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

Okay. Good morning. I'm Doug Harned, Bernstein's senior global aerospace and defense analyst and really happy to have with us again Chris Kubasik, Chairman and CEO of L3Harris. With us also is Ken Bedingfield, Chief Financial Officer. I think to start -- I think, Ken, you got a couple of things you want to say, and then we'll go into fireside chat.

Yes. Great. Thanks for having us, Doug. We're excited to be here. And I just want to start and say that today's comments may include forward-looking statements, and those statements involve risks and uncertainties. And I would refer you to our SEC filings for more information on those risks and uncertainties. Thank you.

Great. Chris, if I go back December 2023, you had, what I thought was a big event, your investor conference in Florida. Since that time -- right at that time, Ken joined as CFO. You added 2 new Board members. You set new targets for the company. You're underway integrating Aerojet Rocketdyne. When you look back over the last 18 months, how do you see what's happened there? Has it met your expectations?

Yes. Thanks, and thank you all for joining either virtually or here in person. No, I think as I look back over the past 18 months, I feel much more confident in our 2026 framework today than I did a year ago and 18 months ago. There were a lot of uncertainties, but we've made great progress. We laid out $23 billion of top line revenue growth. We're on track to get that. I think when you look at some of the tailwinds, whether it's the skinny budget as we call it, for '26, the fact that there's $150 billion of reconciliation. In fact, Saudi laid out $142 billion. A lot of details to come forward, but there's clearly more tailwinds and headwinds on the revenue growth. I think our strategy and business model is unique. We're the only company that has no problem being a prime, a sub or a merchant supplier. I think that gives us a unique opportunity. And we're also 20% commercial. You hear a lot about commercial business models. 20% of our business to the Department of Defense is, in fact, commercial. We can talk more about that. The margins, we've already increased our margins. We have industry-leading margins approaching 16% that would get to 16% by 2026. We're now saying more than that. And then ultimately, cash, we have a good pathway to $2.8 billion of free cash flow. So everything seems to be coming together rather nicely, in my opinion. And LHX NeXt is the program we laid out to do 2 things, number one, to streamline the organization and cut cost. We set a goal of $1 billion by the end of 2026. As of today, we're right at about $1 billion, and we've committed to $1.2 billion. So we're going to do $1.2 billion, maybe more, in 2 years versus 3. That is driving the efficiency. The second part is transforming the company to be much more digital, much more timely in getting data into our executives and program managers so they can make decisions. So very pleased with it. A lot of this is a result of bringing in more and more talent of the leadership team of 12. There's only 3 of us, including me from the merger, a couple of internal promotes and everybody else; segment presidents, the CTO, the CIO, the General Counsel, LHX NeXt, all came from outside. So I get a couple of e-mails a day or a week probably, to be honest, if people wanted to join L3Harris because they see what they're doing. I think it's one of the most exciting places to work in the industry. And we're getting the best talent we can and that's contributing to our success.

When you look at that 2026 guide, where do you see the potential for more upside? Or where may you see some risks in that?

I'll let Ken do the upside because that's fun and easy. I'd say the only risk that I see is the NASA budget. It's been put out there that NASA is going to be cut. It's a small part of our business, specifically the hardiness program where we have some propulsion. It's 1% or so of our revenue. But again, there isn't a lot of support in Congress to reduce the NASA budget or that program specifically. But NASA is probably the only little headwind that we're watching. Everything else is looking pretty good. Do you want to hit the highlights?

