WRAPUP 2-US defense firms top estimates; L-3 sets spinoff

Thu Jul 28, 2011 2:19pm EDT

* Raytheon, L-3 boost year profit forecasts

* L-3 plans spinoff, following Northrop, ITT

* Sales pressure seen

* L-3 shares up 2 pct, Raytheon edges up (Adds background, updates shares)

ATLANTA, July 28 (Reuters) - Defense contractors L-3 Communications Holdings Inc (LLL.N) and Raytheon Co (RTN.N) topped Wall Street earnings estimates on Thursday and raised their profit outlooks.

L-3, which has faced activist investor pressure to shed underperforming assets, said it plans a tax-free spinoff of part of its government services segment into a new company that will focus on systems engineering and technical assistance [ID:nL3E7IS30W].

The spinoff is expected to take place next year. The new company, to be called Engility, will have sales of about $2 billion and a workforce of some 10,000.

Defense contractors, challenged by tightening global budgets and planned U.S. troop withdrawals from the Middle East, are moving to shed non-core divisions and acquire companies with niche technologies to enhance their growth prospects.

Earlier this year, Raytheon bought cybersecurity firm Applied Signal Technology to expand its reach in intelligence gathering. Northrop Grumman Corp (NOC.N) spun off its ship operations in March, and ITT Corp (ITT.N) expects to spin off water and defense divisions by year-end.

"L-3 is the third defense company to go down the spin route (after Northrop and ITT), and investors have applauded these prior moves," RBC Capital Markets analyst Robert Stallard said in a note to clients.

L-3 said the spinoff would also help it avoid perceived conflicts of interest in business and that it followed a company strategic review. Relational Investors reported a nearly 6 percent stake in L-3 last month and called on the company to shed low-growth businesses.

Shares of L-3 were up 2.5 percent to $81.06 in afternoon trade, and Raytheon was up 0.6 percent to $45.26. The Standard & Poor's Aerospace and Defense index .GSPAERO was up 0.7 percent.

SECTOR PROFIT BEAT STREAK

Industry leader Lockheed Martin Corp (LMT.N), General Dynamics Corp (GD.N) and Northrop also beat Wall Street profit estimates this week, benefiting from cost-cutting, acquisitions and divestitures taken to right-size their staffing and expand into higher-margin businesses.

But sales at some defense companies have been hurt by U.S. budget constraints and program terminations. As defense spending slows, that pressure is likely to increase.

L-3 said the loss of logistics contracts and order delays contributed to its 5 percent fall in second-quarter sales [ID:nN1E76Q1NX].

Raytheon, whose products include Patriot missiles, lowered its full-year revenue forecast, citing a better sense of second-half results, but noted solid international demand [ID:nN1E76Q16J].

"We expect the second half to be busy for us, and of course the economic environment puts a cloud over everything," Raytheon Chief Executive William Swanson said during a conference call. "The (Paris) airshow convinced me that these customers still want what we have." (Reporting by Karen Jacobs; editing by John Wallace and Gunna Dickson)

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