L3Harris Technologies, Inc.

Greetings and welcome to the L3 Harris Technologies first quarter calendar year 2020 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. If you should require operator assistance please press star then zero on your touchtone telephone. It is now my pleasure to introduce your host Mr. Rajiv Lawani, Vice President Investor Relations. Thank you, you may begin.

Thank you, Jess. Good morning everyone and welcome to our first quarter calendar year 2020 earnings call. On the call with me today are Bill Brown our CEO, Chris Kibasek our COO and Jay Malave our CFO. First a few words on forward-looking statements and non-GAAP measures. Forward-looking statements involve risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information please see the press release, the presentation, and our SEC filings. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the investor relations section of our website which is L3Harris.com where a replay of this call will also be available. And to aid with -over-year comparability following the L3 Harris merger, prior year results will be on a pro forma basis as reflected in the AK filed yesterday. With that Bill I'll turn it over to you.

Okay well thank you Rajiv and good morning everyone. As we're all aware the environment has changed considerably since our last update due to the global COVID-19 pandemic. Our top priority remains the safety and well-being of our employees while continuing to deliver the mission essential products and services to our customers. And I will start by thanking all of our employees for their hard work and dedication through this crisis. While we have a resilient portfolio and customer base and we're well positioned, we're not immune to the effects of COVID-19. Despite the solid start to the year, we're trimming our outlook for revenue and earnings per share due principally to our commercial aerospace exposure and our recently completed divestiture plus some anticipated softness in international and public safety and potential risks from supply chain disruption. We move quickly with cost and other actions to offset these headwinds holding earnings per share within 2% of our prior guidance while increasing our margin outlook and maintaining free cash flow. Our core US government business which represents about 75% of revenue is performing well and without significant challenges. Earlier today we reported first quarter results with non-GAAP earnings per share of $2.80 up 21% on 5% revenue growth. Company margins increased 170 basis points to .5% and adjusted free cash flow was $533 million. Total company funded book to bill was 1.11 driving funded backlog up 3% versus the prior year. These results were ahead of our expectations. We're actively assessing and monitoring global developments and continue to use best practices to mitigate risks related to COVID-19. We've mandated work from home for those who can, implemented social distancing and canceled all travel and external events. In our production facilities we've staggered work shifts, redesigned stations and implemented stringent cleaning protocols. As of today all our facilities are up and running with limited disruptions reported to date. We continue to receive a great deal of support from our key customers the DOD, FAA, NASA and others and a large majority of our programs and facilities as well as those of our suppliers have been deemed essential to national security. The DOD has moved quickly to adjust the terms of progress payments to drive cash into the industrial base which we have passed through to our small suppliers and started a dialogue with industry on how to size and cover COVID-19 related costs. These measures combined with potential tax deferral benefits through the CARES Act provide some risk mitigation for our company and supply chain. Looking at our credit profile our balance sheet remains healthy and we expect to have over 3.5 billion dollars in liquidity in the form of cash on hand and revolver availability at the end of the quarter. Jay will discuss this in some more detail. In these uncertain times we continue to execute well on the strategic priorities that we previously outlined which is helping us deal with the crisis at hand while at the same time delivering long-term value for our shareholders. First we continue to make great progress on integration despite the environment. Our team delivered 55 million dollars in net synergies in Q1 from improvements in benefits and overhead costs and we now expect to achieve 165 million dollars of incremental net savings in 2020 up versus our previous expectation of 115 million as we accelerate savings and manage through the pandemic. And there is no change to achieving 300 million dollars in cumulative net savings or about 500 million dollars gross in 2021 which as we've announced before is about one year ahead of schedule. Second we continue to drive a culture of operational excellence deep into the company to improve quality and productivity and expand margins. This was evident in our first quarter results where we built upon last year's performance and delivered E3 savings on top of synergies offset mixed headwinds. For the year the combination of cost synergies and E3 savings allow us to increase full year margin by 25 basis points to 17.5 percent at the midpoint despite the cost absorption challenge from revenue headwinds and the expenses being incurred to fight the pandemic. And on working capital we continue on the improvement trajectory from the stub year with another two-day operational reduction since year end and about 10 days operationally since the merger closed primarily from better inventory management. We believe we have the tools and proper focus to manage in the current environment leaving the path of 50 days of working capital intact for 2022. Third is to invest in technology and innovation and anticipation of customer needs to grow revenue in the long run and we expect to sustain our industry leading spend on R&D despite the pandemic. The team is making terrific progress in improving the efficiency and effectiveness of our investments creating room in our budget to support investment in the growing pipeline of revenue synergy opportunities. We have now submitted 41 revenue synergy proposals of 18 from last quarter with another three down selects out of eight in the first quarter primarily related to classified work in our space and aviation system segments. To date we've been down selected on half of the 16 proposals awarded with orders booked in the tens of millions and a lifetime revenue potential of over two billion dollars. Our fourth priority is reshaping portfolio to focus on high margin high growth and technology differentiated businesses and this is not changed. So far we've announced three transactions representing about three percent of revenue that will result in about a billion dollars in proceeds. Our airport security and automation business the largest of these announcements closed yesterday with two smaller ones closing later this month and by mid-year neither of which have a financing contingency. We're still targeting divestitures in the range of eight to ten percent of revenue including the divestitures announced to date and while the timing is now more fluid we continue to have active discussions and are committed to maximizing value. And then finally our fifth priority is to maximize cash flow and sustainably grow free cash flow per share. We're maintaining our adjusted free cash flow guide for 2020 at 2.6 to 2.7 billion dollars and remain on track to achieve three billion dollars in 2022. In the quarter we generated over five hundred million dollars in free cash flow and returned eight hundred eighty three million dollars to shareholders including seven hundred million dollars in buybacks and dividends and dividends which were increased 13 percent in the quarter. For the year we have now assumed one point seven billion dollars in share repurchases including the proceeds from divestitures which leaves us with plenty of liquidity given the environment. Moving to 2020 guidance we expect organic revenue growth of three to five percent versus the prior five to seven percent as we consider risks related to our commercial aerospace international and public safety businesses due to the pandemic. On margins again we are expanding guidance at the upper end and allowing the range to 17.4 to 17.6 percent and we expect earnings per share of eleven dollars and fifteen cents to eleven dollars and fifty five cents with our free cash flow outlook unchanged. Overall I'm proud of the dedication of L3 Harris employees and their commitment to the mission at hand and I'm confident in our ability to proactively manage risk so we can navigate these unprecedented times. So with that let me turn it over to Chris to provide an update on our operations and segment

