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

Greetings. Welcome to the L3Harris Technologies Investor Briefing. A brief question-and-answer session will follow each section of today's program. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce Rajeev Lalwani, Vice President, Investor Relations. Thank you, and you may now begin.

Thank you, Rob. Good morning. We're excited to have everyone join today. The agenda is here on Slide 3. You'll first hear from Bill Brown, our CEO; and Chris Kubasik, our COO, regarding the L3Harris' strategy, followed by the Presidents of our IMS and SAS segments, who will provide a deeper dive into their businesses. We'll also look to build on these discussions at future events. On Q&A, we'll have several sessions today. Sell-side analysts can queue in through the phone line much like on an earnings call, and other participants can ask questions through the webcast that I'll anonymously read aloud as time permits. And on any 2021 guidance-related items, we'll save that for our next earnings call in April. Now 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, refer to Slide 2 of this briefing and our SEC filings. For a reconciliation of non-GAAP financial measures to comparable GAAP measures, refer to the appendix of this briefing and the Investor Relations section of our website, which is l3harris.com, where a replay of this event will also be available. With that, Bill, I'll turn it over to you.

Okay. Well, thank you, Rajeev, and good morning, everyone. It's great to finally get everyone together on a call for our first investor briefing as a new company, and I know you'll find it informative. If I take us back about 2.5 years ago when we announced the merger of L3 and Harris, our vision was to create a differentiated nontraditional defense technology company. And from early on, it was clear that the opportunity was compelling. The much larger scale of the combined company created an ability to make broader investments in innovation, with a focus on areas where future military spending was shifting. Resiliency, survivability and interoperability are all examples. It also enabled us to strengthen our leading C5ISR capabilities across all domains and across a diversified global customer base. We're a leader in ISR with a broad portfolio across all spectrums, electro-optical, infrared, hyperspectral, RF, sonar and all forms of intelligence, signals, comms, electronic and image. And we also lead in communications with strong niche positions in computing, command and control and cyber. We saw significant opportunities to expand margins from a transition to a more centralized operating company model, with gross cost synergies of $500 million or $300 million net by 2022, supplemented by opportunities from a single operational excellence program. And finally, capital allocation potential was enhanced. With the benefit of a strong balance sheet and healthy free cash flow from clear working capital opportunities, along with the anticipated proceeds from portfolio shaping, capital returns were set to be substantial and well into the billions. Fast forward a couple of years and we're off to a strong start as the legacy companies are integrating into a single, high-performance, technology-focused operating company, consistent with the day 1 vision and our strategic priorities. We've grown the top line on an organic basis by 8%, with our DoD portfolio leading the way, driven by the tactical radio, mission avionics, maritime and classified businesses. And this is despite COVID headwinds, which if excluded, would have put growth up in the double digits. We've also strengthened our pipeline with over $7 billion in revenue synergy opportunities and have grown total backlog by 11%. Integration has been purposeful and methodical, led by a full-time team of seasoned leaders put in place at the time of signing, and we're delivering cost synergies that are higher than initial targets and about a year sooner, driven by headquarter and segment consolidation, shared services, benefits harmonization, supply chain leverage and facility rationalization. At the same time, we created a culture of operational excellence through our E3 program, which when combined with synergies, delivered 200 basis points of margin expansion. This focus on execution carried over to free cash flow. With working capital improvement of 14 days since the merger from better inventory management as well as a disciplined CapEx approach, we've generated over $4 billion in cash. When combined with portfolio shaping proceeds to date of over $1 billion, excluding recent announcements, we've returned nearly $5 billion to shareholders through buybacks and a rising dividend. And we're set to exceed these levels over the next 2 years, with cash flow increasing to $3 billion in 2022 and gross proceeds from divesting about 10% of revenue, reaching $2.8 billion to $3 billion. Overall, the benefits of the merger are tangible, and they're coming in well ahead of S-4 projections for revenue, margin and cash flow. The momentum in our business is clear, and we're positioned to continue creating value for all stakeholders. And with that, let me turn it over to Chris.

Okay. Thanks, Bill. It's clearly rewarding to see our vision become a reality, and the timing of our merger couldn't have been better. Today, when we hear from the DoD and MoDs around the world, they're saying they want a differentiated and nontraditional defense prime, one that is agile, responsive, innovative and affordable. And considering our strategy, our culture and our portfolio, we're in a great position to meet their needs through our innovative and technology-focused capabilities across and between all domains. So let's start with growing revenue and the market environment. We see counteracting dynamics when it comes to global defense spending. On one hand, we have a rapidly evolving environment with persistent threats, mainly from China and Russia. These threats are increasingly sophisticated and span multiple domains, consistent with what the national defense strategy and the new administration officials have highlighted. On the other hand, as we're all aware, we have budgetary pressures that stem from the pandemic, with deficits widening to the U.S. and around the world. The net of this is an expectation for flattish defense budgets and a customer focus on procuring more advanced, resilient and affordable solutions. And whether it's in our space, comms or ISR capabilities, we're well positioned. Let's go to Slide 7. As we look at our portfolio, we have a leading capability across all domains and can serve as the go-to mission solutions prime for our global customer needs. And with an expectation for increased focus on the airspace, sea and cyber domains, which represent about 70% of our portfolio, we're in a great position to capitalize on the shifting environment. Our largest position is within the air domain, representing nearly half of our revenue at about $8 billion. We provide world-class capabilities, including modernizing electronic warfare for variants of the F-18 and F-16, multifunction processing for the F-35, data links in electro-optics for a range of platforms and signals intelligence along with an ability to fully integrate and missionize them on aircraft. These technologies will be essential for the future fight and key to our revenue growth strategy. On the land side, our approximately 40% share of the global tactical radio and night vision markets, which are just ramping up due to modernization, provide future growth and stability looking forward as they remain a high priority. We also have unique classified and battlefield integration capabilities with over $1 billion in revenue, which also see continued robust growth. Within space, our $2 billion in revenue reflects our position as a payload provider of comms, optics and sensor solutions on exquisite satellites. And we've methodically expanded into end-to-end responsive sats for the intel community and DoD with notable success. We're also layering in our ability to support situational awareness from ground-based assets. We're excited about the potential as we pursue our $10 billion-plus pipeline. Ed will cover this area in more detail. In the sea domain, we have roughly $1.5 billion position, including leading content on manned platforms like the Columbia and Constellation classes, where we provide comms, sensor, power and navigation systems. This pairs well with our ability to provide end-to-end solutions for unmanned surface or undersea vessels, a growing part of the U.S. Navy's long-range plan to expand the fleet. Sean will focus on the progress we've made over the past couple of years. Lastly, while limited in what we can say due to its classified nature, we have $1 billion cyber business that services global intel customers with diverse capabilities. And as the threat environment escalates, this should remain a growth area for the company. And when we consider our R&D, we expect to stay at a roughly 4% of revenue for the foreseeable future. Our focus will be on rapidly developing and upgrading these capabilities for multiple programs and platforms through spectrum superiority, actionable intelligence and war fighter effectiveness. Within spectrum superiority, which is our largest area of investment, we're developing advanced solutions to complex communication and network challenges. We build solutions to operate, obstruct, observe and obscure across the electromagnetic spectrum. For example, we're a leader in low probability of interception, low probability of detection systems, enabling us to successfully operate across all domains and in contested environments. Paired with investments in actionable intelligence such as ISR sensors, this allows our customers to rapidly acquire process and target the threat at hand. And finally, supporting war fighter effectiveness, we're investing in open systems architecture across both manned and unmanned platforms to provide cost-effective upgrades and sustainability. So given our position in leading C5ISR capabilities across domains, along with our investments in open architecture, multifunction and software-defined solutions, which make up over 60% of our R&D spend, we expect to play a central role in enabling multi-domain operations for our customers, a leading priority for the DoD, especially on the focus of joint force lethality. Slide 9 provides the graphics to show how our capabilities can work together to interconnect the military and support the Joint All-Domain Command and Control concept or JADC2. So think of it as a responsive satellite linking to an ISR aircraft that relays data to a ship or a tactical radio to enable real-time threat resolution. Each of the services are coordinating their strategies to advance JADC2, whether it's ABMS at the Air Force or Project Overmatch at the Navy, with an end goal of more connections between platforms, programs and services to effectively address near peer threats. Though we're in the early days, we've seen an increase in budget allocations, with the most recent 5-year plan showing over $3 billion. What does this all mean for our revenue outlook? Well, it supports our pillars of growth, our strong domestic position, revenue synergies and international expansion. Our domestic position stems from capabilities that are aligned with the DoD and the MDS, recently enforced -- reinforced by the Interim National Security strategy put forth by President Biden. And we envision the areas with the healthiest growth prospects be in space, maritime, tactical comm along with selected classified areas, which we believe will continue to be well funded in the budget. We had solid progress here in 2020 with total backlog growth in the high single digits that came from these areas. On top of that, our revenue synergies from combining L3 and Harris capabilities in areas like space EW, avionics and maritime have enabled us to build a pipeline of over $7 billion for the next 3 years. And our win rate to date of 65% provides a level of confidence that we can add about 1 point of growth each year. On the international front, we're focused on exporting our leading capabilities and technologies such as aircraft missionization, EW for fighter platforms, solutions for manned and unmanned ships and soldier modernization via radios and night vision. We have a targeted list of 10 countries, primarily in the Asia Pacific and Mideast as well as the U.K. and Canada. And based on our funded book-to-bill of 1.08 last year plus a couple of notable awards here in the first quarter, there's runway to build on our 20% of revenue penetration. We're targeting international growth of mid-single-digits plus, which would add another point of growth for L3Harris. We've made progress to date through a handful of prime-level wins within each of these 3 pillars, locking in part of our over $125 billion 3-year pipeline. This includes and builds on the previously disclosed 18-month pipeline of $67 billion. And we've recently noted within the domestic market, we've secured a prime position with the Missile Defense Agency's HBTSS program and the Space Development Agency's Tracking Layer, which is also a revenue synergy. Both are innovative and technologically advanced responsive satellite solutions that come from significant investments as part of a multiyear strategy. In addition, we've expanded our relationship with the U.S. Navy with 2 key wins: the Next-Gen Jammer Low Band electronic warfare upgrade and the Medium Unmanned Surface Vehicle. When combined, the potential of these programs and platforms is well into the billions. And on the international front, we recently signed a $1 billion-plus program with a NATO customer to missionize a series of G550s. This program was upsized considerably as a smaller version of it was previously set to be booked in late 2020. And we're building on the continued modernization push for tactical radios and night vision systems with recent wins in Australia, which, when combined with countries like the U.K. and Saudi Arabia, represent opportunities of over $4 billion. So great progress with building our backlog and executing on our pipeline, which will remain a keen focus of ours as budgets tighten. Now pulling it all together from a revenue standpoint, we feel good about our mid-single-digit growth guide this year. The trajectory of the budgets and outlays will inherently play a role in our growth profile over time but we're expecting sustainable growth beyond 2021. Let's go to Slide 12. On top of consistently growing our revenue, we're focused on supporting a stable and upward trajectory for our margins that builds on our 2021 guide. In the near term, there's clear opportunity around cost synergies that by the end of the year, we'll have delivered margin expansion of nearly 200 basis points since the merger closed. We've executed our targets for segment and headquarter consolidation as well for employee benefits and expect to see further traction with IT, supply chain and facilities this year. And we'll naturally work to achieve the upper end of our $320 million to $350 million cost synergy range, which is net of the savings we share with our customers. We also expect portfolio shaping efforts to yield improvements in margins as we're exiting businesses that have less of a strategic fit, along with a lower margin profile versus our core. And the upside to our margins doesn't end here. We've institutionalized our E3 operational excellence program and continue to ramp our efforts, creating another phase of cost saving opportunities for L3Harris. Now a bit more on our E3 program and our goals on Slide 13. As a company, we have a cost structure of roughly $15 billion, and there are efficiencies to be gained from a culture of excellence, which stem from the operating company model that both Bill and I envisioned when we put the companies together. The key for us will be to continue tackling each of our major cost buckets, and we believe our operational cadence and culture of excellence position us well to do so. Direct labor and supply chain represent a lion's share of our spend at roughly 80%. And here, our efforts will be focused on quality improvement, program excellence and lower input cost. We expect to accomplish this through investments in digital process, talent management and a tighter partnership with the supply chain. We deploy resources to help our small business suppliers, including our continuous improvement methodology. From an SG&A standpoint, continuing to optimize our shared service organization, consolidating facilities and reducing ERP instances to approximately 20 across 3 core platforms are where we see additional savings. And finally, from an R&D perspective, it remains one of our top priorities, and our spend will stay elevated to support the top line longer term. We'll be focused on utilizing DevSecOps on key software developments to ensure speed and agility and bringing capabilities to market. And we're rigorously implementing our checkpoint decision process to ensure business cases align with investments in technology road maps as well as enterprise strategy. Ultimately, our goal will be to continuously optimize our cost structure so we're leaner and more competitive, so that we can win next-generation platforms while steadily expanding our margins. With our growth in revenue and margins, we'll see tailwind to income. And when we combine this with our continued discipline around cash management, net of supporting key suppliers, especially small businesses, we anticipate sustaining our free cash flow conversion at or above 105% for the foreseeable future, absent any shifts in tax policies. On the working capital front, we're only in the middle innings and see opportunities to reach closer to 40 days over time. And the drivers are consistent with what we've noted around tackling inventory at several key businesses through reduced cycle times and fewer SKUs, along with better vendor terms. On the CapEx side, our 2% of revenue target is set to remain in place, which implies a range of $350 million to $400 million per year. And with R&D sitting at about $700 million, there's a healthy $1 billion-plus of annual investments into our business. Lastly, from a pension standpoint, based on asset returns and funding to date as well as active plan management, we see no meaningful cash contributions for the next several years. So assuming no surprises in R&D, tax and other policies, our expectation is to build on the $3 billion free cash flow target that we have for 2022 and to continue growing. With our free cash flow generation and nearly $2 billion in additional divestiture proceeds, we expect between 2021 and 2022 returning over $7.5 billion to shareholders. Starting with the dividend, we recently raised it by 20%, bringing increases since the merger to nearly 50%. And we expect to sustain increases above the growth in EPS and cash per share as we look to reach our target of a 30% to 35% payout on free cash flow. This target provides a good balance between dividends and repurchases, and the latter provides an opportunity to capitalize on the uncertainty in the markets and drive bottom line growth. In addition, we're on pace to largely exhaust our recently announced new $6 billion share repurchase program through 2022 from our free cash flow generation and divestiture proceeds. This implies that buyback since the merger and through 2022 will represent roughly 25% of our current market cap. Beyond this, we have a balance sheet capacity with a net leverage at 1.6, and we'll be opportunistic with its usage. And while there's no urgency on our part, this can ultimately drive additional shareholder value. On Slide 16, let's pull it all together. Our focus is on driving double-digit bottom line growth for investors, and we anticipate accomplishing this through 3 primary levers. First, we expect to consistently grow the top line, given our strong portfolio position and unique benefits from the merger such as revenue synergies and international expansion. The persistent threat environment, supportive commentary from the administration and Congress and unspent DoD funds also support this. Second, margins should continue their upward trend given the benefit of synergies and the runway we have on operational excellence. This implies solid growth in our profits and cash flow that are above the top line. Third, through our cash discipline and capital allocation opportunities, earnings and free cash flow per share are poised for consistent multiyear growth in the years ahead. Our strategic priorities will be the key enablers to execute our plan and build on our success. As you can see, they're consistent with what we've highlighted and delivered on since the merger: grow revenue, deliver on the integration, build on operational excellence and expand margins, shape the portfolio and maximize cash flow and pursue shareholder-friendly capital deployment. We expect these priorities to continue creating opportunities for our employees, delivering innovative solutions to our customers and value to our shareholders over the coming years. So Rob, with that, let's start the Q&A, and myself, Bill and Jay will be available to answer your questions.