Sure. Yes. So we do get some questions, Doug, about the revenue target in particular. And so let me just address that head-on and say, in '25, there were a few things that had kind of slid a little bit. So on F-35, the TR-3 development was ramping down and the production levels didn't quite offset the revenue decline that came out of the development. In '26, that will kind of kick in and we'll see that getting back to growth. There were a couple of space opportunities that given, I think, some budgetary issues with the customer had kind of slid into '26. Now, with Golden Dome and the importance of space, we've seen a few of those slide back into '25, and we'll see that give some growth to our space business in '26. And then quite frankly, I would say Aerojet Rocketdyne is really off and starting to climb the ramp to hit the capacity levels that are needed. I think there's probably a decades-long run of Tactical solid rocket motors that we need to deliver. You saw Aerojet Rocketdyne had 9% growth in the first quarter. That was a short 12-week quarter as well, and we see that continuing to climb the ramp. And then if you look at a large solid rocket motor market outside of the Tactical, there's probably a 20- to 30-year run for large solid rocket motors between Sentinel, NextGen interceptor, Glide Phase interceptor, Zoiss and some classified work. So I think there's significant growth that comes out of that business as well. And then from an upside perspective, just at the end of the first quarter, we announced a significant classified award. There was an international ISR award. And then if we can get a couple of opportunities within Golden Dome to hit, I think $23 billion becomes a number that's relatively easy for us to accomplish. I think we've got a number of levers to get there. I know there's questions of what's the growth rate in '26. I would say we're busy working in '25 to try to get ahead of midpoint of guidance from a revenue perspective to buy down that growth rate a bit. But my feeling is, as I look at the $23 billion in revenue in '26, I feel more confident about it today than I did yesterday. And I feel more -- a heck of a lot more confident than I did at the end of '24 and certainly when we set the target in -- at Investor Day back in December '23. So I think there's a number of upsides that give us opportunity. Growth is exciting, but there's not a lot of companies that can grow the top line while expanding margins and while delivering free cash flow growth as well. And so people often ask us about Golden Dome. How much investment is that going to take? Well, it's great that we were investing to become a prime in space, and in particular, investing to become a prime in space and missile defense, missile tracking and missile warning. And so a lot of those investments are already behind us. We put $100 million into Fort Wayne, Indiana. You may have seen in the Oval Office announcement, Fort Wayne -- our facility in Fort Wayne, in particular, was called out as a facility where much of this capability would be produced. And then we've got final integration facility in Palm Bay, Florida, where we've invested in final assembly and final integration and test production lines there as well. So we're largely ready to go address the Golden Dome opportunity, especially at the space-tracking layer. And I think there's some acceleration and extension opportunities there at Aerojet Rocketdyne as well. So I think it's exciting. I think we've got a number of levers and a number of opportunities to make sure that we hit that $23 billion, at least that $23 billion. And continue with our margin expansion, I think we've had 7 or 8 quarters of margin expansion, 10 quarters of growth, and again, continuing on that path of free cash flow growth as well.

And I'll just chime in. I have 2 quick thoughts. International as well, we've always had 21%, 22% of our business international. I think there's great opportunities there as well, especially in Europe and NATO, where they've been increasing their budget. I know they like to support their indigenous supply chain, which is fine, but there's more than enough work. We're seeing significant wins already this year in Tactical Communications, software-defined radios, networks, billion-dollar win earlier this year in the Netherlands. They call it Netherlands FOXTROT; $0.5 billion in Germany, believe it or not. And I think we call that the D-LBO that stand for Dan...

Digital Land Based Organization (sic) [ Digitalization of Land-Based Operations ], I think.

And the checks recently. So we actually are winning there. I think a key indicator to look at will be the book-to-bill metric as the year progresses because we have a continuing resolution. There's things that are happening in the Pentagon. And I'm not a big fan of looking at book-to-bill quarter-to-quarter, but I think second quarter will be a good indicator. We're trying to get to 1.5, not 1.05 but 1.5 book-to-bill in Q2, which again gives us more backlog and confidence. And then ultimately, it comes down to the portfolio. We've been very active over the last several years of trying to put the portfolio in place where the future of warfare is. And it's easy to just kind of status quo keep what you have, but we've divested about $3 billion of revenue where we thought these assets were noncore, there was a better owner. And we purchased, amazingly, about $3 billion of revenue as well. And these are in markets that are growing that are the key to the future of warfare and aligned with the National Defense Strategy. So you have to have the right portfolio to grow, and I believe we have the best portfolio in the industry aligned with the National Defense Strategy, current threats and the growth markets going forward.

You mentioned Golden Dome, which obviously is a big topic these days, very complex conceptually. When you think about it, and I think about other complex systems that have been done, where you're looking at things like whether it's JADC2, it was future combat system, JTRS, there have been all kinds of architectures for how you do these. When you think of this, you had sort of a company-led one with FCS, you've had national team leadership on JTRS, sort of had free for all on JADC2, I would say. When you think about how this technical strategy should be architected and how the acquisition strategy should be done, what are your thoughts on that?

