Q4 2024 L3Harris Technologies Inc Earnings Call
Yes.
Yeah.
Speaker Change: Good morning, ladies and gentlemen, and welcome to the fourth quarter 2024 elsewhere Harris technologies earnings call. At this time all lines are in a listen only mode.
Speaker Change: The presentation, we will conduct a question and answer session. If at any time. During this call you need assistance. Please press star zero for the operator.
Sunny: This call is being recorded on Thursday July 30th 2025, I would now like to turn the conference over to Jan Kit. So rich. Please go ahead.
Speaker Change: Thank you Joanna good morning, and welcome joining me. This morning are Chris and Ken earlier today, we published our fourth quarter earnings release detailing our financial results and 2025 guidance. We've also provided a supplemental earnings presentation on our website. Today's discussion will include certain matters that constitute forward.
A word 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 off.
Speaker Change: Chris.
Chris: Okay. Good morning, everyone and thank you Dan we delivered on our commitments for 2024 by executing our trusted disruptor strategy and making progress towards our 2026 framework. We ended the year with record backlog that positions us well for the future two.
Chris: 2024 was a pivotal year for <unk> III Harris as we marked the five year anniversary of the transformative merger between <unk> and Harris.
Speaker Change: The combination formed a new company that now operates differently.
Speaker Change: <unk> nimble and fast while delivering solutions that are trusted by our customers across all domains. We.
Speaker Change: We span the gap between the traditional primes and the new entrants forming partnerships around critical capabilities, such as AI and autonomy, allowing us to rapidly meet the evolving needs of national security and modern warfare.
Speaker Change: Domestically National and Homeland Defense remains a key priority for the new administration with strong support for our programs in areas such as space missiles advanced electronic systems.
Speaker Change: <unk> and resilient comps.
Speaker Change: Internationally, we saw strong demand for our software defined radios night vision goggles, and munitions, reflecting our commitment to supporting allies around the world.
Speaker Change: Partnerships remain a cornerstone of our trusted disruptor strategy in 2024, we advanced collaboration with Palin tier and venture capital backed startups, focusing on AI enabled solutions and emerging technologies.
Speaker Change: These partnerships are accelerating a culture of innovation and speed enhancing our ability to meet customers' needs faster and more effectively.
Speaker Change: Let me highlight some of our key accomplishments this year.
Speaker Change: We want that next Gen jammer competition, which establishes us as a long term jamming franchise worth billions of dollars in production of airborne pods to support the F 18 fleet.
Speaker Change: Our wins on the glide phase interceptor and next generation interceptor programs will drive growth in our solid rocket motor business for decades to come.
Speaker Change: Along with the propulsion content on the previously won Sentinel and Zeus programs, we are solidifying our position as a global leader in large solid rocket motor design and manufacturing capability.
Speaker Change: We want a $1 billion <unk> award for the U S. Navy to provide resilient communications technology to U S and Allied forces over the next five years, our broadband communications business will deliver software defined link 16 terminals that are critical to enabling secure and resilient collaboration across.
Speaker Change: <unk> are ground maritime and space platforms by.
Speaker Change: By integrating link 16 in this space based assets, we are expanding its reach in utility ensuring U S and Allied forces have seamless connectivity and situational awareness across all domains.
Speaker Change: As a testament to our trusted disruptor strategy at work.
Speaker Change: <unk> led by L. Three Harris partnering with venture backed startups was selected by the defense innovation unit to prototype a command and control system capable of operating hundreds or even thousands of swarming autonomous assets.
Speaker Change: This project advances the Dod's Replicator Replicator initiative.
Speaker Change: Integrating advanced commercial technologies to enable collaborative autonomy in all domains.
Speaker Change: Our open system architecture supports rapid integration of third party algorithms, providing unmatched scalability and flexibility to meet mission demands.
Speaker Change: By combining these capabilities with our expertise we are shaping the future of warfare, ensuring U S and Allied forces maintain a competitive edge in contested environments.
Speaker Change: As you saw in the press last week I recently took steps to strategically align our leadership team to drive sustained profitable growth.
Speaker Change: Ken has been appointed President of Aerojet Rocketdyne effective Monday in addition to his responsibilities as CFO.
Speaker Change: With his extensive defense sector experienced Ken will drive operational excellence and continue our strong performance.
Speaker Change: <unk> role has been expanded to lead enterprise strategic collaboration agreements to further elevate our focus on partnerships, while continuing to have the communication systems segment.
Speaker Change: We are also elevated the la <unk> next organization, which has been led by Heidi Wood for the last year and achieved excellent results. She will report directly to me as we continue to drive cost savings, while accelerating enterprise wide transformation.
Speaker Change: Lastly, I want to thank Ross neighbor golf for his contributions to L. Three Harris first as CTO and then as president of Aerojet Rocketdyne.
Speaker Change: His leadership has been instrumental in positioning Aerojet rocketdyne for long term success.
Speaker Change: After a distinguished career Ross has chosen to step down to focus on his family's health.
Speaker Change: And enjoy a well deserved retirement.
Speaker Change: I'm also pleased to have been elected chairman of the board of Governors for the Aerospace Industries Association, the leading voice for the industry.
Speaker Change: As our country navigate an increasingly complex global threat landscape, maintaining our technological edge has never been more critical public.
Speaker Change: I look forward to partnering with my industry colleagues, the incoming administration and Congress. The Leverages the ingenuity of our World Class U S talent and drive innovation that strengthens our competitive advantage.
Speaker Change: Looking ahead to 2025, our priorities remain clear to drive profitable growth, while meeting our customers' evolving mission critical needs.
Ken: I'll now turn it to Ken to provide details on our financial results.
Ken: Thanks, Chris and good morning, everyone. Let me recap full year 2024 real quick.
Ken: Revenue was $21 3 billion up 10% and 4% organically.
Ken: Segment operating margin was 15, 4%, reflecting continued cost savings and strong execution non.
Ken: non-GAAP EPS was $13 10.
Ken: Free cash flow grew to $2 3 billion, representing an increase of 14% driven by earnings growth and effective working capital management.
Ken: For the fourth quarter revenue was $5 5 billion up 4% organically with a segment operating margin of 15, 3%.
Ken: non-GAAP EPS was $3 47.
