L3Harris Technologies (LHX) Q3 2026 earnings review
L3Harris backlog jumps 47%, but near-term conversion slows
L3Harris Technologies, the US defense contractor, booked a record wave of missile and radio orders while tightening overhead costs. Sales from businesses owned a year ago grew 9%, and profit per share climbed 33% as headquarters expenses fell and free cash flow nearly tripled to $1.3 billion. Chief executive Sam Mehta raised the full-year profit outlook and lifted the bottom of the sales range, though by our math the plan leaves fourth-quarter revenue growth slowing to about 5%.
| Sales from businesses owned a year ago | +9% reported revenue $6.06B (+7%) |
|---|---|
| Contractual backlog | $53.2B +47% from a year ago (3.2x book-to-bill) |
| Diluted profit per share | $3.28 +33% from a year ago |
| Full-year outlook | Raised revenue middle +$150M; profit per share +$0.40 |
⚖️ Verdict: 🟢 Bullish
The story got better because $19.3 billion of quarterly orders turned the promised missile ramp into $53.2 billion of contracted backlog and reversed the order-book drop in the high-margin communications division. One caution: the new seven-year missile awards are mostly unfunded, which pushed the share of total backlog converting into revenue over the next year down from 40% to 35%.
The question now is how fast the defense group can turn its $20 billion missile backlog into shipments as new factories open. Either annual government funding and new production lines lift missile revenue growth into the high teens next year, or budget delays keep the unfunded contracts sitting in backlog. Management's initial 2027 sales outlook next quarter will show the pace.
🐂 Bull Case
Missile Awards Drove Backlog Up 47%
L3Harris Technologies, the US defense contractor, builds solid rocket motors in its Missile Solutions division. President and chief executive Sam Mehta said, "We grew backlog to record levels, underscoring the consistently strong demand for our mission-critical capabilities." Total orders reached $19.3 billion, or 3.2 times quarterly sales, which lifted the total order book by $11.3 billion from last quarter to $53.2 billion.
- THAAD (Terminal High Altitude Area Defense) award: a $6.3 billion "seven-year undefinitized contract to scale propulsion production"
- PAC-3 (Patriot Advanced Capability-3) award: a $4.7 billion "seven-year undefinitized contract to scale propulsion production"
- Missile Solutions order book: $20.0 billion, nearly double the $10.1 billion held a year ago
- Underlying Missile Solutions sales: up 17% from businesses owned a year ago after stripping out the sold space propulsion unit
These awards matter because they turn a general framework into booked orders and double the missile backlog in a single quarter. The defense group also opened its Camden, Arkansas rocket motor plant in October to "address rising demand for munitions". What to watch: finalizing the contract terms on the $11 billion of missile awards over the next two quarters, because preliminary agreements carry less certainty on pricing and delivery schedules.
Communications Orders Reversed the Backlog Drop
Communications & Spectrum Dominance makes tactical radios and electronic warfare gear, and it earns the highest profit margins in L3Harris Technologies. Last quarter its order book shrank 4% from a year ago, which raised a concern that strong international sales were depleting future work. In the third quarter, customers placed $3.9 billion of orders in this division, or 1.9 times its quarterly sales.
The company won an $876 million contract modification for the US Navy Next Generation Jammer Low Band system, which disrupts enemy radar. It also booked over $500 million for VAMPIRE, its counter-drone weapon system, and delivered the first units to the US Army two months after the order. Those wins lifted the division's backlog by 21% from last quarter to $10.9 billion, while international sales across the business reached 24% of revenue.
What to watch: fourth-quarter revenue in Communications & Spectrum Dominance. The contractor trimmed the division's full-year sales plan by $100 million to $7.9 billion, so fourth-quarter shipments will show whether the new orders convert quickly enough to restart revenue growth.
Third-Quarter Cash Surge Eased Full-Year Pressure
Defense contractors often collect most of their cash late in the year, and L3Harris Technologies generated only $577 million of recast free cash flow in the first half against a $3.0 billion full-year plan. In the third quarter, operating cash flow jumped to $1.44 billion and free cash flow nearly tripled from a year ago to $1.26 billion, even as factory spending rose 50% to $179 million.
