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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 April 3, 2020



☐	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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	LHX	New 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.

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 May 1, 2020 was 215,870,340 shares.

L3HARRIS TECHNOLOGIES, INC.

FORM 10-Q

For the Quarter Ended April 3, 2020

TABLE OF CONTENTS



	Page No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statement of Income for the Quarter Ended April 3, 2020 and March 29, 2019	1
Condensed Consolidated Statement of Comprehensive Income for the Quarter Ended April 3, 2020 and March 29, 2019	2
Condensed Consolidated Balance Sheet at April 3, 2020 and January 3, 2020	3
Condensed Consolidated Statement of Cash Flows for the Quarter Ended April 3, 2020 and March 29, 2019	4
Condensed Consolidated Statement of Equity for the Quarter Ended April 3, 2020 and March 29, 2019	5
Notes to Condensed Consolidated Financial Statements	6
Report of Independent Registered Public Accounting Firm	31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures About Market Risk	52
Item 4. Controls and Procedures	53

Part II. Other Information:
Item 1. Legal Proceedings	54
Item 1A. Risk Factors	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3. Defaults Upon Senior Securities	56
Item 4. Mine Safety Disclosures	56
Item 5. Other Information	56
Item 6. Exhibits	56

Signature	57

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 Ended
	April 3, 2020			March 29, 2019

	(In millions, except per share amounts)
Revenue from product sales and services	$	4,626		$	1,728
Cost of product sales and services	(3,298		)	(1,139		)
Engineering, selling and administrative expenses	(815		)	(310		)
Impairment of goodwill and other assets	(324		)	—
Non-operating income	95			46
Interest income	5			1
Interest expense	(68		)	(43		)
Income from continuing operations before income taxes	221			283
Income taxes	(26		)	(40		)
Income from continuing operations	195			243
Discontinued operations, net of income taxes	(1		)	—
Net income	194			243
Noncontrolling interests, net of income taxes	23			—
Net income attributable to L3Harris Technologies, Inc.	$	217		$	243
Amounts attributable to L3Harris Technologies, Inc. common shareholders
Income from continuing operations	$	218		$	243
Discontinued operations, net of income taxes	(1		)	—
Net income	$	217		$	243

Net income per common share attributable to L3Harris Technologies, Inc. common shareholders
Basic
Continuing operations	$	1.00		$	2.06
Discontinued operations	—			—
	$	1.00		$	2.06
Diluted
Continuing operations	$	0.99		$	2.02
Discontinued operations	—			—
	$	0.99		$	2.02

Basic weighted average common shares outstanding	217.3			117.9
Diluted weighted average common shares outstanding	219.3			120.3

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)



	Quarter Ended
	April 3, 2020			March 29, 2019

	(In millions)
Net income	$	194		$	243
Other comprehensive loss:
Foreign currency translation gain (loss), net of income taxes	(67		)	3
Net unrealized loss on hedging derivatives, net of income taxes	(73		)	(8		)
Net unrecognized loss on postretirement obligations, net of income taxes	(1		)	(1		)
Other comprehensive loss, net of income taxes	(141		)	(6		)
Total comprehensive income	53			237
Comprehensive loss attributable to noncontrolling interests	23			—
Total comprehensive income attributable to L3Harris Technologies, Inc.	$	76		$	237

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



	April 3, 2020			January 3, 2020

	(In millions, except shares)
Assets
Current Assets
Cash and cash equivalents	$	663		$	824
Receivables	1,278			1,216
Contract assets	2,467			2,459
Inventories	990			1,219
Income taxes receivable	205			202
Other current assets	400			392
Assets of disposal group held for sale	1,208			—
Total current assets	7,211			6,312
Non-current Assets
Property, plant and equipment	2,032			2,117
Operating lease right-of-use assets	784			837
Goodwill	19,265			20,001
Other intangible assets	8,171			8,458
Deferred income taxes	112			102
Other non-current assets	530			509
Total non-current assets	30,894			32,024
	$	38,105		$	38,336
Liabilities and Equity
Current Liabilities
Short-term debt	$	2		$	3
Accounts payable	1,422			1,261
Contract liabilities	1,138			1,214
Compensation and benefits	329			460
Other accrued items	1,095			790
Income taxes payable	37			24
Current portion of long-term debt, net	896			257
Liabilities of disposal group held for sale	204			—
Total current liabilities	5,123			4,009
Non-current Liabilities
Defined benefit plans	1,744			1,819
Operating lease liabilities	729			781
Long-term debt, net	6,294			6,694
Deferred income taxes	1,402			1,481
Other long-term liabilities	786			808
Total non-current liabilities	10,955			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 215,759,497 shares at April 3, 2020 and 218,226,614 shares at January 3, 2020	216			218
Other capital	20,182			20,694
Retained earnings	2,151			2,183
Accumulated other comprehensive loss	(651		)	(508		)
Total shareholders’ equity	21,898			22,587
Noncontrolling interests	129			157
Total equity	22,027			22,744
	$	38,105		$	38,336

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



	Quarter Ended
	April 3, 2020			March 29, 2019

	(In millions)
Operating Activities
Net income	$	194		$	243
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	230			64
Share-based compensation	87			37
Qualified pension plan contributions	(2		)	—
Pension and other postretirement benefit plan income	(80		)	(37		)
Impairment of goodwill and other assets	324			—
Deferred income taxes	(35		)	5
(Increase) decrease in:
Accounts receivable	(164		)	41
Contract assets	(110		)	(52		)
Inventories	40			(8		)
Increase (decrease) in:
Accounts payable	253			2
Contract liabilities	(47		)	(13		)
Compensation and benefits	(126		)	48
Income taxes	20			35
Other accrued items	(69		)	26
Other	18			14
Net cash provided by operating activities	533			405
Investing Activities
Net additions of property, plant and equipment	(48		)	(37		)
Other investing activities	(10		)	—
Net cash used in investing activities	(58		)	(37		)
Financing Activities
Net proceeds from borrowings	245			—
Repayments of borrowings	(1		)	(301		)
Proceeds from exercises of employee stock options	33			6
Repurchases of common stock	(700		)	—
Cash dividends	(183		)	(81		)
Distributions to noncontrolling interests	(5		)	—
Tax withholding payments associated with vested share-based awards	(1		)	(4		)
Net cash used in financing activities	(612		)	(380		)
Effect of exchange rate changes on cash and cash equivalents	(24		)	3
Net decrease in cash and cash equivalents	(161		)	(9		)
Cash and cash equivalents, beginning of year	824			343
Cash and cash equivalents, end of quarter	$	663		$	334

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

L3HARRIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)



	Common Stock			Other Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Non-controlling Interests			Total Equity

	(In millions, except per share amounts)
Balance at January 3, 2020	$	218		$	20,694		$	2,183		$	(508	)	$	157		$	22,744
Net income	—			—			217			—			(23		)	194
Other comprehensive loss	—			—			—			(141		)	—			(141		)
Net gain from postretirement obligations and hedging derivatives reclassified to earnings	—			—			—			(2		)	—			(2		)
Shares issued under stock incentive plans	1			32			—			—			—			33
Shares issued under defined contribution plans	—			71			—			—			—			71
Share-based compensation expense	—			16			—			—			—			16
Repurchases and retirement of common stock	(3		)	(631		)	(66		)	—			—			(700		)
Cash dividends ($.85 per share)	—			—			(183		)	—			—			(183		)
Distributions to noncontrolling interests	—			—			—			—			(5		)	(5		)
Balance at April 3, 2020	$	216		$	20,182		$	2,151		$	(651	)	$	129		$	22,027

Balance at December 28, 2018	$	118		$	1,681		$	1,824		$	(211	)	$	—		$	3,412
Net income	—			—			243			—			—			243
Other comprehensive loss	—			—			—			(6		)	—			(6		)
Shares issued under stock incentive plans	—			7			—			—			—			7
Shares issued under defined contribution plans	—			23			—			—			—			23
Share-based compensation expense	—			14			—			—			—			14
Repurchases and retirement of common stock	—			(5		)	—			—			—			(5		)
Cash dividends ($.685 per share)	—			—			(81		)	—			—			(81		)
Balance at March 29, 2019	$	118		$	1,720		$	1,986		$	(217	)	$	—		$	3,607

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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 and cash flows for the periods presented therein. The results for the quarter ended April 3, 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.

On October 12, 2018, Harris Corporation, a Delaware corporation (“Harris”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with L3 Technologies, Inc., a Delaware corporation (“L3”), and Leopard Merger Sub Inc., a Delaware corporation and a newly formed, direct wholly owned subsidiary of Harris (“Merger Sub”), pursuant to which Harris and L3 agreed to combine their respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and into L3, with L3 continuing as the surviving corporation and a direct wholly owned subsidiary of Harris (the “L3Harris Merger”).

