Kenneth Herbert

Ken Herbert inquired about the trajectory of Flight Support Group (FSG) margins into fiscal 2026 and beyond, and HEICO's view on aftermarket fundamentals for 2026, considering aircraft retirements, fuel prices, and the continued use of older assets.

Answer

Eric Mendelson anticipated continued FSG margin expansion due to greater absorption of fixed costs and additional leverage from investments. Carlos Macau provided a GAAP operating margin range of 23.5%-24.5% for FSG, citing mix impacts. Eric Mendelson expressed a bullish long-term view on aftermarket fundamentals, expecting strong demand for older aircraft despite potential increases in new aircraft deliveries.

Ken Herbert inquired about the outlook for Flight Support Group (FSG) margins into Fiscal 2026 and beyond, considering the substantial margin growth achieved. He also asked for HEICO's perspective on aftermarket fundamentals for 2026, specifically regarding aircraft retirements and the continued use of older assets amidst potential improvements in Boeing and Airbus deliveries.

Answer

Eric Mendelson sees continued margin expansion opportunity for FSG due to fixed cost absorption and leverage from investments. Carlos Macau projected FSG's GAAP operating margins between 23.5%-24.5% for Fiscal 2026, citing mix impacts. Eric Mendelson expects strong aftermarket fundamentals in 2026, with older aircraft remaining in high demand and consuming many parts, irrespective of OEM delivery improvements.

Ken Herbert inquired about growth trends and opportunities in the Electronic Technologies Group's (ETG) European business and asked for an outlook on working capital and inventory levels for the rest of the year.

Answer

Co-CEO Victor Mendelson described European defense opportunities as 'accelerating well,' with growing orders and a strong design-in pipeline. EVP & CFO Carlos Macau stated that inventory turns have improved and he expects working capital investment to be flat to slightly down in the second half of the fiscal year.

Kenneth Herbert of RBC Capital Markets questioned if there was any reason not to expect double-digit organic growth for the Flight Support Group in fiscal 2025 and asked for HEICO's view on how improved OEM delivery rates might impact spending on legacy aircraft.

Answer

Co-President Eric Mendelson stated there is no reason not to expect double-digit organic growth in FSG for fiscal 2025, citing optimistic internal forecasts. He also expressed skepticism about a substantial near-term improvement in OEM supply chains, believing the aftermarket will remain strong due to persistent supplier challenges and robust growth in available seat miles.

Kenneth Herbert questioned the sustainability of FSG's aftermarket growth rate, the source of its market share gains, and the specific sales contribution from the acquired Honeywell product line.

Answer

Eric Mendelson, Co-President, expressed hope that FSG's significant outperformance versus the market would continue, driven by market share capture. He clarified that gains come from increasing wallet share with existing customers, as HEICO already sells to nearly every major airline. CFO Carlos Macau specified that just under $217 million of quarterly sales were from acquisitions, mostly Wencor with a smaller contribution from the Honeywell display business.

Ken Herbert sought more specific details on the expected growth rate for the accelerating growth portfolio within the 3%-4% organic growth outlook for FY26, asking if it would be in the high single digits and how much it might accelerate into FY27 and FY28. He also asked for a reminder on the recompete risk or exposure for fiscal year 2026.

Answer

COO Steve Arnette indicated an underlying revenue growth of 3%-5% for FY26, expecting acceleration in the accelerating growth markets into FY27 and FY28, with awards like Space Force Range and Stellafield ramping up in the second half of FY26. CEO John Heller added that an uptick in space and global nuclear energy markets is expected to accelerate into FY27 and FY28, along with expansion in digital infrastructure. Steve Arnette stated that over 90% of FY26 revenue would come from firm and follow-on work, with less than 10% from new business and less than 5% recompete risk.

Ken Herbert sought more specific details on the growth expectations for Amentum's accelerating growth portfolio, asking if it's projected to be in the high single digits for fiscal year 2026 and how much this growth is expected to accelerate into fiscal years 2027 and 2028. He also asked for a reminder of the recompete risk or exposure for fiscal year 2026.

Answer

CFO Travis Johnson stated that for FY26, underlying revenue growth is expected to be 3-5%, in line with expectations. He anticipates acceleration in the accelerating growth markets (Space Force Range, Stellafield awards) as they ramp up through the back half of FY26 and into FY27 and beyond. CEO John Heller added that opportunities in the space market are expected to adjudicate this year, impacting next year significantly, and the global nuclear energy market will see an uptick in activity accelerating through FY27 and FY28. He also mentioned the expansion of digital infrastructure work with hyperscalers and 5G networks. Travis Johnson confirmed that over 90% of FY26 revenue will come from firm and follow-on work, with less than 10% from new business and less than 5% recompete risk.

Kenneth Herbert requested more detail on the drivers of the second-half revenue ramp, including specific headwinds like JV transitions, and asked if Amentum has seen any impact from the GSA's scrutiny of consulting work.

Answer

CFO Travis Johnson explained the H2 revenue increase is driven by ~6% organic growth, including a 53rd week, partially offset by JV transitions to unconsolidated status and administrative change impacts. CEO John Heller clarified that the GSA's consulting focus is not an issue for Amentum, as its business model is centered on mission operations and technology delivery, not consulting.

Ken Herbert of RBC Capital Markets inquired about any significant recompetes expected in Q4 or fiscal 2026. He also asked if the Digital Solutions segment's 8% adjusted EBITDA margin is a sustainable run rate for the future.

Answer

CFO Travis Johnson confirmed there are no major recompetes pending in FY2025 and only one top-10 program is up for recompete in FY2026, which is likely to be extended. Regarding margins, Johnson stated that while they were pleased with the 8% performance in Digital Solutions, they see it heading higher long-term, driven by accretive growth in commercial digital infrastructure. COO Steve Arnette added that digital capabilities are becoming a 'horizontal thread' across the business, driving further margin opportunity.

Kenneth Herbert of RBC Capital Markets asked about the expected margin progression for the Digital Solutions and Global Engineering segments through fiscal 2025 and sought more context on the company's pursuit of over 15 opportunities valued at more than $1 billion each.

Answer

CFO Travis Johnson indicated that while Amentum does not provide segment-level guidance, he expects slight EBITDA margin accretion in both segments during the year due to integration and value-capture initiatives. COO Steve Arnette explained that a minority of the large $1B+ opportunities are new pursuits made possible by the merger's expanded capabilities. CEO John Heller emphasized that this robust pipeline reflects the company's market leadership and strategic goal to continuously add such large-scale opportunities.

Kenneth Herbert requested more detail on the full-year revenue guidance, particularly the headwinds impacting H2 growth and the drivers behind the expected sequential step-up. He also asked about any impact from the GSA's focus on consulting services.

Answer

CEO John Heller explained the 3% H1-to-H2 revenue growth is driven by 6% organic growth (including a 53rd week), partially offset by JV transitions to unconsolidated status and administrative change impacts. CFO Travis Johnson added that applying the new combined enterprise capabilities to bids should drive future growth in FY26 and beyond. Regarding consulting, Heller stated it is not an issue for Amentum, as the company's business model is focused on mission operations and technology delivery, not consulting.

Inquired about the margin trajectory for the two main business segments and sought more detail on the large, billion-dollar-plus opportunities in the pipeline.

