Good morning, everyone. My name is Sheila Kahyaoglu with the Jefferies Aerospace, Defense, and Airlines Equity Research Team. Thank you so much for joining us, and we really appreciate the support of LHX, who's here today, Chris Kubasik, who's Chairman and CEO, and Ken Bedingfield, who's SVP and CFO. Thank you both for joining us. Ken, you've been in the role for about eight months now, and Chris, five years of-
Sure. A couple years.
Couple years.
Feels like five.
Well, it's been five years since the L3 and Harris merger and one year since the acquisition of Aerojet Rocketdyne. You've been pretty busy, and let's not even forget about LHX Next, which we'll get to. How do you think about the competitive position of the company today, and what are areas of the portfolio you're most excited about the future?
Absolutely. Ken, you wanna give the safe harbor?
Sure. Yeah, let me just start by saying the comments today may involve risks and uncertainties, which can be further set out in our 10-K and SEC filings, and with that, I'll turn it over to Chris. I think he had a couple of just opening remarks, and then we can respond to the first question.
Yeah, I just wanna go back and reflect on December when we had our Investor Day. We laid out a financial framework for 2026, which was $23 billion of revenue, at least 16% margins, already industry-leading margins, but grow into 16%, which would be near our all-time high, both from legacy companies and post-merger, and $2.8 billion of free cash flow, which is low teens growth from here to there. And when we get back into the share repurchase market, it would probably be mid-teens on a per-share basis. So that's the financial framework to your question. You know, I've talked about the past, in the past, about how we're trying to build a portfolio that's aligned with the future of warfare. We're divesting non-core assets.
We are making acquisitions, which we did two of in 2023, and when I look at the portfolio, I look at the National Defense Strategy, I think we're well aligned for the future of warfare. We're taking the cash to reduce our debt to a 3x leverage ratio, and then we'll return cash to shareholders in the form of share repurchases. To your question, I think I'm getting to the point that, you know, we're very happy with the portfolio. I'm excited about what we have in space. I'm excited about what we have in communications. I think one of the key lessons learned coming out of Ukraine is the importance of resilient communications. We are number one in that market.
We made an acquisition with the tactical data links to even increase our capabilities there. Munitions, I don't think you can pick up the paper without seeing the high demand for munitions. The Aerojet acquisition gave us access to that market through solid rocket motors. We're one of two manufacturers in the U.S., and we can talk more about that if you like. And then, of course, just our ISR capabilities, the ability to sense and see where the adversaries are, I think is a differentiator.
Yeah, maybe we'll start with Aerojet first. Starting on the growth topic, you've invested heavily in the operational performance of the business and reduced overdue deliveries by 40% over the past year. Maybe talk about Aerojet growth from here.
Yeah, I'll just give you an overview on Aerojet. You know, first, we'll start with the integration. I'll say we're ahead of schedule on the integration, both in time and in cost. We committed to $50 million of synergies. We've already exceeded that. We're investing in digitizing and using robotics in a variety of the factories. As Sheila said, by the day we acquired it, about thirteen months ago, there was a significant delinquency in deliveries to our key customers. We've cut that in half. We're booking a significant amount of new orders. Aerojet, L3Harris Aerojet, was selected for the NGI, Next- Gen Interceptor, huge opportunity that will fuel growth, and there's basically more demand than supply, and I feel real good about the future.
We envision this thing getting from, you know, low $2.5 billion of revenue to $4 billion by the end of the decade, and we have good visibility into that. We should be breaking ground on some new facilities in Camden, Arkansas, by the end of the month, going through all the permitting and EPA process, and that's moving along. Slower than I would like, but we have to follow the rules, and I think the capacity build-up is gonna make a huge difference.
How much of that growth is locked in through programs like NGI that you've already won from that $2.5 billion to get to $4 billion? And one of the things I really appreciate is you've kept it as a standalone segment, so we have a lot of clarity on what the business is actually doing once you acquire it. So margins are about high 11s today, 13% pre-pandemic. There's a lot of bottlenecks in that business. How do we think about the normalized growth, growth and margin profile?
