L3Harris Technologies, Inc.

Okay, why don't we get started here? I'm Doug Harned, Bernstein's Global Aerospace and Defense Analyst, and I'm really happy to have with us again Chris Kabasic, Chairman and CEO of L3Harris. I don't know if you have anything you want to... I'll just say it's great to be here.

I probably ought to start by saying I will be making forward-looking statements, so refer to our SEC filings there. It's always good to be here, and I'm sure you've got a lot of questions, so... It's been an exciting five years since L3 and Harris merged, and I'd love to talk about what we've done and where we're going.

DAN GALPIN- You know, actually, why don't we start right there? If you look back four to five years, you put these two companies together. When you look at how all that's worked out, what do you think have been the big successes? What do you think perhaps could be better?

Yeah, I think that's a great question. I mean, as I look back on this five years ago, I think the strategic rationale for the merger of equals makes more and more sense each and every day. Both L3 and Harris, when we looked at it independently, felt were too small to compete with the primes and arguably too large to compete with the small. So there were two companies stuck in the middle. We came together, wanted to give different alternatives to our customer, different capabilities. We've had lots of successes in space and other domains, you know, where we're disrupting the market. We've kind of branded ourselves as the trusted disruptor. But I'd say a majority of what happened went on plan, on schedule or better from the integration cost of over $600 million. Everything per the merger agreement with the terms and conditions, the board succession planning, moving headquarters, everything went exactly how we laid it out. You know, there was a disruption relative to our integration. as a result of COVID and the pandemic. So that would probably be the one area where we lost some momentum, which is why we're rolling out what we're calling LHX Next, which is really the continuation or the second wave of the integration or transformation of the company. Did some portfolio shaping, sold some non-core assets, made a couple acquisitions, as you're well aware of. So we're pleased with where we are, and we think we've had good success. We've laid out Back in December, our 2026 framework of $23 billion of revenue. We already have industry-leading margins, but we committed to at least 16% margins and $2.8 billion of free cash flow, up from $2 billion last year. So pretty aggressive targets. We had a good first quarter. Everything is tracking.

So if you pull back and look at the budget, the macro level, so the 2025 budget has It has been constrained by congressional caps, so it's actually even down a little bit in real dollars. How do you look at that budget environment from an L3Harris lens?

We spend a lot of time looking at the budget just to recalibrate everyone. For 2024, we just used the top-line budget as a proxy, is $844 billion dollars. And the constraint is a 1% growth, so 2025 would be 852. Now, fortunately, we had a $67 billion supplemental, so I look at 2024 as 911 billion, I guess arguably going to 852. It is an election year, and I think history has shown when you look at the threats in the world, which everybody acknowledges is getting more and more dangerous, the budget ultimately follows. Senator Wicker just put out a letter yesterday, I think, you know, who's the leading Republican on the Senate Armed Services Committee requesting another $55 billion for 2025. And I think there's a lot of discussion about the need to increase the 2025 defense budget. There'll be a continuing resolution as always. And I think post-election there'll be markups and, you know, we think there'll be growth in the defense budget. But maybe more importantly, when I look at our portfolio, which we have purposely focused on national security and for the future fight or future warfare, I like where our positioning is. We have capabilities in space, capabilities in air, maritime, a lot of autonomy, ground with resilient communications and cyber, and of course with aerojet rocketine, munitions and solid rocket motors. I think when you look at the budget and where the money is going, it aligns pretty well with our portfolio.

In your discussions on the Hill, how do you see the dynamics playing out? I would argue this has been a pretty dysfunctional Congress in terms of trying to pass any kind of budget. Do you see any potential for breakthroughs here? Clearly, we've got an election coming up, which complicates things, but what do you hear?

Yeah, I hear it's the usual battle, right? I think there's a general belief that you need more money in defense. And then you have those that say, well, for every dollar you put in defense, you ought to add a dollar to non-defense. You know, some people are for that, some people are against it, right? So it's going to be that balancing act. And then, of course, we have the national debt that's really, I think, the bigger concern. How much more debt can we incur? The cost of the debt's getting more expensive. So we go through all those dynamics. We also diversify A little bit of that, you know, with going to international markets, about 20% of our revenues from our allies, so those markets tend to be growing. But back here in the U.S., I think it's going to be a deliberation process, and I think ultimately, you know, they're going to look at what's going on around the world, and there will be additional funding. Everybody in the DOD wants it. And I think it's ultimately just getting the mindset of the ecosystem being on a wartime footing. And I've said this before, I think the defense industry is is on this wartime footing mindset. We have several factories running two shifts, three shifts. We need Congress on a wartime footing, which means you approve the budget timely. You need the DOD to award contracts on schedule or early, make decisions. And until the whole ecosystem is there, it's going to continue like it has the past decade, and we're going to have these inefficiencies.

