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Earnings Beat at L-3 on Higher Int'l Orders

Zacks Equity Research

Defense operator L-3 Communications Holdings Inc. (LLL) reported first quarter 2013 adjusted earnings from continuing operations of $2.00 per share, surpassing the Zacks Consensus Estimate of $1.93 by 3.6%, thanks to strong international and commercial operations. The results also surged 7.5% from the year-ago profit of $1.86 per share.

Total Revenue

Quarterly net sales went up 25% year over year to $3,185 million, easily beating the Zacks Consensus Estimate of $2,976 million by $209 million.

During the quarter, the company witnessed higher sales from its Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR), Electronic Systems and Platform & Logistics Solutions (P&LS) segments, offset by lower sales from the National Security Solutions (NSS) segment.

It appears that the company is doing well in its international and commercial businesses as evidenced by 18% year-over-year growth in the reported quarter. However, uncertainty in the U.S. defense budget continues to be an overhang on future prospects.

Segment Performance

C3ISR: The segment recorded net sales of $888.4 million, up 2.3% year over year.

Higher demand for airborne ISR systems for U.S. government and foreign military customers was offset by lower deliveries of remote video terminals to the U.S. Army.

Electronic Systems: Electronic Systems generated net sales of approximately $1,349.9 million in the reported quarter, up a considerable 37.3% year over year.

This segment benefited from higher contribution from Simulation & Training, Precision Engagement, Microwave Products and Marine Services.

P&LS, formerly known as Aircraft Modernization & Maintenance or AM&M: Net sales at the segment increased 2.5% year over year to $616.5 million.

This segment gained primarily from Platform Solutions owing to higher volume for aircraft maintenance for the Canadian Department of National Defence, EC-130 aircraft for the U.S. Air Force (:USAF), international head-of-state aircraft modifications, and the Australia C-27J. This was partially offset by decline in logistics support services due primarily to the competitive loss of a task order for U.S. Army contract field team support services in Southwest Asia.

NSS: The NSS unit generated net sales of $329.7 million, a decrease of 18% from the year-ago level. The downtrend reflects waning demand for U.S. Special Operations Command information technology (IT) support services.

Operational Highlight

Total operating income in the first quarter 2013 dropped almost 4% to $313.3 million from $325.3 million in the first quarter 2012. Operating margin contracted 50 basis points to 9.8% in the reported quarter.

The company experienced a drop in operating margin across all its segments except the NSS unit. The NSS division registered an 80 basis point improvement in operating margin in the quarter.

Interest expenses were $43 million, reflecting a decline of 4.4% year over year due to lower debts.

Financial Position

Cash and cash equivalents as of Mar 31, 2013 were $276 million versus $349 million as of Dec 31, 2012. Long-term debt stood at $3.62 billion versus $3,629 million at the end of first quarter 2013 with a debt to capitalization ratio of 39.4%.

During the quarter, the company repurchased $122.0 million of its common stock and paid $52 million through dividends.


The company reaffirmed its guidance for 2013 which included earnings per share from continuing operations in the range of $8.15–$8.35. The company maintained its revenue guidance in the range of $12,550–$12,750 million. Operating margin expectation for 2013 remained unchanged at 10.0%.

Other Defense Company Releases

Northrop Grumman Corporation (NOC) delivered first quarter 2013 adjusted earnings per share of $1.94, easily surpassing the Zacks Consensus Estimate of $1.73 and the year-ago figure of $1.88. The significant upside in earnings was attributable to a lower share count and strong operating performance.  

The Boeing Company (BA) reported stellar first quarter 2013 results, attributable to solid performance across the company's businesses. Its adjusted first quarter 2013 earnings came in at $1.73 per share, beating the Zacks Consensus Estimate of $1.47 by 17.7% as well as the year-ago profit level of $1.40 by 24%.

Again, the world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT) posted first quarter 2013 adjusted earnings of $2.48 per share, comfortably surpassing the Zacks Consensus Estimate of $2.01 by 23.4%. The upcast in earnings was mainly attributable to lower tax expenses.

Zacks Rank

L-3 Communications, Northrop Grumman, Lockheed Martin and General Dynamics all retain a Zacks Rank #3 (Hold).

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