performance. Okay thank you Bill and good morning everyone. I'll start with what we're doing from an operational standpoint to mitigate business risks due to COVID-19 then shift to our operating performance and results. The management team has taken measures to ensure the safety of our employees at our over 100 facilities. We've modified the workspace especially in areas with high capacity such as our production floors in Rochester New York and Clifton New Jersey to either create space for individuals between workstations or to install partitions when social distancing is impossible. In addition we've adjusted our work schedules by implementing multiple shifts or staggered shifts across our company and at several of our locations that have higher risk we have already implemented temperature checks and health screening before employees enter buildings. We've provided PPE to employees eliminating travel and taking other recommended precautions. The environment changes daily and these safety protocols are mitigating risk and continue to limit disruption for our company. Turning to supply chain we're managing risk daily with cross-company crisis teams established to assess and develop mitigation plans where needed. We've provided essential certification letters to all of our key suppliers globally and continue to engage in active dialogue and analysis to identify areas of vulnerability. With the recent changes by the DOD around its progress payment policy we expect to flow down in excess of a hundred million of cash to help small businesses during these unprecedented times. As of today we've advanced approximately 80 million dollars and expect to exceed a hundred million this week. Now turning to quarterly segment results on slide six. Integrated mission systems grew revenue 1% from a ramp in our maritime business on classified programs partially offset by timing in electro-optical and ISR following double-digit performance last year. Order momentum was broad-based with a funded book to bill above 1.0 in every IMS sector during the quarter resulting in the overall segment at 1.37 for the quarter and 1.09 since the merger. One highlight was over 800 million in award activity from our leading position on the big safari programs. First quarter operating income was up 22% and margin expanded 260 basis points to .7% from operational excellence and integration benefits. On side seven space and airborne systems revenue increased 7% in the quarter. This solid performance was driven by a production ramp and increased content on the F-35 platform as well as growth on classified programs and Intel and cyber. Funded book to bill was 1.16 for the quarter and about 1.0 since the merger. In the quarter we secured our position as a prime mission integrator for our nation's space domain awareness program called Mosaic. This award of fully exercised has the potential to reach $2 billion. Segment operating income was up 12% and margin expanded 70 basis points to .5% driven by strong program execution and integration benefits. On slide eight communication systems revenue was up 5% for the quarter as DOD tactical benefited from modernization demand that supported weekly deliveries of the two channel multi-band radio increasing by 50% sequentially. Additionally solid growth in broadband communications partially offset by timing of sales and international tactical and prior year strength and public safety factored into the growth rate. Funded book to bill has a slight down shift to .8 in the quarter due to timing though it's been solid at 1.03 since the merger. Key awards included a 383 million sole source IDIQ from the US Marines for next generation HF radio systems as part of a multi-year modernization effort and an IDIQ for 500 million from the US Space Force to provide secure anti-jam satellite communications for the A3M program. Segment operating income was up 11% and margins expanded 120 basis points to .9% in the quarter from integration benefits and strong operational performance partially offset by the mixed impact from the ramp and tactical radio modernization programs. Lastly on slide nine aviation systems revenue grew 11% in the quarter driven by our defense businesses. Orders outpaced sales on the defense side leading to a funded segment book to bill of 1.05 for the quarter and 1.09 since the merger. Segment operating income was up 40% and margins expanded 300 basis points to .5% from improved operational efficiencies and integration benefits. Looking ahead we expect the headwinds on the commercial side to pick up. As a result we've taken a number of measures to improve the cost structure based on the market conditions. The downturn has also been a triggering event that led to over 300 million of non-cash impairments for Goodwill and other assets of the segment. We're committed to supporting our employees, our supply base, and our customers to ensure we get through this together. With that I'll turn it over to Jay.

