Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page
Management’s Report on Internal Control Over Financial Reporting	55
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements	56
Report of Independent Registered Public Accounting Firm on the Effectiveness of Internal Control Over Financial Reporting	57
Consolidated Statement of Income — Fiscal Years ended June 29, 2018; June 30, 2017; and July 1, 2016	58
Consolidated Statement of Comprehensive Income (Loss) — Fiscal Years ended June 29, 2018; June 30, 2017; and July 1, 2016	59
Consolidated Balance Sheet — June 29, 2018 and June 30, 2017	60
Consolidated Statement of Cash Flows — Fiscal Years ended June 29, 2018; June 30, 2017; and July 1, 2016	61
Consolidated Statement of Equity — Fiscal Years ended June 29, 2018; June 30, 2017; and July 1, 2016	62
Notes to Consolidated Financial Statements	63
Supplementary Financial Information	101
Schedule II — Valuation and Qualifying Accounts — Fiscal Years ended June 29, 2018; June 30, 2017; and July 1, 2016	113

MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

The management of Harris Corporation (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 June 29, 2018. 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 June 29, 2018.

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 57 of this Annual Report on Form 10-K.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Harris Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Harris Corporation (the Company) as of June 29, 2018 and June 30, 2017, the related consolidated statements of income, comprehensive income (loss), cash flows and equity for each of the three years in the period ended June 29, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(2), 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 June 29, 2018 and June 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 29, 2018, 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 June 29, 2018, 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 August 27, 2018 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.

/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

August 27, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Harris Corporation

Opinion on Internal Control over Financial Reporting

We have audited Harris Corporation’s internal control over financial reporting as of June 29, 2018, 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, Harris Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of June 29, 2018, 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 Harris Corporation as of June 29, 2018 and June 30, 2017, the related consolidated statements of income, comprehensive income (loss), cash flows and equity for each of the three years in the period ended June 29, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(2) and our report dated August 27, 2018 expressed an unqualified opinion thereon.

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

August 27, 2018

CONSOLIDATED STATEMENT OF INCOME

	Fiscal Years Ended
	2018				2017				2016
	(In millions, except per share amounts)
Revenue from product sales and services
Revenue from product sales	$	5,062			$	4,667			$	4,814
Revenue from services	1,120				1,233				1,178
	6,182				5,900				5,992
Cost of product sales and services
Cost of product sales	(3,106		)		(2,964		)		(3,079		)
Cost of services	(825		)		(770		)		(753		)
	(3,931		)		(3,734		)		(3,832		)
Engineering, selling and administrative expenses	(1,129		)		(1,093		)		(1,105		)
Operating income	1,122				1,073				1,055
Non-operating income (loss)	(28		)		2				10
Interest income	2				2				2
Interest expense	(170		)		(172		)		(183		)
Income from continuing operations before income taxes	926				905				884
Income taxes	(205		)		(267		)		(273		)
Income from continuing operations	721				638				611
Discontinued operations, net of income taxes	(3		)		(85		)		(287		)
Net income	$	718			$	553			$	324
Net income per common share
Basic
Continuing operations	$	6.06			$	5.19			$	4.91
Discontinued operations	(0.02		)		(0.69		)		(2.30		)
	$	6.04			$	4.50			$	2.61
Diluted
Continuing operations	$	5.94			$	5.12			$	4.87
Discontinued operations	(0.02		)		(0.68		)		(2.28		)
	$	5.92			$	4.44			$	2.59

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

	Fiscal Years Ended
	2018				2017				2016
	(In millions)
Net income	$	718			$	553			$	324
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of income taxes	15				(34		)		(69		)
Net unrealized gain on hedging derivatives, net of income taxes	1				1				1
Net unrecognized gain (loss) on postretirement obligations, net of income taxes	93				200				(411		)
Other comprehensive income (loss), net of income taxes	109				167				(479		)
Total comprehensive income (loss)	$	827			$	720			$	(155	)

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEET

	June 29, 2018				June 30, 2017
	(In millions, except shares)
Assets
Current Assets
Cash and cash equivalents	$	288			$	484
Receivables	735				623
Inventories	925				841
Income taxes receivable	174				24
Other current assets	101				101
Total current assets	2,223				2,073
Non-current Assets
Property, plant and equipment	900				904
Goodwill	5,372				5,366
Other intangible assets	989				1,104
Non-current deferred income taxes	116				409
Other non-current assets	239				234
Total non-current assets	7,616				8,017
	$	9,839			$	10,090
Liabilities and Equity
Current Liabilities
Short-term debt	$	78			$	80
Accounts payable	622				540
Compensation and benefits	142				140
Other accrued items	313				329
Advance payments and unearned income	314				252
Income taxes payable	15				31
Current portion of long-term debt, net	304				554
Total current liabilities	1,788				1,926
Non-current Liabilities
Defined benefit plans	714				1,278
Long-term debt, net	3,408				3,396
Non-current deferred income taxes	90				34
Other long-term liabilities	517				528
Total non-current liabilities	4,729				5,236
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 118,280,120 shares at June 29, 2018 and 119,628,884 shares at June 30, 2017	118				120
Other capital	1,714				1,741
Retained earnings	1,692				1,343
Accumulated other comprehensive loss	(202		)		(276		)
Total shareholders’ equity	3,322				2,928
	$	9,839			$	10,090

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

	Fiscal Years Ended
	2018				2017				2016
	(In millions)
Operating Activities
Net income	$	718			$	553			$	324
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	158				183				229
Amortization of intangible assets from Exelis Inc. acquisition	101				128				132
Share-based compensation	82				42				39
Qualified pension plan contributions	(301		)		(589		)		(174		)
Pension income	(135		)		(97		)		(26		)
Net liability reduction for certain post-employment benefit plans	—				—				(101		)
Settlement of Exelis Inc. excess pension plan	—				—				(244		)
Impairment of goodwill and other assets	—				240				367
(Gain) loss on sales of businesses, net	—				14				(10		)
Adjustment to loss on sales of businesses, net	—				—				20
Loss on extinguishment of debt	24				—				—
(Increase) decrease in:
Accounts receivable	(112		)		111				192
Inventories	(84		)		28				(28		)
Increase (decrease) in:
Accounts payable	82				18				(10		)
Advance payments and unearned income	63				(42		)		(96		)
Income taxes	202				131				199
Other	(47		)		(151		)		111
Net cash provided by operating activities	751				569				924
Investing Activities
Cash paid for fixed income securities	—				—				(19		)
Net additions of property, plant and equipment	(136		)		(119		)		(152		)
Proceeds from sales of businesses, net	—				1,014				181
Adjustment to proceeds from sales of businesses, net	(2		)		(25		)		(11		)
Other investing activities	(3		)		—				—
Net cash provided by (used in) investing activities	(141		)		870				(1		)
Financing Activities
Net proceeds from borrowings	1,387				85				61
Repayments of borrowings	(1,658		)		(584		)		(730		)
Proceeds from exercises of employee stock options	34				54				44
Repurchases of common stock	(272		)		(710		)		—
Cash dividends	(272		)		(262		)		(252		)
Other financing activities	(24		)		(21		)		(16		)
Net cash used in financing activities	(805		)		(1,438		)		(893		)
Effect of exchange rate changes on cash and cash equivalents	(1		)		(4		)		(24		)
Net increase (decrease) in cash and cash equivalents	(196		)		(3		)		6
Cash and cash equivalents, beginning of year	484				487				481
Cash and cash equivalents, end of year	$	288			$	484			$	487

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF EQUITY

	Common Stock				Other Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Noncontrolling Interests				Total Equity
	(In millions, except per share amounts)
Balance at July 3, 2015	$	124			$	2,031			$	1,258			$	(16	)		$	5			$	3,402
Net income	—				—				324				—				—				324
Other comprehensive loss	—				—				—				(479		)		—				(479		)
Shares issued under stock incentive plans	1				43				—				—				—				44
Share-based compensation expense	—				37				—				—				—				37
Repurchases and retirement of common stock	—				(15		)		—				—				—				(15		)
Cash dividends ($2.00 per share)	—				—				(252		)		—				—				(252		)
Other activity related to noncontrolling interests	—				—				—				—				(4		)		(4		)
Balance at July 1, 2016	125				2,096				1,330				(495		)		1				3,057
Net income	—				—				553				—				—				553
Other comprehensive income	—				—				—				167				—				167
Net accumulated foreign currency loss reclassified to earnings	—				—				—				52				—				52
Shares issued under stock incentive plans	1				53				—				—				—				54
Share-based compensation expense	—				40				—				—				—				40
Repurchases and retirement of common stock	(6		)		(410		)		(278		)		—				—				(694		)
Forward contract component of accelerated share repurchase	—				(38		)		—				—				—				(38		)
Cash dividends ($2.12 per share)	—				—				(262		)		—				—				(262		)
Other activity related to noncontrolling interests	—				—				—				—				(1		)		(1		)
Balance at June 30, 2017	120				1,741				1,343				(276		)		—				2,928
Reclassifications due to adoption of accounting standards updates	—				—				35				(35		)		—				—
Net income	—				—				718				—				—				718
Other comprehensive income	—				—				—				109				—				109
Shares issued under stock incentive plans	—				33				—				—				—				33
Shares issued under defined contribution plans	—				31				—				—				—				31
Share-based compensation expense	—				49				—				—				—				49
Repurchases and retirement of common stock	(2		)		(178		)		(132		)		—				—				(312		)
Forward contract component of accelerated share repurchase	—				38				—				—				—				38
Cash dividends ($2.28 per share)	—				—				(272		)		—				—				(272		)
Balance at June 29, 2018	$	118			$	1,714			$	1,692			$	(202	)		$	—			$	3,322

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

Organization — Harris Corporation, together with its subsidiaries, is a leading technology innovator, solving customers’ toughest mission-critical challenges by providing solutions that connect, inform and protect. We support government and commercial customers in more than 100 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 the end of fiscal 2018, we had approximately 17,500 employees, including approximately 7,900 engineers and scientists.

Principles of Consolidation — Our Consolidated Financial Statements include the accounts of Harris Corporation and its consolidated subsidiaries. As used in these Notes to Consolidated Financial Statements (these “Notes”), the terms “Harris,” “Company,” “we,” “our” and “us” refer to Harris Corporation and its consolidated subsidiaries. Intracompany transactions and accounts have been eliminated.

In connection with our divestitures in fiscal 2017 of two significant businesses that were part of our Critical Networks segment, our remaining operations that had been part of our former Critical Networks segment were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. The historical results, discussion and presentation of our business segments set forth in our Consolidated Financial Statements and these Notes reflect the impact of these changes for all periods presented in order to present all segment information on a comparable basis. There is no impact on our previously reported consolidated statements of income, balance sheets or statement of cash flows resulting from these segment changes. See Note 3: Discontinued Operations and Divestitures for additional information related to divestitures, some of which were reported as discontinued operations in our 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.

Amounts contained in this Report may not always add to totals due to rounding.

Reclassifications — The classification of certain prior-year amounts have been adjusted in our Consolidated Financial Statements to conform to current-year classifications. Reclassifications include certain human resources, information technology (“IT”), direct selling and bid and proposal costs that were previously included as “Cost of product sales and services” line items and are now reflected in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income and in these Notes.

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 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.

