Q4 2020 L3harris Technologies Inc Earnings Call
Greetings and welcome to the L. Three Harris technologies fourth quarter calendar year, 'twenty and 'twenty earnings call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation and.
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As a reminder, this call is being recorded.
It is now my pleasure to introduce your host Rajeev Motwani Vice President Investor Relations. Thank you you may begin.
Thank you Rob good morning, and welcome to our fourth quarter 2020 earnings call on the call with me today are Bill Brown, our CEO Christie basic our CLO and Jay Malave, our CFO first a few words on forward looking statements and non-GAAP measures forward looking statements involve risks assumptions and uncertainties that could cause.
Cause actual results to differ materially for more information. Please see our press release presentation, and our SEC filings a reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the Investor Relations section of our website, which is L. Three arris dot com, where a replay of this call will also be available.
And to aid with year over year comparability. Following the <unk> merger prior year results will be on a pro forma basis with that Bill I'll turn it over to you.
Hello, Thank you Rajiv and good morning, everyone earlier today, we reported fourth quarter results and I'd like to start by thanking our employees for their continued dedication and perseverance through 2020.
Despite COVID-19, we met customer commitments advanced the integration and delivered bottom line results ahead of initial expectations, all while keeping our workforce safe will.
We will continue to follow mitigation plans implemented at the onset of the pandemic and keep them in place until widespread vaccinations have occurred.
As a combined company, we're successfully executing the strategy, we laid out a year and a half ago to drive shareholder value and our progress is reflected in our operating results and outlook.
First we delivered solid results and 2020, where we exceeded our initial guidance on margins earnings per share and free cash flow offsetting the negative impacts of the pandemic with a solid 7% growth and our core U S government business and modest growth on the international side.
Margins expanded 120 basis points to 18% from synergies and operational excellence and drove earnings per share up 13% consistent with our double digit growth framework.
With an eight day improvement in working capital. We also generated strong free cash flow and nearly $2 $7 billion.
This along with progress on portfolio shaping enabled us to return $3 billion to shareholders and deliver growth and free cash flow per share of over 10%.
Second our guidance for the current year shows continued momentum and the business with.
With the fiscal 'twenty, one budget now set and broad program support across key areas were and are positioned to deliver mid single digit organic revenue growth at the midpoint underpinned by the building blocks. We previously described.
Our portfolio is well in line with National security priorities and while the overall budget is flat, we expect at least low single digit growth driven by space Maritime Dod modernization and classified programs.
Revenue synergies will contribute about a point of growth with the notable driver being the S. T. A tracking leader award as well as continued traction elsewhere with a win rate of about two thirds of the 40 proposals awarded to date.
On the international front, we expect another about another point from mid single digit growth plus back by a funded book to bill of above, 1% and 2020 and a growing pipeline of pursuits.
And then finally and our commercial businesses, we foresee a more modest impact of full year results as we lap COVID-19 pressures following the first quarter.
We also expect another year of margin expansion supported by increased synergies and continued operational excellence net of dilution from new program starts.
We exited the year at $270 million and net cumulative synergy savings $20 million ahead of our prior estimate and with more confidence and savings from the supply chain facility rationalization and shared services and functional efficiencies.
Now, increasing our cumulative savings to $320 million to $350 million in 2021 up from our prior estimate of 300 million plus and still a year ahead of schedule.
Our free cash flow guide of two 8% to $2 $9 billion demonstrates clear progress towards our $3 billion target in 2022 with all cash used for capital returns to support double digit earnings and free cash flow per share growth.
Yesterday, we announced that our board approved a new $6 billion share repurchase authorization alongside a 20% increase and our dividend the third raise since we closed and bringing us closer to our target of a 30% to 35% payout and a free cash flow.
And then finally, we continued to position the business for long term value creation by exiting non core businesses and focusing our significant R&D investment on a more strategic technology based business areas.
We're now and the latter stages of several portfolio shaping processes and we will look to provide updates over the coming months.
Our expectation continues to be for divestitures to represent a cumulative 8% to 10% of revenue with about a third completed to date and all proceeds going towards repurchases.
And we'll continue to sustain R&D spending it appear high of nearly 4% of revenue with a focus on open architecture Multifunction software defined solutions across our broad C. Five ISR portfolio of capabilities.
These technologies are essential to a countering near peer threats across all domains and our past investments with a driver behind the recent SD tracking layer, HB, TSS and Nexgen jammer wins.
So overall, we're clearly making progress and building a high performance technology focused operating company and positioning L. Three Harris as a full end to end mission solutions Prime and with that let me turn it over to you Chris Okay. Thanks, Bill and good morning, everyone. Let's go to slide five.
Integrated mission systems fourth quarter revenue was flat strong growth and our maritime business continued as a result of several key wins during the year.
We were awarded prime contracts for the medium unmanned surface vehicle program and the classified undersea acoustic systems program, which alongside and important win on the U S. Navy frigate program affirms our strategy to establish ourselves as both a prime contractor and a systems integrator.
This progress was offset by a moderate decline and electro optical due to program timing and and ISR due to aircraft timing our prior guidance assumed a December contract for ISR aircraft from an international customer that was delayed due to the customer's decision to expand the program. We are now awaiting.