Yes. Well, first of all, I look at it as a portfolio of different programs and different products. So JADC2, we're probably going to talk about that because it's hard to actually understand what that was. And there never was that $1 billion RFP to JADC2 something, right? It was a concept connectivity. But Golden Dome has actual tangible assets. There's a space side, which I'll talk about, and then there's an interceptor side that I'll ask Ken to talk about. So you have these assets in space called sensors. There's the tracking layer, the transport layer to communicate, and they have something called the custody layer. And then you have the ability to shoot down incoming missiles or hypersonic missiles. So I think when you look at this, it's going to be several different programs, many of which already technology exists. And we've been pretty outspoken relative to our capabilities. In the executive order that the President signed on Golden Dome, there were 8 major streams: 7 said develop, develop, develop; and 1 said accelerate HBTSS, which is the Hypersonic Ballistic Tracking Space Sensor, which we have in orbit that works. So I believe we won this competition. The executive order says accelerate it. And we've been pretty forward-leaning and saying, sooner we get a contract, say, like in the next month, we can actually build and launch 40 satellites while Trump is still President and provide coverage over the U.S. And this will be a couple of billion-dollar opportunity. So we've been pretty aggressive in pushing and say, "Give us the contract," or "If you want to put out an RFP, put out an RFP." But if we want to go fast and the threat is China, China, China, I think this is the perfect example to show what this administration is trying to do and going faster. You'll hear more about the SDA's Tranche 3 contract. We're the only company to have won Tranche 0, Tranche 1, Tranche 2. Tranche 3 is about 18 or maybe more satellites, again, about a billion-dollar opportunity. We just turned in a proposal last week, and that's another part of the architecture. So I think like anything, we just need to get these assets up. Ultimately, you got to figure out how to communicate the command and control piece. But I think there'll be a lot of different companies, each having specific roles. Now they've appointed General Guetlein to lead this effort. He'll be a direct report right into the Deputy Secretary of Defense, Secretary Feinberg, which is very unusual. It's not going to be caught down in the layers of bureaucracy. So this shows the significance. And the money is in the -- the money is out there. You keep talking about $25 billion this year, $175 billion over 3 years. It's going to be there as part of the process. So there's a requirement, there's a presidential support, there's congressional support. We have the capability. And that's just the space piece. On the interceptor, which is the next piece, you can see them, you can track them, you got to shoot them down. And again, I think we're in a really good position as a result of mainly Aerojet but some other capabilities.

Yes. From an interceptor perspective, I would say we have not just propulsion capability but, Doug, we've got, I would say, world-class technology and capability around divert and attitude control and how do you get an interceptor precisely where it needs to be essentially to hit a bullet with a bullet. And in my view, we've kind of run the tables on interceptor programs. We're on THAAD, we're on standard missile, we're on PAC-3. We won a significant position on NextGen interceptor and Glide Phase Interceptors. So I think this does a number of things. One, it firms up the interceptor programs. I think it extends some. It adds volume to some. And then I think there's some request to potentially accelerate some of the development of NextGen interceptor and potentially even accelerate and add more volume to low-rate production. And again, I think we've got significant capability there. And that's the ground-based interceptors. There's obviously in Golden Dome a concept of space-based interceptors as well. And as we look and evaluate that opportunity, I think between our space business that is now our prime and space vehicles; and our Aerojet Rocketdyne business with propulsion divert and attitude control; and then throw in IMS and CS in terms of communications, data links, things like that, I think we've got a real opportunity to really think about how we would play. And again, Chris mentioned, we're the one company that can prime, that can sub, that can merchant supply. And I think there's some wide space for us to think about where we really fit into that space-based interceptor opportunity.

Chris, at the beginning, you mentioned the 20% commercial that you do. And certainly, Communication Systems, you're able to get high margins using basically on your own IP. You've tended historically to invest more in R&D yourselves than anybody else, which has allowed you to do that. I guess 2 things here. There's been a big emphasis by the administration talking about using more commercial-type processes. But at the same time, you face this so of others when you go to fixed-price development contracts, many times, those don't turn out very well. How do you think about navigating sort of between the advantages of fixed-price commercial contracting versus the risks on some of these development programs?

