L3 Technologies [LLL] on Thursday reported higher sales in its second quarter driven by organic growth while earnings results were a bit mixed given gains from sales from various business units as well as a debt retirement charge.

Net income was $375 million, $4.72 earnings per share (EPS), up 86 percent from $202 million ($2.54 EPS) a year ago. The recent sale of the company’s Vertex, Crestview and TCS business units to a private equity firm contributed $205 million ($2.58 EPS) after taxes to the bottom line and a lower tax rate helped as well. An after-tax $36 million (45 cents EPS) debt retirement charge took from the bottom line.

Excluding the debt retirement charge and the gain from the Crestview and TCS sales, L3’s adjusted earnings from continuing operations were $2.47 EPS, which beat analysts’ estimates by 11 cents per share.

Chris Kubasik, chairman, president and CEO of L3 Technologies. Photo: L3
Chris Kubasik, chairman, president and CEO of L3 Technologies, is working to consolidate and better integrate the company. Photo: L3

At the operating level, profit gains at the Electronic Systems, Aerospace Systems and Sensor Systems segments were more than offset by a decline at Communications Systems, which benefited a year ago from a real estate sale. Segment operating margin fell 170 basis points to 10.6 percent

Sales increased 8 percent to $2.6 billion from $2.4 billion a year ago with organic revenue accounting for 7 percent of the gain. The topline growth was led by L3’s Sensor Systems segment while the other three segments also posted gains.

Last December, just before assuming the role of L3’s CEO, Christopher Kubasik said that 2018 would be a transformative year for the company with a goal to become a non-traditional “sixth prime” contractor for the government. Kubasik, who was president and chief operating officer at the time and is now chairman, president and CEO, said L3 would deliver innovative solutions for its customers at a faster pace.

The ongoing transformation will take place over the next five years, Kubasik said on Thursday’s earnings call.

Kubasik is working on making L3 a more integrated and collaborative enterprise that operates more efficiently. On the call, he said the company is looking to standardize processes, systems and policies, highlighting a new effort to integrate information technology systems under the chief information officer, and is developing leadership and training programs to “invigorate our workforce.” He also said L3 is working to develop its engineering talent and capabilities through more collaboration and investments in training and professional development.

Consolidation of facilities and operational units is also ongoing, Kubasik said, noting that the Electronic Systems segment has a goal to reduce its divisions by half by 2021. He also in August, L3 will provide details on plans to restructure into three operating segments to help it provide more integrated solutions, improve technology development, and respond to customer needs faster.

“Many customers are underserved relative to their needs for fast, innovative, low-cost solutions and we intend to fill that need as a non-traditional sixth prime,” Kubasik said.

L3 plans to announce the hiring of a chief transformation officer in the near-term to help steer the changes being made, Kubasik said.

L3 raised its sales and earnings guidance for the year. Sales are now forecast to be $150 million higher and range between $10 billion and $10.2 billion. Adjusted earnings are projected to be between $9.80 to $10 EPS, 40 cents higher than the prior outlook. Free cash flow is expected to be $915 million, $15 million above earlier guidance.

L3 hasn’t provided guidance for 2019 but said it expects operating margins of 12 percent and organic sales growth in the mid-single digits.

Free cash flow in the quarter was $165 million, orders totaled $2.8 billion, and funded backlog stood at $8.8 billion, up $300 million since the start of the year.