Our first question comes from Carter Copeland of Melius Research.

Can you hear me okay?

Yes, we can.

Still haven't figured out how the mute button works. Just wondered, Chris, if you could elaborate a little more on -- I know you've been talking about this kind of 6 prime concept and idea now for several years. But with some of these wins you brought in, you guys have successfully kind of expanded on that. I just wondered, when you think about how that's evolving and where the next kind of potential is on there, if you could just give us a kind of sense of your thoughts on that whole strategic thrust.

Yes. Thanks, Carter. No, a couple of years ago, we talked about this nontraditional sixth prime concept before the merger. And I would say, with the merger, everything is pretty much going as planned. We've increased the R&D investment, we have stronger capabilities. And part of the strategy was to become a prime, and you mentioned and highlighted that. And we've seen just in this past year, the opportunities with FDA, MDA, Next-Gen Jammer and MUSV is just a few. So I'd say everything is tracking. We talked about nontraditional. Both Bill and I mentioned agility and affordability and innovation. But also, I think part of that is the focus on the mission systems and the open architecture. So I believe when you put all that together and you couple it with our mission and domain knowledge, I think we're in a unique position to support the customer for the future.

Our next question is from Doug Harned with Bernstein.

This is a question for Chris. Chris, if you think back before the merger was announced and where L3 was, you had, and I thought of it as, nearly 100 businesses with some great assets in there, some maybe not so great. But I think it's fair to say that a lot of those businesses had been under-managed for many years in terms of earnings and cash performance, overlapping costs. I know you talked about that a lot. Overlapping capabilities across the portfolio. So when you look at where you were back then and you think about the journey you've been on, working through this, like where do you stand in terms of really rationalizing that portfolio you used to have, maximizing performance and what still needs to be done? And over what time frame would you do it?

Yes, Doug, that's a great set of questions. Let me start with the portfolio shaping. I think your summary and description of L3 was pretty good. I'd probably call them core and noncore versus great and not so great. But either way, I think the portfolio shaping, as we've highlighted, is -- has already been identified. Bill and I spent a lot of time deciding what was core, what was noncore. We've announced that 80% of the portfolio shape and has already been behind us are announced. So I would say, that process is well on its way. Relative to where we are, on the multiyear journey, I'd say we're probably in the mid-innings. We did a lot upfront on the synergies that we talked about. We developed a program, excellence function and E3 function. I think we have better margins. And I think as the previous question, we've been able to move up the food chain and get some prime opportunities. But it's a journey. You take something like information technology, the focus on the infrastructure, the ERP system, they take several years to continue to integrate and we have a focus on that. So I believe there's continue upside in the margins, and we'll continue to integrate and focus on continuous improvement. So I hope that answers your question.

Our next question is coming from the line of Robert Spingarn with Credit Suisse.

This is a question on space and I suppose it could wait until later when Ed speaks, but I figured it's got a strategic element so I'd ask it now. To that end, we're seeing quite a few new commercial players enter the space domain, including several that are focused on deploying their own satellite constellations and offering space-based analytics to a wide variety of customers, and some of them are commercial and outside the DoD. So I wanted to ask if you have any relationships with these kinds of companies to use your sensing and communications technologies. Or maybe asking more broadly, what role might LHX play in this market?

Yes. No, thanks for that. We were -- Bill and I were just talking the other day when everybody focuses on these new entrants. In an odd way, we kind of think of ourselves as a new entrant, only being a 20-month-old company. And that's the culture and the attitude that we bring to, to this environment. So yes, historically, the payload providers have been sub to the bus providers. I think we've seen that flip, and part of the success we've had in priming is to realize that the payload is the unique capability that we bring to the war fighter and the bus becomes more of a commodity. So we've seen that situation flipped. And yes, we team with and compete with some of the new entrants that you referenced or suggest. And I really like our position. I think we're very competitive on a cost side. We're very agile. A lot of these wins have launches in the next couple of years. So I feel good about what we've done strategically. Later in the day, we'll have Ed expand on that more but that's how we've approached the market.

The next question is from Robert Stallard with Vertical Research Partners.

It's probably for Bill and/or Chris. And it's really regarding the environment we're in, in the defense industry at the moment. You highlighted that you continue to spend a high percentage of sales on R&D. But as the budget gets as slightly more challenging going forward, do you expect the customer to be expecting defense companies to perhaps invest more, be it R&D or CapEx or contractual terms? But on the other side of that, is there an opportunity to potentially make higher margins?

So maybe I'll start there, Rob, since you asked it, and maybe Chris can jump onto that because he talked a little bit about what we spend in R&D., it's about 4% of our revenue. It's pretty consistent, $700 million. Our capital spending is sitting right around 2% of revenue. So in the order about $375 million, so over $1 billion. And we think that, that is -- that's fully invested. It's not like we're sitting there looking at opportunities that we have not funded that are good opportunity to drive shareowner value. So we feel good about the position we have, the investments that we're making. I don't expect over time that 4% is going to come down much, to be honest with you. We -- as we continue to expand the set of offerings we provide, we're finding opportunities over time to invest. So I don't think it's going to come down measurably. So I wouldn't look to that lever to improve margins. But we feel pretty good about the investments that we have to be making here. I don't know, Chris, if you want to build on that.

Yes. No, I echo what Bill says. I mean we do have industry-leading investments in R&D and people ask a lot about margins. I mean clearly, we could crank up our margins by cutting our R&D, but that's not our strategy and that's not our plan. And again, we're positioning ourselves for long-term growth. So I'm really impressed with the way we approach R&D from a top-down perspective. We have off-ramps, we have on-ramps to accelerate spending as the environment changes. So I think we're in a real good position. On the CapEx side, that's an area that we've really tightened the screws and again prioritized. Both Bill and I referenced the facility consolidation, but there's a plan where we're going to take out about 20% of the square footage, both from consolidations and divestitures. And ultimately, what we're trying to have is a more focused, less complex business and those actions will allow us to do so.

Your next question is from Greg Konrad with Jefferies.

Just a bigger picture question. I mean you kind of created a compelling case for mid-single digit growth over the medium term. What type of assumptions are kind of baked in that -- to that for the budget? And how much of that is driven by maybe prior budgets versus where the budget could go? And what is the risk to that forecast if we maybe do see a bigger step-down in the budget, given your argument that you're more focused on kind of high-value areas?