And parliamentary approval for that program.
For the full year revenue was up three 3% from double digit growth and maritime and low single digit growth and ISR.
Operating income was up seven 2% and the fourth quarter and 21% for the year.
And margins expanded 100 basis points to 14, 3%.
And 230 basis points to 15, 3% for the quarter and year respectively.
Our ISR business made significant progress on its international strategy with a contract to provide missionize ISR aircraft for the Canadian Air Force capabilities on our Maritime patrol aircraft for our customer and the Asia Pacific region and.
And the introduction of parted cig and capability for unmanned aircraft for deployments in Europe and Asia.
We have a strong pipeline and our allies appreciate the need for situational awareness that our systems provide.
And space and airborne systems organic revenue increased four 8% for the quarter from a ramp on the F 35, as we transitioned from development to production on the next generations mission systems, and our mission avionics sector.
And growth and space from New program wins.
This growth was partially reduced by low single digit decline and our Intel and cyber due to program timing.
From a full year organic revenue increased five 8% from the F 35 ramp and classified growth and Intel and cyber.
Space and electronic warfare were down due to and year program transition, but recent wins position space to be a key growth driver for 2021.
Operating income was up 13% and the fourth quarter and six 8% for the year and margins expanded 150 basis points to 19, 5% for the quarter and 20 basis points to 18, 8% for the year.
Overall, our space business had a transformative year as we've been awarded contracts within the missile defense area, including the space development agencies tracking layer and more recently here in January on the missile defense agency's hypersonic and ballistic tracking space sensor program or <unk>.
<unk> SaaS, culminating multiple years of investment and innovation.
On HB TSS, our team will develop a prototype satellite that will demonstrate our capability to detect and track hypersonic weapons and space the.
And the initial launch is targeted for 2023 with an opportunity to build out a constellation thereafter.
These competitive wins have potential value of over $5 billion uniquely.
Uniquely positioning and L. Three Harris to play a lead role with multiple agencies and Mark the culmination of a successful multiyear repositioning strategy, establishing ourselves as a mission solutions prime with a responsive satellites and within missile defense.
Next communication systems organic revenue was up three 4% for the quarter driven by tactical growth of 17% that included record international sales up over 30% from the mid East and Central Asia and continued Dod modernization.
This strength was partially offset by anticipated weakness and our public safety business due to COVID-19, as well as a decline and integrated vision systems from International program timing.
Full year revenue was up four 4% driven by 13% growth and tactical communications, primarily from the ramp and Dod modernization programs, which also benefited integrated vision solutions.
As anticipated, we saw solid international growth of 4% and tactical communications with major wins in Australia, Europe and the mid east.
Total communication systems orders, and Australia exceeded 200 million with contracts for tactical radios and wave forms supporting crypto modernization requirements and.
And the land and 53 Nextgen night vision Goggle program.
And to 17% decline and <unk> was consistent with expectations and should ease post the first quarter.
Operating income was up 14% and the fourth quarter and 13% for the year and margins expanded 280 basis points to 25, 9% and 200 basis points to 24, 4% for the quarter and year respectively.
Our broadband business had a major strategic win with a prime contract award for the U S. Navy's next generation Jammer low band program for nearly $500 million.
Lighting, our advanced technology and innovative solutions for the contested environments, our customers will need to compete and operate in and the future.
The program comes with follow on opportunities and the $4 billion range and demonstrates our standing as a leader and spectrum superiority and electronic warfare for legacy and next Gen platforms.
This multiyear pursuit validates our strategy to be a prime and provide leading edge technical solutions to our customers.
Finally, and aviation systems organic revenue decreased 11% and the quarter and 3% for the year as expected due to COVID-19 related impacts and the commercial aviation business.
Growth with our U S government customers remained healthy and defense avionics from a ramp on classified programs and Graham and ground vehicle systems.
And mission networks from higher FAA volume.
Operating income was down 22% in the fourth quarter and five 4% for the year, primarily from the sale of our airport security and automation businesses.
As cost actions and growth and defense aviation and mission networks mitigated our commercial headwinds.
Margins were flat at 14, 9% and the quarter full year margins, However, expanded 100 basis points to 13, 8%.
Notable activity in the quarter included $142 million order from the U S space and missile systems Center to continue the development of the Nextgen M code GPS receivers with inception to date awards and over half a billion.
Over the last few months, we have successfully positioned ourselves for growth with notable awards that represent opportunities and the multibillion dollar range. These wins provide a long term visibility and highlight the strength of our portfolio and a range of budget environments and across multiple domains with a healthy <unk>.
Backlog of $22 billion, that's up nearly 80% for the year adjusting for divestitures and a funded book to Bill of one four we are confident and the sustainability of our growth.
As we think about 'twenty and 'twenty, one we will continue to execute on our strategic priorities that are focused on growing the top line advancing the integration expanding margins through flawless execution and continuous improvement and reshaping our portfolio and maximizing cash flow to support capital return.
And.
With that I'll hand, it over to Jay Thank you, Chris and good morning, everyone.
