L3Harris Technologies, Inc. (NYSE:LHX) has announced a strong start to 2024 with significant first-quarter financial results, emphasizing its focus on national security and critical technologies. The company has benefited from the recent passage of the 2024 appropriations bills, with $844 billion allocated for defense spending, and has reported double-digit year-over-year revenue growth.
L3Harris also raised its full-year guidance for margins, earnings per share (EPS), and revenue, while reaffirming its commitment to free cash flow. Moreover, the company has outlined its strategic plans, including portfolio shaping and international business expansion, and has made progress on its LHX NeXt initiative aimed at achieving gross cost savings of $1 billion by 2026.
Key Takeaways
- L3Harris Technologies reported double-digit year-over-year revenue growth in Q1 2024.
- The company raised its 2024 guidance for margin, EPS, and revenue.
- A strong international pipeline includes a $150 million secure networking program for Taiwan.
- LHX NeXt gross cost savings target set at $1 billion by 2026.
- The company's CS segment expects a heavier DoD tactical mix in H1 2024, with less margin opportunity.
- Plans to reduce data centers from 98 to 2 by 2025-2026 are underway.
- Two portfolio transactions are in progress, with the antenna business expected to close in Q2 and the commercial aviation transaction in H2.
Company Outlook
- The company is optimistic about the future, with plans to digitize factories by year-end.
- The CEO anticipates long-term double-digit growth, driven by increased demand and recent contract wins.
Bearish Highlights
- Interest expenses will remain elevated in the second quarter.
- The CS segment will face lower margin opportunities in the first half due to a heavier DoD tactical mix.
Bullish Highlights
- Strong backlog and opportunities in the tactical radio business are reported.
- The company's IMS segment showed strong performance with a net EAC of 11.4% in Q1.
Misses
- The company acknowledges production bottlenecks, including low yields and supply chain challenges, that need to be addressed.
Q&A Highlights
- The company is adjusting the LHX NeXt program out of earnings, with cash severance costs reflected in the schedules to the earnings release.
- A business review committee is set up to focus on operations, portfolio, and capital deployment strategy, with findings to be reported mid-year.
L3Harris Technologies has demonstrated a robust financial and strategic position in the first quarter of 2024. The company's focus on national security and critical technologies, along with the recent defense appropriations bills, has positioned it well for continued growth. With a strong international pipeline, including significant contracts like the one in Taiwan, L3Harris is expanding its global footprint.
The company's commitment to cost savings and operational efficiency through the LHX NeXt program is expected to yield significant results by 2026. Despite some challenges, such as production bottlenecks and a heavier DoD tactical mix in the first half of the year, the company's leadership remains confident in its long-term growth prospects and strategic initiatives.
InvestingPro Insights
L3Harris Technologies, Inc. (LHX) has not only started the year with robust financial results but also stands out in the investment landscape with several noteworthy metrics and strategic advantages. Here are some InvestingPro Insights that further illuminate the company's position:
InvestingPro Data highlights L3Harris Technologies' substantial market capitalization of $40.78 billion, underlining the company's significant presence in the Aerospace & Defense industry. The company's P/E ratio stands at a high 34.73, suggesting a strong investor confidence in its earnings potential. Moreover, the revenue growth for the last twelve months as of Q1 2024 is an impressive 15.66%, indicating a solid financial performance and potential for future growth.
An InvestingPro Tip worth noting is that L3Harris has raised its dividend for an impressive 22 consecutive years, showcasing a strong commitment to returning value to shareholders. This is complemented by the fact that the company has maintained dividend payments for 54 consecutive years, reinforcing its reputation as a reliable dividend payer.
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Full transcript - L3Harris Technologies Inc (LHX) Q1 2024:
Operator: Greetings. Welcome to the L3Harris Technologies First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the opening remarks. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mark Kratz, Vice President of Investor Relations. You may now begin Mr. Kratz.
Mark Kratz: Thank you, Rob. Good morning, and welcome to our First Quarter 2024 Earnings Call. Joining me this morning are Chris Kubasik, our CEO; and Ken Bedingfield, our CFO. Yesterday we published our first quarter earnings release detailing our financial results and guidance. We also provided a supplemental earnings presentation on our website. As a reminder, today's discussion will include certain matters that constitute forward-looking statements. These statements involve risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please reference our earnings release and our SEC filings. We will also discuss non-GAAP financial measures which are reconciled to GAAP measures in the earnings release. I'd now like to turn it over to Chris.
