Annual Statements Open main menu

L3HARRIS TECHNOLOGIES, INC. /DE/ - Quarter Report: 2020 October (Form 10-Q)





hrs-20201002_g1.jpg
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                              to                            _
Commission File Number: 1-3863
L3HARRIS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-0276860
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1025 West NASA Boulevard
Melbourne,Florida 32919
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (321) 727-9100
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00 per shareLHXNew York Stock Exchange
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                         þ   Yes    o  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                                     þ  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ  Accelerated filero
Non-accelerated filer o  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes    þ  No
The number of shares outstanding of the registrant’s common stock as of October 30, 2020 was 210,112,037 shares.



L3HARRIS TECHNOLOGIES, INC.
FORM 10-Q
For the Quarter Ended October 2, 2020
TABLE OF CONTENTS
 Page
No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statement of Income for the Quarter and Three Quarters Ended October 2, 2020 and September 27, 2019
Condensed Consolidated Statement of Comprehensive Income for the Quarter and Three Quarters Ended October 2, 2020 and September 27, 2019
Condensed Consolidated Balance Sheet at October 2, 2020 and January 3, 2020
Condensed Consolidated Statement of Cash Flows for the Three Quarters Ended October 2, 2020 and September 27, 2019
Condensed Consolidated Statement of Equity for the Quarter and the Three Quarters Ended October 2, 2020 and September 27, 2019
Notes to Condensed Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information:
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Signature
This Report contains trademarks, service marks and registered marks of L3Harris Technologies, Inc. and its subsidiaries. All other trademarks are the property of their respective owners.





PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 Quarter EndedThree Quarters Ended
(In millions, except per share amounts)October 2,
2020
September 27,
2019
October 2,
2020
September 27,
2019
Revenue from product sales and services$4,463 $4,431 $13,534 $8,024 
Cost of product sales and services(3,152)(3,242)(9,625)(5,604)
Engineering, selling and administrative expenses(817)(999)(2,484)(1,658)
Business divestiture-related (losses) gains(10)229 (62)229 
Impairment of goodwill and other assets— — (394)— 
Non-operating income96 79 296 173 
Interest income12 10 
Interest expense(66)(67)(202)(149)
Income from continuing operations before income taxes518 440 1,075 1,025 
Income taxes(87)(5)(171)(78)
Income from continuing operations431 435 904 947 
Discontinued operations, net of income taxes(1)— (2)(1)
Net income430 435 902 946 
Noncontrolling interests, net of income taxes(4)(6)24 (6)
Net income attributable to L3Harris Technologies, Inc.$426 $429 $926 $940 
Amounts attributable to L3Harris Technologies, Inc. common shareholders
Income from continuing operations$427 $429 $928 $941 
Discontinued operations, net of income taxes(1)— (2)(1)
Net income$426 $429 $926 $940 
Net income per common share attributable to L3Harris Technologies, Inc. common shareholders
Basic
Continuing operations$2.00 $1.93 $4.31 $6.25 
Discontinued operations— — (0.01)— 
$2.00 $1.93 $4.30 $6.25 
Diluted
Continuing operations$1.99 $1.90 $4.27 $6.13 
Discontinued operations(0.01)— (0.01)— 
$1.98 $1.90 $4.26 $6.13 
Basic weighted average common shares outstanding213.4 222.6 215.5 150.6 
Diluted weighted average common shares outstanding215.1 225.4 217.3 153.5 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
1


L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited) 
 Quarter EndedThree Quarters Ended
(In millions)October 2,
2020
September 27,
2019
October 2,
2020
September 27,
2019
Net income$430 $435 $902 $946 
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of income taxes32 (25)(28)(24)
Net unrealized gain (loss) on hedging derivatives, net of income taxes(38)(55)(57)
Net unrecognized loss on postretirement obligations, net of income taxes— — — (478)
Other comprehensive income (loss) recognized during the period37 (63)(83)(559)
Less: reclassification adjustments for (gains) losses included in net income(3)14 14 
Other comprehensive income (loss), net of income taxes34 (49)(82)(545)
Total comprehensive income464 386 820 401 
Comprehensive (income) loss attributable to noncontrolling interests(4)(6)24 (6)
Total comprehensive income attributable to L3Harris Technologies, Inc.$460 $380 $844 $395 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
2


L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In millions, except shares)October 2, 2020January 3, 2020
Assets
Current Assets
Cash and cash equivalents$1,341 $824 
Receivables1,128 1,216 
Contract assets2,416 2,459 
Inventories894 1,219 
Income taxes receivable197 202 
Other current assets383 392 
Assets of disposal group held for sale 34 — 
Total current assets6,393 6,312 
Non-current Assets
Property, plant and equipment2,047 2,117 
Operating lease right-of-use assets878 837 
Goodwill18,992 20,001 
Other intangible assets8,172 8,458 
Deferred income taxes116 102 
Other non-current assets547 509 
Total non-current assets30,752 32,024 
$37,145 $38,336 
Liabilities and Equity
Current Liabilities
Short-term debt$$
Accounts payable1,207 1,261 
Contract liabilities1,089 1,214 
Compensation and benefits411 460 
Other accrued items1,239 790 
Income taxes payable37 24 
Current portion of long-term debt, net666 257 
Liabilities of disposal group held for sale 15 — 
Total current liabilities4,666 4,009 
Non-current Liabilities
Defined benefit plans1,583 1,819 
Operating lease liabilities737 781 
Long-term debt, net6,261 6,694 
Deferred income taxes1,402 1,481 
Other long-term liabilities1,057 808 
Total non-current liabilities11,040 11,583 
Equity
Shareholders’ Equity:
Preferred stock, without par value; 1,000,000 shares authorized; none issued
— — 
Common stock, $1.00 par value; 500,000,000 shares authorized; issued and outstanding 210,004,233 shares at October 2, 2020 and 218,226,614 shares at January 3, 2020
210 218 
Other capital19,310 20,694 
Retained earnings2,383 2,183 
Accumulated other comprehensive loss(590)(508)
Total shareholders’ equity21,313 22,587 
Noncontrolling interests126 157 
Total equity21,439 22,744 
$37,145 $38,336 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
3


L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 Three Quarters Ended
(In millions)October 2, 2020September 27, 2019
Operating Activities
Net income$902 $946 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization768 330 
Share-based compensation71 124 
Share-based matching contributions under defined contribution plans168 90 
Qualified pension plan contributions(7)(328)
Pension and other postretirement benefit plan income(241)(132)
Impairment of goodwill and other assets394 — 
Business divestiture-related losses (gains)62 (229)
Gain on sale of asset group— (12)
Deferred income taxes(142)41 
(Increase) decrease in:
Accounts receivable(35)50 
Contract assets(98)(88)
Inventories139 88 
Increase (decrease) in:
Accounts payable(2)17 
Contract liabilities(94)10 
Compensation and benefits(42)70 
Income taxes86 (124)
Other accrued items102 (3)
Other61 (53)
Net cash provided by operating activities2,092 797 
Investing Activities
Net additions of property, plant and equipment(194)(178)
Proceeds from sales of businesses, net 1,002 346 
Net cash acquired in L3Harris Merger— 1,132 
Proceeds from sale of asset group— 20 
Other investing activities(10)
Net cash provided by investing activities798 1,322 
Financing Activities
Net proceeds from borrowings249 
Repayments of borrowings(257)(405)
Proceeds from exercises of employee stock options39 127 
Repurchases of common stock(1,850)(750)
Cash dividends(546)(334)
Tax withholding payments associated with vested share-based awards(2)(88)
Other financing activities(6)(7)
Net cash used in financing activities(2,373)(1,453)
Effect of exchange rate changes on cash and cash equivalents— (8)
Net increase in cash and cash equivalents517 658 
Cash and cash equivalents, beginning of year824 343 
Cash and cash equivalents, end of quarter$1,341 $1,001 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
4


L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(In millions, except per share amounts)Common
Stock
Other
Capital
Retained
Earnings
Accumulated Other
Comprehensive Loss
Non-controlling
Interests
Total
Equity
Balance at July 3, 2020$216 $20,260 $2,250 $(624)$124 $22,226 
Net income— — 426 — 430 
Other comprehensive gain— — — 34 — 34 
Shares issued under stock incentive plans— — — — 
Shares issued under defined contribution plans45 — — — 46 
Share-based compensation expense— 31 — — — 31 
Tax withholding payments on share-based awards— (1)— — — (1)
Repurchases and retirement of common stock(7)(1,028)(115)— — (1,150)
Cash dividends ($.85 per share)
— — (179)— — (179)
Other, including distributions to noncontrolling interests— — (2)— 
Balance at October 2, 2020$210 $19,310 $2,383 $(590)$126 $21,439 
Balance at June 28, 2019$119 $1,778 $2,173 $(707)$ $3,363 
Net income— — 429 — 435 
Other comprehensive loss— — — (49)— (49)
Shares issued for L3Harris Merger104 19,696 — — — 19,800 
Shares issued under stock incentive plans93 — — — 95 
Shares issued under defined contribution plans— 48 — — — 48 
Share-based compensation expense— 94 — — — 94 
Tax withholding payments on share-based awards— (83)— — — (83)
Repurchases and retirement of common stock(3)(336)(411)— — (750)
Cash dividends ($.75 per share)
— — (172)— — (172)
Fair value of noncontrolling interests recognized in purchase accounting    151 151 
Other, including distributions to noncontrolling interests— (2)— — (5)(7)
Balance at September 27, 2019$222 $21,288 $2,019 $(756)$152 $22,925 
Balance at January 3, 2020$218 $20,694 $2,183 $(508)$157 $22,744 
Net income— — 926 — (24)902 
Other comprehensive loss— — — (82)— (82)
Shares issued under stock incentive plans38 — — — 39 
Shares issued under defined contribution plans167 — — — 168 
Share-based compensation expense— 71 — — — 71 
Tax withholding payments on share-based awards— (2)— — — (2)
Repurchases and retirement of common stock(10)(1,659)(181)— — (1,850)
Cash dividends ($2.55 per share)
— — (546)— — (546)
Other, including distributions to noncontrolling interests— — (7)(5)
Balance at October 2, 2020$210 $19,310 $2,383 $(590)$126 $21,439 
Balance at December 28, 2018$118 $1,681 $1,824 $(211)$ $3,412 
Net income— — 940 — 946 
Other comprehensive loss— — — (545)— (545)
Shares issued for L3Harris Merger104 19,696 — — — 19,800 
Shares issued under stock incentive plans125 — — — 127 
Shares issued under defined contribution plans90 — — — 91 
Share-based compensation expense— 122 — — — 122 
Tax withholding payments on share-based awards— (88)— — — (88)
Repurchases and retirement of common stock(3)(336)(411)— — (750)
Cash dividends ($2.12 per share)
— — (334)— — (334)
Fair value of noncontrolling interests recognized in purchase accounting— — — — 151 151 
Other, including distributions to noncontrolling interests— (2)— — (5)(7)
Balance at September 27, 2019$222 $21,288 $2,019 $(756)$152 $22,925 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
5


