Q2 2021 L3harris Technologies Inc Earnings Call
Greetings and welcome to the L..3 Harris technologies second quarter of calendar year, 2021 and earnings call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this call is being recorded.
And it's now my pleasure to introduce your host Rajeev <unk> Vice President Investor Relations. Thank you you may begin.
Thank you Rob good morning, and welcome to our second quarter 2021 earnings call on the call with me today are Chris Q basic our CEO and Jamie <unk> All day.
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 for more information. Please see our press release presentation and SEC filings.
A reconciliation of non-GAAP financial measures to GAAP comparable measures is included and the Investor Relations section of our website, which is L..3 Harris Dot com, where a replay of this call will also be available without Chris and I'll turn it over to you well. Thank you Rajiv and good morning, everyone I'd.
And I'd like to thank the entire health Reed Harris team for a job well done and as we began our third year as a new company.
We are executing the integration plan and have exceeded many of our targets despite challenges such as the pandemic.
The high performance culture and leadership team. We've created are set to carry this momentum forward, which is reflected in today's results.
We reported a strong second quarter organic revenue was up over 6% with growth across our key end markets and all 4 business segments.
Funded book to Bill was 1 point out for the quarter and 1.15 year to date margins.
Margins increased to 18, 6% res.
The resulting in EPS of $3.26 up 15%, we had solid free cash flow of $685 million, which contributed to shareholder returns above $1 billion, including.
Repurchases of $850 million and the quarter and over $1.5 billion year to date.
Our first half performance, coupled with our expectations for continued execution and the back half more than offset the divestiture headwinds and supports and other raise to our EPS guidance, which Jay will cover.
Execution against our strategic priorities that are on slide 3 continue to deliver results and create value for the company's stakeholders as we make progress and build momentum with top line opportunities operational performance announcing and closing divestitures and delivering on our capital return commitments.
In terms of the top line, we had our best quarter since the start of the pandemic with progress against our key and market growth objectives, while seeing data points that validate our focused R&D strategy.
Our government businesses were up 6% and the second quarter driven by double digit growth internationally.
Our international revenue benefited from increased aircraft ISR and radio sales to regions and the Asia Pacific and Europe.
And on the domestic front the growth was broad based with our responsive space and maritime programs as well as land modernization for night vision and satcom products, leading the way.
Our strategy to deliver end to end mission solutions utilizing the capabilities and scale across the broader organization continues to gain momentum.
Our space business strategy is working as we grew 10% and the quarter capturing classified awards totaling over 300 million for ground and responsive satellite solutions.
These awards are also part of the revenue synergy capture efforts and bring awards to date to over $700 million on a win rate of 70% from our growing 7 billion dollar plus pipeline.
Turning to our commercial aerospace and public safety businesses, they were up over 5% and aggregate and were led by our commercial aerospace business up double digits off a low base and from strength and product sales.
And the public safety side, there was a modest decline, but with sequential improvement and increased bid and proposal activity from a more stable backdrop.
Our solid topline was accompanied by backlog growth as we continue to win strategic programs that includes several prime roles backlog increased 7% organically year over year to over $20 billion with notable award activity across all domains.
On the space side, our revenue synergy awards came from combining electronics and optics capabilities across the company to deliver solutions for and increasingly contested environment.
These are incremental to the Pathfinder programs, we previously won which have billions of dollars of potential over time.
Customers are viewing L..3 Harris as a trusted disruptor.
See us as a company that understands the complexities of emission and can offer fresh and creative solutions.
With the 3 year space pipeline of nearly $20 billion, there's more opportunity for continued growth.
Within the air domain, we strengthened our existing F 35 franchise with initial production awards for the aircraft memory system and the panoramic cockpit display electronic unit under the tier 3 program.
<unk> total orders year to date on the platform to about $500 million we're progressing.
<unk> on all 3 tier 3 systems through integration and qualification of this year and and supported a planned with lot 15 cut and of the production hardware.
We are also secured a roughly $100 million IQ with so calm for infrared sensors on rotary platforms, furthering our modernization opportunities for cross sell 3 Harris.
Moving over to the land side, we signed several key contracts that touched both international and domestic markets.
First we received a $3.3 billion 5 year IQ for foreign military sales to a range of partner countries from our new broader portfolio of products, including radios and satcom terminals and.
This replaces our prior 5 year $1.7 billion dollar contract, which supports and validates the continued modernization across geographies and expands our product scope.
Second and the U K, we received and logistics support contract covering legacy Bowman and future Morpheus radios positioning us well for $1 billion modernization opportunity and that country.
And third we want a competitive 10 year I'd IQ to supply the U S Air Force with our T..7 multi mission robots further expanding our customer reach after launching the <unk> 7 with the U K a few years back we're now pursuing other international opportunities and the robotic area.
Within the <unk> domain, our team was successful and extending its leading prime position and undersea sensor systems and warfare training for a range of the U S. Navy platforms and support of distributed Maritime operations. This undersea warfare training range program called you sweeter.
Has and award value of nearly $400 million and further builds our credibility to pursue additional domestic and international opportunities.
And the cyber domain, while limited into what we can say due to the classified nature, our $1 billion, Intel and cyber business received over $250 million and orders for complex mission solutions and specialized communications for both domestic and international markets, leading to another quarter of book to Bill above 1 O for this.
Business.