Christopher Kubasik: Hey, thanks, Mark, and good morning, everyone. Since the merger of L3 and Harris five years ago and after strategic acquisitions and targeted divestitures, we have built a company with a national security focus. We have critical technologies in all domains that align to national security priorities and the global threat environment. Responsive space, resilient communications, and rocket motors are critical for the future fight. The trusted disruptor strategy and our portfolio are setting the stage for L3Harris to differentiate ourselves with top line growth, while simultaneously increasing our industry-leading margins. The global security environment continues to be one with heightened tensions and regional conflict. Domestically, Congress recently passed the 2024 appropriations bills, which included $844 billion for defense. Our programs are well-funded and we are positioned for profitable growth across much of the enterprise. Demand remains strong for our products and solutions as we started off the year with a 1.06 book-to-bill ratio. Internationally, we continue to see a strong and geographically diverse pipeline of opportunities. As an example, we were recently awarded a $150 million program to provide secure networking to Taiwan, displacing a longtime incumbent. This win is an integral part of our interoperability and supports the CJADC2 mission. Turning to tactical radios, we maintain a robust international pipeline of over $10 billion, including several FMS cases, primarily for Europe totaling more than $1 billion. These opportunities along with a continued strong backlog give us confidence in an international tactical radio ramp in the second half of the year. Other international opportunities are supported by the DoD supplemental funding, particularly in Ukraine. Earlier this week, the President signed a foreign aid package for Ukraine, Israel and Taiwan that includes $67 billion in funding for key defense programs. L3Harris has been a key supplier in Ukraine since the start of the conflict and the need for this equipment remains strong. Our products are being used in theater and exceeding expectations. The supplemental bill will provide our allies access to needed capabilities, while at the same time support the US defense industrial base, including small and mid-sized businesses. With the bill just recently passed, we will give you more information during the next earnings call on the incremental opportunities it provides. Our workforce is proud to support our country and its allies around the globe. Turning to 2024, our strong first quarter results reflect improvement across our diverse set of programs and products. We're executing on our contracts and improving cost and schedule performance, which helped drive net positive EACs for the second consecutive quarter. In our product businesses, we are improving quality and driving higher on-time deliveries. Turning to programs, I see development risk abating. This is not to say that we're out of the woods on all of our development programs, but the business is performing well and the disciplined bidding focus and programmatic rigor is starting to pay off. LHX NeXt cost savings are also starting to contribute and we see that benefit accelerating in 2024 and 2025. Ken will cover the financials in more detail, but I wanted to highlight that revenue was up double-digit year-over-year, and operating income was up $150 million, resulting in margins expanding 80 basis points to 15.1%. Given the strong start to the year, we are raising our 2024 margin EPS and revenue guidance while reaffirming our free cash flow commitments. At our Investor Day, we committed to $1 billion in LHX NeXt gross cost savings by 2026, focused on optimizing our workforce infrastructure and supply chain. The initiative will enable us to maintain our industry-leading margins while investing in technologies, tools and systems to support our customers and employees. We are accelerating our LHX NeXt activity in 2024 and earlier this month we implemented a workforce reduction that will result in about 5% fewer people than when we began the year. With these reductions, we are focused on eliminating non-core processes, streamlining our organizational structure to maximize efficiency and rightsizing our physical footprint. To summarize, our actions to date have put us ahead of our gross run-rate savings target of $400 million by the end of the year. There's more work to do, and I am confident in our LHX NeXt leadership team and know that our collective efforts will yield the $1 billion savings target as previously committed. Operationally, we continue to make progress within our Aerojet Rocketdyne segment. Since closing the acquisition, we've implemented processes and tools, which has helped reduce late deliveries by 20%. We've returned multiple programs back to green and we continue to work with our customers and the DoD to accelerate and improve deliveries of these critical products and to support future growth. Aligned with that growth it was recently announced that we were selected to be the primary propulsion provider for the Missile Defense Agency's next-generation interceptor. We anticipate this to be a multi-billion dollar opportunity over the life of the program. Outside of operations, our finance team saw an opportunity to refinance some variable rate debt and replace it with fixed-rate notes saving 150 basis points. On capital deployment, we increased our dividend for the 23rd consecutive year and we were able to get back into the share repurchase market in Q1, executing about half of the 2024 share repurchase target. We expect about $1 billion in gross proceeds from the previously announced divestitures, which will largely be used to reduce our leverage below our 3.0 target ratio. We remain focused on achieving the financial framework we laid out at Investor Day and our first quarter results are a solid step forward towards delivering on our commitments. I'll now turn it over to Ken to provide additional perspective.
