L3Harris Technologies, Inc. (LHX) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Financial Results for Q2 2024: L3Harris reported segment operating margin of 15.6%, up 80 basis points versus the prior year, and non-GAAP earnings per share of $3.24, up 9%.
• Record Backlog in Communication System Segment: Ended the quarter with a record backlog of over $6 billion due to increasing demand for resilient communication products.
• Operational Performance and Margin Expansion: Expanded margins reflect focus on execution and driving profitable growth, with substantial progress in improving the operational performance of Aerojet Rocketdyne.
• Guidance Increase for 2024: Confidence in first half performance led to an increase in guidance for revenue, margin rate, and EPS.
• Capital Deployment and Strategic Divestitures: Returned over $300 million to shareholders through dividends and share repurchases, and completed the sale of the antennas business with plans to finalize the divestiture of the commercial aviation business.

Pessimistic Highlights

• Challenges in Airborne Combat Systems: Revenue was flat with growth in space systems and classified programs offset by lower volumes in airborne combat systems.
• Supply Chain Management: The next phase of LHX NeXt focuses on supply chain management, indicating ongoing efforts to address potential challenges in cost, quality, and delivery.

Company Outlook

• Increased 2024 Guidance: Based on strong first half performance, L3Harris increased its guidance for revenue, margin rate, and EPS, reflecting solid growth and operational performance.
• Continued Focus on Operational Excellence: The company remains committed to driving operational improvements, particularly in Aerojet Rocketdyne, to support future margin profile.
• Strategic Focus on Growth Markets: Emphasis on space, intel, cyber, and undersea markets as key areas of growth, with ongoing investments in technology and capabilities.

Q & A Highlights

• Q: Can you discuss the margin performance and outlook for Aerojet Rocketdyne? (Peter Arment, Baird)

  A: The business is performing well, with positive program performance in the first half. Operational improvements and purchase accounting adjustments are expected to continue improving the future margin profile.

• Q: How does the outlook and targets at Investor Day translate into margin improvement across the businesses? (Seth Seifman, J.P. Morgan)

  A: The midterm financial framework remains solid, with confidence in achieving 16% margins by 2026. The guide reflects improvements across segments, building towards the long-term goals.

• Q: How does the competitive landscape and bidding discipline impact bookings and revenue growth? (Robert Stallard, Vertical Research Partners)

  A: L3Harris maintains a disciplined approach to bidding, focusing on contract types and reasonable fees. The company is well-positioned in its portfolio, expecting a bump in book-to-bill in Q3.

• Q: What opportunities does increased defense spending in Europe create for L3Harris? (Ronald Epstein, Bank of America)

  A: The focus on interoperability at the NATO Summit highlights significant opportunities in Europe, particularly for software-defined radios, with potential for substantial growth in the region.

• Q: Can you provide details on the Ad Hoc business review committee's recommendations and implementation plans? (Kristine Liwag, Morgan Stanley)

  A: The review was beneficial, with no change to the 2026 financial framework. Recommendations are being implemented to continue driving value for shareholders and customers.

• Q: What are the order trends and backlog for the Communication Systems segment? (Myles Walton, Wolfe Research)

  A: The segment has a $32 billion backlog with robust demand for DoD modernization and NATO interoperability, supported by investments in capacity and software upgrades.

• Q: Can you elaborate on IMS margins and expectations for the second half? (David Strauss, Barclays)

  A: IMS margins improved in the first half, with expectations for continued solid performance. Mix shifts and commercial business impacts are considered in the guidance.

• Q: How does the SAS segment's top and bottom line look, especially with the shift towards space and intel? (Sheila Kahyaoglu, Jefferies)

  A: Space and intel are growth areas with solid margin performance, supported by strategic investments and operational improvements, offsetting challenges in airborne combat systems.

• Q: What drives Aerojet Rocketdyne's growth in the second half of the year? (Michael Ciarmoli, Truist Securities)

  A: Growth is driven by operational improvements, supplier deliveries, and facilitization investments, with a focus on delivering critical capabilities to customers.

• Q: Will you consider disclosing book-to-bill by segment again? (Scott Deuschle, Deutsche Bank)

  A: The company prefers to focus on long-term guidance and annual disclosures, aiming for transparency without getting lost in quarterly fluctuations.

• Q: Can you clarify the RFI for SDA Tranche 3 and its impact on margins? (Jason Gursky, Citigroup)

  A: The RFI for Tranche 3 is analyzed, with no specific volume details available yet. LHX NeXt program aims for significant cost savings, with a portion accruing to the company for margin opportunities.

• Q: Why maintain the $2.2 billion free cash flow guidance despite strong 2Q performance? (Richard Safran, Seaport Research Partners)

  A: The guidance reflects confidence in achieving targets without expecting significant working capital headwinds, aligning with the midterm financial framework.

• Q: What's the focus on unmanned systems, especially in maritime? (Peter Skibitski, Alembic Global)

  A: Unmanned systems, particularly in undersea and autonomy, remain a focus area with ongoing investments and opportunities in sensors and autonomous surface vehicles.

• Q: How do you view the competitive landscape and price pressure in the tactical communications market? (Kenneth Herbert, RBC Capital Markets)

  A: The company maintains a disciplined pricing strategy, focusing on technology and interoperability to secure international opportunities without significant price pressure.