Q3 2023 L3Harris Technologies Inc Earnings Call
Speaker 1: Greetings. Welcome to L3 Harris Technologies, third quarter 2023 earnings conference call. At this time, all participants are in listening mode. Brief question, and
Greetings and welcome to the L. Three Harris technologies third quarter 2023 earnings Conference call.
At this time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
Speaker 1: If anyone should require operator assistance during the conference, please press store zero on your telephone keypad. As a reminder, this conference...
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker 1: Now my pleasure to introduce your host, Mark Kratz, Vice President and Vest Relations.
Now my pleasure to introduce your host Mark Kratz, Vice President Investor Relations. Thank you you may now begin.
Speaker 2: Thanks Rob. Good morning and thank you everyone for joining us to discuss their quarter results.
Thanks, Rob Good morning, and thank you everyone for joining us to discuss third quarter results, joining me or Chris Good basic our CEO and Michele Turner our CFO.
Speaker 2: Joining me are Chris Kubasik, our CEO and Michelle Turner RCFO.
Speaker 2: Yesterday we published our investor letter, detailing our results, guidance, and key company updates. So this morning's call will be focused...
Yesterday, we published our Investor letter detailing our results guidance and key company updates. So this morning's call will be focused on answering questions.
Speaker 2: As always, we may discuss certain matters that constitute forward-looking statements. These statements involve risks, assumptions, and uncertainties that could cause results to differ materially. For more information, please reference our provisions found in our investor letter and our SEC file.
Louis we may discuss certain matters that constitute forward looking statements. These statements involve risks assumptions and uncertainties that could cause results to differ materially for more information. Please reference our provisions found in our Investor letter and our SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measure.
Speaker 2: We will also discuss non- GAAP financial measures which are reconciled to GAAP measures in the investor letter. I would now like to turn it over to Chris for some brief remarks.
As in the Investor letter.
I'd now like to turn it over to Chris for some brief remarks.
Speaker 3: Okay, thank you Mark and good morning everyone. I know you've all had a busy week and we appreciate you joining us this morning.
Okay. Thank you Mark and good morning, everyone. I know you've all had a busy weekend. We appreciate you joining us this morning.
Speaker 3: The current events in the Middle East remind us that what we do at L3 Harris matters and the industry in which we operate is more critical than ever before. As a national security technology focus company, we remain committed to supporting the U.S. and its allies to deter aggression and foster stability around the world.
The current events in the Middle East remind us that what we do at L. Three Harris matters and the industry in which we operate is more critical than ever before.
As a national security Technology focused company, we remain committed to supporting the U S and its allies to deter regression and foster stability around the world.
Speaker 3: As we embark on our 50 years since the merger of L3 and Harris, I'm proud of our achievements.
As we embark on our 50 years since the merger of L. Three and Harris I'm proud of our achievements, we built a diverse and seasoned team that is integrating our company L.
Speaker 3: We've built a diverse and seasoned team that is integrating our company.
Speaker 3: L3 Harris is viewed as a disruptive competitor that is reshaping the US defense industrial.
L. Three Harris is viewed as a disruptive competitor that is reshaping the U S defense industrial base.
Speaker 3: Meanwhile, underpinning our strategy is a focus on operational excellence, delivering quality products on time, driving costs out of our system, and focusing our portfolio as a national security
Meanwhile, underpinning our strategy is a focus on operational excellence.
And quality products on time.
Giving a cost out of our system and focusing our portfolio has a national security company.
Speaker 3: This ultimately benefits our customers and creates long-term value for our shareholders.
This ultimately benefits our customers and creates long term value for our shareholders.
Speaker 3: While the macro environment has been challenging, we are making considerable progress.
While the macro environment has been challenging we are making considerable progress the business is on solid footing and we are building operational momentum.
Speaker 3: The business is on solid footing, and we are building operational momentum.
Speaker 3: In the third quarter, we reported 16% top line growth, a second consecutive quarter of sequential margin improvement, and strong cash generation resulting in more than 100% free cash flow conversion.
In the third quarter, we reported 16% topline growth our second consecutive quarter of sequential margin improvement and strong cash generation, resulting in more than 100% free cash flow conversion.
Speaker 3: This extends our trend of generating positive free cash flow in each of the quarters since the merger.
This extends our trend of generating positive free cash flow in each of the quarters since the merger.
Speaker 3: The team and I look forward to providing more details on our strategy and our 2024 outlook at our investor day in December . And with that Rob, let's open the line for questions.
The team and I look forward to providing more details on our strategy in our 'twenty 'twenty four outlook at our Investor day in December.
And with that Rob, let's open the line for questions.
Speaker 1: Thank you. Well now we're conducting a question and answer session.
Thank you well now be conducting a question and answer session.
Speaker 1: In the each suit time, when you ask you please limit yourselves to one single part question.
In the interest of time, we ask you please limit yourselves to one single part question.
Speaker 1: If you'd like to ask a question at the time, please press star one on your telephone keypad. A confirmation telephone will indicate your line is in the question queue. You may press star two if you would like to remove...
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You May press star two he would like to remove your question from the queue.
Speaker 1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One more, please.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Yeah.
Speaker 1: Thank you. Our first question is from Christine Llewijk with Morgan Stanley . Please receive your question. Good morning.
Thank you. Our first question is from Cristina <unk> with Morgan Stanley. Please proceed with your question.
Hey, good morning, everyone.
Good morning.
Speaker 4: Chris, Michelle, after owning the Aerojet Rocket Dying now for a few months, are there any surprises to the positive or negative that you've seen?
You know, Chris Michel off after owning Aerojet Rocketdyne now for a few months are there any surprises to the positive or negative that you've seen.
Speaker 3: Okay. Well, I expected an Aerojet question. So let me, let me, let me take this one and.
Okay, well I expected and Aerojet question. So let me let me let.
Let me take this one and try to answer your question and maybe give a little more insight on aerojet rocketdyne, but just to refresh everyone's memory, we we signed and announced the deal back back in December and we're able to close it in seven and a half months, which I think is a pretty impressive in this environment. So either there was support.
Speaker 3: try to answer your question and maybe give a little more insight on Aerojet Rocketdyne. But just to refresh everyone's memory, we signed and announced the deal back in December , and we're able to close it in seven and a half months.
Speaker 3: I think is pretty impressive in this environment. So either there was support or probably no objections obviously from industry and the Department of Defense to allow the acquisition to
Or probably no objections, obviously from our industry and in the department of defense to allow the acquisition to to go through so probably closed a little quicker than we expected I think when we announced it we said it could take up to 12 months, but we did hit the ground running on day one.
Speaker 3: So probably closed a little quicker than we expected. I think when we announced that we said it could take up to 12 months, but we did hit the ground running on day one, deployed the Celterie Harris leadership team to run the business.
<unk> deployed the L. Three Harris' leadership team to to run the business.
Speaker 3: which I thought was critical to the success that we're going to realize. I'll say from an integration perspective, all is going well. We're clearly on track to get the $40 to $50 million of cost savings that we talked about previously.
Which I thought was critical to our to the success that we're going to we're going to realize I'll say from a integration perspective, all is going well, we're clearly on track to get to 40 to 50 million of cost savings that we talked about previously we've shut down the aerojet rocketdyne headquarter in California.
Speaker 3: We've shut down the Aerojet Rocketdyne headquarter in California.
Yeah.
Speaker 3: We're ready for January 1 to transition all the employees to a
We're ready for January one to transition all of the employees to L. Three Harris payroll system benefits and in such a the I T team is already a networked connected all the network. So the communication and such is working well and we obviously have a little longer term I T strategy.
Speaker 3: L3 Harris payroll system benefits and such.
Speaker 3: The IT team has already networked, connected all the networks, so the communication and such is working well and we obviously have a little longer term IT strategy to optimize the business from that perspective.
To to optimize the business from that perspective.
Speaker 3: I will say the workforce, we actually did a survey of the workforce about a month ago and the results were actually off the charts. I was more than pleased to see the enthusiasm of the workforce, the confidence that they have in being part of L3Harris.
I will say the work force, we actually did a survey of the workforce are about a month ago and and the results were actually off the charts I think that was more than pleased to see the enthusiasm of the workforce the confidence that they have and being part of L. Three Harris.
Speaker 3: the alignment of being a part of a larger company that's focused on defense and national security in space. So that's encouraging to get those types of...
The alignment of being a large part of a larger company. That's that's focused on defense and national security and space. So that's encouraging too.
Get those types of results. So we've been clear at least internally and hopefully externally.
Speaker 3: So we've been clear, at least internally and hopefully externally, that our number one priority is to increase the deliveries, specifically in the rocket motor sector. So everything we're doing is focused on increased deliveries. We developed a plan.
That our number one priority is to increase the deliveries specifically in the rocket motor sector. So everything we're doing is focused on increased deliveries we developed a plan.
Speaker 3: Myself and the leadership team has reviewed it and we're off executing on it. It includes having centers of excellence.
Myself and the leadership team has reviewed it and we're off executing on it.
Includes having the centres of excellence for energetics, and Merck's separately and I think that's going to help with our production and flow and deliveries.
We've supplemented the existing leadership teams at some of the key locations and Alabama, Arkansas, and Virginia with with resources and experience that I think is going to start showing.
Speaker 3: showing immediate results, and then we've deployed resources to our sub-tier suppliers, and that really is.
Showing immediate results and then we've deployed our resources to our sub tier suppliers in and that really is the challenge in the munitions and rocket motor business is a couple of levels down and we only have a in some cases, one or two.
Speaker 3: The challenge in the munitions and rocket motor business is a couple levels down.
Speaker 3: We only have, in some cases, one or two certified suppliers of cases and igniters and sometimes nozzles. So that is ultimately a choke point that we need to focus on as an industry and as a country. The DPA, you've heard us talk about the Defense Production Act, the over $200 million that was awarded earlier this year. That's focused on three main products.
Certified suppliers of cases, an igniter as them and sometimes a novel so that that is ultimately a choke point that we need to focus on as a as an industry and as a country are the D. P. A you've heard US talk about the defense Defense production Act are the over $200 million that was awarded earlier this year.
Year, that's focused on three main products are we have a plan and we're starting to execute upon that in fact, we just leased a building and in Alabama, So that he can.
Speaker 3: We have a plan and we're starting to execute upon that in fact. We just leased a building and in Alabama so that we can modify and
Modify and and and.
And.
Speaker 3: order the equipment to increase capacity at that facility. So we'll use that as a framework. We're going to revitalize the business, and we'll use that for the other products that weren't necessarily covered by the DPA money.
Order the equipment to increase capacity at that facility. So we will use that as a faint framework, we're going to revitalize the business and we'll use that for for the other products that werent necessarily covered by the by the Tpa money. So all of this will contribute to our 2024 starting to.
Speaker 3: So all of this will contribute to 2024, starting to see a ramp up in the output and I would expect to have noticeable improvements by the end of 2024 and then continuing into 2025.
See a ramp up in the output and I would expect to have a noticeable improvements by the end of 'twenty 'twenty four and then continuing into 2025.
Speaker 3: We've had discussions. I've had discussions with our end customers, different military services, and they are very excited to have L3Harris own this asset. Obviously, they see us as the answer to the challenges and problems that they and the industry has had relative to Rocket Motors. And we have their full support, which I expected, but is also encouraging.
We've had our discussions I've had discussions with our end customers different military services and they are very excited to have L. Three Harris I own. This asset obviously, they see us as the answer to the challenges and problems that they and the industry has had relative to rocket motors and we have there.
Their full support which I expected, but is also encouraging.
