All set? Okay. Hey, thanks. Good morning, everyone. My name is Peter Arment. I'm the Senior Aerospace Defense Analyst here at Baird. We're very excited to have with us L3Harris Technologies. With us, we have Chris Kubasik, who's Chair and CEO, and Ken Bedingfield, who's Senior Vice President and CFO. Those of you who don't know, or maybe are generalists or not familiar with L3, it's a $50 billion market cap company. It keeps going up every day, so we'll keep updating that as we get through the morning. They are really focused on being the Trusted Disruptor in the industry, delivering advanced capabilities for the U.S. industry allies, leading industry operating margins, mid-teens, and trending higher. They've had some really great recent M&A and just, again, two of the finest guys in the industry right here, Chris and Ken. So thank you very much for joining us.
Ken, forward-looking statement, any opening comments you need to make?
Yeah, first, just thanks for having us, Peter. We're excited to be here today. I'll just say that some of the comments today may involve forward-looking statements with certain uncertainties, and you can find more information in our SEC filings. With that, I'll turn it back to you.
Terrific. All right, so maybe we'll start with just the defense landscape has changed a little bit since 2022 with the Russian invasion. You've been very focused on kind of realigning and getting your company positioned to be really kind of the Trusted Disruptor in the industry. Maybe you can explain that, how someone who may not be familiar, how you've positioned L3Harris to be a Trusted Disruptor.
Yeah, well, good morning, everyone. Thanks for joining. Yeah, L3 and Harris merged a little more than five years ago to create another company to provide more capability and competition to the Department of Defense. We've branded ourselves as Trusted Disruptor, trusted meaning we understand the mission of our approximately 50,000 employees, about 20% are former military and government. So we understand the mission, how the products are used, and how warfare is actually enacted. And then the disruptive piece, we're trying to be different from the traditional companies, not to be different, but to be better, to be more innovative, to be faster, to do things differently. We've invested in a venture capital fund. We own 2%-8% of 40 different companies. Last week, two weeks ago, we announced a strategic partnership with Palantir to bring AI into our solutions. We've been acquisitive, especially in 2023.
As you mentioned, we have industry-leading margins. And I think our portfolio is well-positioned for the future of warfare. We can talk about that in subsequent questions if you want. But we have capability in space, air, sea, land, and cyber. So we're in all five domains, and we're the company that connects and passes the data amongst those different domains.
So when we think, maybe just highlight a couple of key growth drivers for each of your businesses, and then we'll get into kind of maybe the individual segments. How do you think about kind of the bigger drivers?
Yeah, I look at it by domain. I mean, space is probably the best example where six years ago we had no satellites in orbit. The first Trump administration set up the Space Force, and while we were a payload provider, we used that opportunity to become a prime. We've been awarded over 40 satellite contracts by the Space Development Agency, what they call Tranche 0, Tranche 1, Tranche 2. And we're waiting for the RFP to get Tranche 3. Those tend to be about 10-20 satellites per award. So we're pretty excited about that opportunity. So space continues to be a growth area. Say, air domain tends to be flat-ish for the industry and us as well. You're seeing a lot of capabilities go from airplanes into space.
Doesn't mean that we still don't need F-35s, F/A-18s, and such, but our role there is more on the electronic warfare and the components. Navy and the maritime business is a growth area for us. A lot of our focus is on autonomy. We have autonomous surface and autonomous undersea vehicles. Land, I tend to think of our networks, our Army networks, our radios, our night vision goggles. And then we have a $1 billion cyber business that we don't talk a whole lot about, but they've been growing reasonably well over the last few years. So that's how I see it. Of course, Aerojet Rocketdyne, an acquisition we made a little more than 15 months ago. We can elaborate on that, but that's a growth engine for us as well.
Terrific.
Feeling pretty good about the portfolio.
Yeah, maybe just we've been asking everyone just kind of where post the election. I think everyone's pretty relieved that we're post that. Maybe just how you may have any impacts to your business or how you're thinking about overall industry impacts.
Yeah, the way I think about this is what I talked a little about the Trusted Disruptor. The disruption needs to occur, in my opinion, for the whole industry. I think it's too slow, too bureaucratic, and we need to streamline the whole acquisition process. And Ken can elaborate here, but we are unique in that we have what we call a commercial business model, which means we sell things to the government in a commercial-like manner. We don't have all the regulation, the Cost Accounting Standards, your Truth in Negotiations, a lot of those things. There's a lot of new entrants that are doing commercial. Then we also have the traditional defense acquisition process, which last time I looked is now up to 3,500 pages in the federal acquisition. I don't even think I've read 3,500 pages in my life, let alone as an acquisition official.
