Q4 2019 Earnings Call
Greetings and welcome to the L. Three Harris technologies fourth quarter calendar year 2019 earnings call.
At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If any once you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Rajiv Ahwahnee, Vice President Investor Relations. Thank you may begin.
Thank you Michelle good morning, everyone and welcome to our fourth quarter calendar year 2019 earnings call on the call with me today, our bill Brown or CEO, Christy basic RCR chalabi, our CFO and on a broad mastery first a few worth on forward looking statements and non-GAAP measures.
Looking statements involve assumptions risks and uncertainties that could cause actual results to differ materially from that statement.
For more information please see the press release, the presentation and RSV filing.
Reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly materials on the Investor Relations section of our website, which is all three her cycle, where a replay of this call will also be available.
Hey, with year over year compare ability following the yelp rehearse merger discussions will be on a combined basis with prior year results along with year to date and first half 2019 results, reflecting a combined alperin Harris.
Businesses had been operate together during those periods without bill I'll turn it over to you. So thank you Rob either welcome to your first earnings call. Good morning, everyone.
He has recently taken over as head of Investor Relations and joins US from Morgan Stanley, where he was executive director Nobel equity research coverage in aerospace and defense and we're pleased to have them on the team.
I also take this opportunity you think entourage as he transitions to a new opportunity back home in Singapore, and Rocky to truly exceptional job as vice President Investor Relations over the past three years in communicating our story as we didn't barked on a significant transformation in introducing your company to a broader base of investors and he.
Was appropriately recognized a few months ago by institutional investor as the number one I our professional in aerospace and defense sector on a rock we wish you well you have big shoes for Rajiv to Phil.
So earlier today, we reported strong fourth quarter results with non-GAAP EPS of $2, an 85 cents, that's up 28% on 10% revenue growth.
Overall company margin increased 240 basis points to 17.3% and free cash flow was strong at $831 million.
These results cap, an exceptional first six months or the newly combined company in which we grew revenue and expanded margins in all four segments outperformed on all guidance metrics and delivered earnings per share growth of 27% for the second half in calendar year with full year free cash flow of 2.46 Bill.
<unk> dollars.
Total company funded book to Bill was 1.02 for the second half and 1.4 for the full year driving funded backlog up 5% setting us up for continued topline growth in 2020.
We continue to execute well against our strategic priorities and I'll start with an update on our progress on slide four and Kristen Jay will provide details on segment results in calendar 2000 guidance.
First integration is progressing ahead of plan and in the first six months since close we delivered $65 billion of net synergies were $15 million higher than our previous guidance.
This momentum along with a well defined path to generate $180 million of cumulative net savings in 2020 give us confidence in achieving our $300 million net savings target or $500 million gross earlier than anticipated in about a year ahead of plan.
Second well integration projects are well underway, we continue to make great progress on lowering cost driving productivity and improving working capital performance as portable normal operational excellence program called E three and you're seeing the benefits in our reported results.
Since June we've lowered working capital by eight days, primarily from better inventory management with plenty of runway ahead of us.
In addition, we've established common operating metrics instead improvement goals that all major sites with a rigorous reporting and review cadence put in place.
I'm very pleased with the way the teams have leveraged eathree to deliver immediate benefits that has helped offset mix in investment headwinds and I'm confident this focus will drive organic margin expansion longer term.
Third we continue to invest smartly in technology and innovation in anticipation of customer needs to support future growth.
In the past six months, we've analyzed our combined R&D spend of about $700 million with a focus on improving both the efficiency and effectiveness of our investments.
Since the close we reduced the number of R&D projects by about 30% and redeploying about 10% of our spend from overlapping or discontinue projects to focus on areas, where we can go revenue increase share an expanded into into adjacent sees including supporting newfound revenue synergy opportunities.
We've now submitted 23 revenue synergy proposals and that's up nine from last quarter and of the eight that had been awarded we were down selected for five.
If we're successful on these five and that the fully develop we estimate a lifetime revenue potential of about $2 billion.
Our fourth priority is reshaping our portfolio to focus on high margin high growth technology differentiated businesses, where we can win and generate attractive returns.
Well the effort is ongoing we made progress and just announced a definitive agreement on the sale of our airport security business for $1 billion to light dose, which we expect to close by mid year with net proceeds used to repurchase shares and offset dilution.
Although this is the first and largest transaction, we're contemplating our portfolio shaping process is ongoing and they ultimately result in 8% to 10% of total company revenue being divested overtime.
And as we've said before this will not impact or 3 billion dollar free cash flow target in 2022, and we'll continue to communicate transactions as they occur.
And finally, our fifth priority is to maximize free cash flow with shareholder friendly capital deployment to drive value on a per share basis for owners.
In the second half, we generated free cash flow 1.4, or $5 billion were $110 billion higher than guidance driven by better than expected working capital performance, while returning $1.8 billion to shareholders.
Well on track to deliver on our commitment to buy back $2.5 billion insurers or the first 12 months post merger with $1.5 billion recently completed in the stub period and $1 billion planned for the first half of 2020.
