Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of our financial condition and results of operations. This MD&A is provided as a supplement to, should be read in conjunction with, and is qualified in its entirety by reference to, our Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes appearing elsewhere in this Report (the “Notes”). In addition, reference should be made to our audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Fiscal 2021 Form 10-K. Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in this MD&A under “Forward-Looking Statements and Factors that May Affect Future Results.”

Inflation

Given broader inflation in the economy, we are monitoring the risk inflation presents to active and future contracts. To the extent feasible, we have consistently followed the practice of adjusting our prices to reflect the impact of inflation on salaries and fringe benefits for employees and the cost of purchased materials and services. However, our fixed-price contracts could subject us to losses in the event of cost overruns or a significant increase in or a sustained period of increased inflation. During the two quarters ended July 1, 2022, we have not seen broad based increases in costs from inflation that are material to the business as a whole; however, if we begin to experience greater than expected supply chain and labor inflation, our profits and margins under our contracts, in particular fixed price contracts, could be adversely affected.

KEY DEVELOPMENTS

The following is a list of the remaining sections of this MD&A, together with our perspective on their contents, which we hope will assist in reading these pages:

Results of Operations** — an analysis of our consolidated results of operations and the results in each of our business segments, to the extent the segment operating results are helpful to an understanding of our business as a whole, for the periods presented in our Condensed Consolidated Statement of Income (Unaudited).
Liquidity, Capital Resources and Financial Strategies** — an analysis of cash flows, funding of pension plans, common stock repurchases, dividends, capital structure and resources, material cash requirements and commercial commitments.
Critical Accounting Policies and Estimates** — a discussion of accounting policies and estimates that require the most judgment and a discussion of accounting pronouncements that have been issued but not yet implemented by us and their potential impact on our financial condition, results of operations, cash flows and equity.
Forward-Looking Statements and Factors that May Affect Future Results** — cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.

Effective January 1, 2022, we streamlined our business segments from four business segments to three business segments. As a result of the segment reorganization, the Aviation Systems segment was eliminated as a business segment. Effective for fiscal 2022, which began January 1, 2022, we reported our financial results in the following three reportable segments:

Integrated Mission Systems, including multi-mission ISR systems; integrated electrical and electronic systems for maritime platforms; advanced 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.

The following business divestitures and asset sales were completed in the two quarters ended July 1, 2022 and July 2, 2021:

On April 29, 2022, we completed one business divestiture, the results of which are reported as part of our Integrated Mission Systems segment through the date of divestiture and on May 31, 2022, we completed the sale of certain assets from our Integrated Mission Systems segment;
CPS business, definitive agreement entered into on March 1, 2021 and classified as held for sale during the quarter ended April 2, 2021 and divested on July 2, 2021, the results of which are reported as part of other non-reportable businesses through the date of divestiture;
Military training business, definitive agreement entered into on February 27, 2021 and classified as held for sale during the quarter ended April 2, 2021 and divested on July 2, 2021, the results of which are reported as part of other non-reportable businesses through the date of divestiture; and
VSE disposal group, definitive agreement entered into on February 23, 2021 and classified as held for sale during the quarter ended July 3, 2020 and partially divested on July 2, 2021, with the remainder divested on July 30, 2021, the results of which are reported as part of other non-reportable businesses through the date of divestiture.

See Note B — Business Divestitures and Asset Sales in the Notes for additional information regarding asset sales and businesses divested for sale during the quarter and two quarters ended July 1, 2022 and July 2, 2021.

RESULTS OF OPERATIONS

Consolidated Results of Operations


	Quarter Ended								Two Quarters Ended
(Dollars in millions, except per share amounts)	July 1, 2022			July 2, 2021			% Inc/(Dec)		July 1, 2022			July 2, 2021			% Inc/(Dec)

