NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless otherwise specified, all disclosures in these Notes to Consolidated Financial Statements (“Notes”) relate to Harris Corporation as of June 28, 2019 and exclude any information related to and any potential impact that has resulted or may result from the L3Harris Merger (as described in Note 1: Significant Accounting Policies under “Principles of Consolidation” and Note 26: Subsequent Events).
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Organization — L3Harris Technologies, Inc., together with its subsidiaries, is a leading technology innovator, solving customers’ toughest mission-critical challenges by providing solutions that connect, inform and protect. We support government and commercial customers in more than 100 countries, with our largest customers being various departments and agencies of the U.S. Government and their prime contractors. Our products, systems and services have defense and civil government applications, as well as commercial applications. As of the end of fiscal 2019, we had approximately 18,200 employees, including approximately 8,000 engineers and scientists.
Principles of Consolidation — On October 12, 2018, Harris Corporation, a Delaware corporation (“Harris”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with L3 Technologies, Inc., a Delaware corporation (“L3”), and Leopard Merger Sub Inc., a Delaware corporation and a newly formed, direct wholly owned subsidiary of Harris (“Merger Sub”), pursuant to which Harris and L3 agreed to combine their respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and into L3, with L3 continuing as the surviving corporation and a direct wholly owned subsidiary of Harris (the “L3Harris Merger”).
The closing of the L3Harris Merger occurred on June 29, 2019 (“Closing Date”), after the end of Harris’ fiscal 2019 on June 28, 2019. Upon completion of the L3Harris Merger, Harris was renamed “L3Harris Technologies, Inc.” (“L3Harris”), and each share of L3 common stock converted into the right to receive 1.30 shares of L3Harris common stock. Shares of L3Harris common stock, which previously traded under ticker symbol “HRS” on the New York Stock Exchange (“NYSE”) prior to completion of the L3Harris Merger, are traded under ticker symbol “LHX” following completion of the L3Harris Merger. L3Harris was owned on a fully diluted basis approximately 54 percent by Harris shareholders and 46 percent by L3 shareholders immediately following the completion of the L3Harris Merger.
Because the L3Harris Merger closed after Harris’ fiscal 2019 ended, the preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires that our Consolidated Financial Statements and most of the disclosure in these Notes be presented on a historical basis, as of or for the fiscal year ended June 28, 2019 (Harris’ fiscal 2019) or prior periods. Unless the context otherwise requires, the terms “we,” “our,” “us,” “Company” and “L3Harris” as used in this Report mean Harris Corporation and its subsidiaries (“Harris”) when referring to periods prior to the end of fiscal 2019 (prior to the L3Harris Merger) and to the combined company L3Harris Technologies, Inc., when referring to periods after the end of fiscal 2019 (after the L3Harris Merger).
The L3Harris Merger will be accounted for using the acquisition method of accounting, and Harris will be treated as the accounting acquirer. Under the acquisition method of accounting, we are required to allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values at the Closing Date. The excess of the purchase price over those fair values is recorded as goodwill. Due to the timing of the merger, the initial accounting and valuation work was incomplete at the time these financial statements were issued. Other required disclosures will be provided once the initial accounting for the L3Harris Merger is complete. See Note 26: Subsequent Events for additional information related to the merger.
As part of the regulatory process in connection with the L3Harris Merger, we entered into a definitive agreement on April 4, 2019 to sell the Harris Night Vision business to Elbit Systems of America, LLC, a subsidiary of Elbit Systems Ltd., for $350 million in cash, subject to customary purchase price adjustments as set forth in the definitive agreement. The sale transaction was conditioned on completion of the L3Harris Merger, as well as customary closing conditions, including receipt of regulatory approvals. The Harris Night Vision business, which is reported as part of our Communication Systems Segment in this Report, is a global supplier of high-performance, vision-enhancing products for U.S. and allied military and security forces and commercial customers. During the fourth quarter of fiscal 2019, we received all necessary regulatory approvals for the L3Harris Merger and the assets and liabilities of the Harris Night Vision business were classified as held for sale in our Consolidated Balance Sheet at June 28, 2019. We expect to close the sale of the Harris Night Vision business during the third quarter of calendar year 2019 and use the proceeds from the sale to pre-fund L3Harris pension plans and return cash to shareholders.
See Note 3: Discontinued Operations and Divestitures for additional information related to divestitures, some of which were reported as discontinued operations in our Consolidated Financial Statements and these Notes. Except for disclosures
related to our cash flows, or unless otherwise specified, disclosures in the accompanying Consolidated Financial Statements and these Notes relate solely to our continuing operations.
Amounts contained in this Report may not always add to totals due to rounding.
Use of Estimates — The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the accompanying 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 Consolidated Financial Statements and these Notes. Materially different results can occur as circumstances change and additional information becomes known.
Fiscal Year — Through fiscal 2019, our fiscal years ended on the Friday nearest June 30. Commencing June 29, 2019, our fiscal year will end on the Friday nearest December 31, and the period commencing on June 29, 2019 will be a fiscal transition period ending on January 3, 2020 (the “Fiscal Transition Period”). Each of our fiscal years 2019, 2018 and 2017 included 52 weeks.
Cash and Cash Equivalents — Cash equivalents are temporary cash investments with a maturity of three or fewer months when purchased. These investments include accrued interest and are carried at the lower of cost or market.
Fair Value of Financial Instruments — The carrying amounts reflected in our Consolidated Balance Sheet for cash and cash equivalents, accounts receivable, non-current receivables, notes receivable, accounts payable, short-term debt and long-term variable-rate debt approximate their fair values. Fair values for long-term fixed-rate debt are primarily based on quoted market prices for those or similar instruments. See Note 13: Debt for additional information regarding fair values for our long-term fixed-rate debt. A discussion of fair values for our derivative financial instruments is included under the caption “Financial Instruments and Risk Management” in this Note 1: Significant Accounting Policies.
Fair Value Measurements — Fair value is defined as the price that would be received to sell 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:
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Level 1 — Quoted prices in active markets for identical assets or liabilities.
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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.
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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.
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In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the pricing service, 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.
Accounts Receivable — We record receivables at net realizable value and they generally do not bear interest. This value includes an allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances which is charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and economic status of the customers. We consider a receivable delinquent if it is unpaid after the term of the related invoice has expired. Write-offs are recorded at the time a customer receivable is deemed uncollectible. See Note 5: Receivables for additional information regarding accounts receivable.
Contract Assets and Liabilities — The timing of revenue recognition, customer billings and cash collections results in accounts receivable, contract assets and contract liabilities at the end of each reporting period. Contract assets include 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. 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. Contract assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period.
The non-current portion of contract liabilities is included within the “Other long-term liabilities” line item in our Consolidated Balance Sheet.
Contract assets related to amounts withheld by customers until contract completion are not considered a significant financing component of our contracts because the intent is to protect the customers from our failure to satisfactorily complete our performance obligations. Payments received from customers in advance of revenue recognition are not considered a significant financing component of our contracts because they are utilized to pay for contract costs within a one-year period or are requested by us to ensure the customers meet their payment obligations. See Note 6: Contract Assets and Contract Liabilities for additional information.
Inventories — Inventories are valued at the lower of cost (determined by average and first-in, first-out methods) or net realizable value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements. See Note 7: Inventories for additional information regarding inventories.
Costs to Obtain or Fulfill a Contract — Costs to obtain a contract are incremental direct costs incurred to obtain a contract with a customer, including sales commissions and dealer fees, and are capitalized if material. Costs to fulfill a contract include costs directly related to a contract or specific anticipated contract (for example, mobilization, set-up and certain design costs) that generate or enhance our ability to satisfy our performance obligations under these contracts. These costs are capitalized to the extent they are expected to be recovered from the associated contract. Capitalized costs to obtain or fulfill a contract are amortized to expense over the expected period of benefit for contracts with terms greater than one year on a systematic basis that is consistent with the pattern of transfer of the associated goods and services to the customer. As a practical expedient, capitalized costs to obtain or fulfill a contract with a term of one year or less are expensed as incurred.
Property, Plant and Equipment — Property, plant and equipment are carried on the basis of cost and include software capitalized for internal use. Depreciation of buildings, machinery and equipment is computed by the straight-line and accelerated methods. The estimated useful lives of buildings, including leasehold improvements, generally range between 2 and 45 years. The estimated useful lives of machinery and equipment generally range between 2 and 10 years. Amortization of internal-use software begins when the software is put into service and is based on the expected useful life of the software. The useful lives over which we amortize internal-use software generally range between 3 and 10 years. See Note 8: Property, Plant and Equipment for additional information regarding property, plant and equipment.
Goodwill — We follow the acquisition method of accounting to record the assets and liabilities of acquired businesses at their estimated fair value at the date of acquisition. We initially record goodwill for the amount costs exceed the acquisition-date fair value of net identifiable assets acquired.
We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is our business segment level, and, if and when applicable, one level below the business segment. We test our goodwill for impairment annually, or under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. Such events or circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of our industry, a decline in our market capitalization, operating performance indicators, competition, reorganizations of our business or the disposal of all or a portion of a reporting unit.
We identify goodwill impairment and measure any loss from an impairment by comparing the fair value of each reporting unit to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired, and an impairment loss is recognized in an amount equal to that excess. See Note 3: Discontinued Operations and Divestitures and Note 9: Goodwill for additional information regarding goodwill.
Long-Lived Assets, Including Finite-Lived Intangible Assets — Long-lived assets, including finite-lived intangible assets, are amortized on a straight-line basis over their useful lives. We assess the recoverability of the carrying value of our long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. We evaluate the recoverability of such assets based on the expectations of undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. See Note 8: Property, Plant and Equipment and Note 10: Intangible Assets for additional information regarding long-lived assets and intangible assets.
Other Assets and Liabilities — No assets within the “Other current assets” or “Other non-current assets” line items in our Consolidated Balance Sheet exceeded 5 percent of our total current assets or total assets, respectively, as of June 28, 2019 or June 29, 2018. No accrued liabilities or expenses within the “Other accrued items” or “Other long-term liabilities” line items in our Consolidated Balance Sheet exceeded 5 percent of our total current liabilities or total liabilities, respectively, as of June 28, 2019 or June 29, 2018.
Income Taxes — We follow the liability method of accounting for income taxes. We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in our Consolidated Balance Sheet, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. See Note 22: Income Taxes for additional information regarding income taxes.
Standard Warranties — We record estimated standard warranty costs in the period in which the related products are delivered. Factors that affect the estimated cost for warranties include the terms of the contract, the type and complexity of the delivered product, number of installed units, historical experience and management’s assumptions regarding anticipated rates of warranty claims and cost per claim. Our standard warranties start from the shipment, delivery or customer acceptance date and continue as follows:
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Segment
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Average Warranty Period
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Communication Systems
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One to five years
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Electronic Systems
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One to two years
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Space and Intelligence Systems
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60 days to two years
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Because our products are manufactured, in many cases, to customer specifications and their acceptance is based on meeting those specifications, we historically have experienced minimal warranty costs. Factors that affect our warranty liability include the number of installed units, historical experience, anticipated delays in delivery of products to end customers, in-country support for international sales and our assumptions regarding anticipated rates of warranty claims and cost per claim. We assess the adequacy of our recorded warranty liabilities every quarter and make adjustments to the liability as necessary. See Note 11: Accrued Warranties for additional information regarding warranties, including extended warranties.
Foreign Currency Translation — The functional currency for most international subsidiaries is the local currency. Assets and liabilities are translated at current rates of exchange and income and expense items are translated at the weighted average exchange rate for the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity.
Stock Options and Other Share-Based Compensation — We measure compensation cost for all share-based payments (including employee stock options) at fair value and recognize cost over the vesting period, with forfeitures recognized as they occur. It is our practice to issue shares when options are exercised. See Note 15: Stock Options and Other Share-Based Compensation for additional information regarding share-based compensation.
Restructuring and Other Exit Costs — We record restructuring and other exit costs 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. These costs are included as a component of the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Consolidated Statement of Income. See Note 4: Restructuring and Other Exit Costs for additional information regarding restructuring and other exit costs.
Revenue Recognition — Effective June 30, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), as amended (“ASC 606”), using the full retrospective method. Refer to Note 2: Accounting Changes or Recent Accounting Pronouncements for additional information. The significant accounting policies disclosed below reflect the impact of our adoption of ASC 606.
We account for a contract when it has approval and commitment from all parties, the rights and payment terms of the parties can be identified, the contract has commercial substance and the collectibility of the consideration, or transaction price, is probable. Our contracts are often subsequently modified to include changes in specifications, requirements or price that may create new or change existing enforceable rights and obligations. We do not account for contract modifications (including unexercised options) or follow-on contracts until they meet the requirements noted above to account for a contract.
At the inception of each contract, we evaluate the promised goods and services to determine whether the contract should be accounted for as having one or more performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. A substantial majority of our revenue is derived from long-term development and production contracts involving the design, development, manufacture or modification of aerospace and defense products and related services according to the customers’ specifications. Due to the highly interdependent and interrelated nature of the underlying goods and services and the significant service of integration that we provide, which often result in the delivery of multiple units, we account for these contracts as one performance obligation. For contracts that include both development/production and follow-on support services (for example, operations and
maintenance), we generally consider the follow-on services distinct in the context of the contract and account for them as separate performance obligations. Additionally, a significant amount of our revenue is derived from contracts to provide multiple distinct goods to a customer where the goods can readily be sold to other customers based on their commercial nature and, accordingly, these goods are accounted for as separate performance obligations. These arrangements are most prevalent in our Communication Systems segment and primarily involve the sale of secure tactical radios and accessories and other standard products. Shipping and handling costs incurred after control of a product has transferred to the customer (for example, in free on board shipping arrangements) are treated as fulfillment costs and, therefore, are not accounted for as separate performance obligations. Also, we record taxes collected from customers and remitted to governmental authorities on a net basis in that they are excluded from revenue.
As discussed above, our contracts are often subsequently modified to include changes in specifications, requirements or price. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Often, the deliverables in our contract modifications are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract, and we may be required to recognize a cumulative catch-up adjustment to revenue at the date of the contract modification.
We determine the transaction price for each contract based on our best estimate of the consideration we expect to receive, which includes assumptions regarding variable consideration, such as award and incentive fees. These variable amounts are generally awarded upon achievement of certain negotiated performance metrics, program milestones or cost targets and can be based upon customer discretion. We include such estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We estimate variable consideration primarily using the most likely amount method.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price of the good or service underlying each performance obligation. The standalone selling price represents the amount for which we would sell the good or service to a customer on a standalone basis (i.e., not sold as a bundle with any other products or services). Our contracts with the U.S. Government, including foreign military sales contracts, are subject to the Federal Acquisition Regulations (“FAR”) and the prices of our contract deliverables are typically based on our estimated or actual costs plus a reasonable profit margin. As a result, the standalone selling prices of the goods and services in these contracts are typically equal to the selling prices stated in the contract, thereby, eliminating the need to allocate (or reallocate) the transaction price to the multiple performance obligations. In our non-U.S. Government contracts, we also generally use the expected cost plus a reasonable profit margin approach to determine standalone selling price. In addition, we determine standalone selling price for certain contracts that are commercial in nature based on observable selling prices.
We recognize revenue for each performance obligation when (or as) the performance obligation is satisfied by transferring control of the promised goods or services underlying the performance obligation to the customer. The transfer of control can occur over time or at a point in time.
Point in Time Revenue Recognition: Our performance obligations are satisfied at a point in time unless they meet at least one of the following criteria, in which case they are satisfied over time:
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The customer simultaneously receives and consumes the benefits provided by our performance as we perform;
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Our performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced; or
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Our performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date.
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As noted above, a significant amount of our revenue is derived from contracts to provide multiple distinct goods to a customer that are commercial in nature and can readily be sold to other customers. These arrangements are most prevalent in our Communication Systems segment and primarily involve the sale of secure tactical radios and accessories and other standard products. These performance obligations do not meet any of the three criteria listed above to recognize revenue over time; therefore, we recognize revenue at a point in time, generally when the goods are received and accepted by the customer.
Over Time Revenue Recognition: The majority of our revenue recognized over time is for U.S. Government development and production contracts in our Electronic Systems and Space and Intelligence Systems segments. For U.S. Government development and production contracts, there is a continuous transfer of control of the asset to the customer as it is being produced based on FAR clauses in the contract that provide the customer with lien rights to work in process and allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. This also typically applies to our contracts with prime contractors for U.S. Government development and production contracts, when the above-described FAR clauses are flowed down to us by the prime contractors.
Our non-U.S. Government development and production contracts, including international direct commercial contracts and U.S. contracts with state and local agencies, utilities and commercial and transportation organizations, often do not include the FAR clauses described above. However, over time revenue recognition is typically supported either through our performance creating or enhancing an asset that the customer controls as it is created or enhanced or based on other contractual provisions or relevant laws that provide us with an enforceable right to payment for our work performed to date plus a reasonable profit if our customer were permitted to and did terminate the contract for reasons other than our failure to perform as promised.
Revenue for our development and production contracts is recognized over time, typically using the POC cost-to-cost method, whereby we measure our progress towards completion of the performance obligation based on the ratio of costs incurred to date to estimated costs at completion under the contract. Because costs incurred represent work performed, we believe this method best depicts transfer of control of the asset to the customer.
For performance obligations to provide services that are satisfied over time, we generally recognize revenue on a straight-line basis or based on the right-to-invoice method (i.e., based on our right to bill the customer). Because these methods closely reflect the value of the services transferred to the customer, we believe these methods best depict transfer of control to the customer.
Contract Estimates: Under the POC cost-to-cost method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. Recognition of profit on a contract requires estimates of the total cost at completion and transaction price and the measurement of progress towards completion. Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction price include contractual cost or performance incentives (such as incentive fees, award fees and penalties) and other forms of variable consideration as well as our historical experience and our expectation for performance on the contract. At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.
Net EAC adjustments resulting from changes in estimates impacted our operating income favorably by $17 million ($13 million after tax or $.10 per diluted share) in fiscal 2019, and unfavorably by $19 million ($13 million after tax or $.11 per diluted share) in fiscal 2018 and $1 million (.01 per diluted share) in fiscal 2017. Revenue recognized from performance obligations satisfied in prior periods was $59 million, $43 million and $45 million for fiscal 2019, 2018 and 2017, respectively.
Bill-and-Hold Arrangements: For certain of our contracts, the finished product may temporarily be stored at our location under a bill-and-hold arrangement. Revenue is recognized on bill-and-hold arrangements at the point in time when the customer obtains control of the product (for example, through a present right to payment from the customer, transfer of title and/or significant risks and rewards of ownership to the customer and customer acceptance) and all of the following criteria have been met: the arrangement is substantive (for example, the customer has requested the arrangement); the product is identified separately as belonging to the customer; the product is ready for physical transfer to the customer; and we do not have the ability to use the product or direct it to another customer.
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 (“IDIQ”) contracts.
Retirement and Post-Employment Benefits — Defined benefit plans that we sponsor are accounted for as defined benefit pension and other postretirement defined benefit plans (collectively referred to as “defined benefit plans”). Accordingly, the funded or unfunded position of each defined benefit plan is recorded in our Consolidated Balance Sheet. Actuarial gains and losses and prior service costs or credits that have not yet been recognized through income are recorded in the “Accumulated other comprehensive loss” line item within equity in our Consolidated Balance Sheet, net of taxes, until they are amortized as a component of net periodic benefit cost. The determination of benefit obligations and the recognition of expenses related to defined benefit plans are dependent on various assumptions. The major assumptions primarily relate to discount rates, long-term expected rates of return on plan assets, the rate of future compensation increases, mortality, termination, and healthcare cost trend rates. We develop each assumption using relevant Company experience in conjunction with market-related data. Actuarial assumptions are reviewed annually with third-party consultants and adjusted as appropriate. For the recognition of net periodic benefit cost, the calculation of the long-term expected return on plan assets is generally derived using a market-related value of plan assets based on yearly average asset values at the measurement date over the last five years, to be phased in over five years. Actual results that differ from our assumptions are accumulated and generally amortized for each plan to the extent required over the estimated future life expectancy or, if applicable, the future working lifetime of the plan’s active participants. The fair value of plan assets is determined based on market prices or estimated fair value at the measurement date. The measurement date for valuing defined benefit plan assets and obligations is the end of the month closest to our fiscal year end.