We also had a key award and and adjacent market with our public safety business with a 15 year $450 million contract from the state of Florida to upgrade and continue operating as law enforcement system for first responders.
Moving over to the budgets, while the process is ongoing and we await a final <unk>. We were pleased with the initial request for the FY 'twenty to budget and the support stability and the Dod and NASA and FAA spending and is aligned with our capabilities and investment priorities for.
The Dod and it's focused on continuing to revolve around and address near peer threats through high value technology, which Congress is reviewing.
And when we look at the portfolio and the relevant line items our programs are well supported.
This builds on the trend, we've seen and international markets, where theres, a broad stability and military spending including key countries such as the UK, Australia, Canada, Japan amongst others. We're also seeing growing demand for the type of defensive systems, we offer per our alignment with the U S export policies to ensure partner.
Security.
Our most significant opportunities remain for ISR aircraft Commission as Asian, and other upgrades land force modernization and enhanced maritime systems.
All in all as we consider the trajectory of our top line over the coming years, we remain confident and our ability to outgrow the budget and to deliver sustainable growth through our domestic positioning revenue synergies and international expansion to drive a large pipeline of opportunities underpinned by our leading R&D investments.
Shifting to operational performance, we continue to surpass milestones for priority programs for example, and SaaS. The team completed a successful preliminary design review for and advanced EW solution called Viper Shield that can deliver self protection capability for block 70 F Sixteens and.
IMS, we advanced our unmanned maritime strategy with several customer engagements and demonstrations highlighting differentiators and predictive autonomy on U S fees as well as a submerged torpedo tube launch and recovery for our small <unk>.
We also successfully completed our prototype demonstration for SOCOM multi role aircraft and a variety of challenging conditions, while utilizing the breadth of L..3 Harris offerings.
And financially we had another quarter of strong margins as the team continues to offset mix impacts from early stage programs with 3 key 3 initiatives, including program excellence and factory productivity.
Allowing us to flow through cost synergies totaling an incremental $27 million and the quarter.
In addition, the first half synergy run rate is now $350 million driven by progress on facilities consolidation and efficiencies.
We see this as the minimum level will deliver on this year up from the 320 million to $350 million range. We discussed in April and still a year ahead of schedule.
Any upside from here will be incorporated in our <unk> program with our integration efforts blending into operational excellence initiatives.
On margins for the year. This leaves us at about 18, 5% for the top end of the prior guide and a level, we'll look to build on and the years ahead.
Next on capital allocation today, we announced the sale of 2 small businesses within our aviation systems segment for $185 million and cash and these should close before year end.
And when combined with the roughly $2.5 billion divested under our portfolio shaping initiatives total gross proceeds are set to be $2.7 billion.
We have now divested nearly 10% of our revenues and with the completion of a few others and process our portfolio shaping program announced in 2019 is largely complete.
Proceeds from divestitures, including those from the recently completed military training and combat propulsion businesses will be part of our capital returns program consistent with our shareholder friendly capital allocation approach.
Our expectation now is for buybacks to be roughly $3.4 billion. This year up versus our prior guide of $2.3 billion when.
And when combined with dividends and capital returns will be about $4.2 billion and 2021.
So to wrap up I'm pleased with the execution against our strategic priorities confident and our ability to consistently deliver double digit EPS and double digit free cash flow per share growth and I'm excited about the next phase for L..3 Harris with that I'll hand, it over to Jay.
Chris and good morning, everyone.
First I'll provide more color on the quarter I'll cover also the segment results and finish with our updated outlook.
Starting with the second quarter organic revenue was up 6.2% with a return to growth and all 4 segments.
<unk> led the way up 12% followed by a return to growth at <unk> of 4% 4.7%.
Margins expanded 40 basis points to 18, 6% primarily from <unk> III productivity program performance and integration benefits, partially offset by higher R&D.
The sequential decline and margin was also due to timing of R&D as expected.
These drivers along with our share repurchases led to EPS being up 15% from <unk> 43.
To $3.26 as shown on slide 5.
While this growth volume synergies and operations contributed 18.
A lower share count contributed another 18.
And pension tax and interest accounted for the remaining 7.
Free cash flow was $685 million, while working capital days stood at 57 due to receivables timing.
And shareholder returns of over $1 billion.
Were comprised of $850 million and share repurchases and $207 million and dividends.
Of note our last 12 months of share repurchases have totaled over $3 billion at an average price of $195 per share well below our current share price.
Now turning to the quarterly segment results on slide 6.
Integrated mission systems revenue was up 12% led by double digit growth and ISR aircraft <unk> on a recently awarded NATO program.
In addition to mid single digit growth and maritime from a ramp on key platforms, including the Virginia class submarine and constellation class frigates.
This more than offset the low single digit decline and our electro optical business that was due to the timing of west, Kansas hurt deliveries, which we expect to increase and the back half.
Operating income was up 2%, while margins contracted 150 basis points to 15, 3%, reflecting expected mixed impacts, including the ramp and growth platforms and programs.
Funded book to Bill was <unk>, 8.1 and the quarter and 1.06 for the first half with strength across the segment.
And space and airborne systems.
Organic revenue increased 3.2% from our missile defense and other responsive programs do.
Driving 10% growth and space.
Along with mid single digit.
Classified growth and Intel and cyber.
This strength outweighed the impact from modernization program transitions and our airborne businesses. We have 35 Tech refresh 3 program within 8 mission avionics and the F 16, Viper Shield advanced electronic warfare system.
