L3Harris Technologies Inc Stock

Greetings. Welcome to the L3Harris Technologies Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, John Sweeney, Vice President, Investor Relations. Thank you. John, you may now begin.

Thank you, Hillary, and good morning, everyone. Joining me today are our Chief Executive Officer, Sam Mehta and Chief Financial Officer, [indiscernible] Release detailing our financial results. To the L3 Hans Technologies Third Quarter 2020 earnings presentation on our website. Before we begin, please note that our discussion will include forward-looking statements subject to risks, assumptions and uncertainties that could cause actual results to differ materially. We will discuss GAAP results alongside non-GAAP financial measures of organic revenue, segment operating income and free cash flow, which are reconciled to GAAP measures in the earnings release. For more information, please refer to our earnings release and SEC filings. With that, let me turn it over to Sam. Sam? .

Thank you, John, and good afternoon, everyone. I've had the privilege of spending the vast majority of my career in an industry devoted to supporting and protecting those who protect us. My passion is helping to innovate and deliver critical capability to our nation, partners and allies. I'm particularly excited to lead this team of over 43,000 talented and committed employees who share that same passion for delivering the outstanding results that we'll discuss today. These results not only affirm the strong execution of our strategy, but more importantly, form the foundation of an extremely exciting future. We grew organic revenues by 9% and despite having 1 fewer week as compared to the third quarter of 2025.

We grew EPS to $3.28, which is up 33% year-over-year. We generated $1.3 billion of free cash flow in the quarter, up 195% and achieve a book-to-bill of 3.2, which translated to a historic backlog of $53 billion. That backlog is highly aligned to 4 strong growth vectors, missiles and missile products, space, resilient communications and electronic warfare and multi-domain sensing. Our capability sets in these categories form the foundation from which we will continue to invest and grow. This backlog also underscores the customers' confidence in our ability to deliver innovation, efficiency and quality and will generate sustainable profitable growth, which is the backbone of our financial performance.

In light of this and continued strength of customer relationships, my top priority is to focus on the improved delivery and execution in every aspect of the business. We continue to improve our operational efficiency, which is delivering bottom line benefit to the company through traditional methods of continuous improvement. These efforts are now embedded in our DNA and culture. But we will supplement and accelerate productivity and efficiency gains by embracing new techniques and technologies. For instance, we are harnessing the power of automation and artificial intelligence to accelerate delivery of PAC-3 solid rocket motors to customers, in some cases, reducing the amount of traditional manual quality inspections from 21 hours to 6.5 hours per motor.

This is but 1 of countless examples that have enabled us to double our pack free solid rocket motor delivery from last year to this year and will allow us to double again in 2027. We have partnered with companies like Palantir to drive similar efficiency gains in tactical radios, night vision goggles and Wescam turrets, just to name a few examples. In the past few years, we have acquired and developed new products and capabilities in several areas and have also trimmed the portfolio of businesses and product lines that we don't see as integral to our future. The result of that activity are 4 growth vectors, in which we will continue to invest heavily, whether it's capital, innovation or additional capability. I'll start with missiles and missile products. The third quarter represents a watershed moment in our Missile solutions business.

We booked $11 billion of contractual backlog, representing years of future deliveries, validating the investments we made and we continue to make to fuel the growth of this business. Those orders relate to 2 critical programs, PAC-3 and FAD, where we partnered very closely with the Department of War and prime contract customers to improve delivery and quality, while not sacrificing the safety of our employees. From 2023 to 2026, we are increasing deliveries by more than 100%. The good news with these and other critical Department of War solid rocket motor programs is that we're just getting started. For instance, we plan to triple our FAD solid rocket motor deliveries in 2027 as compared to 2026. And and we'll do the same on numerous additional programs.

Importantly, these contract awards and improved deliveries validate the investments in people, process, facilities and supply chain that we've made and committed to make in support of an important national security priority. I would note that the estimated dollar values of these contracts do not include or take into account economic price escalation or the strong demand from international partners and allies, which is to say, we expect there will be upside to these values that we have highlighted.

L3Harris is investing in capacity expansion to provide unmatched speed and scale for the Sentinel intercontinental ballistic missile program. The post boost system is the propulsion system during Exoatmospheric flight. This system has already undergone major milestones, including a hot fire test in 2025. The Stage 3 motor has achieved several milestones on the march to flight testing, including a hot-fire test early in 2024. L3Harris has made substantial investments in capacity expansion to accelerate Sentinel production, including ongoing construction of the Arkansas advanced propulsion facilities, which is expected to increase large solid rocket motor manufacturing capacity sixfold. The campus will include more than 20 buildings across 110 acres.

Space is the second growth driver and represents a priority capability for our customers. Whether we are delivering capability as a satellite prime contractor to the Department of War, or as a differentiated provider of payloads to other primes, we are becoming an indispensable player and partner in this growing domain. We are now capitalizing on our previous commitments of nearly $250 million in facility and capacity expansion to capture and deliver important programs like our recently won $955 million ANDT3 award. That win continues to position us as the only company that has been awarded prime contracts across all 5 space and missile warning missile defense tranches.

A clear sign of customers' confidence in our ability to deliver in support of national critical homeland defense. In addition to our investment in capability and capacity, we also plan to add to our technical prowess and space by investing roughly $175 million over the 3 years in research and development to position us for continued success and growth. Moving on to resilient communications and electronic warfare, where we have established a proud and historic legacy of investment, innovation and market leadership. Recent conflicts in Ukraine and the Middle East highlight the importance of continuous innovation in this area. If the war fighter can't communicate, they can fight but they can't win. A key win in this quarter was the $876 million next Gen Jammer low-band contract, which allows our pilots to safely navigate highly contested environments.

To date, we have been awarded nearly $1.5 billion in support of this program. While these cost type contracts typically generate single-digit returns during development, they can drive years of sustained production and improve margins once development is complete. We continue to see strong demand for our Vampire counter unmanned systems with orders from the Department of War and international customers exceeding $500 million in the quarter. With significant inbound interest across domestic and international markets, we are well positioned to accelerate the business and grow our approximately $1 billion pipeline. Vampire is a proven vehicle agnostic solution that provides advanced reconnaissance and precision strike capabilities against drones with more than 350,000 operational hours since 2023. As global attention remains focused on the proliferation of drones, Vampire is an increasingly important in providing the critical last mile of defense needed to protect war fighters at the tactical edge.

No discussion of our capabilities would be complete without mentioning continued innovation and demand for our tactical software-defined radios. Our commercial business model of assessing market demand, funding innovation and selling on a commercial basis accelerates delivery of capability to customers. This year, we will deliver more tactical radios to Natal partners, allied and international customers into the Department of War, which reflects strong international demand. Having said that, we continue to win domestically. For instance, capturing more than $315 million of awards this year for Army modernization in conjunction with next-generation command and control program.

The fourth growth vector of our portfolio is multi-domain sensing, where we provide critical information, situational awareness and decision-making advantage to war fighters ranging from the tactical edge to high levels of command. Our capability ranges from individual centers to complete mission solutions from the farthest reaches of space to the deepest depth of the ocean. An exciting example is the recent launch of the Nancy Grace from in telescope. We partnered with NASA's Goderbased Flight Center to provide key components of the telescope including the optical telescope assembly, which serves as Roman's eye and radiation hard and electronics that keep the telescope operating approximately 1 million miles from earth.

Importantly, we continue to build momentum in missionize business jets, securing $323 million in contract awards in the third quarter and increasing our year-to-date total to nearly $1.5 billion. This includes an additional 2 aircraft under the U.S. Air Force's Compass Call program, bringing the total to 12 of the 22 aircraft requested. We continue to be a leader in missionized business jet which allow our customers a more flexible, cost-effective manner to sense and collect information versus expensive bespoke single mission dedicated platforms. Slide 5 shows our investment priorities, which are highly aligned to our strategy. For the foreseeable future, the most compelling investment opportunity I see is investing in L3Harris. That includes investing to further develop our capabilities in the strategic growth vectors I outlined, expanding capacity to meet growing domestic and international demand.

To be clear, we believe we have the appropriate organizational structure in place to support our growth and execution. As a result, we do not intend to significantly change the way we are organized for the foreseeable future. Moving on to Slide 6. Here is how we are positioning our company for sustainable, long-term financial success. We are leveraging our strong and growing backlog and differentiating capability while continuing our investment in innovation and capacity. We will increase focus on programmatic and operational execution. In the third quarter, we produced positive net EACs across 3 segments and improved delivery performance with laser-like focus on details. Of course, we will continue to lean forward with a return for our shareholders and customers is justified, but use enhanced tools and strategies to identify and mitigate risk at the earliest possible opportunity.

We will leverage our strong free cash flow to invest in innovation, capacity and capability where it drives differentiation and outsized competitive advantage, whether that manifested improved margins or accelerated top line growth. We will be relentless in our pursuit of productivity and efficiency gains as a means to accelerate delivery, sustain strong margins and remain a competitive partner to our customers. We have and will continue to embrace artificial intelligence, automation and emerging technologies to capture these gains. And we will leverage our financial strength for continued flexibility whether that is consistent dividend, targeted share buybacks or strategic portfolio shaping. I will now turn the call over to Ken, who will discuss the financials.

Thank you, Sam. While this is our first earnings call together, it has been great working with you as you've driven the business forward with a pragmatic approach sustaining our strong momentum and bringing an increased focus to our operations. Sam, John and I appreciate the investor and analyst feedback that shaped this quarter's earnings materials. These changes are intended to improve ease of use and connect our financial results to operational execution. Turning to our third quarter, where our strong execution delivered solid financial results. Orders were $19.3 billion, yielding a book-to-bill of 3.2x and backlog increased 27% to $53.2 billion and was up 47% year-over-year. The 2 largest awards were PAC-3 and THAAD totaling $11 billion, consistent with our volume and pricing expectations. .

Revenue totaled $6.1 billion, up $401 million or 7% year-over-year. Organic revenue grew 9% despite 1 fewer week as previously discussed, an extra week contributes about $200 million, implying double-digit organic growth, excluding the extra week and the prior year quarter. International growth continues to be strong as Ally's ramp investments in national defense. International revenue grew 18%, and as a percentage of our total revenue was 24%, increasing in the last year or so by about 300 basis points. Segment margin was 15.9%, consistent with prior year. Segment margin benefited from strong disciplined execution with positive EAC performance across all 3 segments.

Operating income of $786 million increased $165 million or 27% versus prior year. Operating income margin increased 200 basis points to 13% due to higher revenues and lower corporate costs. GAAP diluted earnings per share for the quarter was $3.28, up 33%. The $0.82 year-over-year improvement is due to higher revenue volume, $0.28, higher operating income margins $0.51, lower interest expense, $0.17. This was partially offset by preferred stock dividends of $0.10. We also had investment gains offset by the Department of War Preferred Stock mark-to-market adjustment. Operating cash flow was $1.4 billion, up from $546 million in the prior year quarter. Capital expenditures were $179 million or 3% of revenue, which is historically elevated as we continue to invest to build out our missile capacity.

Free cash flow was $1.3 billion, up nearly 200%. Year-to-date, free cash flow is $1.8 billion with clear momentum to achieve our full year guidance. Research and development costs were $143 million or 2.4% of revenue and helped drive our strong awards and organic growth. We believe maintaining R&D spend at current levels positions us well for the future. Moving to Slide 9, let me provide some color on our Space and Mission Systems segment performance. Revenues grew 10% to $3.1 billion. Revenue increased due to higher volumes in space, missile warning, missile tracking satellite programs, ISR aircraft air traffic control modernization and F-35 control systems.

Space & Mission Systems segment operating margin was 10.9%, up 20 basis points from prior year. The margin expansion primarily reflects higher volumes and improved program execution. Turning to communications and spectrum dominance, which delivered revenue of $2 billion, up 3% year-over-year driven by increased international volumes for our software-defined resilient communication radios and program ramp for our Vampire counter-UAS systems partially offset by lower volume in our spectrum superiority business. As we recently discussed at the Jefferies conference, we experienced supply disruption for a small handful of components which reduced our third quarter revenue growth. We were able to sort much of the supplier challenges by the end of the quarter and expect stronger fourth quarter revenue growth.

Communications and spectrum dominance operating margin was 25.2%, up 50 basis points on favorable program performance and mix. Missile Solutions revenue increased 5% year-over-year. Organic revenue, excluding the divestiture of the commercial space propulsion business increased 17% primarily driven by increased volumes on key missile programs. Missile Solutions segment operating income margin was 12%, down 30 basis points due to mix. In the quarter, we closed on the sale of our commercial space propulsion business, investment gains and losses associated with our retained ownership interest will be recorded as other nonoperating income.

Now turning to cash conversion and leverage on Slide 12. Over the past few years, our free cash flow has consistently exceeded net income. The team's disciplined execution and strong cash generation have enabled us to reduce net debt leverage from 4.3x to approximately 1.9x, strengthening our balance sheet. At the end of the third quarter, we had $3 billion in cash and short-term investments. In the fourth quarter, we expect to generate approximately $1 billion of free cash flow and repay $800 million of debt, bringing our projected year-end cash balance to $3.2 billion. Looking ahead to 2027 and 2028, we expect to continue generating meaningful operating cash flow. We have sufficient cash to fund our $3 billion investment in missile capacity expansion, normal capital expenditures and dividends.

Even after these investments, we expect to have more than $5 billion in excess cash we intend to deploy. Let me turn to our capital allocation priorities. Our first priority is investing in the business, including our $3 billion missile investment. Second, we remain committed to our dividend. Third, while our leverage is attractive, we have the ability to further delever and create more dry powder. Fourth, we believe share repurchases are an important tool and are highly attractive at our current valuation. Lastly, for M&A, we do not expect to engage in any large-scale M&A in the foreseeable future. we believe we will create the most value by focusing on our business and driving operational performance. Moving to our 2026 guidance. We are increasing the bottom end of our revenue guidance by $300 million two, $23.5 billion to $23.7 billion, increasing the midpoint by $150 million. Accordingly, organic revenue growth is now 9% to 10%. Segment operating margin guidance is reaffirmed at low 16%.

We are raising our EPS guidance to $12.25 to $12.35, up from our prior guidance range of $11.80 to $12. The updated range represents an increase of $0.40 at the midpoint, with about half of the increase due to lower interest expense, which is now expected to be $515 million. We are reaffirming our free cash flow guidance of $3 billion. To improve investor ease of use and comparability, we updated our free cash flow definition to exclude cash proceeds from asset sales. At the segment level, we are making 2 adjustments. Space and Mission Systems full year revenue is increasing $200 million to $11.9 billion. Communications and spectrum dominance revenue is reduced by $100 million to $7.9 billion.

Now let's turn to our 2028 financial framework. We are reaffirming organic growth expectation of 8%. We expect segment margins of approximately 16%, down from our prior estimate of 16.3%. This updated guidance assumes no significant gains from product line sales or investment income. We now expect 2028 free cash flow of $3 billion compared to our previous expectation of $3.5 billion. The revised outlook reflects 3 changes funding approximately $250 million in company 401(k) contributions with cash rather than newly issued L3Harris shares, lower segment margin and changes in capital expenditure timing to accelerate our missiles investments. The $3 billion free cash flow guidance represents over 100% cash conversion. With that, I'll turn the call back to Sam.

Thank you, Ken. We are comfortable operating in a dynamic political and economic environment and remain confident that we are well positioned with our strong backlog in areas of continued priority and urgency. Finally, I would like to once again thank our employees and leadership team for delivering such a strong quarter. I will now turn the call over for questions. .

[Operator Instructions] Your first question comes from the line of Kristine Liwag from Morgan Stanley. .

Congratulations, Sam, on your new role. So I guess I wanted to ask you about margins and your operational priorities. You delivered a pretty impressive 200 basis points of operating margin expansion this quarter, your first quarter and the head of L3Harris. So I guess part of it is, given your background as an operations focused leader, your comments around accelerating productivity through automation and AI. How much opportunity do you see to drive further efficiencies and expand margins, especially when you've got this robust revenue outlook ahead of you? And I know we're limited to 1 question, but I wanted to step back and say more broadly, as you put your stamp on L3Harris, should we think of your approach as largely accelerating the execution of the existing strategy? Or are there areas where you see opportunities to do things differently?

Thank you, Christine. Appreciate the feedback. A couple of things maybe from my perspective. Number one, on the lower corporate cost and the operating costs you mentioned in the growth from operating margin -- that's embedded in our DNA now. We'll be focused on making sure whether it's business process at the corporate office all the way down to the factory floor. We're going to be relentless in our pursuit of productivity and efficiency gains. And that will be really across the entire enterprise. What you might see, which is a little bit different, a change in strategy, we increased focus on driving the portfolio we have. We spent the last several years building this fantastic portfolio we have. Now it's time to probably stop with as many moving pieces and focus on the business we have to drive better performance. And again, that means disciplined performance disciplined execution, driving costs out of the business, most importantly, accelerating turning -- converting -- accelerating the backlog that we have into sales by accelerating execution through our business processes on our factory floors. So that's the most exciting part of the business for me and you'll see continued focus on it.

Your next question comes from the line of Ronald Epstein from Bank of America.

This is Sal Grant on for Ron. I first just wanted to ask about your free cash flow, especially given the strong about $1.3 billion in 3Q. Can you outline how much of that was potentially a benefit of timing of collections or a pull forward from 4Q as well as bridging it to the maintained $3 billion full year outlook?

Well, we remain -- first of all, we do remain confident in our $3 billion full year outlook. Ken mentioned in his remarks, we remain committed to making sure that cash flow to net income is always greater than 100% in our business. I think that's 1 of the strengths of the portfolio. We're very careful and cautious and intentional in the way we negotiate agreements to make sure that we remain cash flow neutral or better in most of these negotiations, whether that's in the Missiles business with these framework agreements or agreements like Vampire for international customers. Ken, any additional comments?

Yes, I would just add that, look, we have great momentum on cash flow. There's been a lot of focus with the team to make sure our cash is more linear. So we don't look at it certainly as Q4 pull forward. We just looked at it as doing the hard work day in and day out, and the team is doing a nice job. So we're kind of 75% through the year. We have 60% of our cash generation. So we think we're in a great place to deliver on our full year guidance and look forward to delivering and getting on the next.

Your next question comes from the line of Sheila Cat from Jefferies. .

So nice to officially hear from you and Ken, of course. Maybe, Sam, for you, if you don't mind, just starting with the 2028 targets, you've made some relatively modest changes to that framework that was approved by the Board just 8 months ago. Can you help us understand what was the impetus for this? And just how you're thinking about the framework more broadly from here? And of course, just as new CEO, I have to ask you the margin outlook doesn't look impressive at all over the next 3 years. Is there any reason you're thinking about that? And how you're thinking about capital deployment, just given the sum of the parts value LA.c2x the value of where you're currently trading. So just how you're broadly thinking about strategic capital deployment from here? .

Yes. Thank you, Sheila. I appreciate the questions. A couple of things. First of all, on the 2028 financial framework, on the segment operating margin, I feel confident in the -- we know previous guidance was around 16.3%. Really, what we've done is removed any assumed benefit from product line sales or investment income from our formula from our calculation. So what you'll see is a 16% operating -- roughly 16% operating margin, which more closely matches the actual underlying execution and operation of the business. On the free cash flow side, a couple of big moving pieces there to go from $3.5 billion to $3 billion.

The single biggest piece is really just a change in the way that we make our company 401(k) contributions. Previously, we issued $250 million of new stock on a regular basis to do that. We will be funding that with cash now. We think that will limit the effect of dilution, which we know is not great. We also see a little bit of lower segment margin. Again, some of that comes in mix, faster growth on some of the lower-margin businesses as we grow margin those businesses over time. And then the opportunity to maybe pull forward a little bit of capital expenditure into 2028, so that we can continue to go accelerate revenue in out years even beyond this framework.

Yes. Maybe just to add, Sam, and Sheila, I really appreciate your comment about our sum of parts, and clearly, we're more valuable than what we're trading at. So I think that's very astute on your part. Certainly, we made comments that we're going to generate pretty meaningful free cash flow. So we're looking forward to deploying that in a very share order friendly manner to drive value for the company. I just also maybe touch on Sam's margin adjustment. When you look at those nonrecurring items, and you kind of back away and you say, okay, where are we at today versus that?

It's about 50 basis points of margin from kind of like 16 to 15%, puts us somewhere around 15.5%. So we have some work ahead of us, right? That's where Sam's very focused on the execution piece drive the margin up. So I would expect you'll see margins improve as we drive the performance of the business without some of these nonrecurring items.

And Sheila, I would just add, there's also the disposition of the space propulsion business, that would be about $75 million as well on the free cash flow side.

Your next question comes from the line of Robert Stallard from Vertical Research.

Thanks much. Good morning. Sam, I don't know if you touched on this. I missed the first bit of your call, which is a very busy morning. But I was wondering if you could give us an update on your thoughts on this potential missile IPO. You mentioned you have the internal generated cash flow to cover the CapEx requirement, but also that your valuation perhaps is not that generous. So an update on that would be much appreciated. .

Yes. Great question. Thank you. Appreciate that, Robert. Really, the status of the IPO has not significantly changed or moved from the last time we discussed it, which was we established 4 criteria that we feel need to be satisfied in order to create value for our shareholders through the -- those were government contract environment, which continues to look favorable. -- contracts. Of course, we've locked down some great contracts in the meantime. So that's moved in a positive direction. We continue to execute strongly on the business. We're doubling, tripling on key solid rocket motor programs with our deliveries.

And of course, the valuation has to be something which is attractive. And that's really the area that we continue to monitor to make sure that capital markets, capital formation, some of the valuation of our peer companies. We'd like to see much more attractive valuations before we move forward. We consider -- we continue to reconsider. We continue to consider the timing of an IPO right now, we're targeting sometime in the middle of next year to continue that consideration.

Your next question comes from the line of John Godin from Citi. Your line is open. Please go ahead.

What I wanted to use my question on is just to focus on the organic growth outlook. I know there have been some tweaks to the 2028 framework, but you guys kept 8% organic growth. you're already outperforming that this year. There seems to be a good setup into next year even though you haven't kind of offered Crisp guidance on that. needless to say, 8% does not feel like a high bar given what we're seeing in missile solutions space, et cetera. Maybe we could just kind of discuss the puts and takes as we're forming a view into next year. .

Well, appreciate the question, John. Thanks. A couple of things. Number one, we are very, very confident in our ability to be able to hit and possibly even exceed the 8% year-over-year growth that's in our 2028 framework. Now some of this depends upon timing of budgets, especially not only domestically, but internationally and making sure that about 24% of our sales on an annual basis. are from international customers. So there are conditions that are outside of our control. Having said that, with the $53 billion plus backlog that we currently enjoy, will do everything we can to accelerate that backlog into this period of the framework to see if we can meet and exceed that 8% CAGR that you referenced.

And just to add, I mean that guidance is 2 years out, right? So we're very focused on driving the business. We'll certainly update that as we execute. .

Your next question comes from the line of Peter Arment from Baird. .

Sam and Ken and John, congratulations, Sam, glare sentiment. Maybe if you could just quickly touch base Sam on we've got a lot of inputs that we've heard from a lot of other players around the supply chain and kind of bottlenecks that within that. And if you touched upon it, sorry, I missed it. But just how you're viewing the supply chain like what is internal bottlenecks versus supplier control bottlenecks and kind of how you're addressing that just given all the frame agreements and everything else that you guys are winning. .

Yes. I appreciate the question. Thanks, Peter. A couple of areas. When we talk about supply chain, as we referenced, as Ken referenced it earlier in his remarks, we're talking a little bit about CST. There were a small handful of parts that we're constrained, having to do with printed circuit board manufacturing. We're talking about things like laminates that were 2 or 3 tiers down in the supply chain. There are capacity constraints largely because of the pull on AI and data centers for car electronics. We've worked our way through those. We have to thank the Department of War for their assistance in doing so. They actually reached out directly to some of these suppliers in partnership with us to make sure that we got priority from the delivery so that we can make sure that we can protect the war fighter.

We don't expect that to have a material impact or any kind of effect in Q4 as we recover. On the -- on the MSL side, on the missile Solutions side, obviously, a different set of challenges. Having said that, about 25% of our $3 billion investment is directly into supply chain and supply chain capacity. So we're seeing the benefit of that coming online, Peter. This is multiple sources, developing multiple sources for critical bottleneck items. But I would say also making sure that our existing supply base modernizes its equipment, it's production, efficiency gains in their supply chain as well. So we're really kind of funding. We're helping to develop the entire ecosystem to make sure we have a resilient supply chain really in all 3 of our segments.

And I would just add, the Department of War investment was very important to us because I think most people are aware, we didn't have contracts until really this quarter that $1 billion allowed us to go out and start working with vendors, making commitments. And we had, I think, up until these awards, we had about $2 billion of precontract costs floating around. And now we've gotten a lot of that on contract on our side. So we have been working, Ken and the missiles team has done a really nice job of getting out with the vendors and so forth. So I think we should be in pretty good shape. .

Your next question comes from the line of Doug Harned from Bernstein.

On CSD, really 2 things there. The radio business is such an important high-margin business for you all. And 1 is you talked a lot about the things you can do with respect to cost reduction. So the first part of this is -- how far can you go? You've been at these 25% margins because of the fixed cost nature of this business, you would think there's real upside potential there over time. But also as you look forward, and we head towards NGC 2, and I know you've won some things on this, but we saw -- it's a very different structure. And with GD and Pacific Defense winning the core chassis last year. And then looking at a push towards continuous competition on this program going forward. How do you see the transition over time from the current radio business that's been so successful heading into NGC 2. .

Yes. I appreciate the question, Doug. Listen, on NGC 2, in particular, we are an interval partner and part of NGC 2. It's created a little bit of confusion because oftentimes in budget documents, it's listed separately from our core radio programs like HMS, but rest assured that we've won our fair share of NGC 2-related awards, especially since we played very, very heavily in that transport layer. So -- we don't expect any significant material reduction in the amount of warts, the amount of business we get from the Army under NGC2. As a matter of fact, in recent demonstrations, we've actually seamlessly integrated with companies like Anderol and Lockheed Martin, as they build out their NGC 2 networks.

So we remain confident that we'll be a major player for the Army going forward, whether it's NGC2 or whether the Army reverts the funding individual line items, specifically in models that we play. Just a reminder, we always compete under the Army's radio program. So whether it's HMS Manpack or the different radios models we have, we have competitors in each of those areas where we compete on an annual basis. So competition is nothing new for us in this space. From a cost perspective, we continue to find new opportunity every single day, Doug. An example would be the way that we're using AI on the manufacturing floor to make our operations more efficient every day. And so as new technologies like AI and automation take hold and we incorporate them, we do expect to be able to maintain and grow margins in our radio business over time.

Yes. And just maybe touch on the margins, right, because we are big fans of the innovation the team does. Sam mentioned earlier about communications on the battlefield, which is kind of music to my heart making sure our war fighters get home is what the mission is all about. Our radios are critically important in that we talk about software-defined radios. We talked about rate yield on the last call. Those capabilities are very important. So I think our focus right now is bringing technology some that comes out of the radios, like rate yield that may be put on Vampire for example, those things are very important to us. So we're not looking to accelerate the margin necessarily, but really accelerate the innovation across the whole business. .

Your next question comes from the line of Richard Safran from Seaport Research.

Congrats, Sam. So I have a 2-part very related question. The slide appendix details are pretty impressive and interesting. Just curious as to what's behind providing all that detail. And second, as I'm looking at that, contract mix has been moving towards cost type. And I was wondering how the surge in bookings and new awards might affect contract mix generally as we look ahead. .

Appreciate the question. I'll answer the second part of the question first and maybe defer to Ken on the financial appendix. We largely see a lot of the growth in our backlog associated -- is really associated with firm fixed price contracts. So -- we do have -- next Gen Jammer, which we're very proud of in our SQ business, and that's within CSC that we capture it. That's cost type. That's 1 of the exceptions. The vast majority of the business that we are booking and we booked in this previous quarter had firm fixed price contract type. So we look forward to being able to execute those efficiently, so we can get the additional margin associated with productive and define execution. Ken, I'll defer to you on the appendices.

Yes. Thanks, Sam. And it's interesting. I think this is some of Sam's spend as well as being an operator and having details. I would also categorize as you kind of engage with investors, we have a great business, right? And it's very clear to me because I'm in the details every day. And then when you get more into our numbers, it gets harder to understand our numbers. So we said how do we make that great business, that great performance clear. So our desire was to go look at our investor materials, and we got a lot of great investor feedback.

So it was around how do you improve ease of use, understandability and all those places, really take Sheila's question around the sum of the parts and why we're not getting valued. So we want to make sure people understand the core performance. That's really where we're at. We're going to go drive the business. Sam is going to clearly drive the business. That's the focus. And we'll make sure that kind of the easy use for investors and analysts is there.

Your next question comes from the line of Noah Poponak from Goldman Sachs. .

Good morning, everyone. I wanted to ask about I wanted to ask about Space and Mission Systems growth. The growth year-to-date is pretty strong. The backlog is up a lot over the last few years. If I take the 2028, and I appreciate the comments you've made here about that's a few years out and maybe a bit of a moving target. But -- if I take the '28 revenue forecast, it implies the organic growth would decelerate '27 and '28 quite a bit and I think be below market. Can you talk about the puts and takes of that? What are the biggest growth drivers there? And is there anything slowing or rolling off that we should be aware of? .

Thanks, Noah, for the question. We don't see anything particularly slowing down. Some of this comes down to timing. From a space standpoint, continue to see strong growth. We saw that year-over-year this third quarter this year as compared to the third quarter last year. We do think on programs like ISR, which tend to be big and lumpy in nature. We're talking about multibillion dollar programs that are let many times from international customers, but the timing of those can get tricky. And so they can be a little bit lumpy in nature. Frankly, I expect this number to be able to continue to change significantly based upon those $1 billion-plus movements as our international customers, in particular, consider, reconsider and move the timing of some of their planned missionize business jet purchases.

Yes. I would just say, no, we feel like we're very well positioned to look forward to delivering on the guidance. .

Your next question comes from the line of Myles Walton with Wolf Research. We will move to your next question from Ken Herbert from RBC Capital Markets. Your line is open, please go ahead.

Congrats on the quarter. And I wanted to just dig a little deeper, if we could, into the Missile Solutions. Obviously, the contract is now flowing in, reflected in the backlog. I know you provided some color around the structure of these contracts. But maybe just frame with us, if you could, how we should think about the risks to the execution near term on these contracts. How you structure them in terms of protecting and obviously being able to ideally expand margins in the business and just how we think about those progressing over the next couple of years is, obviously, you're still in a very significant sort of investment phase as we think about the SRM in this business? .

Yes, I appreciate the question. Thanks, Ken. A couple of things. From a structural standpoint, I mentioned this before, we're very, very thoughtful in the way they're structured from an advanced payment and milestone payment standpoint to make sure they remain in conjunction remain very highly aligned with our capital spend to be able to go execute these contracts. I think the second piece of it is we do have protective provisions in the contract. So I think the Department of War prime contractors are very, very confident in the volumes materializing during the term of the 7-year term in this framework. And so we have very, very strong protections in the contract to make sure that there are financial mitigations that afforded us if that somehow does not materialize.

Third, I will say is we ourselves have supreme confidence in this demand signal materializing over the 7-year period. It's listed as a primary priority for the Department of War. I spent a lot of time in the Pentagon in my career, I spent a lot of time in the Pentagon over the last couple of months, it's been made very clear that this is the foremost priority from the senior most levels within the Department of War. So we feel very, very confident about the demand signal, the enduring and resilient nature of the demand signal.

From an execution standpoint, a lot of that $3 billion-plus investment that we've made, even the investments that we made so far in advance of receiving those framework agreements is to make sure that we can execute. And those are areas of building a resilient supply chain with multiple suppliers so we can avoid single points of failure, modernizing a lot of our internal equipment. We will be building over 100 buildings adding approximately 1 million square feet to our manufacturing space in order to accommodate this new capacity. And a lot of that will be building solid rocket motors in new ways with new equipment, new production methodologies. Obviously, a lot of execution before us and the proof will be in the results. But we remain confident we're very, very determined to make sure that we meet this national priority defense need.

Your next question comes from the line of Michael Carole from Guggenheim Securities.

Sam, congrats. Just maybe on the longer-term 2028 targets and thinking about backlog, can you give us a sense of how much of kind of your current plan is already in backlog? I guess, what's the coverage through 2028? And then you talked more about booking more firm fixed. Should we expect then that the the margin profile? And I could appreciate the conservatism and the ramp-up and scaling up of new production, but it would seem like there'd be a natural margin expansion lever if you've got more firm fixed contracts or if you're shifting in that direction. .

Thank you. Appreciate the question, Michael. First of all, we're very, very excited about the quality of the backlog we've built. I think of the $53 billion or so, I think $22 billion is funded. Of the amount that's unfunded, we remain very confident in that primarily because of what I had mentioned in the previous question, the vast majority of that backlog is built around our Missile Solutions business, of which we have ultimate very, very strong confidence that, that will materialize given how much of a need this is for our nation and enduring priority.

As far as margin and margin improvement, that is certainly the objective and the goal. I have grown up and I've come through the organization in previous organizations and with my time in L3Harris very deeply involved on the operations execution and program management side, which is to say, we're always looking for opportunity to reduce costs and be able to go either manufacture product, deliver to our customers innovate more efficiently and more productively. So we'll definitely look for additional opportunities to drive the margin upward, which certainly the opportunity presents itself. We'll update our 2028 framework as we go, but I'm confident in the team and their ability to be able to drive the business to get better results.

Yes. And just maybe add, so just for clarity, right, the fund to backlog of $31 billion. And when you go and think about execution, a lot of these are in the backlog, specifically, a lot of new fixed price work. clearly, fixed-price work doing a lot what we know how to do. So I think -- and our guide also infers this that we have some acceleration of margin. I know it's a little confusing with having approximately 16 in the out years. But that's 16 without the product line sales and without investment income and so forth. So you're really kind of on an apples-to-apples basis, accelerating up probably 50 basis points of margin. So I think we feel like we're in a really good position to do that. .

Your next question is from the line of Myles Walton with Wolf Research.

It's Emlen from Miles to checking. You can hear me.

Yes.

Okay. Quick question on the missile and munition ramp. Quite a bit of the funding for that, at least in this fiscal year is in reconciliation. How are you guys thinking about the trajectory of those programs given that aspect? And also on the budget, given where in a CR, are there any areas within the portfolio, particularly in CSD that may be impacted by it? .

Yes. We obviously very, very conscious of the budgetary environment we're in Emily. We feel very, very confident that as trade-offs happen, should trade-offs happen to the extent they happen that we continue to operate and focus in areas that will be of the top priority of the department of war. Certainly, missiles and munitions falls into that category. I think if they are forced to make trades and as they make trades in this budgetary environment, we consider this to be a very, very strong area that will continue to be funded -- as far as CRs, I often joke in my colleagues here, the 3 things that you can count on is debt taxes and CRs.

We've operated under this under a CR now for many, many years. we've been used to operating under a CR. The key for us is twofold. -- operating, and I've already spoken about one, which is operating in areas that we know are the utmost priority. The second is making sure that we perform well against our program and our delivery requirements. What we say in our company is it never pays to be the slow Gazelle here when it comes to execution and performance. So minimizing the number of red programs, overdue deliveries we have so that when our customers are forced to make tough trade-offs, we don't leave any of our programs wonderful.

Your next question comes from the line of Scott Mikus from Melissa.

I wanted to go back to Rob's question regarding the Missile Solutions IPO. I'm just curious, has there been any significant change in the ownership percentage you'd like to retain post IPO. And if for some reason you couldn't get the valuation you'd like through the IPO, is selling all of Missile Solutions or Arrow yet a possibility?

Yes. I mean, I'll say a couple of things there. I appreciate the question. Number one, we're so excited about this missile Solutions business. We think it presents a tremendous value to it. Whether we own 100% of that is L3 Harris or we own a significant majority share. nothing has significantly changed our posture. So nothing has changed in our prospective ownership share, our posture or the criteria against we're measuring the attractiveness of the IPO as we continue to monitor solutions.

Yes. And we're -- and just for clarity, right, we're not required to do an IPO. We are required to pursue one, and we've been doing that -- so I think we feel like we're really in a good position. We have a strong balance sheet and strong cash generation to more than support the CapEx. So we'll certainly visit it, like we said, previously, and we'll say again, we're going to visit it mid-2027, and that's where we are. .

Your final question comes from the line of Gautam Khanna from TD Securities. .

Sorry, I joined late. So forgive me if you already answered this, but I was wondering if you could talk through the RF tactical demand backdrop in terms of what you have in backlog what sales are likely to be this year just to calibrate us? And then what are the big international pursuits and domestic pursuits over the next year that we should be monitoring? .

Well, I appreciate the question. We do have a very strong backlog on the tactical radio portfolio. Of course, it's always tricky at any point in time when you look at the backlog because it is such a upcycle business. I'll remind you that we have a commercial business model here. So we build the forecast in anticipation of winning contracts that we can deliver quickly. I can tell you this, this year, we will actually deliver more radios to international customers than we will domestic. We don't see that as a weakness in the domestic market. We see that instead of a strength in the international market. you take a look around the world and see what's happening in places like Ukraine.

Our international customers, our NATO customers, our European allies are becoming more and more conscious of the fact that in order to win in a modern warfare environment they need to overcome electronic warfare, all the nonkinetic effects that are being brought to bear. So to keep our war fighters from being able to effectively communicate with each other. So -- that is driving a significant demand cycle, significant growth year-over-year. We look forward to being able to capture more of that business as a lot of our European and NATO partners and allies want to retain some interoperability with their U.S. allied forces. So we're very, very bullish and excited about the international market for RF.

Great. Well, that concludes the call. Thank you, everybody, for joining. We look forward to updating you as we move through the quarter and on our next earnings call. Thank you very much, and have a good day.

Hi. Good afternoon, everyone. I'm Kristine Liwag, Morgan Stanley's Head of Aerospace and Defense Equity Research. I'm very excited to host our next panel with Ken Sharp, CFO of L3Harris. Ken, welcome.

Thank you, Kristine, and I'm the L3Harris' CFO. So great to be here today. Look forward to the dialogue.

I hope you're likely [ going ] to enough to come back next year.

Yes, it's a terrible, terrible duty here so...

So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representatives.

So with that, we'll dive into some Q&A. Ken, with the recent CEO change, how is the transition progressing under Sam? And are there any meaningful changes in company approach and operations or priorities?

Sure. So one, I think we have a great portfolio. [ Chris ] did a really nice job of -- I think when you look at it, right, bringing L3 and Harris together, then 2 strategic acquisitions and then about 13 divestitures. And we did all that in kind of 4 or 5 years, it's been a lot, right? Sam would say, hey, Ken, we got a great business. So I'm really about execution. We need to go drive what we have. We've got to the portfolio we want to have. We're very well positioned in areas like space, sensing, the whole ISR side, the communication side, certainly with our tactical radios and then missiles, so we've got a great hand, let's go execute. So I think that's what you're going to hear from Sam when he comes out and next one of these, I'm sure.

And so what's it like working with Sam?

Yes. I think it's great. I mean, we're kidding around. I think, he may go to bed a little earlier than me, but he gets up a little earlier than me as well. So I'll have to get my cadence right with them, but he's very passionate about operations. It used to be when I would call them as the CFO, I think your whole goal is you call somebody when you think there's a problem. And you hope they are in some level of detail and their thoughtful.

I joke around with Sam because I asked the question and then I really just want 2 levels deep at most, and he's like at Level 6, and I'm like, okay, saying, we're all good. That was pre-CEO, so now CEO -- and by the way, it's great that he was in that level of detail. So I enjoy that because it made my job as the CFO a lot easier. I think he's still there as far as being very operational, getting into the business, understanding what drives performance. So I think you'll see a little bit more of a [ bend going ] more operational. So for those of you that have been CFOs, I'd argue that makes your life a little bit easier.

And a lot more just kind of focused around making boring quarters and a little bit more boring operations as far as we just kind of hit our numbers and go on report the next quarter and the next quarter. So kind of beating and delivering and whatnot. So I think that's what you'll hear from Sam. He's definitely very in tune with the portfolio. I think you know we had about 80% of the business before the latest role, so he's really getting up the speed on the missiles. I think that's pretty short [ put ] form because he knows a lot as well, and he knows a lot of the customers. So I think it makes it pretty easy.

I think he enjoyed being here at Laguna last year. So next year, we hope to have both of you.

Well, he's really looking forward to it, and he's a little bit disappointed he couldn't make it, but he's got a lot going on with customers and really just getting into the business and the details and making sure we're driving it the right way. So [ do you ] made sense for me to come out. So next time, you'll absolutely have Sam, you'll have both of us together. And I think we'll have a lot of fun. So we'll probably go to bed a little earlier than you is my guess so...

Well, we'll have drinks at Laguna bar later. But with that, Ken, you mentioned the portfolio a few times in the reshaping that's already occurred the past few years, but as you and Sam evaluate the portfolio today, how do you think of where it should be? Are you exposed and aligned to the priorities that the U.S. government wants to go? And also, are there still some businesses where you're looking at it and it may fit better elsewhere.?

Sure. I mean, I think in general, the portfolio is well aligned. So we look at our business, the sectors we have. There are some pieces that maybe they're not growing as fast. You kind of look at those. Maybe we'll do look at them a little more carefully going forward. So that could, I guess, potentially be something. But I don't think so. At the end of the day, I think it's really about driving the business we have, and I think we're in a good place.

Yes, that's wonderful. Look, as you look out the next few years, how do we think about the relative growth contribution from the U.S. tactical radios versus international. This is a significant opportunity set highlighted even when L3Harris was at even one company when it was portion from the Harris part of the business. There was a lot of excitement there. So can you level set us on domestic demand, international demand? And where are the risks and opportunities from here?

Yes. And this is a part where I'm really excited about Sam because I think as most people know, if you read my bio, I was a marine and I was enlisted kid. So at the end of the day, the radios are near and dear to my heart, making sure that we're protecting the war fighter and we can get them home I think that's -- and we're very honored to have that position and have the position with a radio that has so much more capability.

We talk about them being software-defined. I still have kind of figured out what that means, right? So for those of you that's like your smartphone, you can load apps into what waveforms and whatnot. That gives the radio infinite capability. It makes it so -- it's very, very difficult to jam, very, very difficult to actually disturb the communication pieces. So in a contested environment, I think you want to have an L3Harris radio.

So I think you'll hear Sam talk a lot about the business. I think maybe we need to talk more about the business candidly. You saw last quarter, we talked about Wraith Shield, I know I'll get to your question, I promise. But I think this is so important. It's so important for L3Harris but we talked a lot about Wraith Shield, that's a software application goes on the phone and it creates -- and just like -- sorry, I [ said ], but the smart radio, it goes on the smart radio and it basically networks all the radios together in the battlefield, and it literally sends detected drone and then literally the war fighter compress the button and bring the drone down and jam it. So this is like a network that you'll see out in the battlefield.

For me, it's really important for the war fighter. There's no incremental equipment. I think its capability like that, that our team is building, I think most people know there's a commercial business for us. We develop our product. We sell it into the customers. We don't sit back, wait for RFPs and figure out, okay, let's meet that capability. We think we're -- we spend our own research and development. We drive the business. That's why the business has the performance it has and the margins and it's all about bringing capability. So we go through refresh cycles just like your iPhone or whatever device you carry around. I think we're on -- we're due for refreshes for we call the radio Falcon. So Falcon IV is the domestic version and Falcon III, the international.

So you'll see those models get refreshed shortly. And when they refresh them for us, and for those of you that have seen the videos of what a war fighter looks like, the radios are pretty big. So we're very focused on form factor. The radio has put off some heat. They have battery life and we want to make sure they have capability and capacity for communication. And that's all the great work the team is doing.

So then I think when you go back to the business, international has been a great driver this year. I think we've talked about international holistically across L3Harris being up about 250 basis points over the last year. So we're getting a last couple of years. So we're getting a lot of demand in the process. And we did talk, I think, just recently about just some slowdown on the kind of a fifth tier supplier. So we'll see a little kind of bumps in the road around the supply chain, but it's a great business. We really expect to see good growth kind of as we exit the year and into next year. So really a solid business.

Budget-wise, because there's always been a discussion on budgets and NGC2, HMS the Marine Corps budget, what we keep seeing and the demand signals are really strong. We got our first NGC2 order. I think we would argue it's our fair share. So we feel good about that. We also -- the HMS budget lines are up and then the Marine Corps side, up pretty significantly. So we think we're well positioned in the business and the capabilities, I think, position us even better. International, I mean, look, if you want the best radio, you want your kids to come home at the end of the day. That's why they get L3Harris radios and our goal is to keep expanding that market share, and that's where we're going to go.

And so Ken, with your history also as a marine, can you give some context to how differentiated the software-defined radio capability is? Because when you look at electronics, right, compare it to a phone, there's a commodity that's occurred with the proliferation of technology. But the radio lead that you have in terms of your capability is differentiated. Can you walk through kind of what are those things that make you different? Why is it that the strength of the L3Harris radio is enduring? And just give us context on around those capabilities.

