L3Harris Technologies (LHX) FY2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed February 12, 2026, fiscal year ended January 2, 2026) + Yahoo Finance

Auditor: Ernst & Young LLP — Unqualified opinion (1 critical audit matter: cost estimation for revenue recognition on development and production contracts)

One-line verdict: L3Harris is the product of the 2019 Harris–L3 merger plus the 2023 Aerojet Rocketdyne acquisition, and both deals sit on the balance sheet as $26.5B of goodwill and intangibles (135% of equity). The income statement is healthy: revenue up 3% to $21.87B, operating income up 10% to $2.11B, operating cash flow up 21% to $3.11B, free cash flow of $2.68B. But cash of $1.07B covers only 10% of total debt of $11.12B (C4 fail), goodwill+intangibles exceed equity 1.35x (D1 fail), and accounts receivable grew 27.9% versus revenue growth of 2.5% (A2 watch). The MD&A discloses: "As of January 2, 2026, we had fixed-rate debt of $10.9 billion, reflecting our total long-term debt, including current portion but excluding finance leases, of which $650 million is due within the next 12 months... The majority of our fixed-rate debt has been incurred in connection with merger and acquisition activity." Plus a $85M goodwill impairment on the Space Technology disposal group, a $204M revenue gap from the CAS divestiture, and a $38M negative EAC adjustment on a classified Maritime program. The "Trusted Disruptor" narrative is real; so is the balance sheet overhang.

A Defense Prime Pivoting on Golden Dome, Munitions, and Space

From Item 7 Overview: "We are the Trusted Disruptor in the defense industry. With customers mission-critical needs in mind, we deliver end-to-end technology solutions connecting the space, air, land, sea and cyber domains in the interest of national security. We support customers in more than 100 countries... As of January 2, 2026, we had approximately 45,000 employees, including approximately 18,000 engineers and scientists."

Four reportable segments: Communication Systems (CS), Space and Airborne Systems (SAS), Integrated Mission Systems (IMS), and Aerojet Rocketdyne (AR) — the AR segment being the acquired missile/propulsion business.

Customer concentration is very high: "The percentage of our revenue that was derived from sales to U.S. Government customers, whether directly or through prime contractors, including foreign military sales funded through the U.S. Government, was 75%, 76% and 76%, in fiscal 2025, 2024 and 2023, respectively."

The MD&A gives unusual detail on the budget environment: the 43-day federal government shutdown starting October 1, 2025, resolution with a continuing resolution, and the subsequent Defense Appropriations bill providing "$859 billion for DoW programs, an increase of 1% or ~$9 billion over the President's Budget Request." Plus the July 4, 2025 reconciliation package including $155B for DoW priorities with specific mention of "Golden Dome, munitions, and shipbuilding" — three areas where L3Harris has direct exposure.

Financial Performance: Margin Expansion Despite Divestitures

From the MD&A consolidated results table:

Per the MD&A: "Revenue increased $540 million, or 3%, for fiscal 2025 compared to fiscal 2024 due to higher revenues across all of our segments excluding the impact of the CAS disposal group divestiture, primarily from higher volumes, including new program ramps, and increased international deliveries."

Note the effective tax rate normalization from 5.3% to 16.9%. The MD&A attributes the increase to: "a state legislative change that required us to establish a valuation allowance on state R&D credit carryforwards, the CAS disposal group divestiture, and the enactment of the OBBBA, representing unfavorable impacts of 3.9%, 2.4% and 1.8%, respectively." The FY2024 ETR of 5.3% was abnormally low due to "favorable impacts of R&D credits, favorable resolution of audit uncertainties, and tax deductions for foreign derived intangible income (FDII)." Without these one-timers, FY2025 earnings look stronger than the headline comparison suggests.

LHX NeXt cost savings program is the margin story. G&A fell $138M despite an $85M impairment charge. Per the MD&A: "G&A expenses decreased $138 million, or 4%, for fiscal 2025 compared with fiscal 2024 primarily due to an increase in gains recognized in connection with the monetization of certain legacy end-of-life assets, lower LHX NeXt implementation costs, including lower third-party consulting expenses of $59 million."

Segment detail:

Cash Flow: The Quality Signal

From the MD&A cash flow table: "Net income $1,606M + Non-cash adjustments $1,551M + Changes in working capital ($7M) + Other, net ($44M) = Net cash provided by operating activities $3,106M."

Per the MD&A: "The $547 million increase in net cash provided by operating activities in fiscal 2025 compared with fiscal 2024 was primarily due to favorable impacts of tax planning strategies and tax reform and less cash used for merger, acquisition and severance related payments and CP program interest as a result of lower average outstanding CP notes in fiscal 2025. Such amounts were partially offset by $73 million more cash used to fund working capital (i.e., receivables, contract assets, inventories, accounts payable and contract liabilities), largely due to timing of billing and collection activity and cash used for settlement of a longstanding legal matter."

