Q1 2025 Earnings Call Transcript

Welcome to the L3Harris Technologies First Quarter Calendar Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. Today's call will be focused on question and answers following brief opening remarks. As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Daniel Gittsovich, Vice President of Investor Relations. You may begin.

Thank you, Ina. Good morning, and welcome. Joining me this morning are Christopher E. Kubasik and Kenneth L. Bedingfield. Earlier today, we published our first quarter earnings release detailing our financial results and updated 2025 guidance. We also filed our 10-Q and 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, reconciled to GAAP measures in the earnings release.

With that, I'll turn it over to Chris.

Thank you, Dan, and good morning, everyone. During our January call, I discussed how this administration is planning to drive transformative change like never before, and we are seeing it unfold daily. L3Harris Technologies, Inc. isn't only embracing these changes but is helping shape the future and advocating for more commercial-like business practices within the DOD. Our trusted disruptor culture and mindset continue to deliver results.

It enables us to stay agile and rapidly adapt to the changing environment, whether from the administration, allied partners, or world events. The external environment remains dynamic, and since we live it every day, I thought I'd give you the latest update on how we assess its impact on L3Harris Technologies, Inc. We're pleased that President Trump signed a full-year continuing resolution. Unlike a traditional CR, this bill allows for new program starts, greater budget flexibility, and affirms the budget in line with the expected 1% increase over 2024 levels.

Congress is now focused on a reconciliation package which could include over $150 billion in additional defense funding. We view the continued emphasis by key congressional leaders to bolster national defense as a positive sign for us. There are many initiatives within the DOD and Congress focusing on existing program capabilities, cost and schedule performance, and investments in emerging technologies. To highlight a few, each service has been asked to reduce 8% of their budget to allow for reallocation of funding to administration priorities.

We don't have any insight into these deliberations at this time. Secondly, as part of this process, the 74 MDAP, which is the major defense acquisition programs, are being evaluated to identify those that are either 15% over budget or 15% late to schedule. For the programs where we are prime, our performance is solid, and for those where we are a subcontractor, we are highly dependent on the Prime's performance. The DOD issued their 17 priorities, which we are well aligned with.

Our two most recent acquisitions are clearly in the sweet spot capabilities needed for the future fight. The classified interim national defense strategy was released focusing on deterring China and defending the homeland. All these initiatives may be hard to follow from the outside, but clearly show a fresh look at aligning dollars to programs that are performing well while reallocating budget to the administration's identified priorities. You saw that President Trump and Secretary Hagseff suggested that the 2026 presidential budget request could be as high as $1 trillion.

This represents strong top-line growth and highlights a sense of urgency and is another positive development. Over 30 executive orders have been issued in the first days, and I wanted to highlight a few starting with Golden Dome. We're well positioned to support this initiative and ready to respond directly to requests and contribute to emerging industry teams given our world-class capabilities in missile warning, tracking, and discrimination. We've made substantial investments in new space factories in Fort Wayne, Indiana, and Palm Bay, Florida.

We're the only company to secure awards across all three tranches of the Space Force's tracking layer and are prepared to respond to the recently released RFP for the next tranche expected to be awarded later this year. Our hypersonic and ballistic tracking space sensor satellite known as HPTSS, launched in February 2024, is the only proven on-orbit system capable of tracking the NewRain hypersonic missiles. This is expected to be a core component of the Golden Dome architecture. If we were to get an award in the next few months, we could launch enough satellites into orbit while President Trump is still in office, thereby having complete coverage of the US.

We broadly participate across offensive and defensive missile programs, providing propulsion and attitude control for all interceptors both in production and development. This supports our long-term growth and underscores our leadership in this area. One of my favorite executive orders is entitled "Restore Common Sense to Federal Procurement." This focus is on simplifying the acquisition process across the federal government. We've been the only major A&D company publicly advocating for reform and supportive of DOD efforts.

I continue to think significant change is in the best interest of the defense ecosystem, and the long-term benefits will be significant for the country and our company. Those efforts in prioritizing budget for high-priority capabilities, advancing innovation, promoting efficiency in acquisition, and implementing risk reduction policies all align with our strategy and keep us at the forefront of innovation and customer alignment. As the DOD considers procuring more through a commercial model, we are very comfortable with this approach with over twenty years of experience about 20% of our products already being sold in this way.

At its core, our LHX NEXT initiative embodies DOD's principles, tailored to accelerate internal transformation through greater speed, efficiency, and agility. Turning to international, we're seeing a significant increase in defense spending since our NATO allies modernize their technologies. We continue to see strong demand for our mission-critical solutions across key regions. So far, we've seen the need for the most advanced battlefield-proven equipment taking priority over politics, and we are staying closely connected with our customers through our NATO offices in countries, including Poland, Germany, The Netherlands, and The UK.