See Note 14: Pension and Other Postretirement Benefits for additional information regarding our defined benefit plans.
We also provide retirement benefits to many of our U.S.-based employees through defined contribution retirement plans, including 401(k) plans and certain non-qualified deferred compensation plans. The defined contribution retirement plans have matching and savings elements. Company contributions to the retirement plans are based on employees’ savings with no other funding requirements. We may make additional contributions to the retirement plans at our discretion. Retirement and postretirement benefits also include unfunded limited healthcare plans for U.S.-based retirees and employees on long-term disability. We estimate benefits for these plans using actuarial valuations that are based in part on certain key assumptions we make, including the discount rate, the expected long-term rate of return on plan assets, the rate of future compensation increases, healthcare cost trend rates and employee turnover and mortality, each appropriately based on the nature of the plans. We accrue the cost of these benefits during an employee’s active service life, except in the case of our healthcare plans for disabled employees, the costs of which we accrue when the disabling event occurs.
Environmental Expenditures — We capitalize environmental expenditures that increase the life or efficiency of property or that reduce or prevent environmental contamination. We accrue environmental expenses resulting from existing conditions that relate to past or current operations. Our accruals for environmental expenses are recorded on a site-by-site basis when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies available to us. Our accruals for environmental expenses represent the best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees, and are reviewed periodically, at least annually at the year-end balance sheet date, and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. If the timing and amount of future cash payments for environmental liabilities are fixed or reliably determinable, we generally discount such cash flows in estimating our accrual.
As of June 28, 2019, we were named, and continue to be named, as a potentially responsible party at 60 sites where future liabilities could exist. These sites included 5 sites owned by us, 47 sites associated with our former locations or operations and 8 hazardous waste treatment, storage or disposal facility sites not owned by us that contain hazardous substances allegedly attributable to us from past operations.
Based on an assessment of relevant factors, we estimated that our liability under applicable environmental statutes and regulations for identified sites was approximately $99 million, consisting of approximately $93 million for environmental liabilities related to Exelis operations and approximately $6 million for other environmental liabilities. In each case, 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 Consolidated Balance Sheet.
The relevant factors we considered in estimating our potential liabilities under applicable environmental statutes and regulations included some or all of the following as to each site: incomplete information regarding particular sites and other potentially responsible parties; uncertainty regarding the extent of investigation or remediation; our share, if any, of liability for such conditions; the selection of alternative remedial approaches; changes in environmental standards and regulatory requirements; potential insurance proceeds; cost-sharing agreements with other parties and potential indemnification from successor and predecessor owners of these sites. We do not believe that any uncertainties regarding these relevant factors will materially affect our potential liability under applicable environmental statutes and regulations. We believe the total amount accrued is appropriate based on existing facts and circumstances, although we note the total amount accrued may increase or decrease in future years.
Financial Guarantees and Commercial Commitments — Financial guarantees are contingent commitments issued to guarantee the performance of a customer to a third party in borrowing arrangements, such as commercial paper issuances, bond financings and similar transactions. As of June 28, 2019, we did not have material financial guarantees and there were no such contingent commitments accrued for in our Consolidated Balance Sheet.
We have entered into commercial commitments in the normal course of business including surety bonds, standby letter of credit agreements and 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 and to obtain insurance policies with our insurance carriers.
Financial Instruments and Risk Management — In the normal course of business, we are exposed to global market risks, including the effect of changes in foreign currency exchange rates. We use derivative instruments to manage our exposure to such risks and formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions. We may also enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. We recognize all derivatives in our Consolidated Balance Sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. We do not hold or issue derivatives for speculative trading purposes. See Note 19: Derivative Instruments and Hedging Activities for additional information regarding our use of derivative instruments.
Income From Continuing Operations Per Share — For all periods presented in our Consolidated Financial Statements and these Notes, income from continuing operations per share is computed using the two-class method. The two-class method of computing income from continuing operations per share is an earnings allocation formula that determines income from continuing operations per share for common stock and any participating securities according to dividends paid and participation rights in undistributed earnings. Our restricted stock awards and restricted stock unit awards generally meet the definition of participating securities and are included in the computations of income from continuing operations per basic and diluted common share. Our performance share awards and performance share unit awards do not meet the definition of participating securities because they do not contain rights to receive nonforfeitable dividends and, therefore, are excluded from the computations of income from continuing operations per basic and diluted common share. Under the two-class method, income from continuing operations per common share is computed by dividing the sum of earnings distributed to common shareholders and undistributed earnings allocated to common shareholders by the weighted-average number of common shares outstanding for the period. Income from continuing operations per diluted common share is computed using the more dilutive of the two-class method or the treasury stock method. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted-average shares outstanding during the period. See Note 16: Income From Continuing Operations Per Share for additional information.
Business Segments — We evaluate each segment’s performance based on its operating income or loss, which we define as profit or loss from operations before income taxes, including pension income and excluding interest income and expense, royalties and related intellectual property expenses, equity method investment income or loss and gains or losses from securities and other investments. Intersegment sales are generally transferred at cost to the buying segment, and the sourcing segment recognizes a profit that is eliminated. The “Corporate eliminations” line item in Note 24: Business Segments represents the elimination of intersegment sales. The “Unallocated corporate expense and corporate eliminations” line item in Note 24: Business Segments represents the portion of corporate expenses not allocated to our business segments and elimination of intersegment profits. The “Pension adjustment” line item in Note 24: Business Segments represents the reconciliation of the non-service components of net periodic pension and postretirement benefit costs, which are a component of segment operating income but are included in the “Non-operating income” line item in our Consolidated Statement of Income as a result of our adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”) as discussed in Note 2: Accounting Changes or Recent Accounting Pronouncements. The non-service components of net periodic pension and postretirement benefit costs include interest cost, expected return on plan assets and amortization of net actuarial gain or loss.
NOTE 2: ACCOUNTING CHANGES OR RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
As previously reported, effective June 30, 2018 we adopted ASC 606. This standard supersedes nearly all revenue recognition guidance under GAAP and International Financial Reporting Standards and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based, and, consequently, entities are required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to
separate performance obligations. The core principle of this standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the revenue and cash flows, this standard requires significantly more interim and annual disclosures. We have adopted the requirements of the new standard using the full retrospective method, which means that we have restated each prior reporting period presented and recognized the cumulative effect of applying the standard at the earliest period presented. We opted for this adoption method because we believe it provides enhanced comparability and transparency across periods. We elected to apply the practical expedient related to backlog disclosures for prior reporting periods. We also elected to apply the practical expedient related to evaluating the effects of contract modifications that occurred prior to the earliest period presented. No other transition practical expedients were applied.
Adopting this standard resulted in the recognition of a cumulative-effect adjustment of $15 million to reduce the opening balance of retained earnings at July 2, 2016. Our fiscal 2017 revenue from product sales and services decreased by $3 million and our income from continuing operations decreased by $10 million ($.08 per share). Our fiscal 2018 revenue from product sales and services decreased by $14 million and our income from continuing operations decreased by $19 million ($.15 per share). This standard also resulted in the establishment of “Contract assets” and “Contract liabilities” line items and the reclassification to these line items of amounts previously presented in the “Receivables,” “Inventories” and “Advanced payments and unearned income” line items in our Consolidated Balance Sheet. Total net cash provided by operating activities and total net cash provided by or used in investing activities and financing activities in our Consolidated Statements of Cash Flows were not impacted by the adoption of ASC 606. These amounts are reflected in the tables below and are updated from the preliminary assessment of the impacts of adopting ASC 606 included in our Fiscal 2018 Annual Report on Form 10-K.
We also adopted ASU 2017-07 effective June 30, 2018. This standard requires that entities present components of net periodic pension and postretirement benefit costs other than the service cost component (“other components of net benefit cost”) separately from the service cost component. The other components of net benefit cost may be presented as a separate line item or items, or if a separate line item is not used, the line item used to present the other components of net benefit cost must be disclosed. Previously, we included each component of net benefit cost within the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Consolidated Statement of Income. In accordance with this update, we present the other components of net benefit cost as part of the “Non-operating income” line item in our Consolidated Statement of Income. We adopted this update retrospectively by recasting each prior period presented, using as our estimation basis for recasting prior periods the amounts disclosed in the postretirement benefit plan footnote to our previously issued financial statements. Adopting this update resulted in a $147 million increase in cost of sales and services, a $37 million increase in engineering, selling and administrative expenses and a corresponding $184 million increase in non-operating income for fiscal 2018, with no impact to net income, and a $132 million increase in cost of sales and services, a $32 million increase in engineering, selling and administrative expenses and a corresponding $164 million increase in non-operating income for fiscal 2017, with no impact to net income. Adopting this accounting standard did not impact our financial position or cash flows.
The following tables summarize the effect of adopting ASC 606 and ASU 2017-07 on our Consolidated Statement of Income for fiscal 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 29, 2018
|
|
As Previously Reported
|
|
Effect of Adopting ASC 606
|
|
Effect of Adopting ASU 2017-07
|
|
As Recast
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Revenue from product sales and services
|
|
|
|
|
|
|
|
Revenue from product sales
|
$
|
5,062
|
|
|
$
|
(24
|
)
|
|
$
|
—
|
|
|
$
|
5,038
|
|
Revenue from services
|
1,120
|
|
|
10
|
|
|
—
|
|
|
1,130
|
|
|
6,182
|
|
|
(14
|
)
|
|
—
|
|
|
6,168
|
|
Cost of product sales and services
|
|
|
|
|
|
|
|
Cost of product sales
|
(3,106
|
)
|
|
14
|
|
|
(147
|
)
|
|
(3,239
|
)
|
Cost of services
|
(825
|
)
|
|
(2
|
)
|
|
—
|
|
|
(827
|
)
|
|
(3,931
|
)
|
|
12
|
|
|
(147
|
)
|
|
(4,066
|
)
|
Engineering, selling and administrative expenses
|
(1,129
|
)
|
|
(16
|
)
|
|
(37
|
)
|
|
(1,182
|
)
|
Non-operating income (loss)
|
(28
|
)
|
|
—
|
|
|
184
|
|
|
156
|
|
Interest income
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Interest expense
|
(170
|
)
|
|
—
|
|
|
—
|
|
|
(170
|
)
|
Income from continuing operations before income taxes
|
926
|
|
|
(18
|
)
|
|
—
|
|
|
908
|
|
Income taxes
|
(205
|
)
|
|
(1
|
)
|
|
—
|
|
|
(206
|
)
|
Income from continuing operations
|
721
|
|
|
(19
|
)
|
|
—
|
|
|
702
|
|
Discontinued operations, net of income taxes
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Net income
|
$
|
718
|
|
|
$
|
(19
|
)
|
|
$
|
—
|
|
|
$
|
699
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
6.06
|
|
|
$
|
(0.16
|
)
|
|
$
|
—
|
|
|
$
|
5.90
|
|
Discontinued operations
|
(0.02
|
)
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
|
$
|
6.04
|
|
|
$
|
(0.16
|
)
|
|
$
|
—
|
|
|
$
|
5.88
|
|
Diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
5.94
|
|
|
$
|
(0.16
|
)
|
|
$
|
—
|
|
|
$
|
5.78
|
|
Discontinued operations
|
(0.02
|
)
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
|
$
|
5.92
|
|
|
$
|
(0.16
|
)
|
|
$
|
—
|
|
|
$
|
5.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2017
|
|
As Previously Reported
|
|
Effect of Adopting ASC 606
|
|
Effect of Adopting ASU 2017-07
|
|
As Recast
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Revenue from product sales and services
|
|
|
|
|
|
|
|
Revenue from product sales
|
$
|
4,667
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,667
|
|
Revenue from services
|
1,233
|
|
|
(3
|
)
|
|
—
|
|
|
1,230
|
|
|
5,900
|
|
|
(3
|
)
|
|
—
|
|
|
5,897
|
|
Cost of product sales and services
|
|
|
|
|
|
|
|
Cost of product sales
|
(2,964
|
)
|
|
10
|
|
|
(104
|
)
|
|
(3,058
|
)
|
Cost of services
|
(770
|
)
|
|
2
|
|
|
(28
|
)
|
|
(796
|
)
|
|
(3,734
|
)
|
|
12
|
|
|
(132
|
)
|
|
(3,854
|
)
|
Engineering, selling and administrative expenses
|
(1,093
|
)
|
|
(25
|
)
|
|
(32
|
)
|
|
(1,150
|
)
|
Non-operating income
|
2
|
|
|
—
|
|
|
164
|
|
|
166
|
|
Interest income
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Interest expense
|
(172
|
)
|
|
—
|
|
|
—
|
|
|
(172
|
)
|
Income from continuing operations before income taxes
|
905
|
|
|
(16
|
)
|
|
—
|
|
|
889
|
|
Income taxes
|
(267
|
)
|
|
6
|
|
|
—
|
|
|
(261
|
)
|
Income from continuing operations
|
638
|
|
|
(10
|
)
|
|
—
|
|
|
628
|
|
Discontinued operations, net of income taxes
|
(85
|
)
|
|
—
|
|
|
—
|
|
|
(85
|
)
|
Net income
|
$
|
553
|
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
543
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
5.19
|
|
|
$
|
(0.08
|
)
|
|
$
|
—
|
|
|
$
|
5.11
|
|
Discontinued operations
|
(0.69
|
)
|
|
—
|
|
|
—
|
|
|
(0.69
|
)
|
|
$
|
4.50
|
|
|
$
|
(0.08
|
)
|
|
$
|
—
|
|
|
$
|
4.42
|
|
Diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
5.12
|
|
|
$
|
(0.08
|
)
|
|
$
|
—
|
|
|
$
|
5.04
|
|
Discontinued operations
|
(0.68
|
)
|
|
—
|
|
|
—
|
|
|
(0.68
|
)
|
|
$
|
4.44
|
|
|
$
|
(0.08
|
)
|
|
$
|
—
|
|
|
$
|
4.36
|
|
The following table summarizes the effect of the adoption of ASC 606 on our Consolidated Balance Sheet at June 29, 2018 and June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29, 2018
|
|
June 30, 2017
|
|
As Previously Reported
|
|
Effect of Adopting ASC 606
|
|
As Recast
|
|
As Previously Reported
|
|
Effect of adopting ASC 606
|
|
As Recast
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
288
|
|
|
$
|
—
|
|
|
$
|
288
|
|
|
$
|
484
|
|
|
$
|
—
|
|
|
$
|
484
|
|
Receivables
|
735
|
|
|
(269
|
)
|
|
466
|
|
|
623
|
|
|
(258
|
)
|
|
365
|
|
Contract assets
|
—
|
|
|
782
|
|
|
782
|
|
|
—
|
|
|
706
|
|
|
706
|
|
Inventories
|
925
|
|
|
(514
|
)
|
|
411
|
|
|
841
|
|
|
(449
|
)
|
|
392
|
|
Income taxes receivable
|
174
|
|
|
—
|
|
|
174
|
|
|
24
|
|
|
—
|
|
|
24
|
|
Other current assets
|
101
|
|
|
2
|
|
|
103
|
|
|
101
|
|
|
—
|
|
|
101
|
|
Total current assets
|
2,223
|
|
|
1
|
|
|
2,224
|
|
|
2,073
|
|
|
(1
|
)
|
|
2,072
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
900
|
|
|
—
|
|
|
900
|
|
|
904
|
|
|
—
|
|
|
904
|
|
Goodwill
|
5,372
|
|
|
—
|
|
|
5,372
|
|
|
5,366
|
|
|
—
|
|
|
5,366
|
|
Other intangible assets
|
989
|
|
|
—
|
|
|
989
|
|
|
1,104
|
|
|
—
|
|
|
1,104
|
|
Non-current deferred income taxes
|
116
|
|
|
3
|
|
|
119
|
|
|
409
|
|
|
15
|
|
|
424
|
|
Other non-current assets
|
239
|
|
|
8
|
|
|
247
|
|
|
234
|
|
|
8
|
|
|
242
|
|
Total non-current assets
|
7,616
|
|
|
11
|
|
|
7,627
|
|
|
8,017
|
|
|
23
|
|
|
8,040
|
|
|
$
|
9,839
|
|
|
$
|
12
|
|
|
$
|
9,851
|
|
|
$
|
10,090
|
|
|
$
|
22
|
|
|
$
|
10,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
78
|
|
|
$
|
80
|
|
|
$
|
—
|
|
|
$
|
80
|
|
Accounts payable
|
622
|
|
|
—
|
|
|
622
|
|
|
540
|
|
|
—
|
|
|
540
|
|
Advanced payments and unearned income
|
314
|
|
|
(314
|
)
|
|
—
|
|
|
252
|
|
|
(252
|
)
|
|
$
|
—
|
|
Contract liabilities
|
—
|
|
|
372
|
|
|
372
|
|
|
—
|
|
|
291
|
|
|
291
|
|
Compensation and benefits
|
142
|
|
|
—
|
|
|
142
|
|
|
140
|
|
|
—
|
|
|
140
|
|
Other accrued items
|
313
|
|
|
4
|
|
|
317
|
|
|
329
|
|
|
3
|
|
|
332
|
|
Income taxes payable
|
15
|
|
|
—
|
|
|
15
|
|
|
31
|
|
|
(1
|
)
|
|
30
|
|
Current portion of long-term debt, net
|
304
|
|
|
—
|
|
|
304
|
|
|
554
|
|
|
—
|
|
|
554
|
|
Total current liabilities
|
1,788
|
|
|
62
|
|
|
1,850
|
|
|
1,926
|
|
|
41
|
|
|
1,967
|
|
Non-current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
714
|
|
|
—
|
|
|
714
|
|
|
1,278
|
|
|
—
|
|
|
1,278
|
|
Long-term debt, net
|
3,408
|
|
|
—
|
|
|
3,408
|
|
|
3,396
|
|
|
—
|
|
|
3,396
|
|
Non-current deferred income taxes
|
90
|
|
|
(11
|
)
|
|
79
|
|
|
34
|
|
|
—
|
|
|
34
|
|
Other long-term liabilities
|
517
|
|
|
5
|
|
|
522
|
|
|
528
|
|
|
6
|
|
|
534
|
|
Total non-current liabilities
|
4,729
|
|
|
(6
|
)
|
|
4,723
|
|
|
5,236
|
|
|
6
|
|
|
5,242
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
118
|
|
|
—
|
|
|
118
|
|
|
120
|
|
|
—
|
|
|
120
|
|
Other capital
|
1,714
|
|
|
—
|
|
|
1,714
|
|
|
1,741
|
|
|
—
|
|
|
1,741
|
|
Retained earnings
|
1,692
|
|
|
(44
|
)
|
|
1,648
|
|
|
1,343
|
|
|
(25
|
)
|
|
1,318
|
|
Accumulated other comprehensive loss
|
(202
|
)
|
|
—
|
|
|
(202
|
)
|
|
(276
|
)
|
|
—
|
|
|
(276
|
)
|
Total equity
|
3,322
|
|
|
(44
|
)
|
|
3,278
|
|
|
2,928
|
|
|
(25
|
)
|
|
2,903
|
|
|
$
|
9,839
|
|
|
$
|
12
|
|
|
$
|
9,851
|
|
|
$
|
10,090
|
|
|
$
|
22
|
|
|
$
|
10,112
|
|
The following table presents the effect of the adoption of ASC 606 on our Consolidated Statement of Cash Flows for fiscal 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
June 29, 2018
|
|
June 30, 2017
|
|
As Previously Reported
|
|
Effect of Adopting ASC 606
|
|
As Recast
|
|
As Previously Reported
|
|
Effect of Adopting ASC 606
|
|
As Recast
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Net income
|
$
|
718
|
|
|
(19
|
)
|
|
$
|
699
|
|
|
$
|
553
|
|
|
$
|
(10
|
)
|
|
$
|
543
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquisition-related intangibles(1)
|
117
|
|
|
—
|
|
|
117
|
|
|
151
|
|
|
—
|
|
|
151
|
|
Depreciation and other amortization(1)
|
142
|
|
|
—
|
|
|
142
|
|
|
160
|
|
|
—
|
|
|
160
|
|
Share-based compensation
|
82
|
|
|
—
|
|
|
82
|
|
|
42
|
|
|
—
|
|
|
42
|
|
Qualified pension plan contributions
|
(301
|
)
|
|
—
|
|
|
(301
|
)
|
|
(589
|
)
|
|
—
|
|
|
(589
|
)
|
Pension income
|
(135
|
)
|
|
—
|
|
|
(135
|
)
|
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
Impairment of goodwill and other assets
|
—
|
|
|
—
|
|
|
—
|
|
|
240
|
|
|
—
|
|
|
240
|
|
Los on sales of businesses, net
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
Loss on extinguishment of debt
|
24
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
(112
|
)
|
|
11
|
|
|
(101
|
)
|
|
111
|
|
|
(87
|
)
|
|
24
|
|
Contract assets
|
—
|
|
|
(76
|
)
|
|
(76
|
)
|
|
—
|
|
|
156
|
|
|
156
|
|
Inventories
|
(84
|
)
|
|
65
|
|
|
(19
|
)
|
|
28
|
|
|
(60
|
)
|
|
(32
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
82
|
|
|
—
|
|
|
82
|
|
|
18
|
|
|
—
|
|
|
18
|
|
Advance payments and unearned income
|
63
|
|
|
(63
|
)
|
|
—
|
|
|
(42
|
)
|
|
42
|
|
|
—
|
|
Contract liabilities
|
—
|
|
|
81
|
|
|
81
|
|
|
—
|
|
|
(31
|
)
|
|
(31
|
)
|
Income taxes
|
202
|
|
|
—
|
|
|
202
|
|
|
131
|
|
|
(20
|
)
|
|
111
|
|
Other
|
(47
|
)
|
|
1
|
|
|
(46
|
)
|
|
(151
|
)
|
|
10
|
|
|
(141
|
)
|
Net cash provided by operating activities
|
$
|
751
|
|
|
$
|
—
|
|
|
$
|
751
|
|
|
$
|
569
|
|
|
$
|
—
|
|
|
$
|
569
|
|
_______________
|
|
(1)
|
“Amortization of acquisition-related intangibles” includes amortization of non-Exelis Inc. acquisition-related intangibles, which was previously included in the “Depreciation and amortization” line item in our Consolidated Statement of Cash Flows in our Fiscal 2018 Annual Report on Form 10-K.
