Dear Shareholders,
Throughout the year I’ve written letters each quarter updating you on our progress. In “good” and “bad” times our goal remains the same: offer differentiated value for all our stakeholders. We relentlessly focus on delivering that value in various forms – from innovating battlefield solutions for our customers’ toughest missions, to developing talent across our employee base, to managing the efficient allocation of capital for shareholders – enabling long-term growth.
Organically, our investments in innovation, “priming” more programs and expanding internationally across all domains created a record year of orders and the largest backlog in our history.
IN THE SPACE DOMAIN
we captured $800 million in contracts to develop and integrate multiple end-to-end satellite systems for the National Defense Space Architecture Tracking Layer, expanding our reach into missile defense applications. As space continues to grow in importance, our strategy is to leverage our top-tier payload technology to lead next-gen architecture transformations and increase prime positions in satellite systems and space superiority.
IN THE AIR DOMAIN
we expanded our leadership position in missionizing commercial aircraft with a nearly $3 billion prime contract for U.S. Special Operations Command’s Armed Overwatch program to deliver up to 75 manned, fixed-wing aircraft domestically with the potential for additional international opportunities. We plan to expand our integrated airborne mission systems offerings, solidifying our position as the supplier of choice for current airborne platforms, and positioning for prime roles on next-gen systems.
IN THE LAND DOMAIN
the demand for network modernization is growing. Our tactical communications business continued to advance key programs for the U.S. and its allies with nearly $1 billion in contracts, while delivering several hundred million dollars in radios to Ukraine. This conflict has validated the need for a new generation of ground capabilities, so we will not only advance our resilient networking solutions, we’ll focus on next-gen systems to support cyber, electronic warfare, ISR and tactical weapons.
IN THE SEA DOMAIN
we furthered our position as a leading naval mission solutions provider with an award potentially valued at up to $600 million as the prime for the U.S. Navy’s Shipboard Panoramic Electro-Optic/Infrared program to detect and track anti-ship cruise missiles, attack craft and unmanned air systems as well as aid navigation. To help our customers address near-peer threats at sea, we are developing, integrating, and delivering surface and undersea autonomous mission systems at speed and scale to enable manned/unmanned teaming, and distributed maritime operations.
IN THE CYBER DOMAIN
we continued to solidify our position as a key provider of offensive cyber solutions with a multi-year contract as the prime integrator for a classified program potentially valued at up to $1.5 billion. With the rapidly growing demand for cyber products and services, our strategy is to apply cyber tools, techniques and cutting-edge technologies to penetrate hard target missions while accelerating up the value chain to prime integrator.
Our organic investments in, and commitment to, environmental, social and governance earned us an ESG ranking among the top five percent of aerospace and defense companies worldwide, with 2022 marking three consecutive years of improvement and progress toward achieving our 2026 sustainability goals.
Inorganically, we announced strategic acquisitions valued at more than $6.5 billion. We closed the acquisition of Viasat’s Tactical Data Link product line in early January 2023 for just under $2 billion. Combined with L3Harris’ presence across all warfighting domains, this acquisition provides us access to the Link 16 network, positioning us to make the installed base of 20,000 terminals more resilient and relevant, consistent with the DoD and armed services’ Joint All-Domain Command and Control (JADC2) objectives.
In December 2022, we signed an agreement to acquire Aerojet Rocketdyne for approximately $4.7 billion. The acquisition will enable us to enter into new weapons and space segments, strengthening the merchant-supplier propulsion market and improving earnings visibility with an over 30 percent backlog increase to nearly $30 billion.
Complementing this highly visible acquisition activity, we are pursuing collaboration with more than 30 startup companies and have made strategic investments in 10 innovative companies with technologies spanning autonomy, laser communication links, artificial intelligence and more.
Our strategy pairs well with increasing defense spending worldwide, given the heightened threat environment. This fast-moving, geopolitical landscape further validates the need for L3Harris to be the Trusted Disruptor: A company positioned at the nexus between “traditional primes” and “new commercial entrants” that understands the threats, requirements and solutions across all domains.
FINANCIAL PERFORMANCE AND OUTLOOK
Despite a challenging 2022 with mixed financial results, our strategy remains solid and is supported by a rising global demand for defense products and solutions across all domains. Order activity was strong with a funded book-to-bill of 1.08x and an expanded backlog in mid-single digits versus the prior year, providing additional revenue and operating income visibility.
We remain focused on addressing the ongoing macroeconomic challenges and have made notable progress with our mitigation actions that were key to improved performance in the back half of the year. This momentum was evident in our fourth quarter results where we reported a second consecutive quarter of top-line growth. Additionally, we continue to attract top talent and experienced industry executives who will further drive a high-performance culture.
For next year, we expect a modestly rising topline with steady segment margins and free cash flow. Consistent with our peers, pension and financial market-related headwinds are expected to weigh on EPS. On capital allocation, we will continue to support annual dividend increases to remain competitive, however, share repurchases will be moderated in the near term to sustain solid investment-grade credit ratings.
Looking ahead to 2023, our strategic priorities remain to Grow, Innovate and Perform, but we are emphasizing a Performance First focus. We will deliver for all of our stakeholders by prioritizing operational performance, meeting contractual commitments, improving quality, controlling costs, and advancing our continuous improvement culture. I want to thank our 46,000 employees, our board members and our shareholders for their unwavering support. As we focus on delivering on our commitments and executing our strategy, I’m optimistic about our opportunities in the year ahead.
Christopher E. Kubasik
Chair and Chief Executive Officer
Read the original letter here.