Again with a brief recap of our fourth quarter and 2020 results before shifting over to our 2021 outlook.
Fourth quarter organic revenue was flat largely driven by the effects of the pandemic and aircraft timing as our core U S government business was up about 4% with the international side up modestly.
<unk> expanded 120 basis points to 18, 5%, primarily from integration benefits and operational excellence and cost management.
Earnings per share of $11 60 was better than we expected and grew 10% or 29 as shown on slide nine.
This growth synergies and operations contributed 47.
Along with a lower share count for 15.
Which more than compensated for the headwinds from divestitures and pandemic impacted and markets.
For the full year organic revenue was up 3% with our core U S government business up 7% and international up a point.
Partially offset by the impact from our commercial businesses due to the pandemic.
Margins expanded 120 basis points to 18% and 75 basis points ahead of the midpoint of our initial guide.
And the integration benefits and operational excellence and cost management being the primary drivers.
Earnings per share grew 13% or $1 34, primarily from operations synergy benefits and a 4% lower share count.
Enabling us to deliver on our double digit growth target.
Solid fourth quarter free cash flow of $642 million resulted and the full year coming in at the upper end of our guidance range with this cash flow, we repurchased $2 3 billion and stock and paid $725 million and dividends.
Now switching over to the 2021 guidance on slide 10, and starting with the top line.
Organic revenue is expected to be up 3% to 5% reflecting growth in every segment with a light first quarter as we lap pandemic related impacts and phase and new programs.
And full year EBIT, we expect total company margins to be 18% to 18, 5%, a 25 basis point improvement over the prior year at the midpoint, primarily driven by increased cost synergies operational excellence and pension net of mix headwinds from space IMS.
And tactical radios.
This combined with a 4% lower share count will result in 2021, EPS and the range of $12 60 to $13 per share up double digits at the midpoint versus 2020.
Our free cash flow, our guide implies nearly $14 per share at the midpoint and clear traction with our growth framework.
This reflects a three day working capital improvement to 51 days $375 million and capital expenditures and no pension funding.
Our guidance also reflects approximately $2 3 billion and share repurchases, excluding divestitures as part of our recently approved buyback authorization.
And following yesterday's announced dividend increase this will be our third hike since the merger representing a cumulative increase of about 50%, reflecting our confidence and continued cash generation.
All told we expect to return $3 $1 billion to shareholders. This year before accounting for any divestiture proceeds and that'll be additive.
Switching over to the segments.
Integrated mission systems revenue is expected to be up 4% to 6% driven by ISR aircraft <unk> demand and maritime from recent wins.
Operating margin is anticipated to be 15, 5% at the midpoint as operational excellence centers synergy savings and pension benefits are netted by program mix impacts.
And space and Airborne systems, we expect organic revenue to be up 4% to 6% driven by traction and space and continued classified strength and Intel and cyber.
Segment operating margin of 18, 5% at the midpoint is driven by mixed headwinds from key growth programs that outweigh <unk> III productivity pension and integration benefits.
Communication systems revenue is expected to be up two and a half to four 5% from continued modernization growth and Dod tactical as well as international growth and integrated vision solutions.
Public safety will have a modest headwind and the year as COVID-19 related impacts lap and the first quarter of 2021 with a recovery later in the year.
Segment margins are anticipated to be 24, and 5% at the midpoint from operational excellence and synergies, partially offset by product mix within tactical radios.
And lastly, and aviation systems organic revenue is expected to be up 1% to 3% driven by continued growth and our U S government businesses from a ramp and combat propulsion systems and classified programs, which will be moderated by a slight decrease and commercial aerospace for the year.
Segment margins of 14% at the midpoint reflects improvement driven by operational excellence cost management and synergy savings.
Okay, turning to the EPS slide and bridge on Slide 11.
Expected full year EPS of $12 80 at the midpoint reflects 10% growth.
This operations and synergies will contribute 44.
Along with a lower share count for 57 and.
And pension and other items of 26 moving.
More than offsetting the <unk> <unk> headwind from completed divestitures.
So just putting it altogether 2020 performance demonstrating the resilience of our earnings and cash generating power.
And a 2021 outlook, reflecting further progress against our financial targets with recurring double digit earnings and free cash flow per share growth driven by a rising top line as well as industry, leading margins and capital returns.
Okay, one last item before getting to your questions. I know there has been interest and a deeper look into our company as well as our growth drivers. So and March 10th we'll start with the virtual business briefing focusing on two of our segments space and airborne systems and integrated mission systems there'll be followed by a closer look at our other businesses at a later date.
Okay with that operator, let's open up the line for questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you and our first question comes from the line of Sheila <unk> with Jefferies. Please proceed with your question.
Standby one loans please.
Sure sure.
Please standby one moment and my apologies.
Sheila will continue and just a moment.
Please go ahead Sheila your line is open and thank you good morning, guys.
Okay.
Bill Chris Jay Your EPS guide is up 10% at the midpoint on a 4% revenue increase.
And you announced a fairly hefty dividend increase last night of 20%, but your total deployment is up 8% year over year, how do you think about growth and cap deployment from here, how does that tie into your medium term expectations of EPS and free cash flow per share growth.