Kenneth Bedingfield: Thanks, Chris. Let's start with consolidated results for the quarter. We reported solid bookings of $5.5 billion, including over $900 million for SDA Tracking Tranche 2, nearly $150 million for US Marine Corps and SOCOM handheld tactical radios, and an international award for a NATO country for missionized business jets that leverages our domestic ISR capabilities. Backlog remains at over $32 billion and supports margin expansion opportunity as we move forward given operational improvements and recent bidding discipline. Revenue grew 17% and 5% organically with growth in three of our four segments. Revenue at IMS reflects aircraft procurements in Q1 '23, resulting in lower sales in Q1 2024. As Chris mentioned, operating margins expanded to 15.1%, up 80 basis points from improved operational and program performance, while also starting to see the benefits of LHX NeXt. EPS grew 7% to $3.06 per share, primarily from segment operating margin performance, partially offset by higher interest expense and lower pension income. On a pension-adjusted basis, first quarter EPS was up over 10%. Free cash was an outflow of $156 million as first quarter cash flows are typically the lowest of the year. As you will recall, we derisked 2024 cash taxes at the end of '23 and we remain confident in delivering free cash flow growth this year to $2.2 billion. I'd now like to turn to some segment details for the quarter. I highlighted earlier that revenue grew 17% from the acquisition of Aerojet Rocketdyne and organic growth in our SAS and CS segments, as we continue to see strong demand for Space Systems and Tactical Communications businesses. On margins, we drove operational improvements throughout each of our four segments. In SAS, we are making progress on development programs, including the recent launch of five L3Harris missile tracking satellites as part of the SDA Tracking Tranche 0 and HBTSS programs. With these space investments and risks largely behind us, we are beginning to realize the benefits of the new growth areas and maturing processes as we move forward. These efficiencies were a contributing factor in expanding SAS margins by a 100 basis points in the quarter. We made progress on program performance, resulting in a $75 million improvement in net EACs versus the first quarter of 2023. These were driven by improvements in all segments as our focus on operational rigor continues to pay dividends. This was most prominent in our CS segment where the Integrated Vision Systems sector saw stronger results. The Tactical Data Links business continues to perform well as we realized synergy benefits of a consolidated business within our broadband communications sector. And in Tactical Communications, which drove solid results with an increased level of lower-margin DoD deliveries, we anticipate it will continue through the first half of the year. On capital allocation, our plan remains the same. We will continue to focus on deleveraging the balance sheet before we look at opportunities to accelerate share repurchase beyond offsetting dilution. During the first quarter, we returned over $450 million to shareholders through dividends and share repurchases. Moving on to 2024 guidance. We are tightening our revenue range of $20.8 billion to $21.3 billion, while we reaffirm our free cash flow commitment of $2.2 billion. We are increasing total company margin guidance for the year to greater than 15% versus prior guidance of approximately 15%. This increase is most notable in SAS, where we now expect margins of approximately 12%, up from prior guidance of mid-to-high 11%. Outside of operations, we are also updating our guidance for pension income. At the end of last year, we combined the acquired Aerojet Rocketdyne pension assets with our own. Our actuarial update is more positive than our initial outlook, so we have updated those figures accordingly. Lastly, on guidance, we are increasing our earnings guidance to a range of $12.70 per share to $13.05 per share, up from prior guidance of $12.40 to $12.80. From a modeling perspective, I would continue to point out that our CS segment will have a heavier DoD tactical mix in the first half that has less margin opportunity than international programs. Interest expense will also remain elevated in the second quarter. Both trends should reverse as we make our way into the second half of the year, along with the second half weighted free cash flow profile. Overall, a good start to 2024, and we remain focused on executing to deliver on commitments to our customers and our shareholders. With that, let's open the line for questions. Rob?
Operator: Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from Noah Poponak with Goldman Sachs (NYSE:GS). Please proceed with your question.
Noah Poponak: Hey, good morning, everyone.
Christopher Kubasik: Hey, good morning, Noah.
Noah Poponak: Hey, Chris, I wanted to ask you, you have the trusted disruptor strategy and you've talked about trying to prime more and kind of growing the profile and the size in the sector and that's been working to a degree. We're seeing -- now that we're seeing, I think some new entrants in the space try the same thing. And maybe have a little more success than they've had in the past. How do you think about that? I mean, does that crowd that effort for you or is the pie big enough for multiple companies to do that? And then, Ken, just one clarification on the LHX NeXt, will you -- will all of that be adjusted out of earnings, and is all of that cash or some of that non-cash? Thank you.
Christopher Kubasik: All right. Hey, Noah, thanks for the question. Yeah, I think our strategy is working, as I said and the portfolio is well-aligned. Relative to the pie between the supplemental and the fiscal year '24 budget, we're well over $900 billion. So I think there's plenty of DoD funding relative to the new entrants, which sometimes I like to think of us as one since we're five years old, but I know where you're going with your question. We've taken the approach to team and work collaboratively with these new entrants at the highest levels. So a lot of the new entrants tend to be a little more software-focused. I think the traditional, including ourselves are a little more hardware-focused. So we're working collaboratively. There has been some recent awards in Q1 where we are actually a subcontractor to a new entrant that won a significant program and sometimes they work under us. So I would say we're embracing them and working collaboratively with them. And of course I've talked about our shield investments in the past and working with those venture capital companies who are much smaller, but also have great technology. So I think it's working and that's been our approach. Ken?
Kenneth Bedingfield: Yeah. Noah, from an LHX NeXt perspective, we are adjusting out the implementation costs of the program and certainly then trying to leverage the benefits of LHX NeXt in the businesses. We talked about what that target looked like for 2024 and the businesses are off working hard to operationalize that and reflect that benefit in their performance. And I think you're starting to see that here in the first quarter. And then from a cash perspective, we're primarily just adjusting out the cash severance costs related to the program. And you'll see all that reflected in the schedules to the earnings release.
Christopher Kubasik: Yeah. Look, we've gotten the feedback relative to our disclosures. So under Ken's leadership, we're trying to cut back on these one-time non-GAAP adjustments and be much more transparent. So I think it will be all laid out clear for you to analyze.
Operator: Our next question comes from the line of Pete Skibitski with Alembic Global. Please proceed with your question.
Peter Skibitski: Yeah, good morning guys.
Christopher Kubasik: Good morning, Pete.
