Morning, everyone. Welcome to day two of the Barclays Industrials conference. I'm David Strauss, I cover U.S., Aerospace and Defense. To kick it off this morning, pleased to have L3Harris here, Chris Kubasik, Chairman and Chief Executive Officer, and Michelle Turner, CFO. I'm gonna turn it over to Michelle to give the necessary disclaimers for looking statements. Hi, good morning, everyone. That's energy back. We're not getting any energy back, so. Good morning. Thank you, Chris. As a reminder, our discussion is being webcast this morning, so we may be making some forward looking statements. If you have interest, we encourage you to go check out our SEC filings specific to the risk and uncertainty which may permeate in terms of our go-forward projections. Thanks for joining us today. Yeah. David, thanks for inviting us back. Looks like we have a full house here, so thank you all for joining in person and online. I thought I'd just make a couple quick comments on Aerojet Rocketdyne, because I know that's on everybody's mind. In late December, we announced we signed a deal to acquire Aerojet Rocketdyne. I think it fits very nicely into our strategy and gets us into some high growth markets, specifically weapons through rocket motors, specifically in space propulsion. We filed with the HSR filing in mid-January. It's a 30-day process. On the 30th day, we executed what's known as a pull and refile, which we did, which started the second 30-day clock. That runs out on March 15th. On or about March 14th, 15th, we'll know the next step, whether it's a second request or whether we move forward with the transaction at that time. Aerojet Rocketdyne shareholders vote on March 16th. T hat's kind of a high level where the process, where the timing is. We think it's an exciting deal. We think it's a game changer for L3Harris and it really fills in the portfolio nicely. I believe there's gonna be a lot of demand, as you've probably read and seen, for munitions, missiles, weapons, whatever you wanna call them, for the next several years, not only in the U.S., but internationally. I think you'll see that reflected in the budgets going forward. Perfect. I wanted to ask about the 2024 budget process, since that seemed to get kicked off even earlier than expected this year with the speaker vote. What you're hearing in terms of where the initial 2024 request might shake out. Obviously, last year we ended up way above what the initial White House request was. We're up 25% or so off of the last two years. What you're hearing in terms of where the initial requests could come out and how your best guess at how the process could play out from there? Okay, absolutely. It's good for. Let me go back to 2023. We actually have a 2023 defense budget was enacted on December 29th. In prior years, David, everybody would come up here and talk about continuing resolution, continuing resolution. I can assure you it's hard enough to run a business, let alone a defense contractor. It was good to start January with a enacted defense budget. That's a big deal for not only L3Harris, but the whole industry. Now it's time to talk about the 2024 defense budget. 2023 was up 10%, as you know, top line, which is a big deal. The timing, as we understand it, is on March 9th, the top line number will be disclosed without a lot of detail. There will be a number given. We believe it's probably gonna be in the 4%-6% growth range. Coming off $818 billion as the jumping off point, maybe $850 billion-$860 billion, then it'll go through the normal process. I think what's unique this year will be the debt ceiling. Sometime in the summer, Congress will have to deal with the debt ceiling. I think we've all read the Democrats, the Republicans, they've all drawn lines in the sand for different reasons. Either cooler heads will prevail and we'll find a resolution. It just seems, notwithstanding all the good things and the crazy things that Congress does, that we would default on our obligations as a nation. I think, the general thought process is there will be a resolution in some form or fashion, and the budget will get approved at the right time and we'll move forward. Maybe a continuing resolution in 2024, but hopefully we'll have a signed budget by the beginning of January of 2024. The one thing that, I think we all struggle with is the budget you talked about above $800 billion, modernization above $300 billion. The industry as a whole last year, I think was flat, maybe even down a little bit. You guys were in that, in that range as well. O utlays, there seems to be this big, larger than normal lag between outlays and the budget. Maybe speak to that. Are you seeing things loosen up at all? Would you expect to see a bit of a catch-up here? Should that lead to accelerating growth for you all and the industry? It is interesting to see that bow wave or backlog build up. I think you see it in our financials. You're right. F or those in the audience, you're looking there saying the defense budget went up 10%, how did all you guys manage to remain flat? What you'll see is our backlog, in our case, is at an all-time high. O ur tactical radio business, maybe Michelle can comment on that in a moment, is over $2 billion, which is the most it's ever been. We're not losing orders. What's happening is we're building them up, and we need to deliver them. Supply chain has caused some of this. We've all talked about the slow contracting environment coming out of the DoD. I think that process is improving. The fact we have a budget, like I said, in December, has allowed January and February to pick up a little more pace. We're seeing RFP, we're responding to them. I think we're getting the contract signed quicker than we have in the past, and that's gonna allow for some tailwind, as I see it. I would think in 2023 and 2024, all the backlog we've all accumulated, we get the right people, we