Now, the supplemental was passed. How did L3 Harris fare in the supplemental?

Yeah, I mean, from what we look at, we're in pretty good shape. There was money in there for tactical radios, which, again, I think is one of the lessons learned in Ukraine, is the importance of having resilient communications, being able to pass data, video, voice, without having it jammed, interrupted, or intercepted. So that's one of our sweet spots with a lot of our technology and waveforms, data links, as an example, some money in there for night vision goggles. And then as a supplier to a couple of missile primes, You know, with our solid rocket motors, we have a fair amount of work in there as well.

Yeah. Now, supply chain's been a challenge over the last few years. Semiconductors were a big part of that. Can you talk about where you stand today, kind of across that supply chain? What's difficult? How it's getting better?

It's definitely getting better. You know, I wouldn't want to ever declare a success, but I think it's for the most part behind us. You know, we're continuing under our LHX Next initiative. to really focus on supply chain here, not only the resiliency, but the ability to be more strategic, enter long-term agreements, maybe not just have single source or sole source suppliers, diversify a little bit. And then more importantly, as we develop new technologies, new capabilities, our engineers are really focused more on the design for supply chain, design for manufacturability. How do we design products where we know there's a supply chain and able to make them efficiently with higher quality and on-time delivery. So that's kind of what's changing. But I think for the most part, it's behind us. There'll be a couple things pop up here and there, but that's kind of business as usual.

I mean, you had a buildup in inventories a little bit, particularly in communication systems related to semiconductors. I mean, is that kind of washing through now?

That is washing through. I can assure you our CFO and myself and our P&L leaders spend a lot of time managing the balance sheet and bringing down those inventory balances. I am proud to say, even through all that churn, we did not miss any contractual deliveries out of our communications business because we were clearly focused on getting every part, unfortunately, at any cost, expediting fees and such. But we did meet our commitments, and I think that's allowed us to continue to win new business and build record backlog not only in communications but for the company in total.

related to supply chain has been inflation. And at one point, I would have thought was completely a virtue was the high percentage of fixed price contracts you have. But when you get into these high inflation environments, that gets tough. And I know that's impacted your margins. How do you see things now in terms of the effect of inflation, both on the contracts you have in place and the ability when you're doing follow-ons or new contracts to get that pricing in there?

Yeah, that's a great question. Yeah, so inflation's been around forever, right? And we've been pricing, you go back 20, 30 years, I think the industry had inflationary assumptions. And then when the inflation didn't occur, I think we all used that to our benefit and increase our margins. And then it turned around on us, right? We had certain assumptions, but not enough for the inflationary impacts And, you know, it's been well communicated. The defense industry pretty much did absorb the inflationary impacts for the Department of Defense for several years, given all of our backlog. We have long-term contracts. We could not renegotiate those. The DOD never funded, had the money to reimburse us. So I think we've all given up on going back and trying to get made whole. That's like doing equitable prices. Equitable price. Yeah. They talk a good game, but nobody got any money to the best of my knowledge. So I think we've all kind of given up and moved forward. So what we have to do on our bidding discipline, there's a lot of focus on fees and types of contracts, but it's really getting the cost basis right. So you have actual data as to how long it takes to build satellite or whatever the product is. You know the cost of the labor because you're currently paying them and you have inflationary assumptions. And the same with the supply chain. So our goal is to adequately bid our products. What's the labor? What's the material? What's the overhead? And what's a reasonable fee for that work? So we've been doing that each and every year. And I think we're getting better and better. And we're building that into our new products. So the DOD, in effect, is now paying you know, market value based on the cost of labor and materials. And I think they recognize that.

So we jump over to communication systems. I mean, this is a very high margin business. You've got a lot of your own intellectual property in there. It's allowed you to do commercial contracts. When you look at the tactical radio business, how do you see that progressing in terms of demand, both in terms of outfitting the U.S., Army, Navy, and international?

Yeah. So that is clearly our highest margin business. Tactical radios, we'll start with the U.S. domestically. There's a modernization in process. To give you some calibration, there's a discussion about the need for 425,000 radios, I think, Year to inception to date, we're probably about 130,000. So you can look at that and see a seven to 10 year runway, at least for the Army. I think for the Marines, Navy, it's kind of three to five. But there's literally hundreds of thousands of radios that need to continue to be modernized. So we have pretty good visibility.

On those radios, so is that a steady run? Or is it something that grows over time? How should we think about the trajectory for that need?