Fiscal Year — Our fiscal year ends on the Friday nearest June 30. Each of our fiscal years 2018, 2017 and 2016 included 52 weeks.

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 12: Debt 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 5: Receivables for additional information regarding accounts receivable.

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 6: Inventories for additional information regarding inventories.

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 7: Property, Plant and Equipment 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 costs exceed the acquisition-date fair value of net identifiable assets acquired.

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 test goodwill for impairment at a level within the Company referred to as the reporting unit, which is our business segment level, and, if and when applicable, one level below the business segment.

We identify goodwill impairment and 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: Discontinued Operations and Divestitures and Note 8: Goodwill for additional information regarding goodwill.

Long-Lived Assets, Including Finite-Lived Intangible Assets — Long-lived assets, including finite-lived intangible assets, are amortized on a straight-line basis over their useful lives. 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. See Note 7: Property, Plant and Equipment and Note 9: Intangible Assets 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, as of June 29, 2018 or June 30, 2017. No accrued liabilities or expenses within the “Other accrued items” or “Other long-term liabilities” line items in our Consolidated Balance Sheet exceeded 5 percent of our total current liabilities or total liabilities, respectively, as of June 29, 2018 or June 30, 2017.

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 21: Income Taxes for additional information regarding income taxes.

Warranties — On development and production contract sales in our Electronic Systems and Space and Intelligence Systems segments, the value or price of our warranty is generally included in the contract and funded by the customer. A provision for warranties is built into the estimated program costs when determining the profit rate to accrue when applying the cost-to-cost percentage-of-completion (“POC”) revenue recognition method. Warranty costs, as incurred, are charged to the specific program’s cost, and both revenue and cost are recognized at that time. Factors that affect the estimated program cost for warranties include terms of the contract, complexity of the delivered product or service, number of installed units, historical experience and management’s assumptions regarding anticipated rates of warranty claims and cost per claim.

On product sales in all our segments, we provide for future standard warranty costs upon product delivery. The specific terms and conditions of those warranties vary depending on the product sold, customer and country in which we do business. In the case of products sold by us, our warranties start from the shipment, delivery or customer acceptance date and continue as follows:

Segment		Average Warranty Period
Communication Systems		One to five years
Electronic Systems		One to two years
Space and Intelligence Systems		60 days 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 10: Accrued Warranties 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 14: Stock Options and Other Share-Based Compensation 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 for additional information regarding restructuring and other exit costs.

Revenue Recognition — Our segments have the following revenue recognition policies:

Development and Production Contracts: Estimates and assumptions, and changes therein, are important in connection with, among others, our segments’ revenue recognition policies related to development and production contracts. Revenue and profits related to development and production contracts are recognized using the POC method, generally based on the ratio of costs incurred to estimated total costs at completion under the contract (i.e., the “cost-to-cost” method) with consideration given for risk of performance and estimated profit. Revenue and profits on cost-reimbursable development and production contracts are recognized as allowable costs are incurred on the contract and become billable to the customer, in an amount equal to the allowable costs plus the profit on those costs.

Development and production contracts are combined when specific aggregation criteria are met. Criteria generally include closely interrelated activities performed for a single customer within the same economic environment. Development

and production contracts are generally not segmented. If development and production contracts are segmented, we have determined that they meet specific segmenting criteria. Change orders, claims or other items that may change the scope of a development and production contract are included in contract value only when the value can be reliably estimated and realization is probable. Possible incentives or penalties and award fees applicable to performance on development and production contracts are considered in estimating contract value and profit rates and are recorded when there is sufficient information to assess anticipated contract performance. Incentive provisions that increase earnings based solely on a single significant event are generally not recognized until the event occurs. We are party to certain contracts with incentive provisions or award fees that are subject to uncertainty until the conclusion of the contract and our customers may be entitled to reclaim and receive previous award fee payments.

Under the POC method of accounting, a single estimated total profit margin is used to recognize profit for each development and production contract over its period of performance. Recognition of profit on a development and production fixed-price contract requires estimates of the total cost at completion and the measurement of progress toward completion. The estimated profit or loss on a development and production contract is equal to the difference between the estimated contract value and the estimated total cost at completion. Due to the long-term nature of many of our programs, developing the estimated total cost at completion 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, the risk and impact of delayed performance, availability and timing of funding from the customer and the recoverability of any claims outside the original development and production contract included in the estimate to complete. 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 development and production 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, at the outset of a cost-reimbursable contract (for example, contracts containing award or incentive fees), we establish an estimate of total contract value, or revenue, based on our expectation of performance on the contract. As the cost-reimbursable contract progresses, our estimates of total contract value may increase or decrease if, for example, we receive higher or lower than expected award fees. When adjustments in estimated total costs at completion or in estimated total contract value are determined, the related impact to 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. Anticipated losses on development and production contracts or programs in progress are charged to operating income when identified. Net EAC adjustments resulting from changes in estimates favorably impacted our operating income by $2 million ($.01 per diluted share) in fiscal 2018, $14 million ($8 million after-tax or $.07 per diluted share) in fiscal 2017 and $68 million ($42 million after-tax or $.33 per diluted share) in fiscal 2016.

Products and Services Other Than Development and Production Contracts: Revenue from product sales other than development and production contracts and revenue from service arrangements are recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is reasonably assured, and delivery of a product has occurred and title has transferred or services have been rendered. Unearned income on service contracts is amortized by the straight-line method over the term of the contracts. Also, if contractual obligations related to customer acceptance exist, revenue is not recognized for a product or service unless these obligations are satisfied.

Multiple-Element Arrangements: We have entered into arrangements other than development and production contracts that require the delivery or performance of multiple deliverables or elements under a bundled sale. These arrangements are most prevalent in our Communication Systems segment. For example, in our Communication Systems segment, in addition to delivering secure tactical radios and accessories, we may be required to perform or provide installation, design and development solutions for custom communication infrastructures, and extended warranties.

For arrangements with multiple elements, judgment is required to determine the appropriate accounting, including whether the individual deliverables represent separate units of accounting for revenue recognition purposes, and the timing of revenue recognition for each deliverable. We recognize revenue for contractual deliverables as separate units of accounting when the delivered items have value to the customer on a standalone basis (i.e., if they are sold separately by any vendor or the customer could resell the delivered items on a standalone basis) and, if the arrangement includes a general right of return relative to the delivered items, we consider delivery or performance of the undelivered items as probable and substantially in our control.

Deliverables that are not separable are accounted for as a combined unit of accounting, and revenue generally is recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is reasonably assured, and delivery of a product has occurred and title has transferred or services have been rendered. If we determine that the deliverables represent separate units of accounting, we recognize the revenue associated with each unit of accounting separately, and contract revenue is allocated among the separate units of accounting at the inception of the arrangement based

on relative selling price. If options or change orders materially change the scope of work or price of the contract subsequent to inception, we reevaluate and adjust our prior conclusions regarding units of accounting and allocation of contract revenue as necessary. The allocation of selling price among the separate units of accounting may impact the timing of revenue recognition, but will not change the total revenue recognized on the arrangement. We establish the selling price used for each deliverable based on the vendor-specific objective evidence (“VSOE”) of selling price, or third-party evidence (“TPE”) of selling price if VSOE of selling price is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE of selling price is available. In determining VSOE of selling price, a substantial majority of the recent standalone sales of the deliverable must be priced within a relatively narrow range. In determining TPE of selling price, we evaluate competitor prices for similar deliverables when sold separately. Generally, comparable pricing of our products to those of our competitors with similar functionality cannot be obtained. In determining BESP, we consider both market data and entity-specific factors, including market conditions, the geographies in which our products are sold, our competitive position and strategy, and our profit objectives.

Bill-and-Hold Arrangements: Certain contracts include terms and conditions through which we recognize revenue upon completion of equipment production, which is subsequently stored at our location at the customer’s request. Revenue is recognized on such contracts upon the customer’s assumption of title and risk of ownership and when collectibility is reasonably assured. At the time of revenue recognition, there is a schedule of delivery of the product consistent with the customer’s business practices, the product has been separated from our inventory, and we do not have any remaining performance obligations such that the earnings process is not complete.

Other: Net income or expense related to intellectual property matters is included as a component of the “Non-operating income (loss)” line item in our Consolidated Statement of Income and is recognized on the basis of terms specified in contractual agreements. Shipping and handling fees billed to customers are included in the “Revenue from product sales” line item in our Consolidated Statement of Income and the associated costs are included in the “Cost of product sales” line item in our Consolidated Statement of Income. Also, we record taxes collected from customers and remitted to governmental authorities on a net basis in that they are excluded from revenue.

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 healthcare 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.

Beginning in 2017, we changed the approach used to estimate the service and interest components of net periodic benefit cost of the U.S. defined benefit plans. The new estimation approach discounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used to discount the cash flows in determining the benefit obligation. Prior to fiscal 2017, the service and interest cost components were determined by a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. We accounted for this change as a change in accounting estimate and accordingly have accounted for it prospectively. This change resulted in approximately $46 million of lower service and interest costs for our U.S. defined benefit plans in fiscal 2017 compared with the single weighted-average discount rate method.

See Note 13: Pension and Other Postretirement Benefits 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 June 29, 2018, we were named, and continue to be named, as a potentially responsible party at 60 sites where future liabilities could exist. These sites included 5 sites owned by us, 46 sites associated with our former locations or operations and 9 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 $103 million, consisting of approximately $97 million for environmental liabilities related to Exelis operations and approximately $6 million for other environmental liabilities. In each case, 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 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 June 29, 2018, 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. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. We do not hold or issue derivatives for speculative trading purposes. See Note 18: Derivative Instruments and Hedging Activities 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. Our restricted stock awards and restricted stock unit awards generally meet the definition of participating securities and are included in the computations of income from continuing operations per basic and diluted common share. Our performance share awards and performance share unit awards do not meet the definition of participating securities because they do not contain rights to receive nonforfeitable dividends and, therefore, are excluded from the computations of income from continuing operations per basic and diluted common share. 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 15: Income From Continuing Operations Per Share for additional information.

Business Segments — We evaluate each segment’s performance based on its operating income or loss, which we define as profit or loss from operations before income taxes 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 items in Note 22: Business Segments represent the elimination of intersegment sales. The “Unallocated corporate expense and corporate eliminations” line item in Note 22: Business Segments represents the portion of corporate expenses not allocated to our business segments and elimination of intersegment profits.

NOTE 2: ACCOUNTING CHANGES OR RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In the first quarter of fiscal 2018, we adopted an accounting standards update issued by the Financial Accounting

Standards Board (“FASB”) that requires recognition of the income tax consequences of intra-entity transfers of assets other

than inventory when the transfer occurs. Consequently, this update eliminates the exception to the recognition of current and

deferred income taxes for intra-entity transfers of assets other than for inventory until the assets have been sold to an outside

party. This update requires entities to apply a modified retrospective approach with a cumulative catch-up adjustment to

beginning retained earnings in the period of adoption. In addition, entities are required to record deferred tax balances with an

offset to retained earnings for unrecognized amounts that will be recognized under this update. We applied all changes

required by this update using the modified retrospective approach from the beginning of fiscal 2018. Adopting this update

resulted in a $27 million reduction of prepaid income tax assets from the “Other current assets” and “Other non-current

assets” line items and a $27 million increase in the “Non-current deferred income taxes” line item in our Condensed

Consolidated Balance Sheet (Unaudited) as of September 29, 2017.

