L3Harris Technologies, Inc. (LHX) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the EMCORE Corporation conference call to discuss the acquisition of L3Harris Space and Navigation business. [Operator Instructions] As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Mr. Tom Minichiello, EMCORE's Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, everyone. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on our current expectations and projections about future events and trends affecting our business. Such forward-looking statements include, in particular, projections about future results, the anticipated benefits, including anticipated revenue of EMCORE's acquisition of the Space & Navigation business from L3Harris Technologies, market trends and the anticipated relationship with L3Harris following the transaction. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of the business or our industry to be materially different from those expressed or implied by any forward-looking statements. We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business which are included in the company's filings available on the SEC's website located at sec.gov, including the sections entitled Risk Factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. The company assumes no obligation to update any forward-looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation. With me today is Jeff Rittichier, EMCORE's President and Chief Executive Officer. Jeff will begin with a few prepared remarks regarding the acquisition before we open up the call for your questions. I'll now turn the call over to Jeff.

Thank you, Tom, and good morning, everyone. Today, we're pleased to announce that we have acquired L3Harris' space and navigation business, a leading developer and manufacturer of high-performance inertial navigation systems for $5 million in cash. Through the transaction, EMCORE has acquired all of the outstanding assets and liabilities of space and navigation, including their production facility in Budd Lake, New Jersey, which we will utilize to support the space and navigation product line and its customers. Depending on the timing of the close, shipment volume during the interim and lumpiness, we expect Space and Navigation to add $20 million to $25 million in revenue during the first year and become non-GAAP EPS accretive. L3Harris Space and Navigation is a leader in navigation programs of national importance. The team in Budd Lake designs and builds some of the most accurate navigation products in the world. This acquisition expands our fiber optic gyroscope product portfolio into the strategic-grade and space-qualified markets. We will also gain a technical team with a sterling track record of development and production of high-performance FOGs, Ring Laser Gyros and Reaction Wheels for satellite applications. We see the technical team at Space and Navigation as being entirely complementary to our existing teams of engineers and scientists and expect to reap the benefits of the best design practices across our facilities. Strategically, we couldn't ask for a better fit. The transaction will combine Space and Navigation's strong brand, inertial technology and development program wins with EMCORE's vertically integrated manufacturing capability. This acquisition further solidifies EMCORE's position as one of the largest independent inertial navigation providers in the industry. We're a subcontractor that does not compete with our customers. The combination will expand EMCORE's growth opportunities into the launch vehicle and satellite markets, both of which are experiencing significant growth. The commercial side of the transaction is even more compelling because it includes a Master Supply Agreement for two critically important multiyear launch vehicle programs: One is called BoRG, Booster Rate Gyro; and two is called TAIMU, which is the Tri-Axial Inertial Measurement Unit used by United Launch Alliance. The Board program is already moving into production, and the TAIMU development program provides important partnership opportunities with L3Harris, which we expect to expand our business together. Furthermore, EMCORE will be added as a preferred supplier to all of the L3Harris divisions to develop more business between us. The technical team at Space & Navigation comes equipped with a complete set of capabilities to design and test for space applications and includes extensive shock, vibration, thermal and vacuum chambers. The facility has a large number of rate tables, which are used for final checkout and can serve multiple product applications. EMCORE has been a long-term supplier of space qualified components to Space and Navigation and our vertically integrated manufacturing capability is expected to create additional operating synergies. Finally, with regard to sales and marketing, there is very limited overlap from a personnel perspective. Since EMCORE did not compete in the strategic segment, we also have no program overlap. We expect to further build and optimize the sales and marketing teams to serve all of these applications. Finally, during the closing period, we have to clear certain regulatory and commercial obligations we expect to take up to 90 days. During this period, we will begin to work with L3Harris on closing out the details on certain commercial agreements as well. Our expectation is that we will hit the ground running at closing. Before concluding my formal comments, I would point out that EMCORE identified the space and navigation team as a high priority target over 2 years ago. We were persistent, worked hard and ultimately succeeded with this transaction. We believe it will strengthen EMCORE's aerospace and defense business and our company as a whole. This concludes my formal comments, and now I would like to ask the operator to open up the line for questions regarding today's announced acquisition. Operator?

