L3Harris Technologies Inc (LHX) — Q4 2024 Earnings Call Transcript

Thank you, Joanna. Good morning and welcome. Joining me this morning are Chris and Ken. Earlier today, we published our fourth quarter earnings release detailing our financial results and 2025 guidance. We have also provided a supplemental earnings presentation on our website. Today's discussion will include certain matters that constitute forward-looking statements. These statements involve risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information, please reference our earnings release and SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release. With that, I'll turn it over to Chris.

Okay. Good morning, everyone, and thank you, Dan. We delivered on our commitments for 2024 by executing our Trusted Disruptor strategy and making progress towards our 2026 framework. We ended the year with record backlog that positions us well for the future. 2024 was a pivotal year for L3Harris as we marked the five-year anniversary of the transformative merger between L3 and Harris. The combination formed a new company that now operates differently. We are agile, nimble, and fast, while delivering solutions that are trusted by our customers across all domains. We span the gap between the traditional primes and the new entrants, forming partnerships around critical capabilities such as AI and autonomy, allowing us to rapidly meet the evolving needs of national security and modern warfare. Domestically, national and homeland defense remains a key priority for the new administration with strong support for our programs in areas such as space, missiles, advanced electronic systems, cyber, and resilient communications. Internationally, we saw strong demand for our software-defined radios, night vision goggles, and munitions, reflecting our commitment to supporting allies around the world. Partnerships remain a cornerstone of our Trusted Disruptor strategy. In 2024, we advanced collaboration with Palantir and venture capital-backed startups focusing on AI-enabled solutions and emerging technologies. These partnerships are accelerating a culture of innovation and speed, enhancing our ability to meet customers' needs faster and more effectively. Let me highlight some of our key accomplishments this year. We won the Next-Gen Jammer competition, which establishes us as a long-term jamming franchise worth billions of dollars in the production of airborne pods to support the F-18 fleet. Our wins on the Glide Phase Interceptor and next-generation interceptor programs will drive growth in our solid rocket motor business for decades to come. Along with the propulsion content on the previously won Sentinel and Zeus programs, we are solidifying our position as a global leader in large solid rocket motor design and manufacturing capability. We won a $1 billion IDIQ award for the U.S. Navy to provide resilient communications technology to U.S. and allied forces. Over the next five years, our broadband communications business will deliver software-defined Link 16 terminals that are critical to enabling secure and resilient collaboration across air, ground, maritime, and space platforms. By integrating Link 16 into space-based assets, we are expanding its reach and utility, ensuring U.S. and allied forces have seamless connectivity and situational awareness across all domains. As a testament to our Trusted Disruptor strategy at work, a team led by L3Harris, partnering with venture-backed startups, was selected by the Defense Innovation Unit to prototype a command-and-control system capable of operating hundreds or even thousands of swarming autonomous assets. This project advances the DoD's replicator initiative by integrating advanced commercial technologies to enable collaborative autonomy in all domains. Our open system architecture supports rapid integration of third-party algorithms, providing unmatched scalability and flexibility to meet mission demand. By combining these capabilities with our expertise, we are shaping the future of warfare, ensuring U.S. and allied forces maintain a competitive edge in contested environments. As you saw in the press last week, I recently took steps to strategically align our leadership team to drive sustained profitable growth. Ken has been appointed President of Aerojet Rocketdyne effective Monday, in addition to his responsibilities as CFO. With his extensive defense sector experience, Ken will drive operational excellence and continue our strong performance. Sam Mehta's role has been expanded to lead enterprise strategic collaboration agreements to further elevate our focus on partnerships while continuing to head the Communication Systems segment. We've also elevated the LHX NeXt organization, which has been led by Heidi Wood for the last year and achieved excellent results. She will report directly to me as we continue to drive cost savings while accelerating enterprise-wide transformation. Lastly, I want to thank Ross Niebergall for his contributions to L3Harris first as CTO and then as President of Aerojet Rocketdyne. His leadership has been instrumental in positioning Aerojet Rocketdyne for long-term success. After a distinguished career, Ross has chosen to step down to focus on his family's health and enjoy a well-deserved retirement. I'm also pleased to have been elected Chairman of the Board of Governors for the Aerospace Industries Association, the leading voice for the industry. As our country navigates an increasingly complex global threat landscape, maintaining our technological edge has never been more critical. I look forward to partnering with my industry colleagues, the incoming administration, and Congress to leverage the ingenuity of our world-class U.S. talent and drive innovation that strengthens our competitive advantage. Looking ahead to 2025, our priorities remain clear: to drive profitable growth while meeting our customers' evolving mission-critical needs. I will now turn it to Ken to provide details on our financial results.

