Thank you, Rob. Good morning, and welcome to our second quarter 2022 earnings call. We published our investor letter after the market closed yesterday, a streamlined format that we're pleased to continue, given the positive feedback. So today's call will be focused primarily on answering your questions. Joining me for the call are Chris Kubasik, our CEO; and Michelle Turner, our CFO. 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 investor letter and SEC filings. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the Investor Relations section of our website, and a replay of this call will also be available. With that, Chris, I'll turn it over to you for some brief comments.

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

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

All right. Thanks, David. I think there were about three questions in there. Let me see if I can address them. Let me start with F-35. Usually, I give a long answer and list all the components that we're involved with, but it really comes down to the ICP, the integrated core processor. So today, I'll provide you a shorter answer because we actually completed the safety of flight certification, and the first flight systems were delivered to Lockheed Martin last month. So great news relative to TR3 and meeting that delivery, a little late, but nonetheless, it's progressing. Our last 15 hardware starts are getting delivered later this year, and the whole focus here is to support Lockheed to enable their 2023 aircraft delivery. So I'm feeling much better about the progress the team has made. I know they worked a lot of long nights and weekends to get here. So I appreciate that effort. And your financial numbers remain accurate, based on what we've told you before. Relative to the strategy, I think it's working. We've talked about this trusted disruptor strategy with more innovation, more prime, and more international involvement. We've invested in free-space optics and had a handful of investments with Shield through our venture capital.

I'm going to try to follow the rules. Just a follow-up on David's question for SAS. The top line is accelerating to mid-single-digit growth from low single-digit decline in the first half. Can you talk about the drivers of that improvement? How much is coming from the space business accelerating versus better avionics and EW volumes? And how do you think about the growth going forward, given some of the progress on F-35?

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

Yes. No. You did a nice summary in space with high to mid-single digits in terms of growth. From a Mission Avionics perspective, this is the ramp that we talked about on F-35. So as we head into production, you'll see that come in the second half. Additionally, our classified business in Intel and Cyber is continuing to grow as well, and we'll expect to see that ramp in the second half as well.

Let me start. Just at a high level, I think at least at L3Harris, the whole industry has now realized there's a new norm in supply chain. We're adapting to that as quickly as we can. In the past, the focus was just-in-time inventory, inventory reductions, and single sources. Now we have multiple workstreams going in parallel. I think we're doing well in the short term, trying to mitigate the disruptions, but also looking at how we revamp our supply chain resiliency for the long term. We've invested in tools to get end-to-end visibility beyond Tier 1, critical materials, smart inventory, and safety stock, which builds our inventory balance. We're moving to more localized and distributed production to shorten the supply chain network and looking at multiple sources for every part.

Yes. So just to frame it a little bit in terms of the numbers. Coming into the year, we anticipated that we would see a first-half impact, particularly within electronic components, and we are seeing that play out in our first-half results. Additionally, we also talked about sequential quarter-over-year improvement from Q4 into Q1, additionally from Q1 into Q2. Albeit it is more modest than what we originally anticipated in our guide back in January. When you look at our guidance update, pointing to the low end of the range, part of that is the elongation of the supply chain impacts we're seeing.

So I thought you might comment on the SOCOM Armed Overwatch program, where you're competing with Textron. And also, could you talk a bit more about the improvement you mentioned in commercial aviation? I'm interested in what the back half growth outlook might be for that business and if you think the momentum continues into 2023.

Right, Rich, let me take Armed Overwatch, and Michelle will talk to you about aviation. This program goes back into late '19 and early 2020. We took a clean sheet approach to this program to align with the requirements. Our team has spent a fair amount of money in R&D and capital on this. We've had many demos that have gone well, and we believe that positions us well to potentially win this program. It's for 75 aircraft, and it's a couple of billion-dollar opportunity both domestically and internationally. There's a lot of need for this type of capability in countries that are fighting terrorism. We see potential opportunities in Africa and the Middle East; whether it's border protection, maritime operations, or light strike ISR, it will be a very flexible, affordable program.

Yes. And I would just add to the Armed Overwatch in terms of second-half ramp. When you look at our overall ISR business, this is part of our expectations in terms of growth, particularly around these aircraft missionization programs. We didn't have those in the first half.

Chris, circling back a little to David's question on the budget. So 40% of L3's international revenues are in Europe. And your total international book-to-bill has been averaging around 1 or above in the past 12 months. Specifically, what do you see playing out for L3 in Europe? Should we expect bookings to accelerate in '23? Any color there, just given all the budget actions and the situation in Ukraine?

Yes. I appreciate the question, Peter. Clearly, we have opportunities in Europe. We've talked about some ISR capabilities that we've already won in the past, where we continue to add aircraft. Clearly, with Ukraine, we have a core competency and experience with the Ukraine Security Assistance Initiative. We see opportunities for radios, night vision goggles, and even ISR capabilities. We're also planning to open offices in Europe, particularly in NATO countries. Poland is a big opportunity, as we've submitted a few bids for resilient communications and SATCOM. I see significant progress with opportunities that could favorably impact our financials for 2022 and continue into '23.

I wanted to try to understand what's going on in Tactical Communications a little better. You've had a rising backlog, but at the same time have been constrained with supply chain issues. Once the supply chain constraints ease up, what trajectory do you expect to see as radios are delivered? A big surge or more of a long-term better growth outlook? Additionally, we've seen you keep your margins. Margins have held well despite inflation and supply chain issues. How do you see risks around margins going forward if inflation persists?

