L3Harris Technologies [LHX] last Thursday posted lower net income in its fourth quarter due to ongoing macroeconomic issues while sales grew on the strength of the tactical radio, space and classified programs.

The “Macroeconomic environment remains dynamic,” Christopher Kubasik, chairman and CEO of L3Harris, said in the company’s investor letter that was released after the markets closed last Thursday.

Inflation remains a bugaboo, raising material and labor costs and in turn lowering operating margin. L3Harris projects about a $400 million headwind in 2023 from inflation, Michelle Turner, the company’s chief financial officer, said last Friday during an earnings call.

Supply chain woes began easing during the quarter around microelectronics, as increased availability of electronic components helped boost product sales drove significantly higher sales of tactical military radios within the Communications Segment. The microelectronics shortages and supplier challenges will “remain dynamic, with modest improvements sequentially” in 2023, the L3Harris investor letter says.

Net income in the quarter fell 14 percent to $416 million, $2.17 earnings per share (EPS), from $484 million ($2.46 EPS) a year ago. Adjusting for various acquisition, merger and impairment expenses and charges, earnings of $3.27 EPS in the quarter were three cents higher than a year ago and a penny above analysts’ estimates.

The lower net income was driven by a combination of acquisition, divestiture and integration costs, and by lower operating performance. Segment operating margin fell a percent to 14.6 percent due to labor and inflationary pressure, estimates to complete programs, and a mix of lower margin programs.

Sales in the quarter were up 5 percent to $4.6 billion from $4.4 billion a year ago. Discounting for divestitures, organic revenue was up 6 percent. The top-line drivers included tactical and public safety radios, increased work on the Space Development Agency’s space tracking layer, subcontract work on the Virginia-class nuclear-powered attack submarine program, classified intelligence and cyber programs, and work related to the F-35 Tech Refresh 3 effort that includes new electronic warfare and sensor capabilities.

Overall, in 2022 net income tumbled 39 percent to $1.1 billion ($5.49 EPS) from $1.8 billion ($9.09 EPS) in 2021, largely due to a hefty goodwill impairment charge that hit the company’s third quarter results. Adjusted net income was $12.90 EPS. Sales slipped 4 percent to $17.1 billion from $17.8 billion a year ago with international business accounting for 23 percent of the total.

In 2023, sales are expected to grow between 2 and 4 percent to a range of between $17.4 billion and $17.8 billion. The forecast includes the recently acquired tactical data link business of

ViaSat [VSAT].

Adjusted net income this year is expected to be between $12 and $12.50 EPS with segment operating margin between 15.2 and 15.7 percent versus 15.4 percent in 2022. Free cash flow is expected to exceed $2 billion. L3Harris generated $2 billion in free cash in 2022.

Kubasik said L3Harris is focused on completing its $4.7 billion acquisition of Aerojet Rocketdyne [AJRD] and doesn’t foresee any additional acquisitions in the next two years. The company does plan to divest “some non-core assets” and use the proceeds to reduce debt over the next few years, he said.

Kubasik received several questions about the rationale for the Aerojet deal, which L3Harris announced in December and said then that it expected to close the acquisition this year. He responded that the three largest global defense markets are command and control, sensors and weapons, with L3Harris well positioned in the first two.

L3Harris’ stake in the “$75 billion weapons market is practically non-existent” and Aerojet Rocketdyne gives it an entrée here with its tactical solid rocket motors for missiles, he said. The deal also benefits L3Harris in the hypersonic weapons area, which Kubasik said “could be the crown jewel of the acquisition” given the “significant growth opportunities that are well supported by the budget and the customer.”

Kubasik also highlighted Aerojet Rocketdyne’s strong position with rocket engines for the launch vehicle market, which adds to L3Harris’s existing space capabilities in satellites and sensors.

He also pointed out that Aerojet Rocketdyne’s business is long-cycle, and with $7 billion in backlog gives it more visibility. There will also some cost savings synergies with headquarters’ consolidation, he said.

Last week, Defense News reported that Sen. Elizabeth Warren (D-Mass.) has asked the Federal Trade Commission to block L3Harris’ buy of Aerojet Rocketdyne. The agency last January successfully blocked Lockheed Martin [LMT] from acquiring the rocket-maker, warning that the deal would limit competition.

However, given that L3Harris doesn’t make missiles and munitions, and doesn’t have a stake in launch vehicles currently, some defense analysts have suggested that anti-trust concerns are less relevant with this deal.