All right. I think we're good. To get going, thanks so much for joining us. Excited to have with us LHX's [honest] CFO, Ken Bedingfield. Thanks for coming, Ken. Really appreciate it.
Thanks for having us, Miles. It's great to be here. Maybe just real quick, I'll just remind everyone that today's discussion may include forward-looking statements, and forward-looking statements involve risks and uncertainties, which can be further understood in our SEC filings.
You've been in a dual-headed role. Ken is both the CFO. I neglected to give you all your titles. He's both the CFO and the President of Aerojet. In that dual-headed role, you've been there for five months. Tell us a little bit about what you're learning about Aerojet, as a segment, where its operations are, like you want to take it. It's one of the bigger growth potentials of the business, but obviously a newly integrated part. There are probably some observations you have in the first few months.
Yeah. Yeah, look, it's exciting times at Aerojet Rocketdyne, and it's a fantastic business and a fantastic team. Really honored to have the opportunity to serve as both the President of Aerojet Rocketdyne as well as the CFO of L3Harris. In terms of Aerojet Rocketdyne, obviously it's been, you know, roughly 20 months, approaching two years since we closed on the acquisition. I think it's, you know, number one, a fantastic business. Number two, really important to our country and our allies. Number three, I think very well positioned to grow as we look forward. That growth, I think, is importantly aligned to, you know, some critical capabilities.
From my perspective, you know, there's probably a decade-long run of capacity for tactical solid rocket motors as we look at, you know, delivering that capacity and those products to basically, you know, catch up for a lot of, let's just say, you know, capability that's been used across recent conflicts as well as some tactical issues that our customers have been facing. A little bit longer term, there's significant opportunity in what we would call large solid rocket motors. I'll include medium solid rocket motors in that group just for ease of purposes. You know, beyond the tactical, we've been successful and we're investing in, you know, things like the Sentinel program, Next Generation Interceptor, Glide Phase Interceptor, the Zeus program, as well as some classified business.
I do think, you know, that area does have some, you know, kinda solid, let's say, protection in terms of, you know, harder for folks to break into that market given the size and scale of those motors, the facilities, and the capabilities and the technology needed to do that. I think we've been very successful, not just from a propulsion perspective, but also from a divert and attitude control perspective where I think we have incredible capability that has really helped us to be on every interceptor program today as well as all of the new development programs from an interceptor perspective. You know, outside of missiles, you know, that business should be a solid, you know, double-digit grower for a number of years in front of us.
Outside of missiles, we obviously have an important space propulsion business as well. I think there's, you know, a real solid backlog and a lot of work to do around the RL10, second stage, liquid fuel engine. We're, you know, doing a lot to support ULA in that regard. We're, you know, keeping our eye on the RS-25, which is the old space shuttle engine that is now on the NASA SLS rocket. Obviously, you know, tracking and working to keep an eye on how many missions, how many flights will that rocket actually do. I do think, you know, most of that work is done in our Canoga Park, California facility. We'll likely do other large solid rocket motor there.
I think we've got a plan that, you know, number one, I think NASA SLS is important for getting to the moon, some national security aspects of that, ultimately getting to Mars. We do have solid plan Bs, you know, should that set of missions be truncated to make sure that we've got adequate work in that facility. A fascinating business, fantastic team, great growth opportunity. It's not just revenue growth, but I think we've got the opportunity to really solidify our margin, as well. You know, there's a little bit of, you know, purchase accounting that's working its way out of the system. As we're getting onto new contracts, I think we're seeing that what I'll call the economic profit will start to contribute and ultimately bring that cash with it as we look forward in the business.
Exciting times at Aerojet Rocketdyne.
I got a few follow-ups, as you might imagine on that. First one, the capacity constraints that you have in, sort of the outer Aerojet Rocketdyne, how are you relieving those? Where are you today? Where are you gonna be? And how important are those to, sort of the reacceleration of revenue that you've talked about, both in the near term as well as the target of $4 billion out in 2030?
From a capacity constraint perspective, I would say, you know, during 2024, you know, the first full year that we had the business in the portfolio, I got the sense that there were, you know, kinda some frustrations around, hey, it was not growing as fast as anticipated. There is a big market opportunity here, and the revenue cadence maybe is not hitting that. It is a long-cycle business, and it takes some time to get the investments in. Some of the equipment that we needed has, you know, 52-week lead time. We placed the orders. We are investing in the business. We are investing our capital. We did get a couple hundred million dollars from the U.S. government in Defense Production Act dollars as, as I think they have recognized this is critical capability for their needs. We are off and executing on that work to support the capacity increases.
