filings.toolsItem 1. Financial Statements (Unaudited).
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Item 1. Financial Statements (Unaudited).
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions, except per share amounts) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Revenue from product sales and services | $ | 4,229 | $ | 4,463 | $ | 13,464 | $ | 13,534 | |||||||||||||||
| Cost of product sales and services | (2,921) | (3,152) | (9,385) | (9,625) | |||||||||||||||||||
| Engineering, selling and administrative expenses | (793) | (817) | (2,485) | (2,484) | |||||||||||||||||||
| Business divestiture-related gains (losses) | 27 | (10) | 192 | (62) | |||||||||||||||||||
| Impairment of goodwill and other assets | — | — | (207) | (394) | |||||||||||||||||||
| Non-operating income | 111 | 96 | 314 | 296 | |||||||||||||||||||
| Interest expense, net | (67) | (62) | (198) | (190) | |||||||||||||||||||
| Income from continuing operations before income taxes | 586 | 518 | 1,695 | 1,075 | |||||||||||||||||||
| Income taxes | (107) | (87) | (336) | (171) | |||||||||||||||||||
| Income from continuing operations | 479 | 431 | 1,359 | 904 | |||||||||||||||||||
| Discontinued operations, net of income taxes | — | (1) | (1) | (2) | |||||||||||||||||||
| Net income | 479 | 430 | 1,358 | 902 | |||||||||||||||||||
| Noncontrolling interests, net of income taxes | 2 | (4) | 4 | 24 | |||||||||||||||||||
| Net income attributable to L3Harris Technologies, Inc. | $ | 481 | $ | 426 | $ | 1,362 | $ | 926 | |||||||||||||||
| Amounts attributable to L3Harris Technologies, Inc. common shareholders | |||||||||||||||||||||||
| Income from continuing operations | $ | 481 | $ | 427 | $ | 1,363 | $ | 928 | |||||||||||||||
| Discontinued operations, net of income taxes | — | (1) | (1) | (2) | |||||||||||||||||||
| Net income | $ | 481 | $ | 426 | $ | 1,362 | $ | 926 | |||||||||||||||
| Net income per common share attributable to L3Harris Technologies, Inc. common shareholders | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Continuing operations | $ | 2.41 | $ | 2.00 | $ | 6.70 | $ | 4.31 | |||||||||||||||
| Discontinued operations | — | — | — | (0.01) | |||||||||||||||||||
| $ | 2.41 | $ | 2.00 | $ | 6.70 | $ | 4.30 | ||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Continuing operations | $ | 2.39 | $ | 1.99 | $ | 6.64 | $ | 4.27 | |||||||||||||||
| Discontinued operations | — | (0.01) | — | (0.01) | |||||||||||||||||||
| $ | 2.39 | $ | 1.98 | $ | 6.64 | $ | 4.26 | ||||||||||||||||
| Basic weighted average common shares outstanding | 199.5 | 213.4 | 203.3 | 215.5 | |||||||||||||||||||
| Diluted weighted average common shares outstanding | 201.6 | 215.1 | 205.2 | 217.3 |
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Net income | $ | 479 | $ | 430 | $ | 1,358 | $ | 902 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation (loss) gain, net of income taxes | (34) | 32 | (37) | (28) | |||||||||||||||||||
| Net unrealized (loss) gain on hedging derivatives, net of income taxes | (7) | 5 | — | (55) | |||||||||||||||||||
| Net unrecognized gain on postretirement obligations, net of income taxes | 576 | — | 574 | — | |||||||||||||||||||
| Other comprehensive income (loss) recognized during the period | 535 | 37 | 537 | (83) | |||||||||||||||||||
| Reclassification adjustments for (gains) losses included in net income | (3) | (3) | (1) | 1 | |||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | 532 | 34 | 536 | (82) | |||||||||||||||||||
| Total comprehensive income | 1,011 | 464 | 1,894 | 820 | |||||||||||||||||||
| Comprehensive loss (income) attributable to noncontrolling interests | 2 | (4) | 4 | 24 | |||||||||||||||||||
| Total comprehensive income attributable to L3Harris Technologies, Inc. | $ | 1,013 | $ | 460 | $ | 1,898 | $ | 844 |
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
| (In millions, except shares) | October 1, 2021 | January 1, 2021 | |||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 1,126 | $ | 1,276 | |||||||
| Receivables, net | 1,027 | 1,344 | |||||||||
| Contract assets | 2,813 | 2,437 | |||||||||
| Inventories | 1,024 | 973 | |||||||||
| Inventory prepayments | 50 | 61 | |||||||||
| Income taxes receivable | 151 | 295 | |||||||||
| Other current assets | 280 | 246 | |||||||||
| Assets of businesses held for sale | 155 | 35 | |||||||||
| Total current assets | 6,626 | 6,667 | |||||||||
| Non-current Assets | |||||||||||
| Property, plant and equipment, net | 2,044 | 2,102 | |||||||||
| Operating lease right-of-use assets | 788 | 766 | |||||||||
| Goodwill | 18,207 | 18,876 | |||||||||
| Other intangible assets, net | 6,796 | 7,908 | |||||||||
| Deferred income taxes | 79 | 119 | |||||||||
| Other non-current assets | 478 | 522 | |||||||||
| Total non-current assets | 28,392 | 30,293 | |||||||||
| $ | 35,018 | $ | 36,960 | ||||||||
| Liabilities and Equity | |||||||||||
| Current Liabilities | |||||||||||
| Short-term debt | $ | 2 | $ | 2 | |||||||
| Accounts payable | 1,608 | 1,406 | |||||||||
| Contract liabilities | 1,174 | 1,198 | |||||||||
| Compensation and benefits | 368 | 496 | |||||||||
| Other accrued items | 1,058 | 1,066 | |||||||||
| Income taxes payable | 32 | 49 | |||||||||
| Current portion of long-term debt, net | 11 | 10 | |||||||||
| Liabilities of businesses held for sale | 60 | 13 | |||||||||
| Total current liabilities | 4,313 | 4,240 | |||||||||
| Non-current Liabilities | |||||||||||
| Defined benefit plans | 857 | 1,906 | |||||||||
| Operating lease liabilities | 792 | 734 | |||||||||
| Long-term debt, net | 7,053 | 6,943 | |||||||||
| Deferred income taxes | 1,293 | 1,237 | |||||||||
| Other long-term liabilities | 1,116 | 1,059 | |||||||||
| Total non-current liabilities | 11,111 | 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 196,795,809 and 208,230,353 shares at October 1, 2021 and January 1, 2021, respectively | 197 | 208 | |||||||||
| Other capital | 16,847 | 19,008 | |||||||||
| Retained earnings | 2,743 | 2,347 | |||||||||
| Accumulated other comprehensive loss | (303) | (839) | |||||||||
| Total shareholders’ equity | 19,484 | 20,724 | |||||||||
| Noncontrolling interests | 110 | 117 | |||||||||
| Total equity | 19,594 | 20,841 | |||||||||
| $ | 35,018 | $ | 36,960 |
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| Three Quarters Ended | |||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | 1,358 | $ | 902 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Amortization of acquisition-related intangibles | 475 | 529 | |||||||||
| Depreciation and other amortization | 248 | 239 | |||||||||
| Share-based compensation | 100 | 71 | |||||||||
| Share-based matching contributions under defined contribution plans | 165 | 168 | |||||||||
| Qualified pension plan contributions | (5) | (7) | |||||||||
| Pension and other postretirement benefit plan income | (275) | (241) | |||||||||
| Investment and asset impairment charges | 244 | 394 | |||||||||
| Business divestiture-related (gains) losses | (192) | 62 | |||||||||
| Deferred income taxes | (102) | (142) | |||||||||
| (Increase) decrease in: | |||||||||||
| Accounts receivable | 233 | (35) | |||||||||
| Contract assets | (615) | (98) | |||||||||
| Inventories | (108) | 139 | |||||||||
| Prepaid expenses and other current assets | (38) | (18) | |||||||||
| Increase (decrease) in: | |||||||||||
| Accounts payable | 270 | (2) | |||||||||
| Contract liabilities | 56 | (94) | |||||||||
| Compensation and benefits | (119) | (42) | |||||||||
| Income taxes | 100 | 86 | |||||||||
| Other accrued items | 72 | 84 | |||||||||
| Other | (2) | 97 | |||||||||
| Net cash provided by operating activities | 1,865 | 2,092 | |||||||||