Peter Skibitski: Hey, Chris, how does the win on NGI with your partner, how does that impact your outlook for Aerojet? And also considering, as you mentioned, the fiscal '24 supplementals, do you get more bullish about your ability to hit that $26 billion target or $23 billion, I should say?
Christopher Kubasik: $23 billion and $26 billion? Yeah, absolutely. No, you know, NGI, which is designed to protect the US against evolving long-range ballistic missile threats is a huge win for the OEM. We were a merchant supplier, as I've talked about before on both teams. So this definitely gives us a tailwind. When we looked, I went back and looked at our deal model, this really was not factored in when we made the acquisition of Aerojet Rocketdyne. So from that perspective, it's going to be accretive at least to our own internal goals. Aerojet Rocketdyne is a great technology, especially with the large solid rocket motors. The quantities are still to be determined. It's going to start as a development program. We're in discussions obviously with the prime. We haven't actually been awarded and signed the contract yet, but as you saw in the media, we were selected as a propulsion provider. So it's very exciting. And again I think it will be a slower ramp as you would imagine, but '25-'26 timeframe, I think we'll start to see the revenue hit our financials.
Operator: The next question comes from the line of Kristine Liwag with Morgan Stanley (NYSE:MS). Please proceed with your question.
Kristine Liwag: Hey, good morning, everyone.
Christopher Kubasik: Hey, Kristine.
Kenneth Bedingfield: Good morning.
Kristine Liwag: You know, since you formed a new business review committee back in December, can you give us any color on how progress has been? What are the key areas that have come under focus and how this compares to your LHX NeXt type initiatives as well? Do they overlap?
Christopher Kubasik: Yeah, Kristine, it's Chris. We did set up the ad-hoc business review committee of the Board comprised of four Board members as you saw. We've been meeting a couple of times a month for a few hours each. And we brought through a variety of topics that have been laid out in the charter that we filed in the 8-K. I would say from anything from operations, we've looked at the programs. They reviewed the program, review process, the bidding process, the LHX NeXt strategy and goals. They've reviewed the portfolio, our capital deployment strategy. And we're just kind of checking through the items in the charter. Some topics are one meeting, some topics are two meetings. I feel like we're about halfway through the process, maybe a little more. And then probably middle of the year or so, the BRC will report out to our Board of Directors with observations and recommendations and findings. So I'd say it's been a very collaborative process. I think it's an -- it's been good for the company and it's a good way to orient some new Board members quickly about the company and what we're trying to accomplish. So I'd say all is going well to this point. So more to come.
Operator: Thank you. The next question is from the line of Gavin Parsons (NYSE:PSN) with UBS. Please proceed with your question.
Gavin Parsons: Thanks. Good morning.
Christopher Kubasik: Good morning.
Gavin Parsons: I wanted to ask on the nearly 100 basis points of year-over-year margin expansion. If there's a way to parse that out between the drivers, I know a lot of them go hand-in-hand, but how much of that is NeXt versus EACs, repricing for inflation, mix, so on, just if there is a way to think about what the drivers were in buckets?
Kenneth Bedingfield: Yeah. Hey, Gavin, it's Ken. I would say that, we're seeing improvement in the kind of the high-level buckets across the Board. I would say we're seeing some mix benefits in terms of, as Chris mentioned, kind of moving out of some of the development of phase of contracts and into some of the more mature phase. From a mix perspective, we are seeing some of the areas of the business that are higher mix of cost-plus growing. So as an example, a space within SAS was a strong grower and has a bit of a higher-cost plus mix. So that kind of works the other way a little bit. But we are seeing some of the disciplined bidding start to come through in terms of confidence in our ability to perform as well as price discipline and then just performing on our programs and certainly LHX NeXt contributing. And I wouldn't want to put numbers on each of the individual buckets, but largely as we think about kind of how you bridge from last year to this year, for the most part, each of those major buckets are contributing.
Operator: Thank you. The next question is from the line of Peter Arment with Baird. Please proceed with your question.
Peter Arment: Hey, good morning, Chris and Ken. Hey, Chris, you've made a lot of progress already on starting on LHX NeXt. And I think about a third of it is tied to your gross saving targets, it's tied to labor reductions. You recently made an announcement there. Maybe if you could just give us a little more color on how you think things will evolve on what's optimal for LHX and then related to all of the actions that you've been taking, also on portfolio shaping, just in terms of any future kind of thoughts that you've had on further shaping the portfolio? Thanks.
