L3Harris Technologies Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 29, 2022

Key Takeaways

  • L3H initiated safety-of-flight testing on its F-35 Tech Refresh 3 integrated core processor, completed key PCD and AMS qualifications, and secured Lot 16/17 production contracts.
  • The newly branded Agile Development Group of 2,000 engineers, backed by a strategic investment from Shield Capital, will accelerate modular open systems and integrate startup technologies for defense applications.
  • The U.S. request for an additional $33 billion—including $20 billion for defense, $6 billion USAI and $6 billion FMS—to support Ukraine is driving increased demand for L3H’s secure communications, ISR, EOIR and night vision products.
  • L3H won over $10 billion in tactical radio IDIQ awards across Army, Navy, Marine and SOCOM programs and targets a book-to-bill ratio above 1.05 for FY 2022.
  • Ongoing inflation and supply chain pressures, chiefly in electronic components and labor, are dragging ~$100 million per quarter from revenue with a recovery now expected in H2 2022.
AI Generated. May Contain Errors.
Earnings Conference Call
L3Harris Technologies Q1 2022
00:00 / 00:00

There are 11 speakers on the call.

Operator

Greetings. Welcome to the L3 Harris Technologies First Quarter Calendar Year 2022 Earnings Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President of Investor Relations. You may now begin.

Speaker 1

Thank you, Rob. Good morning and welcome to our Q1 2022 earnings call. On the call with me today are Chris Gvasik, our CEO and Michelle Turner, our CFO. First, a few words on forward looking statements and non GAAP measures. Forward looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially.

Speaker 1

For more information, please see our investor letter and SEC filings. A reconciliation of non GAAP financial measures to comparable GAAP measures is included in the Investor Relations section of our website, on the call, which is lpreharris.com, where a replay of this call will also be available. And as a reminder, at the start of the year, we began reporting our results in our realigned 3 segment structure that shifts pension items to the corporate level. With that, I'll turn it over to Chris for a few comments.

Speaker 2

Okay. Well, thank you, Rajeev, and good morning, everyone. As you saw, we released our results after the market closed yesterday in our new streamlined format. We're always looking at ways to improve and challenge the status quo. So instead of issuing a press release at 7:30 this morning and have Michelle and I prepared remarks, which were very similar to the press release and maybe with some added color and then having you follow along with on our web charts, which are just a graphic depiction of what we were going to say anyway.

Speaker 2

We thought we'd try something new and come out with what we're calling our investor letter and putting So So just real quickly, the Q1 results are consistent with our prior commentary of a back half twenty twenty two weighted revenue and margin plan. This will also be the case with our free cash flow as well. And for the full year, we're reiterating our guide across the board as we continue to advance our strategy in a dynamic environment, whether it's from the pandemic or the global threats in Eastern Europe So before opening the line to questions, I'd like to express our steadfast support to the people of Ukraine. I think we all agree that unwavering strength and resilience are a motivating force behind our mission here at L3 Harris. So with that, Rob, let's open the lines for questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is from Robert Spingarn with Melius Research. Please proceed with your question.

Speaker 3

Good

Speaker 2

morning. Chris,

Speaker 3

I wanted to ask you really a general question to just elaborate on your Agile Development group and the strategy behind the partnership with Shield Capital, but then something more specific, on the flight test status for your integrated core processor for the F-thirty five Tech Refresh 3 and the possibility that delays on TR-three

Speaker 2

and then I'll ask Michelle to give you some of the financial numbers on F-thirty 5, then I'll come back and do ABG and Shield. So Yes, we talk about F-thirty 5 each quarter appropriately. So I'll say this last quarter is probably the best quarter we've had in a while. We're progressing through the integration and test, which we all know is the most challenging part of any development program. And the integrated core processor did begin safety of flight testing earlier In March, so that is a good sign and progressing well.

Speaker 2

I do want to highlight, we do also have the panoramic cockpit display, Which just completed its safety of flight and then the aircraft memory system completed its full qualification test. So everything is tracking well to the first flight. We just provide this to Lockheed and I think in 2023 is going to be the 1st flight of the aircraft. So all seems to be going well. Focused on the contractual side, we secured a contract for ICP for Lot 16 and for AMS and PCD on Lot 16 and 17.

