2019 Transition Report
FINANCIAL
HIGHLIGHTS*
SECOND HALF
FULL YEAR
NON-GAAP EARNINGS PER SHARE*
$10.08
$7.92
$4.26
$5.43
2018
2019
2018
2019
ADJUSTED FREE CASH FLOW*
(IN MILLIONS)
$1,449
$1,264
$2,460
$1,929
FULL YEAR
NET DEBT/EBITDA*
2.0
1.8
2018
2019
FUNDED BACKLOG (IN BILLIONS)
$16.1
$15.3
SECOND HALF
FULL YEAR
2018
2019
2018 2019
$ in millions
Revenue
$8,392
$9,240
$16,404
$18,074
Non-GAAP EBIT
Income*
Non-GAAP EBIT
Margin*
Capital Returns
Dividends
$1,266
$1,601
$2,456
$2,995
15.1%
17.3%
15.0%
16.6%
$289
$347
$553
$647
Share Repurchases
$235
$1,500
$644
$1,500
CUMULATIVE TOTAL RETURN
$211
$204
$323
LHX
S&P
500
S&P UP
74%
SINCE CY14
LHX UP
223%
SINCE CY14
CY 14
15
16
17
18
19
ABOUT L3HARRIS TECHNOLOGIES
L3Harris Technologies is an agile global aerospace
and defense technology innovator, delivering end-to-end
solutions that meet customers’ mission-critical needs.
The company provides advanced defense and commercial
technologies across air, land, sea, space and cyber
domains. L3Harris has approximately $18 billion in
annual revenue and 50,000 employees, with customers
in 130 countries.
2018
2019
2018
2019
$150
$124
$100
2018
2019
L3HARRIS TECHNOLOGIES 2019 TRANSITION REPORT
*Financial results for calendar 2018 and first half included in calendar 2019 are “combined” results;
refer to “Basis of Preparation” on page 5 of this report. Refer to pages 6-7 of this report for reconciliations
of non–GAAP financial measures to the most directly comparable GAAP financial measures. GAAP refers
to U.S. generally accepted accounting principles.
LETTER TO
SHAREHOLDERS
Chris Kubasik and I knew merging L3 and Harris
could be a game changer. We adopted the phrase
“Fast. Forward.” to highlight how we operate and
our commitment to bringing affordable innovation
to our customers – fast.
That approach helped drive the newly combined
company’s performance and integration forward
even faster than initially anticipated. In six short
months, we established a common set of values
and executed well against our strategic priorities.
This created a solid foundation and strong path
forward for the new L3Harris Technologies.
RESULTS*
Our strategy and focus helped deliver exceptional
results for the company in its first six months
of operation. We grew revenue double digits,
expanded margins and outperformed on all
guidance metrics. Non-GAAP earnings per
share grew 27% to $5.43, with revenue up
10% and margin increasing 220 bps to 17.3%.
For the full year, non-GAAP earnings per share
rose 27% to $10.08, with revenue up 10% and
margin expanding 160bps to 16.6%. Adjusted
free cash flow was up 28% to $2.46 billion. We
reported solid orders and a book-to-bill of 1.04,
with funded backlog increasing 5% over the
previous year.
VALUES
We operate L3Harris as one company with a high-
performance culture based on shared values of
integrity, respect and excellence. Our 50,000
employees have an unwavering commitment to
maintain the highest ethical standards, signing
an annual pledge to never compromise our values
in order to achieve business objectives. We’re
committed to maintaining a workplace built on
individual respect, with a community-minded
culture that’s inclusive, safe and sustainable.
And we strive for excellence, delivering
innovation with speed and flawless execution.
STRATEGIC PRIORITIES
We have made tremendous strides executing
our strategic priorities. Our focus on flawless
execution delivered $100 million of gross
integration synergies since merger close – higher
than initially expected. We’re confident we have a
well-defined path to reach our $500 million gross
synergy target by 2021, one year faster than first
projected. And we drove operational excellence
by embedding common metrics, improvement
goals and our new e3
(Excellence, Everywhere,
Every Day) initiative
throughout the company.
We also optimized our R&D
investments – reducing
the number of projects and
redeploying our spend from
overlapping or discontinued
programs to those with
the best returns, including
funding revenue synergy opportunities. Our
emphasis on improving working capital helped
generate $1.4 billion in adjusted free cash flow
since the merger, while returning $1.8 billion
to shareholders, including $1.5 billion in share
repurchases.
Finally, we made strides to reshape our
portfolio to focus on high-margin, high-growth,
technology-differentiated businesses where
we can win and generate attractive returns.
This is an ongoing effort and we expect to make
considerable headway in 2020.
OUTLOOK
CY19 was an exciting year for our company –
a period of true transformation. We’re off to
a terrific start as a new company and are
well-positioned for continued success in
2020 and beyond. We aligned our businesses
and investments with our customers’ key
priorities, particularly the U.S. National Defense
Strategy, and expanding international market
opportunities.
Our go-forward strategy is straightforward –
to build on the merger momentum and continue
executing our strategic priorities.
The merger and last year’s successes would
not have been possible without our supportive
Board of Directors, our committed leadership
team and our company’s 50,000 hard-working
and dedicated employees. We all work together
with one shared mission – the success of our
stakeholders.
William M. Brown
Chairman and Chief Executive Officer
February 28, 2020
1
COMPANY
HIGHLIGHTS
$18B
ANNUAL REVENUE
~4%
INDUSTRY-LEADING
IRAD INVESTMENT
20K
SCIENTISTS
& ENGINEERS
EMPLOYEES
50K
CUSTOMERS IN
130 COUNTRIES
INTEGRATED
MISSION SYSTEMS
$5.4B
Leading technology integrator to U.S. and
international militaries for complex ISR,
airborne, maritime and space platforms
ISR | Maritime | Electro-Optical
SPACE AND
AIRBORNE SYSTEMS
$4.7B
Mission solutions for space and airborne
domains with defense, intelligence and
commercial applications
Space | Intel and Cyber | Avionics |
Electronic Warfare
COMMUNICATION
SYSTEMS
$4.3B
AVIATION
SYSTEMS
$3.9B
Secure ground and airborne communications
and network systems for U.S. military, international
forces and commercial customers
Tactical Communications | Broadband
Communications | Integrated Vision Solutions |
Public Safety
L3HARRIS TECHNOLOGIES 2019 TRANSITION REPORT
Commercial and military aviation solutions,
systems, networks and pilot training
Defense Aviation | Commercial Aviation |
Commercial & Military Training |
Mission Networks
CORPORATE
RESPONSIBILITY
COMPANY VALUES
ENVIRONMENTAL, SOCIAL AND GOVERNANCE PROGRAM
Following our merger, we stood up an Environmental, Social and Governance (ESG)
working group to harmonize programs, and we plan to issue the first ESG report
next year. Key program focus areas include:
SOUND GOVERNANCE & BOARD LEADERSHIP
L3Harris is committed to responsible and effective corporate
governance to enhance the creation of sustainable, long-term
shareholder value and to be accountable and responsive to our
shareholders.
LIVING OUR VALUES
Our unwavering commitment to the highest ethical standards is
a cornerstone of our values and our continued success. We instill
it in our employees, who sign an annual pledge to never compromise
our values in order to achieve business objectives.
ENVIRONMENTAL SUSTAINABILITY & COMPLIANCE
The company’s robust environmental, health and safety (EH&S)
management system provides the framework for establishing
policies and standards, as well as enterprise initiatives to reduce
solid waste, water usage and greenhouse gas emissions.
INTEGRITY
> Accountable
> Ethical
> Honest
EXCELLENCE
> Flawless Execution
> Customer-Focused
ENSURING A SAFE WORKPLACE
L3Harris is dedicated to protecting the health and safety of
our workers and customers in the global communities where
we operate. By leveraging our EH&S management systems,
we minimize exposures to hazards to uphold our strong
“Take Care, Stay Aware” safety culture.
> Innovative
BUILDING A HIGH-PERFORMANCE CULTURE
RESPECT
We employ innovators and problem solvers entrusted to
deliver mission-critical solutions our customers depend on.
We understand and embrace the value of diverse ideas,
perspectives, backgrounds and experiences, and we foster
a work environment where everyone is treated with respect
and has the opportunity to succeed.
> Safe & Sustainable
SUPPORTING OUR COMMUNITIES
> Community-Minded
> Inclusive
Community outreach and investment is at the core of the
company’s culture. Our companywide LIFT (L3Harris Investing for
Tomorrow) initiative provides philanthropic support to communities
through strategic investments in programs that align with STEM
education, our customers’ missions and the communities where
we live and work.
3
BOARD OF
DIRECTORS
L3Harris Board of Directors
(Standing L-R) Sallie B. Bailey, Peter W. Chiarelli, Lloyd W. Newton, Thomas A. Dattilo, Lewis Kramer, Lewis Hay III, Roger B. Fradin and Thomas A. Corcoran
(Seated L-R) Robert B. Millard, William M. Brown, Christopher E. Kubasik and Rita S. Lane
BOARD OF DIRECTORS
> William M. Brown
Chairman and CEO
> Christopher E. Kubasik
Vice Chairman, President
and COO
> Sallie B. Bailey 1,3
Former EVP and CFO,
Louisiana-Pacific
> Peter W. Chiarelli 1,5
General, U.S. Army (Retired)
EXECUTIVE OFFICERS
> William M. Brown
Chairman and CEO
> Thomas A. Corcoran 1,3
> Lewis Hay III 2,4
> Robert B. Millard 4,5
Former President and CEO,
Allegheny Teledyne
Former Chairman
and CEO, NextEra Energy
> Thomas A. Dattilo 2,4
Former Chairman, CEO
and President, Cooper
Tire & Rubber
> Roger B. Fradin 3,5
Former Vice Chairman,
Honeywell
> Lewis Kramer 1,2
Retired Partner,
Ernst & Young
> Rita S. Lane 2,3
Former Vice President,
Operations, Apple
Chairman, MIT Corporation
> Lloyd W. Newton 4,5
General, U.S. Air Force
(Retired)
BOARD COMMITTEES
1 Audit Committee
2 Compensation Committee
3 Finance Committee
4 Nominating & Governance Committee
5 Technology Committee
> Todd W. Gautier
> Scott T. Mikuen
> Todd A. Taylor
President, Aviation Systems
Senior Vice President,
General Counsel and
Secretary
> Sean J. Stackley
President, Integrated
Mission Systems
Vice President,
Principal Accounting Officer
> Edward J. Zoiss
President,
Space & Airborne Systems
> Christopher E. Kubasik
> James P. Girard
Vice Chairman, President
and COO
Vice President and Chief
Human Resources Officer
> Jesus “Jay” Malave Jr.
> Dana A. Mehnert
Senior Vice President and
Chief Financial Officer
President,
Communication Systems
L3HARRIS TECHNOLOGIES 2019 TRANSITION REPORT
L3Harris Board of Directors
(Standing L-R) Lloyd W. Newton, Roger B. Fradin, Rita S. Lane, Thomas A. Dattilo, Robert B. Millard, Lewis Hay III, Peter W. Chiarelli and Thomas A. Corcoran
(Seated L-R) Lewis Kramer, Christopher E. Kubasik, William M. Brown and Sallie B. Bailey
BASIS OF
PREPARATION
To aid with year-over-year comparability following
the L3Harris merger, financial results in this transition
report for calendar year 2018 and the first half included
in calendar 2019 are combined financial results, with
“combined” meaning, in the case of prior-year results,
L3 and Harris combined results for the applicable prior-
year period on the basis described in the paragraphs
below, including regarding adjustments for certain
items; and in the case of full year 2019 results,
including L3 results for the first half of 2019 on
the same basis.
Specifically, the combined financial results are unaudited
combined L3 and Harris historical financial information,
which combines L3 and Harris historical operating results
as if the businesses had been operated together prior
to the merger on the basis of the combined company’s
four segment structure effective following the merger,
but excluding the operating results of Harris’ Night
Vision business (also excluded for Q3 of calendar year
2019 for comparability) and L3’s divested businesses,
allocating Harris’ corporate department expense to the
new segment structure and excluding Harris historical
deal amortization (primarily related to Exelis) (the
“Unaudited Combined Financial Information”). L3Harris
current-period adjusted results exclude, and L3Harris
intends to continue to exclude in future-period adjusted
results, all deal amortization (including L3 historical
deal amortization). The Unaudited Combined Financial
Information has no impact on L3’s or Harris’ previously
reported consolidated balance sheets or statements of
income, comprehensive income, cash flows or equity.
For avoidance of doubt, the Unaudited Combined
Financial Information also was not intended to be,
and was not, prepared on a basis consistent with the
unaudited pro forma condensed combined financial
information in Exhibit 99.7 to L3Harris’ Current Report
on Form 8-K filed July 1, 2019 with the U.S. Securities
and Exchange Commission (the “Pro Forma 8-K Filing”),
which provides the pro forma financial information
required by Item 9.01(b) of Form 8-K, or other pro forma
financial information prepared in accordance with Article
11 of Regulation S-X that may be included in L3Harris
periodic reports filed with the SEC (collectively with the
pro forma information in Exhibit 99.7 to the Pro Forma
8-K Filing, the “Pro Forma Financial Information”). For
instance, the Unaudited Combined Financial Information
does not give effect to the L3Harris merger under
the acquisition method of accounting in accordance
with Financial Accounting Standards Board (“FASB”)
Accounting Standard Codification Topic 805, Business
Combinations (“ASC Topic 805”), with Harris treated as
the legal and accounting acquirer, and was not prepared
to reflect the merger as if it occurred on the first day
of any of the fiscal periods presented. The Unaudited
Combined Financial Information has not been adjusted
to give effect to pro forma events that are (1) directly
attributable to the merger, (2) factually supportable,
or (3) expected to have a continuing impact on the
combined results of L3 and Harris. More specifically,
other than excluding the operating results of Harris’ Night
Vision business and L3’s divested business, allocating
Harris’ corporate department expense to the new
segment structure and excluding Harris historical deal
amortization (primarily related to Exelis), the Unaudited
Combined Financial Information does not reflect
the types of pro forma adjustments in the Pro Forma
Financial Information. Consequently, the Unaudited
Combined Financial Information is intentionally different
from, but does not supersede, the Pro Forma Financial
Information.
In addition, the Unaudited Combined Financial
Information does not purport to indicate the results
that actually would have been obtained had the L3 and
Harris businesses been operated together on the basis
of the combined company’s four segment structure
during the periods presented, or which may be realized
in the future.
Amounts Adjusted for Certain Items - The Unaudited
Combined Financial Information includes amounts
adjusted for certain items, including revenue, earnings
per diluted share from continuing operations, earnings
before interest and taxes (“EBIT”) and EBIT margin, and
cash flow, in each case as adjusted to exclude merger-
related deal and integration costs, amortization of
Harris acquisition-related intangibles and certain other
items previously reported by L3 or Harris, as applicable,
for prior periods. Such amounts should be viewed in
addition to, and not in lieu of, revenue, earnings per
diluted share from continuing operations, EBIT and EBIT
margin, cash flow and other financial measures on an
unadjusted basis. Pages 6-7 of this report, quarterly
earnings materials and the L3Harris investor relations
website provide a reconciliation of adjusted amounts
with the most directly comparable unadjusted amount.
L3Harris management believes that these adjusted
amounts, when considered together with the unadjusted
amounts, provide information that is useful to investors
in understanding period-over-period operating results
separate and apart from items that may, or could, have a
disproportionate positive or negative impact on results in
any particular period. L3Harris management also believes
that these adjusted amounts enhance the ability of
investors to analyze trends in L3Harris’ business and to
understand L3Harris’ performance. In addition, L3Harris
may utilize adjusted amounts as guides in forecasting,
budgeting and long-term planning processes and to
measure operating performance for some management
compensation purposes. Adjusted amounts should be
considered in addition to, and not as a substitute for, or
superior to, unadjusted amounts.
5
RECONCILIATION OF NON–GAAP FINANCIAL MEASURES AND REGULATION G DISCLOSURE
To supplement our condensed, consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP),
we provide additional measures of revenue, income from continuing operations, income from continuing operations per diluted common share, income
from continuing operations before income taxes, net cash provided by operating activities, operating income and operating margin, adjusted to include,
exclude or deduct certain costs, charges, expenses, losses or other amounts. L3Harris management believes that these non–GAAP financial measures,
when considered together with the GAAP financial measures, provide information that is useful to investors in understanding period–over–period operating
results separate and apart from items that may, or could, have a disproportionately positive or negative impact on results in any particular period. L3Harris
management also believes that these non–GAAP financial measures enhance the ability of investors to analyze L3Harris’ business trends and to understand
L3Harris’ performance. In addition, L3Harris may utilize non–GAAP financial measures as guides in its forecasting, budgeting and long–term planning
processes, and to measure operating performance for some management compensation purposes. Any analysis of non–GAAP financial measures should
be used only in conjunction with results presented in accordance with GAAP. A reconciliation of these non–GAAP financial measures with the most directly
comparable financial measures calculated in accordance with GAAP follows:
NON-GAAP INCOME FROM CONTINUING OPERATIONS PER DILUTED COMMON SHARE
SECOND HALF
FULL YEAR
DOLLARS IN MILLIONS
GAAP income from continuing operations per diluted common share
Pre-merger L3 income from continuing operations per diluted common share
Impact of L3 diluted common shares
Adjustments:
Net operating income generated by divested businesses
(Gain) loss on sale of businesses
Gain on sale of asset group
L3Harris Merger transaction costs, including change-in-control (CIC) charges, and pre-merger L3 transaction costs
L3Harris Merger integration costs
Charges related to consolidation of facilities
Gain on pension curtailment
Additional cost of sales related to the fair value step-up in inventory sold
Amrotization of acquisition-related intangibles
Non-cash cumulative adjustment to lease expense
Losses and other costs related to debt refinancing
Charges related to decision to transition and exit a commercial line of business and other items
Total pre-tax adjustments
Income taxes on above adjustments
Impact of non-cash adjustment related to tax reform
Total adjustments after-tax
Non-GAAP income from continuing operations per diluted common share
GAAP YOY % increase
Non-GAAP YOY % increase
ADJUSTED FREE CASH FLOW
DOLLARS IN MILLIONS
Net cash provided by operating activities
Pre-merger L3 net cash provided by operating activities
Net additions of property, plant and equipment
Pre-merger L3 net additions of property, plant and equipment
Free cash flow
Net cash (provided by) used in operating activities from L3 discontinued operations
Income tax payments attributable to discontinued operations
Cash used for L3Harris Merger transaction costs, including CIC payments, and pre-merger L3 transaction costs
Cash used for L3Harris Merger integration costs
Voluntary contribution to defined pension plans
Adjusted free cash flow
Funded Backlog
DOLLARS IN BILLIONS
Funded backlog for L3Harris
Pre-merger L3 funded backlog
Combined funded backlog
Revenue
DOLLARS IN MILLIONS
Revenue from product sales and services
Add pre-merger L3 revenue from product sales and services
Less revenue generated by divested businesses
Intracompany eliminations
Combined revenue from product sales and services
Combined revenue YOY increase
Dividends
DOLLARS IN MILLIONS
Dividends
Pre-merger L3 dividends
Combined dividends
Share Repurchases
DOLLARS IN MILLIONS
Share repurchases
Pre-merger L3 share repurchases
Combined share repurchases
L3HARRIS TECHNOLOGIES 2019 TRANSITION REPORT
December 28, 2018
$
3.66
1.91
(1.68)
3.89
January 3, 2020
$
3.68
-
-
3.68
December 28, 2018
$
7.01
3.56
(3.22)
7.35
January 3, 2020
$
7.90
1.89
(1.95)
7.84
(0.05)
0.03
-
0.18
-
-
-
-
0.22
-
0.09
-
0.47
(0.10)
-
0.37
4.26
$
-
(1.02)
(0.05)
0.68
0.84
0.22
(0.10)
0.64
1.30
0.04
0.01
-
2.56
(0.81)
-
1.75
5.43
1%
27%
$
(0.08)
(0.18)
-
0.18
-
0.03
-
-
0.45
-
0.42
0.21
1.03
(0.23)
(0.23)
0.57
7.92
$
(0.03)
(1.02)
(0.05)
0.98
0.97
0.22
(0.10)
0.64
1.52
0.04
0.02
-
3.19
(0.95)
-
2.24
10.08
13%
27%
$
SECOND HALF
FULL YEAR
December 28, 2018
$
January 3, 2020
$
December 28, 2018
January 3, 2020
$
939
-
(173)
-
766
-
-
254
127
302
1,449
$
847
1,032
(160)
(229)
1,490
10
80
49
-
300
1,929
$
December 28, 2018
$
January 3, 2020
$
$
$
AS OF
5.7
9.6
15.3
$
$
$
SECOND HALF
FULL YEAR
December 28, 2018
January 3, 2020
December 28, 2018
January 3, 2020
$
$
$
$
$
$
$
$
SECOND HALF
FULL YEAR
December 28, 2018
$
January 3, 2020
$
December 28, 2018
$
January 3, 2020
$
$
$
$
$
SECOND HALF
FULL YEAR
December 28, 2018
January 3, 2020
December 28, 2018
January 3, 2020
$
$
$
$
$
$
$
$
6,431
10,244
(250)
(21)
16,404
299
254
553
322
322
644
9,263
-
(23)
-
9,240
10.1%
347
-
347
1,500
-
1,500
1,655
414
(267)
(98)
1,704
(19)
-
323
150
302
2,460
16.1
-
16.1
5.2%
12,856
5,331
(104)
(9)
18,074
10.2%
509
138
647
1,500
-
1,500
469
845
(67)
(122)
1,125
19
71
49
-
-
1,264
3,208
5,290
(98)
(8)
8,392
163
126
289
200
35
235
NET DEBT TO NON-GAAP EBITDA RATIO
DOLLARS IN MILLIONS
Short-term debt
Current portion of long-term debt, net
Long-term debt, net
Total debt
Less cash and cash equivalents
Net debt
Add pre-merger L3 long-term debt
Less pre-merger L3 cash and cash equivalents
Combined net debt
Net income
Adjustments:
Net interest expense
Income taxes
Depreciation and amortization
EBITDA
Pre-merger L3 and other adjustments:
Net income
Discontinued operations, net of income taxes
Net interest expense
Income taxes
Depreciation and amortization
Net operating income generated by divested businesses
Gain on sale of businesses
Gain on sale of asset group
L3Harris Merger transaction costs, including CIC charges, and pre-merger L3 transaction costs
L3Harris Merger integration costs
Charges related to consolidation of facilities
Gain on pension curtailment
Additional cost of sales related to the fair value step-up in inventory sold
Non-cash cumulative adjustment to lease expense
Losses and other costs related to debt refinancing
Charges related to decision to transition and exit a commercial line of business and other items
Non-GAAP combined EBITDA
GAAP net debt to EBITDA ratio
Non-GAAP combined net debt to EBITDA ratio
EBIT MARGIN
DOLLARS IN MILLIONS
Net income
Adjustments:
Pre-merger L3 net income
Discontinued operations, net of income taxes
Net interest expense
Income taxes
Net operating income generated by divested businesses
(Gain) loss on sale of businesses
Gain on sale of asset group
L3Harris Merger transaction costs, including CIC charges, and pre-merger L3 transaction costs
L3Harris Merger integration costs
Charges related to consolidation of facilities
Gain on pension curtailment
Additional cost of sales related to the fair value step-up in inventory sold
Amortization of acquisition-related intangibles
Non-cash cumulative adjustment to lease expense
Losses and other costs related to debt refinancing
Charges related to decision to transition and exit a commercial line of business and other items
Total adjustments
Adjusted EBIT (A)
Combined revenue from product sales and services (B)
Adjusted EBIT margin percentage (A) / (B)
Adjusted EBIT YOY increase
December 28, 2018
$
FULL YEAR
January 3, 2020
3
$
257
6,694
6,954
(824)
6,130
-
-
6,130
1,345
$
$
103
305
3,411
3,819
(343)
3,476
3,321
(1,066)
5,731
847
$
$
194
136
257
1,434
204
146
571
2,266
1,026
(205)
127
103
241
(19)
(42)
-
41
-
5
-
-
-
95
47
2,853
2.4
2.0
$
437
2
60
87
117
(12)
(229)
(12)
220
219
48
(23)
142
10
6
-
3,338
2.7
1.8
$
SECOND HALF
FULL YEAR
December 28, 2018
$
438
January 3, 2020
$
834
December 28, 2018
January 3, 2020
$
847
$
1,345
439
4
158
118
(9)
6
-
41
-
-
-
-
50
-
21
-
1
123
73
-
(229)
(12)
153
189
48
(23)
142
289
10
3
-
828
1,266
8,392
15.1%
-
767
1,601
9,240
17.3%
2.2%
1,026
(205)
321
239
(19)
(42)
-
41
-
5
-
-
101
-
95
47
1,609
2,456
16,404
15.0%
437
2
270
233
(12)
(229)
(12)
220
219
48
(23)
142
339
10
6
-
1,650
2,995
18,074
16.6%
1.6%
$
$
$
$
$
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KT
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended _____________
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from June 29, 2019 to January 3, 2020
Commission File Number 1-3863
L3HARRIS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
34-0276860
(I.R.S. Employer Identification No.)
1025 West NASA Boulevard
Melbourne, Florida
(Address of principal executive offices)
32919
(Zip Code)
Registrant’s telephone number, including area code: (321) 727-9100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
LHX
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
No
No
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of the voting common equity held by non-affiliates of the registrant at June 28, 2019 was $22,330,592,127
(based on the quoted closing sale price per share of the stock on the New York Stock Exchange). For purposes of this calculation, the registrant
has assumed that its directors and executive officers as of June 28, 2019 are affiliates.
No
The number of shares outstanding of the registrant’s common stock as of February 28, 2020 was 216,896,195.
Portions of the registrant’s definitive Proxy Statement for the 2020 Annual Meeting of Shareholders scheduled to be held on April 24, 2020,
which will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s Fiscal Transition Period, are
incorporated by reference into Part III of this Transition Report on Form 10-KT to the extent described therein.
Documents Incorporated by Reference:
TRANSITION REPORT ON FORM 10-KT FOR THE FISCAL TRANSITION PERIOD ENDED JANUARY 3, 2020
L3HARRIS TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
ITEM 1. Business...................................................................................................................................
ITEM 1A. Risk Factors .............................................................................................................................
ITEM 1B. Unresolved Staff Comments....................................................................................................
ITEM 2. Properties.................................................................................................................................
ITEM 3. Legal Proceedings ...................................................................................................................
ITEM 4. Mine Safety Disclosures..........................................................................................................
Information about our Executive Officers ....................................................................................................
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ................................................................................................
ITEM 6. Selected Financial Data ...........................................................................................................
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations..
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ................................................
ITEM 8. Financial Statements and Supplementary Data .......................................................................
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .
ITEM 9A. Controls and Procedures..........................................................................................................
ITEM 9B. Other Information ....................................................................................................................
ITEM 10. Directors, Executive Officers and Corporate Governance ......................................................
ITEM 11. Executive Compensation .........................................................................................................
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.................................................................................................................
ITEM 13. Certain Relationships and Related Transactions, and Director Independence........................
ITEM 14. Principal Accounting Fees and Services .................................................................................
Part I:
Part II:
Part III:
Part IV:
ITEM 15. Exhibits, Financial Statement Schedules ................................................................................
ITEM 16. Form 10-KT Summary ............................................................................................................
Signatures......................................................................................................................................................................
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Exhibits
This Transition Report on Form 10-KT contains trademarks, service marks and registered marks of L3Harris Technologies,
Inc. and its subsidiaries. All other trademarks are the property of their respective owners.
Cautionary Statement Regarding Forward-Looking Statements
This Transition Report on Form 10-KT (this “Report”), including “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well
as assumptions that may not materialize or prove correct, which could cause our results to differ materially from those expressed
in or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could
be deemed forward-looking statements, including, but not limited to, statements concerning: our plans, strategies and objectives
for future operations; new products, systems, technologies, services or developments; future economic conditions, performance or
outlook; future political conditions; the outcome of contingencies; the potential level of share repurchases, dividends or pension
contributions; potential acquisitions or divestitures; the integration of Harris Corporation (“Harris”) and L3 Technologies, Inc.
(“L3”) and of our acquisitions; the value of contract awards and programs; expected annualized revenue; expected cash flows or
capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or
anticipate will or may occur in the future; and assumptions underlying any of the foregoing. Forward-looking statements may be
identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “could,” “should,” “would,” “will,”
“intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words or expressions. You should not place undue reliance
on these forward-looking statements, which reflect our management’s opinions only as of the date of filing of this Report and are
not guarantees of future performance or actual results. Factors that might cause our results to differ materially from those
expressed in or implied by these forward-looking statements, from our current expectations or projections or from our historical
results include, but are not limited to, those discussed in “Item 1A. Risk Factors” of this Report. All forward-looking statements
are qualified by, and should be read in conjunction with, those risk factors. Forward-looking statements are made in reliance on
the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are made as of the date of filing of this Report, and we
disclaim any intention or obligation, other than imposed by law, to update or revise any forward-looking statements, whether as a
result of new information, future events or developments or otherwise, after the date of filing of this Report or, in the case of any
document incorporated by reference, the date of that document.
Amounts contained in this Report may not always add to totals due to rounding.
L3Harris Merger
As described in more detail in Note 1: Significant Accounting Policies under “Principles of Consolidation” and Note 5:
Business Combination in the Notes to Consolidated Financial Statements in this Report (the “Notes”), on October 12, 2018,
Harris entered into an Agreement and Plan of Merger (the “Merger Agreement”) with L3 and Leopard Merger Sub Inc., a newly
formed, direct wholly owned subsidiary of Harris (“Merger Sub”), pursuant to which Harris and L3 agreed to combine their
respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and into L3, with L3
continuing as the surviving corporation and a direct wholly owned subsidiary of Harris (the “L3Harris Merger”). The closing of
the L3Harris Merger occurred on June 29, 2019 (“Closing Date”), after the end of Harris’ fiscal 2019 on June 28, 2019.
ITEM 1.
BUSINESS.
General
PART I
L3HARRIS
We were incorporated in Delaware in 1926 as the successor to three companies founded in the 1890s. Our principal
executive offices are located at 1025 West NASA Boulevard, Melbourne, Florida 32919, and our telephone number is
(321) 727-9100. Our common stock is now traded under the ticker symbol “LHX” on the New York Stock Exchange (“NYSE”),
and unless the context otherwise requires, the terms “we,” “our,” “us,” “Company” and “L3Harris” as used in this Report mean
the combined company L3Harris Technologies, Inc. and its subsidiaries, when referring to periods after the end of fiscal 2019
(after the L3Harris Merger) and mean Harris and its subsidiaries when referring to periods prior to the end of fiscal 2019 (prior to
the L3Harris Merger).
L3Harris Technologies, Inc. is an agile global aerospace and defense technology innovator, delivering end-to-end solutions
that meet customers’ mission-critical needs. We provide advanced defense and commercial technologies across air, land, sea,
space and cyber domains. We support government and commercial customers in 130 countries, with our largest customers being
various departments and agencies of the U.S. Government and their prime contractors. Our products, systems and services have
defense and civil government applications, as well as commercial applications. As of January 3, 2020, we had approximately
50,000 employees, including approximately 20,000 engineers and scientists.
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We structure our operations primarily around the products, systems and services we sell and the markets we serve. We
implemented a new organizational structure effective at the beginning of the Fiscal Transition Period (as defined below), which
resulted in changes to our operating segments, which are also our reportable segments and are referred to as our business
segments:
• Integrated Mission Systems, including multi-mission intelligence, surveillance and reconnaissance (“ISR”) and
communication systems; integrated electrical and electronic systems for maritime platforms; and advanced electro-
optical and infrared (“EO/IR”) solutions;
• Space and Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and
cyber defense; avionics; and electronic warfare;
• Communication Systems, including tactical communications; broadband communications; integrated vision solutions;
and public safety; and
• Aviation Systems, including defense aviation products; security, detection and other commercial aviation products;
commercial and military pilot training; and mission networks for air traffic management (“ATM”).
The historical results, discussion and presentation of our business segments as set forth in this Report reflect the impact of
these changes to our segment reporting for all periods presented in order to present segment information on a comparable basis.
There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or
statements of equity resulting from these changes.
L3Harris Merger
As noted above and described in more detail in Note 1: Significant Accounting Policies under “Principles of Consolidation”
and Note 5: Business Combination in the Notes, we completed the L3Harris Merger on June 29, 2019, the day after Harris’ fiscal
2019 ended and the first day of our Fiscal Transition Period (as defined below). L3 was a prime contractor in ISR systems,
aircraft sustainment (including modifications and fleet management of special mission aircraft), simulation and training, night
vision and image intensification equipment, and security and detection systems. L3 also was a leading provider of a broad range
of communication, electro-optical solutions, and electronic and sensor systems used on military, homeland security and
commercial platforms. L3 customers included the U.S. Department of Defense (“DoD”) and its prime contractors, the U.S.
Intelligence Community, the U.S. Department of Homeland Security (“DHS”), foreign governments and domestic and foreign
commercial customers.
Change in Fiscal Year
Through fiscal 2019, our fiscal years ended on the Friday nearest June 30. Commencing June 29, 2019, our fiscal year ends
on the Friday nearest December 31, and the period that commenced on June 29, 2019 was a fiscal transition period that ended on
January 3, 2020 (“Fiscal Transition Period”).
Subsequent Events
As described in more detail in Note 28: Subsequent Events in the Notes, on February 4, 2020, we entered into a definitive
agreement under which we will sell Security & Detection Systems and MacDonald Humfrey Automation solutions (“airport
security and automation business”) to Leidos, Inc. for $1 billion in cash, subject to customary purchase price adjustments as set
forth in the definitive agreement. The sale transaction is conditioned on customary closing conditions, including receipt of
regulatory approvals. We expect the sale transaction to close in mid-2020; however, there can be no assurances that the conditions
will be satisfied (or waived, if applicable) or that closing will occur in mid-2020 or at all. We intend to use the proceeds from the
sale of the airport security and automation businesses to repurchase shares of our common stock. The airport security and
automation business provides solutions used by the aviation and transportation industries, regulatory and customs authorities,
government and law enforcement agencies and commercial and other high-security facilities. The decision to divest the airport
security and automation business represented a significant milestone in our strategic priority to reshape our portfolio and focus
our resources on core technologies following the L3Harris Merger. Because the expected disposal of the airport security and
automation business did not meet the held for sale criteria as of January 3, 2020, the assets and liabilities of the airport security
and automation business were not classified as held for sale in our Consolidated Balance Sheet at January 3, 2020.
Divestitures
The following paragraphs summarize recent divestitures. For additional information related to divestitures, some of which
were reported as discontinued operations, see Note 3: Divestitures, Asset Sales and Discontinued Operations in the Notes. Our
historical financial results for all periods presented in this Report have been restated to account for businesses reported as
discontinued operations in this Report. Except for disclosures related to our cash flows, or unless otherwise specified, disclosures
in this Report relate solely to our continuing operations.
Divestiture of the Harris Night Vision Business. On September 13, 2019, we completed the sale of the Harris Night Vision
business to Elbit Systems of America, LLC, a subsidiary of Elbit Systems Ltd., for $350 million (net cash proceeds of $343
million after selling costs and estimated purchase price adjustments), subject to final customary purchase price adjustments as set
forth in the definitive agreement. The Harris Night Vision business was not included in any of the business segments in our new
2
organizational structure and the operating results of the Harris Night Vision business through the date of the divestiture are
discussed and presented as part of “Other non-reportable business segments” in this Report.
Divestiture of Government IT Services Business. On April 28, 2017, we completed the divestiture to an affiliate of Veritas
Capital Management, L.L.C. of our government information technology (“IT”) services business (“IT Services”), which primarily
provided IT and engineering managed services to U.S. Government customers, for net cash proceeds of $646 million, after
transaction expenses and purchase price adjustments in respect of net cash and working capital as set forth in the definitive sale
agreement. The decision to divest IT Services was part of our strategy to simplify our operating model to focus on technology-
differentiated, high-margin businesses. IT Services is reported as discontinued operations in this Report.
Divestiture of Harris CapRock Communications Commercial Business. On January 1, 2017, we completed the divestiture
to SpeedCast International Ltd. of our Harris CapRock Communications commercial business (“CapRock”), which provided
wireless, terrestrial and satellite communications services to energy and maritime customers, for net cash proceeds of $368
million, after transaction expenses and purchase price adjustments in respect of net cash and working capital as set forth in the
definitive sale agreement. The decision to divest CapRock was part of our strategy to simplify our operating model to focus on
technology-differentiated, high-margin businesses. CapRock is reported as discontinued operations in this Report.
Description of Business by Segment
Our four business segments provide a wide-range of products and services to various customers and are described below.
Financial information with respect to our business segments, including revenue, operating income and total assets, and with
respect to our operations outside the United States, is contained in Note 25: Business Segments in the Notes and is incorporated
herein by reference, and for additional information with respect to our business segments, see “Discussion of Business Segment
Results of Operations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of
this Report. For a discussion of certain risks affecting our business segments, including risks relating to our U.S. Government
contracts and subcontracts, see “Item 1. Business - Principal Customers: Government Contracts,” “Item 1A. Risk Factors” and
“Item 3. Legal Proceedings” of this Report.
Integrated Mission Systems
Integrated Mission Systems segment revenue of $2,774 million for the two quarters ended January 3, 2020, represented 30
percent of our total revenue. With a diverse portfolio of more than 300 programs, this segment is comprised of three business
sectors: ISR, Maritime and Electro Optical, the principal products and services of which are described below. This segment
principally consists of operating businesses acquired in the L3Harris Merger.
ISR: We develop and maintain multi-mission ISR and communication systems, including fleet management support
services, sensor development, modifications and periodic depot maintenance for ISR and airborne missions. Significant customers
include DoD and classified customers within the U.S. Government, U.K. Ministry of Defence, Royal Australian Air Force and
other select foreign military services.
Maritime: We are a manufacturer and integrator of maritime integrated command, control, communications, computers and
cyber ISR (“C5ISR”) systems for maritime platforms, specializing in signals intelligence and multi-intelligence platforms;
unmanned surface and undersea autonomous solutions; power and ship control systems and other electronic and electrical
products and systems. Significant customers include the U.S. Navy (“USN”), the U.S. Coast Guard, U.S. Army, allied navies,
other military customers and commercial ship owners.
Electro Optical: We design and manufacture advanced EO/IR sensors and surveillance and targeting systems and provide
modernization and life extension maintenance upgrade and support services for military aircraft. Significant customers include the
National Aeronautics Space Administration, DoD, USN, U.S. Air Force (“USAF”), select foreign militaries and commercial space
companies.
Additional information regarding the composition of Integrated Mission Systems revenue for the two quarters ended January
3, 2020 is as follows:
• 75 percent was derived from sales to U.S. Government customers, including foreign military sales funded through the
U.S. Government, whether directly or through prime contractors;
• 69 percent was derived from contracts under which we are the prime contractor;
• 17 percent was derived from products and services for which the end consumer is located outside the U.S.; and
• 8 percent and 44 percent was derived from this segment’s largest and ten largest programs, respectively.
Space and Airborne Systems
Space and Airborne Systems segment revenue of $2,360 million for the two quarters ended January 3, 2020, represented 25
percent of our total revenue. With a diverse portfolio of more than 300 programs, this segment is comprised of four business
sectors: Space, Intel & Cyber, Avionics and Electronic Warfare, the principal products and services of which are described below.
This segment consists of a mix of operating businesses acquired in the L3Harris Merger and legacy Harris operating businesses,
3
including nearly all of the operating businesses of our pre-merger Space and Intelligence Systems and Electronic Systems
segments, except: the mission networks ATM operating business noted below in the description of Aviation Systems.
Space: We provide intelligence, space protection, geospatial, complete Earth observation, universe exploration, positioning,
navigation and timing (“PNT’) and environmental solutions for national security, defense, civil and commercial customers, using
advanced sensors, antennas and payloads, as well as ground processing and information analytics. Many of these solutions
include reliable resilient and innovative capabilities. We are a global provider of PNT products, systems and solutions. Our
navigation payload technology is an integral component of U.S. Global Positioning System (‘GPS”) satellites and supports GPS
availability, accuracy and integrity. We also provide space antenna systems and precision space structures. We are an experienced
space reflector manufacturer and specialize in large, high-accuracy reflectors, which can range from unfurlable and fixed-mesh
reflector antennas to solid spot beam antennas. Some of the more significant programs in this sector include:
• System Engineering and Sustainment Integrator (“SENSOR”), a program to maintain and modernize radar
installations and provide engineering support and sustainment for ground-based systems for the USAF:
• Geostationary Operational Environmental Satellite - Series R (“GOES-R”), a program to design, develop and build
systems to measure, understand and monitor weather and environmental trends for the U.S. National Oceanic and
Atmospheric Administration; and
• GPS III, a program to modernize the GPS satellite system for the USAF.
Intel & Cyber: We provide situational awareness optical networks and advanced wireless solutions for classified
intelligence and cyber defense. Although classified programs are generally not discussed in this Report, the operating results
relating to classified programs are included in our Consolidated Financial Statements in this Report. We believe that the business
risks associated with our classified programs do not differ materially from the business risks associated with our other U.S.
Government programs.
Avionics: We provide avionic sensors, hardened electronics, release systems, data links and antennas supporting fixed wing
and rotary platforms. Significant customers include military aircraft manufacturers, DoD customers within the U.S. Government
and select foreign military services. For the F-35 Lightning II Joint Strike Fighter (“F-35”) and F/A-18E/F Super Hornet (“F/
A-18”) aircraft, we provide high-performance, advanced avionics such as high-speed fiber optic networking and switching, image
processing, digital map software and other electronic components, including Mulifunction Advanced Data Link communication
subsystems primarily intended for stealth platform air-to-air communications.
Electronic Warfare: We provide multi-spectral situational awareness, threat warning and countermeasures capabilities for
electronic warfare solutions for airborne and maritime platforms. Significant customers include military aircraft manufacturers,
DoD customers within the U.S. Government and select foreign military services. Examples of our electronic warfare technology
include:
• Our advanced integrated defense electronic warfare systems (“AIDEWS”) that provide integrated and podded self-
protection and jamming;
• Our integrated defensive electronic countermeasures (“IDECM”) system for the F/A-18;
• Our counter-radio controlled improvised explosive device technology that protects ground forces in asymmetrical
combat environments; and
• Our land-based surveillance radar that provides three-dimensional radar capability for airborne defensive
surveillance for the USN.
Additional information regarding the composition of Space and Airborne Systems revenue for the two quarters ended January
3, 2020 is as follows:
• 88 percent was derived from sales to U.S. Government customers, including foreign military sales funded through the
U.S. Government, whether directly or through prime contractors;
• 57 percent was derived from contracts under which we are the prime contractor;
• 14 percent was derived from products and services for which the end consumer is located outside the U.S.; and
• 5 percent and 35 percent was derived from this segment’s largest and ten largest programs, respectively.
For a discussion of certain risks affecting this segment, including risks relating to our U.S. Government contracts and
subcontracts, see “Item 1. Business - Principal Customers; Government Contracts,” “Item 1A. Risk Factors” and “Item 3. Legal
Proceedings” of this Report.
Communication Systems
Communication Systems segment revenue of $2,151 million for the two quarters ended January 3, 2020, represented 23
percent of our total revenue. This segment is comprised of four business sectors: Tactical Communications, Broadband
Communications. Integrated Vision Solutions and Public Safety, the principal products and services of which are described below.
This segment consists of a mix of operating businesses acquired in the L3Harris Merger and operating businesses from our pre-
merger Communication Systems segment.
4
Tactical Communications: We provide tactical radio communications, SATCOM terminals and battlefield management
networks for U.S. and international defense customers. Some of our more significant tactical radio products include:
• Our 2-channel handheld radio, the AN/PRC-163, for the U.S. Special Operations Command (“SOCOM”) Special
Operations Forces Tactical Communications (“STC”) program and the U.S. Army 2-Channel Leader Radio program;
• Our multi-channel manpack radio, the AN/PRC-158;
• Our wideband high frequency (“HF”) manpack radios, the AN/PRC-160; and
• Our multiband manpack radio, the AN/PRC-117G, for which we have been providing Mobile User Objective System
(“MUOS”) waveform software upgrades to enable connectivity to DoD’s next-generation MUOS satellite system.
We operate in this market principally on a “commercial” market-driven business model. We believe our business model,
which drives speed and innovation, coupled with the scale provided by our international presence, will continue to make us
competitive in the global market.
Broadband Communications: We develop, design, manufacture and integrate broadband secured mobile networked
communication equipment, including airborne, space and surface data link terminals, ground stations and transportable tactical
SATCOM systems used on manned aircraft, unmanned aerial vehicles (“UAVs”) and naval ships. Significant customers include
U.S. defense and intelligence agencies.
Integrated Visions Solutions: We provide a full suite of helmet and weapon mounted integrated night vision systems for
U.S. and international customers.
Public Safety: We provide radios, systems applications and equipment for critical public safety and professional
communications.
• We design, build, supply and maintain wireless communications systems, including digital trunked, statewide, multi-
agency systems for public safety communications and large, wide-area and multi-state land mobile radio (“LMR”) and
radio frequency (“RF”) systems for some of the largest utility companies in the U.S.
• We offer a full range of single-band LMR terminals, as well as multiband radios that include a handheld radio and a
full-spectrum mobile radio for vehicles.
Additional information regarding the composition of Communication Systems revenue for the two quarters ended January 3,
2020 is as follows:
• 69 percent was derived from sales to U.S. Government customers, including foreign military sales funded through the
U.S. Government, whether directly or through prime contractors;
• 65 percent was derived from contracts under which we are the prime contractor; and
• 29 percent was derived from products and services for which the end consumer is located outside the U.S.
Aviation Systems
Aviation Systems segment revenue of $2,038 million for the two quarters ended January 3, 2020, represented 22 percent of
our total revenue. This segment is comprised of four business sectors: Defense Aviation Products, Commercial Aviation Products,
Commercial and Military Training and Mission Networks, the principal products and services of which are described below. This
segment principally consists of operating businesses acquired in the L3Harris Merger, but includes the mission networks ATM
operating business from Harris’ former Electronic Systems segment.
Defense Aviation Products: We provide precision engagement sensors and systems, small UAVs, antennas and arrays, RF
amplifiers and microwave electronic devices. In addition, this business sector provides combat vehicle engines, transmissions and
GPS receivers for guided projectiles and precision munitions as well as navigation for fire control systems. Significant customers
include U.S. defense and foreign military agencies.
Commercial Aviation Products: We provide airport security and detection solutions, including offerings such as airport
security screening solutions and threat and contraband detection and body scanning systems. In addition, we provide automation
and integration services for airports, automotive manufacturing and other industries. We also provide airborne avionics products,
such as traffic collision avoidance and flight recorders. Significant customers include the U.S. Transportation Security
Administration, domestic and international airports and port operators, the U.S. Customs and Border Control agency and
international equivalents, commercial airplane manufacturers, commercial airlines and automotive manufacturers.
On February 4, 2020, as part of our ongoing process to reshape our business portfolio to focus on technology-differentiated,
high-margin businesses, we entered into a definitive agreement to sell the airport security and automation business within our
Commercial Aviation Products business sector to Leidos, Inc. for $1 billion in cash. See Note 28: Subsequent Events in the Notes
for additional information.
Commercial and Military Training: We provide commercial and military pilot training and flight and maintenance
simulation solutions to commercial airlines, aircraft manufacturers, DoD and foreign military agencies.
Mission Networks: We provide mission-critical infrastructure communications and networking solutions for ATM for the
U.S. Federal Aviation Administration (“FAA”) and international airspace national service providers. We are the prime contractor
5
and system architect for the FAA Telecommunications Infrastructure (“FTI”) program and several major FAA Next Generation
Air Transportation System (“NextGen”) programs to transform and upgrade the National Airspace System (“NAS”), including the
Automatic Depend4ent Surveillance-Broadcast (“ADS-B”) program.
Additional information regarding the composition of Aviation Systems revenue for the two quarters ended January 3, 2020 is
as follows:
• 59 percent was derived from sales to U.S. Government customers, including foreign military sales funded through the
U.S. Government, whether directly or through prime contractors;
• 61 percent was derived from contracts under which we are the prime contractor; and
• 26 percent was derived from products and services for which the end consumer is located outside the U.S.
International Business
Revenue from products and services where the end consumer is located outside the U.S., including foreign military sales
through the U.S. Government, was $2.0 billion (21 percent of our revenue) in the two quarters ended January 3, 2020. Revenue
from products and services where the end consumer is located outside the U.S., including foreign military sales through the U.S.
Government, was $1.5 billion (22 percent of our revenue), $1.4 billion (23 percent of our revenue) and $1.5 billion (25 percent of
our revenue) in fiscal 2019, 2018 and 2017, respectively. Direct export sales are primarily denominated in U.S. Dollars, whereas
sales from foreign subsidiaries are generally denominated in the local currency of the subsidiary. Financial information regarding
our domestic and international operations, including long-lived assets, is contained in Note 25: Business Segments in the Notes
and is incorporated herein by reference.
The majority of our international marketing activities are conducted through subsidiaries that operate in the EMEA (Europe,
Middle East and Africa) and APAC (Asia-Pacific) regions and Canada. We also have established international marketing
organizations and several regional sales offices. For further information regarding our international subsidiaries, see Exhibit 21 of
this Report.
International revenue for the two quarters ended January 3, 2020 came from a large number of countries, and no single
foreign country accounted for more than 5 percent of our total revenue. Some of our exports are paid for by letters of credit, with
the balance carried on an open account. Advance payments, progress payments or other similar payments received prior to or
upon shipment often cover most of the related costs incurred. Significant foreign government contracts generally require us to
provide performance guarantees. In order to remain competitive in international markets, we also sometimes enter into offset
agreements or recourse or vendor financing arrangements to facilitate sales to certain customers.
We utilize indirect sales channels, including dealers, distributors and sales representatives, in the marketing and sale of
some lines of products and equipment, both domestically and internationally. These independent representatives may buy for
resale or, in some cases, solicit orders from commercial or government customers for direct sales by us. Prices to the ultimate
customer in many instances may be recommended or established by the independent representative and may be above or below
our list prices. Our dealers and distributors generally receive a discount from our list prices and may mark up those prices in
setting the final sales prices paid by the customer.
The particular economic, social and political conditions for business conducted outside the U.S. differ from those
encountered by businesses in the U.S. We believe that the overall business risk for our international business as a whole is
somewhat greater than that faced by our domestic businesses as a whole. A description of the types of risks to which we are
subject in our international business is contained in “Item 1A. Risk Factors” of this Report. In our opinion, these risks are
partially mitigated by the diversification of our international business and the protection provided by letters of credit and advance
payments, progress payments and other similar payments.
Competition
We operate in highly competitive markets that are sensitive to technological advances. Some of our competitors in each of
our markets are larger than we are and can maintain higher levels of expenditures for research and development. In each of our
markets, we concentrate on the opportunities that we believe are compatible with our resources, overall technological capabilities
and objectives. Principal competitive factors in these markets are product quality and reliability; technological capabilities,
including reliable, resilient and innovative cyber capabilities; service; past performance; ability to develop and implement
complex, integrated solutions; ability to meet delivery schedules; the effectiveness of third-party sales channels in international
markets; and cost-effectiveness. We frequently “partner” or are involved in subcontracting and teaming relationships with
companies that are, from time to time, competitors on other programs. Our principal competitors include BAE Systems, Boeing,
General Dynamics, Lockheed Martin, Northrop Grumman, Raytheon, Thales and United Technologies.
Principal Customers; Government Contracts
The percentage of our revenue that was derived from sales to U.S. Government customers, including foreign military sales
funded through the U.S. Government, whether directly or through prime contractors, was approximately 73 percent in the two
quarters ended January 3, 2020, and was approximately 77 percent, 75 percent and 74 percent in fiscal 2019, 2018 and 2017,
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respectively. No other customer accounted for more than 5 percent of our revenue in the two quarters ended January 3, 2020.
Additional information regarding customers for each of our segments is provided under “Item 1. Business — Description of
Business by Segment” of this Report. Our U.S. Government sales are predominantly derived from contracts with departments and
agencies of, and prime contractors to, the U.S. Government. Most of the sales in our Space and Airborne Systems and Integrated
Mission Systems segments are made directly or indirectly to the U.S. Government under contracts or subcontracts containing
standard government contract clauses providing for redetermination of profits, if applicable, and for termination for the
convenience of the U.S. Government or for default based on performance.
Our U.S. Government contracts and subcontracts include both cost-reimbursable and fixed-price contracts. Government-
wide Acquisition Contracts (“GWACs”) and multi-vendor indefinite duration-indefinite quantity (“IDIQ”) contracts, which can
include task orders for each contract type, require us to compete both for the initial contract and then for individual task or
delivery orders under such contracts.
Our U.S. Government cost-reimbursable contracts provide for the reimbursement of allowable costs plus payment of a fee
and fall into three basic types: (i) cost-plus fixed-fee contracts, which provide for payment of a fixed fee irrespective of the final
cost of performance; (ii) cost-plus incentive-fee contracts, which provide for payment of a fee that may increase or decrease,
within specified limits, based on actual results compared with contractual targets relating to factors such as cost, performance and
delivery schedule; and (iii) cost-plus award-fee contracts, which provide for payment of an award fee determined at the
customer’s discretion based on our performance against pre-established performance criteria. Under our U.S. Government cost-
reimbursable contracts, we are reimbursed periodically for allowable costs and are paid a portion of the fee based on contract
progress. Some overhead costs have been made partially or wholly unallowable for reimbursement by statute or regulation.
Examples include certain merger and acquisition costs, lobbying costs, charitable contributions, interest expense and certain
litigation defense costs.
Our U.S. Government fixed-price contracts are either firm fixed-price contracts or fixed-price incentive contracts. Under
our U.S. Government firm fixed-price contracts, we agree to perform a specific scope of work or sell a specific product for a fixed
price and, as a result, benefit from cost savings and carry the burden of cost overruns. Under our U.S. Government fixed-price
incentive contracts, we share with the U.S. Government both savings accrued for performance at less than target cost as well as
costs incurred in excess of target cost up to a negotiated ceiling price, which is higher than the target cost, but carry the entire
burden of costs exceeding the negotiated ceiling price. Accordingly, under such incentive contracts, profit may also be adjusted up
or down depending on whether specified performance objectives are met. Under our U.S. Government firm fixed-price and fixed-
price incentive contracts, we generally receive from the U.S. Government either milestone payments totaling 100 percent of the
contract price or monthly progress payments in amounts equaling 80 percent of costs incurred under the contract. The remaining
amounts, including profits or incentive fees, are billed upon delivery and final acceptance of end items and deliverables under the
contract. Our production contracts are mainly fixed-price contracts, and development contracts are generally cost-reimbursable
contracts.
As stated above, U.S. Government contracts are terminable for the convenience of the U.S. Government, as well as for
default based on performance. Companies supplying goods and services to the U.S. Government are dependent on Congressional
appropriations and administrative allotment of funds and may be affected by changes in U.S. Government policies resulting from
various military, political, economic and international developments. Long-term U.S. Government contracts and related orders are
subject to cancellation if appropriations for subsequent performance periods become unavailable. Under contracts terminable for
the convenience of the U.S. Government, a contractor is entitled to receive payments for its allowable costs and, in general, the
proportionate share of fees or earnings for the work done. Contracts that are terminable for default generally provide that the
U.S. Government pays only for the work it has accepted and may require the contractor to pay for the incremental cost of re-
procurement and may hold the contractor liable for damages. In many cases, there is also uncertainty relating to the complexity of
designs, necessity for design improvements and difficulty in forecasting costs and schedules when bidding on developmental and
highly sophisticated technical work. Under many U.S. Government contracts, we are required to maintain facility and personnel
security clearances complying with DoD and other Federal agency requirements.
In addition, the U.S. Government recently has increased its focus on procurement process improvement initiatives and has
implemented certain changes in its procurement practices. These developments may change the way U.S. Government contracts
are solicited, negotiated and managed, which may affect whether and how we pursue opportunities to provide our products and
services to the U.S. Government, including the terms and conditions under which we do so, which may have an adverse impact to
our business, financial condition, results of operations and cash flows. For example, contracts awarded under the DoD’s Other
Transaction Authority for research and prototypes generally require cost-sharing and may not follow, or may follow only in part,
standard U.S. Government contracting practices and terms, such as the Federal Acquisition Regulation (“FAR”) and Cost
Accounting Standards.
For further discussion of risks relating to U.S. Government contracts, see “Item 1A. Risk Factors” and “Item 3. Legal
Proceedings” of this Report.
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Backlog
Company-wide total backlog was $20.6 billion at January 3, 2020, of which $16.2 billion was funded backlog, compared
with $8.3 billion at June 28, 2019, of which $5.8 billion was funded backlog. We acquired $11.7 billion of total backlog in the
L3Harris Merger, of which $10.3 billion was funded backlog. We expect to recognize approximately 60 percent of the revenue
associated with Company-wide total backlog within the next twelve months and the substantial majority of the revenue associated
with Company-wide total backlog within the next three years. However, we can give no assurance of such fulfillment or that our
backlog will become revenue in any particular period, if at all. Backlog is subject to delivery delays and program cancellations,
which are beyond our control.
We define funded backlog as unfilled firm orders for products and services for which funding has been authorized and, in
the case of U.S. Government customers, appropriated. The level of order activity related to U.S. Government programs can be
affected by the timing of U.S. Government funding authorizations and project evaluation cycles. Year-over-year comparisons
could, at times, be impacted by these factors, among others. The determination of the unfunded portion of total backlog involves
substantial estimating, particularly with respect to customer requirements contracts and development and production contracts of
a cost-reimbursable or incentive nature.
Backlog information for each of our business segments is contained in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of this Report and is incorporated herein by reference.
See Note 24: Backlog in the Notes for additional information regarding Company-wide total backlog.
Research and Development
Company-sponsored research and development (“R&D”) costs, which include R&D for commercial products and services
and independent R&D related to government products and services, were approximately $329 million in the two quarters ended
January 3, 2020. R&D costs were approximately $331 million, $311 million and $310 million in fiscal 2019, 2018 and 2017,
respectively. A portion of our independent R&D costs are allocated among contracts and programs in process under
U.S. Government contractual arrangements. Company-sponsored R&D costs not otherwise allocable are charged to expense when
incurred. Company-sponsored research is directed to the development of new products and services and to building technological
capability in various markets.
Customer-sponsored R&D costs are incurred pursuant to contractual arrangements, principally U.S. Government-sponsored
contracts requiring us to provide a product or service meeting certain defined performance or other specifications (such as
designs). This research helps strengthen and broaden our technical capabilities. Customer-sponsored research costs are accounted
for principally by the cost-to-cost percentage-of-completion method and included in our revenue and cost of product sales and
services.
Patents and Other Intellectual Property
We consider our patents and other intellectual property, in the aggregate, to constitute an important asset. We own a large
portfolio of patents, trade secrets, know-how, confidential information, trademarks, copyrights and other intellectual property,
including reliable, resilient and innovative cyber capabilities, and we routinely apply for new patents, trademarks and copyrights.
We also license intellectual property to and from third parties. As of January 3, 2020, we held approximately 2,460 U.S. patents
and 2,070 foreign patents, and had approximately 280 U.S. patent applications pending and 280 foreign patent applications
pending. Unpatented research, development and engineering skills also make an important contribution to our business. Although
our intellectual property rights in the aggregate are important to our business and the operations of our business segments, we do
not consider our business or any business segment to be materially dependent on any single patent, license or other intellectual
property right, or any group of related patents, licenses or other intellectual property rights. We are engaged in a proactive patent
licensing program and have entered into a number of licenses and cross-license agreements, some of which generate royalty
income. Although existing license agreements have generated income in past years and may do so in the future, there can be no
assurances we will enter into additional income-producing license agreements. From time to time, we engage in litigation to
protect our patents and other intellectual property. Any of our patents, trade secrets, trademarks, copyrights and other proprietary
rights could be challenged, invalidated or circumvented, or may not provide competitive advantages. For further discussion of
risks relating to intellectual property, see “Item 1A. Risk Factors” of this Report. With regard to certain patents, the
U.S. Government has an irrevocable, non-exclusive, royalty-free license, pursuant to which the U.S. Government may use or
authorize others to use the inventions covered by such patents. Pursuant to similar arrangements, the U.S. Government may
consent to our use of inventions covered by patents owned by other persons. Numerous trademarks used on or in connection with
our products are also considered to be a valuable asset.
Environmental and Other Regulations
Our facilities and operations are subject to numerous domestic and international laws and regulations designed to protect
the environment, particularly with regard to waste and emissions. The applicable environmental laws and regulations are common
within the industries and markets in which we operate and serve. We believe that we have complied with these requirements and
that such compliance has not had a material adverse effect on our financial condition, results of operations or cash flows. We have
8
installed waste treatment facilities and pollution control equipment to satisfy legal requirements and to achieve our waste
minimization and prevention goals. A portion of our environmental expenditures relates to businesses or operations we no longer
own, but for which we have retained certain environmental liabilities. We did not spend material amounts on environmental-
related capital projects in the two quarters ended January 3, 2020 or fiscal 2019, 2018 or 2017. Based on currently available
information, we do not expect capital expenditures in fiscal 2020 or over the next several years to protect the environment and to
comply with current environmental laws and regulations, as well as to comply with current and pending climate control
legislation, regulation, treaties and accords, to be material or to have a material impact on our competitive position or financial
condition, but we can give no assurance that such expenditures will not exceed current expectations, and such expenditures may
increase in future years. If future treaties, laws and regulations contain more stringent requirements than presently anticipated,
actual expenditures may be higher than our present estimates of those expenditures.
