L3해리스 테크놀로지스(LHX) 2026년 3분기 실적 발표 콘퍼런스 콜: 사상 최대 수주잔고 및 가이던스 상향

핵심 요약

• L3해리스 테크놀로지스는 2026년 3분기 매출이 전년 동기 대비 7% 증가한 61억 달러를 기록했다고 발표했습니다. 2025년 3분기보다 영업일수가 1주일 적었음에도 자체 사업 매출은 9% 증가했습니다.
• 수주액은 193억 달러를 기록해 수주출하비율 3.2배를 달성했습니다. 수주잔고는 전분기 대비 27%, 전년 동기 대비 47% 증가해 사상 최대치인 532억 달러를 기록했으며, 여기에는 110억 달러 규모의 PAC-3 및 사드(THAAD) 수주가 포함됩니다.
• GAAP 희석 주당순이익(EPS)은 33% 증가한 3.28달러를 기록했습니다. 영업이익은 7억 8,600만 달러로 27% 증가했으며, 영업이익률은 200bp 확대된 13%를 나타냈습니다.
• 잉여현금흐름은 거의 200% 증가한 13억 달러를 기록했습니다. 경영진은 연간 30억 달러의 잉여현금흐름 목표를 재확인했으며, 4분기에는 약 10억 달러를 기록할 것으로 예상했습니다.
• 회사는 2026년 매출 및 EPS 가이던스를 상향 조정했습니다. 매출은 235억~237억 달러, EPS는 12.25~12.35달러로 예상됩니다.
• 경영진은 2028년 자체 사업 성장률 목표 8%를 재확인했으나, 2028년 부문 이익률 전망치는 약 16%로, 잉여현금흐름 목표는 30억 달러로 하향 조정했습니다.

핵심 재무 데이터

사업 및 영업 실적

미사일 솔루션

미사일 솔루션 부문 매출은 전년 동기 대비 5% 증가했습니다. 상업용 우주 추진체 사업 매각 영향을 제외한 자체 사업 매출은 주요 미사일 프로그램의 물량 증가에 힘입어 17% 상승했습니다. 부문 이익률은 제품 믹스 영향으로 30bp 하락한 12%를 기록했습니다.

이 부문은 110억 달러 규모의 PAC-3 및 사드 계약 수주잔고를 확보했습니다. 경영진은 PAC-3 고체 로켓 모터 인도량이 2025년에서 2026년 사이 2배 증가한 데 이어 2027년에도 다시 2배 늘어날 것으로 예상된다고 밝혔습니다. 사드 고체 로켓 모터 인도량은 2027년에 2026년 대비 3배로 늘어날 계획입니다.

L3해리스는 미사일 생산능력 확장에 30억 달러를 투자할 계획입니다. 이 중 약 25%는 공급망 역량 강화에 투입됩니다. 아칸소주의 첨단 추진 시설은 대형 고체 로켓 모터 제조 능력을 6배 확충할 것으로 기대됩니다.

우주 및 미션 시스템

매출은 우주 기반 미사일 경보 및 추적 프로그램, ISR 항공기, 항공교통관제 현대화, F-35 제어 시스템 등에 힘입어 10% 증가한 31억 달러를 기록했습니다. 부문 이익률은 물량 증가와 사업 수행 개선에 힘입어 20bp 상승한 10.9%를 기록했습니다.

회사는 9억 5,500만 달러 규모의 수주를 강조하며, 5개 우주 및 미사일 경보·미사일 방어 트랜치 전체에 걸쳐 주계약을 확보했다고 밝혔습니다. 또한 L3해리스는 3년 동안 우주 관련 연구개발에 약 1억 7,500만 달러를 투자할 계획입니다.

특수임무용 비즈니스 제트기 수주액은 3분기 3억 2,300만 달러, 연초 대비 누적 기준으로 거의 15억 달러에 달했습니다. 여기에는 미 공군 콤파스 콜(Compass Call) 프로그램에 따른 항공기 2대가 추가로 포함되어, 요청된 22대 중 총 12대를 확보하게 되었습니다.

통신 및 스펙트럼 우위

매출은 3% 증가한 20억 달러를 기록했습니다. 해외 전술 라디오 수요와 뱀파이어 드론 대응 시스템(counter-UAS) 생산 확대에 따른 성장은 스펙트럼 우위 물량 감소 및 부품 공급 차질로 일부 상쇄되었습니다. 경영진은 대부분의 공급업체 문제가 분기 말까지 해결되었으며 4분기에는 더 강력한 성장을 기대한다고 밝혔습니다.

부문 이익률은 우수한 사업 수행 성과와 믹스 개선을 반영해 50bp 상승한 25.2%를 기록했습니다. 회사는 8억 7,600만 달러 규모의 차세대 교란기 저주파 대역(Next Generation Jammer Low Band) 계약을 수주하여, 해당 프로그램의 총 수주액을 거의 15억 달러로 늘렸습니다.

이번 분기 미 전쟁부 및 해외 고객으로부터의 뱀파이어 주문액은 5억 달러를 넘어섰습니다. 경영진은 약 10억 달러 규모의 파이프라인과 국내외의 높은 관심을 언급했습니다.

해외 수요는 전술 라디오의 중요한 성장 동력으로 유지되었습니다. 경영진은 L3해리스가 2026년에 미 전쟁부보다 해외 고객에게 더 많은 전술 라디오를 인도할 것으로 예상한다고 말했습니다.

경영진 가이던스

경영진은 2028년 잉여현금흐름 목표 하향의 원인으로 주식 발행 대신 현금으로 지급하는 약 2억 5,000만 달러 규모의 401(k) 적립금, 부문 이익률 가정치 하향, 상업용 우주 추진체 사업 매각, 미사일 관련 자본적 지출 조기 집행 등을 꼽았습니다. 회사는 수정된 목표치 역시 100%를 상회하는 현금 전환율을 의미한다고 설명했습니다.

L3해리스는 2028년까지 미사일 생산능력 확충, 통상적인 자본적 지출, 배당금 지급을 완료한 후에도 50억 달러가 넘는 잉여 현금을 보유할 것으로 예상하고 있습니다. 경영진은 내부 투자와 배당을 우선순위로 두는 한편, 자본의 잠재적 활용 방안으로 부채 상환과 자사주 매입도 언급했습니다. 당분간 대규모 M&A는 예상하지 않고 있습니다.