Sure. So we came out, and it's funny because we were up in Rochester at the end of last week, and they -- there was a radio that for, I guess, a couple of months was really popular. And everybody gets into this new entrant disruptive, and oh, it's going to take a lot of market share. And I think we set this demo up for the customer and they got the engineers that are up there, love this kind of stuff. So they literally bought some jamming stuff off of Amazon. They would say it was $30 a year. They literally fired this radio up press the button and the radio went down and then they send that same jamming equipment on our radios. And when -- and this is the administration's change, people have great ideas. But at the end of the day, at the end of that radio is a war fighter that we want to get home. That's why they want the best capability, the best radio. And when you press that same button, our radios don't go down.

There's a lot of sophistication. When we say software-defined. We probably have the only full suite of radios, all software-defined. And what it really means is if you need to change a waveform, we can just send the software out to the radio, it updates, so you can change it as far as contested environments jamming or you don't want your radio to turn on like a beacon so people can find the people in the field and pinpoint them. So between that, and then I would just say, I'm a big fan of the software productization with Wraith Shield. That's early stages for us but that's the first kind of real, what I would argue, real proof point to look at the capability that this radio will bring beyond just a communication device. So when you think about it, right, it's a radio, it's an antenna battery pack. And at the end of the day, all you're doing is uploading software, and it's going to literally create a ring fence around the battlefield for the war fighter and radio frequency drones will be picked off and done really good things. I think it's really important at the end of the day.

This Wraith Shield software upgrade is pretty interesting. I think we talked about that last quarter or 2 in the earnings call. So first, I'll take a step back. This thing in terms of additional costs, is this something that you invested your own dollars? Or is it part of an RFP? And then second, in terms of the actual capabilities, what is this Wraith Shield doing in terms of -- is it detection using the antennas? And how is it taking down a drone?

Sure. So one, we use our own investment dollars. So we invest our profit in the business. We don't -- it's not -- like I said, it's a commercial business. for us. So we have commercial end item determination. So we bring capability if the customer wants it, they pay for it and the margins or where the margins are. And that's no different than what a lot of the disruptive defense companies are talking about.

So you are the trusted disruption...

Yes, we would argue we are the trusted -- and that's part of making the investments in the business, and that's part of the investments we've made elsewhere in the business to make sure that we are delivering what the customer, the war fighter needs. So we're out front, that's why we think that we can have top quartile revenue growth and top quartile margin.

So specifically for Wraith Shield, so it's just -- it's a software upload, there's nothing different to the radio. The antenna is the same. Everything is the same. Now, by the way, it's still in development, we're working [ with ] -- it's funny. I have, and I say this and I always hate saying it because I'm not trying to be commercial about it and I was a marine a long time ago, I'm kind of -- I hate to admit it being a little bit overweight and a little bit bald. So I'm not really the kind of ideal person for Wraith Shield, but I have a young kid that comes over my house and he's an Army ranger. He's in the Ranger [ began ] he is the kind of kid that needs this. So I showed them the video and said, hey, what do you think about this? And he had lots of great words. And at the end of the day that -- I mean, it's like how do we get that capability. And the good news is we're working with SOCOM on it. I would argue with maybe fewer demonstrations and get it out there.

So we didn't reply to an RFP. That's not our wiring. I think it's really important that we kind of keep innovating and bringing it to the customer. And I think that's what the team has been doing. I'd like to believe that there's other products behind this that you would keep saying there'll be more and more software content that we're selling that's on our radios. But for me, it's about the capability. And I always think of real estate, right? A war fighter's got a uniform, they've got a radio and they've got a weapon and some ammunition. It's how do you take that real estate, make it better. We own the real estate today and for a lot of this. So I think it makes sense.

Now by the way, our radios are in vehicles and all that other stuff. So when I talk about ring-fencing it, it's more than just the radio on the war fighter, it's what's on the vehicle. Our VAMPIRE system, we're going to integrate these radios into them and then also integrate Wraith Shield in. So it's just a little bit more capability for Wraith Shield -- or sorry, VAMPIRE having Wraith Shield there as well.

But it's -- I'd still say early stages with it. We don't have our first sale. I think I was kidding with [ Chris ] a little bit around, hey, quit putting it in my script, and I'm just like, but it's so game changing for the war fighter and he's like, okay, fine. And we did do a demonstration, our Board saw it. It was really [ neat in ] the drones drop out of the sky. So I think it's something that it's just a good product what our team has been able to develop. So it's really all just radio frequency, jamming, to get back to your question.

I mean it's pretty incredible to be able to add software into an existing radio and create a counter-UAS system. Right, that's local to the war fighter. So looking forward to seeing this be integrated with VAMPIRE and seeing the maturity of this platform.

Absolutely. And I think that's what's really exciting about it.

So pivoting to the CSD margins, can you talk about the sustainability of margins of that segment? And should the mid-20s level, is that a sustainable number in the medium term?

Yes. And I think we feel pretty good about the mid-20s. That's been our guide. The business has drifted up a little bit. I think we'd like to keep that guide just in general because I want to make sure -- we want to make sure we're making investments in the business. There's other parts of that market that we could probably invest in spend some more energy in. I mean we have amazing technology with radios, and there's parts of that market that we're not really in, in a big way. So I think that's where some of the opportunity space looks and sit. So we just need to make sure the team gets the R&D money, whether it's in radio expansion or software capabilities and so forth, we want to make sure we're putting the investment back so we stay on top.

Great. And in the first half of the year, your ISR business was being pretty stellar, very strong. So when we think about the trajectory of that, can you talk about the variables that drive that growth? And do you see this strength continuing through the rest of the year? And how does that trend in the next few years?

Sure. So I mean, one, the backlog, the awards, the pipeline for ISR is very good. And for those of you that maybe aren't as familiar with the portfolio in the ISR business, is there's aircraft. So that's what we talk typically about ISR is the aircraft side. There's the space side, right? So I think missile warning, missile tracking, a lot of classified content, but satellites up in space or stuff down on the ground doing things with space. I think that's important parts. Then we have a cyber component that's in there, which you'd argue that's also sensing. So all the theme around this is sensing and then there's a maritime component in there as well.

So I would say when you look at the portfolio, the maritime piece has probably been a little slower. Everybody says our stuff goes on to the ship at near the end as a life cycle, you think about putting ships together, so you would expect our maritime business to accelerate on the space side. I mean, we've had just really positive success, right? So missile warning, missile tracking, Golden Dome, they've had kind of 5 tranches it's hard to keep track because they keep renumbering, it started with 0, and now we're on 3. But I think we were the only prime that actually launched a satellite, and it actually worked, so that's a positive. And I think we're the only prime to win all 5. So I think we feel really good about it. We've got an exquisite payload, provides a lot of capability. So I think the team is pretty excited there.

Of course, last quarter, we had an award AMDT3. So that's the tranche 5 that the 3 is tranche 3 but anyway, someone else will figure it out. But I think that's good. There's other opportunities on the Golden Dome franchise. So Sam certainly very energized about that. So we'll see what that looks like. There's different orbits. And I would actually -- maybe I should back up because people always ask me what excites me the most about L3Harris and then somehow we end up talking about missiles. And then I'm like, okay, but it's really -- missiles is very exciting, of course, but I would argue what's really exciting is thing -- and by the way, everybody knows the missile story. So we don't need to talk a lot about it, but I would argue things like we built the satellite franchise really on the back of our P&L, we probably didn't do as well financially. We didn't tell investors, that's what we were doing, maybe we did, we didn't, and it was very hard to forecast and build this kind of prime position that I would argue is going to be a franchise position that we really put ourselves into.

So we've done all this. We spend probably half a decade doing it. Now it's about how do you get the value for all the investments we've made. I mean, we've got high bays and factories and all this great stuff. And we've got 70 satellites, I think that we're in process of building that we need to get up and running, up in space. And then I think everybody realizes how space works, depending on what orbit, the lives of these satellites are pretty short. The minute you get them up, you're working on the next batch. And they tend to work in constellation. So you may have a need for a build-to-print of another 5 or another 4 of the same thing or 8 or whatever the numbers are, I think we would expect to see a lot of that just based on the capability we bring, the positioning, the payload is differentiated. So it's hard to kind of compete with L3Harris in that space. So I think the moat's pretty deep. And so we look forward to kind of seeing that business do well.

And then the aircraft side, that piece is, I'd argue a little different, right, because we do -- we basically buy an aircraft. We go in and rip it all apart, and it's usually a business jet-sized aircraft, it doesn't always have to be, I think, people can find the news and we can build some big stuff or redo some big stuff. In that, these aircraft get stripped down and the amount of electronics that goes on this aircraft, it's amazing and we cut holes in the frame. We have to get the airframes recertified. So it ends up being a little bit of our know-how and technology that we build into these when they go up, you're getting the capability a lot faster, and it's a lot less expensive to buy and certainly a lot less expensive to operate, so I think that's why it's so exciting.

Now you get some a little bit of kind of bumpiness with it because we're buying aircraft, and we try to control that -- control's the wrong word, but maybe a little bit of own the supply chain a bit because if somebody wants to go out and buy a G550 and deliver it to us and say to kind of [ it go ] fix this and make it work for what we wanted. You don't know what condition it's in and all that other stuff. So it's a lot easier for us to take that risk from risk out of the equation, take it away from the customer so we end up with kind of pretty decent margins for the business, but we end up with some lumpiness on the revenue side. And you can imagine, if you're buying an aircraft, it's hard to get a 15% or 20% margin on top of the aircraft cost. So it really ends up kind of diluting the margin. But I think owning the supply chain with it and making sure we bring the customer the best value and taking the risk out on our side is pretty important.

So that's what we've been doing. I think first half, we had pretty elevated growth in there. We had some -- I think we talked about in Q1 some material stuff flow through that drove a lot of revenue, but I still think that business is doing great. We raised the guide on it last quarter, and I think you'll see that business continue to perform.

Super helpful. Thank you, Ken. And you touched on space as part of your commentary with ISR. When you look at the execution risk that the space industry is facing, especially with some of the supply chain challenges and you kind of talked through some of these things. What gives you the confidence that you can get the higher return on the space business, especially as the business scales?

Sure. So I mean, one, and I think it just becomes at the end of the day, the know-how just becomes reality would be my argument. But I will be very clear, we're booking margins far below what we're bidding at. Ken set this up, Bedingfield, I think he did a really nice job with it. And I think the Board also believes that's very appropriate is we kind of earn the right. So if you did bid at 15%, we're booking at 10% and you earn the right to get to that 15% through execution. I think that's a thoughtful way of doing it. We're certainly not going to change that.

So and then a lot of these programs that they're kind of repeats to some degree. I don't want to call them build-to-prints because I think that does it in injustice a little bit. And I'm still waiting -- I used to spend some time with one of our colleagues that was out there, [ Barry ], on the satellite side at orbital. And I always think that it's really hard until it's up and running and doing what it needs to do. I'd rather give it some time. I think with me and [ Barry ] so one, we've been bidding higher margins. And then two, I think we're booking at a lower booking rate in general than what we're bidding at. So I think it will evolve over time. That's why I feel really good about the business, and we just need to go execute at the end of the day.

Now on Golden Dome, can you talk about L3Harris' progress on this? And how do you see the architecture of the program evolving? And what's your role for the program?

Yes. So one, we're very happy to support the administration. We think it's a very important program. At the end of the day, defending the homeland is an absolute honor to be part of that. So clearly, the missile warning, missile tracking, we've done a phenomenal job on getting the awards, the team and the technology that we bring, I think, it's demonstrated we have the capability. So I think that's really positive at the end of the day.

The challenge with Golden dome, and then by the way, we also have a lot of other awards maybe part of Golden Dome, maybe not that are classified. So I think there's pieces there that are also good or potentially good. And then the architecture itself, I think, continues to be classified. So I think that -- but you can imagine, right, and if you're going to have a missile warning, missile tracking and an ecosystem, you would fully expect there'd be some kind of way of disrupting an inbound missile or whatever. So I think we look at the rest of our portfolio and say, we have great capability with that, and we look forward to supporting the nation at the end of the day in our allies.

And by the way, that's the piece I think people aren't always picking up as well. I think Golden Dome would ultimately be something broader that would be really important. [ I have ] a lot of longevity as this current administration is talking about having other countries support kind of the industrial base and support their own defense at the end of the day.

And Ken, it sounds like you've got visibility for growth. You've got some balance on margin and there should be upside. Free cash flow is pretty robust. So when we think about capital deployment priorities for this year and next year, how should investors think about your approach?

Yes. So one -- Sam should answer this question with us, right? And I've had -- I've quizzed Sam. So I think I'm okay to say what I'm going to say. But one, me personally, I love share buybacks. I know the administration, not a big fan, right, because they have a memo out an Executive Order that talks about dividends and buybacks, I would say, I think that's an important tool that we all should be able to deploy. And I think it's about -- I would argue the Executive Order was about making sure you're making investments in new factories and capabilities. And I think L3Harris demonstrates that routinely, right?

We've invested in the missile capacitization, $2 billion at the end of the day, ahead of contract actually over $2 billion that feels like a wartime footing. So when we talk about the first half of the year, we bought back $525 million of stock. I think if you look at our peers, we're well out in front. I think we want to be thoughtful at the end of the day. We want to make sure our shareholders are rewarded, they stick with us. I would also add to that, right, part of the administration's focus is having a strong industrial base. A lot of that is investments in the business, certainly, but a lot of that's having good quality investors standing behind the industry, which I think right now we're a little shorter on candidly. I think all of our multiples have compressed. So I think we need the tools as a company to reward shareholders and keep people with us.

So that's my bias. So I'll go back when we stack capital deployment, right? So today, investing in the business is number one. So I think that's really important. That's why we have products like Wraith Shield, that didn't come by accident, right? That was pure investment. We've been making investments in the missile capacitization. That's not by accident. In fact, we've been -- we get a lot of questions around dual sourcing and this and that. And as Ken Bedingfield, would say, we're going to win the race. What that really means is we've made the investments so we can win the race. And we've put kind of our money where our mouth is, so to speak. And I think that's what you'll see. And I think that's really positive. So I think kind of holistically, I think we're in a really good position.

And then when you go down the capital allocation route, you have certainly debt, we probably have a little bit more leverage than our peer group, may be a turn. So I've got about [ $1.4 billion ] of debt coming due. So you can imagine maybe we pay down our debt. So I think that's fair. And then dividends, we've been a dividend grower for 24 years, I guess we're getting ready to hit that quarter century mark. So I think we'll keep looking at that. We like the smile on your face with that. So we want to keep putting -- we want to have that kind of dividend risk to [ correct ] model, I think that's important. So that will be there.

And I think when you look down like things like M&A right now, we would say we really like what we have. So why don't we run it? I think that's maybe less interesting today as far as any large-scale M&A, Sam would tell me, we need to earn the right to go do large-scale M&A? What's really odd, right? And this is kind of my view coming in is we did a great deal with Aerojet Rocketdyne, but there's a lot of consternation in the system around was it -- and by the way, I think everybody would say it was a good deal. Maybe we didn't do a great job on explaining the thesis and it took too many years for the thesis to unfold. Maybe we just weren't thoughtful with how we engage with investors.

So I think we're very mindful of that, and we don't want to kind of set ourselves down a path. It's [ to us ] right now, execution is probably the most important thing. So that's why we probably prioritize if you go down the stack, share buybacks make a lot of sense. Plus, by the way, look, we're trading for a 13x multiple. If you told me to go out and buy something for 40x or 30x earnings, and then explain it's really whatever number 20x, I'm not really good at that. So I would rather us just buyback our stock at 13x multiple, that would make some sense. So I think for the near future, that's kind of way the capital allocation will work.

Thank you, Ken. Now shifting gears, with Sam stepping up to the CEO role, does the leadership transition create an opportunity to revisit how the company is organized or how you reported? Are you guys considering potentially resegmenting the business?

Yes. So that's a great question.

You [ had ] to move cheese around.

Yes. I'm not really a cheese mover guy. And it's funny. So I'm not going to use my words. I went and talk to Sam because we spent the weekend kind of working through the announcements and all that other stuff. And then I think I spent the next day with the Monday with 18 investors going through kind of what Sam is planning on doing. And the reason I say that is because I kind of sat down when we went through a Q&A. And I said the worst thing that could happen is I start telling investors something on Monday and you have a different view I was very appreciative of his time and -- because I thought it was important to make sure we were interlocked on this.

So question 1 for me was reorganizing. Question 2 was actually or do you have leaders for the segment. So question one, he looked at me, and I -- trust me, I was a marine so I was ready to take the hill. And he said, Ken, the last thing we need to do is reorganize the business. So at that point, I was kind of like putty and Sam's hand a little bit, and look, it's kind of hard to argue with the guy. We have a great portfolio. Let's go drive it. He was part of reorganizing it. So he's like, hey, we have what we need, let's go drive the business. Last time we reorganized, right, I think this is part of where some of the investors are like, hey, what's this piece, that piece? We created a little bit of confusion. Sam's gotten that feedback, and he's like, yes, I agree, we don't need to do that. And we resegment -- look, we resegmented the business. We did the [ Dow ] investment we did the IPO. We sold 60% of the commercial space propulsion. And then we did all of that in basically 5 months. So it's really hard on investors. And it takes a lot out of the team.

So really about -- and by the way, that means the team is not focused on driving performance in the business, and that's been my band, right, is I want the finance team all over the CapEx build out, the R&D spend because when I see R&D spend on Wraith Shield, and we understand the product and what it's going to do, okay, great. But when you hear sometimes, and we've all seen this, right, where somebody talks about something and you're like, okay, well, what's the deliverable at the end, and it's not very sensible. That's where finance people, I think, can have add good value. So having the time to make sure we're doing those things versus reorganizing, I think, is the way to go. So I'm very happy with Sam's answer. I just smiled and say, hey, it's a good idea, Sam. So it was certainly his idea, not mine, but I would have tried to give them my idea if I needed to.

That made me happy and my team, too.

Yes. We all [ are going ] model.

So looking for the team is kind of hard following it around different segments. So I guess, look, there's a big push from the administration for dual sourcing. So how do we think about this for L3? Do you see this more L3Harris? Do you think this is more of a risk to your incumbent positions where you might be sole sourced? Do you see this as an opportunity to potentially be a dual source provider for other products? What are the puts and takes for you?

Yes. So one, we're really in the competition because at the end of the day, it's all about the war fighter and it's all about bringing capability to them. So we don't say, open up everything, let's have [ added ] for me personally, I'd say, open up missiles, the [ whole ] missile hierarchy and you let folks like us compete on [ seekers ] and things like that, because we've got one ready to go tomorrow, and we think ours is more manufacturable. So for me, things like that are very exciting.

If people want to come into solid fuel rocket motors, I said I came out of a business that had solid fuel rocket motors. There's 2 of them really of scale in the U.S. It's not -- it's a great business. It's a great market. It just surprises me. I hear so much talk about it because at the end of the day, it's kind of dangerous work and it's pretty specialized and you're usually in the middle of somewhere in West Virginia, Camden, Arkansas or Orange, Virginia or wherever and/or Utah. And you're doing this stuff and very spread out facilities. And I just think there's a special expertise and skill. And then I keep hearing about like new entrants, bladeless mixers and they're going to build it in the office building and then my head hurts and they're going to print motors and all this other stuff. And we have bladeless mixers, right? I mean it's almost comical but some of these missiles, motors that we make are so complicated and they require you have to have bladed mixers right? So it's like -- I think everybody is trying to feel their way through it, but they're feeling their way with energetics. And I think we're best positioned and I think we'll outrun the competitors. So wherever it is, whether it's radios that we think we make a superior product, if somebody has something better that's going to protect the war fighter, I say bring it and it makes us better, we're happy for it. We just want the same opportunity. We want a level playing field, and we want to be able to actually bring more value to the war fighter.

Well, great. I think we have time for just one last question. So trusted disruptor, that was a key Sam's [ team ] for L3Harris in the past few years. Is that core to Sam's thesis and strategy for the company?

It's interesting because when I came here, there were certain parts of [ Chris' ] team talking about the trusted disruptor and what it means. And then we did a whole investor perception study and asked investors what they thought trusted disruptor means. And I know what it means to me, right? So and I would have argued my old employer was a little bit of a trusted disruptor.

So I think that we need to do a better job as a company, explaining what trusted disruptor is, and I do believe it's here to stay. I think it's more of a culture at the end of the day. It's how you make investments, you support the war fighter, the trusted pieces, we have the manufacturing capability to know-how the capital behind us. So when we say we can do something, you can trust it and the disruptor is we're willing to go figure out how to invest our capital. And like I use this with one of our folks who were saying, well, we're not really doing that. The Pentagon doesn't believe it or whatever. And I said, well, on here for a second. I've been at prime. I see what primes do. We made a $93 million investment in AMDT3. The whole award came down to who could move the fastest and deliver on schedule.

So guess what? We spent $93 million. We were ahead on everybody's schedule. So of course, we won. Right now, we took risk of doing that. By the way, the disruptors take risk, Wraith Shield is us making investments to build a better product. We could sit back and say, wait for an RFP, we don't. We actually built a better product. There's no RFP for Wraith Shield that exists. So we built a better product. And then we go and demo it and explain it to the customer why they need it, they love it, and they say, let's go. I think those are 2 great examples.

Missiles, we spent $2.2 billion ahead of contract to go put shovels in the ground, invest in the supply chain, get the hardware invested. These are all elements of disruptor. We don't wait. We actually move. It's all about capability for the war fighter. So I think it's alive and well. You'll get some great answers from Sam, but I'm real happy. I mean, that's why I came to the company. I say this to people, but then I realized it kind of like a pig looking at a watch, looking at me because they don't know what it means, but I do, and we're going to run really hard to support the war fighter and our customers.

Well, thank you very much, Ken. This concludes this session in L3Harris.

Thank you. Appreciate it.

Good afternoon, everyone. My name is Sheila Kahyaoglu. I'm with the Jefferies Aerospace Defense and Airlines Equity Research team for those on the webcast. And we have the LHX team here. Ken Sharp, who's graciously stepped in as -- who's the CFO since March of 2026. So Ken, thank you for being here.

And lots of action going around what's happened. And I know you've taken care of all the investor engagements and Sam Mehta's appointment to CEO. And I really appreciate Chris, because he was a great professional mentor to me, and he came to this conference when no other companies would come. So he's been a supporter of mine and a great professional mentor. So I really appreciate it what Chris brought to the table to LHX and all the growth that's ahead.

So with that said, how do you think about just the continuation of the strategy here and what Sam's background brings to the table as well?

Sure. So look, I love Chris, and I've known him for a long time as well, Sheila, I think we both worked at the same eons ago. And I enjoyed my time with them, was great joining L3Harris. And so we look forward to building on what he did candidly.

I think we have a great portfolio. Sam would recognize that. I think we've gone through a lot of M&A, right, putting L3Harris, L3 together with Harris, then putting on two other acquisitions, including Aerojet Rocketdyne and about 10 or 12 divestitures in the process is probably 13, I'm probably, I should count the latest one. I think all that's been dizzying for investors a little bit, and we've also reorganized the business.

So I think where we're at right now today is let's build on the great stuff Chris has done and the great portfolio we have because I think we do have a spectacular portfolio very well positioned. And Sam would say, "Hey, look, I like the business. I like what we did when we reorganized it. We kind of lined ourselves up with multi-domain sensing, spectrum dominance, and then the missiles business. I think it's good.

We did -- by the way, last earnings call, we talked a lot about the missiles portfolio because I think people viewed that as maybe we paid too much for a transaction. I think if people could pay was $4.7 billion for the business today, they would think that was a steal today. So I think there's a lot of goodness in the business.

And I think Sam is going to drive it and build off of it. He would say, "Hey, look, when we're focused on driving the business, we get great results, shareholders like it. And when we get distracted and start chasing some things around, people don't like it as much." So our job is to get kind of normal and boring and drive the business.

Since you called it out, maybe asked that as well, you paid $4.7 billion for Aerojet. How do you -- is there a different change of how Sam and yourself view the value of the business to the core LHX portfolio today?

Sure. And I don't know if it's a lot different than Chris and maybe if Ken Bedingfield was here, he'd probably have similar comment. It is a highly valuable asset, whether it's inside L3Harris or outside L3Harris. I think there's benefits of being inside L3Harris. And just given the fact that you have the ability to make the investments, you don't duplicate a lot of pieces, and you can focus on driving the business, meaning build the missile capacitization while we're actually L3Harris is picking up some of the more administrivia pieces. So I think that makes sense. That's why when we talked about the IPO, we said we'd revisit it in mid-2027.

We also have, I think, everybody realizes there's some contractual requirements around the timing with that. So we're not required to do an IPO, but certainly kind of like take business efforts to do on part of our Department of War investment. So not required to do an IPO, but certainly something we need to work through the process, which is what we're doing.

And by the way, this is something we put criteria together with Chris and Ken and Sam and briefed it to the Board. The Board thought it was a really thoughtful. We said we weren't going to go chase multiples. So everybody asked why we position this for mid next year. I just think it makes sense. At the end of the day, we'll have 6 good quarters of performance. We'll get through some of this government: hey, CRs and Blue Wave and 833 Language, which was highly unhelpful, right?

Because I think our stock was down 7% that day, and we don't seem like we need any more bad news, so we get enough news and we need to go fight through those things. But -- so get through the government piece, get stuff under contract. I mean we're talking about $20 billion of new contracts and it's kind of mind numbing, right? So how do we get them under? We had the first UCA yesterday, it went out, $4.7 billion. And by the way, every time we have a press release, there's always more questions. So...

I will call Tony and I ask that.

Yes. Yes, I'll get better at press releases, I think, because I thought it was clear, but we're never clear, I guess. Not by the way, it wasn't aimed at your question. I got more this morning. So I just think we have a great business and a great position. So let's go run it and drive value for the LHX shareholders.

I'll go back to missiles, but just sticking on high level for a minute. How do you think about just the -- we mentioned some of the enduring elements of the strategy. Where do you think Sam will focus in on the most to start? As you think about just everything going on, whether it's the defense backdrop, the positive Golden Dome, missile defense spending Europe NATO, how do you think about how you'll conquer the growth ahead of you?

Well, you're giving me lots of options. So it's funny because I think supply chain right now is something that's kind of going bump in the night for a lot of companies. We have our CSD business. We've talked about a second half ramp up pretty significantly in the second half, and then you wake up and the people that are buying all the stuff for AI are now impacting your radio capability as far as manufacturing it.

So you're kind of scratching your head I think Sam's right now is big focus is on making sure we're executing at the business level. And then I would say also making sure he spends the time with the customers. It's no surprise, right? Everybody -- Chris had access to pretty much everybody in the Pentagon. And I think Sam's working to go make sure we have that same access.

I don't think it's a problem. I think he's doing a really good job at it. He was in with Feinberg last week, and he was out of Camden making sure we deliver on the missile side. I think maybe just taking a step back, just maybe more operational. I'm a big radios fan just because the capability with the software side, Chris maybe was a little less excitable about radios. You can debate why.

I think I was -- I kid around, I say, I put the Wraith Shield in a script three times last time we took it out twice, and I said, "Well, if you take it out again. I'm just going to put it in the CFO's script, which really isn't a good place for it. So then relented, right?

But I think it's so important to talk about because we say software-defined radios, I don't think people really know what that means, and it really means about putting technology on a radio to help the war fighter. And I think you'll see Sam spend a lot of time with the comms business.

So I'd like to see us talk more about the strategy on comms what we can do to win the battlefield for our war fighters and protect them. So I think that's really important. I think Wraith Shield is great. If you guys haven't watched a video, I think it is very important as far as the capability.

Okay. We'll go back to comms more because I think it was maybe animosity towards Rochester, something like that and his preference for Florida. I'm not sure.

We can hit on that, sure.

Sure. How do you think about just on the missiles business, the Department of Wars billion investment. How much of that is flowing through? What are you setting up in terms of just buildings, infrastructure, automation and pursuing supplier agreements as well?

Yes, I would say we're setting up too much. That's the challenge for everybody. So I think Ken Bedingfield is doing an amazing job. He's out in the -- out working routinely. Sam was in Camden last week, and he said, he calls me up and he said it's like the Manhattan project. There's more bulldozers and things getting moved to build. It's 100 different buildings, ultimately, not just in Camden, but everywhere.

We're also working, as you think about the supply chain, up and down the supply chain to make sure that we can meet our commitments. And we've been -- and maybe wrong or right, and I'm waiting for hopefully not to get a bad report on this, but we've been out driving commitments to our supply chain way ahead of contract with the Department of War.

Ken said this. I think it's right. We've been focused on winning the race, which means get the capacity in place, get the vendors lined up. So when other competitors come in, they're behind us. And we will be delivering all the capacity to the Department of War that they need that the country deserves with protect the homeland. We're very proud of this. and we're going to go drive the business. So now we've done that ahead of contract. I don't think there's a lot of contractors doing that.

That's great. Can you give us any insights on that capacity expansion road map as we think about solid rocket motors?

Sure. It feels like it changes routinely a little bit as far as the demand signal just keeps getting bigger. The different missiles that we provide components to, and we're on pretty much all the major programs. We're generally sole sourced on, I would say, most, if not all of them. That's probably what creates some of the general energy around new entrants and all of that, which I think is important, and we love competition.

We just hope they open up the whole missile architecture. and leave things like seekers to folks like us who have great products that actually, we built in the old L3 business. I think we have a seeker that can go on PAC-3 today, and we want to prove it out because we think it's a pretty important part. So things like that, we think, are really important.

And I guess, what are the biggest constraints that you're seeing today in terms of doubling the capacity over the next few years?

So I would say, and I probably say this too much, we don't have contracts. So I would like contracts first, second and third because I'm the guy that keeps signing off on stuff for Ken to say, go build and spend more. I mean, like I said, we got on the last earnings call, and we said we had $2.2 billion out in either supply chain or building commitments. And at some point, I need a customer and product build to build them. And if I don't have a contract, in theory, I can't, right? I mean we know it will get resolved, but I would sleep a lot better if I had multiple contracts.

And I think everybody saw the PAC-3 award, right, $4.6 billion. We didn't put any of the escalators or anything in that. That's 80% of the PAC-3 demand. You guys can bounce that off of the 833 language, but that's 100% of all the DACs as well. So I think we're in a good position. We just want to go get busy and build them. Look, Ken is working up and down the supply chain, moving dirt. I mean you'd be amazed. I mean, one day, we're out working in Orange and then the construction workers are like, hey, we have to go work someplace else because it's a data center and they actually have preference over you and we go back to the Department of War and they come back the next day and say, no if you have preference over them. So it is -- Ken's got a full-time job at the end of the day, working through this, but I think it's really important. I think he's doing a great job.

How do you think about the competitive positioning of solid rocket motors and propulsion? We hear a lot about it from the new entrants, but also your market share is there opportunity for you to become second source on some programs where you might not be a provider?

So I mean, for one, there's just so much demand out there. We're happy to see people come in and compete. If it puts a better product in for the war fighter, we're all for it. We think it actually is causing us to drive harder for the business. So one, I want to be open around competition. If it's there, great. We think we're going to outrun everybody. That's been Ken's mantra. That's been Chris' mantra. Sam will carry that mantra one. I certainly have it. I think it's important.

So the solid fuel rocket motor place, we feel pretty good. We've been working on some other pieces around affordable mass, cruise missiles, those kind of things, I think, are definitely opportunities. The electronics side, this goes back to the thesis of putting L3Harris together with Aerojet, 30% of what's the missiles business today is stuff that we put in.

It's probably 40%, 35%, 40% with the divestiture we just made. I think it's pretty important that we go and do different things on missiles. And we do a lot of stuff with electronics and fuses and so forth. So seekers, whatever else, I think, is a good place for us to play. I think the team just needs to drive and the opportunities are there.

Maybe moving on to the Space & Mission Systems business. How do we think about how -- what needs to happen for Space & Mission Systems to consistently outperform defense budgets? And just give us an update on what's going on with some programs, whether it's SDA or missile warning and tracking?

Sure. So we just received the latest Golden Dome award. I think that was last quarter. So we were the only -- we're really the only awardee on the kind of missile tracking missile warning layer that has been the prime on all 5 kind of awards. And I would say 5 tranches, but then we get confused on the nomenclature of what each award is called. So AMDT3, the 3 stands for third tranche, but it's the fifth award on a set of satellites. So you guys can figure that out later, I can't.

But I would say I think we're well positioned. I think the clear Golden Dome gets, I think we're well positioned for it. If we won all 5, clearly, we have some secret sauce around that. We believe our payloads are very important into that. I think it's why we win. We've been trying to work through the mechanics of we weren't a space prime, right? We weren't building satellites as a prime. We're now doing that. There's a lot of lessons learned we've been taking in, in the last 4 or 5 years.

I would say some of this we did through our own P&L that probably maybe surprised a few people here or there. Certainly, the charge we took last quarter, the $55 million was on a relatively -- program we signed a relatively long time ago, but that's what happens when you're kind of breaking in pioneering space. And we look to get that behind us and drive better returns in that business.

That's great to hear. I guess what -- when we think about the business today, $11.5 billion of revenues in '26, what gets it to the $13 billion plus? Where does the $1 billion of revenue come from?

Yes, it will be interesting. We have a fair amount -- and this business has been exceeding our expectations, right? The organic growth in the first half is 15%. So it's been a very strong grower. We've had some episodic things with aircraft and so forth and this business is split kind of 1/3, 1/3, 1/3. But I would say, 1/3 on the space side, 1/3 on the ISR. In fact, you went to the Greenville location with Tony, pretty cool stuff, right?

Best facility visit I've ever been to. I can't stop...

Yes. See that got Tony a promotion to go back to do real engineering instead of financial stuff. So he's -- I mean, as you know, he's a classically trained engineer. So I think it's great that he got -- he's running a P&L now. So 1/3 is that ISR kind of aircraft capability and then a mixture on the other 1/3 around cyber and some other pieces. We've had a great period of time, right? We'll do better probably this year than we expected in that business. So let's see where it goes. I think we feel pretty good about it.

Certainly, the backlog we've built up there will help whether there's a CR or not, whether there is other awards, how quick Golden Dome comes out. I mean we need to just focus on driving down and delivering the satellites, giving the -- I think there's 72 left that we got to get up in space. So getting those completed and ready to go.

Maybe can we talk about the $955 million AMDT3 contract for 18 satellites. It now means that you have 70 satellites on order. How do you transition from prototype demonstration to mass production, and what it means for your margins as they sit around 10% at the end of the quarter?

Yes. So if you had to dissect the segment and look at the sector, the space business is lower than the average margin in the segment. So certainly getting that to perform better is important. And as you can imagine, like Tranche 5, AMDT3 is Tranche 5. So as you get into that next level, certainly, we've learned a lot as far as what buses we're using, what other components are on a spacecraft and just getting kind of better on the supply chain side, the engineering, I think, has been where the team has been after. I think they've been doing a nice job. How we bid the programs has shifted. And I think we've been trying to be more thoughtful around or disciplined around the economics. So I think that part is good.

And truth is we've been kind of being somewhat conservative on our booking rates on the margins to make sure we deliver. And then as we derisk the programs, you'll see better and better margins. So in the past, we probably didn't run with a level of management reserve on the programs that we've kind of built into the programs now.

Maybe I just want to close the loop on the space -- on the segment margins as we think about space only representing 1/3. How do we think about the ISR business? It's gone through transformation here and it's on a positive trajectory, where margins sit there and the remaining 1/3 of the business?

Yes. And I think the ISR piece is closer to the average margin in the business. So I think it is, to your point, and Tony was there, they did a great job of getting that business where it needed to be. We've got a couple of very large newer wins as far as new aircraft types. So just kind of getting those kind of laid flat, getting the -- I mean, these are real hard to -- until you go on one, you don't realize what the team is doing. I mean they're cutting new holes. They're filling them full of cutting new holes in a fuselage, sorry, and redesigning kind of the airplanes and what they can -- the loads they can carry, how to carry them, how to also do the ISR work that the payload is doing inside.

So I think the team has done a nice job. They'll get to a level that it's repeatable, right? They've done that on the domestic side and these new international variants. That's what they're working through now. I think there's a lot of -- you asked about growth, I think, both on the space side, specifically in the ISR side for the aircraft. I think there's a lot of opportunity.

That's great to hear. Maybe just on CSD, let's go to communications, we could finally touch on it. You talked about resilient communication orders of over $1 billion from European allies like Germany, Poland and Netherlands. I guess, how do you -- first, maybe let's size the total communications business and how you think about demand both U.S. and internationally?

Sure. And it moves around a lot because -- and maybe for folks if they don't fully get our radios business, it's generally kind of the military radios. They're highly effective. So if we have them deployed in Ukraine today, the Russians are very good at jamming communications. So our radios are the best. So we're very good about uploading new capabilities into the radios to get them on different spectrum and so forth.

So or waveforms, so people can communicate. They don't get jammed. So at the end of the day, it's a great business where we get into the kind of how the revenue ebbs and flows, we go through upgrades like your iPhone or whatever device you use. We're -- right now, we're on Falcon IV domestically. Falcon IV will go to Falcon V in the next probably 1.5 years that drives a little bit of the demand signal as well because you get better capabilities and maybe different than iPhone if you guys ever look at a war fighter, but they have a screen in front of them a radio and a battery over here, it's still pretty big, right? It has to have a lot of capability, survive and combat.

So the form factor is important to work down the compute power, the communication power of the radios are all still unlike your phone, and I'm not a kid, so I have to ask my kids, but they do different things when you get the newer phone, but they all kind of seem to be the same to me. I think our radios aren't all the same. So -- and maybe Chris' frustration with Rochester was they're too hot and we weren't working the form factor fast enough.

And I think we've worked the form factor well and the Falcon V will be that. In the international space, we tend to be on Falcon III, move to Falcon IV. When we talk about software products going out on these radios, you need the newer variants for the software products. And if you think about Wraith Shield being this kind of fence that goes around with every radio that you can detect drones coming in and literally, it will detect it, sense it and then jam it and drop these drones down if there are drones, it's pretty important. So -- and for me, I mean, it's like a personal thing because I used to be a war fighter, and I got a young kid that comes to my house, he's an Army Ranger. And at the end of the day, I said, "Hey, watch this video, tell me what you think." -- and he's like one of -- in the Ranger Battalion. So these are the guys that get deployed all the time. He's like, hey, -- I mean, he has a lot of choice words. There's too many people here and it's by recorded.

So I won't use his words, but he would say it's very important. And how do we get it? And we're working with SOCOM on something like that. And he's very big, too, by the way. So I try to be really nice to him. But he dates my daughter. I should probably given you guys too much. So I get a little worried about that, too.

But anyway, that's the importance of the radios. That's why I think getting these software products out, getting capability in the war fighter. I mean if you think about it, if a swarm of drones comes in, you can't take it out with munitions and firing and kinetics. It has to be kind of jamming and whatever else. It's just a really cool capability.

That's what our radios do without any additional kind of weight. It's just software. So I think it's a great business. Tony is now in the business that does the turrets with WESCAM and also the counter UAS. I think that's also a really good business. We've talked about $1 billion in pipeline that showed up out of nowhere because everybody now feels like they need counter UAS systems.

Our first round of that is really kind of firing $30,000 missiles at drones. The kill rate on it is about 80%. It's probably better now, but we've been working through all the algorithms and so forth. It's been fielded in Ukraine. So it's had live fire activity. So I think Tony is like probably the best salesman for it. Is that right, Tony? Yes.

I'll check them out at AUSA next month. So I might get to see Tony one more.

Fabulous. You'll see him a bunch here because that's going to be his hotspot, right? So I mean -- but like with all things like this, we have a huge ramp in front of us, trying to get all the electronics. Like literally, I think 2 weeks ago, we're working through how do you get the Department of War certifications behind you internationally because the AI demand is huge. So I think we've talked about a huge ramp second half. And I've said, hey, revenue ramp second half. We still firmly believe it will ramp second half, but it's probably more fourth quarter weighted.

Second, third quarter is probably flatter at the end of the day. But that's a little frustrating because it's such a great business. We want to see the product out. But I will tell you, Sam is working that with the team night and day because we got to drive to get the supply chain laid flat. It's really two vendors, and it's like fourth tier materials and that kind of stuff. So it just shows you the world we live in today, right?

I have two follow-up questions for that. As we think about the U.S. market, Falcon IV to Falcon V over the next 1.5 years, what does that mean? Is it a software upgrade? What does that mean in terms of the investment ahead? And how do we think about the U.S. modernization cycle in terms of what's completed and what's ahead?

Sure. So it's a whole new radio. So it's all hardware. So think of something that -- this is like big going to something maybe half the size and hopefully has better battery life heat, more capacity for communication, so more ability to put software on it. So that new radio will probably effectively roll out the end of next year.

So we don't want to get ahead of ourselves because we also want to keep selling Falcon IVs because they're very important, and we have to keep everything moving. So I think this will just be the next iteration like your iPhone -- like I said, it's kind of like going from an iPhone 5 to 14, which then I'm not really sure which one they're at today, but maybe a 17 because my kids tell me we need a new one. So -- but anyway, I think it's kind of a pretty big evolution. So we're very excited about it.

And what's the percentage in terms of the modernization that you think -- how do you think about the modernization cadence as we progress every year?

Yes. I think somewhere around -- we've been at like 40-plus percent in the U.S. And then internationally, it's a lot harder, right, because every country, they don't all use our radios, but let's be -- if you're trying to communicate and you want this commonality between systems so you can communicate. And then if you're putting your kids on the battlefield, you want to give them the best odds of survivability. That's all L3Harris radios. So that's why we've been doing a really bang-up job internationally, and that's where you're seeing a lot of demand come in.

One more follow-up question. You mentioned, it's a very Q4-weighted business. How do we think about some of the, I guess, supply chain areas that you're keenly focused on to get that ensure you ship?

Yes. I would say it's predominantly kind of pieces that go into electronic boards. I mean we make these radios all ourselves. So it's always putting resistors and stuff like that on boards. So I would say there are some materials in the boards that have gotten to be a little bit harder. We've had to go dual source different vendors, also work with countries that some of these suppliers are not in the U.S. So trying to go explain to them, "Hey, it's important for the Department of War, engage with the Department of War with them, which Sam has done and vendors -- a little bit of a positive surprise candidly.

The vendors have said, okay, we're prioritizing you. Our demands aren't as high as like somebody building a bunch of boxes for a data center. So maybe that's why it's been a little bit easier. But we hit a little bit of a bump, and I think we'll work our way through it. But we'll certainly talk about it on the next call for sure.

That's helpful. Maybe if you could talk about last year, the team had mentioned Link 16. You've kind of highlighted success of getting Link 16 into space. Can you talk about what that means and how you think about Next-Gen Jammer Low-Band pods, and how does the integration of Palantir's AI platform help with your sensor business?

Yes. So I would say you've got a big universe there. So let me try. So Link 16 in the space, I think it's just kind of -- it's important from a comms perspective and we're a big comms company. So owning kind of the framework, how things work I think is really important. So -- and that was also part of why we bought the business. So I think that's a positive all the way around.

Let's see you then mentioned, next-gen jammer. The team would say they're absolutely on schedule, on price. We're kind of in the first phase of the contract. There will hopefully be another booking somewhere in the distant future, not too distant future, excuse me, on Next-Gen Jammer. I think Sam would say it's working really well. I checked them out on the next-gen jammer recently.

But we're in a development phase on the program. So it's cost type, lower margins. So look, we just need to work through the program. It's a great program to have, right? And we like the position we have with it. And you asked about pods, electronic warfare in general?

Because we've segmented into two segments now. So we need you to break out again and get more, so I'm not jamming all these questions into...

It's all good. Yes, yes. So -- and then just kind of electronic warfare in general, I think we -- like everybody, right, where I think it's a very important part of the business, even putting -- I was spending some time the other day just even getting EW platforms on relatively small drones just so you can fly in contested environments and be able to make deliveries even believe it or not on ships, for example. That's been one of the mission as of late. So I think there's a whole lot going on. It's -- I think it's an important space.

Moving on to some financials, the CFO stuff now get to talk about. So LHX next, that seems long ago now. How do you think about the next steps of implementation? You've exceeded your targets of $1.2 billion of savings. How do we think about next steps in terms of residual -- sorry, margins from here?

Yes. So I mean, one, I think it's very important. I just always margins. And I've had enough kind of time at L3Harris now where people talk about noise in our financials and stuff like that and how to have cleaner quarters. So I'll be honest, I'm kind of a cleaner quarter guy. So we pulled all the one-timers out of our numbers or nonrecurring items and look at it and say, okay, we're not at our 16% margin. So what do we need to do to make sure we get to our 16% in a clean way, right?

When I say clean, it's not asset sale gains or nonoperational things. So I think a big part of the focus is how do we go drive the business to get there and be able to -- any of these one-timers that come up or kind of on top of the numbers at the end of the day.

So the LHX NeXt program was important. I think this going in and looking at the business differently and spending a little bit more time operationally, I think it was good. I think Sam will -- candidly, I think Sam will take it to the next level, and he's already asking for tons of data on spend and consultant spend and different pieces that I think are really important.

I guess, how do we think about the next level deep? Is it -- what do you think is required, whether it's focused on supply chain? Is it just delivering on operating leverage? Is it mix transitioning from development to production? That's a broad scope for such a large company, but how do we think about some of the 3 -- maybe few buckets as you think about margin expansion?

I think one, getting out of the EAC charges we've had specifically, I know we had some ISR ones. We had some space ones. I think Ken Bedingfield did a nice job of -- and we've talked about this, right, making sure we put more management reserve on program starting off with lower margins. And then as we have the right to book larger margins, we book them up.