Additional information regarding environmental and regulatory matters is set forth in “Item 3. Legal Proceedings” of this
Report and in Note 1: Significant Accounting Policies and Note 26: Legal Proceedings and Contingencies in the Notes.
Electronic products are subject to governmental environmental regulation in a number of jurisdictions, such as domestic and
international requirements requiring end-of-life management and/or restricting materials in products delivered to customers,
including the European Union’s Directive 2012/19/EU on Waste Electrical and Electronic Equipment and Directive 2011/65/EU
on the Restriction of the use of certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), as amended.
Other jurisdictions have adopted similar legislation. Such requirements typically are not applicable to most equipment produced
by our segments. We believe that we have complied with such rules and regulations, where applicable, with respect to our existing
products sold into such jurisdictions. We intend to comply with such rules and regulations with respect to our future products.
Wireless communications, whether radio, satellite or telecommunications, are also subject to governmental regulation.
Equipment produced in our Communication Systems and Space and Airborne Systems segments, in particular, is subject to
domestic and international requirements to avoid interference among users of radio and television frequencies and to permit
interconnection of telecommunications equipment. We are also required to comply with technical operating and licensing
requirements that pertain to our wireless licenses and operations. We believe that we have complied with such rules and
regulations and licenses with respect to our existing products and services, and we intend to comply with such rules and
regulations and licenses with respect to our future products and services. Governmental reallocation of the frequency spectrum
could impact our business, financial condition and results of operations.
Raw Materials and Supplies
Because of the diversity of our products and services, as well as the wide geographic dispersion of our facilities, we use
numerous sources for the wide array of raw materials, such as electronic components, printed circuit boards, metals and plastics,
needed for our operations and for our products. We are dependent on suppliers and subcontractors for a large number of
components and subsystems and the ability of our suppliers and subcontractors to adhere to customer or regulatory materials
restrictions and to meet performance and quality specifications and delivery schedules. In some instances, we are dependent on
one or a few sources, either because of the specialized nature of a particular item or because of local content preference
requirements pursuant to which we operate on a given project. Although we have been affected by financial and performance
issues of some of our suppliers and subcontractors, we have not been materially adversely affected by the inability to obtain raw
materials or products. On occasion, we have experienced component shortages from vendors as a result of natural disasters, or the
RoHS environmental regulations in the European Union or similar regulations in other jurisdictions. These events or regulations
may cause a spike in demand for certain electronic components, such as lead-free components, resulting in industry-wide supply
chain shortages. As of January 3, 2020, these component shortages have not had a material adverse effect on our business. For
further discussion of risks relating to subcontractors and suppliers, see “Item 1A. Risk Factors” of this Report.
Seasonality
We do not consider any material portion of our business to be seasonal. Various factors can affect the distribution of our
revenue between accounting periods, including the timing of contract awards and the timing and availability of U.S. Government
funding, as well as the timing of product deliveries and customer acceptance.
Employees
We had approximately 50,000 employees at January 3, 2020, approximately 86 percent of which were located in the U.S. A
significant number of our employees possess a U.S. Government security clearance. We also utilize a number of independent
contractors. As of January 3, 2020, approximately 3,000 of our U.S. employees were working under collective bargaining
agreements with labor unions and worker representatives. These collective bargaining agreements will be renegotiated at various
times over the next three years as they expire. We have historically renegotiated these agreements without significant disruption to
operating activities. For certain international subsidiaries, our employees are represented by workers’ councils or statutory labor
unions. In general, we believe that our relations with our employees are good.
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Website Access to L3Harris Reports; Available Information
General. We maintain an Internet website at https://www.l3harris.com. Our annual reports on Form 10-K, this Report,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website as soon as reasonably practicable after
these reports are electronically filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”). We also will
provide the reports in electronic or paper form free of charge upon request to our Secretary at L3Harris Technologies, Inc.,
1025 West NASA Boulevard, Melbourne, Florida 32919. We also make available free of charge on our website our annual report
to shareholders and proxy statement. Our website and the information posted thereon are not incorporated into this Report or any
current or other periodic report that we file with or furnish to the SEC. All reports we file with or furnish to the SEC also are
available free of charge via the SEC’s electronic data gathering and retrieval, or EDGAR, system available through the SEC’s
website at https://www.sec.gov.
Additional information relating to our business, including our business segments, is set forth in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
Corporate Governance Guidelines and Committee Charters. We previously adopted Corporate Governance Guidelines,
which are available on the Corporate Governance section of our website at https://www.l3harris.com/corporate-governance. In
addition, the charters of each of the standing committees of our Board of Directors, namely, the Audit Committee, Compensation
Committee, Finance Committee and Nominating and Governance Committee, are also available on the Corporate Governance
section of our website. A copy of the charters is also available free of charge upon written request to our Secretary at L3Harris
Technologies, Inc., 1025 West NASA Boulevard, Melbourne, Florida 32919.
Certifications. We have filed with the SEC the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002
as exhibits to this Report. In addition, an annual CEO certification was submitted by our Chief Executive Officer to the NYSE in
November 2019 in accordance with the NYSE’s listing standards, which included a certification that he was not aware of any
violation by L3Harris of the NYSE’s corporate governance listing standards.
ITEM 1A.
RISK FACTORS.
We have described many of the trends and other factors that we believe could impact our business and future results in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report. In addition,
our business, financial condition, results of operations and cash flows are subject to, and could be materially adversely affected
by, various risks and uncertainties, including, without limitation, those set forth below, any one of which could cause our actual
results to vary materially from recent results or our anticipated future results.
We depend on U.S. Government customers for a significant portion of our revenue, and the loss of these relationships, 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 and cash flows.
We are highly dependent on sales to U.S. Government customers, primarily defense-related programs with the DoD and a
broad range of programs with the U.S. Intelligence Community and other U.S. Government departments and agencies. The
percentage of our revenue that was derived from sales to U.S. Government customers, including foreign military sales funded
through the U.S. Government, whether directly or through prime contractors, was approximately 73 percent in the two quarters
ended January 3, 2020 and 77 percent, 75 percent and 74 percent in fiscal 2019, 2018 and 2017, respectively. Therefore, any
significant disruption or deterioration of our relationship with the U.S. Government (in particular, the DoD) would significantly
reduce our revenue and have an adverse impact on our business, financial condition, results of operations and cash flows.
Our competitors continuously engage in efforts to expand their business relationships with the U.S. Government and will
continue these efforts in the future, and the U.S. Government may choose to use other contractors. We expect that a majority of
the business that we seek will be awarded through competitive bidding. The U.S. Government has increasingly relied on certain
types of contracts that are subject to multiple competitive bidding processes, including multi-vendor IDIQ, GWAC, General
Services Administration Schedule and other multi-award contracts, which has resulted in greater competition and increased
pricing pressure. We operate in highly competitive markets. Some of our competitors have greater financial resources than we do
and may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some
areas. We may not be able to continue to win competitively awarded contracts or to obtain task orders under multi-award
contracts. Further, the competitive bidding process involves significant cost and managerial time to prepare bids and proposals for
contracts that may not be awarded to us or may be split with competitors, as well as the risk that we may fail to accurately
estimate the resources and costs required to fulfill any contract awarded to us. The current competitive environment has resulted
in an increase of bid protests from unsuccessful bidders, which typically extends the time until work on a contract can begin.
Following any contract award, we may experience significant expense or delay, contract modification or contract rescission as a
result of our competitors protesting or challenging contracts awarded to us in competitive bidding.
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Our U.S. Government programs must compete with programs managed by other government contractors and with other
policy imperatives for consideration for limited resources and for uncertain levels of funding during the budget and appropriations
process. Budget and appropriations decisions made by the U.S. Government are outside of our control and have long-term
consequences for our business. U.S. Government spending priorities and levels remain uncertain and difficult to predict and are
affected by numerous factors, including sequestration (automatic, across-the-board U.S. Government budgetary spending cuts)
and potential alternative funding arrangements. A change in U.S. Government spending priorities or an increase in non-
procurement spending at the expense of our programs, or a reduction in total U.S. Government spending, could have material
adverse consequences on our current or future business. Any inability of the U.S. Government to complete its budget process for
any government fiscal year and consequently having to operate on funding levels equivalent to its prior fiscal year pursuant to a
“continuing resolution” or shut down also could have material adverse consequences on our current or future business. For more
information regarding sequestration, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Business Considerations — Industry-Wide Opportunities, Challenges and Risks” of this Report.
We depend significantly on U.S. Government contracts, which often are only partially funded, subject to immediate
termination, and heavily regulated and audited. The termination or failure to fund, or negative audit findings for, one or more
of these contracts could have an adverse impact on our business, financial condition, results of operations and cash flows.
Over its lifetime, a U.S. Government program may be implemented by the award of many different individual contracts and
subcontracts. The funding of U.S. Government programs is subject to Congressional appropriations. In recent years, U.S.
Government appropriations have been affected by larger U.S. Government budgetary issues and related legislation. Although
multi-year contracts may be authorized and appropriated in connection with major procurements, Congress generally appropriates
funds on a government fiscal year basis. Procurement funds are typically made available for obligation over the course of one to
three years. Consequently, programs often initially receive only partial funding, and additional funds are obligated only as
Congress authorizes further appropriations. We cannot predict the extent to which total funding and/or funding for individual
programs will be included, increased or reduced as part of the annual appropriations process ultimately approved by Congress and
the President or in separate supplemental appropriations or continuing resolutions, as applicable. The termination of funding for a
U.S. Government program would result in a loss of anticipated future revenue attributable to that program, which could have an
adverse impact on our operations. In addition, the termination of a program or the failure to commit additional funds to a program
that already has been started could result in lost revenue and increase our overall costs of doing business.
Generally, U.S. Government contracts are subject to oversight audits by U.S. Government representatives. Such audits
could result in adjustments to our contract costs. Any costs found to be improperly allocated to a specific contract will not be
reimbursed, and such costs already reimbursed must be refunded. We have recorded contract revenue based on costs we expect to
realize upon final audit. However, we do not know the outcome of any future audits and adjustments, and we may be required to
materially reduce our revenue or profits upon completion and final negotiation of audits. Negative audit findings could also result
in termination of a contract, forfeiture of profits, suspension of payments, fines or suspension or debarment from U.S.
Government contracting or subcontracting for a period of time.
In addition, U.S. Government contracts generally contain provisions permitting termination, in whole or in part, without
prior notice at the U.S. Government’s convenience upon payment only for work done and commitments made at the time of
termination. For some contracts, we are a subcontractor and not the prime contractor, and in those arrangements, the U.S.
Government could terminate the prime contractor for convenience without regard for our performance as a subcontractor. We can
give no assurance that one or more of our U.S. Government contracts will not be terminated under those circumstances. Also, we
can give no assurance that we would be able to procure new contracts to offset the revenue or backlog lost as a result of any
termination of our U.S. Government contracts. Because a significant portion of our revenue is dependent on our performance and
payment under our U.S. Government contracts, the loss of one or more large contracts could have a material adverse impact on
our business, financial condition, results of operations and cash flows.
Our U.S. Government business also is subject to specific procurement regulations and a variety of socioeconomic and other
requirements. These requirements, although customary in U.S. Government contracts, increase our performance and compliance
costs. These costs might increase in the future, thereby reducing our margins, which could have an adverse effect on our business,
financial condition, results of operations and cash flows. In addition, the U.S. Government has and may continue to implement
initiatives focused on efficiencies, affordability and cost growth and other changes to its procurement practices. These initiatives
and changes to procurement practices may change the way U.S. Government contracts are solicited, negotiated and managed,
which may affect whether and how we pursue opportunities to provide our products and services to the U.S. Government,
including the terms and conditions under which we do so, which may have an adverse impact on our business, financial condition,
results of operations and cash flows. For example, contracts awarded under the DoD’s Other Transaction Authority for research
and prototypes generally require cost-sharing and may not follow, or may follow only in part, standard U.S. Government
contracting practices and terms, such as the FAR and Cost Accounting Standards.
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Failure to comply with applicable regulations and requirements could lead to fines, penalties, repayments, or compensatory
or treble damages, or suspension or debarment from U.S. Government contracting or subcontracting for a period of time. Among
the causes for debarment are violations of various laws and regulations, including those related to procurement integrity, export
control (including International Traffic in Arms Regulations (“ITAR”)), U.S. Government security, employment practices,
protection of the environment, accuracy of records, proper recording of costs and foreign corruption. The termination of a
U.S. Government contract or relationship as a result of any of these acts would have an adverse impact on our operations and
could have an adverse effect on our standing and eligibility for future U.S. Government contracts.
The U.S. Government’s budget deficit and the national debt, as well as any inability of the U.S. Government to complete its
budget process for any government fiscal year and consequently having to shut down or operate on funding levels equivalent
to its prior fiscal year pursuant to a “continuing resolution,” could have an adverse impact on our business, financial
condition, results of operations and cash flows.
Considerable uncertainty exists regarding how future budget and program decisions will unfold, including the defense
spending priorities of the U.S. Government, what challenges budget reductions will present for the defense industry and whether
annual appropriations bills for all agencies will be enacted for U.S. Government fiscal 2021 and thereafter. The
U.S. Government’s budget deficit and the national debt could have an adverse impact on our business, financial condition, results
of operations and cash flows in a number of ways, including the following:
• The U.S. Government could reduce or delay its spending on, or reprioritize its spending away from, the
government programs in which we participate;
• U.S. Government spending could be impacted by alternate arrangements to sequestration, which increases the
uncertainty as to, and the difficulty in predicting, U.S. Government spending priorities and levels; and
• We may experience declines in revenue, profitability and cash flows as a result of reduced or delayed orders or
payments or other factors caused by economic difficulties of our customers and prospective customers, including
U.S. Federal, state and local governments.
Furthermore, we believe continued budget pressures could have serious negative consequences for the security of the U.S.,
the defense industrial base and the customers, employees, suppliers, investors and communities that rely on companies in the
defense industrial base. Budget and program decisions made in this environment would have long-term implications for L3Harris
and the entire defense industry.
We could be negatively impacted by a security breach, through cyber attack, cyber intrusion, insider threats or otherwise, or
other significant disruption of our IT networks and related systems or of those we operate for certain of our customers.
We face the risk, as does any company, of a security breach, whether through cyber attack, cyber intrusion or insider threat
via the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or with access to systems
inside our organization, threats to the physical security of our facilities and employees or other significant disruption of our IT
networks and related systems or those of our suppliers or subcontractors. We face an added risk of a security breach or other
significant disruption of the IT networks and related systems that we develop, install, operate and maintain for certain of our
customers, which may involve managing and protecting information relating to national security and other sensitive government
functions or personally identifiable or protected health information. The risk of a security breach or disruption, particularly
through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, is persistent and
substantial as the volume, intensity and sophistication of attempted attacks, intrusions and threats from around the world remain
elevated and unlikely to diminish. As an advanced technology-based solutions provider, and particularly as a government
contractor with access to national security or other sensitive government information, we face a heightened risk of a security
breach or disruption from threats to gain unauthorized access to our and our customers’ proprietary or classified information on
our IT networks and related systems and to the IT networks and related systems that we operate and maintain for certain of our
customers. These types of information and IT networks and related systems are critical to the operation of our business and
essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our
customers. We make significant efforts to maintain the security and integrity of these types of information and IT networks and
related systems and have implemented various measures to manage the risk of a security breach or disruption. Our efforts and
measures have not been entirely effective in the case of every cyber security incident, but no incident has had a material negative
impact on us to date. Even the most well protected information, networks, systems and facilities remain potentially vulnerable
because attempted security breaches, particularly cyber attacks and cyber intrusions, or disruptions will occur in the future, and
because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a
target, and in some cases are designed not to be detected and, in fact, may not be detected. In some cases, the resources of foreign
governments may be behind such attacks due to the nature of our business and the industries in which we operate. Accordingly,
we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures. Thus,
it is impossible for us to entirely mitigate this risk, and there can be no assurance that future cyber security incidents will not have
a material negative impact on us. A security breach or other significant disruption involving these types of information and IT
networks and related systems could:
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• Disrupt the proper functioning of these networks and systems and, therefore, our operations and/or those of certain
of our customers;
• Result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary,
confidential, sensitive or otherwise valuable information of ours, our customers or our employees, including trade
secrets, which could be used to compete against us or for disruptive, destructive or otherwise harmful purposes and
outcomes;
• Compromise national security and other sensitive government functions;
• Require significant management attention and resources to remedy the damages that result;
• Result in costs which exceed our insurance coverage and/or indemnification arrangements;
•
Subject us to claims for contract breach, damages, credits, penalties or termination; and
• Damage our reputation with our customers (particularly agencies of the U.S. Government) and the general public.
We must also rely on the safeguards put in place by customers, suppliers, vendors, subcontractors or other third parties to
minimize the impact of cyber threats, other security threats or business disruptions. These third parties may have varying levels of
cybersecurity expertise and safeguards, and their relationships with government contractors, such as L3Harris, may increase the
likelihood that they are targeted by the same cyber threats we face. In the event of a breach affecting these third parties, our
business and financial results could suffer materially. With respect to our commercial arrangements with these third parties, we
have processes designed to require that the third parties and their employees and agents agree to maintain certain standards for the
storage, protection and transfer of confidential, personal and proprietary information. However, we remain at risk of a data breach
due to the intentional or unintentional non-compliance by a third party’s employee or agent, the breakdown of a third party’s data
protection processes, which may not be as sophisticated as ours, or a cyber attack on a third party’s information network and
systems.
Any or all of the foregoing could have a negative impact on our business, financial condition, results of operations and cash
flows.
Our ability to successfully manage ongoing business and organizational changes could impact our business results.
We have recently undergone several significant business and organizational changes, including the L3Harris Merger. In
addition, competition to retain or recruit talent can be heightened during a time when we are experiencing significant changes.
Effectively managing these business and organizational changes is critical to retaining talent, servicing customers and our
business success overall. The failure to effectively manage such changes could adversely impact our business or financial results.
Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-material
type contracts. In particular, our fixed-price contracts could subject us to losses in the event of cost overruns or a significant
increase in inflation.
We generate revenue through various fixed-price, cost-plus and time-and-material contracts. For a general description of our
U.S. Government contracts and subcontracts, including a discussion of revenue generated thereunder and of cost-reimbursable
versus fixed-price contracts, see “Item 1. Business - Principal Customers; Government Contracts” of this Report. For a
description of our revenue recognition policies, see “Item 7. Management’s Discussion and Analysis of Financial Conditions and
Results of Operations - Critical Accounting Policies and Estimates - Revenue Recognition” of this Report.
In the two quarters ended January 3, 2020, approximately 76 percent of our revenue was derived from fixed-price contracts
which allow us to benefit from cost savings, but subject us to the risk of potential cost overruns, particularly for firm fixed-price
contracts because we assume all of the cost burden. If our initial estimates are incorrect, we can lose money on these contracts.
U.S. Government contracts can expose us to potentially large losses because the U.S. Government can hold us responsible for
completing a project or, in certain circumstances, paying the entire cost of its replacement by another provider regardless of the
size or foreseeability of any cost overruns that occur over the life of the contract. Because many of these contracts involve new
technologies and applications and can last for years, unforeseen events, such as technological difficulties, fluctuations in the price
of raw materials, a significant increase in inflation in the U.S. or other countries, problems with our suppliers and cost overruns,
can result in the contractual price becoming less favorable or even unprofitable to us over time. Furthermore, if we do not meet
contract deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to pay penalties or
liquidated damages or suffer major losses if the customer exercises its right to terminate. In addition, some of our contracts have
provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not
realize their full benefits. Our results of operations are dependent on our ability to maximize our earnings from our contracts. Cost
overruns could have an adverse impact on our financial results. The potential impact of such risk on our financial results would
increase if the mix of our contracts and programs shifted toward a greater percentage of fixed-price contracts, particularly firm
fixed-price contracts.
In the two quarters ended January 3, 2020, approximately 24 percent of our revenue was derived from cost-plus and time-
and-material contracts. Substantially all of our cost-plus contracts and time-and-material contracts are with U.S. Government
customers, while sales to foreign government and commercial customers are generally transacted under fixed-price sales
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arrangements and are included in our fixed-price contract sales. For a cost-plus contract, we are paid our allowable incurred costs
plus a profit, which can be fixed or variable depending on the contract’s fee arrangement up to predetermined funding levels
established by our customers. On a time-and-material contract, we are paid on the basis of direct labor hours expended at
specified fixed-price hourly rates (which include wages, overhead, allowable general and administrative expenses and profit) and
materials at cost. Therefore, on cost-plus and time-and-material type contracts, we do not bear the risks of unexpected cost
overruns, provided that we do not incur costs that exceed the predetermined funded amounts.
We use estimates in accounting for many of our programs, and changes in our estimates could adversely affect our future
financial results.
Accounting for our contracts requires judgment relative to assessing risks, including risks associated with customer-directed
delays and reductions in scheduled deliveries, unfavorable resolutions of claims and contractual matters, judgments associated
with estimating contract revenue and costs and assumptions for schedule and technical issues. Due to the size and nature of many
of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. For example,
we must make assumptions regarding: (i) the length of time to complete the contract because costs also include expected increases
in wages and prices for materials; (ii) whether contracts should be accounted for as having one or more performance obligations
based on the goods and services promised to the customer; (iii) incentives or penalties related to performance on contracts in
estimating revenue and profit rates, and recording them when there is sufficient information for us to assess anticipated
performance; and (iv) estimates of award fees in estimating revenue and profit rates based on actual and anticipated awards.
Because of the significance of the judgments and estimation processes involved in accounting for our contracts, materially
different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes
in underlying assumptions, circumstances or estimates may adversely affect our future results of operations and financial
condition. For additional information regarding our critical accounting policies and estimates applicable to our accounting for our
contracts, see “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Critical
Accounting Policies and Estimates” of this Report.
We derive a significant portion of our revenue from international operations and are subject to the risks of doing business
internationally, including fluctuations in currency exchange rates.
We are dependent on sales to customers outside the U.S. The percentage of our total revenue represented by revenue from
products, systems and services where the end consumer is located outside the U.S., including foreign military sales through the
U.S. Government, was 21 percent in the two quarters ended January 3, 2020 and 22 percent, 23 percent and 25 percent in fiscal
2019, 2018 and 2017, respectively. Approximately 40 percent of our international business in the two quarters ended January 3,
2020 was transacted in local currency. Losses resulting from currency rate fluctuations can adversely affect our results. We expect
that international revenue will continue to account for a significant portion of our total revenue. Also, a significant portion of our
international revenue is from, and a significant portion of our business activity is being conducted with or in, less-developed
countries and sometimes countries with unstable governments, or in areas of military conflict or at military installations. Other
risks of doing business internationally include:
• Currency exchange controls, fluctuations of currency and currency revaluations;
• The laws, regulations and policies of foreign governments relating to investments and operations, as well as
•
U.S. laws affecting the activities of U.S. companies abroad, including the Foreign Corrupt Practices Act (“FCPA”);
Import and export licensing requirements and regulations, including ITAR, as well as unforeseen changes in export
controls and other trade regulations;
• Changes in regulatory requirements, including business or operating license requirements, imposition of tariffs or
embargoes;
• Uncertainties and restrictions concerning the availability of funding, credit or guarantees;
• Risk of non-payment or delayed payment by foreign governments;
• Contractual obligations to non-U.S. customers may include specific in-country purchases, investments,
manufacturing agreements or financial or other support arrangements or obligations, known as offset obligations,
that may extend over several years, may require teaming with local companies and may result in significant
penalties if not satisfied;
• The complexity and necessity of using, and disruptions involving our, international dealers, distributors, sales
representatives and consultants;
• The difficulties of managing a geographically dispersed organization and culturally diverse workforces, including
compliance with local laws and practices;
• Difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax
laws;
• Uncertainties as to local laws and enforcement of contract and intellectual property rights and occasional
requirements for onerous contract terms;
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• Rapid changes in government, economic and political policies, political or civil unrest, acts of terrorism or the
•
threat of international boycotts or U.S. anti-boycott legislation; and
Increased risk of an incident resulting in damage or destruction to our facilities or products or resulting in injury or
loss of life to our employees, subcontractors or other third parties.
The level of returns on defined benefit plan assets, changes in interest rates and other factors could affect our financial
condition, results of operations and cash flows in future periods.
A substantial portion of our current and retired employee population is covered by defined benefit pension and other
postretirement defined benefit plans (collectively, “defined benefit plans”). We may experience significant fluctuations in costs
related to defined benefit plans as a result of macro-economic factors, such as interest rates, that are beyond our control. The cost
of our defined benefit plans is incurred over long periods of time and involves various factors and uncertainties during those
periods that can be volatile and unpredictable, including the rates of return on defined benefit plan assets, discount rates used to
calculate liabilities and expenses, mortality of plan participants and trends for future medical costs. We develop our assumptions
using relevant plan experience and expectations in conjunction with market-related data. These assumptions and other actuarial
assumptions may change significantly due to changes in economic, legislative, and/or demographic experience or circumstances.
Our financial condition and results of operations could be materially affected by significant changes in key economic indicators,
financial market volatility, future legislation and other governmental regulatory actions.
We will make contributions to fund our defined benefit plans when considered necessary or advantageous to do so. The
macro-economic factors discussed above, including the rates of return on defined benefit plan assets and the minimum funding
requirements established by government funding or taxing authorities, or established by other agreement, may influence future
funding requirements. A significant decline in the fair value of our plan assets, or other adverse changes to our overall defined
benefit plans, could require us to make significant funding contributions and affect cash flows in future periods.
U.S. Government Cost Accounting Standards (“CAS”) govern the extent to which postretirement costs and plan
contributions are allocable to and recoverable under contracts with the U.S. Government. We expect to continue to seek
reimbursement from the U.S. Government for a portion of our postretirement costs and plan contributions; however, pension plan
cost recoveries under our U.S. Government contracts may occur in different periods from when those pension costs are
recognized for financial statement purposes or when pension funding is made. CAS rules have been revised to partially harmonize
the measurement and period of assignment of pension plan costs allocable to U.S. Government contracts and minimum required
contributions under the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of
2006. However, there is still a lag between the time when we contribute cash to our plans under pension funding rules and when
we recover pension costs under CAS rules. These timing differences could have a material adverse effect on our cash flows.
We may not be successful in obtaining the necessary export licenses to conduct certain operations abroad, and Congress may
prevent proposed sales to certain foreign governments.
We must first obtain export and other licenses and authorizations from various U.S. Government agencies before we are
permitted to sell certain products and technologies outside of the U.S. For example, the U.S. Department of State must notify
Congress at least 15 to 60 days, depending on the size and location of the proposed sale, prior to authorizing certain sales of
defense equipment and services to foreign governments. During that time, Congress may take action to block the proposed sale.
We can give no assurance that we will continue to be successful in obtaining the necessary licenses or authorizations or that
Congress will not prevent or delay certain sales. Our ability to obtain these licenses and authorizations timely or at all is subject to
risks and uncertainties, including changing U.S. Government policies or laws or delays in Congressional action due to
geopolitical and other factors. If we are not successful in obtaining or maintaining the necessary licenses or authorizations in a
timely manner, our sales relating to those approvals may be reversed, prevented or delayed, and any significant impairment of our
ability to sell products or technologies outside of the U.S. could negatively impact our business, financial condition, results of
operations and cash flows.
Disputes with our subcontractors or the inability of our subcontractors to perform, or our key suppliers to timely deliver our
components, parts or services, could cause our products, systems or services to be produced or delivered in an untimely or
unsatisfactory manner.
We engage subcontractors on many of our contracts. We may have disputes with our subcontractors, including regarding the
quality and timeliness of work performed by the subcontractor, customer concerns about the subcontract or subcontractor, our
failure to extend existing task orders or issue new task orders under a subcontract, our hiring of the personnel of a subcontractor
or vice versa or the subcontractor’s failure to comply with applicable law. In addition, there are certain parts, components and
services for many of our products, systems and services that we source from other manufacturers or vendors. Some of our
suppliers, from time to time, experience financial and operational difficulties, which may impact their ability to supply the
materials, components, subsystems and services that we require. Tariffs recently imposed on certain materials and other trade
issues may create or exacerbate existing materials shortages and may result in further supplier business closures. Our supply chain
could also be disrupted by external events, such as natural disasters or other significant disruptions (including extreme weather
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conditions, medical epidemics, acts of terrorism, cyber attacks and labor disputes), governmental actions and legislative or
regulatory changes, including product certification or stewardship requirements, sourcing restrictions, product authenticity and
climate change or greenhouse gas emission standards, or availability constraints from increased demand from customers. In
addition, the ongoing coronavirus outbreak emanating from China at the beginning of 2020 has resulted in increased travel
restrictions and extended shutdown of certain businesses in the region. These or any further political or governmental
developments or health concerns in China or other countries in which we operate could result in social, economic and labor
instability. Any inability to develop alternative sources of supply on a cost-effective and timely basis could materially impair our
ability to manufacture and deliver products, systems and services to our customers. We can give no assurances that we will be free
from disputes with our subcontractors; material supply constraints or problems; or component, subsystems or services problems in
the future. Also, our subcontractors and other suppliers may not be able to acquire or maintain the quality of the materials,
components, subsystems and services they supply, which might result in greater product returns, service problems and warranty
claims and could harm our business, financial condition, results of operations and cash flows. In addition, in connection with our
government contracts, we are required to procure certain materials, components and parts from supply sources approved by the
U.S. Government and we rely on our subcontractors and suppliers to comply with applicable laws, regulations and other
requirements regarding procurement of counterfeit, unauthorized or otherwise non-compliant parts or materials, including parts or
materials they supply to us, and in some circumstances, we rely on their certifications as to their compliance. From time to time,
there are components for which there may be only one supplier, which may be unable to meet our needs. Each of these
subcontractor and supplier risks could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
Our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or business
partners.
We have implemented compliance controls, training, policies and procedures designed to prevent and detect reckless or
criminal acts from being committed by our employees, agents or business partners that would violate the laws of the jurisdictions
in which we operate, including laws governing payments to government officials, such as the FCPA, the protection of export
controlled or classified information, such as ITAR, false claims, procurement integrity, cost accounting and billing, competition,
information security and data privacy and the terms of our contracts. This risk of improper conduct may increase as we continue
to grow and expand our operations. We cannot ensure, however, that our controls, training, policies and procedures will prevent or
detect all such reckless or criminal acts, and we have been adversely impacted by such acts in the past. If not prevented, such
reckless or criminal acts could subject us to civil or criminal investigations, monetary and non-monetary penalties and suspension
and debarment by the U.S. Government and could have a material adverse effect on our ability to conduct business, our results of
operations and our reputation. In addition, misconduct involving data security lapses resulting in the compromise of personal
information or the improper use of our customer’s sensitive or classified information could result in remediation costs, regulatory
sanctions against us and serious harm to our reputation and could adversely impact our ability to continue to contract with the
U.S. Government.
Our future success will depend on our ability to develop new products, systems, services and technologies that achieve market
acceptance in our current and future markets.
Our businesses are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our
performance depends on a number of factors, including our ability to:
Identify market needs and growth opportunities;
Identify emerging technological trends in our current and target markets;
Identify additional uses for our existing technology to address customer needs;
•
•
•
• Develop and maintain competitive products, systems, services and technologies;
• Enhance our offerings by adding innovative hardware, software or other features that differentiate our products,
systems, services and technologies from those of our competitors;
• Develop, manufacture and bring to market cost-effective offerings quickly;
• Enhance product designs for export and releasability to international markets; and
• Effectively structure our businesses to reflect the competitive environment, including through the use of joint
ventures, collaborative agreements and other forms of alliances.
We believe that, in order to remain competitive in the future, we will need to continue to design, develop, manufacture,
assemble, test, market and support new products, systems, services and technologies, which will require the investment of
significant financial resources. In the past, we have allocated substantial funds for such investments through customer funded and
internal research and development, acquisitions or other teaming arrangements. This practice will continue to be required in the
future, but we may not be able to successfully identify new opportunities and may not have the necessary financial resources to
develop new products, systems, services and technologies in a timely or cost-effective manner. Furthermore, the need to make
these expenditures could divert our attention and resources from other projects, and we cannot be sure that these expenditures
ultimately will lead to the timely development of new products, systems, services or technologies. Due to the design complexity
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of some of our products, systems, services and technologies, we may experience delays in completing development and
introducing new products, systems, services or technologies in the future. Any delays could result in increased costs of
development or redirect resources from other projects. In addition, we cannot provide assurances that the markets for our
products, systems, services or technologies will develop as we currently anticipate, that we will be successful in newly identified
markets as we currently anticipate, or that acquisitions, joint ventures or other teaming arrangements we may enter into to pursue
developing new products, systems, services or technologies will be successful. The failure of our products, systems, services or
technologies to gain market acceptance could significantly reduce our revenue and harm our business. Furthermore, we cannot be
sure that our competitors will not develop competing products, systems, services or technologies that gain market acceptance in
advance of our products, systems, services or technologies, or that our competitors will not develop new products, systems,
services or technologies that cause our existing products, systems, services or technologies to become non-competitive or
obsolete, which could adversely affect our results of operations. The future direction of the domestic and global economies,
including its impact on customer demand, also will have a significant impact on our overall performance.
We participate in markets that are often subject to uncertain economic conditions, which makes it difficult to estimate growth
in our markets and, as a result, future income and expenditures.
We participate in U.S. and international markets that are subject to uncertain economic conditions. In particular, U.S.
Government spending priorities and levels remain uncertain and difficult to predict and are affected by numerous factors,
including sequestration and potential alternative funding arrangements. In addition, certain of our non-U.S. customers, including
in the Middle East and other oil or natural gas-producing countries, could be adversely affected by weakness or volatility in oil or
natural gas prices, or negative expectations about future prices or volatility, which could adversely affect demand for tactical
communications, electronic systems or other products, systems, services or technologies. As a result, it is difficult to estimate the
level of growth in the markets in which we participate. Because all components of our budgeting and forecasting are dependent on
estimates of growth in the markets we serve, the uncertainty renders estimates of or guidance relating to future revenue, income
and expenditures even more difficult. As a result, we may make significant investments and expenditures but never realize the
anticipated benefits.
We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in which we
operate, our ability to insure against risks, our operations or our profitability.
Ongoing instability and current conflicts in global markets, including in the Middle East and Asia, and the potential for
other conflicts and future terrorist activities and other recent geo-political events throughout the world, including new or increased
tariffs and potential trade wars and the withdrawal of the United Kingdom from the European Union on January 31, 2020
(commonly referred to as “Brexit”), have created and may continue to create economic and political uncertainties and impacts that
could have a material adverse effect on our business, operations and profitability. These matters cause uncertainty in the world’s
financial and insurance markets and may significantly increase the political, economic and social instability in the geographic
areas in which we operate. If credit in financial markets outside of the U.S. tightened, it could adversely affect the ability of our
customers and suppliers to obtain financing and could result in a decrease in or cancellation of orders for our products, systems
and services or impact the ability of our customers to make payments. These matters may cause us to incur increased costs or
experience difficulty with future borrowings under our commercial paper program or credit facilities or in the debt markets, or
otherwise with financing our operating, investing (including any future acquisitions) or financing activities. These matters also
may cause our insurance coverages and performance bonds to increase in cost, or in some cases, to be unavailable altogether.
Although the transition period subsequent to Brexit maintains all existing trade agreements, the effects of Brexit will
depend on the agreements, if any, the United Kingdom makes to retain access to European markets either during the transition
period or more permanently. An exit from the European Union without an agreement in place could result in more significant
disruptions to our supply chain, the imposition of increased tariffs and currency devaluation in the United Kingdom and have an
adverse impact on our consolidated revenue, earnings and cash flow. For the two quarters ended January 3, 2020, L3Harris
generated 2 percent of its net revenues in the United Kingdom.
Strategic transactions, including mergers, acquisitions and divestitures, involve significant risks and uncertainties that could
adversely affect our business, financial condition, results of operations and cash flows.
Strategic mergers, acquisitions and divestitures we have made in the past and may make in the future present significant
risks and uncertainties that could adversely affect our business, financial condition, results of operations and cash flows, which
include:
• Difficulty in identifying and evaluating potential mergers and acquisitions, including the risk that our due diligence
does not identify or fully assess valuation issues, potential liabilities or other merger or acquisition risks;
• Difficulty and expense in integrating newly merged or acquired businesses and operations, including combining
product and service offerings, and in entering into new markets in which we are not experienced, in an efficient
and cost-effective manner while maintaining adequate standards, controls and procedures, and the risk that we
encounter significant unanticipated costs or other problems associated with integration;
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• Difficulty and expense in consolidating and rationalizing IT infrastructure, which may include multiple legacy
systems from various mergers and acquisitions and integrating software code;
• Challenges in achieving strategic objectives, cost savings and other benefits expected from mergers and
acquisitions;
• Risk that our markets do not evolve as anticipated and that the strategic mergers, acquisitions and divestitures do
not prove to be those needed to be successful in those markets;
• Risk that we assume or retain, or that companies we have merged with or acquired have assumed or retained or
otherwise become subject to, significant liabilities that exceed the limitations of any applicable indemnification
provisions or the financial resources of any indemnifying parties;
• Risk that indemnification related to businesses divested or spun off that we may be required to provide or
otherwise bear may be significant and could negatively impact our business;
• Risk that mergers, acquisitions, divestitures, spin offs and other strategic transactions, including the L3Harris
Merger, fail to qualify for the intended tax treatment for U.S. Federal income tax purposes, such as a tax-free
reorganization in the case of the L3Harris Merger;
• Risk that we are not able to complete strategic divestitures on satisfactory terms and conditions, including non-
competition arrangements applicable to certain of our business lines, or within expected timeframes;
Potential loss of key employees or customers of the businesses merged with or acquired or to be divested; and
•
• Risk of diverting the attention of senior management from our existing operations.
The outcome of litigation or arbitration in which we are involved from time to time is unpredictable, and an adverse decision
in any such matter could have a material adverse effect on our financial condition, results of operations and cash flows.
The size, nature and complexity of our business make us susceptible to investigations, claims, disputes, enforcement
actions, litigation and other legal proceedings, particularly those involving governments. From time to time, we are defendants in
a number of litigation matters and are involved in a number of arbitration matters. These actions may divert financial and
management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these
or new matters will be favorable to us. Although we maintain insurance policies, these policies may not be adequate to protect us
from all material judgments and expenses related to current or future claims and may not cover the conduct that is the subject of
the litigation or arbitration. Desired levels of insurance may not be available in the future at economical prices or at all. In
addition, we believe that while we have valid defenses with respect to legal matters pending against us, the results of litigation or
arbitration can be difficult to predict, including litigation involving jury trials. Accordingly, our current judgment as to the
likelihood of our loss (or our current estimate as to the potential range of loss, if applicable) with respect to any particular
litigation or arbitration matter may be wrong. A significant judgment or arbitration award against us arising out of any of our
current or future litigation or arbitration matters could have a material adverse effect on our business, financial condition, results
of operations, cash flows and future prospects.
We are subject to government investigations, which could have a material adverse effect on our business, financial condition,
results of operations, cash flows and future prospects.
U.S. Government contractors are subject to extensive legal and regulatory requirements, including ITAR and FCPA, and
from time to time agencies of the U.S. Government investigate whether we have been and are operating in accordance with these
requirements. We may cooperate with the U.S. Government in those investigations. Under U.S. Government regulations, an
indictment of L3Harris by a federal grand jury, or an administrative finding against us as to our present responsibility to be a U.S.
Government contractor or subcontractor, could result in us being suspended for a period of time from eligibility for awards of new
government contracts or task orders or in a loss of export privileges, which could have a material adverse effect on our results of
operations and cash flows. A conviction, or an administrative finding against us that satisfies the requisite level of seriousness,
could result in debarment from contracting with the U.S. Government for a specific term, which could have a material adverse
effect on our results of operations and cash flows.
Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon their
intellectual property rights, and third parties may infringe upon our intellectual property rights.
Many of the markets we serve are characterized by vigorous protection and pursuit of intellectual property rights, which
often has resulted in protracted and expensive litigation. Our efforts to gain awards of contracts and ensure a competitive position
in the market depends in part on our ability to ensure that our intellectual property is protected, that our intellectual property rights
are not diluted or subject to misuse, and that we are able to license certain third party intellectual property on reasonable terms.
Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon their
intellectual property rights, and we may be found to be infringing or to have infringed directly or indirectly upon those intellectual
property rights. Claims of intellectual property infringement might also require us to enter into costly royalty or license
agreements. There can be no assurance that any of our patents and other intellectual property will not be challenged, invalidated,
misappropriated or circumvented by third parties. Moreover, we may not be able to obtain royalty or license agreements on terms
acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of
18
our products, services and solutions. Our success depends in large part on our proprietary technology. We rely on a combination
of patents, copyrights, trademarks, trade secrets, know-how, confidentiality provisions and licensing arrangements to establish and
protect our intellectual property rights. In addition, the laws concerning intellectual property vary among nations and the
protection provided to our intellectual property by the laws and courts of foreign nations may differ from those of the U.S. If we
fail to successfully protect and enforce these rights, our competitive position could suffer. Our pending patent and trademark
registration applications may not be allowed, or competitors may challenge the validity or scope of our patents or trademark
registrations. In addition, our patents may not provide us a significant competitive advantage. We may be required to spend
significant resources to monitor and enforce our intellectual property rights. Litigation to determine the scope of intellectual
property rights, even if ultimately successful, could be costly and could divert management’s attention away from other aspects of
our business.We may not be able to detect infringement, and our competitive position may be harmed before we do so. In
addition, competitors may design around our technology or develop competing technologies.
Our commercial aviation products, systems and services business is affected by global demand and economic factors that
could negatively impact our financial results.
The operating results of our commercial aviation products, systems and services business may be adversely affected by
downturns in the global demand for air travel which impacts new aircraft production and orders, and global flying hours, which
impacts air transport, regional and business aircraft utilization rates and pilot training needs. The aviation industry is highly
cyclical, and the level of demand for air travel is correlated to the strength of the U.S. and international economies and is
impacted by long-term trends in airline passenger and cargo traffic. The results of our commercial aviation business also depend
on other factors, including general economic growth, political stability in both developed and emerging markets, pricing
pressures, trends in capital goods markets and changes in original equipment manufacturer production rates.
We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or
indemnity.
We are exposed to liabilities that are unique to the products, systems and services we provide. A significant portion of our
business relates to designing, developing and manufacturing advanced defense, technology and communications systems and
products. New technologies associated with these systems and products may be untested or unproven. Components of certain
defense systems and products we develop are inherently dangerous. Failures of satellites, missile systems, air traffic control
systems, electronic warfare systems, space superiority systems, C4ISR systems, homeland security applications and aircraft have
the potential to cause loss of life and extensive property damage. Other examples of unforeseen problems that could result, either
directly or indirectly, in the loss of life or property or otherwise negatively affect revenue and profitability include loss on launch
of spacecraft, premature failure of products that cannot be accessed for repair or replacement, problems with quality and
workmanship, country of origin, delivery of subcontractor components or services and unplanned degradation of product
performance. In addition, problems and delays in development or delivery as a result of issues with respect to design, technology,
licensing and patent rights, labor, learning curve assumptions or materials and components could prevent us from achieving
contractual requirements. In many circumstances, we may receive indemnification from the U.S. Government. We generally do
not receive indemnification from foreign governments. Although we maintain insurance for certain risks, the amount of our
insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs from an
accident or incident. It also is not possible for us to obtain insurance to protect against all operational risks and liabilities.
Substantial claims resulting from an incident in excess of U.S. Government indemnity and our insurance coverage would harm
our financial condition, results of operations and cash flows. Other factors that may affect revenue and profits include loss of
follow-on work, and, in the case of certain contracts, liquidated damages, penalties and repayment to the customer of contract cost
and fee payments we previously received. Moreover, any accident or incident for which we are liable, even if fully insured, could
negatively affect our standing with our customers and the public, thereby making it more difficult for us to compete effectively,
and could significantly impact the cost and availability of adequate insurance in the future.
Changes in our effective tax rate may have an adverse effect on our results of operations.
Our future effective tax rate may be adversely affected by a number of factors including:
• The jurisdictions in which profits are determined to be earned and taxed;
• Adjustments to estimated taxes upon finalization of various tax returns;
•
Increases in expenses not fully deductible for tax purposes, including write-offs of acquired in-process R&D and
impairment of goodwill or other long-term assets in connection with mergers or acquisitions;
• Changes in available tax credits;
• Changes in share-based compensation expense;
• Changes in the valuation of our deferred tax assets and liabilities;
• Changes in domestic or international tax laws or the interpretation of such tax laws; and
• The resolution of issues arising from tax audits with various tax authorities.
Any significant increase in our future effective tax rates could adversely impact our results of operations for future periods.
19
Our level of indebtedness and our ability to make payments on or service our indebtedness and our unfunded defined benefit
plans liability may adversely affect our financial and operating activities or our ability to incur additional debt.
At January 3, 2020, L3Harris had $6.8 billion in aggregate principal amount of outstanding debt and approximately $1.8
billion of unfunded defined benefit plans liability. In the future we may increase our borrowings; however, our ability to do so will
be subject to limitations imposed on us by our debt agreements. Our ability to make payments on and to refinance our
indebtedness as well as any future debt that we may incur, and our ability to make contributions to our unfunded defined benefit
plans liability, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to
generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our
control. If we are not able to repay or refinance our debt as it becomes due or make contributions to our unfunded defined benefit
plans liability, we may be forced to sell assets or take other disadvantageous actions, including reducing financing in the future for
working capital, capital expenditures and general corporate purposes; reducing our cash dividend rate and/or share repurchases; or
dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In
addition, our ability to withstand competitive pressures and to react to changes in the defense technology industry could be
impaired. The lenders who hold such debt could also accelerate amounts due, which could potentially trigger a default or
acceleration of any of our other debt.
A downgrade in our credit ratings could materially adversely affect our business.
The credit ratings assigned to our debt securities could change based on, among other things, our results of operations,
financial condition, mergers, acquisitions or dispositions. These ratings are subject to ongoing evaluation by credit rating
agencies, and there can be no assurance that any rating will not be changed or withdrawn by a rating agency in the future.
Moreover, these credit ratings are not recommendations to buy, sell or hold any of our debt securities. Actual or anticipated
changes or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade or
have been assigned a negative outlook, would likely increase our borrowing costs and affect our ability to incur new indebtedness
or refinance our existing indebtedness, which in turn could have a material adverse effect on our financial condition, results of
operations and cash flows and the market value of our common stock and outstanding debt securities.
Unforeseen environmental issues could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
Our operations are subject to various U.S. Federal, state and local, as well as certain foreign, environmental laws and
regulations within the countries in which we operate relating to the discharge, storage, treatment, handling, disposal and
remediation of certain materials, substances and wastes used in our operations. In addition, we could be affected by future
environmental laws or regulations, including, for example, new restrictions on materials used in our operations, or future
regulations imposed or claims asserted in response to concerns over climate change, other aspects of the environment or natural
resources. Compliance with current and future environmental laws and regulations may require significant operating and capital
costs. Environmental laws and regulations may authorize substantial fines and criminal sanctions as well as facility shutdowns to
address violations, and may require the installation of costly pollution control equipment or operational changes to limit emissions
or discharges. We also incur, and expect to continue to incur, costs to comply with current environmental laws and regulations
related to remediation of conditions in the environment. In addition, if violations of environmental laws result in us, or in one or
more of our operations, being identified as an excluded party in the U.S. Government’s System for Award Management, then we
or one or more of our operations would become ineligible to receive certain contracts, subcontracts and other benefits from the
Federal government or to perform work under a government contract or subcontract. Generally, such ineligibility would continue
until the basis for the listing has been appropriately addressed. Developments such as the adoption of new environmental laws and
regulations, stricter enforcement of existing laws and regulations, violations by us of such laws and regulations, discovery of
previously unknown or more extensive contamination, litigation involving environmental impacts, our inability to recover costs
associated with any such developments under previously priced contracts, or financial insolvency of other responsible parties
could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We have significant operations in locations that could be materially and adversely impacted in the event of a natural disaster
or other significant disruption.
Our corporate headquarters and significant business operations are located in Florida, which is subject to the risk of major
hurricanes. Our worldwide operations and operations of our suppliers and customers could be subject to natural disasters or other
significant disruptions, including hurricanes, typhoons, tsunamis, floods, earthquakes, fires, water shortages, other extreme
weather conditions, medical epidemics, pandemics, acts of terrorism, power shortages and blackouts, telecommunications
failures, cyber attacks and other natural and manmade disasters or disruptions. In the event of such a natural disaster or other
disruption, we could experience disruptions or interruptions to our operations or the operations of our suppliers, subcontractors,
distributors, resellers or customers, including inability of employees to work; destruction of facilities; and/or loss of life, all of
which could materially increase our costs and expenses, delay or decrease orders and revenue from our customers and have a
material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the ongoing
outbreak of the novel COVID-19 strain of coronavirus in early 2020, which emanated from China and has spread to other
20
countries globally, has resulted in travel restrictions and business shutdowns in certain regions. These or any further political,
governmental or other actions to contain the spread or treat the impact of coronavirus, and resulting developments, are highly
uncertain and unpredictable and could result in social, economic and labor instability. These uncertainties could have a material
adverse effect on the continuity of our business and our financial condition, results of operations and cash flows.
Changes in future business or other market conditions could cause business investments and/or recorded goodwill or other
long-term assets to become impaired, resulting in substantial losses and write-downs that would adversely affect our results of
operations.
From time to time, we acquire a minority or majority interest in a business. These investments are made upon careful
analysis and due diligence procedures designed to achieve a desired return or strategic objective. These procedures often involve
certain assumptions and judgment in determining acquisition price. After acquisition, such assumptions and judgment may prove
to have been inaccurate and unforeseen issues could arise, which could adversely affect the anticipated returns or which are
otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results
may vary significantly from initial estimates. As of January 3, 2020, we had goodwill of $20.0 billion recorded in our
Consolidated Balance Sheet, $14.6 billion of which was recorded in connection with the L3Harris Merger during the two quarters
ended January 3, 2020. We evaluate the recoverability of recorded goodwill annually, as well as when we change reporting units
and when events or circumstances indicate there may be an impairment. We test goodwill for impairment at a level within the
Company referred to as the reporting unit, which is our business segment level or one level below the business segment. The
impairment test is based on several factors requiring judgment. Principally, a decrease in expected reporting unit cash flows or
changes in market conditions may indicate potential impairment of recorded goodwill. In addition, following the L3Harris
Merger, our reporting units are generally one level below the segment level and two of our segments are comprised of several
reporting units. Allocation of goodwill to several reporting units could make it more likely that we will have an impairment
charge in the future. Because of the significance of our goodwill and other intangible assets, any future impairment of these assets
could have a material adverse effect on our results of operations and financial condition. For additional information on accounting
policies we have in place for impairment of goodwill, see our discussion under “Critical Accounting Policies and Estimates” in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report and Note 1:
Significant Accounting Policies and Note 10: Goodwill in the Notes.
We must attract and retain key employees, and any failure to do so could seriously harm us.
Our future success depends to a significant degree upon the continued contributions of our management and our ability to
attract and retain highly qualified management and technical personnel, including employees who have U.S. Government security
clearances, particularly clearances of top-secret and above. To the extent that the demand for qualified personnel exceeds supply,
as has been the case from time to time in recent years, we could experience higher labor, recruiting or training costs in order to
attract and retain such employees, or could experience difficulties in performing under our contracts if our needs for such
employees were unmet. Failure to attract and retain such personnel would damage our future prospects.
Some of our workforce is represented by labor unions, so our business could be harmed in the event of a prolonged work
stoppage.
At January 3, 2020, approximately 3,000 of L3Harris’ U.S. employees were unionized, which represents approximately 7
percent of L3Harris’ employee-base. If we encounter difficulties with renegotiations or renewals of collective bargaining
arrangements or are unsuccessful in those efforts, we could incur additional costs and experience work stoppages. Union actions
at suppliers can also affect us. We cannot predict how stable our union relationships will be or whether we will be able to
successfully negotiate successor collective bargaining agreements without impacting our financial condition. In addition, the
presence of unions may limit our flexibility in dealing with our workforce. Work stoppages could negatively impact our ability to
manufacture products or provide services on a timely basis, which could negatively impact our business, financial condition,
results of operations and cash flows.
Risks Relating to Integration Following the L3Harris Merger
We may fail to realize all of the anticipated benefits of the L3Harris Merger or those benefits may take longer to realize than
expected. We may also encounter significant difficulties in integrating the businesses.
Our ability to realize the anticipated benefits of the L3Harris Merger will depend, to a large extent, on our ability to
integrate the businesses. The combination of independent businesses is a complex, costly and time-consuming process. As a
result, we will be required to devote significant management attention and resources to integration activities. The integration
process may disrupt the businesses and, if implemented ineffectively, could restrict the realization of the full benefits anticipated.
The failure to meet the challenges involved in integrating the businesses and to realize the anticipated benefits of the L3Harris
Merger could cause an interruption of or a loss of momentum in our activities and could adversely affect our results of operations.
In addition, the overall integration may result in material unanticipated problems, expenses, liabilities, competitive responses, loss
21
of customer relationships, and diversion of management’s attention. The difficulties of combining the operations of the companies
include, among others:
•
•
the diversion of management’s attention to integration matters;
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the
combination;
difficulties in the integration of operations and systems;
conforming standards, controls, procedures and accounting and other policies, business cultures and compensation
structures between the companies;
difficulties in the assimilation of employees;
difficulties in managing the expanded operations of a significantly larger and more complex company;
difficulties in establishing effective uniform controls, systems, procedures and policies for the combined company;
challenges in keeping existing customers and obtaining new customers;
challenges in attracting and retaining key personnel; and
coordinating a geographically dispersed organization.
•
•
•
•
•
•
•
•
Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the
amount of expected revenues and diversion of management’s time and energy, which could materially impact our business,
financial condition and results of operations. In addition, even if our operations are integrated successfully, the full benefits of the
L3Harris Merger may not be realized, including the synergies, cost savings or sales or growth opportunities that are expected.
These benefits may not be achieved within the anticipated time frame or at all. Further, additional unanticipated costs may be
incurred in the integration. All of these factors could cause dilution to our earnings per share, decrease or delay the expected
benefits of the L3Harris Merger and negatively impact the price of our stock. As a result, we can give no assurances that the
L3Harris Merger will result in the realization of the full benefits anticipated.
Certain business uncertainties arising from the L3Harris Merger could adversely affect our businesses and operations.
Uncertainties about the effect of the L3Harris Merger on employees, customers, suppliers, business partners and other
persons with whom we have a business relationship may have an adverse effect on us. During times of significant change and
uncertainty such as the period following the L3Harris Merger, customers, suppliers, business partners and other persons with
whom we have a business relationship may delay or defer business decisions, decide to terminate, modify or renegotiate their
relationships with us, or take other actions as a result of the L3Harris Merger that could negatively affect our revenues, earnings
and cash flows, as well as the market price of our securities. Our ability to raise additional capital through the debt markets, and
the associated borrowing costs, may also be negatively impacted. Any such effects could limit our ability to achieve the
anticipated benefits of the L3Harris Merger. These uncertainties about the effect of the L3Harris Merger may also impair our
ability to attract, retain and motivate key personnel. Employee retention may be challenging, as certain employees may
experience uncertainty about their future roles or may be dissatisfied with their new roles. If key employees depart, our business
could be materially harmed. If key employees join a competitor or form a new competitor, existing and potential clients could
choose to use the products or services of that competitor instead of our products or services.
We have incurred and will incur direct and indirect costs as a result of the L3Harris Merger.
We have incurred substantial expenses in connection with completing the L3Harris Merger and coordinating and integrating
the businesses, operations, policies and procedures of the combined companies and expect to continue to incur such expenses.
While we have assumed that a certain level of transaction and coordination expenses will be incurred, there are a number of
factors beyond our control that could affect the total amount or the timing of these transaction and coordination expenses. Many
of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses may exceed the costs
historically borne by us. These costs could adversely affect our financial condition and results of operation.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2.
PROPERTIES.
Our principal executive offices are located at owned facilities in Melbourne, Florida. As of January 3, 2020, we operated
approximately 400 locations in the U.S., Canada, Europe, Australia, Asia, the Middle East and South America, consisting of
approximately 27 million square feet of manufacturing, administrative, R&D, warehousing, engineering and office space, of
which we owned approximately 12 million square feet and leased approximately 15 million square feet. There are no material
encumbrances on any of our owned facilities. As of January 3, 2020, we had major operations at the following locations:
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Integrated Mission Systems — Greenville, Rockwall and Waco, Texas; Burlington and Mirabel, Canada; Camden, New
Jersey; Mason, Ohio; Sylmar, California; Tulsa, Oklahoma; Pittsburgh and Philadelphia, Pennsylvania; and Salt Lake City, Utah.
Space and Airborne Systems — Palm Bay, Melbourne and Malabar, Florida; Rochester and Amityville, New York;
Clifton, New Jersey; Colorado Springs, Colorado; Van Nuys and San Diego, California; Fort Wayne, Indiana; Wilmington,
Massachusetts; Alpharetta, Georgia; and Tewkesbury, United Kingdom.
Communication Systems — Salt Lake City, Utah; Rochester, New York; Londonderry, New Hampshire; Lynchburg,
Virginia; Tempe, Arizona; Farnborough, United Kingdom; Melbourne, Florida; San Diego, California; and Ann Arbor, Michigan.
Aviation Systems — Melbourne, Florida; Muskegon and Grand Rapids, Michigan; Torrance, Menlo Park and Anaheim,
California; Arlington and Plano, Texas; Cincinnati, Ohio; Hauppauge, New York; Herndon, Virginia; Tewksbury, Massachusetts;
Crawley and Luton, United Kingdom; and Phoenix, Arizona.
Corporate — Melbourne, Florida.
The following is a summary of the approximate floor space of our offices and facilities in productive use, by segment, at
January 3, 2020:
Segment
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Corporate
Total
Approximate
Total Sq. Ft.
Owned
Approximate
Total Sq. Ft.
Leased
(In millions)
Approximate
Total
Sq. Ft.
2.2
5.0
1.6
2.4
0.4
11.6
6.7
2.4
1.6
4.0
0.4
15.1
8.9
7.4
3.2
6.4
0.8
26.7
In our opinion, our facilities, whether owned or leased, are suitable and adequate for their intended purposes and have
capacities adequate for current and projected needs. We frequently review our anticipated requirements for facilities and will,
from time to time, acquire additional facilities, expand existing facilities and dispose of existing facilities or parts thereof, as
management deems necessary. For more information about our lease obligations, see Note 19: Lease Commitments in the Notes.
Our facilities and other properties are generally maintained in good operating condition.
ITEM 3.
LEGAL PROCEEDINGS.
General. From time to time, as a normal incident of the nature and kind of businesses in which we are or were engaged,
various claims or charges are asserted and litigation or arbitration is commenced by or against us arising from or related to
matters, including, but not limited to: product liability; personal injury; patents, trademarks, trade secrets or other intellectual
property; labor and employee disputes; commercial or contractual disputes; strategic acquisitions or divestitures; the prior sale or
use of former products allegedly containing asbestos or other restricted materials; breach of warranty; or environmental matters.
Claimed amounts against us may be substantial, but may not bear any reasonable relationship to the merits of the claim or the
extent of any real risk of court or arbitral awards. We record accruals for losses related to those matters against us that we consider
to be probable and that can be reasonably estimated. Gain contingencies, if any, are recognized when they are realized and legal
costs generally are expensed when incurred. At January 3, 2020, our accrual for the potential resolution of lawsuits, claims or
proceedings that we consider probable of being decided unfavorably to us was not material. Although it is not feasible to predict
the outcome of these matters with certainty, it is reasonably possible that some lawsuits, claims or proceedings may be disposed
of or decided unfavorably to us and in excess of the amounts currently accrued. Based on available information, in the opinion of
management, settlements, arbitration awards and final judgments, if any, which are considered probable of being rendered against
us in litigation or arbitration in existence at January 3, 2020 are reserved against or would not have a material adverse effect on
our financial condition, results of operations or cash flows.
Tax Audits. Our tax filings are subject to audit by taxing authorities in jurisdictions where we conduct or conducted
business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or
ultimately through legal proceedings. We believe we have adequately accrued for any ultimate amounts that are likely to result
from these audits; however, final assessments, if any, could be different from the amounts recorded in our Consolidated Financial
Statements. See Note 23: Income Taxes in the Notes for additional information regarding audits and examinations by taxing
authorities of our tax filings.
23
U.S. Government Business. We are engaged in supplying goods and services to various departments and agencies of the
U.S. Government. We are therefore dependent on Congressional appropriations and administrative allotment of funds and may be
affected by changes in U.S. Government policies. U.S. Government development and production contracts typically involve long
lead times for design and development, are subject to significant changes in contract scheduling and may be unilaterally modified
or canceled by the U.S. Government. Often these contracts call for successful design and production of complex and
technologically advanced products or systems. We may participate in supplying goods and services to the U.S. Government as
either a prime contractor or as a subcontractor to a prime contractor. Disputes may arise between the prime contractor and the
U.S. Government or between the prime contractor and its subcontractors and may result in litigation or arbitration between the
contracting parties.