As the global defense landscape shifts, we're exploring new models for collaboration, including partnerships with European domiciled companies. We secured a key international award just after the quarter closed with the Dutch Ministry of Defense for network modernization and software-defined radios valued at over $1.1 billion. The Netherlands selected our radios for their battlefield based on our proven hardware and software which deliver industry-leading resiliency, low probability detection, and intercept while ensuring secure and interoperable communications with US and allied forces. Looking ahead to 2026, we remain confident in achieving our financial framework of $23 billion in revenue, low 16% margins, and $2.8 billion in free cash flow.

With the priorities of the new administration, we're well positioned to continue to drive profitable growth while meeting our customers' evolving mission-critical needs and delivering on our commitments. For example, as a result of our ability to rapidly respond to customer requirements, early in the second quarter, we secured a classified award in our ISR business valued at over $350 million along with a $200 million international award. And with that, I'll turn it over to Ken.

Thanks, Chris. Our focus on profitable growth is delivering results. We had a strong first quarter with performance reflecting continued momentum and improvement across our diverse portfolio of products and programs. While we're not without challenges, our ability to proactively manage the portfolio addressing headwinds in some areas while driving performance in others, continues to give us confidence in our approach and execution.

This is also the first quarter we're reporting under our new non-GAAP EPS methodology. This change marks another step in our efforts to improve the quality of earnings and narrow the spread between GAAP and non-GAAP results, enhancing transparency, and alignment with how we manage the business. Now let's talk about consolidated results for the quarter. Revenue was $5.1 billion and reflected flat organic growth as we operated through a dynamic external environment and were impacted by a short twelve-week quarter.

Segment operating margin was 15.6%, marking the sixth consecutive quarter of year-over-year margin expansion. Non-GAAP EPS was $2.41, up 7% year-over-year. Free cash was an outflow of about $70 million, as first-quarter cash flows are typically the lowest of the year. This represents less than half the outflow we saw in Q1 2024 and gives us confidence in our ability to deliver free cash of $2.4 to $2.5 billion for the year.

This quarter, we returned nearly $800 million to shareholders, with about $570 million in share repurchases and $230 million in dividends, marking our twenty-fourth consecutive annual dividend increase. Returning excess cash to shareholders remains a top priority and we expect to repurchase more than $1 billion in shares this year as previously updated. Additionally, taking advantage of favorable market conditions, we transferred $1.2 billion of pension obligations to an insurance provider without any cash contributions or book losses, reducing future risk and volatility. Turning to our segment's first-quarter results.

CES delivered revenue of $1.3 billion, up 4% driven by continued strong international demand and quick turn book-to-bill deliveries. Operating margin increased 50 bps to 25.5% reflecting favorable high-margin international mix for resilient communications as well as LHX NEXT cost savings across the segment. IMS revenue was $1.6 billion, down 2% and operating margin was 12.8%, up 40 bps. Revenue declined due to lower aircraft missionization volume and the anticipated ramp down of an ISR mission operations program.

Operating margin increased due to strong program performance, increased volume of higher-margin airborne electro-optical sensors, and LHX NEXT cost savings. SAS revenue was $1.6 billion, down 6% organically primarily due to lower volumes associated with program timing and reduced F-35 volume as our TR3 mission computing hardware transitions from development to a more gradual production ramp. Operating margin was 10.9%, down 40 bps, due to continuing challenges on some legacy fixed-price development programs in space, that are in later stages of completion all of this partially offset by LHX NEXT cost savings.

AR delivered strong results with 9% organic growth. Growth was driven by improved production volume across key missile programs and new program ramps. Operating margin declined 10 bps to 12.1% due to lower net favorable EAC adjustments partially offset by higher volume and LHX NEXT driven cost savings. Now let me turn it back to Chris.

Thanks. Advancing strategic collaborations remains a cornerstone of our trusted disruptor strategy. Most recently, we announced a new partnership with Kuiper Government Solutions, Amazon Government's subsidiary. This effort combines our trusted tactical communication systems with their global low earth orbit satellite network to deliver resilient, hybrid satcom solutions.

This capability will offer high-speed, low connectivity with out-of-the-box interoperability providing greater flexibility and mission assurance across the military, public safety, and commercial domains. This collaboration formalizes our joint work and reflects our commitment to delivering secure, resilient communications in contested environments and creating partnerships with nontraditional participants. It's a differentiated solution that plays to our strengths and aligns with growing demand for hybrid multilayered networks. This arrangement also expands the use of our subscription-based and commercial business model revenue.

Another new partnership is with Shield AI on the groundbreaking demonstration of AI-enabled unmanned systems for electronic warfare operations. Leveraging our software-defined electromagnetic battle management ecosystem with Shield AI's Hive Mind autonomy, we're enhancing decision-making in complex battlefield environments. This collaboration will provide scalable multi-domain solutions for AI-enabled control of swarming systems for the US and its allies. We are a minority shareholder in Shield AI.