리스크 및 관전 포인트

• 인쇄회로기판 부품 및 하위 적층판 공급업체의 공급 제약으로 인해 통신 및 스펙트럼 우위 부문의 3분기 성장이 둔화되었습니다. 경영진은 4분기 회복을 예상하지만, AI 및 데이터센터 수요로 인한 전자 부품 생산능력 확보 경쟁을 리스크로 꼽았습니다.
• 향후 성장의 상당 부분은 미사일 생산능력을 확충하고 신규 확정가격 계약 전반의 사업 수행을 관리하면서, 532억 달러 규모의 수주잔고를 매출로 전환하는 데 달려 있습니다.
• 국내 및 해외 예산 집행 시점이 성장 속도에 영향을 미칠 수 있습니다. 경영진은 대형 해외 ISR 및 특수임무용 항공기 수주가 기간별로 불균등하게 발생할 수 있다고 덧붙였습니다.
• 2028년 이익률 목표는 마진이 낮은 일부 사업의 빠른 성장을 반영하며, 제품군 매각 및 투자 수익으로 인한 예상 이익은 제외되었습니다.
• 차세대 교란기 개발 계약은 본격적인 양산으로 전환되기 전까지는 일반적으로 한 자릿수 수익률을 기록하지만, 양산 단계에서는 더 높은 이익률을 낼 것으로 경영진은 기대하고 있습니다.

애널리스트 Q&A 주요 내용

경영진은 당장의 전략적 우선순위가 대대적인 포트폴리오 재편보다는 실행력 강화에 있다고 밝혔습니다. 회사는 AI, 자동화, 공정 개선을 활용해 수주잔고의 매출 전환을 가속화하고 비용을 절감하며 인도를 개선할 계획입니다. 제시된 한 예시에서는 PAC-3 고체 로켓 모터의 모터당 수동 품질 검사 시간이 21시간에서 6.5시간으로 줄었습니다.

현금흐름과 관련해 경영진은 3분기 실적이 4분기 수요를 조기 반영한 것은 아니라고 설명했습니다. L3해리스는 여전히 연간 잉여현금흐름 30억 달러 및 100% 상회의 현금 전환율 목표를 유지하고 있습니다.

미사일 솔루션 부문의 기업공개(IPO) 가능성에 대해 경영진은 기준과 지분 보유 입장에 실질적인 변화가 없다고 밝혔습니다. L3해리스는 IPO를 반드시 추진해야 하는 것은 아니며, 자체 재무제표 능력만으로도 확장에 필요한 자금을 충분히 조달할 수 있다고 설명했습니다. 회사는 자본시장 평가 등을 고려해 2027년 중반경 추진 여부를 재검토할 계획입니다.

경영진은 예산 집행 시점이 통제 범위를 벗어나 있기는 하지만, 2028년까지 8%의 자체 사업 성장 프레임워크를 달성하고 나아가 상회할 수 있을 것이라는 자신감을 표명했습니다. 사상 최대 수주잔고와 미사일, 우주, 회복력 있는 통신, 전자전, 다중 영역 감지 분야의 견조한 수요가 이러한 전망을 뒷받침합니다.

실적 발표 전화회의(Earnings Call) 녹취록 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Greetings. Welcome to the L3Harris Technologies Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, John Sweeney, Vice President, Investor Relations. Thank you. John, you may now begin.

John Sweeney

Thank you, Hillary, and good morning, everyone. Joining me today are our Chief Executive Officer, Sam Mehta and Chief Financial Officer, [indiscernible] Release detailing our financial results. To the L3 Hans Technologies Third Quarter 2020 earnings presentation on our website. Before we begin, please note that our discussion will include forward-looking statements subject to risks, assumptions and uncertainties that could cause actual results to differ materially. We will discuss GAAP results alongside non-GAAP financial measures of organic revenue, segment operating income and free cash flow, which are reconciled to GAAP measures in the earnings release. For more information, please refer to our earnings release and SEC filings. With that, let me turn it over to Sam. Sam? .

Samir Mehta

Thank you, John, and good afternoon, everyone. I've had the privilege of spending the vast majority of my career in an industry devoted to supporting and protecting those who protect us. My passion is helping to innovate and deliver critical capability to our nation, partners and allies. I'm particularly excited to lead this team of over 43,000 talented and committed employees who share that same passion for delivering the outstanding results that we'll discuss today. These results not only affirm the strong execution of our strategy, but more importantly, form the foundation of an extremely exciting future. We grew organic revenues by 9% and despite having 1 fewer week as compared to the third quarter of 2025.

We grew EPS to $3.28, which is up 33% year-over-year. We generated $1.3 billion of free cash flow in the quarter, up 195% and achieve a book-to-bill of 3.2, which translated to a historic backlog of $53 billion. That backlog is highly aligned to 4 strong growth vectors, missiles and missile products, space, resilient communications and electronic warfare and multi-domain sensing. Our capability sets in these categories form the foundation from which we will continue to invest and grow. This backlog also underscores the customers' confidence in our ability to deliver innovation, efficiency and quality and will generate sustainable profitable growth, which is the backbone of our financial performance.

In light of this and continued strength of customer relationships, my top priority is to focus on the improved delivery and execution in every aspect of the business. We continue to improve our operational efficiency, which is delivering bottom line benefit to the company through traditional methods of continuous improvement. These efforts are now embedded in our DNA and culture. But we will supplement and accelerate productivity and efficiency gains by embracing new techniques and technologies. For instance, we are harnessing the power of automation and artificial intelligence to accelerate delivery of PAC-3 solid rocket motors to customers, in some cases, reducing the amount of traditional manual quality inspections from 21 hours to 6.5 hours per motor.

This is but 1 of countless examples that have enabled us to double our pack free solid rocket motor delivery from last year to this year and will allow us to double again in 2027. We have partnered with companies like Palantir to drive similar efficiency gains in tactical radios, night vision goggles and Wescam turrets, just to name a few examples. In the past few years, we have acquired and developed new products and capabilities in several areas and have also trimmed the portfolio of businesses and product lines that we don't see as integral to our future. The result of that activity are 4 growth vectors, in which we will continue to invest heavily, whether it's capital, innovation or additional capability. I'll start with missiles and missile products. The third quarter represents a watershed moment in our Missile solutions business.

