Item 1. FINANCIAL STATEMENTS (Unaudited).

116K characters. Original on sec.gov · Markdown

Item 1. FINANCIAL STATEMENTS (Unaudited).

L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Unaudited)


	Quarter Ended				Two Quarters Ended
(In millions, except per share amounts)	July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021

Revenue from product sales and services	$	4,135	$	4,668	$	8,238	$	9,235
Cost of product sales and services	(2,907)		(3,251)		(5,767)		(6,464)
Engineering, selling and administrative expenses	(744)		(891)		(1,489)		(1,692)
Business divestiture-related gains, net	—		180		—		165
Impairment of goodwill and other assets	—		(145)		—		(207)
Non-operating income	108		86		214		203


Interest expense, net	(67)		(65)		(135)		(131)
Income from continuing operations before income taxes	525		582		1,061		1,109
Income taxes	(55)		(169)		(116)		(229)
Income from continuing operations	470		413		945		880
Discontinued operations, net of income taxes	—		—		—		(1)
Net income	470		413		945		879
Noncontrolling interests, net of income taxes	1		—		1		2
Net income attributable to L3Harris Technologies, Inc.	$	471	$	413	$	946	$	881

Amount attributable to L3Harris Technologies, Inc. common shareholders
Income from continuing operations	$	471	$	413	$	946	$	882
Discontinued operations, net of income taxes	—		—		—		(1)
Net income	$	471	$	413	$	946	$	881

Net income per common share attributable to L3Harris Technologies, Inc. common shareholders
Basic	$	2.45	$	2.03	$	4.91	$	4.29


Diluted
Continuing operations	$	2.42	$	2.01	$	4.86	$	4.26
Discontinued operations	—		—		—		(0.01)
	$	2.42	$	2.01	$	4.86	$	4.25

Basic weighted average common shares outstanding	192.1		203.6		192.6		205.2
Diluted weighted average common shares outstanding	194.0		205.6		194.5		207.1

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)


	Quarter Ended				Two Quarters Ended
(In millions)	July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021

Net income	$	470	$	413	$	945	$	879
Other comprehensive (loss) income:
Foreign currency translation (loss) gain, net of income taxes	(73)		15		(76)		(3)
Net unrealized (loss) gain on hedging derivatives, net of income taxes	(7)		2		(2)		7
Net unrecognized loss on postretirement obligations, net of income taxes	—		(2)		—		(2)
Other comprehensive (loss) income, recognized during the period	(80)		15		(78)		2
Reclassification adjustments for (gains) losses included in net income	(2)		4		(8)		2
Other comprehensive (loss) income, net of income taxes	(82)		19		(86)		4
Total comprehensive income	388		432		859		883
Comprehensive loss attributable to noncontrolling interests	1		—		1		2
Total comprehensive income attributable to L3Harris Technologies, Inc.	$	389	$	432	$	860	$	885

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)


(In millions, except shares)	July 1, 2022		December 31, 2021

Assets
Current Assets
Cash and cash equivalents	$	420	$	941
Receivables, net	1,191		1,045
Contract assets	3,048		3,021
Inventories	1,241		982
Inventory prepayments	8		48
Income taxes receivable	47		98
Other current assets	233		224

Total current assets	6,188		6,359
Non-current Assets
Property, plant and equipment, net	2,042		2,101
Operating lease right-of-use assets	761		769
Goodwill	18,143		18,189
Other intangible assets, net	6,321		6,640
Deferred income taxes	103		85
Other non-current assets	580		566

Total non-current assets	27,950		28,350
	$	34,138	$	34,709
Liabilities and Equity
Current Liabilities
Short-term debt	$	2	$	2
Accounts payable	1,721		1,767
Contract liabilities	1,270		1,297
Compensation and benefits	381		444
Other accrued items	898		1,002
Income taxes payable	350		28
Current portion of long-term debt, net	262		11

Total current liabilities	4,884		4,551
Non-current Liabilities
Defined benefit plans	437		614
Operating lease liabilities	756		768
Long-term debt, net	6,782		7,048
Deferred income taxes	1,032		1,344
Other long-term liabilities	1,057		1,065

Total non-current liabilities	10,064		10,839
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 191,518,970 and 193,511,401 shares at July 1, 2022 and December 31, 2021, respectively	192		194
Other capital	15,814		16,248
Retained earnings	3,312		2,917
Accumulated other comprehensive loss	(232)		(146)
Total shareholders’ equity	19,086		19,213
Noncontrolling interests	104		106
Total equity	19,190		19,319
	$	34,138	$	34,709

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)


	Two Quarters Ended
(In millions)	July 1, 2022		July 2, 2021

Operating Activities
Net income	$	945	$	879
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of acquisition-related intangibles	303		320
Depreciation and other amortization	162		164
Share-based compensation	69		67
Share-based matching contributions under defined contribution plans	113		117
Qualified pension plan contributions	(3)		(4)
Pension and other postretirement benefit plan income	(198)		(188)

