Greetings, and welcome to L3Harris Technologies Fourth Quarter Calendar Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President, Investor Relations. Thank you. You may now begin.
Thank you, Rob. Good morning, and Welcome to our Fourth Quarter 2021 Earnings Call. On the call with me today are Chris Kubasik, our CEO, and Michelle Turner, our CFO. First, 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 press release, presentation, 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. In addition, following our 8-K filed earlier in the month, we'll be speaking to our 2021 results in our prior four-segment structure. Our 2022 outlook will be in our realigned three-segment structure that also shifts pension items to the corporate level, furthering operational transparency.
With that, Chris, over to you.
Okay. Thank you, Rajeev, and good morning, everyone. I'd like to welcome Michelle Turner to this morning's call. She's an experienced financial executive with diverse operational experience, including two decades in the aerospace and defense industry. She joins us from Johnson & Johnson, where she was the CFO of their supply chain organization. I'm excited to have Michelle on the team, and look forward to our partnership. Welcome to week two, Michelle.
Thanks, Chris. It's great to be back in the defense industry and to be part of the L3Harris team. I've been following the merger, and I'm excited about leveraging my experiences to further our strategy of being a non-traditional prime.
Okay, let's get started. This morning we reported our 2021 earnings, and I'm pleased with the result. Our company delivered another solid year of bottom-line performance, growing EPS and free cash flow per share by 12% and 9% respectively. It wasn't, however, without its challenges, as the pandemic stressed our supply chain at a time when budgets remain uncertain. Organic revenues were up 2% for the year, and our margin performance was exceptional as merger cost synergies alongside E3 savings enabled expansion of 110 basis points. Looking ahead to this year, we initiated guidance today that reflects current market conditions. Organic revenues are expected to be up 1%-3% with steady to rising segment margins.
When combined with the share count decline, we expect EPS of $13.35-$13.65, reflecting another solid year of growth. Our free cash flow guide of $2.15 billion-$2.25 billion incorporates current tax regulations, which requires us to capitalize R&D expenditures beginning in 2022 versus the prior practice of annual deductions, resulting in tax cash payment increases. Excluding this impact, free cash flow per share growth would have been up by double digits. We'll provide more details on these figures later in the call. Our focus on both value creation and advancing our strategy of leading as a non-traditional prime has driven our success to date. Moreover, in recent months, we made progress in our focus areas of growing the top line, strengthening our operations, and augmenting our disciplined allocation of capital.
Let's start with the top line. With the integration of the company largely behind us, we're progressing on our efforts to grow the business through a three-pronged approach. First, investing in our capabilities. Second, bidding, winning, and priming more programs. And finally, expanding our international presence. Our award activity throughout the year demonstrated traction against all three of these efforts across all domains. As a leading defense technology company, we're maintaining our industry-leading R&D spend as a percentage of revenues with an emphasis on open architecture, multifunction, and software-defined solutions across our broad portfolio of capabilities. This remains instrumental in expanding our revenue synergy pipeline as we reached a cumulative $1 billion in funded orders, including a contract for a classified next-generation system in the fourth quarter. We are also accelerating momentum with internal investments in the maritime and cyber domains.
Our leading sensor and integration capabilities for naval solutions on programs such as the Columbia-class and Virginia-class submarines led to awards of $several hundred million in 2021. In addition, we received $100 million sole source IDIQ from the U.S. Navy for cyber-hardened electronic attack shipboard systems in the quarter. Our capabilities positioned us for multi-billion-dollar opportunities across ship classes and geographies that we're pursuing in 2022 and beyond. We also expanded our external investments to broaden overall offerings in various capability sets. We're making calculated investments in partnerships and companies so we can bring unique technological solutions to global defense customers. There will be more on this topic throughout the year. Next, let me update you on the progress we've made as a non-traditional prime, what we call being a trusted disruptor.
Our positioning at the nexus of traditional defense players and new experimental commercial entrants aligns well with the U.S. government's desire for agile, advanced, and affordable solutions to address near-peer threats. We expect budget dollars to continue gravitating in this direction. A notable example is within the space domain and the need for responsive satellites that can be rapidly procured and deployed to address a range of threats. We were awarded over half a billion dollars in responsive satellite contracts as a prime in 2021, including a $200 million award for a classified mission within the intel community in the fourth quarter, and we have considerable and exciting opportunities ahead of us. Turning to international, we continue to see demand for our defensive solutions that are aligned with U.S. export policies and ensure partner security.
With a book-to-bill of 1.1 on solid revenue growth in 2021, our strategy is solid. We had a strong growth in our ISR aircraft missionization business from a key NATO customer with awards of over $600 million, including $70 million in the fourth quarter, which is part of a broader multibillion-dollar opportunity set we're pursuing in 2022 and beyond. In addition, our international tactical communications business continued to experience robust order activity for land modernization in the U.K., Australia, and a Mideast country that totaled approximately $500 million for the year and over $200 million in the quarter. This pairs well with the expanding DoD modernization goals, supporting multiyear growth potential for our business.
