Q3 2019 Earnings Call

Greetings I welcome to the L. three Harris technologies third quarter calendar year 2019 earnings costs at this time I'll participants Arnold listen only about a brief question answer session will follow the final presentation. If anyone should require operator systems. During the conference. Please press stars zero on your telephone keypad as well.

Wider this conference of being recorded at is now my pleasure to introduce your host on a rock <unk> Vice President Investor Relations. Thank you you may begin.

Thank you Michelle good morning, everyone in welcome to our third quarter calendar year 2900 things call on the colon me today is bill Brown C.O. Krisko basic C.O.N.J. <unk>.

Plus a few words on forward looking statements.

She was today will include forward looking statements and non-GAAP financial measures forward looking statements as long as options risk uncertainties that could cause actual results a different materially from the statement.

For more information please see the press release, the presentation and if you see filings reconsideration of non-GAAP financial measures to comparable got measure that included in the quarterly material don't that Investor Relations section of our website, where replay on this call also will be available.

To aid with your your compatibility falling B.L. three Harris merger discussions also will be on the combined basis with prior results as well as yet you did and first of 2019 result, reflecting combined l. three anhydrous historical operating results as of the businesses that'd be upgrading together during by a pre it under the.

For segments structure.

With that <unk>.

Oh you. Thank you on a rock in the morning, everyone.

Today, we reported strong third quarter results with non gap earnings per share of $2.50 up 26% on 10 per cent revenue growth over.

Overall company margin increased 210 basis points is 17.4% and free cash flow more than doubled over Q3 of last year.

These results extend our strong COVID-19 performance with non gap earnings per share with the first three quarters up 27% on 10% revenue growth and free cash pro flow up 73% to $1.6 million.

Funny book to Bill was 1.13 for the quarter and 1.10 year to date driving funded back while growth of 10 per cent versus the last year and setting it's up for a strong finish to the year.

So we're off to a great start as a new combined company, we're executing well against our strategic priorities.

I'll begin with an update on our progress on slight for an increase in J. will provide details on segment results in guidance.

First we remain the laser focused on integration in capturing costs synergies and we're tracking well toward achieving $80 million I'm gross in your savings and $20 million in gross Runrate savings as we exit COVID-19, both higher than previous expectations and giving his confidence in exceeding our 500 million.

Target in calendar 22.

In addition to costs energy projects were also making good progress on our second priority I'm developing institutionalizing, a new enterprise wide operational excellence program called E. three.

Building muscle will be essential to driving your <unk> organic margin expansion and set us up to sustain that benefits productivity well beyond a three year integration period, including you'd probably program execution are in d. efficiency and working capital management.

Third we're building what we're calling a new performance culture as we pivot towards an operating company model leveraging the power the enterprise to shared services shared resources and shared best practices.

At the end of September we held their first technology summit convening more than 200 top engineering leaders to cross pollinate ideas roll out our company wide stage gate development process in detail are planned to manage r. and d. investments on a portfolio basis.

We've also be gone to Institute enterprise wide business metrics <unk> aimed at instill in greater rigor and accountability in our decision making.

Fourth we're investing smartly and aggressively of technology to grow revenue increase share add content and expand it to <unk>.

And while it's still early I'm encouraged by our progress and recent success in capturing potential revenue synergies.

Just 120 days since the merger we've already submitted 14 revenue synergy type proposals, primarily in electronic warfare in space sensing domains with a potential lifetime value of about $3 billion.

One proposal is for the U.S. Air Force F. 16, electronic warfare modernization program supporting of Fleetwide 15 year upgrade cycle.

Are offering combines proven E.W. capabilities from legacy Harris with an innovative digital signal receiver from L. three to provide the customer a high performing low risk solution that we could not have created separately.

In September we were one of two companies down selected for the initial development phase and if we ultimately prevail, we would double r. addressable market and add the domestic F. 16 fleet to our established international position.

From another Big we were awarded early study project for space sensing technologies that combines space optics and electronic solutions from the legacy companies with the potential to grow to over $250 million in value.

So if you encouraging early wins in a growing pipeline of opportunities validating the strategic growth potential or the newly merged company.

[noise] or fifth priorities to Maximise free cash flow with shareholder friendly capital deployment.

The quarter, we generate at $680 million in free cash flow up 123% over prior year through higher earnings tight management of capital spending and a two day sequential improvement in working capital.

We've also improve the Lindy area of cash generation with about 70% of free cash flow guidance deliver in the first three quarters of the year compared to less than 50% for the same period last year.

And in the third quarter, we returned $922 million to shareholders, including $750 million, a share repurchases, which keeps us on track to buy back $1.5 billion a share is in the second half COVID-19.

And finally.

Reshaping our portfolio to focus on high margin high growth technology differentiated businesses, where we can win and generate attractive returns.

Well. This is an ongoing process, we'd be gun marketing several businesses that we've assessed as non core and our plan is to announce transactions that they occur and use the net proceeds to repurchase shares to offset delusion.

So in summary on the back was successful execution against our strategic priorities strong third quarter performance in a solid backlog, we're increasing our second have guidance for non gap earnings per share to $5 in 35 cents with revenue growth of 10% and free cash flow of approximately $1.35 billion.

The higher end of the previous guidance range.

And as we go into 2020 min, assuming appropriations or inaccurate in the line with the recent budget agreement. We continued to expect mid single digit plus revenue growth and expanding margins off a higher 2019 base than we anticipated in s. for driving double digit cash and earnings per share gross.

So with that let me turn them into Kristen provide an update on operational and segment financial performance or do you Chris Okay. Thank you Bill and good morning, everyone. We're performing very well right out of the gate due in large part a month premerger work accomplished by the joint integration team.

Expanding on builds comments in addition to eat three other enterprise wide initiatives. We are also driving a common business development captured process.

We're incorporating best practices from across the company.

And we're focusing on a bottoms up effort to improve working capital performance.

All of these enterprise wide initiatives are gaining momentum unexpected to contribute to our future growth profitability and cast generation.