So Sheila.
What we saw today, what we announced last night on the on the dividend, where it is as far as well as including our share repurchase today and this is consistent with the framework, we've laid out over the past year and a half which is returning.
100% of free cash flow to shareowners Youll see three one is a little bit and access of of that in 2021, but the framework is intact and the framework, we expect to continue moving forward as.
As far as the dividend, maybe being a little more specific on 20%. We're we've had to target as bill mentioned of 30% to 35% in terms of our cash payout ratio and the dividend and Thats still our target that's something that we'll look to accelerate or continue accelerating and dividend growth over the next few years to get ourselves in that range and so I would expect it to be.
More of the same going forward.
Our next question comes from the line of Carter Copeland with Melius Research. Please proceed with your question.
Hey, good morning, guys interest.
A quick clarification on a comment you made Chris and then a question.
The contract you mentioned and IMS.
Air airplane contracts is there any ongoing risk there if it doesn't get parliamentary approval or I think you said that was just scope and just trying to get my arms around that one.
Yes, Thanks Carter no.
Graham is and the budget and it's just a a process to.
Get through the Parliament what happened was the Air force in this country wanted to add additional scope to the program and we had planned for a December award, but due to the changes to the contract and the ongoing.
Holidays, and the usual delays and that time of year.
It's moved into 2021, so we're very confident and this award and it is.
The timing slipped.
Our next question is from the line of Robert Stallard with vertical Research partners. Please proceed with your question.
Thanks, so much good morning.
Hey, good morning, Rob.
Is that a bill or Chris.
You, obviously talked a lot about the defense exports and your ambition to continue to grow this going forward and 2021 and beyond but we do have a new U S administration. They seem to put a few things on hold and do you see any implications from this frees and.
Full year export sales this year or into next year.
Okay.
Well thanks for the question and do think that we'll see in the bite administration continued.
Support for exports to our partners our allies I think.
And that's been clearly signaled we'll see kind of like with the last administration. Some some clear support there you may see some more scrutiny and certain regions like in the Middle East and you saw announcement come out just a couple of days ago.
And frankly, it wasn't necessarily new news it was well signaled is sort of a standard practice at the start of a new administration and take a pause and some of these.
And more contentious exports a certain country. So number one and two we're not we're not and arms or weapons provider. So I'm not sure it really affects us very much but.
But when we look at sales.
Into the region and those two countries net of backlog is less and 1% of our revenue so it's relatively small and.
And then third it's likely just a matter of timing, we think if there's any impact to us at all it's a matter of timing and we think that'll all come out within within 'twenty. One. So so we think this all settle down relatively quickly.
Our next question comes from the line of Christine line with Morgan Stanley. Please proceed with your questions.
Hey, good morning, guys.
King.
And as you continue to shape the portfolio can you provide us with an update of what you're viewing as core capability, especially as non core and whether or not that's changed with the election results.
Well thanks for the question no it's not changing and this is not really driven by who's in the current administration of what's happening and Congress. It really driven by those businesses, which we think that we can better own and drive value to owners that tend to be ones that are more technology intensive businesses that require investment and Iraq and our <unk>.
<unk> thousand plus engineers to make them better every day to differentiate versus competitors. Those are the kinds of businesses that we wanted to be in and the businesses. We're looking to get out of non core don't necessarily fit that model, we're making we're making progress we had a good start to early 2020, COVID-19 sort of slowed us down a little bit we saw some <unk>.
Celebration and Q4 and and then.
And certainly January has been pretty busy it's not going to be a linear journey on divestitures, but we're patient. We're focused we do still think it'll be 8% to 10% of our revenue and as I and Jay and others have talked about will deploy proceeds back to owners as soon as we make those announcements and we'll talk to investors as those transactions occur.
Sure.
Thank you. Our next question is from the line of watching him Kannan with Cowen. Please proceed with your questions.
Hey, Thanks, Good morning, guys, Hey, good morning Gautam.
So one of the questions, we frequently get from investors and I wanted to do to respond to it is.
Despite all of the revenue synergies and the progress you've shown there is a perception that.
And the legacy Harris Com systems business may not fair, so well and a.
Flat to down <unk> top line environment and I wondered if you could just kind of.
Speak to that.
How you think night vision tactical comms et cetera, and some of the shorter cycle.
Dr. Mike Fair over the next couple of years and if you can provide some metrics around some of the.
The pipeline of pursuits that youre pursuing thank you.
Yeah, sure and got them look.
We are very very different business today than we were 789 years ago. When a lot of the <unk> com business was driven by repairs resets. It really wasn't focused on a program of record, but that's very different today. So it's a really stepping back a week when we think about our company as a whole we've got total backlog.
Good day end of last year at about one two times our revenue.
So, it's a little bit less the and what we see with our with our peers. So we're shorter cycle. If you will but we're not necessarily short cycle. We've got a piece of the business and you hit some of the key ones that radios night vision goggles, maybe couple of other sites that are that have backlog listed one one times revenue so for them.
Business and particular most of them are on programs of records today, they're well supported and the Earth.
