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L-3 Beats, Ups Guidance

Zacks Equity Research

Defense operator L-3 Communications Holdings Inc. (LLL) reported its fourth quarter 2012 earnings per share of $2.25, surpassing the Zacks Consensus Estimate of $2.12 by 6.1%. The results were 11.4% lower than the year-ago earnings of $2.54 per share.

2012 operating earnings were $8.01 per share, up 1.5% from the Zacks Consensus Estimate of $7.89 per share. However, the annual performance was 9.5% lower than the year-ago figure of $8.85 per share.

Total Revenue

Quarterly net sales were up 0.5% year over year to $3.56 billion and surpassed the Zacks Consensus Estimate by $92 million.

The company generated total revenue of $13.14 billion in 2012, 0.1% lower than $13.15 billion reported in 2011. The results were $93 million higher than the Zacks Consensus estimate of $13.05 billion.

During the year the company witnessed higher sales from its Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR), Electronic Systems and Aircraft Modernization and Maintenance (AM&M) 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. However, uncertainty in the U.S. defense budget continues to be an overhang on future prospects.

Segment Performance

Electronic Systems: Electronic Systems generated net sales of approximately $1.61 billion in the reported quarter, up 4% year over year. For 2012, sales were up 1% to $5.67 billion.

This segment benefited from higher contribution from inorganic sources and increase in delivery of mobile and ground-based satellite communication systems, partially offset by reduced shipments of tactical quiet generators for the U.S. and reduced U.S. Army requirements for night vision and illumination products.
C3ISR: The segment recorded net sales of $967.1 million, down 5% year over year. For 2012, sales were up 3% to $3.60 billion.

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.

AM&M: Net sales at the AM&M segment were up 2% year over year to $628.8 million. For 2012, sales were also up 2% to $2.48 billion.

This segment gained from international orders, international head-of-state aircraft modification contracts, and improved scope on the EC-130 aircraft for the U.S. Air Force (:USAF). 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 $347.5 million, down 4% year over year. For 2012, sales were down 14% year over year to $1.38 billion.

The downtrend reflects waning demand for U.S. Special Operations Command information technology (IT) support services, decline in IT support services for select non-DoD U.S. government agencies, competitive contract losses, and lower sales from intelligence support services due to the drawdown of U.S. military forces in Iraq.

Operational Highlight

Total operating income for the fourth quarter increased $10 million year over year to $364 million. Operating margin expanded 20 basis points to 10.2%. However, for the full year operating income decreased 3.4% year over year to $1.35 billion.

Interest expenses for 2012 were $184 million reflecting a decline of 9.8% from the year-ago level. This was mainly due to a lower debt level and lower interest rates on outstanding debts.

The company is working hard on lowering its operating cost. The initiatives taken by the company boosted the operating margins of its NSS segment by 20 basis point in 2012.

Financial Position

Cash and cash equivalents as of Dec 31, 2012 were $349 million versus $764 million as of Dec 31, 2012. The decline was primarily due to cash used for M&A purposes during the year.

Long-term debt as of Dec 31, 2012 were $3.62 billion versus $4.12 billion as of Dec 31, 2011.

Capital expenditures, net of dispositions of property, plant and equipment, were $205 million for 2012 , compared with $181 million in 2011.
During the year the company returned nearly $1.1 billion to its shareholders, through share buybacks and payment of dividend, moderately lower than the 2011 level of $1.14 billion.


The company increased its earnings guidance for 2013 to a range of $8.15–$8.35 from the earlier range of $7.95–$8.15. The company maintained its revenue guidance in the range of $12.55–$12.75 billion. Operating margin expectation for 2013 remained unchanged at 10.0%.

Other Defense Company Releases

Northrop Grumman Corporation (NOC) delivered operating earnings of $2.06 per share in fourth-quarter 2012, breezing past the Zacks Consensus Estimate of $1.74.  The Boeing Company (BA) clocked operating earnings of $1.46 per share, ahead of the Zacks Consensus Estimate of $1.19. However, Lockheed Martin Corporation’s (LMT) fourth quarter operating earnings of $1.73 per share fell short of the Zacks Consensus Estimate of $1.79.


L-3 Communications succeeded in beating the Zacks Consensus Estimates. Going forward, we expect the company to continue to post strong earnings based on its opportunities in Electronic Systems and C3ISR.

The company’s balanced business mix, improving operational efficiencies and focus on research and development allow it to pursue strategic opportunities in the commercial arena as well as overseas. Besides, the increase in the year-end funded backlog of the company by nearly 10% indicates that the company is on the right track.

Based in New York, L-3 Communication is a leading supplier of secure communications, simulation, training systems, avionics, ocean and telemetry products, space and wireless products, and microwave components, which are used in a number of aerospace and defense platforms.  With a market cap of $7.33 billion, the company employs 61,000 employees. L-3 Communications presently retain a Zacks Rank #3 (Hold)

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