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Text: As you have seen throughout the week, no company is immune including the L3Harris to global supply chain pressures, a risk we highlighted at the last earnings call.
In recent months, shortages of electronic components began adversely impacting our company at a time when our product is strong.
Our updated full-year guidance now accounts for these impacts.
We've revised our organic revenue growth expectations to approximately 2% primarily due to delays for these components weighing on the CS segment.
Absent such delays, we would have comfortably been within our prior 3% to 5% range.
Ultimately, this is a timing shift, with no anticipated effect on our industry-best market position for radios.
And with our broad and diversified portfolio, along with continued execution elsewhere, especially on the margin front, we've increased our range on earnings per share to $12.85 to $13 per share and still expect to deliver free cash flow per share of around $14, up double-digit on both accounts.
Shifting over to the third quarter, following organic revenue growth of 6% in the second quarter, we saw a decline of 1% due to timing associated with supply chain delays at CS and in ISR aircraft award with IMS. While I'm disappointed by the soft top-line results, I'll note that the order momentum remained strong with a book-to-bill of 1.07 and we delivered record-high margins at 19.6%.
EPS was $3.21, up 13% versus the prior year with solid free cash flow of $673 million, that contributed to shareholder returns of $1.5 billion in the quarter.
Our execution against the company's strategic priorities have been a key factor and value creation for all stakeholders, in spite of the pandemic, and we made progress in the quarter by advancing topline opportunities, improving operational performance, wrapping up portfolio shaping and returning capital to our owners.
Starting with the top line, the revenue decline in the quarter fell short of our internal targets, largely due to two-timing factors.
At CS, the global electronic component shortage has led to a supply chain disruption for our product and electronics-focused businesses notably tactical communications.
In the third quarter, the impact was nearly $100 million or approximately 2 points of revenue.
And in the fourth quarter, our expectation is for the backlog of unfilled orders to grow and all told, we foresee a roughly $250 million to $300 million revenue impact for the year, implying another step down in the fourth quarter.
This is a primary driver of our revenue guidance adjustment at CS.
Having said that, we do not anticipate any impact to our bookings nor our win rate and expect the segment to end the year with a book-to-bill well over 1 time.
In addition, despite the supply chain challenges we faced in Q3 and ongoing headwinds, we were able to meet delivery requirements on all of our key US DoD modernization programs and are on track to continue to do so in the fourth quarter including deliveries on the recently awarded HMS full-rate production contract with the US Army.
Second, in IMS we had a follow-on ISR aircraft order with a NATO customer that booked late in the quarter, causing revenues to slip to Q4 representing roughly a 2.5 point shift between quarters.
While the supply chain headwinds limit upside opportunities to our revenues for this year, I've been pleased with the team's traction against our strategy of delivering end-to-end solutions to global militaries as a trusted disruptor across all domains, and it's reflected in our order activity and operational milestones.
Within the space domain, on the classified side, we continued to advance our responsive and exquisite satellite business with several earlier stage awards, both with the Intel community and DoD which have follow-on opportunities of nearly $2 billion.
And on the unclassified side following the Imager award in Q2, NOAA is progressing on the recapitalization of its GOES weather satellite system and awarded us a study contract for a sounder payload as part of a $3 billion opportunity over the next decade.
On the operational front, we completed the preliminary design review in the development of the missile tracking satellite prototype for the Space Development Agency, progressing toward the launch over the coming years and reflecting yet another significant accomplishment for L3Harris.
Moving to the air domain, key awards within the quarter spanned both legacy and next-generation aircraft.
On the B-52, we received a 10-year $1 billion IDIQ that has the potential to expand our scope on the program to include EW hardware upgrades, such as radar warning receivers, building on our existing software sustainment work.
In addition, on the international front, we were awarded an initial $100 million contract to provide capabilities on 12 multi-mission aircraft to the UAE, with the potential to double these amounts, further demonstrating the breadth of our RSR capabilities that range from turboprops to business jets to larger aircraft.
And in the land domain, we were awarded several contracts with the US Army to advance its modernization priorities.
Under the Army HMS program, we received over $200 million in awards for the Manpack and Leader radios taking a majority share on both products.
These were the first full-rate production award out of a multi-billion dollar IDIQ and represents less than 15% of the acquisition objective pointing to considerable runway ahead.
We also won a majority share on the second program of record for the ENVG-B program with $100 million order setting us up to ramp production on the army's next-generation field-ready Goggle.
So we were three for three on strategically significant programs in the land domain this quarter.
