Diversification keeps L-3 steady

As it enters its 12th year in business, L-3 Communications Corp. is one strapping pre-teen.

The company’s fourth-quarter 2008 financials showed a consolidated net sales increase of 5 percent compared to the same quarter of 2007. Growth occurred in all business segments, with the exception of L-3 Government Services, for which the decrease was attributed to the loss of a prime contract for linguist services and a subsequent transition to subcontractor status.

However, an Air Force award that could eventually be worth as much as $6.9 billion buoyed the New York-based company in August 2008. L-3 was one of 12 prime contractors selected for the indefinite-delivery, indefinite-quantity program known as the Future Flexible Acquisition and Sustainment Tool.

Under the contract, L-3 will compete for work to modify, develop, repair and provide limited, critical or contingency spares for all Air Force-managed weapons systems.

Another win — this one from the Navy and valued at $569 million — was announced in October. L-3 subsidiary Vertex is teaming with Boeing to supply logistics and maintenance services for the T-45A and T-45C trainer aircraft. The contract includes four option years, extending the period of performance through September 2013.

“We’ve had another strong year, above our projections,” said Jerry Bates, president of the Global Security and Engineering Solutions unit in L-3’s Government Services group.

“Strong cash, strong profit, with improved operating margins — L-3 is still doing a pretty good job of navigating this economic turbulence,” he said.

The bumps are smoothed by L-3’s diversification. Its four main business groups are divided into about 80 enterprises, each with its own focus. Roughly three-quarter of the company’s portfolio is military-intensive, with 28 percent of L-3’s business coming from the Army and 20 percent from the Air Force. The Navy and Marine Corps account for another 15 percent and other Defense Department work totaling 11 percent.

The remaining quarter is divvied up more or less evenly among U.S. federal civilian agencies, foreign governments, and commercial domestic and international customers.

“L-3 probably has a better growth profile over the last two years than the other defense companies,” said Troy Lahr, a principal at Stifel Nicolaus.

Although L-3 has had its share of big wins, the company touts its low exposure to major program cuts, a point of view Lahr endorses. “If DOD trims [its] biggest efforts, it won’t affect L-3 much and won’t have a meaningful impact,” he said.

The company spent an aggregate total of $256 million on a quartet of acquisitions in the past 12 months, including Chesapeake Sciences Corp., a developer and manufacturer of anti-submarine warfare systems based in Millersville, Md. Such relatively modest purchases are likely to remain part of L-3’s intermediate acquisition strategy, Lahr said, adding that expensive buys are possible but unlikely.

One hindrance is the company’s $4.5 billion in debt. “The acquisitions going forward are probably going to be bolt-ons,” Lahr said. “There are liquidity constraints out there. It will be tough for banks to lend them the $2 billion or so they’d want for a sizable acquisition.”

However, one persistent bright spot for L-3 is a thriving security business. In March, the company won a three-year contract worth more than $326 million to supply the Marines with next-generation video surveillance gear at military training sites in the United States and overseas. As the prime contractor, L-3 Global Security and Engineering Solutions will lead a team that will implement the intelligent, open-architecture video-observation system known as Praetorian, which seeks to integrate disparate audio and video streams into a coherent whole.

“There’s a huge focus on protection and [security] forensics,” Bates said. “We have unique capabilities there.”

L-3 expects to deploy the Praetorian system across a variety of nondefense sectors, including commerce and finance. Bates said the system could be adapted to protect public events and infrastructure such as power plants, utilities, ports and airports.

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