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

Sure. Yes. Let me go to electronic warfare for a moment, Sheila. There, we've got a strong presence on the F-16. You may know that Lockheed has a pretty strong backlog on aircraft, over 100 aircraft internationally. And we're set to provide an advanced electronic warfare system, what we call Viper Shield on Block 70 aircraft. It's something that's in development. So we've essentially transitioned down on that program for production back into development and then look back into production over the next few years. On F-18, we've got a pretty steady business there as well with a growth on that. But again, in this quarter, we actually saw a decline. Part of that was just production schedule on the F-18. So we'll see some -- figure out the growth in the back half. So there's other opportunities that we're working with and developing. On B-52, we're also on a modernization program there, that is also in development. So a number of modernization opportunities that we're working on. It's just a, really, transition phase in that business. And of course, there's other things down the line, whether they're gen 6 type of aircraft that -- of course, we're going to be competing on developing technology for that. And Chris, I think, mentioned on Mission Avionics just F-35 were on Tech Refresh 3 program, same thing. We're coming really right now in the midst of the test and qualification program and now getting ready to provide a cut-in on Lot 15 there. So same thing, we're dealing with a little bit of a pause in production as we transition from development into production of businesses.

Yes, Sheila, I'll just chime in. I mentioned the revenue synergy, and Jay mentioned sixth gen. And again, what we can say is when we look at our SIGINT capabilities, our IR situational awareness, the comms, the EW, the digital apertures, the multifunction processors, I know it sounds like a bunch of buzzwords there, we have all those capabilities, and we're able to bundle and put these together and I think it positions us well for any future platforms. So that's probably a little more detail, but we're excited about the portfolio and the technology, and we see long-term growth for certain.

That all sounds great. And then turning to communications. This is another business with lots of buzz. The budget seems to have a nice tailwind. But where are you in terms of modernization, whether the Army, SOCOM or some of the other opportunities?

Yes. Maybe I'll take the domestic piece, and I'll give Jay the international piece. But when we look at the Army and SOCOM on a combined basis, we continue to see a greater than 360,000 requirement for modernization for new radios. And what's been awarded as of today is just over 50,000. So you can look at it and say, well, 14% of the way through. Now SOCOM's a little further ahead at [ 60,000 ], and the Army is lower than that, which is how we get 14% in total. There's some awards coming up in the third and fourth quarter for the Army, the HMS Manpack, HMS leader radio. Even the Marines have a handheld competition, which we hopefully will hear in the fourth quarter, maybe that slips to '22. So I feel like we're well positioned. We have a lot of momentum. You're right, the budget was all good news, and there's a lot of runway in front of us, and the team just has to continue to deliver, and they've been doing a good job so far, and I expect that to continue going forward. So you want to talk international, Jay?

Sure. Sheila, we talked a little bit about international this morning. And there's just continues to be a lot of opportunity here. And again, it's really tied into -- very similar to the U.S. where we're seeing modernization. We're talking billion dollar programs individually in some of these countries. In the Middle East country were a significant program, we won a recent award, so well positioned, we believe, that we will be a key player on that $1 billion program, okay? U.K. is going to be replacing its Bowman program with [ what we call ] Morpheus. And we see ourselves being able to really play a significant piece and part of that modernization program. Again, another $1 billion program there. Australia is another significant area where we see modernization take place. We're providing modernization as we speak today on a program that has a multiyear tail to it as well. There's a number of other countries in Europe and really other Middle East countries as well. We see just a tremendous amount of opportunity to modernize and interoperate with -- particularly with the U.S. That's where we see the -- really the requirement of the community in a resilient manner, and that's what the modernization really is going for. That's really it as well as internationally. So we see a nice tail to this over the next few years.

That's great. And then maybe just turning to IMS. We talked about it a little bit this morning, and it is lumpy just given the project pipeline for it. But can you maybe talk about what some of the larger international programs could be? How much of an opportunity is there for LHX given double-digit growth in Q2?

Yes, we continue to see those opportunities. I mean I'll take it in the 3 major sectors that we talk about. I mean ISR with the G550 portfolio. I mean Jay and I were looking at some things just the other day. I think we have 19 G550s in some form or fashion in our production house being modified. Just to give you an idea of the breadth of that program, whether it's Compass Call, Peregrine, the NATO program or some other countries. So yes, we continue to see that as an opportunity. But it's even broader than the Gulf Stream. We have the ability to go down the food chain, if you will, to say a King Air 350. We also have the Airseeker equivalent in the U.K. and upgrades there going through the 2035 time frame. So I think the whole ISR portfolio has a lot of legs in it. And when you look internationally, you talk to the customers that really provides some situational awareness. And that's something that, clearly, they have an interest in. The Maritime business continues to do quite well. And we've been pretty successful there with opportunities in Taiwan and Australia. And of course, there's a growing need for more maritime assets, and I think we're well positioned there on a variety of platforms. And even our EO/IR business, we call it WESCAM, is a great technology. And again, relative to my earlier comments on JADC2 and having sensors, there's a desire and a need for some of their products. So overall, this is probably our highest percentage of international revenues in the IMS portfolio, and we see that continuing. And we have a good reputation, and we've been able to partner and team globally, and we expect that to continue.