Operating income was up 7.7% and margins expanded 90 basis points to 19, 7% as operational excellence, including program performance increased pension income and integration benefits more than offset higher R&D investments.
And funded book to Bill was over 1 for both the quarter and first half driven by space.
Next communication systems organic revenue was up 3.2% with mid single digit growth and tactical communications.
And that included international up double digits.
Driven primarily by modernization demand from Asia Pacific and Europe, and and anticipate and anticipated decline and Deogee from last year's second quarter, 40% plus growth.
USD USD Dod modernization continued to benefit the integrated vision and global communication businesses.
Adding to high single digit and double digit growth respectively.
Conversely, broadband was down low single digits and lower volume for legacy unmanned platforms due to the transition from permissive to congested operating environments as expected and.
And public safety was down 7% from residual pandemic related impacts.
Operating income was up 8.3% and margins expanded 170 basis points to 25, 5% from higher volume.
Operational excellence and integration benefits and.
And put a book to bill and the quarter and first half were about 1.3 and 1.1 respectively.
Finally, and aviation systems organic revenue increased 4.7% driven primarily by our commercial aerospace business that was up 20% from recovering training and air transport OEM product sales.
We also saw mid single digit growth and defense aviation from a ramp on fusing and ordinance programs and and mission networks from higher FAA volume.
Operating income was up 17% and margins expanded 200 basis points to 14, 5% from operational excellence integration benefits and higher volume.
But and book to Bill was about <unk> 9 for the quarter and first half.
Okay shifting over towards 2021 outlook.
Overall organic revenue growth is unchanged at 3% to 5% with our topline training as expected at 4% for the first half and supported by a 1.05 funded book to Bill year to date.
Our U S government businesses are expected to accelerate and the back half driven by space Tactical Communications integrated vision solutions, and classified growth with and Intel and cyber and defense aviation.
On the international side, we continue to expect mid single digit plus growth for the year as a strong first half led by aircraft ISR and international tactical radios moderates and.
And lastly, the encouraging results and our commercial businesses and the second quarter build confidence and a flattish outlook for the year with double digit growth and the back half.
Consistent with our overall guidance of consolidated level. We've also maintained our segment sales guys as well.
And as we think about the second half of the year, our key watch items will be the timing of awards.
The continued performance of our supply chain and the pace of the commercial recovery.
Turning to margins, we have raised our outlook to approximately 18, 5% a 25 basis point increase to the top end of our previous range due to our strong performance to date and confidence and our ability to execute.
On cost synergies <unk>, III and program deliverables.
We do continue to expect margins to move lower and the back half due to higher R&D investment and stronger growth and new earlier stage programs.
From a segment perspective.
We're holding to our prior margin guidance ranges across the board.
But we're expecting IMS and SaaS to be at the upper end of the ranges given their strong performance to date and.
And our holding Aaas and see a steady at their mid points given divestiture dilution at Aes and expected mixed pressure at CES.
And EPS were.
And we're raising our full year guide to a range of $12.80 to $13 with the midpoint now towards the upper end of our previous range and reflecting 11% growth from 2020.
Delivering on our double digit commitment in spite of dilution from divestitures.
Shown on slide 11, and the increase of <unk> from the prior midpoint is driven by 13 and improvement in operations and synergies and 19th sense from a lower share count at 203 million shares along with a lower tax rate of about 16%.
All of which more than offset divested earnings of 31.
On a standalone basis, we expect about 15 <unk> of net dilution from divestitures.
Moving to free cash flow our guidance, our guide of $2.8 to $2.9 billion is intact. Despite divestiture related headwinds of roughly $80 million and continues to reflect a 3 day working capital improvement from year end to around 49 to 50 days.
Now adjusted for divestitures.
Capex is expected to be about $365 million $10 million lower versus the prior guide due to completed divestitures.
Our guidance also now reflects approximately 3 <unk>.
And $4 billion and share repurchases.
And increase of $1.1 billion from our prior guidance to account for net proceeds from recently closed divestitures.
All told all told we expect to return about $4.2 billion to shareholders. This year.
Let me sum it all up.
We delivered strong performance and the quarter and first half solid revenue and book to Bill growth.
Further expansion of industry, leading margins and consistent cash generation and deployment.
All enabling another guide raise as we continue to execute on our strategic priorities and drive 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 we will now be conducting a question and answer session.
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1 moment, please so we pull for questions.
Thank you and our first question is from Doug Harned with Bernstein. Please proceed with your question.
Good morning, Thank you.
Good morning, Doug.
And I wanted I wanted to understand a little more about the outlook for communications systems and some new you already had strong growing positions on radio modernization and night vision.
And then you got some big Big Awards in Q2, and those should add to growth.
And I would expect this should be high margin as well.
And so when you look at debt, but the longer term growth here and it.
Look at the revenue trajectory over the next 3 to 5 years, how do you see that now and is there a potential to take margins up above.
<unk> current 25% levels here.
Yes, Doug this is Chris thanks, Thanks for the question and.
Yes, you absolutely got it right we've been quite successful and the communication segment of late with some of those wins not only here domestically, but internationally as well. So I think what we're seeing is some upward pressure for for revenue growth and margins over the longer term like we've talked about before we had a.
Great quarter, when you look at the book to Bill and.
