NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A — Significant Accounting Policies and Recent Accounting Standards
Basis of Presentation
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”), the day after Harris’ fiscal 2019 ended and the first day of the quarter ended September 27, 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. 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.
The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires that the accompanying Condensed Consolidated Financial Statements (Unaudited) and most of the disclosures in these Notes to Consolidated Financial Statements (Unaudited) (these “Notes”) be presented on a historical basis for periods prior to the closing of the L3Harris Merger. Unless the context otherwise requires, the terms “we,” “our,” “us,” “Company” and “L3Harris” as used in this Quarterly Report on Form 10-Q (this “Report”) mean Harris and its subsidiaries when referring to periods prior to the end of fiscal 2019 (prior to the L3Harris Merger) and to the combined company L3Harris Technologies, Inc. and its consolidated subsidiaries when referring to periods after the end of fiscal 2019 (after the L3Harris Merger).
We are accounting for the L3Harris Merger under the acquisition method of accounting. Under the acquisition method of accounting, we are required to measure identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree at their fair values as of the Closing Date. The excess of the consideration transferred over those fair values is recorded as goodwill. See Note B — Business Combination in these Notes for additional information related to the L3Harris Merger.
The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared by L3Harris, without an audit, in accordance with GAAP for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all information and footnotes necessary for a complete presentation of financial condition, results of operations, cash flows and equity in conformity with GAAP for annual financial statements. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial condition, results of operations and cash flows for the periods presented therein. The results for the quarter ended September 27, 2019 are not necessarily indicative of the results that may be expected for the Fiscal Transition Period (as defined below) or any subsequent period. The balance sheet at June 28, 2019 has been derived from our audited financial statements, but does not include all of the information and footnotes required by GAAP for annual financial statements. We provide complete, audited financial statements in our Annual Report on Form 10-K, which includes information and footnotes required by the rules and regulations of the SEC. The information included in this Report should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 28, 2019 (our “Fiscal 2019 Form 10-K”).
We implemented a new organizational structure effective on June 29, 2019, which resulted in changes to our operating segments, which are also reportable segments and referred to as our business segments. The historical results, discussion and presentation of our business segments as set forth in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes reflect the impact of these changes for all periods presented in order to present segment information on a comparable basis. There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting from these changes.
On September 13, 2019, we completed the sale of the Harris Night Vision business to Elbit Systems of America, LLC, a subsidiary of Elbit Systems Ltd., for $350 million (net cash proceeds of $346 million after selling costs and estimated purchase price adjustments), subject to final customary purchase price adjustments as set forth in the definitive agreement. The Harris Night Vision business was not included in any of the operating segments in our new organizational structure and the operating
results of the Harris Night Vision business through the date of the divestiture are discussed and presented as part of “Other non-reportable business segments” in this Report.
See Note C — Business Divestitures and Asset Sales in these Notes for more information regarding the divestiture of the Harris Night Vision business.
Amounts contained in this Report may not always add to totals due to rounding.
Change in Fiscal Year
Through fiscal 2019, our fiscal year 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”). We will file a transition report on Form 10-KT containing audited financial statements for the Fiscal Transition Period.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes and related disclosures. These estimates and assumptions are based on experience and other information available prior to issuance of the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes. Materially different results can occur as circumstances change and additional information becomes known.
Significant Accounting Policies Update
There have been no material changes to our significant accounting policies described in our Fiscal 2019 Form 10-K, except as described in “Adoption of New Accounting Standards” below.
Adoption of New Accounting Standards
Effective June 29, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), as amended (“ASC 842”) using the optional transition method. We initially applied ASC 842 for leases existing as of June 29, 2019 and recognized $270 million of right-of-use (“ROU”) assets and $289 million of lease liabilities in our Condensed Consolidated Balance Sheet (Unaudited). See Note B — Business Combination in these Notes for ROU assets and lease liabilities assumed as part of the L3Harris Merger.
In accordance with ASC 842, we recognized ROU assets and liabilities in our balance sheet for operating and finance leases under which we are the lessee, except for equipment leases and, as permitted by a practical expedient under ASC 842, leases with a term of 12 months or less. Equipment leases were not material at September 27, 2019 and June 29, 2019. We also elected the package of practical expedients permitted under ASC 842 and did not reassess lease classification for existing or expired leases, whether expired or existing contracts contain a lease under the new definition of a lease or whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
Operating lease assets are classified as operating ROU assets, operating lease liabilities for obligations due within 12 months are classified as other current liabilities and operating lease liabilities for obligations due longer than 12 months are classified as other long-term liabilities. Finance lease assets are classified as property, plant and equipment. Finance lease liabilities are classified as other current liabilities or other long-term liabilities depending on when the obligation is due.
Lease assets and liabilities are recognized based on the present value of future lease payments. Lease payments primarily include base rent. We have some lease payments that are based on an index and changes to the index are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. Our leases also include non-lease components such as real estate taxes and common-area maintenance costs. We elected the practical expedient to account for lease and non-lease components as a single component. In certain of our leases, the non-lease components are variable and are therefore excluded from lease payments to determine the lease asset. The present value of future lease payments is determined using our incremental borrowing rate at lease commencement over the expected lease term. We use our incremental borrowing rate because our lessee leases do not provide an implicit lease rate. The expected lease term represents the number of years we expect to lease the property, including options to extend or terminate the lease when it is reasonably certain that we will exercise such option.
Operating lease expense is recognized as an operating cost on a straight-line basis over the expected lease term in our Condensed Consolidated Statement of Income (Unaudited). For finance leases, the asset is amortized on a straight-line basis over the lease term, and interest on the lease liability is recognized in interest expense. The amortization of lease assets for our finance leases and interest expense was not material for the quarter ended September 27, 2019.
We are a lessor for certain arrangements for flight simulators. These leases meet the criteria for operating lease classification. Lease income associated with these leases was not material for the quarter ended September 27, 2019.
Adoption of ASC 842 did not have a material effect on our results of operations or cash flows.
Effective June 29, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update are intended to better align companies’ risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedge relationships and the presentation of hedge results. The amendments in this update require companies to present the earnings effect of the hedging instrument in the same income statement line in which the earnings effect of the hedged item is reported. Prior to the adoption of this update, GAAP provided hedge accounting for only the portion of the hedge deemed to be highly effective and required companies to separately reflect the amount by which the hedging instrument did not offset the hedged item, which is referred to as the ineffective amount. The amendments in this update include, among other items, removal of the requirement that companies separately measure and recognize in earnings the ineffective amount for highly effective hedges. Adoption of this standard did not have a material effect on our financial condition, results of operations or cash flows.