In fact, just last week, we were awarded a $750 million IDIQ by the U.S. Marines to manufacture the Falcon IV multi-channel advanced handheld radio that meets modern crypto security standards while providing them resilient networking capabilities. Overall, I'm pleased with the tangible progress we made in 2021 as we delivered a funded book-to-bill above 1.0 and grew our organic backlog by 5%. Let's pivot to operations. Our integration efforts were quite successful and will wrap up in early 2022. We also continue to drive a performance culture through our E3 program that pervades the organization and has been key in mitigating the unforeseen challenges related to the pandemic. We talk about the key components of our E3 program, factory optimization, engineering excellence, supply chain, and overhead management.
In 2022, we expect these factors to at least offset predicted inflationary pressures for both labor and materials, which we'll look to improve upon as the year progresses. We're off to a good start with our segment and business consolidation efforts. Over the last two quarters, we've delivered margins at or above 19% on a consolidated basis or approximately 16% on a segment basis using our new reporting structure. We've also reached several key operational milestones this quarter. Within space, we successfully completed critical design reviews for two major responsive satellite programs. First, the Space Development Agency's tracking layer, and second, the Missile Defense Agency's Hypersonic and Ballistic Tracking Space sensor, known as HBTSS. We are gearing up for prototype launches of five satellites over the next two years.
Within our ISR business, we completed a key flight test and received a supplemental type certificate for the first Compass Call Cross Deck aircraft, the U.S. Air Force's missionized business jet. This strategic aircraft arrived in our Waco, Texas, facility in the fourth quarter, where we began the next phase of modification. It is scheduled for delivery to the customer later this year. Lastly, our WESCAM product line within our electro-optical business concluded its transition to a new state-of-the-art manufacturing facility and delivered a record high number of turrets in the fourth quarter, as well as for the year. Concerning our supply chain, the environment continues to be fluid. For 2022, we expect supply chain disruptions to continue into the first half.
As a result, our team is set to continue utilizing the various tools we outlined to address the challenges, such as engaging with lower tiers of the supply chain, accelerating our purchase commitments, utilizing DPAS designations, and leveraging smart inventory in selected areas. Shifting to capital allocation, our focus remains on maximizing cash generation and strengthening our portfolio while sustaining a shareholder-friendly approach. Growth in free cash flow per share is a key metric for us. This will remain a 2022 focus as we drive our profit growth, reduce working capital days, continue tax planning, and manage capital expenditures. When combined with our share repurchases in 2021 and our current target of $1.5 billion of repurchases this year, we expect free cash flow per share growth of 10%, assuming the R&D tax credit is repealed, contributing to double-digit annual growth since the merger.
Regarding the dividend, it remains part of our balanced capital allocation framework, with opportunities to grow it further as we've done in prior years. Finally, with respect to M&A, we'll be opportunistic and use our balance sheet capacity judiciously to complement our capital return program. Let me now provide details on our 2021 results and the consolidated guidance for 2022, and I'll ask Michelle to fill in the segment and other details on the outlook. Let's start on slide four. I'll refer to all 2021 figures in our prior four-segment structure, given our realignment became effective in early 2022. Fourth quarter organic revenue was down 1% versus the prior year. CS and AS were down 11% and 5% respectively, with electronic component shortages in its supply chain weighing down the tactical business at CS, while AS was impacted by the timing of awards.
IMS saw solid 6% growth from continued ISR aircraft missionization activity, and the SAS segment was up 2%, driven by growth in our responsive space franchise. Margins expanded 70 basis points to 19.2%, with the most notable drivers being E3 performance and integration benefits, which offset volume-related supply chain headwinds. We exceeded our internal outlook by 100 basis points through favorable mix related to award timing, continued strong E3 performance, and by containing supply chain impacts. These drivers, along with our share repurchase activity, drove EPS up 5% to $3.30, as shown on slide 5. For the full year, organic revenue was up 2% and in line with our prior guidance at the consolidated level.
At the segment level, IMS and SAS were up 5% and 3% respectively, while CS and AS were down in low single digits. CS would have been up in low single digits excluding these supply chain impacts. Margins expanded 110 basis points to 19.1%, exceeding our prior guidance of approximately 18.75%, and were more than 75 basis points ahead of our midpoint at our initial guide, with E3 performance and integration benefits being the primary drivers. Earnings per share grew 12% or $0.35, primarily from operations, synergy benefits, and a 6% lower share count that overcame divestiture and supply chain headwinds, enabling us to deliver double-digit EPS for another year.
Our full year free cash flow came in just below the bottom end of our prior guidance range as we consciously built inventory levels to reduce supply chain risks. With this cash flow, along with proceeds from divestitures, we repurchased $3.7 billion in stock and paid over $800 million in dividends, returning about 10% of our market cap to our shareholders. Next, on slides 6 through 9, we provide details on segment results, which are largely consistent with prior commentary. In the interest of time, we can take questions in a few minutes so that we can shift our discussion to the 2022 guide. Starting with the top line, revenue is expected to be in the range of $17.3 billion-$17.7 billion, implying organic growth of 1%-3% and reflecting growth in every segment.
