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

Greetings! Welcome to the L3Harris Technologies, Second 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 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. You may begin..

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..

Well, thank you Rajeev and good morning everyone. I’d like to thank the entire L3Harris team for a job well done as we began our third year as a new company. We are executing the integration plan and have exceeded many of our targets despite challenges such as the pandemic.

The high performance culture and leadership team we've created are set to carry this momentum forward, which is reflected in today's results. We reported a strong second quarter, organic revenue was up over 6% with growth across our key end markets and all four business segments. Funded book-to-bill was 1.0 for the quarter and 1.05 year-to-date.

Margins increased to 18.6% resulting in EPS of $3.26, up 15%. We had solid free cash flow of $685 million, which contributed to shareholder returns above $1 billion, including repurchases of $850 million in the quarter and over $1.5 billion year-to-date.

Our first half performance coupled with our expectations for continued execution in the back half more than offset the divestiture headwinds and supports another raise to our EPS guidance which Jay will cover.

Execution against our strategic priorities that are on slide three continue to deliver results and create value for the company's stakeholders as we make progress and build momentum with top line opportunities, operational performance, announcing and closing divestitures and delivering on our capital return commitments.

In terms of the top line, we are at our best quarter since the start of the pandemic, with progress against our key end market growth objectives while seeing data points that validate our focused R&D strategy. Our government businesses were up 6% in the second quarter, driven by double digit growth internationally.

Our international revenue benefited from increased aircraft ISR and radio sales to regions in the Asia Pacific and Europe. And on the domestic front, the growth was broad based with our responsive space and maritime programs, as well as land modernization for night vision and SATCOM products leading the way.

Our strategy to deliver end-to-end mission solutions utilizing the capabilities and scale across the broader organization continues to gain momentum. Our space business strategy is working as we grew 10% in the quarter, capturing classified awards totaling over $300 million for ground and responsive satellite solutions.

These awards are also part of the revenue synergy capture efforts and bring awards to-date to over $700 million on a win rate of 70% from our growing $7 billion plus pipeline.

Turning to our commercial aerospace and public safety businesses, they were up over 5% in aggregate, and were led by our commercial aerospace business, up double digits off a low base, and from strength in product sales.

On the public safety side, there was a modest decline, but with sequential improvement and increased bid in proposal activity from a more stable backdrop. Our solid top line was accompanied by backlog growth, as we continue to win strategic programs that includes several pride roles.

Backlog increased 7% organically year-over-year to over $20 billion with notable award activity across all domains. On the space side our revenue synergy awards came from combining electronics and optics capabilities across the company to deliver solutions for an increasingly contested environment.

These are incremental to the pathfinder finder programs we previously won, which have billions of dollars of potential over time. Customers are viewing L3Harris as a trusted disrupter. They see us as a company that understands the complexity of the mission and can offer fresh and creative solutions.

With a three year space pipeline of nearly $20 billion, there is more opportunity for continued growth. Within the air domain, we strengthened our existing F-35 franchise with initial production awards for the Aircraft Memory System and the Panoramic Cockpit Display Electronic Unit under the TR3 program.

This brings total orders year-to-date on the platform to about $500 million. We're progressing on all three TR3 systems through integration and qualification this year and in support of the planned of Lot 15 cut-in of the production hardware.

We have also secured a roughly $100 million IDIQ with SOCOM for infrared EO Sensors on Rotary platforms, furthering our modernization opportunities across L3Harris. Moving over to the land side, we signed several key contracts that touched both international and domestic markets.

First, we received a $3.3 billion five year IDIQ for foreign military sales, to a range of partner countries from our new broader portfolio of products, including radios and SATCOM terminals. This replaces our prior 5 year $1.7 billion contract, which supports and validates the continued modernization across geographies and expands our product scope.

Second, in the UK we received a logistics support contract covering Legacy Bowman and future MORPHEUS radios, positioning us well for $1 billion modernization opportunity in that country. And third, we won a competitive 10 year IDIQ to supply the U.S. Air Force with our T7 Multi Mission Robots, further expanding our customer reach.

