L3Harris Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
This filing reports L3Harris Technologies’ unaudited results for the quarter and three quarters ended October 1, 2021, compared with October 2, 2020. The source metadata identifies “2020 Q3,” but the filing itself is the fiscal 2021 third-quarter Form 10-Q. L3Harris operates through Integrated Mission Systems, Space and Airborne Systems, Communication Systems and Aviation Systems, with substantial exposure to U.S. Government contracts.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $4.229 billion | $4.463 billion | $13.464 billion | $13.534 billion |
| Gross margin | $1.308 billion; 31% | $1.311 billion; 29% | $4.079 billion; 30% | $3.909 billion; 29% |
| Income from continuing operations | $479 million | $431 million | $1.359 billion | $904 million |
| Net income attributable to L3Harris | $481 million | $426 million | $1.362 billion | $926 million |
| Diluted EPS | $2.39 | $1.99 | $6.64 | $4.27 |
| Operating cash flow | Not separately provided | Not separately provided | $1.865 billion | $2.092 billion |
Q3 revenue declined 5%, while diluted EPS increased 20%. For the first nine months, revenue declined 1%, but income from continuing operations increased 50% and diluted EPS increased 56%. The effective tax rate was 18.3% in Q3 and 19.8% for the first nine months, compared with 16.8% and 15.9%, respectively, in the comparable periods.
At October 1, 2021, cash and cash equivalents were $1.126 billion, compared with $1.276 billion at January 1, 2021. Long-term debt, including the current portion, was approximately $7.064 billion, and the company had no borrowings under its $2 billion revolving credit facility, which expires in June 2024. The company reported compliance with applicable debt covenants.
Free cash flow is not explicitly reported in the filing. Net capital expenditures were approximately $200 million for the first nine months, based on $207 million of property, plant and equipment additions and $7 million of proceeds from property sales. The company expects fiscal 2021 capital expenditures of approximately $350 million.
Segment performance and material changes
- Integrated Mission Systems: Q3 revenue decreased 3% to $1.336 billion, while operating income increased 4% to $222 million. Nine-month revenue increased 5% to $4.281 billion and operating income increased 8% to $691 million.
- Space and Airborne Systems: Q3 revenue increased 3% to $1.284 billion and operating income increased 5% to $242 million. Nine-month revenue increased 3% to $3.807 billion and operating income increased 7% to $735 million.
- Communication Systems: Q3 revenue decreased 6% to $1.030 billion and operating income decreased 1% to $271 million, primarily reflecting supply-chain constraints and delivery timing. Nine-month revenue decreased 1% to $3.269 billion, while operating income increased 6% to $839 million.
- Aviation Systems: Q3 revenue decreased 21% to $625 million and operating income decreased 10% to $90 million, largely due to divestitures. Nine-month revenue decreased 14% to $2.248 billion, but operating income improved to $253 million from a $46 million loss, aided by the absence of prior-year impairment charges.
Revenue was reduced by approximately $181 million in Q3 and $371 million in the first nine months because of completed divestitures. During the first nine months, L3Harris completed the sales of its Combat Propulsion Systems, military training, VSE and Electron Devices businesses, generating $1.598 billion of net cash proceeds. Narda-MITEQ and ESSCO were classified as held for sale, with expected sale prices of $75 million and $55 million, respectively.
Business divestiture-related gains were $27 million in Q3 and $192 million for the first nine months, compared with a $10 million loss and $62 million loss, respectively, in the prior-year periods. The company also recorded $207 million of impairment charges in the first nine months, including a $62 million goodwill impairment related to the CPS divestiture and $145 million of long-lived-asset impairment related to Commercial Training Solutions.
Cash deployment, outlook and management commentary
- Operating cash flow was $1.865 billion for the first nine months, down from $2.092 billion, primarily because of higher cash taxes and increased working-capital usage.
- Investing cash flow was $1.400 billion, including $1.598 billion of net proceeds from business sales.
- Financing cash outflows were $3.413 billion, including $2.875 billion of share repurchases and $618 million of dividends.
- L3Harris repurchased 13.5 million shares for $2.875 billion during the first nine months and had approximately $3.3 billion remaining under its authorization at October 1, 2021. Management expected to repurchase up to approximately $3.4 billion during fiscal 2021.
- The quarterly dividend was increased to $1.02 per share, or an annualized $4.08 per share. Management expected dividends to continue in the near term but provided no assurance.
- Backlog was $21.1 billion at October 1, 2021; management expected approximately 60% to convert to revenue by the end of 2022 and 77% by the end of 2023.
- Management stated that existing cash, operating cash flow, available credit and access to capital markets should fund working capital, capital expenditures, dividends, share repurchases and debt maturities for the next twelve months and the reasonably foreseeable future.
Risks, contingencies and unusual items
- COVID-19 continued to affect commercial aviation, supply chains, workforce availability, customer demand and international operations. The company mandated vaccination of U.S.-based employees by December 8, 2021, subject to applicable exemptions, and warned of possible employee attrition and operational disruption.
- Supply-chain shortages and longer lead times, particularly for electronics and other components, could delay deliveries and pressure margins, especially under fixed-price contracts.
- Results depend significantly on U.S. Government funding, contract awards, appropriations, continuing resolutions, audits and termination provisions.
- Contract accounting is sensitive to estimates of total costs, incentives and progress. Net favorable estimate-at-completion adjustments increased operating income by $85 million in Q3 and $247 million in the first nine months.
- The company had $857 million of net unfunded defined-benefit plan obligations at October 1, 2021, although it expected no required contributions to U.S. qualified pension plans during fiscal 2021 and for several years thereafter.
- Material legal accruals were not recorded. Management stated that probable litigation and environmental matters were reserved for or were not expected to materially affect the company, but adverse outcomes remain possible.
- Other unusual items included a $35 million impairment of an equity-method investment, substantial pension-related income, divestiture gains and non-cash impairment charges.
Facts investors should verify
- Reconcile the requested “2020 Q3” metadata with the filing’s actual October 1, 2021 reporting period.
- Assess whether revenue weakness from divestitures, commercial aviation conditions and supply-chain constraints is offset by organic growth and margin improvement.
- Evaluate debt servicing capacity and the sustainability of large share repurchases and dividends relative to operating cash flow.
- Review the valuation assumptions supporting goodwill and long-lived assets, particularly in Aviation Systems and Commercial Training Solutions.
- Monitor conversion of the $21.1 billion backlog, U.S. Government budget and contract funding, and the effects of COVID-related workforce and supply-chain risks.