Yeah, we tend to be about 50% domestic, 50% international. So we look at continuous growth in that market. We have record backlog over $2 billion in tactical radios, which I don't think anyone ever thought was possible. There's been huge demand internationally with the NATO countries, the need for, as I mentioned, resilient comms, the supplemental. You look at what we're doing with Ukraine, Europe, really on a global basis. First half of this year, was a little more heavily weighted towards domestic deliveries, which is why the margins were a little lower than our guide. And then we'll have much more international deliveries in the second half. So that will get the margins up. But there's pretty good visibility and transparency. These are all software-defined radios, so they're easy to modernize and update. And it's kind of year-to-year, quick-turn business orders. There are scenarios where we can actually get an order and deliver a radio within the same week. So that kind of gives you the magnitude of the speed that this works, which is kind of unusual for a defense contractor.

Now, when you were in the throes of the supply chain difficulties, I know at that point in time, I think you were prioritizing a little more on the international deliveries, which were higher margin. You built up some inventory. Where do you stand now in terms of getting back to that inventory question, burning off that old inventory that's stacked up? Are we still going to see a little bit of a wave here of inventory release in radios?

You should see a reduction in inventory, absolutely, and you should see a ramp in the revenue and the deliveries. We prioritize based on our contractual commitments. That was which happened in that case to be more international. As I mentioned, we made all those commitments. But, you know, clearly there's a lot of common parts in these radios, which is one of the reasons we're able to turn them so quickly and deliver the high margins.

Yeah. And so going back to what you talked about back at your investor conference where you're looking at 100 basis point improvements in margins in each of your for businesses. I mean, this was the one, and I think I asked you about this on an earnings call, this was the one you pointed to as perhaps the easiest opportunity.

Yeah, I don't think any of it's easy. I think I said it was the nearer term.

Easy might be the wrong word, but highest potential, in a sense.

They'll all get there. I think this one will get there quicker because of the commerciality, the fact that we get to keep a majority of the savings, the ability to improve our on-time deliveries, our roll-through put yield, improve on quality, all those steps, you know, cut the cycle time and increase the profitability. We're doing longer term agreements with our supply chain, kind of a change in mindset instead of going quarter to quarter, purchase order to purchase order. We're laying out and giving them insight to our roadmap. A lot of our suppliers are willing to invest in new machinery, new equipment to enhance their own productivity. And we're entering those long-term agreements where it makes sense. So all those things are going to contribute to the 100 basis points. And I think that's just in TACOM, which is part of a larger segment. So I think they have the likelihood to get there first and maybe easiest. I'm sure the team's listening.

I know no one wants to hear that word.

It's more based on the business model and the short cycle business.

And if you're, and is this, I mean, should we think about this as a 25% margin business or given the commercial nature of a lot of your contracts, I mean, what's the potential here?

Well, you're talking at the segment level.

At the segment level, yeah.

At the segment level, which, you know, we have some more traditional programmatic places, right, that tend to run 10%, 12%, 13% margin. So when you blend it together, you know. 25 is not a bad aspiration. And then we go year over year improvement. So I don't want to put a cap on it or limit it. But we should continue to grow margins year over year.

And then if you take another attractive structure, which is on the night vision goggles there, what's the outlook for that now? It seems to go up and down in the budget quite a bit.

It does seem to go up and down. It is in the budget, finally. So I think there's great technology in these night vision goggles. There's a lot of focus on virtual reality and all that type of stuff. And I think those programs are struggling. I think it's well known that there's technical difficulties. And I think when the Army looks at the importance of the mission, you need both the more traditional night vision goggles that we produce, when you're actually in battle. And maybe the virtual reality and such is better used for training. So I think there's enough room for both. And again, when you look at the capabilities, not only domestically, but internationally, we seem to have a tailwind here in the night vision. And I think that's one of the lessons from a lot of these conflicts. Nobody likes these conflicts, right? But there is all this view about future warfare, JADC2 and communication. But at the end of the day, you ultimately end up with boots on the ground. You need the radios. You need to be able to communicate, not be jammed. You need the night vision goggles, you know, to see, obviously, the adversaries and such. So, you know, I don't see a future where you don't have those. And having tried them, they're pretty amazing. They are pretty amazing. I think you can get them on the Internet. Really? Yeah. If anyone's interested.

Okay.

Not including that in your growth? That's not in my growth profile. That's all upside. Ken will be passing out coupons at the end.

So you did the TDL acquisition. So you have link 16 in there. Can you talk about, now that you have it, what opportunities is that giving you?

