Exelis Inc XLS
Q4 2012 Earnings Call Transcript
Transcript Call Date 03/01/2013

Operator: Welcome to the Exelis Fourth Quarter and Year End 2012 Financial Results Conference Call and Webcast. Hosting the call today from Exelis is Ms. Katy Herr, Head of Investor Relations. Today's call is being recorded and will be available for replay beginning at 1 pm Eastern. The dial-in number is, 800-585-8367 and 404-537-3406 and enter pin number 85782756. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation.

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

Katy Herr - IR: Thank you, Maria, and good morning, everyone. Thank you for joining us today on our fourth quarter and year end 2012 conference call. During today's call we will reference supplemental material in the form of the presentation that you may access at www.exelisinc.com/investors.

Let's move 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 fourth quarter and full year 2012. We may refer to non-GAAP measures, which are defined and reconciled in the appendix of today's presentation and available on the website. Joining me on the call are Dave Melcher, our President and Chief Executive Officer; and Peter Milligan, our Chief Financial Officer. As always, we encourage questions at the conclusion of our remarks.

With that said, please turn to Slide 3 and at this time, I'd like to turn the call over to Dave.

David F. Melcher - CEO and President: Thank you, Katy. Good morning and thanks for joining us. As most of you know, the end of 2012 marked the conclusion of our first full year as an independent public Company. Our goal in 2012 was to establish a solid foundation for the future and we achieved this, both operationally and financially. We met or exceeded our guidance on revenue, adjusted operating margin, adjusted EPS and free cash flow. In addition, we closed 2012 in a solid financial position. The Company generated $385 million in cash from operating activities, a 15% increase over 2011.

Net debt was down 33% compared to 2011 and we have an undrawn $600 million credit facility. We also worked to reposition the Company to support our customer's evolving strategic priorities, particularly as U.S. military deployments overseas wind down. We have maintained our competitive focus as we protect our core base of business, aggressively address our re-compete opportunities and continue to look for ways to bring our proven technologies, processes and services to new customers.

Some of our 2012 highlights include the following. $363 million in announced domestic and international airborne electronic warfare awards, we continue to provide innovative ISR technologies to a diverse customer base. For example, the United States Navy chose Exelis to deliver the Adaptive Persistent Awareness System, a single award IDIQ with a ceiling of $90 million to provide an integrated site security solution for critical infrastructure.

The U.S. Army awarded us an IDIQ contract to provide generation three Aviation Night Vision Systems. Our contract valued at up to $217 million and via a separate contract we are also delivering 3,800 Spiral Enhanced Night Vision Goggles to the same customers. We also won positions on large IDIQ, such as the $23.5 billion Enhanced Army Global Logistic System Enterprise or the EAGLE program, and the $10 billion Global Tactical Advanced Communication Systems or GTACS contracts. These contracts give us additional channels to more quickly deliver affordable ready-now communication solutions and logistics in operation services.

As we mentioned last quarter we also made strategic investments in the ADS-B infrastructure, our Salt Lake City aero structure composites business and our Panama City mine defense business. During 2012 we also bought and integrated two niche companies that brought additional ISR and multi-spectral imaging capabilities into our portfolio. In January of this year, we closed our acquisition in Australia of a company called C4i, which expands our global presence in air traffic management.

Let's go to Slide 4. Turning to our fourth quarter performance we closed the year in line with our expectations. Notably, we generated $259 million in free cash flow during the fourth quarter led by strong collections in the INTS segment. From the segment perspective the C4ISR segment delivered a solid operating margin of 15.4% which represents about 120 basis points of sequential improvement driven by performance in space system. Year-over-year INTS segment orders were 11.5% higher, due to higher ADS-B, our NASA Space Communications Network Services Contract or SCNS and other space ground and range programs.

Turning to Slide 5, we closed the quarter with total backlog of $9.5 billion down about 19% from the prior year and down about 10% from the third quarter. While we saw a consistent top line performance this year, longer federal acquisition cycles and lower orders on service contract awards mainly in our Mission Systems division account for most of the decline. About $2.9 billion of backlog is funded, which includes both product deliveries and funded option years for service contracts. As we anticipated we have seen some moderation of funded backlog as production contracts move to sustainment levels and government customers change their acquisition mode to smaller order quantities and smaller funding increments on service contracts.

