L3Harris Technologies Q1 2024 Earnings Call Transcript

Hey, good morning, Noah.

All right. Hey, Noah, thanks for the question. Yeah, I think our strategy is working, as I said, and the portfolio is well-aligned. Relative to the pie, between the supplemental and the fiscal year '24 budget, we're well over $900 billion. So I think there's plenty of DoD funding. Relative to the new entrants, which sometimes I like to think of us as one, since we're five years old, but I know where you're going with your question, we've taken the approach to team and work collaboratively with these new entrants at the highest level. So a lot of the new entrants tend to be a little more software-focused. I think the traditional, including ourselves, are a little more hardware-focused. So we're working collaboratively. There's been some recent awards in Q1 where we are actually a subcontractor to a new entrant that want a significant program, and sometimes they work under us. So I would say we're embracing them and working collaboratively with them. And of course, I've talked about our shield investments in the past in working with those venture capital companies who are much smaller but also have great technology.

So I think it's working, and that's been our approach. Ken?

Yeah. Noah, from an LHX NeXt perspective, we are adjusting out the implementation costs of the program and certainly then trying to leverage the benefits of LHX NeXt in the businesses. We talked about what that target looked like for 2024. And the businesses are off working hard to operationalize that and reflect that benefit in their performance. And I think you're starting to see that here in the first quarter.

And then from a cash perspective, we're primarily just adjusting out the cash severance costs related to the program. And you'll see all that reflected in the schedules to the earnings release.

Yeah. And look, we've gotten the feedback relative to our disclosures. So under Ken's leadership, we're trying to cut back on these onetime non-GAAP adjustments and be much more transparent. So I think it'll be all laid out clear for you to analyze.

Good morning, Pete.

$23 billion and $26 billion. Yeah, absolutely. NGI, which is designed to protect the U.S. against evolving long-range ballistic missile threats, is a huge win for the OEM. We were a merchant supplier, as I've talked about before, on both teams. So this definitely gives us a tailwind. When we looked, went back and looked at our deal model, this really was not factored in when we made the acquisition of Aerojet Rocketdyne. So from that perspective, it's going to be accretive, at least to our own internal goals. Aerojet Rocketdyne has a great technology, especially with the large, solid rocket motors. The quantities are still to be determined. It's going to start as a development program. We're in discussions, obviously, with the prime. We haven't actually been awarded and signed a contract yet, but as you saw on the media, we were selected as a propulsion provider.

So it's very exciting. And again, I think it'll be a slower ramp, as you would imagine. But '25, '26 time frame, I think we'll start to see the revenue hit our financials.

Hey, Kristine.

Good morning.

Yeah, Kristine, it's Chris. We did set up the ad hoc business review committee of the board comprised of four board members, as you saw. We've been meeting a couple times a month for a few hours each. And we brought through a variety of topics that have been laid out in the charter that we filed in the 8-K. I would say from anything from operations, we've looked at the programs, they reviewed the program, review process, the bidding process, the LHX NeXt strategy and goals. They've reviewed the portfolio or capital deployment strategy. And we're just kind of checking through the items in the charter. Some topics are one meeting, some topics are two meetings. I feel like we're about halfway through the process, maybe a little more. And then probably middle of the year or so, the BRC will report out to our board of directors with observations and recommendations and findings.

So I'd say it's been a very collaborative process. I think it's a -- it's been good for the company and it's a good way to orient some new board members quickly about the company and what we're trying to accomplish. So I'd say all is going well to this point. So, more to come.

Good morning.

Yeah. Hey, Gavin, it's Ken. I would say that we're seeing improvement in the high-level buckets across the board. I would say we're seeing some mix benefits in terms of, as Chris mentioned, moving out of some of the development phase of contracts and into some of the more mature phase. From a mix perspective, we are seeing some of the areas of the business that are higher mix of cost plus growing. So as an example, space within SAS was a strong grower and has a bit of a higher cost plus mix, so that kind of works the other way a little bit. But we are seeing some of the disciplined bidding start to come through in terms of confidence in our ability to perform as well as price discipline, and then just performing on our programs, and certainly, LHX NeXt contributing. And I wouldn't want to put numbers on each of the individual buckets, but largely as we think about kind of how you bridge from last year to this year, for the most part, each of those major buckets are contributing.