| Investing Activities | |||||||||||
| Additions of property, plant and equipment | (207) | (194) | |||||||||
| Proceeds from sale of property, plant and equipment | 7 | — | |||||||||
| Proceeds from sales of businesses, net | 1,598 | 1,002 | |||||||||
| Other investing activities | 2 | (10) | |||||||||
| Net cash provided by investing activities | 1,400 | 798 | |||||||||
| Financing Activities | |||||||||||
| Net proceeds from borrowings | 5 | 249 | |||||||||
| Repayments of borrowings | (12) | (257) | |||||||||
| Proceeds from exercises of employee stock options | 94 | 39 | |||||||||
| Repurchases of common stock | (2,875) | (1,850) | |||||||||
| Cash dividends | (618) | (546) | |||||||||
| Other financing activities | (7) | (8) | |||||||||
| Net cash used in financing activities | (3,413) | (2,373) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2) | — | |||||||||
| Net (decrease) increase in cash and cash equivalents | (150) | 517 | |||||||||
| Cash and cash equivalents, beginning of year | 1,276 | 824 | |||||||||
| Cash and cash equivalents, end of quarter | $ | 1,126 | $ | 1,341 |
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
| (In millions, except per share amounts) | Common Stock | Other Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||
| Balance at July 2, 2021 | $ | 202 | $ | 17,863 | $ | 2,633 | $ | (835) | $ | 113 | $ | 19,976 | |||||||||||||||||||||||
| Net income | — | — | 481 | — | (2) | 479 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | 532 | — | 532 | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | — | 56 | — | — | — | 56 | |||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | — | 48 | — | — | — | 48 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | 33 | — | — | — | 33 | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | (5) | (1,150) | (170) | — | — | (1,325) | |||||||||||||||||||||||||||||
| Cash dividends ($1.02 per share) | — | — | (202) | — | — | (202) | |||||||||||||||||||||||||||||
| Other | — | (3) | 1 | — | (1) | (3) | |||||||||||||||||||||||||||||
| Balance at October 1, 2021 | $ | 197 | $ | 16,847 | $ | 2,743 | $ | (303) | $ | 110 | $ | 19,594 | |||||||||||||||||||||||
| Balance at July 3, 2020 | $ | 216 | $ | 20,260 | $ | 2,250 | $ | (624) | $ | 124 | $ | 22,226 | |||||||||||||||||||||||
| Net income | — | — | 426 | — | 4 | 430 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | 34 | — | 34 | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | — | 2 | — | — | — | 2 | |||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | 1 | 45 | — | — | — | 46 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | 31 | — | — | — | 31 | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | (7) | (1,028) | (115) | — | — | (1,150) | |||||||||||||||||||||||||||||
| Cash dividends ($.85 per share) | — | — | (179) | — | — | (179) | |||||||||||||||||||||||||||||
| Other | — | — | 1 | — | (2) | (1) | |||||||||||||||||||||||||||||
| Balance at October 2, 2020 | $ | 210 | $ | 19,310 | $ | 2,383 | $ | (590) | $ | 126 | $ | 21,439 | |||||||||||||||||||||||
| (In millions, except per share amounts) | Common Stock | Other Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | 208 | $ | 19,008 | $ | 2,347 | $ | (839) | $ | 117 | $ | 20,841 | |||||||||||||||||||||||
| Net income (loss) | — | — | 1,362 | — | (4) | 1,358 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | 536 | — | 536 | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | 1 | 93 | — | — | — | 94 | |||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | 1 | 164 | — | — | — | 165 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | 100 | — | — | — | 100 | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | (13) | (2,514) | (348) | — | — | (2,875) | |||||||||||||||||||||||||||||
| Cash dividends ($3.06 per share) | — | — | (618) | — | — | (618) | |||||||||||||||||||||||||||||
| Other | — | (4) | — | — | (3) | (7) | |||||||||||||||||||||||||||||
| Balance at October 1, 2021 | $ | 197 | $ | 16,847 | $ | 2,743 | $ | (303) | $ | 110 | $ | 19,594 | |||||||||||||||||||||||
| Balance at January 3, 2020 | $ | 218 | $ | 20,694 | $ | 2,183 | $ | (508) | $ | 157 | $ | 22,744 | |||||||||||||||||||||||
| Net income (loss) | — | — | 926 | — | (24) | 902 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of income taxes | — | — | — | (82) | — | (82) | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | 1 | 38 | — | — | — | 39 | |||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | 1 | 167 | — | — | — | 168 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | 71 | — | — | — | 71 | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | (10) | (1,659) | (181) | — | — | (1,850) | |||||||||||||||||||||||||||||
| Cash dividends ($2.55 per share) | — | — | (546) | — | — | (546) | |||||||||||||||||||||||||||||
| Other | — | (1) | 1 | — | (7) | (7) | |||||||||||||||||||||||||||||
| Balance at October 2, 2020 | $ | 210 | $ | 19,310 | $ | 2,383 | $ | (590) | $ | 126 | $ | 21,439 |
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A — Significant Accounting Policies and Recent Accounting Standards
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) include the accounts of L3Harris Technologies, Inc. and its consolidated subsidiaries. As used in these Notes to Condensed Consolidated Financial Statements (Unaudited) (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 in consolidation. The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared by L3Harris in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all information and footnotes necessary for a complete presentation of financial condition, results of operations, cash flows and equity in conformity with GAAP for annual financial statements. In the opinion of management, such interim financial statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of our financial condition, results of operations, cash flows and equity for the periods presented therein. The results for the quarter and three quarters ended October 1, 2021 are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period. The balance sheet at January 1, 2021 has been derived from our audited financial statements, but does not include all of the information and footnotes required by GAAP for annual financial statements. We provide complete, audited financial statements in our Annual Report on Form 10-K, which includes information and footnotes required by the rules and regulations of the SEC. The information included in this Quarterly Report on Form 10-Q (this “Report”) should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2021 (our “Fiscal 2020 Form 10-K”).
Amounts contained in this Report may not always add to totals due to rounding.
Supplemental Cash Flow Information
Non-cash investing and financing activities during the three quarters ended October 1, 2021 included a $88 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 Condensed Consolidated Statement of Cash Flows (Unaudited). 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 Condensed Consolidated Balance Sheet (Unaudited).
Non-cash investing and financing activities during the three quarters ended October 1, 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 Condensed Consolidated Statement of Cash Flows (Unaudited). 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 Condensed Consolidated Balance Sheet (Unaudited).
There were no material non-cash investing or financing activities during the three quarters ended October 2, 2020.
Reclassifications
The classification of certain prior-year amounts have been adjusted in our Condensed Consolidated Financial Statements (Unaudited) 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 Condensed Consolidated Balance Sheet (Unaudited).
