L3Harris Technologies Q2 2022 Earnings Call Transcript

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Provided by Quartr
July 29, 2022

Key Takeaways

  • In July alone, L3Harris secured over $1 billion in prime awards and ended Q2 with a book-to-bill ratio of 1.14, signaling robust defense budgets globally.
  • Despite stable year-over-year EPS and a rebound to over $700 million in free cash flow, supply chain disruptions, inflationary pressures and labor tightness prompted management to reaffirm guidance at the low end of ranges.
  • The space segment is the fastest growing area, exemplified by a $700 million SBA tracking tranche 1 win for 14 satellites and a $20 billion responsive space pipeline across all orbits.
  • Tactical communications backlog rose to approximately $1.5 billion, with high-double-digit H2 revenue growth expected as electronic component constraints ease and international orders (B2B 1.15 in Q2) accelerate.
  • Protests and timing delays on key programs—Next-Gen Jammer, F-35 TR3 refresh and stand-in attack weapon competitions—are deferring an estimated ~$100 million of revenues into 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
L3Harris Technologies Q2 2022
00:00 / 00:00

There are 16 speakers on the call.

Operator

Greetings. Welcome to the L3 Harris Technologies Second Quarter Calendar Year 2022 Earnings Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President of Investor Relations. May begin.

Speaker 1

Thank you, Rob. Good morning and welcome to our Q2 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 Christy Vacek, 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.

Speaker 1

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, which is lpreharris.com, where a replay of this call will also be available. With that, Chris, I'll turn it over to you for some brief comments.

Speaker 2

Okay. Thank you, Rajeev, and good morning, everyone. I'm encouraged by our progress as we continue to our trusted disruptor strategy. We're investing in targeted capabilities in and outside of the company. And we've had over $1,000,000,000 in notable Prime Awards this month alone.

Speaker 2

And 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.

Speaker 2

Our book to bill of 1.14 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 labor market tightening that are offsetting and masking our progress as well as the opportunities ahead. Our results, however, Highlights 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 snap back from breakeven last quarter More than $700,000,000 In addition, while we're reiterating our guide, we're now pointing to the low end of the range across the board.

Speaker 2

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.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question comes from the line of David Strauss with Barclays. Please proceed with your question.

Speaker 3

Thanks. Good morning. Thanks for taking my question.

Speaker 2

Yes. Good morning.

Speaker 3

Chris, can you give us lay up the land on F-thirty 5 and Tech Refresh 3 and whether you still see about $150,000,000 headwind there this year We're beginning to recover in 2023. And then bigger picture, the investor letter did a great job of Highlighting the budget upside that came through in 2022 and the plus ups that look likely in 2023, When do you think that really begins to materialize for the industry in terms of seeing it come through in terms of the numbers? And how do you think your strategy

Speaker 2

5. 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 think I'm going to give 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. So our lock 15 hardware starts getting delivered later this year.

Speaker 2

And the whole focus here is to support Lockheed 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.

Speaker 2

So when I look at the innovation, this quarter we made a small investment in a free space optic company called Myneric. We've had a handful of investments with Shield through our venture capital and we continue to spend a fair amount in high R and D to position us for new wins. The goal to prime more has been great. Last year with and earlier this year, significant wins in ISR and MUSV, HBTSS and of course we've been winning a majority of the share on the radio modernization programs. I mentioned so far this year, STA tracking tranche 1 was a big win.

Speaker 2

And here in the month of July, we were also awarded CEC, which is a cooperative engagement capability, really a pillar of the JADC II initiative for the Navy, which I'm quite excited about. And another program we're priming called Eagle, which is the Expeditionary Advanced Ground Link, again tied to free space optics. So Pretty excited there. And then internationally, at a high level, we've had mid single digit growth the past couple of years. Book to bill has always been over 1.0.

Speaker 2

And I think the ability to have these focus countries and put the resources where we think the opportunities are Makes a lot of sense. And just last month, we added Poland and Italy to our focus country program given the Opportunities over in Europe. As far as when we're going to see it, I think it's just a matter of getting to 2023 budget. We've been Tracking the markups, we're very excited to see that our programs are supported. The opportunities we're chasing are supported.

Speaker 2

Whether the base budget or the markup, we're very well positioned, including some of the news coming out of the Senate earlier this week. We basically need a budget. I think everybody thinks there'll be a CR. So I'm guessing 2023 when the awards are made, we'll start to see Industry and L3 Harris benefit. Thanks.

