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 nearly 70% 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, National Security Solutions (NSS), 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 40% of its total sales each year. C3ISR generates 27%, and the other segments account for the remainder.
Subsidiaries include L-3 Communications Integrated Systems, L-3 Avionics Systems, L-3 Communications Vertex Aerospace, L-3 Communications Canada, L-3 Insight Technology, Interstate Electronics Corporation, L-3 Global Communications Solutions, and L-3 Fuzing & Ordnance Systems.
The company operates through nearly 400 locations in Australia, Canada, Europe, and the US. Of this total, it owns 35 locations and leases around 360. Almost 80% of total sales come from customers residing in the US.
L-3 has seen its net sales and profits slowly diminish over the last two years. Revenues dipped by 13% from $15.2 billion in 2011 to $13.2 billion in 2012. Profits plunged 15% from $956 million in 2011 to $810 million in 2012. (The company also restated its financials for the fiscal year 2011.)
L-3's revenues have slowed due to the loss of contracts with the SOFSA, Afghanistan Ministry of Defense (MoD), and Federal Aviation Administration (FAA) over the years. 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 $3.6 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 60% 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
L-3 in 2012 acquired Thales Training & Simulation's civil aircraft simulation and training business for $130 million. Thales was later folded into the Electronic Systems segment and enhanced its presence in the UK.
In 2011 the company obtained 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.