L3Harris (LHX) Q4 2025 earnings review
Record Orders Drive Cash Flow Beat, Despite GAAP Noise
L3Harris closed FY25 with a strong demand signal, posting a 1.3x book-to-bill ratio and record orders of $27.5 billion. While Q4 revenue grew modestly (+2% reported, +6% organic), the company demonstrated significant operational efficiency, driving Adjusted Free Cash Flow up 80% in the quarter to $1.86 billion. However, GAAP earnings took a hit ($1.59 vs $2.37 prior year) due to impairment charges and divestiture impacts. Looking ahead to FY26, management is guiding for continued acceleration with revenue up ~5-7% and a transition to GAAP-only EPS guidance, signaling confidence in cleaner financial reporting post-restructuring.
🐂 Bull Case
Adjusted Free Cash Flow surged 21% for the full year to $2.8B, with a massive Q4 sprint ($1.86B). Management's FY26 guidance calls for $3.0B in FCF, indicating the portfolio integration issues are resolving and working capital is stabilizing.
The Aerojet acquisition is paying off. Q4 revenue grew 10% to $763M, and organic revenue (ex-divestitures) was up 12% in prior quarters. The segment is benefiting from high demand in missile and space programs.
🐻 Bear Case
Integrated Mission Systems (IMS) was a significant laggard. Q4 operating margin collapsed to 11.1% from 13.8% a year ago, driven by the Commercial Aviation Solutions (CAS) divestiture and unfavorable performance in Maritime programs.
The company is undergoing yet another reorganization for FY26 (moving from 4 segments to 3) and divesting the Space Technology group. This constant shuffling creates 'noise' in the numbers, making year-over-year organic comparisons difficult and obscuring underlying operational trends.
⚖️ Verdict: 🟢
Bullish. Despite the noise from divestitures and the IMS margin drop, the leading indicators (Orders, Backlog, Cash Flow) are excellent. The book-to-bill of 1.3x provides high visibility for the FY26 revenue acceleration (~6% growth implied at midpoint).
Key Themes
Integrated Mission Systems (IMS) Stalls
While other segments grew, IMS revenue was flat at $1.71B, and operating income fell 19% to $191M. The segment was hit by the CAS divestiture and 'unfavorable Maritime program performance.' With margins compressing 270 bps to 11.1%, this segment is currently a drag on the broader portfolio.
Aerojet Rocketdyne Momentum
Accelerating. Aerojet Rocketdyne (AR) grew revenue 10% in Q4 to $763M. Adjusted segment operating margins expanded 130 bps to 11.8% (GAAP margin was near zero due to impairment). The demand for propulsion and munitions remains a critical tailwind.
LHX NeXt Cost Savings
The company's transformation program is actively supporting margins. Corporate eliminations/unallocated items improved significantly in Q4 (Operating income impact improved, though unallocated corporate items charge was high due to divestiture losses). Adjusted segment operating margin improved 40 bps YoY to 15.7% despite the IMS drag, validating the efficiency program.
Transition to GAAP Reporting
In a move towards transparency (or reflecting the end of major merger integration costs), LHX is transitioning FY26 guidance to GAAP Diluted EPS ($11.30 - $11.50). This compares to FY25 GAAP EPS of $8.53, implying a massive ~33% jump in reported profitability as amortization and one-time costs roll off.
Government Shutdown Impact
Management noted that the government shutdown resulted in delayed awards within Q4, specifically impacting the Space & Airborne Systems (SAS) segment revenue. While SAS revenue grew 1%, it was held back by these timing issues.
Other KPIs
Accelerating. Up 21% YoY. The conversion was strong in Q4 ($1.86B), recovering from softer quarters earlier in the year due to collections timing. FY26 guidance targets $3.0B, showing continued momentum.
Stable/Strong. With $27.5B in orders against ~$21.9B in revenue, the backlog provides significant coverage for the FY26 revenue target of $23.0-$23.5B.
Accelerating. Up 220 bps YoY (GAAP) and 50 bps (Adjusted). This segment remains the margin cow of the business, driven by LHX NeXt cost savings and international deliveries.
Guidance
Accelerating. The midpoint ($23.25B) implies ~6.3% growth over FY25's $21.86B. This is an acceleration from the 3% growth seen in FY25. (Note: FY26 uses a new 3-segment structure).
Accelerating. Implies ~33% growth vs FY25 GAAP EPS of $8.53. This strong guide suggests a cleaner income statement with fewer adjustments and one-time charges in the coming year.
Stable growth. Represents ~6.6% growth over FY25's $2.81B. While positive, the growth rate is decelerating compared to the 21% jump seen in FY25.
Accelerating. Guidance of 'low 16%' compares favorably to the 15.8% Adjusted Segment Operating Margin achieved in FY25. Driven by Communication Systems (~25%) and improvements in Space & Mission Systems (mid 10%).
Key Questions
IMS Margin Recovery
Integrated Mission Systems margins collapsed to 11.1% in Q4. How much of this is structural due to the CAS divestiture versus temporary performance issues in Maritime? What is the bridge to get this segment (or its successor) back to the 13%+ range?
GAAP EPS Transition
The shift to GAAP EPS guidance ($11.30-$11.50) implies a significant reduction in adjustments. Does this signal that the major integration costs from the merger and Aerojet acquisition are now fully behind us?
Government Shutdown Impact
You mentioned the shutdown delayed Q4 awards. Have those delayed awards been booked in Q1 FY26 yet, or is the continuing resolution still creating a drag on the book-to-bill start for the new year?
Space Technology Divestiture
With the sale of the Space Technology group in the second half of 2026, does the FY26 guidance include partial contributions from this business, and what is the expected revenue leakage once the deal closes?