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. (NYSE: 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/ (decrease)
2012
2011(1)
Increase/ (decrease)
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 attributable to L-3
$
212
$
251
(16)%
$
782
$
855
(9)%
Q4 2011 Items
―
(28
)
nm
―
(28
)
nm
Net income from continuing operations attributable to L-3,
excluding Q4 2011 Items
$
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, excluding
Q4 2011 Items
$
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)%
____________________
(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.
___________________________________
(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
%
___________________
(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/ (decrease)
2012
2011
Increase/ (decrease)
Net sales
$
1,616.7
$
1,555.1
4
%
$
5,676.8
$
5,627.9
1
%
Operating income
$
192.1
$
215.1
(11
)%
$
672.5
$
718.9
(6
)%
Operating margin
11.9
%
13.8
%
(190) bpts
11.8
%
12.8
%
(100) bpts
Fourth Quarter: Electronic Systems net sales for the 2012 fourth
quarter increased by $62 million, or 4%, compared to the 2011 fourth
quarter. Sales increased: (1) $66 million for Simulation & Training of
which $25 million was from the Link U.K. acquisition and $41 million was
primarily due to increased deliveries of U.S. Army rotary wing training
systems for the Flight School XXI program, (2) $17 million for Precision
Engagement primarily due to increased deliveries of ordnance products,
(3) $15 million for Marine Services primarily due to the landing craft
air cushion vehicle service life extension program, (4) $13 million for
Microwave Products primarily due to increased deliveries of mobile and
ground-based satellite communication systems for the U.S. military, and
(5) $4 million for Sensor Systems ($35 million from the L-3 KEO
acquisition partially offset by a decline of $31 million due to lower
volume for airborne EO/IR turrets for the U.S. Department of Defense
(DoD)). These increases were partially offset by sales decreases of: (1)
$39 million for Power & Control Systems due to lower demand for
commercial shipbuilding products, which reduced sales by $19 million
including $5 million of negative foreign currency translation, and lower
shipments of tactical quiet generators for the U.S. Army, which reduced
sales by $20 million, and (2) $14 million for Warrior Systems due to
reduced U.S. Army requirements for night vision and illumination
products.
Electronic Systems operating income for the 2012 fourth quarter
decreased by $23 million, or 11%, compared to the 2011 fourth quarter.
Operating margin decreased by 190 basis points to 11.9%. Operating
margin declined by 120 basis points primarily due to lower sales at
Power & Control Systems and sales mix changes at Sensor Systems and 60
basis points due to more favorable contract performance adjustments
during the 2011 fourth quarter as compared to the 2012 fourth quarter.
Higher pension expense of approximately $1 million reduced operating
margin by 10 basis points.
Full Year: Electronic Systems net sales for the year ended
December 31, 2012 increased by $49 million, or 1%, compared to the year
ended December 31, 2011. Sales increased: (1) $149 million for Sensor
Systems primarily for the L-3 KEO acquisition, (2) $85 million for
Microwave Products primarily due to increased deliveries of mobile and
ground-based satellite communication systems for the U.S. military and
power devices for commercial satellite communication systems, (3) $72
million for Simulation & Training of which $49 million was from the Link
U.K. acquisition and $23 million was primarily due to increased
deliveries of U.S. Army rotary wing training systems for the Flight
School XXI program, and (4) $30 million for Marine Services due to
reasons similar to the 2012 fourth quarter. These increases were
partially offset by sales declines of: (1) $157 million for Power &
Control Systems due to reduced shipments of tactical quiet generators
for the U.S. Army, which reduced sales by $92 million, and by $65
million due to negative foreign currency translation of $41 million and
lower demand for commercial shipbuilding, (2) $82 million for Warrior
Systems due to reduced U.S Army requirements for night vision and
illumination products, and (3) $48 million for Precision Engagement due
to lower volume from completed contracts.
Electronic Systems operating income for the year ended December 31, 2012
decreased by $46 million, or 6%, compared to the year ended December 31,
2011. Operating margin decreased by 100 basis points to 11.8%. Operating
margin declined by 90 basis points primarily due to lower sales for
Power & Control Systems and higher pension expense of $5 million, which
reduced operating margin by 10 basis points.
C3ISR
Fourth Quarter Ended
Year Ended Dec. 31,
($ in millions)
2012
2011
Decrease
2012
2011
Increase/ (decrease)
Net sales
$
967.1
$
1,013.2
(5)%
$
3,601.2
$
3,479.9
3
%
Operating income
$
91.9
$
109.7
(16)%
$
363.7
$
394.4
(8
)%
Operating margin
9.5
%
10.8
%
(130) bpts
10.1
%
11.3
%
(120) bpts
Fourth Quarter: C3ISR net sales for the 2012 fourth
quarter decreased by $46 million, or 5%, compared to the 2011 fourth
quarter. Sales declined by $52 million for networked communication
systems and by $21 million for logistics support and fleet management
services. The decline for networked communication systems was primarily
due to: (1) lower volume for manned and unmanned platforms for DoD
customers as contracts near completion and for the Hawklink contract as
development and low rate initial production work near completion, and
(2) fewer deliveries of remote video terminals to the U.S. Army. The
sales decline for logistics support and fleet management services was
due to lower demand for ISR aircraft supporting U.S. military operations
in Iraq and Afghanistan. These decreases were partially offset by $27
million of higher sales for ISR Systems due to increased demand for
airborne ISR systems for U.S. government and foreign military customers.
C3ISR operating income for the 2012 fourth quarter decreased
by $18 million, or 16%, compared to the 2011 fourth quarter. Operating
margin decreased by 130 basis points to 9.5%. Operating margin declined
by 70 basis points primarily due to lower sales and mix changes. Higher
pension expense of $6 million reduced operating margin by 60 basis
points.