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A — Significant Accounting Policies and Recent Accounting Standards
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) include the accounts of L3Harris Technologies, Inc. and its consolidated subsidiaries. As used in these Notes to Condensed Consolidated Financial Statements (Unaudited) (these “Notes”), the terms “L3Harris,” “Company,” “we,” “our” and “us” refer to L3Harris Technologies, Inc. and its consolidated subsidiaries. Intracompany transactions and accounts have been eliminated in consolidation. The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared by L3Harris, without an audit, in accordance with U.S. generally accepted accounting principles (“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, cash flows and equity for the periods presented therein. The results for the quarter and three quarters ended October 2, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period. The balance sheet at January 3, 2020 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 Transition Report on Form 10-KT for the fiscal transition period from June 29, 2019 to January 3, 2020 (our “Fiscal Transition Period Form 10-KT”), which includes information and footnotes required by the rules and regulations of the SEC. The information included in this Quarterly Report on Form 10-Q (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 Fiscal Transition Period Form 10-KT.
Amounts contained in this Report may not always add to totals due to rounding.
L3Harris Merger
See Note B — Business Combination in these Notes for information related to the business combination in which Harris Corporation (“Harris”) and L3 Technologies, Inc. (“L3”) combined their respective businesses in an all-stock merger that resulted in our combined Company, L3Harris Technologies, Inc.
Due to the L3Harris Merger (as defined in Note B — Business Combination in these Notes), the three quarters ended October 2, 2020 reflect the results of the combined Company, while the three quarters ended September 27, 2019 reflect the results of only Harris operating businesses for the two quarters ended June 28, 2019 and the results of the combined Company for the quarter ended September 27, 2019.
Organizational Structure
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. During the quarter ended April 3, 2020, we further adjusted our segment reporting to better align our businesses and transferred two businesses between our Integrated Mission Systems and Space and Airborne Systems 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.
Divestitures
See Note C — Business Divestitures and Assets Sales in these Notes for information regarding the following and other divestitures by us in 2019 and 2020: the divestiture of the Harris Night Vision business completed on September 13, 2019; the divestiture of the Security & Detection Systems and MacDonald Humfrey Automation solutions business completed on May 4, 2020; the divestiture of the Applied Kilovolts and Analytical Instrumentation business completed on May 15, 2020; and the divestiture of the EOTech business completed on July 31, 2020.
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
6


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 Transition Period Form 10-KT, except as described in “Adoption of New Accounting Standards” below.
Adoption of New Accounting Standards
Effective January 3, 2020, we adopted Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on a modified retrospective basis. The new standard replaces the existing impairment model, under which impairment of financial instruments, including accounts receivable and contract assets, is recognized when it becomes probable a loss has been incurred, with a model that requires recognition of expected credit losses over the estimated life of an asset at inception and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Adopting this standard did not have a material impact on our financial condition, results of operations, cash flows or equity.
Note B — Business Combination
On October 12, 2018, Harris Corporation, a Delaware corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with L3 Technologies, Inc., a Delaware corporation, 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 (the “Closing Date”), the day after Harris’ fiscal 2019 ended and the first day of the fiscal transition period ended January 3, 2020 (the “Fiscal Transition Period”). 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 (“Exchange Ratio”) of L3Harris common stock. Shares of L3Harris common stock, which previously traded under ticker symbol “HRS” on the New York Stock Exchange 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.
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.
In connection with completion of the L3Harris Merger, we issued to L3 shareholders 104 million shares of L3Harris common stock, the trading price of which was $189.13 per share as of the Closing Date. In addition, we issued L3Harris share-based awards in replacement of certain outstanding L3 share-based awards held by employees.
We accounted for the L3Harris Merger under the acquisition method of accounting, which required us to measure identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree at their fair values as of the Closing Date, with the excess of the consideration transferred over those fair values recorded as goodwill.

7


Our calculation of consideration transferred is summarized below:
(In millions, except exchange ratio and per share amounts)June 29, 2019
Outstanding shares of L3 common stock as of June 28, 201979.63 
L3 restricted stock unit awards settled in shares of L3Harris common stock0.41 
L3 performance unit awards settled in shares of L3Harris common stock0.04 
80.08 
Exchange Ratio1.30 
Shares of L3Harris common stock issued for L3 outstanding common stock104.10 
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 restricted stock units attributable to merger consideration10 
Fair value of L3Harris stock options issued to replace L3 outstanding stock options101 
Withholding tax liability incurred for converted L3 share-based awards45 
Fair value of replacement award consideration156 
Fair value of total consideration19,845 
Less cash acquired(1,195)
Total net consideration transferred$18,650 
Our preliminary fair value estimates and assumptions to measure the assets acquired, liabilities assumed and noncontrolling interests in L3 were subject to change as we obtained additional information during the measurement period. We completed our accounting for the L3Harris Merger during the quarter ended July 3, 2020. The following table summarizes the fair value amounts recognized as of the Closing Date for each major class of asset acquired or liability assumed and noncontrolling interests, as well as adjustments made during the measurement period:
(In millions)Preliminary Fair Value as of September 27, 2019Measurement Period AdjustmentsAdjusted Fair Value as of July 3, 2020
Receivables$849 $(20)$829 
Contract assets1,708 (57)1,651 
Inventories1,056 (73)983 
Other current assets517 (16)501 
Property, plant and equipment1,176 43 1,219 
Operating lease right-of-use assets704 108 812 
Goodwill15,423 (841)14,582 
Other intangible assets6,768 1,690 8,458 
Other non-current assets327 (13)314 
Total assets acquired$28,528 $821 $29,349 
Accounts payable$898 $(13)$885 
Contract liabilities722 726 
Other current liabilities772 301 1,073 
Operating lease liabilities715 45 760 
Defined benefit plans1,411 — 1,411 
Long-term debt, net3,548 — 3,548 
Other long-term liabilities1,661 480 2,141 
Total liabilities assumed9,727 817 10,544 
Net assets acquired18,801 18,805 
Noncontrolling interests(151)(4)(155)
Total net consideration transferred$18,650 $— $18,650 
8


Additionally, we acquired certain off-market customer contracts in connection with the L3Harris Merger, and we have recorded liabilities as well as separate identifiable intangible assets for the acquisition-date fair value of the off-market components of these customer contracts. In aggregate, the acquisition-date fair value of the off-market components was a net liability of $139 million. We measured the fair value of these components as the present value of the amount by which the terms of the contract with the customer deviated from the terms that a market participant could have achieved at the Closing Date. The off-market components of these contracts will be recognized as an increase to, or reduction of, revenue as we incur costs to satisfy the associated performance obligations. We recognized $11 million and $51 million of revenue in the quarter and three quarters ended October 2, 2020, respectively, for amortization of net off-market contract liabilities (including, for three quarters ended October 2, 2020, the cumulative effect of amortization that would have been recognized in the Fiscal Transition Period). We recognized $13 million for amortization of net off-market contract liabilities in the Fiscal Transition Period. Future estimated revenue from the amortization of net off-market contract liabilities (based on the estimated pattern of cash flows to be incurred to satisfy associated performance obligations) is as follows: $7 million in the remainder of 2020, $20 million in 2021, $15 million in 2022, $10 million in 2023 and $23 million thereafter.
The goodwill resulting from the L3Harris Merger is 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.
See Note K — Goodwill and Other Intangible Assets in these Notes for more information regarding the allocation of goodwill by business segment.
The following table provides further detail of the fair value and weighted-average amortization period of identifiable intangible assets acquired by major intangible asset class:
Weighted Average Amortization PeriodTotal
(In years)(In millions)
Identifiable intangible assets acquired:
Customer relationships (Government)14$5,082 
Customer relationships (Commercial)15860 
Contract backlog319 
Trade names — divisions9123 
Developed technologies7550 
Total identifiable intangible assets subject to amortization136,634 
Trade names corporate
indefinite1,803 
In-process research and developmentn/a21 
Total identifiable intangible assets$8,458 
L3Harris Merger-related charges were as follows:
Quarter EndedThree Quarters Ended
(In millions)October 2, 2020September 27, 2019October 2, 2020September 27, 2019
Equity award acceleration charges, recognized upon change in control
$— $(61)$— $(61)
Transaction costs, recognized as incurred— (74)— (96)
Additional cost of sales related to the fair value step-up in inventory sold— (92)(31)(92)
Restructuring charges— (111)(7)(111)
Integration costs, recognized as incurred(27)(35)(95)(65)
Total L3Harris Merger-related charges$(27)$(373)$(133)$(425)
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 above costs were recorded in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited), except for the additional cost of sales related to the fair value step-up in inventory sold.
9


Pro Forma Results
The following unaudited consolidated pro forma results of operations for the three quarters ended September 27, 2019 combines reported results for the quarter ended September 27, 2019 with the pro forma results for the two quarters ended June 28, 2019. The pro forma results for the two quarters ended June 28, 2019 were prepared on a pro forma basis, as if the L3Harris Merger had been completed as of June 30, 2018, the first day of Harris’ fiscal 2019, 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 pro forma adjustments such as amortization of identifiable 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.
(In millions)Three Quarters Ended September 27, 2019
Revenue from product sales and services — as reported$8,024 
Revenue from product sales and services — pro forma13,265 
Income from continuing operations — as reported947 
Income from continuing operations — pro forma1,252 
Note C — Business Divestitures and Assets Sales
EOTech business. On July 31, 2020, we completed the divestiture of our EOTech business for $42 million (net cash proceeds of $40 million after selling costs and estimated purchase price adjustments), subject to final customary purchase price adjustments as set forth in the definitive sale agreement, and recognized a pre-tax gain of $2 million, which is included in the “Business divestiture-related (losses) gains” line item in our Condensed Consolidated Statement of Income (Unaudited) for the quarter and three quarters ended October 2, 2020. The EOTech business manufactures holographic sighting systems, magnified field optics and accessories for military, law enforcement and commercial markets around the world. The operating results of the EOTech business through the date of divestiture are reported as part of our Communication Systems segment. Income before income taxes of the EOTech business through the date of divestiture was not material for the quarter or three quarters ended October 2, 2020 or the quarter or three quarters ended September 27, 2019.
In connection with the preparation of our financial statements for the quarter ended April 3, 2020, we tested goodwill assigned to the EOTech business disposal group and goodwill assigned to the retained businesses of the reporting unit for impairment and concluded that no goodwill impairment existed at the time the held for sale criteria were met.
Applied Kilovolts and Analytical Instrumentation business. On May 15, 2020, we completed the divestiture of our Applied Kilovolts and Analytical Instrumentation business for net cash proceeds of $12 million, after selling costs and estimated purchase price adjustments, subject to final customary purchase price adjustments as set forth in the definitive sale agreement. The operating results of the Applied Kilovolts and Analytical Instrumentation business through the date of divestiture are reported as part of our Space and Airborne Systems segment. Income before income taxes of the Applied Kilovolts and Analytical Instrumentation business through the date of divestiture was not material for the three quarters ended October 2, 2020 or the quarter or three quarters ended September 27, 2019.
In connection with the preparation of our financial statements for the quarter ended April 3, 2020, we tested goodwill assigned to the Applied Kilovolts and Analytical Instrumentation business disposal group and goodwill assigned to the retained businesses of the reporting unit for impairment and concluded that goodwill related to the disposal group was impaired. As a result, we recorded a non-cash impairment charge of $5 million, which is included in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 2, 2020.
Airport security and automation business. On May 4, 2020, we completed the divestiture of the Security & Detection Systems and MacDonald Humfrey Automation solutions business (“airport security and automation business”) to Leidos, Inc. for $1 billion (net cash proceeds of $950 million after selling costs and estimated purchase price adjustments), subject to final customary purchase price adjustments as set forth in the definitive sale agreement, and recognized a pre-tax loss of $26 million during the quarter ended July 3, 2020. During the quarter ended October 2, 2020, we recognized a $2 million adjustment related to selling costs, which increased the loss initially recognized. These charges are included in the “Business divestiture-related (losses) gains” line item in our Condensed Consolidated Statement of Income (Unaudited) for the quarter and three quarters ended October 2, 2020. The airport security and automation business provides solutions used by the aviation and transportation industries, regulatory and customs authorities, government and law enforcement agencies and commercial and other high-security facilities. The operating results of the airport security and automation business through the date of divestiture are reported as part of our Aviation Systems segment. Income before income taxes of the airport security and automation business through the date of divestiture was not material for the three quarters ended October 2, 2020 or the quarter or three quarters ended September 27, 2019.
10


