By Calvin Biesecker
L-3 Communications [LLL] yesterday reported solid third quarter financial results increasing both sales and earnings due to a tax benefit and a strong contribution from its C3ISR segment.
Net income increased 22 percent to $250 million, $2.12 earnings per share (EPS), from $210 million ($1.70 EPS) a year ago, topping consensus estimates by 27 cents. The tax benefit added 22 cents EPS to net income. Free cash flow was $405 million.
Operating income was driven by the C3ISR segment due to higher sales, improved contract performance, and a sales mix that favored higher margin products, notably airborne intelligence, surveillance and reconnaissance and networked communications systems.
Sales rose 5 percent to $3.8 billion from $3.7 billion, driven by double-digit increases at the C3ISR and Aircraft Modernization and Maintenance segments. Organic growth topped 4 percent.
Specific sales drivers included airborne ISR and networked communications systems for the Defense Department, work on the Joint Cargo Aircraft, the logistics work for Special Operations Forces, and support for Army and Air Force rotary-wing and fixed-wing aircraft.
Due to the tax gain, L-3 raised its earnings guidance for the year to between $7.45 to $7.50 EPS from the prior outlook of between $7.25 to $7.35 EPS. The company narrowed its sales guidance by $100 million on the high end of the range to between $15.5 billion and $15.6 billion.
L-3 also initiated guidance for 2010, forecasting a slim increase in sales to between $15.7 billion and $15.9 billion. Earnings would increase to between $7.85 and $8.05 EPS and assumes a slight increase in operating martins and no change in pension expense from 2009.
Next year’s sales guidance excludes L-3 potentially winning a recompete of its multi-billion Special Operations Forces Support Activity contract, which it lost in March, a decision the company subsequently protested. L-3 has received a contract extension that runs through February 2010. If the company wins the recompete, it expects another $400 million in sales above current guidance.
L-3 has been relatively quiet all year on the acquisition front although the company continues to evaluate potential deals, Michael Strianese, L-3’s chairman, president and CEO, said on yesterday’s earnings call. Price expectations on the part of sellers are beginning to moderate, and with L-3’s strong balance sheet the company will be opportunistic, he said.
Funded orders L-3 received in the quarter were down 15 percent to $3.4 billion from $4 billion due to timing, company officials said. There isn’t one specific reason for the lighter orders, but the officials said factors such as the change in presidential administration, changing policies, and the slow release of some Recovery Act funds all contributed to the decline. They expect strong bookings in the fourth quarter. The decline in orders led to a 6 percent slide in the funded backlog to $10.8 billion since the start of the year.
Regarding changing government policies, Strianese said that for all the talk of government insourcing the trend is uneven across the customer base. He also said that some services appear to not be susceptible to insourcing. He added that it is also unclear how new rules for Organizational Conflicts of Interest will play out for firms.