Note B — Business Combination
On October 12, 2018, Harris entered into the 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, the first day of the quarter ended September 27, 2019. Upon completion of the L3Harris Merger, Harris was renamed “L3Harris Technologies, Inc.” and each share of L3 common stock converted into the right to receive 1.30 shares 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 intelligence, surveillance and reconnaissance (“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 U.S. Department of Defense 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 customers’ mission-critical needs, with approximately 50,000 employees and customers in 130 countries. We provide advanced defense and commercial technologies across air, land, sea, space and cyber domain.
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 L3Harris share-based awards were issued for certain outstanding L3 share-based awards.
We are accounting for the L3Harris Merger under the acquisition method of accounting. Under the acquisition method of accounting, we are required to measure identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree at their fair values as of the Closing Date. Due to the timing of the L3Harris Merger relative to its size and complexity, our accounting for the L3Harris Merger is preliminary. The acquisition-date fair value estimates for consideration transferred, identifiable assets acquired, liabilities assumed and noncontrolling interests are based on preliminary calculations and our estimates and assumptions are subject to change as we obtain additional information during the measurement period (up to one year from the Closing Date).
Our preliminary calculation of estimated consideration transferred is summarized below:
|
|
|
|
|
|
|
|
|
(In millions, except exchange ratio and per share amounts)
|
|
Outstanding shares of L3 common stock as of June 28, 2019
|
79.63
|
|
|
L3 restricted stock unit awards settled in shares of L3Harris common stock
|
0.41
|
|
|
L3 performance unit awards settled in shares of L3Harris common stock
|
0.04
|
|
|
|
80.08
|
|
|
Exchange Ratio
|
1.30
|
|
|
Shares of L3Harris common stock issued for L3 outstanding common stock
|
104.10
|
|
|
Price per share of L3Harris common stock as of June 28, 2019
|
$
|
189.13
|
|
|
Fair value of L3Harris common stock issued for L3 outstanding common stock
|
$
|
19,689
|
|
|
Fair value of replacement RSUs attributable to merger consideration
|
10
|
|
|
Fair value of L3Harris stock options issued for L3 outstanding stock options
|
101
|
|
|
Withholding tax liability incurred for converted L3 share-based awards
|
45
|
|
|
Fair value of replacement award consideration
|
156
|
|
|
Fair value of total consideration
|
19,845
|
|
|
Less cash acquired
|
(1,195
|
)
|
|
Total net consideration transferred
|
$
|
18,650
|
|
Our preliminary measurement of assets acquired, liabilities assumed and nonconrolling interests is summarized below:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Receivables
|
$
|
849
|
|
|
Contract assets
|
1,708
|
|
|
Inventories
|
1,056
|
|
|
Other current assets
|
517
|
|
|
Property, plant and equipment
|
1,176
|
|
|
Operating lease right-of-use assets
|
704
|
|
|
Goodwill
|
15,423
|
|
|
Other intangible assets
|
6,768
|
|
|
Other non-current assets
|
327
|
|
|
Total assets acquired
|
$
|
28,528
|
|
|
|
|
|
Accounts payable
|
$
|
898
|
|
|
Contract liabilities
|
722
|
|
|
Other current liabilities
|
772
|
|
|
Operating lease liabilities
|
715
|
|
|
Defined benefit plans
|
1,411
|
|
|
Long-term debt, net
|
3,548
|
|
|
Other long-term liabilities
|
1,661
|
|
|
Total liabilities assumed
|
9,727
|
|
|
Net assets acquired
|
18,801
|
|
|
Noncontrolling interests
|
(151
|
)
|
|
Total net consideration transferred
|
$
|
18,650
|
|
The goodwill resulting from the L3Harris Merger was primarily associated with L3’s market presence and leading positions, growth opportunities in the markets in which L3 businesses operate, experienced work force and established operating infrastructures. Most of the goodwill related to the L3Harris Merger is nondeductible for tax purposes. As described in more detail in Note X — Business Segment Information in these Notes, we adjusted our segment reporting to reflect our new organizational structure commencing with the quarter ended September 27, 2019. Under the revised reporting structure, our Integrated Mission Systems segment is comprised almost entirely of L3 operating businesses, as of the acquisition date, whereas our other segments are comprised of both L3 and Harris operating businesses.
See Note K — Goodwill and Other Intangible Assets in these Notes for more information regarding the preliminary allocation of goodwill by reportable business segment under the revised reporting structure.
The following table provides further detail of the fair value and weighted-average amortization period of identified intangible assets acquired by major intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Period
|
|
Total
|
|
|
|
|
|
|
|
(In years)
|
|
(In millions)
|
|
Identifiable intangible assets acquired:
|
|
|
|
|
Customer relationships (Government)
|
15
|
|
$
|
3,549
|
|
|
Customer relationships (Commercial)
|
16
|
|
561
|
|
|
Trade names — Divisions
|
10
|
|
162
|
|
|
Developed technology
|
8
|
|
630
|
|
|
Total identifiable intangible assets subject to amortization
|
14
|
|
4,902
|
|
|
Trade names — Corporate
|
indefinite
|
|
1,803
|
|
|
In-process research and development
|
n/a
|
|
63
|
|
|
Total identifiable intangible assets
|
|
|
$
|
6,768
|
|
During the quarter ended September 27, 2019, we recorded $373 million of L3Harris Merger-related charges, consisting of restructuring, integration, transaction and other costs as follows:
|
|
|
|
•
|
$74 million of transaction costs, recognized as incurred;
|
|
|
|
|
•
|
$35 million of integration costs, recognized as incurred;
|
|
|
|
|
•
|
$61 million of equity award acceleration charges, recognized upon change in control;
|
|
|
|
|
•
|
$92 million of additional cost of sales related to the fair value step-up in inventory sold; and
|
|
|
|
|
•
|
$111 million of restructuring costs as discussed in Note E — Restructuring and Other Exit Costs in these Notes.
|
Because the L3Harris Merger benefited the entire Company as opposed to any individual business segment, the above costs were not allocated to any business segment. All of the costs above were recorded in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited), except for the $92 million of additional cost of sales related to the fair value step-up in inventory sold, which is included in the “Cost of product sales and services” line item in our Condensed Consolidated Statement of Income (Unaudited).
