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

Greetings. Welcome to the L3Harris Technologies Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, John Sweeney, Vice President, Investor Relations. Thank you. John, you may now begin.

Thank you, Hillary, and good morning, everyone. Joining me today are our Chief Executive Officer, Sam Mehta and Chief Financial Officer, [indiscernible] Release detailing our financial results. To the L3 Hans Technologies Third Quarter 2020 earnings presentation on our website. Before we begin, please note that our discussion will include forward-looking statements subject to risks, assumptions and uncertainties that could cause actual results to differ materially. We will discuss GAAP results alongside non-GAAP financial measures of organic revenue, segment operating income and free cash flow, which are reconciled to GAAP measures in the earnings release. For more information, please refer to our earnings release and SEC filings. With that, let me turn it over to Sam. Sam? .

Thank you, John, and good afternoon, everyone. I've had the privilege of spending the vast majority of my career in an industry devoted to supporting and protecting those who protect us. My passion is helping to innovate and deliver critical capability to our nation, partners and allies. I'm particularly excited to lead this team of over 43,000 talented and committed employees who share that same passion for delivering the outstanding results that we'll discuss today. These results not only affirm the strong execution of our strategy, but more importantly, form the foundation of an extremely exciting future. We grew organic revenues by 9% and despite having 1 fewer week as compared to the third quarter of 2025. We grew EPS to $3.28, which is up 33% year-over-year. We generated $1.3 billion of free cash flow in the quarter, up 195% and achieve a book-to-bill of 3.2, which translated to a historic backlog of $53 billion. That backlog is highly aligned to 4 strong growth vectors, missiles and missile products, space, resilient communications and electronic warfare and multi-domain sensing. Our capability sets in these categories form the foundation from which we will continue to invest and grow. This backlog also underscores the customers' confidence in our ability to deliver innovation, efficiency and quality and will generate sustainable profitable growth, which is the backbone of our financial performance. In light of this and continued strength of customer relationships, my top priority is to focus on the improved delivery and execution in every aspect of the business. We continue to improve our operational efficiency, which is delivering bottom line benefit to the company through traditional methods of continuous improvement. These efforts are now embedded in our DNA and culture. But we will supplement and accelerate productivity and efficiency gains by embracing new techniques and technologies. For instance, we are harnessing the power of automation and artificial intelligence to accelerate delivery of PAC-3 solid rocket motors to customers, in some cases, reducing the amount of traditional manual quality inspections from 21 hours to 6.5 hours per motor. This is but 1 of countless examples that have enabled us to double our pack free solid rocket motor delivery from last year to this year and will allow us to double again in 2027. We have partnered with companies like Palantir to drive similar efficiency gains in tactical radios, night vision goggles and Wescam turrets, just to name a few examples. In the past few years, we have acquired and developed new products and capabilities in several areas and have also trimmed the portfolio of businesses and product lines that we don't see as integral to our future. The result of that activity are 4 growth vectors, in which we will continue to invest heavily, whether it's capital, innovation or additional capability. I'll start with missiles and missile products. The third quarter represents a watershed moment in our Missile solutions business. We booked $11 billion of contractual backlog, representing years of future deliveries, validating the investments we made and we continue to make to fuel the growth of this business. Those orders relate to 2 critical programs, PAC-3 and FAD, where we partnered very closely with the Department of War and prime contract customers to improve delivery and quality, while not sacrificing the safety of our employees. From 2023 to 2026, we are increasing deliveries by more than 100%. The good news with these and other critical Department of War solid rocket motor programs is that we're just getting started. For instance, we plan to triple our FAD solid rocket motor deliveries in 2027 as compared to 2026. And and we'll do the same on numerous additional programs. Importantly, these contract awards and improved deliveries validate the investments in people, process, facilities and supply chain that we've made and committed to make in support of an important national security priority. I would note that the estimated dollar values of these contracts do not include or take into account economic price escalation or the strong demand from international partners and allies, which is to say, we expect there will be upside to these values that we have highlighted. L3Harris is investing in capacity expansion to provide unmatched speed and scale for the Sentinel intercontinental ballistic missile program. The post boost system is the propulsion system during Exoatmospheric flight. This system has already undergone major milestones, including a hot fire test in 2025. The Stage 3 motor has achieved several milestones on the march to flight testing, including a hot-fire test early in 2024. L3Harris has made substantial investments in capacity expansion to accelerate Sentinel production, including ongoing construction of the Arkansas advanced propulsion facilities, which is expected to increase large solid rocket motor manufacturing capacity sixfold. The campus will include more than 20 buildings across 110 acres. Space is the second growth driver and represents a priority capability for our customers. Whether we are delivering capability as a satellite prime contractor to the Department of War, or as a differentiated provider of