The closing of the L3Harris Merger occurred on June 29, 2019 (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.” (“L3Harris”), and each share of L3 common stock converted into the right to receive 1.30 shares (“Exchange Ratio”) of L3Harris common stock. Shares of L3Harris common stock, which previously traded under ticker symbol “HRS” on the New York Stock Exchange 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.

We are accounting for the L3Harris Merger under the acquisition method of accounting. Under the acquisition method of accounting, we are required to measure identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree at their fair values as of the Closing Date. The excess of the consideration transferred over those fair values is recorded as goodwill. See Note B — Business Combination in these Notes for additional information related to the L3Harris Merger.

We implemented a new organizational structure effective on June 29, 2019, which resulted in changes to our operating segments, which are also reportable segments and referred to as our business segments. The historical results, discussion and presentation of our business segments as set forth in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes reflect the impact of these changes for all periods presented in order to present segment information on a comparable basis. There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting from these changes.

On September 13, 2019, we completed the sale of the Harris Night Vision business to Elbit Systems of America, LLC, a subsidiary of Elbit Systems Ltd., for $350 million (net cash proceeds of $343 million after selling costs and estimated purchase price adjustments), subject to final customary purchase price adjustments as set forth in the definitive agreement. The Harris Night Vision business was not included in any of the operating segments in our new organizational structure and the operating results of the Harris Night Vision business through the date of the divestiture are discussed and presented as part of “Other non-reportable business segments” in this Report.

On February 4, 2020, we entered into a definitive agreement to sell Security & Detection Systems and MacDonald Humfrey Automation solutions (“airport security and automation business”) to Leidos, Inc. for $1 billion in cash, subject to customary purchase price adjustments as set forth in the definitive agreement. The airport security and automation business, which is reported as part of our Aviation Systems segment, 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 assets and liabilities of the airport security and automation business were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at April 3, 2020. On May 4, 2020, following the close of the first quarter of fiscal 2020, we completed the sale of the airport security and automation business. We expect to use the net cash proceeds from the sale for general corporate purposes and potential repurchases of shares of our common stock.

On February 19, 2020, we entered into a definitive agreement to sell our Applied Kilovolts and Analytical Instrumentation business, which is reported as part of our Space and Airborne Systems segment, subject to closing conditions as set forth in the definitive agreement. The assets and liabilities of the Applied Kilovolts and Analytical Instrumentation business were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at April 3, 2020. We expect to complete the sale of the Applied Kilovolts and Analytical Instrumentation business in mid-2020.

On March 20, 2020, we entered into a definitive agreement to sell our EOTech business for $42 million, subject to customary purchase price adjustments and customary closing conditions as set forth in the definitive agreement. The EOTech business, which is reported as part of our Communications Systems segment, manufactures holographic sighting systems, magnified field optics and accessories for military, law enforcement and commercial markets around the world. The assets and liabilities of the EOTech business were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at April 3, 2020. We expect to complete the sale of the EOTech business in mid-2020.

See Note C — Business Divestitures and Assets Sales in these Notes for more information regarding the divestitures.

Amounts contained in this Report may not always add to totals due to rounding.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes and related disclosures. These estimates and assumptions are based on experience and other information available prior to issuance of the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes. Materially different results can occur as circumstances change and additional information becomes known.

Significant Accounting Policies Update

There have been no material changes to our significant accounting policies described in our Fiscal 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 receivables 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 or cash flows.

Note B — Business Combination

On October 12, 2018, Harris entered into the Merger Agreement with L3 and Merger Sub, pursuant to which Harris and L3 agreed to combine their respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and into L3, with L3 continuing as the surviving corporation and a direct wholly owned subsidiary of Harris.

The closing of the L3Harris Merger occurred on June 29, 2019. Upon completion of the L3Harris Merger, Harris was renamed “L3Harris Technologies, Inc.” and each share of L3 common stock converted into the right to receive 1.30 shares of L3Harris common stock. L3Harris was owned on a fully diluted basis approximately 54 percent by Harris shareholders and 46 percent by L3 shareholders immediately following the completion of the L3Harris Merger.

L3 was a prime contractor in intelligence, surveillance and reconnaissance (“ISR”) systems, aircraft sustainment (including modifications and fleet management of special mission aircraft), simulation and training, night vision and image intensification equipment, and security and detection systems. L3 also was a leading provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. L3 employed approximately 31,000 employees and its customers included the U.S. Department of Defense and its prime contractors, the U.S.

Intelligence Community, the U.S. Department of Homeland Security, foreign governments and domestic and foreign commercial customers.

Following the completion of the L3Harris Merger, we issued 104 million shares of L3Harris common stock to L3 shareholders. The trading price of L3Harris common stock was $189.13 per share as of the Closing Date. In addition to shares of our common stock issued to L3 shareholders, replacement L3Harris share-based awards were issued for certain outstanding L3 share-based awards.

Our preliminary calculation of estimated 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, 2019	79.63
L3 restricted stock unit awards settled in shares of L3Harris common stock	0.41
L3 performance unit awards settled in shares of L3Harris common stock	0.04
	80.08
Exchange Ratio	1.30
Shares of L3Harris common stock issued for L3 outstanding common stock	104.10
Price per share of L3Harris common stock as of June 28, 2019	$	189.13
Fair value of L3Harris common stock issued for L3 outstanding common stock	$	19,689
Fair value of replacement RSUs attributable to merger consideration	10
Fair value of L3Harris stock options issued for L3 outstanding stock options	101
Withholding tax liability incurred for converted L3 share-based awards	45
Fair value of replacement award consideration	156
Fair value of total consideration	19,845
Less cash acquired	(1,195		)
Total net consideration transferred	$	18,650

Our preliminary measurement of assets acquired, liabilities assumed and noncontrolling interests as of the Closing Date and measurement period adjustments recorded since the Closing Date through April 3, 2020, are as follows:



	Preliminary Fair Value			Measurement Period Adjustments			Adjusted Fair Value
	(In millions)
Receivables	$	849		$	(20	)	$	829
Contract assets	1,708			(56		)	1,652
Inventories	1,056			(74		)	982
Other current assets	517			(26		)	491
Property, plant and equipment	1,176			42			1,218
Operating lease right-of-use assets	704			—			704
Goodwill	15,423			(585		)	14,838
Other intangible assets	6,768			1,206			7,974
Other non-current assets	327			(9		)	318
Total assets acquired	$	28,528		$	478		$	29,006

Accounts payable	$	898		$	(17	)	$	881
Contract liabilities	722			2			724
Other current liabilities	772			199			971
Operating lease liabilities	715			—			715
Defined benefit plans	1,411			—			1,411
Long-term debt, net	3,548			—			3,548
Other long-term liabilities	1,661			290			1,951
Total liabilities assumed	9,727			474			10,201
Net assets acquired	18,801			4			18,805
Noncontrolling interests	(151		)	(4		)	(155		)
Total net consideration transferred	$	18,650		$	—		$	18,650

Due to the timing of the L3Harris Merger relative to its size and complexity, certain aspects of our accounting for the L3Harris Merger remain preliminary, including the acquisition-date fair value of identifiable intangible assets, certain tangible assets, liabilities assumed (including environmental reserves), and tax-related items. Amounts recorded associated with these assets and liabilities are based on preliminary calculations and our estimates and assumptions are subject to change as we obtain additional information during the measurement period (up to one year from the Closing Date). As of April 3, 2020, we have completed our determination of the fair value of consideration transferred, property, plant and equipment, defined benefit plan liabilities and long-term debt assumed.

Additionally, we acquired certain off-market customer contracts in connection with the L3Harris Merger, and 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 estimated acquisition-date fair value of the off-market components is a net liability of $103 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 deviate from the terms that a market participant could have achieved on 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 $23 million of revenue in the quarter ended April 3, 2020 for amortization of net off-market contract liabilities (including the cumulative effect of amortization that would have been recognized 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: $28 million in the remainder of 2020, $12 million in 2021, $9 million in 2022, $7 million in 2023 and $5 million in 2024.

The goodwill resulting from the L3Harris Merger was primarily associated with L3’s market presence and leading positions, growth opportunities in the markets in which L3 businesses operate, experienced work force and established operating infrastructures. Most of the goodwill related to the L3Harris Merger is nondeductible for tax purposes.

See Note K — Goodwill and Other Intangible Assets in these Notes for more information regarding the preliminary allocation of goodwill by business segment.

