Q3 2024 L3Harris Technologies Inc Earnings Call
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Good morning, everyone welcome to the L. Three Harris technologies third quarter 2024 earnings call. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing star one on your telephone keypad you made.
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Speaker Change: Now at this time I'll turn things over to Mr. Dan gets a bitch Vice President Investor Relations. Please go ahead Sir.
Speaker Change: Thank you Bob Good morning, and welcome to our third quarter 2024 earnings call. Joining me. This morning are Christian Kern yesterday, we published our third quarter earnings release detailing our financial results and guidance. We've also provided a supplemental earnings presentation on our website. Today's discussion will include certain matters that constitute forward.
Speaker Change: Looking statements. These statements involve risks assumptions and uncertainties that could cause actual results to differ materially for more information. Please reference our earnings release and SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release with that I'll turn it over to Chris.
Speaker Change: For some opening remarks.
Chris: Good morning, everyone and thanks, Dan we had a very strong quarter and our strategy is delivering results.
Chris: Achieved record order volume and impressive book to Bill robust segment operating margins and solid free cash flow.
Chris: We're proud of the progress we've made so far this year and are confident that we are on track to deliver on the commitments, we made to our stakeholders.
Chris: Our customers tell us that we're agile fast and fully aligned with their priorities. This empowers us to deliver the right capabilities at the right time meeting the evolving needs of our nation and its allies.
Speaker Change: Our business model enables us to operate as either a prime.
Speaker Change: <unk> or merchant supplier offering commercial pricing or utilizing the traditional government acquisition approach. This flexibility in our platform agnostic approach gives us a unique advantage and rapidly adapting to the changing threat environment and addressing our customers' mission critical needs.
Speaker Change: It also enables us to effectively partner with new entrants and non traditional contractors we've.
Speaker Change: We've made key acquisitions, including Aerojet Rocketdyne and tactical data links while simultaneously divesting non core assets.
Speaker Change: These moves have allowed us to further hone our portfolio to reinforce our national security focus.
Speaker Change: Our capabilities in areas like resilient communications munitions space, ISR and passive sensing our innovative allowing us to deliver solutions across all domains and providing our customers with superiority across the entirety of the electromagnetic spectrum.
Speaker Change: Our diversified portfolio limits, our reliance on a single program, enabling steady growth with lower variability and a greater ability to manage risk over the long term.
Speaker Change: Partnerships are a hallmark of our trusted disruptor of strategy.
Speaker Change: On Wednesday, we announced a strategic partnership with talented <unk> working together to deliver advanced solutions to our customers.
Speaker Change: In fact yesterday, the White house order, the Pentagon Tandy Intel agencies to increase the use of AI. So I feel we're well positioned in this evolving market.
Speaker Change: We continue to focus on profitable growth. This approach allows us to grow while delivering sustained margin improvement, which will drive financial outperformance.
Speaker Change: Growth for Growth's sake is not our strategy, we prioritize profitable growth that drives the appropriate returns and cash generation.
Speaker Change: Our strategy to act as a sub or a merchant supplier also enables us to participate in key strategic programs, even when we choose not to prime.
I am pleased to report that we've made considerable progress on our innovative airway checks next program to transform L. Three air Harris and how we operate Ken would you like to elaborate.
Thanks, Chris.
Ken: On track to exceed our 2024 run rate cost savings target of $400 million and.
Ken: And now expect to achieve at least $600 million by the end of the year. We're also confident in our ability to reach our $1 billion cost savings target a year early.
Ken: And our pipeline provides opportunity for additional cost savings to exceed the $1 billion target.
The accelerated savings give us confidence that we will surpass the segment operating margin target of 16% that we set at our Investor day.
Ken: And we now expect to achieve at least 16% in 2026.
Ken: This performance highlights our ongoing commitment to transforming the way we work.
Ken: Improving operational efficiency and program management.
As well as aggressively managing all costs delivering value to our shareholders.
We are realizing the power of real time data across all of our systems ERP manufacturing engineering to name a few and even our products for better decision, making.
Ken: Moving into the next phase of Valley Chex snacks, our primary focus has shifted from workforce optimization to strengthening supply chain management and modernizing our digital infrastructure.
Ken: By leveraging the scale of our enterprise using modern AI enabled tools from partners like talented here, we're improving cost quality and delivery times for our customers at the same time this creates demand stability for our suppliers, giving them the opportunity to grow alongside us supply chain.
Ken: <unk> is becoming a competitive differentiator back to you Chris we.
Chris: We had several key wins during the quarter and our communications segment. We won a 600 million dollar next generation jammer contract. Following the cost plus development phase it will enable L. Three Harris to establish a long term jamming franchise worth billions of dollars in high margin production available on pods.
Chris: These types of wins are critical to driving sustained long term profitable growth and reinforced the strength and diversity of our technology portfolio.
Chris: Another highlight this quarter was securing one or two positions on a $1.2 billion of I D tied to contract with the U S. Navy to provide support for the P. Eight Poseidon fleet. This contract strengthens our relationship with the Navy within the ISR sector.
Chris: On the international front, we were awarded three contracts for software defined tactical radios by NATO allies totaling over $400 million we.
Chris: We began deliveries in the quarter again, displaying the speed at which we can provide capabilities to our customers.
Chris: The international demand for these resilient software defined radios with our proprietary waveforms highlights, our leading capability and low probability of detect and low probability of intercept communications. This is driving our allies to choose L. Three Harris solutions over antigen as products with increased.
Chris: Frequency.
Over the last several years, we have strategically invested in a new mission set bringing important capabilities in space based missile warning and missile tracking leading to orders for 50 satellite five of which are in orbit.
Chris: Our advanced solid rocket Motor Technology also plays a critical role in this mission set demonstrating our leadership in advanced missile and missile defense technology, including hypersonic counter hypersonic and precise attitude control.
