Bill Brown - Chief Executive Officer Chris Kubasik - Chief Operating Officer Jay Malave - Chief Financial Officer Anurag Maheshwari - Vice President of Investor Relations.

Greetings, and welcome to the L3Harris Technologies, Fourth Quarter Fiscal Year 2019 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Anurag Maheshwari, Vice President of Investor Relations. Thank you. You may begin..

Thank you, Dena. Good morning, everyone, and welcome to our fourth quarter fiscal 2019 earnings call. On the call with me today is Bill Brown, CEO; Chris Kubasik, COO; and Jay Malave, CFO. First, a few words on forward-looking statements. Discussions today will include forward-looking statements and non-GAAP financial measures.

Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release, the presentation and our SEC filings.

A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the quarterly materials on the Investor Relations section of our website, where a replay of this call also will be available.

As supplemental information for investors, discussions also will include selected L3and Harris combined financial information, which combines the historical operating results as if the business had been operated together on the basis of a newly announced four segment structure during prior periods, but excluding the operating results of Harris’ night vision business and L3’s divested businesses.

With that, Bill, I will turn it over to you..

So, thank you Anurag, good morning everybody. I’m excited to welcome you to our first ever L3Harris Technologies earnings call. I’m also pleased to welcome our new Chief Financial Officer, Jay Malave, who joined us on July 1 from United Technologies where he most recently was CFO of Carrier.

Prior to that Jay spent more than 20 years at the aerospace businesses, including as CFO of United Technologies Aerospace Systems and working the integration of the Goodrich acquisition.

Many of you know Jay from his time leading the Investor Relations function at United Technologies and I’m thrilled to have him onboard and confident he will be a strong business partner to me, Chris and the rest of the management team.

As you are aware on June 29, in fact in minutes after we ended Harris’s fiscal ‘19, we successfully completed the transformative merger establishing L3Harris Technologies and we really hit the ground running.

On the first working day after closing, we consolidated headquarters activities between Harris and L3 and announced our new organizational model, creating four mission focused segments that combine the top talent of both companies.

In the first week we completed 115 Town Halls with senior leadership touching 80% of all employees, and then in the second week we held a multi-day leadership meeting were Chris and I shared our joint vision, values and operating philosophy with nearly 100 executives and then set out our initial game plan.

I have to say that the level of energy and excitement across the company is extraordinary. So we are off to a good start as a combined company. We’ll talk more about that in a few minutes.

But let me first begin by providing an update on Harris’s fourth quarter and fiscal ‘19 results, followed by Chris with L3, Q2 and first half results and then Jay with combined L3 and Harris Financials and guidance.

So starting with Harris on slide three, we ended fiscal ‘19 on a high note with fourth quarter at non-GAAP earnings per share of 39% and revenue growth of 12%, the highest top line growth we’ve seen in eight years. Overall the company margin in the fourth quarter expanded 80 basis points to a record 20.2%.

These results cap an exceptional year in which we accelerated revenue growth and had margin expansion in all three segments. We outperformed on all guidance metrics, and we delivered a record earnings per share of $8.29, up 30% and free cash flow of $1.055 billion.

Total company book-to-bill was 1.1, driving funded backlog growth of 12%, and setting us up for continued toppling growth. All three segments contributed to our strong performance, driven by their top line growth which continued to exceed expectations.

Let me take a few minutes to recap some of the highlights of the year on slide four and five, with the additional segment detail in the appendix. Communication Systems had a terrific year with revenue up 14% from solid growth in DoD Tactical and Public Safety. DoD Tactical ended the year with revenue of 31% from last year, and up 80% from fiscal ‘17.

This strong growth was driven by nearly $300 million of modernization demand from the Army, Marine Corps and SOCOM as they embark on a multiyear upgrade cycle. Modernization order momentum continued in the quarter with the Army awarding us a second HMS Manpack LRIP Order, followed in July with the release of the 2 Channel Leader Radio RFP.

We also continued to execute well on our strategy to penetrate adjacent airborne markets and we were awarded the initial prototype phase of the Air Force’s Airborne High Frequency Radio Modernization program, expanding our leadership is HF from ground airborne.

International Tactical performed as expected and revenue was up 3% for the year, driven by the ramp on the Australian Modernization program, early adoption of multi-channel products in Canada and Western Europe and ongoing counterterrorism support in Africa.

Overall Tactical ended the year stronger than initially expected, with revenue up 14%, book-to-bill of 1.1 and backlog up 17% to $1.1 billion.

This combined with the well supported DoD budget request, increasing international demand for 2 Channel Radios and executing on expansion into adjacency gives us confidence in the continued growth trajectory in Tactical for the second half of the year and the medium term.

In Electronic Systems, revenue increased 14%, the ninth consecutive quarter of revenue growth ending the year at 9%.

The strong performance was driven by sustained growth in long term platforms F-35, F-18 and F-16 and more recently by growth on B-52 and SOCOM Rotary Aircraft, all of which collectively grew double digit as we leverage technology upgrades and ramp production.

Orders were strong in ES ending the year at nearly $3 billion in booking, with two-thirds from the avionics and electronic warfare franchises as we continue to leverage our long standing customer relationships to solidify our position on new and long term platforms.

In April we received a $340 million award for F-35 Release Systems, supporting LRIP 12-14, which means all of our F-35 production content across avionics and release systems is now under multiyear contracts, which increases medium term visibility.

We also received a $72 million production order to deliver Upgraded Countermeasure Electronic Warfare Systems for the B-52 Platform, bringing that programs current value to over $430 million against the $1.3 billion total opportunity.

This order momentum, along with our investments in innovation, increased content on existing platforms and expansion of the next-gen platforms will drive a multiyear growth cycle in avionics and electronic warfare.

In Space and Intel, revenue was up 8% for the quarter and the year, well above our initial expectation of 4% to 5%, driven by mid-teens growth in our classified business.

