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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 2023 Form 10-K. Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements.
OVERVIEW
We are the Trusted Disruptor in the defense industry. With customers’ mission-critical needs always in mind, we deliver end-to-end technology solutions connecting the space, air, land, sea and cyber domains in the interest of national security. We support government customers in more than 100 countries, with our largest customers being various departments and agencies of the U.S. Government, their prime contractors and international allies. Our products and services have defense and civil government applications, as well as commercial applications.
U.S. and International Budget Environment
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 77% for the three quarters ended September 27, 2024.
On March 9, 2024, the President signed the first tranche of U.S. Government fiscal year (“GFY”) 2024 appropriations funding bills into law, which funded six government agencies, including funding for the National Aeronautics and Space Administration, the National Oceanic and Atmospheric Administration, and the Federal Aviation Administration, through the remainder of GFY 2024 which ended on September 30, 2024. A second funding bill, signed into law on March 23, 2024, funded all remaining agencies, including the U.S. Department of Defense (“DoD”), through the remainder of GFY 2024. The bill provides approximately $844 billion in funding for DoD. This was in line with our expectations for 3% growth for defense over GFY 2023 levels and in line with the first year of the Fiscal Responsibility Act of 2023 (“FRA”) caps.
On March 11, 2024, the President’s Budget Request (“PBR”) for GFY 2025 was released. The DoD requested $850 billion, a 1% topline increase consistent with the FRA caps.
On April 24, 2024, the President signed into law a supplemental GFY 2024 appropriations package that includes $67 billion in funding for key DoD programs, bringing the DoD funding for GFY 2024 to $911 billion.
Congress has not yet reached a final agreement on GFY2025 funding. A short-term Continuing Resolution (“CR”) was enacted on September 26, 2024 that will fund the U.S. Government until December 20, 2024.
While operating under a CR, government agencies are allocated a portion of GFY 2024 enacted funds, and DoD is prohibited from starting new programs. The 2024 election cycle complicates the budget outlook. The outcome of the election in November will determine which political party has the majority in the House and Senate, which has implications, including potential delays in Congress’ ability to complete GFY 2025 appropriations bills during the lame duck session, making another CR highly likely. If Congress does not enact all 12 GFY 2025 appropriations bills by April 30, 2025, a 1% automatic sequestration cut will go into effect as mandated by the FRA.
Further complicating the budget outlook is the need to raise the debt ceiling in 2025. Congressional inaction may lead to a default and potentially create economic instability.
The overall defense spending environment, both in the U.S. and internationally, reflects the continued impacts of global conflicts and geopolitical tensions, and changes to U.S. Government or international spending priorities have and could in the future impact our business.
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 2023 Form 10-K.
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Economic Environment
The macroeconomic environment continues to evolve, which has impacted our business and may continue to impact our future results. The ongoing uncertainty related to the impacts of inflation, as well as the interest rate environment and ongoing federal deficits, which raises the cost of borrowing for the federal government, could in the future impact U.S. Government spending priorities for our products. For a discussion of inflation-related risks, see Part I. Item 1A. Risk Factors in our Fiscal 2023 Form 10-K.
RESULTS OF OPERATIONS
Consolidated Results of Operations
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | September 27, 2024 | September 29, 2023 | September 27, 2024 | September 29, 2023 | |||||||||||||||||||||||||||||||
| Revenue | $ | 5,292 | $ | 4,915 | $ | 15,802 | $ | 14,079 | |||||||||||||||||||||||||||
| Cost of revenue | (3,873) | (3,608) | (11,675) | (10,419) | |||||||||||||||||||||||||||||||
| % of total revenue | 73 | % | 73 | % | 74 | % | 74 | % | |||||||||||||||||||||||||||
| Gross margin | 1,419 | 1,307 | 4,127 | 3,660 | |||||||||||||||||||||||||||||||
| % of total revenue | 26.8 | % | 26.6 | % | 26.1 | % | 26.0 | % | |||||||||||||||||||||||||||
| General and administrative expenses | (924) | (828) | (2,778) | (2,388) | |||||||||||||||||||||||||||||||
| % of total revenue | 17 | % | 17 | % | 18 | % | 17 | % | |||||||||||||||||||||||||||
| Operating Income | 495 | 479 | 1,349 | 1,272 | |||||||||||||||||||||||||||||||
| Non-service FAS pension income and other, net | 101 | 80 | 275 | 245 | |||||||||||||||||||||||||||||||
| Interest expense, net | (166) | (159) | (514) | (372) | |||||||||||||||||||||||||||||||
| Income before income taxes | 430 | 400 | 1,110 | 1,145 | |||||||||||||||||||||||||||||||
| Income taxes | (26) | (18) | (54) | (73) | |||||||||||||||||||||||||||||||
| Effective Tax Rate | 6.0 | % | 4.5 | % | 4.9 | % | 6.4 | % | |||||||||||||||||||||||||||
| Net income | 404 | 382 | 1,056 | 1,072 | |||||||||||||||||||||||||||||||
| Noncontrolling interests, net of income taxes | (4) | 1 | (7) | (3) | |||||||||||||||||||||||||||||||
| Net income attributable to L3Harris Technologies, Inc. | 400 | 383 | 1,049 | 1,069 | |||||||||||||||||||||||||||||||
| Diluted EPS | $ | 2.10 | $ | 2.02 | $ | 5.50 | $ | 5.61 |
Revenue and Gross Margin
Quarter Ended Comparison. Revenue increased 8% for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher revenue of $141 million in our AR segment from a full quarter of revenue, rather than a partial quarter of revenue for the quarter ended September 29, 2023 following the July 28, 2023 acquisition of AJRD (“the AR Partial Quarter”) and higher revenues of $127 million and $103 million in our CS and IMS segments, respectively.
