Q1 2021 L3harris Technologies Inc Earnings Call
Greetings and welcome to the L. Three Harris technologies first quarter calendar year, 2021 earnings call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad and.
As a reminder, on this conference is being recorded.
And now my pleasure to introduce your host Rajeev Leilani, Vice President Investor Relations. Thank you you may begin.
Thank you Rob good morning, and welcome to our first quarter 2020 one 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 actual results to differ materially from our information. Please see our press release presentation, and our SEC filings and.
A reconciliation of non-GAAP financial measures to comparable GAAP measures is included and the Investor Relations section of our website, which is L. Three Harris Dot com, where a replay of this call will also be available with that Bill I'll turn it over to you.
Thank you Rajiv and good morning, everyone earlier today, we reported strong first quarter results building on last year's progress with solid execution across all financial metrics.
Organic revenue was up approximately 2% with mid single digit growth and our core government businesses, partially offset by COVID-19 related impacts and about three points from our commercial businesses.
Assistant with our expectations.
This should be the last quarter of tough compare due to the pandemic, which our team has managed incredibly well and we anticipate more stability and the affected businesses ahead.
Margins expanded at a robust 140 basis points to 18, 9%, resulting in earnings per share of $3.18 up 14% and ahead of internal targets.
Free cash flow of $630 million supported shareholder returns in excess of $900 million, including repurchases of 700 million from our recently authorized $6 billion program with the balance from dividends following our 20% increase in March.
Before handing over to Chris.
With the transition occurring as planned on June 29th this quarter marks my 38th and final earnings call, leading Harris and and L. Three Harris as CEO.
It's been a rewarding nearly 10 years with the hard work and dedication of our employees Harris grew from a small niche defense company to a leading mission solutions defense Prime post the exact position of <unk> and the merger with L. Three with revenue today of over $18 billion.
I'm, especially proud of the people at L. Three Harris, who work hard every single day to support our customers' critical missions and deliver value to shareholders.
The performance culture and the work environment. We've created is really special and we recently were recognized for by Fortune 100, Best company to work for in 2021 and earlier this year as a world's most admired company.
As you know I'll continue as exec chair of the board for another year working closely with Chris as he becomes CEO.
Last week, the independent directors of the board unanimously endorsed the transition occurring as planned and the merger agreement, indicating their confidence and mine and Chris ability to lead this company going forward.
The results today speak to the momentum we have and the company and the strong foundation, we built for the future.
And I'm excited and optimistic about what L. Three hours can accomplish and its next phase under Chris's leadership, so with that Chris Let me turn it over to you. Okay well. Thank you Bill and I appreciate your and the board's vote of confidence and look forward to our continued partnership and your new role.
As you heard at our Investor briefing last month, we're excited about the potential for the company and the value creation opportunities in front of us the.
And the strategic priorities, we develop together as shown on slide three are the foundation on which will deliver sustainable topline growth steady margin expansion and robust free cash flow with industry, leading capital returns and all areas, where we showed great progress and the first quarter.
In terms of the top line, our Q1 results coupled with the Biden administration's announcement that the defense budget will continue to grow and FY 'twenty two about a point and a half verses FY 'twenty, one reinforces our optimism for growth.
We are encouraged by the continued focus on national security and support for our military within the budget and believe L. Three Harris is well aligned with priorities and emphasize the return to peer competition and operations and increasingly contested environments.
This backdrop provides us opportunities to offer our advanced and affordable solutions across all domains.
And we're watching closely for more details on the coming months and expect to consistently grow through our strong Dod portfolio revenue synergies and international expansion, which stem from our R&D investments.
And the first quarter, we gained traction as we grew four 8% and our core government businesses with international up double digits, driven by solid growth and aircraft ISR and tactical radios.
Turning to revenue synergies and we received eight new awards, maintaining our healthy win rate of about 70% with total awards to date of approximately $400 million.
We anticipate sustaining our momentum given notable prime level of awards across all domains that represent multibillion dollar opportunities.
On the space side, and addition to our recently highlighted HB TSS responsive satellite award with the missile Defense Agency, our five decades of experience building and space based imaging systems has led to our down select for the initial concept and design of next generation whether imagers.
This award supports Noah's future satellite system recapitalization and.
The administration's focus on climate and initiatives supported by a nearly 30% FY 'twenty two budget increase for NOLA reinforces the opportunity set for L. Three Harris as we are a leader and whether payload and ground systems, creating an opportunity of $3 billion over the next decade.
On the air side, we had strong orders on both new platforms, such as the F 35, and legacy platforms, including the F 18 and F 16.
In particular, we leveraged our experience with providing F 16, and systems and our expertise and software defined open systems architecture to secure a contract to develop the next generation electronic warfare suite on international aircraft.
We can further expand our global footprint with opportunities and more than a dozen countries and the middle East Asia and Europe.
This adds to our recent success with the U S. Navy's next generation Jammer low band award for the EEA Atg Growler, we're quickly establishing ourselves as a global leader and electronic warfare and aircraft survivability.
We also closed on the ISR aircraft contract with the NATO customer to mission is a series of <unk> that was still pending and parliamentarian approval last quarter and.