Thank you Chris. I'll begin with a quick recap of first quarter results before discussing our revised outlook and liquidity position. Revenue was up 5% and EBIT increased 17% leading to EPS growth of 21%. With solid margin expansion of 170 basis points, .5% primarily from integration savings and pension benefits. Free cash flow for the quarter was $533 million and we ended the period with 62 days in working capital before purchase accounting adjustments. Overall solid results in the face of a tough compare and a deteriorating backdrop. Okay let's now turn to the 2020 outlook on slide 10 and I'll provide more color on our updated guidance. Starting with the top line, organic revenue is now expected to be up 3 to 5% versus our original guidance of up 5 to 7%. About two-thirds of this comes from resetting expectations for our commercial aerospace businesses due to COVID-19 and its impact on the macro environment. When adjusting for the sale of airport security and automation, the remaining business generated about $800 million in sales in 2019 tied to commercial aerospace through training and avionics equipment. Commercial training represents roughly 40% of the sales and includes the manufacturing of simulators and training of new pilots as well as those of airlines. And within avionics we manufacture and service a number of components including collision avoidance systems, transponders, as well as voice and data recorders. These businesses are tied to broader aviation trends including air traffic, airline profitability, and OEM production rates which are all under pressure. For instance, IATA has forecast traffic to be down nearly 50% for the year. As a result, our guidance now reflects approximately $500 million in revenues or a reduction of about half of the sales for the remainder of the year when compared to 2019. In addition, we factored in pressures at our public safety radios business which in 2019 had $500 million in sales. This business is focused on state and local municipalities in North America which are facing budget and operational constraints due to the pandemic, leading to an over 10% decline relative to our prior expectation of low single digit growth. Finally, on the international front which comprises roughly 20% of our sales, we are now assuming a more flattish outlook versus an increase in the low to mid single digits previously. In contrast, we expect higher revenues from our DOD businesses including tactical radios and ISR. On our margin outlook, Bill talked about the acceleration of integration and productivity benefits that drive the 25 basis points increase in our margin guide to 17.5%, putting us at the upper end of the prior range. And that's net of approximately 30 basis points of headwinds associated with fixed cost absorption from volume declines that we've offset with expense reductions. Bringing this down to our full year EPS, we now see $11.15 to $11.55 or $11.35 at the midpoint, down 20 cents as compared to our prior guide midpoint. The range is premised on 217 million shares, inclusive of the $1.7 billion in share buybacks noted earlier and a 17% tax rate. And bridging EPS to our prior guide on slide 12, we have 15 cents in headwinds from the timing of the vestitures and repurchases. While the 52 cents in COVID-related headwinds are nearly offset by incremental synergies and improved performance from midpoint to midpoint. Finally, a quick note on the profile of EPS for the remainder of the year. We expect a pandemic-related impact to be most notable in the second quarter, with stronger growth anticipated in the second half. Moving to pre-cash flow, our guide of $2.6 to $2.7 billion is intact, and so is the multi-year outlook. For this year, our cash flow is bolstered by accelerated synergies, federal stimulus, and cost takeout, which will offset the reduced revenues discussed earlier. And our working capital will also look to manage the environment, so our three-day goal of improvement in 2020 remains in place as well. Moving over to liquidity, as Bill noted earlier, we remain in a strong position. We ended the first quarter with over $400 million of cash in hand, net of the April debt maturity, and a $2 billion untapped credit revolver. We're looking ahead to the end of the second quarter. Our liquidity should reach over $3.5 billion post-divestitures, which would include at least $1.5 billion in cash and full access to the revolver. Also, our next debt maturity of $650 million isn't due until early 2021, and our balance sheet is healthy at two times leverage. Now, switching to the segment outlook, we've narrowed our integrated mission systems revenue range to be up .5% to 7%, versus the prior 5% to 7% guidance, driven primarily by strength in our ISR business. Segment operating margin is projected to be about 13.5%, or a 25-base point increase from the previous midpoint, reflecting performance to date and synergy benefits. In space and airborne systems, we've also narrowed our revenue range to 6% to .5% growth, driven by modernization and sustainment on the F-35 platform in mission avionics. Segment operating margin is expected to be 18.75%, and is unchanged at the midpoint. Communication systems revenue is now expected to be up between .5% to 5%. First, the prior guide of .5% to 8.5%. This reflects headwinds in our public safety business of about 1.5 points, and a reduction of international volumes in tactical radios and integrated vision. Segment operating margin is anticipated to be about 23.75%. That's up 100 basis points relative to the prior midpoint, reflecting increased cost and integration benefits. And finally, in aviation systems, we are forecasting an organic revenue decline of 1 to 5% year over year, primarily from the factors I noted earlier in commercial aerospace. This points to reported revenues of approximately 3.4 to 3.6 billion dollars for the year, post-divestitures. On the commercial side, revenues are set to be down around 35% organically for the year. And for our government-related businesses, which include mission networks, military training, and defense aviation products, they are expected to be up in the mid to high single digits. Segment operating margins are expected to be approximately 13.25%, down versus the prior guide by 75 basis points from the midpoint, drew primarily to fixed cost absorption from the volume declines, partially offset by cost actions. The margin guide also accounts for the airport security and automation divestiture we closed yesterday. So to summarize and put it all together, overall, a pullback in our outlook, but one where the pandemic-related impacts have been nearly offset by management actions, with the remainder being the result of a more flexible approach to capital deployment in this environment. With that, I'll ask the operator to open the line for questions.

Thank you. The floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. If you're using a speakerphone, we ask that while posing your question, you pick up your handset to provide the best sound quality. We ask that you please limit yourself to one question to allow everyone the opportunity to ask a question. Again, ladies and gentlemen, if you do have a question or comment, please press star one on your telephone keypad at this time. We will go first to Carter Copeland with Mellius Research. Please proceed with your question.