After launching the T7 with the UK a few years back, we are now pursuing other international opportunities in the robotic area. Within the sea domain, our team was successful in extending its leading prime position in undersea sensor systems and warfare training for a range of the U.S. Navy platforms and support of distributed maritime operations.

This Undersea Warfare training range program called USWTR has an award value of nearly $400 million and further builds our credibility to pursue additional domestic and international opportunities.

In the cyber domain, while limiting to what we can say due to the classified nature, our $1 billion Intel and Cyber business received over 250 million in orders for complex mission solutions and specialized communications for both domestic and international markets, leading to another quarter of book-to-bill above 1.0 for this business.

We also had a key award in an adjacent market with our public safety business, with a 15 year $450 million contract from the state of Florida to upgrade and continue operating its law enforcement system for first responders.

Moving over to the budgets, while the process is ongoing, and we await to file up [ph] we were pleased with the initial request for the FY 22 budget as a support stability in the DoD, NASA and FAA spending and is aligned with our capabilities and investment priorities.

For the DoD, it's focused on continuing to revolve around and address near peer threats, through high value technology which Congress is revealing, and when we look at the portfolio and the relevant line items, our programs are well supported.

This builds on the trend we've seen in international markets, where there's a broad stability in military spending, including key countries such as the UK, Australia, Canada, Japan amongst others. We are also seeing growing demand for the type of defensive systems we offer for our alignment with the U.S. Export policies to ensure partner security.

Our most significant opportunities remain for ISR aircraft missionization and other upgrades, land force modernization and enhanced Maritime Systems.

All-in-all, as we consider the trajectory of our top line over the coming years, we remain confident in our ability to outgrow the budget and deliver sustainable growth through our domestic positioning, revenue synergies and international expansion to drive a large pipeline of opportunities underpinned by our leading R&D investments.

Shifting to operational performance, we continue to surpass milestones for priority programs. For example, at SAS the team completed a successful preliminary design review for an advanced EW solution called Viper Shield that can deliver self-protection capability for Block 70 F-16.

At IMS we advanced our unmanned Maritime Strategy with several customer engagements and demonstrations, highlighting differentiators and predictive autonomy on USVs, as well as a submerged torpedo tube launch and recovery for our small UUVs.

We also successfully completed a prototype demonstration for a SOCOM Multirole aircraft in a variety of challenging conditions, while utilizing the breadth of L3 Harris offerings.

And financially, we had another quarter of strong margins as the team continues to offset mixed impacts from early stage programs with three e3 initiatives, including program excellence and factory productivity, allowing us to flow through cost synergies totaling an incremental $27 million in the quarter.

In addition, the first half synergy run rate is now $350 million, driven by progress on facilities, consolidation and IT efficiencies. We see this as the minimum level we'll deliver on this year, up from the $320 million to $350 million range we discussed in April and still a year ahead of schedule.

Any the upside from here will be incorporated in our e3 programs, with our integration efforts blending into operational excellence initiatives. Our margins for the year, this leaves us at about 18.5% for the top hand of the prior guide and a level we’ll look to build on in the years ahead.

Next, on capital allocation, today we announced the sale of two small businesses within our Aviation Systems segment for $185 million in cash, and these should close before year end. When combined with the roughly $2.5 billion divested under our portfolio shaping initiative, total gross proceeds are set to be $2.7 billion.

We have now divested nearly 10% of our revenues and with the completion of a few others in process, our portfolio shaping program announced in 2019 is largely complete.

Proceeds from divestitures including those from the recently completed military training and combat propulsion businesses will be part of our capital returns program, consistent with our shareholder friendly capital allocation approach.

Our expectation now is for buybacks to be roughly $3.4 billion this year, up versus our prior guide of $2.3 billion. When combined with dividends, capital returns will be about $4.2 billion in 2021.

So to wrap up, I'm pleased with the execution against our strategic priorities, confident in our ability to consistently deliver double digit EPS and double digit free cash flow per share growth, and I'm excited about the next phase for L3Harris. With that, I'll hand it over to Jay. .

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. .

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. And our first question is from Doug Harned with Bernstein. Please proceed with your question. .

Good morning. Thank you..

Good morning, Doug. .

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?.

Yes Doug, this is Chris. Thanks for the question, and yes, you absolutely got it right. We've been quite successful in the Communication Segment of late with some of those wins not only here domestically but internationally as well.