|
Accounting Standards Issued But Not Yet Effective
In February 2016, the Financial Accounting Standards Board issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires, among other things, the recognition of right-of-use assets and liabilities on the balance sheet for most lease arrangements and disclosure of certain information about leasing arrangements. The new standard currently allows two transition methods with certain practical expedients available. Companies may elect to use the modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements or to initially apply this standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
We are adopting the new standard effective June 29, 2019 by applying the standard at the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings. We plan to elect the package of practical expedients permitted by the standard, which, among other things, allows us to carry forward the historical lease classification. The substantial majority of our current lease arrangements are classified as operating leases under existing GAAP lease guidance, and they will continue to be classified as operating leases under the new standard. We have made substantial progress in executing our implementation plan, including identifying our lease population. We are in the process of implementing a new lease management software tool, a new accounting policy, as well as new processes and internal controls. We expect to record right-of-use assets and liabilities of $200 million to $300 million on our Consolidated Balance Sheet for historical Harris’ leases. This quantification does not take into account any potential impact that may result from the L3Harris Merger. We do not expect that the adoption of this standard will have a material impact on our results of operations or cash flows.
NOTE 3: DISCONTINUED OPERATIONS AND DIVESTITURES
Discontinued Operations
We completed two significant divestitures during fiscal 2017, the divestiture of our government information technology (“IT”) services business (“IT Services”) and the divestiture of our Harris CapRock Communications commercial business (“CapRock”), which are described in more detail below. These divestitures individually and collectively represented a strategic shift away from non-core markets (for example, energy, maritime and government IT services). The decision to divest these businesses was part of our strategy to simplify our operating model to focus on technology-differentiated, high-margin businesses, and had a major effect on our operations and financial results.
As a result, IT Services and CapRock are reported as discontinued operations in the accompanying Consolidated Financial Statements and these Notes. Except for disclosures related to our cash flows, or unless otherwise specified, disclosures in the accompanying Consolidated Financial Statements and these Notes relate solely to our continuing operations.
The major components of discontinued operations in our Consolidated Statement of Income included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Revenue from product sales and services
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,039
|
|
Cost of product sales and services
|
—
|
|
|
—
|
|
|
(885
|
)
|
Engineering, selling and administrative expenses
|
—
|
|
|
—
|
|
|
(91
|
)
|
Impairment of goodwill and other assets
|
—
|
|
|
—
|
|
|
(240
|
)
|
Non-operating loss, net(1)
|
(5
|
)
|
|
(8
|
)
|
|
(7
|
)
|
Loss before income taxes
|
(5
|
)
|
|
(8
|
)
|
|
(184
|
)
|
Loss on sale of discontinued operations, net(2)
|
—
|
|
|
—
|
|
|
(11
|
)
|
Income tax benefit
|
1
|
|
|
5
|
|
|
110
|
|
Discontinued operations, net of income taxes
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
|
$
|
(85
|
)
|
_______________
|
|
(1)
|
“Non-operating loss, net” included a loss of $2 million in fiscal 2017 related to our former broadcast communications business (“Broadcast Communications”), which was divested in fiscal 2013.
|
|
|
(2)
|
“Loss on sale of discontinued operations, net” in fiscal 2017 included a $3 million decrease to the loss on the sale of Broadcast Communications.
|
Depreciation and amortization, capital expenditures and significant non-cash items of discontinued operations included the following:
|
|
|
|
|
|
2017
|
|
|
|
(In millions)
|
Depreciation and amortization
|
$
|
39
|
|
Capital expenditures
|
4
|
|
Significant non-cash items:
|
|
Impairment of goodwill and other assets
|
(240
|
)
|
Loss on sale of discontinued operations, net
|
(11
|
)
|
IT Services
On April 28, 2017, we completed the divestiture to an affiliate of Veritas Capital Fund Management, L.L.C. (“Veritas”) of IT Services, which primarily provided IT and engineering managed services to U.S. Government customers, for net cash proceeds of $646 million, and recognized a pre-tax loss of $28 million (an after-tax gain of $55 million after certain tax benefits related to the transaction or $.44 per diluted share) on the sale after transaction expenses. The decision to divest IT Services was part of our strategy to simplify our operating model to focus on technology-differentiated, high-margin businesses. IT Services was part of our former Critical Networks segment and in connection with the definitive agreement to sell IT Services, as described above, the other remaining operations that had been a part of the Critical Networks segment, including our air traffic management business, primarily serving the Federal Aviation Administration (“FAA”), were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. We agreed to provide various transition services to Veritas for a period of up to 18 months following the closing of the transaction pursuant to a separate agreement.
Because the then-pending divestiture of IT Services represented the disposal of a portion of a reporting unit within our former Critical Networks segment, we assigned $487 million of goodwill to the IT Services disposal group on a relative fair value basis during the third quarter of fiscal 2017, when the held for sale criteria were met. The fair value of the IT Services disposal group was determined based on the negotiated selling price, and the fair value of the retained businesses (which comprised the remaining portion of the reporting unit) was determined based on a combination of market-based valuation techniques, utilizing quoted market prices and 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 1: Significant Accounting Policies for additional information regarding the fair value hierarchy.
In conjunction with the allocation, we tested goodwill assigned to the disposal group and goodwill allocated to the retained businesses for impairment. As a result, we concluded that goodwill and other assets related to IT Services were impaired as of March 31, 2017, and we recorded a non-cash impairment charge of $240 million in discontinued operations, $228 million of which related to goodwill. The goodwill impairment charge was non-deductible for tax purposes.
The following table presents the key financial results of IT Services included in “Discontinued operations, net of income taxes” in our Consolidated Statement of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Revenue from product sales and services
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
895
|
|
Cost of product sales and services
|
—
|
|
|
—
|
|
|
(777
|
)
|
Engineering, selling and administrative expenses
|
—
|
|
|
—
|
|
|
(68
|
)
|
Impairment of goodwill and other assets
|
—
|
|
|
—
|
|
|
(240
|
)
|
Non-operating loss
|
(1
|
)
|
|
(4
|
)
|
|
(9
|
)
|
Loss before income taxes
|
(1
|
)
|
|
(4
|
)
|
|
(199
|
)
|
Loss on sale of discontinued operations, net
|
—
|
|
|
—
|
|
|
(28
|
)
|
Income tax benefit
|
—
|
|
|
5
|
|
|
69
|
|
Discontinued operations, net of income taxes
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
(158
|
)
|
CapRock
On January 1, 2017, we completed the divestiture to SpeedCast International Ltd. of CapRock, which provided wireless, terrestrial and satellite communications services to energy and maritime customers, for net cash proceeds of $368 million, and recognized a pre-tax gain of $14 million ($61 million after certain tax benefits related to the transaction, including reversal of valuation allowances on capital losses and net operating losses, or $.49 per diluted share) on the sale after
transaction expenses and purchase adjustments in respect of net cash and net working capital as set forth in the definitive sales
agreement entered into November 1, 2016.
The following table presents the key financial results of CapRock included in “Discontinued operations, net of income taxes” included in our Consolidated Statement of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Revenue from product sales and services
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
144
|
|
Cost of product sales and services
|
—
|
|
|
—
|
|
|
(108
|
)
|
Engineering, selling and administrative expenses
|
—
|
|
|
—
|
|
|
(23
|
)
|
Non-operating income (loss)
|
(3
|
)
|
|
(4
|
)
|
|
4
|
|
Income (loss) before income taxes
|
(3
|
)
|
|
(4
|
)
|
|
17
|
|
Gain on sale of discontinued operations
|
—
|
|
|
—
|
|
|
14
|
|
Income tax benefit
|
1
|
|
|
—
|
|
|
41
|
|
Discontinued operations, net of income taxes
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
72
|
|
Divestitures
As part of the regulatory process in connection with the L3Harris Merger, we entered into a definitive agreement on April 4, 2019 to sell Harris Night Vision business to Elbit Systems of America, LLC, a subsidiary of Elbit Systems Ltd., for
$350 million in cash, subject to customary purchase price adjustments as set forth in the definitive agreement. The sale transaction was conditioned on completion of the L3Harris Merger, as well as customary closing conditions, including receipt of regulatory approvals. The Harris Night Vision business, which is reported as part of our Communication Systems Segment in this Report, is a global supplier of high-performance, vision-enhancing products for U.S. and allied military and security forces and commercial customers. During the fourth quarter of fiscal 2019, we received all necessary regulatory approvals for the L3Harris Merger and the assets and liabilities of the Harris Night Vision business were classified as held for sale in our Consolidated Balance Sheet at June 28, 2019. We expect to close the sale of the Harris Night Vision business during the third quarter of calendar year 2019 and use the proceeds from the sale to pre-fund L3Harris pension plans and return cash to shareholders.
Summarized financial information for the Harris Night Vision business is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Revenue from product sales and services
|
$
|
166
|
|
|
$
|
148
|
|
|
$
|
121
|
|
Income before income taxes
|
27
|
|
|
23
|
|
|
11
|
|
|
|
|
|
|
|
Receivables
|
$
|
18
|
|
|
|
|
|
Inventories
|
52
|
|
|
|
|
|
Property, plant and equipment
|
29
|
|
|
|
|
|
Goodwill
|
30
|
|
|
|
|
|
Other intangible assets
|
4
|
|
|
|
|
|
Assets of disposal group held for sale
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
13
|
|
|
|
|
|
Contract liabilities
|
1
|
|
|
|
|
|
Compensation and benefits
|
3
|
|
|
|
|
|
Other accrued items
|
3
|
|
|
|
|
|
Defined benefit plans
|
16
|
|
|
|
|
|
Liabilities of disposal group held for sale
|
$
|
36
|
|
|
|
|
|
NOTE 4: RESTRUCTURING AND OTHER EXIT COSTS
We record charges for restructuring and other exit activities related to sales or terminations of product lines, closures or relocations of business activities, changes in management structure, and fundamental reorganizations that affect the nature and focus of operations. Such charges include termination benefits, contract termination costs 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. These charges are included as a component of the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Consolidated Statement of Income.
Restructuring, Exelis Acquisition-Related Integration and Other Charges
In fiscal 2018, we recorded $5 million of charges for integration and other costs in connection with our acquisition of Exelis in fiscal 2015, substantially all of which were included as a component of the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income.
In fiscal 2017, we recorded $58 million of charges for integration and other costs in connection with our acquisition of Exelis, substantially all of which were included as a component of the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income.
We had liabilities of $16 million and $27 million as of the end of fiscal 2019 and 2018, respectively, associated with these integration activities and previous restructuring actions. The majority of the remaining liabilities as of the end of fiscal 2019 represent lease obligations associated with exited facilities with remaining terms of five years or less.
Other Exit-Related Charges
In fiscal 2018, we recorded $45 million of charges in connection with our decision to transition and exit a commercial line of business that had been developing an air-to-ground radio access network for the business aviation market based on the Long Term Evolution (“LTE”) standard operating in the unlicensed spectrum. These charges are included as a component of “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income. We had a liability of $18 million at June 29, 2018 associated with this exit activity, which was paid on July 2, 2018.
NOTE 5: RECEIVABLES
Receivables are summarized below:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Accounts receivable
|
$
|
459
|
|
|
$
|
468
|
|
Less allowances for collection losses
|
(2
|
)
|
|
(2
|
)
|
|
$
|
457
|
|
|
$
|
466
|
|
We have a receivables sale agreement (“RSA”) with a third-party financial institution that permits us to sell, on a nonrecourse basis, up to $50 million of outstanding receivables at any given time. From time to time, we have sold certain
customer receivables under the RSA, which we continue to service and collect on behalf of the third-party financial
institution. Receivables sold pursuant to the RSA meet the requirements for sales accounting under Accounting Standards Codification 860, Transfers and Servicing, and accordingly, are derecognized from our Consolidated Balance Sheet at the time of sale. Outstanding accounts receivable sold pursuant to the RSA were not material as of the end of fiscal 2019, 2018 and 2017.
NOTE 6: CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets include unbilled amounts typically resulting from revenue recognized exceeding amounts billed to customers for contracts utilizing the POC cost-to-cost revenue recognition method. 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. The increase in contract liabilities in fiscal 2019 was primarily due to an increase in the receipt of advance payments and the timing of contractual billing milestones. Changes in contract assets and contract liabilities balances during the fiscal year ended June 29, 2018 were not materially impacted by any factors other than those described above.
Contract assets and contract liabilities are summarized below:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Contract assets
|
$
|
807
|
|
|
$
|
782
|
|
Contract liabilities, current
|
(496
|
)
|
|
(372
|
)
|
Contract liabilities, noncurrent(1)
|
(42
|
)
|
|
(35
|
)
|
Net contract assets
|
$
|
269
|
|
|
$
|
375
|
|
_______________
|
|
(1)
|
Non-current portion of contract liabilities are included as a component of the “Other long-term liabilities” line item in our Consolidated Balance Sheet.
|
The components of contract assets are summarized below:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Unbilled contract receivables, gross
|
$
|
916
|
|
|
$
|
881
|
|
Progress payments
|
(109
|
)
|
|
(99
|
)
|
|
$
|
807
|
|
|
$
|
782
|
|
Impairment losses related to our contract assets were not material during fiscal 2019, 2018 or 2017. During fiscal 2019, 2018 and 2017, we recognized $287 million, $204 million and $221 million, respectively, of revenue related to contract liabilities that were outstanding at the end of the prior fiscal year.
NOTE 7: INVENTORIES
Inventories are summarized below:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Finished products
|
$
|
77
|
|
|
$
|
91
|
|
Work in process
|
90
|
|
|
121
|
|
Raw materials and supplies
|
193
|
|
|
199
|
|
|
$
|
360
|
|
|
$
|
411
|
|
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized below:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Land
|
$
|
40
|
|
|
$
|
43
|
|
Software capitalized for internal use
|
187
|
|
|
171
|
|
Buildings
|
631
|
|
|
620
|
|
Machinery and equipment
|
1,429
|
|
|
1,349
|
|
|
2,287
|
|
|
2,183
|
|
Less accumulated depreciation and amortization
|
(1,393
|
)
|
|
(1,283
|
)
|
|
$
|
894
|
|
|
$
|
900
|
|
Depreciation and amortization expense related to property, plant and equipment was $138 million, $143 million and $147 million in fiscal 2019, 2018 and 2017, respectively.
NOTE 9: GOODWILL
The assignment of goodwill by business segment, and changes in the carrying amount of goodwill for the fiscal years ended June 28, 2019 and June 29, 2018, by business segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication
Systems
|
|
Electronic
Systems
|
|
Space and Intelligence
Systems
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Balance at June 30, 2017
|
$
|
785
|
|
|
$
|
3,104
|
|
|
$
|
1,477
|
|
|
$
|
5,366
|
|
Currency translation adjustments
|
—
|
|
|
3
|
|
|
3
|
|
|
6
|
|
Balance at June 29, 2018
|
785
|
|
|
3,107
|
|
|
1,480
|
|
|
5,372
|
|
Currency translation adjustments
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Decrease from reclassification to assets of disposal group held for sale(1)
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
(30
|
)
|
Balance at June 28, 2019
|
$
|
755
|
|
|
$
|
3,106
|
|
|
$
|
1,479
|
|
|
$
|
5,340
|
|
_______________
|
|
(1)
|
In connection with our pending divestiture of the Harris Night Vision business, which is reported as part of our Communication Systems segment, we assigned $30 million of goodwill to the Harris Night Vision business during the quarter ended June 28, 2019 on a relative fair value basis, because the pending divestiture of the Harris Night Vision business represents the disposal of a portion of a reporting unit. Harris Night Vision assets, including assigned goodwill, are presented as “Assets of disposal group held for sale” in our Consolidated Balance Sheet as of June 28, 2019. See Note 3: Discontinued Operations and Divestitures and Note 26: Subsequent Events in these Notes for additional information.
|
NOTE 10: INTANGIBLE ASSETS
Unless otherwise specified, all disclosures in this Note relate to Harris Corporation as of June 28, 2019 and exclude any information related to and any potential impact that has resulted or may result from the L3Harris Merger (as described in Note 1: Significant Accounting Policies under “Principles of Consolidation” and Note 26: Subsequent Events).
We assess the recoverability of the carrying value of our long-lived assets, including intangible assets with finite useful lives, whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable.
Intangible assets are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Customer relationships
|
$
|
1,203
|
|
|
$
|
419
|
|
|
$
|
784
|
|
|
$
|
1,206
|
|
|
$
|
327
|
|
|
$
|
879
|
|
Developed technologies
|
206
|
|
|
136
|
|
|
70
|
|
|
208
|
|
|
119
|
|
|
89
|
|
Trade names
|
42
|
|
|
26
|
|
|
16
|
|
|
43
|
|
|
22
|
|
|
21
|
|
Other
|
2
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
Total intangible assets
|
$
|
1,453
|
|
|
$
|
583
|
|
|
$
|
870
|
|
|
$
|
1,459
|
|
|
$
|
470
|
|
|
$
|
989
|
|
Amortization expense related to intangible assets was $115 million, $117 million and $126 million in fiscal 2019, 2018 and 2017, respectively, including approximately $101 million, $101 million and $109 million, respectively, of amortization expense for intangible assets related to our acquisition of Exelis.
Future estimated amortization expense for intangible assets is as follows:
|
|
|
|
|
|
(In millions)
|
Year 1
|
$
|
101
|
|
Year 2
|
101
|
|
Year 3
|
101
|
|
Year 4
|
101
|
|
Year 5
|
101
|
|
Thereafter
|
365
|
|
Total
|
$
|
870
|
|
NOTE 11: ACCRUED WARRANTIES
Changes in our liability for standard product warranties, which is included as a component of the “Other accrued items” and “Other long-term liabilities” line items in our Consolidated Balance Sheet, during fiscal 2019 and 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
(In millions)
|
Balance at beginning of fiscal year
|
$
|
24
|
|
|
$
|
26
|
|
Warranty provision for sales
|
16
|
|
|
13
|
|
Settlements
|
(11
|
)
|
|
(14
|
)
|
Other, including adjustments for divestitures and foreign currency translation
|
(4
|
)
|
|
(1
|
)
|
Balance at end of fiscal year
|
$
|
25
|
|
|
$
|
24
|
|
We also sell extended product warranties and recognize revenue from these arrangements over the warranty period. Costs of warranty services under these arrangements are recognized as incurred. Deferred revenue associated with extended product warranties at June 28, 2019 and June 29, 2018 was $26 million and $16 million, respectively, and is included as a component of the “Contract liabilities” and “Other long-term liabilities” line items in our Consolidated Balance Sheet.