Because the then-pending divestiture of the airport security and automation business would represent the disposal of a portion of a reporting unit within our Aviation Systems segment, we assigned $531 million of goodwill to the airport security and automation business disposal group on a relative fair value basis during the quarter ended April 3, 2020, when the held for sale criteria were met. In connection with the preparation of our financial statements for the quarter ended April 3, 2020, we tested goodwill assigned to the disposal group and goodwill assigned to the retained businesses of the reporting unit for impairment and concluded that no goodwill impairment existed at the time the held for sale criteria were met in late January 2020. However, indicators of potential impairment of goodwill related to the retained businesses of the reporting unit were present at April 3, 2020 and July 3, 2020 due to the downturn in the commercial aviation market that resulted from the novel COVID-19 strain of coronavirus (“COVID-19”) pandemic and its impact on global air traffic and customer demand. See Note K — Goodwill and Other Intangible Assets in these Notes for additional information regarding goodwill impairment.
Other AS Disposal Group. During the quarter ended July 3, 2020, we determined the criteria to be classified as held for sale were met with respect to another business within our Aviation Systems segment (“other AS disposal group”); consequently, the assets and liabilities of the other AS disposal group are classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) as of October 2, 2020. Income before income taxes of the other AS disposal group was not material for the quarter or three quarters ended October 2, 2020 or the quarter or three quarters ended September 27, 2019.
Because the potential divestiture of the other AS disposal group would represent the disposal of a portion of a reporting unit within our Aviation Systems segment, we assigned $14 million of goodwill to the other AS disposal group on a relative fair value basis during the quarter ended July 3, 2020, when the held for sale criteria were met. In connection with the preparation of our financial statements for the quarter ended July 3, 2020, we recognized a $28 million loss to reduce the assets of the other AS disposal group to fair value, which included a non-cash goodwill impairment charge of $14 million (based on the excess of the carrying value of the business over estimated net cash proceeds, after estimated purchase price adjustments) and a $14 million non-cash remeasurement loss to reduce the remaining assets to fair value. In connection with the preparation of our financial statements for the quarter ended October 2, 2020, we recognized an additional non-cash remeasurement loss of $10 million to reduce the assets of the other AS disposal group to fair value. These charges are included in the “Impairment of goodwill and other assets” and “Business divestiture-related (losses) gains” line items in our Condensed Consolidated Statement of Income (Unaudited) for the quarter and three quarters ended October 2, 2020. The carrying amounts of assets and liabilities of the other AS disposal group that were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at October 2, 2020 were $34 million and $15 million, respectively. We expect to complete the sale of the other AS disposal group by the end of the first quarter of 2021.
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 $343 million after selling costs and 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 in the “Business divestiture-related (losses) gains” line item in our Condensed Consolidated Statement of Income (Unaudited) during the quarter ended September 27, 2019. During the quarter ended July 3, 2020, we finalized the purchase price adjustments and recognized a $12 million non-cash adjustment related to working capital, which decreased the gain initially recognized and is included in the “Business divestiture-related (losses) gains” line item in our Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 2, 2020.
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 quarter and three quarters ended September 27, 2019 in this Report. See Note V — Business Segment Information in these Notes for additional information.
For purposes of allocating goodwill to the disposal groups above, we determined the fair value of each disposal group based on the respective negotiated selling price (or estimated net cash proceeds, in the case of no negotiated selling price), and the fair value of the retained businesses of the respective reporting unit based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions, and projected discounted cash flows. These fair value determinations are categorized as Level 3 in the fair value hierarchy due to their use of internal projections and unobservable measurement inputs. See Note 1: “Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Fiscal Transition Period Form 10-KT for additional information regarding the fair value hierarchy.
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) during the quarter ended September 27, 2019.
11


Note D — Stock Options and Other Share-Based Compensation
As of October 2, 2020, we had options or other share-based compensation outstanding under two Harris shareholder-approved stock incentive plans, the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010) and the Harris Corporation 2015 Equity Incentive Plan (As Amended and Restated Effective as of August 28, 2020), as well as under employee stock incentive plans of L3 assumed by L3Harris (collectively, “L3Harris SIPs”).
The compensation cost related to our share-based awards that was charged against income was $31 million and $71 million, respectively, for the quarter and three quarters ended October 2, 2020, and $95 million and $124 million, respectively, for the quarter and three quarters ended September 27, 2019, including acceleration expense recognized in connection with the L3Harris Merger. The aggregate number of shares of our common stock that we issued under the terms of L3Harris SIPs, net of shares withheld for tax purposes, was not material for the quarter ended October 2, 2020 and was 0.5 million for the three quarters ended October 2, 2020, and 2.8 million and 3.4 million for the quarter and three quarters ended September 27, 2019, respectively, including shares issued as merger consideration to settle pre-merger L3 share-based awards.
Awards granted to participants under L3Harris SIPs during the quarter ended October 2, 2020 were not material. Awards granted to participants under L3Harris SIPs during the three quarters ended October 2, 2020 consisted of 0.3 million restricted stock units, 0.6 million stock options and 0.2 million 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 1.55 percent; expected volatility of 22.74 percent; risk-free interest rates averaging 0.89 percent; and expected term of 5.04 years. The fair value as of the grant date of each restricted stock unit award was based on the closing price of our common stock on the grant date. The fair value as of the grant date of each performance stock unit award was determined based on the fair value from a multifactor Monte Carlo valuation model that simulates our stock price and total shareholder return (“TSR”) relative to companies in our TSR peer group.
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. We recorded restructuring charges of $7 million during the quarter ended July 3, 2020 and $111 million during the quarter ended September 27, 2019 in connection with the L3Harris Merger. At October 2, 2020, we had liabilities of $24 million associated with these L3Harris Merger-related restructuring actions, of which substantially all will be paid in the next twelve months.
COVID-19-Related Restructuring Costs. During the quarter and three quarters ended October 2, 2020, we recorded $2 million and $16 million, respectively, of restructuring charges, including workforce reductions and other exit costs within our Aviation Systems segment associated with the COVID-19-related downturn in our Commercial Aviation Solutions sector and its impact on global air traffic and customer operations. In addition, during the quarter ended July 3, 2020, we recorded $1 million of restructuring charges for workforce reductions in our Communication Systems segment associated with the COVID-19 impact to local and state government customers of our Public Safety sector. At October 2, 2020, we had liabilities of $10 million associated with COVID-19-related restructuring actions, of which substantially all will be paid in the next twelve months.
Other Restructuring and Exit Costs. Prior to the L3Harris Merger, we had liabilities for lease obligations associated with exited facilities with remaining terms of three years or less, of which $6 million remained outstanding at October 2, 2020.
12


Our liabilities for restructuring and other exit costs are included in the “Other accrued items” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited). Changes to our liabilities for restructuring and other exit costs during the three quarters ended October 2, 2020 were as follows:
(In millions)Employee severance-related costsFacilities consolidation and other exit costsTotal
Balance at January 3, 2020$58 $$65 
Additional provisions24 — 24 
Payments(49)(1)(50)
Other, including foreign currency translation adjustments— 
Total changes(24)(1)(25)
Balance at October 2, 2020$34 $$40 
Note F — Accumulated Other Comprehensive Income (Loss) ("AOCI")
The components of AOCI are summarized below:
(In millions)Foreign currency translationNet unrealized losses on hedging derivativesUnrecognized postretirement obligationsTotal AOCI
Balance at January 3, 2020$(81)$(55)$(372)$(508)
Other comprehensive loss, before income taxes(28)(75)— (103)
Income taxes— 20 — 20 
Other comprehensive loss before reclassifications to earnings, net of income taxes(28)(55)— (83)
Losses (gains) reclassified to earnings(1)
(16)(1)
Income taxes— (2)
Losses (gains) reclassified to earnings, net of income taxes(12)
Other comprehensive loss, net of income taxes$(21)$(49)$(12)$(82)
Balance at October 2, 2020$(102)$(104)$(384)$(590)
Balance at December 28, 2018$(107)$(19)$(85)$(211)
Other comprehensive loss, before income taxes(24)(75)(631)(730)
Income taxes— 18 153 171 
Other comprehensive loss before reclassifications to earnings, net of income taxes(24)(57)(478)(559)
Losses reclassified to earnings(1)
— 17 18 
Income taxes— — (4)(4)
Losses reclassified to earnings, net of income taxes— 13 14 
Other comprehensive loss, net of income taxes$(24)$(56)$(465)$(545)
Balance at September 27, 2019$(131)$(75)$(550)$(756)
_______________
(1)Losses (gains) reclassified to earnings are included in the “Revenue from product sales and services,” “Business divestiture-related (losses) gains,” “Interest expense” and “Non-operating income line items in our Condensed Consolidated Statement of Income (Unaudited).
Note G — Receivables
Receivables are summarized below:
(In millions)October 2, 2020January 3, 2020
Accounts receivable$1,154 $1,228 
Less allowance for credit losses(26)(12)
Receivables, net$1,128 $1,216 
13


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. We had no outstanding accounts receivable sold pursuant to the RSA at October 2, 2020 or January 3, 2020.     
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.
Contract assets and liabilities in the three quarters ended October 2, 2020 were impacted primarily by divestitures, reclassifications to assets and liabilities of disposal group held for sale, accelerated progress payments due to the U.S. Government's increase in the progress payment rate from 80 percent to 90 percent and the timing of contractual billing milestones. See Note C — Business Divestitures and Assets Sales in these Notes for additional information regarding assets and liabilities held for sale.
Contract assets and contract liabilities are summarized below:
(In millions)October 2, 2020January 3, 2020
Contract assets$2,416 $2,459 
Contract liabilities, current(1,089)(1,214)
Contract liabilities, non-current(1)
(76)(87)
Net contract assets$1,251 $1,158 
_______________
(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:
(In millions)October 2, 2020January 3, 2020
Unbilled contract receivables, gross$4,166 $3,690 
Progress payments and advances(1,750)(1,231)
Contract assets$2,416 $2,459 
Impairment losses related to our contract assets were not material for the quarter or three quarters ended October 2, 2020 or the quarter or three quarters ended September 27, 2019. For the quarter and three quarters ended October 2, 2020, we recognized as revenue $0.1 billion and $0.8 billion, respectively, of contract liabilities that were outstanding at January 3, 2020. For the quarter ended September 27, 2019, we recognized as revenue $0.6 billion of contract liabilities that were outstanding at June 29, 2019. Because of the L3Harris Merger and our change in fiscal year-end from June to December, revenue recognized in the three quarters ended September 27, 2019 from contract liabilities that were outstanding at the end of the prior year is not comparable.
Note I — Inventories
Inventories are summarized below:
(In millions)October 2, 2020January 3, 2020
Finished products$167 $216 
Work in process254 386 
Raw materials and supplies473 617 
Total inventories$894 $1,219 
14


