L3Harris Technologies [LHX] on Wednesday posted strong third quarter consolidated sales and earnings that combine the results of the former Harris Corp. and L3 Technologies and raised its guidance for earnings this year.
Pro forma sales increased 10 percent to $4.4 billion from $4 billion a year ago and adjusted operating income grew 25 percent to $766 million, $2.58 earnings per share (EPS), from $612 million ($2.04 EPS), topping consensus estimates by 21 cents per share. Adjusted operating margins were up 2.1 percent to 17.4 percent.
The report marks the first full quarter of results since Harris completed its acquisition of L3 in late June at the end of the second quarter and the company was renamed. The consolidated results don’t meet generally accepted accounting guidelines but compare top and bottom lines as if L3Harris was operating under the combination of the two companies a year ago.
Under generally accepted accounting principles, L3Harris’ sales nearly tripled to $4.4 billion and net income more than doubled to $435 million ($1.90 EPS).
Adjusted operating income was higher on sales growth, operational performance, cost saving synergies being realized through the integration of Harris and L3, pension savings, and the elimination of intangibles related to L3, company officials said on a call with analysts.
Integration of the two companies is ahead of expectations in terms of cost savings targets, and tracking toward achieving $80 million of savings this year and $200 million in annual run-rate savings by year-end, William Brown, chairman and CEO of L3Harris, said on the call. These numbers give the company “confidence” it will exceed the $500 million annual savings planned for 2022, he said.
Brown outlined a number of integration efforts aimed at fostering a focused operating culture, including a new enterprise operational excellence effort it calls E3 that will help it expand margins and improve operating performance in the years ahead.
Part of the company’s new performance culture includes integrated research and development efforts across the company, Brown said, highlighting an enterprise “technology summit” at the end of September that brought together more than 200 top L3Harris “engineering leaders to cross-pollinate ideas, roll out our company wide stage-gate development process, and detail our plan to manage R&D investments on a portfolio basis.”
Other ongoing enterprise integration efforts include shared services, best practices, business metrics and reviews aimed at fostering accountability and rigor in decision-making, Brown said.
In addition to cost synergies, L3Harris already is beginning to realize potential revenue synergies from the marriage of the two companies’ complementary capabilities, Brown said. In its first three months, L3Harris has submitted 14 bids that leverage the combined know-how of Harris and L3, “primarily in electronic warfare and space-sensing domains,” Brown said. This pipeline of potential work represents about $3 billion in work over the next 10 years, he said.
For example, L3Harris is one of two companies downselected to compete in the initial development phase for an Air Force program to modernize electronic warfare capabilities on the F-16 fighter aircraft over 15 years. Brown said the company’s bid includes “proven EW capabilities from legacy Harris with an innovative digital signal receiver from L3 to provide the customer a high-performing low-risk solution we could not have created separately.”
If L3Harris wins this competition, it would “double our addressable market” for support of the F-16 electronic warfare suite and give it a domestic position to go along with its international support for the aircraft, he said.
Brown also said L3Harris was awarded a study contract in the space-sensing area based on legacy Harris and L3 capabilities. This work is potentially worth $250 million, he said.
In addition to the ongoing integration efforts, Brown said the company is marketing several of its non-core businesses for potential divestiture. Sale proceeds will go toward share repurchases, he said.
Free cash flow in the quarter was $618 million. Orders were close to $5 billion, driving funded backlog up 10 percent from a year ago to $16.5 billion.
For 2019, L3Harris now expects adjusted earnings to be around $10 EPS, up from the prior guidance of between $9.60 to $9.70 EPS. Sales are expected to be $18.1 billion, which is the high end of the prior outlook of $18 billion to $18.1 billion.