# L3HARRIS TECHNOLOGIES, INC. /DE/ (LHX) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from L3HARRIS TECHNOLOGIES, INC. /DE/'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/202058/000020205824000029/hrs-20231229.htm Accession: 0000202058-24-000029 Filing date: 2024-02-20 Report date: 2023-12-29 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/ Previous year: /company/LHX/mda/fy2022/ (FY 2022) Next year: /company/LHX/mda/fy2025/ (FY 2025) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 fiscal 2023 compared with fiscal 2022. A discussion of fiscal 2022 compared to fiscal 2021 can be found in Part II: Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2022 (our “Fiscal 2022 Form 10-K”). 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.” OVERVIEW We are the Trusted Disruptor in the defense industry. With customers’ mission-critical needs in mind, we deliver end-to-end technology solutions connecting the space, air, land, sea and cyber domains. We support government 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 and services have defense and civil government _____________________________________________________________________ 24 applications, as well as commercial applications. As of December 29, 2023, we had approximately 50,000 employees, including approximately 20,000 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 we report the financial results of our continuing operations in the four segments: SAS, IMS, CS and AR. See Note 14: Business Segments in the Notes for further information regarding our business segments, including how we define segment operating income or loss. U.S. and International Budget Environment 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 76%, 74% and 75%, in fiscal 2023, 2022 and 2021, respectively. On December 29, 2022, the President signed the Consolidated Appropriations Act, 2023 (H.R. 2617 ) into law, which provided $858 billion of national defense funding for the 2023 GFY, of which $816 billion was allotted to the DoD. On March 13, 2023, the President’s Budget Request for GFY 2024 (“2024 PBR”) was released. The 2024 PBR includes $842 billion for the DoD, a proposed increase of approximately 3% over the enacted GFY 2023 DoD budget. Many of our offerings funded in the enacted GFY 2023 DoD budget are also supported by the 2024 PBR, including responsive satellites, ISR aircraft, tactical communications and maritime solutions. On June 3, 2023, the President signed into law the Fiscal Responsibility Act of 2023 (“FRA”), (P.L., 118-5) which suspended the federal debt limit through January 1, 2025 and established new discretionary funding limits for defense and non-defense accounts. The deal capped GFY 2024 national defense funding at $886 billion, including $842 billion for the DoD specifically, and non-defense funding at $704 billion. The FRA includes a provision that requires if a CR is in effect on January 1, 2024, for any discretionary account, the discretionary spending limits would be revised to reflect GFY23 enacted levels for defense and nondefense, decreased by 1%. If a final GFY2024 appropriations bill is not enacted by April 30, the 1% spending cuts would go into effect. On September 30, 2023, the President signed a short-term CR, funding the government for 48 days through November 17, 2023. On November 17, 2023, the President signed a second CR into law. The second CR funded some government agencies through January 19, 2024, and other agencies, including the DoD, through February 2, 2024. On January 19, 2024, the President signed a third CR into law extending government funding through March 1 and March 8, respectively. Congress must enact full-year GFY appropriations bills or another CR to fund the government by those respective deadlines. While operating under a CR, government agencies are allocated a portion of GFY 2023 enacted funds, and DoD is prohibited from starting new programs. The overall defense spending environment, both in the U.S. and internationally, reflects the continued impacts of the conflicts in Ukraine and geopolitical tensions across Asia and the Middle East, and changes to U.S. Government or international spending priorities have and could in the future impact our business. For a discussion of U.S. Government funding risks and international business risks see “Item 1. Business -Government Contracts,” “Item 1. Business - International Business,” “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” of this Report. Economic Environment The macroeconomic environment continues to present challenges, which have impacted and may continue to impact our future results. The ongoing uncertainty related to the impacts of inflation, as well as increased interest rates, which raises the cost of borrowing for the federal government, could in the future impact U.S. Government spending priorities and the demand for our products. For a discussion of inflation-related risks, see “Item 1A. Risk Factors” of this Report. Acquisitions and Pending Divestitures TDL Product Line. On January 3, 2023, we completed the acquisition of TDL for a purchase price of $1,958 million. TDL is reported within our CS segment. AJRD. On July 28, 2023, we completed the acquisition of AJRD for a total net purchase price of $4,715 million. The operations of AJRD are reported in the newly established AR segment and in our corporate headquarters. Pending Divestiture of CAS Disposal Group. On November 27, 2023, we announced that we entered into a definitive agreement to sell our CAS disposal group, which is included in our IMS segment. _____________________________________________________________________ 25 See Note 13: Acquisitions, Divestitures and Asset Sales in the Notes for further information. Operating Environment, Strategic Priorities and Key Performance Measures The heightened geopolitical tensions worldwide emphasize the need for strengthened deterrence to support the U.S. and its allies. With a national security, technology-focused portfolio, we are uniquely positioned to meet our customers’ evolving needs across all domains and deliver advanced capabilities to support the U.S. and its allies. Many of our offerings are supported in the 2024 GFY DoD budget, including responsive satellites, ISR aircraft, tactical communications, networked maritime systems and classified cyber solutions. In fiscal 2023, we received several key strategic contract awards across each of our domains, and we ended the year with backlog of $32.7 billion, a 47% increase over the prior year. Also in fiscal 2023, we invested $480 million (2% of total revenue) in company-funded R&D focused on technologies that expand our capabilities across our domains. As noted in the “Acquisitions and Pending Divestitures” section above, during fiscal 2023, we closed on two acquisitions. The TDL acquisition provides us access to the Link 16 network and positions us to make the installed base of terminals more resilient and relevant, consistent with joint all-domain command and control (“JADC2”) modernization efforts. The AJRD acquisition provides access to new markets in missiles and missile defense as well as space exploration. This year, we embarked on the next phase of the L3Harris