Ken: And free cash flow came in over $1 billion.
Ken: Turning to our segment fourth quarter results.
Ken: <unk> delivered revenue of $1 7 billion down 4% year over year, largely reflecting the divestiture of the antenna business.
Ken: Organically revenue was down 1%.
Ken: Primarily due to lower F 35 related volumes as our tier three mission computing hardware transitions from development.
Ken: Two a more gradual production ramp.
Ken: Operating margin was 10, 8%.
Ken: Up 20 basis points, primarily due to la checks next cost savings and partially offset by challenges on some of our fixed price development programs in space.
That are in the later later stages of completion.
Ken: IMS delivered strong results with revenue of $1 8 billion up 9% and margin of 13, 4%.
Ken: Spanning by 150 basis points. This.
This performance reflects strong program execution and a favorable mix.
Ken: We're pleased with the momentum at IMS and feel confident in the strength and resilience of this business as it continues to perform.
Ken: CFS achieved revenue of $1 4 billion up 5% driven by demand of software defined resilient communications equipment.
Ken: Operating margin was 24, 4% driven by a heavier mix of deliveries to USD Dod customers.
Ken: We are seeing particularly strong demand in international momentum, winning key programs as NATO allies and expanding into other international markets.
Ken: To remind you international and domestic mix fluctuate based on quarterly delivery profiles.
Eric: Eric <unk> Rocketdyne grew 5% with an operating margin of 11, 5%.
Eric: Up 40 basis points supported by progress on solid rocket motor production and offset by lower volume in space propulsion.
Chris: Now, let me turn it back to Chris to cover some operational achievements for 2024.
Chris: Let me start with our portfolio, we completed the integration of the Aerojet Rocketdyne and tactical data link acquisitions, and we also divested our antenna products and Aerojet ordinance, Tennessee non core businesses.
Chris: We further strengthened our leadership position in space delivering four satellites to orbit for the SDA and one for MDA or.
Chris: Our progress in satellite systems and space superiority continued to gain momentum in 2020 for reaching a record backlog of 40 satellites in just five years.
Chris: Noteworthy achievement, considering we started with no satellites as a prime.
Chris: A significant highlight in our SaaS segment was successful completion of the customers' engineering design review for <unk>, 18th space vehicles under the Sba's tranche two tracking layer program. This.
Chris: This milestone confirms our advanced space vehicles equipped with infrared payloads to detect track and target hypersonic threats meets the rigorous requirements of the program.
Chris: <unk>. This milestone in just 11 months reflects the speed agility and expertise of our team.
Chris: These satellites are part of the space forces Leo constellation, providing global missile tracking and defense with 38 satellites awarded a crushed across tranche zero, one and two including those already on orbit. We continue to support the efforts to advanced integrated deterrence with debt.
Chris: Tranche three opportunity on the horizon, we are well positioned to expand our role in building. This critical layered missile defense system.
Chris: Furthermore, this capability positions us well to support the evolving defense needs of the U S and aligns closely with the Trump administration's recent executive order directing the development of an iron Dome missile defense shield for our homeland.
Chris: We've also made significant progress on our <unk> next initiative in 2024, we exceeded our gross cost savings target by two X, reaching $800 million.
Chris: This strong performance provides confidence in our ability to accelerate and exceed our overall cost savings target.
Chris: We are now expecting to achieve $1 2 billion in cumulative cost savings by the end of 2025 exceeding our $1 billion commitment a year early.
Chris: This initiative is driving margin expansion operational efficiency facility rationalization and enhanced supply chain management.
Chris: At its core La sex next the bodies the same principles as dose tailored to drive greater speed and efficiency to allow data driven decision making.
Chris: We are driving improvements across our operations and supply chain, simplifying and streamlining internal policies to eliminate inefficiencies and monetizing end of life assets to sharpen our focus and unlock value.
Chris: This program enables us to respond more effectively to evolving customer needs, while creating value for our shareholders back to you Ken.
Ken: Turning to guidance for 2025, we expect revenue of $21 8 billion to $22 2 billion, representing organic growth of 4% at the midpoint our.
Ken: Our guidance includes a full year of our commercial aviation solutions business as we continue to work towards closing the transaction.
Ken: Segment operating margin is anticipated to be mid to high 15%.
Ken: Supported by continued <unk> cost savings strong program execution, and reflecting investments to drive continued transformation.
Ken: Free cash flow is expected to be two four to $2 5 billion driven by growth higher profitability and disciplined working capital management or.
Ken: Our guidance reflects appropriate risk posture early in the year and the dynamics associated with the New administration.
Ken: We assume a continuing resolution through March 25.
Ken: And no other funding delays or impacts.
Ken: The administration has issued several executive orders that are still being assessed but.
Ken: But are not expected to have a significant impact on our 2025 results.
Ken: However, as U S government contracting officers assess the impact of these executive orders on existing and new contracts, we could see an effect on our Q1, 'twenty five bookings and revenue, particularly at CES, which can deliver which can deliver product rapidly against order intake.
Ken: Beginning in 2025 following comments for many of our investors. We are revising the reporting of non-GAAP EPS to exclude adjustments for amortization of acquisition related intangible assets.
Ken: This change aligns our reporting with peers and has no impact on our underlying profitability or cash.
Ken: If this change had been applied for 2024, non-GAAP diluted EPS would have been $9 70, reflecting.
Ken: An impact of $3 40 per share or.
Ken: Our 2025, non-GAAP EPS is projected to be in the range of $10 55.
Ken: To $10 85.
Ken: Representing growth of 10% at the midpoint.
Ken: At the segment level SaaS revenue is expected to grow to a range of six 9% to $7 1 billion.
Ken: Reflecting budgetary constraints in the space sector that we expect to abate in 2026.
Ken: Operating margin is expected to be in the low 12% range.
Ken: IMS revenue is projected at seven to $7 2 billion driven by increased demand and advanced electronics for space and munitions programs as well as maritime solutions with an operating margin in the low 12% range.
Ken: <unk> revenue is anticipated to be five six to $5 7 billion with margins in the high 24% range supported by increasing demand for our software defined resilient communications equipment.
Ken: Eric <unk> Rocketdyne is expected to reach approximately $2 5 billion.