Within the maritime domain, the team continues to progress on the US Navy constellation class frigate with follow-on awards for the next ship sets of electrical propulsion and navigation systems as part of a several hundred million dollar opportunity for L3Harris.
We're also awaiting decisions on two major prime awards over the coming months.
One, to provide electro-optical infrared capabilities on a broad range of the US Navy surface combatants.
And another within international allies highlighting our superior undersea sensor capabilities, both would expand our market reach in this domain.
Operationally, the team delivered power conversion's fleet hardware as part of the Virginia-class Block 5 upgrade and completed qualifications for a portion of the power distribution system on the Columbia class, advancing the US Navy's top priority.
We also had a key award within our Mission Networks business.
We leveraged the Air Traffic Management capabilities we provide to the FAA winning a new international franchise with the Australian government to modernize the nation's air traffic control and surveillance networks.
This program is over $300 million opportunity and strengthens L3Harris's long-standing relationship with Australia.
Finally, we received a strategic award on the revenue synergy front as we signed a $130 million contract with the Mid-East customer to provide modernized software-defined radios through a localized joint venture.
And this customer channel synergy award opens the door to a long-term opportunity for up to 50,000 radios.
When combined with other orders in the quarter, revenue synergy awards to date totaled roughly $900 million on the win rate that remains at 70%.
With a pipeline of over $7 billion, these synergies will be a notable contributor to our top line growth.
These wins supported another strong quarter for a book-to-bill of 1.07 and 1.06 times year-to-date, increasing our organic backlog to $21 billion or up 9% from last year and 4% year-to-date.
This is a validation of our internal investments in leading R&D spend, as well as confirmation of our alignment with government priorities.
Shifting over to the outlook for budgets, we're pleased with the progress made on the FY '22 defense spending bills.
They continue to prioritize near-peer threats notwithstanding another CR.
The plus-ups from the HASK, SAFC and SAC-D along with steadiness from HAQ-T [Phonetic] combined with recent global events provide a degree of comfort that we should expect stability in military spending over the coming years.
And in my personal discussions with senior leadership of the administration and Congress, I have consistently heard of a growing need for innovative resilience and affordable solutions, which we're focused on providing.
All in all, as we consider the trajectory of our top line, we remain confident in our ability to deliver sustainable growth through our domestic positioning, revenue synergies and international expansion that stem from a pipeline of opportunities, well in excess of $100 billion.
Pivoting to margin performance, our team delivered a stellar quarter at 19.6%, the best post merger results and an indication of the company's potential over the next couple of years as we further build a culture of operational excellence.
Our performance was the result of delivering another $15 million of incremental cost synergies and we're well on track to hit our $350 million targets.
We continue to manage our overhead costs and drive our E3 program to more than offsetting supply chain headwinds, due primarily to our year-to-date results, we now see margins for 2021, exceeding our prior expectation of 18.5% by 25 basis points.
Beyond 2021, our E3 program will remain a key contributor to steady expansion in our operating margins, net of inflationary pressures.
This program is one of our key discriminators, and let me highlight just a couple of examples.
First is factory optimization that represents half of this opportunity set through streamlining and simplifying our manufacturing processes, be it from a redesign of our factories layout for integrating automation tools, we can shorten cycle times, increase labor efficiency and continue to drive our cost.
A great example is a pilot program in our Amityville facility in New York.
We're in augmented reality assembly aid that electronically displays and validates our processes, helps reduce cycle time by 25% and higher first-pass yields by several points.
And we're in the early stages of the strategy with the three-year rollout ahead of us.
The other half of our opportunity comes from the engineering excellence and supply chain on the former through the deployment of our digital ecosystem, front-loading our program activities, and enhancing training for our roughly 20,000 engineers and 1500 program managers, we're able to increase commonality and better manage cost and schedule across the company.
These have been key with some of our stand out wins within the space domain enabling a foray into missile defense as well as with driving favorability in our EACs.
On supply chain, the global disruption we've highlighted have been largely contained to about 15% of the company and are temporary in nature.
The focus we've had be it on reducing the number of suppliers or leveraging our roughly $7.5 billion spend as an enterprise remain in place with further opportunities in the years ahead.
Moving over to the portfolio, we put a bow on the post-merger shaping activities in the quarter and closed on the Electron Devices divestiture for $185 million while announcing the sale of two small businesses within AS for a combined $130 million, bringing total gross proceeds since the merger to $2.8 billion.