Operator

The next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Speaker 4

Good morning, guys. Thank you for the time. 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?

Speaker 4

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-thirty five?

Speaker 2

Yes. I'll take the first shot and then maybe ask Michelle to give a little more color On the sectors, but space is clearly our fastest growing sector in the company. This win that we had earlier This month for SBA tracking tranche 1. It's just a huge opportunity. If you recall, we won tranche 0 for 4 satellites.

Speaker 2

This is 14 satellites, 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, dollars 700,000,000 award, 14 satellites. And it really ties into our responsive satellite strategy.

Speaker 2

A couple of years ago, it was non existent. Now we have satellites in low earth orbit, Medium Earth Orbit and Geosynchronous Orbit. So it's really going well. I think at the date of the merger, we had no business with Defense Agency, now we're smack in the middle of that growing business line. So I'm really pleased with where we are.

Speaker 2

Think the other day, Michelle and I were looking, we have about a $20,000,000,000 pipeline in space alone. And when you look at our capabilities in missile defense, weather, Like I mentioned, all orbits and even ground capabilities, it's quite exciting. But Michelle, you want to talk about the rest of the sector?

Speaker 5

Yes. No, you did a nice summary space in terms of high to mid single digits in terms of growth. From a Mission AV On X perspective, this is the ramp that we talked about on F-thirty 5. So as we head into production, you'll see that come in the second half. And then also, Chris didn't mention it, but Intel and Cyber, right, our classified business is continuing to grow as well and we'll expect to see that ramp in the second half as well.

Operator

Thank you. The next question is from the line of Ron Epstein with Bank of America. Please proceed with your question.

Speaker 4

Good morning. This is Elizabeth on for Ron. How are you?

Speaker 2

Hi, Elizabeth.

Speaker 4

Hi. Can you give us some color on what you're seeing on the chip Side of the supply chain and whether you're seeing an easing there or any sort of color you might be able to provide would be great.

Speaker 1

Yes. Let me start. Just at

Speaker 2

a high level, I think at least at L3 Harris, I think the whole industry is now realized. There is a new norm in supply chain and we're adapting to that as quickly as we can. In the past, The whole focus was just in time inventory, inventory reductions, single sources and you'd always go with the low cost bidder without Serious consideration on the certainty of supply and delivery. So we have multiple work streams Going in parallel, and I think we're doing a pretty good job in the short term trying to mitigate and avoid the disruptions, but we're also looking How we revamp our supply chain resiliency for the long term. So I mentioned in the past, we've invested in tools to get end to end visibility beyond Tier 1.

Speaker 2

We're investing in critical materials. Tier 1, we're investing in critical materials, smart inventory, safety stock, which I understand Builds our inventory balance. You'll see that on our balance sheet, but I think it's the right business decision. And we're trying to move to more localized and distributed production to shorten the whole So complete turnaround almost to 180 from where we were 3 years ago, but this is the new norm in our opinion. This is what we're doing.

Speaker 2

Michelle, you want to talk a little bit about the headwinds and the recovery?

Speaker 5

Yes. So just to frame it a little bit in terms of the numbers to Chris' Point, what's the same, right? So coming into the year, we anticipated that we would see a first half impact, particularly within Electronic components, we are seeing that play out in terms of our first half results. Additionally, we also talked about seeing sequential quarter over quarter improvement, we are seeing that from Q4 into Q1, additionally from Q1 into Q2, albeit it is more modest Than what we originally anticipated in our original guide back in January. So when you look at our guidance update Pointing to the low end of the range, part of that is to Chris' point, this elongation of the supply chain impacts that we're seeing Out of 2022 and into 2023.

Speaker 5

I'd also highlight the risk mitigations that Chris talked about, in particular, in terms of how those are We've been talking for 6 months about moving away from sole source suppliers along with redesigning parts. We're continuing to work those activities. Many of those start to come online in the second half. And so that is part of where we're getting some of our confidence in

Operator

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

Speaker 6

Chris, Michelle, Rajeev, good morning. How are you?

Speaker 2

Good morning, Rich.

Speaker 6

So, I thought you might comment on the So armed overwatch program, where you're competing with Textron? And also could you talk a bit more about the improvement you mentioned at 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. Thanks.

Speaker 2

All right, Rich. Let me take armed overwatch and Michel will talk to you about aviation. So This is a program that goes back into late 2019 early 2020 and we decided to take Clean sheet approach to this program to align with the requirements. Team has spent a fair amount of money in R and D and capital. We've had lots of demos that have gone well and we think position us In a good place to potentially win this program.

