L3Harris Technologies’ turn toward simulation and training serving commercial air travel is coming back to haunt it as the company now forecasts lower organic revenue and earnings per shares (EPS) for 2020 due to a COVID-19 falloff.
Revenue from the company’s Aviation Systems business, including simulation and training of commercial pilots, is now expected to drop 40% to $500 million this year. “Effectively, what we’ve done is [forecast] that we won’t sell any new full simulators beyond the first quarter,” executive chairman and CEO Bill Brown said May 5. “So, we sort of zero that out.”
Brown told financial analysts in a quarterly earnings call that his company completed a thorough, bottoms-up analysis over the last 4-6 weeks, talking with airlines and OEMs. Beyond sim and training, L3 Harris’ avionics work is expected to fall 30% this year, less than the others due to robust military work.
“We’re watching it very, very carefully, watching order intake rates, and we think, based on what we see today, we’ve sized it appropriately,” Brown said. “But it’s a very, very volatile environment, and we’re watching it very closely.”
Organic revenue growth, i.e. without acquiring other businesses, is seen falling to a range of 3-5% now versus 5-7% before. EPS is forecast at $11.15-11.55 compared with $11.35-11.75. However, predicted free cash flow—the important funds used to provide shareholder returns—remains unchanged at $2.6-2.7 billion.
That stems in part from cost-cutting elsewhere, such as laying off more L3Harris workers. “We’ve taken the actions in commercial aviation to reduce the cost with the operating expense maybe down $20 million for the remainder of the year,” said COO Chris Kubasik. “We’ve been pretty aggressive with reductions in force and furloughs.” On May 4, the company also formally transferred 1,200 workers to Leidos as part of a sale of its Security and Automation businesses.
For 2020, Brown and Kubasik are targeting $165 million in net cost savings to help reach a $300 million total net goal one year earlier. The $300 million was promised as part of their merger in 2019 of L3 Technologies and Harris Corp., and originally eyed by fiscal 2022. The gross amount is $500 million but about $200 million would have to be shared with government customers under certain contracts. Ultimately, Brown expects even more savings after squeezing out costs from the supply chain.
Meanwhile, L3Harris expects to spend roughly $1.7 billion on share repurchases this year, including proceeds from divestitures announced already and a $700 million share repurchase during the first quarter.
While the company’s commercial portfolio—including aerospace and radios for public safety authorities—is expected to drop 20% this year, military work remains robust. “The core defense part of the organization is very healthy, it’s high single digits,” according to Brown. “We see a very good pipeline, about $64 billion of ... opportunities.” That is up about 8% since they closed the merger last July.
For the first quarter of 2020 ended March 31, L3Harris reported revenue of $4.6 billion, up 168% and 5% versus prior-year GAAP and pro forma comparisons, respectively. EPS was $0.99, down 51% versus prior-year GAAP and down 43% versus prior-year pro forma.
“No-one in A&D is immune to the negative impact of coronavirus, though the net impact on L3Harris in 2020 is expected to be relatively muted,” said analysts at Vertical Research Partners.
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