Top 100: L-3 positions for uptick in defense work

L-3 Communications has been weathering the defense downturn by divesting and investing to put the company in the best position to win new work as when the market turns.

It’s clear that defense contractors heavily focused on the U.S. Defense Department are not out of the woods just yet. L-3 Communications joins other defense giants in struggling to maintain its government sales because of sequestration, the drawdown in Afghanistan, and the gradual phasing out of legacy aviation systems.

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The company faced in recent years “persistent challenging conditions,” L-3 President, Chairman and CEO Michael Strianese said in a full-year 2014 conference call with analysts in January.

“We believe the bottom of the downturn is in sight, and have taken strategic steps to take advantage of opportunities that the upturn is certain to bring,” Strianese said during the conference call. “Events unfolding around the world show that a strong U.S. commitment is needed.”

Those events are likely to drive a demand for L-3’s expertise in ISR communications, electronics and security, he said.

The challenge facing L-3 is seen in its declining revenue. The New York-based company reported revenue for 2014 of $12.1 billion, down from $12.6 billion in 2013. The good news is that the Defense Department budget is expected to grow in fiscal 2016, which would be the first increase in the DOD budget since fiscal 2010, company officials said in May 5 shareholders annual meeting.

But the company still ranks at No. 15 on the Washington Technology Top 100 with $1.7 billion in prime contracts.

Like other first-tier integrators, L-3 grew its international business to compensate for the U.S. government downturn. In 2014, L-3 derived 71 percent of its revenue from U.S. government work and 29 percent from international and commercial work, company officials said.

L-3 continues to see robust growth opportunities abroad in aviation products, security screening, simulation and training, and satellite communications, company officials said.

In March 2014, L-3 overhauled its business segments to improve product and service delivery to its customers and also to drive operational efficiencies. The four business segments are Aerospace Systems, Electronic Systems, Communication Systems and National Security Solutions (NSS).

L-3’s NSS Group furnishes cybersecurity technologies, high-performance computing, enterprise IT, and analytics and intelligence analysis. NSS had some impressive wins in first quarter 2015. In a deal announced in January, NSS won two enterprise program management contracts at the National Security Agency worth a total of $367.3 million. Under the five-year contracts, L-3 will furnish systems engineering, acquisition planning, and program and financial management. Together, the contracts have a maximum ceiling of $1 billion.

NSS announced in March that it had won a contract worth up to $117 million with the U.S. Army’s Medical Communications for its Combat Casualty Care program. Under the contract, NSS will expand operational technical support for the Army’s tactical medical information system.

The company announced a major divestiture last year. L-3 signed an agreement in December to sell for $285 million euros its Marine Systems International business to Wärtsilä of Helsinki, Finland. The deal is expected to close in the second quarter, L-3 officials said.

L-3 had two noteworthy acquisitions since January 2014. In March 2014, L-3 acquired Data Tactics Corp., of McLean, Va., a provider of big data analytics and cloud computing services to further enhance its NSS business.

More recently, L-3 announced in January that it had acquired MITEQ Inc., a manufacturer of radio-frequency microwave products and solid-state satellite communications components. L-3 combined the company with its Nardia Microwave-East business in Hauppauge, N.Y., renaming the entity L-3 Nardia-Miteq. The new entity is part of the L-3’s Communications Systems Group.

The company is keeping a sharp eye out for more acquisition targets. “M&A continues to be a key element of our growth strategy,” L-3 Chief Financial Officer Ralph D’Ambrosio said during the 2014 year-end conference call. But he qualified that by saying that a company has to be available to be acquire, they have to fit with L-3, and they must offer a good economic return on the investment.

“We’d like to do more acquisitions,” D’Ambrosio said. “But it is going to be subject to those three factors.”