Reporting for the first time since the close of Harris Corp.’s acquisition of L3 Technologies in late June, L3Harris Technologies [LHX] on Wednesday posted unaudited second quarter financial results with net income down due to merger and integration costs and sales up.
Unaudited net income fell 19 percent to $482 million, $2.12 earnings per share (EPS), from $592 million ($1.75 EPS), due to merger and integration costs associated with the Harris deal for L3. Excluding these costs, adjusted operating income rose 16 percent to $723 million and adjusted per share earnings were $2.42, 14 cents EPS above consensus estimates. Operating margin rose 140 basis points to 16.3 percent.
L3Harris attributed the higher operating income to higher sales and improved program performance and efficiencies.
The results are unaudited as the deal between Harris and L3 closed on June 29 after the last business day in the second quarter.
Sales increased 7 percent to $4.4 billion from $4.2 billion on growth across the company’s four segments. Growth drivers included electro-optical airborne imaging systems, intelligence, surveillance and reconnaissance aircraft missionization, avionics and electronic warfare systems on legacy aircraft, classified space, Defense Department tactical radios and public safety radios, fuzing and ordnance systems, airport security equipment, and programs for the Federal Aviation Administration.
Orders were $4.3 billion, down 6 percent from a year ago and combined free cash flow was $487 million.
The company also introduced guidance for 2019, with sales expected to be between $18 billion and $18.1 billion, up between 9.5 and 10.5 percent from 2018. Earnings per share are expected to between $6.35 and $6.45.
Excluding merger and integration costs, adjusted earnings in 2019 are expected to be between $9.60 and $9.70 versus $8 in 2018. The increases this year will come from higher sales, program efficiencies, cost savings synergies, and intangibles and pension from L3, partially offset by higher taxes.
Adjusted free cash flow is expected to be between $2.3 billion and $2.4 billion in 2019.
L3Harris also reported standalone results for Harris’ fourth quarter and L3’s second quarter. Harris posted a 12 percent increase in sales to $1.9 billion and 26 percent increase in net income to $268 million.
L3’s sales were up 2 percent to $2.6 billion while operating income fell 8 percent to $294 million due to merger and acquisition costs. L3’s earnings a year ago also benefited from the sale of the Crestview Aerospace and TCS businesses.
William Brown, chairman and CEO of L3Harris, said on the company’s earnings call that he is “encouraged” by the recently negotiated two-year budget deal between congressional leaders and the Trump administration that will raise budget caps on federal spending. He believes the House and Senate will increase funding for national security and expects “growth momentum to continue in the medium term.”
Brown was asked by analysts about potential divestitures and responded that the company is in the early stages of reviewing the portfolio. There is “no predetermined target,” he said, adding that the management team will focus on strategic businesses that “are technology driven, have great returns and we can win.” Brown said that he and Chris Kubasik, vice chairman, president and chief operating officer, will meet with the company’s board in two weeks to discuss potential divestitures.