And we continue to work on similar opportunities for other customers.
Which when combined with the NATO award demonstrates our ability to expand our international footprint and represents over 3 billion and potential value over the next several years.
Moving over to the land side, we continued to make progress supporting and modernization efforts on both the domestic and international fronts, including on a follow on production order under so comps 255 million dollar multichannel Manpack IV IQ contract. We also received orders for our advanced radio and night vision products from <unk>.
Western Europe, the Middle East and Central Asia further strengthening our international leadership.
And finally, and the C and cyber domains. Our maritime team was successful on winning two new prime level programs to provide imaging systems on submarines for international customers. These.
These strategic wins highlight our ability to expand our global maritime solutions to new customers with additional follow on opportunities to come.
And while limited and what we can say due to its classified nature our billion dollar Intel and cyber business received a follow on order to provide end to end mission solutions within its ground based adjacency franchise as we continue to deliver against our customers' most challenging cyber requirements.
These wins provide long term visibility and support for a funded book to Bill of 1.1 other on the quarter. Our total backlog remains above 21 billion up 6% year over year when adjusted for divestitures.
In addition, with considerable recent bid and proposal activity, we're aggressively going after our three year $125 billion pipeline to deliver a sustainable topline growth.
Shifting over to margins this quarter, we saw the healthiest result, since the merger at nearly 19%, which puts us and a strong position to meet the upper end of our full year guidance.
Cost synergies of $33 million, primarily attributable to supply chain and facilities consolidation and put us well on track to deliver up to $350 million of accumulative net benefits in 2020 one a year ahead of schedule.
Our our <unk> three program also gained traction through strong program performance factory productivity and supply chain savings and we continue to believe that there is considerable potential beyond this year to enable another phase of cost opportunities to sustain margin expansion for L. Three Harris.
Lastly, we're maximizing cash flow through continued working capital and capex discipline and driving shareholder friendly capital deployment.
And while we're holding off on updating our $2 $3 billion share repurchase target for the year based on our announced and potential divestitures and we still see considerable upside to the plan.
As an update on portfolio shaping.
We've recently cleared the U S antitrust waiting period on both the previously announced military training and combat propulsion systems divestitures and are on track to close on the second half of the year.
We're progressing on other portfolio shaping opportunities and will provide more details over the coming months.
And to reiterate inclusive of divestitures, we remain on track to deliver on our $3 billion of free cash flow commitment in 2022, along with double digit cash growth on a per share basis, excluding potential tax policy impacts.
So we're pleased with the execution against our strategic priorities and progress we've made at the start of the year, which gives us confidence to raise the bottom end of our EP test guidance, so with that I'll hand, it over to Jay. Thank you, Chris and good morning, everyone.
First let me begin with a brief recap of the quarter before I get into segment results on.
<unk> revenue was up about 2% as growth and IMS SaaS and see US was partially offset by the expected decline and aaas due to the pandemic.
Overall, our core government businesses were up four 8% reduced by about three points of COVID-19 related impacts and our commercial businesses.
Margins expanded 140 basis points to 18, 9% with expansion and all four segments, primarily from operational excellence integration benefits and cost management.
We did better than expected and the quarter from stronger E III and cost synergies of roughly 70 basis points as well as some timing benefits from lower R&D and program mix of approximately 50 basis points.
This along with share with share repurchase activity led to earnings per share growth of 14% or <unk> 38 to $3 18 as shown on slide six.
On this growth synergies and operations contributed 34.
Along with a lower share count pension and interest totaling 23.
Which more than offset divested earnings and headwinds from bent pandemic impacted and markets.
Free cash flow of $630 million was the result of solid net income drop through as well as capex and working capital discipline with days roughly steady at 55.
And so all of the returns of $909 million were comprised of $700 million and share repurchases and $209 million of dividends.
Now, let's turn to slide seven and discuss quarterly segment results.
Integrated mission systems revenue was up five 9% with growth and all three businesses.
Double digit growth and maritime from a ramp on manned platforms, including the Columbia class submarine and constellation class frigate was.
It was complemented by growth and ISR from the NATO Award carryover from last year.
And intellectual optical from deliveries of our west Cam airborne and <unk> to the U S Army.
Operating income was up 19% and margins expanded 180 basis points to 16, 5% from cost management integration benefits and operational excellence.
Funded book to Bill was impressive and over one three and the quarter.
And space and airborne systems organic revenue increased four 1%.
From responsive programs, including SDA tracking and HB TSS driving high single digit growth and space.
As well as growth from the F 35 platform and mission avionics and double digit classified growth and Intel and cyber.
And strength was partially offset by program timing and electronic warfare.
Operating income was up eight 6% and <unk>.
Margins expanded 90 basis points to 19, 4% from cost management, including R&D timing operational excellence and higher pension income.
Funded book to Bill was a solid 1.15 for the quarter from strong bookings and our space and electronic warfare businesses.
Next communication systems organic revenue was up two 9% with high single digit growth and tactical communications.
Primarily from the continued ramp and U S. Dod modernization.