Pro Forma Results
The following summary, prepared on a pro forma basis, presents our unaudited consolidated results of operations for the quarter ended September 28, 2018 as if the L3Harris Merger had been completed as of the beginning of the quarter ended September 28, 2018, after including any post-acquisition adjustments directly attributable to the acquisition, such as the sale of Harris’ Night Vision business, and after including the impact of adjustments such as amortization of intangible assets as well as the related income tax effects. This pro forma presentation does not include any impact of transaction synergies. The pro forma results are not necessarily indicative of our results of operations that actually would have been obtained had the combination of Harris and L3 been completed on the assumed date or for the period presented, or which may be realized in the future.
|
|
|
|
|
|
|
|
|
September 28, 2018
|
|
|
|
|
|
(In millions)
|
|
Revenue from product sales and services — as reported
|
$
|
1,542
|
|
|
Revenue from product sales and services — pro forma
|
$
|
4,018
|
|
|
Income from continuing operations — as reported
|
$
|
216
|
|
|
Income from continuing operations — pro forma
|
$
|
373
|
|
For the quarter ended September 27, 2019, our Condensed Consolidated Statement of Income (Unaudited) includes the results of L3 operating businesses from the Closing Date, with total revenue of approximately $2.67 billion (net of intercompany sales between L3 operating businesses) and income from continuing operations before income taxes of approximately $0.19 billion (including $92 million of additional cost of sales related to the fair value step-up in inventory sold and $101 million of restructuring charges for workforce reductions associated with the L3Harris Merger).
Note C — Business Divestitures and Asset Sales
Harris Night Vision. On September 13, 2019, we completed the sale of the Harris Night Vision business, a global supplier of high-performance, vision-enhancing products for U.S. and allied military and security forces and commercial customers, for
$350 million (net cash proceeds of $346 million after selling costs and estimated purchase price adjustments), subject to final customary purchase price adjustments pursuant to a definitive agreement we entered into on April 4, 2019 as part of the regulatory process in connection with the L3Harris Merger and recognized a pre-tax gain of $229 million.
Through fiscal 2019, the Harris Night Vision business was reported as part of our former Communication Systems segment. As a result of the then-pending divestiture, the Harris Night Vision business was not included in any of our new business segments and, consequently, the operating results of the business are included in “Other non-reportable business segments” for the quarters ended September 27, 2019 and September 28, 2018 in this Report.
Income before income taxes for the Harris Night Vision business was not material for the quarter ended September 27, 2019 and was $6 million for the quarter ended September 28, 2018. The carrying amounts of the major classes of assets and liabilities of the Harris Night Vision business classified as held for sale at June 28, 2019 are summarized below:
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
|
|
|
|
(In millions)
|
|
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
|
|
Stormscope. On August 30, 2019, we completed the sale of the Stormscope product line for $20 million in cash and recorded a pre-tax gain of $12 million in the “Engineering, selling and administrative expenses” line item of our Condensed Consolidated Statement of Income (Unaudited).
Note D — Stock Options and Other Share-Based Compensation
As of September 27, 2019, we had options or other share-based compensation outstanding under two Harris 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”), as well as under employee stock incentive plans of L3 assumed by L3Harris (collectively, “L3Harris SIPs”).
Harris 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, except stock options which automatically vested and remained outstanding. Harris equity awards 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 (except stock options automatically converted into stock options with respect to L3Harris Common Stock and remained outstanding), 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. Pursuant to the Merger Agreement, L3Harris assumed the converted L3 equity awards.
The compensation cost related to our share-based awards that was charged against income was $95 million, including acceleration expense recognized in connection with the L3Harris Merger, and $14 million for the quarters ended September 27, 2019 and September 28, 2018, respectively.
The aggregate number of shares of our common stock that we issued under the terms of L3Harris SIPs (including shares issued as merger consideration to settle pre-merger L3 share-based awards), net of shares withheld for tax purposes, was 2,837,153 and 403,953 for the quarters ended September 27, 2019 and September 28, 2018, respectively.
Awards granted to participants under L3Harris SIPs during the quarter ended September 27, 2019 consisted of 245,991 restricted stock units, 738,956 stock options and 55,020 performance stock units. The fair value as of the grant date of each stock option award was determined using the Black-Scholes-Merton option-pricing model and the following assumptions: expected dividend yield of 1.70 percent; expected volatility of 22.18 percent; risk-free interest rates averaging 1.68 percent; and expected term of 5.65 years.
The fair value as of the grant date of each restricted stock unit award and performance stock unit award was based on the closing price of our common stock on the grant date.
Note E — 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 “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited).
L3Harris Merger-Related Restructuring Costs
During the quarter ended September 27, 2019, we recorded $111 million of restructuring charges for workforce reductions (including severance and other employee-related exit costs) in connection with the L3Harris Merger. At September 27, 2019, we had recorded liabilities of $74 million associated with these restructuring actions, of which substantially all will be paid in the next twelve months. At this time, we are unable to reasonably estimate the total amount of cost expected to be incurred in connection with L3Harris Merger-related restructuring activities because we are still formulating plans for facility consolidations. We will disclose the total amount of cost expected to be incurred in connection with L3Harris Merger-related activities in future filings once the amount can be reasonably estimated.
Previous Restructuring and Other Exit Costs
Prior to the L3Harris Merger, we had liabilities of $16 million for lease obligations associated with exited facilities with remaining terms of four years or less, of which $13 million remained outstanding at September 27, 2019.
The following table summarizes our restructuring and other exit activities during the quarter ended September 27, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance-related costs
|
|
Facilities consolidation and other exit costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Balance at June 28, 2019
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
Additional provisions
|
111
|
|
|
—
|
|
|
111
|
|
|
Payments
|
(37
|
)
|
|
(3
|
)
|
|
(40
|
)
|
|
Balance at September 27, 2019
|
$
|
74
|
|
|
$
|
13
|
|
|
$
|
87
|
|
Note F — Accumulated Other Comprehensive Income (Loss) (“AOCI”)
The components of AOCI are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation(1)
|
|
Net unrealized (losses) gains on hedging derivatives(2)
|
|
Unrecognized postretirement obligations(3)
|
|
Total AOCI
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Balance at June 28, 2019
|
$
|
(106
|
)
|
|
$
|
(38
|
)
|
|
$
|
(563
|
)
|
|
$
|
(707
|
)
|
|
Other comprehensive loss
|
(25
|
)
|
|
(38
|
)
|
|
—
|
|
|
(63
|
)
|
|
Amounts reclassified to earnings from AOCI
|
—
|
|
|
1
|
|
|
13
|
|
|
14
|
|
|
Balance at September 27, 2019
|
$
|
(131
|
)
|
|
$
|
(75
|
)
|
|
$
|
(550
|
)
|
|
$
|
(756
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 2018
|
$
|
(99
|
)
|
|
$
|
(20
|
)
|
|
$
|
(83
|
)
|
|
$
|
(202
|
)
|
|
Other comprehensive income (loss)
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
Amounts reclassified to earnings from AOCI
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance at September 28, 2018
|
$
|
(99
|
)
|
|
$
|
(19
|
)
|
|
$
|
(84
|
)
|
|
$
|
(202
|
)
|
_______________
|
|
|
|
(1)
|
Net of income taxes of $2 million at September 27, 2019, June 28, 2019, September 28, 2018 and June 29, 2018.