Answer

Executives expect slight margin accretion in both segments throughout the year, driven by integration synergies. The large opportunities in the pipeline include some that are newly addressable post-merger, demonstrating the combined company's enhanced capabilities and market position.

Kenneth Herbert of RBC Capital Markets questioned the expected margin progression for the Digital Solutions and Global Engineering segments through fiscal 2025 and sought more context on the pipeline of over 15 opportunities valued at more than $1 billion each.

Answer

CFO Travis Johnson stated that while Amentum does not provide segment-level guidance, he expects slight EBITDA margin accretion in both segments during the year due to integration and value-capture initiatives. COO Steve Arnette explained that a minority of the 15+ large opportunities are new pursuits made possible by the merger, representing high-content engineering work that neither legacy company could pursue alone. CEO John Heller added that this pipeline is dynamic and reflects the company's strength in securing large, complex contracts.

Ken Herbert asked if Karman Space & Defense is observing any customer efforts to dual-source its offerings to support increased missile production, and if this impacts the 2026 outlook. He also questioned whether Karman has received specific RFPs related to the Golden Dome initiative and its potential timing impact.

Answer

CEO Tony Koblinski stated Karman is unaware of any new dual-sourcing efforts beyond existing ones, believing ample demand exists on current platforms without efforts to displace them. Regarding Golden Dome, he noted increased demand signals for existing assets but no hard RFQs for new content yet, expecting clarity over the next two quarters. COO Jonathan Beaudoin added that Karman is preparing facilities to meet future demand.

Ken Herbert asked if Karman Space & Defense is observing any customer efforts to dual-source their offerings, potentially influencing the 2026 outlook. He also sought information on specific RFPs or the timing impact of the Golden Dome program on the company.

Answer

CEO Tony Koblinski stated that Karman Space & Defense is not aware of any dual-source efforts beyond what already exists and believes there is ample demand on current platforms. Regarding Golden Dome, he noted increased demand signals for existing assets but indicated it's too early for hard RFQs on new content, expecting more clarity over the next two quarters. COO Jonathan Beaudoin added that they are proactively preparing facilities to meet anticipated demand.

Ken Herbert asked for details on the drivers behind the raised full-year revenue guidance, questioning whether it was due to volume, share gains, or pricing. He also requested clarity on the expected progression of gross margins for the remainder of the year and into 2026.

Answer

CEO Tony Koblinski attributed the revenue upside primarily to production rate increases on key programs. CFO Mike Willis added that he expects stronger EBITDA margins in the second half of the year, driven by modest improvements from operational efficiencies and strategic capital deployment, rather than a significant step-change.

Ken Herbert asked for details on the drivers behind the raised full-year revenue guidance, questioning whether it was due to volume, share gains, or pricing. He also inquired about the expected progression of gross margins through the second half of the year and into 2026.

Answer

CEO Tony Koblinski attributed the upside primarily to production rate increases on existing and development programs. CFO Mike Willis added that EBITDA margins are expected to be stronger in the second half of 2025, driven by operational efficiencies, and projected modest margin improvements moving forward.

Ken Herbert asked about the impact of expected DoD procurement reform changes on Kratos's top line and margin opportunities, and what factors might make these reforms more successful than past attempts.

Answer

Eric DeMarco, President and CEO of Kratos, expressed optimism for procurement reforms, aligning them with legislative acts and executive orders, which he believes will benefit Kratos by prioritizing speed and proven products. He estimated a significant portion of annual hardware spend could shift to companies like Kratos. DeMarco attributed potential success to the current administration's entrepreneurial personnel, lobbying by new defense tech companies, and the military's need for force multipliers and incentive-based contracts.

Ken Herbert asked about the expected procurement reform changes by Hegseth and Feinberg, focusing on how these reforms, emphasizing commercial pricing and speed of technology, could benefit Kratos and shift top-line or margin opportunities. He also questioned what makes these reforms potentially more successful than past attempts.

Answer

Eric DeMarco, Kratos' President and CEO, expressed excitement about the procurement reforms, viewing them as consistent with existing legislative efforts and executive orders. He believes these changes will be outstanding for Kratos by shifting a portion of defense spending from traditional contractors to companies like Kratos, due to the need for speed and readily available products. Mr. DeMarco attributed the potential for greater success to the current administration's focus, the lobbying efforts of new defense tech companies, and the military's need for force multipliers through incentive-based contracts.

Ken Herbert of RBC Capital Markets inquired about the free cash flow outlook for 2026 given increased investments, and asked for an assessment of supply chain confidence and key risks.

Answer

CFO Deanna Lund indicated that CapEx will remain elevated in 2026 to support new programs, and working capital will likely remain a use due to high growth. CEO Eric DeMarco expressed confidence in 99% of the supply chain, but highlighted risk from a few sole-source suppliers who are significantly increasing prices, impacting margins on certain fixed-price contracts until they can be renewed.

Kenneth Herbert of RBC Capital Markets questioned the expected profitability of the Unmanned Systems segment for the year and sought assurance on the plan to minimize disruption from the upcoming Israeli facility move.

Answer

CFO Deanna Lund stated the Unmanned Systems segment is expected to remain profitable on an EBITDA basis. CEO Eric DeMarco elaborated that profitability is impacted by legacy fixed-price target drone contracts from 2018-2019, with relief expected in 2027-2028 on new contracts. Regarding the Israeli facility, he expressed high confidence in the 3-week timeline, citing pre-approved qualifications and a phased approach.

Ken Herbert inquired about the profit contribution from unmanned systems this year and the expected timing of the facility move in Israel.

Answer

CFO Deanna Lund expects unmanned systems to be profitable this year. CEO Eric DeMarco discussed the facility move and confidence in minimizing disruption.

Kenneth Herbert from RBC Capital Markets requested more specifics on the programs driving the forecasted 2026 revenue acceleration and asked for the potential magnitude of the EBITDA margin improvement expected in 2026 and beyond.

Answer

CEO Eric DeMarco identified key 2026 growth drivers as the MACH-TB program, another hypersonic program, an air defense system program (IBCS), and various radar and missile programs. He projected an EBITDA margin expansion of 100 to 150 basis points annually for 2026, 2027, and 2028, driven by repricing old contracts, bidding new ones at higher rates, and operating leverage.

Kenneth Herbert of RBC Capital Markets LLC questioned how a potential increase in defense spending under a new administration might affect Kratos's long-term 10% revenue growth target, and whether to expect margin expansion in the Unmanned Systems segment in 2025.

Answer

CEO Eric DeMarco expressed optimism that a favorable defense budget environment, coupled with a focus on affordability, positions Kratos well, stating the company is looking to potentially raise its 10% growth forecast in 2026. The primary constraint, he noted, is hiring qualified personnel. CFO Deanna Lund added that they expect some margin expansion in the Unmanned Systems segment in 2025 due to operating leverage and the shift from development to production.

Ken Herbert asked about Leidos' balance sheet, cash flow performance, and current leverage, specifically inquiring about the company's M&A strategy, focus areas for acquisitions, and the potential to accelerate the pace of inorganic growth.

Answer

CEO Tom Bell explained that Leidos maintains a shareholder-friendly view of capital deployment, balancing organic growth investments (like the Kudu acquisition) with a more focused inorganic strategy aligned with the North Star 2030 growth pillars. He emphasized a judicious and prudent approach, prioritizing shareholder value across all capital deployment avenues, including internal investments, M&A, share buybacks, and dividend increases.

