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

We are an agile global aerospace and defense technology innovator, delivering end-to-end solutions that meet customers’ mission-critical needs. We provide advanced defense and commercial technologies across space, air, land, sea and cyber domains. We support government and commercial customers in more than 100 countries, with our largest customers being various departments and agencies of the U.S. Government and their prime contractors. Our products, systems and services have defense and civil government applications, as well as commercial applications.

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.”

U.S. and International Budget Environment

For the 2023 government fiscal year (“GFY”), the President’s budget request (“PBR”) proposed $773 billion of DoD funding, a 4% increase above the amount enacted for the 2022 GFY, and the Senate Appropriations Subcommittee on Defense has supported a $37 billion plus-up to the PBR, representing a 9% increase year over year, with a currently expected range of DoD budget proposals from $773 billion to $819 billion. Additionally, at the end of the 2022 GFY, Congress passed a Continuing Resolution (“CR”) through December 16, 2022; however based on recent trends, there is uncertainty about whether Congress will pass a budget or the government will continue to operate under the CR. When the government operates under a CR, all programs of record are funded at the prior year’s appropriated levels, and the DoD is prohibited from starting new programs. As part of the CR, an additional Ukraine aid package was enacted for $12 billion, bringing supplemental funding for the country to over $65 billion, a portion of which we believe to be addressable by our capabilities. Notwithstanding the increased supplemental funding, a CR represents a risk that we are monitoring and could impact the availability of funding for new contracts from the U.S. Government. See also the discussion of U.S. Government funding risks within “Item 1A, Risk Factors” included in our Fiscal 2021 Form 10-K.

In international markets, the North Atlantic Treaty Organization (“NATO”) continues to evolve its strategy on multiple levels. Several countries, including Finland and Sweden, are pursuing NATO membership, while existing NATO members such as the U.K. and France have in recent months committed to increased spending beyond the 2% of gross domestic product target. Recently, additional countries, such as Japan, have followed similar paths with expanded defense budgets. The expectation of increased spending in international markets provides us with the opportunity to offer a range of solutions to international customers, but international sales remain dependent on economic, social and political conditions that may differ from those in the United States as well as changes in export controls and other trade regulations in the United States. See also the discussion of our international business risks within “Item 1A, Risk Factors” included in our Fiscal 2021 Form 10-K.

Even with the increases in expected DoD budget proposals and with the overall demand environment both in the U.S. and internationally reflecting the conflict in Ukraine and geopolitical tensions, changes to U.S. Government spending priorities have and could in the future impact our business. A decline in demand for fuzing and ordnance systems due to reduced U.S. Government spending for precision weapons was largely responsible for charges for impairment of goodwill in our IMS segment. See Note I — Goodwill and Other Intangible Assets in the Notes for further information. Other changes in spending priorities in the future could adversely affect our existing programs and future contracts and impact our financial condition and results of operations.

Economic Environment

The macroeconomic environment continues to present challenges, which have impacted and may continue to impact our future results. Rising inflation in the U.S. has led to higher costs. The on-going uncertainty related to the impacts of inflation, as well as increased interest rates, which raises the cost of borrowing for the federal government, could in the future impact government spending priorities and the demand for our products. Higher interest rates have also had an impact on the fair value of our reporting units and contributed to charges for impairment of goodwill at our IMS and CS segments. See Note I — Goodwill and Other Intangible Assets in the Notes for further information.

While 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, 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. Management has worked to mitigate supply chain and labor market challenges, with modest improvements in the supply chain sequentially for Tactical Communications, the company’s largest product-based business, and a stable headcount within our company. However due to uncertainty in the current environment, there can be no assurances that we will not see further impacts in our financial condition and results of operations.

