L-3 Communications Holdings Inc.
) reported its third quarter 2012 earnings per share of $1.97,
surpassing the Zacks Consensus Estimate of $1.86. However, on a
year-over-year basis, earnings were down 17% from $2.24. Even
strong orders failed to offset the challenging U.S. defense
Quarterly net sales were down by 0.5% year over year to $3.28
billion. However, net sales were above the Zacks Consensus
Estimate by $26 million. Sales were up in the three segments,
namely Aircraft Modernization and Maintenance ("AM&M"),
Command, Control, Communications, Intelligence, Surveillance and
Reconnaissance ("C3ISR") and Electronic Systems. However, this
was offset by lower sales from the National Security Solutions
Key contract wins during the quarter included continued
operations and sustainment for the U.S. Army Constant Hawk
aircraft, an indefinite-delivery/indefinite-quantity (ID/IQ)
contract to supply VideoScout products and related upgrades to
the Marine Corps, communications systems for NASA's Common
Communications for Visiting Vehicles program, and an ID/IQ
contract to supply medium-speed explosives detection and
ProVision Automatic Target Detection advanced imaging technology
systems to the Transportation Security Administration. Funded
order backlog was $11.0 billion versus $9.9 billion at fiscal-end
Total operating income for the reported quarter decreased 8% year
over year to $331 million. Operating margin contracted 80 basis
points to 10.1%. Overall net income decreased 9% year over year
to $193 million.
Electronic Systems: Electronic Systems generated net sales of
approximately $1.40 billion in the reported quarter, up 1% year
over year. The upside reflects higher sales for Microwave
Products, Sensor Systems, and Simulation & Training products.
These increases were partially offset by sales decrease for
Marine & Power Systems, reduced shipments of tactical quiet
generators for the U.S. Army, and lower volume for Precision
Engagement products. Segment operating income was $158.3 million,
down 5% year over year.
C3ISR: The segment recorded net sales of $885.9 million, up 1%
year over year, driven by higher volume for airborne ISR systems.
These increases were partially offset by lower sales for
networked communication systems primarily from fewer deliveries
of remote video terminals and lower volume on the Hawklink
contract. Segment operating income was down 7% to $92.9 million.
AM&M: Net sales at the AM&M segment were up 4% year over
year to $648.9 million. The upside reflects higher platform
system sales due primarily to volume on new contracts, including
the Australian order for C-27J aircraft and international
head-of-state aircraft modification contracts, and increased
scope on the EC-130 aircraft for the U.S. Air Force ("USAF").
This was partially offset by decline for logistics support
services due primarily to the competitive loss of a task order
for U.S. Army contract field team support services in Southwest
Asia. The segment generated operating income of $65.0 million, up
8% year over year.
NSS: The NSS unit generated net sales of $352.6 million, down 16%
year over year. The results reflect less demand for U.S. Special
Operations Command information technology (IT) support services,
decline in IT support services for select non-DoD U.S. Government
agencies, competitive contract losses, and lower sales from
intelligence support services due to the drawdown of U.S.
military forces in Iraq. Segment operating income was down 55% to
L-3 Communications ended the quarter with cash and cash
equivalents of $514 million versus $538 million at the end of the
third quarter of 2011. Long-term debt was $3.88 billion versus
$4.13 billion at fiscal-end 2011.
Net cash generated from operating activities was $692 million
during the first nine-month period of 2012, a decrease of $57
million from $749 million generated in the year-ago period. The
decrease in net cash generated from operating activities was
primarily due to the decline in income from continuing operations
and higher income tax payments. This was partially offset by
lower interest payments.
Capital expenditures, net of dispositions of property, plant and
equipment, were $118 million for the 2012 year-to-date period,
compared with $119 million for the comparable period last year.
Following the trend of deploying capital and free cash flow, the
company repurchased $504 million of common stock and disbursed
$149 million as dividends.
L-3 Communications narrowed its revenue guidance range for fiscal
2012 to $13.00-$13.10 billion versus the earlier guidance range
of $12.95-$13.15 billion. It however raised its earnings per
share guidance to the range of $7.80-$7.90 versus the earlier
range of $7.70-$7.85. Operating margin is expected to be 10.3%.
On July 17, 2012, L-3 Communications Holdings completed the 100%
spin-off of a new, independent, publicly traded government
services company -
Engility Holdings Inc.
) - to L-3 shareholders. The company has retained its cyber,
intelligence and security solutions businesses.
Going forward, the segment was renamed as NSS that develops
unique solutions to deal with the challenges faced by the U.S.
Department of Defense, intelligence and global security
L-3 Communications' top and bottom line surpassed the
corresponding Zacks Consensus Estimates with ease. Going forward,
we expect the company to continue to post strong earnings based
on its opportunities in growth areas, including Intelligence,
Surveillance, and Reconnaissance, Electro-Optical/Infrared
systems and cyber security.
Moreover, the company's balanced business mix, improving
operational efficiencies and focus on research and development
allow it to pursue strategic opportunities in the commercial
arena and overseas.
Also, with the completion of the spin-off, the company will be
able to focus more on core areas by providing market-leading,
value-added products and solutions to its customers. In the long
run, we expect the company to be one of the best-positioned pure
defense players based on its broad diversification of programs
and its focus on shareholders' value. However, we remain
concerned about the loss of key contracts, defense spending cuts
and the lack of near-term catalysts. Currently, L-3
Communications has a Zacks #3 Rank, which implies a Hold rating
in the near term (1-3 months).
L-3 Communications Holdings operates through its wholly owned
subsidiary, L-3 Communications Corporation. L-3 Communications is
a leading supplier of a wide range of products and services used
in a number of aerospace and defense platforms. The company
supplies subsystems on many platforms that are used for secure
communication networks; mobile satellite communications;
information security systems; shipboard communications; telemetry
and instrumentation; and airport security systems.
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