Speaker 3: We don't talk too much, but we should, about the space engine business.
We don't talk too much but we showed about the space our engine business and.
Speaker 3: You know, that's maybe about a third of Aerojet Rocketdyne. That business is operating well. The RL-10 engine, which is the upper stage, is performing flawlessly. I think the
That's that's maybe about a third or a payroll jet rocket on that business is operating well.
Our IL 10 engine, which is the upper stage is performing flawlessly I think the run of successes is goes back decades.
Speaker 3: run of successes goes back decades without a failure, and I'm not even sure it ever has failed. So that's great news. We're excited to be on the United Launch Alliance, ULA first Vulcan launch and subsequent launches. So there's two RL-10s per launch.
Without a failure and it's not even sure if ever has failed. So that's great news, we're excited to be on the United launch Alliance U L. A first Vulcan launch and subsequent launches. So there's two R L tens per launch and as.
Speaker 3: As of today, we have over 150 in backlog, so that gives us pretty good visibility and stability into the, to the.
As of today, we have over 150 in backlog, so that gives us pretty good visibility and stability into the to.
To the space side, so that's kind of operationally, where we are relative to our aerojet rocketdyne Kristine, but I also want to step back on the strategic rationale for the acquisition Hasnt quite been a year, but I I know people are still asking questions.
Speaker 3: So that's kind of operationally where we are, relative to Aerojet, Rocketdyne, Christine, but I also want to.
Speaker 3: step back on the strategic rationale for the acquisition. It hasn't quite been a year, but I know people are still asking questions.
Speaker 3: But at L3Harris, we, as I said, are building a defense-focused, technology-focused company. We're taking a portfolio approach. We're looking to acquire businesses that are aligning with our nation's defense strategy.
But at L. Three Harris wheat, so as I said our building.
Defense focused technology focused company, we're taking a portfolio approach, we're looking to acquire businesses that are aligning with our nation's defense strategy.
Speaker 3: and in growing markets, and then we're divesting those businesses that don't necessarily align with our strategy.
And and in growing our growing markets and then we're divesting those businesses that don't necessarily align with our strategy.
Speaker 3: but are still good businesses, but not part of our focus. So, Aerojet Rocketdyne is growing faster than the legacy L3 Harris.
But are still good businesses, but not part of our focus so yeah, we're jet rocker diners growing faster than the legacy L. Three Harris business I think our when we look at everything that has happened since we signed the deal on December there should be no dispute there.
Speaker 3: business. I think when we look at everything that has happened since we signed the deal in December .
Speaker 3: There should be no dispute that the demand for these products, as they flow through the primes in most cases, is up significantly in the U.S. and in the world, which is why we need to focus on the increase in output. And I already mentioned the DPA money of $200 million, which will help us.
Demand for these products as they flow through the primes and most cases is up significantly in the U S and in the World, which is why we need to focus on the increase in output and I already mentioned, the DPA money of 200 million, which will help us on these three.
Speaker 3: on these three particular lines, increase capacity, move production lines, and digitize the engineering. So the tailwinds are there as well.
<unk> lines increased capacity move production lines and digitize the engineering. So the tail winds are are there as well so feel better about the acquisition today than I did in December to be to be honest with you and I think it's highlighting my last point some some of the some of the challenges in India.
Speaker 3: feel better about the acquisition today than I did in December , to be honest with you. And I think it's highlighting my last point, some of the challenges in the industry. Going back, you know, to the 80s and the peacetime dividend, the industry contracted, our capacity contracted. We're on a kind of a peacetime.
History going back you know to the Eighty's in peace time dividend the industry contracted our capacity contracted.
We're on a kind of a peace time.
Speaker 3: mindset for the last several decades, and I believe as a country, we need to ramp up to more of a wartime footing. And like I said, I think money and focus needs to go to the sub-tier suppliers.
<unk> said for the last several decades and I believe as a as a country.
We need to ramp up to more of a wartime footing and like I said, I think money and focus needs to go to the sub tier suppliers that feed into not only us but other industry partners generally through primes and then to the end user so maybe a longer answer than you wanted kristine, but I tried to hit.
Operator: Greetings, welcome to L3Harris Technologies, 3rd quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation.
Speaker 3: that feed into not only us, but other industry partners, generally through primes, and then to the end users. So maybe a longer answer than you wanted, Christine, but I'll try to hit a.
Operator: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
A lot of different topics as it surrounds aerojet rocketdyne, So I think I'll just stand on that.
Speaker 3: A lot of different topics is it surrounds the rocket line. So I think I'll just tend on that.
Speaker 1: Thank you. Our next question is from the line of Gautam Khanna with TD Cowen. Please proceed with your question.
Thank you. Our next question is from the line of Gautam Khanna with TD Cowen. Please proceed with your question.
Mark Kratz: It is now my pleasure to introduce your host, Mark Kratz, Vice President and Vest Relations. Thank you, you may now begin. Thanks Rob.
Hi, good morning, guys.
Good morning, guys good morning.
Mark Kratz: Good morning and thank you everyone for joining us to discuss 3rd quarter results. Joining me are Chris Kubasik, our CEO and Michelle Turner, our CFO. Yesterday, we published our investor letter detailing our results, guidance and key company updates. So this morning's call will be focused on answering questions. As always, we may discuss certain matters that constitute forward-looking statements, these statements involve risks, assumptions, and uncertainties that could cause results to differ materially. For more information, please reference our provisions found in our investor letter and our SEC violence. We will also discuss non-gap financial measures which are reconciled to get measures in the investor letter.
Speaker 5: I actually wanted to switch subjects and ask about tactical RF. Maybe if you could talk about, you know, book to bill in the quarter where backlogs stand.
I actually wanted to switch subjects and ask about tactical RF. If maybe if you could talk about in a book to bill in the quarter, where backlog stands and.
Speaker 5: Give us some pipeline color, both domestically and internationally, and also if you can answer the supply chain questions, how that's evolved in that.
Give us some pipeline color.
Both domestically and internationally and also if he can answer the supply chain questions. How that's evolved.
In that business line.
Speaker 6: Yes, but thanks for the question. From an overall comms perspective, we continue to be on track to deliver to our guidance, which was double digit growth across the business, which includes to your point, got them about the baiting supply chain challenges, which we continue to see along with the acquisition of our tactical data links business.
Yeah. So thanks for the question from our overall comps perspective, we continue to be on track to deliver to our guidance, which was double digit growth.
Across the business, which includes to your point I don't know that the Beijing supply chain challenges, which we continue to see along with the acquisition of our tactical data links business.
Christopher Kubasik: I would now like to turn it over to Chris for some brief remarks. Okay, thank you Mark and good morning everyone. I know you've all had a busy weekend. We appreciate you joining us this morning. The current events in the Middle East remind us that what we do at L3 Harris matters and the industry in which we operate is more critical than ever before. As a national security technology focus company, we remain committed to supporting the U.S, and its allies to deter aggression and foster stability around the world.
Speaker 6: I'm specific to radios and comms, you know, from a overall DOD budgetary perspective.
Specific to radios and calms you know from overall D. O D. Budgetary perspective, we continue to see support where about 40% of the way through that modernization program and we continue to see strong demand internationally as well and so overall I'd say, we're feeling like we're in a good place from a.
Speaker 6: We continue to see support. We're about 40% of the way through that modernization program. And we continue to see strong demand internationally as well. And so overall, I'd say we're feeling like we're in a good place from a comps perspective. And then just from looking at supply chain specifically, you know, we continue to see hiccups like you're hearing across the industry. But, you know, significant complements to our supply chain, our tactical communication business, Sam Mehta, Chris Abley.
Toms perspective, I mean, just from looking at supply chain, specifically you know we continue to see hiccups like you're hearing across the industry, but you know significant complements to our supply chain, our tactical communication business and that at Christina Lake.
Christopher Kubasik: As we embark on our 50 years since the merger of L3 and Harris, I'm proud of our achievements. We built a diverse and seasoned team that is integrating our company. L3 Harris is viewed as a disruptive competitor that is reshaping the U.S, defense industrial base. Meanwhile, underpinning our strategy is a focus on operational excellence, delivering quality products on time, driving costs out of our system, and focusing our portfolio as a national security company.
Speaker 6: That efforts that they put in over the last 18 to 24 months and truly building a resilient supply chain that allows us to pivot when we continue to experience these hiccups is enabling us to continue to deliver for our customers and for our shareholders. And the other thing I would note for this quarter is that our overall deliveries are actually up from Q2. And so we continue to see the results of the efforts and the diligence that the team has put in over the last 18 to 24 months.
The efforts that they've put in over the last 18 to 24 months and truly building a resilient supply chain that allows us to pivot when we continue to experience. The setups is enabling us to continue digital ever for our customers and for our shareholders and then the other thing I would note for this quarter is that our overall deliveries.
We're actually up from Q2, and so we continue to see the results of the efforts and the diligence that the team has put in over the last 18 to 24 months.
Christopher Kubasik: This ultimately benefits our customers and creates long-term value for our shareholders. While the macro environment has been challenging, we are making considerable progress. The business is on solid footing and we are building operational momentum. In the third quarter, we reported 16% top line growth, a second consecutive quarter of sequential margin improvement, and strong cash generation resulting in more than 100% free cash flow conversion. This extends our trend of generating positive free cash flow in each of the quarters since the merger. The team and I look forward to providing more details on our strategy and our 2024 outlook at our investor day in December. And with that Rob, let's open the line for questions.
Unknown Executive: Thank you.
Speaker 1: Our next question comes from the line of Noah Popernuk with Goldman Sachs. Please receive your question. Hey, good morning, everybody.
Our next question comes from the line of Noah popping up with Goldman Sachs. Please proceed with your question.
Hey, good morning, everybody.
Hey, good morning Noah.
Thanks for the time.
Speaker 7: Chris, so you've alluded to the competing inputs for national security.
Chris So you've alluded to the competing inputs for.
National Security spending.
Speaker 7: I guess, you know, when you think about what's evolving geopolitically versus what's evolving with the deficit battle in the U.S., you know, maybe some of
I guess you know when you think about the what's evolving geopolitically versus what's evolving with the deficit battle in the U S. A.
You know maybe some of the short term.
Speaker 7: items as well. How are you thinking about what your medium-term end market growth rate is?
All items as well I guess.
What do you how are you thinking about what your medium term end market growth rate is.
Unknown Executive: We'll now be conducting a question and answer session. In the interest of time, we ask you please limit yourselves to one single part question. If you'd like to ask a question at this time, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 7: and your latest thinking on the L3 Harris spread versus that growth rate.
And in your latest thinking on the all three harris spread versus that growth rate.
Speaker 3: Yeah, no, thanks. No, I appreciate the appreciate the question. You know, I step back a moment, I think kind of implied in there is the budget and what's going to happen in the with the supplemental. So as we all know, we we finally have a speaker of the House. So that's that's step one. I do believe.
Yeah no. Thanks, no I appreciate the I. Appreciate the question you know I stepped back Ah Ah moment, I think kind of implied in there is the the budget and what's going to happen with the with the supplemental so as we all know we finally have a speaker of the house so.
Unknown Executive: One more, please, will we poll for questions?
That's step one.
Christine Luig: Thank you, our first question is from Christine Luig, with Morgan Stanley. Please proceed with your questions.
I do believe you know when I've been pretty pretty outspoken on this it feels like it's an even more dangerous world then than it ever has been you look at what's going on in the mid East Ukraine, South China Seas National security has to be a top top priority and I'm concerned.