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes and related disclosures. These estimates and assumptions are based on experience and other information available prior to issuance of the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes. Materially different results can occur as circumstances change and additional information becomes known.
Significant Accounting Policies Update
There have been no material changes to our significant accounting policies described in our Fiscal 2020 Form 10-K.
Note B — Business Divestitures
Businesses Held For Sale
The following table presents information regarding businesses held for sale as of October 1, 2021:
| Sale Price**(1)** | ||||||||||||||||||||
| Business Segment | Date of Agreement | (In millions) | ||||||||||||||||||
| Narda-MITEQ(2) | Aviation Systems | August 31, 2021 | $ | 75 | ||||||||||||||||
| ESSCO(3) | Aviation Systems | September 1, 2021 | 55 |
(1) Subject to customary purchase price adjustments and closing conditions as set forth in the definitive agreement.
(2) The Narda-MITEQ business manufactures component, satellite communication and radio frequency safety products for both military and commercial markets. We expect to complete the sale of the Narda-MITEQ business in the next two quarters.
(3) The ESSCO business manufactures metal space frame ground radomes and composite structures. We expect to complete the sale of the ESSCO business in the fourth quarter of 2021.
The carrying amounts of the major classes of assets and liabilities for businesses classified as held for sale included in our Condensed Consolidated Balance Sheet (Unaudited) at October 1, 2021 were as follows:
| (In millions) | Narda-MITEQ business | ESSCO business | Consolidated Total | ||||||||||||||
| Receivables, net | $ | 14 | $ | 3 | $ | 17 | |||||||||||
| Contract assets | 12 | 1 | 13 | ||||||||||||||
| Inventories | 26 | 4 | 30 | ||||||||||||||
| Other current assets | 1 | — | 1 | ||||||||||||||
| Property, plant and equipment, net | 11 | 4 | 15 | ||||||||||||||
| Goodwill | 7 | 4 | 11 | ||||||||||||||
| Other intangible assets | 21 | 10 | 31 | ||||||||||||||
| Deferred taxes | 1 | — | 1 | ||||||||||||||
| Other non-current assets | 33 | 3 | 36 | ||||||||||||||
| Assets of businesses held for sale | $ | 126 | $ | 29 | $ | 155 | |||||||||||
| Accounts payable | $ | 7 | $ | 2 | $ | 9 | |||||||||||
| Contract liabilities | 2 | 2 | 4 | ||||||||||||||
| Other accrued items | 7 | 2 | 9 | ||||||||||||||
| Other non-current liabilities | 34 | 2 | 36 | ||||||||||||||
| Deferred taxes | — | 2 | 2 | ||||||||||||||
| Liabilities of businesses held for sale | $ | 50 | $ | 10 | $ | 60 |
The carrying amounts of the assets and liabilities of the Voice Switch Enterprise disposal group (“VSE disposal group”) classified as held for sale in our Consolidated Balance Sheet at January 1, 2021 were $35 million and $13 million, respectively.
Completed Divestitures
The following table presents information regarding business divestitures completed by us during the three quarters ended October 2, 2020 and fiscal year ended January 1, 2021:
| (In millions) | Business Segment**(1)** | Date of Divestiture | Sale Price | Net Cash Proceeds**(2)** | ||||||||||||||||||||||
| Three quarters ended October 1, 2021 | ||||||||||||||||||||||||||
| Electron Devices business(3) | Aviation Systems | October 1, 2021 | $ | 185 | $ | 173 | ||||||||||||||||||||
| VSE disposal group(4) | Aviation Systems | July 30, 2021 | 20 | 19 | ||||||||||||||||||||||
| CPS business(5) | Aviation Systems | July 2, 2021 | 398 | 347 | ||||||||||||||||||||||
| Military training business(6) | Aviation Systems | July 2, 2021 | 1,050 | 1,059 | ||||||||||||||||||||||
| $ | 1,653 | $ | 1,598 | |||||||||||||||||||||||
| Fiscal year ended January 1, 2021 | ||||||||||||||||||||||||||
| EOTech business(7) | Communication Systems | July 31, 2020 | $ | 42 | $ | 40 | ||||||||||||||||||||
| Applied Kilovolts business(8) | Space and Airborne Systems | May 15, 2020 | 12 | 12 | ||||||||||||||||||||||
| Airport security and automation business(9) | Aviation Systems | May 4, 2020 | 1,000 | 987 | ||||||||||||||||||||||
| $ | 1,054 | $ | 1,039 |
(1) Business segment in which the operating results of each divested business were reported through the date of divestiture.
(2) Net cash proceeds after selling costs and purchase price adjustments.
(3) The Electron Devices and Narda Microwave-West divisions (“Electron Devices business”) manufactures microwave devices for ground-based, airborne and satellite communications and radar.
(4) The VSE disposal group provides voice over internet protocol systems for air traffic management communications.
(5) The Combat Propulsion Systems and related businesses (“CPS business”) engineers, designs and manufactures engines, transmissions, suspensions and turret drive systems for tracked and wheeled combat vehicle systems.
(6) The military training business provides flight simulation solutions and training services to the U.S. Department of Defense (“DoD”) and foreign military agencies.
(7) The EOTech business manufactures holographic sighting systems, magnified field optics and accessories for military, law enforcement and commercial markets around the world.
(8) The Applied Kilovolts and Analytical Instrumentation business (“Applied Kilovolts business”) business manufactures high-voltage power supplies and ion detectors for customers in fields such as biotechnology, materials science, healthcare, forensics, environmental sciences, and homeland security.
(9) The airport security and automation business provides solutions used by the aviation and transportation industries, regulatory and customs authorities, government and law enforcement agencies and commercial and other high-security facilities.
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 Condensed Consolidated Statement of Income (Unaudited):
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Electron Devices business | $ | 11 | $ | 8 | $ | 41 | $ | 23 | |||||||||||||||
| CPS business | — | 16 | 53 | 44 | |||||||||||||||||||
| Military training business | — | 17 | 35 | 57 | |||||||||||||||||||
Business Divestiture-related Gains (Losses)
The “Business divestiture-related gains (losses)” line item in our Condensed Consolidated Statement of Income (Unaudited) is comprised of the following pre-tax gains (losses) associated with businesses divested or held for sale:
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| VSE disposal group(1) | $ | (4) | $ | (10) | $ | (30) | $ | (24) | |||||||||||||||
| Electron Devices business | 29 | — | 29 | — | |||||||||||||||||||
| CPS business(2) | — | — | (19) | — | |||||||||||||||||||
| Military training business | 2 | — | 214 | — | |||||||||||||||||||
| Airport security and automation business | — | (2) | — | (28) | |||||||||||||||||||
| Other(3) | — | 2 | (2) | (10) | |||||||||||||||||||
| Total Business divestiture-related gain (losses) | $ | 27 | $ | (10) | $ | 192 | $ | (62) |
(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 Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 2, 2020. We recognized an $18 million non-cash remeasurement loss related to the VSE disposal group during the year ended January 1, 2021.
(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 Condensed Consolidated Statement of Income (Unaudited). See Note I — Goodwill and Other Intangible Assets 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 gain initially recognized on the sale of the Harris Night Vision business divested on September 13, 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 O — Fair Value Measurements in these Notes for additional information regarding the fair value hierarchy and see Note I — Goodwill and Other Intangible Assets in these Notes for additional information regarding the impairment of goodwill related to our business divestitures.