Full Year: C3ISR net sales for the year ended December
31, 2012 increased by $121 million, or 3%, compared to the year ended
December 31, 2011. The increase in sales was primarily due to higher
demand for airborne ISR systems for U.S. government and foreign military
customers.
C3ISR operating income for the year ended December 31, 2012
decreased by $31 million, or 8%, compared to the year ended December 31,
2011. Operating margin decreased by 120 basis points to 10.1%. Higher
pension expense of $24 million reduced operating margin by 70 basis
points and sales mix changes reduced operating margin by 50 basis points.
AM&M
Fourth Quarter Ended
Year Ended Dec. 31,
($ in millions)
2012
2011
Increase
2012
2011
Increase
Net sales
$
628.8
$
614.1
2
%
$
2,483.3
$
2,439.5
2
%
Operating income
$
57.4
$
47.6
21
%
$
236.2
$
228.1
4
%
Operating margin
9.1
%
7.8
%
130 bpts
9.5
%
9.4
%
10 bpts
Fourth Quarter: AM&M net sales for the 2012 fourth quarter
increased by $15 million, or 2%, compared to the 2011 fourth quarter.
Platform systems sales increased by $52 million, which was partially
offset by a sales decline of $37 million for logistics support services.
The platform systems sales increase was due primarily to volume on new
contracts, including international head-of-state aircraft modification
contracts and the Australia C-27J, and increased scope on the EC-130
aircraft for the U.S. Air Force (USAF). The logistics support services
decrease was due primarily to the competitive loss of a task order for
U.S. Army contract field team support services in Southwest Asia,
partially offset by increased volume for field maintenance and
sustainment services for U.S. Army C-12 aircraft, training aircraft for
the USAF and U.S. government agency aircraft.
AM&M operating income for the 2012 fourth quarter increased by $10
million, or 21%, compared to the 2011 fourth quarter. Operating margin
increased 130 basis points to 9.1%. Operating margin increased by 190
basis points due to a $12 million charge in the 2011 fourth quarter for
the reduction in the USAF Joint Cargo Aircraft (JCA) aircraft order
quantity. This increase was partially offset by higher pension expense
of $4 million, which reduced operating margin by 60 basis points.
Full Year: AM&M net sales for the year ended December 31, 2012
increased by $44 million, or 2%, compared to the year ended December 31,
2011. Platform systems sales increased by $130 million, which was
partially offset by a sales decline of $86 million for logistic support
services. The platform systems increase was due primarily to volume on
new contracts, including the Australia C-27J and international
head-of-state aircraft modification contracts and increased scope on the
EC-130 aircraft for the USAF. These increases were partially offset by
lower JCA volume for the USAF. Logistics support services decreased due
primarily to the loss of a task order for U.S. Army contract field team
support services in Southwest Asia, partially offset by increased demand
for field maintenance and sustainment services on a U.S. Army rotary
wing aircraft contract that was competitively won in September 2011, and
for U.S. Army C-12 aircraft.
AM&M operating income for the year ended December 31, 2012 increased by
$8 million, or 4%, compared to the year ended December 31, 2011.
Operating margin increased by 10 basis points to 9.5%. Unfavorable
contract performance in 2011 primarily for JCA increased operating
margin by 110 basis points. This increase was partially offset by sales
mix changes, which reduced operating margin by 60 basis points, and an
increase in pension expense of $9 million, which reduced operating
margin by 40 basis points.
NSS
Fourth Quarter Ended
Year Ended Dec. 31,
($ in millions)
2012
2011
Decrease
2012
2011
Decrease
Net sales
$
347.5
$
360.2
(4
)%
$
1,385.0
$
1,610.3
(14
)%
Operating income
$
22.9
$
24.5
(7
)%
$
79.0
$
100.4
(21
)%
Operating margin
6.6
%
6.8
%
(20) bpts
5.7
%
6.2
%
(50) bpts
Fourth Quarter: NSS net sales for the 2012 fourth quarter
decreased by $13 million, or 4%, compared to the 2011 fourth quarter due
to a $10 million decline in information technology (IT) support services
for select non-DoD U.S. Government agencies as a result of contract
losses in 2011 and 2012, and a $3 million decline for intelligence
support services due to the drawdown of U.S. military forces in Iraq.
NSS operating income for the 2012 fourth quarter decreased by $2
million, or 7%, compared to the 2011 fourth quarter. Operating margin
decreased by 20 basis points to 6.6%, primarily due to legal fees of $2
million related to a supplier dispute, which reduced operating margin by
60 basis points. This decrease was partially offset by reduced overhead
costs, which increased operating margin by 40 basis points.
Full Year: NSS net sales for the year ended December 31, 2012
decreased by $225 million, or 14%, compared to the year ended December
31, 2011. Less demand for U.S. Special Operations Command IT support
services, due to our previous single-award contract converting to
several multiple-award contracts which reduced our work share, lowered
sales by $82 million. A decline in IT support services for select
non-DoD U.S. Government agencies lowered sales by $93 million comprised
of: (1) $38 million due to customer IT spending reductions, and (2) $55
million due to contract losses in 2011 and 2012. Sales also declined by
$50 million for intelligence support services due to the drawdown of
U.S. military forces in Iraq.
NSS operating income for the year ended December 31, 2012 decreased by
$21 million, or 21%, compared to the year ended December 31, 2011.
Operating margin decreased by 50 basis points to 5.7%. The decrease in
operating margin was due primarily to legal fees of $5 million related
to a supplier dispute, which reduced operating margin by 40 basis
points, and a $4 million inventory write-down for security and safety
equipment, which reduced operating margin by 30 basis points. These
decreases were partially offset by reduced overhead costs, which
increased operating margin by 20 basis points.