Revenue
Integrated Mission Systems	$	1,673		$	1,792		(7)	%	$	3,394		$	3,543		(4)	%
Space & Airborne Systems	1,498			1,510			(1)	%	2,948			2,970			(1)	%
Communication Systems	993			1,127			(12)	%	1,956			2,239			(13)	%
Other non-reportable businesses	—			282			*		—			566			*
Corporate eliminations	(29)			(43)			(33)	%	(60)			(83)			(28)	%
Total revenue	4,135			4,668			(11)	%	8,238			9,235			(11)	%
Total cost of product sales and services	(2,907)			(3,251)			(11)	%	(5,767)			(6,464)			(11)	%
% of total revenue	70		%	70		%			70		%	70		%
Gross margin	1,228			1,417			(13)	%	2,471			2,771			(11)	%
% of total revenue	30		%	30		%			30		%	30		%
Engineering, selling and administrative expenses	(744)			(891)			(16)	%	(1,489)			(1,692)			(12)	%
% of total revenue	18		%	19		%			18		%	18		%
Business divestiture-related gains, net	—			180			*		—			165			*
Impairment of goodwill and other assets	—			(145)			*		—			(207)			*
Non-operating income	108			86			26	%	214			203			5	%
Net interest expense	(67)			(65)			3	%	(135)			(131)			3	%
Income from continuing operations before income taxes	525			582			(10)	%	1,061			1,109			(4)	%
Income taxes	(55)			(169)			(67)	%	(116)			(229)			(49)	%
Effective tax rate	10		%	29		%			11		%	21		%
Income from continuing operations	470			413			14	%	945			880			7	%
Noncontrolling interests, net of income taxes	1			—			*		1			2			*
Income from continuing operations attributable to L3Harris common shareholders	$	471		$	413		14	%	$	946		$	882		7	%
% of total revenue	11		%	9		%			11		%	10		%
Diluted EPS	$	2.42		$	2.01		20	%	$	4.86		$	4.26		14	%

Not meaningful

Revenue and Gross Margin

One Quarter Comparison: Revenue declined 11% in the quarter ended July 1, 2022 compared to the quarter ended July 2, 2021, primarily from $270 million of lower revenue from the impact of completed business divestitures, continued supply chain

disruptions and airborne program transitions. Additionally, the quarter ended July 1, 2022 had one less working day compared to the quarter ended July 2, 2021 as the company recognized the Juneteenth holiday within the 2022 quarter. Gross margin and gross margin as a percentage of revenue (“gross margin percentage”) decreased in the quarter ended July 1, 2022 compared to the quarter ended July 2, 2021 primarily due to a mix of program revenue and product sales with relatively lower operating margin percentage for the quarter ended July 1, 2022, as well as the impact of supply chain disruptions on higher margin businesses.

Two Quarters Comparison: Revenue declined 11% in the two quarters ended July 1, 2022 compared to the two quarters ended July 2, 2021, primarily from $538 million of lower revenue from the impact of completed business divestitures, as well as the reasons noted above in the one quarter comparison of revenue. Gross margin and gross margin percentage decreased in the two quarters ended July 1, 2022 compared to the two quarters ended July 2, 2021 primarily due to a mix of program revenue and product sales with relatively lower operating margin percentage for the two quarters ended July 1, 2022, as well as the impact of supply chain disruptions on higher margin businesses.

See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.

Engineering, Selling and Administrative Expenses

One Quarter Comparison: The decreases in engineering, selling and administrative (“ESA”) expenses and ESA expense as a percentage of revenue (“ESA percentage”) in the quarter ended July 1, 2022 compared with the quarter ended July 2, 2021 were primarily due to $47 million of lower costs from the impact of completed business divestitures, $39 million of lower R&D expenses, $30 million from the impact of changes in market value related to our deferred compensation plan liabilities and $15 million of lower divestiture-related expenses.

Two Quarters Comparison: The decreases in ESA expenses and ESA percentage in the two quarters ended July 1, 2022 compared with the two quarters ended July 2, 2021 were primarily due to $85 million of lower costs from the impact of completed business divestitures, $35 million of lower R&D expenses, $41 million from the impact of changes in market value related to our deferred compensation plan liabilities and $21 million of lower divestiture-related expenses.

See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.

Business Divestiture-Related Gains

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. There were no significant gains or losses during the quarter or two quarters ended July 1, 2022.


	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 the Notes for additional information.

See Note B — Business Divestitures and Asset Sales in the Notes for further information.

Impairment of Goodwill and Other Assets

One Quarter Comparison: No impairment charges were recorded in the quarter ended July 1, 2022. Impairment of goodwill and other assets in the quarter ended July 2, 2021 reflected $145 million of non-cash charges for the impairment of identifiable intangible and other long-lived assets related to our CTS business.

Two Quarters Comparison: No impairment charges were recorded in the two quarters ended July 1, 2022. Impairment of goodwill and other assets in the two quarters ended July 2, 2021 reflected $62 million of non-cash charges for the impairment of goodwill and other assets associated with the divestiture of the CPS business and $145 million of non-cash charges for the impairment of identifiable intangible and other long-lived assets related to our CTS business.

See Note B — Business Divestitures and Asset Sales and Note I — Goodwill and Other Intangible Assets in the Notes for further information.

Non-Operating Income

One Quarter Comparison and Two Quarters Comparison: The increase in non-operating income in the quarter and two quarters ended July 1, 2022 compared with the quarter and two quarters ended July 2, 2021 was primarily due to a $35 million charge for impairment of our equity investment in a nonconsolidated affiliate during the quarter ended July 2, 2021.