Order momentum was even stronger as we saw continued success in strengthening incumbent positions and expanding the addressable market of our classified business by providing end-to-end mission solutions and penetrating new adjacency.

I’m also pleased with our relentless focus on operational excellence, which drove the margin expansion across each of our segments, despite the mixed challenges that come with new program starts.

Our operational excellence program called HPX has driven net productivity savings that more than offset the dilutive margin impact of DoD Tactical modernization and revenue growth on long-term platforms in classified space, resulting in total company margin of 20.2% for the fourth quarter and 19.8% for the year, 90 basis points of margin expansion.

Similarly, our multiyear focus on working capital has delivered terrific results. We ended the year with working capital of 41 days, a four day improvement over last year at a 37 day improvement since the XLS acquisition.

Our working capital reduction, combined with earnings growth resulted in record free cash flow of $1.055 billion, exceeding the post XLS acquisition goal of $1 billion by 2019.

Overall, we had an outstanding year of accelerating revenue growth, margin expansion and record EPS and free cash flow, exceeding the targets we set for ourselves, and we’ll continue building on this momentum as we go forward as L3Harris to drive continued above market growth, margin expansion and cash generation, creating long term value for our shareholders.

Let me now turn it over to Chris to discuss L3 results for the quarter and the first half.

Chris?.

Okay, thank you Bill and good morning everyone. Let me take a moment to thank and congratulate the L3 and Harris teams for their hard work this past quarter. Today’s results from both companies are due to everyone’s focus and the uncertain times leading up to the close of this historic merger. As Bill mentioned, day one was seamless.

We rolled out new email addresses to all L3 Harris employees, launched a new website and portal that connected to 50,000 employees across the globe and installed new signage at our 50 largest sites.

On the operational side, in the first week we issued nearly 40 RFPs to our supplier base totaling $900 million in annual spend to start leveraging the purchasing power of the combined enterprise and to work towards our cost synergies goal.

Shifting now to L3 results, we had a solid second quarter, highlighted by our consolidated margin and free cash flow, both outperforming the second quarter guidance we discussed on our May earnings call. Margins expanded 160 basis points to 12.2% and free cash flow was up 38% to $220 million. Non-GAAP EPS was up 18% to $2.91 on 2% revenue growth.

These results caped a strong first half with EPS up 21% on 8% revenue growth. Total company margins expanded 130 basis points to 11.9% and free cash flow was $365 million or 5x last year’s first half, as we executed on working capital improvements that resulted in a 12 day reduction over the past 12 months.

Orders were up 8% resulting in a book-to-bill of 1.11 and funded backlog increased 16%.

Turning to the segments on slide six, ISR revenue grew 2%, driven by a ramp up in WESCAM turret systems and the strength of our ISR missionization business, as several key programs accelerated, including the Australian Peregrine and the Presidential Aircraft recapitalization program.

This growth was partially offset by lower deliveries of night vision products due to export timing and operating income was up 50%, resulting in margin expansion of 460 basis points to 14.3%. This was due to higher volume, improved contract performance and L365 savings.

In the first half ISR revenue was up 12% and operating income grew 45%, with margin expansion of 280 basis points to 12.3%. In the Communication Segment revenue was flat in the quarter with higher production volume for UAV Communication System offset by lower volume in the Integrated Maritime and Microwave product sectors.

Margins declined by 130 basis points to 7.9% from the dilutive mix impact of the Maritime Developmental Programs and the continued investment in Unmanned Undersea Vehicles. For the first half, segment revenue was up 5% with margin expansion of 20 basis points to 9.3%.

Lastly the Electronics Segment second quarter revenue was up 3% with strong growth in Precision Engagement Systems which includes the fuzing and ordnance business, F-35 Display Systems and Airport Security Equipment, more than offsetting the expected headwind in the Defense Training Solutions due to last year’s competitive loss of the C-17 training contract and lower volume from Commercial Flight Simulator sales.

Margin expanded 10 basis points to 13.6% and in the first half segment revenue was up 3% with margin expansion of 10 basis points to 14.1%. Overall L3 had a strong first half, tracking above the guidance set at the beginning of the year and ahead of the amounts disclosed in the S4.

Looking forward, as we announced on July 1 and detailed in the appendix to the webcast slides, we have organized L3 Harris into four segments, that group technologies and capabilities to allow us to compete across multiple missions and domains.

Cutting across these segments, we have business development, operations and program excellent functions to drive further growth, while achieving greater costs and operational and programmatic efficiency.

We have worked on the structure since we announced the merger in October and have assembled an outstanding, seasoned and collaborative team to lead the new organization. I’m excited to be part of it and look forward to the work ahead. With that, I will turn it over to Jay. .

In Integrated Mission Systems we expect revenue to be up approximately 10.5% in the second half, driven by continued strength in Airborne Imaging Systems and growth in ISR Aircraft Missionization and Maritime Platforms with operating margin of approximately 12.5%.

Full year segment revenue is expected to be up approximately 11.2%, with operating margin of approximately 12.3%. Space and Airborne Systems revenue is expected to be up approximately 11.5% in the second half, driven by continued double digit growth in avionics and electronic warfare and strong growth in classified space.

Segment operating margin is expected to be approximately 18.7%. Full year segment revenue is expected to grow approximately 13.9% with operating margin of approximately 18.4%. Communication Systems revenue is expected to be up approximately 9.5% in the second half, driven by strong growth across all sectors with operating margin in the range of 22.1%.

Full year segment revenue is expected to be up approximately 10.7% with operating margin of approximately 21.8%. Lastly, Aviation Systems revenue is expected to be up approximately 7% in the second half, driven largely by continued double digit growth in precision engagement.

Operating margin is expected to be up – I’m sorry, expected to be approximately 14% from improvements in EDD and productivity initiatives across the second. Full year segment revenue is expected to grow approximately 4% with operating margin of about 12.3%.

