Q4 2021 L3harris Technologies Inc Earnings Call
Greetings and welcome to L. Three Harris technologies fourth quarter calendar year 2021 earnings call at.
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Question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Rajeev <unk> Vice President of Investor Relations. Thank you you may now begin.
Thank you, Rob and good morning, and welcome to our fourth quarter 2021 earnings call on the call with me today are Chris Q basic our CEO and Michele Turner, 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 our SEC filings.
A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the Investor Relations section of our website, which is L. Three Harris Dot com, where a replay of this call will also be available.
In addition, following our 8-K filed earlier in the month, we will be speaking to our 2021 results and our prior four segment structure and our 2022 outlook will be in our realigned three segment structure that also shifts pension items to the corporate level furthering operational transparency with that Chris over to you.
Okay. Thank you Rajiv and good morning, everyone I'd like to welcome Michelle Turner to this mornings call. She is an experienced financial executive with diverse operational experience, including two decades in the aerospace and defense industry. She joins us from Johnson <unk> Johnson, where she was the CFO of their supply chain organization.
I am excited to have Michelle on the team and look forward to our partnership so welcome to week to Michelle.
Chris it's great to be back in the defense industry and to be part of the <unk> team I've been following the merger and I'm excited about leveraging my experiences to further our strategy of being a non traditional prime.
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 Bottomline performance growing EPS and free cash flow per share by 12% and 9% respectively.
Wasn't however, without its challenges as the pandemic stress to 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 <unk> III savings enabled expansion of 110 basis points.
Looking ahead to this year, we initiated guidance today that reflects current market conditions.
Organic revenues are expected 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 215 to two and a quarter billion dollars.
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 will 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've made progress in our focus areas of growing the topline 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 three pronged approach first investing in our capabilities.
Second bidding winning and priming more programs and finally, expanding our international presence.
Award activity throughout the year demonstrated traction against all three of these efforts across all domains.
As a leading defense technology company, we're maintaining our industry, leading R&D spend as a percentage of revenues with an emphasis on open architecture multi function and software defined solutions across our broad portfolio of capabilities.
This remains instrumental in expanding our revenue synergy pipeline as we reached a cumulative 1 billion in funded orders, including a contract for a classified next generation system in the fourth quarter.
We are also accelerating momentum with internal investments and the maritime and cyber domains, our leading sensor and integration capabilities for naval solutions on programs, such as the Columbia, and Virginia Class submarines led to awards of several hundred million dollars in 2021.
In addition, we received $100 million sole source <unk> IQ from the U S. Navy for cyber hardened electronic attack shipboard systems in the quarter.
Our capabilities positioned us for multibillion dollar opportunities for cross ship classes in geographies that we're pursuing in 2022 and beyond.
We also expanded our external investments to broaden overall offerings in various capability sets.
We're making calculated investments in partnerships and companies. So we can bring unique technological solutions to global defense customers.
There will be more on this topic throughout the year.
Next let me update you on the progress we've made as a non traditional prime what we call being a trusted disruptor.
Our positioning at the Nexus of traditional defense players and new experimental commercial entrants aligns well with the U S government's desire for agile advanced and affordable solutions to address near peer threats. We expect budget dollars to continue gravitating in this direction.
A notable example is within the space domain and the need for responsive satellites that can be rapidly procured and deployed to address a range of threats. We were awarded over half a billion dollars in responsive satellite contracts as a prime in 2021, including a $200 million award for a classified mission.
Within the Intel community in the fourth quarter, and we have considerable and exciting opportunities ahead of us.
Turning to international we continue to see demand for our defensive solutions that are aligned with U S export policies and ensure partner security.
And with a book to Bill of one one on solid revenue growth in 2021, our strategy is solid.
We had a strong growth in our ISR aircraft <unk> business from our key NATO customer with awards of over $600 million, including $70 million in the fourth quarter, which is part of a broader multibillion dollar opportunity set we're pursuing in 2022 and beyond.
In addition, our international Tactical Communications business continued to experience robust order activity for land modernization in the U K, Australia, and a mid east country that totaled approximately 500 million for the year and over $200 million in the quarter.
This pairs well with the expanding Dod modernization goals supporting multi year growth potential for our business.
In fact, just last week, we were awarded a $750 million <unk> IQ by the U S Marines to manufacture the Falcon for multichannel advanced health handheld radio.
That meets modern crypto security standards, while providing them resilient networking capabilities.
Overall I am pleased with the tangible progress we made in 2021 as we delivered a funded book to Bill above one O and grew our organic backlog by 5%.
Let's pivot to operations our integration efforts were quite successful and we will wrap up in early 2022.
We also continue to drive a performance culture through our <unk> three program that pervades the organization and has been key and mitigating the unforeseen challenges related to the pandemic.