Overall I'm very pleased with the progress we've made as a newly combined company and expect to build on those momentum in 2020, as we leverage our well funded defense budget benefit from our increased scale and continue to execute against our strategic priorities.
For 2020 guidance, we expect earnings per share, but $11.35 to $11.75 up double digits on organic revenue growth of 5% to 7% and free cash flow of $2.6 billion to $2.7 billion, implying free cash flow per share of approximately $12 in 25. So.
And at the midpoint.
Inline with our commitment to shareholders. This year, we plan to return more than $3.5 billion through share repurchases in dividends, which were able to do as a result, a strong operational performance accelerating cost synergies and successful ex successfully executing on our portfolio shaping strategy and with that let me turn it over to.
Chris to provide an update on operational and segment financial performance Chris.
Thank you Bill and good morning, everyone, let's turn to operating results by segment on slide seven.
Integrated mission systems grew revenue, 10.2% for the second half of 19 and 11% for the calendar year.
This was driven by strength in our highest Saar mission as Asian business from growth on several key programs.
Including conference call Cross that Australian paired rent and presidential aircraft recap along with the ramp in the WESCAM turrets systems, both domestically and internationally.
Not funded book to Bill was 0.96 for the second half and 1.06 for the year as we leveraged our incumbent position with Big Safari booking more than 1.7 billion in orders this year.
Orders also outpaced sales, it's an hour electoral electro optical and maritime businesses.
Second half segment operating income was up 29% and margins expanded 200 basis points to 13.6% from cost synergies merger related accretion and operational excellence.
This combined with solid first half performance resulted in full year margin expansion of 130 basis points to 12.9%.
A key achievements in the last quarter was obtaining the certificate of airworthiness in our highest Saar business on our fourth and final paragraph aircraft.
Through this multiyear effort, we modified GE five fifties with next generation electronic warfare capabilities for the Royal Australian airports, our strong performance and customer focus positions us for continued international growth in our mission is Asian business into Twentytwenty and beyond.
On slide eight space and airborne systems revenue increased 15.7% in the second half and 16% for the year.
This strong performance was driven by a production ramp and increased content on long term platforms, including that 35 F 18, and F 16, as well as sustained growth in classified programs.
Funded book to Bill was solid for the first three quarters with a downshift to 0.74 in the fourth quarter due to timing, resulting in a second half book to Bill roughly 0.9 and full year of 1.1.
Segment operating income was up 21.8% and margin expanded 90 basis points to 18.7% for the second half driven by strong program execution and integration savings. This resulted in full year margin of 18.5%.
Okay. That's so yes, we have achieved several major milestones in our response of satellite franchise this past year, including new key wins for additional satellite buys.
These milestones are a testament to our innovation and strong program performance and opens new opportunities with multiple classified customers reinforcing our credibility in the market as a responsive mission problem.
On slide nine nine communication systems revenue was up 10.4% for the second half and 11% for the year.
For both periods deal de tactical was up more than 30% driven by modernization to band, which more than doubled versus the prior year.
Integrated vision systems grew double digits from my ramp than the E. N BGB program and public safety continued to gain share with state and federal agencies.
[noise] order momentum was broad based with a funded book to Bill above 1.0 in every sector. During the second half, resulting in the overall segment 1.15 for the half and 1.06 for the year.
Highlight was the considerable progress we made on D. tactical radio modernization programs.
Production awards from the Army Marines and SOCOM.
We received the second low rate production order for two channel radios from the army with nearly two thirds share awarded to us, reflecting the army's confidence in our capabilities performance and affordability.
Segment operating income was up 15.7% and margin expanded 100 basis points to 22.9% in the second half from integration savings and strong operational performance, partially offset by the mix impact some of the ramp in tactical radio modernization programs.
This resulted in a full year margin of 22.3%.
Lastly on slide 10 aviation systems revenue grew 3.5% in the second half and 2% for the full year driven by growth in defense aviation products, partially offset by the previously announced competitive loss on the C 17 training program.
Demand for full flight commercial simulators picked up in the quarter with bookings of six units, bringing the calendar year total to 10.
This order momentum along with continued demand in defense aviation products resulted in second half and full year funded book to Bill of 1.11 and 1.05, respectively.
Segment operating income was up 68% and margin expanded 550 basis points to 14.2%. The second half from improved performance merger related items and cost synergies, partially offset by mix. This resulted in full year margin of 12.4%.
And our mission networks business, our system went live in India on an air traffic control contract that mirrors, our success with F. T I in the U.S.
The network operations and security operations control centers became fully operational in the fourth quarter and the first service connectivity was established in December.
An additional 80 plus services are anticipated to be activated in the first quarter as we continue to make progress on the first ever international at Ti contract, establishing our position as a partner of choice globally.
So overall, a solid first six months and I'm confident in our outlook for 2020 with that I'll turn it over to Jay.
Thank you, Chris and good morning, everyone I'll begin with a recap of fourth quarter results, where revenue was up 10% and EBIT increased 28% on higher volume operational efficiencies and integration savings.
This resulted in margin expansion of 240 basis points to 17.3% EPS growth of 28% or 63 cents as shown on slide 11.
Well this growth 56 cents came from higher volume solid program execution and integration synergies as well as 15 cents from pension and elimination of L. Three intangibles.
