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 and accompanying Notes. In addition, reference should be made to our audited Consolidated Financial Statements and accompanying Notes to our Consolidated Financial Statements and Part II: Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2022 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.”

We are the Trusted Disruptor for the global aerospace and defense industry. With customers’ mission-critical needs in mind, we deliver end-to-end technology solutions connecting the 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 and services have defense and civil government applications, as well as commercial applications. We generally sell directly to our customers, and we utilize agents and intermediaries to sell and market some products and services, especially in international markets.

U.S. and International Budget Environment

Our largest customers are various departments and agencies of the U.S. Government — the percentage of our revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 74% for the two quarters ended June 30, 2023.

On December 29, 2022, the President signed the National Defense Authorization Act, providing $858 billion of national defense funding for the 2023 U.S. Government fiscal year (“GFY”), of which $816 billion was allotted to the DoD. On March 13, 2023, the DoD released details around the President’s GFY 2024 $886 billion national defense budget request (“PBR”). The PBR includes $842 billion for the DoD, a proposed increase of approximately 3% over the enacted GFY 2023 DoD budget. Many of our offerings funded in the enacted GFY 2023 DoD budget are also supported by the PBR, including responsive satellites, ISR aircraft, tactical communications and maritime solutions.

The President’s 2024 GFY budget request and the overall defense spending environment in both the U.S. and internationally reflect the continued impacts of the conflicts in Ukraine, and geopolitical tensions across Asia and the Middle East. Changes to U.S. Government or international spending priorities have and could in the future impact our business.

On June 3, 2023, the President signed into law the Fiscal Responsibility Act of 2023 (“FRA”), which suspended the federal debt limit through January 1, 2025 and established new discretionary funding limits for defense and non-defense accounts. The deal capped GFY 2024 national defense funding at $886 billion. This includes $842 billion for the DoD specifically. GFY non-defense funding is capped at $704 billion. On July 14, 2023, the House passed its GFY 2024 National Defense Authorization Act authorizing $842 billion for the DoD, consistent with the GFY PBR and the caps set forth by the FRA. We expect that the House and Senate will continue consideration of GFY 2024 appropriation and authorization bills.

The overall defense spending environment, both in the U.S. and internationally, reflects the continued impacts of the conflicts in Ukraine and geopolitical tensions across Asia and the Middle East, but changes to U.S. Government or international spending priorities have and could in the future impact our business. The Federal budget and debt ceiling in particular could be the subject of considerable Congressional debate, and changes in spending priorities, including changes in the DoD budget, could adversely affect our existing programs and future contracts and impact our financial condition and results of operations.

See our U.S. Government funding risks and the discussion of our international business risks within Part I: Item 1A. Risk Factors in our Fiscal 2022 Form 10-K.

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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 input costs. The ongoing uncertainty related to the impacts of inflation, as well as increased interest rates, raise the cost of borrowing for the Federal government.

To the extent feasible, we continue to proactively deploy operational improvement strategies and 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.

KEY DEVELOPMENTS

Business Realignment. Effective for fiscal 2023, we adjusted our reporting to better align our businesses and transferred our ADG business (representing $74 million and $157 million of revenue for the quarter and two quarters ended June 30, 2023, respectively, and $77 million and $147 million of revenue for the quarter and two quarters ended July 1, 2022, respectively) from our IMS segment to our SAS segment. See Note A: Basis of Presentation and Summary of Significant Accounting Policies in the Notes for further information.

Acquisition of Viasat’s TDL. On January 3, 2023, we completed the TDL acquisition which is reported within our CS segment. See Note B: Acquisitions, Divestitures and Asset Sales in the Notes for further information regarding the TDL acquisition.

Pending Acquisition of AJRD. On March 15, 2023, in connection with our definitive agreement to acquire AJRD, we and AJRD each received a request for additional information and documentary material (the "Second Request") from the FTC, which extended the waiting period for review under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. We were advised on July 26, 2023 that the FTC will not block the acquisition of AJRD. We expect the acquisition to close on or about July 28, 2023.

