L-3 Announces Second Quarter 2013 Results

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L-3 Announces Second Quarter 2013 Results

  • Diluted earnings per share of $2.03
  • Net sales increased 2% to $3.2 billion
  • Net cash from operating activities of $250 million
  • Funded orders of $3.5 billion, funded backlog of $10.8 billion
  • Updated 2013 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 $2.03 for the quarter ended June 28, 2013 (2013 second quarter), an increase of 5%, compared to $1.94 for the quarter ended June 29, 2012 (2012 second quarter). Net sales of $3.2 billion for the 2013 second quarter increased by 2% compared to the 2012 second quarter.


"Our second quarter results were very good, underscored by strong orders, sales and EPS growth and solid cash flow. International and commercial sales rose 17%, offsetting declines in our U.S. national security-related businesses. We recorded several strategic new business wins during the quarter that expanded both our international and domestic security work, demonstrating that we continue to successfully execute our strategy to grow international and commercial sales and to increase market share. For the quarter, our funded orders were $3.5 billion, resulting in a book-to-bill ratio of 1.09," said Michael T. Strianese, chairman, president and chief executive officer. "We continue to closely monitor the effects of sequestration and subsequent budget uncertainties. Although we have experienced some impacts from sequestration, including funding delays and cuts, award deferrals and staffing reductions at select customers, the result is manageable and we are taking the appropriate action at the affected business units."

"We continued to execute on our commitment to deliver shareholder value by repurchasing $126 million of our common stock and paying dividends of $49 million during the quarter, resulting in $349 million of cash returned to our shareholders year-to-date. At the same time, we continue to increase the efficiency of our business units, invest wisely in R&D, ensure that our operations are appropriately sized, address important customer priorities, and pursue acquisition opportunities that strengthen and expand our business and customer base."

Key competitive contract wins for the quarter included: (1) a contract to provide sustainment and maintenance services for the Canadian Department of National Defence's long-range, multi-use A310 aircraft, (2) a contract to provide fleet management, maintenance and logistics support for the U.S. Navy's TH-57 fleet of training helicopters, (3) maintenance and material management for the National Aeronautics and Space Administration (NASA) fleet of manned and unmanned aircraft, (4) new international business to upgrade eight P-3C aircraft for the Republic of Korea, (5) a contract to provide a full range of professional and information technology (IT) support services to the Centers for Disease Control (CDC), and (6) a contract to supply SATCOM terminals to the Australian Defence Force (ADF).

                    

L-3 Consolidated Results

        
 
Second Quarter EndedFirst Half Ended
($ in millions, except per share data)

June 28,
2013

  

June 29,
2012

Increase/
(decrease)

June 28,
2013

  

June 29,
2012

Increase/
(decrease)

 
Net sales

$

3,192

$3,143$49

$

6,377

$

6,303$74
Operating income$307$331$

(24

)

 

$

620

$656$

(36

)

 

Operating margin9.6%10.5%

 

(90

)

 bpts

9.7%10.4%

 

(70

)

 bpts

Interest expense$44$45$

(1

)

 

$

87

$90$

(3

)

 

Interest and other income, net$5$3$2

$

8

$6$2
Effective income tax rate30.6%33.9%

 

(330

)

 bpts

 

 

29.8

%33.9%

 

(410

)

 bpts

Net income from continuing operations
  attributable to L-3

$185$191$

(6

)

 

$

378

$377$1

 

Diluted EPS from continuing operations

$2.03$1.94$0.09

$

4.14

$3.79

$

0.35

Diluted weighted average common shares
outstanding

91.198.5

 

(7.4

)

 

91.3

99.4

 

(8.1

)

 

                          
 

Second Quarter Results of Operations: For the 2013 second quarter, consolidated net sales of $3.2 billion increased $49 million, or 2%, compared to the 2012 second quarter. Sales growth was primarily from the Platform & Logistics Solutions (P&LS) and Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) segments. Acquired businesses(1), which are all included in the Electronic Systems segment, added $24 million to net sales in the 2013 second quarter. Net sales to commercial and international customers increased 17%, or $126 million, to $856 million in the 2013 second quarter, including $24 million from acquired businesses, compared to $730 million in the 2012 second quarter. Net sales to commercial and international customers, as a percentage of consolidated net sales, increased to 27% for the 2013 second quarter compared to 23% for the 2012 second quarter.

