Major defense contractor L-3 Communications Holdings Inc. LLL has acquired UK-based CTC Aviation Group in a deal worth $220 million (£143 million) in cash. The acquisition aims at enhancing its commercial aviation training operations and strengthening its international presence.
CTC Aviation has been renamed L-3 CTC Ltd. and integrated into the company’s Electronic Systems segment.
L-3 CTC Aviation has a worldwide reputation in providing specialized and innovative solutions related to pilot training and crew resourcing services to major airlines and retail customers. Its integration into L-3’s Commercial Aviation Training business, which already includes L-3 Link UK, a world-class provider of flight-training simulation devices, will strengthen L-3 Communications’ foothold as a leading provider of flight training and simulation services.
L-3 CTC expects sales of $86 million in 2015 and $95 million in 2016. Being a high-margin business, it has the potential to generate operating margins more than that of the entire Electronic Systems segment. Hence, the acquisition is a strategic fit for the company as it strengthens its training solutions across a wide range of military and commercial platforms. The company expects L-3 CTC to add approximately $50 million to its total sales this year.
Given that L-3 Communications’ business is primarily driven by contracts from the U.S. government, a tepid defense budget scenario has compelled it to expand and consolidate its international presence. A steady flow of foreign contracts will thus help to counter the sequestration impact at home.
Recently, the company posted weak first-quarter results with earnings falling 24.7% year over year hurt by a sales decline in each of its four segments. The company also lowered its revenue and earnings guidance for 2015. Although growth slowed down in the first quarter, its strategy of gradually expanding its commercial and international operations has partially offset some of the domestic decline.
The company’s international and commercial sales represented about 30% of its consolidated net sales in the first-quarter 2015, up from 29% in first-quarter 2014. Moreover, the company has expanded its international sales by 35% since 2011 and expects international and commercial sales to make up for 32% of consolidated 2015 sales.
L-3 Communications is one of the best-positioned, pure defense players due to its non-platform-centric focus and broad diversification of programs. Its timeliness and contributions from strategic acquisitions will sustain its financial performance, going forward.
L-3 Communications currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the defense space include API Technologies Corp. ATNY, Leidos Holdings, Inc. LDOS and Northrop Grumman Corporation NOC, each carrying a Zacks Rank #2 (Buy).
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