L3Harris results mix pessimism and optimism

Approximately three-fourths of L3Harris Technologies’ revenue comes from U.S. government agencies and is less exposed to effects from the coronavirus pandemic given the defense industry’s status as an essential sector that must keep running.

Commercial aerospace and state and local governments by comparison present a completely different dynamic for L3Harris and other government contractors with exposure in those markets that are much more dependent on overall economic trends.

In L3Harris’ first quarter financial release and earnings call with investors Tuesday, the company reset its forecast for organic revenue growth (excluding divested sales) of 3-to-5 percent for this year versus the prior range of 5-to-7 percent.

Nearly two-thirds of that cut is because of the dimmer commercial aerospace environment and related global air travel slump, which also led L3Harris to recognize a $330 million charge against its earnings. Airlines, airplane makers, subsystem providers and others in the supply chain are all feeling the effect of declines in travel and can do very little about it.

State and local government presents just as murky a picture to L3Harris for its public safety business, which posted $500 million in revenue last year. Chief Financial Officer Jay Malave told analysts the expectation now is at least a 10-percent decline versus prior forecasts of low single-digit growth.

“Beyond 2020, it depends on what happens to the economy (and) state and local tax revenues,” Brown said. “Right now we're fighting not just a revenue impact, but just the fact that you have the states and localities dealing with COVID and not able to work.”

A shift in the platforms public safety agencies use could change because of the pandemic, according to Brown. He said the situation could “drive an accelerated shift from (land mobile radio) to LTE that’s been gaining some steam” with the nationwide FirstNet broadband network for first responders.

In contrast, L3Harris expects revenue growth in the high single digits this year from its U.S. government business that includes the core defense portfolio and revenue synergy pursuits the company sees as being better positioned for after the June 2019 merger to create it.

Brown told investors the company has submitted 41 revenue synergy proposals and been “downselected on half of the 16 proposals awarded with orders booked in the tens of millions and a lifetime revenue potential of over $2 billion.”

Procurements and increased progress payments from the Defense Department appear to be on track as well, according to Brown. L3Harris for its part is accelerating $100 million to its small business partners to help them get through the pandemic and any related disruptions to cash flow.

"We did see some opportunities moving left and I think that we'll continue to see that," Brown said. "DOD is really focused on this. They are trying to put money on contract that we then quickly then put suppliers on contracts."

L3Harris' integration work also includes a portfolio review and opting to divest some businesses, most notably the security product business that Leidos closed its $1 billion purchase of on Monday.

Brown said L3Harris continues to target total divestitures of 8-to-10 percent of last year’s revenue, including the deal with Leidos and two other sales previously announced. Those three represent about 3 percent of 2019 sales.

He acknowledged that “the timing is now more fluid” regarding more divestitures and what was sized up for sales in February “was pre-COVID,’ but the company is still in active discussions with others.