Q4 2024 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2024 L3Harris Technologies Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, January 30, 2025. I would now like to turn the conference over to Dan Gittsovich. Please go ahead.

Thank you, Joanna. Good morning and welcome. Joining me this morning are Chris and Ken. Earlier today, we published our fourth quarter earnings release detailing our financial results and 2025 guidance.

We have also provided a supplemental earnings presentation on our website. 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 SEC filings.

We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release. With that, I'll turn it over to Chris.

Okay. Good morning, everyone, and thank you, Dan. We delivered on our commitments for 2024 by executing our Trusted Disruptor strategy and making progress towards our 2026 framework. We ended the year with record backlog that positions us well for the future. 2024 was a pivotal year for L3Harris as we marked the five-year anniversary of the transformative merger between L3 and Harris.

The combination formed a new company that now operates differently. We are agile, nimble and fast, while delivering solutions that are trusted by our customers across all domains. We span the gap between the traditional primes and the new entrants, forming partnerships around critical capabilities such as AI and autonomy, allowing us to rapidly meet the evolving needs of national security and modern warfare. Domestically, national and homeland defense remains a key priority for the new administration with strong support for our programs in areas such as space, missiles, advanced electronic systems, cyber and resilient comms.

Internationally, we saw strong demand for our software-defined radios, night-vision goggles and munitions, reflecting our commitment to supporting allies around the world. Partnerships remain a cornerstone of our Trusted Disruptor strategy. In 2024, we advanced collaboration with Palantir and venture capital-backed start-ups focusing on AI-enabled solutions and emerging technologies. These partnerships are accelerating a culture of innovation and speed, enhancing our ability to meet customers' needs faster and more effectively.

Let me highlight some of our key accomplishments this year. We won the Next-Gen Jammer competition, which establishes us as a long-term jamming franchise worth billions of dollars in production of airborne pods to support the F-18 fleet. Our wins on the Glide Phase Interceptor and next-generation interceptor programs will drive growth in our solid rocket motor business for decades to come. Along with the propulsion content on the previously won Sentinel and Zeus programs, we are solidifying our position as a global leader in large solid rocket motor design and manufacturing capability.

We won a $1 billion IDIQ award for the U.S. Navy to provide resilient communications technology to U.S. and allied forces. Over the next five years, our broadband communications business will deliver software-defined Link 16 terminals that are critical to enabling secure and resilient collaboration across air, ground, maritime and space platforms. By integrating Link 16 into space-based assets, we are expanding its reach and utility, ensuring U.S. and allied forces have seamless connectivity and situational awareness across all domains.

As a testament to our Trusted Disruptor strategy at work, a team led by L3Harris, partnering with venture-backed startups was selected by the Defense Innovation Unit to prototype a command-and-control system capable of operating hundreds or even thousands of swarming autonomous assets. This project advances the DoD's replicator initiative by integrating advanced commercial technologies to enable collaborative autonomy in all domains. Our open system architecture supports rapid integration of third-party algorithms, providing unmatched scalability and flexibility to meet mission demand. By combining these capabilities with our expertise, we are shaping the future of warfare, ensuring U.S. and allied forces maintain a competitive edge in contested environments.

As you saw in the press last week, I recently took steps to strategically align our leadership team to drive sustained profitable growth. Ken has been appointed President of Aerojet Rocketdyne effective Monday, in addition to his responsibilities as CFO. With his extensive defense sector experience, Ken will drive operational excellence and continue our strong performance. Sam Mehta's role has been expanded to lead enterprise strategic collaboration agreements to further elevate our focus on partnerships while continuing to head the Communication Systems segment.

We've also elevated the LHX NeXt organization, which has been led by Heidi Wood for the last year and achieved excellent results. She will report directly to me as we continue to drive cost savings while accelerating enterprise-wide transformation. Lastly, I want to thank Ross Niebergall for his contributions to L3Harris first as CTO and then as President of Aerojet Rocketdyne. His leadership has been instrumental in positioning Aerojet Rocketdyne for long-term success.

After a distinguished career, Ross has chosen to step down to focus on his family's health and enjoy a well-deserved retirement. I'm also pleased to have been elected Chairman of the Board of Governors for the Aerospace Industries Association, the leading voice for the industry. As our country navigates an increasingly complex global threat landscape, maintaining our technological edge has never been more critical. I look forward to partnering with my industry colleagues, the incoming administration and Congress to leverage the ingenuity of our world-class U.S. talent and drive innovation that strengthens our competitive advantage.

Looking ahead to 2025, our priorities remain clear; to drive profitable growth while meeting our customers' evolving mission-critical needs. I will now turn it to Ken to provide details on our financial results.

Thanks, Chris, and good morning, everyone. Let me recap full-year 2024 real quick. Revenue was $21.3 billion, up 10% and 4% organically. Segment operating margin was 15.4%, reflecting continued cost savings and strong execution.