Ken Herbert asked about Leidos' balance sheet, specifically how the company views M&A in the current environment, its focus areas for acquisitions, and the potential to accelerate the pace of inorganic growth.

Answer

CEO Tom Bell explained that Leidos maintains a shareholder-friendly view of capital deployment, with M&A now more integrated into the playbook due to the defined North Star 2030 growth strategy. He emphasized a judicious, prudent, and holistic approach to capital deployment, considering internal investments, external acquisitions, share buybacks, and dividend increases.

Ken Herbert from RBC Capital Markets asked for quantification of the cost dynamics between the first and second half of the year, given the disciplined spending in H1 and planned increase in H2, and its implication for margins.

Answer

CFO Chris Cage confirmed a shift from a fiscally conservative stance in H1 to increased spending in H2, planning for 'tens of millions of dollars' of incremental investment in areas like AI and maritime demos. While not providing specific margin impact, he indicated this reflects a return to more normal spending levels. CEO Thomas Bell added that while austerity measures are easing, they will not be removed entirely.

Kenneth Herbert of RBC Capital Markets asked if upcoming recompetes are seeing changes in contract terms or risk profiles due to the new administration's focus on cost and efficiency.

Answer

CEO Tom Bell said that while they haven't seen widespread changes on submitted bids yet, they fully anticipate a shift towards outcome-based contracting. He emphasized that Leidos welcomes this change, believing its technology-driven approach to delivering 'better, faster, cheaper' outcomes makes it a 'net winner' in such an environment.

Kenneth Herbert noted the updated 2024 guidance implies a top-line step-down in Q4 and asked about the moving pieces within the segments and if Q4's performance is a good indicator for the start of 2025.

Answer

CFO Chris Cage attributed the Q4 outlook to intentional investments, higher employee vacation time, and caution around potential government funding disruptions. He stressed that the modest Q4 margin step-down is not indicative of 2025, for which Leidos expects strong performance and margins "solidly in the 12%" range. He anticipates Q4 revenue volumes will be roughly flat with Q3.

Ken Herbert requested an update on the V2500 program, specifically regarding the pipeline of full performance restoration shop visits. He also asked about the expected percentage of aerospace products revenue that will be SCI-related in the coming years and any natural cap on this proportion.

Answer

Joe Adams, Chairman and CEO of FTAI Aviation, reported that the V2500 program is about halfway through its five-year deal, with incredible demand driven by GTF grounding issues. He expects discussions for extension or alternatives in the next couple of years. He anticipates SCI-related business will remain roughly 20% to 25% of FTAI Aviation's aerospace products revenue for the foreseeable future, as the company aims to grow both SCI and third-party business at similar rates.

Ken Herbert requested an update on the V2500 program, specifically regarding the progress on 100 full performance restoration shop visits and the pipeline. He also asked about the expected percentage of aerospace products revenue that will eventually be SCI-related and the natural cap on this figure.

Answer

Joe Adams, Chairman and CEO, reported being about halfway through the five-year V2500 deal, with strong demand driven by GTF grounding issues and operators seeking to avoid shop visits, expecting discussions on extensions in the coming years. He anticipates SCI business to represent roughly 20%-25% of FTAI Aviation's aerospace products business for the foreseeable future, as both SCI and third-party business are growing at similar rates.

Ken Herbert of RBC Capital Markets questioned what the company is seeing in terms of material availability and lead times for spare parts, and how the company is thinking about the valuation of legacy engines over the next one to two years.

Answer

David Moreno, COO, explained that FTAI's unique inventory strategy of procuring parts in advance and 'kitting' modules avoids production delays, contributing to a significant improvement in turnaround times at the Montreal facility. Joseph Adams, Chairman, CEO & Director, added that while they expect the rate of engine value growth to slow, their business model is based on a relative value spread and does not depend on rising asset prices for its forecasted growth.

Ken Herbert asked about current trends in lease rates and lease extensions amid macro uncertainty, and also inquired about the geographic exposure of the Aerospace Products segment.

Answer

CEO Joseph Adams reported no softening in demand, with stable-to-rising lease rates and 'tremendous' demand for extensions, citing the low percentage of stored narrowbody aircraft as a key strength indicator. He stated there is no significant geographic over-indexing in Aerospace Products but identified Southeast Asia as a key growth area and China as a potential 'wildcard on the upside' due to its need to maintain older aircraft.

Kenneth Herbert asked for an update on the legacy third-party contracts at the Montreal facility, their margin impact in Q4, and when they would fully roll off. He also inquired about new customer additions in the quarter and progress on penetrating the target market of 600 operators.

Answer

CEO Joe Adams stated that legacy contracts at Montreal were a 1-2 percentage point drag on Q4 margins but are mostly gone, with the remainder expected to phase out by the end of Q1 2025. On customer growth, he noted double-digit new additions in Q4 but emphasized that the key metric is now market share. With revenues of ~$1 billion against a $22 billion addressable market, FTAI is under 5% penetration and focused on increasing that share.

Kenneth Herbert from RBC Capital Markets asked how FTAI has managed to avoid the supply chain issues plaguing the MRO industry and inquired about the pipeline for large-scale opportunities similar to the LATAM deal.

Answer

CEO Joe Adams explained that FTAI's strategy is to preorder and hold significant inventory, noting a $120 million increase in working capital partly for this purpose. He described it as 'low-cost insurance' to guarantee engine availability for customers. COO David Moreno added that the pipeline includes many similar-sized opportunities to the LATAM deal, focused on airlines that want to outsource maintenance, with potential advancements expected in Q4.

Ken Herbert asked for clarification on what General Dynamics considers a 'protracted' government shutdown and if any specific impacts on cash collection or contract timing were already being observed.

Answer

Phebe Novakovic, Chairman and CEO of General Dynamics, indicated that while cash collection hadn't been impacted yet, contract timing was being pushed due to contracting personnel being sent home. She described a 'protracted' shutdown as one that introduces increasing uncertainty, especially if it extends into the next year, potentially impacting particular lines of business and the supply chain.

Kenneth Herbert commented on the strong Gulfstream deliveries and asked for commentary on the expected delivery cadence for the remainder of the year. He also asked about geographic trends in Gulfstream order activity beyond the strong Middle East market.

Answer

Phebe Novakovic, Chairman and CEO, stated that the delivery cadence should be pretty consistent, though with some mix changes quarter-over-quarter, and affirmed the company is sticking with its previous full-year estimate. Geographically, she noted that activity is consistent with recent trends, with both the U.S. and Middle East markets remaining strong.

Kenneth Herbert of RBC Capital Markets asked if the strong growth in Aerospace services represents a new sustainable run rate and inquired about its impact on overall segment margins. He also sought confirmation that the specific supplier quality escape issue impacting G700 deliveries is now resolved.

Answer

CEO Phebe Novakovic stated that services growth tracks with fleet expansion, as Gulfstream captures 85-90% of all service work. She noted the margin impact is 'rather lumpy' but not significantly dilutive. Regarding the quality escape, she confirmed they are working cooperatively with the supplier and it's not a long-term issue, but described it as emblematic of risks that remain, contributing to delivery shifts into next year.

