L3 Technologies [LLL] on Thursday posted strong second quarter earnings, driven in part by a gain from a property sale, a lower tax rate, and higher sales and operating income.
Net income jumped 34 percent to $202 million, $2.54 earnings per share (EPS), from $151 million ($1.88 EPS) a year ago, bolstered by a $26 million (33 cents EPS) benefit from a property sale related to a consolidation within its Communication Systems segment. Excluding the benefit, per share results still easily topped consensus estimates of $2.03 EPS by 18 cents.
Operating margin was 11.4 percent versus 9.3 percent a year ago. Excluding the property sale, operating margin was still strong at 10.5 percent.
Sales increased 3 percent to just over $2.7 billion from just under $2.7 billion a year ago, with 1 percent of the growth organic. The organic growth was driven by three of the company’s four segments, with contributions from aircraft training solutions, precision weapons, Navy power and electronic systems, networked communication systems for the Defense Department, airborne turret systems for the Air Force, and space electronics products.
The Aerospace Systems segment was the lone drag on the top line, with sales off on declines in systems for intelligence, surveillance and reconnaissance, and aircraft.
During the first quarter, L3 lost its bid to continue its support under an Army contract for logistics services for government-owned fixed wing aircraft, including the C-12, C-26 and UC-35. DynCorp International won the potential $795 million contract.
Chris Kubasik, L3’s president and chief operating officer, who last week was tapped as its next CEO, said on the earnings call that L3 was “performing well” and fully understood the scope and hours and was simply underbid on the Army contract. He said L3 won’t submit bids where it will “knowingly lose money.”
L3 is focused on upgrading the business development and personnel at Aerospace Systems to generate growth, changes that were made this month, Kubasik said. He said he has also directed a review of “all aspects of our Aerospace costs, and in the months ahead I’ll get an out briefing on potential plans to further consolidate operating units with the goal of lowering costs through a leaner structure and improving operating efficiencies.”
There are several competitions expected to be decided on in the near-term, Kubasik said, including a Special Forces award in the coming weeks, a September decision on the Army Fleet Support contract at Fort Rucker, Ala., where L3 is the incumbent, and a new opportunity to support Navy P-8 maritime patrol aircraft, expected in October.
L3 also continues to streamline its Electronic Systems segment and expects to go from 11 divisions currently to four by the end of 2018, Kubasik said.
“We are flattening the organization, saving money, and getting closer to the customer,” he said.
Orders in the quarter totaled $2.4 billion, and funded backlog stood at $8.5 billion, down nearly $400 million since the start of the year. Free cash flow was a healthy $274 million.
Michael Strianese, L3’s chairman and outgoing CEO, said on the call that the company’s priorities for capital allocation begin with mergers and acquisitions and research and development (R&D) investments, followed by returning cash to shareholders “when the other two growth options aren’t as attractive.”
The R&D investments are focused on “immediate needs and longer-term requirements that address future threats and emerging markets.”
A lower tax rate combine with higher sales and operating margin improvements led L3 to increase its earnings guidance for the year by 15 cents EPS to between $8.65 and $8.85. The company also increased its sales outlook by $50 million, but still in the range of $10.8 billion to $11 billion.