Let me now turn to operating results by segment.

On slide five integrated mission systems revenue grew by 10% for the quarter and 11% calendar year to date from strengthen I.S.R. mission is <unk>, an increase global demand for WESCAM turrets systems orders were strong as we continue to solidify or position on big Safari programs.

Increase Sharon electro optical and enhance our unmanned maritime franchise.

This resulted in a book to Bill 0.99 for the quarter and 1.11 ear today.

Segment operating income was up 24% and margin expanded 160 basis points to 13.8% for the quarter, resulting in a year to date margin of 12.7%.

They're solid performance was driven by increased volume integration savings pension income and operational excellence slightly offset by program mix.

In space and airborne systems on slide six revenue increase 20 per cent for the quarter and was up 18% calendar year to date from increased content when Anna production ramp on long term platforms, including up 35, F. 18 and asset 16.

In addition to sustain broken classified space as we expand into a full mission solution provider.

Order momentum was broadbased, resulting in a book to Bill of 1.05 for the quarter and 1.1 year today.

Segment operating income was up 38% and margins expanded 250 basis points to 19.4% for the quarter, resulting in a year to date margin of 18.6%.

This robust performance was driven by higher volume operational efficiency and integration savings.

Finally, offset by higher investments in open systems architecture, and advanced space technology.

Moving to slide seven and communication systems revenue growth was up 11% for the quarter and the year driven by solid growth in tact communications in public safety.

Tactical grew 19% with D.O.D. up 33% on increased modernization revenue and international was up 9% from ongoing border security support in Eastern Europe , and early adoption of the multi channel radios in Western Europe .

Revenue was once again double digit and P.S.P.C. has the business continue to gain share with utilities and state and local and federal agencies.

Order momentum was even stronger with segment book to build 1.36 for the quarter and one point O. nine year to date as each sector is successfully executing on it strategy.

Tactical as ramping up modernization and D.O.D.N. International broadband is maintaining incumbency on legacy platforms public safety is increasing sharing utilities and integrated vision systems received E.N.V.G.B. <unk> certification and made initial deliveries in August result.

Teen and a significant follow on for.

Additionally, last week, we achieved an important milestone on the so calm handheld program with the award of a full rate production order for $86 million. Following a successful field test in early August .

Not only is this a significant step into $390 million sole source program, but the core architecture or the SOCOM handheld radio is also shared by the $250 million. So calm manpack program.

So calm handheld radio there's also the foundational radio for the army to channel and several international modernization programs.

The investment in common architecture facilitates our customers desire for interoperability and future capability.

Segment operating income was up 18% and margin expanded 140 basis points to 22.7% for the quarter, resulting in a year to date margin of 21.9%.

Strong performance derived from higher volume and operational excellence more than offset the mixed impact from the ramp and tactical radio modernization program.

Lastly on slide eight in aviation systems, we grew in defense, all declining and commercial aviation for a net last quarter and nine months.

Klein and commercial aviation is the result of lower volume and commercial training solutions.

Orders for full flight simulators continue to slip to the right.

We received three simulator awards in the first task and we're expecting 12 and the second half.

And although our pipeline remain strong due to uncertain timing of bookings we have now lowered our award expectation to lower single digits for the second half, which is reflected in our revised segment guidance.

Aside from simulators order strength was good resulting in a segment book to build 1.16 for the quarter at 1.05 year to date.

<unk> operating income was up 32% margin expanded 330 basis points to 13.4% for the quarter, resulting in a year to date margin of 11.5%.

His performance was driven by integration saving and improved operational performance, primarily in our traveling wave to business, partially offset five mix.

I'm very pleased with our first quarter as L. three Harris with three of the for segments outperforming and more than making up for the shortfall in A.S.R. customers remained supportive of the merger both domestically and internationally.

And we as we build a mission focused mission solution focus company and I'm increasingly encouraged by our company outlook with that I'll turn it over j.

Thank you Chris good morning, everyone.

Recapping third quarter results on slide nine successful execution against our strategic priorities draw strong results for the quarter with revenue growing 10% any P.S., increasing 26% or 54 sex.

Oh this growth 49 cents came from higher volume solid program execution and integration synergies.

And 15 cents from pension and elimination of L., three intangibles offset by a net 10 cent hadwin from taxes sure account and interest.

On the back of this performance, where revising our look for the second half as noted on slide 10.

Starting with the top line, we are tightening second half revenue to be up approximately 10%.

The midpoint of the previous range of 9.5% to 10.5% from strengthened S.A.S.N.C.S. offsetting lower volume in A.S.

Second half total company ebbed margin is expected to be 17.1%.

40 basis points improvement from the previous guidance of 16.7%.

Driven by higher costs energies and pension income.

This combined with lower interest and toxic Spanish results in the second half B.P.S. expectation to approximately $5 in 35 cents 35 cents for the prior mid point of guidance to $4 in 95 cents to $5 in five cents.

The C.P.S. guide is also reflects what and a half billion dollars a share repurchase for the server purchases for the second half.

Bringing the second half share count to around 224 million shares and effective tax rate to 17% versus our prior expectation of 18%.

In a second half, we expect to generate free cash flow of approximately $1.35 billion at the high end of our <unk> prior range of $1.3 billion to $1.35 billion.

By increased earnings and a two to three day working capital of reduction from June .

Capital expenditures are unchanged expected to be $190 million or two per cent of revenue.

As noted on slide 11 for the full year revenue is expected to be up around 10% with EBIT margin of approximately 16.4%.

Any P.S. of about $10 per share.

Full year free cash flow is expected to be approximately $2.35 billion or about $420 million higher than last year for the combined company.

Turning to the E.P.S. bridge on Slide 12 expected for your U.P.S. approximately $10 per share reflects a total increase of $2.08.

$1.74 from volume operational improvements in cost synergies as well as 29 cents from the elimination of L. three intangibles in higher pension income.

And five cents <unk> five cents net of interest in taxes.

Switching to the segment outlook.

And I M.S. revenue guidance is unchanged at approximately 10.5% for the second house.