Yeah, TDL, this is the tactical data link part of Viasat that we bought in January of 93. We were just out at Salt Lake City the last couple days, Ken and I going through the business, looking at the opportunities. Again, we're seeing more and more focus on the importance of having the ability to communicate without being jammed, without being interrupted, intercepted, without being geolocated. Link 16 has been a great addition to the portfolio. It gives us a footprint on 20,000 different platforms of all types, aircraft, ships, and such. So now we're able to insert and sell different waveforms, different data links into these existing platforms. So it's probably working out a little better than we thought. We were able to get Link 16 in space just the other day. One of the generals talked about the importance of Link 16 in space and how that's been a game changer. And that was why when we were going through the acquisition, we really wanted to make sure not only that we got the more traditional business, they did have a space business, and that was kind of the, It took a while to negotiate. But, you know, we get Link 16 in space, which we started. It's a game changer, and that's the customer speaking, not me. So I think there's tons of opportunity. Again, commercial business model on a fair amount of their products, which gives us the opportunity for higher margins, you know, 20% range or so. So I think we're going to look back and see that that was a really good deal.

And how do you tie in? I'm trying to picture with your other products what the leverage is. I understand the attractiveness of TDL itself. Right. But how does it fit with what other things you're doing?

Yeah, this goes back to, you know, the acronym that we talk about, this joint all-domain command and control. This has been a major focus of the DoD, although it's hard to find, you know, contracts and budget line items for this. So it's just the ability... to get these satellites to communicate amongst themselves, satellites to air vehicles, air vehicles to ships. So it just kind of becomes built into some of our solutions. I think by all accounts, it's somewhat lagging from a DOD perspective. They've been talking about this, it seems like, for a decade. But ultimately, that's where it needs to go, and I think that's where we feel we're well positioned.

Well, it's interesting you describe it that way because, You hear some conversations about it as kind of grand unified field theory of everything. But on the other hand, philosophically, it can be down at a more segmented level where you're connecting some things together. Is that how you view it?

I view you just kind of have to start connecting piece by piece. And then you look back years from now, and then there's more pieces connected than less. But if you're going to sit around for this grand vision that someday everything is going to be connected to each other. You can only go there product by product, program by program. And that's kind of the approach we've been taking.

So we switch over to space. So space and airborne. I mean, this is one where I was in your facility down in Melbourne and very impressive sort of doing small sats and what I would call next-gen space. Right. What do you see as the opportunity for growth in space?

Yeah, I mean, we're kind of saying mid-single digit for growth in space, but clearly this is probably the best example, going back to your first question, where we believe we've disrupted a market and are now a new entrant. I'd like to talk about at the time of merger, we had no satellites in orbit today anymore, between what's in orbit, what's in backlog, it's over 60. So we are a prime provider of satellites. We've run the table with the SDA, having one Tron zero, one and two, each more profitable than the latter. No other company has done that. And, you know, it's our speed to market and reliability. We have some great technologies in this case that you've heard us talk about that was more focused on weather that we've been able to repurpose for missile tracking and missile warning, there's a lot of classified satellites. These are constellations with three to five-year lives. So this is a replenishment factor. It's taking capability that was historically airborne and moving it to space. So from our side, having the ability to have literally dozens or hundreds of satellites in orbit with three to five-year lives, it really becomes an annuity. And I think it differentiates us from our competitors and These are $40, $50 million satellites, not billion-dollar satellites, mainly in low-Earth orbit, some other orbits. But we're proud of what we've accomplished. The team's done a great job. We're investing in a new factory, and it's becoming about reliability and speed. We're delivering on time. Satellites are working.

So how all of this works, I have to say, is not obvious to most people. And can you, when you look at, these constellations, which can have hundreds of satellites in them. And when you think about bids, they're traditional suppliers. There's L3Harris, , Lockheed Martin. There are new entrants that people have tried to bring them in. So you're bidding on individual tranches. How does all of this fit together? I mean, are we going to see a long-term satellite production system here where we continue to see tranches that are always competed?

Yeah, I think the government always likes competition. I think, you know, we've, I think tranche zero, there might have been nine bidders and three winners. And then, you know, tranche one, probably a couple guys went out of business or lost money or didn't work. I'm guessing there were like six bidders and three winners. And I think this last one, there were five bidders and three winners. And, you know, Some companies have withdrawn from the market for a variety of reasons. So I think you probably get down to just a handful. I could see, you know, given the quantity down the road, maybe always I'd like a two-person, you know, split by, you know, based on performance, capability, and price. But I don't know if they're ever going to put all their eggs in one basket because I don't know from a capacity if anyone can crank out, you know, 75, 100 satellites a year. But you do think this –

This will narrow down a little bit. I think it's just... It just seems too complex to have too many people, I mean, constantly bidding on each tranche. I mean, I don't know how you switch out providers.

