Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good afternoon. My name is Holly and I will be your conference facilitator. At this time, I would like to welcome everyone to the L-3 Communications 2004 first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).
I would now like to turn the conference over to Mr. Eric Boyriven of Financial Dynamics.
ERIC BOYRIVEN, INVESTOR CONTACT, FINANCIAL DYNAMICS: Thank you and good afternoon. Again, this is Eric Boyriven of Financial Dynamics, and I would like to welcome you to the L-3 Communications conference call. We are here to discuss the Company's 2004 first-quarter results, which were reported this morning.
We'd like to let the audience participating on the conference call know that this call is taking place live within an investment community meeting here in New York on the same day as the Company's annual shareholders meeting. With us from management are Frank Lanza, Chairman and Chief Executive Officer; Robert LaPenta, President and Chief Financial Officer; Michael Strianese, Senior Vice President of Finance; Christopher Cambria, Senior Vice President, Secretary, and General Counsel; Ralph D'Ambrosio, Vice President and Controller; and Cynthia Swain, Vice President of Corporate Communications. Also joining us are Bob Drewes, President of L-3 Integrated Systems; Greg Roberts, President of Communications Systems East; and Curtis Brunson, President of Communications Systems West.
Despite the location change, the conference call procedure remains largely the same. Joining us are people on the call, as well as analysts and investors here in the room. After management has made its formal remarks, we will take your questions, at which point we will alternate between questions from the call and questions from the room, beginning with questions from call.
Please note that, during this conference call, management will reference certain non-GAAP financial metrics. For more information regarding the Company's definition of these metrics and their usefulness in interpreting L-3 Communications' financial results, please refer to the Company's 2004 first-quarter earnings press release and its filings with the Securities and Exchange Commission.
In addition, also please note that during this call management will reiterate forward-looking statements that were made in the press release. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, we would like to call your attention to the risks related to these statements, which are more fully described in the press release and in the Company's filings with the SEC.
With these formalities out of the way, I would like to turn the call over to Mr. Frank Lanza. Mr. Lanza, please go ahead.
FRANK LANZA, CHAIRMAN CEO, L-3 COMMUNICATIONS HOLDINGS, INC.: Thank you, everybody, for joining us. What we are going to do is give you a little bit of color on what's going on and we are going to show you -- on the screen, you'll be able to see what I'm reading from and I guess it's being put on the Internet also so the people on the other end of the phone can hear it.
Basically, we had what we consider to be a great first quarter that ended up a great '03. We expect the rest of the year to be good. We've raised our projections for the year to be about $6.5 billion of sales, and we've upped our projections that was I think 3.30 to 3.35 for earnings, we've upped it from 3.35 to 3.40, in that range, so we've upped it a nickel.
Basically, if you look at the screen, a lot of conversation still about the budget and whether we will have a strong budget. I think that my consensus is that the argument won't be the size of the budget as *much as what does the budget cover and what's going to be the mix between homeland defense budget and defense budget, and what programs and platforms are going to go.
I think -- I'm going to use your words, overweight and neutral, but we've been telling you for a year that the *defense budget is going to be strong. In an overweight case, I'm going to say that they're going to decide that the defense budget is no longer a discretionary budget -- not a budget to pay bills, it will be a budget that's necessary. I can guarantee you that platforms will be sacrificed by '06 without question, sacrificed and stretched, and the money will go into *re-monetization of our present assets. They won't use the budget -- the defense procurement was at about $166 billion when you put O&M in it as a discretionary account to pay bills.
In Iraq, we've talked a little bit about it. You can see now that we're reaching back and bringing the politicians back in, teachers and doctors that were in Saddam Hussein's party that we probably *should have used in the first place. We're going to *hold *in-theater our *forces longer, we're *going to have a steady-state troops right now for the next year at least of 130,000. Question you can ask us -- who are we going to hand-off to? That's a question that needs answering. We don't really -- can't tell you who are we going to hand-off on June 30th.
A U.N. resolution is needed. I don't think we're going to get one. It would be helpful if we got a U.N. resolution. And of course, how long is the U.S. commitment is a question that everybody is going to ask.
Afghanistan we don't talk about but it is still a problem. We still have a lot of people on the ground.
South Korea, the Prime Minister is still Acting -- is still Acting President. The President is under impeachment for things that occurred, and the new political constituency that is in Korea right now is not as pro-American as we had prior to the elections, and that could be a problem.
North Korea, we have a six-party negotiations (sic) going on. China is mandatory; China's *views are the same as us on North Korea. And why is that? China doesn't want nuclear destruction on their borders, and China cannot afford to have all of the refugees fleeing North Korea to go into China. Remember, China puts a lot of food into North Korea, so nothing will get settled in North Korea without China leadership.
The military -- Congress is starting to address platforms. They are now asking the questions like Cebroski, who you might know who is a major advisor to the military said, that's not bad. He said, what's wrong with having less platforms? Why do we need all of the platforms? Why don't we just use our legacy platforms and modernize a lot of them? The OEM budget is going to increase, you can be sure of that. The army is recognizing that nothing that we are doing puts (ph) in '07, '08 in our budget. The platforms that we have in development from aircraft to ships -- there's no budget for it. And Congress is starting to say that it's got o put.