Yeah, I think this is easily mid-single-digit growth, as I mentioned, and getting to four billion by the end of the decade, and I think these margins are in the mid-teens, and I think we have pretty good visibility into that. We are negotiating with our customers. We're not gonna take bad deals. We're not gonna sign contracts to meet a quarter end or a year end. We're gonna go through a thoughtful, deliberate process. We're gonna get our costs covered, and we're gonna get a reasonable return for the work that we're doing.
And you mentioned this earlier, but budget and demand around missiles and missile defense appears to be really strong. How do we think about this within the Aerojet side of the business, as well as other parts of your portfolio?
Yeah, I think clearly in the munitions, it's well documented there's a shortfall in our stockpiles as weapons have been given to Ukraine and other countries, so there's an absolute demand. That's why we had a supplemental last year. Maybe we'll have a supplemental next year to replenish the stockpile. We are a supplier to major primes when it comes to the missile market, so you'll see that they are awarded a major contract. Sometimes it takes weeks or months or even a little longer before we get our contract, you know, as a supplier to them. In missile defense, you know, I think we hold this out as maybe one of our better examples where our trusted disruptor strategy is working.
You know, I was in Fort Wayne, Indiana, yesterday with our team, where, you know, we've really broken through the market on the missile defense tracking from space. So we're doing work for the Space Development Agency and the Missile Defense Agency. We launched five satellites on Valentine's Day. They're working well. As you know, we're the only contractor to win Tranche 0, Tranche 1, Tranche 2. The revenue's growing, the margin's growing, and, you know, I think, by all accounts, we're the best performing supplier for both those agencies, and you know, we're excited about further opportunities in the years ahead.
Maybe let's talk about your communication systems business, and within that, tactical communications. Your radio business represents about 50% of the segment. How do we think about volume throughput, given supply chain challenges? Are you seeing any of those, have they abated over the past few years? And what should the book-to-bill look like in that business, both domestically and internationally?
All right, I'll ask Ken to take the first shot on this one, and maybe I'll tack on.
Sure. Yeah, from my perspective, I think, you know, obviously, the TCOM business is, you know, really strong, and I think it's positioned really well from not just the U.S. market, but also international. And, you know, as we look, there's. I think we've talked about a $10 billion pipeline for international opportunities. And we're, you know, we're working to balance the demand and, you know, the supply in terms of how we manage the factory, what the throughput is. You ask about, you know, backlog book-to-bill. I would say, you know, it is a pretty quick turn business, and it's not unusual for some of those opportunities to get booked, shipped, billed, and collected, in the same quarter.
So you may not see it all come through in backlog, but it is, you know, working its way through revenue and bookings. You know, I think, you know, certainly a growing business for us. Again, we're just, you know, working to, you know, balance the long-term demand and the investment that we're making in the factory, which we have made some investments in Rochester. In particular, I think some really interesting investments in how we do, you know, final testing and integration to make sure that we can, you know, get as much throughput there as possible. We did another kind of interesting thing. We actually outsourced some of the radios that were produced in Rochester for the public service radio business to enable us to have more capacity for the tactical military radios.
So I think, you know, everything's looking really good in TCOM. I think it's a strong, growing business. It's gonna be an important part of the portfolio as we look forward and, you know, also really interested in overall how that business is being managed. So the integration of BCS, a lot of really interesting things going on at BCS. You may have seen we recently won Next- Gen Jammer for what, third or fourth time, I guess, Chris? And we're really excited about that opportunity. And so, you know, really thinking about how the CS segment, you know, works together across TCOM, BCS, in particular, as you think about, you know, in the future of warfare, how information is disseminated on the battlefield, how you get the right information to the right people at the right time.
We think, you know, between BCS and TCOM, overall, CS has a really strong position in that area.
I'll just chime in. As a reminder, I think we're unique at L3Harris, in about 20% of our revenue comes from the commercial business model. So when you're looking at our drive towards 16% margins, which is 300-400 basis points higher than anybody else in the traditional defense industry, the commercial business model allows us to get higher margins. We're about 20%-21% international, which again, gives us higher margins, and those are the key drivers. In addition to our base business and some of the initiatives that we're taking with our LHX Next transformation, is why we have confidence in our pathway to 16% by 2026, if not sooner.