KEY DEVELOPMENTS

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 three quarters ended September 30, 2022 and October 1, 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, and we completed the sale of certain assets from our Integrated Mission Systems segment;
Electron Devices business, definitive agreement entered into on July 2, 2021, classified as held for sale during the quarter ended July 2, 2021 and divested on October 1, 2021, the results of which are reported as part of other non-reportable businesses through the date of divestiture;
CPS business, definitive agreement entered into on March 1, 2021, 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, 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, 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 three quarters ended September 30, 2022 and October 1, 2021.

RESULTS OF OPERATIONS

Consolidated Results of Operations


	Quarter Ended								Three Quarters Ended
(Dollars in millions, except per share amounts)	September 30, 2022			October 1, 2021			% Inc/(Dec)		September 30, 2022			October 1, 2021			% Inc/(Dec)

Revenue
Integrated Mission Systems	$	1,710		$	1,649		4	%	$	5,104		$	5,192		(2)	%
Space & Airborne Systems	1,502			1,494			1	%	4,450			4,464			—	%
Communication Systems	1,068			1,030			4	%	3,024			3,269			(7)	%
Other non-reportable businesses	—			95			*		—			661			*
Corporate eliminations	(34)			(39)			(13)	%	(94)			(122)			(23)	%
Total revenue	4,246			4,229			—	%	12,484			13,464			(7)	%
Total cost of product sales and services	(3,052)			(2,921)			4	%	(8,819)			(9,385)			(6)	%
% of total revenue	72		%	69		%			71		%	70		%
Gross margin	1,194			1,308			(9)	%	3,665			4,079			(10)	%
% of total revenue	28		%	31		%			29		%	30		%
Engineering, selling and administrative expenses	(742)			(793)			(6)	%	(2,231)			(2,485)			(10)	%
% of total revenue	17		%	19		%			18		%	18		%
Business divestiture-related gains, net	—			27			*		—			192			*
Impairment of goodwill and other assets	(802)			—			*		(802)			(207)			*
Non-operating income, net	99			111			(11)	%	313			314			—	%
Net interest expense	(70)			(67)			4	%	(205)			(198)			4	%
(Loss) income from continuing operations before income taxes	(321)			586			*		740			1,695			(56)	%
Income taxes	20			(107)			*		(96)			(336)			(71)	%
Effective tax rate	6.2		%	18.3		%			13.0		%	19.8		%
(Loss) income from continuing operations	(301)			479			*		644			1,359			(53)	%
Noncontrolling interests, net of income taxes	1			2			*		2			4			*
(Loss) income from continuing operations attributable to L3Harris common shareholders	$	(300)		$	481		*		$	646		$	1,363		(53)	%
% of total revenue	(7)		%	11		%			5		%	10		%
Diluted EPS	$	(1.56)		$	2.39		*		$	3.33		$	6.64		(50)	%

Not meaningful

Revenue and Gross Margin

One Quarter Comparison: Revenue remained flat in the quarter ended September 30, 2022 compared to the quarter ended October 1, 2021, as higher revenue across our segments was offset by $95 million of lower revenue from the impact of completed business divestitures in the quarter ended October 1, 2021. Gross margin and gross margin as a percentage of revenue (“gross margin percentage”) decreased in the quarter ended September 30, 2022 compared to the quarter ended October 1, 2021, largely due to higher input cost (labor, material and overhead) and supply chain disruptions that adversely impacted program performance and mix.

Three Quarters Comparison: Revenue decreased 7% in the three quarters ended September 30, 2022 compared to the three quarters ended October 1, 2021, from the impact of $633 million of lower revenue from completed business divestitures in the three quarters ended October 1, 2021 and supply chain disruptions. Gross margin and gross margin percentage decreased in the three quarters ended September 30, 2022 compared to the three quarters ended October 1, 2021 primarily due to the reasons noted above in the one quarter comparison.

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: Engineering, selling and administrative (“ESA”) expenses and ESA expense as a percentage of revenue (“ESA percentage”) decreased in the quarter ended September 30, 2022 compared with the quarter ended October 1, 2021, primarily from $44 million of lower expenses related to compensation, $19 million of lower R&D expenses and $15 million of lower costs from the impact of completed business divestitures, partially offset by a $31 million charge related to an additional pre-merger legal contingency and a $29 million charge in the quarter for severance and other benefit payments related to employees that accepted a voluntary retirement plan with an effective retirement date of September 30, 2022.