Impairment of goodwill and other assets	—		242


Business divestiture-related gains, net	—		(165)
Gain on sale of property, plant and equipment	(1)		—
Gain on sale of asset group	(8)		—


Deferred income taxes	(326)		(151)
(Increase) decrease in:
Receivables, net	(146)		62
Contract assets	(25)		(438)
Inventories	(259)		46
Prepaid expenses and other current assets	31		(21)
Increase (decrease) in:
Accounts payable	(44)		69
Contract liabilities	(21)		86
Compensation and benefits	(63)		(80)
Other accrued items	(103)		8
Income taxes	376		309
Other	(14)		59
Net cash provided by operating activities	788		1,381
Investing Activities

Additions to property, plant and equipment	(117)		(128)
Proceeds from sale of property, plant and equipment, net	4		4
Proceeds from sales of businesses, net	2		1,430

Proceeds from sale of asset group	18		—
Cash used for equity investments	(30)		—
Other investing activities	2		1
Net cash (used in) provided by investing activities	(121)		1,307
Financing Activities
Net proceeds from borrowings	7		5
Repayments of borrowings	(10)		(10)


Proceeds from exercises of employee stock options	34		38
Repurchases of common stock	(729)		(1,550)
Cash dividends	(435)		(416)

Tax withholding payments associated with vested share-based awards	(38)		(2)
Other financing activities	(3)		(2)
Net cash used in financing activities	(1,174)		(1,937)
Effect of exchange rate changes on cash and cash equivalents	(14)		2
Net (decrease) increase in cash and cash equivalents	(521)		753
Cash and cash equivalents, beginning of period	941		1,276
Cash and cash equivalents, end of period	$	420	$	2,029

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 April 1, 2022	$	193	$	16,089	$	3,128	$	(150)	$	105	$	19,365
Net income	—		—		471		—		(1)		470
Other comprehensive loss, net of income taxes	—		—		—		(82)		—		(82)
Shares issued under stock incentive plans	—		4		—		—		—		4
Shares issued under defined contribution plans	1		57		—		—		—		58
Share-based compensation expense	—		41		—		—		—		41
Tax withholding payments on share-based awards	—		(26)		—		—		—		(26)
Repurchases and retirement of common stock	(2)		(351)		(68)		—		—		(421)
Cash dividends ($1.12 per share)	—		—		(217)		—		—		(217)

Other	—		—		(2)		—		—		(2)
Balance at July 1, 2022	$	192	$	15,814	$	3,312	$	(232)	$	104	$	19,190

Balance at April 2, 2021	$	205	$	18,487	$	2,529	$	(854)	$	115	$	20,482
Net income	—		—		413		—		—		413
Other comprehensive loss, net of income taxes	—		—		—		19		—		19
Shares issued under stock incentive plans	1		27		—		—		—		28
Shares issued under defined contribution plans	1		59		—		—		—		60
Share-based compensation expense	—		34		—		—		—		34
Tax withholding payments on share-based awards	—		(1)		—		—		—		(1)
Repurchases and retirement of common stock	(5)		(744)		(101)		—		—		(850)
Cash dividends ($1.02 per share)	—		—		(207)		—		—		(207)

Other	—		1		(1)		—		(2)		(2)
Balance at July 2, 2021	$	202	$	17,863	$	2,633	$	(835)	$	113	$	19,976

Balance at December 31, 2021	$	194	$	16,248	$	2,917	$	(146)	$	106	$	19,319
Net income	—		—		946		—		(1)		945
Other comprehensive loss, net of income taxes	—		—		—		(86)		—		(86)
Shares issued under stock incentive plans	—		34		—		—		—		34
Shares issued under defined contribution plans	1		112		—		—		—		113
Share-based compensation expense	—		69		—		—		—		69
Tax withholding payments on share-based awards	—		(38)		—		—		—		(38)
Repurchases and retirement of common stock	(3)		(611)		(115)		—		—		(729)
Cash dividends ($2.24 per share)	—		—		(435)		—		—		(435)

Other	—		—		(1)		—		(1)		(2)
Balance at July 1, 2022	$	192	$	15,814	$	3,312	$	(232)	$	104	$	19,190

Balance at January 1, 2021	$	208	$	19,008	$	2,347	$	(839)	$	117	$	20,841
Net income	—		—		881		—		(2)		879
Other comprehensive loss, net of income taxes	—		—		—		4		—		4
Shares issued under stock incentive plans	1		37		—		—		—		38
Shares issued under defined contribution plans	1		116		—		—		—		117
Share-based compensation expense	—		67		—		—		—		67
Tax withholding payments on share-based awards	—		(2)		—		—		—		(2)
Repurchases and retirement of common stock	(8)		(1,364)		(178)		—		—		(1,550)
Cash dividends ($2.04 per share)	—		—		(416)		—		—		(416)

Other	—		1		(1)		—		(2)		(2)
Balance at July 2, 2021	$	202	$	17,863	$	2,633	$	(835)	$	113	$	19,976

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 two quarters ended July 1, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period. The balance sheet at December 31, 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 December 31, 2021 (our “Fiscal 2021 Form 10-K”).

