L3Harris at Bernstein Conference: Strategic Growth and Challenges

On Thursday, 29 May 2025, L3Harris Technologies (NYSE:LHX) presented at the Bernstein 41st Annual Strategic Decisions Conference 2025. The company showcased its strategic plans to achieve its 2026 financial framework, emphasizing organic revenue growth and margin expansion. While L3Harris remains optimistic about its growth trajectory, challenges such as fixed-price contracts and potential NASA budget cuts were acknowledged.

Key Takeaways

• L3Harris aims for $23 billion in revenue by 2026, with margins exceeding 16%.
• Aerojet Rocketdyne integration is surpassing expectations, contributing to growth.
• LHX NEXT program targets $1.2 billion in cost savings by 2026.
• The company is expanding internationally, with significant wins in Europe and NATO.
• L3Harris is focusing on commercial business models within the Department of Defense.

Financial Results

• Revenue growth is projected to reach $23 billion by 2026.
• Margins are expected to exceed 16%, positioning L3Harris as an industry leader.
• Free cash flow is on track to hit $2.8 billion.
• The LHX NEXT program is ahead of schedule, with $1.2 billion in committed cost savings.

Operational Updates

• Aerojet Rocketdyne has shown 9% growth in the first quarter, with long-term demand for solid rocket motors.
• The LHX NEXT program focuses on streamlining operations and digital transformation.
• International expansion includes billion-dollar contracts in The Netherlands and Germany.
• Investments in the Golden Dome program support missile defense opportunities.

Future Outlook

• L3Harris is targeting 30-50% of defense acquisitions to be commercial.
• Communication systems are expected to grow, driven by modernization efforts.
• The space business is poised for growth, with opportunities in missile tracking and defense.
• Aerojet Rocketdyne is expected to maintain margins above 12%.

Q&A Highlights

• Golden Dome is seen as a portfolio of programs with space and interceptor capabilities.
• L3Harris advocates for streamlined commercial contracting processes within the DoD.
• Continued growth in communication systems is anticipated, supported by U.S. and international demand.
• The space business is expected to benefit from SDA contracts and missile defense opportunities.

In conclusion, L3Harris remains confident in executing its strategy and delivering shareholder value. For a detailed account, please refer to the full transcript.

Full transcript - Bernstein 41st Annual Strategic Decisions Conference 2025:

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: Okay. Good morning. I’m Doug Harned, Bernstein senior global aerospace and defense analyst, and really happy to have with us again Chris Kobacek, chairman and CEO of l three Harris. With us also is Ken Bettingfield, chief financial officer. I think to start, I think I think, Ken, you got a couple things you wanna say, and then we’ll go into fireside chat.

Ken Bettingfield, Chief Financial Officer, L3Harris: Yeah. Great. Thanks for having us, Doug. We’re excited to be here. And I just wanna 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.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: 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 you know, right at that time, Ken joined as CFO. You had two new board members. You set new targets for the company.

You’re underway integrating Aerojet Rocketdyne. When you look back over the last eighteen months, how do you see what’s happened there? Has it met your expectations?

Chris Kobacek, Chairman and CEO, L3Harris: Yeah. Thanks, and thank you all for joining either virtually or here in person. Now I think as I look back over the past eighteen months, I feel much more confident in our 2026 framework today than I did a year ago and eighteen months ago. There were a lot of uncertainties, but we’ve made great progress. We we laid out 23,000,000,000 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 a hundred and 50,000,000,000 of reconciliation, the fact that Saudi laid out a hundred and 42,000,000,000, A lot of details to come forward, but there’s clearly more more tailwinds than headwinds on the 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 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 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 a good pathway to 2,800,000,000.0 of free cash flow. So everything seems to be, coming together rather rather nicely in my opinion.

And LHX NEXT is the program we laid out to do two things. Number one, to to streamline the organization and cut costs. We set a goal of a billion dollars by the end of twenty twenty six. As of today, we’re right at about a billion, and we’ve committed to a billion 2. So we’re gonna do a billion 2, maybe more in two years versus three.

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 three of us, including me from the merger, couple internal promotes, everybody else, segment presidents, the CTO, the CIO, the general counsel, LHX NEXT, all came from outside.