Speaker 3: you know, and I've been pretty, pretty outspoken on this. It's, it feels like it's an even more dangerous world than it ever has been. You look at what's going on in the mid-east, Ukraine, South China sees. National security has to be a top priority. And I'm concerned, you know, that a government shutdown would clearly weaken our national security as does a continuing resolution. So. So.
Christopher Kubasik: Okay, good morning, everyone. Good morning. Chris, Michelle, after owning Aerojet Rocket Dying now for a few months, are there any surprises to the positive or negative that you've seen? Okay, well, I expected an Aerojet question. So let me, let me, let me take this one and try to answer your question and maybe give a little more insight on Aerojet Rocket Dying. But just to refresh everyone's memory, we, we signed and announced the deal back, back in December.
And you know that our government shutdown would clearly weakened our national security as does continuing resolution. So you know I think I speak for the entire industry and probably our customers. We hope that we get a budget here in the next couple of weeks. So we can start having the money flowed to the industrial base.
Speaker 3: you know, I think I speak for the entire industry and probably our customers, we hope that we get a budget here in the next couple of weeks so we can start having the money flow to the industrial base. You know, there's been a lot of talk about the supplemental.
Christopher Kubasik: And, well, I think it's going to be a lot of fun. We're able to close it in seven and a half months, which I think is pretty impressive in this environment. So either there was support or probably no objections, obviously from industry and in the Department of Defense to allow the acquisition to go through. So probably closed a little quicker than we expected. I think when we announced that we said it could take up to 12 months, but we did hit the ground running on day one, deployed the L3.
You know theres been a lot of talk about the supplemental.
Over $100 billion.
Speaker 3: you know split between state and DOD and Ukraine and Israel and
Now split between the state and in D O D in Ukraine, and Israel and.
Speaker 3: Taiwan and South border, I think we feel confident there will be a
Taiwan and the South border I I think we feel confident there will be a.
Speaker 3: Supplemental, I don't know if it'll be one or two or somehow be partitioned, but I look at the supplemental is kind of Playing into the near term
A supplemental I don't know if it will be one or two or somehow be partition, but I look at the supplemental was kind of playing into the near term.
Speaker 3: And I think when I look at our portfolio of products, literally products, not necessarily systems or platforms, we've been well positioned specifically in Ukraine with the quick turn on the radio's night vision goggles, fights, sensors, cameras. So I look at the supplemental to kind of help us in the near term. The midterm I think is, is, you know, relying more on a continued budget growth than need to invest. 35
Christopher Kubasik: Harris leadership team to run the business, which I thought was critical to, to the success that we're going to, we're going to realize, I'll say from integration perspective, always going well. We're clearly on track to get the 40 to 50 million of cost savings that we talked about previously. We've shut down the Aerojet Rocket Dying headquarters in California. We're ready for January 1 to transition all the employees to L3 Harris payroll system benefits and such.
And I think when I look at our portfolio of products literally products not necessarily systems or platforms are.
We've been well positioned specifically in Ukraine with the quick turn.
On the radios night vision goggles sites sensors cameras. So I look at the supplemental to kind of help us in the in the near term the midterm I think as you know relying more on a continued budget growth to need to invest in technologies advanced technologies for a peer or near peer threats and you know.
Speaker 3: and advanced technologies for a peer or near peer threat.
Speaker 3: We keep talking about that as part of our national defense strategy, but we keep getting distracted by these other conflicts. So I think that's probably where I feel good about how we've shaped our portfolio, specifically in the space arena. A lot of the missions that were normally conducted in the air domain, not all of them, but some of them have been moved into space.
We keep talking about that as part of our National defense strategy, but we keep getting distracted by these these other conflicts. So I think that's probably where we're I feel good about how we've shaped our portfolio.
Christopher Kubasik: The IT team has already networked, connected all the network. So the communication and such is working well. And we obviously have a little longer term IT strategy to optimize the business from that perspective. I will say the workforce, we actually did a survey of the workforce about a month ago and the results were actually off the charts. I was more than pleased to see the enthusiasm of the workforce, the confidence that they have and be in part of L3 Harris, the alignment of being a part of a larger company that focused on defense and national security in space.
Specifically.
All in the space Arena, a lot of the the missions that we're normally conducted and in the air domain not all of them, but some of them and then move into space and you know I know people get tired of me, saying it I think this is the best example of our trusted disruptor strategy working and it's the day.
Speaker 3: And, you know, I know people get tired of me saying it. I think this is the best example of our trust of disruptor strategy working. And at the date of the merger.
The merger.
Speaker 3: L3 Harris had zero satellites in orbit as a prime and as I look at our manifest in our backlog, we could
L. Three Harris had zero satellites into orbit as a prime and as I look at our manifest in our backlog.
Christopher Kubasik: So that's encouraging to get those types of results. So we've been clear, at least internally and hopefully externally, that our number one priority is to increase the deliveries specifically in the rocket motor sector. So everything we're doing is focused on increased deliveries. We developed a plan. Myself and the leadership team has reviewed it and we're off executing on it includes having centers of excellence for energetics and inert separately. And I think that's going to help with production and flow and deliveries.
Good.
Speaker 3: Very likely have 5050 L3 Harris prime satellites in orbit in the next three to five years. So I think we're well positioned there. They tend to be more Leo satellites, three to four year useful lives, large constellations. You can kind of see that as a potential.
Very likely have 55 zero 50, a L. Three Harris prime satellites in orbit in the next three to five years. So I think we're well positioned position there they tend to be more Leo.
Satellites, you know three to four year useful lives are large constellations. So you can kind of see that as a potential ongoing annuity in fact, we're building a state of the art factory you now for for the satellite to integration. So clearly I see upside there Aerojet Rocketdyne, we talked.
Speaker 3: ongoing annuity. In fact, we're building state-of-the-art factory, you know, for the satellite to integration. So clearly, I see a upside there. Air-Eject Rocket 9, we talked about, you know, the munitions. We are in the rocket motor, solid rocket motor business supporting some great primes who ultimately integrate the missiles. So I feel comfortable with our position there. Michelle talked about the radios.
Christopher Kubasik: We've supplemented the existing leadership teams at some of the key locations in Alabama, Arkansas and Virginia with resources and experience that I think is going to start showing immediate results. And then we've deployed resources to our sub-tier suppliers and that really is, is the challenge in the munitions and rocket motor business is a couple levels down and we only have in some cases one or two certified suppliers of cases and igniters and sometimes nozzles.
You know the munitions, we are on the rocket motor solid rocket motor business supporting some a great primes, who ultimately integrate the missiles. So I feel comfortable with our position there and Michelle talked about the radios you know what.
Speaker 3: You know, we made an acquisition earlier this year on tactical battle lengths from
We made an acquisition earlier this year on tactical data links from Viasat.
Speaker 3: And we keep talking about the connectivity of this network. And it is happening and it is going to happen. It's hard to find the budgetary numbers. But these different domains, space, air, land, sea, they have to be able to connect cross services, multi-domain, all those buzzwords we hear. But it's critical and it's happening. And someone was asking me best to try to explain what wave forms and all these different things that we're doing with League of 16. And it's going to happen.
And you know, we keep talking about the connectivity.
All of this network and it is happening and it is going to happen, it's hard to find a.
The the budgetary numbers, but these different domain space Air land sea they have to be able to connect cross services multi domain all those buzzwords, we here, but it's critical and it's happening and someone was asking me best to try to explain with a wave forms and all these different things that we're doing with link 16 and <unk>.
Christopher Kubasik: So that is ultimately a choke point that we need to focus on as an industry and as a country. The DPA, you've heard us talk about the Defense Production Act, the over $200 million that was awarded earlier this year, that's focused on three main products. We have a plan and we're starting to execute upon that. In fact, we just released a building in Alabama so that we can modify and order the equipment to increase capacity at that facility.
Speaker 3: I think the simplest way I could come up with is just categorizing it as stealth communication.
I think the simplest way I could come up with is just just Kara categorizing it as a stealth communications I think that's kind of a simple way to look at it and we have the footprint on these 20000 platforms. So we're upgrading if you will an existing network of connectivity and I'll, just say making itself. So.
Speaker 3: that's kind of a simple way to look at it. And we have the footprint on these 20,000 platforms, so we're upgrading, if you will, and existing network of connectivity. And I'll just say making it still.
Speaker 3: So, you know, I think, you know, depending on the budget world events, you got to feel like mid-single-digit growth is not an unreasonable aspiration over the mid-term. And, you know, that's what we're striving for. And as I mentioned to Christine, you know, I still think as a nation we have to find a way to invest.
You know I think you know depending on the budget World events, you Gotta feel like mid single digit growth is not an unreasonable aspiration over the midterm and you know that's that's what we're striving for and as I mentioned, the two to Christine.
Christopher Kubasik: So we use that as a framework. We're going to revitalize the business and we'll use that for the other products that weren't necessarily covered by the DPA money. So all this will contribute to 2024 starting to see a ramp up in the output and I would expect to have noticeable improvements by the end of 2024 and then continuing into 2025. We've had discussions, I've had discussions with our end customers, different military services and they are very excited to have L3Harris own this asset.
I think as a nation, we have to find a way to invest in the infrastructure.
Speaker 3: in the infrastructure to build the capacity of this industrial base given the surge of certain key products and areas.
To build the capacity of this industrial base, given given the surge of certain key products and areas. So.
That's how I see it Noah.
Speaker 1: Next question is from the line of Scott Dishwale with Deutsche Bank. Please receive your question.
Our next question is from the line of Scott <unk> with Deutsche Bank. Please proceed with your question.
Christopher Kubasik: Obviously they see us as the answer to the challenges and problems that they and the industry has had relative to rocket motors and we have their full support which I expected but is also encouraging. We don't talk too much but we should about the space engine business and you know that's maybe about a third of their rocket line. That business is operating well. The RL10 engine which is the upper stage is performing flawlessly.
Hey, good morning.
Speaker 2: I have two quick questions, both for Michelle. The first is on what's driving the difference between the $56 million of M&A expense add-backs on the P&L and the $215 million of add-backs for M&A on adjusted free cash flow. So that's my first question. And then my second question is what would drive CS margins to the 26 percent range in the fourth quarter, which is, I think, what's implied in the guide. Thanks.
Hey, good morning, Scott.
I have two quick questions both from Michel the first is on what's driving the difference between the $56 million of M&A expense add backs on the P&L and the $250 million 10 or $15 million of add backs for M&A on adjusted free cash flow. So that's my first question and then my second question is what would drive C. S margins to the 26% range.
In the fourth quarter, which is I think what's implied in the guide thanks.
Speaker 6: You know, thanks for that Scott. And I'm going to start with the margin question and kind of take a step back and address it starting with the enterprise margins because we really think about this as managing a portfolio. So.
Yeah, Thanks for that Scott and I'm going to start with the margin question and kind of take a step back and address it starting with the enterprise margins because we really think about this just managing our portfolio. So we're encouraged with the overall margin results within the quarter. This is our second consecutive quarter of sequential I'm Crazy margins at 15% and this includes.
Christopher Kubasik: I think the run of successes goes back decades without a failure and I'm not even sure it ever has failed so that's great news. We're excited to be on the United Launch Alliance, ULA first Vulcan launch and subsequent launches so there's two RL10s per launch and as of today we have over 150 in backlog so that gives us pretty good visibility and stability into the space side.
Speaker 6: We're encouraged with the overall margin results within the quarter. This is our second consecutive quarter of sequential improving margins at 15%. And this includes two months of Aerojeta as part of our portfolio. So we're most pleased because we're starting to see the efforts of our actions related to our performance first initiative. Which you may remember is really grounded in meeting the commitments of our customers and shareholders and it's starting to pay dividends now in terms of margin improvement.
