L-3 Communications Holdings Inc. (LLL) reported better-than-expected second quarter 2010 (ended June 25, 2010) results. In the reported quarter, the company achieved earnings of $2.04 per share (excluding debt retirement charge and incremental interest expense of $0.09), higher than the Zacks Consensus Estimate of $1.93. The upside mainly came from the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) and the Aircraft Modernization and Maintenance (AM&M) segments.
Net sales came in at $3.96 billion, a 1% increase from the year-ago quarter and 1.5% below the Zacks Consensus Estimate, on account of improved sales at the C3ISR and AM&M segments, offset by revenue decline in the Electronic Systems segments.
C3ISR Segment
The C3ISR segment sales rose 7% 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. The segment operating income was also up 7%, while operating margin remained flat versus last year.
AM&M Segment
Aircraft Modernization and Maintenance (AM&M) sales increased by 9% due to higher sales for Joint Cargo Aircraft (JCA), higher aircraft modernization revenues and higher demand from existing contracts for system field support services for the U.S. Army’s rotary wing training aircraft. Partially offsetting these positives were sales volume declines for contract field services (CFS) and Special Operations Forces (SOF) support activities, and the loss of an aircraft maintenance contract with the U.S. Customs and Border Patrol. Operating income and margins stepped up by 14% and 130 basis points, respectively, year-over-year.
Government Services Segment
The Government Services segment sales fell 4% from the year-ago period. This was mainly on account of reduced subcontractor pass-through sales volume and lower sales associated with the Iraq support, somewhat offset by increased logistics, training and law enforcement support services and information technology support services. Operating income for the segment decreased 16% and operating margin fell by 120 basis points.
Electronic Systems Segment
Electronic Systems sales were down 2% year-over-year, reflecting a reduction in combat propulsion systems, commercial shipbuilding products, and training & simulation and displays. These were partially offset by volume increases for electro-Optical/Infrared (EO/IR) products.
Despite the revenue drop, the segment operating income increased 16% over the corresponding period of 2009, and operating margin increased by 230 basis points. This was due to improved contract performance and favorable sales mix (mainly for EO/IR products), lower pension expense, lower sales volume for commercial shipbuilding products and training & simulation, and lower margin sales mix for commercial space-based microwave products.
Operating Statistics
Operating income in the reported quarter increased 6% year over year, while the operating margin improved 52 basis points from 10.6% in the previous-year quarter to 11.1%. Superior contract performance and favorable sales mix for businesses in the Electronic Systems segments were the primary drivers for the positive comparisons, also supported by a lower pension expense.
The fall in pension expense increased operating income by $3 million, or $0.03 per share, and augmented the operating margin by 10 basis points. These increases were partially offset by lower operating margins in the Government Services segment.
Cash Position
L-3 Communications reported $589 million of cash from operating activities at the end of six months in 2010, compared to $528 million in the same period last year. Cash and cash equivalents as of June 25, 2010 were $1.0 billion, while long-term debt stood at $3.4 billion.
Guidance Raised
L-3 Communications lowered the revenue guidance for fiscal 2010 to $16.0 billion – $16.1 billion from the earlier guidance range of $16.2 billion – $16.3 billion. The company also cut its EPS guidance range for fiscal 2010 to $8.05 – $8.25 from the earlier guidance range of $8.13 – $8.33.
Read the full analyst report on “LLL”
Zacks Investment Research
