L3 sounds ready to buy in 2018

Amid wide expectations for another busy year in government market merger-and-acquisition activity, L3 Technologies is signaling its intent to be an active buyer as it also looks to sell one of its aerospace units.

Speaking on L3’s fourth quarter earnings call with investors Thursday, new CEO Chris Kubasik said the defense contractor has “about 20 companies of varying sizes in our pipeline” for acquisitions.

“We have a couple that maybe (are) able to close in the next 60 days and we'll keep your abreast on that, but we're all moving very, very quickly,” Kubasik told analysts on the call.

New York City-based L3 invested $317 million in eight acquisitions last year and $388 million on four deals in 2016. That streak has covered markets such as airport security, electronic warfare and the unmanned undersea domain -- where L3 made a triple play of buys last year in the span of five months.

The company expects to have plenty of firepower this year to make more deals. L3 ended last year with a $662 million cash balance and expects that to almost double to $1.2 billlon by the end of this year, according to an accompanying fourth quarter investor presentation.

"I think it is reasonable to say we can spend $1 billion a year in M&A," Kubasik said.

That emphasis on acquisitions is part of the company’s larger effort to recast itself as the defense industry’s “nontraditional sixth prime,” a term Kubasik used both on the Thursday call with analysts and L3’s Investor Day presentation Dec. 5.

Getting there means “having us prime more work... bundle our systems into subsystems, subsystems into the product and such,” Kubasik said Thursday. That does not include “a multibillion dollar bomber a multibillion dollar submarine or a multibillion dollar ship,” he added.

Some of the groundwork for L3’s new effort to become that sixth prime has been laid down in recent years through the company’s decisions to spin off its former government services businesses.

L3 spun out what is now Engility Corp. in 2012 and sold the former National Security Solutions business to CACI International in February 2016.

L3 was not the only defense prime to shed services and refocus on higher-margin platform businesses. Lockheed Martin followed suit in August 2016 with the spinoff and merger of its IT and services business into Leidos, then Harris Corp. sold its former IT business (now known as Peraton) to Veritas Capital in April of last year.

L3’s efforts to find attractive acquisition targets also go on as the company looks to sell its Vertex Aerospace unit, a move announced in October. Kubasik told analysts Thursday L3 expects to receive initial indications of interest before the end of February and complete the sale of Vertex by the middle of this year.

The Vertex sale aims to “enable the aerospace systems leadership team to redirect their focus into areas where it is best suited to grow,” Kubasik said.

Aerospace systems is one of four segments at L3 alongside communication systems, electronic systems and sensor systems.

L3 expects revenue of $9.85 billion-$10.05 billion this year to register growth of around 4 percent. Excluding acquisitions, the company forecasts organic growth of around 3 percent.

L3 reported $15.17 billion in revenue for 2011, its last full year before the Engility spinoff. Sales came in at $10.46 billion for 2015, the last full year before the NSS segment’s sale to CACI.