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RESULTS OF OPERATIONS

Consolidated Results of Operations


	Quarter Ended								Two Quarters Ended
(Dollars in millions, except per share amounts)	June 30, 2023			July 1, 2022			% Inc/(Dec)		June 30, 2023			July 1, 2022			% Inc/(Dec)

Revenue from product sales and services:
IMS	$	1,735		$	1,608		8	%	$	3,435		$	3,267		5	%
SAS	1,715			1,572			9	%	3,370			3,089			9	%
CS	1,289			993			30	%	2,452			1,956			25	%

Corporate eliminations	(46)			(38)			21	%	(93)			(74)			26	%
Revenue from product sales and services	4,693			4,135			13	%	9,164			8,238			11	%
Cost of product sales and services	(3,476)			(2,907)			20	%	(6,763)			(5,767)			17	%
% of total revenue	74		%	70		%			74		%	70		%
Gross margin	1,217			1,228			(1)	%	2,401			2,471			(3)	%
% of total revenue	26		%	30		%			26		%	30		%
Engineering, selling and administrative expenses	(783)			(744)			5	%	(1,556)			(1,489)			4	%
% of total revenue	17		%	18		%			17		%	18		%
Business divestiture-related gains, net	26			—			*		26			—			*
Impairment of other assets	(60)			—			*		(78)			—			*
Non-operating income, net	83			108			(23)	%	165			214			(23)	%
Interest expense, net	(111)			(67)			66	%	(213)			(135)			58	%
Income before income taxes	372			525			(29)	%	745			1,061			(30)	%
Income taxes	(21)			(55)			(62)	%	(55)			(116)			(53)	%
Effective tax rate	6		%	10		%			7		%	11		%



Net income	351			470			(25)	%	690			945			(27)	%
Noncontrolling interests, net of income taxes	(2)			1			*		(4)			1			*
Net income attributable to L3Harris Technologies, Inc.	$	349		$	471		(26)	%	$	686		$	946		(27)	%
% of total revenue	7		%	11		%			7		%	11		%
Diluted EPS	$	1.83		$	2.42		(24)	%	$	3.60		$	4.86		(26)	%

*Not meaningful

Revenue and Gross Margin

One Quarter Comparison. Revenue increased 13% in the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022 from higher revenue across all segments as CS, SAS and IMS revenues increased $296 million, $143 million and $127 million, respectively.

Gross margin and gross margin as a percentage of revenue decreased in the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022, largely due to a net change in EAC adjustments and higher mix of lower-margin revenue, partially offset by the increases in revenue volume noted in the revenue discussion above.

Two Quarters Comparison. Revenue increased 11% in the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 from higher revenue across all segments as CS, SAS and IMS revenues increased $496 million, $281 million and $168 million, respectively.

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Gross margin and gross margin as a percentage of revenue decreased in the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022, largely due to a net change in EAC adjustments and higher mix of lower-margin revenue, partially offset by the increases in revenue volume noted in the revenue discussion above.

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

Engineering, Selling and Administrative Expenses

Engineering, selling and administrative expenses (“ESA”) expenses were as follows:


	Quarter Ended				Two Quarters Ended
(In millions)	June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022

Amortization of acquisition-related intangibles	$	(150)	$	(133)	$	(292)	$	(267)
Company-sponsored R&D costs	(117)		(145)		(231)		(301)
Acquisition-related transaction and integration expenses	(36)		—		(76)		—
L3Harris merger-related integration expenses	—		(26)		—		(50)
LHX NeXt	(22)		—		(35)		—


Gain on sale of asset group	—		8		—		8
Pre-acquisition and other divestiture-related expenses	(2)		(35)		(12)		(36)
Other ESA expenses	(456)		(413)		(910)		(843)
Total ESA expenses	$	(783)	$	(744)	$	(1,556)	$	(1,489)

Non-Operating Income, Net

Non-operating income, net was as follows:


	Quarter Ended				Two Quarters Ended
(In millions)	June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022

Non-service FAS pension income(1)	$	77	$	111	$	154	$	221
Other, net	6		(3)		11		(7)
Non-operating income, net	$	83	$	108	$	165	$	214

(1)Includes interest cost, expected return on plan assets, amortization of net actuarial gains under our pension and postretirement benefit plans. See Note I: Pension and Other Postretirement Benefit Plans in the Notes for more information on the composition of non-service cost components of FAS pension and OPEB income and expense.