|
|
|
|
|
(2)
|
Net of income taxes of $24 million, $13 million, $6 million and $7 million at September 27, 2019, June 28, 2019, September 28, 2018 and June 29, 2018, respectively.
|
|
|
|
|
(3)
|
Net of income taxes of $183 million and $188 million at September 27, 2019 and June 28, 2019, respectively, and net of income taxes of $30 million at September 28, 2018 and June 29, 2018.
|
Reclassifications from AOCI into earnings for the quarter ended September 27, 2019 are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from AOCI
|
|
Affected line item in the Condensed Consolidated Statement of Income (Unaudited)
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
Loss on hedging instruments
|
$
|
1
|
|
|
Engineering, selling and administrative expenses
|
|
|
$
|
1
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
Postretirement benefit obligations
|
$
|
13
|
|
|
Gain on sale of business
|
|
|
4
|
|
|
Non-operating income
|
|
|
(4
|
)
|
|
Income taxes
|
|
|
$
|
13
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
Total reclassifications for the period
|
$
|
14
|
|
|
|
Note G — Receivables
Receivables are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
|
|
|
|
|
(In millions)
|
|
Accounts receivable
|
$
|
1,283
|
|
|
$
|
459
|
|
|
Less allowances for collection losses
|
(8
|
)
|
|
(2
|
)
|
|
|
$
|
1,275
|
|
|
$
|
457
|
|
We have a receivables sale agreement (“RSA”) with a third-party financial institution that permits us to sell, on a non-recourse basis, up to $100 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 and which we account for as sales of receivables with sale proceeds included in net cash from operating activities. Outstanding accounts receivable sold pursuant to the RSA were not material at September 27, 2019 and June 28, 2019.
Note H — Contract Assets and Contract Liabilities
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 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 assets and contract liabilities in the quarter ended September 27, 2019 was primarily due to contract assets and liabilities acquired in connection with the L3Harris Merger. Changes in contract assets and contract liabilities balances during the quarter ended September 27, 2019 were not materially impacted by any factors other than those described above.
Contract assets and contract liabilities are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
|
|
|
|
|
(In millions)
|
|
Contract assets
|
$
|
2,625
|
|
|
$
|
807
|
|
|
Contract liabilities, current
|
(1,210
|
)
|
|
(496
|
)
|
|
Contract liabilities, non-current(1)
|
(80
|
)
|
|
(42
|
)
|
|
Net contract assets
|
$
|
1,335
|
|
|
$
|
269
|
|
_______________
|
|
|
|
(1)
|
The non-current portion of contract liabilities is included as a component of the “Other long-term liabilities” line item in our Condensed Consolidated Balance Sheet (Unaudited).
|
The components of contract assets are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
|
|
|
|
|
(In millions)
|
|
Unbilled contract receivables, gross
|
$
|
3,969
|
|
|
$
|
916
|
|
|
Progress payments and advances
|
(1,344
|
)
|
|
(109
|
)
|
|
|
$
|
2,625
|
|
|
$
|
807
|
|
Impairment losses related to our contract assets were not material during the quarter ended September 27, 2019 and September 28, 2018. For the quarter ended September 27, 2019, we recognized revenue of $0.6 billion related to contract liabilities that were outstanding at June 28, 2019. For the quarter ended September 28, 2018, we recognized revenue of $0.2 billion related to contract liabilities that were outstanding at June 29, 2018.
Note I — Inventories
Inventories are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
|
|
|
|
|
(In millions)
|
|
Finished products
|
$
|
273
|
|
|
$
|
77
|
|
|
Work in process
|
430
|
|
|
90
|
|
|
Raw materials and supplies
|
636
|
|
|
193
|
|
|
|
$
|
1,339
|
|
|
$
|
360
|
|
Inventories at September 27, 2019 included engineering, selling and administrative costs of $39 million. Engineering, selling and administrative costs included in inventories at June 28, 2019 were not material. Inventories acquired in connection with the L3Harris Merger included $40 million of engineering, selling and administrative costs.
Note J — Property, Plant and Equipment
Property, plant and equipment are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
|
|
|
|
|
(In millions)
|
|
Land
|
$
|
71
|
|
|
$
|
40
|
|
|
Software capitalized for internal use
|
326
|
|
|
187
|
|
|
Buildings
|
1,019
|
|
|
631
|
|
|
Machinery and equipment
|
2,120
|
|
|
1,429
|
|
|
|
3,536
|
|
|
2,287
|
|
|
Less accumulated depreciation and amortization
|
(1,463
|
)
|
|
(1,393
|
)
|
|
|
$
|
2,073
|
|
|
$
|
894
|
|
Depreciation and amortization expense related to property, plant and equipment was $79 million and $35 million for the quarters ended September 27, 2019 and September 28, 2018, respectively.
Note K — Goodwill and Other Intangible Assets
Goodwill. As discussed in Note X — Business Segment Information in these Notes, after the completion of the L3Harris Merger, we adjusted our segment reporting to reflect our new organizational structure effective for the quarter ended September 27, 2019. Because our accounting for the L3Harris Merger is still preliminary, we assigned goodwill acquired on a provisional basis. Immediately before and after our goodwill assignments, we completed an assessment of any potential goodwill impairment under our former and new segment reporting structure and determined that no impairment existed.
The assignment of goodwill by business segment, and changes in the carrying amount of goodwill for the quarter ended September 27, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Mission Systems
|
|
Space and Airborne Systems
|
|
Communication Systems
|
|
Aviation Systems
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Balance at June 28, 2019
|
$
|
63
|
|
|
$
|
3,707
|
|
|
$
|
924
|
|
|
$
|
646
|
|
|
$
|
5,340
|
|
|
Goodwill acquired
|
6,297
|
|
|
1,320
|
|
|
2,475
|
|
|
5,331
|
|
|
15,423
|
|
|
Currency translation adjustments
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(11
|
)
|
|
(14
|
)
|
|
Balance at September 27, 2019
|
$
|
6,360
|
|
|
$
|
5,024
|
|
|
$
|
3,399
|
|
|
$
|
5,966
|
|
|
$
|
20,749
|
|
Identifiable Intangible Assets. The most significant identifiable intangible asset that is separately recognized for our business combinations is customer relationships. Our customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from the follow-on sales expected from the customer relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value. Our indefinite-lived intangible assets include in-process research and development (“IPR&D”).
