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

Good morning, and welcome to L3Harris' 2023 Investor Day. I'm Mark Kratz, Vice President of Investor Relations and I will be your host this morning. The executive leadership team and I are excited to share more with you about the company, and thank you for joining us this morning. For those of you in person, we hope last night's capability demonstrations and this morning's tour were very insightful. For everyone, including those who have joined us virtually, we look forward to what we have to present today. Today's presentation is being webcast live. We will provide the slides to our website following the conclusion of today's event. Before we begin, a few housekeeping items that I want to cover, first, could everyone please check to make sure your electronic devices are on silent? Second, we ask that we remain seated throughout the presentation. We will have a couple of breaks. For everyone, today's presentation will include forward-looking statements. These statements involve risks and uncertainties that could cause results to differ materially. I encourage you to go to our website to see disclosures in our investor materials as well as our SEC filings for more information. We also reference non-GAAP financial measures. These measures are reconciled to GAAP measures and can also be found in our investor materials on the website. Turning now to the agenda. We'll kick it off with an executive overview, and then we'll have presentations from each of our 4 segment presidents who are responsible for the operations and executions of their respective businesses. We'll take a 15-minute break around the halfway point. And after the formal presentation, we'll take about a 10-minute break to assemble for Q&A. I will moderate the Q&A. I'll call upon members of the audience, who would like to ask question. We'll also take questions from those, who are joining virtually. As a reminder, for those who are online, you can submit your questions in the Q&A panel at any time during the event. Before we get started, we'd like to share a quick video. [Presentation]

With that, please welcome our Chair and Chief Executive Officer, Chris Kubasik.

All right. Thank you, Mark, and good morning, everybody. It's good to see a lot of familiar faces in the audience. And again, we really enjoyed last night. You had a chance to look at some of our disruptive technologies and products and solutions that we've been offering to our customers. So after last night, I kind of reflected and thought about the history of how we got to where we got. And many of you know, I graduated college back in the 1980s. And L3 did not exist. And to be honest, I've never heard of the Harris Corporation. But in the 1990s, L3 was created and after 160 acquisitions over a 25-year period, created a great company that the primes and the DoD rely on, mainly as a merchant supplier and also as a subcontractor. I went back the same period of time, and Harris had acquired 25 to 30 companies in that same time period. So when I reflect on the merger of equals back in 2019, where we put together 2 mid-tier companies to create an alternative for our customer to disrupt the market, to be more agile, to be more innovative and more affordable, it was a result of almost 200 acquisitions in the prior couple of decades. And the reason I mentioned that is that some of the challenges that we face, and we have faced in the past and you may hear about today. But I'm more excited that it's the opportunities that lay ahead of us as we continue to integrate, streamline and optimize the business. So I'm proud of our past we're probably not going to talk too much about the past other than to give you a baseline. It's all about the future. And I think the future at L3Harris is bright, and we're going to spend time today talking about our strategies, our portfolio, our culture of continuous improvement, our focus on operational excellence and the financial commitments that we're making to ourselves and to you for the next 3 years. So let me get started. We have 3 stakeholders that we spend a lot of time focusing on. I think when I think about our relationship with our customers, I believe we have good relationships and access to our customers. We spend a lot of time with them listening, trying to understand the threat environment, trying to understand where the future fight is going. I was one of a few CEOs that went to the Pentagon for a classified briefing on the national defense strategy. And that time is invaluable because you know what's on their mind, you know where we're going as a nation, and you know where we, as L3Harris, have to invest our R&D and focus our portfolio. Our employees, 52,000 employees, highly engaged, highly motivated, driven by the mission. The mission is an important part of what we do here at L3Harris and for the industry at whole. We are critical to the national security of this nation and that's what motivates people to come to work and do the tough job each and every day. And of course, you, online and here in person as our shareholders, we have a commitment to you to give you a good return on your investment. We're going to double down on our efforts with shareholder communications, with the cadence of meetings and do a better job explaining to you our strategies, our commitments and our path forward. At the end of the day, it's about driving shareholder value. And I put together this foundational chart, which we'll go into a lot more detail in the hours ahead. But it starts with talent. I mentioned the 52,000 employees. Again, I have to take the opportunity to thank them for their hard work and dedication. You saw some last night, you saw some today on the tours, we're very excited about the workforce. This year, we'll hire over 1,200 new college grads. So we're bringing in new college grads. We're bringing in experienced tires from commercial businesses from the government, from the military, from the primes. Our latest addition to the executive team is Ken Bedingfield. He's in his second day as CFO. Ken, if you want to stand up and say hello. I think many of you know, Ken was the CFO of Northrop Grumman for 5 years. He comes to us as the CEO -- former CEO of Epirus, a high-tech start-up company focused on commercial technology coming into the defense industry. You know that's part of our strategy. We embrace the new entrants. We work with them, whether it's through our Shield Capital Investments or other partnerships. So I think Ken's experience as a seasoned CFO and running a high-tech company will add great value to the team. So welcome aboard, Ken. The portfolio, we are taking a portfolio approach to this company, like many of you in the audience do. The part of my job and my team's job with the Board oversight is where do we position this portfolio for the future fight. We don't acquire assets and hold on to them forever. We are making acquisitions. We've made 2 acquisitions this year, well-publicized, well-documented acquisitions, which I will talk about, and Sam will talk about, and Ross will talk about because we believe based on all of our insight, the future fight needs resilient communications, and there is a huge demand for weapons and munitions and we took advantage of those acquisitions. I'll say it several times, so there's no confusion. We're done with acquisitions for the foreseeable future. More to come on that topic. We also are divesting assets, and I will show you what we've done since the merger, and we will continue to look at non-core assets to divest or monetize as we continue to reduce our debt. So it's a portfolio approach, and it's all about going skating to where the puck is going, that's what we've done, and we'll talk more about that. Growth. Our trusted disruptor strategy is working. We're seeing organic growth in our portfolio. Sometimes it's a prime, sometimes is a sub, sometimes there's a merchant supplier. We look at where our technology capabilities fit best. We look at our probability to win and we look where we get the best return. And I think that's a differentiation and a unique thing about L3Harris. We don't have a single strategy or go-to-market. We're flexible, agile and readapt. Margins. My team and I are so proud of our industry-leading margins, but I don't really care because margins either go up or they go down. And unfortunately, ours have been going down. And we have lots of excuses, which you actually are not going to hear about because it doesn't matter. We're going forward and our margins are going up. They're going to go up in '24, they're going to go up in '25, they're going to go up in '26. We'll talk more about that. Have to wait a few hours to see exactly how much they're going to go up. And we'll talk how we're going to get there. Capital deployment is one of my main responsibilities. There's only a handful of things you can do with capital. First and foremost, we will continue to invest in our business. We will reduce our debt to a leverage ratio of 3.0. I'll show you numbers and how we get there and when we get there. And then we will return the excess cash, all the excess cash, 100% of the excess cash, however, you want to write that one down to our shareholders through dividends and share repurchases. So a quick snapshot. This is L3Harris today. When we put the 2 companies together, less than 5 years ago, what was unique is it gave us access to all 5 domains. A lot of our talk today will be about the different domains, our capabilities in those domains. And I continue to believe we're one of the few companies that not only is in all 5 domains, but has the ability to connect those domains for the betterment of the services and the warfighter. We talk about the need to improve margins. We have a unique product portfolio, 25% of our business is products, the rest is programs. Products tend to come with higher margins. We have a commercial business model that you've heard about for years. That gives us a unique differentiation and capability relative to our peers. And then international, we've grown international every year since the merger. We have some interesting international strategies that I'll talk to you about. And generally, our margins on international business the terms and conditions and the cash are more favorable than doing business with the DoD. So all those things, I think, put us in a unique position and differentiate us from our peers. These are our 4 segments. I think the main thing I want to point out here is the Aerojet number is a 5-month number, not to worry the $1 billion since we acquired them. But for annual run rate basis, it's going to be more in the $2.5 billion range. And you'll see there each of the segments has unique capabilities in different domains, and we continue to be well positioned in that regard. No presentation is complete without talking about the budget. I think it's well documented. If you look at the top line, $842 billion, and I think it's always surprising when you just reflect back and see a $100 billion increase in the top line. And then we tried to highlight the investment accounts, which is a combination of the procurement and the R&D accounts are even growing faster. And the big question is where are we going to end up relative to the continuing resolution. I met with Speaker Johnson a couple of weeks ago, and he is highly confident that we have a path forward to get all 12 appropriation bills completed no later than the first quarter of 2024, and I think that will eliminate a little bit of overhang on the industry and our company in particular. Supplementals are over and above these numbers. There's talk of a $58 billion supplemental whether it's for Ukraine, Israel, Taiwan or some combination thereof, we feel that something will get passed and that provides additional upside, which feeds into our international growth and generally feeds into our product portfolio. Very rare where you see an aircraft carrier put in a supplemental. These are quick-turn products for urgent needs and our portfolio is aligned to meet those needs. International, I mentioned this is another area of growth. We have an interesting and differentiated way of going to market. We have focused countries, 11 focus countries where we have full-time executives, men and women, either local country nationals or ex-pats, depending on the country and the culture whose jobs are to build relationships with the end user, the government, the military, understand the threats and the needs that they have work with local companies to build relationships and then reach back to our businesses who you will hear from to bring those capabilities to market. And I think that's a pretty common business model. But in addition to that, we have CVRs, consultants, distributors and representatives in these nations, over 100 countries, Sam will talk more about it as it relates to radios and night vision goggles, where we have quick turn sales with the higher margins, and it saves us having the -- to forward deploy the resources. It's a very efficient way. I pointed out because we're one of the few companies that both have the executives in country at the 11 focused countries that we've identified and used the distributors and reps in the rest of the world. So I'll talk a little bit about portfolio shaping. I really want to emphasize this point that we're on the journey, right? We are on a journey. We've laid out a strategy and we're executing the strategy. May not be in the sequence everybody likes, but we are where we are. So we did the merger, right? We realized significant savings, as you can see, and we executed reasonably well for those first couple of years. We have the pandemic. We know all the challenges with regards to that. And now we're moving forward in 2024. We're going to continue to divest non-core assets. As I said, we're going to pay down our debt, right? We're going to get the synergies from the acquisitions that we made, and we're going to really focus on the margin improvement, and we'll talk more about LHX NeXt as 1 of the tools and 1 of the processes that we've started and will continue to roll out over the years ahead. I tried here to just quantify what I talked about. You can see from the date of the merger till the end of 2024, we've grown a couple of billion basically as a result of organic growth. This will highlight that while we've made acquisitions, and added revenue, we've also divested the non-core assets in similar amounts of revenue. We're not trying to be the largest defense contractor. We're not trying to be the largest company. We're trying to be the most valuable. And the strategy we have laid out gives us a path to get there. We are continuing to assess what our non-core assets are. And consistent with past practice, we will announce any divestitures upon their closure. I expect you're still going to ask questions in a few hours. That will be the answer. All right. Let's talk about acquisitions in the order that we made them tactical data links. Tactical data links was owned by ViaSat, we closed in January of 2023 almost a year ago. And we look at these acquisitions strategically, operationally and financially. So strategically, this enhanced our resilient communications capabilities. I think one of the obvious lessons learned in the Ukraine war is the importance of resilient communications. It's well documented that you have to be able to communicate in a way where your calls and data are not intercepted, and maybe even more importantly, are not jammed. This gives us 20,000 terminals on platforms, not only in the U.S., but with NATO and allies, a great footprint. And as we upgrade this Link 16 capability, we're able to sell software at higher margins than most of our business to increase these capabilities. So the hardware gives us the access to sell the software. And as the threat continues and our customer has more and more demands. We are assuming and predicting that they're going to need new hardware. So it's a hardware strategy that enables software sales that will enable hardware sales. So this -- we could not be happier with this acquisition relative to our portfolio, the strategy and where the future fight is going. Operationally, we've already closed 2 facilities in California, legacy ViaSat facilities where they were producing the various products, and we've moved them into an existing facility. We have too many facilities. Here's a tangible example where we took 2 out and we've already moved them. Sam will talk about the integration. Last time I looked at it. We were on budget and ahead of schedule, which means we should be under budget, but we'll get to that later, the way I look at it. And all the key products are already in full rate production in our new Salt Lake City facility, an existing facility higher quality, higher rolled throughput yield, lower cost, fewer hours. Everything is coming together. And then financially, we are going to end this year with a record TDL backlog going back decades, showing we are, in fact, the better owner. The customer wants this capability. We are booking orders, and we're building up the backlog. And this business yields commercial-like margins. Sam will talk more about this or you may hear some of the stuff for a second time in a few hours, great acquisition. Second one is Aerojet Rocketdyne. So let me give you some insight relative to Aerojet Rocketdyne. When I looked at our portfolio, this is something we've been looking at for years. We look at the kill chain, and I'll ask Ross to talk more about the kill chain the weapons and munitions were a missing part of the kill chain. We've been looking at getting into this market for years, how we were going to get into it wasn't necessarily known. When this asset became available after a thorough due diligence, who was one of our alternatives, we decided to move forward. Aerojet Rocketdyne is known by the primes and the end users as having the best technology, which aligns with our strategy of having technology differentiation. It is clearly a national asset. There's a duopoly and solid rocket motors. There is huge demand and the DoD awarded over $200 million of Defense Production Act money to increase the facilities to move production lines and to digitize engineering. We have tried to go back as far as we can, and I think we're going to end up in World War II was the last time the Department of Defense gave a company over $200 million. That shows the importance and the significance of this asset to our nation and why we strategically think it's a good fit. There are synergies that Ross will talk about that are coming to fruition, both on the cost side and on the revenue side, and will talk more about that in his presentation. Operationally, we have a team that knows what they're doing. We've been hiring people for a few years to build up our missile and ammunition capability, not knowing which way we were going to jump into this market. So we already have those capabilities. Ross' team is comprised of half the people have already come or have previously come from missile primes. So the concern, do we know what we're doing? We know what we're doing in this particular market. I mentioned the synergies. I believe we are a better owner for a variety of reasons. If you look at the scale of the company, you look at their performance, we are bringing the operational discipline that they need. We have a playbook and a toolkit that's been derived from real-life experiences. Rochester, New York, we make radios. We have all sorts of tools. We've actually improved those operations. Nobody is perfect to get better each and every year. We have WESCAM where we make the turrets. We have a playbook that we've deployed. We're using models and simulation. When we reviewed the Defense Production Act program recently, we're running like a program. We're doing models and simulation to build the facility. We've actually reduced the size of the proposed building to save capital. And we've adjusted the flow to optimize productivity. So those are just a couple of the examples where our operational rigor, our engineering capabilities are making a difference at Aerojet Rocketdyne. Financially, it's a growth market. And the #1 challenge is capacity. I mentioned how we're going to invest. The DoD is investing to increase capacity here in the U.S., it will be a 2025 before we start to see some of those benefits. But we've already entered into a strategic agreement with a company in Australia to talk about them co-producing. We're in discussions with the company in Europe to do the same. The more people that are making solid rocket motors under the Aerojet Rocketdyne licensing agreement, subcontract, prime is good for the world, good for the nation and good for our shareholders. We'll have more on that in the years to come. I think there's margin expansion opportunity. Clearly, there have been operational challenges, well documented. And we clearly see several hundred basis points improvement in the years ahead. This acquisition, we looked at all the financial metrics. They're accretive, some in the near term, some in the midterm, some in the longer term. And when we look at plan 5 years out, it looks like this is going to have a ton of potential. How that Ross comment as the leader of this business, what could be possible 5 years out financially, given all the things that we're doing in just the 4 months that we've owned them. Imperatives. We've kept the same imperatives since the merger. We want to perform, we want to grow, and we want to innovate. For 2023, we rolled out performance first as our mantra. With all the things everybody has going on, first and foremost, focus on performance, whatever your job is, meet your contractual commitments, meet your commitments to yourself, your commitments to the team and the commitments to Wall Street. Grow. We are now saying profitable growth is one word at L3Harris. We're not going to grow for growth's sake, we're going to grow to improve profitability. You've heard me say publicly, there are some contracts that we will not bid. If the terms, the conditions and the contract type are too risky, we are not going to bid, and I will sacrifice top line growth every day of the year for better profitability and to reduce the risk of our portfolio. I continue to say this. I think the customer is listening. We're seeing better contracts, again, for the appropriate risk. It's well known that certain development programs to start as cost plus, you move into low rate production, full rate production and then export internationally, different contracts, different risks, different profitability for each. And then innovation. When we did the merger, we survey the employees trying to figure out the culture, and it was interesting to see that we came back as an innovative culture. There is this drive for innovation. You saw it in the video. It's a very highly skilled workforce, 25,000 people with clearances, 25,000 engineers, I think it's a differentiator. All right. Let's talk about margin improvement and operational performance. So we'll start with E3. E3 has been here from day 1. Both legacy companies had a prior differently named program, but ultimately, it's our culture, it's our operating system, it's continuous improvement. We are targeting about $500,000, $500 million -- $500 million a year of cost takeout. I know it frustrates people when we talk about gross cost takeout. There's all sorts of intricacies that we will explain. Ken will explain, I'll explain as to what gets the bottom line. We'll keep it at a simple level, $500 million, and that's to offset headwinds. We've done this since 2019. We're going to do it in '23. We're going to do it in '24, and we're going to do it for the foreseeable future. The variable is the headwinds. Generally, it's 3%, 3.5% of labor inflation, last year similar to other companies and to keep the workforce engaged and motivated, we increased our annual merit pool to 4.5%, which was a big headwind. And then it also offsets the material inflation, which generally had been in the $50 million to $75 million a year, mainly in the electronic components and such. And then that would fall to the bottom line. We're doubling down, continuing to take out at least 500 gross, I'm thinking the headwinds are starting to subside both in labor and material, and we should see more of that drop to our bottom line. We've rolled out a program in the third quarter, which we're calling LHX NeXt. So LHX NeXt is different than E3. Similar philosophy, similar goals, but this is an enterprise-wide initiative, topped around, driven by me and my team to change the way we do business. This is not some peanut butter cost-cutting effort. It is how do we change our business and do things differently? How do we use AI? How do we use automation? We have a new CIO who joined us a few months ago, looking at our technologies. What can we do differently? And how can we add this to the bottom line? LHX NeXt is going to be a key to our margin improvement. I'm going to give you a few more details. We are now targeting a $1 billion run rate at the end of 3 years for LHX NeXt additive to E3. This is about $350 million a year. You see the $1 billion of gross savings. This contributes to the margin improvement. We are estimating about $400 million of that goes to the bottom line. These are conservative estimates this early in the process. It's a little less than what we had when we did the merger. But we have to look at each and every component where the costs come from, what the contracts are, but that's the top line there. There will be a onetime cost like there was with the merger to realize some of these costs. There are consulting fees. There are severance. There's investments in technologies. But net-net, this is a key contributor to our 2026 goals. Spend comes in different buckets. I think the direct spend is a big opportunity. A lot of people just kind of take that for granted. We've changed the way we go to market in the supply chain. We used to be way too tactical and transactional. We are now sitting down with strategic partnerships. We're showing them the roadmap. We're sharing technology. And we have examples when you do this, where the suppliers willing to make investments. And if we can give them visibility to several years of work, we get better prices. And we had to invest to get the data so that when we sit down, we're negotiating from an L3Harris perspective. Many of these suppliers are on our products in 2, 3 and in some cases, all 4 segments. So it's the power of the enterprise, it's a top-down approach. Indirect spend. We've already outsourced a majority of our indirect spend to a third party who does a lot of procurement for Fortune 500 companies. So we get the power of the pricing of an enterprise that's literally buying hundreds of billions of dollars of product. And every company thinks they have the best deal and the best supply chain team, and we have a hard-working, well-trained team. But when you have half $1 trillion of buying power, I don't care how good you are, they're going to get us better prices. And that's step 1. Step 2 is focusing on the volume of the indirect procurement. Can we actually buy less at a lower cost? And then workforce and labor. This is where I think we can move the needle. We're relooking at the organization structure. I think we have made progress in this regard, but we still have too many layers and too many spans aren't wide enough. So we're going to relook at our organizational structure, try to flatten the organization. We've made some progress. Talked about the 200 acquisitions leading up to this, that's one of the complexities that we're dealing with. When Jon comes up, he'll talk a little bit about IMS and what he's doing. This will take time. This will take a journey and the use of AI technology redeploy these assets to direct, working on programs, billing the customer and delivering our products. One more chart on LHX NeXt, I want to give you some tangible examples of what we've looked at so far. Think of the merger, in fact, I know about the merger, we had over 400 facilities. We're down to 275 today, and we're working on a road path to get to 200. I gave an example of just 2 that were done this year. This has lots of complications, but we're grinding through these. We have a combination of buildings that we own, buildings that we lease and the team is working to come up with a plan and has a plan to bring this down over time. ERP systems, we're going to reduce those by 50%. This refers not to the systems, but the entities. It's complicated cost accounting standards, all sorts of government challenges and bureaucracy and rules. So we're trying to combine these entities, thereby reducing the cost on the systems. I'm not going to go to each and everyone, but you look at the data centers, we're actually happy to be down to 85 data centers, which sounds like a lot and it is. We have a plan to get to 2, right, Ken?