Well, yeah, we're three for three, so I kind of like what we're doing. I would think if I was O for three and the team came forward and said, let's bid tranche three, at some point you've got to prioritize your R&D and your bidding proposal and your marketing cost. and say it appears that our probability of winning is pretty low, and each time you win, it increases your probability of the next one because you have the know-how, the learning curve, right? You have the presence. You have the past performance, and if the past performance is good. So I think it's just natural that people are just going to focus on different capabilities. But, you know, we're in this market. We plan to stay on it. I think from a customer perspective, they put out RFPs and, 357 bid, you know, the more the merrier from their mind, and they pick it based on the selection criteria, which is usually schedule, technical, and cost. We've been performing quite well.

Well, if you look at these with three- to five-year lifetimes, so you've got kind of a constant flywheel of replacements that will go for as long as one can imagine here, I think. So what does that look like in terms of your plans to potentially increase capacity for And because these will be fixed price in nature, expand margins.

I think we are expanding capacity. You saw we're building a satellite factory of the future, which will allow us to be able to produce these even more efficiently and cost-effectively than we are currently. And, you know, like anything, you bid fixed price based on your actual cost estimate. And then, you know, with performance and continuous improvement, you know, you might be able to get some extra 100 pips or so per contract.

So if you look at space, you were saying that you expect space to grow mid-single digit. But if I look at space and airborne as a whole, the other portion of that is, I think, flatter. Is that...?

Correct. And that would be mainly the airborne assets, right? Because a lot of those missions are, in fact, moving... to space-based solutions. So the two will always exist. You'll need the airplanes. You'll need the satellites. Just more and more things are moving to space, as you've read and seen. And I think that kind of keeps the core airborne business, where, again, we're a merchant supplier, a subcontractor, core processors, memory systems, F-35, F-22, F-16, all those, you know, good, solid business, great capabilities, but not a lot of growth.

Well, on F-35... So you've been right in the middle of the whole TR3, Tech Refresh 3 upgrade. Can you talk about where that stands now and your role in that? I know you have software suppliers involved. What's happening there?

Yeah, TR3, we kind of get billed as being the TR3 guys, which is fine. But TR3 is much larger than just L3 errors. There's radars. There's the core processors. There's the software. I would say each and every quarter, each and every week, we kind of monitor this weekly, as you'd imagine. We're gaining momentum. You know, we're working collaboratively with Lockheed. You know, in fact, we're all getting together next week and kind of doing a CEO summit to check status and progress. But, you know, we're keeping up with the demand. And we have the core processor, the panoramic cockpit display, the memory system. The latter two are going reasonably well. It's the core processor that was delayed going back a few years, but we're delivering those. And I think for the most part, Lockheed Martin's happy with us. We're working collaboratively with the end users, and I think it's going well.

Does that look like a fairly stable revenue stream? Is there sort of a hiccup in here as you go through next year when?

No, it's pretty flattish. It's pretty flattish. And then the question will be, you know, how many aircraft do you go back and upgrade and whether that, you know, from our perspective might be a unique tailwind, right, because we'll be able to go back and retrofit, if you will, the existing aircrafts that have already been delivered. But right now we're focused on the current lots. I think at some point there will be a desire maybe to go back. That may give you a little bit of a lift. Absolutely. There.

Yeah. So if you look at space and airborne and you look at that, 100 basis point margin expansion goal, where do you expect that to come from?

Yeah, I think I'd kind of put that in your scale. That would probably be number two on my list after communications relative to getting there. I think I see it from a couple places. You know, F-35, as we get into production, right, as we've continued the development, we should be able to get some better margins based on our performance there as we increase deliveries there. have better quality, better on-time deliveries. I think in space, you know, we did make investments, bid lower margins to kind of get into that new market. Now that we're into tranche two, tranche three, I think we have a tailwind there. We have a billion-dollar cyber business that we don't talk a lot about, but, you know, that tends to be a growth market, and there's some unique business models within there where we can continue to grow. You can grow margin in cyber business? Absolutely. Okay. There's some commercial business models, some software, some types there that we're going to be able to grow. You know, and then all this comes under this whole LHX next, you know, taking out the cost, the billion dollar cost takeout by 2026 is going to contribute to the margins as well.

Yeah. We go over to IMS. So this is an area that, if we go back a year ago, was difficult. You had some EAC issues. some large negative EACs there. Can you talk about how that stands now, particularly the ISR portion of this?

Yeah, we have all new leadership at key positions, including the president of ISR, relatively new leaders at the segment IMS level. I think this was the longest cycle business, so this would probably come in fourth relative to the 100 basis points because of the long cycle business and having to absorb some of the disruptions caused by supply chain and labor and such. So we've had two good quarters relative to negative EACs, so we're getting good momentum. I think we're continuing to bid with even more and more discipline. I think we just have a different mindset down there, and we're doing a lot better. Armed Overwatch is a good example. That was a new disruptive win. The budget has 12 in for 2025, so that program's continuing. So that gives us a lot of momentum. And, you know, the nice thing there when you look at just not only that program or that platform, it has L3 Harris radios, it has L3 Harris turrets. So you look at the synergy and the pull through of some of our high margin products, it kind of makes for a nice overall solution. So I'm pleased with the progress there. You know, building airplanes are probably one of the more complicated things, especially getting through the test regime, FAA certification, which is not as easy as it used to be given some of the challenges. in the overall industry, but we're making pretty good progress.

