L3Harris Technologies, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Greetings. Welcome to the L3Harris Technologies First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.
Thank you, Rob. Good morning and welcome to our first quarter 2024 earnings call. Joining me this morning are Chris Kubasik, our CEO; and Ken Bedingfield, our CFO. Yesterday, we published our first quarter earnings release detailing our financial results and guidance. We also provided a supplemental earnings presentation on our website.
Thanks, Mark, and good morning, everyone. Since the merger of L3 and Harris 5 years ago and after strategic acquisitions and targeted divestitures, we have built a company with a national security focus. We have critical technologies in all domains that align to national security priorities and the global threat environment. Responsive space, resilient communications and rocket motors are critical for the future fight. The trusted disruptor strategy and our portfolio are setting the stage for L3Harris to differentiate ourselves with top line growth while simultaneously increasing our industry-leading margins.
Thanks, Chris. Let's start with consolidated results for the quarter. We reported solid gains of $5.5 billion, including over $900 million for SDA tracking Tranche 2, nearly $150 million for U.S. Marine Corps and SOCOM handheld tactical radios, and an international award for a NATO country for missionized business jets that leverages our domestic ISR capabilities.
[Operator Instructions] And our first question is from Noah Poponak with Goldman Sachs.
Chris, I wanted to ask, you have the trusted disruptor strategy, and you've talked about you've been trying to prime more and kind of growing the profile and the size in the sector and that's been working to a degree. Now that we're seeing, I think, some new entrants in the space, try the same thing and maybe have a little more success than they've had in the past, how do you think about that? I mean does that crowd that effort for you? Or is the pie big enough for multiple companies to do that? And then, Ken, just one clarification on the LHX NeXt. Will you -- will all of that be adjusted out of earnings? And is all of that cash or some of that noncash?
All right. Noah, thanks for the question. Yes, I think our strategy is working, as I said, and the portfolio is well aligned. Relative to the pie between the supplemental and the fiscal year '24 budget, we're well over $900 billion. So I think there's plenty of DoD funding.
Yes. No, from an LHX NeXt perspective, we are adjusting out the implementation costs of the program and certainly then trying to leverage the benefits of LHX NeXt in the businesses. We talked about what that target looked like for 2024, and the businesses are off working hard to operationalize that and reflect that benefit in their performance. And I think you're starting to see that here in the first quarter. And then from a cash perspective, we're primarily just adjusting out the cash severance costs related to the program. And you'll see all that reflected in the schedules to the earnings release.
Yes. Look, we've gotten the feedback relative to our disclosures. So under Ken's leadership, we're trying to cut back on these onetime non-GAAP adjustments and be much more transparent. So I think it will be all laid out clear for you to analyze.
Our next question comes from the line of Pete Skibitski with Alembic Global.
Chris, how does the win on NGI with your partner, how does that impact your outlook for Aerojet? And also considering as you mentioned, the fiscal '24 supplementals, do you get more bullish about your ability to hit that $26 billion target -- $23 billion, I should say?
$23 billion and $26 billion? Yes, absolutely. No, NGI, which is designed to protect the U.S. against evolving long-range ballistic missile threats, is a huge win for the OEM. We were a merchant supplier, as I've talked about before, on both teams. So this definitely gives us a tailwind.
The next question comes from the line of Kristine Liwag with Morgan Stanley.
Since you formed a new Business Review Committee back in December, can you give us any color on how progress has been? What are the key areas that have come under focus? And how this compares to your LHX NeXt pipe initiatives as well? Do they overlap?
Yes, Kristine, it's Chris. We did set up the ad hoc Business Review Committee of the Board comprised of 4 Board members, as you saw. We've been meeting a couple of times a month for a few hours each. And we brought through a variety of topics that have been laid out in the charter that we filed in the 8-K.
The next question is from the line of Gavin Parsons with UBS.
Wanted to ask on the nearly 100 basis points of year-over-year margin expansion. If there's a way to parse that out between the drivers? I know a lot of them go hand in hand, but how much of that is NeXt versus EACs, repricing for inflation, mix and so on? Just if there's a way to think about what the drivers were in buckets.
