L3Harris Technologies Inc (LHX) — Q3 2020 Earnings Call Transcript

Thank you, Rob. Good morning and welcome to our third quarter 2020 earnings call. On the call with me today are Bill Brown, our CEO; Chris Kubasik, 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 our press release, 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 year-over-year comparability, following the L3Harris merger, the first half of prior-year results will be on a pro forma basis. With that, Bill, I’ll turn it over to you.

Thank you, Rajeev, and good morning, everyone. So two years ago this month, we announced the merger of L3 and Harris. Thanks to the hard work and perseverance of our employees, we've been able to deliver results consistent with or better than expectations, despite market volatility and unforeseen obstacles like COVID. Their efforts have led to another strong quarter and put us in a position to raise our 2020 guidance. The mitigation plans we implemented earlier in the year to manage COVID-19 have proven effective in keeping our employees safe and our facilities open and will remain in place for the foreseeable future. We also continue to support our supply chain through accelerated payments, totaling over $200 million in the quarter and nearly $0.5 billion year-to-date, and we expect these advances will continue in the fourth quarter. Earlier today, we reported third quarter results with non-GAAP earnings per share of $2.84, up a solid 10%. Company margins expanded 60 basis points to 17.9% on organic revenue growth of 4.5%, and adjusted free cash flow was $726 million. Our core U.S. and international government businesses were up over 7%, including double-digit growth internationally, partially offset by COVID-related impacts on our commercial businesses that were down largely in line with expectations. With another quarter of strong execution under our belt, we're improving our outlook for the year and increasing margins, earnings per share, and free cash flow to the upper end of the prior range, while narrowing organic revenue growth to the prior midpoint of approximately 4%. It's worth noting that despite the pandemic headwinds, we're back to the midpoint of our initial 2020 earnings per share guidance, a testament to the benefits of the merger and our earnings power. Integration activity continued to progress well. In the quarter, we delivered net cost synergies of $50 million, bringing year-to-date savings to $165 million and well on track to meet our $185 million target this year. At this rate, we'll exit the year with $250 million in net cumulative savings, which positions us to deliver at least $300 million net in 2021, a year ahead of schedule. Our E3 operational excellence program continues to mature and become institutionalized, and alongside cost synergies was a key driver of the 60 basis points of margin expansion in the quarter and 130 basis points year-to-date. With our strong performance to date, we're increasing our margin guidance to approximately 17.75% for the year, a 100 basis point improvement from 2019 and a solid base to build on over the medium term. As we look beyond 2020, we see three primary building blocks supporting mid-single-digit top line growth. First, we have a portfolio that is well aligned with national security priorities irrespective of the outcome of the elections. Our broad C5ISR capabilities are essential elements encountered in the near-peer threats identified in the National Defense Strategy: resilient communications, open architecture command and control, offensive and defensive cyber, and ISR across all spectrums—electro-optical, infrared, hyperspectral, RF, sonar; and all forms of intelligence, signals, comms, electronic, and image. We have leadership positions in many of these areas and operate in all domains. And we've realigned our R&D efforts to extend our position through investments in open architecture, multifunction, software-defined technologies. The security threats are real, and we anticipate that future defense budgets will continue to prioritize spending in these areas where we're well positioned and we're investing. Second, we uniquely benefit from the revenue synergy opportunities created in a merger of two complementary companies that expanded our addressable market. This quarter we received an additional 12 revenue synergy awards bringing the total down selected proposals to 25 out of 37 for a cumulative value of over $300 million, an initial down payment on our multi-billion dollar pipeline. Two recent wins worth highlighting are the Space Development Agency's tracking layer, which leveraged legacy Harris' strength in space payloads and integration with L3's onboard space avionics solutions. The other is SAFE-SiM, a DARPA program to simulate and train for future multi-domain battle that addresses the challenge of secured data sharing of highly classified sensors. And third, we see upside in international, which at about 20% of revenue is underrepresented versus peers. With a now larger international footprint, we can better leverage our scale and extensive sales channels and capitalize on our domestic position to support global modernization efforts and extend our ISR leadership in the airborne, land, and maritime domains. As seen with recent awards this quarter to deliver missionized aircraft to both Canada and the Royal Australian Air Force, we're making progress. Our top-line and margin opportunities along with our discipline around working capital and CapEx support our free cash flow potential as well as our ability to return capital to shareholders. We're off to a good start to date and now expect to deliver free cash flow of approximately $2.65 billion to $2.7 billion for the year at the top end of our prior guidance. This performance coupled with divestiture proceeds has enabled us to return over $1.3 billion of capital to shareholders in the third quarter, which put share repurchases to-date at $1.85 billion ahead of our full year 2020 commitment of $1.7 billion. For the full year, we now expect share repurchases to be about $2.2 billion, a pace we plan to sustain through next year. On portfolio reshaping, we're about one-third of the way through our bottoms-up target of divesting 8% to 10% of revenues and activity continues to be robust. Our criteria and strategy haven't changed as a result of recent events. We continue to be patient and persistent as we look to maximize value. And as previously stated, we will announce divestitures as they occur, with proceeds primarily used for capital returns. So overall, we're executing well despite the uncertain times. And with our unique revenue, margin, and cash opportunities we remain focused on delivering double-digit earnings and free cash flow per share. So with that, I'll turn it over to Chris to discuss segment results.