Generally, U.S. Government contracts are subject to procurement laws and regulations, including the FAR, which outline
uniform policies and procedures for acquiring goods and services by the U.S. Government, and specific agency acquisition
regulations that implement or supplement the FAR, such as the Defense Federal Acquisition Regulation Supplement. As a
U.S. Government contractor, our contract costs are audited and reviewed on a continuing basis by the Defense Contract Audit
Agency (“DCAA”). The DCAA also reviews the adequacy of, and a U.S. Government contractor’s compliance with, the
contractor’s business systems and policies, including the contractor’s property, estimating, compensation and management
information systems. In addition to these routine audits, from time to time, we may, either individually or in conjunction with
other U.S. Government contractors, be the subject of audits and investigations by other agencies of the U.S. Government. These
audits and investigations are conducted to determine if our performance and administration of our U.S. Government contracts are
compliant with applicable contractual requirements and procurement and other applicable Federal laws and regulations, including
ITAR and FCPA. These investigations may be conducted with or without our knowledge or cooperation. We are unable to predict
the outcome of such investigations or to estimate the amounts of resulting claims or other actions that could be instituted against
us or our officers or employees. Under present U.S. Government procurement laws and regulations, if indicted or adjudged in
violation of procurement or other Federal laws, a contractor, such as us, or one or more of our operating divisions or subdivisions,
could be subject to fines, penalties, repayments, or compensatory or treble damages. U.S. Government regulations also provide
that certain findings against a contractor may lead to suspension or debarment from eligibility for awards of new
U.S. Government contracts for a period of time to be determined by the U.S. Government. Suspension or debarment would have a
material adverse effect on us because of our reliance on U.S. Government contracts. In addition, our export privileges could be
suspended or revoked, which also would have a material adverse effect on us. For further discussion of risks relating to
U.S. Government contracts, see “Item 1A. Risk Factors” of this Report.
International. As an international company, we are, from time to time, the subject of investigations relating to our
international operations, including under U.S. export control laws (such as ITAR), the FCPA and other similar U.S. and
international laws.
In September 2019, we reached an administrative settlement with the Department of State to resolve alleged U.S. export
control regulation violations. Under the terms of the settlement we have committed to strengthen our trade compliance program
under the supervision of a special compliance officer and will pay a civil penalty of $13 million over three years (with $7 million
suspended on the condition of use for qualified remedial compliance measures). The settlement did not result in any debarment or
limitation on export licensing.
Environmental Matters. We are subject to numerous U.S. Federal, state, local and international environmental laws and
regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental
issues. We or companies we have acquired are responsible, or alleged to be responsible, for environmental investigation and/or
remediation of multiple sites. These sites are in various stages of investigation and/or remediation and in some cases our liability
is considered de minimis. Notices from the U.S. Environmental Protection Agency (“EPA”) or equivalent state or international
environmental agencies allege that a number of sites formerly or currently owned and/or operated by us or companies we have
acquired, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or
recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances of us being
identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act
(commonly known as the “Superfund Act”) and/or equivalent state and international laws. For example, in June 2014, the U.S.
Department of Justice, Environment and Natural Resources Division, notified several potentially responsible parties, including
Exelis Inc., which we acquired on May 29, 2015 (“Exelis”), of potential responsibility for contribution to the environmental
investigation and remediation of multiple locations in Alaska. In addition, in March 2016, the EPA notified over 100 potentially
responsible parties, including Exelis, of potential liability for the cost of remediation for the lower 8.3-mile stretch of the Lower
Passaic River, estimated by the EPA to be $1.38 billion, but the parties’ respective allocations have not been determined. Although
it is not feasible to predict the outcome of environmental claims, based on available information, in the opinion of our
management, any payments we may be required to make as a result of environmental claims in existence at January 3, 2020 are
reserved against, covered by insurance or would not have a material adverse effect on our financial condition, results of
operations or cash flows.
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25
ITEM 4.
MINE SAFETY DISCLOSURES.
Not Applicable.
26
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The name, age, position held with us, and principal occupation and employment during at least the past five years for each
of our executive officers as of February 28, 2020, were as follows:
Name and Age
Position Currently Held and Past Business Experience
William M. Brown, 57
........ Chairman and Chief Executive Officer since June 29, 2019. Chairman, President and Chief
Executive Officer from April 2014 to June 2019. President and Chief Executive Officer from
November 2011 to April 2014. Formerly with United Technologies Corporation (“UTC”), as
Senior Vice President, Corporate Strategy and Development from April 2011 to October
2011; as President of UTC’s Fire & Security division from 2006 to 2011; and in U.S. and
international roles at UTC’s Carrier Corporation from 2000 to 2006, including President of
the Carrier Asia Pacific Operations; and as Director, Corporate Strategy and Business
Development from 1997 to 2000. Before joining UTC in 1997, Mr. Brown worked for
McKinsey & Company as a senior engagement manager, and prior to that, at Air Products
and Chemicals, Inc. as a project engineer.
Todd W. Gautier, 56
........ President, Aviation Systems since June 29, 2019. Served with L3 as Senior Vice President
James P. Girard, 43
Christopher E. Kubasik, 58
and President of Electronic Systems Segment from March 2017 to June 2019; as President of
Precision Engagement and Training Sector from January 2014 to March 2017; as President
of Precision Engagement Sector from January 2010 to January 2014; and as Vice President
of Business Development and Strategy for the Sensors and Simulation Group from January
2005 to January 2010. Before joining L3 in 2001, Mr. Gautier served in the U.S. Navy for 15
years as a Strike/Fighter Pilot; was Vice President of Navy Operations for BGI, LLC; and
worked for United Airlines as a flight crew member.
........ Vice President and Chief Human Resources Officer since June 29, 2019. Vice President,
Human Resources from July 2015 to June 2019. Vice President, Human Resources -
Government Communications Systems from May 2014 to June 2015. Before joining
L3Harris in May 2014, Mr. Girard worked for UTC, as Vice President, Human Resources at
Sikorsky Aircraft from February 2014 to April 2014; as Director, Talent Resources from
November 2011 to January 2014; as Vice President, Human Resources at UTC’s Global Fire
Products from June 2010 to October 2011; and served in various Human Resources roles
from 1995 to 2010.
........ Vice Chairman, President and Chief Operating Officer since June 29, 2019. Served with L3,
as Chairman, Chief Executive Officer and President from May 2018 to June 2019; as Chief
Executive Officer and President from January 2018 to May 2018; and as President and Chief
Operating Officer from October 2015 to December 2017. Before joining L3 in October
2015, Mr. Kubasik worked for Seabury Advisory Group as President and Chief Executive
Officer from March 2014 to October 2015; for Ackuity Advisors, Inc., as President and
Chief Executive Officer from January 2013 to March 2014; and for Lockheed Martin
Corporation, where he held various senior executive and finance roles from 1999 to 2012,
including Vice Chairman, President and Chief Operating Officer from 2010 to 2012. Prior to
that, he worked for Ernst & Young LLP, including as a partner from 1996 to 1999.
Jesus “Jay” Malave Jr., 51
........ Senior Vice President and Chief Financial Officer since June 29, 2019. Before joining
L3Harris, Mr. Malave worked at UTC, as Vice President and Chief Financial Officer of
UTC’s Carrier Corporation from April 2018 to June 2019; as Chief Financial Officer of
UTC’s Aerospace Systems from January 2015 to April 2018; as Head of Investor Relations
from June 2012 to December 2014; as Vice President, Financial Planning and Treasury at
Hamilton Sundstrand, with responsibility for planning the integration of Goodrich
Corporation from May 2011 to June 2012; as Director of Investor Relations from June 2009
to May 2011; and prior to that, in other roles of increasing responsibility in financial
planning and analysis, treasury and accounting.
........ President, Communication Systems since September 2018. Senior Vice President, Chief
Global Business Development Officer from July 2015 to September 2018. Group President,
RF Communications from May 2009 to July 2015. President, RF Communications from July
2006 to May 2009. Mr. Mehnert joined L3Harris in 1984.
........ Senior Vice President, General Counsel and Secretary since February 2013. Vice President,
General Counsel and Secretary from October 2010 to February 2013. Vice President,
Associate General Counsel and Secretary from October 2004 to October 2010. Vice
President — Counsel, Corporate and Commercial Operations and Assistant Secretary from
November 2000 to October 2004. Mr. Mikuen joined L3Harris in 1996 as Finance Counsel.
Dana A. Mehnert, 57
Scott T. Mikuen, 58
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Sean J. Stackley, 62
........ President, Integrated Mission Systems since June 29, 2019. Served with L3 as Senior Vice
President and President of Communications & Networked Systems Segment from
September 2018 to June 2019; and as Corporate Vice President, Strategic Advance Programs
and Technologies from January 2018 to September 2018. Before joining L3 in January 2018,
(Hon.) Mr. Stackley spent four decades in public service, including a 27-year career with the
U.S. Navy, where he most recently was Acting Secretary of the Navy from January 2017 to
July 2017 and Secretary of the Navy for Research, Development and Acquisition from 2008
to 2017.
Todd A. Taylor, 47
........ Vice President, Principal Accounting Officer since May 2015. Vice President from April
Edward J. Zoiss, 55
2015 to May 2015. Formerly with Molex, Inc., as Vice President, Chief Accounting Officer
and Corporate Controller from September 2012 to April 2015; as Director of Finance and
Corporate Controller from September 2010 to September 2012; and as Director of
Accounting from June 2008 to September 2010; Before joining Molex, Mr. Taylor worked
for PricewaterhouseCoopers as Internal Audit Advisory Director from March 2003 to June
2008; for Wells Fargo as Internal Controls Manager from September 1999 to February 2003;
and for RSM McGladrey.
........ President, Space and Airborne Systems since June 29, 2019. President, Electronic Systems
from July 2015 to June 2019. Vice President and General Manager, Defense Programs,
Government Communications Systems from June 2013 to July 2015. Vice President, C4ISR
Electronics, Government Communications Systems from June 2012 to June 2013; Vice
President, Advanced Programs and Technology, Government Communications Systems from
July 2010 to June 2012. Mr. Zoiss joined L3Harris in 1995.
There is no family relationship between any of our executive officers or directors. There are no arrangements or
understandings between any of our executive officers or directors and any other person pursuant to which any of them was
appointed or elected as an officer or director, other than arrangements or understandings with our directors or officers acting
solely in their capacities as such. All of our executive officers are elected annually and serve at the pleasure of our Board of
Directors.
28
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock, par value $1.00 per share, is listed and traded on the NYSE, under the ticker symbol “LHX.” According
to the records of our transfer agent, as of February 28, 2020, there were approximately 11,306 holders of record of our common
stock.
Dividends
We paid cash dividends on our common stock of $.75 per share each quarterly period of the two quarters ended January 3,
2020, $.685 per share each quarterly period of fiscal 2019 and $.57 per share each quarterly period of fiscal 2018. On February
28, 2020, our Board of Directors increased the quarterly cash dividend rate on our common stock from $.75 per share to $.85 per
share, for an annualized cash dividend rate of $3.40 per share, which was our nineteenth consecutive annual increase in our
quarterly cash dividend rate. Our annualized cash dividend rate was $3.00 per share in the two quarters ended January 3, 2020 and
$2.74 per share, $2.28 per share and $2.12 per share in fiscal 2019, 2018 and 2017, respectively. Quarterly cash dividends are
typically paid in March, June, September and December. We currently expect that cash dividends will continue to be paid in the
near future, but we can give no assurances concerning payment of future dividends or future dividend increases. The declaration
of dividends and the amount thereof will depend on a number of factors, including our financial condition, capital requirements,
cash flows, results of operations, future business prospects and other factors our Board of Directors may deem relevant.
L3Harris Stock Performance Graph
The following performance graph and table do not constitute soliciting material and the performance graph and table
should not be deemed filed or incorporated by reference into any other previous or future filings by us under the Securities Act or
the Exchange Act, except to the extent that we specifically incorporate the performance graph and table by reference therein.
The performance graph and table below compare the 5-year and Fiscal Transition Period cumulative total shareholder return
of our common stock (the common stock of Harris Corporation prior to the L3Harris Merger and the common stock of L3Harris
Technologies, Inc. after the L3Harris Merger) with the comparable cumulative total returns of the Standard & Poor’s 500
Composite Stock Index (“S&P 500”) and the Standard & Poor’s 500 Aerospace & Defense Index (“S&P 500 Aerospace &
Defense”). The figures in the performance graph and table below assume an initial investment of $100 at the close of business on
June 27, 2014 in L3Harris common stock, the S&P 500 and the S&P 500 Aerospace & Defense and the reinvestment of all
dividends.
29
COMPARISON OF FIVE-YEAR (PRIOR TO L3HARRIS MERGER) AND FISCAL TRANSITION PERIOD (AFTER
L3HARRIS MERGER) CUMULATIVE TOTAL RETURN AMONG L3HARRIS, S&P 500 AND S&P 500
AEROSPACE & DEFENSE
L3HARRIS PERIOD END
L3Harris Technologies, Inc.
S&P 500
S&P 500 Aerospace & Defense
June 27,
2014
July 3,
2015
July 1,
2016
June 30,
2017
June 29,
2018
June 28,
2019
January 3,
2020
$
$
$
100 $
100 $
100 $
105 $
108 $
108 $
114 $
112 $
122 $
154 $
132 $
156 $
208 $
151 $
196 $
276 $
166 $
217 $
310
185
237
Sales of Unregistered Securities
In connection with the L3Harris Merger, in July 2019, we issued $501 million in aggregate principal amount of 4.95%
Senior Notes due 2021, $741 million in aggregate principal amount of 3.85% Senior Notes due 2023, $326 million in aggregate
principal amount of 3.95% Senior Notes due 2024, $535 million in aggregate principal amount of 3.85% Senior Notes due 2026
and $918 million in aggregate principal amount of 4.40% Senior Notes due 2028 (collectively, the “Debt Exchange Notes”). The
Debt Exchange Notes were issued in a private offering exempt from the registration requirements of the Securities Act, to
qualified institutional buyers in accordance with Rule 144A under the Securities Act and to persons outside of the U.S. pursuant to
Regulation S under the Securities Act. See Note 14: Debt in the Notes for additional information regarding our Debt Exchange
Notes.
30
Issuer Purchases of Equity Securities
During the two quarters ended January 3, 2020, we repurchased 7,356,168 shares of our common stock under our current
repurchase program for $1.5 billion at an average share price of $203.90, excluding commissions of $.02 per share. The level of
our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of
operations, future business prospects and other factors our Board of Directors and management may deem relevant. The timing,
volume and nature of repurchases are subject to market conditions, applicable securities laws and other factors and are at our
discretion and may be suspended or discontinued at any time. Shares repurchased by us are cancelled and retired. The following
table sets forth information with respect to repurchases by us of our common stock during the fiscal quarter ended January 3,
2020:
Period*
Month No. 1
(September 28, 2019-October 25, 2019)
Repurchase program(1)
Employee transactions(2)
Month No. 2
(October 26, 2019-November 29, 2019)
Repurchase program(1)
Employee transactions(2)
Month No. 3
(November 30, 2019-January 3, 2020)
Repurchase program(1)
Employee transactions(2)
Total
Total number of
shares purchased
as part of publicly
announced plans
or programs
(1)
Maximum
approximate
dollar value
of shares that may
yet be purchased
under the plans
(1)
or programs
Total number of
shares purchased
Average price
paid per share
580,000
4,373
2,535,640
9,312
658,028
19,324
3,806,677
$
$
$
$
$
$
205.39
206.63
580,000
—
$3,130,775,855
—
198.10
202.12
2,535,640
—
$2,628,454,481
—
195.04
205.42
658,028
—
3,773,668
$2,500,113,105
—
$2,500,113,105
Periods represent our fiscal months.
_______________
*
(1) On July 1, 2019, we announced that our Board of Directors approved a new $4 billion share repurchase authorization (our “2019 Repurchase Program”)
replacing our prior share repurchase programs and authorizing us to repurchase up to $4 billion in shares of our common stock through open market
purchases, private transactions, transactions structured through investment banking institutions or any combination thereof. As of January 3, 2020,
$2,500,113,105 (as reflected in the table above) was the approximate dollar amount of our common stock that could still be purchased under the 2019
Repurchase Program.
(2) Represents a combination of (a) shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of performance units,
restricted units or restricted shares that vested during the quarter and (b) performance units, restricted units or restricted shares returned to us upon retirement
or employment termination of employees. Our equity incentive plans provide that the value of shares delivered to us to pay the exercise price of options or to
cover tax withholding obligations shall be the closing price of our common stock on the date the relevant transaction occurs.
The information required by this Item with respect to securities authorized for issuance under our equity compensation
plans is included in “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” of this Report. See Note 16: Stock Options and Other Share-Based Compensation in the Notes for a general description
of our share-based incentive plans.
31
ITEM 6.
SELECTED FINANCIAL DATA.
The following table summarizes our selected historical financial information for the two quarters ended January 3, 2020 and
each of the prior five fiscal years. Amounts pertaining to our results of operations are presented on a continuing operations basis,
which includes divested business not reported as discontinued operations. See Note 3: Divestitures, Asset Sales and Discontinued
Operations in the Notes for information regarding discontinued operations and divestitures. The selected financial information
shown below has been derived from our audited Consolidated Financial Statements, which for data presented for the two quarters
ended January 3, 2020 and fiscal 2019, 2018 and 2017, are included elsewhere in this Report. This table should be read in
conjunction with our other financial information, including “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated Financial Statements and accompanying Notes, included elsewhere in
this Report.
Results of Operations:(1)
Revenue from product sales and services
Cost of product sales and services
Interest expense
Income from continuing operations before
income taxes
Income taxes
Income from continuing operations
Discontinued operations, net of income taxes
Net income
Noncontrolling interests, net of income taxes
Net income attributable to L3Harris
Technologies, Inc.
Average shares outstanding (diluted)
Per Share Data (Diluted) Attributable to
L3Harris Technologies, Inc. Common
Shareholders:
Income from continuing operations
Income (loss) from discontinued operations, net
of income taxes
Net income
Cash dividends
Financial Position at Fiscal Period-End:
Net working capital(9)
Property, plant and equipment
Long-term debt, net
Total assets
Equity
Book value per share
Two Quarters
Ended
January, 3
2020(2)
Fiscal Years Ended
June 28,
2019(3)
June 29,
2018(4)
June 30,
2017(5)
July 1,
2016(6)(8)
July 3,
2015(7)(8)
(In millions, except per share amounts)
$
9,263
$
6,801
$
6,168
$
5,897
$ 5,992
$
3,885
6,726
135
908
73
835
(1)
834
(12)
4,467
169
1,113
160
953
(4)
949
—
4,066
170
3,854
172
3,832
183
2,304
130
908
206
702
(3)
699
—
889
261
628
(85)
543
—
884
273
611
(287)
324
—
396
109
287
47
334
—
822
223.7
949
120.5
699
121.1
543
124.3
324
125.0
334
106.8
$
3.68
$
7.89
$
5.78
$
5.04
$
4.87
$
2.67
(0.01)
3.67
1.50
(0.03)
7.86
2.74
$
2,303
$
2,117
6,694
38,336
22,744
104.22
$
310
894
2,763
10,117
3,363
28.37
(0.02)
5.76
2.28
374
900
3,408
9,851
3,278
27.71
(0.68)
4.36
2.12
(2.28)
2.59
2.00
0.44
3.11
1.88
$
$
105
904
643
924
3,396
4,120
$
909
1,031
5,053
10,112
12,009
13,127
2,903
24.27
3,057
24.53
3,402
27.51
Includes the operating results of L3 businesses after the L3Harris Merger on June 29, 2019.
_______________
(1)
(2) Results for the two quarters ended January 3, 2020 included: (i) $390 million of L3Harris Merger-related transaction and integration expenses and losses; (ii)
$289 million of amortization of acquisition-related intangibles, including $239 million of amortization of identifiable intangible assets acquired as a result of
the L3Harris Merger and $50 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis; (iii) a $229 million
gain on the sale of the Harris Night Vision business; (iv) $142 million of additional cost of sales related to the fair value step-up in inventory sold; (v) a $23
million gain on pension plain curtailment; (vi) a $12 million gain on the sale of an asset group; (vii) a $10 million non-cash cumulative adjustment to lease
expense; and (viii) $3 million of losses and other costs related to debt refinancing. The net after-tax impact from these two quarters ended January 3, 2020
items was $392 million or $1.75 per diluted common share.
32
(3) Results for fiscal 2019 included: (i) $101 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis and (ii) $65
million of L3Harris Merger-related transaction and integration costs. The net after-tax impact from these fiscal 2019 items was $128 million or $1.06 per
diluted common share.
(4) Results for fiscal 2018 included: (i) $101 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis; (ii) $47
million of charges related to our decision to transition and exit a commercial air-to-ground Long Term Evolution (“LTE”) radio communications line of
business and other items; (iii) $27 million of losses and other costs related to debt refinancing; (iv) $20 million of charges related to non-cash adjustments for
deferred compensation and the impact of tax reform; and (v) a $5 million charge related to consolidation of certain Exelis facilities initiated in fiscal 2017.
The net after-tax impact from these fiscal 2018 items was $145 million or $1.20 per diluted common share.
(5) Results for fiscal 2017 included: (i) $109 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis and (ii) a
$58 million charge for Exelis acquisition-related and other items. The net after-tax impact from these fiscal 2017 items was $124 million or $1.00 per diluted
common share.
(6) Results for fiscal 2016 included: (i) $121 million for integration and other costs associated with our acquisition of Exelis in the fourth quarter of fiscal 2015,
including $11 million for amortization of a step-up in inventory; (ii) $109 million of amortization of identifiable intangible assets acquired as a result of our
acquisition of Exelis; (iii) a net liability reduction of $101 million for certain post-employment benefit plans; (iii) $33 million of charges for restructuring
and other items; and (iv) a $10 million net gain on the sale of our aerostructures business. The net after-tax impact from these fiscal 2016 items was $108
million or $0.86 per diluted common share.
(7) Results for fiscal 2015 included results of Exelis following the close of the acquisition on May 29, 2015 and a $205 million after-tax ($1.91 per diluted
share) charge for transaction, financing, integration, restructuring and other costs, primarily related to our acquisition of Exelis.
(8) Historical financial information for fiscal 2016 and 2015 has not been updated for our adoption of Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers (Topic 606), as amended (“ASC 606”), and ASU 2017-07, Compensation - Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”) on a retrospective basis, and
consequently, the selected financial data for such fiscal years in this Item are not necessarily comparable to fiscal 2019, 2018 and 2017 in this Item.
(9) Net working capital increased in the two quarters ended January 3, 2020 compared with fiscal 2019 primarily due to net working capital of L3 businesses
recognized in connection with the L3Harris Merger on June 29, 2019. Net working capital decreased in fiscal 2017 compared with fiscal 2016 primarily due
to a $172 million increase in current portion of long-term debt and a $161 million decrease associated with net working capital of discontinued operations.
33
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of our financial
condition and results of operations. This MD&A is provided as a supplement to, should be read in conjunction with, and is
qualified in its entirety by reference to, our Consolidated Financial Statements and accompanying Notes appearing elsewhere in
this Report. Except for the historical information contained herein, the discussions in this MD&A contain forward-looking
statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to, those discussed below in this MD&A under
“Forward-Looking Statements and Factors that May Affect Future Results.”
The following is a list of the sections of this MD&A, together with our perspective on their contents, which we hope will
assist in reading these pages:
• Business Considerations — a general description of our business; the value drivers of our business; Fiscal
Transition Period results of operations and liquidity and capital resources key indicators; and industry-wide
opportunities, challenges and risks that are relevant to us in defense, government and commercial markets.
• Operations Review — an analysis of our consolidated results of operations and of the results in each of our
business segments, to the extent the segment operating results are helpful to an understanding of our business as a
whole, for the periods presented in our financial statements.
• Liquidity, Capital Resources and Financial Strategies — an analysis of cash flows, funding of pension plans,
common stock repurchases, dividends, capital structure and resources, contractual obligations, off-balance sheet
arrangements, commercial commitments, financial risk management, impact of foreign exchange and impact of
inflation.
• Critical Accounting Policies and Estimates — a discussion of accounting policies and estimates that require the
most judgment and a discussion of accounting pronouncements that have been issued but not yet implemented by
us and their potential impact on our financial condition, results of operations and cash flows.
• Forward-Looking Statements and Factors that May Affect Future Results — cautionary information about
forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to
differ materially from our historical results or our current expectations or projections.
BUSINESS CONSIDERATIONS
General
We generate revenue, income and cash flows by developing, manufacturing or providing, and selling advanced, technology-
based solutions that meet government and commercial customers’ mission-critical needs. We support government and commercial
customers in 130 countries, with our largest customers being various departments and agencies of the U.S. Government and their
prime contractors. Our products, systems and services have defense and civil government applications, as well as commercial
applications. As of January 3, 2020, we had approximately 50,000 employees, including approximately 20,000 engineers and
scientists. We generally sell directly to our customers, and we utilize agents and intermediaries to sell and market some products
and services, especially in international markets.
We structure our operations primarily around the products, systems and services we sell and the markets we serve. As
discussed in “Item 1: Business” and Note 25: Business Segments in the Notes, we implemented a new organizational structure
effective on June 29, 2019, and starting with the Fiscal Transition Period, we report the financial results of our continuing
operations in the following four reportable segments, which are also referred to as our business segments:
• Integrated Mission Systems, including multi-mission ISR and communication systems; integrated electrical and
electronic systems for maritime platforms; and advanced EO/IR solutions;
• Space and Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and
cyber defense; avionics; and electronic warfare;
• Communication Systems, including tactical communications; broadband communications; integrated vision solutions;
and public safety; and
• Aviation Systems, including defense aviation products; security, detection and other commercial aviation products;
commercial and military pilot training; and mission networks for ATM.
The historical results, discussion and presentation of our business segments as set forth in this MD&A reflect the impact of
these changes for all periods presented in order to present segment information on a comparable basis. There is no impact on our
34
previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting
from these changes.
See Note 25: Business Segments in the Notes for further information regarding our business segments, including how we
define segment operating income or loss.
As discussed in further detail in Note 5: Business Combination and Note 4: Restructuring and Other Exit Costs in the Notes,
in the two quarters ended January 3, 2020, we recorded $532 million of charges at our corporate headquarters in connection with
the L3Harris Merger, consisting of restructuring, integration, transaction and other costs as follows:
•
•
•
•
•
•
$142 million of additional cost of sales related to the fair value step-up in inventory sold;
$117 million of costs for workforce reductions, including severance and other employee-related exit costs;
$83 million of transaction costs, recognized as incurred;
$72 million of integration costs, recognized as incurred;
$70 million of equity award acceleration charges, recognized upon the change in control; and
$48 million of impairment and other losses related to operating lease right-of-use assets.
All of the costs above were recorded in the “Engineering, selling and administrative expenses” line item in our Consolidated
Statement of Income, except for the $142 million of additional cost of sales related to the fair value step-up in inventory sold,
which is included in the “Cost of product sales and services” line item in our Consolidated Statement of Income.
As described in more detail in Note 3: Divestitures, Asset Sales and Discontinued Operations in the Notes, we completed
the divestitures of the Harris Night Vision business during the two quarters ended January 3, 2020 and CapRock and IT Services
in fiscal 2017. Through fiscal 2019, the Harris Night Vision business was reported as part of our former Communication Systems
segment. As a result of the then-pending divestiture, the Harris Night Vision business was not included in any of our new business
segments and, consequently, the operating results of the business are included in “Other non-reportable business segments” in this
Report. CapRock and IT Services are reported as discontinued operations in this Report. Our historical financial results have been
restated for all periods presented in this Report to account for businesses reported as discontinued operations in this Report.
Except for disclosures related to our cash flows, or unless otherwise specified, disclosures in this Report relate solely to our
continuing operations.
As described in more detail in Note 1: Significant Accounting Policies in the Notes, effective June 29, 2019, we changed
our fiscal year end to the Friday nearest December 31, and the period that commenced on June 29, 2019 was a fiscal transition
period that ended on January 3, 2020 (the “Fiscal Transition Period”). References herein to the two quarters ended December 28,
2018 represent the unaudited prior year results for the comparative period ended December 28, 2018.
Value Drivers of Our Business
In recent years, we have successfully integrated Exelis, reshaped our portfolio of businesses to focus on high-growth, high-
margin, technology-differentiated businesses, combined with L3 in a transformative merger of equals and have made investments
in technology and innovation that have led to several new product launches and strategic program awards. Execution of this
multi-year strategy set the stage for financial results during the Fiscal Transition Period that have exceeded the targets we set at
the beginning of the period.
The Fiscal Transition Period has been transformative. Our dedicated integration team executed its plan for a successful day
one transition to the new L3Harris following the closing of the L3Harris Merger on June 29, 2019. We successfully implemented
a new organizational structure, accelerated growth across all four business segments and expanded margins through our focus on
operational excellence. We refinanced debt and made voluntary contributions to our U.S. qualified defined benefit pension plans,
expanding our future financial flexibility. We plan to build on our strong Fiscal Transition Period performance, and together with
a well-funded U.S. Government budget and a continued focus on operational excellence and innovation, we believe we are well
positioned to achieve our strategic priorities for fiscal 2020 and thereafter, which include the following:
• Executing seamless integration of L3 and Harris, including achieving at least $500 million in gross cost synergies from
the L3Harris Merger by the end of 2021;
• Driving flawless execution and margin expansion through our e3 (excellence everywhere every day) operational
excellence program;
• Growing revenue through investments in differentiated technology and innovation;
• Reshaping our portfolio to focus on high margin, high growth businesses; and
• Maximizing cash flow with shareholder friendly capital deployment.
We are focused on successfully completing the integration of the two companies to maximize the benefits of the
transformative merger. Our integration efforts focus on driving greater cost and operational efficiencies and capturing
opportunities to drive revenue growth, while maintaining our deep customer relationships, commercializing our technology and
driving operational excellence.
35
Our operational excellence program, e3 (excellence everywhere every day), is grounded in our deep commitment to
excellence, innovation, customer satisfaction and continuous improvement in everything we do. Prior to the L3Harris Merger, we
made substantial progress in laying the foundation of our future enterprise-wide digital strategy by standardizing our IT systems,
reducing our number of enterprise resource planning platforms and simplifying our operating environment to drive productivity
through growth in shared services and automation of core processes. We are working toward eliminating many of our data centers
and making the remainder cloud-enabled. We also are continuing to focus on cost savings in our supply chain through “value
engineering” and “should-cost” analysis, as well as improving supplier performance and reducing sole-sourced components on
legacy solutions. We will continue these efforts as we integrate the two companies.
Innovation is at the core of our success, and R&D investment represents the foundation for innovation. We are
fundamentally reshaping how we design and develop new products to get more out of our R&D investment. We also use
standardized processes and common metrics to track progress, gauge success and drive disciplined execution, as well as core
technology centers to more fully leverage R&D investment across our Company. We are expanding implementation of “DevOps”
to streamline software development, which has grown to be a significant portion of our engineering work today and is expected to
increase over time.
Our commitment to excellence and innovation carries through to the L3Harris Merger integration process. Our goal is to
maximize the benefits of this transformative merger, creating significantly greater scale and bringing together two engineering-
driven companies and workforces with similar cultures that value technology leadership. Together, the two companies’
complementary technologies and capabilities strengthen core franchises and provide new opportunities for innovation to solve our
customers’ most complex challenges. We are combining top talent and technology from each company in a market-focused
reorganization that will align with our strategic growth platforms and will help improve our competitive position, increase
operational efficiency, and capture synergies, while we continue to bring innovative and affordable solutions to our customers. As
our integration efforts focus on driving greater cost and operational efficiencies and revenue growth through synergies, we intend
to maintain our focus on continuing to execute against our strategic priorities and other objectives - including satisfying our
customers, driving operational excellence, improving cash flow and optimizing capital deployment. The L3Harris Merger also
provides a unique opportunity for portfolio shaping actions, and we will continue to evaluate what businesses are strategic and
what businesses are better served under a different owner. See Note 28: Subsequent Events in the Notes for additional
information.
During the Fiscal Transition Period, we returned to our shareholders $337 million through dividends and $1,500 million
through share repurchases and we used $109 million for net repayments of borrowings. In fiscal 2020, we believe accelerating
revenue growth across our business segments and margin expansion will improve our operating cash flow, which we expect to use
for increased dividends, share repurchases and investments in technology and innovation.
Key Indicators
We believe our value drivers, when implemented, will improve our financial results, including: revenue; income from
continuing operations and income from continuing operations per diluted common share; income from continuing operations as a
percentage of revenue; net cash provided by operating activities; return on invested capital; return on average equity; consolidated
total indebtedness to total capital ratio; and net unfunded defined benefit plans liability. The measure of our success is reflected in
our results of operations and liquidity and capital resources key indicators as discussed below.
Because the L3Harris Merger occurred on June 29, 2019, the two quarters ended January 3, 2020 reflect the results of the
combined company, while the two quarters ended December 28, 2018 reflect the results of only Harris operating businesses. Due
to the significance of the L3 operating businesses included in the combined company results following the L3Harris Merger, the
reported results for the two quarters ended January 3, 2020 and December 28, 2018 generally are not comparable. Therefore, to
assist with a discussion of the January 3, 2020 and December 28, 2018 consolidated results of operations on a more comparable
basis, certain supplemental unaudited pro forma combined income statement information prepared in accordance with the
requirements of Article 11 of Regulation S-X (referred to in this MD&A as “pro forma”) also is provided (see “Supplemental
Unaudited Pro Forma Condensed Combined Income Statement Information” below in this MD&A).
Fiscal Transition Period Results of Operations Key Indicators: Revenue, income from continuing operations, income
from continuing operations per diluted common share and income from continuing operations as a percentage of revenue
represent key measurements of our value drivers:
Consolidated — as reported
• Revenue increased 189 percent to $9.3 billion in the two quarters ended January 3, 2020 from $3.2 billion in the
•
two quarters ended December 28, 2018;
Income from continuing operations attributable to L3Harris common shareholders increased 87 percent to $823
million in the two quarters ended January 3, 2020 from $441 million in the two quarters ended December 28, 2018;
36
•
•
Income from continuing operations attributable to L3Harris common shareholders as a percentage of revenue
decreased to 9 percent in the two quarters ended January 3, 2020 from 14 percent in the two quarters ended
December 28, 2018; and
Income from continuing operations per diluted common share attributable to L3Harris common shareholders
increased 1 percent to $3.68 in the two quarters ended January 3, 2020 from $3.66 in the two quarters ended
December 28, 2018, reflecting the increase in income from continuing operations as noted above, partially offset
by higher diluted common shares outstanding due to additional shares issued in connection with the L3Harris
Merger during the two quarters ended January 3, 2020.
Consolidated — pro forma
• Revenue increased 10 percent to $9.3 billion in the two quarters ended January 3, 2020 from $8.4 billion in the two
•
•
•
quarters ended December 28, 2018;
Income from continuing operations attributable to L3Harris common shareholders increased 10 percent to $823
million in the two quarters ended January 3, 2020 from $748 million in the two quarters ended December 28, 2018;
Income from continuing operations attributable to L3Harris common shareholders as a percentage of revenue in
the two quarters ended January 3, 2020 was comparable with the two quarters ended December 28, 2018 at 9
percent; and
Income from continuing operations per diluted common share attributable to L3Harris common shareholders
increased 13 percent to $3.68 in the two quarters ended January 3, 2020 from $3.27 in the two quarters ended
December 28, 2018, reflecting both the increase in income from continuing operations as noted above and fewer
diluted common shares outstanding due to repurchases of shares of common stock under our repurchase program
during the two quarters ended January 3, 2020.
Refer to MD&A heading “Operations Review” below in this Report for more information.
Fiscal Transition Period Liquidity and Capital Resources Key Indicators: Net cash provided by operating activities,
return on invested capital, return on average equity, our consolidated total indebtedness to total capital ratio and our net unfunded
defined benefit plans liability also represent key measurements of our value drivers:
• Net cash provided by operating activities increased to $939 million in the two quarters ended January 3, 2020 from
$469 million in the two quarters ended December 28, 2018;
• Return on invested capital (defined as after-tax operating income from continuing operations divided by the two-
point average of invested capital at the beginning and end of the period, where invested capital equals equity plus
debt, less cash and cash equivalents) decreased to 4 percent in the two quarters ended January 3, 2020 from 6
percent in the two quarters ended December 28, 2018;
• Return on average equity (defined as income from continuing operations divided by the two-point average of
equity at the beginning and end of the fiscal period) decreased to 6 percent in the two quarters ended January 3,
2020 from 13 percent in the two quarters ended December 28, 2018;
• Our consolidated total indebtedness to total capital ratio at January 3, 2020 was 24 percent, compared with our 65
percent covenant limitation under our senior unsecured revolving credit facility; and
• Our net unfunded defined benefit pension plan liability increased $577 million in the two quarters ended January 3,
2020 to $1.7 billion at January 3, 2020 compared with $1.2 billion at June 28, 2019, primarily due to the addition
of L3’s pension plans assumed in connection with the L3Harris Merger.
Refer to MD&A heading “Liquidity, Capital Resources and Financial Strategies” below in this Report for more information
on net cash provided by (used in) operating, investing and financing activities.
Industry-Wide Opportunities, Challenges and Risks
Department of Defense and Other U.S. Federal Markets: Our largest customers are various departments and agencies of
the U.S. Government — the percentage of our revenue that was derived from sales to U.S. Government customers, including
foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 73
percent in the two quarters ended January 3, 2020 and approximately 77 percent, 75 percent and 74 percent in fiscal 2019, 2018
and 2017, respectively.
On February 9, 2018, President Trump signed into law the Bipartisan Budget Act of 2018 (“BBA 2018”), a two-year budget
agreement aimed to provide stability to the U.S. Government budget process for the government fiscal year (“GFY”) 2018 and
GFY 2019 (U.S. Government fiscal years begin October 1 and end September 30). While the BBA 2018 raised the spending caps
for GFY 2018 and GFY 2019 previously constrained by the Budget Control Act of 2011 (“BCA”) and temporarily suspended the
statutory debt ceiling through March 1, 2019, it did not modify the BCA’s spending caps or sequestration mechanisms beyond
GFY 2019.
37
On September 28, 2018, President Trump signed a final conference agreement on the GFY 2019 Defense Appropriations
Bill into law, providing $716 billion for defense, including $647 billion in defense base funding and $69 billion for overseas
contingency operations (“OCO”). Our major programs were fully funded and continue to remain priorities for U.S. Government
customers.
On August 2, 2019, President Trump signed into law the Bipartisan Budget Act of 2019 (“BBA 2019”), a two-year budget
agreement for GFY 2020 and GFY 2021 that increased defense funding spending caps to $738 billion ($667 billion in defense
base funding and $71 billion for OCO funding) for GFY 2020 and $741 billion ($672 billion in defense base funding and $69
billion for OCO funding) for GFY 2021, representing an increase of 3% from GFY 2019 funding levels. The BBA 2019 also
temporarily suspended the statutory debt ceiling through July 31, 2021. The BBA 2019 builds on sustained funding increases
Congress provided in GFY 2019, GFY 2018 and GFY 2017. On December 20, 2019, President Trump signed into law the
Consolidated Appropriations Act of 2020, which provides full-year funding through September 30, 2020 for the U.S.
Government. The Consolidated Appropriations Act of 2020 provides $623 billion in base DoD funding and $71 billion in OCO
funding, as well as $2 billion in emergency funding. Although we anticipate debate will continue within the U.S. Government
over defense spending for future years (which may have a significant impact on defense spending broadly and on our specific
programs), our programs have been well supported in recent years.
Government Oversight and Risk: As a U.S. Government contractor, we are subject to U.S. Government oversight. The
U.S. Government may investigate our business practices and audit our compliance with applicable rules and regulations.
Depending on the results of those investigations and audits, the U.S. Government could make claims against us. Under U.S.
Government procurement regulations and practices, an indictment or conviction of a government contractor could result in that
contractor being fined and/or suspended from being able to bid on, or from being awarded, new U.S. Government contracts for a
period of time determined by the U.S. Government. Similar government oversight exists in most other countries where we
conduct business.
For a discussion of risks relating to U.S. Government contracts and subcontracts, see “Item 1. Business — Principal
Customers; Government Contracts” and “Item 1A. Risk Factors” of this Report. We are also subject to other risks associated with
U.S. Government business, including technological uncertainties, dependence on annual appropriations and allotment of funds,
extensive regulations and other risks, which are discussed in “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” of this
Report.
State and Local: We also provide products to state and local government agencies that are committed to protecting our
homeland and public safety. The public safety market was highly competitive and dependent on state and local government
budgets during the two quarters ended January 3, 2020. Future market opportunities include upgrading aging analog infrastructure
to new digital standards, as well as opportunities associated with next-generation LTE solutions for high data-rate applications.
International: We believe there is continuing international demand from military and government customers for tactical
radios, public safety communications, electronic warfare equipment, ATM, electronic attack and release systems and ISR. We
believe we can leverage our domain expertise and proven technology provided in the U.S. to further expand our international
business.
We believe that our experience, technologies and capabilities are well aligned with the demand and requirements of the
markets noted above in this Report. However, we remain subject to the spending levels, pace and priorities of the U.S.
Government as well as international governments and commercial customers, and to general economic conditions that could
adversely affect us, our customers and our suppliers. We also remain subject to other risks associated with these markets,
including technological uncertainties, adoption of our new products and other risks that are discussed below in this Report under
“Forward-Looking Statements and Factors that May Affect Future Results” and in “Item 1A. Risk Factors” of this Report.
38
OPERATIONS REVIEW
Consolidated Results of Operations
Revenue:
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Other non-reportable business segments
Corporate eliminations
Total revenue
Total cost of product sales and services
% of total revenue
Gross margin
% of total revenue
Engineering, selling and administrative expenses
% of total revenue
Gain (loss) on sales of businesses
Non-operating income
Net interest expense
Income from continuing operations before income taxes
Income taxes
Effective tax rate
Income from continuing operations
Noncontrolling interests, net of income taxes
Income from continuing operations attributable to L3Harris
common shareholders
% of total revenue
Income from continuing operations per diluted common share
attributable to L3Harris common shareholders
_______________
*
Not meaningful
Two Quarters Ended
January 3,
2020
December 28,
2018
Percent
Increase/
(Decrease)
December 28,
2018
Percent
Increase/
(Decrease)
As Reported
Pro Forma
(Dollars in millions, except per share amounts)
23
1,741
1,018
342
86
(2)
3,208
(2,105)
66%
1,103
34%
(583)
18%
—
94
(86)
528
(87)
16%
441
—
441
14%
* $
36%
111%
*
(73)%
*
189%
220%
130%
231%
*
104%
43%
72%
(16)%
89%
*
2,517
2,039
1,949
1,970
12
(83)
8,404
(5,939)
71%
2,465
29%
(1,598)
19%
(6)
122
(143)
840
(80)
10%
760
(12)
87% $
748
9%
10%
16%
10%
3%
92%
—%
10%
13%
3%
21%
*
57%
(14)%
8%
(9)%
10%
—%
10%
3.66
1% $
3.27
13%
$
2,774
$
2,360
2,151
2,038
23
(83)
9,263
(6,726)
73%
2,537
27%
(1,927)
21%
229
192
(123)
908
(73)
8%
835
(12)
823
9%
3.68
$
$
$
$
39
June 28,
2019
June 29,
2018
Fiscal Years Ended
Percent
Increase/
(Decrease)
As Reported
June 30,
2017
Percent
Increase/
(Decrease)
(Dollars in millions, except per share amounts)
$
48
$
45
7% $
38
3,304
2,015
668
148
(12)
6,168
(4,066)
66%
2,102
34%
(1,182)
19%
156
(168)
908
(206)
23%
702
—
702
11%
12%
10%
1%
11%
(42)%
10%
10%
3,156
1,891
697
121
(6)
5,897
(3,854)
65%
11%
2,043
35%
(1,150)
20%
166
(170)
889
(261)
29%
628
—
5%
21%
(1)%
23%
(22)%
36%
—%
36% $
628
11%
3,715
2,208
672
165
(7)
6,801
(4,467)
66%
2,334
34%
(1,242)
18%
188
(167)
1,113
(160)
14%
953
—
$
$
953
14%
7.89
$
$
18%
5%
7%
(4)%
22%
100%
5%
6%
3%
3%
(6)%
(1)%
2%
(21)%
12%
—%
12%
5.78
37% $
5.04
15%
Revenue:
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Other non-reportable business segments
Corporate eliminations
Total revenue
Total cost of product sales and services
% of total revenue
Gross margin
% of total revenue
Engineering, selling and administrative expenses
% of total revenue
Non-operating income
Net interest expense
Income from continuing operations before income taxes
Income taxes
Effective tax rate
Income from continuing operations
Noncontrolling interests, net of income taxes
Income from continuing operations attributable to L3Harris
common shareholders
% of total revenue
Income from continuing operations per diluted common share
attributable to L3Harris common shareholders
As Reported
Revenue
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increase in revenue in
the two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018 was primarily due to the
inclusion of $5.7 billion of revenue (net of intercompany sales eliminations) from L3 operations in operating results for the two
quarters ended January 3, 2020 and organic revenue growth in all four segments.
Fiscal 2019 Compared With Fiscal 2018: The increase in revenue in fiscal 2019 compared with fiscal 2018 was primarily
due to higher DoD tactical radio sales in our Communication Systems segment, reflecting a ramp in DoD modernization
programs, higher Avionics and Electronic Warfare revenue from long-term avionics platforms, including the F-35, F/A-18 and
F-16, and higher revenue from classified programs in our Space and Airborne Systems segment.
Fiscal 2018 Compared With Fiscal 2017: The increase in revenue in fiscal 2018 compared with fiscal 2017 was primarily
due to higher DoD tactical radio sales in our Communication Systems segment, reflecting readiness and modernization demand
from the U.S. Army and USAF, and higher Avionics and Electronic Warfare revenue from long-term avionics platforms, including
the F-35, F/A-18 and F-16, and higher revenue from C4ISR (including wireless solutions).
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.
40
Gross Margin
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: Gross margin increased in
the two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018 primarily due to the inclusion
of L3 operations in operating results for the two quarters ended January 3, 2020. The decrease in gross margin as a percentage of
revenue (“gross margin percentage”) for the two quarters ended January 3, 2020 compared with the two quarters ended December
28, 2018 was primarily due to a mix of program revenue and product sales with relatively lower gross margin, $142 million of
additional cost of sales related to the fair value step-up in inventory sold and $42 million of amortization of identifiable intangible
assets acquired as a result of the L3Harris Merger in the two quarters ended January 3, 2020.
Fiscal 2019 Compared With Fiscal 2018: Gross margin increased in fiscal 2019 compared with fiscal 2018 primarily due
to higher revenue and productivity savings, partially offset by higher employment costs. Gross margin percentage in fiscal 2019
was comparable with fiscal 2018.
Fiscal 2018 Compared With Fiscal 2017: Gross margin increased in fiscal 2018 compared with fiscal 2017 primarily due
to higher revenue, partially offset by a 1 percentage point decrease in gross margin percentage. The decrease in gross margin
percentage in fiscal 2018 compared with fiscal 2017 reflected a less favorable mix of program revenue and product sales and an
unfavorable impact from the ADS-B program, including a favorable contract settlement in the second quarter of fiscal 2017 and
the program transition from build-out to sustainment, partially offset by productivity savings and incremental pension income.
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.
Engineering, Selling and Administrative Expenses
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increase in
engineering, selling and administrative (“ESA”) expenses and ESA expenses as a percentage of revenue (“ESA percentage”) in
the two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018 was primarily due to the
inclusion of L3 operations in operating results, as well as $390 million of charges for integration, restructuring and other costs
associated with the L3Harris Merger and $197 million of amortization of identifiable intangible assets acquired as a result of the
L3Harris Merger in the two quarters ended January 3, 2020. ESA expenses for the two quarters ended January 3, 2020 also
included a $12 million gain on sale of a product line, offset by a $10 million non-cash cumulative adjustment to lease expense.
Overall Company-sponsored R&D costs were $329 million in the two quarters ended January 3, 2020 compared with $144
million in the two quarters ended December 28, 2018.
Fiscal 2019 Compared With Fiscal 2018: The increase in ESA expenses in fiscal 2019 compared with fiscal 2018 was
primarily due to $65 million of L3Harris Merger-related transaction and integration costs and increased investments in R&D and
bids and proposals, partially offset by the absence in fiscal 2019 of $47 million of charges related to our decision to transition and
exit a commercial air-to-ground LTE radio communications line of business and other items and a $12 million non-cash
adjustment for deferred compensation, which were incurred in fiscal 2018. The decrease in ESA percentage in fiscal 2019
compared with fiscal 2018 was primarily due to management of expenses on higher revenue.
Overall Company-sponsored R&D costs were $331 million in fiscal 2019 compared with $311 million in fiscal 2018.
Fiscal 2018 Compared With Fiscal 2017: The increase in ESA expenses in fiscal 2018 compared with fiscal 2017 was
primarily due to $47 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio
communications line of business and other items, higher employment and distribution costs and a $12 million non-cash
adjustment for deferred compensation, partially offset by a $53 million reduction in Exelis acquisition-related and other charges in
fiscal 2018 compared with fiscal 2017. The decrease in ESA percentage in fiscal 2018 compared with fiscal 2017 was primarily
due to cost containment.
Overall Company-sponsored R&D costs were $311 million in fiscal 2018 compared with $310 million in fiscal 2017.
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.
Gain (loss) on Sale of Businesses
The increase in gain (loss) on sale of businesses for the two quarters ended January 3, 2020 compared with the two quarters
ended December 28, 2018 was due to a $229 million pre-tax gain on the sale of the Harris Night Vision business, which was
completed on September 13, 2019.
See Note 3: Divestitures, Asset Sales and Discontinued Operations in the Notes for further information.
Non-Operating Income
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increase in non-
operating income in the two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018 was
41
primarily due to an increase in the non-service cost components of pension and other postretirement benefit plan income,
including a $23 million gain on pension plan curtailment, reflecting the inclusion in pension and other postretirement benefit plan
income of benefit plans assumed in connection with the L3Harris Merger.
Fiscal 2019 Compared With Fiscal 2018: The increase in non-operating income in fiscal 2019 compared with fiscal 2018
was primarily due to $27 million of losses and other costs related to debt refinancing in the fourth quarter of fiscal 2018.
Fiscal 2018 Compared With Fiscal 2017: The decrease in non-operating income in fiscal 2018 compared with fiscal 2017
was primarily due to $27 million of losses and other costs related to debt refinancing in the fourth quarter of fiscal 2018, partially
offset by a $20 million increase in pension and postretirement benefit income.
See Note 21: Non-Operating Income in the Notes for further information.
Net Interest Expense
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: Our net interest expense
increased in the two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018 primarily due to
higher average debt levels as a result of the assumption of $3.5 billion of debt in connection with the L3Harris Merger. See Note
14: Debt in the Notes for further information.
Fiscal 2019 Compared With Fiscal 2018: Our net interest expense decreased in fiscal 2019 compared with fiscal 2018
primarily due to lower average debt levels as a result of $281 million of net repayment of borrowings, which included our
repayment at maturity of the entire outstanding $300 million aggregate principal amount of our Floating Rate Notes due February
27, 2019. See Note 14: Debt in the Notes for further information.
Fiscal 2018 Compared With Fiscal 2017: Our net interest expense decreased in fiscal 2018 compared with fiscal 2017
primarily due to lower average debt levels as a result of $271 million of net repayment of borrowings, which included our
repayment at maturity of the entire outstanding $500 million aggregate principal amount of our 1.999% Notes due April 27, 2018.
Income Taxes
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: In the two quarters ended
January 3, 2020, our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes)
benefited from the favorable impact of:
• Excess tax benefits related to equity-based compensation;
• The ability to utilize capital loss carryforwards with a full valuation allowance against capital gains generated from
the Harris Night Vision business divestiture; and
• The release of reserves for uncertain tax positions due to statute of limitations expirations.
In the two quarters ended December 28, 2018, our effective tax rate benefited from the net favorable impact of:
• A reduction in the deferred tax liability maintained on the basis differences related to the unremitted foreign
earnings;
• The favorable impact of excess tax benefits related to equity-based compensation; and
• An increase in the R&D credit; partially offset by
• An unfavorable impact of the differences in U.S. generally accepted accounting principles (“GAAP”) and tax
accounting related to investments.
Fiscal 2019 Compared With Fiscal 2018: In fiscal 2019, our effective tax rate benefited from the net favorable impact of:
• Legislative changes from the Tax Cuts and Jobs Act which became applicable to Harris during fiscal 2019, such as:
(i) a reduction in our U.S. statutory corporate income tax rate from the blended rate of 28.1% in fiscal 2018 to a
flat 21% rate in fiscal 2019; (ii) the recent clarification that foreign military sales qualify for the foreign derived
intangible income deduction; (iii) tax planning to allow for the utilization of foreign tax credits that were
previously valued; and (iv) the loss of the U.S. domestic manufacturing deduction;
• The favorable impact of excess tax benefits related to equity-based compensation; and
• Additional research credits claimed on our prior year tax returns.
In fiscal 2018, our effective tax rate benefited from the net favorable impact of:
• The enactment of a lower U.S. statutory corporate income tax rate in fiscal 2018;
• Additional research credits claimed on our fiscal 2017 tax return compared with our recorded estimates at the end
of fiscal 2017; and
• The favorable impact of releasing provisions for uncertain tax positions.
Fiscal 2018 Compared With Fiscal 2017: The major discrete items from which our fiscal 2018 effective tax rate benefited
are those noted for fiscal 2018 in the preceding discussion under “Income Taxes.” In fiscal 2017, our effective tax rate benefited
from:
42
• The favorable impact of excess tax benefits related to equity-based compensation;
•
• Additional deductions and additional research credits claimed on our fiscal 2016 tax return compared with our
Several differences between U.S. GAAP and tax accounting related to investments; and
recorded estimates at the end of fiscal 2016.
See Note 23: Income Taxes in the Notes for further information.
Income From Continuing Operations
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increase in income
from continuing operations in the two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018
was primarily due to the combined effects of the reasons noted above in this “As Reported” discussion regarding the two quarters
ended January 3, 2020 and two quarters ended December 28, 2018.
Fiscal 2019 Compared With Fiscal 2018: The increase in income from continuing operations in fiscal 2019 compared
with fiscal 2018 was primarily due to the combined effects of the reasons noted above in this “As Reported” discussion regarding
fiscal 2019 and 2018.
Fiscal 2018 Compared With Fiscal 2017: The increase in income from continuing operations in fiscal 2018 compared
with fiscal 2017 was primarily due to the combined effects of the reasons noted above in this “As Reported” discussion regarding
fiscal 2018 and 2017.
Income From Continuing Operations Per Diluted Common Share Attributable to L3Harris Common Shareholders
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increase in income
from continuing operations per diluted common share attributable to L3Harris common shareholders in the two quarters ended
January 3, 2020 compared with the two quarters ended December 28, 2018 was primarily due to higher income from continuing
operations, as discussed above, partially offset by the increase in our diluted weighted average common shares outstanding as a
result of approximately 104 million shares issued in connection with the L3Harris Merger.
Fiscal 2019 Compared With Fiscal 2018: The increase in income from continuing operations per diluted common share in
fiscal 2019 compared with fiscal 2018 was due to the increase in income from continuing operations in fiscal 2019 compared with
fiscal 2018 and the decrease in average common shares outstanding from shares of our common stock repurchased under our
repurchase program during fiscal 2019, partially offset by shares issued under our stock incentive and defined contribution plans
and the incremental dilutive impact of share-based awards during fiscal 2019 compared with fiscal 2018.
Fiscal 2018 Compared With Fiscal 2017: The increase in income from continuing operations per diluted common share in
fiscal 2018 compared with fiscal 2017 was due to the increase in income from continuing operations in fiscal 2018 compared with
fiscal 2017 and the decrease in diluted weighted average common shares outstanding from shares of our common stock
repurchased under our repurchase program during fiscal 2018, partially offset by shares issued under our stock incentive and
defined contribution plans and the incremental dilutive impact of share-based awards during fiscal 2018 compared with fiscal
2017.
See the “Common Stock Repurchases” discussion below in this MD&A for further information.
Pro Forma
Revenue
The increase in revenue for the two quarters ended January 3, 2020 compared with pro forma revenue for the two quarters
ended December 28, 2018 was primarily due to $321 million higher revenue in our Space and Airborne Systems segment, from a
ramp in modernization of the F-35 platform in Mission Avionics, increased production of electronic warfare systems for F/A-18
and B-52 aircraft in Electronic Warfare and growth in ground-based adjacencies and exquisite systems in classified areas; $257
million higher revenue in our Integrated Mission Systems segment, driven by growth in all three businesses: ISR, Electro Optical
and Maritime; $202 million higher revenue in our Communication Systems segment, from a ramp in DoD modernization
programs in Tactical Communications and Integrated Vision Solutions as well as increased demand with state and federal
customers in Public Safety and Professional Communications; and higher revenue in our Aviation Systems segment, reflecting
organic growth from precision engagement sensors and systems, partially offset by the prior period competitive loss of the USAF
C-17 training contract.
Gross Margin
The increase in gross margin and decrease in gross margin percentage for the two quarters ended January 3, 2020 compared
with pro forma gross margin and gross margin percentage for the two quarters ended December 28, 2018 were primarily due to
higher volume and strong operational performance, partially offset by $142 million of additional cost of sales related to the fair
value step-up in inventory sold in the two quarters ended January 3, 2020.
43
Engineering, Selling and Administrative Expenses
The increases in ESA expenses and ESA percentage for the two quarters ended January 3, 2020 compared with pro forma
ESA expenses and ESA percentage for the two quarters ended December 28, 2018 were primarily due to $390 million of charges
for integration, restructuring and other costs associated with the L3Harris Merger in the two quarters ended January 3, 2020,
partially offset by integration savings.
Gain (loss) on Sale of Businesses
The increase in gain (loss) on sale of businesses for the two quarters ended January 3, 2020 compared with pro forma gain
(loss) on sale of businesses for the two quarters ended December 28, 2018 was due to a $229 million pre-tax gain on the sale of
the Harris Night Vision business, which was completed on September 13, 2019.
See Note 3: Divestitures, Asset Sales and Discontinued Operations in the Notes for further information.
Non-Operating Income
The increase in non-operating income for the two quarters ended January 3, 2020 compared with pro forma non-operating
income for the two quarters ended December 28, 2018 was primarily due to an increase in the non-service cost components of
pension and other postretirement benefit plan income, including a $23 million gain on pension plan curtailment, in the two
quarters ended January 3, 2020 and a $21 million debt extinguishment loss recognized by L3 in the two quarters ended December
28, 2018.
Net Interest Expense
The decrease in net interest expense for the two quarters ended January 3, 2020 compared with pro forma net interest
expense for the two quarters ended December 28, 2018 was primarily due to lower average debt levels as a result of the
repayment at maturity of the entire outstanding $300 million aggregate principal amount of our Floating Rate Notes due February
27, 2019. See Note 14: Debt in the Notes for further information.
Income Taxes
In the two quarters ended January 3, 2020, our effective tax rate benefited from the favorable impact of:
• Excess tax benefits related to equity-based compensation;
• The ability to utilize capital loss carryforwards with a full valuation allowance against capital gains generated from
the Harris Night Vision business divestiture; and
• The release of reserves for uncertain tax positions due to statute of limitations expirations.
See “Supplemental Unaudited Pro Forma Condensed Combined Income Statement Information” below in this MD&A for
information regarding our pro forma effective tax rate for the two quarters ended December 28, 2018.
Income From Continuing Operations
The increase in income from continuing operations for the two quarters ended January 3, 2020 compared with pro forma
income from continuing operations for the two quarters ended December 28, 2018 was primarily due to the combined effects of
the reasons noted above in this “Pro Forma” discussion regarding the two quarters ended January 3, 2020 and two quarters ended
December 28, 2018.
Income From Continuing Operations Per Diluted Common Share Attributable to L3Harris Common Shareholders
The increase in income from continuing operations per diluted common share attributable to L3Harris common
shareholders for the two quarters ended January 3, 2020 compared with pro forma income from continuing operations per diluted
common share attributable to L3Harris common shareholders for the two quarters ended December 28, 2018 was primarily due to
higher income from continuing operations, as discussed above, and the decrease in our diluted weighted average common shares
outstanding from shares of our common stock repurchased under our repurchase program during the two quarters ended January
3, 2020.
See the “Common Stock Repurchases” discussion below in this MD&A for further information.
