Operator:

Greetings. Welcome to the L3Harris Technologies First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

Mark Kratz:

Thank you, Rob. Good morning and welcome to our first quarter 2024 earnings call. Joining me this morning are Chris Kubasik, our CEO; and Ken Bedingfield, our CFO. Yesterday, we published our first quarter earnings release detailing our financial results and guidance. We also provided a supplemental earnings presentation on our website.

Noah Poponak:

Chris, I wanted to ask, you have the trusted disruptor strategy, and you've talked about you've been trying to prime more and kind of growing the profile and the size in the sector and that's been working to a degree. Now that we're seeing, I think, some new entrants in the space, try the same thing and maybe have a little more success than they've had in the past, how do you think about that? I mean does that crowd that effort for you? Or is the pie big enough for multiple companies to do that? And then, Ken, just one clarification on the LHX NeXt. Will you -- will all of that be adjusted out of earnings? And is all of that cash or some of that noncash?

Kenneth Bedingfield:

Yes. No, from an LHX NeXt perspective, we are adjusting out the implementation costs of the program and certainly then trying to leverage the benefits of LHX NeXt in the businesses. We talked about what that target looked like for 2024, and the businesses are off working hard to operationalize that and reflect that benefit in their performance. And I think you're starting to see that here in the first quarter. And then from a cash perspective, we're primarily just adjusting out the cash severance costs related to the program. And you'll see all that reflected in the schedules to the earnings release.

Operator:

Our next question comes from the line of Pete Skibitski with Alembic Global.

Christopher Kubasik:

$23 billion and $26 billion? Yes, absolutely. No, NGI, which is designed to protect the U.S. against evolving long-range ballistic missile threats, is a huge win for the OEM. We were a merchant supplier, as I've talked about before, on both teams. So this definitely gives us a tailwind.

Kristine Liwag:

Since you formed a new Business Review Committee back in December, can you give us any color on how progress has been? What are the key areas that have come under focus? And how this compares to your LHX NeXt pipe initiatives as well? Do they overlap?

Operator:

The next question is from the line of Gavin Parsons with UBS.

Kenneth Bedingfield:

Yes. Gavin, it's Ken. I would say that we're seeing improvement in the kind of the high-level buckets across the board. I would say we're seeing some mix benefits in terms of, as Chris mentioned, kind of moving out of some of the development phase of contracts and into some of the more mature phase.

Peter Arment:

Chris and Ken, you've made a lot of progress already on -- starting on LHX NeXt. And I think about 1/3 of it is tied to your gross saving targets, is tied to labor reductions. You recently made an announcement there. If you could just give us a little more color on how you think things will evolve on what's optimal for LHX and then in related to all the actions that you've been taking. Also on portfolio shaping, just in terms of any future kind of thoughts that you've had on further shaping the portfolio.

Jason Gursky:

Chris, would you spend a few minutes kind of walking around the Communications business? And maybe give us some updated thoughts since you last reported out on the funding environment. We've had fiscal '24 that got passed; '25, they got introduced. We've had some supplementals as well. And just kind of give us your take on how this plays out over the next couple of years and maybe offer up some comments on Link 16 and the expected refresh of all that hardware and when that kind of hits. Just what have we learned here over the last couple of 3 months on the Communications business?

Kenneth Herbert:

Chris and Ken, maybe just a 2-part question. First, on the Communications segment. You, obviously, did 24% margins in the first quarter. The guidance implies some slight ramp in the second half, but it clearly sounds like with international mix and maybe a little bit of a depressed second quarter, there could be some upside to that. Can you just talk about if there's anything onetime in the segment in the first quarter? And any puts and takes there we should think about as we think about the second quarter?

Kenneth Bedingfield:

Sure. I'll take that one. So the first part of the question on CS margins. We delivered 24% margin in the first quarter, which I think was great performance by the CS team. And that does reflect a higher domestic mix than we saw late in '23 as well as a higher domestic mix than we expect to see in the second half of '24.

Operator:

Our next question is from the line of Gautam Khanna with TD Cowen.

Christopher Kubasik:

Yes, we can.

Kenneth Bedingfield:

Yes. From a tactical radio perspective, I would say we're -- had a solid bookings order in the quarter. We've got a very solid backlog for that business at this point in time, looking at a multibillion dollar backlog in that business. And for a pretty quick turn, our shortest-cycle business, that is a very robust backlog at this point in time. So we're excited about the opportunities.

Richard Safran:

Chris, Ken, Mark, I wanted to ask 2 things about Stand-in Attack. It was an opportunity for to be prime. And correct me if I'm wrong, I think you decided to no bid. We're hearing a lot more about too much risk being pushed to industry. One of your competitors just talked about adjusting for that in their bids. So I was curious about what your thinking is about bidding going forward. And what's the next opportunity for you to be prime?

David Strauss:

I wanted to ask about the performance in the quarter. I think well above your full year guidance. So how are you thinking about that? And then if you could just touch on 2 programs out there in the press a lot where you're a supplier, F-35 Tier 3. And then how you're [indiscernible] those.

Christopher Kubasik:

And I think second part of your question was F-35. Our production deliveries are tracking. We have a ramp coming up in production here starting next month. So we continue to have good relations with Lockheed. In fact, I was just talking to them yesterday. They'll be starting to deliver aircraft, as you know. They'll comment on that themselves. But as they start delivering aircraft, we're going to have to ramp up even further and quicker. And that's our plan. We've made the investments in most of the infrastructure we need. So continued improvement month-over-month, quarter-over-quarter. And it's all about the core processor, and that's where the focus of the team is.

Matthew Akers:

Chris, I wonder if you could comment on the international pipeline at IMS in particular. You mentioned the award in the quarter, but just curious if orders are kind of starting to move there.

Operator:

Our next question is from the line of Sheila Kahyaoglu with Jefferies.

Christopher Kubasik:

Yes. Thanks, Sheila. We're being selective in where we invest and bid. And if I look at the different domains, I think space is a perfect example where we are absolutely taking a market share. And as I said earlier, we've been awarded 60 satellites as a prime just since the merger, including 38 for SDA tracking alone.

Douglas Harned:

Chris, when -- I mean, right now, you're looking at Aerojet Rocketdyne, and demand in that market is just getting better and better. And you talked a little bit about the NGI win earlier. But when you look at the demand there, and I think back to -- I remember a year ago talking with you about the situation at Aerojet Rocketdyne, Camden, for example, and how serious the bottlenecks were in trying to get production up?

Christopher Kubasik:

Yes. Doug, great, great question. And yes, it was about 16 months ago when we announced this acquisition. And I think I agree with you. When I look at where we are now, the business case gets better and better. The demand, there was no conflict in Israel. People thought Ukraine would be done. Nobody anticipated a $900 billion of defense spending for 2024.

Operator:

Greetings. Welcome to the L3Harris Technologies' Fourth Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the opening remarks. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mark Kratz, Vice President of Investor Relations. You may begin.

Christopher Kubasik:

Okay. Thanks, Mark, and welcome, Ken, to your first L3Harris earnings call. We're excited to have you on the team.

Christopher Kubasik:

All right. I want to start by thanking our investors and analysts for attending our Investor Day last month. We had a great turnout and appreciate the strong positive feedback from the event. 2023 marked the fourth full year since the merger and served as an inflection point in many respects. We met our financial commitments. We closed our integrating and seeing the benefits of two acquisitions that are focused on national security and aligned with defense spending priorities. We announced the sale of a non-core business further aligning our portfolio and we returned to growth following a few years of macroeconomic disruptions. This past year, we also strengthened our leadership team and Board of Directors adding key talent that will help drive future value for our investors, customers and employees. This year's progress gives us confidence that we have set the foundation to achieve the financial outlook that we laid out at our Investor Day and are reaffirming today with segment level detail. Globally, the threat environment remains elevated emphasizing the importance of our mission. With the national security-focused portfolio, we continue to support the US and its allies providing vital solutions for our customers' most critical missions. Domestically, we await Congress to pass all 12 appropriation bills by the end of April including the pending vote for an $842 billion topline defense budget which has solid support for our programs, most notably, in the areas of space, missiles, intelligence, and resilient communications. In 2023, demand remained strong. We reported a record $23 billion in orders, including key awards for the US Army's Manpack and Leader Radios, Compass Call missionized business jets, and rocket motors for the Army's Guided Multiple Launch Rocket System. The orders we received in 2023 contributed to a record backlog of $33 billion, more than doubled to $16 billion of backlog at the time of the merger. This positive momentum continued into early 2024, underscored by the recent award for 18 satellites from the Space Development Agency for more than $900 million. Internationally, orders were up 24% including tactical radios, VAMPIRE systems for Ukraine, and an international space award that leverages our 55-year trusted heritage to build and deliver advanced payloads for Japan's next-generation weather satellite. We are maintaining our international growth strategy and aim to improve that mix over the medium term. Operationally, our Performance First culture has been a driving factor in meeting our financial commitments, and we are gaining momentum as we focus on profitable growth. We're about six months into the Aerojet Rocketdyne integration and we have captured the $50 million in cost synergies that we were targeting. The team is using the savings to deploy resources from across L3Harris to help improve operational performance and ultimately increase capacity. In our short time owning this business, we are seeing improvements and we are progressing towards returning to contracted production levels. As highlighted at our Investor Day, we are executing on our LHX NeXt initiative aimed at delivering $1 billion in gross cost savings over the next three years. These efficiencies will optimize our infrastructure and leverage our scale, which enables us to achieve margin expansion moving forward. We executed a number of projects included in exiting facility leases to reduce cost and overall square footage. We continue with our ERP consolidation with 10 reporting units being consolidated into one reporting unit earlier this month. And at the program level, our continued focus on program excellence has helped drive better EAC performance. However, we have more work to do in this area. In 2024, we are prioritizing our focus on execution, margin expansions, and growing free cash flow. Additionally, we will continue to evaluate parts of our portfolio against strategic alternatives for non-core assets. It should be clear that we have made significant progress on the journey to transform the company. Our core businesses are aligned with our customers' priorities and provide many levers to enable us to create shareholder value. Ken will discuss our capital deployment strategy in more detail, but it is unchanged from what we discussed at Investor Day. We will invest to grow organically to delever the balance sheet and then to return excess cash to shareholders. Our strategy is backed by our diverse and talented team and we continue to invest in our workforce, both financially and professionally. This gives me confidence that we have the right leaders in place to execute our imperatives and drive long-term shareholder value. With that, let me turn it over to Ken for some financial details including our 2024 guidance.

Operator:

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from the line of Scott Deuschle with Deutsche Bank. Please proceed with your question.

Christopher Kubasik:

Hey, good morning, Scott.

Christopher Kubasik:

All right. Thanks, Scott. Yeah, talking about IMS, if we look at 2023, you'll see that we did improve margins in the second half compared to the first half. And as we've talked about, it is a little bit of a lumpy business based on the timing of aircraft purchases. We laid out at Investor Day that our strategy in the near term here was really to continue to have stability, especially with the program performance and focus on margin improvement. So to answer your question specifically, here in the short-term, we are seeing better program performance and I think that's what gives us confidence and opportunities not only for 2024 but the next several years. The attrition is definitely slowing down. We've been successful in hiring new people, training new employees, and I think that's starting to be reflected in our performance. And equally as important, the suppliers, and maybe more specifically in this case our subcontractors' performance is starting to improve as we got through those macroeconomic disruptions. The bidding rigor is improving, we've lowered the delegations of authority, so more bids are being reviewed. Not only at the segment level but the corporate level and we have at least one instance in the fourth quarter where we no bid a fixed price development program, and I've been talking about this for at least a year and we will continue to no bid programs where the contract type does not appropriate for the risks we're assuming and I said it in December and I'll say it again. I will sacrifice revenue for earnings and cash every day of the year and we will continue to do so until that changes. And of course, we're making structural changes to the business. In the midterm, I see upside to the margins as we're going to grow internationally at IMS. We're looking at about 25% international this year. I see that getting into the 30% range in a couple of years, driven by WESCAM and international business jets. In fact, this quarter already European customer has awarded $300 million award to us for aircraft missionization and that will be accretive to our margins. And then when we, sure, we will talk more about LHX NeXt in the time that remains but I think this segment is clearly ripe for opportunities. We laid out the fact despite all the good work we've done in the last four years, we still have 100 facilities. We still have eight different ERP vendors and we have 24 reporting units. I did mention that 10 of those in my comments were migrated into one. So we're making progress and the team has taken action, takes some investment on our part, but I like the momentum in the path that we're on. So maybe with that, Ken, you want to?

Operator:

Our next question comes from the line of Doug Harned with Bernstein. Please proceed with your question.

Christopher Kubasik:

Hi. Good morning, Doug.

Christopher Kubasik:

Yeah, Doug. Let me take that one. Yeah, let me start with where we are on margins. I mean, we have well-documented that our margins have declined in the last couple of years. We acknowledge we have had some performance issues across the portfolio. But I also want to mention that we have consciously made investments in some high-growth programs and businesses, which impacted the margins in the short-term, but we believe create value in the long-term, and I think Space is probably the best example that we keep highlighting in that regard. Investor Day we did step up our cost savings goal to $1 billion gross run-rate savings by the end of '26 that goes across the entire enterprise. We're calling that program LHX NeXt, as you well know. And look, I agree with you that there's differences by segments for a variety of reasons, and we're setting out a framework, three years out. So we put the 100 -- the 100 basis points is kind of the floor. If I go through or maybe in the -- in some form of order relative to the ability to realize the 100 basis points either earlier or exceeded, I'd like to start with Communication Systems. I think we all know that that has a commercial business model and the potential for more international growth. I think those will be key drivers. We run that like a commercial factory where we make the radios. We look at the quality, the cost of poor quality, the real throughput yield. We're making investments in equipment and training that gives us potential upside. And in that regard, pretty much every dollar falls to the bottom line. We're also looking at the models and seeing if we can be more aggressive on increasing our software sales as an example in addition to the hardware. So, CS would probably be at the top of my list. Aerojet Rocketdyne, we've only had it for five months. We're starting to see some improvements. Big, big volume increase, big investment in capacity, and negotiating the new contracts. Maybe I'll just mention now since owning them, we've already turned in 200 proposals for over $13 billion. Of course, we have to win them and negotiate them, but clearly, the demand is outweighing the supply. So feel good about the potential there, and the ability to return to their historical margins or even better. Scott asked about IMS. I think I laid that out. I think there's upside there with the shift to international. Again, we have the WESCAM business that provides designs and builds and delivers turrets or cameras or gimbals, whatever you want to call them. Again, that's a commercial business model which has accretive margins to the business and end of the day, it comes down to stabilizing the volatility and the program performance, and I think with some leadership changes and better negotiations on new contracts, we should be in a better shape there. And then, of course, Space or SAS, it does have the highest mix of cost plus contracts, Doug, as you know. So most of those savings go back to the customer. But again, the investments that we've made to get into some of these new markets, such as Space, will be decreasing or have decreased. So I don't know if that gives you a little more granularity. I think as we get closer to 2026, we'll be able to be more specific, but the 100 basis points is the floor, and that's kind of my order of how I'd put them. I don't know, Ken, if you agree or have different thoughts there.

Christopher Kubasik:

All right.

Ronald Epstein:

Yeah. Good morning, guys. One of the big focuses at the Investor Day was the Space business. And maybe if you can give us a deeper dive into how that's going, work on the SDA transport and tracking layers, and maybe continued opportunities for growth in that business.

Operator:

Thank you. The next question is from the line of David Strauss with Barclays. Please proceed with your question.

Christopher Kubasik:

Good morning, David .

Christopher Kubasik:

All right, David. No, good questions. Yeah, so if I look at SAS, we have several sectors there, two of them, relatively large are flat. The air domain that we've talked about is a flat business. It's a good business with good margins. This is where we perform on mission systems for F-35, F-16, F-18, some classified platforms, but a relatively flat market. And as I just mentioned, those missions are migrating into Space in some cases. So that's how we see that playing out. Mission Networks, which does a lot of work for the FAA, is a very solid business. Good margins, but that's traditionally a pretty flat business for the foreseeable future, especially given some of the budget pressures at the FAA. So that's two of our segments or two of our sectors. Space is growing and Intel and Cyber are growing as well. Just as an aside, I mentioned a lot of this -- more of this business is cost plus than most. So as we continue to reduce cost, I think, David, sometimes -- not sometimes, it always does ultimately reduce your revenue a little bit as well. So the good news of taking out costs, you get higher margins. And as continue to say revenue is interesting, but I'll take margins and cash and EBIT every day, and that's a little bit of the headwind. So that's how I see SAS coming out where it does. And second question on Aerojet Rocketdyne, interesting that you say that, because nobody really knows what their 2023 revenue is. We will disclose that in the 10-K, they only reported the first quarter. There were four months that weren't reported, and then we reported the five months. Anyway, when you see those numbers, you will see that we're right around 5% top-line growth, 2024, compared to the pro-former 2023. Aerojet disclosed three months, we disclosed five. The four fell through the cracks just based on how the accounting works. So we'll put that all in there, and you'll see the 5% growth.

Michael Ciarmoli:

Hey, good morning, guys. Thanks for taking the question. Maybe, Chris, just to stay on Aerojet, looks like, I think, you said you got all $50 million of cost synergies achieved. I mean, it sounds like that was a lot of low-hanging fruit, public company cost. Is there more there? I mean, is that layered into the next initiative? And then I guess just on NeXt, what flowed through in the quarter? I mean, we saw the $47 million in cost. What did you net out in savings? I think the goal was $175 million for the year. And does one segment maybe benefit disproportionately as you progress through NeXt?

Kenneth Bedingfield:

Yeah. No, I agree on that front. I would say the team did a great job of working aggressively to get on top of the initial integration cost savings. We did hit that target. We're continuing to drive for more, but at this point, the primary focus is really around some of the operational efficiencies working to drive the throughput through the business and getting what were some bottlenecks to increased production out of the way so that we can deliver these critical capabilities to our customers at Aerojet. So, great work by the team, certainly continues. And as Chris mentioned, we'll continue to drive opportunity for further, not only integration, but I would say at this point, more importantly, operational efficiencies, again, to drive volume. In terms of LHX NeXt, what I would say is we are very consistent at this point with what we discussed at Investor Day, the gross run rate of a $1 billion savings. We talked about, to your question, $175 million of margin improvement exiting 2024. And I think we see that across the business. I don't necessarily see any individual sector that will benefit first from that. I think Chris talked about the margin opportunity at the sectors through 2026 in getting to our 16% margin framework, but in terms of LHX NeXt, a lot of confidence in the program, confidence in the team. We had set an initial target out there. As we started to work through it, we saw the ability to drive further savings out of that. I've got confidence that we're working to drive at least to that level of savings. And I think, again, all of the segments should see the benefit of that here in 2024.

Peter Arment:

Yeah, thanks. Good morning, Chris and Ken. And welcome, Ken. Hey, Ken, maybe just on guidance, if there is, could you maybe level set us just on cadence if first half versus second half, anything to really call out? And then also it was highlighted at the Investor Day that working capital would certainly be positive contributor in cash over the kind of the guidance period. How are you thinking and seeing any opportunities from a working capital perspective, and maybe just working capital profile going forward? Thanks.

Christopher Kubasik:

And I'll just chime in, Peter, the continuing resolution. While we've had one every year since 2010, and I think we in the industry know how to deal with it, it does tend to slow things down, really, from a customer perspective. So as I mentioned, we are under a CR through March. Hopefully we'll get a defense budget and eleven other appropriation bills passed so we can get back to normal. But that causes a little bit of the slow start, unfortunately, like it does pretty much every year for the last 13.

Operator:

Thank you. Our next question comes from the line of Seth Seifman with JPMorgan. Please proceed with your question.

Christopher Kubasik:

Hey, Seth.

Christopher Kubasik:

Yeah, let me take that. We actually had a pretty -- we had a great year in CS and especially tactical radios specifically. The interesting thing here, as we talk about the margins, is really the mix between the DoD and the International. So when I looked at the first two quarters, we were heavily weighted towards International versus domestic and then it flipped again in Q3, Q4. And we'll start 2024 with a little more domestic deliveries than commercial, and then it flips in the back half. So we had a record year when it came to revenue in TCOM. I think the business is really coming together quite nicely. We've overcome most of the supply chain challenges. I know when we talked in the past, we literally had hundreds of key suppliers that we were tracking. Now we're down to just a handful. So the results are getting better. We're getting dual sources. And in fact, we've recently had some wins in some new markets that we've been informed of. We're not authorized to disclose them quite yet, but there's a lot of good news coming out of TCOM.

Robert Spingarn:

Good morning, Chris. Welcome, Ken.

Kenneth Bedingfield:

Thanks, Rob.