Okay. Thank you, Bill, and good morning, everyone. Let's go to slide 5. Integrated Mission Systems revenue increased 6.2% primarily from growth in our Maritime business as recently awarded manned and classified programs began to ramp up, along with growth from our ISR business driven by strength in aircraft missionization. The modest decline in our Electro Optical business was due to timing of deliveries. Operating income was up 21% and margins expanded 190 basis points to 15.5% from operational excellence and integration benefits, partially offset by higher R&D investments. Order momentum at IMS was broad-based with particular strength in Maritime, resulting in a segment funded book-to-bill of 1.08 for the quarter and 1.22 year-to-date. Our Maritime business continued to build out its pipeline of opportunities following the Medium Unmanned Surface Vehicle award. Additionally, the team finalized its position as the largest subcontractor on the U.S. Navy's frigate program. We're playing a key role as a mission solutions provider for electrical propulsion and navigation systems. The current 10-ship contract could exceed $300 million if all options are exercised. In addition, the Department of Defense recently reported its long-range plan to significantly expand the U.S. Navy's manned and unmanned ship count to over 500, with the greatest increase planned for unmanned vessels. With our experience and capabilities in both platform types, we are well-positioned to support the Navy's growth. Turning to Space and Airborne Systems, organic revenue increased 6.8%. Growth in our Avionics business was driven by the production and modernization ramp on the F-35 and increased classified work at Intel and Cyber. These were somewhat offset by program timing in the Space and Electronic Warfare businesses, which based on recent awards including the F-18 IDECM contract position us for growth in the coming quarters. Segment operating income was flat and margins contracted 110 basis points to 18.5% as integration benefits and operational excellence were more than offset by program mix from recent wins. Overall funded book-to-bill was 1.04 for the quarter and 1.05 year-to-date with key awards received in our Space, Avionics, and Electronic Warfare businesses. As Bill highlighted, our Space business was one of two awardees for a contract with the Space Development Agency to develop and integrate an end-to-end system of four satellites, where we are providing both the bus and mission payload validating our space strategy to become a mission solutions prime. This system will provide warning and tracking of advanced threats including hypersonic missiles. The initial satellites will be launched within the next 24 months and support the tracking layer of the DoD's missile defense network in space. Once fully operational, there could be a demand for many more satellites with the value well into the billions leading to the next space-based franchise for our company. We expect to build on these opportunities in the near to medium-term with a space pipeline of over $10 billion in opportunities. Next, Communication Systems organic revenue was up 6.7% for the quarter driven by tactical growth in the mid-teens, which included international growth of about 20%. The Middle East, Europe, and Asia Pacific provided most of that growth. Both DoD tactical and integrated vision systems benefited from continued modernization demand. This strength was partially offset by our public safety business due to COVID-19, which was down consistent with expectations in the mid-teens. Segment operating income was up 17% and margins expanded 230 basis points to 25% from operational excellence integration benefits and cost management. Funded book-to-bill was about 1.0 for the quarter and 0.94 year-to-date and was particularly strong in tactical communications at over 1.1 for the quarter. This was driven by an initial full-rate production award on the U.S. SOCOM's multichannel manpack program as part of the $255 million sole-sourced IDIQ, an important milestone for this multiyear modernization strategy. We also saw healthy activity on the international front including customers in the Middle East where we continue to build out our installed base and identify new opportunities. Lastly, Aviation Systems organic revenue decreased 4.1% as the anticipated COVID-19-related impacts in commercial aviation were partially offset by consistent strong performance in Defense Aviation Products, which was up high teens; and Mission Networks, which was up mid-single digits. Operating income was down 19% with most of the decline resulting from divestitures, while margins contracted 40 basis points to 13% as integration benefits operational efficiencies and cost management were more than offset by COVID-19 related market headwinds in commercial aviation. Third quarter funded book-to-bill was 0.94, following strong first half orders resulting in a year-to-date funded book-to-bill of 1.08. Award activity was notable on several ground vehicle programs from the DoD and international customers for our power and propulsion systems, which totaled approximately $150 million. In addition, we recently announced that we're a partner with Northrop on the U.S. Air Force's GBSD program for operations and maintenance training systems, highlighting continued progress with next-generation programs and platforms. Now over to Jay, who will discuss the financials in more detail as well as our guidance.

