L3Harris Earnings Call Highlights Growth, Cash and Expansion

L3harris Technologies ((LHX)) has held its Q4 earnings call. Read on for the main highlights of the call.

L3Harris Earnings Call Signals Confidence Amid Investment Surge

L3Harris Technologies’ latest earnings call carried a distinctly upbeat tone, with management leaning into a narrative of strong execution, rising profitability and accelerating demand. Executives highlighted broad-based organic growth, expanding margins, and a powerful free cash flow story, all underpinned by a record backlog and a string of major contract wins. While they were candid about execution challenges in certain programs, funding timing risks, and the near‑term cash drag from higher capital spending, the message to investors was that the company is in a “scale-up” phase with tailwinds that far outweigh the headwinds.

Record Revenue and Organic Growth Momentum

L3Harris closed fiscal 2025 with revenue of $21.9 billion, up 5% organically from the prior year, underscoring steady demand across its defense and space portfolio. Fourth-quarter revenue reached $5.6 billion, also up 6% on an organic basis, confirming that growth strengthened into year-end rather than fading. Management framed this as evidence that the company is well-positioned in priority U.S. and allied defense spending areas, especially in advanced communications, space systems, and missile technologies. For investors, the consistent mid‑single‑digit organic growth provides a solid baseline on which the company expects to build as recent contract awards convert into sales.

Margin Expansion and EPS Climb Higher

Profitability trends were a central focus. Adjusted segment operating margin improved to 15.8% for 2025, a 40‑basis‑point increase year over year, with Q4 margins of 15.7%, also up 40 basis points. This improvement, combined with disciplined cost control, helped push non‑GAAP EPS to $10.73 for the year, up 11%, and $2.86 in Q4, up 10%. Management emphasized that margin expansion is coming from both structural cost savings and mix improvement, not just one‑off items. The EPS growth outpacing revenue growth suggests increasing operating leverage, an attractive sign for shareholders looking for earnings power as the top line continues to grow.

Robust Free Cash Flow and Balance Sheet Discipline

The company’s cash generation story strengthened notably. Adjusted free cash flow rose to $2.8 billion in 2025, an increase of more than 20%, driven by earnings growth, tighter working capital management, and favorable tax items. Management is guiding to $3.0 billion of free cash flow in 2026, even as capital expenditures rise, signaling confidence in the underlying cash engine. This gives L3Harris flexibility: it can fund elevated CapEx to expand missile and propulsion capacity while still maintaining a solid balance sheet and optionality for future capital allocation, including debt reduction, potential buybacks and continued dividends.

Record Backlog and Powerful Book-to-Bill

Demand visibility is strong, anchored by a record backlog exceeding $38 billion and a healthy book‑to‑bill ratio of 1.3 for the year. Management spotlighted a series of marquee wins: a $2.2 billion airborne early warning (AEW) business‑jet award from South Korea, roughly $850 million for 18 satellites in the Space Development Agency tracking layer, an international weather satellite program of about $200 million, and multiple tactical communications and software-defined radio orders totaling more than $200 million. After quarter‑end, the company also received an initial order exceeding $700 million for multi‑aircraft special mission business jets, with total program potential above $2 billion. For investors, this backlog represents multi‑year revenue visibility and supports the company’s confidence in sustaining above‑GDP growth.

Aerojet Rocketdyne: Integration and Growth Pay Off

The Aerojet Rocketdyne business delivered some of the fastest growth in the portfolio, with 2025 revenue exceeding $2.8 billion and organic growth running at 12% for both the full year and Q4. Margins reached 12.5% for the year, with Q4 margin expanding to 11.8%, up 130 basis points. Management portrayed Aerojet as a cornerstone of L3Harris’ strategy in missiles and space propulsion, benefiting from surging demand for solid rocket motors and space launch systems. While they acknowledged earlier delivery delinquencies and program issues post-acquisition, the tone suggested that integration is now on track, with improved execution supporting both growth and profitability.

Segment Performance and Strategic Reorganization

Management used the call to walk investors through segment-level performance and a strategic reorganization. The CS/CSD segment delivered revenue of $5.7 billion, up 4%, with a strong margin of 25.2%, up 50 basis points, reinforcing its role as a high‑margin cash generator. The IMS segment posted $6.6 billion in revenue with 8% organic growth, while SAS revenue reached $6.9 billion. Looking ahead, L3Harris is shifting from four segments to three: Sensors & Mission Systems (SMS), Communications Systems & Data (CSD), and Missile Solutions (MSL). The realignment is designed to better match technology clusters and business models, simplify reporting, and clarify the growth narrative for investors, especially around missile and space propulsion opportunities.

Cost Savings Program Beats Target Ahead of Schedule

A key driver of margin expansion has been the LHX NEXT cost savings initiative. Management announced that they exceeded the $1 billion savings commitment a full year ahead of plan. These savings are flowing through in the form of higher margins and more efficient operations, while also giving the company room to reinvest in capacity and R&D without sacrificing profitability. The early over‑delivery on such a large savings target boosts management’s credibility with investors and suggests that internal execution discipline is strengthening.