We're also making solid progress on our partnership with Palantir. Together, we're supporting the US Army's Titan program, where we are leading the communications systems integration for Palantir. Further, we're integrating Palantir's Foundry software platform with our software-defined tactical radio networks. This collaboration is driving new insights and advancements bringing artificial intelligence to the battlefield.

By enhancing the data processing power of tactical networks, we're enabling faster, more effective mission execution for warfighters at the edge. Together, we're pursuing a new opportunity that emerged directly from this partnership to modernize and integrate AI and resilient C2 comms into a next-generation C5ISR architecture for international customers. Partnerships like these and many others allow us to accelerate innovation and rapidly field advanced capabilities. By taking a more thoughtful and open systems approach leveraging the strengths of our partnerships and existing capabilities and bandwidth, we're able to rapidly adapt, scale, and deliver differentiated solutions that meet evolving, mission-critical needs.

Back to you, Ken.

First, a few comments on LHX NEXT and our portfolio. Then I'll move into guidance updates. We remain focused on executing our LHX NEXT initiative and delivering $1.2 billion in gross run rate savings this year. We are nearing completion of the cost optimization phase of this initiative including driving supply chain savings, process improvements, and facility consolidation.

As a result, you may have noticed the reduction in corporate unallocated costs as LHX NEXT implementation costs ramp down. We will, of course, maintain our continuous improvement framework and drive for year-over-year cost savings. The next phase of LHX NEXT is centered on enterprise transformation. Leveraging AI-enabled solutions, driving enterprise-wide digital transformation, and optimizing our supply chain to become leaner and more agile.

We are developing our LHX operating system for all functions so that we have a common way of executing and managing our business. We continue to proactively reshape our business. This quarter, we further sharpened our national security-focused portfolio by completing the divestiture of our commercial aviation solutions business, the last remaining commercial aerospace business in our portfolio. Additionally, we transitioned our fusing and ordnance systems or FOS business from IMS to AR as part of our portfolio optimization effort.

We expect this shift to drive additional synergies as we align across common customers and leverage internal expertise for key RocketMotor content. Turning to guidance updates for 2025. As Chris noted, there are several moving parts in the current environment. But the key takeaway is that we see as much if not more, opportunity than risk ahead. That said, our updated guidance reflects a balanced and disciplined approach.

It incorporates our solid Q1 performance while taking a risk-aware posture as we await greater clarity on several fronts. Specifically, we are monitoring the FY 2026 defense budget, details around the implementation of the 17 priority areas outlined by the DOD. Until we have greater visibility, we believe this is the most prudent path forward and expect to provide further updates on the Q2 call. With that, we now expect revenue of $21.4 to $21.7 billion, representing organic growth of 4% at the midpoint and reflecting a slight increase relative to growth implied by prior guidance.

This update reflects the elimination of about $525 million of revenue related to the CAS divestiture. We are maintaining our segment operating margin guidance of mid to high 15% despite the elimination of higher-margin CAS revenue supported by continued LHX NEXT cost savings and confidence in strong program execution. Non-GAAP EPS is expected to be $10.30 to $10.50. At the midpoint, this includes a 55¢ reduction related to CAS and a 25¢ increase from improved operational performance and capital deployment actions, including the pension buyout. Despite the elimination of three-quarters of CAS revenue, we are reaffirming our free cash flow guidance of $2.4 to $2.5 billion driven by growth, higher profitability, and disciplined working capital management.

At the segment level, we are reaffirming our communication systems revenue outlook of $5.6 to $5.7 billion with an increase in profitability to 25% from high 24%. IMS revenue guidance is now approximately $6.3 billion, reflecting a $525 million impact from the CAS divestiture and $300 million from the FOS business transfer to AR. About an $800 million reduction from the midpoint of prior guidance. Operating margin is now expected in the high 11% range down from low 12% due to the divestiture with plans to offset dilution over time through improved program performance and LHX NEXT savings.

We are maintaining our guidance for space and airborne systems, with revenue expected in the range of $6.9 to $7.1 billion reflecting government fiscal year 2025 budget constraints in the space sector that we expect to abate by 2026. Operating margin is expected to remain in the low 12% range. Aerojet Rocketdyne revenue guidance is now approximately $2.8 billion reflecting the addition of FOS and continued strong growth in missile solutions. We continue to expect margins in the mid 12% range. Although we are closely monitoring the changing trade landscape, have put various mitigation strategies in place, we do not anticipate tariffs to have a meaningful impact on our financial results.

We're actively managing any impact within our current guidance assumptions. Most importantly, we are ensuring timely access to international components to mitigate potential disruptions. Though these risks are limited, we remain confident in our ability to navigate this dynamic environment while maintaining our focus on execution. With that, I'll turn it back to Chris.