Hey, good morning, gentlemen. I trust everyone's good morning. Good morning, Carter. Just a quick clarification and a question. I wondered, Jay, if you could give us a little bit more color on the cash bridge on the guidance for all the moving pieces with, you know, A.S. and tax and suppliers and progress payments and synergies. I think that would help everyone. And just a bigger picture, Bill or Chris, you know, with respect to how the business, the combined business is evolving. I mean, you highlighted the, you know, the synergy opportunities, the revenue synergy opportunities. You look at that opportunity pipeline. You look at, you know, what the business is going to look like in the wake of COVID-19. How does all of this influence your, you know, your thoughts on portfolio and shaping and whatnot? Any updated thoughts there would be great. Thanks.

Sure, Carter. Let me start with the pre-cash flow. You know, as we mentioned earlier in the prepared remarks, we have the benefit of the progress payments going from 80 to 90 percent. You know, that's in excess of around $100 million that's being flowed down to the suppliers. And so net-net, that's a very little impact. There is a benefit on stimulus related to taxes, which is helping us offset some of the other impacts across the business. But when you take a look at, you know, net income, that is moving. But as I mentioned the prepared remarks as well, we've largely offset that. And so, you know, with the benefit of the stimulus efforts, we're just holding that as a placeholder. We may have to go deeper into supplier payments. We may have to think about our pension contributions and things like that. But for the most part, you know, we've held the working capital intact after three days. Net income is a little bit lower. We're getting benefits from the stimulus efforts. And we're just kind of holding that as a placeholder for other things for later in the year. You know,

and Carter, on your question on those sort of long-term outlook, look, we're very pleased with the progress of the integration so far. The cost energies are going very, very well. We're finding great opportunities on revenue opportunities. And it gets testament to the power of the combined portfolios as we laid out 18 months ago when we announced the merger and the areas that we could offer new mission sets to our customers. And COVID-19, notwithstanding, it's playing out as we had expected. We have, you know, much more powerful competitive offering. And it's helping us, you know, quite substantially in mitigating some of the risks that you were seeing coming through in small parts of the portfolio through the pandemic. Now, in the portfolio shaping, we've been at this now for 18 months. We've made some good progress here. We've about a third of the way through in terms of the revenue we anticipated divesting. We had sized that for investors back in early February. That was pre-COVID. You know, we keep looking at the portfolio. It's an ongoing process. But we're going to shape our decisions on what is in our portfolio based on long-term strategy, our ability to differentiate via technology, our ability to grow and win in those segments. And that hasn't changed based on the pandemic. We continue to look at that. I don't know, Chris, if you wanted to maybe augment that.

Yeah, Carter, I'll just chime in that, you know, when I look at our new business opportunities and some of the things we're currently working on, I continue to believe our portfolio is well aligned with our customer's focus and desire. You know, you hear a lot about multifunction systems, you know, which we are currently implementing in space. You know, we are submitting white papers on ABMS. And of course, the Navy's coming out with an offering or an RFP on Spectral. So I think we're well aligned there on the capability front. And then the modular open system architecture, I think the F-35 is a good example of those capabilities. So I think it positions us well for the long term.

All right. Thanks, guys. Thank you, Carter.

Our next question comes from David Strauss with Barclays. Please proceed with your question.

Thanks. Good morning. So, Bill, just wanted to ask on working capital progress. It doesn't sound like the progress payment change benefited you at all in Q1, but you got two days of sequential improvement. I think you had talked about that in Q1, you might have given back some of the upside that you saw in early collections in Q4. And so maybe just comment on that. And I think from here, you're only assuming about one day of additional working capital improvement through the rest of the year. Thanks.

Yeah, David, that's all factual. ProgPay did really benefit us in the first quarter. It's really just starting now in some ways. It's not a big part of our portfolio. It's only about 7% of our revenue. So you're not going to see big numbers. And as Jay and others and Chris pointed out, what we're receiving from the government through progress payment acceleration, we're flowing that out to the supplier base. So that net net won't be a factor in the year. So we're making good progress. So two days sequentially, 10 days operationally since the beginning of when we closed on the merger. I think it's just fantastic work that the team has done. A lot of it's coming out of inventory. We're seeing some opportunities elsewhere, but a lot of inventory coming out as we've been pointing out to investors for some time. We're expecting maybe another day towards the balance of the year. There's some purchase accounting opportunities here, if you will, in the year. So we'll end this year below 60, probably in a 58-day range. And as we look out the next couple of years, again, three to four days per year in 21, three to four days in 22. So we see ourselves around 50 days of working capital by the time we get out into 2022, which, as you know, is still about five days higher than our peers were at the end of 19 and about 10 days higher than where Harris was before we closed on the transaction. So we still see some good opportunities to continue to drive working capital performance beyond 22. Thank you. You bet.

Our next question comes from Robert Stallard at Vertical Research. Please proceed with your question.

Thanks so much. Good morning.

Good morning.

On the adjustment to the aviation guidance for the year, I was wondering if you could elaborate on whether this has resulted from the order intake or the conversations with your customers, or whether it is a best estimate at this stage in its relatively early days. And in relation to that, Chris, I was wondering if you comment on what sort of flexibility you have to reallocate cost or capacity in the aerospace business to defense or elsewhere. Thank you.

