LHX 10-Q
L3harris Technologies, Inc. /De/ (LHX)
10-Q
2024-07-26
For: 2024-06-28
View Original
Added on
April 10, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the transition period from _______________ to ______________ | |||||
Commission File Number 1-3863
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code: (321 ) 727-9100
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| þ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No
The number of shares outstanding of the registrant’s common stock as of July 19, 2024 was 189,705,190 .
L3HARRIS TECHNOLOGIES, INC.
FORM 10-Q
For the Quarter Ended June 28, 2024
TABLE OF CONTENTS
| Page No. | |||||
| Part I. Financial Information: | |||||
ITEM 1. Financial Statements (Unaudited): | |||||
Condensed Consolidated Statement of Equity for the Quarter and Two Quarters Ended June 28, 2024 and June 30, 2023 | |||||
Notes to Condensed Consolidated Financial Statements | |||||
| Part II. Other Information: | |||||
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||||
ITEM 6. Exhibits | |||||
This Quarterly Report on Form 10-Q (this “Report”) contains trademarks, service marks and registered marks of L3Harris Technologies, Inc. and its subsidiaries. All other trademarks are the property of their respective owners.
_____________________________________________________________________
1
PART I. FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS. | ||||
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions, except per share amounts) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | ( | ( | ( | ( | |||||||||||||||||||
| General and administrative expenses | ( | ( | ( | ( | |||||||||||||||||||
| Operating income | |||||||||||||||||||||||
Non-service FAS pension income and other, net(1) | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Noncontrolling interests, net of income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to L3Harris Technologies, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Net income per common share attributable to L3Harris Technologies, Inc. common shareholders | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted-average common shares outstanding | |||||||||||||||||||||||
| Diluted weighted-average common shares outstanding | |||||||||||||||||||||||
(1)“FAS” is defined as Financial Accounting Standards.
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
_____________________________________________________________________
2
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation income (loss), net of income taxes | ( | ||||||||||||||||||||||
| Net unrealized income (loss) on hedging derivatives, net of income taxes | ( | ||||||||||||||||||||||
| Net unrecognized gains on postretirement obligations, net of income taxes | |||||||||||||||||||||||
| Other comprehensive income (loss) recognized during the period | ( | ||||||||||||||||||||||
| Reclassification adjustments for gains included in net income | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | ( | ||||||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | ( | ( | ( | ( | |||||||||||||||||||
| Total comprehensive income attributable to L3Harris Technologies, Inc. | $ | $ | $ | $ | |||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
_____________________________________________________________________
3
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| Two Quarters Ended | |||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Share-based matching contributions under defined contribution plans | |||||||||||
| Pension and other postretirement benefit plan income | ( | ( | |||||||||
| Deferred income taxes | ( | ( | |||||||||
| (Increase) decrease in: | |||||||||||
| Receivables, net | ( | ( | |||||||||
| Contract assets | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Other current assets | ( | ( | |||||||||
| Increase (decrease) in: | |||||||||||
| Accounts payable | ( | ||||||||||
| Contract liabilities | ( | ||||||||||
| Compensation and benefits | ( | ( | |||||||||
| Other accrued items | ( | ||||||||||
| Income taxes | |||||||||||
| Other operating activities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities | |||||||||||
| Net cash paid for acquired businesses | ( | ||||||||||
| Additions to property, plant and equipment | ( | ( | |||||||||
| Proceeds from sales of asset groups and businesses, net | |||||||||||
| Other investing activities | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Proceeds from borrowings, net of issuance cost | |||||||||||
| Repayments of borrowings | ( | ( | |||||||||
| Change in commercial paper, maturities under 90 days, net | |||||||||||
| Proceeds from commercial paper, maturities over 90 days | |||||||||||
| Repayments of commercial paper, maturities over 90 days | ( | ||||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Other financing activities | ( | ||||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
_____________________________________________________________________
4
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
| (In millions, except shares) | June 28, 2024 | December 29, 2023 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, net of allowances for collection losses of $ | |||||||||||
| Contract assets | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Assets of business held for sale | |||||||||||
| Total current assets | |||||||||||
| Non-current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity | |||||||||||
| Current liabilities | |||||||||||
| Short-term debt | $ | $ | |||||||||
| Current portion of long-term debt, net | |||||||||||
| Accounts payable | |||||||||||
| Contract liabilities | |||||||||||
| Compensation and benefits | |||||||||||
| Other accrued items | |||||||||||
| Income taxes payable | |||||||||||
| Liabilities of business held for sale | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Equity | |||||||||||
| Shareholders’ Equity: | |||||||||||
Common stock, $ | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
_____________________________________________________________________
5
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
| (In millions, except per share amounts) | Common Stock | Other Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||
| Balance at March 29, 2024 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | — | — | — | ||||||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | — | — | — | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding payments on share-based awards | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
Cash dividends ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | ( | ( | — | ( | ( | |||||||||||||||||||||||||||||
| Balance at June 28, 2024 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | — | — | — | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding payments on share-based awards | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
Cash dividends ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
_____________________________________________________________________
6
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
| (In millions, except per share amounts) | Common Stock | Other Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||
| Balance at December 29, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of income taxes | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | — | — | — | ||||||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | — | — | — | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding payments on share-based awards | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
Cash dividends ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | ( | ( | — | ( | ( | |||||||||||||||||||||||||||||
| Balance at June 28, 2024 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Balance as of December 30, 2022 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued under defined contribution plans | — | — | — | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax withholding payments on share-based awards | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Repurchases and retirement of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
Cash dividends ($ | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
_____________________________________________________________________
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements include the accounts of L3Harris Technologies, Inc. and its consolidated subsidiaries. As used in these notes to Condensed Consolidated Financial Statements (these “Notes”), the terms “L3Harris,” “Company,” “we,” “our” and “us” refer to L3Harris Technologies, Inc. and its consolidated subsidiaries. Intracompany transactions and accounts have been eliminated.
The accompanying Condensed Consolidated Financial Statements have been prepared by L3Harris in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all information and footnotes necessary for a complete presentation of financial condition, results of operations, cash flows and equity in conformity with GAAP for annual financial statements and are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements and these Notes and related disclosures. These estimates and assumptions are based on experience and other information available prior to issuance of the accompanying Condensed Consolidated Financial Statements and these Notes. Materially different results can occur as circumstances change and additional information becomes known.
Reclassifications
The classification of certain prior year amounts have been adjusted in our Condensed Consolidated Financial Statements and these Notes to conform to current year classifications.
Recently Issued Accounting Pronouncements
NOTE B: EARNINGS PER SHARE (“EPS”)
The weighted-average number of common shares outstanding used to compute basic and diluted EPS were as follows:
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
| Basic weighted-average common shares outstanding | |||||||||||||||||||||||
| Impact of dilutive share-based awards | |||||||||||||||||||||||
| Diluted weighted-average common shares outstanding | |||||||||||||||||||||||
_____________________________________________________________________
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Diluted EPS excludes the antidilutive impact of 0.9 million and 1.7 million weighted-average share-based awards outstanding for the quarter and two quarters ended June 28, 2024, respectively, and 0.8 million and 2.0 million weighted-average share-based awards outstanding for the quarter and two quarters ended June 30, 2023, respectively.
NOTE C: CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets mainly represent unbilled amounts typically resulting from revenue recognized exceeding amounts billed to customers for contracts utilizing the percentage of completion (“POC”) cost-to-cost revenue recognition method. Contract assets become receivables as we bill customers as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, upon achievement of contractual milestones or upon deliveries and, in certain arrangements, the customer may withhold payment of a small portion of the contract price until contract completion. Contract liabilities include advance payments and billings in excess of revenue recognized, including deferred revenue associated with extended product warranties. Contract assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period.
Contract assets and contract liabilities are summarized below:
| (In millions) | June 28, 2024 | December 29, 2023 | |||||||||
| Contract assets | $ | $ | |||||||||
| Contract liabilities, current | ( | ( | |||||||||
Contract liabilities, non-current(1) | ( | ( | |||||||||
| Net contract assets | $ | $ | |||||||||
_______________
(1)The non-current portion of contract liabilities is included as a component of the “Other long-term liabilities” line item in our Condensed Consolidated Balance Sheet.
There were no significant credit or impairment losses related to our contract assets during the quarter and two quarters ended June 28, 2024 or the quarter and two quarters ended June 30, 2023. Revenue recognized related to contract liabilities that were outstanding at the end of the respective prior fiscal year were $353 million and $1,048 million for the quarter and two quarters ended June 28, 2024, respectively, and $295 million and $898 million for the quarter and two quarters ended June 30, 2023, respectively.
NOTE D: INVENTORIES
Inventories are summarized below:
| (In millions) | June 28, 2024 | December 29, 2023 | |||||||||
Finished products | $ | $ | |||||||||
| Work in process | |||||||||||
| Materials and supplies | |||||||||||
Inventories | $ | $ | |||||||||
_____________________________________________________________________
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE E: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The assignment of goodwill and changes in the carrying amount of goodwill, by business segment, were as follows:
| (In millions) | SAS | IMS | CS | AR | Total | ||||||||||||||||||||||||
Balance at December 29, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Goodwill from AJRD acquisition(1) | — | — | — | ||||||||||||||||||||||||||
| Impairment of goodwill | ( | ( | |||||||||||||||||||||||||||
Goodwill decrease from divestitures | ( | ( | |||||||||||||||||||||||||||
| Currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||||||||
| Balance at June 28, 2024 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
_______________
(1)Represents the effect of measurement period adjustments associated with the acquisition of Aerojet Rocketdyne Holdings, Inc. (“AJRD”) during the two quarters ended June 28, 2024. See Note O: Acquisitions and Divestitures in these Notes for further information.
At June 28, 2024 and December 29, 2023, accumulated goodwill impairment losses totaled $80 1,126 355 no
Reallocation of Goodwill in Business Realignment. Effective in fiscal 2024, to better align our businesses, we adjusted our IMS segment by realigning our Electro Optical (“EO”) and Maritime sectors, which are also reporting units, splitting EO into two sectors, Global Optical Systems (“GOS”) and Defense Electronics (“DE”), and moving one EO business to the Maritime sector. GOS and DE represent one reporting unit. Immediately before and after the realignment, we performed a quantitative impairment assessment under our former and new reporting unit structure. These assessments indicated no impairment existed either before or after the realignment.