Non-GAAP EPS was $13.10. Free cash flow grew to $2.3 billion, representing an increase of 14% driven by earnings growth and effective working capital management. For the fourth quarter, revenue was $5.5 billion, up 4% organically with a segment operating margin of 15.3%. Non-GAAP EPS was $3.47, and free cash flow came in over $1 billion. Turning to our segment fourth quarter results.

SAS delivered revenue of $1.7 billion, down 4% year-over-year, largely reflecting the divestiture of the antenna business. Organically, revenue was down 1% primarily due to lower F-35 related volumes as our TR-3 mission computing hardware transitions from development to a more gradual production ramp. Operating margin was 10.8%, up 20 basis points primarily due to LHX NeXt cost savings and partially offset by challenges on some of our fixed price development programs in space that are in the later stages of completion. IMS delivered strong results with revenue of $1.8 billion, up 9% and margin of 13.4%, expanding by 150 basis points.

This performance reflects strong program execution and a favorable mix. We are pleased with the momentum at IMS and feel confident in the strength and resilience of this business as it continues to perform. CS achieved revenue of $1.4 billion, up 5% driven by demand of software-defined resilient communications equipment. Operating margin was 24.4% driven by a heavier mix of deliveries to U.S.

DoD customers. We are seeing particularly strong demand and international momentum, winning key programs with NATO allies and expanding into other international markets. But I'd remind you, international and domestic mix fluctuate based on quarterly delivery profiles. Aerojet Rocketdyne grew 5% with an operating margin of 11.5%, up 40 basis points, supported by progress on solid rocket motor production and offset by lower volume in space propulsion.

Now let me turn it back to Chris to cover some operational achievements for 2024.

Let me start with our portfolio. We completed the integration of the Aerojet Rocketdyne and Tactical Data Links acquisitions, and we also divested our antenna products and Aerojet Ordnance Tennessee non-core businesses. We further strengthened our leadership position in space, delivering four satellites to orbit for the SDA and one for MDA. Our progress in satellite systems and space superiority continued to gain momentum in 2024, reaching a record backlog of 40 satellites in just five years, a noteworthy achievement considering we started with no satellites as a prime.

A significant highlight in our SAS segment with successful completion of the customer's engineering design review for 18 space vehicles under the SDA's Tranche 2 tracking layer program. This milestone confirms our advanced space vehicles, equipped with infrared payloads to detect, track and target hypersonic threats, meets the rigorous requirements of the program. Completing this milestone in just 11 months reflects the speed, agility and expertise of our team. These satellites are part of the Space Forces LEO Constellation, providing global missile tracking and defense.

With 38 satellites awarded across tranche zero, one and two, including those already on orbit, we continue to support the efforts to advance integrated deterrents. With the Tranche 3 opportunity on the horizon, we are well positioned to expand our role in building this critical layered missile defense system. Furthermore, this capability positions us well to support the evolving defense needs of the U.S. and aligns closely with the Trump administration's recent executive order directing the development of an Iron Dome missile defense shield for our homeland. We've also made significant progress on our LHX NeXt initiative.

In 2024, we exceeded our gross cost savings target by 2x, reaching $800 million. This strong performance provides confidence in our ability to accelerate and exceed our overall cost savings target. We are now expecting to achieve $1.2 billion in cumulative cost savings by the end of 2025, exceeding our $1 billion commitment a year early. This initiative is driving margin expansion, operational efficiency, facility rationalization and enhanced supply chain management.

At its core, LHX NeXt embodies the same principles as DOGE, tailored to drive greater speed and efficiency to allow data-driven decision making. We are driving improvements across our operations and supply chain, simplifying and streamlining internal policies to eliminate inefficiencies and monetizing end-of-life assets to sharpen our focus and unlock value. This program enables us to respond more effectively to evolving customer needs while creating value for our shareholders. Back to you, Ken.

Turning to guidance for 2025. We expect revenue of $21.8 billion to $22.2 billion, representing organic growth of 4% at the midpoint. Our guidance includes a full-year of our commercial aviation solutions business as we continue to work towards closing the transaction. Segment operating margin is anticipated to be mid to high 15%, supported by continued LHX NeXt cost savings, strong program execution and reflecting investments to drive continued transformation. Free cash flow is expected to be $2.4 billion to $2.5 billion driven by growth, higher profitability and disciplined working capital management.

Our guidance reflects appropriate risk posture early in the year and the dynamics associated with the new administration. We assume a continuing resolution through March of 2025 and no other funding delays or impacts. The administration has issued several executive orders that are still being assessed, but are not expected to have a significant impact on our 2025 results. However, as U.S. government contracting officers assess the impact of these executive orders on existing and new contracts, we could see an effect on our Q1 2025 bookings and revenue particularly at CS, which can deliver product rapidly against order intake.

Beginning in 2025, following comments from many of our investors, we are revising the reporting of non-GAAP EPS to exclude adjustments for amortization of acquisition-related intangible assets. This change aligns our reporting with peers and has no impact on our underlying profitability or cash. If this change had been applied for 2024, non-GAAP diluted EPS would have been $9.70, reflecting an impact of $3.40 per share. Our 2025 non-GAAP EPS is projected to be in the range of $10.55 to $10.85, representing growth of 10% at the midpoint.