NOTE 12: CREDIT ARRANGEMENTS
On June 28, 2019, we established a new $2 billion, 5-year senior unsecured revolving credit facility (the “2019 Credit Facility”) by entering into a Revolving Credit Agreement (the “2019 Credit Agreement”) with a syndicate of lenders. The 2019 Credit Facility replaced our prior $1 billion, 5-year senior unsecured revolving credit facility established under the Revolving Credit Agreement, dated as of June 26, 2018 (the “2018 Credit Agreement”). No loans or letters of credit under the 2018 Credit Agreement were outstanding at the time of, or were repaid in connection with, such termination, and we incurred no early termination penalties as a result of such termination.
The 2019 Credit Agreement provides for the extension of credit to us in the form of revolving loans, including swingline loans and letters of credit, at any time and from time to time during the term of the 2019 Credit Agreement, in an aggregate principal amount at any time outstanding not to exceed $2 billion for both revolving loans and letters of credit, with a sub-limit of $140 million for swingline loans and a sub-limit of $350 million for letters of credit. Borrowings under the 2019 Credit Agreement may be denominated in U.S. Dollars, Euros, Sterling and any other currency acceptable to the administrative agent and the lenders, with a foreign currency sub-limit of $400 million. The 2019 Credit Agreement includes a provision pursuant to which, from time to time, we may request that the lenders in their discretion increase the maximum amount of commitments under the 2019 Credit Agreement by an amount not to exceed $1 billion. Only consenting lenders (including new lenders reasonably acceptable to the administrative agent) will participate in any increase. In no event will the maximum amount of credit extensions available under the 2019 Credit Agreement exceed $3 billion. The proceeds of loans or letters of credit borrowings under the 2019 Credit Agreement are restricted from being used for hostile acquisitions (as defined in the 2019 Credit Agreement) or for any purpose in contravention of applicable laws. We are not otherwise restricted under the 2019 Credit Agreement from using the proceeds of loans or letters of credit borrowings under the 2019 Credit Agreement for working capital and other general corporate purposes or from using the 2019 Credit Facility to refinance existing debt and to repay maturing commercial paper issued by us from time to time. Subject to certain conditions stated in the 2019 Credit Agreement (including the absence of any default and the accuracy of certain representations and warranties), we may borrow, prepay and re-borrow amounts under the 2019 Credit Agreement at any time during the term of the 2019 Credit Agreement.
The 2019 Credit Agreement provides that we may designate wholly-owned subsidiaries organized in the United States, Canada or the United Kingdom (or such other jurisdictions as all lenders shall approve) as borrowers under the 2019 Credit Agreement. The obligations of any such subsidiary borrower shall be guaranteed by us.
The 2019 Credit Agreement provides that we may from time to time designate certain of our subsidiaries as unrestricted subsidiaries, which means certain of the representations and covenants in the 2019 Credit Agreement do not apply in respect of such subsidiaries.
At our election, borrowings under the 2019 Credit Agreement denominated in U.S. Dollars will bear interest either at (i) the eurocurrency rate for the applicable interest period plus an applicable margin, or (ii) the base rate plus an applicable margin. The eurocurrency rate for an interest period is the rate per annum equal to (a) the London interbank offered rate (“LIBOR”) for such interest period, divided by (b) a percentage equal to 1.00 minus the daily average eurocurrency reserve rate for such interest period. The applicable interest rate margin over the eurocurrency rate is initially equal to 1.375%, but may increase (to a maximum amount of 1.875%) or decrease (to a minimum amount of 1.125%) based on changes in the ratings of our senior unsecured long-term debt securities (“Senior Debt Ratings”). The base rate for any day is a rate per annum equal to the greatest of (i) the prime lending rate published in the Wall Street Journal, (ii) the Federal Reserve Bank of New York (“NYFRB”) Rate (“NYFRB Rate”) plus 0.500% (the NYFRB Rate is the greater of (a) the federal funds rate and (b) the overnight bank funding rate published by the NYFRB, and (iii) the eurocurrency rate for a one month interest period (as defined in the 2019 Credit Agreement) plus 1.000%. The applicable interest rate margin over the base rate is initially equal to 0.375%, but may increase (to a maximum amount of 0.875%) or decrease (to a minimum amount of 0.125%) based on changes in our Senior Debt Ratings.
Borrowings under the 2019 Credit Agreement denominated in a currency other than U.S. Dollars will bear interest at the eurocurrency rate for the applicable interest period plus an applicable margin, as described above, plus, in some cases, additional costs. Letter of credit fees are also determined based on our Senior Debt Ratings.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the 2019 Credit Agreement and letter of credit fees, we are required to pay a quarterly unused commitment fee, which shall accrue at an applicable rate per annum multiplied by the actual daily amount of the lenders’ aggregate unused commitments under the 2019 Credit Agreement. The applicable rate per annum for the unused commitment fee is initially equal to 0.200%, but may increase (to a maximum amount of 0.300%) or decrease (to a minimum amount of 0.125%) based on changes in our Senior Debt Ratings.
The 2019 Credit Agreement contains certain representations and warranties for the benefit of the administrative agent and the lenders, including but not limited to representations relating to: due incorporation and good standing; due authorization of the 2019 Credit Agreement documentation; absence of any requirement for governmental or third party authorization for the due execution, delivery and performance of the 2019 Credit Agreement documentation; enforceability of the 2019 Credit Agreement documentation; accuracy of financial statements; no material adverse effect since June 29, 2018; absence of material undisclosed litigation on June 28, 2019; compliance with the Employee Retirement Income Security Act of 1974 (“ERISA”) and environmental, anti-money laundering, sanctions, anti-corruption and certain other laws; payment of taxes; and solvency.
The 2019 Credit Agreement contains certain affirmative covenants, including but not limited to covenants relating to: reporting obligations; maintenance of corporate existence and good standing; compliance with laws; maintenance of properties and insurance; payment of taxes; compliance with ERISA and environmental, anti-money laundering, sanctions, export controls, anti-corruption and certain other laws; maintenance of accurate books and records; and visitation and inspection by the administrative agent and the lenders. The 2019 Credit Agreement also contains certain negative covenants, including covenants: limiting certain liens on assets; limiting certain mergers, consolidations or sales of assets; limiting certain sale and leaseback transactions; limiting certain vendor financing investments; limiting certain investments in unrestricted subsidiaries; and limiting certain hedging arrangements. The 2019 Credit Agreement also requires that we not permit our ratio of consolidated total indebtedness (excluding defined benefit plan liabilities) to total capital, each as defined in the 2019 Credit Agreement, to be greater than 0.65:1.00. We were in compliance with the covenants in the 2019 Credit Agreement at June 28, 2019.
The 2019 Credit Agreement contains certain events of default, including: failure to make payments under the 2019 Credit Agreement; failure to perform or observe terms, covenants or agreements contained in the 2019 Credit Agreement; material inaccuracy of any representation or warranty under the 2019 Credit Agreement; payment default by us or certain of our subsidiaries under other indebtedness with a principal amount in excess of $200 million or acceleration of or ability to accelerate such other indebtedness; occurrence of one or more final judgments or orders for the payment by us or certain of our subsidiaries of money in excess of $200 million that remain unsatisfied; incurrence by us or certain of our subsidiaries of certain ERISA liability in excess of $200 million; any bankruptcy or insolvency of L3Harris or any material subsidiary; invalidity of 2019 Credit Agreement documentation; or a change of control (as defined in the 2019 Credit Agreement) of L3Harris. If an event of default occurs, then the lenders may, among other things, terminate their commitments and declare all outstanding borrowings to be immediately due and payable together with accrued interest and fees.
All principal amounts borrowed or outstanding under the 2019 Credit Agreement are due on June 28, 2024, unless (i) the commitments are terminated earlier either at our request or if certain events of default described in the 2019 Credit Agreement occur or (ii) the maturity date is extended pursuant to provisions allowing us, from time to time after June 28, 2020, but at least 45 days prior to the scheduled maturity date then in effect, to request that the scheduled maturity date then in effect be extended by one calendar year (with no more than one such extension permitted in any calendar year and no more than two such extensions during the term of the 2019 Credit Agreement), subject to approval by lenders holding a majority of the commitments under the 2019 Credit Agreement and satisfaction of certain conditions stated in the 2019 Credit Agreement (including the absence of any default and the accuracy of certain representations and warranties); provided, however, that all revolving loans of those lenders declining to participate in the requested extension and whose commitments under the 2019 Credit Agreement have not been replaced pursuant to customary replacement rights in our favor shall remain due and payable in full, and all commitments under the 2019 Credit Agreement of such declining lenders shall terminate, on the maturity date in effect prior to the requested extension. At June 28, 2019, we had no borrowings outstanding under the 2019 Credit Facility, but we had $100 million of short-term debt outstanding under our commercial paper program that was supported by the 2019 Credit Facility.
NOTE 13: DEBT
Unless otherwise specified, all disclosures in this Note relate to Harris Corporation as of June 28, 2019 and exclude any information related to and any potential impact that has resulted or may result from the L3Harris Merger (as described in Note 1: Significant Accounting Policies under “Principles of Consolidation” and Note 26: Subsequent Events).
Long-Term Debt
Long-term debt is summarized below:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Variable-rate debt:
|
|
|
|
Floating rate notes, due February 27, 2019
|
$
|
—
|
|
|
$
|
300
|
|
Floating rate notes, due April 30, 2020
|
250
|
|
|
250
|
|
Total variable-rate debt
|
250
|
|
|
550
|
|
Fixed-rate debt:
|
|
|
|
2.7% notes, due April 27, 2020
|
400
|
|
|
400
|
|
3.832% notes, due April 27, 2025
|
600
|
|
|
600
|
|
7.0% debentures, due January 15, 2026
|
100
|
|
|
100
|
|
6.35% debentures, due February 1, 2028
|
26
|
|
|
26
|
|
4.400% notes, due June 15, 2028
|
850
|
|
|
850
|
|
4.854% notes, due April 27, 2035
|
400
|
|
|
400
|
|
6.15% notes, due December 15, 2040
|
300
|
|
|
300
|
|
5.054% notes, due April 27, 2045
|
500
|
|
|
500
|
|
Other
|
17
|
|
|
14
|
|
Total fixed-rate debt
|
3,193
|
|
|
3,190
|
|
Total debt
|
3,443
|
|
|
3,740
|
|
Less: unamortized discounts and issuance costs
|
(24
|
)
|
|
(28
|
)
|
Total debt, net
|
3,419
|
|
|
3,712
|
|
Less: current portion of long-term debt, net
|
(656
|
)
|
|
(304
|
)
|
Total long-term debt, net
|
$
|
2,763
|
|
|
$
|
3,408
|
|
The potential maturities of long-term debt, including the current portion, for the five years following fiscal 2019 and, in total, thereafter are: $657 million in the next twelve months; $5 million in year two; $2 million in year three; $2 million in year four; $1 million in year five; and $2,776 million thereafter.
Long-Term Debt Repaid in Fiscal 2019
During the third quarter of fiscal 2019, we repaid at maturity the entire outstanding $300 million aggregate principal amount of our Floating Rate Notes due February 27, 2019.
Long-Term Debt Repaid in Fiscal 2018
On June 22, 2018, we completed our optional redemption of the entire outstanding $400 million aggregate principal amount of our 4.4% notes due December 15, 2020 (the “4.4% 2020 Notes”) and $400 million aggregate principal amount of our 5.55% notes due October 1, 2021 (the “2021 Notes” and collectively with the 4.4% 2020 Notes, the “Redeemed Notes”) at a “make-whole” redemption price as set forth in the Redeemed Notes. The combined “make-whole” redemption price for the Redeemed Notes was $844 million, and after adjusting for the carrying value of our bond premium, discounts and issuance costs, we recorded a combined $22 million loss on the extinguishment of the Redeemed Notes in the fourth quarter of fiscal 2018, which is included as a component of the “Non-operating income (loss)” line item in our Consolidated Statement of Income.
During the fourth quarter of fiscal 2018, we also repaid at maturity the entire outstanding $500 million aggregate principal amount of the 1.999% notes due April 27, 2018.
During the second quarter of fiscal 2018, we repaid in full the $253 million in remaining outstanding indebtedness under the 5-year tranche of our $1.3 billion senior unsecured term loan facility pursuant to our Term Loan Agreement, dated as of March 16, 2015, and recognized a $1 million extinguishment loss, which is included as a component of the “Non-operating income (loss)” line item in our Consolidated Statement of Income, as a result of associated unamortized debt issuance costs. During the fourth quarter of fiscal 2018, we also repaid in full the $36 million in remaining indebtedness under the 3-year
tranche (for a total of $305 million in term loan indebtedness repaid during fiscal 2018), and as a result, our $1.3 billion senior unsecured term loan facility pursuant to our Term Loan Agreement, dated as of March 16, 2015, was terminated.
Long-Term Debt Issued in Fiscal 2018
Variable-rate Debt: On November 6, 2017, we completed the issuance and sale of $250 million in aggregate principal amount of Floating Rate Notes due April 30, 2020 (“Floating Rate Notes 2020”). We incurred $2 million of debt issuance costs related to the issuance of the Floating Rate Notes 2020, which are being amortized using the effective interest rate method over the life of the notes, and such amortization is included as a component of the “Interest expense” line item in our Consolidated Statement of Income. The Floating Rate Notes 2020 bear interest at a floating rate, reset quarterly, equal to three-month LIBOR plus 0.48% per year. Interest is payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year, commencing January 30, 2018. The Floating Rate Notes 2020 are not redeemable at our option prior to maturity. Upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the notes at a price equal to 101 percent of the aggregate principal amount of the notes being repurchased, plus accrued interest on the notes being repurchased to, but not including, the date of repurchase. We used the net proceeds, together with cash on hand, to repay in full the $253 million in remaining outstanding indebtedness under the 5-year tranche of our $1.3 billion senior unsecured term loan facility as described above under “Long-Term Debt Repaid in Fiscal 2018”.
Fixed-rate Debt: On June 4, 2018, in order to fund our optional redemption of the Redeemed Notes as described above under “Long-Term Debt Repaid in Fiscal 2018,” we completed the issuance of $850 million in aggregate principal amount of 4.400% notes due June 15, 2028 (the “New 2028 Notes”). Interest on the New 2028 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2018. At any time prior to March 15, 2028, we may redeem the New 2028 Notes, in whole or in part, at our option, at a “make-whole” redemption price equal to the greater of 100 percent of the principal amount of the New 2028 Notes or the sum of the present values of the remaining scheduled payments of the principal and interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis at the Treasury Rate, as defined, plus 25 basis points. We will pay accrued interest on the principal amount of notes being redeemed to, but not including, the redemption date. At any time on or after March 15, 2028, we may redeem the New 2028 Notes, in whole or in part, at our option, at a redemption price equal to 100 percent of the principal amount of the notes being redeemed, plus accrued interest on the principal amount of the notes being redeemed to, but not including, the redemption date. In addition, upon change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the New 2028 Notes at a price equal to 101 percent of the aggregate principal amount of the notes being repurchased, plus accrued interest on the notes being repurchased to, but not including, the date of repurchase. We incurred $8 million of debt issuance costs related to the issuance of the New 2028 Notes, which are being amortized using the effective interest rate method over the life of the New 2028 Notes, and such amortization is included as a component of the “Interest expense” line item in our Consolidated Statement of Income.
Long-Term Debt From Prior to Fiscal 2019 That Remained Outstanding at June 28, 2019
On April 27, 2015, in connection with the then-pending acquisition of Exelis, to fund a portion of the cash consideration and other amounts payable under the terms of the merger agreement and to redeem certain of our existing notes, we issued long-term fixed-rate debt securities in the aggregate amount of $2.4 billion. The principal amounts, interest rates and maturity dates of these securities that remained outstanding at June 28, 2019 were as follows:
|
|
•
|
$400 million in aggregate principal amount of 2.700% notes due April 27, 2020 (the “2.700% 2020 Notes”),
|
|
|
•
|
$600 million in aggregate principal amount of 3.832% notes due April 27, 2025 (the “2025 Notes”),
|
|
|
•
|
$400 million in aggregate principal amount of 4.854% notes due April 27, 2035 (the “2035 Notes”), and
|
|
|
•
|
$500 million in aggregate principal amount of 5.054% notes due April 27, 2045 (the “2045 Notes” and collectively with the 2.700% 2020 Notes, 2025 Notes and 2035 Notes, the “Exelis Notes”).
|
Interest on each series of the Exelis Notes is payable semi-annually in arrears on April 27 and October 27 of each year, commencing October 27, 2015. The Exelis Notes are redeemable at our option up to one month prior to the scheduled maturity date at a price equal to the greater of 100 percent of the principal amount of the notes being redeemed or the sum of the present values of the remaining scheduled payments, plus accrued interest, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus (i) 20 basis points in the case of the 2.700% 2020 Notes, (ii) 30 basis points in the case of the 2025 Notes, (iii) 35 basis points in the case of the 2035 Notes, and (v) 40 basis points in the case of the 2045 Notes. In addition, upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the Exelis Notes at a price equal to 101 percent of the aggregate principal amount of the notes being repurchased, plus accrued interest on the notes being repurchased to, excluding the date of repurchase.
On December 3, 2010, we completed the issuance of $300 million in aggregate principal amount of 6.15% notes due December 15, 2040 (the “2040 Notes”). The 2040 Notes are redeemable at our option at a price equal to the greater of 100 percent of the principal amount of the notes being redeemed or the sum of the present values of the remaining scheduled
payments, plus accrued interest, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus 35 basis points. In addition, upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the notes at a price equal to 101 percent of the aggregate principal amount of the notes being repurchased, plus accrued interest on the notes being repurchased to, but not including, the date of repurchase.
In January 1996, we completed the issuance of $100 million in aggregate principal amount of 7.0% debentures due January 15, 2026. The debentures are not redeemable prior to maturity.
In February 1998, we completed the issuance of $150 million in aggregate principal amount of 6.35% debentures due February 1, 2028. On December 5, 2007, we repurchased and retired $25 million in aggregate principal amount of the debentures. On February 1, 2008, we redeemed $99 million in aggregate principal amount of the debentures pursuant to the procedures for redemption at the option of the holders of the debentures. We may redeem the remaining $26 million in aggregate principal amount of the debentures in whole, or in part, at any time at a pre-determined redemption price.
The following table presents the carrying amounts and estimated fair values of our long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Long-term debt (including current portion)(1)
|
$
|
3,419
|
|
|
$
|
3,802
|
|
|
$
|
3,712
|
|
|
$
|
3,848
|
|
_______________
|
|
(1)
|
The fair value was estimated using a market approach based on quoted market prices for our debt traded in the secondary market. If our long-term debt in our balance sheet were measured at fair value, it would be categorized in Level 2 of the fair value hierarchy.
|
Short-Term Debt
Our short-term debt at June 28, 2019 and June 29, 2018 was $103 million (including $100 million outstanding under our commercial paper program) and $78 million (including $75 million outstanding under our commercial paper program), respectively. Interest expense incurred on our short-term debt was not material in fiscal 2019, 2018 or 2017.
Interest Paid
Total interest paid was $170 million, $175 million and $168 million in fiscal 2019, 2018 and 2017, respectively.
NOTE 14: PENSION AND OTHER POSTRETIREMENT BENEFITS
Unless otherwise specified, all disclosures in this Note relate to Harris Corporation as of June 28, 2019 and exclude any information related to and any potential impact that has resulted or may result from the L3Harris Merger (as described in Note 1: Significant Accounting Policies under “Principles of Consolidation” and Note 26: Subsequent Events).