And maybe if we could talk about the software-defined element of radios, 'cause we all think the radio cycle's over in the U.S., but I don't think anytime soon, and your international business is running at all-time highs. There's also that element-
Yeah
... internationally.
Yeah, I don't know why people think it's over, but people keep saying that. If you look at the facts, about 30% of the modernization has occurred with the DoD, Army, Air Force, Marines, and such. So there's a long pathway. It's about a 12-year to 15-year cycle, and people tend, which I can appreciate, look at it from a hardware perspective, probably 'cause we all have iPhones or whatever. So there's the hardware element, which is interesting, and these radios will last, like I said, 12-15 years. By the time we get to the end of the decade, you know, there will be soldiers and such that have radios that are 12 or 15 years old. So the replenishment on the hardware will need to continue. But more importantly, these are software defined. It's a huge differentiator.
There are issues that are found in Ukraine, you know, with Russia, jamming or trying to jam some of these radios. We're able to have our teams work, you know, around the clock, update the software, and make the radios more and more resilient. We're selling waveforms separately, both internationally and domestically. I really think of it as a software business that happens to ride on some hardware. So I see great visibility. I think this is a key differentiator. I don't lose any sleep over the TCOM business. In fact, I think it's got the greatest potential for growth and margin expansion for the foreseeable future.
And I think what's unique is that competitively, you're a market share leader in the U.S. and international, which doesn't happen often. Maybe sticking with modernization within communication systems, how do you think about modernization within the night vision portfolio, broadband? You mentioned TDL earlier. How does that contribute to the broader outlook?
Yeah. Night vision business, that was the only business when we had the merger five years ago. Both companies had a night vision business, so we divested one of them to get it approved by the FTC. I think we're continuing to see great growth and performance in the night vision. There's always been a desire and a need for virtual reality and augmented reality. There's well-documented large programs that, you know, quite honestly, aren't performing. We're continuing to move forward with tried and true technology. We're doing soldier touch points. We're testing the products. They're very pleased with the progress we've made. We have new leadership up in New Hampshire. We're streamlining the operations.
We're using more robotics, relooking at our testing, and we're seeing great, great growth opportunity. Just some new opportunities coming out that we'll be bidding. I think it's called Next-Gen Night Vision or something clever like that.
Mm-hmm.
We're well positioned for those opportunities. And again, the international market, we tend to be the go-to customer there. BCS, the Broadband Communication, Next-Gen Jammer, super excited about that. And there's another example where that program would have traditionally gone to one of the large, traditional five primes. Talk about being the trusted disruptor, talk about doing different things. This was protested multiple times. We won again, $600 million. I have to give the Navy credit on this one in that it's a development program for $600 million, and it's cost reimbursable. Finally, they're doing something the way it's supposed to be done.
Mm-hmm.
We will develop this. It'll be iterative, there'll be changes, and then upon completion of development, we will enter into fixed-price production contracts, which is the way the acquisition process should work and is working. So appreciate the Navy following the appropriate contract terms and conditions or methodology to get this done. And down the road, there could be some international exports, at least to the Five Eyes countries. This is a multi-billion-dollar opportunity and will allow our F-18s to fly into harm's way by jamming our adversaries' sensors. Big deal for L3Harris. We're super excited. Team already started working and you know, we need more and more opportunities like that and proud of what we've accomplished.
Is there a three-protest limit, so you could actually start recognizing revenues on this program in the coming year?
We have a contract, and we've been working for eight days, so-
Okay, that's great.
We'll see what happens.
In terms of IMS, let's go to IMS. International ISR pursuits is one of the big drivers of that business. Maybe if you could size it for us and also talk about your platform-agnostic approach to ISR.
Yeah, ISR, we go back to maybe 2015 , and again, a little bit of a market disruption where we listened to the customer and saw what they needed, and the platform that they needed to accomplish their mission was a business jet. And historically, these were never used for the ISR market. They fly high. They have higher altitude, more endurance. So we've been successful working with Gulfstream, with their 550s, both in Australia, both for the U.S. Air Force. As you know, they've stopped production on new 550s, so we're now acquiring used 550s and modifying those to provide all sorts of jamming, ISR, and other electronic warfare capabilities.