Early innings of modernization and we feel very good about that and I'll take tactical radio for the minerals and the Dod side and as we know there's 350 to 400000 radios that will be upgraded about 10% of the way through there you can see and the budget and in 'twenty. One continued to be well supported in terms of revenue or in terms of budget authority for right.
Yo Modernizations, and where and the front and have a long modernization curve on tactical radios. The same thing is on the international side Theres more than a dozen countries and their funding of modernization a lot of it and the announced couple of hundred thousand radios $4 billion worth of pipeline. So so we're again, we're and our front out of modernization ramp on the international side, which is.
It tends to follow what happens in the U S. And then you mentioned night vision and vision goggles.
And our on a sole source directed requirement for ENB GB, we delivered about 5000 goggles to date, we're on a program of record, which was announced in September which were one of the Awardees for that 100000, plus night vision goggles. So were 5% of the way through again with very clear budget visibility. So when you look at where we're at.
Modernization and visibility into the budgets. We think the outlook is very very positive for all of those critical shorter cycle businesses got them.
Thank you. Our next question is from the line of Noah <unk> from Goldman Sachs. Please proceed with your questions.
Hi, good morning, everyone.
No.
Hey, Jay just wanted to try to better understand the.
The cash flow progression.
And thinking through 'twenty and 'twenty.
There's a few hundred million of adjusted net income growth, which I think gets all the all the non cash out.
The decks sites eight days of working capital, which.
Using the number you guys used to quote for per day, that's a sizable increase I think.
<unk> cash tax so I'm surprised that the 'twenty and 'twenty final free cash was only up 200 million. Maybe you can help me square up what I'm missing there and then if you could then just carry into 2021 and helping us understand the.
Major moving pieces and the cash flow bridge and that are outside of the business guidance you've given.
Sure.
Thanks for the question and I was sure.
2020 at the end of 2020, we.
We accelerated we continue to accelerate payments to small suppliers total impact most of which was small suppliers is about $100 million.
Of outflow I'd say the other piece of it was just a little bit of a timing issue between of cash taxes, and so there was some timing of cash.
Cash and it was more in 2020 that was paid versus what we had originally expected that will be a benefit in 2021. So those are the two.
The primary drivers of 2020 and.
2021, where as I mentioned, we're relying on three days of working capital will also get a benefit from the from these cash tax a little bit better than we expected and those are really the two major drivers.
And just speak and going back to working capital we continue to drive well. It's three days our opportunity set is substantially bigger than that so theres runway beyond 2020, even into I'm sorry in 2021, even in 2021, where our projects are by our sectors by our segments are pretty well defined particularly and inventory and.
We've got a really nice I think.
And our roadmap to deliver 2021 and beyond going forward and so.
I'd say the moving pieces are not much different from what we've talked about in the past really and focus on working capital to make that not a use of cash and could make it either neutral or source of cash and dropping through the net income and 'twenty 'twenty, one as I mentioned and get a little bit of a tax benefit.
And really kind of set the stage for continued cash flow growth beyond 'twenty, one as well.
Our next question comes from the line of Richard Safran with Seaport Global. Please proceed with your questions.
Thanks.
Bill Chris Jay Rajeev. Good morning, how are you hey, good morning.
So at.
And IMS you noted strong maritime sales and for Q U S had a ramp and NAND and <unk>.
And classified programs you also mentioned that I believe in your opening remarks about driver of 2021, so I'm interested in.
If you could comment a bit more and more detail about sales and margin gross and net business in 'twenty, one and maybe even what.
Longer term.
Your answer could you also comment on classified versus unclassified program growth.
So I'll start that and maybe Chris can jump in and that look Richard it's the maritime business has been a real strong performer for us in 2020, we have good leadership. There was lots of pieces that were well integrated together, we're not completely through all that but but we're making really good progress 2020 was a very strong year.
Was up double digits. Your orders were really strong book to Bill came in above one fact reasonably above one and we see continued growth in in calendar 'twenty, one we're calling into mid single digit range, but but lots of good indicators of continued growth. There. We just have a very solid position, we do a lot of work on power conversion.
Our distribution and total res mass sonar is crypto a bunch of different things and we got a great position on the unmanned side as well so it's pretty broad based it's across both the OE and serve as U S International so manned and unmanned so we like the position that we happen to have and the manned side. We've got good content on both.
And Virginia those programs are well supported and Chris talked about the future frigate with I think and Terry we've got a very strong position and content on the future frigate those all look really good and well supported and on the unmanned side I think we're on the front end of this is not a big part of the business today, but it's but it's growing.
We're the only prime of any unmanned.
Maritime vessel here for the U S Navy and the <unk> view of the medium unmanned surface vessel, we're the prime on that as a pretty good contract. We're executing on and we've got a study on the <unk>, which is the large unmanned surface vehicle vessel. We're doing mine countermeasure systems I think we've talked about and a press release about a phase III.
And with in Europe, with a partner, where we're providing substantial content for unmanned manned and unmanned mine countermeasure systems and then all the underwater side I really can't talk about.