Gross margin increased, largely due to the increase in revenue, while gross margin as a percentage of revenue remained flat for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023.
Three Quarters Ended Comparison. Revenue increased 12% for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher revenue of $1,264 million in our AR segment from the acquisition of AJRD, in addition to higher revenues of $315 million, $85 million and $66 million in our CS, SAS and IMS segments, respectively.
Gross margin increased, largely due to the increase in revenue, while gross margin as a percentage of revenue remained relatively flat for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023.
See the “Segment Product and Service Analysis” and “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.
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Segment Product and Service Analysis
The following tables present revenue and cost of revenue from products and services by segment for the quarters ended September 27, 2024 and September 29, 2023:
| Quarter Ended September 27, 2024 | |||||||||||||||||||||||||||||||||||
| (In millions) | SAS | IMS | CS | AR | Eliminations | Total | |||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,173 | $ | 1,026 | $ | 1,096 | $ | 400 | $ | — | $ | 3,695 | |||||||||||||||||||||||
| Services | 498 | 634 | 269 | 196 | — | 1,597 | |||||||||||||||||||||||||||||
| Intersegment | 12 | 11 | 17 | — | (40) | — | |||||||||||||||||||||||||||||
| Total | $ | 1,683 | $ | 1,671 | $ | 1,382 | $ | 596 | $ | (40) | $ | 5,292 | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 928 | $ | 793 | $ | 697 | $ | 310 | $ | 11 | $ | 2,739 | |||||||||||||||||||||||
| Services | 385 | 457 | 144 | 157 | (9) | 1,134 | |||||||||||||||||||||||||||||
| Intersegment | 12 | 11 | 17 | — | (40) | — | |||||||||||||||||||||||||||||
| Total | $ | 1,325 | $ | 1,261 | $ | 858 | $ | 467 | $ | (38) | $ | 3,873 | |||||||||||||||||||||||
| Quarter Ended September 29, 2023 | |||||||||||||||||||||||||||||||||||
| (In millions) | SAS | IMS | CS | AR | Eliminations | Total | |||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,183 | $ | 907 | $ | 985 | $ | 322 | $ | — | $ | 3,397 | |||||||||||||||||||||||
| Services | 490 | 640 | 255 | 133 | — | 1,518 | |||||||||||||||||||||||||||||
| Intersegment | 13 | 21 | 15 | — | (49) | — | |||||||||||||||||||||||||||||
| Total | $ | 1,686 | $ | 1,568 | $ | 1,255 | $ | 455 | $ | (49) | $ | 4,915 | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 894 | $ | 676 | $ | 595 | $ | 249 | $ | 7 | $ | 2,421 | |||||||||||||||||||||||
| Services | 394 | 489 | 202 | 116 | (14) | 1,187 | |||||||||||||||||||||||||||||
| Intersegment | 13 | 21 | 15 | — | (49) | — | |||||||||||||||||||||||||||||
| Total | $ | 1,301 | $ | 1,186 | $ | 812 | $ | 365 | $ | (56) | $ | 3,608 |
Quarter Ended Comparison. Products revenue increased $298 million for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher products revenues of $119 million and $111 million in our IMS and CS segments, respectively, and $78 million in our AR segment from the AR Partial Quarter.
Cost of products revenue increased $318 million for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher cost of products revenues of $117 million and $102 million in our IMS and CS segments, respectively, and $61 million in our AR segment from the AR Partial Quarter .