Speaker 2

So We're getting into production contracts and we're going to be ready to hit the ground running as we complete these tests. So As you'd expect, we're investing R and D and capital to continue to support the program and find more efficient ways To meet these commitments and I do want to recognize the team because we are working effectively 3 shifts and weekends. This is the highest Priority for everyone and we've had customer visits and they've been very complementary of the workforce and the progress that we're making. So, Michelle?

Speaker 4

Yes. Good morning, Rob. So just to add a little bit of color from a financial perspective. So our overall Mission Avionics on the future is going to be down mid single digits consistent with what we shared before. The F-thirty five development is going to be down low double digits before we get into the on the ramp from a production perspective.

Speaker 4

So we anticipate going into next year that will be flattish to up a couple of percent.

Speaker 2

Yes. So let me go back to the first question about the Agile Development Group and our investment in Shield. So you've heard us talk about our strategy of being on a trusted disruptor, investing more in R and D as a percentage of revenue than most, trying to prime more Contracts and embracing the new entrants that are disrupting the marketplace So we set up the Agile Development Group. It is an entity that previously existed. So some of this is just kind of branding it and giving it the recognition it deserves.

Speaker 2

We have a couple of 1,000 engineers in this group. Their R and D is double digits as a percentage of revenue and they're really the front end of the business and They've been working with speed and agility and innovation. Most of their focus has been on modular open systems, which has been embraced by our customer. And it's hard to give examples because a lot of what we're doing is in the classified arena, initially focused on the air domain. We're also doing some interesting Development on new and creative weapon systems.

Speaker 2

So they're the front end. And as we get these contracts out of development and into production, they'll hand these off to another entity who is a world class at producing them. So I don't think it's the most unique thing in the industry, but it's something we thought made sense and they're off to a pretty good start. I've spent a lot of time in D. C.

Speaker 2

And the customers have been excited about it and Have even come down and visited our facilities and generally very impressed with how we're moving along. Now, Shield Capital is a venture capital firm. They raised $125,000,000 We're their largest strategic partner. And the thought process there was trying to find a way to get these new startup technology companies, which I differentiate from small businesses. Small businesses is a compliance, contractual compliance and usually applies to service contracts.

Speaker 2

These are Mainly Silicon Valley high-tech startup companies who have great commercial technologies that want to support the Department of Defense. And it's hard for these companies to get programs of record. So we're embracing and working with them. So we will make investments to get this technology into our systems quicker, faster, more affordable and meet the warfighter needs. So very excited about that and We'll keep you updated as that progresses in the years ahead.

Operator

Thank you. Our Our next question is from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Speaker 5

Good morning, Chris, Michelle, Rajeev. Thanks so much for the bold new focused on the business. I think Slide 16 or Page 16 is my favorite though. So Chris, since the last time we spoke, there's been a lot of change. The budget came out, it was more robust of an outlook than we thought, coupled with NATO members stepping up defense spending.

Speaker 5

So given your ability to be perhaps more nimble than others, what are you seeing in terms of incremental opportunities? And how do you think that could impact on the intermediate growth profile of LHX.

Speaker 2

Okay. Well, thanks, Sheila. We'll obviously welcome all feedback on the new investor letter, but I think we got a lot of positive feedback, given you 15 hours to read it instead of 1 hour. So hopefully that was helpful. Yes.

Speaker 2

On Ukraine and I'll just say Ukraine and the whole region, The breaking news yesterday was you saw the White House asked Congress for an additional $33,000,000,000 of funding. And when you look into the details, which I know will evolve over time, dollars 20,000,000,000 is for defense and of that $6,000,000,000 is the USAI, which is the Ukraine Security Assistance Initiative and $6,000,000,000 is FMS. And those are 2 vehicles and processes that we're very familiar with And we've used over the last several years or decades in supporting Ukraine. So I think we understand how that process works, which of course The $6,000,000,000 compares to $300,000,000 last year. So this is a significant increase and we just need How long it's going to take to get this bill passed.

Speaker 2

As we read it, it appears to have a lot more flexibility So as you would imagine, we're in discussion with several customers In the region and here in the U. S, there's lots of opportunities for L3 Harris. When you think of secured communications, I think it's been pretty well publicized the importance of having secured communications and No, that's worked well with Ukraine, who's been a long time customer of ours. I think you can read and see that The Russians are having difficulty with the communication. So I think that positions us well.

