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Can L3Harris' Contract Cost Control Support Future Margin Growth?
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Key Takeaways
LHX uses EAC reviews to refine contract cost estimates as program risks are retired.
LHX's contract process can support profitability through disciplined cost and performance monitoring.
LHX adjusts future revenues and margins as revised contract estimates improve program visibility.
L3Harris Technologies, Inc. (LHX - Free Report) uses a structured process to monitor the cost and performance of its long-term contracts. The company establishes an estimated total cost at completion based on contract complexity and perceived risks, and regularly reviews progress and performance. This process provides an opportunity to adjust cost estimates as technical, schedule and cost risks are retired.
Contract execution is particularly important because L3Harris’ production contracts are mainly fixed-price, while development contracts are generally cost-type. Under fixed-price arrangements, the company can benefit from cost savings, but it also carries the burden of cost overruns. As a result, effective monitoring of contract costs and execution can have a direct effect on profitability.
L3Harris’ recent results show the potential earnings impact of this process. Net favorable Estimate at Completion (‘EAC”) adjustments affected earnings by $47 million in 2025 compared with $39 million in 2024. These adjustments reflect changes in estimated costs and transaction prices, with the cumulative impact recognized in operating income and future revenues and margins adjusted based on revised estimates.
Continued discipline in contract execution could remain an important factor for L3Harris’ margin performance. The company notes that cost estimates can improve when technical, schedule and cost risks are successfully retired, while supply-chain disruptions, inflation, labor issues, design challenges and program execution problems can increase estimated costs. Managing these factors effectively could support more consistent profitability as contracts progress.
Companies Managing Contract Cost and EAC Performance
Effective contract cost management can help aerospace and defense companies manage profitability as long-term programs progress. Northrop Grumman Corporation (NOC - Free Report) and AeroVironment, Inc. (AVAV - Free Report) use contract estimates and adjustments to reflect changes in expected program performance.
Northrop Grumman uses EAC adjustments to reflect changes in estimated contract earnings, which can affect sales, operating income and margins. It reported $209 million of net favorable EAC adjustments in 2025.
AeroVironment uses cumulative catch-up adjustments to reflect changes in estimated contract performance and reported $14.3 million of favorable cumulative catch-up adjustments in fiscal 2026.
Earnings Estimates for LHX
The Zacks Consensus Estimate for 2026 and 2027 earnings per share suggests year-over-year growth of 9.79% and 14.44%, respectively.
Image Source: Zacks Investment Research
LHX Stock Is Trading at a Discount
LHX is trading at a discount relative to the industry, with a forward 12-month price-to-sales of 1.79X compared with the industry average of 2.24X.
Image Source: Zacks Investment Research
LHX Stock Price Performance
Over the past year, LHX shares have fallen 18.9% compared with the industry’s 14.9% decline.
View the Zacks #1 Rank List
Image: Bigstock
Can L3Harris' Contract Cost Control Support Future Margin Growth?
Key Takeaways
L3Harris Technologies, Inc. (LHX - Free Report) uses a structured process to monitor the cost and performance of its long-term contracts. The company establishes an estimated total cost at completion based on contract complexity and perceived risks, and regularly reviews progress and performance. This process provides an opportunity to adjust cost estimates as technical, schedule and cost risks are retired.
Contract execution is particularly important because L3Harris’ production contracts are mainly fixed-price, while development contracts are generally cost-type. Under fixed-price arrangements, the company can benefit from cost savings, but it also carries the burden of cost overruns. As a result, effective monitoring of contract costs and execution can have a direct effect on profitability.
L3Harris’ recent results show the potential earnings impact of this process. Net favorable Estimate at Completion (‘EAC”) adjustments affected earnings by $47 million in 2025 compared with $39 million in 2024. These adjustments reflect changes in estimated costs and transaction prices, with the cumulative impact recognized in operating income and future revenues and margins adjusted based on revised estimates.
Continued discipline in contract execution could remain an important factor for L3Harris’ margin performance. The company notes that cost estimates can improve when technical, schedule and cost risks are successfully retired, while supply-chain disruptions, inflation, labor issues, design challenges and program execution problems can increase estimated costs. Managing these factors effectively could support more consistent profitability as contracts progress.
Companies Managing Contract Cost and EAC Performance
Effective contract cost management can help aerospace and defense companies manage profitability as long-term programs progress. Northrop Grumman Corporation (NOC - Free Report) and AeroVironment, Inc. (AVAV - Free Report) use contract estimates and adjustments to reflect changes in expected program performance.
Northrop Grumman uses EAC adjustments to reflect changes in estimated contract earnings, which can affect sales, operating income and margins. It reported $209 million of net favorable EAC adjustments in 2025.
AeroVironment uses cumulative catch-up adjustments to reflect changes in estimated contract performance and reported $14.3 million of favorable cumulative catch-up adjustments in fiscal 2026.
Earnings Estimates for LHX
The Zacks Consensus Estimate for 2026 and 2027 earnings per share suggests year-over-year growth of 9.79% and 14.44%, respectively.
Image Source: Zacks Investment Research
LHX Stock Is Trading at a Discount
LHX is trading at a discount relative to the industry, with a forward 12-month price-to-sales of 1.79X compared with the industry average of 2.24X.
Image Source: Zacks Investment Research
LHX Stock Price Performance
Over the past year, LHX shares have fallen 18.9% compared with the industry’s 14.9% decline.
Image Source: Zacks Investment Research
LHX’s Zacks Rank
LHX stock currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.