Three Quarters Comparison: ESA expenses decreased in the three quarters ended September 30, 2022 compared with the three quarters ended October 1, 2021, primarily from $94 million of lower expenses related to compensation, $80 million of lower costs from the impact of completed business divestitures, $62 million of lower R&D expenses and $15 million of lower divestiture-related expenses, partially offset by a $31 million charge related to an additional pre-merger legal contingency and a $29 million charge in the quarter for severance and other benefit payments related to employees that accepted a voluntary retirement plan with an effective retirement date of September 30, 2022. ESA percentage was flat in the three quarters ended September 30, 2022 compared with the three quarters ended October 1, 2021.

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 Operations (Unaudited) is comprised of the following pre-tax gains associated with businesses divested. There were no significant gains or losses during the quarter or three quarters ended September 30, 2022.


	Quarter Ended		Three Quarters Ended
(In millions)	October 1, 2021		October 1, 2021





Electron Devices business	$	29	$	29
VSE disposal group	(4)		(30)
CPS business(1)	—		(19)
Military training business	2		214




Other	—		(2)

Total business divestiture-related gains, net	$	27	$	192

(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 Operations (Unaudited) for the three quarters ended October 1, 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: Impairment of goodwill and other assets in the quarter ended September 30, 2022 reflected non-cash impairment charges for goodwill of $355 million, $313 million and $134 million associated with our Broadband, ADG and Electro Optical reporting units, respectively. No impairment charges were recorded in the quarter ended October 1, 2021.

Three Quarters Comparison: Impairment of goodwill and other assets in the three quarters ended September 30, 2022 reflected non-cash impairment charges for goodwill of $355 million, $313 million and $134 million associated with our Broadband, ADG and Electro Optical reporting units, respectively. Impairment of goodwill and other assets in the three quarters ended October 1, 2021 reflected a $62 million non-cash impairment charge for goodwill associated with the divestiture of the CPS business and $145 million of non-cash impairment charges for identifiable intangible and other long-lived assets related to the 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, Net

One Quarter Comparison: Non-operating income, net decreased in the quarter ended September 30, 2022 compared with the quarter ended October 1, 2021, primarily from an $11 million increase in losses recorded for our equity investments in nonconsolidated affiliates.

Three Quarters Comparison: Non-operating income, net remained flat in the three quarters ended September 30, 2022 compared with the three quarters ended October 1, 2021, as a $30 million increase in market value related to our rabbi trust assets and $12 million increase in losses recorded for our equity investments in unconsolidated affiliates were offset by a $35 million charge for impairment of our equity investment in a nonconsolidated affiliate and a $7 million FAS pension settlement charge during the quarter ended July 2, 2021.

Net Interest Expense

One Quarter Comparison and Three Quarters Comparison: Net interest expense increased in the quarter and three quarters ended September 30, 2022 compared with the quarter and three quarters ended October 1, 2021 primarily due to lower interest income in the quarter and three quarters ended September 30, 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 (loss) income from continuing operations before income taxes) was 6.2% on the loss from continuing operations for the quarter ended September 30, 2022 compared with 18.3% on the income from continuing operations for the quarter ended October 1, 2021. For the quarter ended September 30, 2022, our effective tax rate benefited from the favorable impacts of R&D credits, incremental foreign-derived intangible income (“FDII”) and the release of a valuation allowance in a foreign jurisdiction resulting from an internal restructuring, partially offset by the unfavorable impact of non-deductible goodwill impairments. For the quarter ended October 1, 2021, our effective tax rate was unfavorably impacted by non-deductible goodwill from completed business divestitures and the unfavorable impact of valuation allowances in certain foreign jurisdictions, partially offset by the favorable impacts of R&D credits, favorable adjustments upon finalization of our Federal tax return, the favorable impact of excess tax benefits related to equity-based compensation and the favorable resolution of specific audit uncertainties.

