# L3HARRIS TECHNOLOGIES, INC. /DE/ (LHX) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from L3HARRIS TECHNOLOGIES, INC. /DE/'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/202058/000020205822000015/hrs-20211231.htm
Accession: 0000202058-22-000015
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LHX/
All MD&A years: /company/LHX/mda/
Next year: /company/LHX/mda/fy2022/ (FY 2022)

ITEM 7. 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 for the fiscal year ended December 31, 2021 (“fiscal 2021”) compared with the fiscal year ended January 1, 2021 (“fiscal 2020”) and fiscal 2020 compared with the four quarters ended January 3, 2020. For a discussion of our results for the two quarters ended January 3, 2020 (“Fiscal Transition Period”) compared with two quarters ended December 28, 2018, see “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for fiscal 2020. 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 Consolidated Financial Statements and accompanying Notes appearing elsewhere in this Report. 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.”

The following is a list of the sections of this MD&A, together with our perspective on their contents, which we hope will assist in reading these pages:

•Business Considerations — a general description of our business; the value drivers of our business; fiscal 2021 results of operations and liquidity and capital resources key indicators; and industry-wide opportunities, challenges and risks that are relevant to us in defense, government and commercial markets.

•Operations Review — an analysis of our consolidated results of operations and of the results in each of our business segments, to the extent the segment operating results are helpful to an understanding of our business as a whole, for the periods presented in our financial statements.

•Liquidity, Capital Resources and Financial Strategies — an analysis of cash flows, funding of pension plans, common stock repurchases, dividends, capital structure and resources, material cash requirements, commercial commitments, financial risk management, impact of foreign exchange and impact of inflation.

•Critical Accounting Policies and Estimates — a discussion of accounting policies and estimates that require the most judgment and a discussion of accounting pronouncements that have been issued but not yet implemented by us and their potential impact on our financial condition, results of operations, cash flows and equity.

•Forward-Looking Statements and Factors that May Affect Future Results — cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results, or our current expectations or projections.

BUSINESS CONSIDERATIONS

General

We generate revenue, income and cash flows by developing, manufacturing or providing and selling advanced, technology-based solutions that meet government and commercial customers’ mission-critical needs. We support government and commercial customers in more than 100 countries, with our largest customers being various departments and agencies of the U.S. Government and their prime contractors. Our products, systems and services have defense and civil government applications, as well as commercial applications. As of December 31, 2021, we had approximately 47,000 employees, including approximately 19,000 engineers and scientists. We generally sell directly to our customers, and we utilize agents and intermediaries to sell and market some products and services, especially in international markets.

We structure our operations primarily around the products, systems and services we sell and the markets we serve, and for fiscal 2021 we reported the financial results of our continuing operations in the following four operating segments, which were 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 EO/IR solutions;

•Space & 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 radios; global communications solutions and

•Aviation Systems, including defense aviation; commercial aviation products; commercial pilot training; and mission networks for air traffic management.

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During the first quarter of fiscal 2020, we adjusted our segment reporting to better align our businesses and transferred two businesses between our Integrated Mission Systems and Space & Airborne Systems 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.

As described in more detail in Note 3: Business Divestitures and Asset Sales and elsewhere in the Notes, during fiscal 2021, fiscal 2020 and the two quarters ended January 3, 2020, we completed the following business divestitures (which had revenue attributable to them as set forth below):

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Two Quarters Ended"],["(In millions)","December 31, 2021","","January 1, 2021","","January 3, 2020"],["Revenue attributable to divested businesses(1):"],["Narda-MITEQ business","$","84","","","$","111","","","$","57"],["ESSCO business","23","","","26","","","14"],["Electron Devices business","167","","","265","","","124"],["VSE disposal group","19","","","30","","","16"],["CPS business","142","","","233","","","93"],["Military training business","205","","","458","","","245"],["EOTech business","\u2014","","","48","","","27"],["Applied Kilovolts business","\u2014","","","7","","","9"],["Airport security and automation business","\u2014","","","147","","","263"],["Harris Night Vision business","\u2014","","","\u2014","","","23"],["Total","$","640","","","$","1,325","","","$","871"]]
[[/GREPCENT_TABLE]]
_________________

(1)Net of intracompany sales. See “Item 1. Business” of this Report for more information regarding businesses divested during fiscal 2021 and 2020.

See Note 24: Business Segments in the Notes for further information regarding our business segments, including how we define segment operating income or loss.

As discussed in further detail in Note 4: Business Combination in the Notes, we recorded the following charges at our corporate headquarters in connection with the L3Harris Merger.

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Two Quarters Ended","","Fiscal Year Ended"],["(In millions)","December 31, 2021","","January 1, 2021","","January 3, 2020","","June 28, 2019"],["Equity award acceleration charges, recognized upon change in control","$","\u2014","","","$","\u2014","","","$","70","","","$","\u2014"],["Transaction costs, recognized as incurred","\u2014","","","\u2014","","","83","","","31"],["Additional cost of sales related to the fair value step-up in inventory sold","\u2014","","","31","","","142","","","\u2014"],["Restructuring charges","\u2014","","","10","","","117","","","\u2014"],["Facility consolidation costs","\u2014","","","\u2014","","","48","","","\u2014"],["Integration costs, recognized as incurred","128","","","130","","","72","","","34"],["Total L3Harris Merger-related charges","$","128","","","$","171","","","$","532","","","$","65"]]
[[/GREPCENT_TABLE]]

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. Most of the costs above were recorded in the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income, except for additional cost of sales related to the fair value step-up in inventory sold and facility consolidation costs. These costs are included in the “Cost of product sales and services” and “Impairment of goodwill and other assets” line items in our Consolidated Statement of Income, respectively.

As described in more detail in Note 1: Significant Accounting Policies in the Notes, effective June 29, 2019, we changed our fiscal year end to the Friday nearest December 31, and the period that commenced on June 29, 2019 was a fiscal transition period that ended on January 3, 2020. References herein to the four quarters ended January 3, 2020 and two quarters ended December 28, 2018 represent the unaudited prior year results for the comparative periods ended January 3, 2020 and December 28, 2018.

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

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Value Drivers of Our Business

During fiscal 2021, we made progress executing our strategy of building a technology-focused operating company and becoming a full end-to-end mission solutions prime contractor to drive shareholder value. Despite impacts from COVID, global supply chain delays and award timing, we met customer commitments, delivered organic revenue growth during fiscal 2021, exceeded our target of $320 million to $350 million in net cost synergies from the L3Harris Merger by the end of 2021 and completed portfolio shaping, while continuing to focus on keeping our employees safe.

We received several key strategic contract awards in fiscal 2021, establishing us as a mission solutions prime contractor with our responsive satellites within missile defense and international aircraft missionization within ISR, as well as highlighting our technology and solutions for the contested environments our customers will need to compete and operate within in the future. We also invested $692 million (4 percent of total revenue) in company-sponsored R&D focused on technologies that expand our capabilities in the following areas:

•Spectrum superiority;

•Actionable intelligence; and

•Warfighter effectiveness.

We also completed reshaping our portfolio to focus on technology-differentiated businesses and expanded our future financial flexibility by completing six divestitures and used the proceeds, along with our net cash provided by operating activities, to repurchase shares of our common stock.

Effective January 1, 2022, we have streamlined our business segments from four to three business segments. As a result of the segment reorganization, the Aviation Systems segment was eliminated as a business segment. Effective for fiscal 2022, which began January 1, 2022, we will report our financial results in three reportable segments. As part of this process, we formed an internal entity that will be focused on pulling together innovative solutions and technologies from across L3Harris.

We plan to build on our fiscal 2021 momentum, and together with broad support for our programs across key areas in the DoD budget, expected international growth, L3Harris Merger synergies and a continued focus on operational excellence and innovation, we believe we are well positioned to achieve our strategic priorities for fiscal 2022 and thereafter, which include the following:

•Investing in innovation internally and externally to support sustainable growth and to bring unique technologies to global defense customers;

•Driving flawless execution through our e3 (excellence, everywhere, every day) operational excellence program; and

•Maximizing cash flows with shareholder friendly capital deployment.

During fiscal 2021, we returned to our shareholders $817 million through dividends and $3.7 billion through share repurchases. On February 25, 2022, we announced that our Board of Directors approved a 10 percent increase in the quarterly per share cash dividend rate on our common stock to $1.12, commencing with the dividend to be declared for the first quarter of 2022, for an annualized per share rate of $4.48. In fiscal 2022, we believe revenue growth across our business segments will improve our operating cash flow, which we expect to use to strengthen our portfolio while sustaining a shareholder-friendly capital approach.

Beyond fiscal 2021, we expect three main building blocks will support growth over the next three to five years, although we can give no assurances on this growth. First, we have a portfolio that is well aligned with national security priorities for threats identified in the National Defense Strategy. We have aligned our R&D efforts to extend our position through investments in open architecture, multi-function software-defined technologies, and we anticipate future defense budgets will continue to prioritize spending in the areas in which we are currently well-positioned and investing in new technologies. Second, we are well-positioned to advance our strategy of being a leading non-traditional prime. Third, we expect to leverage our sales channels and capitalize on our strengths domestically to support global modernization efforts and drive growth in international revenue.

Key Indicators

We believe our value drivers, when implemented, will improve our financial results, including: revenue; income from continuing operations and income from continuing operations per diluted common share; income from continuing operations as a percentage of revenue; total backlog; net cash provided by operating activities; return on invested capital (defined as after-tax operating income from continuing operations divided by the two-point average of invested capital at the beginning and end of the period, where invested capital equals equity plus debt, less cash and cash equivalents); return on average equity (defined as income from continuing operations divided by the two-point average of equity at the beginning and end of the fiscal period); and consolidated total indebtedness to total capital ratio. The measure of our success is reflected in our results of operations and liquidity and capital resources key indicators as discussed below.

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Fiscal 2021 Results of Operations Key Indicators: Revenue, income from continuing operations, income from continuing operations as a percentage of revenue, income from continuing operations per diluted common share and total backlog represent key measurements of our value drivers:

•Revenue decreased 2 percent to $17.8 billion in fiscal 2021 from $18.2 billion in fiscal 2020 primarily due to the impact of divestitures within Aviation Systems and supply chain-related constraints within Communication Systems;

•Income from continuing operations attributable to L3Harris common shareholders increased 65 percent to $1,847 million in fiscal 2021 from $1,121 million in fiscal 2020, primarily due to the combined effects of the reasons discussed below under the caption “Operations Review” in this MD&A; particularly, the reduction of non-cash charges for impairments of goodwill and other assets associated with the COVID-related downturn in the commercial aviation market and its impact on customer operations in fiscal 2020;

•Income from continuing operations attributable to L3Harris common shareholders as a percentage of revenue increased to 10 percent in fiscal 2021 from 6 percent in fiscal 2020;

•Income from continuing operations per diluted common share attributable to L3Harris common shareholders increased 75 percent to $9.09 in fiscal 2021 from $5.19 in fiscal 2020, reflecting the increase in income from continuing operations and lower weighted average diluted common shares outstanding due to share repurchases during fiscal 2021; and

•Total backlog decreased 3 percent to $21.1 billion at December 31, 2021 from $21.7 billion at January 1, 2021. Backlog at January 1, 2021 included $1.5 billion associated with businesses divested in fiscal 2021.

Refer to MD&A heading “Operations Review” below in this Report for more information.

Fiscal 2021 Liquidity and Capital Resources Key Indicators: Net cash provided by operating activities, return on invested capital, return on average equity and our consolidated total indebtedness to total capital ratio also represent key measurements of our value drivers:

•Net cash provided by operating activities decreased to $2,687 million in fiscal 2021 from $2,790 million in fiscal 2020 reflecting higher net income more than offset by the impacts of non-cash charges for goodwill and other assets, business divestitures, depreciation and amortization of assets and the change in working capital;

•Return on invested capital increased to 7 percent in fiscal 2021 from 4 percent in fiscal 2020;

•Return on average equity increased to 9 percent in fiscal 2021 from 5 percent in fiscal 2020; and

•Our consolidated total indebtedness to total capital ratio at December 31, 2021 was 26.8 percent compared with our 65 percent covenant limitation under our senior unsecured revolving credit facility.

Refer to MD&A heading “Liquidity, Capital Resources and Financial Strategies” below in this Report for more information on net cash provided by (used in) operating, investing and financing activities.

We also measure the success of our business using certain measures that are not defined by GAAP, such as adjusted earnings before interest and taxes, adjusted earnings per share and adjusted free cash flow, which may be calculated differently by other companies. We use these measures, along with our key indicators above, to assess the success of our business and our ability to create shareholder value. We also use some of these and other performance metrics for executive compensation purposes.

Industry-Wide Opportunities, Challenges and Risks

Department of Defense and Other U.S. Federal Markets: Our largest customers are various departments and agencies of the U.S. Government — the percentage of our revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 75 percent, 78 percent, 73 percent and 77 percent in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019, respectively.