Christopher Kubasik:

Yes. Thanks, Rob. Let me start -- cover a couple of things and work in specifically your question. The demand, I mentioned earlier, there's more demand than there is supply, which is a great thing when we look back on the acquisition. And to repeat myself, 200 proposals for $13 billion is something we would have never expected in just a six-month period. The infrastructure, great progress. We've got the $50 million. We've got the policies. We've got the personnel. The IT systems are in work. And in fact on the talent front, the attrition at Aerojet Rocketdyne has dropped by 1/3 overall and 50% for the engineers. We do these regular surveys. There's just a lot of enthusiasm and excitement about the acquisition, the strategy. And I think it's a tribute to the team that shows how we successfully have integrated them and welcomed them into L3Harris. Going back to the demand, it's all about capacity. We've talked about the DPA investment for $216 million focused on GMLRS and Javelin and Stinger. In fact, we've already acquired a building in Huntsville, Alabama. Our capacity and footprint there is 4x and that will ultimately -- it is, but it will ultimately be our inert center of excellence, which is great. The challenges are really at the sub-tier suppliers, as you said. I don't think it makes a lot of sense to bring them in-house. We've actually invested in some of these, not as an ownership, but by helping them with tooling and capital. Our customers have also -- our end customer and our immediate prime customers have also invested. So as we've said, there's a little bit of a chokepoint here at the sub-tier. Personally, I think over time, a third solid rocket motor provider is fine. We don't shy away from competition. But that doesn't really solve the problem because at the end of the day, everybody's going to be going to the same sub-tiers, for the cases, for the igniters, for the nozzles and such. So we have to fix the sub-tier. We're doing our part by helping them out financially, getting the equipment, improving their -- the capacity. And we started to see it. There is a big well documented, I think, we call it backlog or undelivered motors, and we're chipping away at that, as I mentioned. And once we get these facilities and equipment up and running, I think it's going to look pretty good. And, yes, there's a lot of people trying to get into this market now, which is fine. It's a high-growth market, and in my mind, reaffirms the rationale and the value potential from this acquisition.

Myles Walton:

Ken, I'm hoping you can provide a few of the cash details on the surface, the Section 174 impact for '23 and '24, maybe what the benefit would be if they retroactively reversed it, what you've paid and what you could get back. And then maybe just also as it relates to stripping out from the cash numbers, is it just the $220 million for LHX NeXt that you laid out at Investor Day? Or are there other adjustments we should consider? Thanks.

Operator:

Our next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Christopher Kubasik:

Hi, Sheila.

Christopher Kubasik:

Yes. Thanks for the question. I mean, obviously, the broader margin implication is we tend to have higher margins in international than domestic, just like we do with commercial. So I see an increase -- slight increase year-over-year. We're kind of hanging around the 22%, 23% of our revenue comes from international, maybe a little uptick in '24, '25 and '26. But every point helps. I think it comes down to this -- the one that's going to move the needle a little bit is going to be the supplementals. And we haven't talked a whole lot about DC in the budget. But there is a supplemental out there for Ukraine, Taiwan and Israel put out last year for $110 billion. I think about $58 billion is targeted for the DoD. It's all tied up in politics as it relates to border security. But I think at the end of the day, we need to get these things passed because it's really just backfilling the stockpile that we've already given into several of the countries I mentioned. So hopefully, we get that behind us, and that will solidify our growth opportunities in those regions specifically. So as I look at each of the segments. Aerojet, as you know, most of that goes through a couple of primes. So we actually don't have any international revenue the way we disclose it for Aerojet, notwithstanding that several of these products get deployed from -- but from our perspective, we just sell them to two or three primes and then they put them wherever they need to go. So we just call that domestic for what that's worth. IMS, I talked about WESCAM and bizjets, I see upside there. SAS, it's really given the classified nature of so many things they do. We have an occasional space satellite, like I mentioned, in Japan. Some of the avionics stuff goes international as well. And then CS has the highest percentage of international mainly coming out of the tactical radio business. And when I look at what we've done in Ukraine and what's needed in Europe and the Mid-East and the Far East, it's looking rather positive. So I hope that help, Sheila.

Operator:

Sure. Our last question comes from Robert Stallard with Vertical Research Partners. Please proceed with your question.

Christopher Kubasik:

Good morning.

Robert Stallard:

And welcome back, Ken.

Robert Stallard:

Chris, probably a question for you. Your counterpart at Lockheed Martin, Jim Taiclet was kind of talking about structural problems in the defense industry with regard to pricing and contracting and whether that could change in the future. I was wondering if you have any issues lingering in the L3Harris portfolio that maybe fits that criteria. But on the flip side, do you see the opportunity to grow more sort of commercial terms contracts in the future?

Christopher Kubasik:

So look, before I sign off, I really would like to take a moment and thank our 50,000 employees for their focus on performance and execution throughout the year. Clearly, this is impossible without them, and they're critical to our success in meeting not only our shareholders, but our customer commitments. So really appreciate everybody joining the call. Ken, again, welcome to the team. And we'll be talking to you all soon. Thanks.

Operator:

Greetings. Welcome to L3Harris Technologies Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Kratz, Vice President, Investor Relations. Thank you. You may now begin.

Chris Kubasik:

Okay. Thank you, Mark, and good morning, everyone. I know you've all had a busy week, and we appreciate you joining us this morning. The current events in the Middle East remind us that what we do at L3Harris matters. And the industry in which we operate is more critical than ever before. As a national security technology focused company, we remain committed to supporting the U.S. and its allies to deter aggression and foster stability around the world. As we embark on our fifth year since the merger of L3 and Harris, I'm proud of our achievements. We built a diverse and seasoned team that is integrating our company. L3Harris is viewed as a disruptive competitor that is reshaping the U.S. Defense industrial base. Meanwhile, underpinning our strategy is a focus on operational excellence, delivering quality products on time, driving costs out of our system, and focusing our portfolio as a national security company. This ultimately benefits our customers and creates long-term value for our shareholders. While the macro environment has been challenging, we are making considerable progress. The business is on solid footing, and we are building operational momentum. In the third quarter, we reported 16% top-line growth, the second consecutive quarter of sequential margin improvement and strong cash generation, resulting in more than 100% free cash flow conversion. This extends our trend of generating positive free cash flow in each of the quarters since the merger. The team and I look forward to providing more details on our strategy and our 2024 outlook at our Investor Day in December. And with that, Rob, let's open the line for questions.

Kristine Liwag:

You know Chris, Michelle, after owning Aerojet Rocketdyne now for a few months. Are there any surprises to the positive or negative that you've seen?

Operator:

Our next question is from the line of Gautam Khanna with TD Cowen.

Michelle Turner:

Yes. So thanks for the question. From an overall comps perspective, we continue to be on track to deliver to our guidance, which was double-digit growth across the business, which includes to your point, gotten about the [bidding] [ph] supply chain challenges. which we continue to see along with the acquisition of our tactical data links business. Specific to radios and comms from an overall DoD budgetary perspective, we continue to see support. We're about 40% of the way through that modernization program. And we continue to see strong demand internationally as well. And so overall, I'd say we're feeling like we're in a good place from a comps perspective. And then just from looking at supply chain specifically, we continue to see hiccups like you're hearing across the industry, but significant complements to our supply chain, our tactical communication business, Sam Mehta, Chris Abley. The efforts that they've put in over the last 18 to 24 months in truly building a resilient supply chain that allows us to pivot when we continue to experience these hiccups is enabling us to continue to deliver for our customers and for our shareholders. And the other thing I would note for this quarter is that our overall deliveries are actually up from Q2. And so we continue to see the results of the efforts and the diligence that the team has put in over the last 18 to 24 months.

Noah Poponak:

Chris, so you've alluded to the competing inputs for national security spending. I guess when you think about what's evolving geopolitically versus what's evolving with the deficit battle in the U.S., maybe some of the short-term items as well. I guess, what do you -- how are you thinking about what your medium-term end market growth rate is? And your latest thinking on the L3Harris spread versus that growth rate?

Operator:

Next question is from the line of Scott Deuschle with Deutsche Bank.

Michelle Turner:

Thanks for that Scott. I'm going to start with the margin question and kind of take a step back and address it starting with the enterprise margins because we really think about this as managing our portfolio. So we're encouraged with the overall margin results within the quarter. This is our second consecutive quarter of sequential improving margins at 15% and this includes 2 months of Aerojet as part of our portfolio. And so, we're most pleased because we're starting to see the efforts of our actions related to our Performance First initiative, which you may remember is really grounded in meeting the commitments of our customers and shareholders, and it's starting to pay dividends now in terms of margin improvement. So I'll walk through each of the segments because I think there's a lot of good work that's happening across the organization, plus it gives you a little bit of flavor as to how you should think about your models go forward. So I'll start with our Space and Airborne Systems business. It delivered a record op profit in Q3 and 12.5% margins. And [indiscernible] and the SAS team have really been early adopters on our LHX NeXt initiative in terms of really leaning into maniacally managing cost and spend, but also looking at organizational construct to ensure that we are most effectively running our business. The SAS business also benefited from a couple of accretive contract mods that they were successful and being able to deliver on within the quarter. And so when you look at Q4, there is a step-down as a result of those onetime accretive actions that occurred within Q3. From an Integrated Mission Systems business perspective, this business and along with John Rambo's leadership and the IMS leadership team, saw sequential margin improvement of 180 basis points from Q2. And so you may remember this is where we've had the most acute EAC programmatic challenges in the first half of the year. And a lot of the work that John and his team are doing are starting to pay dividends now where we sit here in Q3. Now this will continue to be a bit of a lumpy part of our portfolio. But we expect that the worst is behind us in terms of overall programmatic challenges within IMS. Within our CS business, I'm getting specifically to your question, Scott, CS delivered consistent with our expectations within the quarter, along with consistent with Q1. And so we anticipated Q3 to be lower margins aligned with a heavier DoD shipment mix from a tactical radio perspective. And as I noted earlier, we actually delivered more radios this quarter. So this really speaks to the efforts that we're really putting around driving a resilient supply chain. A lot of work has gone into this from the teams to make this happen. And then, finally, from an Aerojet perspective, 2 months, a little over 90 days as part of our portfolio, roughly 12% margins within the quarter. You will note though there is a step-down within Q4. Q3 did benefit from about $8 million of purchase price accounting adjustments within the quarter. So we expect in the year consistent with the guide that we have updated for. And then, Scott, to your question about the difference between the expense and the cash impact. This is really driven by the Aerojet acquisition cash that flowed out closure from what was originally booked on the books of Aerojet from an expense perspective, we actually paid that cash post-closing.

Jason Gursky:

I just wanted to go back to the Space business for a minute, if you don't mind. Little contracting things going on here in the industry this quarter, you guys had a positive EAC in one of your customers, one of your competitors out there in the world at a very large start this quarter in the aerospace business. So I wonder if you could just help us or maybe walk around the space portfolio and tell us a little bit about what you have in that portfolio from a fixed price versus cost plus kind of mix and help us understand what the risks are and what the opportunities are as it relates to both revenue in the future. But I think most importantly, given what we're seeing across the industry, kind of what the risks might be on execution in EACs and just kind of help us better understand the overall health of that business.

Michelle Turner:

I would just add to complement that along with the SDA and NDA work that Chris just referred to. We also have a very steady, stable business that we've been in for decades from a civil weather perspective. And so that -- there's also a growth cycle that's happening there, and we booked about $1.5 billion associated with that business. So it's a good complement to the other work that's really growing from a DoD perspective.

Richard Safran:

Chris, I heard your remarks about 2024 in the Investor Day, but I thought you might be willing to discuss and maybe give a qualitative assessment of which segments have the most room to grow in '24? Any color you could provide there, I thought would be helpful.

Richard Safran:

I'm already signed up.

Operator:

Our next question comes from the line of Ken Herbert with RBC Capital Markets.

Chris Kubasik:

Yes. I'll start it off and then ask Michelle to fill in. I mean we're going to continue to prioritize our R&D and our CapEx based on business cases and based on needs. I think Aerojet Rocketdyne always had $50 million, $60 million of CapEx in their plan so that I don't see any scenario where that would change or come down significantly. But we'll look at it compared to all the other investments that we have. I think I've all been said, it's a pretty high-growth market. and we're trying to accelerate. So between the DPA money, which is over 200, the $50 million to $60 million annual CapEx, any other supplemental sources of funding we get sometimes from states and local municipalities. I think it all fits within our overall CapEx target and to the extent we need more, it will be at the expense of something else in the legacy portfolio that we don't view is having the near-term need or the ROI. So that's kind of how I see it. There could be new markets down the road once we kind of catch up on this acceleration. And those will be case by case, but there's a lot of exciting new technologies within Aerojet Rocketdyne, but the team is really focused on the backlog and the core business for now.

Operator:

Our next question is from the line of Matt Akers with Wells Fargo.

Michelle Turner:

Yes. Thanks for this question. I'm glad we're getting to talk about it a little bit more. And so this is the next phase of our L3 and Harris merger evolution, if you will. And so if you think about the initial integration savings that we did as a company, several hundred million along with some offsets. This is the next phase of this, kind of the harder parts, if you will. And it's really focused on leveraging our scale to drive efficiencies and also functional organization to ensure that we're optimized for value creation. And so to your point specifically around the overall bottom-line impact, we do anticipate that there's more investment that goes along with this phase of the journey, Matt. So you'll see in our investor letter, we laid out about $400 million of investment. And so you should think of this more as a nominal tailwind from a margin perspective and not flow it all to the bottom-line. But I do want to highlight a couple of tangible examples that the teams have already driven as we're in the early stages of this, just so you can start to characterize what are we talking about, when we're talking high level about LHX NeXt. And one of our recent wins, I'll complement our HR team in [indiscernible]. They've done a fantastic job in renegotiating our employee benefit package, again, leveraging the scale of the new L3Harris portfolio to not only increase our benefits and also save on costs, but we're also going to be holding our employee benefit cost flat to our employees. So this is really creating a win-win opportunity, both from a shareholder perspective, and our employees in terms of better benefits while maintaining the cost that they have to flow back to their families. And then, on the organizational side of the equation, our comms team led by Tania Hanna has redesigned how we serve the company from a comms perspective and really focusing on the things that matter, right? And so, when you think about comms and how we send out external communications or internal communications, what are the things that are really going to move the needle from a value creation perspective in terms of our shareholders. And so they focused on streamlining our overall workflows, and we've actually reduced double digits the number of communications that we're distributing as a result. So that gives you a little bit of color as to the things we're looking at. But the biggest buckets, I would highlight here are really around the material opportunities, both on the direct side and the indirect side of the equation. And so again, going back to -- we're in our fifth year as a company and truly leveraging the scale of L3Harris as a $35 billion market cap. And what we can bring to the table and negotiating with our suppliers has a real opportunity to drive value for our shareholders.

Seth Seifman:

Michelle, maybe another question for you. If you could talk about the path to the delevering and just kind of how much cash you need to have on the balance sheet. I think there's probably some more debt coming up, then the company will have an ability to repay. So how do you think about what to term out versus what to repay now?

Operator:

The next question comes from the line of Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu:

Just stepping back, big picture, your margins are 15% today. How do we think about expansion from here, is it possible? And then, to that extent maybe specifically on communication systems, can you talk about the puts and takes there? Can you shake off some of these supply chain issues? And how do you think about the improvement progress and just the core margin of that business and run away from here?

Chris Kubasik:

So I think with that, I'll just thank everybody for joining the call this morning and another shout out to the employees who are really coming through and delivering a great third quarter. I know we're all working hard on Q4 and can't wait to see everybody in early December for our Investor Day down here in Florida. So with that, we will sign off, and thank you again.

Operator:

Greetings, and welcome to the L3Harris Technologies Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. At this time, it is now my pleasure to introduce your host, Mark Kratz, Vice President, Investor Relations. Thank you. You may now begin.

Chris Kubasik:

Okay. Thanks, Mark, and good morning, everyone. Yesterday marked a significant milestone for L3Harris in our acquisition of Aerojet Rocketdyne. Our investor letter disclosed that the FTC will not block our acquisition. This is one of the final closing conditions for the transaction, and we are moving forward to close in the next day or so. I look forward to extending a warm welcome to Aerojet's team of over 5,000 employees who will soon become part of L3Harris. This acquisition represents a pivotal moment for both our company and the defense industry and is poised to generate shareholder value beyond initial expectations. Budgets are increasing for munitions, and the DoD has committed DPA, Defense Production Act, funding for the expansion and modernization of Aerojet Rocketdyne's operations. Upon closing, this acquisition will strengthen the defense industrial base, foster healthy competition and accelerate innovation in support of the war fighter. In conjunction with this exciting news, we continue to focus on execution across the enterprise and have delivered on our financial commitments again in second quarter. Our results reflect the momentum we have been building over the last year, as the team delivered the fourth consecutive quarter of top-line growth which accelerated to 13% with increases in each segment. We don't talk much about our sectors, but 13 of the 14 grew their top-line in Q2 and 13 of 14 had a book-to-bill greater than 1.0. This gives me confidence that we've been investing in the right technologies, and we are aligned with customer priorities. Operating income was up 7% and margins expanded 50 basis points sequentially as we had anticipated. In total, we delivered earnings of $2.95 -- $2.97 per share, ahead of consensus and free cash flow was positive, in line with prior commentary at over $300 million. Given our performance to-date, we are increasing revenue and EPS guidance for the year and reiterating our free cash flow commitment. With easing supply chain constraints, operational improvement initiatives, and accelerating sequential growth in product-centric businesses, we remain focused on delivering second half results for 2023. With that, let's open the line for questions, Rob.

Peter Arment:

Yes, thanks. Good morning, Chris, Michelle and Mark. Chris, congratulations on the Aerojet deal. If it's okay, I wanted to kind of focus on that, just versus asking a question about the quarter. But maybe to start, maybe you could just give us high levels, walk us through kind of the go-forward plan on Aerojet and did you have to sign any consent agreements and any comments you would like talk about on integration would be helpful. Thanks again.

Operator:

The next question comes from the line of Seth Seifman with JPMorgan. Please proceed with your question.

Chris Kubasik:

Okay. No, again, thanks, Seth. Yeah, we did raise our hands, but to help. We had a pretty active M&A process and there were several companies or a handful of companies that we thought made a lot of sense. And one of those, of course, was the TDL line of ViaSat and of course Aerojet Rocketdyne. And as I've said before, and I know there was feedback, it was kind of unusual that both properties came to market in the same quarter. So it fits in strategically in my opinion. So we're always available to help the DoD, but the strategic rationale for Aerojet Rocketdyne continues to be entry into new markets. These are growth markets as you well know, with -- especially on the weapons side and it's well aligned with the government priorities, I already mentioned. From when we announced it to where we are today, significant increases in in the budget. And as you mentioned, the DPA money was over and above maybe what we had planned. So I think that makes a lot of sense. We've been impressed as we've gone out to the sites, with the talent and the skill of the workforce at these sites and as you would expect, the majority of those key individuals, hopefully all of them will be staying with the merger. And again, as of last night, the top 100 or so individuals we identified, over 98% have agreed to stay with the company. So I was excited to see that. I think hypersonics is going to be a capability that is very exciting. It doesn't get a whole lot of press, but longer term, when I look at where things are headed, I think the -- or soon to be our capability in hypersonics, that actually sounds pretty good. Our hypersonic capability is going to be a differentiator and I think continue to disrupt the market. We used to answer lots of questions about the backlog and whether we're short cycled, long cycled, but this clearly brings some long cycle backlog to L3Harris, gives us more earnings visibility. And the business case that we laid out back in December with accretion of EPS and free cash flow in the first full year and first full second year continue to remain in place or maybe slightly better. So relative to your question on operations, we obviously comply with the rules. There's this concept known as gun jumping, which is something you don't want to do. So we did not gun jump, which means we really couldn't get too involved in their businesses. But through the diligence process, we were able to engage with their team. They have a plan to go forward that we've reviewed. It's a real focus on deliveries and quality of critical missile programs. You mentioned a fair amount of those. And most of that surrounds the modernization of the Camden, Arkansas production operations and expanding production across other sites. And as you mentioned, the DPA, the $215 million, we've looked at that plan. That money will go mainly to those facilities and the programs you mentioned, but there’s also money in there to digitize their engineering. So we're quite excited about that. So we've developed some tools since the merger to improve operations and processes. We utilize capability modeling, we have zero defect planning, just as a couple of examples. So we're going to take those processes and merge them into what Aerojet has and we'll be ready to hit the ground running on day one. We'll be at the key sites and we have a plan to execute. It's going to take some time you would imagine, but they're excited about the acquisition. We're excited about it. And in next 48 hours or so, we just want to close it and get ready to go from there. So, thanks, Seth.

Robert Spingarn:

Hi, good morning.

Michelle Turner:

Hey, good morning.

Michelle Turner:

Yeah. So I'll start, Rob. Good morning and thanks for joining. So as Chris pointed out, we're focused on closing the deal first and then welcoming all the new AeroJet employees for the day one celebratory event. So we certainly are going to get to the guide. We do plan to update the guidance in October for the five months remaining as part of our Q3 earnings call. And then of course for 2024, that'll part of our January update consistent with the rest of our portfolio. Once we have officially closed, we will be reviewing the forecasts and the assumptions, but high level, we do anticipate revenue to be around $1 billion for the remainder of the year, but we don't anticipate a material contribution to earnings as we anticipate the income contribution will offset the interest expense from the incremental debt. To Chris' point around the value creation, I do just want to remind everybody what we had shared previously which is consistent with where we stand today. EPS accretion within year one, along with free cash flow within year two.

Operator:

Our next question comes from the line of Doug Harned with Bernstein. Please proceed with your question.

Chris Kubasik:

Good morning, Doug.