Chris: This is illustrated by a recent win on the glide phase interceptor contract as part of an industry team, where we will provide two critical propulsion systems, including a large solid rocket motor for the first stage and an advanced motor to power. The third stage of the interceptor missile. This interceptor will defense against hypersonic.
Chris: Light vehicles, a real threat in today's environment.
Chris: The glide Phase Interceptor award establishes another long term propulsion franchise alongside our next generation interceptor win earlier this year, where we were part of a different industry team.
Speaker Change: With that I'd like to turn it back to Ken.
As we look ahead to next year, we anticipate growth across key financial metrics, including revenue segment operating margin EPS and free cash flow.
Ken: We're on track to achieve our 2026 framework of $23 billion in revenue.
Ken: At least 16% segment operating margin and $2 8 billion in free cash flow we.
Ken: We do expect the growth rate in 'twenty six to exceed 2025, given budgetary and political dynamics over the next few months.
Ken: We will provide more detailed 2025 guidance in January but these commitments are a testament to our ongoing focus on disciplined growth and profitability.
Ken: Our financial framework anticipates mid single digit organic revenue growth continued margin expansion.
Ken: And low double digit free cash flow growth as we achieve our targets.
Ken: As we reach our near term target debt leverage ratio of 3.0, and deploy excess capital to repurchase shares our free cash flow per share growth will accelerate into the mid double digits over our 2023 baseline.
Ken: Let's dive into the consolidated results for the third quarter, our fifth straight quarter of strong delivery of financial results versus expectations.
Ken: We're continuing to see strong demand across the board with New awards totaling over $7 billion this quarter.
This allowed us to achieve an overall company book to Bill of one four with all four segments delivering book to Bill of at least one.
Ken: Our Aerojet Rocketdyne and communications systems segments had particularly strong bookings this past quarter with both recording book to Bill well above one five.
Ken: Our total backlog has now reached a new record of $34 billion.
Ken: Turning to the financials consolidated revenue increased by 8% in the third quarter.
Operating margins improved to 15, 7% an impressive 70 basis point increase driven by a continuing program execution and operational performance.
Ken: With strong contributions from LH X next.
Ken: non-GAAP EPS grew by 5%.
And on a pension adjusted basis, our EPS increased by 8%.
Ken: Our performance so far in 'twenty four puts us on track to achieve the top end of our full year guidance range of 9% to 11% pension adjusted EPS growth.
Ken: We believe this is the best economic measure of our earnings per share highlighting how our disciplined focus is delivering strong bottom line results.
Ken: We recognize the need to take on risk to grow and as you can see from this quarter's results. We are managing our portfolio to enable profitable growth and limit risk to digestible single digit and low double digit millions we.
We generated over $700 million of free cash flow this quarter with adjusted free cash flow of $728 million, primarily driven by increased operating income and effective working capital management.
Ken: And we reduced overall debt by $325 million during the quarter, reducing our net leverage to 3.1 nearing our target.
Turning to segment performance, we saw we saw strong growth and see us with revenue up 10% supported by increased domestic and international demand for resilient communications equipment and related wave forms.
Ken: As well as higher volumes for night vision devices.
Ken: At IMS revenue was up 7% year over year. This was driven by increased volume of avionics products higher aircraft integration volume for international and domestic customers and increased volume for advanced electronics for space and munitions programs.
Ken: SaaS revenue was about flat due to the divestiture of the antenna business in Q2.
Ken: Lower F 35 related volumes as tier three development ramps ramps down and a few challenges on classified development programs and our space business.
Ken: This was offset by a classified program growth in Intel and cyber and increased volume supporting FAA mission critical safety of flight networks.
Ken: On an organic basis revenue growth for SaaS was 2%.
Ken: Aerojet Rocketdyne contributed approximately 600 million to our overall revenue this quarter.
Ken: We are pleased with the segment's performance and have booked significant new business to support future profitable growth as Chris mentioned.
Ken: Alright are turning our attention to margins.
Ken: <unk> delivered excellent margins of 26%.
350 basis point improvement year over year, driven by strong performance from higher volumes favorable.
Ken: Favorable high margin international mix proprietary wave form license sales and <unk> cost savings.
Waveforms sales a focused effort in the last few years are demonstrating our effective transitioning from hardware centric to software enabled products.
Ken: IMS also performed well reporting margins of 12, 2% up 30 basis points from the previous year, primarily due to improved program execution driving net positive EAC adjustments in the quarter.
Ken: As well as L. A chex snacks contributions and favorable mix in our commercial aviation solutions business.
Ken: SaaS margins declined to 11 six.
Ken: Largely due to a onetime license sale in the prior year and the previously mentioned challenges on classified development programs and our space business.
Ken: Partially offset by <unk> savings.
Ken: Aerojet Rocketdyne delivered margins of 12, 6%, which included $11 million of benefit from amortization of off market purchase price adjustments.
I'll remind you that these adjustments were always considered in our guidance.
As PPA amortize off we continue to expect economic profit of new programs to fill in the gap.
Ken: Turning to guidance given our strong performance. So far this year, we are increasing guidance again.
Ken: We now expect total company revenue of 21, 1% to $21 $3 billion.
Ken: <unk> operating margin of approximately 15, 5%.
Ken: Aps in the range of $12 95 to $13 15 per share.
Ken: And we're reiterating free cash flow guidance of $2 2 billion.
Ken: You can find additional segment guidance details in the earnings release and presentation on our website.
Ken: Overall, we're extremely pleased with our strong performance so far this year.
Reflecting on the progress the team has made since I joined L. Three Harris nearly a year ago I'm truly impressed by how we built on our strengths our agility and ability to make fast informed decisions are clear differentiators and it's this culture of innovation responsiveness decisive leadership and being up.
Platform agnostic honest broker that enables this company to deliver on our customers' most mission critical needs, while staying fully aligned with the commitments we've made to our stakeholders.