Okay. Before we open it up to questions, I want to briefly summarize our value proposition and how we're differentiating ourselves in the industry. With strong support from the new administration for defense, and a potential for a $1 trillion budget in 2026, the backdrop is favorable. We're driving relentlessly for profitable growth and are committed to our 2026 financial framework which we continue to gain confidence in.

From a top-line perspective, the new opportunities we have won in Q2, as mentioned previously, will contribute to our ability to get there. We have grown our top line organically in each quarter since Q3 of 2022 and except for this twelve-week quarter, this will continue for the rest of 2025. Turning to profitability. We effectively manage risk and performance across the diverse portfolio of products and programs increasing margins even in the face of occasional programmatic challenges. Our LHX NEXT transformation is unique and driving our success.

We've now expanded margins year over year for six consecutive quarters and we're delivering double-digit free cash flow growth since 2023. With deleveraging largely behind us and share repurchases accelerating, we see a clear path to mid double-digit growth in free cash flow per share. And last quarter, we increased our dividend for the twenty-fourth consecutive year. With that, Ina, let's open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. And should you wish to cancel a request, please press star followed by the two.

I would like to advise everyone to have a limit of one question. And if anyone has an additional question, you can put yourself back in the queue by pressing star one. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Seth Seifman from JPMorgan.

Please go ahead.

Chris, I wanted to drill in a little bit on something you said a little bit earlier when you talked about international sales, particularly in Europe. I think there's some concern over there given the state of relations between the US and some of the European allies. And, you know, a sense that in the comms business and radios in particular, there are some suppliers in Europe. And so it sounds like you still have a fair amount of confidence in L3Harris Technologies, Inc.'s prospects there.

So I wonder if you could talk a little bit about that. What sort of gives you that confidence going forward?

Yeah. Seth, a great question, and I expect you know, that there would be some concern. The confidence we're having is the orders that we've been able to book and the discussions we're having with our customers. You know, I mentioned The Netherlands, a $1.1 billion opportunity here in April that we booked.

Poland, Germany, and there's other Eastern European countries we can't disclose. At the end of the day, it comes down to the crypto, the interoperability, and the modernization programs that these countries have undertaken. Need new technology. There tend to be seven to ten-year programs.

And, given the sense of urgency and the threats in the area, I believe they don't really have the time to go back and start over. So, as I mentioned in my prepared remarks, there's a lot going on in politics. But at the end of the day, they want the best technology available. And it's proven over and over that our tactical networks and software-defined radios are superior, and that's why they're being procured.

Thank you. And your next question comes from the line of Ronald Epstein from Bank of America. Please go ahead.

Yeah. Hey. Good morning, Chris and Ken. Could you speak a little bit more about Golden Dome? You've mentioned that you're making some investment there already. Is that in anticipation of an award? Have you already gotten an award? I mean, how are you thinking about that? And then I have a follow-up, if I may.

Yeah. No. On Golden Dome, we've been seeing a lot of growth in our satellite business. We use that as an example of our trusted disruptor strategy going back several years.

So when you look at the whole portfolio of satellites that we're manufacturing, we needed to develop these factories given the quantity that we have in backlog and those that we in the future. So no Golden Dome awards have been made. You know, TR3 for Space Force, the RFP came out. That will be part of the architecture but it's still early in the process.

I did mention, you know, HPTSS. And if you look at that executive order, you know, it has about eight different focal points. The only one in there that says accelerate the deployment of HBTSS layer is critical because we have the only proven satellite in orbit that works. So that is an acceleration.

That's why I said if we can get an order here quickly, we can have the US covered while the president is still in office. Every other part of that executive order uses the phrase develop. So you know, we feel really good about the HPTSS and I believe this administration is putting money where contractors are performing and you know, we're hopeful that we can move quickly, get this under contract, and start launching these capabilities. But the other part of it is with the Aerojet acquisition, there's a huge part, with Solid Rocket Motors and the different interceptors.

Ken, do you want to take that?

Sure. Yeah. And, just high level, Ron, to the investment part of your question, I would say, you know, the Golden Dome opportunity aligns very well to investments that we have been making. In particular, in the area of missile warning, missile tracking, and that's both in our Fort Wayne operation as well as here in Palm Bay, Florida.

So, you know, we just believe that, you know, smart investments and our alignment to the needs of the customer are being revealed in terms of the focus on Golden Dome. To Chris's point on Solid Rocket Motors, I think Aerojet is extremely well positioned, not just from a propulsion perspective, but we're on just about every interceptor program to include technologies around the divert and attitude control and how you precisely get an interceptor where it needs to be. So we're looking at a focus on advancing our capabilities and our production and development, on both production and developing interceptor opportunities like next-gen interceptor, glide phase interceptor.

And, also, you know, we do have a business that does targets for the missile defense agency. I think that'll be an important part of Golden Dome. Being able to test the new system and capabilities. So we're looking at opportunities to work with the missile defense agency to try to accelerate that as an enabler for the system as well.

