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.
