L3 Technologies [LLL] on Thursday reported a big drop in net income in the first quarter because of one-time gain last year related to divestiture of a former business segment but the results soared well above analysts’ expectations on stronger than expected operating performance.
Net income fell 28 percent to $164 million, $2.07 earnings per share (EPS), from $227 million ($2.87) a year ago, beating consensus estimates by 26 cents per share. The results a year ago benefited from a $64 million (79 cents EPS) after-tax gain of the former National Security Solutions segment to Leidos [LDOS].
Operating margin slipped 120 basis points to 9.5 percent due largely to lower favorable contract performance adjustments at the Aerospace Systems segment and higher severance and restructuring costs at Communication Systems.
Sales in the quarter increased 13 percent to $2.7 billion from $2.4 billion a year ago, with organic revenue accounting for 11 percent of the increase. Sales to international customers were up 8 percent to $668 million.
Revenues were up by double-digit percentages in three of the company’s four segments, Electronic, Communication and Sensor Systems, and up modestly at Aerospace.
Based on the first quarter results and expectations for the rest of 2017, L3 increased its earnings and sales guidance for the year. Earnings are projected to be a dime higher at between $8.50 to $8.70 EPS on a slightly lower tax rate and a 10 basis point improvement in operating margin at Sensor Systems.
Sales are now expected to range between $10.8 billion and $11 billion, a $125 million improvement from earlier guidance due to an increase in estimated sales at Electronic and Aerospace System on business with the Defense Department, and higher international sales at Sensor Systems.
Orders in the quarter totaled more than $2.6 billion, just shy of sales, and funded backlog stood at $8.9 billion, essentially flat from versus the end of 2016. Free cash flow was $44 million in the quarter.
Christopher Kubasik, L3’s president and chief operating officer, said on the company’s earnings call that the company continues to look at potential divestitures and acquisitions. He said L3 recently closed an aviation product facility in Florida and distributed the work to other company units. The consolidation of two traveling wave tube businesses within the Communication Systems segment is ongoing, he said.
The company is looking for acquisitions that enhance its technology, open access to new markets, or strengthen existing leadership positions, Kubasik said.
L3 closed four acquisitions in 2016 and so far in 2017 has sealed two deals.