02010 Deutsche Bank Industrials Conference | June 23, 2010
2010 Deutsche BankIndustrials Conference
June 23, 2010
Ralph D'AmbrosioSenior Vice President and
Chief Financial Officer
12010 Deutsche Bank Industrials Conference | June 23, 2010
L-3 Overview● Aerospace & defense company
● 2009 sales of $15.6B (~70% prime)
● Fortune No. 148 (based on sales)
● Non-platform centric prime contractor plus diverse subcontractor/supplier
● 67,000 employees
● 76% of sales U.S. Department of Defense (DoD)
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2009 Sales by End Customer
Army 4,107$ 26%Air Force 3,721 24%Navy/Marines 2,544 16%Other Defense 1,560 10%
U.S. Military (DoD) 11,932$ 76%
Other U.S. Government 1,127$ 7%Foreign Governments 1,082 7%Commercial - Foreign 867 6%Commercial - Domestic 607 4%
Total 15,615$ 100%
($ in Millions)
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External Environment
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U.S. DoD Budgets and Priorities
● Modest base budget growth, plus large OCO supplementals
● Rebalancing for today's wars… Iraq and Afghanistan resource focus
● Rapid acquisition… end unneeded, poorly performing programs
● Budget constraints… few new starts… rationing and re-programming continue
● SecDef (May 8)… overhead cuts needed to fund modernization and force structure
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$411 $432$480 $513 $531 $549 $566 $582 $598 $616
$124$169
$187 $153$163 $159
$50 $50 $50 $50
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
DoD Topline Budget FY06 - FY15
Source: Department of Defense Appropriation Acts FY2006 - FY2010, FY11 President's Budget document.http://comptroller.defense.gov/budget.html (Feb 2010)
Base FY09 to FY15 CAGR = 3% nominal (1% real) growth
$616
$693 $666$708
$632 $648
$535$601
$667 $667
DoD Base Budget OCO Supplemental
($ in Billions)
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Commercial/International Markets
● Commercial market - - currently declining, possible rebound late 2010, next year
● Homeland security market - - opportunity emerging for advanced checkpoint imaging systems (WBI and ACX)
● Foreign Military Sales (FMS) - - fiscal pressures curbing growth, stretching procurements
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L-3 Strategy, Objectives and Outlook
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Strategic Goals and Objectives
● Grow business base and increase market share
● Supply superior quality customer solutions with high satisfaction
● Achieve financial growth objectives - - double digit EPS growth with increasing FCF/share
● Maintain strong balance sheet, liquidity and credit ratings
● Exceed average investment returns in defense sector
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35%
20%
18%
27%
2009 Sales Mix
Command, ControlCommunication,
Intelligence,Surveillance andReconnaissance
(C3ISR)
ElectronicSystems
AircraftModernization &
Maintenance(AM&M)
GovernmentServices
SegmentsProducts / Services
48%52%
Products Services
2009 Sales $15.6B
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C3ISR Segment
● Global ISR market solutions specializing in SIGINT and COMINT systems
● Networked communications systems and secure communications products
● Logistics and field support services
● 20% of 2009 consolidated sales • Unmanned/Manned
• Small ISR aircraft
• Manpacks
• Logistics
Sales and Margin
Growth Areas
$2,278$2,537
$3,095$3,450
$0
$1,000
$2,000
$3,000
$4,000
2007 2008 2009 2010E
($ in Millions)
9.9% 9.6%
11.1%11.7%
* Based on midpoint segment guidance of April 22, 2010
*
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Government Services Segment● Engineering, technical and support
services for the U.S. Government and allied foreign governments Capacity BuildingOrganizational Sustainment Training & Education Linguist Services Systems Engineering & Integration Advisory & Acquisition Services Intelligence Analysis & Support Security & Incident Management
Systems
● 27% of 2009 consolidated sales
