No. 8: L-3 puts its house in order

Realignment of government services unit will cut costs, improve competitiveness

L-3 Communications Corp.

Top 100 revenue: $3.9 billion

2007 revenue: $13.9 billion

2007 net earnings: $756.1 million

2006 revenue: $12.4 billion

2006 net earnings: $526.1 million

Employees: 64,000

http://www.l-3com.com

L-3 Communications Corp. has grown so rapidly in recent years that the company had to stop and catch its breath. Earlier this year, executives launched a reorganization of the Government Services unit to prepare for tough prime contract competitions ahead.

The company squeezed eight divisions down to five to form a more streamlined services operation in January, said Les Rose, president of L-3 Enterprise Information Technology Solutions, a new division. The purpose was to better align services with customers, he said.

"The L-3 Services Group reorganization is definitely an indication of the future, where we potentially will have to reduce the number of operating organizations," Rose said.

The maxim strength through diversity applies to L-3. The New York-based company has more than 70 units, and although they follow corporate guidance and policy, they operate somewhat independently, Rose said.

"Diversification is generally a positive since it means a company is not overly dependent on a few programs," said Joseph Nadol, an aerospace and defense analyst at JPMorgan Chase and Co. "On the other hand, managing 70 units can be a challenge."

The group's reorganization should enable the company to cut costs and pursue new business in a more coordinated manner, he said.

L-3 posted sales of almost $14 billion in 2007, up from $12.4 billion in 2006. Its prime contract revenue of $3.9 billion lands it at No. 8 on the Top 100 list.

The company has invested in high-growth areas, said Bob Kipps, managing director at investment banking firm KippsDeSanto and Co.

"L-3 has been a very opportunistic buyer, seeing sector trends early and picking up companies well-positioned in growth areas such as intelligence, [unmanned aerial vehicles] and other technologies," Kipps said.

The company's ability to compete successfully against well-entrenched players is reflected in its technical ranking for the General Services Administration's Alliant contract. Of the 62 bids cast, L-3's technical ranking was the highest, Rose said.

The Alliant award has been delayed while GSA re-evaluates the proposals.

But L-3 faces formidable challenges in maintaining its current growth rate. The company's role decreased from that of prime contractor to subcontractor on the Army deal for translation services in Iraq. It lost the competition for the five-year, $4.6 billion deal to Global Linguistic Solutions but has a subcontract worth about $150 million annually.

The lesser role on the translation deal "creates a head wind for 2008 sales growth," Nadol said.

Nevertheless, L-3 continues to win major prime contracts. The company won a three-year, $326 million contract in March to provide a video training system to the Marine Corps and a $600 million contract for logistics support to the Special Operations Command.

On the civilian side, L-3 won a five-year, $215 million contract in February from the Centers for Disease Control and Prevention to assist with preparedness efforts against acts of bioterrorism and pandemics.

One motivation for L-3's Government Services reorganization was the government's reliance on task-order contracts, Rose said.

That trend makes it imperative for L-3 to "be in the prime role on as many of those [awards] as possible," he added.

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