I'd like to take a moment to discuss the pipeline. We are seeing some conservatism in contracting in U.S. federal markets, particularly in the Department of Defense as the uncertainty of the fiscal situation continues to weigh on our customer's ability to make decisions. I will address the fiscal situation a bit more in a minute. But for now let me say that business development remains a top priority. We currently have over $7 billion in proposals in evaluation for decision during the next 12 months or so. This does not include potential IDIQ awards. We're seeing contract award delays, longer acquisition cycles and shorter contract extensions. I continue to push our business development teams to aggressively add to our pipeline, deepen our customer relationships and bring new opportunities to the table.

In the middle right of this slide we have tried to give you a flavor of some of the key 2013 programs in the pipeline for new re-compete and follow-on business. We are actively developing our pipeline of future opportunities in our strategic growth platforms of electronic warfare, ISR, and analytics, critical networks, and aerostructures. We are also laying the ground work to expand our international and commercial market presence. Today it is my pleasure to announce that last week we received a significant order from an international customer for a space-based meteorological imager solution.

This system will provide the same next-generation capabilities as those currently being developed by Exelis for the United States and Japan. These new systems provide a quantum leap in the collection of data for weather forecasting and environmental monitoring and the addition of this system to our existing portfolio of domestic and international customers firmly establishes Exelis as the preeminent global provider of advanced meteorological satellite solutions.

You will see this program move into backlog in quarter one. This is exactly the type of market expansion we have been discussing for the past year or so. It brings our experience in advanced imagery to an international customer via a commercial market sale. It's great to see our team bring home this award and we see several other similar opportunities in the pipeline, most notably, a potential in 2014 for two similar systems for another international customer.

I expect that we will continue to expand our international and commercial presence modestly over the next few years. In particular, we see significant international opportunities for our air traffic management solutions, communication systems, radars and night vision goggles. You may have noticed that at the end of 2012, we realigned the C4ISR segment a bit to carve out night vision and tactical communications systems as a standalone division within the segment. One of the reasons for this reorganization was to better focus and leverage business development resources and international distribution channels for these products. This group currently has about a $0.5 billion in proposals in evaluation, the majority of which are international.

Moving to Slide 6, working on the front end of our business is only half the equation. We are actively addressing our cost structure and operational efficiency in order to improve competitiveness and reinvest in the business. As all of us understand, there continues to be uncertainty for fiscal year 2013 and beyond and since sequestration begins today with no apparent imminent action to stop it we have to acknowledge that. The Office of Management and Budget and the DoD Service Chief have described some of the impacts and steps to be taken in response to sequestration. Our 2013 guidance anticipate continuing resolution through March 27 but does not contemplate a protracted sequestration scenario. That said, we do expect that the U.S. federal contracting environment will slow over the coming months and funding will eventually be re-prioritized from in-theater actions to investment aligned with the administrations strategic objectives.

We mentioned last quarter our plans to continue to right-size the business for the future competitive environment. 2012 results included about $12 million in restructuring expense, most of which was incurred in the fourth quarter. In our 2013 guidance we anticipate $60mi to $70 million in restructuring charges, with the majority of the expense incurred in the first half of the year. We expect to consolidate our facility square footage by about 10% during the year and we are targeting at least that much in the following 12 to 24 months. We will manage our employee population to the market requirements. We are to reduce our total employee headcount by about 6%, including nearly 600 employees who have already accepted a voluntary early retirement.

We will continue to reduce discretionary expenses across the board and we will focus R&D investments in the key strategic growth areas of electronic warfare, ISR and analytics and critical networks. We expect that the benefits of these actions will mostly offset the expense during the year. In parallel, we're moving out on a second phase of deeper business restructuring over the next 12 to 24 months, that will as I mentioned further consolidate our footprint, optimized appropriate spends of control within our organizations, reduce our corporate and division overhead and reengineer business process for greater efficiency and cost reduction allowing for appropriate investments in enterprise systems. We will keep you posted on these next steps as we move through the year.

Let me close with a few examples of the great work our team is doing. Just this week at Mission Systems, we started a new contract as the service provider at Fort Rucker, Alabama, the home of Army Aviation. We're also looking forward to the Army's NETCOM award of the TAC-SWACAA contract in the near future, having successfully delivered this capability since 2005. We will also deliver the 393rd domestic airborne electronic warfare system during our multi-decade partnership with the United States Navy, which includes 192 months of on-time delivery. Importantly we will complete the construction of the ADS-B network during 2013. By the end of 2012 we had deployed more than 80% of the required ground stations and achieved acceptance testing of approximately 75% of the required service volumes. The ADS-B team's performance continues to be outstanding, delivering contracted capability on schedule and within budget.