CFFO/NI of 1.93 is strong — non-cash adjustments are large ($1,551M) because of depreciation, amortization of acquisition-related intangibles ($707M per the G&A breakdown), and pension accounting differences. This is structural, not a manipulation signal.

Investing activities produced $407M of cash (unusual for a defense prime) because of $820M in CAS disposal group proceeds. The CAS divestiture on March 28, 2025 removed a capital-intensive business.

Balance Sheet: The M&A Legacy

From the MD&A liquidity section:

Per the MD&A: "As of January 2, 2026, we had fixed-rate debt of $10.9 billion, reflecting our total long-term debt, including current portion but excluding finance leases, of which $650 million is due within the next 12 months. In addition, cash interest on fixed-rate debt of $520 million is due within the next 12 months. The majority of our fixed-rate debt has been incurred in connection with merger and acquisition activity."

C4 fails: Cash $1,069M / Total debt $11,116M = 10%. This is extremely concentrated in fixed-rate notes maturing over a long ladder — only $650M due in the next 12 months.

D1 fails: Goodwill + intangibles $26.5B = 135% of equity $19.6B. The dominant goodwill drivers are:

The $85M FY2025 impairment on the Space Technology disposal group plus $38M in FY2024 impairments show the write-down cycle is active. The filing discloses: "In fiscal 2025, we recognized a $85 million non-cash charge for impairment of goodwill in connection with execution of the agreement to sell a newly established technology company, consisting of certain product lines of our SPPS sector ('SPPS business'), reported in our AR segment, and our Space Avionics & Communications division ('SA&C business'), reported in our IMS segment."

Z-Score of 1.92 is in the grey zone (1.81 to 2.99), consistent with the leverage picture.

Contractual backlog is robust at $38.7B, up 13% year-over-year — this is the asset that supports the leverage story. Each segment shows backlog expansion except CS (slight decrease).

Capital return was aggressive: "During fiscal 2025, we repurchased 5.1 million shares of our common stock under our share repurchase program for $1.2 billion. During fiscal 2024, we repurchased 2.5 million shares of our common stock... for $554 million." Dividends paid were $903M, meaning total capital return was $2.1B against FCF of $2.68B — an 80% payout ratio. The remainder went to debt reduction and net M&A activities.

The 18-Point Screening

Revenue Quality

The A2 watch is notable. AR growth of 27.9% vs revenue growth of 2.5% is the largest gap in this 10-ticker batch. Combined with the MD&A's explicit mention of "$73 million more cash used to fund working capital... largely due to timing of billing and collection activity and cash used for settlement of a longstanding legal matter," this looks like a timing anomaly rather than a quality issue — but it bears monitoring next year.

Expense Quality

Gross margin was flat per the MD&A: "Gross margin as a percentage of revenue remained flat compared to fiscal 2024."

Cash Flow Quality

Balance Sheet

Acquisition Risk

Manipulation Score

M-Score components: DSRI 1.247, GMI 1.007, AQI 0.985, SGI 1.025, DEPI 1.000, SGAI 0.983, TATA -0.036, LVGI 0.963. DSRI of 1.247 is the standout — this captures the AR growth gap that triggered A2. A DSRI near 1.25 suggests receivables are growing faster than sales, which is exactly what A2 flagged. The overall M-Score is clean at -2.39 because other components offset it, but DSRI alone is a yellow light.

Key Risks from the 10-K

1. U.S. Government Budget and Shutdowns

The risk factors: "A reduction in U.S. Government funding or a change in U.S. Government spending priorities could have an adverse impact on our business, financial condition, results of operations, cash flows and equity... Any inability of the U.S. Government to complete its budget process for any GFY and resulting operation on funding levels equivalent to its prior fiscal year pursuant to a Continuing Resolution ('CR') or shut down, also could have material adverse consequences on our current or future business." The MD&A confirms the risk materialized: "On October 1, 2025, after Congress failed to reach an agreement on a short-term spending deal or full-year appropriation, the federal government experienced its longest shutdown on record, lasting 43 days." With 75% of revenue from U.S. Government customers, a 43-day shutdown directly affected billings, billings, and cash conversion.