We expect a weaker first half, down in the mid-single digits, driven by continued global supply chain impacts in our product-heavy businesses at CS, along with international ISR aircraft award timing IMS, given tough compares. We expect high single-digit growth coming in the second half of 2022. Segment operating margins are expected to be 16%-16.25%, positioning us for another year of expansion and are expected to follow sales with more profit in the second half of the year. This, combined with a 4% lower share count, will result in 2022 EPS of $13.50 at the midpoint. On free cash flow, our $2.15 billion-$2.25 billion guide includes a $600 million-$700 million headwind from the R&D tax policy. With that, I'll turn it over to Michelle.
Thank you, Chris, and good morning, everyone. I look forward to my engagement with the analysts and investor community at upcoming events and conferences. I'll continue now on slide 10 with our 2022 segment details and our realigned three-segment structure, as well as provide additional color on the 2022 EPS bridge and cash flow. Integrated Mission Systems revenue is expected to be $7.1 billion-$7.3 billion, up 2%-4%, driven by maritime expansion, classified growth in defense aviation, and continued recovery in our commercial aerospace business. ISR aircraft timing from a tough compare is expected to drive a low- to mid-single-digit decline in the first half with high single-digit growth coming in the back half of the year.
Segment operating margins are anticipated to be within a range of 13.5%-13.75% with E3 program savings more than offsetting program mix impacts. In Space & Airborne Systems, we expect revenue of $6 billion-$6.1 billion or flat to +2%, driven by our traction in responsive space along with classified strengths in intel and cyber, which will be moderated by continued pressure in our airborne businesses as we transition to modernization over the coming years. Segment operating margins are expected to be within a range of 12.5%-12.75% as E3 program savings offset mix headwinds from key growth programs within space.
Communication systems revenue is expected to be $4.4 billion-$4.5 billion or up 2%-4% from modernization demand in tactical communications, with supply chain delays netting an expected mid-teen decline in the first half. Strong double-digit growth in the back half of the year, along with recovering sales in public safety. Growth will be moderated by a flattish outlook in broadband and integrated vision solutions. Segment operating margins are anticipated to be within a range of 24.25%-24.50%, as our E3 program savings will more than offset inflationary pressures within tactical communications. Now turning to the EPS bridge on slide 11. As Chris said, we expect full year EPS of 13.50 at the midpoint.
Of this increase, operations will contribute $0.62, along with a lower share count for $0.60, overcoming headwinds from divested earnings and residual supply chain impacts, as well as lower pension income and other items of $0.05. On cash flow, our outlook reflects a modest working capital improvement, $330 million in capital expenditures and no pension funding. We expect to deploy roughly 100% of our free cash flow to shareholders through $1.5 billion in buybacks, barring any strategic M&A. With that, I'll turn it back over to you, Chris.
All right. Thanks, Michelle. Well done. To sum it up, 2021 performance demonstrated our ability to deliver strong bottom-line results in a dynamic environment with our 2022 outlook reflecting growth in all key metrics. With that, Rob, let's open the line for questions.
Thank you. We'll now be conducting a question-and-answer session. In the interest of time, we ask you, please limit yourselves to one single part question. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question is from David Strauss with Barclays. Please proceed with your question.
Thanks. Good morning, everyone, and welcome, Michelle.
Good morning.
Chris, can you maybe touch on the budget outlook, what you saw in the fiscal 2022 authorization markup, and if that becomes approached, what that might mean for you guys, as well as what you're assuming in terms of CR. Last one, a little bit more detail on the individual buckets within SAS in terms of, you know, what you're expecting for each of the individual businesses relative to that flat to up 2% for the overall business. Thanks.
Okay. Thanks, Dave. Let me start with the CR, the continuing resolution. You know, we're assuming a half year CR, meaning, you know, by April 1, we'll move forward. You know, I just look at the fact that the president's State of the Union speech got moved to March, so I'm assuming he wants to have a budget at that point in time. That's what we factored in. Obviously, I think like others, if it's a full year CR, you know, it'll provide $200 million of top line headwind, which is not unexpected. You know, relative to budget, you know, I think we were all pleased to see the markup. I think that could be a good foreshadowing of the future.
We don't have a fight up yet, but you know, we continue to think aspirationally that mid-single-digit growth is something that we can achieve. As I've said before, I really like our portfolio, the fact that we're in all these domains. As I laid out in my prepared comments, you know, we continue to invest high R&D to grow. We're working with some of these new commercial entrants. We're priming and bidding more, and international has been a good story. That's how I see the budget rolling out. Look forward to more information there. You know, when we go to SAS, the components of SAS, you know, there's focus on the key sectors. You know, we continue to see space growing in the mid-single digits.
You know, we were probably a little more bullish back in October, but there continue to be delays in contract awards, either directly or indirectly related to the CR. Space, I see mid-single digit this year. Intel and cyber, you know, is one of our hot businesses continuing to grow, high single digits. That's maybe a little better than what we had told you in October. Our mission networks, you know, which we moved from AS into SAS as we collapsed segments, has been and always continues to be in that low single digit growth, mainly doing work for the FAA. Where we're seeing the decline is in our air sectors, Mission Avionics and EW combined. That's really almost entirely tied to the F-35 program.