Note C — Stock Options and Other Share-Based Compensation
As of October 1, 2021, we had options or other share-based compensation outstanding under two Harris Corporation shareholder-approved 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 as of August 28, 2020) (the “2015 EIP”), as well as under employee stock incentive plans of L3 Technologies, Inc. assumed by L3Harris (collectively, “L3Harris SIPs”). We believe that share-based awards more closely align the interests of participants with those of shareholders.
The compensation cost related to our share-based awards that was charged against income was $33 million and $100 million for the quarter and three quarters ended October 1, 2021, respectively, and $31 million and $71 million for the quarter and three quarters ended October 2, 2020, respectively. The aggregate number of shares of our common stock issued under L3Harris SIPs, net of shares withheld for tax purposes, was 0.7 million and 1.2 million for the quarter and three quarters ended October 1, 2021, respectively, was not material for the quarter ended October 2, 2020 and was 0.5 million for the three quarters ended October 2, 2020.
Awards granted to participants under L3Harris SIPs during the quarter ended October 1, 2021 were not material. Awards granted to participants under L3Harris SIPs during the three quarters ended October 1, 2021 consisted of 0.5 million stock options, 0.2 million performance stock units and 0.3 million restricted stock units. The fair value as of the grant date of each stock option award was determined using the Black-Scholes-Merton option-pricing model and the following assumptions: expected dividend yield of 1.99 percent; expected volatility of 31.71 percent; risk-free interest rates averaging 0.75 percent; and expected term of 5.05 years. The fair value as of the grant date of each restricted stock unit award was based on the closing price of our common stock on the grant date. The fair value as of the grant date of each performance stock unit award was
determined based on the fair value from a multifactor Monte Carlo valuation model that simulates our stock price and total shareholder return (“TSR”) relative to companies in our TSR peer group.
Note D — Accumulated Other Comprehensive Income (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 1, 2021 | $ | (58) | $ | (80) | $ | (701) | $ | (839) | |||||||||||||||
| Other comprehensive (loss) income, before income taxes | (37) | — | 769 | 732 | |||||||||||||||||||
| Income taxes | — | — | (195) | (195) | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications to earnings, net of income taxes(1) | (37) | — | 574 | 537 | |||||||||||||||||||
| Losses (gains) reclassified to earnings(2) | 1 | (10) | 8 | (1) | |||||||||||||||||||
| Income taxes | — | 2 | (2) | — | |||||||||||||||||||
| Losses (gains) reclassified to earnings, net of income taxes | 1 | (8) | 6 | (1) | |||||||||||||||||||
| Other comprehensive (loss) income, net of income taxes | (36) | (8) | 580 | 536 | |||||||||||||||||||
| Balance at October 1, 2021 | $ | (94) | $ | (88) | $ | (121) | $ | (303) | |||||||||||||||
| Balance at January 3, 2020 | $ | (81) | $ | (55) | $ | (372) | $ | (508) | |||||||||||||||
| Other comprehensive loss, before income taxes | (28) | (75) | — | (103) | |||||||||||||||||||
| Income taxes | — | 20 | — | 20 | |||||||||||||||||||
| Other comprehensive loss before reclassifications to earnings, net of income taxes | (28) | (55) | — | (83) | |||||||||||||||||||
| Losses (gains) reclassified to earnings(2) | 7 | 8 | (16) | (1) | |||||||||||||||||||
| Income taxes | — | (2) | 4 | 2 | |||||||||||||||||||
| Losses (gains) reclassified to earnings, net of income taxes | 7 | 6 | (12) | 1 | |||||||||||||||||||
| Other comprehensive loss, net of income taxes | (21) | (49) | (12) | (82) | |||||||||||||||||||
| Balance at October 2, 2020 | $ | (102) | $ | (104) | $ | (384) | $ | (590) |
(1)Other comprehensive income before reclassifications to earnings, net of income taxes, for the quarter and three quarters ended October 1, 2021 includes remeasurement of funded status of pension plans after the purchases of group annuity policies. See Note K — Postretirement Benefit Plans in these Notes for further information.
(2)Losses (gains) reclassified to earnings are included in the “Revenue from product sales and services,” “Business divestiture-related gains (losses),” “Interest expense, net” and “Non-operating income” line items in our Condensed Consolidated Statement of Income (Unaudited).
Note E — Receivables, net
Receivables, net are summarized below:
| (In millions) | October 1, 2021 | January 1, 2021 | |||||||||
| Accounts receivable | $ | 1,066 | $ | 1,369 | |||||||
| Less allowance for credit losses | (39) | (25) | |||||||||
| Receivables, net | $ | 1,027 | $ | 1,344 |
We have two receivables sale agreements (“RSAs”) with 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 not material at October 1, 2021 or January 1, 2021.
Note F — Contract Assets and Contract Liabilities
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 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 the three quarters ended October 1, 2021 were impacted primarily by reclassifications to assets and liabilities of businesses held for sale, 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. See Note B — Business Divestitures in these Notes for additional information regarding assets and liabilities of businesses classified as held for sale.
Contract assets and contract liabilities are summarized below:
| (In millions) | October 1, 2021 | January 1, 2021 | |||||||||
| Contract assets | $ | 2,813 | $ | 2,437 | |||||||
| Contract liabilities, current | (1,174) | (1,198) | |||||||||
| Contract liabilities, non-current(1) | (98) | (73) | |||||||||
| Net contract assets | $ | 1,541 | $ | 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 Condensed Consolidated Balance Sheet (Unaudited).
The components of contract assets are summarized below:
| (In millions) | October 1, 2021 | January 1, 2021 | |||||||||
| Unbilled contract receivables, gross | $ | 4,587 | $ | 4,268 | |||||||
| Unliquidated progress payments and advances | (1,774) | (1,831) | |||||||||
| Contract assets | $ | 2,813 | $ | 2,437 |
Impairment losses related to our contract assets were not material for the quarter or three quarters ended October 1, 2021 or October 2, 2020. Contract liabilities recognized as revenue that were outstanding at the end of the prior fiscal year were $94 million and $821 million for the quarter and three quarters ended October 1, 2021, respectively, and $97 million and $882 million for the quarter and three quarters ended October 2, 2020, respectively.
Note G — Inventories
Inventories are summarized below:
| (In millions) | October 1, 2021 | January 1, 2021 | |||||||||
| Finished products | $ | 240 | $ | 136 | |||||||
| Work in process | 325 | 367 | |||||||||
| Raw materials and supplies | 459 | 470 | |||||||||
| Total inventories | $ | 1,024 | $ | 973 |
Note H — Property, Plant and Equipment, net
Property, plant and equipment, net are summarized below:
| (In millions) | October 1, 2021 | January 1, 2021 | |||||||||
| Land | $ | 81 | $ | 90 | |||||||
| Software capitalized for internal use | 541 | 417 | |||||||||
| Buildings | 1,205 | 1,097 | |||||||||
| Machinery and equipment | 2,173 | 2,265 | |||||||||
| 4,000 | 3,869 | ||||||||||
| Less accumulated depreciation and amortization | (1,956) | (1,767) | |||||||||
| Total property, plant and equipment, net | $ | 2,044 | $ | 2,102 |
Depreciation and amortization expense related to property, plant and equipment was $85 million and $249 million for the quarter and three quarters ended October 1, 2021, respectively, and $83 million and $237 million for the quarter and three quarters ended October 2, 2020, respectively.
As discussed in more detail in Note I — Goodwill and Other 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 Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 1, 2021.