Great question. And yes, I want to emphasize this commercial business model is something we've been doing for 20 years. There's a lot of new entrants coming into this market. They talk about being commercial. And I've been, as well as a team, we've been pretty outspoken. If -- there's 2 ways to go. We have to have a level playing field. So if we like commercial in the DoD, which I think makes perfect sense to go faster, we should set a goal of 30%, 40%, 50% of the defense acquisitions should be commercial. And let's embrace this and go quickly. And this deals with doing away with all these regulations and bureaucracy. And there's cost accounting standards, which is a separate set of books. There's Austin pricing data. If there's 2 companies bidding on something like night vision goggles, I mean, I honestly use this as a simple example. We're working on Lot 4, which means this is like the fourth year. I don't understand how I can't get 1-page RFP that just says, "I want 10,000 night vision goggles" identical to last year, like the same thing, don't change the color, don't make it heavier, don't change the velcro, the same exact thing. And give me prices for 10,000, 9,000 8,000, 7,000. The other guy will do the same. And we can turn this a day, give us a week, if you want. And we'd turn it into a 2-page proposal. Here are the prices. I know what these costs. I know what I want to sell them for. And then in this case, the Army, they always do a split by, by $6,000, $7,000, $8,000 a mine and $3,000, $4,000 the other guys, and let's get started in 2 weeks. And I could be making 80% margin. I could be losing money. It's arguably none of your business. It's a commercial business model. It's competitive advantages. And the price will be the price. And a company that's more efficient and drives down the cost, whatever, can make their own business decisions. That's what we need to get to. This should be a couple-week process. But to your question on the fixed price development, the nice thing also about commercial business model, say, on the radios, is you design it and you define the capability. And there's been studies going back decades, and everybody like me comes up and talks about the requirement. There's just so many requirements. There was a recent contract for a -- I'll just say, a relatively simple thing. Trust me. It was simple and probably is going to cost $7,000 or $8,000 to me. That's kind of simple. The proposal came out or the RFP 190 requirements. I don't want to get into details on this one yet because it's still competitive, but how can you come up with 190 requirements for a $7,000 -- like it should weigh this much, it should go this faster, see this far? Like you can come up with 5. So on a commercial business models, like, "Hey, I have this software-defined radio. Here it is. Do you want to buy," right? And they say, "Oh, can you do this? Can you do that, no." This is what I have. It takes the discipline. This is better than anything else in the world. It cost this much. Do you want to buy it, yes or no? And you buy. And then next time, we could spend our own R&D, upgrade it however we want, but we control the requirement, right? You don't get an RFP on a commercial item necessarily. So that's how we do it. The fixed-price contracts, I think where everybody has gotten in trouble, 2 things. The entire industry, which is water under bridge, we absorbed the whole impact to COVID, right, and the inflation and supply chain. Nobody got a penny from anyone in the government, notwithstanding prior administrations talking about it, whatever they call this stuff, 36 10, all these -- but there was never any money, nobody got an adjustment. We just all took a hit as a result of it. Some took bigger hits. We took smaller hits. We still hit our numbers. And then it's the options. And that's where we've been pretty outspoken and say, "We are not going to bid a fixed-price development program that wants me to price option." We could -- we have the ability to calculate and do parametric modeling. So I can build this thing for $100 million, but I'm not going to give you a price for like 100 of these in 2026; and 220, '27; and 320, '28. I haven't even built the thing. So we're not going to -- it's irresponsible for the government to ask for fixed price options when something hasn't been developed. We are not going to bid it, more of industry is not going to bid it. And that's how I think we control it. And look, we've been able to turn around our negative EACs. We have positive estimates to complete the last several quarters. And look, it's tough stuff that we're doing. And we take $20 million, $30 million charges here and there, but we find a way to cover it, we find a way to hit our numbers. And so far, knock on wood, we haven't had to deal with $100 million, $1 billion charges. And I think that's a result of the discipline and the process we have in place.

So if we turn now to the center of a lot of your commercial contracts, Communication Systems. So when you look at the outlook for radio, and we've talked about this before, can you describe when you're providing radios to U.S., to Army, Marines, so how far along are we in fully outfitting, what's needed in those services?

Yes. This is just called the modernization, mainly for the Army, the Marines, to a lesser degree. As of a few weeks ago, it's about 40%. So we see pretty good visibility at least through 2028 here in the U.S. to get these software-defined radios out there. And the beauty is they're software-defined, which means as new threats have evolved, especially switching to Ukraine, we're able to identify those threats, find a countermeasure, if you will, and then update the software to the radio. So this business has changed. Going back a decade, it was always focused on the hardware, radio, radio, radio. These are software-defined. Radio is just the installed base. The real secret sauce is in the software, the waveforms and the ability to update it. And we have the largest library of waveforms. And you'll hear things. Everybody will say there's a resilient -- when I was in the Pentagon recently, I said, "It'd be helpful if you guys could define what resilient is because everyone like me you're going to meet with is going to say they have a resilient system." But this is a technical thing that's pretty significant. You don't want to admit RF, you don't want to be jammed. You want to be able to communicate in a secure environment. And I think our technology has proven that we have the resilient networks, the resilient software-defined radio. So 40%, more to go for the U.S.

And on this, I mean, you've -- on the handheld, you've been split with the European supplier as well. How do you view that competition? And I'd also just throw in, you mentioned some of the European wins you've had with radios. Can you talk about sort of the bi-European move today and if there are any implications for you on this?

