L3Harris Technologies, Inc. (NYSE:LHX) Q4 2023 Earnings Call Transcript
L3Harris Technologies, Inc. (NYSE:LHX) Q4 2023 Earnings Call Transcript January 26, 2024
L3Harris Technologies, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the L3Harris Technologies' Fourth Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the opening remarks. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mark Kratz, Vice President of Investor Relations. You may begin.
Mark Kratz: Thank you, Rob. Good morning, everyone, and welcome to our Fourth Quarter 2023 Earnings Call. Joining me this morning are Chris Kubasik, our CEO; and Ken Bedingfield, our CFO. We've updated our quarterly earnings approach based on feedback and yesterday evening, we published our fourth quarter earnings release detailing our financial results and guidance. We've also provided a supplemental earnings presentation on our website. As a reminder, today's discussion will include certain matters that constitute forward-looking statements. These statements involve risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information, please reference our earnings release and SEC filings.
We also discuss non-GAAP financial measures which are reconciled to GAAP measures in the earnings release. Specifically, I will note, segment operating income, which excludes items such as impairments to goodwill and other assets reported at the business segment level. I would now like to turn it over to Chris and Ken for some opening remarks.
Christopher Kubasik: Okay. Thanks, Mark, and welcome, Ken, to your first L3Harris earnings call. We're excited to have you on the team.
Kenneth Bedingfield: Thanks, Chris. I'm excited to be a part of the team.
Christopher Kubasik: All right. I want to start by thanking our investors and analysts for attending our Investor Day last month. We had a great turnout and appreciate the strong positive feedback from the event. 2023 marked the fourth full year since the merger and served as an inflection point in many respects. We met our financial commitments. We closed our integrating and seeing the benefits of two acquisitions that are focused on national security and aligned with defense spending priorities. We announced the sale of a non-core business further aligning our portfolio and we returned to growth following a few years of macroeconomic disruptions. This past year, we also strengthened our leadership team and Board of Directors adding key talent that will help drive future value for our investors, customers and employees.
This year's progress gives us confidence that we have set the foundation to achieve the financial outlook that we laid out at our Investor Day and are reaffirming today with segment level detail. Globally, the threat environment remains elevated emphasizing the importance of our mission. With the national security-focused portfolio, we continue to support the US and its allies providing vital solutions for our customers' most critical missions. Domestically, we await Congress to pass all 12 appropriation bills by the end of April including the pending vote for an $842 billion topline defense budget which has solid support for our programs, most notably, in the areas of space, missiles, intelligence, and resilient communications. In 2023, demand remained strong.
We reported a record $23 billion in orders, including key awards for the US Army's Manpack and Leader Radios, Compass Call missionized business jets, and rocket motors for the Army's Guided Multiple Launch Rocket System. The orders we received in 2023 contributed to a record backlog of $33 billion, more than doubled to $16 billion of backlog at the time of the merger. This positive momentum continued into early 2024, underscored by the recent award for 18 satellites from the Space Development Agency for more than $900 million. Internationally, orders were up 24% including tactical radios, VAMPIRE systems for Ukraine, and an international space award that leverages our 55-year trusted heritage to build and deliver advanced payloads for Japan's next-generation weather satellite.
We are maintaining our international growth strategy and aim to improve that mix over the medium term. Operationally, our Performance First culture has been a driving factor in meeting our financial commitments, and we are gaining momentum as we focus on profitable growth. We're about six months into the Aerojet Rocketdyne integration and we have captured the $50 million in cost synergies that we were targeting. The team is using the savings to deploy resources from across L3Harris to help improve operational performance and ultimately increase capacity. In our short time owning this business, we are seeing improvements and we are progressing towards returning to contracted production levels. As highlighted at our Investor Day, we are executing on our LHX NeXt initiative aimed at delivering $1 billion in gross cost savings over the next three years.
These efficiencies will optimize our infrastructure and leverage our scale, which enables us to achieve margin expansion moving forward. We executed a number of projects included in exiting facility leases to reduce cost and overall square footage. We continue with our ERP consolidation with 10 reporting units being consolidated into one reporting unit earlier this month. And at the program level, our continued focus on program excellence has helped drive better EAC performance. However, we have more work to do in this area. In 2024, we are prioritizing our focus on execution, margin expansions, and growing free cash flow. Additionally, we will continue to evaluate parts of our portfolio against strategic alternatives for non-core assets. It should be clear that we have made significant progress on the journey to transform the company.
Our core businesses are aligned with our customers' priorities and provide many levers to enable us to create shareholder value. Ken will discuss our capital deployment strategy in more detail, but it is unchanged from what we discussed at Investor Day. We will invest to grow organically to delever the balance sheet and then to return excess cash to shareholders. Our strategy is backed by our diverse and talented team and we continue to invest in our workforce, both financially and professionally. This gives me confidence that we have the right leaders in place to execute our imperatives and drive long-term shareholder value. With that, let me turn it over to Ken for some financial details including our 2024 guidance.