FinancialGuidance
Based on information known as of today, the company has updated its
consolidated and segment financial guidance for the year ending December
31, 2013, previously provided on December 4, 2012, as presented in the
tables below. All financial guidance amounts are estimates subject to
change in the future, including as a result of matters discussed under
the “Forward-Looking Statements” cautionary language beginning on page
8, and the company undertakes no duty to update its guidance.
Consolidated 2013 Financial Guidance(1)
($ in millions, except per share data)
Current
Prior
(December 4, 2012)
Net Sales
$ 12,550 to $12,750
$ 12,550 to $12,750
Operating margin
10.0%
10.0%
Interest expense
$
176
$
176
Interest and other income
$
12
$
12
Effective tax rate
32.0%
33.7%
Diluted Shares
90.1
90.1
Diluted EPS from continuing operations
$ 8.15 to $ 8.35
$ 7.95 to $ 8.15
Net cash from operating activities from continuing operations
$
1,225
$
1,210
Less: Capital expenditures, net of dispositions of property, plant
and equipment
195
180
Free cash flow
$
1,030
$
1,030
_________________
(1)
The 2013 guidance assumes that the Sequestration spending reductions
to the fiscal year 2013 (FY13) DoD budget, mandated by the Budget
Control Act of 2011 and scheduled to take effect on March 1, 2013,
do not occur. The 2013 guidance also assumes the FY13 DoD Continuing
Resolution Authority that expires on March 27, 2013 will not be
extended.
The change to our consolidated financial guidance is due to the
enactment of the American Taxpayer Relief Act of 2012 on January 2,
2013, which retroactively reinstated and extended the U.S. Federal
research and experimentation tax credit (R&E Credit) for all of 2012 and
2013. As a result, the company expects to recognize a tax benefit of $18
million, or $0.20 per diluted share, reducing its 2013 expected
effective tax rate by 170 basis points. The company expects to record
$10 million, or $0.11 per diluted share, of the R&E Credit tax benefit
during the first quarter of 2013 for the portion of the R&E Credit
related to the 2012 tax year.
Segment 2013 Financial Guidance
($ in millions)
Current(1)
Net Sales:
Electronic Systems
$5,425 to $5,525
C3ISR
$3,500 to $3,600
AM&M
$2,325 to $2,425
National Security Solutions
$1,200 to $1,300
Operating Margins:
Electronic Systems
10.7% to 10.9%
C3ISR
10.4% to 10.6%
AM&M
9.1% to 9.3%
National Security Solutions
6.4% to 6.6%
_________________
(1)
The current segment 2013 financial guidance has not changed from the
previous guidance provided on
December 4, 2012.
Additional financial information regarding the 2012 fourth quarter
results and the 2013 updated financial guidance is available on the
company’s website at www.L-3com.com.
Conference Call
In conjunction with this release, L-3 will host a conference call today,
Wednesday, January 30, 2013 at 9:30 a.m. ET that will be simultaneously
broadcast over the Internet. Michael T. Strianese, chairman, president
and chief executive officer, and Ralph G. D’Ambrosio, senior vice
president and chief financial officer, will host the call.
9:30 a.m. ET
8:30 a.m. CT
7:30 a.m. MT
6:30 a.m. PT
Listeners may access the conference call live over the Internet at the
company’s website at:
Please allow fifteen minutes prior to the call to visit our website to
download and install any necessary audio software. The archived version
of the call may be accessed at our website or by dialing (888) 286-8010
(passcode: 15485672), beginning approximately two hours after the call
ends and will be available until the company’s next quarterly earnings
release.
Headquartered in New York City, L-3 employs approximately 51,000 people
worldwide and is a prime contractor in C3ISR (Command,
Control, Communications, Intelligence, Surveillance and Reconnaissance)
systems, aircraft modernization and maintenance, and national security
solutions. L-3 is also a leading provider of a broad range of electronic
systems used on military and commercial platforms.
To learn more about L-3, please visit the company’s website at www.L-3com.com.
L-3 uses its website as a channel of distribution of material company
information. Financial and other material information regarding L-3 is
routinely posted on the company’s website and is readily accessible.
Forward-Looking Statements
Certain of the matters discussed in this release, including information
regarding the company’s 2012 financial outlook that are predictive in
nature, that depend upon or refer to events or conditions or that
include words such as ‘‘expects,’’ ‘‘anticipates,’’ ‘‘intends,’’
‘‘plans,’’ ‘‘believes,’’ ‘‘estimates,’’ and similar expressions
constitute forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections
of total sales growth, sales growth from business acquisitions, organic
sales growth, consolidated operating margins, total segment operating
margins, interest expense, earnings, cash flow, research and development
costs, working capital, capital expenditures and other projections, they
are subject to several risks and uncertainties, and therefore, we can
give no assurance that these statements will be achieved. Such
statements will also be influenced by factors which include, among other
things: our dependence on the defense industry and the business risks
peculiar to that industry, including changing priorities or reductions
in the U.S. Government defense budget; backlog processing and program
slips resulting from delayed funding of the Department of Defense (DoD)
budget; our reliance on contracts with a limited number of agencies of,
or contractors to, the U.S. Government and the possibility of
termination of government contracts by unilateral government action or
for failure to perform; the extensive legal and regulatory requirements
surrounding our contracts with the U.S. or foreign governments and the
results of any investigation of our contracts undertaken by the U.S. or
foreign governments; our ability to retain our existing business and
related contracts (revenue arrangements); our ability to successfully
compete for and win new business and related contracts (revenue
arrangements) and to win re-competitions of our existing contracts; our
ability to identify and acquire additional businesses in the future with
terms that are attractive to L-3 and to integrate acquired business