So excited, and I think we're very well positioned.

Thank you.

And your next question comes from the line of Douglas Harned from Bernstein. Please go ahead.

Good morning. Thank you. You know, on SAS, you've had a lot of success winning SDA contracts. And those are easy for us to see.

But when you look at the challenges that you've gotten you recognized this quarter, with respect to classified programs. Can you help us understand sort of the scale of, you know, the split here between classified and other? I know it's hard, but to give us a sense of where the challenge programs are headed. You know, are we gonna see these negative impacts, I guess, on margins and see that dissipate, as we head into 2026-2027?

Sure, Doug. I could take that question. I would say that, you know, maybe addressing the last part of the question first on the challenges. You know, we're certainly managing the challenges on these programs.

You know, we've seen it in, you know, kinda tens of millions of dollars of negative adjustments across a couple of programs. And as we've said, those programs are nearing completion. So we do expect that these challenges, while not necessarily behind us, are in a breadbasket and should be behind us in '25 or early '26. Importantly, these are important programs for our country and the warfighter, and we see it as a strong growth area in the future. And we expect as we've got the technological challenges behind us, it'll be a solid growth area for us with good profitability as we move forward.

And then on the SDA business, you know, that is I would say, you know, it's been a great business model for us. You may remember that we moved from, you know, call it a highly capable weather sensing system to a capable missile warning missile tracking system through advancements in the sensor as well as algorithms and ground processing. We were able to, you know, get a position on prime in that dealt with some challenges on that back in '22 and '23. And as we've won successive awards from tranche zero to tranche one to tranche two, we've been able to drive down cost, give the customer confidence, and at the same time, increase our profitability tranche by tranche.

So we're really pleased with the investments we've been making in the space business. It's not without its challenges. We do hard stuff. You know, I'll be clear on that.

But it is important work for our country and for the warfighter. We're proud of the work we do. We're proud of the challenges we take on. And I think we've got a solid path to managing through it while meeting the guidance that we've put out for you.

And I'll just chime in there, Doug, that we call these legacy programs because they're several years old in some cases. Predate the merger. Which is why I've been pretty outspoken about the fixed-price development programs, which these are and how they can come back and have challenges as you're developing and doing hard stuff, as Ken said. I do want to emphasize this does pave the way for future work.

None of those programs have been bid. We don't have fixed-priced options. So we will know the actual cost. We'll know the technological specs.

And as additional work comes forward, or similar or identical constellations or satellites, I'm highly confident we will win, and we will make money on those.

Thank you. And your next question comes from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, Chris and Ken. Maybe just to stick to SAS, can we talk about the airborne side of the business? What do you see as prospects there? It seems like F-35 is only a near-term headwind. There's a turning point there and maybe new pursuits if you're on F-47. And how do you see L3Harris Technologies, Inc. playing in that market going forward?

Yeah. Good morning, Sheila. Yeah. The airborne market is solid.

In these cases, you know, we are subs to the primes or the OEMs. You're right on F-35. 2025 is the low point for revenue. As the TR3 development comes down and the TR3 increases. So we'll see growth for our F-35 portfolio in 2026, and that involves all aspects from core processors to weapon release and some of the other capabilities that we have on that plane.

I was thinking I'm not sure there's an airplane out there that L3Harris Technologies, Inc. doesn't have some content on. So, you know, we have some great capabilities, even things like the T-7 and other new development programs. Positioned well, and we can support whatever is needed for next-gen aircraft and future planes. So feel good about the portfolio, feel great about the capabilities, and this will be a growth area for us in years ahead.

Thank you. And your next question comes from the line of Matthew Akers from Wells Fargo. Please go ahead.

Hey, thanks very much. Good morning. I wanted to ask Ken. I guess, you know, now that you've been in the Rocketdyne seat here for a couple of months, just curious your initial impressions and kind of thoughts on any opportunities for that business. Here going forward?

Sure. Thanks, Matt. Appreciate the question. Yeah.

Look. My initial impressions are, it's a great business. It's a fantastic team. And we're very well positioned as we look forward to address the critical needs of our country and our warfighter from a tactical and large solid rocket motor perspective.

You know, we're very focused on capacity expansion. In particular, in the missile solutions business. And I think you're seeing that start to reveal itself in terms of 9% revenue growth at Aerojet and solid double-digit growth in the missiles business in particular. And, again, that's both climbing the ramp on the tactical side, as well as starting to see some new programs kick in in terms of primarily large solid rocket motors.

As I mentioned in response to an earlier question, we're excited about the opportunities at Golden Dome at Aerojet. Again, acceleration of Interceptor both production and development programs, as well as targets for missile defense agency. And then we're certainly focused on the space propulsion side of the business as well. You know, protecting NASA, SLS, Artemis, and our RS-25 engine there.