Christopher Kubasik: Yeah. No, thanks, Peter. So, yeah, the workforce was probably the quick hitter for what we need to do for LHX NeXt. And as you said, that got us about a third of the way there. The next part is going to be a little more timely and a little more complicated. And you know the facilities, I think, are going to be a key part of it. Looking at the infrastructure, we have a goal of getting from 275 facilities down to 200. We have about seven or eight that we've identified that will start the process here in the second quarter. So that will have a little bit of cost to move and relocate and consolidate. But these would be smaller -- smaller entities that -- the business case is better to consolidate into a larger facility. We're continuing to reduce our ERP systems. We've invested in some technology called the unified data layer to get us access by laying on top of all of our systems to be able to get data more quickly. And then, of course, we talked about the initiatives in IT ultimately getting believe it or not from 98 data centers, I'm sorry, 85 data centers down to two. So that's the infrastructure, that's going to take some time and that's why it's going to lead into 2025 and 2026. We've already kicked off with the indirect procurement. We've effectively outsourced that, taken advantage of the buying power of that enterprise. So that's both a combination of price and quantity. So we're tracking to that. And then ultimately, we called it the supply chain, but it's really beyond the supply chain. It's the integration of all the functions that are critical to our products with the overall goal of reducing the cost of our products. So there is an engineering component. There's clearly a supply chain component, contracting and such. So that process is ongoing, but that's where we're going to get to next $600 million or so of savings. To your question on portfolio shaping, as you know, we have two that are in process. I'll just give you an update there. The antenna business, which we announced, a couple of hundred million dollars that's tracking to close the middle of this year, second quarter to be specific. And then our commercial aviation is going to be more in the second half of the year, that will give us $1 billion of proceeds. Relative to the rest of the portfolio, we're just taking a hard look at that. We're going to be able to hit our leverage ratio based on these two. And to the extent we can get a good price for what we've identified as non-core, we'll do it. But too many -- too many of the offers are coming in low and people think we're desperate to sell and I can assure you we're not. So we need to get better valuations before we proceed on other transactions. Otherwise, we'll keep and run the business and go forward from there.
Operator: Our next question comes from the line of Jason Gursky with Citigroup. Please proceed with your question.
Jason Gursky: Good morning. Hey, Chris, would you spend a few minutes kind of walking around the communications business and maybe give us some updated thoughts since you last reported out on the funding environment? We've had fiscal '24 that got past, '25 that got introduced. We've had some supplementals as well. And just kind of give us your take on how this plays out over the next couple of years and maybe offer up some comments on Link 16 and the expected refresh of all that hardware when that kind of hits. Just what have we learned here over the last couple of three months on the communications business? Thanks.
Christopher Kubasik: Yeah. Thanks, Jason. Let me start with Link 16. Again, we have a footprint on 20,000 platforms and then there is variations of Link 16 and other data links that we've developed that are going to be able to go into those platforms or footprints. So I think we're starting to see that. Our ultimate goal was to get Link 16 into space. I can tell you for the SDA transport opportunities that are coming up, our team is going to be a merchant supplier. And as of now, it looks like we're going to be on all the teams providing a Link 16 type capability in space. So we're excited about that. Relative to the communication systems, I want to reiterate the opportunity that we won in Taiwan, $150 million for networking, which was a cross-company win, but led by our communications segment. So that's a big deal for us. And as I mentioned, it really supports the CJADC2 initiative that our country has been talking about for quite some time. Relative to the radios, I mean, this is just absolute good news. I know we've been talking about modernization, not only here in the US but globally. And as I mentioned, we have six FMS cases that are currently going through the process, through the system in Europe. The backlog is going to be a record backlog. Even in Q1, we were able to get the marine and the SOCOM radio orders booked. And there is a certain capacity and ability to deliver out of our Rochester facility. And it really comes to be honest how quickly we can get these supplemental funds under contract and approved and delivered. And with our trusted disruptor strategy, our business model actually allows us to potentially deliver radios within a week of getting the contract depending on the configuration in the country. So the way I look at it, we have high confidence in the guidance we've given. We clearly have the second half ramp-up, but which countries will get -- which radios will really be a factor of when the funding turns into a contract and those that don't get signed and delivered in 2024, will clearly be 2025. So just feel better about the business in a huge way. And again, the products are in theater being tested daily and they're working and exceeding expectation and the whole focus on resilient communications is paying off.
Operator: Our next question is from the line of Ken Herbert with RBC Capital Markets. Please proceed with your question.
Kenneth Herbert: Yeah. Hi, good morning.
Christopher Kubasik: Good morning.
Kenneth Herbert: Hey, Chris and Ken. Hey, maybe just a two-part question. First, on the Communications segment, you obviously did 24% margins in the first quarter. The guidance implies some slight ramp in the second half, but it clearly sounds like with international mix and maybe a little bit of a depressed second quarter, there could be some upside to that. Can you just talk about if there's anything one-time in the segment in the first quarter and any puts and takes there we should think about as we think about the second quarter? And then just or in the second half of the year and then just at a higher level, obviously, international seems to be a growing business maybe faster than the US. Can you just talk about longer-term the margin impact of the international opportunity within the CS segment, but then more broadly? Thank you.