Business Divestiture-Related Gains

For the quarter and two quarters ended June 30, 2023, the pre-tax gain associated with VIS was $26 million. There were no business divestiture-related gains or losses during the quarter and two quarters ended July 1, 2022.

See Note B: Acquisitions, Divestitures and Asset Sales in the Notes for further information.

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Impairment of Other Assets

Impairment of other assets for the quarter and two quarters ended June 30, 2023 consisted of non-cash impairment charges for the following:


	Quarter Ended		Two Quarters Ended
(In millions)	June 30, 2023		June 30, 2023

Impairment of customer contracts:
IMS	$	3	$	3
SAS	27		27
Unallocated corporate expense	—		18
	30		48
Facility closures:
IMS	9		9
Unallocated corporate expense	21		21
Impairment of other assets	$	60	$	78

There was no impairment of other assets during the quarter or two quarters ended July 1, 2022.

Interest Expense, Net

One Quarter Comparison. Interest expense, net increased in the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022 primarily due to $37 million of interest expense on the $2.25 billion outstanding under our variable rate Term Loan 2025.

Two Quarters Comparison. Interest expense, net increased in the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 primarily due to $72 million of interest expense on the $2.25 billion outstanding under our variable rate Term Loan 2025.

See Note H: Debt and Credit Arrangements in the Notes for further information.

Income Taxes

One Quarter Comparison. Our effective tax rate was 5.6% for the quarter ended June 30, 2023 compared with 10.5% for the quarter ended July 1, 2022. For the quarter ended June 30, 2023, our effective tax rate benefited from the favorable impacts of R&D credits, FDII deductions and the resolution of specific audit uncertainties. For the quarter ended July 1, 2022, our effective tax rate benefited from the favorable impact of R&D credits, an 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.

Two Quarters Comparison. Our effective tax rate was 7.4% for the two quarters ended June 30, 2023 compared with 10.9% for the two quarters ended July 1, 2022. For the two quarters ended June 30, 2023, our effective tax rate benefited from the favorable impacts of R&D credits, FDII deductions and the resolution of specific audit uncertainties. For the two quarters ended July 1, 2022, our effective tax rate 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.

Net Income

One Quarter Comparison and Two Quarters Comparison. The decrease in net income in the quarter and two quarters ended June 30, 2023 compared with the quarter and two quarters ended July 1, 2022 was due to the combined effects of reasons noted in the sections above.

Diluted EPS

Diluted EPS in the quarter and two quarters ended June 30, 2023 decreased compared with the quarter and two quarters ended July 1, 2022 due to lower net income, partially offset by fewer diluted weighted average common shares outstanding, primarily reflecting the repurchases of our common stock under our share repurchase program during the quarter and two quarters ended June 30, 2023 and fiscal 2022 share repurchases subsequent to July 1, 2022.

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

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Discussion of Business Segment Results of Operations

IMS Segment


	Quarter Ended								Two Quarters Ended
(Dollars in millions)	June 30, 2023			July 1, 2022			% Inc/(Dec)		June 30, 2023			July 1, 2022			% Inc/(Dec)

Revenue	$	1,735		$	1,608		8	%	$	3,435		$	3,267		5	%
Operating income	162			207			(22)	%	347			458			(24)	%
Operating income as a percentage of revenue ("operating margin")	9		%	13		%			10		%	14		%

One Quarter Comparison. The increase in IMS segment revenue for the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022 was primarily due to higher revenues of $41 million in Electro Optical and $39 million in Commercial Aviation Solutions, both from higher volumes, $36 million in Maritime largely from power and energy solutions and classified programs and $13 million in ISR from growth in domestic aircraft procurement and missionization.

The decrease in IMS segment operating income for the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022 was primarily due to net change in EAC adjustments principally in ISR and Maritime and a $12 million non-cash impairment of other assets related to facility closures and restructuring of a customer contract.