Needs to be fixed, needs to be blown up. I think President Trump and whoever his men and women are supporting him are the most likely people to kind of clean things up, streamline them, not dissimilar to what we're doing in our own company. But I think that could be a huge positive for the industry, reduce the cost of the government, accelerate. If there are conflicts around the world, it's all going to be about speed, speed, speed. We cannot take months and years to make an acquisition, so I think it's time to pick up the pace, and I'm hoping that President Trump and whoever else he appoints can kind of fix the DOD process once and for all.
Yeah, Ken, any comments?
Yeah, I'll just add, I think our company is uniquely positioned to move fast to address those either changing threats or changing budgetary dynamics as we look forward. As Chris mentioned, we have a business model that can address items on a commercial or commercial-like basis, as well as through traditional acquisition vehicles or even other transaction authorities, and so we're focused on positioning ourselves for change, focused on positioning ourselves to be agile and able to rapidly respond to changing threats or changing budget dynamics. We feel good about how we position within what continues to be a challenging geopolitical and threat environment globally and feel like we're really ready and able to support the warfighter, the U.S. government, and its allies.
Terrific. Let's talk about one of your commercial businesses, communications systems. I mean, it's been a great margin story. It's got a lot of growth tailwinds. You've supported some activities in Ukraine, but really that's not the story. I mean, it's really about a much bigger kind of refresh that's going on. Maybe you talk a little bit about the opportunities you see in communications.
Yeah, and in communications, people think of our tactical radios, which is kind of the hardware piece, but it's really more of a software company. These are software business. These are software-defined radios, and it's really more of a network. The radio is just a node on the network. We're seeing a modernization here in the U.S. I like to say by analogy, it's kind of like having whatever, your iPhone. At some point, you got to get rid of your iPhone 8, Peter, and get like with the program.
I'm still on the 6.
You're still on the 6. You got to get those upgrades. So a lot of people wonder when is the DOD going to stop buying these radios? When is the modernization going to end? I don't think it ever is. I think it's a continuous cycle. A couple of years ago, we changed our go-to-market approach relative to waveforms. There's a handful of companies that make the hardware, and they have the waveforms. Think of that as the software that goes in them. And they seem to be proprietary to their radio. And they don't all work together, which is a completely different issue. We have made our waveforms available to everybody, which is a change in our business approach. We get licensing fees for that. So in a competition, ideally, these radio contracts are split by the winner gets 70, the loser gets 30.
I want to win the 60%-70% at high margins, and then I want the other guy to pay for our waveforms and put them in their radio. That's a new approach over the last year, year and a half. And I think that gives us an exciting opportunity. Relative to Ukraine, I think that one of the lessons learned there is the importance of interoperability. And we're seeing huge demand in Europe for our tactical radios. We just announced a $1.4 billion opportunity, $1.4 billion for the Netherlands. So this isn't about Ukraine-specific. It's about being prepared for future conflicts. And all of these countries have to be able to have interoperable hardware. And historically, Europe has been more indigenous and bought from their own defense industrial base. We're seeing more and more U.S. products, specifically ours, because of better technology, plain and simple.
When you're in a dangerous part of the world, you want the technology to work. We're seeing and benefiting from that.
We're still kind of. Would you consider kind of early innings in this kind of multi-year upgrade cycle, or how would you characterize the domestic or where domestic is versus international?
Yeah, I think domestic, we're maybe like a third of the way through. I think you recall it's like 350,000 radios and 175,000, or 110 have been delivered. About a third is the answer. And then international, those are just kind of winner take all. And we've been very, very successful. The Netherlands is a big deal. We got a couple more that we hope to sign here in the next month or two. But we have a $10 billion backlog, $10 billion backlog. I'm sorry, $10 billion pipeline of opportunities just in tactical radios as we look across the globe. So it's in high demand, largest backlog we've ever had, and real excited about.
Is it constant kind of cat and mouse with this waveform, and kind of that gives you more opportunity to kind of refresh things over time?
Oh, absolutely. I'd like to get this to be a recurring business model. And so much of the, I guess, in Ukraine and Russia, the Russians are pretty sophisticated and jamming some capabilities. And our team in Rochester, New York, works and is able to update and counter with new technology. So that's the importance of the software-defined. In the old days, it would just be a radio, it would be worthless. It would basically be a target. Here we can update not only our electronic warfare, but our radios through software. And I think that's kind of the future of warfare.
Yeah, and you've got industry-leading margins in this business, but you still see opportunities for margin growth here over time.