So I think what we're seeing is some upward pressure for revenue growth and margins over the longer term, like we've talked about before. We had a great quarter when you looked at the book-to-bill, and the continuation for modernization of the land force is, whether it's the radios, the night vision goggles, SATCOM we're really in a good, position.

So maybe I'll throw it over to Jay to give you a little more color. .

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. .

And I'll just chime in there. Yesterday we signed a contract with the Mid-East country for the first phase of a multi-year Next Gen STR standardization program, and this has the potential for up to $1 billion over the next several years, so a lot of good positive momentum. .

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

Hey! Good morning, guys. .

Good morning. .

Chris, in Space, can you provide more color on the competitive landscape, the available programs for bid and how you're performing?.

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. .

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

Hi! Thanks, good morning. .

Good morning. .

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?.

Well, thanks David. I mean a small part of the margin improvement does come from volume and you know we've talked about organic growth trajectory, so that's a contributor. But the big driver is ultimately e3, and we talked about the synergies which are a year ahead of schedule and we're committed to a $350 million run rate.

A lot of this takes more than just the two or three years that we've talked about, and each and every function is developed and executing a transformation plan. It takes investments sometimes in systems and processes, but we believe there's continual upside. We've proven it, we're focused on this, something Jay and I review on a regular basis.

So we see no reason why the e3 program can't continue. I'll let Jay jump in on the pension assumptions, but again, the execution has been what's helpful and driving the margins. We're able to control our EACs and the commitments that we sign up to with our customers. So Jay, a little more color. .

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. .

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

Thanks so much. Good morning. .

Good morning. .

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. .

Well, thank you for the question. Now we've had numerous transactions that comprise the $2.7 billion. You know I went back and looked at our original estimates and we've generally answered your question and have been able to meet or in some cases slightly exceed what we had projected.

You know we talked way back about maybe about $2.8 billion of gross proceeds from all these divestitures where 2.7 and as I mentioned a couple of small ones. So we'll clearly get within the range of our expectations.

You know on the M&A front, we did come out of the box two years ago and said we really were going to stand down on M&A and focus on the integration and the divestitures, and as I've highlighted that's gone very well or maybe even better than expected. But even during that two year period we watched the market.

I'm highly confident we didn't miss anything in the two year period. So we'll continue to survey the market where we're looking at anything that is “a must have” as we call it. You know when I look at the portfolio, as we said over the two years, we're in all five domains. I don't really see any glaring needs or gaps.

So we'll either proactively approach companies or respond to inbound calls, but we're really going to continue to hold the discipline, look at things strategically, look at them operationally, make sure the financial hurdles make sense. So not really in a rush and very pleased with what we've been able to win organically.

So, hopefully that that gives you some insight Robert and we'll let you know as things progress. .

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

Hey, good morning. I was wondering if you could comment a bit on the second half implied to sit down in SAS margins. I think you talked in the past about R&D and mix, maybe just quantify those.

And also Chris or Jay, could you just update us on Next Generation Jammer? I know the second protest has been you know – or is being adjudicated I guess by GAO and I guess that's due for a decision here in the next couple of weeks.

Would that have a swing factor on this year's top line or guidance in anyway?.

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. .

And on the SAS margins Myles, you know this make about – the first half, about 19.5% in that ballpark. The back half of the year does step down to 18%, maybe 18% plus in the guidance range at the high end of 18.75%. The key driver is really mixed on the new programs, particularly in Space. We've got to step up on these missile defense programs.

There's a number of other classified programs that we've already won and that you know we anticipate winning here in the back half of the year, which will continue to put some pressure on the margins in the back half.

But again, those are things that we had contemplated coming into the year when we set the guide originally and we're pretty impressed by the fact we're able to go to the high end of the guide now based on these same new programs. .

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

Hey, good morning everybody.

How are you?.

Good morning.

Fine! How are you doing?.

Great! You know the international market for defense is always dynamic and I thought I'd follow-up on some of your opening remarks here. Could you give us an update in the overall international outlook, the opportunity set where you're seeing demand coming from and for what types of systems, you know, etc.