Speaker 2

We have just under the whole focused on our situational awareness, whether it's space ISR, air ISR, even the EOIR turrets focused on our WESCAM or examples of things that I think could be needed and of course night vision goggles. So We're really not able to give a lot of details as you would imagine. But I think broadly, we're well situated And many of these capabilities are in our sweet spot, even including EW, Electronic Warfare. So I think over the mid term, we continue to believe low to mid single digit I do like the tailwinds and I think more to come over the next several quarters. I will say relative to being a And just so you know a lot of this is reprioritization, right.

Speaker 2

So we have other customers who are willing to give up their products to get them over in the region and then we have to obviously

Operator

Our next question is from the line of Robert Stallard with Vertical Research. Please proceed with your question.

Speaker 6

And Chris, I'd reiterate the thanks for this new format and the timing especially is very helpful. In terms of my question, inflation obviously is a big issue across the world at the moment. And in relation to defense, there's obviously been some concern focused on how this could flow through on fixed price contracts. So I was wondering if you could comment on that and what sort of alleviation L3 Harris might have to this issue?

Speaker 2

Okay. Well, thank you. No, inflation is a challenge for all of us and I think all And I think a lot of people immediately jump to the traditional supply chain of materials, which obviously I get the attention, but I Also believe and we're planning for wage and labor inflation as well as the job market gets tighter. So I think we look at it When I look at our backlog and our portfolio, we have about 25% of our contracts are cost To our end user and I think that's one of the reasons you see the budget increase, although I don't think anyone believes it's large enough to absorb all the inflationary headwinds. We have about 25% of our business through the not only commercial products, but the commercial business model that we've talked about, whether it's our Westcam turrets or our taccom radios and such.

Speaker 2

Similar to other industries at the right time, you increase your prices to take that So the real risk, if you will, is the 50% that's from fixed price. As you know, we don't have a lot of multiyear backlog, but we do have a little over 12 months of backlog. So in that case, It is a headwind. So in a lot of those contracts, there's escalation clauses. The reality is Those indices are probably less than the real inflation, but that does absorb some of the headwind.

Speaker 2

We've talked about E3 and some of the initiatives we're taking there. We we've doubled down on that effort and are going to have to continue to find ways to be more efficient. We're really embracing and rolling out digital engineering. We're investing in more machinery and tooling to be more efficient. So that's going to be the challenge.

Speaker 2

And then on new bids, So that's how we address it and it's given us a little bit of headwind as you see here in the quarter. I don't know, Michelle, if you want to maybe quantify it?

Speaker 4

Yes. So I would just characterize it's very consistent with what we shared in our previous guidance. And the other thing I would say is that from a 2022 perspective, we've locked in most of our supply pricing, so we've mitigated most of the risk consistent with what we put into the guidance. Although I will say that this environment is becoming more elongated. So as we're thinking about our strategic planning, this is certainly going to be a as we think about 2023.

Operator

Our next question comes from the line of Gautam Khanna with Cowen. Please proceed with your question.

Speaker 7

Good morning, guys.

Speaker 2

Good morning.

Speaker 7

Thank you for the very efficient format, both last

Speaker 1

I had a couple of questions

Speaker 7

So A, if you could just broadly characterize kind of how LHX fared in the fit up forecast Night vision, what have you. So take it as far as you'd like, but talk to us about the fit up

Speaker 2

Okay. Did you have more or just is that your only question?

Speaker 7

Meaning of life and other questions as well. We can defer

Speaker 2

that. Okay. Yes. I mean, as we saw The good news is we did get a 2020 2 budget finally. And we've talked at length of challenges of taking 165 days to get a budget, but nonetheless, we do get a budget.

Speaker 2

Now we're starting to see some Contracts and activity pick up at a quicker pace. For 'twenty three, I think we've all seen just focused on the top line, the 773 1,000,000,000 top line. In my discussions with several customers and members of Congress, I believe that number is actually going to go up during the conferencing process. I think we've seen about $20,000,000,000 on the YUPEL list, the unfunded priority list. And I think a majority of that's going to be ultimately rolled into the final 2023 budget.