So to summarize, we expect the first half momentum to carry over to the second half in addition to the benefit from cost synergies, resulting in a strong 2019. I’ll stop here and turn it back over to Bill for closing remarks. .

Excellence Everywhere Everyday, establishing a new performance culture, building on the strengths of both companies, investing smartly and aggressively in technology to grow revenue and increase share, reshaping our portfolio to focus on high margin, high growth, technology differentiated businesses and maximizing cash flow that will be returned to shareholders through repurchases and dividends.

Overall the progress and alignment in the first 30 days has exceeded our expectations, and we feel even more confident in the strategic combination, and our ability to deliver shareholder value. So with that, let me turn to the operator to open the line for questions. .

Thank you. [Operator Instructions]. Our first question comes from Robert Stallard of Vertical Research Partners. Caller, you may proceed. .

Thanks so much. Good morning. .

Hey, good morning Robert. .

Maybe a quick first question for Bill.

There was some commentary, the Paris Air Show, the combined company might be looking at some post-merger disposals and I wonder if there had been any further thought or development on that front?.

Well Rob, thanks for the question. Yeah, it’s definitely a key priority as I mentioned in my closing remarks in terms of top priorities for the management team.

Certainly as we’ve talked about before on this call and other venues, a broader mix of businesses gives us an opportunity to take a fresh look at the combined company portfolio and really think about what fits, what doesn’t fit, certainly gives us an optionality to do something’s with businesses that we no longer consider strategic.

We continue to look at this through a couple of different lenses. Certainly one is, does the business have technology that’s required by differentiation? Can we deliver good returns? Can we grow and win, gain share etcetera, and we are going to evaluate what businesses were based on those metrics.

We continue to have this dialogue, Chris and I are working very hard on this, we are engaging our new board on this as well. We are not going to deliberate decisions and discussions in public, but it’s really top of mind to us Rob. .

Okay thanks, and then maybe as a follow-on Jay and welcome back. In the free cash flow guidance, that’s around $400 million worth of adjustments and I was wondering how many of these one off items for 2019 and won’t be repeating themselves in 2020 and beyond? Thanks. .

Are you talking about the back half, Rob. .

Yeah, it’s in the release. There’s a reconciliation of the guidance for the full year. We’ve got 1875 to 1925 and then the number of adjustments gets you to 2.3 to 2.35 adjusted free cash flow for the year. .

Right, so when you look at that, we will continue to expect some of the integration costs, we’ll still see it going into next year from a cash basis. But let me just take you back to the second half of free cash flow, because we expect you know an up-tick in net income.

There will be a little bit of an outflow related to our working capital within one or two days improvement, but we’re going to try to hold that flat and we’ll see a little bit of a benefit in cash taxes. So we feel good about the second half, specific to your question in terms of what we see going next year.

As I mentioned there will be some continued costs related to the integration, restructuring type level of costs and those type of items, but beyond that I don’t expect there to be other significant items that will repeat going forward. .

I mean just in a nutshell, I think for the year Rob, $260 million of free cash impact from deal and integration cost. We had about $25 million or so in the first half. The $235 million will be in the back half. About $100 million of that 95 are going to be deal cots; that’s going to be behind us by Q3.

You know the balance is integration costs and we’ll see some little drag forward into calendar ‘20 on integration costs as well. .

That’s very helpful. Thank you. .

Our next question comes from Sheila Kahyaoglu of Jefferies. Caller you may proceed. .

Thanks. Good morning Bill and Chris and welcome Jay.

On the deal closing you guys increased share repurchases in your dividends, how are you may be thinking about your overall free cash flow target and targeting return to shareholders?.

Well, I think you know as Jay was alluding to, we feel good about this year in terms of cash generation. We are still targeting $3 billion three years out, that’s calendar ’22, we’ll certainly ramp to that. So I think we’re off to a really good start in terms of the cash we generated in the first half.

You know LTM cash, what we are going to do this year. So you know, all that’s looking pretty good. We ended June on a proforma basis with $1.7 billion of balance sheet. You know we are going to generate about say $2.5 billion more or less in the next 12 months. So that’s puts us about $4.2 billion more or less of cash available for deployment.

You know our dividend is about $700 million, $680 million and that’s including the 10% increase we did, that we announced on July 1 that will be enacted here in August, we’ll reevaluate that in January, about $700 million in dividends. We have about $300 million worth of deal and integration costs, we just spoke about that over the next 12 months.

We had to fund the surf [ph] and differed compensation programs, but what that means, that leave you about $3 billion over that period of time. For things that do, $2.5 billion is on buyback and about $0.5 billion Sheila, that’s going to be held on the balance sheet, just because that’s what we require for normal working capital needs..

Sure. Thanks and then maybe just on the margins, the pro forma margin guidance for the total company implies second half margins are up 80 basis points over the first half.

But just a decent acceleration, can you maybe talk about the moving pieces, how much of that is coming from synergies versus the underlying business profitability?.

Yeah, so you’re right Sheila, the first half on a pro forma basis up 90 basis points, the second half up 170, so it’s up subsequently as well, 16.7. For the year about 130 basis points of margin expansion, so 16 too, a little bit better than we had though when we put the deal together in the S4, so we feel good about the trajectory.

You know as we mentioned on the call about $40 million on the back half is coming from net cost synergies. There’s a road map in the back on the EPS bridge which indicates the absence of L3 intangibles and pension amortization for another $40 million $43 million.

We see an operational improvement year-over-year in a couple of businesses from L3 including EDD. We see operational excellence savings which offset some mix, grow some investments in the back half, all of which gets us to about that 170 in the back half and we feel it’s pretty well calibrated. .

Thanks. Very precise as always. .

Our next question comes from Carter Copeland of Melius Research. Caller, you may proceed..

Hey, good morning gentlemen. .

Good morning. .

