L-3 sees growth despite budget pressure

L-3 Communications Holdings Inc. Chief Executive Officer Michael Strianese speaks during the 2010 Reuters Aerospace and Defense Summit in Washington September 9, 2010.

WASHINGTON (Reuters) - L-3 Communications Holdings Inc's (LLL.N) business model is well suited for changing times, but the overall industry may face lower profit margins on program contracts as competition increases and defense budgets come under pressure, the company's chief executive said.

"Tightening dollars will lead to more competition, which will lead to the voluntary reductions in margins by the companies," CEO Michael Strianese told the Reuters Aerospace and Defense Summit in Washington on Thursday.

Sectors with fewer barriers to entry, such as services, could attract more competitors, which could push profit margins down, possibly into single digits; but generally margins should remain in the range of 10 to 12 percent, he said.

While many defense companies have announced job cuts and moves to cut layers of management, Strianese said that as a younger firm, L-3 had a streamlined executive structure to begin with. While L-3 had carried out some job cuts, Strianese said L-3 currently had 1,000 to 2,000 job openings.

He said L-3's quick work in fielding a new Project Liberty unmanned plane, in just eight months, also gave it an edge in meeting the Pentagon's drive to reform procurement.

As defense spending comes under pressure and Pentagon acquisition reforms take hold, Strianese said contractors will likely see "flatter" sales but be able to maintain profits as they make acquisitions and shed non-core operations.

Strianese welcomed Defense Secretary Robert Gates' commitment to maintaining steady top-line defense budgets, and he said top Pentagon officials recognized that companies needed to generate profits to ensure continued innovation. "I don't believe there's an appetite to mess with that model," he said.

Strianese said New York-based L-3 expects to report record sales this year, driven by continued strong demand for electronic sensors, airport security scanners and other intelligence surveillance equipment, as well as services and aircraft maintenance. Sales in 2009 came to $15.6 billion.

SENSORS, SCANNERS

Strianese said continued demand for unmanned planes and intelligence, surveillance and reconnaissance capabilities would continue to drive sales for "years to come" on an array of sophisticated electro-optical infrared sensors.

The company's book of business for airport body imaging scanners was also "pretty full."

L-3 said it has developed ways to make body scanner images less intrusive than many had feared. "We've worked this out. There are no naked pictures of anybody," Strianese said.

Next month, L-3 said it would introduce a new hybrid Army vehicle that could be outfitted with different "plug and play" missions, and it was also delivering its Mobius plane, which can be manned or unmanned, to an unnamed U.S. government customer for demonstration purposes.

L-3 is also looking at possible acquisitions in the intelligence, services and cybersecurity areas, and could spend much of its $1 billion cash on hand for good deals, Strianese said.

L-3, which provides systems that gather, monitor and disseminate intelligence and other products, bought more than 50 companies between 1997, when it was spun off by Lockheed Martin Corp (LMT.N), and 2006, when founder Frank Lanza died.

Strianese, who took over as chief executive after Lanza's death, said consolidation among top-tier defense contractors was unlikely because of competition issues and a lack of appetite for mega-mergers at the Pentagon.

Asked about a possible takeover approach by a larger defense contractor, Strianese said the company was not up for sale, but was mindful of its obligation to shareholders.

Strianese said the U.S. government should consider investments in aerospace and defense projects as a way to stimulate the economy, saying the industry had many "shovel ready" projects that could boost jobs.

An agreement with the Air Force in July lifted a suspension of a company division that provides logistics support and marked the end of an incident that was not positive for the company, Strianese said.

"I'm hopeful it's not a black mark," Strianese said. "I think it was pretty much cleared up in a satisfactory way."

In June, the U.S. government awarded a contract worth up to $5 billion for logistics support to Lockheed after the L-3 unit that had been doing the work was suspended from receiving new federal contracts amid a criminal investigation of possible mishandling of classified emails.

L-3 has said the loss of that contract would shave $150 million from full-year sales and 4 cents from per-share profit, but Strianese said he was grateful the matter was resolved quickly. He also said the Air Force settlement stated that no one at L-3 had "reviewed, open or used" any government emails.

(Reporting by Andrea Shalal-Esa, Soyoung Kim, Karen Jacobs and Tim Hepher; Editing by John Wallace and Tim Dobbyn)