Kenneth Bedingfield: Thanks and good morning, everyone. It's great to be part of the L3Harris team and working alongside Chris. Over the last six weeks, I've been actively engaged with the team, reviewing the business and our financial plan. I'm all in on our approach and grow more confident with each day. We'll be on the road meeting with investors next week and attending a few conferences during the quarter, so I look forward to re-engaging with you all over the coming months. Let's start with consolidated results, which were all in line with our latest guidance. We reported full-year revenue of $19.4 billion at the high end of our guidance, up 14% year-over-year and 6% organically, which was primarily from growth in our Space and Airborne Systems and Communication Systems segments.
We delivered segment operating margin of 14.8%, earnings of $12.36 a share and free cash flow was just over $2 billion. For the fourth quarter, revenue was $5.3 billion, up 17%, largely driven by the Aerojet Rocketdyne and Tactical Data Links acquisitions and continued strong growth in space systems and resilient communications. Fourth quarter segment margin was 15.1%, up 50 basis points from higher volume and favorable product mix, and better program performance, which all resulted in net positive EAC adjustments. The first net positive quarter since mid-2022. Fourth quarter earnings per share grew 2% to $3.35. Let me hit on segment results before turning to 2024 guidance. SAS reported revenue of $6.8 billion for the year, up 7% as we continue to see strong growth in Space, Mission Networks, and Intel & Cyber programs.
I've been impressed with what we're doing in Space. To me, this demonstrates how we are thinking differently, responding quickly, making targeted investments, and seeing them pay off and growing in enduring markets. It's exciting to see how much progress we have made in responsive space where we are taking share. Segment operating margin was 11.4% for the year, down 30 basis points, driven by growth in those early phase Space programs. We are now beginning to move into the more mature production phase of these programs as we look to improve margin in 2024. In IMS, revenue was $6.6 billion for the year, which was roughly flat. Segment operating margin was 11.2%, down 180 basis points from program challenges and lower international mix. I've looked at the changes the team has implemented throughout the year to address these operational challenges and believe that the multipronged approach, including leadership changes, training, and maturing programmatic risk management processes will improve the business going forward.
We've already seen sequential improvements within the business and expect greater financial stability in 2024. CS revenue was $5.1 billion, up 20% year-over-year, with 12% organic growth. Beyond the acquisition of TDL, revenue growth was driven by higher volume of Tactical Communication equipment. Segment operating margin was 24.2%, flat year-over-year as higher volumes were offset by lower international mix. I will note that CS had a great Q4 with record operating margin since the merger at 26.1%. Lastly, Aerojet Rocketdyne revenue was over $1 billion and operating margin was 11.6% for the post-acquisition period. The new leadership team Aerojet Rocketdyne is working to drive operational improvements to increase throughput of its critical products.
Expanding on Chris' comments, early actions the team has taken include investing in critical suppliers, deploying resources to their sites, improving processes, and co-investing in supplier infrastructure. We look forward to sharing more data with you as we progress on these efforts in 2024. Turning now to 2024 guidance, which is consistent with the framework that we presented at Investor Day. We expect $20.7 billion to $21.3 billion in revenue with organic growth in all segments. As you fill out your models, I would note that with strong fourth quarter results at CS and some favorable SAS timing, we expect a slower top line growth rate to start the year. IMS and total company guidance also contemplates the sale of CAS in 2024 with any potential timing impact within the revenue and margin guidance ranges.
Consolidated segment operating margin is anticipated to be approximately 15% from efficiencies gained with increased volume, operational improvements and LHX NeXt cost savings. This is partially offset by a full year of Aerojet Rocketdyne. Throughout the year, margins should gain momentum driven by program ramps, international product mix and accelerating LHX NeXt cost savings. We do have two nonoperational headwinds totaling more than $200 million. First is lower pension income, which we anticipate netting to about $300 million this year and second is an anticipated $650 million in interest expense. With taxes and share count, we anticipate non-GAAP EPS to grow to a range of $12.40 to $12.80. We should see it grow ratably across the quarters, ultimately reflecting a sequential build much like we saw in 2023.
We closed out 2023 with solid working capital improvement coming down from elevated levels during the pandemic. The team and I are keenly focused on this as we aim to grow free cash flow over the next several years. For 2024, we expect free cash flow of approximately $2.2 billion, up 10%, driven by earnings growth and continued balance sheet efficiency. At a segment level, we expect SAS revenue of $6.9 billion to $7.1 billion, with operating margin in the mid to high 11% range. IMS revenue is anticipated to be $6.4 billion to $6.6 billion, with operating margin in the low to mid-11% range, driven by lower-than-historical international mix. We expect CS revenue of $5.3 billion to $5.4 billion, with operating margin in the low to mid 24% range.
And for Aerojet Rocketdyne, we anticipate revenue of $2.4 billion to $2.5 billion and operating margin in the high 11% range. As Chris mentioned, our capital allocation priority remains focused on first, paying down debt to achieve a leverage ratio of less than 3.0 and then a shift to returning all excess cash to shareholders through dividends and share repurchases. On the dividend, we continue to target a payout ratio of 35% to 40% of free cash flow. For share repurchases, I will note that we returned over $0.5 billion in 2023, we are targeting a similar amount in 2024, and we look to accelerate buyback in '25 and 2026. To close out, one of the reasons I joined L3Harris was my belief that there is tremendous value potential. In my time here, I have gained more confidence that we can deliver on our 2024 and future commitments.
With that, let's open the line for questions. Rob?
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