At the segment level, SAS revenue is expected to grow to a range of $6.9 billion to $7.1 billion, reflecting budgetary constraints in the space sector that we expect to abate in 2026. Operating margin is expected to be in the low 12% range. IMS revenue is projected at $7 billion to $7.2 billion driven by increased demand in advanced electronics for space and munitions programs as well as maritime solutions with an operating margin in the low 12% range. CS revenue is anticipated to be $5.6 billion to $5.7 billion with margins in the high 24% range, supported by increasing demand for our software-defined resilient communications equipment.

Aerojet Rocketdyne is expected to reach approximately $2.5 billion, fueled by double-digit growth in the missile solutions business. Margins are expected to be in the mid-12% range as we drive continued operational improvements. As we set our 2025 guidance, we want to highlight the varying number of weeks in certain quarters in 2025 that will result in some variability in revenue and EPS between quarters. In particular, Q1 is a short 12-week quarter and should be considered in your modeling.

Our capital deployment strategy reflects our commitment to delivering value to our shareholders. We strengthened our balance sheet and ended 2024 with a net leverage of 2.9x, exceeding our target of 3.0. With that achievement, we will maintain a competitive dividend and are focused on repurchasing at least $1 billion of shares in 2025. Additionally, we had another solid year of performance in our pension plan with no significant contributions in 2024 and none expected in 2025. To further derisk our balance sheet, we are working to transfer approximately $1.2 billion in pension assets and liabilities to a third party with little gain or loss and no impact on cash flow, taking advantage of attractive funding levels and interest rate environment.

We expect to complete this action by the end of first quarter 2025, resulting in a reduction in non-cash non-service FAS pension income, which is reflected in our guidance. Considering our strong performance in 2024 and our growing confidence in the cost savings that the LHX NeXt program will continue to deliver, we are also updating our 2026 financial framework announced at our Investor Day last year and increasing the segment operating margins we expect to achieve to low 16% in 2026. We are continuing to target $23 billion of sales in 2026, representing 5% organic CAGR and $2.8 billion in 2026 cash, representing a double-digit CAGR with further upside on a free cash flow per share basis.

I'm proud of the tremendous progress our team made in 2024. This year has been one of transformation, growth and strong execution, underscoring the strength of our portfolio and the talent of our team. We have faced a dynamic and demanding environment, but our ability to be agile and execute with discipline has allowed us to deliver strong results. From achieving record backlog to advancing key strategic priorities, we have demonstrated resilience, the ability to deliver on our commitments even in the face of challenges and remain focused on delivering for our customers and our shareholders. As we continue to build on this momentum, I'm excited about what's ahead.

The opportunity before us is meaningful. And our strategic focus on operational excellence and innovation positions us well for sustained profitable growth. With that, I'll turn it back to Chris.

As we look ahead, we remain steadfast in our commitment to driving innovation and delivering mission-critical solutions that align with our national security priorities. As we navigate an increasingly complex threat environment, L3Harris continues to stand at the forefront of innovation and national defense. Our vision for the nation's next arsenal democracy is rooted in the convergence of cutting-edge hardware, software and AI technologies that ensure mission success in every domain. This concept goes beyond traditional platforms.

It's also providing adaptable, scalable, open and interoperable solutions that give our war fighters a decisive edge. Whether it's in resilient communications, advanced munitions or space-based capabilities, we are enabling the Department of Defense and our allies to stay ahead of evolving threats. In my recent letter to the DOGE, I outlined key recommendations to modernize the national defense ecosystem. These principles reflect our dedication to advancing efficiencies, strengthening collaboration and ensuring that the U.S. maintains a technological edge.

We encourage others to come forth and submit ideas to the DOGE Committee. We are excited to work with the new administration to bring these and other ideas to life and continue playing a pivotal role in supporting the missions that protect our homeland and our allies around the world. The incoming administration's transparency and understanding of the defense industry sets the stage for disruptive change in 2025. We expect a period of unprecedented evolution in defense priorities and policies. With our agility, speed and commitment to innovation, we are well positioned to adapt.

This new era presents a chance to redefine how we support the war fighter, and we are excited to play a pivotal role in driving this change forward and seize opportunities that align with our nation's strategic objectives. Our work is critical to empowering the war fighter, who protect democracy, ensuring that they have the tools to maintain global stability. With a deep commitment to innovation and collaboration, we are proud to play a central role in this effort. Joanna, let's open the lines for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Peter Arment at Baird. Please go ahead.

Hey, thanks. Good morning, Chris, Ken and Dan. Hey, Chris maybe just to start where you kind of finished, which is you wrote a letter to the DOGE leaders just before the inauguration, and you recommended for I think policy recommendations. Have you heard any feedback?