Net Interest Expense

One Quarter Comparison and Two Quarters Comparison: Our net interest expense increased in the quarter and two quarters ended July 1, 2022 compared with the quarter and two quarters ended July 2, 2021 primarily due to lower interest income in the quarter and two quarters ended July 1, 2022.

See Note 13: Debt in the Notes to Consolidated Financial Statements in our Fiscal 2021 Form 10-K for further information.

Income Taxes

One Quarter Comparison: 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 impact of R&D credits, incremental 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.

Two Quarters Comparison: 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 the one quarter comparison of income taxes. Our effective tax rate for the two quarters ended July 2, 2021 were impacted by the items described above in the one quarter comparison of income taxes.

Income From Continuing Operations

One Quarter Comparison: The increase in income from continuing operations in the quarter ended July 1, 2022 compared with the quarter ended July 2, 2021 was primarily due to the combined effects of the reasons noted in the sections above regarding the quarter ended July 1, 2022 and quarter ended July 2, 2021.

Two Quarters Comparison: The increase in income from continuing operations in the two quarters ended July 1, 2022 compared with the two quarters ended July 2, 2021 was primarily due to the combined effects of the reasons noted in the sections above regarding the two quarters ended July 1, 2022 and two quarters ended July 2, 2021.

Diluted EPS

One Quarter Comparison and Two Quarters Comparison: Diluted EPS attributable to L3Harris common shareholders in the quarter and two quarters ended July 1, 2022 increased compared with the quarter and two quarters ended July 2, 2021, primarily due to higher net income from the combined effects of the reasons noted in the sections above regarding the quarter and two quarters ended July 1, 2022 and quarter and two quarters ended July 2, 2021 and fewer diluted weighted average common shares outstanding, reflecting the repurchases of shares of our common stock under our repurchase program in the quarter and two quarters ended July 1, 2022.

See the “Common Stock Repurchases” discussion below in this MD&A for further information.

Discussion of Business Segment Results of Operations

Integrated Mission Systems Segment (“IMS”)


	Quarter Ended								Two Quarters Ended
(Dollars in millions)	July 1, 2022			July 2, 2021			% Inc/(Dec)		July 1, 2022			July 2, 2021			% Inc/(Dec)

Revenue	$	1,673		$	1,792		(7)	%	$	3,394		$	3,543		(4)	%
Operating income	217			142			53	%	472			376			26	%
Operating income as a percentage of revenue (“operating margin”)	13.0		%	7.9		%			13.9		%	10.6		%

One Quarter Comparison: IMS revenue for the quarter ended July 1, 2022 compared with the quarter ended July 2, 2021 decreased 7%, reflecting a decline of $38 million in ISR, primarily due to $107 million lower revenue on a North Atlantic Treaty Organization aircraft missionization program, partially offset by an increase in aircraft subcontractor progress for a U.S. Government customer. IMS revenue was also driven by declines of $38 million from lower volume on fuzing and ordnance systems and other related programs, $33 million in Electro Optical, primarily due to a decline in WESCAM airborne turret delivery volumes, reflecting supply chain constraints and $30 million in Maritime primarily due to supplier and material delays. The declines were partially offset by an increase of $28 million in Commercial Aviation Solutions, primarily due to an increase in pilot training center volume and the sale of end-of-life inventory.

IMS operating margin for the quarter ended July 1, 2022 compared with the quarter ended July 2, 2021 expanded 510 basis points to 12.9%, primarily due to an $82 million non-cash impairment charge at Commercial Aviation Solutions in the quarter ended July 2, 2021 as well as higher volumes in Commercial Aviation Solutions, partially offset by a mix of program revenue and product sales with relatively lower operating margin percentages for the quarter ended July 1, 2022.

Two Quarters Comparison: IMS revenue for two quarters ended July 1, 2022 compared with two quarters ended July 2, 2021 decreased 4%, reflecting a decline of $73 million in ISR, primarily due to $186 million lower revenue on a North Atlantic Treaty Organization aircraft missionization program, partially offset by an increase in aircraft subcontractor progress for aircraft missionization programs. IMS revenue was also driven by declines of $85 million from lower volume on fuzing and ordnance systems and other related programs, $9 million in Electro Optical, primarily due to a decline in WESCAM airborne turret delivery volumes, reflecting supply chain constraints and $8 million in Maritime primarily due to supplier and material delays. The declines were partially offset by higher revenue on Virginia-class and classified programs and an increase of $38 million in Commercial Aviation Solutions, primarily due to an increase in pilot training center volume and sale of end-of-life inventory.

