L3Harris Technologies, Inc. — Form 10-K Summary
Reporting period: The supplied filing is the Form 10-K for the 52-week fiscal year ended December 29, 2023, filed February 16, 2024. The request metadata refers to “2022 Q4,” which does not match the filing period. Fiscal 2022 ended December 30, 2022.
Business context
L3Harris is a defense and technology contractor serving space, air, land, sea and cyber markets. Its principal customers are U.S. government departments and agencies, prime contractors, international governments and selected commercial customers. The company reported four segments: Space & Airborne Systems, Integrated Mission Systems, Communication Systems and Aerojet Rocketdyne.
- Approximately 50,000 employees at year-end, including approximately 20,000 engineers and scientists.
- U.S. government-related revenue represented 76% of fiscal 2023 revenue.
- International end-market revenue was $4.2 billion, or 21% of total revenue.
- Company-wide backlog was $32.7 billion, including $22.0 billion of funded backlog, compared with $22.3 billion in fiscal 2022.
Financial performance and liquidity
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Revenue | $19.419 billion | $17.062 billion | 14% increase |
| Gross margin | 26% | 29% | Decrease |
| Operating income | $1.426 billion | $1.127 billion | 26% increase |
| Operating margin | 7.3% | 6.6% | Improvement |
| Net income attributable to L3Harris | $1.227 billion | $1.062 billion | 16% increase |
| Diluted EPS from continuing operations | $6.44 | $5.49 | 17% increase |
| Cash from operating activities | $2.096 billion | $2.158 billion | 3% decrease |
| Capital expenditures | $449 million | $252 million | Increase |
| Cash and cash equivalents | $560 million | $880 million | Decrease |
- Gross margin percentage declined because of unfavorable estimate-at-completion adjustments and a higher mix of lower-margin revenue, particularly in Communication Systems.
- Net estimate-at-completion adjustments reduced operating income by $85 million in fiscal 2023, compared with a $36 million benefit in fiscal 2022.
- Total debt, including current debt and finance lease obligations, was approximately $11.5 billion at year-end, versus $7.0 billion at the end of fiscal 2022.
- Short-term debt was $1.6 billion, primarily commercial paper. Commercial paper outstanding was $1.599 billion at year-end, with a weighted-average interest rate of 5.95%.
- The company reported no material liquidity issues expected over the next 12 months, while acknowledging risks from leverage, interest rates, government budgets and capital-market conditions.
- Fiscal 2023 dividends totaled $4.56 per share. The company repurchased 2.5 million shares for approximately $0.5 billion and had $3.9 billion remaining under its authorization.
Segment results
| Segment | Revenue | Operating income | Operating margin | Year-over-year change |
|---|---|---|---|---|
| Space & Airborne Systems | $6.856 billion | $756 million | 11.0% | Revenue +7%; operating income +14% |
| Integrated Mission Systems | $6.630 billion | $459 million | 6.9% | Revenue flat; operating income -7% |
| Communication Systems | $5.070 billion | $1.229 billion | 24.2% | Revenue +20%; operating income +84% |
| Aerojet Rocketdyne | $1.052 billion | $122 million | 11.6% | New segment; acquired July 28, 2023 |
Material changes versus the prior comparable period
- Revenue growth primarily reflected the Aerojet Rocketdyne acquisition, the Tactical Data Links acquisition and higher Communication Systems and Space & Airborne Systems volume.
- L3Harris acquired Viasat’s Tactical Data Links product line on January 3, 2023, for approximately $1.958 billion. The acquisition contributed $365 million of revenue and $131 million of operating income.
- L3Harris acquired Aerojet Rocketdyne on July 28, 2023, for a net purchase price of approximately $4.715 billion. Aerojet Rocketdyne contributed $1.052 billion of revenue and $122 million of income before taxes from the acquisition date through year-end.
- The acquisitions materially increased debt, goodwill and intangible assets. Goodwill rose to $19.979 billion from $17.283 billion, and intangible assets rose to $8.540 billion from $6.001 billion.
- Interest expense increased to $543 million from $279 million, principally because of acquisition-related borrowings.
- Fiscal 2023 included $374 million of impairment charges, including a $296 million goodwill impairment related to the Commercial Aviation reporting unit. Fiscal 2022 included $802 million of goodwill impairment charges.
- L3Harris announced the planned sale of its Commercial Aviation Solutions disposal group for $700 million in cash plus potential contingent consideration of up to $100 million. The transaction was expected to close in 2024 and generated a $77 million pre-tax loss in fiscal 2023.
- L3Harris launched the three-year LHX NeXt efficiency and organizational transformation program. Fiscal 2023 costs were $115 million, and the program is expected to continue through 2025.
Guidance, outlook, risks and unusual items
- Management expects to recognize approximately 40% of backlog revenue by the end of 2024 and approximately 65% by the end of 2025.
- Fiscal 2024 capital expenditures are expected to be approximately 2% of revenue.
- Management expects approximately $35 million of contributions to U.S. qualified defined benefit pension plans in fiscal 2024.
- Commercial paper balances are expected to remain elevated compared with historical levels through fiscal 2025.
- Major risks include dependence on U.S. government appropriations and competitively awarded contracts, fixed-price contract cost overruns, inflation, supply-chain disruption, labor availability, cybersecurity incidents, export controls, geopolitical conflict and acquisition integration.
- At December 29, 2023, the company had $22.391 billion of disclosed material cash requirements, including debt, interest, purchase obligations, leases and minimum pension contributions. The table excluded $652 million of unrecognized tax benefits.
- Environmental liabilities were estimated at $613 million, with $432 million of expected recoveries. The Sacramento, California remediation liability was accrued at $266 million, within an estimated cost range of $266 million to $399 million.
- The company reported $1.259 billion of commercial commitments, including $536 million of surety bonds and $723 million of standby letters of credit.
- Management reported effective internal control over financial reporting, and Ernst & Young issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded the acquired TDL and Aerojet Rocketdyne controls from the fiscal 2023 assessment; they are expected to be included in the fiscal 2024 assessment.
Most important facts for investors to verify
- Confirm that the intended reporting period is fiscal 2023 rather than “2022 Q4,” because the supplied filing is not a quarterly filing.
- Assess whether Communication Systems’ unusually strong margin and operating income performance is sustainable after acquisition effects and the absence of the prior-year goodwill impairment.
- Review leverage, commercial paper refinancing needs, debt maturities and the company’s ability to fund acquisitions, dividends, repurchases and required debt service.
- Evaluate the quality and conversion timing of the $32.7 billion backlog, including the $10.7 billion unfunded portion.
- Monitor estimate-at-completion adjustments, fixed-price contract execution, supply-chain performance and potential future contract losses.
- Review Aerojet Rocketdyne purchase accounting, environmental liabilities, integration progress and the remaining measurement-period adjustments.
- Assess impairment sensitivity for goodwill, particularly reporting units with relatively low valuation headroom, including ISR, Electro Optical and Broadband.
- Track the planned Commercial Aviation Solutions divestiture, contingent consideration and the effect of the $296 million goodwill impairment.