("L-3 Exiting VIP Jet Conversions, Evaluating Cyber Unit --
Update," at 2:05 p.m. EDT incorrectly reported the company intended
to exit its VIP aircraft conversion business. The article below
replaces the previous one.)
By Doug Cameron
L-3 Communications Holdings Inc. said Thursday that it was
evaluating a business that converts 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.
"Well, I don't want to get ahead of ourselves. I would say
that's a safe statement though," said L-3 Chief Executive Michael
Strianese when asked on a post-earnings call whether the company
was likely to stop performing 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 closed down 7.5% at $114.75 after it cut 2015 profit
guidance to a range of $6.70 to $7 adjusted per share from $7.35 to
$7.65, though the company retained its sales forecast of $11.45
billion to $11.65 billion this year. Last year, the company
recorded sales of $12.1 billion.
Alongside reviewing whether to pursue future 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 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.
Write to Doug Cameron at doug.cameron@wsj.com
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