On December 27, 2020, the President signed into law the Consolidated Appropriations Act, 2021, providing annual funding for the DoD and other government agencies. This bill appropriates $635 billion in total DoD base funding and $69 billion in Overseas Contingency Operations (“OCO”) funding. It also appropriates $28 billion for the Department of Energy national security mission and $9 billion for other defense related activities, resulting in total national defense funding of $741 billion for government fiscal year (“GFY”) 2021. (U.S. Government fiscal years begin October 1 and end September 30). In May 2021, President Biden released his GFY 2022 Budget Request. His request includes $715 billion in DoD base funding, $28 billion for the Department of Energy and $10 billion for other defense related activities, resulting in total requested national defense funding of $753 billion for GFY 2022.

Government Oversight and Risk: As a U.S. Government contractor, we are subject to U.S. Government oversight. The U.S. Government may investigate our business practices and audit our compliance with applicable rules and regulations. Depending on the results of those investigations and audits, the U.S. Government could make claims against us. Under U.S. Government

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procurement regulations and practices, an indictment or conviction of a government contractor could result in that contractor being fined and/or suspended from being able to bid on, or from being awarded, new U.S. Government contracts for a period of time determined by the U.S. Government. Similar government oversight exists in most other countries where we conduct business.

For a discussion of risks relating to U.S. Government contracts and subcontracts, see “Item 1. Business — Principal Customers; Government Contracts” and “Item 1A. Risk Factors” of this Report. We are also subject to other risks associated with U.S. Government business, including technological uncertainties, dependence on annual appropriations and allotment of funds, extensive regulations and other risks, which are discussed in “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” of this Report.

State and Local: We also provide products to state and local government agencies that are committed to protecting our homeland and public safety. The public safety market was highly competitive and dependent on state and local government budgets during fiscal 2020 and fiscal 2021. Revenue in our Public Safety business sector in fiscal 2020 and the first half of fiscal 2021 was adversely impacted by COVID-related pressures on state and local government customers; however, revenue improved in the second half of fiscal 2021. Future market opportunities include upgrading aging analog infrastructure to new digital standards, as well as opportunities associated with next-generation Long-Term Evolution (“LTE”) solutions for high data-rate applications.

International: We believe there is continuing international demand from military and government customers for tactical radios, electronic warfare equipment, products and systems for maritime platforms, air traffic management, release systems and ISR. We believe we can leverage our domain expertise and proven technology provided in the U.S. to further expand our international business.

We believe that our experience, technologies and capabilities are well aligned with the demand and requirements of the markets noted above in this Report. However, we remain subject to the spending levels, pace and priorities of the U.S. Government, as well as international governments and commercial customers, and to general economic conditions that could adversely affect us, our customers and our suppliers. We also remain subject to other risks associated with these markets, including technological uncertainties, adoption of our new products and other risks that are discussed below in this Report under “Forward-Looking Statements and Factors that May Affect Future Results” and in “Item 1A. Risk Factors” of this Report.

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OPERATIONS REVIEW

Consolidated Results of Operations

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended","","","","Four Quarters Ended"],["","December 31, 2021","","January 1, 2021","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)","","","","January 3, 2020","","% Inc/(Dec)"],["(Dollars in millions, except per share amounts)","As Reported","","As Reported","","","","As Reported (Unaudited)","","","","","","Pro Forma"],["Revenue:"],["Integrated Mission Systems","$","5,839","","","$","5,538","","","5","%","","$","2,783","","","99","%","","","","$","5,360","","","3","%"],["Space & Airborne Systems","5,093","","","4,946","","","3","%","","4,352","","","14","%","","","","4,689","","","5","%"],["Communication Systems","4,287","","","4,443","","","(4)","%","","3,340","","","33","%","","","","4,278","","","4","%"],["Aviation Systems","2,783","","","3,448","","","(19)","%","","2,368","","","46","%","","","","3,917","","","(12)","%"],["Other non-reportable businesses","\u2014","","","\u2014","","","*","","102","","","*","","","","23","","","*"],["Corporate eliminations","(188)","","","(181)","","","4","%","","(89)","","","*","","","","(170)","","","6","%"],["Total revenue","17,814","","","18,194","","","(2)","%","","12,856","","","42","%","","","","18,097","","","1","%"],["Total cost of product sales and services","(12,438)","","","(12,886)","","","(3)","%","","(9,088)","","","42","%","","","","(12,907)","","","\u2014","%"],["% of total revenue","70","%","","71","%","","","","71","%","","","","","","71","%"],["Gross margin","5,376","","","5,308","","","1","%","","3,768","","","41","%","","","","5,190","","","2","%"],["% of total revenue","30","%","","29","%","","","","29","%","","","","","","29","%"],["Engineering, selling and administrative expenses","(3,280)","","","(3,315)","","","(1)","%","","(2,540)","","","31","%","","","","(3,588)","","","(8)","%"],["% of total revenue","18","%","","18","%","","","","20","%","","","","","","20","%"],["Business divestiture-related gains (losses)","220","","","(51)","","","*","","229","","","*","","","","229","","","*"],["Impairment of goodwill and other assets","(207)","","","(767)","","","(73)","%","","(46)","","","*","","","","(46)","","","*"],["Non-operating income","439","","","401","","","9","%","","286","","","40","%","","","","309","","","30","%"],["Net interest expense","(265)","","","(254)","","","4","%","","(204)","","","25","%","","","","(253)","","","\u2014","%"],["Income from continuing operations before income taxes","2,283","","","1,322","","","73","%","","1,493","","","(11)","%","","","","1,841","","","(28)","%"],["Income taxes","(440)","","","(234)","","","88","%","","(146)","","","60","%","","","","(189)","","","24","%"],["Effective tax rate","19","%","","18","%","","","","10","%","","","","","","10","%"],["Income from continuing operations","1,843","","","1,088","","","69","%","","1,347","","","(19)","%","","","","1,652","","","(34)","%"],["Noncontrolling interests, net of income taxes","4","","","33","","","(88)","%","","(12)","","","*","","","","(24)","","","*"],["Income from continuing operations attributable to L3Harris common shareholders","$","1,847","","","$","1,121","","","65","%","","$","1,335","","","(16)","%","","","","$","1,628","","","(31)","%"],["% of total revenue","10","%","","6","%","","","","10","%","","","","","","9","%"],["Income from continuing operations per diluted common share attributable to L3Harris common shareholders","$","9.09","","","$","5.19","","","75","%","","$","7.90","","","(34)","%","","","","$","7.25","","","(28)","%"]]
[[/GREPCENT_TABLE]]

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*Not meaningful

Because of the L3Harris Merger, fiscal 2020 reflects the results of the combined Company, while the four quarters ended January 3, 2020 reflect the results of only Harris operating businesses for the two quarters ended June 28, 2019 and the results of the combined Company for the two quarters ended January 3, 2020. Due to the significance of the L3 operating businesses included in the combined Company results following the L3Harris Merger, the reported results for fiscal 2020 and four quarters ended January 3, 2020 generally are not comparable. Therefore, to assist with a discussion of the consolidated results of operations for fiscal 2020 and four quarters ended January 3, 2020 on a more comparable basis, certain supplemental unaudited pro forma condensed 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).

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Revenue

Fiscal 2021 Compared With Fiscal 2020: The decrease in revenue in fiscal 2021 compared with fiscal 2020 was primarily due to divestitures within Aviation Systems and supply chain-related constraints within Communication Systems.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The increase in revenue in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to the inclusion of $5.5 billion of revenue (net of intercompany sales eliminations) from L3 operations in operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger) and organic revenue growth in our Space & Airborne Systems, Integrated Mission Systems and Communication Systems. The increase was partially offset by the impact of divestitures and the COVID-related downturn in the commercial aviation market and its impact on customer operations in fiscal 2020.

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

Gross Margin

Fiscal 2021 Compared With Fiscal 2020: Gross margin and gross margin as a percentage of revenue (“gross margin percentage”) for fiscal 2021 increased compared to fiscal 2020, primarily due to integration benefits and operational excellence,$31 million of lower cost of sales related to the fair value step-up in inventory sold and $12 million of lower amortization of identifiable intangible assets acquired as a result of the L3Harris Merger, partially offset by a mix of program revenue and product sales with relatively lower gross margin percentage.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  Gross margin increased in fiscal 2020 compared with the four quarters ended January 3, 2020 primarily due to the inclusion of L3 operations in operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger). Gross margin percentage for fiscal 2020 was comparable with the four quarters ended January 3, 2020 reflecting integration benefits and operational excellence, and $111 million of lower cost of sales related to the fair value step-up in inventory sold, offset by a mix of program revenue and product sales with relatively lower gross margin percentage and $37 million of higher amortization of identifiable intangible assets acquired as a result of the L3Harris Merger.

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

Engineering, Selling and Administrative Expenses

Fiscal 2021 Compared With Fiscal 2020:  The decrease in engineering, selling and administrative (“ESA”) expenses in fiscal 2021 was primarily due to $70 million of lower amortization of identifiable intangible assets acquired as a result of the L3Harris Merger, $27 million of lower L3Harris Merger-related transaction, integration and restructuring expenses and the absence in fiscal 2021 of COVID-related restructuring charges and exit costs recorded in fiscal 2020, partially offset by $53 million of higher divestiture-related expenses and the absence in fiscal 2021 of a $22 million gain on the sale of property, plant and equipment recorded in fiscal 2020. ESA expense as a percentage of revenue (“ESA percentage”) in fiscal 2021 was comparable to fiscal 2020.

Overall Company-sponsored R&D costs were $692 million in fiscal 2021 compared with $684 million in fiscal 2020.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The increase in ESA expenses in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to the inclusion of L3 operations in operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger), $333 million of higher amortization of identifiable intangible assets acquired as a result of the L3Harris Merger, $16 million of COVID-related restructuring expenses and other costs and $13 million of higher divestiture-related expenses, partially offset by $254 million of lower L3Harris Merger-related transaction, integration and restructuring expenses and a $22 million gain on sale of property, plant and equipment.

The decrease in ESA percentage in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily driven by cost management, operational excellence, integration benefits, as well as lower L3Harris Merger-related transaction, integration and restructuring expenses and a gain on sale of property, plant and equipment, partially offset by higher amortization of identifiable intangible assets acquired as a result of the L3Harris Merger, COVID-related restructuring expenses and other items and divestiture-related expenses, as discussed above.

Overall Company-sponsored R&D costs were $684 million in fiscal 2020 compared with $504 million in the four quarters ended January 3, 2020.

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

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Business Divestiture-Related Gains (Losses)

The “Business divestiture-related gains (losses)” line item is comprised of the following pre-tax gains (losses) associated with businesses divested:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended"],["(In millions)","December 31, 2021","","January 1, 2021"],["Narda-MITEQ business","$","(9)","","","$","\u2014"],["ESSCO business","31","","","\u2014"],["Electron Devices business","31","","","\u2014"],["VSE disposal group","(29)","","","(18)"],["CPS business","(19)","","","\u2014"],["Military training business","217","","","\u2014"],["EOTech","\u2014","","","2"],["Airport security and automation business","\u2014","","","(23)"],["Other(1)","(2)","","","(12)"],["Total Business divestiture-related gain (losses)","$","220","","","$","(51)"]]
[[/GREPCENT_TABLE]]

_________________

(1)Reflects adjustments to the gains (losses) on completed divestitures not shown above, including for fiscal 2020, $12 million for finalization of purchase price adjustments and recognition of a non-cash adjustment related to working capital, which decreased the $229 million gain initially recognized on the sale of the Harris Night Vision business divested on September 13, 2019.

See Note 3: Business Divestitures and Asset Sales in the Notes for further information.

Impairment of Goodwill and Other Assets

Fiscal 2021 Compared With Fiscal 2020: Impairment of goodwill and other assets for fiscal 2021 reflects $62 million of non-cash charges for the impairment of goodwill and other assets associated with the divestiture of the CPS business and $145 million of non-cash charges for impairment of identifiable intangible and other long-lived assets related to our CTS reporting unit. Impairment of goodwill and other assets for fiscal 2020 included $748 million of non-cash charges for the impairment of goodwill and other assets associated with the COVID-related downturn in the commercial aviation market and its impact on customer operations, a $14 million non-cash charge for impairment of goodwill recorded in connection with the then-potential divestiture of the VSE disposal group and a $5 million non-cash charge for impairment of goodwill recorded in connection with the divestiture of our Applied Kilovolts business.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  Impairment of goodwill and other assets for fiscal 2020 reflects $748 million of non-cash charges for the impairment of goodwill and other assets associated with the COVID-related downturn in the commercial aviation market and its impact on customer operations, a $14 million non-cash charge for impairment of goodwill recorded in the quarter ended July 3, 2020 in connection with a then-potential divestiture of the VSE disposal group and a $5 million non-cash charge for impairment of goodwill recorded in the quarter ended April 3, 2020 in connection with the then-pending divestiture of our Applied Kilovolts business.

See Note 3: Business Divestitures and Asset Sales and Note 9: Goodwill in the Notes for further information.

