filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
The management of L3Harris Technologies, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance, based on an appropriate cost-benefit analysis, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. 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 December 31, 2021.
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 68 of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of L3Harris Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of L3Harris Technologies, Inc. (the Company) as of December 31, 2021 and January 1, 2021, the related consolidated statements of income, comprehensive income, cash flows and equity for each of the two years in the period ended December 31, 2021, the two quarters ended January 3, 2020, and the year ended June 28, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and January 1, 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, the two quarters ended January 3, 2020, and the year ended June 28, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, 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 February 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Cost estimation for revenue recognition on development and production contracts | |||||
| Description of the Matter | As described in Note 1 of the consolidated financial statements, the Company recognized revenue for certain of its development and production contracts over time, typically using a percentage of completion cost-to-cost method, which required estimates of costs at completion for each contract. At the outset of each contract, the Company gauges its complexity and perceived risks and establishes an estimated total cost at completion with these expectations. After establishing the estimated cost at completion, the Company reviews the progress and performance on its ongoing contracts at least quarterly and updates the estimated total cost at completion. Such estimates are subject to change during the performance of the contract and significant changes in estimates could have a material effect on the Company’s results of operations. Auditing the cost estimation for development and production contracts involved subjective auditor judgment because the Company’s development of the estimated total cost at completion required estimates of the cost of the work to be completed based on the Company’s underlying assumptions around achieving the technical, schedule, and cost aspects of its contracts. In determining the estimates of the cost of the work to be completed, the Company considered the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Estimates of total cost at completion were also affected by management’s assessment of the current status of the contract and expectation for performance on the contract, as well as historical experience. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s accounting for cost estimation for development and production contracts. For example, we tested certain controls over management’s review of the estimate at completion analyses and the significant assumptions underlying the estimated total costs at completion. We also tested certain of management’s controls to validate that the data used in the estimate at completion analyses was complete and accurate. To test the cost estimation for development and production contracts, our audit procedures included, among others, obtaining an understanding of the contract, meeting with program management to confirm our understanding of the risks associated with the arrangement and the current contract performance, review of customer correspondence and contractual milestones, and comparing cost estimates to historical cost experience with similar contracts, when applicable. Additionally, we obtained an understanding of the Company’s past performance of estimating total costs at completion by reviewing changes in the cost estimates from previous periods and reviewing the overall accuracy of management’s cost to completion estimations through lookback analyses. |
| Valuation of Goodwill | |||||
| Description of the Matter | At December 31, 2021, the Company’s goodwill was $18 billion. As more fully described in Note 1 to the consolidated financial statements, the Company tests goodwill for impairment annually (or under certain circumstances, more frequently) at the reporting unit level using either a qualitative or quantitative assessment. Under the quantitative assessment to test for goodwill impairment, the Company compares the fair value of a reporting unit to its carrying amount, including goodwill. Generally, the Company estimates the fair value of its reporting units using a combination of a discounted cash flows analysis and market-based valuation methodologies. Auditing the Company’s quantitative goodwill impairment tests involved subjective auditor judgment due to the significant estimation required by management in the valuation models used to determine the fair value of the reporting units. The significant estimation involved the sensitivity of the underlying assumptions used in the valuation models, including changes in the weighted average cost of capital, projected revenue growth rates, projected operating margins, and terminal growth rate. These assumptions relate to the expected future operating performance of the Company’s reporting units, are forward-looking, and are sensitive to and affected by economic, industry and company-specific qualitative factors. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant internal controls over the Company’s goodwill impairment review process, including controls over management’s review of significant assumptions used in the valuation models. We also tested management’s controls to validate that the data used in the valuation models was complete and accurate. To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing the valuation methodologies used by the Company, involving our valuation specialists to assist in testing the significant assumptions discussed above, and testing the completeness and accuracy of the underlying data the Company used in its valuation analyses. For example, we compared the significant assumptions used by management to current industry, market and economic trends, the historical results of the reporting units, and other relevant factors. We also assessed the historical accuracy of management’s valuation estimates and performed sensitivity analyses of significant assumptions used in the impairment tests to evaluate the change in the fair value of the reporting unit resulting from changes in the significant assumptions. In addition, we reviewed the reconciliation of the fair value of the reporting units based on the annual impairment test to the market capitalization of the Company. |
We have served as the Company’s auditor since at least 1932, but we are unable to determine the specific year.
/s/ Ernst & Young LLP
Orlando, Florida
February 25, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of L3Harris Technologies, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited L3Harris Technologies, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, L3Harris Technologies, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and January 1, 2021, the related consolidated statements of income, comprehensive income, cash flows and equity for each of the two years in the period ended December 31, 2021, the two quarters ended January 3, 2020 and for the year ended June 28, 2019 and the related notes and our report dated February 25, 2022 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 regulations 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 Limitations 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 transactions 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 authorizations 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
February 25, 2022
CONSOLIDATED STATEMENT OF INCOME
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions, except per share amounts) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Revenue from product sales and services | |||||||||||||||||||||||
| Revenue from product sales | $ | 13,156 | $ | 13,581 | $ | 6,908 | $ | 5,638 | |||||||||||||||
| Revenue from services | 4,658 | 4,613 | 2,355 | 1,163 | |||||||||||||||||||
| 17,814 | 18,194 | 9,263 | 6,801 | ||||||||||||||||||||
| Cost of product sales and services | |||||||||||||||||||||||
| Cost of product sales | (9,007) | (9,464) | (4,996) | (3,615) | |||||||||||||||||||
| Cost of services | (3,431) | (3,422) | (1,730) | (852) | |||||||||||||||||||
| (12,438) | (12,886) | (6,726) | (4,467) | ||||||||||||||||||||
| Engineering, selling and administrative expenses | (3,280) | (3,315) | (1,881) | (1,242) | |||||||||||||||||||
| Business divestiture-related gains (losses) | 220 | (51) | 229 | — | |||||||||||||||||||
| Impairment of goodwill and other assets | (207) | (767) | (46) | — | |||||||||||||||||||
| Non-operating income | 439 | 401 | 192 | 188 | |||||||||||||||||||
| Interest expense, net | (265) | (254) | (123) | (167) | |||||||||||||||||||
| Income from continuing operations before income taxes | 2,283 | 1,322 | 908 | 1,113 | |||||||||||||||||||
| Income taxes | (440) | (234) | (73) | (160) | |||||||||||||||||||
| Income from continuing operations | 1,843 | 1,088 | 835 | 953 | |||||||||||||||||||
| Discontinued operations, net of income taxes | (1) | (2) | (1) | (4) | |||||||||||||||||||
| Net income | 1,842 | 1,086 | 834 | 949 | |||||||||||||||||||
| Noncontrolling interests, net of income taxes | 4 | 33 | (12) | — | |||||||||||||||||||
| Net income attributable to L3Harris Technologies, Inc. | $ | 1,846 | $ | 1,119 | $ | 822 | $ | 949 | |||||||||||||||
| Amount attributable to L3Harris Technologies, Inc. common shareholders | |||||||||||||||||||||||
| Income from continuing operations | $ | 1,847 | $ | 1,121 | $ | 823 | $ | 953 | |||||||||||||||
| Discontinued operations, net of income taxes | (1) | (2) | (1) | (4) | |||||||||||||||||||
| Net income | $ | 1,846 | $ | 1,119 | $ | 822 | $ | 949 | |||||||||||||||
| Net income per common share attributable to L3Harris Technologies, Inc. common shareholders | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Continuing operations | $ | 9.17 | $ | 5.24 | $ | 3.72 | $ | 8.06 | |||||||||||||||
| Discontinued operations | — | (0.01) | — | (0.03) | |||||||||||||||||||
| $ | 9.17 | $ | 5.23 | $ | 3.72 | $ | 8.03 | ||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Continuing operations | $ | 9.09 | $ | 5.19 | $ | 3.68 | $ | 7.89 | |||||||||||||||
| Discontinued operations | — | — | (0.01) | (0.03) | |||||||||||||||||||
| $ | 9.09 | $ | 5.19 | $ | 3.67 | $ | 7.86 |
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Net income | $ | 1,842 | $ | 1,086 | $ | 834 | $ | 949 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation (loss) gain, net of income taxes | (63) | 16 | 25 | (7) | |||||||||||||||||||
| Net unrealized loss on hedging derivatives, net of income taxes | (3) | (31) | (17) | (18) | |||||||||||||||||||
| Net unrecognized gain (loss) on postretirement obligations, net of income taxes | 758 | (313) | 178 | (480) | |||||||||||||||||||
| Other comprehensive income (loss), recognized during the period | 692 | (328) | 186 | (505) | |||||||||||||||||||
| Reclassification adjustments for losses (gains) included in net income | 1 | (3) | 13 | — | |||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | 693 | (331) | 199 | (505) | |||||||||||||||||||
| Total comprehensive income | 2,535 | 755 | 1,033 | 444 | |||||||||||||||||||
| Comprehensive loss (income) attributable to noncontrolling interests | 4 | 33 | (12) | — | |||||||||||||||||||
| Total comprehensive income attributable to L3Harris Technologies, Inc. | $ | 2,539 | $ | 788 | $ | 1,021 | $ | 444 |
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
| (In millions, except shares) | December 31, 2021 | January 1, 2021 | |||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 941 | $ | 1,276 | |||||||
| Receivables, net | 1,045 | 1,344 | |||||||||
| Contract assets | 3,021 | 2,437 | |||||||||
| Inventories | 982 | 973 | |||||||||
| Inventory prepayments | 48 | 61 | |||||||||
| Income taxes receivable | 98 | 295 | |||||||||
| Other current assets | 224 | 246 | |||||||||
| Assets of disposal group held for sale | — | 35 | |||||||||
| Total current assets | 6,359 | 6,667 | |||||||||
| Non-current Assets | |||||||||||
| Property, plant and equipment, net | 2,101 | 2,102 | |||||||||
| Operating lease right-of-use assets | 769 | 766 | |||||||||
| Goodwill | 18,189 | 18,876 | |||||||||
| Other intangible assets, net | 6,640 | 7,908 | |||||||||
| Deferred income taxes | 85 | 119 | |||||||||
| Other non-current assets | 566 | 522 | |||||||||
| Total non-current assets | 28,350 | 30,293 | |||||||||
| $ | 34,709 | $ | 36,960 | ||||||||
| Liabilities and Equity | |||||||||||
| Current Liabilities | |||||||||||
| Short-term debt | $ | 2 | $ | 2 | |||||||
| Accounts payable | 1,767 | 1,406 | |||||||||
| Contract liabilities | 1,297 | 1,198 | |||||||||
| Compensation and benefits | 444 | 496 | |||||||||
| Other accrued items | 1,002 | 1,068 | |||||||||
| Income taxes payable | 28 | 49 | |||||||||
| Current portion of long-term debt, net | 11 | 8 | |||||||||
| Liabilities of disposal group held for sale | — | 13 | |||||||||
| Total current liabilities | 4,551 | 4,240 | |||||||||
| Non-current Liabilities | |||||||||||
| Defined benefit plans | 614 | 1,906 | |||||||||
| Operating lease liabilities | 768 | 734 | |||||||||
| Long-term debt, net | 7,048 | 6,943 | |||||||||
| Deferred income taxes | 1,344 | 1,237 | |||||||||
| Other long-term liabilities | 1,065 | 1,059 | |||||||||
| Total non-current liabilities | 10,839 | 11,879 | |||||||||
| 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 193,511,401 and 208,230,353 shares at December 31, 2021 and January 1, 2021, respectively | 194 | 208 | |||||||||
| Other capital | 16,248 | 19,008 | |||||||||
| Retained earnings | 2,917 | 2,347 | |||||||||
| Accumulated other comprehensive loss | (146) | (839) | |||||||||
| Total shareholders’ equity | 19,213 | 20,724 | |||||||||
| Noncontrolling interests | 106 | 117 | |||||||||
| Total equity | 19,319 | 20,841 | |||||||||
| $ | 34,709 | $ | 36,960 |
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Operating Activities | |||||||||||||||||||||||
| Net income | $ | 1,842 | $ | 1,086 | $ | 834 | $ | 949 | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Amortization of acquisition-related intangibles | 627 | 709 | 289 | 115 | |||||||||||||||||||
| Depreciation and other amortization | 340 | 323 | 153 | 143 | |||||||||||||||||||
| Share-based compensation | 129 | 94 | 125 | 58 | |||||||||||||||||||
| Share-based matching contributions under defined contribution plans | 219 | 216 | 102 | 83 | |||||||||||||||||||
| Qualified pension plan contributions | (6) | (8) | (328) | (1) | |||||||||||||||||||
| Pension and other postretirement benefit plan income | (375) | (321) | (129) | (150) | |||||||||||||||||||
| Gain on pension plan curtailment | (1) | — | (23) | — | |||||||||||||||||||
| Impairment of goodwill and other assets | 244 | 767 | 46 | — | |||||||||||||||||||
| Business divestiture-related (gains) losses | (220) | 51 | (229) | — | |||||||||||||||||||
| Gain on sale of property, plant and equipment | — | (22) | — | — | |||||||||||||||||||
| Deferred income taxes | (114) | (215) | — | 44 | |||||||||||||||||||
| (Increase) decrease in: | |||||||||||||||||||||||
| Accounts receivable | 217 | (250) | 74 | (9) | |||||||||||||||||||
| Contract assets | (820) | (116) | 15 | (25) | |||||||||||||||||||
| Inventories | (68) | 60 | 158 | (1) | |||||||||||||||||||
| Prepaid expenses and other current assets | 23 | 57 | 127 | 2 | |||||||||||||||||||
| Increase (decrease) in: | |||||||||||||||||||||||
| Accounts payable | 430 | 173 | (148) | (84) | |||||||||||||||||||
| Contract liabilities | 178 | 14 | — | 124 | |||||||||||||||||||
| Compensation and benefits | (44) | 43 | (28) | 19 | |||||||||||||||||||
| Other accrued items | 20 | 41 | (128) | (95) | |||||||||||||||||||
| Income taxes | 190 | 61 | 47 | (23) | |||||||||||||||||||
| Other | (124) | 27 | (18) | 36 | |||||||||||||||||||
| Net cash provided by operating activities | 2,687 | 2,790 | 939 | 1,185 | |||||||||||||||||||
| Investing Activities | |||||||||||||||||||||||
| Net cash acquired in L3Harris Merger | — | — | 1,130 | — | |||||||||||||||||||
| Additions to property, plant and equipment | (342) | (368) | (173) | (161) | |||||||||||||||||||
| Proceeds from sale of property, plant and equipment, net | 7 | 91 | — | — | |||||||||||||||||||
| Proceeds from sales of businesses, net | 1,729 | 1,040 | 343 | — | |||||||||||||||||||
| Proceeds from sale of asset group | 10 | — | 20 | — | |||||||||||||||||||
| Other investing activities | (10) | (12) | — | 2 | |||||||||||||||||||
| Net cash provided by (used in) investing activities | 1,394 | 751 | 1,320 | (159) | |||||||||||||||||||
| Financing Activities | |||||||||||||||||||||||
| Net proceeds from borrowings | 6 | 901 | 396 | 27 | |||||||||||||||||||
| Repayments of borrowings | (13) | (931) | (505) | (308) | |||||||||||||||||||
| Payments of interest rate derivative obligations | — | (113) | (32) | — | |||||||||||||||||||
| Proceeds from exercises of employee stock options | 97 | 56 | 109 | 50 | |||||||||||||||||||
| Repurchases of common stock | (3,675) | (2,290) | (1,500) | (200) | |||||||||||||||||||
| Cash dividends | (817) | (725) | (337) | (325) | |||||||||||||||||||
| Tax withholding payments associated with vested share-based awards | (5) | (4) | (86) | (24) | |||||||||||||||||||
| Other financing activities | (6) | (6) | (16) | (1) | |||||||||||||||||||
| Net cash used in financing activities | (4,413) | (3,112) | (1,971) | (781) | |||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (3) | 23 | 6 | (3) | |||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (335) | 452 | 294 | 242 | |||||||||||||||||||
| Cash and cash equivalents, beginning of period | 1,276 | 824 | 530 | 288 | |||||||||||||||||||
| Cash and cash equivalents, end of period | $ | 941 | $ | 1,276 | $ | 824 | $ | 530 |
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF EQUITY
| (In millions, except per share amounts) | Common Stock | Other Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||
| Balance at June 29, 2018 | $ | 118 | $ | 1,714 | $ | 1,648 | $ | (202) | $ | — | $ | 3,278 | |||||||||||||||||||||||
| Net income | — | — | 949 | — | — | 949 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | (505) | — | (505) | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | 1 | 49 | — | — | — | 50 | |||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | 1 | 82 | — | — | — | 83 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | 57 | — | — | — | 57 | |||||||||||||||||||||||||||||
| Tax withholding payments on share-based awards | — | (24) | — | — | — | (24) | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | (1) | (100) | (99) | — | — | (200) | |||||||||||||||||||||||||||||
| Cash dividends ($2.74 per share) | — | — | (325) | — | — | (325) | |||||||||||||||||||||||||||||
| Balance at June 28, 2019 | 119 | 1,778 | 2,173 | (707) | — | 3,363 | |||||||||||||||||||||||||||||
| Net income | — | — | 822 | — | 12 | 834 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | 199 | — | 199 | |||||||||||||||||||||||||||||
| Shares issued for L3Harris Merger | 104 | 19,696 | — | — | — | 19,800 | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | 2 | 107 | — | — | — | 109 | |||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | — | 101 | — | — | — | 101 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | 122 | — | — | — | 122 | |||||||||||||||||||||||||||||
| Tax withholding payments on share-based awards | — | (86) | — | — | — | (86) | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | (7) | (1,018) | (475) | — | — | (1,500) | |||||||||||||||||||||||||||||
| Cash dividends ($1.50 per share) | — | — | (337) | — | — | (337) | |||||||||||||||||||||||||||||
| Fair value of noncontrolling interest recognized in purchase accounting | — | — | — | — | 155 | 155 | |||||||||||||||||||||||||||||
| Other | — | (6) | — | — | (10) | (16) | |||||||||||||||||||||||||||||
| Balance at January 3, 2020 | 218 | 20,694 | 2,183 | (508) | 157 | 22,744 | |||||||||||||||||||||||||||||
| Net income | — | — | 1,119 | — | (33) | 1,086 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | (331) | — | (331) | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | 1 | 55 | — | — | — | 56 | |||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | 1 | 215 | — | — | — | 216 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | 93 | — | — | — | 93 | |||||||||||||||||||||||||||||
| Tax withholding payments on share-based awards | — | (4) | — | — | — | (4) | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | (12) | (2,046) | (232) | — | — | (2,290) | |||||||||||||||||||||||||||||
| Cash dividends ($3.40 per share) | — | — | (725) | — | — | (725) | |||||||||||||||||||||||||||||
| Other | — | 1 | 2 | — | (7) | (4) | |||||||||||||||||||||||||||||
| Balance at January 1, 2021 | 208 | 19,008 | 2,347 | (839) | 117 | 20,841 | |||||||||||||||||||||||||||||
| Net income | — | — | 1,846 | — | (4) | 1,842 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | 693 | — | 693 | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | 1 | 96 | — | — | — | 97 | |||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | 1 | 218 | — | — | — | 219 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | 129 | — | — | — | 129 | |||||||||||||||||||||||||||||
| Tax withholding payments on share-based awards | — | (5) | — | — | — | (5) | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | (17) | (3,199) | (459) | — | — | (3,675) | |||||||||||||||||||||||||||||
| Cash dividends ($4.08 per share) | — | — | (817) | — | — | (817) | |||||||||||||||||||||||||||||
| Other | 1 | 1 | — | — | (7) | (5) | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 194 | $ | 16,248 | $ | 2,917 | $ | (146) | $ | 106 | $ | 19,319 |
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Organization — L3Harris Technologies, Inc., together with its subsidiaries, is an agile global aerospace and defense technology innovator, delivering end-to-end solutions that meet customers’ mission-critical needs. We provide advanced defense and commercial technologies across space, air, land, sea and cyber domains. 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 December 31, 2021, we had approximately 47,000 employees, including approximately 19,000 engineers and scientists.
Principles of Consolidation — Our Consolidated Financial Statements include the accounts of L3Harris Technologies, Inc. and its consolidated subsidiaries. As used in these Notes to the Consolidated Financial Statements (these “Notes”), the terms “L3Harris,” “Company,” “we,” “our” and “us” refer to L3Harris Technologies, Inc. and its consolidated subsidiaries. Intracompany transactions and accounts have been eliminated.
Amounts contained in this Report may not always add to totals due to rounding.
L3Harris Merger — See Note 4: Business Combination in these Notes for information related to the business combination in which Harris Corporation (“Harris”) and L3 Technologies, Inc. (“L3”) combined their respective businesses in an all-stock merger that resulted in our combined Company, L3Harris Technologies, Inc.
Due to the L3Harris Merger (as defined in Note 4: Business Combination in these Notes), which closed on June 29, 2019, the fiscal years ended December 31, 2021 and January 1, 2021 and two quarters ended January 3, 2020 reflect the results of the combined Company, while the fiscal year ended June 28, 2019 reflects the results of only Harris operating businesses.
Organizational Structure — We implemented a new organizational structure effective June 29, 2019, resulting in changes to our operating or reportable segments, which are referred to as our business segments. During the quarter ended April 3, 2020, we further adjusted our segment reporting to better align our businesses and transferred two businesses between our Integrated Mission Systems and Space & Airborne Systems segments. The historical results, discussion and presentation of our business segments as set forth in the accompanying Consolidated Financial Statements and these Notes reflect the impact of these changes for all periods presented in order to present segment information on a comparable basis. There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting from these changes. See Note 27: Subsequent Events in these Notes for information regarding our new structure effective in fiscal 2022.
Divestitures — See Note 3: Business Divestitures and Asset Sales in these Notes for information regarding the divestitures and other asset sales by us in fiscal 2021, fiscal 2020 and the two quarters ended January 3, 2020.