Ken: Fueled by double digit growth in the missile solutions business.
Ken: Margins are expected to be in the mid 12% range as we drive continued operational improvements.
Ken: As we set our 2025 guidance, we want to highlight the varying number of weeks in certain quarters in 2025.
Ken: It will result in some variability in revenue and EPS between quarters.
Ken: In particular Q1 is a short 12 week quarter and should be considered in your modeling.
Ken: Our capital deployment strategy reflects our commitment to delivering value to our shareholders.
Ken: We strengthened our balance sheet and ended 2024 with a net leverage of two nine times.
Ken: Exceeding our target of three point now.
Ken: With that achievement, we will maintain a competitive dividend and are focused on repurchasing at least $1 billion of shares in 2025.
Ken: Additionally, we had another solid year performance in our pension plan with no significant contributions in 'twenty four and none expected in 2025.
Ken: To further derisk, our balance sheet, we are working to transfer approximately $1 2 billion in pension assets and liabilities.
Ken: Through a third party with little gain or loss and no impact on cash flow.
Ken: Taking advantage of attractive funding levels and interest rate environment.
Ken: We expect to complete this action by the end of the first quarter 'twenty five resulting in a reduction in non cash non service fast pension income, which is reflected in our guidance.
Ken: Considering our strong performance in 2024, and our growing confidence in the cost savings at the <unk> next program. We'll continue to deliver we are also updating our 2026 financial framework announced at our Investor day last year and.
Ken: And increasing the segment operating margins, we expect to achieve to low 16% in 2026.
Ken: We're continuing to target $23 billion of sales in 2026.
Ken: Representing 5% organic CAGR.
Ken: $2 8 billion in 2026 cash representing a double digit CAGR with further upside on our free cash flow per share basis.
Ken: I am proud of the tremendous progress our team made in 2020 for this year has been one of transformation.
Ken: Rose and strong execution underscoring the strength of our portfolio and the talent of our team.
We have faced a dynamic and demanding environment, but our ability to be agile and execute with discipline has allowed us to deliver strong results from achieving record backlog to advancing key strategic priorities, we have demonstrated resilience.
Ken: The ability to deliver on our commitments even in the face of challenges.
Ken: And we remain focused on delivering for our customers and our shareholders.
Ken: As we continue to build on this momentum I'm excited about what's ahead.
Ken: The opportunity before us is meaningful and our strategic focus on operational excellence and innovation positions us well for sustained profitable growth.
Chris: With that I'll turn it back to Chris.
Chris: As we look ahead, we remain steadfast in our commitment to driving innovation and delivering mission critical solutions that align with our national security priorities.
Chris: As we navigate an increasingly complex threat environment L. Three Harris continues to stand at the forefront of innovation in National Defense, Our vision for the nation's next Arsenal of democracy is rooted in the convergence of cutting edge hardware software and AI technologies that insurer mission success in every domain.
Chris: Concept goes beyond traditional platforms. It's also providing adaptable scalable open and interoperable solutions that give our warfighters a decisive edge, whether it's and resilient communications advanced munitions space space capabilities, we are enabling the department of defense and our allies to stay ahead.
Chris: Ed of evolving threats.
Chris: Recent letter to the Doe's I outlined key recommendations to modernize the national defense ecosystem. These.
Chris: These principles reflect our dedication to advancing efficiencies strengthening collaboration and ensuring that the U S maintains a technological edge we.
Chris: We encourage others to come forth and submit ideas to the dose Committee we're.
Chris: We are excited to work with the new administration to bring these and other ideas to life and continue playing a pivotal role in supporting the missions that protect our homeland.
Chris: And our allies around the world.
Chris: The incoming administrations transparency and understanding of the defense industry sets the stage for disruptive change in 2025.
Chris: We expect a period of unprecedented evolution in defense priorities and policies.
Chris: With our agility speed and commitment to innovation, we are well positioned to adapt.
Chris: This new era of presents a chance to redefine how we support the war fighter and we're excited to play a pivotal role in driving this change forward and seize opportunities that align with our nation's strategic objectives.
Chris: Our work is critical to empowering empower and the war fighter, who protect democracy, ensuring that they have the tools to maintain global stability with a deep commitment to innovation and collaboration we are proud to play a central role in this effort.
Joanna: Joanna let's open the lines for questions.
Chris: Thank you.
Chris: Ladies and gentlemen, we will now begin the question and answer session.
Chris: Last quick question. Please press star one on your Touchtone phone you will hear that Johan has been raised.
Chris: In consideration of other callers today, we ask that you please limit yourself to one question.
Chris: Should you wish to decline from the polling question. Please press star two.
Speaker Change: Your first question comes from Peter Arment Baird. Please go ahead.
Speaker Change: Hey, Thanks, Good morning, Chris and Ken and Dan.
Speaker Change: Hey, Chris maybe maybe just to start with.
Speaker Change: You can kind of finished which is you wrote a letter to the Doe.
As.
Speaker Change: Leaders just before the inauguration in.
Speaker Change: We recommended for I think policy recommendations.
Speaker Change: Have you heard any feedback or have you had any active discussions and how do you think this is all going to play out.
Speaker Change: With kind of dose impacts on the Dod.
Speaker Change: Your occupancy, which I think you've called out many of times.
Speaker Change: Just how youre thinking that obviously its been an overhang on the group.
Speaker Change: We've seen a lot of valuations compressed so be curious your thoughts thanks.
Peter: Yes, Thanks Peter.
Peter: I am excited about the dos and I tried to parallel the similarities what we've been doing this this past year and as I think as to how we got as a nation.
Peter: Each and every policy and regulation has put in place to reduce risk and they're well intended but when you step back after a few decades I believe the cumulative effect of.
Peter: Of all of these risk reduction policies and procedures are actually created more risk and they've actually resolved or mitigated. So to answer your question received lots of.
Peter: Positive feedback from members of Congress and the Pentagon last week, a couple of other classified meetings I think a lot of people read the letter.
Peter: I'm really just trying to start the dialogue I think Congress plays a role I think the Dod plays a role the Warfighter plays a role in I think it is important for industry.
Peter: And to be part of this ecosystem and give their perspective I know several others have started to write letters.