I think our industrial engineering team has done a great job of really studying the process and finding where the choke points are. Not every choke point requires, you know, significant amounts of capital. Sometimes it's as little as, you know, you find, you can put $100,000 into a small piece of equipment that will double a small choke point that enables you to really drive that capacity down the road. It is exciting to see that the momentum is building, the capacity is coming online. I feel very comfortable that we're doing all the right things and starting to see it pay off.
We will see that Defense Production Act money, that will be new facilities to support three tactical solid rocket motor programs, should be online late 2025, early 2026. We'll really see that start to almost double, triple capacity on a few programs that are important to our customer and therefore obviously important to us. I think all is firing on all cylinders, so to speak, in that regard. We're very excited about where it's going. It's just about, you know, keeping that cadence of, you know, day-to-day, getting motors out the door.
Obviously, you know, what we do is not only important, but it's dangerous work as well, working with energetics and keeping that safety cadence at the same time so that all of our employees, you know, return home in the same condition they came in, and we can just continue that production without any risk or stops along the way.
There was an announcement a couple days ago in the Oval at the Golden Dome, not a ton of information except two name drops of LHX by your senator from Indiana. Maybe just to stay on Aerojet Rocketdyne, what is the opportunity for the Aerojet portion of your portfolio within Golden Dome? I think at the press conference it was more on the space side, but get to that.
Sure. You know, first of all, we're really excited about the Golden Dome opportunity. You know, clearly, I think it's a high priority for the administration. You know, we're excited to see an announcement. We were certainly excited to see Senator Banks there, and supportive of the investments that we've made in Fort Wayne, Indiana, and our payload facility there, as well as our final integration facility in Palm Bay, Florida. Your question was about Aerojet Rocketdyne, and I will get to that now. You know, from the Aerojet perspective, I think that we've got significant opportunity when it comes to Golden Dome. I would say that the first is ground-based interceptors. As I mentioned, we're on existing interceptor programs today.
We do expect that THAAD would likely see an extension to production of that program. I think we're seeing additional demand and additional drive for capacity increases on Standard Missile. As we look at some of the new interceptor programs, you know, Next Generation Interceptor as well as Glide Phase on the hypersonic interceptors, we're seeing, you know, requests for information to potentially accelerate the development, potentially pull low-rate production in, and potentially even increase the rate at which low-rate production would start. You know, we're tracking a number of opportunities. I think it can have significant impact to that path to $4 billion that you talked about. To be honest, that path to $4 billion was before we knew about Golden Dome. I think Golden Dome opportunities could potentially give us some upside to that.
We gotta figure out how we get the capacity in the system, not just, you know, the physical, the buildings, and the equipment, but also the labor. We're working hard on that. We've invested not just in Camden, Arkansas. You may have seen we just did a groundbreaking in Orange, Virginia. We've moved the inert work, so anything that's non-energetic, to Huntsville, Alabama for the most part. We do a little bit in Canoga Park, California as well. To get everything in the right places, let the team focus on the right things. We see that as paying big dividends as we look out at the ability to deliver, you know, the capacity and the capability that will be required.
Ultimately, you know, I think the next stage of Golden Dome, so, you know, first, existing interceptors, second, kinda those next generation of interceptors. Those, I think, think of those as kind of accelerations of what existed. I think the next one, and maybe as importantly, would be the space-based interceptor opportunity. I think there we're, you know, really evaluating, you know, how do we play. Obviously, Aerojet Rocketdyne has a role, but we do have an important space business as well. Really thinking about that holistically from a one LHX perspective as to how we might go and address that kinda longer tail of space-based interceptor development. We're working strategies around that.
Would that be something you would consider priming on?
I think that's certainly in the mix. Absolutely. Not determined at this point in time, but I don't see why we couldn't.
and then the upside from Golden Dome, I think, but worse about sounds like that's more than enough to offset the RS-25 if they curtail after Artemis III?
Yes. Yeah. RS-25, you know, the NASA SLS program roughly is about 1% of revenue for us. And, you know, we've been producing engines for, you know, beyond flight three. We're on contract through nine flights currently. So we're, you know, we're hard at work on that, and we'll see where that goes. You know, it'll take some time. I don't think anything has been determined on that front yet. There is a President's budget that has requested to basically curtail that program after three flights, and, you know, Capitol Hill will weigh in, and we'll see where that goes. Again, I think we're working appropriate strategies to think about that risk.
Then, you know, from a Golden Dome perspective, you know, looking at the space business, you know, we've invested over the years, really since the acquisition, to become a prime in space with a focus on missile warning, missile defense. I should say missile warning, missile tracking, and missile defense. We've had success. We've been on all three tranches of the Space Development Agency's tracking layer. We were successful in launching a prototype on HBTSS, Hypersonic and Ballistic Tracking Space Sensor, I think, if I remember correctly, that stands for. And we think that there's an opportunity for us to, you know, put some additional HBTSS satellites up that could provide coverage for the entire United States while this administration is still in office. And that's in facilities that we've invested in.
