L3HARRIS TECHNOLOGIES, INC. quarterly report, Q3 FY2023

L3Harris Technologies, Inc. — Form 10-Q Summary

Reporting period: Quarter and three quarters ended September 29, 2023, compared with September 30, 2022. The provided metadata labels this as “2022 Q3,” but the filing is for fiscal 2023 Q3 and was filed October 27, 2023. Financial statements are unaudited and presented under U.S. GAAP.

Business Context

L3Harris provides aerospace, defense, space, missile, communications, electronic warfare, cyber and related technology solutions to government and commercial customers in more than 100 countries. U.S. Government customers, including foreign military sales funded through the U.S. Government, represented 75% of revenue for the first three quarters of fiscal 2023.

The company completed the acquisition of Viasat’s Tactical Data Links product line on January 3, 2023, and acquired Aerojet Rocketdyne Holdings, Inc. on July 28, 2023. Aerojet Rocketdyne created a new reportable segment, Aerojet Rocketdyne (“AR”).

Financial Results and Key Metrics

Metric	Q3 2023	Q3 2022	First 3 Quarters 2023	First 3 Quarters 2022
Revenue	$4.915 billion	$4.246 billion	$14.079 billion	$12.484 billion
Gross margin	27%	28%	26%	29%
Net income attributable to L3Harris	$383 million	$(300) million	$1.069 billion	$646 million
Diluted EPS	$2.02	$(1.56)	$5.61	$3.33
Operating cash flow	Not separately provided	Not separately provided	$1.307 billion	$1.376 billion

Q3 revenue increased 16%, while revenue for the first three quarters increased 13%. Q3 gross profit was $1.307 billion; first-three-quarter gross profit was $3.708 billion. Engineering, selling and administrative expenses were $828 million in Q3 and $2.384 billion year to date.

Segment revenue and operating income for Q3 were: SAS $1.686 billion and $210 million; IMS $1.568 billion and $187 million; CS $1.255 billion and $282 million; and AR $455 million and $56 million. AR results reflect only the period from the July 28 acquisition date through September 29.

The effective tax rate was 4.5% in Q3 and 6.4% for the first three quarters, compared with 6.2% and 13.0%, respectively, in the prior-year periods. Benefits included R&D credits, FDII deductions and resolution of specific audit uncertainties.

Liquidity, Debt and Capital Allocation

Cash and cash equivalents were $499 million at September 29, 2023, down from $880 million at December 30, 2022.
Net cash used in investing activities was $6.938 billion, primarily reflecting $6.688 billion of cash paid for the TDL and AJRD acquisitions and $312 million of capital expenditures.
Net cash provided by financing activities was $5.254 billion, including debt issuance and borrowings, partly offset by $3.159 billion of borrowing repayments, $518 million of share repurchases and $652 million of dividends.
Total debt, including current debt and financing lease obligations, was approximately $11.503 billion, compared with $7.043 billion at December 30, 2022. Long-term debt, net, was $11.140 billion.
Short-term debt included approximately $2.0 billion of commercial paper, primarily maturing in October 2023, with a weighted-average interest rate of 5.50% at quarter-end.
The company had no borrowings outstanding under its $2.4 billion 2023 Credit Agreement or $2.0 billion 2022 revolving credit facility and reported compliance with applicable covenants.
Management stated that existing cash, operating cash flow, credit facilities, commercial paper capacity and debt-market access should support anticipated needs for the next 12 months and the foreseeable future, while acknowledging risks from leverage, government budgets and financial-market conditions.
The company paid $652 million in dividends during the first three quarters and increased the quarterly dividend to $1.14 per share. It repurchased $518 million of common stock and had $3.9 billion of remaining repurchase authorization, but announced that repurchases would be moderated in the near term.

Material Changes Versus Prior Comparable Period

AJRD added $455 million of Q3 revenue and $56 million of operating income and materially increased goodwill, intangible assets and debt.
TDL contributed to CS revenue growth; CS Q3 revenue increased 18% and first-three-quarter revenue increased 23%.
SAS revenue increased 6% in Q3 and 8% year to date. IMS revenue declined 4% in Q3 but increased 2% year to date.
Prior-year results included $802 million of goodwill and other asset impairment charges, including impairments in Broadband, ADG and Electro Optical. No comparable Q3 2023 impairment was recorded, although $78 million of other-asset impairment charges were recorded year to date in 2023.
Interest expense increased to $159 million in Q3 and $372 million year to date, compared with $70 million and $205 million, respectively, primarily because of acquisition-related borrowings and higher commercial paper balances.
Gross margin declined to 27% in Q3 and 26% year to date, compared with 28% and 29%, respectively, driven by mix and changes in estimate-at-completion adjustments.
Net unfavorable estimate-at-completion adjustments reduced pretax earnings by $10 million in Q3 and $97 million year to date; the year-to-date impact was $0.38 per diluted share after tax.
Backlog increased to $31.8 billion from $22.3 billion at December 30, 2022. Management expects approximately 55% of backlog revenue to be recognized by the end of 2024 and 80% by the end of 2025.

Guidance, Outlook, Risks and Unusual Items

Fiscal 2023 capital expenditures are expected to be approximately $330 million. No full-year revenue or earnings guidance is provided in the filing text.
Management cited continuing defense demand related to conflicts in Ukraine and geopolitical tensions in Asia and the Middle East, but noted uncertainty from the U.S. Government continuing resolution, appropriations timing and changes in spending priorities.
Inflation, higher interest rates, supply-chain constraints and fixed-price contract execution may pressure margins and cash flow. Changes in contract estimates can materially affect results.
AJRD acquisition accounting remains preliminary; adjustments to acquired assets, liabilities, intangible assets, environmental matters, loss contracts and related taxes could be material.
AJRD contributed $469 million of environmental remediation reserves and $433 million of recoverable environmental remediation costs. The Sacramento, California site had an estimated cost range of $239 million to $372 million, with $239 million accrued.
The company identified increased risks from handling explosive and hazardous materials, environmental liabilities, acquired real estate, integration execution, leverage and debt refinancing.
The company expects commercial paper balances to remain elevated compared with historical levels through fiscal 2025. Liquidity could be affected by weaker operating cash flow, reduced credit availability, higher borrowing costs or disruptions in capital markets.
Legal contingencies considered probable were not material at September 29, 2023, although unfavorable outcomes in excess of accrued amounts remain reasonably possible.

Most Important Facts for Investors to Verify

Confirm the effect of AJRD integration, preliminary purchase accounting and the sustainability of AR’s reported 12% operating margin.
Monitor commercial paper maturities, refinancing needs, interest rates and leverage following the acquisitions.
Assess whether backlog converts to revenue and cash flow as projected, particularly under the continuing resolution and future appropriations cycles.
Review estimate-at-completion adjustments, fixed-price contract exposure and program execution for evidence of additional margin pressure.
Track environmental remediation obligations and the recoverability of related costs, especially for the Sacramento site.
Separate underlying operating performance from acquisition amortization, acquisition costs, LHX NeXt costs, impairments, divestiture gains and other unusual items.
Validate future dividend and share-repurchase capacity against debt service, acquisition integration costs and operating cash generation.