We talk about the key components of our <unk> three program factory optimization engineering excellence supply chain and overhead management and.
In 2022, we expect these factors to at least offset predicted inflationary pressures for both labor and materials, which will look to approve upon as the year progresses, we're off to a good start with our segment and business consolidation efforts and over the last two quarters, we've delivered margins at or above 19% on a.
Holiday consolidated basis or.
Or approximately 16% on a segment basis, using our new reporting structure.
We've also reached several key operational milestones this quarter.
Within space, we successfully completed critical design reviews for two major responsive satellite programs.
First the space development agencies tracking layer and second the missile defense agency's hypersonic and ballistic tracking space sensor known as HPT SaaS.
We are gearing up for prototype launches of five satellites over the next two years.
Within our ISR business, we completed a key flight test and received a supplemental type certificate for the first compass call Cross deck aircraft. The U S Air Force's Missionize business jet.
This strategic aircraft arrived in our Waco, Texas facility in the fourth quarter, where we where we began the next phase of modification.
It is scheduled for delivery to the customer later this year.
Lastly, our west Cam product line within our electro optical business concluded its transition to a new state of the art manufacturing facility and delivered a record high number of tourists in the fourth quarter as well as for the year.
Concerning our supply chain the environment continues to be fluid for 2022, we expect supply chain disruptions to continue into the first half as.
As a result, our team is set to continue utilizing the various tools, we outlined to address the challenges.
Such as engaging with lower tiers of the supply chain accelerating our purchase commitments utilizing D past designations and leveraging smart inventory in selected areas.
Shifting to capital allocation, our focus remains on maximizing cash generation and strengthening our portfolio, while sustaining a shareholder friendly approach.
Growth in free cash flow per share is a key metric for us. This will remain a 2020 to focus as we drive our profit growth reduce working capital days continued tax planning and manage capital expenditures.
When combined with our share repurchases in 2021, and our current target of $1 5 billion of repurchases. This year we.
We expect free cash flow per share growth of 10%.
The R&D tax credit is repealed.
Contributing to double digit annual growth since the merger.
Regarding the dividend it remains part of our balanced capital allocation framework with opportunities to grow it further as we've done in prior years.
Finally, with respect to M&A, we'll be opportunistic and use our balance sheet capacity judiciously.
Complement our capital return program.
Let me now provide details on our 2021 results.
And the consolidated guidance for 2022, and I'll ask Michel to fill in the segment and other details on the outlook.
So let's start on slide four I'll refer to all 2021 figures in our prior four segment structure, given our realignment became effective in early 2022.
Fourth quarter organic revenue was down 1% versus the prior year.
<unk> were down, 11% and 5%, respectively with electronic component shortages and its supply chain weighing down the tactical business. It's yes.
While <unk> was impacted by the timing of awards.
MFS saw solid 6% growth from continued ISR aircraft emission as Asian activity.
And the SaaS segment was up 2% driven by growth in our responsive space franchise.
Margins expanded 70 basis points to 19, 2% with the most notable drivers being <unk> three performance and integration benefits, which offset volume related supply chain headwinds we.
We exceeded our internal outlook by 100 basis points through favorable mix related to award timing continued strong <unk> performance and by containing supply chain impacts.
These drivers along with our share repurchase activity drove EPS up 5% to $3 30.
As shown on slide five.
For the full year organic revenue was up 2% and in line with our prior guidance at the consolidated level at the segment level IMS and SaaS were up 5% and 3% respectively, while <unk> were down low single digits.
C S would've been up in low single digits, excluding these supply chain impacts.
Margins expanded 110 basis points to 19, 1% exceeding our prior guidance of approximately 18% and three quarters percent and where more than 75 basis points ahead of our midpoint at our initial guide with <unk> performance and integration benefits being the primary drivers.
Earnings per share grew 12% or $1 35, primarily from operations synergy benefits and a 6% lower share count that overcame divestiture and supply chain headwinds, enabling us to deliver double digit EPS for another year.
Our full year free cash flow came in just below the bottom end of our prior guidance range as we consciously built inventory levels to reduce supply chain risks.
With this cash flow along with proceeds from divestitures, we repurchased $3 7 billion of stock and paid over $800 million in dividends, returning about 10% of our market cap to our shareholders.
Next on slides six through nine we provide details on segment results, which are largely consistent with prior commentary.
Interest of time, we can take questions in a few minutes. So that we can shift our discussion to the 2022 guide.
Starting with the topline revenue is expected to be in the range of 117, 3% to $17 7 billion <unk>.
Implying organic growth of 1% to 3% and reflecting growth in every segment.
We expect a weaker first half down in the mid single digits, driven by continued global supply chain impacts in our product heavy businesses at CES.
Along with International ISR aircraft award timing IMS given tough compares.
We expect high single digit growth coming in the second half of 2022.