Thanks. You're absolutely right; there's high demand for our radios. The conflict in Ukraine highlighted the importance of resilient communications. We have opportunities in Australia worth about $300 million for the Deltic Phase 2 with the Australian Defense Force. We expect to hear the news soon. We've also discussed the Kingdom of Saudi Arabia, where we have received congressional notification for 4,000 radios, and we’re preparing for our first article acceptance in August. In the U.K., we have the Morpheus program, with approximately a $100 million award. All these opportunities are building our backlog. We're also focused on supply chain shortages and have invested in capacity. We've reduced our red list of suppliers from 20 to 5. We’ve redesigned over 1,000 parts in our products to ensure we can deliver.

To your point, in the first half, we saw Tactical Communications down low double digits due to electronic component constraints. In the second half, we expect that to grow in the high double digits, so we anticipate easing from a capacity perspective. We do have an elevated backlog, around $1.5 billion, which will factor into our growth as we head into 2023.

Chris, I was wondering if you could comment on the NSO situation and what happened there? Additionally, do you have any potential M&A deals in the pipeline?

Yes, regarding our M&A pipeline, we're continually looking for opportunities that will enhance our ability to serve customers. We're assessing a handful of options while monitoring the regulatory environment and any potential antitrust issues. As for NSO, we're aligned with U.S. national security on this matter. It’s clear from the reports that no deal will happen with us.

Chris, something you're likely frustrated about, but can you give a sense of key dates or milestones regarding the next-generation jammer and the ongoing protest?

Yes, this has taken longer than anyone wanted. There's going to be a re-procurement process between us and Northrop. We all signed an agreement on a path forward. I expect to see the RFP go out in the next month or two, and we'll update our proposal accordingly. We hope to have a selection by mid-2023, given the Navy's requirements. Meanwhile, it’s important to us as we’ve accounted for $100 million of revenue in this year’s planning, so this has added some headwind.

Could you discuss the back half relative to the prior guide? The acceleration in organic revenue growth to mid-single, how much of that's in 3Q versus 4Q? What visibility do you have, and anything on payment timing you're looking at?

In the second half, the drivers for growth are threefold. First, there's supply chain recovery; we originally expected a healthier ramp, but we're seeing it elongate into 2023, so we adjusted our guide. The second factor involves new program wins, and the third is around our ISR missionization programs like Armed Overwatch. We expect these wins in Q3, with a ramp occurring in Q4. As for Q3 and Q4, growth is fairly consistent; no hockey stick.

I want to add a point. We've been talking to our leadership team about controlling the controllables with all the external frustrations in the system. We're navigating an unprecedented situation with the pandemic, Ukraine, inflation, and supply chain challenges that change daily. While we give guidance for the second half that Michelle laid out, predicting future visibility has become more challenging. We're trying to stay calm and manage what we can, making the best efforts to communicate upside and downside potential. The interesting part is we're talking about a backlog; we aren't losing opportunities, they're just delayed due to factors outside of our direct control.

Regarding cash, we're expecting it to be split between Q3 and Q4, more like a 30-70 split.

You were down selected for Phase I of the stand-and-attack weapon. Can you talk about your strategy here?

Great question. We started investing in weapon systems about 4 or 5 years ago. This air-to-ground tactical missile is right in our wheelhouse now. We're taking a clean sheet approach, and I think that will be our differentiator. We're investing in our Seekers and have multiple classified opportunities as well. It will take some time, but this is clearly an area of core competency for us and one we'll continue to develop.

On cash flow, your inventories are up significantly in the first half. Where do you expect that to go?

Yes, you're correct that our cash generation is heavily weighted towards the second half, inversely tied to working capital reductions. We have built inventory in anticipation of a second-half ramp. Our ISR missionization business also contributes to inventory. Chris mentioned several programs we're pursuing, and we expect cash pressures to ease as these programs develop.

With all the non-controllable headwinds you've mentioned, could '23 or '24 be a spring-loaded year, possibly causing capacity issues?

The CR in Q4 could impact '23. I'd love to see a strong year, and we’ve made strategic investments in our facilities to grow capacity responsibly. Labor may pose a greater challenge than facilities, but we’re hiring aggressively. We’ve added 4,000 employees this year alone. While there are challenges with attrition, we're receiving numerous applications from interested candidates.

Regarding the CR, our guide factors in some level of a CR in Q4.

Could you quantify the margin headwinds from inflation and labor? And how long does it take to flow through price increases on raw materials or higher billing rates?

We anticipate about $100 million in gross inflationary impacts this year; about $20 million occurred in Q2. Approximately 50% of our portfolio is fixed-price, lasting about a year. We're seeing inflationary pressures before EPA clauses are in effect, and these will continue into 2023. We'll focus on including clauses in new contracts to manage inflation. We expect remnants of current inflation effects to linger into Q3 and Q4 of next year.

Before ending the call, I want to recognize our 47,000 strong L3Harris team around the globe. Thank you for remaining focused on creating value for all stakeholders, supporting critical missions. What you do matters in making the world a safer place. Thanks, everyone, for your time today, and have a great weekend. We look forward to connecting again in the next few months.

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