Two Quarters Comparison. The increase in IMS segment revenue for the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to higher revenues of $77 million in ISR from growth in domestic aircraft procurement and missionization, $66 million in Commercial Aviation Solutions and $62 million in Electro Optical, both from higher volumes.

The decrease in IMS segment operating income for the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to net change in EAC adjustments principally in ISR and Maritime and a $12 million non-cash impairment of other assets related to facility closures and restructuring of a customer contract.

SAS Segment


	Quarter Ended								Two Quarters Ended
(Dollars in millions)	June 30, 2023			July 1, 2022			% Inc/(Dec)		June 30, 2023			July 1, 2022			% Inc/(Dec)

Revenue	$	1,715		$	1,572		9	%	$	3,370		$	3,089		9	%
Operating income	168			203			(17)	%	355			380			(7)	%
Operating margin	10		%	13		%			11		%	12		%

One Quarter Comparison**.** The increase in SAS segment revenue for the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022 was primarily due to higher revenue of $105 million in Space Systems and $20 million in Intel & Cyber, both from new program ramps and $24 million in Mission Networks from program scope growth. Such increases were partially offset by a decline in legacy airborne platform volume.

The decrease in SAS segment operating income for the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022 was primarily due to a $27 million non-cash impairment of other assets related to restructuring of a customer contract, in addition to lower recovery of overhead costs on fixed price contracts.

Two Quarters Comparison. The increase in SAS segment revenue for the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to higher revenue of $196 million in Space Systems and $28 million in Intel and Cyber, both from new program ramps, $60 million in Mission Avionics from an increase in production revenues and $38 million in Mission Networks from program scope growth. Such increases were partially offset by a decline in legacy airborne platform volume.

The decrease in SAS segment operating income for the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to a $27 million non-cash impairment of other assets related to restructuring of a customer contract, in addition to lower recovery of overhead costs on fixed price contracts.

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CS Segment


	Quarter Ended								Two Quarters Ended
(Dollars in millions)	June 30, 2023			July 1, 2022			% Inc/(Dec)		June 30, 2023			July 1, 2022			% Inc/(Dec)

Revenue	$	1,289		$	993		30	%	$	2,452		$	1,956		25	%
Operating income	325			238			37	%	591			467			27	%
Operating margin	25		%	24		%			24		%	24		%

One Quarter Comparison. The increase in CS segment revenue for the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022 was primarily due to higher revenue of $160 million in Tactical Communications and $27 million in Public Safety, both from higher volumes driven by improved electronic component availability and $115 million in Broadband Communications due to $83 million from the TDL acquisition and higher volumes on legacy platforms.

The increase in CS segment operating income for the quarter ended June 30, 2023 compared with the quarter ended July 1, 2022 was primarily due to higher volumes, including the TDL acquisition, and favorable mix in Tactical Communications.

Two Quarters Comparison. The increase in CS segment revenue for the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to higher revenue of $261 million in Tactical Communications and $65 million in Public Safety, both from higher volumes driven by improved electronic component availability, and $221 million in Broadband Communications due to $164 million from the TDL acquisition and higher volumes on legacy platforms. Such increases were partially offset by a decrease of $34 million related to program execution in Integrated Vision Solutions.

The increase in CS segment operating income for the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to higher volumes, including the TDL acquisition, and favorable mix in Tactical Communications partially offset by program execution in Integrated Vision Solutions.

Unallocated Corporate Expenses


	Quarter Ended						Two Quarters Ended
(Dollars in millions)	June 30, 2023		July 1, 2022		% Inc/(Dec)		June 30, 2023		July 1, 2022		% Inc/(Dec)