Note J — Property, Plant and Equipment
Property, plant and equipment are summarized below:
(In millions)October 2, 2020January 3, 2020
Land$90 $90 
Software capitalized for internal use362 287 
Buildings1,065 1,073 
Machinery and equipment2,219 2,194 
3,736 3,644 
Less accumulated depreciation and amortization(1,689)(1,527)
Total property, plant and equipment$2,047 $2,117 
Depreciation and amortization expense related to property, plant and equipment was $83 million and $237 million for the quarter and three quarters ended October 2, 2020, respectively, and $79 million and $149 million for the quarter and three quarters ended September 27, 2019, respectively.
Note K — Goodwill and Other Intangible Assets
Goodwill
As discussed in Note V — 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. 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, by business segment, for the three quarters ended October 2, 2020, were as follows:
(In millions)Integrated Mission SystemsSpace and Airborne SystemsCommunication SystemsAviation SystemsTotal
Balance at January 3, 2020$5,768 $5,131 $4,243 $4,859 $20,001 
Goodwill decrease from divestitures(1)
— (2)(9)(530)(541)
Impairment of goodwill— (5)— (364)(369)
Currency translation adjustments(3)(4)(2)(8)
Other (including adjustments to previously estimated fair value of assets acquired and liabilities assumed)(2)
740 112 (82)(861)(91)
Balance at October 2, 2020$6,505 $5,232 $4,150 $3,105 $18,992 
_______________
(1)During the three quarters ended October 2, 2020, we completed the divestiture of three businesses (airport security and automation business, Applied Kilovolts and Analytical Instrumentation business and EOTech business) and derecognized $541 million of goodwill as the part of determining the gain or loss on these divestitures. See Note C — Business Divestitures and Assets Sales in these Notes for additional information.
(2)See Note B — Business Combination in these Notes for additional information regarding adjustments to previously estimated fair values of assets acquired and liabilities assumed.
Commercial Aviation Solutions Impairment. Indications of potential impairment of goodwill related to our Commercial Aviation Solutions reporting unit (which is part of our Aviation Systems segment) were present at April 3, 2020 and July 3, 2020 due to COVID-19 and its impact on global air traffic and customer operations, which resulted in a decrease in the fiscal 2020 outlook for the reporting unit. Although our cash flow projections for the Commercial Aviation Solutions reporting unit did not change significantly compared with the projected cash flows as of April 3, 2020, we determined it was more-likely-than-not that the fair value of our Commercial Aviation Solutions reporting unit was less than its carrying amount as of July 3, 2020 due to the amount by which the fair value of the Commercial Aviation Solutions reporting unit exceeded its carrying amount as of April 3, 2020 and heightened uncertainty regarding the timing of expected recovery for the overall commercial aviation market. Consequently, in connection with the preparation of our financial statements for the quarters ended April 3, 2020 and July 3, 2020, we performed quantitative impairment tests on an interim basis. To test for potential impairment of goodwill related to our Commercial Aviation Solutions reporting unit, we prepared an estimate of the fair value of the reporting unit based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions, and projected discounted cash flows.
15


As a result of these impairment tests, we concluded that goodwill related to our Commercial Aviation Solutions reporting unit was impaired as of April 3, 2020 and July 3, 2020, and we recorded non-cash impairment charges of $296 million (including $28 million attributable to noncontrolling interests) during the quarter ended April 3, 2020 and $54 million (including $8 million attributable to noncontrolling interests) during the quarter ended July 3, 2020. These charges are included in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 2, 2020 and are primarily not deductible for tax purposes.
Other AS Disposal Group Impairment. During the quarter ended July 3, 2020, we determined the criteria to be classified as held for sale were met with respect to the other AS disposal group within our Aviation Systems segment and assigned $14 million of goodwill to the disposal group on a relative fair value basis. In connection with the preparation of our financial statements for the quarter ended July 3, 2020, we concluded that goodwill related to the other AS disposal group was impaired and recorded a non-cash impairment charge of $14 million, which is included in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the three quarters ended October 2, 2020.
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 a customer relationship is determined, as of the date of acquisition of such relationship, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows arising from the follow-on sales expected from the customer relationship over its estimated life, including the probability of expected future contract renewals and sales, less a contributory asset charge, all of which is discounted to present value. We assess the recoverability of the carrying value of our finite-lived identifiable intangible assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. We assess the recoverability of the carrying value of indefinite-lived identifiable intangible assets annually, or under certain circumstances more frequently, such as when events and circumstances indicate there may be an impairment.
In conjunction with, and in advance of, the interim tests of goodwill related to our Commercial Aviation Solutions reporting unit, we also performed recoverability tests of the long-lived assets of our Commercial Aviation Solutions reporting unit, including identifiable intangible assets and property, plant and equipment. To test these long-lived assets for recoverability, we compared the estimated future cash flows (on an undiscounted basis) to be generated from the use and hypothetical eventual disposition of the asset group to its carrying value and concluded that the long-lived assets of our Commercial Aviation Solutions reporting unit were not impaired at April 3, 2020 or July 3, 2020.
Identifiable intangible assets are summarized below:
 October 2, 2020 January 3, 2020
(In millions)Gross
Carrying
Amount
 Accumulated Amortization 
Net Carrying Amount(1)
 Gross Carrying Amount Accumulated Amortization Net Carrying Amount
 
Customer relationships$6,923 $1,103 $5,820 $6,518 $653 $5,865 
Developed technologies670 242 428 768 183 585 
Contract backlog19 15 — — — 
Trade names — divisions138 43 95 165 35 130 
Other10 
Total identifiable intangible assets subject to amortization7,754 1,406 6,348 7,461 875 6,586 
In-process research and development21 — 21 69 — 69 
L3 trade name1,803 — 1,803 1,803 — 1,803 
Total identifiable intangible assets$9,578 $1,406 $8,172 $9,333 $875 $8,458 
_______________
(1)During the three quarters ended October 2, 2020, we completed the divestiture of three businesses and derecognized $296 million of intangibles as part of the gain or loss on these divestitures. Additionally, in connection with a pending divestiture, we reclassified $5 million of identifiable intangible assets to “Assets of disposal group held for sale” in our Condensed Consolidated Balance Sheet (Unaudited) at October 2, 2020. See Note C — Business Divestitures and Assets Sales in these Notes for additional information regarding divestitures.
Amortization expense related to identifiable intangible assets, which primarily relates to the L3Harris Merger, was $179 million and $546 million for the quarter and three quarters ended October 2, 2020, respectively, and $125 million and $181 million for the quarter and three quarters ended September 27, 2019, respectively.
16


Future estimated amortization expense for identifiable intangible assets subject to amortization is as follows:
 (In millions)
Year 1$682 
Year 2685 
Year 3677 
Year 4647 
Year 5598 
Thereafter3,059 
Total$6,348 
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 three quarters ended October 2, 2020 were as follows:
(In millions)
Balance at January 3, 2020$112 
Adjustments to previously estimated fair value of warranty liabilities assumed19 
Decrease from divestitures(8)
Accruals for product warranties issued during the period52 
Settlements made during the period(43)
Other, including foreign currency translation adjustments(2)
Balance at October 2, 2020$130 
17


Note M — Debt
Long-term debt is summarized below:
(In millions)October 2, 2020January 3, 2020
Variable-rate debt:
Floating rate notes, due April 30, 2020$— $250 
Floating rate notes, due March 10, 2023250 — 
Total variable-rate debt250 250 
Fixed-rate debt:
4.95% notes, due February 15, 2021
650 650 
3.85% notes, due June 15, 2023
800 800 
3.95% notes, due May 28, 2024
350 350 
3.832% notes, due April 27, 2025
600 600 
7.00% debentures, due January 15, 2026
100 100 
3.85% notes, due December 15, 2026
550 550 
6.35% debentures, due February 1, 2028
26 26 
4.40% notes, due June 15, 2028
1,850 1,850 
2.90% notes, due December 15, 2029
400 400 
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 
Other51 49 
Total fixed-rate debt6,577 6,575 
Total debt6,827 6,825 
Plus: unamortized bond premium127 154 
Less: unamortized discounts and issuance costs(27)(28)
Total debt, net6,927 6,951 
Less: current portion of long-term debt, net(666)(257)
Total long-term debt, net$6,261 $6,694 
For additional information on our long-term debt, see Note 14: “Debt” in the Notes to Consolidated Financial Statements in our Fiscal Transition Period Form 10-KT.
Long-Term Debt Repaid in the Quarter Ended July 3, 2020
During the quarter ended July 3, 2020, we repaid at maturity the entire outstanding $250 million aggregate principal amount of our Floating Rate Notes due April 30, 2020.
Long-Term Debt Issued in the Quarter Ended April 3, 2020
During the quarter ended April 3, 2020, we completed the issuance and sale of $250 million in aggregate principal amount of Floating Rate Notes due March 10, 2023 (the “Floating Rate Notes 2023”). The Floating Rate Notes 2023 bear interest at a floating rate, reset quarterly, equal to three-month LIBOR plus 0.75% per year. Interest on the Floating Rate Notes 2023 is payable quarterly in arrears on March 10, June 10, September 10 and December 10 of each year, commencing on June 10, 2020. The Floating Rate Notes 2023 are unsecured and unsubordinated and rank equally in right of payment with all other unsecured and unsubordinated indebtedness. The Floating Rate Notes 2023 are not redeemable at our option prior to maturity. Debt issuance costs related to the issuance of the Floating Rate Notes 2023 were not material. We used the net proceeds from the sale of the Floating Rate Notes 2023 to repay at maturity the aggregate principal amount of our Floating Rate Notes due April 30, 2020 as described above under “Long-Term Debt Repaid in the Quarter Ended July 3, 2020.”
Debt Exchange
In connection with the L3Harris Merger, on July 2, 2019, we settled our previously announced 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
18


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.
(In millions)Aggregate Principal Amount of L3 Notes (prior to debt exchange)Aggregate Principal Amount of New L3Harris Notes IssuedAggregate Principal Amount of Remaining L3 Notes
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 
On March 31, 2020, we commenced offers to eligible holders (“Exchange Offers”) to exchange any and all outstanding New L3Harris Notes issued by L3Harris as set forth in the table above (the “Original Notes”), which were previously issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), for an equal principal amount of new notes registered under the Securities Act (the “Exchange Notes”).
The Exchange Notes were offered to satisfy L3Harris’ obligations under the registration rights agreement entered into as part of the issuance of the Original Notes, which occurred in exchange for the L3 Notes as described above.
The terms of the Exchange Notes issued in the Exchange Offers are substantially identical to the terms of the corresponding series of the Original Notes, except that the Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights and related special interest provisions applicable to the Original Notes do not apply to the Exchange Notes. Each series of Exchange Notes is part of the same corresponding series of the Original Notes and were issued under the same base indenture.
The Exchange Offers expired at 5:00 p.m., New York City time, on May 1, 2020. On May 5, 2020, we settled the Exchange Offers and issued Exchange Notes for validly tendered Original Notes for over 99.9% of the 4.95% 2021 Notes, 3.85% 2023 Notes, 3.95% 2024 Notes and 3.85% 2026 Notes and approximately 98.9% of the 4.40% 2028 Notes.
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 October 2, 2020Three Quarters Ended October 2, 2020
(In millions)PensionOther BenefitsPensionOther Benefits
Net periodic benefit income
Service cost$17 $— $49 $
Interest cost68 205 
Expected return on plan assets(158)(5)(473)(15)
Amortization of net actuarial loss (gain)(1)(2)
Amortization of prior service credit(7) (21)— 
Contractual termination benefits(1)
— — — 
Total net periodic benefit income $(78)$(3)$(232)$(9)
_______________
(1)Contractual termination benefits related to facility rationalization as part of restructuring activities in connection with the L3Harris Merger integration. See Note E — Restructuring and Other Exit Costs in these Notes for additional information regarding restructuring activities.
19


