L3Harris Technologies, Inc. (LHX) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A session reveal strong financial performance, strategic partnerships, and growth opportunities in Europe. Management provided optimistic guidance, particularly in the Aerojet Rocketdyne segment, and highlighted cost-saving initiatives through LHX NeXt. Although management was cautious about growth rates exceeding 4%-6%, they expressed confidence in exceeding targets. The new partnerships and international growth prospects, especially the $1.1 billion Dutch award, are positive indicators. Overall, the sentiment is positive, with potential for stock price appreciation over the next two weeks.

Key Financial Performance

Orders $8.3 billion this quarter, resulting in a 1.5 book-to-bill. This is a record and reflects strong demand.

Revenue $5.4 billion, reflecting strong organic growth of 6%. This growth was driven by new programs ramping and increased demand across all segments.

Segment Operating Margin 15.9%, up 30 basis points, marking the seventh consecutive quarter of year-over-year margin expansion.

Non-GAAP EPS $2.78, up 16% year-over-year. On a pension-adjusted basis, EPS was $2.42, up 22% year-over-year.

Free Cash Flow $574 million, driven by increased operating income and improved working capital performance.

CS Revenue $1.4 billion, up 2%, driven by increased demand for resilient communication equipment and related waveforms. Operating margin remained solid at 24.4%, reflecting higher domestic volumes and LHX NeXt-driven cost savings.

IMS Revenue $1.6 billion, up 6% organically, with an operating margin of 13.2%, up 120 basis points. Revenue increased due to the ramp-up of several classified ISR programs. Operating margin increased due to the monetization of legacy end-of-life assets, partially offset by an unfavorable EAC adjustment from the resolution of a subcontract matter.

SAS Revenue $1.8 billion, up 7% organically, primarily due to increased volume in FAA networks and improved program performance in our airborne Combat Systems business. Operating margin was 12.3%, down 30 basis points due to an unfavorable mix, partially offset by LHX NeXt cost savings.

Aerojet Rocketdyne Revenue 12% organic growth and a 2.0 book-to-bill. Growth was driven by improved production volume across key missile programs and new program ramps. Operating margin increased 50 basis points to 13.3% due to solid performance, LHX NeXt-driven cost savings and a favorable contract resolution.

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Operating Highlights

Golden Dome initiative: L3Harris is preparing to deploy a full constellation of 40 to 45 HBTSS satellites as part of the Golden Dome architecture, which is critical for detecting hypersonic threats. Investments have been made in Florida and Indiana to scale up space sensor manufacturing and payload integration.

Solid rocket motors: L3Harris is rapidly scaling solid rocket motor manufacturing to meet urgent demand, with new production facilities in Virginia, Arkansas, and Alabama. Aerojet Rocketdyne Missile Solutions business grew 15% in the quarter, driven by global conflicts.

Software-defined radios: Secured approximately $200 million in orders to deliver interoperable communication systems to Germany, along with other wins in NATO countries like the Netherlands and Czech Republic.

Space propulsion: Secured a major award for 130 upper stage RL10 engines valued at nearly $850 billion, highlighting its role in space launch missions.

International defense spending: NATO members are targeting defense spending increases to 5% of GDP, leading to meaningful orders for L3Harris, including software-defined radio awards from Germany and Czech Republic.

U.S. defense budget: The U.S. fiscal year 2026 budget includes $1 trillion in national defense funding, with $155 billion signed into law. L3Harris is well-positioned in areas like space-based architectures, missile systems, and autonomous platforms.

LHX NeXt savings: Tracking 40% ahead of the $1 billion cost-saving target, a year earlier than planned, contributing to achieving the 2026 margin target.

Aerojet Rocketdyne integration: Integration is complete, doubling deliveries and production rates while reducing costs of poor quality.

Production facility enhancements: New modular robotic-enabled facilities in Virginia will increase capacity, enhance efficiency, and reduce product travel time by 90%.

Portfolio alignment: Reshaped the company through internal investments, strategic acquisitions, and divestitures to focus on national security priorities.

Partnerships: Deepened partnerships with government and industry to accelerate innovation and mission outcomes.

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Risk or Challenges

Supply Chain Disruptions: The company is rapidly scaling solid rocket motor manufacturing to meet urgent demand, which may strain supply chains and production capabilities. Investments in new facilities and workforce expansion are being made to address this, but risks of delays or inefficiencies remain.

Regulatory and Compliance Risks: The company is heavily involved in defense contracts, including the Golden Dome initiative and missile systems, which are subject to stringent regulatory oversight. Any failure to meet compliance standards or delays in approvals could impact operations and financial performance.

Economic and Budgetary Uncertainties: While the U.S. defense budget is robust, any future changes in government defense spending priorities or economic downturns could adversely affect the company's revenue and growth projections.

Operational Execution Risks: The company is undertaking complex projects like the Golden Dome initiative and scaling up production for solid rocket motors. Any delays, cost overruns, or quality issues could harm its reputation and financial outcomes.

International Market Risks: The company is expanding its footprint in international markets, including NATO countries. Geopolitical tensions, trade restrictions, or changes in foreign defense budgets could pose challenges.

Integration Challenges: The integration of Aerojet Rocketdyne has been completed, but ongoing efforts to optimize operations and achieve cost savings may encounter unforeseen challenges, impacting efficiency and margins.

Technological and Innovation Risks: The company is investing in advanced technologies like AI-enabled tools and space-based architectures. Failure to innovate or delays in technology deployment could result in lost opportunities and reduced competitiveness.

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Guidance & Outlook

Revenue Guidance for 2025: Increased by $200 million, expecting strong organic revenue growth of 5% for the year.

Segment Operating Margin Guidance for 2025: Maintained at mid to high 15%, supported by continued LHX NeXt cost savings and strong program execution.

