L-3 Announces Fourth Quarter 2012 Results
L-3 Announces Fourth Quarter 2012 Results
Diluted earnings per share from continuing operations of $2.25
Net sales of $3.6 billion
Net cash from operating activities of $539 million
Funded orders up 17% to $3.3 billion, funded backlog up 10% to $10.9 billion
Updated consolidated financial guidance for 2013
NEW YORK--(BUSINESS WIRE)-- L-3 Communications Holdings, Inc. (NYS: LLL) today reported diluted earnings per share (diluted EPS) from continuing operations of $2.25 for the quarter ended December 31, 2012 (2012 fourth quarter), compared to $2.49 for the quarter ended December 31, 2011 (2011 fourth quarter). The 2011 fourth quarter included a $0.28 net gain for certain items, which are discussed below. Excluding this net gain, diluted EPS increased by 2% compared to $2.21 for the 2011 fourth quarter. Net sales of $3.6 billion for the 2012 fourth quarter increased by 0.5% compared to the 2011 fourth quarter.
"Overall, we had a solid fourth quarter underscored by strong orders, sales and cash flows in spite of the challenges and uncertainty in the U.S. defense budget. Sales increased in our Electronic Systems and AM&M segments, which demonstrates that L-3 is well-positioned and executing our strategy to grow our international and commercial businesses and expand market share," said Michael T. Strianese, chairman, president and chief executive officer. "For the year, orders grew 7% compared to last year, resulting in a book-to-bill ratio of 1.05x. We ended the quarter with funded backlog of $10.9 billion, up 10% compared to December 2011."
"We continue to aggressively manage our costs to maintain a competitive advantage in the markets we serve, while delivering affordable and innovative solutions to our customers. We remain focused on shareholder value and deploying our capital using a disciplined and balanced approach that includes cash dividends and share repurchases, modest debt reduction, investment in research and development and acquisitions. Consistent with this strategy, we repurchased $368 million of our common stock and paid dividends of $46 million during the quarter. For 2012, we repurchased a total of $872 million of our shares and paid dividends of $195 million, resulting in approximately $1.1 billion of cash returned to our shareholders. In addition, our acquisitions of the Kollmorgen Electro-Optical business (named L-3 KEO) and the commercial aircraft simulation business of Thales Group (named Link U.K.), enhance our market position and also expand our commercial opportunities."
Key contract wins for the quarter included: (1) an indefinite-delivery, indefinite-quantity (ID/IQ) contract to supply the second generation of Advanced Imaging Technology (AIT) systems to the Transportation Security Administration (TSA), (2) new business to provide contractor logistics services for specialized pilot training for the U.S. Air Force, and (3) a production contract for modems and SATCOM On-The-Move (SOTM) antennas to be used on the U.S. Army's Warfighter Information Network-Tactical (WIN-T) program.
L-3 Consolidated Results
Fourth Quarter Ended | Year Ended Dec. 31, | ||||||||||||||||||||||||||||||||||||
($ in millions, except per share data) | 2012 | 2011(1) | Increase/ | 2012 | 2011(1) | Increase/ | |||||||||||||||||||||||||||||||
Net sales | $ | 3,560 | $ | 3,543 | 0.5% | $ | 13,146 | $ | 13,158 | (0.1)% | |||||||||||||||||||||||||||
Operating income | $ | 364 | $ | 354 | 3% | $ | 1,351 | $ | 1,399 | (3)% | |||||||||||||||||||||||||||
Goodwill impairment charge | ― | 43 | nm | ― | 43 | nm | |||||||||||||||||||||||||||||||
Segment operating income | $ | 364 | $ | 397 | (8)% | $ | 1,351 | $ | 1,442 | (6)% | |||||||||||||||||||||||||||
Operating margin | 10.2 | % | 10.0 | % | 20 bpts | 10.3 | % | 10.6 | % | (30) bpts | |||||||||||||||||||||||||||
Segment operating margin | 10.2 | % | 11.2 | % | (100) bpts | 10.3 | % | 11.0 | % | (70) bpts | |||||||||||||||||||||||||||
Interest expense | $ | 46 | $ | 52 | (12)% | $ | 184 | $ | 204 | (10)% | |||||||||||||||||||||||||||
Interest and other income (expense) | $ | 2 | $ | (10 | ) | nm | $ | 8 | $ | ― | nm | ||||||||||||||||||||||||||
Debt retirement charge | $ | 5 | $ | 17 | (71)% | $ | 13 | $ | 35 | (63)% | |||||||||||||||||||||||||||
Effective income tax rate | 31.7 | % | 7.6 | % | nm | 32.2 | % | 25.5 | % | 670 bpts | |||||||||||||||||||||||||||
Net income from continuing operations | $ | 212 | $ | 251 | (16)% | $ | 782 | $ | 855 | (9)% | |||||||||||||||||||||||||||
Q4 2011 Items | ― | (28 | ) | nm | ― | (28 | ) | nm | |||||||||||||||||||||||||||||