Yeah. No, thanks, Peter. So, yeah, the workforce was probably the quick hitter for what we need to do for LHX NeXt. And as you said, that got us about a third of the way there. The next part is going to be a little more timely and a little more complicated. And the facilities, I think, are going to be a key part of it. Looking at the infrastructure, we have a goal of getting from 275 facilities down to 200. We have about seven or eight that we've identified that will start the process here in the second quarter. So that'll have a little bit of cost to move and relocate and consolidate, but these would be smaller entities that the business case is better to consolidate into a larger facility.

We're continuing to reduce our ERP systems. We've invested in some technology called the unified data layer to get us access by laying on top of all of our systems to be able to get data more quickly. And then, of course, we talked about the initiatives in IT, ultimately getting, believe it or not, from 98 data centers -- I'm sorry, 85 data centers down to two. So that's the infrastructure. That's going to take some time, and that's why it's going to lead into 2025 and 2026.

We've already kicked off with the indirect procurement. We've effectively outsourced that, taken advantage of the buying power of that enterprise. So that's both a combination of price and quantity. So we're tracking to that. And then ultimately, we called it the supply chain. But it's really beyond the supply chain. It's the integration of all the functions that are critical to our products with the overall goal of reducing the cost of our products. So there's an engineering component, there's clearly a supply chain component, contracting and such. So that process is ongoing, but that's where we're going to get the next $600 million or so of savings.

To your question on portfolio shaping, as you know, we have two that are in process. I'll just give you an update there. The antenna business, which we announced, $200 million that's tracking to close the middle of this year, second quarter to be specific. And then our commercial aviation is going to be more in the second half of the year. That will give us the $1 billion of proceeds. Relative to the rest of the portfolio, we're just taking a hard look at that. We're going to be able to hit our leverage ratio based on these two. And to the extent we can get a good price for what we've identified as non-core, we'll do it. But too many of the offers are coming in low and people think we're desperate to sell, and I can assure you we're not.

So we need to get better valuations before we proceed on other transactions. Otherwise, we'll keep and run the business and go forward from there.

Yeah, thanks, Jason. Let me start with Link 16. Again, we have a footprint on 20,000 platforms and then there's variations of Link 16 and other data links that we've developed that are going to be able to go into those platforms or footprints. So I think we're starting to see that. Our ultimate goal was to get Link 16 into space. I can tell you, for the SDA transport opportunities that are coming up, our team is going to be a merchant supplier. And as of now, it looks like we're going to be on all the teams providing Link 16 type capability and space. So we're excited about that.

Relative to the communication systems, I want to reiterate the opportunity that we won in Taiwan $150 million for networking, which was a cross-company win, but led by our communications segment. So that's a big deal for us. And as I mentioned, it really supports the CJADC2 initiative that our country has been talking about for quite some time.

Relative to the radios, I mean, this is just absolute good news. I know we've been talking about modernization not only here in the U.S., but globally. And as I mentioned, we have six FMS cases that are currently going through the process through the system in Europe. The backlog is going to be record backlog. Even in Q1, we were able to get the marine and the SOCOM radio orders booked. And there's a certain capacity and ability to deliver out of our Rochester facility. And it really comes, to be honest, how quickly we can get these supplemental funds under contract and approved and delivered. And with our Trusted Disruptor strategy, our business model actually allows us to potentially deliver radios within a week of getting the contract depending on the configuration and the country.

So the way I look at it, we have high confidence in the guidance we've given. We clearly have the second half ramp-up. But which countries will get which radios will really be a factor of when the funding turns into a contract. And those that don't get signed and delivered in 2024 will clearly be 2025. So just feel better about the business in a huge way. And again, the products are in theater, being tested daily, and they're working and exceeding expectation. And the whole focus on resilient communications is paying off.

Good morning, Ken.