Chris Kubasik:

Okay. Well, thanks, Doug. Yeah, a lot of questions there. Look, I think the bottom line here is the TDL acquisition is really looking better than maybe we had expected. It's probably too early to declare success, but we're off to a real strong start. I'll just pick up on the operations first and then get to your more strategic question. But part of the plan was to integrate and move the production to Salt Lake City, where we have our BCS, Broadband Communication Systems, sector headquartered, which will co-locate these properties. So as of today, we've actually moved more than half of the production lines successfully. We're slightly ahead of schedule, which is always good. And we've already built first articles with no issues related to the production lines that we've moved. So we kind of expected that to be the case, but it's never easy to move a production line or several production lines, but that's going better than planned and actually more employees have agreed to relocate than we had planned for, which I think is contributing to the success. Sam Mehta, our segment President, and I will be out there next week for a few days and topics you're talking about are clearly on the agenda. I think on an integrated approach, our company does this probably better than anyone. We've had some successes over the last year or so on some significant classified programs, on Optionally Manned Fighting Vehicle, on SPEAR for the Navy and each and every one of these have in excess of seven or eight different L3Harris entities working collaboratively across multiple segments. So we think all the challenges the companies have working internally, whether it's the internal accounting, the cost transfer, who gets credit for the bonuses, all the reasons why people have a hard time working collaboratively, we've been able to fix. And I think that's really set us up well for exactly what you're talking about. I mean, the customer interest has been very, very strong. And most of the discussions have focused on how we integrate the BCS waveforms with the Link 16 capabilities. We talked about Link 16 having the footprint in over 20,000 platforms. So the boxes to put it crudely are already there and it's just a matter of taking those capabilities and integrating them and then also possibly enhancing the Link 16 capabilities. I think, while that sounds like a lot of words, what we were excited about and we put in the investor letter is that near the end of the quarter, we won, specifically TDL, a $150 million competitive Prime award for MIDS, and MIDS is the Multifunctional Information Distribution System as part of the Joint Tactical Radio program. This was the largest production order ever. It's about three times larger than anything we've ever received. And I think that's tangible example of the customer excitement and the capabilities. Obviously, we have strong backlog as a result of that order in that one business. And as I said, I couldn't be more pleased with this acquisition and still more to do, but everything is looking good so far. So hopefully that helps, Doug.

Sheila Kahyaoglu:

Sure. Good morning, Chris and Michelle. Thank you. I want to ask specifics on margins in the quarter and how we think about the second half. So I guess first up on Q2, CS performance was pretty good, tracking ahead of your full year. How do we think about mix benefits, the normalization of supply chain and the sustainability of 25% plus margins in CS? And then additionally, if you could dig into the operational items within IMS and what drives the sequential step-up in the second half? Thank you.

Chris Kubasik:

I'll just chime in. I think we try to highlight within IMS, the challenges on these few select programs were within the ISR and the maritime sectors. I will say that there continues to be a lot of demand for those products and capabilities. We do a fair amount of undersea test ranges for the US Navy and we've been successful in winning work just recently for the similar capability in Australia. We've talked about Compass Call here for the US Air Force. There's similar capabilities for a European country that will be mainly focused on modernizing the aircraft, which will have higher margins since the aircraft have already been procured. We're continuing to pursue undersea test range and sensing capability here in the US Navy, kind of a follow-on to something that we started winning four or five years ago. We've talked about the business jets and the strategy years ago to start missionizing business jets. We have an opportunity to far east, we have another opportunity in Europe. And then here in the US, you saw that we won the ATHENA-R program, which we're very excited about. I think the other day we announced that we're teaming with another OEM on ATHENA-S. We'd kind of hope to win one of the two and now we're going to go two for two. And then the Army has a program known as HADES, which could be up to 10 aircraft. So there's a lot of opportunities and how I want to tie this back to the margins is IMS has the longer cycle backlog relative to the other businesses, say, CS in particular. They have a lot of fixed price contract, probably some fixed price development programs, which I think I've publicly said we're really going to be selective on bidding going forward, especially when the customer is asking for a fixed price production or low rate production, simultaneous with development, that's just bad business and makes no sense and we're going to continue to push back and not bid those because very hard to price something that you haven't developed. But I have discussions on that topic regularly with our customers and we will continue to no-bid those until the contracting vehicle is appropriate. So I throw that in that some of these challenges which Michelle laid out well is really the lagging effect of attrition and inflation because of the long cycle business. We've taken those lessons that we've learned or we've more bluntly or clearly updated these bids based on the latest performance, the latest cost. So every single program I mentioned is double digit and sometimes more than double digit margins or higher double digit. So we'll get those wins, we'll get those in backlog that gives me confidence that we'll be able to improve the margins in IMS with Jon and his team.

Operator:

Our next question is from the line of Pete Skibitski with Alembic Global. Please proceed with your question.

Michelle Turner:

Good morning.

Chris Kubasik:

Yeah. Thanks, Pete. We talk about this Trusted Disruptor strategy at the L3Harris level. And as you would expect, it really flows down to each and every one of the sectors. And I mentioned we have 14 sectors When we close Aerojet Rocketdyne, we'll be up to 16 sectors as they'll have two sectors within that segment. But it's hard to think of a better example than maybe space where they've really been able to embrace this strategy and execute upon it. And at the highest level, we talk about doing more prime work with the end users, being more innovative, being more agile. I know it just sounds like buzzwords, but it's clearly working in space. And to back it up, at the time of the merger, we had five satellites, mainly experimental demo satellites under contract. And today, we have over 50 contracts for satellites. I mean, that's a 10x in four years, which I think reinforces to what's implied in your question that what we're doing is working. We actually have two classified operational constellations. Again, five years ago, we didn't have any. We might have had parts on other people's satellites on their constellation. So we really have disrupted this market and we're viewed as a prime and a legitimate competitor and we're winning and we're performing. We've invested a fair amount in R&D to get us in this position in capital. We're actually facilitating, we have two facilities, one in Fort Wayne, Indiana that we expanded and one here down in Palm Bay, Florida satellite manufacturing. So we're investing capital for growth, which will allow us to continue to perform. I mean, just since the merger, our revenue is up in space alone over 50%. We have record backlog, we have solid execution. We can always do better. We've had some challenges with certain suppliers. We don't call anybody out by name, but we just kind of work with those -- with those companies to bring them along. So in the space world, it all comes down to launches. We have a bunch of launches coming up in October and that's where the money hits the road. We're excited about a launch we have, the co-manifested payloads, both our SDA tranche 0 satellites will be going up with the MDA's HBTSS satellite. So I think that worked out real well. Upcoming opportunities, we do a lot of work going back decades for NOAA for their weather satellites, about $700 million opportunity coming up this year. We feel really good about that. It's called the sounder program. As always, a lot of classified opportunities, which I know is never satisfying for you and others to hear, Pete, but they are there. The SDA tranche 2 for tracking, the RFP is coming out. So we'll be prepared to respond there. And I think at the end of the day, you hear me talk a lot about prioritization and aligning with customers' needs. Secretary Kendall at the Air Force, their number one operating imperative is all about space. So we have the mission sets. We have the phenomenologies. We've adapted to the rapid acquisition process and we've been quite successful. So couldn't be more proud of the team. And it's just one example where the strategy has been laid out, it's been executed and it's working. So, more to come.

Mark Kratz:

Rob, in the interest of time and to stop at 40 minutes, we'll go ahead and take the last question this morning.

Myles Walton:

Hi, thanks. Good morning. Chris, I wanted to ask about TDL, at the sales and the margin side, I think the sales year-to-date since you've rounded it down [about 10%] (ph), did the MIDS contract you mentioned turn that around, get you back above a $400 million sort of run rate where you acquired it? And then on the margin side, if I strip out some of the market loss making contracts, the margins look a bit light. Is there a case for a significant margin expansion once those MIDS drop in? Thanks.

Chris Kubasik:

I guess with that, we'll just wrap up the call. Again, apologies to cut it a little bit short, but Mark and his team will be available all day. And, Michelle and I have to go work some acquisition related tasks as I hope you can appreciate. So thanks for dialing in. And again, we'll get you more information about the Investor Day in December and have a great rest of the week. Thanks.

Operator:

Greetings and welcome to the L3Harris Technologies First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. It's now my pleasure to introduce your host, Mark Kratz, Vice president, Investor Relations. Thank you. You may now begin.

Chris Kubasik:

Okay. Good morning and thanks, Mark, and welcome aboard. We've been focusing on execution under our Performance First imperative and I'm pleased with our results. The first quarter was strong in many respects as we continue to build momentum with our trusted disruptor strategy, resulting in record orders and record backlog, improving macro trends serve as a positive backdrop, including the President's 2024 budget request released to Congress in March. We are well aligned with the priorities in the National Defense Strategy, which is reflected in robust funding and major areas for us, including space and joint force capabilities as well as missiles and munitions given our pending acquisition of Aerojet Rocketdyne. Our goal for Q1 was to grow the top line, meet the EPS number and have positive cash flow. The team rallied and delivered on all counts. For a third consecutive quarter, we had top line growth, a 9% increase with each segment growing. Operating income was up in two of the three segments, despite the usual headwinds. However, we came in line with where we thought we would be to begin the year. This resulted in EPS of $2.86 and we anticipate building from there. Free cash flow came in at over 300 million, a significant improvement from a year ago and we also front loaded our share repurchase commitment for the year. We received a second request from the FTC in March, which was followed by the Aerojet Rocketdyne shareholder approval vote the following day. Both of these outcomes were expected and we are responding to the FTC. We still anticipate the deal will close later this year. First quarter results are differentiated winning strategy and the overall business environment led us to reaffirm our 2023 guidance with the recognition that record orders and strong revenue growth to date could support a bias towards the higher end of our revenue guidance range should these trends continue. We still have work to do on profitability, but with abating macro headwinds, operational improvement initiatives and accelerating sequential growth in product centric businesses, we remain committed to our full year EPS guidance. So we're off to a strong start and I'd like to recognize our employees for continuing to prioritize Performance First in everything they do. With that, let's open the lines for questions, Rob.

Matthew Akers:

Hey, good morning. Thanks for the question. I wanted to put maybe a finer point on the Rocketdyne timing. Have you I guess substantially complied with the FTC's second request you had, If not, sort of how much is left there? I think that's what starts the clock for that review.

Operator:

Thank you. Our next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your quest0ion.

Chris Kubasik:

Okay. Well, thank you, Sheila. I was actually in Clifton, New Jersey all day with our electronic warfare team. So just a short drive to get on TV. So thank you. Thank you for that. You know, let me kind of kick this off and then I'll ask Michelle to give a little more detail. And I really want to step back and think of space and the space domain and how it aligns with the strategy that we've been talking about since the merger. So a few fun facts that the date of the merger there were actually zero L3Harris or legacy company satellites in orbit. Today, there are seven that we have built, obviously, as a prime and we have 33 in backlog as a prime that will be launched over the next couple of years. So when we look back, we saw this as a growth market several years ago, which it is. We invested R&D and capital and facilities and tooling to position ourselves for growth. And the discussion aligned with what we've been saying for several years was to move up the food chain and become a prime by providing disruptive technologies and alternatives to our customers. And I think as we sit here today, we can see that that strategy, that investment is starting to payoff. We're probably best known recently for the work we're doing with the Missile Defense Agency and the Space Development Agency launches that will be coming up in the next year or so. But we're also a market leader in weather and ISR and also space exploration. And I appreciate you highlighting the fact that we're growing internationally as well. You don't always think of space as an international growth opportunity, but the team has a global reputation of delivering on time and having quality products, and we're seeing that being recognized around the globe. So, Michelle, do you want to maybe give more detail?

Operator:

Our next question is from the line of Kristine Liwag with Morgan Stanley. Please proceed with your question.

Chris Kubasik:

Yeah. Thanks, Kristine. I believe the worst is behind us relative to all the macro headwinds we've talked about supply chain attrition and inflation. But to your question specifically on supply chain, you know, I'm proud of the team because these alternative parts just don't happen. We took a fair amount of talent and expense to redesign our products, if you will, design for availability. And the team has done an amazing job. And as we highlighted in our letter, we now have 1300 alternative parts that weren't originally designed into our products. So that's been able to allow us to grow. As you saw in the quarter and maybe position us for continued growth for the rest of the year. I think after the last few years, I hate to predict anything because it's hard to predict what's going to happen day to day or month to month. But I feel real good about the opportunities and the positioning. And we referenced, you know, we've signed a strategic agreement with a major microelectronic chip providing company. The benefit for us is it gives us assured availability and kind of moves us up and out of the allocation process, which is always an uncertainty kind of day by day. And in exchange for that, you know, we're sitting down and sharing with them our technology roadmap and working collaboratively as we design new products, taking advantage of some of their more advanced technologies. So long way of saying we're happy with the first quarter. We have good visibility for Q2 and beyond. And you know, if we continue with this momentum, it's possible we could see outperformance.

Scott Deuschle:

Hey, good morning. Michelle, can you lay out what drove the softer margins in IMS.

Scott Deuschle:

IMS and CS this quarter and then walk through the factors that unlocked the implied margin improvement in the second half. And if you can touch on the dynamics with backlog repricing, that would also be very helpful. Thank you.

Scott Deuschle:

Yeah, that's right. Backlog repricing. Thank you.

Chris Kubasik:

Yeah, I think I'll just chime on Scott a little bit more. And look none of us are happy where we are in Q1 with the margins, but it's exactly what we had planned. And we clearly have a ramp to get to 15.5 by the end of the year, which we will. You know, we kind of teased out in the letter a little bit about our enterprise transformation. And I just wanted to talk briefly about that. You know, it's actually been less than four years ago that we had the merger. And what I call Phase One was our three year integration, which I highlighted is very, very successful with over 650 million of savings. But that was really just Phase One, right? That was harmonizing the benefits, closing down headquarters, consolidating segments, taking advantage, you know, of the enterprise relative to supply chain rebidding contracts. And, you know, it's water under the bridge, but still proud of what the team was able to accomplish, especially during COVID. So the natural evolution under our continuous improvement mindset is to move into Phase Two. And we've really looked at the success of our trusted disruptor strategy and how it's being embraced by our customers and suppliers, and we're applying it to ourselves. How do we disrupt ourselves and how do we get better and more efficient? So we just completed about a ten-week sprint to highlight and confirm that there are opportunities for us and we're trying to figure out how we're going to function differently and really rethink every function and everything we do. Easy example would be on real estate, especially as we've supported and embraced the remote and hybrid world. We don't need nearly as much office space as we used to, and there's a clear opportunity for savings. We're looking at functional cost. We're looking at what we do. We started using as everybody as I'm sure bots to remove some of the manual labor and actually provide some savings and also our indirect procurement strategy, just to name a few of the things. So now that the sprint is complete. We're in the design phase of the program. And on our next call, we plan to give you some actual tangible numbers and tangible timeframe to show how this is going to make L3Harris an even better company and contributed to our already industry leading margins. So the entire leadership team is excited about this project and I think we're off to a good start and more to come in, you know, 90 days.

Peter Arment:

Yeah. Thanks. Good morning Chris, Michelle and Mark.

Peter Arment:

Chris, I wanted to ask on working capital and I'm sure Michelle want to weigh in. I know you've kind of focused on driving the metrics lower over the last few years. And last year you obviously built up some inventory. Maybe you could just update us I know working capital was less of a use this quarter, but maybe whether you think the 53 days that you kind of ended in 2021, is that still something you can target this year? And ultimately do you think you can get into the 40s? Thanks so much.

Chris Kubasik:

And Peter, clearly working capital is a top priority. It's something we briefed our board at each and every meeting. And as we have our monthly reviews, that's something that Michelle, I and the team look at. You know, I don't think it was surprising to see it. The working capital days grow in the last couple of years. You know, we were taking the approach, you know, to get all the parts we could pretty much at any cost, and that resulted in a build-up of inventory. We're much more confident in our ability now to plan and have alternatives to part. So you'll see that contribute as we bring down the working capital days. And if you recall, we were very aggressive and continue to be in negotiating performance based payments versus progress payments and tying the receipt of cash to specific performance milestones. And, you know, I view that as an opportunity. I think it's fair to say there's certain programs that are behind schedule either due to our performance or our suppliers performance. And you know, that's fine. We've identified it and we're working it. And that gives me even further confidence that we'll be able to hit our numbers as we continue to perform and tie the cash to those milestones. So thanks for the question, Peter.

Doug Harned:

Good morning. Thank you. As you work through the process on Aerojet Rocketdyne, how are you thinking about divestitures at this point? Things stand out that light commercial aircraft, simulation and training, public safety. So how are you thinking about kind of the timing of when you might do a divestiture, what the size might be, and how do you decide what fits?

Operator:

Our next question is from the line of Richard Safran with Seaport Global Research. Please proceed with your question.

Chris Kubasik:

Yeah. Thanks, Rich. I mean, we always set our internal goals and aspirations to be more than 101 on book-to-bill. It's kind of hard to grow if you're not booking more orders than the revenue you're recognizing. I think the 1.3 was -- is absolutely a great way to start the year. When we talked last time, you know, this is the impact of a continuing resolution, right. And, until the CR gets broken loose, which it did, we start to see the money flow. And as I've said before, the only one who dislikes the CR more than industry is the Department of Defense. So I think we're off to a really good start. The President's budget request of $842 billion is 3% growth, as you know, Rich. And when you peel it back 4% on the investment accounts, you couple that with what we've been able to do internationally the last several years, the interest in the TCOM, the Space International, you would clearly expect that we'll be over 10 for book-to-bill for the year. And aspirationally I'd like to be at least 105 and maybe even 11. But it's somewhat lumpy, right, as you know. And it depends on we only talk and record the funded backlog. So that always has a little bit of a difference maybe relative to other companies. But we're feeling really, really good. And I think the key message here is, you know, this just confirms that, that our strategy is working and the customers appreciate and recognize what we're trying to do. Sometimes, we have more innovative solutions. The focus is on speed and schedule and cost. So we kind of mix those in and they've been pretty aggressive in pursuing different markets and different technologies. I will also say that Michelle and I and the team spent a lot of time focused on risk management and we had two opportunities in the quarter that were pretty exciting to us. But when the final RFP came out, there were fixed price development with fixed priced options and we chose not to bid those for obvious reasons. It's very hard to commit to a fixed price development program when you don't know the spec. I think we all look back at all the write-offs and losses and more times than not they're tied to that. So we will not be playing that game. I've elevated it to what I think is the highest levels within the Pentagon and the RFP has come out. We're not going to bid. And I would think over time others aren't going to bid. And ultimately we'll go back to the appropriate contracting vehicle for the appropriate opportunity. So kind of a roundabout answer there, Rich, but I wanted to cover a few of those -- a few of those points. I guess I'll just maybe throw in the pending acquisition of Aerojet Rocketdyne. I mean, by all accounts, and it's not always easy to look and compare apples-to-apples, but the munitions line in '24 appears to be at least 20% higher than '23. So I think we all know the need and the desire for these munitions for not only current threats, but future threats in addition to refilling the stockpile. So I think the acquisition in December made a heck of a lot of sense. And I think when you look at the budget, it makes even more sense. So I'll just leave it at that.

Operator:

The next question is from the line of Michael Ciarmoli with Truist Securities. Please proceed with your question.

Chris Kubasik:

Let me try to address them. Yes, relative to working together, there's some pretty clear rules that are called gun jumping, and we're very conscious, as is Aerojet Rocketdyne, not to trip over those thresholds. So we cannot actually work together and help them relative to the DPA money. We're aware of it. We have the ability to review the documents. But Eileen is running her company, I'm running my company. And until we close, we can't really change that. And that's been around forever with all acquisitions, mergers and consolidations, but all the more reason to get this transaction approved in a timely manner so that we can start working on that. The Defense Production Act, DPA, it's actually been around since the '50s. So this is a pile of money, a bucket of money that the DoD has, and it's really there to help strengthen the resiliency of the defense industrial base. And with the focus on manufacturing and capability of these key technologies, I was pleased to see that they received this money. I know the team has been working on this for probably a year there at Aerojet Rocketdyne. It's unrelated to the acquisition. But it is in support of their growth. It highlights to me the critical nature of these technologies and the DoD need for this company to be successful. And this money, I view, as maybe a little more tactical relative to increasing both the physical and the digital infrastructure of Aerojet Rocketdyne. Our acquisition being more less tactical and more strategic will assure a strong industrial base, a more viable competitor. And I think it's great news for Aerojet Rocketdyne and great news for the Department of Defense. And I'm pretty sure they have pretty thorough plans and a competent leadership team on how best to spend this money to optimize both capacity, digital engineering and moving a couple of production lines for the growth that we talked about. So relative to the divestitures, yes, we're not -- everything I was talking about would be legacy L3Harris. So clearly, the space propulsion space once the deal closes.

Peter Skibitski:

Hey, good morning, everyone. Hey, guys, maybe Michele on capital allocation, as Chris alluded to in his remarks, you guys went pretty heavy on repurchases to start the year, pretty close to your $0.5 billion target for the full year. How are you thinking about allocation now on the balance of the year? Because I know you do have some debt maturing this summer, I think. So do you look to address that? Or are you looking at other options? Thanks.

Operator:

The next question is from the line of Robert Stallard with Vertical Research Partners. Please proceed with your question.

Michelle Turner:

Hi, Rob. Can you hear us?

