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L-3 Communications Holdings, Inc. (NYSE:LLL) L-3 Communications is a prime contractor in command, control, communications, intelligence, surveillance, and reconnaissance systems, aircraft modernization and maintenance, and government services. The company reported earnings before the market opened on 30Jan14 and on the surface everything looked good with the company reporting fourth quarter earnings of $2.17 per share (beating estimates by $0.19) on revenue of $3.3 billion (beating analysts' estimates by $140 million). What I'd like to at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment results (millions)

4Q13

4Q12

Y/Y

C3ISR

$ 846

$ 967

-13%

Electronic Systems

$ 1,484

$ 1,617

-8%

Platform & Logistics Solutions

$ 616

$ 629

-2%

NSS

$ 310

$ 347

-11%

Total

$ 3,256

$ 3,560

-9%

Compared to last year total revenue has decreased by 9%. C3ISR is the company's secure communications systems for intelligence, surveillance and reconnaissance aircrafts and this segment decreased revenues by 13%. The NSS or National Security Solutions segment is focused on defending networks and equipment against increasingly sophisticated attacks and applying forensics to deter cyberspace breaches but saw its revenues decrease by 11%.

Income Statement

Income Statement

4Q13

4Q12

Y/Y

Net sales

$ 3,256

$ 3,560

-9%

Cost of sales

$ (2,932)

$ (3,196)

-8%

Operating income

$ 324

$ 364

-11%

Interest expense

$ (46)

$ (46)

0%

Interest and other income, net

$ 4

$ 2

100%

Debt retirement charge

$ -

$ (5)

-100%

Income from continuing operations before income taxes

$ 282

$ 315

-10%

Provision for income taxes

$ (83)

$ (100)

-17%

Income from continuing operations

$ 199

$ 215

-7%

Income from discontinued operations, net of income tax

$ -

$ -

#DIV/0!

Net income

$ 199

$ 215

-7%

Net income from continuing operations attributable to noncontrolling interests

$ (3)

$ (3)

0%

Net income from discontinued operations attributable to noncontrolling interests

$ -

$ -

#DIV/0!

Net income attributable to L-3

$ 196

$ 212

-8%

Avg. basic outstanding shares

88

93

-5%

Avg. diluted outstanding shares

90.5

94.3

-4%

Earnings per basic shares

$ 2.23

$ 2.28

-2%

Earnings per diluted shares

$ 2.17

$ 2.25

-4%

Looking at the income statement at first glance might be a bit unappealing as you look at the bottom lines and notice that earnings decreased by 4% from last year. The first thing to notice is that operating income decreased by 11% which was due to lower sales and higher severance costs. Interest and other income increased 100% while debt retirement charge decreased by the same percentage helping income from continuing operations before income taxes decrease by 10%. Provision for income taxes increased 17% helping income from continuing operations decrease by 7%. The company's operations for the fourth quarter of 2013 turned out a 4% drop in overall earnings.

Balance Sheet

Balance Sheet

4Q13

4Q12

Y/Y

Cash and cash equivalents

$ 500

$ 349

43%

Billed receivables

$ 1,015

$ 968

5%

Contracts in process

$ 2,526

$ 2,592

-3%

Inventories

$ 359

$ 363

-1%

Deferred income taxes

$ 113

$ 95

19%

Other current assets

$ 124

$ 138

-10%

Total current assets

$ 4,637

$ 4,505

3%

Property, plant and equipment, net

$ 1,039

$ 1,016

2%

Goodwill

$ 7,796

$ 7,776

0%

Identifiable intangible assets

$ 285

$ 314

-9%

Deferred debt issue costs

$ 24

$ 29

-17%

Other assets

$ 215

$ 151

42%

Total assets

$ 13,996

$ 13,791

1%

Accounts payable, trade

$ 541

$ 494

10%

Accrued employment costs

$ 538

$ 551

-2%

Accrued expenses

$ 460

$ 462

0%

Advance payments and billings in excess of costs incurred

$ 570

$ 618

-8%

Income taxes

$ 10

$ 21

-52%

Other current liabilities

$ 383

$ 400

-4%

Total current liabilities

$ 2,502

$ 2,546

-2%

Pension and postretirement benefits

$ 727

$ 1,360

-47%

Deferred income taxes

$ 641

$ 328

95%

Other liabilities

$ 395

$ 385

3%

Long-term debt

$ 3,630

$ 3,629

0%

Total liabilities

$ 7,895

$ 8,248

-4%

Shareholders' equity

$ 6,026

$ 5,467

10%

Noncontrolling interests of continuing operations

$ 75

$ 76

-1%

Total equity

$ 6,101

$ 5,543

10%

Total liabilities and equity

$ 13,996

$ 13,791

1%

Cash and cash equivalents increased 43% while deferred income taxes increased 19% and other current assets decreased 10%, all of which helped contribute a 3% increase in total current assets. Deferred debt issue costs decreased 17% while other long-term assets increased 42% causing total assets to appreciate by 1%. Income taxes decreased by 52% helping current liabilities decrease by 2%. Pension and postretirement benefits decreased 47% while deferred income taxes increased 95% making total liabilities decrease by 4%.

Conclusion

The company reported earnings which were 4% lower than a year before on 9% less revenue while the share price was up 41.54% in the past year excluding dividends. The share count has decreased 4% for the entire year. I believe this to be an indication that management thinks the stock price may just be too inexpensive up here. I definitely don't like that earnings decreased on a year over year basis and that revenue was also down. On a fundamental basis I believe this company is inexpensively valued with respect to 2014 earnings. The stock was up 2.08% the day after reporting earnings in the face of an S&P500 which is losing 0.53%. Although the company beat analyst estimates the earnings per share were less than last year in a white hot industry of the economy, the aerospace industry. With earnings expected to decrease more in 2014 I believe I will be rotating out of LLL when February comes. I'd like to replace it with something else in the aerospace industry; I will be looking at United Technologies (NYSE:UTX) or Boeing (NYSE:BA).

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long LLL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: L-3 Communications' Earnings Decrease 4%, But Is It A Buy?

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