Charges related to a pending divestiture and trouble with two international aircraft modification programs, higher pension expense, lower sales and program mix changes sent net income tumbling in the first quarter at L-3 Communications [LLL], the company reported on Thursday.
The charge related to the sale of L-3’s Germany-based Marine Systems International (MSI) unit, which is slated to close in the second quarter, slashed $22 million, 18 cents earnings per share (EPS) off the bottom line due to a weakening of the Euro versus the U.S. dollar and a loss on a contract related to the weaker Euro.
The two aircraft modification programs for international heads-of-state trimmed $17 million from operating profits due to supplier issues that have led to cost growth and schedule delays. One program is expected to be delivered in June and the other in December and while L-3 believes it has appropriately bounded the cost overruns, “lingering risks” remain until the deliveries are complete, Ralph D’Ambrosio, the company’s chief financial officer, said on an earnings call.
Overall, net income fell 38 percent to $105 million ($1.25 EPS) from $170 million ($1.90 EPS) a year ago. Excluding the MSI impact, adjusted earnings were $1.43 EPS in the quarter, 11 cents below consensus estimates. Total operating margin fell 2.3 percent to 7.4 percent in the quarter.
Sales decreased 8 percent to $2.7 billion from nearly $3 billion a year ago as revenue from United States government customers was off 10 percent and international and commercial business declined 4 percent, mostly related to lower sales at MSI from the weaker Euro.
Across all four of the company’s operating segments, sales and profits were lower, with National Security Solutions leading the decline as the top and bottom lines were off 20 percent to $243 million and 39 percent to $11 million, respectively, driven by the drawdown of U.S. forces from Afghanistan, completed contracts and government budget cuts.
The Communication Systems segment also posted double-digit declines in sales and profit, down 14 percent to $435 million and 30 percent to $35 million, respectively, on networked and satellite-related communications programs, data recorders, and higher pensions expenses. At Aerospace Systems, which oversees the troubled international aircraft modification programs, sales were off 4 percent to $1 billion and operating income crashed 33 percent to $62 million.
L-3 said it has taken restructuring actions within the Aerospace Systems segment in response to the cost overruns and schedule delays on the two aircraft programs. The restructuring entails integrating the Platform Systems business into the ISR Systems sector to strengthen management, improving program performance and enhancing competitiveness, the company said.
L-3’s Electronic Systems segment posted single-digit declines in sales, down 6 percent to $1 billion and operating income, down 9 percent to $114 million, related to MSI, completed contracts for Army ordnance, lower volume on night vision goggles and delays in security detection products for international airports.
Michael Strianese, L-3’s chairman and CEO, said there is a high volume of activity ongoing related to potential mergers and acquisitions (M&A), which remains part of the company’s growth strategy to expand its business base and address customer priorities.
L-3 is interested in “augmenting” businesses within its Electronic Systems segment to add capability, technology and customers, he said, with potential deal sizes in the area of $100 million to $200 million.
Portfolio reshaping activities to divest non-core businesses are also ongoing and the company recently sold its small broadcast sports unit to a private equity firm, Strianese said.
D’Ambrosio said the outlook for organic sales is improving over the “next year or so as we come out of the downturn, particularly with the DoD budgets.”
Due to the pending MSI sale and related charge, L-3 lowered its sales guidance for the year by $300 million to between $11.5 billion and $11.7 billion and its earnings guidance by 18 cents to between $7.17 and $7.47 EPS.
Free cash flow in the quarter was $47 million and L-3 tallied $2.9 billion in orders. Funded backlog increased a percent to $10.3 billion from the end of 2014.