Oh, absolutely. I've long believed the divisions with the highest margin have the greatest opportunity to get them higher than the guys with the low margin. So not everybody agrees with me in the company, but if you're making 30%, I think it's a lot easier to get to 33% than if you're making 7% trying to get to 10%.
Yeah.
You agree?
Absolutely. And I'll just add that we absolutely are focused on increasing our margins. I think Chris talked about when we kicked off the year and our kind of path to profitable growth, that every segment was going to see a significant increase in their margin rates, including communication systems, which is our most profitable segment within the company. And we do manage it as a portfolio. So just as an example, we were successful in Next Gen Jammer Low Band, which is a significant opportunity for us as a company, but will come in or has come in as a cost-plus contract that we are often executing on. And we know that cost-plus contract will be at lower than average margin, but will yield billions of dollars' worth of fixed price opportunity at average or better than average margins down the road.
And so we're accommodating that early phase development through trying to deliver better than average margins on our mature production programs to manage that portfolio such that we can see that important seed corn new opportunities, but yet continue to drive margin expansion as we make sure that we are performing on the mature areas of the portfolio. So I think it's not just about delivering existing capability, but we are absolutely focused on kind of that entire lifecycle of technology development.
You got it. Well, another area where you're seeing margin improvement is a business you acquired about almost 16 months ago, I guess, Aerojet Rocketdyne. And that has been, obviously, there's been major improvements that I think you've improved the daily operations, and you've had a lot of good customer feedback. Maybe talk to us how kind of what it was first like and now kind of how you feel about the business today, Chris.
Yeah, well, you're right. We bought it about 16 months ago. And from a business side, we've seen much more demand than we ever expected. We announced it in December of 2021. Then, of course, we had the conflict in Ukraine and took a while to close, get through the FTC process. But the demand is more than we ever expected. And you'll read and hear other people now are trying to get into the solid rocket motor business.
Vogue to be in solid rockets.
Apparently, I think we were trendsetters.
You were first there, yeah.
but we actually have the infrastructure, we have the employees, we have the facility throughout the country where we manufacture. So demand is high. The challenges with that business were several. Started with the leadership team. We've basically replaced everybody rather quickly on that leadership team. We have high demand of people wanting to join L3Harris. We're able to hire people who worked at missile and solid rocket motor companies. So we have a very competent workforce. The challenge was somewhat with the supply chain, which I keep saying the issue here is there are not enough companies that are making nozzles, igniters, and cases. So for everyone who wants to be a prime in solid rocket motors, we love competition, bring it on.
But you're going to call the same one or two people that we are working with, which I can assure you, we've negotiated long-term agreements and we will have preferred access to this capability. So you cannot build an SRM without a nozzle, a case, and an igniter and ammonium perchlorate. And the supply chain was under a lot of stress. No one's fault, pandemic and such. I think we've kind of corrected that. The Department of Defense gave us DPA money, Defense Production Act money, $215 million. We just broke ground in Camden, Arkansas, and starting to build a new facility to increase capacity. The number one issue is capacity. There's only two companies that make solid rocket motors, cannot meet the demand that is out there. And that's why we're investing with the government money in buildings, equipment, mixers, ovens. Could not be more excited about the future.
And we're negotiating new contracts based on actual cost with reasonable returns. And we just kind of have to burn off the stuff we acquired, which are not as good contracts as I would have liked, but we knew they would just kind of burn off and the new stuff will provide a tailwind, so.
Yeah, maybe you want to talk about just the margin profile. I mean, you started the year high 11%. You kind of moved it up here recently into the mid-12% range. But I mean, I know you guys have talked about this business long-term that you really have a lot of confidence that this is still going to be. You still have runway on the margins.
Yeah, we feel really confident about this business. To Chris's comment, I think the team has done a great job in really positioning it for the long-term. It is a long-cycle business. So it's taken us a little while to get some of that legacy backlog, legacy contracts through the system. But we think come late 2025, early 2026, some of these new contracts, newly negotiated contracts start to kick in. That's when we'll see some of that economic profit really start to come in from those contracts. And we think we can start to potentially even expand the margins from where they are today. We talked about high 11s to start the year. We're running into 12s today. And feel good about, again, the investments that we're making, yielding those economic profits as they pull cash with those newly negotiated contracts with them.
