L3 announces Q1 2017 results

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L3 Technologies, Inc. reported diluted EPS from continuing operations of $2.07m for the quarter ended March 31, 2017 (2017 first quarter), as compared to diluted EPS from continuing operations for the quarter ended March 25, 2016 (2016 first quarter) of $2.08m.

Net sales of $2,669 million for the 2017 first quarter increased by 13% compared to the 2016 first quarter.

“We are pleased with our first quarter results, which reflect a 13% increase in net sales, primarily organic, and gains in funded orders,” said Michael T. Strianese, L3’s Chairman and Chief Executive Officer. “All of our segments are performing well and the recently realigned Electronic and Sensor Systems segments have sharpened our market focus, positioning L3 to anticipate and respond more quickly to evolving customer needs. We are confident that our disciplined approach to growth will contribute to the value we deliver to our customers and shareholders as we continue through 2017.”

As previously announced on January 25, 2017, the company realigned its Electronic Systems segment effective March 1, 2017. The Electronic Systems segment was separated into two segments named: (1) Electronic Systems and (2) Sensor Systems. Accordingly, the company’s structure consists of the following four segments: Electronic Systems, Aerospace Systems, Communication Systems and Sensor Systems. The company has reported its segment results for all periods presented under the realigned business segments.

First Quarter Results of Operations: For the 2017 first quarter, consolidated net sales of $2,669 million increased $316 million, or 13%, compared to the 2016 first quarter. Organic sales(1) increased by $270 million, or 11%, to $2,618 million for the 2017 first quarter. Organic sales exclude $51 million of sales increases related to business acquisitions and $5 million of sales declines related to business divestitures. For the 2017 first quarter, organic sales to the U.S. Government increased $218 million, or 13%, to $1,950 million and organic sales to international and commercial customers increased $52 million, or 8%, to $668 million.

Due to the calendarization of the Company’s fiscal quarter end dates, the 2017 first quarter had 7% more business days compared to the 2016 first quarter. The extra days in the 2017 first quarter will reverse in the 2017 fourth quarter.

Operating income for the 2017 first quarter increased by $1 million compared to the 2016 first quarter. Operating income as a percentage of sales (operating margin) decreased by 120 basis points to 9.5% for the 2017 first quarter, compared to 10.7% for the 2016 first quarter. The decrease in operating margin was driven primarily by lower favorable contract performance adjustments, primarily at Aerospace Systems and higher severance and restructuring costs, primarily at Communication Systems. See the reported segment results below for additional discussion of sales and operating margin trends.

 


(1)

Organic sales represent net sales excluding the sales impact of acquisitions and divestitures. Sales increases related to acquired businesses are sales from acquisitions that are included in L3’s actual results for less than 12 months. Sales declines related to business divestitures are sales from divestitures that are included in L3’s actual results for the 12 months prior to the divestitures. The company believes organic sales is a useful measure for investors because it provides period-to-period comparisons of the company’s ongoing operational and financial performance.

The effective tax rate for the 2017 first quarter decreased to 22.2% from 22.3%, primarily due to the benefit from the release of a valuation allowance for capital losses, offset by a higher income tax rate on foreign earnings.

Diluted EPS from continuing operations was $2.07 for the 2017 first quarter compared to $2.08 for the 2016 first quarter. Diluted weighted average common shares outstanding for the 2017 first quarter increased slightly compared to the 2016 first quarter due to changes in the dilutive impact of common share equivalents, primarily caused by a higher L3 stock price.

Orders: Funded orders for the 2017 first quarter increased 1% to $2,624 million compared to $2,591 million for the 2016 first quarter. The book-to-bill ratio was 0.98x for the 2017 first quarter. Funded backlog decreased 0.5% to $8,855 million at March 31, 2017, compared to $8,896 million at December 31, 2016.

Cash Flow: Net cash from operating activities was $85 million for the 2017 first quarter, a decrease of $27 million, compared to $112 million for the 2016 first quarter. The decrease in net cash from operating activities was driven primarily by higher uses of cash for working capital compared to the 2016 first quarter. Capital expenditures, net of dispositions, were $41 million for the first quarter, compared to $28 million for the 2016 first quarter. The Company paid dividends of $61 million during the 2017 first quarter compared to $58 million during the 2016 first quarter. The Company did not repurchase any of its common stock during the 2017 first quarter. Repurchases of the Company’s common stock during the 2016 first quarter totaled $198 million.

Reported Segment Results

The company has four reported segments. The company evaluates the performance of its segments based on their sales, operating income and operating margin. Corporate expenses are allocated to the company’s operating segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. Accordingly, segment results include all costs and expenses, except for goodwill impairment charges and certain other items that are excluded by management for purposes of evaluating the performance of the company’s business segments.

