L-3 Communications [LLL] on Thursday reported strong second quarter results posting double-digit earnings gains in large part because it has fixed troubled programs and business operations that were plaguing it the past two years.
Net income increased 27 percent to $147 million, $1.88 earnings per share (EPS), from $116 million ($1.39 EPS). Wall Street analysts had predicted the company would earn $1.69 EPS in the quarter.
In the first quarter L-3 posted a 60 percent increase in net income on improved contract performance, higher margins and lower pension expense.
Sales in the second quarter increased 5 percent to $2.7 billion from $2.5 billion a year ago, with organic growth up 7 percent. L-3’s internal growth excludes revenue from acquisitions and revenue declines from divested businesses.
All three of L-3’s operating segments posted gains in income with both Electronic Systems and Aerospace Systems not suffering from charges that hampered results a year ago on international head-of-state aircraft modification contracts and holographic weapon sights. Operating earnings in the quarter also benefited from a recovery on an Army aircraft training contract, higher margins related to acquisitions and divestitures completed last year, and lower pension expense.
Segment operating margin was 9.3 percent in the quarter, up from 5.9 percent a year ago.
Aerospace Systems was the lone segment with higher sales on ISR systems for a foreign military customer, a contract price adjustment for recovery of cost overruns on an earlier Army contract, and aircraft systems.
L-3 raised its sales and earnings guidance for the year with sales now forecast to be $100 million higher related to volume on various Defense Department contracts and income a dime above earlier expectations on the higher sales, lower interest expense, and lower tax rate. Sales are pegged to come in between $10.2 billion and $10.3 billion and earnings between $7.65 and $7.85 EPS.
Chris Kubasik, L-3’s president and chief operating officer, said the company is realigning facilities, reducing the workforce, and consolidating business units to “enhance our competitive profile and position L-3 for future growth.” He said the company’s divestiture of businesses is nearing an end and it will soon shed some small units that he suggested would be immaterial to its results.
Kubasik said the company is merging its Unmanned Systems, Space and Navigation, and Mustang Technologies units into a single business “to expand strategically into emerging markets as a prime system integrator and a subsystem provider.” He also said the consolidation will optimize research and development and lower management and back office costs.
L-3 is also looking at acquisitions as part of its growth profile and is reviewing about a dozen candidates across the markets it serves, Kubasik said, adding it is looking for new technologies, products and customers.
Ralph D’Ambrosio, L-3’s chief financial officer, said the company has “deliberately slowed the pace of share repurchases” to free up cash for acquisitions in the second half of the year.
Free cash flow in the quarter was $221 million and orders tallied $2.1 billion, about $250 million below the company’s projections due to timing volatility and the slip of some international ISR systems bookings into 2017 while other ISR orders won’t happen, D’Ambrosio said.
Funded backlog at the end of the quarter stood at $8.1 billion, down from $8.4 billion at the end of 2015.