Thank you, Chris, and good morning, everyone. I'll begin with a quick recap of third quarter results and then shift over to our updated outlook. In the quarter, organic revenue was up 4.4% and margins expanded 60 basis points to 17.9% as the benefit from synergies more than offset higher R&D investment. Earnings per share grew 10%, or $0.26 as shown on slide 9. Of this growth, synergies and operations contributed $0.24 along with a lower share count for $0.13, which more than offset headwinds from divestitures and pandemic impacted end markets. Free cash flow for the quarter was $726 million and we ended the quarter with 55 working capital days, holding the strong first half improvement of seven days. With year-to-date organic revenue growth just over 4% and margins of 17.9% along with a 5% higher backlog, L3Harris is set up well to close the year. So let's turn to slide 10 to cover our updated outlook. Organic revenue is now anticipated to be approximately up 4% or at the midpoint of our prior range with the top line trending largely as expected. Our core U.S. government businesses continue to perform well, up about 7% year-to-date and driven by DoD tactical radios, maritime, mission avionics, and classified growth at intel and cyber, and defense aviation products. On the international side, the business returned to growth in the third quarter up double digits, which sets up for a flattish year or better supported by ISR and international tactical radios. Finally, this guidance reflects about a two-point impact from our commercial businesses due to the pandemic in the range of our initial assessment. Shifting to margins, we've revised our outlook to approximately 17.75%, a 25 basis point increase versus our prior expectation from better cost performance and mitigation of COVID impacts. On EPS, we are raising our full year to approximately $11.55 at the top end of our previous range and consistent with the midpoint set at the beginning of the year. As shown on slide 11, the increase of $0.20 from the prior midpoint is primarily driven by $0.13 of improvement in operations including our mitigation efforts plus $0.07 between a lower share count and other items. Moving to free cash flow, we now plan to deliver approximately $2.65 billion to $2.7 billion or the upper end of our prior guidance driven by higher net income and CapEx discipline. This keeps us on track to deliver our 2022 free cash flow target of $3 billion and double-digit annual growth on a per-share basis. On capital returns, we returned over $1.3 billion to shareholders in the third quarter with $1.15 billion of share repurchases and $179 million in dividends. Year-to-date, total buybacks were $1.85 billion ahead of our prior target of $1.7 billion for the year. With an elevated cash position and solid cash generation anticipated in the fourth quarter, we now expect share buybacks for the year to be around $2.2 billion. We expect to continue our shareholder-friendly capital framework into 2021, as we normalize our cash balance, generate healthy cash flow and continue shaping our portfolio. Now switching to our segment outlook. In Integrated Mission Systems, we now anticipate revenues up approximately 6% for the year from the prior range of up 5.5% to 7%, driven by growth in ISR and Maritime. Segment margin is now expected to be about 15%, up 150 basis points versus the prior guidance driven by solid program performance and cost management. At Space and Airborne Systems, we're now guiding to organic revenue growth of approximately 7% within the previous range of up 6% to 7.5%, as higher F-35 revenues continue to drive Mission Avionics. Segment margin guidance remains unchanged at approximately 18.75%. In Communication Systems, organic revenue growth is expected to be approximately 4% and within the prior range of up 3.5% to 5%, mainly driven by modernization strength in DoD tactical radios. Segment margins are now expected to be about 24%, a 25 basis point increase from our prior guidance, primarily from mix related to our Tactical business and cost management. Lastly, in Aviation Systems, we now anticipate revenues to be down approximately 3% on an organic basis versus our prior range of down 1% to 5%, consistent with our prior estimates in the commercial aero business, partially offset by double-digit growth on the defense side from classified and other programs. Segment margin guidance remains unchanged at 13.25%, reflecting the timely and decisive actions to mitigate commercial aero headwinds. Overall, we delivered solid performance in the quarter and year-to-date and now expect to deliver results consistent with our original EPS and free cash flow guidance set back in February. Before wrapping up, I'd like to briefly touch on our outlook post 2020. We'll provide 2021 guidance as we typically do with fourth quarter results. Though note we remain confident in our framework of annual double-digit growth in earnings and free cash flow per share, as the building blocks remain the same: mid-single-digit top line growth, steady to rising margins, working capital, and CapEx discipline, and returning our free cash flow to shareholders through buybacks and dividends. With that, I'll ask the operator to open up the line for questions.

Thanks. Good morning everybody. You increased the repurchase effort by $0.5 billion directionally closer to sort of your pre-COVID capital return level of $3.5 billion, but not quite there yet. I'm just curious, is there anything that would hold you back from going that much higher? And then more philosophically, Bill or Chris, as you look at capital returns through dividends and repurchase, do you have more headroom here to maybe push the dividends a little bit harder? And do you think that would be more appealing to investors? Thanks.