Driven by strength, an airborne imaging systems and growth in I.S.R. aircraft <unk>.

Segment operating margin is not expected to be approximately 13.3% versus previous guidance of 12.5%.

Run by higher costs energies and pension income.

This implies for your segment revenue approximately 11.2% with operating margin of approximately 12.7%.

I say, yes revenue was now expected to be up approximately 15.5% and the second half versus up 11.5% previously.

<unk> stronger growth on long term aircraft platforms and classified space.

Segment operating margin is expected to be approximately 18.8%.

Implies for your segment revenue growth or approximately 16% with operating margin of approximately 18.5%.

C.S. revenues now expected to be up approximately 10 per cent in the second half versus previous guidance of 9.5%, resulting from better than expected modernization orders in D.O.D. tactical.

Operating margin is now expected to be approximately 22.5% versus previous guidance at 22.1%.

Them by higher volume costs energies and operational excellence.

This implies for your segment revenue growth.

Somaly, 10.8%, but operating margin approximately 22.1%.

Finally, with A.S., where loring revenue guidance for the business, which second half revenue now expected to be up approximately 3% versus previous guidance up 7% driven by slower simulator sales.

This guidance, we believe that we have sufficiently d. risk the uncertainty related to simulator sales segment operating margin is unchanged at 14%.

This implies full year segment revenue growth approximately 2% with operating margin of about 12.3%.

So in summary, and improved outlook, reflecting a strong start for the combine company with that I'll ask the operator to open the light up for questions.

Thank you will now be conducting a question and answer session and the interest of time. We also you. Please let me yourself. So one question in one file that if you would like to ask a question. Please press start one on your telephone keypad, a confirmation tone will indicate your line isn't the question Q. you May press start to if you'd like to have your question from the queue for participants.

Using speaker equipment may be necessary to pick up your hands out before pressing the star keys, one moment please people for questions.

Our first question comes from the line Sheila Aglow with Jeffries. Please proceed what's your question.

Good morning, they'll Christian Thank you for the time, California prepared.

And you're prepared remarks, you mentioned 14 by the Neatest energy proposals that total about rebellion in my time value as you guys have combine the two personally is how do you think about the potential when's, how do they changed the grass profile of the business over maybe then coming here too and where are you seeing the most opportunity. Thank you.

She'll if a fake set a great question. So we haven't thought 14 proposals that are in you know, it's very early days, but we're pretty encourage especially given the fact that we've been down selected on two of them. So this is.

Good news, so we talked about $3 billion in value that lifetime value. So read that over the next 10 years.

I think the way these things will work, there's a bit of an incubation period, the studies or the small ward you receive up front that eventually lead into bigger opportunities over time. So I think in twice probably minimal impact and getting to 21, maybe a little bit more and I think it should random bit beyond that so I went down I went through the 14, but there's about 80 total ideas that would trade.

Tracking year, so hopefully we we see some some other good news coming over the next over the next number of months they broadly really come into mostly right now electronic warfare in space sensing domains, mostly relative to leveraging complimentary technologies, but <unk> encouraging start and we hope to see more overtime.

Yeah.

Thank you.

Thank you are next question comes from the line of Carter Copeland with Melius Research. Please proceed with your question.

Oh, good morning, gentlemen.

Morning.

Oh, just a couple a quick ones one I wondered if you could just give us some color on the the slippage in the simulator sales. It just seems strange given all the.

Talk about pilot training out there and I wonder, though maybe that's not particular customer behavior for one reason or another on a commercial realm I just wonder if you talk a little bit about that and as a secondary one I'm just kind of curious on that the efforts on e. three <unk>.

How does that differ from what you were each individually trying to accomplish with with H.E.X. or L. 365, and what's unique to the to the opportunity set that you think you have together thanks.

So maybe crystal take on the peace on the simulators, let me hit quickly on the three of the IBEX program. So both both L. three at Harris had operational excellence programs, we called ours H.B.X. theirs was L. 365, and he three really is a combination of the best across both programs in the objective really isn't mentioned in my remarks is that.

Well about operational excellence muscle to go after labor reductions go after supply chains savings will have to improving quality performance on time delivery program execution, all those things we need to do to keep winning over time. So we know that there's going to be in organic margin expansion opportunity separate from costs synergies ego.

Side by side with what we're doing on integration, but really over the next couple three years they'll start their merged together and what we want to make sure as we build that I'm also so that once we get beyond integration, we continue to see that regular cost takeout, improving quality well beyond the integration period, and that's really what we're trying to do I think we're off to a great start we've got.

You know core people work in this we have a new hire driving this across the company doing a great job and they go off to a really good start so let Chris <unk> comment on on the simulators.

Yeah. Good morning, Carter as I said my prepared remarks, we we had three in the first half of the year, we only had one in the the third quarter and while we have a lot of.

<unk> find and such we we get to a secure of those and the fourth quarter and I think what we're really see is that the airlines and the training companies [noise].

Slowing down there discretionary span.

As a result of the depending issues with the Max aircraft is you know that's put a financial pressures on the airlines themselves and there's still some uncertainty surrounding that so we've we've actually speaking a v. three we've had a lot of progress on the simulators.

Able to reduce the cost of the cycle time, a building. We just now I'll need to go ahead and sell them. So it's still a good business still optimistic just a little lumpy here in dealing with a market trends somewhat outside our control is this car. It's another comment there that the pipeline is pretty solid it's just it's orders or lumpy and at the time, it's difficult to predict and so.

We thought it's prudent with one quarter left to just push it to the right and take it out of the year, we'll revisit that for for 2020, Oh, but the pipeline is pretty solid.

Great. Thanks for the color and good numbers guys.

<unk>.

Thank you are next question comes from the line of no up Poponak, What's Goldman Sachs. Please proceed with your question.

Hey, good morning, everyone.

<unk>.

Kind of hoping to just get your updated thoughts on.

You know where you think you can take the total operating margin of the business long term.

Cause or you know you're going to exit the year at this kind of 17 or a little better than 17, and then you know the incremental costs energies you still have you have to achieve alone <unk> yeah.

