Defense and aerospace operator
L-3 Communications Holdings Inc
) lower-than-expected second quarter earnings and possible
misconduct in maintenance of accounts have taken a toll on its
share price. L-3 Communications lost 12.27% yesterday to close at
$104.96 per share. The aftermarket trade indicates L-3
Communications shares will continue to slide.
What were the accounting irregularities?
During the second quarter release, the company announced that they
have unearthed an accounting misconduct at its Aerospace Systems
segment. The company is being assisted by outside accounting and
legal advisors to solve this problem.
The accounting problems pertained to a Department of Defense
contract running from Dec 2010 through Jan 2015. That contract has
averaged annual sales of approximately $150 million. It related to
cost overruns on the program that were inappropriately deferred
while net sales were overstated in the accounts.
Steps Taken by the Company
L-3 Communications decided to incur a pre-tax charge of $84 million
and reduce net sales by $43 million over 2011-2014. The
company incurred a post-tax charge of 21 cents per share in the
reported quarter. The company also lowered its estimated operating
income from the Aerospace Systems segment by nearly $35 million for
the second half of 2014.
In addition, the company fired four employees while one resigned.
What the law firms will try to find out?
Concealment and manipulation of financial information and
presenting a rosier picture to the investors is a serious
allegation. Shareholders have every right to be in the know, as
they have a stake in the company and any fall in the share price
affects them financially.
This alleged misconduct has brought in a group of shareholder
rights law firms who will try to probe whether the problem runs
deeper than what has been apparently revealed. The objective of
these law firms will be to protect the interest of the investors of
Investigation will throw light on the persons involved in the fraud
and how the accounts were manipulated over the years.
Though the company said that it has isolated the problem and
adjusted current as well as previous year accounts, it also
admitted the gravity of the misconduct of its employees.
We note that L-3 Communications has been a consistent performer
clocking earnings beats over the last few years. However, the probe
will reveal the company's true accounting details and the real
picture when compared to market projections.
L-3 Communications currently holds a Zacks Rank #2 (Buy). Other
operators in the aerospace and defense space, which look well
placed at current levels, include
The Boeing Company
Northrop Grumman Corporation
General Dynamics Corp.
). All these stocks carry the same Zacks Rank as L-3
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