We believe that particular program aligns very well with national security purposes. In returning to the moon and making sure that we don't cede the moon to one of our country's adversaries. And then we're also focused on accelerating and driving production efficiencies on the RL10 largely in support of ULA which we believe is the world's most capable, second-stage engine. We've made some changes there, driving additive manufacturing, which should enable us to see some efficiencies and acceleration as we move forward.

So great business, great team. I'm really excited to be leading it. And I've been spending a fair amount of time in some of the Aerojet facilities Camden, Arkansas, West Palm, Canoga Park, California. And as I've been engaging with the team, it's just fantastic.

And we're really very well positioned.

Yeah. And in my discussions with the customers, they're very pleased that L3Harris Technologies, Inc. made this acquisition. And more importantly, they're impressed with the turnaround. So I believe we're absolutely in the right market at the right time. And the future is quite bright.

Thank you. And your next question comes from the line of Noah Poponak from Goldman Sachs. Please go ahead.

Hey, good morning, everyone.

Hey, Noah.

Just a few questions on the outlook. A few of the outlook items. Given that the divestiture coming out reiterating the $23 billion for 2026, I think, would require closer to 7% organic growth in '26 versus the four this year and the four in the CAGR you've talked about. You maybe just talk about you know, I know you've described an opportunity-rich environment here, but how much risk is there to you know, just getting things on contract quickly enough to achieve that?

And then for 2025, can the pension income and interest expense change? I think look like about 20¢. And you called the 25¢ operational. I'm just wondering how much you're ahead of plan operationally versus that being below the line.

Sure. Let me address the first question. And then I can get to the second part there. So, look, in terms of the growth drivers, the 2026, you know, Chris mentioned in his prepared remarks that we are building confidence to the '26 framework and the $23 billion in sales.

A number of moving parts, and let me just kinda walk through them. First of all, Chris mentioned, classified award that we booked early in the second quarter at IMS. And we see that contributing to revenues in '25 and into '26. There's also an IMS International booking that Chris mentioned, and we see that contributing in '26. We believe that space will return to growth. As we mentioned, there's some budgetary challenges in government fiscal year '25. But we know that there's a focus on that, and we see more budget in FY government's fiscal year '26 on space.

Whether that's SDA T3, accelerating into the fourth quarter of '25 as an award, as well as the potential for upside on Golden Dome opportunities. And then Aerojet Rocketdyne will continue to contribute growth in terms of missiles capacity again, both at the tactical missile level as we climb the ramp as well as some of the development wins that we've seen in the interceptors and large solid rocket motors. That's across a number of interceptor programs, a classified Sentinel, and others. And then, as Chris mentioned, the F-35 headwind that we see in 2025 will abate.

So we are, you know, we are building confidence. We understand it's a 7% growth rate in the twenty-six. But we feel like we've got a really solid path to get there. And feel better about that today than we did one quarter ago.

In terms of the second question, you know, we look at our performance in Q1. We think it was solid performance. I'm not gonna parse out, you know, 5¢ here or there at the EPS level, but we think the operations certainly contributed. There clearly is some benefit of interest and capital deployment actions, whether it's pension, or, as we've updated, you know, we think share count with the repurchase that we've done in the first quarter. Will be somewhere between 188 to 189 million shares versus previous 190. So we're feeling good about what we're doing to drive upside to EPS, whether that's performance of the segment line, or capital deployment actions and you know, we'll continue to crank through that and try to drive upside at the segments through the remaining three quarters of the year.

Yeah. No. We haven't really seen an abnormal slowdown in getting orders. I think it's just the usual change of administration.

Nothing beyond that. I think just about everybody's book-to-bills were below one. We kinda manage it and look at that at an LTM basis. So we're at 1.14 on a book-to-bill, which gives me confidence in the growth.

And, again, we have this twelve-week quarter, and I think we booked almost a billion dollars of orders in the first week of Q2. So there's growth in cyber, which is all classified, great opportunities in the Mideast. And these partnerships and focus on AI, I think, are gonna be able to contribute more in '26 than maybe people appreciate. So thanks for the question.

Thank you. And your next question comes from the line of Robert Stallard from Vertical Research Partners. Please go ahead.

Thanks so much. Good morning.

Morning.

Chris, just wanted to follow-up on Sheila's question from earlier on. With regard to the F-35. Lockheed Martin said a couple of days ago that they're looking to substantially enhance the capability on the aircraft. Exactly what Jim Taiclet said. But I was wondering if there were any opportunities there for L3Harris Technologies, Inc. to be involved in this process?

Yeah. I would think so. You know, we are leading the hardware piece of TR3, and I think a lot of those TR3 capabilities when they're combat-ready and operational will give significantly improved capabilities for that aircraft. So I think we're well positioned.