payloads to other primes, we are becoming an indispensable player and partner in this growing domain. We are now capitalizing on our previous commitments of nearly $250 million in facility and capacity expansion to capture and deliver important programs like our recently won $955 million ANDT3 award. That win continues to position us as the only company that has been awarded prime contracts across all 5 space and missile warning missile defense tranches. A clear sign of customers' confidence in our ability to deliver in support of national critical homeland defense. In addition to our investment in capability and capacity, we also plan to add to our technical prowess and space by investing roughly $175 million over the 3 years in research and development to position us for continued success and growth. Moving on to resilient communications and electronic warfare, where we have established a proud and historic legacy of investment, innovation and market leadership. Recent conflicts in Ukraine and the Middle East highlight the importance of continuous innovation in this area. If the war fighter can't communicate, they can fight but they can't win. A key win in this quarter was the $876 million next Gen Jammer low-band contract, which allows our pilots to safely navigate highly contested environments. To date, we have been awarded nearly $1.5 billion in support of this program. While these cost type contracts typically generate single-digit returns during development, they can drive years of sustained production and improve margins once development is complete. We continue to see strong demand for our Vampire counter unmanned systems with orders from the Department of War and international customers exceeding $500 million in the quarter. With significant inbound interest across domestic and international markets, we are well positioned to accelerate the business and grow our approximately $1 billion pipeline. Vampire is a proven vehicle agnostic solution that provides advanced reconnaissance and precision strike capabilities against drones with more than 350,000 operational hours since 2023. As global attention remains focused on the proliferation of drones, Vampire is an increasingly important in providing the critical last mile of defense needed to protect war fighters at the tactical edge. No discussion of our capabilities would be complete without mentioning continued innovation and demand for our tactical software-defined radios. Our commercial business model of assessing market demand, funding innovation and selling on a commercial basis accelerates delivery of capability to customers. This year, we will deliver more tactical radios to Natal partners, allied and international customers into the Department of War, which reflects strong international demand. Having said that, we continue to win domestically. For instance, capturing more than $315 million of awards this year for Army modernization in conjunction with next-generation command and control program. The fourth growth vector of our portfolio is multi-domain sensing, where we provide critical information, situational awareness and decision-making advantage to war fighters ranging from the tactical edge to high levels of command. Our capability ranges from individual centers to complete mission solutions from the farthest reaches of space to the deepest depth of the ocean. An exciting example is the recent launch of the Nancy Grace from in telescope. We partnered with NASA's Goderbased Flight Center to provide key components of the telescope including the optical telescope assembly, which serves as Roman's eye and radiation hard and electronics that keep the telescope operating approximately 1 million miles from earth. Importantly, we continue to build momentum in missionize business jets, securing $323 million in contract awards in the third quarter and increasing our year-to-date total to nearly $1.5 billion. This includes an additional 2 aircraft under the U.S. Air Force's Compass Call program, bringing the total to 12 of the 22 aircraft requested. We continue to be a leader in missionized business jet which allow our customers a more flexible, cost-effective manner to sense and collect information versus expensive bespoke single mission dedicated platforms. Slide 5 shows our investment priorities, which are highly aligned to our strategy. For the foreseeable future, the most compelling investment opportunity I see is investing in L3Harris. That includes investing to further develop our capabilities in the strategic growth vectors I outlined, expanding capacity to meet growing domestic and international demand. To be clear, we believe we have the appropriate organizational structure in place to support our growth and execution. As a result, we do not intend to significantly change the way we are organized for the foreseeable future. Moving on to Slide 6. Here is how we are positioning our company for sustainable, long-term financial success. We are leveraging our strong and growing backlog and differentiating capability while continuing our investment in innovation and capacity. We will increase focus on programmatic and operational execution. In the third quarter, we produced positive net EACs across 3 segments and improved delivery performance with laser-like focus on details. Of course, we will continue to lean forward with a return for our shareholders and customers is justified, but use enhanced tools and strategies to identify and mitigate risk at the earliest possible opportunity. We will leverage our strong free cash flow to invest in innovation, capacity and capability where it drives differentiation and outsized competitive advantage, whether that manifested improved margins or accelerated top line growth. We will be relentless in our pursuit of productivity and efficiency gains as a means to accelerate delivery, sustain strong margins and remain a competitive partner to our customers. We have and will continue to embrace artificial intelligence, automation and emerging technologies to capture these gains. And we will leverage our financial strength for continued flexibility whether that is consistent dividend, targeted share buybacks or strategic portfolio shaping. I will now turn the call over to Ken, who will discuss the financials.