So I get a couple emails a day or a week, probably, to be honest, of people wanting to join l three Harris 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 that’s contributing to our success.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: When when you look at that at that 2026 guide, you know, where do you see the potential for more upside, or where may you see some risks in that?

Chris Kobacek, Chairman and CEO, L3Harris: I’ll I’ll let Ken do the, the upside because that’s that’s, fun and easy. I’d say the only, risk that I I see is the, NASA, budget. It’s been put out there that NASA’s gonna be cut. It’s a small part of our our business, specifically the Artemis 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 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. You wanna hit the highlights?

Ken Bettingfield, Chief Financial Officer, L3Harris: Yeah. You know, so, you know, we we do get some questions, Doug, about the the revenue target in particular. And so let me just address that head on and say, you know, in ’25, there were, you know, a few things that that had kinda slid a little bit. So on f thirty five, you know, the t r three development was ramping down, and the the production, levels didn’t quite offset, the the revenue decline that came out of the development. In ’26, that that will, you know, kinda kick in, and we’ll we’ll see that getting back to growth.

There were a couple of space, opportunities that, you know, given, I think, some budgetary, issues with the customer had kinda slid into ’26. Now with with Golden Dome and 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, you know, 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 twelve week quarter as well, and we see that continue to climb the ramp. And then if you look at at a large solid rocket motor market outside of the tactical, you know, there’s probably a twenty to thirty year run for large solid solid rocket motors between Sentinel, NextGen Interceptor, GlidePhase Interceptor, Zeus, and, some classified work. So I think there’s a significant growth that comes out of, out of that that business as well. And then, you know, from an upside perspective, you know, just at the end of the first quarter, we announced a a significant classified, award. There was an international ISR award.

And then if we can get, you know, a couple opportunities within Goldendum to hit, I think 23,000,000,000 becomes, you know, a number that’s, you know, you know, relatively easy for us to to accomplish. I think we’ve got a number of levers to get there. I know there’s some questions of, you know, what’s the growth rate in ’26. I would say, you know, we’re busy working in ’25 to try to get, you know, ahead of midpoint of guidance from a revenue perspective to, you know, to buy down that growth rate a bit. But my feeling is, you know, as I look at the 23,000,000,000 in revenue in ’26, I feel more confident about it today than I did yesterday.

And I feel more heck of a lot more confident than I did at the end of, ’24 and certainly when we set the target in, in, at Investor Day back in December 23. So I think there’s a number of upsides that that give us opportunity. You know, 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, you know, people often ask us about Golden Dome. How much investment is that gonna take?

Well, it’s, you know, great that we were investing to become a prime in space, and in particular, investing to become a prime in space in missile defense, missile tracking, and missile warning. And so a lot of those investments are already behind us. We put a hundred million dollars 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, you know, 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 to make sure that we hit that 23,000,000,000, at least that 23,000,000,000, and continue with our margin expansion.

I think we’ve had, you know, seven or eight quarters of margin expansion, 10 quarters of of growth, and and again, you know, continuing on that path of of free cash flow growth as well.

Chris Kobacek, Chairman and CEO, L3Harris: And I’ll just chime in. I have two quick thoughts. International as well, we’ve always had, you know, 21, 20 two percent 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, the tactical communications, software defined radios, networks, billion dollar win earlier this year in The Netherlands. They call it Netherlands. Foxtrot, Half A Billion in Germany, believe it or not. And I think we call that the Dilbo. That stand for

Ken Bettingfield, Chief Financial Officer, L3Harris: Dan, digital land based organization, I think.

Chris Kobacek, Chairman and CEO, L3Harris: And and the checks recently. So we have actually are are winning there. I think a key indicator to look at will be the book to bill metric, you know, as the year progresses because we have a continuing resolution. There’s there’s things that are happening in the Pentagon, and, you know, I’m not a big fan of looking at book to bill quarter to quarter, but I I think second quarter will be a good indicator. We’re we’re we’re trying to get to, you know, a 1.5, not one zero five, but one five book to bill in q two, 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, you know, it’s easy to just kinda status quo keep what you have, but we’ve divested about 3,000,000,000 of revenue where we thought, these assets were noncore. There was a better owner, and we purchased amazingly about 3,000,000,000 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 and the growth markets going forward.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: You know, you mentioned Golden Dome, which obviously is a big big topic these days, very complex conceptually. When you 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 JADC two, there was future combat system, jitters. There’ve been all kinds of architectures for how you do these. When when you think of this, you know, you had sort of a company led one with FCS. You’ve had national team leadership on jitters, sort of had free for all on JADC two, I would say.