Yes. So in the U.S. -- and this is the beauty of the commercial business model is there is an annual competition each and every year. I use the night vision goggle exampled earlier, which is a split eye. The same thing happens in the U.S. for radios, both handheld and manpack. Every year, you get the opportunity to bid for a certain amount. In the winter, sometimes you get 70%, 80%, 60% "loser", which isn't really losing too bad, gets the other piece. So even though it's commercial, it's not a monopoly, it's not sole-sourced, and there's an annual competition between 2 companies or if someone else develops a radio company, 3 companies, but so far, it's generally 2. On the European side, what we're seeing is NATO is increasing their budgets, right? So in many cases, the European countries are doubling their defense spending. And ultimately, it's about interoperability, the importance of communication. And when you're trying to protect your country, you want the best technology available. And I think this would show that L3Harris has the best technology when it comes to radios and networks. Otherwise, in Netherlands, and Germany and the Czechs and Poland and other countries wouldn't be buying our stuff. It allows for interoperability. They have their own indigenous capabilities. But those countries, I think they're using that, buying land vehicles and other things. If you double your budget, there's more than enough money to buy the best U.S. capability and support your own indigenous industrial base. So that's what we're seeing. And these are orders that we booked, not speculation, it's happening. And there'll be more between now and the end of the year.

And when you think about this business, so you're describing 40% along outfitting the U.S. forces. I think clearly a farther to go with opportunities in Europe. On top of it, you've talked about the ability to do software upgrades with new waveforms. How should we think about this in terms of growth over the next 5 years?

Yes. I think it's at the top line, we're looking at mid-single-digit growth. We're looking at margin expansion. A lot of that driven by the waveforms. And we changed our strategy a few years ago. A lot of the companies, including ourselves, would only have their waveforms on their own hardware. We've now taken the approach to sell to the military or international customers our waveforms that they could then use on other people's hardware. So the vision we have is, "Hey, we win 70% of the hardware with their waveforms, someone else gets 30% and then they license waveforms from us to put on those radios." And we're getting close to getting a couple of those across the line, and that would be a huge change in our strategy and drive even more margin, more cash and more profitability.

Because that's one of the things that I think is particularly interesting here is you're doing 25% margins in this -- in CS right now. When you look at the opportunities, you're talking about reducing costs on commercially structured contracts, more international business, additional waveforms. Can you give us a sense on where you could go beyond that 25%?

Yes. Let me jump in on that, Doug, because it's important to think of the CS business beyond just Tactical radios. I mean, TCOM is the biggest business within Communication Systems, but we also have BCS out in Salt Lake that's had some real significant wins. So in particular, we were successful on the NextGen Jammer program, and that's a 3-year development program with the Navy. That development likely will be significantly below that 25% kind of segment margin. But it's very important work that we believe can lead to billions of dollars of production opportunity for jamming pods as we look out several years post that development into low rate, and ultimately, full rate production. And then we've got a growing night vision business as well as a solid public service radio business as well. So yes, TCOM has opportunity to run, and I think the other businesses do as well. But as much as anything, it will likely be driven by mix across the segment. But I do think there's opportunity for us to see continued margin expansion at CS. And even within TCOM, some of it is how many domestic radios versus international radios are we able to deliver. And I think they've done a great job of making some investments in their production lines to provide some flexibility on what they're able to deliver from an international, U.S. Army, Marine Corps, radio, to make sure that we're both hitting customer needs and milestones as well as able to kind of keep that margin profile as we see it. But clearly, a growing business. I think CS will be a solid grower as we look forward. And I think there is certainly opportunity to maintain that and potentially expand that margin profile.

And I'll say, I could see a little more lumpy. We're just trying to go fast and get these capabilities into the war fighters' hands. In some cases, we can get a contract. And because of our inventory and commercial business model, we could literally deliver in days or the same week. So again, historically, it was what it was. We probably had too many people trying to keep a smooth margin profile on a quarter-to-quarter basis. And it will be like, "Oh, we need to deliver more domestic radios last week of the quarter because we want to tamp down the margins. So in the next quarter, when we do it." And I'm like, "Let's just get the stuff out the door." And some quarters, we'll have 100 or 200 bps higher and the next quarter, it could be down. But when you look at it over the year, we're going to see margin growth. And we look at this as a long-cycle business, even though those are short cycle. And let's just get the product out the door as quick as we can because of much revenue, cash in the door. And if there's a little bit of lumpiness quarter-to-quarter, I could care less as long as the yearly trend is positive, which it will be. That's the way we want to run the business.

If we jump over to space and airborne. So you talked a little bit about the -- particularly about Golden Dome opportunities also -- yes, you're on all 3 tranches of the tracking layer so far with the SDA. When you look at the SDA work you're doing, I mean, how large can this become? I mean that's one part of what's going on in space today. But how big is that?