 Quarter Ended September 27, 2019Three Quarters Ended September 27, 2019
(In millions)PensionOther BenefitsPensionOther Benefits
Net periodic benefit income
Service cost$21 $$39 $
Interest cost76 180 
Expected return on plan assets(157)(5)(348)(13)
Amortization of net actuarial gain— (1)— (4)
Effect of curtailments or settlements(1)
— — 
Total net periodic benefit income $(55)$(3)$(123)$(10)
_______________
(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.
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), except for contractual termination benefits which are included in restructuring in the “Engineering, selling and administrative expenses” 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. As a result of this voluntary contribution, as well as $700 million of voluntary contributions made in fiscal 2018 and 2017, we made no material contributions to our U.S. qualified defined benefit pension plans during the quarter and three quarters ended October 2, 2020 and are not required to make any contributions to these plans during the remainder of fiscal 2020.
Note O — Income From Continuing Operations Per Share
The computations of income from continuing operations per common share attributable to L3Harris common shareholders are as follows:
 Quarter EndedThree Quarters Ended
(In millions, except per share amounts)October 2,
2020
September 27,
2019
October 2,
2020
September 27,
2019
Income from continuing operations (A)$427 $429 $928 $941 
Basic weighted average common shares outstanding (B)213.4 222.6 215.5150.6
Impact of dilutive share-based awards1.7 2.8 1.8 2.9
Diluted weighted average common shares outstanding (C)215.1 225.4 217.3153.5
Income from continuing operations per basic common share (A)/(B)$2.00 $1.93 $4.31 $6.25 
Income from continuing operations per diluted common share (A)/(C)$1.99 $1.90 $4.27 $6.13 
Potential dilutive common shares primarily consist of employee stock options, restricted stock units and performance stock units. Income from continuing operations per diluted common share excludes the anti-dilutive impact of 1.5 million and 1.3 million weighted average share-based awards outstanding for the quarter and three quarters ended October 2, 2020, respectively, and 0.5 million and 0.3 million weighted average share-based awards outstanding for the quarter and three quarters ended September 27, 2019, respectively.
20


Note P — Non-Operating Income
The components of non-operating income were as follows:
Quarter EndedThree Quarters Ended
(In millions)October 2, 2020September 27, 2019October 2, 2020September 27, 2019
Pension adjustment(1)
$97 $80 $292 $173 
Other(1)(1)— 
Total non-operating income$96 $79 $296 $173 
_______________
(1)Pension adjustment recorded in the “Non-operating income” line item in our Condensed 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 Q — Income Taxes
Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 16.8 percent in the quarter ended October 2, 2020 compared with 1.1 percent in the quarter ended September 27, 2019. In the quarter ended October 2, 2020, our effective tax rate benefited from favorable adjustments upon the finalization of our Federal tax returns including the benefit of recently released tax regulations and the resolution of audit uncertainties. 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.
Our effective tax rate was 15.9 percent in the three quarters ended October 2, 2020 compared with 7.6 percent in the three quarters ended September 27, 2019. In addition to the items noted above for the quarter ended October 2, 2020, our effective tax rate for the three quarters ended October 2, 2020 benefited from the favorable impact of research and development credits, the favorable impact of excess tax benefits related to equity-based compensation, partially offset by the unfavorable impact of non-deductible goodwill impairment charges. In addition to the items noted above for the quarter ended September 27, 2019, our effective tax rate for the three quarters ended September 27, 2019 benefited from additional research credits claimed on our prior year tax returns and favorable adjustments recorded upon the filing of our Federal tax returns.
Note R — 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.
21


The following table presents assets and liabilities measured at fair value on a recurring basis (at least annually) at October 2, 2020 and January 3, 2020:
October 2, 2020January 3, 2020
(In millions)TotalLevel 1Level 2TotalLevel 1Level 2
Assets
Deferred compensation plan assets:(1)
Equity and fixed-income securities$60 $60 $— $58 $58 $— 
Investments measured at NAV:
Corporate-owned life insurance30 29 
Total fair value of deferred compensation plan assets$90 $60 $— $87 $58 $— 
Derivatives (foreign currency forward contracts)$14 $— $14 $10 $— $10 
Liabilities
Deferred compensation plan liabilities:(2)
Equity securities and mutual funds$$$— $$$— 
Investments measured at NAV:
Common/collective trusts and guaranteed investment contracts91 69 
Total fair value of deferred compensation plan liabilities$94 $$— $71 $$— 
Derivatives (foreign currency forward contracts)$$— $$$— $
Derivatives (treasury lock contracts)$130 $— $130 $56 $— $56 
_______________
(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):
 October 2, 2020January 3, 2020
(In millions)Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Long-term debt (including current portion)(1)
$6,927 $7,889 $6,951 $7,536 
_______________
(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.
See Note C — Business Divestitures and Assets Sales and Note K — Goodwill and Other Intangible Assets in these Notes for information regarding fair value measurements associated with goodwill.
Note S — 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.
22


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 October 2, 2020, we had no outstanding foreign currency forward contracts to hedge balance sheet items. The net gains or losses on foreign currency forward contracts designated as fair value hedges were not material in the quarter or three quarters ended October 2, 2020 or in the quarter or three quarters ended September 27, 2019. In addition, no amounts were recognized in earnings in the quarter or three quarters ended October 2, 2020 or in the quarter or three quarters ended September 27, 2019 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 inter-segment 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 (loss). Gains and losses in AOCI 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 October 2, 2020, we had open foreign currency forward contracts with an aggregate notional amount of $551 million denominated in Canadian Dollars, U.S. Dollars, British Pounds, Euros, New Zealand Dollars and Australian Dollars, to hedge certain forecasted transactions.
At October 2, 2020, our foreign currency forward contracts had maturities through 2025.
The table below presents the fair values of our derivatives designated as foreign currency hedging instruments in our Condensed Consolidated Balance Sheet (Unaudited) at October 2, 2020 and January 3, 2020:
(In millions)October 2, 2020January 3, 2020
Derivatives designated as hedging instruments:
Foreign currency forward contracts(1)
Other current assets$12 $
Other non-current assets
Other accrued items
Other long-term liabilities— 
_______________
(1)See Note R — Fair Value Measurements in these Notes for a description of the fair value hierarchy related to our foreign currency forward contracts.
Net unrealized gains or losses recognized in other comprehensive loss and net gains and losses reclassified from AOCI into earnings from foreign currency derivatives designated as cash flow hedges were not material for the quarter or three quarters ended October 2, 2020 or September 27, 2019.
Gains and losses from foreign currency derivatives designated as cash flow hedges are included in the line item in our Condensed Consolidated Statement of Income (Unaudited) associated with the hedged transaction, with the exception of any losses resulting from discontinued cash flow hedges, which are included in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited).
At October 2, 2020, the estimated amount of existing gains to be reclassified into earnings within the next twelve months was not material.
23


Interest-Rate Risk — Cash Flow Hedges. At October 2, 2020, we had two treasury lock agreements (“treasury locks”) with third-party financial institution counterparties with a combined notional amount of $650 million. These treasury locks were initiated in January 2019 (and assumed by us in connection with the L3Harris Merger) 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 $650 million outstanding principal amount of our 4.95% Notes due February 15, 2021 (“4.95% 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 of the 4.95% 2021 Notes. If the benchmark interest rate increases during the period of the agreement, the treasury locks position becomes an asset and we 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 becomes 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 R — Fair Value Measurements in these Notes for additional information.
At October 2, 2020, the combined fair value of these treasury locks was a liability of $130 million, which is included in the “Other accrued items” line item 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 $71 million and $16 million at October 2, 2020 and January 3, 2020, respectively.
Net gains or losses from interest rate derivatives designated as cash flow hedges recognized in earnings were not material in the quarter or three quarters ended October 2, 2020 or in the quarter or three quarters ended September 27, 2019.
Note T — 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 as well as 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. These variable amounts generally are awarded upon achievement of certain negotiated performance metrics, program milestones or cost targets and can be based upon customer discretion. We include such estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.
24


Net EAC adjustments had the following impact to earnings for the periods presented:
Quarter EndedThree Quarters Ended
(In millions, except per share amounts)October 2, 2020September 27, 2019October 2, 2020September 27, 2019
Net EAC adjustments, before income taxes $99 $62 $300 $80 
Net EAC adjustments, net of income taxes$74 $46 $225 $59 
Net EAC adjustments, net of income taxes, per diluted common share$0.34 $0.20 $1.03 $0.30 
Revenue recognized from performance obligations satisfied in prior periods was $121 million and $359 million for the quarter and three quarters ended October 2, 2020, respectively, and $73 million and $116 million for the quarter and three quarters ended September 27, 2019, respectively.
Note U — 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 October 2, 2020, our ending backlog was $20.8 billion. We expect to recognize approximately 65 percent of the revenue associated with this backlog by the end of 2021 and approximately 80 percent by the end of 2022, with the remainder to be recognized thereafter. At January 3, 2020, our ending backlog was $20.6 billion, including $380 million of backlog associated with the airport security and automation business, which was divested during the quarter ended July 3, 2020.
Note V — Business Segment Information
We adjusted our segment reporting due to the L3Harris Merger to reflect our new organizational structure that was effective June 29, 2019 and announced July 1, 2019. We structure our operations primarily around the products and services we sell and the markets we serve, and 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:
Integrated Mission Systems, including multi-mission ISR and communication systems; integrated electrical and electronic systems for maritime platforms; and advanced electro-optical and infrared solutions;
Space and Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare;
Communication Systems, including tactical communications; broadband communications; integrated vision solutions; and public safety; and
Aviation Systems, including defense aviation products; commercial aviation products; commercial and military pilot training; and mission networks for air traffic management.
During the quarter ended April 3, 2020, we further adjusted our segment reporting to better align our businesses and transferred two businesses between our Integrated Mission Systems and Space and Airborne Systems segments. The historical results, discussion and presentation of our business segments as set forth in this Report reflect the impact of the above 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.
As noted in Note C — Business Divestitures and Assets Sales and elsewhere in these Notes, during 2019 and 2020, we completed the following business divestitures:
The divestiture of the Harris Night Vision business, completed on September 13, 2019, the results of which are included in “Other non-reportable business segments” through the date of divestiture;
The divestiture of the airport security and automation business, completed on May 4, 2020, the results of which are reported as part of our Aviation Systems segment through the date of divestiture;
The divestiture of the Applied Kilovolts and Analytical Instrumentation business, completed on May 15, 2020, the results of which are reported as part of our Space and Airborne Systems segment through the date of divestiture; and
The divestiture of the EOTech business, completed on July 31, 2020, the results of which are reported as part of our Communication Systems segment through the date of divestiture.
The accounting policies of our business segments are the same as those described in Note 1: “Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Fiscal Transition Period Form 10-KT. 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. Inter-segment
25