The continuation for modernization of the land forces, whether it's the radios and night vision goggles Satcom and we're really on a good good position. So maybe I'll throw it over to Jay to give you a little more color share just maybe just 1 another quick comment on.
And revenue growth over the medium term.
Doug if you recall and if you look at the future.
Similar to what we had this year if you look at our segments. We had SaaS at 4 to 6 IMS a 4 to 6 and that was followed by <unk> and Aes. If you look to the future and we would expect that to those 2 top segments to continue to be leaders and growth.
I will say as Chris mentioned that this gives us more confidence and the outlook, but we probably expect those 2 to drive a little bit higher growth than <unk> and the medium term.
On the margin profile you see this year, we are taking from the first half we are going back a little bit and.
And that's really a reflection of the mix and the new programs, we have the army.
<unk> monetization programs, we also have and our broadband communication the Nexgen Jammer program. So we have some pretty sizable programs that are actually margin dilutive. The good thing about that is the team is track record and being able to take cost out drive the margins better over time. So if you look at the first half that shows you what the potential of this segment could be.
So when we end the year this year will be and that say 24, right now, we're saying 24, 5% at the midpoint, we delivered over 25 and the first half of the year that gives you a kind of a view of what what the medium term could look like over time.
And I'll, just chime in and yesterday, we signed a contract with the mid east country for the first phase of our multiyear Nextgen STR standardization program and this has the potential for.
We're up to $1 billion.
Over the next several years, so a lot of good positive momentum.
Our next question comes from the line of Christine and the way with Morgan Stanley. Please proceed with your question.
Hey, good morning, guys.
Good morning.
Hi, Chris and space can you provide more color on the competitive landscape available program per bed and how youre performing.
Oh absolutely.
<unk> had a good a good run and space and as I've mentioned.
We had a good quarter.
Book to Bill and space was 1.2.
So far this year and.
And.
We've been successful in winning 10 of 18 prime positions just and the last 18 months, so that's something that.
We're quite proud of and we've also moved into the missile Defense Arena.
Maybe a little longer answer the approach, we're taking and space is similar to what we've done and and.
All 5 domains and it's really understanding the customer's mission, we have 47000 employees and 20000 engineers and 20000 employees with clearances. So we're looking at our capabilities. We're looking at how we're spending and our Iran, and we're trying to develop solutions and alternatives that debt.
Meet their needs, we've talked a lot and the past as you know about our response of SaaS.
We were able to develop and launch satellites within 20 months. So that's helping us win a lot of these prime positions. We understand the mission we have innovative solutions. The focus is on the payload and the integration and speed. So strategically I think that has been a been a needle mover, but I look at the exquisite satellites.
We continue to have some of the best payloads out there. So we're working with partners.
Usually the larger primes and and that's contributed to some success and we have some awards coming up and in the next few months that are classified and then we're working collaboratively with some of these new entrants just.
And just like we do with the traditional primes and find where we can partner, where we can compete and it seems to be working so very proud of that team and the outlook is quite quite positive and space and the budgets clearly support and this growth as well.
Thank you next.
Our next question comes from the line of David Strauss with Barclays. Please proceed with your question.
Hi, Thanks, good morning.
And then.
Chris just wanted to ask about the margin side.
You you're hinting at the idea for further margin upside from here can you just talk about the different drivers you see how much of the margin upside that you see from here is dependent on volume versus kind of what's under your own control from an <unk> perspective, and then also what you're assuming for for pension when you say higher margins from here.
Guidance.
Thanks, David.
A small part of the margin improvement does come from volume and we've talked about.
Organic growth trajectory, so that's a contributor but but the big drivers ultimately E 3 and.
And we talked about the synergies, which are a year ahead of schedule and we are.
Committed to a $350 million run rate a lot of this takes it takes more than just 2 or 3 years that we've talked about and each and every function has developed and executing a transformation plan and it takes investments, sometimes and systems and processes, but we believe there is there is continual upside we've proven it.
Focused on this something Jay and I review on a on a regular basis. So we see no reason why the <unk> III program can't continue.
I'll, let Jay jump in on the pension.
Assumptions, but.
Again, the execution has been what's helpful and it's driving.
The margins, we're able to <unk>.
Control, our Eac's and.
And the commitments that we sign up to with our customers, So Jay and little more color, yes sure.
Just to confirm on the ground and the margins if the absorption is a little benefit and Thats typically factored in when we talk about the mix headwinds and thats, usually coming and these new programs with thinner margins.
And as Chris mentioned <unk> is the key driver is going to drive it and we've talked about 20 to 25 basis points per year over the medium term and being able to continue to drive expansion and.
We feel pretty confident and that the pension you think about this year all in between <unk> and cash benefit of about $470 million on an absolute basis.
We expect that next year, the cash element to decline a little bit as a result of the <unk> legislation that was enacted earlier and the year.
And that's that pushed out funding requirements for pension.
Our recovery per casual come down a little bit, but that should be offset by some some fast income. So net net I would expect the year over year pension to be pretty much flat.
Thank you. Our next question is coming from the line of Robert Stallard with vertical research. Please proceed with your question.
Thanks, so much good morning.
Good morning.
Chris It's probably 1 for you you mentioned that the disposal process is now are pretty much done I was wondering how the prices on the assets that <unk> sold have compared versus your expectations and do we now see a maybe a shift in strategy and perhaps start to look again at acquisitions. Thank you.