evolution, known as LHX NeXt, a targeted three-year program designed to enhance organizational agility and performance by leveraging our scale and relationships across segments, driving operational efficiency and competitiveness for the enterprise. With this program we are investing in enterprise tools and optimized, revamped processes to unlock further opportunities for margin expansion and create additional value for our shareholders. Our strategic priorities continue to be performance, growth and innovation, with “Performance First” continuing to be our primary focus. We plan to continue to invest, consistent with growth opportunities, and sustain our culture of innovation, while delivering on our commitments to investors, our customers and on every contract we are awarded. We intend to accomplish this by: •Relentlessly focusing on program execution and continuous improvement; •Strengthening the risk management culture that has developed over the highly volatile past three years; •Seamlessly integrating TDL and AJRD; and •Attracting, developing and retaining the skilled workforce key to our role as a Trusted Disruptor. We use the following key financial performance measures to manage our business, which are discussed in detail below in the “Operations Review” and “Liquidity and Capital Resources” sections of this MD&A: •Revenue; •Operating income and margin; and •Net cash provided by operating activities. We also measure the success of our business using certain measures that are not defined by U.S. Generally Accepted Accounting Principles (“GAAP”), such as adjusted segment operating income (defined as operating income excluding certain corporate items and certain significant and/or nonrecurring items), earnings before interest and taxes, non-GAAP earnings per share, free cash flow (defined as net cash provided by operating activities less additions of property, plant and equipment net of proceeds from the sale of property, plant and equipment) and return on invested capital (defined as after-tax operating income from continuing operations divided by the five-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), which may be calculated differently by other companies. We use these measures, along with our key financial performance measures above, to assess the success of our business and our ability to create shareholder value. We believe these measures are balanced among long-term and short-term performance, growth and innovation. We also use some of these and other performance metrics for executive compensation purposes. _____________________________________________________________________ 26 OPERATIONS REVIEW Consolidated Results of Operations [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(Dollars in millions, except per share amounts)","December 29, 2023","","December 30, 2022"],["Revenue","$","19,419","","","$","17,062"],["Cost of revenue","(14,306)","","","(12,135)"],["% of total revenue","74","%","","71","%"],["Gross margin","5,113","","","4,927"],["% of total revenue","26","%","","29","%"],["General and administrative expenses","(3,262)","","","(3,006)"],["% of total revenue","17","%","","18","%"],["Asset group and business divestiture-related (losses) gains, net","(51)","","","8"],["Impairment of goodwill and other assets","(374)","","","(802)"],["Operating income","1,426","","","1,127"],["Non-service FAS pension income and other, net1","338","","","425"],["Interest expense, net","(543)","","","(279)"],["Income from continuing operations before income taxes","1,221","","","1,273"],["Income taxes","(23)","","","(212)"],["Effective tax rate","1.9","%","","16.7","%"],["Net income","1,198","","","1,061"],["Noncontrolling interests, net of income taxes","29","","","1"],["Net income attributable to L3Harris Technologies, Inc.","$","1,227","","","$","1,062"],["% of total revenue","6","%","","6","%"],["Net income from continuing operations per diluted common share attributable to L3Harris Technologies, Inc common shareholders","$","6.44","","","$","5.49"]] [[/GREPCENT_TABLE]] _____ 1“FAS” is defined as Financial Accounting Standards. Revenue As described in more detail in Note 13: Acquisitions, Divestitures and Asset Sales and elsewhere in the Notes, during fiscal 2023 and 2022, we completed certain asset group sales and business divestitures. There was no significant revenue attributable to divested businesses. Revenue for fiscal 2023 increased 14% compared with fiscal 2022 from the inclusion of $1,052 million of revenue from the July 28, 2023 acquisition of AJRD, which is reported in our AR segment, and higher revenue in CS of $853 million (including $365 million of revenue from the acquisition of TDL) and SAS of $472 million. See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A for further information. Gross margin Gross margin for fiscal 2023 increased compared to fiscal 2022, largely due to the increases in revenue noted above, partially offset by an unfavorable net change in EAC adjustments which decreased gross margin by $121 million and a higher mix of lower margin revenue, primarily in our CS segment. Gross margin as a percentage of revenue decreased compared to fiscal 2022 from EAC adjustments and a higher mix of lower margin revenue, primarily in our CS segment. For discussion of operating income by segment see the “Discussion of Business Segment Results of Operations” below in this MD&A for further information. _____________________________________________________________________ 27 Segment Product and Service Analysis The following tables present revenue and cost of revenue from products and services by segment. [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["","December 29, 2023"],["(In millions)","SAS","","IMS","","CS","","AR","","Eliminations","","Total"],["Revenue"],["Products","$","4,879","","$","4,006","","$","4,057","","$","752","","$","\u2014","","$","13,694"],["Services","1,928","","2,537","","960","","300","","\u2014","","5,725"],["Intersegment","49","","87","","53","","\u2014","","(189)","","\u2014"],["Total","$","6,856","","$","6,630","","$","5,070","","$","1,052","","$","(189)","","$","19,419"],["Cost of revenue"],["Products","$","3,777","","$","3,055","","$","2,319","","$","558","","$","2","","9,711"],["Services","1,554","","1,944","","845","","259","","(7)","","4,595"],["Intersegment","49","","87","","53","","\u2014","","(189)","","\u2014"],["Total","$","5,380","","$","5,086","","$","3,217","","$","817","","$","(194)","","14,306"],["","Fiscal Year Ended"],["","December 30, 2022"],["","SAS","","IMS","","CS","","AR","","Eliminations","","Total"],["Revenue"],["Products","$","4,574","","$","4,152","","$","3,370","","**","","$","\u2014","","$","12,097"],["Services","1,761","","2,403","","802","","**","","\u2014","","4,965"],["Intersegment","49","","71","","45","","**","","(165)","","\u2014"],["Total","$","6,384","","$","6,626","","$","4,217","","$","\u2014","","$","(165)","","$","17,062"],["Cost of revenue"],["Products","$","3,397","","$","3,008","","$","1,953","","**","","$","(3)","","$","8,355"],["Services","1,364","","1,814","","600","","**","","2","","3,780"],["Intersegment","49","","71","","45","","**","","(165)","","\u2014"],["Total","$","4,810","","$","4,893","","$","2,598","","$","\u2014","","","$","(166)","","$","12,135"]] [[/GREPCENT_TABLE]] _________________ ** AR is a new reportable segment established in the quarter ended September 29, 2023 which consists of the operations assumed in the AJRD acquisition. As such, there is no comparable prior year information. Products revenue. Products revenue increased $1,598 million, from the inclusion of $752 million of products revenue from AR, as well as increases of $687 million at CS, primarily from the inclusion of TDL, and of $305 million at SAS, respectively. Such increases were partially offset by a decrease of $146 million at IMS. Cost of product revenue. Cost of product revenue increased $1,356 million, primarily from the inclusion of $558 million of cost of product revenue from AR and an increase of $366 million at CS, in line with the increase in product revenue and primarily from the inclusion of TDL. The increase was also attributable to an increase in cost of product revenue of $380 million at SAS, primarily from an increase in products revenue in Space Systems and $47 million at IMS. Services revenue. Services revenue increased $759 million, from the inclusion of $300 million of services revenue from AR, as well as increases of $167 million at SAS, $158 million at CS, primarily from the inclusion of TDL, and $134 million at IMS. Cost of services revenue. Cost of services revenue increased $815 million, primarily from the inclusion of $259 million of cost of services revenue from AR and an increase of $245 million, higher costs of services revenue at CS primarily from the inclusion of TDL, and $190 million and $130 million higher costs of services revenue at SAS and IMS respectively, primarily due to a larger volume of lower margin service sales. _____________________________________________________________________ 28 General and administrative expenses Major components of General and administrative expenses (“G&A”) were as follows: [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(In millions)","December 29, 2023","","December 30, 2022"],["Amortization of acquisition-related intangibles","$","(687)","","","$","(532)"],["Company-funded R&D costs","(480)","","","(603)"],["Merger, acquisition, and divestiture related expenses","(174)","","","(162)"],["LHX NeXt(1)","(115)","","","\u2014"],["Selling and marketing","(450)","","","(483)"],["Other G&A expenses(2)","(1,356)","","","(1,226)"],["Total G&A expenses","$","(3,262)","","","$","(3,006)"]] [[/GREPCENT_TABLE]] ______________ (1)Costs associated with transforming multiple functions, systems and processes to increase agility and competitiveness, including third-party consulting, workforce optimization and incremental IT expenses for implementation of new systems. (2)Other G&A expenses primarily includes unallocated corporate expenses and segment G&A expense. In fiscal 2023, G&A expenses increased due to the inclusion of costs from our LHX NeXt initiative, as discussed in more detail under the “Operating Environment, Strategic Priorities and Key Performance Measures” section above in this MD&A, as well as increases in amortization of acquisition-related intangibles and an increase in Other G&A expenses as described below. Such increases were partially offset by a decrease in R&D costs and decreases from charges for severance and other termination costs and charges related to an additional pre-merger legal contingency that occurred in fiscal 2022. For fiscal 2023, the increase in other G&A expenses of $190 million is attributable to increases of $39 million at our CS segment, partially from the inclusion of TDL and $16 million at our IMS segment, as well as the inclusion of approximately $75 million of other G&A expenses in our new AR segment, partially offset by a decrease in other G&A expenses in our SAS segment of $8 million. The remaining amount is attributable to an increase in corporate other G&A expenses and eliminations. Asset group and business divestiture-related (losses) gains, net During fiscal 2023, pre-tax losses, net, consist of a $77 million loss associated with the pending divestiture of the CAS disposal group within the IMS segment, partially offset by a $26 million pre-tax gain recognized on divestiture of our Visual Information Solutions (“VIS”) business from our SAS segment. During fiscal 2022, we completed one business divestiture and one asset sale from our IMS segment and recognized a pre-tax gain of $8 million associated with the asset sale. See Note 13: Acquisitions, Divestitures and Asset Sales in the Notes for further information. Impairment of goodwill and other assets Impairment of goodwill and other assets consisted of the following non-cash charges: [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(In millions)","December 29, 2023","","December 30, 2022"],["Goodwill:(1)"],["IMS","$","296","","","$","367"],["CS","\u2014","","","355"],["SAS","\u2014","","","80"],["Total impairment of goodwill","$","296","","","$","802"],["Other assets:"],["Impairment of customer contracts","48","","","\u2014"],["Facility closure","9","","","\u2014"],["In-process R&D impairment(1)","21","","","\u2014"],["Total impairment of other assets","$","78","","","$","\u2014"],["Total impairment of goodwill and other assets","$","374","","","$","802"]] [[/GREPCENT_TABLE]] _____________________________________________________________________ 29 ______________ (1) See Note 6: Goodwill and Intangible Assets in the Notes for further information. Non-service FAS pension income and other, net Included in this caption is non-service FAS pension income and other non-operating income and expenses. Non-service FAS pension income of $310 million in fiscal 2023 decreased $131 million compared with fiscal 2022 primarily due to the $170 million increase in interest cost due to a higher discount rate in fiscal 2023, partially offset by a $31 million increase in amortization of net actuarial gains. Other non-operating income, net of $28 million in fiscal 2023 increased $44 million from non-operating expense, net of $16 million in fiscal 2022 primarily from changes in the market value of our rabbi trust assets, gains and losses on our equity investments in nonconsolidated affiliates and royalty income. See Note 9: Retirement Benefits in the Notes for more information on the composition of non-service cost components of FAS pension and other postretirement benefits (“OPEB”) income and expense. Interest expense, net Our net interest expense increased in fiscal 2023 compared with fiscal 2022 primarily due to interest expense of $207 million on the $5.5 billion of long-term debt issued in fiscal 2023 and $69 million increase in interest expense on outstanding notes under our commercial paper program (“CP Program”) during fiscal 2023, both of which were primarily due to the acquisitions of TDL and AJRD. See Note 8: Debt and Credit Arrangements in the Notes for further information. Income taxes Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 1.9% in fiscal 2023 compared with 16.7% in fiscal 2022. The decrease was primarily attributable to favorable impacts of divestitures and internal restructuring and the reduction of unfavorable non-deductible goodwill impairments experienced in fiscal 2022. See Note 7: Income Taxes in the Notes for further information. Net income per common share attributable to L3Harris Technologies, Inc. common shareholders The increase in income from continuing operations per diluted common share attributable to L3Harris common shareholders in fiscal 2023 compared with fiscal 2022 was primarily due to higher net income and fewer diluted weighted average common shares outstanding, primarily reflecting the repurchases of our common stock under our share repurchase program during fiscal 2023. See the “Common Stock Repurchases” discussion below in this MD&A for further information. Discussion of Business Segment Results of Operations Effective for fiscal 2023, we adjusted our reporting to better align our businesses and transferred our ADG business from our IMS segment to our SAS segment. Additionally, upon completion of the AJRD acquisition on July 28, 2023, we established a new reportable segment, AR. 