Or have you had any active discussions? And how do you think this is all going to play out with kind of DOGE and the impacts on the DoD bureaucracy, which I think you've called out many times and just how you're thinking of that. Obviously, it's been an overhang on the group. We've seen a lot of valuations compressed.

So I'd be curious your thoughts. Thanks.

Yes. Thanks, Peter. I'm excited about the DOGE, and I tried to parallel the similarities with what we've been doing this past year. And as I think as to how we got as a nation, each and every policy and regulation is put in place to reduce risk, and they're well intended.

When you step back after a few decades, I believe the cumulative effect of all these risk reduction policies and procedures have actually created more risk than they've actually resolved or mitigated. So to answer your question, received lots of positive feedback from members of Congress. I was in the Pentagon last week, a couple of other classified meetings. I think a lot of people have read the letter.

I'm really just trying to start the dialogue. I think Congress plays a role. I think the DoD plays a role. The war fighter plays a role.

And I think it's important for industry to be part of this ecosystem and give their perspective. I know several others have started to write letters. And I threw out four recommendations. There's probably better ones or different ones.

It's really just trying to start the dialogue, get people to sit down and say, how can we go faster and get better capability to the war fighter quicker? And I'm excited about the future. And I think, as I said, there's going to be an unprecedented change in 2025. And some will be able to adapt and take advantage of it. We plan to be one of those companies, and maybe others won't.

But let's see what the future brings.

Thank you. The next question comes from Myles Walton at Wolfe Research. Please go ahead.

Thanks. Good morning.

Hi, Myles.

Ken, you've got about $150 million of growth in free cash flow in 2025 and then $350 million at the midpoint, placeholder for growth in 2026. Can you flesh out what specifically accelerating? And then also on the increase in LHX NeXt of $200 million, how much of that drops through to actual margin savings versus savings for the customer? Thanks.

Yes, I'll take that one. In terms of growth and free cash flow, I think it pretty well aligned with the growth profile that we've laid out. We're growing the topline 2024 to 2025, 2026, a bit accelerated in 2026. As we've mentioned on topline, there's a couple items that are resulting in some better opportunities for growth, 2026, F-35 with TR-3, our hardware development ramp down and then the production ramp being a bit more – still kind of climbing that ramp in 2025, but accelerating in 2026. There's a little bit of space budget challenges in 2025. We do see the potential to get some space awards pulled into 2025, that will drive 2026 revenue and then a little bit of international opportunities as well at IMS.

So a little bit of a better growth profile in 2026 and 2025, continued margin expansion from where we are today to mid to high 15s in 2025 and then low 16s in 2026. And then I would say, effective working capital management, the team will continue to do that. And I think if you kind of run that through, it will support the growing free cash flow profile both in 2025 and in 2026. To the LHX NeXt question, we're still holding to our target of about at least 40% of the savings will result in margin opportunity for the company. And as we look at that, there's obviously some timing of how that works.

You got to factor in the percent complete on the various contracts that we've got in place at any point in time. It was certainly a strong contributor in 2024 margin expansion. It will also be that in 2025 and then certainly supporting the 2026 margin expansion to low 16% margin rate as well. So we'll certainly work to try to see if we can drive some upside to that above the 40% cost savings in the margin opportunity.

And I think the team is working hard on that every day. But as of now, that's kind of what we're seeing in terms of actual delivery of the opportunity to that target that we set.

Thank you. The next question comes from Douglas Harned at Bernstein. Please go ahead.

Good morning. Thank you. I wanted to see how you're looking at the Communications Systems business. There's a lot of things that sort of line in there that seem to allow some real margin upside, the software sales for new waveforms, more exports, commercial contracts with LHX NeXt that could flow right through.

But your guidance for 2025 is still below 25% margin. Where is this going to – where is the potential in margin expansion here? Because it seems like you've got a lot of the ingredients in place to get above the 24% range.

Yes. Thanks, Doug. Appreciate it. As I mentioned, I'll point out a couple of things.

As I mentioned in the prepared remarks, certainly, as we're looking at 2025, we've got to go and continue to perform in the business. It's early in the year, and we're certainly thinking about it from a risk-adjusted perspective. CS team has demonstrated the ability to produce product to generate margins. So just in terms of looking at margins for 2025 at CS, I would say a couple of things.

One, we're certainly evaluating the mix between U.S. DoD as well as international deliveries. From a software perspective, I think we've talked about that kind of comes in chunks here and there. So we've got to go continue to drive strong deliveries in terms of waveforms that are both integrated into the products and driving high-margin product opportunity as well as waveform upgrades where we really see the opportunity for high-margin business.

And then from an LHX NeXt perspective, the CS team certainly has been doing a great job of integrating the cost [indiscernible] for the margin compression that we saw in the fourth quarter really was related to the mix of U.S. DoD deliveries versus international. We're at a higher mix in the end of 2023. So I think the team is doing a great job. I do think we'll continue to work to meet, if not beat, our segment guidance.