Yes.

Absolutely. So this is the type of detail we have. We have a whole lot more detail, but I want to give some tangible examples because the feedback has been, what is LHX NeXt happy to answer more questions on it, $1 billion gross run rate over 3 years, it's going to go to the bottom line. It's going to help with margins. We're looking at every element of cost from structure to indirect to direct and more to come. All right. Let me move that was the performance growth. Again, I think this is what I'm pretty excited about. We talk about the portfolio. We look at the budget. I've been in this industry a long time, as many of my teammates have, if it's not in the budget, the customer is not going to buy it. I mean it is that simple. We just need a budget. They have to publish their budget. We have to read the budget. And I'm telling you what's in the budget. There's a lot of money for space, missiles, munitions and intelligence. The areas that we're going to talk about in more detail today in areas where we have invested, where this merger put us in a position of strength and where our acquisitions are allowing us to grow in the mid- to long term. R&D and innovation. We talk a lot about annual high-rad internal R&D. This goes in our overhead rates. Sometimes it goes right to the bottom line, about $0.5 billion of R&D. We've really been focusing on getting our customers to give us R&D, research contracts. So we are up to -- I think this has doubled since the time of the merger, $2 billion of our revenue is R&D paid for by our customers. Now this is a margin headwind because we're not getting double-digit margins on R&D, but this is positioning us for strength over the long run, and I'd much rather have the customer pay for R&D than us. So this is how we are bridging the 2, $2.5 billion of R&D inventing, creating and going to develop the capabilities for the future fight. You can see in some of the major areas of focus, a lot of the things you see in the budget, a lot of things you read about in the national defense strategy. These are our core capabilities. You'll learn more and more about them in the hours ahead. Leadership team, it's a very experienced leadership team, but it's a diverse leadership team. I think about 1/3 of these people are new since the merger. And I think what's unique about us, and I can assure you, they're in the front rows here, you can talk to them at the break. We have all sorts of heated debates and discussions in our staff meetings because we have different experiences. We have people from commercial entities. Byron Green was at General Motors. He's running operations. I think the first year or 2 is like, you got to be kidding me. This place can go a hell a lot faster. So we've put in new tools, new techniques, new metrics. We have people who've worked in the government like Sean Stackley, with people from mid-tier companies. We have people from primes. And I think that is one of our unique differentiators. Those different experiences, all coming together to try to get the best answer for our customers, for our shareholders and for our employees. Board of Directors. We have a great Board of Directors. It actually increased over the weekend by 2 individuals. You probably read about it, Bill Swanson, an industry veteran, talked to Bill several times, probably should ask them before I quoted them. But anyway, when we made the Aerojet acquisition, he sent me an e-mail, he said, "Great acquisition, Chris. Let me know if I can help." Well, now he's going to help. He's on our board. Bill, if you're listening, I hope you vouched for that. And then Kirk Harrigan, great experience -- Kirk Hatchigan, I'm sorry, CEO, Chair -- CEO of several companies, focus on operational improvement, operational excellence, capital deployment, very successful in each and every company he has been with throughout his career. So we're excited to welcome those 2 Board members on that gives us 6 new Board members in less than 2 years. So relative to refreshing the board, 6 of the 13 have been with us less than 2 years. We also setup an ad hoc business committee. You can see the 4 members there. We've already started having a couple of phone calls over the weekend. We're going to get together, finalize our game plan, our cadence, our meetings, but this is going to be an exciting opportunity for the company. We have lots of initiatives underway. They're going to become aware of these initiatives, and they're going to help us. They're going to help us with the margins. They're going to help us with the portfolio. ideas and suggestions on LHX NeXt and some of the initiatives that I've laid out. So looking forward to them to be in either an accelerant or basically an accelerant give us a sense of urgency and allow us to achieve the objectives that we've laid out or potentially better. Capital deployment. I mentioned it once, but I want to mention it again and we'll send you these charts, so it's clear and obvious. We will continue to invest in the business first and foremost with R&D and capital. We will reduce our debt down to a leverage ratio of 3.0. And then through dividends and share repurchases, we'll reduce debt. I'll give you more detail when I come up for the finance section at the end of the day. So before I pass it on, I hope that was helpful to frame what we're trying to do here at L3Harris, what our strategy is, our portfolio approach, our commitments. We are different than the rest. The trusted disruptive strategy is working. You're going to hear more and more about that. The focus on operational excellence, margin improvement, continuous improvement is embedded in our DNA. It's embedded throughout these presentations, and we will give you a clear, concise financial objectives and targets that we'll talk about in a few hours. So with that, I want to turn it over to Dr. Ross Niebergall. He's our segment President for Aerojet Rocketdyne. And thank you.