You know, when you think about how this technical strategy should should be architected and how the acquisition strategy should be done. What are your thoughts on that? Yeah. Well, first of all,

Chris Kobacek, Chairman and CEO, L3Harris: I look at it as a portfolio of different programs and different products. So, you know, JADC two, we’re probably not gonna talk about that because it’s hard to actually understand what that was. And, you know, there never was that billion dollar RFP to JETS two something. Right? It was 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. There’s the transport layer to communicate, and, you know, they have something called the custody layer.

And then you have the ability to shoot down incoming missiles or hypersonic So I think when you look at this, you know, it’s gonna be several different programs, many of which already technology exist. And we’ve been pretty outspoken, you know, relative to our capabilities. In the executive order that the president signed on Golden Dome, there were eight major dreams. Seven said develop develop develop, and one said accelerate HVTSS, which is 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 US. And, you know, this will be a couple billion dollar opportunity. So, you know, we’ve been pretty aggressive in pushing and say, you know, give us give us the contract. Or if you wanna put out an RFP, put out an RFP. But if we wanna go fast and the threat is China’s China’s China, I think this is the perfect example to show, you know, what this administration is trying to do and go going faster.

You know, you’ll hear more about the SBA’s tranche three contract. We’re the only company, two of one tranche zero, tranche one, tranche two. Tranch three is about 18 or maybe more more satellites. Again, about a billion dollar opportunity. We just turned in the 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, we gotta figure out how to communicate and command and control piece. But I think there’ll be a lot of different companies, each having specific roles. Now they’ve appointed, general Gutlein to to to lead this effort. He’ll be a direct report right into the, deputy secretary of defense, secretary, Feinberg, which is is very unusual.

It’s not gonna be caught down in the layers of bureaucracy. So this shows the significance. And the money’s in the, the money’s out there. You know, you keep talking about 25,000,000,000 this year, a hundred and 75,000,000,000 over three years. It’s gonna 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 on the interceptor, which is the next piece, you can see them.

You can track them. You gotta shoot them down. And, again, I think, we’re in really good, position as a result of, mainly Aerojet but some other capabilities.

Ken Bettingfield, Chief Financial Officer, L3Harris: Yeah. From a interceptor perspective, you know, I would say we have not just propulsion, capability, but, Doug, we’ve got, I I would say, world class technology and capability around divert and attitude control. And how do you get an inter interceptor precisely where it needs to be essentially to hit a bullet with a bullet? And, in my in my view, we’ve kinda run the tables on on interceptor programs. You know, we’re on THAAD.

We’re on standard missile. We’re on PAC three. We’ve we won a significant position on next gen interceptor and glide phase interceptor. 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 next gen interceptor and potentially even accelerate and add more volume to low rate production. And, you know, I I 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, you know, as we look and evaluate that opportunity, I think between our space business that is now a prime in, you know, space vehicles and our Aerojet Rocketdyne business with, propulsion, divert, and attitude control, and then, you know, throw in IMS and CS in terms of, you know, communications, you know, the 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, you know, we’re the one company that can prime, that can sub, that can merge and supply. And I think there’s some wide open space for us to think about where we really fit into that space based interceptor opportunity.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: Chris, at the beginning, you mentioned the 20% commercial that you do. And, you know, certainly, you know, communication systems, you’re able to get high margins using basically, on on your own IP, you tend to you’ve tended historically to invest more in r and d yourselves than anybody else, which has allowed you to do that. I guess two things here. You know, 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 have 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?

Chris Kobacek, Chairman and CEO, L3Harris: Great question. And, yeah, I want to emphasize this commercial business model is something we’ve been doing for twenty years. There’s a lot of new entrants coming into this market. They talk about being commercial. And, you know, I’ve been, as as well as the team, we’ve been pretty outspoken.