Three Quarters Comparison: Our effective tax rate was 13.0% for the three quarters ended September 30, 2022 compared with 19.8% for the three quarters ended October 1, 2021. Our effective tax rate for the three quarters ended September 30, 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, the favorable impact of excess tax benefits related to equity-based compensation and the items described above in the one quarter comparison of income taxes. Our effective tax rate for the three quarters ended October 1, 2021 was impacted by the items described above in the one quarter comparison of income taxes.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”) which includes implementation of a new 15% corporate alternative minimum tax, a 1% excise tax on stock buybacks and tax incentives for energy and climate initiatives. These provisions are effective beginning January 1, 2023 and we expect them to be immaterial to our financial results, financial position and cash flows.

(Loss) Income From Continuing Operations

One Quarter Comparison: The loss from continuing operations in the quarter ended September 30, 2022 compared with the income from continuing operations for the quarter ended October 1, 2021 was primarily due to a net loss from continuing operations in the quarter ended September 30, 2022 from the impact of non-cash impairment charges for goodwill recorded within our Broadband, ADG and Electro Optical reporting units, as noted in the impairment of goodwill and other assets section above.

Three Quarters Comparison: Income from continuing operations decreased in the three quarters ended September 30, 2022 compared with the three quarters ended October 1, 2021 primarily due to the loss from continuing operations in the quarter ended September 30, 2022, as discussed in the one quarter comparison above, in addition to the combined effects of the reasons noted in the sections above regarding the three quarters ended September 30, 2022 and three quarters ended October 1, 2021.

Diluted EPS

One Quarter Comparison: Diluted EPS attributable to L3Harris common shareholders in the quarter ended September 30, 2022 decreased compared with the quarter ended October 1, 2021 due to a net loss from continuing operations in the quarter ended September 30, 2022 primarily from the impact of non-cash impairment charges for goodwill recorded within our Broadband, ADG and Electro Optical reporting units, as noted in the impairment of goodwill and other assets section above.

Three Quarters Comparison: Diluted EPS attributable to L3Harris common shareholders in the three quarters ended September 30, 2022 decreased compared with the three quarters ended October 1, 2021, due to lower net income resulting from the combined effects of the reasons noted in the sections above in this MD&A, partially offset by lower diluted weighted average of common shares outstanding, reflecting the repurchases of shares of our common stock under our repurchase program in the quarter and three quarters ended September 30, 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								Three Quarters Ended
(Dollars in millions)	September 30, 2022			October 1, 2021			% Inc/(Dec)		September 30, 2022			October 1, 2021			% Inc/(Dec)

Revenue	$	1,710		$	1,649		4	%	$	5,104		$	5,192		(2)	%
Operating (loss) income	(225)			232			(197)	%	247			608			(59)	%
Operating (loss) income as a percentage of revenue (“operating margin”)	(13.2)		%	14.1		%			4.8		%	11.7		%

One Quarter Comparison: IMS revenue for the quarter ended September 30, 2022 compared with the quarter ended October 1, 2021 increased 4%, reflecting an increase of $73 million in ISR, largely from $59 million of revenue for newly-awarded Armed Overwatch program and an increase of $15 million in Commercial Aviation Solutions primarily due to $18 million of higher revenue related to the sale of end-of-life inventory, partially offset by a decrease of $13 million in Maritime primarily due to material delays as well as program timing.

IMS operating margin for the quarter ended September 30, 2022 compared with the quarter ended October 1, 2021 contracted to (13.2)%, primarily due to non-cash impairment charges for goodwill totaling $447 million, in addition to higher input costs, material delays and mix, partially offset by the sale of end-of-life inventory and higher volumes in Commercial Aviation during the quarter ended September 30, 2022.