Speaker 2

It's for 75 aircraft. It's clearly a couple of $1,000,000,000 here domestically and even more internationally. There's a lot of need for this type of Capability in countries that are fighting terrorism, we've had discussions with countries in Africa, the Mideast, I think is where the initial potential is, whether it's border protection or maritime operations, light strike, ISR, Pretty flexible, pretty affordable program. So we kind of have to wait and see. Hopefully, something comes out in the next week or 2.

Speaker 2

I think it's a key one to watch in my opinion. I know it's important to our company and it really would Validate our strategy and the thesis for the merger, because we invested in the innovation. We started with the Clean Sheet. WESCAM Turrets, Radios, Weapon Carriages and EW Capability. So we'll see what happens.

Speaker 2

I'm pretty excited about it. And Maybe with that, we'll go to Michelle.

Speaker 5

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 missionizations. We didn't have those in the first half. So we're chasing 3 to 5 programs here.

Speaker 5

This is one of them. And so to Chris' point, we're excited about seeing this come online and hearing about a potential win. Back to the question on the commercial aviation. So we are continuing to see recovery. This will be our 5th consecutive quarter of double digit growth.

Speaker 5

The first half of the year, our overall commercial businesses, which also includes our public safety was up double digits And we anticipate that that's going to continue through the end of 2022.

Operator

The next question is from the line of Peter Arment with Baird. Please proceed with your question.

Speaker 7

Yes. Good morning, Chris, Michelle, Rajeev. Hey, Chris, circling back a little bit to David's question on the budget. So 40% of L3's international revenues are in Europe. And I guess your total international book to bill has been averaging Around 1 or above 1 in the past 12 months.

Speaker 7

I guess specifically, what do you see kind of playing out for L3 in Europe? I mean, should we expect bookings to accelerate in 2020 Any kind of color there just given all the budget actions and the Ukraine activity?

Speaker 2

Yes. No, I appreciate the question, Peter. Clearly, we have opportunities in Europe. We've talked about some ISR capabilities that we've been We've already won in the past, but we continue to add aircraft and we have a path to get to 8 aircraft for this particular country. Clearly, with Ukraine, I think we have a core competency and a lot of experience working with the Ukraine Security Assistance initiative, the U.

Speaker 2

S. AI money that's always been in the budget. So clearly, the radios, the night vision goggles, even some ISR capabilities Position us well there. And as I mentioned, we're going to open offices in Europe. The NATO countries, Poland is is a big opportunity where we submitted a few bids, again, with comms, resilient comms, SATCOM, At a high level, that's where I see us making the most progress in the near term and even impacting our 2022 financials Preval and expect it to continue into 2023.

Operator

The next question comes from the line of Doug Harnett with Bernstein.

Speaker 8

I wanted to Trying to understand what's going on in Tactical Communications a little bit better. And you've had a rising backlog, but at the same time, you've been constrained with And what I wanted to get at is to understand once first, once the supply chain Is constraints ease up? What kind of trajectory do you expect to see as radios are delivered, a big surge More of a long term better growth outlook. And then along with that, We've seen you keep your margins. Margins have held pretty well even though we've had a lot of inflation exposure And you've got these supply chain issues.

Speaker 8

I mean, how do you see the risks around margin there as you go forward if we see persistent inflation?

Speaker 2

Okay. Thanks. Let me take a few make a few points and then Michel will give you the numbers. I mean, you're absolutely right. There's high demand for our radios.

Speaker 2

And I think that's one thing that the conflict in Ukraine has highlighted the importance Resilient Com. So we have opportunities in Australia, dollars 300,000,000 for what's called Delsic Phase 2 with the Australian Defense Force, that's over 6,000 radios. We should hear on that maybe in the next month or 2. Talked about the Kingdom of Saudi Arabia and the radios there. The first 4,000 or so cleared congressional notification.

Speaker 2

In August, we're going to have our first article acceptance up in Rochester and they've ordered a couple of 1,000 more. So that's going through the congressional Notification process. In the U. K, the Morpheus program, again, dollars 100,000,000 award approximately. So all those things are building the backlog as you say.

Speaker 2

I will highlight that I think it was last year, we knew there was a supply chain Shortage in 1 half to 3rd. So we invested in the capacity. So we now have more capacity. Michelle will give you the numbers, but we can clearly Do better and grow without any constraints. Last year, we had about 20 suppliers on our red list And now we're down to 5 that we're watching carefully.