And I think it's important to think about this, the business here, Aerojet Rocketdyne, really as we think it's maybe a high-level way to think about it is there's significant opportunity more than we thought there was when we negotiated and closed on the transaction based on geopolitical dynamics today. It is technology differentiated. So it's not just about propulsion, but they have differentiated technology in things like extended range, hypersonics, counter hypersonics, as well as attitude control and precision and how you get a missile precisely where you want it to be. And then, again, we're making smart investments, I think doing a really solid job of industrial engineering, identifying the choke points, investing where it needs to be, working with our customers to figure out what that right profile is as we look forward.
We feel really great about the acquisition and where the future of Aerojet Rocketdyne is going.
Yeah, it's setting up really well. But one of the things you spent a lot of time on was just initially employee retention, right? I mean, how is the morale now since you guys have had ownership for 16 months?
As you would expect me to say it, but it's actually true. They are much happier being part of L3Harris than a standalone company. And no fault of the standalone company. They just had so much drama. They could have had a Netflix series with all the crap that was going on there. But the people that come to work every day, that care about the mission, that want a job, we do employee satisfaction surveys are pretty much off the charts. We pay the employees well. And the men and women that come to Camden, Arkansas, Huntsville, Alabama, they're just there trying to do good things. So we're excited to see the contribution. Attrition is lower than any other part of the company. Not that attrition was an issue a couple of years ago. Now it's kind of single digits. So it's all good.
Yeah, so let's talk. Let's move over to some of the operational things. I mean, something that you had always planned to do was LHX NeXt, and now it's kind of kicked off in a major way in yielding pretty significant net savings. Maybe just talk about kind of what were the original cost savings goals in 2024? We know that's moved a little bit, and how you're approaching that?
Yeah, yeah, I'll tee it up and then Ken can give you some of the numbers. So we branded as LHX NeXt. And this has really been viewed as a cost cutting, which it is, but it's really the transformation of L3Harris. Again, I told you it was a little over five years ago. We had the merger of equals. We took out $650 million of cost within three years. And that was relatively easy, in my opinion, compared to what we're doing now. So we're transforming the business function by function. We're looking at policies. We're looking at systems. We're investing in technology to get data quicker. We're streamlining operations, continuing to close and move facilities, and really ultimately do work differently. Meaning when we talk to the employees, we survey them in a year or nine months, like I can actually see the benefit.
I mean, we hear what you guys are saying, but your day-to-day operations, if you're an engineer, your life is actually changed for the better. There's less bureaucracy and policies. You can be creative. You can get the data. If you're a financial planning analyst working for Ken on a program, on Monday, you get the data on your dashboard. You don't spend Monday, Tuesday, Wednesday, and Thursday gathering data to look at it Friday and then do it again on Monday. So timely data is a huge differentiator. We've invested in some technology. I'm super excited. The team is highly motivated. We're ahead of schedule. I'll let Ken give you some of the numbers, but couldn't be more proud of the team, and it's 110%. Everybody's behind it.
We actually modified our compensation program to make sure people understood that this was a priority not only for me, but for their year-end bonuses. So you align and adjust your comp, and the team is super excited and can't wait to see how the year ends on this one.
Ken, comments on that?
Yeah, I think it's an exciting program, and it really has an opportunity to differentiate us as a company as we really think about how we operate and a differentiated cost structure. But when we announced the program at Investor Day in late 2023, $1 billion of run rate savings by 2026, about $350 million labor and $650 million supply chain. As we've talked about on our most recent earnings call, we think that we are ahead of schedule. So we had a target of about $400 million in savings in 2024. We think we'll yield more likely about $600 million this year. And we think that we'll get the $1 billion run rate savings probably by the end of 2025 rather than in 2026.
We're working hard to try to deliver in excess of $1 billion of run rate savings and make sure that we're turning that into profitability. We talked a little bit about in 2026 in the midterm framework, again, growing the business to $23 billion in sales, increasing margins. We've now increased that target on our margin rate to at least 16% margins in 2026. This also helps us generate significant cash.
Which is about 500 basis points right above the rest of your peers, roughly?
Yeah.
Yeah.
That's right.
Yeah, and I will tell you, I'm sure you've all sat here and you've heard guys like me and Ken talk about these programs. I can assure you this is real savings. This isn't just opportunity smoke and mirror stuff. I mean, this stuff, we had a significant layoff of several thousand employees that went through a very thorough methodical process. We did that in April. We get a weekly report on our headcount to make sure like we're not adding back 73 people every week and you end up where you are. We have been down each and every week from that point, and the supply chain savings are real. It's not like, hey, they want an 8% increase and we negotiated 4%. We saved 4. No, that's 4 of cost. It's no kidding. This stuff's being audited internally. We check it.
