L3Harris Technologies, Inc. (LHX) Q2 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to the L3Harris 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. You may begin.

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, which is l3harris.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.

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. 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. 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 labor markets tightening 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.

. Our first question comes from the line of David Strauss with Barclays.

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 get 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 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 last 15 hardware starts getting delivered later this year, and the whole focus here is to support Lockheed to enable their 2023 aircraft delivery. So 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. So when I look at the innovation, this quarter, we made a small investment in a free space optic company called Minarik. We've had a handful of investments with Shield through our venture capital. And we continue to spend a fair amount in high R&D to position us for new wins. The goal to prime more has been great last year with an 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 program. I mentioned, so far this year, SDA tracking Tranche 1 was a big win. And here in the month of July, we were also awarded CEC, which is a Cooperative Engagement Capability, really a pillar of the JADC2 initiative for the Navy, which I'm quite excited about. And another program we're priming called EAGL, 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. Our book-to-bill has always been over 1.0x. And I think the ability to have these focused 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 the '23 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. So 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. So we basically need a budget. So I think everybody thinks there'll be a CR. So I'm guessing '23, when the awards are made, we'll start to see industry and L3Harris benefit.

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

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. 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, $700 million award, 14 satellites, and it really 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. So it's really going well. 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. So I'm really pleased with where we are. I think the other day, Michelle and I were looking, we have about a $20 billion 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?

Yes. No. You did a nice summary in space in terms of 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. 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.

The next question is from the line of Ron Epstein with Bank of America.

This is Elizabeth on for Ron. Can you give 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.

Yes. Let me start. Just at a high level, I think at least at L3Harris, I think the whole industry has now realized there's 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've mentioned in the past, we've invested in tools to get end-to-end visibility beyond 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 supply chain network to get our parts even quicker. And then we're looking at multiple sources for every part. So a complete turnaround, almost a 180, from where we were 3 years ago. But this is the new norm, in our opinion. This is what we're doing. Michelle, do you want to talk a little bit about the headwinds in the recovery?

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-year 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 '22 and into 2023. I'd also highlight the risk mitigations that Chris talked about, in particular in terms of how those are working. 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 terms of the recovery in second half with the results of those actions starting to take effect.

Our next question comes from the line of Richard Safran from Seaport Global.

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. So yes, this is a program that goes back into late '19 and early 2020. And we decided to take a clean sheet approach to this program to align with the requirements. Team has spent a fair amount of money in R&D and capital. We've had lots of demos that have gone well that we think position us in a good place to potentially win this program. It's for 75 aircraft. It's clearly a couple of billion dollar opportunity 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 Middle East. I think, it 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. And 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 a clean sheet. It's another opportunity to be a prime integrator, it has international potential. And it also has pull-through of our products, Wescam turrets, radios, weapon carriages and EW capabilities. So we'll see what happens. I'm pretty excited about it. And maybe with that, we'll go to Michelle.

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. We didn't have those in the first half. So we're chasing 3 to 5 programs here, 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 fifth consecutive quarter of double-digit growth. 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.

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

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. I guess specifically, what do you see kind of playing out for L3 in Europe? I mean, should we expect bookings to accelerate in '23? Any kind of color there, just given all the budget actions and the Ukraine activity?

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, where 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 USAI 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 a big opportunity, where we've submitted a few 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 favorably and expect it to continue into '23.

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

I wanted to try to understand what's going on in Tactical Communications a little bit better. You've had a rising backlog, but at the same time you've been constrained with supply chain issues. And what I wanted to get is to understand once -- first, once the supply chain constraints ease up, what kind of trajectory do you expect to see as radios are delivered, a big surge or 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 got a lot of inflation exposure and you've got the supply chain issues. I mean, how do you see the risks around margin there as you go forward, if we see persistent inflation?

Okay. Thanks. Let me make a few points, and then Michelle will give you the numbers. I mean, you're absolutely right. There's high demand for our radios, and I think that's one thing that the conflict in Ukraine has highlighted, the importance of resilient comms. So we have opportunities in Australia, 300 million for what's called Deltic 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. We've talked about the Kingdom of Saudi Arabia and the radios there. The first 4,000 or so cleared congressional notification. And in August, we're going to have our first article acceptance up in Rochester, and they've ordered a couple of thousand more. So that's going through the congressional notification process. In the U.K., the Morpheus program, again, $100 million award approximately. So all those things are building the backlog, as you say. I will highlight that I think it was last year, we knew there was a supply chain shortage and we'd have to serve. 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. 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, WESCAM 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. Michelle, you want to talk about the capacity and the ramp capability?

Yes. So Doug, so just to your point, in the first half, we did -- consistent with our expectations, 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, that starts to ease from a capacity perspective. We've made the investments that Chris talked about and continuing to see the electronic components improve. It's going to be critical for the second half and as we go into 2023. We do have an elevated backlog, to your point. It's about 1.5 billion. 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 Communcations is 1.15 within the quarter. And so this really speaks to the overall conflict environment, Ukraine opportunities that we're seeing. And we expect that, that will be a benefit for us as we go into 2023, but a lot of these orders are also being considered over a couple of years. And so you should think about it in terms of 2023, 2024 and into 2025.