Thanks, Chris, and good morning, everyone. Let me recap full-year 2024 real quick. Revenue was $21.3 billion, up 10% and 4% organically. Segment operating margin was 15.4%, reflecting continued cost savings and strong execution. Non-GAAP EPS was $13.10. Free cash flow grew to $2.3 billion, representing an increase of 14% driven by earnings growth and effective working capital management. For the fourth quarter, revenue was $5.5 billion, up 4% organically with a segment operating margin of 15.3%. Non-GAAP EPS was $3.47, and free cash flow came in over $1 billion. Turning to our segment fourth quarter results. SAS delivered revenue of $1.7 billion, down 4% year-over-year, largely reflecting the divestiture of the antenna business. Organically, revenue was down 1% primarily due to lower F-35 related volumes as our TR-3 mission computing hardware transitions from development to a more gradual production ramp. Operating margin was 10.8%, up 20 basis points primarily due to LHX NeXt cost savings and partially offset by challenges on some of our fixed price development programs in space that are in the later stages of completion. IMS delivered strong results with revenue of $1.8 billion, up 9% and margin of 13.4%, expanding by 150 basis points. This performance reflects strong program execution and a favorable mix. We are pleased with the momentum at IMS and feel confident in the strength and resilience of this business as it continues to perform. CS achieved revenue of $1.4 billion, up 5% driven by demand for software-defined resilient communications equipment. Operating margin was 24.4% driven by a heavier mix of deliveries to U.S. DoD customers. We are seeing particularly strong demand and international momentum, winning key programs with NATO allies and expanding into other international markets. But I'd remind you, international and domestic mix fluctuate based on quarterly delivery profiles. Aerojet Rocketdyne grew 5% with an operating margin of 11.5%, up 40 basis points, supported by progress on solid rocket motor production and offset by lower volume in space propulsion. Now let me turn it back to Chris to cover some operational achievements for 2024.

Let me start with our portfolio. We completed the integration of the Aerojet Rocketdyne and Tactical Data Links acquisitions, and we also divested our antenna products and Aerojet Ordnance Tennessee non-core businesses. We further strengthened our leadership position in space, delivering four satellites to orbit for the SDA and one for MDA. Our progress in satellite systems and space superiority continues to gain momentum in 2024, reaching a record backlog of 40 satellites in just five years, a noteworthy achievement considering we started with no satellites as a prime. A significant highlight in our SAS segment with the successful completion of the customer's engineering design review for 18 space vehicles under the SDA's Tranche 2 tracking layer program. This milestone confirms our advanced space vehicles, equipped with infrared payloads to detect, track and target hypersonic threats, meet the rigorous requirements of the program. Completing this milestone in just 11 months reflects the speed, agility, and expertise of our team. These satellites are part of the Space Forces LEO Constellation, providing global missile tracking and defense. With 38 satellites awarded across tranche zero, one, and two, including those already on orbit, we continue to support efforts to advance integrated deterrents. With the Tranche 3 opportunity on the horizon, we are well positioned to expand our role in building this critical layered missile defense system. Furthermore, this capability positions us well to support the evolving defense needs of the U.S. and aligns closely with the recent executive order directing the development of an Iron Dome missile defense shield for our homeland. We've also made significant progress on our LHX NeXt initiative. In 2024, we exceeded our gross cost savings target by 2x, reaching $800 million. This strong performance provides confidence in our ability to accelerate and exceed our overall cost savings target. We are now expecting to achieve $1.2 billion in cumulative cost savings by the end of 2025, exceeding our $1 billion commitment a year early. This initiative is driving margin expansion, operational efficiency, facility rationalization, and enhanced supply chain management. At its core, LHX NeXt embodies the same principles as DOGE, tailored to drive greater speed and efficiency to allow data-driven decision making. We are driving improvements across our operations and supply chain, simplifying and streamlining internal policies to eliminate inefficiencies and monetizing end-of-life assets to sharpen our focus and unlock value. This program enables us to respond more effectively to evolving customer needs while creating value for our shareholders. Back to you, Ken.

