L3Harris (LHX) Q4 2025: Missile Solutions IPO Drives $1B Government Investment, Reshaping Growth Path
L3Harris is pivoting its portfolio with a strategic Missile Solutions IPO and a $1 billion Department of War investment, setting up a new phase of capital-efficient, demand-driven growth. Segment realignment, robust backlog, and operational discipline anchor the outlook, though execution risk remains as capacity expansion accelerates. Investors should watch for clarity on RemainCo growth levers and missile solutions’ scaling trajectory at the upcoming Investor Day.
Summary
- Missile Solutions Restructuring: IPO and $1B government stake unlock capital and scale for missile production expansion.
- Portfolio Realignment: Three-segment structure aligns with high-growth defense priorities and commercial margin models.
- Execution Spotlight: Capacity buildout, supply chain scaling, and RemainCo growth drivers face heightened scrutiny in 2026.
Performance Analysis
L3Harris closed 2025 with record orders and a backlog exceeding $38 billion, reflecting robust demand across missile, space, and communications domains. Organic revenue growth was 5% for the year, accelerating to 6% in Q4, with all segments contributing. Margin expansion of 40 basis points YoY was enabled by LHX Next, a cost transformation initiative that surpassed its $1 billion savings target a year early. Free cash flow surged over 20% to $2.8 billion, driven by disciplined working capital management and tax planning.
Segment performance highlighted differentiated strengths: Communications and Spectrum Dominance (CSD) delivered 25% margins, leveraging a commercial product model; Space and Mission Systems (SMS) posted $11.5 billion in revenue guidance, anchored by ISR aircraft and space awards; and Missile Solutions (MSL) is now positioned for double-digit growth, catalyzed by the Department of War’s $1 billion investment and an anticipated IPO in late 2026. Capital expenditure is set to rise 35-40% in 2026, focused on capacity expansion for missile and space production, while free cash flow is still expected to reach $3 billion.
- Missile Solutions Demand Surge: Double-digit growth outlook underpinned by PAC-3, THAAD, and Standard Missile programs, with government co-investment de-risking scale-up.
- Commercial Model Margin Strength: CSD segment’s 25% margin demonstrates scalability and resilience of commercial product lines.
- Operational Discipline: LHX Next’s integration into daily operations is expected to maintain cost efficiency and margin tailwinds beyond 2025.
Overall, book-to-bill of 1.3x demonstrates sustained demand visibility, but the pace of capacity buildout and supply chain scaling will be critical watchpoints as L3Harris enters a new phase of growth and capital allocation.
Executive Commentary
"We are leading the industry to meet the needs of our customers. We are strengthening the industrial base, reinvigorating competition following decades of consolidation, and unlocking value for our shareholders. In our industry, the year unfolded against one of the most demanding defense and security environments in decades. It was complex, competitive, and rapidly evolving. Speed and execution mattered. Against that backdrop, our workforce delivered. So thanks to them for our best year ever."
Chris Kubasik, President and Chief Executive Officer
"Our guidance reflects appropriate risk posture early in the year and the dynamics associated with administration priorities. It includes a full year of space propulsion and power systems business as we continue to work towards closing the transaction expected in the second half of the year. Consistent with prior practice, we will update as necessary upon the transaction closing."
Ken, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Missile Solutions IPO and Government Partnership
L3Harris is executing a strategic carve-out of its Missile Solutions (MSL) business, with an IPO targeted for the second half of 2026. The Department of War’s $1 billion preferred investment (at a 20% IPO discount) signals both demand urgency and government alignment, de-risking the required capital outlay for rapid capacity expansion. This move positions MSL as a majority-owned, fast-growth public company, with L3Harris retaining control and integration benefits.
2. Portfolio Realignment and Segment Synergy
The company has transitioned from four to three segments—SMS, CSD, and MSL—to better align with defense customer missions and commercial product models. This structure enables focused investment, operational synergy, and differentiated margin profiles, especially as CSD leverages commercial scale and SMS anchors prime contract opportunities in ISR and space.
3. Capacity and Supply Chain Acceleration
With over 60 new facilities and more than a million square feet of new production space under construction, L3Harris is prioritizing speed and scale, particularly for missile and space programs. The company is proactively maturing its supply chain, using robotics and AI to boost productivity, and fostering private equity-backed supplier expansion to address bottlenecks and build resilience.