Non-GAAP EPS Guidance for 2025: Raised by $0.10, reflecting strong first-half performance and higher revenue outlook, partially offset by a $0.30 headwind from recent tax reform.

Free Cash Flow Guidance for 2025: Increased to approximately $2.65 billion, an increase of $200 million due to operating performance and tax reform.

IMS Revenue Guidance for 2025: Increased by $100 million, reflecting strong performance in the ISR sector.

SAS Revenue Guidance for 2025: Increased by $100 million, reflecting an improved outlook in space.

2026 Financial Framework: Revenue expected to reach $23 billion, reflecting 6% growth year-over-year. Segment operating margin expected in the low 16% range. Free cash flow guidance raised to $3 billion, a 13% increase year-over-year.

Golden Dome Initiative: Preparing to deploy a full constellation of 40 to 45 HBTSS satellites in a timely manner, supported by investments in Florida and Indiana to scale up space sensor manufacturing and payload integration.

Solid Rocket Motor Manufacturing: Investing in Arkansas and Virginia to increase solid rocket motor deliveries and drive record production levels, responding to urgent demand.

International Defense Spending: NATO members targeting defense spending increases to 5% of GDP, translating into meaningful orders for L3Harris and supporting sustained medium- to long-term international growth.

Space Propulsion Portfolio: Secured a major award for 130 upper stage RL10 engines valued at nearly $850 billion, highlighting trusted role in enabling space launch missions.

2026 Free Cash Flow Per Share: Expected to grow at a CAGR of 15% from 2023 through 2026.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you explain the comment in the release about monetizing legacy end-of-life assets and discuss the runway left on LHX NeXt cost reductions?

A:Management explained that monetizing legacy end-of-life assets involves identifying product lines that do not align with strategic growth areas and monetizing them to pull future revenue forward. This also allows repurposing of the footprint into growth-aligned areas. Regarding LHX NeXt, cost savings and facility consolidations will continue, with the program largely implemented by the end of 2025, transitioning into ongoing operational improvements.

Q:What impact do you think increased defense spending in Europe will have for L3Harris, and are there plans for a bigger footprint in Europe?

A:Management sees solid growth opportunities in Europe, particularly in telecommunications and software-defined radios. They emphasized the importance of interoperability and resilience. While the partnership model works best for them, they are open to adjusting their strategy country by country. They highlighted a factory opened in Poland as an example of adapting to local needs.

Q:Can you rank by segment where you expect the most growth and margin improvement for 2026?

A:Aerojet Rocketdyne is expected to be the fastest-growing segment due to demand for solid rocket motors and space propulsion. SAS, CS, and IMS follow in growth potential. Margin improvement will come from LHX NeXt program benefits, solid program performance, and transitioning to more commercial acquisition models.

Q:How quickly can you get the HBTSS constellation contract under contract, and does your 2026 confidence hinge on winning tranche 3?

A:Management hopes to secure the HBTSS contract by the end of the year, contributing to 2025 revenue and more in 2026. While tranche 3 is part of their 2026 framework, they are confident in meeting their goals even without winning it, managing their portfolio to ensure commitments are met.

Q:How do you expect bookings to trend through the rest of the year, and could growth rates break out from the 4%-6% range?

A:Management expects solid bookings in the second half of the year, with visibility into exceeding a 1.0 book-to-bill ratio. While large awards like T3 or HBTSS could accelerate growth, they are cautious about calling it a breakout but remain optimistic about exceeding the 4%-6% growth range.

Q:Can you provide a breakdown of the $8.3 billion bookings by segment?

A:Each segment had a book-to-bill ratio over 1.0, with Aerojet Rocketdyne at nearly 2.0, SAS close behind, and IMS and CS in the 1.1 to 1.3 range. Strong orders were seen across missile solutions, space propulsion, mission networks, maritime, and international opportunities.

Q:Are you signing up to riskier contracts due to the customer’s desire to go faster?

A:Management assured they are not taking on riskier contracts. They emphasized cost-plus contracts for development and fixed-price contracts for production, ensuring reasonable terms. They highlighted improved data and modeling capabilities to better estimate costs and manage risks.

Q:How do TDL and Aerojet Rocketdyne contribute to growth, and what are the biggest growth drivers for Aerojet?

A:TDL has shown upper single-digit revenue growth and high margins since acquisition. Aerojet Rocketdyne is expected to grow significantly, driven by investments in missile solutions, interceptors, and large solid rocket motors. Management aims for $5 billion in revenue by the end of the decade.

Q:What is the growth outlook for tactical radios and Armed Overwatch?

A:Management sees continued growth for tactical radios, with modernization embedded in new budget line items. Armed Overwatch has international opportunities to offset domestic quantity dips, ensuring no impact on production flow or overall ISR business growth.

Q:What is the outlook for the Mission Networks business within SAS?

A:Mission Networks, focused on telecommunications infrastructure, is around $1 billion in revenue with good margins. Management sees growth opportunities in upgrading air traffic control systems and transitioning to newer technologies, with no plans to be a prime integrator for a new air traffic control system.

Q:What is the strategy and revenue potential for the Wolf Pack program?

A:Wolf Pack, a transformational capability for launch effects, has been in development before the Aerojet Rocketdyne acquisition. Management aims for a few hundred million in revenue over the next several years, with potential domestic and international opportunities.

Q:What is the demand environment for space, and what role could L3Harris play in Europe?

A:Management sees strong demand for space across all orbital planes and sizes, with opportunities in weather satellites, missile tracking, and transport layers. They are positioned as a prime, sub, and merchant supplier. In Europe, they see potential for leveraging their weather satellite technology and other capabilities.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing the potential for growth rates to break out from the 4%-6% range, using cautious language about visibility and opportunities without committing to a clear answer.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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