Three Quarters Comparison: IMS revenue for three quarters ended September 30, 2022 compared with three quarters ended October 1, 2021 decreased 2%, reflecting a decrease of $91 million in Electro Optical, primarily from lower volume on fuzing and ordnance systems and other related programs, as well as a decline in WESCAM airborne turret delivery volumes resulting from supply chain disruptions and a decrease of $21 million in Maritime due to material delays as well as program timing. These decreases were partially offset by an increase of $53 million in Commercial Aviation Solutions, largely due to $33 million of higher revenue related to the sale of end-of-life inventory as well as an increase in pilot training center volume.

IMS operating margin for three quarters ended September 30, 2022 compared with three quarters ended October 1, 2021 contracted 690 basis points to 4.8%, primarily due to non-cash charges for goodwill impairment totaling $447 million during the quarter ended September 30, 2022 compared with a non-cash charge for goodwill impairment of $62 million associated with the divestiture of the CPS business and a non-cash charge for identifiable intangible and other long-lived assets of $145 million related to our CTS business recorded during the three quarters ended October 1, 2021. In addition, IMS operating margin declined from higher input costs, material delays and mix, partially offset by the sale of end-of-life inventory and higher volumes in Commercial Aviation Solutions during the three quarters ended September 30, 2022.

See Note I — Goodwill and Other Intangible Assets in the Notes for further information related to the charges for goodwill impairment.

Space & Airborne Systems Segment (“SAS”)


	Quarter Ended								Three Quarters Ended
(Dollars in millions)	September 30, 2022			October 1, 2021			% Inc/(Dec)		September 30, 2022			October 1, 2021			% Inc/(Dec)

Revenue	$	1,502		$	1,494		1	%	$	4,450		$	4,464		—	%
Operating income	172			187			(8)	%	539			583			(8)	%
Operating margin	11.5		%	12.5		%			12.1		%	13.1		%

One Quarter Comparison: SAS revenue for the quarter ended September 30, 2022 compared with the quarter ended October 1, 2021 increased 1%, primarily driven by an increase of $68 million in Space, reflecting growth in responsive satellite programs, that more than offset a $40 million decline in our airborne businesses, reflecting transitions from development to production on the F-35 and F-18 programs.

SAS operating margin for the quarter ended September 30, 2022 compared with the quarter ended October 1, 2021 contracted 100 basis points to 11.5% primarily from a $22 million increase in unfavorable EAC adjustments, due to higher input costs and program performance, mainly in Electronic Warfare and Space businesses, and new program ramps, partially offset by a decrease in R&D expenses.

Three Quarters Comparison: SAS revenue for three quarters ended September 30, 2022 compared with three quarters ended October 1, 2021 remained flat, primarily driven by an increase of $181 million in Space, reflecting growth in responsive satellite programs, partially offset by a $145 million decline in our airborne businesses, reflecting transitions from development to production on the F-35 and F-18 programs and $42 million decline in Intel & Cyber primarily due to classified program transitions.

SAS operating margin for three quarters ended September 30, 2022 compared with three quarters ended October 1, 2021 contracted 100 basis points to 12.1% primarily from a $62 million decrease in net favorable EAC adjustments, due to higher input costs and program performance, mainly in Electronic Warfare and Space businesses, and new program ramps, partially offset by a decrease in R&D expenses.

Communication Systems Segment (“CS”)


	Quarter Ended								Three Quarters Ended
(Dollars in millions)	September 30, 2022			October 1, 2021			% Inc/(Dec)		September 30, 2022			October 1, 2021			% Inc/(Dec)

Revenue	$	1,068		$	1,030		4	%	$	3,024		$	3,269		(7)	%
Operating (loss) income	(97)			258			(138)	%	370			804			(54)	%
Operating margin	(9.1)		%	25.0		%			12.2		%	24.6		%

One Quarter Comparison: CS revenue for the quarter ended September 30, 2022 compared with the quarter ended October 1, 2021 increased 4%, reflecting an increase of $94 million in Tactical Communications, primarily due to an increase in volume, partially offset by a decrease of $37 million in Broadband Communications due to lower volume on legacy platforms and a decrease of $27 million in Integrated Vision Solutions (“IVS”) primarily from program timing and lower sales volume.