Ken: Looking ahead, I'm more and more confident about L. Three harrises trajectory, we've established ourselves as the trusted disruptor in the industry.
Ken: Continually pushing to disrupt through innovation, while maintaining a trusted and disciplined focus on operational excellence and financial performance.
Ken: The future of <unk> Harris is bright and this team will continue to unlock new opportunities to drive sustained value.
Speaker Change: Back to you Chris.
Chris: I want to reinforce that our mission is clear we are here to deliver for our customers' mission critical needs in an increasingly complex global threat environment. We are proud to be at the forefront helping to build our nation's next arsenal of democracy.
Chris: Unlike World War, two it's more than just building platforms. It's the convergence of hardware software and AI and we're uniquely positioned for the future.
Our team's work is vital to helping the warfighter ensure the safety and security of our nation and its allies and we remain fully committed to delivering the technologies and solutions that will protect and defend democracy.
Chris: Now, let's open the line for questions.
Certainly Mr. Q basic ladies and gentlemen at this time, if you would like to ask a question. Please press star one on your telephone keypad. If you find your question has been addressed you may remove yourself from the queue at any time by pressing star two we ask that you. Please limit yourself to one question and one follow up.
Speaker Change: We'll go first this morning to Sheila chaos glue at Jefferies.
Speaker Change: Good morning, Chris and Ken Thank you so much.
Sheila Chaos: Maybe Chris if we could start off big picture.
Sheila Chaos: That's a long term target of $23 billion of revenue, which implies an acceleration of organic growth from 24 level.
Sheila Chaos: Tony can you maybe talk about the biggest drivers of the acceleration what's left to capture what are opportunities that youre looking at given the strong book to Bill this quarter.
Speaker Change: Alright, good morning, Sheila and thanks for the question Yeah. If you recall in 2023 we had a book to Bill of 121, we're sitting at 1.14 after nine months and as Kevin said, we have a record backlog.
Speaker Change: I believe when I look at our portfolio that we are aligned with the important areas of the U S budget.
Speaker Change: And that will allow us to grow and meet our $23 billion commitment when I look at our CFS, we talked about the NATO software defined radios. There are other opportunities in Europe that we're looking at right now and just like we talked about last time, we still have a 10 billion dollar international pipeline and see.
Speaker Change: S alone on the space side, I think there's some well documented budget pressures here in the near term near term, but I think given the threat environment and as the customer continues to move missions from air to space.
Speaker Change: By 2026, we should be able to see more growth.
Speaker Change: In the out years and Aerojet Rocketdyne you know the operations are improving we're investing in the supply chain. We are investing in capacity that expansion should hit us in 2026, which will enable us.
Speaker Change: To accelerate growth I mentioned, the glide phase interceptor and the Nextgen.
Speaker Change: Interceptor as well so those are large solid rocket motor opportunities that are very very significant and then of course in IMS, we always have international ISR opportunities.
Which are a little lumpy, but given our good performance so far in that market I think that can provide us upside as well.
Speaker Change: Thank you.
Speaker Change: Thank you. We'll go next now to Myles Walton with Wolfe Research.
Myles Walton: Thanks, Good morning, I was hoping you could touch on the cost reduction.
Effort coming in a year ahead of time I think in in the Investor Day, you talked about when that billion dollar cost reduction efforts was accomplished that $400 million in benefit through the margins or are you at or near that in 'twenty five and if so why aren't you knocking on the door of 16% margins in 2012.
Speaker Change: Yeah, Let me, let me start with that miles. Good morning, then I'll, let Ken can you.
Speaker Change: To give a little more more detail, but this is this is a top priority for me and the entire leadership team I've talked in the past as to how we did the easy part of integration shortly after the merger and we were disrupted with the pandemic.
Speaker Change: And this is really a phase two of the integration, which we've.
Now talking about the transformation of L. Three Harris, we're looking at every single function every line of business were down to policies systems, and really just focused on eliminating non value.
Speaker Change: For waste and the systems.
Speaker Change: So we've been very aggressive we have dedicated leader and team focus on this $24 seven and you're starting to see the results I think there was a lot of skepticism I'm proud of the team I'm proud of the fact, we're ahead of schedule and it's quite exciting and we're going to continue to push.
To achieve that $1 billion next year and more thereafter, but.
Speaker Change: I'll, let Ken talk about the margin impact.
Ken: Yeah, Thanks, Chris and thanks for the question miles good morning.
Ken: In terms of the margin flow through I would say, we are absolutely tracking to the.
Ken: Target that we set and I think the team is working aggressively to try to realize additional margin opportunity out of the savings either through <unk> or through a combination of over delivery of the ultimate target as well as making sure that we can realize as much of the opportunity.
Ken: And turning to savings into into margins as possible.
Ken: We will give more detail on 2025 guidance in January.
Ken: We mentioned in the remarks that 2026 margin target has moved from approximately 16% to at least 16% and.
Ken: As we think about that it won't necessarily be linear path.
Ken: But we certainly see opportunity for margin improvement in 'twenty five as well.
Ken: Remember these are run rate savings, so we expect them to recur and certainly have long term benefit.
Ken: We're certainly focused on the long term, but we will see benefit in 'twenty five.
Ken: Through and.
Ken: Just as we look at it again the program has really performed well the team is firing on all cylinders and.
Ken: I really feel like it's it's delivering the results that we need.
Speaker Change: Alright, thank you.
Speaker Change: Thank you. We'll go next now to Richard Safran at Seaport Research partners.
Richard Safran: Chris Ken Dan Good morning.
Richard Safran: I'd like to ask you about talented if I might.
Richard Safran: The partnership that you talked about.
Richard Safran: Two things here first.
Richard Safran: If you could tell us what's the investment and profit sharing arrangement between the two of you and second could you go into a little bit about the strategic rationale for doing this I mean, you mentioned complementary capabilities.
Richard Safran: Seems to me, maybe you're looking to avoid a huge technology R&D spend here, but that was my view was I thought we get your take on it.