Segment reorganization and change in accounting policy: We implemented a new organizational structure effective January 1, 2022, resulting in changes to our operating segments, which are also our reportable segments and are referred to as our business segments. The new structure streamlined our business segments from four to three business segments. Our former Aviation Systems segment was eliminated as a business segment.

We updated our business segment reporting and accounting policies for pension and other postretirement benefits plan (“OPEB”) income or expense to better align our presentation of business segment information with our industry peers. Our business segment operating results include pension and OPEB cost under U.S. Government Cost Accounting Standards (“CAS”), as CAS pension and OPEB cost is allocable to and allowable under contracts with the U.S. Government. We no longer assign or allocate Financial Accounting Standards (“FAS”) pension and OPEB income or expense to our business segments. GAAP requires pension and OPEB income or expense to be recognized on a FAS basis. Therefore, we present a “FAS/CAS operating adjustment” outside of business segment results, representing the difference between the service cost component of FAS pension and OPEB income or expense and total CAS pension and OPEB cost or expense. Non-service cost components of FAS pension and OPEB income or expense are included as a component of non-operating income or expense.

The historical results, discussion and presentation of our business segments as set forth in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes reflect the impact of these changes for all periods presented in order to present segment information on a comparable basis. There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting from these changes. See Note R — Business Segment Information in these Notes for further information regarding our new segment structure and pension presentation effective in fiscal 2022.

Supplemental Cash Flow Information

Non-cash investing and financing activities during the two quarters ended July 2, 2021 included a $120 million right-of-use asset we obtained in exchange for a corresponding financing lease liability. These non-cash investing and financing activities are excluded from the “Additions to 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).

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 2021 Form 10-K.

NOTE B— BUSINESS DIVESTITURES AND ASSET SALES

Completed Divestitures and Asset Sales — Two Quarters ended July 1, 2022

During the two quarters ended July 1, 2022, we completed one business divestiture and one asset sale from our Integrated Mission Systems business segment for combined net cash proceeds of $20 million and recognized a pre-tax gain of $8 million associated with the asset sale included in the “Engineering, selling and administrative expenses” line of our Condensed Consolidated Statement of Income for the quarter and two quarters ended July 1, 2022.

Completed Divestitures and Asset Sales — Two Quarters ended July 2, 2021

The following table presents information regarding business divestitures and asset sales completed during the two quarters ended July 2, 2021:


(In millions)	Business Segment Prior to Divestiture / Asset Sale(1)	Date of Divestiture / Asset Sale	Sale Price		Net Cash Proceeds(2)






CPS business(3)	Other non-reportable businesses(7)	July 2, 2021	$	398	$	354
Military training business(4)	Other non-reportable businesses(7)	July 2, 2021	1,050		1,074
VSE disposal group(5)	Other non-reportable businesses(7)	July 2, 2021(6)	20		2
			$	1,468	$	1,430

(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 Combat Propulsion Systems and related businesses (“CPS business”) engineered, designed and manufactured engines, transmissions, suspensions and turret drive systems for tracked and wheeled combat vehicle systems.

(4)The military training business provided flight simulation solutions and training services to the U.S. Department of Defense and foreign military agencies.

(5)The Voice Switch Enterprise disposal group (“VSE disposal group”) provided voice over internet protocol systems for air traffic management.

(6)The sale of the VSE disposal group was partially closed on July 2, 2021, with the remainder divested on July 30, 2021.

(7)Formerly our Aviation Systems segment.

Income Before Income Taxes Attributable to Businesses Divested: The following table presents the amount of significant income before income taxes attributable to businesses divested in our Condensed Consolidated Statement of Income (Unaudited):


	Quarter Ended		Two Quarters Ended
(In millions)	July 2, 2021			July 2, 2021



Electron Devices business(1)	$	11		$	30



CPS business	27			53
Military training business	18			35

(1)The Electron Devices and Narda Microwave-West divisions (“Electron Devices business”) manufactured microwave devices for ground-based, airborne and satellite communications and radar. We entered into a definitive agreement to sell the Electron Devices business on July 2, 2021. The sale of the Electron Devices business was closed on October 1, 2021.

Business Divestiture-Related Gains, net: The “Business divestiture-related gains, net” line item in our Condensed Consolidated Statement of Income (Unaudited) is comprised of the following pre-tax gains associated with businesses divested.


	Quarter Ended		Two Quarters Ended
(In millions)	July 2, 2021			July 2, 2021






VSE disposal group	$	(18)		$	(26)
CPS business(1)	(12)			(19)
Military training business	212			212




Other	(2)			(2)

Total business divestiture-related gains, net	$	180		$	165

(1)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) for the two quarters ended July 2, 2021. See Note I — Goodwill and Other Intangible Assets in these Notes for additional information.

