L3Harris Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended April 1, 2022, compared with the quarter ended April 2, 2021. The request metadata identifies “2021 Q1,” but the filing itself is for fiscal 2022 first quarter. Financial statements are unaudited and were reviewed by Ernst & Young LLP.
Business context and reporting period
L3Harris is a defense and technology contractor serving primarily U.S. Government, international, commercial aviation and other customers. Effective January 1, 2022, the company reorganized from four to three reportable segments: Integrated Mission Systems, Space & Airborne Systems, and Communication Systems. Aviation Systems was eliminated as a separate segment, with operations reassigned to the remaining segments.
The company also classified its Space and Navigation business as held for sale during the quarter under a definitive agreement with a stated selling price of $5 million, expected to close in the second quarter of fiscal 2022.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $4.103 billion | $4.567 billion | Down 10% |
| Gross margin | $1.211 billion; 30% of revenue | $1.354 billion; 30% of revenue | Gross profit down 11%; margin stable |
| Engineering, selling and administrative expense | $713 million; 17% of revenue | $801 million; 18% of revenue | Down 11% |
| Income from continuing operations | $475 million | $467 million | Up 2% |
| Net income attributable to L3Harris | $475 million | $468 million | Up 1% |
| Diluted EPS from continuing operations | $2.44 | $2.25 | Up 8% |
| Effective tax rate | 11.3% | 11.4% | Essentially stable |
| Net cash from operating activities | $39 million | $661 million | Down $622 million |
| Capital expenditures | $55 million | $67 million | Down $12 million |
| Cash dividends | $218 million | $209 million | Up $9 million |
| Share repurchases | $308 million | $700 million | Down $392 million |
Segment results were mixed. Integrated Mission Systems revenue declined 2% to $1.721 billion, while operating income increased 9% to $255 million and margin expanded to 14.8%. Space & Airborne Systems revenue declined 1% to $1.450 billion, operating income fell 10% to $172 million and margin declined to 11.9%. Communication Systems revenue declined 13% to $963 million, operating income declined 15% to $229 million and margin declined to 23.8%.
At April 1, 2022, cash and cash equivalents were $402 million, including $211 million held by foreign subsidiaries. Net long-term debt was approximately $7.1 billion, and total long-term debt including the current portion had a carrying value of $7.057 billion. The company had no borrowings under its $2 billion revolving credit facility, which was fully available and expires in June 2024.
Total assets were $34.444 billion and total equity was $19.366 billion at April 1, 2022. Net unfunded defined benefit plan obligations were $524 million. Backlog was $21.1 billion, unchanged from December 31, 2021; management expects approximately 51% of backlog revenue to be recognized by the end of 2022 and approximately 75% by the end of 2023.
Material changes versus the prior comparable period
- Revenue decreased primarily because of $268 million of prior-year divestiture revenue, supply-chain disruptions, electronic component shortages affecting Communication Systems, award timing and airborne program transitions.
- Gross margin percentage remained approximately 30%, but gross profit declined because of lower volume and supply-chain impacts.
- Operating results benefited from the absence of the prior-year $62 million goodwill and other asset impairment charge, $15 million of divestiture-related losses and a $15 million value-added-tax accrual.
- Net favorable estimate-at-completion adjustments declined to $46 million from $82 million. Management attributed the 2022 benefit primarily to operational performance, risk retirement and material and labor cost savings.
- Operating cash flow fell sharply as working capital used $525 million more cash, including increases in receivables, contract assets and inventories, together with lower income excluding noncash items.
- Weighted-average diluted shares declined to 195.1 million from 208.5 million, primarily reflecting share repurchases, supporting the increase in diluted EPS.
- The quarterly dividend increased from $1.02 to $1.12 per share, or an annualized rate of $4.48. The company repurchased 1.3 million shares for $308 million and had approximately $2.2 billion remaining under its authorization.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2022 capital expenditures of approximately $330 million and states that existing cash, operating cash generation, available credit and market access should fund expected working capital, capital expenditures, dividends, repurchases and debt maturities for at least the next twelve months.
- The company estimates that tax-law requirements to capitalize and amortize research and experimental expenditures could reduce fiscal 2022 operating cash flow by approximately $600 million to $700 million; management stated that there was no first-quarter 2022 cash-flow impact from this provision.
- Management expects no required contributions to U.S. qualified defined benefit pension plans in fiscal 2022 and for several years thereafter, although future requirements depend on asset returns, discount rates and funded status.
- Key operating risks include U.S. Government budget and funding uncertainty, contract termination or audit exposure, fixed-price contract cost overruns and inflation, electronic-component shortages, supplier and subcontractor disruptions, COVID-related effects, geopolitical and international risks, cybersecurity, employee retention, litigation, environmental obligations, impairment of goodwill and the company’s significant indebtedness.
- Probable legal and environmental liabilities accrued at April 1, 2022 were not material, according to management. The filing notes that potential claims, including the Lower Passaic River remediation matter, could exceed current accruals, although management does not expect existing matters to have a material adverse effect based on available information.
- No material goodwill impairment, business-divestiture-related loss or other asset impairment was recorded in the quarter. The filing continues to identify contract estimates, revenue recognition, pension obligations, goodwill impairment and income taxes as critical accounting areas.
Important facts for investors to verify
- Confirm the effect of the segment reorganization and held-for-sale classification on year-over-year comparability, particularly the removal of prior-year divested businesses.
- Assess whether the sharp decline in operating cash flow reflects temporary working-capital timing or a continuing deterioration in collections, contract assets, inventories and supplier payments.
- Monitor electronic-component shortages, supply-chain constraints and airborne program transitions, especially within Communication Systems and Space & Airborne Systems.
- Evaluate leverage and debt-service capacity in light of approximately $7.1 billion of net long-term debt, low quarter-end cash and potential future cash-flow pressure from research-and-development capitalization rules.
- Review the sustainability of favorable contract estimate adjustments, pension-related income and the low effective tax rate.
- Verify completion and economics of the Space and Navigation divestiture, the remaining share-repurchase authorization and the company’s stated fiscal 2022 repurchase expectations.