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 inter-segment 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 (loss) and a reconciliation of segment operating income to total income from continuing operations before income taxes are as follows:
 Quarter EndedThree Quarters Ended
(In millions)October 2, 2020September 27, 2019October 2, 2020September 27, 2019
Revenue
Integrated Mission Systems$1,372 $1,292 $4,073 $1,317 
Space and Airborne Systems1,249 1,173 3,690 3,148 
Communication Systems1,094 1,032 3,300 2,221 
Aviation Systems792 948 2,603 1,278 
Other non-reportable business segments(1)
— 23 — 102 
Corporate eliminations(44)(37)(132)(42)
Total revenue$4,463 $4,431 $13,534 $8,024 
Income From Continuing Operations Before Income Taxes
Segment Operating Income (Loss):
Integrated Mission Systems$213 $176 $638 $182 
Space and Airborne Systems231 230 687 599 
Communication Systems273 234 788 577 
Aviation Systems100 127 (46)163 
Other non-reportable business segments(1)
— — — 14 
Unallocated corporate expenses(2)
(23)(93)(113)(94)
L3Harris Merger-related transaction, integration and restructuring expenses (27)(170)(95)(222)
L3Harris Merger-related restructuring charges— (111)(7)(111)
Amortization of acquisition-related intangibles(3)
(176)(123)(529)(173)
Business divestiture-related (losses) gains(10)229 (62)229 
Pension adjustment(97)(80)(292)(173)
Non-operating income96 79 296 173 
Net interest expense(62)(58)(190)(139)
Total income from continuing operations before income taxes$518 $440 $1,075 $1,025 
_______________
(1)Includes the operating results of the Harris Night Vision business prior to the divestiture on September 13, 2019. See Note C — Business Divestitures and Assets Sales in these Notes for more information.
(2)For the quarter ended October 2, 2020, includes $2 million of divestiture-related expenses, and for the three quarters ended October 2, 2020, includes (i) $31 million of additional cost of sales related to the fair value step-up in inventory sold (see Note B — Business Combination in these Notes for more information); (ii) a $14 million non-cash goodwill impairment charge related to a potential divestiture; (iii) $11 million of divestiture-related expenses; and (iv) a $5 million non-cash goodwill impairment charge related to the divestiture of the Applied Kilovolts and Analytical Instrumentation business. For the quarter and three quarters ended September 27, 2019, includes (i) $92 million of additional cost of sales related to the fair value step-up in inventory sold; (ii) a $12 million gain on the sale of an asset group; and (iii) a $12 million non-cash cumulative adjustment to lease expense.
(3)Includes $151 million and $454 million for the quarter and three quarters ended October 2, 2020, respectively, and $98 million for the quarter and three quarters ended September 27, 2019 of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger. Also includes $25 million and $75 million, respectively, for the quarters and three quarters ended October 2, 2020 and September 27, 2019, of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis Inc. in fiscal 2015. Because the L3Harris Merger and the acquisition of Exelis Inc. benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired was not allocated to any segment.
26


Disaggregation of Revenue
We disaggregate revenue for all four business segments by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
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.
 Quarter EndedThree Quarters Ended
(In millions)October 2, 2020September 27, 2019October 2, 2020September 27, 2019
Revenue By Customer Relationship
Prime contractor$910 $882 $2,717 $894 
Subcontractor462 410 1,356 423 
$1,372 $1,292 $4,073 $1,317 
Revenue By Contract Type
Fixed-price(1)
$1,041 $1,010 $3,064 $1,035 
Cost-reimbursable331 282 1,009 282 
$1,372 $1,292 $4,073 $1,317 
Revenue By Geographical Region
United States$1,097 $1,071 $3,240 $1,086 
International275 221 833 231 
$1,372 $1,292 $4,073 $1,317 
_______________
(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.
Quarter EndedThree Quarters Ended
(In millions)October 2, 2020September 27, 2019October 2, 2020September 27, 2019
Revenue By Customer Relationship
Prime contractor$674 $705 $2,006 $1,867 
Subcontractor575 468 1,684 1,281 
$1,249 $1,173 $3,690 $3,148 
Revenue By Contract Type
Fixed-price(1)
$703 $702 $2,075 $1,834 
Cost-reimbursable546 471 1,615 1,314 
$1,249 $1,173 $3,690 $3,148 
Revenue By Geographical Region
United States$1,067 $1,018 $3,124 $2,750 
International182 155 566 398 
$1,249 $1,173 $3,690 $3,148 
_______________
(1)Includes revenue derived from time-and-materials contracts.
27


Communication Systems: Communication Systems revenue is primarily derived from fixed-price contracts and is generally recognized at the point in time when products are received and accepted by the customer for standard products offered to multiple customers and over time for customer-specific products, systems and services.
 Quarter EndedThree Quarters Ended
(In millions)October 2, 2020September 27, 2019October 2, 2020September 27, 2019
Revenue By Customer Relationship(1)
Prime contractor$759 $679 $2,248 
Subcontractor335 353 1,052 
$1,094 $1,032 $3,300 
Revenue By Contract Type(1)
Fixed-price(2)
$935 $875 $2,804 
Cost-reimbursable159 157496 
$1,094 $1,032 $3,300 
Revenue by Geographical Region
United States$749 $721 $2,427 $1,423 
International345 311 873 798 
$1,094 $1,032 $3,300 $2,221 
_______________
(1)Prior to the L3Harris Merger, Communication Systems did not recognize significant revenue for customer-specific products and systems, and currently, such customer arrangements primarily exist at operating businesses acquired in connection with the L3Harris Merger. The “Revenue by Customer Relationship” and “Revenue by Contract Type” disaggregation categories were added beginning in the Fiscal Transition Period to best depict how the nature, amount, timing and uncertainty of revenue and cash flows from these types of customer arrangements are affected by economic factors.
(2)Includes revenue derived from time-and-materials contracts.
Aviation Systems: Aviation Systems revenue is primarily derived from fixed-price contracts and is generally recognized at the point in time when products are received and accepted by the customer for standard products offered to multiple customers and over time for customer-specific products, systems and services.
Quarter EndedThree Quarters Ended
(In millions)October 2, 2020September 27, 2019October 2, 2020September 27, 2019
Revenue By Customer Relationship
Prime contractor$511 $584 $1,689 $904 
Subcontractor281 364 914 374 
$792 $948 $2,603 $1,278 
Revenue By Contract Type
Fixed-price(1)
$646 $784 $2,114 $1,070 
Cost-reimbursable146 164 489 208 
$792 $948 $2,603 $1,278 
Revenue By Geographical Region
United States$687 $724 $2,132 $1,045 
International105 224 471 233 
$792 $948 $2,603 $1,278 
_______________
(1)Includes revenue derived from time-and-materials contracts.
28


Total assets by business segment are summarized below:
(In millions)October 2, 2020January 3, 2020
Total Assets
Integrated Mission Systems$8,752 $7,888 
Space and Airborne Systems6,902 6,837 
Communication Systems5,643 5,930 
Aviation Systems5,231 7,569 
Corporate(1)
10,617 10,112 
Total Assets$37,145 $38,336 
_______________
(1)Identifiable intangible assets acquired in connection with the L3Harris Merger in the quarter ended September 27, 2019 and our acquisition of Exelis Inc. in fiscal 2015 were recorded as Corporate assets because they benefited the entire Company as opposed to any individual segment. Identifiable intangible asset balances recorded as Corporate assets were approximately $8.2 billion and $8.5 billion at October 2, 2020 and January 3, 2020, respectively. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan investments, buildings and equipment, as well as any assets and liabilities from discontinued operations and divestitures. See Note C — Business Divestitures and Assets Sales in these Notes for additional information.
Note W — Legal Proceedings and Contingencies
From time to time, as a normal incident of the nature and kind of businesses in which we are or were engaged, various claims or charges are asserted and litigation or arbitration is commenced by or against us arising from or related to matters, including, but not limited to: product liability; personal injury; patents, trademarks, trade secrets or other intellectual property; labor and employee disputes; commercial or contractual disputes; strategic acquisitions or divestitures; the prior sale or use of former products allegedly containing asbestos or other restricted materials; breach of warranty; or environmental matters. Claimed amounts against us may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards. We record accruals for losses related to those matters against us that we consider to be probable and that can be reasonably estimated. Gain contingencies, if any, are recognized when they are realized, and legal costs generally are expensed when incurred. At October 2, 2020, our accrual for the potential resolution of lawsuits, claims or proceedings that we consider probable of being decided unfavorably to us was not material. Although it is not feasible to predict the outcome of these matters with certainty, it is reasonably possible that some lawsuits, claims or proceedings may be disposed of or decided unfavorably to us and in excess of the amounts currently accrued. Based on available information, in the opinion of management, settlements, arbitration awards and final judgments, if any, that are considered probable of being rendered against us in litigation or arbitration in existence at October 2, 2020 are reserved against or would not have a material adverse effect on our financial condition, results of operations, cash flows or equity.
Environmental Matters: We are subject to numerous U.S. Federal, state, local and international environmental laws and regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental issues. We or companies we have acquired are responsible, or alleged to be responsible, for environmental investigation and/or remediation of multiple sites. These sites are in various stages of investigation and/or remediation and in some cases our liability is considered de minimis. Notices from the U.S. Environmental Protection Agency (“EPA”) or equivalent state or international environmental agencies allege that a number of sites formerly or currently owned and/or operated by us or companies we have acquired, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances of being identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent state and international laws. For example, in June 2014, the U.S. Department of Justice (the “DOJ”), Environment and Natural Resources Division, notified several potentially responsible parties, including Exelis Inc., of potential responsibility for contribution to the environmental investigation and remediation of multiple locations in Alaska. In addition, in March 2016, the EPA notified over 100 potentially responsible parties, including Exelis Inc., of potential liability for the cost of remediation for the 8.3-mile stretch of the Lower Passaic River, estimated by the EPA to be $1.38 billion, but the parties’ respective allocations have not been determined. Although it is not feasible to predict the outcome of these environmental claims made against us, based on available information, in the opinion of our management, any payments we may be required to make as a result of environmental claims made against us in existence at October 2, 2020 are reserved against, covered by insurance or would not have a material adverse effect on our financial condition, results of operations, cash flows or equity.
29


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of L3Harris Technologies, Inc.

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of L3Harris Technologies, Inc. (the Company) as of October 2, 2020, the related condensed consolidated statements of income, comprehensive income, and equity for the quarters and three quarters ended October 2, 2020 and September 27, 2019, the condensed consolidated statements of cash flows for the three quarters ended October 2, 2020 and September 27, 2019, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of January 3, 2020, the related consolidated statements of income, comprehensive income, cash flows and equity for the two quarters then ended, and the related notes (not presented herein); and in our report dated March 3, 2020, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 3, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ Ernst & Young LLP
Orlando, Florida
November 2, 2020
30


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of our financial condition and results of operations. This MD&A is provided as a supplement to, should be read in conjunction with, and is qualified in its entirety by reference to, our Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes appearing elsewhere in this Report (the “Notes”). In addition, reference should be made to our audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-KT for the Fiscal Transition Period from June 29, 2019 to January 3, 2020 (our “Fiscal Transition Period Form 10-KT”). Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in this MD&A under “Forward-Looking Statements and Factors that May Affect Future Results.”
COVID-19 
The ongoing COVID-19 pandemic and attempts to contain it, such as mandatory closures, “shelter-in-place” orders and travel and quarantine restrictions, have caused significant disruptions and adverse effects on the U.S. and global economies, such as impacts to supply chains, customer demand, international trade and capital markets. Our response has involved increasing our focus on keeping our employees safe while striving to maintain continuity of operations, meet customer commitments and support suppliers. For example, we instituted work-from-home (for employees who are able to work remotely) and social distancing arrangements; canceled travel and external events; procured personal protective equipment for employees; implemented health screening procedures at all facilities; staggered work shifts, redesigned work stations, implemented stringent cleaning protocols and initiated more detailed safety precautions and protocols for on-site work, such as daily health assessments and mandatory face coverings, which currently remain in effect. We have also maintained an active dialog with key suppliers and developed plans to mitigate supply chain risks. We have allowed certain essential business travel to resume, and we continue to expect to utilize a phased approach based on local conditions for transitioning employees from work-from-home arrangements to on-site work. The U.S. Government response to the COVID-19 pandemic has included identifying the Defense Industrial Base as a Critical Infrastructure Sector and enhancing cash flow and liquidity for the Defense Industrial Base, such as by increasing progress payments and accelerating contract awards. As a part of the Defense Industrial Base, these actions have enabled us to keep our U.S. production facilities largely operational in support of national security commitments to U.S. Government customers and to accelerate payments to small business suppliers, which we expect to continue while the U.S. Government’s responsive actions remain in effect.
Although we believe that the large percentage of our revenue, earnings and cash flow that is derived from sales to the U.S. Government, whether directly or through prime contractors, will be relatively predictable, in part due to the responsive actions taken by the U.S. Government described above, our commercial, international and public safety businesses are at a higher risk of adverse impacts related to the COVID-19 pandemic. For example, the severe decline in global air traffic from travel restrictions and the resulting downturn in the commercial aviation market and its impact on customer operations has significantly reduced demand for flight training, flight simulators and commercial avionics products in our Aviation Systems segment’s Commercial Aviation Solutions sector. As a result, we temporarily closed some of our flight training facilities, initiated restructuring and other actions to align our resources with the outlook for the commercial aviation market (including workforce reduction and facility consolidation) and have recognized $397 million of charges for impairment of goodwill and other assets and other COVID-19-related impacts in the first three quarters of fiscal 2020.
The extent of these disruptions and impacts, including on our ability to perform under U.S. Government contracts and other contracts within agreed timeframes and ultimately on our results of operations and cash flows, will depend on future developments, including the severity and duration of the pandemic and associated containment and mitigation actions taken by the U.S. Government, state and local government officials and international governments, and consequences thereof, and global air traffic demand and governmental subsidies to airlines, all of which are uncertain and unpredictable.
The impact of COVID-19 may also exacerbate other risks discussed in Item 1A. “Risk Factors” of our Fiscal Transition Period Form 10-KT, any of which could have a material effect on us. We continue to work with our customers, employees, suppliers, subcontractors, distributors, resellers and communities to address the impact of the pandemic. We continue to assess possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences. For further information regarding the impact, and the risks of the impact, of COVID-19 on the Company, see Part II, Item 1A. “Risk Factors” in this Report.
31


