LLL
#Thank you
That's a lot of speculation, Rich, but happy to speak.
Obviously, what's new is that we have a two-year deal, which is great.
It's helped one of the most significant problems we as an industry have faced, which is lack of visibility.
So even directionally is a good thing, but you're asking little more.
We think most of the movement is going to be in the classified area.
I think some of the comments made by Secretary Kendall pointed to that as well.
The overseas contingency fund, OCO account, may grow as well.
As you know, a lot of the growth will be driven by international events as they unfold and as you know, there's a lot going on all over the place.
So I'd say more likely upside than downside there.
And we've also been listening very carefully to some of the commentary by those in the building, particularly Secretary Kendall and the acquisition chiefs, in terms of the types of capabilities or investments they are looking for.
But they have been specifically asking the industry to be a little more forward leaning on R&D.
And as you've seen, we have been trying to respond in that way because there are things that we do that fit some of the requirements they have and it would certainly be good to start to grow a little more organically in that space.
So we have been trying to meet those requests and develop more, especially in the classified space, where we are doing very well right now.
And that's why you see numbers like our R&D growing a little bit and we hope that we know that will be well spent in terms of our investments in future growth.
You could, but I mean you've heard some of the OEM commentary this quarter where things seem to be taking a bit of a breather.
We are in operating in a couple of markets, whether it's the training and simulation area, where there is a huge pilot demand because of retirements.
And the number if you research it, is I believe it was 0.5 million pilots over the next, could be 10 years or so.
And then you have our avionics businesses, which have historically done very well.
The problem in that space is that anything that were to come online for sale is typically very expensive and hard to make a good business case for.
We've looked at several companies over the years and where we see something that fits well with what we do, particularly something that could be consolidated and a lot of overhead saved, that's usually requisite to be able to make those numbers work.
Because they're typically higher growth, higher margin, and other things that we would see in the defense space and they command higher prices.
As you know, you have to pay a lot for growth in this marketplace these days.
So yes, we'd love to grow the business and we'd love to grow it through acquisitions.
But right now, we've seen the better deal for us being investing in our own products and developing things rather than acquiring them right now.
And we could also pursue that as a strategy.
We are the next gen system.
We have equipage there and we continually work on developing more avionics for the general aviation marketplace where we continue to do very well.
And for the large transport, that seems to be more regulation driven, whether it's a requirement for a new recorder or a revision to the key test system.
But we keep a robust R&D program that will help us with the growth and should the deal present itself, we will certainly be all over it.
Okay, with respect to the severance, we incurred about $18 million in 2015, and we expect to incur about $10 million in 2016.
So some reduction there for sure.
And you're correct, we did have a few or maybe several one-off items in 2016 ---+ I mean 2015, that we don't expect to recur in 2016.
I think you see that in the margin expansion that we are guiding to and anticipating which is happening in all three segments.
And as Mike said, particularly with respect to Aerospace, we're not satisfied at all with where those margins are presently and that's where we have the most work to do in terms of lifting the margins.
We have some small upsides there.
I'm not sure I would call it a balance.
We said that we are committed to maintaining the investment grade rating, <UNK>.
We think we can do that and still grow the business and we now are beginning to see that we'll start to grow operating income and EBITDA.
We expect that to happen in 2016 and more so thereafter.
So that's going to have a natural deleveraging effect as well.
Okay, so each of the rating agencies calculate leverage slightly different and they explain and publish how they do it.
But if you look at our debt to EBITDA, we are expecting that we.
ll end this year at about 2.8 times.
And I think our target is that we want it to be about 2.7 times or slightly under that.
So we are trending in that direction.
We do have some covenant requirements in our existing debt arrangements but they allow for ---+ they're not a problem in terms of maintaining them.
Being investment grade versus non-investment grade is not a trivial decision.
I mean you don't flip the switch back and forth between those positions.
We've been investment grade since 2009.
Even though we're investment grade, we do have a very aggressive financial policy in that we deploy most of our cash and we have a good amount of leverage on the balance sheet.
And that's responsible in terms of delivering better returns to our shareholders.
<UNK>, that is the trend in this space right now.
You're going to see more and more of this.
I use the term cross-decking, but some of the big heavyweight ISR platforms to more affordable business jets.
This one you saw is very representative of the trend in many countries in how they're looking at their ISR mission requirements.
And we sit well in that space in terms of being able to do that missionization work which includes racks and racks of electronics and the precise placement of antennae systems to increasing range for being on station which could mean auxiliary fuel tanks in systems and putting in a refueling capability and the like.