Partially offset by an eight cents net headwind for tax share count in interest.
At the same time free cash flow was very strong at $831 million for the quarter from better than expected collections.
And for the full year EPS was up 27% or $2.16 was $1.72 driven by operational improvement in cost synergies and an additional 44 cents coming from pension elimination of L. Three intangibles lower interest expense and share count, which was partially offset.
That by headwind in tax.
Okay switching over to guidance for calendar year 2020 on slide 12.
Where our ranges account for planned divestitures.
Starting with the topline organic revenue is expected to be up 5% to 7% with gross growth across all segments, which is in line with the growth previously communicated in the S. Four prior to the merger, though on a higher materially higher base.
We do expect the growth rate to start off slower due to the tough first quarter compare.
Our full year EBIT, we expect total company margin to be between 17 in 17.5%.
65 basis point improvement over the prior year at the midpoint.
Driven by higher cost synergies and merger related accretion.
This combined with a lower share count results in 2020, EPS guidance in a range of $11 in 35 cents to $11.75.
Up 15% at the midpoint for prior year EPS of $10 spent eight cents.
This guidance reflects about $3 billion and share repurchases, including net proceeds from today sale announcement and an effective tax rate of 17%.
We expect to generate between 2.6 in $2.7 billion of free cash flow for the year.
This implies free cash flow per share of $12 to $12, a 50 cents and reflects a three day working capital reduction to 64 days.
Or 61 days normalized for purchase accounting with $400 million and capital expenditures.
Now switching to the segment outlook.
Integrated mission systems revenue is expected to be up 5% to 7%.
Driven by our income it position on big Safari programs strong growth electro optical and increase share on classified programs in our maritime franchise.
Segment operating margin is projected to be between 13 in 13.5%, reflecting increased cost synergies and pension income.
In space and Airborne systems, we expect revenue to be up between five and a half and 7.5% for the year driven by technology upgrades ramped production with increased content, a long term platforms and growth in classified space, including small sats.
Segment operating margin is expected to be between 18, and a half and 19% driven by cost synergies pension income and operational excellence offsetting growth from lower margin programs.
Turning station systems revenue is expected to be up 6.5% to 8.5%.
Driven by growth in deal de modernization and tactical and integrated vision systems segment operating margin is anticipated to be between 22, and a half in 23%, reflecting benefits from operational excellence and integration savings, which more than offset the dilutive margin impact of.
New program starts.
And finally in aviation systems, we forecast revenue growth of 3.5% to 5.5% driven by a ramp in defense aviation and moderate growth in commercial aviation.
Segment operating margins are expected to be between 13.75, and 14.25% from productivity initiatives across the segment. In addition to cost synergies.
Turning to the 2020 EPS bridge on Slide 13 expected full year EPS of $11.55 at the midpoint reflects a total increase of $1.47 cents over the prior year with 86 cents from volume operational improvements and cost synergies 20 nice and.
Nation of L. Three intangibles and higher pension income and 32 cents net of interest tax and of lower share count.
So to summarize our outlook reflects continued momentum on the topline and operational performance with that I'll ask the operator to open up the line for questions.
Thank you we will now be conducting a question and answer session and the interest of time, we ask that you. Please limit yourself to one single part question. If he would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question Q.
Just start to if you'd like to move your question from the Q for participants using speaker equipment, maybe necessary to pick up your hands that before pressing the star keys. One moment. Please only pull for your question.
Our first question comes from the line of Doug Hard with Alliance Bernstein. Please proceed with your question.
Hi, good morning, Thank you.
Good morning.
Yeah.
Talked about the.
How about the improvement in working capital the.
Hey days improvement, which is already seems to meet your six to eight day goal for 2022.
I just have to ask when you look at that 2022 guidance for for 3 billion in free cash flow.
If you've already met this one and there's more to come can you walk us through how you're thinking about that now sort of on the in the three buckets of.
Uh huh.
Yeah of operational performance synergies and.
Working capital improvement.
So yeah, Doug good morning. Thanks. Thanks for the question I think as you noted, we're making very very good progress and we see it exceeded the goal we set for 19 on free cash by the more than $100 million in came in.
Eight days better now about three days of that is just early collections and you'll see a little bit of snap back on that in coming into calendar 20, but but it's a much better than we thought and.
I think the team to doing an excellent job in getting at working capital very very quickly. So 20, we're guiding to 2.6 to 2.7 billion. That's additional three day improvement again, despite some of the additional collections that data snapping back you know in 21, we do see the benefit of increasing cost synergy.
Some of that's moving left we'll see an additional three to four days, a working capital improvement, but keep in mind. The divestitures do have an impact they're going to have an impacted back ended the year, which we have included in our guidance, they're going to impact 21. So so on a per share bases, we do see free cash flow shipped per share getting continuing to get.
Better again, Jay mentioned this year, it's around 12 12 50 per share as we get into 22, we're still confident hitting the 3 billion dollar target. Despite the divestitures you will see another three to four day working capital improvement in 22, So again as we get out the 22, we expect will be into low to mid fiftys in terms of working capital.