Fiscal Year — Through fiscal 2019, our fiscal year ended on the Friday nearest June 30. Commencing with the period from June 29, 2019 through January 3, 2020 (“Fiscal Transition Period”), our fiscal year ends on the Friday nearest December 31. Each of our fiscal years ended December 31, 2021 and January 1, 2021 included 52 weeks. Our Fiscal Transition Period included 27 weeks and our fiscal year ended June 28, 2019 included 52 weeks. The unaudited prior four quarter period results for the comparative period ended January 3, 2020 included 53 weeks and the unaudited prior two quarters period results for the comparative period ended December 28, 2018 included 26 weeks. See Note 26: Transition Period Comparative Data (Unaudited) in these Notes for additional information.
Use of Estimates — The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the accompanying Consolidated Financial Statements and these Notes and related disclosures. These estimates and assumptions are based on 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.
Reclassifications — The classification of certain prior-year amounts have been adjusted in our Consolidated Financial Statements to conform to current-year classifications. Reclassifications include finance lease liabilities that were previously included in the “Other accrued items” and “Other long-term liabilities” line items and are now reflected in the “Current portion of long-term debt, net” and “Long-term debt, net” line items in our Consolidated Balance Sheet.
Supplemental Cash Flow Information — Non-cash investing and financing activities during fiscal 2021 included a $260 million right-of-use asset we obtained in exchange for a corresponding operating lease liability. These non-cash investing and financing activities are excluded from the “Other investing” and “Other financing” line items in our Consolidated Statement of Cash Flows. Right-of-use assets for operating leases are included in the “Operating lease right-of-use assets” line item and the corresponding operating lease liabilities are included in the “Other accrued items” and “Operating lease liabilities” line items in our Consolidated Balance Sheet.
Non-cash investing and financing activities during fiscal 2021 included a $120 million right-of-use asset we obtained in exchange for a corresponding finance lease liability. These non-cash investing and financing activities are excluded from the “Additions of property, plant and equipment” and “Net proceeds from borrowings” line items in our Consolidated Statement of Cash Flows. Right-of-use assets for finance leases are included in the “Property, plant and equipment, net” line item and the corresponding finance lease liabilities are included in the “Current portion of long-term debt, net” and “Long-term debt, net” line items in our Consolidated Balance Sheet.
There were no material non-cash investing or financing activities during fiscal 2020.
Cash and Cash Equivalents — Cash and cash equivalents include cash at banks and 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 13: Debt in these Notes for additional information regarding fair values for our long-term fixed-rate debt. A discussion of fair values for our derivative financial instruments is included under the caption “Financial Instruments and Risk Management” in this Note 1: Significant Accounting Policies.
Fair Value Measurements — Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
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Level 1 — Quoted prices in active markets for identical assets or liabilities.
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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.
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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 at inception based on expected loss over the life of the receivable. We consider historical write-offs by customer, level of past due accounts and economic status of the customers. A receivable is considered 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, Net in these Notes for additional information regarding accounts receivable.
Contract Assets and Liabilities — The timing of revenue recognition, customer billings and cash collections results in accounts receivable, contract assets and contract liabilities at the end of each reporting period. Contract assets include unbilled amounts typically resulting from revenue recognized exceeding amounts billed to customers for contracts utilizing the percentage of completion (“POC”) cost-to-cost revenue recognition method. We bill customers as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, upon achievement of contractual milestones or upon deliveries and, in certain arrangements, the customer may withhold payment of a small portion of the contract price until contract completion. Contract liabilities include advance payments and billings in excess of revenue recognized, including deferred revenue. Contract assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period. The non-current portion of contract liabilities is included within the “Other long-term liabilities” line item in our Consolidated Balance Sheet.
Contract assets related to amounts withheld by customers until contract completion are not considered a significant financing component of our contracts because the intent is to protect the customers from our failure to satisfactorily complete our performance obligations. Payments received from customers in advance of revenue recognition are not considered a significant financing component of our contracts because they are utilized to pay for contract costs within a one-year period or are requested
by us to ensure the customers meet their payment obligations. See Note 6: Contract Assets and Contract Liabilities in these Notes for additional information.
Inventories — Inventories are valued at the lower of cost (determined by average and first-in, first-out methods) or net realizable value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements. See Note 7: Inventories in these Notes for additional information regarding inventories.
Costs to Obtain or Fulfill a Contract — Costs to obtain a contract are incremental direct costs incurred to obtain a contract with a customer, including sales commissions and dealer fees, and are capitalized if material. Costs to fulfill a contract include costs directly related to a contract or specific anticipated contract (for example, mobilization, set-up and certain design costs) that generate or enhance our ability to satisfy our performance obligations under these contracts. These costs are capitalized to the extent they are expected to be recovered from the associated contract. Capitalized costs to obtain or fulfill a contract are amortized to expense over the expected period of benefit for contracts with terms greater than one year on a systematic basis that is consistent with the pattern of transfer of the associated goods and services to the customer. As a practical expedient, capitalized costs to obtain or fulfill a contract with a term of one year or less are expensed as incurred. Capitalized costs to obtain or fulfill a contract included in the “Other current assets” and “Other non-current assets” line items in our Consolidated Balance Sheet were $11 million and $26 million, respectively, at December 31, 2021 and $14 million and $35 million, respectively, at January 1, 2021.
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 50 years. The estimated useful lives of machinery and equipment generally range between 2 and 15 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 8: Property, Plant and Equipment, Net in these Notes for additional information regarding property, plant and equipment.
Goodwill — We follow the acquisition method of accounting to record the assets and liabilities of acquired businesses at their estimated fair value at the date of acquisition. We initially record goodwill for the amount the consideration transferred exceeds the acquisition-date fair value of net identifiable assets acquired.
We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is our business segment level or one level below the business segment. We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter, 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.
To test goodwill for impairment, we may perform both qualitative and quantitative assessments. If we elect to perform a qualitative assessment for a certain reporting unit, we evaluate events and circumstances impacting the reporting unit to determine the probability that goodwill is impaired. If we determine it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, we measure any loss from an impairment by comparing the fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired, and an impairment loss is recognized in an amount equal to that excess. See Note 3: Business Divestitures and Asset Sales, Note 4: Business Combination and Note 9: Goodwill in these Notes for additional information regarding goodwill.
Long-Lived Assets, Including Intangible Assets — Long-lived assets, including finite-lived intangible assets, are amortized to expense over their useful lives either according to the underlying economic benefit as reflected by future net cash inflows or on a straight-line basis depending on the nature of the asset. We assess the recoverability of the carrying value of our long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. We evaluate the recoverability of such assets based on the expectations of undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. Indefinite-lived intangible assets are not amortized, but are tested annually for impairment. This testing compares the fair value of the asset to its carrying amount, and, when appropriate, the carrying amount of these assets is reduced to its fair value. See Note 8: Property, Plant and Equipment, Net and Note 10: Intangible Assets in these Notes for additional information regarding long-lived assets and intangible assets.
Leases — We recognize right-of-use (“ROU”) assets and lease liabilities in our Consolidated Balance Sheet for operating and finance leases under which we are the lessee. As a practical expedient, leases with a term of twelve months or less (including reasonably certain extension periods) and leases with expected lease payments of less than $250 thousand are expensed as incurred. Also as a practical expedient, we did not reassess lease classification for contracts in existence or expired prior to our
adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), as amended (“ASC 842”) on June 29, 2019, and we continue to account for these leases in accordance with Topic 840.
Operating lease assets and finance lease assets are included in the “Operating lease right-of-use assets” and “Property, plant and equipment, net” line items, respectively, in our Consolidated Balance Sheet. Operating lease liabilities and finance lease liabilities for obligations due within twelve months are included in the “Other accrued items” line item in our Consolidated Balance Sheet. Operating lease liabilities and finance lease liabilities for obligations due longer than twelve months are included in the “Operating lease liabilities” and “Other long-term liabilities” line items, respectively, in our Consolidated Balance Sheet.
ROU assets and lease liabilities are recognized based on the present value of future lease payments. Lease payments primarily include base rent. We have some lease payments that are based on an index and changes to the index are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. Our lease payments also include non-lease components such as real estate taxes and common-area maintenance costs. As a practical expedient, we account for lease and non-lease components as a single component. For certain leases, the non-lease components are variable and are therefore excluded from lease payments to determine the ROU asset. The present value of future lease payments is determined using our incremental borrowing rate at lease commencement over the expected lease term. We use our incremental borrowing rate because our leases do not provide an implicit lease rate. The expected lease term represents the number of years we expect to lease the property, including options to extend or terminate the lease when it is reasonably certain that we will exercise the option.
Operating lease expense is recognized as an operating cost on a straight-line basis over the expected lease term in our Consolidated Statement of Income. For finance leases, the asset is amortized on a straight-line basis over the lease term, and interest on the lease liability is recognized in interest expense.
We are a lessor for certain flight simulators and aircraft which meet the criteria for operating lease classification. Lease income associated with these leases was not material in fiscal 2021, fiscal 2020 or the two quarters ended January 3, 2020.
See Note 18: Lease Commitments in these Notes for additional information regarding leases.
Other Assets and Liabilities — No assets within the “Other current assets” or “Other non-current assets” line items in our Consolidated Balance Sheet exceeded 5 percent of our total current assets or total assets, respectively, at December 31, 2021 or January 1, 2021. 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, at December 31, 2021 or January 1, 2021.
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 22: Income Taxes in these Notes for additional information regarding income taxes.
Standard Warranties — We record estimated standard warranty costs in the period that control of the related products transfers to the customer. Factors that affect the estimated cost for warranties include the terms of the contract, the type and complexity of the delivered product, number of installed units, historical experience and management’s assumptions regarding anticipated rates of warranty claims and cost per claim. Our standard warranties start from the shipment, delivery or customer acceptance date and continue as follows:
| Segment | Average Warranty Period | |||||||
| Integrated Mission Systems | One to three years | |||||||
| Space & Airborne Systems | One to three years | |||||||
| Communication Systems | One to five years | |||||||
| Aviation Systems | One to two years |
Because our products are manufactured, in many cases, to customer specifications and their acceptance is based on meeting those specifications, we historically have experienced minimal warranty costs. Factors that affect our warranty liability include the number of installed units, historical experience, anticipated delays in delivery of products to end customers, in-country support for international sales and our assumptions regarding anticipated rates of warranty claims and cost per claim. We assess the adequacy of our recorded warranty liabilities every quarter and make adjustments to the liability as necessary. See Note 11: Accrued Warranties in these Notes for additional information regarding warranties.
Foreign Currency Translation — The functional currency for most international subsidiaries is the local currency. Assets and liabilities are translated at current rates of exchange and income and expense items are translated at the weighted average exchange rate for the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity.
Stock Options and Other Share-Based Compensation — We measure compensation cost for all share-based payments (including employee stock options) at fair value and recognize cost over the vesting period, with forfeitures recognized as they occur. It is our practice to issue shares when options are exercised. See Note 15: Stock Options and Other Share-Based Compensation in these Notes for additional information regarding share-based compensation.
Restructuring and Other Exit Costs — We record restructuring and other exit costs at their fair value when incurred. In cases where employees are required to render service until they are terminated in order to receive the termination benefits and will be retained beyond the minimum retention period, we record the expense ratably over the future service period. These costs are included as a component of the “Engineering, selling and administrative expenses” line items in our Consolidated Statement of Income. Restructuring payments and charges were not material for fiscal 2021 and liabilities outstanding related to restructuring actions were not material at December 31, 2021.
Revenue Recognition — We account for a contract when it has approval and commitment from all parties, the rights and payment terms of the parties can be identified, the contract has commercial substance and the collectability of the consideration, or transaction price, is probable. Our contracts are often subsequently modified to include changes in specifications, requirements or price that may create new or change existing enforceable rights and obligations. We do not account for contract modifications (including unexercised options) or follow-on contracts until they meet the requirements noted above to account for a contract.
At the inception of each contract, we evaluate the promised goods and services to determine whether the contract should be accounted for as having one or more performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. A substantial majority of our revenue is derived from long-term development and production contracts involving the design, development, manufacture or modification of aerospace and defense products and related services according to the customers’ specifications. Due to the highly interdependent and interrelated nature of the underlying goods and services and the significant service of integration that we provide, which often result in the delivery of multiple units, we account for these contracts as one performance obligation. For contracts that include both development/production and follow-on support services (for example, operations and maintenance), we generally consider the follow-on services distinct in the context of the contract and account for them as separate performance obligations. Additionally, a significant amount of our revenue is derived from contracts to provide multiple distinct goods to a customer where the goods can readily be sold to other customers based on their commercial nature and, accordingly, these goods are accounted for as separate performance obligations. Shipping and handling costs incurred after control of a product has transferred to the customer (for example, in free on board shipping arrangements) are treated as fulfillment costs and, therefore, are not accounted for as separate performance obligations. Also, we record taxes collected from customers and remitted to governmental authorities on a net basis in that they are excluded from revenue.
As noted above, our contracts are often subsequently modified to include changes in specifications, requirements or price. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Often, the deliverables in our contract modifications are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they are part of the existing contract, and we may be required to recognize a cumulative catch-up adjustment to revenue at the date of the contract modification.
We determine the transaction price for each contract based on our best estimate of the consideration we expect to receive, which includes assumptions regarding variable consideration, such as award and incentive fees. These variable amounts are generally awarded upon achievement of certain negotiated performance metrics, program milestones or cost targets and can be based upon customer discretion. We include such estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We estimate variable consideration primarily using the most likely amount method.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price of the good or service underlying each performance obligation. The standalone selling price represents the amount for which we would sell the good or service to a customer on a standalone basis (i.e., not sold as a bundle with any other products or services). Our contracts with the U.S. Government, including foreign military sales contracts, are subject to the Federal Acquisition Regulations (“FAR”) and the prices of our contract deliverables are typically based on our estimated or actual costs plus a reasonable profit margin. As a result, the standalone selling prices of the goods and services in these contracts are typically equal to the selling prices stated in the contract, thereby, eliminating the need to allocate (or reallocate) the transaction price to the multiple performance obligations. In our non-U.S. Government contracts, we also generally use the expected cost plus a reasonable profit margin approach to determine standalone selling price. In addition, we determine standalone selling price for certain contracts that are commercial in nature based on observable selling prices.
We recognize revenue for each performance obligation when (or as) the performance obligation is satisfied by transferring control of the promised goods or services underlying the performance obligation to the customer. The transfer of control can occur over time or at a point in time.
Point in Time Revenue Recognition: Our performance obligations are satisfied at a point in time unless they meet at least one of the following criteria, in which case they are satisfied over time:
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The customer simultaneously receives and consumes the benefits provided by our performance as we perform;
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Our performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced; or
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Our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date.
As noted above, a significant amount of our revenue is derived from contracts to provide multiple distinct goods to a customer that are commercial in nature and can readily be sold to other customers. These performance obligations do not meet any of the three criteria listed above to recognize revenue over time; therefore, we recognize revenue at a point in time, generally when the goods are received and accepted by the customer.
Over Time Revenue Recognition: For U.S. Government development and production contracts, there is a continuous transfer of control of the asset to the customer as it is being produced based on FAR clauses in the contract that provide the customer with lien rights to work in process and allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. This also typically applies to our contracts with prime contractors for U.S. Government development and production contracts, when the above-described FAR clauses are flowed down to us by the prime contractors.
Our non-U.S. Government development and production contracts, including international direct commercial contracts and U.S. contracts with state and local agencies, utilities, commercial and transportation organizations, often do not include the FAR clauses described above. However, over time revenue recognition is typically supported either through our performance creating or enhancing an asset that the customer controls as it is created or enhanced or based on other contractual provisions or relevant laws that provide us with an enforceable right to payment for our work performed to date plus a reasonable profit if our customer were permitted to and did terminate the contract for reasons other than our failure to perform as promised.
Revenue for our development and production contracts is recognized over time, typically using the POC cost-to-cost method, whereby we measure our progress towards completion of the performance obligation based on the ratio of costs incurred to date to estimated costs at completion under the contract. Because costs incurred represent work performed, we believe this method best depicts transfer of control of the asset to the customer.
For performance obligations to provide services that are satisfied over time, we recognize revenue either on a straight-line basis, the POC cost-to-cost method, or based on the right-to-invoice method (i.e., based on our right to bill the customer), depending on which method best depicts transfer of control to the customer.
Contract Estimates: Under the POC cost-to-cost method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. Recognition of profit on a contract requires estimates of the total cost at completion and transaction price and the measurement of progress towards completion. Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction price include contractual cost or performance incentives (such as incentive fees, award fees and penalties) and other forms of variable consideration as well as our historical experience and our expectation for performance on the contract. At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.
Net EAC adjustments had the following impact to earnings for the periods presented:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions, except per share amounts) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Net EAC adjustments, before income taxes | $ | 304 | $ | 400 | $ | 137 | $ | 17 | |||||||||||||||
| Net EAC adjustments, net of income taxes | 228 | 300 | 103 | 13 | |||||||||||||||||||
| Net EAC adjustments, net of income taxes, per diluted share | 1.12 | 1.39 | 0.46 | 0.10 | |||||||||||||||||||
Revenue recognized from performance obligations satisfied in prior periods was $402 million, $493 million, $170 million and $59 million in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively.
Bill-and-Hold Arrangements: For certain contracts, the finished product may temporarily be stored at our location under a bill-and-hold arrangement. Revenue is recognized on bill-and-hold arrangements at the point in time when the customer obtains control of the product and all of the following criteria have been met: the arrangement is substantive (for example, the customer has requested the arrangement); the product is identified separately as belonging to the customer; the product is ready for physical transfer to the customer; and we do not have the ability to use the product or direct it to another customer. In determining when the customer obtains control of the product, we consider certain indicators, including whether we have a present right to payment from the customer, whether title and/or significant risks and rewards of ownership have transferred to the customer and whether customer acceptance has been received (in the case of arrangements with customer acceptance provisions).
Backlog: Backlog, which is the equivalent of our remaining performance obligations, represents the future revenue we expect to recognize as we perform on our current contracts. Backlog comprises both funded backlog (i.e., firm orders for which funding is authorized and appropriated) and unfunded backlog. Backlog excludes unexercised contract options and potential orders under ordering-type contracts, such as indefinite delivery, indefinite quantity (“IDIQ”) contracts.
Retirement and Post-Employment Benefits — Defined benefit plans that we sponsor are accounted for as defined benefit pension and other postretirement defined benefit plans (collectively referred to as “defined benefit plans”). Accordingly, the funded or unfunded position of each defined benefit plan is recorded in our Consolidated Balance Sheet. Actuarial gains and losses and prior service costs or credits that have not yet been recognized through income are recorded in the “Accumulated other comprehensive loss” line item within equity in our Consolidated Balance Sheet, net of taxes, until they are amortized as a component of net periodic benefit cost. The determination of benefit obligations and the recognition of expenses related to defined benefit plans are dependent on various assumptions. The major assumptions primarily relate to discount rates, long-term expected rates of return on plan assets, the rate of future compensation increases, mortality, termination and health care cost trend rates. We develop each assumption using relevant Company experience in conjunction with market-related data. Actuarial assumptions are reviewed annually with third-party consultants and adjusted as appropriate. For the recognition of net periodic benefit cost, the calculation of the long-term expected return on plan assets is generally derived using a market-related value of plan assets based on yearly average asset values at the measurement date over the last five years, to be phased in over five years. Actual results that differ from our assumptions are accumulated and generally amortized for each plan to the extent required over the estimated future life expectancy or, if applicable, the future working lifetime of the plan’s active participants. The fair value of plan assets is determined based on market prices or estimated fair value at the measurement date. The measurement date for valuing defined benefit plan assets and obligations is the end of the month closest to our fiscal year end.
We record the service cost component of net periodic benefit income in the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Consolidated Statement of Income. The non-service cost components of net periodic benefit income are included in the “Non-operating income” line item in our Consolidated Statement of Income.
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.
See Note 14: Pension and Other Postretirement Benefits in these Notes for additional information regarding our defined benefit plans.
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 December 31, 2021, we were named, and continue to be named, as a potentially responsible party at 82 sites where future liabilities could exist. These sites included 8 sites owned by us, 63 sites associated with our former and current locations or operations and 11 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 $115 million. The current portion of our estimated environmental liability is included in the “Other accrued items” line item and the non-current portion is included in the “Other long-term liabilities” line item in our Consolidated Balance Sheet.
The relevant factors we considered in estimating our potential liabilities under applicable environmental statutes and regulations included some or all of the following as to each site: incomplete information regarding particular sites and other potentially responsible parties; uncertainty regarding the extent of investigation or remediation; our share, if any, of liability for such conditions; the selection of alternative remedial approaches; changes in environmental standards and regulatory requirements; probable 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 December 31, 2021, 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 are adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. We do not hold or issue derivatives for speculative trading purposes. See Note 19: Derivative Instruments and Hedging Activities in these Notes for additional information regarding our use of derivative instruments.
Income From Continuing Operations Per Share — For all periods presented in our Consolidated Financial Statements and these Notes, income from continuing operations per share is computed using the two-class method. The two-class method of computing income from continuing operations per share is an earnings allocation formula that determines income from continuing operations per share for common stock and any participating securities according to dividends paid and participation rights in undistributed earnings. Historically, our restricted stock awards and restricted stock unit awards generally have met the definition of participating securities and were included in the computations of income from continuing operations per basic and diluted common share. However, restricted stock awards and restricted stock unit awards granted during fiscal 2020 and the two quarters ended January 3, 2020 did not meet the definition of participating securities. Under the two-class method, income from continuing operations per common share is computed by dividing the sum of earnings distributed to common shareholders and undistributed earnings allocated to common shareholders by the weighted-average number of common shares outstanding for the period. Income from continuing operations per diluted common share is computed using the more dilutive of the two-class method or the
treasury stock method. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted-average shares outstanding during the period. See Note 16: Income From Continuing Operations Per Share in these Notes for additional information.
Business Segments — We evaluate each business segment’s performance based on its operating income or loss, which we define as profit or loss from operations before income taxes, including pension income and excluding interest income and expense, royalties and related intellectual property expenses, equity method investment income or loss and gains or losses from securities and other investments. Intersegment sales are generally transferred at cost to the buying segment, and the sourcing segment recognizes a profit that is eliminated. The “Corporate eliminations” line item in Note 24: Business Segments in these Notes represents the elimination of intersegment sales. Corporate expenses are primarily allocated to our business segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. The “Unallocated corporate department expense, net” line items in Note 24: Business Segments in these Notes represents the portion of corporate expenses not allocated to our business segments or elimination of intersegment profits. The “Pension adjustment” line item in Note 24: Business Segments in these Notes represents the reconciliation of the non-service cost components of net periodic pension and postretirement benefit income, which are a component of segment operating income but are included in the “Non-operating income” line item in our Consolidated Statement of Income. The non-service cost components of net periodic pension and postretirement benefit income includes interest cost, expected return on plan assets, amortization of net actuarial gain or loss and effect of curtailments or settlements under our pension and postretirement benefit plans.