How much did you pay per pound or ton for ammonium perchlorate? Got it. What is the new price? It's not lower. It's not a savings. And then we also work on the volume, especially for the indirect. So we have about $10 billion of supply chain between indirect, subcontractors, direct material. We're methodically going through those, signing long-term agreements where they make sense, sharing technology, roadmaps, all the things that seem like common sense, but never get done. And the hardest part with all these mergers, L3 had 165 mergers in 20 years. Harris had a few. We came together. Goes back to what I said is the data, right? CEO, if I want to meet, which I do with the CEO of a company, it's hard to negotiate a deal if you don't know what the heck you're buying.
So, I asked Ken, and he asked four people who asked 13 people who asked 89 people who then, like a week later, give you a number. Can't even remember what the question was. Now we get the data. You sit down, and you have all the leverage, all the strength. So, I couldn't be more excited about LHX NeXt.
Yeah, no, it's obviously yielding great results for your performance this year. 2025, kind of preliminary comments, obviously you're feeling good about kind of the outlook and just maybe the glide path for 2026, your Investor Day targets. Maybe you want to highlight that.
Yeah, we laid out targets in 2023 for 2026, $23 billion of revenue, 16% margins. We said now we'll be more than 16%, $2.8 billion of free cash flow on a per-share basis. It's double-digit growth. We're progressing. We'll have a very good 2024. We'll give guidance on 2025 that will get us towards our 2026 goals. So everything is moving along, I would say.
Yeah, we're feeling really good about the trajectory, Peter. And as we look at 2025, we're certainly on that path to the 2026 framework. We may see a little bit more growth opportunity in 2026 than in 2025 as we look at some of the dynamics coming out of the election. There's a little bit of budget pressure in space, as an example. So we see that as maybe getting back to better growth in 2026 than 2025. But we've got confidence in the framework. And then maybe as importantly is as we get back down to our leverage ratio at the end of 2024 here, three times leverage, it'll enable us to get back into a more traditional capital allocation strategy. And so we've been able to, in 2024, buy back about $500 million of shares to kind of offset dilution from incentive compensation programs.
But as we look at 2025, I think we get back to a more normalized level. Think of it probably $1 billion or so as we look at share repurchase, which would more than offset dilution. So if you think about our free cash flow, we can.
free cash flow per share, right?
Oh, you're going to be hearing a lot of that in the next couple of years.
Yeah, I figured that. That's the driver, right? Free cash flow per share.
Yep. Yeah, we think we can do certainly probably a mid-teen free cash flow per share growth as we look forward.
Yeah, that's terrific. Maybe just lastly, just to wrap up, I mean, the emergence of defense tech, right? And you talked about all these different kinds of smaller companies. You talked about your partnership with Palantir. How are you thinking about what the Defense Innovation Unit is doing and trying to stimulate? But you're already kind of in that position as a disruptor. How do you see some of those players interacting with the overall?
Yeah, I'll get to that. I just want to go and talk. I keep referencing the future of warfare. We talked about the Arsenal of Democracy. You go back to the 1940s, FDR. You can fact-check me. I've done it myself. We were losing World War II, and FDR called the industrial base together. And in a matter of years, I still can't believe it, 300,000 airplanes, 89,000 tanks, and 9,000 ships to win World War II. So we go to the future Arsenal of Democracy. It's not going to be platform-centric in that quantity. It's going to be the convergence of hardware, our leading-edge hardware and other companies' hardware, software, and AI. Those three are what is going to win a future conflict. It's called shortening the kill chain. We have the sensors. We have the ability to get that sensor to shooter quicker.
And we're using AI where appropriate to reduce the workload of the operators to have them look at literally tons of data, video, or whatever to identify targets and things that used to take weeks and days are now taking minutes and hours. I'm super excited about it. I think that the two key messages is I don't think anyone really knows what's going to happen in the future despite all those questions and our answers. I think we're the company that's agile enough to adjust depending on the changing circumstances, whether it's political, government, budget, otherwise. And we are far from perfect, and we sure as heck aren't experts in much. And we are willing to partner with the new entrants, whether it's Palantir, Shield AI, whomever, 40 venture capital companies. We embrace them. We work with them. It's collaborative.
I don't care if I'm a prime, a sub, a merchant supplier. They can do the same. We're bringing the best technology. We're working collaboratively. We think we're going to disrupt the industry. We think we're off to a great start and could not be more excited about the future and appreciate the chance to talk to everybody.
Terrific. Well, we took us right to the end. And Chris, thank you so much.
All right. Thank you.
Thanks so much for being here, Peter.
All right.
Appreciate it.
All right.
It's really terrific.