And I know the CS team will be off and working on that. So feel good about the opportunity, and we'll update you later in the year.

I'll just chime in. Doug, we're seeing finally more and more opportunities to bid and win C2 and C3 systems. So the market is going beyond just selling the software defined radios in the waveforms that you said. So we're finally getting to more of a network and systems approach, and I think that's going to give us some additional tailwind.

I think of all the segments, this one probably has the highest inflation impact from the supply chain, given all the electronic components. So we have to absorb and offset that, not only with LHX NeXt, but our E3 savings. But the trend is positive, and we're optimistic.

Thank you. The next question comes from Sheila Kahyaoglu at Jefferies. Please go ahead.

Good morning, Chris and Ken. Thank you. Maybe I'll follow-up, Ken, on the $1.2 billion of LHX NeXt or Chris. You raised it by $200 million and 40% drops through to the bottom line, it's about an extra 30 bps on top of your peer high margin.

So where are you seeing that come through the most? What's really driving some of those opportunities? And if you could just talk about maybe like KPIs that you track there.

Yes. I'll start and then let Ken – yes, we're seeing it from a variety of places. Supply chain, I think we're finally had a pretty good year in not only getting the savings, but building the resilience of our supply chain, not only the indirect materials which we probably did first and is a little easier now we're working on direct materials and subcontract management. So I think those are going to be big drivers.

We're continuing to look at the facility rationalization and the org structure and roles and responsibilities. So I think there's some additional opportunities, similar buckets to what we had before. But in parallel, we're also, as I mentioned, transforming the business as well and making the investments necessary to digitize the company to allow the employees to get data quickly. And that had also factored into our guidance.

So it's just not a $1.2 billion gross run rate cost savings. We're reinvesting in the business, make it an even better and more efficient place to work for the employees. So you net that down. And as you know, even at 40%, the 30 bps comes in over time, as Ken said, depending on the percent complete accounting and such.

So I think it's been a huge success and amazing accomplishment. We will hit the 1.2 in two years. And given the size of the company, very proud of that. Tack that on to the $650 million we did right at the merger.

We've almost taken out $2 billion of cost in six years, which is pretty impressive in my opinion. Anything else, Ken?

I would just add, Sheila, that we certainly delivered on the cost-savings in 2024. A chunk of that was some difficult decisions we had to make around labor, but we did realize some labor savings. That's probably the cost that results in the quickest turn into the savings turning into actual costs flowing through the EACs, working hard on some other opportunities. Chris mentioned supply chain facilities, and then transformation some of the systems and how we work. And those take a little bit more time to flow through the EACs and into the actual realization of the savings.

So we're certainly tracking that. So in terms of your question on KPIs, certainly, the generation of the savings, but then also programmatically and through the businesses, how do we track those through to actually delivering on the savings, ordering against new agreements, things like that, long-term agreements and that sort of thing. So I think we've got the right approach. We've got the right metrics.

The team is fully aligned and delivering. And I think it certainly continues to contribute to the margin profile 2025 and into 2026.

Thank you. Our next question comes from Ron Epstein of Bank of America. Please go ahead.

Hi. Good morning, guys. Chris, how are you thinking about the environment right now with regard to M&A? That's to say, with the new administration, maybe things change, and Boeing has got some assets for sale.

Is there anything out there that you're thinking about that could be a bolt-on in new technology, maybe an investment in something like more venture-oriented given the push towards some of the start-ups? Broadly, how are you thinking about that?

Yes. Good morning, Ron. Great question. I do think this administration will probably be more favorable towards allowing acquisitions.

As you know, we made two in 2023. It made perfect sense for us strategically. They did not eliminate competition. And even in the prior administration, we were able to get two acquisitions approved. Relative to the way I look at it there's – we've really tried to take more and more of this partnership approach.

AI is a hot market, and I think we have some interesting partnerships and opportunities. I try to highlight what we're doing with Palantir specifically. We actually have a couple opportunities that we will be bidding on competitively as a team in the next several months that could actually be awarded in 2025 that deal with next-gen command and control and army network modernization. Of course, we have to go win those.

But it's easier, in my opinion, to find partners and work with them when it comes to AI and even autonomy. I think we own small parts of up to 40 different venture-backed companies now. So we're pulling that technology through. And the next step, if we do anything, would be a bolt-on type acquisition to fill a niche or to expand the capability.

But nothing has come our way yet. We continue to review and get lots of inbound calls, and not many of them get a whole lot of traction. I like the playbook we have. We're transforming the company.

We're buying back our stock. We're growing margins. In fact, when we hit our 2026 goals, we will have grown our revenue, margins and free cash flow four consecutive years, just straight up operationally. No exceptions, no exclude this, exclude that.

Just good old-fashioned organic growth, margin expansion and free cash flow four straight years. And hard to argue against that playbook, and we're executing on it and proud of what the team has done.

Thank you. The next question comes from David Strauss of Barclays. Please go ahead.

Thanks. Good morning.

Good morning.