I think, in fact, we're in the midst of doing a lot of that work now. You know, we never really talked about the retrofit market. So to the extent there's continued upgrades in the core processor or the digital cockpit or the memory system, we always talk about the current deliveries, but there's also a retrofit perspective. So I think we're well positioned.

I think we're one of the few that have the capabilities they need. So we'll work closely with Lockheed and see how we can help and support them.

Thank you. And your next question comes from the line of Myles Walton from Wolfe Research. Please go ahead.

Thanks so much. Chris, I was wondering, some defense executives have had meetings with the president and sort of made direct appeals as it relates to their solutions. I'm curious to the extent that you've been able to do that. And then maybe more from a budget outlook perspective, what is the timeline you're currently thinking about in terms of gaining visibility into the fiscal 2026 budget, the Golden Dome, and the 17 priorities areas.

Do you see that as being sort of a May, June, or later than that? Thanks.

Yeah. Thanks, Myles. I'll take the second one first. Yeah.

We're actually expecting the 2026 PBR in the month of May. I think it's gonna be referred to as a skinny PBR with the dollars allocated more at the mission level than at the program-specific level, a little different than in the past. And I think a lot of those are gonna probably be aligned with those priorities, whether it's homeland missile defense, munitions, autonomy, counter UAS. And then at that level, yeah, we're working hard to make sure that our programs are supported and the dollars will be allocated to them.

It's a little different process, but we'll have that number. Everyone will have it, I think, within the next couple of weeks is what I've been told. And, relative to customers, I can assure you I spend a lot of time in DC or wherever I need to go to meet with the right people and not only myself but the segment president. So I feel we have access pretty much to anyone we need and want access to and I think our message is clear and concise and it's unique.

And people appreciate the capabilities and the speed in which we're willing to do the work. So feel real good on that front.

Thank you. And your next question comes from the line of Jason Gursky from Citigroup. Please go ahead.

Hey, Chris. You've been pretty forward-leaning on procurement reform and the need for it and have even given some prescriptions to the building. I'm just kind of curious to get a few more thoughts from you. These efforts obviously are geared towards speeding things up and saving money.

And I'm kind of curious on the saving money part whether this is to put downward pressure on spending overall or if it's to increase the purchasing power of DOD so they're getting more for the money that they're spending. Love to get your thoughts on what the intent here is. And then maybe just talk a little bit about what you think would be some low-hanging fruits, some easy wins for them to go get. And then lastly, what do you think the overall impact of an exercise kind of like a rewrite of FAR is gonna have on the industrial base?

Is this gonna favor one type of company versus another one type of technology versus another? Just kind of your overall thoughts on the longer-term implications for the industrial base as we go into what looks like is gonna be maybe a full rewrite of FAR. Thanks.

I'm passionate about it. Yeah. Thanks, Jason. No.

I'm trying to drive reform, and there's a lot of initiatives out there driven by the warfighter, members of Congress, and I just want to make sure that the defense industrial base has seats at the table because we do have a perspective. So, you know, speed and agility save money, and the quicker we can make these acquisition decisions, and the sooner anyone can get under contract, the better off we are as a country because we can get those capabilities to the warfighter. So by saving money not only in reducing the time to get an acquisition but allowing companies to have multiyear contracts commercial terms.

We have so many competitive bids. You know, let's put out the RFP. Let's get the proposals, and let's make a decision and go quick. And the goal would ultimately be to get more purchasing power.

I mean, the defense industrial base in my opinion, has pretty much absorbed all the inflation and the impacts of COVID. Given all of our hundreds of billions of dollars of backlog. We have not been able, until recently, you know, to flow those costs through. So the quantities that our customer is getting are less than they probably want.

So this will be a way maybe to increase back the quantity. You know? And I did write a letter, you know, reforming FAR, getting rid of the cost accounting standards. I think it's odd that, you know, we need three sets of books, a GAAP set of tax books, and then cost accounting.

Drives an incredible amount of inefficiency, audits out to Wazoo, disclosure statements make it hard to run the business and do what you would think would be a logical thing. Relocating businesses, consolidations, all that take on us. A life of their own. The truth in negotiation, you know, to have those requirements for every contract over $2 million.

You know, it's pretty much darn near everything they buy. If we want to keep Tina, which I'm in favor of, you know, we ought to raise that to half a billion or a billion dollars. And then it just comes down to commerciality. And, like I said, if we can get more DOD commercial-like practices, business practices, I think that's great.

I think it's gonna favor the companies that can adjust and go quickly and adopt to new change. Think our culture mainly as a result of what we've done with LHX NEXT. I think our employees are used to change on a daily or weekly basis. So I think we can adapt rather quickly.

There'll be IT costs and systems costs and all that kind of stuff, but hard to imagine there's anything negative coming out of this type of reform. And even Secretary Hagset put out guidance on buying software. So the future software resilience communications, change in the way they buy, these types of services whether it's subscription, commercial, or otherwise, I think is a game-changer for the industry and a game-changer for L3Harris Technologies, Inc. And can't wait to get to that point.