In the fourth quarter of fiscal 2018, we adopted an accounting standards update issued by the FASB that allows companies to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), from accumulated other comprehensive loss to retained earnings. Stranded tax effects are the deferred tax amounts recorded through other comprehensive income, using a 35% statutory rate, that remained after we remeasured our net deferred tax assets and liabilities to reflect the lower enacted corporate tax rates. We elected to early adopt this accounting standards update and elected to reclassify, in the period of enactment, stranded tax effects totaling $35 million from the “Accumulated other comprehensive loss” line item to the “Retained earnings” line item in our Consolidated Balance Sheet. The reclassification amount primarily included income tax effects related to our pension and postretirement benefit plans. Income tax effects remaining in accumulated other comprehensive income will be released into earnings as the related pretax amounts are reclassified to earnings.

Accounting Standards Issued But Not Yet Effective

In May 2014, the FASB issued a comprehensive new revenue recognition standard that supersedes nearly all revenue recognition guidance under GAAP and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based and, consequently, entities will be required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations. The core principle of this standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the

revenue that is recognized, this standard requires significantly more interim and annual disclosures.

We adopted the new standard in fiscal 2019 using the full retrospective method, whereby the guidance in the new standard will be applied to each prior fiscal year presented and the cumulative effect of applying the guidance in the new standard will be recognized at the beginning of fiscal 2017. In preparation for the adoption of this standard, we formed a project team to assess customer contracts across our business segments and have periodically briefed our Audit Committee on the progress of our assessment. We designed and implemented controls over our assessment, including our calculation of the cumulative effect of adoption. We have also updated our accounting policies, redesigned certain business processes and systems, determined the extent of the expanded disclosure requirements and changed internal controls over financial reporting in connection with adopting the new standard.

We have completed our preliminary assessment of the impact of adopting the new standard, and the following table presents adjusted and as reported selected financial data:

	AS ADJUSTED (PRELIMINARY)								AS REPORTED
	2018				2017				2018				2017
	(In millions)
Revenue from product sales and services	$	6,171			$	5,897			$	6,182			$	5,900
Operating income	$	1,110			$	1,066			$	1,122			$	1,073

Although the adjusted selected results of operations presented above may not be indicative of our future results of operations, we do not expect the new standard to have a material impact on our financial condition, results of operations or cash flows after the period of adoption.

In March 2017, the FASB issued an accounting standards update to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This update requires that entities present components of net periodic pension cost and net periodic postretirement benefit cost other than the service cost component separately from the service cost component and outside the subtotal of income from operations. We will adopt the new standard in fiscal 2019, whereby the new guidance will be applied retrospectively to each prior fiscal year presented. Adopting this accounting standard will result in a decrease in operating income and an increase in the net non-operating components of income from continuing operations of $186 million, $184 million and $164 million for fiscal 2019, 2018 and 2017, respectively. Adopting this accounting standard will not have a material impact on our financial condition or cash flows.

In February 2016, the FASB issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires, among other things, the recognition of right-of-use (“ROU”) assets and liabilities on the balance sheet for all leases longer than 12 months and disclosure of certain information about leasing arrangements. The standard currently allows two transition methods whereby companies may elect to use the modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available, or to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020. We continue to evaluate the impact this standard will have on our financial condition, results of operations and cash flows, which could be material, and we have not yet made a decision on the adoption method, as this determination is primarily dependent on the completion of our analysis.

NOTE 3: DISCONTINUED OPERATIONS AND DIVESTITURES

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.

The major components of discontinued operations in our Consolidated Statement of Income included the following:

		Fiscal Years Ended
		2018				2017				2016
		(In millions)
Revenue from product sales and services		$	—			$	1,039			$	1,529
Cost of product sales and services		—				(885		)		(1,286		)
Engineering, selling and administrative expenses		—				(91		)		(150		)
Impairment of goodwill and other assets		—				(240		)		(367		)
Non-operating loss, net(1)		(8		)		(7		)		(4		)
Loss before income taxes		(8		)		(184		)		(278		)
Loss on sale of discontinued operations, net (2)		—				(11		)		(21		)
Income tax benefit(3)		5				110				12
Discontinued operations, net of income taxes		$	(3	)		$	(85	)		$	(287	)

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(1) “Non-operating loss, net” included losses of $2 million in fiscal 2017 and $4 million in fiscal 2016 related to our former broadcast communications business (“Broadcast Communications”), which was divested in fiscal 2013.

(2) “Loss on sale of discontinued operations, net” included a $3 million decrease and $21 million increase to the loss on the sale of Broadcast Communications in fiscal 2017 and 2016, respectively.

(3) “Income tax benefit” included a $4 million income tax benefit in fiscal 2016 related to Broadcast Communications.

Depreciation and amortization, capital expenditures and significant non-cash items of discontinued operations included the following:

	Fiscal Years Ended
	2017				2016
	(In millions)
Depreciation and amortization	$	39			$	78
Capital expenditures	4				19
Significant non-cash items:
Impairment of goodwill and other assets	(240		)		(367		)
Loss on sale of discontinued operations, net	(11		)		(21		)

IT Services

On April 28, 2017, we completed the divestiture to an affiliate of Veritas Capital Fund Management, L.L.C. (“Veritas”) 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. IT Services was part of our former Critical Networks segment and in connection with the definitive agreement to sell IT Services, as described above, the other remaining operations that had been apart of the Critical Networks segment, including our air traffic management (“ATM”) business, primarily serving the Federal Aviation Administration (“FAA”), were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. We agreed to provide various transition services to Veritas for a period of up to 18 months following the closing of the transaction pursuant to a separate agreement.

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. 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.

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:

	Fiscal Years Ended
	2018				2017				2016
	(In millions)
Revenue from product sales and services	$	—			$	895			$	1,168
Cost of product sales and services	—				(777		)		(1,002		)
Engineering, selling and administrative expenses	—				(68		)		(84		)
Impairment of goodwill and other assets	—				(240		)		—
Non-operating loss	(4		)		(9		)		—
Income (loss) before income taxes	(4		)		(199		)		82
Loss on sale of discontinued operation	—				(28		)		—
Income tax benefit (expense)	5				69				(30		)
Discontinued operations, net of income taxes	$	1			$	(158	)		$	52

CapRock

On January 1, 2017, we completed the divestiture to SpeedCast International Ltd. (“SpeedCast”) 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 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:

	Fiscal Years Ended
	2018				2017				2016
	(In millions)
Revenue from product sales and services	$	—			$	144			$	361
Cost of product sales and services	—				(108		)		(284		)
Engineering, selling and administrative expenses	—				(23		)		(66		)
Impairment of goodwill and other assets	—				—				(367		)
Non-operating income (loss)	(4		)		4				—
Income (loss) before income taxes	(4		)		17				(356		)
Gain on sale of discontinued operation	—				14				—
Income tax benefit	—				41				38
Discontinued operations, net of income taxes	$	(4	)		$	72			$	(318	)

Indications of potential impairment of goodwill related to CapRock (which was part of our former Critical Networks segment) were present at the end of the second quarter of fiscal 2016 due to the downturn in the energy market and its impact on customer operations, which also resulted in a decrease in the fiscal 2016 outlook for CapRock. Consequently, in connection with the preparation of our financial statements for the second quarter of fiscal 2016, we performed an interim test of CapRock’s goodwill for impairment as of the end of the second quarter of fiscal 2016.

To test for potential impairment of goodwill related to CapRock, we prepared an estimate of the fair value of the reporting unit based on projected discounted cash flows. The current carrying value of the CapRock reporting unit exceeded its estimated

fair value, and accordingly, we allocated the estimated fair value to the assets and liabilities of the CapRock reporting unit to estimate the implied fair value of goodwill.

In conjunction with the above-described impairment test, we also conducted a test for impairment of other assets related to CapRock, including amortizable intangible assets and fixed assets, and impairment of these assets was considered prior to the conclusion of the goodwill impairment test. The estimated fair value of these other assets related to CapRock was determined based, in part, on an analysis of projected cash flows.

As a result of these impairment tests, we concluded that goodwill and other assets related to CapRock were impaired as of January 1, 2016, and we recorded an estimated non-cash impairment charge of $367 million, of which $290 million related to goodwill, which is included in the “Discontinued operations, net of income taxes” line item in our Consolidated Statement of Income for fiscal 2016. Most of the $367 million impairment charge was not deductible for tax purposes.

Broadcast Communications

On February 4, 2013, we completed the divestiture of Broadcast Communications, which provided digital media management solutions in support of broadcast customers, to an affiliate of The Gores Group, LLC (“Gores”) pursuant to a definitive Asset Sale Agreement entered into December 5, 2012 for $225 million, including $160 million in cash, subject to customary adjustments (including a post-closing working capital adjustment), a $15 million subordinated promissory note (which was collected in fiscal 2014) and an earnout of up to $50 million based on future performance. Broadcast Communications was recorded as discontinued operations in connection with the sale.

Based on a dispute between us and Gores over the amount of the post-closing working capital adjustment, we and Gores previously appointed a nationally recognized accounting firm to render a final determination of such dispute. On January 29, 2016, the accounting firm rendered its final determination as to the disputed items, in which it concluded substantially in our favor and partly in Gores’ favor. As a result of such determination, we recorded a loss in the second quarter of fiscal 2016 of $21 million ($17 million after-tax or $.14 per diluted share).

Divestitures

Aerostructures

On April 8, 2016, we completed the divestiture of our composite aerostructures business (“Aerostructures”), which designed and manufactured technically advanced, lightweight composite aerospace assembly structures, sub-assemblies and components for defense and commercial industries, for $187 million in cash at closing and the assumption of a $23 million capitalized lease. The operating results of Aerostructures through the date of divestiture are reported as part of our Electronic Systems segment. We recognized a net gain of $10 million on the sale, which is included in the “Non-operating income (loss)” line item in our Consolidated Statement of Income. Summarized financial information for Aerostructures is as follows:

	Fiscal Year Ended
	2016
	(In millions)
Revenue from product sales and services	$	60
Income before income taxes	5
Net gain on sale of business	10

NOTE 4: RESTRUCTURING AND OTHER EXIT COSTS

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 these charges 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 “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Consolidated Statement of Income.

Restructuring, Exelis Acquisition-Related Integration and Other Charges

In fiscal 2018, we recorded a $5 million charge for consolidation of certain Exelis Inc. (collectively with its subsidiaries, “Exelis”) facilities initiated in fiscal 2017. This charge is included as a component of the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income.

In fiscal 2017, we recorded $58 million of charges for integration and other costs in connection with our acquisition of Exelis, substantially all of which were included as a component of the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income.

In fiscal 2016, we recorded $33 million of restructuring charges for workforce reductions, facility consolidation and other costs and $121 million of charges at our corporate headquarters for integration and other costs (including $11 million for amortization for a step-up in inventory) in connection with our acquisition of Exelis. These charges are included as a component of the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income.

We had liabilities of $27 million and $43 million as of the end of fiscal 2018 and 2017, respectively, associated with these integration activities and previous restructuring actions. The majority of the remaining liabilities as of the end of fiscal 2018 will be paid within the next twelve months.