A couple of clarifications, I guess. On CAS, and that divestiture, I think you mentioned it, Ken, but what – exactly how much revenue is assumed there? And I guess what is taking so much time for that deal to close? That's the first thing. And then EACs, what they were in the fourth quarter and what you're assuming for 2025? Thanks.

Yes. Thanks, David. From a CAS perspective, there's – we're working through some regulatory and other processes in 2024. There are some different joint venture aspects to that and just getting all the parties in the same room and an agreement on that. We do anticipate that, that transaction will close in 2025. From a guidance perspective, 2024 kind of felt like we were hoping it would close, and it didn't.

We have kept having to update. So we thought rather than having to update each quarter, we would just include it. And then we can obviously just back it out once when it closes. So we thought that was kind of the easiest way to reflect that business.

In terms of the timing, I wouldn't predict it. We do think it's going to be in 2025. And the revenue of that business is somewhere north of $500 million, $600 million in terms of how that business looks. No major impact on trends at the company level from a growth perspective or other. EAC, to your question on that one, we did deliver positive EACs at the company level in the fourth quarter.

As well, we delivered positive EAC, positive net EACs for the full year of 2024. So when we file the 10-K, I think you'll see somewhere $40-ish million of positive EACs for 2024. And I think even in the face of some program challenges, we've talked about a couple of classified programs in our space business that are seeing some issues as we work through integration and test-type activities. These are kind of legacy programs that have been around for a while. And as we've moved into prime positions, we're just working through some of the IMT aspects of those types of programs. But even with that, we were able to work hard, generate strong program performance and see positive EACs in 2024. As we look at 2025, we don't really project or predict positive EAC performance.

So our guidance generally assumes that we would have flat EACs in 2025. And as we're able to perform on the programs and hopefully generate strong performance and net positive EACs in 2025, that will be upside to our guidance and our performance for the programs and across the segments. Chris, did you want to comment on that?

I just want to, David, emphasize what Ken said on these EACs. And we have literally thousands of programs, and what we do is complicated. And nothing is easy and nobody is perfect, but this team finds a way to deliver on its commitments. And occasionally, there's tens of million dollar challenger, couple of million here, and it just adds up, but we take our LHX NeXt savings.

We take our other innovative and creative ideas, and we meet our commitments. We don't make excuses. We don't back stuff out. What you see is what you get.

And these margins are inclusive of all the good news and all the bad news. And we're going to continue to run the business that way and find a way to deliver. And I think that's the culture we've built, and that's what the team wakes up every day focused on.

Thank you. The next question comes from Seth Seifman at JPMorgan. Please go ahead.

Thanks very much. Good morning. Maybe just to follow-up on that, on the space charges. Should we think about the magnitude there being kind of the difference between the guided margin and kind of where things landed? And then I think you mentioned in the materials that those program were nearing completion kind of how close are we to completing those programs? And how much risk remains?

Yes, Seth, from a space program perspective, so I guess at a high level, I would say we've got a couple of classified programs we're working through. We are, as I mentioned, at a significant percent complete. We do expect those programs to – we'll continue to monitor them through 2025. We'll continue to manage risk through 2025. During 2024, we did realize probably about $100 million of negative adjustments or negative EACs across a couple of those space programs. And clearly, as to Chris' comment, as the team works hard, we were able to largely offset that.

So that's kind of the way to think about it. I do expect we'll, for the most part, get that risk behind us in 2025 as we think about some customer milestones early in 2026. And given the nature of the programs, I probably can't comment any further than that. But we'll continue to work. I know the team's got a good approach, data is coming in and working through those things.

And we're very comfortable with what we've guided for 2025, so.

And I think it's the same story you hear from everyone. A lot of these are fixed price – a couple are fixed price development programs, some going back seven, eight years pre-merger. And I think I've been pretty clear on my views on these high-risk fixed price development programs. So we have to run through these.

And you shouldn't assume in all cases that we're the prime. So it even gets little more complicated when you have to integrate with the prime and such. So as Ken said, we're in the – we're kind of in the red zone, to use a football analogy, and we just got to get these things in the end zone and continue to grow the missile tracking business, which is sequentially profitable each and every order and focus on the SDA TR-3 win later this year.

Thank you. The next question comes from Gautam Khanna at TD Cowen. Please go ahead.

Yes. Thanks. Good morning, guys. Ken, I was wondering if you could elaborate on some of your objectives now with your increased role at AJRD?

Sure. Yes. Thanks for the question. I'm really excited about the opportunity.

And as we look at Aerojet Rocketdyne, I think the priorities are clear. There is absolutely an incredible amount of demand in the market for solid rocket motors to support critical mission needs of not only our country, but also its allies in addressing the geopolitical threats and issues that are out there. So absolutely making sure that we are increasing our capacity, and we have been making investments to do that. We'll certainly be making sure that we're doing everything we can to drive capacity on the missile side of the business.