get the supplies, we're gonna be able to see the increased revenue growth. Any thoughts? Yeah. No, I agree with that. I think clearly in 2022 across the industry, we were constrained from a supply chain perspective, along with the labor attrition. To the extent that we start to see those bottlenecks ease, that's when you're gonna see the backlog flow. Okay. With the recent announced deals, TDL and the Aerojet announcement, this pivot towards M&A, talk about how you see the balance sheet evolving over the next couple of years, how you're gonna allocate your cash flow between deleveraging and buyback, and then the potential for divestitures to help in that deleveraging process? Yes, I'll take that. Chris, feel free to jump in. To Chris's comments at the beginning, we do remain optimistic that we're going to close on Aerojet by the end of the year. As a result, we will be taking on increased debt, and we expect our gross leverage ratio to be close to 3.8 post that acquisition with about $14 billion of debt. Our focus will really be threefold. One, around repaying the debt over the next few years. That's going to be primary in terms of maintaining our credit ratings. We're also going to moderate our share repurchases to cover dilution, so that's about $500 million a year. We also expect that we're going to maintain a competitive dividend consistent with our peers within the industry. The other only thing I would add is from a longer-term capital deployment perspective, if you haven't had a chance, here's a plug. Check out our investor relations letter from our last earnings call. We included a really nice pie chart in there that illustrates our capital deployment strategies, both from a history perspective since the merger, but also through the next couple years. What you'll see is across the capital deployment levers, we're relatively balanced, from an equivalency perspective across those levers. I'll just add in on the acquisitions. I f we had chatted in, say, August 1st, and you asked me, "How many acquisitions do you think you'll announce, let alone close in 2022?" I'd say, "Probably nothing." You know, because we look at things all the time, and obviously the sellers control the timeline. Shortly after that, you know, the Viasat opportunity, tactical data links, which ties in nicely to one of the acronyms I'm sure you're tired of hearing about called JADC2, which is basically connecting not only the satellites to the ships, to the airplanes, and allowing the data to be transmitted across these various platforms, is critical to the national defense strategy. Aerojet Rocketdyne came to market. I've been in this industry a long time, as many have. There aren't that many properties that are interesting and for sale, and both kind of came up, and we signed two deals in the fourth quarter. It was the right thing to do. We had numerous meetings with our board, and we're confident we can make these a success. As Michelle said, next couple years, go ahead and focus on debt reduction. To your divestiture question, we have a couple non-core assets that we've had kind of on the back burner waiting for the markets to recover so that we can get full and fair value, and that will accelerate the debt reduction. We'll be executing on that hopefully later this year. The size of the potential divestitures? About $1 billion or $2 billion. Y ou just mentioned there that if I would ask you in August, you wouldn't have done any deals. You ended up doing two deals. This coincided with numbers coming in below, I think, your own expectations for the year. I think there's this narrative that you've pivoted to M&A because maybe there's something broken in the underlying business. It's not performing to expectations, and you had to bulk up to be able to compete with the big guys. I guess, how would you? I'll leave that to you, that seems to be the narrative out there that with regard to why you've done this pivot towards M&A. Well, if something was broken, I wouldn't do M&A. I would focus full-time on fixing what is broken. What we've talked about is, yeah, we were disappointed in our financial results, driven mainly by supply chain, driven mainly by our tactical radio business. I think it was in the third quarter, we talked about the fact there's a lot of products in this industry you can deliver without all the parts. You can deliver an airplane with machine parts and a punch list and a ship, probably a submarine. Certain things like radios, night vision goggles, and missiles, you need every single part. While we've been able to reduce our parts that are lagging from hundreds down to single digits, you actually need every single part to deliver a radio. In our case, we recognize our revenue upon delivery of the product, 25% of our revenue. That is different than a lot of other companies who have longer term contracts percent completion. That's why we knew it would hit us harder externally and more visibly than others. W e looked at the ease or the difficulty of these acquisitions and how they're gonna affect the underlying business. Viasat is just one single entity, carve out, lift clean in place. It goes into one of our sectors. Very simple integration. We closed January third. As of today, all their employees are on our payroll, they're on our benefits. It's not done yet, but we're probably 50% done. Just very simple. Aerojet Rocketdyne, we have three segments today. We'll set up a fourth segment. This will not impact or distract the core team focused on Comms, Integrated Mission Systems, and Space and Airborne Systems. You know, that's how I looked at it. If it was another merger of equals, like an L3 and a Harris, I would have concluded that's just too much of a distraction, too much effort. You know, it's an opportunity. They come, you know, they come upon us rarely, and it seemed if we missed these opportunities, we wouldn't have