Turning to guidance for 2025. We expect revenue of $21.8 billion to $22.2 billion, representing organic growth of 4% at the midpoint. Our guidance includes a full year of our commercial aviation solutions business as we continue to work towards closing the transaction. Segment operating margin is anticipated to be mid to high 15%, supported by continued LHX NeXt cost savings, strong program execution, and reflecting investments to drive continued transformation. Free cash flow is expected to be $2.4 billion to $2.5 billion driven by growth, higher profitability, and disciplined working capital management. Our guidance reflects an appropriate risk posture early in the year and the dynamics associated with the new administration. We assume a continuing resolution through March of 2025 and no other funding delays or impacts. The administration has issued several executive orders that are still being assessed but are not expected to have a significant impact on our 2025 results. However, as U.S. government contracting officers assess the impact of these executive orders on existing and new contracts, we could see an effect on our Q1 2025 bookings and revenue, particularly at CS, which can deliver product rapidly against order intake. Beginning in 2025, following comments from many of our investors, we are revising the reporting of non-GAAP EPS to exclude adjustments for amortization of acquisition-related intangible assets. This change aligns our reporting with peers and has no impact on our underlying profitability or cash. If this change had been applied for 2024, non-GAAP diluted EPS would have been $9.70, reflecting an impact of $3.40 per share. Our 2025 non-GAAP EPS is projected to be in the range of $10.55 to $10.85, representing growth of 10% at the midpoint. At the segment level, SAS revenue is expected to grow to a range of $6.9 billion to $7.1 billion, reflecting budgetary constraints in the space sector that we expect to abate in 2026. Operating margin is expected to be in the low 12% range. IMS revenue is projected at $7 billion to $7.2 billion driven by increased demand in advanced electronics for space and munitions programs as well as maritime solutions with an operating margin in the low 12% range. CS revenue is anticipated to be $5.6 billion to $5.7 billion with margins in the high 24% range, supported by increasing demand for our software-defined resilient communications equipment. Aerojet Rocketdyne is expected to reach approximately $2.5 billion, fueled by double-digit growth in the missile solutions business. Margins are expected to be in the mid-12% range as we drive continued operational improvements. As we set our 2025 guidance, we want to highlight the varying number of weeks in certain quarters in 2025 that will result in some variability in revenue and EPS between quarters. In particular, Q1 is a short 12-week quarter and should be considered in your modeling. Our capital deployment strategy reflects our commitment to delivering value to our shareholders. We strengthened our balance sheet and ended 2024 with a net leverage of 2.9x, exceeding our target of 3.0. With that achievement, we will maintain a competitive dividend and are focused on repurchasing at least $1 billion of shares in 2025. Additionally, we had another solid year of performance in our pension plan with no significant contributions in 2024 and none expected in 2025. To further derisk our balance sheet, we are working to transfer approximately $1.2 billion in pension assets and liabilities to a third party with little gain or loss and no impact on cash flow, taking advantage of attractive funding levels and interest rate environment. We expect to complete this action by the end of first quarter 2025, resulting in a reduction in non-cash non-service FAS pension income, which is reflected in our guidance. Considering our strong performance in 2024 and our growing confidence in the cost savings that the LHX NeXt program will continue to deliver, we are also updating our 2026 financial framework announced at our Investor Day last year and increasing the segment operating margins we expect to achieve to low 16% in 2026. We are continuing to target $23 billion of sales in 2026, representing 5% organic CAGR and $2.8 billion in 2026 cash, representing a double-digit CAGR with further upside on a free cash flow per share basis. I'm proud of the tremendous progress our team made in 2024. This year has been one of transformation, growth, and strong execution, underscoring the strength of our portfolio and the talent of our team. We have faced a dynamic and demanding environment, but our ability to be agile and execute with discipline has allowed us to deliver strong results. From achieving record backlog to advancing key strategic priorities, we have demonstrated resilience, the ability to deliver on our commitments even in the face of challenges, and remain focused on delivering for our customers and our shareholders. As we continue to build on this momentum, I'm excited about what's ahead. The opportunity before us is meaningful. Our strategic focus on operational excellence and innovation positions us well for sustained profitable growth.