Segment operating margins are expected to be 16% to 16.25% positioning us for another year of expansion and are expected to follow sales with more profit in the second half of the year.
This combined with a 4% lower share count will result in 2022 EPS of $13 50 at the midpoint.
On free cash flow, our 215 to two and a quarter billion dollar guide includes a $600 million to $700 million of headwind from the R&D tax policy.
So with that I'll turn it over to Michelle.
Thank you, Chris and good morning, everyone I look forward to my engagement with the analysts and investor community at upcoming events and conferences.
Ill continue now on slide 10, with our 2022 segment details and our realigned three segment structure as well as provide additional color on the 2022, EPS bridge and cash flow.
Integrated mission systems revenue is expected to be seven one to $7 3 billion up 2% to 4% driven by maritime expansion classified growth in defense Aviation and continued recovery in our commercial aerospace business.
ISR aircraft timing from a tough compare is expected to drive a low to mid single digit decline in the first half with high single digit growth coming in the back half of the year.
Segment operating margins are anticipated to be within a range of 13, 5% to $13 seven 5% with <unk> III program savings more than offsetting program mix impacts.
In space and Airborne systems, we expect revenue of six to $6 1 billion or flat to up 2% driven by our traction in responsive space, along with classified strength and talent cyber what should we moderated by continued pressure in our airborne businesses as we transition to modernization over the coming years.
Segment operating margins are expected to be within a range of 12, 5% to 12, 75% and <unk> III program savings offset mix headwinds from key growth programs within the space.
Communication systems revenue is expected to be four four to $4 5 billion or up to two 4% from modernization demand in tactical communications with supply chain delays, netting and expect a mid teen decline in the first half and strong double digit growth in the back half of the year along with recovering.
Sales and public safety growth will be moderated by a flattish outlook in broadband in the integrated vision solutions.
Operating margins are anticipated to be within a range of $24. Two five to 24 point, 50% as our E. III program savings were more than offset inflationary pressures within tactical communications now.
Now turning to the EPS bridge on Slide 11, as Chris said, we expect full year EPS of $13 50 at the midpoint of this increase operations will contribute 62 cents, along with a lower share count for 60.
Overcoming headwinds from divested earnings and residual supply chain impacts as well as lower pension income and other items of pipes.
On cash flow our outlook reflects a modest working capital improvement $330 million in capital expenditures and no pension funding, we expect to deploy roughly 100% of our free cash flow to shareholders through $1 5 billion in buybacks barring any strategic M&A with that I'll turn it back over to you Chris.
Alright, Thanks, Michelle well done so.
So to sum it up 2021 performance demonstrated our ability to deliver a 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.
Thank you, we'll now be conducting a question and answer session.
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Thank you and our first question is from David Strauss with Barclays. Please proceed with your question.
Thanks, Good morning, everyone and welcome Michelle.
Good morning.
Chris can you maybe touch on the the budget outlook, what you saw in the fiscal 'twenty two authorization mark up and if that becomes approach.
That might mean for you guys and as well as what you're assuming in terms of the CR and then.
Last one a little bit more detail on the individual buckets within SaaS in terms of.
What you're expecting for each of the individual businesses relative to that flat to up 2% for the overall business. Thanks.
Okay. Thanks, Dave Let me, let me start with the C or the continuing resolution.
We're assuming a half year CR, meaning.
By April one will move forward and I just look at the fact that the President's state of the Union speech got moved to March So I'm, assuming he wants to have a a.
Our budget at that point in time. So that's that's what we factored in obviously I think like others have as a full year CR I'll provide a couple of hundred millions of a top line headwind, which is not unexpected.
Relative to the budget I think we were all pleased to see the markup.
I think that could be a good foreshadowing of the future. We don't have a fight up yet, but we continue to think our aspirational you that mid single digit grow.
Both.
Is something that we can achieve as I've said before I really like our portfolio. The fact that we're in all of these domains and are as I laid out in my prepared comments, we continue to invest a high rab to grow we're working with some of these new commercial entrants were primary in bidding more.
Nashville has been a good a good story. So that's that's how I see the budget rolling out look forward to more more information there you know when we can.
Go to SaaS.
Components of SaaS.
You know Theres there is focus on the key the key sectors, we see continue to see space growing.
In the mid single digits.
We were probably a little more bullish.
Bullish back in October , but there continue to be delays.
And contract awards.
Directly or indirectly related to the CR, so space I see mid single digit this year Intel and cyber.
One of our hot businesses continuing to grow high single digits. So that's maybe a little better than what we had told you in October our.
Mission networks, which we moved from SaaS and the SaaS as we collapsed segments.
<unk> has been and always continues to be in that low single digit growth, mainly doing work for the FAA, but where we're seeing the.
The decline is in our hair.
Sectors mission avionics and EW combined and that's really almost entirely tied to the F. 35 program as you know the tier three.
