L3Harris Technologies, Inc. (LHX) Earnings Call Transcript & Summary

Good morning, everyone. I'm Bill Brown. It's my pleasure as Chairman and CEO of L3Harris Technologies to welcome you to the company's 2020 Annual Meeting of Shareholders. Our annual meeting is an important event for our Board, management and shareholders. This year, it is being held as a virtual-only meeting due to COVID-19-related precautions with participants attending via the web portal and operator-assisted telephone line. Please note that this meeting is being recorded. However, no participant is permitted to use any audio recording device. I now call the meeting to order. Serving as secretary for the meeting is Scott Mikuen, the company's General Counsel and Secretary. The order of business displayed on the web portal sets forth the agenda for the meeting, which we will conduct in accordance with the guidelines available on the web portal. At this time, I'd like to introduce Chris Kubasik, Vice Chairman of the Board, President and Chief Operating Officer; as well as the other members of the L3Harris Board who are attending today by phone: Sallie Bailey; Pete Chiarelli; Tom Corcoran; Tom Dattilo; Roger Fradin; Lew Hay; Lew Kramer; Rita Lane; Bob Millard; and Fig Newton. I would like to thank the members of the Board for their service to our company and its shareholders. Also attending today is Brent Smith representing EY, our independent auditor. He will be available to respond to relevant questions during the question-and-answer session later in the meeting. I have appointed as inspectors of election, Robert Johnson, L3Harris Counsel and Assistant Secretary; and Sean Dunleavy of Broadridge. They have sworn an oath of office and will be tabulating the votes. The secretary and inspectors of election have reported to me that notice of this annual meeting has been properly given to shareholders and a quorum is present. Therefore, the meeting is duly convened. The secretary will now outline the business matters to be addressed.

Thank you, Mr. Chairman. There are 7 business items presented for shareholder action, each as described more fully in the company's 2020 proxy statement. The first item is the election of 12 nominees for director for a term expiring at the company's annual meeting to be held in April 2021. The second item is the advisory vote to approve the compensation of named executive officers as disclosed in the company's 2020 proxy statement. The third item is ratification of the Audit Committee's appointment of EY as the independent registered public accounting firm for the fiscal year ending January 1, 2021. The fourth item is an amendment to the company's restated certificate of incorporation to eliminate the supermajority and fair price requirements for business combinations involving interested shareholders. The fifth item is an amendment to the company's restated certificate of incorporation to eliminate the anti-greenmail provision. The sixth item is an amendment of the company's restated certificate of incorporation to eliminate the cumulative voting provision that applies when the company has a 40% shareholder. The seventh and final item of business is a shareholder proposal to permit the ability of shareholders to act by written consent if such proposal is properly presented at this meeting. When it is time to take up the shareholder proposal, we will recognize the shareholder proponent attending by phone to present the proposal and ask the operator to open line. To the shareholder proponent, when your line is open, please state your name and verify that you are the shareholder bringing forth the proposal. You will then have the opportunity to make a brief statement not to exceed 3 minutes. Mr. Chairman, the company has received no notice of any further matters to be considered at today's meeting beyond the 7 items I summarized. Therefore, no such further matters may be properly introduced by shareholders at today's meeting.

The 7 business items are now before the meeting for shareholder action. The polls are open for voting and will stay open until the conclusion of the formal business portion of the meeting. For shareholders, if you have not yet voted or would like to change your vote, you may do so by clicking the Voting button on the web portal and following the instructions there. To be clear, if you have already voted, you do not need to take any further action unless you would like to change your prior vote. After the formal business portion of the meeting, we will provide time for the germane questions from validated shareholders. Shareholders should use the designated text box on the web portal, where, if they must ask the question verbally, they may use the operator-assisted telephone line by following the instructions on the web portal. Out of consideration for others, please limit yourself to 1 question. Though we may not be able to answer every question, we will attempt to respond to as many as possible in the time allotted.

Mr. Chairman, with respect to the first 6 business items, the Board recommends a vote for each of the 12 nominees for director, for approval of the named executive officer compensation, for ratification of the Audit Committee's appointment of EY and for approval of the 3 amendments of the company's restated certificate of incorporation, in each case, as set forth in the company's 2020 proxy statement.

With respect to the final item of business, the shareholder proposal to permit the ability of shareholders to act by written consent, I have been advised that no representative of the shareholder bringing forth the proposal is present.

Mr. Chairman, under our bylaws, if the shareholder proponent or a qualified representative of the shareholder proponent does not appear at the Annual Meeting to make the shareholder proposal, the proposal must be disregarded.

Because the shareholder proponent or a qualified representative has not appeared, the shareholder proposal is hereby disregarded in accordance with our bylaws and is not placed before the meeting. This concludes the presentation of the proposals. The polls are about to close. So if you have not yet voted, please do so now and I'll pause for a few seconds. [Voting]

The polls are now closed, and the inspectors of election will submit their preliminary report.

