L-3 Communications [LLL] on Thursday said it swung to a profit in the third quarter versus a year ago when the company suffered nearly $500 million in charges related to a business segment that it eventually divested.
Net income in the quarter was $148 million, $1.88 earnings per share (EPS), versus a loss of $299 million ($3.68 EPS) a year ago, beating analysts’ estimates by six cents per share. L-3 sold its National Security Solutions unit to CACI International [CACI].
Excluding the results from discontinued operations, L-3’s net income of $148 million increased 18 percent from $125 million ($1.54 EPS). Various tax benefits boosted earnings including a reversal related to federal, foreign and state taxes, the reinstatement of the federal research tax credit, and adoption of a new accounting standard for income tax benefits related to employee stock-based compensation.
The tax benefits were partially offset by a $14 million pre-tax charge for a pending settlement related to holographic weapon sights.
L-3’s segment income was down 22 percent to $215 million on declines at all three of its segments, driven by big declines Aerospace Systems and Communication Systems, and a small drop at Electronic Systems. Segment operating margin was down 210 basis points to 8.6 percent.
Sales in the quarter dipped 2 percent to $2.5 billion from $2.6 billion a year ago due mainly to lower revenue at Aerospace Systems and slight declines at the other two segments. Sales to the United States government, primarily the Defense Department, were higher, but were more than offset by lower revenue from commercial and international customers, Michael Strianese, L-3’s chairman and CEO, said on the company’s earnings call.
Orders in the quarter were $2.7 billion and funded backlog stood at $8.3 billion, down from $8.4 billion at the end of 2015. Free cash flow was $163 million.
L-3 continues to look at targeted acquisitions to build its core business, broaden operations, expand market share and add new customers, Strianese said. There is the potential for several small deals to be announced this year or in early 2017, Christopher Kubasik, L-3’s president and chief operating officer, said on the call.
The company spent $80 million on two small acquisitions recently, AeroSym and Micreo, and a pending deal for Implant Sciences [IMSC] would cost just under $120 million. Ralph D’Ambrosio, L-3’s chief financial officer, said if several other small deals close this year the company’s acquisition spending would be at or above $300 million in 2016. In 2017 D’Ambrosio expects “at a minimum” the deal flow would be like it is this year.
L-3 is working to divest several small businesses that contributed about $50 million in sales and $3 million to $4 million annually in operating income, D’Ambrosio said.
L-3 updated its 2016 guidance and provided a preliminary outlook for 2017. The company raised its sales forecast for this year by $100 million to between $10.3 billion and $10.4 billion and upped its earnings guidance to between $7.85 and $7.95 EPS from the prior range of $7.65 to $7.85 EPS. The top line guidance increased on better volume in Aerospace and the bottom line is gaining from the third quarter tax benefits.
In 2017 sales are expected to grow organically between 1 and 2 percent and per share earnings are projected to be $8.25.