Peter: Hi throughout four recommendations is probably better ones are different ones. It's really just trying to start the dialogue get people to sit down and say how can we go faster and get better capability to the war fighter quicker and.
Speaker Change: I am excited about the future and I think as I said, there's going to be unprecedented change in 2025, and some will be able to adapt and take advantage of it we plan to be one of those companies.
Peter: And maybe others won't but let's.
Peter: Let's see what the future brings.
Speaker Change: Thank you. The next question comes from Myles Walton at Wolfe Research. Please go ahead.
Myles Walton: Thanks, Good morning.
Speaker Change: You've got $150 million, you get about $150 million of growth in free cash flow in 'twenty, five and then $3 $50 million at the midpoint placeholder for growth in 2006.
Speaker Change: Your flesh out what specifically accelerating and then also on the increase in <unk> next to $200 million, how much of that drops through to actual margin savings versus savings for the customer.
Speaker Change: Yes, I'll take that one in terms of growth and free cash flow.
Speaker Change: <unk>.
Speaker Change: Pretty well aligns with the growth profile that we've.
Speaker Change: Laid out.
Speaker Change: Sure.
Speaker Change: And the top line, 24% to $25 26.
Speaker Change: It accelerated in 2006 as we've mentioned on the top line.
Speaker Change: A couple.
Speaker Change: Items that are resulting in some better opportunities for growth 26 F 35 with tier three.
Speaker Change: Hardware.
Speaker Change: Development ramped down and then the production ramp being a bit more.
Still kind of climbing that ramp in 'twenty five but accelerating in 26, there is a little bit of space budget challenges in 'twenty five we do see the potential to get some.
Speaker Change: Space Awards fold into 25 that will drive 26 revenue.
Speaker Change: And then a little bit of international opportunities as well at IMS, So a little bit of a better growth profile and 26% and 25 continued margin expansion from where we are today to mid to high <unk> and 25% and then low sixteens in 'twenty six.
Speaker Change: And then I would say effective working capital management team, we'll we'll continue to do that and I think if you kind of run that through it will support the growing free cash flow.
Speaker Change: Profile, both in 'twenty, five and in 'twenty six.
Speaker Change: To the to the <unk> question.
Speaker Change: We're still holding to.
Speaker Change: Our target of about at least 40% of the savings will result in margin opportunity for the company.
Speaker Change: And as.
Speaker Change: As we look at that there's obviously some timing of.
Speaker Change: How that works you got to factor in the percent complete on the various.
Speaker Change: Contracts that we've got in place at any point in time.
Speaker Change: It was certainly a strong contributor in 'twenty for margin expansion. It will also be that in 2005.
Speaker Change: And then certainly supporting the 26 margin expansion to low 16% margin rate as well so.
Speaker Change: We will certainly work to try to see if we can drive some upside to that.
Speaker Change: Above the 40% cost savings into and the margin opportunity I think the team's working hard on that.
Speaker Change: Every day, but as of now.
Speaker Change: That's kind of what we're seeing in terms of actual delivery of the opportunity to to that target that we set.
Speaker Change: Thank you. The next question comes from Douglas.
Speaker Change: Please go ahead.
Speaker Change: Good morning, Thank you.
Speaker Change: I wanted.
Speaker Change: See how youre looking at the communications systems business.
Speaker Change: There's a lot of things that sort of line in there that seem to allow some real margin upside.
Speaker Change: The software sales for new wave forms more exports.
Speaker Change: Commercial contracts with <unk> next that could flow right through.
Speaker Change: Your guidance for 2025 is still below 20%, 25% margin.
Speaker Change: Where is this going to where's the potential margin expansion here because it seems like you've got a lot of the ingredients in place to get.
Speaker Change: Above the 24% range.
Doug: Yeah. Thanks, Doug I appreciate it as I mentioned I'll just point out a couple of things.
Doug: As I mentioned in the prepared remarks, certainly as we're looking at.
Doug: 25, we've got to go and continue to perform in the business.
Doug: Early in the year, and we're certainly thinking about it from us.
Doug: From a risk.
Doug: Adjusted perspective TST.
Doug: <unk> team has demonstrated the ability to produce product to generate margins.
Doug: Just in terms of looking at margins for 25 at CES I would say a couple of things one we're.
Doug: Certainly evaluating the mix between USD O D as well as international deliveries.
Doug: From a software perspective, I think we've talked about that kind of comes in chunks here and there.
Doug: So we've got to go continue to drive strong deliveries in terms of.
Doug: Waveforms that are both integrated into the products and driving high margin.
Doug: Product opportunity as well as wave form upgrades.
Doug: Where we really see the opportunity for high margin business.
Doug: And then from an <unk> perspective, the CF team certainly has been doing a great job of integrating the.
Doug: The costs.
Doug: Four.
Doug: The margin.
Doug: <unk>.
Doug: Compression that we saw in the fourth quarter really was related to the mix of.
Doug: U S Dod deliveries versus international we're at a higher mix in the end of 'twenty three.
So I think the team is doing a great job I do think.
Doug: We'll continue to work to to.
Doug: Meet if not beat our segment guidance and I know the CS team will be off.
Doug: <unk> been working on that so.
Doug: Feel good about the opportunity and we will update you later in the year.
Doug: I'll just chime in.
Doug: Seeing.
Doug: Finally, more and more opportunities to bid and win.
Doug: <unk> and <unk> system, so the market is going beyond.
Doug: Beyond just selling the software defined radios in the waveforms that you said so.
Doug: Finally get into more of our network and systems approach and I think that's kind of give us some some additional tailwind.
Doug: If all of the segments. This one probably has the highest.
Doug: Inflation impact from the supply chain given all of the electronic components. So we have to absorb and offset that with not only with <unk>, but our <unk> savings, but the trend is positive and we're optimistic.
Speaker Change: Thank you. The next question comes from Sheila <unk>.
Speaker Change: At Jefferies. Please go ahead.
Speaker Change: Good morning, Chris and Ken Thank you.
Speaker Change: Maybe I'll follow up Ken on the $1 $2 billion of Alisha Max aircraft.
Speaker Change: You raised it by $200 million and a 20% drop through to the bottom line. It's about an extra 30, perhaps on top of your peer high margin though.