Unallocated corporate department (expense) income, net(1)	$	(35)	$	19	*		$	(41)	$	15	*
Amortization of acquisition-related intangibles(2)	(173)		(151)		15	%	(338)		(303)		12	%
Additional cost of sales related to the fair value step-up in inventory sold	(15)		—		*		(30)		—		*
L3Harris merger-related integration expenses	—		(26)		(100)	%	—		(50)		(100)	%
Acquisition-related transaction and integration expenses	(36)		—		*		(76)		—		*
Pre-acquisition and other divestiture-related expenses	(2)		(35)		(94)	%	(12)		(36)		(67)	%
Business divestiture-related gains, net	26		—		*		26		—		*
Gain on sale of asset group	—		8		(100)	%	—		8		(100)	%
Impairment of other assets(3)	(21)		—		*		(39)		—		*
LHX NeXt(4)	(22)		—		*		(35)		—		*


FAS/CAS operating adjustment(5)	23		21		10	%	45		43		5	%
Total unallocated items	$	(255)	$	(164)			$	(500)	$	(323)

*Not meaningful

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(1) Includes certain corporate-level expenses that are not included in management’s evaluation of any segment’s operating performance.

(2) Includes amortization of identifiable intangible assets acquired in connection with business combinations. Because our acquisitions benefited the entire Company, the amortization of identifiable intangible assets acquired was not allocated to any segment.

(3) Includes a $21 million non-cash charge for impairment of intangible assets related to the closure of a facility during the quarter and two quarters ended June 30, 2023. See Note G: Goodwill and Other Intangible Assets in these Notes for additional information. Additionally, includes $18 million charge related to an impairment of a customer contract during the two quarters ended June 30, 2023.

(4) Costs associated with transforming multiple functions, systems and processes to increase agility and competitiveness, including third-party consulting, workforce optimization and incremental IT expenses for implementation of new systems.

(5) Represents the difference between the service cost component of FAS pension and OPEB cost 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 Note O: Business Segment Information in the Notes for additional information regarding the FAS/CAS operating adjustment.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES

Cash Flows


	Two Quarters Ended
(In millions)	June 30, 2023		July 1, 2022

Cash and cash equivalents, beginning of period	$	880	$	941
Operating Activities:
Net income	690		945
Non-cash adjustments	340		111
Changes in working capital	(120)		(495)
Other, net	(146)		227
Net cash provided by operating activities	764		788
Net cash used in investing activities	(2,074)		(121)
Net cash provided by (used in) financing activities	794		(1,174)
Effect of exchange rate changes on cash and cash equivalents	2		(14)
Net decrease in cash and cash equivalents	(514)		(521)
Cash and cash equivalents, end of period	$	366	$	420

Net cash provided by operating activities

The $24 million decrease in net cash provided by operating activities in the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to increases in income and payroll related tax payments partially offset by less cash used to fund net working capital (i.e., receivables, contract assets, inventories, accounts payable and contract liabilities) and a decrease in net income, excluding the impact of non-cash items.

Net cash used in investing activities

The $1,953 million increase in net cash used in investing activities in the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to the $1,973 million cash used for the acquisition of TDL during the first quarter of fiscal 2023.

Net cash provided by (used in) financing activities

The $1,968 million increase in net cash provided by financing activities in the two quarters ended June 30, 2023 compared with the two quarters ended July 1, 2022 was primarily due to $2.25 billion in proceeds from borrowings on our Term Loan 2025 for which $2.0 billion was utilized for the TDL acquisition, $579 million in net proceeds from issuances of commercial paper and $211 million decrease in cash used to repurchase our common stock under our share repurchase program, partially offset by $1.1 billion increase in repayments of borrowings including the $800 million aggregate principal amount of our 3.85% 2023 Notes and $250 million aggregate principal amount of our Floating 2023 Notes.

See Note H: Debt and Credit Arrangements in the Notes for further information.

Cash and cash equivalents

At June 30, 2023, we had cash and cash equivalents of $366 million, which includes $293 million held by our foreign subsidiaries, a significant portion of which we believe can be repatriated to the U.S. with minimal tax cost.

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Capital Structure and Resources

Below describes significant changes to our credit arrangements and debt during the two quarters ended June 30, 2023.

Credit Arrangements

Credit Agreements. On March 10, 2023, we established the $2.4 billion 2023 Credit Facility to finance a portion of the purchase price for the pending acquisition of AJRD. At June 30, 2023, we had no outstanding borrowings and were in compliance with all covenants under our 2023 Credit Agreement. Additionally, at June 30, 2023, we had no outstanding borrowings and were in compliance with all covenants under our $2.0 billion 2022 Credit Agreement.