Yes. Gavin, it's Ken. I would say that we're seeing improvement in the kind of the high-level buckets across the board. I would say we're seeing some mix benefits in terms of, as Chris mentioned, kind of moving out of some of the development phase of contracts and into some of the more mature phase.
The next question is from the line of Peter Arment with Baird.
Chris and Ken, you've made a lot of progress already on -- starting on LHX NeXt. And I think about 1/3 of it is tied to your gross saving targets, is tied to labor reductions. You recently made an announcement there. If you could just give us a little more color on how you think things will evolve on what's optimal for LHX and then in related to all the actions that you've been taking. Also on portfolio shaping, just in terms of any future kind of thoughts that you've had on further shaping the portfolio.
Yes. No. Thanks, Peter. So yes, the workforce is probably the quick hitter for what we need to do for LHX NeXt. And as you said, that got us about 1/3 of the way there. The next part is going to be a little more timely and a little more complicated. And the facilities, I think, are going to be a key part of it.
Our next question comes from the line of Jason Gursky with Citigroup.
Chris, would you spend a few minutes kind of walking around the Communications business? And maybe give us some updated thoughts since you last reported out on the funding environment. We've had fiscal '24 that got passed; '25, they got introduced. We've had some supplementals as well. And just kind of give us your take on how this plays out over the next couple of years and maybe offer up some comments on Link 16 and the expected refresh of all that hardware and when that kind of hits. Just what have we learned here over the last couple of 3 months on the Communications business?
Yes. Thanks, Jason. So let me start with Link 16. Again, we have a footprint on 20,000 platforms, and then there's variations of Link 16 and other data links that we've developed that are going to be able to go into those platforms or footprint. So I think we're starting to see that. Our ultimate goal was to get Link 16 into space.
Our next question is from the line of Ken Herbert with RBC Capital Markets.
Chris and Ken, maybe just a 2-part question. First, on the Communications segment. You, obviously, did 24% margins in the first quarter. The guidance implies some slight ramp in the second half, but it clearly sounds like with international mix and maybe a little bit of a depressed second quarter, there could be some upside to that. Can you just talk about if there's anything onetime in the segment in the first quarter? And any puts and takes there we should think about as we think about the second quarter?
Sure. I'll take that one. So the first part of the question on CS margins. We delivered 24% margin in the first quarter, which I think was great performance by the CS team. And that does reflect a higher domestic mix than we saw late in '23 as well as a higher domestic mix than we expect to see in the second half of '24.
Yes, Ken. Just as a reminder, we're in the low 20% of our revenue comes from international customers, and part of our margin improvement strategy is to grow our international business. And just as a reminder, about half of that is foreign military sales, which has margins consistent with the DoD work for the most part, and the other half is direct commercial sale. And that's where we tend to have the higher margins. But as Ken said, more international is synonymous with higher margins, and that's where our focus is. These supplementals are a big step in the right direction.
Our next question is from the line of Gautam Khanna with TD Cowen.
Can you hear me, guys?
Yes, we can.
Terrific. I just had 2 quick questions. First, I was wondering if you could give us more granularity on the RF tactical backlog book-to-build trends. You mentioned something on SOCOM. And if you could just talk a little bit about overall mix this year and perhaps next in that business? And then I had a question on IMS EACs and if those have turned positive? And if not, what sort of still holding that segment back with respect to kind of the profit accruals?
Yes. From a tactical radio perspective, I would say we're -- had a solid bookings order in the quarter. We've got a very solid backlog for that business at this point in time, looking at a multibillion dollar backlog in that business. And for a pretty quick turn, our shortest-cycle business, that is a very robust backlog at this point in time. So we're excited about the opportunities.
Our next question is from the line of Richard Safran with Seaport Research Partners.
Chris, Ken, Mark, I wanted to ask 2 things about Stand-in Attack. It was an opportunity for to be prime. And correct me if I'm wrong, I think you decided to no bid. We're hearing a lot more about too much risk being pushed to industry. One of your competitors just talked about adjusting for that in their bids. So I was curious about what your thinking is about bidding going forward. And what's the next opportunity for you to be prime?
