L-3 Tops Estimates, Raises Outlook

Before the opening bell, L-3 Communications Holdings Inc. (LLL - Analyst Report) released strong third quarter results. In the reported quarter, the company clocked earnings per share (EPS) of $2.12, soundly beating both the Zacks Consensus Estimate of $1.85 and the year-ago quarterly EPS of $1.73.

Net sales rose 5% to $3.8 billion in the reported quarter from $3.7 billion in the year-ago quarter. The upside came mainly from the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) and Aircraft Modernization and Maintenance (AM&M) segments. However, these were partially offset by decrease in the Government Services and Specialized Products segments sales year-over-year.

C3ISR segment sales rose 21% year-over-year primarily due to increased demand and new business from the U.S. Department of Defense (DoD) for airborne ISR and networked communication systems for manned and unmanned platforms. AM&M sales increased 17% due to higher revenues from systems field support services, Special Operations Forces logistics support and higher sales for Joint Cargo Aircraft (JCA).

However, the Government Services segment sales decreased 3% due to reduced sales for U.S. Army systems and software engineering and sustainment (SSES) services, lower Iraq-related linguist services and lower volume for intelligence support for the U.S. Army and U.S. Government agencies. Specialized Products sales also decreased 2% year-over-year, reflecting lower sales volume primarily for naval power & control systems and aviation products, training & simulation, precision engagement and displays & combat propulsion systems.

Operating income increased 5% in the reported quarter year-over-year. However, operating margin remained stagnant at 10.9% in both the quarters. Higher margins primarily for C3ISR and Government Services segments were offset by higher pension expense. The increase in pension expense reduced operating income by $13 million, or 11 cents per diluted share, and reduced operating margin by 50 basis points.

L-3 Communications reported $978 million in cash from operating activities in the reported quarter, compared to $1 billion reported in the year ago quarter. Cash and cash equivalents at the end of the reported quarter was $1.2 billion, while long term debt stood at $3.9 billion.

L-3 Communications increased the upper range of its revenue guidance for fiscal 2009 to $15.5 billion - $15.7 billion from the earlier guidance range of $15.5 billion - $15.6 billion. The company also increased its EPS guidance range for fiscal 2009 to $7.45 - $7.50 from the earlier guidance range of $7.25 - $7.35. We maintain our market Neutral recommendation on the shares.