Defined Contribution Plan
As of June 28, 2019, we sponsor a defined contribution savings plan, which allows our eligible employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. The plan includes several match contribution formulas which requires us to match a percentage of the employee contributions up to certain limits, generally totaling between 2.0% to 6.0% of employee eligible pay. Matching contributions charged to expense were $85 million, $83 million and $80 million for fiscal 2019, 2018 and 2017, respectively, including both continuing and discontinued operations, and in fiscal 2019 and 2018 included the issuance of shares of our common stock.
Deferred Compensation Plan
We also sponsor a supplemental executive retirement plan, which is a nonqualified deferred compensation arrangement for highly compensated employees (within the meaning of section 201(2) of ERISA). The plan obligations are funded by investments held in a Rabbi Trust.
The following table provides the fair value of our deferred compensation plan investments and liabilities by category and by fair value hierarchy level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
Total
|
|
Level 1
|
|
Total
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Assets
|
|
|
|
|
|
|
|
Deferred compensation plan assets:(1)
|
|
|
|
|
|
|
|
Equity and fixed income securities
|
$
|
38
|
|
|
$
|
38
|
|
|
$
|
46
|
|
|
$
|
46
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
Equity and fixed income funds
|
61
|
|
|
|
|
63
|
|
|
|
Corporate-owned life insurance
|
28
|
|
|
|
|
27
|
|
|
|
Total investments measured at NAV
|
89
|
|
|
|
|
90
|
|
|
|
Total fair value of deferred compensation plan assets
|
$
|
127
|
|
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities:(2)
|
|
|
|
|
|
|
|
Equity securities and mutual funds
|
$
|
25
|
|
|
$
|
25
|
|
|
$
|
38
|
|
|
$
|
38
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
Common/collective trusts and guaranteed investment contracts
|
132
|
|
|
|
|
111
|
|
|
|
Total fair value of deferred compensation plan liabilities
|
$
|
157
|
|
|
|
|
$
|
149
|
|
|
|
_______________
|
|
(1)
|
Represents diversified assets held in a “rabbi trust” 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 Consolidated Balance Sheet, and which are measured at fair value.
|
|
(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 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.
Defined Benefit Plans
We sponsor numerous defined benefit pension plans for eligible employees. Benefits for most participants under the terms of these plans are based on the employee’s years of service and compensation. We fund these plans as required by statutory regulations and through voluntary contributions. Some of our employees also participate in other postretirement defined benefit plans such as health care and life insurance plans.
The U.S. Salaried Retirement Plan (“U.S. SRP”) is our largest defined benefit pension plan, with assets valued at $4.4 billion and a projected benefit obligation of $5.5 billion as of June 28, 2019. Effective December 31, 2016, accruals under the U.S. SRP benefit formula were frozen for all employees and replaced with a 1% cash balance benefit formula for certain employees who were not highly compensated on December 31, 2016.
Balance Sheet Information
Amounts recognized in our Consolidated Balance Sheet for defined benefit pension plans and other postretirement defined benefit plans (collectively, “defined benefit plans”) reflect the funded status of our plans. The following table provides a summary of the funded status of our defined benefit plans and the presentation of such balances within our Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Fair value of plan assets
|
$
|
4,958
|
|
|
$
|
201
|
|
|
$
|
5,159
|
|
|
$
|
5,098
|
|
|
$
|
207
|
|
|
$
|
5,305
|
|
Projected benefit obligation
|
(6,123
|
)
|
|
(221
|
)
|
|
(6,344
|
)
|
|
(5,774
|
)
|
|
(233
|
)
|
|
(6,007
|
)
|
Funded status
|
$
|
(1,165
|
)
|
|
$
|
(20
|
)
|
|
$
|
(1,185
|
)
|
|
$
|
(676
|
)
|
|
$
|
(26
|
)
|
|
$
|
(702
|
)
|
Consolidated Balance Sheet line item amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
15
|
|
Compensation and benefits
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(3
|
)
|
Liabilities of disposal group held for sale
|
(16
|
)
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Defined benefit plans
|
(1,154
|
)
|
|
(20
|
)
|
|
(1,174
|
)
|
|
(689
|
)
|
|
(25
|
)
|
|
(714
|
)
|
A portion of our projected benefit obligation includes amounts that have not yet been recognized as expense (or reductions of expense) in our results of operations. Such amounts are recorded within accumulated other comprehensive loss until they are amortized as a component of net periodic benefit cost. The following table provides a summary of pre-tax amounts recorded within accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Net actuarial loss (gain)
|
$
|
781
|
|
|
$
|
(36
|
)
|
|
$
|
745
|
|
|
$
|
156
|
|
|
$
|
(46
|
)
|
|
$
|
110
|
|
Net prior service cost (credit)
|
6
|
|
|
(1
|
)
|
|
5
|
|
|
4
|
|
|
(1
|
)
|
|
3
|
|
|
$
|
787
|
|
|
$
|
(37
|
)
|
|
$
|
750
|
|
|
$
|
160
|
|
|
$
|
(47
|
)
|
|
$
|
113
|
|
The following table provides a roll-forward of the projected benefit obligations for our defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of fiscal year
|
$
|
5,774
|
|
|
$
|
233
|
|
|
$
|
6,007
|
|
|
$
|
6,140
|
|
|
$
|
265
|
|
|
$
|
6,405
|
|
Service cost
|
36
|
|
|
—
|
|
|
36
|
|
|
39
|
|
|
1
|
|
|
40
|
|
Interest cost
|
209
|
|
|
8
|
|
|
217
|
|
|
195
|
|
|
7
|
|
|
202
|
|
Actuarial loss (gain)
|
514
|
|
|
(1
|
)
|
|
513
|
|
|
(169
|
)
|
|
(22
|
)
|
|
(191
|
)
|
Amendments
|
3
|
|
|
—
|
|
|
3
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Benefits paid
|
(381
|
)
|
|
(19
|
)
|
|
(400
|
)
|
|
(402
|
)
|
|
(18
|
)
|
|
(420
|
)
|
Expenses paid
|
(30
|
)
|
|
—
|
|
|
(30
|
)
|
|
(35
|
)
|
|
—
|
|
|
(35
|
)
|
Curtailments
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign exchange
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
4
|
|
|
—
|
|
|
4
|
|
Benefit obligation at end of fiscal year
|
$
|
6,123
|
|
|
$
|
221
|
|
|
$
|
6,344
|
|
|
$
|
5,774
|
|
|
$
|
233
|
|
|
$
|
6,007
|
|
The following table provides a roll-forward of the assets and the ending funded status of our defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at beginning of fiscal year
|
$
|
5,098
|
|
|
$
|
207
|
|
|
$
|
5,305
|
|
|
$
|
4,921
|
|
|
$
|
212
|
|
|
$
|
5,133
|
|
Actual return on plan assets
|
271
|
|
|
11
|
|
|
282
|
|
|
307
|
|
|
14
|
|
|
321
|
|
Employer contributions
|
3
|
|
|
2
|
|
|
5
|
|
|
303
|
|
|
(1
|
)
|
|
302
|
|
Benefits paid
|
(381
|
)
|
|
(19
|
)
|
|
(400
|
)
|
|
(402
|
)
|
|
(18
|
)
|
|
(420
|
)
|
Expenses paid
|
(30
|
)
|
|
—
|
|
|
(30
|
)
|
|
(35
|
)
|
|
—
|
|
|
(35
|
)
|
Foreign exchange
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
4
|
|
|
—
|
|
|
4
|
|
Plan assets at end of fiscal year
|
$
|
4,958
|
|
|
$
|
201
|
|
|
$
|
5,159
|
|
|
$
|
5,098
|
|
|
$
|
207
|
|
|
$
|
5,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of fiscal year
|
$
|
(1,165
|
)
|
|
$
|
(20
|
)
|
|
$
|
(1,185
|
)
|
|
$
|
(676
|
)
|
|
$
|
(26
|
)
|
|
$
|
(702
|
)
|
The accumulated benefit obligation for all defined benefit pension plans was $6.1 billion at June 28, 2019. The following table provides information for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Projected benefit obligation
|
$
|
6,041
|
|
|
$
|
5,694
|
|
Accumulated benefit obligation
|
6,041
|
|
|
5,694
|
|
Fair value of plan assets
|
4,864
|
|
|
5,004
|
|
Income Statement Information
The following table provides the components of net periodic benefit income and other amounts recognized in other comprehensive income for fiscal 2019, 2018, and 2017 as they pertain to our defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other Benefits
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Net periodic benefit income(1)
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
36
|
|
|
$
|
39
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
209
|
|
|
195
|
|
|
184
|
|
|
8
|
|
|
7
|
|
|
8
|
|
Expected return on plan assets
|
(382
|
)
|
|
(369
|
)
|
|
(340
|
)
|
|
(16
|
)
|
|
(16
|
)
|
|
(17
|
)
|
Amortization of net actuarial loss (gain)
|
—
|
|
|
—
|
|
|
1
|
|
|
(6
|
)
|
|
(1
|
)
|
|
—
|
|
Effect of curtailments or settlements
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit income
|
(136
|
)
|
|
(135
|
)
|
|
(97
|
)
|
|
(14
|
)
|
|
(9
|
)
|
|
(8
|
)
|
Other changes in plan assets and benefit obligations recognized in other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
626
|
|
|
$
|
(106
|
)
|
|
$
|
(284
|
)
|
|
$
|
4
|
|
|
$
|
(20
|
)
|
|
$
|
(38
|
)
|
Curtailment loss recognized
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service cost
|
3
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized prior service (cost) credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial gain (loss)
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
6
|
|
|
1
|
|
|
—
|
|
Amortization of prior service cost
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total change recognized in other comprehensive loss
|
627
|
|
|
(104
|
)
|
|
(285
|
)
|
|
10
|
|
|
(19
|
)
|
|
(38
|
)
|
Total impact from net periodic benefit cost and changes in other comprehensive loss
|
$
|
491
|
|
|
$
|
(239
|
)
|
|
$
|
(382
|
)
|
|
$
|
(4
|
)
|
|
$
|
(28
|
)
|
|
$
|
(46
|
)
|
_______________
(1) Net periodic benefit income presented in this table includes both continuing and discontinued operations. $2 million of the service cost component of net periodic benefit income is included as a component of the “Discontinued operations, net of income taxes” line item in our Consolidated Statement of Income for fiscal 2017.
The following table provides estimated amounts for net actuarial gain and prior service cost to be amortized from accumulated other comprehensive loss into net periodic benefit income during the next twelve months for plans in existence as of June 28, 2019. These estimates will be recalculated for calendar year 2020 based on our next re-measurement at December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other
Benefits
|
|
Total
|
|
|
|
|
|
|
|
(In millions)
|
Net actuarial (gain) loss
|
$
|
1
|
|
|
$
|
(5
|
)
|
|
$
|
(4
|
)
|
Prior service cost
|
1
|
|
|
—
|
|
|
1
|
|
|
$
|
2
|
|
|
$
|
(5
|
)
|
|
$
|
(3
|
)
|
Defined Benefit Plan Assumptions
The determination of the assumptions related to defined benefit plans are based on the provisions of the applicable accounting pronouncements, review of various market data and discussions with our actuaries. We develop each assumption using relevant Company experience in conjunction with market-related data. Assumptions are reviewed annually and adjusted as appropriate.
The following tables provide the weighted-average assumptions used to determine projected benefit obligations and net periodic benefit cost, as they pertain to our defined benefit pension plans in existence as of June 28, 2019:
|
|
|
|
|
|
|
|
|
|
Obligation assumptions as of:
|
June 28, 2019
|
|
June 29, 2018
|
|
|
Discount rate
|
3.35
|
%
|
|
4.05
|
%
|
|
|
Rate of future compensation increase
|
2.76
|
%
|
|
2.76
|
%
|
|
|
|
|
|
|
|
|
Cost assumptions for fiscal years:
|
2019
|
|
2018
|
|
2017
|
Discount rate to determine service cost
|
3.89
|
%
|
|
3.48
|
%
|
|
3.80
|
%
|
Discount rate to determine interest cost
|
3.75
|
%
|
|
3.28
|
%
|
|
2.94
|
%
|
Expected return on plan assets
|
7.66
|
%
|
|
7.66
|
%
|
|
7.65
|
%
|
Rate of future compensation increase
|
2.76
|
%
|
|
2.76
|
%
|
|
2.75
|
%
|
Key assumptions for the U.S. SRP (our largest defined benefit pension plan with approximately 90.27% of the total projected benefit obligation) included a discount rate for obligation assumptions of 3.37% and expected return on plan assets of 7.75% for fiscal 2019, which is being maintained at 7.75% for the Fiscal Transition Period.
The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic benefit cost, as they pertain to our other postretirement defined benefit plans in existence as of June 28, 2019:
|
|
|
|
|
|
|
|
|
|
Obligation assumptions as of:
|
June 28, 2019
|
|
June 29, 2018
|
|
|
Discount rate
|
3.21
|
%
|
|
3.99
|
%
|
|
|
Rate of future compensation increase
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Cost assumptions for fiscal year:
|
2019
|
|
2018
|
|
2017
|
Discount rate to determine service cost
|
4.14
|
%
|
|
3.62
|
%
|
|
3.52
|
%
|
Discount rate to determine interest cost
|
3.62
|
%
|
|
3.04
|
%
|
|
2.60
|
%
|
Rate of future compensation increase
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The expected long-term rate of return on plan assets reflects the expected returns for each major asset class in which the plans invest, the weight of each asset class in the strategic allocation, the correlations among asset classes and their expected volatilities. Our expected rate of return on plan assets is estimated by evaluating both historical returns and estimates of future returns. Specifically, the determination of the expected long-term rate of return takes into consideration: (1) the plan’s actual historical annual return on assets over the past 15-, 20- and 25-year time periods, (2) historical broad market returns over long-term timeframes weighted by the plan’s strategic allocation, and (3) independent estimates of future long-term asset class returns, weighted by the plan’s strategic allocation. Based on this approach, the long-term annual rate of return on assets is estimated at 7.75% for the Fiscal Transition Period for the U.S. defined benefit plans. The weighted average long-term annual rate of return on assets for all defined benefit pension plans is estimated at 7.67% for the Fiscal Transition Period. In fiscal 2019, we adopted updated mortality tables, which resulted in a decrease in the defined benefit plans’ projected benefit obligation as of June 28, 2019 and estimated net periodic benefit cost beginning with the Fiscal Transition Period.
The assumed rate of future increases in the per capita cost of healthcare (the healthcare trend rate) for fiscal 2019 was 7.35% for pre-age 65 benefits and 6.85% for post-age 65 benefits, decreasing ratably to 4.75% in fiscal 2027. The corresponding assumed rate for the Fiscal Transition Period is 7.00% for pre-age 65 benefits and 6.55% for post-age 65 benefits, decreasing ratably to 4.75% in fiscal 2028. Increasing or decreasing the healthcare cost trend rates by one percent per year would not have a material effect on the benefit obligation or the aggregate annual service and interest cost components. To the extent that actual experience differs from these assumptions, the effect will be accumulated and generally amortized for each plan to the extent required over the estimated future life expectancy or, if applicable, the future working lifetime of the plan’s active participants.
Investment Policy
The investment strategy for managing defined benefit plan assets is to seek an optimal rate of return relative to an appropriate level of risk. We manage substantially all defined benefit plan assets on a commingled basis in a master investment trust. In making these asset allocation decisions, we take into account recent and expected returns and volatility of returns for each asset class, the expected correlation of returns among the different investments, as well as anticipated funding and cash flows. To enhance returns and mitigate risk, we diversify our investments by strategy, asset class, geography and sector and engage a large number of managers to gain broad exposure to the markets.
The following table provides the current strategic target asset allocation ranges by asset category:
|
|
|
|
|
|
|
Target Asset
Allocation
|
Equity investments
|
45
|
%
|
—
|
75%
|
Fixed income investments
|
20
|
%
|
—
|
42%
|
Hedge funds
|
5
|
%
|
—
|
15%
|
Cash and cash equivalents
|
0
|
%
|
—
|
10%
|
Fair Value of Plan Assets
The following is a description of the valuation techniques and inputs used to measure fair value for major categories of investments as reflected in the table that follows such description:
|
|
•
|
Domestic and international equities, which include common and preferred shares, domestic listed and foreign listed equity securities, open-ended and closed-ended mutual funds and exchange traded funds, are generally valued at the closing price reported on the major market exchanges on which the individual securities are traded at the measurement date. Because these assets are traded predominantly on liquid, widely traded public exchanges, equity securities are categorized as Level 1 assets.
|
|
|
•
|
Private equity funds, which include buy-out, mezzanine, venture capital, distressed asset and secondary funds, are typically limited partnership investment structures. Private equity funds are valued using a market approach based on NAV calculated by the funds and are not publicly available. Private equity funds generally have liquidity restrictions that extend for ten or more years. At June 28, 2019 and June 29, 2018, our defined benefit plans had future unfunded commitments totaling $355 million and $246 million, respectively, related to private equity fund investments.
|
|
|
•
|
Hedge funds, which include equity long/short, event-driven, fixed-income arbitrage and global macro strategies, are typically limited partnership investment structures. Limited partnership interests in hedge funds are valued using a market approach based on NAV calculated by the funds and are not publicly available. Hedge funds generally permit redemption on a quarterly or more frequent basis with 90 or fewer days-notice. At each of June 28, 2019 and June 29, 2018, our defined benefit plans had no future unfunded commitments related to hedge fund investments.
|
|
|
•
|
Fixed income investments, which include U.S. Government securities and investment and non-investment grade corporate bonds, are generally valued using pricing models that use verifiable, observable market data such as interest rates, benchmark yield curves and credit spreads, bids provided by brokers or dealers, or quoted prices of securities with similar characteristics. Fixed income investments are generally categorized as Level 2 assets.
|
|
|
•
|
Other is primarily comprised of guaranteed insurance contracts valued at book value, which approximates fair value, calculated using the prior-year balance adjusted for investment returns and changes in cash flows.
|
|
|
•
|
Cash and cash equivalents are primarily comprised of short-term money market funds valued at cost, which approximates fair value, or valued at quoted market prices of identical instruments. Cash and currency are categorized as Level 1 assets; cash equivalents, such as money market funds or short-term commingled funds, are categorized as Level 2 assets.
|
|
|
•
|
Certain investments that are valued using the NAV per share (or its equivalent) as a practical expedient are not categorized in the fair value hierarchy and are included in the table to permit reconciliation of the fair value hierarchy to the aggregate postretirement benefit plan assets.
|
The following table provides the fair value of plan assets held by our defined benefit plans by asset category and by fair value hierarchy level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Asset Category
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
Domestic equities
|
$
|
1,173
|
|
|
$
|
1,173
|
|
|
$
|
—
|
|
|
$
|
—
|
|
International equities
|
896
|
|
|
896
|
|
|
—
|
|
|
—
|
|
Fixed income:
|
|
|
|
|
|
|
|
Corporate bonds
|
923
|
|
|
—
|
|
|
906
|
|
|
17
|
|
Government securities
|
332
|
|
|
—
|
|
|
332
|
|
|
—
|
|
Other
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Cash and cash equivalents
|
59
|
|
|
12
|
|
|
47
|
|
|
—
|
|
Total
|
3,385
|
|
|
$
|
2,081
|
|
|
$
|
1,285
|
|
|
$
|
19
|
|
Investments Measured at NAV
|
|
|
|
|
|
|
|
Equity funds
|
703
|
|
|
|
|
|
|
|
Fixed income funds
|
362
|
|
|
|
|
|
|
|
Hedge funds
|
331
|
|
|
|
|
|
|
|
Private equity funds
|
294
|
|
|
|
|
|
|
|
Total Investments Measured at NAV
|
1,690
|
|
|
|
|
|
|
|
Receivables, net
|
84
|
|
|
|
|
|
|
|
Total fair value of plan assets
|
$
|
5,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29, 2018
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3(1)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Asset Category
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
Domestic equities
|
$
|
1,221
|
|
|
$
|
1,189
|
|
|
$
|
32
|
|
|
$
|
—
|
|
International equities
|
903
|
|
|
899
|
|
|
4
|
|
|
—
|
|
Fixed income:
|
|
|
|
|
|
|
|
Corporate bonds
|
811
|
|
|
—
|
|
|
800
|
|
|
11
|
|
Government securities
|
335
|
|
|
—
|
|
|
335
|
|
|
—
|
|
Other
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Cash and cash equivalents
|
209
|
|
|
6
|
|
|
203
|
|
|
—
|
|
Total
|
3,481
|
|
|
$
|
2,094
|
|
|
$
|
1,374
|
|
|
$
|
13
|
|
Investments Measured at NAV
|
|
|
|
|
|
|
|
Equity funds
|
714
|
|
|
|
|
|
|
|
Fixed income funds
|
318
|
|
|
|
|
|
|
|
Hedge funds(1)
|
395
|
|
|
|
|
|
|
|
Private equity funds(1)
|
401
|
|
|
|
|
|
|
|
Total Investments Measured at NAV
|
1,828
|
|
|
|
|
|
|
|
Payables, net
|
(4
|
)
|
|
|
|
|
|
|
Total fair value of plan assets
|
$
|
5,305
|
|
|
|
|
|
|
|
_______________
|
|
(1)
|
We have reclassified certain prior-year amounts to conform with current-year classifications. Reclassifications include certain alternative investments that were previously included as “Level 3” and are now reflected in “Hedge funds” and “Private equity funds” under “Investments Measured at NAV.”
|
The following table presents a reconciliation of the beginning and ending defined benefit plan asset balances that use significant unobservable inputs (Level 3) to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
(In millions)
|
Level 3 balance — June 30, 2017
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Purchases, net
|
11
|
|
|
—
|
|
|
11
|
|
Level 3 balance — June 29, 2018
|
11
|
|
|
2
|
|
|
13
|
|
Unrealized gains, net
|
1
|
|
|
—
|
|
|
1
|
|
Purchases, net
|
5
|
|
|
—
|
|
|
5
|
|
Level 3 balance — June 28, 2019
|
$
|
17
|
|
|
$
|
2
|
|
|
$
|
19
|
|
Contributions
Funding requirements under Internal Revenue Service (“IRS”) rules are a major consideration in making contributions to our postretirement benefit plans. With respect to U.S. qualified pension plans, we intend to contribute annually not less than the required minimum funding thresholds.
