After a truly awful second quarter last year, L-3 Communications (NYSE:LLL) put together a string of three earnings "beats" to close out fiscal 2006 and begin a brighter 2007. Can the company avoid a repeat of last year's Q2 disaster when it reports the fiscal 2007 edition on Thursday?

What analysts say:

  • Buy, sell, or waffle? Seventeen analysts follow L-3, which garners seven buy ratings, eight holds, and a pair of sells.
  • Revenue. On average, analysts expect to see 11% sales growth, to $3.41 billion.
  • Earnings. The bright side of earning so little in Q2 last year? If all goes as planned, this year's Q2 earnings could show a 262% improvement, to $1.45 per share.

What management says:
CEO Michael Strianese called Q1 "a very good start to the year." Sales and earnings per share both grew about 14% year over year, while free cash flow improved even more -- up 22%, to $196.1 million. The company drew on this cash to repurchase nearly 2% of its shares outstanding. Meanwhile, the business more than replenished its $3.3 billion in recorded revenue, booking $3.9 billion in new (and funded) orders during the quarter.

On the subject we've been most concerned with in this column in the past -- the company's on-again, off-again contract to provide translation services to the U.S. Army -- the GAO-refereed wrestling match with DynCorp (NYSE:DCP) is going into overtime. The good news for L-3 shareholders is that the Army extended the company's contract through June 9 while matters get sorted out.

What management does:
The longer L-3 can stretch out this process, the more revenue it can continue to collect for its services. Of course, a win on the $4.6 billion deal would be preferable to a series of extensions, but so far, the dispute doesn't seem to be crimping margins too much. Operating margin remains in the 10% stratum, and net margin is holding firm north of 4%, as it has all year long.






















All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Much as I've grown attached to covering the dispute with DynCorp, today I want to turn to another aspect of L-3's business: its announcement last quarter that it began expanding its role in the unmanned-aerial-vehicle space. As you may recall, management advised in its earnings release that it had acquired "Geneva Aerospace, Inc., a provider of guidance and navigation systems for unmanned aerial vehicles," and that this company was making sales of about $12 million per year.

Good news? I think so. It puts L-3 into a lucrative, potentially growth-happy niche within the overall defense sector. That same segment has attracted the likes of everyone from tiny AeroVironment (NASDAQ:AVAV) to mighty Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC). But the news also inspires me to remind Foolish readers that press releases don't always tell you everything you want to know.

Sure, it's interesting to know that L-3 may become a player in the UAV space. But it's equally important for investors to learn whether the company got a good price for its entree -- and you may have noticed that price was the one item missing from management's mention of the Geneva buy.

Fortunately, what's outlined in an earnings press release usually must be detailed in a subsequent 10-Q. There, we learn that L-3 paid $15.4 million initially for Geneva, and may be required by the terms of its purchase contract to ante up as much as $30.2 million over time. That works out to anywhere between 1.3 and 3.8 times sales. Compared to L-3's standard-for-the-defense-industry valuation of 1.0 times sales, that looks pricey at first glance. Then again, if Geneva's business grows quickly, it might justify the expense.

Moral of the story: Always read the 10-Q. What a company wants to tell you may not always jibe with what the SEC makes it tell you.

What did we expect out of L-3 last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above.