operations; the impact of any strategic initiatives undertaken by us,
and our ability to achieve anticipated benefits; our ability to maintain
and improve our consolidated operating margin and total segment
operating margin in future periods; our ability to obtain future
government contracts (revenue arrangements) on a timely basis; the
availability of government funding or cost-cutting initiatives and
changes in customer requirements for our products and services; our
significant amount of debt and the restrictions contained in our debt
agreements; our ability to continue to retain and train our existing
employees and to recruit and hire new qualified and skilled employees as
well as our ability to retain and hire employees with U.S. Government
security clearances; actual future interest rates, volatility and other
assumptions used in the determination of pension benefits and equity
based compensation, as well as the market performance of benefit plan
assets; our collective bargaining agreements, our ability to
successfully negotiate contracts with labor unions and our ability to
favorably resolve labor disputes should they arise; the business,
economic and political conditions in the markets in which we operate,
including those for the commercial aviation, shipbuilding and
communications markets; global economic uncertainty; the DoD’s
contractor support services in-sourcing and efficiency initiatives;
events beyond our control such as acts of terrorism; our ability to
perform contracts (revenue arrangements) on schedule; our international
operations; our extensive use of fixed-price type contracts as compared
to cost-plus type and time-and-material type contracts; the rapid change
of technology and high level of competition in the defense industry and
the commercial industries in which our businesses participate; our
introduction of new products into commercial markets or our investments
in civil and commercial products or companies; the outcome of litigation
matters, including in connection with jury trials; results of audits by
U.S. Government agencies; results of on-going governmental
investigations, including potential suspensions or debarments; the
impact on our business of improper conduct by our employees, agents or
business partners; anticipated cost savings from business acquisitions
not fully realized or realized within the expected time frame; the
outcome of matters relating to the Foreign Corrupt Practices Act (FCPA)
and similar non-U.S. regulations; ultimate resolution of contingent
matters, claims and investigations relating to acquired businesses, and
the impact on the final purchase price allocations; competitive pressure
among companies in our industry; and the fair values of our assets,
which can be impaired or reduced by other factors, some of which are
discussed above.
For a discussion of these and other risks and uncertainties that could
impair our results of operations or financial condition, see ‘‘Part I —
Item 1A — Risk Factors’’ and Note 19 to our audited consolidated
financial statements, included in our Annual Report on Form 10-K for the
year ended December 31, 2011, as modified by the Form 8-K filed on
November 20, 2012, “Part I – Item 2 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Overview and
Outlook – Industry Considerations,” included in our Quarterly Reports on
Form 10-Q for the quarters ended September 28, 2012, June 29, 2012 and
March 30, 2012, and any material updates to these factors contained in
any of our future filings.
Our forward-looking statements are not guarantees of future performance
and the actual results or developments may differ materially from the
expectations expressed in the forward-looking statements. As for the
forward-looking statements that relate to future financial results and
other projections, actual results will be different due to the inherent
uncertainties of estimates, forecasts and projections and may be better
or worse than projected and such differences could be material. Given
these uncertainties, you should not place any reliance on these
forward-looking statements. These forward-looking statements also
represent our estimates and assumptions only as of the date that they
were made. We expressly disclaim a duty to provide updates to these
forward-looking statements, and the estimates and assumptions associated
with them, after the date of this release to reflect events or changes
in circumstances or changes in expectations or the occurrence of
anticipated events.
– Financial Tables Follow –
Table A
L-3 COMMUNICATIONS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Fourth Quarter Ended
Year Ended Dec. 31,
2012
2011
2012
2011
Net sales
$
3,560
$
3,543
$
13,146
$
13,158
Cost of sales
3,196
3,146
11,795
11,716
Impairment charge(a)
―
43
―
43
Operating income
364
354
1,351
1,399
Interest expense
46
52
184
204
Interest and other income, net
2
(10
)
8
—
Debt retirement charge
5
17
13
35
Income from continuing operations before income taxes
315
275
1,162
1,160
Provision for income taxes
100
21
374
296
Income from continuing operations
$
215
$
254
$
788
$
864
Income from discontinued operations, net of income tax
―
23
32
104
Net income
215
277
820
968
Less: Net income from continuing operations attributable to
noncontrolling interests
3
3
6
9
Less: Net income from discontinued operations attributable to
noncontrolling interests
—
—
4
3
Net income attributable to L-3
$
212
$
274
$
810
$
956
Less: Net income allocable to participating securities
―
―
―
2
Net income allocable to L-3 Holdings’ common shareholders
$
212
$
274
$
810
$
954
Basic earnings per share allocable to L-3 Holdings’ common
shareholders:
Continuing operations
$
2.28
$
2.52
$
8.12
$
8.17
Discontinued operations
$
―
$
0.23
$
0.29
$
0.97
Basic earnings per share
$
2.28
$
2.75
$
8.41
$
9.14
Diluted earnings per share allocable to L-3 Holdings’ common
shareholders:
Continuing operations
$
2.25
$
2.49
$
8.01
$
8.08
Discontinued operations
$
―
$
0.23
$
0.29
$
0.95
Diluted earnings per share
$
2.25
$
2.72
$
8.30
$
9.03
L-3 Holdings’ weighted average common shares outstanding:
Basic
93.0
99.7
96.3
104.4
Diluted
94.3
100.9
97.6
105.6
____________________________
(a)
Represents a fourth quarter 2011 non-cash goodwill impairment
charge due to a decline in the estimated fair value of our Marine
Services business.
Table B
L-3 COMMUNICATIONS HOLDINGS, INC.