Thank you for the question no. We've had numerous transactions that comprised of $2.7 billion.
And went back and looked at our original estimates and we've.
General and to answer your question been able to to meet or in some cases slightly exceed what we had projected we talked way back about.
Maybe about $2.8 billion of gross proceeds from all these divestitures were a $2.7 and as I mentioned, a couple of small ones. So we will we will clearly get within the range of our expectations.
And on the M&A front, we did come out of the box 2 years ago and said, we really we're going to stand down on M&A and.
And focus on the integration and the divestitures and as I've highlighted that's gone very well or maybe even better than expected, but even during that 2 year period, we watched the market I'm highly confident we didn't miss anything and that 2 year period.
So we'll continue to survey the market we're looking at.
Anything that has quota must have as we call. It and you know and I look at the portfolio as we've said over the 2 years, where and all 5 domains I don't really see any any glaring.
<unk> or gaps so.
We will either proactively approach companies or respond to inbound.
Calls, but we're really going to continue to hold a disciplined look at things strategically look at them operationally make sure the financial hurdles makes sense, so not really and a rush and are very pleased with what we've been able to win organically. So.
Hopefully that gives you some insight Robert.
And we will let you know as things progress.
Our next question is from the line of Myles Walton with UBS. Please proceed with your question.
Hey, Good morning, I was wondering if you could comment a bit on the second half implied step down and SaaS margins I think you've talked in the past or R&D and mix and maybe just quantify those and.
And also Christopher J could you just update us on next generation Jammer I know the second protest has been yes.
Or is being adjudicated I guess <unk>.
And I guess, that's due for decision here and the next couple of weeks with that have a swing factor on this year's topline or guidance anyway.
Yeah, I will take the next Gen Jammer, 1 first and then ask Jay to chime in on SaaS.
Youre right its going to be mid August when we hear the results were very supportive and confident and the process that the U S Navy Ram and.
We're assuming that we began to work and in August and that's that's built within the model and the guidance. So no additional upside from from that but a huge.
And when and we're looking forward to getting started and delivering those capabilities.
And on the excess margins miles debt.
But first half about 19, 5% and that ballpark the back half of the year does step down to 18, 8 maybe 18 plus.
And the guide range at the at the high and at <unk> 7 and 5 key drivers is really mix on the new programs, particularly in the space. We've got to step up and these missile defense programs Theres a number of other classified programs that we've already won.
And.
We anticipate winning here and the back half of the year, which will continue to put some pressure on the margin and the back half, but again those are things that we had contemplated coming into the year. When we set the guidance originally and we're you know we're pretty impressed by the fact, we were able to go to the high end of the guidance now based on these same new programs.
Yeah.
Our next question comes from the line of Richard Safran with Seaport Global. Please proceed with your question.
Hey, good morning, everybody how are you.
Good morning, Fine how are you doing.
Great.
And.
The international market for defense is always dynamic and I thought I'd follow up on some of your opening remarks here could you give us an update and the overall international outlook, the opportunity set where youre seeing demand coming from and for what types of systems et cetera.
And your answer Chris.
You have this reputation and being able to drive and improve relationships with government customers and I was just wondering and your answer if you could discuss where you see the opportunities where else we Harris.
Okay, well, there's a lot of questions there.
I'll go backwards or yeah, I mean, I try to encourage and my team.
And we got to spend time, with our customers and listen to their challenges and.
And such so actually this evening ill be here.
And into DC and have 3 days of meetings and the Pentagon with.
And with a whole variety of customers from OSB and the services and obviously, bringing the key P&L leaders with me, so we'd like to listen to our customers and see how we can help them and.
Work collaboratively with them on the budget process and such so I think everybody does it but that's something I'm focused on international you know we came out of the shoot and said this was 1 of the areas. We thought we could do better and.
And I think we said we were underperforming as a combined company and we were probably right around 19% of our revenue maybe 'twenty on a pro forma basis back and 29.
Our 2019.
So far this year, we're at about 22% of our revenue coming from international and so we're seeing a little little positive movement. As you know, it's a little it's a little lumpy you know as I mentioned.
Maybe somewhat surprising.
And the budgets have really been stable across the globe consistent with the U S. So I think I think that was a pleasant surprise given the threat environment and when you think of U K, Australia, Japan, Canada and.
And.
So our approach and strategy that I've talked about is really twofold. We have the 10 focused countries, where we have executives either local country nationals are ex pats their day to day understanding and the process to threats and and.
And bringing in our P&L leaders at least when the borders open to try to close on deals so that seems to be working well and then more on the traditional product side.
Use the distributors and the reps and we've been able to use previous relationships to expand the portfolio you know I mentioned that <unk>.
<unk> IQ for Fms is an example that now allows.
All the products of the new company to come through not just the traditional radar.
Radio So I think that's a positive you know a lot of what we do is focused on more defensive systems. We're hearing from our international customers because ultimately they want situational awareness and the ability to communicate and the contested environment. So you know I look at our portfolio and the things we're doing on ISR aircraft, whether it's.
And you know something like a rivet joint to a business jet and in some cases to a single prop.
Aircraft, we have a broad portfolio that allows them to get situational awareness, we've talked quite about a bit about our resilient comms capability our wave forms.
<unk>, which is second to non and.
You know relative to the regions as per usual place the mid east far East and and Asia Pacific and we're seeing growth opportunities and all of those areas. So.