And as we consider our portfolio moving forward, we'll be opportunistic with our balance sheet as a buyer and a seller focusing on long-term growth and value creation.
Having said that, we don't see any gaps in the portfolio, nor is there any urgency at this time.
Consistent with our prior commitments, proceeds from the divestitures will be part of our capital return program.
Our expectation now is for buybacks to be roughly $3.6 billion this year versus our prior $3.4 billion.
When combined with dividends, capital returns will be about $4.5 billion in 2021.
So overall, I'm pleased with the L3Harris team's ability to execute against our strategic priorities and deliver bottom line results despite unanticipated setbacks.
With that, I'll hand it over to Jay.
First, and starting on Slide 4, I'll provide more detail on the quarter before I get into segment results and our updated outlook.
In the quarter organic revenue was down 1% lower than our internal expectations by about 4.5 points from the supply chain delays and ISR aircraft award timing.
IMS and CS were down 3% and 5% respectively, and absent these impacts would have been up closer to the mid-single-digit range for both.
The SAS segment was up 3% and led by strong growth in our responsive Space business, while AS was up 1% including the benefit from recovery in commercial aerospace.
Margins expanded 170 basis points to 19.6% with the most notable drivers being from E3 performance and cost management, which more than offset volume-related supply chain headwinds.
We exceeded our internal expectations by more than 100 basis points from favorable mix related to award timing and strong E3 performance.
The team continues to drive margin upside by delivering on E3 improvements that lead to outperformance in scheduled milestones costs and retirement of risk.
These drivers along with our share repurchase activity drove earnings per share up 13% or $0.37 to $3.21 as shown on Slide 5.
Of this growth synergies and operations contributed $0.39, lower share count contributed another $0.20 and pension and tax accounted for the remaining $0.08 then more than offset a $0.14 headwind from divested earnings and a $0.16 headwind from supply chain delays.
Free cash flow was $673 million and we ended the quarter steady with working capital days at 56.
This supported robust shareholder returns of $1.5 billion, comprised of $1.3 billion in share repurchases and $202 million in dividends.
Integrated Mission Systems revenue was down 3% driven by follow on ISR aircraft award timing from the NATO customer that would have contributed 8 points of growth for which revenue has now been booked in October.
Revenue was also impacted by the expected timing of WESCAM turret deliveries from a completed facility move.
By contrast, our maritime business grew in the mid-single digits from a ramp on key platforms including the constellation class frigate and classified programs.
Operating income was up 4% and margins expanded 110 basis points to 16.6% from operational excellence, integration benefits and pension.
Funded book-to-bill was 1.04 in the quarter and 1.05 year-to-date with strength across the segment.
In Space and Airborne Systems, revenue increased 3% driven by double-digit growth in space, primarily from our ramping missile defense and other responsive programs.
The space growth was more than offset -- from the production transition -- I'm sorry the Space program more than offset headwinds from the production transition of the F-35 Tech Refresh 3 program within Mission Avionics, as well as program timing and electronic warfare, and Intel & Cyber.
We expect an overall ramp in the quarter -- in the fourth quarter for the segment.
Operating income was up 5% and margins expanded 30 basis points to 18.8% as E3 performance, increased pension income and integration benefits more than offset higher R&D investments and mix impacts from growth programs such as in space.
And funded book to bill was about 1 for the quarter and 1.05 year-to-date, driven by responsive and other space awards.
Next, Communication Systems organic revenue was down 5% due primarily to product delivery delays within tactical communications that stemmed from the global electronic component shortages, creating an approximately 8.0 headwind year-over-year and versus expectations, as well as lower volume for our legacy unmanned platforms in broadband due to the transition from permissive to contested operating environments.
In addition, the integrated vision and global communication solutions businesses were impacted by delivery timing and contract roll-offs on international programs, respectively.
Conversely, our public safety business was up double digits versus the prior year and sequentially, and strong radio sales following the State of Florida Law Enforcement System award in the prior quarter.
Operating income decreased to 1% and margins expanded 130 basis points to 26.3%.
From operational excellence, including program performance within broadband, favorable mix on public safety radios and integration benefits that outweighed supply chain impacts and higher R&D investments.
And funded book-to-bill was above 1.1 for both the quarter and year-to-date from strong product bookings within tactical communications and in Integrated Vision for modernization alongside key state-level awards within public safety.
Finally, in Aviation Systems, organic revenue increased 1%, by our commercial aerospace business that was up over 40% from recovering training and air transport OEM product sales.