Performance, we do see maybe some additional cost synergy opportunity sitting out there and in a low to mid Fiftys you remember, where we were at Harris were 41 days. We have another 10 12 days of improvement beyond that you will probably still eight nine days higher than where the peers are even today. So as I look at it we still have operate.
Unity is to continue do better in 22 again, we'll get through 20 calendar 20, we'll see we're out in 21 and it will start to shake 20, do we get there.
So I guess the key here is that we should be thinking about this the 3 billion goal is net of divestitures with still some real work you're going through on portfolio shaping in the meantime, et cetera right.
That's the way we're looking at it and I think were purposeful and saying, we're looking at 8% to 10% of our revenue being divested that is contemplated in achieving a $3 billion free cash flow in 22. So again, we do have opportunities with protect perhaps additional cost synergies, but most importantly on working capital improvement and keep in mind a lot of the opportunity from here.
Route on working capital going to come from inventory. So we got some of the low hanging fruit here in calendar 19, we had a pretty quickly, but getting and sustainable improvements in inventories going to fundamentally you have to improve how we run contracts, how we executed in our factories advance payments, we get how we negotiate with customers all those things.
Take time, Doug and that's why we're saying, let's get through 2021, and we will start to feel better about 22.
Great. Thank you you bet.
Thank you. Our next question comes from the line of Peter Arment with Baird. Please proceed with your question.
Good morning, Bill Chris Jay.
Bill or maybe Jay can comment just on the on the on the adjusted EPS Bridge that you mentioned the the range the midpoint at 43 cents for operations quite a big ranged from 23 to 63, maybe if you could just walk us through any of the puts and takes there that would make you come out at the low end or the high on there. Thanks.
Yes, the biggest piece of that as the volume so it'll it'll move with the volume between five and 7%.
Peter I mean, that's that's the biggest variable we feel pretty good about our productivity initiatives and we do have a little bit of headwinds as far as investments, but the biggest variable there is going to be the volume and to the extent that we get you little bit better or worse, it's going to move it around so that's the biggest piece now really in a 43 cents at the midpoint.
Thank you. Our next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed with your question.
Hey, good morning, everyone.
Hey, good morning.
Congrats to the to the too.
Our professionals and entourage. Thanks for all the help you gave us over the years.
Thanks.
[noise], maybe you could give us a sense for how much even if a a wide range approximately how much free cash.
I would be divesting, if you divest 8% to 10% of revenue interested we can all square up.
How we were thinking about the free cash trajectory previously.
Versus that and then if you could speak to.
Use of proceeds one just as a as a clarification is there any incremental use of proceeds from the sale to light us in the 2020.
Denominator of earnings per share and then should we just be thinking about you know incremental share repurchases. Every time, you are selling something or something else.
So first of all I mean, 8% to 10% of our revenue and you can run the math of where we ended up in a in calendar 19, you know it will be businesses that in aggregate will have lower operating margins and the rest of the core company and so we just run that math will be sub below 100.
$80 million with the free cash impact as we get out to complete the final divestitures. So so we've we've contemplated that in our longer term guidance and in our guidance ordinary for sure. This year, we have anticipated in midyear close on this particular transaction and using the proceeds in the back half of the year poor for share.
Buyback and that's contemplated in our guidance as we see it today.
So how much share repurchases in the year then for further guidance.
It will be about $3 billion. This year for on share purchases will do a billion into first half I know they're building in the back half through normal share buyback activities and then as we go.
Transact the sale to to Lydalls will get slightly less than a $1 billion a net net proceeds and we'll execute a in the second half of the year.
And Bill further sales you will just add to the buyback or something else. Our anticipation today is we'll use proceeds for buyback to offset dilution.
Thank you.
You bet.
Thank you. Our next question comes from the line of Robert Stallard with vertical Research partners. Please proceed with your question.
Thanks, so much good morning.
Hey, Rob.
Well I wondering if you could comment our Chris maybe the the book to Bill that you saw in the last call shows the orders can be a bit lumpy, but compared to somebody or defense pay as it did you book to bill was a bit softer than what the rest of the industry seeing.
Yeah, Rob. Thanks. Thanks for the question it was a little a lighter than than we would've wanted for the fourth quarter and I think you're right. There is some some lumpiness.
For the calendar year, we did grow our funded backlog by 5% and we did have a 1.0 for book book to Bill.
Looking at our pipeline.
At a we analyze internally it is up to 66 billion at this point, so about 10% more than we had last time, we talked so 20 or 20, I think we have some pretty good growth opportunities lot of the businesses follow on and some recompetes and we're still optimistic that.
We're going to be able to grow.
Our book to Bill and our topline revenue.
We were pretty careful in our remarks, Rob that well, we talk about book to built on a funded basis, and I think thats, a little bit different and perhaps more conservative than what.
You're hearing from others in space.
Okay. Thank you.
Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.
Hi, Good morning, everyone and thank you for all your help.
Bill I guess, when we look at you guys that you're one of the only defense companies out there with a major margin opportunity and Fythirteen you call out next as an offset to some operations what is the biggest mix impact and 2020, whether it's in tactical coms their cost plus Steven how do you think about these items longer term.
