The operator introduces the L3Harris Technologies Third Quarter 2023 Earnings Conference Call and reminds participants that the call is being recorded. Mark Kratz, Vice President of Investor Relations, introduces CEO Chris Kubasik and CFO Michelle Turner. The call will focus on answering questions and may include forward-looking statements and non-GAAP financial measures. Chris Kubasik briefly discusses the current events in the Middle East and emphasizes the company's commitment to supporting national security. He also mentions the success of the merger between L3 and Harris and the company's reputation as a disruptive competitor in the defense industry.

The company's strategy focuses on operational excellence, delivering quality products on time, reducing costs, and focusing on national security. This benefits customers and shareholders. Despite a challenging macro environment, the company has made progress and is generating positive cash flow. The CEO expects to provide more details on their strategy and outlook at an upcoming Investor Day. The recent acquisition of Aerojet Rocketdyne has gone smoothly and the company is pleased with the results so far.

The integration of Aerojet Rocketdyne into L3Harris is going well, with the leadership team being deployed and cost savings on track. The workforce is enthusiastic and aligned with the company's focus on defense and national security. The main priority is to increase deliveries, and a plan has been developed and is being executed, including establishing Centers of Excellence and deploying resources to suppliers. Immediate results are expected.

The challenge in the munitions and rocket motor business is the limited number of certified suppliers, which is a choke point for the industry and the country. The Defense Production Act has allocated over $200 million to increase production capacity, and plans are in place to revitalize the business and improve output by 2024. L3Harris has the full support of their end customers in addressing these challenges. The space engine business, which makes up 1/3 of Aerojet Rocketdyne, is performing well with a flawless track record and a backlog of over 150 engines.

The speaker discusses the operational status of Aerojet Rocketdyne within L3Harris and the strategic rationale for its acquisition. They mention the company's focus on defense and technology and their approach to acquiring and divesting businesses. The speaker also notes that Aerojet Rocketdyne is growing faster than the legacy L3Harris business and that there is a high demand for their products. They express confidence in the acquisition and highlight the need for increased focus and funding in the defense industry.

In a recent conference call, Michelle Turner, an operator, answered a question from Gautam Khanna about the performance of Tactical RF. Turner stated that the company is on track to meet its double-digit growth guidance and is facing supply chain challenges. She also mentioned that the company is seeing strong demand for its products both domestically and internationally. Turner praised the efforts of the team in building a resilient supply chain and noted that deliveries are up from the previous quarter. Another question from Noah Poponak was about the competing factors influencing national security spending.

The speaker discusses the current geopolitical landscape and its potential impact on the company's medium-term end market growth rate. He also mentions the importance of government funding for national security and expresses hope for a budget to be passed soon. The speaker believes that the company is well positioned to benefit from a potential supplemental budget, but also emphasizes the need for continued budget growth to invest in advanced technologies for potential threats.

The speaker discusses the importance of focusing on space as part of national defense strategy, despite distractions from other conflicts. They mention L3Harris' success in the space arena and the potential for continued growth, as well as their involvement in other areas such as munitions and tactical battle links. The speaker emphasizes the need for connectivity across different domains and describes it as "stealth communications."

The speaker discusses the company's plans for growth and improving margins, mentioning their recent acquisition and efforts to meet customer and shareholder commitments. They are optimistic about future growth and believe that investing in infrastructure is necessary for success. A question is asked about the difference in M&A expenses between the P&L and adjusted free cash flow, and the speaker also addresses the expected increase in CS margins in the fourth quarter.

The speaker discusses the performance of each segment within the organization, highlighting the record op profit and margin improvement in the Space and Airborne Systems business. They also mention the efforts being made to manage costs and improve organizational structure. The Integrated Mission Systems business saw improvement in margins, but may still face challenges. The CS business met expectations and delivered more radios than anticipated, showcasing the efforts to improve the supply chain.

Aerojet has put a lot of work into their recent acquisition and saw a 12% margin in the last quarter. There was a decrease in Q4 due to purchase price accounting adjustments. The Space business has a mix of fixed price and cost plus contracts, with a 50-50 split. This is a change from the past, where space contracts were mostly cost plus.

The speaker discusses how the industry has faced challenges due to changes in trends and supply chain issues. They mention how L3Harris has been impacted and has had to adjust their bidding strategies to mitigate risks. They also mention how they have regular reviews and have been able to maintain solid margins compared to their peers.

The company continues to avoid bidding on fixed-price development programs that include both development and production, as it is difficult to accurately estimate costs and commit to production for multiple years. The CEO believes that the industry will eventually stop bidding on these types of programs and use a more appropriate contracting vehicle. The company is willing to sacrifice top-line growth for profitability and has had success in meeting cost and schedule commitments on some fixed-price contracts. They also have a stable business in the civil weather sector, which has seen growth.

Chris Kubasik, CEO of the company, was asked by Richard Safran during an investor call about which segments have the most potential for growth in 2024. Kubasik mentioned that they will be discussing this at their upcoming Investor Day in December and that all four segments are expected to experience growth. However, he also mentioned that they need to get through some uncertainties, such as potential government shutdowns and world events, before making any definitive statements. Overall, Kubasik expects top line growth, as well as growth in cash, operating income, and EPS, but more details will be revealed in December. The next question was from Ken Herbert with RBC Capital Markets.

Ken Herbert asks Chris Kubasik about the company's CapEx plans for legacy L3Harris and AJRD. Chris responds that they will prioritize R&D and CapEx based on business cases and needs, with AJRD having a planned CapEx of $50-60 million. He also mentions potential additional funding from DPA and other sources, and that any increase in CapEx for AJRD would come at the expense of other areas in the legacy portfolio. Michelle adds that they expect income to grow next year.

The speaker discusses the expected impact of the Aerojet deal on the company's cash flow and working capital. They also mention the LHX NeXt phase of the L3 and Harris merger, which will involve further integration savings but also require additional investment. They anticipate a nominal margin benefit from this phase, rather than a significant increase in bottom-line impact.

The speaker discusses some tangible examples of the benefits of LHX NeXt, highlighting the success of the HR team in renegotiating employee benefits and the comms team in streamlining communication processes. The main focus is on leveraging the scale of L3Harris as a $35 billion company to create value for shareholders, particularly through negotiations with suppliers. The speaker also mentions the potential for direct and indirect opportunities to drive value. A question is then asked by Seth Seifman from JPMorgan.

Michelle Turner, responding to a question from Seth Seifman, discusses the company's focus on debt repayment and their target to reduce debt by the end of the year. Chris Kubasik then addresses a question from Sheila Kahyaoglu about the potential for margin expansion and the communication systems business. He acknowledges the company's current industry-leading margins and their commitment to finding ways to continue growing them, particularly in the commercial business model.

The company is working on leveraging their supply chain and increasing prices to cover the rising costs of components and labor. They have successfully negotiated for direct material and will continue to focus on E3 and LHX NeXt to offset any headwinds and simplify their business. They are looking at all aspects of their business to see where they can eliminate or do things differently.

The speaker discusses the need to lower the company's cost base in order to become more competitive and contribute to the bottom-line. They emphasize the importance of discipline and avoiding losses in order to naturally grow margins. The company has a mix of cost-plus and fixed price programs, with cost-plus programs being dilutive but potentially leading to long-term success. The company runs as a portfolio and some segments may have better results than others.

The team is proud of their accomplishments in the third quarter, exceeding expectations on revenue, EPS, and cash. Chris Kubasik thanks everyone for their hard work and looks forward to the upcoming Investor Day in December. The call ends with a thank you from the operator.

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