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 operations, balance sheets, statements of cash flows or statements of equity resulting from these changes. SAS Segment Our SAS segment includes space payloads, sensors and full-mission solutions; classified intelligence and cyber; avionics; electronic warfare; and mission networks for air traffic management operations. See “Item 1: Business” of this Report for a description of the sectors in SAS. [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(Dollars in millions)","December 29, 2023","","December 30, 2022","","% Inc/(Dec)"],["Revenue","$","6,856","","","$","6,384","","","7","%"],["Operating income","756","","","665","","","14","%"],["Operating margin","11.0","%","","10.4","%"]] [[/GREPCENT_TABLE]] The increase in SAS revenue in fiscal 2023 compared with fiscal 2022 was primarily due to higher revenue of $445 million from program growth in Space Systems, Mission Networks and Intel and Cyber. _____________________________________________________________________ 30 The increases in SAS operating income and operating margin in fiscal 2023 compared with fiscal 2022 were primarily due to higher volume, $66 million of lower R&D expenses, $53 million of lower non-cash charges for impairment of goodwill and other assets, lower overhead costs and favorable mix in Space Systems due to a non-recurring license sale during fiscal 2023. Such increases were partially offset by $40 million change in EAC adjustments from program execution during fiscal 2023. IMS Segment Our IMS segment includes ISR; passive sensing and targeting; electronic attack; autonomy; power and communications; networks; sensors; aviation products; and pilot training operations. See “Item 1: Business” of this Report for a description of the sectors in IMS. [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(Dollars in millions)","December 29, 2023","","December 30, 2022","","% Inc/(Dec)"],["Revenue","$","6,630","","","$","6,626","","","\u2014","%"],["Operating income","459","","","494","","","(7","%)"],["Operating margin","6.9","%","","7.5","%"]] [[/GREPCENT_TABLE]] The flat IMS revenue in fiscal 2023 compared with fiscal 2022 was primarily due to lower revenue of $179 million in ISR largely from lower aircraft missionization volume, offset by higher revenues of $69 million in Electro Optical from higher volume in space and sensors, $63 million in Maritime largely from volume in classified programs, power and energy solutions and international and $61 million in Commercial Aviation Solutions from volume. The decrease in IMS operating income and operating margin in fiscal 2023 compared with fiscal 2022 were primarily due to a net change in EAC adjustments of $103 million, principally in ISR and in Maritime from net unfavorable EAC adjustments in fiscal 2023 due to program execution, and the sale of $33 million of end-of-life inventory in Commercial Aviation Systems during fiscal 2022. Such decreases were partially offset by $64 million of lower R&D expenses and $59 million of lower non-cash charges for impairment of goodwill and other assets in fiscal 2023. CS Segment Our CS segment includes tactical communications with global communications solutions; broadband communications; integrated vision solutions; and public safety radios, system applications and equipment. See “Item 1: Business” of this Report for a description of the sectors in CS. [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(Dollars in millions)","December 29, 2023","","December 30, 2022","","% Inc/(Dec)"],["Revenue","$","5,070","","","$","4,217","","","20","%"],["Operating income","1,229","","","667","","","84","%"],["Operating margin","24.2","%","","15.8","%"]] [[/GREPCENT_TABLE]] The increase in CS revenue in fiscal 2023 compared with fiscal 2022 was primarily due to higher revenue of $464 million in Broadband Communications, from the inclusion of $365 million of revenue from the acquisition of TDL and higher volume on legacy Broadband Communications platforms and $318 million in Tactical Communications and $83 million in Public Safety, both from increased demand and improved electronic component availability. The increases in CS operating income and operating margin in fiscal 2023 compared with fiscal 2022 were primarily due to higher volume during fiscal 2023, including operating income of $131 million from the TDL acquisition and absence of a $355 million non-cash charge for impairment of goodwill recorded in our Broadband reporting unit in fiscal 2022. The increase in CS operating margin was partially offset by a higher mix of lower margin revenue, principally in Public Safety and IVS. AR Segment Our AR segment includes missile solutions with propulsion technologies for strategic defense, missile defense, and hypersonic and tactical systems; and space propulsion and power systems for national security space and exploration missions. See “Item 1: Business” of this Report for a description of the sectors in AR. AR is a new reportable segment established in the quarter ended September 29, 2023 and as such, there is no comparable prior _____________________________________________________________________ 31 year information. [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(Dollars in millions)","December 29, 2023"],["Revenue","$","1,052"],["Operating income","122"],["Operating margin","11.6","%"]] [[/GREPCENT_TABLE]] Fiscal 2023 results were driven by program performance across Missile Solutions and Space Propulsion and Power Systems portfolios from the July 28, 2023 acquisition date through December 29, 2023. Operating income was impacted by operational inefficiencies, partially offset by integration benefits recognized in fiscal 2023. Unallocated Corporate Expenses [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(Dollars in millions)","December 29, 2023","","December 30, 2022"],["Total unallocated corporate expense","$","(1,140)","","","$","(699)"]] [[/GREPCENT_TABLE]] Total unallocated corporate expense includes the portion of corporate costs not included in management’s evaluation of segment operating performance. Unallocated corporate expenses increased $441 million in fiscal 2023 compared with fiscal 2022, primarily from an increase of $174 million of amortization of acquisition-related intangibles related to the inclusion of TDL and AJRD, the inclusion of $115 million of LHX NeXt related implementation costs (see discussion under “LHX NeXt implementation costs” below), higher asset group and business divestiture-related losses of $59 million and a $42 million expense during fiscal 2023 compared with $29 million of income during fiscal 2022 related to our deferred compensation plans. LHX NeXt implementation costs. LHX NeXt is our initiative to transform multiple functions, systems and processes to increase agility and competitiveness. Costs related to the LHX NeXt effort are expected to continue through 2025, and are expected to include workforce optimization costs, incremental IT expenses for implementation of new systems, third-party consulting expenses and other related costs. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES We prioritize cash flow generation through our commitment to operational excellence, efficient balance sheet management and continuous cost reduction efforts. We consistently assess various capital deployment options, considering both our long-term outlook and the evolving market conditions, recognizing the importance of adaptability as market dynamics change over time. Our primary capital deployment priorities involve a focus on funding the business, debt repayment to be achieved through the prioritization of capital allocation, potentially accelerated with proceeds from non-core asset divestitures, and returning cash to our shareholders through dividends and share repurchases. As of December 29, 2023, we had cash and cash equivalents of $560 million, of which $343 million was held by our foreign subsidiaries, a significant portion of which we believe can be repatriated to the U.S. with minimal tax cost. Additionally, we have two credit facilities and a commercial paper program. See the “Capital Structure and Resources” discussion below in this MD&A for further information about our credit facilities and CP Program. _____________________________________________________________________ 32 Cash Flows [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["(In millions)","December 29, 2023","","December 30, 2022"],["Cash and cash equivalents, beginning of period","$","880","","","$","941"],["Operating Activities:"],["Net income","1,198","","","1,061"],["Non-cash adjustments","1,213","","","1,066"],["Changes in working capital","286","","","(196)"],["Other, net","(601)","","","227"],["Net cash provided by operating activities","$","2,096","","","$","2,158"],["Net cash used in investing activities","(7,021)","","","(250)"],["Net cash provided by (used in) financing activities","4,594","","","(1,951)"],["Effect of exchange rate changes on cash and cash equivalents","11","","","(18)"],["Net decrease in cash and cash equivalents","$","(320)","","","$","(61)"],["Cash and cash equivalents, end of period","$","560","","","$","880"]] [[/GREPCENT_TABLE]] Net cash provided by operating activities: The $62 million decrease in net cash provided by operating activities in fiscal 2023 compared with fiscal 2022 was primarily due to increases in payments of income taxes of $406 million and interest of $193 million on the $2.25 billion, three-year senior unsecured term loan facility (“Term Loan 2025”), the $3.25 billion aggregate principal amount of new long-term fixed-rate debt consisting of the 5.4% 2027 Notes, the 5.4% 2033 Notes and the 5.6% 2053 Notes (collectively, the “AJRD Notes”) and our CP Program, partially offset by less cash used to fund net working capital (i.e., receivables, contract assets, inventories, accounts payable and contract liabilities). Cash flow from operations was positive in all of our business segments in fiscal 2023. Net cash used in investing activities: The $6.8 billion increase in net cash used in investing activities in fiscal 2023 compared with fiscal 2022 was primarily due to the $6.7 billion cash used for the acquisitions of TDL and AJRD during the first quarter and third quarter of fiscal 2023, respectively. Net cash provided by (used in) financing activities: The $6.5 billion increase in net cash provided by financing activities in fiscal 2023 compared with fiscal 2022 was primarily due to the issuance and sale of $3.25 billion aggregate principal amount of new AJRD Notes, $2.25 billion in proceeds from borrowings on Term Loan 2025, of which $2.0 billion was utilized for the TDL acquisition, $1.6 billion in net proceeds from issuances of commercial paper and the $565 million decrease in cash used to repurchase our common stock under our share repurchase program. Such amounts were partially offset by an increase in repayments of borrowings, including the $800 million aggregate principal amount of our 3.85% 2023 Notes and the $250 million aggregate principal amount of our Floating Rate Notes due March 2023 (“Floating 2023 Notes”). Capital Structure and Resources Long-Term Debt, Net We had $11.5 billion of long-term debt, net, including the current portion of long-term debt, net and financing lease obligations, outstanding at December 29, 2023, the majority of which we incurred in connection with merger and acquisition activity. Long-Term Variable-Rate Debt. During fiscal 2023, we drew $2.25 billion in long-term debt on Term Loan 2025. The proceeds were utilized to fund the cash consideration paid and a portion of the associated transaction and integration costs related to the TDL acquisition and repay the entire outstanding $250 million aggregate principal amount of our Floating 2023 Notes. See Note 8: Debt and Credit Arrangements in the Notes for further information on our long-term fixed-rate debt. Long-Term Fixed-Rate Debt. On June 15, 2023, we repaid the entire outstanding $800 million aggregate principal amount of our 3.85% 2023 Notes through cash on hand and the issuance of commercial paper. The commercial paper issued to fund repayment of the 3.85% 2023 Notes was repaid during fiscal 2023. On July 31, 2023, we closed the issuance and sale of $3.25 billion aggregate principal amount of the AJRD Notes. The AJRD Notes were used to fund a portion of the purchase price for the AJRD acquisition, which closed on _____________________________________________________________________ 33 July 28, 2023, and to pay related fees and expenses. See Note 8: Debt and Credit Arrangements in the Notes for further information on our long-term variable-rate debt. Short-Term Debt, Credit Arrangements and CP Program We had $1.6 billion of short-term debt at December 29, 2023, consisting of outstanding notes under the CP Program and local borrowing by international subsidiaries for working capital needs. See Note 8: Debt and Credit Arrangements in the Notes for further information on Credit Arrangements and CP Program. 