Note I — Goodwill and Other Intangible Assets
Goodwill
The assignment of goodwill by business segment, and changes in the carrying amount of goodwill by business segment, were as follows:
| (In millions) | Integrated Mission Systems | Space and Airborne Systems | Communication Systems | Aviation Systems | Total | ||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | 6,499 | $ | 5,232 | $ | 4,153 | $ | 2,992 | $ | 18,876 | |||||||||||||||||||
| Goodwill decrease from divestitures(1) | — | — | — | (553) | (553) | ||||||||||||||||||||||||
| Decrease from reclassification to assets of businesses held for sale(2) | — | — | — | (11) | (11) | ||||||||||||||||||||||||
| Impairment of goodwill | — | — | — | (62) | (62) | ||||||||||||||||||||||||
| Currency translation adjustments | (8) | (23) | — | (12) | (43) | ||||||||||||||||||||||||
| Balance at October 1, 2021 | $ | 6,491 | $ | 5,209 | $ | 4,153 | $ | 2,354 | $ | 18,207 | |||||||||||||||||||
| 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) | — | (364) | (369) | ||||||||||||||||||||||||
| Currency translation adjustments | (3) | (4) | (2) | 1 | (8) | ||||||||||||||||||||||||
| Other (including adjustments to previously estimated fair value of assets acquired and liabilities assumed) | 740 | 112 | (82) | (861) | (91) | ||||||||||||||||||||||||
| Balance at October 2, 2020 | $ | 6,505 | $ | 5,232 | $ | 4,150 | $ | 3,105 | $ | 18,992 |
(1)During the three quarters ended October 1, 2021, we completed the divestitures of our CPS business, military training business, Electron Devices business and VSE disposal group and derecognized $553 million of goodwill as part of determining the gain or loss on the sales of these businesses. During the three quarters ended October 2, 2020, we completed the divestitures of our airport security and automation business, Applied Kilovolts business and EOTech business and derecognized $541 million of goodwill as part of determining the gain or loss on the sales of these businesses.
(2)During the three quarters ended October 1, 2021, we assigned $11 million of goodwill associated with pending divestitures to “Assets of businesses held for sale” in our Condensed Consolidated Balance Sheet (Unaudited). See Note B — Business Divestitures in these Notes for additional information.
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 Condensed Consolidated Statement of Income (Unaudited). See Note B — Business Divestitures in these Notes for additional information.
Commercial Aviation Solutions Impairment. Indications of potential impairment of goodwill related to our Commercial Aviation Solutions sector (which is part of our Aviation Systems segment) were present at April 3, 2020 due to COVID and its impact on global air traffic and customer operations, resulting in a decrease in fiscal 2020 outlook for the sector, 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 Commercial Aviation Solutions sector, we prepared an estimate of the fair value of the sector based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions, and projected discounted cash flows. Our methodology for determining the fair value of the sector 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 Commercial Aviation Solutions, including 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 Commercial Aviation Solutions existed as of July 3, 2020.
As a result of these impairment tests, we concluded that goodwill related to our Commercial Aviation Solutions sector was impaired as of April 3, 2020 and July 3, 2020, and we recorded non-cash impairment charges of $296 million and $54 million, respectively (including $28 million and $8 million, respectively, attributable to noncontrolling interest), which are included in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 2, 2020. The goodwill impairment charges were primarily not deductible for tax purposes. There was no impairment of goodwill for the quarter ended October 2, 2020.
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 and 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 Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 2, 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 of $14 million, which is included in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 2, 2020.
Identifiable Intangible Assets
The most significant identifiable intangible asset that is separately recognized for our business combinations is customer relationships. Our customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows arising from the follow-on sales expected from the customer relationships over the estimated lives, including the probability of expected future contract renewals and sales, less a contributory asset 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 Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 1, 2021. See Note H — Property, Plant and Equipment, net in these Notes for additional information.
Identifiable intangible assets are summarized below:
| October 1, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||
| (In millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount**(1)** | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
| Customer relationships | $ | 6,200 | $ | 1,579 | $ | 4,621 | $ | 6,863 | $ | 1,257 | $ | 5,606 | |||||||||||||||||||||||
| Developed technologies | 601 | 304 | 297 | 653 | 261 | 392 | |||||||||||||||||||||||||||||
| Contract backlog | 13 | 13 | — | 19 | 17 | 2 | |||||||||||||||||||||||||||||
| Trade names — divisions | 108 | 54 | 54 | 129 | 45 | 84 | |||||||||||||||||||||||||||||
| Other | 3 | 3 | — | 3 | 3 | — | |||||||||||||||||||||||||||||
| Total identifiable intangible assets subject to amortization | 6,925 | 1,953 | 4,972 | 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 | $ | 8,749 | $ | 1,953 | $ | 6,796 | $ | 9,491 | $ | 1,583 | $ | 7,908 |
(1)During the three quarters ended October 1, 2021, we derecognized $546 million of intangible assets associated with completed divestitures and reclassified $31 million of intangible assets associated with pending divestitures to “Assets of businesses held for sale” in our Condensed Consolidated Balance Sheet (Unaudited). See Note B — Business Divestitures in these Notes for additional information regarding divestitures.
Amortization expense for identifiable intangible assets, which primarily relates to the all-stock merger between Harris Corporation and L3 Technologies, Inc. completed on June 29, 2019 (“L3Harris Merger”), was $156 million and $476 million for the quarter and three quarters ended October 1, 2021, respectively, and was $179 million and $546 million for the quarter and three quarters ended October 2, 2020, respectively.
Future estimated amortization expense for identifiable intangible assets subject to amortization is as follows:
| (In millions) | |||||
| Year 1 | $ | 608 | |||
| Year 2 | 602 | ||||
| Year 3 | 574 | ||||
| Year 4 | 529 | ||||
| Year 5 | 477 | ||||
| Thereafter | 2,182 | ||||
| Total | $ | 4,972 |
Note J — 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 Condensed Consolidated Balance Sheet (Unaudited). Changes in our liability for standard product warranties during the three quarters ended October 1, 2021 were as follows:
| (In millions) | |||||
| Balance at January 1, 2021 | $ | 133 | |||
| Decrease from divestitures | (5) | ||||
| Accruals for product warranties issued during the period | 32 | ||||
| Settlements made during the period | (37) | ||||
| Other, including foreign currency translation adjustments | (2) | ||||
| Balance at October 1, 2021 | $ | 121 |
Note K — Postretirement Benefit Plans
The following tables provide the components of our net periodic benefit income for our defined benefit plans, including defined benefit pension plans and other postretirement defined benefit plans:
| Quarter Ended October 1, 2021 | Three Quarters Ended October 1, 2021 | ||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Pension | Other Benefits | |||||||||||||||||||
| Net periodic benefit income | |||||||||||||||||||||||
| Service cost | $ | 16 | $ | 1 | $ | 52 | $ | 2 | |||||||||||||||
| Interest cost | 47 | 1 | 139 | 4 | |||||||||||||||||||
| Expected return on plan assets | (155) | (5) | (467) | (15) | |||||||||||||||||||
| Amortization of net actuarial loss | 7 | — | 26 | — | |||||||||||||||||||
| Amortization of prior service credit (cost) | (7) | 1 | (21) | 1 | |||||||||||||||||||
| Net loss from curtailments and settlements | 7 | — | 4 | — | |||||||||||||||||||
| Net periodic benefit income | $ | (85) | $ | (2) | $ | (267) | $ | (8) |
| Quarter Ended October 2, 2020 | Three Quarters Ended October 2, 2020 | ||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Pension | Other Benefits | |||||||||||||||||||
| Net periodic benefit income | |||||||||||||||||||||||
| Service cost | $ | 17 | $ | — | $ | 49 | $ | 1 | |||||||||||||||
| Interest cost | 68 | 3 | 205 | 7 | |||||||||||||||||||
| Expected return on plan assets | (158) | (5) | (473) | (15) | |||||||||||||||||||
| Amortization of net actuarial loss (gain) | 2 | (1) | 7 | (2) | |||||||||||||||||||
| Amortization of prior service credit | (7) | — | (21) | — | |||||||||||||||||||
| Contractual termination cost(1) | — | — | 1 | — | |||||||||||||||||||
| Net periodic benefit income | $ | (78) | $ | (3) | $ | (232) | $ | (9) |
(1)For the three quarters ended October 2, 2020, includes contractual termination benefits related to facility rationalization as part of restructuring activities in connection with the L3Harris Merger integration. See Note 4: “Restructuring and Other Exit Costs” in the Notes to Consolidated Financial Statements in our Fiscal 2020 Form 10-K for further information.