The table below presents information for our identifiable intangible assets that are subject to amortization and indefinite-lived intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
|
(In millions)
|
|
Customer relationships
|
$
|
5,314
|
|
|
$
|
518
|
|
|
$
|
4,796
|
|
|
$
|
1,203
|
|
|
$
|
419
|
|
|
$
|
784
|
|
|
Developed technologies
|
837
|
|
|
159
|
|
|
678
|
|
|
206
|
|
|
136
|
|
|
70
|
|
|
Trade names
|
204
|
|
|
30
|
|
|
174
|
|
|
42
|
|
|
26
|
|
|
16
|
|
|
Other
|
5
|
|
|
3
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
Total intangible assets subject to amortization
|
6,360
|
|
|
710
|
|
|
5,650
|
|
|
1,453
|
|
|
583
|
|
|
870
|
|
|
IPR&D
|
63
|
|
|
—
|
|
|
63
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
L3 trade name
|
1,803
|
|
|
—
|
|
|
1,803
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total intangibles assets
|
$
|
8,226
|
|
|
$
|
710
|
|
|
$
|
7,516
|
|
|
$
|
1,453
|
|
|
$
|
583
|
|
|
$
|
870
|
|
For the quarter ended September 27, 2019, amortization expense related to intangible assets was $125 million and primarily related to the L3Harris Merger. For the quarter ended September 28, 2018, amortization expense related to intangible assets was $29 million and primarily related to our acquisition of Exelis Inc.
Future estimated amortization expense for intangible assets is as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Year 1
|
$
|
575
|
|
|
Year 2
|
586
|
|
|
Year 3
|
553
|
|
|
Year 4
|
522
|
|
|
Year 5
|
490
|
|
|
Thereafter
|
2,924
|
|
|
Total
|
$
|
5,650
|
|
Note L — Accrued Warranties
Our liability for standard product warranties is included as a component of the “Other accrued items” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited). Changes in our liability for standard product warranties during the quarter ended September 27, 2019 were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Balance at June 28, 2019
|
$
|
25
|
|
|
Acquisitions during the period
|
83
|
|
|
Accruals for product warranties issued during the period
|
16
|
|
|
Settlements made during the period
|
(14
|
)
|
|
Other, including foreign currency translation adjustments
|
(1
|
)
|
|
Balance at September 27, 2019
|
$
|
109
|
|
Note M — Debt
Long-term debt is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Variable-rate debt:
|
|
|
|
|
Floating rate notes, due April 30, 2020
|
$
|
250
|
|
|
$
|
250
|
|
|
Total variable-rate debt
|
250
|
|
|
250
|
|
|
Fixed-rate debt:
|
|
|
|
|
2.7% notes, due April 27, 2020
|
400
|
|
|
400
|
|
|
4.95% notes, due February 15, 2021
|
650
|
|
|
—
|
|
|
3.85% notes, due June 15, 2023
|
800
|
|
|
—
|
|
|
3.95% notes, due May 28, 2024
|
350
|
|
|
—
|
|
|
3.832% notes, due April 27, 2025
|
600
|
|
|
600
|
|
|
7.0% debentures, due January 15, 2026
|
100
|
|
|
100
|
|
|
3.85% notes, due December 15, 2026
|
550
|
|
|
—
|
|
|
6.35% debentures, due February 1, 2028
|
26
|
|
|
26
|
|
|
4.40% notes, due June 15, 2028
|
1,850
|
|
|
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
|
50
|
|
|
17
|
|
|
Total fixed-rate debt
|
6,576
|
|
|
3,193
|
|
|
Total debt
|
6,826
|
|
|
3,443
|
|
|
Plus: unamortized bond premium
|
163
|
|
|
—
|
|
|
Less: unamortized discounts and issuance costs
|
(26
|
)
|
|
(24
|
)
|
|
Total debt, net
|
6,963
|
|
|
3,419
|
|
|
Less: current portion of long-term debt, net
|
(656
|
)
|
|
(656
|
)
|
|
Total long-term debt, net
|
$
|
6,307
|
|
|
$
|
2,763
|
|
The potential maturities of long-term debt, including the current portion, for the five years following the quarter ended September 27, 2019 and, in total, thereafter are: $656 million in the next twelve months, $656 million in year two; $6 million in year three; $806 million in year four; $355 million in year five; and $4,347 million thereafter.
As part of our purchase accounting for the L3Harris Merger, the L3 Notes (defined below) were recorded at fair value ($3.52 billion on a combined basis, representing a premium of $171 million). This premium will be amortized to interest expense over the lives of the related New L3Harris Notes (defined below) and such amortization is reflected as a reduction of interest expense in our Condensed Consolidated Statement of Income (Unaudited).
For additional information on our long-term debt, see Note 13: “Debt” in the Notes to Consolidated Financial Statements in our Fiscal 2019 Form 10-K.
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 series of the New L3Harris Notes issued has an interest rate and maturity date that is identical to the L3 Notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Principal
Amount of L3 Notes
(prior to debt
exchange)
|
|
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”)
|
$
|
650
|
|
|
$
|
501
|
|
|
$
|
149
|
|
|
3.85% notes due June 15, 2023 (“3.85% 2023 Notes”)
|
800
|
|
|
741
|
|
|
59
|
|
|
3.95% notes due May 28, 2024 (“3.95% 2024 Notes”)
|
350
|
|
|
326
|
|
|
24
|
|
|
3.85% notes due December 15, 2026 (“3.85% 2026 Notes”)
|
550
|
|
|
535
|
|
|
15
|
|
|
4.40% notes due June 15, 2028 (“4.40% 2028 Notes”)
|
1,000
|
|
|
918
|
|
|
82
|
|
|
Total
|
$
|
3,350
|
|
|
$
|
3,021
|
|
|
$
|
329
|
|
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 the 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 the 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, there was approximately $329 million of existing L3 Senior Notes outstanding, which remain the senior unsecured obligations of L3.
Note N — Postretirement Benefit Plans
The following tables provide the components of our net periodic benefit income for our defined benefit plans, including defined benefit pension plans and other postretirement defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 27, 2019
|
|
|
Pension
|
|
Other Benefits
|
|
|
|
|
|
|
|
(In millions)
|
|
Net periodic benefit income
|
|
|
|
|
Service cost
|
$
|
21
|
|
|
$
|
1
|
|
|
Interest cost
|
76
|
|
|
2
|
|
|
Expected return on plan assets
|
(157
|
)
|
|
(5
|
)
|
|
Amortization of net actuarial gain
|
—
|
|
|
(1
|
)
|
|
Net periodic benefit income
|
(60
|
)
|
|
(3
|
)
|
|
Effect of curtailments or settlements(1)
|
5
|
|
|
—
|
|
|
Total net periodic benefit income
|
$
|
(55
|
)
|
|
$
|
(3
|
)
|
_______________
|
|
|
|
(1)
|
During the quarter ended September 27, 2019, we recognized a $5 million settlement loss resulting from the full payout of the liabilities of a non-qualified benefit plan due to the change in control provisions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 27, 2018
|
|
|
Pension
|
|
Other Benefits
|
|
|
|
|
|
|
|
(In millions)
|
|
Net periodic benefit income
|
|
|
|
|
Service cost
|
$
|
9
|
|
|
$
|
—
|
|
|
Interest cost
|
52
|
|
|
2
|
|
|
Expected return on plan assets
|
(95
|
)
|
|
(4
|
)
|
|
Amortization of net actuarial gain
|
—
|
|
|
(2
|
)
|
|
Total net periodic benefit income
|
$
|
(34
|
)
|
|
$
|
(4
|
)
|
The service cost component of net periodic benefit income is included in the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Condensed Consolidated Statement of Income (Unaudited). The non-service cost components of net periodic benefit income are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited).