Allocation of Goodwill in Divestiture. As described in more detail in Note O: Acquisitions and Divestitures, during the quarter ended June 28, 2024, we completed the divestiture of our antenna and related business (“Antenna Disposal Group”). As the Antenna Disposal Group represents the disposal of a portion of the SAS reporting unit, which is also the SAS segment, we assigned $93 million of goodwill to the Antenna Disposal Group on a relative fair value basis during the quarter ended June 28, 2024. We performed a quantitative impairment assessment on goodwill assigned to the Antenna Disposal Group and a qualitative impairment assessment on the goodwill assigned to the retained businesses of the reporting unit. As a result of these tests, we determined that the fair value of the Antenna Disposal Group was below its carrying value and accordingly recorded a non-cash charge for impairment of $14
Other Intangible Assets
Other identifiable intangible assets, net are summarized below:
| June 28, 2024 | December 29, 2023 | ||||||||||||||||||||||||||||||||||
| (In millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
Developed technologies | ( | ( | |||||||||||||||||||||||||||||||||
Trade names — divisions | ( | ( | |||||||||||||||||||||||||||||||||
Other, including contract backlog | ( | ( | |||||||||||||||||||||||||||||||||
| Total finite-lived identifiable intangible assets | ( | ( | |||||||||||||||||||||||||||||||||
| Trade names — corporate | — | — | |||||||||||||||||||||||||||||||||
| Total identifiable intangible assets, net | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
For further description of our accounting policies related to intangible assets acquired in the AJRD acquisition, see Note O: Acquisitions and Divestitures in these Notes, and for our accounting policies related to all other intangible assets, see Note 6: Goodwill and Intangible Assets in our Fiscal 2023 Form 10-K.
_____________________________________________________________________
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization expense for identifiable finite-lived intangible assets was $215 million and $432 million for the quarter and two quarters ended June 28, 2024, respectively, and $173 million and $338 million for the quarter and two quarters ended June 30, 2023, respectively.
Future estimated amortization expense for identifiable intangible assets is as follows:
| (In millions) | |||||
| Next 12 months | $ | ||||
| Months 13-24 | |||||
| Months 25-36 | |||||
| Months 37-48 | |||||
| Months 49-60 | |||||
| Thereafter | |||||
| Total | $ | ||||
NOTE F: INCOME TAXES
_____________________________________________________________________
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G: DEBT AND CREDIT ARRANGEMENTS
Long-Term Debt
Long-term debt, net is summarized below:
| (In millions) | June 28, 2024 | December 29, 2023 | |||||||||
| Variable-rate debt: | |||||||||||
Term loan, due November 21, 2025 (“Term Loan 2025”) | $ | $ | |||||||||
| Fixed-rate debt: | |||||||||||
| Total variable and fixed-rate debt | |||||||||||
| Financing lease obligations and other debt | |||||||||||
| Long-term debt, including the current portion of long-term debt | |||||||||||
| Plus: unamortized bond premium | |||||||||||
| Less: unamortized discounts and issuance costs | ( | ( | |||||||||
| Long-term debt, including the current portion of long-term debt, net | |||||||||||
| Less: current portion of long-term debt, net | ( | ( | |||||||||
| Total long-term debt, net | $ | $ | |||||||||
Long-Term Debt Issued
Fixed-Rate Debt. On March 13, 2024, we closed the issuance and sale of $2.25 billion aggregate principal amount of new long-term fixed-rate debt consisting of the 5.05% 2029 Notes, the 5.25% 2031 Notes, and the 5.35% 2034 Notes (collectively, the “2024 Notes”). The 2024 Notes were used to repay Term Loan 2025, including related fees and expenses, which had an outstanding balance of $2.25 billion at December 29, 2023.
Interest on the 2024 Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2024.
_____________________________________________________________________
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We may redeem the 5.05% 2029 Notes, 5.25% 2031 Notes and 5.35% 2034 Notes prior to May 1, 2029, April 1, 2031 and March 1, 2034, respectively, in whole or in part, at our option, at a redemption price equal to the greater of: (i) the sum of the present values of the remaining scheduled payments of the principal and interest thereon discounted to the redemption date on a semi-annual basis at the “Treasury Rate,” as defined in the 2024 Notes, plus 15 basis points for the 5.05% 2029 Notes and 20 100 % of the principal amount of the respective notes plus, in either case, accrued interest and unpaid interest thereon to the redemption date. On or after May 1, 2029, April 1, 2031 and March 1, 2034, we may redeem the 5.05% 2029 Notes, 5.25% 2031 Notes, and 5.35% 2034 Notes respectively, at a redemption price equal to 100 % of the principal amount being redeemed plus accrued and unpaid interest thereon to the redemption date.
We incurred a combined total of $20 million of debt issuance costs for the 2024 Notes, which are being amortized over the life of each respective note. Such amortization is included as a component of the “Interest expense, net” line item in our Condensed Consolidated Statement of Operations.
Long-Term Debt Repayments
On March 14, 2024, we repaid the entire outstanding $2.25 billion drawn on Term Loan 2025, which at time of repayment had a variable interest rate of 6.7 %, with proceeds from the issuance of the 2024 Notes, which bear fixed interest rates between 5.05 % and 5.35 %. Additionally, during the quarter ended June 28, 2024, we repaid the $350 million aggregate principal amount of our 3.95% 2024 Notes.
Credit Agreements
On January 26, 2024, we established a new $1.5 billion, 364 -day senior unsecured revolving credit facility (“2024 Credit Facility”) by entering into a 364 -day credit agreement maturing no later than January 24, 2025 (“2024 Credit Agreement”) with a syndicate of lenders. We may extend the maturity of any loans outstanding under the 2024 Credit Agreement by one year , subject to the satisfaction of certain conditions. The 2024 Credit Agreement replaces the prior $2.4 billion 364 -Day Credit Agreement (“2023 Credit Agreement”).
At our election, borrowings under the 2024 Credit Agreement, which are designated in U.S. Dollars, bear interest at the sum of the term secured overnight financing rate or the Base Rate (as defined in the 2024 Credit Agreement), plus an applicable margin that varies based on the ratings of our senior unsecured long-term debt securities (“Senior Debt Ratings”). In addition to interest payable on the principal amount of indebtedness outstanding, we are required to pay a quarterly unused commitment fee that varies based on our Senior Debt Ratings.
The 2024 Credit Agreement also contains representations, warranties, covenants and events of default that are substantially similar to the existing Revolving Credit Agreement, dated as of July 29, 2022 (“2022 Credit Agreement”) which established a $2.0 billion, five-year senior unsecured revolving credit facility. For a description of the 2022 Credit Agreement and related covenants, see Note 8: Debt and Credit Arrangements in our Fiscal 2023 Form 10-K.
At June 28, 2024, we had no 1.4
See Note 8: Debt and Credit Arrangements in our Fiscal 2023 Form 10-K for additional information regarding our 2022 Credit Agreement and our 2023 Credit Agreement.
Commercial Paper Program
On January 26, 2024, we lowered the maximum amount available under our CP Program to $3.0 billion from $3.9 billion in accordance with the terms of the CP Program. The CP Program is supported by amounts available under the 2022 Credit Agreement and the 2024 Credit Agreement.
The commercial paper notes are sold at par less a discount representing an interest factor or, if interest bearing, at par, and the maturities vary but may not exceed 397 days from the date of issue. The commercial paper notes will rank at least pari passu with all other unsecured and unsubordinated indebtedness.
At June 28, 2024 and December 29, 2023, we had $2.1 billion and $1.6 billion in outstanding notes under our CP Program, respectively, which is included as a component of the “Short-term debt” line item in our Condensed Consolidated Balance Sheet. The outstanding notes under our CP Program had a weighted-average interest rate of 5.79 % and 5.95 % at June 28, 2024 and December 29, 2023, respectively.
_____________________________________________________________________
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE H: RETIREMENT BENEFITS
The following tables provide the components of our net periodic benefit income for our defined benefit plans, including defined benefit pension plans and other postretirement benefit (“OPEB”) plans:
| Quarter Ended June 28, 2024 | Quarter Ended June 30, 2023 | ||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Pension | Other Benefits | |||||||||||||||||||
Net periodic benefit income | |||||||||||||||||||||||
| Operating | |||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Non-operating | |||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of net actuarial gain | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of prior service (credit) cost | ( | ( | |||||||||||||||||||||
Non-service cost periodic benefit income | ( | ( | ( | ( | |||||||||||||||||||
| Net periodic benefit income | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Two Quarters Ended June 28, 2024 | Two Quarters Ended June 30, 2023 | ||||||||||||||||||||||
| (In millions) | Pension | Other Benefits | Pension | Other Benefits | |||||||||||||||||||
Net periodic benefit income | |||||||||||||||||||||||
| Operating | |||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Non-operating | |||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of net actuarial gain | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of prior service (credit) cost | ( | ( | |||||||||||||||||||||
Non-service cost periodic benefit income | ( | ( | ( | ( | |||||||||||||||||||
| Net periodic benefit income | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The service cost component of net periodic benefit income is included in the “Cost of revenue” and “General and administrative expenses” line items in our Condensed Consolidated Statement of Operations. The non-service cost components of net periodic benefit income are included in the “Non-service FAS pension income and other, net” line item in our Condensed Consolidated Statement of Operations.
NOTE I: STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION
At June 28, 2024, we had stock options and other share-based compensation awards outstanding under three shareholder-approved employee stock incentive plans, including our 2024 Equity Incentive Plan, which was approved by our shareholders during the quarter ended June 28, 2024, as well as under employee stock incentive plans assumed by L3Harris (collectively, the “L3Harris SIPs”). Total share-based compensation expense was $27 million and $53 million for the quarter and two quarters ended June 28, 2024, respectively, and $22 million and $45 million for the quarter and two quarters ended June 30, 2023, respectively.
_____________________________________________________________________
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Awards granted to participants under L3Harris SIPs and the weighted-average grant-date fair value per share or unit during the two quarters ended June 28, 2024 and June 30, 2023 were as follows:
| Two Quarters Ended June 28, 2024 | Two Quarters Ended June 30, 2023 | ||||||||||||||||||||||
| (In millions, except per share/units amounts) | Shares or Units | Weighted-Average Grant-Date Fair Value Per Share or Unit | Shares or Units | Weighted-Average Grant-Date Fair Value Per Share or Unit | |||||||||||||||||||
Stock option shares granted(1) | $ | $ | |||||||||||||||||||||
Restricted stock units granted(2) | $ | $ | |||||||||||||||||||||
Performance share units granted(3) | $ | $ | |||||||||||||||||||||
_______________
(1)Other than certain stock options granted in connection with new hires, our stock options generally ratably vest in equal amounts over a three-year period.
(2)Other than certain restricted stock units granted in connection with new hires, our restricted stock units generally cliff vest after three-years .
(3)Our performance share units are subject to performance criteria and generally vest after the three-year performance period.
The aggregate number of shares of our common stock issued under L3Harris SIPs, net of shares withheld for tax purposes, was 0.3 million and 0.8 million for the quarter and two quarters ended June 28, 2024, respectively, and was 0.1 million and 0.4 million for the quarter and two quarters ended June 30, 2023, respectively.
See Note 10: Stock Options and Other Share-Based Compensation in our Fiscal 2023 Form 10-K for additional information regarding the L3Harris SIPs.
NOTE J: ACCUMULATED OTHER COMPREHENSIVE LOSS (“AOCL”)
At June 28, 2024 and December 29, 2023, AOCL was $234 million and $198 million, respectively. Changes in AOCL, net of tax, consisted of $21 million of other comprehensive loss before reclassifications, primarily from currency translation losses, and $15 million of net gains reclassified to earnings, primarily associated with amortization of unrecognized postretirement benefit plan obligations.