Fair Value of Businesses and Goodwill Allocation

See Note I — Goodwill and Other Intangible Assets in these Notes for additional information regarding the impairment of goodwill related to business divestitures.

NOTE C— STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION

At July 1, 2022, we had stock options and other share-based compensation awards outstanding under several employee stock incentive plans (“L3Harris SIPs”). The compensation cost related to our share-based awards that was charged against income was $41 million and $69 million for the quarter and two quarters ended July 1, 2022, respectively, and $34 million and $67 million for the quarter and two quarters ended and July 2, 2021, respectively. The aggregate number of shares of our common stock issued under L3Harris SIPs, net of shares withheld for tax purposes, was 0.2 million and 0.6 million for the quarter and two quarters ended July 1, 2022, respectively, and 0.4 million and 0.5 million for the quarter and two quarters ended July 2, 2021, respectively.

There were no significant restricted stock units, stock options or performance stock units granted to participants under L3Harris SIPs during the quarter ended July 1, 2022. Awards granted to participants under L3Harris SIPs during the two quarters ended July 1, 2022 consisted of 0.4 million stock options, 0.2 million performance stock units and 0.2 million restricted stock units. During fiscal 2022, the majority of the options and units were granted on February 25, 2022. 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 1.92%; expected volatility of 29.11%; risk-free interest rates averaging 1.86%; and expected term of 5.02 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 other companies in the S&P 500, less a discount to reflect the delay in payments of cash dividend-equivalents that are made only upon vesting. The fair value of these awards is amortized to compensation expense over the performance period if achievement of the performance measures is considered probable.

See Note 15: Stock Options and Other Share-Based Compensation in the Notes to Consolidated Financial Statements in our Fiscal 2021 Form 10-K for additional information regarding L3Harris SIPs.

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 December 31, 2021	$	(118)	$	(89)	$	61	$	(146)


Other comprehensive loss before reclassifications to earnings, net of income taxes	(76)		(2)		—		(78)


Gains (losses) reclassified to earnings, net of income taxes(1)	—		2		(10)		(8)
Other comprehensive loss, net of income taxes	(76)		—		(10)		(86)
Balance at July 1, 2022	$	(194)	$	(89)	$	51	$	(232)

Balance at January 1, 2021	$	(58)	$	(80)	$	(701)	$	(839)


Other comprehensive (loss) income before reclassifications to earnings, net of income taxes	(3)		7		(2)		2


Losses (gains) reclassified to earnings, net of income taxes(1)	2		(6)		6		2
Other comprehensive (loss) income, net of income taxes	(1)		1		4		4
Balance at July 2, 2021	$	(59)	$	(79)	$	(697)	$	(835)

(1)(Gains) losses reclassified to earnings are included in the “Revenue from product sales and services,” “Business divestiture-related gains, net,” “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)	July 1, 2022		December 31, 2021

Accounts receivable	$	1,228	$	1,088
Less: allowances for collection losses	(37)		(43)
Receivables, net	$	1,191	$	1,045

We have two receivables sale agreements (“RSAs”) with two separate third-party financial institutions that permit us to sell, on a non-recourse basis, up to $100 million of outstanding receivables per agreement 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 provided by operating activities. We did not have outstanding accounts receivable sold pursuant to the RSAs at July 1, 2022. Outstanding accounts receivable sold pursuant to the RSAs were $99.9 million at December 31, 2021, with net cash proceeds of $99.8 million.

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 two quarters ended July 1, 2022 were impacted primarily by the timing of contractual billing milestones.

Contract assets and contract liabilities are summarized below:


(In millions)	July 1, 2022		December 31, 2021

Contract assets	$	3,048	$	3,021
Contract liabilities, current	(1,270)		(1,297)
Contract liabilities, non-current(1)	(122)		(107)
Net contract assets	$	1,656	$	1,617

(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)	July 1, 2022		December 31, 2021

Unbilled contract receivables, gross	$	4,603	$	4,921
Unliquidated progress payments and advances	(1,555)		(1,900)
Contract assets	$	3,048	$	3,021

Contract liabilities recognized as revenue that were outstanding at the end of the prior fiscal year were $254 million and $771 million for the quarter and two quarters ended July 1, 2022, respectively, and $219 million and $727 million for the quarter and two quarters ended July 2, 2021, respectively.

NOTE G— INVENTORIES

Inventories are summarized below:


(In millions)	July 1, 2022		December 31, 2021

Finished products	$	194	$	141
Work in process	403		335
Raw materials and supplies	644		506
Inventories	$	1,241	$	982

NOTE H— PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net are summarized below:


(In millions)	July 1, 2022		December 31, 2021

Land	$	79	$	79
Software capitalized for internal use	577		576
Buildings	1,249		1,236
Machinery and equipment	2,216		2,177
	4,121		4,068
Less: accumulated depreciation and amortization	(2,079)		(1,967)
Property, plant and equipment, net	$	2,042	$	2,101

Depreciation and amortization expense related to property, plant and equipment was $83 million and $166 million for the quarter and two quarters ended July 1, 2022, respectively, and $80 million and $164 million for the quarter and two quarters ended July 2, 2021, 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 (“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 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 quarter and two quarters ended July 2, 2021.