2. Critical Audit Matter: Cost Estimation for Revenue Recognition

Ernst & Young's CAM: "Cost estimation for revenue recognition on development and production contracts... the Company recognized revenue for certain of its development and production contracts over time, typically using a percentage of completion cost-to-cost method, which required estimates of costs at completion for each contract. At the outset of each contract, the Company gauges its complexity and perceived risks and establishes an estimated total cost at completion with these expectations. After establishing the estimated total cost at completion, the Company reviews the progress and performance on its ongoing contracts at least quarterly and updates the estimated total cost at completion. Such estimates are subject to change during the performance of the contract and significant changes in estimates could have a material effect on the Company's results of operations."

The MD&A already discloses EAC adjustments hit FY2025 IMS earnings: "negative estimate at completion (EAC) adjustments of $38 million on a classified Maritime program and $25 million from the resolution of a contract matter related to lower utilization on the Canadian Maritime Helicopter Program." With 75% of revenue fixed-price, adverse EAC movements directly compress segment margins.

3. Fixed-Price Contract Risk

The filing states: "In fiscal 2025, 75% of our revenue was derived from fixed-price contracts that allow us to benefit from cost savings, but subject us to the risk of potential cost overruns, including due to greater than anticipated or a sustained period of increased inflation or unexpected delays because we assume all of the cost burden." The Canadian Maritime Helicopter Program loss flagged in the segment discussion is precisely this risk materializing.

4. M&A Integration and Goodwill Impairment

The $85M Space Technology impairment in FY2025 is the third consecutive year of goodwill impairments. Each of the merger/acquisition cohorts (Harris–L3, Aerojet Rocketdyne, TDL) carries goodwill at fair values established in different rate environments, and another rate shock could trigger a larger write-down.

5. Fixed-Rate Debt Refinancing Profile

The $650M of fixed-rate debt due in the next 12 months is the near-term concern. Most of the remaining $10.25B has longer maturities, but refinancing at higher rates would raise interest expense materially. Per the MD&A: "cash interest on fixed-rate debt of $520 million is due within the next 12 months" — roughly 5% blended coupon on the full $10.9B balance.

6. Pension Income Mechanics

Non-service FAS pension income contributes $356M to the FY2025 operating income line (via "non-service FAS pension income and other, net") — this is an accounting benefit driven by plan asset expected returns, not cash generation. A change in discount rates or asset returns could reverse this tailwind.

7. Competition from Non-Traditional Primes

The risk factors warn: "The DoW's current procurement reform initiative, including the increased use of other transaction authority ('OTA') agreements, could reduce barriers to entry and result in even greater competition and increased pricing pressure. OTAs are not subject to many traditional procurement laws, including the Federal Acquisition Regulation ('FAR'), and in some instances, an OTA award may require that a significant part of the work be carried out by a non-traditional defense contractor." Non-traditional entrants (Anduril, Palantir, SpaceX, and others) are the actual "disruptors" L3Harris claims to be.

Summary

Grade: F driven by two balance-sheet checks (C4 at 10% cash/debt, D1 at 135% goodwill/equity) and one watch item (A2 DSRI at 1.25). The operating story is better than the grade suggests — 10% operating-income growth, 21% CFFO growth, 24% FCF growth, $38.7B backlog up 13%, and the LHX NeXt cost-savings program delivering visible G&A reduction.

The balance sheet is the legacy of the 2019 Harris–L3 merger plus the 2023 Aerojet Rocketdyne acquisition. $26.5B of goodwill + intangibles against $19.6B of equity leaves very little margin for another impairment cycle. The $85M Space Technology impairment in FY2025 is the latest in a rolling series. Cash of $1.07B against $11.1B of debt is enabled by the $3.0B undrawn revolver and active commercial paper program, but the filing is clear that "the majority of our fixed-rate debt has been incurred in connection with merger and acquisition activity." Put differently: L3Harris built itself through M&A and is still carrying the debt from those deals.

The receivables growth of 27.9% versus revenue growth of 2.5% is the one item that could evolve into a real problem. The MD&A attributes it to "timing of billing and collection activity and cash used for settlement of a longstanding legal matter," which sounds plausible for a government contractor where billings cluster around contract modifications. But a second year of receivables-outpacing-revenue would move A2 from watch to fail, DSRI through its fraud threshold, and the M-Score into the grey zone. Worth monitoring.

Golden Dome funding and the July 2025 $155B reconciliation package give LHX a meaningful near-term growth tailwind in AR (propulsion/missiles). Whether the company can convert that tailwind into margin expansion on top of the LHX NeXt program — rather than simply growing revenue with compressed margins — will determine whether FCF scales from here.

**Disclaimer**: This report is based on L3Harris Technologies' FY2025 10-K filed with SEC EDGAR. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: Ernst & Young LLP (Unqualified opinion, 1 critical audit matter — cost estimation for development and production contracts)

Fiscal year ended: January 2, 2026