I mean, we're bidding them at higher margins, but we are recording and recognizing. It's all appropriate from accounting. We're recognizing lower margins in the earlier stages because we have more risk. So I think maybe under -- or maybe previously, things got ahead of the company, and we're trying to make sure that we take a pretty conservative stance to new business and programs that are earlier stage.

So I think that's kind of first piece. And then if I had to think about margins, it's like I'll use missiles as a great example. We're going to 3x, 4x, 5x, 10x volumes on different programs and some of it, you just kind of scratch your head a little bit. If you can't drive higher margin than that, you're doing something wrong, right? And I think some people probably here have even been to Ken's new building or facility in Huntsville.

We took the Remington facility. I don't remember, how many square feet. It's huge. And part of that is how do we dual source stuff that's either creating issues in the supply chain or stuff where we think that the vendors aren't treating us fairly and make sure that we're getting the benefit of the cost reductions for all L3Harris shareholders.

So we've got the capacity. So we'll be working through that. So I would like to believe you'll see missiles have kind of supplier margins than where they are. We're not trying to do it on the back of the customer. We're trying to do it by running a better manufacturing, a better operation, and I think Ken will do a nice job with that because that's what we set out to do and he was already doing that.

So I think that's a piece. And just, hey, look, we got to stay focused and vigilant on the business and look at cost. And I think LHX NeXt was nice because I'm not sure we had taken a fresh look at cost. I think we need to keep doing that.

That's helpful. And maybe now that you guys have had some time to sit, not really a lot of time, but how do you think about the business, whether it's from a segment structure? I know you've realigned a few times, or from a portfolio standpoint, how do you think about just -- are there better fits elsewhere? Or do you think like maybe breaking down the segments a little bit more What you'd like to see from here?

Yes, sure. So I'd like to see no changes. And I think our investors would like to see no changes. When we look at all the investor perception studies and everything, in fact, when Sam was getting announced, I sat down with them, went through Q&A. And as every good CFO, right, you want to make sure you're attached to the CEO, and you're not saying something different. And if you don't like what the CEO is going to tell you, you need to change it.

So I literally -- like question one was, org structure, are you going to change it? And I was all ready for, hey, pump the brakes. We're not doing that. But I'll let him give his answer was that was the last thing we need to do again. And I went, check, okay, good. I think we have -- and Sam was a big part of the portfolio and structuring it the way he did. And I think it actually makes sense, right?

Now we could argue, could you split space and ISR. Okay, if you're -- we run it that way today. It's a construct of the businesses are together that way, but we run them in different sectors underneath. So, okay. But I don't think there's a wholesale. We're going to go shuffle the deck chairs. If we did that, I would probably lose my mind, and I don't think we want to do that. So -- and by the way, I think Sam would too. Sam's exact quote was, the last thing, Ken, we need to do is do that. I went, yes, that makes perfect sense is what I was thinking. And he said, and our stock was working really well when we weren't confusing investors, and we were driving the business. He'd actually said driving the business. I added confusing investors.

And I think it's important because we did all this really fast. That is -- that was -- that is an L3Harris way. The problem is when you do things really fast, it's really hard to give investors all the data broken down by quarter, by different segments and the underlying data, not the segments themselves because we don't have it, right? So how can we give it to you. If you want a bookings by segment 3 years ago, I probably -- it would be hard for me to create that. When you do it fast. When you do it in a slower fashion, we have more of that data.

So I would say we're very happy with the structure we have, and we want to continue providing transparency to the investors so they can understand what we know is the great company we have and why you should be investing in it.

Well, thank you for a lot of that clarity. So I appreciate you being here, Ken. Thank you very much, everyone, for listening in.

Thank you.

Greetings. Welcome to the L3Harris Technologies Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Tony Calderon, Vice President, Investor Relations and Corporate Development. Thank you, Tony. You may now begin.

Thank you, Jay, and good evening, everyone. Joining me today are Chairman and CEO, Chris Kubasik, and Chief Financial Officer, Ken Sharp. After the market closed today, we published our second quarter earnings release detailing our financial results and updated 2026 guidance and provided a supplemental earnings presentation on our website. Before we begin, please note that our discussion will include forward-looking statements subject to risks, assumptions and uncertainties that could cause actual results to differ materially. We have discussed GAAP results alongside non-GAAP financial measures of organic revenue, segment operating income and free cash flow, which are reconciled to GAAP measures in the earnings release. For more information, please refer to our earnings release and with that, let me turn it over to Chris. .

Thanks, Tony, and welcome to our call. Before Ken discusses the numbers, I'd like to step back and share some context to frame this quarter's performance within our multiyear strategy. Several years ago, we embarked on the strategy to become the trusted disruptor. We saw an opportunity to focus on national security here and abroad in a way that had not been done before. Today, security threats are growing in volume, intensity and sophistication. Congress, the Pentagon, our war fighters and our citizens need an industrial base on a wartime footing ready to invest and respond quickly, reliably and at scale. Our customers need partners they can trust and depend on, and I believe L3Harris is that partner. .

Today's results are not just a one-off strong quarter. It's the result of leadership, teamwork and a dedicated workforce delivering on our customers' mission. These results build on the momentum that began in late 2023. We are running now 3 Harris for long-term value creation. We are taking deliberate disciplined risks to enter markets we haven't participated in before and to gain share in attractive growth domains. In missile warning and missile tracking, we have been selected by the U.S. Space Force for the AMDT3 satellite constellation. We are the only company to be awarded all 5 contracts related to missile tracking. This award reinforces that the customer trusts us to deliver high quality, resilient integrated spacecraft that are critical for national security.

Also in space, we see a $9 billion pipeline over the next several years across missile warning, missile defense in several classified missions. Since the fourth quarter, we've secured $2.4 billion in new contracts validating our trusted disruptor strategy is working. Our early investments in capacity, along with bidding as a prime are paying off. The programs we win today establish enduring franchises that will serve our customers in L3Harris over the long term. As a reminder, the satellites will be replenished to keep the Constellation operational. Within ISR, we are progressing on a multiyear missionization business jet pipeline. During the quarter, we were awarded the first phase of the next 2 U.S. Air Force Electronic Attack missionized business jets.

Internationally, we've been awarded $3 billion of airborne early warning and control programs since the fourth quarter. Our pipeline includes $10 billion of opportunities across the Middle East, Asia Pacific and Europe. We offer the customers the ability to have more affordable, interoperable and superior sensing solutions while being able to field capabilities faster. 3 years ago, we acquired Aerojet at full price. Recognizing that while the business needed work, we were not simply buying a P&L, we were securing a strategic position and a critical entry point into a business we believe has significant value and was poised for significant growth.

We saw that opportunity enacted decisively. That was not a popular view at the time and the questions you raised were fair about the multiple of the integration risk and our ability to execute and whether we could credibly become a major player in this business. We do not ask for investors to take our vision on faith, and I'm not asking for that today. 3 years later, let me walk you through what has changed and how we executed to validate our investment thesis. We transformed and turned the operation around. We integrated ahead of plan and then combined it with complementary L3Harris missile technologies, creating a purpose-built missile solutions business, spanning propulsion, seekers, antennas, fuses advanced effects and deep space launch systems.

We didn't simply acquire a propulsion company, we built a far broader and more differentiated one-of-a-kind missile technology business. These changes position us to expand into adjacencies and support our customers across the full spectrum of missile systems. More important than the portfolio transformation is the operational transformation. The business we operate today bears little resemblance to the one we acquired 3 years ago. We have all new leadership. We introduced operating discipline, accountability, manufacturing rigor, execution standards, automation, and new technologies that have fundamentally changed how the business operates and performs.

From the day we closed the acquisition, we decided to invest in the business, pivoting the focus to missiles and not reacting but anticipating the market. We increased our investments in R&D and CapEx by a factor of 10. The leadership team and the workforce have done a great job bringing a sense of urgency to the Missiles operations, including work in multiple shifts. And as a result, deliveries are up over 60%, eliminating substantially all delinquent deliveries since the acquisition. Streamlining production has been a priority, and we have improved operational efficiency by 22% while we continue to prioritize our workforce's safety and health.

Our customers have increased confidence in our ability to deliver, which is why the Department of War made a $1 billion investment. That financial investment was not only a vote of confidence by the Department of War, but it was also important to us as it was a strong signal to accelerate our investment plans by 12 to 18 months. We are investing in facilities to meet accelerating demand for missiles and interceptors. We're also investing in new technologies, advanced automation production techniques and AI across both existing and new facilities. As we expand production capacity by almost 1 million square feet, the new missile factories will be among the most modern in the world.

The new GMLRS factory, which we have named the arsenal of Freedom Building is coming online next month. This factory is highly automated with robotics moving motors from station to station along with automated mixing, casting, curing, X-ray inspection cells, all with AI overlaid improving yields and reducing cost. The workforce has been trained in these new tools and is excited about our ramp-up. Our new highly automated GMLRS operation will allow us to more than double capacity while reducing manufacturing times by 50%. The conversations we're having in the Pentagon are no longer about whether we can deliver, but how many can we produce and how fast we can go, a complete turnaround from a year ago.

Our strategic decision 3 years ago alongside our operational turnaround has put us on a clear path to success. Let me share an update on our missile business IPO. We have built an exceptionally strong, well-positioned franchise, and we are more confident than ever in the extraordinary value we are creating through continued execution and the acceleration of the business. Market conditions have evolved and do not reflect the tremendous value we are building. With capacity expansion underway and the momentum accelerating, we are poised to deliver even greater value as we ramp production to support our nation's urgent and critical needs for our missile solutions. The demand signals are outstanding. We are actively negotiating more than $20 billion in new contracts potentially tripling our backlog and positioning us for meaningful and sustained revenue and profit growth, both in the near term as well in the future.

We expect to revisit the IPO mid-2027. Until then, our team is intensely focused on what we do best, contracting the demand, building the capacity and delivering for our customers. In summary, we have built an attractive and increasingly differentiated portfolio with capabilities in share, maritime, cyber, EW and resilient communications, just to name a few. By anticipating the future of warfare, winning new and emerging markets, strengthening our leadership positions in core franchises, expanding our international sales and securing important long-term franchise wins, the future is bright for L3Harris. We intend to keep earning both halves of the trusted disruptor title. Trust is earned by meeting commitments, and we have done that consistently.

Disruption is earned through innovation, speed and a willingness to challenge the status quo while taking calculated risks, and we have done that as well. We know there is more we can do and we intend to do it. With that, let me turn the call over to Ken to walk you through the financials.

Thank you, Chris. I'm a big fan of the trusted disruptor model as it's about putting the war fighter first taking calculated risks, delivering innovation at pace and meeting our commitments to our customers as well as meeting our financial commitments to our shareholders. It all starts with winning in the market, and we continue to do that. Orders were $7.3 billion, yielding a book-to-bill of 1.2x. Our trailing 12-month book-to-bill was 1.3x. Backlog increased by more than $1 billion to $42 billion, positioning us well for sustained growth. Revenue for the quarter was $5.9 billion, up $455 million or 8% year-over-year. Growth was broad-based with all 3 segments contributing. .

Based on our strong positioning, international sales increased $254 million, up over 20%. International sales mix in the last year or so increased by about 250 basis points to 23% of our total revenue. Segment operating income increased $79 million or 9%, and segment operating margin was 16%, up 10 basis points. The increase was driven by strong revenue growth, improved program performance and a net gain on segment investments, partially offset by higher research and development costs. As you think about the comparison, the prior year quarter included $92 million gain related to a product line asset sale.

GAAP and earnings per share for the quarter are $3.13, up 28%. The $0.69 improvement was due to higher revenue volume $0.36, improved program performance $0.20, lower corporate and other expense, including the noncash preferred deemed dividend, $0.24, offset by $0.11 of net product line sales and investment gains.

Operating cash flow was $879 million. Free cash flow was $771 million, up both 37%. Year-to-date, free cash flow is $584 million, $124 million ahead of the prior year. Investments in capital expenditures and research and development increased over 20% in the quarter as we invested in both capability and capacity in our space, ISR, missiles and communications businesses. In our missiles business, we are investing in capacity through both capital expenditures and finance leases. Finance leases are not reflected in our balance sheet until related assets are placed in service. In the quarter, our total missile capacity investments including finance lease activities were $136 million. Our commitments made for missile capacity, including facilities, equipment, and supply chain totaled $2 billion and are being deployed rapidly to support missile and Interceptor delivery.

Turning to our segments. All segments grew revenue and increased their operating income. Space and Mission Systems grew 7% to about $3 billion. Revenue increased across the portfolio, including higher volume on ISR missionized aircraft, classified space, F-35 control systems and air traffic control modernization. Space and Mission Systems segment operating margin was 9.8%, down 60 basis points from the prior year. The decrease primarily reflects a $75 million product line sale gain in the prior year that did not repeat, partially offset by improved program performance and a $23 million net gain on segment investments. Communication and spectrum dominance delivered revenue of $1.9 billion, up 4% year-over-year, driven by increased international volume and higher electronic warfare and Datalinx revenue. Communication and Spectrum dominant operating margin was 26.9%, up 230 basis points, driven by stronger international revenue partially offset by increased investments in research and development.

Missile Solutions delivered 14% year-over-year revenue growth. Revenue increased 16% in the business we are retaining, partially offset by lower growth in the commercial space propulsion business we are divesting. Missile Solutions segment operating margin was substantially similar to the prior year. With that, let me turn the call back to Chris.

Thanks, Ken. We're at a critical time in history in terms of the geopolitical environment. The threats are rising in seriousness and sophistication, placing tremendous demand on the military and our allies overseas. This is why the budgets are increasing both in the U.S. and internationally. Now let me focus on the future and how we see things playing out the rest of the year. You'll see us ramp up operations on AMDT3 and classified satellite awards. We will continue to drive more international orders for greater international revenue, continuing our positive momentum. We will continue to work orders internationally with our smart software-defined radios as we upgrade capability and interoperability. We will build on our NGC2 orders that we received in Q1 and Q2 of this year and continue to bid and win in the second half.

While it's early on NGC2, our products resonate and we are winning more than our fair share. We will execute on our newly awarded $4 billion FAA contract, which could run through 2046 if options are exercised. We will lead a nationwide effort to rebuild and modernize the FAA's telecommunications infrastructure backbone, connecting every tower, radar facility and air traffic control center across the United States, including modernizing more than 700 ground stations. We will work with our international partners to close Vampire counter UAS system opportunities and have targeted $500 million of new orders. building on the momentum from our Q2 U.S. Army $100 million contract award.

We will continue advancing the software capabilities of our smart software-defined radios, including our RateShield, counter U.S. jamming solution. RateShield is an emerging trusted disruptor success story. Our engineers understood what the war fighter needed and invested in software applications that can be loaded on to our smart radios enabling them to sense, detect and jam incoming drones in the last mile without adding new equipment or weight to the soldier. I recently saw a live demo and I have to admit it was quite satisfying to see the drone fall out of the sky. This is proof that the capabilities of software-defined products are endless. This will contribute to our licensing revenue in the years ahead.

We will continue to accelerate missile production while investing in affordable mass, including Red Wolf, a low-cost modular cruise missile that we are developing with the United States Marine Corps for precision strike missions. At the same time, we are well positioned in the emerging low-cost interceptor market with a proven propulsion and in-house seeker capabilities that can reduce the cost per kill equation. Shortly after quarter end, we signed a framework agreement for 7 years of FAD and factory production representing approximately $12 billion of future production revenue and $2 billion of future profit.

This clearly demonstrates the scale and durability of demand for our capabilities. We are working with Lockheed to quadruple FAD production, delivering all solid rocket motors and divert and attitude control systems for this program. We're also making progress to nearly triple production on PAC-3 for solid rocket motors, attitude control motors and mentality enhancers. As the only company producing these solid rocket motors at scale on PAC-3 today, and with the continued sole-source positions on attitude control motors and lethality enhancers, we see the opportunity to deliver solid rocket motor quantities above the 80% framework agreement to cover any potential shortfall from competitors and to address international demand sooner.

Our new modern automated PAC-3 facility is expected to come online in late '27, ensuring we have the capacity to meet the demand at the scale that no 1 else can. Let me touch on the budget as I know it's a leading indicator of growth. It's probably reasonable to expect debate on the department award budgets. We are on a wartime footing. Therefore, I would expect that we'll have the highest defense budget in our country's history and a supplemental budget to fund multiyear munition contracts. But let's be clear, where there's uncertainty our nation's defense has always been bipartisan. Irrespective of where the budget ultimately ends up, our outlook is positive. We have strong and accelerating market-leading positions. We have been successfully penetrating new markets, developing franchise positions and delivering on our commitments. Let me turn it back to Ken to discuss our outlook and guidance.

Based on our strong first half performance and continued momentum, we are raising our full year 2026 revenue and earnings per share guidance. Our 2026 guidance update also reflects the Department of War preferred stock investment, noncash deemed dividend cost of $55 million and the sale of a majority interest in our commercial space propulsion business that we expect to close in August. We now expect the full year revenue of $23.2 million to $23.7 billion yielding organic revenue growth of 8% to 10%. This increases both the bottom end and the top end of our range by $200 million. The revenue guidance increase reflects stronger performance in our Space and Mission Systems business and the excellent work our team did by winning AMDT3 Constellation, which is part of the Golden Dome for America.

We are maintaining our segment operating margin guidance of low 16%. We are reducing net interest expense by $30 million to approximately $560 million, reflecting our higher cash balance. We are increasing both the low and high end of our diluted earnings per share guidance by $0.40 to a range of $11.80 to $12. Notably, this increase comes even after absorbing an approximate $0.20 headwind associated with the divestiture of the commercial space propulsion business. The composition of the $0.40 earnings per share increase includes higher revenue volume $0.15, lower interest expense $0.15, net investment gains, inclusive of noncash preferred stock deemed dividend cost of $0.10. We are reaffirming our free cash flow guidance of $3 billion. At the segment level, Space and Mission Systems full year revenue increased $200 million to $11.7 billion.

Communications and spectrum dominance we expect revenue to ramp up in the second half due to strong demand for our smart software-defined radios and Vampire counter UAS system segment margin increased to mid-25% from approximately 25%. Missile Solutions, we adjusted full year revenue and segment margin guidance to reflect the commercial space propulsion transaction closing in August as the business will no longer be consolidated as part of L3Harris. Our commercial space propulsion business generated revenue of $571 million and segment profit of $82 million in 2025 and revenue of $312 million and segment profit of $57 million Q2 year-to-date 2026. With the divestiture proceeds, together with our current cash balance, and forecasted free cash flow for the remainder of the year, we expect to have approximately $4 billion of cash on hand before any potential debt paydown or additional share repurchases.

That financial flexibility positions us well to invest in the business, return capital to shareholders and/or further reduce leverage. Over the next 5 months, I have had -- over the last 5 months, I've had a great opportunity to visit several of our operations, deepen my understanding of the business and work closely with Chris and his team, which has only furthered my confidence in the business and our ability to deliver our 2026 guidance. With that, Jade, please open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Robert Stallard from Vertical Research. .

Chris, my quick math on the numbers you gave on the missile framework agreement suggests you're going to make around a 17% margin on this work, assuming everything goes to plan. Is that the feeling do you expect on this contract? Or is there an opportunity to go higher than that?

Thanks for the question, Rob. That would be a pretty good return. It's a 7-year number and probably a little bit of rounding, but we're thinking something in the 15%, 17%, 18% range is something to strive for, especially as we ramp up with volume and kept the supply chain lined up with longer-term agreements. So can always do more, but that's a pretty good start in my opinion. .

Your next question comes from the line of Myles Walton from Wolf Research.

I wonder, I think you talked about pushing the PO to mid-2027. Can you just give us some of the puts and takes behind that decision? I noticed the retention agreements you've for a couple of senior management teams and then why mid-2027 is the right time if fourth quarter or second half '26 is not?

I mean, Myles, the market conditions do not reflect the value we're building. I think we have a great business. We have land, we have operating factories, backlog great financials, great workforce, and we're actually making money. And I think, unfortunately, a lot of the recent IPOs are obviously, missing some or all of those key elements to a business and the market is adjusting to valuation. I think we're kind of caught in that process a little bit. So I want to let everything settle down. We'll reevaluate it. Team will keep building buildings, delivering SRMs, and I think the value gets greater each and every day. The majority of the cash that we were going to need from the IPO starts to hit in late '27, '28 and '29, so it just seemed like a prudent business decision, and it's always exciting to go public, but the team unanimously agrees. We got to do what's right for our shareholders and all shareholders and stakeholders. And that's the stand down focus on the business and wait for the market to recover, which I have no doubt it will at the right time. .

Lot of headwinds out there, budget, CR, reconciliation, election, executive orders, these things will get resolved, and I think the market will appreciate our valuation.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Maybe just a follow-up on Myles' question and your comments just right there on missiles. How do we think about growth for the missile segment from here as the timework are being pulled together and maybe some folks are a bit behind or a little ahead of you. How do you think about the framework is materializing into revenues just the ability to have incremental margins on that and the CapEx build out?

Yes. Let me ask Ken to run through the numbers. You obviously see the missile segment, but the actual missile piece is obviously greater than the segment results. .

Wonderful, Sheila. So just kind of as we think about the business, we kind of expect growth in the high teens over the next, call it, couple of years at a minimum, I would say, kind of for the foreseeable future. So we're very excited about the business. I think the business will perform well. We have really significant demand stacking up. I think Chris talked about $20 billion of backlog we're negotiating, that triples our backlog. It will give us incredibly great visibility into the revenue generation. We're standing up a number of factories. I think it's about 60 in total. So as they come online and think about '28 -- well, '27, '28, '29 time line, it will accelerate revenue even faster. So I think we're in a really good position.

Chris mentioned the propulsion business specifically, and that business will grow, let's call it, 20% plus and it's actually been growing around there. That's just one of the pieces of the missiles business.

And Sheila, I'll just chime in. There's been a lot of questions about the $1 billion investment, but I want to reemphasize that gave us the confidence to invest probably 12 to 18 months earlier than we would have had we waited for the framework agreements, or something to go put a shovel in the ground, we'd be doing it today. We did this starting well over a year ago. We're opening the Gimblers building next month, the brand-new PAC-3 building we just literally started building earlier this year when we got the demand signal, changed our strategy a little bit, and that will be open in late 2027. And as Ken said, many other buildings are going up real time and it's quite exciting. So this ramp will probably take a couple of years before you start to see the real significant spike in profitability and revenue. But in the interim, it's still growing 20%, which I think is hard to beat.

Your next question comes from the line of Kristine Liwag from Morgan Stanley.

Maybe switching topics. It's been about 4 years now since you've announced your strategic relationship with Shield Capital to engage with emerging dual-use technologies. Can you provide an update on how the partnership has evolved? Specifically, how much have you committed to the fund? How do you define a successful outcome? And ultimately, should we expect investment income as a recurring component of operating earnings going forward?

All right. Thank you. Great question. I was hoping someone would ask me about Shield. It was a little over 4 years ago. I think first quarter of '22, we made a big announcement. We were the first movers into this concept in my opinion. I think for those 4 years and maybe even earlier than that, we've always embraced and encouraged venture-back tech companies to join the defense ecosystem, and they are all over, and we're proud to be part of helping them get started. So we had about 3 goals when we announced it in probably most -- maybe of equal importance, but maybe a little more important was to pull through this new technology. These are all dual use technologies, meaning commercial and defense and we wanted to get these offerings into our products.

So our customers had newer, more innovative products, whether it was the use of metadata AI or some of the things we're doing in autonomy and space. It was also a way for us to accelerate R&D instead of us spending a few million bucks in a year or so to develop something. Obviously, these companies already had it. So it was easy to go ahead and team up with them in that regard. And then ultimately, we'd like it to create shareholder value, not only through winning more business as a result of working with these companies and their technologies but also through good old-fashioned investment gains. And these companies are starting to appreciate in value, and I'll let Ken talk a little bit about the numbers. But we're in 2 of their funds, we're the strategic partners. They're kind of both about $50 million commitment. I don't think I've disclosed that before, but there you go. So like any VC fund, you make contributions. Fund I is probably 70%, 80% drawn and Fund II is maybe 10% or 20%, but it's something we're quite proud of, and I'm glad it's working. And the most important thing is it helps with our culture going fast. -- we get a quick turn on some of these investments and decisions, and the team is excited to work 24 straight hours and make a yes, no decision.

You don't have time to do your more traditional corporate months of reviews. -- make decisions in hours or days, and they're great partners. I'm glad we connected, and I'm glad it's working out and looking forward to their Fund III when they finish with Fund II. Ken, do you want to give a little more?

Yes, sure. Absolutely, Chris. And it is -- we are seeing some kind of great benefits of the relationship. We did have some gains this quarter, I would characterize them as below operating income gains, so they tend to impact or positively benefit to EPS -- so we did call out the benefits in our EPS walk, so you can pick them up there. .

[Operator Instructions] Your next question comes from the line of Matthew Akers from BNB Paribas. Please go ahead. .

I wanted to ask about capital deployment. You mentioned you're going to have a fair amount of cash on the balance sheet at the end of the year. I think you mentioned share buybacks you've done a fair amount of share buybacks year-to-date. Just your appetite to continue doing that given kind of some of the political pressure we've seen on it. .

Sure. So let me just first say that we -- our goal is to be a very disciplined capital allocators. And clearly, today, our first focus is investing in the business. We talked about $2 billion of commitments we've made to build out our missile capability and prime the supply chain, which I think the team is doing an amazing job. That will drive significant revenue growth Second, we think about debt -- well, I should just add to investing in the business, certainly, if there's assets that made sense to tuck in to our business, we would look at that. Right now, there's nothing in our process that we're looking at intensely to say it makes strategic sense. I mean the valuations have to be right at the end of the day, I think that's really important.

Second, I would categorize as debt paydown would also be a sensible play to go. I think our -- we have about $1.8 billion coming due our total leverage is, I think, in pretty good shape. But at the end of the day, I mean, we're down to 2.3. We've almost reduced the turn from last quarter and then share repurchases I also think or something really important to consider. And I probably should add to the share repurchase line. We're in 24 years of dividend growth. So making sure that we get the dividend aristocrat I think, is important to us. So we'll continue to look at that. But certainly, the $4 billion of excess cash gives us significant flexibility. We're very comfortable making investments with our missile capacity and capability and the business holistically.

Yes. I think I'll just chime in a little bit here. I talked about the venture capital, so that's another source of cash. We kind of throw CapEx out there as a general category, but it's a lot of detail in there. We've been modernizing our IT systems over the past few years, and there's more we're going to do there. But in parallel, we're also transforming the company and really focusing on a digitization ecosystem, which is a little different than just modernizing the infrastructure and staying current. So we have some exciting products that we're using there and developing, working with some world-class companies. This includes embedding AI, and it's a pretty, pretty exciting opportunity and then the more traditional. I think we have more than enough land. But as Ken said, we're building 60 buildings for missiles alone. We built a couple for space a few years back. Those are operational and contributed to the wins.

And then, of course, we need a lot of equipment and we're using more and more modernized equipment as we grow the business. So it's great to have that extra cash. It's kind of a point in time. So we'll obviously do what makes sense. And as I said earlier, the CapEx ramp picks up a little bit more as you would expect, as we're starting to get through these buildings. So it's my understanding that, that was the last question of the evening. So let me wrap it up here. I start by thanking Tony for his time in Investor Relations, with his business acumen and multiple engineering degrees, he's going to be promoted to run one of our sectors.

I have no doubt he'll do a great job, and I wish him the best in his new role. We'll miss you. I also want to recognize and thank our employees for their commitment and execution throughout the first half of the year. Their efforts have supported the war fighter while reinforcing the critical role we are playing in enabling our customers' most important missions. I also want to thank the Department of War leadership for transforming the apartments and changing the way capabilities are acquired. We are fully aligned and supportive of your efforts to get the entire ecosystem on a wartime footing. So thank you all for joining us today, and we look forward to talking to you in the months ahead. Have a good evening. Thanks.

This concludes today's call. Thank you all for attending. You may now disconnect.

Okay. Great. I think we're ready to go here. I'm Doug Harned, Bernstein's Global Aerospace and Defense analyst. I'm thrilled to have back with us, Chris Kubasik, Chairman and CEO of L3Harris. We also have the new CFO of L3Harris, Ken Sharp. And we have a lot to talk about here. I don't know if you have any forward-looking statements.

Yes, sure. So certain of our statements may contain forward-looking statements and applicable within the applicable security laws. Actual results may differ. We undertake no obligation to update -- would also just suggest that we're in a process with an IPO, and we really can't discuss that process. So I would ask you to refrain from asking questions about the process.

The only thing I'll say is I was looking through my files, and on May 27, 2004, you and I were at the Waldorf for this same event 22 years ago, and the defense budget was $369 billion so I just throw that out as.

The benchmark.

Just fun fact. You quite don't remember this, but.

I do remember that.

It's like your first conference.

And I remember that because there was a fat law out on his boss at that time from Al-Qaeda.

You don't remember that.

That's why he sent me.

We actually had. I'm going to -- I really want to sit on the stage for this. And the -- they had to go through the facility heavy-duty, screening, everything, but that was a different time and people thought that was a big budget then.

They did. So it feels like I'm setting myself up for a first question.

There's all kinds of things we can go to here. So -- but now, different company, different time. So maybe just can you start us off with just a little context about how you're looking at the environment. You've got guide now for this year, $23 billion to $23.5 billion in revenues, which is up -- which is above where your plan had been for '26 so maybe you can tell us a little bit about how you're seeing the opportunities here? And any risks that you're concerned about?

All right. Well, thank you all for joining. Yes, it was back in December of 2023, we had an Investor Day, and we set out a 2026 framework for both revenue, cash and margin, and we're going to exceed all of those. And just in February, we had another Investor Day and set out in 2028 financial framework with 8% top line CAGR on -- so just to check that, box, real quick. We spent a lot of time over the last several years, L3 and Harris merged in 2019, really focused on shaping the portfolio for the future of warfare. A couple of acquisitions, a bunch of divestitures. And when we sit here today, our portfolio is kind of this overarching thought of we want to be able to sense, we want to be able to communicate and we want to be able to intercept.

So when you look at our capabilities in space, which is a growth market and something we're excited about. I'm sure we can talk Golden Dome. We look at all of our ISR aircraft that again are growing for not only the U.S. but international customers, are resilient communications. We can talk about our software-defined radios and then the acquisition we made less than 3 years ago -- Rocketdyne for the solid rocket motors. All those are growth markets, and we feel like we're very, very positioned. For decades, people like me and others have always come up and said, "Hey, it's a dangerous world, it's a dangerous world. You need a big defense budget." And here, I am again saying it's a dangerous world. This time, I think it's even more serious than it's ever been and its' obvious what's going on around the world geopolitically and that's why there's the significant increase in the defense budget, which I'm sure we can talk about.

But the base budget, in my opinion, will definitely be over a trillion dollars which is hard to believe, 369, 22 years ago, it was only 600 and change 5 years ago. So this is a huge budget given all the threat. So that environment is positive. The administration. A lot of the players in the administration are successful businessmen and women that bring a different pace of urgency and business cadence to the Pentagon, which I find refreshing, and they're challenging a lot of the status quo and trying to fix maybe some of the inefficiencies in paste. So it seemed to be a lot of tailwinds. The challenges are really come down to the supply chain because a lot of these doubling, tripling, quadrupling in quantities and a lot of these is only a single source. So we're spending a lot of time depending on the product, setting up a second or third source and making sure the whole ecosystem is in fact on a wartime footing.

Well, in terms of this large budget, so the Trump administration has proposed this $1.5 trillion budget. Although we share the view that it's going to be up. We're not necessarily expecting that. When you look at that budget, there's a lot of things in there, though, that benefit L3Harris. But the process to get through that and get settled on a budget is quite complex right now. Can you give us your perspective on how that process might go and how you manage your expectations?

Yes. So I think the budget -- the $1.5 trillion comes in 3 buckets. You have what's known as the base budget, which I think in what I've read and what you've maybe suggested, we'll probably settle in that $1 trillion, $1.1 trillion range, which, again, it's important to get the base up because very rarely does it go backward. So if you can get to $1.1 trillion it's only going to stay flat or get higher in the years to come, which I think is still a huge, huge addressable market for the defense industrial base. So I would think that would probably get passed sometime in the lame duck session after the election, just based on past history. So that -- which is actually a few months earlier than most years when it -- the CR continues into March or April. So the next discussion is this Reconciliation Act, $350 billion. I think that's pretty political.

Hard to say how that thing is going to settle down. There's a lot of munitions and the reconciliation Act. There was one past last year. I think that money has been slow to be spent. So there's probably some reluctance to pass that amount. And then the third bucket, which we're confident if the reconciliation doesn't pass, they'll have what's called a supplemental. So these are just different terms that we have in D.C. for funding these budgets.

Somehow when the dust settles, it is probably going to between 1.1 and 1.5. And as I mentioned, our portfolio is well aligned with what the needs are. And a lot of our products, it's such a complicated process, depending on who's in the White House, who's in Congress, who's in the administration. But at the end of the day, our team wakes up every day trying to support the war fighter -- we're focused on national security. And the men and women out there want and prefer our products and software-defined radios, gets a lot of discussion, should be more in a positive light. There's over 1 million deployed. And if you have family out there, I guarantee they want an L3Harris radio because it's resilient. It works. And when you put all the politics and all the budgets, I look at our portfolio, we talk to the end users, they want our capabilities, and I think that plays well for the long run.

Just 1 thing when you divide up that budget. Let's say we don't get reconciliation or supplemental in the next few months. Then we would go into a CR that would have to be based off the prior appropriations bill. So actually, unlike prior years, when you stay up at least level, this would drop. Do you find anybody worried about that possibility?

Not really. I mean in the past couple of years, they've had anomalies and different types of CRs. So they probably have some plan where certain increases will be allowed or new starts for national security reasons. And a lot of the portfolio is just a continuation, especially in the munitions of existing products. So it's not getting a lot of focus...

Yes, I just wanted, I mean, we've been doing reprogramming on the CRs, which allows you to do those things. It's just this would be somewhat unique in that reconciliation would not that portion of the budget would move forward.

And from a planning, I guess I didn't answer that question, we have over $40 billion of backlog with $23 billion of revenue plan. So the impact on the timing of the budget is important, but there's no 2026 revenue in our guidance tied to anything we just talked about. That's more '27 and '28.

Okay. Now -- the war on following the war in Ukraine. We've used a lot of tactical missiles, interceptors. Other assets have been highly utilized. When you look at the impact of these conflicts on your business clearly affects you on the solid rocket motor side. But my guess is there are other things on more the sustainment side that also are likely to go up. Is that a correct assumption? How do you think about it? .

Well, I think about 2 things. Number one, how are products actually work in conflict some. But generally, I would say everything works as well or better than expected. So we all do a lot of demos and war games and everything, but sometimes unfortunately, a real conflict puts to test the entire defense industrial base and how these products perform. So they are performing very, very well. And we talk about these software-defined radios it really heightened the importance of having a resilient communications, which means you cannot be jammed and people can't intercept your calls. And communications is the key to succeeding in a war so I think that played well with our communication capabilities, just not only on the ground, but air and space as well. But yes, I think some of these products last decades some last seconds and some last a couple of years. So there is a need to replenish.

One of the other things that's been important in both these conflicts, we've seen a lot of asymmetric warfare, the use of low-cost drones, the importance of counter-UAS. A lot of things that this administration has been heavily encouraging new entrants to come into, I know you're involved in these areas. How do you think about your position vis-a-vis others sort of in this growth area. .

Okay. Well, I might be unusual in that we actually love the new entrants and try to embrace them. We own parts of 70 different venture capital backed companies to pull their technology into our solutions to get them through the value of death. We obviously would like to make a few bucks, but more importantly, is to increase the probability of win. And we look at it as accelerated R&D. A couple of these companies have gotten public and been a nice little windfall for us. So we're excited about that. And we tend to partner and work with these companies, especially AI companies who realized you're going to have this great AI technology, but you actually have to put it on something like hardware. So that's where we have these partnerships with companies like Palantir and others.

So to answer your question, on counter-UAS, which gets a lot of press, we have 2 products: one, we call the Vampire system which basically, it's all about hit to kill, how much does it cost? This one is about $30,000 per kill and it's a vehicle-based system been deployed with great success in Ukraine and think of this as not the last layer, but the next to last layer, I don't know what we can say dozens of kilometers in. So that's kind of -- it's not the big multimillion dollar interceptors you need those. This is a little closer in. So we're working with the DOW here in the U.S. to look at a multiyear award of that. A lot of interest internationally. Breaking news that we have on our website that's coming out. We now have, I mentioned over 1 million software-defined radios.

On some of our current models, we have now software that you can load -- the soldier can load onto their phone or their radio. This is very complicated, right? And within the last mile or 2, they can scan the frequency spectrum to identify the frequency on an incoming drone and hit a button and jam that frequency and watch the drone fall to the ground or sometimes it goes back to where it was launched from. This is a huge deal. No impact on the battery, no impact on the performance of the radio, it's just a matter of a software download. We've tested this with great success. We're rolling it out through different models and you think about being innovative, some days, people think we're a prime. Sometimes they think we're a new entrant. I don't know what we are, but we're working hard at just trying to support the war fighter and give you all a decent return on your investments. This is the kind of thing we're doing. So you already have 1 million of these radios. We're making hundreds of thousands a year. And with the software, this is a game changer.

So to counter drone specifically, those are 2 products that we have, both with our own money, both invested without a cone now our job is to go out and sell these. And obviously, the software will have like a 95% margin because it's software and the other one is a little more traditional, but it's pretty exciting.

Well, let's continue on that topic of radios because the community -- your radio business, I mean developed with your own IP, commercially structured contracts is a great margin business as we compare it across all defense companies. So I guess, first, we saw it looked like that we're going to take the budget down for current gen radios. There's been some money. It's been up a little bit. But how should we think about it? I mean the whole -- I view these radio as the whole purpose of it is basically to have commonality across the force, how far out are you in terms of outfitting the Army, the Marines until we get to where we want to be. .

Yes. There's 2 pieces to that, and I'll let Ken chime in, maybe here in a bit. So the international piece is growing. So we have an international -- or diversification, we have international and domestic customers. And depending on the budget and continuing resolution and such, one or the other tends to be the majority. This year, it's been the international. We've had great success in Europe, selling internationally. I mean these are hundreds of millions, billion-dollar deals over decades in countries that we've disclosed, Germany, Netherlands and several others in Europe. So you get the commonality within NATO. And if you think about how difficult the environment is to sell internationally, which you can figure out what that means we have been quite successful.

And I think it's because there's a real threat. And at the end of the day, when there's a threat, you want the best technology, politics and all that stuff is interesting, but you want to have the best technology to protect your country and your war fighter. So that's been going quite well. To the domestic side, these modernizations are about a decade long, I'd say we're about 5, 6 years through so most people will say, "Oh, my gosh, by 2031, you'll be out of business with the Army or the U.S." Well, actually, in 2031, the men and women that got their radios in 2020 would appear to have 11-year-old radios and when was the last time anyone in this room had an 11-year-old iPhone, right. So what do you need? Is this just a continual modernization. So I got to be honest, from a business side, I'd rather have a 10-year modernization than someone say, give me 1 million radios and then 9 years later, they call for another one so it's a continuous thing.

Now are they going to be peaks and valleys? Yes. But the general trend has been upward for well over a decade. And again, these conflicts you referenced gave further credence to the have in these communications. This is a tough market for people to break into with what they think are low-cost commercial products because they're easily jammed and then people die. So at the end of the day, we have, because of hundreds of millions or billions of dollars of investments, the commercial business model, we love fixed price. We love commercial. I've been a big advocate of saying, let's have more commercial in the DOW, like you want to go fast, if you've got more than 1 competitor, do away with all this cost accounting standard crap to call it what it is.

And let's streamline. Nobody does that. You have GAAP financials put out a bid low price wins, best capability and move. So we have a proven case where we've done it, 25% of our business for 20 years. It's a huge success. Customer is happy, shareholders are happy. Guess, I'm almost happy us do more. Let's do more. So it's all talk, let's go do it. So I guess -- we have Ken chime in. He used to carry -- they used to -- this job is more dangerous.

Yes, this job may be more dangerous, but I do think this you asked earlier about the new entrants. And I think this trusted disruptor strategy or culture we have in the business comes really through in the radios, right? And we call them radios, I wish we could call them something else because there's something far more, but to have our engineers off developing rate shield, which I think you guys can Google and see the videos, it's pretty neat stuff, thinking about having a war fighter on the other end with a drone flying around them and they can down it and save themselves and their colleagues, I think, is pretty important.

But really, I mean, it's a great business. We looked at like NGC 2, we had some awards in Q1. That's where the budget got a little confusing, the clarity around the marines buying more radios. So the numbers clearly went up. I think we're pretty excited. That business grew 3% in the first quarter. We expect it to accelerate as the year goes on, but it's certainly a great business.

And that -- so that's where I wanted to go next was NGC 2. So I think many of us have thought about this as you deliver 10 years of radios and then you go to the next gen which is NGC 2. But I mean to and try and understand what on earth this is, it's very difficult. There are all these different elements in there. If I've got it -- do I have it right in saying that what you're talking about is rather than a breakpoint to go to NGC2, what you're talking about is taking a platform and continuing to evolve that platform without a kind of a break.

That would be our understanding and our strategy. And I would admit the budget is confusing to find all these lines. But if you take the couple NG nextgen communication line items, the old HMS, Handheld, Manpack, you add them all up, there's more money than there was a year ago. So that's the most complicated. One of the complicated parts is to figure out where the money is, there's more money for this. Now there's an infrastructure layer, which helps establish the network, which won't be a big market for us, but these devices, radios will clearly be a piece or a big piece of it. We've already got a couple of wins. So it's our job to go win and we think we're well positioned, and our past performance is paying off.

And as long as we have, which we've been advocating for and the customer has been understandably very supportive, but have live demos in contested environments and see whose products win. We can simulate darn near anything. Jamming is the number one issue for COM. So everybody bring what they have. Let's go to an environment, let's jam them. Some will work, buy them, the ones that don't send them home. That's simple.

Essentially what happened in the original jitters program when Harris won this whole platform, right? And so if you look forward, a concern we've had -- you'll have addressed it -- you have addressed this one, but was that you could have a break point, you have this phenomenal only profitable program today that extends out for a decade and that you might end up in something that contractually is not structured the same way. In other words, you can end up with something that's not a commercial contract long term. Is that a risk at all? .

I don't think it's a risk. People have been saying that for decades. The trend in the tailwind is more and more commercial. So I think that's ideally we're going to see more of that and that's the beauty of having the new entrants, people coming in and challenging the status quo, having people in the Pentagon who've never been in the Pentagon saying, what the heck is this? Can we just put out an RFP and pick a winner, and I'm like, please do. And that's what they're trying to do. And they've had some success and goes back to November 7, Hegseth gave a speech about all the acquisition reform and -- so there's a lot of activity having been accomplished in a relatively short period of time and several more years to go. So I'm optimistic.

Now staying in communication systems, spectrum dominant business. Can you talk about how your TDL acquisition has -- how that's impacted your business? It seems like that's one where you've expanded your opportunity significantly.

Yes. TDL is the tactical data link business of ViaSat that we bought in January of 2023. This is probably best known for Link16 as the access point we got Link16 is on 20. It's all about real estate to some degree. It's on 20,000 different platforms, airplanes, ships, vehicles. And that gave us the avenue to be able to insert and upgrade different technologies on those platforms while continuing to deploy Link16, we are able to get Link16 in space, never done before. So now we've opened up the entire space domain so that -- we look at annually the returns on our investments.

We've only made 2, I guess the merger is one. We made that in Aerojet so 3 acquisitions in 6 years. And by all accounts, these have more than beat the business case and more than paid off. So again, a good example of capital deployment knowing how to make an acquisition, integrate, take out the cost and get the revenue synergies even more so than the cost. So it's been a good acquisition.

Now this business great margins, 25% type margins. But because of the commercial structure, it's one where I would expect all the work you've done on cost reductions to flow through to higher margins, how should we think about that trajectory going forward? Because it seems like the optimal place for cost reduction wins.

So there's other guys that have been up here making 11% or 12%, and you ask them, can they get to 14 or 15. To summarize, I'm at 25, and you want to know what I'm getting.

Absolutely.

I want to understand the question.

Yes, that's the question, exactly.

Yes, that's a fair question. We are prioritizing -- no, we're improving each and every year. At that rate, we're investing a lot as a commercial model to get -- it's a growth market. in my mind, and we're a growth company. We're growing 8% CAGR over the next 3 years. So we will prioritize growth over margin every day of the week. It's is a generational opportunity here with $1 trillion budget in our portfolio to really grow the backlog, grow the revenue and position us long term for sustained growth. So I mentioned the radio with the drone. We didn't get an RFP, nobody asked us to do it. It's a threat. We spent tens of millions of dollars developing this capability, and I believe we're going to sell tens or hundreds of thousands of licenses for software to people with radios, new radios or existing radios to knock down a drone.

if they don't want it. I'll be shocked.

Which will have great margin in that work, right?

Once we make the sale. I feel like I'm making a pitch today if anyone listen. Absolutely. So it's that type of cycle.

And we're investing right in the business beyond the radios, the Vampire product. Chris mentioned earlier, things that are also in there. So you saw our R&Ds up actually year-over-year, but we're going to continue looking at the portfolio and make sure we have the next set of products for the war fighter.