So when you talk about long cycle, I mean, the way I interpret that is that basically your fixed price contracts that may run three or four years rather than like a radio one that could be... Three or four days. Yes. Exactly. Kind of like a year, but you're sort of still stuck with the overhang of things that didn't include all of the inflation effects that had happened. Is that fair?

Yeah, but like I said, a majority of that's behind us. I don't know if we're 70%, 80% behind it, but we're renegotiating, not renegotiating, we're rebidding on new lots. We're pretty aggressive. Been very successful in the bizjet market with taking bizjets for ISR. We work with, again, we're platform agnostic. We work with Gulfstream. We work with Bombardier. We have some opportunities that we're pursuing around the world, and that market's been pretty good. There's an Army program called Hades, you know, which we're excited. It could be up to 10 aircraft. Interesting thing here from a margin perspective is the Army has actually procured the aircraft, so we'll just be focusing on the mission systems, which will have higher margins than buying the aircraft at a single-digit margin and then doing the – so we're waiting for that award. That would be a big win for the company.

Now, I thought one of the challenges here – And my experience with this business is from a long time ago where you had some programs that you don't want anymore, which are head of state, aircraft, things like you don't do there. But I remember being in the sites, Waco, Greenville. I thought you had some real issues here with attrition. And those aren't huge metropolitan areas. Getting that workforce back, experienced, after COVID. How is that gone? Where do you stand on the labor side?

Yeah, the labor side, just corporate-wide, the attrition is way down. And in ISR specifically, it's stabilized. So a lot of the talented workforce down there, you know, went into the commercial MRO market, kind of in the greater Dallas, Fort Worth area. So We're in pretty good shape. We do a lot. We spend a lot of time on the focus on the employees, you know, things that may not seem significant, but they are well received by the workforce, keeping the medical costs flat for two straight years. You know, we're increasing the types of benefits that we provide, not only medical, dental, vision, and other things. So we have lots of different programs. We kind of have a – pre-retirement program where instead of just retiring, people go down to 20 hours a week, take advantage of their knowledge and kind of ease in, get another year or two out of them. Those types of creative programs have worked quite well and been well-received, especially on the knowledge transfer. So you think you're pretty much out of any issues there with respect to labor? Yeah. Now as we win these new programs, we'll have to ramp up and get more labor, but we do a lot of new college grad hires probably get close to 1,000 this year, bringing people at different levels, experienced hires. We'll probably hire 7,000 people this year all in between new college grads and experienced hires, which is probably more than you expect, but that's what we're going for.

And you're also, I think you're expecting more international work as well, right, which should be margin.

Yeah, all the biz jets will probably be, other than the Hades for the U.S. Army, which is high-altitude aircraft, will be international. We've had great success there, European country, Australia, we've talked about, and there's a couple other in the pipeline in the Far East.

And then the other piece of this, which seems to not get talked about very much, is the electro-optical side, which I think has performed very well, and even when you had some of the challenges on the ISR side, has held up. What does that look like right now?

Yeah, you're right. I don't know why we don't talk about that more because it's a great business. It's pretty big, too. It's pretty big, and its margins are accretive to L3 Harris. Yeah, we're seeing growth. We've really tried to transform. We built a new factory about five or six years ago. We're seeing the efficiencies from that new market. There were some export challenges to certain countries, which is always... kind of slowed us down a little bit, but we've kind of overcome that for the most part. And these are the turrets, cameras that go on the bottom of airplanes, helicopters. I think we're going to be close to 700 deliveries this year, which would be a record. So we're seeing top line growth. We're seeing margin improvement. Same thing we're doing with the radios. You know, it's a factory. We're entering into long-term agreements. And it's really just the basic block. If you can get that rolled throughput yield up, if you can get the quality numbers, cost report quality down, on-time deliveries, this all contributes to the margins. And that's the mindset that we're setting, and we monitor this on a weekly basis, daily basis to be precise, and we're starting to see improvements.

And so if you roll this up into IMS, what are you thinking about in terms of growth rate top line?

Top line growth? You know, I think I'm going to always kind of say something like mid-single digit at this point to be consistent with what you've said. Some of those could be at the higher end of mid-single digits. Some could be at the lower end. These guys might be at the lower end of mid-single digit. SAS may be at the higher end of mid-single digit. But corporate-wide, that's how we're going to get to the $23 billion in 2026.