UNAUDITED SELECT FINANCIAL DATA
(in millions)
Fourth Quarter Ended
Year Ended Dec. 31,
2012
2011
2012
2011
Segment Operating Data
Net Sales:
Electronic Systems
$
1,616.7
$
1,555.1
$
5,676.8
$
5,627.9
C3ISR
967.1
1,013.2
3,601.2
3,479.9
AM&M
628.8
614.1
2,483.3
2,439.5
NSS
347.5
360.2
1,385.0
1,610.3
Total
$
3,560.1
$
3,542.6
$
13,146.3
$
13,157.6
Operating income:
Electronic Systems
$
192.1
$
215.1
$
672.5
$
718.9
C3ISR
91.9
109.7
363.7
394.4
AM&M
57.4
47.6
236.2
228.1
NSS
22.9
24.5
79.0
100.4
Total
$
364.3
$
396.9
$
1,351.4
$
1,441.8
Operating margin:
Electronic Systems
11.9
%
13.8
%
11.8
%
12.8
%
C3ISR
9.5
%
10.8
%
10.1
%
11.3
%
AM&M
9.1
%
7.8
%
9.5
%
9.4
%
NSS
6.6
%
6.8
%
5.7
%
6.2
%
Total
10.2
%
11.2
%
10.3
%
11.0
%
Depreciation and amortization:
Electronic Systems
$
41.3
$
38.8
$
146.7
$
148.3
C3ISR
12.2
11.5
46.6
44.1
AM&M
5.5
5.5
20.4
18.9
NSS
3.4
6.2
13.9
18.8
Total
$
62.4
$
62.0
$
227.6
$
230.1
Funded order data:
Electronic Systems
$
1,370
$
1,111
$
5,745
$
5,326
C3ISR
1,094
994
3,706
3,779
AM&M
614
500
2,916
2,296
NSS
268
249
1,431
1,490
Total
$
3,346
$
2,854
$
13,798
$
12,891
Dec. 31,
Dec. 31,
2012
2011
Period end data:
Funded backlog
$
10,884
$
9,899
Table C
L-3 COMMUNICATIONS HOLDINGS, INC.
UNAUDITED PRELIMINARY CONDENSED CONSOLIDATED
BALANCE SHEETS
(in millions)
Dec. 31, 2012
Dec. 31, 2011
ASSETS
Cash and cash equivalents
$
349
$
764
Billed receivables, net
968
1,093
Contracts in process
2,665
2,384
Inventories
363
317
Deferred income taxes
131
132
Other current assets
117
177
Assets of discontinued operations
―
1,729
Total current assets
4,593
6,596
Property, plant and equipment, net
1,017
921
Goodwill
7,760
7,472
Identifiable intangible assets
314
308
Deferred debt issue costs
29
33
Other assets
150
176
Total assets
$
13,863
$
15,506
LIABILITIES AND EQUITY
Accounts payable, trade
$
494
$
395
Accrued employment costs
556
563
Accrued expenses
439
517
Advance payments and billings in excess of costs incurred
708
567
Income taxes
5
40
Other current liabilities
398
379
Liabilities of discontinued operations
―
351
Total current liabilities
2,600
2,812
Pension and postretirement benefits
1,363
1,137
Deferred income taxes
355
335
Other liabilities
369
373
Long-term debt
3,629
4,125
Total liabilities
8,316
8,782
Shareholders’ equity
5,471
6,635
Noncontrolling interests of continuing operations
76
79
Noncontrolling interests of discontinued operations
―
10
Total equity
5,547
6,724
Total liabilities and equity
$
13,863
$
15,506
Table D
L-3 COMMUNICATIONS HOLDINGS, INC.
UNAUDITED PRELIMINARY CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in millions)
Year Ended Dec. 31,
2012
2011
Operating activities
Net income
$
820
$
968
Less: Income from discontinued operations, net of tax
32
104
Income from continuing operations
788
864
Depreciation of property, plant and equipment
170
167
Amortization of intangibles and other assets
58
63
Deferred income tax provision
82
124
Stock-based employee compensation expense
59
57
Contributions to employee savings plans in L-3 Holdings’ common
stock
125
113
Amortization of pension and postretirement benefit plans net loss
and prior service cost
68
48
Amortization of bond discounts and deferred debt issue costs
(included in interest expense)
7
13
Goodwill impairment charge
―
43
Equity in losses (earnings) of unconsolidated subsidiaries
3
12
Other non-cash items
9
11
Changes in operating assets and liabilities, excluding amounts
from acquisitions, divestitures and discontinued operations:
Billed receivables
147
(13
)
Contracts in process
(181
)
(119
)
Inventories
(40
)
(14
)
Accounts payable, trade
81
(35
)
Accrued employment costs
(13
)
(23
)
Accrued expenses
(86
)
24
Advance payments and billings in excess of costs incurred
77
4
Income taxes
(18
)
(18
)
Excess income tax benefits related to share-based payment
arrangements
(3
)
(2
)
Other current liabilities
(47
)
2
Pension and postretirement benefits
(61
)
(83
)
All other operating activities
6
(7
)
Net cash from operating activities from continuing operations
1,231
1,231
Investing activities
Contribution received from the spin-off of Engility
335
―
Business acquisitions, net of cash acquired
(348
)
(20
)
Capital expenditures
(210
)
(187
)
Dispositions of property, plant and equipment
5
6
Investments in equity investees
20
―
Other investing activities
(2
)
2
Net cash used in investing activities from continuing operations
(200
)
(199
)
Financing activities
Proceeds from sale of senior notes
―
1,143
Redemption of senior subordinated notes
(500
)
(1,150
)
Redemption of CODES
―
(11
)
Borrowings under revolving credit facility
596
625
Repayment of borrowings under revolving credit facility
(596
)
(625
)
Common stock repurchased
(872
)
(958
)
Dividends paid on L-3 Holdings’ common stock
(195
)
(188
)
Proceeds from exercises of stock options
19
22
Proceeds from employee stock purchase plan
39
46
Debt issue costs
(6
)
(11
)
Excess income tax benefits related to share-based payment
arrangements
3
2
Other financing activities
(15
)
(14
)
Net cash used in financing activities from continuing operations
(1,527
)
(1,119
)
Effect of foreign currency exchange rate changes on cash and cash
equivalents
7
(4
)
Cash from (used in) discontinued operations:
Operating activities
75
253
Investing activities
―
(4
)
Financing activities
(1
)
(1
)
Cash from discontinued operations
74
248
Net (decrease) increase in cash and cash equivalents
(415
)
157
Cash and cash equivalents, beginning of the year
764
607
Cash and cash equivalents, end of the year
$
349
$
764
L-3 Communications Holdings, Inc. Corporate Communications 212-697-1111
Press Release $LLL L-3 Communications Holdings Inc.