We're excited about that opportunity, and we look forward to hopefully getting on contract in the near term to provide that capability to this administration.
Chris raised that on the call, I think, and sort of his pitch was on the call. Said, you know, "Listen to us. We could get it done through your administration." It is a constellation of 40 HBTSS, for initial identification. Is that what the mission would be?
I think it's roughly 40, HBTSS. I think, you know, the space engineers and architects are, you know, finalizing what that looks like. I think it's, you know, in the 40s. I would say, you know, again, we've got a prototype up. I think we understand, you know, the mission and the capability. I think we've got a low-risk approach that doesn't require much non-recurring engineering. Again, we've already invested in the facilities. There's probably some capacity tooling that we would need to invest in, but it's not huge dollars or time. We have confidence that we've got the team, the facilities, and the technology to get those procured, produced, and delivered before, let's say, late 2028 or very early 2029.
That's a couple $3 billion type of translation.
I would say, you know, we haven't yet done final pricing on that opportunity. But if you think about, you know, maybe where SDA tranche one and two have been, you know, this is not significantly different from those. You might land on a number around, you know, in that zip code, I guess I would say. Maybe a little south of that zip code.
That sounds good. So this leads to the targets for 2026 you laid out. Top line, $23 billion, cash flow $2.8 billion, and margins greater than [15%-16%].
Yeah.
The top line, I think, is where most of the investment community is sort of scratching their head because it implies an acceleration of about 7% organic after a couple years lower than that. Does, does this, does basically, Golden Dome, once you're under contract, secure you and your visibility to that $23 billion?
You know, from my perspective, you know, our confidence to the, to the $23 billion continues to build. You know, when we put the framework out there, we had confidence to the $23 billion, and that was before Golden Dome. I think we had a solid path to, to get there, even before this opportunity. Again, initially, to probably accelerate some things that were in process, presented itself. We did have some, you know, headwinds to growth in 2025, and we've talked a little bit about that, you know, some ISR programs that delivered in 2024, F-35 TR-3 development, kinda largely behind us, but production not hitting, you know, a, a rate sufficient enough to offset that until 2026. Then, you know, Aerojet Rocketdyne, as I mentioned, took a little time to get that capacity built.
As the missile business in particular is growing double digits in 2025 and 2026, that'll contribute as well. I think our job, you know, clearly one of the things we need to do is deliver confidence to our investors that we can hit the $23 billion number. I think one of the best ways we could do that would be to drive our 2025 revenues above the midpoint of our guidance. I think it's midpoint that folks are calculating that growth rate off of. And, you know, we're just working on building that momentum, to end 2025 at a strong point that positions us very well for 2026.
I would say, you know, if Golden Dome and a few things hit, you know, we'll see that $23 billion as a number that we can give investors a lot of confidence in. I'll just mention, you know, on the call, we also talked about the second quarter. Just in April, we had a few significant bookings that, you know, were outside of the book-to-bill, which was a little low in Q1, but we see an opportunity for a very solid Q2 book-to-bill, potentially, you know, I would say, above a one-and-a-half book-to-bill in the second quarter. There was an international ISR award as well as a classified program, and that's without Golden Dome potential opportunities. We see those as giving us confidence toward that, you know, growth profile as well.
Were those two key bookings the major go-gets to secure the confidence in the [2023]?
Certainly, those are a couple big items. I don't know that we have any, you know, necessarily big movers that we need to go get to get to the $23 billion. You know, if I think about our CS business, you know, they've been very successful in winning some international contracts. So we're excited to support the Netherlands for its network monetization, as well as Germany, Poland, Romania, and, you know, that certainly contributes to a solid growth path there. You know, space, I think, has a solid profile again, you know, or SAS, I should say, across its portfolio, including, you know, mission networks and supporting the FAA customer and some change orders and some work that we're seeing some additional opportunity on that front.
IMS, you know, has its share of opportunities, and then we've talked about Aerojet. I do think, you know, we've got a pretty robust portfolio. We think it's well aligned, and I think all of the segments are contributing to it.
What, you have capability for modification of large aircraft, I think in Texas. You've done the battle wagon for, what was it called, the, the Air Force One that's actually a battle wagon, nuclear hardened. You've done retrofits for lots of heads of state. Seemed like if we, if we were bringing a aircraft into the country to modify for a head of state aircraft, you'd be well positioned if we ever did that, for a state?
I would say we have a very capable ISR business, you know, based in Texas, to your point. We would be, I would think, well positioned to do that. I do not know that I have any comment beyond that at this point in time.
That sounds good. The reconciliation bill has a provision in it which reverses the capitalization rule for research and development, and it is retro, well, the wording is retroactive to the start of 2025. You have, as a company, I think, had to pay about $1 billion± more in cash taxes because of capitalization of R&D over the last several years. How much of a tailwind would this be if the rule actually were passed?