Can you answer, Chris, you have this reputation with being able to drive and improve relationships with government customers, and I was just wondering in your answer, if you could discuss where you see the opportunities for L3Harris..

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. .

And just to quickly add to that Richard, you know our growth framework we had laid out a target of mid-single digit plus growth over the medium term for international, so we are comfortable with that. Obviously we're going to be doing that this year if not a little bit better.

And as kind of what Chris said, some of these capabilities, the ISR aircraft missionization, if you recall back in our March investor briefing, we've talked about taking the exquisite Rivet Joint capability.

Bringing that to business chat is also bringing it to pod capability based on customer affordability, and there’s a significant amount of demand around the world for that. You look at Tactical Communications, we see a lot of these foreign countries following the same DoD modernization path and so we see opportunities there.

And I'd say the other areas is maritime, both in manned and unmanned, you know request for support in the capabilities we would provide, both in say electrical distribution and power control, as well as things like autonomy. So we just continue to see a growing pipeline and we're pretty comfortable with that growth objective over the medium term. .

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

Yes, thanks. Good morning, guys. .

Good morning. .

I wanted to ask just a follow-up to an earlier question on RF tactical and sort of the prospects for growth in ‘22 and beyond. Maybe if you could frame for us the international and domestic pipeline and then what did you expect kind of rates of growth to be beyond this year? And then I have a follow-up on IVAS.

If you can talk about what your view of that program is as a potential threat or opportunity for the legacy addition? Thank you. .

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..

Yeah Gautam, you know I think overall probably in both cases, both DoD and international you're looking at probably low to mid-single digit growth over the medium term.

Part of the reason particularly in DoD is that while we have strong growth on the modernization programs, it does cannibalize a piece of our base business and so you have a little bit of a reduction there with growth, solid growth on the monetization programs, Army being the largest program, that's really in the early innings and we've got the start of full rate production here coming in the back half of this year.

Internationally Chris mentioned that before, there’s just demand around the world for some significant upgrades as far as modernization, but again I would put the growth rate right now in that low to mid-single digit as new countries come on, other countries fall off and so you know obviously we’re going to drive that to more of a mid-single digit, but for now I think it's the best way to think about and look at it.

.

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. .

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

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?.

Yes Sheila, what's happening with IMS in the back half of the year is we had strong growth in the ISR business, which was mostly these international customers.

That will moderate and abate a little bit here in the second half of the year, and so the growth rate is just going to normalize back to what we are expecting really for the full year, that's really the key driver, really strong international in the first half that moderates really in the second half for the business back to a normal rate. .

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. .

Our next question comes from the line of Rob Spingarn with Credit Suisse. Please proceed with your question..

Hi! Good morning. .

Good morning. .

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. .

Right Rob, great questions. We did see some good recovery, double digit in the second quarter driven a little more by the products and the actual training. I think there's a slight lag there. You know we have a variety of training models from academies you know where the cadets actually come into our facilities for an 18, 12 to 18 month period.

That's been a little challenged due to some of the border closures, so that's a little lagging. I think as the borders open up we'll see an uptick there, of course the delta viruses is coming through on a curved ball in everything compared to what we thought it would be, so the recovery is lagging a little bit.

You know the simulators, as you said there's a pilot shortage. People either need to get the training refreshed or a lot of pilots may have retired and there's now going to be some new pilots that are going to need the simulator training.

And then of course for the actual manufacturing you know we had a slow start to the year as you would expect, not a lot of people buying simulators, but so far in the third quarter, even though it's early August, we've already been awarded two simulators and we’ll be converting those to contracts here in the next 30 to 45 days.

So we are seeing an uptick and you know it's going to drive growth in the second half. We’re assuming – I’ll let Jay give the exact numbers, double digit growth in commercial aviation. So it is a good market, it’s got good technology and we're going to continue to run that business and evaluate and determine strategically what we want to do with it.

But it's part of the company now and its contributing and we're excited about the uptick, so Jay?.

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. .

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

Hey! Good morning guys. Thanks for taking the question. I don't know if this is Chris or Jay, but is it impossible to quantify you know either kind of this year on the top line organic growth or even breaking down your bookings kind of year-to-date.