CS operating margin for the quarter ended September 30, 2022 compared with the quarter ended October 1, 2021 contracted to (9.1)%, primarily due to a non-cash charge for impairment of goodwill of $355 million recorded in our Broadband reporting unit, in addition to higher input costs and lower margin on new program ramp.

Three Quarters Comparison: CS revenue for three quarters ended September 30, 2022 compared with three quarters ended October 1, 2021 decreased 7%, reflecting a decrease of $178 million in Broadband Communications from lower volume on legacy platforms, a decrease of $31 million in Tactical Communications due to supply chain disruptions and a decrease of $44 million in IVS primarily from program timing and lower sales volume.

CS operating margin for three quarters ended September 30, 2022 compared with three quarters ended October 1, 2021 contracted to 12.2%, primarily due to the non-cash charge for impairment of goodwill of $355 million recorded in our Broadband reporting unit during the quarter ended September 30, 2022, in addition to supply chain disruptions, higher input costs and lower margin on new program ramp.

See Note I — Goodwill and Other Intangible Assets in the Notes for further information on the impairment charge for goodwill.

Unallocated Corporate Expenses


	Quarter Ended						Three Quarters Ended
(Dollars in millions)	September 30, 2022		October 1, 2021		% Inc/(Dec)		September 30, 2022		October 1, 2021		% Inc/(Dec)

Unallocated corporate department income (expense), net(1)	$	20	$	(1)	*		$	34	$	(55)	*
L3Harris Merger-related transaction, integration and other expenses and losses	(21)		(35)		(40)	%	(72)		(79)		(9)	%
Amortization of acquisition-related intangibles	(151)		(155)		(3)	%	(454)		(475)		(4)	%

Charges for severance and other termination costs	(29)		—		*		(29)		—		*
Charge related to an additional pre-merger legal contingency	(31)		—		*		(31)		—		*
Business divestiture-related gains, net	—		27		*		—		192		*
Impairment of goodwill and other assets	—		—		*		—		(125)		*
Gain on sale of asset group	—		—		*		8		—		*
Acquisition and other divestiture-related expenses	(10)		(8)		25	%	(45)		(64)		(30)	%
FAS/CAS operating adjustment(2)	22		30		(27)	%	65		90		(28)	%

Not meaningful

(1) For the quarter ended September 30, 2022, includes $11 million of income from greenhouse gas (“GHG”) emission reduction projects and $10 million of income from our deferred compensation plans. For the three quarters ended September 30, 2022, includes $20 million of income from our deferred compensation plans and $11 million of income from GHG emission reduction projects. For the three quarters ended October 1, 2021, includes a $15 million accrual for a value added tax obligation and $9 million of loss related to our deferred compensation plans.

(2) 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.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES

Cash Flows


	Three Quarters Ended
(In millions)	September 30, 2022		October 1, 2021

Net cash provided by operating activities	$	1,376	$	1,865
Net cash (used in) provided by investing activities	(188)		1,400
Net cash used in financing activities	(1,566)		(3,413)
Effect of exchange rate changes on cash and cash equivalents	(34)		(2)
Net decrease in cash and cash equivalents	(412)		(150)
Cash and cash equivalents, beginning of period	941		1,276
Cash and cash equivalents, end of period	$	529	$	1,126