Thank you, Chris, and good morning. For those of you who I didn't meet last night, I'm Ross Niebergall, and I joined L3Harris just over 6 years ago, originally as the Chief Technology Officer for the company. And just about a year ago, I transitioned into the role to be responsible for the integration of Aerojet Rocketdyne. So prior to that, I spent almost 15 years at one of the major missile primes. And the reason why I was drawn to L3Harris was because of the industry-leading capabilities that we developed that are absolutely critical for the future fight. And these include areas like passive sensing and targeting, exquisite cyber capabilities and satellites, many of which you saw this morning, and the glue that holds it all together, which is resilient communication. So those are all components of what Chris described as the kill web. And what we noticed was that there was a piece of our portfolio that was missing from the kill web, and that is missiles and weapons. And although L3Harris has a presence in the missile market, it represented only about a couple of hundred million dollars. And that's in light of the fact that there's $60 billion-plus spent on missiles, munitions and weapons on an annual basis. So this was clearly a focus area that we wanted to get into, and we explored a number of different ways, as Chris suggested. And at the end of it, we looked at the data to see where it would lead us. And where it led us was to the conclusion that Aerojet Rocketdyne was a remarkable opportunity for us to acquire that role and get into this business. And the data that drove that decision was looking back since the turn of the century, there have been 12 new programs that have gone into fielding within the United States. Only 3 of those programs were actually competed. Every one of those programs went to the 2 missile primes. So obviously, there's rare opportunities to become a missile prime, and it's a steep uphill battle to get a role on those programs. Now all of that said, Aerojet Rocketdyne actually provides propulsion and warheads for half of those 12 programs. So what we recognized was that with the acquisition of Aerojet Rocketdyne, we had immediate sure and certain revenue in the missile market. So today, I want to talk to you about where we intend to take this business in this portfolio within L3Harris. Okay. So there's a few key messages that I want to emphasize, and we'll continue to emphasize through the presentation, and that is that L3Harris is absolutely committed to operating Aerojet Rocketdyne as a merchant supplier. That's fortunate because being a merchant supplier is part of our DNA at L3Harris. I mentioned that we also in L3Harris, have other capabilities in the missile market, and we will use Aerojet Rocketdyne's strong presence to pull through compelling content from the rest of the company. Chris talked about the rationale for the Aerojet acquisition, and he talked about the quality embedded in this portfolio. And I'm going to discuss that quality to more extent but what we've also achieved is getting great footholds on next-generation programs and capabilities that will be a flywheel into the future. We also recognize that we will need to extract the value from this portfolio, and we have a clear process and mechanism and plan for achieving that. And all of this is in light of increasing demand, not just from Ukraine and Israel, but also from peer threats around the world. Okay. So before I get into talking about what's actually in this portfolio, just to hit on a few quick numbers, and I won't walk through this at all. You can look at it and read it yourself. But I will note that, as Chris discussed, solid rocket motors and propulsion is a duopoly in this country. And within that duopoly, we capture about 80% of the solid rocket motor business worldwide. And we just about evenly split it. We have a tremendous backlog in this business, and that's one of the reasons why on an annual basis, about 90% -- 95% of our revenue is firm and follow-on business. So this is a remarkably stable business with good predictability from year to year. So now I'd like to talk about the capabilities that are actually in this portfolio. And there's 2 significant pillars. The first is on space propulsion. And the second is on missile propulsion and warheads. So the space business is about 1/3 of our revenue. And it represents from a technology point of view, generally liquid-fueled rocket engines. So this portfolio includes what you normally think of as launch propulsion, first stage, second stage, but it also includes in-space propulsion. And as space is becoming increasingly congested, it's also becoming increasingly contested and maneuverability and space is becoming increasingly important. The second pillar of the portfolio is missiles. This represents about 2/3 of the revenue and also is, from a technology point of view is solid rocket motors and warheads, and we've grouped it into 3 categories. The first is tactical missiles. These are generally offensive capabilities. They're smaller in nature, and they represent from a sheer number point of view, the largest production that we do, but they're generally of a lower cost as well. Second category is air and missile defense. These are of a larger scale, and they're primarily defensive in nature. But because of the larger scale, they're also oftentimes fixed as opposed to mobile. And all -- and because of their scale, they're generally more expensive, but they also -- we'd be building much fewer of them than the tactical missiles. The final category is strategic deterrence. And these are missiles who's very existence is meant to prevent a war from ever occurring. So this is where we talk about the nuclear triad and Aerojet Rocketdyne is on 2 legs of the nuclear triad with the Minuteman and now the Sentinel missile as well as the Trident missile capabilities. These are exquisite rocket motor capabilities for an exquisite usage. Okay. So now digging into the portfolio a bit more. I'm only going to spend a few minutes on space, and that's primarily because the space business is one where we have a significant backlog. Our margins are in the low double digits, and our growth is in the mid-single digits. We have 2 significant franchises in this business. The first is with NASA's space launch system, the SLS. We provide more than 40 different propulsion systems on that rocket. The primary ones that we think about are the main engines, the RS-25 as well as the upper stage engine, the RL10. The SLS is the rocket that's used for the Artemis mission that will take humans back to the moon. The first Artemis launch was just over a year ago this week, in fact, and all of our 40 rockets performed -- or sorry, our engines performed flawlessly on that launch. The second big franchise is with United Launch Alliance's Vulcan Rocket. So since the 1960s, Atlas and Delta families of rockets have been the go-to source for national security space launch. The Vulcan is the next generation of that rocket, and we're providing the second-stage engines for that capability, again, the RL10 engines. We're under contract for more than 35 launches and more than 150 engines. So we have a significant backlog in this. This is also an exciting area where we are upgrading and modernizing that RL10 engine using additive manufacturing, 3D printing to reduce the number of parts by more than 98% and cutting the schedule to build one of these engines in half with commensurate cost savings as well. Okay. So again, missiles is a very stable business, solid backlog. So where I want to spend the bulk of my time is talking about the missile business. So in Aerojet Rocketdyne, you can see here that there are 5 basic components of a missile. And within Aerojet Rocketdyne, we specialize in 2 of those components. That's the propulsion as well as the kinetic effect. You can think of that as the warhead. So when Aerojet Rocketdyne provides this capability to a missile, on average, we end up getting about 20% of the cost of that missile. So I mentioned that L3Harris also has a presence in the missile market. In the other segments, we build data links and guidance. We also have a presence in the kinetic effects, but it doesn't overlap with Aerojet Rocketdyne. This is fusing and ordinance and similar capabilities for triggering the warheads and such. So when I look at the overall presence of Aerojet Rocketdyne and L3Harris, we actually have access to more than 50% of the cost of any given missile. So this is really the driving reason why we think that being a merchant supplier for missiles is the absolute right strategy. Ultimately, our objective is to be the go-to source for companies, the missile primes to acquire subsystems and components to build missile, but we also want to enable new entrants to enter into this market for the first time. So we want to be a one-stop shop for all things related to building missiles. So to add a bit more color to this opportunity, when you take the footprint of Aerojet Rocketdyne and L3Harris, we have content on more than 3 quarters of all of the missiles that are currently fielded by the United States. And we're fortunate, as I said, that these are complementary capabilities between Aerojet Rocketdyne and L3Harris, and they're not overlapped. So the numbers here on the different categories of missiles really speak for themselves. We're present in all of the services and all of the domains. The exciting thing about this too, is that, as I noted, new missile programs are rare and opportunities are sparse. But Aerojet Rocketdyne has done a tremendous job over the last few years in winning these new opportunities and they include the nuclear triad, next-generation missile defense even torpedo propulsion are places where we have won positions and are now poised for the future. I'll talk just briefly about one of those opportunities, which is the sentinel missile. It's the replacement for the Minuteman and again, it's an ICBM intercontinental ballistic missile. So the first award for this was in fall of 2020, and at the prime level, the award was $13.3 billion. Aerojet Rocketdyne builds the third-stage propulsion for this as well as the in-space propulsion for this, very significant pieces of this. I talked about the importance of getting footprint on these new programs. Ultimately, the DoD predicts that this is going to be a program valued at more than $60 billion and for Aerojet Rocketdyne and now L3Harris, our position on this is going to be a flywheel for decades to come. Okay. As Chris noted, it's no secret that Aerojet Rocketdyne has experienced challenges in delivering products, and they haven't lived up to the high expectations of L3Harris. So we knew this when we went into the acquisition. And so far, we haven't been surprised by anything that we have seen. So in the past several years, Aerojet Rocketdyne has been investing in 2 significant areas. One is to go after these new franchise programs that I just spoke about. The other is to build the infrastructure to be able to build that significant backlog of space engines, RL25 and RL10. So with that spending fundamentally behind us, we can now start re-purposing Aerojet Rocketdyne's IRAD, the segment investment, which includes both R&D as well as capital and put it towards improving our manufacturing capability. And since we've closed on the acquisition, we've increased the R&D spending by a factor of 4 and increased the capital by a factor of 2. We've additionally put in L3Harris' more rigorous bidding process to ensure that as we are pursuing new programs, we are equally able to execute on those programs. So I think I note that we anticipate the ability to deliver 100-plus basis points in the next few years. And I think we have a clear roadmap as to how we're going to achieve that. So when it comes to addressing some of the challenges of the past, we have 2 focuses. The first is on triaging programs that are significantly challenged. And the second is on systematic improvements to overall business to make sure that we don't run into these challenges in the future. So just touching on what we're doing on triaging existing programs, the one that I will talk about is the Standard Missile 6, SM-6. This is a cornerstone of the United States integrated air and missile defense and is a ship-launched capability. Aerojet Rocketdyne builds the primary stage as well as the second stage motors for this system. And as we've gone through our integration, we've determined that the significant challenge in delivering this capability is with sub-tier suppliers. So L3Harris has done a number of initiatives to improve that. One is surging our resources, not just from within Aerojet Rocketdyne, but from across the company, to improve the performance of these oftentimes sole source, oftentimes small providers of exquisite components for these missiles. The second is consistent with what I talked about with redirecting investment, all under the umbrella of LHX NeXt, we've also invested in these sub-tier suppliers to give them more bandwidth and more capabilities. And finally, in some cases, we're looking at expanding the production by looking for dual sources of these to make sure that we can ramp up production going into the future. Next on the more systematic changes. We were very fortunate to be awarded $215 million in the Defense Production Act. And for those of you who aren't familiar with DPA, it was enacted in 1948 as a mechanism to present -- prevent the collapse of the defense industrial base following the second World War. It was most recently used to fund the production of COVID-19 vaccines. So we entered into a cooperative agreement with the Department of Defense to enhance our overall capabilities focused on 3 weapon systems, GMLRS, Stinger and Javelin that are absolutely critical for the fight in Ukraine and now in Israel. So I'm going to show you a brief video just to show you what we're doing with this investment. [Presentation]

So this blueprint that we're leveraging to build out the DPA funds is based on some of the very successful programs that we have and past investments to improve production. So we're very excited about this tremendous investment in our business. So before I wrap up, I wanted to say a few words about the integration. As Chris noted, we've been preparing for this integration by staffing up with expertise in the missiles and weapons and rocket motor business for a few years now. And I think this integration is going very well because of the really tremendous mesh of capabilities between L3Harris and Aerojet Rocketdyne. We're giving Aerojet Rocketdyne the opportunity to scale a much bigger customer influence as well as access to the L3Harris operating system and the 52,000 employees of talent that we have that we can surge to this. So I'm excited about what we've accomplished in the 4 months since we closed. Chris talked about our international strategy and the potential for licensing or coproduction in Australia. I'm also very pleased at the high level of employee engagement we have and the employees are very positive and excited about being part of this larger company. Okay. So to wrap up, I'm more confident than ever that Aerojet Rocketdyne can deliver on the value that we've promised, and I think with the fact that we have more than 75% of the U.S. missiles within the family of Aerojet Rocketdyne and L3Harris, we actually have a tremendous future ahead of us. I started at the beginning by talking about the kill web or the kill chain and that Aerojet Rocketdyne and missiles is the last piece of that kill chain. What you're going to hear from the other segments today is their components of this. And now I'd like to introduce Ed Zoiss, the President of Space and Airborne Systems. In my view, they're a critical role in the kill chain, especially with their missile warning, missile defense capabilities that end up queuing up Aerojet Rocketdyne's missile defense weapons. With that, I'll turn it over to you.

Well, good morning, everybody. And as Ross said, my name is Ed Zoiss, and I've had the pleasure to lead the Space and Airborne Systems segment since the merger. In my nearly 30 years with the company, I am proud of the business that we have built, and I am confident that the best is yet to come. For those of you that have had a chance to join us in person, you're seeing that our trusted disruptive strategy in action as we're now an integral part of our nation's NextGen architectures in space, air and cyber. It is an exciting time in the Space and Airborne Systems segment. As we go through the presentation today, I'd like you to remember these 4 key messages. The first message is that L3Harris is disrupting markets. We are taking market share and we're giving our customers a new choice as a mission prime. The second thing is that our move to NextGen architectures has opened a window of opportunity for us to move up the value chain as a mission prime. And then the third thing is, as we moved up the value chain as a mission prime, not only have we won new prime programs, but we've entered 2 new market segments in missile warning and missile defense as well as in trusted microelectronics. And then finally, we've made substantial investments to retool our business to become a space prime. And as those investments subside, we have plenty of opportunity to continue margin expansion. So now let's take a closer look at the segment on the next slide. We provide full system solutions in space, air and cyber. Our systems and solutions provide our strategic customers, the tools and knowledge to make a decision before an event occurs. We also provide the tools and hardware to tactical customers to execute the decisions that our strategic customers make. Taking a closer look by the numbers, you can see that 90% of our business is domestic with a full 50% classified and 75% focused on national security, which really speaks to the underlying high-value missions that we provide to our customers for national security. You'll also see that our business mix between prime sub and fixed price cost plus is stable at 60-40 split, which I see constant as we move into the future. So now let's take a look at the capabilities that we provide in each domain on the next slide. I'm going to go into each domain in detail on subsequent slides, but first, I'm going to summarize what we do in each domain here. So starting in the airborne domain, both myself and Jon Rambeau, the President of Integrated Mission Systems are going to talk about the capabilities that we provide to our airborne customers. In Space and Airborne Systems segment, we provide high-performance mission systems to tactical aircraft that must go into a contested environment and survive. In Jon's business, you're going to hear him talking about missionization of aircraft that go into permissive environments. Our nation needs to be equally prepared for both environments and our portfolios are positioned to do just that. SAS is a subcontractor to the large platform primes, in the airborne domain, providing the types of mission systems that you see on the slide. In the airborne market, our customers are shifting their budgets. They're shifting their budgets from in-service legacy platforms to NextGen platforms or is commonly called NGAD. So as we look at the airborne budgets, the budgets are largely flat over the near term and our business will largely be flat and form a stable revenue stream in air. The next 2 domains, space and cyber will be the growth engines for the segment for years to come. They're also the fastest-growing parts of the government's defense budgets. In space, we have had a long heritage as a premier sensor provider. You'll hear me talk today about taking our premier sensors and payloads and now using them to secure prime awards in space. The thing that I'm most excited in our space business, and Ross has mentioned this, is our entrance into missile warning and missile defense market, which I will cover in detail. And then finally, our cyber business. There's not a lot I can tell you about our cyber business. It's primarily classified. But what I can tell you is that we are a prime mission provider of systems and solutions to penetrate ultra-hard targets in cyber. What I'm very excited about in our cyber business is a new market that we're entering providing trusted and advanced microelectronics, which I will discuss in detail shortly. So let's take a close look at the airborne domain. The United States has long enjoyed airborne superiority. But now we have to prepare for a fight that will test our ability to operate freely in air. In order to move into a contested environment, platforms require greater endurance, more survivable programs and high-performance mission systems. And in order to win this contested fight, our nation needs to do 3 things: the first thing is we need to modernize those in-service platforms that we'll have to use in a fight today if called upon. L3Harris is executing multiple modernizations for in-service programs. As you can see on the slide, we have over $12 billion of future potential production work on those platforms, such as the F-35, F-16 and F-18. The second thing the nation must do is to develop a next-generation high-performance penetrating aircraft. There's no secret about this. It's called NGAD in the budget, and our customers are shifting their dollars over to NGAD. In the Space and Airborne Systems segment, we see this as a multibillion-dollar opportunity but one that's on a longer time horizon. And finally, the third thing that we must do as a nation is we must take those airborne capabilities that are no longer survivable in a contested environment, and we must move them up to space. And in fact, this is happening very quickly. I'm going to cover 2 examples to give you an idea of what this means. At the bottom of the page, you'll see an aircraft that's called JSTARS, it's providing ground-moving target indication to our nation. The JSTARS platform is an E-7 aircraft, which is based on a Boeing 707 commercial airliner. As you can imagine, a 707 commercial airliner would have no chance to penetrate contested environments and survive, which means our warfighters who are have to operate in contested environments, no longer have the ground-moving target indication capability available. That capability must move into the space layer. You've probably read that JSTAR program has been canceled. That program and the aircraft took its last flight this year. So to move from the airborne domain to the space domain is already underway. The second example is airborne moving target indication, which is the aircraft above that, providing an airborne radar picture for our in-flight aircraft. The capability that does that for our nation today is the E-7 aircraft, AWACS. It's based on a Boeing-modified 737 commercial airliner. Again, a 737 doesn't stand a chance in a contested environment, and those capabilities must move to space. So what does that mean for L3Harris? It means as these capabilities move this space, we now have a chance to prime them. Using our strength with our airborne business, coupled with the advanced payloads we have in space, we now have the ability to put together prime-level solutions as this migration occurs. And so when I look at the contested environment in air, the most exciting part of the contested environment of air is the move of airborne capabilities to space, giving us the opportunity to prime. In fact, as I stand here before you, we are executing over $1 billion of work migrating traditional contested airborne capabilities to the space layer. So now let's switch to the space domain on the next slide. In space, we serve the U.S. intelligence communities, the Department of Defense, the large aerospace primes, NASA, NOA and of course, international customers. The challenge in space is that newer advanced threats are putting our legacy architecture in jeopardy. We generally call that legacy architecture exquisite because that's what it is. That's based on billion-dollar-plus satellites. There's very few of them. They're easy to target. But moreover, they're very long to develop, and they have a long mission life, which doesn't allow easy upgrades. So the new architecture our nation is moving to is one that is much more resilient, one that is now proliferated, one that's based on constellations of satellites not just on 1 or 2 or 3 satellites. This NextGen architecture has been a real sweet spot for L3Harris. In fact, over the last 2 years, we've won 20 new prime contracts in space. We have record backlog, and we have strong momentum. But there's no place that this NextGen architecture is more evident than in missile warning and missile defense. The threat has moved in missile warning and missile defense from a traditional ballistic threat, as Ross has talked about, ballistic missiles. Ballistic Missiles have a known trajectory. So that as soon as you know the art that they begin on, you know where they end. The threat has now moved to hypersonic glide vehicles. And so the current architecture in space that we have that tracks missiles for interception is no longer capable of tracking these agile hypersonic threats. We've leveraged our premier position in infrared sensors to create a new system that allows continuous coverage either in wide field of view or in medium field of view for fire control for these systems. And we've won the 4 key programs for our nation for missile warning and missile defense that you see on this slide. We now have over 20 satellites under contract with many more to come. And we're just getting started in missile warning and missile defense. So now let's shift over to the right side of the slide. Look, our surveillance customers have the same challenge and the same issues with exclusive systems. And they are making the same move to the proliferated architectures. Our surveillance customers are generally classified. There's not a lot I can tell you about this. But what I can say is that we have won 5 new classified constellations. We now have 30 satellites under contract. And again, this is just the beginning in both of these market segments. These are the fastest 2 market segments for our space force, missile warning and missile defense and classified and L3Harris has cemented ourselves into the NextGen architecture in both of these market segments. The final 2 market segments I want to cover our position navigation and timing or more commonly called GPS and civil weather. GPS is undergoing a generational change as well. GPS was designed for peacetime operations. In fact, L3Harris has been on the GPS system since its inception in 1977. We provide the heart of GPS called the mission data unit which provides the special waveforms and the precision timing necessary for GPS to work. Could you imagine if you woke up someday and an adversary took our GPS system off-line, what would that would mean for your daily lives? Your own navigation. You may not know it, but our banking systems are built on the precise timing that the GPS signal provides as well as the bulk of our communication systems. So this is integral to our daily lives. It's also integral to our military, which is why we need a more resilient GPS architecture, which is why the U.S. Air Force called upon L3Harris to prime the next generation of GPS satellites called Navigation Technology Satellite 3 or NTS3. This new satellite will be software upgradable. It will provide different bands. It will provide spot beams of coverage and enhanced capabilities to prevent adversaries from jamming it. We've already delivered that satellite to the U.S. Air Force and we look forward to it going into operation next year and becoming the foundation of the NextGen architecture in GPS. So I'm going to wrap up in civil weather. So I talked about the first 3 segments that we participate in, in space, missile warning, missile defense, classified surveillance and now GPS, they were all driven by conflict. They were all driven by advanced threats, which precipitated a generation change. What's precipitating the generation change in civil weather is not conflict, but it's climate change. As the earth is warming, we are having more frequent and more catastrophic weather events. In fact, the average annual cost of these catastrophic weather events is now triple what they used to be at $120 billion. In response to that, civil weather agencies around the globe are recapitalizing to the next generation of weather sensors, ones that have higher resolutions and ones that will provide better forecasting accuracy so that we can move people and property out of harm's way well in advance of these storms. L3Harris is a proud award recipient of 2 major contracts in this area, 1 from NOAH for the next-generation Imager and then another one from Japan for the next-generation imager and sounder, which will provide advanced weather forecasting. With many more opportunities to come, I look forward to continuing to expand in our civil weather business, which has now over $1 billion of backlog. So let's take a look at what this means for our space business on the next slide. Simply put, we're scaling the business. And we're scaling the business now because we see a reliable marketplace for continuous production of not only satellites and sensors. So we've now gone from a bespoke model where we were producing 1 or 2 satellites every 18 years to now continuous flow where these proliferated constellations only last 3 to 5 years, then they're deorbited and the next constellation is inserted. And as it's inserted, it's inserted with more capabilities. So as such, we're scaling our facilities in Fort Wayne, Indiana, where we're constructing a new building, and that new building will allow us to produce that 1 infrared sensor a year, but 1 per week. And we're constructing a new 90,000-square-foot space vehicle integration building here in Palm Bay, Florida for large and midsized satellites. So it truly is an exciting time in our space business. Cyber is also undergoing a generational change. As I said before, there's not a lot I can tell you about our cyber business, but we are a premier provider of systems and solutions for our nation and our national security counts on what we do. What I can tell you and what is tremendously exciting in this business is our move now into trusted microelectronics. I think many of you know that 90% of the world's semiconductors come from East Asia and in particular, Taiwan. Because you imagine if conflicts broke out in East Asia, where there was a major supply chain disruption, well, in response to that, the U.S. government through the chips Act and other funding sources is going to put nearly $60 billion of funding to create onshore capabilities so that our defense systems have a reliable and assured source of high-performance electronics. Over the last 5 years, L3Harris has pioneered some breakthrough capabilities that are now going to enter production. We've built over a $600 million backlog already, and we're looking forward to begin production next year at the completion of an advanced semiconductor manufacturing facility here in our Palm Bay campus. The need is so great that we have multiple customers who have funded the bulk of this building, will be 100,000 square feet and it will be for classified advanced microelectronics. So I've talked at length about how we're growing the business not only in space, air and cyber, I want to refocus us on operational excellence. Chris talked at length about LHX NeXt. SAS was truly an early adopter of LHX NeXt. Over the last 21 months alone, we have removed 25% of the overhead labor costs out of the business. We've also streamlined our operations this year. and we're realizing in-year benefits today on LHX NeXt with more to come. As you've heard from many of the presenters E3 as part of our foundation, really formed at the merger, it is our continuous improvement toolkit. We execute hundreds of V3 projects each and every year inside the segment. routinely taking 3% of the cost out each and every year. What I'm most excited about on E3 is some of the new tools that we'll be providing to our program teams to allow even greater efficiency. And then finally, program execution. We continue to focus on all aspects of execution with the main one being making sure that we're bidding programs with the appropriate contract types. We've already no-bid several large contracts because of undue risk posed by fixed-price contract types from our U.S. government. In fact, not only is L3Harris, but I would say the industry at large is helping retrain many of our customers on the appropriate contract type for the appropriate risk and we're seeing them respond. So just wrapping up, our strategy in Space and Airborne Systems segment is working. We are now an integral part of the next-generation architectures in space, air and cyber, and I am excited about our future growth potential. And I look forward to your questions during the Q&A portion. Next, I'd like to bring up Mark Kratz.