Non-Operating Income

Fiscal 2021 Compared With Fiscal 2020: The increase in non-operating income in fiscal 2021 compared with fiscal 2020 was primarily due to an increase in the non-service cost components of pension and other postretirement benefit plan income partially offset by a $35 million charge for impairment of our equity investment in a nonconsolidated affiliate recorded in the quarter ended July 2, 2021.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The increase in non-operating income in fiscal 2020 compared with the four quarters ended January 3, 2020 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 20: Non-Operating Income in the Notes for further information.

Net Interest Expense

Fiscal 2021 Compared With Fiscal 2020:  Our net interest expense increased in fiscal 2021 compared with fiscal 2020 primarily due to lower interest income in fiscal 2021, reflecting lower sales-type lease receivables due to the divestiture of the military training business on July 2, 2021.

39

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  Our net interest expense increased in fiscal 2020 compared with the four quarters ended January 3, 2020 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 13: Debt in the Notes for further information.

Income Taxes

Fiscal 2021 Compared With Fiscal 2020:  Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 19 percent in fiscal 2021 compared with 18 percent in fiscal 2020. During fiscal 2021, we benefited from the net favorable impact of:

•Favorable impact of R&D credits;

•Favorable adjustments upon the resolution of certain audit uncertainties; and

•Excess tax benefits related to equity-based compensation; partially offset by

•Unfavorable impact from completed business divestitures.

In fiscal 2020, our effective tax rate benefited from the net favorable impact of:

•Favorable adjustments upon the finalization of our Federal tax returns, primarily due to recently released tax regulations and the resolution of audit uncertainties;

•Favorable impact of R&D credits; and

•Excess tax benefits related to equity-based compensation; partially offset by

•Unfavorable impact of non-deductible goodwill impairment charges.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  Our effective tax rate was 18 percent in fiscal 2020 compared with 10 percent in the four quarters ended January 3, 2020. During fiscal 2020, our effective tax rate benefited from the net favorable impact of the reasons stated above in the fiscal 2021 comparison with the fiscal 2020 effective tax rate.

In the four quarters ended January 3, 2020, our effective tax rate benefited from the net favorable impact of:

•Excess tax benefits related to equity-based compensation;

•The ability to utilize capital loss carryforwards with a full valuation allowance against capital gains generated from the Harris Night Vision business divestiture;

•The release of reserves for uncertain tax positions due to statute of limitations expirations;

•Additional research credits claimed on our prior year tax returns; and

•Favorable adjustments recorded upon the filing of our Federal tax returns.

See Note 22: Income Taxes in the Notes for further information.

Income From Continuing Operations

Fiscal 2021 Compared With Fiscal 2020: The increase in income from continuing operations in fiscal 2021 compared with fiscal 2020 was primarily due to the combined effects of the reasons noted in the sections above regarding fiscal 2021 and 2020.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020: The decrease in income from continuing operations in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to the combined effects of the reasons in the sections noted above regarding fiscal 2020 and the four quarters ended January 3, 2020.

Income From Continuing Operations Per Diluted Common Share Attributable to L3Harris Common Shareholders

Fiscal 2021 Compared With Fiscal 2020:  The increase in income from continuing operations per diluted common share attributable to L3Harris common shareholders in fiscal 2021 compared with fiscal 2020 was primarily due to higher income from continuing operations and fewer diluted weighted average common shares outstanding, reflecting the repurchases of shares of our common stock under our repurchase program in fiscal 2021.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The decrease in income from continuing operations per diluted common share attributable to L3Harris common shareholders in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to the combined effects of the reasons in the sections noted above regarding fiscal 2020 and the four quarters ended January 3, 2020, particularly the non-cash charges for impairment of goodwill and other assets and other COVID-related impacts in our Commercial Aviation Solutions reporting unit associated with the downturn in the commercial aviation market and its impact on customer operations, the absence of a prior-year benefit from the gain on the sale of the Harris Night Vision business and divestitures in fiscal 2020, as well as higher diluted weighted average common shares outstanding as a result of 104 million shares issued in connection with the L3Harris Merger, partially offset by share repurchases during fiscal 2020.

See the “Common Stock Repurchases” discussion below in this MD&A for further information.

40

Pro Forma Basis Discussion for Fiscal 2020 Compared With the Four Quarters Ended January 3, 2020

Revenue

The increase in revenue for fiscal 2020 compared with pro forma revenue for the four quarters ended January 3, 2020 was primarily due to growth in core U.S. and international businesses, excluding commercial aviation and public safety markets, which more than offset the COVID-related decline. Revenue growth was driven by $257 million of higher revenue in our Space & Airborne Systems segment, $178 million of higher revenue in our Integrated Mission Systems segment and $165 million of higher revenue in our Communication Systems segment, partially offset by a decline in our Aviation Systems segment, due to the divestiture of the airport security and automation business and COVID-related impacts.

Gross Margin

The increase in gross margin and comparability of gross margin percentage for fiscal 2020 compared with pro forma gross margin and gross margin percentage for the four quarters ended January 3, 2020 reflects integration benefits, higher volume, operational excellence and $111 million of lower cost of sales related to the fair value step-up in inventory sold in the L3Harris Merger, partially offset by a mix of program revenue and product sales with relatively lower gross margin percentage in fiscal 2020.

Engineering, Selling and Administrative Expenses

The decreases in ESA expenses and ESA percentage for fiscal 2020 compared with pro forma ESA expenses and ESA percentage for the four quarters ended January 3, 2020 were primarily due to $262 million of lower L3Harris Merger-related transaction, integration and restructuring expenses, a $22 million gain on sale of property, plant and equipment and integration savings, partially offset by $105 million of higher amortization of identifiable intangible assets acquired as a result of the L3Harris Merger, $16 million of COVID-related restructuring expenses and other costs and $13 million of higher divestiture-related expenses in fiscal 2020.

Business Divestiture-Related Gains (Losses)

Business divestiture-related gains (losses) for fiscal 2020 and the four quarters ended January 3, 2020 on a pro forma basis included the same items as noted above for fiscal 2020 and the four quarters ended January 3, 2020 on an as reported basis.

See Note 3: Business Divestitures and Asset Sales in the Notes for further information.

Impairment of Goodwill and Other Assets

Impairment of goodwill and other assets for fiscal 2020 and the four quarters ended January 3, 2020 on a pro forma basis reflects the same charges as noted above for fiscal 2020 and the four quarters ended January 3, 2020 on an as reported basis.

See Note 3: Business Divestitures and Asset Sales and Note 9: Goodwill in the Notes for further information.

Non-Operating Income

The increase in non-operating income for fiscal 2020 compared with pro forma non-operating income for the four quarters ended January 3, 2020 was primarily due to an increase in the non-service cost components of pension and other postretirement benefit plan income, partially offset by a $23 million gain on a pension plan curtailment in the four quarters ended January 3, 2020.

Net Interest Expense

Net interest expense for fiscal 2020 was largely unchanged compared with pro forma net interest expense for the four quarters ended January 3, 2020.

Income Taxes

Our effective tax rate was 18 percent in fiscal 2020 compared with a 10 percent pro forma effective tax rate for the four quarters ended January 3, 2020. Our effective tax rate for fiscal 2020 was impacted by the same items as noted above for fiscal 2020 on an as reported basis.

See “Supplemental Unaudited Pro Forma Condensed Combined Income Statement Information” below in this MD&A for information regarding our pro forma effective tax rate for the four quarters ended January 3, 2020.

Income From Continuing Operations

The decrease in income from continuing operations for fiscal 2020 compared with pro forma income from continuing operations for the four quarters ended January 3, 2020 was primarily due to the combined effects of the reasons noted above in this “Pro Forma” discussion, particularly the non-cash charges for impairment of goodwill and other assets in our Commercial Aviation Solutions reporting unit associated with the COVID-related downturn in the commercial aviation market and its impact on customer operations, the absence of a prior-year benefit from the gain on the sale of the Harris Night Vision business, and divestitures in fiscal 2020.

41

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 fiscal 2020 compared with pro forma income from continuing operations per diluted common share attributable to L3Harris common shareholders for the four quarters ended January 3, 2020 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 during fiscal 2020.

See the “Common Stock Repurchases” discussion below in this MD&A for further information.

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 four quarters ended January 3, 2020 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 Consolidated Financial Statements and the Notes appearing elsewhere in this Report.

42

[[GREPCENT_TABLE]]
[["Unaudited Pro Forma Condensed Combined Statement of Income"],["For the Four Quarters Ended January 3, 2020"],["","Two Quarters Ended June 28, 2019","","Two Quarters Ended January 3, 2020","","Four Quarters Ended January 3, 2020"],["(In millions, except per share amounts)","Historical Harris","","Historical L3","","Pro Forma Adjustments","","Note Ref","","Pro Forma","","L3Harris As Reported","","Pro Forma"],["Revenue from product sales and services","$","3,593","","","$","5,331","","","$","(11)","","","a","","$","8,834","","","$","9,263","","","$","18,097"],["","","","","","(79)","","","b"],["Cost of product sales and services","(2,362)","","","(3,875)","","","11","","","a","","(6,181)","","","(6,726)","","","(12,907)"],["","","","","","54","","","b"],["","","","","","(9)","","","c"],["Engineering, selling and administrative expenses","(659)","","","(824)","","","11","","","b","","(1,707)","","","(1,881)","","","(3,588)"],["","","","","","(228)","","","c"],["","","","","","38","","","d"],["","","","","","(4)","","","e"],["","","","","","4","","","f"],["","","","","","(45)","","","j"],["Business divestiture-related gains","\u2014","","","\u2014","","","\u2014","","","","","\u2014","","","229","","","229"],["Impairment of right-of-use asset","\u2014","","","\u2014","","","\u2014","","","","","\u2014","","","(46)","","","(46)"],["Merger, acquisition and divestiture related expenses","\u2014","","","(45)","","","45","","","j","","\u2014","","","\u2014","","","\u2014"],["Non-operating income","94","","","\u2014","","","23","","","j","","117","","","192","","","309"],["Interest and other income, net","\u2014","","","15","","","19","","","g","","\u2014","","","\u2014","","","\u2014"],["","","","","","(34)","","","j"],["Debt retirement charges","\u2014","","","(3)","","","3","","","j","","\u2014","","","\u2014","","","\u2014"],["Interest income","1","","","\u2014","","","8","","","j","","9","","","12","","","21"],["Interest expense","(82)","","","(75)","","","4","","","h","","(139)","","","(135)","","","(274)"],["","","","","","14","","","i"],["Income from continuing operations before income taxes","585","","","524","","","(176)","","","","","933","","","908","","","1,841"],["Income taxes","(73)","","","(87)","","","44","","","k","","(116)","","","(73)","","","(189)"],["Income from continuing operations","512","","","437","","","(132)","","","","","817","","","835","","","1,652"],["Noncontrolling interests, net of income taxes","\u2014","","","(12)","","","\u2014","","","","","(12)","","","(12)","","","(24)"],["Income from continuing operations attributable to common shareholders","$","512","","","$","425","","","$","(132)","","","","","$","805","","","$","823","","","$","1,628"],["Income from continuing operations per basic common share attributable to common shareholders","$","4.32","","","","","","","","","$","3.62","","","$","3.72","","","$","7.34"],["Income from continuing operations per diluted common share attributable to common shareholders","$","4.23","","","","","","","","","$","3.57","","","$","3.68","","","$","7.25"],["Basic weighted average common shares outstanding","118.1","","","","","104.1","","","l","","222.2","","","221.2","","","221.7"],["Diluted weighted average common shares outstanding","120.7","","","","","104.6","","","l","","225.3","","","223.7","","","224.5"]]
[[/GREPCENT_TABLE]]

Notes:

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

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

43

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 two quarters ended June 28, 2019. Assumptions and details are as follows:

[[GREPCENT_TABLE]]
[["","Weighted Average Amortization Period","","Fair Value(1)","","Two Quarters Ended June 28, 2019"],["","(In years)","","(In millions)"],["Identifiable Intangible Assets Acquired:"],["Customer relationships","15","","$","5,417","","","$","222"],["Trade names \u2014 Divisions","9","","123","","","6"],["Adjustment to engineering, selling and administrative expenses","","","","","228"],["Developed technology","7","","562","","","33"],["Less: L3 historical amortization","","","","","(24)"],["Adjustment to cost of product sales and services","","","","","9"],["Total net adjustment to amortization expense","","","","","$","237"],["_________"],["(1) As of May 4, 2020, the date of filing our Current Report on Form 8-K."]]
[[/GREPCENT_TABLE]]

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 were reclassified to engineering, selling and administrative expenses; and

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

k.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 25 percent for the two quarters ended June 28, 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 outstanding L3 common stock and in respect of vested L3 restricted stock units and L3 performance stock units. Diluted shares also include the dilutive impact of L3Harris stock options issued in replacement of L3 stock options calculated using the treasury stock method.