I think -- yes, I mentioned these SDA contracts are about $1 billion each. They tend to take, say, 3 years. So think of $1 billion spread over 3 years. They're going to buy 54 satellites. Right now, the plan is to use 3 companies at 18 apiece is what they've done. But at some point, I think the DoD is going to focus more and more on rewarding those contractors that are delivering and rewarding those contractors that are innovating. And someone's performing and others aren't for whatever reason. We've had discussions as to maybe give someone 36 contracts -- or 36 satellites, like us, specifically, because again, we're performing, we're on schedule. It's nobody's -- others aren't. It is what it is. I mean we're not perfect, trust me, and there's things we don't do well. But when we're doing things well and you need it, why don't you give me 36 satellites. Give someone else 18, right? So that's kind of the mindset. I talked about this HBTSS, which is coming out of Missile Defense Agency, who ultimately gets it. 40 satellites is $2 billion to $2.5 billion, again, over 3 or 4 years, right? So those are the types of things that can significantly move the needle. And once you have these constellations up, they have a certain life, which is measured in single digits. And then you have to continually replenish those. So it's that type of business model that gives you a lot of visibility, a lot of annuity. And at some point, when these things are up and running, everybody kind of falls into their niche. I think they'll just be less and less competition. There will clearly be a leader in tracking, will be a leader in transport. And once you have that incumbency, an occasional competition will make sense. But if you look at the major defense acquisition programs, the last time I was looking at them, over 60% are sole-source. So once we become known as the tracking layer company, then we should go through the normal process and continue to populate. And maybe it turns out to be a split buy like the radios and night vision. There's 2 of us. They want 54 in 2026, you price them and someone gets 30, someone gets 24, both guys get 27. It doesn't matter to me. That's where I think we need to go.

Well, one of the things that I think is so interesting about this is that the replenishment point you make, if you're looking at sort of 5-year lifetimes as opposed to like 20, and this becomes a production line, which a senior one in Florida. But this suggests that there's potential for higher margin here than we've gotten on traditional, more exquisite space programs. Is that -- do you see it that way?

I absolutely see it that way. And again, this is -- I made the comment about having a strategy, having a portfolio at the date of our merger, which was 6 years ago, and someday else stop talking about it, we had no satellites in orbit, right? And this was a strategic decision to prime satellites because we saw that we had the payload, right? There's a payload in the bus, payload is the value, we should be priming. So we're bus-agnostic. We use different people's buses. They're all out there. And depending on the mission, we use different companies' buses. And now you see a multibillion-dollar space business where we're doing more and more prime work. And admittedly, those first couple programs for SDA were not very profitable, low single digits. But we're building it up and investing. And yes, we'll be double-digit margin, as we should be, for all these satellite programs.

Well, at the same time, you've had a couple fixed-price classified programs in space that you've taken negative adjustments on. Can you talk about that? Are we...

Absolutely. It sounds like a great, great question for our CFO. I mean, I kind of take the positive EACs and Ken books the negative EACs. So what are you doing?

I don't know. You gave him some positive stuff earlier. So...

Yes. So look, we take on challenging work, for sure. And we do have a couple programs on the classified side that are technically challenging, but they're very important, not just for our customer, but I think also for the future opportunity that we see to continue to produce these units down the road. So we're working through some technical challenges. We have seen a few negative EACs. I mean they're not hugely material, $10 million here, $15 million there, on a couple of programs. And we manage it, we offset, we find ways to drive positive EACs in other areas. And we meet our commitments. And that's what we've been focused on since Investor Day is laying out what we're going to do and go off and do it. And in a complex business where we're solving hard challenges, you're going to run into some issues. But having been in the classified spaces and understanding what we're working on is very important. And I think there is -- I think we now know what has to happen. I think we're probably dealing with a manageable risk as we look forward, some number of months of schedule risk largely at this point in time. So I think we kind of understand what the risk is. We've got it bound. We've got it, I think, into our forecast and guidance, and we'll be able to move forward. But maybe more importantly, I think we've got a very meaningful franchise as we look forward to future production levels. So we deal with challenges. We work through them. We have great engineers. We have great teams that support them and getting through it. And I think it's exciting. And we're largely managing it, I think, successfully.