How much of the growth is coming from new programs and I guess what I'm getting at is what kind of dilution on either new start programs are you trying to offset or deal with, and I guess Gautam kind of hit on it.

You know are you seeing any more pricing pressure, competitive pressures from new start commercial players, you know like what we're seeing in the IVAS program. .

Yeah Michael, thanks for that. It’s a great, great question. I mean as I said, 6%, 6.2% organic growth.

You know when I look at – as we go through the planning process and build up our annual operating plan, you know we start the year and we usually have pretty good visibility into what's already in backlog, you know so a lot of – it's kind of in the 70% range as we look forward, so you know going back to December of 2020 when we put out our guidance for ’21 pretty good visibility, 70%.

You know there's maybe 10-ish or so of follow-on. So you know to answer your question, I guess you could say maybe 15%, maybe 20% at the most is revenue derived from new business to give you some idea. You know on the – it is driven by new programs or new contracts is kind of how I look at it.

And as you suggest, some of those, especially with the DoD start out as cost plus contracts, you know then its migrated into a low rate production, a full rate production.

So you know it's no secret that the cost plus margins tend to be lower than what we're currently realizing, so it's dilutive on that front and then even on the fixed price contracts. I think we’re generally pretty conservative in how we start poking those until we retire and mitigate the risk. So maybe that answers your question there.

As far as competitive pricing pressures, you know nothing new or different than what we’ve had over the last decade or two in this industry.

You know the selection criteria varies by program and I think our customers are very sophisticated and they look at the technical solutions, they look at past performance, they look at the management team, they look at cost, they look at schedule. So you know they are taking all those things into consideration.

Like I said earlier, to an earlier question, we try to find ways to work collaboratively with these new entrants, when and if they can add value and increase our probability of when. So, I don't know, Jay anything further? [Cross Talk].

Yeah, I mean it varies year-to-year. I'd say on the mix headwind, maybe at a gross level, you're talking anywhere around 25 basis points or so of headwind from year-to-year. And our challenge is really to offset that with about 50 basis points of productivity and so that we have a net 20 to 25 basis points improvement year-to-year.

But again just, it will vary. I'd say that it’ll probably be just like an average to think about. .

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

Hey guys! It's Tyler [ph] on for Seth. Good morning. .

Good morning. .

Just, I have a couple quick ones here.

Can you just speak through the remaining schedule and maybe the execution risk on TR3 and just touching on the F-35 growth trends ahead?.

Yeah, yeah let me give a quick F-35. You know we've talk about before we're a top 10 supplier, looking at it just the other day. We deliver about 1500 parts per jet. But the main focus has been TR3, where we have three components; I mentioned two of those three.

We were successful in getting a production contract, which I think is indicative of the progress we've made. You know where we are right now is going through the safety of flight on these three products. One has completed the test. One is just about to start later this week and the third starts in October, so it's all per schedule.

We're committed and focused on making sure we're ready for the lot 15 cut in. That's a big focus of both Lockheed and the [inaudible] and I'd say over the last six months the teams have made a lot of good progress. We are communicating, we understand the schedule, we understand the risk.

So you know I feel good about our piece of that great program in contributing to Lockheed and allowing them to deliver their jet. So as usual, in any development program there's directed change, there's government dependencies and stuff that we're used to and accustomed to and manage and work around.

So I'd say probably feel better about the program now that I did in April. .

Our next question comes from the line of George Shapiro with Shapiro Research. Please proceed with your question. .

Good morning. .

Good morning, George. .

Jay if you could go through the working capital days you expect for the end of the year. The goal I thought has been 52 days. This quarter it looks like working capital actually was up like about $135 million on a sequential basis, so just looking at where you are going there.

And then just to verify, the $400 million reduction in sales was all due to the divestiture?.

That's exactly right. I'll take the second question first, George. The two businesses, the multiple businesses that we divested at the end of the quarter were about $800 million of combined sales, so half here about $400 million impact for the second half and that’s what's driving the reported sales to come down by that amount.

On the working capital it's also good observation. We reset again with the impact of these divestitures George, so at the end of the second quarter, on an adjusted basis we're 57 days and we're trying to get now to around 50-ish days.