44

Discussion of Business Segment Results of Operations

Integrated Mission Systems Segment

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Four Quarters Ended"],["","December 31, 2021","","January 1, 2021","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)"],["(Dollars in millions)","As Reported","","As Reported","","","","As Reported (Unaudited)","","","","Pro forma"],["Revenue","$","5,839","","","$","5,538","","","5","%","","$","2,783","","","99","%","","$","5,360","","","3","%"],["Operating income","950","","","847","","","12","%","","377","","","125","%","","698","","","21","%"],["% of revenue","16","%","","15","%","","","","14","%","","","","13","%"]]
[[/GREPCENT_TABLE]]

As Reported

Fiscal 2021 Compared With Fiscal 2020:  The increase in segment revenue in fiscal 2021 compared with fiscal 2020 was primarily due to $210 million of higher revenue in ISR, driven by aircraft missionization on a North Atlantic Treaty Organization program, $53 million of higher revenue in Maritime, reflecting a ramp on key platforms and $19 million higher revenue in Electro Optical reflecting higher product deliveries. The funded backlog for this segment was $6.2 billion at December 31, 2021 compared with $6.3 billion at January 1, 2021.

The increases in segment operating income and operating income as a percentage of revenue (“operating margin percentage”) in fiscal 2021 compared with fiscal 2020 were primarily due to e3 and program performance, expense management and integration benefits.

The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 70 percent in fiscal 2021.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The increases in segment revenue, operating income and operating margin percentage in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to the inclusion of L3 operations in segment operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger). Because the Integrated Mission Systems segment is almost entirely comprised of L3 businesses, comparison to the four quarters ended January 3, 2020 segment operating metrics is not meaningful. The funded backlog for this segment was $6.3 billion at January 1, 2021 compared with $5.3 billion at January 3, 2020.

The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 77 percent in fiscal 2020.

Pro Forma

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020: The increase in segment revenue in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to $163 million of higher revenue in Maritime from a ramp in manned and classified platforms and $31 million of higher revenue in ISR.

The increases in segment operating income and operating margin percentage in fiscal 2020 compared with the four quarters ended January 3, 2020 were primarily driven by operational excellence and integration benefits.

Space & Airborne Systems Segment

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Four Quarters Ended"],["","December 31, 2021","","January 1, 2021","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)"],["(Dollars in millions)","As Reported","","As Reported","","","","As Reported (Unaudited)","","","","Pro forma"],["Revenue","$","5,093","","","$","4,946","","","3","%","","$","4,352","","","14","%","","$","4,689","","","5","%"],["Operating income","970","","","932","","","4","%","","816","","","14","%","","873","","","7","%"],["% of revenue","19","%","","19","%","","","","19","%","","","","19","%"]]
[[/GREPCENT_TABLE]]

As Reported

Fiscal 2021 Compared With Fiscal 2020:  The increase in segment revenue in fiscal 2021 compared with fiscal 2020 was primarily due to $175 million of higher revenue in Space, reflecting a ramp in missile defense and other responsive programs and $8 million of higher revenue in Intel and Cyber from classified programs, partially offset by $77 million of lower revenue in Electronic Warfare and Mission Avionics, reflecting the transition towards modernization programs within airborne businesses. The funded backlog for this segment was $3.9 billion at December 31, 2021 compared with $3.8 billion at January 1, 2021.

45

The increase in segment operating income in fiscal 2021 compared with fiscal 2020 was primarily due to e3 performance, higher pension income and integration benefits, partially offset by higher R&D investments and a mix of program revenue and product sales with relatively lower gross margin percentage. Segment operating margin percentage in fiscal 2021 was comparable to fiscal 2020.

The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 87 percent in fiscal 2021.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020: The increases in segment revenue and operating income in fiscal 2020 compared with the four quarters ended January 3, 2020 were primarily due to the inclusion of L3 operations in segment operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger), as well as organic growth in Mission Avionics and Intel and Cyber as discussed further below in the “Pro Forma” discussion for fiscal 2020 compared with the four quarters ended January 3, 2020. The funded backlog for this segment was $3.8 billion at January 1, 2021 compared with $3.9 billion at January 3, 2020. Segment operating margin percentage in fiscal 2020 was comparable with the four quarters ended January 3, 2020.

The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 90 percent in fiscal 2020.

Pro Forma

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020: The increase in segment revenue in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to $317 million of higher revenue in Mission Avionics, driven by a ramp on the F-35 platform, and $70 million of higher revenue in Intel and Cyber from growth on classified programs, partially offset by $107 million of lower revenue in Space and lower revenue in Electronic Warfare, reflecting program transition timing.

The increase in segment operating income in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to cost management, operational excellence and integration benefits, partially offset by program mix, including in respect of newly awarded fixed-priced development contracts. Segment operating margin percentage for fiscal 2020 was comparable with the four quarters ended January 3, 2020.

Communication Systems Segment

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Four Quarters Ended"],["","December 31, 2021","","January 1, 2021","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)"],["(Dollars in millions)","As Reported","","As Reported","","","","As Reported (Unaudited)","","","","Pro forma"],["Revenue","$","4,287","","","$","4,443","","","(4","%)","","$","3,340","","","33","%","","$","4,278","","","4","%"],["Operating income","1,092","","","1,084","","","1","%","","836","","","30","%","","958","","","13","%"],["% of revenue","25","%","","24","%","","","","25","%","","","","22","%"]]
[[/GREPCENT_TABLE]]

As Reported

Fiscal 2021 Compared With Fiscal 2020:  The decrease in segment revenue in fiscal 2021 compared with fiscal 2020 was primarily due to $57 million of lower revenue in Tactical Communications, reflecting product delivery delays from supply chain-related constraints, $82 million of lower revenue in Broadband Communications, reflecting lower sales on legacy unmanned platforms, modestly lower revenue in Public Safety and flat revenue in Integrated Vision Solutions after adjusting for the impact of the divestiture of the EOTech business on July 31, 2020 (which generated $41 million of revenue through the date of divestiture in the quarter ended October 2, 2020). These decreases were partially offset by $19 million of higher revenue in Global Communications Solutions from the DoD modernization program. The funded backlog for this segment was $3.7 billion at December 31, 2021 compared with $3.3 billion at January 1, 2021.

The increases in segment operating income and operating margin percentage in fiscal 2021 compared with fiscal 2020 was primarily due to e3 performance and integration benefits, partially offset by supply chain impacts and higher R&D investments.

The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 68 percent in fiscal 2021.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The increases in segment revenue and operating income, and decrease in segment operating margin percentage, in fiscal 2020 compared with the four quarters ended January 3, 2020 were primarily due to the inclusion of L3 operations in segment operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger), as well as organic growth in Tactical Communications, partially offset by lower revenue in Public Safety and the divestiture of the EOTech business as discussed

46

further below in the “Pro Forma” discussion for fiscal 2020 compared with the four quarters ended January 3, 2020. The funded backlog for this segment was $3.3 billion at January 1, 2021 compared with $3.7 billion at January 3, 2020.

The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 69 percent in fiscal 2020.

Pro Forma

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The increase in revenue in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to $268 million of higher Tactical Communications revenue (including Global Communications Solutions), primarily due to a ramp in DoD modernization programs that also benefited Integrated Vision Solutions, partially offset by $84 million of lower revenue in Public Safety, reflecting COVID-related pressures on state and local government municipality customers, and a $21 million revenue impact from the divestiture of the EOTech business.

The increases in segment operating income and operating margin percentage in fiscal 2020 compared with the four quarters ended January 3, 2020 were primarily due to operational excellence, integration benefits and cost management.

Additional Information on Known Trends and Uncertainties

Revenue, operating income and orders in our Communication Systems segment have been, and we expect will continue to be, adversely impacted by supply chain-related constraints. While our customer base remains strong, we expect continued impacts to revenue, operating income, and orders in our Communication Systems segment in early fiscal 2022 with stability in the second half of 2022; however, we can give no assurances and the ultimate extent of the supply chain-related constraints to our Communication Systems segment remains uncertain.

Aviation Systems Segment

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Four Quarters Ended"],["","December 31, 2021","","January 1, 2021","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)"],["(Dollars in millions)","As Reported","","As Reported","","","","As Reported (Unaudited)","","","","Pro forma"],["Revenue","$","2,783","","","$","3,448","","","(19","%)","","$","2,368","","","46","%","","$","3,917","","","(12","%)"],["Operating income (loss)","$","330","","","$","(177)","","","*","","$","325","","","*","","$","503","","","*"],["% of revenue","12","%","","(5)","%","","","","14","%","","","","13","%"]]
[[/GREPCENT_TABLE]]
_________________

*Not meaningful

As Reported

Fiscal 2021 Compared With Fiscal 2020:  The decrease in segment revenue in fiscal 2021 compared with fiscal 2020 was primarily due to the impact of business divestitures. Segment revenue decreased 2 percent organically in fiscal 2021 compared with fiscal 2020 primarily due to $20 million of lower revenue in Commercial Aviation reflecting COVID-related impacts and lower revenue due to business divestitures. The funded backlog for this segment was $1.5 billion at December 31, 2021 compared with $3.0 billion at January 1, 2021, reflecting a $1.4 billion reduction from businesses divested during fiscal 2021.

The increases in segment operating income and operating margin percentage in fiscal 2021 compared with fiscal 2020 were primarily due to $527 million of lower non-cash charges for impairments of goodwill and other assets in fiscal 2021 compared with fiscal 2020 and the absence of $18 million of restructuring charges and other exit costs recorded in fiscal 2020 in our Commercial Aviation Solutions reporting unit due to the downturn in the commercial aviation market, as well as e3 performance, expense management and integration benefits, partially offset by the impact of divestitures.

The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 74 percent in fiscal 2021.

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The increase in segment revenue in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to the inclusion of L3 operations in segment operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger). Because the Aviation Systems segment is primarily comprised of L3 businesses, comparison to the four quarters ended January 3, 2020 segment operating metrics is not meaningful. The funded backlog for this segment was $3.0 billion at January 1, 2021 compared with $3.4 billion at January 3, 2020, reflecting a $380 million reduction from the divestiture of the airport security and automation business during the quarter ended July 3, 2020.

The segment operating loss in fiscal 2020 compared with segment operating income for the four quarters ended January 3, 2020 was primarily due to $635 million of non-cash charges for the impairment of goodwill and other assets, $18 million of restructuring charges and other exit costs recorded in fiscal 2020 in our Commercial Aviation Solutions reporting unit due to the

47

downturn in the commercial aviation market, as well as the divestiture of the airport security and automation business, partially offset by the inclusion of L3 operations in segment operating results for the two quarters ended July 3, 2020 (but not for the comparable prior-year two quarters preceding the L3Harris Merger), principally Defense Aviation operations.

The percentage of this segment’s revenue that was derived from sales to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was 71 percent in fiscal 2020.

Pro Forma

Fiscal 2020 Compared With Four Quarters Ended January 3, 2020:  The decrease in segment revenue in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to $681 million of lower commercial aviation sales, including a $364 million impact from the airport security and automation business divestiture and lower revenue from the downturn in the commercial aviation market and its impact on customer operations, partially offset by $189 million of higher revenue in Defense Aviation, from a ramp on classified programs and combat propulsion systems, and higher FAA volume in Mission Networks.

The segment operating loss in fiscal 2020 compared with segment operating income for the four quarters ended January 3, 2020 was primarily due to $635 million of non-cash charges for impairment of goodwill and other assets, $18 million of restructuring charges and other exit costs recorded in fiscal 2020 in our Commercial Aviation Solutions reporting unit due to the downturn in the commercial aviation market and its impact on customer operations, as well as a $39 million impact from the divestiture of the airport security and automation business, partially offset by operational efficiencies, integration benefits and cost management in fiscal 2020.

Additional Information on Known Trends and Uncertainties

Effective January 1, 2022, we have streamlined our business segments from four business segments to three business segments. As a result of the segment reorganization, the Aviation Systems segment was eliminated as a business segment. Our new business segment structure reflects that the ongoing operations that had been part of the Aviation Systems segment were integrated into the remaining segments. Defense aviation, commercial aviation products and commercial pilot training operations were moved into the Integrated Mission Solutions segment; and mission networks for air traffic management operations was moved into the Space & Airborne Systems segment.

See Note 27: Subsequent Events in the Notes for further information.