Speaker Change: Yeah, No Richard Thanks, There there is no upfront investment or capital for their this relationship goes back.
Speaker Change: About five years and before we signed a strategic relationship with another company. We wanted to make sure that the cultures are aligned our focus on mission was aligned and there's just a lot of great teamwork not only at the top of the two organizations, but throughout the organization. So it's based on.
Speaker Change: And that we wanted to take it to the next level.
Speaker Change: This will be both teams looking.
Speaker Change: For opportunities to bid we have one program where patents here is the prime Titan it's mobile.
Speaker Change: V S vehicular mobile network, where we're a sub provide into resilient comms comms architecture, the comm hardware through other programs, where we're going to prime and then there's R&D projects were working on together. So I would say it's business as usual and it's really putting the two capabilities together as far as the strategic rationale.
I mean could not a time to the whitehouse announcements any better that I referenced if you haven't had a chance to look at it I mean, they are really putting the pressure on the Dod and Intel agencies to two.
Speaker Change: To use AI more and you know I think what our secret sauce is there's no one company that can do it all they may think they can but there really isn't and our strategy of partnering and working with the best companies and a platform agnostic manner. I think is a key differentiator and to have the.
Speaker Change: Hi skills and the algorithms and the.
Large language models that they have is literally billions of dollars I don't have billions of dollars in five or 10 years to build it. So we are a team and work collaboratively.
Speaker Change: Could not be more and more excited about that.
Speaker Change: Maybe I'll, let Ken.
Speaker Change: I talked about the customer side and we also received a few calls from customers as early as yesterday. Shortly after the announcement, there's a lot of excitement about this and couldn't be more proud of the team, but we're also use them. There are products internally as part of <unk> Max I don't know Kevin do you want to give a couple of examples of how that is helping us.
Kevin: Sure. Thanks, Yeah, we're using.
Speaker Change: Talented product we call it unified data layer as I mentioned in my remarks, and enables us to look across all of our systems, whether those are ERP systems manufacturing systems engineering labor other EV.
Speaker Change: Even to the point, Chris talked about in terms of some of the customer opportunities looking across the data generated out of our products in order to do some of the advanced targeting real time targeting and things like that that are subject to the strategic partnership.
Speaker Change: But again back to some of the internals, we're using that data to make real time data driven decisions to drive costs down we've.
Speaker Change: We've seen that as a contributor in identifying not only.
Speaker Change: As for labor efficiencies factory efficiencies process improvements.
But it is contributing significantly to the supply chain as well so really excited about the partnership I think it's one of these where there's.
Speaker Change: Certainly benefit on the customer side and we are.
Speaker Change: Realizing that benefit upfront in our internal operations to really show how it will actually operation operationalize itself for our customers and I'll just chime in we recently rolled out a.
Speaker Change: For our program managers and their financial analyst.
Speaker Change: The ability to get data, even more timely real time and you know at the end of the day rich, it's all about managing your programs.
Speaker Change: The earlier you can get the data of the earlier you can identify opportunities and risks the easier it is to either realize those opportunities or mitigate the risks and it's always been a struggle in this industry to get timely data and.
Speaker Change: It's exciting are 800.
Speaker Change: Financial analyst have real time data and I think it's going to make a difference.
Speaker Change: And our operations in a positive way.
Speaker Change: Appreciate all the color thanks, guys.
Speaker Change: We'll go next now to Doug Harned at Bernstein.
Doug Harned: Good morning, Thank you.
Doug Harned: Hi.
Doug Harned: Let's see yes.
Doug Harned: You had.
Doug Harned: Good results with a.
No need or demand for radios, but when you look at it.
Doug Harned: At the outlook here and I would say first on the Army's Army and marine side in the U S and then on NATO.
Speaker Change: Well I guess since it's World series day, what inning are we in.
Speaker Change: Outfitting, the army and Marines and the U S with Nextgen radios, and then how do you see that playing out with NATO countries as well.
Yeah, Let me, we will start with the U S where you can't agree whether we're on the bottom of the third or the top of the fourth but somewhere between those two is where I think we're positioned here with the Dod theres still a lot of lot of strong demand are proud of the team we're now upselling.
Speaker Change: Our latest wave forms in addition to just the software defined radio sometimes thought of as hardware. Although it's all about the weight forms that gives us great great market opportunity and every time.
Speaker Change: There is an annual buy we continue continue to win so I'm pretty pretty excited there I'd say on NATO its probably even earlier you know maybe the second.
Speaker Change: Second is heading and what we're really seeing.
Is the interoperability is absolutely critical within the NATO countries are resilience our crypto Mod. These are all reasons why NATO countries are selecting us over their indigenous radio providers, it's a huge huge opportunity in fact.
Speaker Change: We recently.
Speaker Change: Wanna program with the Netherlands for one $4 billion over 10 years, that's going through the congressional U S congressional notification process.
I think one of the key lessons learned coming out of Ukraine is the need for this interoperability and the need for resilient comms and a majority of the NATO countries are in fact, not only signing up but spending to 2% of GDP that they committed to we have a couple of opportunities that we won here in.
Speaker Change: Q4 already in eastern Europe, the pipeline is healthy and.
Speaker Change: We're real real excited about.
Speaker Change: The software defined tactical radio business and as I said $10 billion International pipeline, Ken Yeah, Doug just to put a couple of numbers on the on the U S side to your question about Army and Marine Corps.
Speaker Change: In particular, the Dod has.
Speaker Change: Yeah.
Speaker Change: <unk> cycle, we think that's just shy of 500000 radios in the current cycle and.
Almost 150000 of those had been awarded we have seen about three quarters of those about 75%.
Speaker Change: Coming to L. Three Harris that leaves somewhere shy of 300000 radios to go so just put a little bit of numbers behind Chris's comments on the U S market.
Really good about that monetization cycle.