Yes. No, Greg, as I said in my comments, we have the domestic piece, we have the revenue synergies and we have the international. So those 3 pieces combined allow us to set this mid-single-digit top line growth as a goal for the company. I mean clearly, there's some dependency on the budget and we'll have more visibility later in the year. But what we'll be focused on so much is trying to position this company and its capabilities in areas where we believe our customers domestically and globally are going to need our capabilities. So relative to the assumptions in there, we're looking at the current budget. We're looking at what's going to come out in the months ahead. But our goal remains mid-single digit. And when you look at the synergies in international, in addition to what I've just said, I feel pretty confident. But notwithstanding that, we still focus a lot on the bottom line and the need to grow the earnings per share or free cash flow per share double digit. So even some top line pressure is not going to impact our ability to get to the double-digit bottom line, with a combination of the margins that I talked about, the capital deployment. So hopefully, that answers your question, Greg.

Our next question comes from the line of Peter Arment with Baird.

This question for, I guess, Bill or Chris. Just on the revenue synergies, it's been a number that -- or at least an area that you've highlighted quite a bit since the merger. Maybe Bill, if you just could just highlight how you think that's coming together. It seems like the $7 billion number in your win rates is kind of exceeding expectations. Or was that kind of always what you thought it would translate to?

Peter, it's a great question. No, this has gone much, much better than we had anticipated. If you go back when we -- when Chris and I announced this merger back in October of '18, we really articulated well the cost side, the net cost synergies, and we referenced the combined capabilities, the scale. But we didn't dimensionalize the revenue opportunity. But we knew that, that was going to be the true value creation opportunity. And Chris had been leading a team, working on it as hard for the last 20 months. The pipeline has grown substantially. You're talking nearly $7 billion. We have more than 70 proposals that are in, 48 that have been awarded. We're winning 2/3, which is pretty spectacular with $400 million worth of revenue. So when I look at it, that's coming together in a much, much better way than I would have expected. And we're still at the front end. We're still working as a team, collaborating, sharing. A lot of these ideas require some investment in technology to go out and capture. But early days, I think it's very encouraging, which is why we're leaning forward saying it's going to help us 1 point a year of growth on the top line. I think we've got more coming. A lot of it's in the classified side, so we don't really talk about some of the bigger ones externally. They're -- and they're -- sometimes, they're smaller prototypes or studies that can grow into larger things over time. But Peter, very, very encouraging. I think the true potential value creation is really on the revenue growth, not so much on the cost takeout.

Our next question is from Jon Raviv with Citi.

Looking at Slide 7. What's your perspective on how some of those various buckets and end markets that you identified, how might they grow in relation to each other? I mean Chris, you mentioned, I think you're seeing the most support in space, maritime, tech comms and some select classified. So does air maybe lose some share in the total pie for the company? And then also looking at how that air end market spans all your segments but space is here obviously more segment-focused, is there an ability to make more of those boxes more multi-colored, so to speak?

Yes, Jon, great question here. I'm just looking at Page 7. And yes, I think what we're going to see over time as we talk about the importance of networks and multi-domain and our customers' focus on jointness, you're going to see these converge and blend over time. Clearly, I think, as we said, space, sea, cyber are growing probably the most. And it's not only taking a bigger piece of the pie, it's actually the pie is getting larger. We still have a good position and growth opportunities, as we mentioned, in air and land. So all 5 have the potential, but I think the space, sea and cyber are probably the most -- at the top of the list, if you will. So hopefully, that answers your question, Jon.

The next question is from the line of David Strauss with Barclays.

So Chris, Bill, you talked about targeting mid-single-digit growth. But I guess, as you think about being able to continue to grow earnings and free cash flow per share at a double-digit rate, what do you see as kind of the minimal amount of top line growth that you need to enable that? And then you touched on the balance sheet a little bit. What do you view as the optimized capital structure relative to where you are today, like 1.5x levered? And are you willing to put on some additional leverage to buy back more stock than you're already talking about?

Okay, David, 2 of my favorite questions at once. So yes, look, on the bottom line, double-digit growth, whether it's free cash flow per share, which again, was almost $12.50 last year and if you look at the midpoint of our guidance, it comes pretty close to $14 a share. So not sure everybody focuses on the free cash flow per share but it's pretty powerful. To achieve that lower single-digit top line growth will enable us to get there, especially when we add in the E3, the margin improvement and the capital deployment. So that's the 3-pronged approach to get there. Yes, relative to the balance sheet leverage, maybe I'll throw it to Jay. But clearly, we're, as an industry and as a company, probably a tad under-levered, which gives us opportunity if we wanted to, to go ahead and use our balance sheet. So I think that's one of the items that maybe differentiates us from others is having such a strong balance sheet. But Jay, you want to...

Sure. Thanks, Chris. David, to your point, there's certainly additional capacity for really the right investment or investments at the right time. Even on a gross basis, we're a little bit right under 2 from a leverage ratio perspective, and so there's certainly room there. But keep in mind, the amount of share repurchase we've done, as Chris mentioned, over -- through the end of next year since the merger, we'll be around 25% of our market cap having repurchased. And so as the company naturally evolves, there'll be other opportunities, we believe, for capital deployment. And so we'll approach that with being specific, being disciplined and doing the right thing at the right time.

Our next question is from Seth Seifman with JPMorgan.

When you think about margin expansion contributing to that double-digit EPS and cash flow per share growth over time, is there any mix headwind as kind of a sixth prime, some of the prime awards you might win, whether it's unmanned underwater or in space, that those are margin dilutive? And I guess that, to the extent that there are opportunities like that, that you win, while it's certainly a good thing overall, that it sort of requires a little bit more on the cost side to get to the margin expansion each year?

Yes, Seth. Great question. Yes, everything I'm talking about is net of headwinds caused by mix, annual increases in employee compensation. All those things are netted to get to that goal of maybe 20 to 25 basis points per year increase. I mean you raised a good point. As we continue to win and I think we all know this, a lot of these early wins in developmental programs start out as cost-plus and then they evolve to fixed price as you get to production or export internationally. And that's just all part of the business. So we will absorb those mix. I look at those cost-plus programs. We don't talk a lot about ROIC. But clearly, when you look at them from that perspective, they're accretive to value. So that's the business we're in. And I would always want to have some new cost-plus programs mixed in with our fixed price production. But notwithstanding that, we have a path to grow. I'll throw this over to Jay, who's my partner in crime in making sure we achieve this in the years ahead for his thoughts.

Sure. No, that's exactly right. And maybe just to bring it together, as Chris mentioned in his prepared remarks, we're -- this year will be $320 million to $350 million in synergies. But there's still a tail that comes from that. We have continuing benefits to flow into next year on facilities consolidations. As Chris mentioned, we're consolidating our ERPs over the next few years. And so that provides a decent platform, if not a boost, to our core operational excellence program. And so as we transition everything over to our operational excellence program, that will just supplement things like factory productivity, stronger and continued improvement in our program performance in terms of risk retirement, supply chain management and the like. And so all of that, as Chris mentioned, is all contemplated to more than offset the mix headwinds. Those are clear. We will see those. They do come in either development or low rate production at lower margins. But we've had that fully contemplated as we talk about continued margin expansion from here on out.

Our last question comes from the line of Kristine Liwag with Morgan Stanley.

Your focus on portfolio reshaping has been on divestitures, and capital deployment is a capital return. With all your margin and cost-cutting initiatives underway, at what point would you think about acquisitions again? We're seeing a discount in valuation for defense companies. And where in your portfolio would you be interested in growing inorganically? And what would you have to see to make you comfortable about growing the business in that way?

Okay, Kristine. No, thanks for that question. When the merger was put together, we said that our focus would be on integration and we would only make acquisitions if they were must-haves. As you would expect, we watched the market over the last 20 months and we're highly confident we didn't -- did not miss anything that we would have wanted to acquire. When we go back pre-merger, I think it's safe to say, both companies had gaps strategically. And that's why when Bill and I put the companies together, the complementary nature of it really hits all those domains. And that is really the focus of my upfront comments to show how we're well positioned in these domains, how we're technology-focused. But to answer your question, we don't see any glaring needs right now. I will continue to say that we're -- if we see something that's a must-have, we have the capacity to look at it. We have very, very strict hurdles relative to the strategic value of any acquisition, operationally how we would integrate it, what we would do with it. And then, of course, financially, they would have to clear all the hurdles. So we do have a strong balance sheet. There's no rush, and we're focused on growing organically and some of the capital deployment initiatives that we already mentioned.

That wraps up our first Q&A session. Let me now introduce Sean Stackley, President of our Integrated Mission Systems segment. Sean, over to you.