So Myles, I'll begin with the second question and then I’ll ask Jay to address the first one regarding the buyback. When it comes to capital returns, our approach is to ensure that 100% of our free cash flow goes back to our shareholders through repurchases or dividends, and we plan to continue this into next year. We have been focusing significantly on share buybacks, and Jay will elaborate on our strategy shortly. Given our share price, we view this as a strong value opportunity. We also see that our dividend has potential to increase, as we've raised it about 25% since the last close, with two increases this year. Currently, about 28% of our free cash flow is being distributed, which is on the lower end of our target range. We plan to thoroughly review this early next year and are likely to enhance our dividend distribution. In general, all of our cash will return to shareholders, along with divestiture proceeds, at least through next year. Jay, would you like to discuss the buyback?

In the third quarter, we saw an increase of about $150 million in proceeds. Based on calculations, I would estimate $350 million for the fourth quarter. You can calculate our free cash flow for that period, and with the dividends, we're moving toward the framework that Bill mentioned regarding returning free cash flow to shareholders. There may be some additional flexibility there. Our balance was elevated at $1.3 billion at the end of September, and considering the guidance we've provided, we expect that balance to stay high in December. This creates potential opportunities. We're also looking into other options, which might involve pension contributions, so we're keeping our options open. If we don't see developments this quarter, we would carry those plans into next year.

Hi, sorry about that. Thank you guys for the question and good morning. I wanted to ask about just integration activity. Clearly, it's been performing really well and EBIT was up $32 million in the quarter. But ex-synergies, your incrementals were about flat. And then the implied incremental for 2021, ex-synergies is 20%. So, how are you thinking about maybe incrementals going forward outside of synergies? And what changes with mix going forward? Thank you.

So, Sheila, that's a great question. If you consider the bigger picture, we expect to finish the year at around 17.75%. Next year, we have additional synergies of $50 million, which translates to approximately 25 to 30 basis points of expansion. Our core E3 productivity will certainly drive our growth, although we will face some mixed headwinds, as we do each year. Our goal is always to outpace those headwinds. Currently, we are balancing our planning to offset them one for one. I should mention that we will experience a slight headwind in Q1 due to the lingering effects of the pandemic that will impact all four quarters, putting pressure on Q1 and consequently affecting the entire year. Nonetheless, while we need to monitor mix closely, we anticipate that our core E3 productivity will help counteract that on a run rate basis. After we move past the synergy and integration phases, our core E3 operating excellence program will continue to enhance our margins.

Hey good morning everyone. Bill and Chris, what drove your narrower 2020 revenue outlook? And I know it's still too early to talk 2021, but how much of your expected 2021 revenue is already in the backlog versus what you need to go out and win?

So, right now as you'll see in the Q, our funded and unfunded backlog at the end of Q3 was about $20 billion. And you'll note there about two-thirds of it, 65%, rolls out through calendar 2021. So, we think that that part of our business is pretty solid. We've got a very good pipeline of $69 billion. It's come up over the last quarter. It's come up about 8% or 10% since the beginning of the year. So, it continues to grow and be very robust. As we look into next year and to Jay's points about mid-single-digit growth, we see good solid growth in our core U.S. government businesses. You've heard a couple of our peers talk about low to mid-single-digit growth there. We will add on top of that with revenue synergies that we've talked quite a bit about. We see international growing. It's a growth business for us here in the back half. Book-to-bill was very good. The pipeline is really strong internationally. We see that being a contributor into next year. And certainly, as Jay just mentioned about commercial, it will be a little bit of a headwind until we lap one year on COVID. But the other dimensions will be pretty strong going into next year.

Thanks very much and good morning. Maybe two areas following up there to talk about growth. One is in space. I know Chris, you mentioned a lot of the opportunities there. Is there a point in which we should see maybe the book-to-bill step up even further and the backlog start to grow a little bit more? And then Bill, you just mentioned the international opportunities. Are those principally on the tactical radio side, or are they across IMS or avionics or other areas? Thanks.

Hey good morning Seth. I'll take a first shot at both of those. Yes, so in space, we're going to be seeing the book-to-bill increase. We talked about some of the key wins we had here in the third quarter. We talked about our strategy to be a mission solutions prime, and it's really taken traction here. The SDA win was a big one. There are some opportunities coming down the pipe in the fourth quarter. A fair amount of them are in the classified world, but you'll be able to see that in the quarters ahead. As Bill said on the international side, we do have a strong pipeline a good book-to-bill. The tactical radios are going to grow. That represents about 20% to 25% of our international revenue. We're really seeing it across the board. The ISR platforms are doing well with the aircraft missionization and, of course, the Maritime business. So it's pretty well distributed across the portfolio and the domains.

Good morning. Thank you and congratulations on the SDA win. I was hoping you could provide more details on the revenue synergy opportunity. The SDA win appears to establish a new franchise for your company. Are there other similar franchise-setting opportunities in the pipeline that you could discuss, so we can consider growth beyond 2021? Additionally, would you share your thoughts on what the topline growth rate might be for 2022?