As you know, the TR-3 development is rolling off and production is ramping up. As I quantify it, I think I've said before that, 2022, we're gonna have about $150 million decline in revenue just attributed to the F-35 program. We'll see that start to return to growth in 2023. This is just the roll-off of development on TR-3 and then moving into production on the three components that we provide to that aircraft.
Our next question comes from the line of Peter Arment with Baird. Please proceed with your question.
Yeah. Thanks, morning, Chris, and welcome, Michelle. Hey, Chris, maybe you had an $0.18 at least baked into your 2022 guidance for the supply chain adjustment, you know, and that's obviously better than the 29 cents in 2021. Maybe just your confidence around the supply chain and what kind of visibility, what's baked into the $0.18. Then just also, Michelle made a comment about just modest working capital improvement. Maybe you could just discuss a little bit what's behind that. Thanks.
Yeah. Thanks, Peter. No, relative to the supply chain, we think we're doing a pretty good job over the last maybe six or nine months, as I mentioned, with getting more visibility into the second, third tier supply chain. We've invested in tools that give us that visibility. When we've talked previously about a $200 million revenue headwind in 2021, we see that continuing in the first half of 2022. I think where we've been maybe a little more conservative than in October is we see that recovery bouncing back in the second half of 2022 and then also in early 2023.
You know, think of that about a $100 million headwind each quarter in one and two, and then maybe getting $100 million back in the second half and $100 million back in early 2023 from revenue. Of course, that brings along the related operating income. That's how we see it. You know, it's a dynamic area. It's mainly been focused on electronic components, but you know, we're monitoring it and managing it in all sectors and all segments, and it feels like we've turned the corner. You know, we'll keep you up to date quarter to quarter as things change.
Relative to working capital, you know, as we try to get to the guidance, you know, we ended the year at 52 working capital days. We'll bring that down a couple days as we go to that $2.8 billion-$2.9 billion guide. Michelle?
Yeah. Just to add a little bit more color on the working capital. If you think about it, you know, we built smart inventory at the end of 2021, and so we expect as tactical communications comes back in the second half, we'll lead some of that down. Then there's also an advantage from ISR perspective on advanced payments that we're anticipating at the end of the year as well. It's gonna help free cash flow within 2022.
I'll just throw in, Peter, just our definition of supply chain, you know, is pretty broad. We're throwing in the labor, we're throwing in material, and we're throwing in inflation. All that contributes to the $0.18.
Our next question comes from the line of Doug Harned with Bernstein. Please proceed with your question.
Good morning. Thank you. In communication systems, you know, you've clearly been hit by some issues around COVID, supply chain. We've also got inflation that would be hitting fixed price contracts, commercial fixed price contracts there. If you were to think of 2022 without these headwinds having been there, what would you see communication systems looking like in terms of growth margin? Is this something, given that it's a headwind there, that we should see all coming back when we move out to 2023, or is there just going to be some lost demand and margin here?
Yeah. Doug, that's a great question, something we spend a lot of time looking at. I don't see any loss. I think this is just a timing issue. You know, as we were looking through the business just the other day, I mean, it's had a great book to bill in 2021. Now some of that's due to less revenue. We have a record backlog, an all-time high in backlog, which, you know, is an indication that we continue to win new business. I mentioned you know just the Marines recently, you know, which was a winner-take-all competition. We're very excited to have won that $750 million IDIQ.
Throughout 2021, I think, we were pretty clear in all the head-to-head competitions, we won the majority share. You know, the demand is there, the modernization is happening, it's in our backlog, and everything indicates quite to be doing quite well. You know, what we would've had without supply chain risks, you know, probably would've been, you know, 300 or 400 basis points more growth, as these things slip into 2022, and as I mentioned, potentially 2023, depending on how the supply chain plays out. At a high level, that's kinda how I see tactical. You asked about Communications Systems in totality. You know, the PSPC business, a lot of that's tied to state and local municipalities.
As we've said, that ought to rebound as the budgets get back in place. We had some key wins last year, but we expect that to continue to grow. BCS, our Broadband Communication System in Salt Lake, a lot of that is still tied, you know, to the Next Generation Jammer startup and some new opportunities that they're pursuing. We feel pretty good about our communications. I've got, you know, for the full year 2022, tactical up mid-single digits, maybe even a little better. BCS and IVS, you know, are kind of flattish area, and PSPC should bounce back with the budget improvement.
Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.
Thank you. Hi, Chris, and welcome, Michelle. Maybe wanted to bridge that growth from 2022, the 1-3. Chris, you've talked about it in a bunch of moving pieces, some of the CS softness, airborne and F-35 you mentioned, versus the mid-single-digit growth profile you have. Then maybe just to follow up on the SAS growth perhaps being softer, what are you seeing there in terms of trends, longer term?
Yeah. Thanks, Sheila, and good morning. Yeah. We had said in October that we'd be in the lower- to mid-single digits, which, best I can tell, everybody's interpreting as 2%-4%, and now we're at 1%-3%. It's a close call there. Again, I'm the accountable exec here for giving the guidance with Michelle and my team, but I really try to look at the current market conditions. Everything I see, you know, from not having a budget, a CR, and supply chain risks, it seems appropriate to guide. I don't see this as a major change from 90 days ago, but I am trying to give you the visibility.