As we look ahead, we remain steadfast in our commitment to driving innovation and delivering mission-critical solutions that align with our national security priorities. As we navigate an increasingly complex threat environment, L3Harris continues to stand at the forefront of innovation and national defense. Our vision for the nation's next arsenal democracy is rooted in the convergence of cutting-edge hardware, software, and AI technologies that ensure mission success in every domain. This concept goes beyond traditional platforms; it's also providing adaptable, scalable, open, and interoperable solutions that give our war fighters a decisive edge. Whether it's in resilient communications, advanced munitions, or space-based capabilities, we are enabling the Department of Defense and our allies to stay ahead of evolving threats. In my recent letter to the DOGE, I outlined key recommendations to modernize the national defense ecosystem. These principles reflect our dedication to advancing efficiencies, strengthening collaboration, and ensuring that the U.S. maintains a technological edge. We encourage others to come forth and submit ideas to the DOGE Committee. We are excited to work with the new administration to bring these and other ideas to life and continue playing a pivotal role in supporting the missions that protect our homeland and our allies around the world. The incoming administration's transparency and understanding of the defense industry sets the stage for disruptive change in 2025. We expect a period of unprecedented evolution in defense priorities and policies. With our agility, speed, and commitment to innovation, we are well positioned to adapt. This new era presents a chance to redefine how we support the war fighter, and we are excited to play a pivotal role in driving this change forward and seizing opportunities that align with our nation's strategic objectives. Our work is critical to empowering the war fighter, who protect democracy, ensuring that they have the tools to maintain global stability. With a deep commitment to innovation and collaboration, we are proud to play a central role in this effort. Joanna, let's open the lines for questions.

Hey, thanks. Good morning, Chris, Ken, and Dan. Hey, Chris, maybe just to start where you kind of finished, which is you wrote a letter to the DOGE leaders just before the inauguration, and you recommended, I think, policy recommendations. Have you heard any feedback? Or have you had any active discussions? And how do you think this is all going to play out with kind of DOGE and the impacts on the DoD bureaucracy, which I think you've called out many times and just how you're thinking of that? Obviously, it's been an overhang on the group. We've seen a lot of valuations compressed. So I'd be curious your thoughts. Thanks.

Yes. Thanks, Peter. I'm excited about the DOGE, and I tried to parallel the similarities with what we've been doing this past year. And as I think as to how we got as a nation, each and every policy and regulation is put in place to reduce risk, and they're well-intended. When you step back after a few decades, I believe the cumulative effect of all these risk reduction policies and procedures have actually created more risk than they've actually resolved or mitigated. So to answer your question, I've received lots of positive feedback from members of Congress. I was in the Pentagon last week, along with a couple of other classified meetings. I think a lot of people have read the letter. I'm really just trying to start the dialogue. I think Congress plays a role; I think the DoD plays a role; the war fighter plays a role. It is important for industry to be part of this ecosystem and provide their perspective. I know several others have started to write letters. I threw out four recommendations, and there are probably better ones or different ones. It's really just trying to start the dialogue, get people to sit down and ask, how can we go faster and get better capability to the war fighter quicker? I'm excited about the future. There's going to be an unprecedented change in 2025, and some will be able to adapt and take advantage of it while others may not. Let's see what the future brings.

Thanks. Good morning.

Hi, Myles.

Ken, you've got about $150 million of growth in free cash flow in 2025 and then $350 million at the midpoint, a placeholder for growth in 2026. Can you flesh out what specifically is accelerating? And then also on the increase in LHX NeXt of $200 million, how much of that drops through to actual margin savings versus savings for the customer? Thanks.