At least 100 basis points, if not more higher than that and then bill you just spoke to you know continuing the drumbeat of operational improvement beyond this energies and I you know each legacy business had a couple you know sorta temporarily depressed pieces that look like they were going to improve so I mean is this.

20% sustainable you know starting four to five years out, but then sustainable operating margin business.

You know look we're very of optimistic about what we've seen so far in the the back half of the errors, we raise our guidance on margins here in the second half is better than we thought some of it's coming from some pension good news, but the reality is they get team is coming together very well, Chris and I've been working for for a number of months here on integration. This goes.

Back to from the time, we signed and we knew we can get out of the gates quickly will getting out of the gates, a little bit faster than we thought so some of the ideas. It did pull forward a little bit exiting the year at $200 million Runrate least puts us in you know something north at $20 million grow savings next year. So we will see margin expansion next year I think it will continue to grow we still have more.

Gas in a tank certainly from integration savings.

Could it be you know the numbers, you're suggesting you know that's a little bit for out there you know our job is to keep driving it every day and every year, we'll see margin expansion next year, we'll see it again going into into 21, they're probably 22, just simply because of the tail and behind this on a on integration saving a lot of it comes from growth in the mix of new.

Ah customers in development programs, so what they keep a close track all that well to keep watching our investment in in business for N.B.N.P. activity as well as in Iraq to to find some of the revenue growth I ideas. So so no I think we'll we'll keep updating you over time, but we we are more encouraged today about margin expansion.

I think we started out.

That's great.

But if I could just follow up really quickly on the on the aviation systems situation I, just sort of yeah. I think some people have the segment growth rates mottled somewhat somewhat level of next year and so.

Any help you can provide on on how the comparisons will shake out with a simulation and trading piece and then also you have the C. 17 piece coming out just you know in an effort to kind of get ahead of level setting every one for the for the right order of magnitude changed in that business next year would be helpful.

<unk>. So so yeah I see 17 drive will go away, but overall, we you know my comments are talking about mid single digit plus so you know just based on where we were rather than the s. for L. three was at 5% were at six and a half so it's in that range and it's coming off of a much higher base in 2019, so not a half a billion dollars above the s. four so.

We're still expecting good grow going into next year, you know I think we'll see you know communication systems it'd be pretty good it's more short cycle, well C.I.M.S. and space business sort of in the middle both doing pretty well and we'll see aviation systems, probably being a little bit less and the other three part of the some of the trend that Chris talked about will continue with the next year I don't think.

I'll go into any more detail within the segment you know, but the reality of those are the major drivers out a pretty macro level across the for segments.

Okay. That's really helpful. Thank you yep.

Thank you are next question comes from the line of David Strauss with Barclays. Please.

<unk>.

[noise] Thanks, the morning, everyone.

One at a two part question first on not on the margins their implied in the fourth quarter lower than a lower than what you do in Q3, despite having more in the way of synergies coming through can you just explain what what exactly is going on there.

And then on the on the working capital.

It looks like you were relatively flat overall in terms on working capital in the corner can you just maybe update is how you're thinking about this target I think longer term target you out of out there to reduce working capital days from 75 down to 50 to 60 days. Thanks.

I mean, it the first one and now past what onto to J. So yeah. We did see really good performances <unk> three you know what steps down sequentially queue for still up you over a year and and it's really coming from higher higher costs energies going from Q3 to queue for offset by some additional investment quite it's quite a bit big chunk of investment coming into for both in R. and D. as well.

It'd be and P.. So there's a little bit of you know sloppiness here in our Q3, but we see good opportunities to invest investing in some of the ideas that are coming out as we're really busy on B.M.P. activity and really it's just a measure of a additional step up in investment in Q4 from Q3, So a j. at the word like when I'm on a margins David <unk> you know we did 200.

And basis points acute three we're almost 200 basis points in Q4 ce of expansion is fairly similar just starting up a little bit of a lower base and and Q4 as far as working capital you know in and we've got a couple of days that we achieved in a in a third quarter, where as I mentioned were big flat to maybe a day in the fourth quarter over the longer term we're still.

Kind of holding onto the 678 days of reduction to get us $2 billion to $3 billion and 2022, so really nothing's changed from our prior of communication. There obviously the internal it's objective is to do better than that natural we continue to do and drive are working capital initiatives across our businesses in our sectors are right now, we're just holding it to where we were before.

Oh, I'll, just say the a working capital improvement really begins and ends with the operations and you know we have 1200 program managers and we're pushing down a specific goals and education at the program management level. In addition to the general managers and three to finance organization. So it's part of.

Top down bottom up effort to focus on an improved working capital.

And and they'll just a quick follow up at the the investment so you're talking about look it would look like from them from the merging Guy and these are mostly in I.M.S.N.S.A.S. is that the right way to think about.

Yeah that'll be that's primarily the two places, yes, correct, a little bit in C.S., but mostly at the or the too right.

Thank you.

<unk>.

Thank you are next question comes from the line of Richard Saffron with Buckingham Research Group. Please proceed with your question.

Oh, Chris <unk> <unk> morning, how are you.

Morning.

Yeah, another philosophical for strict or a strategic question to open up here could you elaborate on your building a new performance culture and grow revenue remarks on the slide for no you're constantly using the word innovation and it's clear there's been a substantial benefit from innovation, but you know what works against that.

Sys and I think you're all aware of the rule of thumb that a bigger company gets the less nimbo on the less they are able to what to innovate. So you're so you're going to invest in innovation, but I thought you might discuss a bit more on how you're going to incentivise and foster innovation at a much bigger l. three Harris.

So Richard that's a good question and I won't be a long winded on it but you know this is fundamentally what Chris and I and the rest of the senior team are focusing quite a bit of time on its this building the culture that we want to see in the organization.

Going back eight years ago Harris went from holding company to an operating company. This is the path that Chris has been on you know that is a clear statement of intent within the organization is moving towards an operating company. You know that means you know more centralized coordination of the things I talked about my remarks size Church services resources technology.