Speaker Change: Where are you seeing that come through the most what's really driving some of those opportunities open up you could just talk about maybe.
Speaker Change: KBR checkmark.
Speaker Change: Yeah, I'll start and then let Ken Yes, we're seeing it from a variety of places supply chain I think we're finally.
Speaker Change: We had a pretty good year in not only getting the savings with building the resilience of our supply chain not only the indirect materials, which we probably did it first and there is a little easier now we're working on direct materials and subcontract management.
Speaker Change: No.
Speaker Change: I think those are going to be big drivers were continuing to look at the facility rationalization and.
Speaker Change: The org structure and roles and responsibilities so.
Speaker Change: I think there is some some additional opportunities similar buckets to what we had before but in parallel. We're also as I mentioned, transforming the business as well and making the investments necessary to digitize the company.
Speaker Change: To allow the employees to get data quickly and that is also factored into our guidance. So it is just not a one 2 billion.
Speaker Change: Gross run rate cost savings, we're reinvesting in the business.
Speaker Change: Even better and more efficient place to work for the employees. So you net that down and as you know even a 40% to 30 bps comes in over overtime as Ken said, depending on the percent complete.
Speaker Change: Counting and such so I think it's been a huge success and amazing accomplishment.
Speaker Change: We'll hit the $1 two in two years and given the size of the company very proud of that tack that on to the $650 million, we did right at the merger.
Speaker Change: The homeless taken out $2 billion of costs in six years.
Speaker Change: Which is pretty impressive in my opinion.
Speaker Change: Anything else, Ken I would just add Sheila that.
Speaker Change: We certainly.
Speaker Change: Delivered on the cost savings in 'twenty four.
Speaker Change: Hunk of that.
Speaker Change: Was some difficult decisions, we had to make around labor, we did realize some labor savings thats probably.
Speaker Change: The costs that results in.
Speaker Change: Quickest turn into.
Speaker Change: The savings turning into actual costs flowing through the EAC is working.
Speaker Change: Working hard on some other opportunities Chris mentioned supply chain facilities, and then transformation some of the systems and how we work and those take a little bit more time to flow through the eac's it into the actual realization of the savings. So we're certainly tracking that so.
Speaker Change: In terms of your question on Kpis certainly the generation of the savings, but then also.
Speaker Change: <unk> and through the businesses, how do we track those through to actually delivering on the savings ordering against new.
Speaker Change: Agreements things like that long term agreements and that sort of thing. So I think we got the right approach without the right metrics. The team is fully aligned in delivering.
Speaker Change: I think it certainly continues to contribute to the margin profile 25 and into 'twenty six.
Ron Epstein: Thank you. Our next question comes from Ron Epstein of Bank of America. Please go ahead.
Ron Epstein: Yeah, Hey, good morning, guys.
Speaker Change: Chris how are you thinking about.
Speaker Change: The environment right now with regard to M&A.
Speaker Change: That's to say with the New administration, maybe things change and.
Speaker Change: <unk> got some assets for sale.
Speaker Change: There anything out there that youre thinking about that could be a.
Speaker Change: Bolt on technology, maybe an investment in something like more venture oriented given the push towards.
Speaker Change: Some of the startups, Brian how are you thinking about that.
Brian: Yeah. Good morning, Ron Great. Great question I do think this administration will probably be more.
Speaker Change: Favorable towards towards allowing acquisitions as you know we made two in 2023 they made.
Speaker Change: Perfect sense for us strategically they did not eliminate competition even in the prior administration, we were able to get two acquisitions approved.
Relative to the way I look at it.
Speaker Change: We've really tried to take more and more of this partnership approach.
Speaker Change: AI is a hot market and I think we have some interesting.
Speaker Change: Partnerships and opportunities I've tried to highlight what we're doing with.
Speaker Change: With talented specifically, we actually have a couple opportunities that we will be bidding on competitively as a team.
Speaker Change: In the next several months that could actually be awarded in 2025 that debt deal with Nextgen command and control an army network modernization of course, we have to go win those but it's easier in my opinion to find partners and work with them when it comes to AI and even even autonomy I think we own small parts of up to.
Speaker Change: 40 different venture backed companies now so we're pulling that technology through.
Speaker Change: And.
Speaker Change: The next step if we do anything would be a bolt on type.
Speaker Change: Acquisitions have to fill a niche or to expand the capability, but nothing has come our way yet we continue to.
Speaker Change: Review and get lots of inbound calls in.
Speaker Change: Not many of them get a whole lot of traction I'd like the playbook, we have we're transforming the company we're buying back our stock will grow in the margins in fact, when we hit our 2026 goals.
Speaker Change: We will have grown our revenue margins and free cash flow four consecutive years.
Speaker Change: Just straight up operationally no.
Speaker Change: No exceptions no exclude this exclude that just good old fashion organic growth margin expansion free cash flow four straight years.
Speaker Change: Hard to argue against that playbook, and we're executing on it and proud of what the team has done.
Speaker Change: Thank you. The next question comes from David Strauss of Barclays. Please go ahead.
Speaker Change: Thanks.
Speaker Change: Arnie.
Speaker Change: Yeah.
Speaker Change: Good morning.
Speaker Change: A couple of clarifications I guess.
Speaker Change: On CASM that divestiture I think you mentioned at Campbell.
Speaker Change: Exactly how much of revenue is assumed there and I guess what is taking so much time for that deal to close.
Speaker Change: Thing and then.
Speaker Change: EAC.
Speaker Change: They were in the fourth quarter and what you're assuming for 2025.
Speaker Change: Yes, thanks, David from a cash perspective.
Speaker Change: There is.
Speaker Change: Working through some.
Speaker Change: Regulatory and other processes in 2024.
Speaker Change: There are some.
Speaker Change: Different joint venture aspects to that and just getting all the parties in the same room and an agreement on that.
Speaker Change: Do you.
Speaker Change: Anticipate that that transaction will close in 2025.
Speaker Change: From a guidance perspective, 2024 kind of felt like we were hoping would close in the debt and we have kept having to update so we thought rather than having to update each quarter. We would just include it and then we've got obviously just back it out once when it.
Speaker Change: When it closes so we thought that was kind of the easiest way to.
Speaker Change: To reflect that business.