Two months out of the Arab data as part of our portfolio. So we're most pleased with is we're starting to see the efforts of our actions related to our performance first initiative, which you may remember is really grounded in meeting the commitments of our customers and shareholders and it's starting to pay dividends now in terms of margin improvement.
Christopher Kubasik: That's kind of operational where we are relative to air jet rocket on Christine but I also want to step back on the strategic rationale for the acquisition. It hasn't quite been a year but I know people are still asking questions but at L3Harris we, as I said, are building a defense focused, technology focused company. We're taking a portfolio approach. We're looking to acquire businesses that are aligning with our nation's defense strategy and in growing markets and then we're investing those businesses that don't necessarily align with our strategy but are still good businesses but not part of our focus.
Speaker 6: So I'll walk through each of the segments because I think there's a lot of good work that's happening across the organization, plus it gives you a little bit of flavor as to how you should think about your models go forward.
I'll walk through each of the segments because I think there's a lot of good work that's happening across the organization plus it gives you a little bit of flavor as to how you should think about your models going forward. So I'll start with their space and airborne systems business. It delivered a record a profit in Q3, 12.5% margins and waste in the us.
Speaker 6: So I'll start with our space and airborne systems business that delivered a record up profit in Q3 and 12 and a half percent margins.
Speaker 6: As Joyce and the SAS team have really been early adopters on our LHX next initiatives in terms of really leaning into maniacally managing cost and spend, but also looking at organizational construct to ensure that we are most effectively running our business.
His team have really been early adopters on our L. A check snacks the initiatives in terms of really leaning into my nightly managing hospital spend but also looking at organizational construct to ensure that we are most effectively running our business in the SaaS business also benefited from a couple of accretive contract Mod.
Speaker 6: The SAS business also benefited from a couple of accretive contract mods that they were successful in being able to deliver on within the quarter. And so when you look at Q4, there is a step down as a result of those one-time accretive actions that occurred within Q3.
They were successful in being able to deliver on within the quarter and so when you look at Q4, there is a step down as a result of those are one time accretive actions that occurred within Q3.
Christopher Kubasik: Air jet rocket is growing faster than the L3Harris business. I think when we look at everything that has happened since we signed the deal on December there should be no dispute to demand for these products as they flow through the primes in most cases is up significantly in the US and in the world which is why we need to focus on the increase in output. I already mentioned the DPA money of 200 million which will help us on these three particular lines increase capacity move production lines and digitize the engineering so the tailwinds are there as well so feel better about the acquisition today than I did in December to be honest with you.
Speaker 6: From an integrated mission systems business perspective, this business, and along with John Rambo's leadership and the IMS leadership team.
From a integrated mission systems business perspective, this business and along with John Randos leadership in the IMS leadership team saw sequential margin improvement of 100, and basically 180 basis points from Q2, and so you may remember this is where we've had the most acute E T programmatic challenges in the first half.
Speaker 6: So sequential margin improvement of 180 basis points from Q2. And so you may remember this is where we've had the most acute EAC programmatic challenges in the first half of the year. And a lot of the work that John and his team are doing are starting to pay dividends now where we sit here in Q3. Now this will continue to be a bit of a lumpy part of our portfolio, but we expect that the worst is behind us in terms of overall programmatic challenges within IMS.
A year and a lot of the work that John and his team are doing are starting to pay dividends now where we sit here in Q3 now this will continue to be a bit of a lumpy part of our portfolio, but we expect that the worst is behind us in terms of overall programmatic challenges with an eye on that.
Christopher Kubasik: I think it's highlighting my last point some of the challenges in the industry going back to the 80s and the peacetime dividend, the industry contracted or capacity contracted. Mindset for the last several decades, and I believe is a country. We need to ramp up to more of a wartime footing. And like I said, I think money and focus needs to go to the subtier suppliers, that feed in to not only us but other industry partners, generally through primes, and then to the end users. So maybe a longer answer than you wanted, Kristine, but I tried to hit a lot of different topics. So I think I'll just stand on that.
Speaker 6: Within our CS business, I'm getting specifically to your question, Scott. CS delivered consistent with our expectations within the quarter, along with consistent with Q1. And so we anticipated Q3 to be lower margins.
Within our CFS business I'm getting specifically to your question Scott. She has delivered consistent with our expectations within the quarter, along with consistent with Q1, and so we anticipated Q3 to be lower margins aligned with a heavier a D. O D shipment next from a tactical radio perspective, and as I noted.
Speaker 6: Aligned with a heavier DOD shipment mix from a tactical radio perspective.
Unknown Executive: Thank you.
Speaker 6: And as I noted earlier, we actually delivered more radios this quarter, so this really speaks to the efforts that we're really putting around, driving a resilient supply chain. A lot of work is gone into those from the genes to make this happen.
Earlier, we actually delivered more radios this quarter. So this really speaks to the efforts that we're really putting around driving a resilient supply chain a lot of work has gone into that it's from low teens to make those happen.
Speaker 6: And then finally, from an Aerojet perspective, two months, a little over 90 days as part of our portfolio. Roughly 12% margins within the quarter. You will note, though, there is a step down within Q4. Q3 did benefit from about 8 million of purchase price accounting adjustments within the quarter, so we expect in the year consistent with the guide that we have updated for.
And then finally from an Aerojet perspective, two months a little over 90 days as part of our portfolio I'm roughly 12% margins within the quarter. You will note, though there is a step down within Q4 Q3 did benefit from about 8 million of purchase price accounting adjustments within the quarter and so we expect in New York.
Gautam Khanna: Our next question is from the line of Gautam Khanna with TD Cowan.
Assistant with the guide that we've updated for.
Unknown Executive: Please excuse your third question. Hi, good morning, guys. Good morning, God morning.
Speaker 6: And then Scott, your question about the difference between the expense and the cash impacts. This is really driven by the Aerojet acquisition. Cash that float out closure from a, what was originally booked on the books of Aerojet from an expense perspective, we actually paid that cash post closing.
And then Scott to your question about the difference between the expense and the cash impacts. This is really driven by the Aerojet acquisition.
Unknown Executive: I actually wanted to switch subjects and ask about technical RF. If maybe if you could talk about, you know, book to Bill in the quarter where backlog stands and give us some pipeline color. Both domestically and internationally, and you know, also if you can answer the supply chain questions, how that's evolved in that business line.
Cash that flowed out closure with from what was originally booked on our books as Ara jobs from an expense perspective, we actually paid that cash post closing.
Speaker 1: Our next question comes from the line of Jason Gersky with City. Please see you through questions.
Our next question comes from the line of Jason Gursky with Citi. Please proceed with your question.
Unknown Executive: Thanks. Yes, but thanks for the question. From an overall comms perspective, we continue to be on track to deliver to our guidance, which was double digit growth. Across the business, which includes to your point, got them about the baiting supply chain challenges, which we continue to see along with the acquisition of our tactical data links business. Specific to radios and comms, you know, from an overall DOD budgetary perspective, we continue to see support.
Hey, good morning, everybody.
Hey, good morning, I just wanted to go.
Go back to the space business for a minute if you don't mind.
Little contrasting things going on here in the industry. This quarter you guys.
Positive EAC and in one of your customers.
One of your competitors out there in the.
In the world at a very large part.
Speaker 7: this quarter in their space business. So, one of you could just help us, we're gonna walk around the space portfolio and tell us a little bit about.
This quarter in their space business.
I Wonder if you could just help us or can they be walk around the space portfolio and.
Unknown Executive: We're about 40% of the way through that modernization program. And we continue to see strong demand internationally as well. And so overall, I'd say we're feeling like we're in a good place from a comms perspective. And then just from looking at supply chain specifically, you know, we continue to see hiccups like you're hearing across the industry. But, you know, significant compliments to our supply chain or tactical communication business, Sam Metta, Chris Abley, the efforts that they put in over the last 18 to 24 months in truly building a resilient supply chain that allows us to pivot when we continue to experience these hiccups is enabling us to continue to deliver for our customers.
Tell us a little bit about.
What you have.
Speaker 8: in that portfolio from a six-price versus cost plus kind of mix and help us understand what the risks are and what the opportunities are as it relates to both revenue in the future. But I think most importantly, getting what we're seeing across the industry and what the risks might be on execution in the AACs and just kind of help us better understand the overall health of that.
In that portfolio from a fixed price versus cost plus kind of mix and help us understand what the what the risks are and what the opportunities are as it relates to you know both revenue in the future, but I think most importantly, given what we're seeing.
Across the industry kind of what the risks might be on execution and a season, just kind of help us better understand the overall health of that business.
Speaker 3: Okay, well let me take that one Jason great great questions and
Okay, well, let me take that one Jason great great questions and.
Unknown Executive: And for our shareholders. And the other thing I would note for this quarter is that our overall deliveries are actually up from Q2. And so we continue to see the results of the efforts and the diligence that the team has put in over the last 18 to 24 months.
Speaker 3: Yeah. I mean, to give the answer on the cost plus fixed price, it's about 50-50 between the two. And, you know, that's a big change over the last decade or so. I mean, people generally would have thought of space being predominantly cost plus if you go back 10 or 20 years. And as you know, that trend has changed, bringing more risk to everyone. You know, what we've.
Yeah, I mean, just to give the answer on the cost plus fixed price. It's about 50 50 between our between the two and that's the big change over the last decade, or so I mean people generally would've thought of space being predominantly a cost plus if you go back 10, or 20 years and as you know.
Noah Poponak: Our next question comes from the line of Noah Papinak, Goldman Sachs. Please excuse your question. Hey, good morning, everybody. Hey, good morning, Noah. Thanks for the time. Chris, so you've alluded to the competing inputs for, you know, national security spending. I guess, you know, when you think about what's evolving geopolitically versus what's evolving with the deficit battle in the US, you know, maybe some of the short-term, you know, items as well.
That that trend has changed bringing bringing more risk to.
Two to everyone.
What we've.
Speaker 3: I think a lot of this goes back, I don't know, specifically here referring to, but I think a lot of the challenges that the industry is having.
I think a lot of this goes back I don't know, specifically, who you're referring to but I think a lot of the challenges that the industry is having a.
Speaker 3: stems from the supply chain, which I'm sure is getting hold hearing that. But if you go back a few years, we were talking about how we're portfolio, having a combination of short cycle, quick turn product.
Stems from from the supply chain, which which I'm sure is getting hold a hearing that but you know if you go back a few years, we were talking about our portfolio.
Now, having a combination of short cycle.
Quick turn products, you know that we're reliant on microelectronic part so I felt like a L. Three Harris was kind of at the pointy end of the spear in and leading the industry and the supply chain.
Speaker 3: that were reliant on microelectronic parts. So I felt like L3 Harris was kind of at the point the end of the spear and leading the industry in the supply chain.
Noah Poponak: I guess, how are you thinking about what your medium-term end-market growth rate is and your latest thinking on the L3 Harris spread versus that growth rate? Yeah, thanks, Noah. I appreciate the question. You know, I step back a moment, I think kind of implied in there is the budget and what's going to happen with the supplemental. So as we all know, we finally have a speaker of the house, so that's step one.
Speaker 3: adverse impacts given the fact we couldn't get those parts to deliver our products and recognize the revenue and profit.
Adverse impacts given the fact, we couldnt get those those parts to deliver our products and recognize the revenue and profit and then I think the longer cycle businesses, you know, which I would kind of throw a space and there you.