Chris Kubasik:

Yes. I think that's an easy one, Rob. So just picking up where Michelle left off, the answer would be no. We'll have close to $13 billion, $14 billion of debt. And as we've said previously, we'll be using our free cash flow to reduce that debt to maintain our investment credit rating. So no. No is the answer. And a couple of years down the road, we can relook at that. But we want to keep a strong balance sheet, focus on execution. We really -- going back to December, there were three things that were a challenge, whether reality or perceived, and that was how could you integrate ViaSat, fix your operational issues and buy Aerojet Rocketdyne at the same time. I'm pleased to report on ViaSat that the integration is going well. It looks like both the revenue and the cost synergies will meet or exceed our business case, so that is exciting. We're about six months ahead of schedule relative to consolidating facilities. We have a four phase process. So the risk of moving is reasonably low. We're in the middle of the first phase. So we'll basically take the four major product lines one by one and that could be done by the end of this calendar year, which again is ahead of schedule. And the customer feedback and the interactions has been real exciting relative to these new capabilities. And we talked briefly about Link 16 in Space. And I'm pleased to say for the first time ever, Link 16 is in space, based on some recent payloads that were launched. So probably a little early to say that ViaSat is done, but it's on a really good track. And I would think we kind of have that behind us. I think on the operational challenges, again, really proud of this team in this quarter. It feels like we've turned the corner. A lot of this -- and I know it was -- nobody wanted to keep hearing about the products and 25% and revenue recognition and such, but it was unique compared to the rest of the industry. And now that we're getting the supplies in, we're redesigning products. You're seeing that in the top line and you'll see that in the bottom line as well. And then by the time the deal closes, the focus for my team and others will be on Aerojet Rocketdyne. So January 1, a lot of questions, a lot of uncertainty, and I think we're knocking these issues out one by one over a 12-month period. And by the time we get to '24, we're going to have a lot of momentum behind us. So I hope that helps. Maybe we have time for -- looks like one last question or -- that was it. All right. No other questions in the queue.

Operator:

Thank you, everyone. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Operator:

Greetings. Welcome to the L3Harris Technologies Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President, Investor Relations. Thank you, and you may now begin.

Chris Kubasik:

Okay. Thank you, Rajeev, and good morning, everyone. As we reported yesterday, our fourth quarter came in ahead of expectations, and our 2023 guidance points to steady or improving trends. We've also been active on the M&A front, consistent with our strategy, as opportunities present themselves. Let's start with Q4. The team delivered a solid top line, up 6% organically, with Communications leading the way as we saw improvements in electronic component availability within tactical comms. This contributed to the second consecutive quarter of organic growth for our company. Segment margins were about what we expected, with ongoing pressures from macro factors, including inflated costs for material and labor. The net of this is EPS just above our recently guided midpoint and free cash flow at our $2 billion outlook. Turning to 2023. We're consistent with what we said on the last call

Doug Harned:

Good morning. Thank you.

Doug Harned:

Yeah. Well, this question is going to have a few parts, I'm afraid because I want to understand a little bit more about your case for Aerojet Rocketdyne. I mean, you've talked a lot about it being a valuable asset. It diversifies your portfolio. But as you've also said, it's been a merchant supplier. So trying to understand, there are a few things here. When you look at it, what are some of the specific parts of the company that have potential for revenue synergy? Second, are there some areas of cost reduction there beyond just corporate costs? Because I know the facilities are difficult to move, for example. Third, are there things that you can do to improve operations and better performance for the end customers? And then last, when you're in this pre-close period, how do you ensure that the value of this asset doesn't deteriorate some over time?

Operator:

Thank you. Our next question is from the line Robert Stallard with Vertical Research. Please proceed with your question.

Chris Kubasik:

Good morning.

Robert Stallard:

Chris, I'll keep it to one following up from Doug's question though. When you looked at Aerojet and you look to the other levers you could pull on capital deployment, why did you think this is the best option for shareholders to go with versus continuing with the share buyback? Thank you.

Operator:

Our next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Chris Kubasik:

Yes. Good morning, Sheila. And yes, IRAD is something that we have been investing in year-over-year. We have industry-leading IRAD kind of in the 3.5% range. We've significantly increased what we call ERAD, our external R&D from customers. When I look at the two together, we're well over $2 billion. So we have a pretty good process to -- a very good process to prioritize how we spend that money. So I think through some of the exciting things, if I start in space, we're excited about the investments that we've made in some new optics that we'd refer to as replicated composite optics. Basically, this is a replacement for glass mirrors in telescopes made out of carbon graphite. So the exciting thing is it's about half the weight. It takes about two-thirds of the time to manufacture, and it's significantly less expensive. And we're going to be launching the first ever replicated optics in the middle of the year. So I think this is going to reduce risk. We'll see how it performs, but this could be a game changer for a satellite business. And the air and land domains with ViaSat, we're investing in the advanced Tactical Data Link with a lot more resiliency. So that's part of the whole strategy there to modernize Link 16. And I think we have the largest library of waveform. So we're very excited about that. And then, maybe on the maritime front, I'm pretty excited that our -- we've talked about our Iver vehicle in the past. This is our autonomous undersea vehicle, just recently has achieved the first ever repetitive submerged launch and recovery from a torpedo tube. This is a significant step for our company, and I think it gives us an opportunity to considerably enhance the nation's autonomous undersea capabilities. So trying to give you some tangible examples and each of those will result in new business programs of record and maybe give you some insight to what's coming out of all the money that we're spending, whether it's IRAD or ERAD. As you probably saw in the letter in other release, we have two new segment presidents join us this year, and I can speak for them and say as they went through our portfolio and looked at the IRAD and some of the things we're working on, both John and Sam were pretty excited about the potential. So thank you, Sheila.

Scott Deuschle:

Hey, good morning and congratulations on the progress this quarter. It's great to see.

Scott Deuschle:

Michelle, are there any large ISR missionization contracts and the guides that haven't been finalized yet, particularly on the international side? I'm just trying to get a sense of whether there's any timing-related downside risk from that. Or if that's more just an upside opportunity, if one or more contracts do go your way? Thank you.

Operator:

Our next question is from the line of Michael Ciarmoli with Truist. Please proceed with your question.

Chris Kubasik:

Yeah. Thank you, Michael. We do have confidence in margin expansion. I think when you look at the customer, or you look at the portfolio mix they have, it's like everybody in the industry, it's a combination of cost plus and fixed price. So I'm not sure it would all go back to the customer. It should obviously -- they should be able to keep it on the fixed price. But that's in the past. I'm looking going forward. Like any of these acquisitions, there are systems that are fragmented or maybe older technology just like when we put L3 and Harris together. Our IT organization knows how to convert these. I used my reference to ViaSat, the fact that those employees are already on our systems, and it hasn't even been a month. So most of the challenges, challenged program, and I know they've talked about it at length, seems to be at one facility. Like I said, we'll have people down there in the next week or two. And everything has been contemplated in our business case. One of the benefits of being a large -- part of a larger organization, again, this is an acquisition, not a merger, I just like to make a -- an important distinction. We are buying them. They're about one-tenth of our market cap, and this will be a quick integration relative to decisions that need to be made, and a lot of their systems will migrate on to ours, whether it's benefits, payroll, et cetera. On the ERP manufacturing execution systems, they've been putting those in. We're familiar with those systems, familiar with those systems, familiar with the technology. And all that has been contemplated. With our scale, we have the capital. We have the IRAD. We prioritize it, and we have the ability to invest as they have been doing to make them world class.

Seth Seifman:

Hey. Thanks very much, and good morning.

Seth Seifman:

I wonder, if you could talk a little bit about the kind of the medium-term outlook for the Communications business. We recently saw a management change there, and the – the details of the management change suggest that you're looking for some really fresh and different thinking in a business that's been kind of the core of the earnings for the company. And we've seen some good growth in the radio budgets in recent years. But when we look out to the middle of the decade and beyond, it doesn't necessarily look as good. So, can you tell us about your medium-term thought process for communications?

Operator:

Our next question is from the line of Gautam Khanna with Cowen & Company. Please proceed with your question.

Chris Kubasik:

Good morning.

Gautam Khanna:

I was curious, Chris, if you could talk to where you guys are in the L3 kind of integration journey. Meaning a couple of years ago, you guys talked about $250 million of annual cost out for a number of years kind of moving from a holding company to an integrated business, et cetera, et cetera. I'm just curious where do you think you are on that journey? And then if you could just comment also on the supply chain and the pace of healing within it assumed in the guidance and what you saw in Q4? Thanks.

Michelle Turner:

I always agree with you, Chris. But just to add a little bit more color, I think a great example of where we're continuing on this next phase is around our real estate and our footprint consolidation efforts. And so to Chris' point, we took the low-hanging fruit in the first couple of years. Byron Green and his real estate team have really been focused on what's the next phase of that. We're in the middle of a two-year plan to take out an additional 10% as a result -- 10% of our overall sites as a result of this current operating environment where we have more of a hybrid workforce. So, it's continuing to be an evolution that's going to continue to pay dividends for. It's really helping to offset some of the macro inflationary challenges that are permeating across the industry. And then just to give a little bit more color from a supply chain perspective, I talked about our 2023 guide. And the word I would use is -- to describe it as a balanced approach. Again, the guide assumes it's consistent with our second half 2022 performance. But just to make this a little bit more tangible, I think it's helpful to think about what's different as we think about 2023 versus what remains the same at the start of, say, 2022 or at the end of 2021. So, I'll illuminate a few things for you because I think it helps bound the risk as you think about our guidance. Frankly, it's how we're managing the business internally. So, what's the same? What's the same is we do continue to see hiccups from an overall supply chain ecosystem perspective. This is consistent across our industry and other industries. This is something that's become a bit of the new norm. What's also consistent is we do continue to be on a 90-day allocation process with our microelectronic chip manufacturers. And this is a really important point because even when we continue to see the improvements like we did within Q4, the reality is the insights that we're getting to our supply from a chip perspective is good for about 90 days out. Then it gets more nebulous as we get into the latter part of the year. And then finally, I know we've put some of this within our Q3 earnings call. But just a reminder, 25% of our portfolio, which is different than our peers, is tied to in product deliveries. But if we're short on chips or we're short on washers or nuts, we're not going to be able to deliver that radio or that turret. And so those things remain the same as you think about our 2023 guide. Now what is different, right? And we've been talking about a lot of this in 2022, but what's really different is those proactive actions that we took last year to be purposeful and focusing on the things we can control. They help to minimize the risk in 2023. And so just a reminder, engineering redesigns were a big focus for 2022. We get the full value of that benefit in 2023. Our alternate part bank within our Tactical Communications Systems business is up to 1,000 parts. That would have been at 100 parts in 2021. Our overall revenue base in terms of DPAS coverage, it's also increased double digits. So that aids in the prioritization of our supply and material availability. And then finally, I think this is the most important predictive indicator is the number of critical parts. When we started and we felt the most acute impact from supply chain was really in the second half of 2021. We had hundreds of critical part shortages at that time. Fast forward to where we are today, and we're in the 10s in terms of the impact and what we're having to manage through. So the way I would characterize this is we continue to see sequential improvement from a supply chain perspective. We're not out of the woods by any means. And so as a result, we're taking a balanced approach to 2023, and that's what's reflected in our guide.

Robert Spingarn:

Hi. Thank you. So Michelle, just on the back of all of that, it seems like the positives are there might support higher margins in 2023. Now I know the guidance range allows for that. But what would cause the downside?

Chris Kubasik:

And I'll just chime in that, if you recall, last time we talked about the importance of our workforce, keeping them engaged and motivated and focusing on some of the attrition. And recall, in October, we talked about some of the things we're doing that are unique. Michelle mentioned the increased merit. We also held all the benefit costs flat from an employee perspective. We've increased the budget for spot awards to recognize performance and some of the other initiatives. And that was a headwind and investments of over $100 million that we're absorbing in 2023 and that provides a little bit of a drag, but it was the right thing to do, and I'm confident it's going to pay off.

Kristine Liwag:

Hey. Good morning, guys. Chris, earlier you mentioned that the ViaSat deal closed 90 days ahead of expectations. Was this something that you did differently with this acquisition to help speed up the regulatory review? And how much of that playbook is applicable to the Aerojet Rocketdyne deal?

Operator:

Thank you. The next question is from the line of Peter Arment with Baird. Please proceed with your question.

Chris Kubasik:

Yes. Thanks, Peter. Now look, we've talked about Link 16 being on 20,000 platforms. And that really gives us the ability to upgrade and modernize. So when I mentioned the IRAD we're spending on the advanced data tactical link, that's an obvious fit. One of the things we focused on in the negotiation, this was a carve-out. So that's a little unique as to what we buy, what we don't buy. And we really wanted to get access to a relatively small piece of the business, which was the Link 16 to space and Link 16 and Viasat's on the SDA transport. Later this year will be a launch. We will have the first-ever Link 16 capability in space. And I think, again, that's kind of the hidden jewel in this thing. There's going to be Link 16 in space. The connectivity from space to air is a game changer to focus on resiliency. So relative to revenue synergies, we're very excited about the potential here with ViaSat. So the upgrade is going to happen. We're investing in new products. We also have the existing product production that's going well. So I think we're going to look back on this one. It's going to look pretty successful and pretty straightforward and off to a good start. So hopefully, that helps.

Richard Safran:

Thanks. Chris, Michelle, Rajeev, good morning.

Richard Safran:

Chris, last year, I'm going to try two, because I think they're quick. So your letter indicates you're getting compensated for inflation on new contracts. I was just wondering on existing fixed price contracts, is the government allowing you any adjustments based on higher unforeseen costs? And if so, would that the upside to your guide? Second question is Chris, just given your knowledge on – I asked this of your competitors. It seems to be just a general view that, as we move into a deficit reduction, defense is going to be the bill payer. I was kind of curious about, though, your view of sentiment on the Hill and for continued defense spending and funding modernization? Thanks.

Chris Kubasik:

So I think with that, we'll wrap up. So I appreciate everybody calling in. I'm a big believer in momentum, and I feel like we have the beginning of some momentum with two consecutive quarters of growth, some acquisitions. I don't know if you can hear it in my voice and Michelle's, but we're really excited about the future and what the potential brings. And I know the initial feedback from the ViaSat employees has been all positive and the Aerojet Rocketdyne employees. And we've actually heard from many of the former Aerojet Rocketdyne employees who are also excited about the transaction. So, we're going to focus on the closing, get this deal done. And once it's closed, we're looking forward to connecting with any former Aerojet Rocketdyne employees and welcome them back if they're passionate about the mission. So, I think it's going to be an exciting couple of years. But before I sign off, I wanted to recognize and thank Dana Mehnert for his 38 years of service. As you know, Dana announced his retirement in Q4 and is assisting with a smooth transition. So, we appreciate that, Dana and wish him all the best in his future endeavors. And I want to turn it over to Michelle real quick.

Michelle Turner:

So, thank you, everyone, for joining the call today and for your continued interest in our company. Before we disconnect, I just want to take a minute. As many of you know, this will be Rajeev's last earnings call with us. And I want to thank you, Rajeev, for your contributions in our Investor Relations function, overall L3Harris and for me, personally, for my transition over the last year. We all wish you the very best in this next adventure. So, thank you.

Operator:

Greetings. Welcome to the L3Harris Technologies Third Quarter Calendar Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President of Investor Relations. Thank you. You may now begin.

Chris Kubasik:

In the midst of quarterly results and financial outlooks, we can easily lose sight of the importance of the mission. Delivering the technologies to our war fighters who are never in a fair fight is imperative. Earlier this week, we lost a great American and pioneer in Defense. Dr. Ash Carter fostered collaboration between Silicon Valley, the defense industrial base, and the Pentagon. He successfully changed the way we combat terrorists and he opened combat roles to women. Many of us at L3Harris, including our Board of Directors, either knew or worked for Ash Carter. We all send our deepest condolences to his family and friends. Before jumping into questions, as we normally do, I'd like to make a few comments. By now, you have read our investor letter and much like you've heard from our peers, it's clear that we're operating in a dynamic environment. Starting with the good news. My team's energy and excitement continues to build as our trusted disruptor strategy is yielding tangible results and is well-aligned with the recently released National Defense strategy. We've carved out a leadership position as a non-traditional prime with a record quarter of over $5 billion in funded orders and a book-to-bill of roughly 1.2. These were driven by notable prime position awards related to Armed Overwatch for SOCOM, responsive space with the SDA tracking tranche 1 and network systems for the US Navy. We also announced our first acquisition since the merger. We're acquiring Viasat's Tactical Data Link business and gaining access to the ubiquitous Link 16 network. This product line fits nicely in our comms and networking-centric portfolio, enabling us to bring the DoD's JADC2's effort to life. Our momentum is building, and I'm optimistic about the value-creating opportunities ahead. Conversely, on the not so good news, we rightsized our 2022 guidance based on current realities. We previously highlighted a steep ramp in the back half of the year. And while we're making progress, today's backdrop necessitates a more measured approach. Let's start with the top line. We grew for the first time in four quarters at 3%, though fell short of our mid-single-digit expectations. This is because of two primary factors. First, we were previously selected for a Mideast aircraft missionization program that included a profitable sale to a key customer, but the formal signing of the contract has now been pushed out as the shifting geopolitical landscape continues to hamper the timing of certain international awards. This would have supported two points of growth for the full year, alongside profits and cash. Second, supply chain headwinds continue, and although improved, the recovery was not aligned with our expectations. As a reminder, with our commercial business model, 25% of our revenue is tied to end unit deliveries. We need 100% of the parts to assemble our products, such as a radio in order to make deliveries and recognize revenue. Thus, we are taking a more prudent approach in the fourth quarter as the availability of mainly electronic components remain volatile. So our expectations is for a 2% decline in 2022 versus the roughly 1% growth we pointed to previously. We ultimately view these as deferrals versus lost sales. Next, on segment margins. The approximately 16% in our previous guide is going to be closer to 15.5% and in the range of our year-to-date average. This is a result of net higher inflationary input costs offset by proactive cost actions focused on controlling what we can. As expected, the reduced revenue and margins are driving the guidance decline in EPS and free cash flow. On 2023, I know there's a lot of focus here, and we'll properly guide with year-end results as we typically do in January. That being said, our expectation is for improving revenues and relatively steady margins, while growing free cash flow and free cash flow per share year-over-year. This remains a work in process for the next couple of months. So a tough, but necessary financial update. We remain focused on executing our strategy of being a trusted disruptor and controlling the controllables in today's dynamic environment. With that, Rob, let's open up the line for questions.

Sheila Kahyaoglu:

Thanks so much. Good morning, guys and Chris, thanks so much for your letter and kind words on Secretary Carter. I think, there's no doubt that you're not only a trusted disruptor, but you add a human element to everything that you do, whether it's talking to the DoD or the investor community, and you picked a partner in Michelle that does the same. So just wanted to mention that. But in terms of my question, in the letter, you talked about analyzing the situation over the next few months prior to providing 2023 guidance. So, how do you think about maybe the pinch points, whether it's on sales or margins and how you're thinking about the range of outcomes?

Michelle Turner:

Yes. And I'll just add before jumping into the margins. When we look at our overall portfolio, just a reminder for those on the call, 25% is recognized in terms of revenue based on delivery. So that's a little bit different than others within the industry. So as you think about some of the supply chain constraints and the deferrals associated with it, it really is the entirety of the revenue being recognized versus over like a cost incurred type of revenue recognition. Also, this is our higher-margin business. It runs about 25% for us. So again, to Chris' point, this is more reflective of deferred revenue versus lost. But just to give a little bit more color in terms of margins, how it's playing out in 2022 and how we're thinking about 2023, to Chris' opening comments, we did reduce our guide to 15.5 from an overall segment perspective, really driven by two things. One was around the volume mix, in terms operating aircraft missionization along with the supply chain constraints, these tend to be margin accretive for us across our own portfolio. But also just in recognition of the overall macro operating environment, you're hearing this consistent with our peers. Higher input costs, whether it be supply chain, labor, inflation, along with things like redesigning parts internally to ensure we can continue to meet our customers' critical missions, all of that is equating to about a $250 million incremental cost headwind for us in 2022, of which we are doing what we can to control the controllables, and we've been able to successfully offset about 70% of that increased cost across the overall ecosystem. So, as we think about 2023, we're taking all of these data points into effect, along with where do we land at the end of the year from a supply chain perspective. Given that 40% of our overall portfolio is short cycle in nature, that data point is going to be very relevant in terms of how do we set guidance, both from a top line and bottom line perspective for next year.

Robert Stallard:

Thanks so much. Good morning.

Robert Stallard:

I'd like to delve into the non-cash charges that you booked this quarter. And what exactly drove the timing of those charges being taken here? And in particular, you mentioned that the demand for precision guidance seems to be weakened, but that would go against the grain given the broader defense environment we're seeing.

Chris Kubasik:

And I think, Rob, to the timing question, I think most companies look at this at the end of the year per the requirements for goodwill accounting. But to the extent you become aware of an instance to do a check, you ought to do it. So, when we looked at the rising interest rate environment, and as Michelle said, having just completed our preliminary plan, we went ahead and ran the numbers and took the charge here in Q3. So, that's the timing.

Richard Safran:

Chris, Michelle, Rajeev, good morning.

Richard Safran:

Chris, I appreciate and I really like the commentary in your letter. But I was really surprised to see you categorize defense budget environment under ugly. So, I have two things I want to ask you here. First, nobody thinks that CR is good, but they're generally short-term. Do you think -- or is your thinking that the CR could go past December? And more importantly is if we just exclude the CR for a moment, given the bipartisan support for defense, do you hold a positive view of defense spending and see continued year-over-year increases above inflation and especially as it pertains to L3Harris programs?

