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    LHX
    Earnings call· Mar 2025(Q1 FY25)

    L3HARRIS TECHNOLOGIES, INC. /DE/ Q1 FY25 earnings call LHX

    Apr 24, 2025 Source

    Executive summary

    L3Harris Q1 FY25 — Strong Margins and Reaffirmed 2026 Targets Despite Divestiture

    L3Harris delivered a strong first quarter, marked by continued margin expansion and robust shareholder returns, despite flat organic revenue growth and the divestiture of its Commercial Aviation Solutions business. The company reaffirmed its ambitious 2026 financial framework, citing confidence from new contract wins and strategic partnerships. Management emphasized its 'Trusted Disruptor' strategy, advocating for commercial-like business practices within the DoD and aligning its portfolio with national security priorities, particularly in space and missile defense.

    Highlights

    5

    • Segment operating margin expanded for the sixth consecutive quarter to 15.6% in Q1 FY25.

    • Non-GAAP EPS increased 7% year-over-year to $2.41 in Q1 FY25.

    • Free cash flow outflow of approximately $70 million in Q1 FY25 was less than half the outflow in Q1 FY24, supporting reaffirmed full-year guidance of $2.4 billion to $2.5 billion.

    • Secured a $1.1 billion international award from the Dutch Ministry of Defense for network modernization and software-defined radios.

    • Returned nearly $800 million to shareholders in Q1 FY25, including $570 million in share repurchases and $230 million in dividends, marking the 24th consecutive annual dividend increase.

    Concerns

    3

    • SAS revenue declined 6% organically in Q1 FY25 due to lower volumes from program timing and reduced F-35 volume.

    • SAS operating margin decreased 140 bps to 10.9% in Q1 FY25 due to challenges on some legacy fixed-price development programs in space.

    • IMS revenue declined 2% in Q1 FY25 due to lower aircraft missionization volume and the ramp down of an ISR mission operations program.

    Guidance & targets

    17
    CategoryTargetConfidence
    Full-year 2025 Revenue
    $21.4 billion to $21.7 billion
    high materiality
    High
    Full-year 2025 Organic Revenue Growth
    4% at the midpoint
    high materiality
    High
    Full-year 2025 Segment Operating Margin
    Mid- to high 15%
    high materiality
    High
    Full-year 2025 Non-GAAP EPS
    $10.30 to $10.50
    high materiality
    High
    Full-year 2025 Free Cash Flow
    $2.4 billion to $2.5 billion
    high materiality
    High
    Full-year 2025 Communication Systems Revenue
    $5.6 billion to $5.7 billion
    medium materiality
    High
    Full-year 2025 Communication Systems Operating Margin
    25%
    medium materiality
    High
    Full-year 2025 Integrated Mission Systems (IMS) Revenue
    Approximately $6.3 billion
    medium materiality
    High
    Full-year 2025 Integrated Mission Systems (IMS) Operating Margin
    High 11% range
    medium materiality
    High
    Full-year 2025 Space and Airborne Systems (SAS) Revenue
    $6.9 billion to $7.1 billion
    medium materiality
    High
    Full-year 2025 Space and Airborne Systems (SAS) Operating Margin
    Low 12% range
    medium materiality
    High
    Full-year 2025 Aerojet Rocketdyne (AR) Revenue
    Approximately $2.8 billion
    medium materiality
    High
    Full-year 2025 Aerojet Rocketdyne (AR) Operating Margin
    Mid-12% range
    medium materiality
    High
    Full-year 2026 Revenue
    $23 billion
    high materiality
    High
    Full-year 2026 Segment Operating Margin
    Low 16%
    high materiality
    High
    Full-year 2026 Free Cash Flow
    $2.8 billion
    high materiality
    High
    Full-year 2025 Share Repurchases
    More than $1 billion
    medium materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Communication Systems
    Driven by continued strong international demand and quick turn book-to-bill deliveries. Margin reflects favorable high-margin international mix for resilient communications and LHX NeXt cost savings.
    Operating margin increase: 150 bps
    		$1.3 billion4%—25.5%
    Integrated Mission Systems
    Revenue declined due to lower aircraft missionization volume and anticipated ramp down of an ISR mission operations program. Margin increased due to strong program performance, increased volume of higher-margin airborne electro-optical sensors, and LHX NeXt cost savings. FAS business transferred to AR.
    Operating margin increase: 140 bps
    		$1.6 billion-2%—12.8%
    Space and Airborne Systems
    Revenue decline primarily due to lower volumes from program timing and reduced F-35 volume as TR-3 transitions. Margin decreased due to continuing challenges on some legacy fixed-price development programs in space, partially offset by LHX NeXt cost savings.
    Operating margin decrease: 140 bps
    		$1.6 billion-6% organically—10.9%
    Aerojet Rocketdyne
    Strong results driven by improved production volume across key missile programs and new program ramps. Margin declined due to lower net favorable EAC adjustments, partially offset by higher volume and LHX NeXt-driven cost savings. Includes FAS business transfer from IMS.
    Operating margin decrease: 110 bps
    		—9% organic growth—12.1%

    Operational metrics

    19
    Non-GAAP EPS
    $2.41Up 7% year-over-year
    Q1 FY25

    First quarter reporting under new non-GAAP EPS methodology to improve quality of earnings and narrow GAAP/non-GAAP spread.