Speaker 3: And then I think the longer cycle businesses, which I would kind of throw space in there.
Speaker 3: You know, it's also having supply chain issues, but the challenge there I believe is more on inflation, you know, and then workmanship.
It was also having supply chain issues, but the challenge there I believe is more on the inflation you know and then workmanship.
Speaker 3: that everybody is dealing with those quality challenges. So, well, there's still supply chain challenges. I think they've shifted. And I think they're hitting the longer cycle businesses, businesses now. So, what we've done,
That that everybody is dealing with those quality challenges so while theres still supply chain challenges I think they've shifted and I think they're hitting the longer cycle businesses.
Noah Poponak: I do believe when I've been pretty outspoken on this, it feels like it's an even more dangerous world than it ever has been. You look at what's going on in the mid-east, Ukraine, South China sees, national security has to be a top priority. And I'm concerned, you know, that a government shutdown would clearly weaken our national security as does a continuing resolution. So, you know, I think I speak for the entire industry, and probably our customers, we hope that we get a budget here in the next couple of weeks so we can start having the money flow to the industrial base.
Now so what we've done.
Speaker 3: is really a double down on our bidding discipline. You know, some of the longers cycle things going back five years, you know, probably are making less margin than I would like, but on the new bids, you know, we're clearly...
It was really a double down on our our bidding discipline you know some of the longer cycle things going back five years, you know probably are making less margin than I would like but on the new beds. You know we're clearly.
Speaker 3: factoring in the appropriate risks, taking the most current estimates and
Factoring in the appropriate risks taken the most current estimates and you know we're not going to we're not going to bid to lose money and do the best we can whether it's terms and conditions contract reopening escalation clauses.
Speaker 3: You know, we're not gonna bid to lose money and do the best we can, whether it's terms and conditions, contract reopening, escalation clauses.
Noah Poponak: You know, there's been a lot of talk about the supplemental, over $100 billion, you know, split between state and DOD and Ukraine and Israel and Taiwan and the south border. I think we feel confident there will be a supplemental, I don't know if there will be one or two or somehow be partitioned, but I look at the supplemental as kind of playing into the near term. And I think when I look at our portfolio of products, literally products, not necessarily systems or platforms, we've been well positioned specifically in Ukraine with the quick turn, you know, on the radio's night vision goggles, fights, sensors, cameras.
Speaker 3: to protect ourselves. So I feel like we're doing a pretty good job on the bidding discipline. We have regular independent reviews of our key programs, and that helps.
To protect ourselves so I feel like we're doing a pretty good job on the bidding discipline, we have regular independent reviews of our key programs and that helps again identify risk early to the extent we have any and then then work on our work on mitigation of work around so you know you see you see how we're doing.
Speaker 3: Again, identify risk early to the extent we have any and then work on mitigation or work around. So, you know, you see how we're doing.
Noah Poponak: So, I look at the supplemental to kind of help us in the near term. The mid term I think is, you know, relying more on a continued budget growth, the need to invest in technologies, advanced technologies for a peer or near peer threats. And, you know, we keep talking about that as part of our national defense strategy, but we keep getting distracted by these other conflicts. So, I think that's probably where I feel good about how we've shaped our portfolio specifically, you know, in the space arena, a lot of the missions that were normally conducted in the air domain, not all of them, but some of them have been moved into space.
<unk>.
Relative to our.
The others on margins and in space and you know where.
Speaker 3: Well pretty solid compared to our peers and we haven't had fortunately any major write-off.
We're pretty solid compared to our peers and we havent had fortunately any any major.
Write offs are we.
Speaker 3: We continue to not bid fixed price development programs that simultaneously ask for development and production, as I've said before. It's hard enough to estimate the development, let alone commit to production for one, two, or three lots in 26, 27, and 20...
We continue to not bid fixed price development programs that simultaneously.
Ask for development and production as I've said before it's hard enough to estimate the the development, let alone a commit to production for one two or three lots in 'twenty six 'twenty seven in 2028. So we will continue to no bid those and ultimate.
Speaker 3: So we will continue to know bid those. And ultimately, the customer has to use the right vehicle.
Really you know the customer has to use the right vehicle contracting vehicle I believe and I think at some point in time, everyone in the industry will stop bidding and we'll get the right vehicle and we'll fight it out for the best solution. So.
Speaker 3: contracting vehicle, I believe, and I think at some point in time, everyone in the industry will stop bidding, and we'll get the right vehicle, and we'll fight it out for the best solution. So, you know, the
You know the are more than happy to sacrifice, a topline growth for our profitability cash and margin and I've said before the best way to get your margins up is stop writing off our money on on programs and that moves the needle and that's what we're trying trying to do I think there's some real tangible evidence you know we had some.
Speaker 3: sacrifice top line growth for profitability cash and margin. And I've said before the best way to get your margins up is top rating off money on programs and that moves the needle and that's what we're trying to do. I think it's some real tangible evidence. You know, we had some fixed-friced contracts.
Noah Poponak: And, you know, I know people get tired of me saying it, I think this is the best example of our trusted disruptor strategy working. And, at the date of the merger, L3 Harris had zero satellites in orbit as a prime, and as I looked at our manifest in our backlog, we could very likely have 50, 50, L3 Harris prime satellites in orbit in the next three to five years. So, I think we're well positioned there, they tend to be more Leo satellites, you know, three to four year useful lives, large constellations, you can kind of see that as a potential ongoing annuity.
Fixed price contracts.
Speaker 3: for missile tracking, we have one for the Missile Defense Agency.
For missile tracking we have won for the missile Defense agency.
Speaker 3: we refer to as HBTSS, and we have four for the SDA, call it Space Force Now, Tronch Zero for tracking, and those satellites...
We referred to as H P. T. S S and we have four for the S. T. A hot space Force now.
Tranche zero for tracking and those satellites are done and are waiting to be launched so can't wait to get those things in orbit and you know I think that's pretty good pretty good evidence that we're able to.
Speaker 3: done and waiting to be launched. So I can't wait to get those things in orbit. And I think that's pretty good evidence that we're able to...
Speaker 3: meet our commitments relative to cost and schedule, notwithstanding all the challenges.
Noah Poponak: In fact, we're building state-of-the-art factory, you know, for the satellite to integration. So, clearly, I see a upside there. Air reject rocket nine, we talked about, you know, the munitions, we are on the rocket motor, solid rocket motor business supporting some great primes who ultimately integrate the missile. So, I feel comfortable with our position there. Michelle talked about the radios. You know, we made an acquisition earlier this year on tactical battle lengths from via SAT.
Meet our meet our commitments relative to two cost and schedule notwithstanding all the challenges from a supply chain inflation attrition and such so feel pretty good about our space business and we've been able to attract new talent, which helps helps as well so.
Speaker 3: the supply chain inflation attrition and such so feel pretty good about our or space uh... business and uh... we've been able to attract you know new talent uh... which helps helps as well
Speaker 6: Hopefully that answered your question there, Jason. I would just add a compliment that, along with the SDA and MD and work that Chris just referred to, we also have a very steady, stable business that we've been in for decades from a civil weather perspective. And so that, there's also a growth cycle that's happening there, and we've talked about a billion and a half associated with that business. So it's a good compliment to the other work that's really growing from a DOD perspective.
Hopefully that answered your question there, Jason I would just add.
As a complement that along with the FDA in Indiana that Chris just referred to we also have a very steady stable business that we've been in for decades from a civil weather perspective, and so that there is also growth cycle, that's happening there and we talked about a billion and a half associated with that business. So it's a good complement to the.
Noah Poponak: And, you know, we keep talking about the connectivity of this network, and it is happening and it is going to happen. It's hard to find the budgetary numbers, but these different domains, space, air, land, sea. They have to be able to connect cross-services, multi-domain, all those buzzwords we hear, but it's critical and it's happening. And someone has asked me best to try to explain with waveforms and all these different things that we're doing with League 16.
Their work, that's really growing from a D O D perspective.
Speaker 1: Our next question comes from the line of Richard Saffron with Seaport Global Research. Please proceed with your question.
Our next question comes from the line of Richard Safran with Seaport Global Research. Please proceed with your question.
Speaker 9: Chris Michele Mark Good morning. Um, all right. Chris, um.
Chris Michel Mark Good morning.
Noah Poponak: I think the simplest way I could come up with is just categorizing it as stealth communication. I think that's kind of a simple way to look at it. And we have the footprint on these 20,000 platforms, so we're upgrading, if you will, an existing network of connectivity, and I'll just say making it stealth. So, you know, I think, you know, depending on the budget world events, you got to feel like mid-single digit growth is not an unreasonable aspiration over the mid-term.
Good morning, Chris.
Speaker 9: Good morning. Chris, I heard you're marked about 2024 in the rest of the day, but I thought you might be willing to discuss and maybe give a qualitative assessment of what segments have the most room to grow in 24. And any call you could provide there, I thought it would be helpful.
Good morning, Chris.
Chris I heard I heard your remarks about 'twenty 'twenty four and the rest of the day, but I thought you might be willing to discuss and maybe give a qualitative assessment of which segments have the most room to grow in 'twenty four and any color you could provide there I thought it would be helpful.
Speaker 3: Are you going to come visit us in December at our investor day, Rich? I'm already.
Or are you going to come visit us in December at our Investor Day Rich.
I'm already I'm already signed up.
Speaker 3: Well, there you go. There you go. I mean, this is like becoming attraction here. This is after Taylor Swift. This is like an hottest ticket in Florida, apparently. So yeah, I, you know, we're in the process of going through our 2024 plan actually next month. And...
Well there you go there you go I mean this is this is like the coming attraction here. This is after Taylor Swift is the second hottest ticketing, Florida, apparently so yeah I you know we're in the process of going through our our 'twenty 'twenty four our plan actually next month and.
Noah Poponak: And, you know, that's what we're doing. We're striving for, and as I mentioned, to Kristine, you know, I still think as a nation, we have to find a way to invest in the infrastructure to build the capacity of this industrial base given the surge of certain key products and areas. So, that's how I see it, Noah.
Speaker 3: You know, so I'm not going to actually give you an answer that will be satisfying. I will tell you, based on what I see right now, it looks like all four of our segments will be growing. So, we'll reveal which ones are growing faster in December . But, in all seriousness, we kind of want to get through the next month or two and, you know, see what's going to happen. You know, we can't have a government shutdown.
You know so I'm not going to actually give you an answer that will be satisfying I will tell you based on what I see right now it looks like all four of our segments will be growing so well will reveal which ones are growing faster in December but in all seriousness, we kind of want to get through the next month or two and then you now see what's going to happen.
Unknown Executive: Thanks questions from the line of Scott display with Deutsche Bank, which is your question.
Unknown Executive: Hey, good morning. Hey, good morning Scott.
You know, we can't have a government shutdown.
Speaker 3: uh... for any period of time we can have a continuing uh... resolution we all know the impact that has
Scott Deuschle: I have two quick questions both for Michelle. The first is on what's driving the difference between the 56 million of M&A expense addbacks on the PNL in the 250 million, 215 million of addbacks for M&A on adjusted free cash flow. So, that's my first question.
For any period of time, we can't have a continuing resolution we all know the impact that has.
Speaker 3: You know, on our business, we all say it really doesn't impact 2023 because the year's three quarters over, more or less true. But 2024, you know, a one year CR, which I'm not.
Our business, we all say it really doesn't impact 2020 three because of the year as three quarters over more or less true, but 'twenty 'twenty four you know a one year C R, which I'm not.