Speaker Change: And how we're doing against the competitive landscape. There you may remember theirs.
Speaker Change: A competitor or two in the handhelds as well as a different set on manpack in vascular.
And if I can as a follow on.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: This is something where it seems like on the edge of funding being stopped like every time, we turn around but then you go to next.
Speaker Change: The award how do you see the outlook for the night vision goggles there.
Speaker Change: Yeah, we're we're optimistic on the night vision goggles I think they actually.
Speaker Change: Put money in the budget for a change usually with a zero and then we go to D C and try to get the money to put back in this time of the money is actually in there I think its ultimately going to be.
Speaker Change: How how high Vas and the virtual reality augmented reality.
Speaker Change: Plays out I think it's pretty well documented that they are behind schedule and they're struggling and.
Speaker Change: You know the <unk> is a is a.
Speaker Change: <unk> product for our Warfighters. So I think the two we're also going to be used.
Theres going to be a convergence, but I think it's safe to say, we feel a lot better about the night vision goggle business now than maybe a year or two ago and again some of these.
D O D procurements are split buys and we've been winning the majority.
Speaker Change: Bye Bye a fair amount as we are meeting our commitments, we're delivering on our competitor is behind so the army is always going to award the business to the company, that's delivering and performing that's what we're doing and we'll watch it closely but feel pretty good about it.
Speaker Change: Doug.
Doug Harned: Right. Thank you.
Thank you we'll go next to Matt Akers with Wells Fargo.
Matt Akers: Yeah, Hey, good morning, Thanks for the question Chris.
Matt Akers: I wanted to talk about.
The progress you guys are making on the cost savings and obviously that a lot of that goes to all three but a lot of it also goes to your customers and sort of how they are responding to that are they take notice of that.
Matt Akers: But our competitive competitiveness, maybe helping you convert some of those orders you got this quarter.
Yeah. Thanks, Thanks, Matt as you would imagine I and my team spend a lot of time in D C.
Matt Akers: What the customers and.
Matt Akers: It's always flattering when they ask you how things are going and how the OE checks next is growing because they're looking at it not only as a cost savings, but a transformation the use of digital engineering.
Matt Akers: The ability to make data driven decisions more and more timely.
Matt Akers: It gives a ken and I and the team the flexibility as we roll up our new bids.
Matt Akers: We know what our labor costs are we know what our materials, we know what our overhead are and it allows us to either share some of that with the customer or bid higher margin programs. We tried to split the two and you know based on these book to Bill rates and the win rate is.
Clearly given us given us an advantage and.
Matt Akers: Couldnt be more and more excited about it but it is definitely front and center with the with everybody we meet with.
Speaker Change: Okay. Thank you.
Speaker Change: We'll go next now to David Strauss at Barclays.
David Strauss: Thanks, Good morning.
David Strauss: Good morning.
Speaker Change: Hey, Chris so far.
Speaker Change: The margin progress we've seen it's been pretty ratable across the individual segments.
Speaker Change: As you progress from here up above 16%.
Speaker Change: How do you see that kind of playing out you still see a similar margin opportunity across the individual segments.
Speaker Change: Yeah, Yeah, we do David we see it at the segment level and of course, we we see it at the sector level, we have 13 sectors and the mantra has been everybody has to improve their margins and we have a toolbox on how to do that.
Speaker Change: Ken mentioned the next phases on supply chain, both indirect and direct cost I'm really excited about that we've had some early progress.
Speaker Change: And I think the opportunities are great again, the hard part is getting all the data and once we know how much we spend with each supplier, we're able to sit down and negotiate kind of a.
Speaker Change: A win win situation so.
Speaker Change: I'm excited about that <unk> is an interesting number if we looked at our 13.
Speaker Change: Sectors.
Speaker Change: Don't think there's anybody really close to 16, Ken there's a bunch of people well above 16, and a bunch of people below 16, so the.
Speaker Change: The guys, making 11 need to get to 11 to 11 511, eight and the people, making 25 or 30 and need to go to 26% and 32, so everybody's going forward <unk> snacks, an enterprise wide initiative benefits are spread across the company.
I'm excited about the progress I don't know Ken anything you want to add yes, I was just going to say in terms of.
Speaker Change: The margin progress.
Speaker Change: <unk> is certainly a big part of that but.
But I think at the end of the day. It's also.
Speaker Change: The investments we've made in the team and the tools our performance on our programs.
Speaker Change: One of the big contributors.
Speaker Change: Just solid performance getting some of the.
Speaker Change: Negative.
Speaker Change: <unk> out of the system, we talk about bidding discipline and I don't want that message to come across is that means we're not bidding new work. We are bidding. We think we have a more effective cost structure than our peers and that gives us the ability to win.
Speaker Change: And.
Speaker Change: Determine what the right amount of margin opportunity is for us and what the right amount of lower cost is for the customers.
So as I look at it certainly a piece of it is.
Speaker Change: Avoiding some of the lower margin.
Negative program issues, we saw in the past certainly working with the supply chain pricing and inflation, we sort of had to deal with some of the inflationary pressures as an industry.
Speaker Change: Back during the pandemic, but we're now on new program is able to reflect that more appropriate cost.
Speaker Change: And again really focusing on kind of bid to win and knowing what our cost is and I think having a better view that that we are more.
Competitive than many of the peers so.
Speaker Change: It's kind of that combination of all of those.
Speaker Change: Various pieces that I think help us drive to the margin upside and Thats, what gives us the confidence in saying, we're going to get to at least that 16% in 2026.
Speaker Change: Great that's helpful and a quick follow up.
So you can I think.
Speaker Change: You talked about a low double digit free cash flow per share growth out through 'twenty six.
Speaker Change: It would imply a pretty pretty significant pivot back to to share repo.
Speaker Change: Kind of kind of soon here as you approach your targeted leverage although I just wanted to kind of confirm that.
Speaker Change: Yeah. Thanks, David that's confirmed.