Just a couple quick ones. One, I realize it’s hard because we didn’t have a, you know a Harris guide for the next, you know sort of fiscal year out there. But it looks like on a pro forma basis the top line that you’ve you know put forth for the second half is a little bit ahead of where we may have been on a pro forma basis coming in.

Can you just verify that and maybe help us size it.

And then as a follow on, you know I wondered as part of the many decisions you made in getting the deal closed and what not, where you shook out on things like incentive compensation, not necessarily for the executive team, but as you go a layer down in terms of you know driving this sort of behavior that you want and so was anything useful or notable to speak about there that that will help us understand, you know where your points of emphasis are? Thanks guys.

.

Yeah, sure Carter, thanks. So really on the first point, first of all Harris is feeling a little bit backtracking, a bit better on our calendar ‘19 in terms of versus the S4 and a combined company basis. For calendar ‘19 we are about a $0.5 billion better.

So you know it’s quite a bit stronger than we envisioned late last year when we put out the S4, but again as we mentioned at that time, the S4 was related to strategic plans which were put together earlier in the year over the summer.

You know when the markets guide a bit better, we want some strategic opportunities, so we feel good about where we are at in calendar ’19, a bit better than we started. You know ‘20 is looking pretty good as well as certainly with the budget, a backdrop, you know a strong funded backlog at the beginning – at the midpoint of the year, up 15%.

So a lot of this tracking I think for really good top line progress. On the comp program, you know we are still in discussions with our Board in terms of what we do going forward, but you know Chris and I, you know obviously there’s a short term plan and a longer term plan.

On the short term basis it will be some combination of revenue op-income and free cash, and since we all know the importance of cash generation, the impotence of driving working capital improvements, you know there’s probably a slight tilt towards free cash, much like we did a number of years ago at Harris.

You’ll note Chris mention about the big step up in the first half and free cash generation, a 5x over the first half of last year. I think 50% of the short term comp for the L3 executives came on free cash, and we all know when you incentivize for something you get results. So that’s kind of what we are thinking on a short term basis.

Longer term it will be performance based equity, you know that will be tied to the targets we are discussing with share owners. .

Okay, great. Thanks. .

You bet Carter. .

Our next question comes from Peter Arment of Baird. Caller, you may proceed. .

Yeah thanks. Good morning Bill, Chris, Jay. A question Jay, I guess on CapEx you mention $190 million for the second half of the year, about 2% of revenues.

Just thinking about longer term as we think over the forecast period and thinking about your integration period, is that still a good number to go off of about 2% of sales?.

Yeah I believe it is Peter, I mean 2% this year on a full year basis, that’s $380 million, $190 million in the first half, $190 million in the second half. I think going forward it feels like that’s the right place to be to fund and be prepare for the growth, and yeah, I think 2% is where we should go with. .

Okay, and just as a quick follow up. I know you are not talking about quarterly guidance here, but just thinking about the second half guidance that you put out. Is there anything you’d call out regarding 3Q versus 4Q either on the EPS or free cash flow, just thinking from a modeling perspective for the street? Thanks. .

Nothing material Peter. There’ll be additional non-GAAP charges in Q3, because of some of the deal and integration expenses, but on a non-GAAP reported earnings per share, revenue growth should all look pretty stable, Q3 versus Q4. .

Thank you for the color. .

You bet. .

Our next question comes from David Strauss of Barclays. Caller, you may proceed. .

Thanks. Good morning. Thanks for all the information and welcome Jay. .

Thank you, David. .

Bill, you used to have – in the Harris deck you had a slide that showed the medium term outlook by segment.

I want to see if you might offer, since we are new to the combined company segment, so I wanted to see if you would offer your thoughts on kind of how the growth rates relative to each other among the segments might look going forward and also from a margin opportunity, beyond what we’re looking at for the second half of ’19. .

Well David, I mean it’s still a bit early. I mean obviously we just put the company together and it took enormous work to put together pro forma guidance in the back half. So it’s a little bit premature to get out beyond that, but maybe just some high level comments without getting into the segment by segment looks here.

You know for us, I mean looking at 10% growth in a calendar year, in the industry that happened to be in, it’s pretty special. You follow us, you follow others in the space. You know looking at 10% in the back half feels pretty good as well. So you know I mentioned the S4 is a little dated.

We are doing a lot better than the S4, about $0.5 billion stronger this year. So we’re coming off a stronger starting point. You know in the S4 I think L3 numbers were growing at 5% to 6% in that range. We are a bit, a little bit higher than that.

You know I see us continuing to grow in that mid to high single digit range into ‘20 and maybe a little bit beyond that. It comes from you know a good bipartisan budget deal.

You know the topline budget is not growing that much, 3% and then basically flat the year after, but the certainty that provides, the funding lines that we see tactical, F-35, other plays that affect the business look very, very good and very positive.

It features a $122 billion worth of appropriations that are out there, that are exceeding the outlays. So those outlays have to catch up. This is a lot of dry-powder in the system that should keep, well you know all of the boats moving in the water and we feel pretty good about the medium term outlook.

On the margins side, look ending at 16.2 this year will be a great result. You know we’re at the front end of our ramp on synergies. Only $40 million this year getting to $300 million several years out, that’s another 170, 180 basis points.

So if you could kind of run the math and get to 18% pretty quickly a few years out, and we’ll ramp to that as quickly as we can. So you know as we look out in the back end of the year we feel great and I think the outlook into calendar ‘20 also looks pretty good too. .

Okay, that’s helpful. As a follow-up I wanted to ask about the free cash flow cadence beyond this year. So you know you are guiding to the full year adjusted free cash flow number around $2 billion, $3 billion. You’ve got this $3 billion target for 2022, I guess counter 2022.

You know and applies like a little less than 10% CAGR between here and there, which just seems a little light given what you are talking about from a working capital upside opportunity and synergies.

Can you just help square that, why it’s not a higher growth rate between here and there?.

