L3Harris Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended April 2, 2021, compared with the quarter ended April 3, 2020. The supplied metadata identifies “2020 Q1,” but the filing is the first-quarter 2021 Form 10-Q, filed May 3, 2021. Results are unaudited and cover continuing operations unless otherwise noted.
Business Context and Reporting Period
L3Harris is a defense, aerospace and technology 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 customers and contracts. COVID-19 continued to affect commercial aviation, public safety and international operations, while U.S. Government actions, including increased progress payments, supported defense-industry liquidity.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $4.567 billion | $4.626 billion | Down 1% |
| Gross margin | $1.354 billion; 30% | $1.328 billion; 29% | Margin up 1 point |
| Income from continuing operations | $467 million | $195 million | Up 139% |
| Net income attributable to L3Harris | $468 million | $217 million | Up 116% |
| Diluted EPS from continuing operations | $2.25 | $0.99 | Up 127% |
| Effective tax rate | 11.4% | 11.8% | Lower by 0.4 points |
| Operating cash flow | $661 million | $533 million | Up $128 million |
| Capital expenditures | $64 million | $48 million | Up $16 million |
| Cash and equivalents | $976 million | $663 million | Prior-year quarter-end comparison |
Segment performance: Integrated Mission Systems revenue was $1.451 billion, up 6%, with operating income of $240 million, up 19%. Space and Airborne Systems revenue was $1.236 billion, up 4%, with operating income of $240 million, up 9%. Communication Systems revenue was $1.112 billion, up 2%, with operating income of $281 million, up 12%. Aviation Systems revenue declined 19% to $814 million, while operating income was $128 million compared with a $177 million loss in the prior-year quarter, largely because the prior period included substantial COVID-related impairment charges.
Balance sheet and liquidity: Total assets were $36.590 billion and total equity was $20.482 billion at April 2, 2021. Long-term debt, including the current portion, was approximately $7.078 billion, with $2 million of short-term debt. The company had no borrowings under its $2 billion revolving credit facility, which expires in June 2024, and stated that the facility was fully available. Net unfunded defined benefit plan obligations were $1.8 billion.
Capital allocation: The company repurchased 3.8 million shares for $700 million during the quarter. Approximately $5.5 billion remained authorized at quarter-end. The quarterly dividend was increased from $0.85 to $1.02 per share, or $4.08 annualized, and cash dividends paid during the quarter totaled $209 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly because Aviation Systems was affected by the airport security and automation divestiture and continued weakness in commercial aviation. Government-oriented businesses grew.
- Gross margin improved due to merger integration benefits, operational improvements and the absence of the prior-year $15 million inventory fair-value step-up cost.
- Net income and diluted EPS increased substantially, primarily because the prior-year quarter included $319 million of non-cash goodwill and other asset impairment charges associated with Commercial Aviation Solutions and a $5 million impairment related to another pending divestiture.
- Q1 2021 included a $62 million non-cash goodwill impairment charge and $15 million of divestiture-related losses, primarily associated with the pending CPS and VSE transactions.
- Net favorable estimate-at-completion adjustments contributed $82 million to pretax operating income in Q1 2021, compared with $103 million in Q1 2020. Management stated that no individual program adjustment was material to consolidated or segment results.
- Cash provided by operations increased to $661 million, but cash declined $300 million after $700 million of share repurchases, $209 million of dividends and $64 million of capital expenditures.
- Weighted average diluted shares declined to 208.5 million from 219.3 million, primarily reflecting share repurchases.
Guidance, Outlook, Commentary and Risks
Management expects fiscal 2021 capital expenditures of approximately $375 million and stated that existing cash, operating cash flow, credit availability and capital-market access should fund anticipated working capital, capital expenditures, dividends, share repurchases and debt maturities for the next twelve months and the reasonably foreseeable future. The company currently expected to repurchase up to $2.3 billion of shares during fiscal 2021, excluding proceeds from divestitures, although timing and amount remain discretionary.
Ending backlog was $21.4 billion at April 2, 2021, down from $21.7 billion at January 1, 2021. Management expected approximately 75% of backlog revenue to be recognized by the end of 2022 and approximately 85% by the end of 2023.
The company expected to complete the sales of the CPS business for $398 million, the military training business for $1.050 billion and the VSE disposal group for $20 million during the second half of fiscal 2021, subject to customary conditions and adjustments. The CPS transaction resulted in the $62 million goodwill impairment charge. Assets held for sale totaled $1.414 billion at quarter-end.
Key risks include the duration and severity of COVID-19, commercial aviation recovery, supply-chain and subcontractor disruptions, dependence on U.S. Government funding and contract execution, fixed-price contract cost overruns, government audits or termination rights, high indebtedness, pension obligations, goodwill impairment, cybersecurity, international and foreign-currency exposure, litigation, environmental matters and execution of divestitures. The company stated that there were no material changes to the risk factors in its fiscal 2020 Form 10-K.
Probable litigation accruals were not material, and management did not expect existing litigation or environmental matters to have a material adverse effect, although outcomes remain uncertain. Internal disclosure controls were evaluated as effective as of April 2, 2021.
Important Facts for Investors to Verify
- Confirm the reporting period: the filing is Q1 2021, not Q1 2020.
- Assess the sustainability of earnings excluding prior-year impairment charges, current-period divestiture losses, pension income and favorable contract estimate adjustments.
- Monitor commercial aviation and public safety recovery, particularly within Aviation Systems.
- Track closing timing, proceeds and final purchase-price adjustments for the CPS, military training and VSE divestitures.
- Evaluate leverage, refinancing requirements, pension obligations and the company’s ability to continue substantial repurchases and dividends.
- Reconcile backlog conversion assumptions with future contract awards, funding authorizations and U.S. Government budget conditions.
- Review the effect of contract cost estimates, fixed-price exposure and future EAC adjustments on margins and cash flow.