Yes, I'll take that one. In terms of growth in free cash flow, I think it aligns pretty well with the growth profile that we've laid out. We're growing the top line from 2024 to 2025 and accelerating a bit in 2026. As we've mentioned on the top line, there are a couple of items that are resulting in some better opportunities for growth in 2026 through F-35 with TR-3, our hardware development ramp down, and then the production ramp is still climbing in 2025 but accelerating in 2026. There's a little bit of space budget challenges in 2025, but we do see the potential to get some space awards pulled into 2025 that will drive 2026 revenue and also some international opportunities at IMS. So a little bit of a better growth profile in 2026 compared to 2025, and we expect continued margin expansion from where we are today to mid to high 15s in 2025 and low 16s in 2026. I would say effective working capital management will continue to support the growing free cash flow profile in both 2025 and in 2026. To answer your LHX NeXt question, we're still holding to our target of about at least 40% of the savings will result in margin opportunities for the company. There’s some timing with how that works, considering the percent completion of the various contracts that we have in place. It certainly was a strong contributor to 2024's margin expansion and will be for 2025. We will also work to try to drive some upside to that above the 40% cost savings in margin opportunity. The team is working hard on that every day.

Good morning. Thank you. I wanted to see how you're looking at the Communications Systems business. There's a lot of things that sort of line in there that seem to allow for some real margin upside, the software sales for new waveforms, more exports, commercial contracts with LHX NeXt that could flow right through. But your guidance for 2025 is still below 25% margin. Where is this going to lead? Where is the potential in margin expansion here? Because it seems like you've got a lot of the ingredients in place to get above the 24% range.

Yes. Thanks, Doug. I appreciate it. As I mentioned, in the prepared remarks, as we're looking at 2025, we've got to perform in the business. It's early in the year, and we're certainly thinking about it from a risk-adjusted perspective. The CS team has demonstrated the ability to produce product that generates margins. So, in terms of looking at margins for 2025 at CS, I would say a couple of things. One, we're evaluating the mix between U.S. DoD as well as international deliveries from a software perspective. I think we’ve talked about that comes in chunks here and there. So we need to drive strong deliveries in terms of waveforms that are both integrated into the products and driving high-margin product opportunities, as well as waveform upgrades where we see the opportunity for high-margin business. From a LHX NeXt perspective, the CS team has been doing a great job of managing costs. The margin compression that we saw in the fourth quarter was primarily related to the mix of U.S. DoD deliveries versus international. The team is doing a great job, and I believe we can exceed our segment guidance. I know the CS team will be off and working on that, so I feel good about the opportunity, and we'll update you later in the year.

I'll just chime in. Doug, we’re seeing more opportunities to bid and win C2 and C3 systems. The market is going beyond selling just the software-defined radios in the waveforms that you noted. We’re finally getting to a more network and systems approach, and I think that's going to provide us some additional tailwind. I think this segment probably faces the highest inflation impact from the supply chain given all the electronic components. So we have to absorb and offset that, not only with LHX NeXt but also our E3 savings. But the trend is positive, and we're optimistic.

Good morning, Chris and Ken. Thank you. Maybe I'll follow-up, Ken, on the $1.2 billion of LHX NeXt, or Chris. You raised it by $200 million, and 40% drops through to the bottom line, which is about an extra 30 basis points on top of your peer-high margin. So where are you seeing that come through the most? What's really driving some of those opportunities? And if you could just talk about maybe like KPIs that you track there.

Yes. I'll start and then let Ken take over. We're seeing it from a variety of places. The supply chain has improved, so we've had a solid year in not only getting the savings but also building the resilience of our supply chain, not just for indirect materials, which we managed first and are a little easier, now we're working on direct materials and subcontract management. I think those will be significant drivers. We're also continuing to focus on facility rationalization, organizational structure, and defining roles and responsibilities. So there are additional opportunities, similar buckets to what we had previously. Simultaneously, we are transforming the business and making the necessary investments to digitize the company to allow employees to get data quickly. And that’s factored into our guidance. It's not just about the $1.2 billion gross run rate cost savings. We're reinvesting in the business to make it a more efficient place to work. Netting that down, as you know, the 40%, the 30 basis points comes in over time, depending on the percent completion accounting and such. It's been a significant success and an impressive achievement; we're on track to hit $1.2 billion in two years. Given the size of the company, I'm quite proud of that. That adds to the $650 million we saved right at the merger, almost $2 billion in cost taken out in six years.