You know look, we feel really good about where we ended on an LTM basis on cash and just for you know referencing a couple of data points. I mean Harris over the last 12 months was better than, by four days of working capital. So we went from 45 to 41, a day or two better than we thought a couple months ago.

L3s results were 12 days better, year-over-year in the June ending quarter. You know so we are making good progress. Over the balance of the year we are only looking at another day or two between June and the back end of the year. You know but we are starting from our 75 days pro forma at the end of June. You know Harris is sitting at 41.

You know I think we got a lot of opportunity ahead of us, let’s get through the next couple of quarters, we’ll give you guidance on calendar ’20, and certainly as I look at Chris and Jay, you know we’re all over trying to figure out a way to make sure the cash gets accelerated, that’s certainly what we’re trying to do..

David, keep in mind, the working capital is going to want to grow with the increase in volume. So our challenge is going to be to take out the productivity in working capital and hold it flat over that period of time. .

You know I’ll just chime in, that we are clearly focused on this David. You’ve seen the progress as Bill mentioned, the 12 days. The good news is a lot of that is coming out of inventory, a little bit out of day sales outstanding. So we haven’t even really focused on the payable levels.

So the teams are working as hard and we’re allocating targets right down to the program manager level. Everybody knows what they need to do to achieve these targets. .

Great! Thanks everyone. .

Our next question comes from Gautam Khanna of Cowen. Caller, you may proceed. .

Yes, thank you. I may have missed it, but Bill could you talk about maybe some sort of ballpark of what you expect in divestments now that the deal is closed in terms of size? Maybe by sales, and then I have a follow-up. .

No, I don’t think that we’re to sort of size it because the decisions aren’t yet made you know, and we are at the front end of the process.

It’s going to take some time to get alignment, you know work the process and what I’ll do Gautam as I’ve done before, I know Chris has done before is, you know rather than talking about something that we are going to do, I’ll talk about what we have done when that is done. So we don’t have a predetermined target for what we’re trying to do.

Again what we are looking at is, is we want to make sure the management team is focused on the business that are strategic, ones that are technology driven, have great returns we can win and Chris and I spent a lot of time in the last few months on this. We working with our boards; we’ve got a meeting coming up in a couple of weeks on this.

So we are on it, but I’m not going to size how much the divestiture might be until we really get around to making some decisions around that. .

I appreciate that. Just a quick follow up, tactical comp, book-to-bill look pretty strong. I was wondering if you could give us some flavor on you know the 12 to 18 months outlook, the pipeline, international domestic and just any commentary you can give around. .

Yeah, but look, I mean the international pipeline remains pretty good at about $2.5 billion and the shape of its not changed a lot. So we had a good finish on international, basically flattish on Q4, but we had a good year about 3%. You know DoD pipeline is around $1.7 billion, so it’s up a little bit. What’s interesting is the mix.

It’s about 50/50 now between base and modernization, as we would have expected, modernization is starting to grow and we’re seeing that over the course of fiscal ’19. It basically tripled in size in terms of modernization. The pipeline is now half modernization, that’s back stopped by what is a pretty good budget outlook.

So I got to tell you Gautam, we had a good year intact, where the guys did such a great job. You know we were up about 13% this year in calendar ’19. You know it’s going to be you know about 10%, 12% or so, low double digit in the back half. DoD is going to continue to grow pretty well.

When we see international, the low to mid-single digit range, so we see continued momentum in this business you know and it goes beyond the back end of the year based on what I’m seeing in the budget. So you know the tactical business is performing very well as expected. .

And last one from me, Bill any major recompletion monitoring over the next 12 months. Thank you. .

In major recompetes, what was the question? Okay, I think if it was a major recompetes, we are going to see a lot over the last 12 months. I mean there’s always places that we are bidding, and there’s opportunities out there, you know but there’s nothing that’s really significant.

The one that really comes to the mind is what we call our sensor program. That’s where we do maintenance for ground based telescopes, out of all sites around the work, the legacy Exelis program to $150 million to $200 million a year of revenue, it’s under a recompete. But it’s one of those programs I feel very strongly about.

From way back when we bought Exelis it was about 35%, 38% on time delivery. We closed the quarter around 94%, 95% very, very good reputation with the customer. So that’s the only one that’s jumping off my mind as a recompete and certainly I got my eye on it, but nothing more than that Gautam. So thanks for the question. .

Thanks you. .

Our next question comes from Michael Ciarmoli of SunTrust. Caller you may proceed. .

Hey, good morning guys. Thanks for taking the questions and a nice result. Just on the second half margins, specifically the aviation segment, I think you’ve got you know pretty strong margin expansion in the second half of the year. They are looking at 14% versus you know 10.5%.

You gave some initial comments on what’s driving that, but can you be a little bit more specific there on the sharp margin expansion in that segment?.

Yeah, this is Chris. We see an up ramp from a couple of main drivers. If you recall we have the EDD business in there, which of course is a tough compare for ‘18 compared to ’19.

So we talked earlier in January about a significant improvement, 40 basis points from not having the same issues of EDD which we don’t expect to have in ‘19 that we had an ’18.

We have some E3 savings that are pretty significant in the $40 million range and we have a pretty good road path to execute upon those and you know we have some growth opportunities in the commercial aviation sector, specifically avionics that has higher margins in addition to some, using an ordinance opportunities.

All that contributes to the guidance we gave. .

Got it, and then just a bigger picture on the defense budget. I know we’ve got the two year budget deal, but any thoughts on sort of what’s taking place now with the expansion of this night core process that you know mark us for looks to be implementing.

Do you guys see this as a risk or opportunity as you look at the potential pipeline of business, you know versus modernization, legacy, I know you know funding lines look good now, but it seems like you know what we saw take place at the Army could be expanding now into the Navy and Air Force and just wondering how you guys are viewing that process?.

Well look, I think it’s still very early. It was only confirmed very recently, but through what he did when he was Army Secretary was actually a very positive, very productive.