Ken Herbert asked for clarification on the expected push-out of A350 units from Q4 2025 and Hexcel's anticipated exit rate for the program this year. He also questioned whether there are opportunities to recapture some of the incremental costs incurred due to tariffs.

Answer

Tom Gentile, CEO, Chairman, and President, confirmed that approximately five A350 units were pushed out of Q4, noting that while Q4 orders were lighter, 2026 orders are stronger, indicating growing traction. He stated that Airbus is currently at 7 A350 units per month, targeting 8 mid-year, and potentially 9 by year-end. He added that Hexcel is exploring various provisions (e.g., for export or military goods) and shifting foreign supply to domestic sources to recover some tariff costs, which currently amount to $3-4 million per quarter.

Ken Herbert inquired about the A350 delivery schedules, specifically if approximately five units were pushed out of Q4, and what Hexcel's expected exit rate for the program is this year. He also asked about the potential to recapture some of the incremental costs associated with tariffs.

Answer

CEO Tom Gentile confirmed that Q4 was a little lighter than expected, with A350 orders for the quarter being softer, but noted that orders for 2026 are stronger. He stated that Airbus is currently at seven aircraft per month and is expected to increase to eight, and possibly nine, by the end of 2026. Regarding tariffs, he mentioned provisions for export or military use and efforts to recover costs, as well as plans to shift foreign supply to domestic sources to avoid future tariffs.

Ken Herbert of RBC Capital Markets inquired about Hexcel's specific build rate assumptions for the Airbus A350 program in the second half of 2025 and the growth outlook for the defense business.

Answer

Chairman, CEO & President Tom Gentile stated that Hexcel anticipates full-year A350 production in the 'low sixties,' with destocking expected to conclude in Q3, leading to a strong Q4. He also expressed continued optimism for growth in the defense portfolio throughout the remainder of the year.

Kenneth Herbert of RBC Capital Markets asked about Hexcel's confidence in A350 inventory levels within the supply chain and whether the revised guidance sufficiently accounts for potential destocking. He also questioned if Hexcel would need to add capacity to support Airbus's planned A350 ramp to 12 aircraft per month by 2028.

Answer

Chairman, CEO and President Tom Gentile stated that the revised plan already factors in a level of inventory destocking. He expressed strong optimism about the A350 ramp to 12 per month in 2028, projecting it could generate $1 billion in free cash flow for Hexcel over the next four years. Both Gentile and VP of Investor Relations Patrick Winterlich confirmed that Hexcel is already capacitized to support that rate and higher, with an additional fiber line also coming online.

Kenneth Herbert inquired about the key drivers behind the 2025 Commercial Aerospace guidance of high single-digit growth, specifically asking for details on production rate assumptions for major programs like the Airbus A350.

Answer

Chairman, CEO & President Tom Gentile detailed the conservative production rate assumptions underpinning the 2025 forecast. He cited rates of low 30s per month for the Boeing 737, around 7 per month for the 787, low 60s for the Airbus A320, and 6-7 per month for the A350. Gentile emphasized that Hexcel has the capacity and personnel to support higher rates if required by OEMs.

Kenneth Herbert of RBC Capital Markets asked if Hexcel is currently staffed to support the A350 production rate increase to 8 per month and requested a quantification of the margin headwind from carrying excess labor.

Answer

CEO Tom Gentile confirmed Hexcel is staffed to meet future production rates forecasted by customers, acknowledging this creates a near-term margin pressure but will pay dividends in quality and delivery. Executive Patrick Winterlich declined to quantify the specific margin point impact but confirmed it is a headwind on the adjusted EBIT level.

Ken Herbert asked about the IBCS program's continued success, its growth prospects into 2026, and its suitability for Iron Dome applications, also inquiring about the expected timing for incremental international IBCS orders.

Answer

Kathy Warden, Chair, CEO, and President, expressed bullishness on IBCS growth opportunities, both domestically and internationally, highlighting its ability to integrate sensors and kinetic effectors for homeland protection. She mentioned over a dozen countries have expressed interest, with Poland's live-fire example demonstrating its utility. She expects international orders to phase in over a multi-year period starting in 2026, projecting IBCS to be a significant double-digit growth driver next year.

Kenneth Herbert inquired about the outlook for international sales growth and mix, given strong recent bookings. He also asked if assumptions for F-35 international sales had changed.

Answer

CEO Kathy Warden highlighted strong international demand, noting a 1.45x book-to-bill in Q1 and broad-based interest across IBCS, AARGM missiles, and aircraft platforms. She stated that expectations for the F-35 program have not changed, and the company continues to produce at its contracted rate.

Kenneth Herbert from RBC Capital Markets asked about Northrop Grumman's portfolio and investment strategy in autonomy, its most significant opportunities, and whether customer risk appetite could constrain adoption.

Answer

Chair, CEO and President Kathy Warden positioned Northrop Grumman as a leader in autonomy across air, space, and weapons systems, with a focus on software and integration. She stated that while customer demand for autonomous capabilities is strong, the rigorous and necessary certification process, especially for airworthiness, serves as the primary pacing item for deployment, not a lack of customer appetite.

Ken Herbert inquired about the 13% growth in Collins' aftermarket, its specific components, and the retrofit segment. He also asked if catalog pricing for spare parts at both Collins and Pratt was similar to last year or if there was increased customer pushback.

Answer

CEO Chris Calio noted Collins' double-digit organic growth across all three aftermarket channels (parts and repair, provisioning, mods and upgrades), driven by its large out-of-warranty installed base. For pricing, he stated both Pratt and Collins have been 'appropriately aggressive' this year due to tariffs and demand, and will continue this approach next year. CFO Neil Mitchill added that parts and repair (13% organic growth) indicates strong break-fix demand with good margins, and mods and upgrades (17% organic) saw significant growth in interiors, positioned for future expansion.

Ken Herbert inquired about the 13% growth in Collins' aftermarket, specifically the components driving it and retrofit activity. He also asked about catalog pricing for both Collins and Pratt, comparing current levels to last year and any customer pushback.

Answer

CEO and Chairman Chris Calio highlighted Collins' double-digit organic growth across all three aftermarket channels (parts and repair, provisioning, mods and upgrades), driven by its large out-of-warranty installed base. CFO Neil Mitchill added that parts and repair showed 13% organic growth, and mods and upgrades were up 17%, including strong interiors business. Chris Calio stated that both Pratt and Collins have been appropriately aggressive in catalog pricing due to tariffs and market demand, expecting continued aggression next year.

Kenneth Herbert of RBC Capital Markets requested a breakdown of the drivers for Collins Aerospace's 2025 aftermarket growth, specifically between provisioning and repair, and asked about any risk of destocking by airlines.

Answer

CFO Neil Mitchill stated that the company has not seen significant airline destocking. For the 2025 Collins aftermarket forecast, he expects parts and repair to grow in the high single digits, provisioning in the mid-single digits, and mods & upgrades to be a particular bright spot with growth over 10%.

Ken Herbert (RBC) inquired about the factors driving AAR's raised full-year organic sales growth expectation, specifically if it's primarily due to stronger performance in parts supply, and asked for an update on the pipeline for new distribution agreements, distinguishing between market share gains and new market opportunities.

Answer

Chairman, President, and CEO John Holmes confirmed that parts supply is indeed leading the improved outlook, citing its strong 27% organic growth and progress in new parts distribution. He explained that the majority of recent distribution wins involve taking market share due to AAR's exclusive distribution model, which resonates with OEMs and is opening more doors for new business conversations.