Kenneth Bedingfield: Sure, I'll take that one. So the first part of the question on CS margins, we delivered 24% margin in the first quarter, which I think was great performance by the CS team. And that does reflect a higher domestic mix than we saw late in '23 as well as a higher domestic mix than we expect to see in the second half of '24. We did guide a low-to-mid 24% margin for CS for '24. And I think what we're trying to communicate is that we expect the domestic mix to be kind of consistent in the second quarter with the first quarter, solid performance could yield similar results. But in driving that margin up to the low-to-mid 24% for the full year, we are looking at some international opportunities to realize some additional margin benefit as we think about that kind of full year impact. And I think so that's what we're trying to communicate on CS margins from a Q1 and full year '24 perspective. And then from the international side, clearly, as Chris talked about in his prepared remarks and in the response to Jason's question, a lot of international opportunity at certainly the CS segment. But as we look beyond that as well, we see international opportunity, in particular at IMS and certainly the other segments have international components to their business. We don't necessarily track some of the ultimate end customers quite as closely in some of those. But the international margins tend to be stronger across the Board. In my remarks, I talked about an ISR program for a NATO country. We would expect that would have strong margins as we again think about how we make those deliveries to our international allies and our country's partners. And recognizing the different risks and challenges that come with those programs that should you perform and we expect to be able to perform will generate higher margins for the business. So we do see that continuing to move into the business. So I will comment, CS clearly is the kind of the quickest turn segment, the shortest cycle segment in terms of ability to take international orders and turn it into sales. So just an example, that ISR program we talk about will be a multiyear program and we'll see that kind of move into the revenue over a bit more time. But with that, I'll turn it to Chris for a few more comments.
Christopher Kubasik: Yeah, Ken, just as a reminder, we're in the low 20% of our revenue comes from international customers and part of our margin improvement strategy is to grow our international business. And just as a reminder, about half of that is foreign military sales, which has margins consistent with the DoD work for the most part and the other half is direct commercial sale and that's where we tend to have the higher margins. But as Ken said more international is synonymous with higher margins and that's where our focus is. The supplementals are a big step in the right direction.
Operator: Our next question is from the line of Gautam Khanna with TD Cowen. Please proceed with your questions.
Gautam Khanna: Hi. Can you hear me guys?
Kenneth Bedingfield: Yes, we can.
Gautam Khanna: Terrific. Hey, thank you. I just had two quick questions. First, I was wondering if you could give us more granularity on the RF tactical backlog book-to-bill trends, you mentioned something on SOCOM. And if you could just talk a little bit about overall mix this year and perhaps next in that business? And then I had a question on IMS EACs. And if those have turned positive and if not what's sort of still holding that segment back with respect to kind of the profit accruals? Thank you.
Kenneth Bedingfield: Yeah. From a tactical radio perspective, I would say, we're -- had a solid bookings order in the quarter. We've got a very solid backlog for that business at this point in time. Looking at a multi-billion dollar backlog in that business, and for a pretty quick turn, our shortest cycle business, that is a very robust backlog at this point in time. So we're excited about the opportunities, I would say. The Marine Corps and SOCOM opportunity is a great one as we continue to expand that partnership with that very important customer for the business. We were also down-selected for the Air Force Next-Gen Survivor Radio, which is a great opportunity for that business to expand into a new market as well. And then clearly the supplemental, as Chris mentioned, and the international opportunities so I think a huge opportunity in terms of really strong backlog at the Tactical Communications business. And as Chris mentioned, a great business model that enables them to kind of turn that factory pretty quick to deliver the radios to appropriate customers as needed based on critical demand and critical needs on the battlefield. At IMS, in terms of -- I think the question was about EACs. And I would say that as we talked about in the prepared remarks, every segment performed better from a net EAC perspective. IMS was a part of that, significantly better performance than Q1 '23. IMS is our longest cycle business and it takes a while to kind of turn those programs and the operations and get everything working through the system. I think IMS had great performance in the first quarter at 11.4%, working towards the guidance that we put out there for IMS for full year '24. And strong performance on their programs, I think really starting to stabilize both the operations in terms of rates, realizing some of the benefits of LHX NeXt as well as all the hard work that the sectors within IMS segment are doing to deliver on their programs. So we're really excited about kind of the stabilization and the continued strong performance as we look out into the remaining quarters of '24.
Operator: Our next question is from the line of Richard Safran (EPA:SAF) with Seaport Research Partners. Please proceed with your question.
Richard Safran: Yeah. Good morning. Chris, Ken, Mark, how are you doing? So I wanted to ask two things about Stand-in Attack. It was an opportunity for you to be prime and correct me if I'm wrong, I think you decided to no bid. We're hearing a lot more about too much risk being pushed to industry. One of your competitors just talked about adjusting for that in their bids. So I was curious about what your thinking is about bidding going forward and what's the next opportunity for you to be prime.