I think it’s notable that he with Ryan McCarthy, with the Chief got together and really prioritize where they want to spend limited army dollars and focus on key priorities, and start to move away from things that weren’t you know all that critical. The fact is I think between what we do, what L3 does on a combined basis.

You know the fact is working on important programs and I think we ended up doing very well through the army process. I’d envision the same thing for across DoD what is now going to work on.

So you know the discipline of looking at where they want to spend dollars is important and I think based on the things that were working on, you know we are going to be, I would think we are going to end up being pretty strong here. .

Sounds good. Thanks guys. .

You bet..

Our next question comes from George Shapiro of Shapiro Research. Caller, you may proceed. .

Hi, good morning.

I was wondering, Bill if you could provide a breakdown of your revenues between the O&M budget and the investment budget, because L3 had a high percentage from the O&M budget?.

Yeah, no, on the DoD side, so we are about 55%, 60% DoD and it’s not 50/50 O&M versus procurement. .

Okay and then with some of the shorter cycle businesses that you are in and the flattening of the budget, is there any concern that your growth rate can slow somewhat quickly or more quickly than others with longer cycle businesses might have or you think that you gained enough share that we keep going on with better than industry growth rates..

Yeah I mean the short cycle business that we really have talked about in the past George is really around the tactical radio business and that has become, you know when we merge with Exelis, it became a smaller piece of the overall company.

Certainly as we improved in the other segment you know so it was like 35%, 36% of the legacy Harris companies, not even the smaller part of L3 Harris. You know but the fact is, it is a relatively quick turn business, but it’s a little bit different today than it would have been a few years ago.

But today lot more of the business is driven by modernization, and modernization, there’s a lot more visibility into it than these quick turn O&M funded orders that we would have gotten in the past. So I’m not terribly concerned, we had a very, very strong calendar of fiscal ’19.

We had a really extraordinary first half of calendar ’19 in DoD Tactical. Well, that would naturally mitigate itself from or slow down a little bit in the back half, but it’s still very healthy growth, north of 20%.

So look, it’s a great business, we’re across all of the different platforms, different contract vehicles, all the services on the front end of what we believe is a multiyear ramp here George..

Okay, very good. Thanks very much. .

You bet..

Our next question comes from Rob Spingarn of Crédit Suisse. Caller, you may proceed. .

Hi, good morning..

Good morning Rob. .

Congrats on the deal. I just wanted to go back to the guidance and this really could be for anybody, but Jay this is the guidance you gave. If I look at the second half revenues, it looks like in everything but AS, we have a slight decrease in growth.

Is that just comps or is there anything else going on there?.

Yeah Rob, some of it is comps. We had you know up in the last half of last year some pretty significant growth rates, but you’re talking, you’re kind of splitting hairs. In the Integration Mission System business it was 12% growth in the first half, we were expecting around 10.5%, so a real slight reduction there.

In Communication Systems we are nearly 12%, we’re going to be 9.5% there, close to 10%. And so yeah, I’d say more compares than anything else, but the growth rates are still pretty substantial and pretty significant to support the 10% in the back half. As I said in my comments, high visibility with the backlog.

We have 90% visibility in the backlog to the back half and so we feel really good about going into this next six months. .

And then I guess for the increase in growth in AS, does this go back to the comments that Chris just made about some new programs or are there things ramping there?.

We are seeing, you know what Chris called the Precision Engagement Systems business. It ramps a bit more in the back half than the front half. It grew really nicely in the first half.

You know even stronger in the back and it’s just a lot of classified work that Chris and his team have solidify themselves on, plus a lot of fusing business for munitions and that [inaudible] there is pretty high.

We’re also getting you know a little bit better comps on the commercial training business, the defense training business looks a little bit better, the C-17 carries for the full year, but there’s F-16 wins that have happened that’s going to help mitigate the C-17 loss in the back half.

So really across all the pieces of AS it just get better and that’s where we are seeing you know better growth in the back half than the front half. .

Okay, and then just a clarification, just on the proceeds from the night vision sale, just the L3 pension pre-funding that I think you were going to direct those proceeds toward, has that happened? Is that in the op-cash flow guidance for this year?.

You know what’s going to happen is so we’re still on track with that. The net proceeds will be about $325 million. We expect to get through the process in Q3, its deep in the sypheus [ph] review and that will be used to prefund the pension.

You know that would basically mitigate any cash contributions on the all three sides of the pension through the next couple years into calendar ’22. So that’s like a $70 million, $80 million improvement if you will in cash, but you know remember night vision generated some cash, so there’s a bit of an offset.

On an annualized basis that sort of a $50 million, $60 million net benefit to us on the free cash side and that is in our guidance. .

The timing is in the guidance for this year. .

Its not in the back half. It’s in the outlook as we are getting into ’20 and beyond. .

Okay, thank you that..

Our next question comes from Richard Safran of Buckingham Research Group. Caller, you may proceed. .

Thanks.

Bill, Chris, Jay good morning, how are you?.

Good Rich, good morning. .

First I had a bit of a top level kind of philosophy question here. You know for lack of a better term, you know commercial business model has really been at the core of Harris.

So what I wanted to ask was how long you might think it might take to apply that model to the new combined company? How long do you think it might be before we see tangible results? Just interested in any color you could provide there on how you are thinking about implementing that?.

Well, it’s a great question and its less philosophical, more a financial in a sense of what we’ve tried to do. You know relate back to where we were three years ago with Exelis. Exelis manufactured radios and for Wayne it was under a sort of normal model and with cost disclosures and we moved that up to Rochester.

It took us some time, but that’s now our full commercial model business. And L3 WESCAM, the WESCAM business had a very profitable, nice size business, growing very well, great positions around the world, that’s a commercial model business, much like what we do in the tactical side.

There’s a possibility to take the SATCOM business that L3 has was very strong and over time migrate that to a commercial model. It’s something that we’ll work on. It may not be a needle mover in the next couple of years. It’s something that obviously we are focused on, but I wouldn’t say that that’s going to be the key driver to margin expansion.