At June 30, 2023 and December 30, 2022, AOCL was $263 million and $288 million, respectively. Changes in AOCL, net of tax, consisted of $44 million of other comprehensive income before reclassifications, primarily from currency translation gains, net of $19 million of net gains reclassified to earnings, primarily associated with amortization of unrecognized postretirement benefit plan obligations.
NOTE K: FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.
•Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed using the best information available in the circumstances.
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the external pricing services, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including net asset value (“NAV”). Additionally, in certain circumstances, the NAV reported by an asset manager may be adjusted when sufficient evidence indicates NAV is not representative of fair value.
_____________________________________________________________________
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents assets and liabilities measured at fair value on a recurring basis (at least annually) at June 28, 2024 and December 29, 2023:
| June 28, 2024 | December 29, 2023 | ||||||||||||||||||||||
| (In millions) | Total | Level 1 | Total | Level 1 | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
Deferred compensation plan assets:(1) | |||||||||||||||||||||||
| Equity and fixed income securities | $ | $ | $ | $ | |||||||||||||||||||
| Investments measured at NAV: | |||||||||||||||||||||||
| Corporate-owned life insurance | |||||||||||||||||||||||
| Total fair value of deferred compensation plan assets | $ | $ | |||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Deferred compensation plan liabilities:(2) | |||||||||||||||||||||||
| Equity securities and mutual funds | $ | $ | $ | $ | |||||||||||||||||||
| Investments measured at NAV: | |||||||||||||||||||||||
| Common/collective trusts and guaranteed investment contracts | |||||||||||||||||||||||
| Total fair value of deferred compensation plan liabilities | $ | $ | |||||||||||||||||||||
_______________
(1)Represents diversified assets held in “rabbi trusts” primarily associated with our non-qualified deferred compensation plans, which we include in the “Other current assets” and “Other non-current assets” line items in our Condensed Consolidated Balance Sheet.
(2)Primarily represents obligations to pay benefits under certain non-qualified deferred compensation plans, which we include in the “Compensation and benefits” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet. Under these plans, participants designate investment options (including stock and fixed-income funds), which serve as the basis for measurement of the notional value of their accounts.
The following table presents the carrying amounts and estimated fair values of long-term debt that is not carried at fair value in our Condensed Consolidated Balance Sheet:
| June 28, 2024 | December 29, 2023 | ||||||||||||||||||||||
| (In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
Term Loan 2025(1) | $ | $ | $ | $ | |||||||||||||||||||
All other long-term debt, net (including current portion)(2) | |||||||||||||||||||||||
| Long-term debt, including the current portion of long-term debt, net | $ | $ | $ | $ | |||||||||||||||||||
_______________
(1)The carrying value of Term Loan 2025 approximates fair value due to its variable interest rate.
(2)The fair value was estimated using a market approach based on quoted market prices for our debt traded in the secondary market. If measured at fair value, it would be categorized in Level 2 of the fair value hierarchy.
The fair value of our short-term debt approximates the carrying value due to its short-term nature. If measured at fair value, the commercial paper would be classified as level 2 and other short-term debt would be classified as level 3 within the fair value hierarchy. See Note G: Debt and Credit Arrangements in these Notes and Note 8: Debt and Credit Arrangements in our Fiscal 2023 Form 10-K for further information regarding our long-term debt and CP Program.
See Note E: Goodwill and Other Intangible Assets and Note O: Acquisitions and Divestitures in these Notes and Note 13: Acquisitions, Divestitures and Asset Sales in our Fiscal 2023 Form 10-K for additional information regarding fair value measurements associated with acquisitions, divestitures and goodwill.
_____________________________________________________________________
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE L: CHANGES IN ESTIMATES
Many of our contracts utilize the POC cost-to-cost method of revenue recognition. A single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. At the outset of each contract, we gauge its complexity and associated risks and establish an estimated total cost at completion. Due to the long-term nature of many of these contracts, developing these estimates often requires judgment. After establishing the estimated total cost at completion, we follow a standard estimate at completion (“EAC”) process in which we review the progress and performance on our ongoing contracts. As the contracts progress, we may successfully retire risks or complexities and may add additional risks, and we adjust our estimated total cost at completion. For additional discussion of our revenue recognition policies and our EAC process, see “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.
Net EAC adjustments had the following impact to earnings for the periods presented:
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions, except per share amounts) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
Net EAC adjustments, before income taxes | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Net EAC adjustments, net of income taxes | ( | ( | |||||||||||||||||||||
| Net EAC adjustments, net of income taxes, per diluted share | ( | ( | |||||||||||||||||||||
NOTE M: BACKLOG
Backlog, which is the equivalent of our remaining performance obligations, represents the future revenue we expect to recognize as we perform on our current contracts. Backlog comprises both funded backlog (i.e., firm orders for which funding is authorized and appropriated) and unfunded backlog. Backlog excludes unexercised contract options and potential orders under ordering-type contracts, such as indefinite-delivery, indefinite-quantity contracts.
At June 28, 2024, our ending backlog was $31.7 billion. We expect to recognize approximately 45 % of the revenue associated with this backlog over the next twelve months and an additional 30 % over the following twelve months , with the remainder to be recognized thereafter.
NOTE N: RESTRUCTURING AND OTHER EXIT COSTS
From time to time, we record charges for restructuring and other exit activities related to changes in management structure and fundamental reorganizations that affect the nature and focus of operations, such as our LHX NeXt initiative, described below. Such charges may include severance benefits and costs to consolidate facilities or relocate employees. We record these charges at their fair value when incurred. In cases where employees are required to render service until they are terminated in order to receive the termination benefits and will be retained beyond the minimum retention period, we record the expense ratably over the future service period.
LHX NeXt Initiative. LHX NeXt is our initiative to reduce cost and transform our systems and processes to increase agility and competitiveness, as discussed in more detail under the “Operating Environment, Strategic Priorities and Key Performance Measures” section in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2023 Form 10-K.
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17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes to our liabilities for restructuring and other exit costs during the two quarters ended June 28, 2024 were as follows:
_______________
| (In millions) | Employee Severance Related Costs | ||||
Balance at December 29, 2023(1) | $ | ||||
Additional provisions(2) | |||||
| Payments | ( | ||||
| Total changes | |||||
Balance at June 28, 2024(1) | $ | ||||
(1)Our liabilities, which we expect will be paid in the next twelve months, are included in the “Compensation and benefits” line item in our Condensed Consolidated Balance Sheet.
NOTE O: ACQUISITIONS AND DIVESTITURES
Acquisition of AJRD
On July 28, 2023, we acquired AJRD, a technology-based engineering and manufacturing company that develops and produces missile solutions and technologies for strategic defense, missile defense, and hypersonic and tactical systems, as well as space propulsion and power systems for national security space and exploration missions. The acquisition provides us access to a new market. We acquired 100 % of AJRD for a total net purchase price of $4,715 million. The acquisition was financed through the issuance and sale of $3.25 billion aggregate principal amount of new long-term fixed-rate debt consisting of the 5.4% 2027 Notes, the 5.4% 2033 Notes and the 5.6% 2053 Notes (collectively, the “AJRD Notes”) and a draw down under the 2023 Credit Agreement. See Note 8: Debt and Credit Arrangements in our Fiscal 2023 Form 10-K for further information regarding the financing of the AJRD acquisition.
Net assets and results of operations of AJRD are reflected in our financial results commencing on July 28, 2023, the acquisition date, and are reported in our AR segment, which is also the AR reporting unit, except for certain assets and liabilities recorded at corporate headquarters.
We accounted for the acquisition of AJRD using the acquisition method of accounting, which required us to measure identifiable assets acquired and liabilities assumed in the acquiree at their fair values as of the acquisition date, with the excess of the consideration transferred over those fair values recorded as goodwill. Our preliminary fair value estimates and assumptions are subject to change as we obtain additional information over the measurement period and our measurement of certain assets and contingencies, such as intangible assets, property, plant and equipment, real estate held for development and leasing, loss contracts, environmental matters and related deferred tax impacts remain preliminary for completion of the related valuations.
| (In millions) | July 28, 2023 | ||||
| Cash consideration paid for AJRD outstanding common stock & equity awards | $ | ||||
| AJRD debt settled by L3Harris | |||||
| Cash consideration paid | |||||
| Less cash acquired | ( | ||||
| Fair value of consideration transferred | $ | ||||
_____________________________________________________________________
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the preliminary allocation of the fair value of consideration transferred to assets acquired and liabilities assumed as of the acquisition date:
| July 28, 2023 | |||||||||||||||||
| (In millions) | Preliminary | Measurement Period Adjustments, Net(1) | Preliminary Adjusted | ||||||||||||||
| Receivables | $ | $ | — | $ | |||||||||||||
| Contract assets | ( | ||||||||||||||||
| Inventories | — | ||||||||||||||||
| Other current assets | |||||||||||||||||
| Property, plant and equipment | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Other intangible assets | — | ||||||||||||||||
| Other non-current assets | |||||||||||||||||
| Total assets acquired | $ | $ | $ | ||||||||||||||
| Current portion of long-term debt, net | $ | $ | — | $ | |||||||||||||
| Accounts payable | — | ||||||||||||||||
| Contract liabilities | |||||||||||||||||
| Compensation and benefits | |||||||||||||||||
| Income taxes payable | ( | ||||||||||||||||
| Other accrued items | |||||||||||||||||
| Long-term debt, net | — | ||||||||||||||||
| Deferred income taxes | ( | ||||||||||||||||
| Other long-term liabilities | |||||||||||||||||
| Total liabilities assumed | $ | $ | $ | ||||||||||||||
| Fair value of consideration transferred | $ | $ | $ | ||||||||||||||
_______________
(1)Fair value adjustments during the measurement period primarily related to EAC updates for circumstances existing at the acquisition date, including updates to the forward loss provision and off-market customer contract reserve described below, refinements to the fair value of fixed assets, as well as corresponding adjustments to the deferred tax liability account which was partially offset by the release of a portion of the uncertain tax position previously recorded by AJRD.
We determined the fair value of assets acquired and liabilities assumed by using available market information and various valuation methods that require judgment related to estimates. Our accounting for the acquisition of AJRD remains preliminary. Amounts recorded associated with these assets and liabilities are based on calculations and estimates. Our estimates and assumptions are subject to change as we obtain additional information during the measurement period (up to one year from the acquisition date). Any potential adjustments made could be material in relation to the values presented above.
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19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Intangible Assets. All finite-lived intangible assets identified in the AJRD acquisition are subject to amortization. The preliminary fair value and weighted-average amortization period of identifiable intangible assets acquired as of the acquisition date are as follows:
| Total | Useful Lives | ||||||||||
| (In millions) | (In Years) | ||||||||||
Customer relationships: | |||||||||||
| Backlog | $ | ||||||||||
| Government programs | |||||||||||
| Total customer relationships | |||||||||||
| Trade names | |||||||||||
| Total identifiable intangible assets acquired | $ | ||||||||||
The fair value of intangible assets is estimated using the relief from royalty method for the acquired trade names and the multi-period excess earnings method for the acquired customer relationships. Both of these level 3 fair value methods are income-based valuation approaches, which require judgment to estimate appropriate discount rates, royalty rates related to the trade names intangible assets, revenue growth attributable to the intangible assets and remaining useful lives.