IMS operating margin for two quarters ended July 1, 2022 compared with two quarters ended July 2, 2021 expanded 330 basis points to 13.9%, primarily due to an $82 million non-cash impairment charge at Commercial Aviation Solutions in the quarter ended July 2, 2021, as well as higher volumes in Commercial Aviation Solutions, partially offset by a mix of program revenue and product sales with relatively lower operating margin percentages for the quarter ended July 1, 2022.

Space & Airborne Systems Segment (“SAS”)


	Quarter Ended								Two Quarters Ended
(Dollars in millions)	July 1, 2022			July 2, 2021			% Inc/(Dec)		July 1, 2022			July 2, 2021			% Inc/(Dec)

Revenue	$	1,498		$	1,510		(1)	%	$	2,948		$	2,970		(1)	%
Operating income	195			204			(4)	%	367			396			(7)	%
Operating margin	13.0		%	13.5		%			12.4		%	13.3		%

One Quarter Comparison: SAS revenue for the quarter ended July 1, 2022 compared with the quarter ended July 2, 2021 decreased 1%, primarily driven by a $35 million decline in our airborne businesses, reflecting production transitions and lower development on the F-35 program and a $25 million decline in Intel & Cyber primarily driven by classified program transitions. The declines were partially offset by a $53 million increase in revenue in Space, reflecting growth in responsive satellite programs.

SAS operating margin for the quarter ended July 1, 2022 compared with the quarter ended July 2, 2021 contracted 50 basis points to 13.0% from lower risk retirements and a mix of program revenue and product sales with a relatively lower operating margin percentage for the quarter ended July 1, 2022, partially offset by a decrease in R&D as current quarter expenses normalized following elevated spend in the quarter ended July 2, 2021.

Two Quarters Comparison: SAS revenue for two quarters ended July 1, 2022 compared with two quarters ended July 2, 2021 decreased 1%, primarily driven by a $104 million decline in our airborne businesses, reflecting production transitions and lower development on the F-35 program and a $41 million decline in Intel & Cyber due to classified program transitions. The declines were partially offset by a $113 million increase in revenue in Space, reflecting growth in responsive satellite programs.

SAS operating margin for two quarters ended July 1, 2022 compared with two quarters ended July 2, 2021 contracted 90 basis points to 12.4% from lower risk retirements and a mix of program revenue and product sales with a relatively lower operating margin percentage for the quarter ended July 1, 2022, partially offset by a decrease in R&D expenses as current year expenses normalized following elevated spend in the two quarters ended July 2, 2021.

Communication Systems Segment (“CS”)


	Quarter Ended								Two Quarters Ended
(Dollars in millions)	July 1, 2022			July 2, 2021			% Inc/(Dec)		July 1, 2022			July 2, 2021			% Inc/(Dec)

Revenue	$	993		$	1,127		(12)	%	$	1,956		$	2,239		(13)	%
Operating income	238			276			(14)	%	467			546			(14)	%
Operating margin	24.0		%	24.5		%			23.9		%	24.4		%

One Quarter Comparison: CS revenue for the quarter ended July 1, 2022 compared with the quarter ended July 2, 2021 decreased 12% as Broadband Communications declined $69 million, due to lower volume on legacy platforms and Tactical Communications declined $66 million, primarily from continued supply chain disruptions arising from electronic component shortages. This was partially offset by modest growth within Public Safety from market recovery.

CS operating margin for the quarter ended July 1, 2022 compared with the quarter ended July 2, 2021 contracted 50 basis points to 24.0% primarily due to volume and supply chain impacts, as noted in the discussion above regarding CS revenue.

Two Quarters Comparison: CS revenue for two quarters ended July 1, 2022 compared with two quarters ended July 2, 2021 decreased 13%, as Broadband Communications declined $141 million, due to lower volume on legacy platforms and Tactical Communications declined $125 million, primarily from continued supply chain disruptions arising from electronic component shortages, which also impacted Integrated Vision Solutions and Public Safety.

CS operating margin for two quarters ended July 1, 2022 compared with two quarters ended July 2, 2021 contracted 50 basis points to 23.9% primarily due to volume and supply chain impacts, as noted in the discussion above regarding CS revenue.

