L3Harris Technologies, Inc.

Greetings. Welcome to L3Harris Technologies' third quarter calendar year 2021 earnings call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rajiv Lawani, Vice President, Investor Relations. Thank you. You may begin.

Thank you, Rob. Good morning and welcome to our third quarter 2021 earnings call. On the call with me today are Chris Cubasic, 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 comparable cap 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.

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. Absent 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 CS and an ISR aircraft award at IMS. While I'm disappointed by the soft top-line results, I'll note that the order momentum remained 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 strategic priorities have been a key factor in value creation for all stakeholders, in spite of the pandemic. And we make progress in the quarter by advancing top-line opportunities and improving operational performance, wrapping up portfolio shaping, and returning capital to our owners. Starting with the top line, the revenue decline in the quarter fell short of our internal targets, largely due to two timing factors. At CS, 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 $100 million, or approximately two 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 CS. 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. At IMS, we had a follow-on ISR aircraft order with a NATO customer that booked late in the quarter, causing revenues to slip to Q4, representing roughly a two-and-a-half point shift between quarters. While the supply chain headwinds limit upside opportunities to our revenues for this year, I've 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 geoweather 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 B-52, 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 $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 RSR capabilities that range from turboprops 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 HMS program, we received over $200 million in awards for the MANPAC and LIDAR 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 won a majority share on the second program of record for the ENVGV program with a $100 million order, setting us up to ramp production on the Army's next-generation field-ready goggles. 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 shipsets of electrical, propulsion, and navigation systems as part of a several hundred million dollar opportunity for L3 Harris. We're also awaiting decisions on two 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 sensor 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 Columbia 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' longstanding relationship with Australia. Finally, we received a strategic award on the revenue synergy front as we signed a $130 million contract with a Mideast customer to provide modernized software-defined radios through a localized joint venture. And this customer channel 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%. With a pipeline of over $7 billion, these synergies will be a notable contributor to our top-line growth. These wins supported another strong quarter for a book-to-bill of 1.07 and 1.06 times year-to-date, increasing our organic backlog to $21 billion, or 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. The plus-ups from the HASCs, SASC, and SACD, along with steadiness from HACD, 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 $100 billion. Pivoting to 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 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 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 a pilot program in 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 three-year rollout ahead of us. The other half of our opportunity comes from the engineering excellence and 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 or 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 two small businesses within AF 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'll hand it over to Jay.