L3Harris Reports Second Quarter 2020 Results

L3Harris Technologies, Inc. (NYSE:LHX) reported second quarter 2020 revenue of $4.4 billion, up 138% and flat versus prior-year GAAP and pro forma¹, respectively, and up 2.3% on an organic² basis. Net income was $278 million, up 4% and down 33% versus prior-year GAAP and pro forma, respectively. Adjusted EBIT³ was $810 million, up 9% versus prior-year adjusted pro forma, and margin increased 150 basis points (bps) to 18.2%. GAAP EPS was $1.30, down 41% and 29% versus prior-year GAAP and pro forma, respectively. Non-GAAP EPS³ was $2.83, up 13% versus prior-year adjusted pro forma.

"Our top priority continues to be the safety of our workforce, and I am proud of their dedication as well as the progress we have made delivering on customer and shareholder commitments during the pandemic. We're now at the 1-year mark post-merger and our performance highlights the benefits of the combination," said William M. Brown, Chairman and Chief Executive Officer. "Our traction with the integration and execution against strategic priorities give us confidence in our current-year outlook and position us well over the medium term."

Summary Financial Results

Revenue for the quarter increased 138% versus prior-year GAAP due to the post-merger inclusion of L3 operations in results. On a pro forma basis, revenue was largely unchanged for the quarter, primarily driven by growth in the core U.S. defense-related businesses, offset by the divestiture of the airport security and automation business and COVID-19-related impacts, mainly in commercial-related businesses. On an organic⁵ basis, revenue increased 2.3% for the quarter primarily from growth in Integrated Mission Systems, Space and Airborne Systems, and Communication Systems, partially offset by a decline in Aviation Systems due to the pandemic.

GAAP EPS decreased 41% and 29% for the quarter versus prior-year GAAP and pro forma, respectively, due to divestiture-related charges, COVID-19-related impacts and amortization of merger-related intangibles, partially offset by operational excellence, cost management and integration benefits. Second quarter non-GAAP EPS⁶ increased 13% versus prior-year adjusted pro forma driven by the favorable factors noted above, partially offset by the impacts of the pandemic.

For the quarter, net income margin decreased 810 bps and 310 bps versus prior-year GAAP and pro forma, respectively. Adjusted EBIT⁶ margin increased 150 bps to 18.2%.

Segment Results

Integrated Mission Systems

The comparison to prior-year GAAP segment operating results is not meaningful because this segment is comprised almost entirely of former L3 businesses. On a pro forma basis, second quarter revenue was up 7.3% from growth in Electro Optical and Maritime, while ISR was largely unchanged due to the timing of aircraft inductions. Second quarter operating income increased 38% to $224 million, and margin expanded 370 bps versus prior-year pro forma to 16.8%, driven by integration benefits, operational excellence and cost management.

Segment funded book-to-bill was 1.19 for the quarter and 1.12 since the merger.

Orders strength in ISR missionization continued with over $380 million in funding across several platforms, including $139 million supporting the Rivet Joint program and $45 million from the U.S. Air Force to upgrade systems for data collection and management during ISR missions.

Domestic and international demand for L3Harris electro-optical systems remained strong with a $380 million single-award IDIQ for WESCAM products in support of global U.S. Army operations and a $33 million order for WESCAM sensor suites supporting the U.S. Army's Shadow UAV program. The company also reinforced its incumbency with international customers, receiving $100 million in orders for electro-optical systems driven by European and Middle Eastern customers.

In Maritime, the company leveraged its investments in innovation to grow its unmanned maritime franchise and was awarded $53 million from a classified customer to support an unmanned surface vehicle program.

Space and Airborne Systems

Second quarter revenue increased 23% and operating income increased 21% versus prior-year GAAP, primarily due to the post-merger inclusion of L3 operations in results and the factors below regarding pro forma revenue growth. Second quarter revenue increased 4.1% versus prior-year pro forma from a ramp on the F-35 platform in Avionics and classified growth in Intel and Cyber, partially offset by program transition timing and double-digit prior-year growth in Space. Second quarter operating income increased 3% to $235 million versus prior-year pro forma. Second quarter operating margin contracted 20 bps versus prior-year pro forma to 18.8% as operational excellence and integration benefits were more than offset by unfavorable program mix.