Speaker 2

And obviously, we need all the parts, but that's Been pretty helpful. The last thing I'll mention before giving to Michelle, I've talked in the past how we reengineer and redesign Our products or our components based on availability and just this week, I was looking at our data. We've actually redesigned over 1,000 Component parts in our products, whether it's radios, night vision goggles, Westcam Balls to be able to make these commitments and continue to Deliver our products. So I'm pretty proud of our engineering team and how they've been able to adapt. So that's kind of at a high level.

Speaker 2

Michelle, you want to talk about the capacity and the ramp

Speaker 5

Yes. So, good morning, Doug. So just to your point in the first half, we did consistent with our We did see our tactical communications down low double digits, really driven by the electronic component constraints. As we go into second half, We expect that that's going to grow in the high double digits. So to your point, we expect that with that starts to ease from Capacity perspective, we've made the investments that Chris talked about and continuing to see the electronic components improve is going to be critical the second half and as we go into 2023, we do have an elevated backlog.

Speaker 5

To your point, it's about $1,500,000,000 So we have a healthy backlog that we'll be looking at as we go into 2023. And additionally, I'd note to the international question, the international book to bill within tactical Communications is 1.15 within the quarter. And so this really speaks to the overall conflict environment, Ukraine opportunities that And we expect that that will be a benefit for us as we go into 2023. But a lot of these orders are also Considered over a couple of years and so you should think about it in terms of 2023, 2024 and into 2025.

Operator

Our next question is coming from the line of Robert Stallard with Vertical Research. Please proceed with your question. Thanks so much. Good morning.

Speaker 2

Good morning, Rob.

Speaker 9

Chris, I was wondering if you could comment on this NSO situation and what happened there. And in conjunction with that, whether you have any additional M

Speaker 2

Yes. I would say, clearly, relative to our M and A pipeline, We're looking at opportunities all the time, looking for game changing solutions that are going to help us with our customers. So We're looking at a handful. We continue to look at M and A on a regular basis. We're also watching the regulatory environment and seeing what could Potentially be approved and the any potential overlap or antitrust issues.

Speaker 2

So I'd say we have a healthy process. We look at things all Time and I don't see us in a position to announce anything in the next quarter or 2, but we'll continue to look. Relative to NSO, we're fully aligned with the U. S. National security leadership on this matter.

Speaker 2

And I think all the reporting out there made it clear that no deal is going to happen at least with us. So maybe someone else is talking to them, but not me. So hope that helps.

Operator

Thank you. The next question is from the line of Pete Skibitski with Alembic Global. Please proceed with your question.

Speaker 10

Hey, good morning, everyone.

Speaker 5

Good morning.

Speaker 10

Hey, Chris, something you're probably super frustrated about, but this next gen jammer low band Ongoing protests. Can you give us any sense of for key dates or milestones in terms of kind of getting that resolved? I know it's dragged on probably way longer than anyone expected.

Speaker 2

Yes, yes. Well, Pete, I don't really get frustrated about much, but This has taken a long, longer time than anybody wanted. So there's going to be a re procurement Between us and Northrop, we all signed an agreement as to a path forward. I expect to get an RFP in the next month or 2. We'll update our proposal.

Speaker 2

And I would think in mid-twenty 23, hopefully earlier 2023, the Navy will make a selection and we'll move on. It's really about the capabilities that the Navy needs and the threats that we keep talking about. And we respect The process to allow people to protest and I think there's been 4 or 5 different judges and reviews and such, It's progressing. So it was over $100,000,000 of revenue we had in our plan for this year. So that's kind of giving us a little headwind.

Speaker 2

We'll move it into 2023. The team is ready to go. We like our We like our solution and we'll wait for them maybe to select us again hopefully.

Operator

Our next question is coming from the line of Noah Poponak with Goldman Sachs. Please proceed with your question.

Speaker 11

Hi, good morning, everyone.

Speaker 2

Good morning. Good morning, Noah.

Speaker 11

Wondered if you could just talk a little bit more about the back half As you see it now relative to the prior guide, the acceleration in organic revenue growth to mid single, How much of that's 3Q versus 4Q? How much visibility you have versus things that could slide? And then if there's anything on the cash flow side in terms of payment timing that you're looking at as well? Thanks.

Speaker 5

Yes. So I'll jump in and then Chris you can feel free to compliment. So in the second half to your point in terms of the drivers, It's really 3 components. 1 is around supply chain recovery. And so as I noted earlier, we had an assumption that we'd have a pretty healthy hockey Going into the back half of the year, as we're seeing the supply chain environment elongate into 2023, We've mitigated that a bit in terms of the change in the guide to the lower end of the range, although we still do have a hockey stick going into the second half.