The following table provides further detail of the fair value and weighted-average amortization period of identified intangible assets acquired by major intangible asset class:



	Weighted Average Amortization Period	Total

	(In years)	(In millions)
Identifiable intangible assets acquired:
Customer relationships (Government)	15	$	4,769
Customer relationships (Commercial)	15	648
Trade names — Divisions	9	123
Developed technology	7	562
Total identifiable intangible assets subject to amortization	14	6,102
Trade names — Corporate	indefinite	1,803
In-process research and development	n/a	69
Total identifiable intangible assets		$	7,974

During the quarter ended April 3, 2020, we recorded $46 million of L3Harris Merger-related charges, consisting of integration and other costs as follows:


•	$15 million of additional cost of sales related to the fair value step-up in inventory sold; and


•	$31 million of integration costs, recognized as incurred.

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. Integration costs were recorded in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited).

Pro Forma Results

The following summary, prepared on a pro forma basis, presents our unaudited consolidated results of operations for the quarter ended March 29, 2019 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 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.



	March 29, 2019

	(In millions)
Revenue from product sales and services — as reported	$	1,728
Revenue from product sales and services — pro forma	$	4,386
Income from continuing operations — as reported	$	243
Income from continuing operations — pro forma	$	400

Note C — Business Divestitures and Assets Sales

Airport security and automation business. On February 4, 2020, we entered into a definitive agreement to sell the airport security and automation business to Leidos, Inc. for $1 billion in cash, subject to customary purchase price adjustments as set forth in the definitive agreement. The airport security and automation business, which is reported as part of our Aviation Systems segment, 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 assets and liabilities of the airport security and automation business were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at April 3, 2020. On May 4, 2020, following the close of the first quarter of fiscal 2020, we completed the sale of the airport security and automation business. We expect to use the net cash proceeds from the sale for general corporate purposes and potential repurchases of shares of our common stock.

Because the then pending divestiture of the airport security and automation business represented the disposal of a portion of a reporting unit within our Aviation Systems segment, we assigned $588 million of goodwill to the airport security and automation business disposal group on a relative fair value basis during the first quarter of fiscal 2020, when the held for sale criteria were met. The fair value of the airport security and automation business disposal group was determined based on the negotiated selling price, and the fair value of the retained businesses of the reporting unit was determined based on a

combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions, and projected discounted cash flows. These fair value determinations are categorized as Level 3 in the fair value hierarchy due to their use of internal projections and unobservable measurement inputs. See Note 1: Significant Accounting Policies in the Notes to Consolidated Financial Statements in our Fiscal Transition Period Form 10-KT for additional information regarding the fair value hierarchy.

In conjunction with the allocation of goodwill to the airport security and automation business, we tested goodwill assigned to the disposal group and goodwill allocated 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 as of April 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. See Note K — Goodwill and Other Intangible Assets in these Notes for additional information regarding goodwill impairment charges.

The carrying amounts of the major classes of assets and liabilities of the airport security and automation business classified as held for sale at April 3, 2020 are as follows:



	April 3, 2020

	(In millions)
Receivables	$	75
Contract assets	75
Inventories	136
Other current assets	11
Property, plant and equipment	39
Goodwill	588
Other intangible assets	203
Other assets	19
Assets of disposal group held for sale	$	1,146

Accounts payable	$	82
Contract liabilities	34
Other accrued items	24
Other non-current liabilities	33
Deferred taxes	22
Liabilities of disposal group held for sale	$	195

The airport security and automation business had net income before income taxes of $12 million for the quarter ended April 3, 2020.

EOTech business. On March 20, 2020, we entered into a definitive agreement to sell our EOTech business for $42 million, subject to customary purchase price adjustments and customary closing conditions as set forth in the definitive agreement. The EOTech business, which is reported as part of our Communication Systems segment, manufactures holographic sighting systems, magnified field optics and accessories for military, law enforcement and commercial markets around the world. The assets and liabilities of the EOTech business were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at April 3, 2020. We expect to complete the sale of the EOTech business in mid-2020.

Because the pending divestiture of the EOTech business represented the disposal of a portion of a reporting unit within our Communication Systems segment, we assigned $9 million of goodwill to the EOTech business disposal group on a relative fair value basis during the first quarter of fiscal 2020, when the held for sale criteria were met. The fair value of the EOTech business disposal group was determined based on the negotiated selling price, and the fair value of the retained businesses of the reporting unit was determined based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions, and projected discounted cash flows. These fair value determinations are categorized as Level 3 in the fair value hierarchy due to their use of internal projections and unobservable measurement inputs. See Note 1: “Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Fiscal Transition Period Form 10-KT for additional information regarding the fair value hierarchy.

In conjunction with the assignment of goodwill to the EOTech business, 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.

The carrying amounts of the major classes of assets and liabilities of the EOTech business classified as held for sale at April 3, 2020 are as follows:



	April 3, 2020

	(In millions)
Receivables	$	10
Inventories	12
Property, plant and equipment	3
Goodwill	9
Other intangible assets	12
Other assets	2
Assets of disposal group held for sale	$	48

Accounts payable	$	4
Contract liabilities	1
Other accrued items	3
Liabilities of disposal group held for sale	$	8

Applied Kilovolts and Analytical Instrumentation business. On February 19, 2020, we entered into a definitive agreement to sell our Applied Kilovolts and Analytical Instrumentation business, which is reported as part of our Space and Airborne Systems segment, subject to customary closing conditions as set forth in the definitive agreement. The carrying amounts of Applied Kilovolts and Analytical Instrumentation business assets and liabilities classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at April 3, 2020 were $14 million and $1 million, respectively. We expect to complete the sale transaction of the Applied Kilovolts and Analytical Instrumentation business in mid-2020.

We assigned $2 million of goodwill to the Applied Kilovolts and Analytical Instrumentation 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 concluded that goodwill related to the Applied Kilovolts and Analytical Instrumentation business was impaired and 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 quarter ended April 3, 2020.

Harris Night Vision. On September 13, 2019, we completed the sale of the Harris Night Vision business, a global supplier of high-performance, vision-enhancing products for U.S. and allied military and security forces and commercial customers, for $350 million (net cash proceeds of $346 million after selling costs and estimated purchase price adjustments), subject to final customary purchase price adjustments pursuant to a definitive agreement we entered into on April 4, 2019 as part of the regulatory process in connection with the L3Harris Merger and recognized a pre-tax gain of $229 million.

Through fiscal 2019, the Harris Night Vision business was reported as part of our former Communication Systems segment. As a result of the then-pending divestiture, the Harris Night Vision business was not included in any of our new business segments and, consequently, the operating results of the business are included in “Other non-reportable business segments” for the quarters ended April 3, 2020 and March 29, 2019 in this Report. Income before income taxes for the Harris Night Vision business was $6 million for the quarter ended March 29, 2019.

Note D — Stock Options and Other Share-Based Compensation

As of April 3, 2020, we had options or other share-based compensation outstanding under two Harris shareholder-approved stock incentive plans (“SIPs”), the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010) and the Harris Corporation 2015 Equity Incentive Plan (the “2015 EIP”), as well as under employee stock incentive plans of L3 assumed by L3Harris (collectively, “L3Harris SIPs”).

The compensation cost related to our share-based awards that was charged against income was $17 million and $14 million for the quarters ended April 3, 2020 and March 29, 2019, respectively.

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 450,183 and 147,176 for the quarters ended April 3, 2020 and March 29, 2019, respectively.

Awards granted to participants under L3Harris SIPs during the quarter ended April 3, 2020 consisted of 206,366 restricted stock units, 583,200 stock options and 203,606 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 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

During the quarter ended April 3, 2020, we did not record any restructuring charges in connection with the L3Harris Merger. At April 3, 2020, we had recorded liabilities of $38 million associated with previous L3Harris Merger-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 $7 million remained outstanding at April 3, 2020.

During the quarter ended April 3, 2020, we recorded $3 million of restructuring charges for workforce reductions (including severance and other employee-related exit costs) within our Aviation Systems business segment associated with the COVID-19-related downturn in the Commercial Aviation Solutions sector and its impact on customer operations. The corresponding $3 million liability remained outstanding at April 3, 2020.