Forward Loss Provision. We have recorded a preliminary forward loss provision of $357 million which was included in the “Other accrued items” line item in our Condensed Consolidated Balance Sheet. Since the completion of the acquisition of AJRD, we have undertaken significant operational efforts to further understand the root cause of identified preexisting manufacturing and supply chain challenges resulting in delivery delays, primarily related to certain Missile Solutions programs. We have identified operational activities necessary to remedy these challenges and inefficiencies and the incremental costs required as compared to its initial estimates and actual costs incurred. The incremental forward loss provisions relate to the increased cost estimates of labor and material to remedy the underlying preexisting technical and supply chain challenges. These cost increases impacted both cost-plus and fixed-price contracts in proportions that are consistent with the ratio of the overall AJRD revenue by contract type. The forward loss provisions will be recognized as a reduction to cost of sales as we incur actual costs associated with these estimates in to satisfying the associated performance obligations. There will be no net impact on our Condensed Consolidated Statement of Operations. We recognized $47 million and $61 million of amortization related to the forward loss provision in the quarter and two quarters ended June 28, 2024, respectively.
Off-market Customer Contracts. We have identified certain customer contractual obligations as of the acquisition date with economic returns that are higher or lower than could be realized in market transactions and have recorded assets or liabilities for the preliminary acquisition date fair value of the off-market components. The preliminary acquisition date fair value of the off-market components is a net liability of $194 million, consisting of $49 million and $145 million included in the “Other accrued items” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet, respectively, and excludes any amounts already recognized in forward loss provisions (see discussion in the preceding paragraph). Additional provisions to off-market customer contracts relate to labor and material cost increases primarily associated with supply chain and manufacturing challenges and inefficiencies. These cost increases impacted both cost-plus and fixed-price contracts in proportions that are consistent with the ratio of the overall AJRD revenue by contract type. We measured the fair value of these components as the amount by which the terms of the contract with the customer deviates from the terms that a market participant could have achieved at the acquisition date. The off-market components of these contracts will be recognized as an increase to revenue as we incur costs to satisfy the associated performance obligations. We recognized $22 million and $30 million of amortization related to off-market contract liabilities in the quarter and two quarters ended June 28, 2024, respectively.
Goodwill. The $2,861 million of goodwill recognized is attributable to AJRD’s market presence as one of the two primary providers of advanced propulsion and power systems for nearly every major U.S. government space and missile program, the assembled workforce and established operating infrastructure. The acquired goodwill is not tax deductible. See Note E: Goodwill and Other Intangible Assets in these Notes for further information.
Financial Results. See Note P: Business Segment Information in these Notes for the AR segment financial results for the quarter and two quarters ended June 28, 2024.
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20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pending Divestiture of Commercial Aviation Solutions (“CAS Disposal Group”)
During the quarter ended December 29, 2023, we entered into a definitive agreement to sell our CAS Disposal Group for a cash purchase price of $700 million, with additional contingent consideration of up to $100 million, subject to customary purchase price adjustments and closing conditions as set forth in the agreement. As of June 28, 2024, the fair value less estimated costs to sell of the CAS Disposal Group was $875 million, inclusive of consideration related to noncontrolling interest and accumulated other comprehensive income. Income before income taxes for the quarter and two quarters ended June 28, 2024 was $23 million and $44 million, respectively, and for the quarter and two quarters ended June 30, 2023 was $15 million and $32 million, respectively. The CAS Disposal Group, which is part of our IMS segment, provides integrated aircraft avionics, pilot training and data analytics services for the commercial aviation industry. The transaction is expected to close in fiscal 2024.
In connection with the preparation of our financial statements for fiscal 2023, we concluded that goodwill related to the CAS Disposal Group was impaired and we recorded a non-cash impairment charge of $296 million, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Operations in our Fiscal 2023 Form 10-K. See Note 6: Goodwill and Intangible Assets in our Fiscal 2023 Form 10-K. Additionally, we recognized a pre-tax loss of $77 million included in the “Asset group and business divestiture-related (losses) gains, net” line item in our Consolidated Statement of Operations in our Fiscal 2023 Form 10-K. During the quarter ended June 28, 2024, we recognized an additional pre-tax loss of $15 million, due to increases in the net assets of the disposal group and costs to sell, partially offset by an increase in the fair value of the disposal group. The loss is included in the General and administrative expenses” line item in our Condensed Consolidated Statement of Operations for the quarter and two quarters ended June 28, 2024.
The carrying amounts of assets and liabilities of the CAS Disposal Group classified as held for sale in our Condensed Consolidated Balance Sheet were as follows:
| (In millions) | June 28, 2024 | December 29, 2023 | |||||||||
| Receivables, net | $ | $ | |||||||||
| Contract assets | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other non-current assets | |||||||||||
| Valuation allowance | ( | ( | |||||||||
| Total assets held for sale | $ | $ | |||||||||
| Accounts payable | $ | $ | |||||||||
| Contract liabilities | |||||||||||
| Compensation and benefits | |||||||||||
| Other accrued items | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities held for sale | $ | $ | |||||||||
_____________________________________________________________________
21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Divestiture of Antenna Disposal Group
On May 31, 2024, we completed the divestiture of our Antenna Disposal Group, which provides a variety of airborne and ground-based antennas and test equipment, to Kanders & Company, Inc. for net cash proceeds of $166 million (after selling costs and purchase price adjustments) and a $25 million note receivable, included in Other non-current assets line item in our Condensed Consolidated Balance Sheet at June 28, 2024.
The carrying amounts of assets and liabilities included in the Antenna Disposal Group sale on May 31, 2024 were $265 million and $65 million, respectively. During the quarter ended June 28, 2024, $93 million of goodwill was assigned to the Antenna Disposal Group on a relative fair value basis. In connection with the preparation of our financial statements for the quarter ended June 28, 2024, we tested goodwill assigned to the Antenna Disposal Group and goodwill assigned to the retained businesses of the SAS reporting unit for impairment and concluded that goodwill related to the Antenna Disposal Group was impaired. As a result, we recorded a non-cash charge for impairment of $14
In connection with the sale, we recognized a pre-tax loss of $9 million included in the “General and administrative expenses” line item in our Condensed Consolidated Statement of Operations for the quarter and two quarters ended June 28, 2024. Operating results of the Antenna Disposal Group reported in our SAS segment through the date of divestiture were not material for the quarter and two quarters ended June 28, 2024 or the quarter and two quarters ended June 30, 2023.
Divestiture of Visual Information Solutions (“VIS”)
On April 6, 2023, we completed the sale of VIS for a sale price of $70 million and recognized a pre-tax gain of $26 million included in the “General and administrative expenses” line item in our Consolidated Statement of Operations for the fiscal year ended December 29, 2023 in our Fiscal 2023 Form 10-K. After selling costs and purchase price adjustments, the net cash proceeds for the sale of VIS were $71 million. The operating results of VIS were reported in the SAS segment through the date of divestiture.
The carrying amounts of the assets and liabilities of VIS were classified as held for sale in our Consolidated Balance Sheet as of December 30, 2022 in our Fiscal 2023 Form 10-K.
Fair Value of Businesses and Goodwill Allocation
For purposes of allocating goodwill to the disposal groups that represent a portion of a reporting unit, we determine the fair value of each disposal group based on the respective negotiated selling price, and the fair value of the retained businesses of the respective reporting unit based on a combination of market-based and income-based valuation techniques, utilizing quoted market prices, comparable publicly reported transactions and projected discounted cash flows. These fair value determinations are categorized as level 3 in the fair value hierarchy due to their use of internal projections and unobservable measurement inputs. See Note E: Goodwill and Other Intangible Assets and Note K: Fair Value Measurements in these Notes for additional information.
NOTE P: BUSINESS SEGMENT INFORMATION
We structure our operations primarily around the products, systems and services we sell and the markets we serve and report our financial results in the following four
•SAS: including space payloads, sensors and full-mission solutions; classified intelligence and cyber; avionics; electronic warfare; and mission networks for air traffic management operations;
•IMS: including multi-mission intelligence, surveillance and reconnaissance (“ISR”) systems; passive sensing and targeting; electronic attack; autonomy; power and communications; networks; sensors; and the CAS Disposal Group, which includes aviation products and pilot training operations, see Note O: Acquisitions and Divestitures;
•CS: including tactical communications with global communications solutions; broadband communications; integrated vision solutions; and public safety radios, system applications and equipment; and
•AR: including missile solutions with propulsion technologies for strategic defense, missile defense, and hypersonic and tactical systems; and space propulsion and power systems for national security space and exploration missions.
Business Segment Financial Information
Segment revenue, segment operating income and a reconciliation of segment operating income to total income before income taxes were as follows:
_______________
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| SAS | $ | $ | $ | $ | |||||||||||||||||||
| IMS | |||||||||||||||||||||||
| CS | |||||||||||||||||||||||
| AR | ** | ** | |||||||||||||||||||||
| Corporate eliminations | ( | ( | ( | ( | |||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Income before Income Taxes | |||||||||||||||||||||||
| Operating income: | |||||||||||||||||||||||
SAS | $ | $ | $ | $ | |||||||||||||||||||
IMS | |||||||||||||||||||||||
| CS | |||||||||||||||||||||||
| AR | ** | ** | |||||||||||||||||||||
| Total segment | |||||||||||||||||||||||
| Total unallocated corporate expenses | ( | ( | ( | ( | |||||||||||||||||||
| Total operating income | |||||||||||||||||||||||
| Non-service FAS pension income and other, net | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
** AR is a reportable segment established during the quarter ended September 29, 2023, which consists of operations of AJRD. As such, there is no comparable prior year information.
Unallocated Corporate Expenses. Total unallocated corporate expenses include corporate items such as a portion of management and administration, legal, environmental, compensation, retiree benefits, other corporate expenses and eliminations and the FAS/Cost Accounting Standards (“CAS”) operating adjustment. Total unallocated corporate expenses also include the portion of corporate costs not included in management’s evaluation of segment operating performance, such as amortization of acquisition-related intangibles; additional cost of revenue related to the fair value step-up in inventory sold; merger, acquisition, and divestiture-related expenses; asset group and business divestiture-related (losses) gains, net and any related impairment of goodwill; impairment of other assets; LHX NeXt implementation costs; and other items.
FAS/CAS Pension Operating Adjustment. In accordance with CAS, we allocate a portion of pension and OPEB plan costs to our U.S. Government contracts. However, our Condensed Consolidated Financial Statements require pension and OPEB plan income or expense to be calculated in accordance with FAS requirements under GAAP. The “FAS/CAS operating adjustment” line item in the table below represents the difference between the service cost component of net periodic benefit income under our pension and OPEB plans and total CAS pension and OPEB cost. The non-service cost components of net periodic benefit income under our pension and OPEB plans are included as components of the “Non-service FAS pension income and other, net” line item in our Condensed Consolidated Statement of Operations. See Note H: Retirement Benefits in these Notes for more information on the composition of non-service FAS pension income.