As a team we are proud of the solid foundation built in 2012. We understand that the ongoing budget uncertainty and the reality of sequestration cast a shadow on the whole Aerospace and Defense segment. We continue to manage proactively and decisively that which is within our control. We are actively pursuing a broad spectrum of business opportunities. Restructuring the business for greater cost efficiency and realigning the business for greater agility and we are focused on delivering outstanding performance for our customers by offering them innovative technologies and affordable solutions for their current and future needs.

I will now turn the call over to Peter, to go through some more detail on the 2012 results on Slide 7. Peter?

Peter J. Milligan - SVP and CFO: Thanks, Dave and good morning, everyone. I'll review the 2012 results and then provide an update on pension performance and outlook as well as our guidance for 2013. Starting with our full year 2012 results, as you heard from Dave, our performance met or exceeded our guidance on all projected metrics. Of note, free cash flow for the year came in at $285 million that's after contributing $266 million to our pension. Excluding those contributions, we converted free cash flow at over 130% of net income.

Revenue came in at $5.5 billion, slightly higher than our high-end of our range due to stronger anticipated sales in I&TS segment particularly on Afghanistan and NASA programs. Adjusted operating margin was 10.7%, the midpoint of our range and adjusted EPS was $1.85.

Moving to Slide 8, the C4ISR segment performed as expected. Orders were down about 13% year-over-year due to international radar and communication systems, which tend to be lumpy and counter-IED jammer upgrades.

Orders for airborne electronic warfare systems and Spiral Enhanced Night Vision Goggles have somewhat offset this decline. The segment delivered $2.5 billion in revenue, again in line with our expectations. Adjusted operating income of $366 million, reflects lower volumes, somewhat offset by lower pension expense and discretionary cost management.

Turning to the I&TS segment on Slide 9, revenue in the segment was up about 0.5% compared to 2012 as a result of stronger sales in Afghanistan, as well as the Space Communications Network or SCNS contract for NASA.

While we didn't see the topline decline as we originally expected, we did see lower orders during the year as programs like LOGCAP wind down and customers slow their awards in advance of a budget decision. Lower orders, our Middle East programs were somewhat offset by higher orders on ADS-B, SCNS, and several other spacing ground range support contracts.

Adjusted operating income was up 33% for the year due to strong performance on a few fixed-price contracts and lower discretionary spending. For 2013, I would expect margin to trend towards the 7% range in that segment.

Turning to Slide 10, our FAS pension expense came in at $32 million but it is expected to increase to a range of $90 million to $100 million in 2013. The increase is mainly due to higher amortization from the large asset loss in 2008 and $20 million increase from reducing the expected long-term return on assets by 50 basis points to 8.5% to reflect the current asset allocation.

Our current assumption is that 2013 should be the high watermark for FAS pension expense and should hold flat or trend down as we move into 2014. CAS pension expense was in line with our original expectation and we expect that expense to remain flat in 2013. So, therefore roughly comparable to our projected FAS expense in 2013. At the end of '12 the unfunded liability was about $2 billion.

While the return on assets exceeded our expectations the benefit was more than offset by the decline in the discount rate which added over $400 million to the liability. As I mentioned we contributed $266 million to our plans in 2012 and for '13 we anticipate that contributions will be between $145 million and $160 million due to the reduced minimum funding threshold resulting from the MAP 21 legislation.

As I mentioned last quarter during 2012 several steps were taken to manage pension costs and strengthen the overall health of the plan. In addition to the voluntary lump sum payout for certain deferred invested plan participants actions were taken to adjust the asset mix in the trust to reduce future volatility. We will continue to evaluate the pension for opportunity to improve financial flexibility as we go forward.

Slide 11 shows our guidance for 2013, it does assume that the current six months continuing resolution does assume any significant disruption or shutdown of government operation resulting from the sequestration. As you heard from Dave, our guidance does anticipate a more conservative U.S. federal acquisition process through the year. At the top line, I think 2013 revenue will be in the range of $5 billion to $5.1 billion with a bit more than half of that decline coming from the C4ISR segment.

You can see that we are guiding to operating margin and EPS as reported. There are no adjustments since 2013 numbers for restructuring or pension expense but we do believe it's important to see the impact of both items. Note that the comparisons on that chart are year-over-year against 2012 where the only adjustment – the only non-GAAP adjustment we had was for spend costs. As I mentioned previously there will be no adjustments for spend costs in 2013. We would expect the numbers to be immaterial. As we look at the operating margin in '13 it should be between 9.4% and 9.8%, and EPS between $1.45 and $1.55. These metrics as I mentioned do include the $60 million to $70 million in restructuring charge which is about $0.18 year-over-year.

