Year two post merger, L3Harris looks toward $1B more in divestitures

By: Jill Aitoro

WASHINGTON — One year post merger, L3Harris is a third of the way to its goal of shedding roughly $1.5 billion of the company, with COVID-19 slowing progress, said its two top executives in an interview with Defense News.

About $500 million in business has been divested since June 2019, when Harris and L3 Technologies combined into a single, $17 billion company. That total came by way of three deals that shed the EOTech business, the night vision business, and the security detection and automation businesses.

“Out of the gates, we were really running at this,” said CEO Bill Brown, who noted in previous interviews the audacious goal for divestitures of 8-10 percent of total revenue. “We continue to make progress on others, but obviously with the COVID crisis and the financial impacts of that, it's moved some opportunities to the right.”

The sale of the security detection and automation businesses to Leidos for about $1 billion will ultimately be one of if not the biggest divestiture for the company, said Brown, who declined to point to any specific portions of business as currently up for sale or likely to be shed.

Thus far divestitures have been driven either by overlap created by the merger — which subsequently raised the alarm bells of regulators — or by a desire to focus the portfolio even more to become what Brown described as a “powerhouse C4ISR company.”

Brown stopped short of stating any intention to exit the commercial or federal business altogether — even as the former took a significant hit from pandemic fallout: Commercial revenues are expected to be down around 35 percent organically for the year.

Also likely to suffer from the COVID-19 pandemic is international business. Foreign sales, which account for 20 percent of total revenue, will likely remain flat, versus the increase in low to mid-single digits previously expected.

“We identify that as an area where we think we can outperform,” Chris Kubasik, L3Harris chief operating officer, said during the interview. “Clearly the global pandemic applies some pressure, especially in the Middle East with the prices of oil and all the countries having their own bailouts or stimulus plans. Just like the U.S., I think the situation is going to call into question how those countries deal with defense going forward. It's going to be one of these areas that we need to monitor, and are probably going to have to take market share to grow.”

An inability to travel has, however, opened doors to new ways of doing business around the world. Kubasik pointed to a particular deal with a customer in a Far East country that was negotiated via Skype.

“Nobody's really closed for business,” he said. “We've just got to be creative and do it differently. You feel pretty good when you do a one- or two-hour Zoom [video conference], where in the old days it would have taken four days by the time you flew to the country, cleared customs, got a good night's rest, held a meeting, met again and flew back.”

For L3Harris, year two post merger will focus on the remaining $1 billion in divestitures and see a continuation of company integration. In the longer term, those efforts will set the company up nicely for additional acquisitions, which Kubasik called “a clear expectation” for spurring growth.

And C4ISR is the area that will likely be the focus of potential buys.

“The value of those capabilities and technologies will be even greater in the future in a near-peer competition,” Brown said. “It's not the platforms, but what the platforms do and how they interoperate that requires networks and new ways of communicating, which is in the sweet spot of the company. So I would imagine that anything we would do through acquisition would happen in that broad C4ISR domain.”

But for now, he added, the company is focusing on “the basic fundamentals."

"And if we do that really well, then we build credibility to go and do another acquisition, another merger over time. The key is earning the right to do that — building the credibility and the muscle to go down that path, and that's what we're doing today.”

https://www.defensenews.com/industry/2020/06/11/year-two-post-merger-l3harris-looks-toward-1b-more-in-divestitures/