L3Harris Technologies [LHX] last Thursday reported a sharp drop in first quarter earnings driven by higher interest and pension expenses and a combination of costs related to acquisitions and divestitures despite strong sales.
Net income slid 29 percent to $339 million, $1.76 earnings per share (EPS), from $475 million ($2.44 EPS) a year ago. Excluding costs related to acquisitions, divestitures and integrations, L3Harris generated per share earnings of $2.86, a penny above analysts’ estimates.
Sales increased 9 percent to $4.5 billion from $4.1 billion a year ago with 7 percent of the growth organic. The acquisition of ViaSat’s [VSAT] tactical data link business in early January also contributed to sales.
Integration of the data link business is going well and L3Harris expect it to “meet or exceed” sales and cost savings targets, Christopher Kubasik, chairman and CEO of L3Harris, said last Friday morning on the company’s earnings call.
L3Harris still expects its pending $4.7 billion acquisition of
Aerojet Rocketdyne [AJRD] to close this year. The purchase agreement was announced last December and in March the federal government asked both companies for additional information about the acquisition.
L3Harris should have its information submitted in June and Aerojet likely before, Kubasik said. Once the Federal Trade Commission (FTC) has the requested information, it has 30 days to complete its review.
L3Harrris’ bid for Aerojet followed a failed attempt by Lockheed Martin [LMT] for the rocket maker after the government rejected the acquisition on anti-competitive concerns. Kubasik on Friday said there should be no similar concerns with his company’s effort to acquire Aerojet.
“When I look at it, we do not compete with Aerojet Rocketdyne,” he said. “I mean plain and simple they make rocket motors and rocket engines and we do not and that term is known as horizontal competitiveness. And there is none. We are not a customer of theirs. They are not a customer of ours. Which the term of art the FTC and lawyers use ss vertical competition. So, I look at this and say if there’s no vertical competition and no horizontal competition we’ll submit the data, we’ll certify the information and we’ll let the process run.”
If the acquisition goes through, L3Harris will have about $14 billion of debt on its balance sheet and its cash focus for the next two years would be lower the debt. The company also hopes to raise about $1 billion in cash through two or three potential divestitures of non-core businesses to help pay off the Aerojet acquisition, Kubasik said.
Kubasik wouldn’t say what businesses L3Harris may exit but noted that as the “company evolves, we’ll become more and more of a government or defense contractor.”
Kubasik was responding to a question from Doug Harned, an aerospace and defense analyst with the investment firm Sanford C. Bernstein & Company, who highlighted the public safety radio products and commercial aircraft training and simulation businesses of L3Harris as potential candidates for divesting.
“We’re not at all in a fire sale situation,” Kubasik said. “We’re going to take our time, and we’re going to get the maximum value for those properties.”
Kubasik also said he’s hoping that a deal could be signed and announced this year.
If the deal for Aerojet concludes successfully, Kubasik said it will likely be two years before the company does any more significant acquisitions as it focuses on debt reduction.
Excluding the data link acquisition, the largest growth drivers in the quarter were tactical communications, space systems, intelligence, surveillance and reconnaissance related to aircraft procurement and missionization, avionics and public safety radios.
Macro trends are positive the company said, citing increasing domestic and global defense demand, a slow but improving easing of supply chain shortages of electronic components, stabilizing labor and material costs, and improving labor stability through declining employee attrition.
L3Harris is also undertaking a new “enterprise transformation program” that aims to enhance efficiencies and lower costs, including reducing its real estate footprint to take advantage of employees that are working remotely or splitting time between home and office. The new initiative exploits the company’s “trusted disruptor” strategy that has been focused on becoming a more agile, cost competitive prime contractor for its government customers by “applying it to ourselves” to improve, Kubasik said.
The company’s financial guidance for 2023 was unchanged. Orders in the quarter were a record $5.8 billion with 30 percent of the work from international customers, and backlog rose to a record $24.5 billion, up 16 percent from $21.1 billion a year ago. Free cash flow was $314 million.