[noise] talent across the organization to leverage the power the enterprise and or the lots of things that spill off of that that's driving a lot of change with the organization, that's fundamentally where we're heading and I think that speaks to the culture. We're trying to create that also flows into our indeed, how we're thinking about or indeed development.

Again back to where Harris was a number of years ago. We're developing already planned my each segment very sigh load you know that's what else three it's been doing we're moving towards more of an integrated model, where we're sharing ideas across the company. You know we're with you know we had our technologist together at the end of September started in the shared different ideas. So how we remain either.

<unk> <unk> look at it comes through multiple dimensions bored of it is structural and how we set up the organization with tools for us to be able to share ideas across the enterprise and things like cyber or a I a wave forms you know capabilities that really embed across all that we do your part of it is in prophecies in going.

To a common stage gate process for developing programs, making sure. There's good business cases, managing things on a portfolio see you trading off investments across the organization and then a lot of it is going to come from just being just culturally and part of that is J. Christian I being willing to step forward and invest ahead of the curve on innovation.

Ahead of need we've been demonstrating a willingness to do that and then of course you'd want mentioned that part of it is the type of people were selecting how we incentivize them look Richards along with it in answering I went it was longer than I wanted to but the reality. This is fundamental how we're creating a different organizational recalling l. three harris to remain agile fast moving <unk>.

Actually in the World we're in today with D.U.D., where it's not just innovation, we're affordable innovation, it's affordable innovation now, it's moving quickly delivering solutions and that's what I think when geared towards.

Okay I was terrific chip just quickly here a space and airborne on the a F. 16 modernization program you went down selected for because this is a potential revenue revenue synergy and because it sounds like a pretty large opportunity here just wondering if he could size that and give us a sensor timing.

Yeah look is going to take you know several years couple of years to the final selection occurs I mean, the fact is we got in a little bit late but we were one of two down selected for the program you Richard as you know we Harris legacy Harris has the the E.W. platform for International F. Sixteens, we are not on the domestic F. 16.

It opens up that market. Yeah, we we think over time that could be cumulatively something like a billion dollars, but depends on how many aircraft and it costs per ship said, but it's a pretty substantial opportunity working at a pretty aggressively and you were encouraged by within just a few months being down selected to be one of the too.

Thanks very much.

Thank you are next question comes from the line I've gotten caught up with counting company. Please proceed with your question.

Thank you guys appreciate it.

Couple of questions first it was wondering can you give us any sense of the size of the divestments that you guys have identified.

No I don't think we're going to be prepared to do that today got that might lead on what what I'm very encouraged about is the fact that you know in a relatively short period of time I think we the line to cross the management team and with the board on how we're how we're thinking about the portfolio. We're moving quickly on a number of different businesses, Yeah, we'll announce.

The transactions as we go forward in as we do then I'll size them for for investors, but I think it would be premature to give you any sort of a target at this point.

Okay. Secondly, just wondering you know you guys are running ahead of the cost targets.

When will you formally address those again.

Yeah, we'll we'll talk about that every earnings release got them I think you will probably give you a as we get into 20, an update on what the 20 numbers are you know given where we're tracking again exiting this year at $20 million gross Runrate, you'll makes 20 look pretty good and probably at that time, we'll give you a sense is too.

You know the magnitude of the opportunities, we're seeing longer term and and if we were coming up about 500 million dog gross and if so how much so probably shape that little bit more early next year.

Okay and I was hoping you could also just walk through the.

Legacy U.R.F. tactical pipeline, and what you're saying their domestic international one.

What's your expectations for bookends are over the next 12 buttons.

Thank you.

Yeah. So let me hit on that when a pretty quickly. So so on the tactical aside you know we're seeing the for the second half or the legacy or a tactical business.

Up a low double digits, you know, which is still pretty pretty good growth. It was a mid teens in the front of the year or so so as we get through COVID-19 overall tactical business will be up sort of a little bit low to mid teens in that in that range. You D.O.D. has been very very strong. This year, we start off in the mid forties in the first have it'll be sort of in the mid twenties per cent.

Growth in the back half so very good trajectory was up 33% as Chris mentioned in a in Q3. So so so very good numbers, but you know we're starting to get into some were tougher compares here as we get into the fourth quarter, which is why the you over the years not quite as good as it was in the past, but still very healthy we're seeing a grave shift towards modernization the base.

Revenue in D.U.D. has been relatively stable modernization is coming up pretty dramatically to have about two and a half times over last year. So is moving quickly you only replacing some of the readiness spend that we saw last year. So overall deal d. looks pretty good the pipeline is about $1.7 billion.

Pretty solid on the international side, you know this year it for a COVID-19 will be up low single digits. We are flatten the first half will be up sort of on three 4% the back half of the year. Chris meant you were up nine in the quarter. So it was quite good you know there will be down in in Q4, but when you look at two three versus cute <unk> for the on on a dollar magnitude.

It'll be fairly fairly similar in size, yeah, we just had better liddy already this year on our Calenderization that we did last year. So all that you really good trends. The the pipeline is about two and half billion dollars. It's right in line with where we were before it's pretty resilient. This year. The story has been largely around Europe , Europe had a really good or bad.

Both western and eastern Europe , but we also submit Elise divvy up quite a bit this year, we saw Asia up pretty pretty nicely as well. So we're seeing I think generally good trends is we expected you know, Canada it'd be down we knew callow it'd be down a little bit. So so generally that's kind of where we're heading but but overall, adding things are hanging in pretty well.

Both the L.D. and international for I think a very good year on tactical.

Thank you.

You bet.

Thank you are next question comes from the line of Robert Spin Garden with Credit Suisse. Please proceed what's your question.

Hey, good morning.

I just wanted to Jay ask you about the free cash flow guide and and if the pension pretty funding into three is flattering. Your <unk> recoveries. This year at all and and therefore the driver up the yeah. The the boosted free cash flow Guide and then how do you plan to report has recoveries going forward you know another pension.