Yes. Thanks, Richard. I think I've been pretty consistent on the -- on our bidding strategy. We talked about the bidding discipline. It's been referenced a few times. There's 2 things going on there. A lot of people in this industry sending an inordinate amount of time and money trying to focus on a price-to-win strategy and hiring outside consultants. And we kind of find that interesting but irrelevant, so we've taken a different approach.
Our next question is from the line of David Strauss with Barclays.
I wanted to ask about the performance in the quarter. I think well above your full year guidance. So how are you thinking about that? And then if you could just touch on 2 programs out there in the press a lot where you're a supplier, F-35 Tier 3. And then how you're [indiscernible] those.
Yes. Thanks for the question, David. Appreciate it. I think you were breaking up a little bit, but I believe the question was about SAS performance in the quarter. And solid performance by the SAS team in the first quarter, 12.3% margin rate. And they are performing well on their programs. We talked a little bit about some of the drivers there, including maturing some of the development programs. And we also talked a little bit about the mix. And as space continues to grow, that's a little more cost-plus mix. That could temper a little bit of the margins in the last 3 quarters of the year.
And I think second part of your question was F-35. Our production deliveries are tracking. We have a ramp coming up in production here starting next month. So we continue to have good relations with Lockheed. In fact, I was just talking to them yesterday. They'll be starting to deliver aircraft, as you know. They'll comment on that themselves. But as they start delivering aircraft, we're going to have to ramp up even further and quicker. And that's our plan. We've made the investments in most of the infrastructure we need. So continued improvement month-over-month, quarter-over-quarter. And it's all about the core processor, and that's where the focus of the team is.
Our next question is from the line of Matt Akers with Wells Fargo.
Chris, I wonder if you could comment on the international pipeline at IMS in particular. You mentioned the award in the quarter, but just curious if orders are kind of starting to move there.
Yes. Thanks, Matt. I mean at IMS, we did get the NATO Electronic Attack Aircraft. And this -- we were thinking back on this not that long ago. I mean this is something about 8 years ago, 9 years ago. We talked about disrupting the market, and I always give the space example. But it feels like we pretty much invented and created this biz jet ISR market. We have over 50 biz jet orders in the last 8 or 9 years on 5 different platforms.
Yes. Chris, maybe I'll just add real quick on to that in terms of Armed Overwatch, so beyond biz jets at IMS. We did get a delivery order 3 on that program for 9 aircraft, I think, bringing the total order to 25. And to your comments, I think as that program matures, gives us greater confidence in the international opportunities for that aircraft. So looking to the building confidence on that one.
Our next question is from the line of Sheila Kahyaoglu with Jefferies.
In the past, you guys have talked about revenue synergies with a lot of discussion today focused on LHX NeXt, which is clearly great because your profit was up over 20%. So Chris, you mentioned Taiwan, and you won a bid over a 20-year incumbent. Maybe is there any way to think about potential share gains and investment? What it means for the revenue top line outlook over the next few years? I know you laid out mid-single-digit targets, but how do we think about your revenue growth and market share gains?
Yes. Thanks, Sheila. We're being selective in where we invest and bid. And if I look at the different domains, I think space is a perfect example where we are absolutely taking a market share. And as I said earlier, we've been awarded 60 satellites as a prime just since the merger, including 38 for SDA tracking alone.
Our last question is from Doug Harned with Bernstein.
Chris, when -- I mean, right now, you're looking at Aerojet Rocketdyne, and demand in that market is just getting better and better. And you talked a little bit about the NGI win earlier. But when you look at the demand there, and I think back to -- I remember a year ago talking with you about the situation at Aerojet Rocketdyne, Camden, for example, and how serious the bottlenecks were in trying to get production up?
Yes. Doug, great, great question. And yes, it was about 16 months ago when we announced this acquisition. And I think I agree with you. When I look at where we are now, the business case gets better and better. The demand, there was no conflict in Israel. People thought Ukraine would be done. Nobody anticipated a $900 billion of defense spending for 2024.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.