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 quarter ended April 3, 2020 were as follows:



	Employee severance-related costs			Facilities consolidation and other exit costs		Total

	(In millions)
Balance at January 3, 2020	$	58		$	7	$	65
Additional provisions	3			—		3
Payments	(20		)	—		(20		)
Balance at April 3, 2020	$	41		$	7	$	48

Note F — Accumulated Other Comprehensive Income (Loss) (“AOCI”)

The components of AOCI are summarized below:



	Foreign currency translation			Net unrealized (losses) gains on hedging derivatives			Unrecognized postretirement obligations			Total AOCI

	(In millions)
Balance at January 3, 2020	$	(81	)	$	(55	)	$	(372	)	$	(508	)
Other comprehensive loss, before income taxes	(67		)	(98		)	(1		)	(166		)
Income taxes	—			25			—			25
Other comprehensive loss	(67		)	(73		)	(1		)	(141		)
Amounts reclassified to earnings from AOCI, before income taxes	—			3			(5		)	(2		)
Income taxes	—			(1		)	1			—
Amounts reclassified to earnings from AOCI	—			2			(4		)	(2		)
Balance at April 3, 2020	$	(148	)	$	(126	)	$	(377	)	$	(651	)

Balance at December 28, 2018	$	(107	)	$	(19	)	$	(85	)	$	(211	)
Other comprehensive income (loss), before income taxes	3			(11		)	(2		)	(10		)
Income taxes	—			3			1			4
Other comprehensive income (loss)	3			(8		)	(1		)	(6		)
Balance at March 29, 2019	$	(104	)	$	(27	)	$	(86	)	$	(217	)

Note G — Receivables

Receivables are summarized below:



	April 3, 2020			January 3, 2020

	(In millions)
Accounts receivable	$	1,312		$	1,228
Less allowance for credit losses	(34		)	(12		)
	$	1,278		$	1,216

In the quarter ended April 3, 2020, we recorded a $10 million charge to our provision for doubtful accounts at our Aviation Systems business segment to reflect an increase in expected credit losses associated with the COVID-19-related downturn in the Commercial Aviation Solutions sector and its impact on customer operations.

We have a receivables sale agreement (“RSA”) with a third-party financial institution that permits us to sell, on a non-recourse basis, up to $100 million of outstanding receivables at any given time. From time to time, we have sold certain customer receivables under the RSA, which we continue to service and collect on behalf of the third-party financial institution and which we account for as sales of receivables with sale proceeds included in net cash from operating activities. Outstanding accounts receivable sold pursuant to the RSA were not material at April 3, 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 quarter ended April 3, 2020 were impacted by reclassifications to assets and liabilities of disposal group held for sale, a decrease in the receipt of advance payments, the timing of contractual billing milestones and the impairment loss described below. See Note C — Business Divestitures and Assets Sales in the Notes for additional information regarding assets and liabilities held for sale.

Contract assets and contract liabilities are summarized below:



	April 3, 2020			January 3, 2020

	(In millions)
Contract assets	$	2,467		$	2,459
Contract liabilities, current	(1,138		)	(1,214		)
Contract liabilities, non-current⁽¹⁾	(74		)	(87		)
Net contract assets	$	1,255		$	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:



	April 3, 2020			January 3, 2020

	(In millions)
Unbilled contract receivables, gross	$	3,781		$	3,690
Progress payments and advances	(1,314		)	(1,231		)
	$	2,467		$	2,459

We recorded impairment losses of $13 million at our Aviation Systems segment to reflect an increase in expected credit losses associated with the COVID-19-related downturn in the Commercial Aviation Solutions sector and its impact on customer operations. Impairment losses related to our contract assets were not material for the quarter ended March 29, 2019. For the quarter ended April 3, 2020, we recognized as revenue $484 million of contract liabilities that were outstanding at January 3, 2020. For the quarter ended March 29, 2019, we recognized as revenue $52 million of contract liabilities that were outstanding at June 29, 2018.

Note I — Inventories

Inventories are summarized below:



	April 3, 2020		January 3, 2020

	(In millions)
Finished products	$	197	$	216
Work in process	307		386
Raw materials and supplies	486		617
	$	990	$	1,219

Note J — Property, Plant and Equipment

Property, plant and equipment are summarized below:



	April 3, 2020			January 3, 2020

	(In millions)
Land	$	90		$	90
Software capitalized for internal use	333			287
Buildings	1,044			1,073
Machinery and equipment	2,120			2,194
	3,587			3,644
Less accumulated depreciation and amortization	(1,555		)	(1,527		)
	$	2,032		$	2,117

Depreciation and amortization expense related to property, plant and equipment was $76 million and $34 million for the quarters ended April 3, 2020 and March 29, 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. Because our accounting for the L3Harris Merger is still preliminary, we assigned goodwill acquired on a provisional basis. Immediately before and after our goodwill assignments, we completed an assessment of any potential goodwill impairment under our former and new segment reporting structure and determined that no impairment existed.

The assignment of goodwill by business segment, and changes in the carrying amount of goodwill for the quarter ended April 3, 2020, were as follows:



	Integrated Mission Systems			Space and Airborne Systems			Communication Systems			Aviation Systems			Total

	(In millions)
Balance at January 3, 2020	$	5,768		$	5,131		$	4,243		$	4,859		$	20,001
Decrease from reclassification to assets of disposal group held for sale⁽¹⁾	—			(2		)	(9		)	(588		)	(599		)
Impairment of goodwill	—			(5		)	—			(296		)	(301		)
Currency translation adjustments	(2		)	(9		)	(3		)	(10		)	(24		)
Other (including adjustments to previously estimated fair value of assets acquired and liabilities assumed)	22			55			38			73			188
Balance at April 3, 2020	$	5,788		$	5,170		$	4,269		$	4,038		$	19,265

_______________


(1)	During the quarter ended April 3, 2020, we assigned $599 million of goodwill to “Assets of disposal groups held for sale” in our Condensed Consolidated Balance Sheet (Unaudited) associated with three pending divestitures. See Note C — Business Divestitures and Assets Sales in these Notes for additional information.

Impairment of Goodwill. 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 due to the COVID-19 pandemic and its impact on global air traffic and customer operations, which resulted in a decrease in the fiscal 2020 outlook for the reporting unit. Consequently, in connection with the preparation of our financial statements for the quarter ended April 3, 2020, we performed an interim goodwill impairment test. 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. As a result of this impairment test, we concluded that goodwill related to our Commercial Aviation Solutions reporting unit was impaired as of April 3, 2020 and recorded a non-cash impairment charge of $296 million (including $28 million attributable to noncontrolling interests) in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the quarter ended April 3, 2020. The goodwill impairment charge is primarily not deductible for tax purposes.

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 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 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 test of goodwill related to our Commercial Aviation Solutions reporting unit, we also performed a recoverability test 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 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 as of April 3, 2020.

Intangible assets are summarized below:



	April 3, 2020						January 3, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(In millions)
Customer relationships	$	6,454	$	769	$	5,685	$	6,518	$	653	$	5,865
Developed technologies	689		194		495		768		183		585
Trade names	139		36		103		165		35		130
Other	32		16		16		10		4		6
Total intangible assets subject to amortization	7,314		1,015		6,299		7,461		875		6,586
In process research and development	69		—		69		69		—		69
L3 trade name	1,803		—		1,803		1,803		—		1,803
Total intangibles assets	$	9,186	$	1,015	$	8,171	$	9,333	$	875	$	8,458

For the quarter ended April 3, 2020, amortization expense related to intangible assets was $158 million and primarily related to the L3Harris Merger. For the quarter ended March 29, 2019, amortization expense related to intangible assets was $29 million and primarily related to our acquisition of Exelis Inc. in the fourth quarter of fiscal 2015.

Future estimated amortization expense for intangible assets is as follows:



	(In millions)
Year 1	$	554
Year 2	622
Year 3	604
Year 4	580
Year 5	551
Thereafter	3,388
Total	$	6,299

Note L — Accrued Warranties

Our liability for standard product warranties is included as a component of the “Other accrued items” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited). Changes in our liability for standard product warranties during the quarter ended April 3, 2020 were as follows:



	(In millions)
Balance at January 3, 2020	$	112
Adjustments to previously estimated fair value of warranty liabilities assumed	19
Decrease from reclassification to liabilities of disposal group held for sale	(8		)
Accruals for product warranties issued during the period	17
Settlements made during the period	(21		)
Other, including foreign currency translation adjustments	(2		)
Balance at April 3, 2020	$	117

Note M — Debt

Long-term debt is summarized below:



	April 3, 2020			January 3, 2020

	(In millions)
Variable-rate debt:
Floating rate notes, due April 30, 2020	$	250		$	250
Floating rate notes, due March 10, 2023	250			—
Total variable-rate debt	500			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
7.0% 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
2.900% 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
Other	48			49
Total fixed-rate debt	6,574			6,575
Total debt	7,074			6,825
Plus: unamortized bond premium	145			154
Less: unamortized discounts and issuance costs	(29		)	(28		)
Total debt, net	7,190			6,951
Less: current portion of long-term debt, net	(896		)	(257		)
Total long-term debt, net	$	6,294		$	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 Issued in the Quarter Ended April 3, 2020

On March 13, 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 rate 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. Following the end of the quarter, we used the net proceeds from the sale of the Floating Rate Notes 2023, together with cash on hand, to repay at maturity the aggregate principal amount of our Floating Rate Notes due April 30, 2020 and for general corporate purposes.

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 principal amount of new notes issued by L3Harris (“New L3Harris Notes) and (2) one dollar in cash for each $1,000 of principal amount. Each series of the New L3Harris Notes issued has an interest rate and maturity date that is identical to the L3 Notes.