[Operator Instructions] We'll take our first question from Richard Shannon with Craig-Hallum.

Congratulations on the deal announcement here. I guess a couple of questions here and start off with Jeff. If I heard you correctly, I jumped on a little bit late, so I may have missed some detail, but I think you're talking about revenues expected after close of $20 million to $25 million compared to a business purchase price of $5 million seems like a great valuation at the high level here. Can you kind of discuss the kind of the ramifications and the things that went into this purchase price here to help us get a sense of value and importance?

Sure. And thanks for being available on such short notice, Richard, I know we didn't give you a lot of time. I think it's also important to note that we've got some work to do with the Space and Navigation division in terms of getting some, what I'll call, light restructuring in place largely related to facilities. I think it's important to note that we could be looking at somewhere between $3 million to $5 million in restructuring costs largely related to equipment and real estate over a few years. And this, of course, is going to depend on a number of things that we can't quite predict. If we get lucky, it will be at the low end or maybe even a little less. If negotiations don't go so well, it will probably be closer to [ 5 ]. So that's the only thing in terms of the financial piece that is really relevant here. We will pick up the obligation for L3Harris' Union employees and the pension obligation. But we believe, at this point, that is really well funded, and we've been through this extensively. And so unless something changes absolutely dramatically, we're not expecting much, if any, impact from that. Tom, you want to chime in? Because I'm sure I forgot something.

Well, I think you got the main points across, Jeff. And so Richard, I think just to reiterate and amplify what Jeff is saying, there are some additional costs that we'll be having to spend over the next year or maybe a little longer. The lease that we inherited is a -- as you probably see in the press release, it's 110 square feet. It's certainly of a size that is more than what's needed for the business. There's about 45 people that work there. So -- and it's a pricey lease. It does expire in a little over a year, in May of 2023. So between now and then, we'll have to figure out how we best utilize the space. There is a closeout obligation on that lease, too, that we'll have to record once we do the purchase accounting, and that will all happen in the June quarter, which is the quarter in which we expect to close on the deal.

Yes. The amount of any closeout obligation, Richard, also will depend on negotiations with the landlord, which we, obviously, been unable to get started, but soon, we will. And so we'll update everyone as soon as we have a particulars on that.

Okay. Fair enough then. You talked about this expected to be EPS -- non-GAAP EPS accretive. And I think you mentioned something in the prepared remarks, again, in [indiscernible] have jumped in a little something here. But can you talk about the timeframe by which that will be accretive, as I expected to be immediately over the first year? Or it's just can you give the details on that would happen?

Yes. So there's a lot of moving pieces underneath the water line. There's changes importantly in the product line over to L3Harris and what they're shipping in volume and new business going to pick up. So when I was talking about lumpiness, that's what I meant. These are orders that they've already received. I think the -- or parts of the orders that they've already received. So there is some element of unpredictability in this, but what I will say is we'll expect it to hit EPS -- non-GAAP EPS accretive sometime in the year -- first year. And it's just going to depend on a few factors as far as how close it is. And it may bounce around a little bit for a while, but we'll expect that to get pretty steady. One of the features of the space, strategic-grade market is that you tend to see really long contracts and lead times. And once we get past the transition, we expect this to be far more like the traditional defense business than -- even the current product lines. Does that make sense?

Okay. Fair enough. Yes. Yes, it does. That's helpful. Let's maybe ask a question too on L3Harris, not highly knowledgeable of their business here. Maybe you can help us understand where they fit in the grand scheme of FOG sensors and -- ones that are specifically in navigation grade here. And we're ultimately -- in the context of your expectation of $20 million to $25 million in the first year after close, where can this go over time? What do you think in terms of their pipeline and the markets that they could...