Thank you, Rajeev. Let me start by describing that the Integrated Mission Systems segment was formed to capitalize on L3Harris' broad range of sensor, network, power and processing capabilities to provide our defense customers with a higher order integrated systems called for by their future force planning. Now our strategy for growth, it's fourfold: win on best value, build a better system than the competition at a better price for the customer. Chris and Bill described our significant IRAD investment and cost takeout through our E3 program. And I can tell you, having been the customer, that's what best value is all about. Leverage strength in 1 domain such as airborne to take out wins across other domains such as maritime and land. Leverage our strength on U.S. military programs to increase our strength internationally, and move up the chain from being the systems provider to being the systems integrator and increasingly the prime contractor. This first slide describes the 3 core IMS business systems. The largest of these business is ISR, is the premier provider of signals intelligence capability for the U.S. Air Force and the sole provider of secure, resilient communications for the fleet of National Command Authority aircraft, supporting the President and senior-most executives of the U.S. government. And I'll discuss how we're leveraging our 6-decades experience in these missions to grow the business. The maritime business comprises an array of U.S. and international ship and submarine systems, power, acoustics, communications, optical sensors, navigation and control systems and separately, unmanned systems, undersea vehicles, surface vessels and seabed systems. The Electro Optical business is a world-leading provider of airborne electro-optical sensors, stabilized laser imaging systems and space launch avionic systems. Each of these businesses is rich in design, integration and test expertise and is reaching across domains, across services and internationally. And so to provide some sense of our progress, our order book in 2020, $6.5 billion, when coupled with the $5.5 billion revenue noted on this slide, resulted in a very healthy 1.17 book-to-bill last year. To build on Chris' earlier assessment of defense trends, there are a number of cornerstones of the current National Defense Strategy, which the Biden administration have continued to emphasize and are expected to remain prominent in future budgets. In particular, to contend with the return to pure competition, the strategy calls for greater intelligence through signals collection, greater networking of ships, aircraft, ground and space to enable every platform to leverage every sensor on the network and greater presence around the globe to be provided by a larger force of ships, aircraft and unmanned vessels. And while there's a great deal of anticipation regarding this first Biden budget, we know there'll be a priority placed on affordability. So these defense priorities, they align closely with our core capabilities and our strategy for future growth. And our advanced sensors span the spectrum from RF to acoustic to EOIR. Our signal processing capabilities is at the heart of defense intelligence collection. Our resilient networks, which pull in capability from across all 4 L3Harris segments directly support the department's requirements for performance in a communications-denied environment. Our naval power and control systems are alone in meeting the power demands of the Navy's newest ships and submarines, and our autonomy is front and center on the Navy's highest priority unmanned programs. And furthermore, as I described, we're continuing to invest in advanced sensors, signal processing, open systems architecture and autonomy to further our lead. We're crossing domains, driving our premier airborne system to land and maritime. We're leveraging the strength of our U.S. military systems internationally, and we're moving up the chain. So I'd like to just give you a simple example. We've taken the transducers that are manufactured by legacy Harris business, integrated those into the sonar arrays manufactured by our legacy L3 acoustics business, coupled that with the signal's processing capability of an acquired autonomy business, to win a $300 million contract for seabed acoustic systems. And we've springboarded off of that contract to win an adjacent opportunity in other sea-tracking ranges, and now we're taking that capability to compete for a similar system internationally. So with that as background, let me walk you through the IMS businesses, beginning on Slide 21. The ISR business is built upon 3 tiered capabilities. The first here is underpinned by more than 6 decades of systems design, integration test and signal processing for the U.S. Air Force preeminent signals intelligence aircraft known as Rivet Joint, which, over time, we've expanded to international and special purpose aircraft programs for a steady run rate of $800 million to $1 billion per year to maintain and modernize the 26 large-body aircraft of the RC-135 fleet. Alongside Rivet Joint, our 46 large-body aircraft that support our nation's highest priority missions, Air Force One, VIP transport for the Cabinet and Joint Chiefs and nuclear command, control and communications. In our role as the provider of the secure communication systems for these national command authority aircraft, that forms the second tier, generating an additional $300 million to $400 million revenue per year. The third tier comprises our core capability for maintaining and modernizing some of the world's greatest fleets of aircraft. Our hangar capacity, tooling, engineering and skilled labor have uniquely positioned L3Harris as a competitive alternative to traditional aircraft manufacturers. And the major wins for the C-130H avionics modernization program and associated depot maintenance, those alone represent $125 million per year revenue across the near to midterm. Now turning to Slide 22. I'd like to talk about expanding our position in airborne ISR. We've been able to leverage the deep technical expertise we've developed on Rivet Joint and an adjacent C-130-based EW program known as Compass Call to scale and integrate these and like systems into medium altitude aircraft and business jets to open wide the airborne ISR market. The first of these programs is Javaman. It's eclipsed 1 million flight hours of ISR in support of special operations. In a subsequent award to missionize the G550 business jets to form the Compass Call mission established a parallel path for higher altitude, longer endurance missions. And today, we're in various stages of contract, production, integration and testing for an additional 20 aircraft, spanning 4 aircraft types in support of 6 airborne ISR programs for the U.S. Air Force, U.S. Army and our allies. And as we line up for no less than a half dozen U.S. and international opportunities for tailored ISR aircraft over the next 2 years, our cost, technical and operational experience with these missions tells us that we're in a strong position to capture these opportunities. We're looking further down the road, beyond platform-based ISR programs. We've gone the next step in providing tailored capabilities by developing a modular pod-based signals intelligence system able to be integrated onto the wing of a military aircraft, including unmanned aircraft. This capability, which we call SOAR for scalable, open architecture reconnaissance, it's been successfully demonstrated to the U.S. and allies, and we expect this SOAR pod to open a new customer base around the world. Now let me shift to maritime business. Maritime enjoyed a strong 2020 with double-digit growth and equally impressive $1.8 billion in orders for a very healthy book-to-bill of approximately 1.3. And that growth stems from the strength of the discriminating capabilities described earlier: shipboard communications, acoustic sensors, power management, mass-mounted sensors, command and control, navigation and auxiliary systems. Virtually every U.S. Navy ship under construction today is equipped with L3Harris systems. The Navy's 2 newer ship classes, the Columbia submarine and Constellation Frigate showcase these systems from stem to stern. Now what's most noteworthy about Columbia is that it's an all-electric submarine, requiring an advanced power system provided by L3Harris that's unlike any other in the world. And this next-generation power system, it's key, it's key to our $2.5 billion total program value on Columbia. In the case of the Constellation Frigate, which was awarded last year, we're proud to have been selected by Fincantieri Marine as the ship's systems integrator for the electric power system and for what's referred to as the frigate architecture framework, the digital backbone that manages the data across the ship systems, a takeaway, in fact, from the competition. So as systems integrator, we've secured a role spanning design, production and total life cycle that today, we conservatively estimate to be $1 billion in the event of a 20-ship program. However, we fully expect the program to extend well beyond 20 ships with a frigate promising to be the largest surface ship program in the Navy's shipbuilding plan. And our growth in maritime is a result of the strategy that I described upfront. We strengthened our competitive position system by system to capture greater content on new construction programs. We began to bundle our capability to capture cost efficiencies and improve our competitive position. And in parallel, we increased our R&D investment towards next-generation systems required on future ship programs such as Columbia and the Frigate. And more recently, we made the leap, capturing the role of ship systems integrator. And in parallel, we've been able to capture key positions on international shipbuilding programs, stretching from Canada to Europe, the Middle East and the Asia Pacific, resulting in a strong 1.3 book-to-bill and double-digit revenue growth for international maritime. So going forward, we'll continue to invest while we leverage our core position with the U.S. Navy to expand with the growth in both U.S. and international shipbuilding. Now I'd like to wrap up with maritime, discussing 3 key capabilities that are at the center of the Navy's maritime strategy outlined on Slide 25 here. First, the emergence of unmanned technology has provided the U.S. and international navies with the ability to affordably build a network of sensors, able to operate with persistence in regions of interest around the world. So in anticipation of this increased focus on unmanned, we strongly position ourselves in every class of unmanned undersea vehicle or UUV and unmanned surface vessel or USV. We recently reached a milestone of 125 USVs operating around the world, more than any of our competitors. And this underpins our discriminating advantage in autonomy. Our position as prime on both U.S. Navy USV demonstrator and medium USV program have earned us the pole position on future USV opportunities. And then complementing our unmanned surface position in the U.S., we're well positioned internationally with a maritime mine countermeasure USV in the U.K. Undersea, we provide critical sensor and mission planning capability to the extra-large UUV program. We've submitted a proposal and are waiting the Navy decision on the medium UUV program. And we're separately conducting at-sea demonstrations with the Navy as the sole provider of a small diameter UUV, able to be launched and recovered by a submarine via the torpedo tube. Second, separate and distinct from our role in unmanned, L3Harris is 1 of 2 prime contractors involved in designing and deploying seabed acoustic systems, and we're the sole provider for undersea tracking and training ranges. And with the return to peer competition, the Navy has placed a priority on recapitalizing these systems. In 2020, we won the first of a series of contracts valued at greater than $300 million to provide this capability. And we're marching toward a second and third contract of equal or greater values in 2021 and 2022. The third capability is the secure network of distributed shipboard, airborne, unmanned and seabed sensor systems to provide an integrated air and surface picture to naval commanders. This secure network, which Chris described earlier as Joint All-Domain Command and Control, requires the very same discriminating signals intelligence and secure communication capabilities that we provide the Air Force in the airborne ISR domain. So by leveraging our airborne capability, we're able to provide the Navy proven joint capability that can be rapidly, affordably feed to the fleet. So let me turn now to the third of our Integrated Mission Systems businesses, Electro Optical. In contrast to the ISR and maritime systems businesses, the Electro Optical business is predominantly a product business, a world-leading product business, that begins with technical superiority in the design and manufacture of electro-optical turrets, laser imaging systems and space launch avionics. But it doesn't end there. We've developed a family of systems that provides an unmatched range of ITAR and ITAR-free capabilities to meet the wide range of demands from our customers around the world. We've made quality and reliability trademarks of our products, ideally suited for the harsh operating environments of our customers. And we've coupled that high quality with unsurpassed global service to ensure the highest availability rating in the business. We've streamlined our processes from demand forecasting to supply chain and manufacturing in order to guarantee the best lead time in the market. And we've maintained efficiency and affordability as guideposts, such that for the range of products and performance we offer, we win on best value while delivering strong margins. As a result, L3Harris electro-optical turrets are #1 in the airborne market with 30% share, and we're leveraging our position as an airborne ISR mission systems integrator for pull-through opportunities to expand our airborne EOIR position. But while we're the leader in the airborne market, we're underpenetrated in highly fragmented in land and maritime markets. We see tremendous opportunity for growth in these domains and are targeting near-term opportunities, such as the capture this past year, the Swiss Army tactical reconnaissance system. While we invest in the development of next-generation dual-band capabilities to capture emerging franchise opportunities, such as the U.S. Army Optionally Manned Fighting Vehicle and U.S. Navy shipboard panoramic EOIR programs. So in summary, we like the alignment between our core capabilities and the National Defense Strategy and believe the systems and services which are in high demand today with our U.S. and international customers will remain in high demand in future budgets. We're reaping the benefits today of investments in technology and the buildup of skills and expertise in signal processing, electro-optics, power systems, advanced sensors, modular open systems architecture, autonomy and systems integration, to expand our support to our defense customer and drumming up new lines of business such as missionized business jets, unmanned surface vessels and dual-band EOIR. We've expanded our historically strong role as a Navy ship system provider by leveraging the strength of our systems engineering expertise to compete and win as a ship systems integrator. And we successfully integrated our maritime businesses themselves, enabling us to provide greater value to our global Navy customers and earn the opportunity to ride the growth curve in U.S. and international shipbuilding. And we're leveraging the strength of all L3Harris as we engage with our defense customer, targeting our extraordinary talents and market-leading IRAD investment on tackling the Defense Department's highest priorities and the return to peer competition. So with that, I'll open up to questions.

[Operator Instructions] Our first question is from Michael Ciarmoli with Truist Securities.

Sean, just -- I guess, maybe this might span a couple of the capabilities, but as I think about the unmanned market and kind of the ISR and maybe even the EOIR, how do those capabilities, price points, fit with some of the future Air Force programs or the direction the Air Force wants to go? Maybe things like Skyborg, Golden Horde, some of the other manned machine teaming plays that might be lower cost in nature versus the higher-end exquisite systems? I'm thinking maybe some of the converted business jets. But how do you guys think you're positioned for that market? I know you mentioned one of the lower cost sensor pods that could be deployable on unmanned. But any color you can give there about the positioning of the segment?

Yes. Let me try to cover that. First, we provide a range of capabilities in terms of ISR. At the high end is the Rivet Joint capability that I described, unmatched around the world. That's what you call a high demand, low volume asset. Few countries in the world can afford that. So that's a U.S. Air Force's premier SIGINT platform. But then we've bridged from that large-body aircraft, as I described, to medium altitude aircraft and business jets, which, in fact, are a sweet spot in terms of affordability and, equally important, tailored capability for customers around the world. So we're seeing pent-up demand come to the door now to provide tailored SIGINT capability within their range of what they can afford. And then this last discussion with regards to podded or modular SIGINT. This is not going to be competing with a Rivet Joint or with a missionized G550. But this will be for a large number of customers who have, around the world, U.S. and international, that have a very specific need, and they could take a pod, modular capability and put it on a number of available aircraft to most affordably provide signals intelligence to fill their gap.

Your next question comes from Gautam Khanna with Cowen and Company.

