Q1 2024 Earnings Summary
- L3Harris is taking market share in key growth areas, being awarded over 60 satellites as a prime since the merger, including 38 for SDA tracking, and winning contracts by displacing long-term incumbents, such as the $150 million secure networking program in Taiwan.
- The acquisition of Aerojet Rocketdyne is expected to drive double-digit top-line growth over the next 5-7 years, fueled by increasing demand for tactical missiles and solid rocket motors, with significant opportunities like the Next Generation Interceptor (NGI) program.
- Margin expansion and cost savings initiatives are boosting profitability, with nearly 100 basis points of year-over-year margin expansion achieved through operational improvements, disciplined bidding, and the LHX NeXt program contributing to savings, already achieving about 1/3 of the $1 billion gross savings target.
- The Aerojet Rocketdyne segment continues to face bottlenecks due to low yields, performance issues, and supply chain challenges, requiring significant investment in capacity before improvements are realized.
- The Integrated Mission Systems (IMS) segment may still face challenges as it is the company's longest-cycle business, and turning programs and operations takes time despite recent improvements.
- The establishment of a new Business Review Committee suggests potential internal concerns requiring attention at the Board level, indicating possible challenges in operations or strategic direction.
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Aerojet Rocketdyne & NGI Impact
Q: How does the NGI win affect Aerojet and growth targets?
A: The NGI win is a significant boost for Aerojet Rocketdyne, providing a tailwind that was not factored into the acquisition plans. It's expected to be accretive and contribute to achieving the $23 billion target, with revenue impact starting in 2025-2026. The demand environment is improving, pointing to potential double-digit top-line growth over the next 5-7 years. Investments are being made to expand capacity and address bottlenecks, aiming for strong growth by 2026-2027. -
Communications Outlook & Margins
Q: What is the outlook for the Communications business and margins?
A: The Communications segment is seeing positive developments, including a $150 million networking win in Taiwan and increasing radio modernization efforts globally. The backlog is at a record level, with significant international opportunities pending. Margins were 24% in Q1, reflecting a higher domestic mix, and are expected to reach low to mid-24% for the full year, aided by higher-margin international sales. -
LHX NeXt Cost Savings
Q: How are LHX NeXt cost-saving initiatives progressing?
A: LHX NeXt is on track, with about one-third of the gross savings achieved through workforce reductions. Plans include reducing facilities from 275 to 200, consolidating ERP systems, and cutting data centers from 85 to 2. Indirect procurement and supply chain efficiencies are also targeted to realize additional savings, contributing to margin improvement. -
Bidding Strategy & Risk Management
Q: What's your approach to bidding and managing program risks?
A: The company maintains strict bidding discipline, avoiding programs with unfavorable contract terms, such as fixed-price development contracts with options for undeveloped products. This approach led to the decision not to bid on the Stand-in Attack Weapon program. Future opportunities include being selective in priming roles, focusing on areas like Armed Overwatch and classified space programs. -
International Growth & Margins
Q: How does international business impact growth and margins?
A: International revenue accounts for low 20% of total sales, with a strategy to grow this segment due to its higher margins. About half of international sales are direct commercial sales, which typically yield better margins than foreign military sales. Recent wins, like an ISR program for a NATO country, are expected to contribute significantly. -
IMS Performance & EACs
Q: How is the IMS segment performing regarding EACs?
A: The IMS segment showed significant improvement in the quarter, with margins at 11.4%, working towards the full-year guidance. Programs are stabilizing, operations are improving, and benefits from LHX NeXt initiatives are materializing, leading to better EAC performance. -
F-35 Production Ramp
Q: What's the status of F-35 production deliveries?
A: Production deliveries for the F-35 are on track, with a ramp-up starting next month. Investments have been made to support the increased production, focusing on the core processor. The company maintains good relations with Lockheed and is prepared to meet the growing demand. -
Market Share Gains
Q: How are you achieving revenue growth and market share gains?
A: The company is selectively investing and bidding in areas where it can take market share. In space, they've been awarded 60 satellites as a prime since the merger, including 38 for SDA tracking. In other domains like undersea systems and radios (e.g., the Next Gen Survival Radio for the Air Force), they are displacing incumbents and innovating to stay ahead. -
Business Review Committee Progress
Q: What's the progress of the Business Review Committee?
A: The committee, formed in December, has been meeting twice a month, covering operations, program reviews, the bidding process, LHX NeXt strategy, portfolio, and capital deployment. They are more than halfway through, aiming to present observations and recommendations to the Board by mid-year. -
Margin Expansion Drivers
Q: What are the main drivers of margin expansion?
A: Margin expansion is attributed to improved mix as programs move out of development phases, disciplined bidding practices, operational performance, and contributions from LHX NeXt initiatives. Each of these areas is contributing to the year-over-year margin increase of nearly 100 basis points.
Research analysts covering L3HARRIS TECHNOLOGIES, INC. /DE/.