The year-over-year increase in pension expense impacts EPS by about $0.21 or importantly 125 basis points on the operating margins. So absent this increase in what is a non-cash expense, operating margin, would show a slight expansion notwithstanding a more than $400 million revenue decline. While excellent program performance drives much of this margin performance, we've also continuously reduced our cost structure getting ahead of our markets and as you can see we intend to continue this path aggressively in 2013. We project free cash flow of at least $225 million for the year, and as a reminder that does conclude the pension contribution that I mentioned before.

Looking across the year, I expect revenue to be fairly linear quarter-to-quarter, other than the first quarter, which I expect to come in at about $1.2 billion with approximately 60% of that coming from the I&TS segment. While the first quarter represents about 24% of our overall projected revenue I expect that only about 10% to 15% of our projected EPS to be produced in Q1. The reason for this is that the vast majority of the restructuring impact will be in Q1 – the vast majority will be in the first half, but most of that will be in the first quarter, with three quarters of that overall charge coming during the first quarter when C4ISR bearing the brunt of that.

There will be some lingering pressure in 2Q '13, but I would expect improving profitability in the second half of the year, as benefits from the first half restructuring become apparent. For the full year, C4ISR margins should be in the low-teens and I&TS margin should be around 7%.

Now, with that, I'll open the floor to questions.

Transcript Call Date 03/01/2013

Operator: Robert Spingarn, Credit Suisse.

Robert Spingarn - Credit Suisse: You've both talked about the fact that the guide does contemplate a softening federal acquisition climate as the year progresses, but one of the scenarios you pointed out in this morning's 10-K was a full year extension of the CR, which potentially might not be accompanied with new fiscal '13 action and we know that that could create a problem for new starts et cetera. How might your guidance differ, if we actually get that outcome?

Peter J. Milligan - SVP and CFO: Well, so, I think about it this way Rob. We have about 86% or so of our full year revenue in backlog, which would include unfunded backlog right now. So, for programs like ADS-B and K-BOSSS which represent some of our large unfunded programs that we see obviously continuing to support on throughout 2013, So, from that perspective, we think that the topline is fully protected, but as Dave will mention or has mentioned if the environment get much worse than of course it seems to be evolving minute by minute then there could be some incremental pressure in what we'd see on the top line, but this is our best guess of taking into account everything we know quite literally through today.

Robert Spingarn - Credit Suisse: I was just going to say so you don't have any major new starts that we'd need to worry about under our continued CR?

David F. Melcher - CEO and President: There is a couple of new starts that we hope to win certainly things like NextGen Jammer. There are some other programs with the FAA that could represent a new start. I think the key on that piece though is that you could impact clearly to orders and backlog that would be I think a line item that we would see more pressure on, let so protect, we're more protected I guess on the top line on revenue because we're pulling it out of the backlog. But certainly if the environment was to get worse you would see the pressure on backlog.

Robert Spingarn - Credit Suisse: So that's really a '14 issue then it sounds like. Then just the other question I have is on the restructuring the $60 million to $70 million how should we think about from a cash perspective and when would we see that as we flow through the year?

David F. Melcher - CEO and President: Yeah, so largely those restructuring expenses represent employee separation. We should see most of that being paid out in this year, fairly linear. Again, most of that and we say $60 million to $70 million probably $55 million to $60 million of that would be paid during 2013 and again in a fairly linear way.

Robert Spingarn - Credit Suisse: So, you cash flow guidance embeds that cost?

David F. Melcher - CEO and President: Absolutely.

Operator: Joe Nadol, JPMorgan.

Joseph Nadol - JPMorgan: Could you guys characterize or do you have a bookings target you could share for the year just given the pipeline you mentioned et cetera?

David F. Melcher - CEO and President: Yes. We are trying to make sure that we are booking as much as we say we are going to have in sales, if not more. The hesitancy I have is that nobody knows exactly how this year's going to unfold. It's one of the reasons that I mentioned having $7 billion in potential bookings in the pipeline right now for decision. We will see how those things rollout during the year and one of the – as you know with a Company that's got a service business the size that we have there used to be a day when those contracts were funded fully upfront and now it tends to be month by month or maybe two months by two months at the most. So we are cognizant of the environment. We want to basically hold the line on any backlog erosion and make some inroads into building it.