NEW YORK--(BUSINESS WIRE)-- L-3 Communications Holdings, Inc. (NYSE: 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
2011(1)
(decrease)
2011(1)
Increase/
(decrease)
$
3,560
$
13,146
Goodwill impairment charge
$
―
Debt retirement charge
Net income from continuing operations
attributable to L-3
Net income from continuing operations attributable
to L-3, excluding Q4 2011 Items
Diluted earnings per share from continuing operations,
excluding Q4 2011 Items
____________________
(1)
nm
-
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.
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.
___________________
Reportable Segment Results
Electronic Systems
2011
Increase/
(decrease)
Increase/
(decrease)
Fourth Quarter: Electronic Systems net sales for the 2012 fourth quarter increased by $62 million, or 4%, compared to the 2011 fourth quarter. Sales increased: (1) $66 million for Simulation & Training of which $25 million was from the Link U.K. acquisition and $41 million was primarily due to increased deliveries of U.S. Army rotary wing training systems for the Flight School XXI program, (2) $17 million for Precision Engagement primarily due to increased deliveries of ordnance products, (3) $15 million for Marine Services primarily due to the landing craft air cushion vehicle service life extension program, (4) $13 million for Microwave Products primarily due to increased deliveries of mobile and ground-based satellite communication systems for the U.S. military, and (5) $4 million for Sensor Systems ($35 million from the L-3 KEO acquisition partially offset by a decline of $31 million due to lower volume for airborne EO/IR turrets for the U.S. Department of Defense (DoD)). These increases were partially offset by sales decreases of: (1) $39 million for Power & Control Systems due to lower demand for commercial shipbuilding products, which reduced sales by $19 million including $5 million of negative foreign currency translation, and lower shipments of tactical quiet generators for the U.S. Army, which reduced sales by $20 million, and (2) $14 million for Warrior Systems due to reduced U.S. Army requirements for night vision and illumination products.
Electronic Systems operating income for the 2012 fourth quarter decreased by $23 million, or 11%, compared to the 2011 fourth quarter. Operating margin decreased by 190 basis points to 11.9%. Operating margin declined by 120 basis points primarily due to lower sales at Power & Control Systems and sales mix changes at Sensor Systems and 60 basis points due to more favorable contract performance adjustments during the 2011 fourth quarter as compared to the 2012 fourth quarter. Higher pension expense of approximately $1 million reduced operating margin by 10 basis points.
Full Year: Electronic Systems net sales for the year ended December 31, 2012 increased by $49 million, or 1%, compared to the year ended December 31, 2011. Sales increased: (1) $149 million for Sensor Systems primarily for the L-3 KEO acquisition, (2) $85 million for Microwave Products primarily due to increased deliveries of mobile and ground-based satellite communication systems for the U.S. military and power devices for commercial satellite communication systems, (3) $72 million for Simulation & Training of which $49 million was from the Link U.K. acquisition and $23 million was primarily due to increased deliveries of U.S. Army rotary wing training systems for the Flight School XXI program, and (4) $30 million for Marine Services due to reasons similar to the 2012 fourth quarter. These increases were partially offset by sales declines of: (1) $157 million for Power & Control Systems due to reduced shipments of tactical quiet generators for the U.S. Army, which reduced sales by $92 million, and by $65 million due to negative foreign currency translation of $41 million and lower demand for commercial shipbuilding, (2) $82 million for Warrior Systems due to reduced U.S Army requirements for night vision and illumination products, and (3) $48 million for Precision Engagement due to lower volume from completed contracts.
Electronic Systems operating income for the year ended December 31, 2012 decreased by $46 million, or 6%, compared to the year ended December 31, 2011. Operating margin decreased by 100 basis points to 11.8%. Operating margin declined by 90 basis points primarily due to lower sales for Power & Control Systems and higher pension expense of $5 million, which reduced operating margin by 10 basis points.
C3ISR
2011
Increase/
(decrease)
Fourth Quarter: C3ISR net sales for the 2012 fourth quarter decreased by $46 million, or 5%, compared to the 2011 fourth quarter. Sales declined by $52 million for networked communication systems and by $21 million for logistics support and fleet management services. The decline for networked communication systems was primarily due to: (1) lower volume for manned and unmanned platforms for DoD customers as contracts near completion and for the Hawklink contract as development and low rate initial production work near completion, and (2) fewer deliveries of remote video terminals to the U.S. Army. The sales decline for logistics support and fleet management services was due to lower demand for ISR aircraft supporting U.S. military operations in Iraq and Afghanistan. These decreases were partially offset by $27 million of higher sales for ISR Systems due to increased demand for airborne ISR systems for U.S. government and foreign military customers.
C3ISR operating income for the 2012 fourth quarter decreased by $18 million, or 16%, compared to the 2011 fourth quarter. Operating margin decreased by 130 basis points to 9.5%. Operating margin declined by 70 basis points primarily due to lower sales and mix changes. Higher pension expense of $6 million reduced operating margin by 60 basis points.
Full Year: C3ISR net sales for the year ended December 31, 2012 increased by $121 million, or 3%, compared to the year ended December 31, 2011. The increase in sales was primarily due to higher demand for airborne ISR systems for U.S. government and foreign military customers.
