Yahoo Finance L3Harris Technologies, Inc. (NYSE:LHX) Q1 2024 Earnings Call Transcript
L3Harris Technologies, Inc. (NYSE:LHX) Q1 2024 Earnings Call Transcript April 26, 2024
L3Harris Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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?
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