By Calvin Biesecker
L-3 Communications [LLL] yesterday posted strong fourth quarter income and sales driven by organic growth and better operating performance.
Almost all of the sales growth in the quarter and the year was organic, as the company completed just four acquisitions in 2007 valued at just over $200 million, the most recent of which occurred in December with the purchase of MKI Systems, a small veteran owned business providing logistics services to the DoD. Most of L-3’s cash went to share repurchases, $500 million, and another $126 million was used to pay shareholders’ dividends.
While L-3 has enjoyed substantial organic growth in the past, the combination of fewer acquisitions, more reliance on internal growth, and more cash being returned to shareholders, demonstrates a different approach by the company to growing the business and rewarding stockholders following the death of former Chairman and CEO Frank Lanza, who died suddenly in June 2006. In December L-3’s board of directors authorized a new $750 million share repurchase program and so far the company has bought back $200 million of its stock, Michael Strianese, L-3’s president and CEO, said.
Strianese said on yesterday’s earnings call that L-3 isn’t averse to making a big acquisition as long as it fits within the company’s core business. However, he said the focus this year is on emphasizing the program wins it garnered last year, decreasing overhead by consolidating business units, and continuing to grow international sales.
Net income in the quarter increased 19 percent to $207 million, $1.63 earnings per share, versus $174 million ($1.37 EPS) a year ago, edging Wall Street’s estimates by two cents EPS. Income rose on the higher sales and improved operating margins, which increased mainly due to better contract performance. Operating margins improved 30 basis points to 10.4 percent.
Sales increased 12 percent to $3.8 billion from $3.4 billion, with 11 percent of the gain organic. Sales continue to benefit from ongoing work providing linguist services to the United States military operating in Iraq and Afghanistan. L-3 recently lost another recompete of the contract, but protested the result, which led the Army to extend the work another several months.
L-3’s C3ISR, Government Services and Specialized Products segments led the way to the strong fourth quarter with each delivering double-digit operating income and sales increases. L-3 attributed the growth in part to earlier than expected sales related to aircraft programs, sales to DoD for networked communications systems, the linguist work, training and operational support for the U.S. war efforts, additional information technology needs by the Army and Special Operations Command, higher volume for simulation devices, power and control systems for foreign allied navies, and electro-optic/infrared and undersea warfare products.
For the year net income increased 44 percent to $756 million ($5.98 EPS) from $526 million ($4.22 EPS). Sales grew 12 percent to a record $14 billion from $12.5 billion, with 10 percent of the gain organic. Funded backlog at year end stood at $9.6 billion, a 10 percent increase from a year ago.
Work under the linguist contract combined with the recent MKI acquisition led L-3 to bump up its sales guidance by about $200 million for this year to between $14.2 billion and $14.4 billion.
The company also added 7 cents to EPS, mainly due to the linguist contract and MKI purchase.