2023 Credit Agreement. On March 10, 2023, we established a $2.4 billion, 364-day senior unsecured revolving credit facility (“2023 Credit Facility”) by entering into a 364-Day Credit Agreement (“2023 Credit Agreement”) with a syndicate of lenders. Proceeds of the initial funding of loans under the 2023 Credit Agreement were required to be used to finance a portion of the purchase price for the acquisition of AJRD and for the fees, taxes, costs and related expenses related to it, and thereafter may be used for working capital purposes. On July 28, 2023, we borrowed $2.1 billion under the 2023 Credit Agreement and used the proceeds together with proceeds from the AJRD Notes to fund the acquisition of AJRD and to pay related fees and expenses. All borrowings under the 2023 Credit Agreement were repaid with proceeds of commercial paper issued during fiscal 2023. At December 29, 2023, we had no outstanding borrowings under the 2023 Credit Agreement, had available borrowing capacity of $800 million, net of outstanding CP Program borrowings, and were in compliance with all covenants under the 2023 Credit Agreement. On January 26, 2024, we replaced the 2023 Credit Agreement with a new $1.5 billion, 364-day senior unsecured revolving credit facility maturing no later than January 24, 2025. 2022 Credit Agreement. We have a $2.0 billion, 5-year senior unsecured revolving credit facility (the “2022 Credit Facility”) under a Revolving Credit Agreement (the “2022 Credit Agreement”) entered into on July 29, 2022 with a syndicate of lenders, which the lenders may agree to increase by up to $1.0 billion upon our request. At December 29, 2023, we had no outstanding borrowings and were in compliance with all covenants under the 2022 Credit Agreement. Commercial Paper Programs. On March 14, 2023, we established the CP Program, which is supported by amounts unused and available under the 2022 Credit Agreement and the 2023 Credit Agreement. From time to time, we use borrowings under the CP Program for general corporate purposes, including the funding of acquisitions, debt refinancing, dividend payments and repurchases of our common stock. We terminated our prior existing $1.0 billion commercial paper program during fiscal 2023. During fiscal 2023, we had a maximum outstanding balance of $3.0 billion under our CP Program, which we primarily used to repay $2.1 billion outstanding under the 2023 Credit Agreement, a portion of which was repaid with cash on hand during the second half of fiscal 2023. Amounts outstanding under the CP Program at December 29, 2023 and the daily average balance and weighted average yield during fiscal 2023 were as follows: [[GREPCENT_TABLE]] [["","December 29, 2023"],["(In millions, except weighted-average interest rate)","Outstanding","","Daily Average"],["CP Program","$","1,599","","","$","1,300"],["Weighted-average interest rate","5.95","%","","5.45","%"]] [[/GREPCENT_TABLE]] We expect balances under the CP Program to remain elevated as compared to historical norms through fiscal 2025. Liquidity Assessment Given our current cash position, outlook for funds generated from operations, credit ratings, available credit facilities, cash needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity for the next 12 months and in the longer term, 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 global financial uncertainty. Based on our current business plan and revenue prospects, we believe that our existing cash, funds generated from operations, availability under our senior unsecured credit facilities and our CP Program 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 the reasonably foreseeable future thereafter. Our total _____________________________________________________________________ 34 additions of property, plant and equipment net of proceeds from the sale of property, plant and equipment for fiscal 2024 are expected to be approximately 2% of revenue. Other than operating expenses, cash uses for fiscal 2024 are expected to consist primarily of additions of property, plant and equipment, dividend payments, debt repayments, costs associated with our LHX NeXt program and repurchases under our share repurchase program. Purchase of Tax Credits under Inflation Reduction Act of 2022 (“IRA”) The IRA includes a new transferability provision under Section 6418 of the Internal Revenue Code which permits, in certain circumstances, the sale of federal income tax credits generated from renewable and alternative energy sources. During the year ended December 29, 2023, we entered into a binding agreement to purchase tax credits totaling $51 million for the 2023 tax year for a net purchase price of $0.95 per $1.00 of tax credits, allowing us to reduce our 2023 federal income taxes payable by the amount of credits we expect to claim on our tax returns as a result of our binding agreement. We have recorded a liability to the transferor for the amount owed in the “Other accrued items” line of the Consolidated Balance Sheet. We have recorded an income tax benefit of $2 million for the difference between the amount paid or to be paid to the transferor and the reduction to our taxes payable in the “Income taxes” line of the Consolidated Statement of Operations. Funding of Pension Plans 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 made no material contributions to our U.S. qualified defined benefit pension plans in fiscal 2023. We expect to make approximately $35 million of contributions to these plans in fiscal 2024, and may consider voluntary contributions 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 defined benefit plan assets of $66 million as of December 29, 2023 compared with net unfunded defined benefit plan obligations of $69 million as of December 30, 2022. The improvement in the funded status as of December 29, 2023 is primarily due to more favorable than expected return on plan assets, partially offset by increased pension obligations resulting from lower discount rates. See Note 9: Retirement Benefits in the Notes for further information regarding our pension plans. Common Stock Repurchases During fiscal 2023 and 2022, $30 million and $45 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. At December 29, 2023, we had a remaining unused authorization under our repurchase program of $3.9 billion. Our repurchase program does not have a stated expiration date and authorizes us to repurchase shares of our common stock through open market purchases, private transactions, transactions structured through investment banking institutions or any combination thereof. We have announced that share repurchases will be moderated in the near-term, but the level and timing of our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board and management may deem relevant. The timing, volume and nature of repurchases are also subject to market conditions, applicable securities laws and other factors and are at our discretion and may be suspended or discontinued at any time. Additional information regarding our repurchase program is set forth above under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report. Dividends Information concerning our dividends is set forth above under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report. _____________________________________________________________________ 35 Material Cash Requirements and Commercial Commitments Current and long-term material cash requirements at December 29, 2023 are as follows: [[GREPCENT_TABLE]] [["","","","Payment Due"],["(In millions)","Total","","Within 1 Year"],["Long-term debt(1)","$","11,275","","","$","355"],["Interest