I was curious if you could just talk a little bit about the evolution of mix over the next couple of years as we think about the new programs that you've talked about in unmanned and the like. Is mix a net negative to margin as you move forward? And if you could also maybe just give us some sense of how pension running through the segments is contemplated in the margin outlook.

Sure, Gautam, this is Jay. Let me maybe take a shot at it and then hand it over to Sean. When you look at IMS, particularly what we've been able to accomplish since the merger, there's been some pretty substantial margin expansion. Part of it is due to the significant synergies that have come through, but not all of it. And so part of it has been some pension benefit. If you break down 2020, there are over 200 basis points of margin expansion. A little bit over half of that was from synergies. The remaining was split between pension and the net productivity benefits that we talked about through our operational excellence program, which is exceeding what the mix headwinds were in 2020. As we look forward in IMS, we will see -- continue to expect margin expansion. We believe the appropriate target for this business is anywhere -- is mid- to high-teens and so there's still room from where we are today. And you'll see a similar formula that we spoke to earlier in Chris' session where operational excellence will be the target to overdrive and overcome mix headwinds. Now that will vary from year to year and typically, it improves as the year progresses, as your visibility improves. But that's our target overall, it's really no different for the IMS business.

I would simply add briefly. We're -- as was previously described, we're leveraging the shared services model that the company has established. We've got some very important consolidation efforts going on across the business where we're able to take what were once disparate businesses and align them and then capture some synergies in that regard. And E3, operations excellence, we had a great year in 2020. And that is, I would say that's a start with a lot of momentum building up where we're able to capture great ideas coming up through the operations to drive cost out of our business.

Your next question is from the line of Ron Epstein with Bank of America.

So Sean, just kind of going back to that SOAR pod that you brought up. What's your guess, I mean, how big a market is that? Because you'd be selling that with domestically and internationally. I mean ultimately, how much of a business could that be?

I have to be careful. The term I used with SOAR, I have a vision for the SOAR pod. I'll give you a simple example. Right now, the U.S. Navy does not operate the Rivet Joint aircraft. So if you think about a tailored subset of Rivet Joint capability that you could strap on a maritime patrol aircraft, then all of a sudden, the U.S. Navy has 119 P-8s that are able to provide signals intelligence that today, it has to rely on a command location that Rivet Joint reports to. So I think there's a large opportunity there in terms of numbers. I think it's U.S. and international. I think the fact that it's an open systems architecture design, it allows for not just the capability to be tailored but also for it to be continually upgraded so that programs will be able to get the benefit of upgrades that come through Rivet Joint without paying for the nonrecurring. We did our first demonstrations at the end of 2020 in Eucom. And the demand for the capability was such that we took demo units -- we took 2 demo units over and they bought them. And so now we're at the front end of new capability that when the world sees this, I think there will be demand for it.

Your next question is from the line of Myles Walton with UBS.

Sean, I was hoping you could maybe flesh out a little bit on the IMS portfolio. You highlighted the 3 major programs there. But I'm curious under ISR, I'm curious, the other half of the ISR portfolio. Do you think there's a balance between the retirement of legacy systems and new systems coming online or new approaches to ABMS with the Air Force that will be competing forces within that sub business unit in particular?

Yes. I think first thing to understand about the ISR business is that we provide the capability, the relevant capability that the Air Force and the other services are going to be demanding, not just the National Defense Strategy. But if you were to pull up the hearing that Admiral Davidson, INDOPACOM Commander, held with the Congress this week, he talked exactly about the capability that we provide in our ISR business and as being a priority for the future fight. So the relevance of the capability is there. And then the question becomes, how many different platforms, how do you distribute that capability across platforms? The Rivet Joint platform, the reality is that we care and feed that program such that those aircraft have another 15 to 20 years of life in them, without question. And then what we've done by moving over to medium altitude aircraft and business jets, we're going to our customer and capturing newer aircraft that have long life to them. So we believe that both the relevance of the capability that are being provided as well as the affordability of the platforms that we're migrating to, and then the life that those platforms have in the customers' eyes, we're just in a good position there.

Your next question is from the line of Robert Stallard with Vertical Research Partners.

Can you hear me now?

Yes, we can.

Sorry, I don't know what happened there. I was just saying, just following up on Myles' question, Sean, on Slide 21 and 22. There's a lot of quite old aircraft on there, lots of different types. And if we enter into a tougher DoD budget environment, and we've heard many comments that they're trying to cut back on legacy spending, could some of these platforms be more vulnerable, particularly if we have a contested airspace situation, maybe space assets are a safer thing to use?

Yes. I would tell you that the defense customer, these programs that the defense customer is entering into with us, whether it's Compass Call Cross Deck or as we look at Army programs -- medium altitude reconnaissance system, the services are entering into those programs, a very clear eye on what's going to be required for the future fight. And so those will not be subject to budget cuts. What they -- their concept of operations for these aircraft, take those concerns into play. And this is all about providing the intel prior to the fight. These capabilities are all about being to the left of bang so that the combatant commanders have a very clear view of what's happening before it happens. Again, I'm going to go ahead and leverage off of Admiral Davidson's hearing again. His point was, we don't want to go to war with China. What we want to do is be in a position where we have a strong hand to avoid, avert any such hostilities. So this is a -- these are a part of the strategy going forward for the services. In terms of legacy aircraft, the 1 legacy aircraft on the page here, the Rivet Joint, I described earlier, we've kept the long legs on that aircraft and the capability is unmatched. We see this as actually having an increased role as the department looks at JADC2.

Your next question is from the line of David Strauss with Barclays.

So a question for, I guess, Sean and Jay. Working capital on this business, how does it compare to kind of the corporate average and what is the opportunity? I kind of think of the business given the ISR and aircraft missionization businesses as maybe carrying more in the way of working capital.

Yes. So I think it's a pretty good assumption there, David. The team -- it's part of our program every week when we review working capital. Sean's businesses all, call it, 3 of those businesses are part of -- those 3 sectors are part of the working capital improvement programs. And yes, and so there's certainly a source of opportunity to bring them down into closer to the average, if not lower than we are. And so it's certainly a source of our free cash flow going forward. No question.

The next question is from George Shapiro with Shapiro Research.

This is probably more for Jay, but is there a big difference in margin across the 3 sectors? And if so, could you tell us how much difference between the high and the low and what opportunities there might be?

Well, let me just maybe say this, George. I'm not going to get into every specific sector margins. But the Electro Optical has pretty attractive margins. That's followed by the ISR and probably the maritime are probably close together. There, I would say that all of them are double digits plus from there. And I think I would just leave it at that.

Our last question comes from Jon Raviv with Citi.

Sean, I was wondering how do you think about platforms versus systems? I know you guys are mostly a systems provider, obviously. But to what extent do you stay cognizant over have to worry about some of those platform providers, realize there's a lot of value in the systems world? So for example, I think about a shipbuilder building out their unmanned capabilities, for instance, or services companies building out their ISR missionization capabilities or an aircraft prime building out their pod business or whatnot. So any thoughts on that dynamic? And then how you compete against all of those various folks looking at the kinds of returns you folks got and pushing into those areas?

Yes. That's a good question. First, we have a very strong relationship with the platform providers, particularly with regard to our content. So there aren't -- I can't point at any areas where the platform provider is in competition with us for the capability that we bring to the platform. Second, we -- our customer ultimately is not the platform provider, it's the service. It's the Air Force, the Navy, the Army, Marine Corps, et cetera, or the international service, it's the service. And so we go after their requirement and it's that best value thing that I talked about at the front end. We go after the services requirement, ensure that we're the best value provider for that program or that platform. And then the other piece is it's moving up the chain. It's going after not just being the system provider but going after that systems integration role and ultimately, prime positions. Our capability, our autonomy capability has enabled us as the autonomy provider to be the prime contractor with the Navy on the medium unmanned surface vessel. So things are turned upside down there, where typically the vessel provider would have been the prime and we'd have been their sub. And so it's understanding what your strengths are, playing to your strengths and making sure you continue to invest to hold on to that discriminating capability that you've got. That's our playbook.

That concludes our IMS Q&A session. We'll now take a short break and resume promptly at 11:30.

Thank you. Please remain on the line. Our next conference will begin promptly again at 11:30. Thank you. [Break]

We will now resume the L3Harris technology investor briefing. [Operator Instructions] You may now continue.

Thank you, Rob. It's my pleasure to introduce our next speaker, Ed Zoiss, President of the Space and Airborne Systems segment. Ed, over to you.

