By Calvin Biesecker
L-3 Communications [LLL] yesterday posted a strong increase in its first quarter earnings despite relatively flat sales due to a lift in operating margins and lower pension expense, which more than offset a charge related to a new healthcare law.
Net income increased 11 percent to $221 million, $1.87 earnings per share (EPS), from $199 million ($1.66 EPS), beating consensus expectations by a dime. Margins were up a percent due to improved contract performance and a favorable mix of sales that favored higher margin products and services at L-3’s C3ISR and Electronic Systems segments.
The healthcare charge, which contributed to declines in net income at Boeing [BA] and Lockheed Martin [LMT] in their earnings results this week, cut $5 million (4 cents EPS) from L-3’s earnings. Earnings a year ago also benefited from the federal research and development tax credit, which expired at the end of 2009.
Sales in the quarter were $3.6 billion, relatively unchanged from a year ago. Acquisitions contributed $16 million in new sales in the quarter. The company had expected an order for additional C-27 Joint Cargo Aircraft from the Air Force that it believes will be awarded in the second quarter.
L-3 raised its guidance for the rest of the year to account for a recent acquisition and an extension of an existing Special Operations support contract pending the results of a new competition. Sales are now expected to be between $16.2 billion and $16.3 billion, about $300 million to $400 million higher than earlier predictions.
The extension for the Special Operations work, worth $400 million through the end of January 2011, follows a successful protest by L-3 of work it had but then lost during a recompete. A new request for proposals is expected this month with a contract award next January, Michael Strianese, L-3’s chairman, president and CEO, said yesterday.
The company also increased earnings expectations by 13 cents EPS largely due to the recent acquisition of Insight Technology. The guidance assumes that Congress will extend the federal research and development tax credit retroactively. The credit expired at the end of 2009.
Free cash flow in the quarter was a healthy $245 million. Backlog decreased 3 percent to $3.6 billion from a year ago.
Strianese said that yesterday the Transportation Security Administration (TSA) has awarded L-3 a $31.7 million production contract for 202 whole body imaging systems, which the agency calls Advanced Imaging Technology (AIT). The agency also awarded OSI Systems [OSIS] Rapiscan division a $16.2 million award for 100 of the company’s Secure 1000 backscatter X-Ray AIT systems. The value of that award was not disclosed by TSA.
TSA already has 40 of L-3’s ProVision millimeter wave-based AIT systems deployed at airports in the United States through an earlier test program. The agency is currently buying 150 Secure 1000 backscatter X-Ray AIT system from Rapiscan under a $25.4 million contract awarded last fall, raising to 250 the number of systems being purchased from that company.
Currently, only L-3 and Rapiscan have AIT systems that have been qualified by TSA, although the agency is testing systems from other companies. TSA has said it plans to have deployed 490 AIT systems at U.S. airports by the end of 2010. The purchases announced yesterday would meet the agency’s goal this year for meeting the 490-system deployment.
Late last December, TSA awarded L-3 a potential five-year, $164.7 million indefinite delivery, indefinite quantity contract for AIT systems (Defense Daily, Jan. 5). Yesterday’s announcement marked the first order against that award.
Strianese also said that L-3 recorded $17 million in international orders for the ProVision system in the first quarter.
TSA is seeking nearly $215 million in its FY ’11 budget request to purchase 500 AIT systems next year. TSA budget documents say that 1,800 AIT systems would be required to achieve full operating capability.