NOTE 2: ACCOUNTING CHANGES OR RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
There have been no new accounting pronouncements which became effective during fiscal 2021 that have a material impact on our Consolidated Financial Statements.
NOTE 3: BUSINESS DIVESTITURES AND ASSET SALES
Completed Divestitures
The following table presents information regarding business divestitures and asset sales completed by us during fiscal 2021, 2020 and the two quarters ended January 3, 2020. There were no businesses divested during the fiscal year ended June 28, 2019.
| (In millions) | Business Segment**(1)** | Date of Divestiture | Sale Price | |||||||||||||||||||||||
| Fiscal 2021 | ||||||||||||||||||||||||||
| Narda-MITEQ business(2) | Aviation Systems | December 6, 2021 | $ | 75 | ||||||||||||||||||||||
| ESSCO business(3) | Aviation Systems | November 26, 2021 | 55 | |||||||||||||||||||||||
| Electron Devices business(4) | Aviation Systems | October 1, 2021 | 185 | |||||||||||||||||||||||
| VSE disposal group(5) | Aviation Systems | July 30, 2021 | 20 | |||||||||||||||||||||||
| CPS business(6) | Aviation Systems | July 2, 2021 | 398 | |||||||||||||||||||||||
| Military training business(7) | Aviation Systems | July 2, 2021 | 1,050 | |||||||||||||||||||||||
| $ | 1,783 | |||||||||||||||||||||||||
| Fiscal 2020 | ||||||||||||||||||||||||||
| EOTech business(8) | Communication Systems | July 31, 2020 | $ | 42 | ||||||||||||||||||||||
| Applied Kilovolts business(9) | Space & Airborne Systems | May 15, 2020 | 12 | |||||||||||||||||||||||
| Airport security and automation business(10) | Aviation Systems | May 4, 2020 | 1,000 | |||||||||||||||||||||||
| $ | 1,054 | |||||||||||||||||||||||||
| Two quarters ended January 3, 2020 | ||||||||||||||||||||||||||
| Harris Night Vision(11) | Other non-reportable businesses | September 13, 2019 | $ | 350 | ||||||||||||||||||||||
| Stormscope(12) | Aviation Systems | August 30, 2019 | 20 | |||||||||||||||||||||||
| $ | 370 | |||||||||||||||||||||||||
(1) Business segment in which the operating results of each divested business were reported through the date of divestiture.
(2) The Narda-MITEQ business manufactured component, satellite communication and radio frequency safety products for both military and commercial markets.
(3) The ESSCO business manufactured metal space frame ground radomes and composite structures.
(4) The Electron Devices and Narda Microwave-West divisions (“Electron Devices business”) manufactured microwave devices for ground-based, airborne and satellite communications and radar.
(5) The Voice Switch Enterprise disposal group (“VSE disposal group”) provided voice over internet protocol systems for air traffic management communications.
(6) The Combat Propulsion Systems and related businesses (“CPS business”) engineered, designed and manufactured engines, transmissions, suspensions and turret drive systems for tracked and wheeled combat vehicle systems.
(7) The military training business provided flight simulation solutions and training services to the U.S. Department of Defense (“DoD”) and foreign military agencies.
(8) The EOTech business manufactured holographic sighting systems, magnified field optics and accessories for military, law enforcement and commercial markets around the world.
(9) The Applied Kilovolts and Analytical Instrumentation business (“Applied Kilovolts business”) manufactured high-voltage power supplies and ion detectors for customers in fields such as biotechnology, materials science, healthcare, forensics, environmental sciences and homeland security.
(10) The Security & Detection Systems and MacDonald Humfrey Automation solutions business (“airport security and automation business”) provided solutions used by the aviation and transportation industries, regulatory and customs authorities, government and law enforcement agencies and commercial and other high-security facilities.
(11) The Harris Night Vision business was a global supplier of high-performance, vision-enhancing products for U.S. and allied military and security forces and commercial customers.
(12) The Stormscope product line (“Stormscope”) provided lightning detection systems for the aviation market.
Assets and Liabilities Held for Sale
The carrying amounts of the assets and liabilities of the VSE disposal group classified as held for sale in our Consolidated Balance Sheet at January 1, 2021 were $35 million and $13 million, respectively. There were no assets or liabilities classified as held for sale at December 31, 2021.
Income Before Income Taxes Attributable to Businesses Divested
The following table presents the amount of income before income taxes attributable to businesses divested in our Consolidated Statement of Income:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Electron Devices business | $ | 44 | $ | 33 | $ | 10 | N/A | ||||||||||||||||
| CPS business | 53 | 62 | 15 | N/A | |||||||||||||||||||
| Military training business | 35 | 84 | 22 | N/A | |||||||||||||||||||
| Airport security and automation business | N/A | * | 27 | N/A | |||||||||||||||||||
| Harris Night Vision | N/A | N/A | * | 27 | |||||||||||||||||||
*Not material
Business Divestiture-Related Gains (Losses)
The “Business divestiture-related gains (losses)” line item in our Consolidated Statement of Income is comprised of the following pre-tax gains (losses) associated with businesses divested:
| Fiscal Years Ended | |||||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||||||||
| Narda-MITEQ business | $ | (9) | $ | — | |||||||||||||||||||
| ESSCO business | 31 | — | |||||||||||||||||||||
| Electron Devices business | 31 | — | |||||||||||||||||||||
| VSE disposal group(1) | (29) | (18) | |||||||||||||||||||||
| CPS business(2) | (19) | — | |||||||||||||||||||||
| Military training business | 217 | — | |||||||||||||||||||||
| EOTech | — | 2 | |||||||||||||||||||||
| Airport security and automation business | — | (23) | |||||||||||||||||||||
| Other(3) | (2) | (12) | |||||||||||||||||||||
| Total Business divestiture-related gains (losses) | $ | 220 | $ | (51) |
(1)During the quarter ended July 3, 2020, upon classifying the VSE disposal group as held for sale, we recorded a non-cash impairment charge of $14 million, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2020. We recognized an $18 million non-cash remeasurement loss related to the VSE disposal group during fiscal 2020.
(2)During the quarter ended April 2, 2021, upon classifying the CPS business as held for sale, we recorded a non-cash impairment charge of $62 million, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2021. See Note 9: Goodwill in these Notes for additional information.
(3)Reflects adjustments to the gains and losses on completed divestitures not shown above, including for fiscal 2020, $12 million for finalization of purchase price adjustments and recognition of a non-cash adjustment related to working capital, which decreased the $229 million gain initially recognized on the sale of the Harris Night Vision business divested on September 13, 2019.
There were no business divestiture-related gains (losses) during the fiscal year ended June 28, 2019.
Fair Value of Businesses and Goodwill Allocation
For purposes of allocating goodwill to the disposal groups that represented a portion of a reporting unit, we determined the fair value of each disposal group based on the respective negotiated selling price (or estimated net cash proceeds, in the case of no negotiated selling price), and the fair value of the retained businesses of the respective reporting unit 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 in these Notes for additional information regarding the fair value hierarchy and see Note 9: Goodwill in these Notes for additional information regarding the impairment of goodwill related to our business divestitures.
NOTE 4: BUSINESS COMBINATION
On October 12, 2018, Harris Corporation, a Delaware corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with L3 Technologies, Inc., a Delaware corporation, and Leopard Merger Sub Inc., a Delaware corporation and a newly formed, direct wholly-owned subsidiary of Harris (“Merger Sub”), pursuant to which Harris and L3 agreed to combine their respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and into L3, with L3 continuing as the surviving corporation and a direct wholly-owned subsidiary of Harris (the “L3Harris Merger”).
The closing of the L3Harris Merger occurred on June 29, 2019 (“Closing Date”), the first day of our Fiscal Transition Period. Upon completion of the L3Harris Merger, Harris was renamed “L3Harris Technologies, Inc.” and each share of L3 common stock converted into the right to receive 1.30 shares (“Exchange Ratio”) of L3Harris common stock. Shares of L3Harris common stock, which previously traded under ticker symbol “HRS” on the New York Stock Exchange prior to completion of the L3Harris Merger, are traded under ticker symbol “LHX” following completion of the L3Harris Merger. L3Harris was owned on a fully diluted basis 54 percent by Harris shareholders and 46 percent by L3 shareholders immediately following the completion of the L3Harris Merger.
L3 was a prime contractor in intelligence, surveillance and reconnaissance (“ISR”) systems, aircraft sustainment (including modifications and fleet management of special mission aircraft), simulation and training, night vision and image intensification equipment and security and detection systems. L3 also was a leading provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. L3 employed approximately 31,000 employees and its customers included the U.S. Department of Defense and its prime contractors, the U.S. Intelligence Community, the U.S. Department of Homeland Security, foreign governments and domestic and foreign commercial customers. L3 generated calendar 2018 revenue of approximately $10 billion.
In connection with completion of the L3Harris Merger, we issued to L3 shareholders 104 million shares of L3Harris common stock, the trading price of which was $189.13 per share as of the Closing Date. In addition, we issued L3Harris share-based awards in replacement of certain outstanding L3 share-based awards held by employees.
We accounted for the L3Harris Merger under the acquisition method of accounting, which required us to measure identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree at their fair values as of the Closing Date, with the excess of the consideration transferred over those fair values recorded as goodwill.
Our calculation of consideration transferred is as follows:
| (In millions, except exchange ratio and per share amounts) | June 29, 2019 | ||||
| Outstanding shares of L3 common stock as of June 28, 2019 | 79.63 | ||||
| L3 restricted stock unit awards settled in shares of L3Harris common stock | 0.41 | ||||
| L3 performance unit awards settled in shares of L3Harris common stock | 0.04 | ||||
| 80.08 | |||||
| Exchange Ratio | 1.30 | ||||
| Shares of L3Harris common stock issued for L3 outstanding common stock | 104.10 | ||||
| Price per share of L3Harris common stock as of June 28, 2019 | $ | 189.13 | |||
| Fair value of L3Harris common stock issued for L3 outstanding common stock | $ | 19,689 | |||
| Fair value of replacement restricted stock units attributable to merger consideration | 10 | ||||
| Fair value of L3Harris stock options issued to replace L3 outstanding stock options | 101 | ||||
| Withholding tax liability incurred for converted L3 share-based awards | 45 | ||||
| Fair value of replacement award consideration | 156 | ||||
| Fair value of total consideration | 19,845 | ||||
| Less: cash acquired | (1,195) | ||||
| Total net consideration transferred | $ | 18,650 |
Our preliminary fair value estimates and assumptions to measure the assets acquired, liabilities assumed and noncontrolling interests in L3 were subject to change as we obtained additional information during the measurement period. We completed our accounting for the L3Harris Merger during the quarter ended July 3, 2020. The following table summarizes the initial fair value amounts recognized during the quarter ended September 27, 2019 for each major class of assets acquired or liabilities assumed and noncontrolling interests, as well as adjustments during the measurement period:
| (In millions) | Preliminary Fair Value as of September 27, 2019 | Measurement Period Adjustments | Adjusted Fair Value as of July 3, 2020 | ||||||||||||||
| Receivables | $ | 849 | $ | (20) | $ | 829 | |||||||||||
| Contract assets | 1,708 | (57) | 1,651 | ||||||||||||||
| Inventories | 1,056 | (73) | 983 | ||||||||||||||
| Other current assets | 517 | (16) | 501 | ||||||||||||||
| Property, plant and equipment | 1,176 | 43 | 1,219 | ||||||||||||||
| Operating lease right-of-use assets | 704 | 108 | 812 | ||||||||||||||
| Goodwill | 15,423 | (841) | 14,582 | ||||||||||||||
| Other intangible assets | 6,768 | 1,690 | 8,458 | ||||||||||||||
| Other non-current assets | 327 | (13) | 314 | ||||||||||||||
| Total assets acquired | $ | 28,528 | $ | 821 | $ | 29,349 | |||||||||||
| Accounts payable | $ | 898 | $ | (13) | $ | 885 | |||||||||||
| Contract liabilities | 722 | 4 | 726 | ||||||||||||||
| Other current liabilities | 772 | 301 | 1,073 | ||||||||||||||
| Operating lease liabilities | 715 | 45 | 760 | ||||||||||||||
| Defined benefit plans | 1,411 | — | 1,411 | ||||||||||||||
| Long-term debt, net | 3,548 | — | 3,548 | ||||||||||||||
| Other long-term liabilities | 1,661 | 480 | 2,141 | ||||||||||||||
| Total liabilities assumed | 9,727 | 817 | 10,544 | ||||||||||||||
| Net assets acquired | 18,801 | 4 | 18,805 | ||||||||||||||
| Noncontrolling interests | (151) | (4) | (155) | ||||||||||||||
| Total net consideration transferred | $ | 18,650 | $ | — | $ | 18,650 |
Additionally, we acquired certain off-market customer contracts in connection with the L3Harris Merger, and we have recorded liabilities as well as separate identifiable intangible assets for the acquisition-date fair value of the off-market
components of these customer contracts. In aggregate, the acquisition-date fair value of the off-market components was a net liability of $139 million. We measured the fair value of these components as the present value of the amount by which the terms of the contract with the customer deviated from the terms that a market participant could have achieved at the Closing Date. The off-market components of these contracts will be recognized as an increase to, or reduction of, revenue as we incur costs to satisfy the associated performance obligations. We recognized $20 million, $58 million and $13 million of revenue in fiscal 2021, fiscal 2020 and the Fiscal Transition Period, respectively, for amortization of net off-market contract liabilities. Fiscal 2020 also included the cumulative effect of amortization that would have been recognized in the Fiscal Transition Period. Future estimated revenue from the amortization of net off-market contract liabilities (based on the estimated pattern of cash flows to be incurred to satisfy associated performance obligations) is as follows: $15 million in 2022, $10 million in 2023 and $23 million in 2024.
The goodwill resulting from the L3Harris Merger was primarily associated with L3’s market presence and leading positions, growth opportunities in the markets in which L3 businesses operate, experienced work force and established operating infrastructures. Most of the goodwill related to the L3Harris Merger is nondeductible for tax purposes.
See Note 9: Goodwill in these Notes for more information regarding the allocation of goodwill by business segment.
The following table provides further detail of the fair value and weighted-average amortization period of identified intangible assets acquired by major intangible asset class:
| Weighted Average Amortization Period | Total | ||||||||||
| (In years) | (In millions) | ||||||||||
| Identifiable intangible assets acquired: | |||||||||||
| Customer relationships — government | 14 | $ | 5,082 | ||||||||
| Customer relationships — commercial | 15 | 860 | |||||||||
| Contract backlog | 3 | 19 | |||||||||
| Trade names — divisions | 9 | 123 | |||||||||
| Developed technologies | 7 | 550 | |||||||||
| Total identifiable intangible assets subject to amortization | 13 | 6,634 | |||||||||
| Trade names — corporate | indefinite | 1,803 | |||||||||
| In-process research and development | N/A | 21 | |||||||||
| Total identifiable intangible assets | $ | 8,458 |
L3Harris Merger-related charges were as follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Equity award acceleration charges, recognized upon change in control | $ | — | $ | — | $ | 70 | $ | — | |||||||||||||||
| Transaction costs, recognized as incurred | — | — | 83 | 31 | |||||||||||||||||||
| Additional cost of sales related to the fair value step-up in inventory sold | — | 31 | 142 | — | |||||||||||||||||||
| Restructuring charges, recognized as incurred | — | 10 | 117 | — | |||||||||||||||||||
| Facility consolidation costs | — | — | 48 | — | |||||||||||||||||||
| Integration costs, recognized as incurred | 128 | 130 | 72 | 34 | |||||||||||||||||||
| Total L3Harris Merger-related charges | $ | 128 | $ | 171 | $ | 532 | $ | 65 |
Because the L3Harris Merger benefited the entire Company as opposed to any individual business segment, the above costs were not allocated to any business segment. Most of the costs above were recorded in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income, except for additional cost of sales related to the fair value step-up in inventory sold, which is included in the “Cost of product sales and services” line item in our Consolidated Statement of Income and facility consolidation costs, the majority of which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income.
Pro Forma Results
The following unaudited consolidated pro forma results of operations for the four quarters ended January 3, 2020 combines reported results for the two quarters ended January 3, 2020 with the pro forma results for the two quarters ended June 28, 2019. The pro forma results for the two quarters ended June 28, 2019 were prepared on a pro forma basis, as if the L3Harris Merger had been completed on June 30, 2018, the first day of Harris’ fiscal 2019, after including any post-merger adjustments directly attributable to the L3Harris Merger, such as the sale of the Harris Night Vision business, and after including the impact of adjustments such as amortization of identifiable intangible assets, as well as the related income tax effects. This pro forma presentation does not include any impact of transaction synergies. The pro forma results are not necessarily indicative of our results of operations that actually would have been obtained had the L3Harris Merger been completed on the assumed date or for the period presented, or which may be realized in the future.
| Four Quarters Ended | Two Quarters Ended | ||||||||||
| (In millions) | January 3, 2020 | December 28, 2018 | |||||||||
| Revenue from product sales and services — as reported | $ | 12,856 | $ | 3,208 | |||||||
| Revenue from product sales and services — pro forma | 18,097 | 8,404 | |||||||||
| Income from continuing operations — as reported | 1,347 | 441 | |||||||||
| Income from continuing operations — pro forma | 1,652 | 760 |
NOTE 5: RECEIVABLES, NET
Receivables, net are summarized below:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Accounts receivable | $ | 1,088 | $ | 1,369 | |||||||||||||
| Less: allowances for collection losses | (43) | (25) | |||||||||||||||
| Receivables, net | $ | 1,045 | $ | 1,344 |
We have two receivables sale agreements (“RSAs”) with two separate third-party financial institutions that permit us to sell, on a non-recourse basis, up to $100 million each of outstanding receivables at any given time. From time to time, we have sold certain customer receivables under the RSAs, which we continue to service and collect on behalf of the third-party financial institutions and which we account for as sales of receivables with sale proceeds included in net cash from operating activities. Outstanding accounts receivable sold pursuant to the RSAs were $99.9 million at December 31, 2021, for net cash proceeds of $99.8 million. We did not have outstanding accounts receivable sold pursuant to the RSAs at January 1, 2021.
NOTE 6: CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets include unbilled amounts typically resulting from revenue recognized exceeding amounts billed to customers for contracts utilizing the POC cost-to-cost revenue recognition method. We bill customers as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, upon achievement of contractual milestones or upon deliveries and, in certain arrangements, the customer may withhold payment of a small portion of the contract price until contract completion. Contract liabilities include advance payments and billings in excess of revenue recognized, including deferred revenue associated with extended product warranties. Contract assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period.
Contract assets and liabilities in fiscal 2021 were impacted primarily by divestitures, accelerated progress payments due to the U.S. Government’s temporary increase in the progress payment rate from 80 percent to 90 percent and the timing of contractual billing milestones. The increase in contract assets from January 1, 2021 to December 31, 2021 is primarily attributable to a $323 million increase in unbilled contract receivables associated with an aircraft missionization program within our Integrated Mission Systems segment.
Contract assets and contract liabilities are summarized below:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Contract assets | $ | 3,021 | $ | 2,437 | |||||||||||||
| Contract liabilities, current | (1,297) | (1,198) | |||||||||||||||
| Contract liabilities, non-current(1) | (107) | (73) | |||||||||||||||
| Net contract assets | $ | 1,617 | $ | 1,166 |
(1)The non-current portion of contract liabilities is included as a component of the “Other long-term liabilities” line item in our Consolidated Balance Sheet.
The components of contract assets are summarized below:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Unbilled contract receivables, gross | $ | 4,825 | $ | 4,268 | |||||||||||||
| Unliquidated progress payments and advances | (1,804) | (1,831) | |||||||||||||||
| Contract assets | $ | 3,021 | $ | 2,437 |
Impairment losses related to our contract assets were not material in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020, or fiscal 2019. In fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, we recognized $930 million, $974 million, $776 million and $287 million, respectively**,** of revenue related to contract liabilities that were outstanding at the end of the respective prior fiscal year.
NOTE 7: INVENTORIES
Inventories are summarized below:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Finished products | $ | 141 | $ | 136 | |||||||||||||
| Work in process | 335 | 367 | |||||||||||||||
| Raw materials and supplies | 506 | 470 | |||||||||||||||
| Inventories | $ | 982 | $ | 973 |
NOTE 8: PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net are summarized below:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Land | $ | 79 | $ | 90 | |||||||||||||
| Software capitalized for internal use | 576 | 417 | |||||||||||||||
| Buildings | 1,236 | 1,097 | |||||||||||||||
| Machinery and equipment | 2,177 | 2,265 | |||||||||||||||
| 4,068 | 3,869 | ||||||||||||||||
| Less: accumulated depreciation and amortization | (1,967) | (1,767) | |||||||||||||||
| Property, plant and equipment, net | $ | 2,101 | $ | 2,102 |
Depreciation and amortization expense related to property, plant and equipment was $343 million, $318 million, $157 million and $138 million in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively.
As discussed in more detail in Note 10: Intangible Assets in these Notes, in conjunction with, and in advance of, the tests of goodwill related to our Commercial Training Solutions reporting unit (“CTS reporting unit”), we recorded an $82 million non-cash impairment charge for long-lived assets, consisting of $19 million, $56 million and $7 million of impairment charges for right-of-use assets, property, plant and equipment and marketable software, respectively, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2021.
In fiscal 2020, as discussed in more detail in Note 10: Intangible Assets in these Notes, in conjunction with, and in advance of, the tests of goodwill related to our Commercial Aviation Solutions reporting unit, we recorded a $257 million non-cash
impairment charge for long-lived assets, including a $103 million impairment charge for property, plant and equipment, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2020.
NOTE 9: GOODWILL
As discussed in Note 24: Business Segments in these Notes, after the completion of the L3Harris Merger, we adjusted our segment reporting to reflect our new organizational structure effective June 29, 2019. Immediately before and after our goodwill assignments, we completed an assessment of any potential goodwill impairment under our former and new segment reporting structure and determined that no impairment existed.