Speaker 5

I will note though that as we're sitting here in Q3, we have similar challenges to what we had in Q1 and Q2. And so the risk profile is very to what we delivered on in the first half. The second is really around new program wins. Chris mentioned SCA along with SPEAR. These are Two new awards that we've already won.

Speaker 5

And so the back half, we will be accelerating as those programs come online. And then the 3rd piece is around our ISR missionization programs. We talked about Armed Overwatch. There are a number of other ISR missionization programs that we are We expect those awards to happen within Q3 with a ramp happening in Q4. And Noah to your point between Q3 and Q4, I would say it's fairly consistent.

Speaker 5

You're not going to see another hockey stick from Q3 to Q4. So hitting expectations in Q3 is what we're focused on now with that

Speaker 2

I'll just chime in, Noah, at a higher level. The approach we've taken and we talked to the leadership team is, Let's just control the controllables. There's a lot of frustration, I think, out there in the system. And we're kind of taking the approach that The last 2 years have clearly been unprecedented, whether it's pandemic, Ukraine, inflation, Supply chain, all the stuff we know. So when we get the guidance for the second half that Michelle laid out, we want to let you know It's kind of hard it's harder than it has been in the last several decades to predict the future and the visibility given the uncertainty and the volatility that Changes literally on a daily basis.

Speaker 2

There are some days where we get a call from a supplier that they're going to be a week late The next day someone shows up a week early. I mean it's really very, very dynamic. We're trying to stay calm and relax And control what we can control and mitigate those things that we can't and then communicate to the best of our ability what the upside and the downside is. The interesting thing is, We're just talking about a Valwave in all cases. We're not losing things.

Speaker 2

Sometimes they take longer to get awarded and sometimes they slip. But We're looking forward to the new norm and some of these uncertainties dissipating.

Speaker 5

Noah, just to go back to your question in terms of cash, The expectation for the second half is really split between Q3 and Q4 more like a thirtyseventy split.

Operator

Our next question is from the line of Morgan Stanley Christine Lai with Morgan Stanley. Please go ahead with your question.

Speaker 12

Hey, good morning, Chris, Michelle.

Speaker 5

Good morning. Good morning.

Speaker 12

You were down selected for Phase 1 of the stand in attack weapon. So a strike weapon like this sounds like relatively new territory for LHX and you're up against competitors with strong missile heritage. You talk about your strategy here? Is the missile market something you're focusing on more generally? Or is there something about this program that plays your traditional

Speaker 2

Yes. No, that's a great, great question. We started investing in weapons, I think going back 4 or 5 years. When I mentioned we set up the Agile Development Group. This is Right in their sweet spot.

Speaker 2

We have multiple classified opportunities. This is a air to ground tactical missile. I think it's when you look at the budget, you look at the threats, we look at our capabilities. I think we're in really good shape here. We've taken a clean Sheen approach, and I think that's what's going to be the differentiator.

Speaker 2

I mentioned that on armed overwatch. I mentioned it here, right? We're not taking an existing capability that's been successful for decades in tweaking it. We're taking a clean sheet approach. We're investing in Our seekers, which I think is unique and has great capabilities, and I'm proud of the team to see us get down selected on this one.

Speaker 2

There's Classified things, we're also getting down selected. Like anything, it starts out a little slow. I think there's 3 of us. I know there's 3 of us. And sometime In August, we'll get the Gate 2 award.

Speaker 2

And I think in 2023, early 2023, they'll probably down select to 2, and then the Fly offs and the fund begins. So this is clearly a core competency for us. It's a market that I like. And I think it's Similar to what I've talked about, it's going to disrupt the market. And I think a lot of people were surprised when they hear L3 tariffs want a Stand and attack weapon.

Speaker 2

And there'll be more of this in the years ahead.

Operator

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

Speaker 13

Yes. Good morning. Good morning. I was wondering on the cash flow, your inventories are up like $260,000,000 in the first half. I assume some of that's Due to supply chain issues, where do you expect that to go?

Speaker 13

Or where does it need to go for you to meet your cash flow guidance? Because obviously, like usual, it's much More second half weighted than first half.

Speaker 5

Yes. Thanks for the question, George. So when you look at our first half versus second half, you're absolutely Right. Most of our cash generation is in the second half with a healthy amount of that coming from working capital reduction assumptions. And so to your Point about the inventories, clearly, we are building in anticipation of that second half ramp.