Unallocated Corporate Expenses


	Quarter Ended						Two Quarters Ended
(Dollars in millions)	July 1, 2022		July 2, 2021		% Inc/(Dec)		July 1, 2022		July 2, 2021		% Inc/(Dec)

Unallocated corporate department income (expense), net(1)	$	17	$	(23)	*		$	14	$	(54)	*
L3Harris Merger-related transaction, integration and other expenses and losses	(26)		(21)		24	%	(49)		(44)		11	%
Amortization of acquisition-related intangibles	(151)		(156)		(3)	%	(303)		(320)		(5)	%

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)		(29)	%	(37)		(56)		(34)	%
FAS/CAS operating adjustment	21		30		(30)	%	43		60		(28)	%

Not meaningful

(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.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES

Cash Flows


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

Net cash provided by operating activities	$	788	$	1,381
Net cash (used in) provided by investing activities	(121)		1,307
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

Cash and cash equivalents: At July 1, 2022 we had cash and cash equivalents of $420 million and we have a senior unsecured $2 billion revolving credit facility that expires in June 2024 (all of which was available to us as of July 1, 2022). Additionally, we had $7.0 billion of net long-term debt outstanding at July 1, 2022. Our $420 million of cash and cash equivalents at July 1, 2022 included $231 million held by our foreign subsidiaries, a significant portion of which we believe can be repatriated to the U.S. with minimal tax cost.

Given our current cash position, outlook for funds generated from operations, credit ratings, available credit facility, cash needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity, although, we can give no assurances concerning our future liquidity, particularly in light of our overall level of debt, U.S. Government budget uncertainties and the state of global commerce and general political and financial uncertainty. We cannot predict the on-going impact that COVID, among other potential risks and uncertainties, will have on our cash from operating activities. Additionally, the provisions in the Tax Cuts and Jobs Act of 2017 require that, beginning in fiscal 2022, research and experimental expenditures be capitalized and amortized over five years, which we estimate will have an approximately $600 million to $700 million impact to cash from operating activities in fiscal 2022 based on the provisions currently in effect, however, there was no impact to cash from operating activities during the first two quarters of 2022. See Item 1A. “Risk Factors” of our Fiscal 2021 Form 10-K and Part II, Item 1A. “Risk Factors” in this Report.

Based on our current business plan and revenue prospects, we believe that our existing cash, funds generated from operations, our credit facility and access to the public and private debt and equity markets will be sufficient to provide for our anticipated working capital requirements, capital expenditures, dividend payments, repurchases under our share repurchase program and repayments of our debt securities at maturity for the next twelve months and reasonably foreseeable future thereafter. Our total capital expenditures for fiscal 2022 are expected to be approximately $300 million. We anticipate tax payments in fiscal 2022 to be approximately equal to or marginally less than our tax expense for the same period, absent R&D capitalization and subject to adjustment for timing differences. Other than those cash outlays noted in “Material Cash Requirements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2021 Form 10-K and in the “Material Cash Requirements and Commercial Commitments” section below in this MD&A, capital expenditures, dividend payments and repurchases under our share repurchase program, we do not anticipate any significant cash outlays during the remainder of fiscal 2022.

There can be no assurance that our business will continue to generate cash flows at current levels or that the cost or availability of future borrowings, if any, under our commercial paper program, or our credit facility or in the debt markets will not be impacted by any potential future credit or capital markets disruptions. If we are unable to maintain cash balances, generate cash flow from operations or borrow under our commercial paper program or our credit facility sufficient to service our obligations, we may be required to reduce capital expenditures, reduce or eliminate strategic acquisitions, reduce or terminate our share repurchases, reduce or eliminate dividends, refinance all or a portion of our existing debt, obtain additional financing, or sell assets. Our ability to make principal payments or pay interest on or refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions affecting the defense, government and other markets we serve and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

Net cash provided by operating activities: The $593 million decrease in net cash provided by operating activities in the two quarters ended July 1, 2022 compared with the two quarters ended July 2, 2021 was primarily due to a $320 million increase in cash used to fund working capital (i.e., accounts receivable, contract assets, inventories, accounts payable and contract liabilities), a $111 million increase in cash used to fund other accrued items (i.e. other expenses and accruals, payroll related taxes and warranty reserve) and the impact of $30 million of lower net income (excluding the impact of non-cash items such as depreciation and amortization, impairment of goodwill and other assets and gains related to business divestitures).

Net cash used in investing activities: The $1,428 million increase in net cash used in investing activities in the two quarters ended July 1, 2022 compared with the two quarters ended July 2, 2021 was primarily due to a $1,428 million decrease in net cash proceeds from sales of businesses and a $30 million increase in cash used for equity investments, partially offset by a $18 million increase in proceeds from sale of asset group, and an $11 million decrease of net cash used for additions of property, plant and equipment in fiscal 2022.