Segment funded book-to-bill was 0.94 for the quarter and 0.97 since the merger.

Order momentum in ground-based adjacencies, responsive satellite technology, specialized communications and commercial capabilities was reflected in wins with significant follow-on opportunities in Space and Intel and Cyber, including:

• $81 million sole-source, follow-on award to provide end-to-end mission solutions for a classified customer, extending the ground-based adjacency franchise
• Multi-million-dollar competitive award for small satellites, reinforcing the company's position as a responsive mission prime
• $100 million in specialized communication awards, including $57 million from the U.S. Space Force to provide key communications services to the Enhanced Mobile Satellite Solutions program office and a $43 million sole-source award from the U.S. Army as the prime system integrator to design, develop and integrate tactical cyber equipment
• Multi-million-dollar order from an international customer for a large commercial space reflector supporting a next-generation satellite, furthering the company's space antenna presence internationally

L3Harris continued to strengthen its position in Avionics and Electronic Warfare with $146 million in orders for F-35 modernization and avionics components as well as a $34 million contract to upgrade electronic warfare systems on international F-16s, leveraging the company's next-generation software-defined open systems architecture to maximize aircraft survivability and mission success.

Communication Systems

Second quarter revenue increased 83% and operating income increased 51% versus prior-year GAAP, primarily due to the post-merger inclusion of L3 operations in results and the factors below regarding pro forma revenue growth. On a pro forma basis, second quarter revenue increased 2.4% versus the prior year as the ramp in U.S. DoD modernization programs in Tactical Communications and Integrated Vision Systems was partially offset by international tactical radio sales timing as well as lower demand, as expected, within Public Safety due to COVID-19. Second quarter operating income and non-GAAP⁷ operating income increased 11%, and non-GAAP operating margin expanded 190bps to 23.9% versus prior-year pro forma from integration benefits and cost management.

Segment funded book-to-bill was 1.03 for the quarter as well as since the merger.

DoD tactical radio modernization order momentum continued in the second quarter, with a $95 million award for the third production order under the U.S. Army's $12.7 billion HMS Manpack IDIQ. The company experienced solid international tactical radio demand in Europe for software-defined radio modernization, counter terrorism operations and anti-jamming networks, including strategic wins with the Ukraine Ministry of Defence for Falcon III HF and multi-band radios.

In Broadband Communications, L3Harris extended its position as a key strategic SATCOM provider for the U.S. Army through a $41 million contract, with significant follow-on opportunity, to provide depot and sustainment services for the Modernization of Enterprise Terminals program. The company also received a $74 million order for ROVER® transceivers, supporting situational awareness and surveillance.

Aviation Systems

The comparison to prior-year GAAP segment operating results is not meaningful because this segment is comprised largely of former L3 businesses. Second quarter revenue decreased 17% versus prior-year pro forma and 7.4% on an organic⁸ basis, driven by COVID-19-related impacts in the commercial aviation business, which was down in-line with expectations, partially offset by classified growth in Defense Aviation Products. Second quarter operating income decreased versus prior-year pro forma due to COVID-19-related impacts and divestiture-related charges. Second quarter non-GAAP⁸ operating income decreased 8% to $100 million versus prior-year pro forma. Second quarter non-GAAP operating margin expanded 120 bps versus prior-year pro forma to 12.5%, as operational efficiencies, integration benefits, cost management and restructuring savings were partially offset by COVID-19-related headwinds.

Segment funded book-to-bill was 1.26 for the quarter and 1.13 since the merger.

Order growth was solid in the second quarter with strength in defense-related businesses. In Defense Aviation Products, the company was awarded $45 million in orders for combat propulsion systems in support of the U.S. Army's ground vehicle recapitalization strategy, increasing the contract value to-date to over $500 million, and a $73 million award for radars supporting the E-2D aircraft. In addition, the company was awarded a $975 million IDIQ to provide real-time responsive airborne ISR solutions to the U.S. Special Operations Command supporting Mid-Endurance Unmanned Aircraft Systems.