KEY DEVELOPMENTS
The following is a list of the remaining sections of this MD&A, together with our perspective on their contents, which we hope will assist in reading these pages:
Results of Operations — an analysis of our consolidated results of operations and the results in each of our business segments, to the extent the segment results are helpful to an understanding of our business as a whole, on both an “as reported” basis and, in the case of the three quarters ended September 27, 2019, a “pro forma basis” (as defined in “Results of Operations” in this MD&A), for the periods presented in our Condensed Consolidated Statement of Income (Unaudited).
Liquidity, Capital Resources and Financial Strategies — an analysis of cash flows, funding of pension plans, common stock repurchases, dividends, capital structure and resources, off-balance sheet arrangements and commercial commitments and contractual obligations.
Critical Accounting Policies and Estimates — information about accounting policies that require critical judgments and estimates and about accounting standards that have been issued, but are not yet effective for us, and their potential impact on our financial condition, results of operations, cash flows and equity.
Forward-Looking Statements and Factors that May Affect Future Results — cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.
As discussed in Note V — Business Segment Information in the Notes, 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. During the quarter ended April 3, 2020, we further adjusted our segment reporting to better align our businesses and transferred two businesses between our Integrated Mission Systems and Space and Airborne Systems segments.
The historical results, discussion and presentation of our business segments as set forth in this MD&A reflect the impact of the above 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.
We report the financial results of our continuing operations in the following four segments, which are also referred to as our business segments:
Integrated Mission Systems, including multi-mission intelligence, surveillance and reconnaissance (“ISR”) and communication systems; integrated electrical and electronic systems for maritime platforms; and advanced electro-optical and infrared solutions;
Space and Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare;
Communication Systems, including tactical communications; broadband communications; integrated vision solutions; and public safety; and
Aviation Systems, including defense aviation products; commercial aviation products; commercial and military pilot training; and mission networks for air traffic management.
As described in more detail in Note C — Business Divestitures and Assets Sales and elsewhere in the Notes, during 2019 and 2020, we completed the following business divestitures: the divestiture of the Harris Night Vision business, completed on September 13, 2019, the results of which are included in “Other non-reportable business segments” through the date of divestiture; the divestiture of the Security & Detection Systems and MacDonald Humfrey Automation solutions business (“airport security and automation business”), completed on May 4, 2020, the results of which are reported as part of our Aviation Systems segment through the date of divestiture; the divestiture of the Applied Kilovolts and Analytical Instrumentation business, completed on May 15, 2020, the results of which are reported as part of our Space and Airborne Systems segment through the date of divestiture; and the divestiture of the EOTech business, completed on July 31, 2020, the results of which are reported as part of our Communication Systems segment through the date of divestiture.
Amounts contained in this Report may not always add to totals due to rounding.
RESULTS OF OPERATIONS
As discussed further in Note A — Significant Accounting Policies and Recent Accounting Standards in the Notes, we completed the L3Harris Merger on June 29, 2019. Because of the L3Harris Merger, the three quarters ended October 2, 2020 reflect the results of the combined Company, while the three quarters ended September 27, 2019 reflect the results of only Harris operating businesses for the two quarters ended June 28, 2019 and the results of the combined Company for the quarter ended September 27, 2019. Due to the significance of the L3 operating businesses included in the combined Company results following the L3Harris Merger, the reported results for the three quarters ended October 2, 2020 and September 27, 2019
32


generally are not comparable. Therefore, to assist with a discussion of the consolidated results of operations for the three quarters ended October 2, 2020 and September 27, 2019 on a more comparable basis, certain supplemental unaudited pro forma combined income statement information prepared in accordance with the requirements of Article 11 of Regulation S-X (referred to in this MD&A as “pro forma”) also is provided (see “Supplemental Unaudited Pro Forma Condensed Combined Income Statement Informationbelow in this MD&A).
Highlights
Consolidated operating results for the quarter ended October 2, 2020 compared with the quarter ended September 27, 2019 included:
Revenue increased 1 percent to $4.5 billion from $4.4 billion;
Gross margin increased 10 percent to $1,311 million from $1,189 million;
Income from continuing operations decreased 1 percent to $431 million from $435 million; and
Income from continuing operations per diluted common share attributable to L3Harris Technologies, Inc. common shareholders increased 5 percent to $1.99 from $1.90.
Consolidated Results of Operations
 Quarter Ended
(In millions, except per share amounts)October 2,
2020
September 27,
2019
% Inc/(Dec)
 
Revenue:
Integrated Mission Systems$1,372 $1,292 %
Space and Airborne Systems1,249 1,173 %
Communication Systems1,094 1,032 %
Aviation Systems792 948 (16)%
Other non-reportable business segments— 23 *
Corporate eliminations(44)(37)*
Total revenue4,463 4,431 %
Cost of product sales and services(3,152)(3,242)(3)%
Gross margin1,311 1,189 10 %
% of total revenue29 %27 %
Engineering, selling and administrative expenses(817)(999)(18)%
% of total revenue18 %23 %
Business divestiture-related (losses) gains(10)229 *
Non-operating income96 79 22 %
Net interest expense(62)(58)%
Income from continuing operations before income taxes518 440 18 %
Income taxes(87)(5)1,640 %
Effective tax rate17 %%
Income from continuing operations431 435 (1)%
Noncontrolling interests, net of income taxes(4)(6)(33)%
Income from continuing operations attributable to L3Harris Technologies, Inc. common shareholders
$427 $429 — %
% of total revenue10 %10 %
Income from continuing operations per diluted common share attributable to L3Harris Technologies, Inc. common shareholders$1.99 $1.90 %
_______________
*    Not meaningful
33


 Three Quarters Ended
October 2,
2020
September 27,
2019
% Inc/(Dec)September 27,
2019
% Inc/(Dec)
(In millions, except per share amounts)As ReportedPro Forma
 
Revenue:
Integrated Mission Systems$4,073 $1,317 *$3,894 %
Space and Airborne Systems3,690 3,148 17 %3,485 %
Communication Systems3,300 2,221 49 %3,159 %
Aviation Systems2,603 1,278 *2,827 (8)%
Other non-reportable business segments— 102 *23 *
Corporate eliminations(132)(42)*(123)*
Total revenue13,534 8,024 69 %13,265 %
Cost of product sales and services(9,625)(5,604)72 %(9,423)%
Gross margin3,909 2,420 62 %3,842 %
% of total revenue29 %30 %29 %
Engineering, selling and administrative expenses(2,484)(1,658)50 %(2,706)(8)%
% of total revenue18 %21 %20 %
Business divestiture-related (losses) gains(62)229 *229 *
Impairment of goodwill and other assets(394)— *— *
Non-operating income296 173 71 %196 51 %
Net interest expense(190)(139)37 %(188)%
Income from continuing operations before income taxes1,075 1,025 %1,373 (22)%
Income taxes(171)(78)119 %(121)41 %
Effective tax rate16 %%%
Income from continuing operations904 947 (5)%1,252 (28)%
Noncontrolling interests, net of income taxes24 (6)*(18)*
Income from continuing operations attributable to L3Harris Technologies, Inc. common shareholders
$928 $941 (1)%$1,234 (25)%
% of total revenue%12 %%
Income from continuing operations per diluted common share attributable to L3Harris Technologies, Inc. common shareholders$4.27 $6.13 (30)%$5.48 (22)%
_______________
*    Not meaningful
Revenue
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: The increase in revenue for the quarter ended October 2, 2020 compared with the quarter ended September 27, 2019 was primarily due to growth in our Integrated Mission Systems, Space and Airborne Systems and Communication Systems segments, partially offset by lower revenue in our Aviation Systems segment from the impact of the airport security and automation business divestiture as well as the COVID-19-related downturn in the commercial aviation market and its impact on customer operations in the quarter ended October 2, 2020.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: The increase in revenue for the three quarters ended October 2, 2020 compared with the three quarters ended September 27, 2019 was primarily due to the inclusion of $5.5 billion of revenue (net of intercompany sales eliminations) from L3 operations in operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger) and organic growth in our Integrated Mission Systems, Space and Airborne Systems and Communication Systems segments, partially offset by the impact of divestitures and the COVID-19-related downturn in the commercial aviation market and its impact on customer operations in the three quarters ended October 2, 2020.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
34