Speaker Change: We talked about 500 million in share repurchases in 2025, we have now hit that target year to date.
Speaker Change: 2024, we have now hit that target year to date in terms of leverage we're at three one which is near that three <unk> target that we talked about that should enable us to get back to more value creating.
Speaker Change: Share repurchase levels in 'twenty five 'twenty six 'twenty four we mentioned we would be at least kind of offsetting dilution from.
Speaker Change: Our equity incentive plans and that sort of thing so.
Speaker Change: Absolutely I think youre thinking about it right and we're excited about this as really what we see as one of the contributors to value creation for our shareholders that growing free cash flow per share at solid.
Speaker Change: Mid teen double digit clip.
Speaker Change: Sure. Thank you.
Speaker Change: Thank you we'll go next now to Michael CMO Lee at Truest.
Speaker Change: Hey, good morning, guys. Thanks for taking the question.
Speaker Change: Ken just maybe one quick clarification on the margin performance.
Speaker Change: Fees in the quarter and then just.
Speaker Change: On the competitive.
Speaker Change: Environment, I guess, specifically as it relates to solid rocket Motors, you know theres been some new entrants it looks like you've got a collaboration going on with Gd and Lockheed and maybe Thats targeting your MLR S program I mean, I guess I'm just trying to get an update on your sense of confidence.
Speaker Change: And maintaining or even growing some of your share gain aerojet, where you've got seemingly like I said, some new start and trend some existing players.
Speaker Change: So just a general update there.
Speaker Change: Yes, great. Thanks, Michael I'll start and then I'll turn it over to Chris on the <unk>.
Speaker Change: Some of the new entrant question as well.
Speaker Change: Look from a margin perspective, and the question about <unk>.
Speaker Change: The adjustments.
Speaker Change: We are as.
Speaker Change: As I mentioned delivering on our programs.
Speaker Change: Talked about we did realize some some program pressures in particular in the space area on a couple of classified programs that we bid a number of years ago. These are very important programs to our customers I think they enable.
Speaker Change: Critical missions and we're proud of the work that our team does in that area certainly realizing some.
Speaker Change: Schedule pressure and working to accelerate and that's been driving a little bit of cost on us, but I think it also represents the power of our portfolio, where we were able to work on some of our other programs realize some upside to more than offset that pressure and still generate 70 basis points.
Speaker Change: Growth in margin rate year over year.
Speaker Change: In terms of the Eac's, we were positive in three of the four segments as I mentioned.
Speaker Change: MFS was positive this quarter take that as a real.
Speaker Change: No.
Speaker Change: Good sign about the performance on their programs and the stability stability that that team is generating on their performance.
Speaker Change: SaaS as I mentioned did realize some challenges and ended up in the red.
Speaker Change: For the third quarter, but again, where we are.
Speaker Change: We're happy that the team is working together all rowing in the same direction.
Speaker Change: To offset.
Speaker Change: What are those manageable pressures that we see in a significant.
Speaker Change: Growth area for this company.
Speaker Change: In terms of out of the question in terms of the question on <unk> and new entrants.
Speaker Change: I would say.
Speaker Change: Look we recognize whats going on Chris has talked about the importance of partnering with new entrants as a part of our trusted disruptor strategy. We certainly are doing that and the aerojet as well.
Speaker Change: We've got a few partnerships that we're working to do.
Speaker Change: See if there is more upside than risk in terms of the new entrants to the question on <unk> specifically.
Speaker Change: We see that as a significant growth opportunity.
In terms of the customer need and.
Speaker Change: There has been discussion of significant increases in capacity needed. There we are working hard at aerojet to increase our capacity.
Speaker Change: And as as the customer there is looking at how they get there.
Speaker Change: They are looking at other opportunities, we're figuring out how we maximize our share of that opportunity and.
Speaker Change: That's a significant growing market for us more than we ever anticipated at the time of acquisition and certainly at the time and diligence and the team's working hard to make sure we get at least our fair share of that opportunity.
Speaker Change: Yeah.
Speaker Change: Mike will give you a little little Maura, Kimler, specifically, which I think is what that a joint venture or a teaming arrangement that you mentioned.
Speaker Change: Army has recently been talking about a need for 32000.
Speaker Change: Solid rocket Motors a year. We're currently producing based on our capacity 8000, we're making investments to ramp to 10 to 14 call. It 12 in the midpoint.
Speaker Change: There's just more demand than there is supply so we welcome the competition.
Speaker Change: We have the best technology, we have the infrastructure were building new buildings, we've already bought equipment to ramp up and just to put it in perspective, just out of our Camden, Arkansas facility, we deliver 100000 solid rock solid rocket Motors, a year 100000 solid rocket motors. So that's just a data point.
Speaker Change: It takes a long time to develop new rockets to get them qualified get them tested we welcomed the competition but.
Speaker Change: More pleased with the acquisition of Aerojet today than than I was a couple of years ago. The demand is strong and the team is performing so.
Speaker Change: Great.
Speaker Change: Great color thanks, guys.
Speaker Change: We'll take our next question now from Gautam Khanna at TD Cowen.
Gautam Khanna: Hey, Thanks, and great results.
Speaker Change: Thank you.
Gautam Khanna: I wanted to ask.
Gautam Khanna: Just if you can give us an update on tech refresh three where that stands and then if you could also just opine on.
Gautam Khanna: The margin progress you've made at IMS.
Gautam Khanna: Getting some of those challenges.
Gautam Khanna: That were there last year under control.
Gautam Khanna: Yeah.
Yes.
Speaker Change: F 35, I know theres been a lot of discussion.
Gautam Khanna: Discussion on tier three.
Last several days I, just want to clarify that were under contract with Lockheed Martin through lock 19. So we are not experiencing any financial headwinds or impact from their negotiations, but I will say, it's a great team effort. We're all working together on this from the prime to the subs and our ourselves to make sure.