Operator:

Thank you. Our next question is from the line of Doug Harned with Bernstein. Please proceed with your question.

Chris Kubasik:

All right, Doug, thanks. Let me take the first part on supply chain. I'll ask Michelle to comment on the surge. And it's a great question. And I'll say, I think we have control over the situation, but let me explain the complexities as we were reviewing this a week or so ago. And I'll just use TCOM as an example. So in the quarter, we delivered about 12,000 radios. And you've heard me say and Michelle say, and we'll probably continue to say, we don't book the revenue, the profit until we make the delivery. So they were split between manpack radios call it, 8,000 manpacks and 4,000 handheld radios. And when you go down into the details, and we looked at the schematics, talk to the team, I think Michelle was just up there a few weeks ago at a KIA event on supply chain that we hosted. There's about 10,000 parts in a manpack; 5,000 in a handheld. I'll do the math for you. The bottom line is we needed 100 million parts to deliver those 12,000 radios. So we monitor this on a daily basis. I would say we get 97.5% of the parts in. But I said in my prepared comments, if you don't have all the parts, you can't deliver a radio. You can deliver an airplane with missing parts. You can deliver a ship with missing parts, and you deliver a lot of things with missing parts, but you can't deliver a radio or arguably night vision goggles or cameras. So I think that's what's unique. And the question got to be, do we know what the heck we're doing here, which this is a fair question, you didn't ask that, but I'm sure that's on people's minds. So we looked at a key supplier as an example, where we ordered 18 months ago, 25,000 parts. 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. So these commitments and all of us, me personally talking to CEOs of major corporations, you get the commitment that passes through the system, and they get an allocation and we come up short. So this happens on a regular basis. We're leveraging DPAS. Like I said, we have executive outreach. We have contacts. We look at this daily. But that's an example of maybe it's down in the weeds, but that's what we're tracking, 100 million parts for one entity for one quarter, and that's how we came up where we are. And that's why, to Sheila's question, we'll look and see how November and December, we do track I'll just stick with radios, but I can go through all the entities if you want. We have about 400 key suppliers. We had 30 that were on the watch list back in Q1. We're down to 10 that are on the watch list, meaning either poor quality or cutting the allocation. So that's where we are. And that's why I can say, we're making progress, but you almost have to be perfect in that regard. So I don't know, Michelle, if you want to supplement what I said or talk about the surge.

Operator:

Thank you. The next question comes from the line of Scott Deuschle with Credit Suisse. Please proceed with your question.

Michelle Turner:

Good morning.

Chris Kubasik:

Scott, thanks for the question. And what I like about your question is it kind of aligns with the culture that we're trying to build here at L3Harris. And that is just encouraging people to speak up and ask the tough questions. And I appreciate you asking it actually because, as you can imagine, I kind of had a similar thought across my mind having taken over L3 back in 2018. So this was the whole basis -- one of the key basis of the merger is how do we accelerate that transition from holding companies, which really doesn't work in this industry for a variety of reasons to an operating model. So I think it has helped. I think if we go back and look, it's probably been at least 12 months for certain, and clearly, the last six months that Michelle and I in public forums and other venues have been pretty outspoken about the risks. I think it was in the second quarter, we talked -- I mean I go back to January, right? And we were very transparent in my opinion. And we said, look, we're going to shrink in the first half and then we're going to go up the steep slope in the second half. And as you would expect, we were -- honored our word and we shrunk in the first half. I wasn't happy about it, but that was the plan, and we executed accordingly. And we really needed to have a good ramp here in Q3. And we laid out there were three main components that were going to drive it. One occurred, which is just our normal focus on delivering quality products on time. We had an assumption on supply chain, which I think I've given enough examples on the 100 million parts and that one supplier as an example that came up short. And then this Mid-East International missionized aircraft which was just a matter of getting the contracts signed. So it was probably the 20th of September with 10 days to go where we figured this contract is going to be signed. And you get down to the 29th, and it's not signed, its 2 points of revenue for the whole year. So I would say, we have very good visibility. I, personally, along with Michelle, participate in monthly financial reviews. I don't think there's a lot of companies who have their CEOs involved in a monthly review at the level and size of our company. So we have good visibility. We track the risks. We mitigate them where we can. Opportunities pop up like Ukraine. We capitalize on those. And we're trying to be transparent and measured and prudent in telling you what's happening. So, I think, that was a great question, and hopefully, that addressed it.

Operator:

Thank you. The next question is from the line of David Strauss with Barclays. Please, proceed with your question.

Chris Kubasik:

Good morning, David.

Chris Kubasik:

Yes. Thanks, David. Yes, there’s got to be -- the free cash flow, we have the tax cap -- the R&D capitalization. That's still something we're watching assuming that there's no fix to that issue. The impact of that will be about $150 million less. So if we can grow the top line, we'll keep the margin steady. We should have a little more cash from operations plus the $150 million from taxes. So that gives me confidence in free cash flow growth and free cash flow per share growth. The current outlook just on the pensions is on cash at zero. We're going to be funded in the mid to high 90s. So there is no cash draw on pensions. Relative to adjusted EPS, I'll ask Michelle to give you the details on the pension. But, yes, there will be a pension headwind. We'll true up those final assumptions at the end of the year. So we'll give you the impact. And I think, we just got to see where the year ends up and what we give for next year. I think it could be flattish to maybe up or down a couple of points, depending on the final assumptions where we end 2023 -- I'm sorry, where we end 2022 as a takeoff point for 2022. So, Michelle?

Operator:

Thank you. Our next question is from the line of Gautam Khanna with Cowen. Please proceed with your question.

Chris Kubasik:

Good morning.

Michelle Turner:

Yes. So, just to give a little bit of color and context, and feel free, Chris, to jump in as well, here is kind of how we're thinking about it. What's going to be key is how we close the year from a Q4 perspective, particularly within tactical communications given the margin impact across all of our product portfolio. Within that, there's also a mix component, right? So, we've seen strong demand internationally. And so these are tailwinds as we think about going into next year. From a headwind perspective, it's really around the macroeconomic environment, right? We're continuing to see higher input costs. I talked about that in terms of 2022 impact. But as we think about going into next year, what does that look like is we're going to -- we're assuming that it's going to continue to be volatile. There's going to continue to be rising costs. And then the actions that we're taking internally to offset that. And I think a great example of this is we announced the voluntary retirement program at the end of Q3. That's going to help us as we think about inflation next year, particularly on the labor side of the equation. And so it's -- how does all of that come together in terms of our guide, which we're triangulating around this relatively flat point based on what we know today.

Operator:

Our next question comes from the line of Peter Arment with Baird. Proceed with your question.

Michelle Turner:

Good morning.

Michelle Turner:

Thanks, Peter, for the question. So just a reminder for folks, about 25% of our overall portfolio is what we consider commercial, and we have the ability to reprice in an environment like we're in today. And so teams are doing a good job in terms of as we're reacting to the higher input costs, ensuring that we're getting priced where the market will accept those price increases. As I think about 2023, and I think one of the benefits of our portfolio is that we do -- on our program side of the house, which is about 50% of what we do or 75%, including the cost side piece, it tends to be shorter in nature in terms of period of performance. And so our average period of performance is about 12 to 18 months. And so if you think about this increased inflationary environment starting in the middle of this year, I anticipate that, by the end of next year, we've worked through that backlog that was priced in the pre-inflationary environment. And so I think that's one of the advantages that we have, given our shorter cycle nature, but it also plays into how are we thinking about guidance for next year and going back to -- there's multiple variables that we're taking into consideration, that being one of them.

Operator:

Thank you. Our next question is from the line of Ken Herbert with RBC Capital Markets. Please proceed with your question.

Chris Kubasik:

Good morning.

Ken Herbert :

If I could just starting off on the Tactical Data Links acquisition. I know obviously, it hasn't closed yet, but Chris, maybe you can provide a little bit more in terms of your thinking strategically how this supports the JADC2 opportunity and maybe how this just supports broader modification and upgrade opportunities? And could we see maybe an acceleration in the top line of that business once it's part of your portfolio? Because obviously, it's a relatively mature technology and a mature set of assets, but I think it could present some interesting opportunities.

Operator:

Thank you. Our final question comes from Ron Epstein of Bank of America. Please proceed with your question.

Chris Kubasik:

Yeah. Well, let me go first, and then I'll throw it to Michelle. Yeah, you have to go back three years to remember this, but it was a merger of equals. And for accounting, one company had to acquire the other based on a variety of a – variety of rules. And I think the key rule is who had the larger shareholder base. So if my memory is right, I think it was 52-48, 52 Harris; 48 L3. So for accounting, Harris acquired L3. So, all the goodwill went to the L3 properties. Had it flipped, all the goodwill would have gone to the Harris properties. Pretty sure, we would have come up with the same answer regardless. But yeah, all this goodwill is applied to the legacy – from the acquisition, the legacy L3 businesses, and those were the ones that took the charges. But go ahead, Michelle.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Operator:

Greetings. Welcome to the L3Harris Technologies Second Quarter Calendar Year 2022 Earnings Call. . As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President of Investor Relations. You may begin.

Christopher Kubasik:

Okay. Thank you, Rajeev, and good morning, everyone. I'm encouraged by our progress as we continue to execute our trusted disruptor strategy. We're investing in targeted capabilities in and outside of the company, and we've had over $1 billion of notable prime awards this month alone. And we're pursuing international expansion as our customers need mission-critical solutions in a rapidly changing threat environment. We're also encouraged by how budgets are shaping up globally. The threats are evident, and there's growing urgency to support defense spending in the U.S., NATO and elsewhere. This is a stark contrast to a couple of years ago, where budgets were expected to be flat at best. Our book-to-bill of 1.14x in the quarter supports this shift in the budget environment. At the same time, there are factors outside of our control, such as supply chain, inflation and labor markets tightening that are offsetting and masking our progress as well as the opportunities ahead. Our results, however, highlight that we're working to mitigate these challenges. Our second quarter results are consistent with prior commentary of a back half weighted year for revenues, margins and cash. Nonetheless, we kept EPS relatively stable year-over-year and our free cash flow stepped back from breakeven last quarter to more than $700 million. In addition, while we're reiterating our guide, we're now pointing to the low end of the range across the board. Based on the timing of some key awards, including protest activity and a prolonged supply chain recovery, we decided to take a more measured approach, especially given the macroeconomic and geopolitical uncertainties that are somewhat unpredictable. So despite the noise, we continue to execute on our strategy. With that, Rob, let's open the line for questions.

David Strauss:

Chris, can you give us a lay of the land on F-35 and Tech Refresh 3? And whether you still see about $150 million headwind there this year before beginning to recover in '23? And then bigger picture, the investor letter did a great job of highlighting the budget upside that came through in '22 and the plus ups could look likely in '23. When do you think that really begin to materialize for the industry in terms of seeing it come through in terms of the numbers? And how do you think your strategy positions you to capture that upside relative to your peers?

Operator:

The next question is from the line of Sheila Kahyaoglu with Jefferies.

Christopher Kubasik:

Yes, I'll take the first shot, and then maybe ask Michelle to give a little more color on the sector. But space is clearly our fastest-growing sector in the company. This win that we had earlier this month for SDA tracking Tranche 1 is just a huge opportunity. If you recall, we won Tranche 0 for 4 satellites. This is 14 satellites. Pretty excited about this particular win. And again, it's an example where we're priming. We have the payload capabilities, and that's ultimately where the value resides. So as a reminder, $700 million award, 14 satellites, and it really ties into our responsive satellite strategy. A couple of years ago, it was nonexistent. Now we have satellites in low earth orbit, medium earth orbit and geosynchronous orbit. So it's really going well. I think at the date of the merger, we had no business with the Missile Defense Agency. Now we're smack in the middle of that growing business line. So I'm really pleased with where we are. I think the other day, Michelle and I were looking, we have about a $20 billion pipeline in space alone. And when you look at our capabilities in missile defense, weather, like I mentioned, all orbits and even ground capabilities, it's quite exciting. But Michelle, you want to talk about the rest of the sector?

Operator:

The next question is from the line of Ron Epstein with Bank of America.

Christopher Kubasik:

Yes. Let me start. Just at a high level, I think at least at L3Harris, I think the whole industry has now realized there's a new norm in supply chain. And we're adapting to that as quickly as we can. In the past, the whole focus was just-in-time inventory, inventory reductions, single sources. And you'd always go with the low-cost bidder without serious consideration on the certainty of supply and delivery. So we have multiple work streams going in parallel. And I think we're doing a pretty good job in the short term, trying to mitigate and avoid the disruptions, but we're also looking how we revamp our supply chain resiliency for the long term. So I've mentioned in the past, we've invested in tools to get end-to-end visibility beyond Tier 1. We're investing in critical materials, smart inventory, safety stock, which I understand builds our inventory balance. You'll see that on our balance sheet, but I think it's the right business decision. And we're trying to move to more localized and distributed production to shorten the whole supply chain network to get our parts even quicker. And then we're looking at multiple sources for every part. So a complete turnaround, almost a 180, from where we were 3 years ago. But this is the new norm, in our opinion. This is what we're doing. Michelle, do you want to talk a little bit about the headwinds in the recovery?

Operator:

Our next question comes from the line of Richard Safran from Seaport Global.

Christopher Kubasik:

Right, Rich, let me take Armed Overwatch, and Michelle will talk to you about aviation. So yes, this is a program that goes back into late '19 and early 2020. And we decided to take a clean sheet approach to this program to align with the requirements. Team has spent a fair amount of money in R&D and capital. We've had lots of demos that have gone well that we think position us in a good place to potentially win this program. It's for 75 aircraft. It's clearly a couple of billion dollar opportunity here domestically and even more, internationally. There's a lot of need for this type of capability in countries that are fighting terrorism. We've had discussions with countries in Africa, the Middle East. I think, it is where the initial potential is, whether it's border protection or maritime operations, light strike, ISR, pretty flexible, pretty affordable program. So we kind of have to wait and see. Hopefully, something comes out in the next week or 2. And I think it's a key one to watch, in my opinion. I know it's important to our company, and it really would validate our strategy and the thesis for the merger because we invested in the innovation. We started with a clean sheet. It's another opportunity to be a prime integrator, it has international potential. And it also has pull-through of our products, Wescam turrets, radios, weapon carriages and EW capabilities. So we'll see what happens. I'm pretty excited about it. And maybe with that, we'll go to Michelle.

Operator:

The next question is from the line of Peter Arment with Baird.

Christopher Kubasik:

Yes. No, I appreciate the question, Peter. Clearly, we have opportunities in Europe. We've talked about some ISR capabilities that we've been -- we've already won in the past, where we continue to add aircraft, and we have a path to get to 8 aircraft for this particular country. Clearly, with Ukraine, I think we have a core competency and a lot of experience working with the Ukraine Security Assistance Initiative, the USAI money, that's always been in the budget. So clearly, the radios, the night vision goggles, even some ISR capabilities, position us well there. And as I mentioned, we're going to open offices in Europe, the NATO countries. Poland is a big opportunity, where we've submitted a few a few bids, again, with comms, resilient comms, SATCOM, at a high level. That's where I see us making the most progress in the near term and even impacting our 2022 financials favorably and expect it to continue into '23.

Douglas Harned:

I wanted to try to understand what's going on in Tactical Communications a little bit better. You've had a rising backlog, but at the same time you've been constrained with supply chain issues. And what I wanted to get is to understand once -- first, once the supply chain constraints ease up, what kind of trajectory do you expect to see as radios are delivered, a big surge or more of a long-term better growth outlook? And then along with that, we've seen you keep your margins. Margins have held pretty well, even though we've got a lot of inflation exposure and you've got the supply chain issues. I mean, how do you see the risks around margin there as you go forward, if we see persistent inflation?

Michelle Turner:

Yes. So Doug, so just to your point, in the first half, we did -- consistent with our expectations, we did see our Tactical Communications down low double digits, really driven by the electronic component constraints. As we go into second half, we expect that, that's going to grow in the high double digits. So to your point, we expect that, that starts to ease from a capacity perspective. We've made the investments that Chris talked about and continuing to see the electronic components improve. It's going to be critical for the second half and as we go into 2023. We do have an elevated backlog, to your point. It's about 1.5 billion. So we have a healthy backlog that we'll be looking at as we go into 2023. And additionally, I'd note to the international question, the international book-to-bill within Tactical Communcations is 1.15 within the quarter. And so this really speaks to the overall conflict environment, Ukraine opportunities that we're seeing. And we expect that, that will be a benefit for us as we go into 2023, but a lot of these orders are also being considered over a couple of years. And so you should think about it in terms of 2023, 2024 and into 2025.

Robert Stallard:

Chris, I was wondering if you could comment on this NSO situation and what happened there? And in conjunction with that, whether you have any additional M&A deals potentially in the pipeline?

Operator:

The next question is from the line of Pete Skibitski with Alembic Global.

Christopher Kubasik:

Yes. Yes. Well, Pete, I don't really get frustrated about much, but this has taken a longer time than anybody wanted. So there's going to be a re-procurement between us and Northrop. We all signed an agreement as to a path forward. So I expect to get into RFP in the next month or 2. We'll update our proposal. And I would think, in mid-2023, hopefully earlier, 2023, that maybe we'll make a selection and we'll move on. It's really about the capabilities that the Navy needs and the threats that we keep talking about. And we'll -- we respect the process to allow people to protest, and I think there's been 4 or 5 different judges and reviews and such, but it's progressing. So it was over $100 million of revenue we had in our plan for this year. So that's kind of given us a little headwind. We'll move it into '23. The team is ready to go. We like our technology. We like our solution, and we'll wait for the Navy to select us again, hopefully.

Noah Poponak:

Wondered if you could just talk a little bit more about the back half as you see it now, relative to the prior guide? The acceleration in organic revenue growth to mid-single, how much of that's 3Q versus 4Q? How much visibility you have versus things that could slide? And then if there's anything on the cash flow side in terms of payment timing that you're looking at as well?

Christopher Kubasik:

I'll just chime in, Noah. At a higher level, the approach we've taken, and we talked to the leadership team, is let's just control the controllables. There's a lot of frustration, I think, out there in the system. And we're kind of taking the approach that -- the last 2 years have clearly been unprecedented, whether it's pandemic, Ukraine, inflation, supply chain, all the stuff we know. So when we give the guidance for the second half that Michelle laid out, we want to let you know it's kind of hard -- it's harder than it has been in the last several decades to predict the future and the visibility, given the uncertainty and the volatility that changes literally on a daily basis. There are some days where we get a call from a supplier that they're going to be a week late. And the next day, someone shows up a week early. I mean, it's really very, very dynamic. We're trying to stay calm and relax and control what we can control and mitigate those things that we can't and then communicate to the best of our ability what the upside and the downside is. The interesting thing is we're just talking about a ballway in all cases. We're not losing things. Sometimes they take longer to get awarded and sometimes they slip, but we're looking forward to the new norm and some of these uncertainties dissipating.

Operator:

The next question is from the line of Morgan Stanley, at Kristine Liwag with Morgan Stanley.

Christopher Kubasik:

Yes. No, that's a great, great question. We started investing in weapons, I think, going back 4 or 5 years. When -- I mentioned we set up the Agile Development Group. This is right in their sweet spot. We have multiple classified opportunities. This is an air-to-ground tactical missile. I think it's -- when you look at the budget, you look at the threats, you look at our capabilities, I think we're in really good shape here. We've taken a clean sheet approach. And I think that's what's going to be the differentiator. I mentioned that on Armed Overwatch. I mentioned it here, right? We're not taking an existing capability that's been successful for decades and tweaking it. We're taking a clean sheet approach. We're investing in our in our Seekers, which I think is unique and has great capabilities. And I'm proud of the team to see us get down selected on this one. There's classified things where we're also getting down selected. Like anything, it starts out a little slow. I think there's 3 of us. I know there's 3 of us. And sometime in August, we'll get the Gate 2 award. And I think in 2023, early '23, they'll probably down select to 2, and then the fly offs and the fund begin. So this is clearly a core competency for us. It's a market that I like. And I think it's similar to what I've talked about. It's going to disrupt the market. And I think a lot of people were surprised when they hear L3Harris want a stand-and-attack weapon. And there'll be more of this in the years ahead.

George Shapiro:

I was wondering on the cash flow, your inventories are up like 260 million in the first half. I assume some of that's due to supply chain issues. Where do you expect that to go? Or where does it need to go for you to meet your cash flow guidance because obviously, like usual, it's much more second half weighted than first half?

Operator:

Our next question is from the line of Robert Spingarn with Melius Research.

