L3 Technologies is moving to focus its research and development and invest in or acquire innovative companies as it seeks to become a "non-traditional sixth prime" under new chief executive Chris Kubasik.
In an interview with Inside Defense at L3's office in Arlington, VA, this month, Kubasik said he's seeking to make L3 leaner and more agile while also bolstering the company's work as a prime contractor.
Since taking over in January, Kubasik, who first joined L3 in 2015 as chief operating officer, has made several key changes. He's hired several high-profile executives, including Sean Stackley, the former Navy acquisition chief, to serve in the newly created role of vice president for strategic advanced programs and technology. Patrick O'Reilly, the former director of the Missile Defense Agency, was named to another newly created role: corporate vice president of engineering.
Kubasik has said publicly he wants L3 to become a “non-traditional sixth prime,” a nod to the existing big five prime contractors.
"The non-traditional part . . . we want to be agile, we want to be affordable and we want to be innovative," he told Inside Defense of his goals for L3. "The sixth prime is a concept that implies we're going to move up the food chain and we're going to have more work with our direct end users."
L3 has sought to increase its work in several markets Kubasik thinks could spur growth, including the unmanned undersea vehicle field. Last year, L3 acquired Open Water Power, which is developing undersea power generation technologies, Adaptive Methods, a systems engineering company focused on undersea warfare, and OceanServer Technology, which develops and manufactures UUVs.
Kubasik said L3 views the UUV market as similar to the unmanned aerial vehicle market years ago.
"We think that market is going to grow a lot quicker than the UAV market did," he said. "There'll be some one-off orders -- 10, 20, 30 -- early on, and it could be a significant growth opportunity."
"It's a long-term business, and I'm taking a long-term view," Kubasik added. "As it grows, we're going to need more people and continue to invest in facilities and tools."
He said he expects L3, which recorded close to $10 billion in sales in 2017, to grow its revenue.
"Ultimately, a billion-dollar program would be a big win for L3," he said. "Obviously we're not going to compete for major [Acquisition Category] I-type programs, but with our unmanned undersea vehicles, with our UAVs, and some of those types of capabilities, especially on the C6ISR front, we can give our customers some alternative choices."
Kubasik said the contractor continues to seek additional acquisitions. Though it made eight in 2017, L3 has not yet made an acquisition this year.
"There's no pressure," he said. "My gut tells me we will probably make one or two this year, but if it doesn't happen, we'll use the cash and maybe buy back . . . more shares."
He said L3 is examining about 18 companies for potential acquisition, and "one or two are getting closer."
Earlier this month, L3 announced it has agreed to sell its Vertex Aerospace business to American Industrial Partners for $540 million. Kubasik said L3 had hoped to fix the business.
"We held on, we thought our past performance would be valued and we could grow this business," he told Inside Defense. "However, we were wrong and it seemed to me the best thing to do for the shareholders and the employees and the customers was to put it in the hands of a different company."
He said L3 has "a couple hundred million dollars" of revenue it might consider divesting in the future.
"But, first and foremost, our goal is to try to fix these businesses that are underperforming," Kubasik added. "That's what I think I should be trying to do."
L3 is also making investments in other companies, including taking a minority interest in one specializing in nanotechnology and another focused on classified technologies, Kubasik said.
The contractor has a "willingness to be flexible and creative and not necessarily feel like we have to own 100 percent of every technology in every company," he said. Peak Nano Optics, the nanotechnology company, "has technology that's applicable to both the military and the commercial world. . . . I wouldn't want to buy the entire company because the . . . commercial market is not appealing to us, the military is."
"We're flexible, we don't have to own 100 percent, we don't have to always prime," he added.
Kubasik said L3 is also considering ways to streamline the organization.
"We have numerous -- 80 or so -- divisions and we have sectors and we have segments, and we all collectively believe that we can flatten the organization, better integrate -- more common systems, more common practices and policies and that will make us even more affordable and leaner," he said.
Kubasik said the company is also seeking to bundle capabilities across groups. For instance, he said, eight divisions are working together on the company's proposal for the Canadian surface combatant program.
Additionally, L3 is seeking to focus its research and development efforts. Kubasik said he expects L3 to spend about 3 percent of revenue on R&D.
"What we've tried to do is instead of having numerous projects for a couple million dollars a year, we're trying to keep the total dollars the same and accelerate some of our investments," he said. "Instead of $2 [million] to $3 million a year for five years, we're looking to see if we can maybe get the product of the innovation in two years by spending $7 [million] or $8 million a year."