That's probably a longer answer than you wanted but were optimistic and.
I think we're in good position and executing on the strategy, we laid out 2 years ago, and just just to quickly add to that Richard our growth framework, we had laid out a target of mid single digit plus growth over the medium term for international and we feel very comfortable with that obviously, we're going to be doing that to share if not a little bit better.
And it's kind of Chris.
Chris since some of these capabilities the ISR aircraft <unk> and if you recall back and our March <unk>.
Investor briefing, we had talked about taking the exquisite.
And with joint capability, bringing that to business chats and is also also bringing it to pod capability based on customer affordability and a significant amount of demand around the world for that you look at tactical Communications, we see a lot of these foreign countries. Following the same Dod modernization path and so we see opportunities there and I would say.
The other areas and maritime both and manned and unmanned.
Requests for.
And support and the capabilities, we provide both and say electrical.
Electrical distribution and power control as well as things like autonomy and so we just continue to see a growing pipeline and they were pretty comfortable with our growth objective over the medium term.
Our next question is from the line of Gautam Khanna with Cowen. Please proceed with your question.
Yes, thanks, good morning, guys.
And then.
Wanted to ask.
Just a follow up to an earlier question on RF tactical and sort of the prospects for growth and 22 and beyond maybe if you can frame for us.
The international and domestic pipeline and.
And then what you expect kind of and rates of growth to be.
Beyond this year and then I have a follow up on that.
And you can talk about.
What's your view of that program as a potential threat or opportunity to legacy issues. Thank you.
Okay, Let me let me.
Stewart do high level and the first question Jay can give you some more and more color on <unk> Com, and then I'll come back and and answer.
To answer the <unk>.
Question.
And specifically you know domestically we've talked about some upcoming awards that should be occurring here domestically the HMS manpack HMS leader.
And those are coming forward here hopefully in the third quarter and the fourth quarter. The Marines have a handheld and competition that we're also looking forward to getting the results and then of course internationally.
We have a pretty good increase.
A year later later in the year and again the focus there is going to be and Europe mid East and Asia.
And the Asia Pacific region.
And we've had good success and the mid east that I just mentioned from yesterday.
Australia, and orders and and really a pretty strong pipeline, but I'll I'll, let Jay give you a little more color and numbers.
As it relates to dot com, yes gotcha.
Overall, probably in both cases, both Dod and international Youre looking at probably low to mid single digit growth over the medium term part of the reason, particularly and Dod.
Is it while we have strong growth on the monetization programs. It does cannibalize a piece of our base business.
Business and so you have a little bit of a reduction there with growth.
Solid growth on the on the monetization programs Army being the largest program, that's really and the early innings and we've got the start up full rate production here coming in the back half of this year internationally and Chris mentioned that before Theres just demand around the world for some significant upgrades as far as modernization and but again I would.
Put the growth rate right now and that low to mid single digit as new countries come on other countries and I'll fall off and so obviously, we're going to drive that to more of a mid single digit but for now I think that's the best way to think about and look at it.
And then going back to a high vas.
And I think when you look at our <unk> B program and I've asked I would say that.
Theyre kind of go and head to head, maybe battling a little bit for budget money. Although both both were funded and our focus is clearly to deliver which our team has done a great job on schedule and meet all of our commitments I think ultimately it's going to be a question of how these get split I think there are several hundred thousand.
Several hundred thousand devices needed and they have slightly different capabilities and mission set. So I would think over time, there's going to be a split between between the 2 we've been talking a little more publicly about some of the augmented reality capabilities within the <unk> the real focus on.
And the night.
Night vision.
Capabilities so different.
And capabilities different mission and I would think that to converge at some point and and we'll see how and how the army and wants to play that out but right now, we're just focused on delivering and making sure we meet our commitments.
Thank you. Our next question comes from the line of Sheila <unk> with Jefferies. Please proceed with your questions. Thanks, and good morning, guys. Thank you for the time.
And.
And maybe can you talk about some of that deceleration and you're saying you're forecasting 5% grasp on the year and.
And you're at 9% and robust growth and the first half and and implies flat for the second half. So what are some of the puts and takes.
Yes, Sheila what what's happening with IMS and the back half of the year and had strong growth and the ISR business, which was mostly these international.
Customers that will will moderate and abate a little bit here and the second half of the year and so the growth rate is going to normalize back to what we're expecting.
For the full year, that's really the key driver really strong international and the first half dot moderates really and the second half for the business back to a normal rate.
Yes, I think of all of our segments Sheila this 1.
It's a little more lumpy based on the large significant.
Procurements of aircraft or deliveries and and so you kind of get these up and down quarters, but I'd much rather be coming out of the chute strong and.
And then having a fourth quarter hockey stick so.
That's what happens and.
Mainly and the ISR sector.
Our next question comes from the line of from Springer and with Credit Suisse. Please proceed with your questions.
Hi, good morning.
Good morning.
Chris it's kind of funny, how things change because now we're actually reading about commercial pilot shortages and I think Jay talked about recovering training sales, but I'm curious if you can quantify how big the increase was either year over year or sequentially and what the latest overall recovery expectation is and whether or not this business is.
Core or noncore. Thanks.
Right, Rob Great Great Great questions, we did see some good good recovery and double digit and the second quarter, driven a little more by the products and the actual training I think theres, a slight slight lag there.