If you know, there’s two 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 to to go faster, you know, we should set a goal of thirty, forty, 50 percent of the defense acquisitions should be commercial. And, you know, let’s embrace this and go quickly. And and, you know, this deals with doing away with all these regulations and bureaucracy and, you know, there’s cost accounting standards, which is a separate set of books.

There’s cost in pricing data. If there’s two companies bidding on something like night vision goggles, I mean, I honestly use this as a simple example. You know, we’re we’re we’re working on lot four, which means this is, the fourth year. I I I don’t understand how I can’t get a one page RFP. It 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 thousand, 8 thousand, 7 thousand. The other guy will do the same. And we can turn this in a day. Give us a week if you want. It would turn a two page proposal.

Here are the prices. I know what these cost. I know what I wanna sell them for. And, you know, then in this case, the army, you know, they always do a split buy buy, you know, six, seven, eight thousand of mine and three, four thousand the other guys, and let’s get started in two weeks. You know?

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 the company that’s more efficient and drives down the cost, whatever, you know, 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, you know, on the fixed price development, the nice thing also about commercial business models, say, on the radios, is you design it and you you define the capability. And, you know, there’s been studies going back decades, and everybody like me comes up and talks about the requirement.

There’s just so many requirements. You know, there was a recent, contract for a, I’ll just say, a relatively simple thing. Trust me. It was simple and probably is gonna cost 7 or $8,000 to me. That’s kinda simple.

The proposal came out or the RFP a 90 requirements. Like, I don’t wanna get into details on this one yet because it’s still competitive, but how can you come up with a 90 requirements for a 7,000? Like, it should weigh this much. It should go this fast or be this far. Like, you can come up with five.

So in a commercial business model, it’s like, hey. I have this software defined radio. Here it is. Do you wanna 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 costs this much. Do you wanna buy it? Yes or no? And you buy.

And then next time, you know, we could spend our own r and 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, two things.

You know, the entire industry, you know, which is water under bridge, we we absorb the whole impact of COVID, right, and the inflation and supply chain. Nobody got a penny from anyone in the government, notwithstanding prior administrations talking about it, you know, whatever they call this stuff, thirty six ten, all these but there was never any money. Nobody got an adjustment. We just all, you know, 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 and say we are not gonna bid a fixed price development program that wants me to price options. You know, we could we we have the ability to calculate and do parametric modeling. So, you know, I can build this thing for a hundred million dollars, I’m not gonna give you a price for, like, a hundred of these in 2026 and two hundred in 2027 and three hundred in 2028.

I haven’t even built the thing. So we’re not gonna we’re not gonna it’s irresponsible for the government to ask for fixed price options when something hasn’t been developed. We are not gonna bid it. More of industry is not gonna bid it, and, you know, that’s how I think we we control it. And, look, we’ve we’ve we’ve been able to turn around our negative EACs.

We have positive estimates to complete the last several quarters. And, look. It’s it’s tough stuff that we’re doing, and we take $2,030,000,000 dollar 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 hundred million, billion dollar charges. And, you know, I think that’s a result of the discipline and the process we have in place.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: 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 radios, and we’ve talked about this before, can you describe when you’re providing radios to US, to army, marines? You know? So how far along are we in fully outfitting what’s needed in those in those services? Yeah.

This is this is called the modernization,

Chris Kobacek, Chairman and CEO, L3Harris: you know, mainly for the army, the marines to a lesser degree. As as of, you know, a few weeks ago, it’s about 40%. So, you know, we see pretty good visibility at least through 2028 here in The US 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 through the the radio. So this this business has changed.

You know, going back a decade, it was always focused on the hardware, radio, radio, radio. These are software defined. The radio is just, you know, the installed base. The real secret sauce is in the software, the waveforms, and the ability to update it. And, you know, we have the largest, library of waveforms, and you’ll hear things.

You know, everybody will say there’s a resilient when I was in the Pentagon recently, I said, you know, it’d be helpful if you guys could define what resilient is because everyone like me you’re gonna meet with is gonna say they have a resilient system. But this is a technical thing that’s pretty, pretty significant. You don’t wanna omit RF. You don’t wanna be jammed. You know, you wanna be able to communicate in a secure environment.

And I think, our technology has proven that, you know, we have the resilient networks, the resilient software defined radio. So 40% more to go for The US.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: And 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 buy European move today and if there are any implications for you on this?