Thank you, Sam. While this is our first earnings call together, it has been great working with you as you've driven the business forward with a pragmatic approach sustaining our strong momentum and bringing an increased focus to our operations. Sam, John and I appreciate the investor and analyst feedback that shaped this quarter's earnings materials. These changes are intended to improve ease of use and connect our financial results to operational execution. Turning to our third quarter, where our strong execution delivered solid financial results. Orders were $19.3 billion, yielding a book-to-bill of 3.2x and backlog increased 27% to $53.2 billion and was up 47% year-over-year. The 2 largest awards were PAC-3 and THAAD totaling $11 billion, consistent with our volume and pricing expectations. . Revenue totaled $6.1 billion, up $401 million or 7% year-over-year. Organic revenue grew 9% despite 1 fewer week as previously discussed, an extra week contributes about $200 million, implying double-digit organic growth, excluding the extra week and the prior year quarter. International growth continues to be strong as Ally's ramp investments in national defense. International revenue grew 18%, and as a percentage of our total revenue was 24%, increasing in the last year or so by about 300 basis points. Segment margin was 15.9%, consistent with prior year. Segment margin benefited from strong disciplined execution with positive EAC performance across all 3 segments. Operating income of $786 million increased $165 million or 27% versus prior year. Operating income margin increased 200 basis points to 13% due to higher revenues and lower corporate costs. GAAP diluted earnings per share for the quarter was $3.28, up 33%. The $0.82 year-over-year improvement is due to higher revenue volume, $0.28, higher operating income margins $0.51, lower interest expense, $0.17. This was partially offset by preferred stock dividends of $0.10. We also had investment gains offset by the Department of War Preferred Stock mark-to-market adjustment. Operating cash flow was $1.4 billion, up from $546 million in the prior year quarter. Capital expenditures were $179 million or 3% of revenue, which is historically elevated as we continue to invest to build out our missile capacity. Free cash flow was $1.3 billion, up nearly 200%. Year-to-date, free cash flow is $1.8 billion with clear momentum to achieve our full year guidance. Research and development costs were $143 million or 2.4% of revenue and helped drive our strong awards and organic growth. We believe maintaining R&D spend at current levels positions us well for the future. Moving to Slide 9, let me provide some color on our Space and Mission Systems segment performance. Revenues grew 10% to $3.1 billion. Revenue increased due to higher volumes in space, missile warning, missile tracking satellite programs, ISR aircraft air traffic control modernization and F-35 control systems. Space & Mission Systems segment operating margin was 10.9%, up 20 basis points from prior year. The margin expansion primarily reflects higher volumes and improved program execution. Turning to communications and spectrum dominance, which delivered revenue of $2 billion, up 3% year-over-year driven by increased international volumes for our software-defined resilient communication radios and program ramp for our Vampire counter-UAS systems partially offset by lower volume in our spectrum superiority business. As we recently discussed at the Jefferies conference, we experienced supply disruption for a small handful of components which reduced our third quarter revenue growth. We were able to sort much of the supplier challenges by the end of the quarter and expect stronger fourth quarter revenue growth. Communications and spectrum dominance operating margin was 25.2%, up 50 basis points on favorable program performance and mix. Missile Solutions revenue increased 5% year-over-year. Organic revenue, excluding the divestiture of the commercial space propulsion business increased 17% primarily driven by increased volumes on key missile programs. Missile Solutions segment operating income margin was 12%, down 30 basis points due to mix. In the quarter, we closed on the sale of our commercial space propulsion business, investment gains and losses associated with our retained ownership interest will be recorded as other nonoperating income. Now turning to cash conversion and leverage on Slide 12. Over the past few years, our free cash flow has consistently exceeded net income. The team's disciplined execution and strong cash generation have enabled us to reduce net debt leverage from 4.3x to approximately 1.9x, strengthening our balance sheet. At the end of the third quarter, we had $3 billion in cash and short-term investments. In the fourth quarter, we expect to generate approximately $1 billion of free cash flow and repay $800 million of debt, bringing our projected year-end cash balance to $3.2 billion. Looking ahead to 2027 and 2028, we expect to continue generating meaningful operating cash flow. We have sufficient cash to fund our $3 billion investment in missile capacity expansion, normal capital expenditures and dividends. Even after these investments, we expect to have more than $5 billion in excess cash we intend to deploy. Let me turn to our capital allocation priorities. Our first priority is investing in the business, including our $3 billion missile investment. Second, we remain committed to our dividend. Third, while our leverage is attractive, we have the ability to further delever and create more dry powder. Fourth, we believe share repurchases are an important tool and are highly attractive at our current valuation. Lastly, for M&A, we do not expect to engage in any large-scale M&A in the foreseeable future. we believe we will create the most value by focusing on our business and driving operational performance. Moving to our 2026 guidance. We are increasing the bottom end of our revenue guidance by $300 million two, $23.5 billion to $23.7 billion, increasing the midpoint by $150 million. Accordingly, organic revenue growth is now 9% to 10%. Segment operating margin guidance is reaffirmed at low 16%. We are raising our EPS guidance to $12.25 to $12.35, up from our prior guidance range of $11.80 to $12. The updated range represents an increase of $0.40 at the midpoint, with about half of the increase due to lower interest expense, which is now expected to be $515 million. We are reaffirming our free cash flow guidance of $3 billion. To improve investor ease of use and comparability, we updated our free cash flow definition to exclude cash proceeds from asset sales. At the segment level, we are making 2 adjustments. Space and Mission Systems full year revenue is increasing $200 million to $11.9 billion. Communications and spectrum dominance revenue is reduced by $100 million to $7.9 billion. Now let's turn to our 2028 financial framework. We are reaffirming organic growth expectation of 8%. We expect segment margins of approximately 16%, down from our prior estimate of 16.3%. This updated guidance assumes no significant gains from product line sales or investment income. We now expect 2028 free cash flow of $3 billion compared to our previous expectation of $3.5 billion. The revised outlook reflects 3 changes funding approximately $250 million in company 401(k) contributions with cash rather than newly issued L3Harris shares, lower segment margin and changes in capital expenditure timing to accelerate our missiles investments. The $3 billion free cash flow guidance represents over 100% cash conversion. With that, I'll turn the call back to Sam.