	Aggregate Principal Amount of L3 Notes (prior to debt exchange)		Aggregate Principal Amount of New L3Harris Notes Issued		Aggregate Principal Amount of Remaining L3 Notes

	(In millions)
4.95% notes due February 15, 2021 (“4.95% 2021 Notes”)	$	650	$	501	$	149
3.85% notes due June 15, 2023 (“3.85% 2023 Notes”)	800		741		59
3.95% notes due May 28, 2024 (“3.95% 2024 Notes”)	350		326		24
3.85% notes due December 15, 2026 (“3.85% 2026 Notes”)	550		535		15
4.40% notes due June 15, 2028 (“4.40% 2028 Notes”)	1,000		918		82
Total	$	3,350	$	3,021	$	329

On March 31, 2020, we commenced offers to eligible holders (“Exchange Offers”) to exchange any and all outstanding 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 notes previously issued by L3 in connection with the L3Harris Merger.

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 additional 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.

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 April 3, 2020
	Pension			Other Benefits

	(In millions)
Net periodic benefit income
Service cost	$	16		$	—
Interest cost	69			2
Expected return on plan assets	(158		)	(5		)
Amortization of net actuarial loss	2			—
Amortization of prior service credit	(7		)	—
Contractual termination benefits⁽¹⁾	1			—
Net periodic benefit income	$	(77	)	$	(3	)

_______________


(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.



	Quarter Ended March 29, 2019
	Pension			Other Benefits

	(In millions)
Net periodic benefit income
Service cost	$	9		$	1
Interest cost	52			2
Expected return on plan assets	(95		)	(4		)
Amortization of net actuarial gain	—			(2		)
Net periodic benefit income	$	(34	)	$	(3	)

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 made a $302 million voluntary contribution to our U.S. qualified defined benefit pension plans during the quarter ended September 27, 2019. As a result of this voluntary contribution, as well as $700 million of voluntary contributions made in fiscal 2018 and 2017, we made no contributions to our U.S. qualified defined benefit pension plans during the quarter ended April 3, 2020, and we currently anticipate making no contributions to our U.S. qualified defined benefit pension plans during the remainder of fiscal 2020 and minor contributions to our non-U.S. pension plans during the remainder of fiscal 2020. During the quarter ended March 29, 2019, we made no contributions to our U.S. qualified defined benefit pension plans and minor contributions to our non-U.S. pension plans.

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 Ended
	April 3, 2020		March 29, 2019

	(In millions, except per share amounts)
Income from continuing operations	$	218	$	243
Adjustments for participating securities outstanding	—		(1		)
Income from continuing operations used in per basic and diluted common share calculations (A)	$	218	$	242

Basic weighted average common shares outstanding (B)	217.3		117.9
Impact of dilutive share-based awards	2.0		2.4
Diluted weighted average common shares outstanding (C)	219.3		120.3
Income from continuing operations per basic common share (A)/(B)	$	1.00	$	2.06
Income from continuing operations per diluted common share (A)/(C)	$	0.99	$	2.02

Potential dilutive common shares primarily consist of employee stock options and restricted and performance unit awards. Income from continuing operations per diluted common share excludes the anti-dilutive impact of 963,402 and 265,652 weighted average share-based awards outstanding for the quarters ended April 3, 2020 and March 29, 2019, respectively.

Note P — Non-Operating Income

The components of non-operating income were as follows:



	Quarter Ended
	April 3, 2020			March 29, 2019
	(In millions)
Pension adjustment⁽¹⁾	$	97		$	47
Other	(2		)	(1		)
	$	95		$	46

_______________


(1)	Pension adjustment recorded as “Non-operating income” 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 11.8 percent in the quarter ended April 3, 2020 compared with 14.1 percent in the quarter ended March 29, 2019. In the quarter ended April 3, 2020, our effective tax rate benefited from the favorable impact of excess tax benefits related to equity-based compensation, research and development (“R&D”) credits and the favorable impact of audit settlements, partially offset by a valuation allowance increase on international credits and the unfavorable impact of non-deductible goodwill impairment charges. In the quarter ended March 29, 2019, our effective tax rate benefited from the favorable impact of excess tax benefits related to equity-based compensation and from 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.

The following table presents assets and liabilities measured at fair value on a recurring basis (at least annually) at April 3, 2020 and January 3, 2020:



	April 3, 2020						January 3, 2020
	Total		Level 1		Level 2		Total		Level 1		Level 2

	(In millions)
Assets
Deferred compensation plan assets:⁽¹⁾
Equity and fixed income securities	$	49	$	49	$	—	$	58	$	58	$	—
Investments measured at NAV:
Corporate-owned life insurance	27						29
Total fair value of deferred compensation plan assets	$	76	$	49	$	—	$	87	$	58	$	—
Derivatives (foreign currency forward contracts)	11		—		11		10		—		10
Total assets measured at fair value	$	87	$	49	$	11	$	97	$	58	$	10

Liabilities
Deferred compensation plan liabilities:⁽²⁾
Equity securities and mutual funds	$	2	$	2	$	—	$	2	$	2	$	—
Investments measured at NAV:
Common/collective trusts and guaranteed investment contracts	61						69
Total fair value of deferred compensation plan liabilities	$	63	$	2	$	—	$	71	$	2	$	—
Derivatives (foreign currency forward contracts)	27		—		27		8		—		8
Derivatives (treasury lock contracts)	135		—		135		56		—		56
Total liabilities measured at fair value	$	225	$	2	$	162	$	135	$	2	$	64

_______________


(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):



	April 3, 2020				January 3, 2020
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

	(In millions)
Long-term debt (including current portion)⁽¹⁾	$	7,190	$	7,485	$	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.

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 April 3, 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 ended April 3, 2020 or in the quarter ended March 29, 2019. In addition, no amounts were recognized in earnings in the quarter ended April 3, 2020 or in the quarter ended March 29, 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 intersegment transactions. These derivatives are used to hedge currency exposures from cash flows anticipated across our business segments. We also hedge U.S. Dollar payments to suppliers to maintain our anticipated profit margins in our international operations. These derivatives have only nominal intrinsic value at the time of purchase and have a high degree of correlation to the anticipated cash flows they are designated to hedge. Hedge effectiveness is determined by the correlation of the anticipated cash flows from the hedging instruments and the anticipated cash flows from the future foreign currency commitments through the maturity dates of the derivatives used to hedge these cash flows. These financial instruments are marked-to-market using forward prices and fair value quotes with the offset to other comprehensive income. Gains and losses in 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 April 3, 2020, we had open foreign currency forward contracts with an aggregate notional amount of $561 million denominated in Canadian Dollars, British Pounds, Euro, New Zealand Dollars and Australian Dollars to hedge certain forecasted transactions.

At April 3, 2020, our foreign currency forward contracts had maturities through 2024.

The table below presents the fair values of our derivatives designated as foreign currency hedging instruments in our Condensed Consolidated Balance Sheet (Unaudited) at April 3, 2020 and January 3, 2020:



	April 3, 2020		January 3, 2020

	(In millions)
Derivatives designated as hedging instruments:
Foreign currency forward contracts⁽¹⁾
Other current assets	$	8	$	8
Other non-current assets	3		2
Other accrued items	21		6
Other long-term liabilities	6		2

_______________


(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.

During the quarter ended April 3, 2020, we recognized a net unrealized loss of $16 million before income taxes in other comprehensive loss from foreign currency derivatives designated as cash flow hedges. During the quarter ended March 29, 2019, the net unrealized gain or loss recognized in other comprehensive income from foreign currency derivatives designated as cash flow hedges was not material.

During the quarters ended April 3, 2020 and March 29, 2019, the net gain or loss reclassified from AOCI into earnings from foreign currency derivatives designated as cash flow hedges was not material. 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 “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited).

At April 3, 2020, the estimated amount of existing losses to be reclassified into earnings within the next twelve months was $12 million before income taxes.

Interest-Rate Risk — Cash Flow Hedges

At April 3, 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, which we expect to occur before the date of maturity 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 April 3, 2020, the combined fair value of these treasury locks was a liability of $135 million, which is included in the “Other expenses and accruals” 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 $75 million and $16 million at April 3, 2020 and January 3, 2020, respectively.

Net gains or losses from cash flow hedges recognized in earnings were not material for the quarters ended April 3, 2020 or March 29, 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.

Net EAC adjustments resulting from changes in estimates increased our operating income by $103 million ($78 million after-tax or $.35 per diluted share) and increased our operating income by $6 million ($4 million after-tax or $.03 per diluted share) for the quarters ended April 3, 2020 and March 29, 2019, respectively. Revenue recognized from performance obligations satisfied in prior periods was $136 million and $18 million for the quarters ended April 3, 2020 and March 29, 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 April 3, 2020, our ending backlog was $20.4 billion. We expect to recognize approximately 50 percent of the revenue associated with this backlog within the next twelve months and the substantial majority of the revenue associated with this backlog within the next three years. At January 3, 2020, our ending backlog was $20.6 billion, at which time we expected to recognize approximately 60 percent of the revenue associated with this backlog within the next twelve months and the substantial majority of the revenue associated with this backlog within the next three years.