Yes. And this portfolio is Next-Gen Jammer which is a huge win for the F-18. That's initially because its development, it was a cost-plus job. So you should think high single-digit margins for hundreds of millions close to $1 billion. So the biggest flaw I see in this industry that we try not to make as we look at both not only the margins are important, but the return on invested capital. And if you can get a $1 billion cost-plus job at 9% margin, which is dilutive to 25, even I can figure that out, you take every day of the week. You've got to take it. It's like infinite ROIC and it opens up a market to get into low rate production, full rate production and ultimately export. So there are people in this industry, sometimes even in my own company, we say, well, I don't want to bid this 9% job. It's like, why not? I don't want to say you can't lose money on a cost-plus job, but trust me, you really, really got to screw up lose money on job -- $1 million, 9% infinite ROIC, not exactly because you got a 2-week plane lag. You take it. Someone's trying to hand you like $90 million. Why do you not take it.

Anyway, that's also depressing a little bit of the 28. -- really I could go on all day. I'm happy with the portfolio.

Got it. It's -- but if I go back to your -- if I go back to like December 23, your Investor Day, when you laid out the framework for 2026, you said the best opportunity for margin expansion would be right there in the Communication Systems business. And so margins are good, but I'm just.

I said all sectors will grow 100 bps in 3 years, and they've all done it.

They've all done it. Okay. So let's go over to Missile Solutions. So demand is really high for -- so if we go back to the beginning of the year, I mean you all were already planning expansion of capacity. We saw the frameworks coming out for Lockheed Martin for Raytheon to triple or quadruple depending on the program. And you all are focused on a lot of those programs with your solid rocket motors. Now the war in Iran starts, well, we were already talking about this large rate increases and given all of the activity in Iran, that only heightens the need and there was the meeting you were at, at the White House to talk about what we can do here. So first, what can you do? I mean, is it possible in the next 3 years to take rates up even higher than you were thinking from these frameworks originally?

We are absolutely focused on accelerating the rates. The industry, as you all know, is consolidated over the years. So it's a capacity issue. We are working our solid rocket motor teams, mainly in Canoga Park, California, Camden, Arkansas, Huntsville, Alabama and Orange, Virginia. No kidding 24/7, we're working nonstop around the clock to be on this wartime footing. The question is, do we have -- and the answer is we don't have enough capacity. So you need a certain number of mixers, which we've ordered. You need ovens. Those have to go into buildings. The building goes on the land. We have thousands of acres. Land's not a problem. We're building buildings, we committed to build 60 buildings.

We've designed 50, we've broken ground on 30. We just announced -- it's not publicly, but I guess I am a new PAC-3 Patriot building that should be opened in July of '27 in Camden, Arkansas, get the equipment in. So that will allow us to double production. So we're doing a couple of things and the Department of war has these bond executives, they've used kind of a PE model. They're at our facilities and everyone's facilities, trying to figure out working with our teams, how to increase with what we have.

So can you get another 10% or 15% or 20% of by improving yields by challenging certain processes, streamlining things. So that will get us some of it. But then at the end of the day, we just need more buildings, more equipment, and we're rolling those out, opening facilities, and we've opened some already and some in '27, '28, '29, that's our $3 billion investment that we've talked about to, as you say, double triple quadruple production. So it's a once-in-a-generation opportunity. We're all in. We've been spending money going back at least 6 months. We've placed purchase orders or supply chain and we've talked about missile segment 120% between now and the 2028 framework. And so it's very, very optimistic is to -- but there, you need the whole ecosystem to line up. If we quadruple a missile, we got to quadruple the cases.

We got to quadruple the igniters, the throttles and a lot of this industry has been single source. So we're getting second source, third sources. It's a great opportunity as I tell everyone, open a company and make nozzles, make cases, make valves, make igniters, I guarantee you're not going to lose on a stuff we're investing our own money and we're going to build ourselves not to replace these other companies, but to supplement them. So it's just several our call last night. I mean I don't know what chime in, Ken, but I've never seen anything like this in my career, just huge opportunities and it's a great mark to be in.

And I think there's some new entrants coming in, which is great. There's more demand than there is supply by a mile.

Yes. And I would have said, Doug, I thought your margin question was going to be about missiles. That was a lead into missiles. I think we're very excited, right? You look at the acquisition we made I think it was a great time to acquisition. It's great capability. I worked at a company that did some solid fuel rocket motor stuff. So just looking at the portfolio, we have the ability to accelerate should be really good. And I think the team is completely focused on. And I think at some point, Chris is probably going to have a hotel in Arkansas and everybody is going to be living right next to the plant, but that's okay because that's what we need to do to get the capacity up.

Well, Chris has talked to me the last 2 years about his trips to Arkansas.

I love Arkansas.

Yes, I know you're all over that.

It's -- we've hired -- I think last year, we hired 500 people. We've hired already this year a couple of hundred people. It's a growth market in Camden, East Camden, Arkansas. We've met myself and the with Governor Sanders, and they're investing in the area because it's a growth market. They need schools, they need shopping centers, they need apartments. I mean, this is a whole ecosystem. There's 2 other companies. General Dynamics is down there, Lockheed Martin is down there. I mean it really is, and we all kind of work collaboratively, but yet we compete. But this whole state has to step forward and make this. We have employees making how are the employees driving 90 minutes each way to and from work. I mean that's not sustainable. I mean they are happy to have the jobs, very patriotic, Secretary Hegseth -- in February and gave a nice raw speech to 1,500 employees. I mean it's exciting stuff, but we just have to get the infrastructure there to support.

And well, as you look at this growth, I mean, -- all you have to do is look at budget numbers, you can look at a lot of the commentary coming out from the Pentagon and that all stress the demand for this segment. But and talk with Jim -- about it this morning and about the frameworks there for the PAC-3, for THAAD and how the process to get these under contract and to get this established in a way where you can have confidence that 5, 6 years from now that, that actual volume will be there. Like as a solid rocket motor provider, how do you get comfortable that this is going to stay in place. If we have a new administration, new geopolitics.

Great question. I should clarify, I was not in the White House. I sent ken -- so he was in the White House. But you really matters. But you can look at the picture. I was in Australia and couldn't get back in time. So you don't get a lot of notice for some of these I'll just leave it at that. Maybe going to DC tonight, anything is possible. No, as we're structuring, the good thing is we're all aligned as an industry as to the need to have these 7-year, 5-year multiyear contracts and be protected in such a way. So the big focus is going to be on the termination liabilities. So we're all investing as an industry, I'm guessing well over $20 billion. Where we get the money is different ways we're doing an IPO. Some people are borrowing, some have free cash. It doesn't really matter. We're investing with the understanding that there is incredible demand at least over 7 years.

And that will be contractually protected. And I think the way we get there is through some sort of termination liability. So if we invest $3 billion assuming this rate of production over 7 years and someone changes the rate to a lower amount, we find a way to recover some of that $3 billion or if a certain program is truncated. You get that back. Now what we've done differently and not that anyone did anything wrong in the past, it's always been way too siloed. Each program, each service had its own building, its own mixer, its own oven, some of our new facilities we're building are more common, right? So if someone says, "I need more standard missiles. We can use the, I mean, different propellant but the same mixers and say, "All right, everybody, let's go make a ton of standard missiles. And 6 months later, I need more THAADs, right? We don't have to go get a THAAD building or standard missile mill. Some of these are made and some are army and make your head hurt.

So we're going with a common facilities that allows the flexibility to flex based on needs. And we haven't even talked about the international demand for these products, which is on top of everything, and I'm sure Jim Takle talked to you about and I'm talking to you about. So I think everybody is aligned, and we all want to help the government go fast, but we also got to protect our own company and our shareholders' interest. And so I think we're -- it's going to all work.

And I would just add too, it's a lot of bipartisan support these tend to be defensive interceptors. So at the end of the day, the inventories are down. They need to be filled. They need to be brought back up. And we talk about capacity is the new capability. And I think that's the big focus.

Well, I think as an important point on it, the National Defense strategy kind of goes back to the Reagan era peace through strength, which was always meant we have more weapons than anybody else. So don't miss us. But it's also what Ken said, is capacity, which we don't have, which we're all building is not only do we have enough in our stockpile whatever product it is, we actually have the capacity, the facilities where we, as a nation, can ramp up and make more quickly. That doesn't exist today as evidenced by everything you read as a result of the consolidation, defense budgets going down or not growing and missiles was always kind of the plug when you have a defense budget and someone whacks your budget, I'll get 500 instead of 800, right? You need like 1 airplane, you need a whole ship. But when you're buying thousands of missiles and your budget is not as big, you just buy 500, like I said, instead of 800, and you do that for a decade, and then you're like darn, I could use more.

But without going into the IPO process or anything like that, you do have a truly unique thing here, which is the $1 billion equity investment into this business by the Pentagon. We haven't seen that before. How should we look at that in terms of the department's commitment to what you're doing and how you manage your capital investments?

Yes. I think they are a passive investor in preferred stock that upon an IPO will convert to common stock at which point after a couple of years, they have the ability to do whatever they want with it, hopefully book a game, sell it, keep it whatever. So it was just a way to creatively finance we look at this IPO as a financing or a capital raise to get us to $3 billion so that we could actually meet these demands. The $1 billion arrived in April. So we had already been spending. So this kind of helps us with our cash flow. We won't see it in free cash flow, it's an equity investment, but you get the point. And then I think it shows the importance to allow us to invest as we continue negotiate the frameworks and the contracts. So I think it's nothing but positive.

I think it's unique based on the company and their capital structure. As we've talked about, we've made several acquisitions levered up for that and going and buying another -- borrowing 3 more, 4 more billion dollars, just didn't seem like a smart move based on our leverage and our credit rating. So that seemed to be a creative way to raise the capital. We'll control it. We'll own 80% plus, and it will be treated like another segment and excited to see how this plays out.

If we jump over to space, I want to get your sense of what your space growth outlook would be -- I mean, you've got wins on every tranche of the tracking layer, you've got HBTSS, how should we look at growth there?

Yes, I'll give it a little bit and then ask Ken to talk more specifically on the number. I think what's with -- and just to give you a situational awareness, as you get into these new markets, which was a new market for us 6 years ago, priming these space satellites, we've always had great payload capability, and we'll be a supplier to some who would be the prime. But you kind of get in this catch-22 is how are we going to give you guys or any of these companies, new entrants generically, business, if you can't make -- so you end up investing in our case, 2 facilities, 100,000 square feet in advance of award, one in Fort Wayne, Indiana and one in Florida. So you actually build -- we had some business, but you take a little bit of risk and say I'm going to build a factory of the future in anticipation of winning these programs.

And it actually gets a little tricky because you're not going to win without a building and you need the building to win. So you hear a lot from the customer. They want to reward companies that are investing, leaning forward, all those buzzwords, there's an example where we did it. We obviously already had a space business. And once you have the facilities, they have the confidence to give you the work versus give me this contract now build a building. They want it in 3 years, it takes you 2 to build a building. So I'm just laying that out, it's a little different than it has been in the past. And you have to be strategic as to where you've done it. We've done it in munitions. We've done it in space and it's paying off. But do you want to talk about the actual growth rates.

Sure. Top line, we're talking about 8% growth this year. When we think about the guidance, this is the 1 we're probably thinking about could we do better on the revenue side. You saw Q1 we had. The whole segment -- yes. So and we did a little bit better in Q1. I think it was 24% growth. So that means the remaining 3 quarters will be, call it, 6. So I think we're set up for a good year in the SMS sector.

How should we think about the space portion relative to Mission Systems in terms of growth?

Yes. I think they're both -- I would argue that well positioned. The HBTSS award coming up. That's probably a big driver for us. So we're looking forward to that being announced and being successful on that.

I'll say there's a lot of classified work in there, too. So the space piece, the actual satellite piece is a solid mid-single growth business.

Okay. Well, as you grow that, though, with -- when we -- if we go back 10 to 15 years ago, and you look at what military space look like. Then it was a lot -- mostly sort of these large exquisite platforms, ones that we talked about 20 years ago here.

And it probably just got launched last week.

But those were lower margin. I view them as almost -- when you go into the facilities, they're like job shop facilities sort of building each one of these $1 billion satellites. So today, this is much more about a production line exactly. And not only is it a production line to put lots of these up, but you're going to have to replace them, right, like 5, 6 years. So how does that change the economics of space?

Yes. That's a great question. Yes. So in the old days, these were multibillion-dollar satellites that were geosynchronous orbit and that would last 15 years. Now we're going with the low earth orbit satellites, as Doug said, that have more to 3- to 5-year life depending on how they are designed and the requirements. So you get more of a constellation, 18, 20, 24 satellites instead of 1 big one, and they have a certain life to them. I think early on, the economics, it's all competitive, right? There's lots of new entrants. There's usually 2 or 3 winners especially for the FDA, their constellations are 54 satellites. They have the specs. So there's usually 3 winters of 18. So I think early on, it's a decent business but not great margins, probably compared to our 16% dilutive to our consolidator, but consistent with you'd call a prime margin, to be honest. But over time, the question will be how many entrants will be in there? And when does your performance pay off? And when do you get the ability maybe to have a premium on pricing based on your performance.

So I think that's kind of how the model works. It's not a service model. There will always be a contract. I want 18 satellites how much, $800 million, we'll launch them in 2 years, build them, launch them that kind of cycle. But we're not going to build ahead of need because the specific -- the requirements are so specific you don't know what they're going to want.

But I guess where I was going with this is, does this become like the exquisite, multibillion-dollar satellite programs tended to be, I think 9%, 10% type margins whereas this one looks potentially more like an assembly line situation. You could operate this fixed price do higher volumes and look more like an aircraft or missile program.

That's fair. Yes. No, I missed the point.

With mid-teens margin. We are at least low double digits.

I think when you get into production, that's absolutely. And who can -- in our case, or who can insert AI or digital engineering and who can build not necessarily what you charge the customer, who can build the cheapest satellite and time is of the essence, right? So it starts with the design. We're spending a lot of focus on design for manufacturing, design for supply chain. I go through my career way back when everybody wanted like the best product regardless of what it cost, right? And you kind of went to the cycle where we need to have the cheapest product because affordability matters. Now my assessment speed matters. So who can get these satellites in 18 months, right? And how do you get that system working so that my material, my labor, my design, my ability to make these things is quicker than my competitors, mine will be cheaper, which will then allow me to charge a higher margin because it's all competitive, not cost and pricing data. And that -- so that's a fair point.

So it's all about optimizing. But again, this is where the whole ecosystem has to be in a wartime footing because if you're cranking out whatever, 20 a year, and then there's a continuing resolution then you shut everything down and then they say start again. I think this administration gets it. You got to have the flow. If you want 20 satellites a year, give me a 5-year contract for 100 and I guarantee that it will be cheaper than 5 20-year with 6-month breaks in between because you can't seem to pass in budget.

So we're at a time of just 1 last thing, just to wrap this up, you've guided to $3 billion in free cash flow this year. How should we think about the opportunities potentially to take that higher or if there are any risks around that number?

Sounds like a CFO. Well, I mean that's our guide, right? So give us some time to work our way through it. Certainly, our pattern of cash, we were slightly negative in Q1. So we'll work the next 3 quarters, look for positive cash generation and certainly closed the gap to the $3 billion and see what we can do beyond that. I think our focus, though, candidly, is as much around investing in the business and getting the capacity so I think if there was a trade on the, say, 3.1 to 3, we'd probably spend another $100 million to drive more growth at the end of the day and keep it to $3 billion. So that's the focus.

Great. Well, Chris and Ken, thank you very much.

Thank you.

Thank you all for joining us.

Greetings. Welcome to the L3Harris Technologies First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

It is now my pleasure to introduce your host, Tony Calderon, Vice President, Investor Relations and Corporate Development. Thank you. Tony, you may now begin.

Thank you, Tiffany, and good morning, everyone. Joining me today are Chairman and CEO, Chris Kubasik; and CFO, Ken Sharp.

Earlier this morning, we published our first quarter earnings release detailing our financial results and updated 2026 guidance. We also filed our 10-Q and provided a supplemental earnings presentation on our website.

Before we begin, please note that today's discussion will include forward-looking statements subject to risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please refer to our earnings release and SEC filings.

We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release.

With that, let me turn it over to Chris.

Thanks, Tony, and good morning, everyone. I'd like to start by thanking Ken Bedingfield for his 2-plus years as CFO and for taking on the Missile Solutions segment President role this past year. Ken is now focused full-time on expanding solid rocket motor production capacity in support of the Munitions Acceleration Council program.

I would also like to welcome our new CFO, Ken Sharp, to today's call. He joined the team in mid-March and has hit the ground running. I continue to believe L3Harris attracts the best talent in the industry, and I'm excited about what we are building here.

Also, I'd like to thank our employees for a great first quarter, one of the best we've had, and especially those employees that are forward deployed supporting our warfighter.

The global security environment is evolving rapidly, and the implications for our customers are increasingly clear. Across the Middle East, Europe and the Indo-Pacific, the threat environment is driving greater urgency around readiness, resilience and modernization. Our customers are focused on capabilities that can be quickly fielded, and they are looking for partners that can deliver. This positions us well to drive industry-leading growth.

Our strategy is aligned with customer demand. The Trump administration has made it clear that rebuilding the defense industrial base is a national security imperative. The Pentagon and Congress are increasingly supportive of multiyear procurement authorities and other mechanisms to improve throughput across the ecosystem.

In support of that imperative, there has been a step-change in the DoW budget request driven by the need for affordable solutions that can be produced at speed and scale. With a $1.1 trillion base budget request and a $350 billion in reconciliation funding, the proposed budget sends a strong signal that our nation must invest in the industrial base.

Specifically, the President's request reinforces demand signals for critical missiles and munitions, [ SDA ] tracking layer, compass call business jets and tactical communication modernization all of which align with our core strengths.

At the same time, our allies are expanding their defense budgets. There is a greater urgency around modernization in Europe and other key international markets. Our international book-to-bill was 2.2x for the quarter.

Over the past 5 years, we have embraced the unique Trusted Disruptor strategy that positions us between traditional primes and the new defense tech companies. We are delivering at the scale expected of a prime, combined with the agility and rapid missionization of new defense tech companies. Our consistently strong financial results demonstrate the success of our strategy. Everything we've done for the past 5 years is positioning us for sustained growth for the next decade. We have purposefully positioned ourselves around the fastest-growing priorities, including space sensing and missile defense, aircraft ISR missionization, resilient communications, and missiles and munitions.

Our customers are moving with urgency. They need capability delivered at speed, at scale and with proven performance. We are aligned with those requirements and we are executing against them now. Capacity is the new capability, and that is what L3Harris has.

So let's get into the details. Our backlog has almost doubled to over $40 billion, and that does not yet include the $25 billion of orders for the Munitions Acceleration Council programs, which are currently in negotiations. This record-breaking backlog also positions us to be more durable and predictable as we've increased to 2x revenue coverage.

In Q1 2026, revenue grew over $600 million or 15% organically. Revenue has now grown organically in 9 of the last 10 quarters. Our operating income increased by $125 million. We continue to expand and deliver industry-leading margins, underpinned by strong program performance even as we continue to accelerate investments in our business. Segment operating margins have now increased for the tenth consecutive quarter.

Our focus on transformation and being agile meant reducing unnecessary costs and streamlining our operations. Revenue per employee has increased by almost 25% over the past couple of years, driven by productivity improvements and aided by investments in technology, including AI.

Earlier this year, we went -- entered into an agreement to sell 60% of our Space Propulsion & Power Systems business, announced and closed a novel partnership, receiving a $1 billion investment from the Department of War, and filed a confidential Form S-1 with the SEC last night to take our Missile Solutions segment public. We accomplished all of this while delivering an impressive first quarter.

Key orders this quarter highlight our strategy in action. We achieved a 1.4x book-to-bill, with awards in missionized aircraft, solid rocket motors and software-defined communication products. Within Space & Mission Systems, we built on our fourth quarter marquee win, the South Korea Airborne Early Warning and Control Aircraft program, we won another international multi-aircraft missionized business jet program just a few months later. This award with a NATO ally is valued at more than $2.2 billion with an initial $726 million order booked in the quarter. We also secured a strategic tanker and transport capability award in Canada with 2 contracts totaling approximately $700 million to support the Royal Canadian Air Force.

Within resilient communications, international demand for software-defined tactical communication products remains very strong. This quarter, we booked $460 million of international orders with 3 NATO member countries who prioritize resilient, low probability of detect communications in contested environments.

In missile warning and missile defense, we've invested in building differentiated positions. To date, we've secured 56 SDA tracking satellites driving growth in our Space & Mission Systems business. We submitted our HBTSS follow-on proposal and look forward to a midyear award.

Within our ISR business, we have produced over 100 missionized business jets over the past decade. In the quarter, we delivered the first 2 Peregrine business jets to the Royal Australian Air Force to advance their airborne ISR and electronic warfare capabilities. Our business continues to grow with 20 missionized business jets in production.

Turning to resilient communications. We have an installed base of 1 million software-defined radios worldwide. We are well positioned to increase that by 20% over the next couple of years, supporting customer needs for secure, upgradable systems that operate seamlessly in contested environments.

Our Missile Solutions strategy, including the $1 billion Department of War investment, which we received in April, and our planned IPO, represents a thoughtful and creative evolution in how we are positioning the business. We designed this model intentionally to move faster, unlock incremental shareholder value and align more closely with customer priorities in a rapidly evolving environment.

We continue to move quickly to accelerate the expansion of solid rocket motor capacity. Our customers are taking note of our investments, all of which are reflected in our 2028 financial framework. In February, we proudly hosted the Secretary Award in Camden, Arkansas to highlight the progress on our solid rocket motor capacity expansion and to meet our patriotic workforce.

Our Missile Solutions business is making excellent progress. Our team is in place, the S-1 is filed, negotiations on multiyear procurement frameworks are progressing, and we expect definitized contracts later this year.

Our new missile company will be named Axyv, spelled A-X-Y-V. The Axyv name is inspired by the engineering of missile guidance positioning. The A for axes of X and Y and the V for the velocity of the missile trajectory. Axyv conveys how we think about the business, with clarity of strategy, certainty of direction and focus on agile execution. The company is built for momentum with a portfolio designed to deliver at scale.

As you can see, we delivered a strong first quarter, reinforcing our line of sight to our 2026 commitments and the 2028 financial framework. Let me turn it over to Ken, who will walk us through our performance for the quarter and the momentum we are seeing across the portfolio.

Thank you, Chris. I would like to start by saying it is an honor to join the L3Harris team at such a pivotal time. I'm excited to contribute to a mission that plays such a critical role in supporting the men and women who serve our country as well as those of our allies. I also want to sincerely thank the entire L3Harris team for such a warm welcome.

Our strategy, as Trusted Disruptor, continue to drive strong financial results. We have the capability to invest and deliver at scale while having a commercial mindset to anticipate customer needs innovate and rapidly bring solutions to the warfighter. This approach has allowed us to outperform our legacy peers over the last couple of years as we have fundamentally changed our processes, ops structure and strategic focus. You can see this in the multiyear financial proof point Chris highlighted earlier.

Revenue grew as reported over $600 million to $5.7 billion, yielding 15% organic growth. We experienced particular strength in our Space & Mission Systems and Missile Solutions segments. We also continued to experience strong international demand with growth accelerating over 20% and as our allies modernize their technology and invest more heavily in their national defense.

Segment operating income increased $125 million to $902 million. The increase was due to revenue volume, improved program performance and higher monetization of legacy assets, partially offset by higher growth in businesses with lower average margin and increased investment in research and development. Segment operating margin was 15.7%, up 10 basis points from the prior year.

GAAP earnings per share of $2.72 was up 33% year-over-year. The increase reflects higher operating income, lower interest expense and a lower effective tax rate, partially offset by lower pension income.

Free cash flow was an outflow of $187 million, driven by working capital timing. The Q1 free cash flow is typical of our trends.

As a reminder, we now report on a GAAP basis for both segment operating income and earnings per share. This change reflects our continued commitment to enhancing transparency and further improving the quality of our earnings. I would also note that the prior-year quarter had fewer working days. Lastly, our investment in innovation and capacity, which are hallmarks of our Trusted Disruptor strategy, increased 44% in the quarter.

Turning to our segment results. Space & Mission Systems delivered revenue of $3 billion, up 24% year-over-year, driven by strength in a number of our sectors. Space & Mission Systems revenue benefited from a milestone associated with procurement of material on a new classified program. Segment margin increased 60 basis points due to improved program performance, partially offset by increased material purchases and increased investment in research and development.

Communication & Spectrum Dominance delivered revenue of $1.9 billion, up 3%, driven by increased volume of Resilient Communications products, night vision devices and the ramp-up on the next-generation jammer electronic warfare program. Segment operating margin increased 60 basis points due to higher sales of Resilient Communication products, night vision devices and a favorable legal settlement. This was partially offset by higher investments in customer demonstrations, prototypes and research and development.

Turning to Missile Solutions. Revenue was $1 billion, up 18%. And segment margin was 12.5%, up 110 basis points. Revenue increased on higher production volumes across key missile munitions and space propulsion programs. Missile's segment margin increased due to mix and volume and a gain on the sale of legacy assets, partially offset by net unfavorable EAC adjustments.

Now let me turn the call back to Chris.

All right. Thanks, Ken. Let me highlight a few examples that demonstrate our agile approach to innovation and growth. Within our missile warning and missile defense business, the DoW jointly recognized the government and our Space Systems team with the 2025 David Packard Excellence in Acquisition award. This award acknowledged the success of this joint team on the HBTSS program. The system successfully demonstrated tracking against the hypersonic target. It's proven and ready to defend the nation.

Turning to the threat from unmanned aircraft systems, we anticipated a need for low-cost counter-UAS system. As a result, we invested ahead of need to develop this capability and converted an existing factory to integrate our VAMPIRE counter-drone systems. We are positioned to capitalize on the rapidly expanding pipeline for these critical counter-drone systems. Our VAMPIRE system is combat-proven with hundreds of successful drone engagements, providing a modular, highly effective, low-cost per kill solution.

And we supported the successful Artemis II mission, contributing over 100 critical subsystems and components, including propulsion communications and critical systems for the first crewed lunar mission in more than 50 years. This mission demonstrates the breadth and depth of our engineering talent and our ability to support some of the most complex missions in the world and beyond.

Taken together, these examples highlight a consistent theme: We are aligned to the most important missions, delivering capabilities needed today and building the capacity required to sustain that growth over time.

Back to you, Ken.

Perfect, Chris. Turning to our 2026 guidance on Slide 10. We are reaffirming the full year revenue guidance of $23 billion to $23.5 billion, representing 7% organic growth at the midpoint. We are maintaining our segment operating margin guidance of low 16%. We are increasing both the bottom end and top end of our GAAP EPS range by $0.10 to $11.40 to $11.60. We are reaffirming our free cash flow guidance of $3 billion. Our cash generation will be weighted to the back half of the year. At the segment level, we are reaffirming our revenue and segment margin guidance.

Our 2026 guidance and 2028 framework continue to include Missile Solutions as it exists today. Consistent with our past practices, we do not contemplate impacts from the planned Missile Solutions IPO, the Department of War investment or the planned sale of a majority stake in our space propulsion business. When these transactions occur, we will update our guidance accordingly.

Moving to our supplemental guidance. Our non-service pension income increased $20 million to $290 million, and total pension income to $310 million.

With that, Tiffany, please open the line for Q&A.

[Operator Instructions] Our first question today comes from the line of John Godyn with Citigroup.

I wanted to ask about SMS and CSD. And I'm reminded of a very cool chart you guys had at the Investor Day that showed that growth versus valuation and it implied that SMS multiyear growth was going to be considerably higher than CSD. When I look at the consensus estimates that are out there, it's pretty tightly packed. So I'd love to just maybe use the opportunity to chat about SMS and what that growth profile might look like over the next couple of years, and understand if there's upside to that growth over time, how do you guys see it?

John, this is Chris here. Yes, I appreciate you referring back to that chart. I think that was an important chart and something people want to go back and reference. But yes, SMS had a great first quarter, as you saw. And the pipeline is very strong. ISR business about a decade ago, we started investing to position ourselves for missionized business jets. Perfect example was the Korea -- South Korea award in Q4. We talked about a NATO country.

And it all started with the Compass Call. We currently have 10 under contract today. And if you look at the budget request, you'll see another 12, bringing the fleet to a potential for 22, and I believe, many, many more.

So I think what's unique about this market and just ISR alone is how well we perform and how quickly we move as a team. Specifically, we can basically take a commercial aircraft and, in 18 months, missionize it, which is unheard of for a military aircraft.

So everyone is wanting an early warning system, I think this is one of the best platforms out there. And I think the future of ISR is very bright as a result of that, just that one market.

Space, we've talked a lot about space, this is another decision strategically we made about 5 years ago to invest in the space to be a prime satellite manufacturer. We've won every SDA competition. We followed -- as I mentioned, we submitted the proposal for the follow-on to HBTSS. We would expect to win that here, hopefully, in a few months, and the space business is growing quite well.

In maritime, which is also part of SMS, there's been a huge increase in the budget for Navy and Navy ships. So we have the acoustics, the optical platform management and communication systems. So absolutely, we stand by the guidance we gave for the year, which I think is better than most out there. And we'll continue to monitor and see if any adjustments are appropriate as the year progresses.

Our next question comes from the line of Ronald Epstein with Bank of America.

Chris, could we go a little deeper on what's going on in the space business? I mean there was so much growth there. I don't know what you can say around Golden Dome and what's going on there, but I'm certain, if you can give any more color on that, everybody would appreciate it.

Yes, Ron. I think just kind of put it into 2 big buckets. We have missile warning and missile tracking is kind of one line of business, and we have the classified work, which I'll give you some insight, which will probably be unsatisfying. But nonetheless, those 2 lines are growing very, very well.

I think Golden Dome, there's been a lot of opportunities there. It's taken a while for the monies to be identified and freed up so that the Space Force can go ahead and start the acquisition process. As I mentioned, the RFP came out for the HBTSS follow-on. We, and I'm sure others, have submitted their proposals and that's currently under evaluation. There's some other capabilities that are classified that fall under the broad Golden Dome umbrella.

But let me just say with our capabilities, we're responding to RFPs and our ability to build these satellites relatively quickly, affordably and get them launched and performing, I think, is a differentiator. Actually, later this year, our customer will be launching the Tranche 1 [ A Satellite ], and I think that will be pretty exciting.

On the classified, I can tell you that we have been awarded a sole-source contract for $600 million with the potential for billions of dollars of follow-on. And that is a result of our past performance, a creative, innovative solution that is working and is pretty much a game changer.

So at least I acknowledge -- I have to acknowledge the customers are doing what they said and they are going to reward and recognize those companies that are, in fact, performing. And in this environment where speed and capacity matter, we have the factories, we've talked about the 200,000 square foot investment we made a few years ago, we are performing. And I believe that positions us well for growth.

I do like to point out on the HBTSS, which is probably why we won that award, it demonstrated capability, the only one to my knowledge that did. So that's why I'm optimistic that we should win the next award.

Our next question comes from the line of Myles Walton with Wolfe Research.

Chris, on the topic of awards, you mentioned $25 billion of orders pending with the Munitions Acceleration Council. Do you expect those negotiations to wrap up in the next quarter or 2 quarters? Is this going to flow through quickly in one fell swoop? Or is it more the visibility of the pipeline and it will come out over time?

Myles, so step one is the framework agreement, which I have to admit, in my decades of being in this industry, is a new concept. I would think of that as kind of a term sheet, if you will. So we are in negotiations, again, as a supplier providing the solid rocket motors to the 2 major primes, Lockheed and Raytheon, specifically. So they have announced their framework deals. They tend to be 7 years for most of these [ MAC ] programs, like a PAC-3 and a THAAD and maybe some are 5-year programs or framework. So they have theirs in place. We're close to finalizing those frameworks as -- I guess this would be a subcontractor framework with a prime. So that should occur here in the near future. And there, we're basically agreeing on the pricing and the schedule and some of the key terms.

Those documents will allow us and give us confidence to continue to invest, even though we have been investing, to accelerate our investments, $1 billion from DoW, additional cash that accelerates that investment. And then the next step will be for the primes to go ahead and turn their framework agreements into contracts. And then I think shortly after that, we would turn ours into contracts.

So we're targeting the end of the calendar year. We have plenty of business and backlog that we're executing upon. This would be the next tranche. But I don't see any line breaks or anything. In fact, we'll be ramping up. So I have to give the Department of War credit for their innovative approach to acquisition here. I mean this -- what is going on now has never been done in the history of our country, and they are going fast. We and the rest of the defense industrial base or keeping up with them to the best of our ability. I think it's a once-in-a-lifetime opportunity, and we are seeing a major shift all for the positive going forward.

The budgets are up. We have the new technology. It's performing. Demand is up. And at the end of the day, you need the capacity to build all this stuff. We have the capacity, and we are even increasing it more. So I feel pretty good about where we are, Myles, and I appreciate the question.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Chris, maybe digging into Ron's question a bit more. You had such stellar growth in Space & Mission Systems. Can we talk about the ISR portfolio, how that did? Was it -- how is it growing? How is South Korea coming in? And can you maybe talk about the international pipeline there?

Yes, Sheila. Yes, ISR has been a complete turnaround over the last couple of years, and it's both domestic and international. So let me start with the domestic side. There are a fair amount of classified programs that we are working on. Again, we are platform-agnostic. We are taking anything from, as you know, crop dusters all the way up to major large commercial aircraft, and missionizing, modernizing as we've always done.

So there probably isn't a platform we haven't worked on. I mentioned 100 different aircraft in the past decade. I highlighted Compass Call, as an example. We can get this budget passed and an additional 12. That is a big deal for us. And so that's how I kind of see the domestic side.

On the international, we were just reviewing the other day, we have about a $40 billion pipeline just on ISR international, to answer your question. And when you look at South Korea, not only highlight that, which I know was in the fourth quarter, but I think everyone on this call knows how long and how hard it takes to close these international deals. To have a marquee win like that, and literally months later, to get a call from a NATO customer based on that award and all the great work we're doing, is unheard of in my career.

So we have the momentum. There are other international opportunities. Like I said, everybody wants early warning systems. And airborne aircraft by modifying a commercial plane seems to be the best, quickest way to get that capability. And I think that speaks for a bright future, and that's why you see the growth for not only '26, but all the way through the '28 framework that we laid out 2 months ago.

Our next question comes from the line of Seth Seifman with JPMorgan.

I wanted to ask about the communications business and kind of what you learned and what your takeaways were from the budget request, both, I guess, in terms of the traditional programs in the Army and the Marines, but also this new C2 infrastructure and C2 transport lines in the Army budget with some significant resources, how do you think about those and your ability to participate there?

Okay. Seth, I was kind of hoping I get that question. We'll start domestically with the Army HMS program. And this has been a long legacy for L3Harris. And happy to report that in 2027, the budget is $515 million -- $515 million in '27. I think there were concerns, including myself, that early on the President's budget request or discussions were that that would be cut significantly. So $515 million is a big deal. And I think even more impressive is that similar amounts are outlined for the next 5 years. So Army HMS is well funded and hopefully eliminates a lot of the concerns out there about the future of that portfolio.

When you switch to the Marines, 2026 was a little bit of an off year, their budget was down to $200 million. As of today, they have requested $750 million. So $200 million to $750 million for the Marines. They love our software-defined radios. They see the need for resilience and dangerous and contested environments. We add in our stealth wave forms, and the affordability of these compared to maybe other options out there gives me a lot of confidence that at least the domestic side is looking good.

You may recall, we won a sole-source IDIQ a couple of years ago for the Marines. I'd just point that out because clearly the vehicle is in place -- contractual vehicles in place if we want to move quickly.

So this continues to demonstrate the power of the commercial business model that we've talked about, at least for a decade, and we'll continue to talk about it. We've had it for close to 20 years. It's working. And I think this kind of budget, this kind of demand signal is a tribute to the commercial business model, which is why I've been advocating for more and more commercial opportunities for the defense industrial base to compete on in that level playing field.

The other piece that gets a lot of attention, rightfully so, is NGC2, that is a large budget, $2.8 billion to be specific. We are absolutely supportive of the NGC2 strategy and initiative. There is a transport layer as they call it, which is basically where our software-defined radios, I think, will play nicely. We've already been awarded 2 contracts under NGC2 for the transport, admittedly not huge contracts, but still 2 pretty early on. The rest of the money is also associated with the infrastructure. So the Army and other companies, we're working with the Army and other NGC2 companies to ensure that our products and radios can seamlessly integrate into an open systems architecture that is currently being developed.

So I feel pretty confident and optimistic about our radio business, whether you look at the domestic side or internationally. I guess I'll just switch internationally. And as I highlighted in my prepared comments, there were 3 NATO allies, I'll mention them by name: the Czech Republic, Germany and Poland, who are, in fact, buying our products. Belgium and Netherlands are other opportunities we're working on. Those are targeted for Q4 of this year.

And all these programs, as we've talked about, are 10-year modernizations. They have road maps. We can see the quantities. We can see how our new products and investments are paying off. And in general, all these countries are about 20% complete. So there's a pretty long runway ahead of us. And as I mentioned, 2.2x book-to-bill international, there's been concerns whether anyone, including us, can grow internationally for all sorts of political and other reasons. But as we've said, at the end of the day, they want the best technology, and we are winning business in those countries with ingenious capabilities in head-to-head competition. Ken, over to you.

All right. Just a quick add, Chris. One, there's spectacular radios, and they're great to have them in the hands of the warfighter. But we do expect the business to accelerate as the year progresses and get to our kind of guidance estimate.

Our next question comes from the line of Doug Harned with Bernstein.

I wanted to continue on this theme on communications. In the past, I mean, part of what's enabled you to get the margins you've gotten in the radios has been your own investment, your own IP. You said this quarter that you had higher R&D spend in both SMS and CSD. Can you talk about how you're looking at your own R&D investment going forward? I mean what percentage of revenues do you see that moving forward at? And then how you see that being used kind of across your portfolio?

Doug, yes, we're proud of the fact that we were able to increase our margins while investing. There's a huge growth market. I think nobody denies that there is a huge demand. And this is kind of a once-in-a-generation opportunity to build backlog and to differentiate ourselves. So we are absolutely investing.

In the radio business specifically, we'll be rolling out a new radio shortly. We call it the Falcon 5, following on from the Falcon 4. But it's got some great new technologies that I think will be well received. And the main focus there is on the high data rate, which is -- which again is a need and a desire by the customer. So we've made those investments to allow for that to occur.

And as everything, these are all 10-year modernization cycles. I mentioned that the international is about 20% complete. I think when I looked at the domestic market, they may be halfway through their modernization. So these go in 10-year cycles we've been investing. We're increasing. And as we roll out these new capabilities, I think it's going to obviously increase our market share. So there's been no cutting back relative to that.

We stick kind of in that 2.5% to 3% of revenue for our R&D. But the reality is we'll do whatever it takes based on the demand and the opportunities. As we've talked before, we have well over $1 billion of [ CRAD ] contracts. So in some cases, the customer gives us R&D contracts. I'd put that on top of it. So we kind of kick around $2 billion or so a year we're spending in R&D. And we throw in the Shield capital investments is another way of accelerating it. So really don't look at it from a specific account. We are spending all in maybe 10% of revenue, in my opinion, on innovation, growth and R&D. So hopefully, that helps, Doug.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

Chris, on the surface, the high rate of organic revenue growth and new order bookings growth in the quarter makes the reiteration of revenue guidance look a little conservative. I know you have the nonlinear working weeks. If you guys could just talk through how much -- was there a pull forward? Is there conservatism? Is it just the math of the working weeks?

And then, Chris, you referenced your backlog coverage now being meaningfully higher. Does that make you feel more like there's upside risk to the near term or more like the existing growth has longer duration?

Yes, Noah. It definitely gives me confidence that the duration -- the longer duration of revenue growth. And as I mentioned, once we get these MAC programs, and you can see $60 billion to $70 billion of backlog in the next 12 months for L3Harris, which if you go back not that long ago, is pretty darn impressive. So as I reiterated, everything we've been doing over these last 3 to 5 years had a purpose to align with the strategy that we've laid out, all the Trusted Disruptor, which I know not everybody understands what it means. But whether you understand what it means or not, you can't argue with the financial results. Not this quarter, but for the last 3 years. We're growing, we're adding backlog. And if we can end the year over the next 12 months with $60 billion to $70 billion of backlog, that gives me a lot of confidence in the future of growth and the visibility. And of course, we always have potential to try to accelerate and pull some of that stuff forward.

So I think I'll ask our new CFO since I defer to my CFO on guidance adjustments and take their recommendations. It sounds like they wanted us to increase revenue. Why don't you do that, Ken?

All right. Thanks, Chris. So look, it's absolutely a great quarter, a great start to the year. I mean 15% organic revenue growth, margin expansion, 33% EPS growth. So I can understand why you're asking the question. I will add, we did increase EPS, so I'll take credit for $0.10 increase there.

But just to give you a couple of thoughts, right? I'm 45 days into the job. We're in the first quarter. We got a lot of road in front of us. We feel incredibly confident with the business. So I think you'll see us in July, it's a great question to ask then. Hopefully, we'll have made some move there. But I do think there's a level of conservatism in there.

The extra productive days, it's really hard to exactly put your finger on the dollar amount, but I think it's a couple of percentage points at the end of the day, so maybe think $200 million-ish in revenue. That really wasn't the driver in the quarter. We just have -- it's just -- it's a great business, doing really solid performance.

Yes. I would just add in, Noah, we stick with our guidance for the full year, which is around 7%. And it's one of these damned if you do, damned if you don't. If we ended the quarter flat, you'd be asking how the heck you're going to get to 7%. We come out at 15%, gives you a heck of a lot more confidence in getting to 7%. So I kind of like to start having not had this experience much, start the year with a great first quarter, have an awesome second quarter and then see where we are and give you guys an update.

But a lot of things still in the work. So we need to win some more, continue to perform. And we're feeling pretty pleased with how we came out so far this year.

Our next question comes from the line of Robert Stallard with Vertical Research.

Chris, you highlighted how classified work contributed to the strong growth in SMS. But I was wondering if you could give us an update on how big classified is as a percentage of the overall company, whether you think it's going to grow faster or slower than the overall company?

Yes, Robert. I know it's never satisfying when you give the classified answer. And actually, more and more programs are becoming classified that weren't historically. But we're kind of hanging out right around 25% to 30%. I mean the actual number is 28%. I'm not sure why I didn't tell you that. 28%, which is an increase from the prior year.

So we see international growing. We see classified growing. I mean really everything is growing. And again, that's a result of getting this portfolio in shape over the last 5 years. I know there was a lot of concern about some of the acquisitions. We only made 2 and they're both blowing away the business case. And we said at the time that we made these, we thought they aligned with the future of warfare. It appears that they are. And the stuff we divested, and we'll continue to look to monetize, are either not core to L3Harris and belong with a better owner. And I really like the portfolio and I think that's why you're seeing these kind of results. And we'll continue to see how we make our 2028 framework.

Our next question comes from the line of Peter Arment with Baird.

Chris, I don't think anyone would question the demand signals on supporting these multiyear agreements, but maybe you could just give us a little color on like how L3 is protected on the demand side if there are changes thinking out -- I know you probably thought a lot about that, but just curious to your thoughts.

Peter, no, I mean, that's absolutely a key focus of these negotiations. And the DoW understands we're leaning forward as is the entire defense industrial base. We may have started sooner than the rest. But everybody understands that it's more like a commercial world, right? You make the investments to get the long-term returns. And these 5 and 7-year deals, I think, are a big deal. I mean there's bipartisan support for this, especially on missiles and munitions.

And then it's hard to predict the future. Hopefully, a lot of this will be funded through the reconciliation. That is 10-year money, so you could argue that that could be covered in that. But yes, there will be protections or changes in quantities. And I guess in the unlikely event that a program is no longer funded or needed, but given the demand signal, it's hard to imagine that that would occur, at least in where we're focused, which, of course, is missiles and munitions. So that will be the next step.

The framework agreement, obviously, at a high level, there's an agreement relative to that and now we just need to reduce it to writing. So great question, but clearly, that's on the top of everybody's list for the entire industry. And I think we're all going to be aligned and get the protections we need.

Our next question comes from the line of Scott Mikus with Melius Research.

Going back to Peter's question, I'm just curious at Missile Solutions, you have an aggressive volume ramp over the next decade. Just curious how much of your material spend at Missile Solutions is with sole-source suppliers. And when you firm up your multiyear agreements with the Department of War, are you also going to lock in those key suppliers so you're protected on inflationary pressures?

Scott, the answer is, yes to the second part. In fact, we've had long-term agreements with the majority of our top suppliers. We're working with them, as you would imagine, to allow them to ramp up as well. And many of those suppliers are making investments on their own. And of course, the Department of War is also helping them either with equity investments or loans.

So I think that's going to be, as you suggest, implied in your question, that's going to be a key really to all of us to ramping is the supply chain. And again, that was one of the first discussions going back almost a year with the DoW. They understand the need for the supply chain. And in fact, we are part of the supply chain as a first-tier supplier with the SRMs to the missile primes.

Sole-source, maybe at the time of the acquisition, there were a lot of sole-source providers. I don't think we really have anything significant at this time. We have clearly focused on getting multiple suppliers, especially with cases, nozzles and igniters. And there's several products that -- or components that we ourselves are investing in to have an additional second or third source of supplier.

