L-3 Communications Holdings Inc. (LLL) reported better-than-expected third quarter 2010 (ended September 25, 2010) results. In the reported quarter, the company achieved earnings of $2.04 per share (excluding debt retirement charge of 3 cents), higher than the Zacks Consensus Estimate of $2.02.
The company’s earnings also streaked past the year-ago quarterly earnings of $1.90 (excluding tax benefit of 22 cents). The upside mainly came from the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) and Electronic Systems segments.
Operating Statistics
Net sales came in at $3.8 billion in line with the year-ago quarterly sales. However, this fell behind the Zacks Consensus Estimate of approximately $4 billion. Sales growth primarily came from the C3ISR segment. This was offset by lower sales from the Aircraft Modernization and Maintenance (AM&M) and Electronic Systems segments.
Segment Results
C3ISR Segment
The C3ISR segment sales of $809.4 million rose 8% year-over-year, primarily due to demand for airborne ISR logistics support services and networked communication systems for manned and unmanned platforms for the U.S. Department of Defense (DoD).
Segmental operating income increased by 10% compared to the year-ago quarter. Operating margin increased by 20 basis points to 10.6%. In the reported quarter improved contract performance was partially offset primarily by higher sales of lower margin logistics support services for airborne ISR (Intelligence, Surveillance and Reconnaissance) platforms.
AM&M Segment
Aircraft Modernization and Maintenance (AM&M) sales of $707.4 million decreased by 5% due to lower volumes for systems field support services, Joint Cargo Aircraft (JCA) and contract field services (CFS), and loss of an aircraft maintenance contract with the U.S. Customs and Border Patrol.
These decreases were partially offset by higher aircraft modernization sales. Segmental operating income decreased by 19% compared to the year-ago quarter. Operating margin decreased by 130 basis points to 7.7%. In the reported quarter decrease in operating margin was primarily due to lower sales volume for CFS, and systems field support services to the U.S. Air Force.
Government Services Segment
The Government Services segment sales of slightly more than a billion increased by 1% from the year-ago period. This was mainly on account of logistics, training and law enforcement support services for the U.S. Army, and information technology support services for the U.S. Special Operations Command (SOCOM) and other U.S. Government agencies. These increases were partially offset by reduced subcontractor pass-through sales volume related to task order renewals for U.S. Army systems and software engineering and sustainment (SSES) services. Segmental operating income decreased by 9% compared to the year-ago quarter. Operating margin decreased by 100 basis points to 9.2%. In the reported quarter decrease in operating margin was primarily due to lower margins on a number of contract renewals due to competitive price pressures.
Electronic Systems Segment
Electronic Systems sales of $1.3 billion were down 3% year over year, reflecting a reduction in commercial shipbuilding products, combat propulsion systems, and precision engagement and marine services. Segmental operating income increased by 20% compared to the year-ago quarter. Operating margin increased by 280 basis points to 15.5%. In the reported quarter increase in operating margin was primarily due to favorable sales mix across several businesses.
Financial Position
L-3 Communications reported $984 million of cash from operating activities at the end of the nine months of 2010, compared to $978 million in the same period last year. Cash and cash equivalents as of September 24, 2010 were $650 million, while long-term debt stood at $3.4 billion.
Guidance
L-3 Communications lowered the revenue guidance for fiscal 2010 to $15.6 billion – $15.7 billion from the earlier guidance range of $16.0 billion – $16.1 billion. The company has however, reaffirmed its EPS guidance range for fiscal 2010 to $8.05 – $8.25.
We currently have a Neutral recommendation on the Zacks #3 Rank stock.
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