C3ISR operating income for the year ended December 31, 2012 decreased by $31 million, or 8%, compared to the year ended December 31, 2011. Operating margin decreased by 120 basis points to 10.1%. Higher pension expense of $24 million reduced operating margin by 70 basis points and sales mix changes reduced operating margin by 50 basis points.
AM&M
2011
Fourth Quarter: AM&M net sales for the 2012 fourth quarter increased by $15 million, or 2%, compared to the 2011 fourth quarter. Platform systems sales increased by $52 million, which was partially offset by a sales decline of $37 million for logistics support services. The platform systems sales increase was due primarily to volume on new contracts, including international head-of-state aircraft modification contracts and the Australia C-27J, and increased scope on the EC-130 aircraft for the U.S. Air Force (USAF). The logistics support services decrease was due primarily to the competitive loss of a task order for U.S. Army contract field team support services in Southwest Asia, partially offset by increased volume for field maintenance and sustainment services for U.S. Army C-12 aircraft, training aircraft for the USAF and U.S. government agency aircraft.
AM&M operating income for the 2012 fourth quarter increased by $10 million, or 21%, compared to the 2011 fourth quarter. Operating margin increased 130 basis points to 9.1%. Operating margin increased by 190 basis points due to a $12 million charge in the 2011 fourth quarter for the reduction in the USAF Joint Cargo Aircraft (JCA) aircraft order quantity. This increase was partially offset by higher pension expense of $4 million, which reduced operating margin by 60 basis points.
Full Year: AM&M net sales for the year ended December 31, 2012 increased by $44 million, or 2%, compared to the year ended December 31, 2011. Platform systems sales increased by $130 million, which was partially offset by a sales decline of $86 million for logistic support services. The platform systems increase was due primarily to volume on new contracts, including the Australia C-27J and international head-of-state aircraft modification contracts and increased scope on the EC-130 aircraft for the USAF. These increases were partially offset by lower JCA volume for the USAF. Logistics support services decreased due primarily to the loss of a task order for U.S. Army contract field team support services in Southwest Asia, partially offset by increased demand for field maintenance and sustainment services on a U.S. Army rotary wing aircraft contract that was competitively won in September 2011, and for U.S. Army C-12 aircraft.
AM&M operating income for the year ended December 31, 2012 increased by $8 million, or 4%, compared to the year ended December 31, 2011. Operating margin increased by 10 basis points to 9.5%. Unfavorable contract performance in 2011 primarily for JCA increased operating margin by 110 basis points. This increase was partially offset by sales mix changes, which reduced operating margin by 60 basis points, and an increase in pension expense of $9 million, which reduced operating margin by 40 basis points.
NSS
2011
Fourth Quarter: NSS net sales for the 2012 fourth quarter decreased by $13 million, or 4%, compared to the 2011 fourth quarter due to a $10 million decline in information technology (IT) support services for select non-DoD U.S. Government agencies as a result of contract losses in 2011 and 2012, and a $3 million decline for intelligence support services due to the drawdown of U.S. military forces in Iraq.
NSS operating income for the 2012 fourth quarter decreased by $2 million, or 7%, compared to the 2011 fourth quarter. Operating margin decreased by 20 basis points to 6.6%, primarily due to legal fees of $2 million related to a supplier dispute, which reduced operating margin by 60 basis points. This decrease was partially offset by reduced overhead costs, which increased operating margin by 40 basis points.
Full Year: NSS net sales for the year ended December 31, 2012 decreased by $225 million, or 14%, compared to the year ended December 31, 2011. Less demand for U.S. Special Operations Command IT support services, due to our previous single-award contract converting to several multiple-award contracts which reduced our work share, lowered sales by $82 million. A decline in IT support services for select non-DoD U.S. Government agencies lowered sales by $93 million comprised of: (1) $38 million due to customer IT spending reductions, and (2) $55 million due to contract losses in 2011 and 2012. Sales also declined by $50 million for intelligence support services due to the drawdown of U.S. military forces in Iraq.
NSS operating income for the year ended December 31, 2012 decreased by $21 million, or 21%, compared to the year ended December 31, 2011. Operating margin decreased by 50 basis points to 5.7%. The decrease in operating margin was due primarily to legal fees of $5 million related to a supplier dispute, which reduced operating margin by 40 basis points, and a $4 million inventory write-down for security and safety equipment, which reduced operating margin by 30 basis points. These decreases were partially offset by reduced overhead costs, which increased operating margin by 20 basis points.
Financial Guidance
Based on information known as of today, the company has updated its consolidated and segment financial guidance for the year ending December 31, 2013, previously provided on December 4, 2012, as presented in the tables below. All financial guidance amounts are estimates subject to change in the future, including as a result of matters discussed under the “Forward-Looking Statements” cautionary language beginning on page 8, and the company undertakes no duty to update its guidance.
Consolidated 2013 Financial Guidance(1)
(December 4, 2012)
$
$
$
$
$ 8.15 to $ 8.35
$
$
$
$
_________________
The change to our consolidated financial guidance is due to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013, which retroactively reinstated and extended the U.S. Federal research and experimentation tax credit (R&E Credit) for all of 2012 and 2013. As a result, the company expects to recognize a tax benefit of $18 million, or $0.20 per diluted share, reducing its 2013 expected effective tax rate by 170 basis points. The company expects to record $10 million, or $0.11 per diluted share, of the R&E Credit tax benefit during the first quarter of 2013 for the portion of the R&E Credit related to the 2012 tax year.
Segment 2013 Financial Guidance
Net Sales:
Operating Margins:
_________________
Additional financial information regarding the 2012 fourth quarter results and the 2013 updated financial guidance is available on the company’s website at www.L-3com.com.
Conference Call
In conjunction with this release, L-3 will host a conference call today, Wednesday, January 30, 2013 at 9:30 a.m. ET that will be simultaneously broadcast over the Internet. Michael T. Strianese, chairman, president and chief executive officer, and Ralph G. D’Ambrosio, senior vice president and chief financial officer, will host the call.