But we're not afraid to make any changes that we need to find a way to grow this business. And you would imagine, people are knocking our door trying to work for us. And look, the companies that are willing to invest and play along with what we're trying to accomplish are going to get more and more work. But that's going to be the key. I would think by the end of the year, if not already, we don't have any single sources of supply.

Our next question comes from the line of Pete Skibitski with Alembic Global.

Chris, I was wondering if I could double-click one last time on space, particularly on the space pipeline. You talked about the aircraft ISR pipeline that's very robust. I'm wondering if you're seeing the space pipeline kind of excluding even HBTSS, if you're seeing the space pipeline really growing meaningfully. Because it seems like the administration is putting a lot of emphasis on space surveillance, that mission area, maybe expanding that. That might be classified.

But also kind of this AMTI, kind of moving AMTI from aircraft to space. And so I'm just wondering if you're seeing a real expansion of the pipeline there. And you talked about the $600 million award, maybe that's in one of those 2 areas. But if we might see some increased order flow even beyond HBTSS over the next 12 months or so?

Pete, I can assure you the pipeline here is, I'm looking at, is in the tens of billions of dollars. A lot of what I talk about is the LEO, the low earth orbit. There are opportunities that we are currently working on and bidding that are both MEO and GEO orbits that, as you would imagine, are all classified.

There really isn't a big international market, if I'm honest, with the space. There's a few things that we're doing there. But it's all going to be Air Force, Space Force, as you suggested. And there's a lot of competitions coming up, and our past performance seems to be positioning us well, and there's absolutely a commitment.

I'd say the last 3 to 5 years, there's been a lot of one-off demos. I'd hate to go back to HBTSS, but that was one satellite, and it worked. So now they're ramping that up with a follow-on. That type of approach is occurring throughout that portfolio.

So big focus on missile warning, missile defense, hypersonics, classified. Some of the areas you mentioned, I can assure you, we have the capability. And again, we don't prime everything. There's a few things we're working as a subcontractor based on our payload capabilities. And then there's a few places we're a merchant supplier, which is kind of nice because you get on whatever team wins.

So looks good. The team just has to continue to perform. We'll get these things launched and the future is bright. I wish I could tell you more, but this is really a classified area, and I think the financial results speak for themselves.

Tiffany, we'll now take the last question.

Our final question today comes from the line of Gautam Khanna with TD Cowen.

In the quarter, and just kind of what's embedded in the guidance for the year with respect to asset sales? And also if you could maybe quantify the legal settlement just so we can get a better sense of the underlying...

Can you start from the beginning? We kind of lost the first 20 seconds or something.

No problem. I was wondering if you could give us some color on the asset sale in the quarter, the legal settlement. And what's sort of embedded for asset sales throughout the year? And kind of how far along are we in that process of portfolio shaping?

Sure. Just maybe some quick color. We're, I think, routinely look at our shop floor space, where the products are in their life cycle. Clearly, we want to continue to keep the floor space focused on things that are higher growth, innovative, delivering capability for the customer. From time to time, I would say we get products that are probably 20, 30-year maturity, they don't grow really fast, they're great products. They just probably belong in somebody else's portfolio. So we tend to look to move those out -- free up the shop floor space and really keep our workforce focused on kind of innovative products.

In the quarter, I would say it's, call it, 30, 40 basis points of margin, give or take, in the missiles business that popped through. We also -- if you look, we also had negative adjustments on EACs in there as well. So they kind of offset one another.

For the full year, I mean, we'll certainly update as we go. I don't think we have any specifics around product line sales built into our guidance at this point.

Okay. Well, as we close today's call, I want to again thank our employees for their continued focus and dedication in a dynamic and demanding environment. We have several factories, working 3 shifts, so your efforts are much appreciated. Their work directly supports the men and women who are bravely serving our nation. Supporting the warfighter is at the core of everything we do, and we remain mindful of their safety and well-being during these times.

So thank you all for joining us today, and we look forward to talking to you in the weeks and months ahead.

Good afternoon, everyone, and welcome back to the aerospace and defense track at the JPMorgan Industrials Conference. I'm Seth Seifman, the U.S. A&D Equity analyst here. And we are very grateful to have with us L3Harris. And we have with us the President of Missile Solutions and soon to be the President of a to-be-named Missile Solutions company, Ken Bedingfield.

Also, if you -- he is 3 days in the job, I think. So we have the new CFO of L3Harris here, which is Ken Sharp. And then I think a lot of you know Tony Calderon from Investor Relations. So thank you all for coming. We really appreciate it. I think we'll do Q&A. I will ask a bunch of questions, but also happy to go out to the room and take questions here from the group as well.

And Seth, maybe just before we get started, if I could just make a couple of quick comments. But certainly, our comments today may include forward-looking statements, and those include risks and uncertainties. And for more information, I would refer you to our SEC filings. And certainly, today, I'm day 3 into my one job as the President of Missile Solutions, certainly as we look to grow the business and take it public with L3Harris as the majority shareholder. But here to discuss all things, L3Harris, certainly to include MSL.

Excellent. We'll probably -- so we'll divide the time. We've got about 35 minutes, so a little bit less now, and we'll make sure that we get to all of the businesses within L3. Maybe we'll start with Missile Solutions. I know it's a focus area for investors and it's at the top of the news as well. Maybe you could give us a sense of the time line here. When should we expect a Form 10, if that's kind of something you should -- you can share? Do you expect that the new business will have segments? Will there be stuff that you'll disclose about customers who might be -- have a high percentage of sales?

So we are working diligently towards the planned IPO of the business. And a number of moving parts in that, certainly closing the announced investment from the government for, call it, the anchor investor in the IPO, making good progress around all the regulatory requirements in terms of carve-out financials and Form S-1 and all those things. And we are looking forward to a planned second half timing in terms of an IPO.

Importantly, we are certainly working actively with our customers to address the need to accelerate capacity, accelerate production of all things relative to Missile Solutions Naturally, people think about solid rocket motors, which is the biggest component, but certainly critical capability around divert and attitude control systems, how do you precisely control a missile as well as fuses and weapons release systems and other advanced electronics. So more and more components of a missile within the newly combined MSL entity within L3Harris. Making great progress in terms of negotiations around multiyear contracts for some of the critical capabilities that we provide.

And as importantly, we're making great progress around our investment plans. I will remind everybody that one of the big rationales for this agreement was that we could move faster with the confidence in terms of the government being willing to invest. And before all of the agreements and contracts are finalized, we'd have the confidence to go forward and invest.

And we are making some of those investments, whether it's facilities, CapEx, equipment, automation, but also purchase orders for materials, thinking about a little bit more like a commercial model, I think appropriately risk-adjusted. So we are ready to grow this business. We are ready to close the investment, and we are ready to get to our planned IPO.

Excellent. Excellent. The investment plan is definitely something I wanted to talk about more, slightly different segment last year, but when it was Aerojet Rocketdyne, I think the CapEx there was $116 million. So we're talking about decades of Aerojet Rocketdyne CapEx happening over the next 4 years or so, if that's -- is that the right time frame?

And then how is that going to look -- make the production base look different? What is building a missile in Camden and Huntsville look like in 2030 when you guys are done with that versus the way it looks today? And what does that imply also for return on sales?

So it's a great question on the CapEx and how we manage that. And I'll say a couple of things. I mean, first of all, yes, we spent $100 million and change in CapEx at legacy Aerojet Rocketdyne last year.

And if you look back to pre-acquisition, I believe as a stand-alone company, the year before we acquired it, Aerojet Rocketdyne spent about $20 million in CapEx. So we significantly increased that almost immediately after acquisition, tripling, quadrupling CapEx.

But maybe as importantly, as we are executing on the strategy, we have been working closely with our customer, and we've been building some facilities under what's called the Defense Production Act. And we've been building out facilities for GMLRS, the guided multiple launch rocket system as well as Javelin and Stinger, again, along with our customers.

And that really gives us the confidence to take those buildings and that infrastructure that we've been overseeing and using that as kind of the blueprint for some of the facilities that we'll be constructing now, whether those are some accelerated program-specific buildings. We've got large solid rocket motor facilities that we're investing in to support things like Sentinel, NextGen Interceptor, Zeus, some classified programs, MPPD, among others, as well as facilities to support Munitions Acceleration Council programs.

So I think we've become very good at construction at managing how we build the facilities, how we get the equipment in, how we get everything calibrated, how we bring it online. And we'll plan to use that as the blueprint for how we kind of do this going forward.

In terms of sort of the model as we look forward, we absolutely believe that we will be able to automate how these systems are produced. So in the past, it's been very labor intensive, not only labor-intensive, but really I guess, using procedures that just aren't what you would use in a modern factory.

Yes. So as we look forward, a lot of automation, robotics, precision application of liners and insulators and things like that, precision ways to cast and cure the motors and that sort of thing. So it will be, we think, the world's most advanced factory for production of solid rocket motors ultimately. And that should yield opportunity for us to expand margins on production programs. And we ought to be able to yield those margins to the investors in MSL.

What I would say because I get a lot of questions around growth and margin expansion. And yes, we do expect both. But I think growth is the biggest driver of value. If you look at MSL, will there be some margin expansion? Yes. Can production programs get to solid significantly ahead of our average margins today? Yes. But we will always have kind of that healthy mix of development programs as well. And the development programs will inherently have lower margins as we work through risk.

So today, we're on Sentinel program. We're on Next-generation Interceptor. We've got some classified programs that we're working on. We've got continued investment in hypersonics, as an example, some low-cost missiles. So as we manage to make sure we've always got that right mix, that right life cycle of contracts, that will ultimately be the limiting factor on multiple -- I'm sorry, on margin expansion, not our ability to perform. I think we can perform very well on our production programs, but we never want to become a cash cow, obviously.

Right. Okay. Okay. You've kind of -- the framework that the company laid out at the L3Harris Investor Day recently was for kind of a high teens CAGR in Missile Solutions through 2028. I guess, do you feel like the supply chain is there to support that right now?

And then also, how much of that can you do with the existing footprint versus how much requires some of the big investments that are coming with the capital that's going to come from DoD and from the offering?

Yes. We're working very actively with our supply chain. And we didn't wait. We haven't been waiting in order to get either the investment or the contracts done. So as soon as we started discussions with the Department of Water about the Munitions Acceleration Council, we actually brought all of our suppliers into our facility, had a discussion about the investments we were planning to make, seeing the demand signals that we were.

We got commitments from our suppliers to do certain things to drive their ability to deliver more capacity. We've actually worked with some of our suppliers to sponsor them into Defense Production Act funding. In some cases, we'll fund our suppliers for some of the capital that they need that would be used for our production purposes. And where there are suppliers, there's a lot of motors, DACs and other systems to be built.

We're certainly trying to derisk the supply chain to ensure that we have multiple sources while I think all of these suppliers will still have plenty of capacity for them to invest and for them to grow their business significantly. So very actively working the supply chain.

Look, the plan is to get motors and DAC systems and fuses and all of the other products that we provide into the hands of our customers as quickly as possible and at a rate and a pace ultimately that no one else can. We plan to be the world's biggest supplier of solid rocket motors and other products for missiles. And it's a race. It's certainly a lot of demand out there and a lot of interest and other parties to get into it. And we welcome competition.

But at the end of the day, we produce over 100,000 motors a year today. We think we can scale at a pace that no one else can. And ultimately, we think we able to build more motors than anybody else can, and that's what we're off to try to do.

Is there a -- if we think about that 100,000 today, is there a number we should have in our head, let's say, 6 or 7 years from now of what that could be?

Well, we've talked about doubling revenue, I think I believe at Investor Day, we talked about doubling revenue through the end of this decade. And it's not unreasonable to think about quantities following that in some linear fashion.

Right. With further growth beyond.

Absolutely. Yes, we think there's solid growth well for many, many years to come.

Okay. Well, when you're at the conference next year, we can make it all about Missile Solutions.

All right. Sounds good.

But for now, I'm just going to ask one more and then we'll pivot. So just understanding the cash flows around some of these large contracts, we've seen framework agreements between Lockheed and Raytheon and the department. I don't know if yours will be directly with the department or if it will be through the primes.

But there's -- the impact of this on near-term cash flow seems relatively neutral in terms of what contractors are expecting. And is that something -- should we think about that meaning that at some point later on in the contract performance period, the cash conversion will be lower because a lot of cash came in sort of upfront to support the ramp-up?

From my perspective, I mean, first of all, most of our contracts today are with the missile primes. And in terms of the framework agreements signed at that level, I would refer you to their disclosures and their comments. There was a, I think, a release or there was a webcast that was held between Jim Taiclet at Lockheed and Secretary Duffy at the Department of War, which you could reference for some more information as well.

So we're working our frameworks, ultimately, want to turn those frameworks into multiyear contracts that we can begin to execute on. And so we're in negotiations with the appropriate to get to where we need to be.

From a cash perspective, what I would say is I think there's a recognition that on these multi -- first of all, the multiyear contracts are very helpful and supportive for the investments that need to be made to capacitize for this acceleration, new factories, new equipment, new automation tools, that sort of thing.

And there's a recognition that as we're all making that multibillion-dollar investment that the cash flow needs to be favorable enough that the business case will close. As we continue to expand and grow this business, I don't see it as a lull or a drop in our free cash flow as we look out past 2028.

We're certainly working to make sure that we get cash that offsets the capital as much as possible. And certainly thinking about it at the overall LHX level and how can LHX pull all the levers to manage the additional CapEx slug that we're pushing through in '27, '28 and maybe a little bit of '29. And so LHX is pulling all the levers, not just MSL. So it's going to be a strong cash story over the long term.

And as we continue to grow the business, we'll continue to do this all over again. These multiyear production contracts tend to have milestone payments. We're going to work to accelerate our deliveries because the customer needs the product. And as you accelerate deliveries, we expect to have positive payment milestones tied to that. Team is performing very well, and we continue to expect to do that, and that will drive solid cash flow.

Okay. Excellent. Let's turn to aircraft missionization because that's emerged as a key growth driver for the business. I think if we were having this conversation a few years ago, maybe we'd be worried, maybe this mission was moving to space and you didn't need aircraft performing this IR mission anymore. And now you're looking at a $20 billion pipeline in this area. So can you talk about the growth opportunity there, maybe some of the duration of the growth opportunity there? And do you see this being outside of Missile Solutions being kind of the biggest growth driver for the company?

Yes. Look, I think the ISR team has done a fantastic job. I mean it's a great team based down in Greenville and Waco, Texas for the most part. And they've been performing well on their programs. A few years back, they had some challenges, and they've come through that.

And I think we have a history of modifying business jets for militarized missions. And there's really a good model there for lower cost per flight hour. You can fly a bit higher, you can see more. You don't have -- there's a lot of missions you can do from space, but there are some things that you -- some missions that you want to or need to do from lower altitudes. And they've been doing great at establishing baseline performance and then working with customers to get confidence in their ability to deliver on cost and schedule for some of these key missions.

So they've signed an over $2 billion agreement with Republic of Korea to deliver advanced early warning aircraft and often executing on that contract. And I think other countries are looking at that and saying, wow, that's a pretty attractive asset. And we've now signed that -- signed up another customer for that in the first quarter.

NATO ally has made the decision to procure, and we see other opportunities. You mentioned a big pipeline there, so great work by that team. It's certainly a competitive field as well. There are international competitors as well as another U.S.-based competitor of larger ISR platforms. And we feel very good about how we're positioned.

Okay. Excellent. Another growth driver for the company in the SMS segment is space, obviously. And L3 has been central to the development of missile tracking and missile warning satellites and that technology. Can you talk about the path forward there? We know that part of the business has grown. The latest award for tracking layer Tranche 3 kind of ensures the next leg of growth. But as some of this work kind of intersects with what's happening in Golden Dome and all the resources that are available for that. What are the next stages of your work in missile warning and missile tracking?

Yes, it's really interesting. And I agree with you. Space, all things space are definitely a growth area for us at L3Harris. Missile defense, missile warning, missile tracking is a big visible part of that. We do have a large classified portfolio as well that's got, I think, a solid growth trajectory.

But if you look at missile defense, just as an example, 5 years ago, we had no satellites in this area. Quite frankly, we were a weather payload provider. The team did a great job in figuring out how to turn a very capable weather payload into an optical sensor for missile warning, missile defense. and add some algorithms and software and ultimately become a prime through SDA Tranche 0. And we're the only company that's been won Tranche 1, 2 and 3, and we look forward to continue to support that customer.

We also were on a program called HBTSS, Hypersonic and Ballistic Tracking Space Sensor, I think it was, which is now called MDT3. Thank you, Tony. And so we look forward to hopefully a successful opportunity and bid on MDT3 to continue to provide the defense that our country needs for hypersonic threats, certainly a lot of capability that we have there displayed in the previous HBTSS program.

So space certainly is a significant growth opportunity for us. I think that business will continue to win and continue to improve its operating margins. As when you move into a new area, there are some growing pains. And we've talked about some negative EAC adjustments on some restricted space programs and the fact that SDA, as we became a prime, would incrementally see margin improvement from Tranche 0 to 1 to 2 to 3, and we're seeing that. And so we think that SMS will have the ability to continue to expand its margins as it sees still pretty solid high single-digit growth.

Right. Right. I guess if we thought about being able to -- as the capability matures in space and as the ISR business grows with maybe a little bit more of an international mix, those 2 factors can be key drivers of margin expansion in SMS.

Yes. I think that will help. That certainly will help as well. International certainly has a higher margin expectation. Some of these big programs, obviously, there's risk and you want to be careful and think about that risk as you start to book your profit on that, burn down risk as you move through the schedule and then have the ability to increase your profitability over time. So we'll be careful as we work on these multibillion, multiyear estimates at completion and programs. But I think there's a huge opportunity for that segment.

Okay. Okay. We're like 25 minutes in. We haven't spoken about radios yet, but it's still an important topic within the company. Can you talk about maybe the relative size of the international and the domestic radio business and the growth trajectory for each of those?

Yes. From the size of the business, what I would say is that the -- the factory in Rochester that where we build the radios is able to modulate. They're awfully close to the domestic radios and the internationals, and they're able to modulate the factory pretty quick to deliver either U.S. Army, domestic, largely radios or international radios for our allies.

And so the size of it, what I'll say is that as we -- as the Department of War has -- and the Army have put some priority around NGC2, we've seen some budget move from radio acquisition to NG next-generation command and control. We're certainly in the mix on that and seeing that as a growth driver for us. That's resulted in some slowdown of the radio acquisition and modernization for the Army.

And we've been able to deliver more international radios while keeping quantities steady and growing a bit. So it's been a great model for us. That's a business that can get an order for a customer and oftentimes turn that around in the same month, if not the same quarter. So a business that knows how to scale quickly and get capability in the hands of the customer.

We often get questions about that business and the international demand. And what I'll say is we have, we believe, the world's most capable radios, in particular, resilience, low probability of intercept and low probability of detect. And that -- we believe that capability is really what drives that continuing international demand. International customers will prioritize capability over politics in our experience.

Yes. I think you've probably seen that over the past year. What -- I guess when you think about NGC2, what does it mean for the domestic radio business in that -- is there still -- I assume there's still an intention to purchase radios. And I think of NGC2 is almost like this kind of architecture. I assume there's still an intention to purchase radios. And if so, I assume also that, that hasn't changed. So is it about figuring out how to -- exactly what radios they need and how to fit them into this new architecture? Is it about something different? I guess how is the Army communications portfolio changing as a result of NGC2?

Yes. Look, as much as I love all things, radio frequency, I don't claim to be an RF engineer. Tony is an engineer, maybe he can come answer the question. But here's the way to think about it. There are a couple of contracts out there to really define the architecture.

We are certainly involved in what is the transport layer within that architecture going to be across multiple layers, applications and that sort of thing. And as a part of that transport layer, we certainly expect to be delivering radios and other hardware, whether that's modems, data links, things like that.

So yes, we absolutely expect to continue to deliver hardware under an NGC 2 architecture. In the meantime, we'll certainly continue to deliver radios that are today. And I think as you look at the battlefield today, it certainly continues to be a contested and quite frankly, more and more contested. And I think that the customer is, therefore, appropriately running some demonstrations to see how these products handle complicated RF environments like jamming and other challenges that adversaries will bring to the table. And as we do that, we see that our products continue to perform exceedingly well in those environments and others, I think, are challenging.

Okay. Okay. When we think about the path -- top line path that you laid out for the CSD segment last month, what role did the tactical radios play in that? Was there an assumption of kind of growth in line with the segment or above the segment, below the segment?

We don't necessarily break down the guidance below the segment level. But if I think about tactical radios, which is the single biggest piece of that business, I would say, roughly growing in line with the segment, mid-single-digit growth.

Okay. Okay. Maybe let's take a quick pause here, look out into the audience and see if anyone has any questions or I'll continue to ask. I guess one of the things I was wondering about, we see kind of a differing defense landscape here in terms of what the department is looking for from contractors. We see a more dynamic defense industrial base emerging. How does L3Harris think about M&A in that environment?

Well, first of all, this, we believe, is an environment that we thrive in. We talk about being the trusted disruptor in the defense industry, and I think this is where we differentiate. So if you think about the primes that have the capacity and the ability to deliver the best technology and capability and you have the new entrants who have different ways to do things, faster moving, but they don't have the capacity to deliver at a scale that's needed.

We believe we sit pretty squarely in the middle. We understand kind of that legacy prime business. We have an installed base, but we can also move a bit faster and partner with some of the new entrants to bring that capacity and capability at scale that others can't do or can't do fast enough depending on who you're looking at.

In terms of M&A, I mean, right now, we're very focused on trying to drive to the planned IPO of MSL. In the meantime, we do have an active strategy and M&A team that evaluates what's going on. Our leverage ratio is relatively low. We're in the sub -3, let's say. So we certainly have opportunity in the future, MSL will certainly, with its -- whatever its valuation ends up being, will have its own set of to evaluate as well. So we're looking at it.

But we pretty firmly believe our portfolio is very well aligned to areas of customer need. So we don't feel the need to do anything unless it's value creating. And if you think about our portfolio and its alignment, certainly, Missile Solutions, we've talked about high double-digit growth, communications spectrum dominance, important business. You've got to be able to communicate on the battlefield, space, strong grower, ISR as kind of the key components of our alignment to areas of customer need.

Okay. Okay. Excellent. We're pretty close to time here. I guess maybe just to round out on that last point. When we think about your internal R&D then, are those areas that you just talked about, would those be the primary destinations as far as the company's IRAD dollars?

Absolutely. Yes, we are -- we've always been a heavy allocator of our resources to R&D. And I think what we're doing today is placing fewer big bets on things that we have -- that we believe in, that we think are critical for our customers and where we can provide game-changing capabilities.

So we're not just trying to peanut butter spread across the business. We're picking big bets and making them, and we expect that to continue to drive to an outsized growth where we think if we're not the fastest grower in the industry, we're certainly among them.

Excellent. Okay. And with that, we are at time. Ken, thanks very much for being here. We really appreciate it.

All right. Fantastic. Thanks, Seth.

Thank you.

Good morning. Please welcome to the stage, Tony Calderon, Vice President of Investor Relations and Corporate Development at L3Harris Technologies.

Good morning, everyone, and welcome to our 2026 L3Harris Investor Day. This morning, I really appreciate having all of you join us, both here in the room who brace some elements over the weekend and even this morning and are those who are joining us by webcast.

Today, the L3Harris leadership team will walk you through our strategy, segment-level capabilities and growth drivers and lay out our road map for long-term shareholder value creation including our 2028 financial framework. Before we begin, just a reminder that you'll be hearing forward-looking statements that are subject to risks, assumptions, uncertainties that may cause actual results to differ from that which is presented here today. Before we get started, if I could ask everyone to silence their phones and other electronic devices, really would appreciate that for here in the room. With that, let's get started.

We're going to start with a short video sort of set the stage for today. Following that, our Chairman and CEO, Chris Kubasik, will come up and talk to you about our L3Harris strategy.

[Presentation]

Can you see us in your portfolio? If you can, thank you for the commitment. Thank you for the investment, and thank you for supporting L3Harris. If you can't see us in your portfolio over the next 2 to 3 hours, we're going to tell you what we've accomplished, and we're going to tell you about a bright future that is facing a very unique defense tech company, L3Harris and we're excited to have everybody here.

I will say we're proud to admit we're probably the only Floridians that flew to New York this week. And it's great to be back in New York City. Many of you know that L3 was formed here 30 years ago, about 4 blocks away. So it's always good to come back to the city and see so many familiar faces in the audience. I believe we're the best positioned defense tech company in the industry, and we're going to talk a lot about that over the next few hours. First and foremost, I think we act quickly. This environment changes on a daily basis, the financial markets, the political markets, the Department of War executive orders, we and my team absorbed the information, make a decision and act quickly. And I think that is what's given us a lead relative to the others in the industry.

We're scaling our business faster than anyone else, and we're going to talk a lot about the investments we're making to get ahead of the curve, we're in a race, and we plan to win that race, and we're going to do it through scaling smartly. And the combination of going quick and scaling the infrastructure is going to allow us to outgrow our competitors and the defense budget. Going forward, I believe that capability is going to be -- capacity is going to be the new capability for the defense industry. You have to have the infrastructure and the assets to scale.

So we last talked at an Investor Day in 2023. We've been busy executing upon that strategy that we laid out at that particular day. And what we're most proud of is we believe we have the best portfolio in the industry. And it just didn't happen. 6.5 years ago, we merged L3 and Harris, merger of equals, everything went exactly as we knew it would, almost flawless, but the portfolio wasn't aligned with where we needed to be. We wanted to be a national security company, broadly defined, focused on national security. So we made the tough calls and we shape the portfolio. We had 10 different divestitures totaling about $3 billion, $3.5 billion of revenue that just didn't fit our strategy or didn't fit our growth profile.

And then we doubled down and made 2 acquisitions, as you know, in 2023. We bought the tactical data link business of Viasat, all in anticipation of the future of warfare, resilient communications is the key. Everything has to connect everything has to communicate and I think we're seeing this every day in the conflicts around the world, specifically in Ukraine. We also bought Aerojet Rocketdyne. I think we had a great portfolio. We had capabilities in space, air, land, sea, cyber, but munitions were a missing part of our portfolio. We've invested in IRAD for seekers. We had weapon release, we had fuses and the only way that seemed to get into the market was to buy the solid rocket manufacturer at Aerojet when it came on the market, and we'll talk a lot more about that.

So is the strategy working? It is, because you see it in these big wins, missionized aircraft around the world, missile warning and defense. You'll hear a lot about that, but we're going to say it over and over again, we're the only company that is one tranche 0,1, 2 and 3. Investments we made 5 years ago are paying off and the international software-defined radio is a high-growth market. We're also not a shame to partner with companies where we don't have the technology. Some of these companies call us. Some of these companies we call them. Our partnership is unique. We see the convergence of AI hardware and software coming together in the work we're doing with Palantir, missionized capabilities that we have, we're putting on platforms such as [ JOBY ] and the Amazon LEO satellites. And of course, we're open to much more partnerships as we go forward.

So those of you that invest and as we spend a lot of time talking to investors, this is what we hear back. Why would you want to own L3Harris stock because we have a track record of meeting our commitments. Our strategic commitments, our operational commitments, our financial commitments. And you remember back in '23, we gave a 2026 framework that I'll talk about on the next chart, and we met those commitments. We have a unique strategy, as I've laid out, the venture capital investments, the partnerships, the willingness just like you do, to buy and sell, to get the portfolio that you want that is optimized to get the greatest returns. Talk about my world-class leadership team, got a great picture of all the 11 people, we'll wait to talk more and more about that. But the financials, Ken will go through this.

We have industry-leading growth. We have industry-leading margins. And if you look at our cash conversion, it's world-class. So what's not to like? We're super excited over the past 3 years, and we're more excited about the future. This is what we showed back in '23 and there was a lot of questions understandably maybe if you didn't think we could get there. It was Ken's first day on the job. I think he stood up and said, yes, not a problem. We can get there. And here we are. Not only did we meet these expectations. The guidance we gave last month exceeds every one of these, the revenue, the margins and the adjusted free cash flow. We have 10 months to go but we will get there. And that's why today, we're going to roll out our 2028 framework.

And the key message I want to leave with you is this team does whatever it takes to make our commitments. We rolled out at December '23, LHX NeXt. We said would take out $1 billion of cost in 3 years. We took out $1.5 billion in 2. This is on top of the $650 million we took out a few years earlier when we put the merger together. So we're looking at every single part of the business. We're adopting AI tools. We're in the midst of our transformation over on top of what we're already doing with the cost savings. We redid the front end of the business. You'll hear from Tania from shortly after me. It's one of the few companies where we have a single person responsible for Congress, [ Pentagon ] inside the [ Beltway ], outside the [ Beltway ], all over the world, our international partners and allies, and I think this should give you all confidence and increase our credibility, which I'll admit we didn't have in 2023, but hopefully, we've proven and have earned it.

So our focus is clear. I talked about adapting fast, scaling smart and accelerating growth. You're going to hear that throughout the day. This is understood and accessible by our employees, our customers understand it, and it will ultimately create value for all of our shareholders. We adapt fast like the new entrants. Everybody loves the new entrants. They go fast, they're innovative, they're quick, they shorten the cycle. We're doing that. The primes, they invest with scale. We invest in scale like a prime. We have the capital to do so and the strategy. So we're scaling smart, we're going quick, and we're trying to take the best of the best from the ecosystem in which we operate.

But that's just not words. Here's evidence. The [ DOW ] investment in partnership, which we'll talk about a little later, was a quick, thorough decision -- it's unique, it's creative, and I think it's going to create a lot of value, not only for the new missile shareholders when we go public, but ultimately, the L3Harris shareholders as we will continue to own at least 80% of that company consolidate it, run it like a segment but also happens to be a public company. We talk about scaling. We have 2 million square feet that we're adding.

A couple of years ago, we added 200,000 square feet for 2 different facilities to build the space satellite factory of the future, 1 in Indiana, 1 in Florida. Those are up and running. They're state-of-the-art, they're full, and we have the capacity to execute on all the wins and we have room for even more Golden Dome awards hopefully here in the new future. And missionized business jets. A decade ago, we jumped into this market, disrupting the market by bidding a Gulf Stream 550, taking on what was known as Compass Call back then. And here we are, a decade later, we've delivered over 100 missionized jets around the world, and we're winning orders each and every day. The strategy is working.

So we talk about disruption. I mentioned that in this world, we have the defense primes that you know. I feel like they get kind of misaligned and poorly spoken about in the media but these are very good companies. Many of us came from a prime. They have backlog. They have a balance sheet. They have the capacity, the facility, the technology. These are great companies in our defense industrial base and our national security would not be where it is today without them. But then we have the new entrants that are coming in because this is a growth market. Why not, right? We have the speed, we have the innovation, we have the sizzle, the cachet. And what we're trying to build over the last several years is take the best of the best.

And L3Harris has record backlog. We have a great workforce, 45,000 employees. We do annual engagement surveys. Our scores go up each and every year, this last year, whoever administers for us that it was almost statistically impossible to see a company improve this high in a 1-year period. The amount of calls and resumes we get from other people and other companies that want to join this, we think we're the hottest place to work in the industry, and we're having a lot of fun doing it, and we have the facilities. We have 33 million square feet of facilities. And that gives us the ability to scale. At the end of the day, whatever the budget is, Tania, will tell us here shortly, you need to be able to produce.

Ken will tell you we're producing 100,000 components for missiles a year, 100,000. I'm glad someone can do 500 or 1,000. There's more than enough room. Make your 1,000. We're doing 100,000 and have a plan to go a lot quicker. I mentioned we're very fast. We're very innovative, and I think we're unique in what we're doing. And this is how we've designed and worked to form L3Harris. The government relations I mentioned, you'll hear from Tania, the facility is the workforce. We're really proud of what we've built. We're never done. We're constantly challenging our strategy, constantly looking out there to see how we can even make it even better. And we're spending a lot of time and effort smartly adopting AI tools to make us even more efficient and better performing.

So the portfolio is built for the future of warfare. So earlier this year, we went from 4 segments to 3 and I think a lot of people were anticipating us to go to 3. And I think a lot of people were assuming we were going to bury Aerojet Rocketdyne somewhere else, which is kind of a common thing to do in this industry. You make an acquisition, you're accused of overpaying it, you bury it somewhere and you never talk about it again. But we didn't do that. We actually broke it out and highlighted it. And now we have the missile segment, right, which is basically Aerojet Rocketdyne and all the other components I mentioned from the legacy companies, the weapon release, the fuses, the seekers. This is a one-of-a-kind world-class missile solution company.

Sam is running SMS. He wanted a new job in January. So we moved him around, and now he has the legacy SAS and IMS businesses for the most part. Jon, who is run an IMS is now running CSD. And this consolidated all of our resilient comms, our electronic warfare and our WESCAM turrets. We talk about innovation and speed. This is what we're doing. Again, real evidence, real examples, the missile warning, missile defense 5 years ago, at the date of the merger, we didn't have 1 satellite in orbit. Five years later, we're a force to be reckoned with. I think we have over 50 satellites in production today. That is a game changer, that is disrupting the market. That happened very quickly by investing upfront, understanding the customer, listening, making a decision and investing.

We talk about the software-defined radios. I mean everything that's going on in Ukraine, it's a terrible situation, but the reality is you get to see how these products work in a real war. And going forward, everything has to work in a contested environment. So people have PowerPoint charts. People have demos. People have one-offs that they built in their garage. The end of the day, you have to have these things work and the threats evolve. And the Russian threat is constantly changing the way they jam these radios. In a relatively quick time, we're able to change the way forms, change the technology and get it back into the field. They don't have to send the radios to Rochester, New York. It's all done remotely. And that is why we have the premier software-defined radio business in the world.

And then we had the Aerojet Rock acquisition. And we knew it was a broken company, and we quickly in less than 2 years, which surprised me, I can't lie fix this business. This business is caught up on its delinquencies. The customer relationship is better. We started investing on day 1, hundreds of millions of dollars. Ken will talk more about it. We have billions to go to double triple quadruple production. This business was turned around quicker than I thought. We made quick decisive decisions, immediately changed most of the management team, brought in expertise, highly motivated workforce and things could not be going any better.

Now the interesting thing now that we have these 3 segments, we have the Space & Mission Systems, which is about half of our revenue. They're on the enduring platforms. You should think of the aircraft, the satellites. And this is more of a traditional defense contracting ecosystem, right? We have the contracts, we have the FAS, the cost plus fixed price pretty traditional. We have a couple of things that are unique that Sam will talk about. Then we have CSD. This is the commercial business model. Nobody else has a commercial business model to the scale we do. Over 24% margins, we're not embarrassed about it, and we plan to make a hell of a lot more. 24% for a big part of this portfolio. This includes the radios. This includes the turrets. And we're working hard to get more and more of our products to be deemed commercial so we can invest, go faster, increase the margins and get the products to our customers sooner.

We've been pretty outspoken as a company, fully supporting the Department of War in its effort to transform and get rid of all this bureaucracy, rules and regulations, and we're seeing some success. And then [ MSL ] half of our growth tied there. Ken will give you a few more details on this in a little bit, but I think it's a very unique, balanced portfolio. If you like traditional defense, if you like commercial, if you like growth, one-stop shopping, all is there. I think it's pretty exciting. And we actually think each of these businesses deserves a different multiple that Ken will talk about, and I think we're underappreciated and undervalued relative to the growth and some of the numbers we'll be showing you later.

Talking about the leadership team. A lot of people work for different reasons. Some people want a sense of purpose, some people focus on the mission, a couple of these people want money, someone all of the above. I like to work and have some fun. And I've been working for 40 years, and I can tell you, I have never had more fun than I had in the last several years on next one's coming up, and it's all because of this team. We have a good time. It's a serious business. We're collaborative. We get along. We debate stuff. We make a decision and we move forward. It is an incredibly fun, exciting culture. We have people, it's kind of like a collection of recovering primes that have joined the team. Ken came from Northrop. But before joining us, he was the CEO of a defense tech start-up. Sam was at UTC, a couple of different locations there. John was at Lockheed Martin. Tania, I think she joined when the founding father signed the constitution, been around forever, can get us a meeting with anybody in D.C., pretty much anybody around the world, amazing, amazing government relations.

And the functions, a lot of companies look down on the functions, look up with the functions. This is a great functional team, both [ Dave ] and Ed ran businesses Nobody wants to take advice and input from people and a function who've never actually done the job. Every one of these has experienced [ Heidi ] was a sell-side analyst. Now came from UTC, [ Kim Textron ], our General Counsel is here in the back, nervously wondering if he's going to have to file an 8-K, if any of us say anything that we shouldn't, but we're going to say what we want and he could file 8-Ks all night long for all I care. So [ Christophe ] joined us, doing a great job. So that's the team. We're super excited, and we have a great time, and I think you'll see the energy as they get on stage today.

So again, I talked about the missile solutions. I think it's a good point -- time for me to tell you about what we're planning here, which is the government investment and the IPO. We basically have a market-leading company. We do have a market-leading company. We have a competitive moat built around 75% of the existing missiles. Solid rocket motors, DACs, all sorts of components. So when we decided that we needed billions of dollars to meet this demand, the demand signal is there, you've read about the NDA authorizing 7-year multiyear contracts. All this comes together to justify the business case. The $1 billion, the reason we wanted the $1 billion is an anchor investor is to give us confidence that we can invest today.

And we're investing and redoing the entire facility. We're taking a holistic approach. Every other company goes program by program, just in Camden, Arkansas, where we'll be later in a few days, Secretary of Defense. Secretary Duffy will come down and visit us, talk to our workforce. So we're looking forward to having them in Arkansas. You will see hundreds of buildings program by program, some are Army programs. Some are Navy, some are Air Force. We're taking a whole different approach. We're going to have all this stuff be interoperable, easily switched over based on supply and demand. We have tactical missiles, intercept missiles, we also have strategic missiles. This is a game changer, and this will justify the growth.

Secondly, is speed, right? This is a national imperative. At the highest level, we need more munitions. This isn't JADC2 and all these things that sound nice that nobody understands. Missiles, we don't have enough, they need more. We have the scale, and we're scaling even larger to make more. This isn't time for experiments. This isn't time for demos. We need to crank out the serious amount of solid rocket motors and the OEMs that we work for need to deliver a ton of missiles, and this is the way to do it. And then as I alluded to, I think it will be interesting to see the valuation that this asset gets as we IPO it because I believe the growth is undervalued and not appreciated as we tend to have all of our businesses peanut buttered as a defense prime multiple. But we'll see what the market says. We're excited about it.

Just to wrap up here pretty quickly. This just shows we have a proven track record of investment 10 years ago, plus we invested commercially in the software-defined radios and now look at it as a growth engine, profit engine for L3Harris. Five years ago, the satellites. They keep coming, more to come. Again, you had to make the decision, you had to invest. You had to have a calculated risk. You can't study this stuff for weeks and months and years and hire consultants. All of us have 25, 30 years experience. We know what the heck we're doing and we're not afraid to make decisions. And then here we are today, talking about missiles. Buying Aerojet Rocketdyne 2.5 years ago, seemed like the right thing to do, not everybody agreed, here we are. The ability to invest IPO and take the government money to be a preferred stock shareholder convertible upon the IPO is going to give us a huge advantage not only for L3Harris, but for our nation.

So you can see why I think we have the best portfolio in the industry. It's up for you to decide. But look, our customers are in a race against China and real threats and the focus of their strategy is piece through strength. And the only way you have strength is you have a big defense budget, you have a strong defense industrial, a strong industrial base. And then you have the actual capacity to build stuff. And that's what the Department of War is talking about. We are their partner. We get the memo. We are doing it faster and faster than anyone else. The world is changing, the DOW is changing. As I've said several times, we listen, the team forms an opinion. We make a decision and we act. And so there's no confusion. We're in a race too. We're in a race against our competitors. And I can assure you, this team wakes up every morning and plans to win that race, and I'm here to tell you, we will.

So thank you very much. And let me turn it over to Tania.

Good morning, everyone. As you all can see, I'm the only one who did not get the memo about wearing a pullover today, it was not in the forward-looking statement, so I missed it. Tony, I blame you. But we'll get started. Let me pick up where Chris left off, everyone.

L3Harris has evolved tremendously since the 2019 merger of equals and we are uniquely positioned for growth, both domestically and internationally. My focus today is to show you how we get there. I want to walk you through the threat environment, the budget environment and then map our capabilities to the demand signals we are receiving and then turn it over to the segment presidents, who will go into more detail.

But before we dive in, I want to highlight 3 key points that Chris touched upon. First, this administration is laser focused on rebuilding the defense industrial base. Production capacity is being treated as a national security imperative. And Congress is supporting that imperative by driving multiyear procurement authorities, accelerating unique contractual mechanisms and leveraging DPA tools to drive throughput across the defense ecosystem.

The second point, allied burden sharing, national security strategy in the national defense strategy. This is more than short-term political pressure to increase military spending. This is about restructuring FMS processes to drive capacity. From our perspective, this will increase visibility into the international markets, and reduce the transaction friction we see across international military sales.

The final point that I want to highlight for you -- all of you is the idea emphasized in the [ NDS ] around advanced capabilities to drive and enhance deterrents. What's important there is you are seeing the focus on space, missile warning, missile tracking, ISR capabilities, resilient communications. These advanced capabilities have become major modernization priorities not just domestically but internationally. And when you combine a multi-theater threat environment that looks like this, with a focus on industrial capacity and allied burden sharing, you end up with a durable demand signal that goes beyond any single administration.

But let's talk about the threat environment. You are all tracking that there is a war raging in Europe today, and the Ukrainians are bearing the brunt of it. But what the Europeans recognize is the security reality for them has changed dramatically. And they are preparing to meet that threat head on. In the Indo-Pacific region, whether we're talking about Taiwan or North Korea, there is increased accelerating Chinese gray zone activities in those regions, but also very aggressive, fly -- very aggressive -- I'm not going to say attacks, but very aggressive military actions taking place in the Indo-Pacific to test Taiwan defenses and frankly, to test U.S. resolve in the region. In the Middle East, you can see what's happening today. Obviously, the Iranian threat is significant enough to trigger sustained policy attention. And all of these things together are driving significant demand signals for key L3Harris capabilities.

But let's talk for a moment about U.S. defense spending. 2025, we were operating on a continuing resolution, fairly flat with the '24 cycle. In 2026, we saw the PBR come in that was also flat with 2025. What we did not expect was reconciliation to pass with $113 billion going to the Pentagon. So our new baseline, when we think about defense spending, we're talking about $1 trillion, in the range of $1 trillion. That new baseline is what Mike Rogers and Senator Wicker are talking about when they talk about increasing defense spending. Whether we get to 5% of GDP or not, doesn't matter. The baseline has changed, Defense spending is going to increase.

On the international side, obviously, the allied burden sharing narrative has forced NATO to increase their military spending from 2% of GDP to a commitment to get to 5% by 2035, 3% in direct spending, 1.5% in infrastructure spending. Across INDOPACOM, we are seeing Taiwan's 2026 national defense budget, increased 20% year-over-year with a focus on a new air defense system called [ Taiwan Dome ]. They plan on exceeding their defense spending by 3% of GDP by the end of 2026 and hitting 5% of GDP by 2030. That's incredible. In South Korea, we're seeing an 8% increase year-over-year. A lot of focus on ISR and [ C2 ] coming from the South Koreans. And in the Middle East, Chris just completed a recent trip that was driven by customers wanting access to L3Harris capabilities. They are also growing their defense budgets. Lots of interest in the Middle East around ISR, Brazilian comms and space and our space capabilities.

So let me take a step back for a moment. What we see is a reset in the security environment. Policy changes have reinforced this new shift. The budget reflects that change. And the fastest-growing segment of global defense spending are aligned with L3Harris capabilities, space, missile production, ISR and resilient comms. That alignment underpins our confidence in sustained and durable growth across the framework Chris outlined. So having said that, let me turn it over to KB who will go into more detail from the Missile Solutions segment. Thanks.

All right. Good morning, everybody. I'm going to talk for a little bit about the MSL segment. And before I do, I just wanted to maybe talk a little bit about myself and how I ended up at L3Harris. Chris mentioned, I had a previous career at one of the defense primes. I also have, I think, a little bit of a unique experience and that I worked at one of the defense tech start-ups. I was the CEO of a new defense tech company. And I've got the sort of big defense prime experience. I've got the [ Newtek ] kind of start-up experience that kind of never-ending valley of death that seems to just continue to stretch out. And now I met L3Harris, and I've got to say it really is the best of both worlds. We move fast. We listen to the customer. We make decisions, we invest, and we're seeing the results. So it really has been a great experience in my time here.

Let's see. As we built the MSL segment really going from 4 to 3, we thought it was really important to design a pure-play missile solutions company that has both breadth and depth. And I think that's what you see here with MSL. In terms of capabilities, I'm not going to focus too much on solid rocket motors because I think you all know that we do that. But there's a lot that's important in this portfolio, advanced technologies. Chris mentioned some of the infrared seekers. Divert and attitude control systems is probably an underappreciated part of what Aerojet Rocketdyne did and what MSL does today. It's not just about propulsion, but how do you precisely control a missile to get it where it needs to be precisely, which is really important, in particular, when you have an interceptor which is I think why you see that we are on every interceptor program in the U.S. inventory. Munitions fuses and igniters an important part of the portfolio and then air launched effects.

