Defense operator L-3 Communications Holdings Inc. LLL posted second-quarter 2015 adjusted earnings of $1.41 per share, lagging the Zacks Consensus Estimate of $1.72 by 18%. Earnings were also lower than the year-ago figure of $1.53 by 8%.
The bottom line was affected by charges in the Platform Integration division of its Aerospace Systems segment, as well as continuing headwinds from U.S. defense budget constraints.
Total Revenues
Total revenues of $2,793 million in the reported quarter missed the Zacks Consensus Estimate of $2,874 million by 2.8%. The top line was down 7% year over year due to lower demand from the U.S. government.
Sales to the U.S. government declined 6% year over year. Net sales to international and commercial customers declined 11% in the reported quarter.
Funded orders in the reported quarter were $2.8 billion, down 14% year over year. Funded backlog decreased 4% to $9.8 billion as of Jun 26, 2015, from $10.2 billion as of Dec 31, 2014 due to the sale of Marine Systems International or MSI.
Operational Highlights
The company’s operating income was down 31% to $166 million in the reported quarter. Interest expenses were $48 million as compared to $39 million in the year-ago quarter.
Segment Performance
Aerospace Systems: Net sales at the segment decreased 6.2% to $995 million from the prior-year figure of $1,061 million on account of lower sales for Platform and Logistics Solutions.
Electronic Systems: The segment recorded net sales of $1,036 million in the reported quarter, down 6.1% year over year. The decrease mainly reflects the divestitures of MSI and Broadcast Sports, Inc. or BSI businesses.
Communication Systems: Net sales at the segment decreased 3.7% year over year to $501 million primarily due to lower demand and reduced deliveries.
National Security Solutions: The segment generated net sales of $261 million, down 22.1% from $335 million a year ago. The decrease reflects lower material requirements on a systems and software sustainment contract with the U.S. Army, and lower demand owing to the U.S. military drawdown in Afghanistan and completed contracts.
Financial Position
As of Jun 26, 2015, L-3 Communications had $353 million in cash and cash equivalents compared with $442 million as of Dec 31, 2014.
Long-term debt as of Jun 26, 2015, was $3,940 million, on par with the 2014-end level.
Net cash from operating activities was $314 million in the first half of 2015 compared with $215 million a year ago. Capital expenditure was $85 million compared with $67 million in the year-ago period.
Guidance
The company maintained its revenue guidance for 2015 in the range of $11.45 billion to $11.65 billion.
The adjusted earnings per share guidance was however reduced to the range of $6.70–$7.00 from its prior projection of $7.35−$7.65 for the year.
Interest expenses for 2015 are expected to be $189 million while segment operating margin is pegged at 8.4% (earlier guidance: 9.4%). The capital expenditure forecast remained at $195 million. Additionally, management expects to generate $850 million of free cash flow (earlier guidance: $925 million).
Strategic Moves
L-3 Communications intends to streamline its portfolio to focus more on its core defense electronics and communications systems businesses, which it expects will improve its sales growth and margin profile. In this context, the company has plans to evaluate strategic alternatives for the National Security Solutions business to maximize value for its shareholders. This could include a potential sale, spin-off or other divestiture transactions for the business.
Peer Comparison
General Dynamics Corporation GD announced second-quarter 2015 earnings from continuing operations of $2.27 per share, comfortably surpassing the Zacks Consensus Estimate of $2.03 by 11.8%. Earnings also increased 20.7% from the prior-year figure of $1.88, backed by improved operating margins.
Pentagon’s prime contractor, Lockheed Martin Corp. LMT posted second-quarter 2015 earnings of $2.94 per share, comfortably surpassing the Zacks Consensus Estimate of $2.67 by 10.1%. Earnings also jumped 6.5% from $2.76 per share a year ago.
Northrop Grumman Corp.’s NOC second-quarter 2015 adjusted earnings came in at $2.47 per share, 6% higher than the Zacks Consensus Estimate of $2.33.
Zacks Rank
L-3 Communications currently has a Zacks Rank #2 (Buy).
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