L3Harris Technologies [LHX] on Wednesday said its net income fell in the second quarter largely due to asset impairment charges despite strong sales growth.
Net income tumbled 25 percent to $351 million, $1.83 earnings per share (EPS), from $470 million ($2.42 EPS) a year ago. In addition to the charges, higher interest, pension, and other expenses took a bite from the bottom-line.
Excluding the asset impairments, adjusted earnings per share were $2.97 EPS versus $3.23 EPS a year ago, edging consensus estimates by 3 cents.
Sales increased 13 percent to $4.7 billion from $4.1 billion a year ago with 12 percent of the increase organic.
At the operating level, the higher sales drove an increase in operating income. The increase in operating income was all due to the Communications Systems segment, up 37 percent on a 2 percent boost in operating margin.
Michelle Turner, L3Harris’ chief financial officer, credited the strong performance at Communications Systems on actions the segment has taken to strengthen the resiliency of the supply chain, which suffered as a result of the COVID-19 pandemic, and the “easing of electronic component shortages.” Speaking on the company’s earnings call Thursday morning, she also said that higher software content in the product mix helped the bottom-line.
Integrated Mission Systems (IMS) and Space & Airborne Systems (SAS), L3Harris’ other segments, suffered from asset impairment charges as well as changes in cost estimates to complete work and lower recovery of overhead costs on fixed-price contracts.
All three segments contributed to the top-line increase, again led by Communications Systems with a 30 percent gain, 21 percent of which was organic, and the rest from the acquisition earlier this year of ViaSat’s [VSAT] Tactical Data Links business. IMS and SAS enjoyed high single-digit percentage sales gains.
Based on the company’s performance through the first half of the year, particularly in SAS, sales guidance was increased to between $18 billion and $18.3 billion from the prior range of between $17.4 billion and $17.8 billion. Improvements in the supply chain are also boosting the sales outlook.
The outlook for earnings was also increased to a new range of between $12.15 and $12.55 EPS from earlier guidance of between $12 and $12.50 EPS. L3Harris said that the benefits from the higher sales are mostly being offset by operational challenges at IMS.
Cash flow is still forecast to be around $2 billion.
L3Harris’ pending $4.7 billion acquisition of
Aerojet Rocketdyne [AJRD] is expected to close on Friday. The company will update financial guidance during its third quarter earnings call in October but Turner said to expect about a $1 billion addition to sales this year and no change to earnings because any new income will be offset by interest expense from new debt.
L3Harris still expects the acquisition to be accretive to earnings within the first year and to free cash flow within two years, she said. The company also said it continues to evaluate divesting non-core assets to potentially accelerate debt repayments.
Free cash flow in the quarter was $338 million. Orders were strong at $5.6 billion, helping drive a 25 percent increase in backlog to $25 billion from $19.9 billion a year ago.