On the classified business, but we've got a very strong position on undersea classified capabilities as well. So overall, a very good business with.
And with the hope and the direction, we likely see and the budget and more growth focused on the navy given given where the future threats happened to be I don't know Chris.
Chris if I missed anything and that no I think I think you get a good. Good summary, I'll also say the future continues to be bright and we have to execute on all the programs.
We just talked about but just looking ahead to 2021. The Navy is looking at a couple programs called spectral spear and spatial and these are all integrated signal intelligence programs sensor to shooter. Those types of things that are under and overall umbrella that doesn't maybe refers to as overwatch.
And so it would be kind of think of that as the navy is equivalent of the abms.
Equivalent so we're excited about those opportunities and as I said in my remarks, both as a system integrator.
Or a prime we're well positioned and then of course internationally, we're getting a lot of interest.
Supporting Oems as they take their business abroad. So.
It's been a good a good run and the future remains bright for marathon.
Thank you. The next question is coming from the line of David Strauss with Barclays. Please proceed with your question.
Thanks, Good morning, everyone.
And one day.
Bill and Chris I guess.
When the when the merger was announced.
The management transition I think was bill you were going to be CEO for two years, and then Chris was going to take over and I think that puts us.
That plan in place happening.
Kind of second half of this year is that is that still what.
We should expect or has there been any sort of change there. Thanks.
So David Thank you know, it's it's exactly the plan that we're working towards it to the end of the end of Q2. It is got a date and a time because it's written and a merger agreement and we're working towards and I think more broadly let niches within the agreement is is the the partnership that I have with our with Chris and we work and with Jay We've got a great leadership team we're working.
Well together, we've we're executing are well on our strategy. We're a line on the direction, we're taking and the company and you'll hear and see more of that in the <unk>.
Investor briefing, we were going to have in in March where Chris will talk a little bit about thoughts on becoming a moving more towards emission solutions provider as you see here, Ed and Sean talking about their business as well, but but tracking well performing well and we're not expecting any sort of strategic redirection ready bump and the performance of the <unk>.
Company.
And I'll, just chime and I know a lot of people ask us the strategy going to change when you change the leader and Thats not the case. So clearly we've been working together for over over two years will be a smooth transition. So as you know bill will remain the exact chair for an additional year. So I don't see any any big surprises come and we've laid out pretty clearly our focus on the growth and the <unk>.
<unk> and and the margin expansion and the cash flow so.
We'll be in good shape. Thank you.
The next question is from the line of Peter Arment with Baird. Please proceed with your question.
Yeah. Good morning, Bill, Chris Jay Bill or Chris I guess I, just wanted to talk ask about the synergy targets and.
Performance in the quarter was really impressive you guys beat I think your target for 2020 by 11% and have raised kind of the longer term target now.
Can you just describe a little bit where you're seeing these gains is it just across the board from your <unk> III efforts, maybe just some color there that'd be helpful. Thanks.
So thanks for the question I know, it's different and <unk> is additive to the synergy targets. So no. We havent really good year the team is performing.
Very very well I talked a little bit about some of the drivers of the outperformance this year in and why we took up our number next year at $3 20 to $3 50, which again is well above what we thought we would do and three years and we're now doing more than that in two so we're seeing a lot more opportunities and supply chain, where we're still working through our facility ran.
<unk> very very good progress substantial activities happening over the course of 2021.
It has been very very well and closely managed and monitored and it's going to execute very well and we're seeing good opportunities are coming through their functional efficiencies shared services, we just keep seeing more and more opportunities to get better. That's the spirit of continuous improvement that's really what's behind E. Three that's why we think as we wrap up in a.
<unk> and at the back end of 'twenty, one and then in 'twenty two we really talk about it lessens integration more is just productivity and operational excellence.
And have a good year in 'twenty, one those are the things that drive it so.
And just executing very very well.
Our next question is from the line of Myles Walton with UBS. Please proceed with your questions.
Thanks, Good morning.
Morning.
Two quick ones, maybe on IMS, obviously, the sales didn't quite come through on the timing you expected and just curious Chris if it's if it's just a slip of timing why 'twenty one's growth isn't more significance. It seems like the kind of the 200 million or 150 million and slip.
Jolt up that growth rate and then secondarily I think the F 35, and the avionics business and particular spoke.
And we're one of the biggest contributors in 2020 gross what does that look like and 21.
Yeah. Thanks, Myles on an IMS I can see where you draw that conclusion, we're still looking 4% to 6% at the initial guidance earlier in the year for IMS and it really comes down to the number of aircrafts that you can some duct and the factory and any one year. So I'd think of it as maybe some of that 2020 slides of 'twenty one.
The latter part of 'twenty, one slides into 'twenty two.
That makes sense. So we're not losing anything it just kind of slipped out to the to the right and then on the F 35, and and mission avionics, we have multiple systems that we're providing.
Two two Lockheed as you well know, especially on the.
And what we're calling tier three of the tech refresh three so we're going through a transition from from development to production, we think longer term there is numerous.
Opportunities for additional content that we could provide but notwithstanding that as the aircrafts ramp up we get more content per port.
