L3Harris Technologies, Inc. (NYSE:LHX) Q4 2022 Earnings Call Transcript

L3Harris Technologies, Inc. (NYSE:LHX) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Greetings. Welcome to the L3Harris Technologies Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President, Investor Relations. Thank you and you may now begin.

Rajeev Lalwani: Thank you, Rob. Good morning and welcome to our fourth quarter 2022 earnings call. We published our investor letter after the market close yesterday. So today’s call will primarily be focused on answering your questions. Joining me for the call are Chris Kubasik, our CEO; and Michelle Turner, our CFO. A few words on forward-looking statements and non-GAAP measures. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please see our investor letter and SEC filings. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the Investor Relations section of our website, which is l3harris.com, where a replay of this call will also be available. Before going to questions, Chris will make some brief comments.

Chris Kubasik: Okay. Thank you, Rajeev, and good morning, everyone. As we reported yesterday, our fourth quarter came in ahead of expectations, and our 2023 guidance points to steady or improving trends. We’ve also been active on the M&A front, consistent with our strategy, as opportunities present themselves. Let’s start with Q4. The team delivered a solid top line, up 6% organically, with Communications leading the way as we saw improvements in electronic component availability within tactical comms. This contributed to the second consecutive quarter of organic growth for our company. Segment margins were about what we expected, with ongoing pressures from macro factors, including inflated costs for material and labor. The net of this is EPS just above our recently guided midpoint and free cash flow at our $2 billion outlook.

Turning to 2023. We’re consistent with what we said on the last call: Expanding our revenue in the 2% to 4% range, including the Link 16 acquisition, while holding our industry-leading margins steady at about 15.5%. EPS adjusted for pension headwinds points to a stable operating results, and we’re expecting an improving cash flow profile. Lastly, on recent M&A activity, we’ve previously discussed an opportunistic approach within our balanced capital allocation framework. We had opportunities to acquire two unique assets in ViaSat’s Tactical Data Link business and Aerojet Rocketdyne. We closed TDL in 13 weeks and are off to a strong start with integration. In fact, our newest employees are already on the L3Harris payroll system and participating in our 401(k) and benefit programs.

This acquisition positions us well to play a central role in networking and resiliency for global defense customers and fills in a needed capability as we develop our JADC2 solutions. Regarding Aerojet Rocketdyne, it’s a national asset critical to future warfare that has a leadership position in propulsion, adding exposure to new growth markets for us with munitions, space exploration and hypersonics. It brings nearly $7 billion of backlog and tailwinds driven by global demand. With both of these acquisitions, we’ll utilize our recent experience from our merger of equals. We expect much of the integration work for TDL to be complete once we bring Aerojet Rocketdyne into L3Harris. We’ll hold an Investor Day later in the year to talk more about the strategy and outlook for our growing company.

So we’re building momentum with our strategy and look forward to executing on our performance first initiative in 2023. With that, let’s open the line for questions.

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Q&A Session

Operator: Thank you. We’ll now be conducting the question-and-answer session. Thank you. And our first question comes from the line of Doug Harned with Bernstein. Please proceed with your question.

Doug Harned: Good morning. Thank you.

Chris Kubasik: Good morning Doug.

Doug Harned: Yeah. Well, this question is going to have a few parts, I’m afraid because I want to understand a little bit more about your case for Aerojet Rocketdyne. I mean, you’ve talked a lot about it being a valuable asset. It diversifies your portfolio. But as you’ve also said, it’s been a merchant supplier. So trying to understand, there are a few things here. When you look at it, what are some of the specific parts of the company that have potential for revenue synergy? Second, are there some areas of cost reduction there beyond just corporate costs? Because I know the facilities are difficult to move, for example. Third, are there things that you can do to improve operations and better performance for the end customers? And then last, when you’re in this pre-close period, how do you ensure that the value of this asset doesn’t deteriorate some over time?

Chris Kubasik: Okay. Well, thank you. Let me see if I can hit all of those. I’m sure there’ll be several Aerojet Rocketdyne questions, but maybe I’ll give a longer answer than usual and try to preempt some of those. So when we look at acquisitions, I’d like to start with the market. And when we’re looking at the market data outside of platforms, the three largest global markets for defense are C2, which is command and control; sensors and weapons. So I’m very comfortable with how we’re positioned on the first two, especially after the TDL acquisition. Our weapon presence in this $75 billion market is practically nonexistent. So we believe that weapons, munitions, missiles, whatever you want to call them, are absolutely aligned with the current and emerging customer demand.

It is a growth market for the future fight. And solid rocket motors, especially for products like Javelin, STINGER, many that we know and they’re about on a regular basis is a great way to position us in the missile and missile defense market. So I look at that from the munition side on the space, we have a long history of working with NASA and NOAA, so relative to space exploration and observation. We already have these relationships. We’re honored or they’re honored and soon us to be able to support SLS and Artemis, and there’s visibility there for several years to come. And then the RL10 is a premium upper stage engine with well over 100 engines under contract with the ELA for the new Vulcan launch vehicle. And I think hypersonics doesn’t really get the attention it deserves.

And the other day, someone said hypersonics is the future. And the reality is hypersonics is now. And I think, this could be the crown jewel of the acquisition, and we believe there’s significant growth opportunities that are well supported by the budget and the customers. So when I look at those three markets, I see growth. If I jump to the financials, if you will, as it relates to Aerojet Rocketdyne and what we can do, I mentioned the $7 billion of backlog, so longer cycle business gives us more visibility. I believe this will grow faster on the top line than our current portfolio. I believe we have the ability to improve margins and get those to be more in line with potentially what we’re doing on a consolidated basis now over time. And there are several multi-year programs that will be coming up for renegotiation in the next year or two.