Ken Herbert asked about the drivers behind AAR's raised full-year fiscal year 2026 sales expectation, specifically inquiring if the improvement was primarily due to parts supply performance and the pipeline for new distribution agreements, including whether growth is from taking market share or new opportunities.

Answer

Chairman, President, and CEO John Holmes confirmed that parts supply, particularly new parts distribution, is leading the improved outlook. He explained that the majority of new distribution wins come from taking market share, driven by AAR's exclusive distribution model which resonates with OEMs and opens more opportunities.

Ken Herbert inquired about the drivers behind AAR's raised full-year organic sales growth outlook, specifically if the parts supply segment was the primary contributor. He also asked about the pipeline for new distribution agreements, distinguishing between market share gains and new-to-market opportunities, and the effectiveness of AAR's exclusive distribution model.

Answer

Chairman, President, and CEO John Holmes confirmed that the parts supply segment, with its 27% organic growth and traction in new parts distribution, was indeed the main driver for the improved outlook. Holmes further explained that while some new contracts emerge, the majority of recent wins in distribution represent AAR taking market share due to its unique exclusive distribution model, which resonates well with OEMs and is opening more business opportunities.

Ken Herbert of RBC Capital Markets asked about the wide range for Q1 revenue growth guidance, the reasons for the margin decline in the Repair and Engineering segment, and which segment is expected to show the most margin improvement in fiscal 2026.

Answer

CEO John Holmes attributed the wide Q1 guidance to the timing of large USM transactions. CFO Sean Gillen explained the Repair & Engineering margin dip was due to stranded costs from the New York facility closure, which will be resolved in Q1. Gillen also identified Repair & Engineering as having the most potential for margin improvement in FY26 due to synergy realization and operational efficiencies.

Ken Herbert of RBC Capital Markets inquired about the wide range of the Q1 revenue growth guidance, the reasons for the adjusted EBITDA margin decline in the Repair & Engineering segment, and which business segment is expected to show the most margin improvement in fiscal 2026.

Answer

CEO John Holmes attributed the wide Q1 guidance to the timing of large, variable USM (Used Serviceable Material) transactions. CFO Sean Gillen explained the Repair & Engineering margin dip was temporary, caused by fixed costs at the New York facility during its closure, and expects this to resolve in Q1. Gillen identified Repair & Engineering as having the most opportunity for margin improvement in fiscal 2026, driven by realizing cost synergies and operational efficiencies.

Kenneth Herbert asked about the drivers behind the temporary weakness in the Used Serviceable Material (USM) business and the potential impact of airline capacity reductions on AAR's demand.

Answer

CEO John Holmes explained that the USM softness was situational, caused by specific customers deferring engine maintenance, and he expects that demand to return. He added that AAR is not currently seeing any meaningful decline in demand signals for its services despite airline capacity commentary, and the company remains focused on demonstrating its value proposition to retain business.

Kenneth Herbert of RBC Capital Markets asked for quantification of the growth in AAR's USM portfolio, particularly regarding whole asset availability and pricing trends for legacy engines. He also inquired about the expected margin cadence for the Parts Supply business in the second half of the fiscal year.

Answer

Executive John Holmes confirmed that USM growth accelerated from Q1 to Q2, driven by increased availability of whole assets. He noted that while pricing for legacy engines remains very strong, the rate of price acceleration has moderated. Holmes anticipates margin expansion for the Parts Supply segment in the second half of the year, fueled by the ramp-up of new distribution agreements and continued USM growth.

Kenneth Herbert of RBC Capital Markets inquired about the new Navy P8 contracts, seeking to clarify the revenue opportunity from the airframe and new engine support work. He also asked about the margin progression in Parts Supply, macro demand from airlines, and the expected cadence of free cash flow generation for the fiscal year.

Answer

John Holmes, Chairman, President and CEO, stated the P8 airframe work is a continuation with potential for higher volume, while the engine contract is entirely new business. He noted Parts Supply margins will improve steadily via distribution growth and situationally via USM. He also confirmed strong demand from major airline customers. Sean Gillen, VP and CFO, added that he expects a cash flow cadence similar to the prior year, with Q1 cash use followed by generation for the rest of the year.

Ken Herbert asked about AeroVironment's full-year revenue outlook, specifically regarding the maintained guidance of $1.9 billion to $2 billion despite strong Q1 results and 82% visibility. He inquired about the puts and takes, risks, and opportunities to potentially outperform the top-line guidance for the fiscal year.

Answer

Chairman, President, and CEO Wahid Nawabi expressed satisfaction with Q1 results and the BlueHalo integration but noted it's still early in the fiscal year with three quarters remaining. He highlighted potential for a continuing resolution, which is not expected to impact the fiscal year, and critical contract timing changes within the U.S. Department of Defense. Despite these factors, Mr. Nawabi affirmed confidence in achieving record revenues and profitability, positioning AeroVironment as a leading defense tech company.

Ken Herbert inquired about AeroVironment's full-year revenue outlook, specifically the factors influencing the $1.9 billion to $2 billion guidance range, given strong first-quarter results and improved visibility at 82%. He sought insight into potential risks and opportunities for outperformance.

Answer

Chairman, President, and CEO Wahid Nawabi acknowledged the strong Q1 and successful BlueHalo integration but emphasized that three quarters remain, with budget uncertainties and contract timing as key variables. He expressed confidence in achieving record revenues and profitability, positioning AeroVironment as a leading defense tech company.

Kenneth Herbert from RBC Capital Markets inquired about the expected timing and value of task orders under the new $1 billion Switchblade IDIQ contract for fiscal 2025 and asked for clarification on pricing uncertainty for recent Switchblade deals.

Answer

CEO Wahid Nawabi confirmed that some of the IDIQ value was factored into the FY25 guidance and noted the first $128 million task order was just booked. He highlighted the contract's benefits, including better progress payment terms, but cited potential CRs and election timing as variables for future task orders. CFO Kevin McDonnell added that while specific pricing details are pending finalization in the next couple of quarters, they expect full-year adjusted gross and EBITDA margins for the LMS segment to improve over the prior year.

Ken Herbert inquired about the LEAP program's Q2 bookings, the revenue conversion timeline for its $1.5 billion backlog, and whether any one-time items contributed to the strong Component Repair Services (CRS) margins.

Answer

CEO Russell Ford announced the LEAP backlog grew to $1.5 billion, up from $1 billion last quarter. He stated revenue conversion will begin with light work scopes over the next two years, followed by heavier work. Ford confirmed there were no unusual items in CRS margins, attributing the record performance to the AeroTurbine acquisition, Land and Marine growth, and strong organic performance.

Kenneth Herbert questioned the progress of signing LEAP service contracts, the growth trajectory of the associated $1 billion revenue opportunity, and the current turnaround times for the CFM56 engine.

Answer

CEO Russell Ford described the LEAP pipeline as increasingly strong, with airlines seeking to lock in long-term maintenance slots well in advance. He also noted that turnaround times are improving across all platforms, including CFM56, driven by better access to used serviceable material (USM) and expanded in-house component repair capabilities, bringing them closer to 2019 levels.

Ken Herbert of RBC Capital Markets asked about the revenue conversion timeline for the $500 million new business pipeline and questioned the potential for aftermarket headwinds as airlines optimize inventory and maintenance spending.