So I think the you know the good news of winning a lot last year is is where revenue is growing and you saw that last year and you see that coming through this year, but.
Some of those wins or in development programs, new modernization programs that come out at a lower lower margin and you prove that over time. So good the good news here I think Sheila this year coming into 20 is that we continue to execute on the cost synergies you are eathree. Our operational excellence program is really getting some traction in that is offsetting a lot of Nick.
Headwinds, which is what we expect to see and overtime I do expect that we'll continue to grow our margins both through the drop through of synergies continued outperformance operational excellence despite mix and also perhaps a little accretion coming from the divestitures of some businesses that are likely to go out of the portfolio at less than the overall company more.
Region. So so I see it growing over time, and I think hopefully up a good opportunity at the high end of the guidance range here in 2000.
Thank you.
Thank you. Our next question comes from the line of Carter Copeland with millions research. Please proceed with your question.
Hey, good morning, gentlemen, moneycard, just I wonder if you might just give us a mark to market on the the divestiture process and how you're looking at the portfolio you know if that's evolving.
In terms of things that you would consider selling and I now at this point and just how that process is going to give us some color on on on the evolution there.
Sure Carter I mean this process, we've talked about this even pre close I think it's going very very well. It has been a key priority vars to take a fresh look at.
Combined portfolio. The company you think through what businesses, we want to stay in which ones are strategic which ones have technology that can differentiate where we can generate good returns and really in really when longer term and obviously with the transaction on STS of Mac HR Airport security business, we felt that lightest was a much better strip.
Dziedzic owner for that asset than we were it's a good business, but there are better owner. So a lot of pre close it planning on this we got out of the gauge very quickly with one there are several others that are in process or a detailed planning and we'll announce those transactions as we as we go through this year in into calendar 21, So it's going very very well, we're very pleased.
The early results.
Great. Thank you.
You bet.
Thank you. Our next question comes from the line of Matt Sharpe with Morgan Stanley. Please proceed with your question.
Good morning, gentlemen, and nice Q.
Bill do you guys have done a pretty good job taking out cost thus far it looks like a year or a fair clip ahead of plan with the 65 million net savings.
Where do you see that going at this point in time, just the original 300 million still hold and are you seeing incremental opportunity or is this simply just an acceleration of the original plan.
Well, it's a very good question. So clearly we are doing better in calendar 19, I think that's.
Testament to the quality of the integration team put together the reviews a christianized Jay have every Monday, you know that started well before we close it back within a couple of days. After announcement and has continued since then I think we're executing very well as we've talked a little bit about in the past, we're seeing more opportunities on site.
Minan headquarter consolidation, we've gone live on a new benefits plan for all of our employees are all the domestic employees on January Onest went from 44 plans to four so quite quite a good set of activities and we're finding great volume leverage as we as we do all that we've had a 88 different supply.
I mean events over 1 billion to extend so we're really moving on this very very quickly moving quickly on shared services. So as we move and I talked about in my remarks, 22 savings target has accelerated into 21 about a year before we with more of faster than we had expected and we're going to continue to work in that.
Third year in 22, so I would expect at 22 will be better than 21, we're not going to size that as we sit here today, but yeah I think you'd expected. The team is going to continue to look for integration opportunities.
Great. Thank you.
You bet.
Our next question comes from the line of Myles Walton.
Please proceed with your question.
Thanks, Good morning.
Was wondering if I could go back to the margins for a second for 2020 and the implied range 17 to seven in half.
His pension 30, or 40 basis points helped to that range and if so.
Why is it not a higher range given you're already June 17th three in the back half of 29 team.
Okay. So you're right. If you can you know kind of normalize on the on the full year miles did.
But 40 basis points improvement on pension synergies at 115 incremental year over years, almost it's about 60 basis points. We do have some basically place holder to midpoint there for incremental investment and mixes as Bill just mentioned, it's about 50 50 between those two at our objective there.
Just a driver productivity hired a really offset fully the impact of of the mix and get us really towards the high end of that play that took place holder of Seventeenthree closer to the 17 five so I just have to normalize kind of full year 2019 to about 17% on a kind of apples to apples basis with the full year.
Impact to the pension and intangibles.
Okay, and one follow up Bill if I could the 700 million bogey you talked about for R&D.
What's the new kind of run rate or is it the same run rate just at a higher sales base.
Yes, it will be in that same range I mean again, we believe spending around.
Athree nine 4% of our revenue is about where we ought to be but it's not so much the specific number or the percent I don't see the changing much over the next couple of years is making sure that we fund the great ideas and opportunities that are coming at us and.
And that's looking hard at what we're spending our money on today and if we have new ideas that are coming through in revenue synergies large most of them do require some level of investment we want to make sure. We put our R&D dollars on those projects that have the best return and that May mean, reducing some others or adding to the topline in total.
All right now we think in that 3.84% range is probably a good number to use.
Okay, great and things on our.
Okay.
Your next question comes from the line of Jon Raviv with Citi. Please proceed with your question.
Hey, Thanks, guys.
Good morning can you talk about the within non military business.
Well.
