No. 9: L-3 leadership stays the course

Some may wonder whether L-3 Communications Inc. had a goal last year of acquiring a company each month. The New York-based company announced at least 12 acquisitions in 2006, boosting its portfolio of military and homeland security products.L-3's buying spree, along with large contract wins, helped boost its overall revenue to more than $12 billion, a significant jump compared with its 2005 revenue of $9.4 billion. Its federal wins came in at about $2.6 billion, placing it at No. 9 on the Top 100 list.The company's revenue growth was largely driven by continued strong demand for government services, including integrated electronic security systems and engineering and scientific services. The company said demand for intelligence, surveillance and reconnaissance systems; secure networked communications products; base support operations; aircraft modification; and several specialized products also contributed to a record year of sales.Company officials have said they expect continued growth, largely driven by the war on terrorism, insurgencies and rogue nations, despite disagreement between the White House and Congress about the future of the war in Iraq."We believe there is recognition that the [United States] needs to provide an adequate level of funding support to ensure the stability of those countries, as well as the Middle East region, and to continue the fight against the expanding circle of terrorist cells," said Michael Strianese, L-3's president and chief executive officer.L-3's government services division, based in Chantilly, Va., once again had the biggest revenue growth, posting $3.8 billion in sales in 2006, which is 75 percent more than its 2005 revenue of $2.2 billion.One of the company's biggest revenue generators in 2006 was its contract with the Army's Intelligence and Security Command to manage translation and interpretation services for military operations in Iraq, in Afghanistan and at detention facilities at Guantanamo Bay, Cuba. The work generated sales of $155.9 million in the fourth quarter of 2006 and $174 million in the first quarter of 2007. The contract, which was originally scheduled to end in March, was recently extended to June.But L-3 suffered a setback when the Army did not choose the company to work on the contract's successor for translators and linguists in Iraq, the Translation and Interpretation Management Services contract. The five-year renewal contract, worth $4.6 billion, was awarded to Global Linguistic Solutions LLC, a joint venture formed by DynCorp International, of Falls Church, Va., and McNeil Technologies Inc., of Springfield, Va. L-3 challenged the decision through a formal protest with the Government Accountability Office. GAO upheld the challenge, and the contract was extended to December."It's not the highest-margin contract, but it has such an impact on their revenue outlook," said Peter Arment, vice president of JSA Research Inc., an aerospace research firm. "They are keeping their guidance in check in terms of what they have in hand."The contract has the potential to be recompeted, Arment added, but it's likely that L-3 will hang onto the work under pressure from the Pentagon."There's a rethinking in the Pentagon in terms of changing horses in the middle of the game, particularly in the middle of a troop surge," Arment said.One of L-3's biggest challenges in 2006 was the sudden death of its chairman and CEO, Frank Lanza. He co-founded the company in 1997, grew it to a multibillion-dollar enterprise and built its reputation as one of the fastest-growing companies in the federal market. After Lanza's death, the company's valuation dropped because of uncertainty about the management. The market looked favorably on the appointment of Strianese, L-3's former chief financial officer, to the position of president and CEO."Since there has been a smooth transition with Michael Strianese, the culture never changed with the loss of [Lanza]," Arment said. "They still acquire businesses and are still run independently under the L-3 umbrella."Most of the company's acquisitions in 2006 were product development companies, ranging from makers of multisensor fusion and tracking systems to security systems for military and public safety use. Most of the acquired companies will be integrated into L-3's specialized products group.But one acquisition was responsible for one of L-3's largest contract wins of the year. The Army hired CyTerra, a creator of land mine-detection technology, to provide 17,000 mine-detecting devices in the next 10 years for $300 million. The 9-pound devices use metal detection and ground-penetrating radar to detect mines.L-3 is still awaiting word on the Army's Joint Cargo Aircraft contract to build the C-27J Spartan, a medium transport aircraft. L-3 and its team are competing against Raytheon Co., for the multibillion-dollar contract."That's probably the closest catalyst in front of the company," Arment said.