The Highway and Transportation Funding Act of 2014 and the Bipartisan Budget Act of 2015 (“BBA 2015”) further extended the interest rate stabilization provision of MAP-21 until 2020. We made voluntary contributions of $300 million and $400 million to our U.S. qualified pension plans during fiscal 2018 and 2017, respectively. As a result, we did not make any contributions to our U.S. qualified pension plans and only minor contributions to our non-U.S. pension plan in fiscal 2019. In addition to the anticipated voluntary contributions to L3Harris pension plans from the pending divestiture of the Harris Night Vision business disclosed in Note 26: Subsequent Events in these Notes, we currently anticipate making $2 million of contributions to Harris U.S. qualified pension plans and $23 million of contributions to L3 U.S. qualified pension plans during the Fiscal Transition Period.
Estimated Future Benefit Payments
The following table provides the projected timing of payments for benefits earned to date and benefits expected to be earned for future service by current active employees under our defined benefit plans in existence as of June 28, 2019. Estimated future benefit payments for calendar years subsequent to the Fiscal Transition Period will be recalculated based on our next re-measurement at December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other
Benefits(1)
|
|
Total
|
|
|
|
|
|
|
|
(In millions)
|
Estimated benefit payments due:
|
|
|
|
|
|
Year 1
|
$
|
414
|
|
|
$
|
22
|
|
|
$
|
436
|
|
Year 2
|
392
|
|
|
22
|
|
|
414
|
|
Year 3
|
392
|
|
|
21
|
|
|
413
|
|
Year 4
|
390
|
|
|
20
|
|
|
410
|
|
Year 5
|
387
|
|
|
20
|
|
|
407
|
|
Years 6 to 10
|
1,859
|
|
|
78
|
|
|
1,937
|
|
_______________
|
|
(1)
|
Projected payments for Other Benefits reflect gross payments from the Company, excluding subsidies, which are expected to approximate 10 percent of gross payments.
|
NOTE 15: STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION
Unless otherwise specified, all disclosures in this Note relate to Harris Corporation as of June 28, 2019 and exclude any information related to and any potential impact that has resulted or may result from the L3Harris Merger (as described in Note 1: Significant Accounting Policies under “Principles of Consolidation” and Note 26: Subsequent Events).
As of June 28, 2019, we had options or other share-based compensation outstanding under two shareholder-approved employee stock incentive plans (“SIPs”), the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010) and the Harris Corporation 2015 Equity Incentive Plan (the “2015 EIP”) (prior to July 3, 2015, we had an additional shareholder approved SIP under which options or other share-based compensation was outstanding). Grants of share-based awards after October 23, 2015 were made under our 2015 EIP. We believe that share-based awards more closely
align the interests of participants with those of shareholders. Certain share-based awards provide for accelerated vesting if there is a change in control (as defined under our SIPs).
Summary of Share-Based Compensation Expense
The following table summarizes the amounts and classification of share-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Total expense
|
$
|
58
|
|
|
$
|
51
|
|
|
$
|
42
|
|
Included in:
|
|
|
|
|
|
Cost of product sales and services
|
$
|
12
|
|
|
$
|
8
|
|
|
$
|
3
|
|
Engineering, selling and administrative expenses
|
46
|
|
|
43
|
|
|
39
|
|
Income from continuing operations
|
58
|
|
|
51
|
|
|
42
|
|
Tax effect on share-based compensation expense
|
(14
|
)
|
|
(16
|
)
|
|
(16
|
)
|
Total share-based compensation expense after-tax
|
$
|
44
|
|
|
$
|
35
|
|
|
$
|
26
|
|
Compensation cost related to share-based compensation arrangements that was capitalized as part of inventory or fixed assets in fiscal 2019, 2018 and 2017 was not material.
As of the end of fiscal 2019, a total of 25,740,420 shares of common stock remained available under our 2015 EIP for future issuance (excluding shares to be issued in respect of outstanding options and other share-based awards, and with each full-value award (e.g., restricted stock and restricted stock unit awards and performance share and performances share unit awards) counting as 4.6 shares against the total remaining for future issuance). In fiscal 2019, we issued an aggregate of 969,063 shares of common stock under the terms of our SIPs, which is net of shares withheld for tax purposes.
Stock Options
The following information relates to stock options, including performance stock options, that have been granted under shareholder-approved SIPs. Option exercise prices are equal to or greater than the fair market value of our common stock on the date the options are granted, using the closing stock price of our common stock. Options may be exercised for a period of ten years after the date of grant, and options, other than performance stock options, generally become exercisable in installments, which are typically 33.3 percent one year from the grant date, 33.3 percent two years from the grant date and 33.3 percent three years from the grant date. In certain instances, vesting and exercisability are also subject to performance criteria.
The fair value as of the grant date of each option award was determined using the Black-Scholes-Merton option-pricing model which uses assumptions noted in the following table. Expected volatility over the expected term of the options is based on implied volatility from traded options on our common stock and the historical volatility of our stock price. The expected term of the options is based on historical observations of our common stock, considering average years to exercise for all options exercised and average years to cancellation for all options canceled, as well as average years remaining for vested outstanding options, which is calculated based on the weighted-average of these three inputs. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of the significant assumptions used in determining the fair value of stock option grants under our SIPs is as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Expected dividends
|
1.6
|
%
|
|
1.8
|
%
|
|
2.4
|
%
|
Expected volatility
|
19.9
|
%
|
|
19.3
|
%
|
|
21.8
|
%
|
Risk-free interest rates
|
2.7
|
%
|
|
1.8
|
%
|
|
1.2
|
%
|
Expected term (years)
|
5.03
|
|
|
5.00
|
|
|
5.03
|
|
A summary of stock option activity under our SIPs as of June 28, 2019 and changes during fiscal 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
(In years)
|
|
(In millions)
|
Stock options outstanding June 29, 2018
|
4,698,370
|
|
|
$
|
74.50
|
|
|
|
|
|
Stock options forfeited or expired
|
(37,059
|
)
|
|
$
|
111.47
|
|
|
|
|
|
Stock options granted
|
270,963
|
|
|
$
|
163.23
|
|
|
|
|
|
Stock options exercised
|
(737,073
|
)
|
|
$
|
69.07
|
|
|
|
|
|
Stock options outstanding June 28, 2019
|
4,195,201
|
|
|
$
|
80.86
|
|
|
5.81
|
|
$
|
454.20
|
|
Stock options exercisable June 28, 2019
|
3,338,448
|
|
|
$
|
70.32
|
|
|
5.24
|
|
$
|
396.63
|
|
The weighted-average grant-date fair value was $30.05 per share, $18.60 per share and $13.82 per share for options granted during fiscal 2019, 2018 and 2017, respectively. The total intrinsic value of options exercised during fiscal 2019, 2018 and 2017 was $75 million, $39 million and $47 million, respectively, at the time of exercise.
A summary of the status of our nonvested stock options at June 28, 2019 and changes during fiscal 2019 is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date Fair Value
Per Share
|
Nonvested stock options June 29, 2018
|
1,613,401
|
|
|
$
|
14.66
|
|
Stock options granted
|
270,963
|
|
|
$
|
30.05
|
|
Stock options vested
|
(1,027,611
|
)
|
|
$
|
14.04
|
|
Nonvested stock options June 28, 2019
|
856,753
|
|
|
$
|
20.28
|
|
As of June 28, 2019, there was $9 million of total unrecognized compensation expense related to nonvested stock options granted under our SIPs. This expense is expected to be recognized over a weighted-average period of 1.08 years. The total fair value of stock options that vested during fiscal 2019, 2018 and 2017 was approximately $14 million, $18 million and $17 million, respectively.
Restricted Stock and Restricted Stock Unit Awards
The following information relates to awards of restricted stock and restricted stock units that have been granted to employees under our SIPs. These awards are not transferable until vested and the restrictions generally lapse upon the achievement of continued employment over a specified time period.
The fair value as of the grant date of these awards was based on the closing price of our common stock on the grant date and is amortized to compensation expense over the vesting period. At June 28, 2019, there were 810 shares of restricted stock and 365,188 restricted stock units outstanding which were payable in shares.
A summary of the status of these awards at June 28, 2019 and changes during fiscal 2019 is as follows:
|
|
|
|
|
|
|
|
|
Shares or Units
|
|
Weighted-Average
Grant Price Per Share or Unit
|
Restricted stock and restricted stock units outstanding at June 29, 2018
|
414,690
|
|
|
$
|
127.70
|
|
Restricted stock and restricted stock units granted
|
94,163
|
|
|
$
|
160.05
|
|
Restricted stock and restricted stock units vested
|
(119,748
|
)
|
|
$
|
130.77
|
|
Restricted stock and restricted stock units forfeited
|
(23,107
|
)
|
|
$
|
142.86
|
|
Restricted stock and restricted stock units outstanding at June 28, 2019
|
365,998
|
|
|
$
|
134.06
|
|
As of June 28, 2019, there was $23 million of total unrecognized compensation expense related to these awards under our SIPs. This expense is expected to be recognized over a weighted-average period of 1.26 years. The weighted-average grant date price per share or per unit of these awards granted during fiscal 2019, 2018 and 2017 was $160.05, $141.46 and $94.60, respectively. The total fair value of these awards that vested during fiscal 2019, 2018 and 2017 was approximately $16 million,$11 million and $14 million, respectively.
Performance Share Unit Awards
The following information relates to awards of performance share units that have been granted to employees under our SIPs. Generally, these awards are subject to performance criteria, such as meeting predetermined operating income or earnings per share and return on invested capital targets (and market conditions, such as total shareholder return (“TSR”)) for a 3-year performance period. These awards also generally vest at the expiration of the same 3-year period. The final determination of the number of shares to be issued in respect of an award is made by our Board of Directors or a committee of our Board of Directors.
The fair value as of the grant date of these awards was determined based on a fair value from a multifactor Monte Carlo valuation model that simulates our stock price and TSR relative to other companies in our TSR peer group, less a discount to reflect the delay in payments of cash dividend-equivalents that are made only upon vesting. The fair value of these awards is amortized to compensation expense over the vesting period if achievement of the performance measures is considered probable. At June 28, 2019, there were 509,749 performance share units outstanding which were payable in shares.
A summary of the status of these awards at June 28, 2019 and changes during fiscal 2019 is as follows:
|
|
|
|
|
|
|
|
|
Shares or Units
|
|
Weighted-Average
Grant Price
Per Share or Unit
|
Performance share units outstanding at June 29, 2018
|
625,293
|
|
|
$
|
98.11
|
|
Performance share units granted
|
168,913
|
|
|
$
|
155.12
|
|
Performance share units vested
|
(266,203
|
)
|
|
$
|
77.80
|
|
Performance share units forfeited
|
(18,254
|
)
|
|
$
|
124.83
|
|
Performance share units outstanding at June 28, 2019
|
509,749
|
|
|
$
|
126.73
|
|
As of June 28, 2019, there was $24 million of total unrecognized compensation expense related to these awards under our SIPs. This expense is expected to be recognized over a weighted-average period of 0.99 years. The weighted-average grant date price per unit of these awards granted during fiscal 2019, 2018 and 2017 was $155.12, $123.13 and $84.40, respectively. The total fair value of these awards that vested during fiscal 2019, 2018 and 2017 was approximately $21 million, $12 million and $21 million, respectively.
Upon completion of the L3Harris Merger, Harris stock options granted prior to October 12, 2018 automatically vested and other Harris equity awards granted prior to October 12, 2018 automatically vested and settled in L3Harris Common Stock. See Note 26: Subsequent Events for additional information.
NOTE 16: INCOME FROM CONTINUING OPERATIONS PER SHARE
The computations of income from continuing operations per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Income from continuing operations
|
$
|
953
|
|
|
$
|
702
|
|
|
$
|
628
|
|
Adjustments for participating securities outstanding
|
(2
|
)
|
|
(2
|
)
|
|
(1
|
)
|
Income from continuing operations used in per basic and diluted common share calculations (A)
|
$
|
951
|
|
|
$
|
700
|
|
|
$
|
627
|
|
Basic weighted average common shares outstanding (B)
|
118.0
|
|
|
118.6
|
|
|
122.6
|
|
Impact of dilutive share-based awards
|
2.5
|
|
|
2.5
|
|
|
1.7
|
|
Diluted weighted average common shares outstanding (C)
|
120.5
|
|
|
121.1
|
|
|
124.3
|
|
Income from continuing operations per basic common share (A)/(B)
|
$
|
8.06
|
|
|
$
|
5.90
|
|
|
$
|
5.11
|
|
Income from continuing operations per diluted common share (A)/(C)
|
$
|
7.89
|
|
|
$
|
5.78
|
|
|
$
|
5.04
|
|
Potential dilutive common shares primarily consist of employee stock options and restricted and performance unit awards. Income from continuing operations per diluted common share excludes the antidilutive impact of 271,892, 48,590 and 421,507 weighted average share-based awards outstanding in fiscal 2019, 2018 and 2017, respectively.
NOTE 17: RESEARCH AND DEVELOPMENT
Company-sponsored research and development costs are expensed as incurred. These costs were $331 million, $311 million and $310 million in fiscal 2019, 2018 and 2017, respectively, and are included in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income. Customer-sponsored research and development costs are incurred pursuant to contractual arrangements, principally U.S. Government-sponsored contracts requiring us to
provide a product or service meeting certain defined performance or other specifications (such as designs), and are accounted for principally by the cost-to-cost POC method. Customer-sponsored research and development is included in our revenue and cost of product sales and services.
NOTE 18: LEASE COMMITMENTS
Unless otherwise specified, all disclosures in this Note relate to Harris Corporation as of June 28, 2019 and exclude any information related to and any potential impact that has resulted or may result from the L3Harris Merger (as described in Note 1: Significant Accounting Policies under “Principles of Consolidation” and Note 26: Subsequent Events).
Total rental expense amounted to $73 million, $61 million and $65 million in fiscal 2019, 2018 and 2017, respectively. Future minimum rental commitments under leases with an initial lease term in excess of one year, primarily for land and buildings, amounted to approximately $313 million at June 28, 2019. These commitments for the five years following fiscal 2019 and, in total, thereafter are: $68 million due within twelve months; $62 million due in year two; $47 million due in year three; $39 million due in year four; $32 million due in year five; and $64 million in total thereafter. These commitments do not contain any material rent escalations, rent holidays, contingent rent, rent concessions, leasehold improvement incentives or unusual provisions or conditions. We do not consider any of these individual leases material to our operations. Leasehold improvements made either at the inception of the lease or during the lease term are amortized over the current lease term, or estimated life, if shorter.
NOTE 19: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, we are exposed to global market risks, including the effect of changes in foreign currency exchange rates. Additionally, during January 2019, we entered into a yield-based treasury lock agreement with a third-party financial institution counterparty (“treasury lock”) to hedge against fluctuations in interest payments due to changes in the benchmark interest rate (10-year U.S. Treasury rate) associated with our anticipated issuance of long-term fixed-rate notes (“New Notes”) to redeem or repay at maturity the entire $400 million outstanding principal amount of our 2.7% notes due April 27, 2020 (“2020 Notes”). We use derivative instruments to manage our exposure to such risks and formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. We recognize all derivatives in our Consolidated Balance Sheet at fair value. We do not hold or issue derivatives for speculative trading purposes.
As of June 28, 2019, we had an open treasury lock agreement with a notional amount of $400 million that was classified as a cash flow hedge, and we had no open foreign currency forward contracts. This compares with open foreign currency forward contracts with an aggregate notional amount of $39 million at June 29, 2018, of which $4 million were classified as fair value hedges and $35 million were classified as cash flow hedges.
Exchange Rate Risk — Fair Value Hedges
To manage the exposure in our balance sheet to risks from changes in foreign currency exchange rates, we implement fair value hedges. More specifically, we have used foreign currency forward contracts and options to hedge certain balance sheet items, including foreign currency denominated accounts receivable and inventory. Changes in the value of the derivatives and the related hedged items are reflected in earnings, in the “Cost of product sales and services” line item in our Consolidated Statement of Income. As of June 28, 2019, we had no outstanding foreign currency forward contracts to hedge balance sheet items. The net gains or losses on foreign currency forward contracts designated as fair value hedges were not material in fiscal 2019, 2018 or 2017. In addition, no amounts were recognized in earnings in fiscal 2019, 2018 or 2017 related to hedged firm commitments that no longer qualify as fair value hedges.
Exchange Rate Risk — Cash Flow Hedges
To manage our exposure to currency risk and market fluctuation risk associated with anticipated cash flows that are probable of occurring in the future, we implement cash flow hedges. More specifically, we have used foreign currency forward contracts and options to hedge off-balance sheet future foreign currency commitments, including purchase commitments to suppliers, future committed sales to customers and intersegment transactions. These derivatives have been used to hedge currency exposures from cash flows anticipated across our business segments. We also have hedged U.S. Dollar payments to suppliers to maintain our anticipated profit margins in our international operations. These derivatives have only nominal intrinsic value at the time of purchase and have a high degree of correlation to the anticipated cash flows they are designated to hedge. Hedge effectiveness is determined by the correlation of the anticipated cash flows from the hedging instruments and the anticipated cash flows from the future foreign currency commitments through the maturity dates of the derivatives used to hedge these cash flows. These financial instruments are marked-to-market using forward prices and fair value quotes with the offset to other comprehensive income, net of hedge ineffectiveness. Gains and losses in accumulated other comprehensive income are reclassified to earnings when the related hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. The cash flow impact of our derivatives is included in the same category in our Consolidated Statement of Cash Flows as the cash flows of the related hedged items.
As of June 28, 2019, we had no outstanding foreign currency forward contracts to hedge forecasted transactions. The net gains or losses from cash flow hedges recognized in earnings or recorded in other comprehensive income, including gains or losses related to hedge ineffectiveness, were not material in fiscal 2019, 2018 or 2017. We do not expect the net gains or losses recognized in the “Accumulated other comprehensive loss” line item in our Consolidated Balance Sheet as of June 28, 2019 that will be reclassified to earnings from accumulated other comprehensive income within the next 12 months to be material.