Michelle Turner: And then my second question is what would drive CS margins to the 26% range in the fourth quarter, which I think what's implied in the gut. Thanks. Thanks for that Scott.
Speaker 3: at all suggested will happen, but the one thing we can all agree on is we have no idea what's going to happen in D.C., and I kind of want to get through November and get some of those things behind us, including world events. But right now, it looks like we're going to experience growth, top-line growth in all segments, and on a consolidated basis.
It all suggests it will happen, but the one thing we can all agree on is we have no idea, what's going to happen in D. C and I kind of want to get through November and get some of those things behind us, including a world events, but right now it looks like we're going to experience growth topline growth in all segments and on a consolidated basis.
Michelle Turner: I'm going to start with the margin question and kind of take a step back and address it starting with the enterprise margins, because we really think about this as managing a portfolio. So, we're encouraged with the overall margin results within the quarter. This is our second consecutive quarter of sequential improving margins at 15% and this includes two months of arrowjet as part of our portfolio. So, we're most pleased because we're starting to see the efforts of our actions related to our performance first initiative, which you may remember is really grounded in meeting the commitments of our customers and shareholders and it's starting to pay dividends now in terms of margin improvement.
Speaker 3: you know, which we'll be talking about in December .
You know, which we'll be talking about in December.
Speaker 3: you know i expect uh... cash in ally in eps not standing up pension headwinds and revenue tall you know that's encouraging but
Expect a cash an ally in E. P S. Notwithstanding the pension headwinds and revenue to all grow so.
You know that's encouraging but details to come.
Speaker 1: Our next question comes from the line of Ken Herbert with RBC Capital Markets. Please proceed with your question.
Our next question comes from the line of Ken Herbert with RBC Capital markets. Please proceed with your question.
Michelle Turner: So, I'll walk through each of the segments because I think there's a lot of good work that's happening across the organization plus it gives you a little bit of flavor as to how you think about your models go forward. So, I'll start with our space and airborne systems business that delivered a record up profit in Q3 and 12 and a half percent margins. And Joyce and the SAS team have really been early adopters on our LHX next initiatives in terms of really leaning into my nightly managing cost and spend but also looking at organizational construct to ensure that we are most effectively running our business.
Hey, good morning, everybody.
Good morning.
Speaker 10: Chris, maybe just following up on Michelle on that comment and some of the comments on AGRD and the opening remarks beyond some of the Defense Production Act opportunities. Can you just talk about how you're viewing CapEx across sort of legacy L3 Harris and then more importantly sort of AGRDs we think about?
Hey, Chris maybe just following up on Michelle on on that comment.
And some of the comments on a G. R. D. In the opening remarks beyond some of the defense production Act opportunities could you just talk about how you're viewing capex across.
Legacy Altra Harris, and then more importantly, sort of EG already as we think about 'twenty 'twenty four and off of this year and are you seeing a need to specifically sort of accelerated capex in a G. R. Do you do to address some of the issues you outlined it and maybe how should we think about that as it relates to the growth in free cash next year.
Speaker 10: 2024 and off of this year. And are you seeing a need to specifically sort of accelerate CAPEX and AJRD to address some of the issues you outlined and maybe how should we think about that as it relates to the growth and free cash next year?
Michelle Turner: The SAS business also benefited from a couple of creative contract mods that they were successful and being able to deliver on within the quarter. And so when you look at Q4, there is a step down as a result of those one time of creative actions that occurred within Q3. From an integrated mission systems business perspective, this business and along with John Rambo's leadership and the IMS leadership team saw sequential margin improvement of 180 basis points from Q2.
Speaker 3: Yeah, I'll start it off and then ask Michelle to fill in. I mean, we we're going to continue to prioritize.
Yeah, I'll start it off and then ask Michel to fill in I mean, we were going to continue to prioritize.
Speaker 3: you know, our R&D and our CAPEX based on business cases and based on needs.
You know, our R&D and our Capex based based on business cases and base based on needs. You know I think aerojet Rocketdyne always had a $50 million to $60 million of Capex and in their plan. So that I don't see any scenario, where that would would change or come down significantly, but we will look at.
Speaker 3: You know, I think Aerojet Rocketdyne always had 50, 60 million of CAPEX.
Speaker 3: in their plan so that I don't see any scenario where that would
Michelle Turner: And so you may remember this is where we've had the most acute EAC programmatic challenges in the first half of the year. And a lot of the work that John and his team are doing are starting to pay dividends now where we sit here in Q3.
Speaker 3: would change or come down significantly, but we'll look at it compared to all the other.
Compared to all the other.
Speaker 3: uh... investments that we have i think of all but that it's a pretty high growth and we're trying to excel tolerate so between the dpa money which is over two hundred uh... the fifty to sixty annual
Investments that we have I think I have all but said, it's a pretty high growth market and we're trying to ask all celebrate so between the D. P. A money which is over 200.
Michelle Turner: Now, this will continue to be a bit of a lumpy part of our portfolio, but we expect that the worst is behind us in terms of overall programmatic challenges within IMS. Within our CS business, now I'm getting specifically to your question, Scott, CS delivered consistent with our expectations within the quarter, along with consistent with Q1. And so we anticipated Q3 to be lower margins, aligned with a heavier DOD shipment mix from a tactical radio perspective.
The 50 to 60 annual Capex.
Speaker 3: any other supplemental sources of funding we get sometimes from states and local municipalities. I think it all fits within our overall CAPEX target.
Any other supplemental our sources of funding, we get sometimes from from states and local municipalities.
I think it all fits within our overall capex target and.
Speaker 3: you know, to the extent we need more, it will be at the expense of something else in the legacy portfolio that we don't view is having the near term need or the ROI. So...
You know to the extent, we need more of it will be at the expense of something else in the legacy portfolio that we don't view as having the near term need or or the R. O y. So.
Michelle Turner: And as I noted earlier, we actually delivered more radios this quarter. So this really speaks to the efforts that we're really putting around, driving in a resilient supply chain. A lot of work is gone into those from the teens to make this happen. And then finally, from an air jet perspective, two months, a little over 90 days as part of our portfolio. Roughly 12% margins within the quarter, you will note though there is a step down within Q4.
Speaker 3: That's kind of how I see it. You know, there could be new markets down the road once we kind of catch up on this acceleration. You know, and those will be case by case. But there's a lot of exciting new technologies within Aerojet Rocketdyne that the team is really focused on the backlog and the core business for now.
That's that's kind of how I see it you know there could be new markets down the road once we kind of catch up on on this acceleration you know when those will be case by case, but there's a lot of exciting new technologies within aerojet rocketdyne, but but the team is really focused on the backlog.
And the core business for now.
Speaker 6: Yeah, and so I would just add in terms of your question, Ken, around free cash flow for next year. So to Chris's comments, we do expect income to grow. So we think that that'll be a tailwind from an overall cash perspective.
Yeah, and so I would just add in terms of your question Ken around the free cash flow for next year or so to Chris's comments, we do expect income to grow. So we think that that'll be a tailwind from an overall cash perspective, we expect some kind of nominal improvement in working capital and then offsetting that just as a reminder for everybody are.
Michelle Turner: Q3 did benefit from about 8 million of purchase price accounting adjustments within the quarter. So we expect in the year consistent with the guide that we have updated for. And then Scott, your question about the difference between the expense and the cash impacts. This is really driven by the air jet acquisition cash that float out closure from what was originally booked on the books of arrow jet from an expense perspective. We actually paid that cash post closing.
Speaker 6: We expect some kind of nominal improvement in working capital. And then offsetting that, just as a reminder for everybody, our initial deal model on Aerojet assumed free cash flow accretion in year two. So we expect there will be some kind of marginal impact just in totality of where they're at in the program cycle.
Initial deal model and your dad assumed free cash flow accretion in year. Two so we expect those to be some kind of a marginal impact I'm just in totality of where they're at in their programs cycles.
Speaker 6: And then on overall CapEx, you know, we typically run around 2%. We're not expecting any fundamental change in that level of investment as we go into next year.
And then on overall Capex you know, we typically run around 2%, we're not expecting any fundamental change in that level of investment as we go into next year.
Jason Kurski: Our next question comes from the line of Jason Kurski with city, please to see if you're question. Good morning, everybody. I just wanted to go back to the space business for a minute, if you don't mind, a little contrasting things going on here in the industry, this quarter, you guys. Positive AC and one of your customers, you can one of your competitors out there in the. In the world at a very large part. This quarter in their space business.
Speaker 1: Our next question from the line of Matt Akers with Wells Fargo. Pleased to see you with your question.
Our next question is from the line of Matt Akers with Wells Fargo. Please proceed with your question.
Speaker 3: Yeah, hey guys, good morning. Thanks for the question. I wanted to ask if you could touch on LHX next a little bit, and specifically just curious of the 500 million benefit that you call out, how much you get to keep. Does any of that flow back to your customer or any other offsets we should think about?
Yeah, Hey, guys. Good morning. Thanks for the question I wanted to ask if you could touch on La Tex Mex to a little bit.
And specifically just curious if the 500 million benefit that you call out how much you have to keep does any of that flow back to your customer or any other offsets we should think about.
Speaker 6: Yeah, thanks for this question, I'm glad we're getting to talk about it a little bit more.
Yeah. Thanks for this question I'm glad we're getting we'll talk about it a little bit more and so this is the next phase of our L. Three and Harris merger evolution. If you will and so if you think about the initial integration savings that we did as a company several hundred million along with some ops that this is the next phase of that is kind of the harder parts. If you will.
Speaker 6: And so this is the next phase of our L3 and Harris merger evolution, if you will. And so if you think about the initial integration savings that we did as a company.
Christopher Kubasik: So what if you could just help us are going to walk around the space portfolio and tell us a little bit about what you have in that portfolio from a six price versus cost plus. Kind of makes and and help us understand what the. What the risks are and what the opportunities are as it relates to, you know, both revenue in the future, but I think most importantly, give it what we're seeing.
Speaker 6: several hundred million, along with some offsets. This is the next phase of this, kind of the harder parts, if you will.
Speaker 6: And it's really focused on leveraging our scale to drive efficiencies and also functional organization to ensure that we're optimized for value creation. And so it's your point specifically around.
And it's really a focus on leveraging our scale to drive efficiencies and also a functional organization to ensure that we're optimized for value creation and so to your point specifically around the overall bottom line impact we do anticipate that there is more investment that goes along with this phase of the journey not so you'll see in our investor.
Christopher Kubasik: Across the industry, kind of what the risks might be on execution and AC using this kind of help us better understand the overall health of that business. Okay, well, let me take that one Jason, great, great questions and. Yeah, I mean to give the answer on the cost plus fixed price, it's about 50, 50 between between the two and you know, that's a big change over the last decade or so. I mean, people generally would have thought of space being predominantly cost plus if you go back 10 or 20 years.
Speaker 6: The overall bottom line impact, we do anticipate that there's more investment that goes along with this phase of the journey, Matt. So you'll see in our investor letter, we laid out about 400 million of investment. And so you should think of this more of the nominal tailwind from a margin perspective and not flow it all to the bottom line.
The letter we laid out about 400 million of investment and so you should think of this more of a there's a.
Nominal tailwind from a margin perspective, and not pull it all to the bottom line.
Speaker 6: But I do want to highlight a couple of tangible examples that the teams have already driven as we're in the early stages of this, just so you can start to characterize what are we talking about when we're talking high level about LHX next. And one of our recent wins, I'll compliment our HR team in Malverquita, they've done a fantastic job in renegotiating our employee benefit package, again, leveraging the scale of the new L3Harris portfolio.