Well, first, about 2022, it's a bit further down the line, but I can address the first part of your question while Chris considers whether he wants to provide guidance on that year. We are making significant progress on revenue synergies, which has pleasantly surprised us all in terms of both pace and scale. This underscores the strategic rationale for our combination and highlights the complementary nature of the technology we are developing. Currently, we have submitted about 80 proposals, an increase from Q3, and we are winning a substantial number of them – 25 out of 37 is quite strong, amounting to $300 million in awards. Some of these wins, like the SDA, are particularly notable. Generally, these projects will span the space domain, electronic warfare, and maritime sectors, with a lot happening in the classified domain. As we've mentioned in previous calls, a unique aspect of our merger is that we've received a lot of input and feedback from our classified customers, who have a broad view across our portfolio and other missions. This feedback has provided strong guidance on opportunities to integrate capabilities within L3Harris. Our team has worked diligently to create compelling proposals, and we continue to have success. This year, we expect modest growth, but we anticipate significant growth next year, contributing positively in 2021 and beyond. Over the next couple of years, we expect this growth to reach hundreds of millions, which is encouraging not just in terms of winning projects but also in translating those wins into revenue. I'm very pleased with the progress on revenue synergy. Chris, do you want to address the question about 2022?

Absolutely. No, I agree with Bill we're really outperforming here on the revenue synergy. And over time and probably by 2022, the business development pursuits and as the business integrates, these things are really going to be merging and part of our overall strategy. So, I'm thinking by the time we get to '22, '23, I'm not sure we're going to be calling these out. What it is going to do is give us higher confidence in our growth rate that we've already talked about. So, I'm looking for good opportunities and year-over-year growth improvements relative to revenue synergies. But over time, it's just going to be merged and part of our normal processes.

And I think Jay's comment about the mid-single-digit framework kind of spans a bit more than one year. Thank you, Gautam.

Thanks. Good morning. Bill, I get this question a lot from investors so I thought I'd give it to you. There's this perception that your portfolio is shorter cycle than your peer group. I guess how much of your portfolio do you view as short cycle converting from backlog into sales within 12 to 18 months? And do you view your portfolio as shorter cycle and I guess more at risk than your peer group to lower budgets? Thanks.

So, David, thanks for the question. Look, as I mentioned earlier about two-thirds of our backlog coming out of Q3 what you'll see in the Q is around twenty—a little over $20 billion funded and unfunded rolls out over the next year. And what I've seen over time is it's hard to compare our portfolio sort of short long cycle versus peers. But certainly, it has lengthened over the last several years as some of the programs that we worked on specifically in tactical radios have moved from sort of book and ship, a quick turn to replenish spares or radios in Iraq and Afghanistan to now being fundamental long-term programs of record which have a lot more longer visibility in terms of the buying pattern and the spending outlook. So, we certainly see our portfolio being longer term than we were several years ago. And certainly, combining with L3, I think puts us in that position as well. So again, I think our portfolio is very sound. It's robust. We're well positioned to grow into next year.

Hey, good morning guys. Bill, can you maybe talk at a high level about these new concepts as ABMS and JADC2? I think you have some bids in there and they seem pretty well supported in DoD. I just wondered if you can maybe size the opportunity set for you there. It's still a little nebulous. And maybe talk about timing, just maybe level set us on your expectations?

That's a great question, Pete. I’ve highlighted the comprehensive range of C5ISR capabilities we possess across the company. When we dissect C5 and ISR into their various components and domains, we find that we have a strong foothold in all necessary sensing technologies, all of which play a critical role in realizing the JADC2 vision for the future. We are a significant player in this area. Regarding ABMS, there are numerous participants in the IDIQ, but we have presence in all seven business areas, which is somewhat distinctive. We contributed content to Project Convergence, which represents the Army's initiative in collaboration with the Air Force, and we hope to see further involvement as it evolves in the next iteration next year. Our strength in maritime and distributed maritime operations is notable. We excel in resilient communications, developing robust waveforms, a strength that was highlighted at L3. Our ISR capabilities are also very strong. I firmly believe that we are central to this initiative. The JADC2 vision will be crucial in near-peer competition. The focus will be more on the capabilities of platforms and their interoperability, rather than the platforms themselves. When I reflect on the powerhouse we’ve built at L3Harris, I am confident in our positioning in this field. This will expand over time, with available funding and expectations that this will become a key growth driver for the company. While it’s challenging to quantify this now, we believe it will be highly significant.

Good morning everybody. How are you doing?

Good morning Richard.

Just a very quick question here on R&D. I wanted to ask you about your opening remarks on research and development. Given the number of wins and the fact that your win rate has been increasing in your remarks, I want to know how you're thinking about R&D longer term, if you think it could be ratcheted back a bit? Do you need to spend more R&D to support the increasing win rate on programs, or are you really just about the right level right now?

