The new administration, Department of Government Efficiency, and that focus, you know, our perspective is that, you know, we're gathering as much information as possible and certainly trying to understand what the focus will be. As much as anything, I think as a company, we're very focused on, you know, our culture as the Trusted Disruptor, you know, being agile, being nimble, being able to respond to changes, whether that's a change in focus, whether that's a change in budget, or a change in mission needs. You know, we are here to support our customer. Our customers need to move fast to address, you know, rapidly evolving threats as well as, you know, enduring threats that are out there. You know, we're ready to support them. You know, we are largely platform agnostic.
We like to think of ourselves as kind of the honest broker, listen to our customer and their challenges and needs, help them solve problems from across a relatively diverse portfolio at L3Harris. And especially if you think about our partnerships with others in industry or even those in, you know, new technology, in defense, you know, how we enable the use of those partnerships to help our customers solve, again, some of those complex problems. So, we're, you know, gathering as much information as possible, trying to stay nimble, and then be ready to support, as the administration determines its path forward, the budget, the levels, and the mission capabilities that are needed.
It seems like, you know, maybe the recommendations from the Department of Government Efficiency would ultimately need to go through Congress. Would you have any sense for, you know, how efficiency initiatives might play out within the government?
You know, again, I would say, you know, remains to be seen, and you know, we understand the focus and the effort, and you know, like any administration, we are absolutely here to support, you know, the administration, the DOD, as well as, you know, the authorizers and appropriators on Capitol Hill, with the focus and the ultimate, you know, execution of what moves forward and when, and a lot of ideas floated out there currently, and we're certainly, you know, taking all that information in, driving strategies for, again, how we can be nimble and reactive to be supportive, as changes occur.
I wanna come back on LHX NeXT, but, you know, you're already in efficiency mode. Is that something that your customer has recognized and acknowledged?
Yeah. I would say, you know, from my perspective, you know, so we've started a program we call LHX Next, which is to save $1 billion of run rate cost on an annual basis no later than 2026. We've made tremendous progress on the program. We had announced about $400 million of savings for 2024. We recently updated that we will hit roughly $600 million. You know, we're making great progress on the program, whether it's, you know, we've made some difficult decisions around, you know, labor and driving labor savings, you know, facilities savings. Certainly we're working very hard on the supply chain and engaging with our suppliers and how we, you know, drive savings there. And then, as importantly, on the program, it's how do we do things differently? How do we make better data-driven decisions?
How do we get better data across the enterprise, such that we can, you know, rapidly make the best decisions possible, wherever that might be, whether that's, you know, in the supply chain or even in how we go and help the customer address some of their, needs and capabilities? So making really good progress on that front. And, yeah, I think the customer, absolutely, appreciates it. You know, we've talked about, a reasonable amount, roughly 40% of the savings accruing to us in terms of margin opportunity. That means about 60% will, accrue to the government in terms of savings on their side. That enables us to be, you know, more competitive from a, you know, price perspective. And as we drive down cost, it enables us to, you know, have that right risk-reward relationship for the, types of business that we're, entering into going forward.
And I think there is a recognition, certainly in the department as well as on the Hill that we're doing good things. You know, it's not easy. It takes a lot of effort. And the team is, you know, really working at all levels together to accomplish it. But it is good to see that the customer knows we're trying to do good things on their behalf.
Got it. And, Ross, Aerojet's maybe been in integration mode for the last year and a half or so, but how has that gone? And how does Aerojet play into the LHX Next savings?
Yeah. Thanks for the question. So, at the time of the acquisition, we forecast $50 million in gross annual run rate savings as part of the integration into L3Harris. So I think it's gone very well, and we've now exceeded that significantly. For us, there was really a threefold strategy for doing that integration. The first phase was related to reducing the costs associated with a publicly traded company. That was done relatively quickly. The second phase was to go after the benefits of being part of a larger company with more finely tuned infrastructure. So this includes in areas like supply chain and getting the benefits from being part of the bigger company, finance, forecasting. So shared services that we get from the larger company.
