L3Harris reduces 2022 guidance after falling short on Q3 expectations

By Shelley K. Mesch  / October 28, 2022

L3Harris Technologies reduced its 2022 outlook after failing to reach expectations in its third-quarter results, the company announced in its earnings report released Thursday evening.

Like many executives in the defense industrial base, L3Harris CEO Christoper Kubasik pointed at supply-chain problems that have persisted longer than expected.

“Supply chain is really the focus and it’s quite volatile,” Kubasik said during Friday morning’s earnings call.

For L3Harris, lead times for many parts have gone “from 18 days to 18 months,” Kubasik said.

“We looked at a key supplier as an example, where we ordered 18 months ago 25,000 parts,” Kubasik said. “We have a commitment, we pay the cash, all the good stuff you would expect, but the mid-September delivery, which would have allowed us to ramp up and maybe get closer to our prior guidance, only 5,000 parts arrived because there’s an allocation process.”

Because of the nature of L3Harris’ products, every part needs to be in place before a product is delivered, like in its handset radios, Kubasik said, whereas aircraft or ships may be functional without 100% of the pieces.

Revenue was flat year-over-year for the quarter, Kubasik wrote in the investor letter released Thursday, although it grew 3% on an organic basis.

Cashflow, meanwhile, was down 19% to $546 million, goodwill impairments weighed down the net margin and GAAP earnings per share, and macroeconomic challenges lowered the performance and timing of programs resulting in flat non-GAAP earnings per share, according to the report.

“On full-year guidance, we are reducing our outlook across all financial metrics to reflect the above factors carrying into the fourth quarter and, most notably, the timing of a Mideast aircraft missionization program and supply disruptions,” Kubasik wrote in the letter. “Though challenges are ongoing, our team is focused on “controlling the controllables” such as key customer deliveries, our e3 cost savings program, employee engagement and capital allocation.”

The company also recorded a goodwill impairment charge of $802 million for the quarter, which Chief Financial Officer Michelle Turner said is related to the merger of L3 Technologies and Harris Corp. in 2019.

“It’s about 4-4.5% of the overall balance, really targeted at two of our legacy businesses that we’ve been talking about for a while in terms of being on the low-end of our portfolio from a growth perspective,” she said, adding, “This is really just a continuation of two of our legacy businesses where we’ve highlighted risk with these businesses.”

Turner said the charge is “not a surprise” and aligns with past statements from the company.

During the quarter, L3Harris secured several Defense Department contracts, including more than $800 million as the prime contractor for the Space Development Agency’s Tranche 1 Tracking Layer of satellites; $3 billion for an indefinite-delivery, indefinite-quantity contract with Special Operations Command’s Armed Overwatch Program; about $900 million for a 10-year, sole-source IDIQ contract to sustain the Common Data Link; and up to $380 million of production, repair and sustainment of the Navy’s Cooperative Engagement Capability system.

Congress’ failure to pass a budget in time for the new fiscal year also puts businesses in the lurch when looking forward, Kubasik said. Even with a continuing resolution to keep the government funded, there is uncertainty for industry until a final budget is approved.

“CRs are getting old,” Kubasik said. “I think this is the 15th CR in 20 years, so it almost becomes the norm.”