Speaker Change: In terms of in terms of the timing I wouldn't predict it we do think it's going to be in 2025.
Speaker Change: And the revenue of that business is.
Speaker Change: Somewhere north of.
Speaker Change: 500 $600 million.
Speaker Change: In terms of how that business looks no major impact on trends at the company level from a growth perspective or other.
Speaker Change: EAC to your question on that one we did deliver positive eac's at the company level in the fourth quarter.
Speaker Change: As well we delivered positive EAC positive net EAC is for the full year of 24.
Speaker Change: When we file the 10-K, I think you'll see somewhere.
Speaker Change: 40 ish million of positive EAC is for 2024.
Speaker Change: And I think even in the face of some program challenges, we've talked about a couple of classified programs and our space business.
Speaker Change: Are seeing some some issues as we work through integration and test type activities.
Speaker Change: As our kind of legacy programs that have been around for a while.
As we've moved into.
Speaker Change: Prime positions, whereas working through some of the.
Speaker Change: Int aspects of those types of programs.
Speaker Change: But even with that we were.
Speaker Change: We're able to.
Work hard generate strong program performance and see positive Acs in 'twenty four.
Speaker Change: As we look at 'twenty, five we don't really project or predict.
Speaker Change: Positive EAC performance. So our guidance generally assumes that we would have flat Acs and 25.
Speaker Change: And as we're able to perform on the programs and hopefully.
Speaker Change: Generate strong performance and net positive the Acs and 25 that will.
Speaker Change: The upside to our to our guidance and our performance for.
Speaker Change: For the programs and across the segments, Chris do you want to comment on that one I just wanted to David emphasize what Ken said on these eac's.
Speaker Change: We have literally thousands of programs in what we do is complicated and nothing is easy and nobody is perfect but this.
Speaker Change: This team finds a way to deliver on its commitments.
Speaker Change: Occasionally there's there is tens of million dollar challenge or a couple of million dollars here and it just adds up.
Speaker Change: But we take our <unk> savings, we take our other innovative and creative ideas and we meet our.
Speaker Change: Our commitments, we don't make excuses, we don't back stuff out where do you see is what you get in these margins are inclusive of all the good news in all of the Bad news and.
Speaker Change: We're going to continue to run the business that way and find a way to deliver.
Speaker Change: And I think that's the culture, we built and that's what the team wakes up every day focused on.
Speaker Change: Thank you. The next question comes from Seth Fleishman at J P. Morgan. Please go ahead.
Seth Fleishman: Thanks very much.
Speaker Change: Good morning.
Seth Fleishman: Maybe just two.
Seth Fleishman: Follow up on that on the.
Seth Fleishman: The space.
Seth Fleishman: Charges.
Seth Fleishman: Should we think about the magnitude there being kind of the difference between.
Seth Fleishman: The guided margin and kind of where things landed and then I think <unk> mentioned in the in the materials that those programs, we are nearing completion and kind of.
Seth Fleishman: How close are we to completing those programs.
Speaker Change: And how much risk remains.
Seth Fleishman: Yes, Seth from our space program perspective so.
Seth Fleishman: I guess at a high level I would say we've got a couple of classified programs we're working through.
We are as I mentioned at a.
Seth Fleishman: A significant percent complete we do expect those programs to we.
Seth Fleishman: We will continue to monitor them through 2025, we will continue to manage risk through 2025.
Seth Fleishman: During 'twenty four we did realize probably about $100 million.
Seth Fleishman: Negative adjustments or negative EAC is.
Seth Fleishman: Across a couple of those space programs.
Seth Fleishman: <unk>.
Seth Fleishman: Clearly as the Christmas comment as the team works hard we were able to largely offset that so.
Seth Fleishman: That's kind of the way to think about it.
Seth Fleishman: I do expect will for the most part.
Seth Fleishman: That risk behind us in 2025, as we think about some.
Seth Fleishman: Customer milestones.
Seth Fleishman: Early in 2006, and given the nature of the programs I probably can't comment.
Seth Fleishman: Any further than that.
Seth Fleishman: But.
Seth Fleishman: We will continue to work on the team's got a got a good approach.
Seth Fleishman: Datas data is coming in and working through those things and we're very comfortable with.
Seth Fleishman: What we've guided for 25, so I think it's the same story you hear from everyone. A lot of these are.
Speaker Change: Fixed price I was wondering a couple of our fixed price development programs, some going back seven eight years pre merger and.
Seth Fleishman: I think I've been pretty.
Seth Fleishman: Pretty pretty clear on my my views on these high risk fixed price development programs. So we have to have to run through these and you shouldnt assume in all cases that were the prime so it even gets.
Seth Fleishman: Little more complicated when you have to integrate.
Seth Fleishman: With the prime and such so.
Seth Fleishman: That said we are.
And the we're kind of in the Red zone to use a football analogy and we've just got to get these things in the end zone and continue to grow the.
Seth Fleishman: Missile tracking business, which is sequentially profitable each and every order and focus on the SDA <unk> III wind.
Seth Fleishman: Later this year.
Seth Fleishman: Thank you. The next question comes from Gautam Khanna at TD Cowen. Please go ahead.
Gautam Khanna: Yeah. Thanks, good morning, guys.
Seth Fleishman: Okay.
Speaker Change: Ken I was wondering if you could elaborate on some of your objective now with your increased role at HRD.
Seth Fleishman: Yeah.
Seth Fleishman: Sure Yes. Thanks for the question I'm really excited about the opportunity and.
Seth Fleishman: As we look at as we look at Aerojet Rocketdyne I think the priorities are clear.
Seth Fleishman: There is absolutely.
Seth Fleishman: An incredible amount of demand in the market for solid rocket motors to support critical mission needs of not only our country, but also its allies.
Seth Fleishman: In addressing the geopolitical threats and issues that are out there.
Oh, absolutely, making sure that we are increasing our capacity and we have been making investments to do that we'll certainly be making sure that we're doing everything we can to drive capacity on the missile side of the business.
Seth Fleishman: On the space propulsion side really looking at how we.
Seth Fleishman: Drive.
Seth Fleishman: <unk> on that side of the business and really think about how we deliver that capability we've got.
