L3Harris Technologies [LHX] last Friday posted a slight decline in third quarter earnings due to higher taxes and sales edged up despite headwinds from the coronavirus and the sale of a business unit.
Net income fell a percent to $430 million, $1.98 earnings per share (EPS), from $435 million ($1.90 EPS) a year ago. Per share earnings were higher on a lower share count.
Higher taxes trimmed off an otherwise solid bottom-line performance at the operating level where profit was higher in three of the company’s four segments, driven by performance improvements and cost savings synergies resulting from the acquisition by Harris Corp. of L3Technologies to create L3Harris.
Cost synergies in the quarter were $50 million and $165 million year-to-date, on track to meet the $185 million target in 2020, William Brown, chairman and CEO of L3Harris, said on the company’s earnings call on Friday. This year the company expects to achieve $250 million in cumulative cost savings and another $300 million in 2021, one year ahead of schedule, he said.
Adjusted earnings in the quarter were $2.84 EPS, 10 percent above the $2.58 EPS a year ago, driven primarily by cost synergies, lower share count, sales, operating efficiencies and a pension tailwind. Adjusted operating margin was 17.9 percent, up 60 basis points from a year ago.
Sales increased less than a percent to $4.5 billion from $4.4 billion with organic growth up 4 percent, partially offsetting the sales contribution a year ago from the security detection and automation business that was sold to Leidos [LDOS] and a decline in commercial aviation business due to COVID-19.
When Harris and L3 agreed to the combination more than a year ago, top executives touted revenue synergies they could create through a more integrated, complementary platform that can address a larger market as a key driver behind the deal. Brown said that in the third quarter the company won 12 “revenue synergy awards,” which brings the total wins created through the merger to 25 out of 37 bids worth over $300 million, “an initial down payment on our multi-billion dollar pipeline.”
Brown highlighted two recent wins that were achieved because of the creation of L3Harris, including the Space Development Agency’s missile tracking layer. This contract for the Wide Field of View (WFOV) program leverages Harris’ legacy capabilities in space payloads and integration and L3’s onboard space avionics solutions, he said.
L3Harris is providing the satellite bus and mission payload for the WFOV program, “validating our strategy to become a mission-solutions prime” contractor, Chris Kubasik, the company’s vice chairman, president and chief operating officer, said on the call. He said demand for the satellites could grow with the value of the program “well into the billions” of dollars, “leading to the next space-based franchise for our company.”
The second revenue synergy win highlighted by Brown was for an advanced simulation and training effort for secure data sharing between classified sensors in multi-domain operations with the Defense Advanced Research Projects Agency called SAFE-SIM.
The company’s results in the quarter were ahead of its expectations, leading it to raise earnings guidance for this year to $6.44 EPS, up from the prior outlook of $6.03 to $6.43. Sales are expected to be around $18.4 billion, the mid-point of the prior range of $18.2 billion to $18.6 billion. Free cash flow is expected to be $2.7 billion, the high end of prior guidance. Free cash flow in the quarter was $726 million.
Beyond 2020, Brown said the company expects mid-single digit top line growth driven by continued demand for the company’s C5ISR capabilities, continued revenue synergy opportunities where the pipeline of current opportunities is around $20 billion, and additional international business.
L3Harris’ international business is “under represented” relative to the company’s peers in the defense industry, Brown said. Kubasik said the goal in the next few years is for international business to make up 25 percent of sales.
During the quarter, the company repurchased nearly $1.2 billion of its shares and expects to buy back $2.2 billion of its stock in total this year, $500 million more than last year. Brown said there is room to increase the dividend payment to shareholders.