The table below is a reconciliation of the FAS/CAS operating adjustment:
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
| FAS pension service cost | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Less: CAS pension cost | ( | ( | ( | ( | |||||||||||||||||||
| FAS/CAS operating adjustment | |||||||||||||||||||||||
| Non-service FAS pension income | |||||||||||||||||||||||
| FAS/CAS pension adjustment, net | $ | $ | $ | $ | |||||||||||||||||||
Disaggregation of Revenue
We disaggregate revenue for all four
| Quarter Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| June 28, 2024 | June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | SAS | IMS | CS | AR | SAS | IMS | CS | AR | |||||||||||||||||||||||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||||||||||||||||||||||||||
| Prime contractor | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Subcontractor | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Intersegment | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Total segment | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||||||||||||||||||||||||||
Fixed-price(1) | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Cost-reimbursable | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Intersegment | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Total segment | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| International | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Intersegment | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Total segment | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Two Quarters Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| June 28, 2024 | June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | SAS | IMS | CS | AR | SAS | IMS | CS | AR | |||||||||||||||||||||||||||||||||||||||
| Revenue By Customer Relationship | |||||||||||||||||||||||||||||||||||||||||||||||
| Prime contractor | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Subcontractor | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Intersegment | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Total segment | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Revenue By Contract Type | |||||||||||||||||||||||||||||||||||||||||||||||
Fixed-price(1) | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Cost-reimbursable | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Intersegment | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Total segment | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| Revenue By Geographical Region | |||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
| International | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Intersegment | ** | ||||||||||||||||||||||||||||||||||||||||||||||
| Total segment | $ | $ | $ | $ | $ | $ | $ | ** | |||||||||||||||||||||||||||||||||||||||
_______________
** AR is a reportable segment established during the quarter ended September 29, 2023, which consists of operations of AJRD. As such, there is no comparable prior year information.
(1)Includes revenue derived from time-and-materials contracts.
Assets by Business Segment
Total assets by business segment were as follows:
| (In millions) | June 28, 2024 | December 29, 2023 | |||||||||
| SAS | $ | $ | |||||||||
| IMS | |||||||||||
| CS | |||||||||||
| AR | |||||||||||
Corporate(1) | |||||||||||
| Total Assets | $ | $ | |||||||||
_______________
(1)Identifiable intangible assets acquired in connection with business combinations were recorded as corporate assets because they benefited the entire Company. Identifiable intangible asset balances recorded as corporate assets were $8.1 billion and $8.5 billion at June 28, 2024 and December 29, 2023, respectively. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan investments, buildings and equipment, real estate held for development and leasing, as well as any assets of businesses held for sale.
NOTE Q: LEGAL PROCEEDINGS AND CONTINGENCIES
In the ordinary course of business, we are routinely defendants in, parties to or otherwise subject to many pending and threatened legal actions, claims, disputes, arbitration and other legal proceedings incident to our business, arising from or related to matters, including but not limited to: product liability; personal injury; patents, trademarks, trade secrets or other intellectual property; labor and employment disputes; commercial or contractual disputes; strategic acquisitions or divestitures; the prior sale or use of former products allegedly containing asbestos or other restricted materials; breach of warranty; or environmental matters. Claimed amounts against us may be substantial, but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitration awards. We record accruals for losses related to those matters against us that we consider to be probable and that can be reasonably estimated. Gain contingencies, if any, are recognized when they are realized and legal costs generally are expensed when incurred. At June 28, 2024, our accrual for the potential resolution of lawsuits, claims or proceedings that we consider probable of being decided unfavorably to us was not material. We cannot at this time estimate the reasonably possible loss or range of loss in excess of our accrual due to the inherent uncertainties and speculative nature of contested proceedings. Although it is not feasible to predict the outcome of these matters with certainty, based on available information, in the opinion of management, settlements, arbitration awards and final judgments, if any, that are considered probable of being rendered against us in litigation or arbitration in existence at June 28, 2024 are reserved against or would not have a material adverse effect on our financial condition, results of operations, cash flows or equity.
Environmental Matters
We are subject to numerous U.S. Federal, state, local and international environmental laws and regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental issues. We or companies we have acquired, including AJRD, are responsible, or alleged to be responsible, for environmental investigation and/or remediation of multiple sites, including sites owned by us and third-party sites. These sites are in various stages of investigation and/or remediation, and in some cases our liability is considered de minimis. Notices from the U.S. Environmental Protection Agency (“EPA”) or equivalent state or international environmental agencies allege that several sites formerly or currently owned and/or operated by us or companies we have acquired, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances of being identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”), the Resource Conservation Recovery Act and/or equivalent state and international laws, and in some instances, our liability and proportionate share of costs that may be shared among other PRPs have not been determined largely due to uncertainties as to the nature and extent of site conditions and our involvement.
Based on an assessment of relevant factors, we estimated that our liability under applicable environmental statutes and regulations for identified sites was $632 million as of June 28, 2024. The current portion of our estimated environmental liability is included in the “Other accrued items” line item and the non-current portion is included in the “Other long-term liabilities” line item in our Condensed Consolidated Balance Sheet. Some of these environmental costs are eligible for future recovery in the pricing of our products and services to the U.S.
_____________________________________________________________________
22
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
government and under existing third party agreements. We consider the recovery probable based on U.S. government contracting regulations and existing third-party agreements. As of June 28, 2024, we had an asset for the recoverable portion of these reserves of $449 million. The current and non-current portion of the recoverable costs are included as a component of the “Other current assets” and “Other non-current assets” line items, respectively, in our Condensed Consolidated Balance Sheet.
_____________________________________________________________________
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of L3Harris Technologies, Inc.
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of L3Harris Technologies, Inc. and subsidiaries (the Company) as of June 28, 2024, the related condensed consolidated statements of operations, comprehensive income, and equity for the quarter and two quarters ended June 28, 2024 and June 30, 2023, the condensed consolidated statements of cash flows for the two quarters ended June 28, 2024 and June 30, 2023, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 29, 2023, the related consolidated statements of operations, comprehensive income, cash flows and equity for the year then ended, and the related notes (not presented herein); and in our report dated February 16, 2024, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 29, 2023, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young LLP
Orlando, Florida
July 26, 2024
_____________________________________________________________________
24
| 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 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.”
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 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
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 two quarters ended June 28, 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 ends 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 modest 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 for GFY 2025 (“2025 PBR”) 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.
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.
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 increased interest rates, 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.
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25
KEY DEVELOPMENTS
Business Realignment. Effective for fiscal 2024, to better align our businesses, we realigned certain businesses within our SAS and IMS segments. See Note E: Goodwill and Other Intangible Assets in the Notes for further information.
Divestiture. On May 31, 2024, we completed the divestiture of our Antenna Disposal Group, which was reported in our SAS segment through the date of divestiture. See Note O: Acquisitions and Divestitures in the Notes for further information.
RESULTS OF OPERATIONS
Consolidated Results of Operations
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
| Revenue | $ | 5,299 | $ | 4,693 | $ | 10,510 | $ | 9,164 | |||||||||||||||
| Cost of revenue | (3,939) | (3,506) | (7,802) | (6,811) | |||||||||||||||||||
| % of total revenue | 74 | % | 75 | % | 74 | % | 74 | % | |||||||||||||||
| Gross margin | 1,360 | 1,187 | 2,708 | 2,353 | |||||||||||||||||||
| % of total revenue | 25.7 | % | 25.3 | % | 25.8 | % | 25.7 | % | |||||||||||||||
| General and administrative expenses | (884) | (787) | (1,854) | (1,560) | |||||||||||||||||||
| % of total revenue | 17 | % | 17 | % | 18 | % | 17 | % | |||||||||||||||
| Operating Income | 476 | 400 | 854 | 793 | |||||||||||||||||||
| Non-service FAS pension income and other, net | 86 | 83 | 174 | 165 | |||||||||||||||||||
| Interest expense, net | (172) | (111) | (348) | (213) | |||||||||||||||||||
| Income from before income taxes | 390 | 372 | 680 | 745 | |||||||||||||||||||
| Income taxes | (23) | (21) | (28) | (55) | |||||||||||||||||||
| Effective tax rate | 5.9 | % | 5.6 | % | 4.1 | % | 7.4 | % | |||||||||||||||
| Net income | 367 | 351 | 652 | 690 | |||||||||||||||||||
| Noncontrolling interests, net of income taxes | (1) | (2) | (3) | (4) | |||||||||||||||||||
| Net income attributable to L3Harris Technologies, Inc. | $ | 366 | $ | 349 | $ | 649 | $ | 686 | |||||||||||||||
| Diluted EPS | $ | 1.92 | $ | 1.83 | $ | 3.40 | $ | 3.60 | |||||||||||||||
Revenue and Gross Margin
Quarter Ended Comparison. Revenue increased 13% for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023, primarily due to the inclusion of $581 million of revenue from the acquisition of AJRD, which is reported in our AR segment, and higher revenue of $57 million in our CS segment from increased demand for tactical and broadband communications.
Gross margin increased, largely due to an increase in revenue volume, and gross margin as a percentage of revenue increased slightly for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023.
Two Quarters Ended Comparison. Revenue increased 15% for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 primarily due to the inclusion of $1.1 billion of revenue from the acquisition of AJRD, which is reported in our AR segment, and higher revenue in our CS and SAS segments of $188 million and $88 million, respectively, partially offset by a decrease in revenue in our IMS segment of $37 million.
Gross margin increased, largely due to an increase in revenue volume, and gross margin as a percentage of revenue remained flat for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 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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26
Segment Product and Service Analysis
The following tables present revenue and cost of revenue from products and services by segment for the quarters ended June 28, 2024 and June 30, 2023:
| Quarter Ended June 28, 2024 | |||||||||||||||||||||||||||||||||||
| (In millions) | SAS | IMS | CS | AR | Eliminations | Total | |||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,189 | $ | 1,051 | $ | 1,062 | $ | 382 | $ | — | $ | 3,684 | |||||||||||||||||||||||
| Services | 505 | 649 | 262 | 199 | — | 1,615 | |||||||||||||||||||||||||||||
| Intersegment | 13 | 29 | 22 | — | (64) | — | |||||||||||||||||||||||||||||
| Total | $ | 1,707 | $ | 1,729 | $ | 1,346 | $ | 581 | $ | (64) | $ | 5,299 | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 909 | $ | 833 | $ | 612 | $ | 291 | $ | 15 | $ | 2,660 | |||||||||||||||||||||||
| Services | 407 | 479 | 242 | 153 | (2) | 1,279 | |||||||||||||||||||||||||||||
| Intersegment | 13 | 29 | 22 | — | (64) | — | |||||||||||||||||||||||||||||
| Total | $ | 1,329 | $ | 1,341 | $ | 876 | $ | 444 | $ | (51) | $ | 3,939 | |||||||||||||||||||||||
| Quarter Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||
| SAS | IMS | CS | AR | Eliminations | Total | ||||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,222 | $ | 1,085 | $ | 1,040 | ** | $ | — | $ | 3,347 | ||||||||||||||||||||||||
| Services | 483 | 626 | 237 | ** | — | 1,346 | |||||||||||||||||||||||||||||
| Intersegment | 10 | 24 | 12 | — | (46) | — | |||||||||||||||||||||||||||||
| Total | $ | 1,715 | $ | 1,735 | $ | 1,289 | $ | — | $ | (46) | $ | 4,693 | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 985 | $ | 840 | $ | 604 | ** | $ | 25 | $ | 2,454 | ||||||||||||||||||||||||
| Services | 381 | 491 | 188 | ** | (8) | 1,052 | |||||||||||||||||||||||||||||
| Intersegment | 10 | 24 | 12 | — | (46) | — | |||||||||||||||||||||||||||||
| Total | $ | 1,376 | $ | 1,355 | $ | 804 | $ | — | $ | (29) | $ | 3,506 | |||||||||||||||||||||||
** AR is a reportable segment established during the quarter ended September 29, 2023, which consists of operations of AJRD. As such, there is no comparable prior year information.