We booked $11 billion of contractual backlog, representing years of future deliveries, validating the investments we made and we continue to make to fuel the growth of this business. Those orders relate to 2 critical programs, PAC-3 and FAD, where we partnered very closely with the Department of War and prime contract customers to improve delivery and quality, while not sacrificing the safety of our employees. From 2023 to 2026, we are increasing deliveries by more than 100%. The good news with these and other critical Department of War solid rocket motor programs is that we're just getting started. For instance, we plan to triple our FAD solid rocket motor deliveries in 2027 as compared to 2026. And and we'll do the same on numerous additional programs.

Importantly, these contract awards and improved deliveries validate the investments in people, process, facilities and supply chain that we've made and committed to make in support of an important national security priority. I would note that the estimated dollar values of these contracts do not include or take into account economic price escalation or the strong demand from international partners and allies, which is to say, we expect there will be upside to these values that we have highlighted.

L3Harris is investing in capacity expansion to provide unmatched speed and scale for the Sentinel intercontinental ballistic missile program. The post boost system is the propulsion system during Exoatmospheric flight. This system has already undergone major milestones, including a hot fire test in 2025. The Stage 3 motor has achieved several milestones on the march to flight testing, including a hot-fire test early in 2024. L3Harris has made substantial investments in capacity expansion to accelerate Sentinel production, including ongoing construction of the Arkansas advanced propulsion facilities, which is expected to increase large solid rocket motor manufacturing capacity sixfold. The campus will include more than 20 buildings across 110 acres.

Space is the second growth driver and represents a priority capability for our customers. Whether we are delivering capability as a satellite prime contractor to the Department of War, or as a differentiated provider of payloads to other primes, we are becoming an indispensable player and partner in this growing domain. We are now capitalizing on our previous commitments of nearly $250 million in facility and capacity expansion to capture and deliver important programs like our recently won $955 million ANDT3 award. That win continues to position us as the only company that has been awarded prime contracts across all 5 space and missile warning missile defense tranches.

A clear sign of customers' confidence in our ability to deliver in support of national critical homeland defense. In addition to our investment in capability and capacity, we also plan to add to our technical prowess and space by investing roughly $175 million over the 3 years in research and development to position us for continued success and growth. Moving on to resilient communications and electronic warfare, where we have established a proud and historic legacy of investment, innovation and market leadership. Recent conflicts in Ukraine and the Middle East highlight the importance of continuous innovation in this area. If the war fighter can't communicate, they can fight but they can't win. A key win in this quarter was the $876 million next Gen Jammer low-band contract, which allows our pilots to safely navigate highly contested environments.

To date, we have been awarded nearly $1.5 billion in support of this program. While these cost type contracts typically generate single-digit returns during development, they can drive years of sustained production and improve margins once development is complete. We continue to see strong demand for our Vampire counter unmanned systems with orders from the Department of War and international customers exceeding $500 million in the quarter. With significant inbound interest across domestic and international markets, we are well positioned to accelerate the business and grow our approximately $1 billion pipeline. Vampire is a proven vehicle agnostic solution that provides advanced reconnaissance and precision strike capabilities against drones with more than 350,000 operational hours since 2023. As global attention remains focused on the proliferation of drones, Vampire is an increasingly important in providing the critical last mile of defense needed to protect war fighters at the tactical edge.

No discussion of our capabilities would be complete without mentioning continued innovation and demand for our tactical software-defined radios. Our commercial business model of assessing market demand, funding innovation and selling on a commercial basis accelerates delivery of capability to customers. This year, we will deliver more tactical radios to Natal partners, allied and international customers into the Department of War, which reflects strong international demand. Having said that, we continue to win domestically. For instance, capturing more than $315 million of awards this year for Army modernization in conjunction with next-generation command and control program.

The fourth growth vector of our portfolio is multi-domain sensing, where we provide critical information, situational awareness and decision-making advantage to war fighters ranging from the tactical edge to high levels of command. Our capability ranges from individual centers to complete mission solutions from the farthest reaches of space to the deepest depth of the ocean. An exciting example is the recent launch of the Nancy Grace from in telescope. We partnered with NASA's Goderbased Flight Center to provide key components of the telescope including the optical telescope assembly, which serves as Roman's eye and radiation hard and electronics that keep the telescope operating approximately 1 million miles from earth.

Importantly, we continue to build momentum in missionize business jets, securing $323 million in contract awards in the third quarter and increasing our year-to-date total to nearly $1.5 billion. This includes an additional 2 aircraft under the U.S. Air Force's Compass Call program, bringing the total to 12 of the 22 aircraft requested. We continue to be a leader in missionized business jet which allow our customers a more flexible, cost-effective manner to sense and collect information versus expensive bespoke single mission dedicated platforms. Slide 5 shows our investment priorities, which are highly aligned to our strategy. For the foreseeable future, the most compelling investment opportunity I see is investing in L3Harris. That includes investing to further develop our capabilities in the strategic growth vectors I outlined, expanding capacity to meet growing domestic and international demand.

To be clear, we believe we have the appropriate organizational structure in place to support our growth and execution. As a result, we do not intend to significantly change the way we are organized for the foreseeable future. Moving on to Slide 6. Here is how we are positioning our company for sustainable, long-term financial success. We are leveraging our strong and growing backlog and differentiating capability while continuing our investment in innovation and capacity. We will increase focus on programmatic and operational execution. In the third quarter, we produced positive net EACs across 3 segments and improved delivery performance with laser-like focus on details. Of course, we will continue to lean forward with a return for our shareholders and customers is justified, but use enhanced tools and strategies to identify and mitigate risk at the earliest possible opportunity.

We will leverage our strong free cash flow to invest in innovation, capacity and capability where it drives differentiation and outsized competitive advantage, whether that manifested improved margins or accelerated top line growth. We will be relentless in our pursuit of productivity and efficiency gains as a means to accelerate delivery, sustain strong margins and remain a competitive partner to our customers. We have and will continue to embrace artificial intelligence, automation and emerging technologies to capture these gains. And we will leverage our financial strength for continued flexibility whether that is consistent dividend, targeted share buybacks or strategic portfolio shaping. I will now turn the call over to Ken, who will discuss the financials.