And then the third phase is really where it starts, combining with the benefits we're getting from LHX Next. And for Aerojet Rocketdyne, that third phase is really all about really a complete transformation of how we do business and how we operate. I mentioned that, you know, we were getting benefits from the larger scale of supply chain, but now we're learning abilities to negotiate, getting the economies of scale of the overall L3Harris company. And that's adding a tremendous amount of benefit. And that's really part of LHX Next as well. I would also emphasize that, one of the areas where, I think Aerojet Rocketdyne was slightly behind was in the digital capabilities of engineering and manufacturing. So really leveraging that broad capabilities across L3Harris have really benefited our business.
Even though we've been here now for 15 months since the close of the deal, we are absolutely seeing the benefits of some of that digital capability and our ability to be more predictive about how we're delivering products. Another benefit that we're taking advantage of really on an almost daily basis is the broad capabilities in engineering and operations that we truly have across the company. There was a great example just within the last two weeks where we've been struggling with a particularly thorny manufacturing issue with a change in material from one of the suppliers. We did the standard root cause action to understand and look at fishbones to figure out what the issue was.
And we reached out to the broader L3Harris, the group in particular that we have doing aircraft fabrication in Texas, and they were able to narrow it down almost immediately and so get the benefit of that, that more broad company. So, you know, the final piece that I would touch on is that since we've closed on the acquisition, again, with the breadth of L3Harris, we have a bigger draw or ability to attract and draw talent. So the leadership team now for Aerojet Rocketdyne is new. It's what, 80% have experience with one of the large defense primes, and 50% come from a background of actually working on missile programs. So I think we're getting a lot of benefit from this bigger perspective on how to do the business.
I expect the integration phase really is going to be completing in Q1 of next year, but they will continue with that ongoing efficiency that comes out of LHX Next.
Maybe in terms of supply chain, I guess specific to Aerojet, but also more broadly, just a topic that continues to be an issue. It's you're not demand constrained or your supply chain constrained. Can you help us with some metrics around how that is progressing?
Yeah, sure. So this was another area where Aerojet Rocketdyne has benefited from the larger L3Harris in that we've adopted a page out of the L3Harris playbook, and that's creating individual supplier management teams for some of our big suppliers. These are groups of people that will actually be deployed on site to support the extended transformation that L3Harris is going through into those individual companies as well, many of which are sole source providers of capabilities. And in the missile business, that's significant because qualification of new providers can be arduous.
So we've been investing in helping them with not only going after Defense Production Act funding, so actually applying to the DOD for the aid and expanding their capacity, but then us going in and training people and helping them get those pieces of equipment up to speed quicker. So we've been investing in the supply chain, and it's paying off. But in addition to that, there are areas like in particular raw materials where we get that larger buying capacity. And another thing that Aerojet Rocketdyne wasn't necessarily proficient at was doing multi-year projections and then signing up for long-term deals with discounts. And so I think that, you know, reflective of what we're seeing in supply chain across the company, we're getting a tremendous lift in that.
Yeah. I would just add broadly that, you know, supply chain is obviously a big chunk of the effort, from an LHX Next perspective and obviously one of the biggest line items of cost for the company. And, you know, we're spending a lot of time and effort in, you know, not only you know negotiating long-term agreements and working with the supply chain, but really investing in the team and the tools that we have. It's one of the areas where I think aggregating data across the entity has been very helpful. And it's not just, you know, ERP systems, but it's manufacturing systems, engineering systems, you know, labor systems, and the ability to gather all that data into one usable place where we can, you know, start to make quicker and better decisions about it. So I think it's going really well.
