L3Harris Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and two quarters ended July 1, 2022, compared with July 2, 2021. The request metadata identifies “2021 Q2,” but the filing is for fiscal 2022 Q2. The interim financial statements are unaudited and were reviewed by Ernst & Young LLP.
Business context and reporting structure
L3Harris is a defense, aerospace and communications contractor with three reportable segments: Integrated Mission Systems, Space & Airborne Systems, and Communication Systems. Effective January 1, 2022, the company eliminated its Aviation Systems segment and reassigned related businesses to the remaining segments. The company completed one business divestiture and one asset sale during the first half of 2022.
Financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $4.135 billion | $4.668 billion | $8.238 billion | $9.235 billion |
| Gross margin | $1.228 billion; 30% | $1.417 billion; 30% | $2.471 billion; 30% | $2.771 billion; 30% |
| Income from continuing operations | $470 million | $413 million | $945 million | $880 million |
| Net income attributable to L3Harris | $471 million | $413 million | $946 million | $881 million |
| Diluted EPS | $2.42 | $2.01 | $4.86 | $4.26 |
| Operating cash flow | Not separately provided | Not separately provided | $788 million | $1.381 billion |
Revenue declined 11% in both the quarter and first half. Income attributable to L3Harris increased 14% in the quarter and 7% in the first half, while diluted EPS increased 20% and 14%, respectively, aided by lower share count from repurchases and lower effective tax rates. The quarterly effective tax rate was 10.5%, versus 29.0% in the prior-year quarter; the first-half rate was 10.9%, versus 20.6%.
Segment performance
| Segment | Q2 revenue change | Q2 operating margin | First-half revenue change | First-half operating margin |
|---|---|---|---|---|
| Integrated Mission Systems | -$119 million; down 7% | 13.0% | -$149 million; down 4% | 13.9% |
| Space & Airborne Systems | -$12 million; down 1% | 13.0% | -$22 million; down 1% | 12.4% |
| Communication Systems | -$134 million; down 12% | 24.0% | -$283 million; down 13% | 23.9% |
Integrated Mission Systems margins improved primarily because the prior-year period included an $82 million non-cash impairment charge. Space & Airborne Systems margins declined due to lower risk retirements, program mix and production transitions. Communication Systems was affected by lower legacy-platform volume and electronic-component shortages.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $420 million at July 1, 2022, down from $941 million at December 31, 2021.
- Operating cash flow was $788 million, compared with $1.381 billion in the prior-year period, primarily because of higher working-capital usage and accrued-item payments.
- Investing cash flow was negative $121 million, compared with positive $1.307 billion in 2021, when the company received $1.430 billion from business sales.
- Financing cash flow was negative $1.174 billion, including $729 million of share repurchases and $435 million of dividends.
- Long-term debt, including the current portion, was approximately $7.044 billion; net long-term debt was approximately $7.0 billion. The $2 billion revolving credit facility was fully available, with no borrowings outstanding, and the company was in compliance with its covenants.
- The company repurchased 3.1 million shares for $729 million during the first half and had approximately $1.8 billion remaining under its authorization at July 1, 2022.
- The quarterly dividend increased from $1.02 to $1.12 per share, an annualized rate of $4.48.
Material changes versus the prior comparable period
- Revenue decreased primarily because of completed divestitures, supply-chain disruptions, airborne program transitions and one fewer working day in the quarter.
- Prior-year results included $180 million of quarterly and $165 million of first-half divestiture-related gains, plus $145 million of quarterly and $207 million of first-half impairment charges. No comparable divestiture gains or impairment charges were recorded in 2022.
- First-half operating cash flow decreased by $593 million, while investing cash flow deteriorated by $1.428 billion because prior-year business-sale proceeds were not repeated.
- Engineering, selling and administrative expenses decreased 16% in the quarter and 12% in the first half, reflecting divestitures, lower research and development costs, deferred-compensation valuation changes and lower divestiture-related expenses.
- Backlog was $19.9 billion at July 1, 2022, down from $21.1 billion at December 31, 2021. Management expected to recognize approximately 39% by year-end 2022 and 68% by year-end 2023.
Guidance, outlook, risks and unusual items
- Management did not provide a consolidated revenue or earnings outlook in the filing. It expected fiscal 2022 capital expenditures of approximately $300 million and estimated that required tax-law capitalization of research and experimental expenditures could reduce fiscal 2022 operating cash flow by approximately $600 million to $700 million; no such cash-flow impact had occurred in the first half.
- Management stated that existing cash, operating funds, the available credit facility and capital-market access should fund working capital, capital expenditures, dividends, repurchases and debt maturities for the next twelve months and the reasonably foreseeable future.
- Inflation and supply-chain constraints remained important risks, particularly because approximately 74% of fiscal 2021 revenue came from fixed-price contracts. Greater-than-expected labor, material or supplier costs could reduce margins or create losses.
- Other principal risks include dependence on U.S. Government funding and contract awards, partial funding and termination rights, government audits and investigations, cybersecurity incidents, geopolitical and international risks, foreign-exchange movements, employee retention, pension obligations, debt service, litigation, environmental claims and impairment of goodwill or other long-lived assets.
- Net favorable estimate-at-completion adjustments contributed $12 million to quarterly operating income and $58 million for the first half, compared with $80 million and $162 million, respectively, in the prior-year periods.
- Probable legal and environmental liabilities accrued at July 1, 2022 were not material according to management. Management stated that reasonably possible unfavorable outcomes were not expected to materially affect the company, although outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Reconcile the company’s improved EPS and net income with the 11% revenue decline, lower operating cash flow and significant tax-rate benefits.
- Assess whether supply-chain constraints, program transitions and lower backlog could persist and affect Communication Systems and Integrated Mission Systems.
- Evaluate debt-servicing capacity and liquidity in light of approximately $7.0 billion of net long-term debt, planned capital returns and the potential $600 million to $700 million fiscal-year cash-tax impact.
- Review fixed-price contract exposure, estimate-at-completion adjustments and the potential for inflation or supplier issues to reduce margins.
- Confirm the effects of segment reorganization and divestitures when comparing 2022 results with prior periods.
- Monitor the remaining $1.8 billion share-repurchase authorization, dividend sustainability and the company’s stated expectation to repurchase up to $1.5 billion of shares in fiscal 2022.