All of those things are in our wheelhouse and we have excellent performance to show for it over the years in delivering these systems.
So when customers think about that cross-decking model, they call L-3 first as I'd like to say.
I mean we do a good job.
Part of it has to do with the fact that we make a lot of the subsystems, whether it's data links or the sensors, cameras, et cetera, and we're able to pull through our own products in these models which also helps the whole business.
If you get on one of these and it's not only the integration work, but it's pulling through data links in cameras and the like, that is how we intended this model to work.
It's being able to pull through L-3's systems and subsystems on these platforms.
But given the economics of operating a business jet versus a wide-body commercial platform, I think this is a trend of the future.
Sure.
Thank you.
I wanted to make a comment also to follow up with Ralph's comment on the investment grade.
If you look at the way I tend to think of it, is we will always want to operate with a credit facility.
I think it's prudent that companies have credit facilities should an M&A come up or any other matter where cash is needed in a short-term.
You run the assumption that yes, we'll always have that.
Then you get to the question of well, what's the difference if you're investment grade or not.
As you may know, that if you're investment grade, you don't have the restrictions on the payment of dividends and share repurchases and M&A.
You have that quote, restrictive payments basket issue.
So, it's really a question of ---+ we're looking at investment grade versus not, you could look at it as you want a credit facility or not because we would not be able to operate with the cash deployment objectives that we embrace with a non-investment grade credit facility.
It just wouldn't work for us and everybody would be unhappy, including me.
And so, I think it.
s not a far stretch to keep that investment grade rating now and it's typically the leverage ratio that is the operative one that gets more restrictive because of the way the numbers work.
And I believe it's, in terms of rating agencies, Moody's is the more restrictive of the three.
So, that's the one we're watching.
Ralph made a comment also, is that we get back to growth in EBITDA or in margins, that should have a natural deleveraging effect which would give us some more headroom, and we won't be having this discussion.
I just wanted to give you my perspective on why that is important.
Yes.
Hi, <UNK>.
Correct, that did not pertain to the Head of State aircraft modification jobs.
We're still on track or inline with the estimates that we had from the second quarter of last year there on the Head of State work.
But we have a variety of other programs in aircraft systems and there were some adjustments on a couple of international jobs and then some items at our Crestview operation.
Those are individually small items and as well as the aggregate, I think it's only $5 million or so.
Nothing alarming or particularly unusual there.
One this year and the other two next year.
Well, we also see that they are the contractor of choice when there's a big job to develop at ISR platform.
So some of the things that we've been doing are things we could bring from corporate are one, that we have or could we bring in more business development folks to the international side.
Number two, we are developing more international partnerships either with aircraft OEMs or with other equipment suppliers or with other industrial players.
So we have a seat at the table in these countries that are going to go forward with these systems.
We are the world leader in ISR manned platforms and I believe that that will continue to be a market that will grow.
And it's also not one of the more margin constrained marketplaces because again, these are one-of-a-kind platforms and we are not usually bidding to a low price.
We are usually bidding to a technical capability and we are not interested in low price technically acceptable in this space.
We are interested in developing and delivering state-of-the-art platforms at good margins.
So, I again, pointed to the fact that some significant international work had been completed and new work had not been brought in to fill that hole.
And also there are under US side, new platforms that will be coming out that have displaced some of the life cycle sustainment that had historically been done across that business.
So there are a couple of holes that need to get filled and this is an area where I want everybody focused on getting this business area back on track where from a margin standpoint and from a growth standpoint.
The execution to continues to be excellent.
Thank you.
So in wrapping up, the current geopolitical environment is volatile but presents new opportunities, both in country, domestically, and internationally, and we are well-positioned to capitalize as we move through 2016.
We continue to execute our strategy of strengthening our portfolio, investing in businesses that we know well and leveraging our strong cash flow generation to invest in the Company and at the same time, return cash to shareholders.
Our investment in R&D and our market-leading positions make us ready to accommodate the short-term needs of the US Government and to adapt and ship according to its longer-term third oil offset strategy.
We are seeing benefits from our refined strategy, margins are improving in 2016, as is our top line, and we will be moving forward with these efforts well into 2017.
And we're planning on keeping the margin expansion front and center for several years to come until we are satisfied with doing the best we could possibly do across the Company.
We're committed to strategic growth and performance and as always, we will work to enhance value for shareholders.
Thanks again for joining us this morning and we look forward to speaking with you again in April.