So Aerojet Rocketdyne. So you acquired that, missiles. as missile demands only become hotter. But at the same time, Aerojet Rocketdyne and Rocket Motors had a pretty difficult time delivering.

They did.

How's that going now?

I would say it's going better than I expected. We made significant changes in leadership. Pretty much everyone at Aerojet Rocketdyne is no longer with the company. We brought in either promoted from within, We've hired people from Lockheed. We've hired people from Raytheon. We absolutely, I think if I look at that team, 80% has, no kidding, missile solid rocket motor experience. So that was always a concern for reasons I didn't quite understand. So we have the talent and the capability. They had what we have now called delinquency backlog. These are solid rocket motors that were late to contract. All sorts of excuses, failed acquisition, proxy fight, you know, doesn't matter to me. It is what it is. By the end of this year, that will be burned down 40%. So, you know, the workforce is absolutely highly engaged. We've invested in capital for near-term fixes. We're digitizing throughout the course of the year some of the factories. The Department of Defense has given us Defense Protection Act money that we've talked about, $215 million to increase capacity, the key to production. is going to be the capacity. The industry consolidated back through the 90s and through the peace dividend and such, and that is the number one challenge, I believe, which I've said publicly to get on this wartime footing, is we don't have the infrastructure as a country to meet the surge. So this money, the 215, is to build factories, to order equipment, mixers and such, ovens, so we can increase the production, mainly at our facility in Camden, Arkansas. So going back to the wartime footing, we're going through the process, and we're struggling with a few bureaucratic things like environmental NEPA, environmental protection, getting the licenses and permits, which to me is disappointing and slowing down, and that's why I've kind of been outspoken. If it's China, China, China, if we're on a global, we're going to be on a wartime footing, we've got to cut through all this bureaucracy, And, you know, start building roads, start building buildings. We've ordered the equipment. That piece, as you can tell, is a little behind for all this administrative nonsense that we're dealing with. So I'd like that to go faster, and then I think we're in a really good sweet spot. Reducing it by 40%. We've submitted, I think, over $11 billion of bids since buying the company in July of 2023. We're winning, you know, a lot of new business, record backlog. And the team has really come through quite well. So we have to continue. We're working with some interesting startup companies, trying to share intellectual property. It's all about production. We have some agreements in Australia to co-produce in Australia. We're talking to a company in Europe. So our goal is to produce these solid rocket motors anywhere in the world to meet the surge. And the backlog and the demand is at an all-time high. So I think people are going to look back and say, this one makes a lot of sense. The margins are improving. The cash dynamics are improving. The customer relations are much better than they used to be and really proud of what the team's done.

Yeah, if you look back before you acquired it, Aerojet Rocketdyne appeared to be losing some share to Northrop Grumman. At the same time, you had the customer frustration and Raytheon and Lockheed each talking about trying to vertically integrate into this space. Do you feel like that's no longer an issue in terms of loss of share or any risk from your customers trying to move in here?

I think the customer likes all the management changes. I think they like our focus. They like the fact that we're investing. They like the fact that the DOD has given us money. And this is a priority for me, for our board of directors, and for the leadership team. So they're seeing the results. And, you know, your customers are never happy, but I would say if you ask them, the relationship's a lot better than it used to be, and that's making a difference. We're working collaboratively. They need us. We need them. And, you know, we just won the NGI bid, all-time billion dollars for the propulsion system for Lockheed Martin. So, you know, we're pretty excited about that. Again, we were on both teams, but we're in a good position there. And, you know, that's going to be a game changer for us for large solid rocket motors. When should we start to see impact from that? Yeah, I would think it will ramp up slowly, probably starting in 2025, but again, you know. Okay, that's fairly soon. Not huge, but we're going to have to build the facilities and invest in the infrastructure and such, so we're still negotiating that particular subcontract. And when you look at your 100 basis points there? Well, they'd have to come in third, based on what I said. Coms one, SAS second, they're third, and

I don't know if you said IMS was fourth. Okay, I just did. IMS was fourth. So they're third, and how do you do it there? I think on the, and I always felt, and I've talked to you about this, on the kind of rocket dying side, it looked pretty difficult to me to do a lot, but perhaps I'm wrong there, but on the rocket motor side, is that where the most potential is?

Yeah, I would say on the rocket motor side, but, you know, on the, The Rocketdyne side, or the space engine side, we have the RL-10 upper stage rockets, well over 150 in backlog. We're now 3D printing, I think, 95% of the parts. There's minimal competition for that because our price is so competitive based on our manufacturing efficiency that it's a great, great position to be in. So UOA is a great customer. We have some other customers that we're pursuing. It's a solid business. We have the RS-25s for NASA, which is more of a cost-plus play. But the margin growth will come out of the solid rocket motor based on just quantity, increased production, better negotiating, better bidding discipline.

