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100 Best Companies 2021-81-L3Harris-Technologies

Though L3Harris enabled more than 20,000 employees to work remotely amid the pandemic, the defense contractor instituted thorough health and safety measures—including daily virtual health screenings, stringent sanitation protocols, and contact tracing—to ensure the well-being of those working on-site. The company extended grants to employees facing unexpected financial hardship through its “L3Harris Cares” relief fund and also provided its workforce with nearly 22,000 hours of backup child and elder care. “There’s an acceptable level of transparency, care, and concern that is genuine and much appreciated,” employees say.

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F500-2021-163-L3 Harris Technologies

Headquartered in Melbourne, Fla., L3Harris works with a global base of clients to produce national security and civil service technologies.

This year's Fortune 500 marks the 66th running of the list.

F500-2020-250-L3-Harris-Technologies

The merger of Harris Corporation and L3 Technologies in June 2019 created the sixth-largest defense contractor in the U.S. and the 10th-largest worldwide, with customers in 130 countries. The Florida-based company specializes in tech like the Falcon IV “multichannel manpack,” a communication system designed for use on the battlefield.

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Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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L3Harris Technologies is a defense and aerospace company that provides advanced technology across air, land, sea, space, and cyber domains. The company offers products and services that support communications, surveillance, electronic warfare, and mission systems. Its customers include government agencies, commercial organizations, and international partners. L3Harris also supports modernization and sustainment efforts for defense platforms and infrastructure.

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L3Harris Technologies (LHX): Company Profile, Stock Price, News, Rankings

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L3Harris Technologies

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Greetings. Welcome to the L3Harris Technologies third quarter 2026 earnings conference call. At this time, participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, Ken Sharp. This morning, we published our third 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 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%, despite having one 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 achieved a book-to-bill of 3.2, which translated to a historic backlog of $53 billion. That backlog is highly aligned to four 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 customer's 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 one of countless examples that have enabled us to double our PAC-3 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 results of that activity are four 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 two critical programs, PAC-3 and THAAD, 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 THAAD solid rocket motor deliveries in 2027 as compared to 2026, 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 AMDT3 award. That win continues to position us as the only company that has been awarded prime contracts across all five 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 investments in capability and capacity, we also plan to add to our technical prowess in space by investing roughly $175 million over the three 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 warfighter 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 productions and improved 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 increasingly important in providing the critical last mile of defense needed to protect warfighters 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 NATO partners, allies, and international customers than to 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 warfighters, ranging from the tactical edge to high levels of command. Our capability ranges from individual sensors to complete mission solutions, from the farthest reaches of space to the deepest depths of the ocean. An exciting example is the recent launch of the Nancy Grace Roman Space Telescope.

We partnered with NASA's Goddard Space Flight Center to provide key components of the telescope, including the optical telescope assembly, which serves as Roman's eye and radiation-hardened electronics that keep the telescope operating approximately 1 million miles from Earth. Importantly, we continue to build momentum in missionized 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 two aircraft under the US 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 jets, which allow our customers a more flexible, cost-effective manner to sense and collect information versus expensive, bespoke, single-mission dedicated platforms. Slide five 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 six. 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 three segments and improved delivery performance with laser-like focus on details.

Of course, we will continue to lean forward where the return for our shareholders and customers is justified but use enhanced tools and strategies to identify and mitigate risks 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 manifests in 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. We will leverage our financial strength for continued flexibility, whether that is consistent dividends, 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 worth $19.3 billion, yielding a book-to-bill of 3.2x. Backlog increased 27% to $53.2 billion and was up 47% year-over-year. The two 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 one 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 allies 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 three 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 help 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 nine, let me provide some color on our Space & 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 & 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 & 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 Solution 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 non-operating 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 to $23.5 billion-$23.7 billion, increasing the midpoint by $150 million. Accordingly, organic revenue growth is now 9%-10%. Segment operating margin guidance is reaffirmed at low 16%. We are raising our EPS guidance to $12.25-$12.35, up from our prior guidance range of $11.80-$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 two adjustments. Space & Mission Systems' full-year revenue is increasing $200 million to $11.9 billion. Communications & 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 three 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.