Okay. Good morning. The Space and Airborne Systems segment is a $5 billion business focused primarily on 3 domains: space, air and cyber. You can see that we are equally split between space and air with the balance of the portfolio of cyber. Our single largest customer is the United States Air Force, and the next largest customer set is classified with approximately 60% of our contracts at the prime level. In our Space business, we provide end-to-end solutions for all phenomenologies and across all orbital regimes. We've leveraged our industry-leading payloads in RF, precision navigation, electrooptical and infrared to enter new markets and win as a prime. In the airborne domain, we provide high-performance avionics and electronic warfare systems. We are on nearly every fixed and rotary wing aircraft in the DoD inventory. And in our cyber business, we provide advanced cyber solutions for worldwide customers. The peer level fight will largely be fought in the space, air and cyber domains and the capabilities that we provide at L3Harris will be critical to help win that fight. In space, we've gone from a peaceful domain to one of war fighting. Since space capabilities can't be brought back home for modernization, there is an entire new generation of solutions being procured to counter these new threats. In the air domain, we've long enjoyed superiority when we fight, but it is not preordained. We've been operating in a largely permissive environment for the last 2 decades, and we must now focus on defeating a hardened Integrated Air Defense System, or IADS. This is a challenging problem that no single platform can solve but will require a family of solutions working together. This hardened threat is driving modernization to existing platforms and is at the heart of new platform developments. And in the cyber domain, the protection level of pure networks has made these ultra hard and require novel and innovative solutions to gain the upper hand in a cyber fight. These new threats have opened up generational opportunities for L3Harris in space, air and cyber. Decisions are happening now on new platforms, new systems and new capabilities. Decisions that will set our growth trajectory for years to come. As I said before, space is transitioning from a domain free from conflict to a domain that must be protected and denied. Space assets are vital to our nation's defense as we count on space for communication, navigation, situational awareness and early warning. These capabilities must remain online during a fight. And we must find ways to deny the use of our adversary space layer. The current space architecture is largely based on high-performance or exquisite systems. These systems are costly and take a decade or more to develop and put into service. We've been a key element of these exquisite systems, providing mission payloads in ISR, weather and PNT for over 60 years. But this architecture is fragile, with a few high-value targets for our adversaries to attack. What's needed is a new architecture, one that can keep pace with the ever-evolving threats, one that can be put into service rapidly and one that is a magnitude less costly. That architecture is what we call responsive space. Responsive solutions will not replace exquisite solutions. They will merely augment the current architecture. You can see on the right-hand side of this chart that L3Harris has become an early leader with 6 new wins in responsive space. The key to our success has been our deep mission knowledge, our payload expertise and our ability to deliver rapid solutions. So how did we transition from a mission payload provider to a full end-to-end solution provider? While clearly, our heritage in exquisite payloads provided us the mission know-how needed to make the transition, but it's not the whole story. More importantly, what customers want most today is the ability to select their preferred mission payload, one that can adapt to the changing threat environment, and one that is best suited for the mission. For this to occur, a different acquisition approach is required. One centered on buying mission capabilities, not the space vehicle. A shift is underway whereby customer buying habits have moved away from procuring the space vehicle or the bus to procuring the payload for its mission value and allowing the payload provider to prime and integrate into a largely commoditized satellite bus market. Think of it like this. L3Harris makes the camera. And our cameras need a tripod, a USB cable and a battery pack. For the last several decades, the customer picked the Tripod supplier and the Tripod supplier picked the camera. This legacy model let the customer out of loop in selecting the most important element of the system, the mission payload. Customers now want to pick the camera and are allowing the camera provider to select a commodity tripod, i.e., the satellite bus. In each of the 3 areas highlighted, ISR, P&T and weather missile defense, we've moved up the value chain from a payload provider to a full end-to-end solution provider. Over the last 6 months, we've won 5 prime positions. Each time, the customer selected the mission payload as the discriminating element, while considering the satellite bus a commodity. These wins are just the beginning in a series of procurements that will provide a more resilient and more capable space layer. Looking to the bottom of the page, we recently announced 2 new wins in missile defense: SDA tracking and hypersonic ballistic tracking space sensor, or HBTSS. Both new wins leverage our long legacy building and providing weather mission payloads to NOAA. Using our research and development funds, we created a full digital twin for the missile defense mission and prove that our weather infrared technology translated well to missile defense. All these recent wins have created a pipeline of satellite production as we move from a hand-built custom model to a true factory model in space, fueling the future growth of our space business. Our move into responsive space has unlocked $9 billion of market opportunity for constellation production, and it is just the beginning as additional responsive solutions are being bid as we speak today. Each one of these new wins has a much quicker refresh cycle, about 3 to 5 years, highlighting that responsive space has a different op tempo, one requiring continuous production and incremental improvements to the solution over time as the threat evolves. By leveraging our proven processes from our commercial and avionics factories, we are ready to scale our output to meet this new demand. So wrapping up the space domain, our strategy is paying off. You can see that we've leveraged our mission payloads to win new prime level programs, and our transition to a prime was further enabled by becoming an intelligent buyer of space vehicles and an assembler and integrator of our own satellite bus. Now turning to the airborne domain. To win the future air fight, it will require monetization of the current inventory while investing in new platforms and new network solutions that will work together to counter these new threats. Looking to the bottom of the page, you can see a sampling of the key programs that we support across our avionics and EW businesses. For the F-35, we've been on the program since its inception. We deliver over 1,600 components to each and every jet, and we've delivered over 2 million components to the 620 jets that have been procured. Our content includes aircraft infrastructure electronics, phased array antennas and weapon release systems. Over the coming months, we will be transitioning 3 new open systems processors into production. These upgrades are part of the block for modernization and will make the F-35 even more capable. On the F-18, we provide targeting processors, digital moving maps, antennas, weapons release systems and the electronic warfare system. We've been delivering the EW system for over 20 years. We've completed 4 block upgrades, and we're preparing for the next block upgrade called advanced DW, unlocking another $1 billion potential on that platform. Like the F-35, we are in the process of transitioning a new open systems processor into production. This processor will be the first open system solution on the F-18. As Chris showed earlier, we recently won the EW upgrade for the new block 70 international jets on the F-16, and that program alone opens up a $1 billion market. And finally, the B-52 has proven to be a real workforce, the nation's first 100-year platform. We are currently in the process of completing an EW technology refresh, moving from a hardware-defined solution to a software-defined EW system. And elements of that system are just now entering production. Moving up to next-generation platforms. We see this as over $10 billion of pursuits in our phone. For next generation platforms, it's all about open systems and even more so, multifunction open systems. L3Harris embraced open systems early on, securing key open system processor wins on the F-18, the F-35, MQ-25 and T7 A. We've taken early lead in the open systems hardware market. But to truly go faster, the software needs to be open as well. The next wave of solutions are now focused on open software with multifunction hardware. I don't see a company better positioned than L3Harris to capitalize on this next phase. We have all the technology needed in our company from open systems processors, software-defined electronic warfare, advanced phased arrays in our AS segment, communication [ way farms ] in our CS segment and, as you heard from Sean earlier today, Premier Signal Intelligence in our IMS segment. While next-gen platforms are important, it will require a family of network solutions working together, spanning all domains to fully counter the coming threats. In the emergence of unmanned attritable network solutions, our investments in small form factor comms, Sigint and EW will be key differentiators. An early example of our success in the EW payload we provide for the Nulka airborne decoy. The Nulka decoy is used for the protection of U.S. and Australian maritime platforms. Our investment in small form factor solutions positions us well for this emerging $4 billion-plus market. Now moving on to cyber. In our $1 billion annual revenue cyber business, we deliver complex mission solutions for our customers' most challenging cyber problems. Much like in the Space and Airborne domains, Cyber is also undergoing generational changes as our customers shift to hardened targets. What we do in this business is primarily classified, so I can't discuss many of the details. But what I can tell you is that we've moved into Prime Mission Systems integrator roles, driving growth that is outpacing budget increases. So in summary, space and airborne systems is well positioned as our customers accelerate counter capabilities to counter peer threats. We are on track as we execute our strategy in each domain. In space, our strategy is to leverage our mission payload capabilities to win prime programs as space transitions to war fighting. In air, leverage our early lead in open systems hardware, combining with capabilities across the company to secure positions on next-gen platforms and advanced network solutions. And then finally, in cyber, to move up the value chain, owning the end-to-end capability for ultra hardened network challenges. We've made the right investments and I'm encouraged by our early next-generation program wins. With that, I'll open it up to questions.

[Operator Instructions] Our first question is from Josh Sullivan with The Benchmark Company.

Just thinking about your historical exposure to the national OTN XL relationship. What do you think is the opportunity around climate change? Do you think upcoming budgets are going to offer you guys anything there?

It's a great discussion. We are in the middle of a generational change as NOAA moves to the next-generation sensor. We have had a historical position. We've had 75 sensors on every one of the systems that NOAA has procured in the past, and we see that as about a $4 billion market opportunity as we look forward. The next gen programs will go online in the 2023 time frame. So we see that as really a near-term opportunity for us as we're competing and participating in the study phase for those next-generation sensors.

Your next question is from Peter Arment with Baird.

Ed, you talked a lot about the operational tempo is really ramping up to support all the kind of satellite deliveries taking place. Maybe you could talk about maybe any changes you've implemented on the factory side in order to kind of preserve the margin structure you enjoy and if there's any opportunities for expansion there?

It's a great question, Peter. I just toured our new factory for responses-based solutions. We've made investments to make sure that we can keep pace with the demands. We've leveraged all the techniques, as I've said, from our Commercial and Avionics businesses to make sure our factory is ready for their production. And I'm confident that we are ready to meet the demand.

Our next question comes from Michael Ciarmoli with Truist Securities.

Just -- that was a really fascinating slide, I thought, just calling out the distinction between some of the exquisite solutions and responsive solutions. But just thinking about where the priorities in space, some of these newer -- granted, they might be more commercial providers with small SaaS, extensive constellations, on demand launch capability, which admittedly might be for instant comms in theater. But 3 to 5 years, is that still too long of a cycle for responsive solutions? I mean do you envision that the customer, whether it's Air Force or whether it's Space Force with more public private partnerships, do they expect even more rapid kind of turn times, customization and lower costs?

I think those are all good points. And I would say yes to that. We're at the early stages of responsive solutions. We just recently delivered a system to the U.S. Air Force in less than 24 months. It was really in record time for a very capable, responsive solution. And as you look to the future, what you could see is really, almost an inventory model happening in the space business where there's buses ready to be mated with mission payloads and mission payloads continuing to advance, ready to be mated with more advanced buses. So I think as we look out into the future, the op tempo will increase as really the threat evolves, and we have to keep pace with the threat. I think that the times will get quicker. And I think we're well positioned to continue to deliver those solutions as those threats evolve.

Our next question is from Doug Harned with Bernstein.

In talking about the sort of reversal of roles we've seen between the bus provider and the payload provider. We saw Raytheon make the decision to acquire Blue Canyon. And their argument was that this will give them more strength in the space market. Now you've used Blue Canyon before. I mean how do you think about it? Can a competitor gain an advantage by owning the bus capability for a relatively low-cost LEO satellite? And does it affect you at all if someone does acquire this type of capability?

Yes. I mean clearly, I mean we saw that occurring. And here's what I would tell you is, as I said before, that we really look at the bus market as more of a commodity. And that there's no reason to really own that commodity element of the market. We're, in fact, integrating and assembling our own satellite bus from commodity parts that we're buying today. So I don't see any gaps in our portfolio as we look out in time and our ability to continue to provide satellite buses, to buy satellite buses, and I'm not sure that, that gives our competitors really a distinct advantage as you move forward. I think, again, the buses are not where the value is. The value is in the mission payload. That's the high barrier to entry in the market. I think we'll see a lot of new entrants to the market. They'll likely come in at the LEO orbital regime, which is very low radiation tolerant, generally with commercial parts, generally with very low life spans. We'll continue to evaluate new entrants as well as continue to mature our own satellite bus as we move forward. But I don't see there's any real distinct advantage to going and acquiring bus capabilities.

Our next question is from Kristine Liwag with Morgan Stanley.

In space, how do we think about the margin profile of some of these programs as we transition from peaceful domain to war fighting domain? Are these cost-plus or fixed price? And also as we see some of the more disruptive providers on the low end offer solutions and commercial terms, how should we think about the margin profile in the long run?

Yes, really good question. Look, we're going to see a mix of contract types. Some of them are going to be cost-plus. Some of these wins that we've had our cost plus, some of them are fixed price. The development programs always come with lower margins than production. But what I can tell you as these move into productions, we're looking at a volume that far eclipses what we've seen traditionally on the exquisite side. And then with the refresh cycle that you look behind that. And again, whether it's 2 years, 3 years, 4 years, 5 years, I see really a constant progression of the ability to increase our margins over time. It's really all about in these early stages, is winning the positions, winning the technology, winning the programs and putting that capability into service. Again, I can't overemphasize that we are in a generational change. Space, being a largely peaceful domain, we are rushing capabilities in this space to harden and make space more resilient. There is no modernization per se that's happening in space. The way you modernize is you put new systems in orbit. So there's a host of new ones. You can see the 6 that we've won. We're bidding more as we sit here today. I feel really bullish on our potential opportunities in space as the market continues to evolve.

Our next question is from Jon Raviv with Citi.

Ed, you've talked multiple times about the generational opportunities setting a growth trajectory for, I guess, s generation. It's a very long time. Can you give us some sense around the time line around some of those decisions? To what extent are those 5 awards you talked about? There's multiple awards you talked about earlier, part of those, are there more to come? And with that, should we expect to see some acceleration in the book-to-bill, for example, which we know just fell just slightly below 1x in 2020?