We have some European countries, and I'd say right now we have several billion dollars of opportunities around the globe. We're looking at other platforms. We're using Bombardier Globals. It doesn't matter to us. It depends on the mission, what's available and what's best for our capabilities. So it's nice not to be in the biz jet market, where you're trying to sell your own products. We just go out and get whatever the customer needs. We tend to be conservative and not build those into our guidance, so they take longer than we'd like. But we have some opportunities in Europe, we have some in the Far East, and we have some in the Middle East over the next year or two. So I think it's an exciting, little lumpy business, but an exciting opportunity.
Maybe if we could talk about the domestic pipeline. HADES was a recent loss for you, Athena-R. How do we think about work you're doing on Athena-R and any potential impacts to guidance?
Yeah, we were disappointed in that loss. We're still trying to learn what caused that loss. So I'm not sure that story's over yet. We had a great capability. We've demonstrated that on our Athena aircraft, which is flying. Our competitor's is not. It's just a fact. So we're going through the process, getting the debriefs and trying to learn from that and then seeing what the next steps are. I don't think it was significant, again, financially in the near term relative to our guidance, but.
Right. Yeah, I would agree with that. No, no change to guidance expected based on that. And as Chris mentioned, you know, we're continuing to evaluate the situation there. But, you know, we've got a diverse portfolio, and, you know, this is just one small opportunity that we were obviously very excited about, and I think we had really strong capability, continue to think we have strong capability in that area. Athena-R is performing well. It's flying. It's, you know, ready to perform the mission. And as we continue to demonstrate that capability, we think it should, you know, continue to open other opportunities, including, to your question about the international market. As Chris mentioned, those tend to be a little bit lumpy.
We were excited to get an award in early 2024 from a NATO ally. I can't say which country, but we're off and working on that capability and then just evaluating again how this can generate other international opportunities for us. Chris mentioned, you know, some interesting opportunities. They do take a little more time working through either, you know, FMS processes and things like that, but between some opportunities in the Far East and Middle East, we think that's a strong long-term business for us.
Great. And-
I'll just clarify on HADES. It's up to 14 aircraft, and they awarded one. It was a task order IDIQ, so they've awarded one. 13 have not been awarded. Maybe an assumption that the person that got the one will get the next 13, but, you know, I don't give up easily, and-
Yeah.
-Let's see what happens.
I checked with Dan before we published the note just to ensure you wouldn't give up on that. So within IMS, let's talk about the naval portfolio. That business is also quite strong. How are you thinking about the runway there, whether it's unmanned or some of the submarine content?
Yeah, look, we've got a strong business in the maritime arena, and you know, I would say, you know, some of it is, you know, very core to what happens today in the Navy, in particular, you know, strong expertise in power systems. Also well-positioned for some of the, you know, the future opportunities like autonomous surface vehicles and autonomous underwater vehicles. And I think we're staying very close to the Navy in terms of their roadmap and making sure that our capabilities meet that. We're excited about the opportunity, but that's obviously a longer-term play. But the maritime portfolio is well positioned for, I think, both margin expansion today, as well as growth in the core business, and then obviously taking advantage or seizing the opportunity for that future in autonomy.
Great.
And I use maritime as maybe an example to try to highlight again how we're different from the traditional defense contractors, and that's really our go-to-market approach. We listen to the customer, we look at what they need, we look at our capabilities, we look at our probability to win, and then we look at the business case. Which is a long way of saying, and I think we do it in maritime maybe more than anywhere else, sometimes we prime, sometimes we have an exclusive subcontract arrangement, and sometimes we're a merchant supplier. So go back several years when the Navy was working on the frigate, there were four shipbuilders. We had content on all four. I didn't honestly care who won, I just wanted the Navy to pick one, because no matter who they pick, we win.
So there aren't a lot of companies out there that take that approach to being a sub, a merchant supplier or a prime. And even some of these subcontract arrangements are with these new entrants or these commercial-type companies, where we think they have a better chance of winning, and then we provide our capabilities and get 30%, 40%, or 50% of the content. So I think another example where we're different than the traditional primes.
What does all this growth within IMS look like in terms of profitability? 11.7% margins in the first half of the year. I think investors are comfortable with the EAC backdrop. How do we get back to that core mid-13% margin level?