Cash and cash equivalents: At September 30, 2022 we had cash and cash equivalents of $529 million and a senior unsecured $2 billion revolving credit facility that matures in July 2027 (all of which was available to us as of September 30, 2022). Additionally, we had $7.0 billion of net long-term debt outstanding at September 30, 2022. Our $529 million of cash and cash equivalents at September 30, 2022 included $208 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. 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 up to a $600 million impact to cash from operating activities in fiscal 2022 based on the provisions currently in effect. During the quarter ended September 30, 2022, we made a tax payment of $205 million related to our research and experimental expenditures, which had an impact to cash from operating activities. 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, the 2022 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 $489 million decrease in net cash provided by operating activities in the three quarters ended September 30, 2022 compared with the three quarters ended October 1, 2021 was primarily due to a $240 million increase in cash used to pay income taxes, primarily from the impact of R&D related tax policy, a $218 million increase in cash used to fund working capital (i.e., accounts receivable, contract assets, inventories, accounts payable and contract liabilities), a $70 million increase in cash used to fund other accrued items (i.e. other expenses and accruals, payroll related taxes and warranty reserve), partially offset by the impact of $47 million of higher net income (excludes 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) provided by investing activities: The $1,588 million increase in net cash used in investing activities in the three quarters ended September 30, 2022 compared with the three quarters ended October 1, 2021 was primarily due to a $1,593 million decrease in net cash proceeds from sales of businesses and a $47 million increase in cash used for equity investments, partially offset by a $18 million increase in proceeds from sale of asset group and a $26 million decrease of net cash used for additions of property, plant and equipment in fiscal 2022.

Net cash used in financing activities: The $1,847 million decrease in net cash used in financing activities in the three quarters ended September 30, 2022 compared with the three quarters ended October 1, 2021 was primarily due to a $1,975 million decrease in cash used to repurchase our common stock under our share repurchase program, partially offset by a $54 million decrease in proceeds from exercises of employee stock options, a $40 million increase in tax withholding payments associated with vested share-based awards and a $32 million increase in 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 $346 million as of September 30, 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 L — Postretirement Benefit Plans in the Notes for further information regarding our pension plans.

Common Stock Repurchases

During the three quarters ended September 30, 2022, we used $900 million to repurchase 3.9 million shares of our common stock under our share repurchase program at an average price per share of $233.77, including commissions of $0.02 per share. During the three quarters ended October 1, 2021, we used $2.88 billion to repurchase 13.5 million shares of our common stock under our share repurchase program at an average price per share of $213.47, including commissions of $0.02 per share. During the three quarters ended September 30, 2022 and October 1, 2021, $44 million and $4 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 September 30, 2022, we had a remaining unused authorization under our share repurchase program of $1.6 billion. On October 21, 2022, we announced that our Board of Directors approved an additional $3.0 billion share repurchase authorization. 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 $650 million in cash dividends during the three quarters ended September 30, 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

Credit Agreement: On July 29, 2022, we established our new $2 billion, 5-year senior unsecured 2022 Credit Facility under the 2022 Credit Agreement with a syndicate of lenders. For a description of the 2022 Credit Facility and the 2022 Credit Agreement, see Note K— Credit Arrangements in the Notes.

We were in compliance with all covenants under the 2022 Credit Agreement at September 30, 2022, including the covenant requiring that we not permit our ratio of consolidated total indebtedness to total capital, each as defined in the 2022 Credit Agreement, to be greater than 0.65 to 1.00. At September 30, 2022, we had no borrowings outstanding under the 2022 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 September 30, 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 September 30, 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 three quarters ended September 30, 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.

On October 3, 2022, we entered into a definitive agreement to acquire Viasat, Inc.’s TDL product line for a purchase price of approximately $1.96 billion, subject to customary adjustments. We plan to fund the acquisition of the TDL product line with debt financing, which may include amounts under the 2022 Credit Facility, new issuances of long or short term debt or other sources we may identify. The acquisition of the TDL product line is expected to close in the first half of 2023, subject to required regulatory approvals and clearances and other customary closing conditions, although we can give no assurances regarding the timing or occurrence of closing.

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. 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				Three Quarters Ended
(In millions)	September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021

Favorable adjustments	$	108	$	158	$	342	$	485
Unfavorable adjustments	(108)		(73)		(284)		(238)
Net operating income adjustments	$	—	$	85	$	58	$	247

In the quarter ended September 30, 2022 there was no impact to operating income from EAC adjustments. The net favorable impact to operating income from EAC adjustments in the three quarters ended September 30, 2022 reflected benefits of operational performance on programs, including additional retirement of risks and material and labor cost savings. There were no individual program impacts to operating income due to EAC adjustments in the quarter or three quarters ended September 30, 2022 or October 1, 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.