I mean, basically, the only thing that really changed, and I know it gets a little complicated as we went from four segments to three, you know, but we can talk about that later. We filed more than enough documents with the SEC and our web charts trying to bridge it. IMS and CS basically did not change from October. You know, those were kind of in the 2%-4% range. As I said, the big change is in SAS and, you know, we can argue how big a change that was. Clearly, downward pressure on the top line. As I mentioned in an earlier comment or response, most of that is driven by the air domain and F-35 specifically.
The good news is, you know, that's a well-known program that everybody has visibility into, so we have confidence that, as we negotiate lots 16 and 17 and prepare for the cut in of our technology on lot 15, you know, that there's a lot of certainty and predictability in our revenue stream. So we do see 2023, 2024, 2025 coming back. You know, longer term, just within SAS, I mean, I really like what we're doing in the space business, both on the satellites and the ground vehicle or the ground stations. You know, we pretty much control our own destiny. You've heard us talk about the missile defense area, and we'll be launching five prototypes in the next two years.
Then I think there'll be further, you know, opportunities to down select from two to one. If we perform and have success, you know, there could be $ billions of opportunities. I really like where we are in space with the responsive Sats. We still work with a lot of our industry partners, providing them payloads for the exquisite sats. We've been successful in winning a lot of ground stations, so I'm excited about space. Intel and cyber continues to grow. You know, that's an international business, doing work with the Five Eyes countries. It's probably the hottest market we have. You know, again, I think long term, there's just gonna be more and more.
Mission networks, you know, we have a competition, a recompete, coming up for the FAA and hopefully sometime this year. That continues to be a good business and solid and steady. It's really all about air and the F-35 program, the EW capabilities for the F-16 internationally. You know, we're on the B-52, and that's a complete overhaul relative to EW capabilities. You know, we think we're well positioned on next gen aircraft. You know, all that is classified, as you know, and more to come as those decisions and down selects are made. You know, longer term, SAS, just like the other two segments, should be able to grow, and that's our plan.
Our next question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question.
Thanks so much, and good morning, everyone.
Good morning, Robert.
Chris, you commented about you had a good year on the export side in 2021. I was wondering what your expectations are for 2022, and whether these various tensions around the world, particularly in Eastern Europe, could have some benefit for orders. Thank you.
Yeah. No, Robert, good point. I mean, for the last couple years, you know, our international business has been growing double-digit. You know, I think our strategy, you know, which is somewhat unique, I think, compared to others. We have focused countries, 10 focused countries, where we have executives full-time in the countries, and then we use our distributors and reps more for the product. It seems to be paying off, and we've been able to see that growth. I mean, beyond 2022 and beyond, you know, we're seeing mid-single-digit growth. As you said, anything can change rather quickly, especially in the European area.
You know, our tactical communications business is generally a quick turn business, and I think could be pretty opportunistic as well as our night vision business. You know, we're always available for quick turns when tensions get tight or there's new demand or requests. You know, I think that could be some potential growth upside that we haven't completely factored in. Again, a lot of our products that I allude to are more on the defensive side. You know, ISR situational awareness has always been key. We've migrated to the biz jets, you know, and we've talked about the success of that strategy and programs in NATO and the Middle East.
Again, we have multiple other countries we're working with over the next few years. We also, you know, being somewhat, I hate to say platform agnostic, you know, but we're working with different parts of the world. We have King Air ISR capabilities. We have large aircraft and biz jets, so they're all working reasonably well. We'll let you know as things move forward in the international world, but optimistic for 2022.
Our next question comes from the line of Mike Maugeri with Wolfe Research. Please proceed with your question.
Hey, good morning. Thank you. Following on Peter's question from earlier, sort of taking a step from the 2022 free cash guide out a year, is $3 billion or better what we should be looking at for 2023? And then is free cash growth in 2023 all earnings growth? Or, where, if we can, should we expect to see you to continue to generate working capital efficiency out in 2023?
Yeah, thanks. Thanks, Mike. Let me take that in reverse order. We absolutely expect to continue to see working cap improvement. We've talked, you know, aspirationally of getting down to the low 40s. You know, we ended the year at 52 for 2021, 52 working capital days. You know, we should be able to take out a few more days in 2022, which still gives us a long runway for 2023 and beyond. You know, notwithstanding the R&D item, which, you know, everybody is confident will be repealed or deferred for four years, but hasn't happened yet, so we figured we'd just give guidance, give you the pieces.
You know, we've effectively, you know, kind of guided to $2.8 billion-$2.9 billion for 2022 if you use the midpoint of the $600 million-$700 million R&D. That should put us on track, you know, to get close or, you know, around the $3 billion mark in 2023, starting with top line growth, you know, which will generate more OI and earnings and then of course the working capital. You know, I try to look at maybe implied in your question, you know, if we go back a couple years or 2.5 years, we talked about getting to $3 billion in 2022, and obviously coming up short. Just thought I'd hit that head on.