On the space propulsion side, really looking at how we drive efficiency on that side of the business and really think about how we deliver that capability. We've got, I think, a solid business. It's got like an eight to 10-year backlog and really thinking about how we maximize our performance there, make some investments and position for continued opportunities on that side. And then I think there's some important business there, including the Artemis program, which really is important in terms of returning to the moon.

And I think we've been clear that, that's a priority as a country. So very much focused on kind of continuing the leadership there, delivering on our commitments and really trying to get back to growth and increasing profitability and cash flow at Aerojet and certainly continue to make sure that we focus on delivering our commitments from a finance perspective. I would just say I think Chris' and the Board's confidence in allowing me to take on this additional role does highlight the strong team that we've got in place or have put in place, both in Aerojet as well as on the finance side of things.

So I am proud of the team that we've built, and I look forward to working with them to deliver results, not just for Aerojet, but also across L3Harris.

Thank you. The next question comes from Gavin Parsons of UBS Financial. Please go ahead.

Great. Thanks. Good morning, Ken. Busy guy.

Hey.

Could you size the drag on revenue growth from the LHX NeXt savings outperformance? And then just a clarification, do the 2026 targets also still have CAS fully incorporated? Thanks.

So in terms of the impact on revenue growth from LHX NeXt, as we are driving the cost savings through, it certainly does have an effect on our revenue. And I will remind everyone primarily on cost-plus programs, but it does also impact longer-term fixed price programs as well as those run through kind of the same EAC model. As we look at 2025 and our growth projections, I would think about it maybe as in terms of incremental cost savings, thinking of it as maybe half of that would be a headwind to revenue growth. And then in terms of – I think the second part of your question was 2026 revenue and Commercial Aviation Solutions business.

And in case it wasn't clear, CAS is in 2025 from a guidance perspective. It is not in 2026 revenue from a framework perspective. And again, we wanted to include it in 2025 just so that we didn't have as much noise in the system as we did in 2024, expecting to close and then having to update guidance. So Commercial Aviation Solutions in 2025, not in the $23 billion framework for 2026 revenues.

I hope that answers the question.

Thank you. The next question comes from Michael Ciarmoli at Truist Securities. Please go ahead.

Hey. Good morning. Thanks, guys. I guess I wanted to go in that same direction, Ken and Chris. So thinking about CAS and the 2026 framework, what do you guys see in the backlog that really drives the doubling of that growth rate from 2025 to 2026 when you strip out CAS?

Yes. Let me take that one, Michael. We've – well, first of all, the portfolio, I'll start with our current portfolio. And we look at the national defense strategy and what we think is going to happen.

There's going to be a lot of focus in space, maritime, cyber, comms, ISR and munitions. We have a multibillion-dollar businesses in each of those areas. So I think the core portfolio is going to kind of fuel some growth. We talked about some of the challenges that the Space Force has had with their budget, which has been impacting the industry, but I think that's going to correct by 2026. And of course, the whole focus on Paycom or the specific region and the need for comms and network.

So I like the portfolio, and I think we're going to get some tailwind there. The prior question about the drag, if you will, from LHX NeXt, yes, it is a drag a little bit in a cost-plus environment or maybe even where we have these truth and negotiation cost and pricing data scenarios, which is why in my DOGE letter, one of the things is if we have competition, let's just get an RFP out, submit a bid and let's go fast. Let's not have 18 months of auditing to do a relatively quick competitive bid. So I think we're going to win more business with a lower cost base, so how I think of it in that regard.

I think international, we're still around 21%, 22% of our business is international. There's been a lot out on there from executive orders and such. But at the end of the day, from an FMS, foreign military sales perspective, that money comes from the local countries or is nationally funded by the ultimate customer. So I think that provides a tailwind to us.

I think the administration has been pretty clear that they want each of these countries to pay their fair share and/or increase their budgets. That's happening. The other half of our business is direct commercial sale. So that does not even have to go through the FMS process.

We're looking hard at the partnerships with AI. I gave a couple of examples with Palantir. I think by 2026, can we get an extra percent or plus of growth from what I call these disruptive partnerships and venture capital and going fast? I believe so, and the team does as well.

So when I kind of look at those areas and just yesterday, something popped up on border security, again, a focus of the current administration. We provide all the comms for the customs and border control. We have the comms for the military. It seems that these two agencies are working collaboratively, at least on the southern border.

And that provides us opportunity to have that capability synced and network. So I guess between international border and security, AI, our portfolio, our lower cost base, we see a path to the $23 billion.

Yes. I would just add, Michael. I mean from my perspective, a couple of things, And we talked about this in a little bit on the prepared remarks, but F-35 hardware delivery ramping, space has a little pause in 2025, back to growth in 2026. International ISR, certainly, Aerojet starting to kick in from a solid rocket motor perspective. CS, both international demand as well as the Next-Gen Jammer win, really starting to kick in volume-wise in 2026 as well.

Thank you. The next question comes from Richard Safran at Seaport Global. Please go ahead.