During the quarter and three quarters ended October 1, 2021, we reduced our pension benefit obligations by purchasing group annuity policies and transferring approximately $81 million and $250 million, respectively, of pension plan assets to an insurance company thereby reducing our defined benefit obligations by approximately $81 million and $250 million, respectively. As a result of the annuity purchases, we recognized pre-tax losses of $7 million and $4 million in the quarter and three quarters ended October 1, 2021, respectively, which are included as a component of the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited).
The service cost component of net periodic benefit income is included in the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Condensed Consolidated Statement of Income (Unaudited). The non-service cost components of net periodic benefit income are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited), except for contractual termination benefits which are included in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited).
As a result of prior voluntary contributions, we are not required to make any contributions to these plans during the remainder of fiscal 2021 and for several years thereafter.
Note L — Earnings Per Share
Income from continuing operations per common share attributable to L3Harris common shareholders (“EPS”) is computed using the two-class method, which is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends paid and participation rights in undistributed earnings. Under the two-class method, EPS is computed by dividing the sum of earnings distributed to L3Harris common shareholders and undistributed earnings allocated to L3Harris common shareholders by the weighted-average number of common shares outstanding for the period. Income from continuing operations per diluted common share attributable to L3Harris common shareholders (“diluted EPS”) is computed using the more dilutive of the two-class method or the treasury stock method. Under the treasury stock method, diluted EPS is computed by dividing net income attributable to L3Harris common shareholders by the weighted-average number of common shares outstanding for the period. 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.
The weighted average number of shares outstanding used to compute EPS and diluted EPS are as follows:
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Basic weighted average common shares outstanding | 199.5 | 213.4 | 203.3 | 215.5 | |||||||||||||||||||
| Impact of dilutive share-based awards | 2.1 | 1.7 | 1.9 | 1.8 | |||||||||||||||||||
| Diluted weighted average common shares outstanding | 201.6 | 215.1 | 205.2 | 217.3 |
Potential dilutive common shares primarily consist of employee stock options, restricted stock units and performance stock units. The anti-dilutive impact of weighted average share-based awards outstanding for the quarter ended October 1, 2021 was immaterial. Diluted EPS excludes the anti-dilutive impact of 1.1 million weighted average share-based awards outstanding for the three quarters ended October 1, 2021 and 1.5 million and 1.3 million weighted average share-based awards outstanding for the quarter and three quarters ended October 2, 2020, respectively.
Note M — Non-Operating Income
The components of non-operating income were as follows:
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Non-service cost components of net periodic benefit income(1) | $ | 104 | $ | 97 | $ | 329 | $ | 292 | |||||||||||||||
| Impairment of equity method investment | — | — | (35) | — | |||||||||||||||||||
| Other | 7 | (1) | 20 | 4 | |||||||||||||||||||
| Total non-operating income | $ | 111 | $ | 96 | $ | 314 | $ | 296 |
(1)Non-service cost components of net periodic benefit income recorded in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited) 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.
Note N — Income Taxes
Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 18.3 percent for the quarter ended October 1, 2021 compared with 16.8 percent for the quarter ended October 2, 2020. During the quarter ended October 1, 2021, our effective tax rate was unfavorably impacted by non-deductible goodwill from completed business divestitures and the unfavorable impact of valuation allowances in certain foreign jurisdictions, partially offset by the favorable impact of research and development (“R&D”) credits, favorable adjustments upon finalization of our Federal tax return, the favorable impact of excess tax benefits related to equity-based compensation and the favorable resolution of specific audit uncertainties. During the quarter ended October 2, 2020, our effective tax rate benefited from favorable adjustments upon finalization of our Federal tax returns, including the favorable impact of a net reduction in our uncertain tax position balance.
Our effective tax rate was 19.8 percent for the three quarters ended October 1, 2021 compared with 15.9 percent for the three quarters ended October 2, 2020. Our effective tax rate for the three quarters ended October 1, 2021 was impacted by the items described above for the quarter ended October 1, 2021. In addition to the items noted above for the quarter ended October 2, 2020, our effective tax rate for the three quarters ended October 2, 2020 benefited from the favorable impact of R&D credits and excess tax benefits related to equity-based compensation, partially offset by the unfavorable impact of non-deductible goodwill impairment charges.
Note O — Fair Value Measurements
Fair value is defined as the price that would be received for an asset or the price that would be paid to transfer a liability in the principal market or most advantageous market in an orderly transaction between market participants at the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
-
Level 1 — Quoted prices in active markets for identical assets or liabilities.
-
Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.
-
Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed using the best information available in the circumstances.
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the external pricing services, 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.
The following table presents assets and liabilities measured at fair value on a recurring basis (at least annually) at October 1, 2021 and January 1, 2021:
| October 1, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Total | Level 1 | Level 2 | |||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan assets:(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity and fixed-income securities | $ | 72 | $ | 72 | $ | — | $ | 67 | $ | 67 | $ | — | |||||||||||||||||||||||||||||||||||
| Investments measured at NAV: | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate-owned life insurance | 34 | 31 | |||||||||||||||||||||||||||||||||||||||||||||
| Total fair value of deferred compensation plan assets | $ | 106 | $ | 72 | $ | — | $ | 98 | $ | 67 | $ | — | |||||||||||||||||||||||||||||||||||
| Derivatives (foreign currency forward contracts) | $ | 8 | $ | — | $ | 8 | $ | 24 | $ | — | $ | 24 | |||||||||||||||||||||||||||||||||||
| 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 | 153 | 116 | |||||||||||||||||||||||||||||||||||||||||||||
| Total fair value of deferred compensation plan liabilities | $ | 159 | $ | 6 | $ | — | $ | 120 | $ | 4 | $ | — | |||||||||||||||||||||||||||||||||||
| Derivatives (foreign currency forward contracts) | $ | 5 | $ | — | $ | 5 | $ | 4 | $ | — | $ | 4 | |||||||||||||||||||||||||||||||||||
(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 Condensed Consolidated Balance Sheet (Unaudited) 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 Condensed Consolidated Balance Sheet (Unaudited). 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.
The following table presents the carrying amounts and estimated fair values of our significant financial instruments that were not measured at fair value (carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of those items):
| October 1, 2021 | January 1, 2021 | ||||||||||||||||||||||
| (In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Long-term debt (including current portion)(1) | $ | 7,064 | $ | 7,814 | $ | 6,953 | $ | 7,986 |
(1)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.
See Note B — Business Divestitures and Note I — Goodwill and Other Intangible Assets in these Notes for information regarding fair value measurements associated with goodwill.