So with that, we've reached the halfway point of this morning's prepared remarks, and we're going to take a 15-minute break. So be aware of the time and we'll start promptly back up in 15 minutes. Thank you. [Break]

All right. Welcome back. We'll go ahead and get started. Our next presenter is Jon Rambeau, President of Integrated Mission Systems.

All right. Well, good morning. It's great to have an opportunity to talk a little bit today about Integrated Mission Systems. I joined L3Harris about a year ago after having spent 26 years with one of the other large primes in the industry. And during my tenure with that company, I had the opportunity to lead a number of businesses across all domains. And as I've come across here to L3Harris and assessed the IMS portfolio, just about everything from a product line perspective that you find in IMS, I would have found in one of those prior positions, so from a product line point of view, this has been a really comfortable shift for me. Why did I join the company? Well, I had a conversation with Chris probably about 18 months ago, and he talked to me about his vision for the company, where he wanted to take it, and we talked especially about the trusted disruptor strategy. That was exciting, and that was energizing for me, I decided to make the jump. And I can tell you that the past year has really exceeded all of my expectations. So let's dive in and talk a little bit about IMS. The key messages I want to leave you with today. First off, we're focused on accelerating the trusted disruptor momentum we've been building in IMS. We have a couple of programs within the portfolio that I'll touch on today that I think are really emblematic of what it means to be the trusted disruptor. We're focused also on scaling and extending some of our specialized mission capabilities, pulling those across platform types and also transitioning them to new domains. We delivered differentiated prime integration capability in IMS. It's not just about taking capabilities from outside our organization and stitching them together. We also have some deep areas of technology differentiation, and we bring those to bear to different the offerings that we provide to our customers and also to improve the profitability of our programs. And finally, at the bottom line, we're focused on profitable growth and incremental margin expansion over the next several years. Some of the fast facts about IMS: We're about a $7 billion revenue business today, 60% prime contracts, about 75% fixed price revenue. Our mix of domestic versus international is about 75-25. That 25% international, we anticipate expanding to something closer to 30% over the next 3 years. And that's really significant because international revenue has historically been and is projected to be accretive to our overall margins in the portfolio. How we break down in terms of domain? We're about 65% revenue in the air domain, 25% sea, 10% you see in the other category there. And a large percentage of that 10% other is the Commercial Aviation business, which, as you're aware, is likely to depart the portfolio before the middle of 2024. So next, I'll go into a little more capability around air and sea and what we do in those 2 domains. In air, first and foremost, we focus on air platform integration. If it flies, we can probably missionize it. Passive sensing and targeting, this is a thread that you'll see throughout the entire conversation today. It's a capability we have in air domain and in the sea domain. Just to level set what I mean when I'm talking about passive sensing and targeting, traditionally, a lot of our military customers have relied on radar to detect and track objects, very useful capability. But for a sophisticated adversary, that radar signal that you're sending out can also be used to pinpoint your location, and you can become a target. So our customers are increasingly focused on a hybrid scenario being able to leverage radar capabilities, but also to use passive sensing to take advantage of energy that's already out there in the environment, absorb that and leverage that to detect, pinpoint and track objects. So a really important capability. You'll see that throughout the course of this conversation. In air, we also have electronic attack capability, also known as jamming, and we have some classified business that we won't be able to talk about here today. In sea, again, passive sensing and targeting, a lot of work in autonomy and working on unmanned system capabilities, both on the surface of the ocean as well as the subsurface. How do those platforms work with manned platforms in tandem to change the way that enable our customers fight? Power and communications for shipboard applications, undersea networks. And we also have some classified business in the sea domain. Again, we won't talk about that today. Now I get a lot of questions about IMS margins. We got some of those last night that was here in the room, and I wanted to hit that topic head on. So I'll jump in and talk a little bit about that and try to set some context for where we've been, where we are and where we're headed from a margin point of view. Just look at a rough timeline, going back to the date of the merger in 2019. We had the merger of equals. We got through the integration of L3 and Harris. And just on the heels of that integration process, we and the rest of the world got dropped into the COVID-19 pandemic. And then we had some post-COVID turbulence. We had a lot of labor mobility, attrition, loss of knowledge, supply chain disruption. And that probably impacted IMS a bit disproportionately because we are a very diverse organization, a large number of physical locations, about 1/3 of those international sites, as well as Chris talked about some of that stove piping of the different government cost accounting entities that we have within the business. So that did put some pressure on our margins as we worked through the balance, certainly, of 2022. And since I joined the business, I've really been focused primarily on stabilizing IMS and getting us positioned to pivot to optimization. Ask where are we in that stabilization journey? How much turbulence can we expect to see? I would say, we've pretty well got our arms around what we're looking at now. I think there will be a little bit of overhang into the first half of 2024 as we wrap up some of the contracts that have caused us some of these challenges. But as we get to the back half of 2024, I expect to see substantial improvement as we go forward and get ourselves back on a trajectory for continued profitable growth in IMS. The optimization is the piece I'm perhaps most excited about. So I'd like to spend a little bit more time talking about what we're focused on there. Multiple levers to continue to improve the performance and to optimize IMS. First off, we're focused on the far right, program execution. This is really about 2 things: It's about performing on the contracts we have today and ensuring the integrity of the bids that are going out the door such that we are confident not just that we will be able to win the business, but when those contracts are awarded, we'll be able to perform at or above the margins we predict at the time the bids are submitted. It really boils down to those 2 things. E3, I think Chris talked about this. It's really embedded in the fabric of who we are in IMS. We turn the crank on E3 every year, and it generates substantial benefits to offset the headwinds that Chris referenced at the beginning of the day today. LHX NeXt, I'll talk about on the next slide in some detail. But bottom line, the combined efforts that you see on this slide are targeted to deliver about 100 basis points or more of improvement in margins for IMS by 2026. So I'll talk a little bit more now about LHX NeXt and what we're doing in IMS in this regard. We're focused on optimizing, streamlining and simplifying the business. For example, Chris talked about the 24 reporting units that we have within the IMS organization. We have an initiative underway. The next big step here will be to collapse 10 of those 24 reporting units to 1 on January 2 of 2024. And along with that, all of those 10 locations will migrate onto our single ERP baseline, which will be SAP. We want to move from [ 8 ] ERP vendors to 1 by 2026. We started this year with 102 physical locations. Organically, we've reduced by 5 already this year. When Commercial Aviation departs the portfolio, there's another 17 facilities and 750,000 square feet of facility space that will be parting ways with IMS. So that will get us already into sort of the 80-ish range, well on our way to a target of 70 or fewer by 2026. And we also want to streamline the number of business lines that we have within the portfolio. This optimization will really position us, I think, to pivot to that profitable growth that I talked about. The 3 key vectors that we have for growth in IMS: The first is in the air domain. It's focused around airborne ISR capabilities and specifically a disruptive shift that we see from traditional use of large commercial and military platforms to being able to translate those same capabilities, the same mission capabilities to what are becoming larger and more capable business jet platforms. And we see that shift happening in the near term. It's happening now. And I'll show you in a couple of slides why I think L3Harris is out in front in that regard. In the sea domain, there are 2 areas of focus. The first is around sensing and targeting. And again, as I said, moving from traditional use of radar systems in the sea domain to a blend of radar, along with passive sensing and targeting capabilities. We think that will really start to scale up on the midterm. And then again, from a platform point of view, shifting from fully manned platforms, both surface and subsurface, to a mix of manned and unmanned systems in both of those areas, see that also happening in the midterm. So next, I'd like to talk a little bit about the foundation that we have for growth, and that really starts, I think, with strong customer partnerships and a strong business foundation. And I think we're well positioned there. First thing I did when I came to IMS was I talked a little bit about how healthy were we from an ability to scale point of view. I'm happy to be able to report that at the end of this year, IMS will have a record backlog of about $8 billion. And the other thing that makes me feel good about the portfolio and how it's positioned is between 50% and 60% of our annual revenue is what I would call stable revenue coming from our naval and our air customers, principally. And that's really revenue that comes from production, modernization and sustainment. I like that type of business because it's pretty predictable and it's pretty consistent year-over-year-over-year. And that does 2 things for you: It helps you to generate resources to invest in differentiation of your product lines. It also generates resources that allow you to invest in pursuing new development programs, which ultimately feed that pipeline of production, modernization, sustainment work down the road. So that's a really nice attribute of IMS. As I said, our foundational partnerships are in air and sea. In the air domain, we work a lot with the U.S. Air Force. We also have a partnership with the U.S. Special Operations Command. One of those marquee trusted disruptor programs I talked about was the program we won recently, called the Armed Overwatch program. Armed Overwatch is really disruptive. It takes an airframe that was traditionally designed to be a crop duster. We missionized it, we weaponized it. And we'll be delivering those aircraft, starting in 2024, to Special Operations Command for them to execute close air support missions around the globe. 75 aircraft anticipated in total under that program, with opportunity for continued foreign military sales. In the naval domain, historically, we've done a lot of work in acoustics, in power systems, communication systems for shipboard applications. We're leveraging that strong partnership with our Navy to expand in unmanned systems and passive sensing and targeting. The U.S. Army is a customer we haven't been as deeply penetrated with historically, but this year, we won a contract with the Army to provide 2 special mission aircraft under a program called Athena-R. And we believe that's very important because there's an ongoing competition with the Army to provide a substantially incremental number of special mission aircraft that will be very similar in configuration to what we're building now under Athena-R. So we think we could see a dozen or more additional aircraft with the Army post decision of that contract, which will be coming sometime in the middle of next year. And then finally, again, we have a number of international customers that we're very focused on. That's important because we see that again becoming an increasing proportion of our portfolio at accretive margins. Now I also get a lot of questions about IMS in the sense that we're a very diverse organization. And the question is what exactly is it do you do, how do you summarize it succinctly. So we put together just a short 1-minute video to give you a little vignette and a little bit of a sense of what it is we do in IMS. [Presentation]

