Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- L3Harris Technologies Inc (LHX, Financial) reported strong financial results for Q2 2024, with a segment operating margin of 15.6%, up 80 basis points year-over-year.
- Non-GAAP earnings per share increased by 9% to $3.24, reflecting strong operational performance.
- The company's total backlog stands at $32 billion, indicating a robust pipeline of domestic and international opportunities.
- L3Harris Technologies Inc (LHX) has made substantial progress in improving operational performance, reducing overdue deliveries by nearly 40% in the past 12 months.
- The company increased its guidance for revenue, margin rate, and EPS for 2024, demonstrating confidence in its financial outlook.
Negative Points
- Despite strong financial performance, L3Harris Technologies Inc (LHX) experienced flat revenue growth in its Space and Airborne Systems and Integrated Mission Systems segments.
- The company faces ongoing challenges in its airborne combat systems business, with lower volumes impacting overall segment performance.
- L3Harris Technologies Inc (LHX) has not disclosed book-to-bill ratios by segment, which may limit transparency for investors analyzing future growth prospects.
- The company is still working through the integration of Aerojet Rocketdyne, with some legacy contract adjustments impacting current margins.
- There are concerns about potential working capital headwinds in the second half of the year, which could affect free cash flow performance.
Q & A Highlights
Q: Ken, maybe just to ask on Aerojet and the margin performance in the first half continues to be really strong, but then you compare it to where the guide is for high 11% implies margin step down. Maybe if you could just walk through that or just the thinking there, or is it just conservative or is there other things that maybe you just mentioned that we should understand? Thanks.
A: Sure, Peter, appreciate the question. With respect to Aerojet, I would say, look, the business is performing well, halfway through the year. We're happy about the margin performance there certainly some aspects of mix in terms of which programs are seeing the volumes at which point through the year as well as you know, as we performed in the first half we were able to see some positive program performance that we've got to go do again in the second half of the year. So, you know, we feel good about how Aerojet Rocketdyne is performing. And it's been about a year since we've integrated this business and we're continuing to learn more. I think you saw that the purchase accounting period ended as well. So we've got that kind of information behind us, better informed with the improvements that we're making and how we're driving operational improvements in the business. And we'll work to continue to deliver on that in the second half and see if we can replicate what we did in the first half of the year.
Q: Wanted to ask, I guess, Ken and maybe Chris as well when you gave the outlook and the targets at Investor Day, it was, I think, about 100 basis points of margin improvement in each business now that we've seen starting off pretty well here through the first half of '24. As you look out, if there are any refinements you might make in terms of how you see getting to that 16% margin and the contributions from the various businesses, given how they've performed so far and what you've been able to on I'll get out of the LHX NeXt program.
A: Yeah, thanks. I appreciate it. I would say, as we look back at Investor Day and the midterm financial framework that we set out, growing to $23 billion in revenue in '26, 16% margins, and $2.8 billion of free cash flow in that period, I think where we are today gives us more confidence in delivering to that framework. And if you think about the businesses, they have been performing well, I think we've got the programs performing. The work we're doing around program excellence is paying off. I think that if you look at our guide across the segments, where we've picked up SAS margin a bit, the same with IMS and CS as well. So -- and then if you look at the business, first half of the year, we're at 15.3% growing from I think it was 14.8% last year. We're making solid progress towards that 16%. I would say that we feel better about it and we are trying to reflect that in the guidance updates that we're making, again, pickups across three segments and then picking up margin from where we were kicking off 2024 at about 15% to pick it up to a range of 15.2% to 15.4%. So really making good progress towards that framework. I think we're building confidence on a quarter by quarter and as we progress through the year and then get into '25, we'll try to provide better clarity around our progress on that. And, you know, again, building confidence and maybe it's something that we'll see some acceleration.
Q: Chris, you highlighted that your margins are some of the best in the defense industry, but at least based on to your second quarter numbers, your bookings and your revenue growth are a bit behind some of your peers. I was wondering if that reflects this discipline that you've had with regard to bidding terms and contracts in that, or is it just this is not fair comparison just for this quarter?
A: Yeah, Rob, it's tough to look at one quarter for a bookings or book-to-bill ratio. For year to date, we're feeling pretty good as to what we've been able to book out at a great first quarter. So one quarter doesn't make a year. I think our portfolio is well-positioned and we're continuing to be disciplined in what we bid. And I think you're seeing that in the results, especially on the margin front, some of the prior strategic decisions we made to invest and go after prime positions with SDA for satellites, maybe changing our waveform strategy, what we're doing with counter-UAS with VAMPIRE, winning Armed Overwatch. All those programs are starting to pay off and as Ken mentioned, we've really upped our program management and execution with training, new tools, hiring experienced hires externally where appropriate. And we talk about bidding discipline that's making sure we have the right contract type. I think we were one of the first to come out and say we are not going to bid fixed price development programs with options at the proposal process. And we're doing a lot better getting the cost basis and asking for a reasonable fee. So we're taking our time and we're negotiating and I would expect the third quarter, we'll see a bump relative to the book-to-bill.
Q: Chris, maybe a big picture question. We just had the NATO Summit and the Royal International Air Tattoo about a week ago, Farnborough. It really does seem like spending in Europe is on the rise, reaching that reflected in some of the defense equities in Europe. What opportunities does that create for L3Harris and maybe new markets or things that the European industrial base just can't do themselves. Can you talk about that a bit?
A: Absolutely. I actually was in attendance at the Defense Summit as part of the NATO Summit in DC with the various ministers of defense and international customer, leadership. And it was a different tone than in the past, and I think you're hitting on an excellent point, I think most US companies don't view Europe as a growth market or even much of a market because of the indigenous capabilities that exist. But the theme at the NATO Summit was all about the interoperability and the need for these countries to either bundle acquisitions or have their products work. And with the conflict in Ukraine, I think everybody sees the benefit of the interoperability, not only amongst the 32 member countries, which includes the US, but given the threat profile in Europe. So in our case, we look at our software defined radios as a perfect example. I think we're uniquely positioned there and there was a lot of interest in that. Back of the envelope. We think this could be 100,000 radio opportunity in the years ahead. So Europe is one of our larger markets that we're now going after for all the reasons you mentioned, Ron. And I think that's a nice upside for 2024 and should give us some tailwind in the years ahead.
Q: So maybe I'm wrapping up on the Ad Hoc Business Review Committee. You mentioned that it completed its review. So can you provide any color to the extent of recommendations
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