L3Harris furthered its position in Military Training with a $900 million single-award IDIQ to develop and manage simulator common architecture requirements and standards across the U.S. Air Force's portfolio.

Cash and Capital Deployment

In the second quarter of fiscal 2020, L3Harris generated $785 million in adjusted free cash flow¹⁰ and returned $184 million to shareholders through dividends.

L3Harris also completed the divestitures of its airport security and automation business and its Applied Kilovolts and Analytical Instrumentation business in the quarter, and expects to complete the divestiture of its EOTech business imminently. Aggregate proceeds from those divestitures total $1,055 million.

Guidance

L3Harris updates 2020 guidance as follows:

• Revenue
  • $18.2 - $18.6 billion, up organically¹¹ 3% - 5% on an adjusted pro forma basis¹² (unchanged from previous guidance)
• Margin and earnings
  • GAAP net income margin of 7.1%+ (decreased from previous guidance of ~8.4%)
  • Adjusted EBIT¹³ margin of 17.5%+ (increased from previous guidance of ~17.5%)
  • GAAP EPS of $6.03 - $6.43 (decreased from previous guidance of $6.95 - $7.35)
  • Non-GAAP EPS¹³ of $11.15 - $11.55 (unchanged from previous guidance)
• Cash flow and capital deployment
  • Operating cash flow and adjusted free cash flow¹⁰ at $2.8 - $2.9 billion and $2.6 - $2.7 billion, respectively (unchanged from previous guidance)
  • ~$1.7 billion in share repurchases, inclusive of proceeds from divestitures announced year-to-date (unchanged from previous guidance)

COVID-19

As communicated in connection with the company's release of financial results for the first quarter of 2020, L3Harris' response to the COVID-19 pandemic and attempts to contain it, such as mandatory closures, "shelter-in-place" orders and travel restrictions, which have caused significant disruptions and adverse effects on the U.S. and global economies, such as impacts to supply chains, customer demand, international trade and capital markets, included an increased focus on keeping its employees safe while continuing to strive to meet customer commitments and support suppliers. For example, L3Harris instituted work-from-home (for employees who are able to work remotely) and social distancing arrangements; canceled travel and external events; implemented procedures for personal protective equipment; initiated health screening procedures at all facilities; staggered work shifts, redesigned work stations and implemented stringent cleaning protocols; maintained an active dialog with key suppliers and developed plans to mitigate supply chain risks; and shifted the timing of share repurchases, which bolstered liquidity in support of employees, suppliers and customers. As part of the company maintaining its increased focus on those areas and seeking to maintain continuity of operations, it has implemented more detailed safety precautions and protocols for on-site work, such as daily health assessments and mandatory face coverings. The company also has allowed certain essential business travel to resume, and it expects to utilize a phased approach based on local conditions for transitioning employees from work-from-home arrangements to on-site work. The U.S. Government response to the COVID-19 pandemic has included identifying the Defense Industrial Base as a Critical Infrastructure Sector and enhancing cash flow and liquidity for the Defense Industrial Base, such as by increasing progress payments and accelerating contract awards. As part of the Defense Industrial Base, these actions have enabled L3Harris to keep its U.S. production facilities largely operational in support of national security commitments to U.S. Government customers and to accelerate more than $230 million in payments to small business suppliers in 47 states.

Although the company continues to believe that the large percentage of its revenue, earnings and cash flow that is derived from sales to the U.S. Government, whether directly or through prime contractors, will be relatively predictable, in part due to the responsive actions taken by the U.S. Government described above, the company's commercial, international and public safety businesses remain at higher risk of adverse impacts related to the COVID-19 pandemic. For example, the severe decline in global air traffic from travel restrictions and the resulting downturn in the commercial aviation market and its impact on customer operations has significantly reduced demand for flight training, flight simulators and commercial avionics products in the company's Aviation Systems segment's Commercial Aviation Solutions sector. As a result, the company temporarily closed some of its flight training facilities, initiated restructuring and other actions to align its resources with the outlook for the commercial aviation market (including workforce reduction and facility consolidation) and also has recognized $69 million and $394 million of charges for impairment of goodwill and other assets and other COVID-19-related impacts in the second quarter and first half of 2020, respectively.