So Rob, really on both. I mean, Jay went through the details, I think, pretty carefully in his script. So the business that was 800 going down to 500 is down 40%. We talked about the components to be very clear. Training is about 40%. And that we see being down 40%, 45% for the year. But effectively what we've done is we won't sell any new full flight simulators beyond Q1. So we sort of zero that out. That could be conservative, but that's what we've assumed so far. It is through conversations with the airlines, with OEMs. It's a pretty detailed bottoms up analysis that the team has done and really has worked on over the last four to six weeks. I think it's done a good job on that. 60% of the businesses is avionics. We see that business down for the year around 30%. But it's got several components. There's a commercial OE and aftermarket component of that. Obviously that's going to be down substantially based on line rates that we're hearing from Airbus and Boeing, based on IATA data on RPKs. There's a piece of it that provides military avionics. In other words, provides avionics on commercial platform as a military end use. That's relatively stable, which is why avionics isn't being hit quite as much as you might expect. So for the year, we've got quite a bit of the back end of the year in backlog. We're watching this very, very carefully, watching order intake rates. And we think based on what we see today, we've sized it appropriately again, but it's a very, very volatile environment and we're watching it very closely. And I'll let maybe Chris talk about some of the shifts that are happening in the workforce.

Yeah. Good morning, Robert. We've taken the actions in commercial aviation to reduce the cost with operating expense, maybe down 20 million for the remainder of the year. And we've been pretty aggressive with reductions in force and furloughs. But to your question specifically on the engineering front, as of today, we have over 50 engineers that were working on the avionics products that have been redeployed to DOD work. And now that we're all learning how to work remotely and a little more creatively, not many of those individuals needed to relocate. So I think it's a good story relative to the engineering talent.

That's great. Thank you.

Our next question comes from Gautam Khanna with Cowen. Please proceed with your question.

Hey, good morning, guys.

Good morning.

Just a couple of questions. First on communication systems. I was wondering, in the revised guidance, sort of what's the anticipated foreign tactical arrest change relative to what the prior was? And at PSPC, you know, how much of a lingering drag beyond 2020 do you anticipate seeing as a result of the recession?

So Gautam, maybe touch on both of those pieces. So overall, tactically, we had, I think, a pretty good start to the year. We're up 12%. So DOD was really strong. International was down mid-teens and pretty close to what we had expected. It'll be down in that same range in the second quarter as well, recovering in the back half. You'll start to see a little softer -over-year growth in DOD simply because of the tough compare. So now what we see international to be is roughly flat for the year. Before, we thought it would be up low to mid-single digits, so call that 3%. So now about flat. In that flatness, we still see the APAC or Asia-Pacific region upload double digits. Central Asia up significantly because of Afghanistan and some of the drawdown that's happening there. We still see Middle East, Africa to be up low single digits, but that has come down from the last guidance. Europe will be down mid-single digits. We know Western Europe is getting a little bit better. Eastern Europe is still going to be down. And then that's really, those are really the bigger pieces here. Central America is roughly flat and Canada is going to be down as we had expected in the year. So overall, we still see DOD being up, in fact, a little bit better, up low to mid-teens, around 14%. And now we see international being about flat. On public safety, we've had a very good run here. The last six to eight quarters have been very, very strong. It's been growing. Last year was close to 20% growth. Margins were coming up. We've got a great product line, better quality, really good execution. So we felt very good about that. This year, we were guiding to low single digits, which is in line with the LMR growth rate in North America. As Jay pointed out, down more than 10 points from that. So call that down 10%. So it's about 50, $60 million of revenue erosion. We'll see that pretty prominently here in the second quarter. And probably you'll see it about the same through the balance of the year. It's going to be a pretty tough back end of the year for public safety. I think beyond 2020, it depends on what happens to the economy, state and local tax revenues. Right now, we're fighting in Q2, not just the revenue impact, but just the fact that you have the states and localities dealing with COVID and not able to work doing an installed system that's public safety. So hopefully it could get a little bit better in 2021, but it's too soon to say that. Got him.

Okay. That's a very helpful overview. And then just maybe I missed it, but the integrated vision systems, what's going on there in terms of decline? Maybe I misheard you in the opening remarks, but what changed?

You're talking about IMF, the integrated mission system business? Integrated vision.

Yeah. Oh, integrated vision, the night

vision business?

No, integrated vision systems. I'm sorry, not IMF, the segment.

Okay. Yeah. Integrated vision systems is performing well on the ENBG program. We're meeting our delivery schedules and looking forward to additional opportunities later in the year. That's more domestically. I think the question is probably related to some of the opportunities we have in the Mideast. And we talked about more conservatism in the Mideast. We have not had any cancellations. What we're seeing are delays or holdups. And I think a lot of that just ties to the several factors. The export approval process, including congressional notification, is a whole new process and it's all being done remotely and virtually. And some of our international customers are working remotely. Some have closed their ministries and some actually curfews in place. So we just see all those items contributing to more of a timing issue. So we reduce the outlook there, if that helps.

But still, low to mid single digits in night vision for the year.

Okay. And that would compare to what was the prior?

It was in the low double digits.

Thank you. Appreciate it,

guys. You bet.

Our next question is Doug Harnon with Alliance Bernstein. Please proceed with your question.

Thanks. Good morning. When you talk about the synergies, you're ahead of plan, 165 million net synergies for 2020. And you've had the, and you've also had, I would assume, impediments from COVID-19. I mean, this seems like awfully good progress. I mean, how does this give you more optimism when you look at that $300 million net synergy total overall? And I'd say that from two things. One is you're ahead of plan here, but also you're ahead of plan and perhaps you could have even done better had you not had the COVID-19 issues.

