L3Harris Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 2, 2021, compared with July 3, 2020. The filing date was August 4, 2021. The request metadata identifies “2020 Q2,” but the filing text clearly covers fiscal 2021 second-quarter results.
Business Context
L3Harris is a defense, aerospace and communications contractor reporting four segments: Integrated Mission Systems, Space and Airborne Systems, Communication Systems and Aviation Systems. A substantial portion of revenue is derived from U.S. Government contracts. The company continued to face COVID-19 effects, particularly in commercial aviation, supply chains and international operations.
Financial Results and Key Metrics
| Metric | Quarter ended July 2, 2021 | Prior-year quarter | Six months ended July 2, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $4.668 billion | $4.445 billion | $9.235 billion | $9.071 billion |
| Gross profit | $1.417 billion | $1.270 billion | $2.771 billion | $2.598 billion |
| Gross margin | 30% | 29% | 30% | 29% |
| Net income attributable to L3Harris | $413 million | $283 million | $881 million | $500 million |
| Diluted EPS | $2.01 | $1.30 | $4.25 | $2.28 |
| Effective tax rate | 29.0% | 17.3% | 20.6% | 15.1% |
- Quarterly revenue increased 5%; six-month revenue increased 2%.
- Quarterly income attributable to L3Harris increased 46%; six-month income increased 76%. Results benefited from divestiture gains, lower impairment charges versus the prior-year six-month period, operational improvements and share repurchases.
- Quarterly diluted EPS increased 55%, aided by higher earnings and lower diluted share count.
- Net favorable estimate-at-completion adjustments contributed $80 million of pre-tax operating income in the quarter and $162 million in the first six months.
- Segment revenue growth in the quarter was led by Integrated Mission Systems, up 12%. Space and Airborne Systems increased 3%, Communication Systems 1% and Aviation Systems 1%. Six-month Aviation Systems revenue declined 10%, primarily because of divestitures and commercial aviation weakness.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $1.381 billion for the first six months, compared with $1.335 billion in the prior-year period.
- Cash provided by investing activities was $1.307 billion, including $1.430 billion of net proceeds from business sales and $128 million of capital expenditures.
- Financing activities used $1.937 billion, including $1.550 billion of share repurchases and $416 million of dividends.
- Cash and cash equivalents were $2.029 billion at July 2, 2021, including $1.430 billion of proceeds received from business divestitures on July 2.
- Total long-term debt, including the current portion, was approximately $7.072 billion; short-term debt was $3 million. Approximate net debt was therefore $5.0 billion.
- The $2 billion revolving credit facility was fully available, with no borrowings outstanding, and the company was in compliance with its covenants.
- Backlog was $20.2 billion at July 2, 2021, versus $21.7 billion at January 1, 2021; the prior figure included $1.1 billion associated with businesses subsequently divested. Approximately 66% of current backlog was expected to be recognized by the end of 2022.
Material Changes Versus the Prior Comparable Period
- Completed the divestitures of the Combat Propulsion Systems business for net proceeds of $347 million and the military training business for net proceeds of $1.057 billion, both on July 2, 2021.
- Recognized a $212 million pre-tax gain on the military training divestiture, partly offset by a $12 million loss on the Combat Propulsion Systems divestiture and losses related to other disposal groups.
- Classified the Electron Devices business and two Aerospace Products disposal groups as held for sale. Electron Devices was subject to a $185 million sale agreement expected to close in the second half of fiscal 2021.
- Recorded $145 million of non-cash impairment charges for Commercial Training Solutions long-lived assets, including $63 million related to identifiable intangible assets. The company also recorded a $62 million goodwill impairment charge related to the Combat Propulsion Systems divestiture.
- Prior-year results included significantly larger COVID-related commercial aviation impairment charges, including $375 million during the first six months of 2020.
- Repurchased 7.7 million shares for $1.550 billion during the first six months, compared with 3.3 million shares for $700 million in the prior-year period. Approximately $4.7 billion remained available under the authorization at July 2, 2021.
- The quarterly dividend increased from $0.85 to $1.02 per share, and $416 million was paid during the first six months.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2021 capital expenditures of approximately $365 million and stated that existing cash, operating cash flow, available credit and capital-market access should fund anticipated requirements for the next twelve months and the reasonably foreseeable future.
- Management stated that no fiscal 2021 contributions were required to U.S. qualified defined-benefit pension plans as a result of prior voluntary contributions. Net unfunded defined-benefit obligations were $1.7 billion at July 2, 2021.
- COVID-19 continued to affect commercial aviation demand, flight training, simulators, commercial avionics, supply chains and certain international and public-safety businesses. The company noted that U.S. Government-related revenue was comparatively more predictable.
- Key risks include U.S. Government budget and contract funding, termination or audit exposure under government contracts, fixed-price contract cost overruns, supply-chain disruptions, commercial aviation recovery, cybersecurity, international and foreign-exchange exposure, indebtedness, pension obligations, litigation, environmental matters and potential impairment of goodwill or other assets.
- Legal and environmental matters were described as routine for the company’s businesses. Accruals for probable unfavorable legal outcomes were not material, and management did not expect existing matters to have a material adverse effect, although outcomes remain uncertain.
- The financial statements were unaudited interim statements reviewed by Ernst & Young LLP. Management concluded that disclosure controls and procedures were effective as of July 2, 2021.
Facts Investors Should Verify
- Reconcile reported earnings and EPS to the $212 million divestiture gain, $145 million Commercial Training Solutions impairment, $62 million Combat Propulsion Systems goodwill impairment and other nonrecurring items.
- Assess the sustainability of operating cash flow after the $1.430 billion of divestiture proceeds received during the period.
- Monitor leverage, debt maturities, interest costs and the company’s ability to continue $1.550 billion-per-period-scale share repurchases and dividend payments.
- Evaluate Aviation Systems exposure to commercial aviation recovery, remaining held-for-sale businesses and the effect of completed divestitures on future revenue and backlog.
- Review backlog quality, funding status, contract mix and the sensitivity of earnings to estimates-at-completion and fixed-price program performance.
- Confirm the timing and proceeds of the announced Electron Devices, VSE and Aerospace Products transactions and any related future impairment or gain/loss adjustments.