Yes. Look, I will tell you that we're bidding 3 more programs as prime here as we sit here today, and there's more on the way. So again, I think, as I've said, there's just a host of capabilities that we need to rush on to orbit. You look at book-to-bill, the programs are coming at, I'll call them, in smaller values. They're at the -- not the full constellation value. They're at the EMD or the development program value. And that over time, as we move into full constellations, I would expect to see a much larger book-to-bill as the constellations are procured. Now some of these programs, it's not going to be winner take all. Right now, the customers' methodology on both SDA tracking and HBTSS is to keep 2 of the suppliers on orbit for the life of the program, whether that's a mix that's higher in one than the other. Over time, we'll see how that plays out. I would say it's over the next 2 to 3 years that these constellations are now going to start appearing in our pipeline.

The next question is from George Shapiro with Shapiro Research.

Yes. I was just wondering, there's been a lot of public companies going into the LEO set market at pretty high valuations. I mean how do you see that shaping up? And how do you see yourself participating in that market?

Yes. I think the way that we see that as more of a partnering opportunity. So if there's a company that has a LEO satellite, we'll evaluate that sideline and the satellite's capabilities, and we'll look to it to how it will satisfy our customers' ultimate mission goals. And if there's a fit, we'll either partner with them or we'll come into some business arrangement where we'll use some of their solutions.

Your next question is from Myles Walton with UBS.

Just a clarification one. You talked about the payload being a differentiator versus the bus. And I'm just curious if you think that played out in the FDA decision on the tracking layer with SpaceX not providing the payload, but outsourcing that. And then just a clarification. Where -- could you benchmark where your responsive space revenue stream was maybe a couple of years ago, and likewise, the exquisite revenue stream and how those 2 would probably swapping places quickly?

Yes. I think -- let me start with the last one first. Yes, the responsive revenue stream was quite low several years ago. So they are swapping, as I will call it, our exclusive and legacy programs are going through what I would call the normal recap cycle. And the customer is really focusing on responsive and getting capability on orbit as quick as they can. And then in regard to the FDA decision, I'll tell you, look, we're the only company on both SDA tracking and missile defense. And so those 2 customers talk frequently. They understand the capability that we were bidding to each 1 of them. And I believe that each customer saw that the mission capability that we were providing was really preeminent, and we were selected for both programs. And I can't speak to the SpaceX offering.

Our last question is from Robert Stallard with Vertical Research Partners.

Ed, I'm actually going to sneak in 2, if that's okay. First of all, are you seeing any increase or change in the competitive environment from these exquisite satellite manufacturers trying to move down into the LEO satellite environment? And then secondly, on the F-35, a lot of focus on the cost of sustainment there. What sort of opportunities do you see to perhaps help the Lockheed Martin and its partners in bringing down that sustainment cost?

Okay. So as far as, I'll call it exquisite providers moving down. We haven't really seen that. The exclusive providers is -- they've tried to compete in the, I will call it, in the responsive solutions area, I would say, with really mixed success. You're starting from a very high cost position and you're trying to move to a low-cost position versus from starting what I would call on the responsive side, the heart of the mission and then tailoring up a solution that is good enough. So I think it's going to be a little more challenging to move downstream than it is for us to move upstream. And then as far as the F-35. Look, the F-35 sustainment cost have come down 50%, nearly 50% in the last 5 years. We're a large part of the F-35. We're a top 5 supplier on it. We work closely with Lockheed Martin on depot and sustainment costs to continue to drive the cost of flight hour down. And I know that Lockheed is committed to a $25,000 per hour flyaway flight cost at 2025. So we work with them very closely. Again, it's a very important program for us, a very important program from them and for our nation.

Thanks, Rob. I'll now open up to webcast participants. We've got a few questions. First one, Ed, is on the legacy platform side within air. We've got a decent amount of exposure there in terms of the aircraft that you highlighted. What are the risks in a tighter budget environment?

Yes. I mean when you look at the aircraft that I've highlighted, the reality is that if we've got to go into a fight, we have to fight with what we have, right? And so the aircraft modernizations, I don't see being cut. The F-35 is about to put in service the black form modernization, which essentially will bring about almost a brand-new jet on the F-35. It almost becomes a super F-35 at that point with the capabilities that block for enables and unlocks. And then you look at the F-18, the F-16 and B-52, they're going to be part of the arsenal in any type of fight that we're going to have to undergo. They may not be on the day 1 fight, but they will be part of our fight. And each one of those platforms have a key modernization program. So I don't see them being cut anytime soon.

On the space side, what positions you well to compete in missile defense? This isn't an area either [ Alter ] or Harris played in historically.

Yes, it's a really good question. We've had a long history with NOAA, 75-plus weather and climate payloads, and our expertise in weather really is around infrared. And that infrared technology is what allowed us to really move into the missile defense market. And it was really purposeful IRAD to create a full digital twin. I mean we've heard a lot about digital engineering, digital twin and what that enables, it unlocks. What it unlocked for us was it unlocked our ability to prove that our weather infrared sensor and the algorithms that we have could detect and track dim hypersonic threats. And we proved that in a digital twin environment, we did it on the ground, and it was really a compelling value proposition for both SDA tracking and HBTSS.

And on the space side, there's a question here on the multiple agencies that are out there with MDA, SDA. Can you talk about whether or not there is coordination here? And if there's a risk, again, with budgets tightening?

Yes. It may look like it's a little bit uncoordinated from the outside. But I would tell you, on the inside, they're very, very well coordinated. There's a joint architecture working group. Those agencies collaborate. Those agencies talk about what capabilities they're going to put in upcoming and future programs. And so I'm very confident that there is a well-coordinated space architecture that is unfolding.

Okay. So we'll conclude our SAS Q&A session. We'll now open up the Q&A session for the broader leadership team. So Rob, would you mind providing the instructions and opening up the queue?

[Operator Instructions] Our first question is from Noah Poponak with Goldman Sachs.

I wondered if you would just level set us on the management movement that is scheduled to take place as that approach is just, what's the kind of precise time line from here? And what does that look like? And then a second question I had is if you could address why you retained the civil side of the simulation and training deal with CAE. I would have thought that you were looking at all of that as non-core.

Noah, that's -- so 2 questions there. I'll cover the first, and I'll pass the second to Chris. So thanks for the question. It's Bill. So we're on track for a midyear leadership transition, as we've been articulating for the last 20 months as part of the merger agreement. Hopefully, you noticed over the last 20 months and even before that, before we closed, the close partnership that Chris and I have developed. We developed the strategy together, the execution model together. And we operate very interchangeably. We're in driving integration together, all the revenue synergies, working capital improvements, operational excellence. All these things are done in tandem. And we fully expect that as we get to midyear, there'll be a handoff, and it will be seamless to investors. I'll continue on as an exec chair for another year, as you know, but investors should see a seamless transition. And I'll pass to Chris on the question on commercial training.

Yes. And I'll just follow-on to what Bill said about the management change. I mean he will be exec chair for another year and there's a long list of things he's going to be responsible for. #1 goal is to help me and help the company. So not to worry between long-term strategy and the normal Board functions. There's plenty to keep Bill busy, and we'll continue to work very, very closely post July 1. Relative to commercial -- Bill's smiling. Like what are you talking about here? Your commercial training question, it kind of got a little garbled, Noah, but I think if you were asking about the business, #1, there's been some headwinds there. I think the team has done a nice job rightsizing the business. We expect that market to rebound. I think we're starting to see pick-up in commercial aviation, which will then follow with the training and the avionics and some of our capabilities. If you were asking about divestitures, we'll stick with what we've always said, which is if and when we have anything to announce, we'll do it. I think that process has worked very well. So hopefully, that answers your question, Noah.

Our next question comes from Gautam Khanna with Cowen & Company.

Yes. Chris, Bill and Jay, I was curious if you could talk about the ongoing cost opportunity. So beyond the integration savings you talked about at the onset of the deal and beyond -- like with E3 with just factory floor optimization, what have you. What should we expect the net cost savings, the kind of average annually over the next, call it, 3, 4 years, net of what you have to give back to customers in cost-plus overhead rates and the like. Sort of what can we pencil in is as [indiscernible]

I'm glad this is helpful to you. Look, there's a clear -- we talk about, I think, a recurring theme here is differentiation. And the 1 thing that we can't overemphasize is the cultural change and the focus on this operating company model and this operational excellence. And it's become part of the routine, part of the operating cadence, part of the DNA. So to answer your question specifically, we would expect that kind of a 2% to 3% improvement. There are cost savings that hit the bottom line after all the things you talked about, the cost-plus jobs and the headwinds and such. And that's what we've had in the past 20 months. That's what we've built into our guidance, and we have high confidence that, that's something we can do. We have the pie chart showing the $15 billion as our current cost base. And we have projects that each and every 1 of those functions that are focused on continuous improvement. And some of this can come from negotiating with supply chain, some of it's factory optimization. I talked about the 20% reduction in footprint. We've talked about fewer IT systems. All these things will contribute to year-over-year savings. I don't know if, Bill or Jay, you have anything you want to add?

No. No, I think you hit it right on there, Chris. I mean look, Gautam, and we've been talking for a long time on this. I'm just sort of amazed that every year, the opportunities we continue to find in places like tactical radios, and it's just become part of the way the business is run. And it's a focus. We're still in the early innings, we believe, and there's lots of opportunities ahead of us.

Our next question is from Robert Spingarn with Crédit Suisse.

Yes. I wanted to -- this is an industry question, Chris. But on M&A, we've seen some opposition into a pending acquisition between a larger prime and a propulsion supplier. And while there are some specifics around that opposition, there's also a growing view the defense sector is more than sufficiently consolidated. So I wanted to get your thought on whether or not you agree with that. I'm talking mostly about the public companies.

Okay. You kind of broke up there, but I think I got the gist to the question. So I'll try and we can bring you back on if I don't hit it. But maybe the first part is, do I foresee additional consolidation? And I think as many of us on this call have been around the industry 30-plus years, if and when budgets tighten, it's not unusual for the free market to go ahead and look at consolidation. Now we've gone through this in the '90s, and maybe we did it a few years ago. And of course, Bill and I with the L3Harris merger was probably 1 of the larger defense mergers just 20 months ago. So we understand those dynamics and the reasons for it. So I think there is a potential that people will be looking to consolidate if, in fact, we have flattish budgets for the next several years. I think you then went into the regulatory approval process with the reaction by the customer. And I think honestly, that's something that's still evolving. There's many open positions. And I think that's something the DoD and FTC and DOJ are going to have to look at, as they always have, and come out with some guidance. So we'll be watching that process. I assume everybody will as well, but it's going to be the trade-off for the financial benefits of consolidating in maybe a flat market to the ability to maintain competition. One of the things we put together here at L3Harris was to give our customer more competitors and more alternatives. And I think you're seeing that in some of the recent wins that we've had. So hopefully, that got to your question.

The next question is from Seth Seifman with JPMorgan.

Great. Okay. Chris or Jay, maybe kind of a small modeling question, but just understanding the 105% plus cash conversion. What's kind of the cash tax in there relative to the book tax? And also on the working capital, I saw the days target you kind of talked about. But in the past, I think we've kind of talked about maybe being able to maintain the dollars while growing the sales, and that's kind of how the days come down over time. Is that still how you're thinking about it? Or is it an actual significant reduction in dollars?