All right. Well, I think that video captures very well what we do in IMS and especially what we do with special mission aircraft. And there's probably no better example of the work we do in special missions of our pedigree than the RC-135 aircraft, which is represented on the slide here. This is a capability we've been partnered with the U.S. Air Force on for a number of decades, and the partnership spans back over 60 years. So we have very, very deep expertise in building and supporting special mission aircraft, and this particular aircraft is one that has been the critical link to all air combat missions for the United States and for many of our allies for a number of decades. Now we talked about the shift to business jet platforms and how we see that as a disruptive transition taking place in the market, and so here's why I think L3Harris is out in front of this one. If you look at the numbers, we have 57 special mission business jets, either delivered or on order, at this point in time, and that's compared to 48 for our next 8 competitors combined. And the most successful of those companies has secured 11. So think about that, 57 for L3Harris, 11 for our next most successful competitors. So we really have, I think, put a very strong foot forward in this market and we see very strong demand for both domestic and international customers to continue to grow this business. These don't take a long time to feel. From the time we receive an order to the time we get these out into operations, it can be as little as 18 months. So it's really a pretty short cycle for our customers to acquire the capability once they've identified the demand signal. I'm going to shift next and talk a little bit about the sea domain. Recall I mentioned some of the growth vectors there are more on the midterm horizon. So I thought I'd start with just a few key proof points as to why we think we're going to see some growth in this area. On the left-hand side of the slide, you see quotes from a number of our key naval customers to include the Chief of Naval Operations talking about their commitment to unmanned systems and passive sensing and targeting capabilities. And these customers are backing up those words with financial commitments. And in fact, we see the budgets for both unmanned systems and passive sensing and targeting systems for the U.S. Navy roughly doubling over the next 5 years. I'm going to show you why I think we're well positioned to capitalize on those investments. In the upper left of this slide, you see a representation of a 360-degree passive sensing and targeting system that we're under contract to develop right now for the U.S. Navy. It's expected the Navy will acquire 21 systems total under the existing contract, and we see the potential for sales of this system to contribute up to $3 billion of revenue to IMS over the next decade. In unmanned surface vessels, we are the world leader, with over 150 small and medium-sized unmanned surface vessels deployed for customers around the globe today. In undersea vehicles, again, a world leader, with over 300 unmanned undersea vessels deployed and over 1,000 kilometers of undersea networks that are deployed for communications and sensing capabilities. So a really strong position here in naval capabilities along those 3 growth vectors that I talked about. Finally, I'd like to come back to that thread of passive sensing and targeting that I started off with at the beginning of the conversation today. We really do have a rich legacy of providing passive sensing and targeting capabilities across multiple domains. And on this slide, you see a representation of just a small handful of the places we've deployed those systems. L3Harris has deployed over 7,000 passive sensing and targeting systems for customers around the globe, over 250 unique platform types, over 400 individual customers in 85 countries. So I think a really strong foundation for us to continue to grow and pivot to that profitable growth vector that I talked about earlier in the presentation. I won't brief this slide, but you'll have it in the take home that you have to leave with today. It's really a summary of the proof points that I included throughout the course of the presentation. And in summary, I just hope that I've left you convinced that IMS is really bringing the trusted disruptor strategy to life and that we're on a solid trajectory for growth and continued margin expansion over the next several years. So next what I'd like to do is introduce Sam Mehta. Sam leads Communication Systems, and I think it's appropriate that Sam be the last of the segment speakers today because the work that he and his team do in Communication Systems really can be the glue that connects the other components of the company together. So Sam, over to you.

Good morning. So as Jon indicated, my name is Sam Mehta, and I'm the President of Communication Systems. In January of this year, I was very privileged to be able to join this experienced and talented leadership team. Now while I'm new to the company, I'm not new to the industry. I've spent over 20 years in aerospace and defense, working as a platform prime all the way down to a commercial subcontractor and component supplier to the commercial aerospace industry. And I'm very excited to spend some time with you today to talk to you a little bit about the progress we're making and the good things we're doing in Communication Systems. So there are 4 key takeaways I'd like you to remember from today's presentation: First of all, we are the leader of products and technologies that enable our customers to communicate seamlessly with security and resilience. Second, we're already extracting and recognizing value from that very strategic acquisition that we made in January, Chris referenced, our Tactical Data Link, or TDL, business. We also have a very, very different differentiated model, not consistent with most models adopted by DoD contractors. We embrace speed and agility in our innovation to meet ever-changing customer needs, and I'll spend some more detail -- I'll spend some more time talking about that later in the presentation. And finally, and perhaps most importantly, we're very aligned with our customers' vision and focus for combined joint all-domain command and control, [ CJADC2 ], which is a very important capability, aligned very closely with our national defense priorities and those of our allies. So before we dive in further, allow me to provide you with a little bit of overview of Communication Systems. We're -- we continue to experience very strong top line growth, and we expect that to be able to continue into the future. Importantly, that growth is coming at industry-leading margins. Of course, we're pleased with these margins, but we're not satisfied. And while I'll talk to you about a number of techniques and strategies that we have employed to continue to grow those margins going forward. We are largely positioned well as a prime contractor. This allows us direct access to our customers, direct feedback from our customers, so that we continue to invest in those products and technologies, which enable their capabilities on the battlefield. We also are privileged to be able to provide a lot of feedback, direct feedback from our customers on a real-time basis. I'll share an example of where this comes into play in Ukraine. I'll also tell you that over the last couple of days, we received a lot of feedback from the 101st Airborne Division, who have recently received our newly fielded enhanced night vision goggle capabilities. The direct [ report ] from the customer is that these goggles are providing overmatch capabilities, followed by a long list of additional capabilities that we could provide in future products to enhance their synthetic training capabilities. We're also largely a firm fixed price contractor. And this allows us to reap the benefits of a lot of our cost-reduction and efficiency-enhancing initiatives and be able to bring drop those to the bottom line with increased margin or allow us to reinvest in the business. And finally, we're very proud of our domestic and international split. We do see our international business growing at a faster rate than our domestic business, going forward, which is very important as that provides us highly accretive margins. We are all domain. We are not reliant in Communication Systems upon the growth associated with one domain. We actually employ technologies and capabilities that connect multiple domains. Let me start a little bit more about the presentation in the same way that we started the year talking about our acquisition, a very strategic acquisition of Tactical Data Links, and I know Chris mentioned this in his opening remarks. For first, a little bit about Link 16. Link 16 is used by NATO and our allies as the premier jam-resistant waveform to convey critical and sensitive information. Link 16 is resident on over 20,000 platforms currently in use and operations around the world. This acquisition of Tactical Data Links allows us access to those platforms, to be able to provide additional capability for waveforms and software that we've developed in the company and to work alongside that Link 16 capability. Despite being in operation for several decades, Link 16 is still under continuous development, adding new capabilities. In fact, recently, the DoD announced that they sent and received their first Link 16 transmission for space, opening up this incredibly important and growing domain, as Ed mentioned, to that Link 16 franchise. It was our equipment that helped enable those transmissions. It's also important to make sure that as we continue to evolve the Link 16 capabilities, we flawlessly integrate the asset and the company, which we purchased. As Chris mentioned, very proud to announce that we are on budget and ahead of schedule with our integration, although I think Chris prefers that we would be ahead of budget and ahead of schedule. We've flawlessly transitioned 5 major production lines from legacy ViaSat TDL facilities in Carlsbad and Tempe and [ flawlessly ] integrated them into our Salt Lake City facility. And we're already seeing the benefits of that integration in the form of higher labor productivity, more manufacturing methodologies. We're also on track to be able to capture a record amount of business in the TDL Link 16 franchise since acquisition. As a matter of fact, we will exit this year with a record $600 million-plus backlog, contributing to our record backlog in Communication Systems overall as we exit 2023. Now I mentioned a lot of the opportunities to be able to grow margins in the business, and that's equally applicable to this Tactical Data Link franchise. And a lot of that margin accretion and a lot of that work is being done in the supply chain. So in Communication Systems, we spent a lot of time over the past several years talking about some of the challenges in the supply chain. As a defense electronics supplier and a user of significant utilization of the semiconductor industry, we have been acutely affected by some of the challenges that have faced all of us in the supply base, scarcity of product, labor shortages and a significant amount of price inflation. I'm very proud of the work that our team in Communication Systems and overall L3Harris has done to be able to overcome those challenges. We launched significant recovery efforts. We have redesigned over 1,400 parts when our suppliers were unable to deliver them to us on time to meet our customer requirements. We significantly increased our inventory safety stock to make sure that when those parts arrive, we are ready to be able to deliver to our customers. We deployed hundreds of resources to our suppliers to help them through some of their difficulties. We also leveraged the defense and priority allocation system to make sure our commercial suppliers understand that our defense need take priority over their commercial customers. All of this has come to fruition, and we're seeing the benefits now. We significantly stabilized outputs. We're not resting on our laurels. We're actually taking the muscle mass that we built in the supply chain crisis and now we're proactively applying them to optimize our supply chain for performance and growth. We're executing value engineering products with our suppliers to make sure that we both reduce costs not only for L3Harris Technologies, but for that supplier as well so that we can reap additional profit margin and pass along some savings to our customers. We're partnering with strategic suppliers. You'll hear more about this, and you may have already seen an announcement we put out about our trusted supplier program. We signed numerous significant suppliers to agreements, which allow us to take advantage of better pricing over the coming years in exchange for the greater volume and forecast accuracy that, that backlog, that record backlog brings. We're also engaging in joint innovation efforts to make sure that as we design the products of the future, we ensure that our supply sources are ready to be able to fuel that growth and fuel that innovation. So we're going from a reactive transactional siloed supply chain to one which is resilient, strategic and differentiated. And we're using LHX NeXt be the catalyst for those improvements. I mentioned the work we're doing in the supply chain. We're also continuing to embrace all those tools of productivity within the E3, and that's basic and inherent in our DNA. We're not only increasing labor efficiencies. We're reinvesting in some of our factories and joint manufacturing facilities to increase the amount of automation, to increase the amount of efficiency that we can gain from those efforts. We're also focused on program execution. You heard from my colleagues, we're doing -- we're engaging in a lot of the same activities. We're pricing our programs to execute not just to win. We're also deploying [ enhanced ] program management tools and training in a largely product-based business. It's also incredibly important for my team to operate flawlessly on program execution and program management. So all of these efforts are combined, I'm very confident it will lead to over a greater 100 -- over a greater than 100 basis points margin expansion through 2026. We're also differentiated because of our business model. Now on the left is a traditional DoD procurement and acquisition model. I don't expect anyone to go into great detail, right? It's a highly appropriate model to develop a very complex, very capable weapon systems platform. We, in Communication Systems, have adopted a different model. We proactively invest our precious [ R&D ] dollars to be able to innovate and quickly and rapidly field solutions for our customers to enable their secure and resilient communications. With that fielding, we get real-time war fighter feedback, not only on how our products and our services are performing in the field, but also how they can be improved. There is no more illustrative of an example than the support we're currently providing, we have provided and currently provided to Ukraine in their fight against their invaders. We've delivered over 15,000 tactical radios to that customer. In many cases, we've actually received real-time feedback as to how the threat has evolved, the electronic warfare and jamming capability of their Russian adversaries. In many cases, we've been able to push solutions, patches, software updates to them in as little as 3 weeks. That's real-time, that's providing the customer with additional services and addition of value. That's also led us to be the company that has the largest installed base of tactical devices. We are resonant in over 140 countries around the world. We talked about the proliferation of Link 16. We also have more than 50,000 [ tactical ] linked devices around the world. As international customers and our allies look for more interoperability with the U.S. DoD, they're choosing L3Harris' technologies and communication systems. And all of those devices that we are now delivering are software defined, and they're hardware enabled. What that means is once they're delivered to the field, software-defined radios have the ability to be consistently updated with new waveforms and new software. This is becoming an incredibly and increasingly important part of our business. As our customers are facing enhanced threats from their adversaries, they need to adopt waveforms in the future that will provide them with seamless, secure and resilient communications. Our strategy is to continue to license those waveforms, develop those waveforms and license them to our customers, driving the most accretive margins that we can earn in our company. At the same time, we're focusing on developing new hardware-enabled capabilities. Because after -- Chris mentioned, after we've developed the software, we need more capable hardware to be able to drive these capabilities. So we're investing in next-generation technologies, next-generation communication devices. I'll just point out the PRC-167, the world's most advanced and capable tactical radio, capable of hosting up to 18 waveforms simultaneously, optimized for different threat environments. We're developing those waveforms. We intend to license those, and we're looking forward to that highly accretive revenue stream in the future. So ultimately, we are the cornerstone of [ CJADC2 ]. This is that combined joint domain -- all-domain command and control. Our enemies and our adversaries are not resting on their laurels. They're investing heavily in their capabilities to be able to jam, interfere and disrupt seamless communication amongst the U.S. and our allies in the battlefield. We play an integral role in creating a secure and resilient communication backbone. This is just one graphical illustration of Communication Systems being able to make sure that we seamlessly pass information from Jon's WESCAM [ turrets ] to Ed's satellites to a tactical control center, which will then convey information to tactical munitions that are fueled and powered by rocket motors made by Ross and his team. So we are the connected tissue and the glue to be able to bring it all together. I look forward to talking more about our business in the Q&A sessions and in future sessions. Without further ado, I'd like to call to the stage our Chairman and CEO, Chris Kubasik.