I think you talked about the guidance that commercial bottlenecks that negotiation, but bigger picture, we're going to that.
Well.
We already have associated Nocs are women how to your exposure to this will.
Inventory at the divestiture. Thank you.
So choice it broke up a little bit there John but I think it was around do you do your non dilutive businesses. So let me comment on that if they don't hit the Mark maybe you can maybe you can follow up but as we look at how we did in 2019 at about 10% growth. We sold the deal de businesses of the company, which are about 60%.
Of our revenue grow mid teens, that's a little bit higher than where the outlays were last year and what and the rest of that which is non beauty U.S. government commercial international growing in the sort of low mid single digit range and on an aggregate basis. It was around 10% as we come into this year, we see the deal the businesses again growing pre.
Well higher than outlays. So we expect in high single digit range with the sort of the non deal the businesses plus international in the low to mid single digit range again, and again on a combined basis in that 5% to 7% range. So I don't if I answer that question specifically, but.
It's not even clarify it.
Yes that would that self stood at one thank you.
Okay.
Thank you. Our next question comes from the line of David Strauss with Barclays. Please proceed with your question.
Thanks.
Good morning, everyone.
Good morning wanted to ask about synergies so it looks like.
In Q4, you did 50 million that on a run rate, but in a 2020, you're forecasting a 180 million, which would imply a lower net run rate do I have that correct.
Yes, David that's your math is right as we go into 20, we do start to see a couple of areas, where we see some negative synergies, including sort of equalizing harmonizing. Our four one key plant would be one of the items that have happened to be in there. So your math is correct.
Okay. Thanks.
Thank you. Our next question comes from the line Gautam Khanna with Cowen and company. Please proceed with your question.
Good morning. This is Jeff on Jeff Molinari on forgotten. Thanks for taking my question.
So so bill I'd like to circle back to the bookings outlook.
Do you expect book to bill to be above one times and.
This year and can you give any color by segment, which you can get a strongest weakest or any any large international opportunities to call out. Thanks.
Maybe I'll start on that and Chris can can jump in here, yes. We ended the year as you mentioned just over one this past year. The backlog was up 5% on the funded basis that was sort of a good progress on a 10% revenue growth year you as we get into next year, we do anticipate book to bill being somewhat above one it should be above one across the segments. We have a it's a little.
Early in the year to kind of call the ball and that it's hard to predict when orders happened, but yes. We we do expect a north of one book to Bill we do see an international to have some some growth outlook for us. It mean, we believe 20 will have a little bit more runway they'll start to accelerate maybe in 21 and 22, because we've got a lot of opportunities on the international market.
So so we do we do see bookings to be pretty pretty healthy through the course of calendar 20, if the market hold as we as we expect it would we don't really give sort of guidance at that level down to the segments, but I think you'll see across all the segments. Some some healthy trends good pipeline, Chris mentioned 66 billion dollar pipeline across the company.
And it's pretty robust across the franchise as I, just look at our space and airborne systems business led business their pipeline was up about 10% over the six months from close to the ended the year. So the opportunities are coming quickly our big BNP activity is very very high. So we think the outlook is going to be pretty good over the course of calendar 20 on both.
Bookings and revenue.
Yes, I'll I'll, just chime in and say a you know as we look look forward to 2020 will clearly target well over a 1.0 book to Bill I look at I'm asked them and some of the opportunities I mentioned the Parago and program for is are clearly there's a couple of other international countries that are interested in a derivative.
Of that capability. So I think that's that's going to give us some international opportunities we look across.
The globe, we see most of the opportunities as we've talked about before in the Asia Pacific region in the Middle East.
Some of those countries.
And opportunities have been pretty well publicized electro optical that's a 50 50, a business between domestic and international as an example, a lot of the work, we're doing and CW and.
The TR three program for the F 35 F 18 F 16, those both have domestic and international opportunities as well, including tactical radios and I mentioned in my prepared remarks, even mission networks with the work in India is going quite well and there is another country or two that are interested in that capability. So good pipeline lot of.
A follow on lot of opportunities and we'll keep you updated as we make progress throughout the year.
Thanks, Bill Chris that's helpful and good to hear.
Thank you. Our next question comes from the line of Seth Seifman with JP Morgan. Please proceed with your question.
Thanks, very much and good morning.
Thanks.
So I wonder if you could talk a little bit about so tactical radios you know in in 2020, both in terms of the more I guess qualitative milestones and in terms of the progress toward that billion plus out your goal that that you expect this year.
Yes. So so thanks for the question and we had a very strong calendar 19 were very pleased with the team's performance. So tactical radio is a whole grew in the mid teens and it was pretty much equal weight in the back half in the front have you de was very very strong sort of in the mid Thirtys, which was which was very good at much.
Better than we had thought as we started at calendar 19 and progress through the years. So it kept getting a little bit better international low single digits, which is basically what we thought where we thought we would be and as you saw in the attach it on the back of our webcast. The tactical backlog sequentially up about $50 million down a little year over year, but it's pretty healthy out about.
1.1 billion. So so the trends here are very very good you know in calendar 20, we see growth rate a moderating a little bit we see overall tactical in the mid to high single digit range you deal de around around 10% off a very very strong year in calendar 19 modernization is ramping.