been able to grow inorganically for the foreseeable future. We seized the opportunity, and we're successful. Aerojet obviously gets a lot of the attention. TDL was a pretty sizable acquisition. Can you thumb it down for us what that capability is? I mean, I think we all hear Link-16, and are like, "Well, what is, what is that?" I mean, it seems like it combine that capability with your sensors, it gives you an advantage when it comes to space and JADC2 and all this stuff. If you could just, like, layman's terms, what it means, what capability it gives you. Yeah, I'm usually pretty good coming up with an analogy. This one is hard to explain. I have to be honest, it is complicated. I think in the simplest terms, Link 16 is effectively modules and cards in a box that go on various platforms. They're in 20,000 platforms. They're on ships. They're on airplanes. Later this year, for the first time, Link 16 will go in space and be on satellites. It allows basically the passage of data amongst all these different platforms and different domains and different services. We have the footprint, and then the next step would be to modernize Link 16, maybe more resiliency, more waveforms. If you already have the footprint, in effect, the boxes, you can easily swap out and update the cards and the modules and get better, more secure capability. I struggle with the best I come up with, which the real smart technical people cringe, it's kind of like Wi-Fi for the Department of Defense, right? It was like, you know, this gentleman's laughing. His iPhone is connected. His TV's connected at home. It connects everything. He just offended all the engineers. I offended damn near everybody in the defense industry. That's how I look at it. It's a good. That's the future of war fighting, obviously, is to be able to sense and shoot. We have the sensors, we now have the connectivity, we have the resiliency, I think going forward, it's gonna put us in a really good spot. Yeah, I've been hearing about Link 16 air to ground for forever, so it kind of makes sense that space is the next frontier. We've got to have that. Absolutely. Gotta have it. B efore all the supply chain issues, you had talked about the portfolio growing mid-single digit organically. Since that time, the budget's, I think, exceeded expectations. When the supply chain normalizes, whenever that may be, is mid-single digit growth out of the existing portfolio still a realistic target? Yeah, I believe it absolutely is. For all the reasons we've talked about, including the backlog and the increased budget. We get the 2024 budget in that 4%-6% range. I think it's a great great tailwind. You know, 23% of our business comes internationally, and we've been pretty successful. We've actually grown internationally each and every year since the merger. We would expect that trend to continue as well. Which areas specifically within the portfolio would be the leaders when it comes to mid-single digit growth? It would be space, it would be cyber, and it would be our yet to acquired, munitions business. I think of maritime as low single digit. I think of the land and the air kind of flat to low single digit. A lot of the missions in air are moving up to space. Capabilities that were on tactical fighter aircraft are now being executed from satellites. When I look at the five domains we have a couple that are growing upper single digit, a couple lower single digit, maybe one that's flattish. Yeah. Mid-single digit on average makes sense. It's our job to deploy the R&D and the capital to where the growth is and that's what we're doing. I think probably for you, Michelle, supply chain following up on that. What exactly are you assuming in the guidance that you gave this year for I think low 1%-4% growth for the business. What are you assuming for supply chain? We hear mixed things. Some people say it's getting better, some people say it's not getting better. Where does it stand from your standpoint? Then also maybe touch on inflation, how much inflation you actually have baked into your guidance for this year. Let me just say, I'm excited that supply chain is out of the top five. That in and of itself is an indicator as to where we're at from a supply chain perspective and frankly, across the industry. From a macro level, just to characterize our assumptions within the 2023 guide on supply chain, we've assumed conditions that are consistent with what we experienced in the second half of 2022. For those that have been on this journey with us, you may recall that we were first impacted by supply chain in Q3 of 2021, most acutely impacted in Q4 of 2021. As we transitioned into 2022, we have seen sequential improvement quarter on quarter from a supply chain perspective, with some quarters being a marked improvement from others. For example, in Q4, we had a really great product delivery quarter, as a result of all of our suppliers wanting to ship and make their financial year ends. As we think about transitioning into 2023 and where we sit today, the way I would characterize it is between comparing 2022 to 2023 in terms of what's the same and what's different. I think this is important in terms of how do you characterize the risk and how do you think about the profile that we're throwing out from a 2023 perspective. What's the same? What's the same is we do continue to experience hiccups, roadblocks, persistent supply chain challenges, whatever word you want to use, across the entirety of our supply chain ecosystem. That continues today. It's not as acute as it was last year, but it's not as seamless as it was two years ago. What else is the same is what Chris alluded to. 25% of our portfolio, we recognize revenue based on delivery. This is our product-based business, which is different than our industry peers, which take revenue over time or based on costs incurred. To the extent that we are short