Unallocated Corporate Expenses

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Four Quarters Ended"],["","December 31, 2021","","January 1, 2021","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)","","January 3, 2020","","% Inc/(Dec)"],["(Dollars in millions)","As Reported","","As Reported","","","","As Reported (Unaudited)","","","","Pro forma"],["Unallocated corporate department expense, net","$","(57)","","","$","(69)","","","(17","%)","","$","35","","","*","","$","(6)","","","*"],["L3Harris Merger-related transaction, integration and other expenses and losses","(128)","","","(140)","","","(9","%)","","(394)","","","(64","%)","","(372)","","","(62","%)"],["Amortization of acquisition-related intangibles","(627)","","","(709)","","","(12","%)","","(339)","","","*","","(601)","","","18","%"],["Additional cost of sales related to fair value step-up in inventory sold","\u2014","","","(31)","","","*","","(142)","","","(78","%)","","(142)","","","(78","%)"],["Business divestiture-related gains (losses)","220","","","(51)","","","*","","229","","","*","","229","","","*"],["Impairment of goodwill and other assets","(125)","","","(132)","","","(5","%)","","(46)","","","*","","(46)","","","*"],["Other items","(71)","","","10","","","*","","\u2014","","","*","","\u2014","","","*"]]
[[/GREPCENT_TABLE]]
______________

*Not meaningful

48

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES

Cash Flows

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Four Quarters Ended","","Two Quarters Ended","","","","Fiscal Year Ended"],["","December 31, 2021","","January 1, 2021","","January 3, 2020","","January 3, 2020","","","","June 28, 2019"],["(In millions)","As Reported","","As Reported","","As Reported (Unaudited)","","As Reported","","","","As Reported"],["Net cash provided by operating activities","$","2,687","","","$","2,790","","","$","1,655","","","$","939","","","","","$","1,185"],["Net cash provided by (used in) investing activities","1,394","","","751","","","1,228","","","1,320","","","","","(159)"],["Net cash used in financing activities","(4,413)","","","(3,112)","","","(2,410)","","","(1,971)","","","","","(781)"],["Effect of exchange rate changes on cash and cash equivalents","(3)","","","23","","","8","","","6","","","","","(3)"],["Net (decrease) increase in cash and cash equivalents","(335)","","","452","","","481","","","294","","","","","242"],["Cash and cash equivalents, beginning of period","1,276","","","824","","","343","","","530","","","","","288"],["Cash and cash equivalents, end of period","$","941","","","$","1,276","","","$","824","","","$","824","","","","","$","530"]]
[[/GREPCENT_TABLE]]

Cash and cash equivalents

The $335 million net decrease in cash and cash equivalents in fiscal 2021 was primarily due to:

•$2,687 million of net cash provided by operating activities;

•$1,729 million of net proceeds from sale of businesses;

•$97 million of proceeds from exercises of employee stock options; and

•$6 million of net proceeds from borrowings; more than offset by

•$3,675 million used to repurchase shares of our common stock;

•$817 million used to pay cash dividends;

•$342 million used for additions of property, plant and equipment; and

•$13 million used for repayment of borrowings.

The $452 million net increase in cash and cash equivalents in fiscal 2020 was primarily due to:

•$2,790 million of net cash provided by operating activities;

•$1,040 million of net proceeds from sale of businesses;

•$901 million of net proceeds from borrowings, including $650 million in proceeds from the issuance of our 1.80% notes due January 15, 2031 and $250 million in proceeds from the issuance of our Floating Rate Notes due March 10, 2023;

•$91 million of net proceeds from sale of property, plant and equipment; and

•$56 million of proceeds from exercises of employee stock options; partially offset by

•$2,290 million used to repurchase shares of our common stock;

•$931 million used for repayment of borrowings, including $650 million used for our optional redemption of our 4.95% Notes due February 15, 2021 and $250 million used for repayment of our Floating Rate Notes due April 30, 2020;

•$725 million used to pay cash dividends;

•$368 million used for additions of property, plant and equipment; and

•$113 million used for payments of interest rate derivative obligations.

We ended fiscal 2021 with cash and cash equivalents of $941 million, and we have a senior unsecured $2 billion revolving credit facility that expires in June 2024 (all of which was available to us as of December 31, 2021). Additionally, we had $7.1 billion of net long-term debt outstanding at December 31, 2021, the majority of which we incurred in connection with the L3Harris Merger in the Fiscal Transition Period and the acquisition of Exelis in the fourth quarter of fiscal 2015. For further information regarding our long-term debt, see Note 13: Debt in the Notes. Our $941 million of cash and cash equivalents at December 31, 2021 included $200 million held by our foreign subsidiaries, a significant portion of which we believe can be repatriated to the U.S. with minimal tax cost.

Given our current cash position, outlook for funds generated from operations, credit ratings, available credit facility, cash needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity, although, we can give no assurances concerning our future liquidity, particularly in light of our overall level of debt, U.S. Government budget uncertainties and the state of global commerce and general political and financial uncertainty. We cannot predict the on-going impact that COVID, among other potential risks and uncertainties, will have on our cash from operating

49

activities. Additionally, the provisions in the Tax Cuts and Jobs Act of 2017 require that, beginning in 2022, research and experimental expenditures be capitalized and amortized over five years, which we estimate will have an approximately $600 million to $700 million impact to cash from operating activities in fiscal 2022 based on the provisions currently in effect. See Part I, “Item 1A. Risk Factors” in this Report.

Based on our current business plan and revenue prospects, we believe that our existing cash, funds generated from operations, our credit facility and access to the public and private debt and equity markets will be sufficient to provide for our anticipated working capital requirements, capital expenditures, dividend payments, repurchases under our share repurchase program and repayments of our debt securities at maturity for the next twelve months and reasonably foreseeable future thereafter. Our total capital expenditures for fiscal 2022 are expected to be approximately $330 million. We anticipate tax payments for fiscal 2022 to be approximately equal to or marginally less than our tax expense for the same period, absent R&D capitalization and subject to adjustment for timing differences. For additional information regarding our income taxes, see Note 22: Income Taxes in the Notes. Other than those cash outlays noted in the “Material Cash Requirements” discussion below in this MD&A, capital expenditures, dividend payments and repurchases under our share repurchase program and L3Harris Merger-related integration costs, we do not anticipate any significant cash outlays in fiscal 2022.

There can be no assurance that our business will continue to generate cash flows at current levels or that the cost or availability of future borrowings, if any, under our commercial paper program, or our credit facility or in the debt markets will not be impacted by any potential future credit or capital markets disruptions. If we are unable to maintain cash balances, generate cash flow from operations or borrow under our commercial paper program or our credit facility sufficient to service our obligations, we may be required to reduce capital expenditures, reduce or eliminate strategic acquisitions, reduce or terminate our share repurchases, reduce or eliminate dividends, refinance all or a portion of our existing debt, obtain additional financing, or sell assets. Our ability to make principal payments or pay interest on or refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions affecting the defense, government and other markets we serve and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

Net cash provided by operating activities: The $103 million decrease in net cash provided by operating activities in fiscal 2021 compared with fiscal 2020 was primarily due to higher net income of $756 million offset by the impact of a $523 million decrease in non-cash impairments of goodwill and other assets, a $271 million increase in gains related to business divestitures, a $65 million decrease in depreciation and amortization and a $56 million decrease in cash used to fund working capital (i.e., accounts receivable, contract assets, inventories, accounts payable and contract liabilities).

The $1,135 million increase in net cash provided by operating activities in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to the impact of higher income (excluding the impacts of a $721 million increase in non-cash impairments of goodwill and other assets and $461 million increase in depreciation and amortization in fiscal 2020), reflecting the inclusion of cash flows from L3 operations following the L3Harris Merger, as well as a $302 million voluntary contribution to our U.S. qualified pension plans and $278 million of cash used for L3Harris Merger transaction costs, including change in control charges, in the four quarters ended January 3, 2020, partially offset by a $306 million increase in cash used to fund working capital in fiscal 2020.

Cash flow from operations was positive in all of our business segments in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 and fiscal 2019.

Net cash provided by investing activities: The $643 million increase in net cash provided by investing activities in fiscal 2021 compared with fiscal 2020 was primarily due to an increase of $689 million in net proceeds from the sales of businesses, partially offset by a $58 million decrease of net cash used for additions of property, plant and equipment in fiscal 2021.

The $477 million decrease in net cash provided by investing activities in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to $1,130 million of net cash received from the L3Harris Merger in the four quarters ended January 3, 2020 and $101 million increase in cash used for additions of property, plant and equipment, partially offset by a $697 million increase in net proceeds from sales of businesses and $91 million of proceeds from sale of property, plant and equipment in fiscal 2020.

Net cash used in financing activities: The $1,301 million increase in net cash used in financing activities in fiscal 2021 compared with fiscal 2020 was primarily due to a $1,385 million increase in cash used to repurchase our common stock, a $895 million decrease in net proceeds from borrowings and a $92 million increase in cash used to pay dividends, partially offset by a $918 million decrease in cash used for repayments of borrowings, a $113 million increase in cash used to pay interest rate derivatives obligations and a $41 million increase in proceeds from exercises of employee stock options.

The $702 million increase in net cash used in financing activities in fiscal 2020 compared with the four quarters ended January 3, 2020 was primarily due to a $790 million increase in cash used to repurchase our common stock, a $226 million increase in cash used to pay dividends, a $121 million increase in cash used for repayments of borrowings, a $85 million decrease in proceeds from exercises of employee stock options and $81 million of payments of interest rate derivatives obligations,

50

partially offset by a $504 million increase in net proceeds from borrowings and a $87 million decrease in cash used for tax withholding payments associated with vested share-based awards in fiscal 2020.

Funding of Pension Plans

Funding requirements under applicable laws and regulations are a major consideration in making contributions to our U.S. pension plans. Although we have significant discretion in making voluntary contributions, the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and Employer Recovery Act of 2008, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”), and applicable Internal Revenue Code regulations, mandate minimum funding thresholds. The Highway and Transportation Funding Act of 2014, the Bipartisan Budget Act of 2015, the American Rescue Plan Act of 2021 and the Infrastructure Investment and Jobs Act further extended the interest rate stabilization provision of MAP-21. Failure to satisfy the minimum funding thresholds could result in restrictions on our ability to amend the plans or make benefit payments. With respect to our U.S. qualified defined benefit pension plans, we intend to contribute annually no less than the required minimum funding thresholds. As a result of prior voluntary contributions and plan performance, we were not required to make any contributions to our U.S. qualified defined benefit pension plans in fiscal 2021 and are not required to make any contributions in fiscal 2022 or for several years thereafter.

Future required contributions primarily will depend on the actual annual return on assets and the discount rate used to measure the benefit obligation at the end of each year. Depending on these factors, and the resulting funded status of our pension plans, the level of future statutory required minimum contributions could be material. We had net unfunded defined benefit plan obligations of $431 million as of December 31, 2021 compared with $1.8 billion as of January 1, 2021. The decrease in the unfunded status as of December 31, 2021 is primarily due to actuarial gains as a result of the increase in the discount rate. See Note 14: Pension and Other Postretirement Benefits in the Notes for further information regarding our pension plans.

Common Stock Repurchases

During fiscal 2021, we used $3.7 billion to repurchase 17 million shares of our common stock under our share repurchase program at an average price per share of $215.30, including commissions of $0.02 per share. During fiscal 2020, we repurchased 12 million shares of our common stock under our share repurchase program for $2.3 billion at an average price per share of $191.42, including commissions of $0.02 per share. During fiscal 2021 and 2020, $5 million and $4 million, respectively, in shares of our common stock were delivered to us or withheld by us to satisfy withholding taxes on employee share-based awards. Shares repurchased by us are cancelled and retired.

On July 1, 2019, we announced that our Board of Directors approved a new share repurchase program authorizing us to repurchase up to $4 billion in shares, replacing our prior share repurchase programs. On January 28, 2021, we announced that our Board of Directors approved a new $6 billion share repurchase authorization under our repurchase program that was in addition to the remaining unused authorization of $210 million at January 1, 2021 for a total unused authorization of $6.2 billion. Our repurchase program does not have a stated expiration date and authorizes us to repurchase shares of our common stock through open market purchases, private transactions, transactions structured through investment banking institutions or any combination thereof. During fiscal 2021, we repurchased $3.7 billion of our common stock under our repurchase programs. At December 31, 2021, we had a remaining unused authorization under our repurchase program of $2.5 billion. We have announced that we currently expect to repurchase up to $1.5 billion in shares under our repurchase program in fiscal 2022, but we can give no assurances regarding the level and timing of shares repurchases. The level and timing of our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board and management may deem relevant. The timing, volume and nature of repurchases are subject to market conditions, applicable securities laws and other factors and are at our discretion and may be suspended or discontinued at any time. Additional information regarding our repurchase program is set forth above under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report.

Dividends

On February 25, 2022, we announced that our Board of Directors increased the quarterly per share cash dividend rate on our common stock from $1.02 to $1.12, commencing with the dividend declared by our Board of Directors for the first quarter of fiscal 2022, for an annualized per share cash dividend rate of $4.48, which was our twenty-first consecutive annual increase in our quarterly cash dividend rate. Our annualized per share cash dividend rate was $4.08 in fiscal 2021, $3.40 in fiscal 2020, $3.00 in the two quarters ended January 3, 2020 and $2.74 in fiscal 2019. Quarterly cash dividends are typically paid in March, June, September and December. We currently expect that cash dividends will continue to be paid in the near future, but we can give no assurances concerning payment of future dividends or future dividend increases. The declaration of dividends and the amount thereof will depend on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board of Directors may deem relevant. Additional information concerning our dividends is set forth above under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report.