NOTE I— GOODWILL AND OTHER INTANGIBLE ASSETS

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 & Airborne Systems		Communication Systems		Aviation Systems(1)		Total

Balance at December 31, 2021 - As Reported	$	6,485	$	5,202	$	4,153	$	2,349	$	18,189
Reallocation of goodwill in segment reorganization(1)	1,702		647		—		(2,349)		—
Balance at December 31, 2021 - After Reallocation	8,187		5,849		4,153		—		18,189

Currency translation adjustments	(13)		(33)		—		—		(46)

Balance at July 1, 2022	$	8,174	$	5,816	$	4,153	$	—	$	18,143

(1)As a result of our new organizational structure, effective January 1, 2022, streamlining our operations from four business segments to three business segments, we reallocated goodwill previously held by our former Aviation Systems segment to our remaining business segments as of January 1, 2021, the earliest period presented in these Notes. See additional information below and “Segment Reorganization” in. Note A — Significant Accounting Policies and Recent Accounting Standards in these Notes.

Fair Value of Businesses

Segment reorganization: We implemented a new organizational structure effective January 1, 2022, resulting in changes to our operating segments, which are also our reportable segments and are referred to as our business segments. The new structure streamlined our business segments from four to three business segments. As a result of the segment reorganization, we realigned

our reporting units from 11 to 9 reporting units, which are our business segments or one level below the business segment. For our realigned reporting units, 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.

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 other non-reportable business 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 1: Significant Accounting Policies and Recent Accounting Standards and Note 3: Business Divestitures and Asset Sales in the Notes to Consolidated Financial Statements in our Fiscal 2021 Form 10-K for additional information regarding the fair value hierarchy and our business divestitures, respectively.

CTS impairment: During the quarter ended July 2, 2021, we adjusted our Aviation Systems segment reporting to better align our businesses and separated the 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 quarter and two quarters ended July 2, 2021. See Note H — Property, Plant and Equipment, net in these Notes for additional information.

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 two quarters ended July 1, 2022 were as follows:


	(In millions)

Balance at December 31, 2021	$	117



Accruals for product warranties issued during the period	20
Settlements made during the period	(35)
Other, including foreign currency translation adjustments	(5)
Balance at July 1, 2022	$	97

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 July 1, 2022				Two Quarters Ended July 1, 2022
(In millions)	Pension		Other Benefits		Pension		Other Benefits

Net periodic benefit income
Operating
Service cost	$	12	$	—	$	22	$	1
Non-operating
Interest cost	55		2		110		4
Expected return on plan assets	(156)		(6)		(312)		(11)
Amortization of net actuarial loss (gain)	3		(2)		5		(4)
Amortization of prior service (credit) cost	(8)		1		(14)		1


Non-service cost periodic benefit income	(106)		(5)		(211)		(10)
Net periodic benefit income	$	(94)	$	(5)	$	(189)	$	(9)

	Quarter Ended July 2, 2021				Two Quarters Ended July 2, 2021
(In millions)	Pension		Other Benefits		Pension		Other Benefits

Net periodic benefit income
Operating
Service cost	$	18	$	—	$	36	$	1
Non-operating
Interest cost	46		2		92		3
Expected return on plan assets	(157)		(5)		(312)		(10)
Amortization of net actuarial loss	10		—		19		—
Amortization of prior service credit	(7)		—		(14)		—

Effect of curtailments or settlements	(3)		—		(3)		—
Non-service cost periodic benefit income	(111)		(3)		(218)		(7)
Net periodic benefit income	$	(93)	$	(3)	$	(182)	$	(6)

During the quarter ended July 2, 2021, we undertook an initiative to de-risk pension obligations by purchasing a group annuity policy and transferring approximately $169 million of pension plan assets to an insurance company thereby reducing our defined benefit obligations by approximately $169 million. As a result of the annuity purchase, we recognized a pre-tax Financial Accounting Standard settlement gain of $3 million in the quarter ended July 2, 2021, which is 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).

We made no material contributions to our U.S. qualified defined benefit pension plans during the quarter or two quarters ended July 1, 2022 or July 2, 2021. As a result of prior voluntary contributions, we are not required to make any contributions to these plans during fiscal 2022 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		Two Quarters Ended
(In millions)	July 1, 2022	July 2, 2021	July 1, 2022	July 2, 2021

Basic weighted average common shares outstanding	192.1	203.6	192.6	205.2
Impact of dilutive share-based awards	1.9	2.0	1.9	1.9
Diluted weighted average common shares outstanding	194.0	205.6	194.5	207.1

Potential dilutive common shares primarily consist of employee stock options and restricted and performance unit awards. Diluted EPS excludes the antidilutive impact of 0.4 million and 0.3 million weighted average share-based awards outstanding for the quarter and two quarters ended July 1, 2022, respectively, and 1.7 million and 1.6 million weighted average share-based awards outstanding for the quarter and two quarters ended and July 2, 2021, respectively.