Christopher Kubasik:

Okay. No, great questions. And to answer the first one, I mean, you kind of got to it. The CR is going to be something that could obviously impact '23. I think you called it a monster year, is that what you said? So I'd love a monster year, whenever that is. But no, the capacity, I don't see as being an issue. We invested in the prior years. We have a world-class factory, if you will, out in Salt Lake City for the Broadband Communication Systems business. They've had a great couple of months here with the win of CEC, the Cooperative Engagement Capability I mentioned earlier, which is JADC2, the EAGL program. Of course, they'll hopefully get next-gen jammer. So we've made those investments up in Canada. We've invested in a new facility for WESCAM, where we're seeing the surge in the turret. We mentioned the extra capital that we spent in Rochester. So for the product quick turn businesses, I think we have the capability. Labor is probably more of a potential constraint than the actual facilities themselves. If we get the supply chain turnaround, I think we'll be okay. And we've been doing pretty good on the labor front. We've hired over 4,000 people so far this year. We have the same challenges with attrition that the rest of the industry does. But we're hiring interns. We're hiring new college grads. I think it's a company that people find interesting and exciting, and we're getting literally hundreds of thousands of resumes to come work for us. So I feel pretty good about that. Relative to '23, we're actually going through our strategic planning process now. We talk about low to mid-single-digit growth, but some of the stuff is pretty lumpy. And we should be in a position if we can get these wins to continue our top line and bottom line growth. Michelle?

Operator:

Our final question will be from the line of Michael Ciarmoli with Truist.

Michelle Turner:

Yes. Thanks for the question, Michael. So consistent with what we shared back in our last call, we anticipate about $100 million of gross inflationary impacts within the year. We had about $20 million of that play out within Q2. And to your point about our overall program mix, about 50% of our portfolio is fixed price. It's about a year in terms of duration. And so we're starting to see some of the inflationary pressures prior to having EPA clauses in our contracts starting to play out here in the second half of the year. We'll see that into 2023. Where we're focusing on what we can control right now is ensuring a new contracts that we are placing clauses that allow for this inflationary environment. But we anticipate that through the middle of next year to probably Q3, Q4. We'll see some remnants of the impacts of the current economy and the inflationary environment. Okay. So before ending the call, I want to take a moment to recognize our 47,000 strong L3Harris teammates around the globe. And thank you for remaining focus on creating value for all of our stakeholders, particularly in support of meeting our customers' critical missions. What you do matters in terms of making the world a safer place. Thanks, everyone, for your time today, and have a great weekend. We look forward to connecting again in the next few months.

Operator:

Greetings. Welcome to the L3Harris Technologies First Quarter Calendar Year 2022 Earnings Call. At this time, all participants are in listen-only mode. Today’s call will be focused on questions-and-answers following brief opening remarks. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President of Investor Relations. You may now begin.

Chris Kubasik :

Okay. Well, thank you, Rajeev, and good morning, everyone. As you saw, we released our results after the market closed yesterday in our new streamlined format. We're always looking at ways to improve and challenge the status quo. So instead of issuing a press release at 7:30 this morning, and have Michelle and I read prepared remarks, which were very similar to the press release and maybe with some added color, and then having you follow along with our web charts, which are just a graphic depiction of what we were going to say anyway. We thought we'd try something new and come out with what we're calling our investor letter and putting everything in one document. And that allows us all the time today to focus on the questions and talk about what's on your mind. So just real quickly, the first quarter results are consistent with our prior commentary of a back half 2022 weighted revenue and margin plan. This will also be the case with our free cash flow as well. And for the full year, we're reiterating our guide across the board as we continue to advance our strategy in a dynamic environment, whether it's from the pandemic or the global threats in Eastern Europe and elsewhere. So before opening the line to questions, I'd like to express our steadfast support the people of Ukraine. I think we all agree their unwavering strength and resilience are a motivating force behind our mission here at L3Harris. So with that, Rob, let's open the lines for questions.

Robert Spingarn :

Good morning. I wanted to ask you really a general question, to just elaborate on your Agile Development Group and the strategy behind the partnership with Shield Capital. Nut then something more specific on the flight test status for your integrated core processor for the F-35 Tech Refresh 3 and the possibility that delays on TR3 might push Block 4 out to fiscal '29 and how all this impacts the revenue back up that you previously talked about between TR2 and TR3?

Michelle Turner :

Yeah. Good morning, Rob. So just to add a little bit of color from a financial perspective. So our overall Mission Avionics sector is going to be down mid-single digits, consistent with what we shared before. The F-35 development is going to be down low-double digits before we get into the ramp from a production perspective. So we anticipate going into next year that we'll be flattish to up a couple of percent.

Operator:

Thank you. Our next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Chris Kubasik :

Okay. Well, thanks, Sheila. We'll obviously welcome all feedback on the new investor letter, but I think we got a lot of positive feedback, giving you 15 hours to read it instead of one hour. So hopefully, that was helpful. Yeah, on Ukraine -- and I'll just say Ukraine in the whole region. The breaking news yesterday was you saw the White House asked Congress for an additional $33 billion of funding. And when you look into the details, which I know will evolve over time, $20 billion is for defense. And of that, $6 billion is the US AI, which is the Ukraine security assistance initiative and $6 billion is FMS. And those are two vehicles and processes that we're very familiar with, and we've used over the last several years or decades in supporting Ukraine. So I think we understand how that process works, which, of course, is very important. The $6 billion compares to $300 million last year. So this is a significant increase, and we just need to see how long it's going to take to get this bill passed. As we read it, it appears to have a lot more flexibility for acting quickly to get these contracts moving. So as you would imagine, we're in discussion with several customers in the region and here in the U.S. There's lots of opportunities for L3Harris. When you think of secured communications, I think it's been pretty well publicize the importance of having secured communications. And that's worked well. With Ukraine, has been a longtime customer of ours. I think you can read and see that the Russians are having difficulty with the communication. So I think that positions us well. We have just, under the whole ISR, situational awareness, whether it's space ISR, air ISR, even the EO/IR turrets out of WESCAM are examples of things that I think could be needed and of course, night vision goggles. So we're really not able to give a lot of details, as you would imagine. But I think broadly, we're well situated. And many of these capabilities are in our sweet spot, even including EW electronic warfare. So I think over the midterm, we continue to believe low to mid-single digits is the right guide at this point in time. We are starting to get demand signals. We're responding to RFIs. But I do like the tailwinds. And I think more to come over the next several quarters. I will say relative to being more agile or nimbler, I can't give you the specifics, but I can tell you within 15 days from receiving a request, we were able to ship product to help with the conflict. And just so you know a lot of this is reprioritization, right? So we have other customers who are willing to give up their products, to get them over in the region. And then we have to obviously backfill those as well. So I don't know if that got to all your point, Sheila, but that's -- I think we're well situated.

Robert Stallard :

Thanks so much. Good morning.

Robert Stallard :

Chris, I'd reiterate the -- thanks for this new format and the timing especially is very helpful. In terms of my question, inflation obviously is a big issue across the world at the moment. And in relation to defense, there's obviously been some concern about how this could flow through on fixed price contracts. So I was wondering if you could comment on that and what sort of alleviation L3Harris might have to this issue.

Michelle Turner :

Yeah. So I would just characterize it's very consistent with what we shared in our previous guidance. And the other thing I would say is that from a 2022 perspective, we've locked in most of our supply pricing. So we've mitigated most of the risk consistent with what we put into the guidance. Although I will say that this environment is becoming more elongated. So as we're thinking about our strategic planning, this is certainly going to be a headwind as we think about 2023.

Gautam Khanna :

Good morning, guys. And thank you for the very efficient format both last night and on your opening comments. I had a couple of questions related to one another. So a, if you could just broadly characterize kind of how LHX fared in the fit-up forecast? An open-ended question, if you could talk about radios? You've won a number of IDIQs, night vision, what have you. So take it as far as you'd like, but talk to us about the fit-up and how you guys are positioned?

Gautam Khanna :

Meaning the lives and other questions as well. We can defer that.

Michelle Turner :

Yeah. No, I agree. I think often in recent discussions, our radio business has been overshadowed by our supply chain challenges. But when you look at the predictive indicators, whether we're talking about the budgets with double-digit growth on our handheld or the IDIQs that we received within first quarter. $10 billion of IDIQ is really speak to a predictive indicator on the overall growth within this business. And so we're excited about the near term. Going back to Sheila's question around the immediate opportunities that we're getting from the conflict environment as well, all of the macro indicators would suggest that we're going to have a tailwind related to this business. So we're excited about what's to come. We do need to get through the hurdle, however, with the immediate supply chain challenges

Peter Arment :

Yeah. Good morning, Chris and Michelle. And thanks for your time. And I appreciate the new format like everyone else. I think it's really efficient. Chris, I guess my question is just leaving off from what Michelle just mentioned on the supply chain. Just your comfort level around kind of things improving in the second half? And then also just how it relates to maybe you take a more cautious approach and carry more inventory as we kind of look towards this kind of building budget environment and just kind of have an adjusting case supply versus kind of targeting your working capital days that you been highly focused on? Thanks.

Michelle Turner :

Yeah. So I can add a little bit from a numbers perspective. But I do just because of the complements that we received on the investor letter, I do want to thank Rajeev and the IR team, along with our controller team, communications and legal, a lot of collaborative effort went into creating this. And we feel like it's really a win on many levels. But the one that I would highlight for this group is really how we're living into our DNA of being a trusted disruptor across the organization. So it's not just about our products and technologies, it's about how each and every one of us show up differently to ensure we're a differentiator. So on the supply chain front, just to put some context from a numbers perspective, in first quarter, we expect this is going to be slightly under $100 million in terms of the top-line impact. We expect that that's going to be fairly consistent in Q2, with the recovery happening in the second half and into 2023. And so to Chris' point, I think it's very consistent with what we -- where we were at in January, except with a potential elongation into 2023 as well. But I do think it's also really important going back to the budget conversation to note that this is all about timing, in particular within tactical radios. The demand for our products remained very strong. So it's really about getting through this short-term lift from a supply chain perspective.

Doug Harned :

Good morning. Thank you. I'd like to continue on the tactical radio side. Because when I think of the products that you've got here, I mean, this is sort of the -- I think of it kind of post-jitter's world where you're trying to have common waveforms. So you need a lot of interoperability. So it means you have to -- and my sense is it means you have to really outfit large portions of the military. And when you think about the IDIQs you've gotten, can you talk about how those -- how you expect those to play out in terms of, in a sense, completing the deployment over time of the radios that the Army, the Marines that they need overtime? And then second, how do you think about the conversion of those IDIQs into revenues in terms of your share, in terms of the timing of individual awards?

Michelle Turner :

Yeah. And just to put some context around the inventory builds. We did build inventory across the enterprise by about $100 million, what we call smart inventory, in terms of solidifying the second half revenue growth. So I think that's a good callout, Chris. But on the IDIQs, we did have 4 substantial IDIQs from outland radio perspective within first quarter. The first one, a $6 billion 10-year dual source IDIQ. So to Chris' point, based on history and how that plays out, we would expect to get half of that in terms of as the funding comes in. And just a reminder, in terms of how we do our backlog? Our backlog does not assume these IDIQs until they're funded. And so part of what we saw play out within Q1 on the book-to-bill being right around one, did not include any of the funding upside that we would anticipate as we add -- as funding is added to these IDIQs. And then just a couple of other notes. We did book a $3.7 billion from a five-year navy multiservice. This is a sole-source IDIQ. So that would be 100% coming to L3Harris. Similarly, a $750 million 10-year award with Marine Corps. That was a competitive award. And then the final one was a $300 million SOCOM award, another sole source. So of the 4 booked, all were sole sourced, except for the first one, which was dual-source. So again, continue to have really strong predictive indicators in terms of our demand for radios.

Richard Safran :

Chris, Michelle. Good morning. So I wanted to ask you, you've been talking about the bookings. Book-to-bill was about one in the quarter. Your comments about continuing to grow. It just seems an understatement to say you're optimistic about demand, given the global increases in defense spending and the upward trajectory of new awards. So what does it say about book-to-bill for the -- how book-to-bill for '22 ends up? I mean, are we talking about an improving outlook here? Do you see international as a bigger driver of your bookings now? And I guess if you could offer a comment on maybe how you're thinking about now what '23 bookings might look like? Anything you could offer there, I think, would be helpful.

Michelle Turner :

Yeah. And just to add a couple of additional words to that because this is part of our second half growth. We are anticipating international ISR missionization programs in the second half as well. And so specifically to the question on international, we did land within Q1 with a book-to-bill over 1 is 1.08 from an international perspective with 4% growth. And so I think that speaks to the -- another predictive indicator in terms of our strategy is working. And then on the space side, clearly continues to be a growth engine for us. We are anticipating the announcement of award on SCCA tracking Tranche 1 as well. And so that's another competitive award that we're anticipating in the second half of the year.

David Strauss :

Thanks. Good morning.

David Strauss :

Good morning, Chris, Michelle. Mix, I wanted to touch on it. I think it was -- it sounds like it was a benefit to IMS in the quarter, but a negative on SAS. And I think for the full year, it's supposed to be a headwind to both of those segments. So if you could just touch on kind of the big moving pieces when we think about the mix and the impact on margins? And could you also just touch on the size within -- I think it's within IMS now? Commercial aviation, how big that business actually is now given you've sold off a decent chunk of it? And where that, I guess, that stands relative to like-for-like pre-pandemic levels? Thanks.

Chris Kubasik :

Yeah. And just to -- on the Commercial Aviation, we're right about $500 million of revenue this year is the outlook, pre-pandemic that was in the $900 million range for our commercial training business. So we're continuing to be patient and take advantage of the rebound, which should be coming soon. We had previously divested the military training, so 900 to 500 there. And I'll just foot stomp, the space business is really doing well, well over $2 billion of revenue, double-digit growth. And I just think we're in the sweet spot, whether it's prime in these responsive space opportunities, such as SDA and HBTSS that we've talked about, some classified opportunities, GPS and the MTS3, which is the next generation of GPS, the weather satellites I mentioned, but also the exquisite satellites, where we are a sub to other companies and provide our payload. So we're going to take this work each and every time. Might be a little headwind on the margins, but it positions us long term for growth and follow-on opportunities.

Michael Ciarmoli :

Hey. Good morning, guys. Thanks for taking question. Love the new format. Chris, just -- and maybe, Michelle, back to the international in the demand environment. I guess if we look at the growth trajectory really in the industry prewar, it was really going to be driven by U.S. DoD modernization next-generation programs in this R&D phase shifting to production. But I guess given what we're seeing with NATO and the increases in their spending plans as a percent of GDP, are you guys seeing more tangible evidence? And you pointed out that 1.08 book-to-bill that there could be an increase for higher-margin legacy systems as you go forward. And that could potentially provide some structural margin tailwinds as you move into kind of this medium term if these European NATO countries really need to recapitalize their business or their industrial base rather?

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.

Operator:

Greetings, and welcome to L3Harris Technologies Fourth Quarter Calendar Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. . As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President, Investor Relations. Thank you. You may now begin.

Christopher Kubasik:

Okay. Thank you, Rajeev, and good morning, everyone. I'd like to welcome Michelle Turner to this morning's call. She is an experienced financial executive with diverse operational experience, including 2 decades in the aerospace and defense industry. She joins us from Johnson & Johnson. She was the CFO of their supply chain organization. I'm excited to have Michelle on the team and look forward to our partnership. So welcome to week 2, Michelle.

Christopher Kubasik:

Okay. Let's get started. This morning, we reported our 2021 earnings, and I'm pleased with the result. Our company delivered another solid year of bottom line performance, growing EPS and free cash flow per share by 12% and 9%, respectively. It wasn't, however, without its challenges as the pandemic stressed our supply chain at a time when budgets remain uncertain. Organic revenues were up 2% for the year, and our margin performance was exceptional as merger cost synergies, alongside E3 savings, enabled expansion of 110 basis points. Looking ahead to this year, we initiated guidance today that reflects current market conditions. Organic revenues are to be up 1% to 3% with steady to rising segment margins. And when combined with the share count decline, we expect EPS of $13.35 to $13.65, reflecting another solid year of growth. Our free cash flow guide of $2.15 billion to $2.25 billion incorporates current tax regulations, which requires us to capitalize R&D expenditures beginning in 2022 versus the prior practice of annual deductions resulting in tax cash payment increases. Excluding this impact, free cash flow per share growth would have been up by double digits. We'll provide more details on these figures later on the call. Our focus on both value creation and advancing our strategy of leading as a non-traditional prime has driven our success to date. Moreover, in recent months, we made progress in our focus areas of growing the top line, strengthening our operations and augmenting our disciplined allocation of capital. Let's start with the top line. With the integration of the company largely behind us, we're progressing on our efforts to grow the business through a 3-pronged approach

Christopher Kubasik:

All right. Thanks, Michelle. Well done. So to sum it up, 2021 performance demonstrated our ability to deliver strong bottom line results in a dynamic environment, with our 2022 outlook reflecting growth in all key metrics. With that, Rob, let's open the line for questions.

David Strauss:

Thanks. Good morning, everyone. And welcome, Michelle.

David Strauss:

Chris, could you maybe touch on the budget outlook, what you saw in the fiscal '22 authorization markup. And if that becomes approach, what that might mean for you guys? And as well as what you're assuming in terms of CR? And then last one, a little bit more detail on the individual buckets within SAS in terms of what you're expecting for each of the individual businesses relative to that flat to up 2% for the overall business?

Operator:

Our next question comes from the line of Peter Arment with Baird.

Christopher Kubasik :

Yes. Thanks, Peter. No, relative to the supply chain, we think we're doing a pretty good job over the last maybe 6 or 9 months, as I mentioned, with getting more visibility into the second, third tier supply chain. We've invested in tools that give us that visibility. So we've talked previously about a $200 million revenue headwind in '21. We see that continuing in the first half of 2022. And I think where we've been maybe a little more conservative than in October as we see that recovery bouncing back in the second half of '22 and then also in early '23. So think of that about a $100 million headwind each quarter in 1 and 2, and then maybe getting 100 back in the second half and 100 back in early '23 from a revenue. And of course, that brings along the related operating income. So that's how we see it. But it's a dynamic area. It's mainly been focused on electronic components. But we're monitoring it and managing it at all sectors and all segments. And it feels like we've turned the corner, but we'll keep you up to date kind of quarter-to-quarter as things change. So relative to working capital, as we try to get to the guidance, we ended the year at 52 working capital days. We'll bring that down a couple of days as we go to that $2.8 billion to $2.9 billion guide. Michelle?

Christopher Kubasik:

And I'll just throw in, Peter, just our definition of supply chain is pretty broad. We're throwing into labor, we're throwing in material and we're throwing in inflation. So all that contributes to the $0.18.

Douglas Harned:

In Communication Systems, there you've clearly been hit by around COVID, supply chain, we've also got inflation, that would be hitting fixed price -- commercial fixed price contracts there. If you were to think of 2022 without these headwinds having been there, what would you see Communication Systems looking like in terms of growth margin? And is this something, given that it's -- there's been -- there's a headwind there, is this something that we should see all coming back when we move out to 2023? Or is there just going to be some lost demand and margin here?

Sheila Kahyaoglu:

Hi, Chris, and welcome, Michelle. Maybe I wanted to bridge that growth from 2022, the 1 to 3. Chris, you've talked about it in a bunch of moving pieces, some of the CS softness, Airborne and F-35, you mentioned versus the mid-single-digit growth profile you have. And then maybe just a follow-up on the SAS growth, perhaps being softer. What are you seeing there in terms of trends longer term?

Operator:

Our next question comes from the line of Robert Stallard with Vertical Research.

Christopher Kubasik :

Yes. No, Robert, good point. I mean for the last couple of years, our international business has been growing double digit. And I think our strategy, which is somewhat unique, I think, compared to others. We have focused countries, 10 focus countries, where we have executives full time in the countries. And then we use our distributors and reps more for the product. So it seems to be paying off, and we've been able to see that grow. I mean beyond '22 and beyond, we're seeing mid-single-digit growth. But as you said, anything can change rather quickly, especially in the European area. So our Tactical Communications business is generally a quick turn business, and I think could be pretty opportunistic as well as our Night Vision business. So we're always available for quick turns when tensions get tight or there's new demand or requests. So I think there could be some potential growth upside that we haven't completely factored in. And again, a lot of our products that I alluded to are more on the defensive side. So ISR situational awareness has always been key. We've migrated to the biz jets and we've talked about the success of that strategy and programs in NATO and the Mid-East. And again, we have multiple other countries we're working with over the next few years. And then we also, being somewhat -- I hate to say, platform agnostic, but we're working with different parts of the world. We have King Air ISR capabilities. We have large aircraft and bizjets. So they're all working reasonably well. We'll let you know as things move forward in the international world, but optimistic for 2022.

Michael Maugeri:

Following on Peter's question from earlier, sort of taking a step from the '22 free cash guide out of a year. Is $3 billion or better what we should be looking at for 2023? And then is free cash growth in 2023 all earnings growth? Or where, if we can, should we expect to see you to continue to generate working capital efficiency out in '23?

Operator:

Our next question is coming from the line of Richard Safran with Seaport Global.