Customer collections drove the improvement, as accounts receivable fell by $369 million during the quarter and customer advances rose by $169 million. Year-to-date free cash flow now stands at $1.84 billion. By our math, the company needs $1.16 billion in the fourth quarter to meet its $3.0 billion outlook, which is 36% less than the $1.80 billion it generated in the fourth quarter of last year.
What to watch: fourth-quarter contract assets, which represent work performed but not yet billed to the government. Contract assets rose $299 million this quarter to $4.0 billion, and billing those balances will determine whether full-year cash tops the $3.0 billion target.
Lower Overhead Lifted Operating Margin Two Points
Total operating margin rose 2.0 percentage points from a year ago to 13.0%, driven by "higher volumes, a lower level of corporate expense, lower interest expense and a lower effective tax rate". General and administrative expenses, which cover headquarters and overhead, fell by 1.8 percentage points of revenue to 13.6%, because integration charges from the LHX NeXt cost programme ended last year and acquisition amortization dropped.
Operating margin across the three business divisions held steady at 15.9%, but its quality improved. Last quarter, division profit included $39 million of investment gains, and Space & Mission Systems margin sat at 9.8%. This quarter, L3Harris Technologies recorded zero investment gains inside its divisions, and Space & Mission Systems lifted its margin to 10.9% on 10.3% revenue growth, which prompted a $200 million raise to its full-year sales outlook.
What to watch: Space & Mission Systems operating margin in the fourth quarter. Year-to-date margin sits at 10.4%, so the division must hold its third-quarter rate to finish at the planned mid-10% level for the year.
🐻 Bear Case
Unfunded Multi-Year Awards Slow Backlog Conversion
Regarding the $53.2 billion order book, Mehta said, "Our priority now is to convert that demand into results." However, the appendix shows that the share of total backlog converting into revenue over the next twelve months fell to 35%, down from 40% last quarter and 45% a year ago. Even with a 47% bigger backlog, the dollar amount scheduled to ship in the next year rose only 11% from last quarter.
- Total backlog converting in 12 months: 35% ($18.6 billion by our math), vs 40% ($16.8 billion) in the second quarter
- Unfunded total backlog: $22.0 billion (41% of the total), up from $11.7 billion (28%) last quarter
- Missile Solutions unfunded backlog: $12.3 billion, up from $3.2 billion last quarter
This happens because the $11.0 billion of seven-year THAAD and PAC-3 awards entered the books largely as unfunded backlog, which requires annual congressional appropriations before L3Harris Technologies can bill for production. Meanwhile, Space & Mission Systems recorded a 1.0 book-to-bill ratio, so its backlog edged down to $22.3 billion. What to watch: initial 2027 revenue targets next quarter, which will show how much missile backlog converts before new factories open in late 2027.
Subsidiary Preferred Stock Charges Cut Into Profit
Earlier this year, the US Department of War invested roughly $1 billion into the Missile Solutions subsidiary through convertible preferred stock and warrants ahead of a planned public offering. In the third quarter, L3Harris Technologies recorded a $50 million non-operating charge for the change in fair value of that preferred conversion feature and warrants, alongside $19 million of deemed dividends that reduced net income available to common shareholders.
The company also continued to pay "costs related to the carve-out and planned MSL public offering" inside its $9 million of transaction expenses. A $37 million corporate investment gain and a lower 14.9% tax rate masked the $50 million derivative charge in reported earnings per share. By our math, pre-tax profit before the derivative loss and corporate investment gain was $756 million, or $13 million higher than reported.
What to watch: fair-value adjustments and deemed dividends in the fourth quarter. Management previously guided to about $55 million of deemed dividends for the full year, leaving $22 million for the fourth quarter after $33 million year to date.
Risks This Quarter Didn't Answer
Because L3Harris Technologies supplied only its earnings release and appendix tables without a call transcript or quarterly filing, three standing operational and financial risks received no updated disclosure this quarter.
- Government funding delays: how a fiscal 2027 continuing resolution affects the timeline for finalizing the $11 billion of undefinitized missile contracts and $20 billion of contracts in negotiation; check the quarterly Form 10-Q filing.
- Off-balance-sheet factory leases: the total value of missile facility finance leases not yet on the balance sheet; check the lease commitments footnote in the Form 10-Q.
- Missile IPO clock and milestones: progress toward the December 2027 deadline on the Department of War preferred stock before redemption penalties apply; check the mezzanine equity footnote in the Form 10-Q.