Other Exit-Related Charges

In fiscal 2018, we 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. These charges are included as a component of “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income. We had a liability of $18 million at June 29, 2018 associated with this exit activity, which was paid on July 2, 2018.

NOTE 5: RECEIVABLES

Receivables are summarized below:

	2018				2017
	(In millions)
Accounts receivable	$	468			$	368
Unbilled costs and accrued earnings on cost-plus contracts	269				258
	737				626
Less allowances for collection losses	(2		)		(3		)
	$	735			$	623

We expect to bill during fiscal 2019 the majority of unbilled costs and accrued earnings outstanding at June 29, 2018.

We have a receivables sale agreement (“RSA”) with a third-party financial institution that permits us to sell, on a nonrecourse basis, up to $50 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 sale. Outstanding accounts receivable sold pursuant to the RSA were not material as of the end of fiscal 2018, 2017 and 2016.

NOTE 6: INVENTORIES

Inventories are summarized below:

	2018				2017
	(In millions)
Unbilled costs and accrued earnings on fixed-price contracts	$	531			$	454
Finished products	91				96
Work in process	104				96
Raw materials and supplies	199				195
	$	925			$	841

Unbilled costs and accrued earnings on fixed-price contracts were net of progress payments of $99 million and $90 million at June 29, 2018 and June 30, 2017, respectively.

NOTE 7: PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized below:

	2018				2017
	(In millions)
Land	$	43			$	43
Software capitalized for internal use	171				155
Buildings	620				617
Machinery and equipment	1,349				1,256
	2,183				2,071
Less accumulated depreciation and amortization	(1,283		)		(1,167		)
	$	900			$	904

Depreciation and amortization expense related to property, plant and equipment was $143 million, $147 million and $160 million in fiscal 2018, 2017 and 2016, respectively.

NOTE 8: GOODWILL

The assignment of goodwill by business segment, and changes in the carrying amount of goodwill for the fiscal years ended June 29, 2018 and June 30, 2017, by business segment, were as follows:

		Communication Systems				Electronic Systems				Space and Intelligence Systems				Total
		(In millions)
Balance at July 1, 2016		$	781			$	3,093			$	1,478			$	5,352
Currency translation adjustments		2				(4		)		(1		)		(3		)
Other		2				15				—				17
Balance at June 30, 2017		785				3,104				1,477				5,366
Currency translation adjustments		—				3				3				6
Balance at June 29, 2018		$	785			$	3,107			$	1,480			$	5,372

NOTE 9: INTANGIBLE ASSETS

We assess the recoverability of the carrying value of our long-lived assets, including intangible assets with finite useful lives, whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable.

Intangible assets are summarized below:

	2018												2017
	Gross Carrying Amount				Accumulated Amortization				Net				Gross Carrying Amount				Accumulated Amortization				Net
	(In millions)
Customer relationships	$	1,206			$	327			$	879			$	1,205			$	233			$	972
Developed technologies	208				119				89				208				101				107
Trade names	43				22				21				58				34				24
Other	2				2				—				2				1				1
Total intangible assets	$	1,459			$	470			$	989			$	1,473			$	369			$	1,104

Amortization expense related to intangible assets was $117 million, $126 million and $129 million in fiscal 2018, 2017 and 2016, respectively, including approximately $101 million, $109 million and $109 million, respectively, of amortization expense for intangible assets related to our acquisition of Exelis.

Future estimated amortization expense for intangible assets is as follows:

	(In millions)
Fiscal Years:
2019	$	115
2020	102
2021	102
2022	101
2023	101
Thereafter	468
Total	$	989

NOTE 10: ACCRUED WARRANTIES

Changes in our liability for standard product warranties, which is included as a component of the “Other accrued items” and “Other long-term liabilities” line items in our Consolidated Balance Sheet, during fiscal 2018 and 2017, were as follows:

	2018				2017
	(In millions)
Balance at beginning of fiscal year	$	26			$	32
Warranty provision for sales	13				14
Settlements	(14		)		(16		)
Other, including adjustments for acquisitions and foreign currency translation	(1		)		(4		)
Balance at end of fiscal year	$	24			$	26

We also sell extended product warranties and recognize revenue from these arrangements over the warranty period. Costs of warranty services under these arrangements are recognized as incurred. Deferred revenue associated with extended product warranties at June 29, 2018 and June 30, 2017 was $16 million and $23 million, respectively, and is included as a component of the “Advance payments and unearned income” and “Other long-term liabilities” line items in our Consolidated Balance Sheet.

NOTE 11: CREDIT ARRANGEMENTS

On June 26, 2018, we established a new $1 billion, 5-year senior unsecured revolving credit facility (the “2018 Credit Facility”) by entering into a Revolving Credit Agreement (the “2018 Credit Agreement”) with a syndicate of lenders. The 2018 Credit Facility replaced our prior $1 billion, 5-year senior unsecured revolving credit facility established under the Revolving Credit Agreement, dated as of July 1, 2015 (the “2015 Credit Agreement”). No loans or letters of credit under the 2015 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. We 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.

The 2018 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 2018 Credit Agreement, in an aggregate principal amount at any time outstanding not to exceed $1 billion for both revolving loans and letters of credit, with a sub-limit of $70 million for swingline loans and a sub-limit of $175 million for letters of credit. Borrowings under the 2018 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 $200 million. The 2018 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 2018 Credit Agreement by an amount not to exceed $500 million. 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 2018 Credit Agreement exceed $1.5 billion. The proceeds of loans or letters of credit borrowings under the 2018 Credit Agreement are restricted from being used for hostile acquisitions (as defined in the 2018 Credit Agreement) or for any purpose in contravention of applicable laws. We are not otherwise restricted under the 2018 Credit Agreement from using the proceeds of loans or letters of credit borrowings under the 2018 Credit Agreement for working capital and other general corporate purposes or from using the 2018 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 2018 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 2018 Credit Agreement at any time during the term of the 2018 Credit Agreement.

The 2018 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 2018 Credit Agreement. The obligations of any such subsidiary borrower shall be guaranteed by us.

The 2018 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 2018 Credit Agreement do not apply in respect of such subsidiaries.

At our election, borrowings under the 2018 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 1.500%, but may increase (to a maximum amount of 2.000%) 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 2018 Credit Agreement) plus 1.000%. The applicable interest rate margin over the base rate is initially equal to 0.500%, but may increase (to a maximum amount of 1.000%) or decrease (to a minimum amount of 0.125%) based on changes in our Senior Debt Ratings.

Borrowings under the 2018 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 2018 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 2018 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 2018 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 2018 Credit Agreement documentation; absence of any requirement for governmental or third party authorization for the due execution, delivery and performance of the 2018 Credit Agreement documentation; enforceability of the 2018 Credit Agreement documentation; accuracy of financial statements; no material adverse effect since June 30, 2017; absence of material undisclosed litigation on June 26, 2018; 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 2018 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 2018 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 2018 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 2018 Credit Agreement, to be greater than 0.65:1.00. We were in compliance with the covenants in the 2018 Credit Agreement at June 29, 2018.

The 2018 Credit Agreement contains certain events of default, including: failure to make payments under the 2018 Credit Agreement; failure to perform or observe terms, covenants or agreements contained in the 2018 Credit Agreement; material inaccuracy of any representation or warranty under the 2018 Credit Agreement; payment default by us or certain of our subsidiaries under other indebtedness with a principal amount in excess of $100 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 $100 million that remain unsatisfied; incurrence by us or certain of our subsidiaries of certain ERISA liability in excess of $100 million; any bankruptcy or insolvency of Harris or any material subsidiary; invalidity of 2018 Credit Agreement documentation; or a change of control (as defined in the 2018 Credit Agreement) of Harris. 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 2018 Credit Agreement are due on June 26, 2023, unless (i) the commitments are terminated earlier either at our request or if certain events of default described in the 2018 Credit Agreement occur or (ii) the maturity date is extended pursuant to provisions allowing us, from time to time after June 26, 2019, 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 during the term of the 2018 Credit Agreement), subject to approval by lenders holding a majority of the commitments under the 2018 Credit Agreement and satisfaction of certain conditions stated in the 2018 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 2018 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 2018 Credit Agreement of such declining lenders shall terminate, on the maturity date in effect prior to the requested extension. At June 29, 2018, we had no borrowings outstanding under the 2018 Credit Facility, but we had $75 million of short-term debt outstanding under our commercial paper program that was supported by the 2018 Credit Facility.

NOTE 12: DEBT

Long-Term Debt

Long-term debt is summarized below:

	2018				2017
	(In millions)
Variable-rate debt:
Term loan, 3-year tranche, due May 29, 2018	$	—			$	36
Term loan, 5-year tranche, due May 29, 2020	—				269
Floating rate notes, due February 27, 2019	300				—
Floating rate notes, due April 30, 2020	250				—
Total variable-rate debt	550				305
Fixed-rate debt:
1.999% notes, due April 27, 2018	—				500
2.7% notes, due April 27, 2020	400				400
4.4% notes, due December 15, 2020	—				400
5.55% notes, due October 1, 2021	—				400
3.832% notes, due April 27, 2025	600				600
7.0% debentures, due January 15, 2026	100				100
6.35% debentures, due February 1, 2028	26				26
4.400% notes, due June 15, 2028	850				—
4.854% notes, due April 27, 2035	400				400
6.15% notes, due December 15, 2040	300				300
5.054% notes, due April 27, 2045	500				500
Other	14				14
Total fixed-rate debt	3,190				3,640
Total debt	3,740				3,945
Plus: unamortized bond premium	—				29
Less: unamortized discounts and issuance costs	(28		)		(24		)
Total debt, net	3,712				3,950
Less: current portion of long-term debt, net	(304		)		(554		)
Total long-term debt, net	$	3,408			$	3,396

The potential maturities of long-term debt, including the current portion, for the five years following fiscal 2018 and, in total, thereafter are: $305 million in fiscal 2019; $654 million in fiscal 2020; $4 million in fiscal 2021; $1 million in fiscal 2022; none in fiscal 2023; and $2,776 million thereafter.

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 “Redeemed Notes”) at a “make-whole” redemption price as set forth in the Redeemed Notes. The combined “make-whole” redemption price for the 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 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 our 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 Repaid in Fiscal 2017

During the second quarter of fiscal 2017, we repaid at maturity the entire outstanding $250 million aggregate principal amount of our 4.25% Notes due October 1, 2016. We also repaid $313 million of the principal amount of our variable-rate term loans during fiscal 2017.

Long-Term Debt Issued in Fiscal 2018

Variable-rate Debt: On February 27, 2018, we completed the issuance and sale of $300 million in aggregate principal amount of floating rate notes due February 27, 2019 (“Floating Rate Notes 2019”). We incurred $2 million of debt issuance costs related to the issuance of the Floating Rate Notes 2019, 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 2019 bear interest at a floating rate, reset quarterly, equal to three-month LIBOR plus 0.475% per year. Interest is payable quarterly in arrears on May 27, 2018, August 27, 2018, November 27, 2018 and February 27, 2019, commencing May 27, 2018. The Floating Rate Notes 2019 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 from the sale of the Floating Rate Notes 2019 to make a voluntary contribution to our U.S. qualified pension plans during the third quarter of fiscal 2018.