9:30 a.m. ET
8:30 a.m. CT
7:30 a.m. MT
6:30 a.m. PT
Listeners may access the conference call live over the Internet at the company’s website at:
http://www.L-3com.com
Please allow fifteen minutes prior to the call to visit our website to download and install any necessary audio software. The archived version of the call may be accessed at our website or by dialing (888) 286-8010 (passcode: 15485672), beginning approximately two hours after the call ends and will be available until the company’s next quarterly earnings release.
Headquartered in New York City, L-3 employs approximately 51,000 people worldwide and is a prime contractor in C3ISR (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance) systems, aircraft modernization and maintenance, and national security solutions. L-3 is also a leading provider of a broad range of electronic systems used on military and commercial platforms.
To learn more about L-3, please visit the company’s website at www.L-3com.com. L-3 uses its website as a channel of distribution of material company information. Financial and other material information regarding L-3 is routinely posted on the company’s website and is readily accessible.
Forward-Looking Statements
Certain of the matters discussed in this release, including information regarding the company’s 2012 financial outlook that are predictive in nature, that depend upon or refer to events or conditions or that include words such as ‘‘expects,’’ ‘‘anticipates,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘believes,’’ ‘‘estimates,’’ and similar expressions constitute forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of total sales growth, sales growth from business acquisitions, organic sales growth, consolidated operating margins, total segment operating margins, interest expense, earnings, cash flow, research and development costs, working capital, capital expenditures and other projections, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved. Such statements will also be influenced by factors which include, among other things: our dependence on the defense industry and the business risks peculiar to that industry, including changing priorities or reductions in the U.S. Government defense budget; backlog processing and program slips resulting from delayed funding of the Department of Defense (DoD) budget; our reliance on contracts with a limited number of agencies of, or contractors to, the U.S. Government and the possibility of termination of government contracts by unilateral government action or for failure to perform; the extensive legal and regulatory requirements surrounding our contracts with the U.S. or foreign governments and the results of any investigation of our contracts undertaken by the U.S. or foreign governments; our ability to retain our existing business and related contracts (revenue arrangements); our ability to successfully compete for and win new business and related contracts (revenue arrangements) and to win re-competitions of our existing contracts; our ability to identify and acquire additional businesses in the future with terms that are attractive to L-3 and to integrate acquired business operations; the impact of any strategic initiatives undertaken by us, and our ability to achieve anticipated benefits; our ability to maintain and improve our consolidated operating margin and total segment operating margin in future periods; our ability to obtain future government contracts (revenue arrangements) on a timely basis; the availability of government funding or cost-cutting initiatives and changes in customer requirements for our products and services; our significant amount of debt and the restrictions contained in our debt agreements; our ability to continue to retain and train our existing employees and to recruit and hire new qualified and skilled employees as well as our ability to retain and hire employees with U.S. Government security clearances; actual future interest rates, volatility and other assumptions used in the determination of pension benefits and equity based compensation, as well as the market performance of benefit plan assets; our collective bargaining agreements, our ability to successfully negotiate contracts with labor unions and our ability to favorably resolve labor disputes should they arise; the business, economic and political conditions in the markets in which we operate, including those for the commercial aviation, shipbuilding and communications markets; global economic uncertainty; the DoD’s contractor support services in-sourcing and efficiency initiatives; events beyond our control such as acts of terrorism; our ability to perform contracts (revenue arrangements) on schedule; our international operations; our extensive use of fixed-price type contracts as compared to cost-plus type and time-and-material type contracts; the rapid change of technology and high level of competition in the defense industry and the commercial industries in which our businesses participate; our introduction of new products into commercial markets or our investments in civil and commercial products or companies; the outcome of litigation matters, including in connection with jury trials; results of audits by U.S. Government agencies; results of on-going governmental investigations, including potential suspensions or debarments; the impact on our business of improper conduct by our employees, agents or business partners; anticipated cost savings from business acquisitions not fully realized or realized within the expected time frame; the outcome of matters relating to the Foreign Corrupt Practices Act (FCPA) and similar non-U.S. regulations; ultimate resolution of contingent matters, claims and investigations relating to acquired businesses, and the impact on the final purchase price allocations; competitive pressure among companies in our industry; and the fair values of our assets, which can be impaired or reduced by other factors, some of which are discussed above.
For a discussion of these and other risks and uncertainties that could impair our results of operations or financial condition, see ‘‘Part I — Item 1A — Risk Factors’’ and Note 19 to our audited consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2011, as modified by the Form 8-K filed on November 20, 2012, “Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview and Outlook – Industry Considerations,” included in our Quarterly Reports on Form 10-Q for the quarters ended September 28, 2012, June 29, 2012 and March 30, 2012, and any material updates to these factors contained in any of our future filings.
Our forward-looking statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected and such differences could be material. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this release to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events.
– Financial Tables Follow –
Table A
Fourth Quarter Ended
Year Ended Dec. 31,
$
13,146
―
$
788
―
Less: Net income from continuing operations attributable to noncontrolling interests
Less: Net income from discontinued operations attributable to noncontrolling interests
—
$
810
―
$
810
$
8.12
$
―
$
0.29
$
8.41
$
8.01
$
―
$
0.29
$
8.30
____________________________
(a)
Represents a fourth quarter 2011 non-cash goodwill impairment charge due to a decline in the estimated fair value of our Marine Services business.
Table B
Segment Operating Data
Funded order data:
Period end data:
Table C
Dec. 31,
2012
Dec. 31,
2011
Table D
Operating activities
―
Investing activities
―
―
Financing activities
―
―
―
L-3 Communications Holdings, Inc.
Corporate Communications
212-697-1111
Source: L-3 Communications