We contributed $327 million to our qualified defined benefit pension plans during the quarter ended September 27, 2019, including a $302 million voluntary contribution to our U.S. qualified defined benefit pension plans. We currently anticipate making no contributions to our U.S. qualified defined benefit pension plans and only minor contributions to our non-U.S. pension plans during the remainder of the Fiscal Transition Period.
See Note B — Business Combination in these Notes for information regarding postretirement benefit plan liabilities assumed in connection with the L3Harris Merger.
Note O — Income From Continuing Operations Per Share
The computations of income from continuing operations per common share are as follows (in this Note O, “Income from continuing operations” refers to income from continuing operations attributable to L3Harris common shareholders):
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
September 27, 2019
|
|
September 28, 2018
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
|
Income from continuing operations
|
$
|
429
|
|
|
$
|
216
|
|
|
Adjustments for participating securities outstanding
|
—
|
|
|
(1
|
)
|
|
Income from continuing operations used in per basic and diluted common share calculations (A)
|
$
|
429
|
|
|
$
|
215
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding (B)
|
222.6
|
|
|
117.9
|
|
|
Impact of dilutive share-based awards
|
2.8
|
|
|
2.7
|
|
|
Diluted weighted average common shares outstanding (C)
|
225.4
|
|
|
120.6
|
|
|
Income from continuing operations per basic common share (A)/(B)
|
$
|
1.93
|
|
|
$
|
1.82
|
|
|
Income from continuing operations per diluted common share (A)/(C)
|
$
|
1.90
|
|
|
$
|
1.78
|
|
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 anti-dilutive impact of 470,983 and 160,167 weighted average share-based awards outstanding for the quarters ended September 27, 2019 and September 28, 2018, respectively.
Note P — Research and Development
Company-sponsored research and development costs are expensed as incurred. These costs were $149 million and $72 million for the quarters ended September 27, 2019 and September 28, 2018, respectively, and are included in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited). 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 POC cost-to-cost revenue recognition method. Customer-sponsored research and development is included in our revenue and cost of product sales and services.
Note Q — Leases
As discussed in Note A — Significant Accounting Policies and Recent Accounting Standards in these Notes, effective June 29, 2019, we adopted ASC 842. Our operating and finance leases at September 27, 2019 were for real estate such as office space, warehouses, manufacturing, research and development facilities, tower space and land, and for equipment. Finance leases were not material at September 27, 2019 and are therefore not included in the disclosures below.
Operating lease cost was $45 million and other lease expenses, including short-term and equipment lease cost, variable lease cost and sublease income, were not material for the quarter ended September 27, 2019.
Supplemental operating lease balance sheet information at September 27, 2019 is presented in the table below:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Operating lease right-of-use assets
|
$
|
934
|
|
|
|
|
|
Other accrued items
|
$
|
129
|
|
|
Operating lease liabilities
|
831
|
|
|
Total operating lease liabilities
|
$
|
960
|
|
The table below presents other supplemental lease information for the quarter ended September 27, 2019:
|
|
|
|
|
|
|
|
|
(In millions, except lease term and discount rate)
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
43
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
14
|
|
|
Weighted average remaining lease term — operating leases (in years)
|
9.4
|
|
|
Weighted average discount rate — operating leases
|
3.3
|
%
|
The table below presents future lease payments under non-cancelable operating leases as of September 27, 2019:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Quarter ended January 3, 2020
|
$
|
49
|
|
|
Year 1
|
162
|
|
|
Year 2
|
135
|
|
|
Year 3
|
124
|
|
|
Year 4
|
104
|
|
|
Thereafter
|
548
|
|
|
Total future lease payments required
|
1,122
|
|
|
Less: imputed interest
|
162
|
|
|
Total
|
$
|
960
|
|
As of September 27, 2019, we had $279 million of additional operating lease commitments for real estate facilities that have not yet commenced. These leases will commence in 2019 or 2020 with lease terms of 5 to 25 years.
As discussed in Note A — Significant Accounting Policies and Recent Accounting Standards in these Notes, we adopted ASC 842 using the optional transition method presenting prior period amounts and disclosures under ASC 840. The following represented future minimum lease payments for operating leases under ASC 840 at June 28, 2019:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Year 1
|
$
|
68
|
|
|
Year 2
|
62
|
|
|
Year 3
|
47
|
|
|
Year 4
|
40
|
|
|
Year 5
|
32
|
|
|
Thereafter
|
64
|
|
|
Total minimum lease payments required
|
$
|
313
|
|
Rent expense was $73 million for the fiscal year ended June 28, 2019.
Note R — Non-Operating Income
The components of non-operating income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
September 27, 2019
|
|
September 28, 2018
|
|
|
(In millions)
|
|
Pension adjustment(1)
|
$
|
80
|
|
|
$
|
47
|
|
|
Other
|
(1
|
)
|
|
—
|
|
|
|
$
|
79
|
|
|
$
|
47
|
|
_______________
|
|
|
|
(1)
|
Pension adjustment recorded as "Non-operating income" in our Consolidated Consolidated Statement of Income (Unaudited) represents the non-service component of net periodic pension and postretirement benefit costs, which includes interest cost, expected return on plan assets, amortization of net actuarial gain and effect of curtailments or settlements.
|
Note S — Income Taxes
Effective Tax Rate
Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 1.1 percent in the quarter ended September 27, 2019 compared with 16.0 percent in the quarter ended September 28, 2018. In the quarter ended September 27, 2019, our effective tax rate benefited from the favorable impact of excess tax benefits related to equity-based compensation, from the ability to utilize capital loss carryforwards with a full valuation allowance against capital gains generated from the Harris Night Vision business divestiture, and from the release of uncertain tax positions due to statute of limitations expirations. In the quarter ended September 28, 2018, our effective tax rate benefited from the tax rate reduction under the Tax Cuts and Jobs Act (the “Tax Act”), from the favorable impact of excess tax benefits related to equity-based compensation, and from several differences in GAAP and tax accounting related to investments.