Net cash used in financing activities: The $763 million decrease in net cash used in financing activities in the two quarters ended July 1, 2022 compared with the two quarters ended July 2, 2021 was primarily due to a $821 million decrease in cash used to repurchase our common stock under our share repurchase program, partially offset by a $36 million increase in cash used for tax withholding payments associated with vested share-based awards and a $19 million increase cash used to pay dividends.

Funding of Pension Plans

Funding requirements under applicable laws and regulations are a major consideration in making contributions to our U.S. pension plans. Although we have significant discretion in making voluntary contributions, the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and Employer Recovery Act of 2008, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”), and applicable Internal Revenue Code regulations, mandate minimum funding thresholds. The Highway and Transportation Funding Act of 2014, the Bipartisan Budget Act of 2015, the American Rescue Plan Act of 2021 and the Infrastructure Investment and Jobs Act further extended the interest rate stabilization provision of MAP-21. Failure to satisfy the minimum funding thresholds could result in restrictions on our ability to amend the plans or make benefit payments. With respect to our U.S. qualified defined benefit pension plans, we intend to contribute annually no less than the required minimum funding thresholds. As a result of prior voluntary contributions and plan performance, we are not required to make any contributions to our U.S. qualified defined benefit pension plans in fiscal 2022 and for several years thereafter.

Future required contributions primarily will depend on the actual annual return on assets and the discount rate used to measure the benefit obligation at the end of each year. Depending on these factors, and the resulting funded status of our pension plans, the level of future statutory required minimum contributions could be material. We had net unfunded defined benefit plan obligations of $436 million as of July 1, 2022. See Note 14: “Pension and Other Postretirement Benefits” in the Notes to Consolidated Financial Statements in our Fiscal 2021 Form 10-K and Note K — Postretirement Benefit Plans in the Notes for further information regarding our pension plans.

Common Stock Repurchases

During the two quarters ended July 1, 2022, we used $729 million to repurchase 3.1 million shares of our common stock under our share repurchase program at an average price per share of $234.77, including commissions of $0.02 per share. During the two quarters ended July 2, 2021, we used $1.55 billion to repurchase 7.7 million shares of our common stock under our share repurchase program at an average price per share of $201.52, including commissions of $0.02 per share. During the two quarters ended July 1, 2022 and July 2, 2021, $38 million and $2 million, respectively, in shares of our common stock were delivered to us or withheld by us to satisfy withholding taxes on employee share-based awards. Shares repurchased by us are cancelled and retired.

On January 28, 2021, we announced that our Board of Directors approved a new $6 billion share repurchase authorization under our share repurchase program that was in addition to the remaining unused authorization of $210 million at January 1, 2021, under our prior share repurchase program, for a total unused authorization of $6.2 billion. Our share repurchase program does not have a stated expiration. At July 1, 2022, we had a remaining unused authorization under our share repurchase program of $1.8 billion. Repurchases under our share repurchase program may be made through open-market transactions, private transactions, transactions structured through investment banking institutions or any combination thereof. The level of our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board and management may deem relevant. The timing, volume and nature of repurchases are subject to market conditions, applicable securities laws and other factors and are at our discretion and may be suspended or discontinued at any time. Additional information regarding our current share repurchase program is set forth in this Report under Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds.”

Dividends

On February 25, 2022, our Board of Directors increased the quarterly per share cash dividend rate on our common stock from $1.02 to $1.12, commencing with the dividend declared by our Board of Directors for the first quarter of fiscal 2022, for an annualized per share cash dividend rate of $4.48, which was our twenty-first consecutive annual increase in our quarterly cash dividend rate. Quarterly cash dividends are typically paid in March, June, September and December. We paid $435 million in cash dividends during the two quarters ended July 1, 2022. We currently expect that cash dividends will continue to be paid in the near future, but we can give no assurances concerning payment of future dividends or future dividend increases. The declaration

of dividends and the amount thereof will depend on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board of Directors may deem relevant.

Capital Structure and Resources

2019 Credit Agreement: We have a $2 billion, 5-year senior unsecured revolving credit facility (the “2019 Credit Facility”) under a Revolving Credit Agreement (as amended, the “2019 Credit Agreement”) entered into on June 28, 2019 with a syndicate of lenders. For a description of the 2019 Credit Facility and the 2019 Credit Agreement, see Note 12: “Credit Arrangements” in the Notes to Consolidated Financial Statements in our Fiscal 2021 Form 10-K.

We were in compliance with the covenants in the 2019 Credit Agreement at July 1, 2022, including the covenant requiring that we not permit our ratio of consolidated total indebtedness to total capital, each as defined in the 2019 Credit Agreement, to be greater than 0.65 to 1.00. At July 1, 2022, we had no borrowings outstanding under the 2019 Credit Agreement.