I mean, clearly we've talked about some of the supply chain decisions we've made, which was a little bit of a headwind. You know, at that time we didn't know there'd be a stimulus bill that has affected Social Security payments. So many of us deferred those payments back in 2020 per the rules, and now we're paying them back. You know, we have almost $100 million of Social Security payments that we have to repay in 2022. That's in our guidance. You know, we divested more businesses than we had initially modeled. I continue to like to look at free cash flow per share.
I went back, you know, to day one and while we don't really disclose or publish it, we had a plan of $14.50 on free cash flow two and a half years ago in 2022. If you do the math today, I'll do it for you, we're at $14.80. On a free cash flow per share, we're ahead of where we were gonna be two and a half years ago, even though we're coming up short on the $3 billion. Hopefully that, Mike, made sense and gave you all the answers to your question.
Thank you. Our next question's coming from the line of Richard Safran with Seaport Global. Please proceed with your question.
Chris, Michelle, Rajeev, good morning. Michelle, welcome to the call.
Good morning. Thank you.
Once again, you're highlighting E3 as a tailwind in 2022. I was curious as to how much runway you think you have left with respect to E3 cost savings. You know, you've been reporting the E3's benefit to margins for quite some time, and I was just curious if you think longer term, you know, you have continued room for meaningful improvement. In your answer, if you could get a bit more specific about where you think the additional benefit comes from. Thanks.
Hey, thanks. Great question. The answer is obviously gonna be yes. You know, I think the system and the methodology we've put in place has been a success and we expect it to continue. I mean, to give you some. You know, historically, I think a lot of these continuous improvement programs start out focused on the supply chain, which is a good thing, and direct labor optimization, and we do that. We've taken a much broader approach, and one area is just the ability to improve our yields. We're looking at our rolled throughput yield at all of our facilities. They come in different sizes and different flavors.
If we can obviously improve those yields, you know, 5 or 10 basis points, it just contributes to the bottom line. This year, you know, we collapsed from 4 segments to 3. That brought us savings. Any savings I get, I put under the E3 umbrella, but, you know, that brings about some savings. When we first merged, we had 19 sectors rolling up to these 4 segments. Today, we're down to 14. We might have sold 1 or 2. We collapsed a couple more. We're getting synergies in the organizational structure. You know, we've been investing in systems. We're putting in a manufacturing execution system in one of our large facilities that had a lot of manual and paper processes.
Those are now getting updated and everything's getting to be electronic. I think that is already starting to show benefits, and the system's not even fully implemented yet. We'll roll that out to other facilities and factories. We have a process that we call our perimeter cost, where we look at the entire cost of each and every facility. You know, we look where the big bucks are and we target our E3 projects, of which we have hundreds, at those larger dollar items. I mean, this comes down to, you know, a lot of this links in with our ESG or environmental initiatives and whether it's energy and utilities. All those types of things I think are maybe some specific examples.
You know, trying to figure out, you know, as I said, and I think everyone said, you know, if we return to and do things the way we used to pre-COVID, we've missed an opportunity. You know, I think I've told you, before the merger, 98% of the workforce came to work every day, and that was kind of the norm. Today we're at about 70% full-time on site, about 20% hybrid, 10% remote. That also brings different savings and facilities and such. We're looking at all those things, Rich, you know, to be specific on E3. You know, in a broader sense, I think implied in your question was the overall segment growth.
Not within E3, you know, is the recovery of the supply chain, you know, more international sales at higher margins, as an example. I mentioned F-35 transitioning out of development into production. I think we all expect higher production margins than development margins. You know, we still have a little commercial business with the aviation and PSPC and as those turn around. When I look at all these things, it's hard not to see where we can continue to grow margins, you know, for the foreseeable future.
Our next question comes from the line of Gautam Khanna with Cowen. Please just proceed with your question.
Hey, Chris, and welcome, Michelle.
Thank you.
I wanted to just ask about capital allocation. You know, you've done a lot of divestments, obviously. You're guiding $1.5 billion of buybacks. You know, what's the appetite for M&A? And do you see any bigger opportunities presenting themselves, or do you think it's gonna be more of a tuck-in variety?
Yeah. Good question. You know, well, first of all, the $1.5 billion of buybacks, you know, is directly tied into, you know, the free cash flow guide. If the R&D matter gets resolved, you know, I'd formally increase the free cash flow guide and bring up the buyback to $2 billion, just to be clear on that one. Yeah, there's absolutely an appetite for M&A. You know, we have a new leader in our strategy and M&A organization, and we've got a process where we've been looking strategically as to where we might wanna make acquisitions. You know, you said big. You know, it's always hard to quantify these adjectives.
I mean, you know, having come from L-3, I'm probably not a huge fan of lots of little $50 million, $70 million, $100 million deals. It just causes a lot of challenges with integration and such. I think the multi-billion, $5 billion and beyond, there aren't many targets, and that's a lot. You know, I'd say, you know, half a billion, $1 billion, $1.5 billion type size, I'd probably call those medium, kinda make sense. As you know, there aren't a whole lot of opportunities out there, but you know, we're in discussions proactively and reactively. Nothing on the horizon or foreseeable. I mean, if we make an acquisition in 2022, that'd be great. If we don't, we don't. You know, it's not like a burning platform. We're running a disciplined process.