That also drove integrated vision solutions and global communication solutions up double digits.
Conversely volume was lower on legacy unmanned platforms within broadband so.
And it has transitioned from permissive to contest the operating environments.
And we've been public safety due to anticipated COVID-19 related impacts that are now showing signs of stabilization.
Operating income was up 12% and margins expanded 240 basis points to 25, 3% from operational excellence cost management and integration benefits.
On a book to Bill was <unk> 92 for the quarter.
Finally, and aviation systems organic revenue decreased eight 3%, primarily driven by COVID-19 related impacts and our commercial aviation business consistent with expectations and from program timing and military training.
High single digit growth and mission networks from higher FAA volume paired with fusing and ordinates growth and defense aviation helped to offset these effects.
As we move past the first quarter, we are anticipating a return to growth and this segment as we lap COVID-19 effects, while our combined government businesses continue to grow.
Operating income was down 13% primarily from the sale of our airport security and automation businesses.
Margins expanded 120 basis points to 15, 7% as operational excellence cost management, including R&D timing and integration benefits more than offset COVID-19 related headwinds.
Funded book to Bill was <unk> 84 for the quarter.
Okay, let's shift over to 2021 guidance.
We're off to a strong start with our first quarter results and performance and we're confident and our integration and operating expectations as well as our topline growth of 3% to 5% supported.
Supported by a solid one one book to Bill this quarter.
This puts us and are positioned to raise the bottom end of our full year EPS guidance by <unk> <unk> inclusive.
Inclusive of announced divestiture impacts will provide a more comprehensive update later in the year.
And the interim I'll provide some color now on the moving pieces, specifically on margins portfolio shaping and capital returns on margins. The strong start will likely push us towards the upper end of our range of 18 to 18, 5%.
We do expect margins to normalize for the balance of the year due to increases in R&D and stronger growth and new programs with lower initial margins.
Overall, the expected upside for the year from our prior midpoint is due to strong program execution and cost performance and will be a key factor and our 2021 earnings strength.
On portfolio shaping we now expect about 10 cents of dilution from announced divestitures net of buybacks from proceeds.
And there are a few remaining businesses that are in various stages of the divestiture process, which could have a modest incremental EPS impact for the year.
Lastly, as highlighted at our Investor briefing.
We have another significant year plan for capital returns and embedded in our guidance is $2 $3 billion of every share of share repurchases from cash generation, which will be further augmented by over $1 billion and net divestiture proceeds.
So overall for 2021, we're confident in delivering on our commitment of double digit annual growth and earnings and free cash flow per share.
With that Rob, let's open up the line for questions.
Thank you well now be conducting a question and answer session and you.
Interest of time, we ask that you please limit yourselves to one single part question.
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Thank you and our first question comes from the line of Sheila <unk> with Jefferies. Please proceed with your question.
Good morning, Congratulations Bill on studying the company you have and Chris of course, and we look forward to let you have and starcraft.
I guess I wanted to focus on two businesses that are doing pretty well on accelerating and so on the international front I think it was up double digits and the quarter. How are you thinking about the main drivers there going forward and then maybe more on the domestic side of things. If you could focus on on the space portion of Fas, you've called out growth and programs and space.
But wanted to quantify overall space and just.
How do you think about growth drivers there going forward, just given wins with FCA, our HB assay.
<unk> sorry.
Okay. Sheila Thank you very much let me start with with International Youre right. We did have a good quarter with double digit growth. We had book to Bill of 1.3, and as I mentioned and the aircraft ISR the tactical radios and maritime were the key drivers.
Looking at our pipeline, we have about 35 billion of opportunities over the next three years, so really really impressed with the team's work as we position ourselves for future growth.
It all started with the strategy that we laid out it's really a two part strategy one focusing on the mission systems and the larger programs such as the ISR platforms, we've talked about.
Working in tandem with our sales force, which is out there with the products. So when you look at the radios and the night vision goggles, the west Cam <unk> turrets, and it's a nice complement so I think the diversity of our portfolio and the geography with customers and over 100 countries really positions us well for continued growth.
Shifting to the space question.
The space business is part of SaaS.
Look at it and four four buckets, you know on the low and we have some products some telemetry and antennas, we do some groundwork, which I think is important to better understand the mission and to support some of these classified constellation's they tend to be mid single digit growth, but it's all about the fabs.
Historically, we've been on the exquisite satellite as a supplier or subcontractor, GPS III and classifieds have come to mind, but the responsive satellites is really where we've moved the needle and the last year or so and where we.
We're optimistic and the future. So that's the fastest growing part of the portfolio.
Double digit growth for the year, we've talked about the Zeus program, we've talked about SBA tracking <unk> TSS and a fair amount of classified the bids that we're working on today. So hopefully that gives you a little bit of granularity and insight as to how we're growing space.
Thank you. Our next question is from Robert Stallard with vertical Research partners. Please proceed with your question.
Thanks very much.
And best of luck for the future and it's been quite a ride.
But.
My question is quite simple this morning.
Communications margin was very strong and the quarter and if its a record margins and he feels like it and.