Tax Uncertainties
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the quarter ended September 27, 2019 is as follows:
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
|
(In millions)
|
|
Balance at beginning of period
|
$
|
204
|
|
|
Additions based on tax positions taken during the period
|
12
|
|
|
Additions based on tax positions taken during prior periods
|
11
|
|
|
Additions for tax positions related to acquired entities
|
169
|
|
|
Decreases based on tax positions taken during prior periods
|
—
|
|
|
Decreases from lapse in statutes of limitations
|
(12
|
)
|
|
Balance at end of period
|
$
|
384
|
|
As of September 27, 2019, we had $384 million of unrecognized tax benefits, of which $324 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 $29 million for the potential payment of interest and penalties as of September 27, 2019 (and this amount was not included in the $384 million of unrecognized tax benefits balance at September 27, 2019 shown above) and $29 million of this total could favorably impact future tax rates.
Note T — Fair Value Measurements
Fair value is defined as the price that would be received for an asset or the price that would be paid to transfer a liability in the principal market or most advantageous market in an orderly transaction between market participants at the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
|
|
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.
|
|
|
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed using the best information available in the circumstances.
|
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the external pricing services, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including net asset value (“NAV”). Additionally, in certain circumstances, the NAV reported by an asset manager may be adjusted when sufficient evidence indicates NAV is not representative of fair value.
The following table presents assets and liabilities measured at fair value on a recurring basis (at least annually) at September 27, 2019 and June 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity and fixed income securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity and fixed income funds
|
26
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
Corporate-owned life insurance
|
28
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
Total investments measured at NAV
|
54
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
Total fair value of deferred compensation plan assets
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
127
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
Derivatives (foreign currency forward contracts)
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total assets measured at fair value
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
127
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities and mutual funds
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
Investments measured at NAV:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trusts and guaranteed investment contracts
|
56
|
|
|
|
|
|
|
132
|
|
|
|
|
|
|
Total fair value of deferred compensation plan liabilities
|
$
|
59
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
157
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
Derivatives (foreign currency forward contracts)
|
12
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Derivatives (treasury lock contracts)
|
107
|
|
|
—
|
|
|
107
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
Total liabilities measured at fair value
|
$
|
178
|
|
|
$
|
3
|
|
|
$
|
119
|
|
|
$
|
183
|
|
|
$
|
25
|
|
|
$
|
26
|
|
_______________
|
|
|
|
(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 Condensed Consolidated Balance Sheet (Unaudited) 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 Condensed Consolidated Balance Sheet (Unaudited). Under these plans, participants designate investment options (including stock and fixed-income funds), which serve as the basis for measurement of the notional value of their accounts.
|
The following table presents the carrying amounts and estimated fair values of our significant financial instruments that were not measured at fair value (carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of those items):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
June 28, 2019
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Long-term debt (including current portion)(1)
|
$
|
6,963
|
|
|
$
|
7,536
|
|
|
$
|
3,419
|
|
|
$
|
3,802
|
|
_______________
|
|
|
|
(1)
|
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.
|
Note U — 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 and changes in interest 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 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 Condensed Consolidated Balance Sheet (Unaudited) at fair value. We do not hold or issue derivatives for speculative trading purposes.
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 Condensed Consolidated Statement of Income (Unaudited).
As of September 27, 2019, we had no outstanding foreign currency forward contracts to hedge balance sheet items. The net gain or losses on foreign currency forward contracts designated as fair value hedges were not material for the quarter ended September 27, 2019 or for the quarter ended September 28, 2018. In addition, no amounts were recognized in earnings for the quarter ended September 27, 2019 or for the quarter ended September 28, 2018 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 use 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 are used to hedge currency exposures from cash flows anticipated across our business segments. We also hedge 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. Gains and losses in accumulated other comprehensive income are reclassified to earnings when the related hedged item is recognized in earnings. The cash flow impact of our derivatives is included in the same category in our Condensed Consolidated Statement of Cash Flows (Unaudited) as the cash flows of the related hedged items. Notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency losses. At September 27, 2019, we had open foreign currency forward contracts with an aggregate notional amount of $401 million to hedge certain forecasted transactions in the Euro, British Pounds, Australian Dollars, Canadian Dollars, New Zealand Dollars and United Arab Emirates Dirhams.
At September 27, 2019, our foreign currency forward contracts had maturities through 2023.
The table below presents the fair values of our derivatives designated as foreign currency hedging instruments in our Condensed Consolidated Balance Sheet (Unaudited) as of September 27, 2019. As of June 28, 2019, we had no outstanding foreign currency forward contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
|
Other Current Assets
|
|
Other Non-Current Assets
|
|
Other Accrued Items
|
|
Other Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts(1)
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
6
|
|
_______________
|
|
|
|
(1)
|
See Note T — Fair Value Measurements in these Notes for a description of the fair value hierarchy related to our foreign currency forward contracts.
|
For the quarter ended September 27, 2019, the net unrealized gain or loss recognized in other comprehensive income from foreign currency derivatives designated as cash flow hedges was a net loss of $4 million before income taxes. For the quarter ended September 28, 2018, the net unrealized gain or loss recognized in other comprehensive income from foreign currency derivatives designated as cash flow hedges was not material.
For the quarter ended September 27, 2019, we reclassified a $1 million pre-tax loss from “Accumulated other comprehensive income” into earnings from foreign currency derivatives designated as cash flow hedges upon discontinuance of cash flow hedge accounting as a result of forecasted transactions determined to be probable of not occurring. For the quarter ended September 28, 2018, the net gain or loss reclassified from “Accumulated other comprehensive income” into earnings from foreign currency derivatives designated as cash flow hedges was not material. These gains and losses are included in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited).
At September 27, 2019, the estimated amount of existing losses to be reclassified into earnings within the next 12 months was $3 million before income taxes.
Interest-Rate Risk — Cash Flow Hedges
At September 27, 2019, we had three open treasury lock agreements with third-party financial institution counterparties (“treasury locks”) with a total notional amount of $1.05 billion that were classified as cash flow hedges, including two open treasury lock agreements with a combined notional amount of $650 million that were assumed in connection with the L3Harris Merger (“L3 treasury locks”).
These treasury locks were initiated in January 2019 to hedge against fluctuations in interest payments due to changes in the benchmark interest rate (10-year U.S. Treasury rate) associated with the 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”) and the entire $650 million outstanding principal amount of our 4.95% Notes due February 15, 2021 (“2021 Notes”).
We designated these treasury locks as cash flow hedges 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 before the date of maturity of the 2020 Notes and 2021 Notes. If the benchmark interest rate increases during the period of the agreement, the treasury locks position will become an asset and we will receive a cash payment from the counterparty when we terminate the treasury locks upon issuance of the New Notes. Conversely, if the benchmark interest rate decreases, the treasury locks position will become a liability and we will make a cash payment to the counterparty when we terminate the treasury locks upon issuance of the New Notes. The fair value of the treasury locks is measured using a pricing model that utilizes observable market data such as the benchmark interest rate. See Note T — Fair Value Measurements in these Notes for additional information.