You know, we initially start by looking at things strategically, followed by operationally. If we were to buy it, what are we gonna do? How are we gonna integrate it? How do we keep the workforce? Do we move people? Do we keep them separate? You know, what are the synergies? I think, with the big merger we just did, we have a lot of talent and skills in figuring out revenue and cost synergies. Then financially, working with Michelle, you know, we'll figure out the hurdle rates and the cash returns and the more traditional piece. That would be the order that it goes in. You know, I'll just comment.
I think a lot of people have been asking, you know, about some of the recent news surrounding Aerojet Rocketdyne and that decision's impact on the industry. I know there's different commentary out there, but I'm not familiar with the details of that decision or the rationale, but it seemed to be specific to vertical integration. Relative to what we're thinking about, I don't expect any opposition or hurdles if and when we get to the point where we need to have approvals. That's something we would consider and evaluate before moving forward. I think it's business as usual from my perspective for L3Harris relative to our portfolio and the things we might consider down the road.
Our next question comes from the line of Ron Epstein with Bank of America. Please proceed with your question.
Hi. Good morning. It's actually Elizabeth on for Ron this morning.
Good morning, Elizabeth.
I just wanted to follow on. Good morning. I just wanted to follow on to the last question. I think you hit on a little bit, but given, you know, what we've seen in the new administration, do you think in general the environment for defense M&A has changed? You said it's not for you, but maybe if just in general, do you think it's changed? In many ways, do you think big defense M&A is over?
Yeah. No, Elizabeth, I would think, you know, these decisions and policies change administration by administration. With the current administration, it would appear that that big M&A, if that was considered big, you know, is potentially over at least until, you know, there's a change in administration at some future point, who may or may not have new policies. As I said, I haven't really looked at and probably won't have the time to figure out what the specific case was. I think it's always, you know, there's always a predisposition for more competition and less vertical integration. You know, when I look at the L3Harris merger, you know, that went through relatively quickly. It was complementary. We're now in all five domains.
It made perfect sense. There was just a very small business that didn't have, you know, wouldn't allow for competition, so it was divested. I think you can look at these things pretty quickly and figure out if they're gonna go through or not. I continue to believe that, you know, from our perspective, there'll be plenty of opportunities. I think at some point, you know, there's a reluctance to have really big guys get bigger. I kinda like where I am relative to the real big guys. That's how I see it from my perspective. We're gonna run our playbook and see what happens, and others either will or won't be in the game. I like where we are.
Our next question is from the line of Robert Spingarn with Melius Research. Please just give us your question.
Morning, Chris. Welcome, Michelle.
Good morning.
Two quick things. Chris, on the talent side, you know, how difficult is it to get people, and what kind of labor inflation are you seeing, and how is that impacting fixed price contracts? Michelle, just on the tax situation, if you could give us the mechanics. We've been talking about this with everybody for a week, but what are the mechanics of this higher tax rate? Will you pay cash taxes at the higher rate quarterly until you find out what's gonna happen, and then it gets refunded? If you could just clarify that.
Yes. I'll start from a R&D perspective. You're right, there has been a lot of fluidity in the calls this week. Just to reiterate what we have in our guidance. Our free cash flow assumes with the $2.15 billion-$2.25 billion, it assumes $600 million-$700 million related to the R&D tax amortization. I think it's important to note that this is the tax law that's in effect today, right? It's part of the 2017 Tax Cuts and Jobs Act. Barring a repeal or deferment, this will have an impact on our results. For us, it's about $2 billion over five years, and then it goes away. That'll go down to zero.
I think, you know, to the point about the paying it, not paying it, that's certainly something that we're looking at right now. Just to give you a sense of kind of the fluidity you're seeing through the other primes, it really comes down to a couple different things. One is, clearly, you have everybody understands what they're paying from an IRAD perspective, but where the interpretation comes in is around the CRAD, and then what you apply to the CRAD in terms of overhead and fringe on top of that. That's where you're seeing the ranges across each of the different peer companies. We're gonna work through in terms of, you know, what the cash payments will look like, and that's discussions that we're having internally right now.
I think what's more important if we were to take this back to a macro level, it's important that we continue to press on the real issue here, which is we need to get this repealed or we need to get it deferred. It is gonna be a huge impact from an overall U.S. competitiveness perspective. Ensuring that this gets delayed is important to continue to drive the innovation that we think about in keeping the U.S. at the cutting edge of innovation.
Thanks, Michelle. Michelle and I have spent a little bit of time with the tax department in her first week, and you know, it's just a world-class organization. When you look at the metrics, whether it's our effective tax rate relative to others, you look at our R&D tax credit, which is not what we're talking about now, relative to others and the percentages, I think we just got a great organization there. You know, we're seeing that in our financial results. Going to the talent question, which is a great question. You know, actually, in 2021, we hired 8,000 new people.
You know, I talked about COVID earlier, and you know, we opened the office and kinda got back to whatever the new norm was in December. It was interesting 'cause at that time, you know, half of those employees, 4,000, had never even been to a L3Harris facility. You know, we'd FedEx them laptops and do everything via Zoom. Talking about a new kind of a new world here. We've hired 8,000. You know, we're probably gonna hire another 8,000 this year. We're seeing a little bit of inflation, or most of the inflation is at the entry level. We haven't really seen that at the higher levels or the executive levels yet. Maybe that comes later in 2022.