The Army has taken the initiative and canceled the Comanche and the Chief of the Army is restructuring the Army to fit into a budget and the transformation of the military. The Air Force and Navy haven't quite got there yet. The Navy still wants a lot of new ships; they still want the 350-ship Navy. *The Air Force still wants an F-22, a JSF -- but recently, the Navy has said, maybe they can't -- they don't need 12 or 13 expeditionary task force, or maybe they could do it with 8. Maybe they don't need all the ships they say, maybe they can do with 300 ships. And why are they saying that? Because they're not going to get all of these new platforms, from MMAs down to DDXs to LCSs to this nuclear carrier that is equal to the price of the current budget for the Army in R&D for a year. Well, the recognition that we've been telling you about for about a year and a half, though, they've got to restructure and look at what's needed for the U.S. over the next ten years, and it may not be platforms.
The U.N.'s role has become one of -- they advocated their responsibility for peacekeeping. The U.N. is supposed to be nonbiased. The U.N. is supposed to settle disputes, no matter who is right or wrong. And the U.N. will not lift a hand to help in Iraq, and that's wrong.
Europe is changing. We had friends in Europe for 50 years during the Cold War. Why were they our friends? Because they were scared to death of the Soviets and they needed America. The threat has disappeared, right? Now, all of a sudden, many European nations are getting very macho. You have seen what has happened in the Iraqi situation. Some of our old friends are not going to be our new friends and some of our new friends are going to be friends that used to be our enemies for 50 years; they're going to be our best friends.
In Europe now, they are creating a new military parallel with NATO, they're going to *write (ph) a new constitution for all of Europe that could be in conflict with the U.S. So, things are going to change over the next several years as to who are really going to be our long-lasting friends, and I can assure you they're not going to be -- not only would (ph) I say enemies, but friends that were close to America are not going to be the same nations that we had for 40 or 50 years.
Iraq -- the mistakes we made -- we didn't recognize obviously the severity of the problem of security. We abolished the whole Baath infrastructure that was decided by Remner (ph). Maybe he got direction from Washington. That was a mistake. We should have used the Iraqi army and started the security and taken the army leadership, because the problem we are having in Iraq with the security forces is there's no leadership. We're just training people. But there's no leadership, so who are they going to follow? They just run.
Post-war urgencies - we didn't recognize we needed the electricity. We should have brought massive generators over there. And we didn't have communications to the public. We let the TV stations go off the air. We had no way of communicating. They had to have separate meetings in every load block (ph) in order to communicate.
Good things happened, obviously -- the oilfields, the farming, the liberation of suppressed women, schools and shops did open, medical facilities were there. And of course, if they would divide the country in half, northern Iraq would a be democracy. It would be very free. And southern Iraq would still be a problem. So, the problem is severe, but it's not uniformly distributed in Iraq. And maybe Iraq will become like the U.S. became back in the colony days, when we formed a confederation of states; we didn't form the United States. Maybe Iraq has to be a confederation of districts first, and have free elections in those areas that support us and isolate those areas that are occurring right now and not have elections until they come to their senses. So you will have an Iraq that will have states in it, that will have free elections, and those areas that want to be militant, let them be militant until they come to it (ph).
How can you take a country and make it into one democracy overnight? You may have to do what we did in Korea. You may have to do it how we *were formed as a nation, with a confederation as opposed to states. Those are the kinds of things that are hitting us.
If you look at the public -- and I don't think these are going to happen -- but is the public going to support a balanced *force structure? Are they going to support a budget that keeps our defense? Those are things that I think are going to be determined over the next election.
If you look at the military leadership -- and the army has kind of taken the lead -- about a year ago, I reported to you guys the Army was behind the power curve and transformation had no plan. Now, they have the best plan. They've got a balanced force structure. They've got spiral insertion technology where they're not going to go with FCS and overnight change every piece of equipment the Army has. They're measuring the affordability versus the threat that we really have. And the Chief of the Army is saying, I have got to be ready for the threat we have. They are eliminating platforms and programs that are inconsistent with the national needs. They're simplifying the organization and they are obtaining -- they've got to obtain nonpartisan support.
Part of the problem of being Secretary of Defense, of course -- if you want to cancel a program, and that program happens to be in a state that has powerful politicians, powerful politicians can override that decision, and you will have to spend money on platforms that the military doesn't really need.
The campaign this year -- the Bush administration says global war, the economy, and Homeland Security are the key things. The issues, of course, are economy, Iraq, deficit spending and taxes. The campaign started. We've got eight months more to go of this agony. The one advice I can give you, which was given to me by a former Vice President of the United States, he said, Frank, don't believe any poll that comes out between now and September; it doesn't mean a damn. They will go up and down. The polls that make sense occur in September. In September, when the polls come out and say, Joe is leading Pete, you can believe that. But all the nonsense going on now, he says, is academic and meaningless.
If you look at what's the impact -- if Bush wins a second term, the Secretary of Defense stays. If Bush *wins a second term, the Secretary of Defense leaves. It could slow down transformation. The services could attempt to get the -- to recapture the authority they had prior to transformation. The Iraqi strategy will probably …