Chris, Ken, Dan, good morning. So I'd like to ask you about I think the Pentagon and almost industry-wide is a recognition that the impact of fixed price development contracts, contract without inflation escalators, et cetera. Now assuming you agree, I want to know if you see major changes coming to the contracting environment? Do you think there are going to be more rewards with good execution?

And how quickly do you think these changes get implemented? Thanks.

Yes. I have to believe based on everything I've seen and read and the people I've met with, and as a reminder, I think it's only been 10 days since the inauguration. So things are going real, real quick. But there is a desire, an overall desire to go quicker.

And I mentioned earlier, the DOGE organization, which is more than a person or two. It's a whole enterprise. I think the ideas and the suggestions are going to come pretty quickly. So maybe by the middle or end of this calendar year, there will be some changes that could affect by 2026. The things that I threw out, as I said, I'm sure there's better ideas out there.

These are just policy and the elimination of bureaucracy and regulation. This is, in fact, people that work in the Pentagon, people work in the government, I know they're hardworking and dedicated and doing good work for the nation. They just are hampered by the tools and the regulations that have grown up over time. So I think the companies that are going to win are the ones that can go fast, that can get solutions, that aren't vertically integrated, that aren't closed systems.

And I think we're leading the industry, as I said, with these partnerships and kind of straddling and working collaboratively with the traditional primes, working with the new entrants. Sometimes we'll prime, sometimes we'll sub, sometimes we'll be a merchant supplier. I think just having that culture of innovation, speed, creativity and being open-minded to serve the customer is going to play well for us. So I'm hopeful that change comes.

And again, executive orders come out every other day. I know some are out. They're rescinded. There's a letter that says this, a letter comes out, says, forget – don't do what I just said.

And Ken hit it well. The first quarter is just going to be lumpiness, right? We read these things every day. A lot of pressure on the contracting officers.

Do we all have to modify contracts for DEI? Do we not have to modify them? We'll work through this stuff. I mean the key is we follow the law, we get the guidance, we adjust and we move forward.

So I think it might be a couple of bumpy months here as things go back and forth. But again, we have record backlog. We have existing contracts. We have a path to our commitments for 2025. And hopefully, there'll be a change that makes us even more efficient as an ecosystem.

Joanna let’s take the last question.

Thank you. The last question comes from Ken Herbert at RBC. Please go ahead.

Yes. Hi. Thanks for squeezing this in. Chris or Ken, as you look at your exposure to Ukraine, can you level set us on sort of directly or indirectly, how you see that? And maybe then just to put a finer point on the international opportunity, where do you see international growing at for you within the portfolio in 2025? And maybe how much does that accelerate into 2026?

Yes, I'll take the first one, and we'll kind of keep it short. I think we're talking tens of millions of dollars, as I see it. When we talk about Ukraine, we're really talking about U.S. government assistance, which is different than FMS, DCS or such. So we have tens of millions in backlog already.

We believe that whether it's in the form of aids or loans or whatever, that will continue and execute and deliver. Termination costs probably equal the cost of delivering the product. And then going forward, we have to see what the policies are. But it's manageable, and it's in that dollar range for that one country, which has historically come through either in aid alone or what I would call broadly U.S. government assistance.

I think that is coming to an end. It's a small percent of our international business. And relative to the growth rate on international, Ken, do you want to take that and we'll wrap it up?

Yes. Thanks, Chris. And yes, Ken, I appreciate the question. From an international growth perspective, we certainly do see the opportunity to grow international faster than domestic.

But I think we see both areas of the business growing. So Chris highlighted, we're a little north of 20% of our revenue from international. Could that grow a percent or two, I think it can. But obviously, the team that's working the domestic opportunities is hard at work trying to grow those revenues as well.

So I think they both contribute, to your question on Ukraine. We're seeing significant demand across all international markets, whether it's our NATO allies, Asia Pacific, even Latin and South America. And we certainly saw opportunities to support our ally in Ukraine in 2023 and 2024. There will be beyond the U.S. aid programs that Chris referenced, I think, other countries that may have some opportunities to acquire some capability and provide it to their allies as well. So growing opportunity set.

I think international can grow a little bit faster. It could grow a percent or two in percentage of total revenue. But we're growing both aspects of the business. So it's a good problem to have.

All right. I'll turn it back to Chris.

Yes, why don't we wrap this up? As I reflect on 2024, I have to say I'm incredibly proud of my leadership team and all the employees for what we accomplished. So I want to thank the 47,000 employees with a focus on performance and execution throughout the year. If you work at L3Harris, you get accustomed to change.

The last five years, we've had change on a regular basis. So I think that's going to help us adapt to the change even though we don't know what it is coming forward. So as I said earlier, our strategic priorities remain the same. We have a dedicated and talented workforce.

I think we're going to continue to grow profitably. The 2026 framework is achievable. And our focus here is to grow and create long-term value for all of our stakeholders. So thank you all for joining the call.

We'll see you in the months ahead, and we'll do this again in April. Have a great day. Thanks.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.