    Share Repurchases
    $570 million
    Q1 FY25

    Part of capital return to shareholders.

    Dividends Paid
    $230 million
    Q1 FY25

    Part of capital return to shareholders.

    Total Capital Returned to Shareholders
    Nearly $800 million
    Q1 FY25

    Includes share repurchases and dividends.

    Pension Obligations Transferred
    $1.2 billion
    Q1 FY25

    Transferred to an insurance provider without cash contributions or book losses, reducing future risk and volatility.

    LHX NeXt Gross Run Rate Savings
    $1.2 billion
    FY25

    Expected for the year, nearing completion of the cost optimization phase.

    Revenue Impact from CAS Divestiture
    -$525 million
    FY25

    Elimination of revenue related to the Commercial Aviation Solutions divestiture.

    EPS Impact from CAS Divestiture
    -$0.55
    FY25

    Reduction in Non-GAAP EPS related to the CAS divestiture.

    EPS Increase from Operational Performance and Capital Deployment
    $0.25
    FY25

    Increase in Non-GAAP EPS from improved operational performance and capital deployment actions, including the pension buyout.

    Revenue Impact from FAS Business Transfer
    -$300 million
    FY25

    Revenue transferred from IMS to AR due to Fusing and Ordinance Systems (FAS) business transfer.

    Total Revenue Reduction from IMS Guidance
    Approximately $800 millionFrom midpoint of prior guidance
    FY25

    Combination of CAS divestiture and FAS business transfer impacts IMS revenue guidance.

    International Revenue Growth
    Growing faster than overall business
    Q1 FY25

    Expected to continue, primarily in Communication Systems and IMS.

    F-35 Revenue Outlook
    Low point for revenue
    FY25

    Due to TR-3 development coming down and production increasing; growth expected in 2026.

    Negative Adjustments on Legacy Fixed-Price Development Programs
    Tens of millions of dollars
    Q1 FY25

    Impacted SAS operating margin, programs nearing completion.

    Expected Share Count
    188 million to 189 millionVersus previous 190 million
    FY25

    Due to share repurchases.

    Presidential Budget Request (PBR) 2026
    As high as $1 trillion
    FY26

    Suggested by President Trump and Secretary Hegseth, representing strong top line growth.

    Additional Defense Funding
    Over $150 billion
    Future

    Congress focused on a reconciliation package that could include this amount.

    DoD Budget Reduction Target
    8%
    Future

    Each service asked to reduce budget to reallocate funding to administration priorities.

    MDAP Evaluation Threshold
    15%
    Current

    74 MDAPs being evaluated to identify those 15% over budget or 15% late to schedule.

    Industry KPIs

    3
    MetricValueDetails
    Book to bill ratio1.14
    Defense program awardsOver $1.1 billionUSD
    Program margins eac chargesTens of millions of dollarsUSD

    Orderbook & backlog

    4
    Total Company Book-to-Bill Ratio1.14LTM
    Dutch Ministry of Defense AwardOver $1.1 billionAfter Q1 FY25 close

    For network modernization and software-defined radios.

    Classified ISR AwardOver $350 millionEarly Q2 FY25
    International Award$200 millionEarly Q2 FY25

    Deals & partnerships

    4
    Kuiper Government Solutions (Amazon)Collaboration to combine tactical communication systems with global low earth orbit satellite network to deliver resilient hybrid SATCOM solutions.

    Aims to provide greater flexibility and mission assurance across military, public safety, and commercial domains. Formalizes joint work and reflects commitment to secure, resilient communications in contested environments.

    Shield AICollaboration on AI-enabled unmanned systems for electronic warfare operations, leveraging L3Harris's software-defined electromagnetic battle management ecosystem with Shield AI's Hivemind autonomy.

    L3Harris is a minority shareholder in Shield AI.

    PalantirSupporting the U.S. Army's TITAN program by leading communication systems integration for Palantir. Integrating Palantir's Foundry software platform with L3Harris's software-defined tactical radio networks.

    Collaboration enhances data processing power of tactical networks.

    nullDivestiture of the Commercial Aviation Solutions business, the last remaining commercial aerospace business in the portfolio.

    Completed in Q1 FY25, part of portfolio shaping to sharpen national security focus.

    Risks & headwinds

    7
    Uncertainty regarding the FY26 defense budget details.Awaiting greater visibility, expected by Q2 call.

    Not quantified, but impacts future growth visibility.

    Mitigation: Balanced and disciplined approach to guidance, risk-aware posture.

    Lack of clarity around the implementation details of the Golden Dome executive order and other recent directives.Awaiting greater visibility, expected by Q2 call.

    Not quantified.

    Mitigation: Balanced and disciplined approach to guidance, risk-aware posture; L3Harris is well-positioned with HBTSS satellite.

    Uncertainty regarding the budget tied to the 17 priority areas outlined by the DoD.Awaiting greater visibility, expected by Q2 call.