51

Capital Structure and Resources

2019 Credit Agreement: We have a $2 billion, 5-year senior unsecured revolving credit facility (the “2019 Credit Facility”) under a Revolving Credit Agreement (the “2019 Credit Agreement”) entered into on June 28, 2019 with a syndicate of lenders. The description of the 2019 Credit Facility and the 2019 Credit Agreement set forth in Note 12: Credit Arrangements in the Notes is incorporated herein by reference.

We were in compliance with the covenants in the 2019 Credit Agreement at December 31, 2021, including the covenant requiring that we not permit our ratio of consolidated total indebtedness to total capital, each as defined in the 2019 Credit Agreement, to be greater than 0.65 to 1.00. At December 31, 2021, we had no borrowings outstanding under the 2019 Credit Agreement.

Exchange Offer: In connection with the L3Harris Merger, on May 30, 2019, we commenced offers to eligible holders to exchange any and all outstanding 4.950% Senior Notes due 2021, 3.850% Senior Notes due 2023, 3.950% Senior Notes due 2024, 3.850% Senior Notes due 2026 and 4.400% Senior Notes due 2028 issued by L3 for up to $3.35 billion aggregate principal amount of new notes issued by L3Harris and cash. On July 2, 2019, we settled the debt exchange offer, and on March 31, 2020, we commenced offers to eligible holders to exchange any and all the outstanding notes that were previously issued by L3Harris pursuant to an exemption from the registration requirements of the Securities Act (“Original Notes”) for an equal principal amount of new notes registered under the Securities Act (the “Exchange Notes”). The terms of the Exchange Notes are substantially identical to the terms of the corresponding series of the Original Notes, except that the Exchange Notes are registered under the Securities Act, and the transfer restrictions, registration rights and related special interest provisions applicable to the Original Notes do not apply to the Exchange Notes. 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. See Note 13: Debt in the Notes for additional information.

Short-Term Debt: Our short-term debt was $2 million at each of December 31, 2021 and January 1, 2021, consisting of local borrowing by international subsidiaries for working capital needs. Our commercial paper program was supported by the 2019 Credit Facility at December 31, 2021 and January 1, 2021. See Note 12: Credit Arrangements in the Notes for additional information regarding credit arrangements.

Long-Term Variable-Rate Debt: The description of our long-term variable-rate debt set forth in Note 13: Debt in the Notes is incorporated herein by reference. As discussed in Note 13: Debt in the Notes, during the first quarter of fiscal 2020, we completed the issuance and sale of $250 million in aggregate principal amount of Floating Rate Notes due March 10, 2023 and used the net proceeds from the sale to repay in full the entire outstanding $250 million aggregate principal amount of our Floating Rate Notes due April 30, 2020 that had been issued in the second quarter of fiscal 2018.

Long-Term Fixed-Rate Debt: The description of our long-term fixed-rate debt set forth in Note 13: Debt in the Notes is incorporated herein by reference. As discussed in Note 13: Debt in the Notes, on November 25, 2020, we completed the issuance and sale of $650 million in aggregate principal amount of 1.80% notes due January 15, 2031 (the “1.80% 2031 Notes”) and used the proceeds from the sale to redeem the entire outstanding $650 million aggregate principal amount of our 4.95% Notes due February 15, 2021 (the “4.95% 2021 Notes”) ($501 million of which was issued by L3Harris and $149 million of which was issued by L3). On November 27, 2019, we completed the issuance and sale of $400 million in aggregate principal amount of 2.900% Notes due December 15, 2029 and used the proceeds from the sale to redeem the entire outstanding $400 million aggregate principal amount of our 2.7% Notes due April 27, 2020 (the “2.7% 2020 Notes”) at a “make-whole” redemption price of $403 million, as set forth in the 2.7% 2020 Notes. The 4.95% 2021 Notes and 2.7% 2020 Notes were terminated and cancelled.

Other Agreements: We have two receivable sales agreements (“RSAs”) with two separate third-party financial institutions that permit us to sell, on a non-recourse basis, up to an aggregate of $100 million of outstanding receivables at any given time. From time to time, we have sold certain customer receivables under the RSAs, which we continue to service and collect on behalf of the third-party financial institution and we account for as sales of receivables with sale proceeds included in net cash from operating activities. Outstanding receivables sold pursuant to RSAs were $99.9 million at December 31, 2021. We did not have outstanding receivables sold pursuant to RSAs at January 1, 2021.

52

Material Cash Requirements

At December 31, 2021, we had contractual cash obligations to repay debt, to purchase goods and services and to make payments under operating leases. Payments due under these long-term obligations are as follows:

[[GREPCENT_TABLE]]
[["","","","Payment Due"],["(In millions)","Total","","Within 1 Year"],["Long-term debt","$","6,994","","","$","15"],["Purchase obligations(1)","4,365","","","3,414"],["Operating and finance lease commitments","1,251","","","142"],["Interest on long-term debt","2,257","","","269"],["Minimum pension contributions(2)","24","","","24"],["Total(3)","$","14,891","","","$","3,864"]]
[[/GREPCENT_TABLE]]

_______________

(1) The purchase obligations of $4.4 billion included $715 million of purchase obligations related to cost-plus type contracts where our costs are fully reimbursable.

(2) Amount includes fiscal 2021 minimum contributions to non-U.S. pension plans. Contributions beyond fiscal 2021 have not been determined. As a result of voluntary contributions made to our U.S. qualified defined benefit pension plans during the two quarters ended January 3, 2020, fiscal 2018 and 2017, we made no material contributions to our U.S. qualified defined benefit pension plans in fiscal 2021 or 2020 and are not required to make any contributions to these plans during fiscal 2022.

(3) The above table does not include unrecognized tax benefits of $587 million.

Commercial Commitments

We have entered into commercial commitments in the normal course of business including surety bonds, standby letter of credit agreements and other arrangements with financial institutions and customers primarily relating to the guarantee of future performance on certain contracts to provide products and services to customers or to obtain insurance policies with our insurance carriers. At December 31, 2021, we had commercial commitments on outstanding surety bonds, standby letters of credit and other arrangements, as follows:

[[GREPCENT_TABLE]]
[["","Five Year","","Expiration of Commitments"],["(In millions)","Commercial Commitment Total","","Less than 1 Year"],["Surety bonds used for:"],["Bids","$","26","","","$","26"],["Performance","515","","","351"],["","541","","","377"],["Standby letters of credit used for:"],["Down payments","374","","","194"],["Performance","330","","","182"],["Warranty","82","","","75"],["","786","","","451"],["Total commitments","$","1,327","","","$","828"]]
[[/GREPCENT_TABLE]]

The surety bonds and standby letters of credit used for performance are primarily related to our Public Safety business sector. As is customary in bidding for and completing network infrastructure projects for public safety systems, contractors are required to procure surety bonds and/or standby letters of credit for bids, performance, warranty and other purposes (collectively, “Performance Bonds”). Such Performance Bonds normally have maturities of up to three years and are standard in the industry as a way to provide customers a mechanism to seek redress if a contractor does not satisfy performance requirements under a contract. Typically, a customer is permitted to draw on a Performance Bond if we do not fulfill all terms of a project contract. In such an event, we would be obligated to reimburse the financial institution that issued the Performance Bond for the amounts paid. It has been rare for our Public Safety business sector to have a Performance Bond drawn upon. In addition, pursuant to the terms under which we procure Performance Bonds, if our credit ratings are lowered to below “investment grade,” we may be required to provide collateral to support a portion of the outstanding amount of Performance Bonds. Such a downgrade could increase the cost of the issuance of Performance Bonds and could make it more difficult to procure Performance Bonds, which would adversely impact our ability to compete for contract awards. Such collateral requirements could also result in less liquidity for other operational needs or corporate purposes. In addition, any future disruptions, uncertainty or volatility in financial and insurance markets could also adversely affect our ability to obtain Performance Bonds and may result in higher funding costs.

53

Financial Risk Management

In the normal course of business, we are exposed to risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks.

Foreign Exchange and Currency: Our U.S. and foreign businesses enter into contracts with customers, subcontractors or vendors that are denominated in currencies other than functional currencies of such businesses. We use foreign currency forward contracts and options to hedge both balance sheet and off-balance sheet future foreign currency commitments. Factors that could impact the effectiveness of our hedging programs for foreign currency include accuracy of sales estimates, volatility of currency markets and the cost and availability of hedging instruments. A 10 percent change in currency exchange rates for our foreign currency derivatives held at December 31, 2021 would not have had a material impact on the fair value of such instruments or our results of operations or cash flows. This quantification of exposure to the market risk associated with foreign currency financial instruments does not take into account the offsetting impact of changes in the fair value of our foreign denominated assets, liabilities and firm commitments. See Note 19: Derivative Instruments and Hedging Activities in the Notes for additional information.

Interest Rates: As of December 31, 2021, we had long-term fixed-rate debt obligations. The fair value of these obligations is impacted by changes in interest rates; however, a 10 percent change in interest rates for our long-term fixed-rate debt obligations at December 31, 2021 would not have had a material impact on the fair value of these obligations. There is no interest-rate risk associated with long-term fixed-rate debt obligations on our results of operations and cash flows unless existing obligations are refinanced upon maturity at then-current interest rates, because the interest rates are fixed until maturity, and because our long-term fixed-rate debt is not putable to us (i.e., not required to be redeemed by us prior to maturity). We can give no assurances, however, that interest rates will not change significantly or have a material effect on the fair value of our long-term fixed-rate debt obligations over the next twelve months. See Note 13: Debt in the Notes for information regarding the maturities of our long-term fixed-rate debt obligations.

We use derivative instruments from time to time to manage our exposure to interest rate risk associated with our anticipated issuance of new long-term fixed-rate notes to repay at maturity our existing long-term fixed-rate debt obligations. If the derivative instrument is designated as a cash flow hedge, gains and losses from changes in the fair value of such instrument are deferred and included as a component of accumulated other comprehensive loss and reclassified to interest expense in the period in which the hedged transaction affects earnings. See Note 19: Derivative Instruments and Hedging Activities in the Notes for additional information.

At December 31, 2021, we had no outstanding treasury lock agreements (“treasury locks”). In connection with the L3Harris Merger, we assumed two treasury locks that had been initiated in January 2019 to hedge against fluctuations in interest payments due to changes in the benchmark interest rate (10-year U.S. Treasury rate) associated with the anticipated issuance of debt to redeem or repay our 4.95% 2021 Notes. These treasury locks were terminated as planned in connection with the issuance of our 1.80% 2031 Notes during the fourth quarter of 2020, and because interest rates decreased during the period of the treasury locks, we made a $113 million cash payment to our counterparty and recorded an after-tax loss of $58 million in the “Accumulated other comprehensive loss” line item of our Consolidated Balance Sheet. The accumulated other comprehensive loss balance will be amortized to interest expense over the life of the 1.80% 2031 Notes. We classified the cash outflow from the termination of these treasury locks as cash used in financing activities in our Consolidated Statement of Cash Flows. See Note 19: Derivative Instruments and Hedging Activities in the Notes for additional information.

At December 31, 2021, we also had long-term variable-rate debt obligations of $250 million of Floating Rate Notes due March 10, 2023. These debt obligations bear interest that is variable based on certain short-term indices, thus exposing us to interest-rate risk; however, a 10 percent change in interest rates for these debt obligations at December 31, 2021 would not have had a material impact on our results of operations or cash flows. See Note 13: Debt in the Notes for further information.

We have also used short-term variable-rate debt borrowings, primarily under our commercial paper program, which are subject to interest rate risk. We utilize our commercial paper program to satisfy short-term cash requirements, including bridge financing for strategic acquisitions until longer-term financing arrangements are put in place, temporarily funding repurchases under our share repurchase programs and temporarily funding redemption of long-term debt. The interest rate risk associated with such debt on our results of operations and cash flows is not material due to its temporary nature.

Impact of Foreign Exchange

In fiscal 2021, 40 percent of our international business was transacted in local currency environments compared with 32 percent in fiscal 2020, 40 percent in the two quarters ended January 3, 2020 and 18 percent in fiscal 2019. The impact of translating the assets and liabilities of these operations to U.S. Dollars is included as a component of shareholders’ equity. As of December 31, 2021, the cumulative foreign currency translation adjustment included in shareholders’ equity was a $118 million loss compared with a $58 million loss at January 1, 2021. We utilize foreign currency hedging instruments to minimize the

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currency risk of international transactions. Gains and losses resulting from currency rate fluctuations did not have a material effect on our results in fiscal 2021 or 2020, the two quarters ended January 3, 2020 or fiscal 2019.