Electronic Systems net sales for the 2017 first quarter increased by $144 million, or 24%, compared to the 2016 first quarter. Organic sales increased by $101 million, or 17%, compared to the 2016 first quarter. Organic sales exclude $48 million of sales increases related to business acquisitions and $5 million of sales declines related to business divestitures. Organic sales increased by: (1) $68 million for Precision Engagement and Training primarily due to increased deliveries of fuzing and ordnance products for U.S. Army and U.S. Air Force (USAF) weapon systems, guidance and control products for the U.S. Army Paladin weapon system and higher volume on simulation and training devices, (2) $22 million for Aviation Products primarily due to deliveries of aviation recorders and traffic and collision avoidance systems for commercial airline customers and higher volume of overhaul and repair services for cockpit displays and aviation recorders for the U.S. military and (3) $11 million for Power & Propulsion primarily due to higher volume on the U.S. Navy (USN) guided destroyer modernization program and ship board integrated and monitoring systems for a foreign navy customer.

Electronic Systems operating income for the 2017 first quarter increased by $6 million, or 7%, compared to the 2016 first quarter. Operating margin decreased by 200 basis points to 12.3%. Operating margin decreased by: (1) 150 basis points due to net gains and losses related to business divestitures in the first quarters of 2016 and 2017, (2) 130 basis points for lower favorable contract performance adjustments across several business areas and (3) 70 basis points due to lower margins related to acquisitions and higher severance expense of $3 million. These decreases were partially offset by 150 basis points primarily due to higher sales volume.

Aerospace Systems

Aerospace Systems net sales for the 2017 first quarter increased by $40 million, or 4%, compared to the 2016 first quarter. Sales increased $60 million for Vertex Aerospace and $17 million for ISR Systems. These increases were partially offset by lower sales of $37 million for Aircraft Systems. Sales increased for Vertex Aerospace primarily due to higher volume for: (1) the U.S. Army C-12 contract, (2) the new USAF KC-10 contractor logistics support contract, (3) USN and USAF training aircraft and (4) aviation support for the U.S. Army rotary wing training aircraft at Fort Rucker. At ISR Systems, higher volume for special mission aircraft and large ISR aircraft systems for the U.S. Government was partially offset by lower volume for large ISR aircraft systems for foreign military customers as contracts near completion and small ISR aircraft fleet management services on a completed USAF contract. Sales decreased for Aircraft Systems primarily due to lower volume for international aircraft modifications and reduced deliveries for aircraft cabin assemblies as contracts near completion.

Aerospace Systems operating income for the 2017 first quarter decreased by $37 million, or 35%, compared to the 2016 first quarter. Operating margin decreased by 390 basis points to 6.6%. Operating margin decreased by: (1) 230 basis points due to lower favorable contract performance adjustments, primarily at ISR Systems, (2) 90 basis points due to a higher than planned price adjustment in the 2016 first quarter in ISR Systems that did not recur and (3) 70 basis points due to sales mix changes.

Communication Systems

Communication Systems net sales for the 2017 first quarter increased by $66 million, or 14%, compared to the 2016 first quarter. The increase was primarily driven by Broadband Communication Systems due to increased volume and deliveries of secure networked communication systems to the U.S. Department of Defense (DoD) and deliveries of tactical communication terminals to the U.S. military.

Communication Systems operating income for the 2017 first quarter decreased by $8 million, or 16%, compared to the 2016 first quarter. Operating margin decreased by 280 basis points to 8.0%. Operating margin decreased by: (1) 170 basis points due to higher severance and restructuring expenses of $9 million, primarily in Space & Power Systems related to the previously announced consolidation of the Company’s traveling-wave tube businesses and (2) 110 basis points primarily due to sales mix changes at Broadband Communication Systems.

Sensor Systems

Sensor Systems net sales for the 2017 first quarter increased by $66 million, or 23%, compared to the 2016 first quarter. Organic sales increased by $64 million, or 23%, compared to the 2016 first quarter. Organic sales exclude $2 million of sales increases related to business acquisitions. Organic sales increased by: (1) $29 million for Integrated Sensor Systems primarily due to increased deliveries of airborne turret systems to foreign military customers and higher volume for space electronics and infrared detection products, (2) $20 million for Warrior Systems primarily driven by $13 million of lower return allowances and deliveries of specialized night vision equipment to the Australian Defence Force and (3) $15 million primarily for Advanced Programs due to increased task order volume on U.S. Government contracts.

Sensor Systems operating income for the 2017 first quarter increased by $40 million compared to the 2016 first quarter. Operating margin increased to 14.3%. Operating margin increased by: (1) 440 basis points due to lower return allowances, (2) 340 basis points primarily for improved contract performance at Ocean Systems and (3) 300 basis points due to higher sales volume primarily at Integrated Sensor Systems

Source: Company Press Release

 

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