The operator welcomes participants to the L3Harris Technologies' Fourth Quarter 2023 Earnings Call and introduces the host, Mark Kratz. He is joined by CEO Chris Kubasik and CFO Ken Bedingfield. They discuss the company's updated quarterly earnings approach and provide a supplemental earnings presentation. The discussion may include forward-looking statements and non-GAAP financial measures. Chris thanks investors and analysts for attending the recent Investor Day and expresses appreciation for the positive feedback.

In 2023, the company experienced significant growth and progress, meeting financial commitments and seeing the benefits of recent acquisitions. They also announced the sale of a non-core business and returned to growth after a few years of disruptions. The company has a strong leadership team and board of directors in place to drive future value. The threat environment remains elevated, highlighting the importance of the company's national security-focused portfolio. Demand for their solutions remains strong, resulting in a record $23 billion in orders and a backlog of $33 billion. This positive momentum has continued into early 2024 with a recent award for 18 satellites.

L3Harris has seen a 24% increase in orders internationally, thanks to successful deals with Ukraine and Japan. They are focused on maintaining their international growth and improving their overall mix. The company has successfully integrated Aerojet Rocketdyne and achieved their targeted cost synergies, which they are using to improve operational performance and increase capacity. They are also executing on their LHX NeXt initiative to achieve $1 billion in cost savings over the next three years. The company is prioritizing execution, margin expansion, and increasing free cash flow in 2024, and will continue to evaluate non-core assets in their portfolio. Overall, L3Harris has made significant progress in transforming the company.

The core businesses of L3Harris are aligned with customer priorities and provide opportunities for creating shareholder value. The company's capital deployment strategy remains unchanged, with a focus on organic growth, deleveraging the balance sheet, and returning excess cash to shareholders. The company continues to invest in its workforce and has confidence in its leadership team. The financial results for the full year and fourth quarter were in line with guidance, with revenue growth driven by acquisitions and strong performance in space systems and resilient communications.

The fourth quarter segment margin for the company was 15.1%, a 50 basis point increase from higher volume and favorable product mix. This resulted in a net positive EAC adjustment, the first since mid-2022. Earnings per share also grew by 2%. The company saw strong growth in Space, Mission Networks, and Intel & Cyber programs. Segment operating margin for the year was 11.4%, with a slight decrease due to growth in early phase Space programs. IMS revenue was flat, with a decrease in segment operating margin due to program challenges and lower international mix. CS revenue saw a 20% increase, driven by the acquisition of TDL and higher volume in Tactical Communication equipment. Segment operating margin was flat due to higher volumes being offset by lower international mix. The company expects improvements in financial stability in 2024.

In the fourth quarter, CS had a record operating margin of 26.1% and Aerojet Rocketdyne revenue exceeded $1 billion with an 11.6% operating margin. The new leadership team at Aerojet Rocketdyne is working to improve operations, and early actions include investing in suppliers and improving processes. The 2024 guidance is consistent with the framework presented at Investor Day, with expected revenue of $20.7 billion to $21.3 billion and organic growth in all segments. The slower top line growth rate at the beginning of the year is due to strong fourth quarter results and favorable SAS timing. The guidance also considers the potential sale of CAS in 2024. Consolidated segment operating margin is expected to be around 15%, driven by increased volume, operational improvements, and LHX NeXt cost savings. Non-operational headwinds include lower pension income and anticipated interest expenses, resulting in a non-GAAP EPS range of $12.40 to $12.80. EPS is expected to grow ratably throughout the year, similar to 2023.

The company had a successful year in 2023, with improved working capital and a focus on growing free cash flow. In 2024, they expect to see continued growth in earnings and efficiency, with specific revenue and operating margin targets for each segment. Their main priority for capital allocation is paying down debt and returning excess cash to shareholders through dividends and share repurchases. The speaker has confidence in the company's potential for value and is looking forward to answering questions.

At IMS, margins improved in the second half of 2023 compared to the first half, and there is a focus on stability and margin improvement in the near term. Attrition is slowing down and new employees are being hired and trained, leading to better performance. Supplier performance is also improving, and there is a focus on improving bidding rigor and lowering delegations of authority.

In the fourth quarter, the company has chosen to no bid on a fixed price development program in order to prioritize earnings and cash over revenue. They are also making structural changes to the business, with a focus on growing internationally. The company has already received a $300 million award from a European customer for aircraft missionization, which will improve margins. The company is also looking at opportunities in the LHX NeXt segment, with plans to streamline their 100 facilities, eight ERP vendors, and 24 reporting units. The guidance for the IMS segment includes the divestiture of CAS in 2024, which may impact margins. There are no major aircraft procurements expected in the second half of 2023.

The company's margin improved in the second half of 2024 due to solid program performance and the expectation of strong commercial margins in the EO product line. The company is confident in their guidance for the year and is focused on delivering results. At an investor conference, the company mentioned a potential 100 basis point upside in each segment by 2026, but acknowledges recent declines in margins and performance issues.

The company has made investments in high-growth programs and businesses, such as Space, that may impact margins in the short-term but create value in the long-term. They have set a goal to achieve $1 billion in cost savings by the end of 2026 and have a plan in place, called LHX NeXt, to achieve this. The company expects to see improvements in their Communication Systems segment, particularly in their commercial business model and potential for international growth. They also anticipate growth in their Aerojet Rocketdyne segment, with a significant increase in volume and a high demand for their products.