Note V — Business Segment Information

We adjusted our segment reporting due to the L3Harris Merger to reflect our new organizational structure announced July 1, 2019. We structure our operations primarily around the products and services we sell and the markets we serve, and effective June 29, 2019, we report the financial results of our operations in the following four operating segments, which are also our reportable segments and are referred to as our business segments:


•	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; security, detection and other commercial aviation products; commercial and military pilot training; and mission networks for air traffic management.

The historical results, discussion and presentation of our business segments as set forth in this Report reflect the impact of these adjustments for all periods presented. There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting from these adjustments. As noted in Note C — Business Divestitures and Assets Sales and elsewhere in these Notes, on May 4, 2020, following the close of the first quarter of fiscal 2020, we completed the sale of the airport security and automation business, which provided security and detection products, among others, as part of our Aviation Systems segment.

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. Intersegment sales are generally transferred at cost to the buying segment, and the sourcing segment may recognize a profit that is eliminated. The “Corporate eliminations” line item in the table below represents the elimination of intersegment sales. Corporate expenses are allocated to our operating segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. The “Pension adjustment” line item in the table below represents the reconciliation of the non-service components of net periodic pension and postretirement benefit costs, which are a component of segment operating income but are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited). The non-service components of net periodic pension and postretirement benefit costs include interest cost, expected return on plan assets and amortization of net actuarial gain or loss.

Segment revenue, segment operating income (loss) and a reconciliation of segment operating income to total income from continuing operations before income taxes are as follows:



	Quarter Ended
	April 3, 2020			March 29, 2019

	(In millions)
Revenue
Integrated Mission Systems	$	1,370		$	14
Space and Airborne Systems	1,192			956
Communication Systems	1,094			580
Aviation Systems	1,011			144
Other non-reportable business segments⁽¹⁾	—			35
Corporate eliminations	(41		)	(1		)
	$	4,626		$	1,728
Income From Continuing Operations Before Income Taxes
Segment Operating Income (Loss):
Integrated Mission Systems	$	201		$	3
Space and Airborne Systems	221			174
Communication Systems	250			167
Aviation Systems	(177		)	17
Other non-reportable business segments⁽¹⁾	—			6
Unallocated corporate expenses⁽²⁾	(33		)	—
L3Harris Merger-related transaction and integration expenses	(31		)	(16		)
Amortization of acquisition-related intangibles⁽³⁾	(145		)	(25		)
Pension adjustment	(97		)	(47		)
Non-operating income	95			46
Net interest expense	(63		)	(42		)
Total	$	221		$	283

_______________


(1)	Includes the operating results of the Harris Night Vision business prior to the date of divestiture on September 13, 2019. See Note C — Business Divestitures and Assets Sales in these Notes for more information.

(2)

Includes: (i) $15 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 $5 million non-cash goodwill impairment charge related to the pending divestiture of our Applied Kilovolts and Analytical Instrumentation business; and (iii) $3 million of divestiture expenses for the quarter ended April 3, 2020.

(3)

Includes $120 million of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger for the quarter ended April 3, 2020 and $25 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis Inc. for each of the quarters ended April 3, 2020 and March 29, 2019. 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.

Disaggregation of Revenue

Integrated Mission Systems: Integrated Mission Systems revenue is primarily derived from U.S. Government development and production contracts and is generally recognized over time using the POC cost-to-cost revenue recognition method. We disaggregate Integrated Mission Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Integrated Mission Systems revenue and cash flows are affected by economic factors:



	Quarter Ended
	April 3, 2020		March 29, 2019

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	949	$	8
Subcontractor	421		6
	$	1,370	$	14
Revenue By Contract Type
Fixed-price⁽¹⁾	$	1,025	$	14
Cost-reimbursable	345		—
	$	1,370	$	14
Revenue By Geographical Region
United States	$	1,105	$	9
International	265		5
	$	1,370	$	14

_______________

(1) Includes revenue derived from time-and-materials contracts.

Space and Airborne Systems: Space and Airborne Systems revenue is primarily derived from U.S. Government development and production contracts and is generally recognized over time using the POC cost-to-cost revenue recognition method. We disaggregate Space and Airborne Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Space and Airborne Systems revenue

and cash flows are affected by economic factors:



	Quarter Ended
	April 3, 2020		March 29, 2019

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	658	$	572
Subcontractor	534		384
	$	1,192	$	956
Revenue By Contract Type
Fixed-price⁽¹⁾	$	670	$	531
Cost-reimbursable	522		425
	$	1,192	$	956
Revenue By Geographical Region
United States	$	1,003	$	846
International	189		110
	$	1,192	$	956

_______________

(1) Includes revenue derived from time-and-materials contracts.

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. We disaggregate Communication Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Communication Systems revenue and cash flows are affected by economic factors:



	Quarter Ended
	April 3, 2020		March 29, 2019

	(In millions)
Revenue By Customer Relationship⁽¹⁾
Prime contractor	$	740
Subcontractor	354
	$	1,094
Revenue By Contract Type⁽¹⁾
Fixed-price⁽²⁾	$	918
Cost-reimbursable	176
	$	1,094
Revenue by Geographical Region
United States	$	834	$	347
International	260		233
	$	1,094	$	580

______________

(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. We disaggregate Aviation Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Aviation Systems revenue and cash flows are affected by economic factors:



	Quarter Ended
	April 3, 2020		March 29, 2019

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	664	$	140
Subcontractor	347		4
	$	1,011	$	144
Revenue By Contract Type
Fixed-price⁽¹⁾	$	841	$	122
Cost-reimbursable	170		22
	$	1,011	$	144
Revenue By Geographical Region
United States	$	749	$	143
International	262		1
	$	1,011	$	144

______________

(1) Includes revenue derived from time-and-materials contracts.

Total assets by business segment are summarized below:



	April 3, 2020		January 3, 2020

	(In millions)
Total Assets
Integrated Mission Systems	$	7,999	$	7,896
Space and Airborne Systems	6,948		6,829
Communication Systems	5,928		5,930
Aviation Systems	7,423		7,569
Corporate⁽¹⁾	9,807		10,112
	$	38,105	$	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 April 3, 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 April 3, 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 April 3, 2020 are reserved against or would not have a material adverse effect on our financial condition, results of operations or cash flows.

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 April 3, 2020 are reserved against, covered by insurance or would not have a material adverse effect on our financial condition, results of operations or cash flows.

Note X — Subsequent Events

Airport security and automation business divestiture

On May 4, 2020, we completed the sale of the airport security and automation business for net cash proceeds of approximately $1 billion, before estimated transaction expenses and estimated adjustments in respect of net cash and working capital, and subject to post-closing finalization of those adjustments as set forth in the definitive sale agreement. We expect to use the net cash proceeds from the sale for general corporate purposes and potential repurchases of shares of our common stock.

Debt exchange

As described in more detail in Note M — Debt in these Notes, the Exchange Offers (to exchange any or all New L3Harris Notes that had been issued pursuant to an exemption from the registration requirements of the Securities Act for an equal principal amount of new notes registered under the Securities Act) 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.

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 April 3, 2020, the related condensed consolidated statements of income, comprehensive income, cash flows and equity for the quarters ended April 3, 2020 and March 29, 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

May 7, 2020

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

In March 2020, the widespread outbreak of the novel COVID-19 strain of coronavirus (“COVID-19”) was recognized as a pandemic by the World Health Organization (“WHO”) and declared a national emergency by the U.S. Government. The COVID-19 pandemic and attempts to contain it, such as mandatory closures, “shelter-in-place” orders and travel restrictions, have caused significant disruptions and adverse effects on U.S. and global economies, including impacts to supply chains, customer demand, international trade and capital markets. In response, we have increased our focus on keeping our employees safe while continuing to strive to meet customer commitments and support suppliers. For example, we have instituted work-from-home (for employees who are able to work remotely) and social distancing arrangements; canceled travel and external events; worked to procure personal protective equipment (“PPE”); initiated health screening procedures at higher-risk facilities; staggered work shifts, redesigned work stations and implemented stringent cleaning protocols, particularly for production facilities; maintained an active dialog with key suppliers and developed plans to mitigate supply chain risks; and shifted the timing of share repurchases, which bolsters liquidity in support of employees, suppliers and customers during the pandemic. The U.S. Government response 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 announce that we will accelerate more than $100 million in payments to small business suppliers in 45 states.