Chris Kobacek, Chairman and CEO, L3Harris: Yeah. So in in in The US, you know and this is the beauty of the commercial business model is there is an annual competition each and every year. I used the night vision gob night vision goggle example earlier, which is a split buy. The same thing happens in The US for radios, both handheld and manpack. Every year, you know, you get the opportunity to bid for a certain amount.

And, you know, the winner, sometimes gets 70%, eighty %, sixty %. You know, the, quote, loser, which isn’t really losing too bad, gets the other piece. So even though it’s commercial, it’s not not a monopoly. It’s not sole source, and there’s an annual competition between two companies. Or if someone else develops a radio, three companies.

But so far, it’s it’s generally two. On the European side, what we’re seeing is NATO is increasing their their budgets. Right? So in many cases, the European countries are doubling their defense spending. And, ultimately, you know, it’s about interoperability, the importance of communication.

And, you know, when when when you’re trying to protect your country, you want the best technology available. And, I think this would show that l three Harris has the best technology when it comes to radios and networks. Otherwise, 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 those, you know, those countries, I think they’re using that, you know, buying land vehicles and other things. If you double your budget, there’s more than enough money to buy the best US 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.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: And and when you when you think about this business, so you’re describing 40% along outfitting The US forces. Think you clearly have 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 five years? Yeah.

Chris Kobacek, Chairman and CEO, L3Harris: I I think at least 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 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, you know, the the the vision we have is, hey. We win 70% of the hardware with our waveforms. Someone else gets 30%, and then they license waveforms from us to put on those radio. And, you know, we’re getting close to getting a couple of those across the line, and that that would be a huge change in our strategy and drive even more margin, more cash, and more profitability.

Because that that’s one of

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: 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 commercial commercially structured contracts, more international business, additional waveforms, Can you give us a bit a sense on where you could go beyond that 25%?

Ken Bettingfield, Chief Financial Officer, L3Harris: Yeah. Let me jump in on that, Doug, because, you know, 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, you know, a three year development program with the with the Navy. That development likely will be, you know, significantly below that 25% kinda 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, you know, a growing night vision business as well as a solid, you know, public service, radio business as well. So, you know, yes, TCOM has opportunity to run, and I think the other businesses do as well. But as much as anything, it’ll it’ll likely be driven by, 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, you know, what they’re able to deliver from an international, a US army, you know, marine corps radio, to make sure that we’re both, you know, hitting customer needs and milestones as well as able to kinda keep that 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.

Chris Kobacek, Chairman and CEO, L3Harris: And I I’ll say I I could see CS being a little a little more lumpy. We’re just trying to go fast and get these capabilities into the, warfighters’ 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, you know, again, historically, it it it was what it was.

We probably had too many people, you know, trying to keep a smooth margin profile on a quarter to quarter basis. You know? And it’d be like, oh, we need to deliver more domestic radios last week of the quarter because we wanna tamp down the margins. So in the next quarter, when we do it and I’m like, let’s just get this stuff out the door. And, you know, some quarters, we’ll have, you know, a hundred or 200 bps higher, and the next quarter could be down.

But when you look at it over the year, we’re gonna see, margin growth. And, you know, 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, get as much revenue, cash in the door. And if there’s a little bit of lumpiness quarter to quarter, I I could care less. You know? As long as the yearly trend is positive, which it will be, that’s the way we wanna run the business.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: If we jump over to space and airborne. So you talked a little bit about the op particularly about golden dome opportunities also. Yeah. You’re on all three 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, you know, how big is that?

Chris Kobacek, Chairman and CEO, L3Harris: Oh, I I think yeah. I mentioned these FDA contracts are are about a billion billion dollars each. You know, they tend to take, say, three years. So, you know, think of a billion dollars spread over over three years. They’re gonna buy 54 satellites right now.

You know, the plan is to use three companies at 18 apiece is what they’ve done. But, you know, at some point, you know, I I think the DOD is gonna focus more and more on rewarding those contractors that are delivering, rewarding those contractors that are innovating. And, you know, if someone’s performing and others aren’t for whatever reason, you know, we’ve had discussions as to, you know, maybe give someone, 36 contract or 36 satellites, like us, specifically. You know? Because, again, we’re performing.