Peter J. Milligan - SVP and CFO: I think Joe, the other thing is, clearly 2012 orders were a little bit disappointing for us as you could imagine and that represented – to a large extent it represented sort of the notorious slips of things. But I guess to be clear one of those items that did slip we had it in the forecast in 4Q. We actually got in early February, Dave mentioned it. We can't give the specific numbers for competitive and customer reasons but it is a material, very material contract for us in the satellite area and that is something that we closed on already this year. So, while the environment maybe weakening our goal of increasing orders year-over-year I think is reasoned by having some of those things that have slipped out already booked this year.

Joseph Nadol - JPMorgan: Then specifically just on that same point, diving into I&TS, a lot of your business there on the Mission side is IDIQs. Is it reasonable to expect in that business, with what's happening in Afghanistan, withdrawal you'd maintain a one-to-one book-to-bill there or is that just for the Company overall and maybe C4 looks a little better with the satellite and recovery there and I&TS a little weaker?

Peter J. Milligan - SVP and CFO: Yeah. I think that's exactly right. I mean, clearly, I think that book-to-bill in Mission Systems at 1 this year will be very, very challenging. I do expect that as you look at the revenue guidance for next year, call it, 450 or so at the midpoint decline, that certainly will be a piece of that, material piece of that could be, well, should be attributable to the Mission Systems business. So, they will have some challenges keeping that book-to-bill at 1, but certainly on the C4ISR side, we see some opportunities and you'll see that – you'd see that piece being over 100% at least in our targeting.

David F. Melcher - CEO and President: Just to add a little color commentary. With sequestration essentially triggering today, the question comes up a lot about what's the impact of that. Certainly, I think initially, the short cycle O&M businesses and particularly those in the Continental United States are more likely to be affected by the Department of Defense pulling really the only reasonable lever they can to respond to that. Interestingly though, some of the overseas O&M associated with theater names like our Afghan North and South contract, the K-BOSSS base support contract in Camp Arifjan, TAC-SWACAA for the communications networks and the pre-positioned stocks contracts. Those are ones that are likely to hold up a lot better and we do have a lot of those right now. So, whereas it was – it's always a mixed blessing, right. It's all co-funded, but it's more durable here in the near term.

Joseph Nadol - JPMorgan: Then just one more on this point. The NextGen Jammer is I think a pretty big one, if I could characterize it that way, probably a understatement for you this in C4. Is that a make or break for your number, I'm sure you're factoring it in as a certain percentage into your bookings target or is that just one of many, many drivers?

David F. Melcher - CEO and President: It's one of many drivers and it certainly would not be make or break for C4ISR for this year. Obviously it's going to be more on the backlog side. The conversion into sales assuming when the program is actually awarded, but say on target and we went and of course there is two assumptions there, then you would see some revenue in 2013 not anything that if it was delayed or for any other reason it didn't happen this year it wouldn't be a material move in the guidance.

Joseph Nadol - JPMorgan: Yeah, I'm at more the bookings target not the revenue guidance.

David F. Melcher - CEO and President: It's definitely more impactful on the bookings and since we haven't factored we haven't given specifics of what we think that could be. But that would definitely put a little bit more challenge on keeping that at a one to one.

Joseph Nadol - JPMorgan: Then just one more finally, Peter could you provide your latest up data on what percentage of that $2 billion deficit is non-Exelis businesses the other ITT-spins?

Peter J. Milligan - SVP and CFO: Yeah it's really no change, Joe. We've said about 60% or so of that unfunded liability would be certainly related to the defense piece and as I mentioned earlier when you think about – I just wanted to make one other point on pension. 2013 our FAS expense and our CAS expense will be virtually identical and as we move forward harmonization takes impact and takes hold and in '14 and then more so in '15, you'll start to see that CAS expense really outstrip the FAS expense, but for this year it is completely flat. So, from the high level perspective and to your specific point really no major change in that breakdown.

Joseph Nadol - JPMorgan: You're managing and even changing the asset balance like you said, but you've been doing that kind of across the board in the various different plants that Exelis and non-Exelis plants so that going forward that proportion we really should think about that remaining pretty steady?

Peter J. Milligan - SVP and CFO: Yes. That's right. I mean there is a commingled trust here but we do have separate reporting units as we work with the government on that. The big change in the assets in 2012, were a move towards fixed income. In hindsight we made that call at the right time. We made it very early in the year and had significant return. I think the 10-K shows that on our fixed income investment. I think we put $0.5 billion into that. But as we go forward we would expect to see some additional moderation in the aggressiveness if you will of that plan and that's why we took the expected return from 9% down to 8.5%.

Operator: Bill Loomis, Stifel.