Okay. We're going to wrap it up here and try to bring it all together. I have a few charts talking about [ our ] financial commitments. So we're meeting our commitments for 2023. No change from what we talked about back in October. I will point out to hit these segment operating margins. Our fourth quarter margins will be the first quarter in a while where there's actually an improvement and an increase compared to 4Q of 2022. So I talked earlier about turning the tide, margins are going up, they're not going down. And outlook for 2024, at this point, $21 billion, 15% margins that will be compared to the 14.8%. But on a pro forma basis, it's about a 50 basis point improvement when you put in a full year of Aerojet Rocketdyne and again, a 10% increase in free cash flow. We'll provide much more detailed guidance for 2024 in January, like we always do. We have a new CFO, want Ken to get through that, and we'll have the segment details and the EPS and such. I will tell you that the earnings per share for 2024 will be more than 2023, talk about that in a moment. Then I thought I would lay out some 2026 framework. First time we've gone out this far, team spent a lot of time on that. We're looking at $23 billion of top line revenue, mainly driven by organic growth -- only driven by organic growth as a result of our current portfolio. I did take the commercial Aviation Systems out of 2026. It will be sold by then. I did leave it in 2024 since we don't have the exact time when that will close, but we do believe midyear. 16% margins, you heard from me and the team, the commitment to get to at least 16%. That is our minimum for 2026. And I think we've made it clear. I know we've made it clear we have the path to get there. And then $2.8 billion of free cash flow by 2026. So I see many of you are taking pictures of this chart. I promise you, we'll be distributing it momentarily or you can just write it down. There aren't that many numbers. All right. For 2024, each of the segments will be growing organically and increasing their margins. You heard from the 4 of them. I thought they all did a great job. So congrats, guys. And we thought we'd give you a little bit more information on some of the traditional data we provide. Pension income continues to be a headwind. We're going from about $400 million of pension income to $300 million, cost of $0.45 a share. As you know, a couple of years ago, we pulled all that out of the segment margins, so you can see the true operational performance. But on an EPS perspective, it is a headwind. And then interest expense is up, obviously, as a result of the acquisitions that we made. To clarify again, we're not making any more, I can't say that enough. But that's an additional $0.45 headwind. But when you put it all together, I'm still confident that our 2024 EPS, notwithstanding these tailwinds, headwinds and such, will show an improvement over 2023. Lowest tax rate in the industry, we assume that will continue. And not much on the share count as the repos really aren't kind of kick in, in significance until the next year. So those are some key assumptions I wanted to make you aware of. Backlog, I think this is pretty impressive. As of the date of the merger, if you go back, we had $20 billion of backlog. Today, we're going to end with $32 billion of backlog. Each and every quarter, we talk about the new wins, we've talked about how our trusted disruptor strategy is working, we talk about our book-to-bill rate, all those good things we added up. We're going to end the year at $32 billion of backlog. That gives us visibility and confidence into our financial commitments that we're making to you. It also shows that the strategy is working. We've talked about the segments. We've talked about the domains. And you can see that the portfolio approach that we have been taking is working. All right, margins. We're going to talk about margins again. There's a lot of components. We talked about LHX NeXt, again, to repeat myself, the $3 billion of gross savings by the end of 2026. But there's also several other components. It starts with program execution. Actually, it starts with the bidding. You've heard the 4 segment Presidents and my team, we're spending much more time making sure that we understand the cost structure of these bids. We're hoping to get and bidding better contracts from our customers. We're building in the appropriate reserves for risks that we identify, and then we mitigate those risks. We're training the program managers, starts on the front end, continues through it throughout the execution. And you see a majority of our portfolio is fixed price. So to the extent we can mitigate those risks, it goes to the bottom line. To the extent we realize those risks, that, obviously, is a headwind for us. I think we're doing much better on the program execution. We're doing better on contract negotiations, and we're really doubling down on how we manage these. It's not uncommon for customers to want changes to programs that are fixed price. And it's just our natural DNA, maybe for the industry to kind of say, "Okay, why not?" We're not doing that anymore. You want to change the contract, you give us a contract mod, plain and simple. And that's something we've been saying for decades, we're really reinforcing that. And I think that's the appropriate way to have that relationship with their customers domestically and internationally. I thought Sam did a great job talking about the business model. That chart on the left, that really is a no-kidding chart from the Department of Defense. Sean Stackley carries a small version in his wallet for reasons I'm not sure why. But he does, to streamline commercial model is the way to go. International, we talked about our go-to-market international approach. Again, with the supplementals, I can see a tailwind there that will be good for the company. Software, I think Sam and everybody alluded to this. We're a hardware-defined company, but the way we're going to really move the needle is through the software upgrades, whether it's in the waveforms as we upgrade Link 16 or in some of our other products. And then the portfolio and products, you saw we're going to continue to look at our portfolio to see what we want to keep. We'll be working closely with the Business Review Committee. We already have some ideas in process here that we'll review with them probably in January. And then we'll exit product lines that don't move the needle and aren't strategic to us. I think, hopefully, one of the challenges you all have is understanding what does L3Harris do. I think we try to keep it at a high level, focused at domains, focused on the significant things that move the needle. And the little things that really aren't strategic, we're going to look to monetize and exit. All right. Free cash flow for the 3 years, cumulative $7.5 billion. We'll start with organic growth. We've highlighted how we've positioned the portfolio. We're going to grow organically. We're going to improve the margins, and there are still balance sheet efficiencies to be gained. We can talk about working capital. But every day, our working capital is now $45 million. A couple of years ago, I told you it was $35 million. But as you grow, it becomes more significant. So a day of working capital is $45 million. We have some assumptions built in that we're going to continue to reduce our day's working capital. That's going to give us $7.5 billion of free cash flow. What are we going to do with this free cash flow? All in unison, pay down the debt, right? We're going to get to 3.0 or 2.95, a little less than 3.0 for those that like to be precise. The good news here is that what we have effectively done since we talked to you in October is we're moving it to the left. As a result of the Commercial Aviation divestiture that we announced, that's going to give us $600 million of cash. The message here is we're going to be paying down our debt and hitting the 3.0 target a year earlier than we had previously forecasted because it's tough to forecast divestitures we've announced it, and that will allow us to increase the share repurchases sooner than previously planned. It's a graphic depiction of what I just said, we'll have $8 billion. We need to pay down $1.7 billion of debt in 2024. Most of that is commercial paper, so that will be easy to do. And then we will maintain our dividends. We've had a dividend increase for 22 consecutive years. As you've seen the last couple of years have been low single digit, I don't expect anything significant. Obviously, it's subject to the Board of Directors approval. But in a per dollar basis, it kind of averages $850 million a year. So even if we have a modest increase in the payout with the reduced share count, it doesn't really change the cash amount, and that would leave $3.7 billion available. For the repurchases through 2026, we have an authorization of $3.8 billion, probably in a year or so, we'll get the Board to update that as well. So hopefully, this is crystal clear, and I think it's a good graphic depiction. So my last chart is just to reemphasize what we're looking at. $23 billion with the current portfolio in 2026, excluding Commercial Aviation; at least 16% margins, $2.8 billion of free cash flow. We'll give you much more detail in January when we wrap up the year. And with that, I'd like to turn it over to Mark.

Thanks, Chris, and thank you, everyone. That concludes the formal part of our presentation this morning. We're going to take a 10-minute break, set up the stage for Q&A, and then we'll begin that session. [Break]

All right. Welcome back. So we'll start our Q&A session. I think in the agenda, we had said that this would be about 45 minutes. We kind of promised everyone to be done by 12:30. We want to meet that commitment, so everyone can make their flights. So we'll start out. I'll have a couple of mic runners in the room. We did get some online questions, had about 400 people watching online. So I'm going to start with a couple of those, and then we'll go open it up to the room. So just raise your hand. When the mic runner comes to you, please state your name, company if you'd like for the record, and we'll go ahead and kick it off. So a lot of financial questions coming in during your presentation, Chris. You mentioned working capital and the $45 million. What should we expect for working capital in 2024 and over the medium term in the assumptions that you put forward for the commitments that we've made?

All right. Should be putting these over to Ken, but it's his second day. So we were at 64 days when we did the merger, and we set some aggressive targets to get down into the mid-40s or lower 40s. We made some pretty good progress in 2021. I think we got to like 55, 53 days to '21. We ramped back up to 55 days in '22 as we were buying inventory for the pandemic. So to answer the question, we should end this year in the 50-ish range, and then we're looking at a couple day improvement year-over-year to drive to the numbers. Ultimately, getting back to the kind of the mid-40s by 2026. That's what we built in the plan. I think it's achievable.

All right. Thanks. Earlier, you had mentioned a 5-year plan around Aerojet Rocketdyne. So maybe, Ross, what is your view on where -- what the potential is for this business and where it could be in 5 years?

Sure. Let's get straight to the heart of it. So I talked in my presentation about some great tailwinds for the business, in particular related to Defense Production Act, which is going to substantially increase our ability to produce some of these key weapon systems such as GMLRS, Javelin and Stinger. So when we look at the historical constraints in this business, a lot of it has been related to throughput, and we see a lot of that being alleviated over the next few years. So we -- I think that in 5 years, we see a very clear path to going from roughly $2.5 billion to $4 billion. And additionally, related to that, OI on the order of $500 million and cash flow as well. So I think it's optimistic about where we can take this business in the next few years.

Thanks, Ross. Maybe one more and then please just raise your hand for those in the room. This is kind of a space question. We're really doing Link 16 in space. So Sam, I know you mentioned Link 16 in space. How big is that today? And how big is the opportunity? And how do you think about that opportunity going forward?

Yes. Thanks, Mark. Well, a few weeks ago was the first transmission from a Link 16 terminal in space. So I'd say we're very much in the early innings of that proliferation. I mentioned 20,000-plus platforms and none of them, actually not one of them, in space. So I think there's a lot of upside and a lot of growth. And one of the advantages we have being part of this great enterprise is the ability to leverage resources that Ed and his team have understanding space, not only the growth in space, the market, but how to harden some of our equipment and terminals to be able to survive that very difficult environment. So our teams are already collaborating to position us well to be the premier space Link 16 provider.

Okay. We have a question here on the left-hand side. Kristine? Speak close into the mic.

Great. Hey, guys. Too close. Kristine Liwag from Morgan Stanley. Thank you for all the details today and the tour this morning and yesterday. So maybe, Chris, it's been 3.5 years since the integration of L3 and Harris together. And I guess I would have thought that we'd be in the periods of harvest for the combined entity. So how necessary is the investment period over the next few years in order to get to your margin targets?

Yes. I think we actually -- great question. Thanks for coming down. I think we actually -- hasn't been 3.5 years. It took about 3 years from the merger until we realized and declared the official integration was over. So that really got us to 2022, just to be more accurate, right? So we're about a year outside of that period. I think we took care of the low-hanging fruit, right? We had 2 headquarters, we went to one. We had 6 segments, we went to 4. Put out a bunch of RFPs for the supply chain, back when the supply chain was a different environment. Got a lot of good prices on then, mainly on indirect, closed a few facilities. The reason I started by giving that history of these approximately 200 acquisitions is the complexity you saw in Jon's presentation and others. This is why we're rolling out LHX next to get to the next level. We could operate as we are today, but it really doesn't get to where we want to go with our margins and increase the competitiveness. So this is kind of wave 2 that we've laid out. I'm excited to work with the Business Review Committee of the Board. We got a lot of great talent there. I think you saw in the release, Bill Brown is going to be a special adviser. So he and I worked very well together during our time. He has a lot of knowledge of the company. I think it will just make it go a heck of a lot quicker, and I'm looking forward to it. This is again over and above the continuous improvement, and I don't think a lot of companies go this next step. They do the low-hanging fruit, you do the easy thing, you save $660 million, you declare victory. You get a surge in your margins in the near term, especially as a government contractor, but this is the next step that needs to be done.

Thanks. Next question. We have one right here.

All right. Thanks. Myles Walton, Wolfe Research. Chris, maybe we can start with you if that's okay. You highlighted your conversation with Speaker Johnson and the optimism he had about appropriations in the first quarter. I'm curious, do you share that optimism? And regardless of that, what is the sensitivity for your outlook for '24 under a CR or 1% less than last year?

Yes, great question. Well, my optimism is only based on all the meetings I have in D.C. I think I'm going to lateral this to someone in the front row to give a little more. A CR has kind of become business as usual. As depressing as that is, I can't remember last time we actually had a budget on October 1. So we've kind of -- we've always built in this 90 day, 120 days. So the CR is not going to be a significant headwind to us. We all know you can't have new starts. You can't increase the revenue on existing programs. Now if we have a 1% cut in the doomsday example of a sequestration again, then I think the entire industry has got to relook at that. That is a serious headwind to the budget, and then the services are going to have to decide where they cut and what they do differently. So that would be hard to predict. We all recall last time we had sequestration. No one would be dumb enough to actually trigger it, and we did trigger it as a country. So, so much for that. I'm thinking the second time around, nobody is going to make that same mistake. But Tania Hanna who runs our government relations business, she's in D.C., came down and I rely on her for getting all of our meetings in D.C. and her insights. You want to stand up and face the audience? Add anything you want?

Sure. Good afternoon, everyone. As you all know and as Chris talked about earlier today, the geopolitical threat environment is very complex and dynamic. And as a result, we've been seeing increases in the defense budget. We can talk about the role of inflation. But overall, from a top line perspective, we've seen an increase in defense budgets, when you look at the '23 numbers and compared to the '24 numbers of a 3% increase. What's interesting is that the investment accounts are growing at a faster rate than the top line. And you all know the investment accounts are the procurement and RDT&E accounts. When you take into consideration that $58 billion supplemental request, depending on how you do the math, and the math is complicated in the supplemental because it's a little intentionally ambiguous, you get another 6% to 10% growth in the investment accounts. It's extraordinary. And what's wonderful or interesting about the growth trajectory in the supplemental is it's focused on missiles and munitions. And given the acquisition of Aerojet Rocketdyne, we are very well positioned to help support the DoD's growth trajectory in that regard. But really quickly, let me give you an overview of where we are in terms of shutting down or completing the '24 budget cycle. As you all know, the National Defense Authorization Act is almost completed. There's agreement from House and Senate leadership as well as the White House to get that bill passed before Congress recesses for the holidays. What's interesting about the top line number for the President's budget request is that $842 billion PBR number, which is aligned with the Fiscal Responsibility Act that was passed in June of 2023. And as you all know, it cost Speaker McCarthy his job. Speaker Johnson last week put out a letter to his entire Republican caucus and he said, "We are committed to passing the appropriations bills aligned with the Fiscal Responsibility Act". That's a powerful message to send to his Republican caucus. He also noted and the long pole of the tent is a supplemental bill. And he wants transformative border security reform before the supplemental will be taken up in the house. Senator Lankford and Senate Democrats are working together to try and achieve a compromise. I think Senator Lankford said it perfectly when he said, "Failure on the supplemental is not an option, so we have to come to agreement". Will that agreement happen before the end of the year? Probably not. But there is a commitment to continue working and driving to get the supplemental done, probably in Q1 of '24. One point about the continuing resolutions, as Chris noted, we know how to operate on a CR. There have been between 2 and 7 continuing resolutions since 2010. So this is normal course of business for everyone in the aerospace and defense sector, including the DoD. And then one last point on the portfolio-shaping strategy we've embarked upon. As you all know, the defense budget tells you where the DoD customer is going. And when we compare where our customers want to go, whether it's in the air domain, the space domain, the cyber domain, the maritime domain that our segment presidents talked about, and they talked about it in the context of a trusted disruptor strategy, we are well aligned with that defense budget and are prepared to win. Thanks.

Thank you. We're going to put Tania on the agenda next year, Mark. Great answer.

We have a couple up here. Yes.

