L3Harris Technologies [LHX] last Thursday posted a steep decline in net income due to ongoing efficiency efforts combined with one-time costs related to an acquisition last year, although sales were up on the same acquisition and solid organic growth.
The efficiency initiative, dubbed LHX NeXT, ran up $127 million in implementation costs versus $13 million a year ago, and amortization costs associated with the acquisition of Aerojet Rocketdyne last July were $52 million higher. A large chunk of the LHX NeXT costs is due to layoffs the company announced in April that will lower headcount by about 5 percent.
LHX NeXT is being accelerated this year and include facility consolidation, standardizing enterprise resource planning, and streamlining organization structure with a goal of $1 billion in cost savings by 2026. Actions taken so far have “us ahead of our gross run rate savings target of $400 million by the end of the year,” Chris Kubasik, chairman and CEO of L3Harris, said during the company’s earnings call last Friday.
Excluding these significant and non-recurring costs, segment operating income increased 24 percent to $788 million. Including these costs, segment income fell 4 percent to $378 million.
Net income slid 17 percent to $283 million, $1.48 earnings per share (EPS), from $339 million ($1.76 EPS) a year ago. Excluding the non-recurring items and efficiency program, adjusted net income increased 7 percent to $584 million ($3.06 EPS), 15 cents per share above consensus estimates.
Adjusted segment operating margin increased 80 basis points to 15.1 percent and each of the company’s segments benefited from improved performance.
Sales in the quarter increased 17 percent to $5.2 billion from $4.5 billion a year ago, mostly on the back of Aerojet Rocketdyne’s contribution, while organic growth was a solid 5 percent due to growth in space systems, classified intelligence and cyber work, and higher volumes in tactical communications, vision systems, and broadband communications.
Free cash flow was negative $156 million and orders were a healthy $5.5 billion. Backlog stood at $32 billion, down from $33 billion at the end of 2023.
The strong performance in the quarter on an adjusted basis led the company to raise earnings guidance for the year to between $12.70 and $13.05 EPS versus the prior guidance of between $12.40 and $12.80 EPS. Sales are forecast to be between $20.8 billion and $21.3 billion, an increase of $100 million on the low end of the range versus the prior outlook. L3Harris was the only major defense contractor reporting first quarter results to increase its top and bottom-line guidance for the year. Free cash flow is still expected to be around $2.2 billion.
L3Harris’ position as the solid rocket motor supplier to Lockheed Martin
[LMT] on its contract to supply the Missile Defense Agency with the potential $17 billion Next Generation Interceptor to protect the U.S. against long-range ballistic missiles will be a tailwind in the coming years, Kubasik said. The initial work will be developmental and hit the top-line in the 2025 to 2026 timeframe and is expected to be a “multi-billion-dollar opportunity over the life of the program,” he said.
The Aerojet Rocketdyne segment develops and builds SRMs, a business that was challenged with production and delivery issues when L3Harris acquired it. Since then, new tools and processes have “helped reduce late deliveries by 20 percent” and “multiple programs” have become profitable, Kubasik said.
Kubasik repeated comments he has made on previous earnings calls that the defense industry does not need a new SRM supplier despite robust demand. That demand, fueled of late by the Russo-Ukraine War and Israel’s fight against Hamas, could mean double-digit growth in the next five to seven years, he said. Northrop Grumman [NOC] also supplies SRMs.
The company’s investments in suppliers have helped improve supply chain performance around SRMs and the government could further invest here to bolster performance, Kubasik said. L3Harris has also ordered new “ovens and mixers,” which take about a year to arrive and once they do will help accelerate production, he said.
“What we need is someone working on the igniters, the nozzles, and the cases and I think that would help unlock the potential,” Kubasik said.
L3Harris still expects to divest its antenna and Commercial Aviation Solutions businesses year and continues to consider additional divestitures, but offers have been low, Kubasik said.
“Too many of the offers have come in low and people think we’re desperate to sell and I can assure you we’re not, so we need to get better valuations before we proceed on other transactions,” he said.