Christopher Kubasik: Yeah. Thanks, Richard. I think I've been pretty consistent on the -- on our bidding strategy. We talk about the bidding discipline. It's been referenced a few times. There's two things going on there. A lot of people in this industry spend an inordinate amount of time and money trying to focus on a price-to-win strategy and hiring outside consultants and we kind of find that interesting, but irrelevant. So we've taken a different approach. What is our labor, what is our supply chain, what is our overhead, and what's a reasonable fee? We add that up and that's the bid we put in. And if it's deemed too high, we move on and if it's appropriate based on our past performance and capabilities, we book the order. So that's a little bit of a change here over the last year or so. But more importantly is bidding the right types of contracts. And I think in Stand-in Attack weapon, it was a fixed-price contract for development, again with fixed-priced options. And we will not bid any programs where we are asked to give a fixed price on an option for a product that's yet to be developed. It's just plain and simple, common sense. I think there are some people in the department that agree with me and maybe there are others that don't, but you see what happens in most of these negative EACs across the industry, when you do a root cause corrective action, more times than not, it's a bad contracting vehicle. Nobody is perfect and there are performance issues, but you cannot perform out of a bad contract. And that's what we're trying to do. I guess, on next opportunities to prime, I mean, we have we -- and again we take an approach where is the best approach, either be a merchant supplier, a subcontractor, or a prime based on our capabilities and what the customer needs. There's Armed Overwatch. We've been successful there. We just got the delivery order three. So we're up to 25 aircraft already. HADES, which is a big opportunity for the Army, it's the high accuracy detection and exploitation system. It's basically up to 14 aircraft. We're bidding a global 6,500. This aligns clearly with our ISR and other capabilities. So that would be a big a big win for us. We have some maritime undersea ranges where we've primed and there is some follow-on opportunities, a bunch in classified space. Usually get a space question for now, but I'll just plug that we have no satellites in orbit at the date of merger. We launched six in the quarter, and we've been awarded 60 SATS as prime and there's more in the pipeline. So those come to mind just off the top of my head. And of course, we have a lot of opportunities at Aerojet Rocketdyne. Those are follow-on, but those are not prime programs. So I guess SDA, maybe I was thinking SDA Tranche 3 for tracking. As you know, we're the only company to have been awarded Tranche 0, 1, and 2. For a total of 38 satellites, we should get an RFP in the fourth quarter for Tranche 3 and that could be another 18 satellites. So hope that helps, Richard.
Operator: Thank you. Our next question is from the line of David Strauss with Barclays (LON:BARC). Please proceed with your question.
Christopher Kubasik: Hey, David.
David Strauss: Wanted to ask about the performance in the quarter. I think well above your full year guidance. So how are you thinking about that? And then if you could just touch on two programs there in the press a lot where you're a supplier F-35 Tier 3 and then how you're [Technical Difficulty] rest of those? Thanks.
Kenneth Bedingfield: Yes. Thanks for the question, David. Appreciate it. I think you were breaking up a little bit, but I believe the question was about SAS performance in the quarter. And solid performance by the SAS team in the first quarter, 12.3% margin rate. And they are performing well on their programs. We talked a little bit about some of the drivers there, including maturing some of the development programs. And we also talked a little bit about the mix. And as space continues to grow, that's a little more cost-plus mix. That could temper a little bit of the margins in the last three quarters of the year. But we did update guidance for SAS to approximately 12% on the margin rate. They were 12.3% in the first quarter some upside from EAC adjustments. And as we saw strong program performance, you've got to kind of book that in the quarter. You does result in a higher booking rate as you move forward, but you do pick up some catch adjustment that flows through in that 90-day period versus the full year impact where that gets tempered a little bit. But we're very confident in the team at SAS. And we're confident in the guide that we put out there for approximately 12%. And I know the SAS team is out there working hard as we speak to try to figure out how to drive that up from there.
Christopher Kubasik: Yeah. And I think the second part of your question was F-35. Our production deliveries are tracking. We have a ramp coming up in production here starting next month. So we continue to have good relations with Lockheed. In fact, I was just talking to them yesterday. They'll be starting to deliver aircraft, as you know, they'll comment on that themselves. But as they start delivering aircraft, we're going to have to ramp up even further and quicker and that's our plan. We've made the investments in most of the infrastructure we need. So continued improvement month-over-month, quarter-over-quarter and it's all about the core processor and that's where the focus of the team is.
Operator: Our next question is from the line of Matt Akers with Wells Fargo (NYSE:WFC). Please proceed with your question.
Matthew Akers: Yeah. Hey guys, good morning. Thanks for the question. Chris, I wonder if you could comment on the international pipeline at IMS. In particular, you mentioned the award in the quarter, but just curious if orders are kind of starting to move there.
Christopher Kubasik: Yeah. Thanks, Matt. I mean, at IMS, we did get the NATO electronic attack aircraft. And this -- we were thinking back on this not that long ago. I mean this is something about eight years ago, nine years ago, we talked about disrupting the market and I always give the space example, but it feels like we pretty much invented and created this bizjet ISR market. We have over 50 bizjet orders in the last eight or nine years on five different platforms. So we have this one opportunity that I mentioned in Europe, NATO country. There is some longer-term opportunities kind of in the Mid-East, these things take a year or two to get booked. So you know the bizjet market for electronic attack, ISR, whatever capabilities are still out there. There's a huge opportunity in the Far East that on our third bid relative to being down-selected. So that could be a couple of billion dollars in 2025. So very excited about that. Armed Overwatch, we're starting to get interest from international customers. Once we start making deliveries later this year, early next year, I think that market is going to pick up from the aircraft side. We still have some C-130 capabilities that I believe have some international opportunities. Maritime, we're doing a lot of work with Australia. So we continue to see opportunities there as well. Viper Shield is actually out of the SAS, but great capability on F-16 EW. So I see that growing as well. And then, of course, WESCAM with the turrets that's just a high growth market with opportunities pretty much all over the globe.