I was wondering if there was anything unusual that pushed at this high in the first quarter and and basically what's going to bring it down into the guidance range for the rest of the year.
Sure Rob.
There's nothing unusual there was and their results a little bit of R&D timing and so we will see a little bit of pressure there, but the more significant kind of factor that will normalize their margins towards the balance of the year will really be related to the newer programs as you know we've got.
The army HMS programs and the back half of the year. We also have a pro.
Programs like the next Gen jammer, and the broadband business and so those will likely put some pressure on the back half of the year and the margins I'll just the broader comment I would say is this.
It's a great start.
And maybe this is an indication of how to think about things, perhaps in the future, but we will see a little bit of a normalization normalization here.
Subsequent three quarters.
Yeah.
Our next question is from the line of Richard Safran with Seaport Global. Please proceed with your question.
Bob Bill, Chris Jay and Rajeev. Good morning, Bill for what it's worth I thought you did on.
Absolutely terrific job.
So I wanted to ask.
The large pipeline you've been talking about you had a very high win rate.
About new starts like the one with one Mattel and systems like <unk> and was wondering.
And how this really large expansion that transformation is going to reshape the company and thinking longer term I mean, do you need to increase overhead and your footprint to support new customers. This capex increase to support manufacturing of new platforms does the focus of your R&D spend need to shift a bit and I'm looking at.
From a return on invested capital standpoint, trying to find out if the company is sized to support all of these new efforts or maybe this is a situation where you're actually doing more with less expanding operations only with current assets.
Okay. Thank you for that question and a great great question and it ties into the strategy that we've talked about you mentioned no Mars.
Which is an interesting opportunity that's the no manning required ship a recent DARPA win.
It is pretty interesting relative to what the Navy is trying to accomplish because as you know historically they've taken manned ships and tried to convert them into unmanned and this is early stage design program, where we were.
B, we're one of three one of three winners if you will and it's really starting with a clean sheet of paper how would you design a ship knowing it was going to be a man from the beginning so and on that one it will be interesting to see how that progresses as the follow on and will be 2022, which would probably be a prototype and in that case, we team with.
A variety of teammates and we would probably team with the shipbuilders. So we're not going to be investing and shipyard in that case.
Generally we're pleased with the footprint and the size.
Of our facilities.
And we talked about space and some other growth and we took some existing facilities and.
And modified them and relayed a re laid out the footprint to optimize the flow with new tooling and such so we spend a $1 billion a year between Capex and Iran. Capex is about 2% of our revenue I think that will drift down over time.
Iran is industry, leading and almost 4% so the $1 billion I think position.
Physicians as well I do not see any increase and overhead or significant capex to meet our strategy and again most of what we're working on are the systems versus the actual platform. So it does not take up as much factory space. If you will.
And Richard if you think about Capex for the moment.
Over the next this year as well as the next few years, we have investments and our it systems as we're consolidating our platforms. We also have investments as were moving facilities and consolidating facilities. So as those trail off that will create capacity to invest and new programs over the next few years. So we don't really see significant new requirements.
Two from where we are at the levels today and Capex.
Our next question is coming from the line of Carter Copeland with Melius. Please proceed with your question.
Hey, good morning, guys and Bill Echo all the congratulations on the last several years, it's been it's been an amazing ride.
And.
Just a quick quick one and then when you might expand on a little bit Chris do you guys have any ISR exposure to speak of in Afghanistan. It makes for a headwind with the plan withdrawal just want to cover that base and then.
Chris I wondered if you might expand a little bit on how you think about the capture rates that are embedded.
And kind of in that three year pipeline to accomplish your growth goals I mean, I look at some of the programs you've won and.
And things like HB TSS and next Gen jammer, low band, which may not have been as.
Yes, the traditional thought of us as things you might go out and win and it seems like those capture rates have been increasing but I don't know if you track that or if you can speak to that thanks.
Yeah. Thanks Carter no we do not the first question, we do not have exposure.
The exposure and ISR and Afghanistan total exposure, there is and the $10 million range of revenue on a fair amount of that is just ground systems and are not significant.
Great question on the on the pipeline on the capture rates and I think you're right I think we've surprised people with some of the wins that we've had but it really aligns with what we're hearing from from our customers and.
And their change and acquisition process. They really are looking for a disruptive and innovative and agile and affordable solutions and that's that's what we've been providing we do track our win rates.
And the company level and you don't necessarily if they're too high at that suggests that we have and opened the aperture and been as aggressive as we would like so we track those on a on a segmented and on overall basis and.
125 billion over three years.
We are successful and at least 50% that easily tracks to our mid single digit growth.
<unk> and then on top of that we have the revenue synergies that we've talked about so we're comfortable with what we've done with professionalize the business development function and I believe and and we're starting to see the results from that.
Thank you. Our next question is from the line of front Epstein with Bank of America. Please proceed with your question.
Yeah.
Yes, good morning, guys. Thanks.
How are you thinking about.
Opportunities and commercial space, rather than the space environment.
Business environment anyway, it looks like we're going through a period of change.
Are there opportunities for all three Harris there and.