I would just add, Sheila, that we've certainly delivered on the cost savings in 2024. A chunk of that involved some difficult decisions around labor which resulted in some labor savings. That's probably the cost that results in the quickest turn from savings to actual costs flowing through the EACs. We're working hard on some of the other opportunities Chris mentioned with the supply chain, facilities, and transformation of systems. Those take a bit longer to flow through the EACs and convert into actual savings. So in terms of your question on KPIs, we track the generation of the savings, but also programmatically through the businesses, we monitor how we deliver on the savings, and order against new agreements. I believe we have the right approach and metrics, and the team is fully aligned and delivering. I think that will continue to enhance our margin profile in 2025 and into 2026.

Hi. Good morning, guys. Chris, how are you thinking about the environment right now with regard to M&A? That's to say, with the new administration, maybe things change, and Boeing has got some assets for sale. Is there anything out there that you're thinking about that could be a bolt-on in new technology, maybe an investment in something like more venture-oriented given the push towards some of the start-ups? Broadly, how are you thinking about that?

Yes. Good morning, Ron. Great question. I do think this administration will probably be more favorable toward allowing acquisitions. We made two in 2023 that made perfect sense for us strategically and did not eliminate competition. Even in the prior administration, we managed to get two acquisitions approved. Relative to how I view it, we are trying to adopt a partnership approach. AI is a hot market, and we have some interesting partnerships and opportunities. I've highlighted our collaboration with Palantir specifically. We have a couple of opportunities that we will bid on competitively as a team in the next several months that could be awarded in 2025 dealing with next-gen command and control and army network modernization. Of course, we have to win those contracts. It's easier to find partners and work with them when it comes to AI and even autonomy. I think we own small parts of up to 40 different venture-backed companies now, and we're leveraging that technology. If we pursue anything it will be a bolt-on acquisition to fill a niche or expand capability. Nothing has come our way yet; we're continuously reviewing potential opportunities, but not many gain traction. I appreciate our current playbook; we're transforming the company, buying back our stock, and growing margins. As we hit our 2026 goals, we’ll have grown our revenue, margins, and free cash flow for four consecutive years, which is a solid operational record without exceptions. Hard to argue against that playbook, and I'm proud of our team's execution.

Thanks. Good morning.

Good morning.

A couple of clarifications, I guess. On CAS, and that divestiture, I think you mentioned it, Ken, but what exactly how much revenue is assumed there? And I guess what is taking so much time for that deal to close? That's the first thing. And then EACs, what were they in the fourth quarter, and what are you assuming for 2025? Thanks.

Yes. Thanks, David. From a CAS perspective, we're working through some regulatory and other processes in 2024. There are some different joint venture aspects to that, and just getting all parties in agreement takes time. We anticipate that this transaction will close in 2025. In terms of guidance, we felt like we hoped it would close in 2024, so we kept needing to update. Rather than reset each quarter, we decided to include it and back it out once it closes. In terms of timing, I wouldn't predict it, but we expect it to happen in 2025. The revenue from that business is somewhere north of $500 million to $600 million. That doesn't majorly impact trends at the company level from a growth perspective or otherwise. As for EACs, we delivered positive EACs at the company level in Q4, and we also achieved positive net EACs for the full year of 2024. When we file the 10-K, you'll see about $40 million of positive EACs for 2024. Even with some program challenges, we worked hard, generated strong program performance, and saw positive EACs. For 2025, we generally assume flat EAC performance; however, if we can perform well on programs, it might lead to some upside in our guidance.

