01 May 14. L-3 Communications Holdings, Inc. (NYSE:LLL) reported diluted earnings per share (diluted EPS) of $2.01 for the quarter ended March 28, 2014 (2014 first quarter), a decrease of 5%, compared to $2.11 for the quarter ended March 29, 2013 (2013 first quarter). The 2013 first quarter included a $12 m ($0.13 per diluted share) tax benefit for the retroactive reinstatement of the U.S. Federal research and experimentation (R&E) tax credit for 2012 and 2013. Net sales of $3.0bn for the 2014 first quarter decreased by 7% compared to the 2013 first quarter.
First Quarter Results of Operations: For the 2014 first quarter, consolidated net sales of $3.0bn decreased $214 m, or 7%, compared to the 2013 first quarter. Sales to the U.S. Government, including the DoD, declined 11% and impacted each segment. Acquired businesses(1), which are included in the Electronic Systems and NSS segments, increased net sales by $14m in the 2014 first quarter. Net sales to international and commercial customers increased 6%, or $46m, to $853m in the 2014 first quarter, compared to $807 m in the 2013 first quarter. Net sales to international and commercial customers, as a percentage of consolidated net sales, increased to 29% for the 2014 first quarter as compared to 25% for the 2013 first quarter.
Operating income for the 2014 first quarter of $307m decreased $6m, or 2%, compared to the 2013 first quarter. Operating income as a percentage of sales (operating margin) increased by 50 basis points to 10.3% for the 2014 first quarter compared to 9.8% for the 2013 first quarter. The increase in operating margin is primarily due to lower pension expense of $24m, which increased operating margin by 80 basis points. Lower sales and mix changes, primarily for Aerospace Systems, offset improved contract performance across several business areas, reducing operating margin by approximately 20 basis points. Additionally, 2014 first quarter severance charges increased $3m to $8m compared to the 2013 first quarter. See the reportable segment results below for additional discussion of sales and operating margin trends. The effective tax rate for the 2014 first quarter increased to 31.8% from 28.9% for the same period last year. The increase is primarily due to the $12m tax benefit for the retroactive reinstatement in the 2013 first quarter of the R&E tax credit for 2012 and 2013, compared to no R&E tax credit in the 2014 first quarter. This increase was partially offset by a lower effective tax rate on foreign earnings.
Net income attributable to L-3 in the 2014 first quarter decreased 7% to $180m compared to the 2013 first quarter, and diluted EPS decreased 5% to $2.01 from $2.11. Diluted weighted average common shares outstanding for the 2014 first quarter declined by 2% compared to the 2013 first quarter due to repurchases of L-3 common stock.
Orders: Funded orders for the 2014 first quarter increased 4.5% to $3.0bn compared to $2.9bn for the 2013 first quarter. Funded backlog increased 0.4% to $10.4bn at March 28, 2014, compared to $10.3bn at December 31, 2013.
Cash flow and cash returned to shareholders: Net cash used in operating activities was $62m for the 2014 first quarter, compared to $146m of cash generated from operating activities in the 2013 first quarter. The use of cash in the 2014 first quarter was primarily due to increases in working capital, including contracts in process and receivables. The table below summarizes the cash returned to shareholders during the 2014 first quarter compared to the 2013 first quarter.
Reportable Segment Results
As previously announced during the 2014 first quarter, the company reorganized its segments to better align its organizational structure with customer priorities and increase operational efficiencies. Accordingly, the company’s structure consists of the following four segments: Aerospace Systems, Electronic Systems, Communication Systems and NSS, as further described below.
Aerospace System