L3’s Earnings Dive On Charge Related To Contract Loss; Will Divest Vertex Business

As expected, L3 Technologies [LLL] on Thursday posted lower net income in the third quarter stemming from a charge at one of its operating units that lost a recompete of an Army aviation support contract, but the company posted a solid increase in sales and strong bookings.

L3 is currently protesting the loss of the aviation support contract at Fort Rucker, Ala., which was awarded to M1 Support Services, but regardless of the outcome it will still shed the Vertex Aerospace unit, Christopher Kubasik, president and chief operating officer of L3, said on the company’s earnings call.

Vertex has lost three major competitions this year, work supporting government-owned fixed-wing aircraft for which it was the incumbent, a challenge to incumbent Lockheed Martin [LMT] to provide global logistics support to U.S. Special Operations Command, and the Army helicopter support contract.

Chris Kubasik, president and chief operating officer of L3 Technologies, will become CEO on Jan. 1, 2018. Photo: L3

Chris Kubasik, president and chief operating officer of L3 Technologies, will become CEO on Jan. 1, 2018. Photo: L3

Kubasik said L3 wasn’t going to bid the Fort Rucker contract at minimal or no profit, pursuing a strategy that would provide the Army with a best value offer while providing a reasonable return to shareholders. The outcomes for Vertex have been driven by “changes in customer behavior,” he said, “and we’re going to move on.”

Going forward, L3’s Aerospace Systems segment, which includes Vertex, is going to “focus on the products and solutions,” Kubasik said. A sale of Vertex is expected within a year, he said, noting there is a lot of interest in the unit.

Net income in the quarter fell to $23 million, 29 cents earning per share (EPS), from $148 million ($1.88 EPS). Excluding the previously announced $187 million ($1.67 EPS) charge at Vertex, adjusted earnings were $156 million ($1.96 EPS), two cents per share above analysts’ estimates.

At the operating level, all four of the company’s segments posted higher profit, led by Sensor Systems and Electronic Systems.

Sales increased 6 percent to $2.6 billion from $2.5 billion a year ago, with all four of the company’s operating segments boosting revenue, led by Electronic Systems and then Communication Systems. Organic sales accounted for 4 percent of the growth.

Bookings in the quarter were $3.1 billion and for the year so far are $8.1 billion, ahead of sales for both periods.

For 2017, L3 lowered its earnings guidance to between $7.13 and $7.23 EPS from the prior outlook of $8.65 to $8.85 to account for the charge, partially offset by a lower tax rate. Sales are still expected to range between $10.8 billion and $11 billion.

In 2018, L3 expects its sales to be flat to down a percent due to the losses on the fixed-wing aircraft and helicopter support contracts, Ralph D’Ambrosio, the company’s chief financial officer, said on the call. He said the 2018 outlook is based on $10.9 billion in sales this year. Excluding the lost awards, sales will be up between 4 to 5 percent, he said.

Operating margins in 2018 should be up about 30 basis points on lower pension expense, D’Ambrosio said.

Earnings next year will be in the $8.75 to $9 EPS range, he added.

Free cash flow in the third quarter was $262 million. Funded backlog at the end of the quarter was up 1 percent to $9 billion versus $8.9 billion at the end of 2016.

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