Note P — 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 Condensed Consolidated Balance Sheet (Unaudited) 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). Gains and losses in AOCI 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 Condensed Consolidated Statement of Cash Flows (Unaudited) 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 October 1, 2021, we had open foreign currency forward contracts with an aggregate notional amount of $520 million, hedging certain forecasted transactions denominated in U.S. Dollars, Canadian Dollars, British Pounds, Australian Dollars and Euros. 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 October 1, 2021, our foreign currency forward contracts had maturities through 2025.
The following table presents the fair values of our derivatives designated as foreign currency hedging instruments in our Condensed Consolidated Balance Sheet (Unaudited) at October 1, 2021 and January 1, 2021:
| (In millions) | October 1, 2021 | January 1, 2021 | |||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts(1) | |||||||||||||||||||||||||||||||||||
| Other current assets | $ | 7 | $ | 21 | |||||||||||||||||||||||||||||||
| Other non-current assets | 1 | 3 | |||||||||||||||||||||||||||||||||
| Other accrued items | 4 | 4 | |||||||||||||||||||||||||||||||||
| Other long-term liabilities | 1 | — | |||||||||||||||||||||||||||||||||
(1)See Note O — Fair Value Measurements in these Notes for a description of the fair value hierarchy related to our foreign currency forward contracts.
Net unrealized gains or losses recognized in other comprehensive loss were a loss of $10 million and a gain of $5 million for the quarter ended October 1, 2021 and October 2, 2020, respectively, and not material for the three quarters ended October 1, 2021 or October 2, 2020, respectively.
The net gains reclassified from AOCI into earnings from foreign currency derivatives designated as cash flow hedges were $4 million and $19 million, respectively, during the quarter and three quarters ended October 1, 2021 and were not material during the quarter and three quarters ended October 2, 2020. At October 1, 2021, the estimated amount of existing net gains to be reclassified into earnings within the next twelve months was $2 million.
Gains and losses from foreign currency derivatives designated as cash flow hedges are included in the line item in our Condensed Consolidated Statement of Income (Unaudited) associated with the hedged transaction, with the exception of any losses resulting from discontinued cash flow hedges, which are included in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited).
Note Q — Changes in 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. These variable amounts generally are awarded upon achievement of certain negotiated performance metrics, program milestones or cost targets and can be based upon customer discretion. We include such estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard
Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.
Net EAC adjustments had the following impact to earnings for the periods presented:
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions, except per share amounts) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Net EAC adjustments, before income taxes | $ | 85 | $ | 99 | $ | 247 | $ | 300 | |||||||||||||||
| Net EAC adjustments, net of income taxes | 64 | 74 | 186 | 225 | |||||||||||||||||||
| Net EAC adjustments, net of income taxes, per diluted common share | 0.32 | 0.34 | 0.91 | 1.03 |
Revenue recognized from performance obligations satisfied in prior periods was $102 million and $317 million for the quarter and three quarters ended October 1, 2021, respectively, and $121 million and $359 million for the quarter and three quarters ended October 2, 2020, respectively.
Note R — 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 October 1, 2021, our ending backlog was $21.1 billion. We expect to recognize approximately 60 percent of the revenue associated with this backlog by the end of 2022 and approximately 77 percent by the end of 2023, 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 the three quarters ended October 1, 2021.
Note S — Business Segment Information
We structure our operations primarily around the products, systems and services we sell and the markets we serve, and we report the financial results of our continuing operations in the following four operating segments, which are also our reportable segments and are referred to as our business segments:
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Integrated Mission Systems, including multi-mission intelligence, surveillance and reconnaissance (“ISR”) and communication systems; integrated electrical and electronic systems for maritime platforms; and advanced electro-optical and infrared solutions;
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Space and Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare;
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Communication Systems, including tactical communications; broadband communications; integrated vision solutions; public safety radios, system applications and equipment; and global communications solutions; and
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Aviation Systems, including defense aviation; commercial aviation products; commercial pilot training; and mission networks for air traffic management.
See Note B — Business Divestitures in these Notes for information relating to businesses divested or classified as held for sale in fiscal 2020 and 2021.
The accounting policies of our business segments are the same as those described in Note 1: “Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Fiscal 2020 Form 10-K. 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 the table below 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 items in the table below represent the portion of corporate expenses not allocated to our business segments and elimination of intersegment profits. The “Pension adjustment” line item in the table below represents the reconciliation of the non-service components of net periodic pension and postretirement benefit costs, which are a component of segment operating income but are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited). The non-service components of net periodic pension and postretirement benefit costs include interest cost, expected return on plan assets, amortization of net actuarial gain or loss, and effect of curtailments or settlements.
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:
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Integrated Mission Systems | $ | 1,336 | $ | 1,372 | $ | 4,281 | $ | 4,073 | |||||||||||||||
| Space and Airborne Systems | 1,284 | 1,249 | 3,807 | 3,690 | |||||||||||||||||||
| Communication Systems | 1,030 | 1,094 | 3,269 | 3,300 | |||||||||||||||||||
| Aviation Systems | 625 | 792 | 2,248 | 2,603 | |||||||||||||||||||
| Corporate eliminations | (46) | (44) | (141) | (132) | |||||||||||||||||||
| Total revenue | $ | 4,229 | $ | 4,463 | $ | 13,464 | $ | 13,534 | |||||||||||||||
| Income From Continuing Operations Before Income Taxes | |||||||||||||||||||||||
| Segment Operating Income (Loss): | |||||||||||||||||||||||
| Integrated Mission Systems | $ | 222 | $ | 213 | $ | 691 | $ | 638 | |||||||||||||||
| Space and Airborne Systems | 242 | 231 | 735 | 687 | |||||||||||||||||||
| Communication Systems | 271 | 273 | 839 | 788 | |||||||||||||||||||
| Aviation Systems | 90 | 100 | 253 | (46) | |||||||||||||||||||
| 825 | 817 | 2,518 | 2,067 | ||||||||||||||||||||
| Unallocated Items: | |||||||||||||||||||||||
| L3Harris Merger-related integration expenses | (34) | (27) | (75) | (95) | |||||||||||||||||||
| Amortization of acquisition-related intangibles(1) | (155) | (176) | (475) | (529) | |||||||||||||||||||
| Additional cost of sales related to fair value step-up in inventory sold | — | — | — | (31) | |||||||||||||||||||
| Business divestiture-related gains (losses) | 27 | (10) | 192 | (62) | |||||||||||||||||||
| Other items | (8) | (2) | (61) | (19) | |||||||||||||||||||
| Impairment of goodwill and other assets | — | — | (125) | (19) | |||||||||||||||||||
| Unallocated corporate department expense | (2) | (21) | (59) | (51) | |||||||||||||||||||
| (172) | (236) | (603) | (806) | ||||||||||||||||||||
| Pension adjustment | (111) | (97) | (336) | (292) | |||||||||||||||||||
| Non-operating income, net | 111 | 96 | 314 | 296 | |||||||||||||||||||
| Interest expense, net | (67) | (62) | (198) | (190) | |||||||||||||||||||
| Total income from continuing operations before income taxes | $ | 586 | $ | 518 | $ | 1,695 | $ | 1,075 |
(1)Includes amortization of identifiable intangible assets acquired as a result of the L3Harris Merger and the acquisition of Exelis Inc., which benefited the entire Company as opposed to any individual segment; therefore, amortization of identifiable intangible assets acquired was not allocated to any segment.
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.