Interest-Rate Risk — Cash Flow Hedges
As noted above, in anticipation of the issuance of the New Notes to redeem or repay at maturity the 2020 Notes, we entered into a treasury lock with a notional value of $400 million. We designated the treasury lock as a cash flow hedge against fluctuations in interest payments on the New Notes due to changes in the benchmark interest rate prior to issuance, which we expect to occur between August 2019 and April 2020. If the benchmark interest rate increases during the period of the agreement, the treasury lock position will become an asset and we will receive a cash payment from the counterparty when we terminate the treasury lock upon issuance of the New Notes. Conversely, if the benchmark interest rate decreases, the treasury lock position will become a liability and we will make a cash payment to the counterparty when we terminate the treasury lock upon issuance of the New Notes. The fair value of the treasury lock is measured using a pricing model that utilizes observable market data such as the benchmark interest rate.
At June 28, 2019, the fair value of the treasury lock was a liability of $26 million, which was categorized in Level 2 of the fair value hierarchy and recorded in the “Other accrued items” line item in our Consolidated Balance Sheet with a corresponding unrealized after-tax loss of $20 million in the “Accumulated other comprehensive loss” line item in our Consolidated Balance Sheet representing the effective portion of the treasury lock’s change in fair value during fiscal 2019. The ineffective portion of the treasury lock’s change in fair value was immaterial during fiscal 2019. See our Consolidated Statement of Comprehensive Income (Loss) for additional information on changes in accumulated other comprehensive loss for the three fiscal years ended June 28, 2019.
Credit Risk
We are exposed to the risk of credit losses from non-performance by counterparties to the financial instruments discussed above, but we do not expect any of the counterparties to fail to meet their obligations. To manage credit risks, we select counterparties based on credit ratings, limit our exposure to any single counterparty under defined guidelines and monitor the market position with each counterparty.
NOTE 20: NON-OPERATING INCOME
The components of non-operating income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Pension income(1)
|
$
|
186
|
|
|
$
|
184
|
|
|
$
|
164
|
|
Loss on extinguishment of debt(2)
|
—
|
|
|
(24
|
)
|
|
—
|
|
Adjustment to gain on sale of business
|
—
|
|
|
—
|
|
|
2
|
|
Net income (loss) related to intellectual property matters
|
1
|
|
|
(1
|
)
|
|
—
|
|
Gain on sale of investment
|
1
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
$
|
188
|
|
|
$
|
156
|
|
|
$
|
166
|
|
_______________
|
|
(1)
|
Non-service components of net periodic pension and postretirement benefit costs, including interest cost, expected return on plan assets and amortization of net actuarial gain is reported as part of the “Non-operating income” line item in our Consolidated Statement of Income as a result of our adoption of ASU 2017-07 as discussed in Note 2: Accounting Changes or Recent Accounting Pronouncements.
|
|
|
(2)
|
Losses associated with our optional redemption of the entire outstanding $400 million principal amount of our 4.4% Notes due December 15, 2020 and $400 million principal amount of our 5.55% Notes due October 1, 2021, the repayment in full of $253 million in remaining outstanding indebtedness under the 5-year tranche of our $1.3 billion senior unsecured term loan facility and the termination of our 2015 Credit Agreement in fiscal 2018. See. Note 13: Debt for additional information.
|
NOTE 21: ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Foreign currency translation, net of income taxes of $2 million at each of June 28, 2019 and June 29, 2018
|
$
|
(106
|
)
|
|
$
|
(99
|
)
|
Net unrealized loss on hedging derivatives, net of income taxes of $13 million and $7 million at June 28, 2019 and June 29, 2018, respectively
|
(38
|
)
|
|
(20
|
)
|
Unrecognized postretirement obligations, net of income taxes of $188 million and $30 million at June 28, 2019 and June 29, 2018, respectively
|
(563
|
)
|
|
(83
|
)
|
|
$
|
(707
|
)
|
|
$
|
(202
|
)
|
Accumulated other comprehensive loss at June 29, 2018 reflects a reclassification to retained earnings of $35 million in stranded tax effects as a result of our adoption of an accounting standards update, including $30 million from “Unrecognized postretirement obligation, net of income taxes,” $4 million from “Net unrealized loss on hedging derivatives, net of income taxes” and $1 million from “Foreign currency translation, net of income taxes.”
Reclassifications to earnings from accumulated other comprehensive loss, other than the reclassification adjustment described above, were not material in fiscal 2019 or 2018.
NOTE 22: INCOME TAXES
Income Tax Provision
The provisions for current and deferred income taxes are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Current:
|
|
|
|
|
|
United States
|
$
|
105
|
|
|
$
|
(141
|
)
|
|
$
|
117
|
|
International
|
9
|
|
|
12
|
|
|
9
|
|
State and local
|
8
|
|
|
(11
|
)
|
|
6
|
|
|
122
|
|
|
(140
|
)
|
|
132
|
|
Deferred:
|
|
|
|
|
|
United States
|
15
|
|
|
324
|
|
|
121
|
|
International
|
(3
|
)
|
|
(3
|
)
|
|
1
|
|
State and local
|
26
|
|
|
25
|
|
|
7
|
|
|
38
|
|
|
346
|
|
|
129
|
|
|
$
|
160
|
|
|
$
|
206
|
|
|
$
|
261
|
|
The total income tax provision is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Continuing operations
|
$
|
160
|
|
|
$
|
206
|
|
|
$
|
261
|
|
Discontinued operations
|
(1
|
)
|
|
(5
|
)
|
|
(110
|
)
|
Total income tax provision
|
$
|
159
|
|
|
$
|
201
|
|
|
$
|
151
|
|
A reconciliation of the U.S. statutory income tax rate to our effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S. statutory income tax rate
|
21.0
|
%
|
|
28.1
|
%
|
|
35.0
|
%
|
State taxes
|
2.4
|
|
|
1.9
|
|
|
1.0
|
|
International income
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(1.3
|
)
|
Research and development tax credit
|
(4.5
|
)
|
|
(2.9
|
)
|
|
(2.0
|
)
|
Foreign derived intangibles income deduction
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
Change in valuation allowance
|
(1.8
|
)
|
|
0.2
|
|
|
(0.2
|
)
|
U.S. production activity benefit
|
—
|
|
|
(0.9
|
)
|
|
(0.5
|
)
|
Excess tax benefits on equity-based compensation
|
(2.2
|
)
|
|
(1.8
|
)
|
|
(2.6
|
)
|
Settlement of tax audits
|
—
|
|
|
(2.2
|
)
|
|
—
|
|
U.S. tax reform
|
—
|
|
|
0.4
|
|
|
—
|
|
Other items
|
1.3
|
|
|
0.4
|
|
|
(0.1
|
)
|
Effective income tax rate
|
14.4
|
%
|
|
22.7
|
%
|
|
29.3
|
%
|
As of June 28, 2019, we have accumulated undistributed earnings of international subsidiaries of approximately $82 million and our intention is to reinvest these earnings indefinitely. Determination of unrecognized deferred U.S. tax liability on outside basis differences is not practicable at this time.
Tax Law Changes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into U.S. law. Among other provisions, the Tax Act reduced the U.S. statutory corporate income tax rate from a maximum 35 percent to a flat 21 percent, effective January 1, 2018. Based on our fiscal year end, our blended U.S. statutory corporate income tax rate for fiscal 2018 was 28.1 percent. This drop in the tax rate resulted in a one-time benefit of $26 million ($.21 per diluted share) at the date of enactment. Additionally, we recognized expense of $8 million in fiscal 2018 to revalue our existing net deferred income tax balances.
During the second quarter of fiscal 2019, we completed our accounting for the income tax impact of enactment of the Tax Act and there were no material changes from the estimates reported in our Current Report on Form 8-K filed with the SEC on December 13, 2018.
The implementation of a modified territorial tax system under the Tax Act subjects us to tax on our Global Intangible Low-Taxed Income (GILTI) starting with fiscal 2019. The FASB has permitted companies to make an accounting policy decision to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes (“deferred method”). We have elected to use the period cost method.
Deferred Income Tax Assets (Liabilities)
The components of deferred income tax assets (liabilities) were as follows:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Deferred tax assets:
|
|
|
|
Inventory valuations
|
$
|
24
|
|
|
$
|
21
|
|
Accruals
|
152
|
|
|
178
|
|
Deferred revenue
|
12
|
|
|
7
|
|
Domestic tax loss and credit carryforwards
|
54
|
|
|
86
|
|
International tax loss and credit carryforwards
|
38
|
|
|
33
|
|
Share-based compensation
|
28
|
|
|
26
|
|
Capital loss carryforwards
|
95
|
|
|
101
|
|
Pension and other post-employment benefits
|
305
|
|
|
188
|
|
Unrealized loss on interest rate hedges
|
13
|
|
|
7
|
|
Unrecognized tax benefits
|
4
|
|
|
4
|
|
Other
|
10
|
|
|
13
|
|
Total deferred tax assets
|
735
|
|
|
664
|
|
Less: valuation allowance(1)
|
(159
|
)
|
|
(181
|
)
|
Total deferred tax assets, net of valuation allowance
|
576
|
|
|
483
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
(71
|
)
|
|
(65
|
)
|
Unbilled receivables
|
(65
|
)
|
|
(86
|
)
|
Acquired intangibles
|
(260
|
)
|
|
(268
|
)
|
Unremitted earnings of foreign subsidiaries
|
(19
|
)
|
|
(24
|
)
|
Total deferred tax liabilities
|
(415
|
)
|
|
(443
|
)
|
Total deferred tax assets, net of valuation allowance
|
$
|
161
|
|
|
$
|
40
|
|
_______________
(1) The valuation allowance has been established to offset certain domestic and foreign deferred tax assets due to uncertainty regarding our ability to realize them in the future.
Total deferred tax assets, net of valuation allowance, were classified as follows in our Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
|
|
|
|
(In millions)
|
Non-current deferred income tax assets
|
$
|
173
|
|
|
$
|
119
|
|
Non-current deferred income tax liabilities
|
(12
|
)
|
|
(79
|
)
|
|
$
|
161
|
|
|
$
|
40
|
|
Tax loss and credit carryforwards at June 28, 2019 have expiration dates ranging between two years and no expiration in certain instances. The amounts of federal, international, and state and local operating loss carryforwards at June 28, 2019 were $24 million, $108 million and $369 million, respectively. The amount of U.S. capital loss carryforwards as of June 28, 2019 was $352 million. Income from continuing operations before income taxes of international subsidiaries was $37 million, $43 million and $42 million in fiscal 2019, 2018 and 2017, respectively. We paid $137 million in income tax, net of refunds received, in fiscal 2019, received $8 million in income tax refunds, net of income taxes paid, in fiscal 2018, and paid $51 million, net of refunds received, in fiscal 2017. The successful completion, during the second half of calendar year 2019, of the sales of entities currently held-for-sale may result in capital gains that would allow us to realize a substantial portion of our capital loss carryforwards. A related reversal of valuation allowance on these deferred tax assets would be recognized as an income tax benefit upon such utilization.
Tax Uncertainties
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Balance at beginning of fiscal year
|
$
|
102
|
|
|
$
|
90
|
|
|
$
|
63
|
|
Additions based on tax positions taken during current fiscal year
|
31
|
|
|
17
|
|
|
52
|
|
Additions based on tax positions taken during prior fiscal years
|
80
|
|
|
23
|
|
|
—
|
|
Decreases based on tax positions taken during prior fiscal years
|
(9
|
)
|
|
(28
|
)
|
|
(25
|
)
|
Balance at end of fiscal year
|
$
|
204
|
|
|
$
|
102
|
|
|
$
|
90
|
|
As of June 28, 2019, we had $204 million of unrecognized tax benefits, of which $162 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. Upon recognition of a portion of these benefits, we also expect to recognize an additional $9 million of current expense which will offset the favorable rate impact from the unrecognized tax benefits. As of June 29, 2018, we had $102 million of unrecognized tax benefits, of which $92 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized.
We recognize accrued interest and penalties related to unrecognized tax benefits as part of our income tax expense. We had accrued $3 million for the potential payment of interest and penalties as of June 28, 2019 (and this amount was not included in the $204 million of unrecognized tax benefits balance at June 28, 2019 shown above) and $3 million of this total could favorably impact future tax rates. We had accrued $4 million for the potential payment of interest and penalties as of June 29, 2018 (and this amount was not included in the $102 million of unrecognized tax benefits balance at June 29, 2018 shown above) and $3 million of this total could favorably impact future tax rates.
We file numerous separate and consolidated income tax returns reporting our financial results and, where appropriate, those of our subsidiaries and affiliates, in the U.S. Federal jurisdiction and various state, local and foreign jurisdictions. Pursuant to the Compliance Assurance Process, the IRS is examining our returns for fiscal 2014 through fiscal 2018. The Canadian Revenue Agency is currently examining our returns for fiscal 2014 through fiscal 2016, and we are still negotiating the provincial portions of a Canadian assessment relating to fiscal 2000 through fiscal 2006. We are currently under examination or contesting proposed adjustments by various state and international tax authorities for fiscal years ranging from 2012 through 2018. It is reasonably possible that there could be a significant decrease or increase to our unrecognized tax benefit balance during the course of the next twelve months as these examinations continue, other tax examinations commence or various statutes of limitations expire. An estimate of the range of possible changes cannot be made for remaining unrecognized tax benefits because of the significant number of jurisdictions in which we do business and the number of open tax periods.
NOTE 23: 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, 2019, our ending backlog was $8.3 billion. We expect to recognize approximately half of the revenue associated with this backlog within the next twelve months and the substantial majority of the revenue associated with this backlog within the next three years.
NOTE 24: BUSINESS SEGMENTS
As of June 28, 2019, we structured our operations primarily around the products, systems and services we sold and the markets we served, and we reported the financial results of our continuing operations in the following three reportable segments, which were also referred to as our business segments:
|
|
•
|
Communication Systems, serving markets in tactical communications and defense products, including tactical ground and airborne radio communications solutions and night vision technology, and in public safety networks;
|
|
|
•
|
Electronic Systems, providing electronic warfare, avionics, and command, control, communications, computers, intelligence, surveillance and reconnaissance solutions for defense and classified customers and mission-critical communication systems for civil and military aviation and other customers; and
|
|
|
•
|
Space and Intelligence Systems, providing intelligence, space protection, geospatial, complete Earth observation, universe exploration, positioning, navigation and timing, and environmental solutions for national security, defense, civil and commercial customers, using advanced sensors, antennas and payloads, as well as ground processing and information analytics.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Revenue
|
|
|
|
|
|
Communication Systems
|
$
|
2,177
|
|
|
$
|
1,904
|
|
|
$
|
1,754
|
|
Electronic Systems
|
2,583
|
|
|
2,365
|
|
|
2,245
|
|
Space and Intelligence Systems
|
2,057
|
|
|
1,913
|
|
|
1,904
|
|
Corporate eliminations
|
(16
|
)
|
|
(14
|
)
|
|
(6
|
)
|
|
$
|
6,801
|
|
|
$
|
6,168
|
|
|
$
|
5,897
|
|
Income from Continuing Operations before Income Taxes
|
|
|
|
|
|
Segment Operating Income:
|
|
|
|
|
|
Communication Systems
|
$
|
654
|
|
|
$
|
566
|
|
|
$
|
514
|
|
Electronic Systems
|
499
|
|
|
432
|
|
|
457
|
|
Space and Intelligence Systems
|
359
|
|
|
331
|
|
|
314
|
|
Unallocated corporate expense and corporate eliminations(1)
|
(234
|
)
|
|
(225
|
)
|
|
(228
|
)
|
Pension adjustment
|
(186
|
)
|
|
(184
|
)
|
|
(164
|
)
|
Non-operating income(2)
|
188
|
|
|
156
|
|
|
166
|
|
Net interest expense
|
(167
|
)
|
|
(168
|
)
|
|
(170
|
)
|
Total
|
$
|
1,113
|
|
|
$
|
908
|
|
|
$
|
889
|
|
_______________
|
|
(1)
|
Unallocated corporate expense and corporate eliminations includes: (i) $65 million of L3Harris Merger-related transaction and integration costs in fiscal 2019, (ii) $47 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business and other items in fiscal 2018, (iii) a $12 million non-cash adjustment for deferred compensation in fiscal 2018, (iii) $5 million and $58 million of Exelis acquisition-related and other charges in fiscal 2018 and 2017, respectively, and (iv) $101 million in each of fiscal 2019 and 2018 and $109 million in fiscal 2017, for amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis. Because the acquisition of Exelis benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired in the Exelis acquisition was recorded as unallocated corporate expense. Corporate eliminations of intersegment profits were not material in fiscal 2019, 2018 or 2017.
|
|
|
(2)
|
Non-operating income in fiscal 2018 includes $27 million of losses and other costs related to debt refinancing. Additional information regarding non-operating income is set forth in Note 20: Non-Operating Income.
|
Disaggregation of Revenue
Communication Systems: Communication Systems operated principally on a “commercial” market-driven business model
through which the business segment provided ready-to-ship commercial off-the-shelf products to customers in the U.S. and
internationally. Communication Systems revenue was primarily derived from fixed-price contracts and was generally recognized at the point in time when the product is received and accepted by the customer. We disaggregated Communication Systems revenue by geographical region, as we believe this category best depicts how the nature, amount, timing and uncertainty of Communication Systems revenue and cash flows were affected by economic factors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Revenue By Geographical Region
|
|
|
|
|
|
United States
|
$
|
1,213
|
|
|
$
|
983
|
|
|
$
|
811
|
|
International
|
964
|
|
|
921
|
|
|
943
|
|
|
$
|
2,177
|
|
|
$
|
1,904
|
|
|
$
|
1,754
|
|
Electronic Systems: Electronic Systems revenue was primarily derived from U.S. Government development and production contracts and was generally recognized over time using the POC cost-to-cost method. We disaggregated Electronic Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Electronic Systems revenue and cash flows were affected by economic factors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Revenue By Customer Relationship
|
|
|
|
|
|
Prime contractor
|
$
|
1,671
|
|
|
$
|
1,670
|
|
|
$
|
1,653
|
|
Subcontractor
|
912
|
|
|
695
|
|
|
592
|
|
|
$
|
2,583
|
|
|
$
|
2,365
|
|
|
$
|
2,245
|
|
Revenue By Contract Type
|
|
|
|
|
|
Fixed-price(1)
|
$
|
2,092
|
|
|
$
|
1,900
|
|
|
$
|
1,833
|
|
Cost-reimbursable
|
491
|
|
|
465
|
|
|
412
|
|
|
$
|
2,583
|
|
|
$
|
2,365
|
|
|
$
|
2,245
|
|
Revenue By Geographical Region
|
|
|
|
|
|
United States
|
$
|
2,095
|
|
|
$
|
1,890
|
|
|
$
|
1,769
|
|
International
|
488
|
|
|
475
|
|
|
476
|
|
|
$
|
2,583
|
|
|
$
|
2,365
|
|
|
$
|
2,245
|
|
_______________
|
|
(1)
|
Includes revenue derived from time-and-materials contracts.
|
Space and Intelligence Systems: Space and Intelligence Systems revenue was primarily derived from U.S. Government development and production contracts and was generally recognized over time using the POC cost-to-cost method. We disaggregated Space and Intelligence Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Space and Intelligence Systems revenue and cash flows were affected by economic factors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Revenue By Customer Relationship
|
|
|
|
|
|
Prime contractor
|
$
|
1,409
|
|
|
$
|
1,384
|
|
|
$
|
1,369
|
|
Subcontractor
|
648
|
|
|
529
|
|
|
535
|
|
|
$
|
2,057
|
|
|
$
|
1,913
|
|
|
$
|
1,904
|
|
Revenue By Contract Type
|
|
|
|
|
|
Fixed-price(1)
|
$
|
748
|
|
|
$
|
544
|
|
|
$
|
448
|
|
Cost-reimbursable
|
1,309
|
|
|
1,369
|
|
|
1,456
|
|
|
$
|
2,057
|
|
|
$
|
1,913
|
|
|
$
|
1,904
|
|
Revenue By Geographical Region
|
|
|
|
|
|
United States
|
$
|
2,003
|
|
|
$
|
1,861
|
|
|
$
|
1,821
|
|
International
|
54
|
|
|
52
|
|
|
83
|
|
|
$
|
2,057
|
|
|
$
|
1,913
|
|
|
$
|
1,904
|
|
_______________
|
|
(1)
|
Includes revenue derived from time-and-materials contracts.
|
Total assets by business segment is as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
(In millions)
|
Total Assets
|
|
|
|
Communication Systems
|
$
|
1,565
|
|
|
$
|
1,567
|
|
Electronic Systems
|
4,188
|
|
|
4,174
|
|
Space and Intelligence Systems
|
2,208
|
|
|
2,193
|
|
Corporate(1)
|
2,156
|
|
|
1,917
|
|
|
$
|
10,117
|
|
|
$
|
9,851
|
|
_______________
|
|
(1)
|
Identifiable intangible assets acquired in connection with our acquisition of Exelis in the fourth quarter of fiscal 2015 were recorded as Corporate assets because they benefited the entire Company as opposed to any individual segment. Exelis identifiable intangible asset balances of continuing operations recorded as Corporate assets were approximately $869 million and $974 million as of June 28, 2019 and June 29, 2018, respectively. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan investments, buildings and equipment and identifiable intangibles, and also included any assets and liabilities from discontinued operations and divestitures. See Note 3: Discontinued Operations and Divestitures for additional information.
|
Other selected financial information by business segment and geographical area is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In millions)
|
Capital Expenditures
|
|
|
|
|
|
Communication Systems
|
$
|
33
|
|
|
$
|
26
|
|
|
$
|
14
|
|
Electronic Systems
|
74
|
|
|
57
|
|
|
40
|
|
Space and Intelligence Systems
|
31
|
|
|
33
|
|
|
34
|
|
Corporate
|
23
|
|
|
20
|
|
|
27
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
4
|
|
|
$
|
161
|
|
|
$
|
136
|
|
|
$
|
119
|
|
Depreciation and Amortization
|
|
|
|
|
|
Communication Systems
|
$
|
50
|
|
|
$
|
57
|
|
|
$
|
64
|
|
Electronic Systems
|
50
|
|
|
44
|
|
|
29
|
|
Space and Intelligence Systems
|
33
|
|
|
36
|
|
|
37
|
|
Corporate
|
125
|
|
|
122
|
|
|
142
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
39
|
|
|
$
|
258
|
|
|
$
|
259
|
|
|
$
|
311
|
|
Geographical Information for Continuing Operations
|
|
|
|
|
|
U.S. operations:
|
|
|
|
|
|
Revenue
|
$
|
6,530
|
|
|
$
|
5,854
|
|
|
$
|
5,637
|
|
Long-lived assets
|
$
|
866
|
|
|
$
|
892
|
|
|
$
|
896
|
|
International operations:
|
|
|
|
|
|
Revenue
|
$
|
271
|
|
|
$
|
314
|
|
|
$
|
260
|
|
Long-lived assets
|
$
|
28
|
|
|
$
|
8
|
|
|
$
|
8
|
|
In addition to depreciation and amortization expense related to property, plant and equipment, “Depreciation and Amortization” in the table above also includes $120 million, $116 million and $125 million of amortization related to intangible assets, debt premium, debt discount and debt issuance costs in fiscal 2019, 2018 and 2017, respectively.