Answer

Founder, CEO & Executive Co-Chairman Dirksen Charles projected that new product introductions would contribute to the lower end of the 1-3% growth target in 2025, accelerating to the higher end in 2026-2027 as FAA certifications progress. He asserted that LOR's sole-source, proprietary portfolio is insulated from aftermarket inventory optimization, noting that any demand choppiness is confined to the commercial OE side.

Kenneth Herbert of RBC Capital Markets inquired about the commercial aftermarket, asking if Loar is facing any airline pushback on pricing or seeing inventory issues that could signal future risk, and whether there was any pre-buying ahead of tariff changes.

Answer

CEO Dirkson Charles stated that Loar is experiencing no pushback on pricing and is, in fact, achieving better pricing than the previous year. He described inventory as mixed, with strong net demand exceeding the prior year. He also confirmed no pre-buying activity related to tariffs, characterizing the situation as 'noisy' but not impactful, as the company can pass along any proven cost increases without adding margin.

Ken Herbert asked for details on the $30 million revenue pull-forward from FY26, questioning if it was driven by execution or customer demand, and sought more granularity on Q4 bookings, particularly regarding the common processing architecture (CPA).

Answer

CEO William Ballhaus attributed the revenue pull-forward to improved execution in accelerating customer deliveries and noted they are applying the same focus in FY26. On bookings, he highlighted a healthy mix across end markets and improving backlog margin. EVP & CFO David Farnsworth specified that two awards totaling $36.9 million were related to the CPA.

Kenneth Herbert of RBC Capital Markets sought context on the significance of the $40 million in common processing architecture (CPA) contracts and asked for an assessment of the competitive landscape and Mercury's potential to outgrow the market.

Answer

CEO Will Ballhaus described the $40 million CPA award as a substantial addition to the backlog, highlighting growing demand and differentiation, further enhanced by the Starlab acquisition. He expressed a positive outlook on the competitive environment, citing a trailing 12-month book-to-bill of 1.1 and a strong start to Q4 bookings as evidence of solid positioning. CFO Dave Farnsworth added that calling out the award indicates its significance.

Kenneth Herbert requested more specific parameters around the company's long-term goal of achieving adjusted EBITDA margins in the low-to-mid 20% range, such as timing or required operational milestones.

Answer

CEO Bill Ballhaus identified two primary levers for margin expansion. The first is improving the average margin of the backlog by booking new awards at target margins to replace lower-margin development programs from fiscal 2024. The second is achieving positive operating leverage as revenue grows, given that operating expenses have been significantly streamlined. While not providing a specific timeline, he suggested the natural turnover of the backlog is a key factor.

Ken Herbert asked about the revenue mix from engineered products, seeking clarity on the expected exit rate for 2025 and the outlook for 2026. He also inquired about the M&A pipeline, potential competition for assets, and requested an update on the sale of the Monrovia, CA property.

Answer

SVP & CFO Suman Mookerji stated the engineered products mix should remain around 23% for 2025 before ramping up in 2026. On M&A, both Mookerji and Chairman, President & CEO Stephen Oswald acknowledged increased competition but confirmed a promising pipeline for the second half, emphasizing a disciplined approach. Oswald also reported the successful sale of the Berryville facility and noted that the Monrovia property will be marketed again after a previous bid was deemed not 'shareholder friendly'.

Kenneth Herbert from RBC Capital Markets asked for an update on the M&A pipeline, its alignment with Vision 2027 targets, the mix of potential targets between aerospace and defense, and the margin impact of growing the engineered products portfolio.

Answer

Suman Mookerji confirmed that Ducommun continues to track multiple opportunities and is confident in its ability to complete a deal this year. CEO Stephen Oswald added that the company is actively engaged in due diligence. Both executives described the pipeline as containing a mix of niche engineered product businesses that span both commercial aerospace and defense. Suman Mookerji emphasized that these businesses are significantly accretive to margins, similar to aftermarket peers, and are a key driver for achieving the company's Vision 2027 margin expansion goals.

Kenneth Herbert of RBC Capital Markets inquired about Ducommun's 2025 mid-single-digit revenue guidance, seeking a breakdown between defense and commercial aerospace, and details on Boeing MAX destocking risks and European defense exposure.

Answer

CEO Stephen Oswald stated that H1 2025 will face destocking headwinds from Spirit, with a stronger H2 recovery expected for commercial aerospace. He highlighted a robust defense backlog, including a new $40M+ NATO order. Executive Suman Mookerji added that commercial growth will be back-half loaded, while defense growth will be more consistent. Oswald noted the new German order represents a significant, new direct foreign military sales (FMS) opportunity in Europe.

Ken Herbert of RBC Capital Markets inquired about the types of assets AerSale is successfully acquiring and whether the Q2 acquisition pace is sustainable. He also asked if the Q2 flight equipment sales run rate is a reliable forecast for the second half of the year, questioned potential impairment risks on the balance sheet, and sought an update on the MRO business restructuring and its outlook.

Answer

Chairman & CEO Nicolas Finazzo explained that AerSale has a strong niche in acquiring airframes and wide-body engines, while the narrow-body engine market remains highly competitive. He stated that forecasting flight equipment sales is difficult due to the strategic decision between short-term sales and long-term leases. He also provided a positive update on the MRO segment, noting the component MRO expansions are complete and the Goodyear facility is at nearly full capacity. CFO & Treasurer Martin Garmendia confirmed a strong inventory of 22 engines available for sale or lease and stated there are no anticipated impairment risks on the balance sheet, given strong market demand.

Kenneth Herbert asked for a framework to understand the outlook for whole asset sales for the remainder of 2025 and inquired about any fundamental shifts in customer demand or pressure on asset values and lease rates.

Answer

CEO Nicolas Finazzo explained that predicting whole asset sales is difficult as the decision to sell or lease is made based on real-time opportunities to maximize risk-adjusted returns. He noted that some engine sales slipped from Q1 to Q2 and that demand for nearly all engine types is unprecedentedly high, with supply constraints being the primary challenge. CFO Martin Garmendia added that AerSale is well-positioned with engines ready for deployment, providing optionality to grow the leasing portfolio or pursue opportunistic sales.

Kenneth Herbert from RBC Capital Markets asked for an outlook on the fourth quarter, particularly regarding typical seasonality, and requested details on the MRO business's current revenue run rate and margin profile ahead of new facility contributions.

Answer

CEO Nicolas Finazzo clarified that Q4 performance is not driven by seasonality but by the timing of large flight equipment sales. CFO Martin Garmendia added that the $50 million in incremental annual revenue from MRO expansions is expected to achieve 20-30% margins and will ramp up through 2025 and 2026. Garmendia estimated the current base MRO business contributes approximately $8-10 million in EBITDA.

Ken Herbert of RBC Capital Markets requested more color on defense bookings, particularly for the OEM business and the short-cycle aftermarket business.

Answer

Co-COO Mike Lisman described year-to-date defense bookings as 'very strong' and 'well in excess of shipments,' which suggests good growth for the next fiscal year. He noted this strength was broadly distributed across operating units. He added that the defense aftermarket can be noisy and had no specific standouts in the quarter.

Kenneth Herbert asked if there was any evidence of pre-buy activity from airlines ahead of potential tariffs and how the experience with the Jeppesen bid might influence TransDigm's M&A approach towards software-related businesses.