Kenneth Bedingfield: Yeah, Chris, maybe I'll just add real quick onto that in terms of Armed Overwatch beyond bizjet, and at IMS, we did get a delivery order three on that program for nine aircraft, I think bringing the total order to 25. And to your comments, I think, as that program matures gives us greater confidence in the international opportunities for that aircraft, so looking to the building confidence on that one.
Operator: Thank you. Our next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.
Sheila Kahyaoglu: Good morning, Chris and Ken. Thank you. In the past, you guys have talked about revenue synergies. There are a lot of discussions today focused on LHX NeXt, which is clearly great because your profit was up over 20%. So Chris, you mentioned Taiwan and you won a bid over a 20-year incumbent. Maybe is there any way to think about potential share gains and investment, what it means for the revenue top line outlook over the next few years? I know you laid out mid-single-digit targets, but how do we think about your revenue growth and market share gains?
Christopher Kubasik: Yeah. Thanks, Sheila. You know, we're being selective in where we invest and bid. And if I look at the different domains, I think space is a perfect example where we were absolutely taking market share. And as I said earlier, we've been awarded 60 satellites as a prime just since the merger, including 38 for SDA tracking alone. And there's an -- it's a hot market, but every couple of weeks or months, you can pick up a paper and see there is one less company in this market, a lot of SPACs, a lot of companies are withdrawing from that market. And we take that as a sign of our success. We're making money and we've disrupted the market. So I feel really good about what we've done in space. The airborne domain, I think it's really going to be more with what I referenced with the business jets, maybe Armed Overwatch to a lesser degree, where again we're filling in gaps and replacing long-term incumbents or giving them different platforms with better capability for the missions that they want. Our maritime work on the undersea ranges is world-class. Again, you go back six years, we had no work in that regard and we found an opportunity to unseat a long-term 40-year incumbent and came up with a different solution. And it's been well-received around the globe as an example. We've talked historically about our torpedo launch and recovery system using unmanned undersea vehicles. You know that market is a hot market in my opinion. We just have to get out there and get a couple of customers. And I think that could be a real game-changer for our undersea business. On the radios, we talk about the radios, a lot of good work there. An exciting one that we haven't really talked much about is for the Air Force, which is the Next-Gen survivable radio. So we're one of two companies competing on that. And in a couple of years, we could be down-selected a new market. And another example dislodging a long-term incumbent. And then of course, innovation with cyber, there's something going on there every day and you kind of have to innovate daily to stay ahead of the threat and we're doing that and seeing good growth and good performance in that domain as well. So I hope that answers your question.
Kenneth Bedingfield: Rob, we'll go ahead, and take our last question this morning.
Operator: Thank you. Our last question is from Doug Harned with Bernstein.
Douglas Harned: Good morning. Thank you.
Christopher Kubasik: Good morning, Doug.
Douglas Harned: Chris, right now you're looking at Aerojet Rocketdyne, and I mean, demand in that market is just getting better and better and you talked a little bit about the NGI win earlier. But when you look at the demand there and I think back to, I remember, a year ago talking with you about the situation at Aerojet Rocketdyne, Camden, for example, and how serious the bottlenecks were in trying to get production up. So when you look at the business now and you see the potential to ramp up. Can you talk about what kind of growth you could potentially get from that business? And then where you stand in the process of being able to get those bottlenecks out and really move production higher.
Christopher Kubasik: Yeah, Doug, great question. And yeah it was about 16 months ago when we announced this acquisition and I think I agree with you. When I look at where we are now the business case gets better and better. The demand, there was no conflict in Israel. People thought Ukraine would be done. Nobody anticipated a $900 billion of defense spending for 2024. So the tactical missiles, the nuclear deterrent, NGI, there is just tonnes of opportunities on SRMs. Over the long-term, call it five, seven years, double-digit growth on the top line does not seem unreasonable to me. We have to, of course, invest in the capacity. You know, the bottlenecks, some of them are based on low yields and performance and supply-chain. I think we've made good progress in that regard, investing in our suppliers, getting additional suppliers. I continue to think the more money the government can give to the supply chain, the better off we are. I continue to believe we don't need in the -- an additional solid rocket motor prime. What we need is the -- someone working on the igniters, the nozzles, and the cases. And I think that would help unlock the potential. We've ordered equipment to continue to expand, whether it's mixers, ovens, they unfortunately tend to have a 50, 60 week lead time, but we placed those orders. And once we get that in, I think it's going to be a help with the ramp. We have DPA money to build some buildings, take existing facilities, and modify them. So the consolidation and peace dividend and budget control acts for a decade kind of stifled the ability for companies to invest and grow and inconsistent demand signals. But right now, I think everything is a potential tailwind. And we'll have the factories digitized by the end of this year and we're making the investments and fixing the processes. So pretty excited about it. And you know 2024 is kind of catch-up and continue to burn down the delinquent backlog and simultaneously invest and put in processes. But I think by the time we get to 2026, 2027, if all stays as is, it's going to really turn out to be a great acquisition. So I appreciate the question, Doug.
Christopher Kubasik: And let me just wrap it up. And first of all thank the workforce and the leadership team for a great first quarter. Obviously, thank you all for joining the call today. And Ken, Mark, myself and the team will be engaging with many of you in person in the months to come. So thank you all and have a great weekend.
Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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