We'll talk a little bit more about [ Red Wolf and Green Wolf ]. There's a model back here in the back of the room. And we're excited about that. We're on contract now with the customer on that. And then we are investing pretty significantly in R&D for things like hypersonics. We are absolutely a leader in that in terms of the ability to travel fast, not just propulsion, but again, some of the body and designs. And then we are the world's leader in advanced weapons, racks and weapons release systems. In terms of growth drivers, we all know that missile ammunition growth is -- there is an incredible need for that, we've underinvested in missiles and munitions over the years. Unfortunately, as with the conflict in Ukraine, the Middle East, defending our fleets in the Red Sea. We've used a lot of missiles and it's time to restock. We have an opinion that this is going to be a significant period of acceleration and then stable production after that. We'll talk a little bit more through that. Certainly, Golden Dome as a piece of it.

And then we had kind of gotten out of the large solid rocket motor business for a while at Aerojet Rocketdyne, but we're back, and we'll talk a little bit more about our capability on that front. And then low-cost extended range effects is absolutely something that we're focused on as well. The bottom line is we stand ready to support the customer. We're going to invest, and we are the company that can scale rapidly to deliver the capability that is required. And I think we have great relationships with the primes and it's great that we have new technology, new entrants, but scale is important and MSL is the company that can do it.

So let's just talk a little bit about MSL. This is our 2026 guidance. You can see we're going to be at $4.4 billion, growing from $3.8 billion in 2025, so that's high teens growth. You can see we're about 50% in the missiles business, missiles and munitions, the legacy Aerojet Rocketdyne propulsion. We do have space propulsion in here. That is inclusive of the business that will be transacted with AE Industrial Partners. So that's in our guide. We do hope that transaction will close. We think it will close in the second half of '26. Most of that space propulsion piece will then come out. We will be keeping the [ RS-25 ], which is about $400 million of revenue in that space propulsion piece. We'll talk a little bit more about why that makes sense.

And then advanced effects. This is about 25% weapons release, about 10% precision navigation and timing electronics, about 30% sensors, IR seekers, and then it's about 1/3 classified, just important capabilities that we can't talk about in this room. And I want to point out, importantly, it's not only the propulsion business that's growing. Advanced effects as it came in and was put together from a few pieces of IMS and SAS. Advanced effects is growing every bit as fast as missile propulsion. It has high double-digit durable growth itself. And then we do have diversity of the portfolio. We're on over 30 missile programs either internationally or in the U.S. inventory.

So the demand and our ability to deliver drives high growth and our operational excellence and the ability to yield margin out of the production programs will drive margin expansion. So we are creating a high growth, again, end-to-end missile technologies company. As Chris mentioned, we put a lot of work, a lot of time and effort into making sure that we fixed some of the challenges that Aerojet Rocketdyne was experiencing. We hired the talent not just at the executive level, but we've hired 500 and trained 500 employees on the production floors in Camden, Arkansas, in Orange, Virginia and Huntsville, Alabama. And I think we've rebuilt the customer confidence.

What's the evidence that we've rebuilt the customer confidence? When the Department of War committed to put $1 billion in as the anchor investor into our plans to IPO Missile Solutions. They said, we chose speed. So it's clear. We are the company that can climb the ramp faster than anybody else. We are the company that can get those motors into the hands of our customers so that they can get them into the hands of the war fighters to execute their missions. So we've done that work. Today, we're doing their portfolio shaping, put MSL together, negotiating a deal with the Department of War, working to get the IPO complete this year.

And then as we look forward, it's really about outsized growth. We're pushing the system hard in '26 and '27 to make sure that we get that high teens growth. But once the facility has come online, '28 and beyond, there will really be that sort of automated new factories, repeatable growth, high teens through the end of the decade, likely getting to 20% type growth as we near 2030. And we think that there is a significant durability of that well into the 2030s.

So let's just talk a little bit more about the capabilities of Missile Solutions. We do have generational demand. Chris mentioned it, program by program on the MAC programs, Munitions Acceleration Council set up by the Secretary of War and Deputy Secretary Feinberg. We're on 75% to 80% of those programs, and there is a 3 to 4x on average overall increase in volumes. We'll talk a little bit more about that in the coming slides. I mentioned 30 -- over 30 programs that we're on and about 80% of those are sole sourced. And then in terms of the growth, again, durable, high teens growth in this business and not just in missile propulsion, but in divert attitude control, and absolutely in the advanced effects sector as well.

And again, scale is important, right? We're moving faster than the primes. We're going to be able to deliver on the capability. One of the reasons, as Chris mentioned, that we thought it was important to get the investment going today was that we could start to invest today. A year is going to be important. Waiting for a year to drive the investment waiting until the framework agreements are actually on contract and delivering, waiting then to invest would mean others have the opportunity to catch up in a market that has significant demand. We believe that we are in a race. We believe that this investment enables us to get a head start and then we believe that we'll be able to win that race by staying ahead. And then certainly, margin expansion opportunity as we automate our factories, as we get on to multiyear contracts, as we get the factories humming, we think that there is absolutely margin expansion into the mid-teens.

And quite frankly, the only limiting factor on margin expansion because we will deliver strong margins on our production programs. The only limiting factor on the margin expansion is that we will always invest in R&D. And not that R&D itself is the limiting factor, but it will yield new development programs in areas like hypersonics, advanced effects, unique capabilities around how solid rocket motors burn. So we will always have some early-stage development programs in the portfolio as well that will be below average margins. Just another way to look at how we fit across the missile value chain, we're on tactical missiles. We're on interceptors and we're on strategic missiles. So if you think about the near-term growth drivers, we are building a new facility for GMLRS. That's the one program that is sort of split between us and the legacy [ ATK ] solid rocket motor business, Javelin, [ Tomahawk ], munitions, fuses all growing rapidly in terms of tactical missiles.

Interceptors, as I mentioned, we are on every interceptor program in the U.S. inventory. PAC-3, [ FAD ], standard missile all in the munitions acceleration council and all growing significantly. And we've got another chart coming up to show you some of the data on that. And then again, into the strategic missile side of the portfolio, Sentinel, NextGen Interceptor, [ Zus ], multipurpose booster. We are producing big motors that I will tell you will be really hard for others to replicate. Some of these are the size of this stage. So I would be curious to see how a new entrant may try to address that market.

Let's talk about our competitive moat for a minute because I really think we do have a competitive moat that is deep and it is wide. And it starts with our people. I've often heard, hey, the customer owns the technical data package. So someone else will try to come in and produce motors. I will tell you that our years of experience, our talented employees who know how to build these motors, who control what we call the MDP, the manufacturing data package not how it's designed, but how it's actually produced, the 400 million hours of experience that they have in building these motors is much more important and much more valuable than the design. And they are a source of unique knowledge. They pass it down generation to generation, training as we bring new employees in. So I would just say our people are an incredible part of the moat and do not underestimate the importance of the manufacturing process beyond the technical data package.

Portfolio. We've talked about the portfolio. Just another way to look at it for a minute here. We do produce a product for the Army, the Navy, the Missile Defense Agency, certainly, Golden Dome will be there as well as the Air Force. And then in terms of production, Chris talked about scale. We have over 4,000 acres where we produce our propulsion capabilities, again, whether it's solid rocket motors, divert attitude control systems, fuses igniters, it takes a lot of space. It takes a lot of facilities. We have over 200 buildings today. We're going to bring about 60 more online, and we are absolutely embracing AI in terms of how we ensure the quality control of our production, and we're certainly going to be embracing robotics and automation as we bring the new factories online. Chris mentioned capacity is the new capability, agree 100%.

Let me just focus for a minute on the adapt fast part of this chart. Again, we have moved back into large solid rocket motors. We're bringing facilities online. We've repurposed what was back in the day in Sacramento, California, now into Camden, Arkansas. So we're ready to move to support all things, large solid rocket motors, just there, we're on 5 or 6 programs that we support. Air launched effects. You can see Red Wolf here. We're really excited about that, working with the Marine Corps to bring a low-cost air launch effect to market and then hypersonics. We have significant capability in the world of hypersonics. I wish I could talk more about it, but much of it is classified. And in scaling smart, we are going to invest $3 billion. I will say it's a bit of a temporal investment, '26, '27, '28 as we bring the facilities online and then it should largely be more of a normal CapEx profile consistent with the 2 to 2.5 percentage points of revenue with the rest of the L3Harris portfolio.

And then in terms of accelerated growth, the combination of the 2, we believe we grow this business from, again, $3.8 billion in 2025 to about $6.3 billion in 2028. We do this in Alabama. We've already got new facilities in Huntsville for inert. So anything that doesn't go boom. Arkansas, we're already clearing land and starting construction for advanced propulsion facility 1. Very excited about that. We know how to do this. We've been building new facilities already. We have a large GMLRS, Javelin and Stinger set of facilities that we've been building, both in Arkansas and Virginia. We're going to take that expertise, move it to APF 1 and APF 2 bring those online, as fast as possible and be able to get these motors built.

And then importantly, I mentioned [ RS25 ] previously. So the motor or the engine for Artemis, it is produced on our [ Canoga Park ] campus in California. That is also our divert and attitude control system center of excellence. And we are making investments to be able to produce more DACs consistent with what we're doing on the propulsion side. And that's why we wanted to make sure that we kept the RS-25, an incredibly talented workforce an incredibly important facility. We will also start to do additional large solid rocket motor work there, both Sentinel and next-generation interceptor as well.

I think you know about the geopolitical drivers, but I just wanted to put a little bit of data in front of us around the capacity expansion. These are some of the critical munition acceleration counsel programs. THAAD, today, we produce about 150 systems. We're going to 3x that. Standard Missile, about 700 systems today, we're going to 3x that. PAC-3 is going 4x and [ Tomahawk ] launches, we're seeing a 5x demand increase. These numbers are largely pretty solid. We've been working closely with our customers, whether it's the missile primes and/or the Department of War. Chris and I have spent a lot of time in the Pentagon making sure that these are understood and locked in.

So just in terms of our priorities, again, we're going to expand our competitive moat. We're going to rely on our incredibly talented and experienced employees. We're scaling for this generational demand. I've been in this industry a long time, 30-plus years. I don't have the 40 years that Chris has, but I'm getting close. I've never seen a demand like this, and we are absolutely investing to scale at a speed with quality and with deliveries that nobody else can. And then certainly, we want to get the Department of War investment complete and the IPO complete here in 2026.

With that, I've got a quick video, and then we will go to a break.

We will now take a 10-minute break.

[Break]

Ladies and gentlemen, please welcome to the stage, Jon Rambeau, President of the Communications & Spectrum Dominant segment.

All right. Well, good morning, everyone, and thanks for the opportunity to talk to you a little bit this morning about the Communications & Spectrum Dominance segment. I'm Jon Rambeau. I've been in the industry now for 30 years, and I can tell you 3 decades go by pretty quickly when you're having a good time. Especially the last 3.5 years that I've spent at L3Harris has been a particularly energizing part of my career. It's great to be part of a company that is able to move with decisive speed, agility, invest smartly, place strategic bets. And right now, to lean into a relationship with a customer here on the domestic front that is different than any I have encountered over the last 3 decades. They're serious about driving change, not just in defense, but in defense industry. And I think L3Harris is incredibly well positioned to meet that customer demand.

And I think that sort of ties into the overall vision for Communications & Spectrum Dominance. We, from a capability point of view, offer products and solutions across the entirety of the electromagnetic spectrum. The products that we provide to our customers are typically used on the front lines. So they really matter. They have to be in our customers' hands when they need them and they have to operate as intended every time. So those customers can do their jobs and return home safe to their families. From a business point of view, Chris talked a little bit about the thought process behind the 3 segments. And as you look across the L3Harris Corporation, it's really hard to find a company outside of L3Harris in this industry that has been a traditional player that has been able to figure out how to do commercial business at scale in a defense environment. L3Harris has done that, not just once but in multiple product lines across the company. And those have now been brought together as part of the CSD segment.

So when you think about CSD from a business point of view, I think commercial business model, I think commercial products, think high volume. We're going to deliver 2.3 million pieces of hardware in 2026 alone. So this really is a high-volume commercial business. A little bit more about the segment, as I said, commercial business model. We'll deliver mid-single-digit growth over the next several years, and we'll do that at significant commercial margins. Were what really helped drive this portfolio to deliver the outsized margins that you see year after year in line with our guidance.

From a capabilities point of view, number one, resilient software-defined radios. This is our tactical radio business. I know a lot of you focus on this business. This business is doing well on the domestic front. It's doing just as well on the international front. I'll talk a little bit more about that and how we're scaling this business as we get into the presentation. Passive sensing capabilities. Chris mentioned our WESCAM business up in Canada. What you see in the photo on this slide is a WESCAM sensor mounted on an unmanned air vehicle. We do encrypted data links for weapons and for unmanned systems, the [ TDL ] acquisition that we made several years back, has exceeded our expectations from a revenue point of view. We're seeing increased demand, not just on the international front -- I'm sorry, not just on the domestic front, also on the international front. And we're seeing Link 16 in places where it has never been before. Link 16 is now operating in space. So that TDL acquisition was a good one that business is performing above our expectations.

Counter drone systems. We'll talk about the VAMPIRE family of systems. This is a smaller part of the portfolio now, but it has a lot of potential to grow as we're just seeing explosive production of military drones around the globe, no place that you're seeing them more visibly than in the conflict in Ukraine today. We also have within my portfolio advanced electronic warfare capabilities. Think about the NextGen Jammer program, for example, is part of this business. Drivers for growth are really 3 that we're focused on modernization of advanced communication systems, that's modernization of tactical radios for the U.S. Army as well as for militaries around the globe, operations and contested environments. We've never had a greater need for the advanced waveforms that we provide on our software-defined radios or for the ability to provide our advanced EW solutions.

And then again, the rapid proliferation of military drones around the globe, how those are going to change conflict and the way we need to defend against those systems. Digging a little bit more deeply into the portfolio. There are 4 main components in how we've structured the business. As I said, previously, tactical communications, Tactical radios, the single largest part of the portfolio today. Then we have our datalink business, encrypted communications, electronic warfare solutions, the second largest part of the portfolio. The electro-optical sensing business, and then we also have our advanced night vision goggle business as part of this portfolio. Not the largest part of the business, but again, a market-leading position here where we produce the tubes that are used in the goggles that are really a discriminator that allow our customers to see in substantially degraded visibility environments. And we continue to see that business see strong demand domestically in the international market.

Overall guidance revenue for 2026 about $8 billion this year. We're going to be growing to about $9 billion by 2028. From a mix point of view, international was about 35% of the revenue for CSD last year, it's going to be 40% of our revenue this year. So we're seeing a significant increase in demand from customers internationally. Margin guidance, about 25%, consistent with how the business performed last year and how we continue to see it performing into the future. And about 80% of the revenue that we do in CSD is under that commercial product model where we invest in advance of demand, we build capacity, we have product on the shelf ready to go when our customers need it.

A little bit more about our competitive moat in CSD. And as you would have imagined, it really is that commercial product model. It's about 3 things for us in CSD. It's about depth. It's about breadth, it's about speed. From a depth point of view, we have market-leading positions in each 1 of the 4 wedges I showed you on the prior slide. So if you think about whether it's tactical radios, night vision goggles, encrypted data links across the board we have very strong positions. And those positions generate the resources for us to continue to invest in advanced technology and continuing to scale our production capacity to support our customers in the U.S. and abroad.

From a breadth point of view, over 12,000 employees in the CSD enterprise. And outside the U.S., we have 10 global business hubs where we also have production operations. So we're able to support our customers locally wherever they are in the world. Millions of systems fielded across our customer countries, over 130 customer countries to date, and this year alone will take orders from over 100 nations around the world. Speed, agile, high-capacity production. The picture that you see at the bottom of the slide is what's known as our Jefferson Road operations center. It's located in Rochester, New York, and it is the heart of our tactical radio business. If you haven't had a chance to visit this facility, I would strongly recommend make some time to go see it, it is very impressive.

The facility would rival the scale of any commercial electronics manufacturing facility, and we're pushing a very large volume of standardized product through this factory every day. Because we self-fund our R&D, we're able to deliver NextGen technology to our customers ahead of need so that when they need the product, it's there, it's off the shelf, and it's in the configuration that's going to be useful for them. A little bit of an example. Last year, we got a call from the U.K. military, they urgently needed some tactical radios to support an operational unit in the field.

From the time we took that phone call, until we had product in the operator's hands in theater, 26 hours, 26 hours from phone call to fielding and that's because we have so much standard product moving down this line. Our radios are about 80% common. There's about 20% of the hardware that's tailored to the individual customer. And then we load it with that software-defined capability and the waveforms that are needed for that particular customer in their environment, we're well to turn that very quickly because we have so much standard product coming down the line. We can support them, whether they're in the field conducting offensive or defensive operations.

A little bit more about the threats that are driving that demand in these offensive and defensive environments. First off, from an offense point of view, you're going to go into combat what's the first thing that you need to be able to do? You need to communicate. You need to communicate consistently, it needs to be secure, and it needs to be safe so that the people who are using those radios don't become targets. Ukrainians are facing some very sophisticated threats based on some of the new Russian technology that's being fielded from a jamming point of view. The resilient waveforms and radios, we're providing in Ukraine allow the Ukrainians to circumvent these advanced threats to continue to communicate effectively in the battle space. Additionally, the advanced electronic warfare solutions that we provide are able to reduce the effective range of these systems, which gives our customers additional freedom to maneuver in battle.

From both an offensive and a defensive point of view, I'd ask you to think a little bit about the Indo-Pacific theater and how U.S. and our allies would traditionally navigate, detect track and target something in that environment, typically by radar, right? It's a very effective technology. The problem is with some of the sophisticated systems, the Chinese are now fielding they're able to detect the source of those radar signals, geo-locate them and then our customers become a target. So what we're providing is electro-optical and infrared sensing technology, which gives additional modalities to our customers to perform that same navigation, detect, track and target without putting any energy out into the atmosphere. So you're not able to be detected and you don't become a target. It's a really important capability that we're feeling for our customers today.

And finally, from a defensive point of view, I talked about the rapid ramp-up of military drone production around the globe and how that continues to challenge our customers. And again, know more visibly than what you're seeing in Ukraine. Our VAMPIRE family of systems is modular, it's adaptable, it's low cost. It has both kinetic and nonkinetic effects that can defeat drones of all shapes and sizes. We've incorporated artificial intelligence algorithms into the system so it can detect and track drones at very, very long ranges. Again, using the same electro-optical and infrared systems that I just spoke about. So across the board, to counter these advanced threats, we're seeing L3Harris product and technology in demand.

So what are we doing to scale up our production capacity? We're making targeted investments in growth product lines. And there really are 3 here, resilient communications. We're going to deliver over 140,000 tactical radios in 2026 alone. Passive sensing will be delivering over 600 electrooptical infrared turrets this year. And from a counter drone system perspective, we expect deliveries to increase by a factor of 4 between now and 2028. So we're investing. We're investing in partnership with Ken and the Missile Solutions team in a shared facility in Huntsville, Alabama, where we're going to be producing the VAMPIRE counter drone systems. And we anticipate getting that factory to a point where we'll be able to produce 20 to 40 systems a month by the end of 2026.

We're also investing in a new electro-optical infrared sensor manufacturing facility in Rochester, New York. Our large world-class manufacturing facility today for WESCAM is located just outside Toronto. In Canada, and we want to have greater access to the U.S. market. We have an administration that's insisting on U.S. production capacity. We're responding to that demand. We're going to put a facility in Rochester that's going to increase our access to the U.S. market. Overall, we're committed between now and 2028 to a 40% expansion of production capacity in these growth product lines. So we're scaling up production. What are we doing to ramp the output of product through these factories? I need somebody to help me advance the slide. There we go.

All right. So how does it all come together? What does this look like in terms of production output and how that drives increase in our installed base. Resilient comms, in 2023, we had about 1 million tactical radios out there in the field. By the end of 2026, that's going to grow to 1.3 million and 2028, 1.5 million. As we look back to when some of these radios were delivered, about 500,000 of the radios that are fielded today, particularly with the international community, are 10 years old or older. They are ready for refresh. And so our customers are actively engaged and you're seeing that international demand come through in the refresh of that inventory. And so we anticipate a couple of hundred thousand of those 0.5 million radios that are more than 10 years old are going to be replaced between now and '28.

From a passive sensing point of view, 7,000 sensors installed across the world in 2023, that's going to grow to over 8,500 by the end of this year. And that will be across about 300 different types of platforms. Most of them airborne, but also in other domains as well. We continue to see the increase in that installed base growing to about 10,000 systems worldwide by '28. And why that's important is because those customers continue to need service on those turrets as well as periodic upgrades and replacements over the life cycle. So even as we're expanding our customer base, we're going back and refreshing those customers we're already supporting.

And finally, from a counter drone system point of view, this is an area where it's so fast moving, and our customers are working very hard to define their requirements. The biggest opportunity we're tracking here is the U.S. Army. It's a program called [ Unit Common ]. We anticipate this will be a $1 billion or larger acquisition program. The army is going through a process right now of defining their specific requirements, which organization that's going to lead this acquisition. But we see that really driving significant demand, and we think VAMPIRE is very well positioned to meet that demand. If you look at where the threat is going, the number of military drones being produced worldwide from '23 to '26 increased by a factor of 10 from 1.5 million to 15 million a year, and we think that's going to double again between now and 2028, so over 31 million. And again, VAMPIRE is going to be well positioned to meet that threat as it continues to increase. So across the board, substantially increasing our deliveries over the next 3 years in these growth product lines.

So to wrap up before I hand it over to Sam, I'll just hit it again. We're continuing to focus on strengthening and expanding our positions in those 4 core markets that I talked about at the beginning of my presentation, we're going to continue to drive growth across those 3 growth vectors of sensors, communications and interceptor effects for drone defense. We're going to maintain those industry-leading margins that you've come to expect at this part of the L3Harris portfolio. We're going to position for the future by making smart investments and scaling capacity. So with that, thanks for your time. Look forward to taking some questions in a little while. I'm going to turn it over to Sam Mehta to talk about SMS.

Good morning. Thanks, Jon. Good morning. My name is Sam Mehta, and I'm privileged to be the President of SMS. A little bit about my background. I spent 25 years in the aerospace and defense industry, part of my time here at L3Harris, is spent my first 17 years in a company named Sikorsky Aircraft where we operated largely, as you know, is a defense prime. Then I've transitioned to Collins Aerospace, where I ran almost a pure-play commercial business for the last 5 or 6 years, and I'm looking forward to bringing that experience to this great business that we have in SMS. One thing, I think, has to be said very definitively. There's never been a better time to be in the aerospace and defense industry. I will also tell you there's never a better -- there's never been a better place to be than L3Harris right now. Hopefully, you'll feel the same way I do.

First, a little bit about Space & Mission Systems. We're really a combination of large parts of legacy IMS and legacy SAS. We offer a traditional business model, long-term enduring generational franchise programs. What is unconventional about we offer is upper single-digit growth. And I'll talk a little bit about some of the drivers of that growth in a couple of our specific businesses. From a capability standpoint, we should look very familiar to you from SAS and IMS, space missile and defense solution, building upon decades of experience largely based upon weather satellites that we've been doing for many, many years. If you're in bright warm and sunny New York City, you probably very recently looked at an image of space for the weather. If you've been anywhere in the Eastern seaboard, you'll look at an imaging space for weather. I'd be willing to bet that, that image was brought to you by one of our payloads operating on the weather satellite. It is that very same technology that we are now leveraging to make sure that we apply to missile warning and missile defense, and I'll talk a little bit more about that applicability.

We are the largest provider of missionized ISR and military avionics, a massive growth opportunity for us. One that we're capitalizing on, not just in the future, but literally every day, every week, and I'll have an exciting announcement later on in the presentation. We are the predominant company in Maritime power, taking nuclear power, converting it to electricity on about 1,700 ships if you heard more about concepts programs like golden fleet coming up, we're well positioned to be able to capitalize on that growth. Intel and product solutions, fantastic capability, helping the DOW and other agencies within the U.S. government ecosystem, making sure that we're always up to speed on what other countries, maybe our adversaries are up to. And mission-critical networks, this is our business that supports the FAA air traffic control.

Just to give you a size, we've been talking quite a bit about adapt, accelerate. But I want to talk a little bit about scale. Last year, this business and mission network successfully conveyed 123 billion individual messages across the air traffic control network, and they did it with [ Six Sigma ] reliability. Now that's scale. Growth drivers, I'll talk about quite a bit as we go through the presentation. One of the things I want to make sure we convey about SMS that we're an extraordinarily well-balanced portfolio. If you look at the breakdown of our revenue of our $11.5 billion, there's actually no one part of the portfolio that's responsible for more than 1/3 of our overall revenue. And when that balance comes strength and diversity in the sources of revenue and the types of contracts we have. We're very confident in our 2026 margin guidance, and we're extraordinarily proud of our classified business.

The hardest part of my job is not being able to tell you about the 1/3 of my business, the almost 1/3 of my business that works in areas that keep ourselves, our allies and our partners safe and secure every single day. I can tell you that of my 11,000 employees at SMS about 7,700 of them have top secret or better clearance. 5,500 of those 7,700 work in engineering and technical areas. We're extraordinarily proud of supporting the customers' most sensitive classified missions. If you would like to compete with SMS, here's just a few of the things that you would have to do. Number one, you'd have to have differentiated technical depth from a capability standpoint. What does that mean? We have about 300 PhDs who have dedicated their entire technical careers towards not only perfecting but in many cases, even developing the technologies that form the foundations of our customers' ability to be able to provide an essential defense capability.

We're mission improvement. We have a legacy of customer intimacy. I'm very proud of the fact that 20% of our employees in SMS, we're actually at one time, our customers, they're veterans and they're some of the most talented and the most mission-oriented employees that we have. We have about 500 employees that are field service representatives that are actually deployed with our customers. And many times, in the most dangerous missions and on the front lines. And from an agility standpoint, we are agnostic to where we land in the value chain. One of our fastest-growing businesses is as a prime in space. We're also willing to partner with companies like [ Joby Aviation ] and provide missionized solutions. We're willing to become a prime on ISR. We're willing to become a component supplier to the fighter jet community. So we can actually play with our flexible business model in many different elements in many different parts of the value chain.

So why do we have such a strong foundation of growth? I mentioned before in space the image in the spectral and sensing system. A large portion of this portfolio is actually in the classified realm as well. We've been leveraging decades of experience of providing payloads, leveraging that to become more preeminent in the prime contracting space to provide full up satellite solutions. In the airborne domain, we have 70 years of experience in aircraft missionization, providing [ signing ] capability to many of our customers around the world. We've actually delivered F-35 mission avionics systems for over 1,300 aircraft. On the sea, we have 80 years plus equipping 500 naval vessels with integrated comms, [ NAVs ] and platform management systems.

I mentioned the work that we do on the intel and networks. There's a tremendous amount of FAA modernization occurring. We are an integral player in making sure that as we go forward as our nation modernizes in air traffic network. We will be a very, very significant partner to the FAA in achieving that modernization. I mentioned the different capabilities we have. It's also important to talk about some of the advantages we have in the market. I mentioned before, we adapted the same sensing solution that we have on our weather satellites to make sure that we leverage that towards missile warning, missile defense. We have the appetite at L3Harris and certainly within SMS to go ahead and invest ahead of scale.

What you see there is a picture from a facility in Palm Bay, in Melbourne, Florida where we've invested between Palm Bay and Fort Wayne, $250 million, making sure that we are ready to be able to manufacture and deliver at scale. These advanced satellite technologies that are most important to our classified customers and certainly for missile warning and missile defense. And of course, accelerating. We're very, very well positioned with record backlog in our business right now to be able to deliver upon that 2028 commitment of $13 billion of revenue.

Why are we well positioned? We have a more than $4 billion pipeline in missile warning and missile defense. Homeland defense, if you look at the National Defense strategy, one of the things that the Department of War called out very clearly was the importance of homeland defense. The capabilities that we have developed through many decades of experience of providing these payloads is going to make us an integral player in Golden Dome defense. We've provided missionized business jets. Our model, our flexible business model that I mentioned before, we can take commercial business jets off a hot active production line and in very short order, provide mission equipment customization to that aircraft so that they can fly and they can provide ISR capability to our partners, our allies and our nation.

Now look, there are alternative solutions out there. You could go ahead and you can buy a purpose-built ISR missionized aircraft. As long as those threats that Tania talked about in her presentation, are willing to wait many, many years before they'd act against you. What we've done is significantly cut down that lead time by providing creative capable solutions that are platform agnostic that allow our customers to take a business jet, missionize it and put it into service in a fraction of a time that it would take a purpose-built aircraft.

What I mentioned before, manufacturing at scale, we're not just talking about future investments, investments that we plan to make in the future. We've gone ahead and we've actually demonstrated manufacturing at scale in our space business. Since 2023, we've doubled our capacity for satellite production. By 2028, we will have tripled our capacity for satellite production. So we're not investing after winning the contracts, we're investing in anticipation of winning the contract, and we will be poised to deliver to our customers on time. We have a track record of delivery. We've delivered 80 contracts. We have a record space backlog to deliver against with this new capacity.

I mentioned a couple of the facilities over 200,000 square feet, Fort Wayne, Indiana, Palm Bay, Florida. It's impressive that those buildings look from the outside? I can tell you they're even more impressive from the inside, we're adopting the most modern manufacturing methods available to make sure that we can go ahead and build and deliver with scale and speed. Digital infrastructure, working partners, you're using -- leveraging our partnerships with companies like Palantir to make sure that we infuse AI into our manufacturing capabilities to enhance efficiency. Very proud of the investment. We're going to be extraordinarily proud to be able to make sure that we continue to deliver on time to our customers.

One of the primary areas of growth driving our business in space and why that capacity investment and increased capacity was so important is the important opportunity that awaits us for missile warning and missile defense. I call it an opportunity. Realistically, this is defending us against an existential threat. And the important thing to know about L3Harris, SMS, we play a very large role in this, but L3Harris actually plays a role in this across the entire value chain. Take a few seconds to talk a little bit more about that.

First of all, SMS, very, very active and left of launch prevention. It's not just important to know what our adversaries are doing after they launch. It's very important to know and anticipate when they're preparing to launch. Who is preparing to launch? What's the time line? What's the effect? We provide capabilities and solutions to the DOW and other agencies to make sure that we -- our customers and our government can adequately predict and accurately predict when a launch might be able to occur. That's an important capability left of launch. If we're not successful in helping our customer preventing the launch, we are -- we will be successful in helping them warn. It's extraordinarily important to know exactly when our customer has -- when our adversaries have decided to take action and launch. So we provide imaging and spectral systems that are able to detect that as soon as the launch takes place so we can provide that information.

Of course, it's important to track the threat. We have -- we're the only company that has proven to track a hypersonic ballistic threat. The only company that has been able to prove that capability. So we're well positioned for follow-on opportunities in programs like hypersonic ballistic tracking space and sensor. We have launched and delivered 4 satellites to the [ FCA ], and we have 52 on production in order. This is that healthy pipeline I talked about on our earlier chart.

After you've tracked the threat, it's also important to make sure that you have reliable, resilient communications that CSD and John Rambeau and his team provide to make sure all the important allies, partners and agencies involved in dealing with that threat have the latest information as to how that threat is progressing. And of course, if all else fails, you need to be able to intercept that threat with kinetic force. And that's where Ken and some of the propulsion products that he has in his business, along with the divert and attitude controllers will help defend the country against that threat. So we play in all elements of the value chain in this very, very important capability.

On the ISR market, I mentioned not only the investments we've made and the incredible investments that we've made in capacity to make sure that we can quickly missionize these business jets and provide that capability to our customer. We're seeing unprecedented strong market demand. And by the way, we are the market leader in this area. So much so that if you took the next 8 competitors and added up their -- the number of aircraft they've delivered, we'd still be the largest. We are largest -- we are 10x larger than our next biggest competitor in this area of missionized business jets. We have important wins. We recently went ahead and announced Korea, our [ AWC ] contract. By the way, at the time of this chart was made, we had $3 billion awarded since Q4 of 2025. As of last week, that is closer to $4 billion.

We recently won a very important strategic contract with the NATO ally to provide missionized business jet capability, and we'll be able to be able to announce that in the next couple of weeks. And that will add about $750 million of backlog to this business with another at least $2 billion of options to follow. So we have $20 billion plus of opportunity in the pipeline for this important capability. So what do we focus on? What are key priorities in SMS? Number one, we will continue to invest in capacity, technology and modernization. The threats are evolving, our technology and our ability to be able to deliver to our customers must also advance and evolve. We'll partner. We'll work with the defense tech start-up. We'll work with the primes, we'll work with component suppliers. We work as a component supplier. We'll work as a prime. Our flexible business model allows us to be able to work in all elements of the value chain.

Third is execute, execute, execute. We will meet or exceed our customers' expectations on delivery and capability. The Secretary of War has made it very clear to the defense industrial base that is either execute or be executed. Fourth, we will remain focused ahead of the industry and strategic capability and talent to outpace competitors. Similar to what Ken mentioned about the artisan he has, the technical depth that we have in our business is a competitive advantage for us. We continue to invest in our workforce. We continue to invest in the development of technologies by that workforce that will keep us ahead of our competitors and more importantly, keep us ahead of our adversaries.

So with that, I'm going to turn it over to Ken Bedingfield to talk a little bit more about the financials.

All right. Good morning. I'm Ken. I've been doing this about -- no, I'm kidding. Just wanted to kind of wrap it all up with a little bit of kind of financial overview. I'll highlight some things that we've already talked about, but that I think are really important to underscore. In terms of commitment, as Chris mentioned, we are a company that's very focused on saying what we're going to do and then going off and doing it. We deliver on our commitments quarter by quarter, year by year and framework by framework. So this will be the second financial framework that we lay out. We set the first one in '23, delivering through to '26. We're now going to set another one to deliver '26 through '28. I'll talk through that in a few minutes.

Unlocking value, we've mentioned some of the strategic transactions. I'll talk a little bit more about that. in this presentation, and then we'll certainly talk a little bit about capital deployment. But very clearly, investing in the business for growth is our first priority. We've got a lot of flexibility. We've got a strong balance sheet. We're going to continue to pay a competitive dividend, and we'll talk a little bit more through those details. So just to reiterate, again, the financial framework that we set in 2023. At the time, we were sitting roughly at $19 billion of revenue, we were struggling to perform a little bit on some of our programs, 14.8% segment operating margin. I will say at that same time, we were investing to become a prime in space, and that was a part of it as well as you grow into a new business like that.

Sometimes you're taking on some more aggressive contracts, and we work through that. And we had free cash flow of about $2 billion. At the time, we said we're going to grow the business to $23 billion, we're going to generate about 16% margins, and we're going to generate $2.8 billion of free cash flow. A lot of folks looked at us and said, oh, how are you going to do that? But the team went off and did it. We move fast. We're agile, we're nimble, and we figure out how to add value, how to grow the business while increasing margin which is not the easiest thing to do and generating solid cash and as Chris mentioned, I think we are, if not the best converter of earnings and the cash in the industry is certainly one of the best. This business generates as much cash as some of our competitors who are significantly larger than we are.

Just to touch again on the margin side. I would say one of the things that we're certainly focused on is winning new business and you can see that we've been growing from $19 billion to $23 billion. But importantly, we win that new business with rigor, and we win new business that we can perform on. That is what enables us to continue to drive our industry-leading margin rates up. So we don't over analyze. We don't overthink it. But we make sure that we have the confidence that we can perform on our programs. And then as we've continued to grow, we've also brought in some new leadership, brought in some new tools brought in the ability to really effectively manage our programs to generate the margins.

You heard about this from each of the segments, just to reiterate, and so you can see it in one place. SMS, solid growth to $11.5 billion, solidly increasing its margins into the mid-10%. That's, call it, 70, 80 basis points of increase in margin rate, so significant. CSD, $8 billion business with 20 -- about 25% commercial operating margins and then as we put MSL together, again, the purpose-built Missile Solutions company, about $4.4 billion in sales and increasing margin to about mid-12% at MSL.

We're going to spend a few minutes on this chart. I think everyone was sort of wondering what was our next financial framework going to look like. So I wanted to spend some time talking about our 2028 targets. We are going to grow our revenue to $27 billion in 2028. That is an 8% organic CAGR as we work through some of the divestitures and other transactions that Chris mentioned. That is a $5 billion increase in sales. As we look at segment operating income for our next financial framework, we're going to generate $4.4 billion of segment operating income, that's a 9% CAGR. So growing faster than our sales as we continue to generate strong and growing margins. And that is going to result in an increase of $1 billion of additional operating income in '28.

And then in terms of cash from operations, we're going to generate $5 billion of cash from ops in 2028. That's a 15% CAGR as we effectively continue to convert our earnings into cash. That's a $2 billion increase in annual cash generation. And even as we deploy capital into CapEx to grow the business, '26, '27, '28, in particular, we're still going to be able to generate $3.5 billion of growing free cash flow from today. So we feel really good about these '28 targets, our next financial framework. I know that I think this is one of the things folks were hoping to hear today. We are excited about it. I think it's really -- the result of a lot of hard work, a lot of positioning. The portfolio is right, the performance is right, the team is right to deliver this value to our customers, how we get product in their hands and to deliver this value to our shareholders in terms of growing the business, expanding margins and generating cash and then ultimately deploying it in value-creating ways.

Just in terms of kind of the capabilities, the areas of growth in terms of the framework, how do we get from where we are today, roughly $22 billion to $27 billion in sales. You've heard about communications and spectrum dominance growth. You've heard about the significant capability, market leading -- global leader in ISR, we've talked about missiles and munitions, the potential ultimately to double MSL sales towards the end of the decade. This is an important step in that process and then space. You heard about the incredible work that our space team has been doing, taking decades in weather payloads and turning that into a position as a prime in the incredibly important mission of missile warning, missile defense and missile tracking. So those are the drivers that ultimately get us to the $27 billion in revenue, about $13 billion in Sam's business at SMS. John Rambeau growing to about $9 billion in CSD. And as we mentioned, MSL about $6.3 billion in revenue.

And I think it's important to point out, if you look at this chart, I don't think anyone else in industry is showing this level of balanced growth, showing this level of multi-domain growth and showing the ability to climb the ramp at this pace. Chris mentioned, we listen to our customers, we form an opinion. We don't have to wait for all of the budget docs to come out and look through all the documents and see where all the funding is going because we listen to our customers. We know where those budgets are going or at least we form an opinion on where those budgets are going and we invest. You've heard us talk about investing ahead of need.

What that means is that we listen, we digest, we form an opinion and we act. That's how we -- that's one of the ways that we move faster than the competition. It's that long lost art of actually listening, not just telling the customer what you think they want you to do or what you think you want them to do. Actually listening, helping them solve their problems and then investing ahead of need smartly. I don't think we've had any issues where we've invested and ultimately decided, you know what, that wasn't the smartest investment.

Okay. Let's just talk about the segment operating income for a second. I think this chart kind of stands on its own, $3.4 billion in 2025, growing to $4.4 billion in 2028. Revenue growth is about 80% of the increase. And then we will continue to drive some margin improvement. That's continued performance on our programs, that's continued growth in the international markets and continued growth in our businesses that generate commercial margins. I remember when we were moving into the business, the space prime, right? And our competition was saying, oh, they don't know how to be a prime, they're not going to be able to do this. Guess what? We do know how do it, and we are able to do it. And it's actually more complicated to produce incredibly complex payloads and space systems than to do program management, manage a schedule, manage the workforce. We've learned how to do it. You can see it. That's how we generate $4.4 billion of operating income in 2028.

Structurally attractive free cash flow. Again, as I mentioned, we're not the biggest company in the defense industry. But I think we generate outsized free cash flow. As I mentioned, there are some other of our peers who are significantly larger than we are, but we generate as much cash as they do. How do we do that? Industry-leading margins certainly helps, growing the business, effectively managing our working capital. And then as we grow in some of these areas, really making sure that we get milestone-based payments or other payment structures that enable us to recover the cash as quickly as we can as we put billions of dollars to work on investment.

So I often get asked, some of the framework agreements of your competition have were told relatively attractive free cash -- or relatively attractive milestone payments we'll certainly work to do precisely the same. And as I mentioned, $5 billion of operating cash, $3.5 billion here of free cash flow even after we're investing heavily in CapEx, '26, '27, '28 before in '29, we really returned to that more normalized level of free cash flow, 2% to 2.5% of sales. Capital allocation, again, we've talked on the internal investment side. Baseline CapEx, 2% to 2.5% of sales, $3 billion invested through Missile Solutions. Again, it's temporal, '26, '27, '28, we'll return to a more normal level after that.

And it's interesting. As those factories come online, the CapEx will start to come down and the capacity, the revenue will really start to increase. So even though we're at I think a solid growth trajectory today, high teens. But when those factories come online and they really start humming and spitting out motors, Chris mentioned, we produce over 100,000 motors a year in Missile Solutions. So we get a lot of questions about these new entrants. They can do 40 motors here or they got $40 million of investment there. Our strategy, as I mentioned, is to build the capacity as rapidly as possible to deliver against the demand that is durable that I just -- I haven't seen in my 30 years, demand like this before, and then get a head start in a very attractive market and stay ahead.

And as Chris mentioned, we know it's an attractive market. We know we're in a race, but we fully intend to win it. We do have flexibility. I talked about a strong balance sheet, certainly a well-aligned portfolio and a diverse portfolio. It's interesting with the diversity of the portfolio it's actually hard to be the fastest grower in the industry. It's actually easier to grow if you have a single program that's growing really fast. We don't have any program that accounts for more than 5% of sales. With that diversity, there's always something growing. There's something shrinking, there's something about the same. But even with that diversity and the power of that diversity, we're growing faster than anybody else, while expanding margins and generating some of the best free cash flow conversion.

We do intend to maintain a competitive dividend. And then we've certainly indicated that from a share repurchase perspective, we will offset dilution as we, again, invest to grow the business. So just talking about unlocking shareholder value. We did make some announcements, some strategic announcements in 2026, early '26. Certainly, the segment realignment. And I will say, we've gone from [ 4 to 3 ]. But importantly, the capabilities within this company are now structurally aligned in the right places within the segments. Before we just had -- we had too many places where we did similar capabilities across multiple segments within the company. I think we've got that alignment laid out. Ultimately, I think that enables us to grow faster and then ultimately, I think it enables us to be more effective as we invest in the business and in our technology for future growth.

Again, we announced the sale of the majority stake in our space propulsion and power systems business. We're excited about that. We're selling it to a very capable party in the industry, AE Industrial Partners. We're going to maintain a 40% stake and as they combine that with other investments, other businesses they have, we'll be able to realize some upside from that. So we're excited to partner with AE Industrial on that. And then as we talk about the Missile Solutions transaction, again, we're excited, incredible demand, and I'll talk a little bit more about that on the next slide.

So really, again, we do have a portfolio that we think delivers significant shareholder value. If you think about SMS as more akin to a defense prime. We think it grows significantly faster, high single-digit growth in SMS relative to most of the primes that are growing 5%, we're pushing high single digits. So significantly faster growth at SMS. If you think about CSD as a commercial entity, more like a mid-cap defense supplier. We're talking about mid-single-digit growth there as they work through the various parts of their portfolio, some of the factory optimization that Jon is working. So we see that very well aligned with sort of the mid-cap defense companies, and we think it's certainly compares favorably.

But if you think about MSL, again, high teens growth. We believe towards the end of the decade, 20% growth, potentially greater than 20% growth. And we think that, that grows well into the 2030s. Again, the capacity will just be coming online '28, '29. It will take some time to get those factories fully loaded with capacity and burning at full rate production into the 2030s. That's where we think really we see that 20-plus percent growth. So really excited about that. And that's ultimately why we decided to do what we did in terms of the transaction. Again, timing matters. The government putting its money where its mouth is, putting $1 billion to work gives us the confidence to invest today to drive the capacity increases to scale at speed that nobody else can.

And we think that MSL compares very favorably in terms of growth, in terms of margin expansion, in terms of being a world leader in the markets that it's in, and it's not just singular growth. Again, it's not just propulsion. It's not just solid rocket motors. It's divert and attitude control systems. The AE sector within MSL is also growing high teens. So it's really a diversity of the portfolio as it grows. So with that, I think I'm about at time. I will say Chris has asked me to really focus on driving the growth in MSL. And pretty soon, I'm going to be taking that responsibility on full time. So we don't have an efficient announcement to make today, but it is possible that this will be the last presentation you hear from me as CFO of L3Harris. It's been a great run. I'm actually not going anywhere, but excited to lead MSL through these times. It's a great team. I've got great partners in Sam and John, and really enjoy working with all the folks here and seeing how we can continue to add value for all of you.

With that, we're going to take a 10-minute break, and then we'll go to Q&A.

We will now take a 10-minute break.

[Break]

Ladies and gentlemen, we will now begin the question-and-answer session. Please direct your attention to the panelists on stage.

Okay. We're going to start our Q&A session here. We'll take questions here in the room, and we'll take questions from our webcast audience. If you're here in the room, you've got 2 options. You can raise your hand and one of our mic runners will run you a mic over. If you are also here in the room and you want to ask a question anonymously, there's a little QR code on the tables in front of you. [Operator Instructions] Why don't we get the -- as we get in the mic sort of situated here. Why don't we take the first question from the web here. And this will be a missile solutions question. And Chris, want me to start with you. You kind of talked about this a bit earlier. Maybe you can talk a little bit more about when you bought Aerojet, did you really think it was going to rise and value this quickly. And now that you realize this additional value, why raise the equity capital to expand solid rocket motor capacity when the other defense primes are effectively self-investing?