Christopher Kubasik :

Thanks. Great question. And the answer is obviously going to be yes. I think the system and the methodology we've put in place has been a success, and we expect it to continue. I mean to give you some -- historically, I think a lot of these continuous improvement programs start out focused on the supply chain, which is a good thing in direct labor optimization, and we do that. But we've taken a much broader approach, and one area is just the ability to improve our yield. So we're looking at our rolled throughput yield at all of our facilities. They come in different sizes and different flavors. But if we can obviously improve those, yields 5 basis points or 10 basis points, it just contributes to the bottom line. This year, we collapsed from 4 segments to 3. That brought us savings, any savings I get, I put under the E3 umbrella. But that brings about some savings. When we first merged, we had 19 sectors rolling up to these 4 segments. Today, we're down to 14. We might have sold 1 or 2. We collapsed a couple more. So we're getting synergies in the organizational structure. With the -- we've been investing in systems. We're putting in a manufacturing execution system in one of our large facilities that have a lot of manual and paper processes. Those are now getting updated, and everything is getting to be electronic. So I think that is already starting to show benefits, and the system is not even fully implemented yet. And we'll roll that out to other facilities and factories. We have a process that we call our perimeter cost, where we look at the entire cost of each and every facility. And we look where the big bucks are, and we target our E3 projects, of which we have hundreds at those larger dollar items. I mean this comes down to a lot of this links in with our ESG or environmental initiatives and whether it's energy and utilities, all those types of things. I think, are maybe some specific examples. Still try to figure out, as I said, and I think everyone said, if we return to -- and do things the way we used to pre-COVID, we've missed an opportunity. So I think I've told you -- before the merger, 98% of the workforce came to work every day, and that was kind of the norm. And today, we're at about 70%, full-time on-site about 20% hybrid, 10% remote. So that also brings different savings and facilities and such. So we're looking at all those things, Rich. To be specific on E3 -- but in a broader sense, I think implied in your question was the overall segment growth. So not within E3 is the recovery of the supply chain, more international sales at higher margins, as an example. I mentioned F-35 transitioning out of development into production. I think we all expect higher production margins and development margins. And we still have a little commercial business with the aviation and PSPC and as those turn around. So when I look at all these things, it's hard not to see where we can continue to grow margins for the foreseeable future.

Gautam Khanna :

Hey, Chris, and welcome, Michelle. Wanted to just ask about capital allocation. So you've done a lot of divestments. Obviously, you're guiding $1.5 billion of buybacks. What's the appetite for M&A? Again, do you see any bigger opportunities presenting themselves? Or do you think it's going to be more of a tuck-in variety?

Operator:

Our next question comes from the line of Ron Epstein with Bank of America.

Christopher Kubasik :

Yes. No. Elizabeth, I would think these decisions and policies change administration by administration. So with the current administration, it would appear that, that big M& A, if that was considered big, is potentially over, at least until there's a change in administration at some future point who may or may not have new policies. So as I said, I haven't really looked at and probably won't have the time to figure out what the specific case was. But I think it's always a predisposition for more competition and less vertical integration. And when I look at the L3Harris merger, that went through relatively quickly. It was complementary. We're now in all 5 domains. It made perfect sense. It was just a very small business that did have -- wouldn't allow for competition. So it was divested. So I think you can look at these things pretty quickly and figure out if they're going to go through or not. And I continue to believe that there's -- from our perspective, there will be plenty of opportunities. I think at some point, there's a reluctance to have really big guys get bigger. So I kind of like where I am relative to the real big guys. So that's how I see it from my perspective. We're going to run our playbook and see what happens. And others either will or won't be in the game, but I like where we are.

Robert Spingarn:

Welcome, Michelle. Two quick things. Chris, on the talent side, how difficult is it to get people? And what kind of labor inflation are you seeing? And how is that impacting fixed-price contracts? And then, Michelle, just on the tax situation, if you could give us the mechanics? We've been talking about this with everybody for a week. But what are the mechanics of this higher tax rate? Will you pay cash taxes at the higher rate quarterly until you find out what's going to happen and then if you could just clarify that.

Christopher Kubasik :

Thanks, Michelle. And Michelle and I have spent a little bit of time with the tax department in her first week. And it's just a world-class organization. And when you look at the metrics, whether it's our effective tax rate relative to others, if you look at our R&D tax credit, which is not what we're talking about now relative to others and the percentages, I think we just got a great organization there and we're seeing that in our financial results. So going to the talent question, which is a great question. Actually, in 2021, we hired 8,000 new people. And I talked about COVID earlier, and we opened the office and kind of got back to whatever the new norm was in December. And it was interesting because at that time, half of those employees, 4,000, have never even been to a L3Harris facility, with FedEx, on laptops and do everything via Zoom. So talking about a new -- kind of a new world here. But we've hired 8,000. We're probably going to hire another 8,000 this year. We're seeing a little bit of inflation or most of the inflation is at the entry level. We haven't really seen that at the higher levels or the executive levels yet. Maybe that comes later in 2022. But a lot of this depends on geography, and half our workforce seems to be in Florida and Texas. And those seem to be places that people enjoy living and working or moving to. So we've been a little more fortunate maybe just based on the geography. We get about 1,000 new college grads a year. We have a whole process as to how to recruit those through key schools, focused schools. And we've maintained our internship program the last 2 years, even during the pandemic. Unfortunately, those -- we're all remote. But I think I told you back in 2020, we extended offers, we honor those offers. All those things kind of contribute and pay off. And my goal and the team's goal is to have an engaged workforce that's excited to come to work every day and help with our mission. We do periodic engagement surveys to track that. So I think we're doing everything we can. A big believer in flexible work schedules. And we've got a whole variety of ways to have the workforce stay engaged and contribute. But clearly, a watch item. But so far, so good. I mentioned F-35 earlier and some of the challenges that, that program has had. We've been fortunate to have a highly engaged workforce holidays, weekends, over time and been able to maintain that staffing even through the pandemic and meet our milestones. So hopefully, that helps, Robert.

Michael Ciarmoli:

Welcome, Michelle. Chris, I just wanted to go back, I think, to maybe Sheila's question on what really changed in SAS? And maybe even dovetailing in kind of programs that are being impacted by the continuing resolution. But I think you kind of called out the biggest, being the F-35. And it seems like that would have been a known sort of headwind, I guess, in October. So were there any other big specific programmatic changes or programs that you can't start up because of the continuing resolution that are weighing on that kind of growth rate?

Operator:

Our final question comes from Pete Skibitski with Alembic Global.

Christopher Kubasik :

Yes. Yes. No, it's right up our alley for the ISR IMS organization. But also those programs, as we do more and more cross-segment work involves BCS and some of the comms team as well. So the one thing I think we're doing a much better job on and what we've been doing since the merger is pulling in other sectors and other segments and looking at some of these things holistically. So yes, IMS will take the lead, but we'll be able to pull through. The E6Bs, I think that's one that we were hoping for last year, and it continues to slide. We'll have to follow up with you with the exact dollar opportunities. It's on our priority of pursuit list to get both of those programs. But I think it's a '22 program. But with all the things that I talked about, it could slip into '23. So -- we'll get you more information on that one, Pete.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Operator:

Greetings, welcome to L3 Harris Technologies, Third Quarter Calendar Year 2021, earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instruction]. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President Investor Relations. Thank you. You may begin.

Chris Kubasik:

Okay. Thank you, Rajiv. And good morning, everyone. As you've seen throughout the week, no Company is immune, including L3Harris to global supply chain pressures, a risk we highlighted at the last earnings call. In recent months, shortages of electronic components began adversely impacting our Company at a time when our product is strong. Our updated full-year guidance now accounts for these impacts. We revised our organic revenue growth expectations to approximately 2%, primarily due to delays for these components weighing on the CS segment. [Indiscernible] such delays, we would have comfortably been within our prior 3% to 5% range. Ultimately, this is a timing shift with no anticipated effect on our industry best market position for radios. And with our broad and diversified portfolio, along with continued execution elsewhere, especially on the margin front we've increased our range on EPS to $12.85 to $13 per share, and still expect to deliver free cash flow per share of around $14, up double-digit on both accounts. Shifting over to the third quarter, following organic revenue growth of 6% in the second quarter, we saw a decline of 1% due to timing associated with supply chain delays at CES and an ISR aircraft awarded IMS. While I'm disappointed by the soft top-line results, I'll note that the order momentum remains strong with a book-to-bill of 1.07 and we delivered record high margins at 19.6%. EPS was $3.21 up 13% versus the prior year with solid free cash flow of 673 million that contributed to shareholder returns of 1.5 billion in the quarter. Our execution against the Company's strategy priorities have been a key factor and value creation for all stakeholders, In spite of the pandemic. And we make progress in the quarter by advancing top-line opportunities, improving operational performance, wrapping up portfolio shaping, and returning capital to our owners. Starting with the top line, the revenue declined and the quarter fell short of our internal targets, largely due to 2 timing factors. At CES, the global electronic component shortage has led to a supply chain disruption for our product and electronics focused businesses, notably tactical communications. In the third quarter, the impact was nearly a $100 million or approximately 2 points of revenue. And in the fourth quarter, our expectation is for the backlog of unfilled orders to grow, and all told we foresee a roughly $250 million to $300 million revenue impact for the year, implying another step-down in the fourth quarter. This is the primary driver of our revenue guidance adjustment at CES. Having said that, we do not anticipate any impact to our bookings, nor our win rates, and expect the segment to end the year with a book-to-bill well over one times. In addition, despite the supply chain challenges we faced in Q3 and ongoing headwinds, we were able to meet delivery requirements on all of our key U.S. DoD modernization programs, and are on track to continue to do so in the fourth quarter, including deliveries on the recently awarded HMS full rate production contract with the U.S. Army. Second, in IMS we had a follow on ISR aircraft order with a NATO customer that booked to late in the quarter, causing revenues to slip to Q4, representing roughly a 2.5 shift between quarters. While the supply chain headwinds is limit upside opportunities to our revenues for this year, I have been pleased with the team's traction against our strategy of delivering end-to-end solutions to global militaries as a trusted disruptor across all domains. And it's reflected in our order activity and operational milestones. Within the space domain on the classified side, we continue to advance our responsive and exquisite satellite business with several earlier-stage awards, both with the intel Community and DoD, which have follow-on opportunities of nearly $2 billion. And on the unclassified side, following the imager award in Q2, NOAA is progressing on the recapitalization of its geo weather satellite system and awarded us a study contract for a sounder payload as part of a $3 billion opportunity over the next decade. On the operational front, we completed the preliminary design review in the development of the missile tracking satellite prototype for the Space Development Agency, progressing towards a launch over the coming years, and reflecting yet another significant accomplishment for L3Harris. Moving to the air domain, key awards within the quarter spanned both legacy and next-generation aircraft. On the B52, we received a 10-year $1 billion IDIQ that has the potential to expand our scope on the program to include EW hardware upgrades such as radar warning receivers, building on our existing software sustainment work. In addition on the international front, we were awarded an initial a $100 million contract to provide capabilities on 12 multi-mission aircraft for the UAE with the potential to double these amounts further demonstrating the breadth of our ISR capabilities that range from turbo props to business jets, to large aircraft. And in the land domain, we were awarded several contracts with the U.S. Army to advance its modernization priorities. Under the army H MS Program, we received over 200 million in awards for the manpack and leader radios, taking a majority share on both products. These are the first full rate production awards out of a multibillion -dollar IDIQ, and represents less than 15% of the acquisition objective, pointing to considerable runway ahead. We also want a majority share on the second program of record for the EM VGV program with $100 million order, setting us up to ramp production on the Army's next-generation field ready cargos. So we were three for three on strategically significant programs in the land domain this quarter. Within the maritime domain, the team continues to progress on the U.S. Navy Constellation Class frigate with follow-on awards for the next chipset of electrical propulsion and navigation systems as part of a several $100 million opportunity for L3Harris. We're also awaiting decisions on 2 major prime awards over the coming months. One to provide Electro Optical infrared capabilities on a broad range of the U.S. Navy surface combatants and another with an international ally, highlighting our superior undersea censor capabilities. Both would expand our market reach in this domain. Operationally, the team delivered power conversion suite hardware as part of the Virginia Class block 5 upgrade and completed qualifications for a portion of the power distribution system on the Columbian Class, advancing the U.S. Navy's top priority. We also had a key award within our mission networks business. We leveraged the air traffic management capabilities we provide to the FAA, winning a new international franchise with the Australian government to modernize the nation's air traffic control and surveillance networks. This program is an over $300 million opportunity, and strengthens L3Harris's long-standing relationship with Australia. Finally, we received a strategic award on the revenue synergy front as we signed a $130 million contract with a mid east customer to provide modernized, software-defined radios through a localized joint venture. And this customer channels synergy award opens the door to a long-term opportunity for up to 50,000 radios. When combined with other orders in the quarter, revenue synergy awards to-date totaled roughly 900 million on a win rate that remains at 70%. For the pipeline of over $7 billion, these synergies will be a notable contributor to our top-line growth. This win supported, another strong quarter for a book-to-bill 1.07 and 1.06 times year-to-date, increasing our organic backlog to $21 billion. We're up 9% from last year and 4% year-to-date. This is validation of our internal investments in leading R&D spend, as well as confirmation of our alignment with government priorities. Shifting over to the outlook for budgets, we're pleased with the progress made on the FY22 defense spending bills that continue to prioritize near-peer threats, notwithstanding another CR. To plus ups from the HASC, SaaS, and SAC-D along with steadiness from HAC -D, combined with recent global events provide a degree of comfort that we should expect stability in military spending over the coming years. And in my personal discussions with senior leadership of the administration and Congress, I have consistently heard of a growing need for innovative, resilient and affordable solutions which we're focused on providing. All-in-all, as we consider the trajectory of our top-line, we remain confident in our ability to deliver sustainable growth through our domestic positioning, revenue synergies, and international expansion that stem from a pipeline of opportunities well in excess of a $100 billion. Pivoting the margin performance our team delivered a stellar quarter at 19.6%, the best post-merger results and an indication of the Company's potential over the next couple of years as we further build a culture of operational excellence. Our performance was the result of delivering another 15 million of incremental cost synergies, and we're well on track to hit our $350 million target. We continue to manage our overhead costs and drive our E3 program to more than offsetting supply chain headwinds. Due primarily to our year-to-date results, we now see margins for 2021 exceeding our prior expectation of 18.5% by 25 basis points. Beyond 2021, our E3 program will remain a key contributor to steady expansion in our operating margins, net of inflationary pressures. This program is one of our key discriminators. And let me highlight just a couple of examples. First, is factory optimization that represents half of this opportunity set. Through streamlining and simplifying our manufacturing processes, be it from a redesign of a factory's layout or integrating automation tools, we can shorten cycle times, increase labor efficiency and continue to drive out costs. A great example is the pilot program at our Amityville facility in New York, where an augmented reality assembly aid that electronically displays and validates our processes helps reduce cycle time by 25% and higher first-pass yields by several points. And we're in the early stages of a strategy with a 3-year roll out ahead of us. The other half of our opportunity comes from the engineering excellence hand supply chain. On the former, through the deployment of our digital ecosystem, front-loading our program activities, and enhancing training for our roughly 20,000 engineers and 1,500 program managers, we're able to increase commonality and better manage cost and schedule across the Company. These have been key with some of our standout wins within the Space domain, enabling a foray into missile defense, as well as with driving favorability in our EACs. On supply chain, the global disruption we've highlighted have been largely contained to about 15% of the Company, and are temporary in nature. The focus we've had, be it on reducing the number of suppliers are leveraging our roughly $7.5 billion spend as an enterprise, remain in place with further opportunities. In the years ahead. Moving over to the portfolio, we put a bow on the post-merger shaping activities in the quarter and closed on the electron devices divestiture for $185 million, while announcing the sale of 2 small businesses with an AS for a combined 130 million, bringing total gross proceeds since the merger to $2.8 billion. And as we consider our portfolio moving forward, we'll be opportunistic with our balance sheet as a buyer and a seller, focusing on long-term growth and value creation. Having said that, we don't see any gaps in the portfolio, nor is there any urgency at this time. Consistent with our prior commitments, proceeds from the divestitures will be part of our capital return program. Our expectation now is for buybacks to be roughly $3.6 billion this year versus our prior $3.4 billion. When combined with dividends, capital returns will be about $4.5 billion in 2021. So overall, I'm pleased with the L3Harris team's ability to execute against our strategic priorities and deliver bottom line results despite unanticipated setbacks. With that, I will hand it over to Jay.

Operator:

Thank you. We'll now be conducting a question-and-answer session. In the interest of time, we ask that you please limit yourselves to one single part question. If you'd like to ask a question please [Operator Instructions] is in the question queue. You may press [Operator Instructions] if you'd like to remove your question from the queue. For participants using speaker equipment, it maybe necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you, our first question is from Sheila Kahyaoglu with Jefferies. Please proceed with your questions.

Chris Kubasik:

Good morning, Sheila It's Chris, I think let me make a couple of comments and then I'll lateral it over to Jay. And I think you said it, right. This is clearly the key question for the week. So I want to go back probably three years when we were talking about the strategic rationale for the merger. And there were 2 items of note and I want to go back and reinforce. And 1 was the complementary nature of the 2 businesses. And after the merger, how we're well-positioned in all 5 domains. So when you look at the threat environment which changes on a regular basis, you look about and read a lot about China. I mean, our positioning in space and maritime, I think puts us in a good position to support the war fighter. Our Cyber capabilities really are applicable not only in China, but all conflicts. I like what we've done in the air domain. While there's applicability in China, it also allows for situational awareness globally. And I think that's critical as we look beyond just the China threat. And the land domain is still a key part of our national security strategy, especially with the focus on resilient comms. So I like the fact that we're well-positioned in all these domains, and I think you see that reflected in our results and we're going to tell you a little bit about 2022. The other one was the revenue synergies. And again, like most of the goals that we set on this merger, we're ahead of schedule. And as I said just a few minutes ago, $900 million of orders earlier than we thought, and I think there's a lot more to come. So the framework that we laid out 3 years ago, and I've talked about each year remains the same. We think we're well-positioned with the DOD and all domains. We have a great revenue synergy, opportunity and process. And our international growth has been the bright spot over the last couple of years. So, as you would expect, we're going through our strategic planning process. As of today, I see all 4 segments growing in 2022, with the overall Company coming in in the low to mid-single digits on an organic growth basis. We'll obviously give you more details in January. But let me hand it over to Jay to maybe give you more detail by sector and also emphasize the 800 million of headwinds as a result of divestitures when you're doing your comparison. So Jay.

Operator:

Your next question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question.

Chris Kubasik:

Good morning.

Robert Stallard:

Thanks for that detail, Jay, that was very helpful. The question I have though is around supply chain, also facing a few issues at the moment. I was wondering what your plans are to mitigate these pressures over the next say 6, 12 months and what the implications could be for say your revenues and margins? Thanks so much.

Jay Malave:

Sure. Just maybe a couple of other items that we're pretty focused on, Rob. Obviously, I think we're probably no different than others in terms of making longer term commitments, our 12, 18, 24 months in certain cases. We've redeployed resources to make sure we're managing this at lower tiers in the electronic component value chain. And we speak secure alternative sources as well as alternative parts and qualify them. We were redesigning parts in products and electronic components to really ensure that we can have adequate sources supply going into next year. And we're making crop progress across each of these areas, which again is why we're gaining confidence that we'll be able to grow in this business next year. As far as supply chain specifically, supply-chain escalation is certainly going to be a cost for us when we think about 2022. Right now the I'm thinking about is about 25 basis points of margin pressure associated with escalation costs. I would say that that's something that we were considering, that's something that we've got baked in, and that's something that will be part of our plans to deliver on our E3 productivity. Our goal will be as it always is, to offset the headwinds from mix, as well as supply chain, and deliver at least flat margins, if not higher. The next year will be no different. The pressure is going to be a little bit higher but nonetheless, we believe that we're going to have a solid path to be able to offset it.

Operator:

Our next question is coming from the line of Seth Seifman with J.P Morgan, please proceed with your question.

Chris Kubasik:

Okay. I'll maybe take in a reverse order. On the integration costs, we actually saw a step up here in the third quarter. We'll see a little bit higher again here in the fourth quarter. It's really mainly due to two things. One is as we work through our facility consolidations, we've seen an uptick in costs. We expect to see continued spending in that area, probably through the mid-year, next year as we complete those factory consolidations. The other element is a really IT harmonization. We've talked a lot about harmonizing our ERP systems. There were just various systems beyond just our ERPs. We've been working through and incurring the cost on related to integration. That will carry over, I would expect it to next year as well. Some for a period of time again, probably through the first 6 months.

Chris Kubasik:

[Indiscernible] in real quick on the integration costs. With the pandemic, we stayed agile and made some changes to strategies. And I'll just say in the IT world, we have laid out an architecture. And with the need for remote work and hybrid work, we re-prioritized and made some changes which caused us to accelerate some of our expenditures in Q3, Q4. Same thing applied to supply chain. We had a whole strategy and one of those was to hit the end of '22, start investing in the risk dashboard to give us more visibility into our supply chain and identified risks. You've seen publicly available data, whether it's stuff such as wildfires or financial stability in the supply chain. We obviously accelerated that into this year, rolling that out in Q3 and Q4. So some of those things seem to make business sense to increase the cost and accelerate the expenditures based on what was going on.

Richard Safran:

Chris, Jay, Rajeev. Good morning. I wanted to ask you about 2 of your programs, if I may. First, that recent GAO decision on the next-gen jammer. I'm curious as to what happens now, f you think the program gets re-competed, do you think changes are made to the program? And the second program I'd like to ask you about is the F-35. We had some long-term guidance come from Lockheed this week. I was just curious if you could discuss a bit how you think that might impact you, where that was relative to expectations, that sort of thing.

Operator:

That's a question comes from the line of Gautam Khanna with Cowen and Company. Please proceed with your question.

Chris Kubasik:

Good morning.