And some of these go back 7 or 8 years, right, so the whole legacy issue, the cost of the supply chain, COVID. The reality is it's a change in culture and mindset. So this industry was generally a cost-plus base mindset. The customer's cost-plus. Everybody wakes up and says, "Let's go fixed price." It sounds easy, but it takes a behavioral change both from the customer and from industry and all these have different industry players on it. And you just have to get used to that, right? You have a fixed price contract, you don't actually get to make changes. If you make changes, you pay more money. And you just kind of have to get that in the DNA. And it sounds easy and obvious, but having been in the industry a long time, it's amazing how many people agree to make changes without getting paid or change the schedule, more importantly, right, because there's going to be more and more focus on the sense of urgency and deliver on time. So I'm happy to sign a fixed-price contract, if you want to add something for $10 million, give me $10 million. But more importantly, this thing is now getting delivered in January of '29, not November of '28. And then that's the wake-up call, right? We can get paid and make finance. But if you really want these things, stop making changes. And that's got the mindset that both sides need to focus on, and I think we're getting there. But it takes years to get that figured out.

Yes. And then the changes have been the bane of the existence on these fixed price programs, right? I mean it's -- so presumably now, to your earlier points on fixed-price contracting, you're going to be looking at these quite differently than you did back when these were first negotiated.

Yes. I'll just say, to beat the HBTSS horse, like there's no nonrecurring. We've launched it at work. If and when we get this contract or an RFP, RFI, whatever they give us, we are aligned just to say -- just human nature, I guarantee there will be a change. And we'll say, "No. It already works. You love it." It's providing data to vary on a daily basis to government agencies that need it. Why would you change it? Get these 40 launched. Let's protect the U.S. ASAP. And in the next one, if you want, but it's just going to be that natural desire to stop asking for more and more stuff. You want to change the resolution. You guys will just naturally say, "We can do that." And Ken and I and the team will say, "No, no." And it's like, "Well, that won't take too long. It's just a month and $4 million." I guarantee it will be 6 months and $10 million. And then you'll have to test it. And you just can't allow that or at least you have to debate with the customers. Are you sure you want this? And we've been submitting proposals over the last year with multiple bids. I'll just tell you that, that they'll ask for something, we'll give them something, and then we'll throw in 1 or 2 alternatives and say, "Or we can do this for this price or we can do this for that price." And it kind of shocks the system a little bit, like, well, which one should we read? All 3. Like normally don't submit 3. We can do what we want. There's no rule that says I can't put in 3. I can give you a bid for 18 satellites, 36 satellites and 54 as an example, multiple choice. What do you want? I want you to pick 54. You're probably going to pick 18. We'll split the difference.

Okay. So let's go over to IMS. So IMS, back at the time of that investor conference, there were a lot of issues. There were substantial negative EACs, you made leadership changes there. Since then, we've seen much better performance, particularly in the ISR universe. Can you talk about what's going on there? What's allowed you to have the stronger performance and where you're headed?

Yes. A lot of this is burning off legacy stuff, as I said. I know it gets old, and we're in 2025. So it's pretty much when you have all these fixed price contracts and you have -- at that time, we probably had almost $30 billion of backlog, probably $10 billion in IMS. These prices are fixed. The supply chain was fragile. All the stuff you hear, nobody likes to talk about it. I don't like to hear it anymore, but we had to absorb that. New leadership who brought in more leaders, I'm telling you that it's all about leadership. We are getting so much talent from the industry that want to come and join L3Harris. And we're taking best practices. Like I mentioned my leadership team, we have hired someone from probably every single prime at some point or another as a direct report to me, and then they bring people in throughout the system. So I think it's the leadership, it's the process, it's better bidding discipline. And I think the workforce down in ISR, mainly in Texas, very patriotic. And some of the prior investments we've made in Armed Overwatch, we're the leader in business jet. Again, we're business jet-agnostic. We use Gulfstream, we use Bombardiers, we use air tractors, we use King Air. It's all about the mission. What do you want as a customer? And then we pick the best platform based on endurance and altitude and other items, right? We don't have our own airplane that we're trying to sell. And you've heard me talk about Armed Overwatch. It's a crop duster. I mean we actually have a crop duster that can carry more weapons and sensors than probably multi-hundred million-dollar airplanes because I think it carries 10,000 pounds of stuff. Now again, it's a single crop coming at you, but there are countries that need it. Africa is a big market, some parts of the Mid East. You're probably not going to buy a crop duster to China. But we go all the way from RIPET joints to business jets to crop dusters and everything in between.

Well, one thing you've talked about with IMS has been more international opportunities there. Can you describe what you see as how that international share is likely to evolve over the next few years?

Yes. I think we're about 30% in our international. These are big, lumpy orders. I think historically, we -- it's always hard to get those booked in the time you want. But when we see the interoperability between what we do with Compass Call, what we do in Australia, what we do with some European countries, there's some Mid East countries. Once you get this technology out here, in this case, the U.S. Air Force uses it, it allows our allies to leverage those prior investments in technologies. So business jets for a lot of these small to midsized countries can provide the coverage for the ISR they need.

