L3Harris Q2 FY12/24 Earnings Review

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Now For The De-Leverage

by Alex King, CEO, Cestrian Capital Research, Inc.

L3Harris ($LHX) is a defense and space sector contractor whose chosen method in life is to acquire their way into sectors they deem attractive, and dispose of business units they deem unattractive. This means that it's almost impossible to get a clean read on the financials as an outsider. For any company engaged in serial M&A, what you really need to do is to model the "pro forma" numbers, which means to be able to recreate the business as it looks today and project that back in time over a few quarters and a few years, to look at how the business as it is today has performed. Of course that is also just a proxy measure, because the units were run by different management teams and different capital allocation rules in the past vs. today, but you get the point. For me then, what I look at with an M&A machine like $LHX is:

• Overall direction of revenue, TTM EBITDA, TTM UFCF (should be up obviously)
• Net debt and net leverage numbers - specifically you want to see the net leverage number coming down over time as acquisition debt is redeemed or at least eclipsed by a growing cash pile.
• The share count not get out of hand (if it is, it means the acquisitions are likely being paid for with stock - doesn't show up in net leverage but is dilutive to shareholders).

So, let's get to work on LHX Q2.

Here's the headline numbers. Below, for our paying subscribers here of all tiers, we dive into more detail on numbers, charts, price targets and stop levels.