    Not quantified.

    Mitigation: Balanced and disciplined approach to guidance, risk-aware posture.

    Continuing challenges on some legacy fixed-price development programs in space.Expected to be behind the company in '25 or early '26.

    Tens of millions of dollars of negative adjustments.

    Mitigation: Programs are nearing completion; management expects future work in these areas to be profitable as technological challenges are overcome.

    Reduced F-35 volume as TR-3 mission computing hardware transitions from development to a more gradual production ramp.2025 is the low point for revenue; growth expected in 2026.

    Contributed to 6% organic revenue decline in SAS segment in Q1 FY25.

    Mitigation: Anticipated and factored into guidance; growth expected as production increases.

    Lower aircraft missionization volume and anticipated ramp down of an ISR mission operations program.Current quarter impact.

    Contributed to 2% revenue decline in IMS segment in Q1 FY25.

    Mitigation: Proactive portfolio management, driving performance in other areas.

    Changing trade landscape and potential tariff impacts.Current and ongoing.

    Not anticipated to have a meaningful impact on financial results.

    Mitigation: Various mitigation strategies in place, actively managing impact within current guidance assumptions, ensuring timely access to international components.

    What to watch in Q2 FY25

    5

    FY26 PBR Release

    Next quarter (May)
    CurrentExpected in May
    TargetSpecific dollar allocation at mission/program level

    Why it matters

    Will provide critical visibility into future defense spending priorities and potential for a $1 trillion budget, impacting L3Harris's growth trajectory.

    Yes, we're actually expecting the 2026 PBR in the month of May. I think it's going to be referred to as a skinny PBR with the dollars allocated more at the mission level than at the program specific level, a little different than in the past.

    Q&A highlights

    5

    Why is L3Harris confident in international sales, especially in Europe, despite geopolitical concerns and local competition in comms/radios?

    Management is confident due to recent orders and ongoing discussions, citing the $1.1 billion Dutch award. They emphasize that L3Harris's tactical networks and software-defined radios are superior in crypto, interoperability, and modernization, which are critical for 7-10 year programs, especially given the urgency of current threats.

    “At the end of the day, you want the best technology available, and it's proven over and over that our tactical networks, our software-defined radios are superior, and that's why they're being procured.”

    asked by Seth Seifman · answered by Christopher Kubasik

    2 min read6 chapters

    Detailed Narrative

    01

    DoD Priorities and Budget Landscape

    The administration is driving transformative change, with a full-year continuing resolution allowing new program starts and a budget increase of 1% over 2024. Congress is considering over $150 billion in additional defense funding. The DoD's 17 priorities align well with L3Harris's capabilities, particularly with recent acquisitions. The potential for a $1 trillion presidential budget request in 2026 signals strong top-line growth and urgency.

    02

    Golden Dome Initiative and Space Capabilities

    L3Harris is well-positioned to support the Golden Dome initiative, with substantial investments in new space factories. The company has secured awards across all three tranches of the Space Force's tracking layer. The Hypersonic and Ballistic Tracking Space Sensor (HBTSS) satellite, launched in February 2024, is the only proven on-orbit system for tracking new RAND hypersonic missiles and is expected to be a core component of the Golden Dome architecture.

    03

    Procurement Reform and LHX NeXt

    L3Harris is actively advocating for federal procurement reform, focusing on simplifying acquisition processes and adopting commercial-like business practices within the DoD. The company's LHX NeXt initiative aligns with these principles, aiming for internal transformation through speed, efficiency, and agility. The initiative is nearing completion of its cost optimization phase, targeting $1.2 billion in gross run-rate savings this year, and is now moving into enterprise transformation leveraging AI-enabled solutions.

    04

    International Growth and Strategic Partnerships

    The company secured a significant $1.1 billion international award from the Dutch Ministry of Defense for network modernization and software-defined radios, highlighting strong demand from NATO allies. L3Harris is exploring new collaboration models with European companies. Strategic partnerships with Kuiper Government Solutions (Amazon), Shield AI, and Palantir are accelerating innovation in hybrid SATCOM solutions, AI-enabled unmanned systems for electronic warfare, and AI integration into tactical networks for the U.S. Army's TITAN program.

    05

    Portfolio Optimization and F-35 Outlook

    L3Harris completed the divestiture of its Commercial Aviation Solutions business, further sharpening its national security-focused portfolio. The Fusing and Ordinance Systems (FAS) business was transferred from IMS to AR to drive synergies. The F-35 program is expected to be a near-term headwind📎 in 2025 due to the TR-3 transition from development to production, but revenue growth for the F-35 portfolio is anticipated in 2026 as production ramps up.

    06

    Aerojet Rocketdyne's Strategic Importance

    Aerojet Rocketdyne is focused on capacity expansion, particularly in Missile Solutions, contributing to 9% organic growth. The business is well-positioned for Golden Dome opportunities, including interceptor production and development programs, and targets for the Missile Defense Agency. Space propulsion programs like NASA's SLS, Artemis, and the RS-25 engine, along with the RL10 engine, are critical for national security and space exploration.

    AI-generated summary of the company’s earnings call. Not investment advice.