Yes, really quick. Jason Gursky from Citi. Jon, this is for you. You mentioned in your slides or your presentation that 50% of your business is stable. So I'm wondering if you can talk a little bit about the other 50% and just the risks and opportunities that you see there. And in particular, particularly given Ed's comments about air moving to space, you've got a lot of air programs going on there. But you mentioned sea as being a potential grower for you. So I'm just kind of curious what kind of product overlap we have on air going in to sea? And how does that transition happen smoothly? So we've got nice, steady growth there? Are we going to have some years where you're going to have some revenue declines? Offset by revenue growth in some later period?

Sure. Yes. And just to build out the pie chart, if you will, I talked about 50% to 60% of the portfolio being production, sustainment, modernization, more steady predictable business. We have about then another I'd say 20% or so, which is more product business. So think of the WESCAM business out of Canada, for example, and then the balance of that being development programs. The development piece, so I would say that the product part of the business, the production sustainment modernization pieces tend to be pretty consistent year-over-year with that nice expected upturn in revenue. The development areas where we do see a little bit more lumpiness and that's driven predominantly by the ISR business and particularly the programs where we acquire aircraft and missionize them. So we get questions from time to time. Why is Q1 this year lower than Q1 last year? Well, Q1 last year, we bought aircraft for our international business jet program. Margins on international programs can be different than domestic. So there can be some margin fluctuation and some revenue fluctuation driven by those aircraft procurements. So that's kind of how the portfolio breaks down and where you can see some lumpiness versus where you can see the stability. In terms of the air domain, the past -- the permissive environments as compared to the contested environments where space becomes more important, Ed and I have that dialogue on a continuing basis. We have it with Sean, who really drives our overall sort of global strategy and how we think about doing all-domain command and control. We work with Sam as part of those conversations. And I don't think of it as much as an either-or as it is a both. You're going to need to have the aircraft that we provide in the ISR portfolio, particularly during peacetime, right? We operate daily off the coast of China, off the coast of Ukraine. We're absolutely utilizing those aircraft. At the same time, there are certain capabilities that make sense to either shift to space or replicate in space because when you get into a conflict scenario, you want to have the option to leverage the space assets more heavily. So I'll let Ed sort of pile on and give his perspective.

Yes, I think, Jon, you said it well. I mean we need both of these capabilities. I mean clearly, your aircraft will be used in the peacetime environment. But think of the contested environment. It's what I call highly contested as kind of night 0, day 1, day 2, day 3. At some point, Jon's aircraft come into play in any type of fight after we've secured enough of the airspace. And so the capabilities that are inside of your portfolio, the Rivet Joint and others, are just critical to our nation. In fact, one of the advantage that L3Harris has is with Jon's airborne capabilities and the capabilities that exist in SAS, we now have a rich heritage that we can pull upon to move those and migrate those capabilities to space. And so it really becomes an end function across the board. We'll need these capabilities in a peacetime. We'll need them for regional conflicts. Our international partners are going to need them, and we're going to need to integrate them. Our space customers aren't talking about a migration. They're talking really more about an integration where we're integrating contested air capabilities in the space. And I think we're amazingly well positioned to do that.

Thanks, guys. Peter?

Thanks. One question for Jon. This is Peter Arment from Baird. So Jon, you just kind of just highlighted the margin differential between first half and second half of this past year and you kind of highlighted it again for next year. But I was more interested when you gave a lot of details around the cost takeouts that you're doing and eliminating a lot of your kind of ERPs and different stuff you're doing. But when we think about just you have a high percentage of fixed-price mix and the risks around that in terms of negative EACs and adjustments. Maybe you could just walk us through just the confidence level, not on the cost side, but just maybe on the bidding side?

Yes, confidence continues to increase. So what I can say is over the course of this year, we've continued to see incremental improvement in those EAC impacts quarter-by-quarter. And we anticipate -- I mean, we do have some contracts in backlog that contain some of those fixed-price development challenges, and we're still working through some of those programs. We understand much better where those challenges are. We have done our best to account for those as we put together our 2024 financial plan. And eventually, we'll burn off that backlog. We've put some new processes in place. It's not just around program management discipline. It's also around the bid process itself. So this year, we've raised what we call our delegations of authority within IMS. So any fixed-price development contract, regardless of value, comes up to my and my staff's level for a personal review. And some of those, we might support if the risk/reward equation is balanced. In many cases, we might say, no, that's not something we want to bid. And we've made some of those tough calls this year, as Chris had indicated. We're also bringing any program that's being bid at less than a 10% return up to my staff level for review. That's not to say we won't ever bid anything below 10%. There are some things that are very low risk that might be cost reimbursable-type contracts, time and materials, reimbursement for travel expenses, those sorts of things. So those things can get through the approval process, but at least we bring them up to a higher level for review. I can also say that of all the bids that we submitted in 2023 that we expect to convert to contracts in 2024, if you aggregate those together, those margins are accretive to how IMS is performing today. So those are the things that really give me confidence that as we get through the first half of the year and into the second half, we'll continue to see improvement. And above all, I think what you are looking for is predictability, and that's my focus.

Sheila?

Sheila Kahyaoglu at Jefferies. Maybe 2 questions. Sorry, Chris. They're not very long term, and they're financially focused. So first one on 2024, the implied organic growth is 1% or so. So maybe if you could just clarify that? And then second, to each of the business unit presidents, the 100 basis points across each of the segments, maybe if you could highlight too the drivers for it. If you could quantify, Jon, I feel like for you, it's 100 bps of how you guys are executing on contracts, and if you guys could elaborate there?

Yes, I'll go first. We'll go just right down the line. It should be 3% is the organic growth implied in those numbers, so 3%. We'll give much more detail, as I said in January, but it's 3%.

Awesome. And I walked through some of the drivers for our OI improvements. Fundamentally, what I would say is it's expanding our capacity and making it more consistent by fixing some of the challenges that we've had with the sub-tier suppliers. But it also is the fact that in our missile business, we have a substantial number of multiyear contracts. And as those multiyear contracts expire and we go into the next contract, we have opportunities to recognize some of the challenges that we've had in the past and embed improvements into those programs where we will be supporting some of the sub-tier suppliers and other areas. So I think we have a pretty confident path on how to achieve that.

And I would add, we have a confident path on a 100 basis point improvement. One of the things I mentioned during my presentation was really the investment we made to become a space prime. That is largely behind us now. That will, in part, fuel a large part of our margin expansion as our space business becomes even more profitable for the future. The second thing I'd say is that when you look at our backlog, although they are very long-term contracts that last, I would say, over decades, they come in 2- or 3-year increments. And those -- most of those contracts now are burned off. And as we look to the future contracts, we've now bid in the cost of the labor inflation and the supply chain inflation that we've seen during COVID. And so as we bleed those -- we finally bleed those contracts off that we executed pre-COVID, we have new pricing structures in place for all of our new awards, which will significantly increase our margins as well. So those are just a couple of the levers that we're using inside the segment.

Three things, if you want to continue onto the margins. Three things in IMS that really are going to drive the margin improvement. First off, I talked about making sure we're submitting bids that not just are winnable but are executable. So I talked about the revision to the delegations of authority to make sure we're looking at low-return proposals and more risky proposals that would include fixed-price development. One of the other things we've implemented this year, and we're just really getting this process ramped up for our largest, most complex bids, implementing what we're calling an independent, non-advocate review process. We're bringing a panel of outside experts to really pressure test prior to proposal the schedule, the technical baseline for the contract, the cost estimating, to identify any gaps that we might have that could prevent us from being able to perform acceptably on the program. And so that, I think, is really going to help us, especially for the more challenging contracts, to make sure we understand upfront what the risks are in the program and how we account for those to submit a proposal that's executable. Second off, it's about just good solid program management fundamentals. And we're well down the path of making sure we drive that discipline through the entire organization. And then third, it's really about LHX NeXt. Chris talked about some of the enterprise focus areas, indirect spend, for example. You saw in the IMS organization, we have additional opportunities for efficiency around collapsing a number of entities, a number of ERP systems, a number of facilities, number of product lines. So those 3 things are really going to combine to give us that 100 basis points of targeted improvement by 2026.

Yes. Thanks. And on my end in Communication Systems, there's really a couple of factors and a couple of initiatives we're driving. One is around supply chain. I mentioned the difficulties and the challenges in the supply chain. We're quite frankly so focused on scarcity of parts and making sure we get parts in the door, maybe foregone some opportunities to be able to go negotiate with those suppliers. I think with the improvement in supply chain and our backlog, we have the ability on an enterprise-wide basis to leverage enterprise spend, go to suppliers and make sure that we get better pricing over the long term. And we've seen a lot of our suppliers be amenable to that in exchange for better long-term forecast and the ability to be able to take an innovative position on some of our new platforms and products going forward. The second is mix. I mentioned that international is actually going to grow at a faster pace, especially in the tactical radio business then the U.S. DoD. And that mix tends to be very favorable for us. We get higher accretive margins in the international side. We're also seeing an increasing trend towards software and licensing revenue, which tends to be extremely accretive to the business and the enterprise. I mentioned more software-defined radios will make their ways into market. Each one of those presents an opportunity for us to license additional software and waveform at those accretive margins.

Okay. I'll take -- Matt, I'll do you in a second. I want to take one that's -- a couple have come in online really around the CFO transition. Ken's in the audience today. Maybe this question is really for Chris, I guess. But I wanted to get initial thoughts on Ken joining the team and really how that relates to the financial plan going forward that you presented today.

It sounds like a Ken question. So Ken, turn on your mic. Look, I've known Ken most of his professional career. You guys know his credentials. You know him. He's going to be a key part of the team. He started yesterday. He's here through the rest of the year. We're going to go through the plans in detail. He's already started doing it a week or so when he signed an NDA. So obviously, it's too early for him to sign off on it, but we have a good process. The planning process is year-round. He's got a great team, so I have the utmost confidence in the '24 and '26 numbers we threw out. But Ken, why don't you make any comments? You feel free.

Yes. Great. Thanks, Chris. I appreciate the opportunity to say a few things. And I'll just maybe start by saying, great session this morning, and I think you all see why I'm so excited to join this team and this company and support Chris in what he's doing and work with my colleagues here to really drive shareholder value to help profitably grow the business, to generate lots of cash that Chris talked about, and to start to execute on the LH NeXt, which I'll really call it, LHX Now. It's time for us to execute on that. I think there's a lot of opportunity. I look forward to working with my colleagues and the other stakeholders who will be helping us in that process of operational excellence, really focusing on how we do, what we do and realize the margins that I think we can and quite frankly, I think, deserve with the capability that we bring and with the intellectual property, the hardware and the software capability that this company has. So really looking forward to supporting Chris and what he's building and how we're moving forward as L3Harris and really operating under the LHX NeXt, LHX Now process, as we move forward. And I look forward to making sure that we say what we're going to do, and we meet those commitments, and I'm looking forward to getting to the 2026 numbers that Chris put out there.

All right. Matt?

Matt Akers from Wells Fargo. There was a slide in the Rocketdyne section on the missile, the various parts that you guys can address. I think it was around 75% that L3Harris addresses now. Is there an opportunity to look at the other 25%? And I guess, to the extent that there are kind of new missile programs in the future, would you think about addressing those maybe as kind of a stand-alone prime?

So that's a great question. And part of what we've thought about very carefully as we were pursuing Aerojet Rocketdyne was the opportunity to really capture as much of the missile market as we could. And I noted that if you look at all of the missiles that are fielded within the United States right now, Aerojet Rocketdyne is on half of those missiles. So we have a tremendous amount of content. And as a result of that, we want to make sure that we are absolutely committed to being a merchant supplier and to get on many -- as many missiles as we possibly can and then pull through additional compelling content from the rest of L3Harris. You're right, when you look at that picture, we have a presence in many of the subsystems associated with that right now because of the strategy that I stated, where we think that there is a better opportunity for us to gain more content in missiles and weapons to be that merchant supplier. Now that said, we have in the past pursued some study contracts to understand the missile business better. In most of those cases, these were paper studies to look at next-generation missiles, building missiles as open systems, so that you can pick the best of breed. In some cases, it might be that the Department of Defense themselves will serve as the prime and the integrator for some of these capabilities and then go out and buy individual subsystems like the motor, like the guidance themselves, and using open interfaces, integrate this into a different -- a new capability. So right now, I don't see that we are intending to become a missile prime, but we will certainly continue reviewing this on a regular basis as the Department of Defense and the Air Force and the Navy change their strategies on acquisition. We will certainly be open for looking for opportunities where it makes sense.

And I think it's interesting to reinforce, how many competitions have there been for a new missile? Three in the last how many years?

Three in the last 23 years.

Three in 23 years. Okay. Well, I don't know when the last one was, but it feels like we could be 7 or 8 years away.

You're exactly right.

All right. We'll talk then.

Okay. Next question coming here.

Sure. Byron Callan, Capital Alpha Partners. Three quick questions. When you talk about NGAD, are you also including the combat collaborative aircraft program, CCA, as an opportunity set? Or is that separate and distinct? Second thing, no one mentioned Replicator. And I know there's a lot of mystery about what that actually is. But when you hear Dr. [ Le Plan ] talk about it, he's really talking about kind of getting the department to move faster, getting muscle movement. So how does that fit into your thinking? Third, if I may. Flat budget environment after FY '24, a lot of this isn't going to be executable. Everybody would say they're well positioned. But do you think in that kind of environment, you're better positioned because we're going to just spend more on this new stuff? We're going to upgrade older stuff? How is that going to play out later after FY '24?

Yes. So a lot of great questions there. And so let me start with -- so NGAD. So when we look at the next-generation systems, you can clearly see in the budget that NGAD is taking a larger and larger part of the department's budget. I mean, clearly, that is a focused platform that will be the premier next-generation aircraft that will penetrate highly contested space. I did not lump in combat collaborative aircraft as well. You've heard -- we've heard the Secretary Kendall talk at length about combat collaborative aircraft. I think the thinking there is continuing to evolve. I think the initial thinking was that potentially a collaborative aircraft for the B-21, then I think it became too expensive. And there's a couple of different increments of combat collaborative aircraft working their way through the department right now. And so I would say that the thinking is continuing to evolve. But I -- we definitely, I think, all see a future where there will be thousands of these combat collaborative aircraft team with an F-35, for example, to go into a fight. Replicator is interesting. It's another attempt to go fast and put lower-cost systems out into the air space with our customers. I look at CCAs and Replicator as something that we're keeping a close eye on. But when you look at the budget line items for these, there's just -- we don't see the budget that we do see in other parts of the business. Most of the budget dollars are continuing to go towards modernization. Like it or not, we have the platforms we have today in the U.S. portfolio. And they need to be upgraded to help them survive whatever fight that we're going to move into. So we have a very stable revenue base that will serve us for years to come with all of the modernizations and many more that I didn't show you on this slide for other classified platforms. And so I think that really, we're talking about the bridge to the next generation. NGAD is going to be on a much longer time line. Experimentation with CCAs will continue, and we'll be part of that entire ecosystem over time.

And on 2024, Byron, first of all, I'm not sure that the budget is going to go down. But assumption -- or flatten out, but...