_____________________________________

(1)

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 and product line divestitures that are included in L-3's actual results for the 12 months prior to the divestitures.

Operating income for the 2013 second quarter of $307 million decreased $24 million, or 7%, as compared to the 2012 second quarter. Operating income as a percentage of sales (operating margin) decreased by 90 basis points to 9.6% for the 2013 second quarter compared to 10.5% for the 2012 second quarter. The decrease in operating margin is primarily due to less favorable contract adjustments and sales mix changes for the C3ISR and Electronic Systems segments. In addition, acquired businesses reduced operating margin by 10 basis points and higher pension expense of $4 million ($3 million after income taxes, or $0.03 per diluted share) reduced operating margin by 10 basis points. Furthermore, the 2013 second quarter included severance charges that reduced operating income by $9 million ($6 million after income taxes, or $0.07 per diluted share), which was higher by $4 million compared to the 2012 second quarter. Higher severance costs reduced operating margin by 10 basis points. See segment results below for additional discussion of sales and operating margin trends.

Interest expense declined by $1 million, as lower outstanding debt reduced interest expense by $8 million, which was partially offset by $7 million of interest expense that was allocated to discontinued operations in the 2012 second quarter.

The effective tax rate for the 2013 second quarter decreased to 30.6% from 33.9% for the same period last year. The decrease is primarily due to tax benefits in the 2013 second quarter of: (1) $6 million primarily related to the reversal of amounts accrued for foreign taxes for years in which the statute of limitations expired and to the finalization of tax returns in certain foreign jurisdictions and (2) $3 million related to the U.S. Federal research and experimentation tax credit.

Net income from continuing operations attributable to L-3 in the 2013 second quarter decreased 3% to $185 million compared to the 2012 second quarter, and diluted EPS from continuing operations increased 5% to $2.03 from $1.94. Diluted weighted average common shares outstanding for the 2013 second quarter declined by 8% compared to the 2012 second quarter due to repurchases of L-3 common stock.

First Half Results of Operations: For the first half ended June 28, 2013 (2013 first half), consolidated net sales of $6.4 billion increased $74 million, or 1%, compared to the first half ended June 29, 2012 (2012 first half). Sales growth in the Electronic Systems, P&LS and C3ISR segments was partially offset by lower sales from the National Security Solutions (NSS) segment. Acquired businesses, which are all included in the Electronic Systems segment, added $72 million to net sales in the 2013 first half. Net sales to commercial and international customers increased 18%, or $248 million, to $1,663 million in the 2013 first half, including $65 million from acquired businesses, compared to $1,415 million in the 2012 first half. Net sales to commercial and international customers, as a percentage of consolidated net sales, increased to 26% for 2013 first half compared to 22% for the 2012 first half.

Operating income for the 2013 first half of $620 million decreased $36 million, or 5%, as compared to the 2012 first half. Operating margin decreased by 70 basis points to 9.7% for the 2013 first half compared to 10.4% for the 2012 first half. The decrease in operating margin is primarily due to unfavorable contract adjustments for the C3ISR segment and sales mix changes for the Electronic Systems segment. In addition, acquired businesses reduced operating margin by 10 basis points and higher pension expense of $8 million ($5 million after income taxes, or $0.05 per diluted share) reduced operating margin by 10 basis points. Furthermore, the 2013 first half included severance charges that reduced operating income by $14 million ($9 million after income taxes, or $0.10 per diluted share), which was higher by $2 million compared to the 2012 first half. See segment results below for additional discussion of sales and operating margin trends.

Interest expense declined by $3 million, as lower outstanding debt reduced interest expense by $16 million, which was partially offset by $13 million of interest expense that was allocated to discontinued operations in the 2012 first half.

The effective tax rate for the 2013 first half decreased to 29.8% from 33.9% for the same period last year. The decrease is primarily due to tax benefits in the 2013 first half of: (1) $15 million related to the retroactive reinstatement in January 2013 of the U.S. Federal research and experimentation tax credit for all of 2012 and 2013, of which $10 million ($0.11 per diluted share) relates to the 2012 benefit and $5 million relates to the 2013 first half benefit and (2) $8 million primarily related to the reversal of amounts accrued for foreign taxes for years in which the statute of limitations expired and to the finalization of tax returns in certain foreign jurisdictions.