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||
| Prime contractor | $ | 906 | $ | 908 | $ | 2,933 | $ | 2,715 | |||||||||||||||
| Subcontractor | 414 | 452 | 1,303 | 1,321 | |||||||||||||||||||
| Intersegment | 16 | 12 | 45 | 37 | |||||||||||||||||||
| $ | 1,336 | $ | 1,372 | $ | 4,281 | $ | 4,073 | ||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||
| Fixed-price(1) | $ | 988 | $ | 1,039 | $ | 3,227 | $ | 3,060 | |||||||||||||||
| Cost-reimbursable | 332 | 321 | 1,009 | 976 | |||||||||||||||||||
| Intersegment | 16 | 12 | 45 | 37 | |||||||||||||||||||
| $ | 1,336 | $ | 1,372 | $ | 4,281 | $ | 4,073 | ||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||
| United States | $ | 1,016 | $ | 1,086 | $ | 3,070 | $ | 3,205 | |||||||||||||||
| International | 304 | 274 | 1,166 | 831 | |||||||||||||||||||
| Intersegment | 16 | 12 | 45 | 37 | |||||||||||||||||||
| $ | 1,336 | $ | 1,372 | $ | 4,281 | $ | 4,073 |
(1)Includes revenue derived from time-and-materials contracts.
Space and Airborne Systems: Space and 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.
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||
| Prime contractor | $ | 753 | $ | 674 | $ | 2,169 | $ | 2,006 | |||||||||||||||
| Subcontractor | 527 | 570 | 1,630 | 1,673 | |||||||||||||||||||
| Intersegment | 4 | 5 | 8 | 11 | |||||||||||||||||||
| $ | 1,284 | $ | 1,249 | $ | 3,807 | $ | 3,690 | ||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||
| Fixed-price(1) | $ | 717 | $ | 702 | $ | 2,172 | $ | 2,072 | |||||||||||||||
| Cost-reimbursable | 563 | 542 | 1,627 | 1,607 | |||||||||||||||||||
| Intersegment | 4 | 5 | 8 | 11 | |||||||||||||||||||
| $ | 1,284 | $ | 1,249 | $ | 3,807 | $ | 3,690 | ||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||
| United States | $ | 1,122 | $ | 1,064 | $ | 3,284 | $ | 3,114 | |||||||||||||||
| International | 158 | 180 | 515 | 565 | |||||||||||||||||||
| Intersegment | 4 | 5 | 8 | 11 | |||||||||||||||||||
| $ | 1,284 | $ | 1,249 | $ | 3,807 | $ | 3,690 |
(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.
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||
| Prime contractor | $ | 681 | $ | 760 | $ | 2,193 | $ | 2,249 | |||||||||||||||
| Subcontractor | 334 | 325 | 1,036 | 1,024 | |||||||||||||||||||
| Intersegment | 15 | 9 | 40 | 27 | |||||||||||||||||||
| $ | 1,030 | $ | 1,094 | $ | 3,269 | $ | 3,300 | ||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||
| Fixed-price(1) | $ | 871 | $ | 931 | $ | 2,765 | $ | 2,790 | |||||||||||||||
| Cost-reimbursable | 144 | 154 | 464 | 483 | |||||||||||||||||||
| Intersegment | 15 | 9 | 40 | 27 | |||||||||||||||||||
| $ | 1,030 | $ | 1,094 | $ | 3,269 | $ | 3,300 | ||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||
| United States | $ | 719 | $ | 745 | $ | 2,337 | $ | 2,410 | |||||||||||||||
| International | 296 | 340 | 892 | 863 | |||||||||||||||||||
| Intersegment | 15 | 9 | 40 | 27 | |||||||||||||||||||
| $ | 1,030 | $ | 1,094 | $ | 3,269 | $ | 3,300 |
(1)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.
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | October 1, 2021 | October 2, 2020 | October 1, 2021 | October 2, 2020 | |||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||
| Prime contractor | $ | 383 | $ | 511 | $ | 1,439 | $ | 1,688 | |||||||||||||||
| Subcontractor | 231 | 263 | 761 | 858 | |||||||||||||||||||
| Intersegment | 11 | 18 | 48 | 57 | |||||||||||||||||||
| $ | 625 | $ | 792 | $ | 2,248 | $ | 2,603 | ||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||
| Fixed-price(1) | $ | 506 | $ | 630 | $ | 1,786 | $ | 2,069 | |||||||||||||||
| Cost-reimbursable | 108 | 144 | 414 | 477 | |||||||||||||||||||
| Intersegment | 11 | 18 | 48 | 57 | |||||||||||||||||||
| $ | 625 | $ | 792 | $ | 2,248 | $ | 2,603 | ||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||
| United States | $ | 530 | $ | 669 | $ | 1,891 | $ | 2,076 | |||||||||||||||
| International | 84 | 105 | 309 | 470 | |||||||||||||||||||
| Intersegment | 11 | 18 | 48 | 57 | |||||||||||||||||||
| $ | 625 | $ | 792 | $ | 2,248 | $ | 2,603 |
(1)Includes revenue derived from time-and-materials contracts.
Total assets by business segment are summarized below:
| (In millions) | October 1, 2021 | January 1, 2021 | |||||||||
| Total Assets | |||||||||||
| Integrated Mission Systems | $ | 9,157 | $ | 8,906 | |||||||
| Space and Airborne Systems | 7,149 | 6,943 | |||||||||
| Communication Systems | 5,990 | 5,746 | |||||||||
| Aviation Systems | 3,712 | 5,026 | |||||||||
| Corporate(1) | 9,010 | 10,339 | |||||||||
| Total Assets | $ | 35,018 | $ | 36,960 |
(1)Identifiable intangible assets acquired in connection with the L3Harris Merger on June 29, 2019 and our acquisition of Exelis Inc. in fiscal 2015 were recorded as Corporate assets because they benefited the entire Company as opposed to any individual segment. Identifiable intangible asset balances recorded as Corporate assets were approximately $6.8 billion and $7.9 billion at October 1, 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 and liabilities from discontinued operations and divestitures. See Note B — Business Divestitures in these Notes for additional information.
Note T — 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 October 1, 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 October 1, 2021 are reserved against or would not have a material adverse effect on our financial condition, results of operations, cash flows or equity.
Environmental Matters: We are subject to numerous U.S. Federal, state, local and international environmental laws and regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental issues. We or companies we have acquired are responsible, or alleged to be responsible, for environmental investigation and/or remediation of multiple sites. These sites are in various stages of investigation and/or remediation and in some cases our liability is considered de minimis. Notices from the U.S. Environmental Protection Agency (“EPA”) or equivalent state or international environmental agencies allege that a number of sites formerly or currently owned and/or operated by us or companies we have acquired, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances of being identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent state and international laws. For example, in June 2014, the U.S. Department of Justice, Environment and Natural Resources Division, notified several potentially responsible parties, including Exelis Inc., 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 Inc., of potential liability for the cost of remediation for the 8.3-mile stretch of the Lower Passaic River, estimated by the EPA to be $1.38 billion, but the parties’ respective allocations have not been determined. Although it is not feasible to predict the outcome of 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 October 1, 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of L3Harris Technologies, Inc.
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of L3Harris Technologies, Inc. (“the Company”) as of October 1, 2021, the related condensed consolidated statements of income, comprehensive income and equity for the quarters and three quarters ended October 1, 2021 and October 2, 2020, the condensed consolidated statements of cash flows for the three quarters ended October 1, 2021 and October 2, 2020, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of January 1, 2021, the related consolidated statements of income, comprehensive income, cash flows and equity for the year then ended, and the related notes (not presented herein); and in our report dated March 1, 2021, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 1, 2021, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and 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 SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young LLP
Orlando, Florida
October 29, 2021
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