Net income from continuing operations attributable | $ | 212 | $ | 223 | (5)% | $ | 782 | $ | 827 | (5)% | |||||||||||||||||||||||||||
Diluted EPS from continuing operations | $ | 2.25 | $ | 2.49 | (10)% | $ | 8.01 | $ | 8.08 | (1)% | |||||||||||||||||||||||||||
Q4 2011 Items | ― | (0.28 | ) | nm | ― | (0.26 | ) | nm | |||||||||||||||||||||||||||||
Diluted earnings per share from continuing operations, | $ | 2.25 | $ | 2.21 | 2% | $ | 8.01 | $ | 7.82 | 2% | |||||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 94.3 | 100.9 | (7)% | 97.6 | 105.6 | (8)% | |||||||||||||||||||||||||||||||
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(1) | The 2011 fourth quarter and full year results were impacted by: (1) a tax benefit of $78 million, or $0.77 per diluted share, and (2) non-cash impairment charges of $57 million ($50 million after income taxes, or $0.49 per diluted share), comprised of a goodwill impairment charge of $43 million ($42 million after income taxes, or $0.41 per diluted share), and a long-lived asset impairment charge at an equity method investment of $14 million ($8 million after income taxes, or $0.08 per diluted share). These items are collectively referred to as the Q4 2011 Items. | |||
The company believes that the Q4 2011 Items affect the comparability of the results of operations of the 2012 fourth quarter and full year to the results of operations for the 2011 fourth quarter and full year. The company also believes that disclosing net income and diluted EPS excluding the Q4 2011 Items will allow investors to more easily compare the 2012 fourth quarter and full year results to the 2011 fourth quarter and full year results. Further, the goodwill impairment charge is included in consolidated operating income, but excluded from segment operating income because the charge is excluded by management for purposes of assessing segment operating performance. | ||||
nm | - | not meaningful | ||
Fourth Quarter Results of Operations: For the 2012 fourth quarter, consolidated net sales of $3.6 billion increased $17 million, or 0.5%, compared to the 2011 fourth quarter. Sales growth from the Electronic Systems and Aircraft Modernization and Maintenance (AM&M) segments was partially offset by lower sales from the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) and National Security Solutions (NSS) segments. Acquired businesses(1), which are all included in the Electronic Systems segment, added $66 million to net sales in the 2012 fourth quarter. Net sales to commercial and foreign government end customers grew 23% to $897 million for the 2012 fourth quarter compared to $727 million for the 2011 fourth quarter.
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(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. |
Segment operating income for the 2012 fourth quarter decreased by $33 million, or 8%, compared to the 2011 fourth quarter. Segment operating income as a percentage of sales (segment operating margin) decreased by 100 basis points to 10.2% for the 2012 fourth quarter compared to 11.2% for the 2011 fourth quarter. Higher pension expense of $11 million ($7 million after income tax, or $0.07 per diluted share) reduced segment operating margin by 30 basis points. The remaining decrease in segment operating margin is primarily due to sales mix changes and 2011 fourth quarter favorable contract performance adjustments that did not recur in the 2012 fourth quarter in the Electronic Systems segment. See segment results below for additional discussion of sales and operating margin.
Interest expense declined by $6 million due to lower interest rates on outstanding fixed rate debt, partially offset by interest expense allocated to discontinued operations for the 2011 fourth quarter.
Interest and other income increased by $12 million for the 2012 fourth quarter compared to the same period last year due primarily to a 2011 fourth quarter impairment charge of $14 million for long-lived assets at an equity method investment.
The effective tax rate for the 2012 fourth quarter increased to 31.7% from 7.6% for the same period last year. Excluding the Q4 2011 Items, the 2011 fourth quarter effective tax rate would have been 31.9%.
Net income from continuing operations attributable to L-3 in the 2012 fourth quarter decreased 16% to $212 million compared to the 2011 fourth quarter, and diluted EPS from continuing operations decreased 10% to $2.25 from $2.49. Excluding the Q4 2011 Items, net income from continuing operations attributable to L-3 decreased 5% and diluted EPS increased by 2%. Diluted weighted average common shares outstanding for the 2012 fourth quarter declined by 7% compared to the 2011 fourth quarter due to repurchases of L-3 common stock.