Our products and systems are produced principally in the U.S. with international revenue derived primarily from exports. No revenue earned from any individual foreign country exceeded 5 percent of our total revenue during fiscal 2019, 2018 or 2017.
Sales made to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, by all segments as a percentage of total revenue were 77 percent, 75 percent and 74 percent in fiscal 2019, 2018 and 2017, respectively. Revenue from services in fiscal 2019 was approximately 8 percent, 28 percent and 13 percent of total revenue in our Communication Systems, Electronic Systems and Space and Intelligence Systems segments, respectively.
Revenue from products and services where the end consumer is located outside the U.S., including foreign military sales through the U.S. Government, was $1.5 billion (22 percent of our revenue), $1.4 billion (23 percent of our revenue) and $1.5 billion (25 percent of our revenue) in fiscal 2019, 2018 and 2017, respectively. Fiscal 2019 export revenue and revenue from international operations was principally from Europe, the Middle East, Asia, Australia, Canada and Africa.
NOTE 25: LEGAL PROCEEDINGS AND CONTINGENCIES
From time to time, as a normal incident of the nature and kind of businesses in which we are or were engaged, various claims or charges are asserted and litigation or arbitration is commenced by or against us 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 employee 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 arbitral 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, 2019, our accrual for the potential resolution of lawsuits, claims or proceedings that we consider probable of being decided unfavorably to us was not material. Although it is not feasible to predict the outcome of these matters with certainty, it is reasonably possible that some lawsuits, claims or proceedings may be disposed of or decided unfavorably to us and in excess of the amounts currently accrued. Based on available information, in the opinion of management, settlements, arbitration awards and final judgments, if any, which are considered probable of being rendered against us in litigation or arbitration in existence at June 28, 2019 are reserved against or would not have a material adverse effect on our financial condition, results of operations or cash flows.
Our tax filings are subject to audit by taxing authorities in jurisdictions where we conduct or conducted business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or ultimately through legal proceedings. We believe we have adequately accrued for any ultimate amounts that are likely to result from these audits; however, final assessments, if any, could be different from the amounts recorded in our Consolidated Financial Statements. Additional information regarding audits and examinations by taxing authorities of our tax filings is set forth in Note 22: Income Taxes.
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 are responsible, or alleged to be responsible, for environmental investigation and/or remediation of multiple 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 a number of 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 under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent state and international laws. For example, in June 2014, the Department of Justice, Environment and Natural Resources Division, notified several potentially responsible parties, including Exelis, of potential responsibility for contribution to the environmental investigation and remediation of multiple locations in Alaska. In addition, in March 2016, the EPA notified over 100 potentially responsible parties, including Exelis, of potential liability for the cost of remediation for the 8.3-mile stretch of the Lower Passaic River, estimated by the EPA to be $1.38 billion, but the parties’ respective allocations have not been determined. Although it is not feasible to predict the outcome of environmental claims, based on available information, in the opinion of our management, any payments we may be required to make as a result of environmental claims in existence at June 28, 2019 are reserved against, covered by insurance or would not have a material adverse effect on our financial condition, results of operations or cash flows.
NOTE 26: SUBSEQUENT EVENTS
Merger with L3 Technologies, Inc.
On October 12, 2018, Harris entered into a Merger Agreement with L3 and Merger Sub, pursuant to which Harris and L3 agreed to combine their respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and into L3, with L3 continuing as the surviving corporation and a direct wholly owned subsidiary of Harris.
The closing of the L3Harris Merger occurred on June 29, 2019, after the end of Harris’ fiscal 2019 on June 28, 2019. Upon completion of the L3Harris Merger, Harris was renamed “L3Harris Technologies, Inc.” (“L3Harris”), and each share of L3 common stock converted into the right to receive 1.30 shares (“Exchange Ratio”) of L3Harris common stock. L3Harris was owned on a fully diluted basis approximately 54 percent by Harris shareholders and 46 percent by L3 shareholders immediately following the completion of the L3Harris Merger.
L3 was a prime contractor in ISR systems, aircraft sustainment (including modifications and fleet management of special mission aircraft), simulation and training, night vision and image intensification equipment, and security and detection systems. L3 also was a leading provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. L3 employed approximately 31,000 employees and its customers included the DoD and its prime contractors, the U.S. Intelligence Community, the U.S. Department of Homeland Security, foreign governments and domestic and foreign commercial customers. L3 generated calendar 2018 revenue of approximately $10 billion.
As a result of the L3Harris Merger, L3Harris is an agile global aerospace and defense technology innovator, delivering end-to-end solutions that meet customer’s mission-critical needs. We provide advanced defense and commercial technologies across air, land, sea, space and cyber domains. L3Harris is expected to have approximately $18 billion in annualized revenue for the Fiscal Transition Period and has approximately 50,000 employees, with customers in more than 130 countries.
Approximately 104 million shares of L3Harris common stock were issued to L3 shareholders following the completion of the L3Harris Merger. The trading price of L3Harris common stock was $189.13 per share as of the Closing Date. In addition, replacement share-based awards were issued for certain outstanding L3 share-based awards.
We will account for the L3Harris Merger under the acquisition method of accounting in accordance with ASC 805, Business Combinations, with Harris treated as the legal and accounting acquirer. Under the acquisition method of accounting, we are required to allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values at the Closing Date. Due to the timing of the L3Harris Merger relative to its size and complexity, our initial accounting for the L3Harris Merger is incomplete. We have not completed our measurement of the share-based award components of the acquisition-date fair value of consideration transferred nor have we completed our provisional valuation of net tangible and identifiable intangible assets acquired and liabilities assumed. We will recognize and disclose our measurement of the acquisition-date fair value of consideration transferred and our provisional allocation of merger consideration in the fiscal quarter ending on September 27, 2019.
Unless otherwise noted, all disclosures in these Notes exclude any information related to and any potential impact that may result from the L3Harris Merger.
Divestiture of Harris Night Vision
As part of the regulatory process in connection with the L3Harris Merger, we entered into a definitive agreement on April 4, 2019 to sell the Harris Night Vision business to Elbit Systems of America, LLC, a subsidiary of Elbit Systems Ltd., for $350 million in cash, subject to customary purchase price adjustments as set forth in the definitive agreement. We expect to close the sale of the Harris Night Vision business during the third quarter of calendar year 2019 and use the proceeds from the sale to pre-fund L3Harris pension plans and return cash to shareholders.
Change in Fiscal Year
Through fiscal 2019, our fiscal years ended on the Friday nearest June 30. Commencing June 29, 2019, our fiscal year will end on the Friday nearest December 31, and the period commencing on June 29, 2019 will be the Fiscal Transition Period (ending on January 3, 2020).
New Segment Structure
Our segment reporting for the Fiscal Transition Period will be adjusted to reflect our new organizational structure announced July 1, 2019, consisting of the following four business segments:
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•
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Integrated Mission Systems, including intelligence, surveillance and reconnaissance; advanced electro optical and infrared solutions; and maritime power and navigation;
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•
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Space and Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare;
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|
•
|
Communication Systems, including tactical communications; broadband communications; night vision; and public safety; and
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•
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Aviation Systems, including defense aviation products; security, detection and other commercial aviation products; air traffic management; and commercial and military pilot training.
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We will report our financial results consistent with this new segment reporting structure beginning with the fiscal quarter ending September 27, 2019.
Debt Exchange
In connection with the L3Harris Merger, on July 2, 2019 we settled our previously announced debt exchange offers in which eligible holders of L3 senior notes (“L3 Notes”) could exchange such outstanding notes for (1) up to $3.35 billion aggregate principal amount of new notes issued by L3Harris (“New L3Harris Notes”) and (2) one dollar in cash for each $1,000 of principal amount. Each of the series of the New L3Harris Notes issued has an interest rate and maturity date that is identical to the L3 Notes.
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|
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Notes
|
|
Aggregate Principal
Amount of L3 Notes
(prior to debt exchange)
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|
Aggregate Principal
Amount of
New L3Harris Notes Issued
|
|
Aggregate Principal
Amount of
Remaining L3 Notes
|
|
|
(In millions)
|
4.95% notes due February 15, 2021 (“4.95% 2021 Notes”)
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|
$
|
650
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|
|
$
|
501
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|
|
$
|
149
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|
3.85% notes due June 15, 2023 (“3.85% 2023 Notes”)
|
|
$
|
800
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|
|
$
|
741
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|
|
$
|
59
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|
3.95% notes due May 28, 2024 (“3.95% 2024 Notes”)
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|
$
|
350
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|
|
$
|
326
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|
|
$
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24
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|
3.85% notes due December 15, 2026 (“3.85% 2026 Notes”)
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|
$
|
550
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|
|
$
|
535
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|
|
$
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15
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|
4.40% notes due June 15, 2028 (“4.40% 2028 Notes”)
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|
$
|
1,000
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|
|
$
|
918
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|
|
$
|
82
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|
Interest on the New L3Harris Notes is payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2019, in the case of the 4.95% 2021 Notes; on June 15 and December 15, commencing on December 15, 2019, in the case of the 3.85% 2023 Notes, 3.85% 2026 Notes and 4.40% 2028 Notes; and on May 28 and November 28, commencing on November 28, 2019, in the case of the 3.95% 2024 Notes. The New L3Harris Notes are unsecured senior obligations and rank equally in right of payment with all other L3Harris senior unsecured debt.
The New L3Harris Notes are redeemable in whole or in part at any time or in part from time to time, at our option, until three months prior to the maturity date, in the case of the 4.95% 2021 Notes, 3.95% 2024 Notes, 3.85% 2026 Notes and 4.40% 2028 Notes, and until one month prior to the maturity date, in the case of the 3.85% 2023 Notes, at a redemption price equal to the greater of 100 percent of principal amount of the notes to be redeemed or the sum of the present values of the principal amount and the remaining scheduled payments of interest on the notes to be redeemed, discounted from the scheduled payment dates to the date of redemption at the treasury rate as defined in the note plus 20 basis points, in the case of the 3.85% 2023 Notes and 3.95% 2024 Notes, or 25 basis points, in the case of the 4.95% 2021 Notes, 3.85% 2026 Notes and 4.40% 2028 Notes, plus, in each case, accrued and unpaid interest due at the date of redemption.
In connection with the issuance of the New L3Harris Notes, we entered into a registration rights agreement, dated July 2, 2019, with BofA Securities, Inc. and Morgan Stanley & Co. LLC, pursuant to which we agreed to use commercially reasonable efforts to complete one or more registered exchange offers for the New L3Harris Notes within 365 days after July 2, 2019. If a registered exchange offer is not consummated within alloted time, we are required to pay special additional interest, in an amount equal to 0.25% per annum of the principal amount of the New L3Harris Notes, for the first 90 days following the day of default. Thereafter, the amount of special additional interest increases another 0.25% per year, up to a maximum of 0.50% per year, until the default is cured.
Following the settlement of the exchange offers, L3 had outstanding approximately $329 million of existing L3 Senior Notes which remain the senior unsecured obligations of L3.
Accelerated Vesting of Harris and L3 Stock Options and Other Equity Awards
Upon completion of the L3Harris Merger, Harris stock options granted prior to October 12, 2018 automatically vested and other Harris equity awards granted prior to October 12, 2018 automatically vested and settled in L3Harris Common Stock. Any Harris equity award granted on or after October 12, 2018 did not automatically vest upon closing of the L3Harris Merger, and instead remained outstanding as an award with respect to L3Harris Common Stock in accordance with the terms that were applicable to such award prior to the L3Harris Merger.
L3’s equity awards granted prior to October 12, 2018, in accordance with the terms and conditions that were applicable to such awards prior to the L3Harris Merger, generally automatically vested upon closing of the L3Harris Merger and settled in L3Harris Common Stock (with stock options automatically converted into stock options with respect to L3Harris Common Stock), in each case, after giving effect to the Exchange Ratio and appropriate adjustments to reflect the consummation of the L3Harris Merger and the terms and conditions applicable to such awards prior to the L3Harris Merger. Any L3 restricted stock unit or L3 restricted stock award granted on or after October 12, 2018 was converted into a corresponding award with respect to L3Harris Common Stock, with the number of shares underlying such award adjusted based on the Exchange Ratio and remained outstanding in accordance with the terms that were applicable to such award prior to the L3Harris Merger.
New Share Repurchase Program
On July 1, 2019, we announced that our Board of Directors approved a new $4 billion share repurchase authorization. The new share repurchase program replaced our prior share repurchase program, which had a remaining unused authorization of approximately $501 million, as well as L3’s prior share repurchase program. Although the new share repurchase program does not have a stated expiration date, we announced that we currently expect to repurchase up to $2.5 billion in shares in the next twelve months, but we can give no assurance regarding the level and timing of share repurchases. Repurchases under the new program may be made through open-market transactions, private transactions, transactions structured through investment banking institutions or any combination thereof. The level of our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board and management may deem relevant. The timing, volume and nature of repurchases are subject to market conditions, applicable securities laws and other factors and are at the our discretion and may be suspended or discontinued at any time.
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is summarized below:
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|
|
|
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|
|
|
|
|
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|
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|
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|
|
|
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Quarter Ended
|
|
Total
Year
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|
9/28/2018
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|
12/28/2018
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|
3/29/2019
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|
6/28/2019
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|
|
|
|
|
|
|
|
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(In millions, except per share amounts)
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Fiscal 2019
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|
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,542
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|
|
$
|
1,666
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|
|
$
|
1,728
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|
|
$
|
1,865
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|
|
$
|
6,801
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|
Gross profit
|
532
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|
|
571
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|
|
589
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|
|
642
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|
|
2,334
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|
Income from continuing operations before income taxes
|
257
|
|
|
271
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|
|
283
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|
|
302
|
|
|
1,113
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|
Income from continuing operations(1)
|
216
|
|
|
225
|
|
|
243
|
|
|
269
|
|
|
953
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|
Discontinued operations, net of income taxes
|
(3
|
)
|
|
—
|
|
|
—
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|
|
(1
|
)
|
|
(4
|
)
|
Net income
|
213
|
|
|
225
|
|
|
243
|
|
|
268
|
|
|
949
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|
Per common share data:
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|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
1.82
|
|
|
1.91
|
|
|
2.06
|
|
|
2.26
|
|
|
8.06
|
|
Net income
|
1.81
|
|
|
1.91
|
|
|
2.06
|
|
|
2.26
|
|
|
8.03
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|
Diluted
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
1.78
|
|
|
1.88
|
|
|
2.02
|
|
|
2.21
|
|
|
7.89
|
|
Net income
|
1.77
|
|
|
1.87
|
|
|
2.02
|
|
|
2.20
|
|
|
7.86
|
|
Cash dividends
|
0.685
|
|
|
0.685
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|
|
0.685
|
|
|
0.685
|
|
|
2.740
|
|
Stock prices — High
|
169.98
|
|
|
175.50
|
|
|
167.09
|
|
|
200.77
|
|
|
|
Low
|
142.95
|
|
|
123.24
|
|
|
129.46
|
|
|
159.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Total
Year
|
|
9/29/2017
|
|
12/29/2017
|
|
3/30/2018
|
|
6/29/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,410
|
|
|
$
|
1,535
|
|
|
$
|
1,562
|
|
|
$
|
1,661
|
|
|
$
|
6,168
|
|
Gross profit
|
491
|
|
|
513
|
|
|
534
|
|
|
564
|
|
|
2,102
|
|
Income from continuing operations before income taxes
|
228
|
|
|
225
|
|
|
208
|
|
|
247
|
|
|
908
|
|
Income from continuing operations(1)
|
165
|
|
|
131
|
|
|
198
|
|
|
208
|
|
|
702
|
|
Discontinued operations, net of income taxes
|
(6
|
)
|
|
—
|
|
|
(2
|
)
|
|
5
|
|
|
(3
|
)
|
Net income
|
159
|
|
|
131
|
|
|
196
|
|
|
213
|
|
|
699
|
|
Per common share data:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
1.39
|
|
|
1.10
|
|
|
1.66
|
|
|
1.76
|
|
|
5.90
|
|
Net income
|
1.33
|
|
|
1.10
|
|
|
1.65
|
|
|
1.80
|
|
|
5.88
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
1.36
|
|
|
1.08
|
|
|
1.63
|
|
|
1.72
|
|
|
5.78
|
|
Net income
|
1.31
|
|
|
1.08
|
|
|
1.62
|
|
|
1.76
|
|
|
5.76
|
|
Cash dividends
|
0.570
|
|
|
0.570
|
|
|
0.570
|
|
|
0.570
|
|
|
2.280
|
|
Stock prices — High
|
132.00
|
|
|
144.94
|
|
|
164.58
|
|
|
170.54
|
|
|
|
Low
|
109.08
|
|
|
131.52
|
|
|
140.84
|
|
|
142.50
|
|
|
|
_______________
|
|
(1)
|
Income from continuing operations in fiscal 2019 includes $65 million ($49 million after-tax or $.40 per diluted common share) of L3Harris Merger-related transaction and integration costs. Income from continuing operations in fiscal 2018 includes: (i) $47 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business and other items; (ii) $27 million of losses and other costs related to debt refinancing; (iii) $20 million of charges related to non-cash adjustments for deferred compensation and the impact of tax reform; and (iv) a $5 million charge related to consolidation of certain Exelis facilities initiated in fiscal 2017. The net after-tax impact from the above items in fiscal 2018 was $74 million or $.60 per diluted common share.
|