Seth Fleishman: I think a solid business Thats got like an eight to 10 year backlog and really thinking about how we maximize our performance there make some investments and positioned for continued.
Seth Fleishman: Opportunities on that side and then I think there are some important business there.
Seth Fleishman: The Artemis program, which really is important in terms of.
Seth Fleishman: Returning to the Moon.
Seth Fleishman: I think we've been clear that.
Seth Fleishman: That's a priority as a country.
Seth Fleishman: So very much focused on kind of continuing the leadership there delivering on our commitments.
Seth Fleishman: And.
Seth Fleishman: Really trying to get back to.
Seth Fleishman: Growth and.
Seth Fleishman: Increasing profitability and cash flow at Aerojet.
Seth Fleishman: And certainly continuing to make sure that we focus on delivering our commitments from a finance perspective.
Seth Fleishman: I'd just say.
Seth Fleishman: I think Chris and the board's confidence in allowing me to take on this additional role does highlight.
Seth Fleishman: The strong team that we've got in place or have put in place both in aerojet.
Seth Fleishman: As well as on the finance side of things. So I am proud of the team that we've built.
Seth Fleishman: And I look forward to working with them to to deliver results.
Seth Fleishman: Not just for air jet, but also a cross sell three years.
Speaker Change: Thank you. The next question comes from Gavin Parsons UBS financial Please go ahead.
Gavin Parsons: Great. Thanks, Good morning, Ken.
Seth Fleishman: Hey.
Speaker Change: Could you size the drag on revenue growth from the <unk> next savings outperformance and then just a clarification to the 2026 targets also still have kaz fully incorporated.
Speaker Change: So in terms of the.
Speaker Change: Impact on revenue growth from LH ex snacks.
Speaker Change: We are driving the cost savings through certainly does have a have an effect on our on our revenue and I will remind everyone.
Speaker Change: Primarily on cost plus programs, but it does also impact longer term fixed price programs as well as those run through kind of the same EAC model.
As we look at 2025.
Speaker Change: Our growth projections I would think about.
Speaker Change: Maybe as.
Speaker Change: In terms of the incremental cost savings thinking maybe half of that would be.
Speaker Change: A headwind to revenue growth.
Speaker Change: And then in terms of I think the second part of your question was 2026 revenue and commercial aviation solutions business and.
Speaker Change: In case it wasn't clear cash in 2025 from a guidance perspective. It is not in 2026 revenue from a framework perspective and again, we wanted to include it in 25, just so that we didn't have as much nor.
Speaker Change: And the system as we did in 'twenty four expecting the close and then having to update guidance. So commercial aviation solutions in 25, not in the 23 billion.
Speaker Change: The framework for 2026 revenues I hope that answers the question.
Thank you. The next question comes from Michael ceremony at <unk> Securities. Please go ahead.
Michael Ceremony: Hey, good morning, Thanks, guys.
Michael Ceremony: I wanted to go in that same direction Ken.
Chris So so thinking about cash and the 26 framework what do you guys see in the backlog that really drives the doubling of that growth rate.
Michael Ceremony: From 25 to 26, when you strip out cost.
Michael Ceremony: Yeah, Let me, let me take that one Michael.
Michael Ceremony: Yes.
Speaker Change: First of all the portfolio I'll start with our current portfolio.
Speaker Change: And we look at the National Defense strategy, and what we think is going to happen.
There's going to be a lot of focus.
Speaker Change: In space Maritime cyber comms, ISR and munitions, we have multi billion dollar businesses in each of those areas. So I think the core portfolio is going to kind of fuel some growth we've talked about some of the challenges.
Speaker Change: That's a space.
Speaker Change: Forces had with their budget, which has been impacting the industry, but I think thats going to correct by 2026 and of course, the whole focus on.
Speaker Change: On <unk> com or the Pacific region, and the need for Comms and network. So I like the portfolio and I think we're going to get some tailwind there.
Speaker Change: Prior question about the the drag if you will from La Chex snacks.
Speaker Change: It is a drag a little bit in a cost plus environment or.
Speaker Change: Maybe even where we have these.
Speaker Change: Truth of negotiation.
Speaker Change: Cost and pricing data <unk>.
Speaker Change: Scenarios, which is why in my Dotage later, one of the things is if we have competition lets us get an RFP out submit some beds and let's let's go fast let's not have.
Speaker Change: Months of auditing too to do a relatively quick and competitive bid so.
I think we're going to win more business with a lower cost base.
Speaker Change: How I think of it in that regard I think international we're still around 21, 22% of our business is international it's been a lot out on there.
Speaker Change: From executive orders and such but at the end of the day.
Speaker Change: From an Fms foreign military sales perspective that money comes from the local countries or is nationally funded by the ultimate customer. So I think that provides a tailwind to us I think the administration has been pretty clear that they want each of these countries to pay their fair share <unk> increased our budgets.
Speaker Change: Happening the other half of our business is direct commercial sale. So that does not even have to go through the Fms process.
Speaker Change: We're looking hard at the partnerships with AI I gave a couple of examples with talent here I think by 2026 can we get an extra percent or plus of growth.
Speaker Change: From what I call. These disruptive partnerships and venture capital and go on fast I believe so and the team does as well so when I kind of look at those areas.
Speaker Change: Just yesterday, something popped up on border security.
Speaker Change: Again, not a focus of the current administration, we provide all the comps for the customs and border control, we have the comps for the military seems that these two agencies are working collaboratively.
Speaker Change: At least on the southern border.
Speaker Change: That provides us opportunity to have that capability St.
Speaker Change: Networks so.
Speaker Change: Between international border security AI our portfolio.
Speaker Change: Our lower cost base.
Speaker Change: We see a path to the 23 billion yes.
Gautam Khanna: Yes, I would just add Michael I mean from my perspective, a couple of things and we've talked about this in a little bit in the prepared remarks, but F 35 hardware delivery ramping space has a little pause in 25 back to growth in 'twenty six international ISR, certainly era jets starting to kick in from.
Speaker Change: Solid rocket motor perspective.
Speaker Change: Yes, both international demand as well as the next Gen jammer win really starting to kick in volume wise in 26 as well.
Richard Safran: Thank you. The next question comes from Richard Safran at Seaport Global. Please go ahead.