We’re on schedule. It’s nobody’s you know, 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 HVTSS, which is coming out of the Missile Defense Agency, you know, who who ultimately gets it. But, you know, 40 satellites is, you know, 2 to 2 and a half billion dollars, again, over three or four years. Right? So those are the types of things that can significant significantly move the needle. And once you have these constellations up, they have a certain life, you know, which is measured in single digits, and then you have to continually, replenish those.

So it’s it’s that type of business model that, you you know, gives you a lot of lot of visibility, a lot of annuity. And at some point, when these things are up and running, you know, everybody kinda falls into their niche, you know, I I think they’ll just be, you know, less and less competition. They’ll clearly be a leader in tracking. They’ll be a leader in transport. And, you know, once you have that incumbency an occasional competition will make sense.

But if you look at the major defense acquisition programs, last time I was looking at them, you know, over 60% are sole source. So, you know, once we become known as the tracking, layer company, then, you know, 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 two of us. They want 54 in 2026.

You price price them, and someone gets 30, someone gets 24, both guys get 27. Doesn’t matter to me. That’s where I think we need to go.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: 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 five year lifetimes as opposed to, like, twenty, and this becomes a production line, which, you know, 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 I absolutely see it that way. And, again, this this I

Chris Kobacek, Chairman and CEO, L3Harris: I made the comment about having a strategy, having a portfolio at the date of our merger, which was six years ago, and someday I’ll stop talking about it. We had no satellites in orbit. Right? And this was a strategic decision to prime, you know, 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’ll use different people’s buses. They’re all out there.

And depending on the mission, we we, you know, we use different companies’ buses. And and now you see a multi, you know, billion dollar space business where we’re doing more and more prime work. And, you know, admittedly, those first couple programs for SDA were were not very profitable, low single digits, but, you know, we’re building it up and and investing. And, yeah, we’ll be double digit margin as we should be for for all these, satellite programs. Well, at the same time, you’ve got a you’ve had

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: a couple fixed price classified programs in space that you’ve taken negative adjustments on. Can you talk about that? Are we Absolutely. Sounds like a great,

Chris Kobacek, Chairman and CEO, L3Harris: great question for our CFO. I mean Okay. I kind of take the positive EACs, and Ken books the negative EACs. So what are you doing? I don’t know.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: You gave you gave him some positive stuff earlier.

Ken Bettingfield, Chief Financial Officer, L3Harris: Yeah. So look. You know, we take on, challenging work, for sure, and we do have a couple programs on the classified side that are, you know, 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, you know, negative EACs.

I mean, they’re, you know, not hugely material, tens 10,000,000 here, 50,000,000 there on a couple of programs. And, you know, we manage it. We offset. We find ways to, drive positive EACs in other areas, and and and we meet our commitments. And that’s what we’ve been focused on since Investor Day is, you know, laying out what we’re gonna do and go off and do it.

And, you know, in a in a complex business where we’re solving hard challenges, you’re gonna run into run into some issues. But, you know, 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, you know, what has to happen. I think we’re probably dealing with, you know, a manageable risk as we look forward, you know, some number of of months of schedule risk largely at this point in time. So I think we kinda understand what the risk is. We’ve got it bound.

We’ve got it, I think, into our, you know, 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 to future production levels. So, you know, we we deal with challenges. We work through them. We have great engineers.

We have great, teams that support them in getting through, getting through it. And, I think it’s exciting. And, you know, we’re, largely managing it, I think, successfully.

Chris Kobacek, Chairman and CEO, L3Harris: And some some of these go back seven or eight years. Right? The whole legacy issue, the cost of the supply chain, COVID, and, you know, the the reality is it’s a change in culture and mindset. So this industry was generally a cost plus space mindset. The customer was cost plus.

Everybody wakes up and says, let’s go fix price. Sounds easy, but it takes a behavioral change both from the customer and from industry. And all these have different, industry players on it, you know, and you just have to get used to that. Right? You you have a fixed price contract.

You don’t actually get to make changes. You make changes, you pay more money. You know? And you just kinda have to get that in the in the DNA. And it sounds easy and obvious, but, you know, 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 gonna be more and more focus on a sense of urgency and deliver on time. So I’m happy to sign a fixed price contract. If you wanna add something for $10,000,000, give me 10,000,000. But more importantly, this thing is now getting delivered in January of twenty nine, not November of twenty eight.