The company's updated 2020 guidance reflects the company's current expectations and assumptions regarding disruptions and other impacts related to the COVID-19 pandemic and associated containment actions, including on the U.S. and global economies. These assumptions continue to include a measured assessment of the downturn in the commercial aerospace business and in demand for public safety solutions, as well as additional potential risks from facility shutdowns, supply chain disruptions and international activity weakness. The company's current expectations and assumptions could change, which could negatively affect the company's outlook. The extent of these disruptions and impacts, including on the company's ability to perform under U.S. Government and other contracts within agreed timeframes and ultimately on its results of operations and cash flows, will depend on future developments, including the severity and duration of the pandemic and associated containment actions taken by the U.S. Government, as well as state, local and international governments, and consequences thereof, and global air traffic demand, all of which are uncertain and unpredictable, and could exacerbate other risks described in the company's filings with the SEC and could materially adversely impact the company's financial condition, results of operations and cash flows.

Conference Call and Webcast

L3Harris will host a conference call today, July 31, 2020, at 8:30 a.m. Eastern Time (ET) to discuss second quarter 2020 financial results. The dial-in numbers for the teleconference are (U.S.) 877-407-6184 and (International) 201-389-0877, and participants will be directed to an operator. Please allow at least 10 minutes before the scheduled start time to connect to the teleconference. Participants are encouraged to listen via live webcast and view management's supporting slide presentation at https://www.l3harris.com/investors. A recording of the call will be available on the L3Harris website beginning at approximately 12 p.m. ET on July 31, 2020.

About L3Harris Technologies

L3Harris Technologies is an agile global aerospace and defense technology innovator, delivering end-to-end solutions that meet customers' mission-critical needs. The company provides advanced defense and commercial technologies across air, land, sea, space and cyber domains. L3Harris has approximately $18 billion in annual revenue and 48,000 employees, with customers in more than 100 countries. L3Harris.com.

Non-GAAP and Pro Forma Financial Measures

This press release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission ("SEC"), including earnings per diluted share from continuing operations for the second quarters and first halves of 2020 and 2019; adjusted earnings before interest and taxes ("EBIT") and adjusted EBIT margin for the second quarters and first halves of 2020 and 2019; adjusted free cash flow for the second quarters and first halves of 2020 and 2019; organic revenue growth for the second quarter of 2020 for the company and the Aviation Systems segment; segment operating income and margin for the second quarter and first half of 2020 for the Communication Systems segment and the Aviation Systems segment; and expected earnings per diluted share from continuing operations, adjusted EBIT margin, adjusted free cash flow and organic revenue growth for 2020; in each case, adjusted for certain costs, charges, expenses, losses or other amounts as set forth in the reconciliations of non-GAAP financial measures included in the financial statement tables accompanying this press release. A "non-GAAP financial measure" is generally defined as a numerical measure of a company's historical or future performance that excludes or includes amounts, or is subject to adjustments, so as to be different from the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles ("GAAP"). L3Harris management believes that these non-GAAP financial measures, when considered together with the GAAP financial measures, provide information that is useful to investors in understanding period-over-period operating results separate and apart from items that may, or could, have a disproportionately positive or negative impact on results in any particular period. L3Harris management also believes that these non-GAAP financial measures enhance the ability of investors to analyze L3Harris business trends and to understand L3Harris performance. In addition, L3Harris may utilize non-GAAP financial measures as guides in forecasting, budgeting and long-term planning processes and to measure operating performance for some management compensation purposes. Non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial measures presented in accordance with GAAP.

This press release also contains pro forma financial measures for the prior year which are reflected in the pro forma condensed combined income statement information (prepared in a manner consistent with Article 11 of Regulation S-X) included in the company's Current Report on Form 8-K filed with the SEC on May 4, 2020. Adjusted pro forma financial measures are included among the non-GAAP financial measures described in the preceding paragraph and refer to the applicable prior-year pro forma financial measure as adjusted for certain costs, charges, expenses, losses or other amounts as set forth in the reconciliations of non-GAAP financial measures included in the financial statement tables accompanying this press release.