But I do want to highlight a couple of tangible examples that the teams have already driven as we're in the early stages of both just so you can start to characterize what are we talking about when we're talking high level about how they check snacks and one of our recent wins all complement our HR team and novel Kidder, they've done a fantastic job in renegotiating our employees.
Christopher Kubasik: And as you know, that trend is change bringing bringing more risk to to everyone, you know, what we've. You know, I think a lot of this goes back, I don't know specifically referring to, but I think a lot of the challenges that the industries having stems from from the supply chain, which I'm sure is getting old hearing that. But you know, if you go back a few years, we were talking about our portfolio, you know, having a combination of short cycle, quick turn products, you know, that were reliant on micro electronic parts.
Pet package again, leveraging the scale of the new L. Three Harris portfolio to not only increase our benefits them and also save on costs, but we're also gonna be halting our employee benefit costs flat term life. So this is really creating a win win opportunity both from a shareholder perspective and term.
Speaker 6: to not only increase our benefits and also save on costs, but we're also going to be holding our employee benefit cost flats during employees.
Speaker 6: So this is really creating a win-win opportunity both from a shareholder perspective and our employees in terms of better benefits while maintaining the cost that they have to throw back to their families.
Employees in terms of better benefits, while maintaining the cost that they have to throw back to their families.
Speaker 6: And then on the organizational side of the equation, our comms team led by Tanya Hannah has-
And then on the organizational side of the equation Coms team led by a tiny Hana has redesigned how we serve the company from a comps perspective, and really focusing on the things that matter right and so when you think about comms and how we send out external communications or internal communications what are the things that are really.
Speaker 6: We designed how we serve the company from a comms perspective and really focusing on the things that matter, right? And so when you think about comms and how we send out external communications or internal communications, what are the things that are really gonna move the needle from a value creation perspective in terms of our shareholders? And so they focus on streamlining our overall work flows and we've actually reduced double digits with the number of communications that we're just triggering as a result.
Christopher Kubasik: So I felt like L3 Harris was kind of at the point the end of the spear and leading the industry and the supply chain adverse impacts given the fact we couldn't get those parts to deliver our products and recognize the revenue and profit. And then I think the longer cycle businesses, you know, which I would kind of throw a space in there, you know, is also having supply chain issues. But the challenge there, I believe is more on inflation, you know, and then workmanship that that everybody is dealing with those quality challenges.
Going to move the needle from a value creation perspective in terms of our shareholders and so they focus on streamlining our overall workflows and we've actually reduced double digits in the number of communications that we're just shipping and as a result, so that gives you a little bit of color as to the things we're looking at but the biggest buckets I would highlight here are really around.
Speaker 6: So that gives you a little bit of color as to the things we're looking at. But the biggest buckets I would highlight here are really around the material opportunities, both on the direct side and the indirect side of the equation. And so again, going back to, you know, we're in our fifth year as a company and truly leveraging the scale of L3 Harris as a $35 billion market cap. And what we can bring to the table and negotiating with our suppliers has a real opportunity to drive value for our shareholders.
The material opportunities and both on the direct side and the indirect side of the equation and so again going back to you know we're in our fifth year as a company and truly leveraging the scale of L. Three Harris as that $35 billion market cap and what we can bring to the table and negotiating with our suppliers that has a real opportunity to drive that.
Christopher Kubasik: So well, there's still supply chain challenges. I think they've shifted and I think they're hitting the longer cycle businesses, businesses now. So what we've done, is really a double down on our bidding discipline. Some of the longer cycle things going back five years, probably are making less margin than I would like. But on the new bids, we're clearly factoring in the appropriate risks, taking the most current estimates. And we're not going to bid to lose money and do the best we can, whether it's terms and conditions, contract reopen.
Christopher Kubasik: And escalation clauses to protect ourselves. So I feel like we're doing a pretty good job on the bidding discipline. We have regular independent reviews of our key programs. And that helps, again, identify risk early to the extent we have any and then work on mitigation or work around. So you see how we're doing relative to the others and margins in space. And we're pretty solid compared to our peers. And we haven't had fortunately any major write offs.
For our shareholders.
Okay.
Speaker 1: The next question comes from the line of Seth Sleifman with J.P. Morgan. Please proceed with your question.
The next question comes from the line of Seth <unk> with Jpmorgan. Please proceed with your question.
Hey, Thanks, very much and good morning, everyone. Michel maybe another question for you. If you could talk about the path to Delevering and just you know kind of how much cash you need to have on the balance sheet I think theres, probably some more debt coming up then you'll have the the company and have an ability to repay so yeah.
Speaker 11: Hey, thanks very much. And good morning, everyone. Michelle, maybe another question for you. If you could talk about the path to de-levering and just kind of how much cash you need to have on the balance sheet. I think there's probably some more debt coming up, then the company will have an ability to repay. So how do you think about what to term out versus what to repay now?
How do you think about what to term out versus what to repay now.
Speaker 6: Yeah, thanks for this question because we want every opportunity we can to highlight that we're focused on debt repayment. And so what are we going to focus on first? We're going to focus on the commercial paper, the higher interest rates, the variable rates, if you will.
Yeah. Thanks for this question that says we want every opportunity we can to highlight that we are focused on debt repayment and so what are we going to focus on first we're going to focus on commercial paper the higher interest rates. The variable rates. If you will on where we sit today post acquisition, we were at $13 5 billion.
Speaker 6: Where we sit today, post-acquisition, we're at 13 and a half billion, and our target by the end of the year is to get to about 13 billion of debt. And so from a leverage ratio perspective, we're looking to be at three-five, and our expectation is that we get below three over the next couple of years.
And our target by the end of the year is to get to about $13 billion of debt and so from a leverage ratio perspective are looking to be at three five and our expectation is that we get below three over the next couple of years.
Christopher Kubasik: We continue to not bid fixed price development programs that simultaneously ask for development and production, as I've said before. It's hard enough to estimate the development, let alone commit to production for one, two or three lots in 26, 27 and 20, 28. So we will continue to know bid those. And ultimately, you know, the customer has to use the right vehicle, contracting vehicle, I believe. And I think at some point in time, everyone in the industry will stop bidding and we'll get the right vehicle.
Thank you.
The next question comes from the line of Sheila <unk> with Jefferies. Please proceed with your crop.
Speaker 2: The next question comes from the line of Sheila Kaigle with Jeffries. Please just use your phone. Rob, this will be our last question of this morning.
Just one last question on this morning.
Thank you.
Speaker 12: Please proceed, Sheila. Thank you. Thank you. Good morning, Chris, Michelle, and Mark. So, thanks, guys. Just stepping back, big picture, your margins are 15 percent today. You know, how do we think about expansion from here? Is it possible? And then to that extent, maybe specifically on communication systems, can you talk about the puts and takes there? Can you shake off some of these supply chain issues, and how do you think about the improvement progress and just the core margin of that business and runway from here?
Please proceed Sheila thank you. Thank you and good morning, Craig.
Thanks, guys just stepping back.
Big picture your margins are 15% today, you know how do we think about expansion from here is it possible and then to that extent, maybe specifically I'm communications for Tom can you talk about the puts and takes there can you shake off some of these supply chain issues and how do you think about the improvement progress.
Christopher Kubasik: And we'll fight it out for the best solution. So, you know, the more than happy to sacrifice top line growth for profitability cash and margin. And I've said before the best way to get your margins up is stop writing off money on on programs and that moves the needle. And that's what we're trying, trying to do. I think it's some real tangible evidence. You know, we had some fixed price contracts for missile tracking.
The core margin of that business and runway from here.
Speaker 3: Okay, I think I'll take this one since it's our last question, Sheila, and I guess you snuck in right under the wire here. So, good morning. Yeah, thanks for acknowledging the 15%, which I think are industry-leading margins, which we are quite, quite proud of. And even though they are industry-leading, we are committed to find ways to continue to grow those margins.
Okay, I think I'll I'll take this one since it's our last question Sheila.
I guess you snuck in right under the wire here so good morning.
Yeah. Thanks for acknowledging the AR, 15%, which are I think our industry, leading margins, which we are quite quite proud of and even though they are industry, leading and we are committed to find ways to continue to to grow those those margins.
Christopher Kubasik: We have one for the missile defense agency. We refer to as HBTSS. And we have four for the SDA, call it space force now. Front zero for tracking. And those satellites are done and waiting to be launched. So can't wait to get those things in orbit. And, you know, I think that's pretty good, pretty good evidence that we're able to meet our commitments relative to cost and schedule. Notwithstanding all the challenges from the supply chain inflation, nutrition and such. So feel pretty good about our space business. And we've been able to attract, you know, new talent, which helps helps as well. So hopefully that answers your question there Jason.
Speaker 3: So on the CS side, we do have the commercial model, commercial business model, which is played well for us. And that goes beyond just the tactical radios. We also have it.
So on the C. S side, you know we do have the commercial model, our commercial business model, which has played well for us in that that goes beyond just the tactical radios. We also have it.
Speaker 3: at Westcam with our turrets and some of our sensors. So I think that's just an area that we need to leverage. We've been increasing our prices to cover the dilutive effect of the cost increase. And I think that's something that this industry...
At West Cam with our tourists and some of our sensors. So I think that's just an area that we need to leverage.
We've been increasing.
Increasing our prices.
To cover you know the dilutive effect of the cost increase and you know I think that's something that this industry.
Speaker 3: doesn't naturally do. I think we all see in our day-to-day lives, prices are going up all over the place. So, you know, we tend to try to want to hold pricing flat. But, you know, the new reality is it's costing more to buy components and labor. And Michelle mentioned holding the employee benefit costs flat for two years in a row. You know, those are going to be priced into our products, plain and simple.
It doesn't naturally do I think we all see in our day to day lives prices are going up all over the place so.
Michelle Turner: I would just add to compliment that along with the SDA and Indian work that Chris just referred to, we also have a very steady stable business that we've been in for decades from a civil weather perspective. And so that there's also a growth cycle that's happening there. And we've talked about a billion and a half associated with that business. So it's a good compliment to the other work that's really growing from a DOD perspective. Kratz.
Now we tend to try to want a whole pricing flat, but you know the new reality is its costing more to buy components and labor and Michel mentioned holding the employee benefit costs flat for two years in a row. You know those are going to be priced into our products plain and simple and you know that's that's going to help us keep keep the profitability.
Speaker 3: That's gonna help keep the profitability where it is, if not maybe even increase it. And again, we'll try to leverage the supply chain.
Where it is if not maybe even increase it and again, we will try to leverage the supply chain. The power of the enterprise. We recently had some successful negotiations by working across all the segments and sectors getting hall, the buy together in negotiating that.
Richard Safran: Our next question comes from the line of Richard Safran with Seapork Global Research. Please excuse me with your question.
Speaker 3: power of the enterprise. We recently had some successful negotiations by working across all the segments and sectors, getting all the buy together and negotiating.
Christopher Kubasik: Chris Michele Mark, good morning. Good morning. Chris, I heard your mark about 2024 and the rest of the day. But I thought you might be willing to discuss and maybe give a qualitative assessment of what segments have the most room to grow in 2024. Any call you could provide there. I thought it would be helpful. Are you going to come visit us in December at our investor day, Rich? I'm already I'm already signed up.
Speaker 3: at a corporate wide basis for actually direct material. Everybody does that for indirects, but direct is a lot harder and we're able to pull that off. So I think that's the key part of it. We haven't talked about E3.
At a corporate wide basis for actually direct material everybody does that for indirect but direct is a lot harder and we were able to pull that off so I think that's a key part of it we haven't talked about E. Three.