The line items, which would be you know, giving us detail as per the industry, just now that they seem to be a little bit more material.

Okay, well for for this year and the cash there's really no recoveries related to this pension.

Funding, what's what's driving the improvement was just a little bit better earnings and just a little bit in terms of balance sheet position to what we were looking out before.

I was going forward on there.

Can take a look at it just it another disclose you're looking for us to provide there. We can certainly take a look at that and give it to well I think going forward I, just I'm not entirely clear exactly what what the.

But to go forward recovery is and so I have to just have to get back to you on that route.

Okay and that just another question.

He asked growth you called out classified space or earlier in the call.

Can you provide any detail on how quickly this area's growing either in percentage terms or or versus the segment as a whole.

Yeah, it's growing in line with the overall segment Rod if it's a it's been very strong it's been strong for multiple quarters.

We say classify space, there's a space, where the big <expletive> meeting things in space and there's you know meeting the domain. So a lot of we we do in that area is classified it could be ground programs. It could be space programs and what we're finding is really good goes truth trends in both both areas in in space with a capital last as well as on ground domain.

And the and really which driving this is a shift again, we talked about this before from components assist sub systems for end admission solutions is starting to move into various adjacent market. So did the trend has been very good the funding isn't very strong in this area and it's been growing sort of in line with the overall overall segment. So we sort of mid.

<unk>.

Okay. That's helpful. Thank you guys.

<unk>.

Thank you are next question comes from the line of John What City. Please proceed with your question.

Thanks in the morning on the free cash flow, finishing this year at the high end of the range and then you also mentioned vanya prepared remarks.

Digit growth over the next couple of years, you know just just try to teach that out gets gets us above 3.1 billion in 2022. So what's your thoughts on that 3 billion dollar targeting 2022, and when it could we you know maybe revisit that and talking about pretend it's potentially some upside there.

So so John Thanks for the question probably talk more about that I would imagine next year as we close this year out and settle down to balance sheets and get ourselves organized we'll talk more about the longer term goal. You know right now we're still saying is 3 billion in calendar 22. So we've had a good start so we hit the guidance your 2.35 billion for the year getting the three is another.

There are $650 million over the next Oh. The next three years broadly speaking, it's about a third each between earnings growth. The after tax costs synergies beyond the 50, we're delivering this year and then working capital J. mentioned six seven days of working capital is still about $35 million a day. So that's.

Generally the mat and a and we'll reassess where we happened to be once we get a little more comfort and what's happening to cost synergies, what's gonna happen with the growth trajectory and really as we start to see real traction on working capital. We had a good quarter. We we are down you over a year on working capital by about 19 days about 10 days.

It is inventory that's pretty good work so to really accelerate 3 billion will require us to do a faster job on inventory take out that just take some time to go and do you know Chris mentioned about some of the metric being pushed down to the <unk> program manager. That's exactly right is striving accountability for that deep in the organization across all over facility.

<unk>. So I think it's going to change about a lot on how quickly can we take out inventory that's what we're working on.

Okay. Thank you and then you talked about investments a lot on this on this call we've talked about it a lot over the past months and quarters How's that investing calculus changed at all in for instance, the customer one to allow you hire returned if you. If you take on more risque <unk> are you investing ahead of need more often today.

But in the past, perhaps in what what does that mean for long term profitability.

Well I think you know look at you know we're running just shy of four per cent of revenue. This year. That's what we've been guiding investors to on an on an overall basis I think we'll still be in that range you over the next couple of years I think the you know the mixed aboard the dollars happened to go will likely shifted move around as we move from running things locally to more.

As a portfolio will start to see shift to spend between programs you may see more shift towards revenue opportunities to backstop. Those you know you know only about 10% or so of our I ride is in support of old T.A.S I mean, I certainly been a trend, but that's not going to be a big driver here you know as I mentioned culturally we haven't been willing to step up and invest ahead of the.

Need and we're going to continue to be able to do that and our job is to drive operational excellence drive costs synergies and make sure that we can invest in great return programs for shareowners, and that's something that Chris denying Jason you're looking at each other committed to go and do John .

Thank you.

You bet.

Thank you are next question comes from the line upset.

What J.P. Morgan. Please proceed with your question.

Hot that thanks, very much had a good morning.

Wanted to to maybe ask the the divestiture question in a different way yeah, we shouldn't and think of the divestitures at all as being you know potentially standing in the way of the the 3 billion dollar cash flow target for for 2022 correct.

That's correct.

Doesn't stand in the way the you know each business. We have are most of them that we're thinking about generates free cash but.

Yeah, we think with some of the lovers, we can pull we'll be able to offset any any cash loss from the best features.

Right, Okay, and then maybe as a a quick follow up the D.O.D. radios in terms of the order flow and kind of what's needed from a a fiscal 20 budget.

How does that shake out in terms of you know you're visibility into your calendar slash fiscal 20 based on you know where things stand with the C.R. and at a budget.

No I think we're we're assuming a C.R. through the balance of this year through December you know if it gets deeper into 2020, you know <unk>. It could have some impact on the D.O.D. business, mainly because it's more of a short cycle business, but you know we've talked about this before the visibilities become a lot better we've got a good bakolobi order trends have been very good you know the.

At least the the you know G. if white 20 budget is up again for tactical radios to about 1.1 billion from I don't know 900 million or so in in G. A flight 19 are still some unspent fun. If you go out over the flight up the next five years I think the number grows the 1.6 1.7 billion in that range. So there's a lot of momentum here still remaining in the tactical.

Radio business I think we're at the front end of the curve in from the way we see it there's funding support there's program momentum there's operational execution by our team up in Rochester, New that still leaves his confidence will we have a billion dollar business here in calendar 22, Indeed tactical.

Great. Thank you very much you bet.

Thank you are next question comes from the line of Michael's normally would Suntrust. Please proceed with your question.

Hey, good morning, guys. Thanks for us taking the questions here just to go back to the to the revenue synergies and I I knew you mentioned a couple of the programs for maybe talk a little bit more about some of the opportunities you might be seen in some of the on man surface or sub surface area is I know that we've got maybe has project overlord out there.