Thank you. Your next question comes from the line of Michael Ciarmoli from Truist Security. Please go ahead.

Hey. Good morning, guys. Thanks for taking the question. Ken, just going back to, I think, Noah's question on that bridge to 2026 growth.

I think I heard some of the wins, which I think were international. International revenue looks to be up about 10% this quarter. Do you have any assumptions for sort of the international growth trajectory? For the remainder of this year into '26. And then just the other one, is there any more portfolio shaping that you think materializes between now and call it the end of the year or you know, you think you're kinda set in the organization right now?

Sure. From an international perspective, as I was answering Noah's question and talking about the particular drivers to '26, there was a particular international award at IMS within the ISR sector. That I was referencing there. To your question on international, yes.

It is growing faster than the overall business. And we expect that to continue. Much of that is within the communication segment a bit at IMS as well. And, you know, we've got that factored into the guide.

And certainly, as I said, it is a part of how we're confident in getting to the 2026 numbers. So, you know, feel good about that. And, you know, again, overall, I think that the cards are laying down real nicely for us in terms of the benefit. It's not, you know, one or two things that are gonna get us there.

I think we got a solid path of, you know, five or six individual items that are all either booked and, you know, will be in Q2 backlog. Or, you know, we've got a solid path to getting there. So again, we feel really good about that. International absolutely will contribute, but solid domestic growth as well.

And we see that enabling us to get to that 7% growth for twenty-six. Was there a second part of the question, Michael?

Asking about portfolio shaping. Whether there's any more anything left to be done.

Yeah. I'll just take that one. Yeah. We're always looking at refining the portfolio and would say nothing significant.

You know, we're not obviously trying to be the largest company. We're trying to be the most valuable and is a benefit of focusing on those core competencies that you're good at. Whether it's ISR, space, resilient comms, weapons, and munitions, we still have a lot of small one-off entities that, in all honesty, don't really move the needle and we get calls on a regular basis. So we can get a good price maybe we do a little bore pruning.

But, you know, there's a lot of concern on the growth of 2026. But it comes down to the portfolio. And, if you look at our portfolio, I mean, I couldn't be happier with what we have. And then in just the five years or so since the merger, you know, we did divest and have divested over $3 billion of revenue. And we've acquired $3 billion of revenue.

If you'd look at these priorities, whether it's nuclear modernization, defense, munitions, you look at these MDAP programs and our performance, you know, probably not having a huge platform is not a bad place to be at this particular point. So I think it's all about the portfolio. We've got the portfolio aligned with current administration's priorities. We can go fast.

Our products aren't that expensive, which is why they're appealing internationally. And this partnership strategy is making a difference. I gave a couple of highlights whether it's Kuiper, Palantir, Shield AI. We have a couple of others in work.

We are the go-to people that are willing to work with anyone as a prime, as a sub, as a merchant supplier, and that's gonna fuel the growth for the future.

Hey, Ina. So let's take the last question.

Thank you. And your last question comes from the line of Peter Arment from Baird.

Hey, thanks. Good morning, Chris, Ken, Dan. Hey, you mentioned SDA programs in your opening remarks. I was wondering if you could just give us an update on how the contracts are performing there.

I know there were some leadership reviews going on, and it doesn't seem like it's resulted in any delays in the program. It's been just in the context of Golden Dome, are there going to be overlaps? Or just how you're thinking about, you know, that overall effort here with your satellite? Thanks.

Yeah. Thanks, Peter. Yeah. Tranche zero is in orbit performing well.

One and two are moving along. Ken and I actually had a couple of hour reviews earlier this week to go through these. It is gonna be part of the Golden Dome architecture as we understand it. They put out the RFP.

This was gonna be a 2026 award. They're now looking at accelerating it into 2025. You know? So I think we're well positioned. We're making money.

We're delivering on time, and these are pretty reasonably priced in the big scheme of things. So we're excited about it. And, you know, all these constellations we keep talking about, you know, tend to have three, five, six-year lives. So once you get them up, whether it's, you know, 50, 100, or 200, there's gonna be a recycle or replenishment, as well.

So I think we're real well positioned in the future of price. Especially in missile tracking and warning. And with the hypersonic threats out there. So let me wrap it up here as we close today's call.

I express my gratitude to our dedicated team of employees and leaders for their hard work and resilience. The progress we've made over the past couple of years is a direct result of their efforts, and I'm proud of what we've accomplished. Before signing off, I'd like to take a moment to remember Rob Spingarn, a long-time A&D research analyst and friend who recently passed away. Rob is a valued member of the investment community, and we always appreciated his insights and professionalism that he brought to every interaction.

Our thoughts and prayers are with his family during this difficult time, and he'll be greatly missed. Thank you for joining us.

Thank you.

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