I want to emphasize what Ken said on these EACs. We manage thousands of programs, and it's complicated work. Nothing is easy, and nobody is perfect, but our team finds a way to meet its commitments. Occasionally, we’ll encounter challenges here and there, and it adds up. We leverage our LHX NeXt savings and other innovative ideas to fulfill our commitments without making excuses. What you see is what you get. These margins incorporate both good and bad performance, and we will continue to run the business this way, delivering strong results.

Thanks very much. Good morning. Maybe just to follow up on that, on the space charges. Should we think about the magnitude there being the difference between the guided margin and where things landed? And then I think you mentioned in the materials that those programs were nearing completion—how close are we to completing those programs? And how much risk remains?

Yes, from a space program perspective, at a high level, I’d say we have a couple of classified programs we're working through. As I mentioned, we're at a significant percent complete. We do expect these programs to complete as we continue to manage risks throughout 2025. During 2024, we realized about $100 million of negative adjustments or negative EACs across a couple of those space programs. We worked hard to offset that, and I expect we’ll largely mitigate that risk in 2025, especially considering customer milestones expected early in 2026. Given the nature of the programs, I probably can’t comment further, but we’re quite comfortable with our guidance for 2025.

I think it's the same story you hear from everyone. A lot of these are fixed price—some are fixed-price development programs, a couple going back seven, eight years pre-merger. My clear view on these high-risk fixed price development programs is we need to navigate through them, and it is not always the case that we are the prime contractor. It can complicate matters when we need to integrate with the prime. We're somewhat in the red zone, and we need to get these projects across the finish line while continuing to grow the missile tracking business, which is sequentially profitable with each order. We need to focus on the SDA TR-3 win later this year.

Yes. Thanks. Good morning, guys. Ken, I was wondering if you could elaborate on some of your objectives now with your increased role at AJRD?

Sure. Yes, thanks for the question. I'm really excited about the opportunity. As we look at Aerojet Rocketdyne, the priorities are clear. There is an incredible amount of demand in the market for solid rocket motors to support the critical mission needs of our country and allies to address the geopolitical threats and challenges out there. We’re ensuring that we increase capacity, and we have been making investments to do that. Moreover, we're focused on driving efficiency and delivering performance on the space propulsion side, maximizing our performance to address upcoming opportunities. We have a strong business with around an 8 to 10-year backlog, and it's important we position it for continued success. The Artemis program is critical as we aim to return to the moon, and we've been clear that this is a national priority. I am proud of the team we've built at Aerojet as well as our finance team. I look forward to working with them to deliver results across L3Harris.

Great. Thanks. Good morning, Ken. Busy guy.

Hey.

Could you size the drag on revenue growth from the LHX NeXt savings outperformance? And then just a clarification, do the 2026 targets also still have CAS fully incorporated? Thanks.

In terms of the impact on revenue growth from LHX NeXt, as we're driving the cost savings through, it certainly has an effect on our revenue. I remind everyone it's primarily on cost-plus programs, but it also impacts long-term fixed price programs as well as those that run through the same EAC model. As we look at 2025 and our growth projections, I think about it as perhaps half of that could be a headwind to revenue growth. As for the second part of your question regarding 2026 revenue and the Commercial Aviation Solutions business, CAS is included in 2025 guidance but not in the $23 billion framework for 2026 revenue. We wanted to include it in 2025 to minimize noise in the system following several updates we had to make in 2024. So, Commercial Aviation Solutions will be incorporated in 2025, but not in 2026 revenue framework.

Hey, good morning. Thanks, guys. I guess I wanted to go in that same direction, Ken and Chris. So thinking about CAS and the 2026 framework, what do you guys see in the backlog that really drives the doubling of that growth rate from 2025 to 2026 when you strip out CAS?