Hey Richard, thanks for the question. I think you're hitting on a very important topic, and that is the power of the IRAD that we spend and the work that's happened over the last five quarters. We're spending in the 3.6% to 3.8% of our revenue in that range. We think it's sized well. More importantly, what the team has done is worked very hard over the last five quarters to ensure it’s spent on the best highest-value highest-return opportunities and focus that spear we call IRAD. We've reduced the number of projects by about 30%. We moved about 10% of the dollars around to really be placed on the technology areas that we think will have the best returns or aligned to revenue opportunities. The second element of it is making sure we’re spending on the right projects, but also doing it efficiently. We have good opportunities to drive operational excellence skills into the way we develop products. We're pushing hard on digital engineering, on DevOps, and a lot of our work is software development. There are lots of ways to improve the effectiveness of our R&D spend. To me, this is going to be a very powerful driver of growth in the future. I don't see it stepping up materially from where we're at. I think it's at a good amount. It will come up with revenue in terms of a dollar perspective, but I think we're spending a healthy amount on R&D.

Good morning. I want to go back really to the budget here. When you look across the portfolio, I'm trying to understand how your businesses are affected by end strength and forward-deployed end strength. And changes really aren't in the plans right now. It's in terms of at least basic number of let's say army troops. But we're about to have an election. So if we were to see military personnel reduced in the coming years how would that affect you? And I'd ask the same thing for changes in forward-deployed troops such as movement in troops out of Afghanistan, Iraq, or elsewhere. So when you look across the businesses how are you tied to those levels?

So Doug, I'll start here and maybe ask Chris to jump in. I don't think we're going to be much affected by the redeployment of overseas troops back onshore. I don't think that's going to be a big driver of growth either a top headwind or a tailwind. On end strength, it would come back to things like businesses like night vision goggles or radios where those are distributed out to individual soldiers. But frankly, we're on the front end of a modernization ramp, even through the next five years. We're not even 40% through the modernization ramp with radio. So even if end strength comes down, as I expect it likely will, I don't think it's going to affect the growth rate in our radio business. I think you are so far underpenetrated with new technology both night vision, as well as radios that we still see good growth opportunities there. So if anything, reduced end strength might actually free up some dollars to be put onto modernization investments that really affect a broad part of our business. I don't know if Chris you wanted to add to that?

Yes. And if there is a reduction in the forward-deployed troops, I mean you look at the rest of the portfolio Doug, and situational awareness is going to be critical. So you look at the ISR assets that we have both in space and air and the need as Bill talked about for the multi-domain comms. It strengthens the rest of the portfolio. So I look at it as kind of a net-net push or maybe a slight positive when you look across all four segments. And the same theory applies internationally. There's just a lot of need for communications and situational awareness. So our ISR capabilities both in space, air, land, and maritime are well positioned.

Hey, good morning everyone.

Good morning, Noah.

Hey, guys. So kind of every quarter since the merger we sort of all get on these earnings calls and question you on the sustainability of your growth rate and ask about short cycle and the O&M exposure. I think those are sensible questions, and you guys provide decent answers to those that have some conservatism, but are mostly qualitative in nature. After every one of those conversations, the stock just de-rates moving sideways while you’re performing well and the numbers are going up. I guess I wonder how much you all talk about that internally in terms of a different way to start from scratch and reframe this for investors? I mean, you talk about the handful of franchises you have. The defense budget is broken down into a handful of franchises. Is there a way to sort of while still giving detail, like super simplify this so that people can see on a legit three to five-year basis you can really keep growing mid-single digits? Because otherwise, it just feels like we’re circling back to the same things every quarter. I don't know, maybe there’s no good answer to that, and you just have to keep performing, and the stock eventually matches the numbers. But I was pretty curious if you guys talk about that or think about that internally and if you could share any thoughts with us.

Well, yes, go ahead.

Well, no, I think I’d comment on some of the new awards that we talked about. I just think it demonstrates and is illustrative of our positioning for the modernization trends that we're seeing going forward. While people may want to focus on O&M budgets and historical tactical radios, the new awards that we're winning are really positioning us well for the trends that we're seeing in terms of defense priority spending. I think you should, as Bill mentioned, think about our portfolio and our revenue potential more in that broader context. That's what gives us confidence in our mid-single-digit growth over the years and we're seeing this in our new awards right now.

Thanks so much. Good morning.

Hey, good morning, Rob.

Bill, you’ve mentioned defense exports a couple of times this morning. I think earlier this year you were suggesting this area could be a bit slower, but that doesn’t seem to have happened. So, I wondered if you could comment on what changed there. And also, looking forward, and maybe to follow on Noah's question, how big could defense exports be as a percentage of sales going forward?