Goodwill

Goodwill as of September 30, 2022 and December 31, 2021 was $18.2 billion and $18.9 billion, respectively. We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter, or under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment or when we reorganize our reporting structure such that the composition of one or more of our reporting units is affected. Events or circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of our industry, a decline in our market capitalization, operating performance indicators, competition, reorganizations of our business or the disposal of all or a portion of a reporting unit. We identify potential impairment by comparing the fair value of each of our reporting units with its carrying amount, including goodwill, which is adjusted for allocations of Corporate assets and liabilities as appropriate. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Precision engagement business allocation and impairment: During the quarter ended September 30, 2022, we realigned our precision engagement business from our ADG reporting unit to our Electro Optical reporting unit. In connection with the realignment, we transferred $325 million of goodwill associated with the precision engagement business to our Electro Optical reporting unit on a relative fair value basis. Immediately before and after the reassignment, we tested goodwill assigned to each reporting unit. As a result of these tests, concurrently with the preparation of our financial statements for the quarter ended September 30, 2022, we concluded that goodwill related to our ADG reporting unit was impaired immediately before the reassignment and recorded a non-cash charge of $313 million for the impairment in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Operations (Unaudited). The impairment of goodwill was due to lower sales volume in our precision engagement business, reflecting U.S. Government spending priorities with respect to precision weapons, and higher interest rates.

Broadband, Electro Optical and ADG interim tests: Indications of potential impairment of goodwill related to our Broadband, Electro Optical and ADG reporting units were present as of September 30, 2022. Consequently, in connection with the preparation of our financial statements for the quarter ended September 30, 2022, we performed interim tests of each of these reporting unit’s goodwill for impairment. We determined that goodwill related our Broadband and Electro Optical reporting units was impaired and goodwill related to our ADG reporting unit was not impaired.

Broadband and Electro Optical goodwill impairments: As a result of the interim tests of goodwill related to our Broadband and Electro Optical reporting units, we recorded $489 million of non-cash charges for the impairment of goodwill ($355 million related to Broadband and $134 million related to Electro Optical) in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Operations (Unaudited). The impairment of goodwill related to our Electro Optical reporting unit was due to persistently lower demand and associated decrease in our outlook for the precision engagement business, and rising interest rates. The impairment of goodwill related to our Broadband reporting unit was due to lower volume on legacy platforms, which also resulted in decreased in out outlook for the reporting unit, and higher interest rates.

Goodwill-related fair value estimates: Fair value determinations described above under the heading “Goodwill” in this Critical Accounting Policies MD&A were determined based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions, and projected discounted cash flows. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. Material changes in these estimates could occur and result in additional impairments in future periods. If the discount rate used for the impairment analysis increased by 25 basis points the total impairment would have increased by approximately $200 million.

An impairment of goodwill could result from a number of circumstances, including different assumptions used in determining the fair value of the reporting units; changes to U.S. Government spending priorities or ability to win competitively awarded contracts; the rescission of significant contract awards as a result of competitors protesting or challenging contracts awarded to us; or an increase in interest rates without a corresponding increase in future revenue.

At-risk goodwill: Because the carrying values of our Broadband, ADG and Electro Optical reporting units equaled their fair values immediately after the non-cash impairment charges recorded during the quarter ended September 30, 2022, goodwill associated with these reporting units remains at increased risk of impairment. The carrying value of goodwill associated with our Broadband, ADG and Electro Optical reporting units was $1,540 million, $328 million and $2,197 million, respectively.

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; 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:

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.
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.
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.
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.
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.
The acquisition of the TDL product line cannot be guaranteed to close in the expected time frame or at all.

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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