Development is rolling off and production is ramping up so as I quantify it I think I've said before that 2022.
We're going to have about $150 million.
Decline in revenue just attributed to the F 35 program, we'll see that start to return to growth in 'twenty three.
This is just the roll off of development.
Tier three and then moving into production.
On the three components that we provide to that aircraft.
Our next question comes from the line of Peter Amit with Baird. Please proceed with your question.
Yes, Thanks, good morning, Chris and welcome Michelle.
Chris maybe you had an 18th at.
At least baked into your 'twenty two guidance for the supply chain.
Adjustment and Thats, obviously better than the 2009 and 21, so maybe just your confidence around the supply chain and what kind of visibility what's baked into the 18th.
And then just also Michelle made a comment about just modest working capital improvement maybe you could just discuss a little bit what's behind that thanks.
Yeah, Thanks, Peter no relative to the.
To to the supply chain, we think we're doing a pretty good job over the last maybe six or nine months as I mentioned with with getting more visibility into the second and third tier supply chain.
We've invested in tools that give us that that visibility. So when we've talked previously about a 200 million a revenue headwind.
In 'twenty, one 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 2022 and then also in early 'twenty three so.
Think of that about 100 million dollar headwind each quarter and a one and two and then maybe getting 100 back in the second half and a hunter back in early 'twenty three from a revenue and of course that brings along the the.
The related.
Operating income.
So.
That's how we see it but it's a dynamic area has mainly been focused on electronic components, but.
We're monitoring and managing that at all sectors in all segments and 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.
As we try to get to the.
To the.
Guidance, we ended the year at 52, working capital days will bring that down a couple of days as we as we go to that two eight to $2 $9 billion Guide, Michelle, Yes, and just add a little bit more color on the working capital or do you think about it rebuilt smart inventory at the end of 2021.
So we expect as tactical communications comes back in the second half hopefully some of that down and then there's often an advantage from ISI.
ISR perspective on advance payments that were in.
Well, that's going to help free cash flow within 2022.
And I'll just throw in a Peter just our definition of supply chain is pretty broad were thrown into labor, we're throwing a material and were thrown in inflation. So all of that contributes to the <unk>.
<unk>.
Our next question comes from the line of Doug Harned with Bernstein. Please proceed with your question.
Good morning, Thank you.
Okay.
Communication systems.
You've clearly been hit by some issues around Covid supply chain. We've also got inflation.
That would be hitting fixed price contract commercial fixed price contracts there.
If you were to think of 2022.
Without these headwinds having been there what would you what would you see communications systems looking like in terms of gross margin.
And is this something.
Given that it's there's been a 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 in March up here.
Yeah, Doug that's a great great question, something we spend a lot of time looking at I don't see any any loss I think this is just a timing issue.
As we were looking through the business just just the other day I mean, it's it's had a great book to Bill.
In 2021 now some of that's due to less revenue, but we have a record backlog in all time high in backlog, which.
As an indication that we continue to win.
New new business that I mentioned, just the Marines.
Recently, which was a winner take all competition. So we're very excited to have won that $750 million dollar high IQ and throughout 'twenty. One I think we were pretty clear in all the head to head competitions. We won the majority share so.
The demand is there the modernization is happening it's in our backlog.
Everything indicates a quite to be to be doing quite quite well what.
What we would have had.
Without supply chain.
Risks probably would've been.
300, or 400 basis point more more growth.
As these things slip into 'twenty, two and as I mentioned potentially 23, depending on how the supply chain.
Plays out so at a high level, that's kind of how I see tactical he asked about communications systems in totality. So you know the.
P SPC business a lot of that's tied to state and local municipalities as we said that ought to rebound as the budget's cut back in place and we had some key wins last year, but we expect that to continue to grow.
BCS our broadband communication system in Salt Lake a lot of that is still tied.
Go to the next Gen jammer startup.
Some new opportunities.
That they are pursuing so we feel pretty pretty good about our communications I've got you know.
For the full year 2002 tactical up mid single digits, maybe even a little better BCS and Ibs.
Flattish area in PSP sees should bounce back with the bunch of improvement.
Our next question comes from the line of Sheila <unk> with Jefferies. Please proceed with your question.
Thank you Hi, Chris and welcome Michelle.
Maybe wanted to bridge that growth from 2020 to the one to three Chris you talked about it in a bunch of moving pieces.
<unk> Dot net airborne and F 35, you mentioned versus.
First is the mid single digit growth profile, you have and then maybe just a follow up on the SaaS growth, perhaps being softer what are you seeing there in terms of trends longer term.
Yes, Thanks, Sheila and good morning, Yeah. We had said in October that would be in the lower to mid single digits, which best I can tell everybody is interpreting as two to four and now we're at 1% to three so it's a.