NOTE M— INCOME TAXES

Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 10.5% for the quarter ended July 1, 2022 compared with 29.0% for the quarter ended July 2, 2021. For the quarter ended July 1, 2022, our effective tax rate benefited from the favorable impacts of Research and Development (“R&D”) credits, incremental foreign-derived intangible income (“FDII”) benefit resulting from the requirement to capitalize and amortize R&D expenses beginning in fiscal 2022 and the resolution of specific audit uncertainties. For the quarter ended July 2, 2021, our effective tax rate was unfavorably impacted by non-deductible goodwill from completed business divestitures, partially offset by the favorable impacts of R&D credits, the resolution of specific audit uncertainties, and excess tax benefits related to equity-based compensation.

Our effective tax rate was 10.9% for the two quarters ended July 1, 2022 compared with 20.6% for the two quarters ended July 2, 2021. Our effective tax rate for the two quarters ended July 1, 2022 was favorably impacted by a reduction in the deferred tax liabilities on the outside basis of certain foreign subsidiaries due to an internal restructuring and the items described above in this Note M - Income Taxes. Our effective tax rate for the two quarters ended July 2, 2021 were impacted by the items described above in this Note M - Income Taxes.

NOTE N— 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 July 1, 2022 and December 31, 2021:


	July 1, 2022				December 31, 2021
(In millions)	Total		Level 1		Total		Level 1

Assets
Deferred compensation plan assets(1)
Equity and fixed income securities	$	62	$	62	$	77	$	77
Investments measured at NAV:

Corporate-owned life insurance	33				35

Total fair value of deferred compensation plan assets	$	95			$	112

Liabilities
Deferred compensation plan liabilities(2)
Equity securities and mutual funds	$	7	$	7	$	6	$	6
Investments measured at NAV:
Common/collective trusts and guaranteed investment contracts	159				177
Total fair value of deferred compensation plan liabilities	$	166			$	183

(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):


	July 1, 2022				December 31, 2021
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Long-term debt (including current portion)(1)	$	7,044	$	6,836	$	7,059	$	7,701

(1)The fair value was estimated using a market approach based on quoted market prices for our debt traded in the secondary market. If our long-term debt in our balance sheet was measured at fair value, it would be categorized in Level 2 of the fair value hierarchy.

See Note I — Goodwill and Other Intangible Assets in these Notes and Note 3: Business Divestitures and Asset Sales in the Notes to Consolidated Financial Statements in our Fiscal 2021 Form 10-K for additional information regarding fair value measurements associated with goodwill.

NOTE O— 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 July 1, 2022, we had open foreign currency forward contracts with an aggregate notional amount of $262 million, hedging certain forecasted transactions denominated in Canadian Dollars, U.S. Dollars, British Pounds, Euros and Australian Dollars. At December 31, 2021, we had open foreign currency forward contracts with an aggregate notional amount of $328 million, hedging certain forecasted transactions denominated in U.S. Dollars, Canadian Dollars, British Pounds, Euros and Australian Dollars.

At July 1, 2022, 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 July 1, 2022 and December 31, 2021:


(In millions)	July 1, 2022		December 31, 2021


Foreign currency forward contracts(1)
Other current assets	$	2	$	2
Other non-current assets	1		1
Other accrued items	9		5
Other long-term liabilities	1		—

(1)See Note N — Fair Value Measurements in these Notes for a description of the fair value hierarchy related to our foreign currency forward contracts.

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 the 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 P— 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				Two Quarters Ended
(In millions, except per share amounts)	July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021

Net EAC adjustments, before income taxes	$	12	$	80	$	58	$	162
Net EAC adjustments, net of income taxes	9		60		44		122
Net EAC adjustments, net of income taxes, per diluted share	0.05		0.29		0.23		0.59

Revenue recognized from performance obligations satisfied in prior periods was $32 million and $90 million for the quarter and two quarters ended July 1, 2022, respectively, and $107 million and $215 million for the quarter and two quarters ended July 2, 2021, respectively.

NOTE Q— 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 July 1, 2022, our ending backlog was $19.9 billion. We expect to recognize approximately 39% of the revenue associated with this backlog by the end of 2022 and approximately 68% by the end of 2023, with the remainder to be recognized thereafter. At December 31, 2021, our ending backlog was $21.1 billion.

NOTE R— BUSINESS SEGMENT INFORMATION

Effective for fiscal 2022, which began January 1, 2022, we report our financial results in the following three reportable segments:

Integrated Mission Systems, including multi-mission intelligence, surveillance and reconnaissance (“ISR”) systems; integrated electrical and electronic systems for maritime platforms; advanced electro-optical and infrared (“EO/IR”) solutions; fuzing and ordnance systems; commercial aviation products; and commercial pilot training operations;
Space & Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and cyber; avionics; electronic warfare; and mission networks for air traffic management operations; and
Communication Systems, including tactical communications with global communications solutions; broadband communications; integrated vision solutions; and public safety radios, system applications and equipment.