William Loomis - Stifel Nicolaus: Can you talk like you mentioned some of your big re-competes coming up specifically with SCIN SWACAA. Can you talk a little bit about those in terms of timing and as you have worked through the process here any – should we expect if you will re-win these – when you re-win them, what any change in run rate or anything of that sort?

David F. Melcher - CEO and President: Sure. So some of the re-competes as we mentioned, on the TAC-SWACAA piece that should be I think mid-year. Size of the contract it probably moderates down a little bit. As far as the NASA, the deep space network that's a significant contract that I think is roughly flat. I think that will also re-compete sometime in the middle of the year. The LISC program as you may know has been one that's been pushed back for a number of years. So we could expect that to be in the late spring or early summer. That's obviously a big one for us. I think that's most of the big opportunities.

William Loomis - Stifel Nicolaus: Just on some of your other programs specifically on APS-5 and the Afghanistan program, it sounds like you expect them to be pretty stable in 2013. How do you see this playing out in 2014?

Peter J. Milligan - SVP and CFO: Yes. 2014, it's obviously going to be some dynamics happening this year, depending on how quickly the withdrawal takes place. Just from a sizing perspective, the two big programs we have in Afghanistan are LOGCAP with Fluor and the Afghan North and South. Collectively, we'll probably do a little north of $300 million on those programs. So, 2013, as Dave mentioned, we feel pretty good about that. 2014, we'll see as the year develops, but right now, I think logically we would expect to see that trending down.

William Loomis - Stifel Nicolaus: The recent commentary of the Army about reducing contractors on or contractor costs on LOGCAP, how might that impact you, have you heard anything specific on that?

David F. Melcher - CEO and President: We are a subcontractor on LOGCAP with Fluor. I think any pressures there would be transmitted in some fashion to us as well, but I think as a general comment across the O&M world, there is a general pressure on contract costs and the government is trying to be a good steward of their resources and we are trying to help them by bringing the best efficiencies we can to our work.

William Loomis - Stifel Nicolaus: You haven't heard of near term reductions of volume or any of that sort at this point?

Peter J. Milligan - SVP and CFO: Nothing sizeable for the work we are doing.

Operator: Howard Rubel, Jefferies.

Howard Rubel - Jefferies: Usually there is an ability to recover some of your costs associated with restructuring, how are you thinking about that and how can you recover it?

Peter J. Milligan - SVP and CFO: Sure. On the cost plus side and in many cases, it's recoverable and we'll put it into the rate to the extent we'll negotiate that with the government and we'll show that the restructuring is a net benefit to them. On the fixed-price jobs obviously that's a different issue and as our mix is roughly 55-45 think about that, but also think about most of the restructuring coming at C4ISR side. So, even though more of our business and services where you'll see that recovery, more of our restructuring expense is in the product side, where you would less of it. But the reality for us of course, you think about restructuring and a couple of thoughts that we had as we went into this year. First of all, Dave mentioned some of the specifics around the area where the costs will have to be moderated and our objective was and is to have as many of those costs out of the cost basis earlier in the year as possible. So, as Dave mentioned we should largely see that restructuring expense offset by the benefit within the year. Then, going forward you have a couple of choices, I mean for one, you have an improved cost base, which you in some cases you certainly want to use for reinvestment and the other you use that lower cost base to have a better competitive position and to offer your customer a better value. So, that's the calculus we'll be going through.

Howard Rubel - Jefferies: Peter actually to follow-up on exactly that point, maybe there is two sort of questions. One is, with respect to whether its radio or night vision how do you see this improved competitiveness translate either into expanding your market share or giving you an opportunity to sell product that would be more compelling than would otherwise be the case?

Peter J. Milligan - SVP and CFO: Yeah, I mean I think if you think about the international market and communications clearly there is lot of choices that are in the market right now. So, price is a piece of the puzzle. So, clearly while the market is not let's say price competitive as you would see on the services side and the economics are very different having a lower price point gives you more flexibility. Like I mentioned before on the investment side, having a lower cost structure allows you to then more aggressively market to areas that maybe you hadn't before. So I think that's part of the process that we will go through.

David F. Melcher - CEO and President: I would just add, more and more the conversations you have with the leadership of the Department of Defense are about providing affordable solutions and upgrading installed base because they understand and appreciate the fact that they're not going to have as many new programs and there are not going to have as many dollars in the future to buy new things. So to the extent we can take advantage of that in where we have a very large installed base with night vision and communications and then to extend some of that internationally I think that that's something that would be important to us to do.

Howard Rubel - Jefferies: I just have one more on this and then one other question. If you look at where you're going to go in square footage and probably headcount, how do you sort of measure that versus a world-class standard and how close do you think you will get close to that?