Thank you, Ken. We are comfortable operating in a dynamic political and economic environment and remain confident that we are well positioned with our strong backlog in areas of continued priority and urgency. Finally, I would like to once again thank our employees and leadership team for delivering such a strong quarter. I will now turn the call over for questions. .

[Operator Instructions] Your first question comes from the line of Kristine Liwag from Morgan Stanley. .

Congratulations, Sam, on your new role. So I guess I wanted to ask you about margins and your operational priorities. You delivered a pretty impressive 200 basis points of operating margin expansion this quarter, your first quarter and the head of L3Harris. So I guess part of it is, given your background as an operations focused leader, your comments around accelerating productivity through automation and AI. How much opportunity do you see to drive further efficiencies and expand margins, especially when you've got this robust revenue outlook ahead of you? And I know we're limited to 1 question, but I wanted to step back and say more broadly, as you put your stamp on L3Harris, should we think of your approach as largely accelerating the execution of the existing strategy? Or are there areas where you see opportunities to do things differently?

Thank you, Christine. Appreciate the feedback. A couple of things maybe from my perspective. Number one, on the lower corporate cost and the operating costs you mentioned in the growth from operating margin -- that's embedded in our DNA now. We'll be focused on making sure whether it's business process at the corporate office all the way down to the factory floor. We're going to be relentless in our pursuit of productivity and efficiency gains. And that will be really across the entire enterprise. What you might see, which is a little bit different, a change in strategy, we increased focus on driving the portfolio we have. We spent the last several years building this fantastic portfolio we have. Now it's time to probably stop with as many moving pieces and focus on the business we have to drive better performance. And again, that means disciplined performance disciplined execution, driving costs out of the business, most importantly, accelerating turning -- converting -- accelerating the backlog that we have into sales by accelerating execution through our business processes on our factory floors. So that's the most exciting part of the business for me and you'll see continued focus on it.

Your next question comes from the line of Ronald Epstein from Bank of America.