Kenneth Sharp

Thank you, Sam. While this is our first earnings call together, it has been great working with you as you've driven the business forward with a pragmatic approach sustaining our strong momentum and bringing an increased focus to our operations. Sam, John and I appreciate the investor and analyst feedback that shaped this quarter's earnings materials. These changes are intended to improve ease of use and connect our financial results to operational execution. Turning to our third quarter, where our strong execution delivered solid financial results. Orders were $19.3 billion, yielding a book-to-bill of 3.2x and backlog increased 27% to $53.2 billion and was up 47% year-over-year. The 2 largest awards were PAC-3 and THAAD totaling $11 billion, consistent with our volume and pricing expectations. .

Revenue totaled $6.1 billion, up $401 million or 7% year-over-year. Organic revenue grew 9% despite 1 fewer week as previously discussed, an extra week contributes about $200 million, implying double-digit organic growth, excluding the extra week and the prior year quarter. International growth continues to be strong as Ally's ramp investments in national defense. International revenue grew 18%, and as a percentage of our total revenue was 24%, increasing in the last year or so by about 300 basis points. Segment margin was 15.9%, consistent with prior year. Segment margin benefited from strong disciplined execution with positive EAC performance across all 3 segments.

Operating income of $786 million increased $165 million or 27% versus prior year. Operating income margin increased 200 basis points to 13% due to higher revenues and lower corporate costs. GAAP diluted earnings per share for the quarter was $3.28, up 33%. The $0.82 year-over-year improvement is due to higher revenue volume, $0.28, higher operating income margins $0.51, lower interest expense, $0.17. This was partially offset by preferred stock dividends of $0.10. We also had investment gains offset by the Department of War Preferred Stock mark-to-market adjustment. Operating cash flow was $1.4 billion, up from $546 million in the prior year quarter. Capital expenditures were $179 million or 3% of revenue, which is historically elevated as we continue to invest to build out our missile capacity.

Free cash flow was $1.3 billion, up nearly 200%. Year-to-date, free cash flow is $1.8 billion with clear momentum to achieve our full year guidance. Research and development costs were $143 million or 2.4% of revenue and helped drive our strong awards and organic growth. We believe maintaining R&D spend at current levels positions us well for the future. Moving to Slide 9, let me provide some color on our Space and Mission Systems segment performance. Revenues grew 10% to $3.1 billion. Revenue increased due to higher volumes in space, missile warning, missile tracking satellite programs, ISR aircraft air traffic control modernization and F-35 control systems.

Space & Mission Systems segment operating margin was 10.9%, up 20 basis points from prior year. The margin expansion primarily reflects higher volumes and improved program execution. Turning to communications and spectrum dominance, which delivered revenue of $2 billion, up 3% year-over-year driven by increased international volumes for our software-defined resilient communication radios and program ramp for our Vampire counter-UAS systems partially offset by lower volume in our spectrum superiority business. As we recently discussed at the Jefferies conference, we experienced supply disruption for a small handful of components which reduced our third quarter revenue growth. We were able to sort much of the supplier challenges by the end of the quarter and expect stronger fourth quarter revenue growth.

Communications and spectrum dominance operating margin was 25.2%, up 50 basis points on favorable program performance and mix. Missile Solutions revenue increased 5% year-over-year. Organic revenue, excluding the divestiture of the commercial space propulsion business increased 17% primarily driven by increased volumes on key missile programs. Missile Solutions segment operating income margin was 12%, down 30 basis points due to mix. In the quarter, we closed on the sale of our commercial space propulsion business, investment gains and losses associated with our retained ownership interest will be recorded as other nonoperating income.

Now turning to cash conversion and leverage on Slide 12. Over the past few years, our free cash flow has consistently exceeded net income. The team's disciplined execution and strong cash generation have enabled us to reduce net debt leverage from 4.3x to approximately 1.9x, strengthening our balance sheet. At the end of the third quarter, we had $3 billion in cash and short-term investments. In the fourth quarter, we expect to generate approximately $1 billion of free cash flow and repay $800 million of debt, bringing our projected year-end cash balance to $3.2 billion. Looking ahead to 2027 and 2028, we expect to continue generating meaningful operating cash flow. We have sufficient cash to fund our $3 billion investment in missile capacity expansion, normal capital expenditures and dividends.

Even after these investments, we expect to have more than $5 billion in excess cash we intend to deploy. Let me turn to our capital allocation priorities. Our first priority is investing in the business, including our $3 billion missile investment. Second, we remain committed to our dividend. Third, while our leverage is attractive, we have the ability to further delever and create more dry powder. Fourth, we believe share repurchases are an important tool and are highly attractive at our current valuation. Lastly, for M&A, we do not expect to engage in any large-scale M&A in the foreseeable future. we believe we will create the most value by focusing on our business and driving operational performance. Moving to our 2026 guidance. We are increasing the bottom end of our revenue guidance by $300 million two, $23.5 billion to $23.7 billion, increasing the midpoint by $150 million. Accordingly, organic revenue growth is now 9% to 10%. Segment operating margin guidance is reaffirmed at low 16%.

We are raising our EPS guidance to $12.25 to $12.35, up from our prior guidance range of $11.80 to $12. The updated range represents an increase of $0.40 at the midpoint, with about half of the increase due to lower interest expense, which is now expected to be $515 million. We are reaffirming our free cash flow guidance of $3 billion. To improve investor ease of use and comparability, we updated our free cash flow definition to exclude cash proceeds from asset sales. At the segment level, we are making 2 adjustments. Space and Mission Systems full year revenue is increasing $200 million to $11.9 billion. Communications and spectrum dominance revenue is reduced by $100 million to $7.9 billion.

Now let's turn to our 2028 financial framework. We are reaffirming organic growth expectation of 8%. We expect segment margins of approximately 16%, down from our prior estimate of 16.3%. This updated guidance assumes no significant gains from product line sales or investment income. We now expect 2028 free cash flow of $3 billion compared to our previous expectation of $3.5 billion. The revised outlook reflects 3 changes funding approximately $250 million in company 401(k) contributions with cash rather than newly issued L3Harris shares, lower segment margin and changes in capital expenditure timing to accelerate our missiles investments. The $3 billion free cash flow guidance represents over 100% cash conversion. With that, I'll turn the call back to Sam.

