L3Harris Technologies, Inc. (LHX) Cash Flow Statement

The extreme quarterly volatility in OCF/NI, ranging from -0.37 in Q1 2024 to 6.54 in Q4 2025, suggests that working capital changes, not earnings quality, drive the conversion metric. In Q2 2026, the ratio of 1.47 indicates strong cash conversion, but this is partly due to a modest $3M working capital benefit. Investors should focus on the cumulative conversion over multiple quarters rather than any single period, as the pattern suggests lumpy contract milestones and timing of collections.

The first quarter of each year consistently shows negative FCF, likely due to working capital outflows and incentive compensation payments, while Q4 typically sees a surge (e.g., $1.8B in Q4 2025). The Q2 2026 FCF of $771M is the second-highest Q2 in the dataset, suggesting improving operational momentum. However, the trailing twelve-month FCF margin of approximately 10% remains below peers like RTX (12.9%) and GD (11.8%), indicating room for improvement as Aerojet integration synergies materialize.

LHX's capital intensity is low relative to its industrial peers, reflecting a business model that relies more on intellectual property and skilled labor than heavy physical assets. The consistent CapEx/Rev ratio suggests that maintenance capex is the primary driver, with limited growth capex. This implies that FCF generation is largely a function of working capital management and earnings growth, rather than asset expansion. The modest capex also supports the company's ability to service its $11.22B debt while returning capital to shareholders.

The large swings in working capital, particularly in Q1 and Q4, appear to be driven by contract milestone timing and government payment cycles. Q1 2026 saw a $1.2B outflow, likely due to inventory build-up and receivables, while Q4 2025 saw a $1.2B inflow, possibly from collections and reduced inventory. This pattern suggests that LHX's cash flow is inherently lumpy, and investors should not overreact to single-quarter figures. The company's ability to manage these swings will be critical to maintaining liquidity while servicing debt.

LHX has consistently returned capital to shareholders, with dividends growing modestly from $221M in Q1 2024 to $232M in Q2 2026. Buybacks have been more variable, ranging from $42M in Q4 2024 to $569M in Q1 2025, suggesting opportunistic repurchases. In Q1 2026, the company returned $534M despite negative FCF, indicating reliance on cash reserves or debt. This aggressive capital return, combined with the $11.22B debt load, may strain liquidity if FCF does not improve, warranting close monitoring of the company's deleveraging progress.

The cumulative OCF/NI ratio of approximately 1.4 over the ten-quarter period suggests that LHX's earnings are backed by robust cash generation, despite quarterly volatility. This divergence is partly due to significant non-cash charges like D&A (averaging ~$300M per quarter) and SBC, which add back to operating cash flow. However, the large working capital swings could distort this trend, and investors should consider the cumulative FCF of $4.8B versus net income of $4.2B, which shows a healthy conversion. This supports the view that the company's earnings quality is solid, though the debt burden remains a key risk.