L3 Posts Solid Financial Results In First Quarter; Selling Vertex To Private Equity Firm

L3 Technologies [LLL] on Tuesday posted a solid financial start to its fiscal year with higher earnings and sales in the first quarter and the company announced that it has agreed to sell its Vertex Aerospace business for $540 million in cash to the private equity firm American Industrial Partners (AIP).

The deal with AIP also includes L3’s Crestview Aerospace and TCS business units and is expected to be completed this summer. Combined, the three business units have around $900 million in annual sales, Jefferies aerospace and defense analyst Sheila Kahyaoglu estimates in a client note that discusses the financial results and the pending divestiture.

“This is a strategic step toward optimizing L3’s portfolio,” Christopher Kubasik, L3’s president and CEO, said in a statement. “We will use the proceeds from the sale to invest in continued growth of l3, consistent with our capital allocation strategy and plans.”

Chris Kubasik, president and CEO of L3 Technologies. Photo: L3

Chris Kubasik, president and CEO of L3 Technologies. Photo: L3

Net income in the quarter rose 24 percent to $203 million, $2.54 earnings per share, from $164 million ($2.07 EPS), driven by higher operating income and lower taxes. Segment operating margin rose 40 basis points to 10.6 percent.

Excluding discontinued operations, per share earnings were $2.34, 33 cents per share better than consensus estimates.

Sales in the quarter rose 2 percent to nearly $2.4 billion from just above $2.3 billion a year ago, largely due to gains in organic growth.

At the operating level, the bottom line gains were driven by L3’s Electronic Systems segment, which benefited from Army work on fuzing, ordnance, and guidance systems, higher sales of security and detection systems to the Transportation Security Administration, and power and conversion systems for the Navy. The Sensor Systems segment also had strong sales, although profit was flat, on space electronics and infrared detection products, airborne turret systems and electronic countermeasures systems for foreign militaries.

L3 increased its earnings guidance by a dime per share for 2018 based on a slightly lower than expected tax rate for the year. Earnings are now expected to be between $9.40 and $9.60 EPS.

Free cash flow in the quarter was an $85 million outflow and the company recorded $2.6 billion in orders. Funded backlog at the end of the quarter stood at $8.8 billion, up from $8.5 billion since the end of 2017.

Once the sale of Vertex, Crestview and TCS closes, L3 said it will record a gain in its financial results. Last October L3 said it planned to divest Vertex, which had lost three major competitions in 2017, which Kubasik said at the time were due to changes in customer behavior.

Vertex does aviation logistics services, supply chain management, and maintenance, repair and overhaul. Crestview fabricates and assembles select rotary aircraft components, and TCS provides engineering services and logistics support.

L3’s financial adviser on the transaction is Moelis & Company LLC.

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