L-3 Announces Third Quarter 2012 Results

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L-3 Announces Third Quarter 2012 Results

  • Diluted earnings per share from continuing operations of $1.98
  • Net sales of $3.3 billion
  • Net cash from operating activities of $352 million
  • Funded orders of $3.2 billion, funded backlog of $11.0 billion
  • Updated 2012 financial guidance

NEW YORK--(BUSINESS WIRE)-- L-3 Communications Holdings, Inc. (NYS: LLL) today reported diluted earnings per share (diluted EPS) from continuing operations of $1.98 for the quarter ended September 28, 2012 (2012 third quarter), compared to $2.02 for the quarter ended September 30, 2011 (2011 third quarter). The 2012 third quarter included a tax benefit of $0.11 per diluted share that is discussed below. Net sales of $3.3 billion for the 2012 third quarter decreased by 0.5% compared to the 2011 third quarter.

On July 17, 2012, L-3 completed the previously announced spin-off of its subsidiary, Engility Holdings, Inc. (Engility). The spin-off was a tax-free distribution to L-3 shareholders for U.S. federal tax purposes in which L-3 shareholders of record on July 16, 2012 (the record date) received one share of Engility common stock for every six shares of L-3 common stock held on the record date. In connection with the spin-off, Engility made a cash distribution of $335 million to L-3. L-3 used a portion of the proceeds to redeem $250 million of its 6 3/8% Senior Subordinated Notes due 2015 (2015 Notes) on July 26, 2012. L-3 intends to use the remaining proceeds primarily to repurchase additional outstanding shares of its common stock. L-3's results present Engility as a discontinued operation.


"Overall, we had a solid third quarter and performed well in our core areas and we continued to make progress in our international and commercial businesses. In spite of the challenges and uncertainty in the U.S. defense budget, sales grew in our Electronic Systems, C3ISR and AM&M segments, which demonstrates that L-3 is well-positioned and executing on its strategy to grow market share and be adaptable and agile in the markets we serve," said Michael T. Strianese, chairman, president and chief executive officer. "Orders for the quarter were $3.2 billion, resulting in a book-to-bill ratio of 0.99x. We ended the quarter with funded backlog of $11.0 billion, up 11% compared to December 2011."

"We remain focused on delivering innovation to our customers and value to all of our stakeholders. We are proactively reducing our operating costs and right sizing our business units, while also investing in research and development. We continue to deploy our capital using a disciplined and balanced approach, with cash dividends and share buybacks, modest debt reduction, plus acquisitions that expand our market share and strengthen our businesses. On August 7, 2012, we acquired the commercial aircraft simulation business of Thales Group, which extends our simulation and training business into the global commercial marketplace and also provides us a full-motion simulator capability. Going forward, this strategy will continue to serve L-3 well."

Key contract wins for the quarter included: (1) continued operations and sustainment for the U.S. Army Constant Hawk aircraft, (2) an indefinite-delivery/indefinite-quantity (ID/IQ) contract to supply VideoScout® products and related upgrades to the Marine Corps, (3) communications systems for NASA's Common Communications for Visiting Vehicles (C2V2) program, and (4) an ID/IQ contract to supply medium-speed explosives detection and ProVision® ATD (Automatic Target Detection) advanced imaging technology systems to the Transportation Security Administration (TSA).

Mr. Strianese continued, "We remain committed to shareholder value, deploying capital and free cash flow to enhance our operations and return cash to our shareholders. During the quarter, we repurchased $189 million of our common stock and paid dividends of $51 million, resulting in $653 million of cash returned to our shareholders year-to-date."

L-3 Consolidated Results

 Third Quarter Ended  Year-to-Date Ended 
Sept. 28, Sept. 30,Increase/Sept. 28, Sept. 30,Increase/
($ in millions, except per share data)20122011(decrease)20122011(decrease)
 
Net sales

$

3,283

$3,301(0.5)%

$

9,586

$9,615(0.3)%
 
Operating income$331$359(8)%$987$1,045(6)%
 
Operating margin10.1%10.9%(80) bpts10.3%10.9%(60) bpts
 
Net interest expense and other income$48$472%$132$142(7)%
 

Debt retirement charge

$8

$

nm$8$18(56)%
 
Effective income tax rate29.1%31.4%(230) bpts32.3%31.1%120 bpts
 
Net income from continuing operations
attributable to L-3
$193$212(9)%$570$604(6)%
 