Services revenue increased $79 million for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher services revenue of $63 million in our AR segment from the AR Partial Quarter.
Cost of services revenue decreased $53 million for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to lower cost of services revenues of $58 million and $32 million in our CS and IMS segments, respectively, partially offset by higher cost of services revenue of $41 million in our AR segment from the AR Partial Quarter.
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.
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The following tables present revenue and cost of revenue from products and services by segment for the three quarters ended September 27, 2024 and September 29, 2023:
| Three Quarters Ended September 27, 2024 | |||||||||||||||||||||||||||||||||||
| (In millions) | SAS | IMS | CS | AR | Eliminations | Total | |||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 3,572 | $ | 3,102 | $ | 3,165 | $ | 1,139 | $ | — | $ | 10,978 | |||||||||||||||||||||||
| Services | 1,529 | 1,911 | 804 | 580 | — | 4,824 | |||||||||||||||||||||||||||||
| Intersegment | 40 | 56 | 53 | — | (149) | — | |||||||||||||||||||||||||||||
| Total | $ | 5,141 | $ | 5,069 | $ | 4,022 | $ | 1,719 | $ | (149) | $ | 15,802 | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 2,765 | $ | 2,410 | $ | 1,911 | $ | 867 | $ | 40 | $ | 7,993 | |||||||||||||||||||||||
| Services | 1,215 | 1,417 | 607 | 454 | (11) | 3,682 | |||||||||||||||||||||||||||||
| Intersegment | 40 | 56 | 53 | — | (149) | — | |||||||||||||||||||||||||||||
| Total | $ | 4,020 | $ | 3,883 | $ | 2,571 | $ | 1,321 | $ | (120) | $ | 11,675 | |||||||||||||||||||||||
| Three Quarters Ended September 29, 2023 | |||||||||||||||||||||||||||||||||||
| (In millions) | SAS | IMS | CS | AR | Eliminations | Total | |||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 3,597 | $ | 3,039 | $ | 2,951 | $ | 322 | $ | — | $ | 9,909 | |||||||||||||||||||||||
| Services | 1,423 | 1,898 | 716 | 133 | — | 4,170 | |||||||||||||||||||||||||||||
| Intersegment | 36 | 66 | 40 | — | (142) | — | |||||||||||||||||||||||||||||
| Total | $ | 5,056 | $ | 5,003 | $ | 3,707 | $ | 455 | $ | (142) | $ | 14,079 | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 2,777 | $ | 2,305 | $ | 1,759 | $ | 249 | $ | 72 | $ | 7,162 | |||||||||||||||||||||||
| Services | 1,150 | 1,464 | 558 | 116 | (31) | 3,257 | |||||||||||||||||||||||||||||
| Intersegment | 36 | 66 | 40 | — | (142) | — | |||||||||||||||||||||||||||||
| Total | $ | 3,963 | $ | 3,835 | $ | 2,357 | $ | 365 | $ | (101) | $ | 10,419 |
Three Quarters Ended Comparison**.** Products revenue increased $1,069 million for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher products revenues of $817 million in our AR segment from the acquisition of AJRD, in addition to $214 million and $63 million in our CS and IMS segments, respectively.
Cost of products revenue increased $831 million for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher cost of products revenues of $618 million in our AR segment from the acquisition of AJRD, in addition to $152 million and $105 million in our CS and IMS segments, respectively.
Services revenue increased $654 million for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher services revenues of $447 million in our AR segment from the acquisition of AJRD, in addition to $106 million and $88 million in our SAS and CS segments, respectively.
Cost of services revenue increased $425 million for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher cost of services revenues of $338 million in our AR segment from the acquisition of AJRD, in addition to $65 million and $49 million in our SAS and CS segments, respectively.
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.