Quarter Ended Comparison. Products revenue increased $337 million for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 primarily from the inclusion of $382 million of products revenue from AR, partially offset by decreases of $34 million and $33 million in products revenue from our IMS and SAS segments, respectively.
Cost of products revenue increased $206 million for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 primarily from the inclusion of $291 million of cost of products revenue from AR, partially offset by a decrease of $76 million in cost of products revenue from our SAS segment.
Services revenue increased $269 million for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 from the inclusion of $199 million of services revenue from AR, as well as increases of $25 million, $23 million and $22 million in services revenue from our CS, IMS, and SAS segments, respectively.
Cost of services revenue increased $227 million for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 primarily from the inclusion of $153 million of cost of services revenue from AR, as well as an increase of $54 million at our CS segment, from higher DoD sales in Tactical Communications during the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 and $26 million at our SAS segment.
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The following tables present revenue and cost of revenue from products and services by segment for the two quarters ended June 28, 2024 and June 30, 2023:
| Two Quarters Ended June 28, 2024 | |||||||||||||||||||||||||||||||||||
| (In millions) | SAS | IMS | CS | AR | Eliminations | Total | |||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 2,399 | $ | 2,076 | $ | 2,069 | $ | 739 | $ | — | $ | 7,283 | |||||||||||||||||||||||
| Services | 1,031 | 1,277 | 535 | 384 | — | 3,227 | |||||||||||||||||||||||||||||
| Intersegment | 28 | 45 | 36 | — | (109) | — | |||||||||||||||||||||||||||||
| Total | $ | 3,458 | $ | 3,398 | $ | 2,640 | $ | 1,123 | $ | (109) | $ | 10,510 | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,837 | $ | 1,617 | $ | 1,214 | $ | 557 | $ | 29 | $ | 5,254 | |||||||||||||||||||||||
| Services | 830 | 960 | 463 | 297 | (2) | 2,548 | |||||||||||||||||||||||||||||
| Intersegment | 28 | 45 | 36 | — | (109) | — | |||||||||||||||||||||||||||||
| Total | $ | 2,695 | $ | 2,622 | $ | 1,713 | $ | 854 | $ | (82) | $ | 7,802 | |||||||||||||||||||||||
| Two Quarters Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||
| SAS | IMS | CS | AR | Eliminations | Total | ||||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 2,414 | $ | 2,132 | $ | 1,966 | ** | $ | — | $ | 6,512 | ||||||||||||||||||||||||
| Services | 933 | 1,258 | 461 | ** | — | 2,652 | |||||||||||||||||||||||||||||
| Intersegment | 23 | 45 | 25 | — | (93) | — | |||||||||||||||||||||||||||||
| Total | $ | 3,370 | $ | 3,435 | $ | 2,452 | $ | — | $ | (93) | $ | 9,164 | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,883 | $ | 1,629 | $ | 1,164 | ** | $ | 65 | $ | 4,741 | ||||||||||||||||||||||||
| Services | 756 | 975 | 356 | ** | (17) | 2,070 | |||||||||||||||||||||||||||||
| Intersegment | 23 | 45 | 25 | — | (93) | — | |||||||||||||||||||||||||||||
| Total | $ | 2,662 | $ | 2,649 | $ | 1,545 | $ | — | $ | (45) | $ | 6,811 | |||||||||||||||||||||||
_______________
** AR is a reportable segment established during the quarter ended September 29, 2023, which consists of operations of AJRD. As such, there is no comparable prior year information.
Two Quarters Ended Comparison. Products revenue increased $771 million for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 primarily from the inclusion of $739 million of products revenue from AR.
Cost of products revenue increased $513 million for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 primarily from the inclusion of $557 million of cost of products revenue from AR.
Services revenue increased $575 million for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 primarily from the inclusion of $384 million of services revenue from AR, as well as increases of $98 million and $74 million in services revenue from our SAS and CS segments, respectively.
Cost of services revenue increased $478 million for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 primarily from the inclusion of $297 million of cost of services revenue from AR, as well as an increase of $107 million at our CS segment, from higher DoD sales in Tactical Communications and $74 million at our SAS segment.
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General and Administrative Expenses (“G&A”)
G&A expenses were as follows:
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
| Amortization of acquisition-related intangibles | $ | (194) | $ | (150) | $ | (391) | $ | (292) | |||||||||||||||
| Company-sponsored R&D costs | (124) | (117) | (238) | (231) | |||||||||||||||||||
| Selling and marketing | (112) | (107) | (225) | (220) | |||||||||||||||||||
LHX NeXt implementation costs(1) | (48) | (22) | (175) | (35) | |||||||||||||||||||
| Merger, acquisition, and divestiture-related expenses | (21) | (38) | (61) | (88) | |||||||||||||||||||
| Business divestiture-related (losses) gains, net | (24) | 26 | (24) | 26 | |||||||||||||||||||
| Impairment of goodwill and other assets | (14) | (30) | (14) | (30) | |||||||||||||||||||
Other G&A expenses(2) | (347) | (349) | (726) | (690) | |||||||||||||||||||
| Total G&A expenses | $ | (884) | $ | (787) | $ | (1,854) | $ | (1,560) | |||||||||||||||
_______________
(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.
(2)Other G&A expenses primarily include unallocated corporate expenses and segment G&A expenses.
Quarter Ended Comparison. For the quarter ended June 28, 2024, total G&A expenses increased primarily due to the recognition of pre-tax losses on the sale of our Antenna Disposal Group and pending divestiture of our CAS Disposal Group during the quarter ended June 28, 2024 compared with a pre-tax gain during the quarter ended June 30, 2023 and an increase in amortization of acquisition-related intangibles during the quarter ended June 28, 2024.
Two Quarters Ended Comparison. For the two quarters ended June 28, 2024, total G&A expenses increased primarily due to increases in LHX NeXt implementation costs including $65 million related to employee severance charges and $110 million for third-party consulting expenses, incremental IT expenses for implementation of new systems and other charges, an increase in amortization of acquisition-related intangibles and the recognition of pre-tax losses on the sale of our Antenna Disposal Group and pending divestiture of our CAS Disposal Group during the two quarters ended June 28, 2024 compared with a pre-tax gain during the two quarters ended June 30, 2023.
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.
Non-service FAS Pension Income and Other, net
Non-service FAS pension income and other, net was as follows:
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
Non-service FAS pension income(1) | $ | 81 | $ | 77 | $ | 161 | $ | 154 | |||||||||||||||
Other, net(2) | 5 | 6 | 13 | 11 | |||||||||||||||||||
| Non-service FAS pension income and other, net | $ | 86 | $ | 83 | $ | 174 | $ | 165 | |||||||||||||||
_______________
(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.
Interest Expense, net
Quarter Ended Comparison. Interest expense, net, increased for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 primarily due to interest expense of approximately $44 million and $30 million on the AJRD Notes and the 2024 Notes, respectively, and an increase of $28 million in interest expense on outstanding notes under the CP Program, partially offset by a decrease of $37 million in interest expense on Term Loan 2025, which was repaid on March 14, 2024.
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Two Quarters Ended Comparison. Interest expense, net, increased for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 primarily due to interest expense of approximately $88 million and $35 million on the AJRD Notes and the 2024 Notes, respectively, and an increase of $60 million in interest expense on outstanding notes under the CP Program, partially offset by a decrease of $41 million in interest expense on Term Loan 2025, which was repaid on March 14, 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 ETR was 5.9% and 4.1% for the quarter and two quarters ended June 28, 2024, respectively, and 5.6% and 7.4% for the quarter and two quarters ended June 30, 2023, respectively. The ETR for all periods benefited from R&D credits, tax deductions for FDII, the resolution of specific audit uncertainties and excess tax benefits related to share-based compensation.
Diluted EPS
Quarter Ended Comparison. Diluted EPS increased for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 primarily due to an increase in net income from the combined effects of reasons noted in the sections above, primarily an increase in gross margin, partially offset by an increase in general and administrative expenses.
Two Quarters Ended Comparison. Diluted EPS decreased for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 primarily due to a decrease in net income from the combined effects of reasons noted in the sections above, primarily an increase in general and administrative expenses and interest expense, partially offset by an increase in gross margin.
Discussion of Business Segment Results of Operations
SAS Segment
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||||||||||||||
| June 28, 2024 | June 30, 2023 | % Inc/(Dec) | June 28, 2024 | June 30, 2023 | % Inc/(Dec) | ||||||||||||||||||||||||||||||
| Revenue | $ | 1,707 | $ | 1,715 | — | % | $ | 3,458 | $ | 3,370 | 3 | % | |||||||||||||||||||||||
| Operating income | 215 | 168 | 28 | % | 431 | 355 | 21 | % | |||||||||||||||||||||||||||
Operating income as a percentage of revenue (“operating margin”) | 12.6 | % | 9.8 | % | 12.5 | % | 10.5 | % | |||||||||||||||||||||||||||
Quarter Ended Comparison. SAS segment revenue was flat for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 primarily due to $47 million of lower revenue from continued reduction in legacy airborne platform volume and $16 million lower revenue from the divestiture of the Antenna Disposal Group, partially offset by higher revenues of $39 million and $21 million in Intel and Cyber and Space Systems, respectively and $11 million in Mission Networks.
The increase in SAS segment operating income for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 was primarily due to a $27 million non-cash charge for impairment of other assets during the quarter ended June 30, 2023, in addition to program performance and the benefit of cost savings realized as a result of transformation initiatives during the quarter ended June 28, 2024.
Two Quarters Ended Comparison. The increase in SAS segment revenue for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 was primarily due to higher revenues of $80 million and $65 million in Space Systems and Intel and Cyber, respectively, from program growth and $22 million in Mission Networks from increased volume, partially offset by $56 million of lower revenue from continued reduction in legacy airborne platform volume and $18 million lower revenue from the divestiture of the Antenna Disposal Group.
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The increase in SAS segment operating income for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 was primarily due to $27 million from improved program performance during the two quarters ended June 28, 2024, a $27 million non-cash charge for impairment of other assets during the two quarters ended June 30, 2023 and cost savings realized as a result of transformation initiatives.
