L-3 Communications [LLL] on Thursday reported increased earnings in its fourth quarter due to the reinstatement of the federal research and development (R&D) tax credit for 2014 although its overall operating income was down slightly.
Net income rose 10 percent to $203, $2.36 earnings per share (EPS), from $185 million ($2.04) a year ago, topping analysts’ expectations of $2.29 EPS. The per share results also benefited from L-3’s stock repurchase program, which lowered the overall share count.
Operating income actually slipped less than a percent to $303 million and operating margin dipped 10 basis points to 9.4 percent as lower profits at the National Security Solutions and Communications Systems segments more than offset increases at the Aerospace Systems and Electronic Systems segments.
L-3’s earnings were hampered by an $18 million (17 cents EPS) charge at Electronic Systems stemming from a product specifications matter.
Sales in quarter were off less than a percent to $3.2 billion, essentially in line with a year ago. Again, declines at NSS and Communications Systems more than offset increases at the other two segments. Sales to United States government customers were down 2 percent while sales to international and commercial customers increased a percent.
For 2014 sales fell 4 percent to $$12.1 billion from $12.6 billion while net income slid 12 percent to $664 million ($7.56 EPS) from $751 million ($8.54 EPS). Operating margins fell 70 basis points to 8.9 percent.
Free cash flow in the quarter was $452 million and for the year $946 million. L-3 spent $823 million on share repurchases and $208 million on dividends.
L-3 expects sales to decline again slightly in 2015 with guidance set at between $11.8 billion and $12 billion, which includes $55 million from the recent acquisition of MITEQ.
Earnings are projected to be in the $7.35 EPS to $7.65 ranges, which excludes an extension of the R&D credit and factors in a swing to pension expense. Operating margin is pegged at 9.3 percent. The forecast for 2015 also excludes any impacts from the pending sale of its Marine Systems International business to Germany’s Wartsila Corp.
L-3 expects free cash flow this year to be $925 million.
Funded backlog at the end of 2014 was $10.2 billion, down a percent from a year ago. Orders in the fourth quarter were $3.4 billion and $12.1 billion for the year.
Michael Strianese, L-3’s chairman, president and CEO, said on Thursday’s analyst call that “I do believe we have reached the bottom of the downturn [in U.S. government spending] and things will soon begin to grow.” He added that he expects the Defense Department will not face a budget sequester in FY ’16 and beyond, stability that give the company more visibility and make it easier to plan.