Net income from continuing operations attributable to L-3 in the 2013 first half increased $1 million to $378 million compared to the 2012 first half, and diluted EPS from continuing operations increased 9% to $4.14 from $3.79. Diluted weighted average common shares outstanding for the 2013 first half declined by 8% compared to the 2012 first half due to repurchases of L-3 common stock.

Orders: Funded orders for the 2013 second quarter were approximately $3.5 billion and declined 2% compared to the 2012 second quarter. Funded orders for the 2013 first half were approximately $6.4 billion compared to approximately $7.2 billion for the 2012 first half. The book-to-bill ratio was 1.09 for the 2013 second quarter and 1.00 for the 2013 first half. Funded backlog declined 1% to $10.8 billion at June 28, 2013, compared to $10.9 billion at December 31, 2012.

Cash flow and cash returned to shareholders: Net cash from operating activities from continuing operations increased by $59 million, or 18%, to $396 million for the 2013 first half, compared to $337 million for the 2012 first half. The table below summarizes the cash returned to shareholders during the 2013 first half compared to the 2012 first half.

     
 First Half Ended
($ in millions)

June 28,
2013

  

June 29,
2012

 
Net cash from operating activities from continuing operations$396$337
Less: Capital expenditures, net of dispositions

(101

)

(75)
Plus: Income tax payments attributable to discontinued operations

 

  16 
Free cash flow(1)$295 $278 
Dividends paid$101$98
Common stock repurchases 248  315 
Cash returned to shareholders$349 $413 
Percent of free cash flow returned to shareholders118%149%

____________________

 

(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) plus income tax payments attributable to discontinued operations. 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 Segment Results

C3ISR

                  
 
Second Quarter EndedFirst Half Ended
($ in millions)

June 28,
2013

 

June 29,
2012

Increase/
(decrease)

June 28,
2013

 

June 29,
2012

Increase/
(decrease)

Net sales$881.7$862.0$19.7$1,770.1$1,748.1$22.0
Operating income$69.2$86.3$(17.1

)

 

$160.7$178.9$(18.2

)

 

Operating margin   7.8%  10.0% 

(220

)

 

bpts

   9.1%  10.2% 

(110

)

 

bpts

 

Second Quarter: C3ISR net sales for the 2013 second quarter increased by $20 million, or 2%, compared to the 2012 second quarter. Sales increased by $10 million for networked communication systems and $10 million for ISR Systems. The increase for networked communication systems was due to higher volume of airborne and ground datalink systems for manned and unmanned platforms, partially offset by lower volume as the production work on a contract for vehicle mounted satellite communication ground stations nears completion and declining U.S. Army demand for remote video terminals. Sales increased for ISR Systems primarily due to higher volume for U.S. Government customers for logistics support and fleet management services.

C3ISR operating income for the 2013 second quarter of $69 million, which included severance charges of $3 million, decreased by $17 million, or 20%, compared to the 2012 second quarter. Operating margin decreased by 220 basis points to 7.8%. Operating margin declined by 100 basis points due to sales mix changes for ISR Systems and 70 basis points due to less favorable contract adjustments compared to the 2012 second quarter, primarily due to higher design and production costs on select networked communication systems contracts. Higher pension expense of $4 million reduced operating margin by 50 basis points.

First Half: C3ISR net sales for the 2013 first half increased by $22 million, or 1%, compared to the 2012 first half. Sales increased by $78 million for ISR Systems and decreased $56 million for networked communication systems. The increase for ISR Systems was due to small ISR aircraft sales to the Department of Defense (DoD) and higher volume for U.S. Government customers for logistics support and fleet management services and ISR platforms for foreign military customers. The decrease in sales for networked communication systems was due to lower volume as the production work on a contract for vehicle mounted satellite communication ground stations nears completion and declining U.S. Army demand for remote video terminals. These decreases were partially offset by higher volume for airborne and ground datalink systems for manned and unmanned platforms.

C3ISR operating income for the 2013 first half of $161 million, which included severance charges of $3 million, decreased by $18 million, or 10%, compared to the 2012 first half. Operating margin decreased by 110 basis points to 9.1%. Operating margin declined by 200 basis points due to unfavorable contract adjustments compared to favorable contract adjustments in the 2012 first half, primarily due to higher design and production costs for select networked communication systems contracts. Higher pension expense of $8 million reduced operating margin by 40 basis points. These decreases were partially offset by 130 basis points primarily due to sales mix changes for ISR Systems.

        

Electronic Systems

                  
 
Second Quarter Ended Read Full Story

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