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General and Administrative (“G&A”) Expenses
G&A expenses were as follows:
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | September 27, 2024 | September 29, 2023 | September 27, 2024 | September 29, 2023 | |||||||||||||||||||
| Amortization of acquisition-related intangibles | $ | (194) | $ | (185) | $ | (585) | $ | (477) | |||||||||||||||
| LHX NeXt implementation costs(1) | (41) | (33) | (216) | (68) | |||||||||||||||||||
| Merger, acquisition, and divestiture-related expenses | (25) | (56) | (86) | (144) | |||||||||||||||||||
| Business divestiture-related (losses) gains, net(2) | (29) | — | (53) | 26 | |||||||||||||||||||
| Impairment of goodwill and other assets | — | — | (14) | (30) | |||||||||||||||||||
| Company-funded R&D costs | (135) | (125) | (373) | (356) | |||||||||||||||||||
| Selling and marketing | (112) | (121) | (337) | (341) | |||||||||||||||||||
| Other G&A expenses(3) | (388) | (308) | (1,114) | (998) | |||||||||||||||||||
| Total G&A expenses | $ | (924) | $ | (828) | $ | (2,778) | $ | (2,388) | |||||||||||||||
(1)Costs associated with transforming multiple functions, systems and processes to increase agility and competitiveness, including third-party consulting, workforce optimization and incremental information technology (“IT”) expenses for implementation of new systems. For more detail on our LHX NeXt initiative and implementation costs, see Note N: Restructuring and Other Exit Costs in the Notes and the “Operating Environment, Strategic Priorities and Key Performance Measures” section in the MD&A in our Fiscal 2023 Form 10-K.
(2)See Note O: Acquisitions and Divestitures in the Notes.
(3)Includes other segment G&A expenses such as payroll and benefits, outside services, facilities, insurance and other expenses and unallocated corporate expenses including a portion of management and administration, legal, environmental, compensation, retiree benefits and includes other corporate G&A expenses and eliminations.
Quarter Ended Comparison. G&A expenses increased $96 million for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due an $80 million increase in other G&A expenses, driven by a $26 million change in the fair value of our deferred compensation plan liabilities and $14 million of other G&A expenses in our AR segment due to the AR Partial Quarter in 2023. Additionally, G&A expenses increased from business divestiture-related losses in the quarter ended September 27, 2024. Such increases were partially offset by a decrease in merger, acquisition, and divestiture-related expenses.
Three Quarters Ended Comparison. G&A expenses increased $390 million for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to increases in LHX NeXt implementation costs, including $56 million related to employee severance charges and $92 million for third-party consulting expenses, incremental IT expenses for implementation of new systems and other costs. G&A expenses also increased from higher amortization of acquisition-related intangibles and a change in business divestiture-related losses, partially offset by a decrease in merger, acquisition, and divestiture-related expenses. Additionally, other G&A expenses increased $116 million from the inclusion of $100 million of other G&A expenses in our AR segment and $84 million in corporate other G&A expenses, primarily from a $23 million change in the fair value of our deferred compensation plan liabilities and a $15 million increase in a legal reserve, partially offset by decreases in other G&A expenses of $29 million, $20 million and $19 million in our SAS, CS and IMS segments, respectively, primarily from LHX NeXt driven cost savings.
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Non-service FAS Pension Income and Other, net
Non-service FAS pension income and other, net was as follows:
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||
| (In millions) | September 27, 2024 | September 29, 2023 | September 27, 2024 | September 29, 2023 | |||||||||||||||||||
| Non-service FAS pension income(1) | $ | 80 | $ | 78 | $ | 241 | $ | 232 | |||||||||||||||
| Other, net(2) | 21 | 2 | 34 | 13 | |||||||||||||||||||
| Non-service FAS pension income and other, net | $ | 101 | $ | 80 | $ | 275 | $ | 245 |
(1)Includes interest cost, expected return on plan assets, amortization of net actuarial gain, and amortization of prior service (credit) cost components of net periodic benefit income under our pension and OPEB plans. See Note H: Retirement Benefits in the Notes for more information on the composition of non-service FAS pension income.
(2)Other, net primarily includes changes in the market value of our rabbi trust assets, gains and losses on our equity investments in nonconsolidated affiliates and royalty income. For the quarter and three quarters ended September 27, 2024, includes $14 million of income net of related expenses from a domain name sale.
Interest Expense, net
Interest expense, net, increased for the quarter and three quarters ended September 27, 2024 compared with the quarter and three quarters ended September 29, 2023 primarily due to the issuance and sale of the March Issued 2024 Notes, AJRD Notes in July 2023 and higher average outstanding notes under our CP Program during the three quarters ended September 27, 2024, partially offset by repayment of Term Loan 2025 in March 2024. See Note G: Debt and Credit Arrangements in the Notes for further information.
Income Taxes
During interim periods, we estimate our worldwide forecasted full-year effective tax rate and apply that rate to year-to-date ordinary income in order to compute the year-to-date income tax provision. Although most items will be considered part of the forecasted full-year effective tax rate, there are a number of items that are instead required to be recorded in the interim period in which they occur; such as certain changes in uncertain tax positions, the accrual of interest and penalties, changes in tax laws or rates, and other items as prescribed by GAAP. As a result, there may be quarterly fluctuations in our effective tax rate and the results for the interim periods are not necessarily indicative of the results to be expected for the full year or future periods.