And how are you thinking about that.
Yeah. Thanks, Ron.
There has been some opportunities and commercial space, where some of our payloads I think we could provide to to the primes as far as us investing and our own.
Constellations or expanding capital.
Not currently and our and our strategic plan of course, we have a <unk>.
Exposure or capabilities that support the launch vehicles, which launch both military and commercial satellite. So we have some some opportunities there as well, but as far as being a prime and the commercial space market. At this time does not align with our strategic plan.
And next question is from the line of Seth <unk> with J P. Morgan. Please proceed with your question.
Thanks, very much good morning, and congratulations to Bill and Chris.
And just wanted to ask if you could provide some of the disclosure. That's typically do you have around the tactical radios and terms of the.
And the domestic and international sales and <unk>.
And the backlog.
And then maybe you mentioned some mix shifts there as HMS ramps up.
At this point.
Roughly what what portion of the Dod and very rough terms tactical.
Sales come from Army HMS and kind of how do you how do you expect that to evolve over the next year or two.
Okay.
First start with some of the accomplishments, we've had and tactical radios and then I'll lateral the ball to Jay to give you the specific numbers and we're off to a very good start in 2021 and.
As you saw on the and the press release and on the Dod side, a couple of highlights here the army.
HMS manpack.
Recently completed the Iot and <unk> last year was and the process and go on through the D O T and <unk>.
And <unk>.
Test and evaluation and recently and the good news is we just received an RFP for the full rate production. So I think thats a great sign that the modernization is moving forward.
And a month or so the army should be issuing at HMS leader radio RFP again for full rate production. So I think that again is and additional positive sign the Marines recently released an RFP for their handheld radio and the SOCAR business has been growing and we've been meeting milestones.
And in my prepared comments, I mentioned and order there for the multichannel manpack. So it just gives you some some flavor as to how the business is doing on the Dod side internationally, we have good visibility and Saudi last year, we booked a $174 million order for the Ministry and National Guard. So we'll have that revenue run out.
This year and we're working closely with the land forces on our software defined radio for about 5000. Initially so that that's going through the Saudi process Europe and U K, we had good growth U K. The Morpheus program is going to replace the Beaumont and radio. So we're hoping to hear something later this year. So again.
I feel pretty confident and what we've done in Australia last year, we talked about the delphic.
On crypto standard upgrade and new radios for Australia, there's follow on opportunities there and of course, New Zealand is also a.
On a customer that we're working closely with so kind of operationally or business development wise I wanted to give you some insight to what's going on and Jay will provide you. The numbers you requested sure sensor. So I'll give you the numbers and the format. We've historically provided orders were $424 million say.
Sales for 74.
On the sales Vod was 297.
International was $1 77 and <unk>.
Funded backlog was 958 related to your question on.
Army modernization about a third of the Dod's Army modernization that and you know that opportunity to grow.
Particularly as we go into full rate production on the army HMS modernization and the back half of this year.
Thank you. Our next question is coming from the line of Myles Walton with UBS. Please proceed with your question.
Thanks, Good morning, and and.
Bill and your.
Transition and going on Chris and yours in terms of the F 35, Chris what better way to save a lot.
Bring back old memories, and and F 35 question.
The hearings last week.
It was brought up about tier tier three and and.
And ultra Harris potentially being one of the sources of some delays there could you comment on that.
I guess, you are making and the recovery plan there as it relates to your subcontract and relationship.
Absolutely Myles I'll I'll give you some background, maybe it's going to be longer answer than you'd like but I think it's important to kind of calibrate everything and then I'll I'll ask Jay to maybe give you some of the financial implications, but youre right I personally.
I've been involved or around F 35 for 20, some years as well as many of our senior exec, So I think that that.
That's an important point and we.
Oh, absolutely are committed.
This platform, which I think is one of the best aircraft and the world. So.
L. Three Harris and legacy companies, we've been a supplier for over 20 years, we have a really good track record a few months ago, we delivered our two millionth part and we're like 99, 9% on time delivery. So a lot of the work historically has been with tier two the tech refresh two weapons release displays but.
And your questions specific to tier III Tech refresh three which is a very complicated.
Developmental program.
And to meet some of the new challenges that are that our nation faces. So you're right. We've we've realized some of the risks to two main drivers we've realized risks that we had identified and thought could occur when we bid the program and secondly, as it was referenced and the testimony there have been numerous government direct.
Changes so those are unfortunate, but not not unexpected when youre in a development total program. We're working on three main products the Ams the advanced.
Memory systems, the PCB, which is the panoramic cockpit display and the ICP, which is the integrated core processor. So we've been stable for the last six months relative to our cost estimates and our schedule and the Ams and PCB hardware start and qualification and ICP.
<unk> is just behind that so you.
And when you look at how important the tier three years, it's a step change and capability. It's half the cost of the tier two once it gets into production and it's been designed for easier affordability and sustainment.
So we're just about ready to kick off the production.
<unk> I will say that our past financials and our current guidance reflect our performance, we don't anticipate any and.
Any changes there and then strategically.
Capabilities that we're developing.