You know, a lot of this depends on geography and, you know, half our workforce seems to be in Florida and Texas, and those seem to be places that people enjoy living and working or moving to. You know, we've been a little more fortunate maybe just based on the geography. We get about 1,000 new college grads a year. We have a whole process as to how to recruit those through key schools, focus schools. You know, we've maintained our internship program the last two years, even during the pandemic. Unfortunately, you know, those were all remote. You know, I think I told you back in 2020, we extended offers, we honored those offers. All those things kinda contribute and pay off.
You know, my goal and the team's goal is to have an engaged workforce that's excited to come to work every day and help with our mission. We do periodic engagement surveys to track that. You know, I think we're doing everything we can. A big believer in flexible work schedules and you know, we've got a whole variety of ways to have the workforce stay engaged and contribute. Clearly a watch item, but so far, so good. You know, I mentioned F-35 earlier, you know, and some of the challenges that that program's had. You know, we've been fortunate to have a highly engaged workforce, holidays, weekends, overtime, and been able to maintain that staffing even through the pandemic and meet our milestones. Hopefully that helps, Robert.
Thank you. Our next question is coming from the line of Michael Ciarmoli with Truist Securities. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the questions. Welcome, Michelle. Chris, I just wanted to go back, I think, to maybe with Sheila's question on, you know, what really changed in SAS, you know, maybe even dovetailing in kind of programs that are being impacted by the continuing resolution. But I think you've kind of called out the biggest being the F-35, and it seems like, you know, that would've been a known sort of headwind, I guess, in October. Were there any other big specific programmatic changes or, you know, programs that you can't start up because of the continuing resolution that are weighing on that kind of growth rate?
Yeah, good question. No, I mean, the F-35 is a pretty dynamic program, right? We follow the prime and, you know, as quantities and strategies change relative to what's gonna be retrofitted and what's not and such. You know, I'm talking about all F-35, you know, which we have crypto capabilities, we have displays, we have bomb racks and of course TR-3. It's a broad portfolio of, you know, just under $1 billion of revenue. It changes on a regular basis, I can assure you. It's a fair point. We didn't have it at $150 million last time we talked.
You know, relative to the CR, you know, it's—This probably won't be a satisfying question. It's not the fact that I think just the fact that we have a CR has caused the contracting organization and our customers just to defer and delay making awards. You know, which is kind of an indirect impact. I mean, there are programs that have been awarded that you know the follow-on work is limited to the prior year dollars. The new work can't get started, so those aren't getting awarded. We just see a huge backlog of things that just haven't been awarded. A lot of these are in the space of the classified arena. You know, most of the space work is domestic. They don't have a big international footprint, for example.
EWs and electronic warfare and the mission avionics. Again, most of those programs, you know, we're supporting an OEM, so we need them to go ahead and get their orders before putting us under contract. So it just feels like a big delay. I think as soon as we get a budget, as soon as there's more certainty, you know, things will kind of open up, and then the floodgates will open. But till now, we're probably erring on the side of conservatism. But like I said, based on the current conditions, we're standing by this guidance until things change for the better. If and when that happens, we'll update you accordingly.
Thank you. Our final question comes from Pete Skibitski with Alembic Global Advisors. Please proceed with your question.
Yeah, thanks. Good morning, everyone. Chris, I had a quick program question. I was wondering if you could update us on what the Navy and Air Force's plans are to replace, you know, the E-6Bs, the E-4Bs. I think that was supposed to be a combined program at one point. I don't know where it is today, but I also know it's kind of, you know, right up IMS's alley and potentially a pretty big opportunity. Was just wondering what your thoughts are on the timing and the sizing of that and, you know, if that's something that DoD's gonna actually fund.
Yeah. No, it's right up our alley for the ISR, IMS organization. But also those programs, you know, as we do more and more cross-segment work involves BCS and some of the comms team as well. You know, the one thing I think we're doing a much better job on and what we've been doing since the merger is pulling in other sectors and other segments and looking at some of these things holistically. Yeah, IMS will take the lead, but we'll be able to pull through. You know, the E-6Bs, you know, I think that's one that we were hoping for last year, and it continues to slide. We'll have to follow up with you with the exact dollar opportunities.
It's on our priority pursuit list to get both of those programs. I think it's a 2022 program, but with all the things I talked about, it could slip into 2023. We'll get you more information on that one, Pete. All right. Well, look, before we sign off, again, I wanna welcome Michelle. It's obvious she's hit the ground running. I also like to acknowledge the dedication and hard work and perseverance of our 47,000 employees worldwide who've continued to perform well in a constantly changing environment. You know, they've had to deal with different work schedules, locations, vaccine mandates, all while navigating through a pretty large merger of equals. At the end of the day, we have a great team here at L3Harris.
I'm excited about the opportunities ahead as our company enters the third year post-merger. I look forward to meeting and talking with everyone over the next few months and introducing Michelle. Then we'll be back in April for our first quarter call. Thank you all for joining. Have a great day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.