It's a close call there and again.
I'm the accountable exact here for given the guidance with Michelle with my team, but I really tried to look at the current market conditions.
I see.
From not having a budget of CRM.
Supply chain risks it seemed appropriate to guide so I don't see this as a as a major change from from 90 days ago, but I'm trying to give you the visibility I mean, basically the only thing that really changed and I know it gets a little complicated as we went from four segments to three but we can talk about that later, but.
We filed more than enough documents with the SEC and our web charts trying to bridge it.
And see US basically did not changed from October you know those were kind of in the 2% to 4% range as I said the big changes.
SaaS.
You know you can we can argue how big a change that was but clearly downward pressure on the top line and so as I mentioned.
In an earlier.
Comment or response most of that is driven.
By the air domain and.
F 35.
Specifically the good news is you know that's a well known program that everybody has visibility into so we have confidence that.
As we negotiate lots of 16 and 17 and prepare for the cut in of our technology on lot 15.
Now that there's there's a lot of certainty and predictability in our revenue stream. So we do see 'twenty three 'twenty four 'twenty five coming coming back.
Longer term just within SaaS, I mean I really.
I really like what we're doing in the space.
Business, both both on the satellites hand, and the ground vehicle or the ground stations.
We pretty much control our own destiny, you've heard us talk about the missile defense area and will be launching five prototypes in the next two years and then I think there'll be further.
Opportunities to down select from from two to one and if we perform and have success you know there could be billions of dollars of opportunity. So I really like where we are in space with the response of SaaS, we still work with a lot of our industry partners, providing them payloads for the exquisite SaaS, so and we've got successor.
And when there's a lot of ground station. So I'm excited about space Intel and cyber continues to grow.
That's our international business.
We want to work with the five eyes countries, it's probably the hottest market, we have and again I think long term this is going to be more.
And more mission networks, we have a competition a recompete coming up for the FAA and hopefully sometime this year, but that.
Continues to be a good good business and solid and steady and then it's really all about hair.
The F 35 program the EW capabilities for the F 16 internationally, where on the B 52, and since Thats, a complete overhaul relative to EW capabilities and then.
We think we're well positioned on nextgen.
Aircraft, but you know Paul that is classified as you know more to come as that.
Those decisions and down selects are made so.
Longer term.
Just like the other two segments should be able to grow and that's our plan.
Our next question comes from the line of Robert Stallard with vertical research. Please proceed with your question.
Thanks, so much and good morning, everyone.
Good morning, Robert.
Chris Your comments about you had a good year on the export side in 2021 I was wondering what your expectations are for 2022 and with visa various tensions around the world, particularly in eastern Europe could have some benefits for this thank you.
Yeah.
Yeah, No Robert there are good good point I mean for the last couple of years.
Our international business has been.
It's been growing double double digit.
I think our strategy.
Which is somewhat unique I think compared to others. We have we are focused countries 10 focus countries, where we have executives.
Full time.
And in the countries and that will use our distributors and reps more for the product. So it seems to be paying off and we've been able to see that growth I mean beyond 'twenty, two and beyond we're seeing mid single digit growth, but as you said anything can change.
Rather rather quickly, especially in the European area. So.
Our tactical communications.
Business is generally a quick turn business that I think could be pretty opportunistic as well as our night vision.
Business. So you know.
We're always always available for quick turns when when tensions get tighter as there's new demand or request so.
I think that could be some potential.
Growth upside that we haven't completely factored in and again a lot of our products that I allude to are more on the defensive side. So.
Saar situational awareness has always been key we've migrated to the.
The the Biz Jets, and we've talked about the success of that strategy.
And programs and at NATO and the mid eastern.
We have multiple other countries, we're working with over the next few years.
We also are 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 in Biz jet, so, they're all working reasonably well.
We'll let you know as things move.
Move forward and in the international World, but optimistic for 2022.
Our next question comes from the line of Mike Maugeri with Wolfe Research. Please proceed with your question.
Hey, good morning, Thank you.
Following on Peter's question from earlier sort of taking a step from the 'twenty two free cash guide out a year is three 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 'twenty three.
Yeah. Thanks, Thanks, Mike.
Let me take that in reverse order, we absolutely expect us to continue to see working cap.
<unk>, we've talked aspirational way of of getting down to the low <unk>. We ended the year at 52 for 2021 52, working capital days, we should be able to take out a few more days in 'twenty, two which still gives us a long runway for for 'twenty three and beyond.
You know not notwithstanding the R&D item, which you know everybody is confident will be repealed or deferred for four years, but it hasnt happened yet so we figured we'd just give give guidance give you the pieces.
We've effectively kind of guided to a two eight to $2 nine for 2022, if you use the midpoint of the R&D.
600 to 700.
That should put us on track to get close or.
Around the 3 billion market in 2023, starting with topline growth.