Our effective tax rate (“ETR”) was 6.0% and 4.9% for the quarter and three quarters ended September 27, 2024, respectively, and 4.5% and 6.4% for the quarter and three quarters ended September 29, 2023, respectively. The ETR for all periods benefited from R&D credits and tax deductions for FDII, with additional benefits from favorable adjustments recognized upon finalization of our 2023 tax returns in the quarter and three quarters ended September 27, 2024 and favorable resolution of specific audit uncertainties in the three quarters ended September 27, 2024 and the quarter and three quarters ended September 29, 2023.
Diluted EPS
Quarter Ended Comparison. Diluted EPS increased 4% for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher net income from the combined effects of reasons noted in the sections above, notably an increase in gross margin, partially offset by an increase in G&A expenses.
Three Quarters Ended Comparison. Diluted EPS decreased 2% for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to lower net income, from the combined effects of reasons noted in the sections above, notably increases in G&A expenses and interest expense, net, partially offset by an increase in gross margin.
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Discussion of Business Segment Results of Operations
SAS Segment
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||||||||||||||
| September 27, 2024 | September 29, 2023 | % Inc/(Dec) | September 27, 2024 | September 29, 2023 | % Inc/(Dec) | ||||||||||||||||||||||||||||||
| Revenue | $ | 1,683 | $ | 1,686 | — | % | $ | 5,141 | $ | 5,056 | 2 | % | |||||||||||||||||||||||
| Operating income | 195 | 210 | (7) | % | 626 | 565 | 11 | % | |||||||||||||||||||||||||||
| Operating income as a percentage of revenue (“operating margin”) | 11.6 | % | 12.5 | % | 12.2 | % | 11.2 | % |
Quarter Ended Comparison. SAS segment revenue remained flat for the quarter ended September 27, 2024 primarily due to higher revenues of $49 million in Intel and Cyber from classified program growth and $18 million in Mission Networks, which is our FAA mission-critical safety of flight business, from higher volumes, offset by lower revenues in Advanced Combat Systems of $42 million from the divestiture of the Antenna Disposal Group and $15 million from lower F-35 related volumes as TR-3 development ramps down as well as $25 million in Space Systems primarily due to a non-recurring license sale during the quarter ended September 29, 2023 and challenges on classified development programs leading to slowed growth during the quarter ended September 27, 2024.
SAS segment operating income decreased for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to a non-recurring license sale during the quarter ended September 29, 2023 and challenges on classified development programs in Space Systems, partially offset by growth in both Intel and Cyber and Mission Networks and LHX NeXt driven cost savings realized during the quarter ended September 27, 2024.
Three Quarters Ended Comparison. SAS segment revenue increased for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher revenues of $114 million and $55 million in Intel and Cyber and Space Systems, respectively, from program growth and $40 million in Mission Networks from higher volumes, partially offset by lower revenues in Advanced Combat Systems of $71 million from lower volumes and $60 million from the divestiture of the Antenna Disposal Group.
SAS segment operating income increased for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to a $27 million non-cash charge for impairment of other assets, partially offset by a non-recurring license sale both of which occurred during the three quarters ended September 29, 2023, in addition to growth in Space Systems and LHX NeXt driven cost savings realized during the three quarters ended September 27, 2024.
IMS Segment
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | September 27, 2024 | September 29, 2023 | % Inc/(Dec) | September 27, 2024 | September 29, 2023 | % Inc/(Dec) | |||||||||||||||||||||||||||||
| Revenue | $ | 1,671 | $ | 1,568 | 7 | % | $ | 5,069 | $ | 5,003 | 1 | % | |||||||||||||||||||||||
| Operating income | 204 | 187 | 9 | % | 600 | 534 | 12 | % | |||||||||||||||||||||||||||
| Operating margin | 12.2 | % | 11.9 | % | 11.8 | % | 10.7 | % |
Quarter Ended Comparison. IMS segment revenue increased for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher revenues of $47 million in Commercial Aviation from higher volume, $32 million in Defense Electronics from higher demand for advanced electronics for space and munitions programs and $31 million in ISR from higher aircraft missionization volume.
IMS segment operating income increased for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher volume and favorable mix in CAS, improved program performance across the segment and LHX NeXt driven cost savings realized during the quarter ended September 27, 2024, partially offset by unfavorable mix impact within ISR.
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Three Quarters Ended Comparison. IMS segment revenue increased for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher revenues of $40 million in Defense Electronics from higher demand for advanced electronics for space and munitions programs, $32 million in Maritime from material volume on classified programs and $31 million in Global Optical Systems from higher commercial revenue on airborne sensors, partially offset by lower revenue of $32 million in ISR from lower aircraft procurement.