Samir Mehta

Thank you, Ken. We are comfortable operating in a dynamic political and economic environment and remain confident that we are well positioned with our strong backlog in areas of continued priority and urgency. Finally, I would like to once again thank our employees and leadership team for delivering such a strong quarter. I will now turn the call over for questions. .

Operator

[Operator Instructions] Your first question comes from the line of Kristine Liwag from Morgan Stanley. .

질의응답

Kristine Liwag

Congratulations, Sam, on your new role. So I guess I wanted to ask you about margins and your operational priorities. You delivered a pretty impressive 200 basis points of operating margin expansion this quarter, your first quarter and the head of L3Harris. So I guess part of it is, given your background as an operations focused leader, your comments around accelerating productivity through automation and AI. How much opportunity do you see to drive further efficiencies and expand margins, especially when you've got this robust revenue outlook ahead of you? And I know we're limited to 1 question, but I wanted to step back and say more broadly, as you put your stamp on L3Harris, should we think of your approach as largely accelerating the execution of the existing strategy? Or are there areas where you see opportunities to do things differently?

Samir Mehta

Thank you, Christine. Appreciate the feedback. A couple of things maybe from my perspective. Number one, on the lower corporate cost and the operating costs you mentioned in the growth from operating margin -- that's embedded in our DNA now. We'll be focused on making sure whether it's business process at the corporate office all the way down to the factory floor. We're going to be relentless in our pursuit of productivity and efficiency gains. And that will be really across the entire enterprise. What you might see, which is a little bit different, a change in strategy, we increased focus on driving the portfolio we have. We spent the last several years building this fantastic portfolio we have. Now it's time to probably stop with as many moving pieces and focus on the business we have to drive better performance. And again, that means disciplined performance disciplined execution, driving costs out of the business, most importantly, accelerating turning -- converting -- accelerating the backlog that we have into sales by accelerating execution through our business processes on our factory floors. So that's the most exciting part of the business for me and you'll see continued focus on it.

Operator

Your next question comes from the line of Ronald Epstein from Bank of America.

Unknown Analyst

This is Sal Grant on for Ron. I first just wanted to ask about your free cash flow, especially given the strong about $1.3 billion in 3Q. Can you outline how much of that was potentially a benefit of timing of collections or a pull forward from 4Q as well as bridging it to the maintained $3 billion full year outlook?

Samir Mehta

Well, we remain -- first of all, we do remain confident in our $3 billion full year outlook. Ken mentioned in his remarks, we remain committed to making sure that cash flow to net income is always greater than 100% in our business. I think that's 1 of the strengths of the portfolio. We're very careful and cautious and intentional in the way we negotiate agreements to make sure that we remain cash flow neutral or better in most of these negotiations, whether that's in the Missiles business with these framework agreements or agreements like Vampire for international customers. Ken, any additional comments?

Kenneth Sharp

Yes, I would just add that, look, we have great momentum on cash flow. There's been a lot of focus with the team to make sure our cash is more linear. So we don't look at it certainly as Q4 pull forward. We just looked at it as doing the hard work day in and day out, and the team is doing a nice job. So we're kind of 75% through the year. We have 60% of our cash generation. So we think we're in a great place to deliver on our full year guidance and look forward to delivering and getting on the next.

Operator

Your next question comes from the line of Sheila Cat from Jefferies. .

Sheila Kahyaoglu

So nice to officially hear from you and Ken, of course. Maybe, Sam, for you, if you don't mind, just starting with the 2028 targets, you've made some relatively modest changes to that framework that was approved by the Board just 8 months ago. Can you help us understand what was the impetus for this? And just how you're thinking about the framework more broadly from here? And of course, just as new CEO, I have to ask you the margin outlook doesn't look impressive at all over the next 3 years. Is there any reason you're thinking about that? And how you're thinking about capital deployment, just given the sum of the parts value LA.c2x the value of where you're currently trading. So just how you're broadly thinking about strategic capital deployment from here? .

Samir Mehta

Yes. Thank you, Sheila. I appreciate the questions. A couple of things. First of all, on the 2028 financial framework, on the segment operating margin, I feel confident in the -- we know previous guidance was around 16.3%. Really, what we've done is removed any assumed benefit from product line sales or investment income from our formula from our calculation. So what you'll see is a 16% operating -- roughly 16% operating margin, which more closely matches the actual underlying execution and operation of the business. On the free cash flow side, a couple of big moving pieces there to go from $3.5 billion to $3 billion.

The single biggest piece is really just a change in the way that we make our company 401(k) contributions. Previously, we issued $250 million of new stock on a regular basis to do that. We will be funding that with cash now. We think that will limit the effect of dilution, which we know is not great. We also see a little bit of lower segment margin. Again, some of that comes in mix, faster growth on some of the lower-margin businesses as we grow margin those businesses over time. And then the opportunity to maybe pull forward a little bit of capital expenditure into 2028, so that we can continue to go accelerate revenue in out years even beyond this framework.

Kenneth Sharp

Yes. Maybe just to add, Sam, and Sheila, I really appreciate your comment about our sum of parts, and clearly, we're more valuable than what we're trading at. So I think that's very astute on your part. Certainly, we made comments that we're going to generate pretty meaningful free cash flow. So we're looking forward to deploying that in a very share order friendly manner to drive value for the company. I just also maybe touch on Sam's margin adjustment. When you look at those nonrecurring items, and you kind of back away and you say, okay, where are we at today versus that?

It's about 50 basis points of margin from kind of like 16 to 15%, puts us somewhere around 15.5%. So we have some work ahead of us, right? That's where Sam's very focused on the execution piece drive the margin up. So I would expect you'll see margins improve as we drive the performance of the business without some of these nonrecurring items.

Samir Mehta

And Sheila, I would just add, there's also the disposition of the space propulsion business, that would be about $75 million as well on the free cash flow side.

Operator

Your next question comes from the line of Robert Stallard from Vertical Research.