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 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, 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 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 From Prior to Fiscal 2018 That Remained Outstanding at June 29, 2018

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 an aggregate principal amount of $2.4 billion. The principal amounts, interest rates and maturity dates of these securities that remained outstanding at June 29, 2018 were as follows:

•	$400 million in aggregate principal amount of 2.700% Notes due April 27, 2020 (the “2.700% 2020 Notes”),

•	$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 2.700% 2020 Notes, 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) 20 basis points in the case of the 2.700% 2020 Notes, (ii) 30 basis points in the case of the 2025 Notes, (iii) 35 basis points in the case of the 2035 Notes, and (v) 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:

		June 29, 2018								June 30, 2017
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(In millions)
Long-term debt (including current portion)(1)		$	3,712			$	3,848			$	3,950			$	4,252

(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 June 29, 2018 and June 30, 2017 was $78 million (including $75 million outstanding under our commercial paper program) and $80 million (including $75 million outstanding under our commercial paper program), respectively. Interest expense incurred on our short-term debt was not material in fiscal 2018, 2017 or 2016.

Interest Paid

Total interest paid was $175 million, $168 million and $177 million in fiscal 2018, 2017 and 2016, respectively.

NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFITS

Defined Contribution Plan

We sponsor a defined contribution savings plan, which allows our eligible employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. The plan includes 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 $83 million, $80 million and $82 million for fiscal 2018, 2017 and 2016, respectively, including both continuing and discontinued operations, and in fiscal 2018 included the issuance of shares of our common stock.

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:

		June 29, 2018								June 30, 2017
		Total				Level 1				Total				Level 1
		(In millions)
Assets
Deferred compensation plan assets:(1)
Equity and fixed income securities		$	46			$	46			$	37			$	37
Investments measured at NAV:
Equity and fixed income funds		63								50
Corporate-owned life insurance		27								25
Total investments measured at NAV		90								75
Total fair value of deferred compensation plan assets		$	136							$	112
Liabilities
Deferred compensation plan liabilities:(2)
Equity securities and mutual funds		$	38			$	38			$	46			$	46
Investments measured at NAV:
Common/collective trusts and guaranteed investment contracts		111								80
Total fair value of deferred compensation plan liabilities		$	149							$	126

(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)	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.

The U.S. Salaried Retirement Plan (“U.S. SRP”) is our largest defined benefit pension plan, with assets valued at $4.6 billion and a projected benefit obligation of $5.2 billion as of June 29, 2018. 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:

	June 29, 2018												June 30, 2017
	Pension				Other Benefits				Total				Pension				Other Benefits				Total
	(In millions)
Fair value of plan assets	$	5,098			$	207			$	5,305			$	4,921			$	212			$	5,133
Projected benefit obligation	(5,774		)		(233		)		(6,007		)		(6,140		)		(265		)		(6,405		)
Funded status	$	(676	)		$	(26	)		$	(702	)		$	(1,219	)		$	(53	)		$	(1,272	)
Consolidated Balance Sheet line item amounts:
Other non-current assets	$	15			$	—			$	15			$	9			$	—			$	9
Compensation and benefits	(2		)		(1		)		(3		)		(2		)		(1		)		(3		)
Defined benefit plans	(689		)		(25		)		(714		)		(1,226		)		(52		)		(1,278		)

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:

	June 29, 2018												June 30, 2017
	Pension				Other Benefits				Total				Pension				Other Benefits				Total
	(In millions)
Net actuarial loss (gain)	$	156			$	(46	)		$	110			$	262			$	(28	)		$	234
Net prior service cost (credit)	4				(1		)		3				2				(1		)		1
	$	160			$	(47	)		$	113			$	264			$	(29	)		$	235

The following table provides a roll-forward of the projected benefit obligations for our defined benefit plans:

		2018												2017
		Pension				Other Benefits				Total				Pension				Other Benefits				Total
		(In millions)
Change in benefit obligation
Benefit obligation at beginning of fiscal year		$	6,140			$	265			$	6,405			$	6,471			$	311			$	6,782
Service cost		39				1				40				58				1				59
Interest cost		195				7				202				184				8				192
Actuarial gain		(169		)		(22		)		(191		)		(160		)		(32		)		(192		)
Prior service cost		2				—				2				—				—				—
Benefits paid		(402		)		(18		)		(420		)		(376		)		(22		)		(398		)
Expenses paid		(35		)		—				(35		)		(34		)		—				(34		)
Curtailments(1)		—				—				—				—				(1		)		(1		)
Foreign exchange		4				—				4				(3		)		—				(3		)
Benefit obligation at end of fiscal year		$	5,774			$	233			$	6,007			$	6,140			$	265			$	6,405

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(1)	We divested IT Services during fiscal 2017, which resulted in a curtailment under the Salaried Retiree Medical Plan.

The following table provides a roll-forward of the assets and the ending funded status of our defined benefit plans:

		2018												2017
		Pension				Other Benefits				Total				Pension				Other Benefits				Total
		(In millions)												(In millions)
Change in plan assets
Plan assets at beginning of fiscal year		$	4,921			$	212			$	5,133			$	4,273			$	216			$	4,489
Actual return on plan assets		307				14				321				470				22				492
Employer contributions		303				(1		)		302				591				(4		)		587
Benefits paid		(402		)		(18		)		(420		)		(376		)		(22		)		(398		)
Expenses paid		(35		)		—				(35		)		(34		)		—				(34		)
Foreign exchange		4				—				4				(3		)		—				(3		)
Plan assets at end of fiscal year		$	5,098			$	207			$	5,305			$	4,921			$	212			$	5,133
Funded status at end of fiscal year		$	(676	)		$	(26	)		$	(702	)		$	(1,219	)		$	(53	)		$	(1,272	)

The accumulated benefit obligation for all defined benefit pension plans was $5.8 billion at June 29, 2018. The following table provides information for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets:

	June 29, 2018				June 30, 2017
	(In millions)
Projected benefit obligation	$	5,694			$	6,061
Accumulated benefit obligation	5,694				6,061
Fair value of plan assets	5,004				4,833

Income Statement Information

The following table provides the components of net periodic benefit income and other amounts recognized in other comprehensive income for fiscal 2018, 2017, and 2016 as they pertain to our defined benefit plans:

		Pension												Other Benefits
		2018				2017				2016				2018				2017				2016
		(In millions)
Net periodic benefit income(1)
Service cost		$	39			$	58			$	75			$	1			$	1			$	1
Interest cost		195				184				245				7				8				13
Expected return on plan assets		(369		)		(340		)		(347		)		(16		)		(17		)		(18		)
Amortization of prior service credit		—				—				—				—				—				(5		)
Amortization of net actuarial loss (gain)		—				1				1				(1		)		—				1
Net periodic benefit income		(135		)		(97		)		(26		)		(9		)		(8		)		(8		)
Effect of curtailments or settlements(2)		—				—				1				—				—				(121		)
Total net periodic benefit income		$	(135	)		$	(97	)		$	(25	)		$	(9	)		$	(8	)		$	(129	)
Other changes in plan assets and benefit obligations recognized in other comprehensive loss (income)
Net actuarial loss (gain)		$	(106	)		$	(284	)		$	645			$	(20	)		$	(38	)		$	15
Prior service cost (credit)(2)		2				—				3				—				—				(121		)
Amortization of prior service credit		—				—				—				1				—				126
Amortization of net actuarial loss		—				(1		)		(1		)		—				—				(2		)
Total change recognized in other comprehensive loss (income)		(104		)		(285		)		647				(19		)		(38		)		18
Total impact from net periodic benefit cost and changes in other comprehensive loss (income)		$	(239	)		$	(382	)		$	622			$	(28	)		$	(46	)		$	(111	)

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(1) Net periodic benefit income presented in this table includes both continuing and discontinued operations. $2 million and $4 million of the service cost component of net periodic benefit income is included as a component of the “Discontinued operations, net of income taxes” line item in our Consolidated Statement of Income for fiscal 2017 and fiscal 2016, respectively.

(2) We discontinued certain significantly underfunded post-employment benefit plans effective December 31, 2015. Under GAAP, this resulted in a negative plan amendment, curtailment and settlement during fiscal 2016.

The following table provides the estimated net actuarial gain and prior service cost that will be amortized from accumulated other comprehensive loss into net periodic benefit income during fiscal 2019:

	Pension				Other Benefits				Total
	(In millions)
Net actuarial gain	$	—			$	(6	)		$	(6	)
Prior service cost	1				—				1
	$	1			$	(6	)		$	(5	)

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:

Obligation assumptions as of:	June 29, 2018			June 30, 2017
Discount rate	4.05	%		3.76	%
Rate of future compensation increase	2.76	%		2.76	%
Cost assumptions for fiscal years:	2018			2017			2016
Discount rate to determine service cost	3.48	%		3.80	%		4.06	%
Discount rate to determine interest cost	3.28	%		2.94	%		4.06	%
Expected return on plan assets	7.66	%		7.65	%		7.91	%
Rate of future compensation increase	2.76	%		2.75	%		2.76	%

Key assumptions for the U.S. SRP (our largest defined benefit pension plan with approximately 90% of the total projected benefit obligation) included a discount rate for obligation assumptions of 4.07% and expected return on plan assets of 7.75% for fiscal 2018, which is being maintained at 7.75% for fiscal 2019.

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:

Obligation assumptions as of:	June 29, 2018			June 30, 2017
Discount rate	3.99	%		3.63	%
Rate of future compensation increase	N/A			N/A
Cost assumptions for fiscal year:	2018			2017			2016
Discount rate to determine service cost	3.62	%		3.52	%		3.86	%
Discount rate to determine interest cost	3.04	%		2.60	%		3.86	%
Rate of future compensation increase	N/A			N/A			2.75	%

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 2019 for the U.S. defined benefit plans. The weighted average long-term annual rate of return on assets for all defined benefit pension plans is estimated at 7.66% for fiscal 2019. In fiscal 2018, we adopted updated mortality tables, which resulted in a decrease in the defined benefit plans’ projected benefit obligation as of June 29, 2018 and estimated net periodic benefit cost beginning fiscal 2019.

The assumed rate of future increases in the per capita cost of healthcare (the healthcare trend rate) for fiscal 2018 was 6.88% for both pre-age 65 and post-age 65 benefits, decreasing ratably to 4.75% in fiscal 2027. The corresponding assumed rate for fiscal 2019 is 7.35% for pre-age 65 benefits and 6.85% for post-age 65 benefits, decreasing ratably to 4.75% in fiscal 2028. 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:

	Target Asset Allocation
Equity investments	45	%	—	75%
Fixed income investments	20	%	—	42%
Hedge funds	5	%	—	15%
Cash and cash equivalents	0	%	—	10%

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 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 valuations are based on the valuation of the underlying investments, which include inputs such as cost, operating results, discounted future cash flows and market-based comparable data. Private equity funds generally have liquidity restrictions that extend for ten or more years. Valuations are largely based on unobservable inputs and short-term liquidity is restricted; consequently, private equity funds are categorized as Level 3 assets. At June 29, 2018 and June 30, 2017, our defined benefit plans had future unfunded commitments totaling $246 million and $157 million, respectively, related to private equity fund investments.