And then that’s the wake up call. Right? You know, we can get paid and made finance. But if you really want this thing, stop making changes. You know?

And and and that’s that’s got the mindset that both sides need to focus on, and I think we’re getting there. But it takes takes years to get that get that figured out.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: Yeah. And then the changes have been the bane of the existence on these fixed price programs. Right? I mean, it’s and so presumably now, to your earlier points on fixed price contracting, you’re gonna be looking at these quite differently than you did back when these were first negotiated.

Chris Kobacek, Chairman and CEO, L3Harris: Yeah. And I’ll I’ll just say, you know, to beat the HPTSS horse, like, there’s no nonrecurring. We’ve launched it at work. You know, if and when we get this contract or an RFP, RFI, whatever they give us, you know, we we are aligned to say, just human nature, I guarantee there’ll be a change. And we’ll say, no.

It already works. You love it. It’s providing data to very on a daily basis to government agencies that need it. Why would you change it? Get these 40 launched.

Let’s protect The US ASAP. And and the next one, if you want, but it’s just gonna be that natural desire to stop asking, you know, for more and more stuff. You know, you wanna change the resolution. The guys will just naturally say, we can do that. And Ken and I and the team will say, no.

No. Yeah. And it’s like, well, that won’t take too long. It’s just a month and $4,000,000.

I guarantee you’ll be six months and $10,000,000, you know, and then you’ll have to test it. And you just can’t, you know, allow that, or at least you have the debate with the, customers. Are you sure you want this? And we’ve been submitting proposals, you know, over the last year with with multiple multiple bids. I’ll just tell you that.

They’ll they’ll ask for something. We’ll give them something, and then we’ll throw in one or two alternatives and say, or we can do this for this price or we can do this for that price. And, you know, it kinda shocks the system a little bit. Like, well, which one should we read? All three.

Like, we normally don’t submit three. Well, we can do what we want. There’s no rule that says I can’t put in three. I can give you a bid for 18 satellites, 36 satellites, and 54 as an example. You know, multiple choice.

What do you want? I want you to pick 54. You’re probably gonna pick 18. We’ll split the difference.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: Okay. So let’s go over to IMS. Alright. 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 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 this stronger performance, and where you’re headed?

Chris Kobacek, Chairman and CEO, L3Harris: Yeah. Well, you know, a lot of this is burning off legacy stuff, as I I said. I know it gets old, we’re in 2025, so it’s it’s pretty much over. But when you have all these fixed price contracts and you have at that time, we probably had almost 30,000,000,000 of backlog, probably 10,000,000,000 in IMF, you know, 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, we brought in more leaders. I’m telling you, it’s it’s all about leadership. We are getting so much talent, from the industry that wanna come and and join l three Harris, 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, you know, I think the workforce down in, ISR, mainly in Texas, very patriotic. And, you know, some of the prior investments we’ve made in armed Overwatch, you know, we’re the leader in business jets. Again, we’re business jet agnostic. We use Gulfstreams. 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 other items.

Right? We don’t have a our own airplane that we’re trying to sell. And, you know, 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, you know, I think it carries 10,000 pounds of stuff.

Now, again, it’s a single prop coming at you, but there are countries that need it. You know? Africa is a a big market. Some parts of the Mideast, you’re probably not gonna fly a crop duster to China. But, you know, we go all the way from rivet joints to business jets to crop dusters and everything in between.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: Well, one thing you’ve one thing you’ve talked about with IMS has been more international opportunities there. Can can you describe what you see as how how that international share is likely to evolve over the next few years?

Chris Kobacek, Chairman and CEO, L3Harris: Yeah. I think we’re about 30% inter international. These are big lumpy orders. I think historically, you know, we it’s it’s always hard to get those to get those booked in the time that 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 or some Mideast countries, you know, once you get this technology out here, in this case, the US Air Force uses it, you know, it allows our allies to to to leverage those prior investments in technology.

So, you know, business jets for a lot of these small to midsized countries can provide the coverage for the ISR they need. I I think Yeah.