Diluted EPS from continuing operations$1.98$2.02(2)%$5.78$5.623%
 
Diluted weighted average common shares outstanding97.4104.8(7)%98.7107.2(8)%

____________________________

nm - not meaningful            
 

Third Quarter Results of Operations: For the 2012 third quarter, consolidated net sales of $3.3 billion were 0.5% lower than the 2011 third quarter. Sales growth from the Aircraft Modernization and Maintenance (AM&M), Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) and Electronic Systems segments was offset by lower sales from the National Security Solutions (NSS) (1) segment. Acquired businesses(2), which are all included in the Electronic Systems segment, added $63 million to net sales in the 2012 third quarter. Net sales to commercial and foreign government end customers grew 19% to $808 million for the 2012 third quarter compared to $679 million for the 2011 third quarter.

____________________________

(1)

 

L-3's Government Services segment has been renamed National Security Solutions and comprises L-3's cyber security, intelligence, enterprise information technology and security solutions businesses.

(2)

Net sales from acquired businesses are comprised of (i) net sales from business acquisitions that are included in L-3's actual results for less than 12 months, less (ii) net sales from business divestitures that are included in L-3's actual results for the 12 months prior to the divestitures.

 

Operating income for the 2012 third quarter decreased by $28 million compared to the 2011 third quarter. Operating income as a percentage of sales (operating margin) decreased by 80 basis points to 10.1% for the 2012 third quarter compared to 10.9% for the 2011 third quarter. Higher pension expense of $15 million ($9 million after income tax, or $0.09 per diluted share) reduced operating margin by 40 basis points. See segment results below for additional discussion of sales and operating margin.

Net interest expense and other income increased by $1 million for the 2012 third quarter compared to the same period last year. The 2012 third quarter includes a $3 million ($2 million after income tax, or $0.02 per diluted share) non-cash asset impairment charge related to the planned dissolution of an unconsolidated joint venture. Interest expense declined by $2 million due to lower interest rates on outstanding fixed rate debt.

During the 2012 third quarter, the company recorded a debt retirement charge of $8 million ($5 million after income tax, or $0.05 per diluted share) related to the redemption of $250 million of the 2015 Notes.

The effective tax rate for the 2012 third quarter decreased by 230 basis points compared to the same period last year. The effective tax rate decreased by 390 basis points due to a tax benefit of $11 million, primarily related to the reversal of amounts previously accrued for tax years in which the statute of limitations had expired, partially offset by the expiration of the U.S. Federal research and experimentation tax credit on December 31, 2011.

Net income from continuing operations attributable to L-3 in the 2012 third quarter decreased 9% to $193 million compared to the 2011 third quarter, and diluted EPS from continuing operations decreased 2% to $1.98 from $2.02. Diluted weighted average common shares outstanding for the 2012 third quarter declined by 7% compared to the 2011 third quarter due to repurchases of L-3 common stock.

Year-to-Date Results of Operations: For the year-to-date period ended September 28, 2012 (2012 year-to-date period) consolidated net sales decreased by $29 million compared to the year-to-date period ended September 30, 2011 (2011 year-to-date period). Higher sales from the C3ISR and AM&M segments were offset by lower sales from the NSS and Electronic Systems segments. Acquired businesses, which are all included in the Electronic Systems segment, added $130 million to net sales in the 2012 year-to-date period. Net sales to commercial and foreign government end customers grew 12% to $2,223 million for the 2012 year-to-date period compared to $1,992 million for the 2011 year-to-date period.

Operating income for the 2012 year-to-date period decreased by $58 million compared to the 2011 year-to-date period. Operating margin decreased by 60 basis points to 10.3% for the 2012 year-to-date period compared to 10.9% for the 2011 year-to-date period. Higher pension expense of $28 million ($17 million after income tax, or $0.17 per diluted share) reduced operating margin by 30 basis points. See segment results below for additional discussion of sales and operating margin.

Net interest expense and other income decreased by $10 million for the 2012 year-to-date period compared to the same period last year. Lower interest expense of $13 million on outstanding fixed rate debt was partially offset by the $3 million non-cash asset impairment charge, recorded in the 2012 third quarter, related to the planned dissolution of an unconsolidated joint venture.

