L-3 Communications Holdings Inc. (LLL) said it will spin off its
government services unit in response to changing dynamics in the
defense industry, and that its second-quarter profit grew 6.6%
despite lower revenue.
The company's board unanimously approved the plan to spin off
the unit, which will be called Engility, to avoid potential
organizational conflicts of interest with L-3 as it grows beyond
its parent company's strategic focus areas.
L-3 has joined some of its defense-sector peers by maximizing
profit with tight cost controls while trying to foster a more
favorable sales mix. The margin-enhancing moves are necessary as
anticipated government spending reductions are expected to pressure
the company's top line, though L-3 differs from larger rivals that
rely on a few major contracts for the bulk of their revenue.
The new spinoff will include the company's systems engineering
and technical assistance business as well as its training and
operational support services unit, while L-3 will retain the
government services segment's cyber, intelligence and security
solutions businesses.
Engility is expected to generate about $2 billion of pro-forma
sales this year, and earn about $179 million of operating income.
The company will employ about 10,000 people.
The deal is designed to be tax-free to shareholders and is
expected to close in the first half of 2012.
The move came as L-3's latest second-quarter sales declined,
mostly due to last year's loss of the special operations forces
support activity and Afghanistan Ministry of Defense support
contracts as well as lower pass-through volume in a U.S. Army
contract.
The defense contractor still boosted its full-year earnings
outlook again to a range of $8.65 to $8.75 a share, up from its
April view of $8.50 to $8.60, due to a lower expected tax
burden.
L-3 posted a second quarter profit of $243 million, or $2.26 a
share, up from $228 million, or $1.95 a share, a year earlier.
There were about 8% fewer shares in the latest quarter after stock
buybacks. The latest quarter included an 11 cents tax benefit.
Revenue fell 5% to $3.77 billion.
In April, the company projected a $2.10 per-share profit on $3.8
billion of revenue.
Operating margin narrowed to 10.7% from 11.1% amid the revenue
slump.
Shares closed at $79.12 Wednesday and were up 0.4% at $79.45 in
premarket trading. The stock is up 12% this year.
-By Drew FitzGerald, Dow Jones Newswires; 212-416-2909;
Andrew.FitzGerald@dowjones.com