Sure, I'll take that one. So the first part of the question on CS margins, we delivered 24% margin in the first quarter, which I think was great performance by the CS team. And that does reflect a higher domestic mix than we saw late in '23 as well as a higher domestic mix than we expect to see in the second half of '24. We did guide low- to mid-24% margin for CS for '24. And I think what we're trying to communicate is that we expect the domestic mix to be kind of consistent in the second quarter with the first quarter. Solid performance could yield similar results. But in driving that margin up to the low- to mid-24% for the full year, we are looking at some international opportunities to realize some additional margin benefit as we think about that kind of full-year impact. And I think so that's what we're trying to communicate on CS margins from a Q1 and full-year '24 perspective.

And then from the international side, clearly, as Chris talked about in his prepared remarks in response to Jason's question, a lot of international opportunity at certainly the CS segment. But as we look beyond that as well, we see international opportunity, in particular at IMS and certainly the other segments have international components to their business. We don't necessarily track some of the ultimate end customer quite as closely in some of those. But the international margins tend to be stronger across the board. In my remarks, I talked about an ISR program for a NATO country. We would expect that would have strong margins as we, again, think about how we make those deliveries to our international allies and our country's partners and recognizing the different risks and challenges that come with those programs that should you perform, and we expect to be able to perform, will generate higher margins for the business.

So we do see that continuing to move into the business. I will comment, CS, clearly, is the kind of the quickest turn segment, the shortest cycle segment in terms of ability to take international orders and turn it into sales. So just an example, that ISR program we talked about will be a multi-year program, and we'll see that kind of move into the revenue over a bit more time.

But with that, I'll turn it to Chris for a few more comments.

Yeah. Ken, just as a reminder, wherein the low 20% of our revenue comes from international customers. And part of our margin improvement strategy is to grow our international business. And just as a reminder, about half of that is foreign military sales, which has margins consistent with the DoD work for the most part and the other half is direct commercial sale. And that's where we tend to have the higher margins. But as Ken said, more international is synonymous with higher margins, and that's where our focus is. The supplementals are a big step in the right direction.

Yes, we can.

Yeah. From an -- from a tactical radio perspective, I would say, we're -- had a solid bookings order in the quarter. We've got a very solid backlog for that business at this point in time. Looking at a multibillion dollar backlog in that business. And for a pretty quick turn, our shortest cycle business, that is a very robust backlog at this point in time. So we're excited about the opportunities. I would say the Marine Corps and SOCOM opportunity is a great one as we continue to expand that partnership with that very important customer for the business. We were also down-selected for the Air Force Next Gen Survivor Radio, which is a great opportunity for that business to expand into a new market as well.

And then clearly the supplemental, as Chris mentioned, and the international opportunities, so I think a huge opportunity in terms of really strong backlog at the tactical communications business. And as Chris mentioned, a great business model that enables them to kind of turn that factory pretty quick to deliver the radios to appropriate customers as needed based on critical demand and critical needs on the battlefield.

At IMS, in terms of -- I think the question was about EACs. And I would say that as we talked about in the prepared remarks, every segment performed better from a net EAC perspective. IMS was a part of that. Significantly better performance than Q1 '23. IMS is our longest cycle business and it takes a while to kind of turn those programs and the operations and get everything working through the system. I think IMS had great performance in the first quarter at 11.4%. Working towards the guidance that we put out there for IMS for full year '24. And strong performance on their programs. I think really starting to stabilize both the operations in terms of rates, realizing some of the benefits of LHX NeXt, as well as all the hard work that the sectors within IMS segment are doing to deliver on their program.

So we're really excited about the stabilization and the continued strong performance as we look out into the remaining quarters of '24.

Yeah. Thanks, Richard. I think I've been pretty consistent on the -- on our bidding strategy. We talked about the bidding discipline. It's been referenced a few times. There's two things going on there. A lot of people in this industry spend an inordinate amount of time and money trying to focus on a price-to-win strategy and hiring outside consultants. And we kind of find that interesting but irrelevant. So we've taken a different approach. What is our labor, what is our supply chain, what is our overhead, and what's a reasonable fee. We add that up and that's the bid we put in. And if it's deemed too high, we move on. And if it's appropriate based on our past performance and capabilities, we book the order.

