L3Harris Reports First Quarter 2020 Results and Updates Outlook

• 1Q20 revenue $4.6 billion; up 168% and 5% versus prior-year GAAP and pro forma¹, respectively; funded book-to-bill of 1.11
• 1Q20 GAAP earnings per share from continuing operations (EPS) of $0.99, down 51% versus prior-year GAAP and down 43% versus prior-year pro forma
• 1Q20 non-GAAP² EPS of $2.80, up 21% versus prior-year adjusted pro forma
• 1Q20 operating cash flow of $533 million; adjusted free cash flow³ of $533 million
• Adjusted 2020 outlook to reflect pandemic-related risks primarily in commercial aerospace
• Completed divestiture of airport security and automation business on May 4, 2020, for $1 billion

L3Harris Technologies, Inc. (NYSE:LHX) reported first quarter 2020 revenue of $4.6 billion, up 168% and 5% versus prior-year GAAP and pro forma¹, respectively. GAAP EPS was $0.99, down 51% versus prior-year GAAP and down 43% versus prior-year pro forma. Non-GAAP EPS² was $2.80, up 21% versus prior-year adjusted pro forma. Net income was $194 million, down 20% and 52% versus prior-year GAAP and pro forma, respectively. Adjusted earnings before interest and taxes (EBIT)² was $808 million, up 17% versus prior-year adjusted pro forma, and margin increased 170 basis points (bps) to 17.5%.

"In these unprecedented times, we have remained focused on protecting the health and safety of our employees while meeting the mission-essential requirements of our customers. We are also focused on supporting our suppliers and the communities where we live and work,” said William M. Brown, Chairman and Chief Executive Officer. “And though we’re off to a solid start to the year, we are taking a more measured approach to guidance as a result of the uncertain environment caused by the pandemic. Our liquidity and ability to drive cash generation remain strong, and we continue to execute well against our strategic priorities, including merger integration and investing for the future."

Summary Financial Results

Revenue for the first quarter increased 168% versus prior-year GAAP due to the post-merger inclusion of L3 operations in operating results and increased 5% versus prior-year pro forma from growth across the businesses. GAAP EPS decreased 51% versus prior-year GAAP primarily due to an impairment of goodwill and other assets and other COVID-19 related charges, amortization of merger intangibles and a less favorable program mix, partially offset by productivity and integration savings. GAAP EPS decreased 43% versus prior-year pro forma, driven by the costs and charges noted above, partially offset by higher volume, strong operational performance and integration savings. Non-GAAP EPS⁴ increased 21% versus prior-year adjusted pro forma, driven by the favorable factors noted in the prior sentence. Net income margin decreased 990 bps and 490 bps versus prior-year GAAP and pro forma, respectively. Adjusted EBIT⁴ margin increased 170 bps to 17.5%.

Segment Results

Integrated Mission Systems

n/m:  Not meaningful

The comparison to prior-year GAAP segment operating results is not meaningful because this segment is almost entirely comprised of former L3 businesses. On a pro forma basis, revenue was up 1% as growth in Maritime was mostly offset by prior-year strength in Electro Optical, and ISR was relatively steady. Operating income increased 22% to $201 million, and margin expanded 260 bps versus prior-year pro forma to 14.7%, driven by operational excellence and integration benefits.

ISR order momentum continued with over $800 million in orders across the Big Safari fleet, including $268 million for aircraft modification, training and sustainment for the Rivet Joint reconnaissance aircraft, strengthening the company's position as partner of choice for aircraft missionization with the U.S. Air Force.

Domestic and international demand for L3Harris electro-optical systems remained strong as continued funding support for the U.S. Army's Shadow UAV program led to a $35 million order for WESCAM sensor suites, bringing funding-to-date to $78 million against a $454 million sole-source IDIQ. Additionally, the company reinforced its incumbency with international customers, receiving $76 million in orders for electro-optical systems from several NATO allies and Middle East customers.

In addition, the company extended its long-standing position as Canada's premier in-service support integrator, and received over $100 million in awards from the Canadian Department of National Defence for fleet maintenance and sustainment solutions in support of CF-18 and CP-140 aircraft.

In Maritime, the company leveraged its expertise in power systems and was awarded contracts for $124 million and $75 million on the Virginia class and Columbia class submarines, respectively.

This order momentum resulted in a segment funded book-to-bill of 1.37 for the quarter and 1.09 since the merger.

Space and Airborne Systems

Revenue increased 25% and operating income increased 27% versus prior-year GAAP, primarily due to the post-merger inclusion of L3 operations in results. On a pro forma basis, revenue increased 7% versus the prior year from a ramp in modernization on the F-35 platform in Avionics and classified growth in Intel and Cyber. Operating income increased 12% to $221 million, and margin expanded 70 bps versus prior-year pro forma to 18.5%, from operational excellence and integration benefits.

In Space, the company leveraged its technical expertise and on-going customer relationships to secure a ten-year, $1.2 billion, competitive award as the prime mission integrator for our nation’s space domain awareness program, MOSSAIC. This award, if fully exercised, has the potential to reach $2 billion and continues our 17-year collaboration with the U.S. Space and Missile Systems Center.

L3Harris continued to strengthen its position in Avionics and Electronic Warfare with $269 million in orders for F-35 modernization and avionics components, including a $52 million award for advanced data links under the first Lot 15 order. In addition, the company was awarded a sole-source IDIQ for up to $493 million from the U.S. Special Operations Command for electronic warfare systems.