Okay. Great. Great question. Well, we're still not sure what it's worth. But as I said, we turned it around and fixed it quicker than I thought. You see the demand, you see the growth. So it probably is, if I'm honest, a little better sooner than I would have expected. We'll see what the IPO brings. And like I said, this is a unique and creative transaction. Could we fund it ourselves. We already have the $11 billion, $12 billion of debt. We got to be careful to keep the investment-grade credit rating. I thought it was a unique opportunity to allow the customer to share in the upside. We're not the first company where we -- they take a stake in it.

And number one, it gives us the confidence to invest now. Ken said it multiple times. I tried to say it, we are building capacity. You saw those were real pictures. The dirt has been cleared. We're building this capacity. We're going to be in a race. We're going to win the race and we're staying ahead of the competition. The $1 billion gives us the confidence. And again, this is a national imperative. This isn't some hobby that the DOW is playing around with. They need munitions. We're the only guys that can scale and deliver well over 100,000 in a couple of years. And then I think it does unlock the valuation and as shareholders of L3Harris, 80%, 83%, 84% of a bigger number sure beats what it is now in our financials. So that's how I look at it. And the Board has been supportive. We kicked this around as a team, and we all thought this was a good way to go.

I would just add maybe one thing to that, and that is that we are modernizing the entirety of the ecosystem, the entirety of how solid rocket motors divert and attitude control systems, fuses and other munitions products are built. We are not just increasing the capacity for a single product, say a PAC-3 missile. We're not just increasing the capacity for standard missile or THAAD. We are going to be able to produce at greater scale across 30 different missile programs, and that's why we're doing things a bit differently than, say, someone who's delivering more capacity of a product or a program. And so this is modernizing the entirety of the Missile Solutions, the entirety of propulsion, divert and attitude control and fusing systems.

Excellent. Appreciate it. We take a question here in the room. Why don't we start way over here.

Thanks. John Godyn at Citi. I wanted to ask about the enduring growth profile just in the context of the budget. I think it was very clear from this presentation that you guys see accelerating growth for many years to come and there are a number of charts going out to 2030 and commentary extending beyond that. What I often hear from investors concern about the budget environment and whether it can support that growth? Perhaps you can elaborate on that?

Sure. Let me kick it off. From the budget environment, I would say we've seen on the domestic side a resetting of the budgets with this reconciliation package. So we anticipate additional growth in '27. Can I promise you that it will be $1.5 billion -- $1.5 trillion, absolutely not. But I don't think anyone can make a promise today. We do know that the administration plans on building and reinforcing what they accomplished in '27. So that's on the domestic side. The other piece to think about is the international side. And the growth on the budgets in the defense ecosystem both in Europe and INDOPACOM and the Middle East are growing. And it's up to all of us to work together to figure out how to leverage that growth and drive our capabilities forward. And that's exactly what we're doing.

I'll just add to that. I think it's really important to think about this beyond just a simple math exercise of the budgets growing and we should grow with the budget. Our portfolio is very well aligned to the needs of our customers not just the Department of War, but also our international allies. And because of that, we think that we're going to be able to grow potentially faster than the budget. And it's easy to say, oh, okay, well, it's $1 trillion in '26, and maybe it's going to be $1.5 trillion in '27. It takes a while for those to get outlaid and then ultimately to get on contract and then to generate revenue. But again, importantly, we think the portfolio very purpose-built, designed to be aligned to the needs of our customers, and that will drive the growth that we're talking about. So I describe it as growing within the budget rather than growing with the budget. And we say the budget, it's not just department work but also international allies.

Yes. Maybe I'll just add one point to that, which is maybe the question for investors as well as based on what you've seen today and heard from this team, are we focusing on the right areas? Do we think missile warning, missile defense, ISR missionized aircraft within that top line number that Ken and Tania talked about do you think they'll be disproportionately higher funded? Do we think resilient communications and electronic warfare in an increasingly dangerous international environment is going to be a greater competency that and get capability that our own customer will want here domestically.

Do we think that munitions need to be recapped with solid rocket motors? Do the world have enough munitions and solid rocket motors, I would say probably not. And so the question is within that, whether it's $1.2 trillion or $1.3 trillion that Ken and Tania talked about, are we focused in the right areas? Do we have capability? Do we have demonstrated expertise? Do we have programs of records in all these growing areas hopefully, I think the answer is yes. So as Ken said, we look at -- we're looking to grow faster than the budget wherever possible because of these capabilities.

Right here in the center. Let's wait for a mic, please.

Hello. My name is [ John Kendall ]. I'm an investor for a long time. I started when L3 had its IPO way back. It was $22 a share. I still have those shares and look at the increase over those years. I've been with Chris, watching Chris, as CEO with L3Harris, it's been up above. Dividends have been fantastic. Growth has been fantastic. And I have to tell you, get in now because it's going up, and I'm telling you -- and this isn't a commercial. I'm an investor started with L3 which was Frank Lanza, [ Bob LaPenta ] from 10 Lockheed Martin Companies. And that was the original L3.

And now with Harris, stronger than ever. And growth has been incredible. I've made a lot of money. And guess what, I would say we're going to continue to make a lot of money Chris is the best CEO. He's fabulous. And this is not a commercial. This company is programmed to go way up. And I've seen -- I've been around long enough to see many administrations in Washington. And whichever administration has been in, we've still grown because there's always a need for defense to make sure the world is safe for freedom and democracy. So take it for me, this is the best investment going.

Mr. Kendall, do you have a question?

The question would be, do you have any idea what this new IPO company will be named and when it's going to happen or any indication of value to start or off?

I just want to clarify, there's no relation between me and -- we are working on the name of the new company that we intend to IPO. It will not be Aerojet Rocketdyne, and it will not be missile solutions. We're working on a name that aligns with the growth, with the capabilities, with the culture of the company, and that is still to be determined. In terms of valuation perspective, I tried to lay it a little bit out on the previous chart when I was in my CFO hat that we think that business is very attractive relative to other kind of defense tech names. And we think that with that strong growth, growing margins and then ultimately, solid free cash flow.

Once we get this kind of investment behind us, that we ought to be valued very much like some of those defense tech names, and I won't name them by name here, but I think you all know what they are and pick your valuation, but we certainly think that as a stand-alone company, it is valued significantly higher than kind of where we've been kind of tied in with some of the defense primes, even though we are a bit different, we are not a prime.

[This call length has exceeded streaming capabilities -- Please refer to the preliminary transcript that will be posted shortly.]

Greetings. Welcome to the L3Harris Technologies Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

It is now my pleasure to introduce your host, Tony Calderon, Vice President, Investor Relations and Corporate Development. Thank you. Tony, you may now begin.

Thank you, Tiffany, and good morning, everyone. Joining me are Chris and Ken. Earlier this morning, we issued our fourth quarter earnings release outlining our results and our 2026 guidance, along with the presentation available on our website.

Before we begin, please note that today's discussion will include forward-looking statements subject to risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please refer to our earnings release and SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release.

With that, let me turn it over to Chris.

Thanks, Tony, and good morning, everyone. We wrapped up 2025 by continuing to execute with speed and discipline, meeting our customer commitments, improving on-time delivery and investing to increase production capacity while delivering strong fourth quarter and full year results. We ended the year with a record order book and strong demand signals from our customers. All of this is positioning us for sustained growth going forward.

We are equally focused on how we evolve our business. Over the past 6 years, we have aligned our portfolio to the fastest-growing defense priorities with a vision of the future of warfare. As a result, we have acquired and divested billions of dollars of businesses, including our recently announced sale of a majority stake in our civil Space Propulsion and Power business. 60% of this business is being sold to AE Industrial Partners. AE's multiple investments in space assets make them an effective steward to scale the business and unlock its value for our shareholders. This transaction enables us to sharpen our focus on our priorities for the Department of War and our allies.

We have continued to improve our operational agility and market position. We reorganized our businesses from 4 segments to 3 in order to align technology and business models. And we announced our intention to pursue an initial public offering of our Missile Solutions business in the second half of 2026.

The Department of War is the anchor investor, creating a $4 billion-plus revenue majority-owned public company with sustainable double-digit growth. This new company will deliver critical propulsion systems at unprecedented speed and scale as well as other Missile Solutions such as air launched effects, IR seekers and weapon release systems. This is an example of the strategic partnerships we have pursued to drive business growth and address critical needs for our customers.

We spent time in the Pentagon and listened to the DoW's needs to significantly expand missile production. And we responded, negotiating a novel partnership structure that benefits the warfighter, taxpayer and our shareholders. We, along with our supply chain, will build production capacity faster than anyone in the industry to meet the demand signal.

The U.S. government is planning to make a financial investment in a new company critical to our national security. Their stake is solely economic. They want greater capacity quickly and a return on their investment. The strategy is straightforward. Construction began last year to expand capacity on large solid rocket motors and certain tactical rocket motor programs.

The government invests now, allowing us to further increase capacity for critical interceptor programs such as THAAD, PAC-3 and standard missile. There is no waiting for contracts or acquisition funding. The investment gives us the confidence to build today while the long-term contracts are being negotiated and finalized. Capacity is now the most important capability.

Our actions are deliberate. We are leading the industry to meet the needs of our customers. We are strengthening the industrial base, reinvigorating competition following decades of consolidation and unlocking value for our shareholders.

In our industry, the year unfolded against one of the most demanding defense and security environments in decades. It was complex, competitive and rapidly evolving. Speed and execution mattered. Against that backdrop, our workforce delivered. So thanks to them for our best year ever. We met our commitments to warfighters, to customers who measure value in deliveries and not intentions, and to the DoW by strengthening the supply chain that underpins national security.

Delivering on our commitments resulted in record orders, solid organic growth, expanding margins and strong cash flow generation. Doing what we say we're going to do is fundamental to how we run the company. Our portfolio is directly aligned with the fastest-growing customer missions, space sensing, missile defense, resilient communications, aircraft ISR missionization and kinetic effects. That alignment is deliberate and informs where we invest, how we come to market and how we engage with customers.

Our mission relevance is seen in our record order book and strong organic growth. We executed on our programs, stabilizing challenging space programs, clearing delinquent rocket motor deliveries dating back to the time of our acquisition and realizing efficiencies through LHX NeXt. These outcomes reflect disciplined execution, technical credibility and our ability to deliver at speed and scale in direct alignment with evolving customer requirements.

Undoubtedly, what stood out the most in 2025 was the pace and urgency of customer demand. Threat environments evolved faster than recent history and expectations shifted just as quickly. Customers require advanced capability at speed and scale. We have the competitive advantage in this environment as the agile, trusted disruptor.

We also deepened our role as a trusted international partner. We won key awards in Europe and Asia, leveraging a global supply base and investing in local industry to scale capacity. We have localized production across the globe, enabling us to meet customer needs during production and during the long sustainment tail. These efforts reinforce our commitment to strengthening global security through interoperable solutions and partnerships.

We secured awards that reflected the full breadth of our capabilities and our ability to consistently bring the right technologies to the table and translate them into customer-aligned solutions. These wins underscore customer confidence in our technical depth, disciplined execution and our ability to deliver integrated mission-ready capabilities. All of this resulted in record backlog and order book this year with an overall book-to-bill of 1.3x and backlog in excess of $38 billion.

Let me highlight a couple of our key wins this quarter. At the start of the fourth quarter, we secured a landmark $2.2 billion award from South Korea for next-generation airborne early warning missionized business jets. Also during the quarter, we were awarded an international weather satellite program for approximately $200 million and multiple international tactical communications and software-defined radio orders in the quarter totaling over $200 million.

At the end of 2025, we strengthened our leadership in space-based missile defense with the award of an SDA contract valued at approximately $850 million to deliver 18 satellites for the Tranche 3 tracking layer. Building on a proven track record as the only company awarded contracts across all 4 tranches, this milestone reinforces our alignment with national defense priorities and underscores our ability to deliver trusted, resilient integrated spacecraft architectures. The continued technology maturation for this contract as well as production synergies positions us very well for the HBTSS award.

And following the quarter, we were selected to deliver multi-aircraft special mission business jets for an international customer with a potential value of over $2 billion. An initial order of over $700 million will be booked in the first quarter of 2026.

Our 2026 guidance exceeds our ambitious targets for revenue, margin and free cash flow that we laid out at our last Investor Day in December 2023. Our record backlog and robust order outlook underpins our 2026 industry-leading 7% organic growth. We also exceeded our LHX NeXt, $1 billion savings commitment 1 year ahead of plan. Many doubted our ability to meet these targets, but today's guidance exceeds the 2026 financial framework and is a result of our relentless focus on leadership, talent, accountability, culture, operational excellence and disciplined execution.

Our 2026 guidance that Ken will take you through momentarily is the foundation for a new 2028 financial framework that we will announce at our upcoming Investor Day in February. With that, I'll turn it over to Ken.

Thanks, and good morning, everyone. Turning to the financial results for 2025. Revenue was $21.9 billion, up 5% organically with growth in all 4 segments. Adjusted segment operating margin was 15.8%, up 40 basis points, reflecting continued cost efficiencies and strong program and product delivery execution.

Non-GAAP EPS was $10.73, an increase of 11% over 2024. Adjusted free cash flow grew to $2.8 billion, representing an increase of greater than 20%, driven by earnings growth, effective working capital management and the benefit associated with favorable tax planning strategies and tax reform. For the fourth quarter, revenue was $5.6 billion, up 6% organically with a segment operating margin of 15.7%, up 40 bps. Non-GAAP EPS was $2.86, up 10% year-over-year.

Turning to our segment results. For 2025, CS delivered revenue of $5.7 billion and margins of 25.2%, 4% growth and 50 bps of margin expansion. In the fourth quarter, CS delivered revenue of $1.5 billion, up 3%, driven by increased international deliveries for software-defined resilient communications as well as Next Generation Jammer program ramp. Q4 operating margin increased to 24.9%, up 50 basis points. CS margin benefited from LHX NeXt.

In 2025, IMS delivered revenue of $6.6 billion, 8% organic growth and margin of 12.2%. In the fourth quarter, IMS revenue was $1.7 billion, up 11% organically due to ramping activity on classified ISR programs and our airborne early warning and control aircraft for the Republic of Korea. Q4 operating margin was 11.1%, down 270 basis points, with the reduction largely reflecting the CAS divestiture and unfavorable program performance in Maritime.

For 2025, SAS delivered revenue of $6.9 billion and margin of 12.3%. For the fourth quarter, SAS revenue was $1.7 billion, up slightly, primarily driven by increased FAA volume in Mission Networks, partially offset by lower classified program volume in Space and Intel and Cyber. The government shutdown delayed awards and limited additional revenue growth in the quarter and the year. Q4 operating margin increased to 13.7%, up 290 basis points, reflecting stabilized performance on classified space programs and LHX NeXt benefits.

For 2025, Aerojet Rocketdyne delivered 12% organic revenue growth with revenue in excess of $2.8 billion and margin of 12.5%. For the fourth quarter, AR delivered another strong quarter with organic growth of 12%, marking its third consecutive quarter of double-digit growth. Performance was driven by higher production volumes across key missile ammunitions programs and the continued ramp of new awards. Q4 operating margin expanded by 130 basis points to 11.8%, benefiting from higher volumes and LHX NeXt. Great results by each of the segments.

Now I'd like to highlight key terms of the Department of Wars planned investment. This is a $1 billion preferred security invested directly into the Missile Solutions business. The security converts at a 20% discount to the IPO price plus 3% detachable warrants priced at a premium. We are planning for an IPO in the second half of 2026, and the DoW is expected to hold a single-digit equity ownership stake.

As a reminder, Missile Solutions will remain a consolidated segment into our financials following the planned public offering. This business will continue to be a part of LHX and will take advantage of our enterprise services and support structure.

Turning to guidance for 2026. We expect revenue of $23 billion to $23.5 billion, representing organic growth of 7% at the midpoint. Segment operating margin is anticipated to be low 16%, supported by strong program execution and investments to drive continued transformation and cost structure efficiency. Free cash flow is expected to be $3 billion, driven by growth, higher profitability and disciplined working capital management even as we increase our CapEx to approximately $600 million.

We are transitioning our diluted EPS guidance from a non-GAAP to a GAAP basis now that we have completed the implementation portion of the LHX NeXt program. Our GAAP diluted EPS is expected to be in the range of $11.30 to $11.50, solid growth even from our non-GAAP diluted EPS in 2025.

Our guidance reflects appropriate risk posture early in the year and the dynamics associated with administration priorities. It includes a full year of Space Propulsion and Power Systems business as we continue to work towards closing the transaction expected in the second half of the year. Consistent with prior practice, we will update as necessary upon the transaction closing.

At the segment level, Space & Mission Systems, or SMS, formed primarily from IMS and SAS delivers critical multi-domain defense solutions in a traditional prime business model. SMS revenue is expected to be approximately $11.5 billion, driven by strength in ISR aircraft missionization and space solutions. Operating margin is expected to be in the mid-10% range.

Communications & Spectrum Dominance or CSD, brings our former CS segment together with our WESCAM sensor business and other EW programs from across the company to deliver primarily commercial products at commercial margins. CSD revenue is projected at approximately $8 billion, driven by growth in EW programs, and communication and airborne EO/IR sensor products with operating margin of about 25%.

Missile Solutions or MSL, combines Aerojet with critical missile systems, including air launched effects, IR seekers and other advanced technologies, creating a focused high-growth business underpinned by scaled capital investment. MSL revenue is anticipated to be approximately $4.4 billion with margins in the mid-12% range, supported by continued growth in solid rocket motor production. And for modeling purposes, this would convert to EBITDA of approximately $620 million.

Our capital deployment strategy reflects our commitment to investing in the business while delivering value to our shareholders. Our approach to dividends is unchanged, and the number of shares outstanding is expected to be relatively consistent with year-end 2025.

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

Thanks, Ken. Our results and actions position us for the next phase of growth. We are more agile, and we're able to allocate capital dynamically, partner strategically and adapt our portfolio as markets evolve. And we are strengthening our foundation for long-term performance by transforming our company, evolving our operating system and adopting AI. Most important, our actions ensure that we remain a trusted partner for our customers and continue to disrupt with a focus on long-term value creation for all stakeholders.

Tiffany, let's go to Q&A.

[Operator Instructions] Our first question today comes from the line of Kristine Liwag with Morgan Stanley.

Chris and Ken, thank you for the additional color you provided on the Missile Solutions business this morning. Considering the strong demand for this product, should we continue to see long-term agreements similar to what was announced on PAC-3 and THAAD? Or is this satisfied by the IPO plans with the U.S. government? And also a follow-up to that is you've called out double-digit growth for this business, but demand is very strong. In the next 3 to 5 years, and maybe it's too premature to think about it like that, but is this something that could grow 3 to 5x larger?

All right. Kristine, thank you for the question. Look, everything is tracking as we've been talking about. We were excited to hear this morning that Lockheed Martin reached an agreement on THAAD. As you know, we're the only provider of the propulsion and DAC systems for THAAD. And obviously, we're going to be glad to support Lockheed Martin and the end customer.

So absolutely, this is what all of the industry has been discussing with the DoW over the last half year or so, and we're starting to see these transactions take form. Yes, once we get the several billion dollars and start with the facilitization, building in excess of 60 factories over 1 million square feet, ordering the equipment and our supply chain doing the same. I think there's a lot of upside and potential, as you would expect, we'll file a Form S-1 as part of the IPO process later this year, and it will provide a lot more information and details and highlight the potential upside.

Yes. I'll just add, Kristine, as Chris mentioned, we're absolutely excited about the framework agreements that have been signed between the Department of War and Lockheed on both PAC-3 and THAAD. We are working closely with our customer as well as the end user to make sure that we're very closely aligned, in particular, those customers that are working closely with the Department of War on the acceleration and the scaling and getting the agreements signed. We've been investing and, again, working closely to modernize production lines for THAAD and PAC-3. We'll continue to do that, and we'll take some of the lessons learned from that to scale across all of the MAC, munitions acceleration programs.

And as we look at this, I don't want to put a number out there on tripling, but we do think that this business, as we combine Missile Solutions is one that can grow at a double-digit CAGR for some period to come. We've studied the market. We've studied the demand. We've had some outside parties come in and do an independent look just to make sure we're looking at it correctly. And we do see this business as able to grow double digits for the foreseeable future.

Our next question comes from the line of Myles Walton with Wolfe Research.

First one was on CapEx. It's obviously higher 2.5% of the '26 sales or thereabouts. Is there a much bigger step-up happening in the future? It's -- I guess a smaller step-up than I would have expected for the multibillion-dollar investment required in Missile Solutions?

Yes, Myles, I can take that one. Yes, we're stepping up CapEx in 2026 to about 2.5% of sales or $600 million. I think that's something like 35% or 40% increase from 2025. As we do that, we're still holding to our 2026 free cash flow guidance of $3 billion. And looking forward, I'm not going to put a number on 2027 CapEx at this point. But we're certainly thinking about it in terms of as we capacitize to deliver, how will we be able to pull cash on some of these new production programs to be able to offset some of that CapEx that we're needing to invest upfront, we'll certainly be working with the entire supply base to make sure that we're going at this together.

And suffice it to say, I think that this is kind of a onetime capital investment to really and truly modernize how solid rocket motors are produced at speed and at scale and at a rate that, quite frankly, the customers haven't gotten to date out of the SRM supply base. And there is a lot of demand, and we're looking to help to fill that as quickly as possible to get that product into the hands of the warfighter. So we think there's a durable long-term benefit to this capital investment. But again, we'll certainly be working to maximize cash inflows as we look at those CapEx requirements in '27 and '28.

And I'll just add, Myles, as you know, we purchased Aerojet Rocketdyne 2.5 years ago. And on day 1, we started investing. So there's been well over $0.5 billion of CapEx spent at Aerojet over the past 2.5 years. So when we made this acquisition, we knew it was a race. We started on day 1, and we sure plan to win the race.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

Ken, just a quick point of clarification. The comment you made about your -- about the expectation of the government or Pentagon stake in Missile Solutions is that it would be a single-digit percentage of the enterprise value of Missile Solutions. Just want to make sure that's what you meant. And then just as a second question, to your point on still doing the $3 billion with the higher CapEx, that implies your cash from ops is growing year-over-year quite a bit faster than your segment EBIT. If you could just break down the pieces of why that's happening.

Sure. Yes. On the first question, yes, I did, in fact, mean single-digit stake -- single-digit ownership stake in the business. And on the second question, look, in terms of our cash from ops and our free cash flow, we're certainly laser-focused on ensuring that we deliver the cash out of the earnings that we generate.

And as we look at 2026, we're very comfortable that we can accommodate the additional CapEx requirements as we look, again, at investing in the business to support our customers and to drive the needed capacity increases in our products. And I should say that's really across the L3Harris portfolio. We focus often on solid rocket motors, but there are demands for a number of our products, as Chris mentioned in his comments.

And look, disciplined working capital management, certainly working all aspects of the contractual deals with our customers as well as our suppliers to make sure that we can deliver the cash at $3 billion for 2026.

Our next question comes from the line of John Godyn with Citigroup.

There's obviously a lot of excitement around Missile Solutions. But we do get questions on RemainCo and what the revenue outlook for RemainCo, LHX RemainCo might look like over the next couple of years and points of leverage to what could be a very large defense budget on the horizon. I'm sure we're going to get more detail at the Investor Day, but I'd love to just kind of give you a chance to speak to what the revenue growth rate might look like, whether you envision it accelerating from here and what points of leverage remain in the business even when you IPO the sort of most exciting, fastest-growing part?

John, thanks for the question. And I appreciate the focus on RemainCo because that's a big part of big part of L3Harris. And as Ken said, and we've said over the last several weeks, we will continue to consolidate own and control MSL even after the IPO. So we're looking at solid mid-single-digit growth, a little faster, I think, than the rest of industry and hopefully, faster than the market in total.

As I said in my prepared comments, I really like our portfolio. We spent a lot of time realigning this over the last 5 or 6 years. And I would look at our capabilities, I look at our capacity. We've talked about building new factories for space. The SDA win is a big win for us, 4 in a row. HBTSS is coming, a lot of classified work.

So when I look at what we have in Space, what we have in the airborne domains, even Maritime, maybe not as a prime, but supporting a lot of the new construction, I think we're well positioned. The accelerant will be -- we need to see the 2027 Defense Budget, the PBR, President's Budget Request has yet to be submitted to Congress. I think sometime in March is what people are saying. And if that's, in fact, $1.5 trillion, I'll be as excited as everybody else in the industry, and it could even be further upside. 7% is the midpoint of a range. So I really like our portfolio. I love our backlog, and I think we're well positioned.

Yes. I would just add, John, to that. If we do see a significantly increased defense budget in FY '27, our expectation certainly is that as we look at upside to growth, we would expect L3Harris to be able to deliver on that quicker given our kind of agile nature and our ability to crank up production given some of the investments that we've made in the business, whether that's in space satellites related to missile defense for America, whether that's in communications or even as we scale the solid rock motors.

Our next question comes from the line of Peter Arment with Baird.

Nice results. Chris, regarding the Golden Dome and SDA, you've been very successful in all the SDA kind of programs that you highlighted and another great win in December. But how do we think about kind of the total opportunity? Or can you quantify kind of what Golden Dome looks like for L3Harris when we think about that?

Absolutely. Golden Dome was set up as part of an executive order probably about a year ago today. We've been tracking as you have, all the progress under general group line and setting them up as a DRP and the budget. $155 billion of reconciliation money, which contains $25 billion just for Golden Dome. So when you look at the 3 pieces, there's space-based interceptors, which I think will be the slowest to develop over time and probably began with development programs. We are taking a merchant supplier approach with space-based interceptor. We have some great technologies that everybody wants.

And I think part of our strategy and the portfolio allows us to prime sub or via merchant supplier. So that's how we're going to play in that. We talked about the actual satellite architecture. I think we're in a really good position as evidenced by what we've won to date, as you said, Peter, and we just need to wait for more awards and more RFPs. I think the government shut down, as we said, probably set back the space force 45 days or so, but they did come out with an architecture. We have our capabilities, and we'll be ready to respond quickly. Again, we've invested. We built the facilities, and we have state-of-the-art modern factories to crank out these satellites at the right time.

And then everything else under Golden Dome, a lot of this deals with the missile defense and the interceptors, which I think we've covered under the THAAD, PAC-3 umbrella. We also have hypersonic capabilities and large solid rocket motors as well. So I believe we're in really good shape relative to each and every piece. And we have the capabilities. We can go fast, as Ken said, and we're just ready to get some awards and respond to some proposals.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

I wanted to ask another business question. You mentioned international tactical comms in your prepared remarks. How robust has that growth been in '25 and expectations over the next few years? And how are you balancing the domestic side of tactical, just thinking about the multiyear outlook there?

Yes. No, thank you, Sheila. I'm glad you asked the question. We still think we have the best and only resilient com capability. It's going to be critical to the future of warfare. On the international, you read a lot about it. We continue to win a lot of business in 2025. We think we're going to continue to win some business in '26. We're in discussions with a lot of countries around the world. And you have to balance all the political rhetoric with the operational needs. At the end of the day, these countries need resilient comms, and they need interoperability.

Our strategy has been and is actually increasing with more and more localization. We utilize in-country partnerships. We're making investments in country. We're transferring technology as appropriate. And we will have more international software-defined radios in 2026 than we will in 2025. So that's growing on that front.

Domestically, there's a lot being reviewed mainly by the Army. I do like the fact that they're running experimentation, they're doing demos, and they're going to make the decision based on the capability. We continue to believe we have the best capabilities by far. Again, our radios are software-defined. So we've been investing and upgrading them with new capabilities.

And look, at the end of the day, the soldiers want to carry 1 radio. We don't want to go backwards where people are carrying 2 or 3 or 4 radios. So the fact that we have the software-defined radios is a huge advantage for us. We've invested in the past. We've leveraged the commercial business model. We can scale, and we have a state-of-the-art factory in upstate New York. So I'm optimistic about the future.

Our next question comes from the line of Gautam Khanna with TD Cowen.

Just following up on the last question. As we think about some of the things that did not get funded as well in the '26 request, things like Armed Overwatch and some of the U.S. military radios. I'm just curious, do you anticipate that we'll start to see some of that stuff get funded in the '27 request? Do you have any indication either way? And then just as a follow-up, obviously, the compare on margins, there were some asset gains in 2025. I'm just curious if you could talk about sort of what's driving the margin improvement in 2026.

Yes. Thanks, Gautam. We don't actually have insight into the '27 budget, as you would expect. But if it is, in fact, going to be $1.5 trillion, I got to believe that the needs for, like I've said, the space sensing, the resilient comms, kinetic effects and such are in our sweet spot, and these will, in fact, be funded.

Finding the budget as it relates to these HMS software radios is on a variety of different line items. Again, we feel that our hardware is needed, that our capability and the network is needed, and we're willing and able to compete with any and all newcomers and incumbents to prove our capabilities. So I'm feeling pretty good about the potential there, but we need to see how this plays out over the next several months.

And to the second part of the question, Gautam, I would say as a part of our strategy and including LHX NeXt, and how we do things differently and most efficiently, we've certainly been focused on investing in the business where we see future opportunities and growth. And as a part of that, where we see some product lines that are, I'll say, legacy or that we're not investing in that are less core to our strategy and our growth, we've focused on trying to monetize some of those, for other folks who may see those as more attractive in terms of longer-term sustainment tails or what aligns better with their business model.

In terms of 2026 margin improvement, I largely see it falling on to our team to deliver on our programs and our product deliveries. We're not projecting a lot of product line sales or gains relative to that in 2026. This is going to be about execution, product delivery, program delivery. And that's how we plan to get to that increased margin in '26. I think we've got confidence.

We're projecting to be, I think, positive EACs for 2025, and that puts us on a good trajectory for '26. I think we've gotten some program challenges understood and behind us, and we've stabilized a few programs that we had been quite frankly, challenged with in parts of '24 and into '25. So feel good. I think we got the right team, and we can deliver on those commitments largely by performing on the business, performing on our programs, getting the product delivered and getting to our low 16% margin rate in 2026.

I'll just clarify in my comments, I talked about LHX NeXt finishing a year early. That was a top-down approach, as you know, for 2 years to take out significant over billions of dollars of cost to streamline the business. That is now part of our DNA. It's going to be embedded into our operations as part of our ongoing continuous improvement program. So the concepts and the philosophy of continuous improvement, efficiency, cost savings will continue. It just won't be called out as a separate top-down initiative. It will be into the day-to-day operations of the business. So another potential tailwind to higher margins.

Our next question comes from the line of Scott Mikus with Melius Research.

And bookings were very strong in the quarter and the year. But given the shutdown, a lot of the funding from last year was delayed and the One Big Beautiful Bill funding is yet to be put on contract. I'm just curious where do you expect book-to-bill to come in for the year? And could you maybe parse that out by the new segments?

Yes. I think you're right on the funding. I think right now, we're waiting for -- I think the Department of Water has to provide a spend plan for the $155 billion reconciliation back to Congress. And then once that occurs, the money will be allocated and start to flow.

We did end the year at 1.3x book-to-bill. We generally don't guide book-to-bill, but I would think it would be at least 1.1x or larger. But again, we need to get the '26 appropriations passed. We've got to see the '27 PBR, but we feel good about it, and we always plan to book more orders and revenue. We're going to grow 7% midpoint. We're going to grow orders double digits.

Our next question comes from the line of Seth Seifman with JPMorgan.

Maybe just a quick question and a clarification. I guess from the question, the CSD business and kind of healthy margin there, 25%. How do you think about the sustainability of that margin going forward? Is that a segment where given the model, there's potential for margin expansion? Or is it at a place where that's about as healthy as things can get? Or are there various pressures out there from mix or anything else?

All right. And the clarification?

The clarification, we talked earlier about the lower funding in the request for tactical radios. Do you, in fact, have a good sense of how everything shook out in appropriations for tactical?

Okay. Let me take those. Yes, on CSD, the nice thing now is we have a majority of our commercial businesses in the same segment. And I think that's what unique about L3Harris. And I think Ken said it well. We have the traditional prime business models. We have the commercial business models. And then, of course, we have the high-growth top line MSL.

So yes, we are constantly looking to improve our margins. And I think with the commercial business model, with the volume and the efficiency, even the upcoming adoption and utilization of AI, there's always potential to increase on those particular opportunities. So I'm really optimistic about it, and there will be best practices shared within the commercial business model segment that has only been formed about 4 weeks ago. So there's absolutely upside in that regard.

And yes, shaking out on the 2026, like I said, there has been some reductions in some of the tactical radio line items. They are kind of peanut buttered throughout. So you have to piece them together. Some are competitive, which we plan to win. And we're still optimistic that we can grow our tactical radio business in 2026, and that is our plan.

Yes. I'll just add maybe just a couple of things, Seth. In terms of CSD and the 25% margin rate that we're forecasting for '26, I think we certainly feel good about that in terms of, look, it's a commercial model. We invest. We bring the product forward. And we will continue to invest in that business to continue to modernize our products and ensure that they meet the ever-changing demands of the warfighter.

And as we make those commercial type investments, they certainly are -- or they do offset some of that margin as you think about that model. We certainly accommodate that within the 25%. Is there the opportunity to see some of that go up, as Chris mentioned, as we continue to modernize and continue to think about how we operate the business? Sure. But we'll also think about that as giving us the ability to continue to invest in the growth of that business.

And I think that ties into -- a bit into your question on the radios. We certainly continue to invest in modern waveforms. Certainly into the software-defined radios themselves and certainly into our relationships with partners around the globe that are able to procure U.S. radios from L3Harris that are, again, resilient and interoperable, and able to enable us to have steady throughput in the factory, even as we think about on the domestic side, reallocating some of our resources to support programs like NGC2 from HMS Manpack and COTS and then filling in the production for our international partners who really want to get their hands on, again, those interoperable L3Harris radios. So it's been a good model for us.

Our next question comes from the line of Doug Harned with Bernstein.

On Space, I wanted to understand a little bit more about what your production plans are ramps in Palm Bay and Fort Wayne. And then how you think about it in the context of your broader space business? You mentioned, as we know, you've been on every one of the tranches for the tracking layer. But when you look at Tranche 3, there are 3 of your peers also on there. So I'm trying to understand how you see the tracking layer evolving over time from a competitive and industrial participation standpoint, and how that ties in with your thinking about production ramps in your new facilities?

Okay. Doug, thanks for the question. Yes, there were 72 tracking satellites awarded. I think in our meetings with the customers over the last year or so, the #1 focus is speed followed closely by scale. So we've made the investments over 200,000 square feet, as you said, in Fort Wayne, Indiana and Palm Bay. We have the capacity to quickly turn these satellites and meet the schedules and commitments that we've made to.

The supply chain is always critical in the satellite manufacturing business. I think with all this ramp, that seems to be the challenge that the entire industry is facing in getting these second and third tier suppliers, the scale and the ability to perform and meet their commitments. So we envision increased revenue in both of those factories as we start to fill them up. Looking forward to getting HBTSS for however many satellites that turns out to be. And there's a lot of work going on, Doug, in the classified arena.

So Golden Dome is starting to fill in. And like I said, we've made the investments. We have the capacity. And I think the DoW is going to look for companies that have the capacity. They don't have time to wait for people to build buildings and go from 1 or 2 demos to 18 or 36 a year. So I think the strategy has worked. And again, being a little further ahead several years back, we're perfectly positioned for this growth.

Our next question comes from the line of Robert Stallard with Vertical Research.

Chris and Ken, you've laid out some pretty interesting growth opportunities ahead, but I suppose all of this is dependent on your supply chain and your personnel. So how do you feel about the capacity of the suppliers and your internal staffing to deal with this trajectory that's ahead of us?

I'll take first shot. Good to hear you. Personnel has not been an issue. I think we're one of the hottest companies in the defense industry for people to work for. We have a very active recruiting, both on-campus and experienced hires. So no issue filling the workforce. We are spending a lot of time with almost half of our employees being engineered engineers, how do we enable the engineers, AI-enabled to be more efficient to get more productivity -- without necessarily having to add a significant amount of people. We're using more and more robotics in our factories, including in the Missile segment as well.

On the supply chain, I think they have now seeing the demand signals where historically, they were sole providers to the entire industry. I think we're seeing 2 and 3 different suppliers out there. There's a ton of private equity money looking for things to do. And every time we meet with them, we tell them start a second, third-tier supplier for the defense industry. The world needs a lot more there. So I think it's healthier than it used to be. It got through COVID. They're investing now that they see the demand signal. And I think as a country, we're close to being able to hit on all cylinders. But as always, they have to be able to hire, they have to be able to invest and perform. And I think this administration is doing a good job setting us all up for success.

Yes. Thanks, Chris. And maybe I'll just comment a little bit further on supply chain at MSL, just given the rapid growth that we are projecting there. And I'll just say we've significantly matured our approach to supply chain, our supply chain organization and the relationships with our suppliers where we really are thinking about our suppliers as partners on this path that we see of growth and getting the additional capacity to our customers, and less about a vendor or a transactional type relationship.

So we're working very closely with all of the key suppliers. I would say, in that particular business, we're certainly one of their, if not their largest customers, certainly for these types of products. We certainly intend to keep it that way with the growth that we project. And as Chris mentioned, in helping our customer get the missiles they need into the hands of the warfighter. And for us, solid rocket motors into the hands of our customers, we are essentially in a race, both to get those in the hands of the customer as well as stay ahead of the competition. And we do intend to win that race and working very closely with our supply chain is a key part of that strategy.

Tiffany, we will now take the last question.

Our final question comes from the line of Michael Ciarmoli with Truist Securities.

Nice results. Just Chris or Ken, a little bit more detail on maybe unwinding Aerojet and MSL now. You'll have the majority stake. In the past, you've talked about having all the capabilities or the majority of capabilities under one roof to compete as a prime. Is this still going to be the case? Or is MSL going to be a 100% merchant supplier model? And if so, were there any stipulations or conditions kind of mandated by the DoW to that end?

Thanks, Mike. There were no stipulations from DOW with regards to that question. They want competition. They want scale, they want speed, and that's what we that's we plan to focus on. Yes, it's interesting. I think this -- when you look at this $4 billion-plus entity, a lot of the focus is on solid rocket motors. But we did talk about seekers. We've been investing hundreds of million dollars in developing seekers. We have weapon release. So it's kind of a one-stop shop relative to missiles, but really as a supplier.

There generally are a lot fewer new start missile programs as a prime. But if that's something we choose to do strategically, we have the ability to do it. My honest assessment is we have so much work, so much growth. We try to focus on what we do well and how we can grow the top line, the bottom line and generate cash. And we're not going to spend a lot of time getting distracted or chasing the shiny objects.

So we have more than enough work. I'm excited about the 60-plus buildings, the equipment, the robotics, the increase in the workforce. But we'll see what they need. And if we can support the customer, we always look to see and what role is best. Sometimes it's a merchant supplier, sometimes it's a prime, sometimes it's a sub. But nothing out there in the near term to focus on in that regard.

So I appreciate the last question. In closing, 2025 was our best year ever. We reinforced the durability and alignment of our portfolio, the strength of our execution and the discipline of our strategy. We took deliberate actions at the beginning of this year to evolve and position ourselves for the future.

As we build on the momentum from 2025, we enter the next phase as the industry's most focused, agile and resilient company, confident in our ability to drive sustainable growth, deliver strong results and to continue to create long-term value for our customers, shareholders and employees.

I want to thank you all for joining today's call. We look forward to seeing you on February 25 at our 2026 Investor Day in New York City. Till then, stay safe and warm. Thank you.

Greetings, and welcome to the L3Harris Investor Update Call. [Operator Instructions] As a reminder, this call is being recorded.

It is now my pleasure to turn over to Tony Calderon, Vice President of Investor Relations and Corporate Development.

Thank you, Tiffany, and good morning, everyone. Joining me are Chris, Ken and Dan Gittsovich, CFO of the Missile Solutions business. Earlier this morning, we announced the first-of-its-kind partnership with the Department of War to significantly increase capacity to build solid rocket motors that power vital U.S. and Allied Missiles. We scheduled this call to update you on this news.

With that, let me turn it over to Chris.

Okay. Thanks, Tony, and good morning, everyone. Since the merger, we have been intentional about shaping L3Harris into a more national security-focused, agile and resilient enterprise. Our actions have been guided by a few clear objectives to concentrate on where we have the greatest ability to differentiate, to grow profitably and to deliver long-term shareholder value in an increasingly complex and dynamic global defense environment. Earlier this year, we announced 2 related and highly strategic actions that advance that objective. First, we entered into a transaction involving the sale of our civil space propulsion and power systems business while retaining a 40% equity stake. Second, we announced a realignment from 4 to 3 segments to align our capabilities and business models with the priorities of the Department of war. Missile production is one of those priorities, which is what we'll be focused on today. Together, these actions underscore our disciplined approach to portfolio management and provide greater transparency into where we are deploying capital, leadership attention and technology to drive the highest returns and the strongest competitive position. And earlier today, we announced a first-of-a-kind partnership with the Department of War for our Missile Solutions segment to raise demand signal creates clear financial visibility and predictability for this business. Over the last 2.5 years of sustained investment and operational improvement, Aerojet deliveries have significantly increased their output. We are taking the next step to build the arsenal of freedom through the creation of a pure-play missile solutions company. This expanded business will provide our nation and our allies sustained rocket motor capacity for decades to come. With that, I'll turn it over to Ken.

Thanks, Chris, and good morning, everybody. Our ability to translate strategy and discipline into strong outcomes is increasingly evident. The quality we've delivered, the capacity we've added and the execution rigor we've brought to transforming Aerojet Rocketdyne positions the realigned Missile Solutions business for this next phase of growth. Missile Solutions is a scaled, diversified missile systems and Effects business with over 7,000 employees across 11 states and 18 sites. We bring together propulsion, precision maneuvering, advanced effects, seekers and launch technologies with the manufacturing depth required to deliver at speed and scale. At its core, Missile Solutions includes missile propulsion and attitude control systems, supporting both offensive and defensive missile systems. Our solid rocket motors provide power, while our DACs deliver precision maneuverability that is critical to the success of our customers' missions. Advanced Effects extends this portfolio beyond propulsion, combining air launch effects, infrared seekers, missile ammunition release systems and other advanced technologies.

Together, these capabilities form the innovation engine that differentiates Missile Solutions and enables us to deliver integrated high-performance missile subsystems rather than stand-alone components. Space propulsion includes launch engines and advanced power systems for national security and civil customers. While a portion of this business is included in the space propulsion and Power Systems majority stake sale announced on January 5, the RS-25 engine used by NASA for deep space missions will remain part of the Missile Solutions portfolio. Our investments plan to further scale the business and provide further upside for everyone involved, the war fighter, the government, the taxpayer and our shareholders. We are modernizing the whole propulsion production process, benefiting the entire solid rocket motor value chain. These investments fund the expansion and modernization of our factories in Camden, Arkansas, Orange, Virginia; Huntsville, Alabama; and Canoga Park, California. In Camden, construction is underway on our Arkansas advanced propulsion facility, over 30 buildings on 250 acres with the ability to produce medium and large-sized motors for interceptors critical to our homeland defense.

In Orange, Virginia, we are building a ground-up advanced propulsion facility to provide a second source of production for critical missile programs. Our Canoga Park facility will expand DAC capacity, and our Huntsville factory will add to their inert component production volumes. Construction will occur in phases with full rate production expected by 2030. When we are done, we will have added over 60 buildings comprising 1 million square feet of new production space, including 8 automated factory areas and 6 casting lines. Taken together, our planned investments are expected to more than triple rocket motor production capacity for critical missile programs by the end of the decade. This new capacity is designed to respond to strong and sustained demand across multiple missile programs. Award timing will vary by program and customer, and our investment approach is structured to accommodate that variability while maintaining flexibility and discipline. The Department of Wars investment reflects a shared objective to expand industrial base capacity and reduce supply chain risk. Through its $1 billion preferred convertible investment, the Department of Water participates economically in the long-term success of the business with any conversion subject to future IPO and market conditions. Tiffany, let's go to Q&A.

[Operator Instructions] Our first question comes from the line of Sheila Kahyaoglu with Jefferies.

Good morning, Chris and Ken. Busy start for 2026 for you guys. Maybe if you could talk about, Chris, how this came about? How this positions you with the administration and Department of War going forward? How this changes the growth profile of the business, given the investments you're making, tripling rocket motor capacity?

Yes. Thanks, Sheila. I'll take part of the question and then Ken can take the growth part. The Department of War has been meeting with the defense and industrial base, either collectively or individually starting back in the summer, talking about the need for speed and the need for capacity. November 7, when Hegseth gave you speech and they rolled out the arsenal of freedom, it further emphasized that point.

And we've been having numerous meetings, dozens, if not more, at all levels with the Department of War, trying to collaborate and partner and figure out a path forward. And the teams came up with this idea, and we think it's a creative solution. Obviously, we need billions of dollars to meet this demand. We are already the premier solid rocket motor provider in the world, and we just need to increase our capacity. So we thought accessing the public markets and having the Department of War as our anchor investor made a lot of sense. And so we negotiated and executed that transaction. Ken?

Yes. Thanks, Chris. Sheila, in terms of the business, I would say we look at it having the potential to more than double in sales by the end of the decade, certainly, I think, a strong margin profile as we look at that business. when you bring Missile Solutions together, we'll kind of give you a full sense of what that business looked like in '25 and as we look forward in '26, but we certainly think it gives us solid margin expansion.

And then certainly, it will take some investment, but there should be a significant opportunity to grow the free cash flow of this business as we look forward as well.