IMS segment operating income increased for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to a $45 million increase from improved program performance during the three quarters ended September 27, 2024, a $12 million non-cash charge for impairment of other assets related to facility closures and restructuring of a customer contract during the three quarters ended September 29, 2023 and LHX NeXt driven cost savings realized during the three quarters ended September 27, 2024.
CS Segment
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | September 27, 2024 | September 29, 2023 | % Inc/(Dec) | September 27, 2024 | September 29, 2023 | % Inc/(Dec) | |||||||||||||||||||||||||||||
| Revenue | $ | 1,382 | $ | 1,255 | 10 | % | $ | 4,022 | $ | 3,707 | 8 | % | |||||||||||||||||||||||
| Operating income | 359 | 282 | 27 | % | 998 | 873 | 14 | % | |||||||||||||||||||||||||||
| Operating margin | 26.0 | % | 22.5 | % | 24.8 | % | 23.6 | % |
Quarter Ended Comparison. CS segment revenue increased 10% for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher revenues of $71 million in Tactical Communications and $31 million in Integrated Vision Solutions associated with increased demand for our resilient communication equipment, related waveforms, and night vision devices and $27 million in Broadband Communications from higher volumes.
CS segment operating income increased for the quarter ended September 27, 2024 compared with the quarter ended September 29, 2023 primarily due to higher volumes, favorable high margin international mix, proprietary waveform license sales and LHX NeXt driven cost savings realized during the quarter ended September 27, 2024.
Three Quarters Ended Comparison. CS segment revenue increased for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher revenues of $146 million in Tactical Communications and $83 million in Integrated Vision Solutions associated with increased domestic and international demand for our resilient communication equipment, related waveforms, and night vision devices and $88 million in Broadband Communications from higher volumes.
CS segment operating income increased for the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 primarily due to higher volumes and LHX NeXt driven cost savings realized during the three quarters ended September 27, 2024, partially offset by a decrease from unfavorable mix of higher DoD sales in Tactical Communication during the three quarters ended September 27, 2024.
AR Segment
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | September 27, 2024 | September 29, 2023 | % Inc/(Dec) | September 27, 2024 | September 29, 2023 | % Inc/(Dec) | |||||||||||||||||||||||||||||
| Revenue | $ | 596 | $ | 455 | 31 | % | $ | 1,719 | $ | 455 | * | ||||||||||||||||||||||||
| Operating income | 75 | 56 | 34 | % | 222 | 56 | * | ||||||||||||||||||||||||||||
| Operating margin | 12.6 | % | 12.3 | % | 12.9 | % | 12.3 | % |
- Not meaningful
AR segment revenue increased for the quarter and three quarters ended September 27, 2024 compared with the quarter and three quarters ended September 29, 2023 primarily due to the AR Partial Quarter in 2023.
AR segment operating income increased for the quarter and three quarters ended September 27, 2024 compared with the quarter and three quarters ended September 29, 2023 primarily due to the AR Partial Quarter in 2023.
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Unallocated Corporate Expenses
| Quarter Ended | Three Quarters Ended | ||||||||||||||||||||||||||||||||||
| (In millions) | September 27, 2024 | September 29, 2023 | September 27, 2024 | September 29, 2023 | |||||||||||||||||||||||||||||||
| Unallocated corporate department (expense) income, net(1) | $ | (40) | $ | 14 | $ | (106) | $ | (27) | |||||||||||||||||||||||||||
| Amortization of acquisition-related intangibles(2) | (210) | (208) | (642) | (546) | |||||||||||||||||||||||||||||||
| Additional cost of revenue related to the fair value step-up in inventory sold | — | — | — | (30) | |||||||||||||||||||||||||||||||
| Merger, acquisition, and divestiture-related expenses | (25) | (56) | (86) | (144) | |||||||||||||||||||||||||||||||
| Asset group and business divestiture-related losses, net(3) | (29) | — | (53) | 26 | |||||||||||||||||||||||||||||||
| Impairment of goodwill and other assets(4) | — | — | (14) | (39) | |||||||||||||||||||||||||||||||
| LHX NeXt implementation costs(5) | (41) | (33) | (216) | (68) | |||||||||||||||||||||||||||||||
| FAS/CAS operating adjustment(6) | 7 | 27 | 20 | 72 | |||||||||||||||||||||||||||||||
| Total unallocated corporate expenses | $ | (338) | $ | (256) | $ | (1,097) | $ | (756) |
(1)Includes corporate items such as a portion of management and administration, legal, environmental, compensation, retiree benefits, other corporate expenses and eliminations. For the quarter and three quarters ended September 27, 2024, includes expense of $19 million and $42 million, respectively, from changes in the fair value of our deferred compensation plan liabilities. Additionally, for the three quarters ended September 27, 2024, includes expense of $15 million associated with an increase in legal reserve. For the quarter and three quarters ended September 29, 2023, includes income of $7 million and expense of $19 million, respectively, from changes in the fair value of our deferred compensation plan liabilities.