CLIA doubled in the back half of 19, we see growing substantially gain in calendar 20, as we look at calendar 20 modernization revenue will be something like two thirds of the overall deal di business. So it's growing very very quickly the offset is a little bit reduction in the base and readiness spend as we always anticipate.
Good and explain that's going to shift the monetization over time, we do see that happening here in a in calendar 20, it's possible that our guidance is a little bit on the conservative size. We've seen the last couple of years. We know we're on a front end of it very very strong ramp in modernization as we look at is Theres only been about 25 found.
Sales in modernize radio that had been ordered so far of what we expect to be about 150000 over the five year period, and maybe 300000 to 500000 radios overtime. So we're at the front end of the ramp a monetization the funding looks very very good when all programs all services performing well.
So I think the deal. These I looks good and we continue to see a billion dollar business sitting out in 22.
Great. Thank you very much you bet.
Thank you. Our next question comes from the line of Robert Spingarn with Credit Suisse. Please proceed with your question.
Good morning.
Bill I wanted to ask you a high level question.
What do you think.
Maybe the most misunderstood aspect of the story or at least the least well appreciated.
Well I think were relatively new here Rob at the end of the day were you are in existence for seven months. So we had very two very strong companies that came together and I think what you're seeing to the results. We reported Q3 Q4 now guiding for the year, you're not seeing hiccups or bumps in this you know colossal.
Well, we it's executing very well the integration savings are coming through the working capital performance is coming through better than we expected we tightly managing capital we're improving our BNP performance, we're executing at the customer interface. The team is excited and energized at the end of the day I think investors, we'll see that more more over the.
Of course, a 20 in our results I think the early results are quite good and you'll see that coming through the balance of the year, So adamant that understood or misunderstood by investors, but I think that's to me is what should be coming through clearly in both the results were reporting which is what meaningful to investors, but also the guided to providing today.
Okay. Do you think people are just so focused on that out your number that you put out that its limiting.
Their view of the the far so to speak from the trees.
You know look I think we've been pretty transparent about setting goals out a couple of years as to what we're.
Trying to achieve internally, we don't set those goals without a roadmap to get there. We're just not going to overreached. The ended the day. We know we can had $3 billion in 22, we've talked about portfolio shaping were out of the gauge very very quickly on that those things do take some time it has to be a buyer and seller as you all know so.
We've got to make sure we conclude those transactions, we got to make sure. We did get really good trajectory here on the working capital performance again, I feel great about the fact were down eight days a little bit more that with purchase accounting, we've got a great opportunity to continue to perform on that and as we keep executing every quarter and keep demonstrating results.
And get closer and closer to that goal and perhaps that goes up overtime. I think the story is going to be much better appreciate it I think the one area, where I think it should be important to investors is the growth opportunity that we see longer term into international markets. Chris talked about this we're not we're appears happened to be we have lots of opportunities.
We put it focused effort on that so you'll Rob I think we're on a great. We have a great start here, we're performing very very well and I think we're all collectively optimistic about the future.
Thank you Bill best wishes on Iraq.
Thank you. Our next question comes from the line of Pete Skibitski, but the one that global. Please proceed with your question.
Good morning, guys.
Sure Chris could you guys talk about your unmanned surface vehicle strategy I know you've kind of got some exposure there today, especially in the restricted world and obviously the Navy's looking at things I don't if you can size for us and maybe talk about how big it could be thanks.
Yes, Thanks, Pete it's Chris.
I'll step back and start talking maybe a little bit more about autonomy in general.
We think we are well aligned with the national defense strategy as they're taking the capabilities away from these major programs and disaggregating them. So the the need for autonomous vehicles is growing so we have capabilities you know with unmanned air vehicles unmanned undersea unmanned surface vehicles.
As well in fact later this week Bill and I are going to be reviewing a bid for for an unmanned ER.
Surface vehicle, we've been pretty successful so far you know there theres the medium unmanned surface vehicle, there's a large unmanned surface vehicle they come a different shapes different flavors in some cases, we're solving.
Subcontract to a prime in other cases were priming. These are several hundred million dollar opportunities over a couple of years and I think the a the systems and the capability, we bring put us in a unique position and it aligns with what our customers are talking about your about multi domain ops distributed maritime maybe.
Matt. This is all about connectivity and this is in our sweet spot and I think something that are kind of provide growth over the long term.
Thanks for the color.
Thank you. Our next question comes from the line of Michael Ciarmoli with Suntrust Robinson Humphrey. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the question here, maybe maybe bill or Chris I mean, you guys hinted at it a couple times running about a year ahead of plan. We are looking at that that obviously that 3 billion dollar 2022 free cash flow target and keeping in mind I guess, you said made.
150 million comes out from divestitures, but if everything else is running ahead of plan should we think that that maybe that that 3 billion. You know has some some potential upside to it should we think about you know achieving that goal coming in ahead of plan and again, realizing you've kind of laid out were working capital can go, but just try and trying to run.
Reconcile that you there.
No look I mean, we it's hard to be more clear about what we're trying to do we're not going to take the goal up in 22 today.