4. International and Commercial Market Expansion
International wins—including a $2.2 billion South Korea airborne early warning contract and key satellite and tactical comms awards—demonstrate growing global relevance and a shift toward localized production and technology transfer. CSD’s commercial business model, with its software-defined radios and resilient comms, is gaining traction both domestically and abroad, leveraging scalable manufacturing in New York and partnerships worldwide.
5. Continuous Improvement and Cost Culture
LHX Next, initially a top-down cost program, is now embedded in daily operations, driving ongoing efficiency and supporting margin expansion. This continuous improvement mindset is expected to sustain cost competitiveness and operational agility as the company scales.
Key Considerations
L3Harris’s 2025 performance and 2026 guidance highlight a decisive pivot toward capitalizing on defense demand surges, but the transformation brings new operational and strategic complexities.
Key Considerations:
- Missile Solutions IPO Execution: The success of the IPO and integration of government co-investment will be pivotal for scaling, valuation, and long-term control.
- RemainCo Growth Levers: Clarity on how SMS and CSD drive mid-single-digit growth and margin expansion post-MSL IPO is essential for investor confidence.
- Supply Chain and Capacity Risks: Scaling over 60 new facilities and expanding supplier partnerships introduces risk of execution delays or cost overruns.
- Defense Budget and Policy Uncertainty: Growth assumptions are tied to anticipated defense budget increases and timely government appropriations.
- Margin Sustainability in Commercial Segments: CSD’s 25% margin model will be tested as investments in modernization and market shifts evolve.
Risks
Execution risk is heightened as L3Harris undertakes rapid capacity expansion and complex segment realignment, with potential for supply chain bottlenecks, cost inflation, or integration challenges. Government funding delays, evolving defense priorities, and competitive dynamics in missiles and space could impact both backlog conversion and growth rates. Margin improvement depends on sustained operational discipline as transformation initiatives transition to embedded processes.
Forward Outlook
For Q1 2026, L3Harris expects:
- Continued backlog conversion and double-digit order growth
- Early bookings for international special mission aircraft and satellite awards
For full-year 2026, management guided:
- Revenue of $23 to $23.5 billion (7% organic growth midpoint)
- Segment operating margin in the low 16% range
- Free cash flow of $3 billion despite increased CapEx
- GAAP diluted EPS of $11.30 to $11.50
Management emphasized risk-aware guidance early in the year, with updates expected following the civil space propulsion divestiture. The upcoming February Investor Day will unveil a new 2028 financial framework, offering more detail on RemainCo strategy and missile solutions scaling.
- Focus on capital allocation flexibility and dynamic portfolio management
- Watch for updates on supply chain scaling and international contract wins
Takeaways
L3Harris is entering a new growth phase, leveraging a government-backed missile solutions carve-out and a streamlined segment structure to address surging defense demand. Operational discipline and embedded cost culture support margin expansion, but execution risks around capacity buildout and supply chain scaling remain material.
- Missile Solutions IPO is a catalyst: Government investment, new capital, and double-digit growth potential set the stage for long-term value creation, but integration and control will be closely watched.
- RemainCo must prove growth: Portfolio realignment and mid-single-digit growth targets require sustained execution across SMS and CSD, especially as missile solutions’ outperformance is partially ring-fenced.
- Execution on capacity and supply chain is critical: Investors should monitor backlog conversion, cost discipline, and the pace of facility and supplier ramp-up as key indicators of delivery on guidance.
Conclusion
L3Harris is strategically repositioning for sustained growth, underpinned by a transformative missile solutions carve-out, robust backlog, and embedded operational discipline. The next phase hinges on flawless execution of capacity expansion, RemainCo growth delivery, and continued alignment with evolving defense priorities. The February Investor Day will be pivotal for clarity on long-term drivers and risk mitigation.
Industry Read-Through
L3Harris’s missile solutions carve-out and government co-investment signal a broader trend toward public-private partnerships and capital-efficient scaling in the defense industrial base, especially for munitions and missile propulsion. The emphasis on speed, capacity, and supply chain resilience is likely to drive similar moves by peers and suppliers, with private equity and new entrants targeting tier-two and tier-three defense manufacturing. Commercial product models, as seen in CSD, are gaining traction for margin resilience and global expansion, while operational discipline and continuous improvement will be critical for all industry players navigating defense demand surges and policy volatility.