Yeah, we're making really progress here, Doug. Look, we did move forward to $500 and $300 million net, which we expected in calendar 22 to calendar 21. So we're not going to be done at the end of 21. We're going to continue working this into 2022 and it'll become part of normal operations. So we do expect that the ultimate synergy value coming out of this merger is going to be beyond the 500 and 300 we've talked about previously, because we're seeing it already. It's coming forward and it's likely to go up. So we had $65 million in the stub year. We started out of the gauge very, very quickly. I wouldn't say it was conservatism coming into this year, but we were still a fairly new company. There were a lot of moving parts in the year. We guided to an incremental 115 in net synergies earlier this year. That's getting quite a bit better, more visibility that we're seeing right now in indirect spend. We've seen the consolidation of all of our benefits programs now being completely implemented. All of the CHQ and segment consolidations are now essentially done. We're just seeing just better progress. So is there any impact from COVID? It's probably on the fringes. There are going to be some issues that we might have that are already embedded in this number that we're talking about here, Doug. Some of the opportunities are really supply chain related. They may slip out a little bit, but we feel very good about the trajectory we happen to be on. We've got a very seasoned integration team, people that know how to work and drive their jobs and are doing a great job remotely. So we feel good about this. And if anything, we have maybe a little more opportunity in the year as opposed to risk.

Okay, great. Thank you.

Our next question is Noah Poppenack with Goldman Sachs. Please proceed with your question.

Hey, good morning, everyone.

Hey, good morning,

Noah. Bill, just trying to rethink through the 2022 $3 billion free cash flow target as we all do every quarter. And at one point it looked pretty conservative. It's now taken the hit of if you're going to divest 8 to 10% of the revenues and then if there's still aerospace coronavirus impacts that far out. But you're reiterating 2020 with the business sold to Leidos out of the free cash flow and then the reset to aerospace businesses. And then the $3 billion is kind of available. Do you still view that number as having some conservatism in it or is it just sort of hanging on despite the hits that it's taken? And specifically in the aerospace businesses, do those need to recover by then to get to the three or can they actually just walk along the bottom and you can still get to the three?

Well, let me start, Noah. Again, $3 billion, as Bill mentioned, is premised on us being able to continue to get improvement in the working capital to around the 50 days. We still see in spite of the business where things are today, the path to be able to deliver that. We've identified the opportunities and a lot of that, as Bill mentioned, is sitting in inventory. And a lot of those benefits weren't necessarily pegged to the commercial business. There's some of it that was there and yes, we'll see the lower cash flow projection than we otherwise would have before the COVID-19 in commercial. But we have the runway and working capital to be able to do that. As Bill mentioned, we see the path. It's certainly going to be more challenging than it was before. But I wouldn't characterize it as hanging on. I would say that perhaps our buffer, our cushions is a little bit lower than it was before, but the path is still very clear to us.

Okay. That's really helpful. And, Jay, just as a follow up on the free cash flow, any ability to articulate to us what the ongoing seasonality through the year should be? Because if I remember correctly, you had discussed pulling some forward into the fourth quarter of 2019, but then the first quarter of 2020 is better than expected. I know you have some, I know there's a lot of moving pieces in there, but should the free cash flow through the years going forward be relatively level loaded or should it be a pretty steep ramp through the year?

It's probably somewhere a mix between the two. It's been kind of back end loaded over the past number of years. I would say in 2019, even 2019 was a little bit more level loaded. This year, $533 million is pretty consistent with what we did for the companies combined last year. And so, you know, our goal is to make it more linear throughout the year, but I think there's just some, there is some natural level of linearity in there where it will probably be still a little bit more back end loaded there. So, yeah, it will still probably stay a little back end loaded, but again, a lot better than it's been historically in 2019, I think was the start of that.

Thank you. Our next question, Sheila Kylaglu with Jeff Friess. Please proceed with your question.

Good morning, Bill, Chris and Jay, and thanks for the time. Bill, growth is muted in 2020 at 3 to 5 percent organic and just from what we've become accustomed to, I understand aviation is two points of that headwind. I guess, how do we think about some of the revenue capture opportunities and timing, whether it's the 41 proposals you mentioned and the three incremental down selects this quarter and or how the core business just reaccelerates in 20 and 21?

Hey, Sheila, thanks. Thanks so much for the question. The revenue synergy is going to be, you know, rolling out over the next probably 12 to 18 months. You know, as I mentioned in my prepared remarks, orders are in the tens of millions. They could grow more substantial in 21 and 22. They require, they were down selects. They have to be then finally awarded and they start to build in time, you know, again, a year and a half out or so. So, yeah, we're down, we're at 3 to 5 percent this year. The defense business remains very good for us. It's up around 8 percent. You know, international, as Jay mentioned, we're flattish, but the commercial part of the portfolio, which is aerospace public safety, is going to be down more than 20 percent. So, the defense piece, the core defense part of the organization is very healthy. It's high single digits. And as we look out of the next year, you know, we've got, we see, you know, good bookings this year. We see a very good pipeline, about 64 billion dollars of pipeline of opportunities. You know, it's up about 8 percent since we closed on the merger. We have revenue synergy opportunities that are starting to kick in. So, you know, I see us getting back in 21, 22. It's more in that mid-single digit range. Let's see how the next, you know, nine months play out this year and what happens with the COVID pandemic, but, and the budget process beyond 21. But, you know, I think things should recover and we'll be in pretty good shape beyond this year.

