L3Harris Technologies, Inc. — Form 10-K Summary
Filing period: Fiscal year ended December 31, 2021. The request metadata identifies “2020 Q4,” but the supplied filing is the fiscal 2021 Form 10-K, filed February 25, 2022, with fiscal 2020 as the primary comparable period.
Business context and reporting period
- L3Harris is a global aerospace and defense technology company serving government and commercial customers in more than 100 countries, with approximately 47,000 employees at year-end.
- Fiscal 2021 included 52 weeks and followed the fiscal 2020 year ended January 1, 2021. Results reflect the combined L3Harris business following the June 29, 2019 merger of Harris and L3 Technologies.
- Fiscal 2021 reportable segments were Integrated Mission Systems, Space & Airborne Systems, Communication Systems, and Aviation Systems. Effective January 1, 2022, management reorganized these into three segments by integrating Aviation Systems operations into the other segments.
- U.S. Government customers, including foreign military sales funded through the U.S. Government, represented 75% of fiscal 2021 revenue, compared with 78% in fiscal 2020.
Financial performance and key metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Revenue | $17.814 billion | $18.194 billion | Down 2% |
| Gross margin | $5.376 billion; 30% | $5.308 billion; 29% | Margin improved |
| Income from continuing operations attributable to common shareholders | $1.847 billion | $1.121 billion | Up 65% |
| Diluted EPS from continuing operations | $9.09 | $5.19 | Up 75% |
| Effective tax rate | 19.3% | 17.7% | Higher |
| Net cash from operating activities | $2.687 billion | $2.790 billion | Down $103 million |
| Capital expenditures | $342 million | $368 million | Down $26 million |
| Cash and cash equivalents | $941 million | $1.276 billion | Down $335 million |
| Total debt, principal amount | $6.994 billion | $6.867 billion | Higher |
| Funded backlog | $15.2 billion | $16.3 billion | Down $1.1 billion |
| Total backlog | $21.1 billion | $21.7 billion | Down $0.6 billion |
- Segment revenue was $5.839 billion for Integrated Mission Systems, $5.093 billion for Space & Airborne Systems, $4.287 billion for Communication Systems, and $2.783 billion for Aviation Systems.
- Segment operating income was $950 million, $970 million, $1.092 billion, and $330 million, respectively. Aviation Systems improved from a $177 million operating loss in fiscal 2020.
- Contract assets increased to $3.021 billion from $2.437 billion, while contract liabilities increased to $1.404 billion, including non-current amounts.
- The company’s consolidated total indebtedness-to-total-capital ratio was 26.8%, versus a 65% covenant limit under its revolving credit facility.
- The company had $2 billion available under its senior unsecured revolving credit facility at December 31, 2021 and no borrowings outstanding under that facility.
Material changes versus the prior comparable period
- Revenue declined primarily because of fiscal 2021 divestitures, particularly in Aviation Systems, and supply-chain constraints affecting Communication Systems.
- Gross margin improved due to merger integration benefits, operational excellence, lower inventory fair-value step-up costs, and lower acquisition-related amortization, partly offset by unfavorable program and product mix.
- Net income increased substantially because fiscal 2020 included $767 million of impairment charges, principally related to COVID-19 impacts on commercial aviation. Fiscal 2021 included $207 million of impairment charges, including $62 million related to the divested Combat Propulsion Systems business and $145 million related to Commercial Training Solutions long-lived assets.
- Fiscal 2021 included $220 million of business-divestiture-related gains, compared with a $51 million loss in fiscal 2020. The fiscal 2021 amount included a $217 million gain on the sale of the military training business.
- The company completed six fiscal 2021 divestitures for aggregate sale proceeds of $1.783 billion and used divestiture proceeds and operating cash flow partly to repurchase shares.
- Share repurchases increased to $3.675 billion for 17.1 million shares, compared with $2.290 billion for 12.0 million shares in fiscal 2020. Dividends paid increased to $817 million from $725 million.
- The funded backlog decline included the removal of backlog associated with divested businesses; approximately 50% of total backlog was expected to convert to revenue by the end of 2022 and approximately 85% by the end of 2024.
Guidance, outlook, commentary, risks and unusual items
- Management expected continued supply-chain effects on Communication Systems revenue, operating income, and orders in early fiscal 2022, with anticipated stability in the second half of 2022; no assurance was provided.
- Fiscal 2022 capital expenditures were expected to be approximately $330 million. Management stated that available cash, operating cash flow, credit capacity, and capital-market access were expected to cover anticipated requirements for the next twelve months and reasonably foreseeable future.
- Changes to tax rules requiring capitalization and five-year amortization of research and experimental expenditures were estimated to reduce fiscal 2022 operating cash flow by approximately $600 million to $700 million if not deferred, modified, or repealed.
- Management announced a fiscal 2022 expectation to repurchase up to $1.5 billion of common stock. The quarterly dividend was increased from $1.02 to $1.12 per share, or $4.48 annualized, effective with the first-quarter 2022 dividend.
- Key risks include dependence on U.S. Government budgets and appropriations, contract termination and audit exposure, fixed-price contract cost overruns, inflation, supply-chain shortages, COVID-19 effects, commercial aviation weakness, cybersecurity incidents, export controls, geopolitical developments, employee retention, pension obligations, debt refinancing, tax audits, litigation, environmental remediation, and goodwill or intangible-asset impairment.
- At December 31, 2021, unfunded defined benefit obligations were $431 million, down from $1.832 billion, primarily because of actuarial gains from higher discount rates. No material contributions to U.S. qualified defined benefit plans were required for fiscal 2021 or fiscal 2022.
- Environmental liabilities were estimated at $115 million for identified sites. The company also disclosed potential involvement in Lower Passaic River remediation, although management stated that expected payments would not be material based on available information.
- The company had $587 million of unrecognized tax benefits, including $488 million that would favorably affect future tax rates if recognized. Tax examinations remain ongoing.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Critical audit matters involved contract cost estimates for revenue recognition and goodwill valuation.
Most important facts for investors to verify
- Reconcile the fiscal 2021 revenue decline and earnings increase with divestitures, impairment charges, divestiture gains, merger synergies, and other non-recurring items.
- Assess whether Communication Systems supply-chain constraints and related backlog effects improve as management expects.
- Evaluate the conversion quality and funding status of the $21.1 billion backlog, particularly the $15.2 billion funded portion.
- Review debt maturities, refinancing needs, interest-rate exposure, and the impact of the projected $600 million to $700 million fiscal 2022 tax-related cash outflow.
- Monitor fixed-price contract performance, estimate-at-completion adjustments, inflation, labor availability, and supplier execution.
- Assess valuation sensitivity for the $18.2 billion goodwill balance, especially the Broadband reporting unit, whose fair value exceeded carrying value by 16% at the annual test date.
- Verify the effect of the January 1, 2022 segment reorganization on future comparability and reported operating trends.