L3Harris Technologies [LHX] last Thursday evening said it swung to a profit in its third quarter largely due to the lack of impairment charges that gouged earnings a year ago.
Sales in the quarter increased 16 percent to $4.9 billion with most of the gain related to revenue from Aerojet Rocketdyne, which L3Harris acquired in late July. Organic sales increased 3 percent driven by tactical communications for U.S. customers and program ramp ups in the Space, and Intelligence & Cyber businesses.
The company generated $382 million, $2.02 earnings per share (EPS), in net income versus a loss of $301 million ($1.56 EPS) a year ago. Excluding the impairment charges, and gains from acquisitions and divestitures a year ago, adjusted earnings of $3.19 EPS beat consensus estimates by 15 cents per share.
Segment operating margin was 15 percent, which “I think are industry leading,” Chris Kubasik, chairman and CEO of L3Harris, said during the company’s earnings call last Friday. He added that “we are committed to finding ways to continue to grow those margins.” Margin was down 40 basis points from a year ago.
The integration of Aerojet Rocketdyne into L3Harris is going well and on track to realize the $40 million to $50 million in expected cost savings, Kubasik said. Aerojet’s headquarters in California has been closed, information technology networks are being integrated, and come January the rocket maker’s will be on the enterprise payroll and benefits system, he said.
Aerojet employees are excited to be part of L3Harris, based on results of a recent workforce survey, and Aerojet’s end customers in the Defense Department are also pleased with the acquisition as “they see us as the answer to the challenges and problems that they and the industry [have] had relative to rocket motors and we have their full support, which I expected but is also encouraging,” Kubasik said.
Aerojet Rocketdyne had struggled with deliveries of its solid rocket motors, which are used to power a number of missiles such as the Javelin anti-armor system, and Stinger and Standard Missile anti-aircraft weapons. Kubasik said that the L3Harris message has been “that our number one priority is to increase the deliveries, specifically in the rocket motor sector.”
The L3Harris leadership has a plan to strengthen its Aerojet segment that includes Centers of Excellence for energetics and inert solid rocket motor components to help production and deliveries, Kubasik said. Aerojet’s leadership at locations in Alabama, Arkansas, and Virginia has been bolstered with resources and expertise, and resources are being provided to sub-tier suppliers where the “challenge” resides in the munitions and rocket motors business, he said.
“We only have in some cases one or two certified suppliers of cases, and igniters, and sometimes nozzles, so that that is ultimately a choke point that that we need to focus on as an industry and as a country,” he said.
Kubasik also touched on the $216 million Defense Product Act contract Aerojet Rocketdyne received from the DoD in April to increase rocket propulsion manufacturing capacity, including modernizing facilities and automating manufacturing, targeted at the Javelin, Stinger, and Guided Multiple Launch Rocket System. Aerojet recently leased space in Alabama to help expand capacity, he said.
“So, all of this will contribute to 2024 starting to see a ramp up in the output,” he said. “And I would expect to have noticeable improvements by the end of 2024, and then continuing into 2025.”
L3Harris increased its revenue and segment operating income guidance for 2023 to account for the Aerojet Rocketdyne acquisition, leaving the underlying guidance excluding the deal intact.
Sales are now forecast to be just over $1 billion higher with the new range between $19.2 billion and $19.4 billion. Segment operating income is projected to be between $2.8 billion and $2.9 billion factoring a $120 million contribution from Aerojet Rocketdyne and operating margin is still forecast to be around 15 percent.
Earnings per share are expected to be in the $12.25 to $12.45 range, down a dime on the high end of the previous outlook due to interest expenses and pension adjustments related to the acquisition. Free cash flow is still forecast to exceed $2 billion.
Free cash flow in the quarter was $635 million, bookings totaled $5 billion, and backlog stood at $31.8 billion, up 49 percent from $21.4 billion a year ago.