This growth was weighed down by flattish sales in mission networks, as well as lower fusing and ordinance systems volume due to contract roll-offs along with the late awards within defense aviation.
Operating income decreased 13% primarily due to divestitures while margins expanded 140 basis points to 14.4% and expense management, the commercial aerospace recovery and integration benefits more than offset divestiture related headwinds.
And funded book-to-bill was 1.1 for the quarter and about 0.9 year-to-date.
Now shifting to our updated 2021 outlook.
Organic revenue is now anticipated to be up about 2% with the different versus our prior guide largely attributable to supply chain delays.
At a segment level, we maintained our sales guides but foresee us, where we now anticipate revenue to be down 2.5% to 4.5% versus our prior range of up 2.5% to 4.5%.
This is largely due to the global supply chain disruptions mainly within tactical communications, that will now be down about 10% versus our prior view of up in the low to mid-single digits.
For the remaining segments, we expect IMS to be in the upper half of the range based on traction with international ISR aircraft while SAS will likely be around the midpoint and driven by growth within Space and Intel & Cyber.
And at AS, we expect the segment to be at the lower end of the range due to award timing slipping to the fourth quarter within our classified business.
By end market, our US government and commercial businesses are now expected to be flattish to up in the low single digits, while our international businesses are expected to be up mid-single digits plus.
This implies fourth quarter sales growth will be in the 1% to 2% range for the company, which includes CS down in the mid-teens, and our other segments up in the mid to high single-digits on average.
Turning to margins, we've raised our outlook to 18.75% from 18.5%, due to performance to date E3 progress and favorable mix from award timing.
Margins will step back in the fourth quarter due to increased supply chain delays along with mixed effects on new earlier-stage programs, but still strong progress for the full year.
From a segment perspective, we've improved the outlook for each with CS above the prior midpoint of its range and IMS, SAS, and AS above the top end of the prior ranges.
On earnings per share we are raising the lower end of the prior guide by $0.05 to $12.85 to $13 per share, reflecting 11% growth from 2020 at the midpoint.
Delivering on our double-digit aspiration in spite of dilution from divestitures and supply chain headwinds, which otherwise would have put us at or above the top end.
As shown on Slide 11, the midpoint is now at $12.93 and $0.55 from improvement in operations and other items, including the release of contingencies, offset additional divested earnings about $0.03 and $0.49 from supply chain delays.
As mentioned previously, we continue to expect about $0.15 of net dilution from divestitures.
Moving to free cash flow, our guide of 2.8% to 2.9% remains intact.
However, due to prior divestiture headwinds and now supply chain delays of over $150 million in the aggregate, we'll likely be toward the lower end.
On working capital, we expect to end the year in the low '50s in terms of days, reflecting a three to five-day sequential improvement in the fourth quarter, and capex is now expected to be around $350 million, about $15 million lower versus the prior expectation primarily from completed divestitures.
Lastly, our guidance now reflects approximately $3.6 billion in share repurchases, an increase of $200 million from our prior guide to account for net proceeds from recently closed divestitures.
Net of these puts and takes, we're in a position to deliver free cash flow per share in the double digits in 2021.
Okay, let me make a few comments on 2022.
The L3Harris business fundamentals are sound and we continue to succeed in our strategy of moving up the value chain to capture more prime positions on core and adjacent applications.
Examples include our leadership positions in space missile tracking, ISR aircraft Missionization, DoD and international soldier modernization, undersea sensing, and cyber resiliency.
These and others will lead to solid growth for the foreseeable future.
As we look specifically at 2022, we are expecting the supply chain impacts to persist into the first half of next year with recovery starting in the back half.
As visibility improves over the coming months, we will provide a more comprehensive update on these expectations in January.
For now, we are expecting some of the shortfall to be recovered by the end of next year and we'll monitor other watch items including the timing of awards, vaccine mandates, and tax rules.
Having said that, we remain focused on delivering sustainable revenue growth, steady to rising margins, and leading cash flow conversion on a declining share count.
So to sum it all up, we've managed the pandemic-related headwinds for seven straight quarters and delivered strong bottom-line performance, and remain on track to meet our commitments for the year and beyond in a dynamic environment.

user
l3harris technologies q3 revenue down 5% to $4.2 bln.
q3 revenue fell 5 percent to $4.2 billion.
qtrly orders of $4.5 billion.
q3 non-gaap earnings per share $3.21.
sees 2021 non-gaap earnings per share $12.85 - $13.00.

assistant