We will now be conducting a question-and-answer session at this time. Please limit yourself to one question per person. If you'd like to ask a question, please press star one on your telephone keypad and a confirmation message will indicate your line is in the question queue. You may press star one if you'd like to remove your question from the queue. If you have an additional question, please press star one again to get back in the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Thank you. Your first question comes from the line of Kristine Liwag from Morgan Stanley. Your line is open. Please go ahead.

Good morning, everyone, and congratulations, Sam, on your new role. I wanted to ask you about margins and your operational priorities. You just delivered a pretty impressive 200 basis points of operating margin expansion this quarter, your first quarter in the head of L3Harris. 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? I know we're limited to one 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.

Thank you, Kristine. Appreciate the feedback. A couple things maybe from my perspective. Number one, on the lower corporate costs and the operating costs you mentioned and 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. That will be really across the entire enterprise. What you might see, which is a little bit different, a change in strategy, be 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.

That means disciplined performance, disciplined execution, driving costs out of the business. Most importantly, accelerating the backlog that we have into sales by accelerating execution through our business processes on our factory floors. That is the most exciting part of the business for me, and you will see continued focus on it.

Your next question comes from the line of Ronald Epstein from Bank of America. Your line is open. Please go ahead.

Good morning. This is Farrell Granath 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?

First of all, we do remain confident in our $3 billion full-year outlook. Ken mentioned it 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 is one of the strengths of the portfolio. We are 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 is in the Missile Solutions business with these framework agreements or with agreements like VAMPIRE for international customers. Ken, any additional comments?

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

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open. Please go ahead.

Good morning, Sam. Nice to officially hear from you and Ken, of course. Maybe Sam, for you, if you do not mind, just starting with the 2028 targets. You have made some relatively modest changes to that framework that was approved by the board just eight months ago. Can you help us understand what was the impetus for this and just how you are thinking about the framework more broadly from here? Of course, just as new CEO, I have to ask you, the margin outlook does not look aggressive at all over the next three years. Is there any reason you are thinking about that, and how you are thinking about capital deployment, just given the sum of the parts values LHX at 2x the value of where you are currently trading? Just how you are broadly thinking about strategic capital deployment from here.

Yeah. Thank you, Sheila. Appreciate the questions. A couple things. First of all, on the 2028 financial framework, on the segment operating margin, feel confident in the 16%. We know previous guidance was around 16.3%. Really what we have done is removed any assumed benefit from product line sales or investment income from our formula, from our calculation. What you will see is a roughly 16% operating margin, which more closely matches the actual underlying execution and operation of the business. On the free cash flow side, 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 a lower segment margin. Again, some of that comes in mix of faster growth on some of the lower margin businesses as we grow margin those businesses over time. 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.

Yeah, maybe just 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. I think that's very astute on your part. Certainly, we made comments that we're going to generate pretty meaningful free cash flow. We're looking forward to deploying that in a very shareholder-friendly manner to drive value for the company.

I just also maybe touch on Sam's margin adjustment. When you look at those non-recurring 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%. We have some work ahead of us. That's where Sam's very focused on the execution piece, drive the margin up. I would expect you'll see margins improve as we drive the performance of the business without some of these non-recurring items.

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

Your next question comes from the line of Robert Stallard from Vertical Research. Your line is open. Please go ahead.

Sam, I don't know if you touched on this, or I missed the first bit of your call, unfortunately. It was a very busy morning. I was wondering if you could give us an update on your thoughts on this potential Missile Solutions IPO. You mentioned you have the internal generated cash flow to cover the CapEx requirements, but also that your valuation perhaps is not that generous. An update on that would be much appreciated. Thank you.

Yeah. 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 four criteria that we feel need to be satisfied in order to create value for our shareholders through the IPO. 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. Of course, the valuation has to be something which is attractive. 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 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 Godyn from Citi. Your line is open. Please go ahead.

Hi, guys. Thank you for taking my question. 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 are already outperforming that this year. There seems to be a good setup into next year, even though you haven't offered crisp guidance on that. Needless to say, 8% does not feel like a high bar, given what we are seeing in Missile Solutions, Space, etc. Maybe we could just discuss the puts and takes as we are forming a view into next year.

I appreciate the question, John. Thanks. A couple 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 is in our 2028 framework. 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. There are conditions that are outside of our control. Having said that, with the $53+ billion backlog that we currently enjoy, we 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.