Theres a couple of dimensions that go to that one is the opportunity to overdrive in 22 versus 21 on cost synergies that that we're really focused on we've got to keep the topline growth momentum going in revenue synergies in 22 should contribute to that.
We are really moving fast on working capital performance into detailed analysis that's happening here.
At a very discreet level across the places in our company that had the highest amount of working capital eyes inventory. The longest number of days, we're putting a lot of time effort into that and if we can move that along faster, though all of those things will contribute to doing better than 3 billion in 22 today why.
Just on executing Q1 of 20, and then calendar 20, and then making sure 21 goes really well and that's a whole lot of heavy lifting on the integration on working capital on topline growth. There's a lot of pieces that are going on here. So as we go through the year and to get a better sense of how we're progressing on all these dimensions, we will continue to shape.
For investors, what our expectations are going to be you two three years out but today, we feel good even despite the divestitures of getting the 3 billion in 22.
That's helpful and maybe just a quick follow up on that you haven't talked about footprint as it as it relates to maybe some of the working capital or other savings can you give us an update on where we are I think at one point, maybe it was 400 combined locations where are we now.
That's true I mean, we had thought we about little over 400 locations 28 million square feet.
We sized the original target getting out to $500 million gross savings, we said that would be coming down in the 8% to 10% range. We have a number of projects that are underway. Some have been announced and have not been those thing to do take some time theres been some early wins in the first part of the integration period office spaces.
Where it's easy to vacate when you when you thinking about moving production, we're engineering development sites, they take more thoughtful planning and making sure that we do the well they take some time, so you'll see it typically you'll see two and a half three year payback on those kinds of of initiatives and I think is pretty typical when you moving facility.
These so we'll see that more on the back end of the integration period as opposed to the front end.
Got it helpful. Thanks, guys.
You bet. Thank you. Our next question comes from the line of Richard Safran with Buckingham Research. Please proceed with your question.
Good morning, everybody Rajiv welcome analog it's been a real pleasure.
I had a question this morning on not something I've asked about before contract mix based on the opportunity set you're pursuing and it always to the best you can could you just discuss how you see your contract mix trending at 20, you know as always I'm, just curious to see if you're moving towards her away from more fixed.
Price or commercial contracts and by the which it separately if you could discuss how you see overall classified versus on classified growth trending long term I'm just curious to see how you think.
How do you think those to play against each other.
Okay, Great Richard as Chris and Oh, It's if Jay wants to add anything at the end I'll I'll allow him to do so I'll take one to reverse order I mean classified right now is about 20% of our portfolio. It grew double digits.
19 over 18, and we see some some really good opportunities across all of our segments. When it comes to classified work. So Unfortunately is not a lot of detail. We can give you in that regard, we're very very upbeat and the classified arena both as a prime in both the supporting.
Some of the other industry partners relative to the contract mix, we're seeing its pretty pretty stable.
On the mix over the next year or so I'll, let Jay due to the specific numbers, but when you run a portfolio. We talk about these new opportunities. We didnt talk a lot about revenue synergies, but bill mentioned the five wins a lot of those start out this kinda cost plus developmental programs, we move in that whole Ripley move into production and sometimes we have.
Sports internationally. So you just are healthy portfolio overtime, you want to have those costs plus and developmental programs feeding. The pipeline. You also want to have the mature fixed price and then you want to be able to exports. So you put that all together, we're going to be in the same range. Joe you want to give a little more specificity of it the fixed price.
The mix is about 70% fixed price, 30% cost plus and as you would expect that requires a rigorous approach to to visit proposals and that's what we have pretty solid processes in place to make sure that we're managing the risk appropriately, but it's it's not new we've been at 70% for some time here and don't expect that to chase.
Substantially from where we are today.
Thanks very much appreciate it.
Thank you. Our final question comes from the line of George Shapiro with Shapiro Research. Please proceed with your question.
Yes.
The margin in the quarter of 17, three I mean, the implied guide based on your second half guidance with 16, eight so is the improvement due to.
Quicker synergies as you mentioned or lower investment or if you could just clarify that a little bit.
Sure George as it was combination of two things one was synergy synergistic were better than there what we guided and also we had a little bit of a benefit from from pension as well and so that dropped through is really the combination those things drop through both of them to get us to the 17 through <unk>.
And then just one clarification Jay you mentioned in the release that the guidance includes the divestitures. So I assume that includes the divestiture of the a airport a business. How did you can calculate aviation sales you took out 250 million for half a year.
In each year or if you just explain what went on there yes. So first of all yes. It does include that divestiture, we guided the revenues organically and so.
You know the EPS guide is organic number as well as the overall, 5% to 7%.
Okay. So you took out the sales from the prior year as well to get the organic number right.
Okay. Thanks, very much thanks, a lot on Iraq for your help.
And welcome Rajiv.
So thank you all for joining us today, we're off to a terrific start as a new company I think we're well positioned for continued success in 2020 and beyond.
Employees in our leadership team have remained focused on meeting customer expectations executing with precision and delivering value to shareholders and I'm real proud of them and I want to thank them for their hard work and for their dedication. Thank you again, everyone for joining our call today. Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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