L-3's good defense is its best commercial offense. L-3 Communications Holdings provides products and services to the government based on Command, Control, Communications, Intelligence, Surveillance, and Reconnaissance (C3ISR), including systems for satellite, avionics (aircraft electronics), security, and marine communications. It also provides aircraft maintenance and modernization. The US government, primarily the Department of Defense (DoD), accounts for 75% of its business, but L-3 is expanding its commercial offerings. The company derives all of its income from operating subsidiary L-3 Communications Corporation (L-3).
L-3 operates through four main segments: Electronic Systems, Government Services, C3ISR, and Aircraft Modernization and Maintenance (AM&M). Its most lucrative segment is Electronic Systems, which makes a variety of components, subsystems, and products and generates roughly 37% of its total sales each year. The other three segments each typically bring in around 20%.
The company operates through 490 locations in Canada, Germany, and the US. Of this total, it owns 37 locations and leases around 450. Almost 85% of sales come from customers residing in the US.
L-3's revenue dipped by 3%, falling from $15.7 billion in 2010 to $15.2 billion in 2011. Its profits have remained stable over the years, staying flat at around $955 million for both 2010 and 2011. The revenue decrease was the result of lower sales from AM&M, Government Services, and Electronic Systems. This was primarily due to the loss of contracts with the SOFSA, Afghanistan Ministry of Defense (MoD), and Federal Aviation Administration (FAA). It also experienced lower sales related to linguist services, training, and logistics support projects for the US Army due to the drawdown of American military forces in Iraq. L-3 is burdened with a long-term debt load of around $4.1 billion.
With such a major amount of business derived from the US government and DoD (the US Army and Air Force collectively account for about 50% of its total revenue), the company is vulnerable to the priorities of the Pentagon and other government agencies, which have resulted in cuts in defense spending and additional troop withdrawals from the Middle East.
L-3 is using acquisitions as a means to benefit from changes in DoD and other government agency funding, currently prioritized on high-tech electronics and systems over more traditional combat warfare equipment. The focus on security systems, information technology (IT) and cyber security, intelligence, logistics, unmanned aircraft systems (UAS), and reconnaissance vehicles bodes well for L-3, since these products are in its portfolio. (L-3 took the shift one step further by spinning off its government services segment into a new company called Engility in 2012.)
In addition to acquisitions, the company enters into collaborative ventures with other businesses to develop new opportunities, especially in the area of providing full-service, rather than just products. Additionally, L-3 has been transitioning from providing individual products and components to bundled products and services, including logistics, MRO (maintenance, repair, and overall), and supply chain management. Its revenues from services is now neck-and-neck with that of its products, and L-3 plans to add additional services under existing programs.
Mergers and Acquisitions
In 2011 the company bought Kollmorgen Electro-Optical (KEO) from Danaher for $210 million in cash. KEO makes marine periscopes, fire control systems for ships, and visual landing aids used by federal contractors and the US military. L-3 also purchased the cargo radiation screening business of Detector Networks International LL and the communications and engineering operations of ComHouse Wireless that year.