Peter J. Milligan - SVP and CFO: Well you certainly want to be at that standard and it's sort of hard to figure out what to measure. We've done benchmarks. We have looked at it in many different cases. We have a couple of outside folks help benchmark that and although as I mentioned earlier this restructuring expense is significant. It's not the first one we've had over the last number of years. The last year was a little lower at $12 million but the year before it was over $20 million. So we have continued to take the costs out and again that's why we don't make adjustments to the numbers. We give you the information and then folks in your role will treat it the way they think is best, but if I do for a second look at our 2013 numbers and I take the increase in pension expense down on a FAS basis which is non-cash, our margins would actually be expanding. Again that's expanding into a fairly significant revenue decline, which means that we've been very efficient on costs. So I certainly won't say that we are world-class, but I think our attempt, of course, will be to get there. Going forward, we'll have more footprint opportunities. We'll have sales of 7 million square feet as we exit '13. We need at least another 10% of that to be reduced over time. If you think about our business when we acquired EDO is a series of -- it was essentially a holding company. I know you've covered that company for many years. So, we distributed manufacturing facilities over time with the right operational approach. We have to begin to rationalize that back and that's exactly what we'll do.

Howard Rubel - Jefferies: Then last on new products, you didn't really talk much Dave about what you could do in the jammer market and while I know that's highly prescribed or the opportunities. My sense is that roadside bombs are not going away and so how do you shape your market opportunity there?

David F. Melcher - CEO and President: No, it's a great question and I agree with your hypothesis that this is going to be a threat it's going to be there for a while. So, I mean, we've tried to provide solutions to upgrade, existing capabilities that were in the field and we were working on the next generation of system of system capabilities going forward. Well, I expect as we've said before for that to remain as the developmental effort for a while. We are trying to have a really robust dialogue, not only with the Navy, who has principally been managing that program, but the Army and Marine Corps who are the recipients of the great bulk of the capability and what is the right way to move that capability forward in order to continually improve it because the threats will not remain idle. We all know that. So, we're continuing to do things so we can to try and help the customer through this long and the day will come when we are going to be buying a lot more of this capability to counter some new threat. We are thinking and are working to try and make sure that we are there.

Operator: Peter Skibitski, Drexel Hamilton.

Peter Skibitski - Drexel Hamilton: Just had some housekeeping questions first. Peter, can you let us know the tax rate you're assuming for 2013 as well as R&D?

Peter J. Milligan - SVP and CFO: Sure. R&D in 2012 was $65 million. We expect it to be roughly in line, maybe trending down a little bit in '13. If you look at the tax rate we ended the year on an adjusted basis of 36.7%. Our view that was for '12 -- our view for 2013 would be in that same range, maybe a little bit lower. Interestingly though, the first quarter rate will be the lowest as you get a couple of discrete benefits in Q1 and you also have that benefit from I guess the double impact of the R&D credit. So, while I mentioned before you have a little bit of an anomaly in our numbers as I look at them across the year. The first quarter is really, a couple of things there of note and of course, the restructuring we've talked about it in detail. The tax rate is the other one, where I would expect that first quarter tax rate to be potentially at or slightly below 30%, but for the full year, Pete probably around that 36.5%.

Peter Skibitski - Drexel Hamilton: Then, the new share repurchase plan should we just assume that's going to offset options creep?

Peter J. Milligan - SVP and CFO: That's right. We ended the year with about $188.5 million or so. Our objective would be to have a similar share count as we exit '13.

Peter Skibitski - Drexel Hamilton: Then, as you talked about a couple on your slides there was a couple of mentions of investment is CapEx going to be up next year?

Peter J. Milligan - SVP and CFO: CapEx in 2013 will be down. Two big reasons for that, we made our capital investment in the aero structure's business as Dave had mentioned that is now largely behind us. Of course so that building is still tied to this point and we will be in a great spot to start to win some new awards there. On the other piece ADS-B capital moderates down as well. But the other thing I think about if you think of our overall investment, there is also sort of the inorganic investment that we made last year. So the two acquisitions which are just a little bit over $40 million in some cases is sort of purchased R&D in one case. So it gives us some opportunities to leverage that as we move into '13. The other thing of importance and this is a little bit beyond '13 but so far capital in 2012 was $120 million. I expect it to be under $100 million in 2013 and then in 2014, it can potentially go way down because ADS-B is essentially as Dave mentioned earlier finished. It doesn't mean that we will necessarily take the capital to the low $40 million or something but we certainly have less of a commitment from a free cash flow perspective for that. So it gives us a nice choice there.

