L3Harris (LHX) Q1 2026 earnings review
Record Backlog and Margin Expansion Mark a Strong Start
L3Harris delivered a robust Q1 2026, accelerating revenue growth to 12% YoY (15% organic) and generating a record $40.7 billion backlog with a 1.4x book-to-bill. The company's strategic realignment into three segments is paying dividends, with Space & Mission Systems (+24%) and Missile Solutions (+18%) driving the top line. Operating margin expanded 120 bps to 11.4%, leading to a 33% surge in GAAP diluted EPS to $2.72. As a result, management raised its FY26 EPS guidance. The only notable blemish was negative Free Cash Flow of $(187) million, dragged down by working capital timing, though full-year FCF guidance remains intact at $3.0 billion.
🐂 Bull Case
Revenue growth accelerated to 12% YoY, supported by $7.8 billion in orders and a record $40.7 billion backlog. The macro environment, including demand from the DoD Munitions Acceleration Council, directly benefits the portfolio.
Operating margin expanded 120 bps to 11.4%, benefiting from structural efficiencies, program performance, and legacy asset monetization, which fueled a 33% EPS increase.
🐻 Bear Case
Free Cash Flow worsened to $(187) million from $(101) million a year ago, primarily due to a $623 million spike in receivables. Converting earnings to cash remains a near-term headwind.
Missile Solutions reported favorable margins, but this was driven by one-time asset monetization that masked net unfavorable Estimate at Completion (EAC) adjustments, indicating underlying cost pressures.
⚖️ Verdict: 🟢
Bullish. The combination of double-digit top-line growth, record backlog, enterprise margin expansion, and a raised EPS outlook firmly outweighs seasonal Q1 cash flow weakness.
Key Themes
Space & Mission Systems Top-Line Surge
SMS revenue surged 24% YoY to $2.99 billion, propelled by strong activity in ISR classified and international missionized aircraft programs, as well as Space and Maritime networks. This solidifies SMS as the primary volume growth engine for the enterprise following the segment reorganization.
SMS Margin Dilution from Procurement
Despite the 24% revenue growth in SMS, operating margin sits at 10.5%. While this is a 60 bps YoY improvement, it remains the lowest margin among the three segments. Management explicitly cited increased material procurement on lower-margin programs as a drag, highlighting structural margin pressure during the early lifecycle of these classified contracts.
Missile Solutions Scaling Production
MSL delivered 18% YoY revenue growth to $990 million. The company is successfully executing on the DoD's Munitions Acceleration Council priorities, ramping up production volumes across key missile, munition, and space propulsion programs.
Unfavorable EAC Adjustments in MSL
While MSL operating margin expanded 110 bps to 12.5%, the improvement was heavily driven by the monetization of legacy assets. Alarmingly, management noted this masked 'net unfavorable EAC (Estimate at Completion) adjustments.' Reliance on asset sales to offset operational cost overruns is a red flag that contradicts the positive scaling narrative and warrants close monitoring.
CSD Profitability Engine
Communication & Spectrum Dominance (CSD) serves as the margin anchor. While top-line growth was a stable 3%, operating margins expanded 60 bps to a robust 25.1%. Favorable product mix—specifically high-margin night vision devices and software-defined resilient communications—along with a legal settlement, easily absorbed increased R&D investments and Next Generation Jammer Electronic Warfare prototyping costs.
Working Capital Dragging Cash Flow
Free Cash Flow deteriorated to a $(187) million burn in Q1. The primary culprit was a massive $623 million increase in net receivables and a $527 million drop in accounts payable. Hitting the $3.0 billion FY26 FCF guidance now requires near-flawless cash conversion over the next nine months.
Other KPIs
L3Harris booked $7.8 billion in orders in Q1, achieving a robust 1.4x book-to-bill ratio. This pushes the total backlog to a new record, providing excellent visibility into the $23 billion FY26 revenue floor and derisking the remaining quarters.
Stable and accelerating. Up 120 bps from 10.2% in 25Q1. The improvement was driven by a $125 million increase in segment operating income and declining unallocated corporate costs, validating the cost-control measures implemented during the LHX NeXt transformation.
Guidance
Accelerating. Management raised the range from the prior $11.30 - $11.50. This reflects confidence in operational execution, lower interest expenses from debt paydowns, and a favorable 13.1% tax rate environment.
Stable. Reaffirmed guidance implies roughly 6% YoY growth compared to FY25. With a $40.7 billion backlog and a Q1 run rate of $5.7 billion, the company is solidly on track to meet or exceed this target.
Reversing. Following the $(187) million cash burn in Q1, L3Harris needs to generate ~$3.2 billion over the next three quarters. The projected operating cash flow is ~$3.6 billion with ~$600 million in CapEx.
Stable. Segment margins printed at 15.7% in Q1. Hitting the low 16% target requires incremental improvement as lower-margin material procurement in SMS normalizes and legacy EAC issues in MSL are flushed out.
Key Questions
Visibility on Working Capital Normalization
The $623M increase in receivables weighed heavily on Q1 cash flow. Can you detail the specific timing dynamics at play, particularly with international customers, and when we should expect these collections to normalize?
EAC Adjustments in Missile Solutions
You cited unfavorable EAC adjustments in MSL that were masked by legacy asset monetization. Are these cost overruns isolated to specific legacy development programs, or are there broader supply chain/labor pressures impacting the core production ramp?
Margin Inflection for Space & Mission Systems
SMS revenue grew an impressive 24%, but margins face pressure from material procurement on classified contracts. At what point in the lifecycle of these specific contracts do we see margins inflect upwards toward the enterprise average?
Missile Solutions IPO Timeline
With the expected IPO of the Missile Solutions business previously discussed, how does the strong 18% revenue growth but mixed underlying EAC performance this quarter influence your timeline and valuation strategy for that spin-off?