So that's a little bit of a change here over the last year or so. But more importantly, is bidding the right types of contracts. And I think in Stand-in Attack Weapon, it was a fixed-price contract for development, again, with fixed-priced options. And we will not bid any programs where we are asked to give a fixed price on an option for a product that's yet to be developed. It's just plain and simple common sense. I think there are some people in the department that agree with me and maybe there are others that don't. But you see what happens in most of these negative EACs across the industry when you do a root cause corrective action, more times than not, it's a bad contracting vehicle. Nobody's perfect and there are performance issues, but you cannot perform out of a bad contract. And that's what we're trying to do.

I guess, on next opportunities to prime, I mean, we have -- and again, we take an approach, where is the best approach, either be a merchant supplier, a subcontractor, or a prime based on our capabilities, and what the customer needs. There's Armed Overwatch. We've been successful there. We just got the Delivery Order #3. So we're up to 25 aircraft already. HADES, which is a big opportunity for the Army, it's the high accuracy detection and exploitation system. It's basically up to 14 aircraft. We're bidding a global 6,500. This aligns clearly with our ISR and other capabilities. So that would be a big win for us.

We have some maritime undersea ranges where we've primed and there's some follow-on opportunities, a bunch in classified space. I usually get a space question for now, but I'll just plug that we had no satellites in orbit at the date of merger. We launched six in the quarter and we've been awarded 60 sats as prime and there's more in the pipeline. So those come to mind just off the top of my head. And of course, we have a lot of opportunities at Aerojet Rocketdyne. Those are follow-on, but those are not prime programs.

So I guess SDA, maybe I was thinking SDA Tranche 3 for tracking. As you know, we're the only company to have been awarded Tranche 0, 1, and 2 for a total of 38 satellites. We should get an RFP in the fourth quarter for Tranche 3, and that could be another 18 satellites.

So hope that helps, Richard.

Hey, David.

Yeah, thanks for the question, David. Appreciate it. Yeah, I think you were breaking up a little bit, but I believe the question was about SAS performance in the quarter. And solid performance by the SAS team in the first quarter, 12.3% margin rate. And they are performing well on their programs. We talked a little bit about some of the drivers there, including maturing some of the development programs. And we also talked a little bit about the mix. And as space continues to grow, that's a little more cost plus mix. That could temper a little bit of the margins in the last three quarters of the year. But we did update guidance for SAS to approximately 12% on the margin rate. They were 12.3% in the first quarter. Some upside from EAC adjustments. And as we saw, strong program performance. You've got to kind of book that in the quarter. You do -- it does result in a higher booking rate as you move forward, but you do pick up some cum catch adjustment that flows through in that 90-day period versus the full-year impact where that gets tempered a little bit.

But we're very confident in the team at SAS, and we're confident in the guide that we put out there for approximately 12%. And I know the SAS team is out there working hard as we speak to try to figure out how to drive that up from there.

Yeah. And I think the second part of your question was F-35. Our production deliveries are tracking. We have a ramp coming up in production here starting next month. So we continue to have good relations with Lockheed. In fact, I was just talking to them yesterday. They'll be starting to deliver aircraft. As you know, they'll comment on that themselves. But as they start delivering aircraft, we're going to have to ramp up even further and quicker. And that's our plan. We've made the investments in most of the infrastructure we need. So continued improvement month-over-month, quarter-over-quarter. And it's all about the core processor and that's where the focus of the team is.

Yeah, thanks, Matt. I mean, at IMS we did get the NATO electronic attack aircraft. And this -- we were thinking back on this not that long ago. I mean, this is something about eight years ago, nine years ago, we talk about disrupting the market. And I always give the space example, but it feels like we pretty much invented and created this bizjet ISR market. We have over 50 bizjet orders in the last eight or nine years on five different platforms. So we have this one opportunity that I mentioned in Europe, NATO country. There's some longer-term opportunities kind of in the Mideast. These things take a year or two to get booked.

So the bizjet market for electronic attack, ISR, whatever capabilities, are still out there. There's a huge opportunity in the Far East that we're on our third bid relative to being down-selected. So that could be $2 billion in 2025. So very excited about that.

Armed Overwatch, we're starting to get interest from international customers. Once we start making deliveries later this year, early next year, I think that market's going to pick up from the aircraft side. And we still have some C-130 capabilities that I believe have some international opportunities. Maritime, we're doing a lot of work with Australia, so we continue to see opportunities there as well. Viper Shield's actually out of SAS, but great capability on F-16 EW. So I see that growing as well. And then, of course, WESCAM with the turrets, that's just a high-growth market with opportunities pretty much all over the globe.