Although we believe that the large percentage of our revenue, earnings and cash flows 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 Commercial Aviation Solutions sector within our Aviation Systems segment. As a result, we have temporarily closed some of our flight training facilities in Europe and several other locations and also have recognized $330 million of charges for impairment of goodwill and other assets and other COVID-19-related impacts in the first quarter of 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 actions taken by the U.S. Government, state and local government officials and international governments, and consequences thereof, and global air traffic demand, 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.

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, for the periods presented in our Condensed Consolidated Financial Statements (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 and cash flows.


•	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. The historical results, discussion and presentation of our business segments as set forth in this MD&A 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.

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 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; security, detection and other commercial aviation products; commercial and military pilot training; and mission networks for air traffic management.

On February 4, 2020, we entered into a definitive agreement to sell Security & Detection Systems and MacDonald Humfrey Automation solutions (“airport security and automation business”) to Leidos, Inc. for $1 billion in cash, subject to customary purchase price adjustments as set forth in the definitive agreement. The sale transaction is conditioned on customary closing conditions, including satisfaction of regulatory requirements. The airport security and automation business, which is reported as part of our Aviation Systems segment, 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. We completed the sale of the airport security and automation business on May 4, 2020 and expect to use the proceeds from the sale for general corporate expenses and for potential repurchases of shares of our common stock.

On March 20, 2020, we entered into a definitive agreement to sell our EOTech business for $42 million, subject to customary purchase price adjustments and customary closing conditions as set forth in the definitive agreement. The EOTech business, which is reported as part of our Communications Systems segment, manufactures holographic sighting systems, magnified field optics and accessories for military, law enforcement and commercial markets around the world. We expect to complete the sale of the EOTech business in mid-2020.

As described in more detail in Note C — Business Divestitures and Assets Sales in the Notes, the assets and liabilities of the airport security and automation, EOTech and the Applied Kilovolts and Analytical Instrumentation businesses were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) as of April 3, 2020.

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 quarter ended April 3, 2020 reflects the results of the combined company, while the quarter ended March 29, 2019 reflects the results of only Harris operating businesses. Due to the significance of the L3 operating businesses included in the combined company results following the L3Harris Merger, the reported results for the quarter ended April 3, 2020 and quarter ended March 29, 2019 generally are not comparable. Therefore, to assist with a discussion of the April 3, 2020 and March 29, 2019 consolidated results of operations 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 Information” below in this MD&A).

Highlights

Consolidated operating results for the quarter ended April 3, 2020, in each case compared with the quarter ended March 29, 2019 on both an “as reported” basis (reflecting the results of only Harris operating businesses for the prior period) and a “pro forma” basis (also reflecting the results of L3 operating businesses for the prior period), included:

Consolidated — as reported


•	Revenue increased 168 percent to $4.6 billion from $1.7 billion;


•	Gross margin increased 125 percent to $1,328 million from $589 million;


•	Income from continuing operations decreased 20 percent to $195 million from $243 million; and


•	Income from continuing operations per diluted common share attributable to L3Harris Technologies, Inc. common shareholders decreased 51 percent to $0.99 from $2.02.

Consolidated — pro forma


•	Revenue increased 5 percent to $4.6 billion from $4.4 billion;


•	Gross margin increased 5 percent to $1,328 million from $1,267 million;


•	Income from continuing operations decreased 51 percent to $195 million from $400 million; and


•	Income from continuing operations per diluted common share attributable to L3Harris Technologies, Inc. common shareholders decreased 43 percent to $0.99 from $1.75.

Consolidated Results of Operations



	Quarter Ended
	April 3, 2020			March 29, 2019			% Inc/(Dec)		March 29, 2019			% Inc/(Dec)

	As Reported								Pro Forma
	(Dollars in millions, except per share amounts)
Revenue:
Integrated Mission Systems	$	1,370		$	14		*		$	1,362		1	%
Space and Airborne Systems	1,192			956			25	%	1,112			7	%
Communication Systems	1,094			580			89	%	1,041			5	%
Aviation Systems	1,011			144			*		914			11	%
Other non-reportable business segments	—			35			(100	)%	—			*
Corporate eliminations	(41		)	(1		)	*		(43		)	(5	)%
Total revenue	4,626			1,728			168	%	4,386			5	%
Cost of product sales and services	(3,298		)	(1,139		)	190	%	(3,119		)	6	%
Gross margin	1,328			589			125	%	1,267			5	%
% of total revenue	29		%	34		%			29		%
Engineering, selling and administrative expenses	(815		)	(310		)	163	%	(799		)	2	%
% of total revenue	18		%	18		%			18		%
Impairment of goodwill and other assets	(324		)	—			*		—			*
Non-operating income	95			46			107	%	55			73	%
Net interest expense	(63		)	(42		)	50	%	(67		)	(6	)%
Income from continuing operations before income taxes	221			283			(22	)%	456			(52	)%
Income taxes	(26		)	(40		)	(35	)%	(56		)	(54	)%
Effective tax rate	12		%	14		%			12		%
Income from continuing operations	195			243			(20	)%	400			(51	)%
Noncontrolling interests, net of income taxes	23			—			*		(6		)	(483	)%
Income from continuing operations attributable to L3Harris Technologies, Inc. common shareholders	$	218		$	243		(10	)%	$	394		(45	)%
% of total revenue	5		%	14		%			9		%
Income from continuing operations per diluted common share attributable to L3Harris Technologies, Inc. common shareholders	$	0.99		$	2.02		(51	)%	$	1.75		(43	)%

_______________

* Not meaningful

As Reported

Revenue

The increase in revenue for the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 was primarily due to the inclusion of $2.9 billion of revenue (net of intercompany sales eliminations) from L3 operations in operating results for the quarter ended April 3, 2020 and organic revenue growth in all four business segments.

See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.

Gross Margin

The increase in gross margin for the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 was primarily due to the inclusion of L3 operations in operating results for the quarter ended April 3, 2020. The decrease in gross margin as a percentage of revenue (“gross margin percentage”) for the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 was primarily due to a mix of program revenue and product sales with relatively lower gross margin percentage, $17 million of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger in the quarter ended April 3, 2020 and $15 million of additional cost of sales related to the fair value step-up in inventory sold in the quarter ended April 3, 2020, partially offset by productivity and integration savings.

See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.

Engineering, Selling and Administrative Expenses

The increase in Engineering, Selling and Administrative (“ESA”) expenses and comparability of ESA expense as a percentage of total revenue (“ESA percentage”) for the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 were primarily due to the inclusion of L3 operations in operating results, as well as $103 million of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger and additional charges for integration and other costs associated with the L3Harris Merger in the quarter ended April 3, 2020, partially offset by productivity and integration savings.

See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information.

Impairment of goodwill and other assets

Impairment of goodwill and other assets for the quarter ended April 3, 2020 included a $296 million non-cash goodwill impairment charge and $23 million of charges to write-down accounts receivable and contract assets in our Commercial Aviation Solutions sector due to the COVID-19-related downturn in the commercial aviation market and its impact on customer operations as well as a $5 million non-cash goodwill impairment charge recorded in connection with the pending divestiture of our Applied Kilovolts and Analytical Instrumentation business.

See Note C — Business Divestitures and Assets Sales, Note G — Receivables, Note H — Contract Assets and Contract Liabilities and Note K — Goodwill and Other Intangible Assets in the Notes for further information.

Non-Operating Income

The increase in non-operating income in the quarter ended April 3, 2020 compared with the quarter ended March 29, 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

The increase in net interest expense in the quarter ended April 3, 2020 compared with the quarter ended March 29, 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

Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 11.8 percent for the quarter ended April 3, 2020 compared with 14.1 percent for the quarter ended March 29, 2019. Our effective tax rate for the quarter ended April 3, 2020 benefited from the favorable impact of excess tax benefits related to equity-based compensation, research and development (“R&D”) credits and the favorable impact of audit settlements, partially offset by a valuation allowance increase on international credits and the unfavorable impact of non-deductible goodwill impairment charges. Our effective tax rate for the quarter ended March 29, 2019 benefited from the favorable impact of excess tax benefits related to equity-based compensation and from favorable adjustments recorded upon the filing of our Federal tax returns.

Income From Continuing Operations

The decrease in income from continuing operations for the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 was primarily due to the non-cash charges for impairment of goodwill and other assets in the quarter ended April 3, 2020 as well as the combined effects of the other reasons noted above in this “As Reported” discussion regarding the quarters ended April 3, 2020 and March 29, 2019.

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 quarter ended April 3, 2020 compared with the quarter ended March 29, 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.

See “Common Stock Repurchases” below in this MD&A for information regarding our share repurchase program.

Pro Forma

Revenue

The increase in revenue for the quarter ended April 3, 2020 compared with pro forma revenue for the quarter ended March 29, 2019 was primarily due to higher revenue in all four business segments.