It’s going to come through operational excellence, it’s going to come through synergy, it’s going to come though basic better performance in our company. So I mean we are certainly on it, Richard. .

Okay, thanks for that. Now, just quickly on the F-35 program, you know just following up on your opening remarks, you know just generally we’ve see a lot of changes among suppliers on the F- 35 program.

So I just wanted to know, you know are there still incremental opportunities out there for you on that program and if possible in your answer, could you just discuss how your content on that platform is evolved?.

Yeah, sure. We you know – now I’m going to quote the number. This is probably just legacy of Harris. I’m looking to Anurag and Jay to confirm this. So there’s like $2.2 million per ship set today. So we do the common components, we do the maddle [ph] system, we do the release systems, so about $2.2 million.

That we know is going to grow to about $2.7 million over the next several years. You know we won three different pieces of what they call Tech New Fresh , so one is the mission computer called the ICP.

You know there is the aircraft memory system, as well as the electronic unit, the Panorama cockpit display, PCD EU and all those things add together over time to give us another $0.5 billion of content for F-35.

So that’s going to grow in terms of content per ship set and then it’s going to also grow with the ramp, which is why it’s an important one for us to keep talking about. As the number of the ship set continue to growth, plus our content continues to grow, it’s going to continue to be a growth driver for the company. .

And Richard on the Legacy L3, as you know we have the crypto, we have the display, so you know think of another 500 or 600 per ship set as well and when we put the merger together, we talked about the benefits of scale. I think Lockheed Martin would knowledge we were one of the top suppliers.

It gives you better access to the management team to be a part of the strategy and we would expect a bid on other components in the years ahead, given our scale and investments..

Thanks very much; appreciate that. .

Our next question comes from Noah Poponak of Goldman Sachs. Caller, you may proceed. .

Hey, good morning everybody. .

Morning. .

In the three, the $3 billion, three year free cash flow target, what is the you know underlying organic business segment.

So you know putting aside anything below the line, putting aside the working capital opportunity in the synergies, just the core newly combined business segment EBITDA growth rate on that three year basis that you are assuming in the $3 billion. .

Yeah, I think topline is around 5%, 6%, a little bit higher than that on a EBITDA growth. When we – it yields about $0.5 billion of incremental net income, incremental cash coming from growth over the three year period..

Okay. I guess 500 on the new – should I be thinking about that relative to the 23 to 23.5, so I would kind of 20% of that, but over three years, so call it a 6% CAGR. .

Yet it was off like a $2.0 billion to $2.1 billion free cash basis. So it’s going to be maybe a little bit less than that, but yeah it’s in about that range, 6%, 7%..

Okay. And then just to make sure I have the bridge correct, working off of this year, in the 23 to 23.5 how much working capital and synergy is in there? It sounded like the one to two days of working capitals maybe $50 million and then I thought I saw $40 million of synergy in the deck, but then I, Bill I heard you saying 150.

I didn’t know if maybe that was a run rate number.

Can you just clarify those for me?.

Yeah sure, so there’s $40 million of net synergies in the back half, net synergies in the full year as well and that drop through into generating cash on an after tax basis. The 150 is the run rate will be added in terms of costs synergies by the calendar year.

So that’s the run rate we’ll be at – which gives us confidence that we can be at $200 million, so in calendar ‘20 gross savings dropping through, so that’s how we talked about it. Over the course of the back end of the year, I think we’re around 75 days on a pro forma basis in June.

As Jay pointed out, we’re expecting one to two days of improvement, sequentially through the back end of the working capital, so anything around 74, 73 days. .

Okay, so I should be kind of in the zone of maybe call it $100 million of the $500 million that you had for the – in that free cash flow bridge of net after tax energy plus capital efficiency, maybe $100 million of the $500 million is happening in 2019. .

I’m not sure. I mean we’re looking at each other here, not sure….

Well, if its $40 million to $50 million of synergy and then one of two days of working capital, I guess, that would be. .

The one – two ways of working capital on a full year basis is probably on the order of $30 million, $60 million in that range. So will be half that over the course of the back end of the year. .

Okay. And then just you know a bigger picture on the margins, you know clearly the margins will expand if you achieve the synergy plans, but should we be giving consideration for margin expansion in the underlying business before synergies. You know Harris kind of had incremental margins from the partially commercial model.

Legacy L3 had plans to continue to improve the operations in the margins of the business before the deal. Is it fair to assume the margins are expanding independent of the synergies, and then synergies in addition to that? It’s fair to assume that. Yeah, both independent businesses had talked about margin expansion.

You know in both pieces it was on the order of 100 basis points and certainly the synergies that we had talked about that would be incremental to that, which is you know going back you know when we first talked about the deal on a pro forma basis, the EBIT margin was around 14.

We said that we’d get around 17 through 100 basis point organic growth of margins, another 200 basis points on synergy to get to 17. Obviously while you’re coming here into calendar 16, we are doing a bit better than that as starting off here. So yeah, it is incremental to the benefits of synergies Noah. .

Great. Thanks very much. .

You bet..

Our next question comes from Seth Seifman of JPMorgan. Caller, you may proceed. .

Thanks very much and good morning everyone. Apologize if I missed it in the prepared remarks, I know there was a lot going on, but the profitability in the communications business at L3 in the quarter, you know just nearly 8%.

Maybe if you can address that, and it kind of seemed like we were moving path last year as she is and kind of – what kind of risks that presents going forward?.

Yeah Seth, this is Chris. That was driven as we put in the prepared comments, mainly by the Maritime sector. We have a pretty strong international focus in Maritime, we have some steady cornerstone programs as they cover them on, there’s a column focused on sensors and control systems, but there are some new developments going on.