In terms of LHX Next, you know, supply chain savings are about 60% or 65% of the overall run rate savings. We do think that as we're making real progress here and investing, that it can become a differentiator for us. You know, I think a great example would be like working with our suppliers to give a better projection of what we see in terms of demand so that they may be able to make investments to ultimately drive costs down as we work together to deliver capability to the customer. Making great progress in that, you know, particular part of LHX Next. More to go in 2025. The team, you know, continues to have work to do.
It's probably, you know, the hardest of the efforts in the program, but ultimately I think will yield the most meaningful benefit down the road. You know, it takes time to get the supply chain benefits cut in at times. You know, long-term agreements are great, but we've got to get some of the inventory out of the system, you know, finish up commitments under existing agreements and things like that. So, we'll see those benefits start to flow through the EACs in 2025. Ultimately that will be a significant contributor to our, you know, 2026 financial framework that we've talked about of at least 16% margins as a business. You know, we see that as, again, a significant contributor to that margin improvement.
Maybe turning to that financial framework, like starting on top line and moving to margins. You guys have talked about growing faster in 2026 than in 2025. What are the puts and takes to that?
So, you know, there's a couple layers of that. And, you know, I guess, you know, we, we've given guidance for 2024, and we've got the framework for 2026. And, you know, just trying to make sure it's understood that it's not necessarily a linear path from 2024 to 2025 to 2026. So we probably see a bit more growth in 2026 than in 2025. But 2025 also grows from 2024, you know, on an organic basis. We've got some a few puts and takes there. But a couple things, you know, one, obviously we're working through a change in administration, you know, continuing resolution and potential for some other budgetary impacts. So we're, you know, keeping an eye on that and how that could impact some programs that we look to move forward to orders and revenue in 2025.
We have a few things that are just sort of more tactical in nature. So as an example, on the F-35 program, we'll see a reduction in development of TR-3 that won't necessarily be immediately filled in with, you know, production volumes on some of the components that we deliver for that program. We're seeing a few challenges in the space community. The space customers have been pretty clear that they've got a little bit of a budget challenge in 2025. So we've seen a few space awards that we had expected maybe in the mid-2025 timeframe start to slide into early 2026. Good news, we've started to see a little bit of a pullback into maybe later 2025 for some of those awards. So we're, you know, excited about that. Space continues to be a significant and meaningful growth opportunity for us.
Just maybe a little bit of a pause in what has been one of the most robust areas of growth for the company. And then in Ross's business at Aerojet, and I can let him comment a little bit more, but it's a long-cycle business. I think Ross and the team are doing a great job of capacitizing or facilitizing for capacity improvement. But it does take time. I think they've identified, you know, where those log jams are through, you know, good, solid industrial engineering, you know, what suppliers we've got to work with, potentially make some investments, where we've got choke points in the, you know, production processes.
Ross and team have put some capital to work in order to do that, including, you know, we're getting ready to break ground on some of the capacity improvements that came along with the government's award to us of $216 million of Defense Production Act funding to really increase capacity for a couple smaller solid rocket motors. So I think, you know, that's why we see, you know, 2026 as a little bit more of a growth opportunity than 2025. But anything else you want to add on your business, Ross?
Yeah. I think you really hit on it. The capacity is the key for growth in our business. It's a surprising number, but we deliver more than 100,000 rocket motors a year. Some of these can fit into, you know, carry-on suitcase, and others are the size of a school bus. So the infrastructure to grow that in a meaningful way is significant. We've taken a four-pronged approach to this. One is investment ourselves. That's the area that we want to do the least of, but there are some pieces of equipment that really span across multiple programs and number of project areas, that are absolutely critical, but that is really an enterprise asset. And we've been buying those things like mixers and curing ovens that are necessary to build solid rocket motors.
And in some cases, these have, you know, up to a year lead time to buy the equipment. So that's why it gives us better visibility into 2026. Second piece is looking at embedding the costs into specific programs. We're doing that, but in that case, the asset is generally only usable for that program without jumping through some support from customers. Next is talking to our suppliers and getting them to invest in themselves, which becomes a great business case when we can really clearly demonstrate to them that the need is there. And then the final area is in building out capacity with that government support, Defense Production Act, as Ken talked about.