Commercial Paper Programs. On March 14, 2023, we established the CP Program, which is supported by amounts unused and available under the 2022 Credit Agreement and the 2023 Credit Agreement. From time to time, we use borrowings under the CP Program for general corporate purposes, including the funding of acquisitions, debt refinancing, dividend payments and repurchases of our common stock. During the quarter ended June 30, 2023, we had a maximum outstanding balance of $1.5 billion under our CP program, which we used for the June 15, 2023 repayment of the $800 million aggregate principal amount of our 3.85% 2023 Notes, a portion of which was repaid with cash on hand during the quarter ended June 30, 2023.

Amounts outstanding under the CP Program at June 30, 2023 and the daily average balance and weighted average yield during the quarter ended June 30, 2023 were as follows:


	June 30, 2023
(In millions, except weighted average yield)	Outstanding			Daily Average

CP Program	$	579		$	588
Weighted Average Yield	5.47		%	5.33		%

We terminated our prior existing $1.0 billion commercial paper program during the two quarters ended June 30, 2023.

Subsequent to June 30, 2023, we increased the maximum amount available under the CP Program from $3.4 billion to $3.9 billion as permitted under its terms. This amount will be reduced by any borrowings under the 2022 Credit Agreement or the 2023 Credit Agreement. Balances under our CP Program may be elevated from time to time during fiscal 2023 as compared to historical norms.

For further information about our Credit Agreements and CP Program, see Note H: Debt and Credit Arrangements in the Notes.

Debt

At June 30, 2023, we had $8.2 billion of outstanding long-term debt, net, including the current portion of long-term debt, net and financing lease obligations, the majority of which we incurred in connection with merger and acquisition activity.

Long-Term Debt Issued. We drew $2.25 billion in long-term debt on Term Loan 2025 during the two quarters ended June 30, 2023.

Long-Term Debt Repayments. On March 14, 2023, we repaid the entire outstanding $250 million aggregate principal amount of our Floating 2023 Notes through a $250 million draw on Term Loan 2025. On June 15, 2023, we repaid the entire outstanding $800 million aggregate principal amount of our 3.85% 2023 Notes through cash on hand and the issuance of commercial paper.

For a description of our long-term debt, see Note H: Debt and Credit Arrangements in the Notes and Note 13: Debt in our Fiscal 2022 Form 10-K.

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Liquidity Assessment

Given our current cash position, outlook for funds generated from operations, credit ratings, available credit facilities, cash needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity for the next 12 months and in the longer term, 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 global financial uncertainty. Additionally, provisions in the Tax Cuts and Jobs Act of 2017 required that, beginning in 2022, R&D expenditures be capitalized and amortized over five years. In the future, Congress may consider legislation that would defer the amortization requirement to later years, possibly with retroactive effect. In the meantime, we will continue to make Federal tax payments based on the current tax law. The impact of this tax law on our cash from operations depends on the amount of R&D expenditures incurred and whether the Internal Revenue Service issues guidance on the provision which differs from our current interpretation, among other things. See Part I: Item 1A. Risk Factors in our Fiscal 2022 Form 10-K and Part II. Item 1A. Risk Factors of this Report.

Based on our current business plan and revenue prospects, we believe that our existing cash, funds generated from operations, our senior unsecured credit facilities, our CP Program 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, the pending acquisition of AJRD and repayments of our debt securities at maturity for the next twelve months and the reasonably foreseeable future thereafter. Our total capital expenditures for fiscal 2023 are expected to be approximately $275 million. Other than operating expenses, cash requirements for fiscal 2023 are expected to consist primarily of expenditures for the pending acquisition of AJRD, capital expenditures, tax payments, dividend payments, and repurchases under our share repurchase program. See “Capital Structure and Resources” and “Commercial Commitments” in Part II: Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2022 Form 10-K for further information regarding our cash requirements.