So, yeah, as we talked earlier this year right after I think it was Q1 maybe Q2 as we looked at the international business, we saw it being more flattish for the year. We saw the first half being down a little bit; the back half growing and being about flat for the year. Q3 came in strong like we had expected it would, a little bit better than we had thought. So it could be up a little bit, so flat to up low single digits internationally, so a little better than we saw a couple of months ago. International tactical has come in almost exactly as we had expected. You could see the numbers up 21% in the third quarter. We expect the fourth quarter to be up a similar amount. So we see good recovery in that business. A lot of it is Middle East, Europe, Asia-Pacific, mostly Australia and New Zealand. So, there's pretty good growth in tactical. We’ve got a nice pipeline of opportunities. I think the number is about $20 billion of international opportunities. The book-to-bill year-to-date is over 1 about 1.06 or so. We see the fourth quarter shaping up to be pretty sizable in terms of book-to-bill, looks pretty good. About $3 billion of those proposals that are out there of our pipeline is in proposal. So, it’s actually getting to be more nearer term. We're starting to turn the corner. We're at 20% roughly in terms of our revenue. We expect it's going to grow several points over the next number of years. I don’t know Chris if you want to state a goal there, but it's going to come up from where we are because it's underrepresented in our portfolio today.

Yeah. I think ultimately the next target would be closer to the 25% of revenue over the several years. What I like about our company is the portfolio and the demand for our products. When you export, there’s always a focus on offensive versus defensive products, especially as administrations look at approving these exports. When you look at our ISR capabilities, maritime capabilities, and radio to comms, those are generally easier to export and approve regardless of which administration is running the country. I think that gives us a lot of confidence. We've been able to stay in touch with our customers. We have executives forward deployed full-time in the focus countries. We’ve all been using new technology to call Zoom and stay in touch with our customers really on a weekly basis, and that's working well. We're negotiating contracts via Zoom and continuing to keep the business running. So, very optimistic on international.

Yeah. Good morning, Bill. Nice results. Bill, I guess on the working capital you've given us a lot of details. Just kind of a clarification is the seven-day improvement year-to-date the number? And is that a good kind of I guess pacing item as we think about your goal to get to the low 40s as we think about next year and into 2022 to hit that kind of $3 billion free cash flow target? Thanks.

Yes. Thanks, Peter. Yeah, so seven days year-to-date it’s about 13 days operationally since the close. So, we put out our divestitures and purchase accounting. We will see towards the back end of the year. We'll probably stay right on 55 days. So, you won't see seven-days of improvement over three quarters as the continued pace into the future. We see the 55 dropping below 50 over the next couple of years, three to four days per year. That gets us to the $3 billion goal in calendar 2022. We still see an opportunity to get down to the low 40s or about 40 days. Certainly, that's where legacy Harris was. We’ve seen our peers at that point. So even after calendar 2022 47, 48 days we see opportunity to continue to improve working capital beyond that. As I said last time and we’ve talked about this a number of times, a lot of it is going to be on inventory. So we've got a lot of opportunity here. We know where it's at. We've got 10 businesses that we're really focused on that drive 75% of our working capital six with more than 75 days. So we know where we're focused. We're driving it hard. We review these every single week. You can see the progress and trajectory that we happen to be on. Again, about three to four days a year beyond calendar 2020.

Good morning. Thank you. I know you talked a lot about margin going above 18% with the synergy drop-through offsetting the mix. I think there's been some conversation over the last month or so about a long-term opportunity for 20% margin. What's your perspective on how you get there? Is it all in your control, or do you need some customer behavior to change? And then also, if we're going to get there, is it linear, or could there something – could something big pop up in a given year such that you have to make a big investment margin could step back for a year or two and then kind of hitting that margin expansion growth trajectory again? So more of a long-term question there around margin? Thank you.

Hey, John, look it's a good question. I mean I think we're really performing better than we had expected on margins even through this year. Keep in mind, we started the year I think guiding to 17% to 17.5%. And now, today it's 17.75%. So in an era of COVID, which actually dinged us about 40 basis points this year, we're performing very, very well. It comes through the synergy drop-through. It comes through operational excellence, which is maturing at a fast clip. Jay has talked about 18% or so next year. He gave you some of the drivers. Will it go up beyond that? It will likely move up. I don't know if and when it will hit 20%. I think the key thing to be thinking about is we got to make sure that we're leaning in to go after and drive revenue growth capturing some opportunities, which might have a near-term short-term impact on margins but long term be good businesses for the overall enterprise. We got to make sure we continue to invest at the level required to grow the business on a long-term basis. Anyone could easily pull back investment like IRAD, and drive margin up in the near term, but it would be detrimental on long-term value for the owners. I think you have to work the pedals here, and I think we do this very, very effectively. So, we can't commit to something beyond next year, but we will commit to continue to work the agenda to drive hard on technology investments which drive differentiation and good cost management lean productivity across the whole company.