At September 27, 2019, the aggregate fair value of these treasury locks was a liability of $107 million, which was recorded in the “Other accrued items” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited). The unrealized after-tax loss associated with these treasury locks included in the “Accumulated other comprehensive loss” line item in our Condensed Consolidated Balance Sheet (Unaudited) was $54 million and $20 million at September 29, 2019 and June 28, 2019, respectively. We recognized a $35 million liability for the L3 treasury locks as part of our purchase accounting for the L3Harris Merger. The net gains or losses from cash flow hedges recognized in earnings or recorded in other comprehensive income were not material for the quarters ended September 27, 2019 and September 28, 2018.
Note V — Changes in Estimates
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 expectation for performance on the contract. At the outset of each contract, we gauge the 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 increased our operating income by $62 million ($46 million after-tax or $.20 per diluted share) and decreased our operating income by $3 million ($2 million after-tax or $.02 per diluted share) for the quarters ended September 27, 2019 and September 28, 2018, respectively. Revenue recognized from performance obligations satisfied in prior periods was $73 million and $7 million for the quarters ended September 27, 2019 and September 28, 2018, respectively.
Note W — 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 September 27, 2019, our backlog was $20.3 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 3 years.
Note X — Business Segment Information
During the quarter ended September 27, 2019, we adjusted our segment reporting to reflect our new organizational structure announced July 1, 2019. We structure our operations primarily around the products and services we sell and the markets we serve, and commencing with the the quarter ended September 27, 2019, we report the financial results of our operations in the following four operating segments, which are also our reportable segments and are referred to as our business segments:
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•
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Integrated Mission Systems, including ISR; 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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•
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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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The historical results, discussion and presentation of our business segments as set forth in this Report reflect the impact of these adjustments for all periods presented. There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting from these adjustments.
The accounting policies of our business segments are the same as those described in Note 1: “Significant Accounting Policies” in our Notes to Consolidated Financial Statements in our Fiscal 2019 Form 10-K. 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 may recognize a profit that is eliminated. The “Corporate eliminations” line item in the table below represents the elimination of intersegment sales. Corporate expenses are allocated to our operating segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. The “Pension adjustment” line item in the table below 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 Condensed Consolidated Statement of Income (Unaudited). 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.
Segment revenue, segment operating income and a reconciliation of segment operating income to total income from continuing operations before income taxes are as follows:
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Quarter Ended
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September 27, 2019
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September 28, 2018
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(In millions)
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Revenue
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Integrated Mission Systems
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$
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1,303
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$
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12
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Space and Airborne Systems
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1,162
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|
|
840
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Communication Systems
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1,032
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|
|
480
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Aviation Systems
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948
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172
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Other non-reportable business segments(1)
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23
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39
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Corporate eliminations
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(37
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)
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(1
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)
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$
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4,431
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$
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1,542
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Income From Continuing Operations Before Income Taxes
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Segment Operating Income:
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Integrated Mission Systems
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$
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180
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$
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2
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Space and Airborne Systems
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226
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156
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Communication Systems
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234
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137
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Aviation Systems
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127
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24
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Other business activities and non-reportable business segments(2)
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(93
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)
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6
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Merger, acquisition and divestiture-related expenses and losses
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(281
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)
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—
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Amortization of acquisition-related intangibles(3)
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(123
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)
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(25
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)
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Gain on sale of business
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229
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|
—
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Pension adjustment
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(80
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)
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(47
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)
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Non-operating income
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79
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47
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Net interest expense
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(58
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)
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(43
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)
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$
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440
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$
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257
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_______________
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(1)
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Includes Harris Night Vision business revenues prior to the date of divestiture on September 13, 2019. See Note C — Business Divestitures and Asset Sales in these Notes for more information.
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(2)
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Includes $92 million of additional cost of sales related to the fair value step-up in inventory sold (see Note C — Business Divestitures and Asset Sales and Note B — Business Combination in these Notes for more information), a $12 million gain on the sale of an asset group and a $12 million non-cash cumulative adjustment to lease expense for the quarter ended September 27, 2019.
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(3)
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Includes $25 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis Inc. for the quarters ended September 27, 2019 and September 28, 2018 and $98 million of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger. for the quarter ended September 27, 2019. Because the acquisition of Exelis Inc. and the L3Harris Merger benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired was not allocated to any segment.
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Disaggregation of Revenue
Integrated Mission Systems: Integrated Mission Systems revenue is primarily derived from U.S. Government development and production contracts and is generally recognized over time using the POC cost-to-cost revenue recognition method. We disaggregate Integrated Mission Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Integrated Mission Systems revenue and cash flows are affected by economic factors:
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Quarter Ended
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September 27, 2019
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September 28, 2018
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(In millions)
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Revenue By Customer Relationship
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Prime contractor
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$
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890
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$
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6
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Subcontractor
|
413
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|
6
|
|
|
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$
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1,303
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|
|
$
|
12
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Revenue By Contract Type
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|
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Fixed-price(1)
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$
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1,021
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$
|
12
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Cost-reimbursable
|
282
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|
|
—
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|
|
|
$
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1,303
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|
|
$
|
12
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Revenue By Geographical Region
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|
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United States
|
$
|
1,074
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$
|
9
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International
|
229
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|
3
|
|
|
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$
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1,303
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|
|
$
|
12
|
|
_______________
(1) Includes revenue derived from time-and-materials contracts.
Space and Airborne Systems: Space and Airborne Systems revenue is primarily derived from U.S. Government development and production contracts and is generally recognized over time using the POC cost-to-cost revenue recognition method. We disaggregate Space and Airborne 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 Airborne Systems revenue
and cash flows are affected by economic factors:
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Quarter Ended
|
|
|
September 27, 2019
|
|
September 28, 2018
|
|
|
|
|
|
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(In millions)
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Revenue By Customer Relationship
|
|
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Prime contractor
|
$
|
697
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|
|
$
|
510
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Subcontractor
|
465
|
|
|
330
|
|
|
|
$
|
1,162
|
|
|
$
|
840
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|
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Revenue By Contract Type
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|
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Fixed-price(1)
|
$
|
691
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$
|
473
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Cost-reimbursable
|
471
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|
|
367
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|
|
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$
|
1,162
|
|
|
$
|
840
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Revenue By Geographical Region
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|
|
|
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United States
|
$
|
1,015
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|
$
|
714
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International
|
147
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|
|
126
|
|
|
|
$
|
1,162
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$
|
840
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_______________