This is Sal Grant on for Ron. I first just wanted to ask about your free cash flow, especially given the strong about $1.3 billion in 3Q. Can you outline how much of that was potentially a benefit of timing of collections or a pull forward from 4Q as well as bridging it to the maintained $3 billion full year outlook?

Well, we remain -- first of all, we do remain confident in our $3 billion full year outlook. Ken mentioned in his remarks, we remain committed to making sure that cash flow to net income is always greater than 100% in our business. I think that's 1 of the strengths of the portfolio. We're very careful and cautious and intentional in the way we negotiate agreements to make sure that we remain cash flow neutral or better in most of these negotiations, whether that's in the Missiles business with these framework agreements or agreements like Vampire for international customers. Ken, any additional comments?

Yes, I would just add that, look, we have great momentum on cash flow. There's been a lot of focus with the team to make sure our cash is more linear. So we don't look at it certainly as Q4 pull forward. We just looked at it as doing the hard work day in and day out, and the team is doing a nice job. So we're kind of 75% through the year. We have 60% of our cash generation. So we think we're in a great place to deliver on our full year guidance and look forward to delivering and getting on the next.

Your next question comes from the line of Sheila Cat from Jefferies. .

So nice to officially hear from you and Ken, of course. Maybe, Sam, for you, if you don't mind, just starting with the 2028 targets, you've made some relatively modest changes to that framework that was approved by the Board just 8 months ago. Can you help us understand what was the impetus for this? And just how you're thinking about the framework more broadly from here? And of course, just as new CEO, I have to ask you the margin outlook doesn't look impressive at all over the next 3 years. Is there any reason you're thinking about that? And how you're thinking about capital deployment, just given the sum of the parts value LA.c2x the value of where you're currently trading. So just how you're broadly thinking about strategic capital deployment from here? .

Yes. Thank you, Sheila. I appreciate the questions. A couple of things. First of all, on the 2028 financial framework, on the segment operating margin, I feel confident in the -- we know previous guidance was around 16.3%. Really, what we've done is removed any assumed benefit from product line sales or investment income from our formula from our calculation. So what you'll see is a 16% operating -- roughly 16% operating margin, which more closely matches the actual underlying execution and operation of the business. On the free cash flow side, a couple of big moving pieces there to go from $3.5 billion to $3 billion. The single biggest piece is really just a change in the way that we make our company 401(k) contributions. Previously, we issued $250 million of new stock on a regular basis to do that. We will be funding that with cash now. We think that will limit the effect of dilution, which we know is not great. We also see a little bit of lower segment margin. Again, some of that comes in mix, faster growth on some of the lower-margin businesses as we grow margin those businesses over time. And then the opportunity to maybe pull forward a little bit of capital expenditure into 2028, so that we can continue to go accelerate revenue in out years even beyond this framework.

Yes. Maybe just to add, Sam, and Sheila, I really appreciate your comment about our sum of parts, and clearly, we're more valuable than what we're trading at. So I think that's very astute on your part. Certainly, we made comments that we're going to generate pretty meaningful free cash flow. So we're looking forward to deploying that in a very share order friendly manner to drive value for the company. I just also maybe touch on Sam's margin adjustment. When you look at those nonrecurring items, and you kind of back away and you say, okay, where are we at today versus that? It's about 50 basis points of margin from kind of like 16 to 15%, puts us somewhere around 15.5%. So we have some work ahead of us, right? That's where Sam's very focused on the execution piece drive the margin up. So I would expect you'll see margins improve as we drive the performance of the business without some of these nonrecurring items.

And Sheila, I would just add, there's also the disposition of the space propulsion business, that would be about $75 million as well on the free cash flow side.

Your next question comes from the line of Robert Stallard from Vertical Research.

Thanks much. Good morning. Sam, I don't know if you touched on this. I missed the first bit of your call, which is a very busy morning. But I was wondering if you could give us an update on your thoughts on this potential missile IPO. You mentioned you have the internal generated cash flow to cover the CapEx requirement, but also that your valuation perhaps is not that generous. So an update on that would be much appreciated. .