Your next question comes from the line of Gautam Khanna with Cowen.

Congrats, guys. I was wondering if you could give us any color on the percentage equity stake that LHX will retain? And how far along you are in some of your contract discussions that may follow as a result of this transaction?

Yes. Thanks for the question. L3Harris will own a majority of the Missile Solutions new company. We will also control that. And the Department of War has only an economic investment. They have no board seats. They have no influence with management or the day-to-day operations it's just an economic investment. I'll let Ken talk about the percent and the contract negotiations.

Yes. Thanks, Sheila. I'll take part of the question and then Ken can take the growth part. The Department of War has been meeting with the defense and industrial base, either collectively or individually starting back in the summer, talking about the need for speed and the need for capacity. November 7, when Hegseth gave you speech and they rolled out the arsenal of freedom, it further emphasized that point. And we've been having numerous meetings, dozens, if not more, at all levels with the Department of War, trying to collaborate and partner and figure out a path forward.

And the teams came up with this idea, and we think it's a creative solution. Obviously, we need billions of dollars to meet this demand. We are already the premier solid rocket motor provider in the world, and we just need to increase our capacity. So we thought accessing the public markets and having the Department of War as our anchor investor made a lot of sense. And so we negotiated and executed that transaction. Ken?

Our next question comes from the line of Robert Stallard with Vertical Research.

Ken, this is probably one for you. I think previously, you've talked about Aerojet doubling its revenues by 2030. Does this $1 billion investment allow you to accelerate that growth and potentially more than double revenues by the time we get to 2030?

Yes. Thanks, Rob. Look, certainly, as we talked about this business previously, we certainly had expectations of where demand was. I do think this has the potential to accelerate revenue by the end of 2030, number one. so we could potentially more than double by that point in time. Number two, I think it enables us to continue to generate strong margins.

And then I think maybe most importantly, these are investments for the durability of the business for the long term. We certainly see this demand well beyond 2030, and we're building for the long-term health of the business. This really is about taking a legacy business turning it into the modern solid rocket motor producer of the future, modern factories, modern facilities, ability to deliver, as you heard under Secretary Duffy say, with the speed and scale that the Department of Water needs and demands. And we feel like this is the right investment for us to get there. And it will take some time to build that capacity, get it qualified, bring it online. So we think there's some upside to 2030, but certainly, beyond 2030, this is great for the long-term health of the business.

Our next question comes from the line of John Godyn with Citigroup.

Congratulations. What I wanted to spend a second on is just understanding why this structure was necessary? What is unlocked in this structure that you guys couldn't do if these businesses were still in LHX consolidated. You could have increased CapEx, you could have increased investment. You could have even had an economic stake with the government, right? So why is this specific structure, the value maximizing structure out of curiosity?

Yes, John, I can answer that question. Look, as we've realigned the business into 3 segments, and I think Chris talked a little bit about that earlier, Space and Mission Systems, Communications and spectrum dominance and then Missile Solutions that we're talking about today. I think we've done a good job of aligning based on our capabilities, but also based on the business models.

And as we looked at Missile Solutions, we believe that it's got certainly the most durable and rapid growth trajectory. And it's going to take some investment to get there and felt like this was the way to really ensure that our shareholders are able to participate in the strength and the durable growth in the business. And certainly, these companies that are growing like this based on the comps that we look at out there, we see it as having significant opportunity to create value for L3Harris shareholders in this structure.

Yes, John, I'll chime in. I don't disagree with you, but we've talked about $3 billion of free cash flow in 2026 for the L3Harris shareholders. I think taking 1/3 or 1/2 of that and investing in Aerojet Rocketdyne CapEx would not be viewed positively by our existing shareholder base. I think we're going to have maybe different types of investors in Missile solutions versus the core traditional L3Harris business. So we looked at a variety of alternatives, and we think a mid-cap solely focused missile solution business.

This is more than SRMs, this has hypersonics, has fuses, has weapons relief, has the ability to unlock a lot of value for those shareholders and then, of course, for our L3Harris shareholders as majority owners. So it seem to be an attractive and unique way to take advantage of the market, the multiples and to generate enough cash through an IPO to fund this. And again, I could not think of a better anchor investor than the Department of War. And I think it's unique. I think it's first of a kind, and I think everybody benefits.

Our next question comes from the line of Myles Walton with Wolfe Research.

Maybe for Ken or Chris, I guess, is the management team that is currently aligned with Missile Solutions anticipated to be the publicly traded management team? And then vis-a-vis the LHX in light of the executive order and the corporate actions you're taking in '26, are you changing your anticipation of increasing share repurchase activity versus '25?

Yes, I'll take that one. The management team of Missile Solutions today is expected to be the management team of the company. Ken will be the CEO of Missile Solutions from the outside, inside, he'll be a segment President reporting to me like the other 2 segment presidents. We will take advantage of the L3Harris Enterprise when it comes to benefits, payrolls, supply chain and such.

So again, we're a majority owner, a controlling owner, and that's how we're going to run the business to keep it efficient and cost effective. The executive order, as we read it, is focused on defense contractors that are not investing in growth or those that are not current and delinquent within their portfolio. So at this point in time, unless I'm told otherwise, I feel that we are not on that list and subject to those requirements. So we will evaluate our capital deployment consistent with past practice, and we'll be given further guidance on the 29th of January.

Our next question comes from the line of Kristine Liwag with Morgan Stanley.

So first, I just wanted to confirm, Chris, I think you mentioned earlier that the convertible securities will not have some sort of golden share or special rights. Can you just expand on that and confirm that's the case?

That is, in fact, the case, yes. Ken, anything you want to add to that?

Kristine, look, from a governance perspective, this is a financial investment. I think it aligns the interest of our customer into the outcomes of the product they want to get and the opportunity for some financial return for an investment there, and it very much aligns our incentives as well to get the factories built, get the product delivered and create returns for all of our shareholders. One of those being the Department of War in terms of their defense industrial base fund.

And I'll just say, as we negotiated the team negotiated this. At no point in time, ever in the conversation with a discussion about the Department of War, being on our board of Missile Solutions have anything to do with management for managing the business. Purely an economic investment with the hopes that they can get a good return for the U.S. taxpayers the same way we wake up every morning trying to get good returns for our shareholders.

Our next question comes from the line of Douglas Harned with Bernstein.

Chris, this is in this huge demand for missiles today, we know there's a shortage of growth in rocket motors. But if you look out over the last 30 years, we've seen periods of high growing demand, but we've seen other periods of overcapacity. I mean how do you look at this over the long term and ensure that you can manage the risks when we get out to 2030? Should we see a different demand environment than we see today?

Yes. Thanks, Doug. And that is what is different about this administration and this transaction because you're absolutely right. In the past, it was year-to-year, which is why nobody would invest the hundreds of millions or billions of dollars to expand and invest in capacity because 12 months later, you could be left holding the bag. There is a -- not only a demand signal, there is language in the NDAA that permits multiyear contracts up to 7 years. And as we've modeled the business case, we look at the investments that we are making in the factories and the equipment, factoring in the manufacturing efficiencies, we'll get the supply chain efficiencies.

We believe that there is -- the next 7 years are pretty well set and committed based on the quantities we're in the process of negotiating. And we've had outside studies and reviews that would suggest that there will be demand for missiles and solid rocket motors well into the 2040s. Arguably, the quantities could come down, but there's more demand than there is supply. And I think this is going to be a great opportunity to create value for Missile Solutions shareholders and L3Harris shareholders.

Yes. Let me just add to that, and thanks for the question, Doug. Look, we're here to have an opinion, right? And we think this is the right thing to do. We think there's plenty of demand for the long run. But one of the things that we are doing, and I touched on this a little bit in the prepared remarks, is really changing how solid rocket motors are built. So to the extent there is a change in demand from product to product or to a next-generation missile or motor, we will be able to deliver those in the facilities that we are constructing because we're really working on more common production across motors as opposed to if you've been to Camden, you may have seen it's very program-specific historically.

So we'll be able to reconfigure. We'll be able to put new motors to Monday or Tuesday, be pouring and casting for one program and Wednesday and Thursday for another. So we're pretty excited about the approach. We think it enables us to not only produce for the current demand and current programs, but have that flexibility to be able to surge across programs or bring in new as we see dynamics change. But again, our opinion is that there's going to be long-term demand for these products.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

Yes. Just I guess, given the divergence in valuations in defense tech versus traditional defense, if you will, which I think is kind of behind this in large part. Are there other parts of the company where you might explore other creative strategies because there's other parts of L3Harris that look and sound or grow like defense tech.

And Chris, I'm curious just -- I don't know how much you would be willing to answer this, but I'm just curious if you think others in the industry will start to follow this type of path. And then last thing I wanted to ask about is just how you thought through the structure? And does -- I guess, why not just let the whole thing go and does retaining a large stake plus a government stake risk not unlocking all of that valuation differential?

Yes. Noah, I'll start there, and then Chris can jump in as well. But look, as we look at this opportunity, we certainly feel like it's value creating for all of the L3Harris shareholders as well as the potential, ultimately, the investors in IPO down the road for Missile Solutions. We certainly think that if you think about a future IPO of this business and us retaining an interest, we've certainly evaluated the float, how those types of businesses trade in terms -- and then the benefits of staying within the L3Harris family in terms of our ability to get some of the work that we've done, some of the help that's been provided around kind of expanding capacity and expanding deliveries and all the efficiencies and production improvements that have been made since Aerojet Rocketdyne has been in the L3Harris family.

So we think it makes a lot of sense. We think that there's good alignment there. In terms of the other businesses, look, we're very comfortable. I think this is a unique situation for Aerojet Rocketdyne. The other 2 businesses, I would say, are going to benefit in terms of -- we'll have the separate ultimate, if the IPO is successful, publicly traded company, we'll be able to continue to invest the profits of L3Harris and the cash flows of L3Harris to continue to grow communications and spectrum dominance in the space and Mission Systems segments as well. So we think it's a pretty symbiotic relationship overall. and we're pretty excited about it as we look forward. And again, we think this is the right approach.

Yes. Noah, I'll pile on. One of the -- as someone said, it's been a busy 2026 with 3 pretty significant announcements in 13 days. But one of the reasons we reorganized is really to get to your point of the difference in valuations. And look, I understand and appreciate it's hard to understand L3Harris, which has been a consistent feedback because of our diverse portfolio and maybe not a lot of big household name programs.

So when we put these 3 together, we've talked a lot about Missile Solutions, so you understand what we're doing there. But with the communications and spectrum dominance, I mean, that's mainly commercial products. We're taking advantage of the commercial business model. We have commercial margins. I view that as being -- if you don't believe L3Harris is defense tech, it clearly is the defense tech piece of it. And then we have the Space and Mission Systems. So I think if you look at this on a sum of the parts, I'm hoping that the market appropriately values the 3 segments and the sum of the parts so we don't have to go off and we will not go off and sell or monetize different pieces the way we did here. This is a very unique situation, completely aligned with everybody at the DoW wants, which is we need more munitions faster. The selection criteria going forward is going to be speed and volume. We have the volume, we have the speed. We're going to have more volume and more speed.

So I expect we're going to win a lot of new business in Missile Solutions business. and there will be competition, and it will be fair in arm's length. Relative to others in the industry, we're all different and unique, and we're all taking different approaches. You saw someone had a big announcement last week and structured a deal that they thought was best for them and their customer and shareholders. We thought this was best for us and our customers and shareholders.

And I'm sure the other leaders are exercising their strategies as such. But I alluded to it, and then we'll wrap this up is it really does start potentially the deconsolidation of the industry. I think many people believed back in the '90s, the consolidation went too far and there wasn't enough competition. And to the extent others negotiate or take a similar approach. The best thing for the nation is we have more prime companies and public companies in the defense industrial base to move faster and provide more competition, which is good for the Department of War, good for the taxpayers. And I believe ultimately good for the shareholders. So I think with that, we're just going to wrap it up. I appreciate everybody calling in today. We'll be talking to you in a couple of weeks when we release our fourth quarter '25 results and provide guidance for 2026. So thank you for joining on short notice.

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2025 L3Harris Technologies Earnings Call. [Operator Instructions]

I would now like to turn the call over to Dan Gittsovich, Vice President, Investor Relations and Corporate Development. Dan, please go ahead.

Thank you, Tiffany, and good morning, everyone. Joining me are Chris and Ken. Earlier this morning, we issued our third quarter earnings release outlining our results and our increased 2025 guidance, along with a detailed presentation available on our website. We'll also be filing our 10-Q later today.

Before we begin, please note that today's discussion will include forward-looking statements subject to risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please refer to our earnings release and the SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the earnings release.

With that, let me turn it over to Chris.

Thank you, Dan, and good morning. Our position as a leading defense innovator has never been stronger. The pace of change across the ecosystem is accelerating, and we're transforming to respond with speed and agility. Our purpose-built portfolio sits at the center of a mission-critical modernization efforts, supporting war fighters across every domain for the U.S. and its allies.

As the Department of [indiscernible] has made clear, the nation needs to transform its acquisition processes to enable an innovative, fast-moving industrial base. The goal is to shorten decision cycles, eliminate bureaucracy, deepen collaboration and deliver more resilient, rapidly deployable solutions to meet increasing demand. These dynamics underscore the essential role of a trusted, disruptive defense partner, and L3Harris is delivering innovation when and where it matters most. We are the company that has the scale and the speed of relevance, and the right mix between established primes and new technology entrants. We continue to execute well, staying tightly aligned with customer priorities and delivering solutions rapidly. That focus is translating into results.

This quarter, we delivered double-digit organic growth, 15.9% margins, and a book-to-bill of 1.2, proof that our strategy is working. Our business growth is accelerating, and we are confident in achieving our increased 2025 guidance, exceeding our original 2026 financial framework and positioning L3Harris for durable, profitable growth well beyond 2026. We are fully aligned with the administration's priorities for developing a next-generation missile defense architecture. Our actions to date advancing our missile warning and tracking franchise, and investing ahead of demand, demonstrate that L3Harris is ready to lead.

With satellites in orbit, in production and in backlog, we are building on our proven record of designing and delivering missile warning and tracking systems across multiple FDA tranches. As new contracts are awarded, we're positioned to accelerate production and integration with work on additional satellites expected to begin soon. This progress reinforces our role as a trusted proven partner in advancing the nation's layered next-generation homeland defense network.

These efforts are the product of deliberate forward-looking investments when we have conviction and customer demand. We've expanded capacity across our space portfolio from Palm Bay, Florida to Fort Wayne, Indiana, strengthening our ability to execute as new missions are awarded. The foundation is in place. The teams are ready and when called upon, L3Harris will deliver with speed, precision and the resilience of our nation demands.

Equally important in our strength is the missile and propulsion domain. Our Aerojet Rocketdyne business continues to see exceptional demand, a reflection of both near-term restocking requirements and longer-term investments in deterrence. In particular, the demand for interceptors is exceedingly strong. We are on every major interceptor program. Standard Missile, [ PAC-3 ], [ SAD ], as well as next-gen interceptor and glide phase interceptor. We are looking forward to continuing to work with the Department of [indiscernible] to address this need. We are also on critical strategic missile programs such as Sentinel, as well as certain classified programs and see those growing for decades to come.

This quarter, AR reached a record financial backlog of $8.3 billion, the majority of which is to support the increased demand for solid rocket motors. An example of expanded production in response to growing demand is for the PAC-3 missile, where we are increasing capacity. As the sole manufacturer of solid rocket motors for PAC-3, we understand our critical role in scaling capacity across our facilities to meet the heightened and sustained demand for both U.S. and allied customers. This is a positive first step as the nation looks to significantly increase missile production in the years ahead.

Reconciliation spending is pending and awards are expected soon. Against the backdrop of the continuing government shutdown, ongoing budget challenges, and the potential for a prolonged continuing resolution, we're staying focused on what we can control. Execution and readiness. We have the right portfolio, the right leadership and the right investments in place. When funding is released, we're prepared to continue to invest and move swiftly to deliver for our customers and our nation.

We agree with Treasury Secretary [ Besson's ] push for a new wave of industrial investment. We're already executing our plan aligned with that vision. Over the past year, we've expanded our domestic manufacturing footprint in Alabama, Arkansas, Virginia, Indiana and Florida, investing in new space and solid rocket motor manufacturing capacity to meet national defense demand. We've increased capital expenditures and continue to direct a substantial portion of free cash flow towards [ IRAD ] expansion and modernization.

But to fully realize this national reindustrialization effort, what's needed now is to convert clear demand signals into multiyear contracts that give industry the confidence to invest in scale. Our facilities, workforce and supply chain are ready. And when these demand signals are formalized, we'll move immediately to the next tier of investment and capacity expansion.

At the same time, we share Army Secretary [ Driscoll's ] sense of urgency around modernization. This call to win with silicon and software perfectly captures the transformation already underway across L3Harris. Were moving faster than ever, partnering with emerging technology companies, codeveloping AI-enabled mission systems, and fielding software-defined resilient communication equipment that can be updated as threats evolve. This is not a theoretical capability, or one that we need to validate in technology demos. It is proven and happening real-time in Ukraine, by our allies in the face of advanced Russian [ EW ] threats. This technology is integral to soldiers survival and mission success.

Our advantage is speed and adaptability. We combine deep mission understanding with a network of agile partners from Silicon Valley to the defense tech ecosystem. As the services modernize their acquisition process, we see that as an opportunity to expand our role as a trusted integrator of choice, delivering open, software-defined, resilient capabilities at the pace of relevance. Our approach remains balanced and disciplined. Returning capital responsibly, while reinvesting in growth infrastructure that directly supports national security. We're fully aligned with the country's reindustrialization and modernization agenda, and we're ready to deliver once that demand is formalized.

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

Thanks, Chris, and good morning, everybody. As we continue to execute on critical national security priorities, it's clear that our investments, manufacturing capacity and disciplined execution are enabling us to deliver real impact for our customers. With that momentum as our foundation, let's talk about consolidated results for the quarter.

We had $6.6 billion in orders this quarter, resulting in a book-to-bill of 1.2. Revenue was $5.7 billion, reflecting strong organic growth of 10%. This growth was across all 4 segments with 2 growing double digits, and driven by higher volume on existing programs, new programs ramping, and increased international demand. Segment operating margin was 15.9%, up 20 bps. This marks our eighth consecutive quarter of sequential margin expansion, underscoring our consistent execution.

Margin expansion this quarter was driven by LHX NeXt cost savings, across all 4 segments, and improved program performance. Margin was slightly offset by the impacts from the higher margin cash divestiture in Q1 '25. Non-GAAP EPS was $2.70, up 10% year-over-year. On a pension-adjusted basis, EPS was up 15%. Free cash flow was about $450 million, reflecting temporary customer-related delays in payment. We remain confident in achieving our 2025 cash flow guidance. Q4 reflects anticipated milestone-based payments and the timing of a tax refund now expected in the fourth quarter. Consistent with prior years, cash generation will be back-end weighted as we manage performance on a full year basis.

Turning to our segment's third quarter results. [ CS ] delivered revenue of $1.5 billion, up 6% and driven by increased international deliveries for a resilient software-defined communication equipment and next-generation [ JMIR ] program ramp. Operating margin increased to 26.1%. CS margin benefited from international deliveries and LHX NeXt driven cost savings. IMS revenue was $1.7 billion, up 17%, organically due to multiple ISR classified programs ramping. Operating margin was 12%, a pro forma increase of 40 bps, excluding the CAS divestiture. SAS revenue was $1.8 billion, up 7%, primarily driven by increased FAA volume and mission networks and higher volume in airborne combat systems and space.

Operating margin increased to 12.1%, reflecting improved program performance on classified development programs in space, a $20 million gain recognized in connection with monetization of legacy end-of-life assets, and LHX NeXt driven cost savings. Aerojet Rocketdyne delivered another strong quarter with organic growth of 15%, marking its second consecutive quarter of double-digit growth and record revenue. Performance was driven by higher production volumes across key missile and munitions programs and the continued ramp of new awards. This progress reflects meaningful increases in capacity and deliveries. Highlighted by the [ Mark 72 ] motor, where quarterly deliveries have increased more than 400% since acquisition. Operating margin expanded 130 basis points to 12.7%, driven by improved program performance and cost efficiencies from LHX NeXt initiatives.

Now let me turn it back to Chris.

Thanks, Ken. We are continuing to gain momentum, and this quarter underscores the strength of our long-term strategy and portfolio. A prime example is the $2.2 billion award from South Korea secured shortly after the quarter closed. It delivered a fleet of next-generation airborne early warning business jets using the Bombardier [ Global 6500 ] airframe. This landmark international award is significant not only for its scale, but also because it reinforces our position as the world's premier integrator of missionized business jets with more than 100 aircraft delivered across multiple platforms. L3Harris is platform-agnostic, having successfully partnered with multiple OEMs, including [ Gulfstream, Bombardier and Dassault ].

We are the world's leading mission system integrator with the ability to combine advanced radar, secured communications and electronic warfare, coupled with our deep civil and military aviation certification pedigree. More than a single contract, this win lays the foundation for a long-term franchise with opportunities for sustainment, upgrade and missionize variance worldwide. While it will be reflected in our fourth quarter bookings, it also signals the strong and sustained global demand for our capabilities.

Furthering our [ missionization ] franchise in August, L3Harris and [ Joby Aviation ] announced an agreement to explore a new aircraft class for defense applications. We are rapidly evolving from concept to physical hardware in direct support of the U.S. Army's acquisition strategy, with ground testing of the prototype hybrid aircraft already underway in preparation for a 2026 demonstration. We also secured award to provide Poland with our Viper Shield electronic warfare system for the country's F-16 aircraft upgrade program. This selection demonstrates the growing international demand for our advanced EW capabilities and strengthens our position across European defense market where this product suite has been selected by 8 countries. It's another clear example of how our innovation and ability to scale continue to differentiate L3Harris as a trusted partner to U.S. allies.

Earlier this month, we announced our award supporting [ NGC 2 ], the [indiscernible], the latest evolution of the Army's software-defined radio platform, delivers high data throughput and multiple transport options, ensuring resilience and interoperability across NATO and homeland security networks. Our expertise is critical to this effort. By winning this award, we have an important stake in shaping the communication systems architecture. Together, these and other recent wins, both domestic and international, demonstrate the breadth and competitiveness of our portfolio. They validate the strength of our strategy, the discipline of our execution, and our ability to convert technology leadership into high-value programs that deliver profitable growth.

Of course, winning new business is only part of the equation. Execution is what ultimately drives value for our customers. A great example is the successful launch of the Navigation Technology Satellite [ 3 ]. [ NTS 3 ] is an experimental navigation satellite designed to test advancements beyond today's GPS system. This milestone underscores our ability to deliver complex high-stake systems on time and on budget. Programs like [ NTS-3 ] reinforced the confidence our customers place in us and the pride our employees take in delivering for them.

One of the key enablers of that execution excellence is our program digital cockpit, a one-of-the-kind innovative, integrated enterprise-wide program management platform built on Palantir's foundry infrastructure. The program digital cockpit aggregates data from hundreds of sources across L3Harris' complex enterprise, providing program teams with real-time access to their most critical metrics. By leveraging automation and artificial intelligence, the platform accelerates decision-making, strengthens program execution and drives favorable program performance. Launched in March of this year, we have completed the pilot phase and are now onboarding our first tranche of programs across all segments through the end of 2025. Our strategic partnership with Palantir continues to deliver value and the program digital cockpit is a clear example of how we're investing in tools that improve execution and outcomes for our customers.

Back to you, Ken.

Thanks, Chris. Turning to guidance updates for 2025. For the total company, we are increasing revenue guidance to $22 billion, representing full year organic growth of 6%. Just a quick comment on 2026. We'll update guidance in January, but we do expect sales for '26 to exceed our current financial framework.

We are increasing segment operating margin guidance to high 15%, driven by ongoing LHX NeXt cost savings and continued confidence in strong program execution. We now expect non-GAAP EPS in the range of $10.50 to $10.70 per share. We are reiterating our free cash flow guidance of $2.65 billion. While cash generation through the third quarter was softer than expected, we remain confident in the government reopening and delivering our full year cash flow commitments. We expect strong fourth quarter cash performance above prior years.

At the segment level, we are increasing our CS revenue guidance to $5.7 billion driven by continued strong international demand, while reaffirming our operating margin of about 25%. IMS revenue is now expected to be approximately $6.5 billion, driven by strong demand and performance in ISR. We are increasing operating margin to the low to mid-12% range. We are increasing our Aerojet Rocketdyne revenue guidance to $2.8 billion to $2.9 billion, supported by higher production volumes with operating margin is expected to remain in the mid-12% range. And we are reaffirming SAS prior guidance.

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

At the start of the year, there were understandable questions about what success would look like for the defense industry and for L3Harris, especially in such a dynamic environment. As we close the third quarter, that conversation has shifted. The focus is now on potential upside and a trajectory that extends well past our 2026 financial framework. That change in tone reflects our disciplined execution and the strength of our strategy. We are turning opportunity into tangible results, both domestically and internationally, and we expect more to come as reconciliation and missile defense-related funding begins to flow.

Across the company, our leaders and employees understand the high stakes as we are transforming and acting with urgency. Our strategy is deliberate, well calibrated and delivering measurable results. It strengthens our position in the global defense market, and drives the kind of sustained growth and value creation that underpins our long-term vision for L3Harris.

Tiffany, let's open up the line for questions.

[Operator Instructions] Our first question today comes from the line of Sheila Kahyaoglu with Jefferies.

Congrats guys on a good quarter. Maybe just I could start off on ISR, Chris, because I think that's the segment that's been improving the most. If you could just talk about some of your recent wins in South Korea being put in, ramp on multiple classified ISR programs you saw in the quarter. How do we think about the outlook for that segment and just runway for the business given capacity?

Thanks, Sheila. Yes, ISR, which is part of our IMS segment, historically, was having some challenges. We made significant changes at the leadership level and we redoubled our focus on execution, and we're finally seeing it pay off. The backlog has doubled in 12 months, and the outlook is very positive. You mentioned the classified growth on multiple programs. We see that for the foreseeable future, especially as the threats continue to grow. Armed Overwatch a program that we've had for several years. We're starting to see some interest for that program internationally. We recently announced the [ C-130 ] award in Morocco. So that line of business is gaining momentum.

In Canada, there's a strategic [ tanker ] award that's competitive that's coming out here in the near future. We feel confident about our position there. Our business in Canada has also been selected for the F-35 depot support. And we're excited about the opportunity with [ Joby ]. We are platform-agnostic. We've historically focused on manned aircraft, but I think there could be some pretty interesting opportunities in the short term with the Army partnering with another new entrants. So I feel really good about the business. The future looks bright and the team is executing, and that leads to more business.

Our next question comes from the line of Ron Epstein with Bank of America.

So just -- maybe a bigger picture kind of management question. So when you have an organization that's kind of the size of yours and the scope of yours, big company, and you're working with smaller companies that tend to be -- have the advantages are just being small, right? They can kind of move fast, make decisions quickly, that sort of thing.

How do you manage that, that when you're working with them, A, your organization can maybe benefit from their nimbleness, but your organization isn't stifling their nimbleness because by the nature of just being a big organization? That makes sense?

Yes, it does make sense, and it's a great question. And I think we're unique in what we've been focusing on over the last several years is empowering the leadership team, eliminating bureaucracy, streamlining the layers and levels, and really getting that sense of entrepreneurship. I think it goes back several years with the Shield Capital where we currently own 10s -- I think, in excess of 40 different companies, or parts of those companies. And that really helped with the culture change because we usually have 24 or 48 hours to turn it around.

So we feel we're pretty agile. I interact and my segment presidents interact with the [ founders ], CEO, Chairman. We put teams together and we work rather quickly. So we've been pretty successful. And the interesting part is a fair amount of these new entrants and technology companies actually reach out to us to initiate the conversation. So I feel like we're the company of choice. And the list goes on from Shield AI to [indiscernible] to Amazon [ Kiper ], Palantir, the 40 or 50 Shield capital companies. And it's working. It's part of the DNA. And I would admit it was a cultural change years ago, but people get excited and like to go fast and see the results. so far so good and maybe even better than I would have expected.

Our next question comes from the line of Myles Walton with Wolfe Research.

Chris, I was wondering if you could touch on your outlook for the Golden Dome space-based competitions that you're looking at from [indiscernible] to space-based Interceptor to [ tranche near ] the tracking layer, and sort of maybe cadence those over the course of the year?

And then the second part of it is on the SAS business itself and the underlying margin performance. I know you've struggled a bit with some of the earlier programs. Are we through the woods on those programs? And should we take the fourth quarter margin rate as an exit rate into next year?

Yes. Let me start with your first question, and then I'll ask Ken to comment specifically on the margins. As we've said for several years, we feel very confident in our capabilities for, what was formerly known as Golden Dome, the missile defense architecture. [ HBTSS ], as we said, was a success, and we're waiting for the government to reopen. And I'm confident that there's a scenario where maybe we could get an award, or a competition here in the fourth quarter.

SDA Tranche 3. In that particular one, we submitted -- the RFP came out in April. There have been many back and forth modifications. We turned in again, the best and final in early October. And there's another example where I think we need the government to open up and get back to work and make an award. You've heard us say before, we've been on all 3 tranches. We're performing well. We think our past performance puts us in a position to win that program.

I was just at our new factory yesterday. We've already moved the Tranche 1 and Tranche 2 satellites in state-of-the-art factory of the future. We have the room, we have the equipment and the tools, and we're ready to go. So we feel really good about the space business. We've kind of held that out as the symbol of our trusted disruptor strategy, opening new markets, clearly some growing pains as we've grown from a supplier, or a subcontractor, to a prime. But we have the tools, the team and feel really good about what we've done so far and what we're going to do in the future.

Ken?

Sure. Yes. On the second part of the question with respect to SAS margin performance. I would just say, as we've talked about the couple of the programs that we've seen some performance challenges on through the year. Those programs are maturing. I think as we've mentioned, nearing completion on some of those legacy programs. Importantly, they are opening up new continued award opportunities for us.

So from an SAS margin performance perspective, I think we expect some stability looking into 2026. I don't know that I would want to give segment guidance on what SAS margin would be for '26 at this point. But I do feel good that I think the performance is really starting to settle down, obviously, until we get some of the final integration stages behind us on a few of these programs. You don't want to declare victory, but I think we're making good progress and I look forward to continued solid performance in '26.

Our next question comes from the line of Seth Seifman with JPMorgan.

I wanted to ask, Ken, when we think about next year and kind of the margin expansion that you're expecting, and some of the gains that have happened this year, is that a difficult headwind to overcome for 2026?

Thanks for the question, Seth. No, I don't think so. Feeling good about our program performance opportunity in '26. I think that -- look, we make sure we find ways to deliver on our commitments. First half of '25. We had a little bit of negative EACs. I think our negative EAC performance was negative in the first half of the year. We've turned that positive here in the third quarter. And I think just good solid performance on our programs, getting our net EACs, turn them back to positive. I think that should more than offset, which I wouldn't say it's noise in the system, but I don't think they're difficult to outgrow the gains here and there from nonstrategic product line or IP sales.

Again, we're focused on what we're focused on. Really trying to grow the core areas of the business. And if there's a few things here and there, we can monetize, we do it. But I think that's, to your point, mostly going to be behind us, and now it's just going to be about performing on our programs, kind of left at right foot, just get it done, and I think we're in a good position to do that.

Our next question comes from the line of Scott Mikus with Melius Research.

Just a quick question. The administration seems to want contractors to have more skin in the game. From 2022 at least through 2024, your [ IRAD ] spend as a percentage of sales, I think, declined from 3.5% to 2.4%. So next year, should we expect that IRAD spend to step up?

Yes. The way I look at it is we have various buckets of IRAD and -- or R&D. IRAD would be one. We have contracts, known as CRAD contractor R&D. We have our Shield capital and other strategic investments that all fuel R&D. And we focus at the -- we focus on the portfolio, where we think the market is going and we double down and invest in those areas. So I don't really look at it as a percent of revenue. We look at what the opportunities are, where we want to invest. And we've had significant investments in the past. We've opened new markets and new portfolios. And once you get that situation, you don't need to continue to invest in R&D. You moved into production, and you rely on the production contracts to deliver the product to customer needs.

So it's a dialogue. We think when I look back over the last couple of years, what we've made in investments broadly, IRAD, CapEx, acquisitions, we are clearly spending the money to position this company for future growth. And I think today's results and the results year-to-date and even last year approved that it's working.

Our next question comes from the line of Michael Ciarmoli with Truist Securities.

Chris, maybe just thinking about Golden Dome and space-based interceptors. Is this going to be your first foray into potentially competing as a prime for missiles? I know way back at the Investor Day after the Aerojet acquisition, you've got a lot of that in-house capability. But -- should we start thinking about you guys going after some of these newer programs as a prime, just given the amount of missile demand, low-cost missiles and capacity that's needed out there?

Yes, I'll just make a few comments and ask Ken to fill in the gaps here. But we stick with our approach of looking at the opportunity and seeing where the best value is for our customers and shareholders, whether that's priming, subbing or being a merchant supplier. The demand that we have at Aerojet Rockadyne is significant, as I mentioned, record financial backlog, huge opportunities that you hear about every day to increase production. So we have to maybe to the earlier question, keep the company focused, where can we move the needle, where our capabilities best aligned? But we spend a lot of time talking about [ SBI ].

So Ken, do you want to update?

Yes. I would just add that from a kind of market perspective at Aerojet Rocketdyne, we have significant opportunity in front of us to Chris' point. Not only in the solid rocket motor portfolio, but we've got significant backlog in the space propulsion area as well. And we're currently significantly focused on delivering the capacity that is needed by our customers. And right now, kind of that's job #1 and #2, we will certainly be evaluating how we best, to Chris' point, our position across space-based interceptors, and where we partner, and who we partner with and how we look at that opportunity.

But at the current time, there is significant demand for our product. We've got -- we've probably seen a number of groundbreakings, ribbon cutting, factories, production lines accelerating opening. And that's what we're focused on at the moment. But as we look forward, we'll certainly be continuing to firm up those partnerships around space-based interceptors.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

I wonder if you guys could talk more about growth at Aerojet Rocketdyne over the medium term. Chris, you mentioned where the backlog is now, I'm curious how many years of backlog you want to keep? And I guess the guidance for this year, midpoint would land around 10% growth for the year. Can that actually -- can you actually grow faster than that over the medium term, just when we speak to your customers, the types of change in production rates that they're talking about are pretty significant? And then last piece of that, Chris, what are you expecting for new competition in solid rocket motors?

Yes. Maybe I'll go first. Look, the opportunities at Aerojet Rocketdyne and the revenue growth that we're seeing is significantly more than the business case that we evaluated a couple of years ago when we made the acquisition. There's clearly a huge demand for these existing programs in solid rocket motors. It's all about capacity. That's always been the challenge. Ken will give you a little more detail.

We are opening facilities. I was just in Camden last week. We're building new buildings. We're getting new equipment. The lead time on this sometimes is 12 to 18 months. We're investing. We're talking to the customer to formalize, as I said, the demand signal into actual multiyear contracts, but we feel really good about our portfolio. As I said, we're on every major interceptor program. And the advancements we've made with some of the tools and the technology is going to allow us to significantly increase production in the years ahead.

We're going as fast as we can. I think in many programs, we're ahead of contractual commitments. So we're going to get as many orders as we can. And we're going to deliver as quick as we can to keep that financial backlog wherever it happens to fall. But I think the next couple of years are critical as we continue to invest, working closely with the OEMs and the Department of [ War ] to prioritize which programs they want, which investments they want? I think in Camden, we have over 150 buildings. We could probably build another 50. We have more than enough land and we just need to formalize the actual contractual arrangements to accelerate.

Yes. I'll just add. I think, Noah, it's important to remember that Aerojet Rocketdyne is not just solid rock motors for missiles. It's also got the space propulsion business, as well as a very well-positioned in-space propulsion business that I think is poised for growth also as we look '26 and forward. So confident that we can grow Aerojet Rocketdyne for the foreseeable future at double digits. I think that, that is absolutely something that we can do.

I think if you look at Missile solutions, so the solid rock motor business today, I think we said 17% growth in the second quarter, and it's a solid mid-teens this quarter as well. And again, if you look at the entire portfolio, I think it's a solid double-digit grower. We've certainly been leaning on, I would say, maybe a little bit of ingenuity and kind of student body left in terms of how we've been driving the capacity expansion at the moment. But to Chris' point, as some of the new production lines, and new facilities come online, it'll be a much kind of smoother delivery of that continued capacity.

So we're very satisfied with the acquisition, very, very satisfied with how it's going at the moment and look forward to continued growing business. And then importantly, delivering product to our customers so that they can get it into the [indiscernible] hands.

Our next question comes from the line of Peter Arment with Baird.

Nice results. Chris, you gave some comments about the international business. We continue to see strong NATO support. Wonder if you could just give us an update on kind of whether you're seeing more teaming operations. I know that there's a lot of talk around they want countries in Europe with their own indigenous capabilities. Just how are you able to kind of execute that and still expand your share internationally?

Yes. Thanks, Peter. Clearly, the international budgets have increased significantly. So those countries are working on getting the best capability they can for their war fighters, resilient interoperability are critical where a lot of our portfolio aligns with that demand, and then also supporting their indigenous industrial base.

We've been partnering around the globe for decades. We have local production capabilities in all of the key countries where it makes business sense. And again, going back to our philosophy, of being indifferent as to whether it's a prime sub merchant supply relationship, we haven't seen this to be a challenge at all. It's being open to the dialogue and creativity, and the leadership team has been traveling the globe pretty much every week for the last several months.

So huge opportunities we see in Europe. We have a segment President going over there Saturday for a week or so. I just came back from the Mid-East and [ other ] ones in Korea as we speak. So we're all over the globe. I think we're the partner of choice because of our receptivity in either technology transfer, expanding the footprint, executing and delivering on our offset obligation. So we're about 22% international and we're headed towards 25% of our base. So a good opportunity.

Our next question comes from the line of Gavin Parsons with UBS.

What's a good baseline for the Aerojet margin? I mean, do you still have legacy contracts that are dragging on that and better capacity utilization as you go forward? Or is that strong growth outlook that you talked about are going to kind of weigh on the margin?

Yes. I don't necessarily expect that strong growth outlook will weigh on the margin. We're still working through some of the legacy contracts. It is a long-cycle business. Takes, sometimes 18, 24 months to deliver on a contract. So yes, we are absolutely working through some of the legacy production. But we are transitioning into the kind of the newer signed contracts.

But I'll remind you, Aerojet is a portfolio not unlike L3Harris overall. And we have important development programs that are in the mix as well. And that's, I think, the biggest piece that kind of keeps that margin in the mid-12s, hopefully ramping as we look forward, '26 and beyond. But it's got important development cost type programs like a next-generation interceptor, like Sentinel glide phase interceptor, really that seed corn for the future production and the future growth. And I think that portfolio kind of keeps it, I think, a very solid margin rate.

And importantly, as we get these new lease signed contracts in, really starting to deliver kind of the economic margins that are important for us to be able to fund and support the investments that are needed to drive this capacity expansion that we see in order to be able to address the significant demand for the product. So I think that's the way to think about it. But Aerojet Rocketdyne is really performing very well on the programs. I think across the board between deliveries for our customers between delivering financial results, and not just capacity delivery, but also quality product safely, that's critically important as well.

Our next question comes from the line of Kristine Liwag with Morgan Stanley.

I guess, Chris, you had called out in your prepared remarks that there's very strong demand signals and your strong book-to-bill actually reflects some of this. But it seems like there's still a schism between what these signals actually indicate, and what should have been a much higher contract award environment.

Can you talk more about what you're seeing in that gap? What would need to happen for that to close? Is this more on the government shutdown? Is it clarity regarding government priorities? Is it visibility into the supply chain? It would just be really helpful to understand where we could see another acceleration of what's already a strong book-to-bill environment?

Yes, Kristine, good to hear from you. We missed that quarter end point with Korea, that would have got us a 1.6 book-to-bill. We're really doing a great job on the front end of the business over the last year or 2. So I'm more than satisfied with our win rates and our results in head-to-head competition.

But the government shutdown is clearly the challenge. I mean, it's disappointing where we are. And we need Congress to get together and resolve this situation. As I look at it, there's clearly in congruency within the government. The DOW wants to go fast. They meet with us all the time. We got to go quicker, and then Congress [ can't fund the ] DOW. So we're kind of stuck between those two situations. So it's always baffling to me that these issues are unique to the U.S. because we all know our adversaries don't have this same challenge.

Anyway, notwithstanding that, I like our portfolio. The team is performing. We're ready to move with speed. But in the meantime, the shutdown is definitely impacting the timing of awards, and we have a handful that we just need the government to open up and have the decisions made. I think some of our export licenses for international are being slowed down and the cash collections are impacted. People are working at [indiscernible], but I think with all the head count reductions and such, there's just more work than there is people to execute.

So the government needs to open. We're a government contractor. 80% of our customer [indiscernible] to work. It's a challenge. And we're assuming they open in November, and then we'll have a busy December to catch up on everything.

Our next question comes from the line of Richard Safran with Seaport Research.

First, Chris, it went quickly, but I think you mentioned something about the need for multiyear contracts in your opening remarks. And I have a 2-part question on that.

First, if you consider the contracting environment and because you've been talking about like you're constantly meeting with the customers and stuff. Is this something that the government seems amenable to? Because it seems it's been reluctant to execute multiyears in the past.

And second part is multiyears typically allow you to get better pricing from suppliers. And then at least [indiscernible] that savings with the government. So is this change in the contracting environment might impact margins? If so, how do you think that might impact?

No, great question. It was a sentence that I slid in there. And this deals with capacity and the need to significantly ramp up, and in some cases double, triple, quadruple production. [indiscernible] been consistent for years that the challenge in the defense industrial base, which is why we need to reinvigorate manufacturing in America is there just is not enough manufacturing capability in the U.S. for defense products. We need more buildings, we need more equipment, and these are substantial investments, which we are willing to make.

But it's a simple business case. Ken and I are not going to spend significant amount of capital without a commitment in the form of a multiyear contract from the government. So you're right. It does give the supply chain more visibility and even allows them the potential to make investments. But if we're going to double, triple or quadruple production on certain programs, let's sign up to a 5-year, 7-year multiyear contract. And I think the entire ecosystem will look at making the investments and amortizing the cost of of those investments in the form of depreciation into the products, getting the benefit of increased production and kind of see where the money lies out. But I think we're getting close.

And to your first question, I think the customers absolutely 110% behind this concept. What happened in the past in all these prior administrations and decisions are really irrelevant. And I like the new administration. They bring in a fresh -- breath of fresh air, and they kind of say, what do we need to do? They're business people, we're business people. We're in regular conversations, and we just need to get [ pencil to paper ] here and move to the next step. So I'm optimistic about the future, but that's clearly what needs to happen. And I don't see why we wouldn't get to that point.

But Ken, you've been in those meetings with me. What do you think?

Yes. I'll just add that, Rich, to your question about multiyears, I think this is a little different than what kind of traditional multiyears. This isn't for nuclear submarines or aircraft carriers. We're talking about largely missile production for which we produce the solid rocket motors and other components. And in that business, there's a pretty dynamic portfolio of products. And unfortunately, you can't just one morning produce PAC-3 motors and then flip a switch and produce standard missile motors in the afternoon. There's pretty specific production line, and we are working to kind of build some amount of common production and common capacity early in the process. But it takes some time.

And so as we invest, as we work with the suppliers, as we work to modernize and open new facilities and production lines, we really need to know what are we producing. Which products, at which rate and to what delivery schedule? And that's really what we're trying to firm up to is really aligning our investments, aligning our suppliers and their investments to our customers' needs and delivery dates, so that we're all on the same page. Kind of hand in glove so to speak, in delivering what needs to occur. And so that's what we're really trying to get down to is firming up the investments rather than kind of a more traditional platform multiyear award.

Our last question comes from the line of Ron Epstein with Bank of America.

I just wanted to follow up on some of the NASA work you're doing. There's talk of kind of restructuring some of the civil NASA work. And what kind of opportunity does that present for you?

Thanks, Ron. Yes. From our perspective, NASA certainly is an important customer for us, in particular, at Aerojet Rocketdyne. The [ RS-25 ] engines for the SLS system is the biggest component of our space propulsion business. We're excited that the government has provided some additional funding for SLS as a part of reconciliation and firmed up through [ Flight 5 ]. We're producing engines through, I think, it's through 9 systems there.

And -- I think supporting not only NASA, but the government in terms of not just defense but also space exploration, and importantly, getting back to the moon and ultimately to Mars, I think, has not just exploration value but also strategic value. And we're proud to be a partner on that. And we expect it to be a solid part of that space propulsion business for a number of years to come. I think we've got multiple years of backlog in there for production of RS-25 engines, as well as other parts of the SLS program portfolio.

All right. Let me wrap it up. As we close today's call, I want to thank all of our L3Harris employees for their commitment, resilience and passion for excellence. In today's environment, changing dynamics and challenges contest even the strongest organizations. Our teams aren't just adapting. They are embracing change while anticipating planning and executing with a focus on controlling what they can control, while I and my senior team engaged with the customers globally as the evolving budgetary and threat dynamics continue.

As a direct result of their dedication and readiness, we're delivering for our customers when and how it matters most. Thank you all for joining us today. We appreciate your continued interest in L3Harris, and we look forward to future discussions. Have a great rest of the day. Thank you.