Are going to put us and are positioned to leverage this technology on the other.
Products platforms and future.
Program. So we're excited about excited about that but maybe Jay can comment more specifically on the revenue and the margin implications.
Going forward, maybe over the next few years.
Our ship set content today is a little bit over two and a $5 million of around two six.
With the tier three production with last 15, and that'll go to around $3 million per ship set so as a net against starting <unk> as the aircraft volume start to flatten out and we will see growth just through higher content.
It's important to keep in mind that as this modernization program, you'll probably be other monetization on modernization programs that that will be involved in and of course, we'll also be part of Sustainment program and so we see this as continue to drive growth I think will updated as each year progresses. This year as Chris mentioned, a little bit softer from a growth perspective, but we.
And that to pick up next year.
Thank you and our next question is coming from the line of David Strauss with Barclays. Please proceed with your question.
Thanks, very much and best of luck Bill.
Thanks, David one I wanted to ask a question on the on the Guy and just so I have it straight so the the EPS guide as of now it doesn't reflect the pending divestitures, but it looks like from from.
From the Slide 12 day, you you think you can offset the.
The dilution through through share repo I guess, that's question number one and then just with the divestitures all coming out of Aaas, what does that do to the to the margin profile on a go forward basis for assets.
Okay.
David just to be clear on the 12 to 85 that does anticipate or include the 10 cents of expected dilution from the announced divestitures, So thats and the 12 85.
As far as the announced divestitures impact going forward on margins, it's about about 100 basis points dilutive.
And the margins on these two businesses composite a little bit higher and the average going forward that will again changes.
Downstream, we will see with organic improvements, but just baseline impact of the divestiture is about 100 basis points.
Our next question is from the line of Doug Harned with Bernstein. Please proceed with your question.
Good morning, Thank you.
Build J, Chris I mean, you've seen a lot of companies.
And I mean, I cannot begin to count the number of situations, where management has said we have a cost reduction program in place.
Lay it out of the off and have interesting names to them.
You all have done the integration you have the three program and we're really seeing the improvement in margins, but I have to say most of the times you see these cost reduction programs happen.
And the savings get competed away mix changes other costs arise. So when you look forward can you talk about the things that youre doing.
And can you how you can really have confidence that we can see a continued progression of margin improvement.
Doug. Thank you first of all it's Chris you are right the integration and the cost synergies I think has been a a.
Great success as I mentioned, we're a year ahead of schedule and it really goes back to after we announced and before we close we had a dedicated team the integration management office that really laid out in detail.
Lamb to go ahead and capture these cost synergies and Thats something that build Jerry and I have been meeting and continue to meet every Monday to review the progress and it takes time.
Especially something like it.
Because we've been consolidating our ERP systems and investing in the infrastructure and <unk>.
And going with new.
New applications.
Relative to so that should wrap up by the end of this year and then we will focus entirely on on the E. Three process, it's really become and part of the culture and we identify projects. We review them on a weekly basis and these are just lots of.
Singles and doubles couple of hundred thousand here a million there and we go sector by sector segment by segment.
And world class organizations.
Continue where you take out 2% to 3% of their cost each and every year.
And so over and above the increase in salaries and and.
And and others so.
We're having good momentum we have good visibility we came out strong this quarter you see it for the year and my expectation is that.
We absorbed the headwinds and we continue to to go forward. So.
I don't know if anyone has anything further I'll just say.
And you would expect and as you know management attention both both the synergy program and the <unk> operational excellence programs are on parallel paths from day one of the merger we have had separate reviews and go through all of those.
And and these reviews are monthly some management system. We expect to continue that we had started from day one of the merger and we have monthly reviews with each of our segments as Chris mentioned, we go through the top 10 to top 15 programs and the <unk> operational excellence program to make sure that they are on track and so it's.
Simple as management attention and focus and continuing to drive the operational foundational basics are performing better each and every day.
Our next question is coming from the line of Christine and the Wang with Morgan Stanley. Please proceed with your question.
And congratulations bill and good morning, everyone.
And we're following up on Doug's question on margins.
Can you provide a little bit more color on what you think the three top programs are what initiatives you're pursuing.
And also on cost cutting and how do you know you're not cutting too much but it and the pampering performance and the future.
Yes. Thanks for the question Christine I'll start and then give it over to Jay to give you the specific numbers, but one way I know, we're not cutting and and I think I've said this back and the.
And March maybe and again you look at what we're investing on the front end of the business and R&D and industry leading amount.
Before we did not cut R&D, we couldnt cut R&D and increase the margins further, but we aren't we're taking a long term approach.
The investments, we have and bid and proposal of which were submitted and lots of proposals the R&D.
And direct sales expenditures generally increased as we try to focus on the front end of the business.
And we talked about the revenue synergies and.
Important part of our success is the work force and we actually started day one of the merger with negative synergies as we increase the cost and the benefits to make sure our workforce.
Was fully engaged and supported so that's.
The headwinds and.
The items I look at to give me confidence that again, we're not we're not looking at this short term quite the contrary, we're looking longer term and were.
Were taken and enterprise wide approach. So we talked about shared services and example, theres lots of companies out there that.