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 2023 or 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 $184 million as of June 30, 2023. See Note 14: Pension and Other Postretirement Benefits in our Fiscal 2022 Form 10-K and Note I: Pension and Other Postretirement Benefit Plans in the Notes for further information regarding our pension plans.

Common Stock Repurchases

During the two quarters ended June 30, 2023, we used $518 million to repurchase 2.5 million shares of our common stock under our share repurchase program at an average price per share of $204.40, including commissions of $0.02 per share. During the two quarters ended June 30, 2023, $28 million 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.

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Our repurchase program does not have a stated expiration date and authorizes us to repurchase shares of our common stock through open market purchases, private transactions, transactions structured through investment banking institutions or any combination thereof. At June 30, 2023, we had a remaining unused authorization under our repurchase program of $3.9 billion. We have announced that share repurchases will be moderated in the near-term, but the level and timing 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 of Directors or management may deem relevant. The timing, volume and nature of repurchases are also 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 repurchase program is in Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Report*.*

Dividends

On February 24, 2023, we announced that our Board of Directors increased the quarterly per share cash dividend rate on our common stock from $1.12 to $1.14, commencing with the dividend declared by our Board of Directors for the first quarter of fiscal 2023, for an annualized per share cash dividend rate of $4.56, which was our twenty-second consecutive annual increase in our quarterly cash dividend rate. Quarterly cash dividends are typically paid in March, June, September and December. We paid $436 million in cash dividends during the two quarters ended June 30, 2023. We currently expect to continue paying and increasing the rates of cash dividends in the near future, but we can give no assurances concerning payment of future dividends or future dividend increases. The annual declaration of dividends by our Board of Directors 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.

Material Cash Requirements and Commercial Commitments

The amounts disclosed in our Fiscal 2022 Form 10-K include our material cash requirements and commercial commitments. Except for the $2.25 billion in borrowings under Term Loan 2025, the level of indebtedness under our CP Program and the establishment of our 2023 Credit Facility, compared to amounts disclosed in our Fiscal 2022 Form 10-K, there were no material changes to our material cash requirements from contractual cash obligations to repay debt, to purchase goods and services or to make payments under operating leases or our commercial commitments; or in our contingent liabilities on outstanding surety bonds, standby letters of credit agreements or other arrangements with financial institutions and customers primarily relating to the guarantee of future performance on certain contracts to provide products and services to customers or to obtain insurance policies with our insurance carriers as disclosed in our Fiscal 2022 Form 10-K. Further information about our Credit Agreements and CP Program can be found in “Capital Structure and Resources” in this MD&A and Note H: Debt and Credit Arrangements in the Notes.

There can be no assurance that our business will continue to generate cash flows at current or expected levels or that the cost or availability of future borrowings, if any, under our CP Program, credit facilities, term loan 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 CP Program, our credit facilities or term loan 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.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to the critical accounting estimates disclosed in “Critical Accounting Estimates” in Part II: Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2022 Form 10-K, except, as set forth below.

Goodwill

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.

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Fiscal 2023 Impairment Tests. Effective December 31, 2022, we adjusted our reporting to better align our businesses and transferred our ADG business (a reporting unit) from our IMS segment to our SAS segment (also a reporting unit). In connection with the realignment, we reduced our reporting units from nine to eight as the ADG reporting unit and all $327 million of associated goodwill was absorbed by our existing SAS reporting unit given the economic similarities of the two reporting units. Immediately before the realignment, we performed a qualitative impairment assessment over our SAS reporting unit and a quantitative impairment assessment over our ADG reporting unit. Immediately after the realignment, we performed a quantitative impairment assessment over the SAS reporting unit. We prepared estimates of the fair value of our pre-realignment ADG reporting unit and post-realignment SAS reporting unit based on a combination of market-based valuation techniques, utilizing quoted market prices, comparable publicly reported transactions and an income-based valuation technique using projected discounted cash flows. These assessments indicated no impairment existed either before or after the realignment.

TDL Acquisition Goodwill. In connection with the January 3, 2023 acquisition of TDL, we recorded $1.117 billion of goodwill in our Broadband reporting unit within our CS segment.