We have a variety of training.
Models from from academies.
And where the.
The cadets actually come into.
Our facilities for and 18.12 to 18 month period, that's been a little challenged due to some of the border closures. So that's a little lag and I think as the borders open up we'll see an uptick there of course, the delta virus was kind of throw and a curve ball and.
And everything compared to what we thought it would be so the recovery is lagging a little bit the.
And the simulators as you said, there's a pilot shortage people, where they need to get to training and refreshed or a lot of pilots may have retired and and there is now going to be some new pilots that are going to need the simulator training and and then of course for the actual manufacturing.
You know we had a slow start to the year as you would expect non of a lot of people buying simulators, but so far and the third quarter, even though it's early August we've already been awarded 2 simulators and will be converting those to contracts here and the next 30 to 45 day. So we are seeing.
And uptick and.
And it's going to drive our.
Growth and the second half, we're assuming I'll have Jay give the exact numbers double digit growth.
And commercial aviation. So it is a good market. It's got good technology, and we're going to continue to run that business and.
We evaluate and determine strategically what we want to do with it but it's part of the company now and it's contributing and we're excited about.
The uptick so okay, yes, we step up and the back half of the year to about 30% growth and the commercial business from 20% here and the second quarter. This is consistent with what we had expected coming into the year. The trends that we've seen are have seen thus far really and the month of July support that.
And so we've got some pretty good demand and a lot of activity going on in terms of our simulator.
Sales and we're also seeing just increased leads as far as new cadet training and our academies.
And we're also seeing it and the simulator training as Chris mentioned and the 1 thing to keep an eye on and for US just to more and maybe company specific and we do operate our simulator training and these regions that had been a little bit mixed as far as lockdowns opens up and backlog back down and so but that's the smallest piece of our business overall, we're pretty confident with this 30% growth.
Based on what we're seeing.
Okay.
Our next question comes from the line of Michael <unk> with <unk>. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the question.
I don't know if this is Christopher J, but is it possible to quantify either kind of this year on the topline organic growth or even breaking down your bookings kind of year to date, how much how much of the growth is coming from new programs and I guess, what I'm getting that is what kind of dilution.
Either new start programs are you trying to offset or deal with and I and I guess Gotham and Tommy hit on it or are you seeing any more pricing pressure or competitive pressures from from new start commercial players you know like what we're seeing and the Ipass program.
Yeah, Michael Thanks, Thanks for that.
Great Great question, I mean, as I said, 6% 6.2% organic growth and when I look at as we go through the <unk>.
The planning process and build up our and.
Annual operating plan, we start the year and we usually have pretty good visibility into what's already in backlog.
So a lot of it's kind of and the 70% range as we look forward. So you know go back to December of 2020, when we put out our guidance for.
For 'twenty, 1 and I had pretty good visibility, 70% you know theres, maybe 10 ish or so a follow on so to answer your question I guess, you could say maybe 15% maybe 20. Most is revenue derived from from new business to give you to give you some idea.
On the.
Driven by new programs or new contracts.
And as kind of how I look at it and as you suggest some of those.
And especially.
With the Dod start out as cost plus contracts.
And then migrate into low rate production a full rate production. So you know it's no secret that the cost plus margins tend to be.
Lower than what we're currently realizing so it's dilutive on that on that front and then even on the fixed price contracts I think we're generally pretty conservative in how we start book and those until we retire and mitigate the risks so maybe that.
That answers your question there as far as competitive pricing.
Pressures, you know nothing nothing new or different than what we've had over the last decade or 2 and this industry. You know the selection criteria varies by program and I think our customers are very sophisticated and they look at the technical solutions and they look and past performance. They look at the management team. They look at cost they look at schedule.
And so theyre, taking all those things into consideration and like I said earlier to an earlier question.
We try to find ways to work collaboratively with these new entrants.
When and if they can add value and increase our probability of win so.
I don't know Jay and anything further.
And it really guy and I mean, it varies year to year I would say on the mix headwind maybe on a gross level you're talking.
Anywhere around 25 basis points or so of headwind from year to year and our challenge is really to offset that with about 50 basis points.
Productivity and so that we are a net 20 to 25 basis points of improvement year to year, but again. It just it'll vary I'd say, that's probably be agents like <unk> and average to think about.
Our next question comes from the line of sensor with J P. Morgan. Please proceed with your question.
Hi, guys its Tyler on for Seth Good morning.
Good morning, good morning.
Stuff and a couple of quick ones here and can you just speak to clear the remaining schedule on that maybe the execution risk on tier 3 and just touching on the F 35 growth ramp ahead.
Yeah, Yeah, let me give a quick F 35, we've talked about before where we're a top 10 and supplier.
Looking at and just the other day, we deliver about 1500 parks per project, but the main focus has been and tier 3 where.
And where we have 3 components I mentioned 2 of those 3.
Were successful and getting a production contract, which I think is indicative of the progress. We've made where we are right now is going through the safety of flight on these 3 products..1 is completed the task..1 is just about to start later this week and the third starts in October so it's all per schedule.
<unk>.
We're committed and focused on making sure we're ready for the last 15 cut in and that's a big focus of both Lockheed and the J Poe and I'd say over the last 6 months.
The teams have made a lot of good progress we're communicating we understand the schedule we understand the risks.
I feel good about.
Our piece of the.