Yeah, and just that guidance is two years out. We are very focused on driving the business. We will certainly update that as we execute.

Your next question comes from the line of Peter Arment from Baird. Your line is open. Please go ahead.

Hi, good morning, Sam and Ken and John. Congratulations, Sam. Glad everyone else is the sentiments. 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 within that. If you touched upon it, sorry, I missed it, but just how you're viewing the supply chain, what is internal bottlenecks versus supplier controlled bottlenecks and kind of how you're addressing that, just given all the framework agreements and everything else that you guys are winning. Thanks.

Yeah, appreciate the question. Thanks, Peter. A couple of areas. When we talk about supply chain, as Ken referenced it earlier in his remarks, we're talking a little bit about CSD. There were a small handful of parts that were constrained, having to do with printed circuit board manufacturing. We're talking about things like laminates that were two or three tiers down in the supply chain. There were capacity constraints, largely because of the pull on AI and data centers for microelectronics. 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 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. We're seeing the benefit of that coming online, Peter. This is multiple sources. This is developing multiple sources for critical bottleneck items. I would say also making sure that our existing supply base modernizes its equipment, its production, efficiency gains in their supply chain as well. 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 three of our segments.

Yeah, 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 pre-contract costs floating around, and now we've gotten a lot of that on contract on our side. We have been working, Ken and the missiles team's done a really nice job of getting out with the vendors and so forth. I think we should be in pretty good shape.

Your next question comes from the line of Doug Harned from Bernstein. Your line is open. Please go ahead.

Thank you. Good morning. On CSD, really two things there. The radio business is such an important high-margin business for you all. One is you talked a lot about the things you can do with respect to cost reduction. 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. As you look forward and we head toward NGC2, I know you've won some things on this, but we saw it's a very different structure.

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 NGC2?

Yeah. Appreciate the question, Doug. Listen, on NGC2 in particular, we are an integral partner and part of NGC2. It's created a little bit of confusion because oftentimes in budget documents, it's listed separately from our core radio programs like HMS. Rest assured that we've won our fair share of NGC2-related awards, especially since we play very heavily in that transport layer. We don't expect any significant material reduction in the amount of awards or 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 Anduril and Lockheed Martin as they build out their NGC2 networks. We remain confident that we'll be a major player for the Army going forward, whether it's NGC2 or whether the Army reverts to funding individual line items, specifically in models that we play.

Just a reminder, we always compete under the Army's radio program Whether it's HMS or Manpack or the different radios models we have, we have competitors in each of those areas where we compete on an annual basis. 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. 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.

Yeah, just maybe touch on the margins. 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's all about. Our radios are critically important in that. We talk about software-defined radios, we talked about Wraith Shield on the last call. Those capabilities are very important. I think our focus right now is bringing technology. Some that comes out of the radios, like Wraith Shield, that may be put on VAMPIRE, for example. Those things are very important to us. 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. Your line is open. Please go ahead.

Thanks very much. Good morning, everybody, and congrats, Sam. I have a two-part, very related question. The slide appendix details are pretty impressive and interesting. I'm curious as to what's behind providing all that detail. 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. Thanks.

Appreciate the question. I will answer the second part of the question first and maybe defer to Ken on the financial appendices. We largely see a lot of the growth in our backlog is really associated with firm-fixed-price contracts. We do have Next Gen Jammer, which we are very proud of in our S2 business, and that is within CSD that we captured. That is cost type. That is one 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 types. We look forward to being able to execute those efficiently so we can get the additional margin associated with productive and efficient execution. Ken, I will defer to you on the appendices.

Yeah. Thanks, Sam, and it is interesting. I think this is some of Sam's bend as well as being in an operator and having details. I would also categorize as you kind of engage with investors, we have a great business. It is very clear to me because I am in the details every day. 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. It was around how do you improve ease of use, understandability, and all those places. Really to take Sheila's question around the sum of the parts and why we are not getting valued. We want to make sure people understand the core performance.

That is really where we are at. We are going to go drive the business. Sam is going to clearly drive the business. That is the focus, and we will make sure that the easy use for investors and analysts is there.

Your next question comes from the line of Noah Poponak from Goldman Sachs. Your line is open. Please go ahead.