Impact of Inflation

To the extent feasible, we have consistently followed the practice of adjusting our prices to reflect the impact of inflation on salaries and fringe benefits for employees and the cost of purchased materials and services. While recent reports show a sharp increase in inflation in late 2021, inflation and changing prices did not have a significantly adverse impact our gross margin, revenue or operating income in fiscal 2021 or 2020, the two quarters ended January 3, 2020 or fiscal 2019. However, our fixed-price contracts could subject us to losses in the event of a significant increase in inflation. See “Item 1A. Risk Factors” of this Report for more information regarding the risk of inflation to our business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following is not intended to be a comprehensive list of our accounting policies or estimates. Our significant accounting policies are more fully described in Note 1: Significant Accounting Policies in the Notes. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes. We consider the policies and estimates discussed below as critical to an understanding of our financial statements because their application places the most significant demands on our judgment, with financial reporting results dependent on estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Specific risks for these critical accounting estimates are described in the following paragraphs. The impact and any associated risks related to these estimates on our business operations are discussed throughout this MD&A where such estimates affect our reported and expected financial results. Senior management has discussed the development and selection of the critical accounting policies and estimates and the related disclosure included herein with the Audit Committee of our Board of Directors. Preparation of this Report requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and backlog as well as disclosure of contingent assets and liabilities. Actual results may differ from those estimates.

Besides estimates that meet the “critical” accounting estimate criteria, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed “critical,” affect reported amounts of assets, liabilities, revenue and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, including for estimates that we do not deem “critical.”

Revenue Recognition

A significant portion of our business is derived from development and production contracts. Revenue and profit related to development and production contracts are generally recognized over time, typically using the percentage of completion (“POC”) cost-to-cost method of revenue recognition, whereby we measure our progress towards completion of the performance obligation based on the ratio of costs incurred to date to estimated costs at completion under the contract. Because costs incurred represent work performed, we believe this method best depicts the transfer of control of the asset to the customer. Under the POC cost-to-cost method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. Recognition of profit on a contract requires estimates of the total cost at completion and transaction price and the measurement of progress towards completion. Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in estimating the cost of the work to be completed include: the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction price include contractual cost or performance incentives (such as incentive fees, award fees and penalties) and other forms of variable consideration as well as our historical experience and our expectation for performance on the contract. 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

55

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.

EAC adjustments had the following impacts to operating income for the periods presented:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ended","","Two Quarters Ended","","Fiscal Year Ended"],["(In millions)","December 31, 2021","","January 1, 2021","","January 3, 2020","","June 28, 2019"],["Favorable adjustments","$","620","","","$","714","","","$","303","","","$","138"],["Unfavorable adjustments","(316)","","","(314)","","","(166)","","","(121)"],["Net operating income adjustments","$","304","","","$","400","","","$","137","","","$","17"]]
[[/GREPCENT_TABLE]]

There were no individual impacts to operating income due to EAC adjustments in fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 or fiscal 2019 that were material to our results of operations on a consolidated or segment basis for such periods.

We recognize revenue from numerous contracts with multiple performance obligations. For these contracts, we allocate the transaction price to each performance obligation based on the relative standalone selling price of the good or service underlying each performance obligation. The standalone selling price represents the amount for which we would sell the good or service to a customer on a standalone basis (i.e., not sold as bundled sale with any other products or services). The allocation of transaction price among separate performance obligations may impact the timing of revenue recognition but will not change the total revenue recognized on the contract.

A substantial majority of our revenue is derived from contracts with the U.S. Government, including foreign military sales contracts. These contracts are subject to the FAR and the prices of our contract deliverables are typically based on our estimated or actual costs plus a reasonable profit margin. As a result, the standalone selling prices of the goods and services in these contracts are typically equal to the selling prices stated in the contract, thereby eliminating the need to allocate (or reallocate) the transaction price to the multiple performance obligations. In our non-U.S. Government contracts, when standalone selling prices are not directly observable, we also generally use the expected cost plus margin approach to determine standalone selling price. In determining the appropriate margin under the cost plus margin approach, we consider historical margins on similar products sold to similar customers or within similar geographies where objective evidence is available. We may also consider our cost structure and profit objectives, the nature of the proposal, the effects of customization of pricing, our practices used to establish pricing of bundled products, the expected technological life of the product, margins earned on similar contracts with different customers and other factors to determine the appropriate margin.

Postretirement Benefit Plans

Certain of our current and former employees participate in defined benefit pension and other postretirement defined benefit plans (collectively, referred to as “defined benefit plans”) in the United States, Canada, United Kingdom and Germany, which are sponsored by L3Harris. The determination of projected benefit obligations and the recognition of expenses related to defined benefit plans are dependent on various assumptions. These major assumptions primarily relate to discount rates, long-term expected rates of return on plan assets, rate of future compensation increases, mortality, termination and other factors (some of which are disclosed in Note 14: Pension and Other Postretirement Benefits in the Notes). Actual results that differ from our assumptions are accumulated and generally amortized for each plan to the extent required over the estimated future life expectancy or, if applicable, the future working lifetime of the plan’s active participants.

As part of our accounting for the L3Harris Merger, we completed a valuation and re-measurement of all L3 pension and other postretirement benefit (“OPEB”) plans as of the June 29, 2019 closing date of the L3Harris Merger and we recorded a $233 million increase to L3’s pension and OPEB liability as of June 29, 2019 based on the results of this valuation. The total L3 pension and OPEB liability assumed by L3Harris was $1.4 billion at June 29, 2019. The discount rate assumption used was a yield curve rather than a single interest rate. For the pension plans, the average June 29, 2019 discount rate used was 3.54 percent for U.S. plans and 2.95 percent for Canadian plans. For OPEB plans, the average June 29, 2019 discount rate used was 3.31 percent for U.S. plans and 2.92 percent for Canadian plans.

Significant Assumptions. We develop assumptions using relevant experience, in conjunction with market-related data for each plan. Assumptions are reviewed annually with third party consultants and adjusted as appropriate. The table included below provides the weighted average assumptions used to estimate projected benefit obligations and net periodic benefit cost as they pertain to our defined benefit pension plans.

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[[GREPCENT_TABLE]]
[["Obligation assumptions as of:","December 31, 2021","","January 1, 2021"],["Discount rate","2.75%","","2.31%"],["Rate of future compensation increase","3.01%","","3.01%"],["Cash balance interest crediting rate","3.50%","","3.50%"],["Cost assumptions for fiscal periods ended:","December 31, 2021","","January 1, 2021"],["Discount rate to determine service cost","2.26%","","2.87%"],["Discount rate to determine interest cost","1.80%","","2.74%"],["Expected return on plan assets","7.43%","","7.68%"],["Rate of future compensation increase","3.01%","","2.80%"],["Cash balance interest crediting rate","3.50%","","3.50%"]]
[[/GREPCENT_TABLE]]

Key assumptions for the Salaried Pension Plan (our largest defined benefit plan, with 86% of the total projected benefit obligation as of December 31, 2021) included a discount rate for obligation assumptions of 2.75%, a cash balance interest crediting rate of 3.50% and expected return on plan assets of 7.50% for fiscal 2021, which is being maintained at 7.50% for fiscal 2022. There is also a frozen pension equity benefit that assumes a 3.25% interest crediting rate.

Expected Return on Plan Assets. Substantially all of our plan assets are managed on a commingled basis in a master investment trust. We determine our expected return on plan assets by evaluating both historical returns and estimates of future returns. Specifically, we consider the plan’s actual historical annual return on assets over the past 15, 20 and 25 years and historical broad market returns over long-term time frames based on our strategic allocation, which is detailed in Note 14: Pension and Other Postretirement Benefits in the Notes. Future returns are based on independent estimates of long-term asset class returns. Based on this approach, the weighted average long-term annual rate of return on assets was estimated to be 7.43% for both fiscal 2021 and fiscal 2022.

Discount Rate. The discount rate is used to calculate the present value of expected future benefit payments at the measurement date. A decrease in the discount rate increases the present value of benefit obligations and generally decreases pension expense. The discount rate assumption is based on current investment yields of high-quality fixed income investments during the retirement benefits maturity period. The pension discount rate is determined by considering an interest rate yield curve comprising AAA/AA bonds, with maturities between zero and thirty years, developed by the plan’s actuaries. Annual benefit payments are then discounted to present value using this yield curve to develop a single discount rate matching the plan’s characteristics.

Sensitivity Analysis

Pension Expense. A 25 basis point change in the long-term expected rate of return on plan assets and discount rate would have the following effect on the combined U.S. defined benefit pension plans’ pension expense for the next twelve months:

[[GREPCENT_TABLE]]
[["","Increase/(Decrease) in Pension Expense"],["(In millions)","25 Basis Point Increase","","25 Basis Point Decrease"],["Long-term rate of return on assets used to determine net periodic benefit cost","$","(20)","","","$","20"],["Discount rate used to determine net periodic benefit cost","$","6","","","$","(4)"]]
[[/GREPCENT_TABLE]]

Projected Benefit Obligation. Funded status is derived by subtracting the respective year-end values of the projected benefit obligations (“PBO”) from the fair value of plan assets. The sensitivity of the PBO to changes in the discount rate varies depending on the magnitude and direction of the change in the discount rate. We estimate that a decrease of 25 basis points in the discount rate of the combined U.S. defined benefit pension plans would increase the PBO by approximately $276 million and an increase of 25 basis points would decrease the PBO by approximately $262 million.

Fair Value of Plan Assets. The plan assets of our defined benefit plans comprise a broad range of investments, including domestic and international equity securities, fixed income investments, interests in private equity and hedge funds and cash and cash equivalents.

A portion of our defined benefit plans asset portfolio is comprised of investments in private equity and hedge funds. The private equity and hedge fund investments are generally measured using the valuation of the underlying investments or at net asset value. However, in certain instances, the values reported by the asset managers were not current at the measurement date. Consequently, we have estimated adjustments to the last reported value where necessary to measure the assets at fair value at the measurement date. These adjustments consider information received from the asset managers, as well as general market

57

information. Asset values for other positions were generally measured using market observable prices. See Note 14: Pension and Other Postretirement Benefits in the Notes for further information.

Goodwill

Goodwill in our Consolidated Balance Sheet as of December 31, 2021 and January 1, 2021 was $18.2 billion and $18.9 billion, respectively. Goodwill is not amortized. We perform annual (or under certain circumstances, more frequent) impairment tests of our goodwill. We identify potential impairment by comparing the fair value of each of our reporting units with its carrying amount, including goodwill, which is adjusted for allocations of Corporate assets and liabilities as appropriate. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Business disposal group goodwill allocation. As described in more detail in Note 3: Business Divestitures and Asset Sales in the Notes, during fiscal 2021 and 2020 we determined the criteria to be classified as held for sale were met with respect to each of the disposal groups below. Because the divestiture of these business disposal groups represented the disposal of a portion of a reporting unit (except the military training business, which represented an entire reporting unit), we assigned goodwill to the business disposal group on a relative fair value basis. For purposes of allocating goodwill to the disposal groups below, we determined the fair value of each disposal group based on the respective negotiated selling price (or estimated net cash proceeds, in the case of no negotiated selling price), and the fair value of the retained businesses of the respective reporting unit based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions and projected discounted cash flows. These fair value determinations are categorized as Level 3 in the fair value hierarchy due to their use of internal projections and unobservable measurement inputs. See Note 1: Significant Accounting Policies in the Notes for additional information regarding the fair value hierarchy.

In conjunction with the relative fair value allocation, we tested goodwill assigned to each of the disposal group businesses below and goodwill assigned to the retained businesses of their reporting units for impairment and concluded that, except as noted in the following table, no goodwill impairment existed at the time the held for sale criteria were met.

[[GREPCENT_TABLE]]
[["(In millions)","Business Segment","","Date of Divestiture","","Goodwill Allocation","","Goodwill Impairment(1)","","Remaining Goodwill"],["Fiscal 2021"],["Narda-MITEQ business","Aviation Systems","","December 6, 2021","","$","7","","","$","\u2014","","","$","7"],["ESSCO business","Aviation Systems","","November 26, 2021","","4","","","\u2014","","","4"],["Electron Devices business","Aviation Systems","","October 1, 2021","","15","","","\u2014","","","15"],["VSE disposal group","Aviation Systems","","July 30, 2021","","14","","","14","","","\u2014"],["CPS business","Aviation Systems","","July 2, 2021","","174","","","62","","","112"],["Military training business","Aviation Systems","","July 2, 2021","","426","","","\u2014","","","426"],["Fiscal 2020"],["EOTech business","Communication Systems","","July 31, 2020","","9","","","\u2014","","","9"],["Applied Kilovolts business","Space & Airborne Systems","","May 15, 2020","","6","","","5","","","1"],["Airport security and automation business","Aviation Systems","","May 4, 2020","","531","","","\u2014","","","531"]]
[[/GREPCENT_TABLE]]
_________________

(1)The non-cash impairment charges are included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income.

Commercial Aviation Solutions goodwill allocation. As described in more detail in Note 10: Intangible Assets and elsewhere in the Notes, during the quarter ended July 2, 2021, we adjusted our Aviation Systems segment reporting to better align our businesses and separated the CTS business from our Commercial Aviation Solutions reporting unit, creating a new CTS reporting unit within the Commercial Aviation Solutions sector of our Aviation Systems segment. We assigned $68 million of goodwill to the CTS reporting unit and $779 million of goodwill to the Commercial Aviation Solutions reporting unit on a relative fair value basis. In conjunction with the relative fair value allocation, we tested goodwill assigned to each new reporting unit and concluded that no goodwill impairment existed as of July 2, 2021.