Yeah, Chris, maybe I'll just add real quick onto that in terms of Armed Overwatch. So beyond bizjets at IMS, we did get a Delivery Order #3 on that program for nine aircraft, I think, bringing the total order to 25. And to your comments, I think as that program matures, it gives us greater confidence in the international opportunities for that aircraft. So looking to the building confidence on that one.

Yeah. Thanks, Sheila. We're being selective in where we invest in bid. And if I look at the different domains, I think space is a perfect example where we're absolutely taking market share. And as I said earlier, we've been awarded 60 satellites as a prime just since the merger, including 38 for SDA tracking alone. And there's -- it's a hot market, but every couple of weeks or months, you can pick up the paper and see there's one less company in this market. A lot of SPACs, a lot of companies are withdrawing from that market. And we take that as a sign of our success. We're making money and we've disrupted the market. So I feel really good about what we've done in space.

The airborne domain, I think it's really going to be more with what I referenced with the business jets, maybe Armed Overwatch to a lesser degree, where, again, we're filling in gaps and replacing long-term incumbents or giving them different platforms with better capability for the missions that they want. Our maritime work on the undersea ranges is world-class. Again, you go back six years, we had no work in that regard, and we found an opportunity to unseat a long-term 40-year incumbent and came up with a different solution. And it's been well-received around the globe as an example. We've talked historically about our torpedo launch and recovery system using unmanned undersea vehicles. That market is a hot market, in my opinion. We just have to get out there and get a couple customers. And I think that could be a real game-changer for our undersea business.

On the radios, we talk about the radios. A lot of good work there. An exciting one that we haven't really talked much about is for the Air Force, which is the Next Gen Survivable Radios. So we're one of two companies competing on that. And in a couple years, we could be down-selected a new market, and another example, dislodging a long-term incumbent. And then, of course, innovation of cyber, there's something going on there every day, and you kind of have to innovate daily to stay ahead of the threat. And we're doing that and seeing good growth and good performance in that domain as well.

So hope that answers your question.

Rob, we'll go ahead and take our last question this morning.

Good morning, Doug.

Yeah. Doug, great question. And, yeah, it was about 16 months ago when we announced this acquisition. And I think I agree with you. When I look at where we are now, the business case gets better and better. The demand, there was no conflict in Israel. People thought Ukraine would be done. Nobody anticipated $900 billion of defense spending for 2024.

So the tactical missiles, the nuclear deterrent, NGI, there's just tons of opportunities on SRMs. Over the long term, call it, five, seven years, double-digit growth on the top-line does not seem unreasonable to me. We have to, of course, invest in the capacity. The bottlenecks, some of them are based on low yields and performance and supply chain. I think we've made good progress in that regard, investing in our suppliers, getting additional suppliers. I continue to think the more money the government can give to the supply chain, the better off we are. I continue to believe we don't need an additional solid rocket motor prime. What we need is someone working on the igniters, the nozzles, and the cases. And I think that would help unlock the potential.

We've ordered equipment to continue to expand, whether it's mixers, ovens. They unfortunately tend to have a 50-week, 60-week lead time. But we placed those orders. And once we get that in, I think it's going to be help with the ramp. We have DPA money to build some buildings, take existing facilities and modify them. So the consolidation and peace dividend and budget control acts for a decade kind of stifled the ability for companies to invest and grow, and inconsistent demand signals. Right now, I think everything is a potential tailwind. And we'll have the factories digitized by the end of this year, and we're making the investments and fixing the processes.

So pretty excited about it. And 2024 is kind of catch-up and continue to burn down the delinquent backlog and simultaneously invest and put in processes. But I think by the time we get to 2026, 2027, if all stays as, is going to really turn out to be a great acquisition.

So, I appreciate the question, Doug, and let me just wrap it up and first of all, thank the workforce and the leadership team for a great first quarter. Obviously, thank you, all, for joining the call today. And Ken, Mark, myself, and the team will be engaging with many of you in person in the months to come.

So thank you, all, and have a great weekend.