Ross Wilkers

COMPANY OUTLOOK

Booz Allen, L3Harris see opportunities ahead but plenty of challenges too

Two more publicly-traded government contractors reported their latest quarterly financial results to investors Friday with a blend of pessimism/realism and optimism, along with details of headwinds now and an expectation of tailwinds to come.

Here are snapshots of what both companies said.

Booz Allen Hamilton

None of the three unknowns Booz Allen previously laid out as factors to shape its current fiscal year are unique: the November election, status and outlook for the federal budget, and the coronavirus pandemic.

All of that at least partially showed up in Booz Allen’s fiscal third quarter results. Revenue climbed 3 percent to $1.9 billion at a rate slower than the firm expected and compared to past years.

One illustration of the slowdown is seen in the quarterly book-to-bill ratio of 0.3, or awards being booked versus billings to the customer that mean sales.

In a conference call with analysts, both CEO Horacio Rozanski and Chief Financial Officer Lloyd Howell highlighted anticipated slowdowns in award activity following the election and during the transition to a new administration. Procurement delays at intelligence agencies due to COVID-19 also are continuing.

The pandemic also causes challenges to productivity as is the case with all companies. But Howell conceded that Booz Allen “did not correctly anticipate the timing and magnitude of the top line impact of those dynamics.”

Booz Allen has thus reduced its full-year revenue growth forecast to between 4.8 percent and 6 percent, down from the prior 7-to-9 percent range. The bottom line outlook looks brighter at mid-to-high 10 percent adjusted EBITDA margin (earnings before interest, taxes, depreciation and amortization).

One factor Booz Allen believes it has more control over is on the headcount front, which is key to the firm’s continued growth. Howell said the firm will ramp up its recruiting efforts over the next six months after a third quarter that saw headcount growth slow.

The firm also is staying focused on the long game.

“We are thinking in general that budgets are not going to grow as fast in the next few years as they grew in the last few years, and so this is why we continue to invest and double down on these key technologies and capabilities: cloud, cyber, AI, 5G,” Rozanski said. “We believe that demand for those types of services will remain strong and in fact accelerate even as the overall budget gets potentially more constrained than it's been in the past.”

Total backlog grew 6.1 percent in the quarter to $23.3 billion and the trailing 12-month book-to-bill ratio stands at 1.2 times -- all signs pointing to future growth.

L3Harris Technologies

Including managing through COVID-19, last year had two big themes for L3Harris: putting its two big pieces together and finding new owners for non-core businesses.

During L3Harris’ fourth quarter earnings call, CEO Bill Brown said the company realized $270 million in net cumulative synergy savings to exceed its prior estimate of $20 million.

L3Harris now sees cumulative synergies hitting between $320 million and $350 million this year, up from the $300 million it expected.

Revenue synergies take more time to realize and are “still at the front end of the build,” Brown said. But L3Harris has won two-thirds of the 40 possible proposals awarded so far under that category.

“There's 70 that are submitted so another 30 to be awarded or not. There's more that are happening in the future. So we hope to continue to build on that,” Brown added.

On the divestiture front, L3Harris still sees those totaling between 8 and 10 percent of revenue with roughly one-third of that done so far including the sale of a security product business to Leidos.

L3Harris’ most significant headwind is the commercial aerospace slump due to COVID-19. That weighed on its revenue outlook for this year at $18.5 billion-to-$18.9 billion, which implies organic growth of 3-to-5 percent. Wall Street had expected a $19.2 billion sales forecast out of L3Harris.

Organic revenue was flat in the fourth quarter, but climbed 2.9 percent for all of last year to $18.2 billion with the U.S. government business up 6.8 percent.

A flat-to-declining budget environment and speculation over which Defense Department components would be bill payers in the future. Early speculation points to the Army but that is not something the company sounds worried about.

That scenario of a shift to the Navy and Air Force “is actually favorable to us,” Brown said.

“We think we can manage through those shifts happening right now between the services,” Brown said. “In 2021, we do think we can build the backlog because we'll see book-to-bill more than one.”

Funded book-to-bill stood at 1.04 at the end of 2020 with a $22 billion backlog.

One certainty for L3Harris is the transition of the CEO role in the summer to Chris Kubasik from Bill Brown, who will remain as executive chairman for one more year afterward. Brown reminded analysts that change has “a date and a time because it’s written in the merger agreement.”

For his part, Kubasik conceded “a lot of people ask if the strategy is going to change when you change the leader.”

But “that’s not the case” here, Kubasik added.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also connect with him on LinkedIn.

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