Thank you.

You bet.

Our next question, Seth Seifman with JPMorgan. Please proceed with your question. Sorry, we've lost his line. We'll move to John Ravi with Citi. Please proceed.

Hey, thanks everyone and good morning. Bill and Jay, can you talk about the capital allocation? I do certainly appreciate the message around growing free cash flow per share and how repurchases is a big tool for you guys. But can you address that tool in an environment where potentially the norm could move against repurchases? You know, what else could you do with cash in that kind of dynamic?

Well, look, I mean, for at the moment, John, I mean, our overall philosophy on capital deployment really hasn't changed. We're going to drive and generate substantial free cash. We're going to pay an attractive dividend that has a payout ratio in the 30, 35% range. You saw back in February, we raised the dividend by 13%, 10% back in August last year. So we will continue to be committed to paying an attractive dividend. We don't have, our leverage ratio, as Jay pointed out, is pretty attractive. You know, anything debt that's coming due will likely be refinanced. So that won't be a pull on cash. We don't see pension contribution for probably another year or two, depending upon what happens in rates and returns, you know, this year. So it does leave a lot of capacity for deployment. And at the moment, we're still committed to returning that to shareholders in the form of repurchases. I mentioned in my remarks, for the year, we're going to be at $1.7 billion. So we'll return the billion dollars in proceeds from selling SDS. Beyond that, we'll pause it, but we'll have a tremendous amount of capacity at the back end of the year, a lot of liquidity. And I see this sort of normalizing as we get into calendar 21.

Thank you.

Our next question, Ron Epstein with Bank of America. Please proceed with your question.

Yeah, hey, good morning, guys. Good morning. Can you, you mentioned the $64 billion of opportunities now with the joint company. Can you talk about some of those that are more near term, things we can keep an eye on to keep score on how you're doing relative to those $64 billion of opportunities?

Yeah, good morning, Ron. It's Chris. We have several opportunities that I think are a little more significant. You can track later in the third quarter, the current plan is for the next-gen jammer contract to be awarded. It's a competitive opportunity. I think that'll be an interesting to watch. We've talked a lot about our responsive satellites. We've been getting orders and continue to get orders on those satellites. So you can track that. On the ISR front, we've talked a lot about the Paragram program in Australia. They'll have follow-on opportunities, but we also have comparable opportunities in Italy and elsewhere around the world. The EW capabilities, Bahrain, UAE comes to mind. Clearly the tactical radios, we have a fair amount to go here in 2020. And then even on the international front, we're on the maritime, teamed with a variety of OEMs and shipbuilders from Romania to Taiwan to Australia. So you'll be able to track those, highlight those as a couple to follow on.

And if I may just to follow on quickly, do you guys have a position on the Frigate program that was just awarded to the FFGX?

Yeah, yeah. Great question. We have, there were four bids and given our capabilities, we were on all four of the teams. So as you would imagine, I think we're well positioned with Finmeccanica Marinette Marine. And more to come on that. Usually they pick the Frigate first and then the second tier suppliers are negotiated and competed. But we feel very comfortable with our capabilities and being able to participate on that program.

Okay, great. Yeah, in Canton area, sorry about that was my error.

Our next question is Peter Armand, Smith-Baird. Please proceed with your question.

Thanks, Chris. Bill, you gave us some color on the international just flat for this year. I mean, what kind of visibility you have or conversations with your customers? I know Chris mentioned that there's some export offices are closed or some customers are even closed. Just thinking about growth as we exit a COVID-19 world. What kind of bookings do you need to see in the second half of this year?

Thanks. Well, as we said, we think the revenue in international will be roughly flat this year. So clearly, booking some of the orders that are important to back have will require engagement with customers happening today via phone. But we're going to have to sort of start seeing an ability to see customers demonstrate product, sign contracts, and that's going to require some -to-face conversation. So there's been a lot of dialogue happening right now. We're trying to get a sense for the timing of some of the opportunities we have in the back end of the year. We think it was appropriate given some of the short term nature of the opportunities in tactical and electro-optical to pull that out, which is what we've done here to recalibrate international for the year. But as this thing starts to open up, we've got a pretty good team internationally and they're out there meeting with their customers, talking to their customers, and we'll see as we get towards the back end of the year how the orders flow through.

Okay. Just a quick follow up. Chris, is there any incoming from West Cam regarding just from a thermography perspective, just an opportunity in the COVID-19 world? Thanks.

Yeah. No, the West Cam business is doing quite well. I think if you're referring to doing some sort of thermal imaging or such, it's really not at that price point. It's better sticking with their core market and focused on the airborne assets.

So I appreciate that. Appreciate it. Thanks.

Our next question comes from Pete Skibitsky at Elemic Global. You're going to please proceed with your question.

Okay. Good morning, guys. Bill, something I've been curious about, kind of top level, is this topic of 5G. And I know it's obviously kind of a commercial standard, but I've also seen mentioned that DOD is running some pilot projects related to 5G as well. So I'm just curious if you can give us your thoughts from a top level on whether or not this impacts L3Harris in any way, and or if you feel like it's a technology you need to be involved in developing or in some other way. Thanks.

