. So there are a number of EW opportunities. There are networking opportunities. There are information and cyber opportunities, all of which we're pursuing.

Pete Skibitski

Got it. Okay. I'll sneak in one last one if I could. Could you just -- on your composites business, could you just give us the military commercial split there, and maybe your growth expectations for each side?

Peter J. Milligan

Yes, Pete, this is probably about 50/50 in that business, and certainly, the growth expectations on the commercial side are much stronger. We do expect to see some growth on both sides. But clearly, on the commercial side, we're looking at a much, much stronger growth opportunity.

Operator

There appear to be no further questions at this time. And I would now like to turn the call back over to Dave Melcher for closing remarks.

David F. Melcher

Well, I want to thank everybody for joining us today on the earnings call. We appreciate the questions and we appreciate the continuing dialogue that we have, both before and after these calls. And I would like to say that Peter and I really look forward to meeting personally with many of you in the months ahead, as we get an opportunity to go to some investor calls and meet with you where you live, or where we live. You're always welcome to come by. So thank you for participating today. And I hope you have a great weekend.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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