• Military/Police Training• Intelligence and SOF Support• Integrated Security Solutions
Sales and Margin
Growth Areas
($ in Millions)
$4,345 $4,317 $4,155 $4,050
$0
$1,000
$2,000
$3,000
$4,000
$5,000
2007 2008 2009 2010E
9.4%
9.9%9.5%
9.3%
* Based on midpoint segment guidance of April 22, 2010*
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$2,549 $2,673$2,827 $2,950
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2007 2008 2009 2010E
AM&M Segment
● Modernization, upgrades service-life extensions and sustainment, maintenance, life-cycle management of military aircraft for the DoD and allied foreign governments
● Integrated logistics support services for military aircraft and other platforms
● 18% of 2009 consolidated sales
Sales and Margin
Growth Areas
($ in Millions)
9.8%9.1%
8.6% 8.7%
* Based on midpoint segment guidance of April 22, 2010
*
• Joint Cargo Aircraft (JCA)• Special mission aircraft• Helicopter maintenance and training
support• Aerostructures and subassemblies
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$4,789$5,374 $5,538
$5,850
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
2007 2008 2009 2010E
Electronic Systems Segment● Broad range of systems, subsystems and
products, plus related services to military and commercial customers
• EO/IR (aircraft, aerostats, warfighter systems)
• Microwave Comms
• Simulation & Training
• Security & Detection
Sales and Margin
Growth Areas
($ in Millions)
11.8%12.0%
12.1% 12.1%Business Area
% of 2009 Segment
Sales
Power & Control Systems 17%
Electro-Optical/Infrared (EO/IR) 16
Microwave 15
Avionics & Displays 10
Simulation & Training 10
Precision Engagement 9
Security & Detection 5
Propulsion Systems 5
Telemetry & Advanced Technology 5
Undersea Warfare 5
Marine Services 3
Total Segment 100%
● 35% of 2009 consolidated sales
* Based on midpoint segment guidance of April 22, 2010
*
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2010 Financial Guidance (April 22, 2010)
Midpoint Growth vs. 2009
Sales $16.2B to $16.3B 4%
Operating Margin 10.8% +20 bpts
Diluted EPS $8.13 to $8.33 8%
Net Cash from Operating Activities $1.51B 7%
Capital Expenditures, Net $0.25B 37%
Notes: (1) 2010 Financial Guidance will be updated in the second quarter results report on July 27, 2010.
(2) The 2010 Financial Guidance (issued on April 22, 2010) excludes (i) an $18M ($11M after income taxes or $0.09 per diluted share) debt retirement charge related to the redemption of the 6-1/8% $800M senior subordinated notes due 2013/2014 announced on May 21, 2010, and (ii) the loss of the follow-on SOFSA contract that is expected to reduce 2010 sales by ~$150M ($0.04 per diluted share), announced on June 21, 2010.
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Cash Flow
2010Guidance 2009
(Apr 22, 2010) ActualNet income 960$ 911$
Depreciation & amortization 230 218
Deferred taxes 95 74
Stock-based compensation 228 213
Amortization of pension net losses 39 52
Non-cash interest expense 22 20
Working capital/Other (64) (81)
Net cash flow from operating activities 1,510 1,407
Captial expenditures, net (250) (182)
Free Cash Flow 1,260$ 1,225$
($ in Millions)
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Capitalization and Leverage
3/26/10 12/31/09 12/31/08Actual Actual Actual
Cash 1,135$ 1,016$ 867$
Debt 4,118$ 4,112$ 4,493$
Equity 6,796 6,660 5,941
Book Capitalization 10,914$ 10,772$ 10,434$
Debt/Book Capitalization 37.7% 38.2% 43.1%
Bank Leverage Ratio 1.9x 1.9x 2.2x
Available Revolver 968$ 968$ 940$
($ in Millions)
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L-3 Summary
● Diverse prime contractor, subcontractor and supplier
● Good positioning within slower growth DoD environment Aligned with irregular warfare priorities Quick reaction capabilities Less exposure to program cancellations/cuts Solutions to sustain/enhance existing platforms
● Growing sales, earnings and cash flow
● Disciplined capital allocation… improving leverage metrics
● Adaptability, agility and collaboration to continue growing
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