You might be able to sell those 550s -- those 19 550s out-of-profit assets, but we'll let you do your thing. In terms of Aviation Systems, there's been a lot of change there given that's in the focus of divestitures thus far. How do we kind of think about the growth profile of this business and just segment margins, the impact segment margins?

Yes. Go ahead, Jay. You want to give detail?

If we look at it, a focus may be on the commercial aviation because that's kind of front and center, I think, right now. Just again maybe take the commercial business to where we're at this quarter and what we expect for the balance of the year. We had 20% growth in Q2. We're expecting about 30% growth in the back half of the year as part of the air traffic recovery. So everything that we've seen, thus far, as I mentioned earlier today, on the first month of the third quarter is consistent with our expectations [ for the first half ]. Our Avionics business is about a $250 million business. It's well positioned. It's -- really enjoyed the growth that we're seeing thus far on the OEMs. We're seeing the MRO pick up as well. So that business is well positioned. It's a good margin business and seeing some solid prospects there. We talked a little bit about the training this morning as well. And there's just 3 elements to it. There's simulators, there's pilot training and cadet training in getting pilots. So in all 3 cases, we're really seeing an uptick in activity. And the one area of caution for us is that in certain areas we -- of our business, we operate in locations or regions that have been choppy as far as coming out of the COVID situation, some have come out and locked back down. So it's just a watch item. But so far, what we're seeing, again, is really a recovery, it's consistent with the traffic recovery. And so that's what we expect over the medium term in that business as well. The other business we have is the FAA business where we manage their telecommunications network and their infrastructure. So that one is probably a low grower, a low single-digit type of grower. It's a good business, decent margin business for us, and we enjoy it. So it provides a solid base of business for us. I think probably low single digit is probably the way to think about it going forward. And we have an expense aviation business, which probably does a lot of classified work for these technologies, a lot of it on contract for the customer. This is where we have our agile engineering, really new technologies. This is actually a very exciting business because it's something that is -- really, we view as a source of growth, not only in that segment but across the portfolio in L3Harris. It's really a technology incubator for us. We would expect that just to continue to grow probably mid- to high single digit. We don't really speak about it as much, but it's because of the classified nature of what they do, but really an exciting business that we have in for us.

That's helpful, Jay. And maybe 1 or 2 more questions as we wrap it up. This -- margins has been a big focus of the LHX story. You raised guidance to the upper end at $18.5 billion. As we think about past 2021, how do we think about margin opportunity, whether that's E3 or mix and getting closer to that 20% target -- 20% rate?

Yes. So we'll try to give you a short answer and you can get more questions. And look, we completed the first phase, the headquarter consolidation, the segment consolidation, benefits shared services. We've talked a lot about that. We still believe there's additional opportunity in facilities and supply chain, overhead efficiencies, just the whole operations on productivity, cutting the cost of poor quality, improving the yields, even getting better EH&S metrics all contribute to a more effective factory of production. And I mentioned today, the IT, we talked about the ERP systems. We have 75. We're on our way to get to 20 on 3 different core platforms. All those things are going to take time, and all those things are going to generate increased opportunities. I don't know, Jay, if you want to add.

Yes. Maybe at a high level, Sheila, when you look at our direct labor, that includes the factory labor, includes direct-charging engineers and direct-charging program people. We spend over $4.5 billion of cost there. In our supply chain, both direct and indirect, it's well over $7.5 billion. There's plenty of opportunity. When you think about what we've accomplished in the past 2 years, it's been extraordinary as far as delivered synergies. That's not the end of the story. It's just that cost base is so significant. There's a lot of opportunities for factory productivity, [ draw on ] our programs better. And what we've been doing is equipping our program managers to better run their programs so they can unlock and reduce risk in the program and unlock the value that they could see in the fixed-price contract. On the supply chain, there's tremendous opportunity to continue with value engineering in that area. And so to be honest, what we've accomplished in synergy period, it's just the beginning of a long tail of opportunity that we have in the company in a pretty significant cost base. So we're pretty excited about this. We think that it's going to continue to deliver benefits. And that's really the source of why we believe we can continue to drive margin expansion over the medium term in spite of what we see, the mix headwinds.

That's super helpful. And thank you both. We're excited to see what you guys have to offer both on the top line and keeping it profitable as well. And we want to keep you guys on time, so we appreciate you joining. And that should conclude our webcast, everyone.

Okay, Sheila, thanks. It's great to participate, and we look forward to some more meetings with your participants. So we'll sign off. Thanks.

Thanks, guys.