The assignment of goodwill and changes in the carrying amount of goodwill, by business segment, for fiscal 2021 and 2020 were as follows:
| (In millions) | Integrated Mission Systems | Space & Airborne Systems | Communication Systems | Aviation Systems | Total | ||||||||||||||||||||||||||||||
| Balance at January 3, 2020 | $ | 5,768 | $ | 5,131 | $ | 4,243 | $ | 4,859 | $ | 20,001 | |||||||||||||||||||||||||
| Goodwill decrease from divestitures(1) | — | (2) | (9) | (530) | (541) | ||||||||||||||||||||||||||||||
| Impairment of goodwill | — | (5) | — | (475) | (480) | ||||||||||||||||||||||||||||||
| Currency translation adjustments | (10) | (4) | 1 | (1) | (14) | ||||||||||||||||||||||||||||||
| Other (including adjustments to previously estimated fair value of assets acquired and liabilities assumed)(2) | 741 | 112 | (82) | (861) | (90) | ||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | 6,499 | 5,232 | 4,153 | 2,992 | 18,876 | ||||||||||||||||||||||||||||||
| Goodwill decrease from divestitures(1) | — | — | — | (564) | (564) | ||||||||||||||||||||||||||||||
| Impairment of goodwill | — | — | — | (62) | (62) | ||||||||||||||||||||||||||||||
| Currency translation adjustments | (14) | (30) | — | (17) | (61) | ||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 6,485 | $ | 5,202 | $ | 4,153 | $ | 2,349 | $ | 18,189 |
(1)During fiscal 2021, we completed the divestiture of six businesses (Narda-Miteq business, ESSCO business, CPS business, military training business, Electron Devices business and VSE disposal group) and derecognized $564 million of goodwill as part of determining the gain or loss on the sales of these businesses. During fiscal 2020, we completed the divestiture of three businesses (airport security and automation business, Applied Kilovolts and Analytical Instrumentation business and EOTech business) and derecognized $541 million of goodwill as part of determining the gain or loss on the sales of these businesses. See Note 3: Business Divestitures and Asset Sales in these Notes for additional information regarding completed divestitures.
(2)See Note 4: Business Combination in these Notes for additional information regarding adjustments to previously estimated fair values of assets acquired and liabilities assumed.
CPS Business Impairment. During the quarter ended April 2, 2021, we determined the criteria to be classified as held for sale were met with respect to the CPS business within our Aviation Systems segment and assigned $174 million of goodwill to the disposal group on a relative fair value basis. In connection with the preparation of our financial statements for the quarter ended April 2, 2021, we concluded that goodwill related to the CPS business was impaired and we recorded a non-cash impairment charge of $62 million, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2021. See Note 3: Business Divestitures and Asset Sales in these Notes for additional information.
Commercial Aviation Solutions Impairments. Indications of potential impairment of goodwill related to our Commercial Aviation Solutions reporting unit (which was part of our Aviation Systems segment) were present at April 3, 2020 due tothe COVID-19 pandemic (“COVID”) and its impact on global air traffic and customer operations, resulting in a decrease in fiscal 2020 outlook for the reporting unit, which we considered to be a triggering event requiring an interim impairment test. Consequently, in connection with the preparation of our financial statements for the quarter ended April 3, 2020, we performed a quantitative impairment test. To test for potential impairment of goodwill related to our Commercial Aviation Solutions reporting unit, we prepared an estimate of the fair value of the reporting unit based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions and projected discounted cash flows. Given the level of uncertainty in the outlook for the commercial aviation industry caused by the impact of COVID on global air traffic, our methodology for determining the fair value of the reporting unit placed the greatest weight on the expected fair value technique, and was dependent on our best estimates of future sales, operating costs and balance sheet metrics under a range of scenarios for future economic conditions. We assigned a probability to each scenario to calculate a set of probability-weighted projected cash flows, and an appropriate discount rate reflecting the risk in the projected cash flows was used to discount the expected cash flows to present value.
As adverse global economic and market conditions attributable to COVID, including projected declines and subsequent recovery in commercial air traffic and original equipment manufacturer production volumes, continued to develop during fiscal
2020, we continued to monitor for facts and circumstances that could negatively impact key valuation assumptions in determining the fair value of our Commercial Aviation Solutions reporting unit, including recent valuations, expectations regarding the timing of a return to pre-COVID commercial flight activity and the associated level of uncertainty, long-term revenue and profitability projections, discount rates and general industry, market and macroeconomic conditions. As a result, we determined indications of further impairment of assets related to our Commercial Aviation Solutions reporting unit existed as of July 3, 2020 and again as of early December 2020.
As a result of these impairment tests, we concluded that goodwill and other assets related to our Commercial Aviation Solutions reporting unit were impaired as of April 3, 2020, July 3, 2020 and January 1, 2021, and we recorded the following non-cash impairment charges:
-
$461 million (including $34 million attributable to noncontrolling interests) for impairment of goodwill during fiscal 2020, including $111 million recognized in the fourth quarter of fiscal 2020; and
-
$257 million for impairment of long-lived assets recognized during the fourth quarter of fiscal 2020, including $113 million for identifiable assets, $103 million for property, plant and equipment, $31 million for ROU assets and $10 million for marketable software.
These charges are included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2020 and are primarily not deductible for tax purposes.
Applied Kilovolts business impairment. During the quarter ended April 3, 2020, we determined the criteria to be classified as held for sale were met with respect to the Applied Kilovolts business within our Space & Airborne Systems segment and assigned $6 million of goodwill to the Applied Kilovolts business on a relative fair value basis. In connection with the preparation of our financial statements for the quarter ended April 3, 2020, we concluded that goodwill related to the Applied Kilovolts business was impaired and recorded a non-cash impairment charge of $5 million, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2020.
VSE Disposal Group Impairment. During the quarter ended July 3, 2020, we determined the criteria to be classified as held for sale were met with respect to the VSE disposal group within our Aviation Systems segment and assigned $14 million of goodwill to the VSE disposal group on a relative fair value basis. In connection with the preparation of our financial statements for the quarter ended July 3, 2020, we concluded that goodwill related to the VSE disposal group was impaired and recorded a non-cash impairment charge $14 million, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2020.
NOTE 10: INTANGIBLE ASSETS, NET
The most significant identifiable intangible asset that is separately recognized for our business combinations is customer relationships. Our customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows arising from the follow-on sales expected from the customer relationships over the estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value. We assess the recoverability of the carrying value of our finite-lived identifiable intangible assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. We assess the recoverability of the carrying value of indefinite-lived identifiable intangible assets annually, or under certain circumstances more frequently, such as when events and circumstances indicate there may be an impairment.
Commercial Training Solutions Impairment. During the quarter ended July 2, 2021, we adjusted our Aviation Systems segment reporting to better align our businesses and separated the Commercial Training Solutions (“CTS”) business from our Commercial Aviation Solutions reporting unit, creating a new reporting unit within the Commercial Aviation Solutions sector of our Aviation Systems segment. Immediately before and after our goodwill assignments, we completed an assessment of any potential goodwill impairment under our former and new reporting unit structure and determined that no impairment existed.
To test for potential impairment of the long-lived assets, including identifiable intangible assets and property, plant and equipment, related to CTS, we compared the estimated future cash flows (on an undiscounted basis) to be generated from the use and hypothetical eventual disposition of the asset group to its carrying value and, as a result, we determined the carrying value of the CTS asset group was not recoverable. Next, we prepared an estimate of the fair value of CTS based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions and projected discounted cash flows. We compared the fair value of CTS to our carrying value and recorded a $145 million non-cash charge for the impairment of CTS long-lived assets, including $63 million for impairment of identifiable intangible assets, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for the fiscal year ended December 31, 2021.
During the fiscal year ended January 1, 2021, in conjunction with, and in advance of, the tests of goodwill related to our Commercial Aviation Solutions reporting unit, we also performed recoverability tests of the long-lived assets of our Commercial Aviation Solutions reporting unit, including identifiable intangible assets and property, plant and equipment. To test these long-lived assets for recoverability, we compared the estimated future cash flows (on an undiscounted basis) to be generated from the use and hypothetical eventual disposition of the asset group to its carrying value. As a result, we concluded that the long-lived assets of our Commercial Aviation Solutions reporting unit were impaired as of January 1, 2021 and we recorded a $257 million non-cash impairment charge, including $113 million for impairment of identifiable intangible assets in the fourth quarter of fiscal 2020, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2020.
Identifiable intangible assets, net are summarized below:
| December 31, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||
| (In millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount (1) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount (1) | |||||||||||||||||||||||||||||
| Customer relationships | $ | 6,194 | $ | 1,708 | $ | 4,486 | $ | 6,863 | $ | 1,257 | $ | 5,606 | |||||||||||||||||||||||
| Developed technologies | 600 | 322 | 278 | 653 | 261 | 392 | |||||||||||||||||||||||||||||
| Contract backlog | 13 | 13 | — | 19 | 17 | 2 | |||||||||||||||||||||||||||||
| Trade names — divisions | 108 | 56 | 52 | 129 | 45 | 84 | |||||||||||||||||||||||||||||
| Other | 3 | 3 | — | 3 | 3 | — | |||||||||||||||||||||||||||||
| Total identifiable intangible assets subject to amortization | 6,918 | 2,102 | 4,816 | 7,667 | 1,583 | 6,084 | |||||||||||||||||||||||||||||
| In-process research and development | 21 | — | 21 | 21 | — | 21 | |||||||||||||||||||||||||||||
| Trade names — corporate | 1,803 | — | 1,803 | 1,803 | — | 1,803 | |||||||||||||||||||||||||||||
| Total identifiable intangible assets, net | $ | 8,742 | $ | 2,102 | $ | 6,640 | $ | 9,491 | $ | 1,583 | $ | 7,908 | |||||||||||||||||||||||
(1)During fiscal 2021, we completed the divestiture of six businesses and derecognized $577 million of intangible assets as part of the gain or loss on these divestitures. During fiscal 2020, we completed the divestiture of three businesses and derecognized $296 million of intangible assets as part of the gain or loss on these divestitures. Additionally, in connection with a then-pending divestiture, we reclassified $5 million of identifiable intangible assets to “Assets of disposal group held for sale” in our Consolidated Balance Sheet at January 1, 2021. See Note 3: Business Divestitures and Asset Sales in these Notes for additional information regarding divestitures.
Amortization expense for identifiable intangible assets was $627 million, $729 million and $290 million in fiscal 2021, fiscal 2020 and the two quarters ended January 3, 2020, respectively, and primarily related to the L3Harris Merger and our acquisition of Exelis Inc. (“Exelis”). Amortization expense for identifiable intangible assets was $115 million in fiscal 2019 and primarily related to our acquisition of Exelis.
Future estimated amortization expense for identifiable intangible assets is as follows:
| (In millions) | |||||
| 2022 | $ | 607 | |||
| 2023 | 600 | ||||
| 2024 | 562 | ||||
| 2025 | 516 | ||||
| 2026 | 460 | ||||
| Thereafter | 2,071 | ||||
| Total | $ | 4,816 |
NOTE 11: ACCRUED WARRANTIES
Our liability for standard product warranties is included as a component of the “Other accrued items” and “Other long-term liabilities” line items in our Consolidated Balance Sheet. Changes in our liability for standard product warranties in fiscal 2021 and 2020 were as follows:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Balance at the beginning of the period | $ | 133 | $ | 112 | |||||||||||||
| Adjustments to previously estimated fair value of warranty liabilities assumed | — | 19 | |||||||||||||||
| Decrease from divestitures | (5) | (9) | |||||||||||||||
| Accruals for product warranties issued during the period | 46 | 72 | |||||||||||||||
| Settlements made during the period | (56) | (61) | |||||||||||||||
| Other, including foreign currency translation adjustments | (1) | — | |||||||||||||||
| Balance at the end of the period | $ | 117 | $ | 133 |
NOTE 12: CREDIT ARRANGEMENTS
On June 28, 2019, we established a $2 billion, 5-year senior unsecured revolving credit facility (the “2019 Credit Facility”) by entering into a Revolving Credit Agreement (as amended, the “2019 Credit Agreement”) with a syndicate of lenders.
The 2019 Credit Agreement provides for the extension of credit to us in the form of revolving loans, including swingline loans and letters of credit, at any time and from time to time during the term of the 2019 Credit Agreement, in an aggregate principal amount at any time outstanding not to exceed $2 billion for both revolving loans and letters of credit, with a sub-limit of $140 million for swingline loans and a sub-limit of $350 million for letters of credit. Borrowings under the 2019 Credit Agreement are denominated in U.S. Dollars. The 2019 Credit Agreement includes a provision pursuant to which, from time to time, we may request that the lenders in their discretion increase the maximum amount of commitments under the 2019 Credit Agreement by an amount not to exceed $1 billion. Only consenting lenders (including new lenders reasonably acceptable to the administrative agent) will participate in any increase. In no event will the maximum amount of credit extensions available under the 2019 Credit Agreement exceed $3 billion. The proceeds of loans or letters of credit borrowings under the 2019 Credit Agreement are restricted from being used for hostile acquisitions (as defined in the 2019 Credit Agreement) or for any purpose in contravention of applicable laws. We are not otherwise restricted under the 2019 Credit Agreement from using the proceeds of loans or letters of credit borrowings under the 2019 Credit Agreement for working capital and other general corporate purposes or from using the 2019 Credit Facility to refinance existing debt and to repay maturing commercial paper issued by us from time to time. Subject to certain conditions (including the absence of any default and the accuracy of certain representations and warranties), we may borrow, prepay and re-borrow amounts under the 2019 Credit Agreement at any time during the term.
The 2019 Credit Agreement provides that we may designate wholly-owned subsidiaries organized in the United States, Canada or the United Kingdom (or such other jurisdictions as all lenders shall approve) as borrowers under the 2019 Credit Agreement. The obligations of any such subsidiary borrower shall be guaranteed by us.
The 2019 Credit Agreement provides that we may from time to time designate certain of our subsidiaries as unrestricted subsidiaries, which means certain of the representations and covenants in the 2019 Credit Agreement do not apply in respect of such subsidiaries.
At our election, borrowings under the 2019 Credit Agreement denominated in U.S. Dollars will bear interest either at (i) the eurocurrency rate for the applicable interest period plus an applicable margin, or (ii) the base rate plus an applicable margin. The eurocurrency rate for an interest period is the rate per annum equal to (a) the London interbank offered rate (“LIBOR”) for such interest period, divided by (b) a percentage equal to 1.00 minus the daily average eurocurrency reserve rate for such interest period. The applicable interest rate margin over the eurocurrency rate is currently equal to 1.250%, but may increase (to a maximum amount of 1.875%) or decrease (to a minimum amount of 1.125%) based on changes in the ratings of our senior unsecured long-term debt securities (“Senior Debt Ratings”). The base rate for any day is a rate per annum equal to the greatest of (i) the prime lending rate published in the Wall Street Journal, (ii) the Federal Reserve Bank of New York (“NYFRB”) Rate (“NYFRB Rate”) plus 0.500% (the NYFRB Rate is the greater of (a) the federal funds rate and (b) the overnight bank funding rate published by the NYFRB), and (iii) the eurocurrency rate for a one month interest period (as defined in the 2019 Credit Agreement) plus 1.000%. The applicable interest rate margin over the base rate is initially equal to 0.375%, but may increase (to a maximum amount of 0.875%) or decrease (to a minimum amount of 0.125%) based on changes in our Senior Debt Ratings.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the 2019 Credit Agreement and letter of credit fees, we are required to pay a quarterly unused commitment fee, which shall accrue at an applicable rate per annum multiplied by the actual daily amount of the lenders’ aggregate unused commitments under the 2019 Credit
Agreement. The applicable rate per annum for the unused commitment fee is currently equal to 0.150%, but may increase (to a maximum amount of 0.300%) or decrease (to a minimum amount of 0.125%) based on changes in our Senior Debt Ratings.
The 2019 Credit Agreement contains certain representations and warranties for the benefit of the administrative agent and the lenders. The 2019 Credit Agreement also contains certain affirmative covenants, and negative covenants with limitations on various transactions including a requirement that we not permit our ratio of consolidated total indebtedness (excluding defined benefit plan liabilities) to total capital, each as defined in the 2019 Credit Agreement, to be greater than 0.65:1.00. We were in compliance with the covenants in the 2019 Credit Agreement at December 31, 2021.
The 2019 Credit Agreement contains certain events of default, including: failure to make payments under the 2019 Credit Agreement; failure to perform or observe terms, covenants or agreements contained in the 2019 Credit Agreement; material inaccuracy of any representation or warranty under the 2019 Credit Agreement; payment default by us or certain of our subsidiaries under other indebtedness with a principal amount in excess of $200 million or acceleration of or ability to accelerate such other indebtedness; occurrence of one or more final judgments or orders for the payment by us or certain of our subsidiaries of money in excess of $200 million that remain unsatisfied; incurrence by us or certain of our subsidiaries of certain ERISA liability in excess of $200 million; any bankruptcy or insolvency of L3Harris or any material subsidiary; invalidity of 2019 Credit Agreement documentation; or a change of control (as defined in the 2019 Credit Agreement) of L3Harris. If an event of default occurs, then the lenders may, among other things, terminate their commitments and declare all outstanding borrowings to be immediately due and payable together with accrued interest and fees.
All principal amounts borrowed or outstanding under the 2019 Credit Agreement are due on June 28, 2024, unless (i) the commitments are terminated earlier either at our request or if certain events of default described in the 2019 Credit Agreement occur or (ii) the maturity date is extended pursuant to provisions allowing us, from time to time after June 28, 2020, but at least 45 days prior to the scheduled maturity date then in effect, to request that the scheduled maturity date then in effect be extended by one calendar year (with no more than one such extension permitted in any calendar year and no more than two such extensions during the term of the 2019 Credit Agreement), subject to approval by lenders holding a majority of the commitments under the 2019 Credit Agreement and satisfaction of certain conditions stated in the 2019 Credit Agreement (including the absence of any default and the accuracy of certain representations and warranties); provided, however, that all revolving loans of those lenders declining to participate in the requested extension and whose commitments under the 2019 Credit Agreement have not been replaced pursuant to customary replacement rights in our favor shall remain due and payable in full, and all commitments under the 2019 Credit Agreement of such declining lenders shall terminate, on the maturity date in effect prior to the requested extension. At December 31, 2021, we had no borrowings outstanding under the 2019 Credit Facility.
NOTE 13: DEBT
Long-Term Debt
Long-term debt, net is summarized below:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||
| Variable-rate debt: | |||||||||||
| Floating rate notes, due March 10, 2023 | $ | 250 | $ | 250 | |||||||
| Fixed-rate debt: | |||||||||||
| 3.85% notes, due June 15, 2023 | 800 | 800 | |||||||||
| 3.95% notes, due May 28, 2024 | 350 | 350 | |||||||||
| 3.832% notes, due April 27, 2025 | 600 | 600 | |||||||||
| 7.00% debentures, due January 15, 2026 | 100 | 100 | |||||||||
| 3.85% notes, due December 15, 2026 | 550 | 550 | |||||||||
| 6.35% debentures, due February 1, 2028 | 26 | 26 | |||||||||
| 4.40% notes, due June 15, 2028 | 1,850 | 1,850 | |||||||||
| 2.90% notes, due December 15, 2029 | 400 | 400 | |||||||||
| 1.80% notes, due January 15, 2031 | 650 | 650 | |||||||||
| 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 | |||||||||
| Total variable and fixed-rate debt | 6,776 | 6,776 | |||||||||
| Financing lease obligations and other debt | 218 | 91 | |||||||||
| Total debt | 6,994 | 6,867 | |||||||||
| Plus: unamortized bond premium | 93 | 116 | |||||||||
| Less: unamortized discounts and issuance costs | (28) | (32) | |||||||||
| Total debt, net | 7,059 | 6,951 | |||||||||
| Less: current portion of long-term debt, net | (11) | (8) | |||||||||
| Total long-term debt, net | $ | 7,048 | $ | 6,943 |
The potential maturities of long-term debt, including the current portion, for the five years following the end of fiscal 2021 and, in total, thereafter are: $15 million in fiscal 2022; $1,065 million in fiscal 2023; $362 million in fiscal 2024; $612 million in fiscal 2025; $662 million in fiscal 2026; and $4,278 million thereafter.
There were no repayments or issuance of fixed-rate or variable-rate debt during fiscal 2021.
Long-Term Debt Repaid in Fiscal 2020
Fixed-rate Debt. On December 14, 2020, we completed our optional redemption of the entire outstanding $650 million aggregate principal amount of our 4.95% 2021 Notes (as defined below under “Debt Exchange”) for a redemption price of $650 million as set forth in the 4.95% 2021 Notes. After adjusting for the carrying value of our unamortized premium, we recorded a $2 million gain on the extinguishment of the 4.95% 2021 Notes, which is included as a component of the “Non-operating income” line item in our Consolidated Statement of Income for fiscal 2020.
Variable-rate Debt. During the second quarter of fiscal 2020, we repaid at maturity the entire outstanding $250 million aggregate principal amount of our Floating Rate Notes due April 30, 2020.
Long-Term Debt Issued in Fiscal 2020
Fixed-rate Debt. On November 25, 2020, in order to fund the optional redemption of the 4.95% 2021 Notes as described above under “Long-Term Debt Repaid in Fiscal 2020,” we completed the issuance of $650 million in aggregate principal amount of 1.80% notes due January 15, 2031 (the “1.80% 2031 Notes”). Interest on the 1.80% 2031 Notes is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on July 15, 2021. At any time prior to October 15, 2030, we may redeem the 1.80% 2031 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 1.80% 2031 Notes or the sum of the present values of the remaining scheduled payments of the principal plus accrued interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis at the “Treasury Rate,” as defined in the 1.80% 2031 Notes, plus 15 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 October 15, 2030, we may redeem the 1.80% 2031 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 1.80% 2031 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 $6 million of debt issuance costs related to the issuance of the 1.80% 2031 Notes, which are being amortized using the effective interest rate method over the life of the 1.80% 2031 Notes, and such amortization is included as a component of the “Interest expense” line item in our Consolidated Statement of Income.
