L3Harris Technologies [LHX] last Thursday reported lower net income in the fourth quarter due to an asset impairment charge related to the pending sale of a commercial aviation business and higher interest expense stemming from borrowing costs for two major acquisitions last year, which in turn were the primary drivers of higher sales during the quarter.
Net income tumbled 62 percent to $158 million, 83 cents earnings per share (EPS), from $417 million ($2.17 EPS) a year ago. Excluding the asset impairment charge related to the pending sale of Commercial Aviation Solutions (CAS), adjusted earnings of $3.35 EPS were eight cents higher than a year ago and beat consensus estimates by three cents. Adjusted segment operating margin increased a half percent to 15.1 percent.
Sales increased 17 percent to $5.3 billion from $4.6 billion, primarily due to the acquisitions of Aerojet Rocketdyne and the tactical datalink business of ViaSat [VSAT]. Organic revenue in the quarter was up 2 percent on growth in space, mission networks, intelligence and cyber work at the Space & Airborne Systems segment, and night vision products at the Communications segment.
Overall, in 2023 net income increased 13 percent to $1.2 billion ($6.44 EPS) from $1.1 billion ($5.49 EPS) and sales increased 14 percent to $19.4 billion from $17.1 billion in 2022. Organic growth was 6 percent. Excluding the asset impairment charge, adjusted per share earnings of $12.31 were down from $12.90 in 2022 due to higher interest expense and lower pension income.
Despite the non-operating headwinds, L3Harris generated record orders of $22.8 billion in 2023 that helped drive backlog to a record $33 billion.
L3Harris also initiated guidance for 2024, with sales forecast to be between $20.7 billion and $21.3 billion, an 8 percent increase at the mid-point of the range over 2023. All the company’s operating segments will grow organically, Ken Bedingfield, chief financial officer at L3Harris, said during an earnings call last Friday.
The guidance assumes the sale of the CAS business will close this year, he said.
Adjusted earnings are forecast between $12.40 and $12.80 EPS and segment operating margin of around 15 percent. The forecast includes two non-operational headwinds amounting to more than $200 million, lower pension income and higher interest expense, Bedingfield said.
Free cash flow in 2023 was $2 billion and is expected to be around $2.2 billion in 2024.
The priorities for deploying cash are unchanged from what was announced in December at the company’s investor day. The use of cash is focused investing in organic growth, paying off debt, and then returning excess cash to shareholders, Christopher Kubasik, chairman and CEO of L3Harris, said on the earnings call.
L3Harris has already captured the $50 million in cost savings synergies it expected after acquiring Aerojet Rocketdyne last July and expects it can accrue between $20 million and $30 million in additional business integration expenses related to the deal, Kubasik said.
Kubasik mentioned three priorities for L3Harris this year: a continued focus on execution, expanding margins, and increasing free cash flow. The company is also continuing to review the divestiture of non-core businesses, he said.