•

Hedge funds, which include equity long/short, event-driven and fixed-income arbitrage and global macro funds, are typically limited partnership investment structures. Limited partnership interests in hedge funds are primarily valued using a market approach based on NAV calculated by the funds and are not publicly available. Hedge funds that permit redemption on a quarterly or more frequent basis with 90 or fewer days notice are generally categorized as Level 2 assets. All other hedge funds are categorized as Level 3 assets.

•

Fixed income investments, which include U.S. Government securities and investment and non-investment grade corporate 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.

•	Other is primarily 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.

•	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.

The following table provides the fair value of plan assets held by our defined benefit plans by asset category and by fair value hierarchy level:

	June 29, 2018
	Total				Level 1				Level 2				Level 3
	(In millions)
Asset Category
Equities:
Domestic equities	$	1,221			$	1,189			$	32			$	—
International equities	903				899				4				—
Alternative investments:
Private equity funds	401				—				—				401
Hedge funds	187				—				—				187
Fixed income:
Corporate bonds	812				—				801				11
Government securities	335				—				335				—
Other	1				—				—				1
Cash and cash equivalents	209				6				203				—
Total	4,069				$	2,094			$	1,375			$	600
Investments Measured at NAV
Equity funds	714
Fixed Income funds	318
Hedge Funds	208
Total Investments Measured at NAV	1,240
Payables, net	(4		)
Total fair value of plan assets	$	5,305
	June 30, 2017
	Total				Level 1				Level 2				Level 3
	(In millions)
Asset Category
Equities:
Domestic equities	$	1,062			$	1,032			$	30			$	—
International equities	838				834				4				—
Alternative investments:
Private equity funds	522				—				—				522
Hedge funds	242				—				—				242
Fixed income:
Corporate bonds	611				—				611				—
Government securities	241				—				241				—
Other	2				—				—				2
Cash and cash equivalents	597				1				596				—
Total	4,115				$	1,867			$	1,482			$	766
Investments Measured at NAV
Equity funds	632
Fixed Income funds	288
Total Investments Measured at NAV	920
Receivables, net	98
Total fair value of plan assets	$	5,133

The following table presents a reconciliation of the beginning and ending defined benefit plan asset balances that use significant unobservable inputs (Level 3) to measure fair value:

	Private Equity Funds				Hedge Funds				Fixed Income				Other				Total
									(In millions)
Level 3 balance — July 1, 2016	$	700			$	282			$	—			$	2			$	984
Realized gains (losses), net	78				(23		)		—				—				55
Unrealized gains (losses), net	(71		)		49				—				—				(22		)
Sales, net	(185		)		(66		)		—				—				(251		)
Level 3 balance — June 30, 2017	522				242				—				2				766
Realized gains (losses), net	47				8				—				—				55
Unrealized gains (losses), net	(25		)		(4		)		—				—				(29		)
Sales, net	(144		)		(59		)		11				—				(192		)
Level 3 balance — June 29, 2018	$	400			$	187			$	11			$	2			$	600

Contributions

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 (“HATFA”) 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 of $300 million and $400 million to our U.S. qualified pension plans during fiscal 2018 and 2017, respectively. As a result, we currently do not anticipate making any contributions to our U.S. qualified pension plans during fiscal 2019.

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:

		Pension				Other Benefits(1)				Total
		(In millions)
Fiscal Years:
2019		$	400			$	24			$	424
2020		384				24				408
2021		385				23				408
2022		384				22				406
2023		382				22				404
2024 — 2028		1,854				89				1,943

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(1)	Projected payments for Other Benefits reflect gross payments from the Company, excluding subsidies, which are expected to approximate 10 percent of gross payments.

NOTE 14: STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION

As of June 29, 2018, we had options or other share-based compensation outstanding under two 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”) (prior to July 3, 2015, we had an additional shareholder approved SIP under which options or other share-based compensation was outstanding). Grants of share-based awards after October 23, 2015 were made under our 2015 EIP. We believe that share-based awards more closely align the interests of participants with those of shareholders. Certain share-based awards provide for accelerated vesting if there is a change in control (as defined under our SIPs).

Summary of Share-Based Compensation Expense

The following table summarizes the amounts and classification of share-based compensation expense:

	2018				2017				2016
	(In millions)
Total expense	$	51			$	42			$	36
Included in:
Cost of product sales and services	$	8			$	3			$	4
Engineering, selling and administrative expenses	43				39				32
Income from continuing operations	51				42				36
Tax effect on share-based compensation expense	(16		)		(16		)		(14		)
Total share-based compensation expense after-tax	$	35			$	26			$	22

Compensation cost related to share-based compensation arrangements that was capitalized as part of inventory or fixed assets in fiscal 2018, 2017 and 2016 was not material.

As of the end of fiscal 2018, a total of 26,913,981 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). In fiscal 2018, we issued an aggregate of 709,367 shares of common stock under the terms of our 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 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 SIPs is as follows:

	2018			2017			2016
Expected dividends	1.8	%		2.4	%		2.5	%
Expected volatility	19.3	%		21.8	%		23.0	%
Risk-free interest rates	1.8	%		1.2	%		1.5	%
Expected term (years)	5.00			5.03			5.05

A summary of stock option activity under our SIPs as of June 29, 2018 and changes during fiscal 2018 is as follows:

	Shares			Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
								(In years)		(In millions)
Stock options outstanding June 30, 2017	4,910,142			$	69.89
Stock options forfeited or expired	(98,532	)		$	88.51
Stock options granted	412,285			$	119.70
Stock options exercised	(525,525	)		$	64.25
Stock options outstanding June 29, 2018	4,698,370			$	74.50			6.53		$	329.05
Stock options exercisable June 29, 2018	3,084,969			$	64.34			5.71		$	247.42

The weighted-average grant-date fair value was $18.60 per share, $13.82 per share and $12.68 per share for options granted during fiscal 2018, 2017 and 2016, respectively. The total intrinsic value of options exercised during fiscal 2018, 2017 and 2016 was $39 million, $47 million and $20 million, respectively, at the time of exercise.

A summary of the status of our nonvested stock options at June 29, 2018 and changes during fiscal 2018 is as follows:

	Shares			Weighted-Average Grant-Date Fair Value Per Share
Nonvested stock options June 30, 2017	2,596,282			$	13.23
Stock options granted	412,285			$	18.60
Stock options vested	(1,395,166	)		$	13.15
Nonvested stock options June 29, 2018	1,613,401			$	14.66

As of June 29, 2018, there was $24 million of total unrecognized compensation expense related to nonvested stock options granted under our SIPs. This expense is expected to be recognized over a weighted-average period of 1.10 years. The total fair value of stock options that vested during fiscal 2018, 2017 and 2016 was approximately $18 million, $17 million and $15 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 under our SIPs. These awards are not transferable until vested and the restrictions generally lapse upon the achievement of continued employment 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 June 29, 2018, there were 25,902 shares of restricted stock and 388,788 restricted stock units outstanding which were payable in shares.

A summary of the status of these awards at June 29, 2018 and changes during fiscal 2018 is as follows:

	Shares or Units			Weighted-Average Grant Price Per Share or Unit
Restricted stock and restricted stock units outstanding at June 30, 2017	260,964			$	84.92
Restricted stock and restricted stock units granted	312,247			$	141.46
Restricted stock and restricted stock units vested	(138,659	)		$	80.44
Restricted stock and restricted stock units forfeited	(19,862	)		$	111.88
Restricted stock and restricted stock units outstanding at June 29, 2018	414,690			$	127.70

As of June 29, 2018, there was $39 million of total unrecognized compensation expense related to these awards under our SIPs. This expense is expected to be recognized over a weighted-average period of 1.79 years. The weighted-average grant date price per share or per unit of these awards granted during fiscal 2018, 2017 and 2016 was $141.46, $94.60 and $81.53, respectively. The total fair value of these awards that vested during fiscal 2018, 2017 and 2016 was approximately $11 million, $14 million and $7 million, respectively.

Performance Share Unit Awards

The following information relates to awards of performance share units that have been granted to employees under our 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 (and market conditions, such as total shareholder return (“TSR”)) 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 determined based on a fair value from a multifactor Monte Carlo valuation model that simulates our stock price and TSR relative to other companies in our TSR peer group, less a discount to reflect the delay in payments of cash dividend-equivalents that are made only upon vesting. The fair value of these awards is amortized to compensation expense over the vesting period if achievement of the performance measures is considered probable. At June 29, 2018, there were 625,293 performance share units outstanding which were payable in shares.

A summary of the status of these awards at June 29, 2018 and changes during fiscal 2018 is as follows:

	Shares or Units			Weighted-Average Grant Price Per Share or Unit
Performance share units outstanding at June 30, 2017	633,735			$	81.81
Performance share units granted	193,321			$	123.13
Performance share units vested	(173,505	)		$	66.48
Performance share units forfeited	(28,258	)		$	97.97
Performance share units outstanding at June 29, 2018	625,293			$	98.11

As of June 29, 2018, there was $23 million of total unrecognized compensation expense related to these awards under our SIPs. This expense is expected to be recognized over a weighted-average period of 1.05 years. The weighted-average grant date price per unit of these awards granted during fiscal 2018, 2017 and 2016 was $123.13, $84.40 and $73.32, respectively. The total fair value of these awards that vested during fiscal 2018, 2017 and 2016 was approximately $12 million, $21 million and $18 million, respectively.

NOTE 15: INCOME FROM CONTINUING OPERATIONS PER SHARE

The computations of income from continuing operations per share are as follows:

	2018				2017				2016
	(In millions, except per share amounts)
Income from continuing operations	$	721			$	638			$	611
Adjustments for participating securities outstanding	(2		)		(2		)		(2		)
Income from continuing operations used in per basic and diluted common share calculations (A)	$	719			$	636			$	609
Basic weighted average common shares outstanding (B)	118.6				122.6				123.8
Impact of dilutive share-based awards	2.5				1.7				1.2
Diluted weighted average common shares outstanding (C)	121.1				124.3				125.0
Income from continuing operations per basic common share (A)/(B)	$	6.06			$	5.19			$	4.91
Income from continuing operations per diluted common share (A)/(C)	$	5.94			$	5.12			$	4.87

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 48,590, 421,507 and 1,671,045 weighted average share-based awards outstanding in fiscal 2018, 2017 and 2016, respectively.

NOTE 16: RESEARCH AND DEVELOPMENT

Company-sponsored research and development costs are expensed as incurred. These costs were $311 million, $310 million and $305 million in fiscal 2018, 2017 and 2016, respectively, and are included in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income. Customer-sponsored research and development 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 cost-to-cost POC method. Customer-sponsored research and development is included in our revenue and cost of product sales and services.

NOTE 17: LEASE COMMITMENTS

Total rental expense amounted to $61 million, $65 million and $65 million in fiscal 2018, 2017 and 2016, respectively. Future minimum rental commitments under leases with an initial lease term in excess of one year, primarily for land and buildings, amounted to approximately $280 million at June 29, 2018. These commitments for the five years following fiscal 2018 and, in total, thereafter are: fiscal 2019 — $58 million; fiscal 2020 — $53 million; fiscal 2021 — $47 million; fiscal 2022 — $40 million; fiscal 2023 — $28 million; and in total thereafter — $54 million. 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 of these individual leases material to our operations. Leasehold improvements made either at the inception of the lease or during the lease term are amortized over the current lease term, or estimated life, if shorter.