Variable-rate Debt. During the first quarter of 2020, we completed the issuance and sale of $250 million in aggregate principal amount of Floating Rate Notes due March 10, 2023 (the “Floating Rate Notes 2023”). The Floating Rate Notes 2023 bear interest at a floating rate, reset quarterly, equal to three-month LIBOR plus 0.75% per year. Interest on the Floating Rate Notes 2023 is payable quarterly in arrears on March 10, June 10, September 10 and December 10 of each year, commencing on June 10, 2020. The Floating Rate Notes 2023 are unsecured and unsubordinated and rank equally in right of payment with all other unsecured and unsubordinated indebtedness. The Floating Rate Notes 2023 are not redeemable at our option prior to maturity. Debt issuance costs related to the issuance of the Floating Rate Notes 2023 were not material. We used the net proceeds from the sale of the Floating Rate Notes 2023 to repay at maturity the aggregate principal amount of our Floating Rate Notes due April 30, 2020 as described above under “Long-Term Debt Repaid in Fiscal 2020”.
Debt Exchange
In connection with the L3Harris Merger, on July 2, 2019, we settled our previously announced debt exchange offers in which eligible holders of L3 senior notes (“L3 Notes”) could exchange such outstanding notes for (1) up to $3.35 billion aggregate principal amount of new notes issued by L3Harris (“New L3Harris Notes”) and (2) one dollar in cash for each $1,000 of principal amount. Each series of the New L3Harris Notes issued has an interest rate and maturity date that is identical to the L3 Notes.
| (In millions) | Aggregate Principal Amount of L3 Notes (prior to debt exchange) | Aggregate Principal Amount of New L3Harris Notes Issued | Aggregate Principal Amount of Remaining L3 Notes | ||||||||||||||
| 4.95% notes due February 15, 2021 (“4.95% 2021 Notes”) | $ | 650 | $ | 501 | $ | 149 | |||||||||||
| 3.85% notes due June 15, 2023 (“3.85% 2023 Notes”) | 800 | 741 | 59 | ||||||||||||||
| 3.95% notes due May 28, 2024 (“3.95% 2024 Notes”) | 350 | 326 | 24 | ||||||||||||||
| 3.85% notes due December 15, 2026 (“3.85% 2026 Notes”) | 550 | 535 | 15 | ||||||||||||||
| 4.40% notes due June 15, 2028 (“4.40% 2028 Notes”) | 1,000 | 918 | 82 | ||||||||||||||
| Total | $ | 3,350 | $ | 3,021 | $ | 329 |
Following the settlement of the exchange offers, there was $329 million of existing L3 Notes outstanding, which remained the senior unsecured obligations of L3.
On December 14, 2020, we redeemed the 4.95% 2021 Notes, as described above under “Long-Term Debt Repaid in Fiscal 2020.” Interest on the remaining New L3Harris Notes is payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 2019, in the case of the 3.85% 2023 Notes, 3.85% 2026 Notes and 4.40% 2028 Notes; and on May 28 and November 28, commencing on November 28, 2019, in the case of the 3.95% 2024 Notes. The New L3Harris Notes are unsecured senior obligations and rank equally in right of payment with all other L3Harris senior unsecured debt.
The New L3Harris Notes are redeemable in whole or in part at any time or in part from time to time, at our option, until three months prior to the maturity date, in the case of the 3.95% 2024 Notes, 3.85% 2026 Notes and 4.40% 2028 Notes, and until one month prior to the maturity date, in the case of the 3.85% 2023 Notes, at a redemption price equal to the greater of 100 percent of the principal amount of the notes to be redeemed or the sum of the present values of the principal amount and the remaining scheduled payments of interest on the notes to be redeemed, discounted from the scheduled payment dates to the date of redemption at the “treasury rate” as defined in the note, plus 20 basis points, in the case of the 3.85% 2023 Notes and 3.95% 2024 Notes, or 25 basis points, in the case of the 3.85% 2026 Notes and 4.40% 2028 Notes, plus, in each case, accrued and unpaid interest due at the date of redemption.
On March 31, 2020, we commenced offers to eligible holders (“Exchange Offers”) to exchange any and all outstanding New L3Harris Notes issued by L3Harris as set forth in the table above (the “Original Notes”), which were previously issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), for an equal principal amount of new notes registered under the Securities Act (the “Exchange Notes”).
The Exchange Notes were offered to satisfy L3Harris’ obligations under the registration rights agreement entered into as part of the issuance of the Original Notes, which occurred in exchange for the L3 Notes as described above.
The terms of the Exchange Notes issued in the Exchange Offers are substantially identical to the terms of the corresponding series of the Original Notes, except that the Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights and related special interest provisions applicable to the Original Notes do not apply to the Exchange Notes. Each series of Exchange Notes is part of the same corresponding series of the Original Notes and were issued under the same base indenture.
The Exchange Offers expired at 5:00p.m., New York City time, on May 1, 2020. On May 5, 2020, we settled the Exchange Offers and Issued Exchange Notes for validly tendered Original Notes for over 99.9 percent of the 4.95% 2021 Notes, 3.85% 2023 Notes, 3.95% 2024 Notes and 3.85% 2026 Notes and 98.9 percent of the 4.40% 2028 Notes.
Long-Term Debt Issued in the Two Quarters Ended January 3, 2020
Fixed-rate Debt: On November 27, 2019, we completed the issuance of $400 million in aggregate principal amount of 2.90% notes due December 15, 2029 (the “2.90% 2029 Notes”). Interest on the 2.90% 2029 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. At any time prior to September 15, 2029, we may redeem the 2.90% 2029 Notes, in whole or in part, at our option, at a “make-whole” redemption price equal to the greater of 100 percent of the principal amount of the 2.90% 2029 Notes or the sum of the present values of the remaining scheduled payments of the principal plus accrued interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis at the “Treasury Rate,” as defined in the 2.90% 2029 Notes, plus 20 basis points. We will pay accrued interest on the principal amount of notes being redeemed to, but not including, the redemption date. At any time on or after September 15, 2029, we may redeem the 2.90% 2029 Notes, in whole or in part, at our option, at a redemption price equal to 100 percent of the principal amount of the notes being redeemed, plus accrued interest on the principal amount of the notes being redeemed to, but not including, the redemption date. In addition, upon change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the 2.90% 2029 Notes at a price equal to 101 percent of the aggregate principal amount of the notes being repurchased, plus accrued interest on the notes being repurchased to, but not including, the date of repurchase. We incurred $3 million of debt issuance costs related to the issuance of the 2.90% 2029 Notes, which are being amortized using the effective interest rate method over the life of the 2.90% 2029 Notes, and such amortization is included as a component of the “Interest expense” line item in our Consolidated Statement of Income.
Long-Term Debt Issued in Fiscal 2018
On June 4, 2018, we completed the issuance of $850 million in aggregate principal amount of 4.40% notes due June 15, 2028 (the “New 2028 Notes”). Interest on the New 2028 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2018. At any time prior to March 15, 2028, we may redeem the New 2028 Notes, in whole or in part, at our option, at a “make-whole” redemption price equal to the greater of 100 percent of the principal amount of the New 2028 Notes or the sum of the present values of the remaining scheduled payments of the principal and interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis at the “Treasury Rate,” as defined in the New 2028 Notes, plus 25 basis points. We will pay accrued interest on the principal amount of notes being redeemed to, but not including, the redemption date. At any time on or 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.
Long-Term Debt Issued Prior to Fiscal 2018 that Remained Outstanding at December 31, 2021
On April 27, 2015, in connection with the then-pending acquisition of Exelis, to fund a portion of the cash consideration and other amounts payable under the terms of the merger agreement and to redeem certain of our existing notes, we issued long-term fixed-rate debt securities in the aggregate amount of $2.4 billion. The principal amounts, interest rates and maturity dates of these securities that remained outstanding at December 31, 2021 were as follows:
-
$600 million in aggregate principal amount of 3.832% notes due April 27, 2025 (the “2025 Notes”),
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$400 million in aggregate principal amount of 4.854% notes due April 27, 2035 (the “2035 Notes”) and
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$500 million in aggregate principal amount of 5.054% notes due April 27, 2045 (the “2045 Notes” and collectively with the 2025 Notes and 2035 Notes, the “Exelis Notes”).
Interest on each series of the Exelis Notes is payable semi-annually in arrears on April 27 and October 27 of each year, commencing October 27, 2015. The Exelis Notes are redeemable at our option up to one month prior to the scheduled maturity
date at a price equal to the greater of 100 percent of the principal amount of the notes being redeemed or the sum of the present values of the remaining scheduled payments, plus accrued interest, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus (i) 30 basis points in the case of the 2025 Notes, (ii) 35 basis points in the case of the 2035 Notes and (iii) 40 basis points in the case of the 2045 Notes. In addition, upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the Exelis Notes at a price equal to 101 percent of the aggregate principal amount of the notes being repurchased, plus accrued interest on the notes being repurchased to, excluding the date of repurchase.
On December 3, 2010, we completed the issuance of $300 million in aggregate principal amount of 6.150%. 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 7.00% 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:
| December 31, 2021 | January 1, 2021 | |||||||||||||||||||||||||||||||||||||
| (In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||||||||||||||||
| Long-term debt (including current portion)(1) | $ | 7,059 | $ | 7,701 | $ | 6,951 | $ | 7,986 |
(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 was $2 million at both December 31, 2021 and January 1, 2021. Interest expense incurred on our short-term debt was not material in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020, or fiscal 2019.
Interest Paid
Total interest paid was $284 million, $313 million, $144 million and $170 million in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively.
NOTE 14: PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined Contribution Plans
As of December 31, 2021, we sponsor numerous defined contribution savings plans, which allow our eligible employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. The plans include several match contribution formulas which requires us to match a percentage of the employee contributions up to certain limits, generally totaling 6.0% of employee eligible pay. Matching contributions, net of forfeitures, charged to expense were $230 million, $225 million, $105 million and $85 million in fiscal 2021 and 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively.
Deferred Compensation Plans
We also sponsor certain non-qualified deferred compensation plans. The following table provides the fair value of our deferred compensation plan investments and liabilities by category and by fair value hierarchy level:
| December 31, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||
| (In millions) | Total | Level 1 | Total | Level 1 | |||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Deferred compensation plan assets:(1) | |||||||||||||||||||||||||||||||||||
| Equity and fixed income securities | $ | 77 | $ | 77 | $ | 67 | $ | 67 | |||||||||||||||||||||||||||
| Investments measured at NAV: | |||||||||||||||||||||||||||||||||||
| Corporate-owned life insurance | 35 | 31 | |||||||||||||||||||||||||||||||||
| Total fair value of deferred compensation plan assets | $ | 112 | $ | 98 | |||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Deferred compensation plan liabilities:(2) | |||||||||||||||||||||||||||||||||||
| Equity securities and mutual funds | $ | 6 | $ | 6 | $ | 4 | $ | 4 | |||||||||||||||||||||||||||
| Investments measured at NAV: | |||||||||||||||||||||||||||||||||||
| Common/collective trusts and guaranteed investment contracts | 177 | 116 | |||||||||||||||||||||||||||||||||
| Total fair value of deferred compensation plan liabilities | $ | 183 | $ | 120 |
(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.
Our Salaried Pension Plan (“SPP”) is our largest defined benefit pension plan, with assets valued at $8.2 billion and a projected benefit obligation of $8.6 billion as of December 31, 2021.
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:
| December 31, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Total | Pension | Other Benefits | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of plan assets | $ | 9,604 | $ | 320 | $ | 9,924 | $ | 9,301 | $ | 299 | $ | 9,600 | |||||||||||||||||||||||||||||||||||||||||
| Projected benefit obligation | (10,007) | (348) | (10,355) | (11,045) | (387) | (11,432) | |||||||||||||||||||||||||||||||||||||||||||||||
| Funded status | $ | (403) | $ | (28) | $ | (431) | $ | (1,744) | $ | (88) | $ | (1,832) | |||||||||||||||||||||||||||||||||||||||||
| Consolidated Balance Sheet line item amounts: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other non-current assets | $ | 150 | $ | 51 | $ | 201 | $ | 88 | $ | 8 | $ | 96 | |||||||||||||||||||||||||||||||||||||||||
| Compensation and benefits | (11) | (7) | (18) | (10) | (8) | (18) | |||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities of disposal group held for sale | — | — | — | (4) | — | (4) | |||||||||||||||||||||||||||||||||||||||||||||||
| Defined benefit plans | (542) | (72) | (614) | (1,818) | (88) | (1,906) |
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:
| December 31, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Total | Pension | Other Benefits | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial loss (gain) | $ | 209 | $ | (73) | $ | 136 | $ | 1,215 | $ | (28) | $ | 1,187 | |||||||||||||||||||||||||||||||||||||||||
| Net prior service (credit) cost | (218) | 6 | (212) | (253) | 7 | (246) | |||||||||||||||||||||||||||||||||||||||||||||||
| $ | (9) | $ | (67) | $ | (76) | $ | 962 | $ | (21) | $ | 941 |
The following table provides a roll-forward of the projected benefit obligations for our defined benefit plans:
| December 31, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Total | Pension | Other Benefits | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Change in benefit obligation | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Benefit obligation at beginning of fiscal year | $ | 11,045 | $ | 387 | $ | 11,432 | $ | 10,268 | $ | 369 | $ | 10,637 | |||||||||||||||||||||||||||||||||||||||||
| Service cost | 66 | 2 | 68 | 65 | 2 | 67 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest cost | 188 | 5 | 193 | 273 | 10 | 283 | |||||||||||||||||||||||||||||||||||||||||||||||
| Actuarial (gain) loss | (381) | (22) | (403) | 1,035 | 24 | 1,059 | |||||||||||||||||||||||||||||||||||||||||||||||
| Benefits paid | (555) | (24) | (579) | (569) | (26) | (595) | |||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | (268) | — | (268) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Expenses paid | (31) | — | (31) | (42) | — | (42) | |||||||||||||||||||||||||||||||||||||||||||||||
| Divestiture | (65) | — | (65) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | 8 | — | 8 | 15 | 8 | 23 | |||||||||||||||||||||||||||||||||||||||||||||||
| Benefit obligation at end of fiscal year | $ | 10,007 | $ | 348 | $ | 10,355 | $ | 11,045 | $ | 387 | $ | 11,432 |
Actuarial gains in the projected benefit obligation as of December 31, 2021 were primarily the result of the increase in the discount rate. Other sources of gains and losses such as plan experience, updated census data, mortality updates and minor adjustments to actuarial assumptions generated combined gains and losses of less than 1% of expected year end obligations.
The following table provides a roll-forward of the assets and the ending funded status of our defined benefit plans:
| December 31, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Total | Pension | Other Benefits | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Change in plan assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Plan assets at beginning of fiscal year | $ | 9,301 | $ | 299 | $ | 9,600 | $ | 8,618 | $ | 274 | $ | 8,892 | |||||||||||||||||||||||||||||||||||||||||
| Actual return on plan assets | 1,215 | 43 | 1,258 | 1,263 | 40 | 1,303 | |||||||||||||||||||||||||||||||||||||||||||||||
| Employer contributions | 17 | 2 | 19 | 20 | 11 | 31 | |||||||||||||||||||||||||||||||||||||||||||||||
| Benefits paid | (555) | (24) | (579) | (569) | (26) | (595) | |||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | (268) | — | (268) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Expenses paid | (31) | — | (31) | (42) | — | (42) | |||||||||||||||||||||||||||||||||||||||||||||||
| Divestiture | (78) | — | (78) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | 3 | — | 3 | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||||||||||
| Plan assets at end of fiscal year | $ | 9,604 | $ | 320 | $ | 9,924 | $ | 9,301 | $ | 299 | $ | 9,600 | |||||||||||||||||||||||||||||||||||||||||
| Funded status at end of fiscal year | $ | (403) | $ | (28) | $ | (431) | $ | (1,744) | $ | (88) | $ | (1,832) |
The accumulated benefit obligation for all defined benefit pension plans was $10.0 billion at December 31, 2021. The following tables provide information for benefit plans with accumulated benefit obligations in excess of plan assets and benefit plans with projected benefit obligations in excess of plan assets:
| December 31, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Pension | Other Benefits | |||||||||||||||||||||||||||||||
| Accumulated benefit obligation | $ | 9,216 | N/A | $ | 10,469 | N/A | |||||||||||||||||||||||||||||
| Fair value of plan assets | 8,672 | N/A | 8,658 | N/A |
| December 31, 2021 | January 3, 2020 | ||||||||||||||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Pension | Other Benefits | |||||||||||||||||||||||||||||||
| Projected benefit obligation | $ | 9,340 | $ | 109 | $ | 10,522 | $ | 181 | |||||||||||||||||||||||||||
| Fair value of plan assets | 8,786 | 30 | 8,689 | 85 |
Income Statement Information
The following table provides the components of net periodic benefit income and other amounts recognized in other comprehensive income in fiscal 2021 and 2020, the two quarters ended January 3, 2020 and in fiscal 2019 as they pertain to our defined benefit plans:
| Pension | |||||||||||||||||||||||
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Net periodic benefit income | |||||||||||||||||||||||
| Service cost | $ | 66 | $ | 65 | $ | 42 | $ | 36 | |||||||||||||||
| Interest cost | 188 | 273 | 149 | 209 | |||||||||||||||||||
| Expected return on plan assets | (621) | (630) | (314) | (382) | |||||||||||||||||||
| Amortization of net actuarial loss | 30 | 10 | 1 | — | |||||||||||||||||||
| Amortization of prior service credit | (28) | (28) | (5) | — | |||||||||||||||||||
| Cost for special termination benefits | — | 1 | — | — | |||||||||||||||||||
| Effect of curtailments or settlements | 1 | — | (18) | 1 | |||||||||||||||||||
| Net periodic benefit income | $ | (364) | $ | (309) | $ | (145) | $ | (136) | |||||||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive loss | |||||||||||||||||||||||
| Net actuarial (gain) loss | $ | (972) | $ | 403 | $ | 55 | $ | 625 | |||||||||||||||
| Prior service cost (credit) | 2 | 1 | (292) | 3 | |||||||||||||||||||
| Amortization of net actuarial loss | (30) | (10) | (5) | — | |||||||||||||||||||
| Amortization of prior service credit (cost) | 28 | 28 | 5 | (1) | |||||||||||||||||||
| Currency translation adjustment | 1 | 2 | — | — | |||||||||||||||||||
| Recognized prior service credit | 4 | — | — | — | |||||||||||||||||||
| Recognized net actuarial loss | (4) | — | — | — | |||||||||||||||||||
| Recognized net loss due to divestiture | — | — | (13) | — | |||||||||||||||||||
| Total change recognized in other comprehensive loss | (971) | 424 | (250) | 627 | |||||||||||||||||||
| Total impact from net periodic benefit cost and changes in other comprehensive loss | $ | (1,335) | $ | 115 | $ | (395) | $ | 491 |
Effective January 1, 2020, for certain acquired L3 U.S. defined benefit pension plans, benefit accruals were frozen and replaced with a 1% cash balance benefit formula for certain employees who were not considered highly compensated on December 31, 2018. During the two quarters ended January 3, 2020, we recognized a $23 million curtailment gain as a result of this change, and a $5 million settlement loss resulting from the payout of the liabilities of a non-qualified benefit plan due to the change in control provisions.
During fiscal 2021, we reduced our pension benefit obligations by purchasing group annuity policies and transferring approximately $250 million of pension plan assets to an insurance company thereby reducing our defined benefit obligations by approximately $250 million. As a result of the annuity purchases, we recognized a pre-tax loss of $4 million in fiscal 2021 which is included as a component of the “Non-operating income” line item in our Consolidated Statement of Income. We also recognized a pre-tax curtailment gain of $3 million in fiscal 2021 as a result of employee terminations, which is included as a component of the “Non-operating income” line item in our Consolidated Statement of Income.
| Other Benefits | |||||||||||||||||||||||
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Net periodic benefit income | |||||||||||||||||||||||
| Service cost | $ | 2 | $ | 2 | $ | 1 | $ | — | |||||||||||||||
| Interest cost | 5 | 10 | 5 | 8 | |||||||||||||||||||
| Expected return on plan assets | (20) | (21) | (10) | (16) | |||||||||||||||||||
| Amortization of net actuarial loss | — | (3) | (3) | (6) | |||||||||||||||||||
| Amortization of prior service credit | 1 | — | — | — | |||||||||||||||||||
| Net periodic benefit income | $ | (12) | $ | (12) | $ | (7) | $ | (14) | |||||||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive loss | |||||||||||||||||||||||
| Net actuarial loss (gain) | $ | (46) | $ | 4 | $ | (1) | $ | 4 | |||||||||||||||
| Prior service cost | — | 8 | — | — | |||||||||||||||||||
| Amortization of net actuarial gain | — | 3 | 3 | 6 | |||||||||||||||||||
| Amortization of prior service cost | (1) | — | — | — | |||||||||||||||||||
| Total change recognized in other comprehensive loss | (47) | 15 | 2 | 10 | |||||||||||||||||||
| Total impact from net periodic benefit cost and changes in other comprehensive loss | $ | (59) | $ | 3 | $ | (5) | $ | (4) |
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: | December 31, 2021 | January 1, 2021 | |||||||||||||||||||||
| Discount rate | 2.75 | % | 2.31 | % | |||||||||||||||||||
| Rate of future compensation increase | 3.01 | % | 3.01 | % | |||||||||||||||||||
| Cash balance interest crediting rate | 3.50 | % | 3.50 | % | |||||||||||||||||||
| Cost assumptions for fiscal periods ended: | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Discount rate to determine service cost | 2.26 | % | 2.87 | % | 3.11 | % | 3.89 | % | |||||||||||||||
| Discount rate to determine interest cost | 1.80 | % | 2.74 | % | 2.94 | % | 3.75 | % | |||||||||||||||
| Expected return on plan assets | 7.43 | % | 7.68 | % | 7.68 | % | 7.66 | % | |||||||||||||||
| Rate of future compensation increase | 3.01 | % | 2.80 | % | 2.97 | % | 2.76 | % | |||||||||||||||
| Cash balance interest crediting rate | 3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % |
Key assumptions for the SPP (our largest defined benefit pension plan with 86% of the total projected benefit obligation) included a discount rate for obligation assumptions of 2.75%, a cash balance interest crediting rate of 3.50% and expected return on plan assets of 7.50% for fiscal 2021, which is being maintained at 7.50% for fiscal 2022. There is also a frozen pension equity benefit that assumes a 3.25% interest crediting rate.