Yes. I wanted to know, what's the progress payment benefits you've gotten this year, and then how much benefit from payroll deferral. And is that inhibiting getting to the $3 billion of free cash flow next year? I'm assuming CapEx probably is no higher next year than what you're saying this year? Thanks.

Sure George. Thanks. The progress payment benefit this year is in the range of say around close to $100 million in that ballpark maybe a little bit lower than that. That one we basically have offset with small supplier payments. So it's just one for one as it's come in. We really pushed supplier payments out. On the payroll tax benefit, that's kind of $150 million plus in that ballpark, similar type of effort. We've kind of put a placeholder there to support the supply chain there as well. That as you know, will be paid back over two years 2021 and 2022. But I would say, as it relates to kind of longer-term targets and our $3 billion target, there's a number of puts and takes. There are risks and opportunities. We've got that factored in. We feel good about our ability to generate continued working capital improvement, and we don't see that getting in the way of us getting to $3 billion in 2022.

Hey guys, good morning.

Good morning, Ron.

Bill, I want to follow up on one of your earlier comments. You provided some insight into the growth in classified. Can you elaborate on that? You also mentioned it as a significant area for synergies. I understand that classified can be complex, but could you share more details on that? Additionally, how many more opportunities exist in this area? Can you outline the growth profile and what percentage of the overall business classified represents today?

Okay. So let me hit on a couple of points there, Ron. But you're right, a lot of it's classified in terms of its nature. But it's about 20% of our total company revenue is classified. As you know, the classified budgets both military and national intelligence programs—those budgets have come up over the last five or six years. They're at a very healthy level. That does offer some cushion, if you will, as you go into the next several years. If there's more pressure on the non-classified DoD budget, money tends to move and be well supported in the classified domain. Even the elements of that, what's in the classified budget, which is around $85 billion plus or minus between military and national intelligence programs, the elements are actually moving in a direction, which we believe supports a lot of the investments we've made. So, a lot of we focus on is in the space domain, various new technologies for optics RF systems, driving larger constellations from prototypes running a full end-to-end mission solution. I think what's interesting is historically, a lot of the space domain was dominated by the intelligence community. Because of the lower cost, faster time to market, more onboard processing of our small satellites, it’s opening up new markets within the DoD. So the addressable base for us is actually expanding, and that's helping us quite a bit. It's really on the space domain, but there's plenty of other classified opportunities on the land in maritime domains as well. We've got a strong position really across all of them. It's hard to shape them, but it gets back to the comment I made on the strength of C5ISR. A lot of the things that we do in the classified domain leverage off of that, we hone technologies advanced technologies, and then you can leverage that benefit into the non-class environment. That's been a strategy of the company for a number of years Ron, and I think it's worked pretty well.

Hi. Good morning, and thanks for squeezing me in. So, Bill, just following up on that. It seems like the competitive landscape for some of your work is changing a bit. There are some public companies in government services that are increasingly moving into comms and EW. Then you have some private companies, especially out on the West Coast like Anduril and UAVs and SpaceX with smallsats. The Air Force is also encouraging new contractor formation, business formation. Ultimately, would you accept the premise the competitive landscape is changing? How do you negotiate this in a potentially flattening budget? How much will M&A factor in?

Rob, it's a very, very good question. The landscape is changing. We are seeing greater penetration of some of the Western companies—Silicon Valley companies, SpaceX you mentioned. As you know, they were one of the awardees of the SDA tracking layer. We could follow what they've done in commercial launch and with Starlink and other things. So they're playing more. There's a number of other companies. You mentioned a few of them. There are some more typical government contractors who are looking to expand what they do into—from services to other components. The market is moving around, and we get it. The way we stay ahead is basically running our strategy, running our game which is really strong investments and performance in R&D and technology moving quickly. There's really nobody that's put up a smallsat with the capability we had and the timeframe we've done it just in the last couple of years. I think that's the way we stay ahead. We continue to drive costs out, drive operational excellence, improve quality, and meet our program objectives. I think if we do that and we continue to accelerate the pace at which we can execute on our programs and technologies, we’re going to stay ahead. I think that’s what we need to do. Will M&A play a role in that? Maybe over time. Right now, we're focused on integrating our portfolio shaping. But as you go out in time, there could be pieces of other companies or things on the market that could become available to fill a gap in our portfolio. We don't see that today, but that's very positive. In fact, it's probably likely it's going to happen over time. But today, we're focused on running our game, and I think that's been an effective strategy. So, Rob thanks for the question. It was very good. I really appreciate that. Let me just wrap up from here. I want to thank again the L3Harris team. They've done a fantastic job of staying focused on meeting our customer commitments. They work very, very hard, and that hard work has led to another quarter of very strong results. We're well positioned coming into year-end and into the coming years, and I look forward to our next update. Thank you very much, everybody, for joining us today. Thank you.