The individual segments or sectors do on their own processing and whether it's payables or payroll. Some of this stuff is on overly exciting but go into a shared service concept, having single process single systems and optimizing for the benefit of the enterprise versus individual divisions sectors or segments is as I think Paul.
A strategy and a lot of people say it it's not easy to do and we're doing it so whether it's procurement whether its quality and three shared services all of those things, we're looking at it and enterprise level taken out the inefficiencies and Theres more work to do and the years ahead, and that's what gives us confidence, but Jay do you want to maybe give.
More detail as far as specific initiatives and.
Things that you've heard of and the past, whether it should cost and value engineering supply chain shop productivity, just a specific example, and.
And our ISR businesses in terms of people as you would expect would be all over and aircraft teardown and built and rebuilt.
Simple things like changing the tooling, so that you get a benefit and ergonomics as well.
Hours reduction or minutes reduction in the rebuild of a particular aircraft and so we've been able to take tooling and some cases its customer funded tooling on top of it where we're able to change our processes improve them and take cost out at the same time. So it's not a let's just slash costs and hopefully it sticks. These are more systemic type reductions that we have.
On organization built around to drive continuous improvement and sustainable reductions.
Our next question comes from the line of Peter Arment with Baird. Please proceed with your question.
Yes, good morning, Bill, Chris Jay Congratulations Bill best of luck.
Hey, Chris on the space and airborne and <unk>.
Margin performance continues to be really impressive and.
And I was thinking just about regarding your cost Reimbursable mix has continued to grow quite a bit there I think it was up 30% year over year.
How do we think about kind of sustaining these margins with the mix shift that's happening there is still a lot of E. Three efforts going on or maybe just any color there. Thanks.
Yeah. Thanks, Peter No we apply E three.
Not only to the fixed price contracts.
Plus when we talk about the portfolio that we've built and how we're positioned and all of these domains.
A lot of these programs that start out.
And.
And as cost plus or developmental and have a long life, sometimes decades right. So they move into full rate production and then of course a fair.
Fair amount have potential for international export. So we look at it as a portfolio and and the natural healthy growing business you are going to have the headwind mix from the development programs, which will take every day of the week, but the rest of the portfolio is continuing to mature through its cycle and as I mentioned F. 35 is a good example, we're getting.
Through the tier three and then we'll be starting our production and.
And that program should have a lot of legs. As an example, GW is part of SaaS. We've had good success of late as I mentioned with the F. 16 is a specific example, we have legacy programs on the F 18.
We don't talk a whole lot about the cyber business, but that's growing and again there is a commercial model aspect to our cyber business that allows us to have licensing and other opportunities to grow margins. So that's pretty much how I look at it and.
And we continue to have confidence even with the cost plus.
Piece of the portfolio.
Our next question comes from the line of Gautam Khanna with Cowen. Please proceed with your question.
Hey, guys. This is Dan on for Gautam. Thanks for the question.
So next question and this is actually already asked for and for CFS, but I was hoping because margins for pretty much stronger across the board.
But the items withheld and so I was hoping maybe you could expound on why.
And particularly at IMS and SaaS, what kind of tempers that performance throughout the remainder of the year to come back into the guidance range. Thanks.
Sure so and in SaaS and particular, we expect and their case R&D to tick up and the back half of the year and so that's one and and as well as just programs growth on some of these new wins is going to drive margins down just on the lower initial margins as I mentioned and my prepared remarks, so for.
Our SaaS is two factors tick up and R&D and then it took up and the lower margin on new programs.
Yes, I'll just add Dan is still early early on the year and you know and my comments I suggested this gives us high confidence to be at the higher end of the range. So.
We will keep it updated and let you know if changes are warranted later in the year and it's similar with IMS as well.
And again for them its program timing, particularly in the maritime business that had been a lot of new wins and that in that sector.
Chris mentioned, we had mentioned before things like the medium unmanned surface vehicle.
And also the other programs that day one.
Is going to drive a little bit lower margin and the back half of the year as we ramp up those particular programs.
Our next question comes from the line of Jon Raviv with Citi. Please proceed with your question.
Hey, good morning, everyone and of course, congratulations to all especially on Bill and Chris.
Slightly more myopic version of Doug's question on Christine's question a question from Dan.
When you think about this year's margin Youre talking about the upper end of the of the guidance range for this year that set a base off of which we can continue to expand or should we take this year's rapid improvement.
Comprising maybe a couple of years of expansion such that 'twenty two could perhaps be flattish for example, you've mentioned several times a day that you have some new programs ramping up as the year progresses is that going on maybe hold down and some of the expansion opportunity next year.
Yes, so it's a little early to talk about our guidance for margins next year, but I will say that our goal each year is to continue to drive.
The margins up we've talked about.
A smaller ramp and expansion, but our but our goal always is that the <unk> III productivity operational excellence program exceeds the headwinds from from mix and that's what we strive for each and every year, it's going to vary from year to year. So as we get into more specifics as we put together our plan for next year will be able and obviously give you more detail.