Defense Production Act, it came as late notice, but we had to go through a certain type of environmental assurance process, something called NEPA, N-E-P-A, that National Environmental Policy Act. For when government invests in projects like this, they have to go through a more extensive review. We just finished that on the Camden facility about two months ago, and now construction is in full swing where we're going to have an official groundbreaking early in the new year on that. But that's the drive that we're getting, you know, since we're just starting construction, end of 2025, early 2026 is when we start seeing the benefits from that.
100,000 rocket motors is today or that's the target?
That's today.
Today. What does the new facility unlock, rough order rank?
The Defense Production Act is focused on three motors for three different systems. These are all done in the context of Ukraine and supporting that conflict in Ukraine. The three systems are something called GMLRS, Guided Multiple Launch Rocket System. Next is Stinger, which is a shoulder-mounted or small vehicular-mounted anti-aircraft system, and then Javelin anti-tank system. That investment is focused on those particular products, and it's looking at about a 50% increase across the board for those particular products. But what that does is it frees up capacity for other systems. You know, off the top of my head, this is probably going to give us a couple thousand more just based on that.
But what it does is it gives us capacity as the needs of the Department of Defense change to put those same resources behind other programs.
Ross mentioned Ukraine. I would just add that, you know, this capacity is not just for Ukraine and that war itself, but also to replenish U.S. stockpiles that have been reduced as we have been supporting our allies as well as our own. You know, as an example, Navy has been using its munitions to keep shipping lanes open and help support Israel and things like that.
Absolutely. I mean, all of these capabilities are absolutely critical for peer and near-peer threats that would include Iran and North Korea and the traditional peer threats in Russia and China as well.
Hypersonics is a significant contributor for Aerojet?
Hypersonics is an area that we've been investing IRAD in for several years, and there are certain capabilities. Again, hypersonics are capabilities that can go faster than Mach 5. We are a leader in hypersonics engines. These are generally liquid air-breathing engines, so might look closer to a jet turbine than a rocket motor in some sense. We have actually demonstrated several years ago dual-mode ramjet, which means that it can operate as a ramjet for slower capabilities and a scramjet, supersonic ramjet for speeds above Mach 5. Ramjet Mach 1 to 5, dual-mode, sorry, scramjet 5 and above. When you pair that with a turbine engine, this can actually create a hypersonic capability that can start, take off from a stop, and actually achieve these supersonic speeds. Absolutely, that is an important piece of our portfolio.
The U.S. is really just now ramping up to programs of record in that.
What's the?
So I think that there's a great future, what I'm saying is, because we're really at the nascent phase of it.
I think ballpark maybe Aerojet's a third space and two-thirds missiles. How does hypersonics fit into that?
Hypersonics are in the missile portion of the business. Right now it would be in the single-digit % of that overall missile business. Again, that's only reflective of the fact that the U.S. currently does not have a fielded hypersonic system, so all of them are still under development.
The Sentinel program that's shifted to the right a little bit, the schedule's changed. Has that affected you at all?
Yeah, the Sentinel program, Ground-Based Strategic Deterrence is the U.S. replacement for the Minuteman missiles, ICBMs. It's obviously a key piece of our strategic deterrence as a nation. We build propulsion for that program. And that program also went through something called a Nunn-McCurdy breach, which meant that it had to be reauthorized because it was overspending. As it turns out, the missile itself is doing fantastic in that whole story. The cost growth has been fundamentally in the infrastructure. Silos, roads, networking, all of those things. The missile itself is doing very well. There have been some schedule extensions that we're working along with the prime, not really necessarily related to our performance, but this is modifications in scope and such for that program.
From our perspective, I think it's going very well and I think it has a great future. This is one of those programs where we invested in our internal development to get a good foothold in that program, and it's going to be paying off for the next two decades.
Aerojet, the segment where you have by far the most visibility.
