L3Harris Technologies, Inc. — Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 30, 2022. The provided filing is a fiscal 2022 annual report, not a 2021 fourth-quarter filing. Fiscal 2022, 2021 and 2020 each included 52 weeks.
Business context
L3Harris is a global aerospace and defense technology company serving government, commercial and international customers in more than 100 countries. Its three reportable segments are Integrated Mission Systems, Space & Airborne Systems, and Communication Systems. Approximately 46,000 employees supported the business at year-end, including approximately 20,000 engineers and scientists.
U.S. Government customers, including foreign military sales funded through the U.S. Government, represented 74% of fiscal 2022 revenue. International end-customer revenue was $3.9 billion, or 23% of total revenue.
Financial performance and liquidity
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Revenue | $17.062 billion | $17.814 billion | Down 4% |
| Gross margin | $4.927 billion; 29% | $5.376 billion; 30% | Down 8%; margin down 1 point |
| Income from continuing operations | $1.061 billion | $1.843 billion | Down 42% |
| Net income attributable to L3Harris | $1.062 billion | $1.846 billion | Down 42% |
| Diluted EPS from continuing operations | $5.49 | $9.09 | Down 40% |
| Operating cash flow | $2.158 billion | $2.687 billion | Down $529 million |
| Capital expenditures | $252 million | $342 million | Down $90 million |
| Cash and cash equivalents | $880 million | $941 million | Down $61 million |
| Total debt, including finance leases | $6.998 billion principal; $7.043 billion net | $6.994 billion principal; $7.059 billion net | Net debt broadly stable |
Gross margin declined because of higher labor, material and overhead costs, supply-chain disruptions, unfavorable estimate-at-completion adjustments and a less favorable revenue mix. The effective tax rate declined to 16.7% from 19.3%, primarily due to additional research and development credits and foreign-derived intangible income benefits, partially offset by nondeductible goodwill impairments.
At December 30, 2022, L3Harris had a fully available $2.0 billion revolving credit facility, no borrowings under that facility, and was in compliance with its debt covenants. The company reported no expected material liquidity issues for the next 12 months, while noting risks from leverage, government funding uncertainty and capital-market conditions.
Segment results
| Segment | Revenue | Operating income | Operating margin | Key change |
|---|---|---|---|---|
| Integrated Mission Systems | $6.916 billion | $424 million | 6% | Revenue down 2%; income down 51% |
| Space & Airborne Systems | $6.060 billion | $735 million | 12% | Revenue up 2%; income down 3% |
| Communication Systems | $4.217 billion | $667 million | 16% | Revenue down 2%; income down 36% |
IMS results were pressured by lower fuzing and ordnance demand, lower product volumes, labor inefficiencies and program-performance issues. SAS revenue benefited from responsive satellite and Space Development Agency tracking programs, but operating income was affected by higher input costs and program ramps. CS was affected by lower legacy-platform volume and supply-chain disruptions, although tactical communications demand and public-safety recovery partially offset these pressures.
Material changes versus the prior period
- Revenue decreased $752 million, primarily reflecting $655 million of lower revenue from businesses divested during fiscal 2021 and continuing supply-chain disruption.
- Goodwill and other asset impairment charges increased to $802 million from $207 million. Fiscal 2022 charges included $447 million in IMS and $355 million in CS, driven by lower demand or volume, reduced outlooks and higher interest rates.
- Operating cash flow declined $529 million because of lower earnings, increased working-capital usage and higher tax payments.
- Company-wide backlog increased to $22.3 billion from $21.1 billion, including $16.2 billion of funded backlog versus $15.2 billion. Management expects to recognize approximately 55% of total backlog by the end of 2023 and 75% by the end of 2024, subject to delays, cancellations and funding availability.
- The company reorganized its reporting structure from four segments to three effective January 1, 2022, with historical segment information recast for comparability.
- The company repurchased 4.7 million shares for $1.1 billion, compared with 17.1 million shares for $3.7 billion in fiscal 2021. Remaining repurchase authorization was approximately $4.5 billion, but management stated that repurchases would be moderated in the near term.
- The quarterly dividend was $1.12 per share during fiscal 2022, and was increased after year-end to $1.14 per share, or an annualized $4.56.
Guidance, outlook, risks and unusual items
Management identified “Performance First” as the primary fiscal 2023 focus, emphasizing program execution, risk management, integration of the Tactical Data Links product line, completion of the Aerojet Rocketdyne transaction and retention of skilled employees. The filing does not provide a clear quantitative fiscal 2023 revenue or earnings guidance value.
- On January 3, 2023, L3Harris completed the approximately $1.96 billion acquisition of Viasat’s Tactical Data Links product line and borrowed $2.0 billion under the new Term Loan 2025. The business will be reported in Communication Systems.
- L3Harris agreed to acquire Aerojet Rocketdyne for approximately $4.7 billion in cash, primarily financed with debt. Closing remained subject to regulatory clearance and other conditions. The company could owe a $406.3 million termination fee if required HSR clearance is not obtained.
- The company agreed to sell its Visual Information Solutions business for $70 million, with closing expected in mid-fiscal 2023, subject to approvals and customary conditions.
- Supply-chain disruptions, especially in Communication Systems, labor constraints and persistent inflation adversely affected results. Management expects inflation to remain persistent in 2023, and fixed-price contracts expose the company to cost-overrun risk.
- Approximately 73% of fiscal 2022 revenue came from fixed-price contracts, increasing sensitivity to labor, material, supplier, schedule and technical cost overruns.
- U.S. Government appropriations, changing defense priorities, contract termination rights, audits and competitive bidding materially affect revenue and backlog. A decline in precision-weapons demand contributed to the IMS goodwill impairment.
- Goodwill was $17.3 billion at year-end. Certain reporting units, including Electro Optical, Broadband and ADG, remained at increased risk of future impairment; a 25-basis-point increase in the discount rate used in the 2022 impairment analysis would have increased the total impairment by approximately $200 million.
- Material commitments included $6.998 billion of debt, $5.402 billion of purchase obligations, $1.238 billion of lease commitments and $1.252 billion of surety bonds and standby letters of credit. Fiscal 2023 capital expenditures were expected to be approximately $275 million.
- Environmental liabilities were estimated at $113 million across 82 potentially responsible sites. The filing states that probable litigation accruals were not material, although unfavorable outcomes in excess of accrued amounts remain reasonably possible.
Most important facts for investors to verify
- Confirm the filing period: this document reports fiscal 2022, ending December 30, 2022, rather than 2021 Q4.
- Assess whether supply-chain, inflation and labor pressures continue to reduce margins, particularly in Communication Systems and fixed-price programs.
- Monitor leverage, interest expense, refinancing needs and credit-rating outlook after the Tactical Data Links acquisition and any Aerojet Rocketdyne acquisition financing.
- Track regulatory clearance and final closing terms for Aerojet Rocketdyne, including potential termination-fee exposure.
- Evaluate the sustainability of backlog conversion, including the funded portion and exposure to U.S. Government appropriations, cancellations and delays.
- Review goodwill sensitivity and the risk of additional impairment charges in the IMS and CS reporting units.
- Verify cash generation after dividends, share repurchases, acquisitions, capital expenditures and debt service.
- Review the detailed legal, tax, environmental and government-contract contingencies, including $613 million of unrecognized tax benefits and ongoing government audits.