Speaker 5

And so when you look at our product based revenues, which is about 25% of our overall portfolio, that is a key driver in terms of our sales uptick within the second half. The other piece I would note is within our ISR missionization business, to the extent that we are buying aircraft in anticipation of those The programs coming online in the second half that also sits within the inventory. And so Chris noted several programs that we're pursuing. We anticipate a couple of those happening of the 4 or 5 we're pursuing in the second half. And so that will alleviate the inventory

Operator

Our next question is from the line of Robert Spingarn with Melius Research.

Speaker 4

Chris,

Speaker 14

I wanted to extrapolate on some of these prior questions about hockey sticks and recovery. With all these non controllable headwinds that you've talked about in 2022, so the elongated supply chain impact and slow outlays and tight labor, etcetera, And then the strong bookings, rising budgets, could 'twenty 23 or 'twenty 24 be a spring loaded year? In other words, you don't necessarily capture in the back half of this year, but We have sort of a monster year in 'twenty three or 'twenty four. And could that in and of itself present capacity issues? And then for Michelle, just how much risk is there to this year's guide if we have a CR in Q4, Especially now that you're pointing to the low end of the guidance.

Speaker 2

Okay. No, great questions. And To answer the first one, I mean, you kind of got to it. The CR is going to be something that could Obviously, impact 2023, I think you called it a monster year, is that what you said? So I'd love a monster year, whatever that is.

Speaker 2

But No. The capacity, I don't see as being an issue. We invested in the prior years. We have a world class Factory, if you will, out in Salt Lake City for the broadband communication systems business. They've had a great couple of months here With the win of CEC, the cooperative engagement capability I mentioned earlier, which is JADC2, the Eagle program, Of course, they'll hopefully get ExGen Jammer.

Speaker 2

So we've made those investments up in Canada. We invested in a new facility for Westcam, where we're seeing the surge in the We mentioned the extra capital that we spent in Rochester. So for the product quick turn businesses, I think we have the capability. Labor is probably more of a potential constraint than the actual facilities We get the supply chain turnaround, I think we'll be okay. And we've been doing pretty good on the labor front.

Speaker 2

We've hired over 4,000 people so far this year. We have the same challenges with attrition That the rest of the industry does, but we're hiring interns, we're hiring new college grads. I think it's a company that people find interesting and exciting and we're getting Literally 100 of 1000 of resumes to come work for us. So I feel pretty good about that. Relative to We're actually going through our strategic planning process now.

Speaker 2

We talk about low to mid single digit growth, but Some of the stuff is pretty lumpy and we should be in position if we can get these wins To continue our top line and bottom line growth. Michelle?

Speaker 5

Yes. So in regards to the question on CR, our guide assumes That there is some level of the CR in the second in Q4 of this year.

Operator

Thank you. Our final question will be from the line of Michael Ciarmoli with Truist. Please proceed with your question.

Speaker 15

Hey, good morning guys. Thanks for taking the questions. Maybe can you guys just Quantify what the margin headwinds are that are coming from inflation and labor. I don't know if you could parse out what's sort of the bigger impact. And I think the investor letter mentioned that you've got a relatively quick turn or short duration backlog.

Speaker 15

Maybe you can walk us through how long it takes The flow through price increases on raw materials or higher billing rates and how we should maybe think about the margin evolution as you can pass through some of those prices?

Speaker 5

Yes. Thanks for the question, Michael. So consistent with what we shared back in our last call, we anticipate about $100,000,000 of gross Inflationary impacts within the year. We had about $20,000,000 of that play out within Q2. And to your point about our overall Program mix, about 50% of our portfolio is fixed price.

Speaker 5

It's about a year in terms of duration. And so We're starting to see some of the inflationary pressures prior to having EPA clauses in our contracts starting to play out Here in the second half of the year, we'll see that into 2023. Where we're focusing on what we can control right now is ensuring the new contracts That we are placing clauses that allow for this inflationary environment, but we anticipate that through the middle of next year probably Q3, Q4, we'll see some remnants of the impacts of the current economy and the inflationary environment. Okay. So before ending the call, I want to take a moment to recognize our 47,000 strong L3 Harris teammates around the globe and thank you for remaining focused on creating value for all of our stakeholders, particularly in support of meeting our customers' critical missions.

Speaker 5

What you do matters in terms of 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.

Operator

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.

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