44
Supplemental Unaudited Pro Forma Condensed Combined Income Statement Information
The following supplemental unaudited pro forma condensed combined income statement information prepared in
accordance with the requirements of Article 11 of Regulation S-X provides further information supporting the preparation of the
supplemental unaudited pro forma condensed combined financial information for the two quarters ended December 28, 2018
provided above in the “Consolidated Results of Operations” discussion in this MD&A and has been prepared to give effect to the
L3Harris Merger under the acquisition method of accounting. It combines the historical results of operations of Harris and L3 and
reflects the L3Harris Merger as if it closed on June 30, 2018, the first day of Harris’ fiscal 2019, and gives effect to pro forma
events that are (a) directly attributable to the L3Harris Merger, (b) factually supportable and (c) expected to have a continuing
impact on our results of operations. The adjustments include adjustments to reflect the sale of the Harris Night Vision business,
which is directly attributable to the L3Harris Merger, but do not include any adjustments for the use of proceeds from such sale,
because the use is not directly attributable to the L3Harris Merger. The pro forma condensed combined income statement
information is provided for informational and supplemental purposes only, and does not purport to indicate what L3Harris’ results
of operations would have been, or L3Harris’ future results of operations, had the L3Harris Merger actually occurred on June 30,
2018. The supplemental unaudited pro forma condensed combined income statement information should be read in conjunction
with other sections of this MD&A, our Consolidated Financial Statements and the Notes appearing elsewhere in this Report.
Unaudited Pro Forma Condensed Combined Statement of Income
For the Two Quarters Ended December 28, 2018
Historical
Harris
Historical
L3
Pro Forma
Adjustments
Note
References
Pro Forma
Combined
Revenue from product sales and services
$
3,208 $
(In millions, except per share amounts)
5,290 $
Cost of product sales and services
(2,105)
(3,887)
Engineering, selling and administrative expenses
(583)
(821)
a
b
a
b
c
d
b
c
e
f
j
j
j
j
g
j
j
j
j
h
i
(8)
(86)
8
60
(15)
18
13
(197)
(4)
4
(28)
(6)
6
28
32
(4)
(23)
21
6
1
15
(159)
38
(121)
—
$
8,404
(5,939)
(1,598 )
(6 )
—
—
122
—
—
7
(150)
840
(80)
760
(12)
748
3.37
3.33
221.9
224.9
k
l
l
$
$
$
—
—
—
94
—
—
1
(87)
528
(87)
441
—
—
(6 )
(28 )
—
23
(21)
—
(79)
471
(31)
440
(12)
Loss on sales of businesses
Loss on sale of Crestview Aerospace and TCS businesses
Merger, acquisition and divestiture related expenses
Non-operating income
Interest and other income, net
Debt retirement charges
Interest income
Interest expense
Income from continuing operations before income taxes
Income taxes
Income from continuing operations
Income from continuing operations attributable to
noncontrolling interests
Income from continuing operations attributable to common
shareholders
Income from continuing operations per basic common
share attributable to common shareholders
Income from continuing operations per diluted common
share attributable to common shareholders
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
$
$
$
441
$
428
$
(121)
3.74
3.66
117.8
120.3
45
104.1
104.6
Notes:
a. Reflects the elimination of intercompany balances and transactions between L3 and Harris.
b. Reflects the sale of the Harris Night Vision business.
c. Reflects the net increase in amortization expense related to the fair value of acquired finite-lived identifiable intangible assets
and the elimination of historical amortization expense recognized by L3 for the two quarters ended December 28, 2018.
Assumptions and details are as follows:
Identifiable Intangible Assets Acquired:
Customer relationships (Government)
Customer relationships (Commercial)
Trade names — Divisions
Adjustment to engineering, selling and administrative expenses
Developed technology
Less: L3 historical amortization
Adjustment to cost of product sales and services
Total net adjustment to amortization expense
Weighted
Average
Amortization
Period
Fair Value
Two Quarters
Ended
December 28,
2018
(In years)
(In millions)
15
15
9
7
$
4,677
643
123
562
$
$
175
14
8
197
42
(27)
15
212
d. Represents the elimination of $18 million of transaction costs, of which $9 million were included in merger, acquisition and
divestiture related expenses in L3’s historical statement of operations for the two quarters ended December 28, 2018 and $9
million were included in engineering, selling and administrative expenses in Harris’ historical Condensed Consolidated
Statement of Income for the two quarters ended December 28, 2018.
e.
In connection with the L3Harris Merger, on October 12, 2018, each company entered into a letter of agreement with its chief
executive officer, to outline the terms of each such person’s role and compensation arrangements following the merger.
Amounts shown reflect the increase in compensation expense as a result of these modified arrangements.
f. Reflects the impact of change-in-control payments under certain post-retirement and share-based and deferred compensation
arrangements.
g. Reflects the elimination of amortization of net actuarial losses from accumulated comprehensive loss related to L3’s
postretirement benefit plans as part of purchase accounting.
h. Reflects the elimination of amortization of deferred debt issuance costs as part of purchase accounting.
i. Reflects amortization of the increase to L3’s long-term debt based on a $172 million fair value adjustment.
j. Certain amounts from L3’s historical statement of operations data were reclassified to conform their presentation to that of
Harris. These reclassifications include:
1. Merger, acquisition and divestiture related expenses of $28 million for the two quarters ended December 28, 2018
were reclassified to engineering, selling and administrative expenses.
2. Loss on sale of the Crestview Aerospace and TCS businesses of $6 million for the two quarters ended December 28,
2018 was reclassified to loss on sales of businesses.
3.
Interest and other income, net of $23 million, of which $6 million was reclassified to interest income and $17
million was reclassified to non-operating income for the two quarters ended December 28, 2018.
4. Debt retirement charges of $21 million for the two quarters ended December 28, 2018 was reclassified to non-
operating income
k. Represents the income tax impact of the pro forma adjustments, using the blended worldwide tax rates for L3, in the case of
pro forma adjustments to L3’s historical results, and the federal and state statutory tax rates for Harris, in the case of pro
forma adjustments to Harris’ historical results. As a result, the combined statutory tax rate used to tax-effect the pro forma
adjustments was approximately 10 percent for the two quarters ended December 28, 2018. This tax rate does not represent the
combined company’s effective tax rate, which will include other tax charges and benefits, and does not take into account any
historical or possible future tax events that may impact the combined company following the consummation of the L3Harris
Merger.
46
l.
Increase in common stock due to shares of L3Harris common stock issued for L3 common stock, L3 restricted stock units
and L3 performance stock units. Diluted shares also include the dilutive impact of L3Harris stock options issued for L3 stock
options calculated using the treasury stock method.
Discussion of Business Segment Results of Operations
Integrated Mission Systems Segment
Two Quarters Ended
Fiscal Years Ended
January 3,
2020
December 28,
2018
Percent
Increase/
(Decrease)
June 28,
2019
June 29,
2018
(Dollars in millions)
Percent
Increase/
(Decrease)
June 30,
2017
Percent
Increase/
(Decrease)
$ 2,774
377
$
14%
$
$
23
3
13%
*
*
$
$
$
$
48
9
19%
45
7
16%
7% $
29% $
38
7
18%
18%
—%
Revenue
Operating income
% of revenue
__________
*
Not meaningful
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increases in segment
revenue, operating income and operating income as a percentage of revenue (“operating margin percentage”) in the two quarters
ended January 3, 2020 compared with the two quarters ended December 28, 2018 were primarily due to the inclusion of L3
operations in segment operating results as a result of the L3Harris Merger during the two quarters ended January 3, 2020. Because
the Integrated Mission Systems segment is almost entirely comprised of L3 businesses, comparison to prior year segment
operating metrics is not meaningful. In the two quarters ended January 3, 2020, segment revenue also benefited from $213 million
of revenue growth in ISR and growth in Electro Optical. The funded backlog for this segment was approximately $5.3 billion at
January 3, 2020 compared with $5.4 billion at the beginning of the Fiscal Transition Period (including backlog acquired on June
29, 2019 in connection with the L3Harris Merger). Segment revenue, operating income and operating margin percentage were
comparable and not material in fiscal 2019, 2018 and 2017.
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 75 percent
in the two quarters ended January 3, 2020.
Space and Airborne Systems Segment
Two Quarters Ended
Fiscal Years Ended
January 3,
2020
December 28,
2018
Percent
Increase/
(Decrease)
June 28,
2019
June 29,
2018
(Dollars in millions)
Percent
Increase/
(Decrease)
June 30,
2017
Percent
Increase/
(Decrease)
Revenue
Operating income
% of revenue
$ 2,360
442
$
19%
$ 1,741
328
$
19%
36% $ 3,715
697
35% $
19%
$ 3,304
628
$
19%
12% $ 3,156
559
11% $
18%
5%
12%
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increases in segment
revenue and operating income in the two quarters ended January 3, 2020 compared with the two quarters ended December 28,
2018 were primarily due to the inclusion of L3 operations in segment operating results as a result of the L3Harris Merger during
the two quarters ended January 3, 2020, as well as higher revenue in Mission Avionics from growth on long-term platforms, $54
million higher revenue from growth in ground-based adjacencies and exquisite systems in classified areas and $58 million of
higher revenue in Electronic Warfare from increased production of electronic warfare systems for F/A-18 and B-52 aircraft.
Segment operating margin percentage in the two quarters ended January 3, 2020 was comparable with the two quarters ended
December 28, 2018. The funded backlog for this segment was approximately $3.9 billion at January 3, 2020 compared with $4.3
billion at the beginning of the Fiscal Transition Period (including backlog acquired on June 29, 2019 in connection with the
L3Harris Merger).
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 88 percent
in the two quarters ended January 3, 2020 compared with 89 percent in the two quarters ended December 28, 2018.
Fiscal 2019 Compared With Fiscal 2018: The increase in revenue in fiscal 2019 compared with fiscal 2018 was primarily
due to higher Mission Avionics and Electronic Warfare revenue from long-term avionics platforms, including the F-35, F/A-18,
47
F-16, CV-22 and B-52, and higher revenue from classified programs, driven by exquisite systems, small satellites and next
generation technology, partially offset by lower revenue from environmental programs.
Segment operating income increased in fiscal 2019 and operating margin percentage was comparable with fiscal 2018,
reflecting higher volume and strong program execution, offset by higher investments and employment costs.
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 91 percent
in fiscal 2019 compared with 90 percent in fiscal 2018.
Fiscal 2018 Compared With Fiscal 2017: The increase in revenue in fiscal 2018 compared with fiscal 2017 was primarily
due to higher Mission Avionics and Electronic Warfare revenue from long-term avionics platforms, including the F-35, F/A-18
and F-16, higher revenue from classified programs, primarily driven by space superiority programs, and higher revenue from
commercial customers, partially offset by lower civil revenue reflecting the impact of lower revenue from environmental
programs.
Segment operating income and operating margin percentage increased in fiscal 2018 compared with fiscal 2017, reflecting
higher volume, a more favorable mix of program revenue, incremental pension income, and productivity savings, partially offset
by increased R&D investments, higher employment costs and the timing of other expense accruals.
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 90 percent
in fiscal 2018 compared with 89 percent in fiscal 2017.
Communication Systems Segment
Two Quarters Ended
Fiscal Years Ended
January 3,
2020
December 28,
2018
Percent
Increase/
(Decrease)
June 28,
2019
June 29,
2018
(Dollars in millions)
Percent
Increase/
(Decrease)
June 30,
2017
Percent
Increase/
(Decrease)
Revenue
Operating income
% of revenue
$ 2,151
493
$
23%
$ 1,018
294
$
29%
111% $ 2,208
637
68% $
29%
$ 2,015
561
$
28%
10% $ 1,891
522
14% $
28%
7%
7%
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increases in segment
revenue and operating income in the two quarters ended January 3, 2020 compared with the two quarters ended December 28,
2018 were primarily due to the inclusion of L3 operations in segment operating results as a result of the L3Harris Merger during
the two quarters ended January 3, 2020, as well as $112 million of higher revenue in Tactical Communications from a ramp in
DoD modernization programs, $46 million of higher revenue in Public Safety, reflecting increased demand from state and federal
customers, and $38 million of higher revenue in Integrated Vision Solutions. The funded backlog for this segment was
approximately $3.7 billion at January 3, 2020 compared with $3.2 billion at the beginning of the Fiscal Transition Period
(including backlog acquired on June 29, 2019 in connection with the L3Harris Merger).
The decrease in segment operating margin percentage in the two quarters ended January 3, 2020 compared with the two
quarters ended December 28, 2018 was primarily due to a mix of program revenue and product sales with relatively lower
operating margin percentage, partially offset by strong operational performance and integration savings.
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 69 percent
in the two quarters ended January 3, 2020 compared with 54 percent in the two quarters ended December 28, 2018.
Fiscal 2019 Compared With Fiscal 2018: The increase in revenue in fiscal 2019 compared with fiscal 2018 was primarily
due to higher revenue in Tactical Communications, driven by DoD Tactical from a ramp in DoD modernization programs, and
higher revenue in Public Safety and Professional Communications from state and federal agencies.
Segment operating income and operating margin percentage increased in fiscal 2019 compared with fiscal 2018, reflecting
higher volume and productivity savings, partially offset by increased investments in R&D and bids and proposals.
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 53 percent
in fiscal 2019 compared with 49 percent in fiscal 2018.
Fiscal 2018 Compared With Fiscal 2017: The increase in revenue in fiscal 2018 compared with fiscal 2017 was primarily
due to higher DoD tactical radio sales, reflecting readiness and modernization demand from the U.S. Army and USAF.
48
Segment operating income increased in fiscal 2018 and operating margin percentage was comparable with fiscal 2017,
reflecting higher volume and productivity savings, partially offset by a less favorable mix of program revenue and product sales
and higher employment costs.
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 49 percent
in fiscal 2018 compared with 46 percent in fiscal 2017.
Aviation Systems Segment
Two Quarters Ended
Fiscal Years Ended
January 3,
2020
December 28,
2018
Percent
Increase/
(Decrease)
June 28,
2019
June 29,
2018
(Dollars in millions)
Percent
Increase/
(Decrease)
June 30,
2017
Percent
Increase/
(Decrease)
Revenue
Operating income
% of revenue
$ 2,038
289
$
14%
$
$
342
40
12%
496% $
623% $
$
$
672
76
11%
668
54
8%
1% $
41% $
697
131
19%
(4%)
(59%)
Two quarters ended January 3, 2020 Compared With Two quarters ended December 28, 2018: The increases in segment
revenue, operating income and operating margin percentage in the two quarters ended January 3, 2020 compared with the two
quarters ended December 28, 2018 were primarily due to the inclusion of L3 operations in segment operating results as a result of
the L3Harris Merger during the two quarters ended January 3, 2020. Because the Aviation Systems segment is primarily
comprised of L3 businesses, comparison to certain prior year segment operating metrics is not meaningful. In the two quarters
ended January 3, 2020, segment revenue also reflected growth from precision engagement sensors and systems and $24 million of
higher revenue in Mission Networks, partially offset by a $50 million revenue impact from the prior period competitive loss of the
C-17 training contract. The funded backlog for this segment was approximately $3.4 billion at January 3, 2020 compared with
$3.1 billion at the beginning of the Fiscal Transition Period (including backlog acquired on June 29, 2019 in connection with the
L3Harris Merger).
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 59 percent
in the two quarters ended January 3, 2020.
Fiscal 2019 Compared With Fiscal 2018: The slight increase in revenue in fiscal 2019 compared with fiscal 2018 was
primarily due to higher Mission Networks revenue. The increase in segment operating income and operating margin percentage in
fiscal 2019 compared with fiscal 2018 was primarily due improved operational performance and cost containment.
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 86 percent
in fiscal 2019 compared with 87 percent in fiscal 2018.
Fiscal 2018 Compared With Fiscal 2017: The slight decrease in revenue in fiscal 2018 compared with fiscal 2017 was
primarily due to lower Mission Networks revenue. The decrease in segment operating income and operating margin percentage in
fiscal 2018 compared with fiscal 2017 was primarily due to a $36 million unfavorable impact from the ADS-B program, including
a favorable contract settlement in the second quarter of fiscal 2017 and the program transition from build-out to sustainment.
The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign
military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 87 percent
in fiscal 2018 compared with 89 percent in fiscal 2017.
49
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES
Cash Flows
Two Quarters Ended
Fiscal Years Ended
January 3,
2020
December 28,
2018
June 28,
2019
June 29,
2018
June 30,
2017
Net cash provided by operating activities
$
939
$
Net cash provided by (used in) investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash
equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
(Dollars in millions)
$
469
(67)
(342)
$
1,185
(159)
(781)
1,320
(1,971)
6
294
530
824
$
(5)
55
288
343
$
(3)
242
288
530
751
(141)
(805)
(1)
(196)
484
$
569
870
(1,438)
(4)
(3)
487
484
$
288
$
Cash and cash equivalents
The $294 million net increase in cash and cash equivalents during the two quarters ended January 3, 2020 was primarily due
to:
•
•
•
•
•
•
•
•
•
•
$1,130 million of net cash acquired in the L3Harris Merger;
$939 million of net cash provided by operating activities;
$343 million of net proceeds from sale of business; and
$109 million of proceeds from exercises of employee stock options; partially offset by
$1,500 million used to repurchase shares of our common stock;
$337 million used to pay cash dividends;
$173 million used for net additions of property, plant and equipment;
$109 million used for net repayments of borrowings, including $400 million in proceeds from the issuance of our
2.900% notes due December 15, 2029, $400 million used for our optional redemption of our 2.7% Notes due April
27, 2020 and $100 million used for repayment of short-term debt;
$86 million used for tax withholding payments associated with vested share-based awards; and
$38 million used in other financing activities.
The $242 million net increase in cash and cash equivalents during fiscal 2019 was primarily due to:
•
•
•
•
•
•
•
$1,185 million of net cash provided by operating activities; and
$50 million of proceeds from exercises of employee stock options; partially offset by
$325 million used to pay cash dividends;
$281 million used for net repayments of borrowings, including repayment at maturity of the entire outstanding
$300 million aggregate principal amount of our Floating Rate Notes due February 27, 2019;
$200 million used to repurchase shares of our common stock;
$161 million used for net additions of property, plant and equipment; and
$24 million used for tax withholding payments associated with vested share-based awards.
Refer to the Liquidity, Capital Resources and Financial Strategies section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 28, 2019 (our
“Fiscal 2019 Form 10-K”) for discussion of the changes in cash and cash equivalents during fiscal 2018.
We ended the Fiscal Transition Period with cash and cash equivalents of $824 million, and we have a senior unsecured $2
billion revolving credit facility that expires in June 2024 (all of which was available to us as of January 3, 2020). Additionally, we
had $6.7 billion of net long-term debt outstanding at January 3, 2020, the majority of which we incurred in connection with our
the L3Harris Merger in the Fiscal Transition Period and the acquisition of Exelis in the fourth quarter of fiscal 2015. For further
information regarding our long-term debt, see Note 14: Debt in the Notes. Our $824 million of cash and cash equivalents at
January 3, 2020 included $437 million held by our foreign subsidiaries, a significant portion of which can be repatriated to the
U.S. with minimal tax cost.
Given our current cash position, outlook for funds generated from operations, credit ratings, available credit facility, cash
needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity,
although we can give no assurances concerning our future liquidity, particularly in light of our current level of debt, U.S.
Government budget uncertainties and the state of global commerce and financial uncertainty.
50
We also currently believe that existing cash, funds generated from operations, our credit facility and access to the public and
private debt and equity markets will be sufficient to provide for our anticipated working capital requirements, capital
expenditures, dividend payments, repurchases under our share repurchase program and repayments of our debt securities at
maturity for the next twelve months and reasonably foreseeable future thereafter. Our total capital expenditures for fiscal 2020 are
expected to be approximately $400 million. We anticipate tax payments for fiscal 2020 to be approximately equal to or marginally
less than our tax expense for the same period, subject to adjustment for certain timing differences. For additional information
regarding our income taxes, see Note 23: Income Taxes in the Notes. Other than those cash outlays noted in the “Contractual
Obligations” discussion below in this MD&A (including repayment at maturity of the entire $250 million of our Floating Rate
Notes due April 30, 2020), capital expenditures, dividend payments, repurchases under our share repurchase program, L3Harris
Merger-related transaction and integration costs and cash payments to counterparties upon termination of yield-based treasury
lock agreements (see Note 20: Derivative Instruments and Hedging Activities in the Notes for additional information regarding
derivative instruments), we do not anticipate any significant cash outlays in fiscal 2020.
There can be no assurance, however, that our business will continue to generate cash flows at current levels or that the cost
or availability of future borrowings, if any, under our commercial paper program or our credit facility or in the debt markets will
not be impacted by any potential future credit and capital markets disruptions. If we are unable to maintain cash balances or
generate sufficient cash flow from operations to service our obligations, we may be required to sell assets, reduce capital
expenditures, reduce or eliminate strategic acquisitions, reduce or terminate our share repurchases, reduce or eliminate dividends,
refinance all or a portion of our existing debt or obtain additional financing. Our ability to make principal payments or pay
interest on or refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are
subject to general conditions in or affecting the defense, government and other markets we serve and to general economic,
political, financial, competitive, legislative and regulatory factors beyond our control.
Net cash provided by operating activities: The $470 million increase in net cash provided by operating activities in the
two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018 was primarily due to the impact of
higher income, including a $229 million pre-tax gain on sale of business, $182 million decrease in net cash used to fund working
capital and $157 million more in share-based compensation, partially offset by $328 million more in qualified pension
contributions, including a $302 million voluntary contribution, in the two quarters ended January 3, 2020.
The $434 million increase in net cash provided by operating activities in fiscal 2019 compared with fiscal 2018 was
primarily due to the impact of higher income in fiscal 2019 and a $300 million voluntary contribution to our U.S. qualified
pension plans in fiscal 2018, partially offset by higher cash paid for income taxes.
Refer to the Liquidity, Capital Resources and Financial Strategies section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Fiscal 2019 Form 10-K for discussion of the changes in net cash provided
by operating changes during fiscal 2018.
Cash flow from operations was positive in all of our business segments in the two quarters ended January 3, 2020 and fiscal
2019, 2018 and 2017.
Net cash provided by (used in) investing activities: The $1.4 billion increase in net cash provided by investing activities
in the two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018 was primarily due to $1.1
billion of net cash acquired in the L3Harris Merger and $343 million of net proceeds from the sale of the Harris Night Vision
business, partially offset by a $106 million increase in cash used for additions of property, plant and equipment.
The $18 million increase in net cash used in investing activities in fiscal 2019 compared with fiscal 2018 was primarily due
to a $25 million increase in cash used for additions of property, plant and equipment.
Refer to the Liquidity, Capital Resources and Financial Strategies section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Fiscal 2019 Form 10-K for discussion of the changes in net cash used in
investing activities from fiscal 2017 to fiscal 2018.
Net cash used in financing activities: The $1.6 billion increase in net cash used in financing activities in the two quarters
ended January 3, 2020 compared with the two quarters ended December 28, 2018 was primarily due to a $1.3 billion increase in
cash used to repurchase our common stock, a $174 million increase in cash used to pay dividends, a $132 million increase in net
cash used for net repayments of borrowings and a $66 million increase in cash used for tax withholding payments associated with
vested share-based awards, partially offset by a $91 million increase in proceeds from exercises of employee stock options.
The $24 million decrease in net cash used in financing activities in fiscal 2019 compared with fiscal 2018 was primarily due
to a $72 million decrease in cash used to repurchase our common stock, partially offset by a $53 million increase in cash used to
pay dividends.
51
Refer to the Liquidity, Capital Resources and Financial Strategies section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Fiscal 2019 Form 10-K for discussion of the changes in net cash used in
financing activities from fiscal 2017 to fiscal 2018.
Funding of Pension Plans
Funding requirements under applicable laws and regulations are a major consideration in making contributions to our U.S.
pension plans. Although we have significant discretion in making voluntary contributions, the Employee Retirement Income
Security Act of 1974, as amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and
Employer Recovery Act of 2008, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) and applicable Internal
Revenue Code regulations mandate minimum funding thresholds. Failure to satisfy the minimum funding thresholds could result
in restrictions on our ability to amend the plan or make benefit payments. With respect to our U.S. qualified pension plans, we
intend to contribute annually not less than the required minimum funding thresholds.
The Highway and Transportation Funding Act of 2014 and the Bipartisan Budget Act of 2015 further extended the interest
rate stabilization provision of MAP-21 until 2020. We made voluntary contributions to our U.S. qualified defined benefit pension
plans of $302 million in the two quarters ended January 3, 2020 and $300 million and $400 million in fiscal 2018 and 2017,
respectively. As a result, we currently do not anticipate making any contributions to our U.S. qualified defined benefit pension
plans and we anticipate making only minor contributions to our non-U.S. pension plans during fiscal 2020.
Future required contributions primarily will depend on the actual annual return on assets and the discount rate used to
measure the benefit obligation at the end of each year. Depending on these factors, and the resulting funded status of our pension
plans, the level of future statutory minimum contributions could be material. We had unfunded defined benefit pension plan
obligations of approximately $1.7 billion as of January 3, 2020 compared with approximately $1.2 billion as of June 28, 2019.
This 42 percent increase in unfunded defined benefit pension plan obligations was primarily due to the inclusion of L3’s defined
benefit pension plans assumed in the L3Harris Merger. See Note 15: Pension and Other Postretirement Benefits in the Notes for
further information regarding our defined benefit plans.
Common Stock Repurchases
During the two quarters ended January 3, 2020, we used $1.5 billion to repurchase 7,356,168 shares of our common stock
under our 2019 Repurchase Program at an average price per share of $203.92, including commissions of $.02 per share. During
the two quarters ended December 28, 2018 (our first two quarters of fiscal 2019), we repurchased 1,219,750 shares of our
common stock under our prior repurchase program for $200 million at an average price per share of $163.99, including
commissions of $.02 per share. We did not repurchase any shares of our common stock under our prior repurchase program
during the third and fourth quarters of fiscal 2019. In the two quarters ended January 3, 2020, $86 million in shares of our
common stock were delivered to us or withheld by us to satisfy withholding taxes on employee share-based awards. In fiscal
2019, $24 million in shares of our common stock were delivered to us or withheld by us to satisfy withholding taxes on employee
share-based awards. Shares repurchased by us are cancelled and retired.
On July 1, 2019, we announced that our Board of Directors approved the 2019 Repurchase Program, a $4 billion share
repurchase authorization that does not have a stated expiration date. The 2019 Repurchase Program replaced our prior share
repurchase program, which had a remaining unused authorization of approximately $501 million, as well as L3’s prior share
repurchase program. At January 3, 2020, we had a remaining, unused authorization of approximately $2.5 billion under our 2019
Repurchase Program. Repurchases under the 2019 Repurchase Program may be made through open-market transactions, private
transactions, transactions structured through investment banking institutions or any combination thereof. The level of our
repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of
operations, future business prospects and other factors our Board and management may deem relevant. The timing, volume and
nature of repurchases are subject to market conditions, applicable securities laws and other factors and are at our discretion and
may be suspended or discontinued at any time. Additional information regarding our 2019 Repurchase Program is set forth above
under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”
of this Report.
Dividends
On February 28, 2020, our Board of Directors increased the quarterly cash dividend rate on our common stock from $.75
per share to $.85 per share, for an annualized cash dividend rate of $3.40 per share, which was our nineteenth consecutive annual
increase in our quarterly cash dividend rate. Our annualized cash dividend rate was $3.00 per share in the two quarters ended
January 3, 2020 and $2.74 per share, $2.28 per share and $2.12 per share in fiscal 2019, 2018 and 2017, respectively. Quarterly
cash dividends are typically paid in March, June, September and December. We currently expect that cash dividends will continue
to be paid in the near future, but we can give no assurances concerning payment of future dividends or future dividend increases.
The declaration of dividends and the amount thereof will depend on a number of factors, including our financial condition, capital
requirements, cash flows, results of operations, future business prospects and other factors our Board of Directors may deem
52
relevant. Additional information concerning our dividends is set forth above under “Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report.
Capital Structure and Resources
2019 Credit Agreement: As discussed in Note 13: Credit Arrangements in the Notes, on June 28, 2019, we established a
new $2 billion, 5-year senior unsecured revolving credit facility (the “2019 Credit Facility”) by entering into a Revolving Credit
Agreement (the “2019 Credit Agreement”) with a syndicate of lenders. The 2019 Credit Facility replaced our prior $1 billion, 5-
year senior unsecured revolving credit facility (the “2018 Credit Facility”). The description of the 2019 Credit Facility and the
2019 Credit Agreement set forth in Note 13: Credit Arrangements in the Notes is incorporated herein by reference.
We were in compliance with the covenants in the 2019 Credit Agreement at January 3, 2020, including the covenant
requiring that we not permit our ratio of consolidated total indebtedness to total capital, each as defined in the 2019 Credit
Agreement, to be greater than 0.65 to 1.00. At January 3, 2020, we had no borrowings outstanding under the 2019 Credit
Arrangement.
Exchange Offer: In connection with the L3Harris Merger, on May 30, 2019, we commenced offers to eligible holders to
exchange any and all outstanding 4.950% Senior Notes due 2021, 3.850% Senior Notes due 2023, 3.950% Senior Notes due
2024, 3.850% Senior Notes due 2026 and 4.400% Senior Notes due 2028 issued by L3 for up to $3.35 billion aggregate principal
amount of new notes issued by L3Harris and cash. On July 2, 2019, we settled the debt exchange offer. See Note 14: Debt in the
Notes for additional information.
Short-Term Debt: Our short-term debt at January 3, 2020, June 28, 2019 and June 29, 2018 was $3 million, $103 million
and $78 million, respectively, consisting of commercial paper and local borrowing by international subsidiaries for working
capital needs. Our commercial paper program was supported by the 2019 Credit Facility at January 3, 2020 and June 28, 2019 and
the 2018 Credit Facility at June 29, 2018. See Note 13: Credit Arrangements in the Notes for additional information regarding
credit arrangements.
Long-Term Variable-Rate Debt: The description of our long-term variable-rate debt set forth in Note 14: Debt in the
Notes is incorporated herein by reference. As discussed in Note 14: Debt in the Notes, during the third quarter of fiscal 2019, we
repaid at maturity the entire outstanding $300 million aggregate principal amount of our Floating Rate Notes due February 27,
2019 that had been issued in the third quarter of fiscal 2018. During the second quarter of fiscal 2018, we completed the issuance
and sale of $250 million in aggregate principal amount of Floating Rate Notes due April 30, 2020 and used the net proceeds,
together with cash on hand, to repay in full the $253 million in remaining outstanding indebtedness under the 5-year tranche of
our $1.3 billion senior unsecured term loan facility pursuant to our Term Loan Agreement, dated as of March 16, 2015. We repaid
the entire $305 million in remaining outstanding indebtedness under our variable-rate term loans during fiscal 2018.
Long-Term Fixed-Rate Debt: The description of our long-term fixed-rate debt set forth in Note 14: Debt in the Notes is
incorporated herein by reference. As discussed in Note 14: Debt in the Notes, on November 27, 2019, in order to fund our
optional redemption of our 2.7% Notes due April 27, 2020 (the “2.7% 2020 Notes”), we completed the issuance and sale of $400
million in aggregate principal amount of 2.900% Notes due December 15, 2029. On December 16, 2019, we completed our
optional redemption of the entire outstanding $400 million aggregate principal amount of the 2.7% 2020 Notes at a “make-whole”
redemption price of $403 million, as set forth in the 2.7% 2020 Notes. The 2.7% 2020 Notes were terminated and cancelled. On
June 4, 2018, in order to fund our optional redemption of the 2018 Redeemed Notes described below, we completed the issuance
and sale of $850 million in aggregate principal amount of 4.400% Notes due June 15, 2028. On June 22, 2018, we completed our
optional redemption of the entire outstanding $400 million aggregate principal amount of our 4.4% Notes due December 15, 2020
(the “4.4% 2020 Notes”) and $400 million aggregate principal amount of our 5.55% Notes due October 1, 2021 (the “5.55% 2021
Notes” and collectively with the 4.4% 2020 Notes, the “2018 Redeemed Notes”) at a “make-whole” redemption price as set forth
in the 4.4% 2020 Notes and the 5.55% 2021 Notes, respectively. The combined “make-whole” redemption price for the 2018
Redeemed Notes was $844 million. The 2018 Redeemed Notes were terminated and cancelled. During the fourth quarter of fiscal
2018, we also repaid at maturity the entire outstanding $500 million aggregate principal amount of our 1.999% Notes due April
27, 2018.
During fiscal 2017, we repaid at maturity the entire outstanding $250 million aggregate principal amount of our 4.25%
Notes due October 1, 2016.
Other Agreements: We have a receivable sales agreement (“RSA”) with a third-party financial institution that permits us
to sell, on a non-recourse basis, up to $100 million of outstanding receivables at any given time. From time to time, we have sold
certain customer receivables under the RSA, which we continue to service and collect on behalf of the third-party financial
institution and which we account for as sales of receivables with sale proceeds included in net cash from operating activities. The
impact to net cash from operating activities from these transactions was not material in the two quarters ended January 3, 2020 or
fiscal 2019, 2018 or 2017.
53
Contractual Obligations
At January 3, 2020, we had contractual cash obligations to repay debt, to purchase goods and services and to make
payments under operating leases. Payments due under these long-term obligations are as follows:
Long-term debt
Purchase obligations (1)
Operating lease commitments
Interest on long-term debt
Minimum pension contributions (2)
Total(3)
Payment Due by Period
Total
Less than
1 Year
Years
1 - 3
Years
3 - 5
More than
5 Years
$ 6,825
3,395
1,058
2,603
5
$ 13,886
$
257
2,818
162
273
5
$ 3,515
(In millions)
662
$
528
257
496
—
$ 1,943
$ 1,156
40
189
441
—
$ 1,826
$ 4,750
9
450
1,393
—
$ 6,602
_______________
(1) The purchase obligations of $3.4 billion included $568 million of purchase obligations related to cost-plus type contracts where our costs are fully
reimbursable.
(2) Amount includes fiscal 2020 minimum contributions to non-U.S. pension plans. Contributions beyond fiscal 2020 have not been determined. During the two
quarters ended January 3, 2020, we contributed $328 million to our qualified pension plans, including voluntary contributions of $302 million to our U.S.
qualified defined benefit pension plans. During fiscal 2018 and 2017, we also made voluntary contributions of $700 million to our U.S. qualified defined
benefit pension plans. As a result, we currently do not anticipate making any contributions to our U.S. qualified defined benefit pension plans and only minor
contributions to non-U.S. pension plans during fiscal 2020.
(3) The above table does not include unrecognized tax benefits of $438 million.
Off-Balance Sheet Arrangements
In accordance with the definition under SEC rules, any of the following qualify as off-balance sheet arrangements:
• Any obligation under certain guarantee contracts;
• A retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves
as credit, liquidity or market risk support to that entity for such assets;
• Any obligation, including a contingent obligation, under certain derivative instruments; and
• Any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that
is held by, and material to, the registrant, where such entity provides financing, liquidity, market risk or credit risk
support to the registrant, or engages in leasing, hedging or R&D services with the registrant.
As of January 3, 2020, we were not participating in any material transactions that generated relationships with
unconsolidated entities or financial partnerships, including variable interest entities, and we did not have any material retained or
contingent interest in assets as defined above. As of January 3, 2020, we did not have material financial guarantees or other
contractual commitments that are reasonably likely to adversely affect our financial condition, results of operations or cash flows,
and we were not a party to any related party transactions that materially affect our financial condition, results of operations or
cash flows.
We have, from time to time, divested certain of our businesses and assets. In connection with these divestitures, we often
provide representations, warranties and/or indemnities to cover various risks and unknown liabilities, such as environmental
liabilities and tax liabilities. We cannot estimate the potential liability from such representations, warranties and indemnities
because they relate to unknown conditions. We do not believe, however, that the liabilities relating to these representations,
warranties and indemnities will have a material adverse effect on our financial condition, results of operations or cash flows.
Due to our downsizing of certain operations pursuant to acquisitions, divestitures, restructuring plans or otherwise, certain
properties leased by us have been sublet to third parties. If any of these third parties vacates any of these premises, we would be
legally obligated under master lease arrangements. We believe that the financial risk of default by such sublessees is individually
and in the aggregate not material to our financial condition, results of operations or cash flows.
54
Commercial Commitments
We have entered into commercial commitments in the normal course of business including surety bonds, standby letter of
credit agreements and other arrangements with financial institutions and customers primarily relating to the guarantee of future
performance on certain contracts to provide products and services to customers or to obtain insurance policies with our insurance
carriers. At January 3, 2020, we had commercial commitments on outstanding surety bonds, standby letters of credit and other
arrangements, as follows:
Total
Less than
1 Year
Year 2
Year 3
After 3 years
Expiration of Commitments
(In millions)
Surety bonds used for:
Performance
Standby letters of credit used for:
Down payments
Performance
Warranty
Total commitments
$
$
539
$
395
$
16
$
10
$
271
345
77
693
1,232
$
155
171
59
385
780
$
65
55
17
137
153
$
40
47
—
87
97
$
118
11
72
1
84
202
The surety bonds and standby letters of credit used for performance are primarily related to Public Safety and Professional
Communications. As is customary in bidding for and completing network infrastructure projects for public safety systems,
contractors are required to procure surety bonds and/or standby letters of credit for bids, performance, warranty and other
purposes (collectively, “Performance Bonds”). Such Performance Bonds normally have maturities of up to three years and are
standard in the industry as a way to provide customers a mechanism to seek redress if a contractor does not satisfy performance
requirements under a contract. Typically, a customer is permitted to draw on a Performance Bond if we do not fulfill all terms of a
project contract. In such an event, we would be obligated to reimburse the financial institution that issued the Performance Bond
for the amounts paid. It has been rare for our Public Safety and Professional Communications business to have a Performance
Bond drawn upon. In addition, pursuant to the terms under which we procure Performance Bonds, if our credit ratings are lowered
to below “investment grade,” we may be required to provide collateral to support a portion of the outstanding amount of
Performance Bonds. Such a downgrade could increase the cost of the issuance of Performance Bonds and could make it more
difficult to procure Performance Bonds, which would adversely impact our ability to compete for contract awards. Such collateral
requirements could also result in less liquidity for other operational needs or corporate purposes. In addition, any future
disruptions, uncertainty or volatility in financial and insurance markets could also adversely affect our ability to obtain
Performance Bonds and may result in higher funding costs.
Financial Risk Management
In the normal course of business, we are exposed to risks associated with foreign currency exchange rates and changes in
interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure
to such risks.
Foreign Exchange and Currency: Our U.S. and foreign businesses enter into contracts with customers, subcontractors or
vendors that are denominated in currencies other than functional currencies of such businesses. We use foreign currency forward
contracts and options to hedge both balance sheet and off-balance sheet future foreign currency commitments. Factors that could
impact the effectiveness of our hedging programs for foreign currency include accuracy of sales estimates, volatility of currency
markets and the cost and availability of hedging instruments. A 10 percent change in currency exchange rates for our foreign
currency derivatives held at January 3, 2020 would not have had a material impact on the fair value of such instruments or our
results of operations or cash flows. This quantification of exposure to the market risk associated with foreign currency financial
instruments does not take into account the offsetting impact of changes in the fair value of our foreign denominated assets,
liabilities and firm commitments. See Note 20: Derivative Instruments and Hedging Activities in the Notes for additional
information.
Interest Rates: As of January 3, 2020, we had long-term fixed-rate debt obligations. The fair value of these obligations is
impacted by changes in interest rates; however, a 10 percent change in interest rates for our long-term fixed-rate debt obligations
at January 3, 2020 would not have had a material impact on the fair value of these obligations. There is no interest-rate risk
associated with long-term fixed-rate debt obligations on our results of operations and cash flows unless existing obligations are
refinanced upon maturity at then-current interest rates, because the interest rates are fixed until maturity, and because our long-
term fixed-rate debt is not putable to us (i.e., not required to be redeemed by us prior to maturity). We can give no assurances,
55
however, that interest rates will not change significantly or have a material effect on the fair value of our long-term fixed-rate debt
obligations over the next twelve months. See Note 14: Debt in the Notes for information regarding the maturities of our long-term
fixed-rate debt obligations.
We use derivative instruments from time to time to manage our exposure to interest rate risk associated with our anticipated
issuance of new long-term fixed-rate notes to repay at maturity our existing long-term fixed-rate debt obligations. If the derivative
instrument is designated as a cash flow hedge, gains and losses from changes in the fair value of such instrument are deferred and
included as a component of accumulated other comprehensive loss and reclassified to interest expense in the period in which the
hedged transaction affects earnings. See Note 20: Derivative Instruments and Hedging Activities in the Notes for additional
information.
At January 3, 2020, we had two outstanding treasury lock agreements, with a notional amount of $650 million, to hedge our
exposure to fluctuations in the benchmark interest rate (10-year U.S. Treasury rate) associated with our anticipated issuance of
long-term fixed-rate notes to redeem or repay at maturity the entire $650 million outstanding principal amount of the 4.95% Notes
due February 15, 2021 (“4.95% 2021 Notes”). We designated these treasury locks as cash flow hedges against fluctuations in
interest payments on the 4.95% 2021 Notes due to changes in the benchmark interest rate prior to issuance, which we expect to
occur before the date of maturity of the 4.95% 2021 Notes. An unrealized after-tax loss of $16 million associated with these
treasury locks was deferred in accumulated other comprehensive loss at January 3, 2020. A 10 percent change in the 10-year U.S.
Treasury rate at September 27, 2019 would not have had a material impact on the fair value of these treasury lock agreements or
our results of operations or cash flows. See Note 20: Derivative Instruments and Hedging Activities in the Notes for additional
information.
As of January 3, 2020, we also had long-term variable-rate debt obligations of $250 million of Floating Rate Notes due
April 30, 2020. These debt obligations bear interest that is variable based on certain short-term indices, thus exposing us to
interest-rate risk; however, a 10 percent change in interest rates for these debt obligations at January 3, 2020 would not have had a
material impact on our results of operations or cash flows. See Note 14: Debt in the Notes for further information.
We have also used short-term variable-rate debt borrowings, primarily under our commercial paper program, which are
subject to interest rate risk. We utilize our commercial paper program to satisfy short-term cash requirements, including bridge
financing for strategic acquisitions until longer-term financing arrangements are put in place, temporarily funding repurchases
under our share repurchase programs and temporarily funding redemption of long-term debt. The interest rate risk associated with
such debt on our results of operations and cash flows is not material due to its temporary nature.
Impact of Foreign Exchange
Approximately 40 percent of our international business was transacted in local currency environments in the two quarters
ended January 3, 2020 compared with 18 percent in fiscal 2019 and 22 percent in fiscal 2018. The impact of translating the assets
and liabilities of these operations to U.S. Dollars is included as a component of shareholders’ equity. As of January 3, 2020, the
cumulative foreign currency translation adjustment included in shareholders’ equity was a $81 million loss compared with a $106
million loss at June 28, 2019 and $99 million loss at June 29, 2018. We utilize foreign currency hedging instruments to minimize
the currency risk of international transactions. Gains and losses resulting from currency rate fluctuations did not have a material
effect on our results in the two quarters ended January 3, 2020 or fiscal 2019, 2018 or 2017.
Impact of Inflation
To the extent feasible, we have consistently followed the practice of adjusting our prices to reflect the impact of inflation on
salaries and fringe benefits for employees and the cost of purchased materials and services. Inflation and changing prices did not
materially adversely impact our gross margin, revenue or operating income in the two quarters ended January 3, 2020 or fiscal
2019, 2018 or 2017.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following is not intended to be a comprehensive list of our accounting policies or estimates. Our significant accounting
policies are more fully described in Note 1: Significant Accounting Policies in the Notes. In preparing our financial statements and
accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes.
We consider the policies and estimates discussed below as critical to an understanding of our financial statements because their
application places the most significant demands on our judgment, with financial reporting results dependent on estimates about
the effect of matters that are inherently uncertain and may change in subsequent periods. Specific risks for these critical
accounting estimates are described in the following paragraphs. The impact and any associated risks related to these estimates on
our business operations are discussed throughout this MD&A where such estimates affect our reported and expected financial
results. Senior management has discussed the development and selection of the critical accounting policies and estimates and the
related disclosure included herein with the Audit Committee of our Board of Directors. Preparation of this Report requires us to
make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and backlog as well as
disclosure of contingent assets and liabilities. Actual results may differ from those estimates.
56
Besides estimates that meet the “critical” accounting estimate criteria, we make many other accounting estimates in
preparing our financial statements and related disclosures. All estimates, whether or not deemed “critical,” affect reported
amounts of assets, liabilities, revenue and expenses as well as disclosures of contingent assets and liabilities. Estimates are based
on experience and other information available prior to the issuance of the financial statements. Materially different results can
occur as circumstances change and additional information becomes known, including for estimates that we do not deem “critical.”
Revenue Recognition
A significant portion of our business is derived from development and production contracts. Revenue and profit related to
development and production contracts are generally recognized over time, typically using the percentage of completion (“POC”)
cost-to-cost method of revenue recognition, whereby we measure our progress toward completion of performance obligations
based on the ratio of costs incurred to date to estimated total costs at completion under the contract. Because costs incurred
represent work performed, we believe this method best depicts the transfer of control to the customer. Under the POC cost-to-cost
method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over
its period of performance. Recognition of profit on a contract requires estimates of the total cost at completion and transaction
price as well as measurement of progress towards completion. Due to the long-term nature of many of our contracts, developing
the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in
estimating the cost of the work to be completed include: the nature and complexity of the work to be performed, subcontractor
performance and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction
price include contractual cost or performance incentives (such as incentive fees, award fees and penalties) and other forms of
variable consideration as well as our historical experience and expectation for performance on the contract. These variable
amounts generally are awarded upon achievement of certain negotiated performance metrics, program milestones or cost targets
and can be based upon customer discretion. We include such estimated amounts in the transaction price to the extent it is probable
that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable
consideration is resolved.
At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at
completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard
Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts at least
quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost
aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks.
Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally,
as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees
that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction
price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which
recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these
contracts are fully recognized in the period in which the losses become evident.
EAC adjustments had the following impacts to operating income for the periods presented:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Favorable adjustments
Unfavorable adjustments
Net operating income adjustments
$
$
303
(166)
137
$
$
$
(In millions)
138
(121)
17
$
$
127
(146)
(19) $
117
(118)
(1)
There were no individual impacts to operating income due to EAC adjustments in the two quarters ended January 3, 2020 or
in fiscal 2019, 2018 or 2017 that were material to our results of operations on a consolidated or segment basis for such periods.
We recognize revenue from numerous contracts with multiple performance obligations. For these contracts, we allocate the
transaction price to each performance obligation based on the relative standalone selling price of the good or service underlying
each performance obligation. The standalone selling price represents the amount for which we would sell the good or service to a
customer on a standalone basis (i.e., not sold as bundled sale with any other products or services). The allocation of transaction
price among separate performance obligations may impact the timing of revenue recognition but will not change the total revenue
recognized on the contract.
A substantial majority of our revenue is derived from contracts with the U.S. Government, including foreign military sales
contracts. These contracts are subject to the FAR and the prices of our contract deliverables are typically based on our estimated
or actual costs plus a reasonable profit margin. As a result, the standalone selling prices of the goods and services in these
57
contracts are typically equal to the selling prices stated in the contract, thereby eliminating the need to allocate (or reallocate) the
transaction price to the multiple performance obligations. In our non-U.S. Government contracts, when standalone selling prices
are not directly observable, we also generally use the expected cost plus a margin approach to determine standalone selling price.
In determining the appropriate margin under the cost plus margin approach, we consider historical margins on similar products
sold to similar customers or within similar geographies where objective evidence is available. We may also consider our cost
structure and profit objectives, the nature of the proposal, the effects of customization of pricing, our practices used to establish
pricing of bundled products, the expected technological life of the product, margins earned on similar contracts with different
customers and other factors to determine the appropriate margin.
Postretirement Benefit Plans
Certain of our current and former employees participate in defined benefit pension and other postretirement defined benefit
plans (collectively, referred to as “defined benefit plans”) in the United States, Canada, United Kingdom and Germany, which are
sponsored by L3Harris. The determination of projected benefit obligations and the recognition of expenses related to defined
benefit pension plans are dependent on various assumptions. These major assumptions primarily relate to discount rates, long-
term expected rates of return on plan assets, rate of future compensation increases, mortality, termination and other factors (some
of which are disclosed in Note 15: Pension and Other Postretirement Benefits in the Notes). Actual results that differ from our
assumptions are accumulated and generally amortized for each plan to the extent required over the estimated future life
expectancy or, if applicable, the future working lifetime of the plan’s active participants.
As part of our accounting for the L3Harris Merger, we completed a valuation and re-measurement of all L3 pension and
other postretirement benefit (“OPEB”) plans as of the June 29, 2019 closing date of the L3Harris Merger and we recorded a $233
million increase to L3’s pension and OPEB liability as of June 29, 2019 based on the results of this valuation. The total L3
pension and OPEB liability assumed by L3Harris was $1.4 billion at June 29, 2019. The discount rate assumption used was a
yield curve rather than a single interest rate. For the pension plans, the average June 29, 2019 discount rate used was 3.54 percent
for U.S. plans and 2.95 percent for Canadian plans. For OPEB plans, the average June 29, 2019 discount rate used was 3.31
percent for U.S. plans and 2.92 percent for Canadian plans. The long term expected rate of return on plan assets for the Fiscal
Transition Period was 7.75 percent for the majority of our postretirement benefit plans.
Significant Assumptions
We develop assumptions using relevant experience, in conjunction with market-related data for each plan. Assumptions are
reviewed annually with third party consultants and adjusted as appropriate. The table included below provides the weighted
average assumptions used to estimate projected benefit obligations and net periodic benefit cost as they pertain to our defined
benefit pension plans.
Obligation assumptions as of:
Discount rate
Rate of future compensation increase
Cost assumptions for fiscal periods ended:
Discount rate to determine service cost
Discount rate to determine interest cost
Expected return on plan assets
Rate of future compensation increase
January 3, 2020
3.14%
2.80%
June 28, 2019
3.35%
2.76%
June 29, 2018
4.05%
2.76%
January 3, 2020
3.11%
June 28, 2019
3.89%
June 29, 2018
3.48%
2.94%
7.68%
2.97%
3.75%
7.66%
2.76%
3.28%
7.66%
2.76%
Key assumptions for the U.S. Salaried Retirement Plan (“U.S. SRP”) (our largest defined benefit plan, with approximately
54% of the total projected benefit obligation as of January 3, 2020) included a discount rate for obligation assumptions of 3.10%
and expected return on plan assets of 7.75% for the two quarters ended January 3, 2020, which is being maintained at 7.75% for
fiscal 2020. Effective December 31, 2016, accruals under the U.S. SRP benefit formula were frozen for all employees and
replaced with a 1% cash balance benefit formula for certain employees who were not highly compensated on December 31, 2016.
Expected Return on Plan Assets
Substantially all of our plan assets are managed on a commingled basis in a master investment trust. We determine our
expected return on plan assets by evaluating both historical returns and estimates of future returns. Specifically, we consider the
plan’s actual historical annual return on assets over the past 15, 20 and 25 years and historical broad market returns over long-
term time frames based on our strategic allocation, which is detailed in Note 15: Pension and Other Postretirement Benefits in the
Notes. Future returns are based on independent estimates of long-term asset class returns. Based on this approach, the long-term
annual rate of return on assets was estimated at 7.68% for the two quarters ended January 3, 2020 and fiscal 2020.
58
Discount Rate
The discount rate is used to calculate the present value of expected future benefit payments at the measurement date. A
decrease in the discount rate increases the present value of benefit obligations and generally decreases pension expense. The
discount rate assumption is based on current investment yields of high-quality fixed income investments during the retirement
benefits maturity period. The pension discount rate is determined by considering an interest rate yield curve comprising AAA/AA
bonds, with maturities between zero and thirty years, developed by the plan’s actuaries. Annual benefit payments are then
discounted to present value using this yield curve to develop a single discount rate matching the plan’s characteristics.
Sensitivity Analysis
Pension Expense
A 25 basis point change in the long-term expected rate of return on plan assets and discount rate would have the following
effect on the combined U.S. defined benefit pension plans’ pension expense for the next twelve months:
Long-term rate of return on assets used to determine net periodic benefit cost
Discount rate used to determine net periodic benefit cost
$
$
Increase/(Decrease)
in Pension Expense
25 Basis
Point Increase
25 Basis
Point Decrease
(In millions)
(19.4) $
$
7.4
19.5
(7.7)
Projected Benefit Obligation
Funded status is derived by subtracting the respective year-end values of the projected benefit obligations (“PBO”) from the
fair value of plan assets. The sensitivity of the PBO to changes in the discount rate varies depending on the magnitude and
direction of the change in the discount rate. We estimate that a decrease of 25 basis points in the discount rate of the combined
U.S. defined benefit pension plans would increase the PBO by approximately $288.7 million and an increase of 25 basis points
would decrease the PBO by approximately $274.7 million.
Fair Value of Plan Assets
The plan assets of our defined benefit plans comprise a broad range of investments, including domestic and international
equity securities, fixed income investments, interests in private equity and hedge funds and cash and cash equivalents.
A portion of our defined benefit plans asset portfolio is comprised of investments in private equity and hedge funds. The
private equity and hedge fund investments are generally measured using the valuation of the underlying investments or at net
asset value. However, in certain instances, the values reported by the asset managers were not current at the measurement date.
Consequently, we have estimated adjustments to the last reported value where necessary to measure the assets at fair value at the
measurement date. These adjustments consider information received from the asset managers, as well as general market
information. Asset values for other positions were generally measured using market observable prices. See Note 15: Pension and
Other Postretirement Benefits in the Notes for further information.
Goodwill
Goodwill in our Consolidated Balance Sheet as of January 3, 2020 and June 28, 2019 was $20.0 billion and $5.3 billion,
respectively. Goodwill is not amortized. We perform annual (or under certain circumstances, more frequent) impairment tests of
our goodwill. We identify potential impairment by comparing the fair value of each of our reporting units with its carrying
amount, including goodwill, which is adjusted for allocations of Corporate assets and liabilities as appropriate. If the fair value of
a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a
reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
L3Harris Merger Goodwill Allocation
As discussed in more detail in Note 25: Business Segments in the Notes, after the completion of the L3Harris Merger, we
adjusted our segment reporting to reflect our new organizational structure effective June 29, 2019. Because our accounting for the
L3Harris Merger is still preliminary, we assigned goodwill acquired on a provisional basis. Immediately before and after our
goodwill assignments, we completed an assessment of any potential goodwill impairment under our former and new segment
reporting structure and determined that no impairment existed. See Note 5: Business Combination and Note 10: Goodwill in the
Notes for additional information.
Harris Night Vision Goodwill Allocation
As described in more detail in Note 3: Divestitures, Asset Sales and Discontinued Operations in the Notes, we entered into a
definitive agreement to sell the Harris Night Vision business on April 4, 2019 and completed the sale on September 13, 2019.
Because the then pending divestiture of the Harris Night Vision business represented the disposal of a portion of a reporting unit
within our former Communication System segment, we assigned $30 million of goodwill to the Harris Night Vision business
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disposal group on a relative fair value basis during the fourth quarter of fiscal 2019, when the held for sale criteria were met. The
fair value of the Harris Night Vision business disposal group was determined based on the negotiated selling price, and the fair
value of the retained businesses (which comprised the remaining portion of the reporting unit) was determined based on a
combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions,
and projected discounted cash flows. These fair value determinations are categorized as Level 3 in the fair value hierarchy due to
their use of internal projections and unobservable measurement inputs. In conjunction with the relative fair value allocation, we
tested goodwill assigned to the disposal group and goodwill assigned to the retained businesses for impairment, and we concluded
that goodwill and other assets related to the Harris Night Vision business were not impaired as of June 28, 2019.
IT Services Goodwill Allocation and Impairment
As described in more detail in Note 3: Divestitures, Asset Sales and Discontinued Operations in the Notes, we entered into a
definitive agreement to sell IT Services on January 26, 2017 and completed the sale on April 28, 2017. Because the then-pending
divestiture of IT Services represented the disposal of a portion of a reporting unit within our former Critical Networks segment,
we assigned $487 million of goodwill to the IT Services disposal group on a relative fair value basis during the third quarter of
fiscal 2017, when the held for sale criteria were met. The fair value of the IT Services disposal group was determined based on the
negotiated selling price, and the fair value of the retained businesses (which comprised the remaining portion of the reporting
unit) was determined based on a combination of market-based valuation techniques, utilizing quoted market prices and
comparable publicly reported transactions, and projected discounted cash flows. These fair value determinations are categorized
as Level 3 in the fair value hierarchy due to their use of internal projections and unobservable measurement inputs. In conjunction
with the relative fair value allocation, we tested goodwill assigned to the disposal group and goodwill assigned to the retained
businesses for impairment. As a result, we concluded, in connection with the preparation of our financial statements for the third
quarter of fiscal 2017, that goodwill and other assets related to IT Services were impaired as of March 31, 2017, and we recorded
a non-cash impairment charge of $240 million in discontinued operations, $228 million of which related to goodwill. The
goodwill impairment charge was non-deductible for tax purposes.
Fiscal 2017, 2018 and 2019 and Fiscal Transition Period Impairment Tests
We perform an annual impairment test of our goodwill as of the first day of our fourth fiscal quarter of each year, and more
frequently if we believe indicators of impairment exist. Following our fiscal year end change, we made a corresponding change to
our annual impairment assessment date and will continue to perform annual impairment test on the first day of our fourth quarter,
which for the Fiscal Transition Period was September 28, 2019 (the first day of the last quarter of the Fiscal Transition Period).
We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is our business
segment level or one level below the business segment. Some of our segments are comprised of several reporting units. Allocation
of goodwill to several reporting units could make it more likely that we will have an impairment charge in the future. An
impairment charge to one of our reporting units could have a material impact on our financial condition and results of operations.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. To
test goodwill for impairment, we may perform both qualitative and quantitative assessments. If we elect to perform a qualitative
assessment for a certain reporting unit, we evaluate events and circumstances impacting the reporting unit to determine the
probability that goodwill is impaired. If we determine it is more-likely-than-not that the fair value of the reporting unit is less
than its carrying amount, we perform a quantitative assessment.
Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or
circumstances, considers various macroeconomic, industry-specific and company-specific factors. These factors include: (i)
deterioration in the general economy; (ii) deterioration in the environment in which the company operates; (iii) increase in raw
materials, labor or other costs; (iv) negative or declining cash flows; (v) changes in management, changes in strategy, or
significant litigation; (vi) change in the composition or carrying amount of net assets or an expectation of disposing all or a
portion of the reporting unit; or (vii) a sustained decrease in share price.
If we perform a quantitative assessment for a certain reporting unit, we calculate the fair value of that reporting unit and
compare the fair value to the reporting unit’s net book value. We estimate fair values of our reporting units based on projected
cash flows, and sales and/or earnings multiples applied to the latest twelve months’ sales and earnings of our reporting units.
Projected cash flows are based on our best estimate of future sales, operating costs and balance sheet metrics reflecting our view
of the financial and market conditions of the underlying business; and the resulting cash flows are discounted using an appropriate
discount rate that reflects the risk in the forecasted cash flows. The sales and earnings multiples applied to the sales and earnings
of our reporting units are based on current multiples of sales and earnings for similar businesses, and based on sales and earnings
multiples paid for recent acquisitions of similar businesses made in the marketplace. We then assess whether any implied control
premium, based on a comparison of fair value based purely on our stock price and outstanding shares with fair value determined
by using all of the above-described models, is reasonable.
60
We tested goodwill for impairment as of September 28, 2019 and the estimated fair value for each of our reporting units
exceeded its carrying amount.
Accounting for Business Combinations
We follow the acquisition method of accounting to record identifiable assets acquired, liabilities assumed and noncontrolling
interests in the acquiree recognized in connection with acquired businesses at their estimated fair value as of the date of
acquisition.
Intangible assets from business combinations are recognized at their estimated fair values as of the date of acquisition and
generally consist of customer relationships, trade names, developed technology and in-process R&D (“IPR&D”). Determination
of the estimated fair value of intangible assets requires judgment. The fair value of customer contractual relationships is
determined based on estimates and judgments regarding future after-tax earnings and cash flows arising from follow-on sales on
contract renewals expected from customer contractual relationships over their estimated lives, including the probability of
expected future contract renewals and sales, less a contributory asset charge, all of which is discounted to present value. The fair
value of trade name intangible assets is determined utilizing the relief from royalty method. Under this form of the income
approach, a royalty rate based on observed market royalties is applied to projected revenue supporting the trade name and
discounted to present value using an appropriate discount rate. Intangible assets deemed to have indefinite lives are not amortized,
but are subject to annual impairment testing. Finite-lived intangible assets are amortized to expense over their useful lives,
generally ranging from three to twenty years. The preliminary estimated fair value of identifiable intangible assets acquired in
connection with the L3Harris Merger was approximately $7.9 billion.
We assess the recoverability of finite-lived intangible assets whenever events or changes in circumstances indicate the
carrying amount of the assets may not be recoverable. We evaluate the recoverability of such assets based on the expectations of
undiscounted cash flows of the assets. If the sum of expected future undiscounted cash flows were less than the carrying amount
of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. See Note 5: Business
Combination and Note 11: Intangible Assets for additional information.