Robert Stallard

Thanks much. Good morning. Sam, I don't know if you touched on this. I missed the first bit of your call, which is a very busy morning. But I was wondering if you could give us an update on your thoughts on this potential missile IPO. You mentioned you have the internal generated cash flow to cover the CapEx requirement, but also that your valuation perhaps is not that generous. So an update on that would be much appreciated. .

Samir Mehta

Yes. Great question. Thank you. Appreciate that, Robert. Really, the status of the IPO has not significantly changed or moved from the last time we discussed it, which was we established 4 criteria that we feel need to be satisfied in order to create value for our shareholders through the -- those were government contract environment, which continues to look favorable. -- contracts. Of course, we've locked down some great contracts in the meantime. So that's moved in a positive direction. We continue to execute strongly on the business. We're doubling, tripling on key solid rocket motor programs with our deliveries.

And of course, the valuation has to be something which is attractive. And that's really the area that we continue to monitor to make sure that capital markets, capital formation, some of the valuation of our peer companies. We'd like to see much more attractive valuations before we move forward. We consider -- we continue to reconsider. We continue to consider the timing of an IPO right now, we're targeting sometime in the middle of next year to continue that consideration.

Operator

Your next question comes from the line of John Godin from Citi. Your line is open. Please go ahead.

John Godyn

What I wanted to use my question on is just to focus on the organic growth outlook. I know there have been some tweaks to the 2028 framework, but you guys kept 8% organic growth. you're already outperforming that this year. There seems to be a good setup into next year even though you haven't kind of offered Crisp guidance on that. needless to say, 8% does not feel like a high bar given what we're seeing in missile solutions space, et cetera. Maybe we could just kind of discuss the puts and takes as we're forming a view into next year. .

Samir Mehta

Well, appreciate the question, John. Thanks. A couple of things. Number one, we are very, very confident in our ability to be able to hit and possibly even exceed the 8% year-over-year growth that's in our 2028 framework. Now some of this depends upon timing of budgets, especially not only domestically, but internationally and making sure that about 24% of our sales on an annual basis. are from international customers. So there are conditions that are outside of our control. Having said that, with the $53 billion plus backlog that we currently enjoy, will do everything we can to accelerate that backlog into this period of the framework to see if we can meet and exceed that 8% CAGR that you referenced.

Kenneth Sharp

And just to add, I mean that guidance is 2 years out, right? So we're very focused on driving the business. We'll certainly update that as we execute. .

Operator

Your next question comes from the line of Peter Arment from Baird. .

Peter Arment

Sam and Ken and John, congratulations, Sam, glare sentiment. Maybe if you could just quickly touch base Sam on we've got a lot of inputs that we've heard from a lot of other players around the supply chain and kind of bottlenecks that within that. And if you touched upon it, sorry, I missed it. But just how you're viewing the supply chain like what is internal bottlenecks versus supplier control bottlenecks and kind of how you're addressing that just given all the frame agreements and everything else that you guys are winning. .

Samir Mehta

Yes. I appreciate the question. Thanks, Peter. A couple of areas. When we talk about supply chain, as we referenced, as Ken referenced it earlier in his remarks, we're talking a little bit about CST. There were a small handful of parts that we're constrained, having to do with printed circuit board manufacturing. We're talking about things like laminates that were 2 or 3 tiers down in the supply chain. There are capacity constraints largely because of the pull on AI and data centers for car electronics. We've worked our way through those. We have to thank the Department of War for their assistance in doing so. They actually reached out directly to some of these suppliers in partnership with us to make sure that we got priority from the delivery so that we can make sure that we can protect the war fighter.

We don't expect that to have a material impact or any kind of effect in Q4 as we recover. On the -- on the MSL side, on the missile Solutions side, obviously, a different set of challenges. Having said that, about 25% of our $3 billion investment is directly into supply chain and supply chain capacity. So we're seeing the benefit of that coming online, Peter. This is multiple sources, developing multiple sources for critical bottleneck items. But I would say also making sure that our existing supply base modernizes its equipment, it's production, efficiency gains in their supply chain as well. So we're really kind of funding. We're helping to develop the entire ecosystem to make sure we have a resilient supply chain really in all 3 of our segments.

Kenneth Sharp

And I would just add, the Department of War investment was very important to us because I think most people are aware, we didn't have contracts until really this quarter that $1 billion allowed us to go out and start working with vendors, making commitments. And we had, I think, up until these awards, we had about $2 billion of precontract costs floating around. And now we've gotten a lot of that on contract on our side. So we have been working, Ken and the missiles team has done a really nice job of getting out with the vendors and so forth. So I think we should be in pretty good shape. .

Operator

Your next question comes from the line of Doug Harned from Bernstein.

Douglas Harned

On CSD, really 2 things there. The radio business is such an important high-margin business for you all. And 1 is you talked a lot about the things you can do with respect to cost reduction. So the first part of this is -- how far can you go? You've been at these 25% margins because of the fixed cost nature of this business, you would think there's real upside potential there over time. But also as you look forward, and we head towards NGC 2, and I know you've won some things on this, but we saw -- it's a very different structure. And with GD and Pacific Defense winning the core chassis last year. And then looking at a push towards continuous competition on this program going forward. How do you see the transition over time from the current radio business that's been so successful heading into NGC 2. .

Samir Mehta

Yes. I appreciate the question, Doug. Listen, on NGC 2, in particular, we are an interval partner and part of NGC 2. It's created a little bit of confusion because oftentimes in budget documents, it's listed separately from our core radio programs like HMS, but rest assured that we've won our fair share of NGC 2-related awards, especially since we played very, very heavily in that transport layer. So -- we don't expect any significant material reduction in the amount of warts, the amount of business we get from the Army under NGC2. As a matter of fact, in recent demonstrations, we've actually seamlessly integrated with companies like Anderol and Lockheed Martin, as they build out their NGC 2 networks.

So we remain confident that we'll be a major player for the Army going forward, whether it's NGC2 or whether the Army reverts the funding individual line items, specifically in models that we play. Just a reminder, we always compete under the Army's radio program. So whether it's HMS Manpack or the different radios models we have, we have competitors in each of those areas where we compete on an annual basis. So competition is nothing new for us in this space. From a cost perspective, we continue to find new opportunity every single day, Doug. An example would be the way that we're using AI on the manufacturing floor to make our operations more efficient every day. And so as new technologies like AI and automation take hold and we incorporate them, we do expect to be able to maintain and grow margins in our radio business over time.