on long-term debt","3,800","","","547"],["Purchase obligations","5,975","","","4,444"],["Operating and finance lease commitments","1,306","","","182"],["Minimum pension contributions(2)","35","","","35"],["Total(3)","$","22,391","","","$","5,563"]] [[/GREPCENT_TABLE]] _______________ (1)Does not include amounts for finance lease commitments. (2)As a result of prior voluntary contributions and plan performance, we made no material contributions to our U.S. qualified defined benefit pension plans in fiscal 2023. We expect to make approximately $35 million in contributions to these plans in fiscal 2024, and may consider voluntary contributions thereafter. In addition, we made no material contributions to our non-U.S. pension plans in fiscal 2023 and do not expect to make any material contributions to these plans in fiscal 2024. (3)The above table does not include unrecognized tax benefits of $652 million. Purchase obligations mainly consist of outstanding commitments on open purchase orders made to suppliers, subcontractors and other outsourcing partners under U.S. government contracts. Our risk associated with these purchase obligations is generally limited to the termination liability provisions within such contracts. As such, we do not believe there to be a material liquidity risk associated with outstanding purchase obligations. 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 CP Program, credit facilities, term loan 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 CP Program, our credit facility or term loan sufficient to service our obligations, we may be required to reduce capital expenditures, reduce or terminate our share repurchases, 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. 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. See Note 15: Legal Proceedings, Commitments and Contingencies in the Notes for additional information. Impact of Foreign Exchange Our international business transacted in local currency environments was 45%, 43% and 40% in fiscal 2023, fiscal 2022 and fiscal 2021, respectively. The impact of translating the assets and liabilities of these operations to U.S. Dollars is included as a component of shareholders’ equity. The cumulative foreign currency translation adjustment included in shareholders’ equity was a $201 million loss and a $237 million loss at December 29, 2023 and December 30, 2022, respectively. We utilize foreign currency hedging instruments to minimize the currency risk of international transactions. Gains and losses resulting from currency rate fluctuations did not have a material effect on our results in fiscal 2023, 2022 or 2021. 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 the 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 _____________________________________________________________________ 36 hedging instruments. A 10% change in currency exchange rates for our foreign currency derivatives held at December 29, 2023 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. Interest Rates. As of December 29, 2023, we had long-term variable-rate and fixed-rate debt obligations. The fair value of these obligations is impacted by changes in interest rates; however, a 10% change in interest rates for our long-term variable-rate and fixed-rate debt obligations at December 29, 2023 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 puttable 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 variable-rate and fixed-rate debt obligations over the next twelve months. See Note 8: Debt and Credit Arrangements in the Notes for information regarding the maturities of our long-term variable-rate and fixed-rate debt obligations. At December 29, 2023, we had long-term variable-rate debt obligations of $2.25 billion under Term Loan 2025. These debt obligations bear interest that is variable based on certain short-term indices, thus exposing us to interest-rate risk; however, a 10% change in interest rates for these debt obligations at December 29, 2023 would not have had a material impact on our results of operations or cash flows. See Note 8: Debt and Credit Arrangements 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, temporarily funding repurchases under our share repurchase programs and funding redemption of long-term debt and acquisitions. These debt obligations bear interest that is variable based on certain short-term indices, thus exposing us to interest-rate risk; however, a 10% change in interest rates for these debt obligations at December 29, 2023 would not have had a material impact on our results of operations or cash flows. CRITICAL ACCOUNTING ESTIMATES Preparation of this Report in accordance with GAAP 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. While the following is not intended to be a comprehensive list of our accounting estimates, we consider the 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 described in the following paragraphs 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 estimates and the related disclosure included herein with the Audit Committee of our Board. Actual results may differ from those estimates. 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, the cost and availability of purchased materials and services, labor cost and availability 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 _____________________________________________________________________ 37 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. We follow a standard 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 incentive or award fees that are higher or lower than expected. When changes in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized on a cumulative basis. Cumulative EAC adjustments represent the cumulative effect of the changes on current and prior periods; revenue and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. 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 Year Ended"],["(In millions)","December 29, 2023","","December 30, 2022"],["Favorable adjustments","$","593","","","$","454"],["Unfavorable adjustments","(678)","","","(418)"],["Net operating income adjustments","$","(85)","","","$","36"]] [[/GREPCENT_TABLE]] There were no individual EAC adjustments that were material to our results of operations on a consolidated or segment basis in fiscal 2023 or 2022. 