Yeah, maybe I can start on that. Look, I think, if you look at the portfolio overall, and in particular, IMS, we're simply trying to make sure that we realize the appropriate reward for the type of business that we're taking on. And I think IMS has very strong capabilities. You mentioned, you know, a mid-eleven% margin rate, and we're looking to improve that roughly by a hundred basis points, by 2026. I think it's a combination of, you know, really effectively managing our cost structure. You know, that we've got a program we call LHX Next, where we are, you know, actively working to take out, about $1 billion of run rate cost by 2026. I would say in regards to that program overall, it's going, very well.
You saw we took a significant labor action in the second quarter. That's obviously, you know, a difficult decision to take, but that's what we do here at, at L3Harris. You know, we move with speed and discipline, and we take action. We make difficult decisions, and now we're off to the next phase of LHX Next, which is facilities actions, supply chain, and really working to kind of modernize how we do business and try to differentiate ourselves as the best, you know, integrator across the supply chain and doing it in the most, you know, schedule-efficient and cost-efficient manner. Overall, I would say LHX Next is ahead of schedule. We targeted $1 billion by 2026.
I wouldn't be surprised if we got there before then, and quite frankly, I wouldn't be surprised if we over-delivered ultimately on that program. We'll provide more update either on the third quarter or year-end call. But I think if you think about that program, and to your question on IMS, I think it positions that business very well, not only to increase its margins, but also to competitively win new business at a margin rate that we think is appropriate for the type of work that we're doing.
We'll get to LHX Next in a minute, but I just wanna close up on the segments, if that's okay, Chris.
Absolutely.
Next one to you, Sheila. The track record of prime wins and merchant supplier strategy have really been a testament to the trusted disruptor strategy. So how do we think about the growth leaders and laggards within that segment and space overall?
Yeah, space is a growth market. I think we've demonstrated that. We've disrupted the market. There continues to be more and more opportunities, both classified and unclassified. I think there are some budget pressures within the space line items, but, you know, our goal is to take market share there. Intel and Cyber, again, we have this billion-dollar cyber business that doesn't get a lot of visibility due to its classified nature, but that's a very solid, growing business with very good margins. And then, you know, Mission Networks, the work we do for the FAA is kind of flattish, but solid performance as the FAA transitions into new systems.
And then everything airborne is laggard, a little harsh, but it is not growing, as a lot of the missions are moving to space from air. And here, you know, we're on F-35. TR-3 is doing well, as you've probably seen, as airplanes are now getting delivered, so our hardware is no longer on the critical path or pacing item. More on the F-16s, F-18s, B-2 bombers, B-52s, and such. But again, it's more of an upgrade market, and right now it's slightly negative on year-over-year growth. But that's not just because of us as the component provider, it's the overall market. So that all nets to our single-digit growth for SAS consistent with the other segments.
Maybe turning to margins and back to LHX Next. You've set your sights on 16% margins, with more than 100 basis points of expansion across all four segments. You make it very easy for us to remember those numbers, and you're one of the only primes actually putting up margin expansion, 15% plus in the second quarter. Update us on the progress on LHX Next. It seems like you're running ahead, whether it's digital engineering, factory footprint, headcount. How are you gonna get there?
Yeah, I mean, Ken, Ken mentioned some of this, where we're gonna get there. He and I have a weekly meeting with the team going through this in detail. We're making. I think they're easy decisions to make, and sometimes they're hard to implement, but we are, no kidding, transforming the business. I've said before, you know, I kind of view this as phase two of the integration from the merger. We did the easy stuff in 2019 and 2020, took out $660 million of cost. We had the pandemic COVID curveball, which slowed things down, obviously, and we were just trying to get our parts and meet our customer commitments. So we're revitalizing this under LHX Next, which is more than cost cutting, but we've taken out heads, no kidding.
We have people on the payroll. We no longer have people on the payroll. We're not eliminating open requisitions. We're not doing all this hypothetical opportunity cost. This is actually auditable, traceable into our financials. We all know some goes back to the customer, some goes back to you as shareholders, and we are tracing it, and you're seeing it in our financial results. So we'll continue to look at headcount based on specific business conditions, but you know, we made significant 5% reduction in April, and we see that flowing through the financials. We're making much more progress on supply chain, which is indirect cost, which is pretty easy. Direct material, a little more challenging.