Income Taxes
We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and
amounts reported in our Consolidated Balance Sheet, as well as operating loss and tax credit carryforwards. We follow very
specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance
sheet and provide necessary valuation allowances as required. Future realization of deferred tax assets ultimately depends on the
existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the
carryback or carryforward periods available under the tax law. We regularly review our deferred tax assets for recoverability
based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary
differences and tax planning strategies. We have not made any material changes in the methodologies used to determine our tax
valuation allowances during the two quarters ended January 3, 2020 or the previous three fiscal years.
Our Consolidated Balance Sheet as of January 3, 2020 included deferred tax assets of $102 million and deferred tax
liabilities of $1.48 billion. This compares with deferred tax assets of $173 million and deferred tax liabilities of $12 million as of
June 28, 2019 and deferred tax assets of $119 million and deferred tax liabilities of $79 million as of June 29, 2018. For all
jurisdictions for which we have net deferred tax assets, we expect that our existing levels of pre-tax earnings are sufficient to
generate the amount of future taxable income needed to realize these tax assets. Our valuation allowance related to deferred
income taxes, which is reflected in our Consolidated Balance Sheet, was $185 million as of January 3, 2020 compared with $159
million as of June 28, 2019 and $181 million as of June 29, 2018. Although we make reasonable efforts to ensure the accuracy of
our deferred tax assets, if we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable
income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary
differences become taxable or deductible, or if the potential impact of tax planning strategies changes, we could be required to
increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in
our effective tax rate and a material adverse impact on our operating results.
The evaluation of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, involves
inherent uncertainty and requires the use of judgment. We evaluate our income tax positions and record tax benefits for all years
subject to examination based on our assessment of the facts and circumstances as of the reporting date. For tax positions where it
is more likely than not that a tax benefit will be realized, we record the largest amount of tax benefit with a greater than 50 percent
probability of being realized upon ultimate settlement with the applicable taxing authority, assuming the taxing authority has full
knowledge of all relevant information. For income tax positions where it is not more likely than not that a tax benefit will be
realized, we do not recognize a tax benefit in our Consolidated Financial Statements.
As of January 3, 2020, we had $438 million of unrecognized tax benefits, of which $313 million would favorably impact
our future tax rates in the event that the tax benefits are eventually recognized. As of June 28, 2019, we had $204 million of
unrecognized tax benefits, of which $162 million would favorably impact our future tax rates in the event that the tax benefits are
61
eventually recognized. As of June 29, 2018, we had $102 million of unrecognized tax benefits, of which $92 million would
favorably impact our future tax rates in the event that the tax benefits are eventually recognized.
It is reasonably possible that there could be a significant decrease or increase to our unrecognized tax benefits during the
course of the next twelve months as ongoing tax examinations continue, other tax examinations commence or various statutes of
limitations expire. However, an estimate of the range of possible changes cannot be made for remaining unrecognized tax benefits
because of the significant number of jurisdictions in which we do business and the number of open tax periods. See Note 23:
Income Taxes for additional information.
Impact of Recently Issued Accounting Pronouncements
Accounting pronouncements that have recently been issued but have not yet been implemented by us are described in Note
2: Accounting Changes or Recent Accounting Pronouncements in the Notes, which describes the potential impact that these
pronouncements are expected to have on our financial condition, results of operations and cash flows.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
The following are some of the factors we believe could cause our actual results to differ materially from our historical
results or our current expectations or projections. Other factors besides those listed here also could adversely affect us. See
“Item 1A. Risk Factors” of this Report for more information regarding factors that might cause our results to differ materially
from those expressed in or implied by the forward-looking statements contained in this Report.
• We depend on U.S. Government customers for a significant portion of our revenue, and the loss of these
relationships, 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 and cash flows.
• We depend significantly on U.S. Government contracts, which often are only partially funded, subject to
immediate termination, and heavily regulated and audited. The termination or failure to fund, or negative audit
findings for, one or more of these contracts could have an adverse impact on our business, financial condition,
results of operations and cash flows.
• The U.S. Government’s budget deficit and the national debt, as well as any inability of the U.S. Government to
complete its budget process for any government fiscal year and consequently having to shut down or operate on
funding levels equivalent to its prior fiscal year pursuant to a “continuing resolution,” could have an adverse
impact on our business, financial condition, results of operations and cash flows.
• We could be negatively impacted by a security breach, through cyber attack, cyber intrusion, insider threats or
otherwise, or other significant disruption of our IT networks and related systems or of those we operate for certain
of our customers.
• Our ability to successfully manage ongoing business and organizational changes could impact our business results.
• Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-
and-material type contracts. In particular, our fixed-price contracts could subject us to losses in the event of cost
overruns or a significant increase in inflation.
• We use estimates in accounting for many of our programs, and changes in our estimates could adversely affect our
future financial results.
• We derive a significant portion of our revenue from international operations and are subject to the risks of doing
business internationally, including fluctuations in currency exchange rates.
• The level of returns on defined benefit plan assets, changes in interest rates and other factors could affect our
financial condition, results of operations and cash flows in future periods.
• We may not be successful in obtaining the necessary export licenses to conduct certain operations abroad, and
Congress may prevent proposed sales to certain foreign governments.
• Disputes with our subcontractors or the inability of our subcontractors to perform, or our key suppliers to timely
deliver our components, parts or services, could cause our products, systems or services to be produced or
delivered in an untimely or unsatisfactory manner.
• Our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or
business partners.
• Our future success will depend on our ability to develop new products, systems, services and technologies that
achieve market acceptance in our current and future markets.
• We participate in markets that are often subject to uncertain economic conditions, which makes it difficult to
estimate growth in our markets and, as a result, future income and expenditures.
• We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in
•
which we operate, our ability to insure against risks, our operations or our profitability.
Strategic transactions, including mergers, acquisitions and divestitures, involve significant risks and uncertainties
that could adversely affect our business, financial condition, results of operations and cash flows.
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• The outcome of litigation or arbitration in which we are involved from time to time is unpredictable, and an
adverse decision in any such matter could have a material adverse effect on our financial condition, results of
operations and cash flows.
• We are subject to government investigations, which could have a material adverse effect on our business, financial
condition, results of operations, cash flows and future prospects.
• Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon
their intellectual property rights, and third parties may infringe upon our intellectual property rights.
• Our commercial aviation products, systems and services business is affected by global demand and economic
factors that could negatively impact our financial results.
• We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance
or indemnity.
• Changes in our effective tax rate may have an adverse effect on our results of operations.
• Our level of indebtedness and our ability to make payments on or service our indebtedness and our unfunded
defined benefit plans liability may adversely affect our financial and operating activities or our ability to incur
additional debt.
• A downgrade in our credit ratings could materially adversely affect our business.
• Unforeseen environmental issues could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
• We have significant operations in locations that could be materially and adversely impacted in the event of a
natural disaster or other significant disruption.
• Changes in future business or other market conditions could cause business investments and/or recorded goodwill
or other long-term assets to become impaired, resulting in substantial losses and write-downs that would adversely
affect our results of operations.
• We must attract and retain key employees, and any failure to do so could seriously harm us.
•
Some of our workforce is represented by labor unions, so our business could be harmed in the event of a prolonged
work stoppage.
• We may fail to realize all of the anticipated benefits of the L3Harris Merger or those benefits may take longer to
realize than expected. We may also encounter significant difficulties in integrating the businesses.
• Certain business uncertainties arising from the L3Harris Merger could adversely affect our businesses and
operations.
• We have incurred and will incur direct and indirect costs as a result of the L3Harris Merger.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, we are exposed to the risks associated with foreign currency exchange rates and changes
in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our
exposure to such risks. For a discussion of such policies and procedures and the related risks, see “Financial Risk Management”
in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report, which is
incorporated by reference into this Item 7A.
In addition, we are exposed to market return fluctuations on our defined benefit plans. A material adverse decline in the
value of these assets and/or the discount rate for projected benefit obligations would result in a decrease in the funded status of the
defined benefit plans, an increase in net periodic benefit cost and an increase in required funding. To protect against declines in
the discount rate (i.e., interest rates), we will continue to monitor the performance of these assets and market conditions as we
evaluate the amount of future contributions. For further information, see Note 15: Pension and Other Postretirement Benefits in
the Notes, which information is incorporated by reference into this Item 7A.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting ........................................................................................
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements ....................................
Report of Independent Registered Public Accounting Firm on the Effectiveness of Internal Control Over Financial
Reporting................................................................................................................................................................................
Consolidated Statement of Income — Two Quarters ended January 3, 2020 and Fiscal Years ended June 28, 2019; June 29,
2018; and June 30, 2017 ........................................................................................................................................................
Consolidated Statement of Comprehensive Income — Two Quarters ended January 3, 2020 and Fiscal Years ended June
28, 2019; June 29, 2018; and June 30, 2017 ..........................................................................................................................
Consolidated Balance Sheet — January 3, 2020, June 28, 2019 and June 29, 2018 ..................................................................
Consolidated Statement of Cash Flows — Two Quarters ended January 3, 2020 and Fiscal Years ended June 28, 2019; June
29, 2018; and June 30, 2017 ..................................................................................................................................................
Consolidated Statement of Equity — Two Quarters ended January 3, 2020 and Fiscal Years ended June 28, 2019; June 29,
2018; and June 30, 2017 ........................................................................................................................................................
Notes to Consolidated Financial Statements ...............................................................................................................................
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69
70
71
72
73
74
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Supplementary Financial Information.........................................................................................................................................
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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
The management of L3Harris Technologies, Inc. (the “Company”) is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance,
based on an appropriate cost-benefit analysis, regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal
control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness
of the Company’s internal control over financial reporting as of January 3, 2020. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (2013 framework). Based on management’s assessment and those criteria, management concluded that the
Company maintained effective internal control over financial reporting as of January 3, 2020.
Management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting
the internal controls of L3 Technologies, Inc. (“L3”), which the Company merged with on June 29, 2019, and whose financial
statements represent 15 percent of the Company’s total assets, excluding the preliminary value of goodwill and other intangible
assets, as of January 3, 2020, and 61 percent of the Company’s total revenue for the two quarters then ended. Management will
include the internal controls of L3 in its assessment of the effectiveness of the Company’s internal control over financial reporting
as of the end of fiscal 2020.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued a report on the
effectiveness of the Company’s internal control over financial reporting. This report appears on page 6(cid:28) of this Transition Report
on Form 10-KT.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of L3Harris Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of L3Harris Technologies, Inc. (the Company) as of January 3,
2020, June 28, 2019 and June 29, 2018, the related consolidated statements of income, comprehensive income, cash flows and
equity for the two quarters ended January 3, 2020 and for each of the three years in the period ended June 28, 2019, and the
related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at January 3, 2020, June 28, 2019 and
June 29, 2018, and the results of its operations and its cash flows for the two quarters ended January 3, 2020 and each of the three
years in the period ended June 28, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of January 3, 2020, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework), and our report dated March 3, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters
or on the accounts or disclosures to which they relate.
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Description of the Matter
How We Addressed the
Matter in Our Audit
Cost estimation for revenue recognition on development and production contracts
As described in Note 1 of the consolidated financial statements, 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 the total cost to be incurred for each
contract at completion. At the outset of the contract, the Company establishes an estimated total cost
to complete, taking into consideration the complexity and perceived risks associated with the
technical, schedule and cost aspects of the contract. After establishing the estimated total cost to
complete, the Company reviews the progress and performance on its ongoing development and
production contracts at least quarterly and updates the estimated total cost to complete as needed.
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.
Auditing the cost estimation for development and production contracts involved subjective auditor
judgment because the Company’s development of the estimated total cost at completion required
estimates of the cost of the work to be completed based on the Company’s assumptions around
achieving the technical, schedule and cost aspects of its development and production contracts. In
determining the estimates of the cost of the work to be completed, the Company considered the nature
and complexity of the work to be performed, subcontractor performance and the risk and impact of
delayed performance. Estimates of total cost at completion were also affected by management’s
assessment of the current status of the contract and expectation for performance on the contract, as
well as historical experience.
We obtained an understanding, evaluated the design and tested the operating effectiveness of certain
internal controls over the Company’s accounting for cost estimation for development and production
contracts. For example, we tested certain controls over management’s review of the estimate at
completion analyses and the significant assumptions underlying the estimated total costs to complete.
We also tested certain of management’s controls to validate that the data used in the estimate at
completion analyses was complete and accurate.
To test the cost estimation for development and production contracts, our audit procedures included,
among others, obtaining an understanding of the contract, meeting with program management to
confirm our understanding of the risks associated with the arrangement and the current contract
performance, review of customer correspondence and contractual milestones, and comparing cost
estimates to historical cost experience with similar contracts, when applicable. Additionally, we
obtained an understanding of the Company’s past performance of estimating total costs to complete
by reviewing changes in the cost estimates from previous periods and reviewing the overall accuracy
of management’s cost to completion estimations through lookback analyses.
.
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Description of the Matter
How We Addressed the
Matter in Our Audit
Valuation of acquired intangible assets
As described in Note 5 to the consolidated financial statements, the Company completed its merger
with L3 Technologies, Inc. (L3) on June 29, 2019 for net consideration of $18.7 billion. The merger
was accounted for using the acquisition method of accounting, and the Company was treated as the
accounting acquirer. The Company’s accounting for the acquisition included determining the fair
value of the intangible assets acquired of $7.9 billion, which primarily included customer
relationships and tradenames.
Auditing the Company's accounting for the acquired intangible assets involved subjective auditor
judgment due to the significant estimation required in management’s determination of the fair value
of intangible assets. The Company used a discounted cash flow valuation method to measure the
customer relationship intangible assets and a relief from royalty valuation method to measure the
tradename intangible assets. The significant estimation was due to the sensitivity of the respective fair
values to the underlying significant assumptions, which included discount rates, royalty rates, and
certain assumptions that formed the basis of the forecasted revenues. These significant assumptions
relate to the future performance of L3, are forward-looking, and could be affected by future economic
and market conditions.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls
over the Company’s process for accounting for the acquired intangible assets. For example, we tested
controls over management’s review of the valuation of acquired intangible assets, including the
review of the valuation models and the significant assumptions used in the valuations. We also tested
management’s controls to validate that the data used in the valuation models was complete and
accurate.
To test the fair value of these acquired intangible assets, our audit procedures included, among others,
evaluating the Company's use of valuation methodologies, evaluating the prospective financial
information and testing the completeness and accuracy of underlying data. For example, we involved
our valuation specialists to assist in evaluating the valuation methods used by the Company and
testing the significant assumptions used to value the acquired intangible assets. We compared the
significant assumptions to current industry, market and economic trends, historical results of L3 and
other relevant factors. We also performed sensitivity analyses of the significant assumptions to
evaluate the change in the fair value of the acquired intangible assets resulting from changes in such
assumptions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since at least 1932, but we are unable to determine the specific year.
Orlando, Florida
March 3, 2020
68
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of L3Harris Technologies, Inc.
Opinion on Internal Control over Financial Reporting
We have audited L3Harris Technologies, Inc.’s internal control over financial reporting as of January 3, 2020, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, L3Harris Technologies, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of January 3, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of January 3, 2020, June 28, 2019 and June 29, 2018, the related
consolidated statements of income, comprehensive income, cash flows and equity for the two quarters ended January 3, 2020 and
for each of the three years in the period ended June 28, 2019, and the related notes and our report dated March 3, 2020 expressed
an unqualified opinion thereon.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment
of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of L3
Technologies, Inc., which is included in the 2019 consolidated financial statements of the Company as of January 3, 2020 and
constituted 15% of L3Harris Technologies’ total assets, excluding the preliminary value of goodwill and other intangible assets as
of January 3, 2020, and 61% of L3Harris Technologies’ total revenue for the two quarters then ended. Our audit of internal control
over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of L3
Technologies, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulation of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitation of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transaction and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorization of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Orlando, Florida
March 3, 2020
69
CONSOLIDATED STATEMENT OF INCOME
Revenue from product sales and services
Revenue from product sales
Revenue from services
Cost of product sales and services
Cost of product sales
Cost of services
Engineering, selling and administrative expenses
Gain on sale of business
Non-operating income
Interest income
Interest expense
Income from continuing operations before income taxes
Income taxes
Income from continuing operations
Discontinued operations, net of income taxes
Net income
Noncontrolling interests, net of income taxes
Net income attributable to L3Harris Technologies, Inc.
$
Amount attributable to L3Harris Technologies, Inc.
common shareholders
Income from continuing operations
Discontinued operations, net of income taxes
Net income
Net income per common share attributable to L3Harris
Technologies, Inc. common shareholders
Basic
Continuing operations
Discontinued operations
Diluted
Continuing operations
Discontinued operations
$
$
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
70
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
(In millions, except per share amounts)
$
$
6,908
2,355
9,263
$
5,638
1,163
6,801
$
5,038
1,130
6,168
(4,996)
(1,730)
(6,726)
(1,927)
229
192
12
(135)
908
(73)
835
(1)
834
(12)
822
823
(1)
822
3.72
—
3.72
3.68
(0.01)
3.67
$
$
$
$
$
$
$
(3,615)
(852)
(4,467)
(1,242)
—
188
2
(169)
1,113
(160)
953
(4)
949
—
949
953
(4)
949
8.06
(0.03)
8.03
7.89
(0.03)
7.86
$
$
$
$
$
$
$
(3,239)
(827)
(4,066)
(1,182)
—
156
2
(170)
908
(206)
702
(3)
699
—
699
702
(3)
699
5.90
(0.02)
5.88
5.78
(0.02)
5.76
$
$
$
$
$
$
$
4,667
1,230
5,897
(3,058)
(796)
(3,854)
(1,150)
—
166
2
(172)
889
(261)
628
(85)
543
—
543
628
(85)
543
5.11
(0.69)
4.42
5.04
(0.68)
4.36
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of income
taxes
Net unrealized gain (loss) on hedging derivatives, net of
income taxes
Net unrecognized gain (loss) on postretirement
obligations, net of income taxes
Other comprehensive income (loss), net of income taxes
Total comprehensive income
Comprehensive income attributable to noncontrolling
interests
Total comprehensive income attributable to L3Harris
Technologies, Inc.
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
$
834
$
(In millions)
949
$
699
$
543
25
(17)
178
186
1,020
(12)
(7)
(18)
(480)
(505)
444
—
15
1
93
109
808
—
$
1,008
$
444
$
808
$
(34)
1
200
167
710
—
710
See accompanying Notes to Consolidated Financial Statements.
71
CONSOLIDATED BALANCE SHEET
Assets
Current Assets
Cash and cash equivalents
Receivables
Contract assets
Inventories
Income taxes receivable
Other current assets
Assets of disposal group held for sale
Total current assets
Non-current Assets
Property, plant and equipment
Operating lease right-of-use assets
Goodwill
Other intangible assets
Deferred income taxes
Other non-current assets
Total non-current assets
Liabilities and Equity
Current Liabilities
Short-term debt
Accounts payable
Contract liabilities
Compensation and benefits
Other accrued items
Income taxes payable
Current portion of long-term debt, net
Liabilities of disposal group held for sale
Total current liabilities
Non-current Liabilities
Defined benefit plans
Operating lease liabilities
Long-term debt, net
Deferred income taxes
Other long-term liabilities
Total non-current liabilities
Equity
Shareholders’ Equity:
Preferred stock, without par value; 1,000,000 shares authorized; none issued
Common stock, $1.00 par value; 500,000,000 shares authorized; issued and
outstanding 218,226,614, 118,552,599 and 118,280,120 shares at January
3, 2020, June 28, 2019 and June 29, 2018, respectively
Other capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Noncontrolling interests
Total equity
See accompanying Notes to Consolidated Financial Statements.
72
January 3, 2020
June 28, 2019
June 29, 2018
(In millions, except shares)
$
$
$
$
$
$
$
824
1,216
2,459
1,219
202
392
—
6,312
2,117
837
20,001
8,458
102
509
32,024
38,336
3
1,261
1,214
460
790
24
257
—
4,009
1,819
781
6,694
1,481
808
11,583
$
$
$
530
457
807
360
191
100
133
2,578
894
—
5,340
870
173
262
7,539
10,117
103
525
496
161
283
8
656
36
2,268
1,174
—
2,763
12
537
4,486
288
466
782
411
174
103
—
2,224
900
—
5,372
989
119
247
7,627
9,851
78
622
372
142
317
15
304
—
1,850
714
—
3,408
79
522
4,723
—
—
—
218
20,694
2,183
(508)
22,587
157
22,744
38,336
$
119
1,778
2,173
(707)
3,363
—
3,363
10,117
$
118
1,714
1,648
(202)
3,278
—
3,278
9,851
CONSOLIDATED STATEMENT OF CASH FLOWS
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Share-based compensation
Qualified pension plan contributions
Pension and other postretirement benefit plan income
Gain on pension plan curtailment
Impairment of goodwill and other assets
(Gain) loss on sale of businesses, net
Gain on sale of asset group
Loss on extinguishment of debt
Deferred income taxes
(Increase) decrease in:
Accounts receivable
Contract assets
Inventories
Increase (decrease) in:
Accounts payable
Contract liabilities
Compensation and benefits
Other accrued items
Income taxes
Other
Net cash provided by operating activities
Investing Activities
Net cash acquired in L3Harris Merger
Net additions of property, plant and equipment
Proceeds from sales of businesses, net
Adjustment to proceeds from sale of business
Proceeds from sale of asset group
Other investing activities
Net cash provided by (used in) investing activities
Financing Activities
Net proceeds from borrowings
Repayments of borrowings
Proceeds from exercises of employee stock options
Repurchases of common stock
Cash dividends
Distributions to noncontrolling interests
Tax withholding payments associated with vested share-
based awards
Other financing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
See accompanying Notes to Consolidated Financial Statements.
73
Two Quarters
Ended
January 3, 2020
Fiscal Years Ended
June 28, 2019
June 29, 2018
June 30, 2017
(In millions)
$
834
$
949
$
699
$
543
442
227
(328)
(129)
(23)
46
(229)
(12)
2
—
74
15
158
(148)
—
(28)
(128)
47
119
939
1,130
(173)
343
—
20
—
1,320
396
(505)
109
(1,500)
(337)
(10)
(86)
(38)
(1,971)
6
294
530
824
$
258
141
(1)
(150)
—
—
—
—
—
44
(9)
(25)
(1)
(84)
124
19
(78)
(23)
21
1,185
—
(161)
—
—
—
2
(159)
27
(308)
50
(200)
(325)
—
(24)
(1)
(781)
(3)
242
288
530
259
82
(301)
(144)
—
—
—
—
24
320
(101)
(76)
(19)
82
81
2
(38)
(117)
(2)
751
—
(136)
—
(2)
—
(3)
(141)
1,387
(1,658)
34
(272)
(272)
—
(17)
(7)
(805)
(1)
(196)
484
288
$
$
311
42
(589)
(105)
—
240
14
—
—
86
24
156
(32)
18
(31)
(37)
(76)
26
(21)
569
—
(119)
1,014
(25)
—
—
870
85
(584)
54
(710)
(262)
—
(21)
—
(1,438)
(4)
(3)
487
484
CONSOLIDATED STATEMENT OF EQUITY
Common
Stock
Other
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Noncontrolling
Interests
Total
Equity
Balance at July 1, 2016 — As Reported
Cumulative effect of adopting ASC 606
Net income
Other comprehensive income
Net accumulated foreign currency loss reclassified to
earnings
Shares issued under stock incentive plans
Share-based compensation expense
Repurchases and retirement of common stock
Forward contract component of accelerated share repurchase
Cash dividends ($2.12 per share)
Other activity related to noncontrolling interests
Balance at June 30, 2017
Reclassifications due to adoption of accounting standards
updates
Net income
Other comprehensive income
Shares issued under stock incentive plans
Shares issued under defined contribution plans
Share-based compensation expense
Repurchases and retirement of common stock
Forward contract component of accelerated share repurchase
Cash dividends ($2.28 per share)
Balance at June 29, 2018
Net income
Other comprehensive income
Shares issued under stock incentive plans
Shares issued under defined contribution plans
Share-based compensation expense
Repurchases and retirement of common stock
Cash dividends ($2.74 per share)
Balance at June 28, 2019
Net income
Other comprehensive income
Shares issued for L3Harris Merger
Equity issuance costs
Net loss from postretirement obligations and hedging
derivatives reclassified to earnings
Shares issued under stock incentive plans
Shares issued under defined contribution plans
Share-based compensation expense
Repurchases and retirement of common stock
Cash dividends ($1.50 per share)
Distributions to noncontrolling interests
Fair value of noncontrolling interest recognized in purchase
accounting
Other
Balance at January 3, 2020
$
125
—
—
—
—
1
—
(6)
—
—
—
120
—
—
—
—
—
—
(2)
—
—
118
—
—
1
1
—
(1)
—
119
—
—
104
—
—
2
—
—
(7)
—
—
(In millions, except per share amounts)
$
$ 2,096
—
—
—
$ 1,330
(15)
543
—
(495) $
—
—
167
—
53
40
(410)
(38)
—
—
1,741
—
—
—
33
31
49
(178)
38
—
1,714
—
—
49
82
57
(124)
—
1,778
—
—
19,696
(2)
—
107
101
122
(1,104)
—
—
—
—
—
(278)
—
(262)
—
1,318
35
699
—
—
—
—
(132)
—
(272)
1,648
949
—
—
—
—
(99)
(325)
2,173
822
—
—
—
—
—
—
—
(475)
(337)
—
52
—
—
—
—
—
—
(276)
(35)
—
109
—
—
—
—
—
—
(202)
—
(505)
—
—
—
—
—
(707)
—
186
—
—
13
—
—
—
—
—
—
—
—
218
—
(4)
$ 20,694
—
—
$ 2,183
$
$
—
—
(508) $
1
—
—
—
—
—
—
—
—
—
(1)
—
$ 3,057
(15)
543
167
52
54
40
(694)
(38)
(262)
(1)
2,903
—
—
699
—
109
—
33
—
31
—
49
—
(312)
—
38
—
(272)
—
3,278
—
949
—
(505)
—
50
—
83
—
57
—
(224)
—
(325)
—
3,363
—
834
12
—
186
— 19,800
(2)
—
13
—
109
—
101
—
122
—
— (1,586)
(337)
—
(10)
(10)
155
—
157
155
(4)
$ 22,744
See accompanying Notes to Consolidated Financial Statements.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Organization — L3Harris Technologies, Inc., together with its subsidiaries, is an agile global aerospace and defense
technology innovator, delivering end-to-end solutions that meet customers’ mission-critical needs. We provide advanced defense
and commercial technologies across air, land, sea, space and cyber domains. We support government and commercial customers
in 130 countries, with our largest customers being various departments and agencies of the U.S. Government and their prime
contractors. Our products, systems and services have defense and civil government applications, as well as commercial
applications. As of January 3, 2020, we had approximately 50,000 employees, including approximately 20,000 engineers and
scientists.
Principles of Consolidation — Our Consolidated Financial Statements include the accounts of L3Harris Technologies, Inc.
and its consolidated subsidiaries. As used in these Notes to Consolidated Financial Statements (these “Notes”), the terms
“L3Harris,” “Company,” “we,” “our” and “us” refer to L3Harris Technologies, Inc. and its consolidated subsidiaries.
Intracompany transactions and accounts have been eliminated.
On October 12, 2018, Harris Corporation, a Delaware corporation (“Harris”), entered into an Agreement and Plan of Merger
(the “Merger Agreement”) with L3 Technologies, Inc., a Delaware corporation (“L3”), and Leopard Merger Sub Inc., a Delaware
corporation and a newly formed, direct wholly owned subsidiary of Harris (“Merger Sub”), pursuant to which Harris and L3
agreed to combine their respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and
into L3, with L3 continuing as the surviving corporation and a direct wholly-owned subsidiary of Harris (the “L3Harris Merger”).
The closing of the L3Harris Merger occurred on June 29, 2019 (“Closing Date”), after the end of Harris’ fiscal 2019 on June
28, 2019. Upon completion of the L3Harris Merger, Harris was renamed “L3Harris Technologies, Inc.”, and each share of L3
common stock converted into the right to receive 1.30 shares (“Exchange Ratio”) of L3Harris common stock. Shares of L3Harris
common stock, which previously traded under ticker symbol “HRS” on the New York Stock Exchange (“NYSE”) prior to
completion of the L3Harris Merger, are traded under ticker symbol “LHX” following completion of the L3Harris Merger.
L3Harris was owned on a fully diluted basis approximately 54 percent by Harris shareholders and 46 percent by L3 shareholders
immediately following the completion of the L3Harris Merger.
We are accounting for the L3Harris Merger under the acquisition method of accounting. Under the acquisition method of
accounting, we are required to measure identifiable assets acquired, liabilities assumed and any noncontrolling interests in the
acquiree at their fair values as of the Closing Date. The excess of the consideration transferred over those fair values is recorded
as goodwill. See Note 5: Business Combination in these Notes for additional information related to the L3Harris Merger.
We implemented a new organizational structure effective on June 29, 2019, which resulted in changes to our operating
segments, which are also reportable segments and referred to as our business segments. The historical results, discussion and
presentation of our business segments as set forth in the accompanying Consolidated Financial Statements and these Notes reflect
the impact of these changes for all periods presented in order to present segment information on a comparable basis. There is no
impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of
equity resulting from these changes.
On September 13, 2019, we completed the sale of the Harris Night Vision business to Elbit Systems of America, LLC, a
subsidiary of Elbit Systems Ltd., for $350 million (net cash proceeds of $343 million after selling costs and estimated purchase
price adjustments), subject to final customary purchase price adjustments as set forth in the definitive agreement. The Harris
Night Vision business was not included in any of the business segments in our new organizational structure and the operating
results of the Harris Night Vision business through the date of the divestiture are discussed and presented as part of “Other non-
reportable business segments” in this Report. See Note 3: Divestitures, Asset Sales and Discontinued Operations in these Notes
for more information regarding the divestiture of the Harris Night Vision business.
Amounts contained in this Report may not always add to totals due to rounding.
Fiscal Year — This Transition Report on Form 10-KT covers the transition period from June 29, 2019 through January 3,
2020 (“Fiscal Transition Period”). Through fiscal 2019, our fiscal year ended on the Friday nearest June 30. Commencing with the
Fiscal Transition Period, our fiscal year ends on the Friday nearest December 31. Our Fiscal Transition Period included 27 weeks
and each of our fiscal years ended June 28, 2019, June 29, 2018 and June 30, 2017 included 52 weeks. Prior year financial
information comparable to the Fiscal Transition Period for the two quarters ended December 28, 2018 represent the unaudited
prior two quarters period results for the comparative period ended December 28, 2018, which included 26 weeks. See Note 27:
Transition Period Comparative Data (Unaudited) in these Notes for additional information.
Use of Estimates — The preparation of financial statements in accordance with U.S. Generally Accepted Accounting
Principles (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the accompanying
Consolidated Financial Statements and these Notes and related disclosures. These estimates and assumptions are based on
75
experience and other information available prior to issuance of the accompanying Consolidated Financial Statements and these
Notes. Materially different results can occur as circumstances change and additional information becomes known.
Cash and Cash Equivalents — Cash equivalents are temporary cash investments with a maturity of three or fewer months
when purchased. These investments include accrued interest and are carried at the lower of cost or market.
Fair Value of Financial Instruments — The carrying amounts reflected in our Consolidated Balance Sheet for cash and
cash equivalents, accounts receivable, non-current receivables, notes receivable, accounts payable, short-term debt and long-term
variable-rate debt approximate their fair values. Fair values for long-term fixed-rate debt are primarily based on quoted market
prices for those or similar instruments. See Note 14: Debt in these Notes for additional information regarding fair values for our
long-term fixed-rate debt. A discussion of fair values for our derivative financial instruments is included under the caption
“Financial Instruments and Risk Management” in this Note 1: Significant Accounting Policies.
Fair Value Measurements — Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an
orderly transaction between market participants at the measurement date. Entities are required to maximize the use of observable
inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that
prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
• Level 1 — Quoted prices in active markets for identical assets or liabilities.
• Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are
not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated
by, observable market data by correlation or other means.
• Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of
the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in
pricing the asset or liability developed using the best information available in the circumstances.
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining
such data from the pricing service, we have evaluated the methodologies used to develop the estimate of fair value in order to
assess whether such valuations are representative of fair value, including net asset value (“NAV”). Additionally, in certain
circumstances, the NAV reported by an asset manager may be adjusted when sufficient evidence indicates NAV is not
representative of fair value.
Accounts Receivable — We record receivables at net realizable value and they generally do not bear interest. This value
includes an allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances
which is charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of
past due accounts and economic status of the customers. We consider a receivable delinquent if it is unpaid after the term of the
related invoice has expired. Write-offs are recorded at the time a customer receivable is deemed uncollectible. See Note 6:
Receivables in these Notes for additional information regarding accounts receivable.
Contract Assets and Liabilities — The timing of revenue recognition, customer billings and cash collections results in
accounts receivable, contract assets and contract liabilities at the end of each reporting period. Contract assets include unbilled
amounts typically resulting from revenue recognized exceeding amounts billed to customers for contracts utilizing the percentage
of completion (“POC”) cost-to-cost revenue recognition method. We bill customers as work progresses in accordance with
agreed-upon contractual terms, either at periodic intervals, upon achievement of contractual milestones or upon deliveries and, in
certain arrangements, the customer may withhold payment of a small portion of the contract price until contract completion.
Contract liabilities include advance payments and billings in excess of revenue recognized, including deferred revenue. Contract
assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period. The non-current portion of
contract liabilities is included within the “Other long-term liabilities” line item in our Consolidated Balance Sheet.
Contract assets related to amounts withheld by customers until contract completion are not considered a significant
financing component of our contracts because the intent is to protect the customers from our failure to satisfactorily complete our
performance obligations. Payments received from customers in advance of revenue recognition are not considered a significant
financing component of our contracts because they are utilized to pay for contract costs within a one-year period or are requested
by us to ensure the customers meet their payment obligations. See Note 7: Contract Assets and Contract Liabilities in these Notes
for additional information.
Inventories — Inventories are valued at the lower of cost (determined by average and first-in, first-out methods) or net
realizable value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory
primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements. See
Note 8: Inventories in these Notes for additional information regarding inventories.
76
Costs to Obtain or Fulfill a Contract — Costs to obtain a contract are incremental direct costs incurred to obtain a
contract with a customer, including sales commissions and dealer fees, and are capitalized if material. Costs to fulfill a contract
include costs directly related to a contract or specific anticipated contract (for example, mobilization, set-up and certain design
costs) that generate or enhance our ability to satisfy our performance obligations under these contracts. These costs are capitalized
to the extent they are expected to be recovered from the associated contract. Capitalized costs to obtain or fulfill a contract are
amortized to expense over the expected period of benefit for contracts with terms greater than one year on a systematic basis that
is consistent with the pattern of transfer of the associated goods and services to the customer. As a practical expedient, capitalized
costs to obtain or fulfill a contract with a term of one year or less are expensed as incurred. As of January 3, 2020, “Other current
assets” and “Other non-current assets” in our Consolidated Balance Sheet included $14 million and $48 million, respectively, of
capitalized costs to obtain or fulfill a contract. Capitalized costs to obtain or fulfill a contract were not material as of June 28,
2019.
Property, Plant and Equipment — Property, plant and equipment are carried on the basis of cost and include software
capitalized for internal use. Depreciation of buildings, machinery and equipment is computed by the straight-line and accelerated
methods. The estimated useful lives of buildings, including leasehold improvements, generally range between 2 and 45 years. The
estimated useful lives of machinery and equipment generally range between 2 and 10 years. Amortization of internal-use software
begins when the software is put into service and is based on the expected useful life of the software. The useful lives over which
we amortize internal-use software generally range between 3 and 10 years. See Note 9: Property, Plant and Equipment in these
Notes for additional information regarding property, plant and equipment.
Goodwill — We follow the acquisition method of accounting to record the assets and liabilities of acquired businesses at
their estimated fair value at the date of acquisition. We initially record goodwill for the amount the consideration transferred
exceeds the acquisition-date fair value of net identifiable assets acquired.
We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is our business
segment level or one level below the business segment. We test our goodwill for impairment annually, or under certain
circumstances, more frequently, such as when events or circumstances indicate there may be impairment. Such events or
circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of our
industry, a decline in our market capitalization, operating performance indicators, competition, reorganizations of our business or
the disposal of all or a portion of a reporting unit.
We perform an annual impairment review of our goodwill as of the first day of our fourth fiscal quarter of each year, and
more frequently if we believe indicators of impairment exist. Following our fiscal year end change, we made a corresponding
change to our annual impairment assessment date and will continue to perform annual impairment review on the first day of our
fourth quarter, which for the Fiscal Transition Period was September 28, 2019 (the first day of the last quarter of the Fiscal
Transition Period).
To test goodwill for impairment, we may perform both qualitative and quantitative assessments. If we elect to perform a
qualitative assessment for a certain reporting unit, we evaluate events and circumstances impacting the reporting unit to determine
the probability that goodwill is impaired. If we determine it is more-likely-than-not that the fair value of the reporting unit is less
than its carrying amount, we measure any loss from an impairment by comparing the fair value of each reporting unit to its
carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered
impaired, and an impairment loss is recognized in an amount equal to that excess. See Note 3: Divestitures, Asset Sales and
Discontinued Operations, Note 5: Business Combination and Note 10: Goodwill in these Notes for additional information
regarding goodwill.
Long-Lived Assets, Including Intangible Assets — Long-lived assets, including finite-lived intangible assets, are
amortized to expense over their useful lives either according to the underlying economic benefit as reflected by future net cash
inflows or on a straight-line basis depending on the nature of the asset. We assess the recoverability of the carrying value of our
long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate the carrying
amount of the assets may not be recoverable. We evaluate the recoverability of such assets based on the expectations of
undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying
amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. Indefinite-lived
intangible assets are not amortized, but are tested annually for impairment. This testing compares the fair value of the asset to its
carrying amount, and, when appropriate, the carrying amount of these assets is reduced to its fair value. See Note 9: Property,
Plant and Equipment and Note 11: Intangible Assets in these Notes for additional information regarding long-lived assets and
intangible assets.
Other Assets and Liabilities — No assets within the “Other current assets” or “Other non-current assets” line items in our
Consolidated Balance Sheet exceeded 5 percent of our total current assets or total assets, respectively, at January 3, 2020, June 28,
2019 or June 29, 2018. No accrued liabilities or expenses within the “Other accrued items” or “Other long-term liabilities” line
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items in our Consolidated Balance Sheet exceeded 5 percent of our total current liabilities or total liabilities, respectively, at
January 3, 2020, June 28, 2019 or June 29, 2018.
Income Taxes — We follow the liability method of accounting for income taxes. We record the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and amounts reported in our Consolidated Balance Sheet,
as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction
regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as
required. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future
taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. See Note 23:
Income Taxes in these Notes for additional information regarding income taxes.
Standard Warranties — We record estimated standard warranty costs in the period in which the related products are
delivered. Factors that affect the estimated cost for warranties include the terms of the contract, the type and complexity of the
delivered product, number of installed units, historical experience and management’s assumptions regarding anticipated rates of
warranty claims and cost per claim. Our standard warranties start from the shipment, delivery or customer acceptance date and
continue as follows:
Segment
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Average Warranty Period
One to three years
One to three years
One to five years
One to two years
Because our products are manufactured, in many cases, to customer specifications and their acceptance is based on meeting
those specifications, we historically have experienced minimal warranty costs. Factors that affect our warranty liability include
the number of installed units, historical experience, anticipated delays in delivery of products to end customers, in-country
support for international sales and our assumptions regarding anticipated rates of warranty claims and cost per claim. We assess
the adequacy of our recorded warranty liabilities every quarter and make adjustments to the liability as necessary. See Note 12:
Accrued Warranties in these Notes for additional information regarding warranties.
Foreign Currency Translation — The functional currency for most international subsidiaries is the local currency. Assets
and liabilities are translated at current rates of exchange and income and expense items are translated at the weighted average
exchange rate for the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity.
Stock Options and Other Share-Based Compensation — We measure compensation cost for all share-based payments
(including employee stock options) at fair value and recognize cost over the vesting period, with forfeitures recognized as they
occur. It is our practice to issue shares when options are exercised. See Note 16: Stock Options and Other Share-Based
Compensation in these Notes for additional information regarding share-based compensation.
Restructuring and Other Exit Costs — We record restructuring and other exit costs at their fair value when incurred. In
cases where employees are required to render service until they are terminated in order to receive the termination benefits and will
be retained beyond the minimum retention period, we record the expense ratably over the future service period. These costs are
included as a component of the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line
items in our Consolidated Statement of Income. See Note 4: Restructuring and Other Exit Costs in these Notes for additional
information regarding restructuring and other exit costs.
Revenue Recognition — We account for a contract when it has approval and commitment from all parties, the rights and
payment terms of the parties can be identified, the contract has commercial substance and the collectibility of the consideration, or
transaction price, is probable. Our contracts are often subsequently modified to include changes in specifications, requirements or
price that may create new or change existing enforceable rights and obligations. We do not account for contract modifications
(including unexercised options) or follow-on contracts until they meet the requirements noted above to account for a contract.
At the inception of each contract, we evaluate the promised goods and services to determine whether the contract should be
accounted for as having one or more performance obligations. A performance obligation is a promise to transfer a distinct good or
service to a customer and represents the unit of accounting for revenue recognition. A substantial majority of our revenue is
derived from long-term development and production contracts involving the design, development, manufacture or modification of
aerospace and defense products and related services according to the customers’ specifications. Due to the highly interdependent
and interrelated nature of the underlying goods and services and the significant service of integration that we provide, which often
result in the delivery of multiple units, we account for these contracts as one performance obligation. For contracts that include
both development/production and follow-on support services (for example, operations and maintenance), we generally consider
the follow-on services distinct in the context of the contract and account for them as separate performance obligations.
Additionally, a significant amount of our revenue is derived from contracts to provide multiple distinct goods to a customer where
78
the goods can readily be sold to other customers based on their commercial nature and, accordingly, these goods are accounted for
as separate performance obligations. Shipping and handling costs incurred after control of a product has transferred to the
customer (for example, in free on board shipping arrangements) are treated as fulfillment costs and, therefore, are not accounted
for as separate performance obligations. Also, we record taxes collected from customers and remitted to governmental authorities
on a net basis in that they are excluded from revenue.
As discussed above, our contracts are often subsequently modified to include changes in specifications, requirements or
price. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the
existing contract or as a separate contract. Often, the deliverables in our contract modifications are not distinct from the existing
contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such
modifications are accounted for as if they were part of the existing contract, and we may be required to recognize a cumulative
catch-up adjustment to revenue at the date of the contract modification.
We determine the transaction price for each contract based on our best estimate of the consideration we expect to receive,
which includes assumptions regarding variable consideration, such as award and incentive fees. These variable amounts are
generally awarded upon achievement of certain negotiated performance metrics, program milestones or cost targets and can be
based upon customer discretion. We include such estimated amounts in the transaction price to the extent it is probable that a
significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable
consideration is resolved. We estimate variable consideration primarily using the most likely amount method.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based
on the relative standalone selling price of the good or service underlying each performance obligation. The standalone selling
price represents the amount for which we would sell the good or service to a customer on a standalone basis (i.e., not sold as a
bundle with any other products or services). Our contracts with the U.S. Government, including foreign military sales contracts,
are subject to the Federal Acquisition Regulations (“FAR”) and the prices of our contract deliverables are typically based on our
estimated or actual costs plus a reasonable profit margin. As a result, the standalone selling prices of the goods and services in
these contracts are typically equal to the selling prices stated in the contract, thereby, eliminating the need to allocate (or
reallocate) the transaction price to the multiple performance obligations. In our non-U.S. Government contracts, we also generally
use the expected cost plus a reasonable profit margin approach to determine standalone selling price. In addition, we determine
standalone selling price for certain contracts that are commercial in nature based on observable selling prices.
We recognize revenue for each performance obligation when (or as) the performance obligation is satisfied by transferring
control of the promised goods or services underlying the performance obligation to the customer. The transfer of control can occur
over time or at a point in time.
Point in Time Revenue Recognition: Our performance obligations are satisfied at a point in time unless they meet at least
one of the following criteria, in which case they are satisfied over time:
• The customer simultaneously receives and consumes the benefits provided by our performance as we perform;
• Our performance creates or enhances an asset (for example, work in process) that the customer controls as the asset
is created or enhanced; or
• Our performance does not create an asset with an alternative use to us, and we have an enforceable right to
payment for performance completed to date.
As noted above, a significant amount of our revenue is derived from contracts to provide multiple distinct goods to a
customer that are commercial in nature and can readily be sold to other customers. These performance obligations do not meet
any of the three criteria listed above to recognize revenue over time; therefore, we recognize revenue at a point in time, generally
when the goods are received and accepted by the customer.
Over Time Revenue Recognition: For U.S. Government development and production contracts, there is a continuous
transfer of control of the asset to the customer as it is being produced based on FAR clauses in the contract that provide the
customer with lien rights to work in process and allow the customer to unilaterally terminate the contract for convenience, pay us
for costs incurred plus a reasonable profit and take control of any work in process. This also typically applies to our contracts with
prime contractors for U.S. Government development and production contracts, when the above-described FAR clauses are flowed
down to us by the prime contractors.
Our non-U.S. Government development and production contracts, including international direct commercial contracts and
U.S. contracts with state and local agencies, utilities and commercial and transportation organizations, often do not include the
FAR clauses described above. However, over time revenue recognition is typically supported either through our performance
creating or enhancing an asset that the customer controls as it is created or enhanced or based on other contractual provisions or
relevant laws that provide us with an enforceable right to payment for our work performed to date plus a reasonable profit if our
customer were permitted to and did terminate the contract for reasons other than our failure to perform as promised.
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Revenue for our development and production contracts is recognized over time, typically using the POC cost-to-cost
method, whereby we measure our progress towards completion of the performance obligation based on the ratio of costs incurred
to date to estimated costs at completion under the contract. Because costs incurred represent work performed, we believe this
method best depicts transfer of control of the asset to the customer.
For performance obligations to provide services that are satisfied over time, we recognize revenue either on a straight-line
basis, the POC cost-to-cost method, or based on the right-to-invoice method (i.e., based on our right to bill the customer),
depending on which method best depicts transfer of control to the customer.
Contract Estimates: Under the POC cost-to-cost method of revenue recognition, a single estimated profit margin is used
to recognize profit for each performance obligation over its period of performance. Recognition of profit on a contract requires
estimates of the total cost at completion and transaction price and the measurement of progress towards completion. Due to the
long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often
requires judgment. Factors that must be considered in estimating the cost of the work to be completed include the nature and
complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Factors that
must be considered in estimating the total transaction price include contractual cost or performance incentives (such as incentive
fees, award fees and penalties) and other forms of variable consideration as well as our historical experience and our expectation
for performance on the contract. At the outset of each contract, we gauge its complexity and perceived risks and establish an
estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we
follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing
contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical,
schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of
these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion.
Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we
receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated
total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up
method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated
losses on these contracts are fully recognized in the period in which the losses become evident.
Net EAC adjustments had the following impact to earnings for the periods presented:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Net EAC adjustments, before income taxes
Net EAC adjustments, net of income taxes
Net EAC adjustments, net of income taxes, per diluted share
$
$
$
137
103
0.46
(In millions, except per share amounts)
$
$
$
(19) $
(13) $
(0.11) $
17
13
0.10
$
$
$
(1)
(1)
(0.01)
Revenue recognized from performance obligations satisfied in prior periods was $98 million for the two quarters ended
January 3, 2020. Revenue recognized from performance obligations satisfied in prior periods was $59 million, $43 million and
$45 million for fiscal 2019, 2018 and 2017, respectively.
Bill-and-Hold Arrangements: For certain of our contracts, the finished product may temporarily be stored at our location
under a bill-and-hold arrangement. Revenue is recognized on bill-and-hold arrangements at the point in time when the customer
obtains control of the product and all of the following criteria have been met: the arrangement is substantive (for example, the
customer has requested the arrangement); the product is identified separately as belonging to the customer; the product is ready
for physical transfer to the customer; and we do not have the ability to use the product or direct it to another customer. In
determining when the customer obtains control of the product, we consider certain indicators, including whether we have a
present right to payment from the customer, whether title and/or significant risks and rewards of ownership have transferred to the
customer and whether customer acceptance has been received (in the case of arrangements with customer acceptance provisions).
Backlog: Backlog, which is the equivalent of our remaining performance obligations, represents the future revenue we
expect to recognize as we perform on our current contracts. Backlog comprises both funded backlog (i.e., firm orders for which
funding is authorized and appropriated) and unfunded backlog. Backlog excludes unexercised contract options and potential
orders under ordering-type contracts, such as indefinite delivery, indefinite quantity (“IDIQ”) contracts.
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Retirement and Post-Employment Benefits — Defined benefit plans that we sponsor are accounted for as defined benefit
pension and other postretirement defined benefit plans (collectively referred to as “defined benefit plans”). Accordingly, the
funded or unfunded position of each defined benefit plan is recorded in our Consolidated Balance Sheet. Actuarial gains and
losses and prior service costs or credits that have not yet been recognized through income are recorded in the “Accumulated other
comprehensive loss” line item within equity in our Consolidated Balance Sheet, net of taxes, until they are amortized as a
component of net periodic benefit cost. The determination of benefit obligations and the recognition of expenses related to
defined benefit plans are dependent on various assumptions. The major assumptions primarily relate to discount rates, long-term
expected rates of return on plan assets, the rate of future compensation increases, mortality, termination, and health care cost trend
rates. We develop each assumption using relevant Company experience in conjunction with market-related data. Actuarial
assumptions are reviewed annually with third-party consultants and adjusted as appropriate. For the recognition of net periodic
benefit cost, the calculation of the long-term expected return on plan assets is generally derived using a market-related value of
plan assets based on yearly average asset values at the measurement date over the last five years, to be phased in over five years.
Actual results that differ from our assumptions are accumulated and generally amortized for each plan to the extent required over
the estimated future life expectancy or, if applicable, the future working lifetime of the plan’s active participants. The fair value of
plan assets is determined based on market prices or estimated fair value at the measurement date. The measurement date for
valuing defined benefit plan assets and obligations is the end of the month closest to our fiscal year end.
We record the service cost component of net periodic benefit income in the “Cost of product sales and services” and
“Engineering, selling and administrative expenses” line items in our Consolidated Statement of Income. The non-service cost
components of net periodic benefit income are included in the “Non-operating income” line item in our Consolidated Statement
of Income.
See Note 15: Pension and Other Postretirement Benefits in these Notes for additional information regarding our defined
benefit plans.
We also provide retirement benefits to many of our U.S.-based employees through defined contribution retirement plans,
including 401(k) plans and certain non-qualified deferred compensation plans. The defined contribution retirement plans have
matching and savings elements. Company contributions to the retirement plans are based on employees’ savings with no other
funding requirements. We may make additional contributions to the retirement plans at our discretion. Retirement and
postretirement benefits also include unfunded limited healthcare plans for U.S.-based retirees and employees on long-term
disability. We estimate benefits for these plans using actuarial valuations that are based in part on certain key assumptions we
make, including the discount rate, the expected long-term rate of return on plan assets, the rate of future compensation increases,
healthcare cost trend rates and employee turnover and mortality, each appropriately based on the nature of the plans. We accrue
the cost of these benefits during an employee’s active service life, except in the case of our healthcare plans for disabled
employees, the costs of which we accrue when the disabling event occurs.
Environmental Expenditures — We capitalize environmental expenditures that increase the life or efficiency of property
or that reduce or prevent environmental contamination. We accrue environmental expenses resulting from existing conditions that
relate to past or current operations. Our accruals for environmental expenses are recorded on a site-by-site basis when it is
probable a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and
existing technologies available to us. Our accruals for environmental expenses represent the best estimates related to the
investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal
fees, and are reviewed periodically, at least annually at the year-end balance sheet date, and updated for progress of investigation
and remediation efforts and changes in facts and legal circumstances. If the timing and amount of future cash payments for
environmental liabilities are fixed or reliably determinable, we generally discount such cash flows in estimating our accrual.
As of January 3, 2020, we were named, and continue to be named, as a potentially responsible party at 84 sites where future
liabilities could exist. These sites included 8 sites owned by us, 66 sites associated with our former and current locations or
operations and 10 hazardous waste treatment, storage or disposal facility sites not owned by us that contain hazardous substances
allegedly attributable to us from past operations.
Based on an assessment of relevant factors, we estimated that our liability under applicable environmental statutes and
regulations for identified sites was approximately $115 million. The current portion of our estimated environmental liability is
included in the “Other accrued items” line item and the non-current portion is included in the “Other long-term liabilities” line
item in our Consolidated Balance Sheet.
The relevant factors we considered in estimating our potential liabilities under applicable environmental statutes and
regulations included some or all of the following as to each site: incomplete information regarding particular sites and other
potentially responsible parties; uncertainty regarding the extent of investigation or remediation; our share, if any, of liability for
such conditions; the selection of alternative remedial approaches; changes in environmental standards and regulatory
requirements; potential insurance proceeds; cost-sharing agreements with other parties and potential indemnification from
successor and predecessor owners of these sites. We do not believe that any uncertainties regarding these relevant factors will
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materially affect our potential liability under applicable environmental statutes and regulations. We believe the total amount
accrued is appropriate based on existing facts and circumstances, although we note the total amount accrued may increase or
decrease in future years.
Financial Guarantees and Commercial Commitments — Financial guarantees are contingent commitments issued to
guarantee the performance of a customer to a third party in borrowing arrangements, such as commercial paper issuances, bond
financings and similar transactions. As of January 3, 2020, we did not have material financial guarantees and there were no such
contingent commitments accrued for in our Consolidated Balance Sheet.
We have entered into commercial commitments in the normal course of business including surety bonds, standby letter of
credit agreements and other arrangements with financial institutions and customers primarily relating to the guarantee of future
performance on certain contracts to provide products and services to customers and to obtain insurance policies with our
insurance carriers.
Financial Instruments and Risk Management — In the normal course of business, we are exposed to global market risks,
including the effect of changes in foreign currency exchange rates. We use derivative instruments to manage our exposure to such
risks and formally document all relationships between hedging instruments and hedged items, as well as the risk-management
objective and strategy for undertaking hedge transactions. We may also enter into derivative instruments that are not designated as
hedges and do not qualify for hedge accounting. We recognize all derivatives in our Consolidated Balance Sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities
or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in
earnings. We do not hold or issue derivatives for speculative trading purposes. See Note 20: Derivative Instruments and Hedging
Activities in these Notes for additional information regarding our use of derivative instruments.
Income From Continuing Operations Per Share — For all periods presented in our Consolidated Financial Statements
and these Notes, income from continuing operations per share is computed using the two-class method. The two-class method of
computing income from continuing operations per share is an earnings allocation formula that determines income from continuing
operations per share for common stock and any participating securities according to dividends paid and participation rights in
undistributed earnings. Historically, our restricted stock awards and restricted stock unit awards generally have met the definition
of participating securities and were included in the computations of income from continuing operations per basic and diluted
common share. However, restricted stock awards and restricted stock unit awards granted during the two quarters ended January
3, 2020 did not meet the definition of participating securities. Under the two-class method, income from continuing operations per
common share is computed by dividing the sum of earnings distributed to common shareholders and undistributed earnings
allocated to common shareholders by the weighted-average number of common shares outstanding for the period. Income from
continuing operations per diluted common share is computed using the more dilutive of the two-class method or the treasury stock
method. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities
based on the weighted-average shares outstanding during the period. See Note 17: Income From Continuing Operations Per Share
in these Notes for additional information.
Business Segments — We evaluate each business segment’s performance based on its operating income or loss, which we
define as profit or loss from operations before income taxes, including pension income and excluding interest income and
expense, royalties and related intellectual property expenses, equity method investment income or loss and gains or losses from
securities and other investments. Intersegment sales are generally transferred at cost to the buying segment, and the sourcing
segment recognizes a profit that is eliminated. The “Corporate eliminations” line item in Note 25: Business Segments in these
Notes represents the elimination of intersegment sales. Corporate expenses are primarily allocated to our business segments using
an allocation methodology prescribed by U.S. Government regulations for government contractors. The “Unallocated corporate
expenses and corporate eliminations” line item in Note 25: Business Segments in these Notes represents the portion of corporate
expenses not allocated to our business segments and elimination of intersegment profits. The “Pension adjustment” line item in
Note 25: Business Segments in these Notes represents the reconciliation of the non-service components of net periodic pension
and postretirement benefit costs, which are a component of segment operating income but are included in the “Non-operating
income” line item in our Consolidated Statement of Income. The non-service components of net periodic pension and
postretirement benefit costs include interest cost, expected return on plan assets, amortization of net actuarial gain or loss and
effect of curtailments or settlements.
NOTE 2: ACCOUNTING CHANGES OR RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
Leases
Effective June 29, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), as amended
(“ASC 842”) using the optional transition method. We initially applied ASC 842 for leases existing as of June 29, 2019 and
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recognized $270 million of right-of-use (“ROU”) assets and $289 million of lease liabilities in our Consolidated Balance Sheet.
See Note 5: Business Combination in these Notes for ROU assets and lease liabilities assumed as part of the L3Harris Merger.
In accordance with ASC 842, we recognized ROU assets and lease liabilities in our balance sheet for operating and finance
leases under which we are the lessee, except for equipment leases and, as permitted by a practical expedient under ASC 842,
leases with a term of 12 months or less. Equipment leases were not material at January 3, 2020 and June 29, 2019. We also elected
the package of practical expedients permitted under ASC 842 and did not reassess lease classification for existing or expired
leases, whether expired or existing contracts contain a lease under the new definition of a lease or whether previously capitalized
initial direct costs would qualify for capitalization under ASC 842.
Operating lease assets are classified as operating ROU assets, operating lease liabilities for obligations due within 12 months
are classified as other accrued items and operating lease liabilities for obligations due longer than 12 months are classified as
other long-term liabilities. Finance lease assets are classified as property, plant and equipment. Finance lease liabilities are
classified as other accrued items or other long-term debt, net depending on when the obligation is due.
ROU assets and lease liabilities are recognized based on the present value of future lease payments. Lease payments
primarily include base rent. We have some lease payments that are based on an index and changes to the index are treated as
variable lease payments and recognized in the period in which the obligation for those payments is incurred. Our lease payments
also include non-lease components such as real estate taxes and common-area maintenance costs. We elected the practical
expedient to account for lease and non-lease components as a single component. In certain of our leases, the non-lease
components are variable and are therefore excluded from lease payments to determine the ROU asset. The present value of future
lease payments is determined using our incremental borrowing rate at lease commencement over the expected lease term. We use
our incremental borrowing rate because our leases do not provide an implicit lease rate. The expected lease term represents the
number of years we expect to lease the property, including options to extend or terminate the lease when it is reasonably certain
that we will exercise the option.
Operating lease expense is recognized as an operating cost on a straight-line basis over the expected lease term in our
Consolidated Statement of Income. For finance leases, the ROU asset is amortized on a straight-line basis over the lease term, and
interest on the lease liability is recognized in interest expense. The amortization of ROU assets for our finance leases and interest
expense were not material for the two quarters ended January 3, 2020.
We are a lessor for certain arrangements for flight simulators. These leases meet the criteria for operating lease
classification. Lease income associated with these leases was not material for the two quarters ended January 3, 2020.
The adoption of ASC 842 did not have a material effect on our results of operations or cash flows.
Derivatives and Hedging
Effective June 29, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. The amendments in this update are intended to better align companies’ risk management
activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for
qualifying hedge relationships and the presentation of hedge results. The amendments in this update require companies to present
the earnings effect of the hedging instrument in the same income statement line in which the earnings effect of the hedged item is
reported. Prior to the adoption of this update, GAAP provided hedge accounting for only the portion of the hedge deemed to be
highly effective and required companies to separately reflect the amount by which the hedging instrument did not offset the
hedged item, which is referred to as the ineffective amount. The amendments in this update include, among other items, removal
of the requirement that companies separately measure and recognize in earnings the ineffective amount for highly effective
hedges. Adoption of this standard did not have a material effect on our financial condition, results of operations or cash flows.
NOTE 3: DIVESTITURES, ASSET SALES AND DISCONTINUED OPERATIONS
Divestitures
Harris Night Vision. On September 13, 2019, we completed the sale of the Harris Night Vision business, a global supplier
of high-performance, vision-enhancing products for U.S. and allied military and security forces and commercial customers, for
$350 million (net cash proceeds of $343 million after selling costs and estimated purchase price adjustments), subject to final
customary purchase price adjustments pursuant to a definitive agreement we entered into on April 4, 2019 as part of the regulatory
process in connection with the L3Harris Merger and recognized a pre-tax gain of $229 million.
Through fiscal 2019, the Harris Night Vision business was reported as part of our former Communication Systems segment.
As a result of the then-pending divestiture, the Harris Night Vision business was not included in any of our new business
segments and, consequently, the operating results of the business are included in “Other non-reportable business segments” for the
two quarters ended January 3, 2020 and fiscal 2019, 2018 and 2017 in this Report.
83
Income before income taxes for the Harris Night Vision business was not material for the two quarters ended January 3,
2020 and was $27 million, $20 million and $9 million for fiscal 2019, 2018 and 2017, respectively.
