L3 Technologies [LLL] on Tuesday reported strong fourth quarter sales but earnings fell due to higher taxes and charges related to its traveling wave tube (TWT) business, and expenses related to its pending merger with Harris Corp. [HRS].

The charge at the TWT business cut $45 million from operating profit, which helped keep the company’s segment operating margin for the year flat at 10.8 percent versus 2017. L3 executives said on the company’s earnings call that they are fixing the TWT issues and that combined with lower pension expenses and ongoing business improvement initiatives expect operating margin to hit 12 percent in 2019.

L3 Chairman, President and CEO Christopher Kubasik said on the call that the company is “very confident” on the margin improvement this year.

Christopher Kubasik, L3 Technologies Chairman, President and CEO. Photo: L3 Technologies

Sales in the quarter rose 8 percent to $2.8 billion from $2.6 billion a year ago, with 7 percent of the gain organic.  Net income slipped 15 percent to $226 million, $2.83 earnings per share (EPS), from $267 million ($3.34 EPS) a year ago.

Excluding debt retirement charges, merger and acquisition related expenses, and gains from business divestitures, adjusted earnings fell 7 percent to $247 million ($3.10 EPS), topping consensus estimates of $2.71 EPS. Free cash flow was $664 million.

Sales and operating profits were up double digits in the Intelligence, Surveillance and Reconnaissance Systems, and the Electronic Systems segments and down in the Communications and Networked Systems segment on the TWT business.

For all of 2018, sales were up 7 percent to $10.2 billion from $9.6 billion in 2017, with substantially all of the growth organic. Net income was up 6 percent to $800 million ($10.05 EPS) from $753 million ($9.46 EPS), and adjusted income was $856 million ($10.75 EPS). Free cash flow was $935 million.

Orders in the quarter were $3 billion and for 2018 $11.6 billion. L3’s funded backlog at the end of 2018 stood at $9.7 billion, up 14 percent from $8.5 billion a year ago.

In 2019, L3 expects sales of about $10.8 billion, a 5 percent increase over 2018 with upside to the top line guidance given the strong order flow in 2018 and backlog, Ralph D’Ambrosio, the company’s chief financial officer, said on the call. Free cash flow is expected to exceed $1 billion.

D’Ambrosio said orders in 2019 will exceed sales for a book-to-bill ratio that approaches 1.1 times sales.