Kenneth Sharp

Yes. And just maybe touch on the margins, right, because we are big fans of the innovation the team does. Sam mentioned earlier about communications on the battlefield, which is kind of music to my heart making sure our war fighters get home is what the mission is all about. Our radios are critically important in that we talk about software-defined radios. We talked about rate yield on the last call. Those capabilities are very important. So I think our focus right now is bringing technology some that comes out of the radios, like rate yield that may be put on Vampire for example, those things are very important to us. So we're not looking to accelerate the margin necessarily, but really accelerate the innovation across the whole business. .

Operator

Your next question comes from the line of Richard Safran from Seaport Research.

Richard Safran

Congrats, Sam. So I have a 2-part very related question. The slide appendix details are pretty impressive and interesting. Just curious as to what's behind providing all that detail. And second, as I'm looking at that, contract mix has been moving towards cost type. And I was wondering how the surge in bookings and new awards might affect contract mix generally as we look ahead. .

Samir Mehta

Appreciate the question. I'll answer the second part of the question first and maybe defer to Ken on the financial appendix. We largely see a lot of the growth in our backlog associated -- is really associated with firm fixed price contracts. So -- we do have -- next Gen Jammer, which we're very proud of in our SQ business, and that's within CSC that we capture it. That's cost type. That's 1 of the exceptions. The vast majority of the business that we are booking and we booked in this previous quarter had firm fixed price contract type. So we look forward to being able to execute those efficiently, so we can get the additional margin associated with productive and define execution. Ken, I'll defer to you on the appendices.

Kenneth Sharp

Yes. Thanks, Sam. And it's interesting. I think this is some of Sam's spend as well as being an operator and having details. I would also categorize as you kind of engage with investors, we have a great business, right? And it's very clear to me because I'm in the details every day. And then when you get more into our numbers, it gets harder to understand our numbers. So we said how do we make that great business, that great performance clear. So our desire was to go look at our investor materials, and we got a lot of great investor feedback.

So it was around how do you improve ease of use, understandability and all those places, really take Sheila's question around the sum of the parts and why we're not getting valued. So we want to make sure people understand the core performance. That's really where we're at. We're going to go drive the business. Sam is going to clearly drive the business. That's the focus. And we'll make sure that kind of the easy use for investors and analysts is there.

Operator

Your next question comes from the line of Noah Poponak from Goldman Sachs. .

Noah Poponak

Good morning, everyone. I wanted to ask about I wanted to ask about Space and Mission Systems growth. The growth year-to-date is pretty strong. The backlog is up a lot over the last few years. If I take the 2028, and I appreciate the comments you've made here about that's a few years out and maybe a bit of a moving target. But -- if I take the '28 revenue forecast, it implies the organic growth would decelerate '27 and '28 quite a bit and I think be below market. Can you talk about the puts and takes of that? What are the biggest growth drivers there? And is there anything slowing or rolling off that we should be aware of? .

Samir Mehta

Thanks, Noah, for the question. We don't see anything particularly slowing down. Some of this comes down to timing. From a space standpoint, continue to see strong growth. We saw that year-over-year this third quarter this year as compared to the third quarter last year. We do think on programs like ISR, which tend to be big and lumpy in nature. We're talking about multibillion dollar programs that are let many times from international customers, but the timing of those can get tricky. And so they can be a little bit lumpy in nature. Frankly, I expect this number to be able to continue to change significantly based upon those $1 billion-plus movements as our international customers, in particular, consider, reconsider and move the timing of some of their planned missionize business jet purchases.

Kenneth Sharp

Yes. I would just say, no, we feel like we're very well positioned to look forward to delivering on the guidance. .

Operator

Your next question comes from the line of Myles Walton with Wolf Research. We will move to your next question from Ken Herbert from RBC Capital Markets. Your line is open, please go ahead.

Kenneth Herbert

Congrats on the quarter. And I wanted to just dig a little deeper, if we could, into the Missile Solutions. Obviously, the contract is now flowing in, reflected in the backlog. I know you provided some color around the structure of these contracts. But maybe just frame with us, if you could, how we should think about the risks to the execution near term on these contracts. How you structure them in terms of protecting and obviously being able to ideally expand margins in the business and just how we think about those progressing over the next couple of years is, obviously, you're still in a very significant sort of investment phase as we think about the SRM in this business? .

Samir Mehta

Yes, I appreciate the question. Thanks, Ken. A couple of things. From a structural standpoint, I mentioned this before, we're very, very thoughtful in the way they're structured from an advanced payment and milestone payment standpoint to make sure they remain in conjunction remain very highly aligned with our capital spend to be able to go execute these contracts. I think the second piece of it is we do have protective provisions in the contract. So I think the Department of War prime contractors are very, very confident in the volumes materializing during the term of the 7-year term in this framework. And so we have very, very strong protections in the contract to make sure that there are financial mitigations that afforded us if that somehow does not materialize.

Third, I will say is we ourselves have supreme confidence in this demand signal materializing over the 7-year period. It's listed as a primary priority for the Department of War. I spent a lot of time in the Pentagon in my career, I spent a lot of time in the Pentagon over the last couple of months, it's been made very clear that this is the foremost priority from the senior most levels within the Department of War. So we feel very, very confident about the demand signal, the enduring and resilient nature of the demand signal.

From an execution standpoint, a lot of that $3 billion-plus investment that we've made, even the investments that we made so far in advance of receiving those framework agreements is to make sure that we can execute. And those are areas of building a resilient supply chain with multiple suppliers so we can avoid single points of failure, modernizing a lot of our internal equipment. We will be building over 100 buildings adding approximately 1 million square feet to our manufacturing space in order to accommodate this new capacity. And a lot of that will be building solid rocket motors in new ways with new equipment, new production methodologies. Obviously, a lot of execution before us and the proof will be in the results. But we remain confident we're very, very determined to make sure that we meet this national priority defense need.

