L3Harris (LHX) Q2 2025: Book-to-Bill Hits 1.5, Backlog and Margin Expansion Signal Multi-Year Growth Path
L3Harris delivered a record 1.5 book-to-bill and expanded margins in Q2, underscoring operational momentum and portfolio alignment with global defense priorities. The company’s performance was broad-based, with Aerojet Rocketdyne and resilient communications driving growth and backlog. Leadership raised guidance and reinforced a multi-year trajectory of double-digit free cash flow growth, while investments in capacity and digital transformation set the stage for durable outperformance.
Summary
- Portfolio Realignment Accelerates: Strategic divestitures and integration of Aerojet Rocketdyne sharpen focus on high-growth defense segments.
- Operational Scale Drives Margin: Cost savings and facility investments expand margins, supporting cash flow leverage.
- Backlog and Bookings Signal Visibility: Sustained record orders and diversified awards reinforce multi-year growth confidence.
Performance Analysis
L3Harris posted its highest organic growth in six quarters, with revenue up across all segments and a company-wide book-to-bill of 1.5, reflecting robust demand and program execution. Aerojet Rocketdyne, propulsion and missile systems business, delivered a standout quarter, achieving a 2.0 book-to-bill and record revenue on surging demand for missile solutions and space propulsion. Segment operating margin expansion, now at its seventh consecutive quarter, underscores the impact of LHXnext, enterprise transformation and cost reduction program, which is tracking 40% ahead of its $1B target and a year early. Communications Systems (CS) and Integrated Mission Systems (IMS) also contributed, with CS backlog up 50% over several years and IMS benefiting from classified ISR program ramps, though IMS margins were partially offset by a one-time contract adjustment.
Free cash flow reached $574M, fueled by higher operating income and improved working capital. The company’s monetization of legacy assets and exit from non-core contracts, part of a broader portfolio realignment, provided additional tailwinds. International demand, particularly in NATO-aligned markets, and solid domestic awards in resilient communications and space-based architectures, further diversified growth drivers.
- Backlog Momentum Across Segments: Every business unit reported book-to-bill above 1.0, with Aerojet Rocketdyne nearly doubling its orders relative to revenue.
- Margin Expansion Outpaces Plan: Operating margin improved for the seventh straight quarter, aided by LHXnext savings and mix improvement.
- Cash Flow Leverage Building: Free cash flow and working capital improvements underpin capital deployment flexibility and future investments.
Execution strength, broad-based demand, and disciplined cost management are driving both near-term outperformance and reinforcing the company’s long-term financial framework.
Executive Commentary
"Our opportunity set is more robust than it's been in decades. Driven by increased global threats requiring speed, capability, and modernization. These dynamics are unfolding across both US and international markets creating a significant opportunity for companies that can move fast and deliver on time. L3 Harris is uniquely positioned to lead in this environment."
Chris Kubasik, Chairman and Chief Executive Officer
"We are at the onset of a generational opportunity for L3 Harris given our capabilities and positioning across key discriminating technologies. Segment operating margin was up 30 basis points marking the seventh consecutive quarter of year-over-year margin expansion."
Ken, Chief Financial Officer
Strategic Positioning
1. Golden Dome and Missile Capacity Expansion
L3Harris is directly aligned with the U.S. Department of Defense’s Golden Dome initiative, a priority homeland security program focused on hypersonic threat detection and missile defense. The company’s investments in Florida and Indiana enable rapid scale-up of HBTSS, Hypersonic and Ballistic Tracking Space Sensor, satellite production. Management expects a full constellation deployment within three years, with contract awards likely to accelerate revenue from late 2025 into 2026 and beyond. Parallel investments in Arkansas and Virginia are expanding solid rocket motor production, underpinning L3Harris’s role on nearly every U.S. interceptor program.
2. Portfolio Realignment and LHXnext Transformation
Ongoing divestitures of non-core product lines and asset monetization are sharpening management focus and redeploying resources to higher-growth, higher-margin segments. The LHXnext program, which digitizes core business processes and embeds AI-enabled tools, is driving both operational efficiency and program execution. With cost savings tracking 40% ahead of plan, management expects to declare victory on LHXnext in 2025 and transition to continuous improvement under its E3 operational excellence framework.
3. International and Commercial Model Expansion
International revenue remains a structural growth driver, with NATO defense spending targets rising and L3Harris winning new awards in Germany, Czech Republic, and the Netherlands. The company’s partnership-centric approach enables local market access without overextending its physical footprint, while commercial acquisition models accelerate margin expansion across segments. The missionized business jet platform and resilient communications portfolio are gaining traction in both Europe and the Far East, further diversifying growth.