NOTE 18: 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. 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. We do not hold or issue derivatives for speculative trading purposes.

At June 29, 2018, we had open foreign currency forward contracts with an aggregate notional amount of $39 million, of which $4 million were classified as fair value hedges and $35 million were classified as cash flow hedges. This compares with open foreign currency forward contracts with an aggregate notional amount of $33 million at June 30, 2017, of which $2 million were classified as fair value hedges and $31 million were classified as cash flow hedges. At June 29, 2018, contract expiration dates ranged from 3 days to 6 months with a weighted average contract life of 1 month.

Exchange Rate Risk — Balance Sheet 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 use 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 services” line item in our Consolidated Statement of Income. As of June 29, 2018, we had outstanding foreign currency forward contracts denominated in the Canadian Dollar to hedge certain balance sheet items. The net gains or losses on foreign currency forward contracts designated as fair value hedges were not material in fiscal 2018, 2017 or 2016. In addition, no amounts were recognized in earnings in fiscal 2018, 2017 or 2016 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 being used to hedge currency exposures from cash flows anticipated across our business segments. We also have hedged U.S. Dollar payments to suppliers to maintain our anticipated profit margins in our international operations. As of June 29, 2018, we had outstanding foreign currency forward contracts denominated in the Euro and Australian Dollar to hedge certain forecasted transactions.

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, net of hedge ineffectiveness. Gains and losses in accumulated other comprehensive income are reclassified to earnings when the related hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately 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.

The net gains or losses from cash flow hedges recognized in earnings or recorded in other comprehensive income, including gains or losses related to hedge ineffectiveness, were not material in fiscal 2018, 2017 or 2016. We do not expect the net gains or losses recognized in the “Accumulated other comprehensive loss” line item in our Consolidated Balance Sheet as of June 29, 2018 that will be reclassified to earnings from accumulated other comprehensive income within the next 12 months to be material.

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.

The amount of assets and liabilities related to foreign currency forward contracts in our Consolidated Balance Sheet as of June 29, 2018 was immaterial. See our Consolidated Statement of Comprehensive Income (Loss) for additional information on changes in accumulated other comprehensive loss for the three fiscal years ended June 29, 2018.

NOTE 19: NON-OPERATING INCOME (LOSS)

The components of non-operating income (loss) were as follows:

		2018				2017				2016
		(In millions)
Losses on extinguishment of debt(1)		$	(24	)		$	—			$	—
Gain on sales of businesses		—				—				10
Adjustment to gain on sale of business		—				2				—
Net income related to intellectual property matters		(1		)		—				—
Other		(3		)		—				—
		$	(28	)		$	2			$	10

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(1)

Losses associated with our optional redemption of the entire outstanding $400 million principal amount of our 4.4% 2020 Notes and $400 million principal amount of our 2021 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. See Note 11: Credit Arrangements and Note 12: Debt for additional information.

NOTE 20: ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss were as follows:

		2018(1)				2017(2)
		(In millions)
Foreign currency translation, net of income taxes of $2 million and $1 million at June 29, 2018 and June 30, 2017, respectively		$	(99	)		$	(113	)
Net unrealized loss on hedging derivatives, net of income taxes of $7 million and $11 million at June 29, 2018 and June 30, 2017, respectively		(20		)		(17		)
Unrecognized postretirement obligations, net of income taxes of $30 million and $89 million at June 29, 2018 and June 30, 2017, respectively		(83		)		(146		)
		$	(202	)		$	(276	)

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(1)	Reclassifications to earnings from accumulated other comprehensive loss, other than the reclassification adjustment described in the paragraph below, were not material in fiscal 2018.

(2)	Accumulated foreign currency translation losses of $52 million (net of income taxes of $14 million) were reclassified to earnings in fiscal 2017 as a result of the divestitures of CapRock and IT Services and are included in “Discontinued operations, net of income taxes” in our Consolidated Statement of Income.

Accumulated other comprehensive loss at June 29, 2018 reflects a reclassification to retained earnings of $35 million in stranded tax effects as a result of our adoption of an accounting standards update, including $30 million from “Unrecognized postretirement obligation, net of income taxes,” $4 million from “Net unrealized loss on hedging derivatives, net of income taxes” and $1 million from “Foreign currency translation, net of income taxes.” See Note 2: Accounting Changes or Recent Accounting Pronouncements for additional information regarding this accounting standards update.

NOTE 21: INCOME TAXES

Income Tax Provision

The provisions for current and deferred income taxes are summarized as follows:

	2018				2017				2016
	(In millions)
Current:
United States	$	(141	)		$	117			$	(36	)
International	12				9				6
State and local	(11		)		6				(11		)
	(140		)		132				(41		)
Deferred:
United States	322				126				279
International	(3		)		1				(3		)
State and local	26				8				38
	345				135				314
	$	205			$	267			$	273

The total income tax provision is summarized as follows:

	2018				2017				2016
	(In millions)
Continuing operations	$	205			$	267			$	273
Discontinued operations	(5		)		(110		)		(12		)
Total income tax provision	$	200			$	157			$	261

A reconciliation of the U.S. statutory income tax rate to our effective income tax rate follows:

	2018			2017			2016
U.S. statutory income tax rate	28.1	%		35.0	%		35.0	%
State taxes	1.9			1.0			1.8
International income	(0.5	)		(1.3	)		(1.2	)
Nondeductible goodwill	—			—			0.9
Research and development tax credit	(2.9	)		(2.0	)		(2.3	)
Change in valuation allowance	0.2			(0.2	)		(2.6	)
U.S. production activity benefit	(0.9	)		(0.5	)		(0.4	)
Excess tax benefits on equity-based compensation	(1.8	)		(2.6	)		—
Settlement of tax audits	(2.2	)		—			(0.3	)
U.S. tax reform	(0.2	)		—			—
Other items	0.4			0.1			—
Effective income tax rate	22.1	%		29.5	%		30.9	%

State and local income taxes allocable to certain U.S. Government contracts are included in our operating expenses and, therefore, are not included in our provision for income taxes. As of June 29, 2018, we have accumulated undistributed earnings of international subsidiaries of approximately $55 million. None of these earnings were subject to the one-time transition tax on foreign earnings as required by the Tax Act or have otherwise been previously taxed. Our intention is to reinvest these earnings indefinitely. Determination of unrecognized deferred U.S. tax liability on outside basis differences, other than what is provided below, is not practicable due to the complexity of laws and regulations issued under the Tax Act and the varying tax treatment of repatriation alternatives.

Tax Law Changes

On December 22, 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.

As of the end of the fiscal year, we were able to reasonably estimate the impact to our existing net deferred income tax balances and recognized a $2 million expense during fiscal 2018 to revalue our deferred tax balances. This expense includes:

•	$52 million ($.43 per diluted share) from estimated write-down of existing net deferred tax asset balances initially recognized in the second quarter of fiscal 2018;

•	$33 million ($.27 per diluted share) of income tax benefit recognized in the third quarter of fiscal 2018 to adjust the provisional amount recorded in the second quarter of fiscal 2018. This adjustment was primarily due to revaluing our deferred tax asset related to our $300 million voluntary pension contribution made during the third quarter of fiscal 2018; and

•	$17 million ($.15 per diluted share) of income tax benefit recognized in the fourth quarter of fiscal 2018 to adjust the provisional amount recorded previously through the third quarter of fiscal 2018. This adjustment was primarily due to revaluing our deferred tax assets based on changes in methods for tax recognition and the actual current year movement in our deferred balances.

As of June 29, 2018, we have not fully completed our accounting for the income tax impact of enactment of the Tax Act. In accordance with SEC Staff Accounting Bulletin No.118, we have recognized provisional amounts for income tax effects of the Tax Act that we were able to reasonably estimate. We intend to adjust the tax effects for the relevant items during the allowed measurement period. We are still evaluating certain aspects of the Tax Act and refining our calculations, which could potentially affect our current estimated valuation of our net deferred income tax balances mentioned above and could give rise to new deferred tax amounts.

We were also able to reasonably estimate the tax treatment of our earnings and profits as per the Tax Act related to foreign subsidiaries (“foreign E&P”). The Tax Act provides for a one-time transition tax on our post-1986 foreign E&P that was previously deferred from U.S. income tax expense. We have provisionally determined that we will not owe any one-time transition tax. However, we are still refining our calculations, including estimated foreign E&P layers for fiscal 2018, which could impact the amount of one-time transition tax we will owe.

We are still in the process of evaluating the U.S. federal corporate income tax impacts of the Global Intangible Low Taxed Income (“GILTI”) and will continue to modify and update our evaluation as additional regulations are issued by the Department of Treasury. Although we do not expect GILTI to have a material impact on our financial statements, a reasonable provision cannot be completed at this time. In accordance with SEC Staff Accounting Bulletin No. 118, we will not adjust current or deferred taxes for GILTI until a reasonable estimate can be determined.

Because of the potential impact of deficit allocations on the tax basis for netted foreign E&P of related foreign

subsidiaries, we are maintaining a deferred tax liability of approximately $24 million in respect of potential cumulative tax

basis differences of $116 million. New statutory or regulatory guidance, including guidance issued after our fiscal year end, requires further analysis and may result in a change in our conclusion as to the need for a deferred tax liability in respect of these cumulative tax basis differences. Other than this deferred tax liability, we have provided for no additional income taxes on any remaining undistributed foreign E&P not subject to the transition tax, or any outside tax basis differences inherent in our foreign subsidiaries, because all other amounts continue to be reinvested indefinitely.

We anticipate any impact on our fiscal 2018 provision at a U.S. state and local tax level related to the Tax Act to be insignificant, but will further refine our calculations as the state and local conformity to the Tax Act becomes more certain.

Deferred Income Tax Assets (Liabilities)

The components of deferred income tax assets (liabilities) were as follows:

		June 29, 2018				June 30, 2017
		(In millions)
Deferred tax assets:
Inventory valuations		$	21			$	31
Accruals		176				292
Deferred revenue		7				16
Domestic tax loss and credit carryforwards		86				60
International tax loss and credit carryforwards		33				35
Share-based compensation		26				31
Capital loss carryforwards		101				133
Long-term debt		—				13
Pension and other post-employment benefits		188				509
Unrealized loss on interest rate hedges		7				10
Unrecognized tax benefits		4				7
Other		1				(17		)
Total deferred tax assets		650				1,120
Less: valuation allowance(1)		(181		)		(183		)
Total deferred tax assets, net of valuation allowance		469				937
Deferred tax liabilities:
Property, plant and equipment		(65		)		(51		)
Unbilled receivables		(86		)		(5		)
Acquired intangibles		(268		)		(459		)
Unremitted earnings of foreign subsidiaries		(24		)		(47		)
Total deferred tax liabilities		(443		)		(562		)
Total deferred tax assets, net of valuation allowance		$	26			$	375

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(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.

