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L3Harris Technologies, Inc. is a defense industry leader known as the "Trusted Disruptor," providing comprehensive technology solutions across space, air, land, sea, and cyber domains . The company primarily serves government customers in over 100 countries, with the U.S. Government being its largest customer . L3Harris operates through four main segments: Space & Airborne Systems, Integrated Mission Systems, Communication Systems, and Aerojet Rocketdyne, offering a range of products from space payloads to missile solutions .
- Integrated Mission Systems (IMS) - Focuses on intelligence, surveillance, reconnaissance systems, passive sensing, targeting, and electronic attack, with a significant portion of revenue from international markets .
- International Revenue Growth - Expected to increase from 25% to 30% over the next three years .
- Space & Airborne Systems (SAS) - Includes space payloads, sensors, avionics, electronic warfare, and mission networks, contributing significantly to the company's operations .
- Communication Systems (CS) - Provides tactical communications, broadband solutions, and public safety radios .
- Aerojet Rocketdyne (AR) - Offers missile solutions and space propulsion systems .
What went well
- Strong and growing demand for L3Harris's tactical radios globally, with significant contracts from NATO allies totaling over $400 million and a $1.4 billion program with the Netherlands, as well as high market share in U.S. DoD modernization programs, positioning the company for continued revenue growth.
- Improved operational efficiency and high margins in the Communication Systems segment, with margins reaching 26%, a 350-basis-point improvement year-over-year, driven by favorable international mix, proprietary waveform sales, and supply chain improvements, leading to strong profitability.
- Strategic initiatives and partnerships, such as the partnership with Palantir to enhance capabilities in AI and data analytics, align with customer priorities and position the company for future growth opportunities in areas like AI, which is becoming increasingly important in defense.
What went wrong
- Margin decline in the SAS segment: Margins in SAS declined to 11.6%, largely due to challenges on classified development programs in the space business, indicating potential ongoing issues in this area.
- Near-term budget pressures in space segment: The company acknowledges well-documented budget pressures in the space side in the near term, which may impact growth expectations.
- Dependence on lumpy international opportunities: International opportunities in IMS are described as "a little lumpy," potentially leading to revenue volatility and unpredictability.
Q&A Summary
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Revenue Growth Drivers
Q: What are the biggest drivers to reach the $23B revenue target?
A: CEO Christopher Kubasik highlighted a record backlog and a book-to-bill ratio of 1.14 after nine months. He emphasized alignment with key areas of the U.S. budget. Growth drivers include Communication Systems (CS) with a $10 billion international pipeline, especially NATO software-defined radios ; in Space, despite near-term budget pressures, growth is expected by 2026 as missions move from air to space ; Aerojet Rocketdyne's operations are improving, with investments in supply chain and capacity expansion that should accelerate growth in 2026, including opportunities with the Glide Phase Interceptor and next-gen interceptor. -
Margin Expansion Goals
Q: Are you on track for 16% margins by 2025-2026?
A: The company is tracking towards its $1 billion cost reduction target a year ahead of schedule. CEO Kubasik emphasized efforts to eliminate non-value activities, expecting to achieve the $1 billion savings next year and more thereafter. CFO Bedingfield stated they are "absolutely tracking" to the margin targets set, moving the 2026 margin target from approximately 16% to at least 16%. Margin improvements are expected across all segments. -
Aerojet Rocketdyne Growth
Q: How do you view growth prospects and competition in solid rocket motors?
A: The company recognizes increased demand, with the Army indicating a need for 32,000 solid rocket motors a year. Currently producing 8,000, L3Harris is investing to ramp up to 10,000–14,000. CEO Kubasik welcomes competition but believes they have the best technology and infrastructure. He is "more pleased with the acquisition of Aerojet today than...a couple of years ago" due to strong demand. -
Free Cash Flow and Share Repurchases
Q: Will you increase share repurchases as you approach target leverage?
A: CFO Bedingfield confirmed plans to return to more value-creating share repurchase levels in 2025 and 2026 as leverage reaches the 3.0 target. The company has already met its $500 million share repurchase target for 2024. Growing free cash flow per share is a priority. -
Palantir Partnership
Q: What's the strategic rationale for partnering with Palantir?
A: The partnership involves no upfront investment. CEO Kubasik emphasized that combining capabilities provides a competitive edge, especially in AI. They are collaborating on programs like TITAN, where Palantir is the prime and L3Harris provides resilient communications. Internally, L3Harris is using Palantir products as part of LHX NeXt to make real-time, data-driven decisions, driving cost reductions and operational efficiencies. -
Supply Chain Improvements
Q: How is the supply chain impacting CS segment growth in 2025?
A: CEO Kubasik stated that the supply chain is in better shape today than before the pandemic. This resilience provides confidence in the CS sector, especially in the software-defined radio business. They anticipate both domestic and international demand growth in 2025, with a more stable mix compared to 2024. -
F-35 Tech Refresh 3
Q: What's the status of F-35 TR-3 and its impact?
A: L3Harris is under contract with Lockheed Martin through Lot 19 and is not experiencing financial headwinds from their negotiations. The company is meeting commitments on TR-3 components like the core processor, memory system, and cockpit display. CEO Kubasik mentioned that the customers and prime are satisfied with their performance. -
Night Vision Goggles Outlook
Q: What's the outlook for night vision goggles given funding uncertainties?
