L3Harris Technologies makes the specialized hardware and software that militaries and government agencies depend on when lives are on the line. Its products include tactical radios that work in jammed environments, night vision goggles used by special forces, satellites that track missiles, sensors that guide weapons, and rocket engines that power spacecraft. The company operates across four business divisions: Communication Systems, Integrated Mission Systems, Space and Airborne Systems, and Aerojet Rocketdyne. Three out of every four dollars it earns comes from the U.S. Government, with the remainder split between international allies and a small slice of commercial customers. Revenue in fiscal 2025 reached $21.9 billion. The diagram below traces where the money goes.
How L3Harris Technologies Makes Money
flowchart LR
A["U.S. Government Customers
75% of revenue"] -->|"$21.9B total revenue"| B["Product & Services Delivery
Products 71% / Services 29%"]
C["International Customers
100+ countries, 22% revenue"] -->|"$4.8B"| B
B --> D["Operating Cash Flow
$3.1B/year"]
D --> E["R&D Investment
Company & customer-funded"]
E --> F["New Capabilities
Hardware, software, AI"]
F --> B
D --> G["Contractual Backlog
$38.7B"]
G -->|"45% recognized by FY2026"| B
E --> H["Skilled Workforce
45,000 employees"]
H --> B
Five years of financial data tell a story of growth alongside pressure. Revenue has risen from $17.8 billion in 2021 to $21.9 billion in fiscal 2026, a meaningful increase driven by new program wins, international deliveries, and the addition of Aerojet Rocketdyne. But the gross margin, the share of each dollar left after paying direct costs, has moved in the opposite direction the whole time.
Gross Margin % Over Five Years
Gross margin has declined steadily from 30.2% in 2021 to 25.7% in fiscal 2026. Revenue growth has not reversed this trend.
That margin compression matters because it reflects two structural pressures. First, the Aerojet Rocketdyne acquisition in 2023 brought in a lower-margin missile and propulsion business, which dragged on the blended rate. Second, 75% of L3Harris revenue comes from fixed-price contracts, where the company agrees upfront to a price and absorbs any cost overruns itself. When inflation pushes up the cost of materials or supply chains snag, the company eats the difference. Net debt surged from $6.1 billion in 2021 to $12.2 billion in 2023 after the Aerojet deal, and has since been pulled back to $9.4 billion in fiscal 2026 as the company pays down borrowings and divests non-core assets.
What Is a Fixed-Price Contract?
A fixed-price contract means the government and the contractor agree on a set price before the work begins. If the job costs more than expected, the contractor pays the difference out of its own pocket. If it costs less, the contractor keeps the savings. This is the opposite of a cost-plus contract, where the government reimburses whatever the work actually costs.
Free cash flow tells a similar story of resilience under stress. It fell from $2.3 billion in 2021 to $1.6 billion in 2023 as the Aerojet integration consumed cash and debt costs rose. By fiscal 2026, it had recovered to $2.7 billion, the strongest figure in the five-year window. Operating cash in fiscal 2026 reached $3.1 billion.
$38.7B
Contractual backlog at end of fiscal 2025, up 13% from the prior year. The company expects to recognize roughly 45% of this by the end of fiscal 2026.
That backlog number is one of the clearest signals of near-term demand health. It means customers have already committed to paying L3Harris for work not yet delivered. The company also spent $536 million on its own research and development in fiscal 2025, about 2% of total revenue, to stay competitive against both traditional defense primes like Lockheed Martin and Northrop Grumman and newer entrants like Anduril.
2023
milestone
The Aerojet Rocketdyne Acquisition Reshapes the Company
L3Harris acquired the missile and propulsion business from Aerojet Rocketdyne in 2023, adding rocket engines, missile propulsion, and space power systems to its portfolio. The deal pushed net debt up sharply to $12.2 billion and introduced a lower-margin business into the mix. Now L3Harris is planning to spin off part of this business as a separate public company in the second half of 2026, with the U.S. Government committing to put in $1 billion. The transaction is designed to let L3Harris focus on its higher-margin core and reduce the debt load it took on to make the purchase.
The risks facing L3Harris are specific and serious. The company is almost entirely dependent on decisions made in Washington. When Congress cannot agree on a budget, the government runs on temporary spending bills called continuing resolutions. In fiscal 2025, the federal government shut down for 43 days, the longest shutdown on record. Programs slow down, new contracts get delayed, and planning becomes harder. In fiscal 2025, the preliminary budget for fiscal 2026 proposed cutting NASA funding by $6 billion, which would directly affect L3Harris programs in space propulsion and weather monitoring.
