L-3's Anti-Pyrrhic Loss

Pyrrhic victory: n. A victory that is offset by staggering losses.

OK, we all know that. But what do you call a staggering loss that is offset by a pretty nice victory? I'm going with "anti-pyrrhic loss" for now, but I'm open to suggestions.

Whatever you call it, L-3 Communications (NYSE: LLL) won/lost big-time on Friday, when the $4.65 billion military translation contract it's been feuding over was finally, definitively, given to someone else (presumably, DynCorp (NYSE: DCP)). For readers just becoming aware of the story, let's bring you up to speed:

• This all began in June 2005, when L-3 bought Titan, a defense contractor providing translation and interpreting services to the U.S. military in Iraq. As Titan's new owner, L-3 was the presumed heir to Titan's ongoing contract, and the presumed favorite in any contract re-ups.
• One year ago, however, the military blew that presumption out of the water when it awarded the re-up to DynCorp in December 2006.
• L-3 promptly appealed the award to the Government Accountability Office (GAO). As I mentioned at the time, analysts did not expect L-3 to succeed with its appeal, but L-3 could "still manage to delay the handover of the contract to DynCorp by a month or three (it was due to expire in March 2007). Then L-3 could continue billing for as much as an entire quarter longer than it would have had it elected not to protest the decision."
• The Army then proceeded to prove this expectation correct (only in part, as we'll see) by extending L-3's contract into June while it considered the appeal.
• And then the GAO rejected L-3's appeal, but the Army allowed L-3 to continue working on the contract through at least Dec. 9 (at which point, presumably, the contract was to be re-awarded to L-3 or DynCorp).

Which brings us to this morning, when L-3 definitively announced that the Army "has not selected [L-3] to continue providing translators and linguists to support the U.S. military operations in Iraq." Full stop.

The good news is that L-3 was expecting this. The failure to win a re-up or a contract extension will not affect previous earnings guidance, which L-3 reaffirmed today: $13.7 billion in 2007 revenue, rising to between $14 billion and $14.2 billion next year; earnings of about $5.88 per share this year and $6.48 next year; and free cash flow of $1.1 billion or better in both years.

And the better news: A good chunk of this year's revenue and earnings shouldn't ever have been, given that when L-3 lost the translation contract 12 months ago, we were looking for only "as much as an entire quarter" of last-gasp business from the contract.

Foolish takeaway
L-3 may have lost its battle today, but it really won big-time.