The speaker discusses the potential for improved margins in the company's IMS and Space or SAS businesses. They mention the shift to international markets and the WESCAM business as potential factors for this improvement. They also mention that most of the savings in the Space business go back to the customer, but investments in new markets have decreased. The speaker also addresses a question about the progress of the Space business and mentions winning contracts for tranche zero and tranche one.

The company has recently been awarded tranche two, which has increased their number of satellites from four to eight to 18. They anticipate further growth with tranche three and beyond, with increasing margins in each successive contract. The team is performing well and has satellites waiting to be launched. The company sees this as an annuity with single-digit useful lives and the need for repopulation over time. They are also investing in a satellite factory in Florida. In addition, the company has a strong backlog and has recently received international opportunities in the weather satellite business. They also provide payloads for classified satellites. The company had 8% organic growth in 2023.

The speaker discusses the expected 2% organic growth for the year, with a slowdown in the Space and Avionics sectors. They mention that the SAS business has flat sectors, such as air domain and mission networks, while Space and Intel/Cyber are growing. The speaker also notes that reducing costs can impact revenue. In regards to Aerojet Rocketdyne, the speaker states that their 2023 revenue is unknown and will be disclosed in the 10-K.

The company reported 5% top-line growth for 2024 compared to pro-former 2023, with Aerojet disclosing three months and the company disclosing five. The $50 million cost synergies from the Aerojet acquisition were achieved quickly, with potential for additional savings through integration and alignment of systems and policies. The LHX NeXt initiative is expected to result in $175 million in cost savings, with potential for disproportionate benefits in one segment.

The team did a great job of achieving initial integration cost savings and is now focused on driving operational efficiencies. LHX NeXt is expected to deliver a $1 billion savings and $175 million margin improvement by 2024. There is confidence in the program and all segments should see the benefit. Guidance will be provided in terms of first half and second half performance.

At the Investor Day, it was mentioned that working capital would contribute positively to cash in the guidance period. The company expects steady revenue growth throughout 2024, with a slightly faster ramp in the second quarter. EPS and margins will follow a similar trend, with slower growth in the first half of the year and building momentum in the second half. Free cash flow will also be weighted towards the second half of the year. The company will continue to focus on improving working capital, but is confident in their 10% free cash flow growth driven by margin and revenue growth and disciplined balance sheet management. This is in line with the company's goal of achieving a 10% free cash flow growth rate.

The speaker discusses the impact of the annual CR on the industry and the slow start it causes. They mention the hope for a defense budget and appropriation bills to be passed, which would help return to normal. The next question asks about the trajectory of tactical radio sales in the Communications business for 2023 and 2024, and the speaker shares that they had a record year in revenue for TCOM and have overcome most supply chain challenges. They also hint at new market wins but cannot disclose them yet.

During a conference call, L3Harris executives discussed the progress of their recent acquisition of Aerojet Rocketdyne. They mentioned that there is high demand for their products and have received 200 proposals worth $13 billion in just six months. The company has made progress in integrating Aerojet Rocketdyne into their operations, including investing in infrastructure, policies, personnel, and IT systems. There has been a decrease in attrition and high enthusiasm from the team. The main challenge is meeting the demand, and the company has invested $216 million in the Defense Production Act to increase capacity. They have also acquired a building in Huntsville, Alabama to support this growth.

The company's capacity and footprint at their inert center of excellence is 4 times larger, but the main challenge lies in the sub-tier suppliers. The company has invested in some of these suppliers to help with tooling and capital, and their end customers have also invested. However, there is still a backlog of undelivered motors. The company is working on improving the capacity and facilities of the sub-tier suppliers and believes that the high-growth market and increased competition reaffirms the value of their recent acquisition. During the Q&A session, Ken was asked about the impact of Section 174 on cash for 2023 and 2024, and he provided details on the potential benefits and what the company has paid and could potentially get back. He also clarified that the $220 million for LHX NeXt is the only expense that should be stripped out from the cash numbers.

The speaker discusses how their tax team works closely with the businesses to support their R&D deductions and credits. They also mention that they will catch up on tax payments in 2023 and that the new legislation being passed would have a positive impact on cash flow. They are willing to trade a rate headwind for the cash benefit. They also mention that their free cash flow guide for 2024 will be adjusted for the LHX NeXt onetime implementation cost.

The speaker responds to a question about the international pipeline and conversion timing. They mention the higher margins in international markets and expect a slight increase in revenue from international markets in the next few years. They also mention a potential supplemental budget for Ukraine, Taiwan, and Israel that could help with growth opportunities in those regions. The speaker notes that the majority of Aerojet's business goes through a few prime contractors.

The speaker discusses the breakdown of international revenue for Aerojet, IMS, SAS, and CS, and mentions potential for growth in the commercial sector. They also address concerns about structural issues in the defense industry and the potential for changes in contracting and pricing in the future.

The speaker discusses the cyclical nature of the defense industry and the challenges of adapting to changing customer needs and business models. They also mention the need for the industry to adjust to the increasing importance of software and the struggle to balance risk and financial gain when bidding on contracts. The speaker thanks their employees for their hard work and performance.

The speaker expresses their gratitude for everyone's participation in the call and welcomes a new team member. They emphasize the importance of their team in meeting their commitments to shareholders and customers. The operator then ends the call.

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