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Why L-3’s National Security Solutions 4Q14 Performance Was Weak

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Business overview

L-3’s National Security Solutions segment supports the US military and government customers. The segment’s products include IT solutions in cyber operations, enterprise and mission IT, integrated security and big data solutions, complex computing solutions, intelligence operations support, and cloud security architectures. The segment also helps deter cyberspace breaches and defends networks and equipment against increasingly sophisticated attacks.

L-3 makes up 0.40% of the iShares US Industrials ETF (IYJ). Other companies included in IYJ are United Parcel Services (UPS), Accenture (ACN), and Danaher (DHR). These companies have 2.57%, 2.05%, and 1.93% holdings, respectively.

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Financial performance

L-3’s National Security Solutions segment also had a poor financial year 2014 and a weak fourth quarter performance. The segment’s net sales declined 15% year-over-year for the fourth quarter of 2014. This decline came as a result of reduced demand and contract completions, delayed contract awards for international contracts, and protests on US government contracts where the company was the winner.

The company acquired Data Tactics during the fourth quarter, which helped offset the decline in its revenues to some extent. For the full year, the segments declined by 7% while its margins saw an improvement of 130 basis points.

On the positive side, the company saw better penetration into emerging markets and gained new customers and market share in the US government intelligence community despite the challenging market conditions.

The segment received some key orders such as the National Security Agency’s Enterprise Program Management contract, which was the company’s largest contract for 2014. The company also won an order from the US Army that includes providing engineering and logistic support for its Medical Communications for Combat Casualty Care program.

L-3 recorded its first-ever prime contract win with the National Geospatial-Intelligence Agency as part of the ITEMS program. The segment also received follow-on funding from the Defense Threat Reduction Agency and Nuclear Test Personnel Review. Most of these projects are for the long term, and will thus help the segment improve its pipeline for the future.

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