Long-Term Debt: For a description of our long-term variable-rate and fixed-rate debt, see Note 13: “Debt” in the Notes to Consolidated Financial Statements in our Fiscal 2021 Form 10-K.

Short-Term Debt: Our short-term debt was $2 million at July 1, 2022 and $2 million at December 31, 2021, consisting of local borrowing by international subsidiaries for working capital needs.

Other Agreements: We have two RSAs with two separate third-party financial institutions that permit us to sell, on a non-recourse basis, up to an aggregate of $100 million 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 institution and we account for as sales of receivables with sale proceeds included in net cash from 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.

Material Cash Requirements and Commercial Commitments

The amounts disclosed in our Fiscal 2021 Form 10-K include our material cash requirements and commercial commitments. There were no material changes during the two quarters ended July 1, 2022 in our material cash requirements from contractual cash obligations to repay debt, to purchase goods and services, to make payments under operating leases or our commercial commitments, or in our contingent liabilities on outstanding surety bonds, standby letters of credit or other arrangements as disclosed in our Fiscal 2021 Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes are prepared in accordance with GAAP. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and backlog as well as disclosures of contingent assets and liabilities. Actual results may differ from our estimates. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting policies and estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies and estimates for us include: (i) revenue recognition on contracts and contract estimates; (ii) postretirement benefit plans; (iii) impairment testing of goodwill; (iv) accounting for business combinations; and (v) income taxes and tax valuation allowances. For additional discussion of our critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2021 Form 10-K.

Revenue Recognition

A significant portion of our business is derived from development and production contracts. Revenue and profit related to development and production contracts are generally recognized over time, typically using the POC cost-to-cost method of revenue recognition, whereby we measure our progress towards completion of the performance obligation based on the ratio of costs incurred to date to estimated costs at completion under the contract. Because costs incurred represent work performed, we believe this method best depicts the transfer of control of the asset to the customer. Under the POC cost-to-cost method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. Recognition of profit on a contract requires estimates of the total cost at completion and transaction price 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 EAC process in which we review the progress and performance on our ongoing contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.

EAC adjustments had the following impacts to operating income for the periods presented:


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

Favorable adjustments	$	99	$	165	$	234	$	327
Unfavorable adjustments	(87)		(85)		(176)		(165)
Net operating income adjustments	$	12	$	80	$	58	$	162

The net favorable impact to operating income from EAC adjustments in the quarter and two quarters ended July 1, 2022 reflected benefits of operational performance on programs, including additional retirement of risks and material and labor cost savings. There were no individual impacts to operating income due to EAC adjustments in the quarter or two quarters ended July 1, 2022 or July 2, 2021 that were material to our results of operations on a consolidated or segment basis for such periods.

We recognize revenue from numerous contracts with multiple performance obligations. For these contracts, we allocate the transaction price to each performance obligation based on the relative standalone selling price of the good or service underlying each performance obligation. The standalone selling price represents the amount for which we would sell the good or service to a customer on a standalone basis (i.e., not sold as bundled sale with any other products or services). The allocation of transaction price among separate performance obligations may impact the timing of revenue recognition but will not change the total revenue recognized on the contract.

A substantial majority of our revenue is derived from contracts with the U.S. Government, including foreign military sales contracts. These contracts are subject to the Federal Acquisition Regulation (“FAR”) and the prices of our contract deliverables are typically based on our estimated or actual costs plus a reasonable profit margin. As a result, the standalone selling prices of the goods and services in these contracts are typically equal to the selling prices stated in the contract, thereby eliminating the need to allocate (or reallocate) the transaction price to the multiple performance obligations. In our non-U.S. Government contracts, when standalone selling prices are not directly observable, we also generally use the expected cost plus margin approach to determine standalone selling price. In determining the appropriate margin under the cost plus margin approach, we consider historical margins on similar products sold to similar customers or within similar geographies where objective evidence is available. We may also consider our cost structure and profit objectives, the nature of the proposal, the effects of customization of pricing, our practices used to establish pricing of bundled products, the expected technological life of the product, margins earned on similar contracts with different customers and other factors to determine the appropriate margin.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

This Report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that may not materialize or prove to be correct, which could cause our results to differ materially from those expressed in or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements concerning: our plans, strategies and objectives for future operations; new products, systems, technologies, services or developments; future economic conditions, performance or outlook; future political conditions; the outcome of contingencies; the potential level of share repurchases, dividends or pension contributions; potential acquisitions or divestitures; the value of contract awards and programs; expected cash flows or capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future, including expected COVID-related impacts to our businesses; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words or expressions. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of filing of this Report and are not guarantees of future performance or actual results. Forward-looking statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The following are some of the factors we believe could cause our actual results to differ materially from our historical results or our current expectations or projections:

The effects of COVID could have a material adverse effect on our business operations, financial condition, results of operations, cash flows and equity.
We depend on U.S. Government customers for a significant portion of our revenue, and the loss of these relationships, a reduction in U.S. Government funding or a change in U.S. Government spending priorities could have an adverse impact on our business, financial condition, results of operations, cash flows and equity.
We depend significantly on U.S. Government contracts, which often are only partially funded, subject to immediate termination, and heavily regulated and audited. The termination or failure to fund, or negative audit findings for, one or more of these contracts could have an adverse impact on our business, financial condition, results of operations, cash flows and equity.
The U.S. Government’s budget deficit and the national debt, as well as any inability of the U.S. Government to complete its budget process for any government fiscal year and consequently having to shut down or operate on funding levels equivalent to its prior fiscal year pursuant to a “continuing resolution,” could have an adverse impact on our business, financial condition, results of operations, cash flows and equity.
Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-material type contracts. In particular, our fixed-price contracts could subject us to losses in the event of cost overruns or a significant increase in inflation.
Our commercial aviation products, systems and services businesses are affected by global demand and economic factors that could negatively impact our financial results.
We participate in markets that are often subject to uncertain economic conditions, which makes it difficult to estimate growth in our markets and, as a result, future income and expenditures.
We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our profitability.
We derive a significant portion of our revenue from international operations and are subject to the risks of doing business internationally, including fluctuations in currency exchange rates.
We are subject to government investigations, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and equity.
We could be negatively impacted by a security breach, through cyber attack, cyber intrusion, insider threats or otherwise, or other significant disruption of our IT networks and related systems or of those we operate for certain of our customers.
Our future success will depend on our ability to develop new products, systems, services and technologies that achieve market acceptance in our current and future markets.
We must attract and retain key employees, and any failure to do so could seriously harm us.
To the extent some of our workforce is or becomes represented by labor unions, a prolonged work stoppage could harm our business.
Disputes with our subcontractors or key suppliers, or their inability to perform or timely deliver our components, parts or services, could cause our products, systems or services to be produced or delivered in an untimely or unsatisfactory manner.
We have significant operations in locations that could be materially and adversely impacted in the event of a natural disaster or other significant disruption.
Changes in estimates we use in accounting for many of our programs could adversely affect our future financial results.
Our level of indebtedness and our ability to make payments on or service our indebtedness and our unfunded defined benefit plans liability may materially adversely affect our financial and operating activities or our ability to incur additional debt.
A downgrade in our credit ratings could materially adversely affect our business.
The level of returns on defined benefit plan assets, changes in interest rates and other factors could materially adversely affect our financial condition, results of operations, cash flows and equity in future periods.
Changes in our effective tax rate may have an adverse effect on our results of operations.
We may not be successful in obtaining the necessary export licenses to conduct certain operations abroad, and Congress may prevent proposed sales to certain foreign governments.
Our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or business partners.
The outcome of litigation or arbitration in which we are involved from time to time is unpredictable, and an adverse decision in any such matter could have a material adverse effect on our financial condition, results of operations, cash flows and equity.
Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon their intellectual property rights, and third parties may infringe upon our intellectual property rights.
We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity.
Unforeseen environmental issues, including regulations related to greenhouse gas emissions or change in customer sentiment related to environmental sustainability, could have a material adverse effect on our business, financial condition, results of operations, cash flows and equity.
Strategic transactions, including mergers, acquisitions and divestitures, involve significant risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows and equity.
Changes in future business or other market conditions could cause business investments and/or recorded goodwill or other long-term assets to become impaired, resulting in substantial losses and write-downs that would materially adversely affect our results of operations and financial condition.

Additional details and discussions concerning some of the factors that could affect our forward-looking statements or future results are set forth in our Fiscal 2021 Form 10-K under Item 1A. “Risk Factors” and in Part II, Item 1A. “Risk Factors” in this Report. The foregoing list of factors and the factors set forth in Item 1A. “Risk Factors” included in our Fiscal 2021 Form 10-K and in Part II, Item 1A. “Risk Factors” in this Report are not exhaustive. Additional risks and uncertainties not known to us or that we currently believe not to be material also may adversely impact our business, financial condition, results of operations, cash flows and equity. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on our business, financial condition, results of operations, cash flows and equity. The forward-looking statements contained in this Report are made as of the date of filing of this Report, and we disclaim any intention or obligation, other than imposed by law, to update or revise any forward-looking statements or to update the reasons actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or developments or otherwise.

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