(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)See Note O: Acquisitions and Divestitures in the Notes for further information.
(4)For the three quarters ended September 27, 2024, includes a non-cash charge for impairment of goodwill related to our Antenna Disposal Group divestiture. See Note O: Acquisitions and Divestitures and Note E: Goodwill and Intangible Assets in the Notes for further information related to the Antenna Disposal Group. For the three quarters ended September 29, 2023, includes a $21 million non-cash charge for impairment of in-process R&D associated with a facility closure and an $18 million non-cash charge for impairment of a customer contract.
(5)Includes 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. For further information on our LHX NeXt initiative and implementation costs see Note N: Restructuring and Other Exit Costs in the Notes and the “General and Administrative Expenses” discussion above in this MD&A.
(6)Represents the difference between the service cost component of net periodic benefit income under our pension and OPEB plans and total CAS pension and OPEB cost. See Note P: Business Segment Information in the Notes for additional information regarding the FAS/CAS operating adjustment.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES
Cash Flows
| Three Quarters Ended | |||||||||||
| (In millions) | September 27, 2024 | September 29, 2023 | |||||||||
| Cash and cash equivalents, beginning of period | $ | 560 | $ | 880 | |||||||
| Operating Activities: | |||||||||||
| Net income | 1,056 | 1,072 | |||||||||
| Non-cash adjustments | 1,243 | 569 | |||||||||
| Changes in working capital | (358) | (94) | |||||||||
| Other, net | (511) | (240) | |||||||||
| Net cash provided by operating activities | 1,430 | 1,307 | |||||||||
| Net cash used in investing activities | (151) | (6,938) | |||||||||
| Net cash (used in) provided by financing activities | (1,309) | 5,254 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 9 | (4) | |||||||||
| Net decrease in cash and cash equivalents | (21) | (381) | |||||||||
| Cash and cash equivalents, end of period | $ | 539 | $ | 499 |
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Net cash provided by operating activities: The $123 million increase in net cash provided by operating activities in the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 was primarily due to decreases in transaction costs related to the AJRD acquisition, partially offset by $264 million more cash used to fund net working capital (i.e., receivables, contract assets, inventories, accounts payable and contract liabilities), primarily due to timing.
Net cash used in investing activities: The $6,787 million decrease in net cash used in investing activities in the three quarters ended September 27, 2024 compared with the three quarters ended September 29, 2023 was primarily due to the $6,688 million cash used for the acquisitions of Viasat, Inc.’s Tactical Data Links and AJRD, in addition to an $87 million increase in net cash proceeds from sale of businesses during the three quarters ended September 27, 2024.
Net cash (used in) provided by financing activities: The $6,563 million change in net cash used in financing activities in the three quarters ended September 27, 2024 compared with net cash provided by financing activities in the three quarters ended September 29, 2023 was primarily due to decreases in net proceeds from borrowings and net proceeds from issuance of commercial paper of $4,742 million and $2,455 million, respectively, partially offset by the decrease in repayments of borrowings of $550 million and the increase in proceeds from exercises of employee stock options of $93 million. See Note G: Debt and Credit Arrangements in the Notes for further information.
Cash and Cash Equivalents
At September 27, 2024, we had cash and cash equivalents of $539 million, of which $263 million was held by our foreign subsidiaries, a significant portion of which we believe can be repatriated to the U.S. with minimal tax cost.
Capital Structure and Resources
Described below are significant changes to our credit arrangements and debt during the three quarters ended September 27, 2024.
Credit Agreements
On January 26, 2024, we replaced the 2023 Credit Agreement with the 2024 Credit Agreement. At September 27, 2024, we had no outstanding borrowings under either our 2024 Credit Agreement or our 2022 Credit Agreement, and had available borrowing capacity of $2.3 billion, net of outstanding CP Program borrowings, and were in compliance with all covenants under both aforementioned credit agreements.