It will generate more Oi and earnings and then of course.
The working capital.
I try to look at maybe implied in your question.
For go back a couple of years with two and a half years, we've talked about getting to $3 billion in 2022 and obviously coming up coming up short just thought I'd hit that head on I mean, clearly we've talked about some of the supply chain decisions, we've made which was a little bit of a headwind at.
At that time, we didn't know there'd be a stimulus bill that's affected social security.
Payments.
Many of US defer those payments back in 2020 for the rules of malware paying them back so we have.
Most of $100 million of social security payments that we have to pay them 2020.
'twenty two that's in our guidance and you know we divested more businesses than we had initially.
Modeled so I continue to like to look at free cash flow per share I went back.
Today, one and while we don't really disclose or publish it.
We had a plan of $14 50.
On free cash flow, two and a half years ago in 2022, if you do the math today I'll do it for you we're at $14 80.
So on a free cash flow per share. We're ahead of where we were kind of be two and a half years ago, even though we're coming up short on that on the 3 billion. So.
Hopefully that Mike.
<unk>.
Gave you all the all of the answers to your question.
Thank you. Our next question is coming from the line of Richard Safran with Seaport Global. Please proceed with your question.
Chris Michel Rajeev, Good morning, Michelle welcome to the call.
Morning.
<unk>.
Once again youre highlighting E E <unk> as a tailwind in 'twenty two.
Was curious as to how much runway you think you have left with respect to each week cost savings you've been reporting the <unk> benefit to margins for quite some time and I was just curious if you think longer term.
You have continued room for meaningful improvement.
In your answer if you could get a bit more specific about where you think the additional benefit comes from thanks.
Hey, Thanks, Great Great question and the answer is obviously going to be gas.
Thank the system and the methodology, we've put in place this is Ben.
Then.
There's 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.
I'll start out.
Focused on the supply chain.
Which is a good thing and direct labor.
The optimization and we do that but we've taken a much broader a broader approach.
And one areas just the ability to improve our yields so we're looking at our rolled throughput yield at all of our facilities to come at different different sizes and different flavors, but if we can obviously improve those yields.
Five or 10 basis points.
Just contributes to the bottom line.
This year, we collapsed from four segments to three that brought us savings, though any savings I get I put under the <unk> umbrella.
It brings about some savings when we first merged we had 19 sectors rolling up to these four segments today, we're down to 2014, we might have sold one or two we collapsed a couple more so we're getting synergies and the organizational structure.
<unk>.
You know.
With the.
We've been investing in systems, we're putting in our manufacturing.
Our manufacturing execution system in one of our large <unk>.
Facilities that had a lot of.
Manual paper processes those are now.
Getting updated and everything is getting to be electronic so I think that that.
That is already starting to show benefits in the systems, not even fully implemented yet and we'll roll that out to two 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 E. Three projects of which we have hundreds at those larger dollar items.
Comes down to.
A lot of this links in with our ESG or environmental.
<unk>.
Whether it's energy and utilities.
All of those types of things I think are maybe some some specific examples so trying to figure out you know as I said and I think everyone said you know if we if we return to work.
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 their workforce came to work every day and that was kind of the norm and today, we're at about 70%.
Full time onsite, it's about 20% hybrid 10%.
Remote so that also brings different savings in facilities.
And such so we're looking at all of those things rich.
To be specific on a three but you know.
Broader sense I think implied in your question was the overall segment growth so not within 83.
As the recovery of the supply chain you know.
More international sales at higher margins as an example, I mentioned F 35 transitioning out of development into production.
We all expect higher production margins and development margins and we still have a little commercial business with the aviation and <unk> and as those turnarounds. So when I look at all of these things.
Hard not to see where we can continue to grow margins.
For the foreseeable future.
Our next question comes from the line of Gautam Khanna with Cowen. Please proceed with your question.
Hey, Chris and welcome Michelle.
Thank you.
I wanted to just ask about capital allocation so.
You've done a lot of divestments, obviously, youre guiding $1 5 billion of buybacks.
Whats the appetite for M&A.
Jim do you see any bigger.
Opportunities presenting themselves or do you think it's going to be more of a tuck in variety.
Yes.
Yes, good good good question.
Well first of all the $1 five of buybacks.
Directly tied into the free cash flow guide if the R&D matter gets resolved.
I formally increased the free cash flow guidance bring up the buyback to $2 billion just to be to be clear on that one yes. There is absolutely an appetite for for M&A.
We have a new leader in our strategy and M&A organization, and we've got a process, where we've been looking strategically as to where we might want to make acquisitions.
You said Big you know, it's always hard to quantify these adjectives I mean.
Having come from L. Three I'm, probably not a huge fan of lots of little $50 $70 million to $100 million deals. It just causes a lot of.
Lot of challenges with integration and such.