IMS Segment
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | June 28, 2024 | June 30, 2023 | % Inc/(Dec) | June 28, 2024 | June 30, 2023 | % Inc/(Dec) | |||||||||||||||||||||||||||||
| Revenue | $ | 1,729 | $ | 1,735 | — | % | $ | 3,398 | $ | 3,435 | (1) | % | |||||||||||||||||||||||
| Operating income | 206 | 162 | 27 | % | 396 | 347 | 14 | % | |||||||||||||||||||||||||||
Operating margin | 11.9 | % | 9.3 | % | 11.7 | % | 10.1 | % | |||||||||||||||||||||||||||
Quarter Ended Comparison. IMS segment revenue was flat for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 primarily due to higher revenue of $48 million in Maritime from material volume on programs, partially offset by lower revenue of $31 million in Commercial Aviation from lower volume.
The increase in IMS segment operating income for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 was primarily due to a $13 million increase from improved program performance during the quarter ended June 28, 2024, a $12 million non-cash charge for impairment of other assets related to facility closures and restructuring of a customer contract during the quarter ended June 30, 2023 and cost savings realized as a result of transformation initiatives during the quarter ended June 28, 2024.
Two Quarters Ended Comparison. The decrease in IMS segment revenue for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 was primarily due to lower revenue of $63 million in ISR from lower aircraft procurement and $30 million in Commercial Aviation from lower volumes, partially offset by higher revenue of $39 million in Maritime from material volume on classified programs and $21 million higher revenue in GOS.
The increase in IMS segment operating income for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 was primarily due to a $28 million increase from improved program performance during the two quarters ended June 28, 2024, a $12 million non-cash charge for impairment of other assets related to facility closures and restructuring of a customer contract during the two quarters ended June 30, 2023, cost savings realized as a result of transformation initiatives, partially offset by a decrease from lower product volumes in GOS during the two quarters ended June 28, 2024.
CS Segment
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | June 28, 2024 | June 30, 2023 | % Inc/(Dec) | June 28, 2024 | June 30, 2023 | % Inc/(Dec) | |||||||||||||||||||||||||||||
| Revenue | $ | 1,346 | $ | 1,289 | 4 | % | $ | 2,640 | $ | 2,452 | 8 | % | |||||||||||||||||||||||
| Operating income | 329 | 325 | 1 | % | 639 | 591 | 8 | % | |||||||||||||||||||||||||||
Operating margin | 24.4 | % | 25.2 | % | 24.2 | % | 24.1 | % | |||||||||||||||||||||||||||
Quarter Ended Comparison. The increase in CS segment revenue for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 was primarily due to higher revenues of $27 million in Broadband Communications from higher volumes and $24 million in Tactical Communications associated with an increase in DoD sales.
The increase in CS segment operating income for the quarter ended June 28, 2024 compared with the quarter ended June 30, 2023 was primarily due to $15 million net favorable settlement of legal matters, higher volumes in Broadband Communications and cost savings realized as a result of transformation initiatives, offset by the timing of software sales and unfavorable mix of higher DoD sales in Tactical Communications during the quarter ended June 28, 2024.
Two Quarters Ended Comparison. The increase in CS segment revenue for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 was primarily due to higher revenues of $75 million in Tactical Communications associated with an increase in DoD sales, $61 million in Broadband Communications from higher volumes and $52 million in Integrated Vision Solutions from higher volumes.
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The increase in CS segment operating income for the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 was primarily due to higher volumes in both Broadband Communications and Integrated Vision Solutions, improved program performance in Integrated Vision Solutions, $15 million net favorable settlement of legal matters and cost savings realized as a result of transformation initiatives, partially offset by a decrease from the timing of software sales and unfavorable mix of higher DoD sales in Tactical Communication during the two quarters ended June 28, 2024.
AR Segment
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | June 28, 2024 | June 30, 2023 | % Inc/(Dec) | June 28, 2024 | June 30, 2023 | % Inc/(Dec) | |||||||||||||||||||||||||||||
| Revenue | $ | 581 | ** | * | $ | 1,123 | ** | * | |||||||||||||||||||||||||||
| Operating income | 75 | ** | * | 147 | ** | * | |||||||||||||||||||||||||||||
Operating margin | 12.9 | % | ** | 13.1 | % | ** | |||||||||||||||||||||||||||||
** AR is a reportable segment established during the quarter ended September 29, 2023, which consists of operations of AJRD. As such, there is no comparable prior year information.
* Not meaningful
Results were driven by program performance across both the Missile Solutions and Space Propulsion and Power Systems sectors in the quarter and two quarters ended June 28, 2024.
Operating income was impacted by cost synergies recognized in the quarter and two quarters ended June 28, 2024.
Unallocated Corporate Expenses
_______________
| Quarter Ended | Two Quarters Ended | ||||||||||||||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | June 28, 2024 | June 30, 2023 | |||||||||||||||||||
Unallocated corporate department expense, net(1) | $ | (33) | $ | (35) | $ | (66) | $ | (41) | |||||||||||||||
Amortization of acquisition-related intangibles(2) | (215) | (173) | (432) | (338) | |||||||||||||||||||
| Additional cost of revenue related to the fair value step-up in inventory sold | — | (15) | — | (30) | |||||||||||||||||||
| Merger, acquisition, and divestiture-related expenses | (21) | (38) | (61) | (88) | |||||||||||||||||||
Asset group and business divestiture-related (losses) gains, net(3) | (24) | 26 | (24) | 26 | |||||||||||||||||||
Impairment of goodwill and other assets(4) | (14) | (21) | (14) | (39) | |||||||||||||||||||
LHX NeXt implementation costs(5) | (48) | (22) | (175) | (35) | |||||||||||||||||||
FAS/CAS operating adjustment(6) | 6 | 23 | 13 | 45 | |||||||||||||||||||
| Total unallocated corporate expenses | $ | (349) | $ | (255) | $ | (759) | $ | (500) | |||||||||||||||
(1)Includes corporate items such as a portion of management and administration, legal, environmental, compensation, retiree benefits, other corporate expenses and eliminations.
(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)For the quarter and two quarters ended June 28, 2024, includes pre-tax losses recognized in connection with the sale of our Antenna Disposal Group and pending divestiture of our CAS Disposal Group. For the quarter and two quarters ended June 30, 2023, includes a pre-tax gain on sale of VIS. See Note O: Acquisitions and Divestitures in these Notes for further information.
(4)For the quarter and two quarters ended June 28, 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 Other Intangible Assets in these Notes for further information related to the Antenna Disposal Group. For the quarter and two quarters ended June 30, 2023, includes the $21 million non-cash charge for impairment of in-process R&D associated with a facility closure and additionally for the two quarters ended June 30, 2023, includes 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.
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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES
Cash Flows
| Two Quarters Ended | |||||||||||
| (In millions) | June 28, 2024 | June 30, 2023 | |||||||||
| Cash and cash equivalents, beginning of period | $ | 560 | $ | 880 | |||||||
| Operating Activities: | |||||||||||
| Net income | 652 | 690 | |||||||||
| Non-cash adjustments | 444 | 288 | |||||||||
| Changes in working capital | (522) | (120) | |||||||||
| Other, net | 76 | (94) | |||||||||
| Net cash provided by operating activities | 650 | 764 | |||||||||
| Net cash used in investing activities | (58) | (2,074) | |||||||||
| Net cash (used in) provided by financing activities | (600) | 794 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (5) | 2 | |||||||||
| Net decrease in cash and cash equivalents | (13) | (514) | |||||||||
| Cash and cash equivalents, end of period | $ | 547 | $ | 366 | |||||||
Net cash provided by operating activities
The $114 million decrease in net cash provided by operating activities in the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 was primarily due to $402 million more cash used to fund net working capital (i.e., receivables, contract assets, inventories, accounts payable and contract liabilities), primarily due to timing, in addition to a decrease in income tax payments, partially offset by a $156 million increase in non-cash adjustments.
Net cash used in investing activities
The $2,016 million decrease in net cash used in investing activities in the two quarters ended June 28, 2024 compared with the two quarters ended June 30, 2023 was primarily due to the $1,973 million cash used for the acquisitions of Viasat, Inc.’s Tactical Data Links in the first quarter of fiscal 2023, in addition to an $87 million increase in net cash proceeds from sale of businesses during the quarter ended June 28, 2024.
Net cash (used in) provided by financing activities
The $1,394 million change in net cash used in financing activities in the two quarters ended June 28, 2024 compared with net cash provided by financing activities in the two quarters ended June 30, 2023 was primarily due to a $1,547 million increase in repayments of borrowings and a $79 million decrease in net proceeds from issuances of commercial paper, partially offset by a $196 million decrease in cash used to repurchase our common stock under our share repurchase program. See Note G: Debt and Credit Arrangements in the Notes for further information.
Cash and cash equivalents
At June 28, 2024, we had cash and cash equivalents of $547 million, of which $283 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 two quarters ended June 28, 2024.
Credit Agreements
On January 26, 2024, we replaced the 2023 Credit Agreement with the 2024 Credit Agreement. At June 28, 2024, we had no outstanding borrowings under either our 2024 Credit Agreement or our 2022 Credit Agreement, and had available borrowing capacity of $1.4 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
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33
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 two quarters ended June 28, 2024, we had a maximum outstanding balance of $2.8 billion and a daily average outstanding balance of $2.4 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 June 28, 2024, we had $11.2 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.
During the two quarters ended June 28, 2024, we closed the issuance and sale of $2.25 billion aggregate principal amount of the 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. 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.
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 $210 million as of June 28, 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 two quarters ended June 28, 2024, we used $322 million to repurchase 1.5 million shares of our common stock under our share repurchase program at an average price per share of $215.24, including commissions of $0.02 per share. During the two quarters ended June 28, 2024, $27 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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At June 28, 2024, we had a remaining unused authorization under our repurchase program of $3.6 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 item 5. Market for registrant’s common equity, related stockholder matters and issuer repurchases 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 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 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. Effective in fiscal 2024, to better align our businesses, we adjusted our IMS segment by realigning our EO and Maritime sectors, which are also reporting units, splitting EO into two sectors, GOS and DE, and moving one EO business to the Maritime sector. GOS and DE represent one reporting unit. Immediately before and after the realignment, we performed a quantitative impairment assessment under our former and new reporting unit structure. These assessments indicated no impairment existed either before or after the realignment.
See Note E: Goodwill and Other Intangible Assets in the Notes for more information.
Impact of Recently Issued Accounting Pronouncements
There have been no new accounting pronouncements which became effective during the two quarters ended June 28, 2024 that have had a material impact on our Condensed Consolidated Financial Statements.
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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 divestitures and the timing thereof; 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 2023 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 2023 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 winning business in competitive markets from U.S. Government customers for a significant portion of our revenue.
•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. Our fixed-price contracts, particularly those for development programs, 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 generally are subject to immediate termination and heavily regulated and audited. The application or impact of regulations, unilateral government action, termination 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.
•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.
•We depend on our subcontractors and suppliers to provide materials, components, subsystems and services for many of our products and services, and failures in or disruptions to our supply chain 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 IT networks and related systems or of those we operate for certain of our customers.
•Our future success will depend on our ability to develop new products 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.
•With our acquisition of AJRD, there is risk of the release, unplanned ignition, explosion, or improper handling of dangerous materials used in our business, which could disrupt our operations and adversely affect our financial results.
•Failure to achieve the expected results of LHX NeXt 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.
•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.
