L3Harris Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2023. The request metadata identifies “2022 Q1,” but the supplied filing is the first quarter of fiscal 2023 and compares results with the quarter ended April 1, 2022. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
L3Harris is an aerospace and defense technology company serving government and commercial customers in more than 100 countries. Its reportable segments are Integrated Mission Systems (IMS), Space and Airborne Systems (SAS), and Communication Systems (CS). U.S. Government customers, including foreign military sales funded through the U.S. Government, represented 77% of quarterly revenue.
Effective fiscal 2023, the Agile Development Group was transferred from IMS to SAS for segment reporting purposes. L3Harris also completed the acquisition of Viasat’s Tactical Data Link (TDL) product line on January 3, 2023; TDL is reported within CS.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $4.471 billion | $4.103 billion | Up 9% |
| Gross margin | 26% | 30% | Down 4 percentage points |
| Income before taxes | $373 million | $536 million | Down 30% |
| Net income attributable to L3Harris | $337 million | $475 million | Down 29% |
| Diluted EPS | $1.76 | $2.44 | Down 28% |
| Effective tax rate | 9.1% | 11.3% | Lower |
| Operating cash flow | $350 million | $39 million | Up $311 million |
- Segment revenue: IMS $1.700 billion, up 2%; SAS $1.655 billion, up 9%; and CS $1.163 billion, up 21%.
- Segment operating income: IMS $185 million, down 26%; SAS $187 million, up 6%; and CS $266 million, up 16%.
- Segment margins: IMS 11% versus 15%; SAS 11% versus 12%; and CS 23% versus 24%.
- Revenue growth reflected higher volumes across all segments, including TDL-related growth in CS, new program ramps in SAS, and higher ISR and commercial aviation activity in IMS.
- Gross margin declined primarily because of unfavorable estimate-at-completion adjustments and a higher mix of lower-margin revenue.
- Net EAC adjustments reduced pretax earnings by $56 million in Q1 2023, compared with a $46 million benefit in Q1 2022. An additional $18 million customer-contract impairment was recorded.
Cash Flow, Balance Sheet, Debt and Liquidity
| Metric | March 31, 2023 | December 30, 2022 |
|---|---|---|
| Cash and equivalents | $545 million | $880 million |
| Total assets | $35.507 billion | $33.524 billion |
| Total debt, net | $9.031 billion | $7.043 billion |
| Shareholders’ equity | $18.306 billion | $18.523 billion |
- Investing cash outflow was $2.048 billion, including $1.973 billion paid for the TDL acquisition.
- Financing cash inflow was $1.361 billion, including $2.25 billion of Term Loan 2025 borrowings, partly offset by $396 million of share repurchases and $220 million of dividends.
- Term Loan 2025 totaled $2.25 billion at quarter-end and carried an interest rate of approximately 6.2%, or 6.1% after the interest-rate cap derivative.
- L3Harris had no borrowings under its $2.4 billion 2023 revolving facility, no borrowings under its $2 billion 2022 revolving facility, and no commercial paper outstanding at quarter-end. Management reported compliance with applicable covenants.
- Management stated that existing cash, operating cash flow, credit facilities, commercial paper capacity, and market access are expected to support liquidity needs for the next 12 months and the reasonably foreseeable future, while noting the risks associated with leverage and market conditions.
- Backlog increased to $24.5 billion from $22.3 billion at December 30, 2022. Approximately 45% was expected to convert to revenue by the end of 2023 and 70% by the end of 2024.
Material Changes, Outlook and Unusual Items
- TDL acquisition: Purchase consideration was approximately $1.974 billion, including $1.014 billion of preliminary goodwill and $850 million of identifiable intangible assets. TDL contributed $81 million of revenue and $26 million of pretax income from acquisition through quarter-end. L3Harris recorded $31 million of transaction and integration costs.
- AJRD acquisition: L3Harris agreed to acquire Aerojet Rocketdyne Holdings for approximately $4.7 billion in cash. The transaction remained pending at quarter-end. The FTC issued a Second Request on March 15, 2023, extending the regulatory review period. Management expected closing in fiscal 2023, but closing was not assured.
- VIS divestiture: The Visual Information Solutions business was classified as held for sale at quarter-end and was sold on April 6, 2023 for $70 million in cash, subject to customary adjustments.
- Cost pressures: Inflation increased input costs, while higher interest rates increased borrowing costs. Fixed-price contracts expose the company to potential losses from cost overruns and sustained inflation.
- Capital allocation: The quarterly dividend increased from $1.12 to $1.14 per share, or $4.56 annualized. L3Harris repurchased $396 million of stock during the quarter and stated that repurchases would be moderated in the near term. Fiscal 2023 capital expenditures were expected to be approximately $275 million.
- Government environment: Management cited U.S. defense spending, Ukraine-related geopolitical effects, tensions in Asia and the Middle East, and potential federal budget and debt-ceiling disruptions as factors that could affect demand and contract funding.
- Contingencies: Accrued probable legal claims were not material. Environmental matters and other litigation could still result in unfavorable outcomes exceeding recorded accruals, although management did not expect existing matters to have a material adverse effect based on available information.
Most Important Facts to Verify
- Confirm the applicable period: the filing is Q1 fiscal 2023, not Q1 2022.
- Assess whether the decline in gross margin and the $56 million unfavorable EAC adjustments are temporary or indicate broader contract execution pressure.
- Review leverage, variable-rate exposure, debt maturities, and funding requirements for the pending AJRD acquisition.
- Verify FTC review status and the eventual closing terms and financing of the AJRD transaction.
- Evaluate the integration progress and final purchase-accounting adjustments for TDL, including the $1.014 billion goodwill balance.
- Monitor conversion of the $24.5 billion backlog into revenue and cash, particularly the funded versus unfunded components.
- Review exposure to U.S. Government budget decisions, fixed-price contracts, inflation, supply-chain constraints, cybersecurity, environmental claims, and potential goodwill impairment.