L3Harris Technologies is working to make its legal argument that its proposed $4.7 billion acquisition of Aerojet Rocketdyne falls within the scope of federal antitrust law.
Within 92 days, L3Harris announced and completed the acquisition of Viasat’s tactical data link business and received all necessary US and international government regulatory approvals. Aerojet transaction review will take longer.
But in the meantime, the business case for L3Harris investors to consider Aerojet featured prominently in the company’s fourth-quarter earnings call with them on Friday.
In fact, the first analyst to ask questions asked L3Harris CEO Chris Kubasik to explain what Aerojet is doing for its potential new owner.
“I’m sure there will be a few Aerojet Rocketdyne questions, but maybe I’ll give a longer answer than usual and try to pre-empt it,” Kubasik responded.
Here’s how Kubasik began making the business case for incorporating Aerojet into L3Harris:
“When we look at market data beyond platforms, the top three defense markets globally are C2, which is command and control; sensors and weapons,” Kubasik said. “I’m very happy with where we are positioned on the first two, especially after the acquisition of TDL. Our weapons are virtually non-existent in this $75 billion market.”
Solid rocket motor production is a subset of the weapons market in which L3Harris will gain a foothold through Aerojet. These products and ammunition are used in missiles such as the Javelin and Stinger, both of which Ukraine uses heavily in its defense against Russia.
But defense isn’t the only market L3Harris is considering when it comes to automotive. Kubasik noted that cars also feature heavily in space programs, including those involving L3Harris’ civilian customers such as NASA and the National Oceanic and Atmospheric Administration.
For NASA in particular, Aerojet provides the engines for the Space Launch System launch vehicle, the primary launch vehicle for the Artemis moon landing program.
L3Harris is also looking at increasing their foothold in the supersonic program as to what Aerojet can do for them.
“The other day, someone said hypersonics was the future, and the reality is that hypersonics is now,” Kubasik said. “I think this could be the crown jewel of this acquisition, and we believe both the budget and the customer support a tremendous growth opportunity.”
On the subject of antitrust review: L3Harris filed documents with the FTC in January, making legal arguments for why the deal went ahead. The FTC asked some questions, and Kubasik said “we’ve been very sensitive.”
Fourth quarter revenue of $4.6 billion was up 5 percent year-over-year and 6 percent organically. Profit of $670 million was down about 1% year-over-year.
Taking into account divestiture revenue, calendar year 2022 sales of $17.1 billion were down 4% overall and 1% organically. Segment operating income was $2.6 billion, down 7.1% year-over-year. L3Harris has a segment operating margin of 15.4% by the end of 2022.
L3Harris’ preliminary guidance for 2023 is for revenue between $17.4 billion and $17.8 billion and segment operating income between $2.7 billion and $2.8 billion, which suggests a margin of 15.2% to 15.7%. These figures include contributions from the Viasat TDL acquisition, but not from Aerojet.
The 2023 outlook also includes how L3Harris sees the current and future state of the supply chain, taking into account all the disruptions to the supply chain over the past two years.
As CFO Michelle Turner noted, issues across the supply chain ecosystem are “consistent in our industry and beyond” and “have become a new normal.”
But L3Harris is also the latest defense company to tell investors they see gradual improvements in supply chains, even as unavailability and delayed deliveries of key components continue to occur.
“We’re feeling the worst impact from the supply chain … really in the second half of 2021. At that time we have hundreds of critical component shortages,” Turner told analysts. “Fast forward to where we are today, we’re in the tens in terms of impact and the things we have to manage.”
L3Harris is focusing much of 2022 on engineering redesigns to address some of those shortages, including computer chips and other microelectronics used in larger products and systems.
Turner said the company learned about the chip supply situation after about 90 days, and then the situation became murkier.