Yes. Great question. Thank you. Appreciate that, Robert. Really, the status of the IPO has not significantly changed or moved from the last time we discussed it, which was we established 4 criteria that we feel need to be satisfied in order to create value for our shareholders through the -- those were government contract environment, which continues to look favorable. -- contracts. Of course, we've locked down some great contracts in the meantime. So that's moved in a positive direction. We continue to execute strongly on the business. We're doubling, tripling on key solid rocket motor programs with our deliveries. And of course, the valuation has to be something which is attractive. And that's really the area that we continue to monitor to make sure that capital markets, capital formation, some of the valuation of our peer companies. We'd like to see much more attractive valuations before we move forward. We consider -- we continue to reconsider. We continue to consider the timing of an IPO right now, we're targeting sometime in the middle of next year to continue that consideration.

Your next question comes from the line of John Godin from Citi. Your line is open. Please go ahead.

What I wanted to use my question on is just to focus on the organic growth outlook. I know there have been some tweaks to the 2028 framework, but you guys kept 8% organic growth. you're already outperforming that this year. There seems to be a good setup into next year even though you haven't kind of offered Crisp guidance on that. needless to say, 8% does not feel like a high bar given what we're seeing in missile solutions space, et cetera. Maybe we could just kind of discuss the puts and takes as we're forming a view into next year. .

Well, appreciate the question, John. Thanks. A couple of things. Number one, we are very, very confident in our ability to be able to hit and possibly even exceed the 8% year-over-year growth that's in our 2028 framework. Now some of this depends upon timing of budgets, especially not only domestically, but internationally and making sure that about 24% of our sales on an annual basis. are from international customers. So there are conditions that are outside of our control. Having said that, with the $53 billion plus backlog that we currently enjoy, will do everything we can to accelerate that backlog into this period of the framework to see if we can meet and exceed that 8% CAGR that you referenced.

And just to add, I mean that guidance is 2 years out, right? So we're very focused on driving the business. We'll certainly update that as we execute. .

Your next question comes from the line of Peter Arment from Baird. .

Sam and Ken and John, congratulations, Sam, glare sentiment. Maybe if you could just quickly touch base Sam on we've got a lot of inputs that we've heard from a lot of other players around the supply chain and kind of bottlenecks that within that. And if you touched upon it, sorry, I missed it. But just how you're viewing the supply chain like what is internal bottlenecks versus supplier control bottlenecks and kind of how you're addressing that just given all the frame agreements and everything else that you guys are winning. .

Yes. I appreciate the question. Thanks, Peter. A couple of areas. When we talk about supply chain, as we referenced, as Ken referenced it earlier in his remarks, we're talking a little bit about CST. There were a small handful of parts that we're constrained, having to do with printed circuit board manufacturing. We're talking about things like laminates that were 2 or 3 tiers down in the supply chain. There are capacity constraints largely because of the pull on AI and data centers for car electronics. We've worked our way through those. We have to thank the Department of War for their assistance in doing so. They actually reached out directly to some of these suppliers in partnership with us to make sure that we got priority from the delivery so that we can make sure that we can protect the war fighter. We don't expect that to have a material impact or any kind of effect in Q4 as we recover. On the -- on the MSL side, on the missile Solutions side, obviously, a different set of challenges. Having said that, about 25% of our $3 billion investment is directly into supply chain and supply chain capacity. So we're seeing the benefit of that coming online, Peter. This is multiple sources, developing multiple sources for critical bottleneck items. But I would say also making sure that our existing supply base modernizes its equipment, it's production, efficiency gains in their supply chain as well. So we're really kind of funding. We're helping to develop the entire ecosystem to make sure we have a resilient supply chain really in all 3 of our segments.

And I would just add, the Department of War investment was very important to us because I think most people are aware, we didn't have contracts until really this quarter that $1 billion allowed us to go out and start working with vendors, making commitments. And we had, I think, up until these awards, we had about $2 billion of precontract costs floating around. And now we've gotten a lot of that on contract on our side. So we have been working, Ken and the missiles team has done a really nice job of getting out with the vendors and so forth. So I think we should be in pretty good shape. .

Your next question comes from the line of Doug Harned from Bernstein.

On CSD, really 2 things there. The radio business is such an important high-margin business for you all. And 1 is you talked a lot about the things you can do with respect to cost reduction. So the first part of this is -- how far can you go? You've been at these 25% margins because of the fixed cost nature of this business, you would think there's real upside potential there over time. But also as you look forward, and we head towards NGC 2, and I know you've won some things on this, but we saw -- it's a very different structure. And with GD and Pacific Defense winning the core chassis last year. And then looking at a push towards continuous competition on this program going forward. How do you see the transition over time from the current radio business that's been so successful heading into NGC 2. .