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Defense operator L-3 Communications Holdings Inc.'s (LLL - Free Report) second quarter 2013 earnings from continuing operations of $2.03 per share surpassed the Zacks Consensus Estimate and the year-ago figure of $1.94.

Operational Highlights

Quarterly net sales went up 1.6% year over year to $3,192 million, easily beating the Zacks Consensus Estimate of $3,064 million by 4.2%. All the segments except National Security Solutions posted a year-over-year gain in the quarter.

International sales were up 17% which helped offset the decline in sales at the domestic national security-related businesses. The company continued to receive new orders during the quarter. Funded orders for the reported quarter were $3.5 billion.

Total operating income in the second quarter 2013 dropped 7.3% to $307 million from $331 million in the second quarter 2012. Operating margin contracted 90 basis points to 9.6% in the reported quarter due to less favorable contract adjustments and sales mix changes for the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) and Electronic Systems segments.

Segment Performance

C3ISR: The segment recorded net sales of $881.7 million, up 2.3% year over year. The results were driven by increase in sales from networked communication systems and ISR Systems. These were, however, partially offset by lower volume, as the production work on a contract for vehicle mounted satellite communication ground stations was almost complete and due to declining U.S. Army demand for remote video terminals.

Electronic Systems: The segment generated net sales of approximately $1,357.4 million in the reported quarter, up a considerable 0.38% year over year.

This segment benefited from higher contribution from Simulation & Training, Precision Engagement, and Marine Services. These positives were, however, partially offset by a decline in sales at Microwave Products, Security & Detection Systems and Space & Propulsion Systems.

Platform & Logistics Solutions: Net sales at the segment increased 4.9% year over year to $620.3 million. The increase was driven by higher Platform Solutions sales and increased volume for field maintenance and sustainment services for USAF training aircraft, partially offset by a decline in sales at Logistics Solutions.

National Security Solutions: The segment generated net sales of $332.8 million, a decrease of 1.3% from the year-ago level. The downtrend reflects lower demand for a technical support contract from a U.S. government agency due to sequestration funding reductions and less demand for U.S. Special Operations Command IT support services. However, these declines were partially offset by increased demand for intelligence and IT support services for the U.S. government and U.S. government agencies on existing contracts.

Financial Position

Cash and cash equivalents as of Jun 30, 2013, were $328 million versus $349 million as of Dec 31, 2012. Long-term debt stood at $3.63 billion, approximately flat as of Dec 31, 2012 with a debt-to-capitalization ratio of 39%.

During the quarter, the company repurchased $126.0 million of its common stock and paid $49 million through dividends.


The company lowered its revenue guidance for 2013 to the range of $12,500 million to $12,600 million versus its prior expectation of $12,550 million to $12,750 million. It expects earnings from continuing operations in the range of $8.05 to $8.15 versus its prior expectation of $8.15 to $8.35. For 2013, the company expects operating margin of 9.8% versus its prior expectation of 10.0%.

Other Defense Company Releases

Northrop Grumman Corp. (NOC - Free Report) reported second quarter 2013 results. Adjusted earnings per share of $2.05 easily surpassed the Zacks Consensus Estimate of $1.70 and the year-ago figure of $1.79. The significant upside in earnings was attributable to a lower share count and strong operating performance.  

Aerospace giant The Boeing Company (BA - Free Report) reported stellar second quarter 2013 results, attributable to solid performance across the company's businesses. Its adjusted second quarter 2013 earnings came in at $1.67 per share, beating the Zacks Consensus Estimate of $1.58 by 5.7% as well as the year-ago profit of $1.48 by 12.8%. The company’s strong numbers came from solid operating performance fueled by higher aircraft deliveries and lower 787 Dreamliner production costs.

Defense and aerospace operator General Dynamics Corp. (GD - Free Report) announced second-quarter 2013 operating earnings of $1.81 per share, surpassing the Zacks Consensus Estimate of $1.63 by 11.0%. Earnings were also ahead of the year-ago figure by 4 cents, backed by robust aerospace activity.

Our Take

L-3 Communications' earnings as well as revenue easily surpassed the Zacks Consensus Estimate. The results reflect strong sales and international orders.

However, going forward, sequestration cuts could pose serious headwinds for the company. The company has also lowered its financial guidance, taking into account the effects of the sequester. Also, the loss of key contracts could have an adverse effect in the future. L-3 Communications presently retains a short-term Zacks Rank #4 (Sell).


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