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: | December 31, 2021 | January 1, 2021 | |||||||||||||||||||||
| Discount rate | 2.60 | % | 2.10 | % | |||||||||||||||||||
| Rate of future compensation increase | N/A | N/A | |||||||||||||||||||||
| Cost assumptions for fiscal periods ended: | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Discount rate to determine service cost | 2.49 | % | 3.25 | % | 3.47 | % | 4.14 | % | |||||||||||||||
| Discount rate to determine interest cost | 1.42 | % | 2.55 | % | 2.74 | % | 3.62 | % | |||||||||||||||
| Rate of future compensation increase | N/A | N/A | N/A | N/A |
The expected long-term rate of return on plan assets reflects the expected returns for each major asset class in which the plans invest, the weight of each asset class in the strategic allocation, the correlations among asset classes and their expected volatilities. Our expected rate of return on plan assets is estimated by evaluating both historical returns and estimates of future returns. Specifically, the determination of the expected long-term rate of return takes into consideration: (1) the plan’s actual historical annual return on assets over the past 15-, 20- and 25-year time periods, (2) historical broad market returns over long-term timeframes weighted by the plan’s strategic allocation and (3) independent estimates of future long-term asset class returns, weighted by the plan’s strategic allocation. Based on this approach, the long-term expected annual rate of return on assets is estimated at 7.50% for fiscal 2022 for the U.S. defined benefit pension plans. The weighted average long-term expected annual rate of return on assets for all defined benefit pension plans is estimated to be 7.43% for fiscal 2022. In fiscal 2021, we adopted updated mortality tables, which resulted in an increase in the defined benefit plans’ projected benefit obligation as of December 31, 2021 and estimated net periodic benefit cost beginning with fiscal 2022.
The assumed composite rate of future increases in the per capita healthcare costs (the healthcare trend rate) is 6.70% for fiscal 2022, decreasing ratably to 4.70% by fiscal 2032. 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 | 40 | % | — | 60% | |||||||
| Fixed income investments | 25 | % | — | 35% | |||||||
| Alternative investments | 10 | % | — | 25% | |||||||
| 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, real estate investment trusts and exchange traded funds, are generally valued at the closing price reported on the major market exchanges on which the individual securities are traded at the measurement date. Because these assets are traded predominantly on liquid, widely traded public exchanges, equity securities are categorized as Level 1 assets.
-
Private equity funds, which include buy-out, mezzanine, venture capital, distressed asset and secondary funds, are typically limited partnership investment structures. Private equity funds are valued using a market approach based on NAV calculated by the funds and are not publicly available. Private equity funds generally have liquidity restrictions that extend for ten or more years. At December 31, 2021 and January 1, 2021, our defined benefit plans had future
unfunded commitments totaling $504 million and $518 million, respectively, related to private equity fund investments.
-
Real estate funds, which include core, core plus, value-add and opportunistic funds, are typically limited partnership investment structures. Real estate funds are valued using a market approach based on NAV calculated by the funds and are not publicly available. Real estate funds generally permit redemption on a quarterly basis with 90 or fewer days-notice. At December 31, 2021, our defined benefit plans had future unfunded commitments totaling $100 million related to real estate fund investments. At January 1, 2021, we had no future unfunded commitments related to real estate fund investments.
-
Hedge funds, which include equity long/short, event-driven, fixed-income arbitrage and global macro strategies, are typically limited partnership investment structures. Limited partnership interests in hedge funds are valued using a market approach based on NAV calculated by the funds and are not publicly available. Hedge funds generally permit redemption on a quarterly or more frequent basis with 90 or fewer days-notice. At each of December 31, 2021 and January 1, 2021, our defined benefit plans had no future unfunded commitments related to hedge fund investments.
-
Fixed income investments, which include U.S. Government securities, investment and non-investment grade corporate bonds and securitized bonds are generally valued using pricing models that use verifiable, observable market data such as interest rates, benchmark yield curves and credit spreads, bids provided by brokers or dealers, or quoted prices of securities with similar characteristics. Fixed income investments are generally categorized as Level 2 assets. Fixed income funds valued at the closing price reported on the major market exchanges on which the individual fund is traded are categorized as Level 1 assets.
-
Other is comprised of guaranteed insurance contracts valued at book value, which approximates fair value, calculated using the prior-year balance adjusted for investment returns and changes in cash flows and corporate owned life insurance policies valued at the accumulated benefit.
-
Cash and cash equivalents are primarily comprised of short-term money market funds valued at cost, which approximates fair value, or valued at quoted market prices of identical instruments. Cash and currency are categorized as Level 1 assets; cash equivalents, such as money market funds or short-term commingled funds, are categorized as Level 2 assets.
-
Certain investments that are valued using the NAV per share (or its equivalent) as a practical expedient are not categorized in the fair value hierarchy and are included in the table to permit reconciliation of the fair value hierarchy to the aggregate postretirement benefit plan assets.
The following tables provide the fair value of plan assets held by our defined benefit plans by asset category and by fair value hierarchy level:
| December 31, 2021 | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Asset Category | |||||||||||||||||||||||
| Equities: | |||||||||||||||||||||||
| Domestic equities | $ | 1,684 | $ | 1,684 | $ | — | $ | — | |||||||||||||||
| International equities | 1,367 | 1,278 | 89 | — | |||||||||||||||||||
| Real Estate Investment Trusts | 259 | 259 | — | — | |||||||||||||||||||
| Fixed income: | |||||||||||||||||||||||
| Corporate bonds | 1,411 | — | 1,335 | 76 | |||||||||||||||||||
| Government securities | 448 | — | 448 | — | |||||||||||||||||||
| Securitized assets | 99 | — | 99 | — | |||||||||||||||||||
| Fixed income funds | 102 | 5 | 97 | — | |||||||||||||||||||
| Cash and cash equivalents | 337 | 9 | 328 | — | |||||||||||||||||||
| Total | 5,707 | $ | 3,235 | $ | 2,396 | $ | 76 | ||||||||||||||||
| Investments Measured at NAV | |||||||||||||||||||||||
| Equity funds | 2,667 | ||||||||||||||||||||||
| Fixed income funds | 444 | ||||||||||||||||||||||
| Hedge funds | 386 | ||||||||||||||||||||||
| Private equity funds | 559 | ||||||||||||||||||||||
| Real estate funds | 180 | ||||||||||||||||||||||
| Other | 3 | ||||||||||||||||||||||
| Total Investments Measured at NAV | 4,239 | ||||||||||||||||||||||
| Payables, net | (22) | ||||||||||||||||||||||
| Total fair value of plan assets | $ | 9,924 |
| January 1, 2021 | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Asset Category | |||||||||||||||||||||||
| Equities: | |||||||||||||||||||||||
| Domestic equities | $ | 1,513 | $ | 1,513 | $ | — | $ | — | |||||||||||||||
| International equities | 1,280 | 1,280 | — | — | |||||||||||||||||||
| Real Estate Investment Trusts | 197 | 197 | — | — | |||||||||||||||||||
| Fixed income: | |||||||||||||||||||||||
| Corporate bonds | 1,447 | — | 1,422 | 25 | |||||||||||||||||||
| Government securities | 485 | — | 485 | — | |||||||||||||||||||
| Securitized assets | 150 | — | 150 | — | |||||||||||||||||||
| Fixed income funds | 119 | 119 | — | — | |||||||||||||||||||
| Other | 2 | — | — | 2 | |||||||||||||||||||
| Cash and cash equivalents | 202 | 20 | 182 | — | |||||||||||||||||||
| Total | 5,395 | $ | 3,129 | $ | 2,239 | $ | 27 | ||||||||||||||||
| Investments Measured at NAV | |||||||||||||||||||||||
| Equity funds | 3,088 | ||||||||||||||||||||||
| Fixed income funds | 532 | ||||||||||||||||||||||
| Hedge funds | 321 | ||||||||||||||||||||||
| Private equity funds | 312 | ||||||||||||||||||||||
| Other | 1 | ||||||||||||||||||||||
| Total Investments Measured at NAV | 4,254 | ||||||||||||||||||||||
| Payables, net | (49) | ||||||||||||||||||||||
| Total fair value of plan assets | $ | 9,600 |
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 Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and Employer Recovery Act of 2008, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) and applicable Internal Revenue Code regulations mandate minimum funding thresholds. The Highway and Transportation Funding Act of 2014, the Bipartisan Budget Act of 2015, the American Rescue Plan Act of 2021 and the Infrastructure Investment and Jobs Act further extended the interest rate stabilization provision of MAP-21. We made a $302 million voluntary contribution to our U.S. qualified defined benefit pension plans during the two quarters ended January 3, 2020. As a result of this and prior voluntary contributions, as well as $700 million of voluntary contributions made in fiscal 2018 and 2017, we made no material contributions to our U.S. qualified defined benefit pension plans in fiscal 2021 or 2020 and are not required to make any contributions to these plans during fiscal 2022 and beyond.
Estimated Future Benefit Payments
The following table provides the projected timing of payments for benefits earned to date and benefits expected to be earned for future service by current active employees under our defined benefit plans.
| (In millions) | Pension | Other Benefits(1) | Total | ||||||||||||||
| Fiscal Years: | |||||||||||||||||
| 2022 | $ | 563 | $ | 30 | $ | 593 | |||||||||||
| 2023 | 569 | 29 | 598 | ||||||||||||||
| 2024 | 571 | 27 | 598 | ||||||||||||||
| 2025 | 573 | 26 | 599 | ||||||||||||||
| 2026 | 572 | 24 | 596 | ||||||||||||||
| 2027 — 2031 | 2,780 | 104 | 2,884 |
(1)Projected payments for Other Benefits reflect net payments from the Company, which include subsidies that reduce the gross payments by less than 10 percent.
Multi-employer Benefit Plans
Certain of our businesses acquired in connection with the L3Harris Merger participate in multi-employer defined benefit pension plans. We make cash contributions to these plans under the terms of collective-bargaining agreements that cover union employees based on a fixed rate per hour of service worked by the covered employees. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects: (1) assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers, (2) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers and (3) if we choose to stop participating in some of our multi-employer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Cash contributed and expenses recorded for our multi-employer plans were not material in fiscal 2021 or 2020.
See Note 4: Business Combination in these Notes for information regarding postretirement benefit plan liabilities assumed in connection with the L3Harris Merger.
NOTE 15: STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION
At December 31, 2021, we had options or other share-based compensation outstanding under two Harris shareholder-approved employee stock incentive plans (“SIPs”), the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010) and the L3Harris Technologies, Inc. 2015 Equity Incentive Plan (As Amended and Restated Effective August 28, 2020) (the “2015 EIP”), as well as under employee stock incentive plans of L3 assumed by L3Harris (collectively, “L3Harris SIPs”). We believe that share-based awards more closely align the interests of participants with those of shareholders.
Harris equity awards granted prior to October 12, 2018, in accordance with the terms and conditions that were applicable to such awards prior to the L3Harris Merger, generally automatically vested upon closing of the L3Harris Merger and settled in L3Harris Common Stock, except stock options which automatically vested and remained outstanding. Harris equity awards granted on or after October 12, 2018 did not automatically vest upon closing of the L3Harris Merger, and instead remained outstanding as an award with respect to L3Harris common stock in accordance with the terms that were applicable to such award prior to the L3Harris Merger.
L3’s equity awards granted prior to October 12, 2018, in accordance with the terms and conditions that were applicable to such awards prior to the L3Harris Merger, generally automatically vested upon closing of the L3Harris Merger and settled in L3Harris common stock (except stock options automatically converted into stock options with respect to L3Harris common stock and remained outstanding), in each case, after giving effect to the Exchange Ratio and appropriate adjustments to reflect the consummation of the L3Harris Merger and the terms and conditions applicable to such awards prior to the L3Harris Merger. Any L3 restricted stock unit or L3 restricted stock award granted on or after October 12, 2018 was converted into a corresponding award with respect to L3Harris common stock, with the number of shares underlying such award adjusted based on the Exchange Ratio, and remained outstanding in accordance with the terms that were applicable to such award prior to the L3Harris Merger. Pursuant to the Merger Agreement, L3Harris assumed the converted L3 equity awards.
Summary of Share-Based Compensation Expense
The following table summarizes the amounts and classification of share-based compensation expense:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020**(1)** | June 28, 2019 | |||||||||||||||||||
| Total expense | $ | 129 | $ | 94 | $ | 125 | $ | 58 | |||||||||||||||
| Included in: | |||||||||||||||||||||||
| Cost of product sales and services | $ | 14 | $ | 11 | $ | 5 | $ | 12 | |||||||||||||||
| Engineering, selling and administrative expenses | 115 | 83 | 120 | 46 | |||||||||||||||||||
| Income from continuing operations | 129 | 94 | 125 | 58 | |||||||||||||||||||
| Tax effect on share-based compensation expense | (33) | (24) | (31) | (14) | |||||||||||||||||||
| Total share-based compensation expense after-tax | $ | 96 | $ | 70 | $ | 94 | $ | 44 |
(1)Includes acceleration expense recognized in connection with the L3Harris Merger.
As of December 31, 2021, a total of 16.3 million shares of common stock remained available under our 2015 EIP for future issuance (excluding shares to be issued in respect of outstanding options and other share-based awards, and with each full-value award (e.g., restricted stock and restricted stock unit awards and performance share and performances share unit awards) counting as 4.6 shares against the total remaining for future issuance). During fiscal 2021, we issued an aggregate of 1.3 million shares of common stock under the terms of our L3Harris SIPs, which is net of shares withheld for tax purposes.
Stock Options
The following information relates to stock options, including performance stock options, that have been granted under shareholder-approved L3Harris SIPs. Option exercise prices are equal to or greater than the fair market value of our common stock on the date the options are granted, using the closing stock price of our common stock. Options may be exercised for a period of ten years after the date of grant, and options, other than performance stock options, generally become exercisable in installments, which are typically 33.3 percent one year from the grant date, 33.3 percent two years from the grant date and 33.3 percent three years from the grant date. In certain instances, vesting and exercisability are also subject to performance criteria.
The fair value as of the grant date of each option award was determined using the Black-Scholes-Merton option-pricing model which uses assumptions noted in the following table. Expected volatility over the expected term of the options is based on implied volatility from traded options on our common stock and the historical volatility of our stock price. The expected term of the options is based on historical observations of our common stock, considering average years to exercise for all options exercised and average years to cancellation for all options canceled, as well as average years remaining for vested outstanding options, which is calculated based on the weighted-average of these three inputs. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of the significant assumptions used in determining the fair value of stock option grants under our L3Harris SIPs is as follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | ||||||||||||||||||||
| Expected dividends | 1.99 | % | 1.55 | % | 1.70 | % | 1.61 | % | |||||||||||||||
| Expected volatility | 31.71 | % | 22.74 | % | 22.18 | % | 19.87 | % | |||||||||||||||
| Risk-free interest rates | 0.75 | % | 0.89 | % | 1.68 | % | 2.72 | % | |||||||||||||||
| Expected term (years) | 5.05 | 5.04 | 5.65 | 5.03 |
A summary of stock option activity under our L3Harris SIPs as of December 31, 2021 and changes during fiscal 2021 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 January 1, 2021 | 4,321,636 | $ | 127.93 | ||||||||||||||||||||
| Granted | 500,489 | $ | 181.91 | ||||||||||||||||||||
| Exercised | (1,207,071) | $ | 79.20 | ||||||||||||||||||||
| Forfeited or expired | (85,966) | $ | 190.28 | ||||||||||||||||||||
| Stock options outstanding December 31, 2021 | 3,529,088 | $ | 150.68 | 6.35 | $ | 220.78 | |||||||||||||||||
| Stock options exercisable December 31, 2021 | 2,009,767 | $ | 116.25 | 4.96 | $ | 194.93 |
The weighted-average grant-date fair value per share was $42.16, $34.49, $38.61 and $30.05 for options granted in fiscal 2021 and 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively. The total intrinsic value of options at the time of exercise was $173 million, $103 million, $212 million and $75 million for options exercised in fiscal 2021 and 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively.
A summary of the status of our nonvested stock options at December 31, 2021 and changes during fiscal 2021 is as follows:
| Shares | Weighted-Average Grant-Date Fair Value Per Share | ||||||||||
| Nonvested stock options January 1, 2021 | 1,289,631 | $ | 36.81 | ||||||||
| Granted | 500,489 | $ | 42.16 | ||||||||
| Vested | (270,799) | $ | 34.49 | ||||||||
| Nonvested stock options December 31, 2021 | 1,519,321 | $ | 38.79 |
As of December 31, 2021, there was $24 million of total unrecognized compensation expense related to nonvested stock options granted under our L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 1.57 years. The total fair value of stock options that vested in fiscal 2021 and 2020 was not material and the total fair value of stock options that vested in the two quarters ended January 3, 2020 and in fiscal 2019 was $17 million and $14 million, respectively.
Restricted Stock and Restricted Stock Unit Awards
The following information relates to awards of restricted stock and restricted stock units that have been granted to employees and non-employee directors under our L3Harris SIPs. These awards are not transferable until vested and the restrictions generally lapse upon the achievement of continued employment (or board membership) over a specified time period.
The fair value as of the grant date of these awards was based on the closing price of our common stock on the grant date and is amortized to compensation expense over the vesting period. At December 31, 2021, there were 26,302 shares of restricted stock and 776,924 restricted stock units outstanding which were payable in shares.
A summary of the status of these awards at December 31, 2021 and changes during fiscal 2021 is as follows:
| Shares or Units | Weighted-Average Grant Price Per Share or Unit | ||||||||||
| Restricted stock and restricted stock units outstanding at January 1, 2021 | 698,920 | $ | 196.26 | ||||||||
| Granted | 279,704 | $ | 202.10 | ||||||||
| Vested | (107,542) | $ | 187.02 | ||||||||
| Forfeited | (67,856) | $ | 191.47 | ||||||||
| Restricted stock and restricted stock units outstanding at December 31, 2021 | 803,226 | $ | 192.33 |
As of December 31, 2021, there was $63 million of total unrecognized compensation expense related to these awards under our L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 1.19 years. The weighted-average grant date price per share or per unit was $202.10, $195.66, $204.62 and $160.05 for awards granted in fiscal 2021 and 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively. The total fair value of these awards was $19 million, $9 million, $75 million and $16 million for awards that vested in fiscal 2021 and 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively.
Performance Share Unit Awards
The following information relates to awards of performance share units that have been granted to employees under our L3Harris SIPs. Generally, these awards are subject to performance criteria, such as meeting predetermined operating income or earnings per share and return on invested capital targets (and market conditions, such as total shareholder return) 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 thereof.
The fair value as of the grant date of these awards was determined based on a multifactor Monte Carlo valuation model that simulates our stock price and total shareholder return (“TSR”) relative to other companies in the S&P 500, 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 performance period if achievement of the performance measures is considered probable.
A summary of the status of these awards at December 31, 2021 and changes during fiscal 2021 is as follows:
| Shares or Units | Weighted-Average Grant Price Per Share or Unit**(1)** | ||||||||||
| Performance share units outstanding at January 1, 2021 | 249,695 | $ | 223.28 | ||||||||
| Granted | 239,590 | $ | 201.32 | ||||||||
| Forfeited | (31,114) | $ | 204.24 | ||||||||
| Performance share units outstanding at December 31, 2021 | 458,171 | $ | 210.18 |
As of December 31, 2021, there was $51 million of total unrecognized compensation expense related to these awards under our L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 1.44 years. The weighted-average grant date price per unit was $201.32, $228.29, $204.85 and $155.12 for awards granted in fiscal 2021 and 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively. The total fair value of these awards was not material for awards that vested in fiscal 2021 and 2020, and was $107 million and $21 million for awards that vested in the two quarters ended January 3, 2020 and fiscal 2019, respectively.
NOTE 16: INCOME FROM CONTINUING OPERATIONS PER SHARE
The computations of income from continuing operations per common share attributable to L3Harris common shareholders are as follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions, except per share amounts) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Income from continuing operations | $ | 1,847 | $ | 1,121 | $ | 823 | $ | 953 | |||||||||||||||
| Adjustments for participating securities outstanding | — | — | — | (2) | |||||||||||||||||||
| Income from continuing operations used in per basic and diluted common share calculations (A) | $ | 1,847 | $ | 1,121 | $ | 823 | $ | 951 | |||||||||||||||
| Basic weighted average common shares outstanding (B) | 201.3 | 214.0 | 221.2 | 118.0 | |||||||||||||||||||
| Impact of dilutive share-based awards | 1.9 | 1.9 | 2.5 | 2.5 | |||||||||||||||||||
| Diluted weighted average common shares outstanding (C) | 203.2 | 215.9 | 223.7 | 120.5 | |||||||||||||||||||
| Income from continuing operations per basic common share (A)/(B) | $ | 9.17 | $ | 5.24 | $ | 3.72 | $ | 8.06 | |||||||||||||||
| Income from continuing operations per diluted common share (A)/(C) | $ | 9.09 | $ | 5.19 | $ | 3.68 | $ | 7.89 |
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 0.8 million, 1.3 million, 0.6 million and 0.3 million weighted average share-based awards outstanding in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively.
NOTE 17: RESEARCH AND DEVELOPMENT
Company-sponsored research and development (“R&D”) costs are expensed as incurred and are included in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income. These costs were $692 million, $684 million, $329 million and $331 million in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively. Customer-sponsored R&D costs are incurred pursuant to contractual arrangements, principally U.S. Government-sponsored contracts requiring us to provide a product or service meeting certain defined performance or other specifications (such as designs), and are accounted for principally by the POC cost-to-cost revenue recognition method. Customer-sponsored R&D is included in our revenue and cost of product sales and services.
NOTE 18: LEASE COMMITMENTS
Our operating and finance leases at December 31, 2021 and January 1, 2021 primarily consisted of real estate leases for office space, warehouses, manufacturing, research and development facilities, tower space and land and equipment leases.