Thanks a lot. Wanted to ask about Space & Mission Systems growth. The growth year-to-date is pretty strong. The backlog's up a lot over the last few years. If I take the 2028 and appreciate the comments you've made here about, that's a few years out and maybe a bit of a moving target. If I take the 2028 revenue forecast, it implies the organic growth would decelerate 2027 and 2028 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 multi-billion dollar programs that are let many times from international customers, that the timing of those can get tricky. 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 billion-dollar plus movements, as our international customers in particular, consider, reconsider, and move the timing of some of their planned missionized business jet purchases.

Yeah, I would just say, Noah, we feel like we're very well positioned and look forward to delivering on the guidance.

Your next question comes from the line of Myles Walton with Wolfe Research. Your line is open. Please go ahead. Apologies. Please stand by. We will move to your next question from Ken Herbert from RBC Capital Markets. Your line is open. Please go ahead.

Hi, good morning, and congrats on the quarter. I wanted to just dig a little deeper, if we could, into the Missile Solutions. Obviously, the contract's now flowing in, reflected in the backlog. I know you've 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, as obviously you're still in a very significant sort of investment phase as we think about the SRMs in this business.

Yeah, appreciate the question. Thanks, Ken. A couple 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 or 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. I think the Department of War prime contractors are very, very confident in the volumes materializing during the seven-year term of this framework. 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 seven-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've spent a lot of time in the Pentagon over the last couple of months. It's made very clear that this is the foremost priority from the senior-most levels within the Department of War. 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 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. Those are areas like 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. We remain confident, and 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 Ciarmoli from Guggenheim Securities. Your line is open. Please go ahead.

Hi, good morning, guys. Thanks for taking the questions. Sam, congrats. Just maybe on the longer term 2028 targets and thinking about backlog, can you give us a sense of how much of your current plan is already in backlog? I guess what's the coverage through 2028? Then you talked more about booking more firm-fixed. Should we expect then that 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 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 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 at 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. We'll definitely look for additional opportunities to drive the margin upward. 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.

Yeah. Just maybe add, so just for clarity, the funded backlog is $31 billion. 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. 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. You're really on an apples-to-apples basis, accelerating up probably 50 basis points of margin. 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 Wolfe Research. Please go ahead.

Hi, everyone, it's Emily on for Myles. Just checking if you can hear me?

Okay. Hi there. Thanks a lot. Quick question on the Missile Solutions and munitions 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? Also on the budget, given we're in a CR, are there any areas within the portfolio, particularly in CSD, that may be impacted by it?

Yeah. We obviously very conscious of the budgetary environment we're in, Emily. We feel 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 strong area that will continue to be funded. As far as CRs, I often joke with my colleagues here, the three things that you can count on is death, taxes, and CRs. We've operated under a CR now for 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. 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 vulnerable.

Your next question comes from the line of Scott Mikus from Melius Research. Your line is open. Please go ahead.

Good morning, everybody. 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? If for some reason you couldn't get the valuation you'd like through the IPO, is selling all of Missile Solutions or Aerojet a possibility?

Yeah, I will say a couple of things there. I appreciate the question. Number one, we are so excited about this Missile Solutions business. We think it presents a tremendous value to it. Whether we own 100% of that as L3Harris or we own a significant majority share. Nothing has significantly changed in our posture. Nothing has changed in our prospective ownership share, our posture, or the criteria against we are measuring the attractiveness of the IPO as we continue to monitor solutions.

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

Your final question comes from the line of Gautam Khanna from TD Securities. Your line is open. Please proceed.

Thanks. Good morning. I am 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. What are the big international pursuits and domestic pursuits over the next year that we should be monitoring? Thank you.

I appreciate the question. We do have very strong backlog on the tactical radio portfolio. Of course, it is always tricky at any point in time when you look at the backlog because it is such a short cycle business. I will remind you that we have a commercial business model here. We build the forecast in anticipation of winning contracts that we can deliver quickly. I can tell you this year, we will actually deliver more radios to international customers than we will domestic. We do not see that as a weakness in the domestic market. We see that instead as a strength in the international market.

If you take a look around the world and see what is 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 non-kinetic effects that are being brought to bear to keep our war fighters from being able to effectively communicate with each other. 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. We are 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.

L3Harris Technologies (LHX) Q3 2026 Earnings Call Transcript

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