L3 Focused on Growing Int’l ISR, Acquiring Companies

By James T. McKenna | August 21, 2017
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L3's AT-802L Longsword features an enhanced, certified cockpit which includes the Garmin G600 system including dual screen Primary/Multi-Function displays, an air data computer and attitude/heading reference system, a digital intercommunication system, and an L3 next-generation Electronic Standby Instrument System. Photo: Business Wire.

L3’s AT-802L Longsword features an enhanced, certified cockpit that includes the Garmin G600 system including dual screen primary/multi-function displays, an air data computer and attitude/heading reference system, a digital intercommunication system, and an L3 next-generation electronic standby instrument system. Photo courtesy of L3

L3 Technologies is focused in the near term on winning more contracts for intelligence, surveillance and reconnaissance (ISR) work from Far and Middle East customers and benefiting from the U.S. military’s need for aircraft upgrades, including possible work to help new U.S. military/allied Lockheed F-35s talk with older-generation fighters, according to its incoming CEO.

The New York City-based communications and electronic systems company plans to add to its capabilities through more acquisitions in 2019, L3 President/COO Christopher Kubasik told Jeffries LLC’s Industrials Conference Aug. 9. L3 said July 19 that, effective Jan. 1, 2018, Kubasik would succeed Michael Strianese, who has been the company’s CEO for 20 years.

L3’s international ISR work historically has been uneven and right now “is flattish,” but there are high-growth opportunities for ISR in the Far East and the Mideast, “ where we have a couple things in the works,” Kubasik said.

“Through the end of the year, as we’re going to focus on our international growth,” he said. “I have two different trips to two regions of the world where I’m going to go out with our team and try to accelerate growth, reconnect on some relationships and let them know more about L3. So I think, over the next couple years, we’re going to see much more in the international market.”

Within the U.S., Kubasik said, L3 expects defense spending to increase by 4% to 7%. He said the company is uniquely positioned to benefit from the Trump administration’s efforts to balance “the desire for near-term readiness with the mid- and long-term modernization and investment.”

About two-thirds of L3’s defense revenue comes from Pentagon operations and maintenance and overseas contingency operations, or OCO, accounts. The revenue comes mainly from the company’s aerospace group, “which is focused on sustainment and modernization,” he said. “The rest comes out of the more traditional investment accounts.”

Kubasik said L3 is working closely with the U.S. Air Force, Marine Corps and Lockheed Martin on the F-35. “I don’t think it’s any secret that the ability for F-35 to communicate with an F-22 and some of these platforms, even within our nation, let alone our partner nations, is not optimal,” he said. “These platforms need to be able to communicate.

He said L3 has “a mature solution” to support better integrated that relies on platform-to-platform communications rather than communications run through nodes. He said the solution was flown during the U.S. joint forces Northern Edge exercise in Alaska last May.

Kubasik noted that much of its growth over the last 20 years has been through acquisitions, more than 160 of them. That is going to continue.

“We’re going to be more acquisitive,” he said, noting that L3 has made seven acquisitions totaling $600 million since he joined the company in 2015, including three this year alone, in international, security and detection, aerospace and undersea markets. “They’re very focused. They make sense financially. Some are nearer-term. Some are longer-term investments.”

He added, “We wake up every morning … predisposed to growing. So we’re going to grow organically, we’re going to grow inorganically. That’s going to be the primary use of our cash. We’re not against continuing to buy shares, but that will not be the first use of our cash.”

An intent to protect L3’s investment credit rating “still allows us to do up to $1 billion of acquisitions a year.” That can mean deals valued in the tens of millions or the hundreds of millions. “I have no problem doing two at $500 million or 10 at $100 million, whatever makes sense strategically,” Kubasik said.

He added, “The nice thing is there are so many companies that are so large that they don’t even look at these $100 million or $200 million deals, so we kind of like where we are on the mergers and acquisitions side.”

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