I think there's also some Altus volume and opportunity if you look at the maritime business around U.K. and Australia submarines as well that provides some international opportunities, certainly in the ISR business. And then if you look at WESCAM and electrooptic infrared sensors, certainly significant international opportunity there. So a lot of international opportunity at IMS. It is a growth area. There's -- that's where we booked the international award in April just after the first quarter. Chris is right, it takes some time to get some of these things, in particular, some of the big opportunities. There are some multibillion-dollar ISR opportunities out there. It takes some time, but it's a worthwhile investment. And I think once we get one of those dominoes to fall, I think more and more will start to fall. And so we're pursuing that international market pretty aggressively at IMS. And it's not just an ISR. There's some other, I'll say, kind of component opportunities in maritime with some of our allies as well.

I want to jump over to your other job, Ken, which is Aerojet Rocketdyne. So no question. You talked about it before. No question, it's very high demand. But this has been a turnaround since you took it over. I mean there were customers complaining. And it sounds like people are much throughput -- the output is getting much better now from at least what we understand. Can you talk about how that turnaround is going? Can you get sort of 12%-plus sustainable margins there? How are you looking at Aerojet Rocketdyne right now?

Sure. Yes. I mean, first of all, I'm thrilled to be leading this team. It really is a great team, top to bottom. I think we've got just a fantastic team in Aerojet Rocketdyne. And the business probably just wasn't invested in as much as it needed to be over the last few years. And it was working through trying to sell itself, was working through a proxy battle. And I think there were just a number of distractions. And once we brought it into the L3Harris portfolio, it was really just a focus on we need to deliver for our customers, and then we need to deliver on the business plan that we set out at the time of acquisition, and that's what we're often doing. The customer, I think, recognized that there was some underinvestment in the supply base within solid rocket motors. We received some money from the Defense Procurement Act (sic) [ Defense Production Act ] to invest in facilities, invest in production lines. We've allocated a fair amount of capital from our CapEx budgets into Aerojet Rocketdyne as well. And we've been deploying that quickly. And then I think, ultimately, Doug, when some of these facilities come online into '25, early '26, we'll really start to see that capacity kick in. So it's a great business. I think we're making it even better. And yes, absolutely has opportunity for sustained greater than 12% margins as we look forward while we're driving significant growth, and again, not just in missiles, but in important space propulsion business. We're working through some of the NASA budget challenges that Chris mentioned, but there are other opportunities. We've been solidifying backlog for RL10, which is probably the workhorse of second stage space propulsion engines. And we're excited about the long production run we see in front of us for that as well.

Well, I know we're pretty much out of time here. But perhaps, Chris, you could just finish off by telling us what are you going to focus on in the next 12 months.

All right. Well, that's good question. I'll start. I'm Chairman of the Board of Directors. So I'll say all of our LHX NeXt is actually applied to our Board. We've cut our committee structures by 40%. We added a couple of directors, but we've also had a couple retire. So we streamlined that process probably in the next 12 months, try to find another sitting who recently retired CEO to add to our Board. I spend a lot of time on LHX NeXt, not only the cost, but more importantly, the transformation. I truly believe, as we work more closely with partners like Palantir and such, the AI capability, the digitization is going to be huge. We spend a lot of time with customers, both Congress and in the Pentagon and out in the field. I think it's critical to show them to listen to understand. And again, I look at our portfolio and where we are, I mean a lot of that comes from listening to the customer, understanding the National Defense Strategy. I spend a lot of time on talent. I talked about my team, continuing to upgrade throughout the company, continuing to develop talent. And then, of course, being a public company, I'd like to hang out here in New York and meet with shareholders and analysts and try to communicate our story and our focus on long-term growth and such. So that's kind of what I do, and I have a great team and a supportive board. And I think I'd just leave you with the message, nobody is perfect. We have a strategy, we're executing, we're not just sitting here on our laurels. We look back on the last 5 years, last 3 years, we're buying companies, we're selling companies. We have partnerships with over 70 different companies. We own parts of 40 of those companies. We've announced our partnership with Palantir to bring them into the AI both internally and externally. We're talking with a and seeing what we can do with them. We are agnostic to platforms. We love partnerships. And Ken and I have said several times, I'll prime, I'll sell, I'll merchant supply. We're focused on the margins, we're focused on cash, and we're focused on deploying it and returning it to shareholders. So it's been a lumpy couple of years, but I think the last 18 months, maybe 2 years, you can see everything falling into place, a lot of momentum. We're excited about the future. So thank you.

Well, great. Well, Chris and Ken, thank you very much for joining us.