Full Year Results of Operations: For the year ended December 31, 2012 consolidated net sales decreased by $12 million, or 0.1%, compared to the year ended December 31, 2011. Higher sales from the C3ISR, Electronic Systems and AM&M segments were offset by lower sales from the NSS segment. Acquired businesses, which are all included in the Electronic Systems segment, added $196 million to net sales in the year ended December 31, 2012. Net sales to commercial and foreign government end customers grew 15% to $3,120 million for the year ended December 31, 2012 compared to $2,719 million for the year ended December 31, 2011.
Segment operating income for the year ended December 31, 2012 decreased by $91 million, or 6%, compared to the year ended December 31, 2011. Segment operating margin decreased by 70 basis points to 10.3% for the year ended December 31, 2012 compared to 11.0% for the year ended December 31, 2011. Higher pension expense of $38 million ($24 million after income tax, or $0.25 per diluted share) reduced segment operating margin by 30 basis points. The remaining decrease in segment operating margin is primarily due to sales mix changes in the Electronic Systems and C3ISR segments and $9 million of legal fees and inventory write-downs related to security and safety equipment in the NSS segment. See segment results below for additional discussion of sales and operating margin.
Interest expense declined by $20 million due to lower interest rates on outstanding fixed rate debt, partially offset by higher interest expense allocated to discontinued operations in 2011.
Interest and other income increased by $8 million for the year ended December 31, 2012, compared to the year ended December 31, 2011 primarily due to reasons similar to the 2012 fourth quarter.
The effective tax rate for the year ended December 31, 2012 increased to 32.2% from 25.5% for the year ended December 31, 2011. Excluding the Q4 2011 Items, the effective tax rate for the year ended December 31, 2011 would have been 31.2%. The increase in the effective tax rate is primarily due to 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 year ended December 31, 2012 decreased 9% to $782 million compared to the year ended December 31, 2011, and diluted EPS from continuing operations decreased to $8.01 from $8.08. Excluding the Q4 2011 Items, net income from continuing operations attributable to L-3 decreased 5% and diluted EPS increased 2%. Diluted weighted average common shares outstanding for the year ended December 31, 2012 declined by 8% compared to the year ended December 31, 2011 due to repurchases of L-3 common stock.
Orders: Funded orders for the 2012 fourth quarter increased 17% to $3.3 billion compared to $2.9 billion for the 2011 fourth quarter. Funded orders for the year ended December 31, 2012 increased 7% to $13.8 billion compared to $12.9 billion for the year ended December 31, 2011. Funded backlog grew 10% to $10.9 billion at December 31, 2012, compared to $9.9 billion at December 31, 2011.
Cash flow: Net cash from operating activities from continuing operations was $1,231 million for each of the years ended December 31, 2012 and 2011. Capital expenditures, net of dispositions of property, plant and equipment, were $205 million for the year ended December 31, 2012, compared to $181 million for the year ended December 31, 2011.
Cash returned to shareholders: The table below summarizes the cash returned to shareholders during the year ended December 31, 2012, compared to the year ended December 31, 2011.
Year Ended Dec. 31, | |||||||||||||
($ in millions) | 2012 | 2011 | |||||||||||
Net cash from operating activities from continuing operations | $ | 1,231 | $ | 1,231 | |||||||||
Less: Capital expenditures, net of dispositions | (205 | ) | (181 | ) | |||||||||
Plus: Income tax payments attributable to discontinued operations | 24 | 63 | |||||||||||
Free cash flow(1) | $ | 1,050 | $ | 1,113 | |||||||||
Dividends paid | $ | 195 | $ | 188 | |||||||||
Common stock repurchases | 872 | 958 | |||||||||||
Cash returned to shareholders | $ | 1,067 | $ | 1,146 | |||||||||
Percent of free cash flow returned to shareholders | 102 | % | 103 | % | |||||||||
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(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 SegmentResults
Electronic Systems
Fourth Quarter Ended | Year Ended Dec. 31, | |||||||||||||||||||||||||||||||||||||
($ in millions) | 2012 | 2011 | Increase/ | 2012 | 2011 | Increase/ | ||||||||||||||||||||||||||||||||
Net sales | $ | 1,616.7 | $ | |||||||||||||||||||||||||||||||||||
