Like other defense companies posting second quarter financial results, L3Harris Technologies [LHX] last week reported ongoing headwinds related to its supply chain that impacted sales and earnings, challenges that aren’t going away and will require the industry to adapt, Christopher Kubasik, the company’s chairman and CEO, said during a July 29 earnings call.
“I think at least at L3Harris, I think the whole industry has now realized there’s a new norm in supply chain and we’re adapting to that as quickly as we can,” Kubasik said. “In the past, the whole focus was just in time inventory, inventory reductions, single sources, and you’d always go with a low-cost bidder without serious consideration on the certainty of supply and delivery.”
The adaptations L3Harris is making include building resiliency through more inventory, investing in critical materials, having “more localized and distributed production to shorten the whole supply chain network to get our parts even quicker” and move from single sources for parts to multiple sources, he said.
Michelle Turner, L3Harris’ chief financial officer, said that the company is also “redesigning parts” and that these various adaptations have been underway for the past six months and are beginning to take effect, adding that “Many of those start to come on line in the second half,” making the company more confident about the recovery.
L3Harris had expected a quicker recovery from the supply chain challenges but instead it has stretched out and will continue into 2023, Turner said.
Summing up, Kubasik said, “So, a complete turnaround, almost a 180 from where we were three years ago, but this is the new norm in our opinion.”
Net income in the second quarter increased a handsome 14 percent to $471 million, $2.42 earnings per share (EPS), from $413 million ($2.01 EPS), due to the divestiture of businesses a year ago that boosted profit at that time and a lower tax rate. Excluding various one-time costs, adjusted earnings of $3.23 EPS topped consensus estimates by a nickel.
The strong net income results masked softness in the operating segments stemming from lower sales, supply chain disruptions, and a sales profile that favored lower margin work. Total segment operating income was down 2 percent to $650 million.
Sales in the quarter declined 11 percent to $4.1 billion from $4.7 billion a year ago, with 6 percent of the drop organic. Supply chain issues contributed to the top-line decline.
Orders in the quarter were a robust $4.7 billion, representing a book-to-bill ratio greater than 1.1 times sales and were driven by tactical communications, mission avionics, space, electro-optical and commercial aviation work.
Adjusted free cash flow was $712 million.
L3Harris confirmed its financial guidance but shifted the outlook to the low end of the prior range for sales, per share earnings and cash flow. Prior guidance was for organic sales to be up 1 to 3 percent this year, with closer to 1 percent now expected due to award timing, supply chain constraints and protest delays on the Navy’s EA-18G Growler Next-Generation Jammer-Low Band program.