an electronic component or a washer, we're not going to be able to recognize the revenue on that particular product. Finally, what's really important within our business is we have been most acutely impacted by electronic components. We do continue to be on a 90-day allocation with those suppliers. Historically, we would have put our demand out for the next 12 months. We would get that demand. It was very seamless. It was all behind the scenes. We continue to be on an allocation process where we sit here in Q1 this year. That's important in terms of how do you think about supply chain within L3Harris throughout the entirety of 2023. What's different and what are we more optimistic about in terms of where we sit today versus last year? A couple of things. We've been talking a while in terms of engineering redesigns that we've been doing. We're going to get the full year benefit of those engineering redesigns in 2023. What does that mean? That means that we went from a place of about 100 alternate parts, is what we call them, to an alternate part bank of over 1,000 within our tactical communication systems business. To the extent that we see supply chain scarcity on those parts, we now have alternates to go through which are not going to stop the entire line. We also have seen an increase in terms of our DPAS ratings. This is the prioritization that we can get within the defense industry to ensure that our product supply is being prioritized over commercial entities, for example. We've seen that number go up by double digits in 2023. Thank you to our DoD customers for supporting us in that regard. Finally, and probably most importantly, is the number of critical parts. When the whole supply chain crisis started back in 2021, we had hundreds of critical parts, red suppliers. We are now down into the tens. You think about that population, that population has dramatically decreased. The takeaway on all that is that we're more optimistic about supply chain in 2023, but we're not back to the point that we were, say, 18 months ago or two years ago. Yeah, we've all learned a lot over the last couple of years. I think the other thing I would add, in 2023 we're going to see some working capital improvements. Because in 2022 the strategy was buy every damn part you can as soon as you can find it, which obviously you can see on our balance sheet, the increase in inventory. Now we know who the key suppliers are, what the key parts are, and where the risk is. We'll be a little more discerning as to where we buy smart inventory. I expect that the inventory balances will come down in 2023 as we're more selective. Following up on that, with the, with the, L3Harris merger, I think the combined company was 60-some working capital days. You had this target of 40. You were making great progress towards that target. pandemic, talked about inventory. I mean, I don't know if 40 is still before we think about the businesses you'll be bringing in, but is 40 still a realistic target? Is there a new target, or are you just going to keep trying to work net working capital days down? Yeah. I think it's more focused on working the days down, right? To your point, we ended 2023 at 53 days or I'm sorry. 2021. 2021 at 53 days. We saw that grow. To Chris's point, we made purposeful investments in our working capital, particularly on the product side of our portfolio, to ensure that we had the right supply as we're going into this year, which we're anticipating mid-single-digit growth on the product side of our business. We saw the days grow to about 55 at the end of 2022. We expect that that's going to come down by roughly about one day. We're going to free up about $125 million from a working capital perspective within the current year. Yeah, we see no reason why we can't improve one or two days per year. When we get into the mid-40s, we can see if 40 is in fact a reasonable target. I think, again, we've done the easy stuff, which I think is really focused more on the payables and the billing cycle. It's all about the inventory, and that's where we see some of the growth. Some of these are one-off things where you buy a couple airplanes that you need to mod and, you know, that adds a couple hundred billion to your balance sheet at a point in time. We're making good progress, and it's a key focus. In fact, we're. We have a board meeting later today and tomorrow. One of the things we're gonna firm up is our 2023 bonus plan. We're gonna allocate a lot more of the bonus to free cash flow. Further backing up what we're saying with how we're getting compensated. Just tweaks like that to align the management team and motivate them to achieve our goals. Michelle, anything you wanna talk to with regard to first half versus second half of the year? You know, you have, you know, so called easy comps first half, harder comps second. I mean, you had down first half up I think it's most acute in CS. Yeah. How should we think about first half versus second half and making sure? Yeah. We're not ahead of ourselves. We anticipate in the first half we are gonna see low single-digit growth and then roughly flattish in the second half of the year. To your point, we did start 2022 with a guide that was much more back half end loaded. We anticipate a much more linear spread when we look at this year. A couple other things I note on this. We do anticipate that the product deliveries will be more skewed to the back half, which is consistent with what we would typically see from a linearity perspective, and the margins will subsequently follow that as well. Just to break it down a little bit from a segment perspective, we do anticipate our Integrated Mission Systems business will actually be down in the first half and up in the second as a result of what Chris talked about from an aircraft missionization perspective. That business tends to be a little bit more lumpy. We