Gautam Khanna: Sure. These aircrafts get delivered and fielded as soon as possible overall, we're meeting our commitments on tier three whether you look at.
Gautam Khanna: The core processor or the memory system or the cockpit display. So it's been a good good effort get a weekly updates on the progress from the team and I think the customers end user and the prime are happy with.
Gautam Khanna: With what we're doing so pretty good in that regard.
Gautam Khanna: Relative to IMS you've seen the.
Gautam Khanna: The improvement.
They are clearly performing well, we're getting a new leadership in place a few years ago, we're investing in system.
Gautam Khanna: The customer relationship is improving and we're <unk>.
Gautam Khanna: I'm pretty good pretty good progress so we're pleased with the.
Gautam Khanna: The margins on IMS, and they're kind of getting back to where they were just a few years ago, which again I don't think anyone thought was possible but deliberate.
Speaker Change: To elaborate on what Ken was saying, it's more than OE Chex snacks is program execution is negotiation.
Speaker Change: Identifying when the customer wants changes in getting change orders. They don't want it we don't get paid for it we don't do it.
Speaker Change: But that goes across the board so good progress all the way around.
Speaker Change: Thank you.
Thank you well go next now to <unk> kubicki at Alembic Global.
Speaker Change: Hey, good morning, guys nice quarter.
Speaker Change: Great.
Speaker Change: Right.
Speaker Change: I'm just wondering if you guys, obviously kind of broke the year out between first half heavy domestic.
Speaker Change: Domestic mix at tactical radios second half heavy.
Speaker Change: International and were seeing that playing out with the margins can you give us a sense of how 2025 might play out <unk> versus 24 do you expect a similar mixed domestic international and 25 versus 24 or will it shift one way or another.
Speaker Change: Thanks, Pete in terms of CFS in the margin I would say a couple of things one in terms of 24.
We did talk about a profile that was a bit more domestic in the first half international in the second half.
And that's playing out as we expected.
Speaker Change: Some of the first half domestic heavier mix was a catch up from a number of international deliveries we made in late 'twenty three.
Speaker Change: And then I think the team did a great job in responding quickly to some of the international demand that we saw and a number of the awards that <unk> received in the third quarter, we're actually not just booked into opportunities, but they were able to ship products to international customers in the same quarter.
Speaker Change: I should make sure to highlight that the way form strat.
Our strategy is working and we saw that play through as a driver of the 26% margins at CSN.
Speaker Change: Over 300 basis point increase in margin year over year.
2025, I would say look we'll give more.
Guidance for 'twenty five in January, but I don't necessarily expect to see as much of <unk>.
Speaker Change: Timing delta between domestic international quarter to quarter or first half second half, we've got growing demand both domestically internationally.
Speaker Change: And as the team has expanded capacity.
Speaker Change: Spaniard testing ability one of the things that they've done that I think is great at CES has invested in some test capability, where they can test multiple radios on single stands whether those are for domestic customers are international customers, that's driving some efficiency.
Speaker Change: And because of that I think we'll be able to see both growing domestic and international.
Speaker Change: 2025.
Speaker Change: Again, as we think about that profile will give you more information in January.
Speaker Change: But it should be I would think a bit more stable in the mix as we look forward.
Speaker Change: Just just chime in our confidence and twenty-five which we'll talk about in January is there's probably going to be better than it has the last couple of years on on CFS in particular the.
Speaker Change: The software defined radio business, if you recall in 'twenty, one 'twenty two the supply chain was really a headwind as we've talked about them kind of hard to deliver a radio. If you don't have all the parts, but Ken and I were going through some things earlier this week and.
Speaker Change: I know what youre going to find its hard to believe but Pete we actually are confident today that our supply chain is in better shape today than it was before the pandemic. So you talk about looking for a silver lining in the pandemic, we have a much more resilient supply chain, we have alternative parts with venture.
Speaker Change: Third our long term strategic agreements, where it makes sense and I think that's gonna give us confidence.
Speaker Change: And that in that particular sector that we didn't have not only during the pandemic, but before the pandemic so pretty exciting progress.
Speaker Change: We don't go back to the norm, it's the new norm and it's much better and supply chain than it ever was so thought I'd show that insight.
Speaker Change: That's great I appreciate it a.
Speaker Change: A quick follow up guys.
Speaker Change: What are your farms Ah reforms now.
Even higher margin than international at this point I don't know if you want to answer that or not but the way you are talking it almost seemed like it is.
Speaker Change: Yes, they are.
Speaker Change: Okay I appreciate it thanks guys.
Speaker Change: Thank you well go next now to assess safety and at J P. Morgan.
Speaker Change: Thanks, very much and good morning.
Speaker Change: Right.
I definitely appreciate all the.
Speaker Change: The investment that you guys have made and Eric and the demand there just looking specifically at the cadence and in the fourth quarter and just kind of again to the low end of the range there.
Speaker Change: It requires a pretty big step up sequentially and year over year, I guess, what kind of gives you the confidence in that and then to what degree do we think of that as something that's maybe.
Seasonal impact versus something that's kind of breaking free in terms of.
Speaker Change: The peso.
Speaker Change: It's out there.
Speaker Change: Yeah. Thanks I. Appreciate the question, we are making really good progress as we mentioned I think in a really operationalized <unk> for the capacity and to realize the opportunities that we see.
Speaker Change: In terms of revenue growth it does take time to get.
Speaker Change: Some of that capacity increase in place, we're starting to see some of the investments that we've made pay off.
Speaker Change: That should start to kick in from a revenue perspective.
Speaker Change: They have been working hard on integration and their own <unk>.
Speaker Change: Peace of cost management.
Whether that's integration or la chex snacks, and driving our costs down has been a little bit of a headwind on revenue as well as.
Speaker Change: Some of the just the legacy contracts.
Speaker Change: That were in place at the time of the acquisition hanging around for a little longer than we expected.