And that grade program, and contributing to Lockheed and allowing them to deliver there theyre jets. So as usual and any development program. There is directed change there's government dependencies them.
And that we're used to and accustomed to and manage and work around so I'd say probably feel better about the programme now than I did in April.
Yeah.
Our next question comes from the line of George Shapiro with Shapiro Research. Please proceed with your question.
Good morning.
Good morning, Josh.
Jay if you could go through the working capital debt.
And as you expect for the end of the year. The goal I thought had been 52 days this quarter. It looks like working capital actually was up like about $135 million on a sequential basis. So just look and where you go in there and then.
Just to verify the $400 million reduction and sales was all due to the divestiture.
That's exactly right.
I'll take the second question first George.
The 2 businesses.
Businesses that we divested.
And at the end of the quarter were about $800 million combined sales so half year about 400 million impact.
For the second half and that's what's driving the reported sales to come down by that amount on the working capital. It's also good observation.
Reset again with the impact of these divestitures.
George So at the end of the second quarter on an adjusted basis were 57 days and we're trying to get now to around 50 ish days.
Part of this was planned.
And where we had some program deliverables and the first half of the year and those receivables will turn into billings and collections and the back half of the year. We also had and the second quarter just high receivables balance with the timing of our sales and so that will just normalize we'll collect that cash here and the third quarter and really for us.
And the working capital reduction is the same as it's always been really for the year, it's really driving down the inventory to.
2 elements as I mentioned, 1 is just delivering on a key program milestones. So we can turn those into billings and collections and then the second element is really delivering on our working capital initiatives and these are the things that we've been talking about as far as reduced cycle time.
And improving our forecasting process, so a big second half for us, but it's essentially the way we had planned it and we believe that we're on track for that and I would say that debt ended the year. George is really kind of 49 to 50 days on this new adjusted basis, taking out these divestitures.
Our next question is from the line of Carter Copeland with Melius Research. Please proceed with your question.
Right and under the hour thanks, guys. Good morning.
Good morning, and Carter.
Chris.
And I want to kind of and here with a higher level question on just strategy. The when you came to L..3 to 5 years ago.
And think about where you've got now in terms of organic growth inorganic growth and divestitures.
And the simultaneous integration you are now at a point, where you said youre done with the divestitures youre not in a hurry on M&A. When you look at the next 5 years and try to maintain that internally disruptive mindset.
And what's going to drive the next leg of the value creation formula as it about R&D and development and customers and products more so than the value creation elements. We've seen over the last 5 years. How do you. How do you continue to have that kind of mindset and and creating value over the next 5.
Alright Carter.
Got a good memory. So so thanks for that and clearly it was a great team effort to get to get to this point.
I've talked somewhat about where we're trying to position the L. III Harrison.
And listen to all the questions throughout the day.
And I'll try to explain the vision here, we have we have our traditional price, which are some some great companies with a lot of cash and employees and processors. There was a couple of questions about these new entrants.
Or maybe a little more commercial mindset, a little more agile and maybe a little more and more creative and what we're trying to do is put a L..3 Harris right and the middle of those 2 and and take the best of the both and.
And position ourselves to listen to our customers and B.
We are trusted disruptor, I don't want to underestimate the importance of understanding the mission. So we know the mission we know the customers and can we take that with our industry, leading R&D investment and position ourselves for growth.
<unk> is something that's out there that we can talk about more in future calls, but we really want to position ourselves to help our customers solve their problems and focus on the organic growth.
Focus on the margin improvement the double digit free cash flow.
<unk> per share.
Metrics I think are all going to drive drive value. So look I ultimately want to be the most valuable.
Defense Technology company, and the mind of our shareholders and the mind of our customers and that's not necessarily the largest and that's what.
And the team is off executing on.
Thank you.
Our final question comes from the line of Peter Arment with Baird. Please proceed with your question.
And Chris Chang Nice results.
Chris just thinking about your <unk>.
<unk> I guess, it's become.
Come and kind of ingrained and the culture now.
Outside of kind of the operational excellence driving is there any kind of other <unk>.
<unk>, that's still and you see as the greatest opportunity to kind of show incremental savings.
Yeah, Peter Thanks for thanks for that question, we've actually taken 83 to be our operating model and in the broadest sense. So a lot of times.
People think of it as just on the on the continuous improvement.
And initiatives, but the approach we've taken on a G. III is much much broader and then competences.
And as it encompasses the supply chain ESG.
Continuous improvement all those aspects quality.
Rolled throughput yield everything that drives our performance including.
Our performance on our programs, where we look at our customer ratings. We looked at award fee scores. We looked at earned value management. So when you look at all of those things holistically, each and everyone contributes.
To our to our cash flow and our profitability. So.
And if we can bring down lead times, our cycle times improve the quality, we look at the cost of poor quality kept the yields higher each and every 1 of those as part of our E..3 umbrella and that's really what's driving the success, we've had to date and the optimism we have for the for the future.
So with that I think I'll, just kind of wrap it up I appreciate everybody taking time to call in today and hopefully as you heard we have a strong corridor and the performance and the operational momentum is all positive.
And obviously wouldn't be possible without my.
Great leadership team and the 47000 employees. So thanks again to them.
We feel good about the opportunities ahead, we're going to continue to execute and look forward to talking to everybody in the months ahead as we focus on growing all 3 Harris again, thanks for joining the call.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.