L3Harris Technologies [LHX] last Friday posted strong earnings in its third quarter, overcoming a drop in sales due to the divestiture of some business units, a delay in international award, and supply chain constraints crimping receipt of electronic components.
The supply chain challenges hit the Tactical Communications business within in the company’s Communications Systems segment, resulting in product delivery delays.
The supply chain disruptions hit in “recent months,” causing a nearly $100 million dent in third quarter revenue and a likely additional $150 million to $200 million impact on sales in the fourth quarter, leading the company to lower its guidance for organic sales growth this year to about 2 percent versus the prior range of 3 to 5 percent, Christopher Kubasik, vice chair and CEO of L3Harris, said on the company’s earnings call.
The supply chain constraints have been “contained to about 15 percent of the company,” Kubasik said, and haven’t impacted orders or deliveries of radios on key programs to the U.S. Army.
The disruptions are expected to last into the first half of 2022 and then ease during the second half of the year, Jesus “Jay” Malave, L3Harris’ chief financial officer, said on the earnings call. Both Kubasik and Malave said that the company should see a bounce back in sales beginning in late 2022 and continuing in 2023 related to products affected by the electronic component shortages.
Net income in the quarter increased 11 percent to $479 million, $2.39 earnings per share (EPS), from $430 million ($1.99 EPS) a year ago. Adjusted per share earnings of $3.21 beat consensus estimates by three pennies and adjusted operating margin jumped 170 basis points to 19.6 percent.
The supply chain impacts coupled with the divestitures added up to a 30 cents EPS headwind on adjusted earnings but were more than offset by performance improvements and cost management efforts, the company said. Earnings benefited further from stock repurchase, pension and tax tailwinds, and cost savings synergies from the merger of Harris Corp. and L3 Technologies to create L3Harris.
Sales fell 5 percent to $4.2 billion from $4.5 billion a year ago, with divestitures accounting for 4 percent of the decline and organic revenue 1 percent, driven by the supply chain issues and a delay of an ISR aircraft award from a NATO country. That award was booked as revenue in the fourth quarter, Kubasik said.
Orders in the quarter were healthy at $4.5 billion and adjusted free cash flow at $673 million.
For 2021, L3Harris now expects sales of about $17.9 billion versus prior guidance of between $18.1 billion and $18.5 billion because of the supply chain challenges. Adjusted earnings are forecast to fall between $12.85 and $13, a nickel higher on the low end of the prior guidance range due to an improvement in operating margin and share repurchases. Free cash flow is expected to be toward the low end of the $2.8 billion to $2.9 billion forecast due to divestiture headwinds and supply chain constraints, Malave said.
Kubasik offered a rough outlook for 2022 with sales up in the low to mid-single digits organically with growth across all of the company’s segments. Malave said recent business divestitures will create an $800 million revenue headwind in 2022.