Part of this was planned, where we had some programs, deliverables in the first half of the year and those receivables will turn into billings and collections in the back half of the year.

We also had in the second quarter just high receivable balance with the timing of sales and so that will just normalize and we'll collect that cash here in the third quarter, and really for us the working capital reduction is the same as it's always been really for the year. It's really driving the inventory.

Two elements as I mentioned; one is just delivering on our key program milestones, so we can turn those into billings and into collations. And then second element is really delivering on our working capital initiatives and these are the things that we’ve been talking about as far as reduced cycle time, improving our forecasting process.

So you know a big second half for us, and it’s actually the way we had planned it and we believe that we are on track for that. And I’d say that end of the year George is really kind of 49 to 50 days on this new adjusted basis, taking out these divestitures. .

Our next question is from the line of Carter Copeland with Melius Research. Please proceed with your question. .

Right in and under the hour. Thanks guys. Good morning. .

Good morning, Carter. .

Chris, I want to kind of end here with a higher level question on you know just strategy.

When you came to L3 five years ago you know and think about where you've gotten now in terms of organic growth, inorganic growth and divestitures, the simultaneous integration, you're now at a point where you said you're done with the divestitures, you’re not in a hurry on M&A.

When you look at the next five years and try to maintain that internally disruptive mindset you know what's going to drive the next leg of the value creation formulary? Is it about R&D and development and customers and products more so than the value creation elements we've seen over the last five years? How do you continue to have that kind of mindset and in creating value over the next five?.

Alright, Carter. Well, you got a good memory, so thanks for that and clearly it was a great team effort to get to this point. I've talked somewhat about where we're trying to position L3 Harris and since I listened to all the questions throughout the day, you know I'll try to explain the vision here.

We have our traditional primes which some great companies with a lot of cash and employees and processes.

There was a couple of questions about these new entrants which are maybe a little more commercial mindset, a little more agile, maybe a little more creative, and what we're trying to do is put L3 Harris right in the middle of those two and take the best of the both and position ourselves to listen to our customers and be a trusted disrupter.

I don't want to underestimate the importance of understanding the mission. So we know the mission, we know the customers and can we take that with our industry leading R&D investment and position ourselves for growth.

You know Jab[ph] C2 is something that's out there, that we can talk about more in future calls, but we really want to position ourselves to help our customers solve their problems and focus on the organic growth, focus on the margin improvement, the double digit free cash flow per share metrics; I think they're all going to drive value.

So I ultimately want to be the most valuable defense technology company in the mind of our shareholders, in the mind of our customers and that's not necessarily the largest and that's what the team is also executing on..

Thank you. Our final question comes from the line of Peter Arment with Baird. Please proceed with your question..

Yes, good morning Chris and Jay, nice results. Hey Chris, just thinking about your e3, I guess it’s you know becoming kind of ingrained in the culture now.

Outside of kind of the operational excellence here you are driving, is there any kind of other buckets that still you see as the greatest opportunity to kind of show incremental savings?.

Yes Peter, thanks for that question. We've actually taken e3 to be our operating model in the broadest sense. So a lot of times people think of it just on the continuous improvement initiative, but the approach we've taken on e3 is much, much broader.

It encompasses EH&S, it encompasses the supply chain, ESG, continuous improvement, all those aspects, quality, roll throughput yield, everything that that drives our performance, including our performance on our programs where we look at our customer ratings, we look at award fee scores. We looked at our value management.

So when you look at all those things holistically, each and everyone contributes to our cash flow and our profitability. So as we can bring down lead times or cycle times, improve the quality, we look at cost of poor quality, get the yield higher.

Each and every one of those is part of our e3 umbrella, and that's really what's driving the success we've had to-date and the optimism we have for the future. .

So with that I think I'll just kind of wrap it up. I appreciate everybody taking time to call in today. Hopefully as you heard, we have a strong quarter and the performance and the operational momentum is all positive. Obviously, it wouldn't be possible without my great leadership team and the 47,000 employees, so thanks again to them.

We feel good about the opportunities ahead. We're going to continue to execute and look forward to talking to everybody in the months ahead as we focus on growing L3 Harris. Again, thanks for joining the call..

This concludes today's teleconference. You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day!.