Strategic Capital Moves and Government Partnership

The company outlined a significant strategic capital plan centered on its missile business. L3Harris plans an initial public offering of its Missile Solutions (MSL) segment in 2026, effectively spotlighting a fast‑growing, high‑demand franchise. In parallel, the Department of War is planning a $1 billion preferred investment in the business, structured to convert at a 20% discount with an additional 3% in detachable warrants, resulting in an expected single‑digit equity stake. Management believes this partnership will help fund the large capacity build‑out required to meet missile demand while sharing risk and underscoring the government’s commitment to the industrial base. Coupled with 2026 top‑line guidance calling for about 7% organic growth and higher EPS, the move signals confidence in future returns from this capital-intensive expansion.

IMS Program Pressures Weigh on Margins

Not all segments are firing perfectly. The IMS segment saw its Q4 operating margin drop to 11.1%, down 270 basis points. Management attributed the decline primarily to the impact of the CAS divestiture and unfavorable program performance in the Maritime business. These issues highlight the execution risk inherent in complex, long‑cycle defense programs. While the company is working through the problem contracts, this segment’s margin volatility is a reminder that growth in defense hardware and systems does not always translate seamlessly into near‑term profitability.

Budget Uncertainty and Government Funding Delays

L3Harris also called out the impact of government funding dynamics on its results. A government shutdown delayed awards and muted incremental revenue growth in Q4 and over the full year, despite strong underlying demand. Looking ahead, uncertainty around the timing and composition of the 2027 budget could affect the pace at which new contracts are awarded and funded. For investors, this introduces timing risk, though not necessarily demand risk, as programs may shift across quarters or fiscal years rather than disappear.

CapEx Spike to Support Missile Capacity Expansion

To support surging missile and solid rocket motor demand, the company is significantly increasing capital expenditures. CapEx is expected to rise to about $600 million in 2026, roughly 2.5% of sales and a 35–40% jump from 2025 levels. These funds will be directed toward modernizing production facilities and scaling missile and propulsion capacity. Management was clear that further CapEx beyond 2026 is likely but not yet fully defined. While this investment phase will put some pressure on near‑term free cash flow and limit capital returns flexibility, the company argues it is essential to secure a durable competitive position in a structurally growing market.

Industrial Base and Supply Chain Scaling Risks

Management spent time addressing the broader industrial base challenge. Meeting rapidly rising demand will require substantial capacity expansion across the supply chain, not just within L3Harris. The company is working with suppliers to increase hiring, invest in new facilities, and build out second‑ and third‑tier supplier networks. Nonetheless, management acknowledged that supplier constraints remain a key risk as volume ramps. For shareholders, this means that even with strong demand and government backing, execution will hinge on how quickly the broader ecosystem can scale without creating new bottlenecks.

Tactical Radio Funding Uncertainty

One pocket of funding concern lies in tactical radios. Some reductions in tactical radio line items in the FY26 request and appropriations have created near‑term uncertainty for certain domestic programs. Management was transparent that this could moderate growth in U.S. tactical radios in the near term. However, they expect rising international demand and ongoing modernization programs overseas to offset some of the domestic funding pressure. Investors should watch how the mix between U.S. and international tactical communications evolves, as it could influence both growth rates and margins within the communications portfolio.

Program Remediation and Legacy Delinquencies

The call also revisited earlier challenges related to rocket motor deliveries and program performance following the Aerojet Rocketdyne acquisition. Management acknowledged that there were delinquent deliveries and pockets of underperformance across 2024–2025 that required remediation efforts. They stated that these issues have been stabilized, with improved execution and more robust program management now in place. While these legacy problems weighed on past results and remain a caution flag for investors, the tone suggested that the most acute issues are behind the company, and lessons learned are being applied across the missile and space businesses.

Guidance: Scaling Up with Higher Margins and Cash

Looking ahead to 2026, L3Harris guided revenue to a range of $23.0–$23.5 billion, implying about 7% organic growth at the midpoint, a step-up from 2025 trends. Company segment operating margin is expected in the low‑16% range, indicating further expansion from 2025 levels. GAAP diluted EPS is projected at $11.30–$11.50, and free cash flow is targeted at $3.0 billion, even with CapEx elevated to around $600 million. By segment, SMS is expected to generate $11.5 billion of revenue with operating margins in the mid‑10% range, CSD about $8.0 billion with roughly 25% margins, and MSL about $4.4 billion with mid‑12% margins and around $620 million of EBITDA. Share count is expected to remain roughly flat, and the dividend is assumed unchanged, signaling a focus on funding growth while maintaining consistent shareholder payouts.

In sum, L3Harris used its earnings call to present a story of solid growth, rising profitability, and strong cash generation, buttressed by a record backlog and deepening government partnership. While investors must weigh the risks of execution, supply chain bottlenecks, budget uncertainty, and higher capital spending, management’s tone and numbers point to a company in the midst of a major scale‑up phase in missiles, space, and advanced defense technologies. For shareholders and prospective investors, the key takeaway is that L3Harris is leaning into demand with aggressive but targeted investment, aiming to convert today’s record orders into tomorrow’s higher and more profitable revenue base.