Total deferred tax assets, net of valuation allowance, were classified as follows in our Consolidated Balance Sheet:

	June 29, 2018				June 30, 2017
	(In millions)
Non-current deferred income tax assets	$	116			$	409
Non-current deferred income tax liabilities	(90		)		(34		)
	$	26			$	375

Tax loss and credit carryforwards as of June 29, 2018 have expiration dates ranging between two years and no expiration in certain instances. The amounts of federal, international, and state and local operating loss carryforwards as of June 29, 2018 were $25 million, $71 million and $543 million, respectively. The amount of U.S. capital loss carryforwards as of June 29, 2018 was $367 million. Income from continuing operations before income taxes of international subsidiaries was $43 million, $42 million and $42 million in fiscal 2018, 2017 and 2016, respectively. We received $8 million in income tax refunds, net of income taxes paid, in fiscal 2018 and we paid $51 million and $53 million, net of refunds received, in fiscal 2017 and 2016, respectively.

Tax Uncertainties

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

	2018				2017				2016
	(In millions)
Balance at beginning of fiscal year	$	90			$	63			$	124
Additions based on tax positions taken during current fiscal year	17				52				7
Additions based on tax positions taken during prior fiscal years	23				—				9
Decreases based on tax positions taken during prior fiscal years	(28		)		(25		)		(73		)
Decreases from lapse in statutes of limitations	—				—				(1		)
Decreases from settlements	—				—				(3		)
Balance at end of fiscal year	$	102			$	90			$	63

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. Upon recognition of a portion of these benefits, we also expect to recognize an additional $14 million of current expense which will offset the favorable rate impact from the unrecognized tax benefits. As of June 30, 2017, we had $90 million of unrecognized tax benefits, of which $74 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 $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) and $3 million of this total could favorably impact future tax rates. We had accrued $5 million for the potential payment of interest and penalties as of June 30, 2017 (and this amount was not included in the $90 million of unrecognized tax benefits balance at June 30, 2017 shown above) and $3 million of this total could favorably impact future tax rates.

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 our returns for fiscal 2014 through fiscal 2017. The Canadian Revenue Agency is currently examining our returns for fiscal 2014 through fiscal 2016, and we are appealing 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 2011 through 2017. 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 22: BUSINESS SEGMENTS

We structure our operations primarily around the products, systems and services we sell and the markets we serve, and we report the financial results of our continuing operations in the following three reportable segments, which are also referred to as our business segments:

•	Communication Systems, serving markets in tactical communications and defense products, including tactical ground and airborne radio communications solutions and night vision technology, and in public safety networks;

•	Electronic Systems, providing electronic warfare, avionics, and command, control, communications, computers, intelligence, surveillance and reconnaissance solutions for defense and classified customers and mission-critical communication systems for civil and military aviation and other customers; and

•	Space and Intelligence Systems, providing intelligence, space protection, geospatial, complete Earth observation, universe exploration, positioning, navigation and timing, 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.

As described in more detail in Note 1: Significant Accounting Policies under “Principles of Consolidation” and in Note 3: Discontinued Operations and Divestitures, in connection with our divestiture of CapRock and entering into the definitive agreement to sell IT Services in the third quarter of fiscal 2017, our other remaining operations that had been part of our former Critical Networks segment, including our ATM business primarily serving the FAA, were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. 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 changes for all periods presented in order to present all segment information on a comparable

basis. There is no impact on our previously reported consolidated statements of income, balance sheets or statements of cash flows resulting from these segment changes.

Total assets by business segment is as follows:

		2018				2017
		(In millions)
Total Assets
Communication Systems		$	1,548			$	1,534
Electronic Systems		4,186				4,094
Space and Intelligence Systems		2,192				2,117
Corporate(1)		1,913				2,345
		$	9,839			$	10,090

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(1)

Identifiable intangible assets acquired in connection with our acquisition of Exelis in the fourth quarter of fiscal 2015 were recorded as Corporate assets because they benefited the entire Company as opposed to any individual segment. Exelis identifiable intangible asset balances of continuing operations recorded as Corporate assets were approximately $1.0 billion and $1.1 billion as of June 29, 2018 and June 30, 2017, respectively. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan investments, buildings and equipment and identifiable intangibles, and also included any assets and liabilities from discontinued operations. See Note 3: Discontinued Operations and Divestitures for additional information regarding discontinued operations.

Other selected financial information by business segment and geographical area is summarized below:

	2018				2017				2016
	(In millions)
Capital Expenditures
Communication Systems	$	26			$	14			$	16
Electronic Systems	57				40				40
Space and Intelligence Systems	33				34				38
Corporate	20				27				41
Discontinued operations	—				4				19
	$	136			$	119			$	154
Depreciation and Amortization
Communication Systems	$	57			$	64			$	63
Electronic Systems	44				29				56
Space and Intelligence Systems	36				37				40
Corporate	122				142				124
Discontinued operations	—				39				78
	$	259			$	311			$	361
Geographical Information for Continuing Operations
U.S. operations:
Revenue	$	5,869			$	5,639			$	5,798
Long-lived assets	$	892			$	896			$	917
International operations:
Revenue	$	313			$	261			$	194
Long-lived assets	$	8			$	8			$	7

In addition to depreciation and amortization expense related to property, plant and equipment, depreciation and amortization includes intangible asset amortization and debt premium, debt discount and debt issuance cost amortization of $116 million, $125 million and $120 million in fiscal 2018, 2017 and 2016, 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 fiscal 2018, 2017 or 2016.

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 75 percent, 74 percent and 77 percent in fiscal 2018, 2017 and 2016, respectively. Revenue from services in fiscal 2018 was approximately 10 percent, 29 percent and 13 percent of total revenue in our Communication Systems, Electronic Systems and Space and Intelligence Systems segments, respectively.

Revenue from products and services exported from the U.S., including foreign military sales, or manufactured or rendered abroad in fiscal 2018, 2017 and 2016 was $1.3 billion (21 percent of our revenue), $1.3 billion (22 percent of our revenue) and $1.2 billion (20 percent of our revenue), respectively. Fiscal 2018 export revenue and revenue from international operations was principally from Europe, the Middle East, Asia, Australia, Africa and Canada.

Segment revenue, segment operating income and a reconciliation of segment operating income to total income from continuing operations before income taxes are as follows:

		2018				2017				2016
		(In millions)
Revenue
Communication Systems		$	1,903			$	1,753			$	1,864
Electronic Systems		2,373				2,251				2,233
Space and Intelligence Systems		1,921				1,902				1,899
Corporate eliminations		(15		)		(6		)		(4		)
		$	6,182			$	5,900			$	5,992
Income from Continuing Operations before Income Taxes
Segment Operating Income:(1)
Communication Systems(2)		$	571			$	524			$	522
Electronic Systems		441				464				430
Space and Intelligence Systems		336				311				288
Unallocated corporate expense and corporate eliminations(3)		(226		)		(226		)		(185		)
Non-operating income (loss)(4)		(28		)		2				10
Net interest expense		(168		)		(170		)		(181		)
Total		$	926			$	905			$	884

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(1)	In fiscal 2017 and 2016, segment operating income included stranded costs and Financial Accounting Standards (“FAS”) pension income previously reported as part of our former Critical Networks segment but now re-allocated to our remaining three segments.

(2)

Communication Systems operating income in fiscal 2016 included $20 million of charges primarily related to workforce reductions, facility consolidation and other items. We recorded $14 million of these charges in the “Cost of product sales and services” line item and the remaining $6 million of these charges in the “Engineering, selling and administrative expenses” line item in the accompanying Consolidated Statement of Income.

(3)

Unallocated corporate expense and corporate eliminations includes: (i) the impact of a net liability reduction of $101 million in fiscal 2016 for certain post-employment benefit plans, (ii) $101 million, $109 million and $109 million in fiscal 2018, 2017 and 2016, respectively, for amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis (because the acquisition of Exelis benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired in the Exelis acquisition was recorded as unallocated corporate expense), (iii) $5 million, $58 million and $121 million of Exelis acquisition-related and other charges in fiscal 2018, 2017 and 2016, respectively, (iv) $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 in fiscal 2018, and (v) a $12 million non-cash adjustment for deferred compensation in fiscal 2018.

(4)	Non-operating income (loss) in fiscal 2018 includes $27 million of losses and other costs related to debt refinancing. Additional information regarding non-operating income (loss) is set forth in Note 19: Non-Operating Income (Loss).

NOTE 23: 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 June 29, 2018, 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 June 29, 2018 are reserved against or would not have a material adverse effect on our financial condition, results of operations or cash flows.

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 21: Income Taxes.

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 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 (“DOJ”), 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 made against us, based on available information, in the opinion of our management, any payments we may be required to make as a result of environmental claims made against us in existence at June 29, 2018 are reserved against, covered by insurance or would not have a material adverse effect on our financial condition, results of operations or cash flows.

SUPPLEMENTARY FINANCIAL INFORMATION

QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected quarterly financial data is summarized below:

	Quarter Ended																Total Year
	9/29/2017				12/29/2017				3/30/2018				6/29/2018
	(In millions, except per share amounts)
Fiscal 2018
Revenue	$	1,413			$	1,535			$	1,568			$	1,666			$	6,182
Gross profit(1)	528				548				574				601				2,251
Income from continuing operations before income taxes	231				229				215				251				926
Income from continuing operations(2)	167				139				203				212				721
Discontinued operations, net of income taxes	(6		)		—				(2		)		5				(3		)
Net income	161				139				201				217				718
Per common share data:
Basic
Income from continuing operations	1.40				1.17				1.71				1.78				6.06
Net income	1.35				1.17				1.70				1.83				6.04
Diluted
Income from continuing operations	1.38				1.15				1.67				1.74				5.94
Net income	1.32				1.15				1.66				1.79				5.92
Cash dividends	0.57				0.57				0.57				0.57				2.28
Stock prices — High	132.00				144.94				164.58				170.54
Low	109.08				131.52				140.84				142.50

		Quarter Ended																Total Year
		9/30/2016				12/30/2016				3/31/2017				6/30/2017
		(In millions, except per share amounts)
Fiscal 2017
Revenue		$	1,420			$	1,449			$	1,489			$	1,542			$	5,900
Gross profit(1)		534				542				544				546				2,166
Income from continuing operations before income taxes		203				235				233				234				905
Income from continuing operations(3)		145				163				164				166				638
Discontinued operations, net of income taxes		15				14				(79		)		(35		)		(85		)
Net income		160				177				85				131				553
Per common share data:
Basic
Income from continuing operations		1.17				1.32				1.33				1.37				5.19
Net income		1.29				1.42				0.70				1.09				4.50
Diluted
Income from continuing operations		1.16				1.30				1.31				1.35				5.12
Net income		1.27				1.40				0.69				1.07				4.44
Cash dividends		0.53				0.53				0.53				0.53				2.12
Stock prices — High		94.09				107.54				113.00				114.32
Low		80.78				88.89				99.13				106.18

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(1)

“Gross profit” from prior periods have been adjusted to conform to current-period classifications. Reclassifications include certain human resources, information technology (“IT”), direct selling and bid and proposal costs that were previously included as “Cost of product sales and services” line items and are now reflected in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income.

(2) Income from continuing operations in fiscal 2018 includes: (i) $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; (ii) $27 million of losses and other costs related to debt refinancing; (iii) $14 million of charges related to non-cash adjustments for deferred compensation and the impact of tax reform; and (iv) a $5 million charge related to consolidation of certain Exelis facilities initiated in fiscal 2017. The net after-tax impact from the above items was $68 million or $.56 per diluted common share.

(3) Income from continuing operations in fiscal 2017 includes $51 million after-tax ($.41 per diluted common share) for Exelis acquisition-related and other items.