Operating lease cost was $172 million, $176 million and $88 million for fiscal 2021, fiscal 2020 and the two quarters ended January 3, 2020, respectively. Finance lease costs, including amortization and interest, and other lease expenses, including short-term and equipment lease cost, variable lease cost and sublease income, were not material for fiscal 2021, fiscal 2020 or the two quarters ended January 3, 2020. Rental expense during fiscal 2019 was $73 million.
On November 24, 2020, we completed a sale and leaseback transaction of a parcel of land and manufacturing facility located in Los Angeles, California for $92 million (net cash proceeds of $66 million after $2 million of closing costs and $24 million for a residual value guarantee payment). The lease has a maximum term of sixteen months (including two options to extend the lease by one month). Due to its short term nature relative to the property’s remaining economic life, the lease will be accounted for as an operating lease. We recognized a pre-tax gain on this sale and leaseback transaction of $22 million, which is included in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income for fiscal 2020.
As discussed in more detail in Note 10: Intangible Assets in these Notes, during the quarter ended July 2, 2021, we tested the CTS reporting unit for potential impairment of the long-lived assets, including identifiable assets and property, plant and equipment and recorded a $145 million non-cash charge for the impairment of CTS long-lived assets, including $19 million for impairment of ROU assets, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2021.
During fiscal 2020, in conjunction with, and in advance of, the tests of goodwill related to our Commercial Aviation Solutions reporting unit, we recorded a $257 million non-cash impairment charge for long lived assets, including $31 million for impairment of ROU assets. Additionally, in connection with COVID restructuring actions, we recognized $5 million of non-cash impairment charges for ROU assets associated with consolidated facilities. These impairments are included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2020.
Supplemental operating and finance lease balance sheet information at December 31, 2021 and January 1, 2021 is as follows:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||
| Operating Leases | |||||||||||
| Operating lease ROU assets | $ | 769 | $ | 766 | |||||||
| Other accrued items | 109 | 116 | |||||||||
| Operating lease liabilities | 768 | 734 | |||||||||
| Total operating lease liabilities | $ | 877 | $ | 850 | |||||||
| Finance Leases | |||||||||||
| Property, plant and equipment | $ | 163 | $ | 44 | |||||||
| Accumulated amortization | (9) | (3) | |||||||||
| Property, plant and equipment, net | $ | 154 | $ | 41 | |||||||
| Current portion of long-term debt | $ | 4 | $ | 2 | |||||||
| Long-term debt | 157 | 35 | |||||||||
| Total finance lease liabilities | $ | 161 | $ | 37 |
Other supplemental lease information for fiscal 2021 and 2020 is as follows:
| Fiscal Year Ended | |||||||||||
| (In millions, except lease term and discount rate) | December 31, 2021 | January 1, 2021 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||
| Net cash provided by operating activities - operating lease payments | $ | 154 | $ | 171 | |||||||
| Net cash provided by operating activities - finance lease interest payments | 5 | 2 | |||||||||
| Net cash used in financing activities - finance lease obligation payments | 3 | — | |||||||||
| Assets obtained in exchange for new lease obligations | |||||||||||
| ROU assets obtained with operating leases | $ | 260 | $ | 103 | |||||||
| Property, plant and equipment obtained with finance leases | 120 | — | |||||||||
| Weighted average remaining lease term (in years) | |||||||||||
| Operating leases | 9.8 | 8.7 | |||||||||
| Finance leases | 23.8 | 23.8 | |||||||||
| Weighted average discount rate | |||||||||||
| Operating leases | 3.7 | % | 3.0 | % | |||||||
| Finance leases | 3.1 | % | 4.1 | % |
Future lease payments under non-cancelable operating and finance leases at December 31, 2021 were as follows:
| (In millions) | Operating Leases | Finance Leases | |||||||||
| 2022 | $ | 134 | $ | 8 | |||||||
| 2023 | 126 | 8 | |||||||||
| 2024 | 113 | 8 | |||||||||
| 2025 | 102 | 9 | |||||||||
| 2026 | 81 | 9 | |||||||||
| Thereafter | 464 | 190 | |||||||||
| Total future lease payments required(1) | 1,020 | 232 | |||||||||
| Less: imputed interest | 143 | 71 | |||||||||
| Total | $ | 877 | $ | 161 |
(1)Total future lease payments exclude approximately $36 million of future lease payments with lease terms of 1 to 10 years that had not yet commenced as of December 31, 2021.
These commitments do not contain any material rent escalations, rent holidays, contingent rent, rent concessions, leasehold improvement incentives or unusual provisions or conditions. We do not consider any individual lease material to our operations.
NOTE 19: 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 also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. We recognize all derivatives in our Consolidated Balance Sheet at fair value. We do not hold or issue derivatives for speculative trading purposes.
Exchange Rate Risk — Cash Flow Hedges
To manage our exposure to currency risk and market fluctuation risk associated with anticipated cash flows that are probable of occurring in the future, we implement cash flow hedges. More specifically, we use foreign currency forward contracts and options to hedge off-balance sheet future foreign currency commitments, including purchase commitments to suppliers, future committed sales to customers and intersegment transactions. These derivatives are used to hedge currency exposures from cash flows anticipated across our business segments. We also hedge U.S. Dollar payments to suppliers to maintain our anticipated profit margins in our international operations. These derivatives have only nominal intrinsic value at the time of purchase and have a high degree of correlation to the anticipated cash flows they are designated to hedge. Hedge effectiveness is determined by the correlation of the anticipated cash flows from the hedging instruments and the anticipated cash flows from the future foreign currency commitments through the maturity dates of the derivatives used to hedge these cash flows. These financial instruments are marked-to-market using forward prices and fair value quotes with the offset to other comprehensive income (loss) and are categorized in Level 2 of the fair value hierarchy. Gains and losses in accumulated other comprehensive loss are reclassified to earnings when the related hedged item is recognized in earnings. The cash flow impact of our derivatives is included in the same category in our Consolidated Statement of Cash Flows as the cash flows of the related hedged items. Notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency losses. At December 31, 2021, we had open foreign currency forward contracts with an aggregate notional amount of $328 million, hedging certain forecasted transactions denominated in U.S. Dollars, Canadian Dollars, British Pounds, Euros and Australian Dollars. At January 1, 2021, we had open foreign currency forward contracts with an aggregate notional amount of $488 million, hedging certain forecasted transactions denominated in U.S. Dollars, Canadian Dollars, British Pounds, Euros, Australian Dollars and New Zealand Dollars.
At December 31, 2021, our foreign currency forward contracts had maturities through 2025.
The table below presents the fair values of our derivatives designated as foreign currency hedging instruments in our Consolidated Balance Sheet at December 31, 2021 and January 1, 2021:
| (In millions) | December 31, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other current assets | $ | 2 | $ | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other non-current assets | 1 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other accrued items | 5 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other long-term liabilities | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains recognized in other comprehensive income from foreign currency derivatives designated as cash flow hedges were not material in fiscal 2021, in the two quarters ended January 3, 2020 or in fiscal 2019, and were $12 million in fiscal 2020. Net gains reclassified from accumulated other comprehensive income in to earnings from foreign currency derivatives designated as cash flow hedges were $20 million in fiscal 2021 and were not material in fiscal 2020, the two quarters ended January 3, 2020 or fiscal 2019.
Gains and losses from foreign currency derivatives designated as cash flow hedges are included in the line item in our Consolidated Statement of Income associated with the hedged transaction, with the exception of the losses resulting from discontinued cash flow hedges, which are included in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income.
At December 31, 2021, the estimated amount of existing losses to be reclassified into earnings within the next twelve months was $3 million.
Interest-Rate Risk — Cash Flow Hedges
At December 31, 2021 and January 1, 2021, we had no treasury lock agreements (“treasury locks”) classified as cash flow hedges.
On November 25, 2020, in order to fund our optional redemption of the 4.95% 2021 Notes as described in Note 13: Debt in these Notes, we completed the issuance of $650 million in aggregate principal amount of the 1.80% 2031 Notes. In connection with the L3Harris Merger, we assumed two treasury locks that were initiated in January 2019 to hedge against fluctuations in interest payments due to changes in the benchmark interest rate (10-year U.S. Treasury rate) associated with the anticipated issuance of debt to redeem or repay the 4.95% 2021 Notes. These treasury locks were terminated as planned in connection with our issuance of the 1.80% 2031 Notes during the quarter ended January 1, 2021, and because interest rates decreased during the period of the treasury locks, we made a cash payment to our counterparty and recorded an after-tax loss of $58 million in the “Accumulated other comprehensive loss” line item of our Consolidated Balance Sheet. The accumulated other comprehensive loss balance will be amortized to interest expense over the life of the 1.80% 2031 Notes. We classified the cash outflow from the termination of these treasury locks as cash used in financing activities in our Consolidated Statement of Cash Flows.
Credit Risk
We are exposed to the risk of credit losses from non-performance by counterparties to the financial instruments discussed above, but we do not expect any of the counterparties to fail to meet their obligations. To manage credit risks, we select counterparties based on credit ratings, limit our exposure to any single counterparty under defined guidelines and monitor the market position with each counterparty.
NOTE 20: NON-OPERATING INCOME
The components of non-operating income were as follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Non-service cost components of net periodic benefit income(1) | $ | 445 | $ | 389 | $ | 172 | $ | 186 | |||||||||||||||
| Gain on pension plan curtailment | 1 | — | 23 | — | |||||||||||||||||||
| Gain (loss) on extinguishment of debt(2) | — | 2 | (2) | — | |||||||||||||||||||
| Impairment of equity method investment | (35) | — | — | — | |||||||||||||||||||
| Other | 28 | 10 | (1) | 2 | |||||||||||||||||||
| $ | 439 | $ | 401 | $ | 192 | $ | 188 |
(1)Non-service cost components of net periodic benefit income recorded in the “Non-operating income” line item in our Consolidated Statement of Income include interest cost, expected return on plan assets, amortization of net actuarial gain and effect of curtailments or settlements under our pension and postretirement benefit plans.
(2)Gain associated with our optional redemption of the entire outstanding $650 million principal amount of our 4.95% 2021 Notes in fiscal 2020; loss associated with our optional redemption of the entire outstanding $400 million principal amount of our 2.70% 2020 Notes in the two quarters ended January 3, 2020. See. Note 13: Debt in these Notes for additional information.
NOTE 21: ACCUMULATED OTHER COMPREHENSIVE LOSS (“AOCI”)
The components of AOCI are summarized below:
| (In millions) | Foreign currency translation | Net unrealized losses on hedging derivatives | Unrecognized postretirement obligations | Total AOCI | |||||||||||||||||||
| Balance at January 3, 2020 | $ | (81) | $ | (55) | $ | (372) | $ | (508) | |||||||||||||||
| Other comprehensive (loss) income, before income taxes | 16 | (41) | (418) | (443) | |||||||||||||||||||
| Income taxes | — | 10 | 105 | 115 | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications to earnings, net of income taxes | 16 | (31) | (313) | (328) | |||||||||||||||||||
| (Gains) losses reclassified to earnings(1) | 7 | 8 | (21) | (6) | |||||||||||||||||||
| Income taxes | — | (2) | 5 | 3 | |||||||||||||||||||
| (Gains) losses reclassified to earnings, net of income taxes | 7 | 6 | (16) | (3) | |||||||||||||||||||
| Other comprehensive (loss) income, net of income taxes | 23 | (25) | (329) | (331) | |||||||||||||||||||
| Balance at January 1, 2021 | (58) | (80) | (701) | (839) | |||||||||||||||||||
| Other comprehensive income (loss), before income taxes | (63) | (4) | 1,013 | 946 | |||||||||||||||||||
| Income taxes | — | 1 | (255) | (254) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications to earnings, net of income taxes | (63) | (3) | 758 | 692 | |||||||||||||||||||
| Losses (gains) reclassified to earnings(1) | 3 | (8) | 6 | 1 | |||||||||||||||||||
| Income taxes | — | 2 | (2) | — | |||||||||||||||||||
| Losses (gains) reclassified to earnings, net of income taxes | 3 | (6) | 4 | 1 | |||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | (60) | (9) | 762 | 693 | |||||||||||||||||||
| Balance at December 31, 2021 | $ | (118) | $ | (89) | $ | 61 | $ | (146) |
(1)(Gains) losses reclassified to earnings are included in the “Revenue from product sales and services,” “Business divestiture-related gains (losses),” “Interest expense” and “Non-operating income” line items in our Consolidated Statement of Income.
NOTE 22: INCOME TAXES
Income Tax Provision
The provisions for current and deferred income taxes are summarized as follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Current: | |||||||||||||||||||||||
| United States | $ | 415 | $ | 337 | $ | 11 | $ | 105 | |||||||||||||||
| International | 70 | 76 | 37 | 9 | |||||||||||||||||||
| State and local | 65 | 45 | 16 | 8 | |||||||||||||||||||
| 550 | 458 | 64 | 122 | ||||||||||||||||||||
| Deferred: | |||||||||||||||||||||||
| United States | (55) | (150) | 33 | 15 | |||||||||||||||||||
| International | (34) | (73) | (15) | (3) | |||||||||||||||||||
| State and local | (21) | (1) | (9) | 26 | |||||||||||||||||||
| (110) | (224) | 9 | 38 | ||||||||||||||||||||
| $ | 440 | $ | 234 | $ | 73 | $ | 160 |
The total income tax provision is summarized as follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Continuing operations | $ | 440 | $ | 234 | $ | 73 | $ | 160 | |||||||||||||||
| Discontinued operations | — | — | — | (1) | |||||||||||||||||||
| Total income tax provision | $ | 440 | $ | 234 | $ | 73 | $ | 159 |
A reconciliation of the U.S. statutory income tax rate to our effective income tax rate follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | ||||||||||||||||||||
| U.S. statutory income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||||||
| State taxes | 1.8 | 3.2 | 1.4 | 2.4 | |||||||||||||||||||
| International income | 0.4 | 0.4 | 0.9 | (0.5) | |||||||||||||||||||
| Non-deductible goodwill impairment | 0.6 | 5.8 | — | — | |||||||||||||||||||
| Research and development tax credit | (5.9) | (9.2) | (4.7) | (4.5) | |||||||||||||||||||
| Foreign derived intangibles income deduction | (1.4) | (1.3) | (0.8) | (1.3) | |||||||||||||||||||
| Change in valuation allowance | 0.9 | 0.5 | (4.8) | (1.8) | |||||||||||||||||||
| Impact of divestitures | 4.1 | — | — | — | |||||||||||||||||||
| Equity-based compensation(1) | (1.1) | (1.0) | (5.4) | (2.1) | |||||||||||||||||||
| Settlement of tax audits | (1.1) | (1.8) | — | — | |||||||||||||||||||
| Other items | — | 0.1 | 0.4 | 1.2 | |||||||||||||||||||
| Effective income tax rate | 19.3 | % | 17.7 | % | 8.0 | % | 14.4 | % |
(1)Includes non-deductible equity-based compensation and excess tax benefits from equity-based compensation.
As of December 31, 2021, we estimate our outside basis difference in foreign subsidiaries that are considered indefinitely reinvested to be approximately $1 billion. The outside basis difference is comprised predominantly of purchase accounting adjustments and to a lesser extent, undistributed earnings and other equity adjustments. In the event of a disposition of the foreign subsidiaries or a distribution, we may be subject to incremental U.S. income taxes, subject to an adjustment for foreign tax credits,
and withholding taxes or income taxes payable to the foreign jurisdictions. As of December 31, 2021, the determination of the amount of unrecognized deferred tax liability related to the outside basis difference is not practicable.
Tax Law Changes
The implementation of a modified territorial tax system under the Tax Act subjects us to tax on our Global Intangible Low-Taxed Income (“GILTI”) starting with fiscal 2019. The Financial Accounting Standards Board has permitted companies to make an accounting policy decision to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes (“deferred method”). We have elected to use the period cost method.
Deferred Income Tax Assets (Liabilities)
The components of deferred income tax assets (liabilities) were as follows:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Deferred tax assets: | |||||||||||||||||
| Accruals | $ | 288 | $ | 315 | |||||||||||||
| Tax loss and credit carryforwards | 174 | 155 | |||||||||||||||
| Pension and other post-employment benefits | 107 | 457 | |||||||||||||||
| Operating lease obligation | 245 | 202 | |||||||||||||||
| Other | 329 | 313 | |||||||||||||||
| Valuation allowance(1) | (257) | (165) | |||||||||||||||
| Deferred tax assets, net | 886 | 1,277 | |||||||||||||||
| Deferred tax liabilities: | |||||||||||||||||
| Property, plant and equipment | (103) | (91) | |||||||||||||||
| Acquired intangibles | (1,663) | (1,934) | |||||||||||||||
| Operating lease right-of-use asset | (218) | (182) | |||||||||||||||
| Other | (161) | (188) | |||||||||||||||
| Deferred tax liabilities | (2,145) | (2,395) | |||||||||||||||
| Net deferred tax assets (liabilities) | $ | (1,259) | $ | (1,118) |
(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. The net increase in our valuation allowance in fiscal 2021 was $92 million.
Net deferred tax assets (liabilities) were classified as follows in our Consolidated Balance Sheet:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Non-current deferred income tax assets | $ | 85 | $ | 119 | |||||||||||||
| Non-current deferred income tax liabilities | (1,344) | (1,237) | |||||||||||||||
| $ | (1,259) | $ | (1,118) |
Tax loss and credit carryforwards at December 31, 2021 have expiration dates ranging from less than one year to no expiration date. A significant portion of the carryforwards are either indefinite or begin expiring between 2034 to 2035. The tax-effected amounts of federal, international and state and local operating loss carryforwards at December 31, 2021 were $6 million, $52 million and $17 million, respectively. The tax-effected amounts of federal, international and state and local capital loss carryforwards were not material at December 31, 2021. The amounts of federal, international and state and local credit carryforwards at December 31, 2021 were $4 million, $11 million and $95 million, respectively.
Income from continuing operations before income taxes of international subsidiaries was $29 million in fiscal 2021, loss from continuing operations before income taxes of international subsidiaries was $101 million in fiscal 2020 and income from continuing operations before income taxes of international subsidiaries was $96 million and $37 million in the two quarters ended January 3, 2020 and in fiscal 2019, respectively. We paid $358 million in income taxes, net of refunds received, in fiscal 2021; paid $394 million in income taxes, net of refunds received, in fiscal 2020; received $8 million in income tax refunds, net of income taxes paid, in the two quarters ended January 3, 2020; and paid $137 million in income taxes, net of refunds received, in fiscal 2019.
Tax Uncertainties
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Balance at beginning of period | $ | 542 | $ | 438 | $ | 204 | $ | 102 | |||||||||||||||
| Additions based on tax positions taken during current period | 115 | 60 | 35 | 31 | |||||||||||||||||||
| Additions based on tax positions taken during prior periods | 11 | 21 | — | 80 | |||||||||||||||||||
| Additions for tax positions related to acquired entities | — | 116 | 226 | — | |||||||||||||||||||
| Decreases based on tax positions taken during prior periods | (64) | (82) | (7) | (9) | |||||||||||||||||||
| Decreases from lapse in statutes of limitations | (15) | (3) | (20) | — | |||||||||||||||||||
| Decreases from settlements | (2) | (8) | — | — | |||||||||||||||||||
| Balance at end of period | $ | 587 | $ | 542 | $ | 438 | $ | 204 |
As of December 31, 2021, we had $587 million of unrecognized tax benefits, of which $488 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. As of January 1, 2021, we had $542 million of unrecognized tax benefits, of which $453 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 recognized interest and penalties of $3 million, $14 million and $2 million in fiscal 2021, fiscal 2020 and the two quarters ended January 3, 2020, respectively, and none in fiscal 2019. We had accrued $47 million for the potential payment of interest and penalties as of December 31, 2021 (and this amount was not included in the $587 million of unrecognized tax benefits balance at December 31, 2021 shown above). We had accrued $47 million for the potential payment of interest and penalties as of January 1, 2021 (and this amount was not included in the $542 million of unrecognized tax benefits balance at January 1, 2021 shown above).
We file numerous separate and consolidated income tax returns reporting our financial results and, where appropriate, those of our subsidiaries and affiliates, in the U.S. Federal jurisdiction and various state, local and foreign jurisdictions. Pursuant to the Compliance Assurance Process, the IRS is examining the Harris federal tax returns for fiscal 2017, 2018, 2019 and 2020 and refund claims related to fiscal 2010 through 2016. In addition, legacy L3’s federal tax returns for calendar years 2017 and 2018 are currently under IRS examination and refund claims related to calendar years 2012, 2013, 2015 and 2016 have been filed with the IRS.
We are currently under examination or contesting proposed adjustments by various state and international tax authorities for fiscal years ranging from 2012 through 2020. 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 23: BACKLOG
Backlog, which is the equivalent of our remaining performance obligations, represents the future revenue we expect to recognize as we perform on our current contracts. Backlog comprises both funded backlog (i.e., firm orders for which funding is authorized and appropriated) and unfunded backlog. Backlog excludes unexercised contract options and potential orders under ordering-type contracts, such as indefinite delivery, indefinite quantity contracts.
At December 31, 2021, our ending backlog was $21.1 billion. We expect to recognize approximately 50 percent of the revenue associated with this backlog by the end of 2022 and approximately 85 percent by the end of 2024, with the remainder to be recognized thereafter. At January 1, 2021, our ending backlog was $21.7 billion, including $1.5 billion of backlog associated with businesses that were divested during fiscal 2020.
NOTE 24: BUSINESS SEGMENTS
We structure our operations primarily around the products, systems and services we sell and the markets we serve, and in fiscal 2021 we reported the financial results of our continuing operations in the following four operating segments, which were also our reportable segments and are referred to as our business segments:
-
Integrated Mission Systems, including multi-mission ISR and communication systems; integrated electrical and electronic systems for maritime platforms; and advanced electro-optical and infrared (“EO/IR”) solutions;
-
Space & Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare;
-
Communication Systems, including tactical communications; broadband communications; integrated vision solutions; and public safety radios; global communications solutions and
-
Aviation Systems, including defense aviation; commercial aviation products; commercial pilot training; and mission networks for air traffic management.
During the first quarter of fiscal 2020, we adjusted our segment reporting to better align our businesses and transferred two businesses between our Integrated Mission Systems and Space & Airborne Systems segments. The historical results, discussion and presentation of our business segments as set forth in our Consolidated Financial Statements and these Notes reflect the impact of these adjustments to our segment reporting for all periods presented in order to present the segment information on a comparable basis. There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting from these adjustments.