💲 Other KPIs
Net debt — total debt minus cash and short-term investments — fell by $2.07 billion since the start of the year, or 20.6% by our math. Strong third-quarter free cash flow and $539 million of cash proceeds from selling the Space Technology business lifted cash and short-term investments to $3.02 billion, cutting net debt to 1.9 times trailing cash profit.
Contract liabilities — cash payments customers have made in advance for work not yet performed — rose 39.3% from a year ago and 5.8% from last quarter, far outpacing the 7.1% rise in reported sales. Rising customer advances funded working capital in the third quarter and support future revenue recognition across the defense divisions.
Stock buybacks slowed to $73 million in the third quarter, down 58.5% from $176 million a year ago and down from $229 million in the second quarter. Year-to-date repurchases of $598 million reduced the diluted share count by 0.6% from a year ago to 186.9 million, as the US company held cash for upcoming debt maturities.
🔮 Guidance
Raised. L3Harris Technologies lifted the bottom of its full-year sales plan by $300 million, putting the middle of the range at $23.6 billion, or 7.9% growth. By our math, that leaves $5.92 billion for the fourth quarter, or 4.7% growth from a year ago and a 2.4% drop from the third quarter, after the August sale of the space propulsion unit. Third raise in four quarters: +$0M, +$200M, +$150M.
Raised. The defense contractor increased its full-year profit-per-share outlook by $0.40 at the middle of the range to $12.30, up 44.2% from last year. By our math, that leaves $3.17 for the fourth quarter, almost double the $1.59 earned in last year's charge-heavy fourth quarter. It is the third raise this year: +$0.10, +$0.40, +$0.40.
Raised. Management lifted the division's full-year sales target by $200 million after third-quarter revenue grew 10.3% to $3.09 billion, its second $200 million increase in a row. By our math, the $11.9 billion plan leaves about $2.85 billion for the fourth quarter, up 4.5% from a year ago.
Cut. The company trimmed its full-year sales forecast for the communications division by $100 million after revenue grew ~3% in each of the first three quarters. By our math, reaching $7.9 billion still requires about $2.11 billion of sales in the fourth quarter, up 7.4% from a year ago.
Unchanged. The plan holds at about $4.1 billion after the space propulsion divestiture closed during the third quarter, reducing that unit's quarterly revenue contribution from $155 million to $38 million. By our math, the full-year target leaves roughly $1.0 billion for the fourth quarter.
Unchanged. Management kept its full-year operating margin target across all divisions at low 16%, with Space & Mission Systems at mid-10%, Communications & Spectrum Dominance at mid-25%, and Missile Solutions at low-12%. Because year-to-date division margin sits at 15.9%, finishing at 16.1% requires about 16.7% in the fourth quarter by our math.
Unchanged. The full-year operating cash flow plan stays at $3.6 billion alongside approximately $600 million of capital expenditures. After generating $2.22 billion in the first nine months, the company needs $1.38 billion in the fourth quarter by our math, down from $1.96 billion in last year's fourth quarter.
Unchanged. The contractor maintained its $3.0 billion free cash flow forecast even after changing its definition this quarter to exclude cash proceeds from selling property and equipment ($20 million year to date). By our math, the outlook leaves $1.16 billion for the fourth quarter and $214 million of fourth-quarter capital expenditures.
❓ Key Questions
When will the $11 billion missile awards be finalized?
The $6.3 billion THAAD and $4.7 billion PAC-3 awards are undefinitized contracts, and unfunded backlog jumped by $10.3 billion. How much of this backlog requires fiscal 2027 congressional appropriations before it moves into funded status?
Why did communications sales targets drop despite record orders?
Communications & Spectrum Dominance booked $3.9 billion of orders (1.9 times sales), yet management cut its full-year revenue forecast by $100 million to $7.9 billion. Did supply-chain bottlenecks or customer delivery schedules push shipments into 2027?
What are the off-balance-sheet lease commitments for missile factories?
Reported capital expenditures reached $386 million year to date against a $600 million full-year plan. How much additional capital did L3Harris Technologies commit through finance leases for its 60 new munitions buildings that have not yet entered service?
What drove the $50 million subsidiary preferred stock charge?
L3Harris Technologies took a $50 million non-operating loss on the fair value of the Missile Solutions preferred conversion feature and warrants. What valuation assumptions changed, and what is the status of the milestones tied to the 2027 public offering deadline?