Per plane and even the potential for Sustainment, we see this as a long term growth driver for years to come not to mention the international opportunities on top of that.
Thank you.
Next question is from the line of Jon Raviv with Citigroup. Please proceed with your questions.
Thanks, and good morning.
Sort of given the divestitures and also the pandemic impact on commercial and 2020 is a bit of and easy comps and into 'twenty. One and then you know with commercial and <unk> still being late 'twenty. One is still kind of setting and a relatively easy comp as well. So can you talk about just the opportunities to for growth rates to actually potentially accelerate beyond 'twenty one even.
Lately as you get over the commercial Aero Com These new space activities ramp up the revenue synergies pick up.
And then also like within that portfolio and what might be sort of heading in the wrong direction versus what is heading and the right direction to sort of maintain at least mid single digit growth.
So John and I think that's a good question I think you laid out kind of the the response and the question and if you.
You will see you laid out some of the drivers next year, yes, we do see.
And my my remarks, Dod and U S government low single digits, we see revenue synergies about a point, we see international mid single digit plus some headwinds coming from commercial but you're exactly right as you start to get out into 'twenty two from 'twenty one.
We'll see less sub and maybe no commercial headwinds and and maybe eventually starts to turn into a tailwind we see international as a front and have a build again, we're very underpenetrated, we have 20% of our revenues and international and Chris laid out a growth target there.
We did we perform very well and the back half of last year was up low to mid single digits. We had a very good Q3 and.
We've got some good momentum coming into this year, a very big pipeline of our $67 billion total company pipeline 16 of which is an international so we've got a lot of opportunities we're chasing on the international front and <unk>.
And we've talked about the revenue synergies you know about a point call. It 158, and $20 million net incremental and 'twenty one from 'twenty, we're still at the front end of the build so we have 40 proposals or they've been awarded we won two thirds of them, but theres 70 that are submitted so another 30 to be to be.
Awarded or not there's more that are happening and the future. So we hope to continue to build on that and we do hope you can give just given the positioning of ourselves within the Dod budget that low to single low single digit growth from from D. O D could actually grow over time, because we're in great places that are going to continue to get funded but we're also growing as admin.
And <unk> solutions provider going after a larger addressable market. So you put all those pieces together that should that could drive acceleration beyond beyond 'twenty, one, but but right now we're laying out the 'twenty one framework and.
And we ought to be thinking about mid single digits beyond that.
Our next question comes from the line of Seth <unk> with Jpmorgan. Please proceed with your questions.
Hey, thanks, very much and Doug good morning, everyone.
So I think you've talked in the past about getting Dod tactical to sort of.
And $1 billion over $1 billion and sales and the early 2020 timeframe and kind of kind of got right up to that 1 billion level and.
In 2020, and so I guess is there anything more specific you can say to kind of outline the outlook there over the next couple of years.
So it's a good good question and in fact, I remember the discussion from a few years ago about getting to $1 billion and.
And frankly, it happened a little bit sooner than we even anticipated at that point in time. So we were just a tad under that last year with our guidance, who will be at or above it'll be above a $1 billion. This year.
And we're just we're just very well positioned across the tactical radio business as you know we're.
Across all of the services across all the contract vehicles very strong position in the Marine Corps was a big driver of Us and in 2020, we're sole source on each have radios were sole source. There on manpack will compete on the handheld. This year were sole source of cross so calm army, we compete versus versus Talis and.
Collins, but the fact is I think given the momentum that we have here, we see continued share gains within within those areas was well within within the army. So I think we're well position the budgets are very supportive, but when you look at all tactical radio and total in 'twenty one over 'twenty the red the budgets themselves were up about 25.
<unk> and <unk> HMS is up 16, and 17%. So theres very good continued budget coverage here.
We're starting the year with mid single digit growth and D. O D. We're coming off a very strong 20, and and even stronger and 19. So maybe hopefully there is some conservatism built into that but there is some competition has happened and this year and we will keep evaluating and updating investors through the year on just our progress and Dod.
Frankly, the team has done a great job and positioning ourselves for success and tactical over a multiyear period.
Our next question comes from the line from Ron Epstein with Bank of America. Please proceed with your question.
Yes.
And good morning, guys.
Could you and with the change in administration.
Can you talk about.
Every defense company tends to say, we are well positioned for the change and.
Everyone can't possibly be right I mean, that's just it.
Possible.
Where do you expect to see weaknesses.
Weaknesses because of the chains, where do you expect to see strength.
And then you know.
Where are you positioned the best for the change and administration.
So I'll start there and maybe Jay and Chris can jump in and look I think there's going to be continued focus on the space domain, which are which we have spent a number of years repositioning. The company to go after last year was a softer year was a transition year. We had a couple of program transitions, but you see in Q.
We came back very very strongly we're up high single digits will be up high single digits and 21, we've got good wins and the Chris walk through some of the key ones there and.
Frankly, that's just going to be continued to be a growth area and you heard some of the commentary from Secretary Austin commentary is hearing about the focus on space and there and it's not just across deal. These are lot of classified community investments going on and space. So so I think number one we've got we've got a really good position there going from.