Speaker 2

Relative to I'll just go to the unfunded priority list first. You did mention Night Vision that was In the budget as a zero, it was zeroed out, but ourselves and our competitor are aggressively working the hill To get that funding back in with the concurrence of the Army, we generally don't go to the Hill without our customers' So the fact that that's on the Eupol list, I think is a positive. So that was probably the one thing that caught our eye on the negative side. But on the positive side. I'll let Michel talk a little bit about the IDIQs.

Speaker 2

Everything we looked at It seemed to align well with what we wanted. I mean, we track all of our current programs, but we also look at new opportunities. We're very aggressive in bidding, We think we're well positioned to win some of those. The only thing I'd just also throw out beyond DoD NOAA. I mentioned that we're well positioned with the next gen weather satellites.

Speaker 2

The NOAA budget went up 17%, 23 over 22. NASA is up 8%. Even the FAA where we do a lot of work trending up, especially in the NATO countries. I just see this as a lot of positive tailwinds that to put us in a good position to continue to grow for the foreseeable future. But maybe I'll give it to Michelle to give a little more color.

Speaker 4

Yes. No, I agree. I think Often, at least in recent discussions, our radio business has been overshadowed by our supply chain challenges. But when you look at the Predictive indicators, whether we're talking about the budgets with double digit growth on our handhelds or the IDIQs that we received within 1st quarter $10,000,000,000 of IDIQ is really speak to a predictive indicator on the overall growth within this business. And so We're excited about the near term going back to Sheila's question around the immediate opportunities that we're getting from the conflict environment as well.

Speaker 4

All of the macro Indicators would suggest that we're going to have a tailwind related to this business. So we're excited about what's to come. We do need to get through the hurdle, however, with the immediate supply chain

Operator

Thank you. Our next question

Speaker 3

Appreciate the new format like everyone else. I think it's really efficient. Hey, Chris, I guess my question is just leaving off what Michelle just mentioned on the supply chain. Just Your comfort level around kind of things improving in the second half and then also just how it relates to maybe do you take a more cautious approach and carry more inventory as we focused on. As we kind of look towards this kind of building budget environment and just kind of have adjusting case supply versus kind of work targeting your working capital days that you've

Speaker 2

Clearly, that's the number one Risk that we're all following and have been talking about for at least the last 9 months and maybe longer. But to put it in perspective from last time we had a conversation, I would say it's about the same. It feels like we're making progress. Every day is different. We get 2 steps forward, 1 step back.

Speaker 2

I think the only thing that's That this was going to all be behind us in 2022. I think it's going to go into 2023. And again, when I look at on the supply chain. I put it in 3 buckets. We have inflation, we have materials and we have labor.

Speaker 2

I think I've covered the inflation in a prior question, but again, we're kind of in the mid to high single digit rates depending which index you're looking at. And we know it's going to come back down To lower single digits, but I'm thinking it's 2023 where previously people might have projected Q4 of this year. The materials is mainly the electronic components. We've talked about our investments in a variety of tools, data analytics and those processes are paying off as we get better visibility. But at the end of the day, the lead times continue And even the freight and shipping challenges are adding to the complexity just getting the products Into the country and of course the increased cost of just shipping everything.

Speaker 2

And labor, the labor shortage, I think the attrition How to address, but I think the labor shortage is even more significant within the supply chain. So Therein lies the challenge. We've been very successful in our new college grad recruiting, so that's working well from our perspective. But I'd say feel about the same as I did 90 days ago, just a little longer recovery is the way I think I would summarize it. I don't know, Michelle, if there's Yes.

Speaker 4

Yes, if I can add a little bit from a numbers perspective, but I do just because of the compliments that we received on the investor letter. I do want to thank Rajiv and the IR team along with our controller team, communications and legal. A lot of collaborative effort went into creating this and we feel like it's really a win on many levels. But the one that I would highlight for this group is really how We're moving into our DNA of being a trusted disruptor across the organization. So it's not just about our products and technologies.

Speaker 4

It's about how each and every one of us show up differently and to ensure we're differentiators. So on the supply chain front, just to put some context from a numbers perspective, In Q1, we expect this is going to be slightly under $100,000,000 in terms of the top line impact. We expect that that's going to be fairly consistent in Q2 with the recovery happening in the second half and into 2023. And so to on the second half and into 2023. And so to Chris' point, I think it's very consistent with what But I do think it's also really important going back to the budget conversation to note that this is all about timing, in particular within tactical radios.

