L-3 Communications (LLL) Tops Q2 Earnings, Ups '16 View

Defense contractor L-3 Communications Holdings Inc. (NYSE:LLL) posted second-quarter 2016 adjusted earnings of $1.88 per share, beating the Zacks Consensus Estimate of $1.68 by 11.9%. Earnings also improved 33.3% from the year-ago figure of $1.41 owing to operating margin expansion.

Total Revenue

Total revenue of $2,664 million in the quarter surpassed the Zacks Consensus Estimate of $2,473 million by 7.7%. Revenues were also up 4.8% year over year.

Organic sales to the U.S. government increased 6%, while that to the international and commercial customers were up 11% in the reported quarter. Overall, organic sales grew 3% in the first half of 2016.

Orders & Margin

Funded orders in the reported quarter were $2.1 billion, reflecting a 15% year-over-year drop. Funded backlog was $8.1 billion, as of Jun 24, 2016, down 3.5% from $8.4 billion as of Dec 31, 2015.

Operating margin expanded 340 basis points (bps) year over year to 9.3% in the quarter.

Segment Performance

Aerospace Systems: Net sales at the segment increased 15.4% to $1,148 million from the prior-year figure of $995 million mainly on account of higher sales of Aircraft Systems, ISR Systems and Vertex Aerospace.

Operating income was $70 million, compared to the year-ago loss of $18 million, while operating margin expanded 790 bps to 6.1%.

Electronic Systems: The segment recorded net sales of $1,021 million in the reported quarter, down 2.2% year over year. The decrease mainly reflects the divestiture of MSI.

Operating income increased 5.9% to $125 million, while operating margin expanded 90 bps to 12.2%.

Communication Systems: Net sales at the segment declined 1.8% year over year to $495 million, primarily due to lower sales at Space & Power Systems.

Operating income rose 2% to $52 million, while operating margin expanded 40 bps to 10.5%.

Financial Position

As of Jun 24, 2016, L-3 Communications had $352 million in cash and cash equivalents, compared with $207 million as of Dec 31, 2015.

Long-term debt as of Jun 24, 2016 was $2,780 million, compared with $3,125 million as of Dec 31, 2015.

Net cash from operating activities was $257 million in the second quarter, up 30.5% year over year. Capital expenditure was $36 million, compared with $43 million in the year-ago period.

2016 Guidance

The company increased its revenue forecast to the $10,150−$10,250 billion band (previous guidance: $9,950−$10,150 billion).

The adjusted earnings per share outlook was raised to the range of $7.65−$7.85 per share from the earlier projection of $7.55-$7.75.

Interest expenses for 2016 are expected to be $157 million, down from the prior expectation of $162 million, while segment operating margin is still expected to be 9.8%. The capital expenditure forecast was also reaffirmed at $205 million. The company continue to expect generating $825 million of free cash flow.

Peer Review

The Boeing Company (NYSE:BA) delivered second-quarter 2016 adjusted loss of 44 cents per share, narrower than the Zacks Consensus Estimate of loss of 88 cents. In the prior-year quarter, however, the company had reported earnings of $1.62.

Northrop Grumman Corporation (NYSE:NOC) reported second-quarter 2016 adjusted earnings of $2.60 per share, beating the Zacks Consensus Estimate of $2.50 by 4%. Reported earnings were also up 5.3% from $2.47 recorded in the year-ago quarter.

Lockheed Martin Corp. (NYSE:LMT) reported second-quarter 2016 earnings of $3.32 per share, surpassing the Zacks Consensus Estimate of $2.92 by 13.7%. Earnings were also up 12.9% from the year-ago level.

Zacks Rank

L-3 Communications currently has a Zacks Rank #3 (Hold).

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