L3Harris Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 29, 2024, compared with March 31, 2023. The request metadata identifies “2023 Q1,” but the filing is for the first quarter of fiscal 2024. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
L3Harris provides defense, aerospace, intelligence, communications, space and related technology products and services. Reportable segments are Space & Airborne Systems (SAS), Integrated Mission Systems (IMS), Communication Systems (CS) and Aerojet Rocketdyne (AR), which was added following the July 2023 acquisition of Aerojet Rocketdyne Holdings, Inc. (AJRD). U.S. Government customers, including foreign military sales funded through the U.S. Government, represented 77% of quarterly revenue.
Ending backlog was $32.1 billion; approximately 50% is expected to convert to revenue within twelve months and an additional 25% during the following twelve months.
Financial Performance and Liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $5.211 billion | $4.471 billion | Up 17% |
| Gross margin | 26% | 26% | Flat |
| Operating income | $378 million | $393 million | Down 4% |
| Operating margin | 7.3% | 8.8% | Down 1.5 percentage points |
| Net income attributable to L3Harris | $283 million | $337 million | Down 16% |
| Diluted EPS | $1.48 | $1.76 | Down 16% |
| Effective tax rate | 1.7% | 9.1% | Lower |
| Net cash from operating activities | $(104) million | $350 million | Down $454 million |
Revenue growth primarily reflected $542 million from AJRD, along with increases in CS and SAS revenue of $131 million and $96 million, respectively. IMS revenue declined $31 million. Gross margin dollars increased to $1.348 billion from $1.166 billion, but higher general and administrative expenses reduced operating income.
- SAS: Revenue of $1.751 billion, up 6%; operating income of $216 million, up 16%; margin of 12.3%.
- IMS: Revenue of $1.669 billion, down 2%; operating income of $190 million, up 3%; margin of 11.4%.
- CS: Revenue of $1.294 billion, up 11%; operating income of $310 million, up 17%; margin of 24.0%.
- AR: Revenue of $542 million and operating income of $72 million; no comparable prior-year segment exists.
Cash and cash equivalents ended at $477 million, down from $560 million at December 29, 2023. Operating cash flow was negative because of working-capital usage, including a $340 million increase in contract assets and a $152 million decrease in contract liabilities. Capital expenditures were $115 million.
Total debt included $2.203 billion of short-term debt, $365 million of current long-term debt and $11.140 billion of non-current long-term debt. Net long-term debt, including the current portion and financing lease obligations, was approximately $11.5 billion. Commercial paper outstanding increased to $2.2 billion from $1.6 billion, with a weighted-average rate of 5.83%.
In March 2024, the company issued $2.25 billion of fixed-rate notes bearing rates from 5.05% to 5.35% and used the proceeds to repay its $2.25 billion term loan, which carried a 6.7% variable rate. The company had no borrowings under its $1.5 billion 2024 revolving facility or $2.0 billion 2022 revolving facility and reported $1.3 billion of available borrowing capacity net of commercial paper borrowings.
Material Changes and Unusual Items
- AJRD contributed $542 million of revenue and $72 million of operating income in the quarter. Its purchase accounting remains preliminary, and future measurement-period adjustments could be material.
- General and administrative expense increased to $970 million from $773 million. LHX NeXt transformation costs were $127 million, including $64 million of employee severance charges and $63 million of consulting, information-technology and other implementation costs.
- Acquisition-related intangible amortization increased to $197 million from $142 million. Total identifiable intangible assets were $8.340 billion at quarter-end.
- Interest expense increased to $176 million from $102 million, primarily due to AJRD-related debt and higher commercial paper balances.
- Net estimate-at-completion adjustments contributed $15 million after tax, or $0.08 per diluted share, compared with a $42 million after-tax charge, or $0.22 per share, in the prior-year quarter.
- The effective tax rate benefited from resolutions of audit uncertainties, AJRD-related research and development credits, excess tax benefits from equity compensation and foreign-derived intangible income deductions.
- The company repurchased $233 million of common stock, or approximately 1.1 million shares, and paid $224 million of dividends. The quarterly dividend was increased from $1.14 to $1.16 per share.
- The pending sale of the Commercial Aviation Solutions Disposal Group is expected to close in fiscal 2024. Assets held for sale were $1.136 billion and related liabilities were $245 million at March 29, 2024.
- On April 5, 2024, the company agreed to sell its antenna and related businesses for $200 million, subject to customary conditions and regulatory approvals.
Outlook, Risks and Contingencies
Management expects sufficient liquidity for the next twelve months and the foreseeable future based on cash, operating cash generation, credit facilities, commercial paper capacity and capital-market access. Fiscal 2024 property, plant and equipment additions are expected to be approximately 2% of revenue. Management expects commercial paper balances to remain elevated compared with historical levels through fiscal 2025.
Management identified risks from U.S. Government budget levels and priorities, continuing resolutions, geopolitical developments, inflation and interest rates, fixed-price contract performance, supply-chain disruptions, cybersecurity, international operations, AJRD integration and hazardous materials, execution of LHX NeXt, leverage and refinancing needs, pension performance, taxes, litigation, environmental obligations and potential impairment of goodwill or intangible assets.
Environmental liabilities were estimated at $614 million, with $433 million of recoverable costs. The Sacramento, California remediation obligation was estimated at $268 million to $403 million, with $268 million accrued. Probable litigation accruals were not material, and management did not expect existing litigation to have a material adverse effect based on available information.
Important Facts for Investors to Verify
- Whether negative operating cash flow and elevated contract assets normalize as billing milestones and customer payments occur.
- The sustainability of earnings after separating AJRD contributions, purchase-accounting amortization, LHX NeXt costs and favorable tax items.
- AJRD integration progress, final purchase-price accounting, forward-loss provisions and potential contract performance adjustments.
- Commercial paper refinancing exposure, interest-rate sensitivity and maturities of approximately $11.5 billion of long-term debt.
- Execution and closing terms for the Commercial Aviation Solutions and antenna-business divestitures.
- Environmental remediation costs, particularly the Sacramento site, and the recoverability of related government or third-party reimbursements.
- Conversion of the $32.1 billion backlog into revenue and cash, including the mix of fixed-price contracts and associated cost-overrun risk.