Unlike other defense companies this week that reported negative tax provisions in their fourth quarter and year-end financial results for 2017, L3 Technologies [LLL] on Thursday said its net income benefited from a new tax law, which led earnings higher amid a modest decline in sales in the quarter.

Net income soared 54 percent to $289 million, $3.62 earnings per share (EPS), from $188 million ($2.38 EPS). Excluding results from the company’s Vertex unit, which is up for sale and is expected to be divested this year, and gains from a new tax bill that added $79 million (99 cents EPS) to the bottom line, per share earnings from continuing operations were $2.35, topping consensus estimates by 7 cents a share.

General Dynamics [GD], Northrop Grumman [NOC] and Raytheon [RTN] all reported this week that the new tax law, which went into effect on Jan. 1 and will lower effective tax rates this year, had a negative impact on their fourth quarter results due to adjustments for deferred taxes and liabilities. Christopher Kubasik, L3’s president and CEO, said on the company’s earnings call Thursday that the one-time gain in the quarter from tax reform was “due to our various tax planning strategies.”

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

L3’s quarterly results were also aided by a tax benefit related to a realignment of foreign legal entities, which added $30 million (38 cents EPS) to the bottom line, partially offset by ongoing restructuring and integration costs that cut 24 cents EPS. The restructuring is being led by Kubasik, who said he is willing to take short-term hits to earnings so as to increase long-term profitability.

Sales in the quarter fell 3 percent to just under $2.6 billion from just over $2.6 billion a year ago. The company posted declines at its Electronic Systems and Sensor Systems segments, which more than offset an increase at Communications. Revenue at Aerospace Systems was flat. L3 pointed out that the fourth quarter had 7 percent fewer business days than the same period in 2016.

Operating income was also down overall at L3’s business segments and segment margin was 10.2 percent, off 50 basis points from a year ago.

Kubasik plans to ramp up spending on mergers and acquisitions and said $1 billion a year is a “reasonable” amount to spend here, adding that there are currently 20 companies of different sizes L3 is looking at for possible deals. L3 spent $317 million on eight acquisitions in 2017 and $388 million on deals in 2016.

Spending on research and development will hold at around 3 percent of overall sales and will be aligned with the company’s technology roadmap, Kubasik said. Spending on share repurchases will be to offset dilution from incentive stock options.

For 2017, sales increased 4 percent to $9.6 billion from $9.2 billion and net income fell 5 percent to $677 million ($8.51 EPS) from $710 million ($9.01 EPS).

In 2018, sales are expected to be between $9.9 billion and $10.1 billion and earnings from continuing operations between $9.30 and $9.50 EPS, up from guidance provided in December that was between $8.60 to $8.85 EPS. The company expects its effective tax rate this year to be 20 percent versus 26.6 percent in 2017.

Free cash flow in 2018 is projected to be $900 million, up from prior guidance of $865 million. In 2017, free cash flow was $949 million, including $86 million from discontinued operations.

L3’s funded backlog at the end of 2017 stood at $8.9 billion, up 6 percent from a year ago, and orders for the year were $10 billion.