Effective January 1, 2022, we have streamlined our business segments from four business segments to three business segments. As a result of the segment reorganization, the Aviation Systems segment was eliminated as a business segment effective for the beginning of fiscal 2022. See Note 27: Subsequent Events for further information relating to our fiscal 2022 segment reorganization.
See Note 3: Business Divestitures and Asset Sales and elsewhere in these Notes for information relating to businesses divested in fiscal 2021, fiscal 2020 and the two quarters ended January 3, 2020.
Segment revenue, segment operating income (loss) and a reconciliation of segment operating income to total income from continuing operations before income taxes are as follows:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Integrated Mission Systems | $ | 5,839 | $ | 5,538 | $ | 2,758 | $ | 52 | |||||||||||||||
| Space & Airborne Systems | 5,093 | 4,946 | 2,377 | 3,711 | |||||||||||||||||||
| Communication Systems | 4,287 | 4,443 | 2,151 | 2,208 | |||||||||||||||||||
| Aviation Systems | 2,783 | 3,448 | 2,038 | 672 | |||||||||||||||||||
| Other non-reportable businesses(1) | — | — | 23 | 165 | |||||||||||||||||||
| Corporate eliminations | (188) | (181) | (84) | (7) | |||||||||||||||||||
| Total Revenue | $ | 17,814 | $ | 18,194 | $ | 9,263 | $ | 6,801 | |||||||||||||||
| Income from Continuing Operations before Income Taxes | |||||||||||||||||||||||
| Segment Operating Income (Loss): | |||||||||||||||||||||||
| Integrated Mission Systems | $ | 950 | $ | 847 | $ | 371 | $ | 10 | |||||||||||||||
| Space & Airborne Systems | 970 | 932 | 447 | 696 | |||||||||||||||||||
| Communication Systems | 1,092 | 1,084 | 493 | 637 | |||||||||||||||||||
| Aviation Systems | 330 | (177) | 289 | 76 | |||||||||||||||||||
| Other non-reportable businesses(1) | — | — | — | 27 | |||||||||||||||||||
| 3,342 | 2,686 | 1,600 | 1,446 | ||||||||||||||||||||
| Unallocated Items: | |||||||||||||||||||||||
| Unallocated corporate department expense, net | (57) | (69) | 3 | (2) | |||||||||||||||||||
| L3Harris Merger-related transaction, integration and other expenses and losses | (128) | (140) | (390) | (65) | |||||||||||||||||||
| Amortization of acquisition-related intangibles(2) | (627) | (709) | (289) | (101) | |||||||||||||||||||
| Additional cost of sales related to fair value step-up in inventory sold | — | (31) | (142) | — | |||||||||||||||||||
| Business divestiture-related gains (losses) | 220 | (51) | 229 | — | |||||||||||||||||||
| Impairment of goodwill and other assets(3) | (125) | (132) | — | — | |||||||||||||||||||
| Other items | (71) | 10 | — | — | |||||||||||||||||||
| (788) | (1,122) | (589) | (168) | ||||||||||||||||||||
| Pension adjustment | (445) | (389) | (172) | (186) | |||||||||||||||||||
| Non-operating income | 439 | 401 | 192 | 188 | |||||||||||||||||||
| Net interest expense | (265) | (254) | (123) | (167) | |||||||||||||||||||
| Total income from continuing operations before income taxes | $ | 2,283 | $ | 1,322 | $ | 908 | $ | 1,113 |
(1)Includes the operating results of the Harris Night Vision business prior to the date of divestiture on September 13, 2019. See Note 3: Business Divestitures and Asset Sales in these Notes for more information.
(2)Includes amortization of identifiable intangible assets acquired as a result of the L3Harris Merger and the acquisition of Exelis. Because the L3Harris Merger and the acquisition of Exelis benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired was not allocated to any segment.
(3)For fiscal 2021 includes: (i) a $62 million non-cash goodwill impairment charge related to our CPS business and (ii) a $63 million non-cash intangible asset impairment charge related to our CTS reporting unit. For fiscal 2020 includes: (i) a $113 million non-cash intangible asset impairment charge related to our CAS reporting unit and (ii) a $14 million non-cash goodwill impairment charge related to the then-potential divestiture of VSE disposal group, as well as a $5 million non-cash goodwill impairment charge related to the divestiture of the Applied Kilovolts business. See Note 9: Goodwill and Note 10: Intangible Assets in these Notes for additional information.
Disaggregation of Revenue
We disaggregate revenue for all four business segments by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Integrated Mission Systems: Integrated Mission Systems revenue was primarily derived from U.S. Government development and production contracts and was generally recognized over time using the POC cost-to-cost revenue recognition method.
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||
| Prime contractor | $ | 4,044 | $ | 3,721 | $ | 1,893 | $ | 27 | |||||||||||||||
| Subcontractor | 1,727 | 1,764 | 847 | 25 | |||||||||||||||||||
| Intersegment | 68 | 53 | 18 | — | |||||||||||||||||||
| $ | 5,839 | $ | 5,538 | $ | 2,758 | $ | 52 | ||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||
| Fixed-price(1) | $ | 4,467 | $ | 4,172 | $ | 2,115 | $ | 52 | |||||||||||||||
| Cost-reimbursable | 1,304 | 1,313 | 625 | — | |||||||||||||||||||
| Intersegment | 68 | 53 | 18 | — | |||||||||||||||||||
| $ | 5,839 | $ | 5,538 | $ | 2,758 | $ | 52 | ||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||
| United States | $ | 4,115 | $ | 4,338 | $ | 2,120 | $ | 30 | |||||||||||||||
| International | 1,656 | 1,147 | 620 | 22 | |||||||||||||||||||
| Intersegment | 68 | 53 | 18 | — | |||||||||||||||||||
| $ | 5,839 | $ | 5,538 | $ | 2,758 | $ | 52 |
(1)Includes revenue derived from time-and-materials contracts.
Space & Airborne Systems: Space & Airborne Systems revenue was primarily derived from U.S. Government development and production contracts and was generally recognized over time using the POC cost-to-cost revenue recognition method.
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||
| Prime contractor | $ | 2,925 | $ | 2,684 | $ | 1,349 | $ | 2,244 | |||||||||||||||
| Subcontractor | 2,157 | 2,247 | 1,023 | 1,439 | |||||||||||||||||||
| Intersegment | 11 | 15 | 5 | 28 | |||||||||||||||||||
| $ | 5,093 | $ | 4,946 | $ | 2,377 | $ | 3,711 | ||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||
| Fixed-price(1) | $ | 2,921 | $ | 2,834 | $ | 1,380 | $ | 2,066 | |||||||||||||||
| Cost-reimbursable | 2,161 | 2,097 | 992 | 1,617 | |||||||||||||||||||
| Intersegment | 11 | 15 | 5 | 28 | |||||||||||||||||||
| $ | 5,093 | $ | 4,946 | $ | 2,377 | $ | 3,711 | ||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||
| United States | $ | 4,417 | $ | 4,180 | $ | 2,038 | $ | 3,252 | |||||||||||||||
| International | 665 | 751 | 334 | 431 | |||||||||||||||||||
| Intersegment | 11 | 15 | 5 | 28 | |||||||||||||||||||
| $ | 5,093 | $ | 4,946 | $ | 2,377 | $ | 3,711 |
(1)Includes revenue derived from time-and-materials contracts.
Communication Systems: Communication Systems revenue was primarily derived from fixed-price contracts and was generally recognized at the point in time when products were received and accepted by the customer for standard products offered to multiple customers and over time for customer-specific products, systems and services.
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Revenue By Customer Relationship(1) | |||||||||||||||||||||||
| Prime contractor | $ | 2,886 | $ | 3,102 | $ | 1,406 | |||||||||||||||||
| Subcontractor | 1,347 | 1,304 | 729 | ||||||||||||||||||||
| Intersegment | 54 | 37 | 16 | ||||||||||||||||||||
| $ | 4,287 | $ | 4,443 | $ | 2,151 | ||||||||||||||||||
| Revenue By Contract Type(1) | |||||||||||||||||||||||
| Fixed-price(2) | $ | 3,631 | $ | 3,784 | $ | 1,840 | |||||||||||||||||
| Cost-reimbursable | 602 | 622 | 295 | ||||||||||||||||||||
| Intersegment | 54 | 37 | 16 | ||||||||||||||||||||
| $ | 4,287 | $ | 4,443 | $ | 2,151 | ||||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||
| United States | $ | 3,001 | $ | 3,181 | $ | 1,507 | $ | 1,280 | |||||||||||||||
| International | 1,232 | 1,225 | 628 | 927 | |||||||||||||||||||
| Intersegment | 54 | 37 | 16 | 1 | |||||||||||||||||||
| $ | 4,287 | $ | 4,443 | $ | 2,151 | $ | 2,208 |
(1)Prior to the L3Harris Merger, Communication Systems did not recognize significant revenue for customer-specific products and systems, and currently, such customer arrangements primarily exist at operating businesses acquired in connection with the L3Harris Merger. The “Revenue by Customer Relationship” and “Revenue by Contract Type” disaggregation categories were added beginning in the Fiscal Transition Period to best depict how the nature, amount, timing and uncertainty of revenue and cash flows from these types of customer arrangements are affected by economic factors.
(2)Includes revenue derived from time-and-materials contracts.
Aviation Systems: Aviation Systems revenue was primarily derived from fixed-price contracts and was generally recognized at the point in time when products were received and accepted by the customer for standard products offered to multiple customers and over time for customer-specific products, systems and services.
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||
| Prime contractor | $ | 1,808 | $ | 2,258 | $ | 1,245 | $ | 654 | |||||||||||||||
| Subcontractor | 920 | 1,114 | 748 | 14 | |||||||||||||||||||
| Intersegment | 55 | 76 | 45 | 4 | |||||||||||||||||||
| $ | 2,783 | $ | 3,448 | $ | 2,038 | $ | 672 | ||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||
| Fixed-price(1) | $ | 2,199 | $ | 2,750 | $ | 1,664 | $ | 583 | |||||||||||||||
| Cost-reimbursable | 529 | 622 | 329 | 85 | |||||||||||||||||||
| Intersegment | 55 | 76 | 45 | 4 | |||||||||||||||||||
| $ | 2,783 | $ | 3,448 | $ | 2,038 | $ | 672 | ||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||
| United States | $ | 2,329 | $ | 2,769 | $ | 1,472 | $ | 640 | |||||||||||||||
| International | 399 | 603 | 521 | 28 | |||||||||||||||||||
| Intersegment | 55 | 76 | 45 | 4 | |||||||||||||||||||
| $ | 2,783 | $ | 3,448 | $ | 2,038 | $ | 672 |
(1)Includes revenue derived from time-and-materials contracts.
Total assets by business segment are as follows:
| (In millions) | December 31, 2021 | January 1, 2021 | |||||||||||||||
| Total Assets | |||||||||||||||||
| Integrated Mission Systems | $ | 9,269 | $ | 8,906 | |||||||||||||
| Space & Airborne Systems | 7,190 | 6,943 | |||||||||||||||
| Communication Systems | 6,035 | 5,746 | |||||||||||||||
| Aviation Systems | 3,531 | 5,026 | |||||||||||||||
| Corporate(1) | 8,684 | 10,339 | |||||||||||||||
| $ | 34,709 | $ | 36,960 |
(1)Identifiable intangible assets acquired in connection with the L3Harris Merger in the two quarters ended January 3, 2020 and our acquisition of Exelis in fiscal 2015 were recorded as Corporate assets because they benefited the entire Company as opposed to any individual segment. Identifiable intangible asset balances recorded as Corporate assets were $6.6 billion and $7.9 billion at December 31, 2021 and January 1, 2021, respectively. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan investments, buildings and equipment, as well as any assets of discontinued operations and divestitures.
Other selected financial information by business segment and geographical area is summarized below:
| Fiscal Years Ended | Two Quarters Ended | Fiscal Year Ended | |||||||||||||||||||||
| (In millions) | December 31, 2021 | January 1, 2021 | January 3, 2020 | June 28, 2019 | |||||||||||||||||||
| Capital Expenditures | |||||||||||||||||||||||
| Integrated Mission Systems | $ | 64 | $ | 67 | $ | 29 | $ | 1 | |||||||||||||||
| Space & Airborne Systems | 101 | 92 | 36 | 48 | |||||||||||||||||||
| Communication Systems | 56 | 58 | 22 | 29 | |||||||||||||||||||
| Aviation Systems | 63 | 87 | 64 | 54 | |||||||||||||||||||
| Other non-reportable businesses(1) | — | — | — | 6 | |||||||||||||||||||
| Corporate | 58 | 64 | 22 | 23 | |||||||||||||||||||
| $ | 342 | $ | 368 | $ | 173 | $ | 161 | ||||||||||||||||
| Depreciation and Amortization | |||||||||||||||||||||||
| Integrated Mission Systems | $ | 74 | $ | 70 | $ | 37 | $ | 2 | |||||||||||||||
| Space & Airborne Systems | 69 | 66 | 31 | 50 | |||||||||||||||||||
| Communication Systems | 49 | 61 | 32 | 49 | |||||||||||||||||||
| Aviation Systems | 66 | 103 | 53 | 29 | |||||||||||||||||||
| Other non-reportable businesses(1) | — | — | — | 3 | |||||||||||||||||||
| Corporate | 709 | 732 | 289 | 125 | |||||||||||||||||||
| $ | 967 | $ | 1,032 | $ | 442 | $ | 258 | ||||||||||||||||
| Geographical Information for Continuing Operations | |||||||||||||||||||||||
| U.S. operations: | |||||||||||||||||||||||
| Revenue | $ | 16,234 | $ | 16,998 | $ | 8,485 | $ | 6,530 | |||||||||||||||
| Long-lived assets(2) | $ | 1,870 | $ | 1,949 | $ | 1,865 | $ | 866 | |||||||||||||||
| International operations: | |||||||||||||||||||||||
| Revenue | $ | 1,580 | $ | 1,196 | $ | 778 | $ | 271 | |||||||||||||||
| Long-lived assets(2) | $ | 231 | $ | 153 | $ | 252 | $ | 28 |
(1)Includes capital expenditures and depreciation and amortization of the Harris Night Vision business prior to the date of divestiture on September 13, 2019. See Note 3: Business Divestitures and Asset Sales in these Notes for more information.
(2)Long-lived assets are net fixed assets attributed to the respective geographic regions.
In addition to depreciation and amortization expense related to property, plant and equipment, “Depreciation and Amortization” in the table above also includes $624 million, $714 million, $285 million and $120 million of amortization related to identifiable intangible assets, debt premium, debt discount, debt issuance costs and other items in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, 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 in fiscal 2021 or 2020, the two quarters ended January 3, 2020, or fiscal 2019.
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, 78 percent, 73 percent and 77 percent in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively. Revenue from services in fiscal 2021 was 36 percent, 16 percent, 16 percent and 40 percent of total revenue in our Integrated Mission Systems, Space & Airborne Systems, Communication Systems and Aviation Systems segments, respectively.
Revenue from products and services where the end consumer is located outside the U.S., including foreign military sales through the U.S. Government, was $3.9 billion (22 percent of our revenue), $3.7 billion (20 percent of our revenue), $2.0 billion (21 percent of our revenue) and $1.5 billion (22 percent of our revenue) in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively. Export revenue and revenue from international operations in fiscal 2021 was principally from the EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific) regions and Canada.
NOTE 25: 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 December 31, 2021, 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, that are considered probable of being rendered against us in litigation or arbitration in existence at December 31, 2021 are reserved against or would not have a material adverse effect on our financial condition, results of operations, cash flows or equity.
Tax Audits
Our tax filings are subject to audit by taxing authorities in jurisdictions where we conduct or conducted business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or ultimately through legal proceedings. We believe we have adequately accrued for any ultimate amounts that are likely to result from these audits; however, final assessments, if any, could be different from the amounts recorded in our Consolidated Financial Statements. Additional information regarding audits and examinations by taxing authorities of our tax filings is set forth in Note 22: Income Taxes in these Notes.
International
As an international company, we are, from time to time, the subject of investigations relating to our international operations, including under U.S. export control laws (such as ITAR), the FCPA and other similar U.S. and international laws.
In September 2019, we reached an administrative settlement with the Department of State to resolve alleged U.S. export control regulation violations. Under the terms of the settlement we have committed to strengthen our trade compliance program under the supervision of a special compliance officer and will pay a civil penalty of $13 million over three years (with $6.5 million suspended on the condition of use for qualified remedial compliance measures). The settlement did not result in any debarment or limitation on export licensing.
Environmental Matters
We are subject to numerous U.S. Federal, state, local and international environmental laws and regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental issues. We or companies we have acquired are responsible, or alleged to be responsible, for environmental investigation and/or remediation of multiple sites. These sites are in various stages of investigation and/or remediation and in some cases our liability is considered de minimis. Notices from the U.S. Environmental Protection Agency (“EPA”) or equivalent state or international environmental agencies allege that several 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 U.S. Department of Justice, Environment and Natural Resources Division, notified several potentially responsible parties, including Exelis, which we acquired in 2015, 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 in New Jersey, estimated by the EPA to be $1.38 billion. During the fourth quarter of fiscal 2021, the EPA further announced an interim plan to remediate sediment in the upper nine miles of the of the Lower Passaic River with an estimated cost of $441 million. The potential responsible parties’ respective allocations for the Lower Passaic River remediation have not been determined. Although it is not feasible to predict the outcome of these 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 December 31, 2021 are reserved against, covered by insurance or would not have a material adverse effect on our financial condition, results of operations, cash flows or equity.
NOTE 26: TRANSITION PERIOD COMPARATIVE DATA (UNAUDITED)
The following table presents certain comparative financial information for fiscal 2020 compared with the four quarters ended January 3, 2020 (Unaudited) and two quarters ended January 3, 2020 compared with the two quarters ended December 28, 2018 (Unaudited). Due to the L3Harris Merger on June 29, 2019, fiscal 2020 and the two quarters ended January 3, 2020 reflect the results of the combined Company, while the four quarters ended January 3, 2020 reflect the results of only Harris operating businesses for the two quarters ended June 28, 2019 and the results of the combined Company for the two quarters ended January 3, 2020. The two quarters ended December 28, 2018 reflect the results of only Harris operating businesses. Due to the significance of the L3 operating businesses included in the combined Company results following the L3Harris Merger, the reported results for fiscal 2020 and the two quarters ended January 3, 2020 generally are not comparable to the four quarters ended January 3, 2020 and two quarters ended December 28, 2018, respectively.
| Fiscal Year Ended | Four Quarters Ended | Two Quarters Ended | |||||||||||||||||||||
| (In millions, except per share amounts) | January 1, 2021 | January 3, 2020 | January 3, 2020 | December 28, 2018 | |||||||||||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Revenue from product sales and services | $ | 18,194 | $ | 12,856 | $ | 9,263 | $ | 3,208 | |||||||||||||||
| Cost of product sales and services | (12,886) | (9,088) | (6,726) | (2,105) | |||||||||||||||||||
| Engineering, selling and administrative expenses | (3,315) | (2,540) | (1,881) | (583) | |||||||||||||||||||
| Business divestiture-related gains (losses) | (51) | 229 | 229 | — | |||||||||||||||||||
| Impairment of goodwill and other assets | (767) | (46) | (46) | — | |||||||||||||||||||
| Non-operating income | 401 | 286 | 192 | 94 | |||||||||||||||||||
| Interest expense, net | (254) | (204) | (123) | (86) | |||||||||||||||||||
| Income from continuing operations before income taxes | 1,322 | 1,493 | 908 | 528 | |||||||||||||||||||
| Income taxes | (234) | (146) | (73) | (87) | |||||||||||||||||||
| Income from continuing operations | 1,088 | 1,347 | 835 | 441 | |||||||||||||||||||
| Discontinued operations, net of income taxes | (2) | (2) | (1) | (3) | |||||||||||||||||||
| Net income | 1,086 | 1,345 | 834 | 438 | |||||||||||||||||||
| Noncontrolling interests, net of income taxes | 33 | (12) | (12) | — | |||||||||||||||||||
| Net income attributable to L3Harris Technologies, Inc. | $ | 1,119 | $ | 1,333 | $ | 822 | $ | 438 | |||||||||||||||
| Net income per common share attributable to L3Harris Technologies, Inc. common shareholders | |||||||||||||||||||||||
| Net income per common share | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Continuing operations | $ | 5.24 | $ | 8.04 | $ | 3.72 | $ | 3.74 | |||||||||||||||
| Discontinued operations | (0.01) | — | — | (0.03) | |||||||||||||||||||
| $ | 5.23 | $ | 8.04 | $ | 3.72 | $ | 3.71 | ||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Continuing operations | $ | 5.19 | $ | 7.90 | $ | 3.68 | $ | 3.66 | |||||||||||||||
| Discontinued operations | — | (0.01) | (0.01) | (0.02) | |||||||||||||||||||
| $ | 5.19 | $ | 7.89 | $ | 3.67 | $ | 3.64 | ||||||||||||||||
| Basic weighted average common shares outstanding | 214.0 | 166.0 | 221.2 | 117.8 | |||||||||||||||||||
| Diluted weighted average common shares outstanding | 215.9 | 169.0 | 223.7 | 120.3 |
NOTE 27: SUBSEQUENT EVENTS
Effective January 1, 2022, we have streamlined our business segments from four business segments to three business segments. As a result of the segment reorganization, the Aviation Systems segment was eliminated as a business segment.
Effective for fiscal 2022, which began January 1, 2022, we will report our financial results in the following three reportable segments:
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Integrated Mission Systems, including multi-mission ISR and communication systems; integrated electrical and electronic systems for maritime platforms; advanced EO/IR and infrared solutions; defense aviation; commercial aviation products; and commercial pilot training operations;
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Space & Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; electronic warfare; and mission networks for air traffic management operations; and
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Communication Systems, including tactical communications with global communications solutions; broadband communications; integrated vision solutions; and public safety radios.
Our new business segment structure reflects that the ongoing operations that had been part of the Aviation Systems segment were integrated into the remaining segments. Defense aviation, commercial aviation products and commercial pilot training operations were moved into the Integrated Mission Solutions segment; and mission networks for air traffic management operations was moved into the Space & Airborne Systems segment.
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