Ken Bettingfield, Chief Financial Officer, L3Harris: I think there’s, also some AUKUS volume and opportunity if you look at the maritime business around, you know, UK and Australia submarines as well that, that provides some international, opportunity certainly in the ISR business. And then if you look at, West CAM and the electro optic, infrared sensors, certainly significant international opportunity there. So a lot of, lot of international opportunity at IMS. It is a growth area. There’s you know, that’s where we booked the international award in in April just after the first quarter.

Chris is right. It 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, you know, we’re we’re pursuing that international market pretty aggressively at IMS. And it’s not just in ISR. There’s, you know, some other, I’ll say, kinda component opportunities in in maritime with some of our allies as well.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: I wanna jump over to your other job, Ken, which is arrows yet rocket dying. So no question. You talked about it before. No question is very high demand. But, you know, this has been a turnaround since you took it over.

I mean, there were customers complaining, and and and it sounds like people are much throughput the output’s getting much better now from at least what we understand. Can you talk about, you know, how that turnaround is going? Can you get sort of 12% plus sustainable margins there? How are you looking at at Aerojet Rocketdyne right now?

Ken Bettingfield, Chief Financial Officer, L3Harris: Sure. Yeah. I mean, first of all, I’m I’m thrilled to be, you know, leading this team. It really is a great team. You know, top to bottom.

I think we’ve got just a fantastic team in Aerojet, Rocketdyne. And, you know, the business probably just wasn’t invested in, as much as it needed to be, over the last few years. And, you know, it was working through, you know, trying to sell itself. It was working through, you know, a proxy battle. And I think there were just a number of distractions.

And once we brought it into the l three Harris 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 under underinvestment in the supply base within Solid Rocket Motors. We received some money from the Defense Procurement 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, end of twenty five, early ’20 ’6, we’ll really start 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, than 12% margins as we look forward while we’re driving significant growth. And again, not just in missiles, but an important space propulsion business. You know, we’re working through some of the NASA budget challenges that Chris mentioned, but there are, other opportunities.

We’ve, you know, been solidifying backlog for r l 10, which is, you know, probably the 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.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: Well, I know we’re pretty much out of time here, but perhaps, Chris, you could just finish up by telling us what are you going to focus on in the next twelve months?

Chris Kobacek, Chairman and CEO, L3Harris: All right. Well, that’s a good question. I’ll start. You know, I’m I’m I’m chair chairman of the board of directors. So, you know, I’ll I’ll say all of our LHX NEXT has actually applied to our board.

We’ve cut our committee structures by 40%. We added a couple directors, but we’ve also had a couple retire. So we we streamline that process, probably in the next twelve months, try to find another sitting or recently retired CEO to add to our board. I spent a lot of time on, LHX NEXT, not only the cost, but more importantly, the transformation. I truly believe, you know, as we work more closely with partners like Palantir and such, the AI capability, the digitization is gonna be huge.

Spent a lot of time with customers, both congress and in the Pentagon and out in the field. Think it’s, you know, critical to show them to listen, to understand. And I again, I look at our portfolio on where we are. I mean, a lot of that comes from listening to the customer, understanding the national, defense strategy, spent a lot of time on talent. I talked about my team, you know, continuing to upgrade, throughout the company, continuing to develop talent.

And then, of course, you know, being a public company, I like to hang out here in New York and meet with shareholders and and analysts and try to communicate our our our story and our focus on long term growth and and such. So, you know, that’s kinda what I what I do, and, I have a great team and a supportive board. And, you know, I think I’d just leave you with a message. You know? No.

Nobody’s perfect. We’re we’re we’re we have a strategy. We’re executing. We’re not just sitting here on our laurels. We we we look back on the last five years, last three 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, you know, to bring them into the AI both internally and externally.

We’re talking with, Andral and seeing what we can do with them. You know, we we we are agnostic to platforms. We love partnerships. And Ken and I have said several times, I’ll prime, I’ll sub, 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, you know, it’s been a lumpy couple years, but I think the last eighteen months, maybe two years, can see everything falling into place. A lot of momentum. We’re excited about the future. So thank you.

Doug Harned, Bernstein Senior Global Aerospace and Defense Analyst, Bernstein: Well, great. Well, Chris and Ken, thank you very much for joining us.

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