Yes. I think so, Seth, let me just go to tax. For modeling for going forward, I think cash and book holding those fairly equal is the right way to think about it and look at it. This year, there actually is a little bit of a benefit. But going forward, cash and book should pretty much approximate each other. As far as working capital, I think you were asking just about the balances and how should we think about it. And maybe I'll do it in the context of the cash flow statement. We talked about the pillars of our growth, both the revenue and the margin expansion, that will drop-through to solid net income growth. On the asset side, as we do grow sales, our assets, our working capital will want to grow. And so hence, that's why we have this program in place. For the most part, we've got a general target between 3 to 4 days per year to reduce. And I think, as Chris mentioned, we have a visibility, and we believe that reaching 40 days is certainly doable. But when you do that and just do the math in terms of the working capital turns and days, it does say that working capital is pretty much flat. So as you grow the business and you grow revenue, margins and expand margins, the working capital balance want to stay flat so that the net income growth drops through, which is driving the cash flow growth as well. And generally, that's the way to think about it as well.

I think I'll just chime in on the working capital because I know there was a question of Sean and IMS. And this just isn't by chance here. There's a lot of effort and a lot of focus on working capital, especially on the DIO. And it's more than the low-hanging fruit. I think we got that in the first 12 or 18 months. We're really looking at the way we operate the business and changing the business models and changing the approach as to how we operate to maximize cash and working capital. And whether it's our design for manufacturing initiatives or designed for supply chain, lead time, cycle time, all this is something that we're spending a lot of time on, and we're starting to see some of those benefits kick in. And it's going to take years, and that's why we have this 3-4 day year-over-year improvement.

Yes, let me just provide some color -- a little bit more color on that to David. I think it was David Strauss that asked the question. If you think about IMS, they represent a little bit less than 40% of our working capital balance. So you're talking a little bit over $800 million of working capital. So as you would have expected, that business would be a little bit more working capital-intensive with the aircraft. Particularly in the aircraft business, the ISR businesses, and that's over 50% of that working capital. And each of those businesses each have their own separate initiatives. Just sticking with ISR for the moment, if you think about it, it's a long cycle modernization of the aircraft, you have to tear it down and build it back up with the new equipment. And so obviously, they will have initiatives to really increase and improve that cycle time. But the other opportunity there is really on the contract side, where we can bringing in more performance-based billings to match our cash inflows with the cash investment in the aircraft as we're tearing down and rebuilding. The other opportunity -- and so those -- the ISR businesses is above our average working capital days, and so it represents still a decent opportunity for us. The other one would be in our EO sector, which is the highest of the 3, as far as working capital days, it's lower in value than ISR, but still higher, and those initiatives would be different, where it's more clear factory business. SCI-op in terms of forecast planning, material planning, operations planning, synchronizing those elements of the planning process together would provide the biggest value as well as just product commonality and SKU rationalization in that business. So sorry, David, I just come back around and just answer that question a little bit more fully for you.

The next question is coming from David Strauss with Barclays.

Great. How about that? That was great. So I just want to ask about the margin upside that you've paid here for the business going forward. I know you've got the E3 upside. But how much, if any, do you view that future margin upside being volume dependent? And do you think you can continue to grow margins even in a down revenue environment for you guys?

Yes, let me take a first shot at that, David. And I mean volume does play into margin expansion. And I was thinking about what Ed was talking about on these constellations and in contrasting the exquisite to the responsive. In the old days, or currently, these exquisite constellation sometimes are 2, 3 or 4 SATs, where the responsive are in the 10s or 100. So when we went in SDA tracking and initially get 4 SATs, I mean that's just the beginning of a long, multi-year, decade-long opportunity to have literally tens, if not hundreds of satellites over time. So I think I think that's the difference, right? And then when we turn satellites into more of a factory or production flow, that gives us the opportunity to improve the margins. The 1 thing I'll throw out that we don't talk a whole lot about are the contract types, and it's not unusual for a lot of these contracts to have award fees and incentive fees and especially on the cost plus. So we spend a lot of time tracking and monitoring our performance with our customers. And to the extent you can start earning 95%, 98%, 100% of the award fees or the incentive fees for either cost or schedule, that gives you additional upside. So we haven't talked a whole lot about that from the contracting and the revenue side. Maybe I'll lob over to Jay if he wants to talk even a little more on the on the cost. But I don't know if there's anything new we haven't covered.

We -- as you would expect, you to get some absorption as volume goes up. And obviously, in the downside, it works the other way. But when you look at our E3 productivity program and each of the businesses, the roll-ups of their line items that form their initiatives for each year, they're not -- there's no such thing as a line item that says, I'm going to deliver x amount of productivity just through the volume. They're all specific projects in terms of cost takeout, whether they're labor productivity, supply chain and value engineering and other types of -- types of projects. And so I think our projects are kind of volume independent. Yes, you're going to get some bigger upside if volume goes up and a little bit, maybe a little bit of a headwind if that goes down. But the core program itself is going to drive continued productivity year in and year out. And I guess, so the drop-through may change if volume were to come down. But it's really independent.

And my last thought here is as we grow our international business, I think it's well-known that international business tends to have higher margins than domestic. So that gives us some additional upside. We've talked about our commercial model that we have relative to doing business with the DOD, at least in tactical radios, we have that also in EO IR. We have it in cyber. So again, that model, which I think will continue to evolve over time, gives us other levers to consider.

Our next question comes from Michael Ciarmoli with Truist Securities.

Maybe, Chris or Bill, I'm not sure who wants to handle this one. But on the overall budget environment and thinking about your mid-single-digit revenue growth. I mean do you guys think you have enough horsepower there to offset what might be headwinds in O&M and personnel spending? I mean clearly, I think -- I forgot who mentioned that we're going to need to fight with what we have and modernize, but if we dial down for structure to help preserve procurement and R&D, you're going to need less equipment. Have you looked at those sensitivities, how it might impact radio volumes, some of the EO IR night vision capabilities or even the number of legacy systems that might be modernized? Have you thought about how those headwinds can play out once we get the budget here in May in to Fida?

Yes. No, absolutely. We've looked at the various scenarios. I think you said it well. We really have to wait until May to see what comes out. I really don't think based on everything we've read and you've probably seen the same thing, a huge change in '22 relative to '21. I think there's only a focus on 6 or 7 specific areas. So I think all expectations are that the '22 budget will be relatively flat compared to '21. But just the other day, you hear someone talking about low single-digit growth. So what we've tried to do and spend a lot of our time on is just positioning our portfolio to be best aligned where we think the future fight and the future capabilities are going. I think the radio and night vision goggles is a great question. Again, those are early on in the modernization process. So -- and strength down the road 5 years, 7 years, maybe it gets cut shorter than what we had planned. But again, these are -- these are needed. These are new technologies. They're relatively inexpensive. And we have a very strong international demand for those products as well. So there's more visibility needed. We've been very aggressive in stating that our goal over the mid- to long-term is mid-single digits. We'll adjust if necessary. But again, you throw in the synergies, you throw in the international growth, we're going to try like heck to get there. So more to come in a few months, but that's how we see it.

Okay. Thank you, Rob. I'll open it up to webcast participants again. We've got a couple of questions here. The first one, Chris, is for you. Can you talk about L3Harris' ability to recruit talent versus peers and other nontraditional players?

Yes. No, that's a good question. I only briefly mentioned the workforce, but I can assure you, Bill and I and all the segment leaders have spent a lot of time communicating or overcommunicating with the workforce, especially post-merger and throwing in the pandemic. So none of our accomplishments that we highlighted for our future is possible without the great workforce that we have. Even during the pandemic, we were deemed as others in the industry as an essential business. So a little more than half the workforce has been coming in on-site each and every day, making sure our customers get their products. So I'd be remiss if I didn't recognize that effort. It's been tough, but we've been able to stay on track. We've been pleasantly surprised with our ability to attract new employees. Our attrition is below 7%, which I think is pretty good, or from everything I've read relative to the industry and our competitors. We're still hiring over 7,000 employees a year. We're picking up just under 1,000 new college grads. Bill and I decided last summer to keep the intern program, which is something we're very proud of. Unfortunately, many of them had to work remotely. But by all accounts, it was pretty successful. So maybe I'll lateral to Bill. But the amount of time and effort we spend focused on the workforce and getting them on board, keeping them engaged, surveys and such is a top priority. And I'm pleasantly surprised. I think I personally hired about 5 people this year via Zoom, which is always an interesting experience. But maybe any thoughts you had, Bill?

No, I think you hit it all right. Our ability to attract people has been very good. I think the message we are providing to potential employees is strong, the ability to build a strong career, move around into different kinds of jobs, the diversity of what we do across our company. So we have a great value proposition to new employees, and we've not seen an issue in attracting people.

There's a question here on M&A. You noted it's for must haves. But if you do engage, what gives you confidence in your ability to execute?

Yes. Yes, that's a fair question. And I think it's just going to be a matter of when we go forward with M&A down the road. But it's a great question. I mentioned the focus on strategy, operations and financial. And strategically, again, I think when I look at the people we have in the company and our experience and the ability to understand our customers, the mission knowledge, domain knowledge. When we make acquisitions, I have no doubt that strategically, they're going to make a lot of sense. But the operational piece is probably one I should elaborate on more. And I can't overemphasize the amount of skills and experience and muscle that we built over the last month -- or last month, last 20 months relative to this large merger that we put together. So when future mergers occur, we have the playbook. We have the talent. We know how to integrate. We know how to make decisions quickly. Each of the functions have strategies. There isn't going to be a lot of confusion relative to what we do. The IT systems are being put in place. Fewer ERP systems make sense, common benefits, optimizing the supply chain. I mean I'm excited about the opportunity down the road when we have acquisitions to just plug and play. Shared services. You've heard us talk about all that. And I think that's going to be a differentiator and allow us to get to value or more value out of any acquisitions down the road. And as I mentioned, financially, it'll make sense, obviously, from the basic financial guidepost that we have in place relative to hurdle rates and cash. So hopefully, that gives a little more insight as to why and how I think we'll be successful if and when we go down that path.

Last question before we go to closing comments. There's lots of discussion around the Army being a source of funds for other services at the DoD like the Navy or Air Force. Is that a risk or an opportunity for L3Harris?

Yes. I think it's probably -- you'd expect me to say, and I'm going to say it's an opportunity. And again, I like the portfolio. I like the fact that the Army has been consistent for years as to what their priorities are. One of those priorities is the network. We talked over the last couple hours about resilient comms in a contested environment, talk about our airborne capabilities, our ground capabilities. Time will tell, but I think we've got a good portfolio, especially in the Army, early in the modernization. And again, very proud of the team we have focused on the Army, and I think we're in good position. So with that, I think I'll just wrap it up. Obviously, I want to thank Sean and Ed for participating today. Great job, guys. And I want to thank all of you who stayed with us for the full 2.5 hours. Hopefully, you can tell we're excited about the differentiated capabilities that we highlighted, the opportunities they're going to create to continue to build momentum. So hopefully, later this year, we'll have a similar event, preferably in person. So please stay safe, and we'll speak to you next month at our upcoming earnings call. Thank you.

This concludes today's event. You may disconnect at this time. Thank you for your participation. Have a wonderful day.