Speaker Change: That's also been a little bit of a headwind, but as we look forward to the fourth quarter.
Speaker Change: There is some timing of <unk>.
Speaker Change: Supply chain.
Speaker Change: Costs flow through and things like that that we see giving us confidence to the full year.
Our.
Speaker Change: Revenue range for the 2024 guide so we're feeling pretty good about about both I think most importantly, the long term trajectory and the investments that we're making to drive our ability to realize that as well as the full year guide.
Speaker Change: Our guidance on revenue and margin rate at a R.
Speaker Change: Thank you we'll go next now to Peter Arment at Baird.
Peter Arment: Yeah. Thanks, Good morning, Chris and Ken really nice results.
Peter Arment: Hey, Chris maybe just.
Peter Arment: Get your latest thoughts on just any updated thoughts on portfolio shaping you talked about some businesses that maybe you wanted to potentially divest and just given the only check that so all of the progress that youre doing there just your latest thoughts there I appreciate it.
Speaker Change: Yeah. Thanks, Thanks Peter.
We continue the process, we have a couple of smaller.
Speaker Change: Properties that are in the market.
Speaker Change: So I don't know if we'll be able to get anything closed in Q4, we might announce something and we have a process that.
We're following none of these would really.
Speaker Change: I don't think be viewed materially $50 million year 100 million there type thing but.
Speaker Change: We're really refining.
Speaker Change: The portfolio and the amount of management oversight at the time and effort.
Speaker Change: With the small entities and the strategic.
Speaker Change: Value to us sometimes doesn't align but.
Speaker Change: These are good businesses in the right hands, it's always who's the best owner and we have a handful that we think others would be better owners of and we will keep you informed but.
Speaker Change: Uh huh.
Speaker Change: A it in a couple of hundred million here or there range.
Speaker Change: Hope that helps leader.
Speaker Change: Yes, I appreciate that and just a quick follow up Ken just since you've been now and it will create for it.
Speaker Change: Just about a year, just how youre thinking about the opportunities with working capital and I know you touched upon the free cash flow growth.
Speaker Change: Your latest thoughts there are you seeing any opportunities without a check next et cetera.
Speaker Change: Yeah. Thanks from a working capital perspective, we certainly want to be.
Speaker Change: Effective.
Speaker Change: Managers of the capital required to run the business that being said we are working on our plan for profitable growth and that takes some investment and at times that means.
Speaker Change: Kind of investing in the business, whether that's capex or working capital to drive those growth opportunities and we're willing to make those investments we look at that and we and we see it as being a part of this free cash flow growth that we drive probably with.
Growth in operating income driven by again that profitable growth at the topline flowing through with increasing margins as the biggest contributor to the free cash flow growth.
Speaker Change: But then also effective working capital management being a part of that but I want to be clear. We are not short term. It's in terms of working capital. We think about the health of this business for the long term.
And we make those important and hard decisions.
Speaker Change: To invest.
Speaker Change: And that that is enabled by <unk> snacks, managing every dollar of cost.
Speaker Change: As we've made difficult decisions around.
Speaker Change: Our workforce around our infrastructure around the tools that we're investing in to drive benefits in the supply chain all of those things enable us to make the investments needed to drive that profitable growth. So we feel really good about it the team certainly knows how to do.
Speaker Change: Effective working capital management, but really the growth and the increase in profit is the biggest contributor to that growing working I'm, sorry, growing free cash flow that we see.
Speaker Change: Appreciate all the color thanks, guys.
Speaker Change: Although let's let's take the last question.
Speaker Change: Certainly we will take that question now from Jason Gursky at Citi.
Hey, guys. This is Jeremy Jason for Jason Gursky today, Thanks for sneaking me in.
Speaker Change: I was just wondering if you could provide an update on the trends going on with <unk>.
Speaker Change: <unk> in your efforts would be proliferating, one factory space architecture programs you guys have made some good strides here and have been investing in facilities to support them. So I was just kind of curious since things have been tracking as planned or.
Speaker Change: What do you think might be next for the company in this area.
Speaker Change: Okay. Thanks, Thanks for the question.
Speaker Change: We actually just review the T D L business cases, with our board of directors.
Speaker Change: We're actually a little ahead of the business case that we presented.
Speaker Change: We successfully moved everything into our Salt Lake City facility as part of that process, we streamlined the flow and the operations hours are down.
Speaker Change: Supply chain Leverages, improving and we've received significant orders.
Speaker Change: Product called bats D handheld link 16 sold the first one.
Speaker Change: Long long time or actually lots of them.
Speaker Change: In a while so we're really happy with the progress we've made there link 16 demos.
Speaker Change: And space are going well and.
Speaker Change: I talked earlier about <unk>.
Speaker Change: Acquisitions that align with our national.
Speaker Change: Defense and security and being aligned with the budget and a customer and he is a perfect example, Brazilian communications you've heard us say for years I'm, telling you that that's the future. We're in the sweet spot we have the technology, we got the workforce, we've got the capability and.
Speaker Change: We're starting to see it pay off so.
Speaker Change: I think with that I'll, just wrap up before concluding and take a moment to acknowledge the efforts of the team their dedication and innovation continue to drive our success and transform not only our country, but the industry. This quarter in particular, we faced significant challenges from tornadoes to her.
Speaker Change: Caines, yet our teams have consistently risen to the occasion.
Speaker Change: This resilience of overcoming obstacles as a testament to the strength and adaptability of the workforce.
Speaker Change: Not be prouder of what we've accomplished together so despite these challenges we've made tremendous progress I'm confident that we're well positioned to build on this momentum in the years ahead and I. Thank everybody for joining the call and we'll talk to you again in January.
Speaker Change: Thank you Mr. Key basic ladies and gentlemen, again that does conclude the <unk> technologies third quarter earnings call again, thanks, so much for joining US everyone and we wish you all a great day Goodbye.
Speaker Change: Sure.
Speaker Change: [music].