What Is a Continuing Resolution?
When Congress cannot agree on a full budget, it passes a continuing resolution, which keeps the government funded at roughly the same level as the prior year. This sounds safe, but it means no new programs can officially start and agencies have less flexibility to shift money to new priorities. For a defense contractor, it means contract awards get delayed and revenue timing becomes unpredictable.
Beyond budget risk, L3Harris faces a supply chain problem it cannot fully control. It depends on a small number of certified suppliers for specialized microelectronics. Tariffs introduced in early 2025 raised the cost of imported materials, and while the company said there was no material impact on fiscal 2025 results, it acknowledged limited ability to pass those costs on to its government customers. The company also carries a documented history of billing misconduct. It paid roughly $83.8 million in settlements for charging the Department of Defense twice for the same materials. Separately, it settled charges for illegally exporting restricted materials. These are not ancient problems; they reflect compliance gaps that regulators and customers continue to watch.
$83.8M
Total settlements paid for billing fraud, including double-charging the Department of Defense for the same parts.
Finally, the cybersecurity exposure is structural. L3Harris holds classified government information as part of its work. A successful breach by a foreign government or criminal group could terminate contracts, expose secret programs, and cause financial damage that would be hard to quantify in advance. The company flags this as an ongoing, high-severity risk with no simple solution.
Almost all NATO allies have now committed to spend 5% of their economic output annually on defense and security over the next decade. L3Harris generated $4.8 billion, or 22% of its fiscal 2025 revenue, from customers outside the U.S. That international base could grow if allied spending commitments hold.
The Bet
L3Harris can expand its margins back toward historical levels while holding onto its dominant position in specialized defense electronics, even as the Pentagon pushes contractors to move faster and accept more commercial pricing. The company's LHX NeXt efficiency program, the planned Aerojet Rocketdyne spinoff, and years of divestitures are all designed to make the business leaner. But that only pays off if the core businesses, tactical radios, night vision, satellites, and sensors, keep winning new contracts at volumes large enough to absorb a heavy debt load and fund continued research spending. If fixed-price contract losses widen, margins compress further, or a major program gets cancelled, the efficiency savings may not be enough to offset the damage.
Open question
L3Harris is a large, complex defense technology company in the middle of a deliberate transformation. It is shedding businesses, paying down debt, cutting costs, and betting that a leaner version of itself wins more of the contracts that matter most. The backlog is growing and free cash flow has recovered. But gross margins have fallen every single year for five years, the debt from the Aerojet acquisition is still large, and the company's revenue depends on political decisions it cannot control. Can L3Harris reverse five straight years of gross margin decline while spinning off Aerojet, digesting a government shutdown, and competing against both traditional defense giants and fast-moving new entrants, all without a major fixed-price contract loss breaking the financial recovery?
Compiled · 10-K · FY2026
Government Contract Dependence
The company gets a big chunk of its money from the U.S. Department of War and other government agencies. If the government reduces spending, changes what programs it wants to fund, or has budget problems like shutdowns, the company could lose significant revenue and have trouble planning for the future.
Fixed-Price Contract Risk
In 2025, 75 percent of the company's revenue came from fixed-price contracts where the company bears the cost if a project goes over budget. Big cost increases from inflation, supply problems, or unexpected delays could cause the company to lose money on these contracts.
Supply Chain Disruption
The company relies on suppliers and subcontractors for materials and parts. Recent global problems with getting microelectronics, materials from sanctioned countries like Russia, and tariff increases could delay products, raise costs, or force the company to pay penalties to customers.
Trade Policy and Tariffs
Starting in early 2025, the company faced significant new U.S. tariffs on imported materials and goods. Even though the company mostly sells to the U.S. Government, it still depends on imported supplies. Rising tariffs could increase costs and harm profits, and the company has limited ability to pass these costs to customers.
Cybersecurity and Data Breach
As a government contractor with access to classified and sensitive information, the company faces ongoing risk from cyber-attacks by foreign governments and hackers. A successful breach could disrupt operations, expose secret information, result in contract termination, and cause major financial and reputational damage.
10-K Item 1A · Risk Factors