Yes. Let me take that one, Michael. First of all, our current portfolio and the national defense strategy indicate a significant focus on space, maritime, cyber, communications, ISR, and munitions—areas where we maintain multibillion-dollar businesses. So I believe the core portfolio will fuel growth. While addressing some challenges faced by the Space Force enterprise budget, I expect a correction by 2026. The focus on Paycom and the need for communications and networks further contribute positively. Regarding the previous question about LHX NeXt dragging growth, yes, it does impact cost-plus environments and where we have truth and negotiation cost and pricing data scenarios. That’s why, in my DOGE letter, I urged for expediting RFP processes. I believe we'll secure additional business with a lower cost basis. I still see potential from international markets representing approximately 21% to 22% of revenue, with executive orders focusing on increasing contributions or budgets from allied countries. This provides us with an additional tailwind, along with opportunities in direct commercial sales. We’re looking hard at partnerships with AI for disruptive initiatives and believe those could yield a percent-plus growth by 2026. I've noticed increased activity related to border security, a priority for this administration, and we provide communications for the customs and border control as well as military. Synchronizing these capabilities presents us with additional opportunities.

I would just add, Michael, from my perspective a couple of things. We’ve talked about this in the prepared remarks, but F-35 hardware delivery is ramping, space has a pause in 2025, but is back to growth in 2026. International ISR is on the rise, and Aerojet is expected to gain momentum from solid rocket motor revenue. CS is also likely to contribute with both international demand and the Next-Gen Jammer win kicking in volume-wise as we head into 2026.

Chris, Ken, Dan, good morning. So I'd like to ask you about the Pentagon and how the industry is recognizing the effect of fixed price development contracts without inflation escalators. Assuming you agree, I want to know if you see major changes coming to the contracting environment? Do you think there will be more rewards for good execution? And how quickly do you think these changes can be implemented? Thanks.

Yes. I believe that based on everything I've seen and read and the people I've met with, there is an overall desire to go quicker. The DOGE organization is more than just one or two people; it comprises a whole enterprise. I think ideas and suggestions for improvement will emerge quickly, perhaps by mid or late this calendar year, leading to changes that could impact 2026. The policies I proposed aim to streamline processes and reduce unnecessary bureaucracy and regulations in defense contracting. I acknowledge the talents and dedication of individuals working in the Pentagon; they’re often hindered by the existing bureaucratic frameworks. The companies that will thrive are those that adapt quickly and provide solutions efficiently. We believe we’re leading the industry with partnerships, and exploring collaborations with traditional prime contractors and new entrants positions us robustly. I’m optimistic we can continue making progress, even if there are challenges to navigate initially as we adjust to the new administration’s guidance.

Yes. Hi. Thanks for squeezing this in. Chris or Ken, as you look at your exposure to Ukraine, can you level set us on sort of directly or indirectly, how you see that? And maybe then just to put a finer point on the international opportunity, where do you see international growing for you within the portfolio in 2025? And maybe how much does that accelerate into 2026?

Yes, I'll take the first one, and we’ll keep it brief. When we talk about Ukraine, we're primarily referencing U.S. government assistance, distinguishing it from FMS or DCS. Our exposure is in the tens of millions, driven by existing U.S. government assistance mechanisms, whether through direct aid or loans. I believe this assistance will persist and unfold in line with the current political context. Importantly, this is a small percentage of our international business, and I expect these trends to subside. For international growth rates, Ken, do you want to take that and then we can wrap this up?

Yes, thanks Chris, and thank you for the question. From an international growth perspective, we see opportunities to grow faster than domestic. However, both segments should witness growth. We're around 21% to 22% of our revenue from international markets, and I do believe there’s potential for that to increase. The demand for our offerings remains high across NATO allies, Asia Pacific, and even Latin America. There were significant opportunities to support Ukraine in 2023 and 2024 with demands expected to arise from both U.S. aid programs and foreign military sales as other nations seek to procure capabilities. Overall, while both segments will contribute positively to growth, we're seeing significant potential for international growth, potentially outpacing domestic growth.

As I reflect on 2024, I must say I'm incredibly proud of my leadership team and all our employees for what we have accomplished. I want to thank the 47,000 employees for maintaining a focus on performance throughout the year. If you work at L3Harris, you become accustomed to change. The last five years have been about transformation, which will help us adapt to what's ahead. Despite the uncertainties, our strategic priorities remain unchanged, and we have a dedicated and talented workforce. We will continue to grow profitably. The 2026 framework is not only achievable; our focus here is to create long-term value for all stakeholders. Thank you all for joining the call. We'll continue to communicate with you in the months ahead, and I look forward to our next session in April. Have a great day.