The operator welcomed participants to the L3Harris Technologies Second Quarter 2023 Earnings Conference Call and introduced Mark Kratz, Vice President of Investor Relations. Kratz mentioned that the call would be focused on answering questions and that he would be available throughout the day for follow-ups. He also referenced the investor letter published to the website and reminded participants of the safe harbor provision in the letter and SEC filings. He then turned the call over to Chris Kubasik, the CEO, for opening remarks. Kubasik mentioned that the FTC would not block their acquisition of Aerojet Rocketdyne.

The paragraph discusses the pending acquisition of Aerojet Rocketdyne by L3Harris and the positive implications for the defense industry. It also highlights the company's strong financial performance, with top-line growth of 13%, operating income up 7%, and earnings of $2.95 - $2.97 per share. As a result, the company is increasing revenue and EPS guidance for the year and reiterating its free cash flow commitment.

Chris Kubasik of L3Harris is proud of the team effort that went into the completion of the Aerojet deal, which was announced in December and received its second request in March. The FTC and DoD conducted a thorough review and the waiting period expired the day prior. The closing of the transaction is expected to be finalized soon and no consent agreement was negotiated or signed.

L3Harris has committed to providing the Department of Defense with reliable rocket motors and engines, and is prepared to do so on day one. The company has a long history of being a merchant supplier, and has allocated $215 million for GMLRS, Javelin, Stinger, Standard Missile, PAC-3, and THAAD. They are motivated to sell their products within the rules of the global market and have been planning and preparing for the acquisition.

Chris Kubasik discusses the active M&A process and the strategic rationale for the acquisition of Aerojet Rocketdyne. He notes that the budget for the acquisition has increased since it was announced and the majority of the key individuals have agreed to stay with the company. He is also excited about the company's future capability in hypersonics, which he believes will be a differentiator and disrupt the market.

In the December business case, Harris stated that the acquisition of Aerojet would bring accretion of EPS and free cash flow in the first full year and first full second year. Harris and Aerojet are excited about the acquisition and are ready to close it in the next 48 hours. Harris has developed tools such as capability modeling and zero defect planning to help improve operations and processes once the acquisition is complete. Additionally, the $215 million DPA will go towards modernizing the Camden, Arkansas production operations and expanding production across other sites, as well as digitizing Aerojet's engineering.

Robert Spingarn asked a financial question about guidance with Aerojet included for the rest of the year both from a P&L perspective and a CapEx perspective for the rest of the year and long term. Michelle Turner responded that they plan to update the guidance in October for the five months remaining and anticipate revenue to be around $1 billion for the remainder of the year. Chris Kubasik added that they will give more details at the next earnings call with two months of actual results and guidance for the remaining three months.

Chris Kubasik responds to a question from Doug Harned about the potential of the TDL acquisition to provide integrated system solutions. He explains that L3Harris will provide more insight into the acquisition and its Trusted Disruptor strategy at an Investor Day in December, and that they will be able to provide more information on how they will approach this integrated approach in the future.

The TDL acquisition is going better than expected, with more than half of the production lines moved and no issues with the production lines. The employees have agreed to relocate more than planned, and the success is attributed to the company's ability to collaborate across multiple segments. Next week, Sam Mehta and the speaker will discuss the customer interest, which has been strong.

In the second quarter, CS performance was ahead of the full year expectations, largely due to mix benefits, normalized supply chain, and the potential for 25%+ margins. Additionally, IMS saw a sequential step-up in the second half, driven by operational items.

Q2 margins for the enterprise improved by 50 basis points from Q1, meeting the 15% expectations. This was due to the improved Electronic Assembly Cost (EAC) trend trajectory since the second half of 2021, as well as the resilient supply chain actions taken, easing of electronic component shortages, and increased software mix. Q3 is expected to have a lighter domestic mix, with a ramp up in the fourth quarter.

The IMS team is addressing operational challenges on fixed price development programs at remote sites, which are related to talent and learning loss inefficiencies. This, along with increased domestic ISR mix, had an impact on the quarter. The guidance for the second half is driven by improvements in EAC performance and higher product deliveries in the second half, with higher international product sales in the fourth quarter. The challenges on select programs were within the ISR and maritime sectors, but there is still a lot of demand for those products and capabilities.

IMS has a longer cycle backlog than other businesses, so it is going to be selective when bidding on fixed price production or low rate production contracts. The company is pursuing undersea test range and sensing capability in the US Navy, as well as opportunities in Europe and the US. The ATHENA-R and ATHENA-S programs are examples of this, and the Army has a program called HADES which could be up to 10 aircraft. The company has taken lessons from attrition and inflation to update bids based on the latest performance and cost.

Chris Kubasik discusses L3Harris' Trusted Disruptor strategy, which applies to all of their sectors. This strategy has been particularly successful in the space sector, allowing them to win multiple awards for low earth orbit projects. With the acquisition of Aerojet Rocketdyne, the number of sectors will increase to 16.

The merger of four years ago has allowed the company to expand its satellite contracts from five to over fifty, with two classified operational constellations. The company has invested in R&D and capital to facilitate growth, resulting in a 50% increase in revenue since the merger. Additionally, the company has record backlog and solid execution, though there have been some supply chain challenges. The company is looking forward to upcoming launches in October, as well as a $700 million opportunity for NOAA's weather satellites.

Chris is asked about the sales and margins of TDL, which has seen a 10% decrease in sales year-to-date. Secretary Kendall's number one operating imperative is space-related and the team has been successful in adapting to the rapid acquisition process. The team is also embracing the performance-first initiative and driving cash performance. The MIDS contract may turn the sales around and there is a potential for significant margin expansion once the MIDS drop in.

Chris Kubasik explains that they are expecting to reach $400 million in revenue for TDL and that the MIDS win and other opportunities they are pursuing will lead to a second half ramp. He also mentions that with the move, they will have labor and overhead efficiencies that will lead to margin expansion. Lastly, he mentions the Next Gen Jammer program that is in the same facility and will further increase the margin potential. He concludes the call by mentioning that the team will be available all day and that they will provide more information about an Investor Day in December.

This summary was generated with AI and may contain some inaccuracies.