You know, look, I would say, you know, we've got pretty robust visibility across the segments. You know, we've certainly been investing in making sure we've got, you know, the capability to, you know, forecast, you know, where we're going. And I think that, you know, each of the segments is, you know, pretty, has pretty good visibility. Probably, you know, clearly CS would be the shortest cycle of the businesses, but, you know, very mature business, extensively robust demand from customers for their products, record backlog in that business. So I think we've got, probably as much visibility at CS as we've ever had.
And you know great tools and techniques for you know forecasting demand, working with the customers, investing in kind of the commercial business model to continue to improve the product, continue to bring waveforms to market that can upgrade the software-defined radios, as well as you know just robust international demand as lessons learned coming out of you know probably mostly the war in Ukraine, but also in Israel, what you need in order to be able to communicate on the battlefield. So I think solid you know ability to kind of project demand at CS. SAS and IMS are both a little bit more like Aerojet you know longer cycle businesses, a bit more driven by programmatic rather than product cycles. And you know we've had Aerojet Rocketdyne in the portfolio, as Ross mentioned, for about 15 months.
So, you know, while Ross and the team have done a great job of integrating, not just integrating, you know, the cost and into the LHX Next program, but I think also culturally, it's been a great integration of bringing that business in. You know, we're very, you know, proud to have Aerojet Rocketdyne in the portfolio. I think that, you know, it shows up in the attrition rate, which is, you know, really at a low point today. And, you know, we're still learning, I guess I would say. We're working through some dynamics. Obviously, you know, we've working on closing out some of the legacy programs that we had acquired with Aerojet Rocketdyne. I think we've done a great job of negotiating new programs, with, you know, again, appropriate margins and appropriate kind of risk-reward equation.
Certainly, you know, there were some challenges in terms of, you know, kind of, making sure that the relationships with the customers were as well as could be and, you know, working to get those into a better place as we move forward, you know, from industrial-based perspective. And I think making good progress on that. And as we give guidance for 2025, I think you'll see that Aerojet will be, you know, fully integrated into that, just like any of the other segments.
You mentioned some of those low-margin legacy contracts in Aerojet. Roughly what proportion of the business is that does that account for and when do those roll off?
You know, look, Aerojet had a pretty robust portfolio of contracts, at the time of acquisition, not all of which were, you know, I'll say, you know, below-market contracts. You know, some of them were in very solid shape. But, you know, we've probably worked through, you know, the required, you know, accounting rules for under U.S. GAAP for how you do, you know, purchase accounting of an acquisition. You know, adjusted probably somewhere in the range of half of the contracts to market levels.
That will, you know, amortize off probably between now and the end of 2025 or maybe into early 2026, at which point we'll see, you know, what I call kind of the economic profit of the new contracts, the newly negotiated contracts that will be, you know, bringing a commensurate amount of cash with the, with the margins. That'll roughly fill in, as the purchase accounting starts to amortize off. The new contracts will be kind of filling in that gap. We expect profitability at Aerojet to be consistent, if not have some opportunity for improvement as we look to move on to those, you know, newer production programs.
If I could just add on to that, I mean, one of the reasons why we're confident in our performance as we transition to these new contracts is that we made a tremendous amount of progress within Aerojet Rocketdyne on changing the cycle, changing the background on our performance capabilities. At the time of the close of acquisition, it was fairly widely known that there were so many troubled development programs. Aerojet Rocketdyne was overdue to contract on really thousands of solid rocket motors. Since the close, we've reduced that by 60%. It'll be 60% by the end of the year. We've been making tremendous progress on that, and that really is undoing several years of eroding performance.
Just as an example of what I think of as tremendous success here is that we have achieved 18 different programs in this quarter where we have hit new records in production. And that might be record for a month, record for a quarter, or records for the entire year so far. So I'm really excited about that progress that we're making and burning down that legacy contracts and positioning us very well for the renewals. Okay. On the broader margin subject, how much of the upside to, you know, 16% plus is Next versus other drivers in the business?