The carrying amounts of the major classes of assets and liabilities of the Harris Night Vision business classified as held for
sale at June 28, 2019 are summarized below:
Receivables
Inventories
Property, plant and equipment
Goodwill
Other intangible assets
Assets of disposal group held for sale
Accounts payable
Contract liabilities
Compensation and benefits
Other accrued items
Defined benefit plans
Liabilities of disposal group held for sale
Asset Sales
June 28, 2019
(In millions)
$
$
$
$
18
52
29
30
4
133
13
1
3
3
16
36
Stormscope. On August 30, 2019, we completed the sale of the Stormscope product line for $20 million in cash and
recorded a pre-tax gain of $12 million in the “Engineering, selling and administrative expenses” line item of our Consolidated
Statement of Income for the two quarters ended January 3, 2020.
Discontinued Operations
We completed two significant divestitures during fiscal 2017, the divestiture of our government information technology
(“IT”) services business (“IT Services”) and the divestiture of our Harris CapRock Communications commercial business
(“CapRock”), which are described in more detail below. These divestitures individually and collectively represented a strategic
shift away from non-core markets (for example, energy, maritime and government IT services). The decision to divest these
businesses was part of our strategy to simplify our operating model to focus on technology-differentiated, high-margin businesses,
and had a major effect on our operations and financial results.
As a result, IT Services and CapRock are reported as discontinued operations in the accompanying Consolidated Financial
Statements and these Notes. Except for disclosures related to our cash flows, or unless otherwise specified, disclosures in the
accompanying Consolidated Financial Statements and these Notes relate solely to our continuing operations.
84
The major components of discontinued operations in our Consolidated Statement of Income included the following:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Revenue from product sales and services
$
— $
Cost of product sales and services
Engineering, selling and administrative expenses
Impairment of goodwill and other assets
Non-operating loss, net(1)
Loss before income taxes
Loss on sale of discontinued operations, net(2)
Income tax benefit
Discontinued operations, net of income taxes
$
_______________
(In millions)
— $
— $
—
—
—
(5)
(5)
—
—
—
—
(8)
(8)
—
—
—
—
(1)
(1)
—
—
(1) $
1
(4) $
5
(3) $
1,039
(885)
(91)
(240)
(7)
(184)
(11)
110
(85)
(1) “Non-operating loss, net” included a loss of $2 million in fiscal 2017 related to our former broadcast communications business (“Broadcast
Communications”), which was divested in fiscal 2013.
(2) “Loss on sale of discontinued operations, net” in fiscal 2017 included a $3 million decrease to the loss on the sale of Broadcast Communications.
Depreciation and amortization, capital expenditures and significant non-cash items of discontinued operations included the
following:
Depreciation and amortization
Capital expenditures
Significant non-cash items:
Impairment of goodwill and other assets
Loss on sale of discontinued operations, net
IT Services
Fiscal Year
Ended
June 30, 2017
(In millions)
$
39
4
(240)
(11)
On April 28, 2017, we completed the divestiture to an affiliate of Veritas Capital Fund Management, L.L.C. of IT Services,
which primarily provided IT and engineering managed services to U.S. Government customers, for net cash proceeds of $646
million, and recognized a pre-tax loss of $28 million (an after-tax gain of $55 million after certain tax benefits related to the
transaction or $.44 per diluted share) on the sale after transaction expenses. The decision to divest IT Services was part of our
strategy to simplify our operating model to focus on technology-differentiated, high-margin businesses.
Because the then-pending divestiture of IT Services represented the disposal of a portion of a reporting unit, we assigned
$487 million of goodwill to the IT Services disposal group on a relative fair value basis during the third quarter of fiscal 2017,
when the held for sale criteria were met. The fair value of the IT Services disposal group was determined based on the negotiated
selling price, and the fair value of the retained businesses (which comprised the remaining portion of the reporting unit) was
determined based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly
reported transactions, and projected discounted cash flows. These fair value determinations are categorized as Level 3 in the fair
value hierarchy due to their use of internal projections and unobservable measurement inputs. See Note 1: Significant Accounting
Policies for additional information regarding the fair value hierarchy.
In conjunction with the allocation, we tested goodwill assigned to the disposal group and goodwill allocated to the retained
businesses for impairment. As a result, we concluded that goodwill and other assets related to IT Services were impaired as of
March 31, 2017, and we recorded a non-cash impairment charge of $240 million in discontinued operations, $228 million of
which related to goodwill. The goodwill impairment charge was non-deductible for tax purposes.
85
The following table presents the key financial results of IT Services included in “Discontinued operations, net of income
taxes” in our Consolidated Statement of Income:
Revenue from product sales and services
Cost of product sales and services
Engineering, selling and administrative expenses
Impairment of goodwill and other assets
Non-operating loss
Loss before income taxes
Loss on sale of discontinued operations, net
Income tax benefit
Discontinued operations, net of income taxes
CapRock
Fiscal Years Ended
June 28, 2019
June 29, 2018
June 30, 2017
(In millions)
$
— $
— $
—
—
—
(1)
(1)
—
$
—
(1) $
—
—
—
(4)
(4)
—
5
1
$
895
(777)
(68)
(240)
(9)
(199)
(28)
69
(158)
On January 1, 2017, we completed the divestiture to SpeedCast International Ltd. of CapRock, which provided wireless,
terrestrial and satellite communications services to energy and maritime customers, for net cash proceeds of $368 million, and
recognized a pre-tax gain of $14 million ($61 million after certain tax benefits related to the transaction, including reversal of
valuation allowances on capital losses and net operating losses, or $.49 per diluted share) on the sale after transaction expenses
and purchase adjustments in respect of net cash and net working capital as set forth in the definitive sales agreement entered into
on November 1, 2016.
The following table presents the key financial results of CapRock included in “Discontinued operations, net of income
taxes” included in our Consolidated Statement of Income:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Revenue from product sales and services
$
— $
Cost of product sales and services
Engineering, selling and administrative expenses
Non-operating income (loss)
Income (loss) before income taxes
Gain on sale of discontinued operations
Income tax benefit
Discontinued operations, net of income taxes
$
NOTE 4: RESTRUCTURING AND OTHER EXIT COSTS
—
—
(1)
(1)
—
—
(1) $
(In millions)
— $
—
—
(3)
(3)
—
— $
—
—
(4)
(4)
—
1
(2) $
—
(4) $
144
(108)
(23)
4
17
14
41
72
We record charges for restructuring and other exit activities related to sales or terminations of product lines, closures or
relocations of business activities, changes in management structure, and fundamental reorganizations that affect the nature and
focus of operations. Such charges include termination benefits, contract termination costs and costs to consolidate facilities or
relocate employees. We record termination benefits and contract termination costs at their fair value when incurred. In cases
where employees are required to render service until they are terminated in order to receive the termination benefits and will be
retained beyond the minimum retention period, we record the expense ratably over the future service period. These charges are
included as a component of the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of
Income.
L3Harris Merger-Related Restructuring Costs
During the two quarters ended January 3, 2020, we recorded $117 million of restructuring costs for workforce reductions
(including severance and other employee-related exit costs) in connection with the L3Harris Merger. At January 3, 2020, we had
86
liabilities of $58 million associated with these restructuring activities, of which we expect substantially all will be paid in the next
twelve months.
During the quarter ended January 3, 2020, we finalized our plan to close L3’s former headquarters offices located at 600
Third Avenue in New York City. On December 3, 2019, we entered into an amended lease agreement with the landlord, which
reduced the number of leased floors from six to five effective October 1, 2020 through the expiration of the lease on October 31,
2031. We plan to fully exit the remaining floors during 2020 and sublease the space over the remaining lease term. During the
quarter ended January 3, 2020, we recorded a $2 million lease modification and a $46 million impairment charge for ROU and
other assets in connection with the termination of the lease.
Previous Restructuring and other Exit Costs
In fiscal 2018 and 2017, we recorded $5 million and $58 million, respectively, for integration and other costs in connection
with our acquisition of Exelis Inc., which we acquired in fiscal 2015 (“Exelis”). We had liabilities of $16 million and $27 million
as of the end of fiscal 2019 and 2018, respectively, associated with these integration activities and previous restructuring actions.
The majority of the remaining liabilities as of January 3, 2020 represent lease obligations associated with exited facilities with
remaining terms of four years or less.
In fiscal 2018, we also recorded $45 million of charges in connection with our decision to transition and exit a commercial
line of business that had been developing an air-to-ground radio access network for the business aviation market based on the
Long Term Evolution (“LTE”) standard operating in the unlicensed spectrum. We had a liability of $18 million at June 29, 2018
associated with this exit activity, which was paid on July 2, 2018.
Our liabilities for restructuring and other exit costs are included in the “Other accrued items” and “Other long-term
liabilities” line items in our Consolidated Balance Sheet. Changes to our restructuring and other exit costs liabilities during the
two quarters ended January 3, 2020 and fiscal 2019 and 2018 were as follows:
Employee
severance-related
costs
Facilities
consolidation and
other exit costs(1)
Total
Balance at June 30, 2017
Additional provisions
Payments
Other
Balance at June 29, 2018
Payments
Balance at June 28, 2019
Additional provisions
Payments
Other
Balance at January 3, 2020
(In millions)
$
31
$
$
12
1
(9)
(2)
2
(2)
—
117
(62)
3
$
58
$
50
(38)
—
43
(27)
16
—
(1)
(8)
7
$
43
51
(47)
(2)
45
(29)
16
117
(63)
(5)
65
_______________
(1) Excludes our operating lease liability related to L3’s former headquarter offices.
NOTE 5: BUSINESS COMBINATION
On October 12, 2018, Harris entered into the Merger Agreement with L3 and Merger Sub, pursuant to which Harris and L3
agreed to combine their respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and
into L3, with L3 continuing as the surviving corporation and a direct wholly-owned subsidiary of Harris.
The closing of the L3Harris Merger occurred on June 29, 2019, the first day of our Fiscal Transition Period. Upon
completion of the L3Harris Merger, Harris was renamed “L3Harris Technologies, Inc.” and each share of L3 common stock
converted into the right to receive 1.30 shares of L3Harris common stock. L3Harris was owned on a fully diluted basis
approximately 54 percent by Harris shareholders and 46 percent by L3 shareholders immediately following the completion of the
L3Harris Merger.
L3 was a prime contractor in intelligence, surveillance and reconnaissance (“ISR”) systems, aircraft sustainment (including
modifications and fleet management of special mission aircraft), simulation and training, night vision and image intensification
equipment, and security and detection systems. L3 also was a leading provider of a broad range of communication, electronic and
87
sensor systems used on military, homeland security and commercial platforms. L3 employed approximately 31,000 employees
and its customers included the U.S. Department of Defense and its prime contractors, the U.S. Intelligence Community, the U.S.
Department of Homeland Security, foreign governments and domestic and foreign commercial customers. L3 generated calendar
2018 revenue of approximately $10 billion.
Following the completion of the L3Harris Merger, we issued 104 million shares of L3Harris common stock to L3
shareholders. The trading price of L3Harris common stock was $189.13 per share as of the Closing Date. In addition to shares of
our common stock issued to L3 shareholders, replacement L3Harris share-based awards were issued for certain outstanding L3
share-based awards.
We are accounting for the L3Harris Merger under the acquisition method of accounting. Under the acquisition method of
accounting, we are required to measure identifiable assets acquired, liabilities assumed and any noncontrolling interests in the
acquiree at their fair values as of the Closing Date. Due to the timing of the L3Harris Merger relative to its size and complexity,
certain aspects of our accounting for the L3Harris Merger remain preliminary, including the acquisition-date fair value of
identifiable assets acquired and certain liabilities assumed. Amounts recorded associated with these assets and liabilities are based
on preliminary calculations and our estimates and assumptions are subject to change as we obtain additional information during
the measurement period (up to one year from the Closing Date). As of January 3, 2020, we have completed our determination of
the fair value of consideration transferred as well as defined benefit plan liabilities and long-term debt assumed.
Our calculation of consideration transferred is as follows:
(In millions, except exchange ratio and per share amounts)
June 29, 2019
Outstanding shares of L3 common stock as of June 28, 2019
L3 restricted stock unit awards settled in shares of L3Harris common stock
L3 performance unit awards settled in shares of L3Harris common stock
Exchange Ratio
Shares of L3Harris common stock issued for L3 outstanding common stock
Price per share of L3Harris common stock as of June 28, 2019
Fair value of L3Harris common stock issued for L3 outstanding common stock
Fair value of replacement RSUs attributable to merger consideration
Fair value of L3Harris stock options issued for L3 outstanding stock options
Withholding tax liability incurred for converted L3 share-based awards
Fair value of replacement award consideration
Fair value of total consideration
Less cash acquired
Total net consideration transferred
79.63
0.41
0.04
80.08
1.30
104.10
189.13
19,689
10
101
45
156
19,845
(1,195)
18,650
$
$
$
88
Our preliminary measurement of assets acquired, liabilities assumed and noncontrolling interests as of the Closing Date and
measurement period adjustments during the two quarters ended January 3, 2020, are as follows:
Receivables
Contract assets
Inventories
Other current assets
Property, plant and equipment
Operating lease right-of-use assets
Goodwill
Other intangible assets
Other non-current assets
Total assets acquired
Accounts payable
Contract liabilities
Other current liabilities
Operating lease liabilities
Defined benefit plans
Long-term debt, net
Other long-term liabilities
Total liabilities assumed
Net assets acquired
Noncontrolling interests
Total net consideration transferred
Preliminary
Fair Value
Measurement
Period
Adjustments
(In millions)
Adjusted
Fair Value
$
$
$
$
849
1,708
1,056
517
1,176
704
15,423
6,768
327
28,528
898
722
772
715
1,411
3,548
1,661
9,727
18,801
(151)
18,650
$
$
$
$
(15) $
(41)
(37)
(20)
39
—
(774)
1,109
(6)
255
$
(14) $
(4)
60
—
—
—
209
251
4
(4)
— $
834
1,667
1,019
497
1,215
704
14,649
7,877
321
28,783
884
718
832
715
1,411
3,548
1,870
9,978
18,805
(155)
18,650
The goodwill resulting from the L3Harris Merger was primarily associated with L3’s market presence and leading positions,
growth opportunities in the markets in which L3 businesses operate, experienced work force and established operating
infrastructures. Most of the goodwill related to the L3Harris Merger is nondeductible for tax purposes.
See Note 10: Goodwill in these Notes for more information regarding the preliminary allocation of goodwill by business
segment.
The following table provides further detail of the fair value and weighted-average amortization period of identified
intangible assets acquired by major intangible asset class:
Identifiable intangible assets acquired:
Customer relationships (Government)
Customer relationships (Commercial)
Trade names — Divisions
Developed technology
Total identifiable intangible assets subject to amortization
Trade names — Corporate
In-process research and development
Total identifiable intangible assets
89
Weighted Average
Amortization
Period
Total
(In years)
(In millions)
15
15
9
7
14
indefinite
n/a
$
$
4,677
643
123
562
6,005
1,803
69
7,877
Merger-Related Charges
During the two quarters ended January 3, 2020, we recorded $532 million of L3Harris Merger-related charges, consisting of
restructuring, integration, transaction and other costs as follows:
•
•
•
•
•
•
$142 million of additional cost of sales related to the fair value step-up in inventory sold;
$117 million of costs for workforce reductions, including severance and other employee-related exit costs;
$83 million of transaction costs, recognized as incurred;
$72 million of integration costs, recognized as incurred;
$70 million of equity award acceleration charges, recognized upon change in control; and
$48 million of facility consolidation costs.
See Note 4: Restructuring and Other Exit Costs in these Notes for additional information regarding severance and facility
consolidation costs.
Because the L3Harris Merger benefited the entire Company as opposed to any individual business segment, the above costs
were not allocated to any business segment. All of the costs above were recorded in the “Engineering, selling and administrative
expenses” line item in our Consolidated Statement of Income, except for the $142 million of additional cost of sales related to the
fair value step-up in inventory sold, which is included in the “Cost of product sales and services” line item in our Consolidated
Statement of Income.
Pro Forma Results
The following summary, prepared on a pro forma basis, presents our unaudited consolidated results of operations for the
comparable period ended December 28, 2018 as if the L3Harris Merger had been completed on June 29, 2018, the beginning of
the comparable period ended December 28, 2018, after including any post-merger adjustments directly attributable to the
L3Harris Merger, such as the sale of the Harris Night Vision business, and after including the impact of adjustments such as
amortization of intangible assets as well as the related income tax effects. This pro forma presentation does not include any impact
of transaction synergies. The pro forma results are not necessarily indicative of our results of operations that actually would have
been obtained had the L3Harris Merger been completed on the assumed date or for the period presented, or which may be realized
in the future.
Revenue from product sales and services — as reported
Revenue from product sales and services — pro forma
Income from continuing operations — as reported
Income from continuing operations — pro forma
Two Quarters Ended
December 28, 2018
(In millions)
$
$
$
$
3,208
8,404
441
760
For the two quarters ended January 3, 2020, our Consolidated Statement of Income includes the results of L3 operating
businesses from the Closing Date, with total revenue of approximately $5.7 billion (net of intercompany sales between L3
operating businesses) and income from continuing operations before income taxes of approximately $0.4 billion (including $142
million of additional cost of sales related to the fair value step-up in inventory sold and $108 million of restructuring charges for
workforce reductions associated with the L3Harris Merger).
NOTE 6: RECEIVABLES
Receivables are summarized below:
Accounts receivable
Less allowances for collection losses
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
$
1,228
(12)
1,216
$
$
459
(2)
457
$
$
468
(2)
466
We have a receivables sale agreement (“RSA”) with a third-party financial institution that permits us to sell, on a
nonrecourse basis, up to $100 million of outstanding receivables at any given time. From time to time, we have sold certain
customer receivables under the RSA, which we continue to service and collect on behalf of the third-party financial
institution. Receivables sold pursuant to the RSA meet the requirements for sales accounting under Accounting Standards
Codification 860, Transfers and Servicing, and accordingly, are derecognized from our Consolidated Balance Sheet at the time of
90
sale. Outstanding accounts receivable sold pursuant to the RSA were not material at January 3, 2020, June 28, 2019 or June 29,
2018.
NOTE 7: CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets include unbilled amounts typically resulting from revenue recognized exceeding amounts billed to
customers for contracts utilizing the POC cost-to-cost revenue recognition method. We bill customers as work progresses in
accordance with agreed-upon contractual terms, either at periodic intervals, upon achievement of contractual milestones or upon
deliveries and, in certain arrangements, the customer may withhold payment of a small portion of the contract price until contract
completion. Contract liabilities include advance payments and billings in excess of revenue recognized, including deferred
revenue associated with extended product warranties. Contract assets and liabilities are reported on a contract-by-contract basis at
the end of each reporting period. The increase in contract assets and contract liabilities in the two quarters ended January 3, 2020
was primarily due to contract assets and liabilities acquired in connection with the L3Harris Merger. Changes in contract asset and
contract liability balances in the two quarters ended January 3, 2020 were not materially impacted by any factors other than those
described above.
Contract assets and contract liabilities are summarized below:
Contract assets
Contract liabilities, current
Contract liabilities, noncurrent(1)
Net contract assets
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
$
2,459
(1,214)
(87)
1,158
$
$
807
(496)
(42)
269
$
$
782
(372)
(35)
375
_______________
(1) The non-current portion of contract liabilities is included as a component of the “Other long-term liabilities” line item in our Consolidated Balance Sheet.
The components of contract assets are summarized below:
Unbilled contract receivables, gross
Progress payments
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
$
3,690
(1,231)
2,459
$
$
916
(109)
807
$
$
881
(99)
782
Impairment losses related to our contract assets were not material during the two quarters ended January 3, 2020 or fiscal
2019, 2018 or 2017. In the two quarters ended January 3, 2020, we recognized $776 million of revenue related to contract
liabilities that were outstanding at the end of fiscal 2019. In fiscal 2019, 2018 and 2017, we recognized $287 million, $204
million and $221 million, respectively, of revenue related to contract liabilities that were outstanding at the end of the respective
prior fiscal year.
NOTE 8: INVENTORIES
Inventories are summarized below:
Finished products
Work in process
Raw materials and supplies
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
$
216
386
617
1,219
$
$
77
90
193
360
$
$
91
121
199
411
91
NOTE 9: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized below:
Land
Software capitalized for internal use
Buildings
Machinery and equipment
Less accumulated depreciation and amortization
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
$
90
287
1,073
2,194
3,644
(1,527)
2,117
$
$
40
187
631
1,429
2,287
(1,393)
894
$
$
43
171
620
1,349
2,183
(1,283)
900
Depreciation and amortization expense related to property, plant and equipment was $157 million in the two quarters ended
January 3, 2020. Depreciation and amortization expense related to property, plant and equipment was $138 million, $143 million
and $147 million in fiscal 2019, 2018 and 2017, respectively.
NOTE 10: GOODWILL
As discussed in Note 25: Business Segments in these Notes, after the completion of the L3Harris Merger, we adjusted our
segment reporting to reflect our new organizational structure effective June 29, 2019. Because our accounting for the L3Harris
Merger is still preliminary, we assigned goodwill acquired on a provisional basis. Immediately before and after our goodwill
assignments, we completed an assessment of any potential goodwill impairment under our former and new segment reporting
structure and determined that no impairment existed.
The assignment of goodwill by business segment, and changes in the carrying amount of goodwill for the two quarters
ended January 3, 2020, and fiscal 2019 and 2018 were as follows:
Integrated
Mission
Systems
Space and
Airborne
Systems
Communication
Systems
Aviation
Systems
Other non-
reportable
business
segments
$
3,733
$
(In millions)
927
$
612
$
6
3,739
(2)
—
3,737
1,390
4
—
927
—
—
927
3,316
—
—
612
—
—
612
4,239
7
64
—
64
—
—
64
5,704
1
30
—
30
—
(30)
—
—
—
Total
$
5,366
6
5,372
(2)
(30)
5,340
14,649
12
Balance at June 30, 2017
$
Currency translation adjustments
Balance at June 29, 2018
Currency translation adjustments
Decrease from reclassification to assets
of disposal group held for sale(1)
Balance at June 28, 2019
Goodwill acquired
Currency translation adjustments
Balance at January 3, 2020
$
5,768
$
5,131
$
4,243
$
4,859
$
— $
20,001
_______________
(1)
In the fourth quarter of fiscal 2019, in connection with our then-pending divestiture of the Harris Night Vision business, which was reported as part of our
former Communication Systems segment, we assigned $30 million of goodwill to the Harris Night Vision business on a relative fair value basis, because the
divestiture of the Harris Night Vision business represented the disposal of a portion of a reporting unit. The Harris Night Vision business’ assets, including
assigned goodwill, are presented as “Assets of disposal group held for sale” in our Consolidated Balance Sheet as of June 28, 2019. We completed the sale of
the Harris Night Vision business on September 13, 2019. As a result, the goodwill assigned to the Harris Night Vision business was not allocated to any of
our new business segments, and, consequently, it is included in “Other non-reportable business segments” in the table above. See Note 3: Divestitures, Asset
Sales and Discontinued Operations in these Notes for additional information regarding the sale of the Harris Night Vision business.
92
NOTE 11: INTANGIBLE ASSETS
The most significant identifiable intangible asset that is separately recognized for our business combinations is customer
relationships. Our customer relationships are established through written customer contracts (revenue arrangements). The fair
value for customer relationships is determined, as of the date of acquisition, based on estimates and judgments regarding
expectations for the estimated future after-tax earnings and cash flows arising from the follow-on sales expected from the
customer relationships over the estimated lives, including the probability of expected future contract renewals and sales, less a
contributory assets charge, all of which is discounted to present value. We assess the recoverability of the carrying value of our
finite-lived intangible assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be
recoverable. We assess the recoverability of the carrying value of indefinite-lived intangible assets annually, or under certain
circumstances more frequently, such as when events and circumstances indicate there may be an impairment.
Intangible assets are summarized below:
Customer relationships
Developed technologies
Trade names
Other
Total intangible assets subject to amortization
IPR&D
L3 trade name
Total intangible assets
Customer relationships
Developed technologies
Trade names
Other
Total intangible assets
Customer relationships
Developed technologies
Trade names
Other
Total intangible assets
January 3, 2020
Gross Carrying
Amount
Accumulated
Amortization
Net
(In millions)
$
$
6,518
768
165
10
7,461
69
1,803
9,333
$
$
653
183
35
4
875
—
—
875
June 28, 2019
Gross Carrying
Amount
Accumulated
Amortization
(In millions)
$
$
1,203
206
42
2
1,453
$
$
419
136
26
2
583
June 29, 2018
Gross Carrying
Amount
Accumulated
Amortization
(In millions)
$
$
1,206
208
43
2
1,459
$
$
327
119
22
2
470
$
$
$
$
$
$
5,865
585
130
6
6,586
69
1,803
8,458
Net
Net
784
70
16
—
870
879
89
21
—
989
Amortization expense related to intangible assets was $290 million for the two quarters ended January 3, 2020 and
primarily related to the L3Harris Merger and our acquisition of Exelis. Amortization expense related to intangible assets was $115
million, $117 million and $126 million in fiscal 2019, 2018 and 2017, respectively, and primarily related to our acquisition of
Exelis.
93
Future estimated amortization expense for intangible assets is as follows:
2020
2021
2022
2023
2024
Thereafter
Total
(In millions)
711
632
617
596
568
3,462
6,586
$
$
NOTE 12: ACCRUED WARRANTIES
Our liability for standard product warranties is included as a component of the “Other accrued items” and “Other long-term
liabilities” line items in our Consolidated Balance Sheet. Changes in our liability for standard product warranties during the two
quarters ended January 3, 2020, and fiscal 2019 and 2018, were as follows:
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
Balance at the beginning of the period
Acquisitions during the period
Accruals for product warranties issued during the period
Settlements made during the period
Other, including adjustments for divestitures and foreign currency translation
Balance at the end of the period
$
$
25
83
23
(23)
4
112
$
$
24
—
16
(11)
(4)
25
$
$
26
—
13
(14)
(1)
24
NOTE 13: CREDIT ARRANGEMENTS
On June 28, 2019, we established a new $2 billion, 5-year senior unsecured revolving credit facility (the “2019 Credit
Facility”) by entering into a Revolving Credit Agreement (the “2019 Credit Agreement”) with a syndicate of lenders. The 2019
Credit Facility replaced our prior $1 billion, 5-year senior unsecured revolving credit facility established under the Revolving
Credit Agreement, dated as of June 26, 2018 (the “2018 Credit Agreement”). No loans or letters of credit under the 2018 Credit
Agreement were outstanding at the time of, or were repaid in connection with, such termination, and we incurred no early
termination penalties as a result of such termination.
The 2019 Credit Agreement provides for the extension of credit to us in the form of revolving loans, including swingline
loans and letters of credit, at any time and from time to time during the term of the 2019 Credit Agreement, in an aggregate
principal amount at any time outstanding not to exceed $2 billion for both revolving loans and letters of credit, with a sub-limit of
$140 million for swingline loans and a sub-limit of $350 million for letters of credit. Borrowings under the 2019 Credit
Agreement may be denominated in U.S. Dollars, Euros, Sterling and any other currency acceptable to the administrative agent
and the lenders, with a foreign currency sub-limit of $400 million. The 2019 Credit Agreement includes a provision pursuant to
which, from time to time, we may request that the lenders in their discretion increase the maximum amount of commitments
under the 2019 Credit Agreement by an amount not to exceed $1 billion. Only consenting lenders (including new lenders
reasonably acceptable to the administrative agent) will participate in any increase. In no event will the maximum amount of credit
extensions available under the 2019 Credit Agreement exceed $3 billion. The proceeds of loans or letters of credit borrowings
under the 2019 Credit Agreement are restricted from being used for hostile acquisitions (as defined in the 2019 Credit Agreement)
or for any purpose in contravention of applicable laws. We are not otherwise restricted under the 2019 Credit Agreement from
using the proceeds of loans or letters of credit borrowings under the 2019 Credit Agreement for working capital and other general
corporate purposes or from using the 2019 Credit Facility to refinance existing debt and to repay maturing commercial paper
issued by us from time to time. Subject to certain conditions stated in the 2019 Credit Agreement (including the absence of any
default and the accuracy of certain representations and warranties), we may borrow, prepay and re-borrow amounts under the
2019 Credit Agreement at any time during the term of the 2019 Credit Agreement.
The 2019 Credit Agreement provides that we may designate wholly-owned subsidiaries organized in the United States,
Canada or the United Kingdom (or such other jurisdictions as all lenders shall approve) as borrowers under the 2019 Credit
Agreement. The obligations of any such subsidiary borrower shall be guaranteed by us.
94
The 2019 Credit Agreement provides that we may from time to time designate certain of our subsidiaries as unrestricted
subsidiaries, which means certain of the representations and covenants in the 2019 Credit Agreement do not apply in respect of
such subsidiaries.
At our election, borrowings under the 2019 Credit Agreement denominated in U.S. Dollars will bear interest either at (i) the
eurocurrency rate for the applicable interest period plus an applicable margin, or (ii) the base rate plus an applicable margin. The
eurocurrency rate for an interest period is the rate per annum equal to (a) the London interbank offered rate (“LIBOR”) for such
interest period, divided by (b) a percentage equal to 1.00 minus the daily average eurocurrency reserve rate for such interest
period. The applicable interest rate margin over the eurocurrency rate is initially equal to 1.375%, but may increase (to a
maximum amount of 1.875%) or decrease (to a minimum amount of 1.125%) based on changes in the ratings of our senior
unsecured long-term debt securities (“Senior Debt Ratings”). The base rate for any day is a rate per annum equal to the greatest of
(i) the prime lending rate published in the Wall Street Journal, (ii) the Federal Reserve Bank of New York (“NYFRB”) Rate
(“NYFRB Rate”) plus 0.500% (the NYFRB Rate is the greater of (a) the federal funds rate and (b) the overnight bank funding
rate published by the NYFRB), and (iii) the eurocurrency rate for a one month interest period (as defined in the 2019 Credit
Agreement) plus 1.000%. The applicable interest rate margin over the base rate is initially equal to 0.375%, but may increase (to a
maximum amount of 0.875%) or decrease (to a minimum amount of 0.125%) based on changes in our Senior Debt Ratings.
Borrowings under the 2019 Credit Agreement denominated in a currency other than U.S. Dollars will bear interest at the
eurocurrency rate for the applicable interest period plus an applicable margin, as described above, plus, in some cases, additional
costs. Letter of credit fees are also determined based on our Senior Debt Ratings.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the 2019 Credit
Agreement and letter of credit fees, we are required to pay a quarterly unused commitment fee, which shall accrue at an
applicable rate per annum multiplied by the actual daily amount of the lenders’ aggregate unused commitments under the 2019
Credit Agreement. The applicable rate per annum for the unused commitment fee is initially equal to 0.200%, but may increase
(to a maximum amount of 0.300%) or decrease (to a minimum amount of 0.125%) based on changes in our Senior Debt Ratings.
The 2019 Credit Agreement contains certain representations and warranties for the benefit of the administrative agent and
the lenders, including but not limited to representations relating to: due incorporation and good standing; due authorization of the
2019 Credit Agreement documentation; absence of any requirement for governmental or third party authorization for the due
execution, delivery and performance of the 2019 Credit Agreement documentation; enforceability of the 2019 Credit Agreement
documentation; accuracy of financial statements; no material adverse effect since June 29, 2018; absence of material undisclosed
litigation as of June 28, 2019; compliance with the Employee Retirement Income Security Act of 1974 (“ERISA”) and
environmental, anti-money laundering, sanctions, anti-corruption and certain other laws; payment of taxes; and solvency.
The 2019 Credit Agreement contains certain affirmative covenants, including but not limited to covenants relating to:
reporting obligations; maintenance of corporate existence and good standing; compliance with laws; maintenance of properties
and insurance; payment of taxes; compliance with ERISA and environmental, anti-money laundering, sanctions, export controls,
anti-corruption and certain other laws; maintenance of accurate books and records; and visitation and inspection by the
administrative agent and the lenders. The 2019 Credit Agreement also contains certain negative covenants, including covenants:
limiting certain liens on assets; limiting certain mergers, consolidations or sales of assets; limiting certain sale and leaseback
transactions; limiting certain vendor financing investments; limiting certain investments in unrestricted subsidiaries; and limiting
certain hedging arrangements. The 2019 Credit Agreement also requires that we not permit our ratio of consolidated total
indebtedness (excluding defined benefit plan liabilities) to total capital, each as defined in the 2019 Credit Agreement, to be
greater than 0.65:1.00. We were in compliance with the covenants in the 2019 Credit Agreement at January 3, 2020.
The 2019 Credit Agreement contains certain events of default, including: failure to make payments under the 2019 Credit
Agreement; failure to perform or observe terms, covenants or agreements contained in the 2019 Credit Agreement; material
inaccuracy of any representation or warranty under the 2019 Credit Agreement; payment default by us or certain of our
subsidiaries under other indebtedness with a principal amount in excess of $200 million or acceleration of or ability to accelerate
such other indebtedness; occurrence of one or more final judgments or orders for the payment by us or certain of our subsidiaries
of money in excess of $200 million that remain unsatisfied; incurrence by us or certain of our subsidiaries of certain ERISA
liability in excess of $200 million; any bankruptcy or insolvency of L3Harris or any material subsidiary; invalidity of 2019 Credit
Agreement documentation; or a change of control (as defined in the 2019 Credit Agreement) of L3Harris. If an event of default
occurs, then the lenders may, among other things, terminate their commitments and declare all outstanding borrowings to be
immediately due and payable together with accrued interest and fees.
All principal amounts borrowed or outstanding under the 2019 Credit Agreement are due on June 28, 2024, unless (i) the
commitments are terminated earlier either at our request or if certain events of default described in the 2019 Credit Agreement
occur or (ii) the maturity date is extended pursuant to provisions allowing us, from time to time after June 28, 2020, but at least 45
days prior to the scheduled maturity date then in effect, to request that the scheduled maturity date then in effect be extended by
one calendar year (with no more than one such extension permitted in any calendar year and no more than two such extensions
95
during the term of the 2019 Credit Agreement), subject to approval by lenders holding a majority of the commitments under the
2019 Credit Agreement and satisfaction of certain conditions stated in the 2019 Credit Agreement (including the absence of any
default and the accuracy of certain representations and warranties); provided, however, that all revolving loans of those lenders
declining to participate in the requested extension and whose commitments under the 2019 Credit Agreement have not been
replaced pursuant to customary replacement rights in our favor shall remain due and payable in full, and all commitments under
the 2019 Credit Agreement of such declining lenders shall terminate, on the maturity date in effect prior to the requested
extension. At January 3, 2020, we had no borrowings outstanding under the 2019 Credit Facility.
NOTE 14: DEBT
Long-Term Debt
Long-term debt is summarized below:
Variable-rate debt:
Floating rate notes, due February 27, 2019
Floating rate notes, due April 30, 2020
Total variable-rate debt
Fixed-rate debt:
2.7% notes, due April 27, 2020
4.95% notes, due February 15, 2021
3.85% notes, due June 15, 2023
3.95% notes, due May 28, 2024
3.832% notes, due April 27, 2025
7.0% debentures, due January 15, 2026
3.85% notes, due December 15, 2026
6.35% debentures, due February 1, 2028
4.40% notes, due June 15, 2028
2.900% notes, due December 15, 2029
4.854% notes, due April 27, 2035
6.15% notes, due December 15, 2040
5.054% notes, due April 27, 2045
Other
Total fixed-rate debt
Total debt
Plus: unamortized bond premium
Less: unamortized discounts and issuance costs
Total debt, net
Less: current portion of long-term debt, net
Total long-term debt, net
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
— $
— $
250
250
—
650
800
350
600
100
550
26
1,850
400
400
300
500
49
6,575
6,825
154
(28)
6,951
(257)
6,694
$
250
250
400
—
—
—
600
100
—
26
850
—
400
300
500
17
3,193
3,443
—
(24)
3,419
(656)
2,763
$
$
300
250
550
400
—
—
—
600
100
—
26
850
—
400
300
500
14
3,190
3,740
—
(28)
3,712
(304)
3,408
The potential maturities of long-term debt, including the current portion, for the five years following the end of the Fiscal
Transition Period and, in total, thereafter are: $257 million in fiscal 2020; $657 million in fiscal 2021; $5 million in fiscal 2022;
$804 million in fiscal 2023; $352 million in fiscal 2024; and $4,750 million thereafter.
As part of our purchase accounting for the L3Harris Merger, the L3 Notes (defined below) were recorded at fair value
($3.52 billion on a combined basis, representing a premium of $171 million). This premium will be amortized to interest expense
over the lives of the related New L3Harris Notes (defined below) and such amortization is reflected as a reduction of interest
expense in our Consolidated Statement of Income.
96
Debt Exchange. In connection with the L3Harris Merger, on July 2, 2019, we settled our previously announced debt
exchange offers in which eligible holders of L3 senior notes (“L3 Notes”) could exchange such outstanding notes for (1) up to
$3.35 billion aggregate principal amount of new notes issued by L3Harris (“New L3Harris Notes”) and (2) one dollar in cash for
each $1,000 of principal amount. Each series of the New L3Harris Notes issued has an interest rate and maturity date that is
identical to the L3 Notes.
4.95% notes due February 15, 2021 (“4.95% 2021 Notes”)
3.85% notes due June 15, 2023 (“3.85% 2023 Notes”)
3.95% notes due May 28, 2024 (“3.95% 2024 Notes”)
3.85% notes due December 15, 2026 (“3.85% 2026 Notes”)
4.40% notes due June 15, 2028 (“4.40% 2028 Notes”)
Total
Aggregate
Principal
Amount of L3
Notes
(prior to debt
exchange)
Aggregate
Principal
Amount of
New L3Harris
Notes
Issued
(In millions)
Aggregate
Principal
Amount of
Remaining L3
Notes
$
$
650
800
350
550
1,000
3,350
$
$
501
741
326
535
918
3,021
$
$
149
59
24
15
82
329
Interest on the New L3Harris Notes is payable semi-annually in arrears on February 15 and August 15, commencing on
August 15, 2019, in the case of the 4.95% 2021 Notes; on June 15 and December 15, commencing on December 15, 2019, in the
case of the 3.85% 2023 Notes, 3.85% 2026 Notes and 4.40% 2028 Notes; and on May 28 and November 28, commencing on
November 28, 2019, in the case of the 3.95% 2024 Notes. The New L3Harris Notes are unsecured senior obligations and rank
equally in right of payment with all other L3Harris senior unsecured debt.
The New L3Harris Notes are redeemable in whole or in part at any time or in part from time to time, at our option, until
three months prior to the maturity date, in the case of the 4.95% 2021 Notes, 3.95% 2024 Notes, 3.85% 2026 Notes and 4.40%
2028 Notes, and until one month prior to the maturity date, in the case of the 3.85% 2023 Notes, at a redemption price equal to the
greater of 100 percent of the principal amount of the notes to be redeemed or the sum of the present values of the principal
amount and the remaining scheduled payments of interest on the notes to be redeemed, discounted from the scheduled payment
dates to the date of redemption at the “treasury rate” as defined in the note, plus 20 basis points, in the case of the 3.85% 2023
Notes and 3.95% 2024 Notes, or 25 basis points, in the case of the 4.95% 2021 Notes, 3.85% 2026 Notes and 4.40% 2028 Notes,
plus, in each case, accrued and unpaid interest due at the date of redemption.
In connection with the issuance of the New L3Harris Notes, we entered into a registration rights agreement, dated July 2,
2019, with BofA Securities, Inc. and Morgan Stanley & Co. LLC, pursuant to which we agreed to use commercially reasonable
efforts to complete one or more registered exchange offers for the New L3Harris Notes within 365 days after July 2, 2019. If a
registered exchange offer is not consummated within the alloted time, we are required to pay special additional interest, in an
amount equal to 0.25% per annum of the principal amount of the New L3Harris Notes, for the first 90 days following the day of
default. Thereafter, the amount of special additional interest increases another 0.25% per year, up to a maximum of 0.50% per
year, until the default is cured.
Following the settlement of the exchange offers, there was approximately $329 million of existing L3 Senior Notes
outstanding, which remain the senior unsecured obligations of L3.
Long-Term Debt Repaid in the Two Quarters Ended January 3, 2020
On December 16, 2019, we completed our optional redemption of the entire outstanding $400 million aggregate principal
amount of our 2.7% Notes due April 27, 2020 (the “2.7% 2020 Notes”) at a “make-whole” redemption price as set forth in the
2.7% 2020 Notes. The “make-whole” redemption price for the 2.7% 2020 Notes was $403 million, and after adjusting for the
carrying value of our unamortized issuance costs, we recorded a $2 million loss on the extinguishment of the 2.7% 2020 Notes in
the two quarters ended January 3, 2020, which is included as a component of the “Non-operating income” line item in our
Consolidated Statement of Income.
Long-Term Debt Issued in the Two Quarters Ended January 3, 2020
Fixed-rate Debt: On November 27, 2019, in order to fund our optional redemption of the 2.7% 2020 Notes as described
above under “Long-Term Debt Repaid in the Two Quarters Ended January 3, 2020,” we completed the issuance of $400 million in
aggregate principal amount of 2.900% notes due December 15, 2029 (the “2.900% 2029 Notes”). Interest on the 2.900% 2029
Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. At any time
prior to September 15, 2029, we may redeem the 2.900% 2029 Notes, in whole or in part, at our option, at a “make-whole”
redemption price equal to the greater of 100 percent of the principal amount of the 2.900% 2029 Notes or the sum of the present
97
values of the remaining scheduled payments of the principal plus accrued interest (other than interest accruing to the date of
redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis at the “Treasury Rate”, as
defined in the 2.900% 2029 Notes, plus 20 basis points. We will pay accrued interest on the principal amount of notes being
redeemed to, but not including, the redemption date. At any time on or after September 15, 2029, we may redeem the 2.900%
2029 Notes, in whole or in part, at our option, at a redemption price equal to 100 percent of the principal amount of the notes
being redeemed, plus accrued interest on the principal amount of the notes being redeemed to, but not including, the redemption
date. In addition, upon change of control combined with a below-investment-grade rating event, we may be required to make an
offer to repurchase the 2.900% 2029 Notes at a price equal to 101 percent of the aggregate principal amount of the notes being
repurchased, plus accrued interest on the notes being repurchased to, but not including, the date of repurchase. We incurred $3
million of debt issuance costs related to the issuance of the 2.900% 2029 Notes, which are being amortized using the effective
interest rate method over the life of the 2.900% 2029 Notes, and such amortization is included as a component of the “Interest
expense” line item in our Consolidated Statement of Income.
Long-Term Debt Repaid in Fiscal 2019
During the third quarter of fiscal 2019, we repaid at maturity the entire outstanding $300 million aggregate principal amount
of our Floating Rate Notes due February 27, 2019.
Long-Term Debt Repaid in Fiscal 2018
On June 22, 2018, we completed our optional redemption of the entire outstanding $400 million aggregate principal amount
of our 4.4% notes due December 15, 2020 (the “4.4% 2020 Notes”) and $400 million aggregate principal amount of our 5.55%
notes due October 1, 2021 (the “2021 Notes” and collectively with the 4.4% 2020 Notes, the “2018 Redeemed Notes”) at a
“make-whole” redemption price as set forth in the 2018 Redeemed Notes. The combined “make-whole” redemption price for the
2018 Redeemed Notes was $844 million, and after adjusting for the carrying value of our bond premium, discounts and issuance
costs, we recorded a combined $22 million loss on the extinguishment of the 2018 Redeemed Notes in the fourth quarter of fiscal
2018, which is included as a component of the “Non-operating income (loss)” line item in our Consolidated Statement of Income.
During the fourth quarter of fiscal 2018, we also repaid at maturity the entire outstanding $500 million aggregate principal
amount of the 1.999% notes due April 27, 2018.
During the second quarter of fiscal 2018, we repaid in full the $253 million in remaining outstanding indebtedness under
the 5-year tranche of our $1.3 billion senior unsecured term loan facility pursuant to our Term Loan Agreement, dated as of March
16, 2015, and recognized a $1 million extinguishment loss, which is included as a component of the “Non-operating income
(loss)” line item in our Consolidated Statement of Income, as a result of associated unamortized debt issuance costs. During the
fourth quarter of fiscal 2018, we also repaid in full the $36 million in remaining indebtedness under the 3-year tranche (for a total
of $305 million in term loan indebtedness repaid during fiscal 2018), and as a result, our $1.3 billion senior unsecured term loan
facility pursuant to our Term Loan Agreement, dated as of March 16, 2015, was terminated.
Long-Term Debt Issued in Fiscal 2018
Variable-rate Debt: On November 6, 2017, we completed the issuance and sale of $250 million in aggregate principal
amount of Floating Rate Notes due April 30, 2020 (“Floating Rate Notes 2020”). We incurred $2 million of debt issuance costs
related to the issuance of the Floating Rate Notes 2020, which are being amortized using the effective interest rate method over
the life of the notes, and such amortization is included as a component of the “Interest expense” line item in our Consolidated
Statement of Income. The Floating Rate Notes 2020 bear interest at a floating rate, reset quarterly, equal to three-month LIBOR
plus 0.48% per year. Interest is payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year,
commencing January 30, 2018. The Floating Rate Notes 2020 are not redeemable at our option prior to maturity. Upon a change
of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the notes at a
price equal to 101 percent of the aggregate principal amount of the notes being repurchased, plus accrued interest on the notes
being repurchased to, but not including, the date of repurchase. We used the net proceeds, together with cash on hand, to repay in
full the $253 million in remaining outstanding indebtedness under the 5-year tranche of our $1.3 billion senior unsecured term
loan facility as described above under “Long-Term Debt Repaid in Fiscal 2018”.
Fixed-rate Debt: On June 4, 2018, in order to fund our optional redemption of the 2018 Redeemed Notes as described
above under “Long-Term Debt Repaid in Fiscal 2018,” we completed the issuance of $850 million in aggregate principal amount
of 4.400% notes due June 15, 2028 (the “New 2028 Notes”). Interest on the New 2028 Notes is payable semi-annually in arrears
on June 15 and December 15 of each year, commencing on December 15, 2018. At any time prior to March 15, 2028, we may
redeem the New 2028 Notes, in whole or in part, at our option, at a “make-whole” redemption price equal to the greater of 100
percent of the principal amount of the New 2028 Notes or the sum of the present values of the remaining scheduled payments of
the principal and interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the
redemption date on a semi-annual basis at the “Treasury Rate”, as defined in the New 2028 Notes, plus 25 basis points. We will
pay accrued interest on the principal amount of notes being redeemed to, but not including, the redemption date. At any time on or
98
after March 15, 2028, we may redeem the New 2028 Notes, in whole or in part, at our option, at a redemption price equal to 100
percent of the principal amount of the notes being redeemed, plus accrued interest on the principal amount of the notes being
redeemed to, but not including, the redemption date. In addition, upon change of control combined with a below-investment-grade
rating event, we may be required to make an offer to repurchase the New 2028 Notes at a price equal to 101 percent of the
aggregate principal amount of the notes being repurchased, plus accrued interest on the notes being repurchased to, but not
including, the date of repurchase. We incurred $8 million of debt issuance costs related to the issuance of the New 2028 Notes,
which are being amortized using the effective interest rate method over the life of the New 2028 Notes, and such amortization is
included as a component of the “Interest expense” line item in our Consolidated Statement of Income.
Long-Term Debt Issued Prior to Fiscal 2018 that Remained Outstanding at January 3, 2020
On April 27, 2015, in connection with the then-pending acquisition of Exelis, to fund a portion of the cash consideration and
other amounts payable under the terms of the merger agreement and to redeem certain of our existing notes, we issued long-term
fixed-rate debt securities in the aggregate amount of $2.4 billion. The principal amounts, interest rates and maturity dates of these
securities that remained outstanding at January 3, 2020 were as follows:
•
•
•
$600 million in aggregate principal amount of 3.832% notes due April 27, 2025 (the “2025 Notes”),
$400 million in aggregate principal amount of 4.854% notes due April 27, 2035 (the “2035 Notes”), and
$500 million in aggregate principal amount of 5.054% notes due April 27, 2045 (the “2045 Notes” and collectively
with the 2025 Notes and 2035 Notes, the “Exelis Notes”).
Interest on each series of the Exelis Notes is payable semi-annually in arrears on April 27 and October 27 of each year,
commencing October 27, 2015. The Exelis Notes are redeemable at our option up to one month prior to the scheduled maturity
date at a price equal to the greater of 100 percent of the principal amount of the notes being redeemed or the sum of the present
values of the remaining scheduled payments, plus accrued interest, discounted to the redemption date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus (i) 30 basis points in the case
of the 2025 Notes, (ii) 35 basis points in the case of the 2035 Notes, and (iii) 40 basis points in the case of the 2045 Notes. In
addition, upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to
repurchase the Exelis Notes at a price equal to 101 percent of the aggregate principal amount of the notes being repurchased, plus
accrued interest on the notes being repurchased to, excluding the date of repurchase.
On December 3, 2010, we completed the issuance of $300 million in aggregate principal amount of 6.15% notes due
December 15, 2040 (the “2040 Notes”). The 2040 Notes are redeemable at our option at a price equal to the greater of 100 percent
of the principal amount of the notes being redeemed or the sum of the present values of the remaining scheduled payments, plus
accrued interest, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day
months) at the Treasury Rate, as defined, plus 35 basis points. In addition, upon a change of control combined with a below-
investment-grade rating event, we may be required to make an offer to repurchase the notes at a price equal to 101 percent of the
aggregate principal amount of the notes being repurchased, plus accrued interest on the notes being repurchased to, but not
including, the date of repurchase.
In January 1996, we completed the issuance of $100 million in aggregate principal amount of 7.0% debentures due
January 15, 2026. The debentures are not redeemable prior to maturity.
In February 1998, we completed the issuance of $150 million in aggregate principal amount of 6.35% debentures due
February 1, 2028. On December 5, 2007, we repurchased and retired $25 million in aggregate principal amount of the debentures.
On February 1, 2008, we redeemed $99 million in aggregate principal amount of the debentures pursuant to the procedures for
redemption at the option of the holders of the debentures. We may redeem the remaining $26 million in aggregate principal
amount of the debentures in whole, or in part, at any time at a pre-determined redemption price.
The following table presents the carrying amounts and estimated fair values of our long-term debt:
January 3, 2020
June 28, 2019
June 29, 2018
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(In millions)
Long-term debt (including current portion)(1)
$
6,951
$
7,536
$
3,419
$
3,802
$
3,712
$
3,848
_______________
(1) The fair value was estimated using a market approach based on quoted market prices for our debt traded in the secondary market. If our long-term debt in
our balance sheet were measured at fair value, it would be categorized in Level 2 of the fair value hierarchy.
Short-Term Debt
Our short-term debt at January 3, 2020, June 28, 2019 and June 29, 2018 was $3 million, $103 million (including $100
million outstanding under our commercial paper program) and $78 million (including $75 million outstanding under our
99
commercial paper program), respectively. Interest expense incurred on our short-term debt was not material in the two quarters
ended January 3, 2020 or fiscal 2019, 2018 or 2017.
Interest Paid
Total interest paid was $144 million in the two quarters ended January 3, 2020. Total interest paid was $170 million, $175
million and $168 million in fiscal 2019, 2018 and 2017, respectively.
NOTE 15: PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined Contribution Plan
As of January 3, 2020, we sponsor numerous defined contribution savings plans, which allow our eligible employees to
contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. The plans include several
match contribution formulas which requires us to match a percentage of the employee contributions up to certain limits, generally
totaling between 2.0% to 6.0% of employee eligible pay. Matching contributions charged to expense were $105 million for the
two quarters ended January 3, 2020. Matching contributions charged to expense were $85 million, $83 million and $80 million for
fiscal 2019, 2018 and 2017, respectively, including both continuing and discontinued operations.
Deferred Compensation Plan
We also sponsor a supplemental executive retirement plan, which is a nonqualified deferred compensation arrangement for
highly compensated employees (within the meaning of section 201(2) of ERISA). The plan obligations are funded by investments
held in a Rabbi Trust.
The following table provides the fair value of our deferred compensation plan investments and liabilities by category and by
fair value hierarchy level:
Assets
Deferred compensation plan assets:(1)
Equity and fixed income securities(2)
Investments measured at NAV:
Corporate-owned life insurance
Total fair value of deferred compensation
plan assets
Liabilities
Deferred compensation plan liabilities:(3)
Equity securities and mutual funds
Investments measured at NAV:
Common/collective trusts and
guaranteed investment contracts
Total fair value of deferred compensation
plan liabilities
$
$
$
$
January 3, 2020
June 28, 2019
June 29, 2018
Total
Level 1
Total
Level 1
Total
Level 1
(In millions)
58
$
58
$
99
$
99
$
109
$
109
29
87
28
27
$
127
$
136
2
$
2
$
25
$
25
$
38
$
38
69
71
132
157
$
111
149
$
_______________
(1) Represents diversified assets held in a “rabbi trust” associated with our non-qualified deferred compensation plans, which we include in the “Other current
assets” and “Other non-current assets” line items in our Consolidated Balance Sheet, and which are measured at fair value.
(2) We have reclassified certain prior-year amounts to conform with current period classifications. Reclassifications include certain equity and fixed income
funds that were previously included under “Investments Measured at NAV” and are now reflected in “Equity and fixed income securities” under “Level 1.”
(3) Primarily represents obligations to pay benefits under certain non-qualified deferred compensation plans, which we include in the “Compensation and
benefits” and “Other long-term liabilities” line items in our Consolidated Balance Sheet. Under these plans, participants designate
investment options (including stock and fixed-income funds), which serve as the basis for measurement of the notional value of their accounts.
Defined Benefit Plans
We sponsor numerous defined benefit pension plans for eligible employees. Benefits for most participants under the terms
of these plans are based on the employee’s years of service and compensation. We fund these plans as required by statutory
regulations and through voluntary contributions. Some of our employees also participate in other postretirement defined benefit
plans such as health care and life insurance plans.
100
The U.S. Salaried Retirement Plan (“U.S. SRP”) is our largest defined benefit pension plan, with assets valued at $4.5
billion and a projected benefit obligation of $5.6 billion as of January 3, 2020. Effective December 31, 2016, accruals under the
U.S. SRP benefit formula were frozen for all employees and replaced with a 1% cash balance benefit formula for certain
employees who were not highly compensated on December 31, 2016.
Balance Sheet Information
Amounts recognized in our Consolidated Balance Sheet for defined benefit pension plans and other postretirement defined
benefit plans (collectively, “defined benefit plans”) reflect the funded status of our plans. The following table provides a summary
of the funded status of our defined benefit plans and the presentation of such balances within our Consolidated Balance Sheet:
January 3, 2020
June 28, 2019
June 29, 2018
Pension
Other
Benefits
Pension
Other
Benefits
Pension
Other
Benefits
Fair value of plan assets
Projected benefit obligation
Funded status
Consolidated Balance Sheet line item amounts:
Other non-current assets
Compensation and benefits
Liabilities of disposal group held for sale
Defined benefit plans
$
$
$
(In millions)
8,618
$
(10,268)
(1,650) $
$
274
(369)
(95) $
$
4,958
(6,123)
(1,165) $
$
201
(221)
(20) $
$
5,098
(5,774)
(676) $
$
91
(10)
—
(1,731)
$
1
(8)
—
(88)
$
12
(7)
(16)
(1,154)
— $
—
—
(20)
$
15
(2)
—
(689)
207
(233)
(26)
—
(1)
—
(25)
A portion of our projected benefit obligation includes amounts that have not yet been recognized as expense (or reductions
of expense) in our results of operations. Such amounts are recorded within accumulated other comprehensive loss until they are
amortized as a component of net periodic benefit cost. The following table provides a summary of pre-tax amounts recorded
within accumulated other comprehensive loss:
Net actuarial loss (gain)
Net prior service cost (credit)
January 3, 2020
June 28, 2019
June 29, 2018
Pension
Other
Benefits
Pension
Other
Benefits
Pension
Other
Benefits
$
$
819
(282)
537
$
$
(34) $
(1)
(35) $
(In millions)
781
$
6
787
$
(36) $
(1)
(37) $
156
4
160
$
$
(46)
(1)
(47)
101
The following table provides a roll-forward of the projected benefit obligations for our defined benefit plans:
January 3, 2020
June 28, 2019
June 29, 2018
Pension
Other
Benefits
Pension
Other
Benefits
Pension
Other
Benefits
Change in benefit obligation
Benefit obligation at beginning of fiscal year
$
6,123
$
Benefit obligation assumed in L3Harris Merger
4,474
Service cost
Interest cost
Actuarial loss (gain)
Amendments
Benefits paid
Settlements
Expenses paid
Curtailments
Foreign currency exchange rate changes
Plan participants' contributions
Divestiture
42
149
301
(292)
(342)
(5)
(43)
(35)
3
1
(108)
(In millions)
$
5,774
$
233
$
6,140
$
—
36
209
514
3
(381)
—
(30)
1
(3)
—
—
—
—
8
(1)
—
(19)
—
—
—
—
—
—
—
39
195
(169)
2
(402)
—
(35)
—
4
—
—
221
156
1
5
7
—
(21)
—
—
—
—
—
—
265
—
1
7
(22)
—
(18)
—
—
—
—
—
—
Benefit obligation at end of fiscal year
$
10,268
$
369
$
6,123
$
221
$
5,774
$
233
The following table provides a roll-forward of the assets and the ending funded status of our defined benefit plans:
January 3, 2020
June 28, 2019
June 29, 2018
Pension
Other
Benefits
Pension
Other
Benefits
Pension
Other
Benefits
(In millions)
Change in plan assets
Plan assets at beginning of fiscal year
$
4,958
$
201
$
5,098
$
207
$
4,921
$
Plan assets acquired in L3Harris Merger
Actual return on plan assets
Employer contributions
Benefits paid
Settlements
Expenses paid
Foreign currency exchange rate changes
Plan participants' contributions
Divestiture
Plan assets at end of fiscal year
Funded status at end of fiscal year
3,183
548
406
(342)
(5)
(43)
4
1
(92)
68
18
8
(21)
—
—
—
—
—
—
271
3
(381)
—
(30)
(3)
—
—
—
11
2
(19)
—
—
—
—
—
—
307
303
(402)
—
(35)
4
—
—
212
—
14
(1)
(18)
—
—
—
—
—
$
$
8,618
$
274
$
4,958
$
201
$
5,098
$
207
(1,650) $
(95) $
(1,165) $
(20) $
(676) $
(26)
102
The accumulated benefit obligation for all defined benefit pension plans was $10.2 billion at January 3, 2020. The following
table provides information for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Income Statement Information
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
$
9,670
9,656
7,931
$
6,041
6,041
4,864
5,694
5,694
5,004
The following table provides the components of net periodic benefit income and other amounts recognized in other
comprehensive income for the two quarters ended January 3, 2020 and fiscal 2019, 2018 and 2017 as they pertain to our defined
benefit plans:
Two Quarters
Ended
Pension
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Net periodic benefit income
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss (gain)
Amortization of prior service credit
Effect of curtailments or settlements(1)
Net periodic benefit income
Other changes in plan assets and benefit obligations
recognized in other comprehensive loss
Net actuarial loss (gain)
Prior service (credit) cost
Amortization of net actuarial gain (loss)
Amortization of prior service credit (cost)
Recognized net loss due to divestiture
Total change recognized in other comprehensive loss
Total impact from net periodic benefit cost and changes in
other comprehensive loss
$
$
$
$
42
149
(314)
1
(5)
(18)
(145) $
$
55
(292)
(5)
5
(13)
(250)
(In millions)
$
36
209
(382)
—
—
1
(136) $
$
625
3
—
(1)
—
627
$
39
195
(369)
—
—
—
(135) $
(106) $
2
—
—
—
(104)
$
(395) $
491
$
(239) $
58
184
(340)
1
—
—
(97)
(284)
—
(1)
—
—
(285)
(382)
_______________
(1) Effective January 1, 2020, for certain acquired L3 U.S. defined benefit pension plans, benefit accruals were frozen and replaced with a 1% cash balance benefit
formula for certain employees who were not considered highly compensated on December 31, 2018. During the two quarters ended January 3, 2020, we
recognized a $23 million curtailment gain as a result of this change, and a $5 million settlement loss resulting from the payout of the liabilities of a non-qualified
benefit plan due to the change in control provisions.
103
Two Quarters
Ended
Other Benefits
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Net periodic benefit income
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss (gain)
Net periodic benefit income
Other changes in plan assets and benefit obligations
recognized in other comprehensive loss
Net actuarial loss (gain)
Amortization of net actuarial gain (loss)
Total change recognized in other comprehensive loss
Total impact from net periodic benefit cost and changes in
other comprehensive loss
$
$
$
$
$
1
5
(10)
(3)
(7) $
(1) $
3
2
(5) $
(In millions)
— $
8
(16)
(6)
(14) $
$
4
6
10
(4) $
$
1
7
(16)
(1)
(9) $
(20) $
1
(19)
(28) $
1
8
(17)
—
(8)
(38)
—
(38)
(46)
The following table provides estimated amounts for net actuarial gain and prior service cost to be amortized from
accumulated other comprehensive loss into net periodic benefit income during the next twelve months for plans in existence as of
January 3, 2020.
Net actuarial (gain) loss
Prior service cost
Pension
Other
Benefits
(In millions)
Total
$
$
$
10
(28)
(18) $
(3) $
—
(3) $
7
(28)
(21)
Defined Benefit Plan Assumptions
The determination of the assumptions related to defined benefit plans are based on the provisions of the applicable
accounting pronouncements, review of various market data and discussions with our actuaries. We develop each assumption using
relevant Company experience in conjunction with market-related data. Assumptions are reviewed annually and adjusted as
appropriate.