Our next question is coming from the line of Robert Stallard with Vertical Research.

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&A deals potentially in the pipeline?

Yes. I would say, clearly, relative to our M&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 yes, we're looking at a handful. We continue to look at M&A on a regular basis. We're also watching the regulatory environment and seeing what could potentially be approved and any potential overlap or antitrust issues. So I'd say, we have a healthy process. We look at things all the 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. 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 I hope that helps.

The next question is from the line of Pete Skibitski with Alembic Global.

Chris, something you're probably super frustrated about, but this next-gen jammer, low-band ongoing protest. 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.

Yes. Yes. Well, Pete, I don't really get frustrated about much, but this has taken a 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. So I expect to get into RFP in the next month or 2. We'll update our proposal. And I would think, in mid-2023, hopefully earlier, 2023, that maybe we'll 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'll -- we respect the process to allow people to protest, and I think there's been 4 or 5 different judges and reviews and such, but it's progressing. So it was over $100 million of revenue we had in our plan for this year. So that's kind of given us a little headwind. We'll move it into '23. The team is ready to go. We like our technology. We like our solution, and we'll wait for the Navy to select us again, hopefully.

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

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?

Yes, I'll jump in, and then Chris, you can feel free to complement. So in the second half, to your point, in terms of the drivers, it's really 3 components. One is around supply chain recovery. And so as I noted earlier, we had an assumption that we'd have a pretty healthy hockey stick 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. 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 consistent to what we delivered on in the first half. The second is around new program wins. Chris mentioned SDA, along with SPEIR. These are 2 new awards that we've already won. And so the back half, we will be accelerating as those programs come online. And then the third piece is around our ISR missionization programs. We talked about Armed Overwatch. There are a number of other ISR missionization programs that we are pursuing. 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. 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 expected to continue into the fourth quarter.

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 give 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. There are some days where we get a call from a supplier that they're going to be a week late. And 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 ballway in all cases. We're not losing things. 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.

And 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 30-70 split.

The next question is from the line of Morgan Stanley, at Kristine Liwag with Morgan Stanley.

You were down selected for Phase I of the stand-and-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. Can 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 to your traditional strength?

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. We have multiple classified opportunities. This is an air-to-ground tactical missile. I think it's -- when you look at the budget, you look at the threats, you look at our capabilities, I think we're in really good shape here. We've taken a clean sheet approach. And I think that's what's going to be the differentiator. I mentioned that on Armed Overwatch. I mentioned it here, right? We're not taking an existing capability that's been successful for decades and tweaking it. We're taking a clean sheet approach. We're investing in our 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. There's classified things where 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. And I think in 2023, early '23, they'll probably down select to 2, and then the fly offs and the fund begin. 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 L3Harris want a stand-and-attack weapon. And there'll be more of this in the years ahead.

Our next question comes from the line of George Shapiro, Shapiro Research.

I was wondering on the cash flow, your inventories are up like 260 million in the first half. I assume some of that's due to supply chain issues. Where do you expect that to go? 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?

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. 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 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 pressures as well to allow us to meet the cash expectations.

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

Chris, I wanted to extrapolate on some of these prior questions about hockey sticks and recovery. With all these noncontrollable headwinds that you talked about in '22, so the elongated supply chain impact and slow outlays and tight labor, et cetera, and then the strong bookings, rising budgets, could '23 or '24 be a spring-loaded year? In other words, you don't necessarily capture in the back half of this year, but then we have sort of a monster year in '23 or '24. 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?

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 '23. I think you called it a monster year, is that what you said? So I'd love a monster year, whenever that is. 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 EAGL program. Of course, they'll hopefully get next-gen jammer. So we've made those investments up in Canada. We've invested in a new facility for WESCAM, where we're seeing the surge in the turret. 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 themselves. If we get the supply chain turnaround, I think we'll be okay. And we've been doing pretty good on the labor front. 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 hundreds of thousands of resumes to come work for us. So I feel pretty good about that. Relative to '23, we're actually going through our strategic planning process now. We talk about low to mid-single-digit growth, but some of the stuff is pretty lumpy. And we should be in a position if we can get these wins to continue our top line and bottom line growth. Michelle?

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

Our final question will be from the line of Michael Ciarmoli with Truist.

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. Maybe you can walk us through how long it takes to 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?

Yes. Thanks for the question, Michael. So consistent with what we shared back in our last call, we anticipate about $100 million of gross inflationary impacts within the year. We had about $20 million of that play out within Q2. And to your point about our overall program mix, about 50% of our portfolio is fixed price. 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 a new contracts that we are placing clauses that allow for this inflationary environment. But we anticipate that through the middle of next year to 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 L3Harris teammates around the globe. And thank you for remaining focus on creating value for all of our stakeholders, particularly in support of meeting our customers' critical missions. 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.

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.