Components to systems, and I think our proven strategy I think some of the things thats happening on the unmanned side are our opportunities for the future bolt on maritime as well as in airborne side, We've got really strong positions and both sides I think that's going to continue to be well funded at.
At the end of the day any fight in the future, particularly against the near peer competitors will require networks network platforms and not just simply platform improvements themselves. So how they work together that requires resilient communications strong secure non <unk> resilient communications and that is the <unk>.
<unk> founded the company, we keep talking about that it's very very important and there's really no. One that is better positioned to enable that Jed situ mission environment, and where we happen to be that's why we're on all of the abms contract vehicles. I think we just have a great positioning here and that's going to continue to be to be well supported so those are the areas.
Is that that I think are going to be where we are best positioned and I know what everyone else is talking about were sitting there with almost 4% of our revenue and I read we're focusing our company, we've got and very unique situation with this merger, where we can start off with a clean sheet and get all of our segments built from the day one to collaborate together.
Gather and that's why we're seeing traction here on the revenue synergies. So you put all those pieces together and that's why I do believe that we've got just a strong powerful portfolio of businesses with good leadership that should outgrow our competitors into the future.
And I'll, just chime in and some of the tradeoffs, obviously youre going to be the force structure versus modernization and then the modernization is it going to be new platforms or upgrading existing platforms and and Theres always the focus on the strategic deterrence. So the.
Types of systems and the type of capabilities, we have across all domains I think position US well there was a question earlier about our content on F 35, as an example, but we're also well positioned on next generation.
Opportunities. So we can support the upgrades and.
And enhancements to existing systems.
And what we have and EW.
Five <unk> signed with international countries for.
And for F. 16 modernization is an example, where on the Columbia classes of strategic deterrent Theres talk about.
And next.
About the nuclear command and control aircraft recapitalization, which again is and our sweet spot. So when you look across the spectrum space EW cyber ISR resilient comms.
And whether we're a prime and sub new systems old systems, I really like where we are.
Thanks for the question Ron.
Our next question is from the line of George Shapiro with Shapiro Research. Please proceed with your question.
Yes, good morning.
Chris I just wanted a little more explanation similar to what you gave miles on IMS and the <unk>.
S sector, because there you were a little bit short as well in terms of the expectation of 7% growth for the year, you mentioned Intel and cyber due to program timing. If you could just give similar color on where the shortfall there was.
Yes, George Great Great question, and I, probably should've elaborated.
Elaborated on that and it was really the timing.
Of awards I mentioned.
HB, TSS and SDA and some of the classified wins.
They took a little longer to get under contract or candidly. Some of these were protested and then it caused the delays. So we just saw a slip from the fourth quarter. If you will of 2020 into early 'twenty, one can't get the contract you cant get the revenue to get get started so that that was just a <unk>.
Clear slipped from 'twenty to 'twenty, one due to the timing of those Intel and cyber.
And that's not too lumpy of our business, but nothing to be concerned with their in fact, when you look at that whole business at close to $1 billion, we're seeing growth and 21, there as well.
Thank you. Our final question comes from Michael <unk> with true Securities. Please proceed with your questions.
Hey, good morning, guys. Thanks for taking my question here, maybe just back to where Ron was going.
Quick one can you guys or do you think you can grow the backlog and 'twenty. One and then just looking at that positioning I think historically <unk> revenues were about 35% tied to O&M exposure and you obviously got some army exposure, but.
Do you think with the administration change Youre confident and this growth trajectory, assuming maybe the prior two would be bill payers can can you drive enough growth out of Navy Air Force and space and maybe even kind of the commercial space to offset.
Some of those O&M and army headwinds if they materialize.
Yes, Michael.
Michael just very quickly the so and on auto and it's about 20% of our revenue and its well supported programs a lot of it's a ISR aircraft.
We feel very confident is going to continue.
On the service mix, yes, there is going to be kind of a tilt towards sea air space centric type platforms, and and near peer competition. That's hearing a lot coming out of the Navy and I talked a lot about what's happening with the Air Force and this space Force.
So and a flat to declining budget environment I think there's general speculation you army and it will be a bill payer here for for us.
Army is only about 10% of our revenue.
Its smaller part of what we do even with the Dod.
I think between the Navy and the year for US is about four times with the army happens to be so it's not a big part of the company I think we are more predisposed to the Air Force was our biggest customer and the Navy. We spent a lot of time talking about some of the maritime opportunities here. So so we think we think the shift is actually favorable to us we think we're well positioned.
And there and we think we can manage through those shifts happening right now between between the services. So we like where we're at we like the positioning of our of our portfolio.
And by the way in 'twenty, one we do think we can build the backlog because we will see a book to build more than one. So we think that will continue to grow into next year. So looked at wrap this up here today. Thank you very much we had a strong solid year was a tough backdrop and I want to thank again, our employees for executing well on our strategic priorities delivering value.
To our customers and our shareholders, but also providing a solid foundation to build on in 'twenty, one as well as the medium term and again. Thank you for joining the call. This morning, and we look forward to speaking with you more and our upcoming Investor briefing on March 10, and thank you very much everybody have a good day.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.