anticipate our Space and Airborne Systems to be relatively flat and consistent quarter or first half to second half. It's our most predominant program based business, so there's a lot of consistency in terms of how that business performs. From a Communication Systems perspective, we do expect that that will be more back half end loaded, aligned with the product deliveries within our tactical communications business. Wanted to ask about comms. Y ou mentioned the backlog growth. T hat business was a $4.5 billion business before supply chain issues. Y our guidance this year, I think, without TDL, as it gets back close to those levels. G iven the backlog growth, I mean, how should we, how should we think about that business potentially growing above and beyond where it was, before we had supply chain issues, I guess? Yeah. It's one of our favorite businesses, as you know. All right. Everybody likes to talk about it as well. We do anticipate organically it's gonna grow 2%-4% this year. Some of that backlog will be alleviated. I mean, Chris alluded to this. We ended last year at over $2 billion, our highest ever from a tactical communication systems perspective. We anticipate with the orders this year that we're gonna land right around that same level. As we start to see easing the supply chain, that's when the opportunity is gonna exist in terms of how do we turn that. Chris alluded to this earlier. We have made investments within our Rochester facility, we have the capacity. We actually have lower attrition rates within that region in terms of the overall people. It really does come down to supply chain, getting the electronic components in terms of our ability to deliver on the backlog. I think one of the lessons learned coming out of Ukraine was the importance of these resilient comms, everything you read about, right? You decide to communicate on a iPhone or something, it's not gonna end well for you. Having these L3Harris radios with the resiliency has been a game changer over there in what we're hearing and what we're seeing. We have a big demand internationally as well, not only the modernization in the U.S., but abroad. It's a great business and it was a great business. It hit a bump and the backlog's building. We've been able to maintain all of our contractual obligations through this process. We probably have a team who every day tries to figure out which radio to build, deliver to meet the obligations and keep everything on track based on the supplies that are coming in. Team's up there doing a great job. Yeah. It was amazing in terms of how they pivoted last year in terms of meeting the surge of the Ukraine demand as well within days of being able to turn product. You're seeing some of that already coming through. Yeah. We're having to reprioritize other things. As a result of the supply chain constraints. Yes. Chris, F-35, if you could just update us there. Obviously big program for you all. I think last year it was down for you. You've got the tech refresh you're working on, where we are in that, when it's gonna cut in, and what does F-35 look like for you in the next in the next couple of years? Yeah. We're working on what's known as Technology Refresh 3, TR-3. Couple key products, the Integrated Core Processor, the brains of the airplane being the key part. We made our first delivery of this key component after years of work and testing to Lockheed, who is the prime, back in June. They've been integrating this and we're seeing some good progress. It's an interesting program because you do development and production simultaneously called concurrency. It's really not a best practice. That's how it's been going on. We see a vision where this is gonna cut in consistent with what the Department of Defense wants. We're in constant communication with Lockheed. I think it should be flattish this year compared to 2022, it just comes down to, we follow the prime. I think it's gonna be about close to $1 billion of revenue for us for the foreseeable future. Yeah. A couple of years it grows 1% or 2%, couple of years flat, just depends on the volume of the airplane. Great airplane. These capabilities really position it well for the new threats that the U.S., is facing. Okay. Can we pull up the audience response questions, please? All right. If everyone could use your clicker. This is before the panel started. Huh? This is before the panel started. No, no. It's real time. It's real time. Okay. You've been up for a while. Yeah, we've been going since seven. We're gonna see the answers here? Yes. What do you think? Can you start the timer, please? There you go. I'm gonna go with number two. Oh, great opportunities. Thank you all for coming. This is exciting. Are we still being webcast? I think so. Okay. Next question, please. Wait. Oh. All right. Really? 61 and a 62. Good. Yes. That's pretty good. Next. Those two kind of, there's some symmetry there. Yes. Next question. 59 more minutes. All right, next question. Are these the same questions? Did everybody get the same? Yeah. Every company. Every company gets the same question? Yes. We will, we'll publish that one. Oh, this will be a good one. Yeah. I think a number two is a 0.05%. Interesting. We're talking. They listened. Next one. This is like a real-time performance. Yeah. We need faster comms. That's about where you are. Next one, please. It's all good stuff. Yeah. I like the feedback. Next question. Okay, the last one. Our new one for this year. Oh. You didn't ask us a question on this. We'll see what this shows. That will inform me whether I should have. Yeah, exactly. Number five globally out of 95 aerospace and defense companies. Yeah, exactly. We could have covered that, David. I guess so. I guess I guess I should have. We're gonna skip it. Thanks very much. Thank you, guys. Thank you all for joining us. Have a great week. Thank you. Good luck with the rest.