Air and maybe additionally on the revenue synergies I know it was already <unk> bid on L., three standalone, but but how does the future vertical list program does does the combination you know make that offering a bit stronger or there's some synergies there is that if that a high priority program for you guys.

Yeah. Good morning, Michael It's Chris first on the on the Maritime you're absolutely right on on the unmanned opportunities. We both have surfaced opportunities. The the Overlord program is as you call It which I think was renamed Black Pearl are we submitted a proposal recently on the medium on man.

Surface vehicle and we're gonna team with another contractor on the large surface vehicle on the under C. You know we legacy L. three had made some investments and those are actually a progressing quite well we've been able to get some smaller awards and demonstration. So we're.

Pretty good about the investments in the opportunities in the young man.

Arena and also relatives to synergies and maritime their capabilities that legacy Harris had that we're now incorporating on new programs like frigate, where there's four different shipbuilders and we're on all four teams with more content than had we not done the merger and then future.

<unk>, you know, which is specifically in the near term is but Farah program. You know our focus there has to be one of the two down select or for phase two were teamed with another company who's the prime they did the design we did the modular open a system architecture and there is additional content.

From a legacy Harris, mainly on the E.W.N. avionics that we're able to pull together. So you know the synergy. We're we're very excited about the revenue synergy Bill mentioned, the 14, but again 120 days and I think that's more than any of US would have predicted we have to go ahead and execute we got to go and when these competition.

We're both very excited about where we are today.

Got it and then just if I made can you sort of give a general state of the union here on the continuing resolution should we think or or do you guys envision that there'll be any near term impacted either revenues are bookings.

There you know it doesn't looks like this might get resolved by November 21st, but if this drags on for three to six months can you. Just you know maybe articulate if you expect any headwinds there.

Well I as I mentioned, you were calibrated through a COVID-19, assuming is here goes to the end of the year. So you know like you were expecting that'll go beyond you know November 20th and and go to belong and that could could could go into early next year I don't want to I don't want to size. It yet because we really to see you know when it actually gets an act when the appropriations Bill.

Or natural we're hopeful that will happen by the end of this year, but you know we'll have enough time as we get into a January to assess for AD and as we guide on 20 will incorporate the latest thinking at a D.C. on on budgeting budget timing, but but the reality I think what's encouraging years. There is a eight a. top line to your agreement, there's a lot of alignment between.

House and Senate bills on funding areas and as I look through that you know, we we feel pretty good about you know the budget as are starting to shape up and I'm optimistic that the overall budget will get approval get food in a timely basis, a lot of pressure on that to to the to that to happen. So you know right. Now you know, it's not a concern for 19 and we'll read.

Visit this early early 20.

Thanks.

You bet.

Thank you are next question comes from the line of George Shapiro. It's Shapiro Research. Please proceed with your question.

Yeah.

Yes, good morning, Uh Huh.

Just wondering that you T.X. has got to sell their pawns G.P.S. business I would think that would be pretty attractive for it I was wondering if your comments on it.

I won't know George you know I'm not sure what a U.T.X. is going to do I'm not really you know falling details what's happening at the regulatory process. So I really can't comment on anything that they they might half the day that I really don't have any inside knowledge on that.

Okay, and then just one for J.

Lowered operating cash flow guidance is that just timing of all of the one time items that cause that kind of the drop.

Yes, yeah. So if you if that's exactly right George It if you look at it you know I think if you take a look at the deal related costs. There were a cash space is $300 billion plus the good news with that is that's pretty much fundamentally behind us and so it's not something that will have to worry about going forward and what we'll have to tended to keep track of.

Is the the cost to implement the synergies deintegration costs going for a piano basis, where we'll be through the year about 250 with 200 left to go to the 450 level and kind of the timing of that in a piano base about two thirds, one third on a cash flow.

A little bit you know slower about $375 million or after tax there and I won't be around you know 200 wish I guess this year and again I would say probably 60 40 in terms of of cash impact between 20 and 21, there and.

And just about if you're comparing it to the guide from Los Angeles be able to prefunded, the bench and of transcript $100, which I thought of the operating cash flow.

Okay, and one quick one if I might squeeze it in you should benefit next year from the discount rate coming down for your with pension income going up to 10 times, just give us any benchmark as to how much it might change <unk> 25 basis point drop in D.R. or something along those lines.

20 by basis points, you know up or down to about $10 million, a piano impacted the balance sheet impacts about $300 million in a liability.

Okay. Thanks very much.

Thank you are next question comes from the line of Peter Arm. It was buried please proceed with your question.

Yeah. Good morning, Bill <unk>, a lot of questions already asked here, but I'll just ask a quick one here bill on on all the investing and then just kind of highlighting I think these great revenue synergy proposals that have been put out I guess what are what are you hearing from the customer in terms of the feedback on your investing obviously it sounds very encouraging and then anything about.

Just you know share gains that you're going to be looking at thanks.

Well look I mean, I'll jump any within a and Chris can jump in as well and build on this so so Peter you know look personal were very encouraged on the revenue synergies Chris mentioned about being early in the process and we are so there's a lot more to do we have to go in when some things. So it's all sort of good indications you know the feedback from the customers I think has been very good but they.

<unk> do what we've been trying to do individually and that step up invested in R. and D. invest ahead of the need you know be proactive in providing or offering solutions, you know being agile moving things quickly. So so over all the feedback has been very good and I think you know the fact that these revenue synergies are moving like they're moving isn't indicate.

<unk> of the trust and confidence at the customer community puts in this new company called L. three Harris all at Chris Me to build on that yeah, absolutely and you know if I put the customers in in two buttons at the end user the the D.O.D., we've had or meetings as as recently as a last month and they're very supportive of the merger they liked the agility.

They liked the significant investments that we are making and again the mission solutions Prime the mission solutions provider plays in very well with the strategies that are that our customer has and whether it's a older platforms with new capabilities are new platforms with better capabilities.

