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 email@example.com
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