L3Harris declares its post-merger divestiture push as nearly done

L3Harris Technologies sounds just about done with the post-merger divestitures it has worked on in the two years since the business combination was created.

During L3Harris’ second quarter earnings call Tuesday, CEO Chris Kubasik told investors the company has agreed to sell two business units within its aviation segment for $185 million in cash and those deals should close before the year ends.

The buyer is private equity firm Arlington Capital Partners, which is acquiring the Electron Devices and Narda Microwave-West divisions. Arlington Capital will operate them as a new standalone defense electronics company named Stellant Systems, with its 800-employee team to be led by L3Harris Electron Devices’ management team.

As that sale and a few other divestitures in process move ahead, Kubasik declared to analysts the “portfolio shaping program announced in 2019 is largely complete” with 10 percent of post-merger revenue sold off. That ratio is the top end of the range L3Harris had targeted for divestitures.

The category of done divestitures include those of the military training and combat propulsion businesses to CAE, plus the security detection and automation product unit to Leidos.

While that big-picture item is done, the other two of integrating all the different pieces and pursuing revenue synergy opportunities remain at the top of L3Harris’ agenda.

Success for L3Harris on both fronts is also tied to how it sees itself in the broader government market’s landscape, especially considering how Kubasik has spoken of the company as a “Nontraditional Sixth Prime” in the past.

Kubasik characterized the market’s overall shape as this: traditional primes at one end and new entrants on the other that “are maybe a little more commercial (in) mindset, a little more agile, maybe a little more creative.”

“What we're trying to do is put L3Harris right in the middle of those two, take the best of the both and position ourselves to listen to our customers and be a trusted disruptor,” he said.

Awards in L3Harris’ space business have driven a sizeable portion of the revenue synergy efforts as the company looks at opportunities in an estimated $20 billion pipeline for that market.

Space also has relatively the same overall shape with regards to its competitive landscape as Kubasik sees it.

“When I look at the exquisite satellites, we continue to have some of the best payloads out there, so we're working with partners, usually the larger prime and that's contributed to some success and we have some awards coming up in the next few months that are classified,” Kubasik said. “Then we're working collaboratively with some of these new entrants, just like we do with the traditional primes and find where we can partner, where we can compete, and it seems to be working.”

Melbourne, Florida-headquartered L3Harris nudged its revenue outlook for this year down slightly to between $18.1 billion and $18.5 billion, or down $400 million at both ends on the divestitures. The company still sees organic growth this year of 3-to-5 percent but raised its expected profit margin to 18.5 percent.

Regarding the transaction announced Tuesday: Harris Williams and Kirkland & Ellis respectively are acting as financial and legal advisers to Arlington Capital.

Houlihan Lokey and Holland & Knight are serving respectively as financial and legal advisers to L3Harris.