L3Harris CEO: Industry turning away from fixed-price development contracts

By Shelley K. Mesch / June 2, 2023

L3Harris Technologies, and likely other defense contractors, won't continue bidding for fixed-price contracts, CEO Chris Kubasik said Thursday.

L3Harris already decided not to pursue two fixed-price development and procurement contracts this year, Kubasik said at the Bernstein Strategic Decisions Conference held in New York. Three to five years into those contracts, he said, the contractors start to take financial hits.

“The reason they’re taking these write-offs is because they’re in fixed-price development,” Kubasik said, “and they can’t get the contract bonds or contract changes as the scope and technology changes.”

L3Harris holds one of the highest percentages of fixed-price contracts among defense contractors at about 70%, he said, but most of those contracts are short-term and will be “flushing through the system.”

The drastic inflation rates since the beginning of the COVID-19 pandemic have been a factor in this decision, he said.

The company has created a “performance first” motto for 2023, Kubasik said. One example of this is that L3Harris won’t be attending the Paris Air Show this month, he said, and executives will instead focus on program reviews, site visits and employee meetings.

“Nobody’s sold a darn thing at the Paris Air Show in 40 years,” Kubasik said. “At least I haven’t.”

Kubasik also expanded on the company’s decisions to acquire two businesses late last year.

L3Harris announced in December its intention to acquire Aerojet Rocketdyne for $4.7 billion as a way to branch into the missiles market. Kubasik said during the company’s year-end earnings call that hypersonic missile technology could be the “crown jewel” of the acquisition.

The Aerojet acquisition is going through the regulatory process for the acquisition, which has faced criticism from some as a move that would reduce competition in the already consolidated defense industry. Kubasik countered by pointing to the lack of financial synergies or overlaps in the acquisition.

“We don’t compete with them, they’re not a customer of mine and I’m not a customer of theirs,” Kubasik said. “So, terms like vertical and horizontal competition do not exist, which is why we’re confident that this deal will close in the second half of" this year.

In January, L3Harris closed its acquisition of ViaSat’s Tactical Data Links products, which make up Link 16, for nearly $2 billion.

Kubasik noted that L3Harris doesn’t plan to make any more acquisitions in the coming years. It was a coincidence, he said, that two businesses that L3Harris wanted to acquire both became available in the fourth quarter last year.