The company recorded debt retirement charges of $8 million ($5 million after income tax, or $0.05 per diluted share) during the 2012 year-to-date period and $18 million ($11 million after income tax, or $0.10 per diluted share) during the 2011 year-to-date period as a result of debt redemptions and refinancings.

The effective tax rate for the 2012 year-to-date period increased by 120 basis points compared to the same period last year primarily due to the expiration of the U.S. Federal research and experimentation tax credit on December 31, 2011. The 2012 and 2011 year-to-date periods included tax benefits of $11 million and $12 million, respectively, primarily related to the reversal of amounts previously accrued for prior tax years.

Net income from continuing operations attributable to L-3 in the 2012 year-to-date period decreased 6% to $570 million compared to the 2011 year-to-date period, and diluted EPS from continuing operations increased 3% to $5.78 from $5.62. Diluted weighted average common shares outstanding for the 2012 year-to-date period declined by 8% compared to the 2011 year-to-date period due to repurchases of L-3 common stock.

Orders: Funded orders for the 2012 year-to-date period increased 4% to $10.5 billion compared to $10.0 billion for the 2011 year-to-date period. Funded backlog grew 11% to $11.0 billion at September 28, 2012, compared to $9.9 billion at December 31, 2011.

Cash flow: Net cash from operating activities was $692 million for the 2012 year-to-date period, a decrease of $57 million, compared to $749 million for the 2011 year-to-date period. The decrease in net cash from operating activities was primarily due to the decline in income from continuing operations and higher income tax payments, partially offset by lower interest payments. Capital expenditures, net of dispositions of property, plant and equipment, were $118 million for the 2012 year-to-date period, compared to $119 million for the 2011 year-to-date period.

Cash returned to shareholders: The table below summarizes the cash returned to shareholders during the 2012 year-to-date period compared to the 2011 year-to-date period.

 
Year-to-Date Ended
($ in millions)

Sept. 28,
2012

 

Sept. 30,
2011

 
Net cash from operating activities from continuing operations$692$749
Less: Capital expenditures, net of dispositions 118  119 
Free cash flow(1)$574 $630 
Dividends paid$149$143
Common stock repurchases 504  800 
Cash returned to shareholders$653 $943 
Percent of free cash flow returned to shareholders114%150%

______________

(1) Free cash flow is defined as net cash from operating activities less net capital expenditures (capital expenditures less cash proceeds from dispositions of property, plant and equipment). Free cash flow represents cash generated after paying for interest on borrowings, income taxes, pension benefit contributions, capital expenditures and changes in working capital, but before repaying principal amount of outstanding debt, paying cash dividends on common stock, repurchasing shares of our common stock, investing cash to acquire businesses, and making other strategic investments. Thus, a key assumption underlying free cash flow is that the company will be able to refinance its existing debt. Because of this assumption, free cash flow is not a measure that should be relied upon to represent the residual cash flow available for discretionary expenditures.

 

Reportable SegmentResults

Electronic Systems

    Third Quarter Ended   Year-to-Date Ended 
($ in millions)

Sept. 28,
2012

 

Sept. 30,
2011

Increase/
(decrease)

Sept. 28,
2012

 

Sept. 30,
2011

Decrease
Net sales$1,395.1$1,385.81%$4,060.1$4,072.8(0.3)%
Operating income$158.3$165.8(5)%$480.4$503.8(5)%
Operating margin     11.3%  12.0% (70) bpts   11.8%  12.4% (60) bpts
 

Third Quarter: Electronic Systems net sales for the 2012 third quarter increased by $9 million, or 1%, compared to the 2011 third quarter. Sales increased for: (1) Microwave Products by $35 million primarily for increased deliveries of mobile and ground-based satellite communication systems for the U.S. military and power devices for commercial satellite communication systems, (2) Sensor Systems by $30 million primarily from the Kollmorgen Electro-Optical (KEO) acquisition, which was completed in February 2012, and (3) Simulation & Training by $20 million primarily due to the commercial aircraft simulation business acquired from Thales Group, which was completed in August 2012 and named Link Simulation & Training U.K., Limited (Link U.K.). These increases were partially offset by a sales decrease of $63 million for Marine & Power Systems due to lower demand primarily for commercial shipbuilding products, which reduced sales by $37 million (including $15 million of negative foreign currency translation), and reduced shipments of tactical quiet generators for the U.S. Army, which reduced sales by $26 million. Also, sales declined by $13 million for Precision Engagement due to lower volume from contracts nearing completion during the quarter and lower demand.