One, in the on Mandarin both service and undersea and that requires investments and I think we have some new programs for the Columbia and the destroyer and laser weapons. Those were slowed in the quarter by some additional costs to get those development programs on track, and those will have long 10 to 20 year lag once we get going.

So it was focused on Maritime development to answer your question..

Great, thanks. And then Bill in Legacy Harris, the Space and Intelligence Segment, it seems like the book-to-bill for fiscal ‘19 was probably around 1.0, which is pretty solid and obviously there’s some good growth there, but there’s also you know a ton of growth in the Space budget.

So maybe if you could talk a little bit about the visibility you have there, and you know the confidence you have that you guys are taking your fair share on the Space side?.

Yeah look, Seth we feel very good about the space business. You’re right, I mean in the year the book-to-bill is over one, you know backlog came up a little bit, so there’s a good trend there and we’ve talked about that pretty consistently over the course of a fiscal ‘19 with the classified business being up in the teens or is looking pretty good.

That comes in a couple different areas. When we talk about classified businesses, it’s not just Space.

So there’s opportunities in Space, it’s both exquisite as well as moving to SmallSat and the team has just done a great job, you know maintaining a strong position on exquisite components, while at the same time taking the lead on full end admission solutions with SmallSat.

But our classified business in that area also relates to other domains and that’s business continues to go well.

Again, the same philosophy moving from providing components to subsystem to now full mission solutions, whether they be terrestrial systems, near shore system, deep water systems, you know and that business has gone very well and it’s really this philosophy.

There’s the budgets are coming up, and we are expanding in our ability to compete on more full end admission solutions, and you can see the trajectory happening in the back end of the year. We continue to see strong growth in the classified business. .

I’ll just day that Bill and I spent a fair amount of time last week reviewing the classified business and I was thoroughly impressed with the technology and the opportunities. So we’re excited about the Space business going forward and other classified as well. .

Thanks very much everyone. .

Our next question comes from Jon Raviv of Citi. Caller, you may proceed..

Hey, good morning, and thank you. Now that we had some more time pass, any sort of additional perspective on industry M&A would be appreciated by you guys as others talk of you know more skilled investments to increase their probability of wins, and by definition taking some market share.

What do you consider the impact to be on LHX going forward besides bagging you a nice CFO?.

[Cross Talk] Exactly. So let me start into them as you led the fact. .

Well look, I think we – so Chris and I started this conversation quite a long time ago, you know with a goal of creating a very large scale mission solutions prime and that's exactly what we've done.

We continue to assess implication of what other people in the space do, but from what I look at, we’re just a company that we have created and the opportunities ahead of us; I think we're very well positioned. When you talk about scale, I think we are scaling places where we need to be scaled.

We were scaled in tactical radios and becoming scale in the space business, so scale in lots of different areas of the company you know and we feel great. The company is a technology leader. You know our strategy is to continue to invest significantly and aggressively in innovation.

You know we've been running about 4% of our revenue in Iraq and we continue to see that continue to go up. You know we've got great set of people who are great technologists and business leaders to drive our business.

You know what's going to require for us to win is continuing to accelerate the deployment of technologies into the market place, into the field as a war fighter and then continue to execute well on our programs.

You know that's what we can do, and no matter what happens in the market and the changes in the structure, we're going to keep focused on what we do well, the things that we can control and it's a technology in a way we execute, so I think we're in a good spot here John. .

Great, thanks. I’ll keep it to one since I know we’re up for time here. .

Okay, thank you. .

Our final question comes from Joshua Sullivan of Seaport Global Securities. Caller, you may proceed. .

Hey, good morning. Thanks for taking the time for the last question here.

You are just given the success with the Exelis combination and maybe using that as a benchmark, can you talk about how the experience so far with L3 has then maybe similar to that integration and then maybe where it's been a little more dynamic?.

Well, certainly it’s a much bigger scale you know clearly and there's a lot of complexity within L3 was a company built over 20 years through a lot of M&A and Chris has talked about the desire to move from a holding company to an operating company and we server one that journey.

So getting information, getting it you know consistently across businesses is a bit of a challenge, but the reality is we’ve out of the gauge very, very, quickly; we've got a great seasoned integration team; people that are very experienced, they've done this before. There are a lot of people from the Exelis integration.

We're getting data very quickly; you know the enthusiasm and energy across the company is very good. You know it's gone from my vantage point certainly better than we would have imagined and better than we did with Exelis. You know we're going faster on supply chain.

That was an area that took a little time to ramp up too on Exelis, so we’re acting a lot faster this time. Obviously with the segments and the headquarters we made those decisions, we execute on that on day one here which is very important.

You know the revenue opportunities ahead of us are quite significant, something that Chris is spending a lot of time on and we’re very encouraged. So we're going to get on that probably a lot faster this time than we do with excels. Keep in mind we're in a different market space, we’re different sort of part in the cycle.

Back with Exelis, we're still coming out of sequestration. The visibility and the budgets weren’t very strong, you know so we focused much more on cost side.

This time it’s different, you know and Chris and the team are really putting a lot of time and effort into making sure we understand what the revenue opportunities are and then making sure that we fund them.

So you know I'm optimistic about the trajectory that we’re on here and clearly we want a great path to deliver $0.5 billion of gross cost synergies and hopefully a bit that more than that over time Josh. .

I appreciate that. I’ll keep it to one as well, thank you..

So that wraps up our call. So thank you very, very much. Chris and I are very excited about the company that we’ve created and getting to the closure of this historic merger on exactly the minute that we thought we would be in mid-October of last year. There's a lot of precision in that as you'd expect from us in this team.

We're very excited, we're confident, created a lot of value for owners, but importantly Chris mentioned this in his comments; we have 50,000 employees of this company who are working very, very hard to deliver results, keep their focus on the customer and we want to thank them for all their efforts and we look forward to updating you again on the merger and the progress we’re having at the end of October for the next earnings release.

So thank you very much. .

Today's concludes today’s conference. You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day!.