The following tables provide the weighted-average assumptions used to determine projected benefit obligations and net
periodic benefit cost, as they pertain to our defined benefit pension plans in existence as of January 3, 2020:
Obligation assumptions as of:
Discount rate
Rate of future compensation increase
January 3, 2020
June 28, 2019
June 29, 2018
3.14%
2.80%
3.35%
2.76%
4.05%
2.76%
Cost assumptions for fiscal periods ended:
Discount rate to determine service cost
Discount rate to determine interest cost
Expected return on plan assets
Rate of future compensation increase
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
3.11%
2.94%
7.68%
2.97%
3.89%
3.75%
7.66%
2.76%
3.48%
3.28%
7.66%
2.76%
3.80%
2.94%
7.65%
2.75%
Key assumptions for the U.S. SRP (our largest defined benefit pension plan with approximately 54% of the total projected
benefit obligation) included a discount rate for obligation assumptions of 3.10% and expected return on plan assets of 7.75% for
the two quarters ended January 3, 2020, which is being maintained at 7.75% for fiscal 2020.
The following table provides the weighted-average assumptions used to determine projected benefit obligations and net
periodic benefit cost, as they pertain to our other postretirement defined benefit plans in existence as of January 3, 2020:
104
Obligation assumptions as of:
Discount rate
Rate of future compensation increase
January 3, 2020
June 28, 2019
June 29, 2018
2.97%
N/A
3.21%
N/A
3.99%
N/A
Cost assumptions for fiscal periods ended:
Discount rate to determine service cost
Discount rate to determine interest cost
Rate of future compensation increase
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
3.47%
2.74%
N/A
4.14%
3.62%
N/A
3.62%
3.04%
N/A
3.52%
2.60%
N/A
The expected long-term rate of return on plan assets reflects the expected returns for each major asset class in which the
plans invest, the weight of each asset class in the strategic allocation, the correlations among asset classes and their expected
volatilities. Our expected rate of return on plan assets is estimated by evaluating both historical returns and estimates of future
returns. Specifically, the determination of the expected long-term rate of return takes into consideration: (1) the plan’s actual
historical annual return on assets over the past 15-, 20- and 25-year time periods, (2) historical broad market returns over long-
term timeframes weighted by the plan’s strategic allocation, and (3) independent estimates of future long-term asset class returns,
weighted by the plan’s strategic allocation. Based on this approach, the long-term annual rate of return on assets is estimated at
7.75% for fiscal 2020 for the U.S. defined benefit pension plans. The weighted average long-term annual rate of return on assets
for all defined benefit pension plans is estimated at 7.68% for fiscal 2020. In the two quarters ended January 3, 2020, we adopted
updated mortality tables, which resulted in a decrease in the defined benefit plans’ projected benefit obligation as of January 3,
2020 and estimated net periodic benefit cost beginning with fiscal 2020.
The assumed composite rate of future increases in the per capita healthcare costs (the healthcare trend rate) was 6.80% for
fiscal 2020, decreasing ratably to 4.70% by fiscal 2030. Increasing or decreasing the healthcare cost trend rates by one percent per
year would not have a material effect on the benefit obligation or the aggregate annual service and interest cost components. To
the extent that actual experience differs from these assumptions, the effect will be accumulated and generally amortized for each
plan to the extent required over the estimated future life expectancy or, if applicable, the future working lifetime of the plan’s
active participants.
Investment Policy
The investment strategy for managing defined benefit plan assets is to seek an optimal rate of return relative to an
appropriate level of risk. We manage substantially all defined benefit plan assets on a commingled basis in a master investment
trust. In making these asset allocation decisions, we take into account recent and expected returns and volatility of returns for each
asset class, the expected correlation of returns among the different investments, as well as anticipated funding and cash flows. To
enhance returns and mitigate risk, we diversify our investments by strategy, asset class, geography and sector and engage a large
number of managers to gain broad exposure to the markets.
The following table provides the current strategic target asset allocation ranges by asset category:
Equity investments
Fixed income investments
Hedge funds
Cash and cash equivalents
Target Asset
Allocation
40% — 60%
20% — 40%
0% — 30%
0% — 10%
105
Fair Value of Plan Assets
The following is a description of the valuation techniques and inputs used to measure fair value for major categories of
investments as reflected in the table that follows such description:
• Domestic and international equities, which include common and preferred shares, domestic listed and foreign listed
•
equity securities, open-ended and closed-ended mutual funds, real estate investment trusts and exchange traded funds,
are generally valued at the closing price reported on the major market exchanges on which the individual securities are
traded at the measurement date. Because these assets are traded predominantly on liquid, widely traded public
exchanges, equity securities are categorized as Level 1 assets.
Private equity funds, which include buy-out, mezzanine, venture capital, distressed asset and secondary funds, are
typically limited partnership investment structures. Private equity funds are valued using a market approach based on
NAV calculated by the funds and are not publicly available. Private equity funds generally have liquidity restrictions
that extend for ten or more years. At January 3, 2020, June 28, 2019 and June 29, 2018, our defined benefit plans had
future unfunded commitments totaling $325 million, $355 million and $246 million, respectively, related to private
equity fund investments.
• Hedge funds, which include equity long/short, event-driven, fixed-income arbitrage and global macro strategies, are
•
typically limited partnership investment structures. Limited partnership interests in hedge funds are valued using a
market approach based on NAV calculated by the funds and are not publicly available. Hedge funds generally permit
redemption on a quarterly or more frequent basis with 90 or fewer days-notice. At each of January 3, 2020, June 28,
2019 and June 29, 2018, our defined benefit plans had no future unfunded commitments related to hedge fund
investments.
Fixed income investments, which include U.S. Government securities, investment and non-investment grade corporate
bonds and securitized bonds are generally valued using pricing models that use verifiable, observable market data such
as interest rates, benchmark yield curves and credit spreads, bids provided by brokers or dealers, or quoted prices of
securities with similar characteristics. Fixed income investments are generally categorized as Level 2 assets. Fixed
income funds valued at the closing price reported on the major market exchanges on which the individual fund is
traded are categorized as Level 1 assets.
• Other is comprised of guaranteed insurance contracts valued at book value, which approximates fair value, calculated
using the prior-year balance adjusted for investment returns and changes in cash flows and corporate owned life
insurance policies valued at the accumulated benefit.
• Cash and cash equivalents are primarily comprised of short-term money market funds valued at cost, which
approximates fair value, or valued at quoted market prices of identical instruments. Cash and currency are categorized
as Level 1 assets; cash equivalents, such as money market funds or short-term commingled funds, are categorized as
Level 2 assets.
• Certain investments that are valued using the NAV per share (or its equivalent) as a practical expedient are not
categorized in the fair value hierarchy and are included in the table to permit reconciliation of the fair value hierarchy
to the aggregate postretirement benefit plan assets.
106
The following tables provide the fair value of plan assets held by our defined benefit plans by asset category and by fair
value hierarchy level:
Total
Level 1
Level 2
Level 3
January 3, 2020
Asset Category
Equities:
Domestic equities
International equities
Real Estate Investment Trusts
Fixed income:
Corporate bonds
Government securities
Securitized Assets
Fixed Income Funds
Other
Cash and cash equivalents
Total
Investments Measured at NAV
Equity funds
Fixed income funds
Hedge funds
Private equity funds
Other
Total Investments Measured at NAV
Receivables, net
Total fair value of plan assets
Asset Category
Equities:
Domestic equities
International equities
Fixed income:
Corporate bonds
Government securities
Other
Cash and cash equivalents
Total
Investments Measured at NAV
Equity funds
Fixed income funds
Hedge funds
Private equity funds
Total Investments Measured at NAV
Receivables, net
Total fair value of plan assets
$
$
$
$
—
—
—
17
—
—
—
2
—
19
—
—
17
—
2
—
19
(In millions)
2,968
1,217
211
—
—
—
101
—
17
4,514
$
$
— $
—
—
1,159
489
131
—
—
674
2,453
$
$
$
2,968
1,217
211
1,176
489
131
101
2
691
6,986
933
323
342
302
1
1,901
5
8,892
Total
Level 1
Level 2
Level 3
June 28, 2019
(In millions)
— $
—
906
332
—
47
1,285
$
$
1,173
896
$
1,173
896
—
—
—
12
2,081
$
$
923
332
2
59
3,385
703
362
331
294
1,690
84
5,159
107
Asset Category
Equities:
Domestic equities
International equities
Fixed income:
Corporate bonds
Government securities
Other
Cash and cash equivalents
Total
Investments Measured at NAV
Equity funds
Fixed income funds
Hedge funds
Private equity funds
Total Investments Measured at NAV
Payables, net
Total fair value of plan assets
Contributions
Total
Level 1
Level 2
Level 3
June 29, 2018
(In millions)
$
1,221
$
1,189
$
903
811
335
2
209
899
—
—
—
6
$
32
4
800
335
—
203
3,481
$
2,094
$
1,374
$
—
—
11
—
2
—
13
714
318
395
401
1,828
(4)
5,305
$
Funding requirements under Internal Revenue Service (“IRS”) rules are a major consideration in making contributions to
our postretirement benefit plans. With respect to U.S. qualified pension plans, we intend to contribute annually not less than the
required minimum funding thresholds.
The Highway and Transportation Funding Act of 2014 and the Bipartisan Budget Act of 2015 (“BBA 2015”) further
extended the interest rate stabilization provision of MAP-21 until 2020. We made voluntary contributions to our U.S. qualified
defined benefit pension plans of $302 million in the two quarters ended January 3, 2020 and $300 million and $400 million in
fiscal 2018 and 2017, respectively. As a result, we currently do not anticipate making any contributions to our U.S. qualified
defined benefit pension plans and only minor contributions to our non-U.S. pension plans in fiscal 2020.
Estimated Future Benefit Payments
The following table provides the projected timing of payments for benefits earned to date and benefits expected to be earned
for future service by current active employees under our defined benefit plans in existence as of January 3, 2020.
Fiscal Years:
2020
2021
2022
2023
2024
2025 — 2028
Pension
Other
Benefits
(1)
(In millions)
Total
$
$
572
576
583
584
581
2,896
$
32
31
30
29
27
117
604
607
613
613
608
3,013
_______________
(1) Projected payments for Other Benefits reflect net payments from the Company, which include subsidies that reduce the gross payments by less than 10
percent.
108
Multi-employer Benefit Plans
Certain of our businesses acquired in connection with the L3Harris Merger participate in multi-employer defined benefit
pension plans. We make cash contributions to these plans under the terms of collective-bargaining agreements that cover union
employees based on a fixed rate per hour of service worked by the covered employees. The risks of participating in these multi-
employer plans are different from single-employer plans in the following aspects: (1) assets contributed to the multi-employer
plan by one employer may be used to provide benefits to employees of other participating employers, (2) if a participating
employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating
employers and (3) if we choose to stop participating in some of our multi-employer plans, we may be required to pay those plans
an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Cash contributed and expenses
recorded for our multi-employer plans were not material in the two quarters ended January 3, 2020.
See Note 5: Business Combination in these Notes for information regarding postretirement benefit plan liabilities assumed
in connection with the L3Harris Merger.
NOTE 16: STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION
At January 3, 2020, we had options or other share-based compensation outstanding under two Harris shareholder-approved
employee stock incentive plans (“SIPs”), the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective
August 27, 2010) and the Harris Corporation 2015 Equity Incentive Plan (the “2015 EIP”), as well as under employee stock
incentive plans of L3 assumed by L3Harris (collectively, “L3Harris SIPs”). We believe that share-based awards more closely
align the interests of participants with those of shareholders.
Harris equity awards granted prior to October 12, 2018, in accordance with the terms and conditions that were applicable to
such awards prior to the L3Harris Merger, generally automatically vested upon closing of the L3Harris Merger and settled in
L3Harris Common Stock, except stock options which automatically vested and remained outstanding. Harris equity awards
granted on or after October 12, 2018 did not automatically vest upon closing of the L3Harris Merger, and instead remained
outstanding as an award with respect to L3Harris common stock in accordance with the terms that were applicable to such award
prior to the L3Harris Merger.
L3’s equity awards granted prior to October 12, 2018, in accordance with the terms and conditions that were applicable to
such awards prior to the L3Harris Merger, generally automatically vested upon closing of the L3Harris Merger and settled in
L3Harris common stock (except stock options automatically converted into stock options with respect to L3Harris common stock
and remained outstanding), in each case, after giving effect to the Exchange Ratio and appropriate adjustments to reflect the
consummation of the L3Harris Merger and the terms and conditions applicable to such awards prior to the L3Harris Merger. Any
L3 restricted stock unit or L3 restricted stock award granted on or after October 12, 2018 was converted into a corresponding
award with respect to L3Harris common stock, with the number of shares underlying such award adjusted based on the Exchange
Ratio, and remained outstanding in accordance with the terms that were applicable to such award prior to the L3Harris Merger.
Pursuant to the Merger Agreement, L3Harris assumed the converted L3 equity awards.
Summary of Share-Based Compensation Expense
The following table summarizes the amounts and classification of share-based compensation expense:
Total expense
Included in:
Cost of product sales and services
Engineering, selling and administrative expenses
Income from continuing operations
Tax effect on share-based compensation expense
Total share-based compensation expense after-tax
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
$
$
$
125
5
120
125
(31)
94
$
$
$
(In millions)
58
12
46
58
(14)
44
$
$
$
51
8
43
51
(16)
35
$
$
$
42
3
39
42
(16)
26
Compensation cost related to share-based compensation arrangements that was capitalized as part of inventory or fixed
assets for the two quarters ended January 3, 2020 or fiscal 2019, 2018 or 2017 was not material.
As of January 3, 2020, a total of 22,071,494 shares of common stock remained available under our 2015 EIP for future
issuance (excluding shares to be issued in respect of outstanding options and other share-based awards, and with each full-value
award (e.g., restricted stock and restricted stock unit awards and performance share and performances share unit awards) counting
as 4.6 shares against the total remaining for future issuance). During the two quarters ended January 3, 2020, we issued an
109
aggregate of 2,425,153 shares of common stock under the terms of our L3Harris SIPs, which is net of shares withheld for tax
purposes.
Stock Options
The following information relates to stock options, including performance stock options, that have been granted under
shareholder-approved L3Harris SIPs. Option exercise prices are equal to or greater than the fair market value of our common
stock on the date the options are granted, using the closing stock price of our common stock. Options may be exercised for a
period of ten years after the date of grant, and options, other than performance stock options, generally become exercisable in
installments, which are typically 33.3 percent one year from the grant date, 33.3 percent two years from the grant date and 33.3
percent three years from the grant date. In certain instances, vesting and exercisability are also subject to performance criteria.
The fair value as of the grant date of each option award was determined using the Black-Scholes-Merton option-pricing
model which uses assumptions noted in the following table. Expected volatility over the expected term of the options is based on
implied volatility from traded options on our common stock and the historical volatility of our stock price. The expected term of
the options is based on historical observations of our common stock, considering average years to exercise for all options
exercised and average years to cancellation for all options canceled, as well as average years remaining for vested outstanding
options, which is calculated based on the weighted-average of these three inputs. The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of the significant assumptions used in determining the fair value of stock option grants under our L3Harris SIPs
is as follows:
Expected dividends
Expected volatility
Risk-free interest rates
Expected term (years)
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
1.70%
22.18%
1.68%
5.65
1.61%
19.87%
2.72%
5.03
1.80%
19.30%
1.80%
5.00
2.36%
21.78%
1.23%
5.03
A summary of stock option activity under our L3 Harris SIPs as of January 3, 2020 and changes during the two quarters
ended January 3, 2020 is as follows:
Stock options outstanding June 28, 2019
Granted
Exercised
Other — L3Harris Merger(1)
Stock options outstanding January 3, 2020
Stock options exercisable January 3, 2020
Weighted
Average
Exercise
Price
Per Share
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
(In years)
(In millions)
80.86
204.85
79.35
112.83
110.48
92.16
6.26
5.61
$
$
454.57
450.42
Shares
4,195,201
$
738,956
$
(1,654,558) $
$
1,266,379
4,545,978
3,807,022
$
$
_______________
(1) Represents L3 stock options converted to L3Harris stock options in accordance with the Merger Agreement.
The weighted-average grant-date fair value was $38.61 per share for options granted during the two quarters ended January
3, 2020 and $30.05 per share, $18.60 per share and $13.82 per share for options granted during fiscal 2019, 2018, and 2017,
respectively. The total intrinsic value of options exercised during the two quarters ended January 3, 2020 was $212 million at the
time of exercise. The total intrinsic value of options exercised during fiscal 2019, 2018 and 2017 was $75 million, $39 million and
$47 million, respectively, at the time of exercise.
110
A summary of the status of our nonvested stock options at January 3, 2020 and changes during the two quarters ended
January 3, 2020 is as follows:
Nonvested stock options June 28, 2019
Granted
Vested
Nonvested stock options January 3, 2020
Shares
Weighted-Average
Grant-Date Fair Value
Per Share
856,753
$
$
738,956
(856,753) $
$
738,956
20.28
38.61
20.28
38.61
As of January 3, 2020, there was $24 million of total unrecognized compensation expense related to nonvested stock
options granted under our L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 2.49 years.
The total fair value of stock options that vested during the two quarters ended January 3, 2020 was approximately $17 million.
The total fair value of stock options that vested during fiscal 2019, 2018 and 2017 was $14 million, $18 million and $17 million,
respectively.
Restricted Stock and Restricted Stock Unit Awards
The following information relates to awards of restricted stock and restricted stock units that have been granted to
employees and non-employee directors under our L3Harris SIPs. These awards are not transferable until vested and the
restrictions generally lapse upon the achievement of continued employment [or board membership] over a specified time period.
The fair value as of the grant date of these awards was based on the closing price of our common stock on the grant date and
is amortized to compensation expense over the vesting period. At January 3, 2020, there were 34,869 shares of restricted stock
and 500,898 restricted stock units outstanding which were payable in shares.
A summary of the status of these awards at January 3, 2020 and changes during the two quarters ended January 3, 2020 is as
follows:
Restricted stock and restricted stock units outstanding at June 28, 2019
Granted
Vested
Forfeited
Other — L3Harris Merger(1)
Restricted stock and restricted stock units outstanding at January 3, 2020
Shares or Units
Weighted-Average
Grant Price
Per Share or Unit
$
365,998
$
260,167
(503,069) $
(16,916) $
$
429,587
$
535,767
134.06
204.62
149.39
193.20
189.13
196.22
_______________
(1) Represents L3 share-based awards converted to L3Harris restricted stock units in accordance with the Merger Agreement.
As of January 3, 2020, there was $74 million of total unrecognized compensation expense related to these awards under our
L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 2.11 years. The weighted-average
grant date price per share or per unit was $204.62 for awards granted during the two quarters ended January 3, 2020 and $160.05,
$141.46 and $94.60 for awards granted during fiscal 2019, 2018 and 2017, respectively. The total fair value of these awards was
approximately $75 million for awards that vested during the two quarters ended January 3, 2020 and $16 million, $11 million and
$14 million for awards that vested during fiscal 2019, 2018 and 2017, respectively.
Performance Share Unit Awards
The following information relates to awards of performance share units that have been granted to employees under our
L3Harris SIPs. Generally, these awards are subject to performance criteria, such as meeting predetermined operating income or
earnings per share and return on invested capital targets for a 3-year performance period. These awards also generally vest at the
expiration of the same 3-year period. The final determination of the number of shares to be issued in respect of an award is made
by our Board of Directors or a committee of our Board of Directors.
The fair value as of the grant date of these awards was based on the closing price of our common stock on the grant date and
is amortized to compensation expense over the vesting period if achievement of the performance measures is considered probable.
At January 3, 2020, there were 55,020 performance share units outstanding which were payable in shares.
111
A summary of the status of these awards at January 3, 2020 and changes during the two quarters ended January 3, 2020 is as
follows:
Performance share units outstanding at June 28, 2019
Granted
Performance based adjustment(1)
Vested
Performance share units outstanding at January 3, 2020
Shares or Units
Weighted-Average
Grant Price
Per Share or Unit
$
509,749
$
55,020
326,656
$
(836,405) $
$
55,020
126.73
204.85
129.84
127.94
204.85
_______________
(1) Represents adjustments for performance conditions that impact the number of shares that vest. All awards with such criteria automatically vested upon the
closing of the L3Harris Merger.
As of January 3, 2020, there was $9 million of total unrecognized compensation expense related to these awards under our
L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 2.41 years. The weighted-average
grant date price per unit was $204.85 for awards granted during the two quarters ended January 3, 2020 and $155.12, $123.13 and
$84.40 for awards granted during fiscal 2019, 2018 and 2017, respectively. The total fair value of these awards was approximately
$107 million for awards that vested during the two quarters ended January 3, 2020 and $21 million, $12 million and $21 million
for awards that vested during fiscal 2019, 2018 and 2017, respectively.
NOTE 17: INCOME FROM CONTINUING OPERATIONS PER SHARE
The computations of income from continuing operations per common share attributable to L3Harris common shareholders
are as follows:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Income from continuing operations
Adjustments for participating securities outstanding
Income from continuing operations used in per basic and
diluted common share calculations (A)
Basic weighted average common shares outstanding (B)
Impact of dilutive share-based awards
Diluted weighted average common shares outstanding (C)
Income from continuing operations per basic common
share (A)/(B)
Income from continuing operations per diluted common
share (A)/(C)
$
$
$
$
(In millions, except per share amounts)
702
$
(2)
953
(2)
$
$
823
—
823
$
951
$
700
$
221.2
2.5
223.7
118.0
2.5
120.5
118.6
2.5
121.1
3.72
3.68
$
$
8.06
7.89
$
$
5.90
5.78
$
$
628
(1)
627
122.6
1.7
124.3
5.11
5.04
Potential dilutive common shares primarily consist of employee stock options and restricted and performance unit awards.
Income from continuing operations per diluted common share excludes the antidilutive impact of 604,969 weighted average
share-based awards outstanding for the two quarters ended January 3, 2020 and 271,892, 48,590 and 421,507 weighted average
share-based awards outstanding for fiscal 2019, 2018 and 2017, respectively.
NOTE 18: RESEARCH AND DEVELOPMENT
Company-sponsored research and development (“R&D”) costs are expensed as incurred and are included in the
“Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income. These costs were $329
million in the two quarters ended January 3, 2020. Company-sponsored R&D costs were $331 million, $311 million and $310
million in fiscal 2019, 2018 and 2017, respectively. Customer-sponsored R&D costs are incurred pursuant to contractual
arrangements, principally U.S. Government-sponsored contracts requiring us to provide a product or service meeting certain
defined performance or other specifications (such as designs), and are accounted for principally by the POC cost-to-cost revenue
recognition method. Customer-sponsored R&D is included in our revenue and cost of product sales and services.
112
NOTE 19: LEASE COMMITMENTS
As discussed in Note 2: Accounting Changes or Recent Accounting Pronouncements, we adopted ASC 842 effective
June 29, 2019. Our operating and finance leases at January 3, 2020 were for real estate such as office space, warehouses,
manufacturing, research and development facilities, tower space and land, and for equipment. Finance leases were not material at
January 3, 2020 and are not included in the disclosures below.
Operating lease cost was $88 million for the two quarters ended January 3, 2020. Other lease expenses, including short-term
and equipment lease cost, variable lease cost and sublease income, were not material for the two quarters ended January 3, 2020.
Supplemental operating lease balance sheet information at January 3, 2020 is as follows:
Operating lease right-of-use assets
Other accrued items
Operating lease liabilities
Total operating lease liabilities
Other supplemental lease information for the two quarters ended January 3, 2020 is as follows:
Cash paid for amounts included in the measurement of operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted average remaining lease term — operating leases (in years)
Weighted average discount rate — operating leases
Future lease payments under non-cancelable operating leases at January 3, 2020 were as follows:
Fiscal Years
2020
2021
2022
2023
2024
Thereafter
Total future lease payments required
Less: imputed interest
Total
(In millions)
837
129
781
910
$
$
(In millions, except
lease term and
discount rate)
$
$
$
91
17
9.4
3.1%
(In millions)
162
134
123
103
86
450
1,058
148
910
These commitments do not contain any material rent escalations, rent holidays, contingent rent, rent concessions, leasehold
improvement incentives or unusual provisions or conditions. We do not consider any individual lease material to our operations.
At January 3, 2020, we had $280 million of additional operating lease commitments for real estate leases that have not yet
commenced. These leases will commence in 2021 with lease terms of 15 to 25 years.
113
As discussed in Note 2: Accounting Changes or Recent Accounting Pronouncements in these Notes, we adopted ASC 842
using the optional transition method and, consequently, we are presenting prior period amounts and disclosures under ASC 840.
Future minimum lease payments for operating leases under ASC 840 at June 28, 2019 were as follows:
June 29, 2019 to July 3, 2020
July 4, 2020 to July 2, 2021
July 3, 2021 to July 1, 2022
July 2, 2022 to June 30, 2023
July 1, 2023 to June 28, 2024
Thereafter
Total minimum lease payments required
(In millions)
68
62
47
40
32
64
313
$
$
Rent expense was $73 million, $61 million and $65 million for fiscal 2019, 2018 and 2017, respectively.
NOTE 20: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, we are exposed to global market risks, including the effect of changes in foreign currency
exchange rates and changes in interest rates. We use derivative instruments to manage our exposure to such risks and formally
document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy
for undertaking hedge transactions. We also may enter into derivative instruments that are not designated as hedges and do not
qualify for hedge accounting. We recognize all derivatives in our Consolidated Balance Sheet at fair value. We do not hold or
issue derivatives for speculative trading purposes.
Exchange Rate Risk — Fair Value Hedges
To manage the exposure in our balance sheet to risks from changes in foreign currency exchange rates, we implement fair
value hedges. More specifically, we have used foreign currency forward contracts and options to hedge certain balance sheet
items, including foreign currency denominated accounts receivable and inventory. Changes in the value of the derivatives and the
related hedged items are reflected in earnings, in the “Cost of product sales and services” line item in our Consolidated Statement
of Income.
At January 3, 2020, we had no outstanding foreign currency forward contracts to hedge balance sheet items. The net gains
or losses on foreign currency forward contracts designated as fair value hedges were not material in the two quarters ended
January 3, 2020 or fiscal 2019, 2018 or 2017. In addition, no amounts were recognized in earnings in the two quarters ended
January 3, 2020 or fiscal 2019, 2018 or 2017 related to hedged firm commitments that no longer qualify as fair value hedges.
Exchange Rate Risk — Cash Flow Hedges
To manage our exposure to currency risk and market fluctuation risk associated with anticipated cash flows that are
probable of occurring in the future, we implement cash flow hedges. More specifically, we use foreign currency forward contracts
and options to hedge off-balance sheet future foreign currency commitments, including purchase commitments to suppliers, future
committed sales to customers and intersegment transactions. These derivatives are used to hedge currency exposures from cash
flows anticipated across our business segments. We also hedge U.S. Dollar payments to suppliers to maintain our anticipated
profit margins in our international operations. These derivatives have only nominal intrinsic value at the time of purchase and
have a high degree of correlation to the anticipated cash flows they are designated to hedge. Hedge effectiveness is determined by
the correlation of the anticipated cash flows from the hedging instruments and the anticipated cash flows from the future foreign
currency commitments through the maturity dates of the derivatives used to hedge these cash flows. These financial instruments
are marked-to-market using forward prices and fair value quotes with the offset to other comprehensive income and are
categorized in Level 2 of the fair value hierarchy. Gains and losses in accumulated other comprehensive income are reclassified to
earnings when the related hedged item is recognized in earnings. The cash flow impact of our derivatives is included in the same
category in our Consolidated Statement of Cash Flows as the cash flows of the related hedged items. Notional amounts are used
to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency losses. At
January 3, 2020, we had open foreign currency forward contracts with an aggregate notional amount of $511 million denominated
in the Euro, British Pound, Australian Dollar, Canadian Dollar and United Arab Emirates Dirham to hedge certain forecasted
transactions.
At January 3, 2020, our foreign currency forward contracts had maturities through 2023.
114
The table below presents the fair values of our derivatives designated as foreign currency hedging instruments in our
Consolidated Balance Sheet at January 3, 2020. As of the end of fiscal 2019, 2018 and 2017, the fair values of our derivatives
designated as foreign currency hedging instruments were not material.
Derivatives designated as hedging instruments:
Foreign currency forward contracts
Other current assets
Other non-current assets
Other accrued items
Other long-term liabilities
January 3, 2020
(In millions)
$
8
2
6
2
During the two quarters ended January 3, 2020, we recognized a net unrealized gain of $3 million before income taxes in
other comprehensive income from foreign currency derivatives designated as cash flow hedges. During fiscal 2019, 2018 and
2017, the net unrealized gain or loss recognized in other comprehensive income from foreign currency derivatives designated as
cash flow hedges was not material.
During the two quarters ended January 3, 2020 and fiscal 2019, 2018 and 2017, the net gain or loss reclassified from
“Accumulated other comprehensive loss” into earnings from foreign currency derivatives designated as cash flow hedges was not
material. Gains and losses from foreign currency derivatives designated as cash flow hedges are included in the line item in our
Consolidated Statement of Income associated with the hedged transaction, with the exception of the losses resulting from
discontinued cash flow hedges, which are included in the “Engineering, selling and administrative expenses” line item in our
Consolidated Statement of Income.
At January 3, 2020, the estimated amount of existing gains to be reclassified into earnings within the next twelve months
was $2 million before income taxes.
Interest-Rate Risk — Cash Flow Hedges
At January 3, 2020, we had two treasury lock agreements (“treasury locks”) with third-party financial institution
counterparties with a combined notional amount of $650 million that were classified as cash flow hedges, which were assumed in
connection with the L3Harris Merger.
These treasury locks were initiated in January 2019 to hedge against fluctuations in interest payments due to changes in the
benchmark interest rate (10-year U.S. Treasury rate) associated with the anticipated issuance of long-term fixed-rate notes (“New
Notes”) to redeem or repay at maturity the entire $650 million outstanding principal amount of our 4.95% 2021 Notes.
We designated these treasury locks as cash flow hedges against fluctuations in interest payments on the New Notes due to
changes in the benchmark interest rate prior to issuance, which we expected to occur before the date of maturity of the 4.95%
2021 Notes. If the benchmark interest rate increases during the period of the agreement, the treasury locks position becomes an
asset and we receive a cash payment from the counterparty when we terminate the treasury locks upon issuance of the New Notes.
Conversely, if the benchmark interest rate decreases, the treasury locks position becomes a liability and we make a cash payment
to the counterparty when we terminate the treasury locks upon issuance of the New Notes. The fair value of the treasury locks is
measured using a pricing model that utilizes observable market data such as the benchmark interest rate.
At January 3, 2020, the combined fair value of these treasury locks was a liability of $56 million, which was categorized in
Level 2 of the fair value hierarchy and recorded in the “Other long-term liabilities” line item in our Consolidated Balance Sheet.
The unrealized after-tax loss associated with these treasury locks included in the “Accumulated other comprehensive loss” line
item in our Consolidated Balance Sheet was $16 million at January 3, 2020. We recognized a $35 million liability for these
treasury locks as part of our purchase accounting for the L3Harris Merger.
On November 27, 2019, in order to fund our optional redemption of the 2.7% 2020 Notes as described in Note 14: Debt in
these Notes, we completed the issuance of $400 million in aggregate principal amount of the 2.900% 2029 Notes. In January
2019, we initiated a treasury lock to hedge against fluctuations in interest payments due to changes in the benchmark interest rate
(10-year U.S. Treasury rate) associated with the anticipated issuance of debt to redeem or repay the 2.7% 2020 Notes. This
treasury lock was terminated as planned in connection with our issuance of the 2.900% 2029 notes during the quarter ended
January 3, 2020, and because interest rates decreased during the period of the treasury lock, we made a cash payment to our
counterparty and recorded an after-tax loss of $24 million in the “Accumulated other comprehensive loss” line item of our
Consolidated Balance Sheet. The accumulated other comprehensive loss balance will be amortized to interest expense over the
life of the 2.900% 2029 Notes. We classified the cash outflow from the termination of this treasury lock as cash used in financing
115
activities in our Consolidated Statement of Cash Flows. At June 28, 2019, the fair value of this treasury lock was a liability of $26
million, which was categorized in Level 2 of the fair value hierarchy and recorded in the “Other accrued items” line item in our
Consolidated Balance Sheet with a corresponding unrealized after-tax loss of $20 million included in the “Accumulated other
comprehensive loss” line item in our Consolidated Balance Sheet.
The net gains or losses from cash flow hedges recognized in earnings were not material for the two quarters ended January
3, 2020 or fiscal 2019, 2018 or 2017. We had no open treasury locks at the end of fiscal 2018 or 2017.
Credit Risk
We are exposed to the risk of credit losses from non-performance by counterparties to the financial instruments discussed
above, but we do not expect any of the counterparties to fail to meet their obligations. To manage credit risks, we select
counterparties based on credit ratings, limit our exposure to any single counterparty under defined guidelines and monitor the
market position with each counterparty.
NOTE 21: NON-OPERATING INCOME
The components of non-operating income were as follows:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020 June 28, 2019
June 29, 2018
June 30, 2017
Pension adjustment(1)
Gain on pension plan curtailment
Loss on extinguishment of debt(2)
Adjustment to gain on sale of business
Other
$
$
172
23
(2)
—
(1)
192
$
$
$
(In millions)
186
—
—
—
2
188
$
184
—
(24)
—
(4)
156
$
$
164
—
—
2
—
166
_______________
(1) The non-service components of net periodic pension and postretirement benefit costs include interest cost, expected return on plan assets, amortization of net
actuarial gain or loss and effect of curtailments or settlements.
(2) Losses associated with our optional redemption of the entire outstanding $400 million principal amount of our 2.7% 2020 Notes in the two quarters ended
January 3, 2020 and our optional redemption of the entire outstanding $800 million aggregate principal amount of our 2018 Redeemed Notes, the repayment
in full of $253 million in remaining outstanding indebtedness under the 5-year tranche of our $1.3 billion senior unsecured term loan facility and the
termination of our 2015 Credit Agreement in fiscal 2018. See. Note 14: Debt for additional information.
116
NOTE 22: ACCUMULATED OTHER COMPREHENSIVE LOSS ("AOCI")
The components of AOCI are summarized below:
Foreign currency
translation
Net unrealized
(losses) gains on
hedging derivatives
Unrecognized
postretirement
obligations
Total AOCI
Balance at June 30, 2017
Other comprehensive income
Income taxes
Other comprehensive income, net of tax
Reclassifications to retained earnings due to
adoption of accounting standards update
Balance at June 29, 2018
Other comprehensive loss
Income taxes
Other comprehensive loss, net of tax
Balance at June 28, 2019
Other comprehensive income (loss)
Income taxes
Other comprehensive income (loss), net of tax
Amounts reclassified to earnings from AOCI(1)
Income taxes
Amounts reclassified to earnings from AOCI,
net of tax
Balance at January 3, 2020
$
$
(113) $
13
(In millions)
(17) $
1
2
15
(1)
(99)
(7)
—
(7)
(106)
25
—
25
—
—
—
1
(4)
(20)
(24)
6
(18)
(38)
(23)
6
(17)
—
—
(146) $
122
(29)
93
(30)
(83)
(638)
158
(480)
(563)
231
(53)
178
18
(5)
(276)
136
(27)
109
(35)
(202)
(669)
164
(505)
(707)
233
(47)
186
18
(5)
13
(508)
—
(81) $
—
(55) $
13
(372) $
_______________
(1) Amounts reclassified to earnings from AOCI are included in the gain on sale of business and non-operating income line items in our Consolidated Statement
of Income.
NOTE 23: INCOME TAXES
Income Tax Provision
The provisions for current and deferred income taxes are summarized as follows:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Current:
United States
International
State and local
Deferred:
United States
International
State and local
(In millions)
105
9
8
122
15
(3)
26
38
160
$
$
(141) $
12
(11)
(140)
324
(3)
25
346
206
$
117
9
6
132
121
1
7
129
261
11
37
16
64
33
(15)
(9)
9
73
$
$
$
$
117
The total income tax provision is summarized as follows:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Continuing operations
Discontinued operations
Total income tax provision
$
$
73
—
73
$
$
$
(In millions)
160
(1)
159
$
206
(5)
201
$
$
261
(110)
151
A reconciliation of the U.S. statutory income tax rate to our effective income tax rate follows:
U.S. statutory income tax rate
State taxes
International income
Research and development tax credit
Foreign derived intangibles income deduction
Change in valuation allowance
U.S. production activity benefit
Equity-based compensation(1)
Settlement of tax audits
U.S. tax reform
Other items
Effective income tax rate
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
21.0%
1.4
0.9
(4.7)
(0.8)
(4.8)
—
(5.4)
—
—
0.4
8.0%
21.0%
2.4
(0.5)
(4.5)
(1.3)
(1.8)
—
(2.1)
—
—
1.2
14.4%
28.1%
1.9
(0.5)
(2.9)
—
0.2
(0.9)
(1.8)
(2.2)
0.4
0.4
22.7%
35.0%
1.0
(1.3)
(2.0)
—
(0.2)
(0.5)
(2.6)
—
—
(0.1)
29.3%
_______________
(1)
Includes non-deductible equity-based compensation and excess tax benefits from equity-based compensation
As of January 3, 2020, we estimate our outside basis difference in foreign subsidiaries that are considered indefinitely
reinvested to be approximately $4 billion. The outside basis difference is comprised predominantly of purchase accounting
adjustments and to a lesser extent, undistributed earnings and other equity adjustments. In the event of a disposition of the foreign
subsidiaries or a distribution, we may be subject to incremental U.S. income taxes, subject to an adjustment for foreign tax credits,
and withholding taxes or income taxes payable to the foreign jurisdictions. As of January 3, 2020, the determination of the amount
of unrecognized deferred tax liability related to the outside basis difference is not practicable.
Tax Law Changes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into U.S. law. Among other
provisions, the Tax Act reduced the U.S. statutory corporate income tax rate from a maximum 35 percent to a flat 21 percent,
effective January 1, 2018. Based on our fiscal year end, our blended U.S. statutory corporate income tax rate for fiscal 2018 was
28.1 percent. This drop in the tax rate resulted in a one-time benefit of $26 million ($.21 per diluted share) at the date of
enactment. Additionally, we recognized expense of $8 million in fiscal 2018 to revalue our existing net deferred income tax
balances.
During the second quarter of fiscal 2019, we completed our accounting for the income tax impact of enactment of the Tax
Act and there were no material changes from the estimates reported in our Current Report on Form 8-K filed with the SEC on
December 13, 2018.
The implementation of a modified territorial tax system under the Tax Act subjects us to tax on our Global Intangible Low-
Taxed Income (“GILTI”) starting with fiscal 2019. The Financial Accounting Standards Board has permitted companies to make
an accounting policy decision to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period
expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes (“deferred
method”). We have elected to use the period cost method.
118
Deferred Income Tax Assets (Liabilities)
The components of deferred income tax assets (liabilities) were as follows:
Deferred tax assets:
Accruals
Tax loss and credit carryforwards
Share-based compensation
Capital loss carryforwards
Pension and other post-employment benefits
Operating lease obligation
Other
Valuation allowance(1)
Deferred tax assets, net
Deferred tax liabilities:
Property, plant and equipment
Unbilled receivables
Acquired intangibles
Operating lease right-of-use asset
Other
Deferred tax liabilities
Net deferred tax assets (liabilities)
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
$
$
240
177
27
44
431
213
238
(185)
1,185
(159)
(51)
(2,037)
(196)
(121)
(2,564)
(1,379) $
152
92
28
95
305
—
75
(159)
588
(71)
(65)
(260)
—
(31)
(427)
161
$
$
178
119
26
101
188
—
64
(181)
495
(65)
(86)
(268)
—
(36)
(455)
40
_______________
(1) The valuation allowance has been established to offset certain domestic and foreign deferred tax assets due to uncertainty regarding our ability to realize
them in the future.
Net deferred tax assets (liabilities) were classified as follows in our Consolidated Balance Sheet:
Non-current deferred income tax assets
Non-current deferred income tax liabilities
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
$
$
102
(1,481)
(1,379) $
173
(12)
161
$
$
119
(79)
40
Tax loss and credit carryforwards at January 3, 2020 have expiration dates ranging from less than one year and no expiration
in certain instances. The tax-effected amounts of federal, international, and state and local operating loss carryforwards at
January 3, 2020 were $8 million, $46 million and $28 million, respectively. The tax-effected amounts of federal and state and
local capital loss carryforwards at January 3, 2020 were $24 million and $21 million, respectively. The amounts of federal,
international, and state and local credit carryforwards at January 3, 2020 were $6 million, $14 million and $78 million,
respectively
Income from continuing operations before income taxes of international subsidiaries was $96 million in the two quarters
ended January 3, 2020. Income from continuing operations before income taxes of international subsidiaries was $37 million,
$43 million and $42 million in fiscal 2019, 2018 and 2017, respectively. We received $8 million in income tax refunds, net of
income taxes paid, in the two quarters ended January 3, 2020; paid $137 million in income tax, net of refunds received, in fiscal
2019; received $8 million in income tax refunds, net of income taxes paid, in fiscal 2018; and paid $51 million, net of refunds
received, in fiscal 2017.
119
Tax Uncertainties
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Balance at beginning of period
Additions based on tax positions taken during current period
Additions based on tax positions taken during prior periods
Additions for tax positions related to acquired entities
Decreases based on tax positions taken during prior periods
Decreases from lapse in statutes of limitations
Balance at end of period
$
$
204
35
—
226
(7)
(20)
438
$
$
(In millions)
102
31
$
80
—
(9)
—
204
$
90
17
23
—
(28)
—
102
$
$
63
52
—
—
(25)
—
90
As of January 3, 2020, we had $438 million of unrecognized tax benefits, of which $313 million would favorably impact
our future tax rates in the event that the tax benefits are eventually recognized. As of June 28, 2019, we had $204 million of
unrecognized tax benefits, of which $162 million would favorably impact our future tax rates in the event that the tax benefits are
eventually recognized. As of June 29, 2018, we had $102 million of unrecognized tax benefits, of which $92 million would
favorably impact our future tax rates in the event that the tax benefits are eventually recognized.
We recognize accrued interest and penalties related to unrecognized tax benefits as part of our income tax expense. We had
accrued $31 million for the potential payment of interest and penalties as of January 3, 2020 (and this amount was not included in
the $438 million of unrecognized tax benefits balance at January 3, 2020 shown above). We had accrued $3 million for the
potential payment of interest and penalties as of June 28, 2019 (and this amount was not included in the $204 million of
unrecognized tax benefits balance at June 28, 2019 shown above). We had accrued $4 million for the potential payment of interest
and penalties as of June 29, 2018 (and this amount was not included in the $102 million of unrecognized tax benefits balance at
June 29, 2018 shown above).
We file numerous separate and consolidated income tax returns reporting our financial results and, where appropriate, those
of our subsidiaries and affiliates, in the U.S. Federal jurisdiction and various state, local and foreign jurisdictions. Pursuant to the
Compliance Assurance Process, the IRS is examining the Harris federal tax returns for fiscal 2017 and 2018 and refund claims
related to fiscal 2010 through 2016. In addition, legacy L3’s federal tax returns for calendar years 2017 and 2018 and refund
claims related to calendar years 2015 and 2016 are currently under IRS examination.
The Canadian Revenue Agency is currently examining our returns for fiscal 2014 through fiscal 2016, and we are still
negotiating the provincial portions of a Canadian assessment relating to fiscal 2000 through fiscal 2006. We are currently under
examination or contesting proposed adjustments by various state and international tax authorities for fiscal years ranging from
2010 through 2018. It is reasonably possible that there could be a significant decrease or increase to our unrecognized tax benefit
balance during the course of the next twelve months as these examinations continue, other tax examinations commence or various
statutes of limitations expire. An estimate of the range of possible changes cannot be made for remaining unrecognized tax
benefits because of the significant number of jurisdictions in which we do business and the number of open tax periods.
NOTE 24: BACKLOG
Backlog, which is the equivalent of our remaining performance obligations, represents the future revenue we expect to
recognize as we perform on our current contracts. Backlog comprises both funded backlog (i.e., firm orders for which funding is
authorized and appropriated) and unfunded backlog. Backlog excludes unexercised contract options and potential orders under
ordering-type contracts, such as IDIQ contracts.
At January 3, 2020, our ending backlog was $20.6 billion. We expect to recognize approximately 60 percent of the revenue
associated with this backlog within the next twelve months and the substantial majority of the revenue associated with this
backlog within the next three years. At June 28, 2019, our ending backlog was $8.3 billion, at which time we expected to
recognize approximately half of the revenue associated with this backlog within the next twelve months and the substantial
majority of the revenue associated with this backlog within the next three years.
120
NOTE 25: BUSINESS SEGMENTS
During the two quarters ended January 3, 2020, we adjusted our segment reporting to reflect our new organizational
structure announced July 1, 2019. We structure our operations primarily around the products and services we sell and the markets
we serve, and effective June 29, 2019, we report the financial results of our operations in the following four operating segments,
which are also our reportable segments and are referred to as our business segments:
• Integrated Mission Systems, including multi-mission ISR and communication systems; integrated electrical and
electronic systems for maritime platforms; and advanced electro-optical and infrared solutions;
• Space and Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and
cyber defense; avionics; and electronic warfare;
• Communication Systems, including tactical communications; broadband communications; integrated vision solutions;
and public safety; and
• Aviation Systems, including defense aviation products; security, detection and other commercial aviation products;
commercial and military pilot training; and mission networks for air traffic management.
The historical results, discussion and presentation of our business segments as set forth in our Consolidated Financial
Statements and these Notes reflect the impact of these adjustments to our segment reporting for all periods presented in order to
present the segment information on a comparable basis. There is no impact on our previously reported consolidated statements of
income, balance sheets, statements of cash flows or statements of equity resulting from these adjustments.
Segment revenue, segment operating income and a reconciliation of segment operating income to total income from
continuing operations before income taxes are as follows:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
Revenue
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Other non-reportable business segments(1)
Corporate eliminations
Income from Continuing Operations before Income Taxes
Segment Operating Income:
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Other business activities and non-reportable business
segments(1)
Unallocated corporate expenses and corporate eliminations(2)
L3Harris Merger-related transaction and integration expenses
and losses
Amortization of acquisition-related intangibles(3)
Gain on sale of business
Pension adjustment
Non-operating income
Net interest expense
Total
$
$
$
$
(In millions)
48
3,715
2,208
672
165
(7)
6,801
9
697
637
76
27
(2)
(65)
(101)
—
(186)
188
(167)
1,113
$
$
$
$
2,774
2,360
2,151
2,038
23
(83)
9,263
377
442
493
289
—
(140)
(390)
(289)
229
(172)
192
(123)
908
$
$
$
$
45
3,304
2,015
668
148
(12)
6,168
7
628
561
54
20
(65)
—
(101)
—
(184)
156
(168)
908
$
$
$
$
38
3,156
1,891
697
121
(6)
5,897
7
559
522
131
9
(62)
—
(109)
—
(164)
166
(170)
889
_______________
(1)
Includes the operating results of the Harris Night Vision business prior to the date of divestiture on September 13, 2019. See Note 3: Divestitures, Asset Sales
and Discontinued Operations in these Notes for more information.
121
(2)
(3)
Includes: (i) $142 million of additional cost of sales related to the fair value step-up in inventory sold (see Note 5: Business Combination in these Notes for
more information), a $12 million gain on the sale of an asset group and a $10 million non-cash cumulative adjustment to lease expense for the two quarters
ended January 3, 2020; (ii) $47 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of
business and other items, a $12 million non-cash adjustment for deferred compensation and $5 million of Exelis acquisition-related and other charges in
fiscal 2018; and (iii) $58 million of Exelis acquisition-related and other charges in fiscal 2017.
Includes $239 million of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger for the two quarters ended January 3, 2020
and $50 million, $101 million, $101 million and $109 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis
for the two quarters ended January 3, 2020 and fiscal 2019, 2018 and 2017, respectively. Because the L3Harris Merger and the acquisition of Exelis
benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired was not allocated to any
segment.
Disaggregation of Revenue
Integrated Mission Systems: Integrated Mission Systems revenue is primarily derived from U.S. Government development
and production contracts and is generally recognized over time using the POC cost-to-cost revenue recognition method. We
disaggregate Integrated Mission Systems revenue by customer relationship, contract type and geographical region. We believe
these categories best depict how the nature, amount, timing and uncertainty of Integrated Mission Systems revenue and cash
flows are affected by economic factors:
Revenue By Customer Relationship
Prime contractor
Subcontractor
Revenue By Contract Type
Fixed-price(1)
Cost-reimbursable
Revenue By Geographical Region
United States
International
_______________
(1)
Includes revenue derived from time-and-materials contracts.
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
(In millions)
25
23
48
48
—
48
30
18
48
$
$
$
$
$
$
1,904
870
2,774
2,138
636
2,774
2,300
474
2,774
$
$
$
$
$
$
20
25
45
45
—
45
39
6
45
$
$
$
$
$
$
24
14
38
37
1
38
27
11
38
$
$
$
$
$
$
122
Space and Airborne Systems: Space and Airborne Systems revenue is primarily derived from U.S. Government development
and production contracts and is generally recognized over time using the POC cost-to-cost revenue recognition method. We
disaggregate Space and Airborne Systems revenue by customer relationship, contract type and geographical region. We believe
these categories best depict how the nature, amount, timing and uncertainty of Space and Airborne Systems revenue and cash
flows are affected by economic factors:
Revenue By Customer Relationship
Prime contractor
Subcontractor
Revenue By Contract Type
Fixed-price(1)
Cost-reimbursable
Revenue By Geographical Region
United States
International
_______________
(1)
Includes revenue derived from time-and-materials contracts.
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
(In millions)
2,246
1,469
3,715
2,097
1,618
3,715
3,255
460
3,715
$
$
$
$
$
$
1,337
1,023
2,360
1,367
993
2,360
2,037
323
2,360
$
$
$
$
$
$
2,159
1,145
3,304
1,634
1,670
3,304
2,937
367
3,304
$
$
$
$
$
$
2,067
1,089
3,156
1,390
1,766
3,156
2,782
374
3,156
$
$
$
$
$
$
Communication Systems: Communication Systems revenue is primarily derived from fixed-price contracts and is generally
recognized at the point in time when products are received and accepted by the customer for standard products offered to multiple
customers and over time for customer-specific products, systems and services. We disaggregate Communication Systems revenue
by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount,
timing and uncertainty of Communication Systems revenue and cash flows are affected by economic factors:
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
(In millions)
Revenue By Customer Relationship(1)
Prime contractor
Subcontractor
Revenue By Contract Type(1)
Fixed-price(2)
Cost-reimbursable
Revenue By Geographical Region
United States
International
$
$
$
$
$
$
1,406
745
2,151
1,849
302
2,151
1,518
633
2,151
$
$
1,281
927
2,208
$
$
1,031
984
2,015
$
$
880
1,011
1,891
_______________
(1) Prior to the L3Harris Merger, Communication Systems did not recognize significant revenue for customer-specific products and systems, and currently, such
customer arrangements primarily exist at operating businesses acquired in connection with the L3Harris Merger. The “Revenue by Customer Relationship”
and “Revenue by Contract Type” disaggregation categories were added beginning in the Fiscal Transition Period to best depict how the nature, amount,
timing and uncertainty of revenue and cash flows from these types of customer arrangements are affected by economic factors.
Includes revenue derived from time-and-materials contracts.
(2)
123
Aviation Systems: Aviation Systems revenue is primarily derived from fixed-price contracts and is generally recognized at
the point in time when products are received and accepted by the customer for standard products offered to multiple customers
and over time for customer-specific products, systems and services. We disaggregate Aviation Systems revenue by customer
relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and
uncertainty of Aviation Systems revenue and cash flows are affected by economic factors:
Revenue By Customer Relationship
Prime contractor
Subcontractor
Revenue By Contract Type
Fixed-price(1)
Cost-reimbursable
Revenue By Geographical Region
United States
International
______________
(1)
Includes revenue derived from time-and-materials contracts.
Total assets by business segment is as follows:
Total Assets
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Corporate(1)
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
(In millions)
654
18
672
587
85
672
644
28
672
$
$
$
$
$
$
1,246
792
2,038
1,688
350
2,038
1,514
524
2,038
$
$
$
$
$
$
656
12
668
582
86
668
627
41
668
$
$
$
$
$
$
697
—
697
636
61
697
647
50
697
$
$
$
$
$
$
January 3, 2020
June 28, 2019
June 29, 2018
(In millions)
$
7,896
$
87
$
6,829
5,930
7,569
10,112
5,027
1,683
1,036
2,284
$
38,336
$
10,117
$
90
4,953
1,724
1,046
2,038
9,851
_______________
(1)
Identifiable intangible assets acquired in connection with the L3Harris Merger in the two quarters ended January 3, 2020 and our acquisition of Exelis in
fiscal 2015 were recorded as Corporate assets because they benefited the entire Company as opposed to any individual segment. Identifiable intangible asset
balances recorded as Corporate assets were approximately $8.5 billion, $869 million and $974 million at January 3, 2020, June 28, 2019 and June 29, 2018,
respectively. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan investments, buildings and
equipment, as well as any assets of discontinued operations and divestitures. See Note 3: Divestitures, Asset Sales and Discontinued Operations for
additional information.
124
Other selected financial information by business segment and geographical area is summarized below:
Capital Expenditures
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Other non-reportable business segments(1)
Corporate
Discontinued operations
Depreciation and Amortization
Integrated Mission Systems
Space and Airborne Systems
Communication Systems
Aviation Systems
Other non-reportable business segments(1)
Corporate
Discontinued operations
Geographical Information for Continuing Operations
U.S. operations:
Revenue
Long-lived assets
International operations:
Revenue
Long-lived assets
Two Quarters
Ended
Fiscal Years Ended
January 3, 2020
June 28, 2019
June 29, 2018
June 30, 2017
(In millions)
1
48
29
54
6
23
—
161
2
50
49
29
3
125
—
258
6,530
866
271
28
$
$
$
$
$
$
$
$
29
36
22
64
—
22
—
173
37
31
32
53
—
289
—
442
8,485
1865
778
252
$
$
$
$
$
$
$
$
1
49
25
37
4
20
—
136
2
54
54
22
5
122
—
259
5,854
892
314
8
$
$
$
$
$
$
$
$
—
49
16
22
1
27
4
119
2
55
60
5
8
142
39
311
5,637
896
260
8
$
$
$
$
$
$
$
$
_______________
(1)
Includes capital expenditures and depreciation and amortization of the Harris Night Vision business prior to the date of divestiture on September 13, 2019.
See Note 3: Divestitures, Asset Sales and Discontinued Operations in these Notes for more information.
In addition to depreciation and amortization expense related to property, plant and equipment, “Depreciation and
Amortization” in the table above also includes $285 million of amortization related to intangible assets, debt premium, debt
discount, debt issuance costs and other items for the two quarters ended January 3, 2020. “Depreciation and Amortization” in the
table above also includes amortization related to intangible assets, debt premium, debt discount and debt issuance costs of
$120 million, $116 million and $125 million in fiscal 2019, 2018 and 2017, respectively.
Our products and systems are produced principally in the U.S. with international revenue derived primarily from exports.
No revenue earned from any individual foreign country exceeded 5 percent of our total revenue during the two quarters ended
January 3, 2020 or fiscal 2019, 2018 or 2017.
Sales made to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether
directly or through prime contractors, by all segments as a percentage of total revenue were 73 percent in the two quarters ended
January 3, 2020 and 77 percent, 75 percent and 74 percent in fiscal 2019, 2018 and 2017, respectively. Revenue from services in
the two quarters ended January 3, 2020 was approximately 32 percent, 16 percent, 15 percent and 39 percent of total revenue in
our Integrated Mission Systems, Space and Airborne Systems, Communication Systems and Aviation Systems segments,
respectively.
Revenue from products and services where the end consumer is located outside the U.S., including foreign military sales
through the U.S. Government, was $2.0 billion (21 percent of our revenue) in the two quarters ended January 3, 2020. Revenue
from products and services where the end consumer is located outside the U.S., including foreign military sales through the U.S.
Government, was $1.5 billion (22 percent of our revenue), $1.4 billion (23 percent of our revenue) and $1.5 billion (25 percent of
125
our revenue) in fiscal 2019, 2018 and 2017, respectively. Export revenue and revenue from international operations in the two
quarters ended January 3, 2020 was principally from the EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific)
regions and Canada.
NOTE 26: LEGAL PROCEEDINGS AND CONTINGENCIES
From time to time, as a normal incident of the nature and kind of businesses in which we are or were engaged, various
claims or charges are asserted and litigation or arbitration is commenced by or against us arising from or related to matters,
including but not limited to: product liability; personal injury; patents, trademarks, trade secrets or other intellectual property;
labor and employee disputes; commercial or contractual disputes; strategic acquisitions or divestitures; the prior sale or use of
former products allegedly containing asbestos or other restricted materials; breach of warranty; or environmental matters.
Claimed amounts against us may be substantial, but may not bear any reasonable relationship to the merits of the claim or the
extent of any real risk of court or arbitral awards. We record accruals for losses related to those matters against us that we consider
to be probable and that can be reasonably estimated. Gain contingencies, if any, are recognized when they are realized and legal
costs generally are expensed when incurred. At January 3, 2020, our accrual for the potential resolution of lawsuits, claims or
proceedings that we consider probable of being decided unfavorably to us was not material. Although it is not feasible to predict
the outcome of these matters with certainty, it is reasonably possible that some lawsuits, claims or proceedings may be disposed
of or decided unfavorably to us and in excess of the amounts currently accrued. Based on available information, in the opinion of
management, settlements, arbitration awards and final judgments, if any, which are considered probable of being rendered against
us in litigation or arbitration in existence at January 3, 2020 are reserved against or would not have a material adverse effect on
our financial condition, results of operations or cash flows.
Tax Audits
Our tax filings are subject to audit by taxing authorities in jurisdictions where we conduct or conducted business. These
audits may result in assessments of additional taxes that are subsequently resolved with the authorities or ultimately through legal
proceedings. We believe we have adequately accrued for any ultimate amounts that are likely to result from these audits; however,
final assessments, if any, could be different from the amounts recorded in our Consolidated Financial Statements. Additional
information regarding audits and examinations by taxing authorities of our tax filings is set forth in Note 23: Income Taxes.
International
As an international company, we are, from time to time, the subject of investigations relating to our international operations,
including under U.S. export control laws (such as ITAR), the FCPA and other similar U.S. and international laws.
In September 2019, we reached an administrative settlement with the Department of State to resolve alleged U.S. export
control regulation violations. Under the terms of the settlement we have committed to strengthen our trade compliance program
under the supervision of a special compliance officer and will pay a civil penalty of $13 million over three years (with $7 million
suspended on the condition of use for qualified remedial compliance measures). The settlement did not result in any debarment or
limitation on export licensing.
Environmental Matters
We are subject to numerous U.S. Federal, state, local and international environmental laws and regulatory requirements
and are involved from time to time in investigations or litigation of various potential environmental issues. We or companies we
have acquired are responsible, or alleged to be responsible, for environmental investigation and/or remediation of multiple sites.
These sites are in various stages of investigation and/or remediation and in some cases our liability is considered de minimis.
Notices from the U.S. Environmental Protection Agency (“EPA”) or equivalent state or international environmental agencies
allege that a number of sites formerly or currently owned and/or operated by us or companies we have acquired, and other
properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or
wastes and require environmental investigation and/or remediation. These sites include instances of us being identified as a
potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly
known as the “Superfund Act”) and/or equivalent state and international laws. For example, in June 2014, the Department of
Justice, Environment and Natural Resources Division, notified several potentially responsible parties, including Exelis, of
potential responsibility for contribution to the environmental investigation and remediation of multiple locations in Alaska. In
addition, in March 2016, the EPA notified over 100 potentially responsible parties, including Exelis, of potential liability for the
cost of remediation for the 8.3-mile stretch of the Lower Passaic River, estimated by the EPA to be $1.38 billion, but the parties’
respective allocations have not been determined. Although it is not feasible to predict the outcome of environmental claims, based
on available information, in the opinion of our management, any payments we may be required to make as a result of
environmental claims in existence at January 3, 2020 are reserved against, covered by insurance or would not have a material
adverse effect on our financial condition, results of operations or cash flows.
126
NOTE 27: TRANSITION PERIOD COMPARATIVE DATA (UNAUDITED)
The following table presents certain comparative financial information for the two quarters ended January 3, 2020 and two
quarters ended December 28, 2018:
Two Quarters Ended
January 3,
2020
December 28,
2018
Revenue from product sales and services
Cost of product sales and services
Engineering, selling and administrative expenses
Gain on sale of business
Non-operating income
Interest income
Interest expense
Income from continuing operations before income taxes
Income taxes
Income from continuing operations
Discontinued operations, net of income taxes
Net income
Noncontrolling interests, net of income taxes
Net income attributable to L3Harris Technologies, Inc.