Answer

Co-COO Mike Lisman stated that the company "did not see anything unusual" regarding pre-buy activity related to tariffs. On M&A strategy, Lisman explained that TransDigm evaluates all aerospace deals, including software, against its disciplined model targeting PE-like returns and would not shy away from software if it met their criteria, but they will not fundamentally change their disciplined approach.

Kenneth Herbert asked for the engine aftermarket's size as a percentage of total aftermarket, how its growth compared to the overall rate, its market weighting, and if there was new pricing pressure.

Answer

Co-COO Joel Reiss stated engine aftermarket revenue was up "significantly more than the 9%" overall growth but did not provide a specific percentage. He confirmed their engine exposure is market-weighted and that there has been no significant change in pricing pressure, with their strategy remaining focused on covering inflation plus a margin.

Kenneth Herbert asked about the defense business, seeking to understand the drivers of its significant outperformance in 2024, potential upside in 2025, and the current mix between OEM and aftermarket revenue.

Answer

Co-COO Mike Lisman explained that the 2024 strength was uniform across most operating units, aided by positive defense spending outlays. Strong bookings in 2024 support the 2025 guidance. He stated the defense mix is 'roughly half and half' between OEM and aftermarket, similar to the commercial business.

Ken Herbert of RBC Capital Markets asked about inventory levels and the risk of destocking across the portfolio, particularly if OEM production ramps from Boeing or Airbus were to slow down.

Answer

Executive Chairman and CEO John Plant noted that while other aerospace companies reported drawdowns, Howmet's underlying growth was strong enough to deliver positive commercial aerospace growth despite facing the same destocking pressures. He confirmed that the company's forward guidance still assumes some destocking in Q3 but expects aggregate growth to accelerate to the 10-11% range, signaling confidence in powering through the inventory adjustments.

Kenneth Herbert inquired about the underlying assumption for aerospace spares growth in 2025 and specifically requested commentary on demand trends for the legacy CFM56 engine program.

Answer

Executive Chairman and CEO John Plant stated that he now believes the peak demand for CFM56 spares has been pushed out from 2025 to around 2027, as the existing fleet is being utilized more heavily. He expects a 'very healthy increase' in overall spares revenue in 2025, driven by continued growth in demand for the LEAP engine family as well. He noted a dynamic where spares demand could be prioritized over new engine builds, a factor they have built caution around in their forecast.

Ken Herbert of RBC Capital Markets inquired about the drivers of organic growth for the second half of the year, the performance split between commercial and business jet markets, the potential margin impact from the "one VSE" integration, and specific opportunities within the engine MRO and distribution space.

Answer

President & CEO John Cuomo detailed that while the Used Serviceable Material (USM) business is being strategically reduced, strong performance in the engine markets, particularly commercial, is driving growth. He noted that a significant portion of Kaelstrom synergies has already been realized, contributing to strong margins, but advised against getting too far ahead on future margin expansion. Cuomo also clarified that VSE has ample opportunity to grow its commercial engine distribution and that its MRO relationships with one OEM do not preclude working with others.

Kenneth Herbert from RBC Capital Markets, LLC inquired about VSE's strong Q1 margins, the potential for conservatism in the full-year guidance, and the relative sensitivity of its business jet and commercial transport segments to a macroeconomic slowdown.

Answer

CFO Adam Cohn explained that Q1 is typically the strongest margin period due to selling lower-cost inventory from the prior year and a favorable sales mix. He noted that while integration synergies will build through the year, the company feels good about its current guidance. CEO John Cuomo added that the engine MRO business has a strong backlog, making it less sensitive to a slowdown than other component repairs. He expressed confidence in the current guidance, noting it already incorporates some conservatism.

Kenneth Herbert asked for a breakdown of the key drivers behind VSE's expected market outperformance, questioning if share gains, distribution, or MRO capabilities were disproportionately contributing. He also asked if the guided 50-60 basis points of core margin expansion in 2025 is a sustainable run-rate for future years.

Answer

President and CEO John Cuomo and CFO Adam Cohn responded that the organic growth outperformance is well-balanced across all areas, including geographic sectors, markets, and programs, rather than being driven by a single factor. Regarding margins, Cohn affirmed that 50-60 basis points of core expansion is a good baseline, noting that further benefits are expected in 2026 from the full realization of Kellstrom integration synergies and the optimization of the Honeywell manufacturing program.

Kenneth Herbert asked about the extent to which distribution is gaining share in the overall aftermarket parts market and inquired about the key factors influencing Aviation segment margins in 2025, particularly with the integration of recent acquisitions.

Answer

CEO John Cuomo stated that VSE's distribution growth is outpacing the broader market, which he estimates is growing in the mid-to-high single digits, indicating significant share gains. Regarding 2025 margins, Cuomo and executive Michael Perlman explained that while the core organic business margin is expected to expand beyond 16%, driven by the Honeywell Fuel Control program, the overall segment margin will be temporarily diluted by the lower-margin TCI and Kellstrom acquisitions until integration synergies are realized.

Ken Herbert of RBC Capital Markets inquired about the Boeing Defense, Space & Security (BDS) segment, asking about the expected pace of margin improvement and the timeline to return to mid-to-high single-digit margins.

Answer

President & CEO Kelly Ortberg downplayed the impact of a potential strike, noting the small number of employees involved. He reaffirmed the goal of reaching high single-digit margins in the BDS segment, emphasizing that new development contracts are being structured as cost-plus to avoid past mistakes. The current focus is on executing and de-risking the existing portfolio of fixed-price development programs.

Ken Herbert of RBC Capital Markets asked for details on the 15% higher narrowbody services revenue outlook, questioning the drivers between CFM56 longevity and supply chain improvements.

Answer

SVP & CFO Rahul Ghai explained that the improved outlook is broad-based. For narrowbody, it is driven by two main factors: an incremental 600 CFM56 shop visits through 2028 due to fewer retirements and extended fleet use, and the continued growth of the LEAP installed base. This indicates the increase is a result of sustained demand rather than just a temporary supply unlock.

Kenneth Herbert of RBC Capital Markets asked if the strong Q1 spare parts sales included pre-buys ahead of tariffs and requested more detail on the growth dynamics between wide-body and narrow-body engines.

Answer

CFO Rahul Ghai confirmed there were no pre-buys, attributing the strength to underlying demand, with 90% of Q2 spare parts orders already in the backlog. He noted that LEAP engine services are growing faster than CFM56, driven by a more than 30% increase in shop visits. Wide-body platforms like the GEnx and GE90 are also seeing good growth as they enter heavier work-scope cycles.

Kenneth Herbert of RBC Capital Markets followed up on the comment that priority supplier sites grew output 18% sequentially, asking if this met expectations and how FLIGHT DECK could drive further gains.

Answer

Executive H. Culp responded that while they were pleased with the 18% improvement, they 'could have used more' given the high demand. He described the FLIGHT DECK approach as a collaborative, on-site problem-solving effort to unlock capacity. He noted this is the foundation for Q4 and 2025 performance but must be supplemented with fixed capacity investments, like the planned $1 billion in MRO, and development of the third-party network.

Kenneth Herbert asked if any expected Q1 bookings had slipped and sought more detail on the drivers behind the 45/55 first-half/second-half revenue split, which implies a soft Q2 followed by a strong ramp.