I think there's multiple contributors, and LHX Next certainly is one of them, and it's significant. I would say, you know, if I thought about it in kind of three buckets, you know, maybe they're, you know, similar size opportunities in terms of margin improvement. One would be, you know, clearly, LHX Next and those cost savings and the amount of the profitability improvement that accrues back to us as we reduce those costs largely on fixed-price programs, but get a little bit of benefit on other programs as well. The second would be, just, you know, really solid program performance. You know, we had some program challenges in 2022 and 2023. You know, some of that was just a few kind of engineering challenges, but some of it was some new businesses that we had entered into strategically.
So, you know, we are now a prime in space where previously we had just been a payload provider. But we saw some payloads that we thought could, you know, through some tweaks and some software and some algorithms, you know, execute other missions for the customer like missile tracking, missile warning. And, you know, we went and won some business in that area. And, you know, that resulted in some, you know, lower margin, lower profitability early on in that development and production phase. But now, as we've now got kind of three contracts under our belt, we're starting to see that profitability improve.
And I think we've put some program management tools in place, earned value management, and, you know, some training for team members as well as some new, you know, industry-experienced team members in the program management world that are doing a great job of, you know, really stabilizing our program execution. So call that maybe a third of the margin improvement, increase or opportunity. And then the other one I think is really our disciplined bidding approach. And, you know, don't take that as meaning we are, you know, deciding not to bid on opportunities.
Largely, we're bidding on opportunities, but we're doing it with a confidence in our cost profile and a confidence in our schedule, which is enabled by Next and the cost that we've been, you know, trying to drive down, as well as some of the tools that we've been investing in, from a you know, forecasting and management and earned value perspective. So the discipline bidding enables us to, again, realize an appropriate return for the type of work that we're doing. I think that discipline bidding and that profitable growth probably represents the other third of the margin improvement opportunity to enable us to have the confidence to get to at least 16% margins in 2026. Again, when we announced the midterm financial framework through 2026, it was approximately 16% margins.
I know it's, you know, not the biggest update to say at least 16%, but we did want to highlight that we are gaining more confidence in our ability to get to that number. So, we are comfortable saying that we will be at least at that 16% bogey in 2026.
This year, I think you've gone from 15 to 15.5 at the midpoint. Anything that's not repeatable or that would cause margins to go backwards next year towards the 15 relative to the 16?
No, no, nothing that comes to mind. I mean, obviously, you know, we do, we do hard stuff. We take on complex engineering challenges, complex programs, you know, different integrations and a lot of systems engineering work that has to tie it all together. You know, we've got to keep all of our program execution, program performance, and schedules on track. You know, there's always challenges, but there's always opportunities as well. I think the team does a great job of managing the portfolio in that regard. Nothing jumps out at me. In fact, you know, from a margin opportunity perspective, you know, I would expect that maybe to be a bit more linear than the revenue line as we talked about that having maybe a little bit more growth opportunity in 2026.
I mean, one more in the room if we have one. Great. I guess final question then on cash flow, raise the margin target. What's the opportunity on the cash flow targets?
So from a cash flow perspective, you know, I think we continue to be comfortable with our cash flow guidance. And, you know, largely, you know, we generated $2 billion of cash in 2023. We'll be at $2.2 billion here in 2024. We did provide 2025 guidance for cash at $2.4 billion and then $2.8 billion as we look at 2026. Biggest drivers of cash continue to be, you know, the profitable growth. So growing to $23 billion in sales, increasing the margins to, you know, at least 16%, turning that into cash effective work and capital management. So for now, we're sticking with the cash flow targets that we've laid out. And, obviously, we'll provide 2025 guidance in January. And if there's any update, we'll let you know at that point in time.
Perfect. Well, I think we'll cut it there. Thank you very much, guys.
Great. Thanks, guys.
Thank you. Appreciate it.