By Doug Cameron
L-3 Communications Holdings Inc. said Thursday that it planned
to exit the business of converting big commercial jets for VIPs
after running up charges of more than $100 million on two existing
contracts, and may also sell or spin off its $1 billion
cybersecurity unit.
The aerospace and defense company said two planes would be
delivered 10 months late after it uncovered quality problems. L-3
didn't identify the aircraft involved, but in 2012 said it won
contracts to convert two Boeing Co. 747-8s for use by heads of
state.
L-3, the world's 10th-largest defense contractor by sales,
booked an $84 million charge against the work in the second quarter
and cut its full-year guidance as the hit also left profits for the
period below expectations.
The company is one of a handful of specialists that convert jets
for ultrawealthy clients. The 747-8 carries a list price of $368
million. Conversion to VIP use can more than double the cost and
take four years to complete. The Jet Aviation arm of General
Dynamics Corp. and units of Deutsche Lufthansa AG and Zodiac
Aerospace SA also carry out such conversions.
"I would say that's a safe statement," said L-3 Chief Executive
Michael Strianese when asked on a post-earnings call whether the
company would stop pursuing VIP jet work when its existing
contracts are completed.
The company also took a $17 million charge in the first quarter
against the work, which generates around $150 million in revenue
for each plane, and changed the senior management overseeing the
business at its facility in Waco, Texas.
L-3 shares were recently down 6.7% at $115.73 after it cut 2015
profit guidance to a range of $6.70 to $7 adjusted per share from
$7.35 to $7.65, though retained its sales forecast of $11.45
billion to $11.65 billion this year compared with $12.1 billion
last year.
Alongside stopping VIP conversion work, L-3 said it was
evaluating the future of its National Security Solutions unit,
which provides cyber services for government and commercial
customers.
Lockheed Martin Corp. and BAE Systems PLC are also looking to
sell or spin off their larger services businesses because of low
margins and fierce competition, but Mr. Strianese said L-3 would
likely act on before its two rivals.
"I believe we'll be way out ahead of them," he said. "I'm not
concerned we're swamping the market."
Sales at the unit fell 7% to $1.2 billion last year, and are
expected to be flat in 2015.
For the latest quarter, L-3 reported a profit of $120 million,
or $1.44 a share, down from a year-earlier profit of $137 million,
or $1.53. Excluding items, earnings fell to $1.41. Revenue slipped
7.5% to $2.79 billion.
Lisa Beilfuss contributed to this article.
Write to Doug Cameron at doug.cameron@wsj.com
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