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Defense operator L-3 Communications Holdings Inc.'s (LLL - Free Report) third quarter 2013 adjusted earnings of $1.97 per share surpassed the Zacks Consensus Estimate of $1.95. The results were up 5.3% year over year. The results reflect better operational performance. Share prices rose 0.9% to close at $97.98 on Oct 29, 2013 from its last traded price of $97.10.

Operational Highlights

Quarterly net sales declined 8.7% year over year to $2,996 million. The top line missed the Zacks Consensus Estimate of $3,069 million by 2.4%. All the segments posted a year-over-year decline in the quarter.

International sales were up 2% that helped in partially offsetting declines from sequestration and the Afghanistan drawdown.

Funded orders for the reported quarter were $2,724 million, down from $3,246 million in the prior-year period. Funded backlog was $10,581 million, down from $10,884 million as of Dec 31, 2012.

Total operating income in the third quarter 2013 dropped 5.1% to $314 million. Operating margin increased 40 basis points to 10.5% in the reported quarter due to improved contract performance at the Electronic Systems segment and lower operating costs at National Security Solutions, partially offset by higher costs and reduced productivity for the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) segment.

Segment Performance

C3ISR: The segment recorded net sales of $750 million, down 15.3% year over year. The decline reflects lower sales for networked communication systems and ISR Systems. However, these decreases were partially offset by higher volume on ISR platforms for foreign military customers and logistics support and fleet management services for U.S. government customers.

Electronic Systems: The segment generated net sales of approximately $1,333 million in the reported quarter, down 4.4% year over year. The decline in sales reflects lower sales of Microwave Products as a result of reduced deliveries of power devices for commercial satellite communication systems. Segment sales also declined due to lower Security & Detection Systems and Sensor Systems sales. These decreases were partially offset by increased demand primarily for Warrior Systems’ night vision and illumination products and holographic weapon sights. The Link U.K. acquisition also contributed to the top line.

Platform & Logistics Solutions: Net sales at the segment decreased 9% year over year to $590 million. The decrease reflects lower Platform Solutions sales partially offset by higher sales from Logistics Solutions.

National Security Solutions: The segment generated net sales of $323 million, a decrease of 8.5% from the year-ago level. The decrease in sales was mainly due to lower demand for a technical support contract for a U.S. government agency due to sequestration budget reductions and less demand for U.S. Special Operations Command information technology support services.

Financial Position

Cash and cash equivalents as of Sep 30, 2013, were $377 million, up from $349 million as of Dec 31, 2012. Long-term debt stood at $3.63 billion, approximately flat with the year-end 2012 level, with a debt-to-capitalization ratio of 39.5%.

During the quarter, the company repurchased $156 million of its common stock and paid $50 million through dividends.


The company maintained its revenue guidance for 2013 in the range of $12,500 million to $12,600 million. However, L-3 increased its earnings from continuing operations forecast to the range of $8.25 to $8.35 from its prior expectation of $8.05 to $8.15. For 2013, the company expects operating margin of 9.8%.

Peer Comparison

Recently, Raytheon Company (RTN - Free Report) reported third quarter 2013 earnings from continuing operations of $1.51 per share, beating the Zacks Consensus Estimate of $1.33 by 13.5%. However, earnings were on par with the year-ago profit level. The better-than-expected results were driven by strong program execution.

Our Take

L-3 Communications reported mixed results with earnings topping the Zacks Consensus Estimate while revenues missing the mark. The company however continued to focus on its cash deployment strategy.

The top line miss reflects the adverse impact of sequestration and the Afghanistan troop withdrawal. Also, the uncertain federal budget environment continued to dent its backlog and orders during the quarter.

L-3 Communications presently carries a short-term Zacks Rank #3 (Hold). Among the stocks worth considering in the space are Lockheed Martin Corp. (LMT - Free Report) and Northrop Grumman Corp. (NOC - Free Report) , both with a Zacks Rank #2 (Buy).

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