Yeah, Pete, look, it's a good question. I won't be able to give you a complete, fulsome answer on this. But we've had an internal team focused on 5G. We're not an inventor, but we certainly have applications that are using 5G technology. So we do play in the space. We need to be present in the area. We need to find DOD or defense-related applications of 5G. It's going to affect warfighter effectiveness. So we do have specific activities here. I wouldn't say it's a big driver this year, but certainly over time, it's a core capability that we need to have as a leader in spectrum superiority. So clearly, Pete, that's years. Okay, more to come. Thanks for the color. More to come.

Our next question, Miles Walton with UPS. Please proceed with your question.

Thanks. Good morning. Hey, maybe Bill, in addition to the higher progress payments, the DOD seems to be also being pretty aggressive on pulling forward contract awards and getting kind of the money out of the hands of the DOD and obligating that as quick as they can. I'm just curious, did you see that in the quarter, obviously, good bookings at SAS and IMS, or is that something that might help bookings continue to be strong in second and third quarter?

Look, Miles, that's a good question. Credit due to the folks in DOD, really across the services, we've had very active dialogue, both Chris and I and some others on the team with a lot of leaders across DOD and across the services. They've been very aggressive, not just on ProgPay, but accelerating awards. You probably heard Hondo at the Navy accelerating quite substantially awards. So we did see some opportunities move left, some out of Q2 into Q1, some out of the back half of the year into the front half. Chris mentioned A3M. That's an opportunity. We saw an acceleration of an opportunity in IMS, the Virginia AMP. So we did see some opportunities moving left. I think that we'll continue to see DOD is really focused on this, trying to put money on contract that we then quickly then put suppliers on contract so we keep not just cash flowing, but opportunities flowing into the supply base. So certainly something we're all focused on.

Okay. And clarification, Jay, on the slide on the block of EPS, there's pension called out under operations, another 28 cents. How much of that 28 cents is pension?

About 10 cents in that 28. There's a lot of moving parts in there, but pension is incremental, about $25 million. Okay.

Thanks. We'll go next to Michael Ciaramoli with SunTrust. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the questions. Just as I guess as you guys are thinking about COVID-related impacts, disruptions, any other color that you have on your broader supply chain, I mean, you guys are pretty technology driven. I'm sure there's a lot of smaller components, subsystems, discrete electronics you're procuring. Are you seeing any potential risk either from parts procured in the Asia Pacific geography or how are you sizing that potential risk as you go forward here? Any need to build buffer stock of inventory on certain maybe at risk product lines?

Great question. This is Chris. On any given day, there's tens of millions of revenue risk to changes on a weekly basis. We really started looking at this back in January in the Asian markets. I think we've been able to mitigate all that risk. A lot of this depends on the India shuts down, Mexico shuts down. We have to monitor those suppliers, look for second sources. But I think we're doing a real good job. We have a dedicated team focused specifically on COVID supply chain and Bill and I get daily updates on the progress. So great question. We're trying to use predictive analysis, identify the risks and mitigate it on a regular basis. Hope that helped. Thanks, guys. Yeah, perfect.

Our final question comes from Robert with Credit Suisse. Please proceed with your question.

Hi, good morning. Two quick things. Bill, on the state and local budget constraints you talked about before in public safety, how do you think about how the crisis may have revealed any shortcomings in the public safety communications and what might be the opportunity coming out of this thing? And then I have a higher level question just on budget austerity and how you and Chris think about the possibility that the defense budget at some point will be funding stimulus repayment, that sort of thing. Not necessarily what we saw 10 years ago but some kind of shift in spending priorities at the federal level a couple years down

the road. So, hey, look, really good questions. On public safety, this could drive an accelerated shift from LMR to LTE. That's been gaining some steam with FirstNet. Fortunately, we've got a radio that is LMR, LTE capable, both qualified by ATT and Verizon. So I think we're really well positioned for that transition. I think that having a domestic supply base here is important in that particular area. We have certain technologies and applications that could allow us to open up new markets that go beyond first responders to health care providers. We've seen that happen over the last couple of months. So the state and local finances I think will be impacted in the near to medium term. We've tried to capture that in our thoughts. But it could drive an acceleration from LMR to LTE. Relative to your question on the budget, so as you know, the 21 budget came out a couple of months ago from the president, including I think 2% pre-growth in the fight at that obviously was all pre-COVID. There's a lot of discussion happening right now between the authorizers and the appropriators of what the budget will be for 21. It came out about flattish from the president. A lot of the things that we're focused on are well funded in that, including a lot of the classified budgets look pretty good. There's $135 billion of, if you will, surplus investment account funding that still remains out there. It's going to provide a little bit of tailwind to us. As you go out into 22, beyond 22 into 23, you've got an election here. Eventually you've got a $4 trillion deficit that's going to have to be paid for in some ways. But at the same time, you've got a very dangerous world. You can see what the North Koreans are doing, what the Iranians are doing, what the Chinese are doing, Russia. We're going to continue to be tested. The threats remain there. The investments that the DOD is trying to make are really long-term investments in technology that have to sustain beyond the next couple of years. I'm hopeful that there'll be a bipartisan alignment to make sure we continue to fund DOD. Thanks very much for that question, Rob. I appreciate that.

Robert Hagstrom Thanks, Bill.

Robert Hagstrom You bet. Thank you all for joining the call this morning during these uncertain times. We're managing risks aggressively and taking appropriate actions to drive value for all of our shareholders. I hope we'll soon be operating under more favorable conditions. I want to close by thanking our employees for going above and beyond to support our customers and our essential missions, as well as the healthcare workers, first responders, and everyone on the front line fighting COVID-19. Thank you all, and be safe.

Coordinator Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.