By Calvin Biesecker
L-3 Communications [LLL] yesterday posted lower net income in the first quarter due to lower operating profits and slightly lower sales, although the company raised its earnings forecast for the year due to a lower than expected tax rate and additional stock repurchases that will lower its overall share count.
Net income in the quarter was $204 million, $1.85 earnings per share (EPS), versus $221 million ($1.87 EPS) a year ago, beating analysts’ estimates by three cents. Income was impacted by an $11 million (10 cents EPS) after-tax debt retirement charge. Margins declined 50 basis points to 10.8 percent.
Operating profits at three of the company’s segments declined due to lower sales, a contract termination at C3ISR and lower margins at Government Services stemming from competitive price pressures. More companies are “buying business” in the government services space, Michael Strianese, L-3’s chairman, president and CEO, said on yesterday’s earnings call. L-3 won’t be pursuing that strategy and instead will focus on higher margin work in the services segment, he said.
The lone segment reporting higher operating profits was Aircraft Modernization and Maintenance (AM&M), which benefited from a gain on an international aircraft modernization program, better performance on helicopter cabin assemblies and a decline in lower margin sales.
Sales declined nearly a percent to $3.6 billion as revenues fell at AM&M and Electronic Systems. The decline would have been further except for the contributions of several small acquisitions last year. The company also said that the long-standing Continuing Resolution and related budget uncertainty chopped $30 million from sales in the quarter and delayed $170 million in orders. Orders were $3.4 billion, off $200 million from a year ago.
L-3 also says growth is slowing for services related to military support in Iraq and Afghanistan as United States troops draw down their presence in those countries. This has typically been high margin work, which is one reason for the decline in profits, Strianese said. There are growth opportunities in the services area, particularly in intelligence, cyber security and enterprise information technology support, but overall in services L-3 is willing to cede market share to protect margins, he said.
Strianese said that cyber security is a “top priority” for DoD and the company will be pursuing prime contracts in this area.
L-3 raised its earnings guidance to between $8.50 and $8.60 from between $8.40 to $8.55. The company lowered its sales guidance by $200 million on the low end of the range and $300 million on the high end to between $15.5 billion and $15.6 billion mainly due to a change in the forecast at Government Services. Specifically, L-3 attributed the decline in sales guidance to delays in new program opportunities, a faster drawdown than expected of U.S. troops in Afghanistan, the loss of a NASA contract and the discontinuation of work on an international program where the company was having issues with payment collections.
L-3 raised its free cash flow guidance for the year by $30 million to $1.3 billion.
Last year, L-3 paid out $184 million in dividends and did $834 million in share repurchases, a balanced deployment strategy that will continue, Strianese said. The company will continue to invest in acquisitions but will remain disciplined, he said. Strianese also said the company is exploring its options to shed around $1 billion in businesses, primarily in Government Services, either through a sale, spin-off or even a wind down.
These are businesses where the margin outlook is below average and the outlook isn’t favorable and they are peripheral to L-3’s core, Strianese said. More information about L- 3’s plans here is expected this summer, he said.
L-3’s funded backlog at the end of the quarter was $10.9 billion, down $200 million since the start of the year.