Speaker 4

The demand for our products remain very strong. So it's really about getting through the short term lift from a supply chain perspective.

Operator

Our next question is from the line of Doug Harnett with Bernstein. Please proceed with your question.

Speaker 8

Good morning. Thank you. I'd like to continue on the tactical radio side because When I think of the products that you've got here, I mean this is sort of the I think of it kind of post jitters world where you're My sense is it means you have to really outfit large portions of the military. And When you think about the IDIQs you've gotten, can you talk about how those how you expect those to play out in terms of, in a sense, completing the deployment over time of the radios that in those IDIQs into revenues in terms of your share, in terms of the timing of individual awards.

Speaker 2

Yes. Doug, great question. Yes, so we can let me take the first quarter by quarter and the outlook. So no, look, you're absolutely right on the importance of these radios and the resilient Communications. A lot of our R and D goes into new waveforms.

Speaker 2

And as we've said before, the modernization handheld. That's an almost $400,000,000 IDIQ. It's a little over halfway utilized, which still means there's a couple of $100,000,000 of opportunity. And SOCOM is a great customer and a lot of our radios That was the handheld. They also we also have a single these are both single awards, which means we get Obviously, up to the IDIQ ceiling limit, dollars 550,000,000 for the manpack.

Speaker 2

And again, that's about So clearly, lots of opportunities in SOCOM and it's 100% LHX. When we go into the some of the tactical radios for the Marines, we had a 2 channel handheld opportunity there. That was competitive winner take all. Again, single award, dollars 750,000,000 That's really just getting started. We've had tens of 1,000,000 of dollars on that so far.

Speaker 2

I think the ones you read more about and hear about are the dual awards. If you look at the Army Rifleman, that's 1 where we're 1 of 2 and same with the Mann Pack. And again, those were just awarded Recently in a re competition, but those ceiling limits go over a decade, just shy of $4,000,000,000 $12,700,000,000 So step 1 as you know is to win the IDIQ, kind of call that the hunting license and then you go task order and situational awareness are 2 key things you need in any conflict. Before handing to Michelle, I will point out notwithstanding on some of the headwinds and volatility in our tactical comm revenue. We still have not missed a customer delivery.

Speaker 2

So the teams are doing a great job. Every day, different parts come in, get deferred, Makes for a challenge. I will point out we did increase our inventory about $30,000,000 just in taccom as we are trying to Get more and more of the electronic components in sooner rather than later. But as you know, the lead times are now 6 to 12 months, So Michelle, you want to give more color?

Speaker 4

Yes. And just to put some context around the inventory builds, we did build inventory across the enterprise by about $100,000,000 what we call smart inventory in terms of solidifying the second half revenue growth. So I think that's a good call out, Chris. But on the IDIQs, we did have 4 substantial IDIQs from a land radio perspective within Q1. The first one is $6,000,000,000 10 year dual source IDIQ.

Speaker 4

So to Chris' point, based on history and how that plays out, we would focused on the next question. I'd like to get half of that, in terms of as the funding comes in. And just a reminder, in terms of how we do our backlog, Our backlog does not assume these IDIQs until they're funded. And so part of what we saw play out within Q1 on the book to bill And then just a couple of other notes, we did book a $3,700,000,000 from a 5 year Navy multi service. This is a full source ADAQ.

Speaker 4

So that would be 100% coming to L3 Harris, similarly a $750,000,000 10 year award with the Marine Corps. That was a competitive Award and then the final one was a $300,000,000 SOCOM award, another sole source. So of the 4 booked, focused on the first one, which was dual source. So again, continue to have really strong

Operator

Our next question comes from the line of Richard Safran with Seaport Research. Please proceed with your question.

Speaker 7

Chris, Michelle, Rajeev, good morning. So I wanted to ask you, you've been talking about the bookings, book to bill was about 1.25. Your comments about continuing to grow, it just seems an understatement to say you're optimistic about demand, given the global increases in So what does this say about book to bill for the how book to bill for 'twenty two ends up? I mean, are we talking about an improving outlook here? Do you see international as a bigger driver of your bookings now?