Attachments: Financial statements (9 tables)

Forward-Looking Statements

Statements in this press release that are not historical facts are forward-looking statements that reflect management's current expectations, assumptions and estimates of future performance and economic conditions. Such statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this press release include but are not limited to: revenue, earnings per share, operating cash flow, adjusted free cash flow, net income, adjusted EBIT margin and share repurchase guidance for 2020; statements regarding workforce safety, confidence in our outlook and being well-positioned over the medium term; statements regarding the timing of the expected divestiture of the EOTech business and proceeds attributable thereto; statements regarding expected, potential or contingent impacts or actual, potential or contingent plans related to the COVID-19 pandemic; potential program and contract opportunities and awards and the potential value and timing thereof; and other statements regarding outlook or that are not historical facts. The company cautions investors that any forward-looking statements are subject to risks and uncertainties that may cause actual results and future trends to differ materially from those matters expressed in or implied by such forward-looking statements. The company's consolidated results, future trends and forward-looking statements could be affected by many factors, risks and uncertainties, including but not limited to: actual impacts related to the COVID-19 pandemic; risks related to disruption of management time from ongoing business operations due to the combination of L3 and Harris; risks related to the inability to realize benefits or to implement integration plans and other consequences associated with the combination; the risk that any announcements relating to the combination could have adverse effects on the market price of the company's stock; the risk that the combination could have an adverse effect on the company's ability to retain customers and retain and hire key personnel and maintain relationships with suppliers and customers, including the U.S. Government and other governments, and on its operating results and businesses generally; the loss of the company's relationship with the U.S. Government or a change or reduction in U.S. Government funding; potential changes in U.S. Government or customer priorities and requirements (including potential deferrals of awards, terminations, reductions of expenditures, changes to respond to the priorities of Congress and the Administration, budgetary constraints, debt ceiling implications, sequestration, and cost-cutting initiatives); a security breach, through cyber attack or otherwise, or other significant disruptions of the company's IT networks and systems or those the company operates for customers; the level of returns on defined benefit plan assets and changes in interest rates; risks inherent with large long-term fixed-price contracts, particularly the ability to contain cost overruns; changes in estimates used in accounting for the company's programs; financial and government and regulatory risks relating to international sales and operations; effects of any non-compliance with laws; the company's ability to continue to develop new products that achieve market acceptance; the consequences of uncertain economic conditions and future geo-political events; strategic transactions, including mergers, acquisitions, divestitures, spin-offs and the risks and uncertainties related thereto, including the company's ability to manage and integrate acquired businesses and realize expected benefits, the potential disruption to relationships with employees, suppliers and customers, including the U.S. Government, and to the company's business generally, and potential tax, indemnification and other liabilities and exposures; performance of the company's subcontractors and suppliers; potential claims related to infringement of intellectual property rights or environmental remediation or other contingencies, litigation and legal matters and the ultimate outcome thereof; downturns in global demand for air travel and other economic factors impacting our commercial aviation products, systems and services business; risks inherent in developing new and complex technologies and/or that may not be covered adequately by insurance or indemnity; changes in the company's effective tax rate; significant indebtedness and unfunded pension liability and potential downgrades in the company's credit ratings; unforeseen environmental matters; natural disasters or other disruptions affecting the company's operations; changes in future business or other market conditions that could cause business investments and/or recorded goodwill or other long-term assets to become impaired and the company's ability to attract and retain key employees, maintain reasonable relationships with unionized employees and manage escalating costs of providing employee health care. Further information relating to these and other factors that may impact the company's results, future trends and forward-looking statements are disclosed in the company's filings with the SEC. The forward-looking statements contained in this press release are made as of the date of this press release, and the company disclaims any intention or obligation, other than imposed by law, to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Persons reading this press release are cautioned not to place undue reliance on forward-looking statements.