It is really on the sweet spot of where the the challenges are and of course, we work collaboratively with a lot of other prime contractors then again.

Relationships are going well and our capabilities that we bring to like and that 35 or or appreciated noticed and we work collaboratively to to to to provide those capabilities. So pleasantly surprised with the feedback and we just have to continue to execute and deliver on time quality products.

Appreciate the color nice core.

Thank you.

Thank you are next question comes from the line of Josh Sullivan, What Seaport Global. Please proceed what's your question.

Good morning.

I just a question on the classified budget exposure you know I know you provided some color there on on the space exposure, you know, but what about the rest of the classified budget you know how big of an opportunity is that outside of space in a in the maybe what percentage of the total portfolio at this point is coming from the classified buttons.

Yeah, we've got like by the come back to you on a piece of the portfolio. You know, we knew where legacy Harris was I think we you know the commonize our definition, but.

You know could be in the 20% range. The the reality is when you look at the combined.

<unk> National Intelligence budgets is north of 80 billion 82 billion something like that you know so our pieces that are sure that still is relatively small I think lots of opportunities to go into it but more importantly, the places where that Bud your those by just shifting or more in line with a direction that we've moved you know.

Clearly, there's been a shift towards resiliency and how you define that with space architecture and I think we're ahead of the curve on that a little bit and we're enjoying some of the benefits of that I think it's so they want to come back you on what piece of her overall company is now classic part of it is his definition all as well so.

We'll come back and maybe I'd have different Antoinette.

Okay, that's fair enough.

And it just on the footprint consolidation efforts you know where are you moving faster you know are there any hurdles popping up and I'm not sure. If you mentioned, but metrics on square footage or the number of facilities, maybe targeted for the end of the year.

No. We we didn't mention it I mean, we you know I think we've talked publicly that we about 20, <unk> 20 million square feet, a space and just over a foreigner facilities. You know so we've obviously moves pretty quickly on a couple of different facilities headquarters facilities. We've moved up pretty quickly on you a few others. There's a number of projects that are working itself through the process where.

Valuating each one in turn you know the bigger I.D. is the ones that are going to move the needle are the ones, where we actually do production those do take some time to to really think through to action to to put teams against and we're right in the middle of that when we step back when we talk about sort of the overall cost savings knew about half was coming from.

Applied chain and facility rationalization and the facility part was <unk> on the order of 30 $40 million and that sort of overall magnitude and we're making good progress I think it's still early days and what would be a multi year journey.

But at the time.

You bet.

Thank you our final question comes from the line.

Well Lonny, what Morgan Stanley . Please proceeded to your question.

Hi, good morning, gentlemen, thanks for squeezing in.

Warning.

Just a couple a quick ones on the international side, though can you talk about the the attraction you been gaining they're opposed to deal given the expanded scale and size of the company and maybe any color on the portion of revenues you think that could be calm as we look forward a couple of years.

You know it's a good question no started maybe Chris can jump in here. So <unk> a good question, it's about 22% of our revenue today is coming out of international again, we're still working for making sure harmonic harmonizing. The definition of the international you know to work in Nablus around 22%, we should expect that to come up over time you know it's.

It's were Underpenetrated internationally combine we've got a great position in five or six different markets and through that combined strengthen those markets. We do believe we can provide better offerings. You know, it's something that we're working through and what the specific strategy is there a Christmas weediness with this team no but that should come up over time.

<unk> offset what might be a D.U.D. flattening. If you will the next couple of years, So Chris maybe jump in and say a couple of things on it or yeah, absolutely and you know I I put it in three buckets. We we have three countries, where we have a pretty big presence in Canada, U.K. in Australia, where we have a engineers and and business development actually delivering it.

Building product him country, and exporting out of those countries and and those three or looking very good and and we've had some combined synergies from both legacy companies with those three countries. We have the distribution systems that latency Harris had in place that we're looking at some legacy l. free products going through those.

Privy to yours, and then of course, we have the business development footprint in about seven countries, mainly far east and mid East and we're we're very optimistic about the growth opportunities again bring in more capabilities to our customers and I agree. We're at 22% now and there was an upward trajectory over the next.

Couple of years, and we'll give you more and future calls, but a good good opportunity and good progress so far.

That's great and then real quick on the technical side Eh deity part of it has been incredibly strong is there any opportunity for the international side to maybe catch up to those her to growth rates over time effectively at all like to pay for us.

Well, they're very different markets are driven by different factors you know what you see in the U.S. is a shift towards modernization and upgrading legacy radios as well funded by government. So you've got different services moving a different race, but you've got only a few services internationally worried and you know 100 different countries.

So each one operates in different ways, but the reality is what we see is what's driving a lot of the growth right now is really coming from monetizations in upgrading from what we're falcon to to talk and three and now parking for radios moving from single channel to to channel radios really lagging and following what we see happening in the U.S. domestic.

Market. So typically the way these things happen you from special operations in the U.S. with things like the two channel radio with a Chris mentioned it to channel Manpack, we're developing the H.M. radio that trickles into regular army in the U.S. It trickles into international special operations that eventually trickles into regular forces on.

The international market that that's sort of the trajectory here that we typically see and they get this encouragement, we'll see continued growth into the future in international I don't think it's going to be the sort of growth rates. We've seen this year on D.O.D. because they'd run on run it different paces, but I do think that that's the general trajectory and with Backstops growth in the future International.

[noise] great. Thanks, Thanks, Chris.

You bad thank you.

So so look just to wrap up here. Thank you very much for joining the call. The progress we've seen in our first 120 days has been terrific.

Leadership team or employees remain focused on meeting customer expectations and delivering value to shareholders, while really executing extremely wealthy integration I'm gonna. Thank them for the hard working for their dedication you know we feel good about or increase guidance as we enter the final <unk> what is really been a an exceptional year.

<unk> was focused on our strategic priorities puts the company and a strong position to continued out before next year and beyond so thank you again for joining us today.

Thank you. This concludes today's teleconference. You may disconnect July's at this time. Thank you for your participation and have a wonderful day.

[noise].