4. Aerojet Rocketdyne Integration and Scale
The Aerojet Rocketdyne acquisition is exceeding its business case, with doubled production rates, cost reductions, and strong cash generation. Management is targeting $5B in Aerojet revenue by decade’s end, driven by missile solutions, interceptor programs, and space propulsion. Facility expansions and Defense Production Act funding support durable, multi-year growth, with management highlighting unmatched technology and scale as key differentiators against new entrants.
5. Space and Mission Networks Opportunity
L3Harris’s space business is positioned for growth across every orbital domain, with roles as prime, subcontractor, and merchant supplier. Recent wins include a major FAA network upgrade and a $850M order for RL-10 upper stage engines. The mission networks segment, centered on telecom infrastructure modernization, is now a $1B business with robust margins and upside as air traffic control systems transition from legacy copper to fiber technology.
Key Considerations
This quarter demonstrates L3Harris’s ability to execute on a complex, diversified portfolio while investing in next-generation capacity and digital transformation. The company’s strategy is tightly aligned with both U.S. and allied defense modernization priorities, providing a multi-year runway for profitable growth.
Key Considerations:
- Capital Deployment Optionality: Free cash flow acceleration provides flexibility for reinvestment, M&A, and shareholder returns as cash tax benefits persist into 2026.
- Program Delivery as Growth Catalyst: On-time execution, especially on Golden Dome and missile programs, is a direct driver of incremental awards and customer confidence.
- Transformation Leverage: LHXnext and E3 initiatives are embedding digital tools and AI, improving bid accuracy, operational agility, and cost structure.
- International Orders Offset Domestic Variability: European and Middle Eastern demand, especially for interoperable radios and missionized aircraft, help buffer potential U.S. budget volatility.
- Commercial Model Margin Expansion: Transitioning programs to commercial acquisition frameworks is delivering segment-wide margin gains ahead of plan.
Risks
Key risks include U.S. defense budget uncertainty, particularly around tactical radios and ISR programs, although management notes offsetting international demand and new funding lines. Execution risk remains on large-scale capacity expansions and contract transitions, as does timing risk on major awards like HBTSS and SDA Tranche 3. Competitive dynamics, especially from new missile entrants and shifting European sovereignty preferences, could pressure future win rates or pricing.
Forward Outlook
For Q3 and Q4, L3Harris guided to:
- Solid book-to-bill above 1.0, with potential upside from large awards in space and missionized aircraft
- Continued organic revenue growth across all segments, with Aerojet Rocketdyne leading
For full-year 2025, management raised guidance:
- Revenue up by $200M, targeting 5% organic growth
- Free cash flow raised to $2.65B, a $200M increase
- Non-GAAP EPS up by $0.10, despite $0.30 tax headwind
- 2026 framework reaffirmed at $23B revenue, low 16% margin, $3B free cash flow
Management cited robust demand signals, operational momentum, and a diversified portfolio as drivers of both near-term outperformance and long-term visibility.
- Golden Dome and missile program awards could accelerate growth above baseline
- Transformation and cost savings are expected to support margin expansion and cash generation
Takeaways
L3Harris is executing on a broad-based growth and transformation strategy, with operational discipline and portfolio alignment driving margin and backlog expansion. The company’s exposure to global defense modernization, coupled with digital transformation and capital reinvestment, positions it for sustained outperformance.
- Backlog and Orders Provide Visibility: Record book-to-bill and diversified segment wins support multi-year revenue confidence, with no single program critical to the 2026 framework.
- Margin and Cash Flow Leverage: LHXnext and commercial models are delivering margin gains ahead of schedule, setting up strong free cash flow growth and capital allocation flexibility.
- Watch for Major Program Awards: Timing and scale of Golden Dome, HBTSS, and SDA Tranche 3 contracts will shape the growth trajectory and could drive upside to current guidance.
Conclusion
L3Harris’s Q2 results confirm that its strategic repositioning and operational discipline are translating into tangible growth and margin expansion. With a record backlog, robust international demand, and accelerating transformation, the company is well positioned for sustained profitable growth into 2026 and beyond.
Industry Read-Through
Defense contractors with exposure to missile solutions, space architectures, and resilient communications are benefiting from a structural upshift in U.S. and allied defense spending. L3Harris’s success in portfolio realignment, digital transformation, and international market penetration highlights the importance of agility and operational focus in capturing outsized share of new and follow-on awards. The accelerating shift to commercial acquisition models and digital operating systems is likely to drive margin expansion industry-wide, while capacity investments in propulsion and space signal multi-year demand visibility for suppliers and partners throughout the defense supply chain.