Sure. Yeah. The old disappearing billion dollars of cash. So, look.
You can't hear now.
Right, right. Look, we've got a great tax team that's been hard at work, you know, trying to figure out how we manage our cash taxes. I think they've done a great job of really starting to chip away at, you know, the capitalization of R&D and the amortization did result in some cash tax headwinds, to your point, of about $1 billion over a five-year period. We've probably done some good work to buy down a couple hundred million of that. I think the Section 172 benefit probably is $700 million-$800 million of benefit over maybe a three to four-year period, to call it $150 million-$200 million a year. Again, I think the team has done some good work, you know, kinda buying back a little bit of that.
We're excited to see the reconciliation bill move forward for multiple reasons, of which, you know, I think important, tax legislation is one, but clearly, from a budgetary perspective as well.
We just raised the free cash flow target for 2026 to $3 billion?
I would say, let's get the, let's get the bill finalized, and then we'll, we'll, look at updating our guidance.
Sounds good. Within the framework of that reconciliation bill, there was $150 billion of added defense spending. What I found fascinating was about 80% of it was to buy things, and about half of it was on programs that really were not yet spoken for, which would seem perfectly aligned with LHX's ability to adapt and move to where the demand is. Outside of what we talked about with Golden Dome, are there other areas of that pot of money that's sort of yet spoken for, that are targets of opportunity for LHX?
Absolutely. Yeah. I think there's, you know, we are, I think, agile, nimble, and able to respond to changing dynamics, which I think is a strength for us as a company. I think there are a number of opportunities. First of all, at, at maybe I'll just run through kinda segment by segment. At CS, I think there's a number of opportunities, you know, between programs like Next Gen Jammer that we've won that'll need to move into production in the next few years. I think we've got great capability around next generation BMC2 that looks like we'll be moving forward. SAS, you know, clearly, opportunities in space as well as electronic warfare, including international opportunities on that front. We talked a little bit about the FAA and some change orders that we're seeing coming from that customer.
IMS, they have, you know, important work, around, a couple things in the maritime world. You know, power generation and, power conditioning for nuclear submarines, which is, a focus. They've invested for a long time in unmanned surface vehicles and unmanned underwater vehicles. We see that as, as an opportunity. They've also got the Center of Excellence for our counter-UAS capability. You may remember we have a program called VAMPIRE that was deployed to Ukraine for counter-UAS. We're now working with other customers, to include the Navy around what that system might look like in a, in a marinized, variant. You know, certainly, I think we've talked enough about the Aerojet Rocketdyne, opportunities. Again, you know, really about the capacity on the missile side.
You know, we've been building backlog on the RL10, and then, you know, we are continuing to monitor the RS-25 massive business.
You have three businesses with margins in the mid-12% range. You got one business in the mid-20%. What is, what is the potential a few years out for those businesses, given the mix changes you might see, given the productivity improvements you're making? Is this sort of the pace and cadence of the margins we should expect and it's a top-line story, or how much more beyond those 16% margins are there?
You know, we do have a diverse portfolio, and that includes kinda the margin portfolio. Even within those, call it 12% businesses, like, you know, SAS, IMS, you know, in particular those two, we do have businesses that are, say, commercial in nature, that do have, you know, above-average margins. You know, we're constantly managing that portfolio. I think one of the things we're trying to do is, you know, increase our performance on our programs and our delivery of products to enable margin improvement, 10, 20, 40 basis points at a time. That enables us to reinvest, not only in R&D but also in some of those early-stage programs.
Even some of these early-stage programs, if you bid them, you know, to deliver, let's just say, our average margin rate, so we bid at 16%, we're gonna start booking likely at a lower risk-adjusted booking rate. We still need those mature programs to deliver, you know, higher. You think you could kinda start low and end high, and we've gotta manage that life cycle of opportunities. I think to answer your question about, you know, what's the opportunity from here, you know, we're committed to the low 16 or at least 16% margins in 2026. Is there opportunity to run from there? I think that likely comes down to, obviously, we need to continue to perform and then what the portfolio mix looks like. Is there a lot more upside from a margin perspective? Probably not.
I think it becomes more of a growth story while maintaining margins in that, you know, 16% plus range. You know, if we were to drive margins much above that, it would likely mean the portfolio was probably getting a little too mature, and we were not investing quite enough in that continued seed corn kinda early-stage, opportunities. I think if we can grow the top line, as we have the opportunity to do, maintain margins in that 16% range, and continue to turn that into cash with a growing set of cash flows, there is a real, kinda value creation opportunity there.
Perfect. That is, perfect. Thanks.
All right. Thanks, Miles. Great to see you.
You too.