L3Harris Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023, compared with the quarter and six months ended July 1, 2022. The request metadata identifies “2022 Q2,” but the filing is the 2023 second-quarter Form 10-Q, filed July 26, 2023.
Business Context
L3Harris is a global aerospace and defense technology company serving U.S. and international government, defense and commercial customers. 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 74% of revenue for the six months ended June 30, 2023.
Fiscal 2023 reporting was realigned by transferring the Agile Development Group from IMS to SAS. L3Harris also completed the acquisition of Viasat’s Tactical Data Links product line on January 3, 2023, reported within CS.
Financial Results and Metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4.693 billion | $4.135 billion | $9.164 billion | $8.238 billion |
| Gross margin | $1.217 billion; 26% | $1.228 billion; 30% | $2.401 billion; 26% | $2.471 billion; 30% |
| Net income attributable to L3Harris | $349 million | $471 million | $686 million | $946 million |
| Net margin | 7% | 11% | 7% | 11% |
| Diluted EPS | $1.83 | $2.42 | $3.60 | $4.86 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $764 million | $788 million |
- Segment revenue: Q2 IMS $1.735 billion, up 8%; SAS $1.715 billion, up 9%; CS $1.289 billion, up 30%. Six-month segment revenue increased 5%, 9% and 25%, respectively.
- Segment operating margins: Q2 IMS 9% versus 13%, SAS 10% versus 13%, and CS 25% versus 24%. Six-month margins were IMS 10% versus 14%, SAS 11% versus 12%, and CS 24% versus 24%.
- Balance sheet: Cash and equivalents were $366 million at June 30, 2023, down from $880 million at December 30, 2022. Total assets were $35.362 billion and total equity was $18.531 billion.
- Debt: Total debt, net, was $8.228 billion, up from $7.043 billion at year-end 2022. This included $2.25 billion outstanding under the variable-rate Term Loan 2025 and $579 million of commercial paper. Long-term debt, net, was $7.867 billion.
- Liquidity: The company had no borrowings under its $2.4 billion 2023 revolving facility or $2.0 billion 2022 revolving facility and was in compliance with applicable covenants.
- Backlog: Ending backlog was $24.9 billion, compared with $22.3 billion at December 30, 2022. Management expects approximately 35% to convert to revenue by year-end 2023 and approximately 70% by year-end 2024.
- Capital returns: Six-month share repurchases were $518 million for 2.5 million shares. Cash dividends were $436 million, and the quarterly dividend was increased to $1.14 per share.
Material Changes Versus the Prior Comparable Period
- Revenue increased 13% in Q2 and 11% for the six-month period, driven by growth across all segments, improved electronic component availability, program ramps and the TDL acquisition.
- Profitability declined despite higher revenue. Gross margin fell four percentage points in both comparisons, primarily due to unfavorable estimate-at-completion adjustments and a higher mix of lower-margin revenue.
- Net income attributable to L3Harris declined 26% in Q2 and 27% for the six-month period. Diluted EPS declined 24% and 26%, respectively.
- Interest expense increased 66% in Q2 and 58% for the six-month period, primarily because of the $2.25 billion Term Loan 2025.
- Operating cash flow decreased modestly to $764 million from $788 million, while investing cash outflows increased substantially because of the $1.973 billion TDL acquisition.
- Goodwill increased to $18.417 billion, including $1.117 billion recorded from the TDL acquisition. Identifiable intangible assets increased to $6.401 billion.
Outlook, Commentary, Risks and Unusual Items
- Management reported no expected material liquidity issues over the next 12 months and the longer term, based on cash, operating cash flow, credit facilities, commercial paper access and capital-market access.
- Fiscal 2023 capital expenditures are expected to be approximately $275 million. Management expects cash needs to include the Aerojet Rocketdyne acquisition, taxes, dividends, repurchases and debt repayments.
- The company expected the approximately $4.7 billion all-cash Aerojet Rocketdyne acquisition to close on or about July 28, 2023, after being advised that the FTC would not block the transaction. The closing remained subject to completion conditions.
- Q2 included $60 million of impairment charges, including customer-contract and facility-closure impairments. Six-month impairment charges totaled $78 million.
- Q2 included $26 million of pre-tax gain from the sale of Visual Information Solutions and $36 million of acquisition-related transaction and integration expenses. Six-month acquisition-related expenses were $76 million.
- Net estimate-at-completion adjustments reduced pre-tax earnings by $31 million in Q2 and $87 million for the six-month period, compared with favorable adjustments of $12 million and $58 million in the prior-year periods.
- Key risks include dependence on U.S. Government funding and priorities, fixed-price contract cost overruns, inflation and supply-chain constraints, high indebtedness and interest rates, acquisition integration and execution, cybersecurity, government investigations, international operations, pension obligations, litigation, environmental matters and potential impairment of goodwill or other long-lived assets.
- Management stated that probable legal and environmental contingencies were either accrued, insured or not expected to have a material adverse effect, although unfavorable outcomes exceeding accrued amounts remain reasonably possible.
Important Facts for Investors to Verify
- Confirm the timing, financing and integration effects of the Aerojet Rocketdyne acquisition, including the effect on leverage and interest expense.
- Assess whether lower gross and segment margins reflect temporary program execution issues or a sustained change in contract mix and estimate-at-completion performance.
- Monitor commercial paper maturities, variable-rate Term Loan 2025 exposure and the company’s ability to maintain liquidity while funding acquisitions and capital returns.
- Evaluate the quality and conversion timing of the $24.9 billion backlog, including the proportion that is funded and subject to government appropriations or contract options.
- Review the valuation assumptions supporting $18.4 billion of goodwill and $6.4 billion of intangible assets, particularly after the TDL acquisition and business realignment.
- Track U.S. Government budget decisions, inflation, supplier availability, fixed-price contract performance and risks related to geopolitical conflicts.