Operator

Your next question comes from the line of Michael Carole from Guggenheim Securities.

Michael Ciarmoli

Sam, congrats. Just maybe on the longer-term 2028 targets and thinking about backlog, can you give us a sense of how much of kind of your current plan is already in backlog? I guess, what's the coverage through 2028? And then you talked more about booking more firm fixed. Should we expect then that the the margin profile? And I could appreciate the conservatism and the ramp-up and scaling up of new production, but it would seem like there'd be a natural margin expansion lever if you've got more firm fixed contracts or if you're shifting in that direction. .

Samir Mehta

Thank you. Appreciate the question, Michael. First of all, we're very, very excited about the quality of the backlog we've built. I think of the $53 billion or so, I think $22 billion is funded. Of the amount that's unfunded, we remain very confident in that primarily because of what I had mentioned in the previous question, the vast majority of that backlog is built around our Missile Solutions business, of which we have ultimate very, very strong confidence that, that will materialize given how much of a need this is for our nation and enduring priority.

As far as margin and margin improvement, that is certainly the objective and the goal. I have grown up and I've come through the organization in previous organizations and with my time in L3Harris very deeply involved on the operations execution and program management side, which is to say, we're always looking for opportunity to reduce costs and be able to go either manufacture product, deliver to our customers innovate more efficiently and more productively. So we'll definitely look for additional opportunities to drive the margin upward, which certainly the opportunity presents itself. We'll update our 2028 framework as we go, but I'm confident in the team and their ability to be able to drive the business to get better results.

Kenneth Sharp

Yes. And just maybe add, so just for clarity, right, the fund to backlog of $31 billion. And when you go and think about execution, a lot of these are in the backlog, specifically, a lot of new fixed price work. clearly, fixed-price work doing a lot what we know how to do. So I think -- and our guide also infers this that we have some acceleration of margin. I know it's a little confusing with having approximately 16 in the out years. But that's 16 without the product line sales and without investment income and so forth. So you're really kind of on an apples-to-apples basis, accelerating up probably 50 basis points of margin. So I think we feel like we're in a really good position to do that. .

Operator

Your next question is from the line of Myles Walton with Wolf Research.

Unknown Analyst

It's Emlen from Miles to checking. You can hear me.

Samir Mehta

Yes.

Unknown Analyst

Okay. Quick question on the missile and munition ramp. Quite a bit of the funding for that, at least in this fiscal year is in reconciliation. How are you guys thinking about the trajectory of those programs given that aspect? And also on the budget, given where in a CR, are there any areas within the portfolio, particularly in CSD that may be impacted by it? .

Samir Mehta

Yes. We obviously very, very conscious of the budgetary environment we're in Emily. We feel very, very confident that as trade-offs happen, should trade-offs happen to the extent they happen that we continue to operate and focus in areas that will be of the top priority of the department of war. Certainly, missiles and munitions falls into that category. I think if they are forced to make trades and as they make trades in this budgetary environment, we consider this to be a very, very strong area that will continue to be funded -- as far as CRs, I often joke in my colleagues here, the 3 things that you can count on is debt taxes and CRs.

We've operated under this under a CR now for many, many years. we've been used to operating under a CR. The key for us is twofold. -- operating, and I've already spoken about one, which is operating in areas that we know are the utmost priority. The second is making sure that we perform well against our program and our delivery requirements. What we say in our company is it never pays to be the slow Gazelle here when it comes to execution and performance. So minimizing the number of red programs, overdue deliveries we have so that when our customers are forced to make tough trade-offs, we don't leave any of our programs wonderful.

Operator

Your next question comes from the line of Scott Mikus from Melissa.

Scott Mikus

I wanted to go back to Rob's question regarding the Missile Solutions IPO. I'm just curious, has there been any significant change in the ownership percentage you'd like to retain post IPO. And if for some reason you couldn't get the valuation you'd like through the IPO, is selling all of Missile Solutions or Arrow yet a possibility?

Samir Mehta

Yes. I mean, I'll say a couple of things there. I appreciate the question. Number one, we're so excited about this missile Solutions business. We think it presents a tremendous value to it. Whether we own 100% of that is L3 Harris or we own a significant majority share. nothing has significantly changed our posture. So nothing has changed in our prospective ownership share, our posture or the criteria against we're measuring the attractiveness of the IPO as we continue to monitor solutions.

Kenneth Sharp

Yes. And we're -- and just for clarity, right, we're not required to do an IPO. We are required to pursue one, and we've been doing that -- so I think we feel like we're really in a good position. We have a strong balance sheet and strong cash generation to more than support the CapEx. So we'll certainly visit it, like we said, previously, and we'll say again, we're going to visit it mid-2027, and that's where we are. .

Operator

Your final question comes from the line of Gautam Khanna from TD Securities. .

Gautam Khanna

Sorry, I joined late. So forgive me if you already answered this, but I was wondering if you could talk through the RF tactical demand backdrop in terms of what you have in backlog what sales are likely to be this year just to calibrate us? And then what are the big international pursuits and domestic pursuits over the next year that we should be monitoring? .

Samir Mehta

Well, I appreciate the question. We do have a very strong backlog on the tactical radio portfolio. Of course, it's always tricky at any point in time when you look at the backlog because it is such a upcycle business. I'll remind you that we have a commercial business model here. So we build the forecast in anticipation of winning contracts that we can deliver quickly. I can tell you this, this year, we will actually deliver more radios to international customers than we will domestic. We don't see that as a weakness in the domestic market. We see that instead of a strength in the international market. you take a look around the world and see what's happening in places like Ukraine.

Our international customers, our NATO customers, our European allies are becoming more and more conscious of the fact that in order to win in a modern warfare environment they need to overcome electronic warfare, all the nonkinetic effects that are being brought to bear. So to keep our war fighters from being able to effectively communicate with each other. So -- that is driving a significant demand cycle, significant growth year-over-year. We look forward to being able to capture more of that business as a lot of our European and NATO partners and allies want to retain some interoperability with their U.S. allied forces. So we're very, very bullish and excited about the international market for RF.

John Sweeney

Great. Well, that concludes the call. Thank you, everybody, for joining. We look forward to updating you as we move through the quarter and on our next earnings call. Thank you very much, and have a good day.