Speaker 3: That is just in the DNA, it's something we do every day, and that will continue to offset some of the headwinds and contribute to our bottom line.
That is just in the DNA, it's something we do every day and that will continue to offset some of the headwinds and contribute to our bottom line airway checks next as Michele gave a great description is cause I think is really a key differentiator for us. It's the continuation like she set of what we started with.
Christopher Kubasik: Well, there you go. There you go. I mean, this is this is like the coming attraction here. This is after Taylor Swift. This is the second hottest ticket in Florida, apparently. So, yeah, I, you know, we're in the process of going through our 2024 plan actually next month.
Speaker 3: LHX Next, as Michelle gave a great description, is I think is really a key differentiator for us. It's the continuation, like she said, of what we started with the merger. I think we did the easy stuff first, and this is the harder piece. And the ultimate goal is to simplify the business and change the way we do business.
The merger I think we did the easy stuff first and this is this is the harder piece and the ultimate goal is to simplify the business and change the way, we do business everyone wants to just taken arbitrary cut to lower their G&A or overhead, but we are looking at everything and so you know if we can eliminate a do it differently.
Christopher Kubasik: And, you know, so I'm not going to actually give you an answer that will be satisfying. I will tell you based on what I see right now, it looks like all four of our segments will be growing. So we'll reveal which ones are growing faster in December. But in all seriousness, we kind of want to get through the next month or two. And, you know, see what's going to happen, you know, we can't have a government shutdown for any period of time.
Speaker 3: Everyone wants to just take an arbitrary cut to lower their GNA or overhead. But we're looking at everything and seeing if we can eliminate it, do it differently. And she gave some good early examples. But I think there's a heck of a lot more we can do. And that will contribute to lowering our cost base, which will make us more competitive and or contribute to the bottom line. And I said it earlier, and I think it's the truth.
And she gave some.
Good early examples, but I think there's there's a heck of a lot more we can do in and that will contribute.
To lowering our cost base, which will make us more competitive and to contribute to the bottom line and I said it earlier and I think it's it's it's the truth. If if if you just look at the programs.
Christopher Kubasik: We can't have a continuing resolution. We all know the impact that has. You know, on our business, we all say it really doesn't impact 2023 because the years three quarters over, more or less true. But 2024, you know, a one year CR, which I'm not at all suggesting will happen. But the one thing we can all agree on is we have no idea what's going to happen in DC. And I kind of want to get through November and get some of those things behind us, including world events.
Speaker 3: If you just look at the programs, which you don't have all the visibility to, I appreciate, but, you know, if you don't de-book profit and you don't have lawsuits.
Which you don't have all the visibility to I appreciate but you know if you don't people profit and you don't have losses.
Speaker 3: you know the margins uh... will will just naturally grow so that comes back to the discipline and i will trade off revenue growth every day of the week for uh... profitable programs and it's easy to say and sometimes it's harder to do but if we can get to the point where we're not writing off money
The margins will just naturally grow so that comes back to the discipline and I will trade off revenue growth every day of the week for a profitable programs and it's easy to say and sometimes it's harder to do but if we can get to the point, where we're not writing off money on programs for what.
Christopher Kubasik: But right now, it looks like we're going to experience growth, top line growth in all segments. And on a consolidated basis, you know, which we'll be talking about in December. You know, I expect cash and OI and EPS, not expanding pension headwinds and revenue to all growth. So, you know, that's encouraging, but details to come.
Speaker 3: programs for whatever reason. There's only overhead, material, and labor. Sounds simple. But you have to get the right contracting vehicle, the right contracting terms, push back on the customer, and negotiate a fair deal for all. And that's something we are absolutely going to do. Relative to the mix.
Ever reason theres only overhead material and labor sounds simple, but you have to get the right contracting build vehicles. The right contracting terms pushback on the customer and and negotiate a fair deal for all and that's something we are absolutely are absolutely going to do you know relative to the mix.
Ken Herbert: Our next question comes from the line of Ken Herbert with RBC Capital Markets. Please use your question. Thank you.
Speaker 3: you know i think what you're getting out there is you know we do have a portfolio and we're always going to have cost-plus jobs and fixed price and the cost-plus jobs
I think what you're getting out there as you know we do have a portfolio and we're always going to have cost plus jobs and fixed price in the cost plus jobs generally our development and on the front end of a potential long term our franchise or annuity programs. So we will bid and we will win cost plus program.
Christopher Kubasik: Good morning, everybody. Chris, maybe just following up on Michelle on that comment. And some of the comments on AJRD and the opening remarks beyond some of the Defense Production Act opportunities. Can you just talk about how you're viewing CapEx across sort of legacy L3 Harris and then more importantly sort of AJRDs. We think about 2024 and off of this year. And are you seeing a need to specifically sort of accelerate CapEx and AJRD to address some of the issues you outlined?
Speaker 3: generally are development and on the front end of a potential long-term franchise or annuity of programs. So we will bid and we will win cost plus programs and we all know those margins are dilutive.
And we all know those margins are dilutive, but I look at it on an ROIC basis is effectively infinite. So if we can get 910 11, 12% cost plus jobs that lead to low rate production that lead to full rate production that lead to exporting that is the grand Slam of.
Speaker 3: But I look at it on an RLIC basis, it's effectively infinite.
Speaker 3: So if we can get 9, 10, 11, 12% cost plus jobs that lead to low rate production, that lead to full rate production, that lead to exporting, that is the grand slam of new business.
Christopher Kubasik: And maybe how should we think about that as a relate to the growth and free cash next year? Yeah, I'll start it off and then ask Michelle to fill in. I mean, we we're going to continue to prioritize. You know, our R&D and our CapEx based based on business cases and based based on needs. You know, I think AJRD always had 50, 60 million of CapEx in their plan. So that I don't see any scenario where that would would change or come down significantly, but we'll look at it compared to all the other investments that we have.
New business, we will better each and every time and it's a portfolio as Michelle said, we run the company as a portfolio. We look at our financial results as our portfolio. Some segments have a good quarter. Some don't we put it all together could not be more proud of the team and what we were able to accomplish in the third quarter.
Speaker 3: We will bid it each and every time, and it's a portfolio. As Michelle said, we run the company as a portfolio. We look at our financial results as a portfolio. Some segments have a good quarter, some don't. We put it all together, could not be more proud of the team and what we were able to accomplish in the third quarter. We exceeded expectations on revenue, EPS, and cash, and it's something we're quite proud of.
We exceeded expertise expectations on revenue EPS and cash and something we're quite proud of so.
Speaker 3: I think with that, I'll just thank everybody for joining the call this morning, and another shout-out to the employees for really coming through and delivering a great third quarter. I know we're all working hard on Q4, and can't wait to see everybody in early December for our Investor Day down here in Florida. So with that, we will sign off, and thank you again.
I think with that I'll, just thank everybody for joining the call. This morning, and another shout out to the employees for really coming through and delivered a great third quarter. I know were all working hard on Q4 and can't wait to see everybody in early December for our Investor day down here in Florida, So with that we will sign off and thank you again.
Christopher Kubasik: I think I've all but said it's a pretty high growth market and we're trying to accelerate. So between the DPA money, which is over 200, the 50s to 60 annual CapEx, any other supplemental sources of funding we get sometimes from from states and local municipalities. I think it all fits within our overall CapEx target and You know, to the extent we need more, it will be at the expense of something else in the legacy portfolio that we don't view as having the near term need or the ROI.
Speaker 1: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Christopher Kubasik: So, that's kind of how I see it. You know, there could be new markets down the road. Once we kind of catch up on this acceleration, you know, and those will be case by case. But there's a lot of exciting new technologies within Aerojet Rockadine, but the team is really focused on the backlog and the core business for now. And so I would just add in terms of your question, Ken around free cash flow for next year.
Christopher Kubasik: So to Chris's comments, we do expect income to grow so we think that that will be a tailwind from an overall cash perspective. We expect some kind of nominal improvement in working capital. And then offsetting that just as a reminder for everybody, our initial deal model on Aerojet assumed free cash flow creation in year two. So we expect those to be some kind of marginal impact, just in totality of where they're at in the program cycles. And then an overall cap ex, you know, we typically run around 2% we're not expecting any fundamental change in that level of investment as we go into next year.
Unknown Executive: Next question from the line of makers with Wells Fargo. Please just see with your question. Yeah, hey guys, good morning. Thanks for the question.
Unknown Executive: I wanted to ask if you could talk on LHX next a little bit and specifically just curious of the 500 million benefit that you call out how much you get to keep as any of that flow back to your customer or any other offsets we should think about. Yeah, thanks for this question. I'm glad we're getting to talk about it a little bit more. And so this is the next phase of our L3 and Harris merger evolution, if you will.
Unknown Executive: And so if you think about the initial integration savings that we did as a company, several hundred million along with some offsets, this is the next phase of this kind of the harder parts, if you will. And it's really focused on leveraging our scale to drive efficiencies and also functional organization to ensure that we're optimized for value creation. And so to your point specifically around the overall bottom line impact, we do anticipate that there's more investment that goes along with this phase of the journey.
Unknown Executive: So you'll see in our investor letter, we laid out about 400 million of investment. And so you should think of this more of the nominal tailwind from a margin perspective and not flow at all to the bottom line. But I do want to highlight a couple of tangible examples that the teams have already driven as we're in the early stages of this just so you can start to characterize what are we talking about when we're talking high level about LHX next.
Unknown Executive: And one of our recent wins, I'll compliment our HR team in Melvercita, they've done a fantastic job in renegotiating our employee benefit package, again leveraging the scale of the new L3 Harris portfolio to not only increase our benefits and also save on cost, but we're also going to be holding our employee benefit cost flats to employees. So this is really creating a win-win opportunity both from a shareholder perspective and our employees in terms of better benefits while maintaining the cost that they have to pull back to their family.
Unknown Executive: You just look at the programs which you don't have all the visibility to, I appreciate, but, you know, if you don't deep book profit and you don't have losses, you know, the margins will just naturally grow. So that comes back to the discipline and I will trade off revenue growth every day of the week for profitable programs. And it's easy to say, and sometimes it's harder to do, but if we can get to the point where we're not writing off money on programs for whatever reason, there's only overhead material and labor sound simple, but you have to get the right contracting vehicle, the right contracting terms, push back on the customer and negotiate a fair deal for all.
Unknown Executive: And that's something we are absolutely, absolutely going to do. So, you know, relative to the mix, you know, I think what you're getting at there is, you know, we do have a portfolio and we're always going to have cost plus jobs and fixed price and the cost plus jobs generally are development and on the front end of a potential long term franchise or a new idea program. So we will bid and we will win cost plus programs and we all know those margins are dilutive, but I look at it on a ROIC basis, it's effectively infinite.
Unknown Executive: So if we can get 9, 10, 11, 12% cost plus jobs that lead to low rate production, that lead to full rate production, that lead to exporting, that is the grand slam of new business, we will bid at each and every time. And it's a portfolio, as Michelle said, we run the company as a portfolio, we look at our financial results as a portfolio. Some segments have a good quarter, some don't, we put it all together, could not be more proud of the team and what we were able to accomplish in the third quarter.
Unknown Executive: We exceeded expectations on revenue, EPS and cash and something we're quite proud of. So I think with that, I'll just thank everybody for joining the call this morning and another shout out to the employees who are really coming through and delivering a great third quarter. I know we're all working hard on Q4 and can't wait to see everybody in early December for our investor day down here in Florida.
Christopher Kubasik: So with that, we will sign off and thank you again. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.