•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 greenhouse gas emissions or change in customer sentiment related to environmental sustainability, could have a material adverse effect on our business, financial condition, results of operations, cash flows and equity.
•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.
•Challenges arising from the expanded operations related to the 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 intangible assets to become impaired, resulting in substantial losses and write-downs that would materially adversely affect our results of operations and financial condition.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | ||||
In the normal course of business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates and market return fluctuations on our defined benefit plans. Other than the debt refinanced as discussed in the Liquidity and Capital Resources section of Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations above, there were no material changes during the two quarters ended June 28, 2024, with respect to the information appearing in Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Fiscal 2023 Form 10-K.
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| ITEM 4. | CONTROLS AND PROCEDURES. | ||||
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosures. As required by Rule 13a-15 under the Exchange Act, as of June 28, 2024, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our CEO and our CFO. Based on this work and other evaluation procedures, our management, including our CEO and CFO, has concluded that as of June 28, 2024, our disclosure controls and procedures were effective.
Changes in Internal Control
We periodically review our internal control over financial reporting (“ICFR”) as part of our efforts to ensure compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we routinely review our system of ICFR to identify potential changes to our processes and systems that may improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment.
As part of our acquisition of AJRD, we are in the process of incorporating our controls and procedures with respect to AJRD’s operations, and we will include internal controls with respect to AJRD’s operations in our assessment of the effectiveness of our ICFR as of the end of fiscal 2024. Other than changes related to incorporating our controls and procedures with respect to AJRD operations, there have been no changes in our ICFR that occurred during the quarter ended June 28, 2024 that have materially affected, or are reasonably likely to materially affect, our ICFR.
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PART II. OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS. | ||||
On March 4, 2024, Plaintiff Bruce Taylor (“Plaintiff”), a purported stockholder of ours, filed a putative class action complaint (“Complaint”) in the Court of Chancery of the State of Delaware (“Court”) against the Company and the members of our Board of Directors, as well as D. E. Shaw Oculus Portfolios, L.L.C. and D. E. Shaw Valence Portfolios, L.L.C. (together, the “D. E. Shaw Parties” and collectively, the “Defendants”) under the caption Taylor v. L3Harris Technologies, Inc., C.A. No. 2024-0205-JTL (the “Action”). Plaintiff alleged that certain provisions in a Cooperation Agreement dated December 10, 2023 between the Company and the D. E. Shaw Parties, as defined and described in the Company’s prior Form 8-K, filed with the SEC on December 11, 2023, were invalid under Section 141(a) of the Delaware General Corporation Law insofar as they allegedly required the Company’s Board to (i) “recommend that the shareholders of the Company vote to elect” and (ii) “use its reasonable best efforts to support and solicit proxies for the election of” certain directors in connection with the Company’s 2024 annual meeting (the “Recommendation Provisions”). The Defendants believe that the allegations of the Complaint were meritless, deny those allegations, and deny that any violation of applicable law has occurred. However, solely to minimize expenses and distraction and to avoid the uncertainty of any litigation, on March 26, 2024, the Company and the D. E. Shaw Parties entered into a “Limited Mutual Waiver” through which (i) the D. E. Shaw Parties irrevocably waived any and all obligations of the Company pursuant to the Recommendation Provisions and (ii) the Company agreed to notify, and irrevocably waive certain obligations of, the D. E. Shaw Parties in the event the Company’s Board changed its recommendation regarding the election of certain directors in connection with the Company’s 2024 annual meeting.
On March 28, 2024, the parties entered into a proposed Stipulation and Order Voluntarily Dismissing The Action As Moot And Retaining Jurisdiction to Determine Plaintiff’s Counsel’s Application for an Award of Attorneys’ Fees and Expenses (the “Stipulation and Proposed Order”), pursuant to which the Court would retain jurisdiction regarding any application Plaintiff may make for an award of attorneys’ fees.
The Court entered the Stipulation and Proposed Order the same day, and retained jurisdiction to approve a form of notice concerning attorneys’ fees payable to Plaintiff in connection with the Limited Mutual Waiver and the Action. The Company subsequently agreed to pay $500,000 in attorneys’ fees and expenses in full satisfaction of any and all claims by Plaintiff and all of his counsel for fees and expenses in the Action.
On July 1, 2024 the Court entered an order closing the Action, subject to the Company filing an affidavit with the Court confirming that this notice has been issued. In entering the order, the Court was not asked to review, and did not pass judgment on, the payment of the attorneys’ fees and expenses or their reasonableness. Plaintiff’s counsel are Kurt M. Heyman and Aaron M. Nelson of Heyman Enerio Gattuso & Hirzel LLP, (302) 472-7300. Counsel to the Company and the individual defendants are Raymond J. DiCamillo and Matthew D. Perri of Richards, Layton & Finger, P.A., (302) 651-7700.
In addition to the foregoing, see also Note Q: Legal Proceedings and Contingencies in the Notes for discussion regarding material legal proceedings and contingencies. Except as set forth in such discussion, there have been no material developments in legal proceedings as reported in Part I. Item 3. Legal Proceedings in our Fiscal 2023 Form 10-K.
| ITEM 1A. | RISK FACTORS. | ||||
Investors should carefully review and consider the information regarding certain factors that could materially affect our business, results of operations, financial condition, cash flows and equity as set forth in Part I. Item 1A. Risk Factors in our Fiscal 2023 Form 10-K. There have been no material changes to the risk factors disclosed in our Fiscal 2023 Form 10-K. We may disclose changes to our risk factors or disclose additional risk factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently believe not to be material also may adversely impact our business, financial condition, results of operations, cash flows and equity.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | ||||
Issuer Purchases of Equity Securities
The following table sets forth information with respect to repurchases by us of our common stock during the quarter ended June 28, 2024:
| Period* | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs(1) | Maximum approximate dollar value of shares that may yet be purchased under the plans or programs(1) ($ in millions) | |||||||||||||||||||
| Month No. 1 | |||||||||||||||||||||||
| (March 30, 2024 - April 26, 2024) | |||||||||||||||||||||||
Repurchase program(1) | — | $ | — | — | $ | 3,702 | |||||||||||||||||
Employee transactions(2) | 1,993 | $ | 203.56 | — | — | ||||||||||||||||||
| Month No. 2 | |||||||||||||||||||||||
| (April 27, 2024 - May 24, 2024) | |||||||||||||||||||||||
Repurchase program(1) | 30,000 | $ | 217.05 | 30,000 | $ | 3,696 | |||||||||||||||||
Employee transactions(2) | 4,182 | $ | 213.44 | — | — | ||||||||||||||||||
| Month No. 3 | |||||||||||||||||||||||
| (May 25, 2024 - June 28, 2024) | |||||||||||||||||||||||
Repurchase program(1) | 378,000 | $ | 220.59 | 378,000 | $ | 3,612 | |||||||||||||||||
Employee transactions(2) | 22,354 | $ | 226.29 | — | — | ||||||||||||||||||
| Total | 436,529 | 408,000 | $ | 3,612 | |||||||||||||||||||
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* Periods represent our fiscal months.
(1) On October 21, 2022, we announced that our Board approved a $3.0 billion share repurchase authorization under our share repurchase program that was in addition to the remaining unused authorization of $1.5 billion at that time.
(2) Represents shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of performance units or restricted units that vested during the quarter. Our stock incentive plans provide that the value of shares delivered to us to pay the exercise price of options or to cover tax withholding obligations shall be the closing price of our common stock on the date the relevant transaction occurs.
Sales of Unregistered Equity Securities
During the quarter ended June 28, 2024, we did not issue or sell any unregistered equity securities.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. | ||||
None.
| ITEM 4. | MINE SAFETY DISCLOSURES. | ||||
Not applicable.
| ITEM 5. | OTHER INFORMATION. | ||||
Securities Trading Plans of Directors and Executive Officers
We require all executive officers and directors to effect purchase and sale transactions in L3Harris securities pursuant to a trading plan (each, a “10b5-1 Plan”) intended to satisfy the requirements of Rule 10b5-1 under the Exchange Act (“Rule 10b5-1”). We limit executive officers to a single 10b5-1 Plan in effect at any time, subject to limited exceptions in accordance with Rule 10b5-1. In addition, our stock ownership guidelines require executive officers to maintain ownership of L3Harris securities (excluding stock options and unearned performance share units) with a value equal to a multiple of their annual salary. Each executive officer identified in the table below is expected to hold securities considerably in excess of L3Harris’ stock ownership guidelines following the sale of the maximum number of shares contemplated.
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The following table includes the material terms (other than with respect to the price) of each 10b5-1 Plan adopted or terminated
| Name and title | Date of adoption of 10b5-1 Plan(1) | Scheduled expiration date of 10b5-1 Plan(2) | Aggregate number of shares of common stock to be purchased or sold(3) | |||||||||||||||||
Up to | ||||||||||||||||||||
(1) Transactions under each Rule 10b5-1 Plan commence no earlier than 90 days after adoption, or such later date as required by Rule 10b5-1.
(2) Each Rule 10b5-1 Plan may expire on such earlier date as all transactions are completed.
(3) Each Rule 10b5-1 Plan provides for shares to be sold on multiple predetermined dates.
| ITEM 6. | EXHIBITS. | ||||
The following exhibits are filed herewith or are incorporated herein by reference to exhibits previously filed with the SEC
(4.1) Restated Certificate of Incorporation of L3Harris Technologies, Inc. (1995), as amended, incorporated herein by reference to Exhibit 4(a) to L3Harris Technologies, Inc.’s Registration Statement on Form S-8, Registration No. 333-279040, filed with the SEC on May 1, 2024.
*(10.1) L3Harris Technologies, Inc. 2024 Equity Incentive Plan, incorporated herein by reference to Exhibit 4(d) to L3Harris Technologies, Inc.’s Registration Statement on Form S-8, Registration Statement No. 333- 279040, filed with the SEC on May 1, 2024.
*(10.2) L3Harris Technologies, Inc. Performance Unit Award Agreement Terms and Conditions (Effective April 19, 2024).
*(10.3) L3Harris Technologies, Inc. Restricted Unit Award Agreement Terms and Conditions (Effective April 19, 2024).
*(10.4) L3Harris Technologies, Inc. Stock Option Award Agreement Terms and Conditions (Effective April 19, 2024).
*(10.5) Amendment Number 1 to the L3Harris Technologies, Inc. Retirement Savings Plan (Amended and Restated Effective January 1, 2024), dated May 14, 2024.
*(10.6) Amendment Number 2 to the L3Harris Technologies, Inc. Retirement Savings Plan (Amended and Restated Effective January 1, 2024), dated June 6, 2024.
(101) The financial information from L3Harris Technologies, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2024 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Statement of Operations, (ii) the Condensed Consolidated Statement of Comprehensive Income , (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, (v) the Condensed Consolidated Statement of Equity, and (vi) the Notes to Condensed Consolidated Financial Statements.
(104) Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101.
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* Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| L3HARRIS TECHNOLOGIES, INC. | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: July 26, 2024 | By: | /s/ KENNETH L. BEDINGFIELD | ||||||||||||
| Kenneth L. Bedingfield | ||||||||||||||
| Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) | ||||||||||||||
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