Speaker 7

And I guess if you could offer a comment on maybe how you're thinking about now what 'twenty three bookings might look like? Anything you could offer there, I think, would be helpful.

Speaker 2

Okay. Well, good morning, Richard. It's always good to hear from you. Yes. The Q1 was 0.98 book to bill and that's really funded book to bill as Mel Michel explained.

Speaker 2

So Maybe a little more conservative than the way others look at it. But we've got a plan of about 105 book to bill. So We're looking at being over 1.0 each of the next 3 quarters. We might be a tad on the conservative But we did have a CR through mid March and now we have to actually convert these into actual contracts. So that's the process we're going through.

Speaker 2

I see international as a tailwind as well. We have some great opportunities for international ISR. We have our EOIR turrets And we just have to go through the process. We have congressional notifications and dealing with foreign governments and their approval process. So We think we're in a good position.

Speaker 2

A lot of these are sole source that we're just going through the contracting and export and approval process. And I would expect those to close as planned. So hopefully over in the $105,000,000 range for this year, We haven't given a lot of insight into 2023, but we kind of use that as probably a benchmark for 2023 as well, because We keep talking about the tailwinds each and every day. There's everything seems to be positive relative to the demand signals that we're getting. We just have to win and then move forward.

Speaker 2

In fact, we're going to be announcing, but the Navy announced something that we're quite excited about and that was a recent award known as SPEAR, which is the Shipboard Panoramic Electro Optical Infrared System. And why I want to bring this up is it aligns perfectly with our strategy, which is to invest The paradigm and have some of the more legacy primes on our team. So we'll get a press release out on this one shortly, but it's a $200,000,000 EMD opportunity and just under $600,000,000 with options and that's just for 21 ships for the U. S. Navy.

Speaker 2

We believe it could be upwards of 100 ships and of course we have the international market. So It's a competitive win. We started this actually 6 years ago by investing our IRAD This is a multibillion dollar opportunity that we're really excited about and it provides 360 EOIR passive Detection and tracking, which is what our Navy needs. If you want to put it under the JADC-two umbrella or whatever, This is a big deal. It's modular.

Speaker 2

It's open systems. And it's something that you'll see more of us in the days ahead. And then we're waiting for award on something called spectral with the Navy, which is the next gen SIGINT, the Information Operations and the Electronic Attack Solutions. So all these things and that's has at least 4 bidders, but We're going after these things and it aligns with our strategy. And these will start to give us more tailwind and confidence in our growth profile.

Speaker 4

Yes. And just to add a couple of additional awards to that, because this is part of our second half growth. We are anticipating international ISR on our missionization programs in the second half as well. And so specifically to the question on international, we did land within Q1 with a book to bill focused on the overall performance of

Speaker 7

our strategy. We are now in a listen only mode. Today's call will be focused on the overall performance of

Speaker 4

our strategy. We are now in a listen only mode. And so I think that speaks focused on the other predictive indicator in terms of our strategy is working. And then on the space side, clearly continues to be a growth engine for us. We are focused on the next call.

Speaker 4

We are anticipating announcement of award on FDA tracking tranche 1 as well. And so that's another competitive award that we are anticipating in the second on half of the

Speaker 7

year. Thank

Operator

you. Our next question is from the line of David Strauss with Barclays. Please proceed with your question.

Speaker 9

Mix, I want to touch on it. I think it was it sounds like it was a benefit to IMS in the quarter, but a negative on SAS. And I think for the full year, it's supposed to be a headwind to both of those segments. So if you could just touch on kind of the big Moving pieces when we think about mix and the impact on margins. And could you also just touch on the I think it's within IMS now, commercial aviation, how big that business actually is now given you've sold off a focused on a decent chunk of it and where that I guess that stands relative to like for like pre pandemic levels.

Speaker 9

Thanks.

Speaker 4

Yes, David, so I'll start and then Chris can jump in. From an overall mix perspective to your point, our segment margins came in at 16 focused on the execution when you looked across our segments. So I'll start with IMS. They had a really strong quarter, landing at 14.8% in comparative to our guide of Really strong execution, so big compliments to Luke and our ISR team, but also overall on program mix within our Commercial Aviation business. So, compliments to Alan and his team as well.