Part of this is getting the data to pull it together to negotiate and take the power of the enterprise to get long-term agreements, better pricing, better cash terms and conditions, and we're seeing great results. It's a relationship-type business and approach that we're taking. Here's our technology roadmap, here's the visibility. We're willing to sign up for long-term agreements. We can see it, and you know, there's $hundreds of millions of savings, and we'll see those coming through in the years ahead. As Ken said, we're gonna do more than $1 billion, and we're gonna get there quicker than 2026. That's what we're motivating the team to do, and you'll see it in our financials. Again, I'm excited about it, and it's just counter, again, to what this defense industry does.
Nobody wants to cut costs 'cause it gives you a headwind on revenue, and we're gonna continue to do that, and it's gonna increase our competitive ability for future wins, and it's counter to the norm. I'm excited about what the team's done, and I think it's gonna be a key differentiator in the years ahead.
Just two last questions before we wrap up. The bidding strategy, you touched upon it a little bit, but you've been passionate about that and actually walking away from programs that are fixed-price development.
Absolutely.
How is the customer reacting to that? Is the DoD evolving at all?
I think they're evolving slowly but surely. You know, I've been outspoken on that, as I should be, and we are not gonna knowingly and willingly take bad deals. You know, you don't see us taking hundreds of millions of dollars and billion-dollar charges to get into markets that, you know, everybody looks as one time, had they not done it. We're not gonna do stupid stuff. That's kind of what we tell you. We are not gonna do stupid stuff. We're gonna bid based on our cost estimates and a reasonable profit.
And I said it, and I'll say it over and over: I will trade revenue growth every day of the week for margins and cash, because when you're losing money on these contracts, you're taking away future cash and margins, whether you want to call it out as a one-timer, if we hadn't done this, they would've done that. We just lay it out, GAAP financials. We make what we make, and I'm not gonna do bad business. And I used Next- Gen Jammer and mentioned the Navy. It's good to see them use the right vehicles. And at some point, when there's a bad bid and nobody bids, the customer will change.
I've talked to a customer, and they said, "We used to get five bids, then we got three bids, then we got two bids." If you were me, Chris, and you got a bid, and your job is to-
You take it.
You take it. So at some point, we'll all stop bidding stupid things, and then they'll use the right vehicle. But, you know, I'm a persistent guy. I'm passionate about it, and you see it in our results, plain and simple.
I'll just add to that, just quickly, that, you know, as the industry's trusted disruptor with a diversified portfolio and I think the honest broker of capability and technology across platforms, we have the ability to really, you know, pick and choose the right business deals for us. Chris mentioned that we're kind of agnostic to business deals. Sometimes we prime, sometimes we supply, sometimes we merchant supply across the entire, industrial base, and we have the ability to kind of pick and choose what makes sense for us from a business deal, business model. And we don't need to take bad deals because we are locked onto a platform, and that enables us to make, I think, good business decisions that Chris was talking about.
I'm gonna squeeze in one last one-
Sure.
Just to wrap it all up. How do we think about all this, better profit than profit above revenue growth, resulting in EPS growth and cash flow? When you think about your cash, it's $2.8 billion free cash flow in 2026, up 27% from the $2.2 billion in 2024.
I can start on that one. Look, we're not stepping away from growth, right? We are gonna grow this business. Chris mentioned $23 billion of revenue in 2026. We are focused on profitable growth. We are absolutely driving the team towards growth. Revenue is one of our metrics from an incentive perspective, but we're not gonna grow just for growth's sake. It's about driving the profit. We're very focused on, again, reasonable returns. We're not trying to be unreasonable. I think it's just what is the appropriate reward for the work that we are taking on, whether that's in our, you know, commercial-type businesses, where we invest our own resources, or in the traditional government businesses. We just think there's an appropriate reward and appropriate business model, and that's what we're focused on.
Grow the business, increase the margins, increase the cash. We think that's a real value creator for our investors. As Chris mentioned, we can grow our cash flow kind of low double digits and grow our free cash flow per share in a mid-double-digit type of opportunity between now and 2026, and we think that's the right model for us to look through for this business.
Great. I appreciate you both being here, and thank you, everyone.