Electronic Systems operating income for the 2012 third quarter decreased by $8 million, or 5%, compared to the 2011 third quarter. Operating margin decreased by 70 basis points to 11.3%. Sales mix changes reduced operating margin by 40 basis points and higher pension expense of $4 million reduced operation margin by 30 basis points.

Year-to-Date: Electronic Systems net sales for the 2012 year-to-date period decreased by $13 million, or 0.3%, compared to the 2011 year-to-date period. Sales declined for: (1) Marine & Power Systems by $105 million primarily due to reduced shipments of tactical quiet generators for the U.S. Army, which reduced sales by $72 million, and $33 million of negative foreign currency translation, (2) Warrior Systems by $68 million for night vision and illumination products due to reduced U.S. Army requirements, (3) Precision Engagement by $65 million due to contracts nearing completion and lower demand. These declines were partially offset by sales increases of: (1) $135 million for Sensor Systems, comprised of $100 million from the KEO acquisition and $35 million primarily for higher sales of airborne EO/IR turrets for the U.S. Department of Defense (DoD), (2) $66 million primarily for Microwave Products due to reasons similar to the 2012 third quarter, and (3) $24 million for the Link U.K. acquisition.

Electronic Systems operating income for the 2012 year-to-date period decreased by $23 million, or 5%, compared to the 2011 year-to-date period. Operating margin decreased by 60 basis points to 11.8%. Sales mix changes reduced operating margin by 80 basis points and higher pension expense of $4 million reduced operating margin by 10 basis points. This decrease was partially offset by improved contract performance, primarily for Displays, Warrior Systems and Precision Engagement, which increased operating margin by 30 basis points.

C3ISR

    Third Quarter Ended    Year-to-Date Ended 
($ in millions)

Sept. 28,
2012

 

Sept. 30,
2011

Increase/
(decrease)

Sept. 28,
2012

 

Sept. 30,
2011

Increase/
(decrease)

Net sales$885.9$874.91%$2,634.1$2,466.77%
Operating income$92.9$100.1(7)%$271.8$284.7(5)%
Operating margin     10.5%  11.4% (90) bpts    10.3%  11.5% (120) bpts
 

Third Quarter: C3ISR net sales for the 2012 third quarter increased by $11 million, or 1%, compared to the 2011 third quarter. Sales for ISR Systems increased by $49 million primarily due to higher volume for airborne ISR systems. These increases were partially offset by lower sales of $38 million for networked communication systems primarily from fewer deliveries of remote video terminals and lower volume on the Hawklink contract due to development and low rate initial production work nearing completion.

C3ISR operating income for the 2012 third quarter decreased by $7 million, or 7%, compared to the 2011 third quarter. Operating margin decreased by 90 basis points to 10.5%. Higher pension expense of $10 million reduced operating margin by 110 basis points and sales mix changes reduced operating margin by 40 basis points. This decrease was partially offset by improved contract performance, which increased operating margin by 60 basis points.

Year-to-Date: C3ISR net sales for the 2012 year-to-date period increased by $167 million, or 7%, compared to the 2011 year-to-date period. Sales for ISR Systems increased by $144 million primarily due to higher volume on airborne ISR systems and increased demand for logistic support and fleet management services. Sales also increased by $23 million primarily for networked communication systems due to higher volume for manned and unmanned platforms for DoD customers.

C3ISR operating income for the 2012 year-to-date period decreased by $13 million, or 5%, compared to the 2011 year-to-date period. Operating margin decreased by 120 basis points to 10.3%. Higher pension expense of $19 million reduced operating margin by 70 basis points and sales mix changes reduced operating margin by 80 basis points. These decreases were partially offset by improved contract performance, which increased operating margin by 30 basis points.

AM&M

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    Third Quarter Ended   Year-to-Date Ended 
($ in millions)

Sept. 28,
2012

 

Sept. 30,
2011

Increase

Sept. 28,
2012

 

Sept. 30,
2011

Increase/
(decrease)

Net sales$648.9$622.74%$1,854.5$1,825.42%
Operating income