This order momentum resulted in a segment funded book-to-bill of 1.16 for the quarter and 0.98 since the merger.

Communication Systems

Revenue increased 89% and operating income increased 50% versus prior-year GAAP, primarily due to the post-merger inclusion of L3 operations in results. On a pro forma basis, revenue increased 5% versus the prior year as the ramp in U.S. DoD modernization programs in Tactical Communications was partially offset by timing of sales for international tactical radios and prior-year strength in Public Safety. Operating income increased 11% to $250 million, and margin expanded 120 bps versus prior-year pro forma to 22.9%, from operational efficiencies and integration benefits, partially offset by less favorable mix.

Tactical Communications received several key awards that support U.S. DoD modernization, strengthening its position in airborne and solidifying its international presence:

• $383 million sole-source IDIQ from the U.S. Marine Corps for next-generation HF radio systems, with an initial task order of $89 million
• $42 million from the U.S. Army for next-generation HF radio systems as part of a multi-year modernization effort
• $28 million from the U.S. Army to provide Single-Channel Ground and Airborne Radio Systems (SINCGARS)
• $86 million for Falcon III® products from countries in Eastern Europe and the Middle East, supporting the company's installed base and furthering its international leadership

Key awards in Broadband Communications include a $500 million IDIQ, with an initial order of $31 million, to provide tactical waveform modems for resilient and secure communications in support of the U.S. Air Force and Army.

Segment funded book-to-bill was 0.80 for the quarter and 1.03 since the merger.

Aviation Systems

n/m:  Not meaningful

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, revenue increased 11% versus the prior year, driven by Defense Aviation Products and Mission Networks, with more muted growth in the commercial aerospace and pilot training businesses due to the effects of the pandemic. Operating income decreased versus prior-year pro forma due to an impairment of goodwill and other assets and other COVID-19-related charges. Non-GAAP operating income increased 40% to $147 million, and margin expanded 300 bps versus prior-year pro forma to 14.5%, from operational efficiencies and integration benefits.

In Defense Aviation Products, L3Harris received multiple awards leveraging investments in precision weapons and unmanned systems capabilities. The company received a $41 million prime contract for the development, integration and testing of an advanced unmanned aircraft system as well as a $24 million contract on the Advanced Low-cost Munitions Ordnance (ALaMO) program for the first low-rate initial production order. Additionally, the company was awarded $59 million in orders for combat propulsion systems in support of the U.S. Army's ground vehicle recapitalization strategy.

This order momentum resulted in a segment funded book-to-bill of 1.05 for the quarter and 1.09 since the merger.

Cash and Capital Deployment

In the first quarter of fiscal 2020, L3Harris generated $533 million in adjusted free cash flow⁶ and returned $883 million to shareholders through $700 million in share repurchases and $183 million in dividends.

Guidance
L3Harris updated its guidance for 2020 to the following to reflect current expectations and assumptions regarding COVID-19-related risks:

• Revenue in a range of $18.3 billion - $18.6 billion, up organically 3% - 5% on an adjusted pro forma basis⁷ (reduced from previous range of up 5% - 7%); primarily reflects downturn in commercial aerospace business, as well as some weakness in international and public safety demand and risks from supply chain disruptions
• GAAP net income margin of 8.2% - 8.5% and adjusted EBIT margin of 17.4% - 17.6% (expanded at upper end of previous range of 17.0% - 17.5%)
• GAAP EPS of $6.95 - $7.35 and non-GAAP EPS⁸ of $11.15 - $11.55 (reduced from previous guidance of $8.35 - $8.75 GAAP and $11.35 - $11.75 non-GAAP)
• Operating cash flow and adjusted free cash flow⁶ unchanged at $2.8 - $2.9 billion and $2.6 - $2.7 billion, respectively
• ~$1.7 billion in share repurchases, inclusive of proceeds from divestitures announced year-to-date

COVID-19
In March 2020, the widespread outbreak of coronavirus disease (“COVID-19”) was recognized as a pandemic by the World Health Organization (“WHO”) and declared a national emergency by the U.S. Government. The COVID-19 pandemic and attempts to contain it, such as mandatory closures, “shelter-in-place” orders and travel restrictions, have caused significant disruptions and adverse effects on the U.S. and global economies, including impacts to supply chains, customer demand, international trade and capital markets. In response, L3Harris has increased its focus on keeping its employees safe while continuing to strive to meet customer commitments and support suppliers. For example, L3Harris has instituted work-from-home (for employees who are able to work remotely) and social distancing arrangements; canceled travel and external events; initiated health screening procedures at higher-risk facilities; staggered work shifts, redesigned work stations and implemented stringent cleaning protocols, particularly for production facilities; maintained an active dialog with key suppliers and developed plans to mitigate supply chain risks; and shifted the timing of share repurchases, which bolsters liquidity in support of employees, suppliers and customers during the pandemic. The U.S. Government response 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 announce that it will accelerate more than $100 million in payments to small business suppliers in 45 states.

Although the company believes 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 and international businesses are 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 has temporarily closed some of its flight training facilities in Europe and several other locations and also has recognized in the first quarter 2020 $330 million of charges for impairment of goodwill and other assets and other COVID-19-related impacts.

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 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, 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.