Thank the multi billion dollars 5 billion and beyond there aren't many targets and that's a lot. So you know I'd.
I'd say.
Half a billion billion billion and a half type size.
We call those medium kind of make a makes sense. So as you know there aren't a whole lot of opportunities out there, but you know we're in.
<unk> proactively and Reactively nothing on the horizon or foreseeable I mean, if we make an acquisition in 2022 that'd be great. If we don't we don't it's not like a burning platform, but we're running.
A disciplined process.
Shall we start by looking at things strategically followed by operationally if we were to buy it what are we going to do how we got to integrate it how do we keep the workforce do we move people.
Do we keep them separate what are the synergies I think what the big merger. We just said we have a lot of talent and skills.
Figuring out revenue and cost synergies and then financially working with Michelle we'll figure out the hurdle rates to.
The cash returns in the more traditional piece, but that that would be the order.
So it goes in.
You know I'll just comment I think a lot of people that ask them about some other recent news surrounding <unk>.
Aerojet Rocketdyne that decision's impact on the industry and I know, there's different commentary out there but.
I'm not familiar with the details of that decision or the rationale, but it seem to be specific to vertical integration so relative to what we're thinking about.
I don't expect any opposition or hurdles, if and when we get to the point, where we need to have.
Approvals and that's something we would consider and evaluate before moving forward, but I think it's business as usual from my perspective for <unk> III harriss relative to our portfolio and the things we might consider down the road.
Our next question comes from the line of Ron Epstein with Bank of America. Please proceed with your question.
Hi, Good morning, it's actually Elizabeth on for Rob This morning.
Hey, good morning good.
Good morning, I just wanted to follow on to the last question I think you hit on a little bit.
Thank you.
What we've seen and the New administration do you think in general the environment Ferguson Timonen M&A has changed.
But maybe just in general do you think it's changed.
In many ways do you think big defense M&A is over.
Yeah No Elizabeth.
I would think.
These these decisions and policies changed administration by administration. So you know what the current administration.
Appear that that big.
Big M&A, if that was considered big.
Potentially potentially over at least until there is a change in administration at some future point.
Who may or may not have new new policies. So you know as I said.
I haven't really looked at it probably won't have the time to figure out what the specific case was but I think it's it's always a.
There's always a predisposition for more competition.
And.
Less vertical integration and when I look at the <unk> Harris merger that went through relatively quickly it was complementary where now and all five domains. It made perfect sense. There was just a very small business.
That didn't have.
Yeah wouldn't allow for competition. So what 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 is there's from our perspective there'll 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 we're going to run our playbook and see what happens and others either will or won't be on the game, but.
I like where we are.
Our next question is from the line of Robert Spingarn with Melius Research. Please proceed with your question.
Good morning, Chris Welcome Michelle.
Arnie.
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 high.
Our tax rate will you pay cash taxes at the higher rate quarterly until you find out what's going to happen and then it gets refunded. So if you could just clarify that.
Yes, so I'll start from the R&D perspective, and you're right. There has been a lot of fluidity in constant sweep and so just to reiterate what we have in our guidance. So our free cash flow assumes with the two one time to 225, which assumes $6 million to $700 million related to the R&D tax amortization and I think it's important to note that this.
Is the tax law that's in effect today right. So it's part of the 2017.
<unk> cuts and jobs acts and so barring a repeal or deferment. This will have an impact on our results and so for US it's about $2 billion over five years and then it goes away so that will go down to zero.
I think to the point about the pain not pain. It that's certainly something that we're looking at right now, but just to give you a sense of kind of the fluidity youre seeing through the other primes. It really comes down to a couple of different things. One is clearly you have everybody understands what they're paying from an IRR perspective, but where the interpretation.
<unk> is around the crowd and then what you apply to the crowd in terms of overhead infringed on top of that and so thats, where youre seeing the ranges.
Cross each of the different peer companies.
And so what we're going to work through in terms of what the cash payments will look like and that's discussions that we're having internally right now.
But I think what's more important is clean let's take this back to a macro level. It's important that we continue to press on the real issue here, which is we need to get this for panels that we need to get it deferred it is going to be a huge impact from our overall U S competitiveness perspective, and so ensuring that this gets delayed is important to continue to drive.
The innovation that we think about and keeping the you asked at the cutting edge of innovation.
Thanks, Michele and then Michelle and I have spent a little bit of time with our tax department her first weekend.
Just just just a world class organization and when you look at the metrics, whether it's our effective tax rate relative to others you look at our R&D tax credit.
Which is not what we're talking about now relative to two others in the percentages.
I think we've just got a great organization there.
We're seeing that.
We're seeing that in our financial results so going to the talent question, which is a great question.
Actually in 2021, we hired 8008.