Based on the inspector's preliminary report, approximately 92% of the company's shares as of the record date are represented at this meeting. And I now declare the following as to the business items presented for shareholder action. The 12 nominees set forth in the 2020 proxy statement have been duly elected as directors of the company for a term expiring at the 2021 Annual Meeting by the affirmative vote of a majority of votes cast. The compensation of the company's named executive officers has been approved by a majority of the voting power entitled to vote. The appointment of EY as independent registered public accounting firm for the fiscal year ending January 1, 2020, has been ratified and approved by a majority of the voting power entitled to vote. The amendments of the company's restated certificate of incorporation to eliminate the supermajority and fair price requirements for business combinations involving interested shareholders has been approved by a supermajority of more than 80% of the shares outstanding and entitled to vote on this item. The amendments of the company's restated certificate of incorporation to eliminate the anti-greenmail provision has been approved by a supermajority of more than 80% of the shares outstanding and entitled to vote on this item. The amendment of the company's restated certificate of incorporation to eliminate the cumulative voting provision that applies when the company has a 40% shareholder has been approved by a majority of more than 80% of the shares outstanding and entitled to vote on this item.

This completes the formal business portion of this meeting, and I declare the business meeting adjourned. I now open the floor to shareholder questions via the web portal or operator-assisted telephone line as indicated earlier. We will attempt to answer as many questions as possible in the time allotted, but only questions that are germane to the meeting will be addressed.

First question. Referring to Pages 5 and 6 of the company's 2020 Annual Report, LHX is described as being a prime contractor but not the sole contractor for the FAA's telecom infrastructure for the FAA next-gen ATC system. Regarding these operations, how often are these contractor services subject to renewal? How stable or variable is it at the company income stream and how exposed is L3Harris to competitors such as Verizon and others?

Well, thank you for the questions. So we are the sole contractor for the air traffic telecommunications network, which we call FTI, which provides critical voice and data communications for the national aerospace system. But -- and given the essential nature of the service, it's highly stable and it's well funded by the government. We were recently awarded a 5-year bridge contract, which extends the program through 2022, which was -- put us more than 15 years on that particular contract. So the next phase of the program, it's called FENS. It will be competitive. We believe we are well positioned given our incumbency and past performance of more than 99.999% the network uptime, so a very strong performance. But I believe, in any event, given -- even if there's a transition of a new contract, it will take several years beyond 2022. So I believe our revenue stream and income stream is pretty stable. So thank you for the question.

Next question. Referring to the 2020 Annual Report, Pages 100, 101 and the table on 101, employee pension obligations are underfunded. And it seems, in fact, the underfunding levels are increasing as of the report date and stands at $1.7 billion. As far as the LHX Board and our Finance Committee is concerned, what are the long-term targets and plans in place to close these underfunded gaps and pension obligations to the many thousands of LHX engineers, production, distribution and legal clients, professionals the company is fortunate to employ?

So thank you, again, for that question. So relative to stand-alone Harris, the obligations have gone up due to the merger. So at the end of calendar '19, we were funded at 84%. The plan is frozen to new entrants and service accruals. And last year, we made a contribution of $300 million from the proceeds of selling the legacy Harris Night Vision business. As any pension plan, the balance can fluctuate from movements in asset returns and interest rates, and we're seeing that clearly this year. We do have a healthy balance sheet. We have strong free cash flow, which we believe supports the pension programs over the coming years for the benefit of both active and retired employees. And the Finance Committee of the Board regularly reviews the funding status as well as investment performance. So thank you very much for the question relative to employee pensions.

Okay. Now we will turn to questions from the phone line. Operator, please open the line for [ Mr. John Kendall ].

Hello, Chris, Bill?

John, how are you doing? Thanks for joining the meeting today.

Can you hear me, Bill?

We can hear you very well, John.

That's great. Thank you very much for the opportunity. I'd like to shout out to Chris Kubasik, and my dear long-time friend, Tom Corcoran and everybody on the Board, and I'll be brief. I'm glad we're all healthy. And thank God, we're able to still walk and talk, and we pray for those that have succumbed to the virus and their families. But I just want to let you know, in Camden, we're doing very well and our Camden L3Harris facility, and everybody is so happy to keep working and support our military and everybody who needs our support. And I just want to say, I've attended all the shareholder meetings since the beginning of L3, so it's nice I got to at least attend this way. And I hope to see everybody next year, and take care, and everybody, stay safe. L3Harris is still the best investment that there is. And we're going to get through all of this together, and we're going to keep working. I like, Chris, when you put up the heroes of L3. We submitted one, maybe you'd take a look at from Camden. And maybe down the line, I just want to throw this out, it'd be nice to have a history of L3 and Harris printed up somehow. I don't know really all the background of Harris because I'm from the L3 side. So it would be nice to have all of the background of both companies put out maybe in a video or something. So I just want to say hi to everybody and may God bless and keep up the great work. We have the best company in the world, and we're going to keep doing extremely well and thank you.

John, thank you very much for your comments here today and for your long-standing participation in these meetings and for being a loyal member of our Camden workforce. Chris is on the phone as well as Tom Corcoran, so they heard your strong regards. Chris has taken the point for our company in our efforts to position our company to respond to this terrible COVID-19 global pandemic and is doing a terrific job in doing that. So I thank you for your comments. I thank Chris for his efforts in doing that. And your comments about the history of L3 and Harris separately and together is well noted and we'll definitely follow up on that. So John, thank you so much for the comment.

Operator, are there any additional questions on the line?

None at this time.

Okay. Well, thank you very much for all joining this meeting, for being shareowners of L3Harris Corporation, and I'd like to thank you all for attending. So thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.