$
(In millions, except per share amounts)
3,208
$
(2,105)
(583)
—
94
1
(87)
528
(87)
441
(3)
438
—
438
9,263
(6,726)
(1,927)
229
192
12
(135)
908
(73)
835
(1)
834
(12)
822
$
$
Net income per common share attributable to L3Harris Technologies, Inc.
common shareholders
Basic
Continuing operations
Discontinued operations
Diluted
Continuing operations
Discontinued operations
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
NOTE 28: SUBSEQUENT EVENTS
$
$
$
$
$
$
$
$
3.72
—
3.72
3.68
(0.01)
3.67
221.2
223.7
3.74
(0.03)
3.71
3.66
(0.02)
3.64
117.8
120.3
On February 4, 2020, we entered into a definitive agreement under which we will sell Security & Detection Systems and
MacDonald Humfrey Automation solutions (“airport security and automation business”) to Leidos, Inc. for $1 billion in cash,
subject to customary purchase price adjustments as set forth in the definitive agreement. The sale transaction is conditioned on
customary closing conditions, including receipt of regulatory approvals. We expect the sale transaction to close in mid-2020;
however, there can be no assurances that the conditions will be satisfied (or waived, if applicable) or that closing will occur
in mid-2020 or at all. We intend to use the proceeds from the sale of the airport security and automation business to repurchase
shares of our common stock. The airport security and automation business provides solutions used by the aviation and
transportation industries, regulatory and customs authorities, government and law enforcement agencies and commercial and
other high-security facilities. The decision to divest the airport security and automation business represented a significant
milestone in our strategic priority to reshape our portfolio and focus our resources on core technologies following the L3Harris
Merger. The airport security and automation business had approximately $500 million in annual revenue. Because the expected
disposal did not meet the held for sale criteria as of January 3, 2020, the assets and liabilities of the airport security and
automation business were not classified as held for sale in our Consolidated Balance Sheet at January 3, 2020. We do not expect
the divestiture of the airport security and automation business will have a significant impact on our financial condition, results of
operations or cash flows.
127
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is summarized below:
Quarter Ended
9/27/2019
1/3/2020
Total
Fiscal Transition
Period
Two Quarters Ended January 3, 2020(1)(2)
Revenue
Gross profit
Income from continuing operations before income taxes
$
Income from continuing operations
Discontinued operations, net of income taxes
Net income
Per common share data:
Basic
Income from continuing operations
Net income
Diluted
Income from continuing operations
Net income
Cash dividends
Stock prices — High
Low
Fiscal Year Ended June 28, 2019(3)
Revenue
Gross profit
Income from continuing operations before
income taxes
Income from continuing operations
Discontinued operations, net of income taxes
Net income
Per common share data:
Basic
Income from continuing operations
Net income
Diluted
Income from continuing operations
Net income
Cash dividends
Stock prices — High
Low
$
$
(In millions, except per share amounts)
4,431
1,189
440
435
—
435
4,832
1,348
468
400
(1)
399
1.93
1.93
1.90
1.90
0.75
217.31
176.16
1.79
1.79
1.77
1.77
0.75
212.43
190.55
9,263
2,537
908
835
(1)
834
3.72
3.72
3.68
3.67
1.50
9/28/2018
12/28/2018
3/29/2019
6/28/2019
Quarter Ended
Total
Year
(In millions, except per share amounts)
$
$
1,542
532
$
1,666
571
$
1,728
589
$
1,865
642
257
216
(3)
213
1.82
1.81
1.78
1.77
0.685
169.98
142.95
271
225
—
225
1.91
1.91
1.88
1.87
0.685
175.50
123.24
283
243
—
243
2.06
2.06
2.02
2.02
0.685
167.09
129.46
302
269
(1)
268
2.26
2.26
2.21
2.20
0.685
200.77
159.29
6,801
2,334
1,113
953
(4)
949
8.06
8.03
7.89
7.86
2.740
_______________
(1)
Includes the operating results of L3 businesses after the L3Harris Merger on June 29, 2019. See Note 5: Business Combination in the Notes for more
information.
(2) Results for the two quarters ended January 3, 2020 included: (i) $390 million of L3Harris Merger-related transaction and integration costs; (ii) $289
million of acquisition-related intangibles, including $239 million of amortization of identifiable intangible assets acquired as a result of the L3Harris
Merger (see Note 5: Business Combination in the Notes for more information) and $50 million of amortization of identifiable intangible assets acquired as
a result of our acquisition of Exelis; (iii) a $229 million gain on the sale of the Harris Night Vision business; (iv) $142 million of additional cost of sales
related to the fair value step-up in inventory sold; (v) a $23 million gain on pension plain curtailment; (vi) a $12 million gain on the sale of an asset group
(see Note 3: Divestitures, Asset Sales and Discontinued Operations in the Notes for more information); (vii) a $10 million non-cash cumulative
adjustment to lease expense; and (viii) $3 million of losses and other costs related to debt refinancing. The net after-tax impact from these two quarters
ended January 3, 2020 items was $392 million or $1.75 per diluted common share.
(3) Results for fiscal 2019 included: (i) $101 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis and (ii)
$65 million of L3Harris Merger-related transaction and integration costs. The net after-tax impact from these fiscal 2019 items was $128 million or $1.06
per diluted common share.
128
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A.
CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures: We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. There are
inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can provide only reasonable assurance of achieving their control objectives, and management necessarily is required
to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15
under the Exchange Act, as of January 3, 2020, we carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer. Based on this work and other evaluation
procedures, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that as of
January 3, 2020 our disclosure controls and procedures were effective.
(b) Changes in Internal Control: We periodically review our internal control over financial reporting as part of our efforts
to ensure compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we routinely review
our system of internal control over financial reporting to identify potential changes to our processes and systems that may
improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may
include such activities as implementing new, more efficient systems, consolidating the activities of business units, migrating
certain processes to our shared services organizations, formalizing policies and procedures, improving segregation of duties and
increasing monitoring controls. In addition, when we acquire new businesses, we incorporate our controls and procedures into the
acquired business as part of our integration activities. During the two quarters ended January 3, 2020, we completed our multi-
year, phased implementation of a new core enterprise resource planning (“ERP”) system in certain business units, which reduced
the number of ERP systems across the Company and enhanced our system of internal control over financial reporting. The
implementation of the new core ERP system in each affected business unit involved changes to related processes that are part of
our system of internal control over financial reporting and required testing for effectiveness. As part of our integration with L3,
we are in the process of incorporating our controls and procedures with respect to L3’s operations, and we will include internal
controls with respect to L3’s operations in our assessment of the effectiveness of our internal control over financial reporting as of
the end of fiscal 2020. Other than the system and related process changes described above as well as changes related to
incorporating our controls and procedures with respect to L3’s operations, there have been no changes in our internal control over
financial reporting that occurred during the two quarters ended January 3, 2020 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
(c) Evaluation of Internal Control over Financial Reporting: Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of January 3,
2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Our management excluded from
its assessment of the effectiveness of the our internal control over financial reporting the internal controls of L3, which we merged
with on June 29, 2019, and whose financial statements represent 15 percent of our total assets, excluding the preliminary value of
goodwill and other intangible assets, as of January 3, 2020, and 61 percent of our total revenue for the two quarters then ended.
Our management will include the internal controls of L3 in its assessment of the effectiveness of our internal control over
financial reporting as of the end of fiscal 2020. Based on our management’s assessment and those criteria, our management
concluded that our internal control over financial reporting was effective as of January 3, 2020. “Management’s Report on
Internal Control Over Financial Reporting” is included within “Item 8. Financial Statements and Supplementary Data” of this
Report. The effectiveness of our internal control over financial reporting was audited by Ernst & Young LLP, our independent
registered public accounting firm, whose unqualified report is included within “Item 8. Financial Statements and Supplementary
Data” of this Report.
129
ITEM 9B.
OTHER INFORMATION.
Not applicable.
130
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
(a) Identification of Directors: The information required by this Item with respect to our directors is incorporated herein
by reference to the discussion under the headings Proposal 1: Election of Directors and Nominees for Election in our Proxy
Statement for our 2020 Annual Meeting of Shareholders scheduled to be held on April 24, 2020 (our “2020 Proxy Statement”),
which is expected to be filed within 120 days after the end of our Fiscal Transition Period.
(b) Identification of Executive Officers: Certain information regarding our executive officers is included in Part I of this
Report under the heading “Information about our Executive Officers” in accordance with General Instruction G(3) of Form 10-
KT.
(c) Audit Committee Information; Financial Expert: The information required by this Item with respect to the Audit
Committee of our Board of Directors and “audit committee financial experts” is incorporated herein by reference to the
discussions under the headings Nominees for Election and Board Committees, Audit Committee in our 2020 Proxy Statement,
which is expected to be filed within 120 days after the end of our Fiscal Transition Period.
(d) Delinquent Section 16(a) Reports: Information related to compliance with Section 16(a) of the Exchange Act is
incorporated herein by reference to the discussion under the heading Delinquent Section 16(a) Reports in our 2020 Proxy
Statement, which is expected to be filed within 120 days after the end of our Fiscal Transition Period.
(e) Code of Ethics: All of our directors and employees, including our Chief Executive Officer, Chief Financial Officer,
Principal Accounting Officer and other senior accounting and financial officers, are required to abide by our Code of Conduct.
Our Code of Conduct is posted on our website at https://www.l3harris.com/content/code-of-conduct and is also available free of
charge by written request to our Director of Ethics and Compliance, L3Harris Technologies, Inc., 1025 West NASA Boulevard,
Melbourne, Florida 32919. We intend to disclose on the Code of Conduct section of our website at https://www.l3harris.com/
content/code-of-conduct any amendment to, or waiver from, our Code of Conduct that is required to be disclosed to shareholders,
within four business days following such amendment or waiver. The information required by this Item with respect to codes of
ethics is incorporated herein by reference to the discussion under the heading Code of Conduct in our 2020 Proxy Statement,
which is expected to be filed within 120 days after the end of our Fiscal Transition Period.
(f) Policy for Nominees: The information required under Item 407(c)(3) of Regulation S-K is incorporated herein by
reference to the discussion concerning procedures by which shareholders may recommend nominees to our Board of Directors,
submit nominees for inclusion in our proxy materials pursuant to our “proxy access” provision of our By-Laws or directly
propose nominees for consideration pursuant to our By-Laws but not pursuant to the proxy access provision contained under the
heading Director Nomination Process in our 2020 Proxy Statement, which is expected to be filed within 120 days after the end of
our Fiscal Transition Period. No material changes to those procedures have occurred since the disclosure regarding those
procedures in our Proxy Statement for our 2019 Annual Meeting of Shareholders.
Additional information concerning requirements and procedures for shareholders directly nominating directors is contained
under the heading Shareholder Nominations and Proposals in our 2020 Proxy Statement, which is expected to be filed within
120 days after the end of our Fiscal Transition Period.
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this Item with respect to compensation of our directors and executive officers is incorporated
herein by reference to the discussions under the headings Director Compensation and Benefits, Compensation Discussion and
Analysis and Compensation Committee Report in our 2020 Proxy Statement, which is expected to be filed within 120 days after
the end of our Fiscal Transition Period.
131
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table provides information as of January 3, 2020 about our common stock that may be issued, whether upon
the exercise of options, warrants and rights or otherwise, under our existing equity compensation plans.
Plan Category
Equity compensation plans approved by shareholders(1)
Equity compensation plans not approved by
shareholders
Total
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)(2)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)(2)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
5,101,896
—
5,101,896
$110.48
—
$110.48
22,071,494
—
22,071,494
_______________
(1) Consists of the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010) (the “2005 EIP”) and the Harris Corporation 2015 Equity
Incentive Plan (the “2015 EIP”), as well as employee stock incentive plans of L3 assumed by L3Harris (collectively with the 2005 EIP and the 2015 EIP, the “L3Harris SIPs”). No
additional awards may be granted under the 2005 EIP.
(2) Under the L3Harris SIPs, in addition to options, we have granted share-based compensation awards in the form of performance shares, shares of restricted stock, performance
share units, restricted stock units, shares of immediately vested common stock and other similar types of share-based awards. As of January 3, 2020, there were awards outstanding
under those plans with respect to 590,787 shares, consisting of (i) awards of 34,869 shares of restricted stock, for which all 34,869 shares were issued and outstanding; and
(ii) awards of 555,918 performance share units and restricted stock units, for which all 555,918 were payable in shares but for which no shares were yet issued and outstanding.
The 5,101,896 shares to be issued upon exercise of outstanding options, warrants and rights as listed in column (a) consisted of shares to be issued in respect of the exercise of
4,545,978 outstanding options and in respect of awards of 555,918 performance share units and restricted stock units payable in shares. Because there is no exercise price
associated with awards of shares of restricted stock, performance share units or restricted stock units, all of which are granted to employees at no cost, such awards are not included
in the weighted-average exercise price calculation in column (b).
See Note 16: Stock Options and Other Share-Based Compensation in the Notes for a general description of our share-based
incentive plans.
The other information required by this Item with respect to security ownership of certain of our beneficial owners and
management is incorporated herein by reference to the discussions under the headings Principal Shareholders and Shares Owned
By Directors, Nominees and Executive Officers in our 2020 Proxy Statement, which is expected to be filed within 120 days after
the end of our Fiscal Transition Period.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information required by this Item is incorporated herein by reference to the discussions under the headings Director
Independence Standards and Related Person Transaction Policy in our 2020 Proxy Statement, which is expected to be filed
within 120 days after the end of our Fiscal Transition Period.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated herein by reference to the discussion under the heading Proposal 3:
Ratification of Appointment of Independent Registered Public Accounting Firm in our 2020 Proxy Statement, which is expected to
be filed within 120 days after the end of our Fiscal Transition Period.
132
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this Report:
PART IV
(1) List of Financial Statements Filed as Part of this Report:
The following financial statements and reports of L3Harris Technologies, Inc. and its consolidated subsidiaries
are included in Item 8 of this Report at the page numbers referenced below:
Management’s Report on Internal Control Over Financial Reporting........................................................................
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements....................
Report of Independent Registered Public Accounting Firm on the Effectiveness of Internal Control Over
Financial Reporting ...............................................................................................................................................
Consolidated Statement of Income — Two Quarters ended January 3, 2020 and Fiscal Years ended June 28,
2019; June 29, 2018; June 30, 2017 ......................................................................................................................
Consolidated Statement of Comprehensive Income — Two Quarters ended January 3, 2020 and Fiscal Years
ended June 28, 2019; June 29, 2018; June 30, 2017..............................................................................................
Consolidated Balance Sheet — January 3, 2020; June 28, 2019; June 29, 2018 .......................................................
Consolidated Statement of Cash Flows — Two Quarters ended January 3, 2020 and Fiscal Years ended June 28,
2019; June 29, 2018; June 30, 2017 ......................................................................................................................
Consolidated Statement of Equity — Two Quarters ended January 3, 2020 and Fiscal Years ended June 28, 2019;
June 29, 2018; June 30, 2017.................................................................................................................................
Notes to Consolidated Financial Statements...............................................................................................................
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable, the amounts are not significant or the required
information is shown in the Consolidated Financial Statements or the Notes thereto.
(3) Exhibits:
Page
65
66
69
70
71
72
73
74
75
The following exhibits are filed herewith or are incorporated herein by reference to exhibits previously filed with the
SEC:
***(2)(a) Agreement and Plan of Merger, dated as of October 12, 2018, by and among Harris Corporation, L3
Technologies, Inc. and Leopard Merger Sub, Inc., incorporated herein by reference to Exhibit 2.1 to Harris Corporation’s
Current Report on Form 8-K filed with the SEC on October 16, 2018. (Commission File Number 1-3863)
(2)(b) First Amendment to Agreement and Plan of Merger, dated as of June 28, 2019, among L3 Technologies, Inc.,
Harris Corporation and Leopard Merger Sub Inc., incorporated herein by reference to Exhibit 2.2 to L3Harris
Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 1, 2019. (Commission File Number 1-3863)
(3)(a) Restated Certificate of Incorporation of L3Harris Technologies, Inc. (1995), as amended, incorporated herein
by reference to Exhibit 3.1 to L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 1,
2019. (Commission File Number 1-3863)
(3)(b) Amended and Restated By-Laws of L3Harris Technologies, Inc., incorporated herein by reference to Exhibit
3.2 to L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 1, 2019. (Commission File
Number 1-3863)
(4)(b) Specimen Stock Certificate for L3Harris Technologies, Inc.’s common stock, incorporated herein by reference
to Exhibit 4 to L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 1, 2019.
(Commission File Number 1-3863)
(4)(c)(i) Indenture, dated as of May 1, 1996, between Harris Corporation and The Bank of New York, as Trustee,
relating to unlimited amounts of debt securities which may be issued from time to time by Harris Corporation when and as
authorized by Harris Corporation’s Board of Directors or a Committee of the Board, incorporated herein by reference to
Exhibit 4 to Harris Corporation’s Registration Statement on Form S-3, Registration Statement No. 333-03111, filed with
the SEC on May 3, 1996.
(ii) Instrument of Resignation from Trustee and Appointment and Acceptance of Successor Trustee, dated as of
November 1, 2002 (effective November 15, 2002), among Harris Corporation, JP Morgan Chase Bank, as Resigning
Trustee, and The Bank of New York, as Successor Trustee, incorporated herein by reference to Exhibit 99.4 to Harris
133
Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2002. (Commission File Number
1-3863)
(iii) Supplemental Indenture, dated June 2, 2015, among Harris Corporation, Exelis Inc. and The Bank of New York
Mellon (as successor to Chemical Bank), to the Indenture, dated as of May 1, 1996 between Harris Corporation and The
Bank of New York (as successor to Chemical Bank), incorporated herein by reference to Exhibit 4.2 to Harris
Corporation’s Current Report on Form 8-K filed with the SEC on June 2, 2015. (Commission File Number 1-3863)
**(4)(d)(i) Indenture, dated as of October 1, 1990, between Harris Corporation and U.S. Bank National Association
(as successor to National City Bank), as Trustee, relating to unlimited amounts of debt securities which may be issued
from time to time by Harris Corporation when and as authorized by Harris Corporation’s Board of Directors or a
Committee of the Board, incorporated herein by reference to Exhibit 4 to Harris Corporation’s Registration Statement on
Form S-3, Registration Statement No. 33-35315, filed with the SEC on June 8, 1990.
(ii) Supplemental Indenture, dated June 2, 2015, among Harris Corporation, Exelis Inc. and U.S. Bank National
Association (as successor to National City Bank), to the Indenture dated as of October 1, 1990 between Harris
Corporation and U.S. National Association (as successor to National City Bank), incorporated herein by reference to
Exhibit 4.1 to Harris Corporation’s Current Report on Form 8-K filed with the SEC on June 2, 2015. (Commission File
Number 1-3863)
(4)(e)(i) Indenture, dated as of September 3, 2003, between Harris Corporation and The Bank of New York Mellon
Trust Company, N.A., as successor to The Bank of New York, as Trustee, relating to unlimited amounts of debt securities
which may be issued from time to time by Harris Corporation when and as authorized by Harris Corporation’s Board of
Directors or a Committee of the Board, incorporated herein by reference to Exhibit 4(b) to Harris Corporation’s
Registration Statement on Form S-3, Registration Statement No. 333-108486, filed with the SEC on September 3, 2003.
(ii) Instrument of Resignation of Trustee, Appointment and Acceptance of Successor Trustee, dated as of June 2,
2009, among Harris Corporation, The Bank of New York Mellon (formerly known as The Bank of New York) and The
Bank of New York Mellon Trust Company, N.A., as to Indenture dated as of September 3, 2003, incorporated herein by
reference to Exhibit 4(m) to Harris Corporation’s Registration Statement on Form S-3, Registration Statement
No. 333-159688, filed with the SEC on June 3, 2009.
(iii) Supplemental Indenture, dated June 2, 2015, among Harris Corporation, Exelis Inc. and The Bank of New York
Mellon Trust Company, N.A. (as successor to The Bank of New York), to the Indenture dated as of September 3, 2003
between Harris Corporation and The Bank of New York Mellon Trust Company, N.A. (as successor to The Bank of New
York), incorporated herein by reference to Exhibit 4.3 to Harris Corporation’s Current Report on Form 8-K filed with the
SEC on June 2, 2015. (Commission File Number 1-3863)
(4)(f)(i) Subordinated Indenture, dated as of September 3, 2003, between Harris Corporation and The Bank of New
York Mellon Trust Company, N.A., as successor to The Bank of New York, as Trustee, relating to unlimited amounts of
debt securities which may be issued from time to time by Harris Corporation when and as authorized by the Harris
Corporation’s Board of Directors or a Committee of the Board, incorporated herein by reference to Exhibit 4(c) to the
Harris Corporation’s Registration Statement on Form S-3, Registration Statement No. 333-108486, filed with the SEC on
September 3, 2003.
(ii) Instrument of Resignation of Trustee, Appointment and Acceptance of Successor Trustee, dated as of June 2,
2009, among Harris Corporation, The Bank of New York Mellon (formerly known as The Bank of New York) and The
Bank of New York Mellon Trust Company, N.A., as to Subordinated Indenture dated as of September 3, 2003,
incorporated herein by reference to Exhibit 4(n) to Harris Corporation’s Registration Statement on Form S-3, Registration
Statement No. 333-159688, filed with the SEC on June 3, 2009.
(4)(g) Form of Floating Rate Global Note due April 2020, incorporated herein by reference to Exhibit 4.1 to Harris
Corporation’s Current Report on Form 8-K filed with the SEC on November 9, 2017. (Commission File Number 1-3863)
(4)(h) Form of 3.832% Global Note due 2025, incorporated herein by reference to Exhibit 4.3 to Harris Corporation’s
Current Report on Form 8-K filed with the SEC on April 27, 2015. (Commission File Number 1-3863)
(4)(i) Form of 4.400% Global Note due 2028, incorporated herein by reference to Exhibit 4.1 to Harris Corporation’s
Current Report on Form 8-K filed with the SEC on June 4, 2018. (Commission File Number 1-3863)
(4)(j) Form of 2.900% Global Note due 2029, incorporated herein by reference to Exhibit 4.1 to L3Harris
Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on November 27, 2019. (Commission File Number
1-3863)
(4)(k) Form of 4.854% Global Note due 2035, incorporated herein by reference to Exhibit 4.4 to Harris Corporation’s
Current Report on Form 8-K filed with the SEC on April 27, 2015. (Commission File Number 1-3863)
134
(4)(l) Form of 6.15% Note due 2040, incorporated herein by reference to Exhibit 4.2 to Harris Corporation’s Current
Report on Form 8-K filed with the SEC on December 3, 2010. (Commission File Number 1-3863)
(4)(m) Form of 5.054% Global Note due 2045, incorporated herein by reference to Exhibit 4.5 to Harris
Corporation’s Current Report on Form 8-K filed with the SEC on April 27, 2015. (Commission File Number 1-3863)
(4)(n) Registration Rights Agreement, dated as of July 2, 2019, by and among L3Harris Technologies, Inc. (f/k/a
Harris Corporation), BofA Securities, Inc. and Morgan Stanley & Co. LLC, incorporated herein by reference to Exhibit
4.1 to L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File
Number 1-3863)
(4)(o) Form of New L3Harris 4.950% 2021 Rule 144A Note, incorporated herein by reference to Exhibit 4.2 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(p) Form of New L3Harris 4.950% 2021 Regulation S Note, incorporated herein by reference to Exhibit 4.3 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(q) Form of New L3Harris 3.850% 2023 Rule 144A Note, incorporated herein by reference to Exhibit 4.4 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(r) Form of New L3Harris 3.850% 2023 Regulation S Note, incorporated herein by reference to Exhibit 4.5 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(s) Form of New L3Harris 3.950% 2024 Rule 144A Note, incorporated herein by reference to Exhibit 4.6 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(t) Form of New L3Harris 3.950% 2024 Regulation S Note, incorporated herein by reference to Exhibit 4.7 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(u) Form of New L3Harris 3.850% 2026 Rule 144A Note, incorporated herein by reference to Exhibit 4.8 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(v) Form of New L3Harris 3.850% 2026 Regulation S Note, incorporated herein by reference to Exhibit 4.9 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(w) Form of New L3Harris 4.400% 2028 Rule 144A Note, incorporated herein by reference to Exhibit 4.10 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(x) Form of New L3Harris 4.400% 2028 Regulation S Note, incorporated herein by reference to Exhibit 4.11 to
L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 3, 2019. (Commission File Number
1-3863)
(4)(y) Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), L3Harris Technologies, Inc. by this filing agrees, upon
request, to furnish to the SEC a copy of other instruments defining the rights of holders of long-term debt of L3Harris
Technologies, Inc. or L3 Technologies, Inc.
(4)(z) Description of L3Harris Technologies, Inc.’s Securities, incorporated by reference to Exhibit (4)(z) to L3Harris
Technologies, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 28, 2019. (Commission File Number
1-3863)
*(10)(a) Form of Director and Officer Indemnification Agreement, for use on or after June 29, 2019, incorporated
herein by reference to Exhibit 10.5 to L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on
July 1, 2019. (Commission File Number 1-3863)
*(10)(b) Form of Executive Change in Control Severance Agreement, effective as of, and for use after, April 22,
2010, incorporated herein by reference to Exhibit 10(o) to Harris Corporation’s Quarterly Report on Form 10-Q for the
fiscal quarter ended October 1, 2010. (Commission File Number 1-3863)
*(10)(c) Annual Incentive Plan, incorporated herein by reference to Exhibit 10.2 to Harris Corporation’s Current
Report on Form 8-K filed with the SEC on October 28, 2015. (Commission File Number 1-3863)
135
*(10)(d)(i) 2005 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to Harris Corporation’s
Current Report on Form 8-K filed with the SEC on November 3, 2005. (Commission File Number 1-3863)
(ii) Amendment No. 1 to 2005 Equity Incentive Plan, effective January 1, 2009, incorporated herein by reference to
Exhibit 10(d) to Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 2, 2009.
(Commission File Number 1-3863)
(iii) Form of Stock Option Award Agreement Terms and Conditions (as of July 4, 2009) for grants under the 2005
Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to Harris Corporation’s Current Report on Form 8-
K filed with the SEC on September 3, 2009. (Commission File Number 1-3863)
*(10)(e)(i) 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010), incorporated herein by
reference to Exhibit 10.4 to Harris Corporation’s Current Report on Form 8-K filed with the SEC on September 2, 2010.
(Commission File Number 1-3863)
(ii) Form of Stock Option Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the 2005
Equity Incentive Plan (As Amended and Restated Effective August 27, 2010), incorporated herein by reference to Exhibit
10(c) to Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2010. (Commission
File Number 1-3863)
(iii) Form of Stock Option Award Agreement Terms and Conditions (as of August 26, 2011) for grants under the
2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010), incorporated herein by reference to
Exhibit 10.1 to Harris Corporation’s Current Report on Form 8-K filed with the SEC on August 31, 2011. (Commission
File Number 1-3863)
(iv) Form of Stock Option Award Agreement Terms and Conditions (as of June 29, 2013) for grants under the 2005
Equity Incentive Plan (As Amended and Restated Effective August 27, 2010), incorporated herein by reference to Exhibit
10(a) to Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2013.
(Commission File Number 1-3863)
(v) Form of Performance Stock Option Award Agreement Terms and Conditions (as of May 27, 2015) for grants
under the 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010), incorporated herein by
reference to Exhibit 10(e)(xi) to Harris Corporation’s Annual Report on Form 10-K for the fiscal year ended July 3, 2015.
(Commission File Number 1-3863)
*(10)(f)(i) 2015 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to Harris Corporation’s
Current Report on Form 8-K filed with the SEC on October 28, 2015. (Commission File Number 1-3863)
(ii) 2015 Equity Incentive Plan Stock Option Award Agreement Terms and Conditions (as of October 23, 2015),
incorporated herein by reference to Exhibit 10(f) to Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal
quarter ended January 1, 2016. (Commission File Number 1-3863)
(iii) Performance Unit Award Agreement Terms and Conditions (August 1, 2019 CEO-COO Award), incorporated
herein by reference to Exhibit 10.3 to L3Harris Technologies, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter
ended September 27, 2019. (Commission File Number 1-3863)
(iv) Performance Unit Award Agreement Terms and Conditions (August 1, 2019 Momentum Award), incorporated
herein by reference to Exhibit 10.4 to L3Harris Technologies, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter
ended September 27, 2019. (Commission File Number 1-3863)
(v) Performance Stock Option Award Agreement Terms and Conditions (August 1, 2019 CEO-COO Award),
incorporated herein by reference to Exhibit 10.5 to L3Harris Technologies, Inc.’s Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 2019. (Commission File Number 1-3863)
(vi) Performance Stock Option Award Agreement Terms and Conditions (August 1, 2019 Momentum Award),
incorporated herein by reference to Exhibit 10.6 to L3Harris Technologies, Inc.’s Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 2019. (Commission File Number 1-3863)
(vii) Performance Stock Option Award Agreement Terms and Conditions (August 1, 2019 Integration Award),
incorporated herein by reference to Exhibit 10.7 to L3Harris Technologies, Inc.’s Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 2019. (Commission File Number 1-3863)
(viii) Restricted Unit Award Agreement Terms and Conditions (August 1, 2019 Integration/Retention/Fiscal
Transition Period Award), incorporated herein by reference to Exhibit 10.8 to L3Harris Technologies, Inc.’s Quarterly
Report on Form 10-Q for the fiscal quarter ended September 27, 2019. (Commission File Number 1-3863)
(ix) Restricted Unit Award Agreement Terms and Conditions (New Hire/Other Award as of August 1, 2019),
incorporated herein by reference to Exhibit 10.9 to L3Harris Technologies, Inc.’s Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 2019. (Commission File Number 1-3863)
136
(x) Non-Employee Director Share Unit Agreement Terms and Conditions (as of June 29, 2019).
*10(g) L3Harris Retirement Savings Plan (Amended and Restated Effective January 1, 2020).
*(10)(h) L3Harris Excess Retirement Savings Plan, as amended and restated effective January 1, 2020.
*(10)(i)(i) Harris Corporation 2005 Directors’ Deferred Compensation Plan (as Amended and Restated Effective
January 1, 2009), incorporated herein by reference to Exhibit 10(h) to Harris Corporation’s Quarterly Report on Form 10-
Q for the fiscal quarter ended January 2, 2009. (Commission File Number 1-3863)
(ii) Amendment Number One to the Harris Corporation 2005 Directors’ Deferred Compensation Plan (As Amended
and Restated Effective January 1, 2009), dated October 27, 2010 and effective as of August 28, 2010, incorporated herein
by reference to Exhibit 10(m) to Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended
October 1, 2010. (Commission File Number 1-3863)
(iii) Amendment Number Two to the Harris Corporation 2005 Directors’ Deferred Compensation Plan (As Amended
and Restated Effective January 1, 2009), dated December 4, 2015, incorporated herein by reference to Exhibit 10(h) to
Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 2016. (Commission File
Number 1-3863)
*(10)(j) L3Harris Technologies, Inc. 2019 Non-Employee Director Deferred Compensation Plan.
*(10)(k)(i) Amended and Restated Master Trust Agreement and Declaration of Trust, made as of December 2, 2003,
by and between Harris Corporation and The Northern Trust Company, incorporated herein by reference to Exhibit 10(c) to
Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 2, 2004. (Commission File
Number 1-3863)
(ii) Amendment to the Harris Corporation Master Trust, dated May 21, 2009, incorporated herein by reference to
Exhibit 10(m)(ii) to Harris Corporation’s Annual Report on Form 10-K for the fiscal year ended July 3, 2009.
(Commission File Number 1-3863)
(iii) Amendment to the Harris Corporation Master Trust, dated December 8, 2009 and effective December 31, 2009,
incorporated herein by reference to Exhibit 4(e)(iii) to Harris Corporation’s Registration Statement on Form S-8,
Registration Statement No. 333-163647, filed with the SEC on December 10, 2009.
(iv) Amendment to the Harris Corporation Master Trust, dated and effective May 3, 2010, incorporated herein by
reference to Exhibit 4(e)(iv) to Harris Corporation’s Registration Statement on Form S-8, Registration Statement No.
333-222821, filed with the SEC on February 1, 2018.
*(10)(l)(i) Master Rabbi Trust Agreement, amended and restated as of December 2, 2003, by and between Harris
Corporation and The Northern Trust Company, incorporated herein by reference to Exhibit 10(d) to Harris Corporation’s
Quarterly Report on Form 10-Q for the fiscal quarter ended January 2, 2004. (Commission File Number 1-3863)
(ii) First Amendment to the Harris Corporation Master Rabbi Trust Agreement, dated September 24, 2004,
incorporated herein by reference to Exhibit 10(b) to Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 2004. (Commission File Number 1-3863)
(iii) Second Amendment to the Harris Corporation Master Rabbi Trust Agreement, dated as of December 8, 2004,
incorporated herein by reference to Exhibit 10.5 to Harris Corporation’s Current Report on Form 8-K filed with the SEC
on December 8, 2004. (Commission File Number 1-3863)
(iv) Third Amendment to the Harris Corporation Master Rabbi Trust Agreement, dated January 15, 2009 and
effective January 1, 2009, incorporated herein by reference to Exhibit 10(i) to Harris Corporation’s Quarterly Report on
Form 10-Q for the fiscal quarter ended January 2, 2009. (Commission File Number 1-3863)
(v) Fourth Amendment to the Harris Corporation Master Rabbi Trust Agreement, dated October 27, 2010 and
effective as of August 28, 2010, incorporated herein by reference to Exhibit 10(n) to Harris Corporation’s Quarterly
Report on Form 10-Q for the fiscal quarter ended October 1, 2010. (Commission File Number 1-3863)
(vi) Fifth Amendment to the Harris Corporation Master Rabbi Trust Agreement, dated and effective as of February
28, 2019, incorporated herein by reference to Exhibit 10 to Harris Corporation’s Quarterly Report on Form 10-Q for the
fiscal quarter ended March 29, 2019. (Commission File Number 1-3863)
(10)(m) Commercial Paper Issuing and Paying Agent Agreement, dated as of March 30, 2005, between Citibank,
N.A. and Harris Corporation, incorporated herein by reference to Exhibit 99.2 to Harris Corporation’s Current Report on
Form 8-K filed with the SEC on April 5, 2005. (Commission File Number 1-3863)
(10)(n) Commercial Paper Dealer Agreement, dated as of June 12, 2007, between Citigroup Global Markets Inc. and
Harris Corporation, incorporated herein by reference to Exhibit 10.1 to Harris Corporation’s Current Report on Form 8-K
filed with the SEC on June 18, 2007. (Commission File Number 1-3863)
137
(10)(o) Commercial Paper Dealer Agreement, dated June 13, 2007, between Banc of America Securities LLC and
Harris Corporation, incorporated herein by reference to Exhibit 10.2 to Harris Corporation’s Current Report on Form 8-K
filed with the SEC on June 18, 2007. (Commission File Number 1-3863)
(10)(p) Commercial Paper Dealer Agreement, dated as of June 14, 2007, between SunTrust Capital Markets, Inc. and
Harris Corporation, incorporated herein by reference to Exhibit 10.3 to Harris Corporation’s Current Report on Form 8-K
filed with the SEC on June 18, 2007. (Commission File Number 1-3863)
*(10)(q)(i) Employment Agreement, dated October 8, 2011 and effective November 1, 2011, by and between Harris
Corporation and William M. Brown, incorporated herein by reference to Exhibit 10.1 to Harris Corporation’s Current
Report on Form 8-K filed with the SEC on October 11, 2011. (Commission File Number 1-3863)
(ii) Employment Agreement Amendment, dated October 12, 2018, by and between Harris Corporation and William
M. Brown, incorporated herein by reference to Exhibit 10.1 to Harris Corporation’s Quarterly Report on Form 10-Q for
the fiscal quarter ended December 28, 2018. (Commission File Number 1-3863)
*(10)(r) Letter Agreement with Christopher E. Kubasik, dated as of November 5, 2018, incorporated herein by
reference to Exhibit 10.4 to L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 1,
2019. (Commission File Number 1-3863)
*(10)(s) Offer Letter Agreement with Jesus Malave Jr., dated as of June 6, 2019, incorporated herein by reference to
Exhibit 10.3 to L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 1, 2019.
(Commission File Number 1-3863)
*(10)(t) Offer Letter Agreement, dated March 6, 2015, between Harris Corporation and Todd Taylor, incorporated
herein by reference to Exhibit 10(e) to Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended
April 3, 2015. (Commission File Number 1-3863)
*(10)(u) Summary of Annual Compensation of Non-Employee Directors of L3Harris Technologies, Inc., effective as
of June 29, 2019, incorporated herein by reference to Exhibit 10.2 to L3Harris Technologies, Inc.’s Current Report on
Form 8-K filed with the SEC on July 1, 2019. (Commission File Number 1-3863)
***(10)(v) Revolving Credit Agreement, dated June 28, 2019, among Harris Corporation and certain of its
Subsidiaries from time to time, as the Borrowers, the Lenders from time to time party thereto, JPMorgan Chase Bank,
N.A., as Administrative Agent, L/C Issuer and Swingline Lender, Citibank, N.A., Bank of America, N.A., Morgan Stanley
MUFG Loan Partners, LLC and Wells Fargo Bank, National Association, as Co-Syndication Agents and JPMorgan Chase
Bank, N.A., Citibank, N.A., Bank of America Securities, Inc., Morgan Stanley MUFG Loan Partners, LLC and Wells
Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners, incorporated herein by reference to Exhibit 10.1
to L3Harris Technologies, Inc.’s Current Report on Form 8-K filed with the SEC on July 1, 2019. (Commission File
Number 1-3863)
*(10)(w)(i) Exelis Excess Pension Plan IA (formerly known as the ITT Excess Pension Plan IA and the ITT Industries
Excess Pension Plan IA), as amended and restated as of October 31, 2011, incorporated herein by reference to Exhibit
10.18 of Exelis Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 2, 2013. (Commission File
No. 1-35228)
(ii) Amendment to the Exelis Excess Pension Plan IA (as Amended and Restated as of October 31, 2011), dated
December 16, 2016, incorporated herein by reference to Exhibit 10(e) to Harris Corporation’s Quarterly Report on Form
10-Q for the fiscal quarter ended December 30, 2016. (Commission File No. 1-3863)
*(10)(x)(i) Exelis Excess Pension Plan IB (formerly known as the ITT Excess Pension Plan IB and the ITT Industries
Excess Pension Plan IB), as amended and restated as of October 31, 2011, incorporated herein by reference to Exhibit
10.19 of Exelis Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 2, 2013. (Commission File
No. 1-35228)
(ii) Amendment to the Exelis Excess Pension Plan IB (as Amended and Restated as of October 31, 2011), dated
December 16, 2016, incorporated herein by reference to Exhibit 10(g) to Harris Corporation’s Quarterly Report on Form
10-Q for the fiscal quarter ended December 30, 2016. (Commission File No. 1-3863)
*(10)(y)(i) Exelis Excess Pension Plan IIA (formerly known as the ITT Excess Pension Plan IIA, the ITT Excess
Pension Plan II, and the ITT Industries Excess Pension Plan II), as amended and restated as of October 31, 2011,
incorporated herein by reference to Exhibit 10.20 of Exelis Inc.’s Quarterly Report on Form 10-Q filed with the SEC on
August 2, 2013. (Commission File No. 1-35228)
(ii) Amendment to Exelis Excess Pension Plan IIA (as Amended and Restated as of October 31, 2011), dated
December 16, 2016, incorporated herein by reference to Exhibit 10(f) to Harris Corporation’s Quarterly Report on Form
10-Q for the fiscal quarter ended December 30, 2016. (Commission File No. 1-3863)
138
*(10)(z)(i) Exelis Excess Pension Plan IIB (formerly known as the ITT Excess Pension Plan IIB), as amended and
restated as of October 31, 2011, incorporated herein by reference to Exhibit 10.21 to Exelis Inc.’s Quarterly Report on
Form 10-Q filed with the SEC on August 2, 2013. (Commission File No. 1-35228)
*(10)(aa) Amendment to the Exelis Pension Plan IIB (as Amended and Restated as of October 31, 2011), dated
December 16, 2016, incorporated herein by reference to Exhibit 10(h) to Harris Corporation’s Quarterly Report on Form
10-Q for the fiscal quarter ended December 30, 2016. (Commission File No. 1-3863)
*(10)(bb) Amendment to the Exelis Excess Pension Plans (as amended and restated as of October 31, 2011), dated
April 28, 2017, incorporated herein by reference to Exhibit 10(pp) to Harris Corporation’s Annual Report on Form 10-K
for the fiscal year ended June 30, 2017. (Commission File No. 1-3863)
*(10)(cc) Amendment to the Exelis Excess Pension Plans (as amended and restated as of October 31, 2011), dated
March 28, 2018, incorporated herein by reference to Exhibit 10(c) to Harris Corporation’s Quarterly Report on Form 10-Q
for the fiscal quarter ended March 30, 2018. (Commission File No. 1-3863)
*(10)(dd) Amendment to the EDO Corporation Employees Pension Plan, dated December 21, 2017, incorporated
herein by reference to Exhibit 10(b) to Harris Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended
December 29, 2017. (Commission File No. 1-3863)
(21) Subsidiaries of the Registrant.
(23) Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
(24) Power of Attorney.
(31.1) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
(31.2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
(32.1) Section 1350 Certification of Chief Executive Officer.
(32.2) Section 1350 Certification of Chief Financial Officer.
(101) The financial information from L3Harris Technologies, Inc.’s Transition Report on Form 10-KT for the
transition period from June 29, 2019 to January 3, 2020 formatted in Inline XBRL (Extensible Business Reporting
Language) includes: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Operations, (iii) the
Consolidated Statement of Comprehensive Loss, (iv) the Consolidated Statement of Changes in Stockholders Equity,
(v) the Consolidated Statement of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.
(104) Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101.
_______________
* Management contract or compensatory plan or arrangement.
** Paper filing.
*** Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. L3Harris Technologies, Inc. hereby undertakes to furnish supplementally copies
of any of the omitted schedules upon request by the SEC.
ITEM 16.
FORM 10-KT SUMMARY.
None.
139
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
L3HARRIS TECHNOLOGIES, INC.
Date: March 3, 2020
(Registrant)
By:
/S/ WILLIAM M. BROWN
William M. Brown
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ WILLIAM M. BROWN
William M. Brown
/s/ CHRISTOPHER E. KUBASIK
Christopher E. Kubasik
/s/ JESUS MALAVE JR.
Jesus Malave Jr.
/s/ TODD A. TAYLOR
Todd A. Taylor
/s/ SALLIE B. BAILEY*
Sallie B. Bailey
/s/ PETER W. CHIARELLI*
Peter W. Chiarelli
/s/ THOMAS A. CORCORAN*
Thomas A. Corcoran
/s/ THOMAS A. DATTILO*
Thomas A. Dattilo
/s/ ROGER B. FRADIN*
Roger B. Fradin
/s/ LEWIS HAY III*
Lewis Hay III
/s/ LEWIS KRAMER*
Lewis Kramer
/s/ RITA S. LANE*
Rita S. Lane
/s/ ROBERT B. MILLARD*
Robert B. Millard
/s/ LLOYD W. NEWTON*
Lloyd W. Newton
Chairman and Chief Executive Officer (Principal
Executive Officer)
Vice Chairman, President and Chief Operating
Officer
Date
March 3, 2020
March 3, 2020
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
March 3, 2020
Vice President, Principal Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
*By:
/s/ SCOTT T. MIKUEN
Scott T. Mikuen
Attorney-in-Fact
pursuant to a power of attorney
140
L3HARRIS TECHNOLOGIES INC.
SUBSIDIARIES AS OF MARCH 3, 2020
(100% direct or indirect ownership by L3Harris Technologies, Inc., unless otherwise noted)
Exhibit 21
Name of Subsidiary
1231670 Ontario Inc.
AeroElite Limited
Aerosim Academy, Inc.
Aerosim Bangkok Company Limited
Aerosim Technologies, Inc.
Aerosim Thai Company Limited
Airline Placement Limited
Airline Recruitment Limited
Applied Defense Solutions, Inc.
Applied Kilovolts Limited
Asian Aviation Training Centre Ltd.
ASV Global, L.L.C.
Autonomous Surface Vehicles Limited
Autonomous Surface Vehicles, LLC
Aviation Communication & Surveillance Systems, LLC
Aydin Yazilim ve Elektronik Sanayi A.S.
Azimuth Security Pty Ltd
Azimuth Security Trust
Azimuth Security, LLC
Beijing MAPPS-SERI Technology Company Ltd.
C.K. Industrial Engineers Limited
Calzoni S.r.l.
Combat Advanced Propulsion, LLC
CR MSA LLC
CTC Aviation Group Limited
CTC Aviation Holdings Limited
CTC Aviation International Limited
CTC Aviation Services Limited
CTC Aviation Training (UK) Limited.
Defence Investments Limited
DMRAC-Aviation Corporation - SGPS, Unipessoal LDA
EAA – Escola de Aviação Aerocondor, S.A.
Eagle Technology, LLC
EDO (UK) Ltd.
EDO MBM Technology Ltd.
EDO Western Corporation
Electrodynamics, Inc.
EMC S.r.l.
ESSCO Collins Limited
Exelis Arctic Services
Exelis Australia Holdings Pty Ltd
Exelis Australia Pty Ltd
Exelis Holdings, Inc.
Exmac Automation Limited
FAST Holdings Limited
State or Other
Jurisdiction of Incorporation
Canada
United Kingdom
Florida
Thailand
Minnesota
Thailand
United Kingdom
United Kingdom
Delaware
United Kingdom
Thailand
Louisiana
United Kingdom
Louisiana
Delaware
Turkey
Australia
Australia
Florida
China
United Kingdom
Italy
Delaware
Delaware
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Portugal
Portugal
Delaware
United Kingdom
United Kingdom
Utah
Arizona
Italy
Ireland
Delaware
Australia
Australia
Delaware
United Kingdom
United Kingdom
Name of Subsidiary
FAST Training Services Limited
Felec Services, Inc.
Flight Data Services Limited
Flight Training Acquisitions LLC
ForceX, Inc
G Air Advanced Training, Lda
G Air II Maintenance, Lda
G4U – Gestão de Activos Aeronáuticos, Sociedade, Lda
Hamilton BioVentures, L.P.
Harris Asia Pacific Sdn. Bhd.
Harris Atlas Systems LLC*
Harris C4i Pty Ltd
Harris Canada Systems, Inc.
Harris Cayman Ltd.
Harris Communications (Australia) Pty. Ltd.
Harris Communications (Spain), S. L.
Harris Communications FZCO
Harris Communications GmbH
Harris Communications Limited
Harris Communications Malaysia Sdn. Bhd.
Harris Communications MH Spain, S. L.
Harris Communications Pakistan (Private) Limited
Harris Communications Systems India Private Limited
Harris Comunicações e Participações do Brasil Ltda.
Harris Defence Ltd.
Harris Denmark ApS
Harris Denmark Holding ApS
Harris Geospatial Solutions B.V.
Harris Geospatial Solutions France SARL
Harris Geospatial Solutions GmbH
Harris Geospatial Solutions Italia SRL
Harris Geospatial Solutions KK
Harris Geospatial Solutions UK Limited
Harris Geospatial Solutions, Inc.*
Harris Global Communications, Inc.
Harris Holdco LLC
Harris International Chile Limitada
Harris International Holdings, LLC
Harris International Saudi Communications
Harris International Venezuela, C.A.
Harris International, Inc.
Harris Luxembourg Sarl
Harris NV
Harris Orthogon GmbH
Harris Pension Management Limited
Harris Solid-State (Malaysia) Sdn. Bhd.
Harris Systems Limited
Honeywell TCAS Inc.
Interstate Electronics Corporation
Jariet Technologies, Inc.
L-3 Afghanistan, LLC
State or Other
Jurisdiction of Incorporation
United Kingdom
Delaware
United Kingdom
Delaware
Tennessee
Portugal
Portugal
Portugal
Delaware
Malaysia
UAE
Australia
Canada
Cayman Islands
Australia
Spain
UAE
Germany
Hong Kong
Malaysia
Spain
Pakistan
India
Brazil
United Kingdom
Denmark
Denmark
Netherlands
France
Germany
Italy
Japan
United Kingdom
Colorado
New York
Delaware
Chile
Delaware
Saudi Arabia
Venezuela
Delaware
Luxembourg
Belgium
Germany
United Kingdom
Malaysia
United Kingdom
Delaware
California
Delaware
Delaware
Name of Subsidiary
L3 Applied Technologies, Inc.
L3 Australia Group Pty Ltd
L3 Aviation Products, Inc.
L-3 Brasil Importação, Exportação e Comércio Ltda.
L-3 Centaur, LLC
L3 Cincinnati Electronics Corporation
L3 Commercial Training Solutions Limited
L-3 Communications AIS GP Corporation
L-3 Communications ASA Limited
L-3 Communications Australia Pty Ltd
L-3 Communications Flight Capital LLC
L-3 Communications Holding GmbH
L-3 Communications Hong Kong Limited
L-3 Communications India Private Limited
L-3 Communications Integrated Systems L.P.
L-3 Communications Investments Inc.
L-3 Communications Korea Co., Ltd.
L-3 Communications Limited
L-3 Communications Link Simulation and Training UK (Overseas) Limited
L-3 Communications Singapore Pte. Ltd.
L-3 Communications U.K. Ltd.
L3 CTS Airline Academy (NZ) Limited
L3 CTS Airline and Academy Training Limited
L-3 Domestic Holdings, Inc.
L3 Doss Aviation, Inc.
L3 Electron Devices, Inc.
L3 ESSCO, Inc.
L3 Foreign Holdings, Inc.
L3 Fuzing and Ordnance Systems, Inc.
L-3 Global Holding UK Ltd.
L3 International Australia Pty Ltd
L-3 International UK Ltd
L3 Investments UK Holdings Ltd
L3 Investments, LLC
L3 Kenya LTD
L3 Kigre, Inc.
L3 Latitude, LLC
L3 Magnet-Motor GmbH
L3 MAPPS INC.
L3 MAPPS Limited
L3 MAPPS Sdn. Bhd.
L3 Micreo Pty Limited
L3 Oceania Pty Limited
L3 Open Water Power, Inc.
L-3 Saudi Arabia LLC
L3 Security and Detection Systems, Inc.
L-3 Security Equipment Trading (Beijing) Co., Ltd.
L-3 Societá Srl.
L3 Technologies Australia Group Pty Ltd
L3 Technologies Canada Group Inc.
L3 Technologies Canada Inc.
L3 Technologies Investments Limited
State or Other
Jurisdiction of Incorporation
Delaware
Australia
Delaware
Brazil
Delaware
Ohio
United Kingdom
Delaware
United Kingdom
Australia
Delaware
Germany
Hong Kong
India
Delaware
Delaware
Korea
United Kingdom
United Kingdom
Singapore
United Kingdom
New Zealand
United Kingdom
Delaware
Texas
Delaware
Delaware
Delaware
Delaware
United Kingdom
Australia
United Kingdom
United Kingdom
Delaware
Kenya
Ohio
Arizona
Germany
Canada
United Kingdom
Malaysia
Australia
Australia
Delaware
Saudi Arabia
Delaware
China
Italy
Australia
Canada
Canada
Cyprus
Name of Subsidiary
L3 Technologies MAS Inc.
L3 Technologies UK Group Ltd
L3 Technologies, Inc.
L-3 Technology & Services UK Ltd
L3 Unidyne, Inc.
L3 Unmanned Systems, Inc.
L3 Westwood Corporation
Linchpin Labs Inc.
Linchpin Labs Inc.
Linchpin Labs Limited
Linchpin Labs Limited
Linchpin Labs Pty Limited
L-Tres Comunicaciones Costa Rica, S.A.
MacDonald Humfrey (Automation) India Private Limited*
MacDonald Humfrey (Automation) Limited
MacDonald Humfrey (Automation) SEA PTE. Ltd.
MacDonald Humfrey Automation Middle East Control Systems LLC*
Manatee Investment, LLC
Manu Kai, LLC*
Melbourne Leasing, LLC
Mustang Technology Group, L.P.
Narda Safety Test Solutions GmbH
Narda Safety Test Solutions S.r.l.
NexGen Communications, LLC
Peak Nano Optics, LLC
Power Paragon, Inc.
Riptide Autonomous Solutions LLC
S.C. Harris Assured Communications SRL
SARL Assured Communications
Sovcan Star Satellite Communications Inc.
SPD Electrical Systems, Inc.
Sunshine General Services, LLC
TRL Electronics Limited
TRL Technology Limited
Wescam Inc.
Wescam USA, Inc.
_______________
* Subsidiary of L3Harris Technologies, Inc. less than 100% directly or indirectly owned by L3Harris Technologies, Inc.
State or Other
Jurisdiction of Incorporation
Canada
United Kingdom
Delaware
United Kingdom
Delaware
Texas
Nevada
Canada
Delaware
United Kingdom
New Zealand
Australia
Costa Rica
India
United Kingdom
Singapore
UAE
Delaware
Hawaii
Florida
Texas
Germany
Italy
Virginia
Delaware
Delaware
Delaware
Romania
Algeria
Canada
Delaware
Iraq
United Kingdom
United Kingdom
Canada
Florida
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
We consent to the incorporation by reference in the following Registration Statements:
Form S-3
Form S-4/A
Form S-8
Form S-8
Form S-8
Form S-8
Form S-8
Form S-8
Form S-8
No. 333-233827
No. 333-228829
No. 333-232482
L3Harris Technologies, Inc. Debt and Equity Securities
Harris Corporation Shares of Common Stock
L3 Technologies, Inc. Amended and Restated 2008 Long
Term Performance Plan; L3 Technologies, Inc. Master
Savings Plan; and Aviation Communications &
Surveillance Systems 401(k) Plan
No. 333-222821
Harris Corporation Retirement Plan
No. 333-192735
Harris Corporation Retirement Plan
No. 333-163647
No. 333-75114
No. 333-130124
No. 333-207774
Harris Corporation Retirement Plan
Harris Corporation Retirement Plan
Harris Corporation 2005 Equity Incentive Plan
Harris Corporation 2015 Equity Incentive Plan
of our reports dated March 3, 2020, with respect to the consolidated financial statements of L3Harris Technologies, Inc. and the effectiveness
of internal control over financial reporting of L3Harris Technologies, Inc. included in this Transition Report (Form 10-KT) of L3Harris
Technologies, Inc. for the transition period from June 29, 2019 to January 3, 2020.
/s/ Ernst & Young LLP
Orlando, Florida
March 3, 2020
POWER OF ATTORNEY
KNOW TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints SCOTT T.
MIKUEN and ROBERT A. JOHNSON JR., each and individually, as his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for and in the name, place and stead of the undersigned, for him or her in any and all capacities, to sign the
Transition Report on Form 10-KT of L3Harris Technologies, Inc., a Delaware corporation, with respect to the fiscal transition period ended
January 3, 2020, and to sign any and all amendments to such Transition Report on Form 10-KT and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary in connection
with such matters and hereby ratifying and confirming all that each such attorneys-in-fact or agents or their substitutes, may do or cause to be
done by virtue hereof. This Power of Attorney may be signed in counterparts.
Exhibit 24
Date: March 3, 2020.
/s/ WILLIAM M. BROWN
William M. Brown
Chairman and Chief Executive Officer
/s/ THOMAS A. DATTILO
Thomas A. Dattilo
Director
/s/ CHRISTOPHER E. KUBASIK
Christopher E. Kubasik
Vice Chairman, President and Chief Operating Officer
/s/ ROGER B. FRADIN
Roger B. Fradin
Director
/s/ JESUS MALAVE JR.
Jesus Malave Jr.
Senior Vice President and Chief Financial Officer
/s/ TODD A. TAYLOR
Todd A. Taylor
Vice President, Principal Accounting Officer
/s/ SALLIE B. BAILEY
Sallie B. Bailey
Director
/s/ PETER W. CHIARELLI
Peter W. Chiarelli
Director
/s/ THOMAS A. CORCORAN
Thomas A. Corcoran
Director
/s/ LEWIS HAY III
Lewis Hay III
Director
/s/ LEWIS KRAMER
Lewis Kramer
Director
/s/ RITA S. LANE
Rita S. Lane
Director
/s/ ROBERT B. MILLARD
Robert B. Millard
Director
/s/ LLOYD W. NEWTON
Lloyd W. Newton
Director
CERTIFICATION
Exhibit 31.1
I, William M. Brown, Chairman and Chief Executive Officer of L3Harris Technologies, Inc., certify that:
1.
I have reviewed this Transition Report on Form 10-KT for the fiscal transition period ended January 3, 2020 of L3Harris
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 3, 2020
/s/ William M. Brown
Name:
Title:
William M. Brown
Chairman and Chief Executive Officer
CERTIFICATION
Exhibit 31.2
I, Jesus Malave Jr., Senior Vice President and Chief Financial Officer of L3Harris Technologies, Inc., certify that:
1.
I have reviewed this Transition Report on Form 10-KT for the fiscal transition period ended January 3, 2020 of L3Harris
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 3, 2020
/s/ Jesus Malave Jr.
Name:
Title:
Jesus Malave Jr.
Senior Vice President and Chief Financial Officer
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the filing of the Transition Report on Form 10-KT of L3Harris Technologies, Inc. (“L3Harris”)
for the fiscal transition period ended January 3, 2020, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), the undersigned, William M. Brown, Chairman and Chief Executive Officer of L3Harris, hereby certifies,
pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of L3Harris as of the dates and for the periods expressed in the Report.
Date: March 3, 2020
/s/ William M. Brown
Name:
Title:
William M. Brown
Chairman and Chief Executive Officer
Certification
Pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the filing of the Transition Report on Form 10-KT of L3Harris Technologies, Inc. (“L3Harris”)
for the fiscal transition period ended January 3, 2020, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), the undersigned, Jesus Malave Jr., Senior Vice President and Chief Financial Officer of L3Harris, hereby
certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of L3Harris as of the dates and for the periods expressed in the Report.
Date: March 3, 2020
/s/ Jesus Malave Jr.
Name:
Title:
Jesus Malave Jr.
Senior Vice President and Chief Financial
Officer
INFORMATION FOR
SHAREHOLDERS
CORPORATE HEADQUARTERS
L3Harris Technologies
1025 West NASA Boulevard
Melbourne, FL 32919–0001
1–321–727–9100
L3Harris.com
L3HARRIS
T E C H N O L O G I E S
NYSE:LHX
STOCK EXCHANGE
L3Harris stock is listed and traded on the
New York Stock Exchange. Ticker Symbol: LHX
TRANSFER AGENT AND REGISTRAR
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
1–888–261–6777 | Outside the U.S., please dial 1–201–680–6578
www.computershare.com/investor
the
records
SHAREHOLDER SERVICES
Computershare maintains
registered
shareholders and can assist you with a variety of shareholder–
related services at no charge. The Computershare automated
telephone voice response system, at 1–888–261–6777, is available
24 hours a day, 7 days a week, to conduct a wide variety of secure
transactions.
for our
Electronic access to your financial statements and shareholder
communications is available 24 hours a day, 7 days a week, via
Computershare’s website,
Visit
this website to view and print Investment Plan Statements,
Investor Activity Reports, 1099 tax documents, notification of ACH
transmissions, transaction activities, annual meeting materials and
other selected correspondence.
computershare.com/investor.
You also can send mail to Computershare at:
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
(U.S. mail only)
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
(Overnight delivery only)
ANNUAL MEETING
The annual meeting of shareholders will be held April 24, 2020
at The Grand America Hotel
in Salt Lake City, Utah
starting at 7:30 a.m. MT.
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP | Orlando, Florida
TELL US WHAT YOU THINK!
Share your Transition Report feedback:
annualreport@L3Harris.com
forward–looking
FORWARD–LOOKING STATEMENTS
This report, including the letter to shareholders,
contains forward–looking statements that are
based on the views of management regarding
future events at the time of publication of this
report. These
statements,
which include, but are not limited to: our plans,
strategies and objectives for future operations;
new products, services or developments; future
economic conditions; outlook; the value of
contract and program awards; the effect of the
merger on our business; our growth potential; and
the potential of the industries and markets we
serve, are subject to known and unknown risks,
uncertainties and other factors that may cause
our actual results to be materially different from
those expressed in or implied by each forward–
looking statement. These risks, uncertainties and
other factors are discussed in our Form 10–KT for
the fiscal transition period ended January 3, 2020.
ANNUAL CERTIFICATIONS
The most recent certifications by our Chief
Executive Officer and Chief Financial Officer
pursuant to sections 302 and 906 of the
Sarbanes–Oxley Act of 2002 were filed as exhibits
to our Form 10–KT for the fiscal transition period
ended January 3, 2020. Our most recent annual
CEO certification regarding L3Harris compliance
with corporate governance listing standards was
submitted to the New York Stock Exchange in
November 2019.
This report is printed on Neo Star Gloss Cover, Neo Star
Gloss Text, and Lynx Opaque papers that are Forest
Stewardship Council® (FSC®) certified.
DESIGN: CDW STRATEGIC COMMUNICATIONS, INC.
PRINTING: RR DONNELLEY—ORLANDO PLANT
L3HARRIS TECHNOLOGIES
1025 West NASA Boulevard
Melbourne, Florida 32919-0001
U.S.: 1–800–442–7747
International: 1–321–727–9100
L3Harris.com