We structure our operations primarily around the products, systems and services we sell and the markets we serve. Effective January 1, 2022, we have streamlined our business segments from four business segments to three business segments. As a result of the segment reorganization, the Aviation Systems segment was eliminated as a business segment. As part of our new business segment structure, the ongoing operations that had been part of our former Aviation Systems segment were integrated into the remaining segments. Fuzing and ordnance systems, commercial aviation products and commercial pilot training operations were moved into our Integrated Mission Systems segment; and mission networks for air traffic management operations was moved into our Space & Airborne Systems segment.

See Note B — Business Divestitures and Asset Sales in these Notes for information relating to businesses divested and asset sales during the quarter and two quarters ended July 1, 2022 and July 2, 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 2021 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 CAS pension cost 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.

In accordance with CAS, we allocate a portion of pension and other postretirement benefit plan costs to our U.S. Government contracts. However, our consolidated financial statements require pension and other postretirement benefit plan income or expense be calculated in accordance with FAS requirements under GAAP. The “FAS/CAS operating adjustment” line item in the table below represents the difference between the service cost component of FAS pension and OPEB expense and total CAS

pension and OPEB cost. The net non-service cost components of FAS pension and OPEB income are included as an income component in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited). See Note K — Postretirement Benefit Plans for more information on the composition of non-service components of FAS pension and OPEB income and expense.

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


	Quarter Ended				Two Quarters Ended
(In millions)	July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021

Revenue
Integrated Mission Systems	$	1,673	$	1,792	$	3,394	$	3,543
Space & Airborne Systems	1,498		1,510		2,948		2,970
Communication Systems	993		1,127		1,956		2,239
Other non-reportable businesses	—		282		—		566
Corporate eliminations	(29)		(43)		(60)		(83)
Total revenue	$	4,135	$	4,668	8,238		$	9,235

Income from Continuing Operations before Income Taxes
Segment Operating Income:
Integrated Mission Systems	$	217	$	142	$	472	$	376
Space & Airborne Systems	195		204		367		396
Communication Systems	238		276		467		546
Other non-reportable businesses	—		41		—		93
	650		663		1,306		1,411
Unallocated Items:
Unallocated corporate department income (expense), net(1)	17		(23)		14		(54)
L3Harris Merger-related transaction, integration and other expenses and losses	(26)		(21)		(49)		(44)
Amortization of acquisition-related intangibles(2)	(151)		(156)		(303)		(320)
Business divestiture-related gains, net	—		180		—		165
Impairment of goodwill and other assets	—		(63)		—		(125)
Gain on sale of asset group	8		—		8		—
Other divestiture-related expenses	(35)		(49)		(37)		(56)
FAS/CAS operating adjustment(3)	21		30		43		60
	(166)		(102)		(324)		(374)
Non-operating income	108		86		214		203
Net interest expense	(67)		(65)		(135)		(131)
Income from continuing operations before income taxes	$	525	$	582	$	1,061	$	1,109

(1)For the quarter and two quarters ended July 1, 2022, includes $10 million of income from our deferred compensation plans and $7 million of income from sale of intellectual property. For the quarter ended July 2, 2021 includes $8 million of loss related to our deferred compensation plans. For the two quarters ended July 2, 2021, includes a $15 million accrual for a value added tax obligation and $8 million of loss related to our deferred compensation plans.

(2)Includes amortization of identifiable intangible assets acquired as a result of the all-stock merger between Harris Corporation and L3 Technologies, Inc. (the “L3Harris Merger”) and the acquisition of Exelis Inc. (“Exelis”). Because the L3Harris Merger and the acquisition of Exelis benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired was not allocated to any segment.

(3)Represents the difference between the service cost component of FAS pension and OPEB income and total CAS pension and OPEB cost and replaces the “Pension adjustment” line item previously presented, which included the non-service components of FAS pension and OPEB income. See Net FAS/CAS operating adjustment table below.

The table below is a reconciliation of the FAS/CAS operating adjustment:



	Quarter Ended				Two Quarters Ended
(In millions)	July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021

FAS pension service cost	$	(12)	$	(18)	$	(23)	$	(37)
Less: CAS pension cost	(33)		(48)		(66)		(97)
FAS/CAS operating adjustment	21		30		43		60
Non-service FAS pension income	111		111		221		222


FAS/CAS pension adjustment, net(1)	$	132	$	141	$	264	$	282

(1)FAS/CAS pension adjustment, net excludes net settlement and curtailment losses recognized in fiscal 2021.

Disaggregation of Revenue

We disaggregate revenue for all three 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.