Fiscal 2021 Impairment Tests. We perform an annual impairment test of our goodwill as of the first day of our fourth quarter of each fiscal year, and more frequently if we believe indicators of impairment exist. Following our fiscal year end change, we made a corresponding change to our annual impairment assessment date and continued to perform our annual impairment test on the first day of our fourth quarter, which was October 3, 2020 for fiscal 2020 and October 2, 2021 for fiscal 2021.

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We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is our business segment level or one level below the business segment. Some of our segments are comprised of several reporting units. Allocation of goodwill to several reporting units could make it more likely that we will have an impairment charge in the future. An impairment charge to any one of our reporting units could have a material impact on our financial condition and results of operations.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. To test goodwill for impairment, we may perform both qualitative and quantitative assessments. If we elect to perform a qualitative assessment for a certain reporting unit, we evaluate events and circumstances impacting the reporting unit to determine the probability that goodwill is impaired. If we determine it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative assessment.

Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. These factors include: (i) deterioration in the general economy; (ii) deterioration in the environment in which the company operates; (iii) increase in raw materials, labor or other costs; (iv) negative or declining cash flows; (v) changes in management, changes in strategy, or significant litigation; (vi) change in the composition or carrying amount of net assets or an expectation of disposing all or a portion of the reporting unit; or (vii) a sustained decrease in share price.

If we perform a quantitative assessment for a certain reporting unit, we calculate the fair value of that reporting unit and compare the fair value to the reporting unit’s net book value. We estimate fair values of our reporting units based on projected cash flows, and sales and/or earnings multiples applied to the latest twelve months’ sales and earnings of our reporting units. Projected cash flows are based on our best estimate of future sales, operating costs and balance sheet metrics reflecting our view of the financial and market conditions of the underlying business; and the resulting cash flows are discounted using an appropriate discount rate that reflects the risk in the forecasted cash flows. The sales and earnings multiples applied to the sales and earnings of our reporting units are based on current multiples of sales and earnings for similar businesses, and based on sales and earnings multiples paid for recent acquisitions of similar businesses made in the marketplace. We then assess whether any implied control premium, based on a comparison of fair value based purely on our stock price and outstanding shares with fair value determined by using all of the above-described models, is reasonable.

We performed our annual impairment test of all of our reporting units’ goodwill as of October 2, 2021 and concluded that for each of our reporting units no impairment existed. As of October 2, 2021, the fair value of our Broadband reporting unit exceeded its carrying value, which included $1.9 billion of goodwill, by 16 percent. Although no impairment exists for the Broadband reporting unit, an impairment of goodwill could result from a number of circumstances, including different assumptions used in determining the fair value of the reporting units; changes to U.S. Government spending priorities or ability to win competitively awarded contracts; the rescission of significant contract awards as a result of competitors protesting or challenging contracts awarded to us; or a sharp increase in interest rates without a corresponding increase in future revenue.

Fiscal 2020 Impairment Tests. 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 COVID and its impact on global air traffic and customer operations, resulting in a decrease in fiscal 2020 outlook for the reporting unit, which we considered to be a triggering event requiring an interim impairment test. Consequently, in connection with the preparation of our financial statements for the quarter ended April 3, 2020, we performed a quantitative 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. Given the level of uncertainty in the outlook for the commercial aviation industry caused by the impact of COVID on global air traffic, our methodology for determining the fair value of the reporting unit placed the greatest weight on the expected fair value technique, and was dependent on our best estimates of future sales, operating costs and balance sheet metrics under a range of scenarios for future economic conditions. We assigned a probability to each scenario to calculate a set of probability-weighted projected cash flows, and an appropriate discount rate reflecting the risk in the projected cash flows was used to discount the expected cash flows to present value.

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 non-cash goodwill impairment charges of $296 million in the first quarter of fiscal 2020.

As adverse global economic and market conditions attributable to COVID, including projected declines and subsequent recovery in commercial air traffic and original equipment manufacturer production volumes, continued to develop during fiscal 2020, we continued to monitor for facts and circumstances that could negatively impact key valuation assumptions in determining the fair value of our Commercial Aviation Solutions reporting unit, including recent valuations, expectations regarding the timing of a return to pre-COVID commercial flight activity and the associated level of uncertainty, long-term revenue and profitability projections, discount rates and general industry, market and macroeconomic conditions. As a result, we determined indications of

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further impairment of assets related to our Commercial Aviation Solutions reporting unit existed as of July 3, 2020 and again as of early December 2020 and recorded $54 million and $368 million of additional non-cash charges for the impairment of goodwill and other assets during the second and fourth quarters of 2020, respectively. These charges are included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Income for fiscal 2020 and are primarily not deductible for tax purposes.

We also performed our annual impairment test of all of our other reporting units goodwill as of October 3, 2020 and concluded that the estimated fair values for each of our other reporting units exceeded their carrying values by greater than 10 percent. As of January 1, 2021, the Commercial Aviation Solutions reporting unit had $847 million of goodwill and the estimated fair value approximated the carrying value of the reporting unit.

See Note 9: Goodwill in the Notes for additional information.

Accounting for Business Combinations

We follow the acquisition method of accounting to record identifiable assets acquired, liabilities assumed and noncontrolling interests recognized in connection with acquired businesses at their estimated fair value as of the date of acquisition.

Identifiable intangible assets from business combinations are recognized at their estimated fair values as of the date of acquisition and generally consist of customer relationships, trade names, developed technology and in-process R&D. Determination of the estimated fair value of identifiable intangible assets requires judgment. The fair value of customer contractual relationships is determined based on estimates and judgments regarding future after-tax earnings and cash flows arising from follow-on sales on contract renewals expected from customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory asset charge, all of which is discounted to present value. The fair value of trade name identifiable intangible assets is determined utilizing the relief from royalty method. Under this form of the income approach, a royalty rate based on observed market royalties is applied to projected revenue supporting the trade name and discounted to present value using an appropriate discount rate. Identifiable intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. Finite-lived identifiable intangible assets are amortized to expense over their useful lives, generally ranging from three to twenty years. The fair value of identifiable intangible assets acquired in connection with the L3Harris Merger was $8.5 billion.

We assess the recoverability of finite-lived identifiable intangible assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. We evaluate the recoverability of such assets based on the expectations of undiscounted cash flows of the assets. If the sum of expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. See Note 4: Business Combination and Note 10: Intangible Assets in the Notes for additional information.

Income Taxes

We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in our Consolidated Balance Sheet, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. We have not made any material changes in the methodologies used to determine our tax valuation allowances during fiscal 2021, fiscal 2020, the two quarters ended January 3, 2020 or fiscal 2019.

Our Consolidated Balance Sheet as of December 31, 2021 included deferred tax assets of $85 million and deferred tax liabilities of $1.3 billion. This compares with deferred tax assets of $119 million and deferred tax liabilities of $1.2 billion as of January 1, 2021. For all jurisdictions in which we have net deferred tax assets, we expect that our existing levels of pre-tax earnings are sufficient to generate the amount of future taxable income needed to realize these tax assets. Our valuation allowance related to deferred income taxes, which is reflected in our Consolidated Balance Sheet, was $257 million as of December 31, 2021 compared with $165 million as of January 1, 2021. Although we make reasonable efforts to ensure the accuracy of our deferred tax assets, if we continue to operate at a loss in certain jurisdictions, or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, or if the potential impact of tax planning strategies changes, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.

The evaluation of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, involves inherent uncertainty and requires the use of judgment. We evaluate our income tax positions and record tax benefits for all years subject to examination based on our assessment of the facts and circumstances as of the reporting date. For tax positions where it

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is more likely than not that a tax benefit will be realized, we record the largest amount of tax benefit with a greater than 50 percent probability of being realized upon ultimate settlement with the applicable taxing authority, assuming the taxing authority has full knowledge of all relevant information. For income tax positions where it is not more likely than not that a tax benefit will be realized, we do not recognize a tax benefit in our Consolidated Financial Statements.

As of December 31, 2021, we had $587 million of unrecognized tax benefits, of which $488 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. As of January 1, 2021, we had $542 million of unrecognized tax benefits, of which $453 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized.

It is reasonably possible that there could be a significant decrease or increase to our unrecognized tax benefits during the course of the next twelve months as ongoing tax examinations continue, other tax examinations commence or various statutes of limitations expire. However, an estimate of the range of possible changes cannot be made for remaining unrecognized tax benefits because of the significant number of jurisdictions in which we do business and the number of open tax periods. See Note 22: Income Taxes in the Notes for additional information.

Impact of Recently Issued Accounting Pronouncements

Accounting pronouncements that have recently been issued but have not yet been implemented by us are described in Note 2: Accounting Changes or Recent Accounting Pronouncements in the Notes, which describes the potential impact that these pronouncements are expected to have on our financial condition, results of operations, cash flows or equity.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

The following are some of the factors we believe could cause our actual results to differ materially from our historical results or our current expectations or projections. Other factors besides those listed here also could adversely affect us. See “Item 1A. Risk Factors” of this Report for more information regarding factors that might cause our results to differ materially from those expressed in or implied by the forward-looking statements contained in this Report.

•The effects of COVID could have a material adverse effect on our business operations, financial condition, results of operations, cash flows and equity.

•We depend on U.S. Government customers for a significant portion of our revenue, and the loss of these relationships, a reduction in U.S. Government funding or a change in U.S. Government spending priorities could have an adverse impact on our business, financial condition, results of operations, cash flows and equity.

•We depend significantly on U.S. Government contracts, which often are only partially funded, subject to immediate termination, and heavily regulated and audited. The termination or failure to fund, or negative audit findings for, one or more of these contracts could have an adverse impact on our business, financial condition, results of operations, cash flows and equity.

•The U.S. Government’s budget deficit and the national debt, as well as any inability of the U.S. Government to complete its budget process for any government fiscal year and consequently having to shut down or operate on funding levels equivalent to its prior fiscal year pursuant to a “continuing resolution,” could have an adverse impact on our business, financial condition, results of operations, cash flows and equity.

•Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-material type contracts. In particular, our fixed-price contracts could subject us to losses in the event of cost overruns or a significant increase in inflation.

•Our commercial aviation products, systems and services businesses are affected by global demand and economic factors that could negatively impact our financial results.

•We participate in markets that are often subject to uncertain economic conditions, which makes it difficult to estimate growth in our markets and, as a result, future income and expenditures.

•We cannot predict the consequences of future geopolitical events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our profitability.

•We derive a significant portion of our revenue from international operations and are subject to the risks of doing business internationally, including fluctuations in currency exchange rates.

•We are subject to government investigations, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and equity.

•We could be negatively impacted by a security breach, through cyber attack, cyber intrusion, insider threats or otherwise, or other significant disruption of our IT networks and related systems or of those we operate for certain of our customers.

•Our future success will depend on our ability to develop new products, systems, services and technologies that achieve market acceptance in our current and future markets.

•We must attract and retain key employees, and any failure to do so could seriously harm us.

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•Some of our workforce is represented by labor unions, so a prolonged work stoppage could harm our business.

•Disputes with our subcontractors or key suppliers, or their inability to perform or timely deliver our components, parts or services, could cause our products, systems or services to be produced or delivered in an untimely or unsatisfactory manner.

•We have significant operations in locations that could be materially and adversely impacted in the event of a natural disaster or other significant disruption.

•Changes in estimates we use in accounting for many of our programs could adversely affect our future financial results.

•Our level of indebtedness and our ability to make payments on or service our indebtedness and our unfunded defined benefit plans liability may materially adversely affect our financial and operating activities or our ability to incur additional debt.

•A downgrade in our credit ratings could materially adversely affect our business.

•The level of returns on defined benefit plan assets, changes in interest rates and other factors could materially adversely affect our financial condition, results of operations, cash flows and equity in future periods.

•Changes in our effective tax rate may have an adverse effect on our results of operations.

•We may not be successful in obtaining the necessary export licenses to conduct certain operations abroad, and Congress may prevent proposed sales to certain foreign governments.

•Our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or business partners.

•The outcome of litigation or arbitration in which we are involved from time to time is unpredictable, and an adverse decision in any such matter could have a material adverse effect on our financial condition, results of operations, cash flows and equity.

•Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon their intellectual property rights, and third parties may infringe upon our intellectual property rights.

•We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity.

•Unforeseen environmental issues, including regulations related to GHG emissions or change in customer sentiment related to environmental sustainability, could have a material adverse effect on our business, financial condition, results of operations, cash flows and equity.

•Strategic transactions, including mergers, acquisitions and divestitures, involve significant risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows and equity.

•Changes in future business or other market conditions could cause business investments and/or recorded goodwill or other long-term assets to become impaired, resulting in substantial losses and write-downs that would materially adversely affect our results of operations and financial condition.