<unk> 8000, new people and I've talked about Covid earlier, and you know 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, you know half of those employees 4000, they've never even been to all three Harris.
Facility.
Fedex lapped.
Laptops and do everything via zoom, so talking about a new kind of a new world here, but we've hired 8000.
We're probably going to hire another 8000 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 of the executive levels. Yet maybe that comes later in 2022 but you know.
A lot of this depends on geography.
And.
Half of our workforce seems to be in Florida, and Texas and those seem to be places that people can.
Enjoy living and working or moving to so.
We've been a little more fortunate maybe just just based on the.
Griffey, we got about 1000, New college grads, a year, we have a whole process as to how the recruit those through key schools focused schools.
We've maintained our internship program the last two years, even during the pandemic. Unfortunately, you know those were all remote but.
I think I told you back in 2020, we extended offers we honor those offers all those things kind of contributed and pay off and Mike.
My goal on 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.
So we've got a whole whole variety of ways to.
To have the workforce stay engaged and contribute but clearly a watch item, but so far so good I mentioned F. 35 earlier, you know in some of the challenges that that program has had you know we've been fortunate to have a highly engaged workforce holidays weekends overtime and.
<unk> been able to maintain that staffing.
Even through the pandemic and meet our milestones so.
Hopefully that.
That helps Robert.
Thank you.
Our next question is from coming from the line of Michael ceremony with <unk> Securities. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my questions welcome Michelle.
Chris I just wanted to go back I think to maybe sheila's question on.
What really changed in MSA ash.
And maybe even dovetailing in kind of programs that are being impacted by the continuing resolution, but I think you've kind of called out the biggest being the F 35, and it seemed like you know.
That would've 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.
Yes. Good question no I mean, the F 35 is a pretty dynamic program right. So we follow the prime and you know as quantities and strategies change relative to what's going to be retrofitted and what's not and such.
And I'm talking about all all F 35, which we have crypto capabilities, we have displays we have.
Bomb racks and of course tier three so it's a broad portfolio of.
Just under.
You know a $1 billion of revenue so.
It changes on a regular basis I can I can assure you, but it's a fair point, we didnt have it at $1 50 last time, we talked but.
Relative to the CR.
It's just probably wont be a satisfying question. It's not the fact that I think just the fact that we have a CR has caused the contracting organization and our customers just to defer and delay making awards, so which is kind of.
An indirect impact I mean, there are programs.
That have been awarded that.
The follow on work is limited to the prior year dollars to new work can't get startup.
Getting awarded and we just see a huge backlog of things that just haven't been awarded so a lot of these are in the space of the classified arena.
And most of the space work as domestic they don't have a big international.
Print is example E w's in electronic warfare, the mission avionics again most of those.
Programs.
We're we're we're supporting an OEM. So we need them to go ahead and get their orders before putting us under contract. So it just feels like a big a big delay I think as soon as we get a budget.
As soon as there is more certainty things will kind of open up and then the floodgates will open but until now we're probably erring on the side of conservatism, but.
Like I said based on the current conditions, we're standing by those guidance until things change for the better and if and when that happens, we'll we'll update you accordingly.
Thank you.
Final question comes from Peter <unk> with Alembic Global. Please proceed with your question.
Yes, thanks, good morning, everyone.
Chris I had a quick program question I was wondering if you could update us on what the Navy Air Force's plans are to replace the <unk> I think that was supposed to be a combined program at one point I don't know where it is today, but I also know it's kind of.
IMS is alley, and potentially a pretty big opportunity. So I was just wondering what your thoughts are on the timing and the sizing of that and if thats something that <unk> can actually fund.
Yeah, Yeah, no that's right that's right up our alley for.
For the ISR IMS organization, but also those programs as we do more and more cross segment work involves BCS.
BCS and some of the comps team as well so.
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 in other segments and looking at some of these things holistically. So yeah, <unk> will take the lead but we will be able to pull through.
<unk> I think that's one that we were hoping for last year and it continues to continues to slide well, we'll have to follow up with you with the exact day.
Opportunities it's on our it's on our priority of pursuit list.
Get both of those programs, but I think it's a.
A 22.
Program, but with all the things that I've talked about it could could slip into <unk> into 'twenty three so.
Well, we'll get you more information on that one Pete.
Alright, well before before we sign off.
Again, I want to welcome Michelle it's obvious he has hit the ground running.
Also like to acknowledge the dedication and hard work and perseverance of our 47000 employees worldwide, who continue to perform well in a constantly changing environment.
They've had to deal with different work schedules locations vaccine mandates.
All while navigating through a pretty large merger of equals. So the end of the day, we have a great team here at L. Three Harris I'm excited about the opportunities ahead as our company answers the third year post merger look forward to meeting and talking with everyone over the next few months introducing Michele and then we'll be back in.
In April for our first quarter call. So thank you all for joining have a great day.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.