There, but the way you should think about it on average each year has continued to drive up it'll slow from what we've seen the last few years, but our expectation is to continue to grow.
Our next question is coming from the line of Noah <unk> with Goldman Sachs. Please proceed with your question.
Hi, good morning, everybody and.
Bill Congratulations on your time and success with the company and thanks for working with US It was really a pleasure to work with you.
Thank you.
And Chris.
All the best going forward and look forward to working with you as well.
Thank you as do I.
Could you guys update us on the programs that had slipped last quarter that you identified there was the ISR aircraft program that you discussed and and I think there might have been a few other smaller ones did those did those land and <unk> or not and if they didnt when do they and with the with the ISR one my understand.
Was the delay was caused actually by being sized up but that you hadn't put all of that and to the guide. If you could just update us on how you are handling that and the outlook.
Yes, no on all those items.
Items that didn't quite cross the goal line and December were in fact.
Booked and in Q1 so.
The guide represents.
Those programs that have been booked.
The results are in the quarter and for the year. So we're very optimistic and the ISR business. When you take this NATO customer plus what we've done in Australia and here and the U S with.
The <unk> program, there's still lots of legs.
And aircraft ISR. So everything is contained and the latest guide and as I mentioned there are several billion dollars of opportunity over the next couple of years, because we continue to execute on these programs.
Our next question comes from the line of George Shapiro with Shapiro Research. Please proceed with your question.
Good morning, and again, congratulations to you Bill and good luck to you Chris.
Thank you.
These questions.
Couple of questions for Jay you spelled out pension income as a benefit and space, but not the other sectors I would think of it and aviation it's pretty symmetrical from <unk>.
Spell out how much of a contribution it was as well and then if.
If you could just provide how much with public safety and commercial revenue is down and how good day, how were they on a sequential basis and what's the kind of rough numbers that we're at today.
Sure George so for pension and Youre right it was largest.
SaaS, but there were benefits across the portfolio IMS benefited about 30 basis points.
<unk> was very small about 10 and asks about 20 basis points from pension and overall for the company about 30 basis points on <unk>.
All in.
As far as.
The commercial businesses PSP C was down low twenties.
And the commercial aviation was down a little bit below 50% and.
And the quarter, so combined youre talking and the <unk>.
<unk>.
Commercial aviation was slightly down from from the fourth quarter and PSP sees the same slightly down some of that those seasonality. Its not I don't think the compares that creates a on a sequential basis, it's better I think year over year fourth quarter, I think are seasonally higher and both businesses.
And I'll, just chime and George relative to the PSP see and I'm sure you've seen the $1 $9 billion COVID-19 Bill.
About 360 billion for state and local municipalities and the states have full discretion on how to spend that money. So I think that's going to give us more confidence and the PSP see recovery.
Most of which as you know as with states and local municipalities. So I'm sure they're going to be trying to figure out between education health care and public safety how to spend that money.
But I think just and the first quarter, we tripled the number of <unk>.
Proposals that we submitted so I.
And I have confidence the second half of the year, we'll start to see the recovery that J J mentioned and I think we're all familiar with what's going on and commercial aviation. So again thats that's back end loaded as well.
Thank you. Our final question comes from the line of Michael <unk> with <unk>. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my questions and congrats.
Phil and Chris.
Maybe just.
Going back a little bit to wrong space question and kind of tie in and <unk>.
And John were going on margin so at the.
Business update presentation last month, you kind of talked about within space and.
Within this segment there around this sort of a factory business model you know.
With these newer constellations.
You know laying out a path towards I guess four times as many deliveries.
How do we think about the move in in that production and the higher volumes and presumably some of the leverage you would get either on better throughput better purchasing is that going to be a big source of margin expansion outside of E. Three it seems like you're taking on a much different production philosophy there.
Yes, Michael on well said I think absolutely that's going to be a contributor to our margins and coupled.
With volume so we talk a lot about the HP TSS SDA.
And we wanted to down select we still on our competition and we're Gonna go ahead and focus on delivering those those aircraft on time and getting them launched and then.
And that's where the real opportunity kicks in and whether they keep two suppliers or go down to one.
And is literally tens if not more of satellites for decades to come so the volume will also.
Play play into that and.
The <unk> III methodology, and our focus on operational excellence and.
He has really taken space and make it a more of a factory type.
Concept and mindset and we have those capabilities, we do it and other parts of the country.
Company and we're sure on those best practices. So each and every one of those will contribute so thank you for that final final question, Michael and let me just wrap it up I think you've heard.
Throughout the day here that we've had a solid start to the year with exceptional execution and healthy string of awards, obviously that wouldn't be possible without the dedication and hard work of our 48000 employees. So clearly appreciate everything they are doing I'm excited about the rest of the year as we finally, hopefully put the pandemic related.
Impacts behind Us and.
The final stages of integration and we make more progress as a unique non traditional defense Tech company.
But before concluding I also have to thank bill for his leadership and contribution to the company and congratulate them on a on a great run. So bill I have enjoyed working alongside you and the last two years I'm proud of what we've created together here at L. Three Harris and more to go. So thank you Michael Thank you Chris.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.