Peter Skibitski - Drexel Hamilton: Yes. I mean it seems like strategically in 2014, I mean your balance sheet is going to be meaningfully improved it seems like and cash flow should be improved and it seems like maybe you guys are going to have some strategic decisions to make in terms of wrapping up the share repurchase meaningfully or doing a big deal or how are you guys kind of thinking through that whole process? I am sure you kind of sense that next year.

Peter J. Milligan - SVP and CFO: Yes. I will let Dave talk at the strategic level in a second but I will say, that our view on '12 or my view certainly and what we are able to do on the cash flow side was just a real strong positive from where I see it. I mean specifically the Mission Systems team was able to drive some real significant cash collections towards the end of the year. That business should operate with a low invested capital and it does. Especially, now, as we made some big collections, I talked throughout 2012 on that topic and said there was a couple of items that we were chasing down that we had no, concern that we're going to collect them it was just timing and it was a significant effort to get that collected, but we do get the cash collected and it's behind us. Our working capital is in the low single-digits. So, we took some working capital off the balance sheet in 2012. We are sort of looking at that 3% to 4% if you exclude cash for a second on that working capital side. So, we feel like we are running the business pretty effectively there, but there is always some additional opportunities, but then from a strategic level on uses of cash, I'll turn to Dave.

David F. Melcher - CEO and President: Peter has addressed some of the things that we are going do. I mean strategically, we want to continue this journey towards becoming the best C4ISR networking company we can possibly be and those growth platforms that I mentioned a bit during the briefing, electronic warfare, ISR and analytics critical networks and aero structures really are the place where we are going to focus the bulk of our investment, acquisitive firepower and so forth. But as you know, we want to continue to pay good dividends. We are going to do some limited share repurchases, and we want to make sure that we are attending to the pension, right as we've been doing here over the last year or so. So, we are trying to balance the capital allocation in a meaningful way and as opportunity presents itself, it will be focused on those strategic growth platforms.

Peter Skibitski - Drexel Hamilton: Then Dave, just a couple of things on re-competes, GPS III, I assume that you guys are going to be on GPS III as a sensor provider for the life of the program, is this something that you have to kind of re-compete for each new satellite, is that why you have that listed?

David F. Melcher - CEO and President: Well, GPS III, right I mean they come in tranches. There is follow-on work that is available. We compete for it as a subcontractor to our prime and it goes over I think the first several four or so, our cost plus contracts and then it goes into a fixed-price regime and they are up to potentially 20 of these things that could be procured over time. So, we're trying to do our best to be competitive, control our costs and provide certainly a great product so as the governments going to want these things.

Peter Skibitski - Drexel Hamilton: Here's my last one, I promise. On to your competitive opportunities do you have any of the radio programs listed and then SRW applique and the Rifleman Radio, is that because you guys see those competitions either sliding to the right or maybe aren't meaningful enough for you, is that why?

David F. Melcher - CEO and President: No they're all meaningful. They're all important part of the landscape. We're going to compete for the SRW applique. It is going a little slower than we thought it would out of the network integration evaluation. We have a product called GNOMAD, which is a network-on-the-move capability that's been requested in field and we're trying to move that out and be a part of it. We are partnered with another one of our prime partners on the MNVR radio and of course, Rifleman is out there. Although I think you've probably noticed that most of the radios have been bought under the Program of Record, rather than competitively and we wish more would be bought competitively. We're also taking some of those similar kinds of capabilities. Internationally, the SpearNet radio is one that we just changed the contract for the other day, which takes some of that mesh network self-healing network capability internationally. So, those are all an important part of the landscape for us. We'll see how much the government is able to put in the contracting, but we were very pleased that they put in place this GTACS contract vehicle, because now it affords an opportunity outside of the Program of Record to buy these capabilities.

Operator: At this time there are no further questions. I would now like to turn the floor back over to Mr. Dave Melcher for any additional or closing remarks.

David F. Melcher - CEO and President: Well, I would just close by saying that this is an interesting day for all of us. This is going to be an interesting year. We are working very hard to control and influence the things that we can control and we have talked about a lot of them. From the capital allocation to the strategy to the reduction of costs in the businesses and looking for ways to provide our shareholders a good return going forward. So we are going to stay in close contact with you through the many conferences and investor interactions that we have over the course of next year. As we've been in our first year as a public Company we will continue to try and be as transparent as we can and make sure that you have a good picture of where we are going and what we are trying to accomplish. So, thanks for your time and attention today.

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