ADG At-Risk Goodwill. As of December 31, 2022, prior to the business realignment, our ADG reporting unit had goodwill of $327 million and approximately 8% clearance. As noted above, ADG and all associated goodwill was absorbed by our existing SAS reporting unit and no impairment existed either before or after the realignment.

See Note B: Acquisitions, Divestitures and Asset Sales and Note G: Goodwill and Other Intangible Assets in the Notes for additional information.

Business Combinations

We follow the acquisition method of accounting to record identifiable assets acquired, liabilities assumed and noncontrolling interests recognized in connection with acquired businesses at their estimated fair value as of the date of acquisition.

Identifiable intangible assets from business combinations are recognized at their estimated fair values as of the date of acquisition and consist of customer relationships and developed technology. Determination of the estimated fair value of identifiable intangible assets requires judgment. The fair value of intangible assets is estimated using the relief from royalty method for the acquired developed technology and the multi-period excess earnings method for the acquired customer relationships. Both of these fair value methods are income-based valuation approaches, which require judgment to estimate appropriate discount rates, royalty rates related to the developed technology intangible assets, revenue growth attributable to the intangible assets and remaining useful lives. Finite-lived identifiable intangible assets are amortized to expense over their useful lives, generally ranging from two to seventeen years. The fair value of identifiable intangible assets acquired in connection with TDL was $752 million.

See Note B: Acquisitions, Divestitures and Asset Sales and Note G: Goodwill and Other Intangible Assets in the Notes for additional information.

Impact of Recently Issued Accounting Pronouncements

See Note A: Basis of Presentation and Summary of Significant Accounting Policies in the Notes for new accounting pronouncements that became effective during fiscal 2023.

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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 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 or litigation; environmental remediation cost estimates; the potential level of share repurchases, dividends or pension contributions; potential acquisitions or divestitures; the integration of our acquisitions; the value of contract awards and programs; expected revenue; 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,” “could,” “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. Factors that might cause our results to differ materially from those expressed in or implied by these forward-looking statements, from our current expectations or projections or from our historical results include, but are not limited to, those discussed in Part I: Item 1A. Risk Factors in our Fiscal 2022 Form 10-K and in Part II. Item 1A. Risk Factors of this Report. All forward-looking statements are qualified by, and should be read in conjunction with, those risk factors. Forward-looking statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and 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, whether as a result of new information, future events or developments or otherwise, after the date of filing of this Report or, in the case of any document incorporated by reference, the date of that document.

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. Other factors besides those listed here also could adversely affect us. See Part I: Item 1A. Risk Factors in our Fiscal 2022 Form 10-K and Part II. Item 1A. Risk Factors of this Report for more information regarding factors that might cause our results to differ materially from those expressed in or implied by the forward-looking statements contained in this Report.

We depend on U.S. Government customers for a significant portion of our revenue, and 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.
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 or sustained period of increased inflation.
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 a future breach of the debt ceiling, could have an adverse impact on our business, financial condition, results of operations, cash flows and equity.
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 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 derive a significant portion of our revenue from international operations and are subject to the risks of doing business internationally.
Disputes with our subcontractors or key suppliers, or their inability to perform or timely deliver our components, parts or services, could cause our products and/or services to be produced or delivered in an untimely or unsatisfactory manner.
We must attract and retain key employees, and any failure to do so could seriously harm us.

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We could be negatively impacted by a security breach, through cyber-attack, cyber intrusion, insider threats or otherwise, or other significant disruption of our information technology 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 and services and technologies that achieve market acceptance in our current and future markets.
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 condition and results of operations.
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.
Market conditions or volatility could impact our business, financial condition, results of operations and cash flows.
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 or additional tax exposures may have an adverse effect on our results of operations and cash flows.
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.
Unforeseen environmental issues, including regulations related to GHG 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.
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.
We are subject to risks relating to the pending acquisition of AJRD, and acquisition of AJRD cannot be guaranteed to close in the expected time frame or at all.
Challenges arising from the expanded operations from the acquisition of TDL and the pending acquisition of AJRD may affect our future results.
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.

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