CP Program
Under the CP Program, we may issue unsecured commercial paper notes up to a maximum aggregate amount of $3.0 billion. Subject to notice and certain other requirements of the CP Program, we may increase the aggregate amount available for issuance up to $3.5 billion. From time to time, we use borrowings under the CP Program for general corporate purposes, including the funding of acquisitions, debt repayment, dividend payments and repurchases of our common stock.
During the three quarters ended September 27, 2024, we had a maximum outstanding balance of $2.8 billion and a daily average outstanding balance of $2.3 billion under our CP Program. We expect balances under the CP Program to remain elevated as compared to historical norms through fiscal 2025. For further information about our Credit Agreements and CP Program, see Note G: Debt and Credit Arrangements in the Notes.
Debt
At September 27, 2024, we had $11.7 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.
During the three quarters ended September 27, 2024, we closed the issuance and sale of $2.25 billion aggregate principal amount of the March Issued 2024 Notes and used the proceeds to repay the entire outstanding $2.25 billion drawn on Term Loan 2025. Additionally, we repaid the $350 million aggregate principal amount of our 3.95% 2024 Notes and closed the issuance and sale of $600 million aggregate principal amount of the 5.50% 2054 Notes. We used net proceeds from the 5.50% 2054 Notes to repay borrowings under our CP Program and intend to use such proceeds to repay the 3.832% 2025 Notes upon maturity. For further information about our long-term debt, see Note G: Debt and Credit Arrangements in the Notes and Note 8: Debt and Credit Arrangements in our Fiscal 2023 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 twelve 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. See Part I. Item 1A. Risk Factors in our Fiscal 2023 Form 10-K.
Based on our current business plan and revenue prospects, we believe that our existing cash, funds generated from operations, availability under our senior unsecured credit facilities and 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 and repayments of our debt securities at maturity for the next twelve months and the reasonably foreseeable future thereafter.
Our total additions of property, plant and equipment net of proceeds from the sale of property, plant and equipment for fiscal 2024 are expected to be approximately 2% of revenue. Other than operating expenses, cash uses for fiscal 2024 are expected to consist primarily of additions of property, plant and equipment, dividend payments, debt repayments, LHX NeXt implementation costs and repurchases under our share repurchase program. See “Capital Structure and Resources” and “Material Cash Requirements and Commercial Commitments” in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2023 Form 10-K for further information regarding our cash requirements.
Funding of Pension Plans
With respect to our U.S. qualified defined benefit pension plans, we intend to contribute annually no less than the required minimum funding thresholds. We do not expect to make material contributions to these plans in fiscal 2024.
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 defined benefit plan assets of $291 million as of September 27, 2024. See Note 9: Retirement Benefits in our Fiscal 2023 Form 10-K and Note H: Retirement Benefits in the Notes for further information regarding our pension plans.
Common Stock Repurchases
During the three quarters ended September 27, 2024, we used $512 million to repurchase 2.3 million shares of our common stock under our share repurchase program at an average price per share of $220.18, including commissions of $0.02 per share. During the three quarters ended September 27, 2024, $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.
At September 27, 2024, we had a remaining unused authorization under our repurchase program of $3.4 billion. See “Liquidity, Capital Resources and Financial Strategies” in our Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2023 Form 10-K and Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this Report for further information regarding common stock repurchases*.*
Dividends
On February 23, 2024, we announced that our Board of Directors (“Board”) increased the quarterly per share cash dividend rate on our common stock from $1.14 to $1.16, commencing with the dividend declared by our Board for the first quarter of fiscal 2024, for an annualized per share cash dividend rate of $4.64. See Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in our Fiscal 2023 Form 10-K for further information regarding our dividends.
Material Cash Requirements and Commercial Commitments
The amounts disclosed in our Fiscal 2023 Form 10-K include our material cash requirements and commercial commitments. Except for the level of indebtedness under our CP Program, the issuance of the 5.50% 2054 Notes and the establishment of our new 2024 Credit Facility, 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
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or to obtain insurance policies with our insurance carriers as disclosed in our Fiscal 2023 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 G: Debt and Credit Arrangements in the Notes.
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 CP Program, credit facilities, 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, borrow under our CP Program or increase the aggregate amount available under our CP Program or our credit facilities sufficient to service our obligations, we may be required to reduce capital expenditures, reduce or terminate our share repurchases, 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 2023 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.
Fiscal 2024 Impairment Tests. Information on interim impairment tests can be found in our Form 10-Q for the quarter ended March 29, 2024. These assessments indicated no impairment existed.
Impact of Recently Issued Accounting Pronouncements
There have been no new accounting pronouncements which became effective during the three quarters ended September 27, 2024 that have had a material impact on our Condensed Consolidated Financial Statements.
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