Speaker Change: Chris Ken Dan Good morning.
Richard Safran: Now I'd like to ask you about.
Speaker Change: Thank the Pentagon almost interest you are just a recognition that Tom.
Speaker Change: The impact of fixed price development contracts contract without inflation escalators et cetera, now assuming you agree I want to know.
Speaker Change: If you see major changes coming to the contracting environment do you think they're going to be more remarks with good execution and how quickly do you think these changes get implemented thanks.
Speaker Change: Yes, I have to believe based on everything I've seen and in Red and the people Ive met with them as a reminder, I think it has only been 10 days.
Speaker Change: <unk> operation So things are going real real quick, but there is just a.
Speaker Change: A desire and overall desire to go quicker.
Speaker Change: When I mentioned earlier, the Doe's org.
Speaker Change: Organization, which is more than a person or two it's a whole enterprise.
Speaker Change: The ideas and the suggestions are going to come pretty pretty quickly. So.
Speaker Change: Maybe by the middle or end of this calendar year there'll be some changes that could could affect by by 2026.
Speaker Change: The things that high throughout and I as I said I'm sure there's better ideas out there. These are just policy and the elimination of bureaucracy.
Speaker Change: And regulation this is in fact.
Speaker Change: People that work in the Pentagon people work in the government I know they are hard working dedicated and doing good work for the nation. They just are hampered.
Speaker Change: By by the tools and the regulations that have that have grown up over time so.
Speaker Change: I think the companies that are going to win are the ones that can go fast that can get solutions.
Speaker Change: That arent.
Speaker Change: Vertically integrated that arent closed systems.
Speaker Change: And I think we're leading the industry.
Speaker Change: With these partnerships and kind of straddling and working collaboratively with the traditional primes working with the new entrants.
Speaker Change: Sometimes we'll prime sometimes will sub sometimes will be a merchant supplier I think just having that culture of innovation speed creativity and being open minded to serve your customer is going to play well for us. So.
Speaker Change: I'm hopeful that that change change comps and again.
Speaker Change: Executive orders come out every other day I know some are out there rescinded theres a letter says theres. The letter comes ounces per GAAP don't do what I, just said and can't hit it well the first quarter or is this going to be Lumpiness right. We read these things every day a lot of pressure on the contracting officers do we all have to modify contracts for <unk>.
Speaker Change: Do we not have to modify them.
Speaker Change: Worked through this stuff I mean, the key is.
Speaker Change: We follow the law, we get the guidance, we adjust and we move forward. So I think it might be a couple of bumpy months' heroes as things go back and forth, but again, we have record backlog we have existing contracts.
Speaker Change: We have a path to our commitments for 25, and hopefully there'll be changed that makes us.
Speaker Change: Even more efficient as the ecosystem.
Speaker Change: Joanna let's take the last question.
Speaker Change: Thank you. The last question comes from Ken Herbert at RBC. Please go ahead.
Ken Herbert: Yeah, Hi, Thanks for squeezing this in.
Ken Herbert: Christopher Ken as you look at your exposure to Ukraine can you can you level set us on sort of directly or indirectly how you see that and maybe then just to put a finer point on the international opportunity, where do you see international growing at for you within the portfolio and 25% and maybe how much does that accelerate into 2006.
Ken Herbert: I'll take the first one and we'll kind of keep it keep it short I think we're talking.
Ken Herbert: Tens of millions of dollars as I as I see it when we talk about Ukraine, we're really talking about U S government assistance.
Ken Herbert: <unk> is different than Fms Dcs.
Ken Herbert: Or such so we have tens of millions in backlog already.
Ken Herbert: We believe that whether it's in the form of AIDS or loans or whatever that will continue.
Ken Herbert: And execute and deliver termination costs, probably equal the cost of delivering the product and then going forward, we have to see what the policies are but it's manageable and it's in that sits in that.
Ken Herbert: The range for that one country, which has historically come through either an aide alone or what I would call broadly U S. Government assistance I think that is coming to an end.
Ken Herbert: Small percent of our international business relative to the growth rate on international Ken you want to take that and.
Ken Herbert: We'll wrap it up yes, thanks, Chris.
Ken Herbert: Ken I appreciate the question from international growth perspective, we certainly do see the opportunity to grow international faster than.
Ken Herbert: Domestic but I think we see both areas of the business growing.
Ken Herbert: So Chris highlighted were a little north of 20% of our revenue from international.
Ken Herbert: Could that grow a percent or two I think it can.
Ken Herbert: But obviously the team that's working the domestic opportunities.
Ken Herbert: Hard.
Ken Herbert: Hard at work trying to grow those revenues as well so I think they both contribute to your question on Ukraine, we're seeing significant demand across all international markets, whether it's our NATO Allies Asia Pacific.
Ken Herbert: Latin and South America.
Ken Herbert: And.
Ken Herbert: We certainly saw opportunity to support our ally in Ukraine and <unk>.
Ken Herbert: 'twenty three and 'twenty four.
Ken Herbert: We'll be beyond the U S aid.
Speaker Change: Programs that Chris referenced I think other countries that may have some.
Opportunities to acquire some.
Speaker Change: Some capability and provide it to their allies as well so.
Speaker Change: Growing opportunity set I think international can grow a little bit faster could grow a percent or two.
Speaker Change: As a percentage of total revenue but.
Speaker Change: We're growing both aspects of the business. So it's a good problem to have.
Speaker Change: Alright, I will turn it back to Chris Yes, why don't we wrap this up.
Speaker Change: As I reflect on 2024 I have to say I'm incredibly proud of my leadership team and all the employees for what we accomplished so I want to thank the 47000 employees for their focus on performance and execution throughout the year.
Speaker Change: Work at El <unk> Harris, we'd get accustomed to change in the last five years, we've had change on a regular basis. So I think thats going to help us adapt to the change even though we don't know what it does come in coming forward. So as I said earlier, our strategic priorities remain the same.
Speaker Change: We have a dedicated and talented workforce I think we're going to continue to grow profitably for 2026 framework is achievable and our focus here is to grow and create long term value for all of our stakeholders. So thank you all for joining the call. We will see you in the months ahead, and we will do this again in April have a great day.
Speaker Change: Thanks.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.
Speaker Change: [noise].