	Quarter Ended
(In millions)	July 1, 2022						July 2, 2021
	Integrated Mission Systems		Space & Airborne Systems		Communication Systems		Integrated Mission Systems		Space & Airborne Systems		Communication Systems

Revenue By Customer Relationship
Prime contractor	$	1,082	$	942	$	690	$	1,185	$	921	$	783
Subcontractor	577		550		294		594		587		330
Intersegment	14		6		9		13		2		14
	$	1,673	$	1,498	$	993	$	1,792	$	1,510	$	1,127
Revenue By Contract Type
Fixed-price(1)	$	1,230	$	898	$	833	$	1,350	$	941	$	954
Cost-reimbursable	429		594		151		429		567		159
Intersegment	14		6		9		13		2		14
	$	1,673	$	1,498	$	993	$	1,792	$	1,510	$	1,127
Revenue By Geographical Region
United States	$	1,223	$	1,311	$	631	$	1,282	$	1,315	$	786
International	436		181		353		497		193		327
Intersegment	14		6		9		13		2		14
	$	1,673	$	1,498	$	993	$	1,792	$	1,510	$	1,127

	Two Quarters Ended
(In millions)	July 1, 2022						July 2, 2021
	Integrated Mission Systems		Space & Airborne Systems		Communication Systems		Integrated Mission Systems		Space & Airborne Systems		Communication Systems

Revenue By Customer Relationship
Prime contractor	$	2,214	$	1,872	$	1,347	$	2,374	$	1,797	$	1,512
Subcontractor	1,151		1,064		590		1,144		1,168		702
Intersegment	29		12		19		25		5		25
	$	3,394	$	2,948	$	1,956	$	3,543	$	2,970	$	2,239
Revenue By Contract Type
Fixed-price(1)	$	2,507	$	1,762	$	1,631	$	2,644	$	1,855	$	1,894
Cost-reimbursable	858		1,174		306		874		1,110		320
Intersegment	29		12		19		25		5		25
	$	3,394	$	2,948	$	1,956	$	3,543	$	2,970	$	2,239
Revenue By Geographical Region
United States	$	2,468	$	2,590	$	1,256	$	2,557	$	2,589	$	1,618
International	897		346		681		961		376		596
Intersegment	29		12		19		25		5		25
	$	3,394	$	2,948	$	1,956	$	3,543	$	2,970	$	2,239

(1)Includes revenue derived from time-and-materials contracts.

Total assets by business segment are as follows:


(In millions)	July 1, 2022		December 31, 2021

Total Assets
Integrated Mission Systems	$	11,761	$	11,830
Space & Airborne Systems	8,381		8,151
Communication Systems	6,170		6,035
Other non-reportable businesses	—		3
Corporate(1)	7,826		8,690
	$	34,138	$	34,709

(1)Identifiable intangible assets acquired in connection with the L3Harris Merger in the two quarters ended January 3, 2020 and our acquisition of Exelis in fiscal 2015 were recorded as Corporate assets because they benefited the entire Company as opposed to any individual segment. Identifiable intangible asset balances recorded as Corporate assets were $6.3 billion and $6.6 billion at July 1, 2022 and December 31, 2021, respectively. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan investments, buildings and equipment, as well as any assets of discontinued operations and divestitures.

NOTE S— 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; environmental matters; or compliance with government procurement or related legal or regulatory requirements. 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 July 1, 2022, our accrual for the potential resolution of lawsuits, claims, investigations 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, investigations 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 or resulting from claims or investigations in existence at July 1, 2022 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 several sites formerly or currently owned and/or operated by us or companies we have acquired, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances of being identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent state and international laws. For example, in June 2014, the U.S. Department of Justice, Environment and Natural Resources Division, notified several potentially responsible parties, including Exelis, which we acquired in 2015, of potential responsibility for contribution to the environmental investigation and remediation of multiple locations in Alaska. In addition, in March 2016, the EPA notified over 100 potentially responsible parties, including Exelis, of potential liability for the cost of remediation for the 8.3-mile stretch of the Lower Passaic River in New Jersey, estimated by the EPA to be $1.38 billion. During the fourth quarter of fiscal 2021, the EPA further announced an interim plan to remediate sediment in the upper nine miles of the of the Lower Passaic River with an estimated cost of $441 million. The potential responsible parties’ respective allocations for the Lower Passaic River remediation have not been determined. Although it is not feasible to predict the outcome of these environmental claims made against us, based on available information, in the opinion of our management, any payments we may be required to make as a result of environmental claims made against us in existence at July 1, 2022 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 the 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. and subsidiaries (“the Company”) as of July 1, 2022, the related condensed consolidated statements of income, comprehensive income, equity for the quarters and two quarters ended July 1, 2022 and July 2, 2021, the condensed consolidated statements of cash flows for the two quarters ended July 1, 2022 and July 2, 2021, 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 December 31, 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 February 25, 2022, 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 December 31, 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 U.S. Securities and Exchange Commission 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

July 29, 2022

Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.