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 quarter ended April 3, 2020 compared with pro forma gross margin for the quarter ended March 29, 2019 was primarily due to productivity and integration savings, partially offset by a less favorable program mix. Gross margin percentage in the quarter ended April 3, 2020 was comparable with the quarter ended March 29, 2019.

Engineering, Selling and Administrative Expenses

The increase in ESA expenses in the quarter ended April 3, 2020 compared with pro forma ESA expense for the quarter ended March 29, 2019 was primarily due to $6 million of additional charges for integration and other costs associated with the L3Harris Merger, $3 million of divestiture expenses and $3 million of COVID-19-related charges in the quarter ended April 3, 2020. ESA percentage in the quarter ended April 3, 2020 was comparable with the quarter ended March 29, 2019.

Impairment of goodwill and other assets

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 quarter ended April 3, 2020 compared with pro forma non-operating income for the quarter ended March 29, 2019 was primarily due an increase in the non-service cost components of pension and other postretirement benefit plan income.

Net Interest Expense

The decrease in net interest expense for the quarter ended April 3, 2020 compared with pro forma net interest expense for the quarter ended March 29, 2019 reflects amortization of the increase to L3’s long-term debt based on a $172 million fair value adjustment.

See “Supplemental Unaudited Pro Forma Condensed Combined Income Statement Information” below in this MD&A for further information.

Income Taxes

Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 11.8 percent for the quarter ended April 3, 2020 compared with a 12.3 percent pro forma effective tax rate for the quarter ended March 29, 2019. Our effective tax rate for the quarter ended April 3, 2020 benefited from the favorable impact of excess tax benefits related to equity-based compensation, R&D credits and the favorable impact of audit settlements, partially offset by a valuation allowance increase on international credits and the unfavorable impact of non-deductible goodwill impairment charges.

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 ended March 29, 2019.

Income From Continuing Operations

The decrease in income from continuing operations for the quarter ended April 3, 2020 compared with pro forma income from continuing operations for the quarter ended March 29, 2019 was primarily due to the non-cash charges for impairment of goodwill and other assets in the quarter ended April 3, 2020 as well as the combined effects of the reasons noted above in this “Pro Forma” discussion regarding the quarters ended April 3, 2020 and March 29, 2019.

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 quarter ended April 3, 2020 compared with pro forma income from continuing operations per diluted common share for the quarter ended March 29, 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.

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 quarter ended March 29, 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.



Unaudited Pro Forma Condensed Combined Statement of Income
For the quarter ended March 29, 2019
	Historical Harris			Historical L3			Pro Forma Adjustments			Note References	Pro Forma Combined

	(In millions, except per share amounts)
Revenue from product sales and services	$	1,728		$	2,700		$	(7	)	a	$	4,386
							(35		)	b
Cost of product sales and services	(1,139		)	(2,007		)	7			a	(3,119		)
							24			b
							(4		)	c
Engineering, selling and administrative expenses	(310		)	(382		)	5			b	(799		)
							(103		)	c
							9			d
							(2		)	e
							2			f
							(18		)	j
Merger, acquisition and divestiture related expenses	—			(18		)	18			j	—
Non-operating income	46			—			9			j	55
Interest and other income, net	—			4			9			g	—
							(13		)	j
Interest income	1			—			4			j	5
Interest expense	(43		)	(37		)	1			h	(72		)
							7			i
Income from continuing operations before income taxes	283			260			(87		)		456
Income taxes	(40		)	(37		)	21			k	(56		)
Income from continuing operations	243			223			(66		)		400
Noncontrolling interest, net of income taxes	—			(6		)	—				(6		)
Income from continuing operations attributable to common shareholders	$	243		$	217		$	(66	)		$	394

Income from continuing operations per basic common share attributable to common shareholders	$	2.06									$	1.77
Income from continuing operations per diluted common share attributable to common shareholders	$	2.02									$	1.75
Basic weighted average common shares outstanding	117.9						104.1			l	222.0
Diluted weighted average common shares outstanding	120.3						104.6			l	224.9

Notes:


a.	Reflects the elimination of intercompany balances and transactions between L3 and Harris.


b.	Reflects the sale of the Harris Night Vision business.


c.	Reflects the net increase in amortization expense related to the fair value of acquired finite-lived identifiable intangible assets and the elimination of historical amortization expense recognized by L3 for the quarter ended March 29, 2019. Assumptions and details are as follows:



	Weighted Average Amortization Period	Fair Value		Quarter ended March 29, 2019

	(In years)	(In millions)
Identifiable Intangible Assets Acquired:
Customer relationships	15	$	5,417	$	100
Trade names — Divisions	9	123		3
Adjustment to engineering, selling and administrative expenses				103
Developed technology	7	562		16
Less: L3 historical amortization				(12		)
Adjustment to cost of product sales and services				4
Total net adjustment to amortization expense				$	107


d.	Represents the elimination of transaction costs, which were included in merger, acquisition and divestiture related expenses in L3’s historical statement of operations and in engineering, selling and administrative expenses in Harris’ historical statement of income.


e.	In connection with the L3Harris Merger, on October 12, 2018, each company entered into a letter of agreement with its chief executive officer, to outline the terms of each such person’s role and compensation arrangements following the merger. Amounts shown reflect the increase in compensation expense as a result of these modified arrangements.


f.	Reflects the impact of change-in-control payments under certain post-retirement and share-based and deferred compensation arrangements.


g.	Reflects the elimination of amortization of net actuarial losses from accumulated comprehensive loss related to L3’s postretirement benefit plans as part of purchase accounting.


h.	Reflects the elimination of amortization of deferred debt issuance costs as part of purchase accounting.


i.	Reflects amortization of the increase to L3’s long-term debt based on a $172 million fair value adjustment.


j.	Certain amounts from L3’s historical statement of operations data were reclassified to conform their presentation to that of Harris. These reclassifications include:


1.	Merger, acquisition and divestiture related expenses, which were reclassified to engineering, selling and administrative expenses; and


2.	Interest and other income, net, which was reclassified to interest income.

Represents the income tax impact of the pro forma adjustments, using the blended worldwide tax rates for L3, in the case of pro forma adjustments to L3’s historical results, and the federal and state statutory tax rates for Harris, in the case of pro forma adjustments to Harris’ historical results. As a result, the combined statutory tax rate used to tax-effect the pro forma adjustments was approximately 24 percent for the quarter ended March 29, 2019. This tax rate does not represent the combined company’s effective tax rate, which will include other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company following the consummation of the L3Harris Merger.


l.	Increase in common stock due to shares of L3Harris common stock issued for L3 common stock, L3 restricted stock units and L3 performance stock units. Diluted shares also include the dilutive impact of L3Harris stock options issued for L3 stock options calculated using the treasury stock method.

Discussion of Business Segment Results of Operations

Integrated Mission Systems



	Quarter Ended
	April 3, 2020			March 29, 2019			% Inc/(Dec)	March 29, 2019			% Inc/(Dec)

	As Reported							Pro Forma
	(Dollars in millions)
Revenue	$	1,370		$	14		*	$	1,362		1	%
Segment operating income	$	201		$	3		*	$	165		22	%
% of revenue	15		%	21		%		12		%

__________

*Not meaningful

As Reported

The changes in segment revenue, operating income and operating income as a percentage of revenue (“operating margin percentage”) in the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 were primarily due to the inclusion of L3 operations in segment operating results for the quarter ended April 3, 2020. Because the Integrated Mission Systems segment is almost entirely comprised of L3 businesses, comparison to prior year segment operating metrics is not meaningful.

Pro Forma

The increase in segment revenue in the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 was primarily due to $19 million of higher revenue in Maritime, reflecting a ramp in classified programs, partially offset by lower revenue in Electro Optical.

The increases in segment operating income and operating margin percentage in the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 were primarily driven by productivity and integration savings and higher pension income, partially offset by a mix of program revenue with relatively lower operating margin percentage.

Space and Airborne Systems



	Quarter Ended
	April 3, 2020			March 29, 2019			% Inc/(Dec)		March 29, 2019			% Inc/(Dec)

	As Reported								Pro Forma
	(Dollars in millions)
Revenue	$	1,192		$	956		25	%	$	1,112		7	%
Segment operating income	$	221		$	174		27	%	$	198		12	%
% of revenue	19		%	18		%			18		%

As Reported

The increases in segment revenue, operating income and operating margin percentage in the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 were primarily due to the inclusion of L3 operations in segment operating results during the quarter ended April 3, 2020 as well as the same reasons as noted below regarding this segment on a pro forma basis.

Pro Forma

The increase in segment revenue in the quarter ended April 3, 2020 compared with the quarter ended March 29, 2019 was primarily due to $92 million of higher revenue in Mission Avionics driven by a production ramp and increased content on the F-35 platform and $28 million higher revenue from growth on classified programs in Intel and Cyber, partially offset by lower revenue in Space due to delayed ramp