Chris Kubasik:

Yeah. Let me take a first shot at this one. Well, first of all, we have a record backlog of $1.2 billion, and that's the best we had in the past 10 years. So relative to that, there is no issue relative to demand, and book-to-bill in the quarter was 1.7 in year to date, we're almost at 1.2, so there is absolutely 0 issue with the demand. I highlighted some of the significant wins that we had recently with the army. You're well aware of those large, high IDIQs and how there is a lot of runway to go relative to those. So we're feeling really good on the demand and the outlook. We're going to see growth in '22 internationally. I think there continues to be lots of interest for this year. Asia-Pacific region and Central and Latin America are growing. Europe and the Mid East is a little flat, but as we look further out in '23 and beyond, I see that trend switching. I think Jay did a good job, just of highlighting it. We look like -- we do about -- if I go back to 2020, we're doing about $450 million, roughly, per quarter in revenue. In '21, the first 2 quarters, due to our growth, we were closer to $475 million. Third quarter, we came in at $400 million and the fourth quarter probably going to be in that $300 million to $400 million range depending on supply chain. I see that trend continuing for the first 2 quarters of next year. The 300 to 400 range, and then maybe ramping up to 500 plus for the second half of 22 and the first two quarters of '23 will make up for the shortfall. So I'm trying to give you some color there based on what we see in backlog and the opportunities that we have around the globe. I don't know Jay if there's more.

Operator:

Our next question is from the line of Kristine Liwag with Morgan Stanley. Please proceed with your question.

Chris Kubasik:

Good morning.

Chris Kubasik:

Good to see on a Friday. Nobody's lost their sense of humor. Now I said earlier, everything related to the merger is going to go on quicker and better than maybe anyone had expected or planned. And we've talked about a 25 basis point increase year-over-year. So the way I look at it is we're a year or 2 ahead of that target. And the goal for '22 and beyond will be to, at a minimum maintain these margins, but look for ways to increase it. I mean, some of the things that contributed, and I'll let Jay give you more details on Q3. We've really been focusing on our discretionary spend the SG&A. I think this was one of our lower quarters since the merger as a percent of revenue. We continue to invest in the irad at about 4% of revenue, which I think has been positioned us for this growth that we talked about going forward. And these -- the mix from these new awards -- talked about some of these awards being delayed. I think, you know, most of these new awards initially are dilutive to margins as you win, especially if there are cost plus or even if they're fixed price, just being conservative so -- but those slipping to Q4. I think that accounts for some of the shift between the 2 quarters, but we look at it on an annual basis, and year-over-year progress is looking good. And we're not going to give up, and we're going to continue with our E3 initiatives. The E3 focus is really what's making the difference. And I tried to highlight some of the things we're doing relative to labor productivity. We're using collaborative robots and augmented reality and some interesting technology that's just going to get our products to market quicker. We talked about the supply chain and some of the things we're doing there, value-engineering, more and more focused on making our products even more manufacturable, we talked about designing for manufacture, design for supply chain. All those initiatives are ongoing and getting better each and every time, so I don't have [Indiscernible]. Further color you want to give?

Operator:

Our next question comes from the line of Doug Harned with Bernstein. Please proceed with your question.

Chris Kubasik:

Good morning.

Doug Harned:

You've talked a lot about supply chain today and a lot of companies have lot of industrial companies, whether they are in defense and honest talked about it. But I'd like to -- what I wanted to understand is in -- supply chain issues have clearly held you back some in communication systems this year and you talked about the first half of next year. But unlike some commercial businesses, I wouldn't expect any of the deliveries and revenues that you were expecting to have gone away. And when you think forward, should we expect the snapback eventually here, where you've just, you've built up -- you've got building up of a backlog of demand and we should actually see what I would think of as a surge when we get into 2023, when you're finally delivering on things that have been delayed?

Doug Harned:

Yes. Doug. You got it exactly right. I mean, 2022 I mentioned it would grow. We'd love it to snap back in 2022, but that's unlikely, but we would expect that recovery to be in '23.

Peter Arment:

Thanks. Good morning, Chris. And Chris, thanks for all the details on that kind of the progress we're making on E3, but kind of just tying back to your comments that you've been operating in 7 quarters in the pandemic that feel like eternity but did -- you set up the E3 program before the pandemic, did you get any kind of opportunities that evolved during the last 7 quarters where you think there is significantly more upside that you can do from the 350 million target that you put out there? Thanks.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Company Representatives:

Chris Kubasik - Chief Executive Officer Jay Malave - Chief Financial Officer Rajeev Lalwani - Vice President, Investor Relations

Rajeev Lalwani:

Thank you, Rob. Good morning, and welcome to our second quarter 2021 earnings call. On the call with me today are Chris Kubasik, our CEO and Jay Malave, our CFO. First, a few words on forward-looking statements and non-GAAP measures. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please see our press release, presentation and SEC filings. A reconciliation of non-GAAP financial measures to GAAP comparable measures is included in the Investor Relations section of our website, which is l3harris.com, where a replay of this call will also be available. With that Chris, I'll turn it over to you.

Jay Malave :

Thank you, Chris and good morning everyone. First, I'll provide more color on the quarter. I'll cover also the segment results and finish with our updated outlook. Starting with the second quarter, organic revenue was up 6.2% with a return to growth in all four segments. IMS led the way up 12%, followed by a return to growth at AS of 4.7%. Margins expanded 40 basis points to 18.6%, primarily from e3 productivity, program performance and integration benefits, partially offset by higher R&D. The sequential decline in margin was also due to timing of R&D as expected. These drivers, along with our share repurchases led to EPS being up 15% up $0.43 to $3.26 as shown on slide five. Of this growth, volume, synergies and operations contributed $0.18; a lower share count contributed another $0.18 and pension tax and interest accounted for the remaining $0.07. Free cash flow was $685 million, while working capital days stood at 57 due to receivables timing. And shareholder returns of over $1 billion were comprised of $850 million in share repurchases, and $207 million in dividends. Of note, our last 12 months of share repurchases have totaled over $3 billion at an average price of $195 per share, well below our current share price. Now, turning to the quarterly segment results on slide six. Integrated Mission Systems revenue was up 12%, led by double digit growth in ISR aircraft missionization on a recently awarded NATO program. In addition to mid-single digit growth in maritime from a ramp on key platforms, including the Virginia Class submarine and Constellation Class frigate. This more than offset the low single digit decline in our Electro Optical business that was due to the timing of WESCAM turret deliveries, which we expect to increase in the back half. Operating income was up 2%, while margins contracted 150 basis points to 15.3%, reflecting expected mixed impacts, including a ramp on growth platforms and programs. Funded book-to-bill was 0.81 in the quarter and 1.06 for the first half with strength across the segment. In Space & Airborne, organic revenue increased 3.2% from our missile defense and other responsive programs, driving 10% growth in space, along with mid-single digit classified growth in Intel and cyber. This strength outweighed the impact from modernization program transitions in our airborne businesses. We have 35 Tech Refresh 3 program within eight Mission Avionics and F-16 Viper Shield Advanced Electronic Warfare System. Operating income was up 7.7% and margins expanded 90 basis points to 19.7% as operational excellence, including program performance, increased pension income and integration benefits more than offset higher R&D investments, and funded book-to-bill was over one for both the quarter and first half, driven by space. Next, Communication Systems organic revenue was up 3.2% with mid-single digit growth in Tactical Communications, that included international up double digits, driven primarily by modernization demand from Asia Pacific and Europe, and an anticipated decline in DoD from last year's second quarter, 40% plus growth. U.S. DoD modernization continued to benefit the integrated vision in global communication businesses leading to high single digit and double digit growth respectively. Conversely, broadband was down low single digits on lower volume for legacy unmanned platforms due to the transition from permissive to contested operating environments as expected. And public safety was down 7% from residual pandemic related impacts. Operating income was up 8.3% and margins expanded 170 basis points to 25.5% from higher volume, operational excellence, and integration benefits, and funded book-to-bill in the quarter and first half grew by 1.3 and 1.1 respectively. Finally, in Aviation Systems, organic revenue increased 4.7%, driven primarily by our commercial aerospace business that was up 20% from recovering training and air transport OEM product sales. We also saw a mid-single digit growth in defense aviation from a ramp on fusing inordinance programs and in mission networks from higher FAA volume. Operating income was up 17% and margins expanded 200 basis points to 14.5% from operational excellence, integration benefits and higher volume. Funded book-to-bill was about 0.9 for the quarter and first half. Okay, shifting over to our 2021 outlook. Overall, organic revenue growth is unchanged at 3% to 5% with our top line trending as expected at 4% for the first half and supported by a 1.05 funded book-to-bill year-to-date. Our U.S. Government businesses are expected to accelerate in the back half driven by Space, Tactical Communications, Integrated Vision Solutions and Classified Growth within Intel and Cyber and Defense Aviation. On the international side we continue to expect mid-single digit plus growth for the year, as a strong first half, led by aircraft ISR and international Tactical Radios moderates. And lastly, the encouraging results in our commercial businesses in the second quarter build confidence in a flattish outlook for the year with double digit growth in the back half. Consistent with our overall guide at the consolidated level, we also maintained our segment sales guide as well. And as we think about the second half of the year, our key watch items will be the timing of awards, the continued performance of our supply chain, and the pace of the commercial recovery. Turning to margins, we have raised our outlook to approximately 18.5%, a 25 basis point increase to the top end of the previous range due to our strong performance to-date and confidence in our ability to execute on cost synergies, e3 and program deliverables. We do continue to expect margins to have moved lower in the back half due to higher R&D investment and stronger growth on new, earlier stage programs. From a segment perspective, we are holding to our prior margin guidance ranges across the board, but we're expecting IMS and SAS to be at the upper end of their ranges given their strong performance to-date and are holding AS and CS steady at their midpoints given divestiture dilution at AS and expected mix pressure at CS. On EPS, we're raising our full year guide to a range of $12.80 to $13, with the midpoint now toward the upper end of our previous range and reflecting 11% growth from 2020, delivering on our double digit commitment in spite of dilution from divestitures. As shown on slide 11, the increase of $0.05 from the prior midpoint is driven by $0.13 improvement in operations and synergies and 0.19% from a lower share count at 203 million shares, along with a lower tax rate of about 16%, all of which more than offset divested earnings of $0.31. On a standalone basis we expect about $0.15 of net dilution from divestitures. Moving to free cash flow, our guide of $2.8 billion to $2.9 billion is intact, despite divestiture related headwinds of roughly $80 million and continues to reflect the three day working capital improvement from year-end to around 49 to 50 days, that’s now adjusted for divestitures. CapEx is expected to be about $365 million, $10 million lower versus the prior guide due to completed divestitures. Our guidance also now reflects approximately $3.4 billion in share repurchases, an increase of $1.1 billion from our prior guide to account for net proceeds from recently closed divestitures. All told, we expect to return about $4.2 billion to shareholders this year. So let me sum it all up. We delivered strong performance in the quarter and first half, solid revenue and book-to-bill growth. Further expansion of industry leading margins and consistent cash generation and deployment, all enabling another guide raise as we continue to execute on our strategic priorities and drive double digit annual growth in earnings and free cash flow per share. With that Rob, let's open up the line for questions.

Doug Harned:

Good morning. Thank you.

Doug Harned:

I wanted to understand a little more about the outlook for Communication Systems. I mean you already had strong growing positions on Radio Monetization and Night Vision, and then you got some big awards in Q2 and those should add to growth and I would expect this should be high margin as well. And so, when you look at the longer term growth here, look at the revenue trajectory over the next three to five years, how do you see that now? And is there potential to take margins up above their current 25% levels here?

Jay Malave :

Sure. Just a – maybe just another quick comment on revenue growth over the medium term, Doug. If you recall and if you look at the future, it's somewhat similar to what we have this year. If you look at our segments, we had SAS at four to six, IMS at four to six and now it’s followed by CS and AS. If you look to the future, we would expect those two segments to continue to be leaders in growth. I will say as Chris mentioned, if this gives us more confidence in the CS outlook, we probably expect those two to drive a little higher growth than CS in the medium term. On the margin profile, see, this year we are taking – from the first half we are going back a little bit and that's really a reflection of the mix on the new programs. We have the army, the HMS Monetization programs, we also have in our broadband communication, the Next Gen Jammer Program, so that’s some pretty sizable programs that are actually margin dilutive. The good thing about that is the CMS track record being able to take cost out, drive the margins better over time. So if you look at the first half that shows you what the potential of the segment could be, and so when we end the year this year we'll be in that say 24% -- right now we're saying 24.5% at the midpoint. We delivered over 25% in the first half of the year, that gives you kind of a view of what the medium term could look like over time.

Operator:

Our next question comes from the line of Kristine Liwag with Morgan Stanley. Please with your question.

Chris Kubasik:

Good morning.

Chris Kubasik:

Oh absolutely! Now we've had a good run in space and as I mentioned, you know we had a good quarter book-to-bill in space was 1.2 so far this year and we've been successful in winning 10 of 18 prime positions just in the last 18 months. So that's something that we're quite proud of and we've also moved into the missile defense arena. So, maybe a little longer answer. The approach we're taking in space is similar to what we've done in all five domains, and it's really understanding the customers’ mission. We have 47,000 employees and 20,000 engineers and 20,000 employees with clearances. So we are looking at our capabilities, we're looking at how we are spending our IRAD and we are trying to develop solutions and alternatives that meet their needs. We've talked a lot in the past as you know about our responsive SATs, where we were able to develop and launch satellites within twenty months. So that's helping us win a lot of these prime positions. We understand the mission, we have innovative solutions. The focus is on the payload and the integration and speed. So strategically, I think that has been a needle mover. When I look at the exquisite satellites, you know we continue to have some of the best payloads out there, so we're working with partners, usually the larger prime and that's contributed to some success and we have some awards coming up in the next few months that are classified. And then we're working collaboratively with some of these new entrants, just like we do with the traditional primes and find where we can partner, where we can compete, and it seems to be working. So very proud of that team and the outlook is quite positive in space and the budget is clearly supporting this growth as well.

David Strauss:

Hi! Thanks, good morning.

David Strauss:

Chris, I just wanted to ask about the margin side. You're hinting at the idea for further margin upside from here. Can you just talk about the different drivers you see? How much of the margin upside that you see from here is dependent on volume versus kind of what's under your own control from an e3 perspective? And then also what you're assuming for pension when you say higher margins from there guidance?

Jay Malave:

Yes, sure. Just to confirm right on the margins, the absorption is a little benefit. That's typically factored in when we talk about the mix headwinds and that’s usually coming in these new programs with thinner margins. As Chris mentioned, e3 is the key driver. It’s going to drive us and talked about 20 to 25 basis points per year over the medium term of being able to continue to drive expansion and we feel pretty confident in that. The pension, if you think about this year, all-in between FAS and CAS is benefited of about $470 million on an absolute basis. We expect that next year the CAS element to decline a little bit as a result to the ARPU legislation, it was an enacted earlier in the year. As that pushed out funding requirements for pension our recovery for CAS will come down a little bit, but that should be offset by some FAS income. So net-net I would expect the year-over-year pension to be pretty much flat.

Robert Stallard:

Thanks so much. Good morning.

Robert Stallard:

Chris, this is probably one for you. You mentioned that the disposal process is now pretty much done. I was wondering how the prices on the assets that you sold have compared versus your expectations, and do we now see maybe a shift in strategy and perhaps start to look again at acquisitions? Thank you.

Operator:

Our next question is from the line of Myles Walton with UBS. Please proceed with your question.

Chris Kubasik:

Yes, I'll take the Next Gen Jammer one first of then ask Jay to chime in on SAS. No, you're right. It's going to be mid-August when we hear the results. We're very supportive and confident and in the process that the U.S. Navy ran and we're assuming that we began work in August and that's built within the model and the guidance. So no additional upside from that, but a huge win and we're looking forward to getting started and delivering those capabilities.

Operator:

Our next question comes from the line of Richard Safran with Seaport Global. Please proceed with your question.

A - Chris Kubasik:

Good morning. Fine! How are you doing?

Chris Kubasik:

Okay. Well, there's a lot of questions there. I'll go backwards. Yeah, I mean I try to encourage my team that we got to spend time with our customers and listen to their challenges and such. So, actually this evening I'll be headed to DC and have three days of meetings in the Pentagon with a whole variety of customers from OSD and the single services and obviously bring in the key P&L leaders with me. So we like to listen to our customers and see how we can help them and work collaboratively with them on the budget process and such, so. I think everybody does it, but that's something I'm focused on. International, you know we came out of the shoot and said, this was one of the areas we thought we could do better and I think we said we were underperforming as a combined company, and we were probably right around 19% of our revenue, maybe 20% on a pro form basis back in 29 – or 2019. So far this year we're at about 22% of our revenue coming from international. So we're seeing a little positive movement. As you it’s a little lumpy. You know as I mentioned, you know maybe somewhat surprising, the budgets have really been stable across the globe consistent with the U.S. So I think that was a pleasant surprise given the threat environment and you think of U.K., Australia, Japan, Canada and so our approach and strategy that I've talked about is really two-fold. We have the ten focus countries where we have executives, either local country national or ex-pats there day-to-day, understanding the process, the threats and bringing in our P&L leaders, at least when the border is opened to try to close on deals. So that seems to be working well and then more on the traditional product side, you know we use the distributors and the reps and we've been able to use previous relationships to expand the portfolio. You know I mentioned that IDIQ for FMS you know as an example. That now allows all the products of the new company to come through, not just the traditional radio. So, I think that's a positive. You know a lot of what we do is focused on more defensive systems we're hearing from our international customers, because ultimately they want situational awareness and the ability to communicate in a contested environment. So you know I look at our portfolio and the things we're doing on ISR aircraft, whether it's something like a rivet joint to a business jet, and in some cases to a single prop aircraft. We have a broad portfolio that allows them to get situational awareness. We've talked quite about – a bit about our resilient comps capability, our Waveforms library, which is second to none and you know relative to the regions it’s the usual place, the Mid East, the Far East and Asia Pacific and we're seeing growth opportunities in all those areas. So that's probably a longer answer than you wanted, but we're optimistic and I think we're in a good position and executing on the strategy we laid out two years ago.

Operator:

Our next question is from the line of Gautam Khanna with Cowen. Please proceed with your question.

Chris Kubasik:

Good morning.

Chris Kubasik:

Okay. Let me do high level on the first question and Jay can give you some more color on Tac Com and then I'll come back and answer the IVAS question. So specifically domestically we've talked about some upcoming awards that should be occurring here domestically, the HMS Manpack, HMS Leader, those are coming forward here, hopefully in the third quarter. You know in the fourth quarter the marines have a handheld competition that we're also looking forward to getting to results. Then of course internationally we have a pretty good increase here later in the year and again, the focus there is going to be in Europe, the Mid East and Asia, the Asia Pacific region. Again, we've had good success in the Mid East that I just mentioned from yesterday, some Australian orders and really a pretty strong pipeline. But I’ll let Jay give you a little more color in numbers as it relates to Tac Com.

Chris Kubasik:

Going back to IVAS, you know I think when you look at our ENVG-B program and IVAS, I would say that you're kind of going head-to-head and maybe battling a little bit for budget money although both were funded and you know our focus is clearly to deliver, which our team has done a great job on schedule and meet all of our commitments. I think ultimately its going to be a question of how these get split. I think there's several hundred thousand devices needed and they have slightly different capabilities and mission sets. So I would think over time there's going to be a split between the two. You know we've been talking a little more publicly about some of the augmented reality capabilities within the ENVG-B, you know the real focus on the night vision capabilities. So different capabilities, different mission and you know I would think the two converge at some point and we'll see how the army wants to play that out. But right now we're just focused on delivering and making sure we meet our commitments.

Sheila Kahyaoglu:

Hey! Good morning guys, thank you for the time. On IMS, maybe can you talk about some of that deceleration you're seeing, you're forecasting 5% growth for the year, and you got 9% robust growth in the first half and it implies flat for the second half, so what are some of the puts and takes?

A - Jay Malave:

Yeah, I think of all of our segment Sheila, this one you know is a little more lumpy based on the large significant procurements of aircraft or deliveries and so you kind of get these up and down quarters, but I'd much rather be coming out of the chute strong than having a fourth quarter hockey stick. So you know that's what happens in IMS, mainly in the ISR sector.

Rob Spingarn:

Hi! Good morning.

Rob Spingarn:

You know Chris, it's kind of funny how things change because now we're actually reading about commercial pilot shortages and I think Jay talked about recovering training sales, but I'm curious if you can quantify how big the increase was, either year-over-year or sequentially and what the latest overall recovery expectation is and whether or not this business is core or non-core. Thanks.

Jay Malave:

Yeah, you know we step up in the back half of the year to about 30% growth and in the commercial business from 20% here in the second quarter. This is consistent with what we had expected you know coming into the year. The trends that we've seen or have seen thus far really in the month of July support that and so we've got some pretty good demand and a lot of activity going on in terms of our simulator sales and we’re also seeing just increased leads as far as new cadet training in our academies and we're also seeing it in the simulator training. You know as Chris mentioned, the one thing to keep an eye on it for us, just that’s more maybe company specific is that we do operate our simulator training in these regions that had been a little bit mixed as far as lockdowns opens up and back – locked back down and so – but that's the smallest piece of our business. Overall we're pretty confident with this 30% growth based on what we're saying.