Speaker 4

This is the 4th consecutive quarter of double digit growth within our commercial aviation sector and we're expecting that to continue to grow in the second half as well. And so really strong EAC performance, we do expect that to modulate a bit as we get into second half to align with the guide that we provided. And then to your point, the opposite dynamic is actually playing out within SAS. So we landed Q1 at 11.9 versus a guide of 12.5 to 12.75, which implies that there is going to be increased expectations from a productivity perspective and mix. Now we did have a really strong quarter from a space perspective within SAS.

Speaker 4

That's a lower margin business for us with a lot of the new program wins within it. So we expect that coupled with our E3 savings to help that business in the on the second half of the year. And then finally, from a CS perspective, we talked a lot about supply chain today, but that was clearly a headwind within Q1. We do expect with the volume recovery in the second half that they're going to be able to get to the overall guide of 24.25% to 24.50%.

Speaker 2

Yes. Just to on the commercial aviation, we're right about $500,000,000 of revenue this year is the outlook. Pre pandemic, that was in the $900,000,000 range for our commercial training business. So We're continuing to be patient and take advantage of the rebound, which should be coming soon. We previously divested the military training, so $900,000,000 to $500,000,000 there.

Speaker 2

And I'll just foot stomp, the Space business Is really doing well, well over $2,000,000,000 of revenue, double digit growth. And I just think we're in the sweet spot, whether it's priming these responsive focused on the marketplace opportunities such as SDA and HPTSS that we've talked about, some classified opportunities, GPS and the MTS-three, which is the next generation of GPS, the weather satellites I mentioned, but also the exquisite satellites where We are a sub to other companies and provide our payload. So we're going to take this work each and every

Operator

Our final question comes from Michael Ciarmoli of Truist. Please proceed with your question.

Speaker 10

Chris, just And maybe Michelle back up, back to the international, in the demand environment. I guess if we looked at the growth trajectory really in the industry pre war. It was really going to be driven by U. S. DoD modernization, Next generation programs in this R and D phase shifting to production.

Speaker 10

But I guess given what we're seeing with NATO and The increases in their spending plans as a percent of GDP. Are you guys seeing more tangible evidence? And you pointed out that 1.08 book to bill that there could be an increase for higher margin legacy systems As you go forward and that could potentially provide some structural margin tailwinds as you move into kind of this medium Or they're industrial based rather?

Speaker 2

Yes. No, Michael, that's a great question on the legacy systems. I think we're all learning. If the system is out of production now, I think it's almost impossible to restart some of these Weapons systems that you read and hear about haven't been in production for a decade. So being able to restart something, I think, is difficult.

Speaker 2

If it's something that's currently operational, but maybe an older version or something. I think those are going to be easier to deploy. Again, with the supply chain headwind, I think that is going to be the challenge. I don't think anyone in the industry has a lot of these products Now what we're seeing is the customer has been depleting their inventory, so we're more in a restocking situation. So Look, I'm real optimistic about our international opportunities.

Speaker 2

I think we are unique relative to other companies because we have a combination focused on staff with in country executives, in focus countries, about 10 focus countries. We're focused where we think These opportunities for growth are. So I'm increasingly optimistic about what we've done in international with on a larger percentage of our company each and every quarter. I think this quarter maybe in the 23% range. So More to come and now that COVID is easing, a lot of us are going to be traveling around the globe more and more So with that, let me just say, first of all, I appreciate The feedback on our new format.

Speaker 2

So I think we're going to do this again and continue to do it at least for the rest of the year and see if we can come up with something I know our customers are under a lot of stress and we're all working in the industry to support our customers. I mentioned the Agile Development Group and Shield, but this is a result of listening to our customer and hearing what they want on the execution. They want to work with Silicon Valley type companies. So we're trying to adapt to that. And of course, I have to thank the employees, the dedication, the hard work, the innovative It's all inspiring.

Speaker 2

I feel like we got a lot of momentum, a lot of excitement and really looking forward to wrap on a solid 2022. I will just say in closing that we'll continue our humanitarian efforts for the people of Ukraine. We'll keep working with DoD, NATO allies and others to support this mission and deal with the conflict at hand. So thank you for joining the call and and we'll wrap up a little earlier than normal. Have a great weekend and talk to you in a couple of months.

Speaker 2

Bye.

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