Answer

SVP and CFO Shawn Mural responded that bookings are playing out as expected with a back-half weighted profile and no significant delays, though he noted some administrative slowness from contracting officers. He clarified the H1/H2 split is closer to 46%/54% for revenue and reaffirmed confidence in the second-half ramp, driven primarily by the WTRS program ramp beginning in July and a full contribution from the F5 program.

Kenneth Herbert asked for a breakdown of the 2024 revenue growth between new contracts and on-contract growth, questioned if similar on-contract growth could be expected in 2025, and inquired about any changes in funding urgency for INDOPACOM under the new administration.

Answer

CFO Shawn Mural stated that the 2024 outperformance was driven predominantly by on-contract growth, which converts to revenue faster. He noted the 2025 guidance range accounts for variability in this type of growth. President and CEO Jeremy Wensinger and Mural both affirmed that V2X's work aligns with the new administration's priorities and they have not seen any slowdown in awards or funding activities.

Kenneth Herbert of RBC Capital Markets asked for details on the drivers of the strong sequential Q3 adjusted EBITDA margin improvement and inquired about future options for deleveraging and reducing interest expense.

Answer

SVP & CFO Shawn Mural attributed the margin step-up to the timing of program deliveries and EAC (Estimate at Completion) improvements, noting about $6 million in EAC benefits during the quarter, consistent with prior guidance for back-end weighted margins. President & CEO Jeremy Wensinger added that a new program management executive committee is driving execution and best-practice sharing. Mural confirmed the company is on track for a net leverage ratio at or below 3.0x by year-end and is evaluating options for the Term Loan A in 2025 to further reduce its ~8.1% interest cost.

Kenneth Herbert asked for more detail on the company's transition to an 'optimization' phase, the potential for margin improvement into 2025, and the key drivers for the expected improvement in free cash flow in the second half of the year.

Answer

President and CEO Jeremy Wensinger described optimization as providing teams with better data, tools, and common processes to improve program execution and leveraging the company's full capabilities to shape the pipeline. SVP and CFO Shawn Mural confirmed the expected second-half margin step-up is on track due to seasonality and contract actions, but cautioned Q1 2025 may not maintain that level. He attributed first-half cash flow headwinds to receipt timing, a system implementation, and working capital for new programs, which are expected to resolve.

Kenneth Herbert asked about L3Harris's financial exposure to Ukraine and the growth outlook for the broader international business in 2025 and 2026.

Answer

CEO Christopher Kubasik quantified direct exposure to U.S. government assistance for Ukraine as 'tens of millions of dollars,' which he described as manageable and a small portion of international business. CFO Kenneth Bedingfield added that international revenue could grow slightly faster than domestic, driven by strong demand from NATO allies, the Asia-Pacific, and other regions.

Kenneth Herbert of RBC Capital Markets inquired about the level of working capital improvement implied in the 2025 free cash flow guidance and the remaining structural opportunities for improvement.

Answer

CFO Jesus Malave explained that the 2025 outlook implies about one day of working capital improvement, aiming to keep it neutral as a use of cash. He noted that while progress was made in 2024, significant opportunity remains to improve asset productivity, particularly by reducing contract assets (unbilled receivables) across the F-35, Sikorsky, and other programs.

Kenneth Herbert of RBC Capital Markets inquired about the incremental investment required to support the A220 production ramp to mid-teens rates, especially within the Belfast facility.

Answer

CFO Mark Suchinski confirmed that supporting the A220 ramp, which represents more than a doubling of output from 2023 to 2026, will require significant capital investments in the Belfast facility for items like autoclaves. He stated that this CapEx will begin in the second half of 2024 and continue into 2025, along with additional hiring and training of 'green labor' to meet the higher rates.

Kenneth Herbert of RBC Capital Markets questioned the level of incremental investment and staffing required to support the aggressive production rate ramp on the Airbus A220 program.

Answer

CFO Mark Suchinski confirmed that significant capital investments, such as for autoclaves, will be needed in the Belfast facility in the second half of 2024 and into 2025. He also stated that Spirit is actively hiring and training 'green labor' to meet the 50%+ delivery increase in 2024, with more hiring required for 2025 and 2026.

Inquired about inventory management, specifically the rate at which they are receiving supplier shipments for the MAX, how much inventory they are prepared to build, and the expected impact of working capital on cash flow for the year.

Answer

Management explained that they built up inventory in 2023 to support a rate of 42/month, so a similar build is not needed in 2024. Suppliers are delivering at the 42/month rate, and they expect the working capital drag from 2023 to ease, potentially becoming a tailwind.

Kenneth Herbert of Canaccord Genuity inquired about the company's 2021 outlook, specifically asking for clarity on gross margin assumptions, the expected cadence of top-line revenue growth, the baseline for guided cash flow improvement, and the quantifiable backlog impact from exiting a business jet program.

Answer

CEO Douglas McCrosson explained that 2021 gross margins might be slightly below the Q4 2020 level of 18.2% due to new program starts. He anticipates that, unlike 2020, revenue will be more evenly distributed throughout 2021 rather than being back-end loaded. McCrosson clarified that the guided cash flow improvement is relative to the reported GAAP results and should also exceed the adjusted figures. He estimated the backlog impact from the business jet program exit was approximately $30 million to $40 million.

Ken Herbert from Canaccord Genuity Group Inc. inquired about the drivers of the strong Q3 revenue growth, the potential for revenue pull-forward from Q4, and the expected revenue cadence for 2021. He also sought clarification on the components of the operating cash flow calculation and the outlook for cash generation in 2021.

Answer

President and CEO Doug McCrosson clarified that no revenue was pulled from Q4, attributing the Q3 strength to the ramp-up of the Northrop Grumman E-2D program and renewed activity on the Raytheon Mid Band pod program. He confirmed that without a $3.2 million customer payback and extraordinary legal fees, operating cash flow would have been positive for the first nine months. McCrosson expressed confidence in a much-improved cash flow profile for 2021, with a goal of reaching breakeven.

Ken Herbert of Canaccord Genuity inquired about the expected pace of gross margin improvement for the second half of 2020, the possibility of a positive earnings quarter during the year, the revenue outlook for the Next Gen Jammer pod program, and the dynamics of pricing pressure from defense customers.

Answer

President and CEO Doug McCrosson stated that he expects gross margins to be sequentially higher in Q3 compared to Q2 and confirmed the company anticipates positive earnings quarters in 2020. He explained the Next Gen Jammer program is in a new development phase with a strong run rate expected through 2021. Regarding pricing, McCrosson noted that the defense backlog consists of fixed-price contracts, limiting pressure on existing orders, and described the overall pricing environment as less pressured than the commercial aviation sector.

Ken Herbert of Canaccord Genuity inquired about the drivers for gross margin improvement in 2020, the company's confidence in its 2021 revenue outlook, the financial control changes made post-restatement, and the expected timing for Q2 results.

Answer

President and CEO Doug McCrosson stated that a one-time $1 million EAC adjustment suppressed Q1 gross margins, but he expects full-year 2020 margins to surpass 2019 levels. He affirmed high confidence in the 2021 revenue growth, noting it is substantially covered by funded backlog. McCrosson also outlined new financial control processes developed with a major advisory firm and projected Q2 results would be released around late October or early November.