[indiscernible] 1% or 2% [indiscernible] I was already thinking about [indiscernible]

Okay. Yes, we'll -- I'll -- let me say something, then you can chime in and give a better answer. It's the -- well, first, we got to get through the election cycle. But put all that aside, I spend a lot of time on the portfolio for that very reason. And again, the hardest -- one of the hardest things you all have to do is try to figure out what it is we do, right? So we don't actually have that single program that's so darn large that it moves the needle or as a single point of failure, right? So when you talk about the software defining the modernization, comms, it's a given. You need to have the resilient comms. We talked about how we can update that with software, right? Ed's air platforms, we're constantly upgrading those, whether it's F-16, F-18, F-32, F-35, EW, F-22. We have all that. The space, right, our solutions, as you saw last night, they're smaller, LEO, quicker. So I know it's frustrating because everybody says they're well positioned. I believe we're well positioned because we've actually done things to get well positioned. This isn't a 5-year-old, 10-year-old portfolio that we're spinning. We have taken concerted effort, action, bought things, sold things, invested, so I like where we are. But go ahead, Tania.

Byron, good point on the FYDP, and you're absolutely right. When the PBR rolled out for '24, the out years were flatlined at 2%. But just a color and context, when Mike McCord spoke to the 2% FYDP growth, he mentioned this was a placeholder and a placeholder only. So we'll have to see what the FYDP growth looks like. Obviously, if there's a $58 billion supplemental, yes, that 2% looks a lot more interesting. Thanks.

Okay. Next question from Ron.

Ron Epstein from Bank of America. Maybe back to that same point, Chris. When you think about the portfolio, I think on the guide you gave on revenue growth, it's a little -- it's like 4.8% or something when you get out to '26. I would expect it to be higher, maybe given everything you guys have presented? No?

Well, 2026 is a ways off. I think I've said we have some conservatism built in there. First time I've given 3-year guidance, so I think the more interesting number is the 16% margin and $2.8 billion free cash flow. But again, that includes our portfolio today, including some non-core assets, which we're looking at divesting, which have slower growth rates that probably belong with a different owner. So I think your math's right.

Got you. A second one, if I can. On the LHX NeXt, when I was -- when you're going through a lot of that stuff, and maybe this is just kind of following on Kristine's question, it would have seemed some of that should have already been done. No? I mean even back to the L3 days, moving numbers of whatever, down from 80 to 4 to 2, I mean I just kind of sat here scratching my head, like didn't that get done already? Or what am I missing?

It did not get done. First of all, L3 was more of a holding company, as you well know. I joined late '15, call it '16. We started investing in systems, first and foremost, in supply chain to figure out the data. It was 88 different fiefdoms. You go way back, I think 90 different people reported to Frank Lanza directly. It was a different model, so nothing was done. One of my objectives when I got there was to start that integration, then we ended up with the merger, which I viewed as an accelerant and a way to get there. So it wasn't done, plain and simple. Again, relative to the integration, I think we got low-hanging fruit. I highlighted some of the things we've done. But when you sit there and you have over 100 ERP systems in June of '19, I don't know how anyone would think we'd have less a couple of years later. It's not easy, and that's why I went through that. We're progressing. And there's a lot of companies out there that could just declare victory. We're not there. We're going to continue to migrate, invest in technology, consolidate the system, simplify the business, fewer entities, fewer disclosure statements. It's a journey, and we're on it. The nice thing is if this was all done, it would be a boring job. This is a lot of excitement, a lot of opportunity, and we've got the team to go ahead and do it.

And then can I do one quick one?

Sure. Go ahead.

Yes, just a quick one. With this transition from the exquisite to the proliferated, what kind of risks are you taking on in terms of the production system, in contracting, right, because it's a dramatically different model?

Yes. So the great thing is our customers making this transition, they're awarding, I would say, Pathfinder programs. So if you look at -- we could use SDA as an example. Their initial tranches were only a few satellites. Many of you that have gotten to see the tour today, like all of you who have seen the tour today, we've seen that the first tranche was 4 satellites. And so it gives industry a chance to understand what the risk posture is on a small number of satellites to make sure that we have mature solutions and so that we're bidding the next tranches. In the Space Force, they call them [ EPICs ]. They're following the same process and methodology. So in the Space Force, we've initially won a study contract. The study contract will then move to a small number of satellites, and then it will build to a larger number of satellites. And so that gives industry a chance to de-risk and build confidence not only for us but for our customers that we'll be able to deliver on time, on schedule, with the cost performance we all anticipate.

One here.

Chris, on the next program, you today have doubled the gross run rate number, if I have that correct, versus what you provided when you reported the third quarter?

That is correct.

Can you talk about that process? I mean that was only 5 or 6 weeks ago. You referenced the feedback you get on the gross versus the net. How much of it is top down? Given the gross versus net, we have to find more? Versus organic individual items? And how did you find all of that in that short window?

Yes. No, we had an internal plan that we laid out. We've been working this since the summer and October, right? So we talked about $500 million back in October. There was a little bit of conservatism built into that. I think given where we are and our focus on margins and the opportunities we have, we decided to commit to a heck of a lot more. And this, again, is over a 3-year period through 2026. So the last one was kind of -- I think, in effect, we added 6 months to it because we were talking about which we have started in July 1 of this year. So we got an extra 6 months. And we're going much more aggressively on the supply chain. That's really the big change. We ran some pilot programs. I don't think a lot of companies go after direct supply. We had some good success. So we've really doubled down the efforts. That's really the big driver.

Okay. That's helpful. And just a follow-up on the organic revenue growth profile. Do all of the businesses in the '24 number have some growth? Are any of the segments kind of...

Yes. All 4 segments are growing organically. All 4 are growing margins.

And is there any concentration in the '25, '26 within the segments? Or is it pretty evenly distributed?

I think everybody is growing different percentages, but all are growing their top line and their margins year-over-year.

All right. Thank you.

Behind you, if you want to pass it.

Doug Harned, Bernstein. Chris, you were commenting on sort of the legacy L3 and how it was pretty much a holding company for quite some time. If I listen to what you all have said today, I mean, Jon, you talked about special mission aircraft and the added value of growth coming from integrating across the capabilities in L3Harris. That was once not the case. When I listen to each of you talk about the advantages of the broader portfolio you have, what is different now that will enable you to grow by -- what's being done at corporate that enables you to grow by working across your segments? And how much of the growth that you're projecting out to 2026 comes from that integration as opposed to just individual businesses growing?

Right. I think I'll try to break the integration into 2 different things, so I think we might be talking past each other. One integration is just the infrastructure, running the business, the IT systems, the number of facilities, all that type of stuff. That consolidation starting is underway. That's a big part of LHX Now. I kind of like that one, Ken, so we'll go with LHX Now. The other integration is how do we take our capabilities and products together to better serve our customers. So from a corporate perspective, we have what we call our priority proceed programs or priority programs, where we look at these things that are strategic and cross domains and cross segments. I think ultimately, it starts with leadership. And you can tell this team here is very collaborative. We work together for the good of the company and for the good of the customer. We sit in each other's strategic reviews. We have classified meetings in the SCIF, where we disclose what everybody is working on. So I think that's a big difference. We go to Washington as a team. We meet with Congress. We meet with the Pentagon. And again, we know where the customer is going. We lay it out. We have Sean Stackley, who oversees our strategy, BD and program excellence. He's well connected, has the connective tissue to bring it all to fruition. And then we've even -- our compensation plans are such where we all are rewarded for the good of the enterprise. While we have individual targets for the business, we all kind of win together, lose together. And speaking of comp, we will be making additional changes in 2024 based on discussions with the Comp Committee Chair that's going to focus even more, in the near term on our annual bonuses, on LHX NeXt and margins and, in the long term, with our TSR being an integral part of our LTI. So we're trying to align all those levers we have to achieve the right objective. But ultimately, I think it comes down to teamwork, mutual respect and trying to do what's best for the company and the country. And that's what we're all doing.

Mike?

Mike Ciarmoli with Truist Securities. I guess, Chris or Ross, the '26 planning period, how do we think specifically about the solid rocket motor environment? Aerojet, Lockheed being a 30% customer. They've been pretty outspoken about qualifying or standing up a new SRM player. There are some upstarts out there. So just how do we think about maybe that competitive threat or the evolving dynamics as there's clearly a need for more rocket motors in the marketplace?

Yes. Absolutely. Maybe I'll take this. So I'll start with the new entrants into the solid rocket motor business. And there's a number of flavors of these. There are companies that are 3D printing the energetics, so that's the part that includes the fuel inside the cases. There are other companies that are experimenting with different formulations to give different fuel economies, if you will, for how these rocket motors work. Personally, I'm excited to see those new entrants entering the market and investing in new capabilities and new technology because Aerojet Rocketdyne, we're also investing in that kind of leading-edge research to understand how we could squeeze more performance out of these motors and how we can build them quicker. So I like it that there's now healthy environment in solid rocket motors and there's excitement about trying to figure out how to make these better because I think it will make all of us -- it will improve all of us, and we'll be able to sort of piggyback on top of each other and move out. When I think about the challenges associated with being in the solid rocket motor industry, I talked specifically about the Standard Missile, SM-6, and that when we dug into it and really researched what was going on with our challenges in delivery of the Mk 72 and Mk 104, and it came down to sub-tier suppliers. And some examples of that issue are small companies that are sole source that were qualified to build that component, perhaps in the early '90s, and there is only one company that has been qualified to do that. So if we look at the new entrants into the market, whether it's one of the new companies or whether it's Lockheed deciding that they want to invest in a third player in the solid rocket motor industry, ultimately, those companies are going to be going to the same sub-tier suppliers as we are. And if we don't fix those bottlenecks, we're all going to continue to be challenged. So I think happy to see competition. It will make all of us better. But at the same time, if we don't solve these sub-tier issues, everybody is going to have that same challenge.

Okay. Scott, maybe we'll take the last one in the room. I know we're coming up on the half hour.

Scott Deuschle from Deutsche Bank. Sam, what percentage of the installed base of Army radios is currently software-defined? And as we think about that installed base growing, is there a point where the sale of waveforms and software becomes a larger contributor to tactical radio EBIT than the sale of hardware itself?

Yes. Right now, we estimate, I would say, and it's consistent, I think, in the Army and the global, we're probably about 50%. We're about halfway penetrated with software-defined radios. So we expect that modernization on the radio monitors, we're halfway through Army modernization. So that kind of makes sense intuitively. I think what will happen with the proliferation of software-defined radios, once we have this installed base, is as we increase our portfolio of waveforms, I think we have more than 65 secure resilient waveforms in our portfolio. And customers want to continue to add that capability on. Even though software-defined radios will have to be upgraded with additional capability and additional capacity to be able to run all these waveforms that are, in and many times, optimized for a specific threat environment. So we see it as a very cyclical business for us to be able to upgrade, provide that software, and then similar, I guess, to your iPhone or your personal device, right, have to upgrade your hardware periodically to take on that additional software and waveform capability.

All right. Thanks. Look, I want to take one question online, and I like it because it's kind of pulls everything together. So Chris, you laid out what appears to be a really solid path for the company, both from a financial perspective as well as the team. What are you most excited about in the years ahead in executing this plan?

All right. Am I the only one to answer it? Or are we going to go down the road?

We'll go down the road.

We'll go down the road here. Nobody is going to miss their flight. What I'm most excited about the future? That's an easy answer. But the future is bright. I love the strategy. I love our portfolio. I love the team. And I'm optimistic about the future, and I'm looking forward to it. Maybe you guys can give a more specific answer, but that's what excites me every day.

Sure. I think for me, I couldn't be more excited about the acquisition of Aerojet Rocketdyne. It truly is a national asset with unique capabilities, unique facilities, unique products. And as Chris noted, we continually hear from our customers that they believe that we are one of the most innovative solid rocket motor providers in the industry. I'm excited about taking this national asset and really having it live up to what it possibly can be. And I talked about where I see the business 5 years from now, I couldn't be more optimistic about our ability to actually achieve that growth and achieve those margins.

Look, I'm very excited about the performance of the segment. We're going to close out the year with very strong growth, record backlog and a record amount of bids submitted this year. Hopefully, I've convinced you during my presentation of where we stand in SAS and the next-gen architectures, especially in space and cyber. In space, we have now cemented ourselves into 4 key market segments as the next-gen provider of critical systems. That is a fantastic place to be, and it's just the beginning. You can see the facilities that we're constructing for the planned growth that we already have upon us today and more growth to come. In our cyber business, I am thrilled to now be entrusted microelectronics. Hopefully, the next time we do this in 2 years, we can take you through a portion of that building and show you what we do. But it really will fulfill a compelling need for our nation. And we talked a little bit about the airborne market. I didn't spend a lot of time on it, although to say that we now have an opportunity to prime airborne capabilities as they transition. But look, we're going to be part of NGAD as well as it moves forward. It's just going to be on a longer time horizon. So I'm very excited about the portfolio inside the Space and Airborne Systems segment and very excited about next year.

All right. Well, I'm most excited about making the pivot in IMS from the stabilization activities really to more of that optimization effort that I talked about in my presentation and in the answer to some of the questions. And I guess, more broadly on the longer term, looking forward to being a part of unlocking the full value of the L3Harris company. I said in my opening remarks earlier that I came here really to be a part of that trusted disruptor vision, to do something different and something special in this industry. And I really see, in a short period of time since the merger, the different parts of the company coming together, collaborating. It starts at the top. It's Chris's spirit, the culture that he creates, and how that flows down through the organization. And I think as we continue to build some momentum here, it's going to be a really exciting time for the company. And I'm excited to be a part of it.

Listen, I'm excited to be part of this team. Well, I think we're very well coordinated. Jon mentioned we're collaborating across segments in a way that maybe previously we haven't done before. And we're creating complete solution sets for customers, right? So yes, customers want to buy individual pieces or products within our portfolios. We can do that. We're stringing them together under Chris's leadership and going to customers and being able to provide a more comprehensive solution. And we not only see this. I think the collaboration at the working levels, our teams are collaborating more seamlessly. So I think there's a lot of energy in the organization towards making that growth profile, but doing it as a team together, not just individually within our segments.

All right. Let me wrap it up here. I want to thank 2 groups. First of all, I hope -- we'll be sending out a survey, right, to get feedback. I think you can tell the amount of time and effort went into prepare this thing. It was perfection. I got to thank Mark and the IR team, our comms team, the AV guys, the IT. I mean, literally, we had hundreds of people working on this over to get ready. Late nights, weekends, the whole 9 yards. I think they deserve a nice round of applause because -- amazingly, I haven't gone to our competitor's Investor Day, so I don't know how it compares. But we'd love your feedback under our culture of continuous improvement. And then I've got to thank everybody here in person and on the webcast for showing the interest in L3Harris. Great questions. I know it takes a lot of time around the holidays to come down. We're going to make this a recurring routine. And again, we're excited about 2024. We're going to wrap up 2023. I wish everybody the best over the holidays and look forward to staying in touch in the weeks and months ahead. Mark?

Thank you. You covered it there, Chris. So again, thank you, everyone, for attending, and we'll be in contact soon.