L-3 Communications [LLL] on Friday said it is making further downward adjustments in income and sales in its Aerospace Segment following similar revisions announced in July as part of its second quarter earnings call and the company also reported charges in its Electronic Systems segment related to a flight simulators program.
In a Securities and Exchange Commission (SEC) filing, L-3 said that due to the findings so far of its internal review into the Aerospace Segment’s finances, it is lowering its segment earnings guidance by $34 million this year, with $24 million related to lower profitability in the Logistics Solutions and Platform System sectors and $10 million associated with costs to conduct the review. The company didn’t update its per share earnings expectations, which currently stands at between $7.90 and $8.10. Current sales guidance is between $12 billion and $12.2 billion for the year.
Based on its internal review, L-3 also said that it has identified “material weaknesses” in its internal financial reporting controls that existed as of Dec. 31, 2013 and March 28, 2014.
L-3 said its review of the Aerospace segment “is substantially complete,” adding that it continues to work on finalizing its second quarter report. At the time L-3 reported its second quarter financials on July 31 it said the results were preliminary.
In July, L-3 said accounting issues in its Aerospace segment that had been withheld from corporate management led to $84 million in pre-tax earnings charges and a $43 million reduction in its sales (
Defense Daily, July 31). In its SEC disclosure Friday, the company said accounting adjustments in the segment total $164 million and the negative impact to sales is $53 million.
Within the Aerospace segment, the earnings adjustment in the Logistics Solutions sector is $117 million, which stems from $69 million in deferred cost overruns on a maintenance and logistics support contract for the Army’s C-12 aircraft, and $48 million in accounting errors related to inventory valuations and unbilled receivables on other logistics support contracts. In the Platform Systems sector, earnings adjustments are $47 million due to losses on two aircraft modifications contracts and write offs for pre-contract costs for aerostructures for a new commercial plane.
In the Electronic Systems segment, L-3 identified $164 in pre-tax income charges, offset by $28 million in interest income, related to a sales-type lease transaction for flight simulators that dates to 2004 and ends in 2023. Sales in the segment are being reduced by $53 million related to the flight simulators contract.
L-3 said that within Electronic Systems the $164 million in earnings charges consist of $51 million and $12 million in the second and first quarters of 2014, respectively, and $101 million for the period before 2014. The $28 million offset from interest income is also before 2014.
J.P. Morgan defense analyst Joseph Nadol said in a note to clients on Friday that the latest disclosures look “like this is probably the worst of it,” noting that the waiver for filing the second quarter results is only for two weeks. He added that “closure is on the horizon.”
Nadol estimates that the revised financials for the Aerospace segment will have a 3 to 4 percent impact on L-3’s per share earnings this year.