So when you talk about the LHX next, when you go across all of this, you're talking about a billion dollars savings. But I think you keep 400 of that in your estimates. Is that other 600 mainly sort of goodness that you give back to the customer?

It's going somewhere. So yeah, I think they're getting it.

Is that what it is?

That is what it is. So just to refresh everybody's memory, and this is what I started with. This was the interruption of COVID. We never, in my opinion, completely integrated the transformation of L3 Harris. So we're calling this LHX, our ticker symbol, LHX Next, which is the second phase. And it's more than taking out cost. It's transforming the company. But on the cost side, we said we'd take a billion dollars of gross run rate savings out by 2026. Talk about $400 million by the end of this year. We had a 5% reduction in workforce in April, which got us over $300 million. So I feel confident in the $400. But I kind of look at these as floors. I think the $400 million that we keep, It'll be what it'll be. We just did an estimate, right, because it depends which entity saves the money, whether it's cost plus, fixed price, forward pricing rate. So, you know, we made our best estimate. I mean, it's going to be what it's going to be. I'm hoping 400 is a floor. I'm hoping a billion is a floor. And I'm hoping 2026 is, you know, the latest we get there. So we're off to a great start. We put dedicated resources focused on this initiative. And, you know, we'll see where it goes. But We're off to a good start, better than I think a lot of people expected. We start seeing that in our margins. And that's how we're going to get to 16% through OHX Next, first and foremost. Focus on workforce, focus on infrastructure, focus on supply chain. You couple that with our bidding discipline, you know, and then better performance on our programs. The combination of those three are going to get us to the 16% margins.

So when you look at your portfolio now, than the Arch at Rocketdyne acquisition. Is there anything else you're looking at on the acquisition side, but also divestitures? Are you done with portfolio shaping here?

I'm never done with portfolio shaping. So, no, we constantly evaluate and take kind of a portfolio approach to the business, just like everyone in the audience does, right? So you have to forecast Where is the future demand? Where is the future fight? In our case, as a national security company, we thought resilient comms and weapons, which is why we went out and made these acquisitions. We have some non-core assets. We're not going to sell stuff that's dilutive or destroys value. So when I say I'm going to sell something, people try to give us 50 cents on the dollar. We turn it down. So these are solid businesses. We're going to continue to run them, but we want to sell these at something reasonable, consistent with our trading multiples. So there's no fire sale going on. We have some small things. We'll announce something in a week, and we've announced CAVs. So we'll get the cash, pay down our debt to 3.0, focus on a competitive dividend, share repurchase. On the M&A front, I said we don't plan on doing any M&A for the foreseeable future. I like the portfolio. We're investing in venture capital funds and getting presence there and some exciting new technologies that we're pulling through. So I'm really happy with the portfolio, and now we just have to continue to execute the next couple of years to achieve that 2026 framework, which I think the team has a lot of confidence in based on what we've done and what we've seen so far.

Well, on that topic of innovation, historically, L3 Harris and its predecessors, have spent more on R&D as a percent of sales, sort of 4% to 5% type range than any of your big peers. That's given you the opportunities that you have to get margins like we see in communication systems. But now, when you look forward, there's perhaps a different set of opportunities than there was back with radios and so forth. So how do you think about the size of that R&D spend going forward? and where it's going to help you win?

Yeah, it's a great question. I mean, we do our annual strategic plan. We don't have a number necessarily set. I think the last couple years has drifted down closer to 3%. There's a couple reasons for it. We look at kind of our innovation strategy or innovation investments. We're getting customer R&D contracts where the customer is paying us to develop technologies, you know, and that's well over a billion dollars, which is a great thing. We have our internal R&D, which is $600 million, $700 million. And then we have venture capital through Shield Capital, where we're actually invested in about 30 portfolio companies. So we own 1%, 2%, 3%. We'll double our money, triple our money, which is fine. But it's really to get that technology that's already been invested in. So if we're getting technology from 30 venture capital firms, that's saving me IRAD. So we look at it as a portfolio of three. I don't think we're ever going to shortchange our investments. And, you know, you have to go when there's a continuing resolution. You don't need a lot of IRAD. You kind of need a budget. So we kind of back-end load it, wait for the budget to come out, and make sure that what we're investing in is actually going to be funded. So it's a pretty dynamic process. I think it's working reasonably well. We prioritize it. You know, we're focused on space. We're focused on resilient comms. Not a lot of new things in the – Solid Rocket Motors, just new programs. But the focus there is on production and manufacturing.

Well, great. I think we've got to leave it there. But, Chris, thank you very much for joining us today. No, thank you. And thank you all for joining us. Appreciate it.