A: CEO Kubasik is optimistic, noting that funding is actually included in the budget this time. He believes both ENVG and IVAS systems will be used, with ENVG being a superior product for warfighters. The company feels better about the night vision goggle business now than a year or two ago. -
Tactical Data Links and Link 16
Q: Can you update on TDL and Link 16 developments?
A: The company is ahead of its TDL business case, successfully moving production to the Salt Lake City facility. They've streamlined operations, reduced hours, and improved supply chain leverage. Significant orders have been received, including for the BATS-D handheld Link 16. Link 16 demonstrations in space are progressing well. -
Working Capital Management
Q: How are you approaching working capital and free cash flow growth?
A: CFO Bedingfield stated they aim to be effective managers of capital while willing to invest in the business to drive growth. The growth and increase in profit are the biggest contributors to growing free cash flow. They are not short-termists and make decisions to invest for long-term benefits, enabled by LHX NeXt.
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With increasing competition in the solid rocket motor market, especially for GMLRS, how do you plan to maintain or grow your market share, and what specific steps are you taking to address capacity constraints and competitive pressures?
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You aim to achieve at least a 16% segment operating margin by 2026; what are the primary risks that could prevent you from reaching this target, especially in the lower-margin sectors, and how do you plan to mitigate them?
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Given past supply chain challenges in your software-defined radio business, what measures have you implemented to ensure supply chain resilience, and how confident are you that similar issues won't resurface?
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With approximately 300,000 radios remaining in the DoD modernization cycle and competition from other providers, how do you plan to maintain your current market share, and what risks do you see in achieving your targets both domestically and with NATO countries?
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Regarding the ENVG night vision goggle program, considering past funding inconsistencies and potential shifts towards augmented reality systems, how confident are you in the sustainability of this business, and what strategies do you have to address potential risks?
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2024
- Guidance:
- Total Company Revenue: $21.1 billion to $21.3 billion .
- Segment Operating Margin: Approximately 15.5% .
- Earnings Per Share (EPS): $12.95 to $13.15 per share .
- Free Cash Flow: $2.2 billion .
- Long-term Targets for 2026:
- Revenue: $23 billion .
- Segment Operating Margin: At least 16% .
- Free Cash Flow: $2.8 billion .
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: FY 2024
- Guidance:
- Earnings Per Share (EPS): $12.85 to $13.15 per share .
- Free Cash Flow: $2.2 billion .
- Revenue, Margin Rate, and EPS: Increased due to strong first-half performance and additional revenue from commercial aviation business .
- Book-to-Bill Ratio: 1.03 .
- Organic Revenue Growth: 3% .
- Segment Operating Margin: Sequentially increasing .
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: FY 2024
- Guidance:
- Earnings Per Share (EPS): $12.70 to $13.05 per share .
- Revenue: $20.7 billion to $21.3 billion .
- Operating Margin: Approximately 15% .
- Free Cash Flow: $2.2 billion .
- Segment Revenue and Operating Margin:
- SAS: $6.9 billion to $7.1 billion, mid- to high 11% margin .
- IMS: $6.4 billion to $6.6 billion, low to mid 11% margin .
- CS: $5.3 billion to $5.4 billion, low to mid 24% margin .
- Aerojet Rocketdyne: $2.4 billion to $2.5 billion, high 11% margin .
- Interest Expense: $650 million .
- Pension Income: $300 million .
- Capital Allocation:
- Leverage ratio less than 3.0 .
- Dividend payout ratio 35% to 40% of free cash flow .
- Share repurchases over $0.5 billion in 2024 .
Q4 2023 Earnings Call
- Issued Period: Q4 2023
- Guided Period: FY 2024
- Guidance:
- Revenue: $20.7 billion to $21.3 billion .
- Consolidated Segment Operating Margin: Approximately 15% .
- Non-GAAP EPS: $12.40 to $12.80 .
- Free Cash Flow: $2.2 billion .
- Segment-Level Guidance:
- SAS: $6.9 billion to $7.1 billion, mid- to high 11% margin .
- IMS: $6.4 billion to $6.6 billion, low to mid 11% margin .
- CS: $5.3 billion to $5.4 billion, low to mid 24% margin .
- Aerojet Rocketdyne: $2.4 billion to $2.5 billion, high 11% margin .
- Capital Allocation: Focus on debt reduction and returning excess cash to shareholders .
- Dividend Payout Ratio: 35% to 40% of free cash flow .
- Share Repurchases: Over $0.5 billion in 2024 .
Competitors mentioned in the company's latest 10K filing.
- BAE Systems, Boeing, General Dynamics, Lockheed Martin, Northrop Grumman, RTX; Thales; and non-traditional defense contractors .
Recent developments and announcements about LHX.
Corporate Leadership
Board Change
General (ret.) Peter W. Chiarelli has notified the Board of Directors of L3Harris Technologies, Inc. that he will retire at the end of 2024. He will not stand for re-election at the next annual meeting due to the company's retirement policy. His decision is not due to any disagreement with the company's operations, policies, or practices.