Gross Margin
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: The increases in gross margin and gross margin as a percentage of total revenue (“gross margin percentage”) for the quarter ended October 2, 2020 compared with the quarter ended September 27, 2019 were primarily due to $92 million of additional cost of sales related to the fair value step-up in inventory sold recorded in the quarter ended September 27, 2019, integration benefits and operational excellence, partially offset by a mix of program revenue and product sales with relatively lower gross margin percentage in the quarter ended October 2, 2020.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: The increase in gross margin for the three quarters ended October 2, 2020 compared with the three quarters ended September 27, 2019 was primarily due to the inclusion of L3 operations in operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger). Gross margin percentage decreased in the three quarters ended October 2, 2020 compared with the three quarters ended September 27, 2019 as integration benefits, operational excellence and $61 million of lower cost of sales related to the fair value step-up in inventory sold were more than offset by a mix of program revenue and product sales with relatively lower gross margin percentage and $40 million of higher amortization of identifiable intangible assets acquired as a result of the L3Harris Merger.
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.
Engineering, Selling and Administrative Expenses (“ESA”)
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: The decreases in ESA expenses and ESA expense as a percentage of total revenue (“ESA percentage”) for the quarter ended October 2, 2020 compared with the quarter ended September 27, 2019 were primarily due to $143 million of lower L3Harris Merger-related transaction and integration expenses and $108 million of lower restructuring charges and other items, partially offset by $55 million of higher amortization of identifiable intangible assets acquired as a result of the L3Harris Merger.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: The increase in ESA expenses for the three quarters ended October 2, 2020 compared with the three quarters ended September 27, 2019 was primarily due to the inclusion of L3 operations in operating results (but not for the comparable prior-year two quarters preceding the L3Harris Merger) and $316 million of higher amortization of identifiable intangible assets acquired as a result of the L3Harris Merger, partially offset by $127 million of lower L3Harris Merger-related transaction and integration expenses and $82 million of lower restructuring charges and other items.
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.
Business Divestiture-Related (Losses) Gains
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: Business divestiture-related (losses) gains for the quarter ended October 2, 2020 included a $10 million non-cash remeasurement loss on a potential divestiture, a $2 million pre-tax gain on the sale of the EOTech business and a $2 million adjustment to increase the loss on the sale of the airport security and automation business. The business divestiture-related gain for the quarter ended September 27, 2019 was a $229 million pre-tax gain on the sale of the Harris Night Vision business.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: Business divestiture-related (losses) gains for the three quarters ended October 2, 2020 included a $28 million pre-tax loss on the sale of the airport security and automation business divestiture, a $24 million non-cash remeasurement loss on a potential divestiture and a $12 million non-cash adjustment to the gain on the sale of the Harris Night Vision business, partially offset by a $2 million pre-tax gain on the sale of the EOTech business. The business divestiture-related gain for the three quarters ended September 27, 2019 was the same item as noted above for the quarter ended September 27, 2019.
See Note C — Business Divestitures and Asset Sales in the Notes for further information.
Impairment of Goodwill and Other Assets
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: Impairment of goodwill and other assets for the three quarters ended October 2, 2020 reflects $375 million of non-cash charges for the impairment of goodwill and other assets in our Commercial Aviation Solutions sector associated with the COVID-19-related downturn in the commercial aviation market and its impact on customer operations, a $14 million non-cash charge for impairment of goodwill recorded in the quarter ended July 3, 2020 in connection with a potential divestiture and a $5 million non-cash charge for impairment of goodwill recorded in the quarter ended April 3, 2020 in connection with the then-pending divestiture of our Applied Kilovolts and Analytical Instrumentation business.
See Note C — Business Divestitures and Assets Sales and Note K — Goodwill and Other Intangible Assets in the Notes for further information.
35


Non-Operating Income
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: The increase in non-operating income in the quarter ended October 2, 2020 compared with the quarter ended September 27, 2019 was primarily due to an increase in the non-service cost components of pension and other postretirement benefit plan income.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: The increase in non-operating income in the three quarters ended October 2, 2020 compared with the three quarters ended September 27, 2019 was primarily due to an increase in the non-service cost components of pension and other postretirement benefit plan income, reflecting the inclusion of income from benefit plans assumed in connection with the L3Harris Merger.
See Note P — Non-Operating Income and Note N — Postretirement Benefit Plans in the Notes for further information.
Net Interest Expense
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: The increase in net interest expense in the quarter ended October 2, 2020 compared with the quarter ended September 27, 2019 was primarily due to lower interest income.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: The increase in net interest expense in the three quarters ended October 2, 2020 compared with the three quarters ended September 27, 2019 was primarily due to higher average debt levels as a result of the assumption of $3.5 billion of debt in connection with the L3Harris Merger.
See Note M — Debt in the Notes and Note 14: “Debt” in the Notes to Consolidated Financial Statements in our Fiscal Transition Period Form 10-KT for further information.
Income Taxes
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 16.8 percent for the quarter ended October 2, 2020 compared with 1.1 percent for the quarter ended September 27, 2019. Our effective tax rate for the quarter ended October 2, 2020 benefited from favorable adjustments upon the finalization of our Federal tax returns including the benefit of recently released tax regulations and the resolution of audit uncertainties. 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.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: Our effective tax rate was 15.9 percent for the three quarters ended October 2, 2020 compared with 7.6 percent for the three quarters ended September 27, 2019. In addition to the items noted above for the quarter ended October 2, 2020, our effective tax rate for the three quarters ended October 2, 2020 benefited from the favorable impact of research and development (“R&D”) credits, and the favorable impact of excess tax benefits related to equity-based compensation, partially offset by the unfavorable impact of non-deductible goodwill impairment charges. In addition to the items noted above for the quarter ended September 27, 2019, our effective tax rate for the three quarters ended September 27, 2019 benefited from additional research credits claimed on our prior year tax returns and favorable adjustments recorded upon the filing of our Federal tax returns.
Income From Continuing Operations
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: The decrease in income from continuing operations for the quarter ended October 2, 2020 compared with the quarter ended September 27, 2019 was primarily due to the combined effects of the reasons noted above regarding the quarters ended October 2, 2020 and September 27, 2019.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: The decrease in income from continuing operations for the three quarters ended October 2, 2020 compared with the three quarters ended September 27, 2019 was primarily due to the combined effects of the reasons noted above regarding the three quarters ended October 2, 2020 and September 27, 2019.
36


Income From Continuing Operations Per Diluted Common Share Attributable to L3Harris Common Shareholders
Quarter Ended October 2, 2020 Compared With Quarter Ended September 27, 2019: The increase in income from continuing operations per diluted common share attributable to L3Harris common shareholders for the quarter ended October 2, 2020 compared with the quarter ended September 27, 2019 was primarily due to a decrease in our diluted weighted average common shares outstanding from shares of our common stock repurchased under our repurchase program since the L3Harris Merger.
Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019: The decrease in income from continuing operations per diluted common share attributable to L3Harris common shareholders for the three quarters ended October 2, 2020 compared with the three quarters ended September 27, 2019 was primarily due to lower income from continuing operations, as discussed above, and an increase in diluted weighted average common shares outstanding as a result of approximately 104 million shares issued in connection with the L3Harris Merger.
Pro Forma Basis Discussion for the Three Quarters Ended October 2, 2020 Compared With Three Quarters Ended September 27, 2019
Revenue
The increase in revenue for the three quarters ended October 2, 2020 compared with pro forma revenue for the three quarters ended September 27, 2019 was primarily due to higher revenue in our Integrated Mission Systems, Space and Airborne Systems and Communication Systems segments, partially offset by the impact of divestitures as well as the COVID-19-related downturn in the commercial aviation market and its impact on customer operations in the three quarters ended October 2, 2020.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
Gross Margin
The increase in gross margin in the three quarters ended October 2, 2020 compared with pro forma gross margin for the three quarters ended September 27, 2019 was primarily due to $61 million of lower cost of sales related to the fair value step-up in inventory sold, integration benefits, operational excellence and higher volume, partially offset by a mix of program revenue and product sales with relatively lower gross margin percentage in the three quarters ended October 2, 2020. Operating margin percentage for the three quarters ended October 2, 2020 was comparable with pro forma operating margin percentage for the three quarters ended September 27, 2019.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
ESA Expenses
The decreases in ESA expenses and ESA percentage in the three quarters ended October 2, 2020 compared with pro forma ESA expenses and ESA percentage for the three quarters ended September 27, 2019 were primarily due to $135 million of lower L3Harris Merger-related transaction and integration expenses, $82 million of lower restructuring charges and other items, and integration benefits, partially offset by $88 million of higher amortization of identifiable intangible assets acquired as a result of the L3Harris Merger.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
Business Divestiture-Related (Losses) Gains
Business divestiture-related (losses) gains for the three quarters ended October 2, 2020 on a pro forma basis included the same charges as noted above for the three quarters ended October 2, 2020 on an as reported basis.
See Note C — Business Divestitures and Asset Sales in the Notes for further information.
Impairment of Goodwill and Other Assets
Impairment of goodwill and other assets for the three quarters ended October 2, 2020 on a pro forma basis reflects the same charges as noted above for the three quarters ended October 2, 2020 on an as reported basis.
See Note C — Business Divestitures and Assets Sales and Note K — Goodwill and Other Intangible Assets in the Notes for further information.
Non-Operating Income
The increase in non-operating income for the three quarters ended October 2, 2020 compared with pro forma non-operating income for the three quarters ended September 27, 2019 was primarily due to an increase in the non-service cost components of pension and other postretirement benefit plan income.
37


Net Interest Expense
Net interest expense for the three quarters ended October 2, 2020 was largely unchanged compared with pro forma net interest expense for the three quarters ended September 27, 2019.
See “Supplemental Unaudited Pro Forma Condensed Combined Income Statement Information” below in this MD&A for further information.
Income Taxes
Our effective tax rate was 15.9 percent for the three quarters ended October 2, 2020 compared with an 8.8 percent pro forma effective tax rate for the three quarters ended September 27, 2019. Our effective tax rate for the three quarters ended October 2, 2020 was impacted by the same items as noted above for the three quarters ended October 2, 2020 on an as reported basis.
See “Supplemental Unaudited Pro Forma Condensed Combined Income Statement Information” below in this MD&A for information regarding our pro forma effective tax rate for the quarter and three quarters ended September 27, 2019.
Income From Continuing Operations
The decrease in income from continuing operations for the three quarters ended October 2, 2020 compared with pro forma income from continuing operations for the three quarters ended September 27, 2019 was primarily due to the combined effects of the reasons noted above in this “Pro Forma Basis Discussion” regarding the three quarters ended October 2, 2020 and September 27, 2019, particularly the charges for impairment of goodwill and other assets in the three quarters ended October 2, 2020.
Income From Continuing Operations Per Diluted Common Share Attributable to L3Harris Common Shareholders
The decrease in income from continuing operations per diluted common share attributable to L3Harris common shareholders for the three quarters ended October 2, 2020 compared with pro forma income from continuing operations per diluted common share attributable to L3Harris common shareholders for the three quarters ended September 27, 2019 was primarily due to lower income from continuing operations, as discussed above, partially offset by a decrease in our diluted weighted average common shares outstanding from shares of our common stock repurchased under our repurchase program since the L3Harris Merger.
See “Common Stock Repurchases” below in this MD&A for information regarding our share repurchase program.
Supplemental Unaudited Pro Forma Condensed Combined Income Statement Information
The following supplemental unaudited pro forma condensed combined income statement information prepared in accordance with the requirements of Article 11 of Regulation S-X provides further information supporting the preparation of the supplemental unaudited pro forma condensed combined financial information for the three quarters ended September 27, 2019 provided above in the “Consolidated Results of Operations” discussion in this MD&A and has been prepared to give effect to the L3Harris Merger under the acquisition method of accounting. It combines the historical results of operations of Harris and L3 and reflects the L3Harris Merger as if it closed on June 30, 2018, the first day of Harris’ fiscal 2019, and gives effect to pro forma events that are (a) directly attributable to the L3Harris Merger, (b) factually supportable and (c) expected to have a continuing impact on our results of operations. The adjustments include adjustments to reflect the sale of the Harris Night Vision business, which is directly attributable to the L3Harris Merger, but do not include any adjustments for the use of proceeds from such sale, because the use is not directly attributable to the L3Harris Merger. The pro forma condensed combined income statement information is provided for informational and supplemental purposes only, and does not purport to indicate what L3Harris’ results of operations would have been, or L3Harris’ future results of operations, had the L3Harris Merger actually occurred on June 30, 2018. The supplemental unaudited pro forma condensed combined income statement information should be read in conjunction with other sections of this MD&A, our Condensed Consolidated Financial Statements (Unaudited) and the Notes appearing elsewhere in this Report.

38


Unaudited Pro Forma Condensed Combined Statement of Income
For the Three Quarters Ended September 27, 2019
Two Quarters Ended June 28, 2019Quarter Ended September 27, 2019Three Quarters Ended September 27, 2019
(In millions, except per share amounts)Historical
Harris
Historical
L3
Pro Forma
Adjustments
Note
Ref.
Pro Forma     L3Harris As Reported Pro Forma
Revenue from product sales and services$3,593 $5,331 $(11)a$8,834 $4,431 $13,265 
(79)b
Cost of product sales and services(2,362)(3,875)11