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 product or service underlying each performance obligation. The standalone selling price represents the amount for which we would sell the product or service to a customer on a standalone basis (i.e., not sold as a 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 products 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. Pension and Other Postretirement Benefit Plans Certain of our current and former employees participate in defined benefit plans in the United States, Canada, United Kingdom and Germany, which are sponsored by L3Harris. The determination of projected benefit obligations (“PBO”) 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 9: Retirement 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. _____________________________________________________________________ 38 Significant Assumptions. We develop assumptions using relevant experience, in conjunction with market-related data for each plan. Assumptions are reviewed annually with third-party experts and adjusted as appropriate. The table included below provides the weighted average assumptions used to estimate the PBOs and net periodic benefit cost as they pertain to our defined benefit pension plans. [[GREPCENT_TABLE]] [["Obligation assumptions as of:","December 29, 2023","","December 30, 2022"],["Discount rate","4.91%","","5.18%"],["Rate of future compensation increase","3.01%","","3.01%"],["Cash balance interest crediting rate","4.50%","","4.00%"],["Cost assumptions for fiscal periods ended:","December 29, 2023","","December 30, 2022"],["Discount rate to determine service cost","5.18%","","2.69%"],["Discount rate to determine interest cost","5.08%","","2.27%"],["Expected return on plan assets","7.46%","","7.44%"],["Rate of future compensation increase","3.01%","","3.01%"],["Cash balance interest crediting rate","4.00%","","3.50%"]] [[/GREPCENT_TABLE]] Key assumptions for the Consolidated Pension Plan (our largest defined benefit plan), with 88% of the total PBO as of December 29, 2023 included a discount rate for obligation assumptions of 4.92%, a cash balance interest crediting rate of 4.50% and expected return on plan assets of 7.50% for fiscal 2023, which is being maintained at 7.50% for fiscal 2024. There is also a frozen pension equity benefit that assumes a 4.25% 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 9: Retirement 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 7.46% for both fiscal 2023 and 2024. Discount Rate. The discount rate is used to calculate the present value of expected future benefit payments at the measurement date. An increase in the discount rate decreases the present value of PBO and generally increases pension expense. A decrease in the discount rate increases the present value of the PBO 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","$","(21)","","","$","21"],["Discount rate used to determine net periodic benefit cost","$","9","","","$","(9)"]] [[/GREPCENT_TABLE]] PBO. Funded status is derived by subtracting the respective year-end values of the 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 $190 million and an increase of 25 basis points would decrease the PBO by approximately $182 million. _____________________________________________________________________ 39 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 (“NAV”). 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 information. Asset values for other positions were generally measured using market observable prices. See Note 9: Retirement Benefits in the Notes for further information. Goodwill We test our goodwill for impairment annually as of the first business day of our fourth fiscal quarter, which was October 2, 2023 for fiscal 2023, or under certain circumstances more frequently, such as when events or circumstances indicate there may be impairment or when we reorganize our reporting structure such that the composition of one or more of our reporting units is affected. 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 materials, labor or other costs; (iv) negative or declining cash flows; (v) changes in management, changes in strategy or significant litigation; (vi) changes 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. Values derived from projected cash flows are corroborated through review of revenue and/or earnings multiples applied to the latest twelve months’ revenue and earnings of our reporting units. Projected cash flows are based on our best estimate of future revenues, 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 revenues and earnings multiples applied to the revenues and earnings of our reporting units are based on current multiples of revenues and earnings for similar businesses, and based on revenues 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. 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. Fiscal 2023 Impairment Tests. We performed our annual impairment test of all of our reporting units’ goodwill as of September 30, 2023 and concluded that for each of our reporting units no impairment existed. Segment reorganization. Effective in fiscal 2023, we adjusted our reporting to better align our businesses and transferred our ADG business (a reporting unit) from our IMS segment to our SAS segment (also a reporting unit). In connection with the realignment, we reduced our reporting units from nine to eight as the ADG reporting unit and all $327 million of associated goodwill was absorbed by our existing SAS reporting unit given the economic similarities of the two reporting units. Immediately before the realignment, we performed a qualitative impairment assessment over our SAS reporting unit and a quantitative impairment assessment over our ADG reporting unit. Immediately after the realignment, we performed a quantitative impairment assessment over the SAS reporting unit. We _____________________________________________________________________ 40 prepared estimates of the fair value of our pre-realignment ADG reporting unit and post-realignment SAS reporting unit based on a combination of market-based valuation techniques, utilizing quoted market prices, comparable publicly reported transactions and an income-based valuation technique using projected discounted cash flows. These assessments indicated no impairment existed either before or after the realignment. CAS Disposal Group Pending Divestiture. As described in more detail in Note 13: Acquisitions, Divestitures and Asset Sales, on November 27, 2023, we announced that we entered into a definitive agreement to sell our CAS disposal group, which includes both the CTS and Commercial Aviation reporting units. As of November 27, 2023, the fair value less costs to sell the CAS disposal group is $834 million, inclusive of considerations related to noncontrolling interest and accumulated other comprehensive income. The CAS disposal group includes both the Commercial Training Solutions (“CTS”) and Commercial Aviation reporting units. In connection with the preparation of our financial statements for the fiscal year ended December 29, 2023, we evaluated the facts and circumstances which impacted the agreed upon selling price of the CAS disposal group and identified interim indicators of impairment within both reporting units subsequent to our annual impairment testing date of October 2, 2023. Specifically, supply chain-related operational challenges which negatively impact cash flows over the short-term forecast period were assessed in combination with our long-term portfolio shaping strategy to dispose of non-core businesses. As a result, we performed quantitative impairment tests for both reporting units as of November 27, 2023, utilizing an income approach aligned to market prices for the two reporting units, as specified in the definitive agreement. As a result of these tests, we determined that the fair value of the CTS reporting unit was above carrying value, while the fair value of the Commercial Avionics reporting unit was below its carrying value, and concluded goodwill related to the Commercial Aviation reporting unit was impaired. Therefore we recorded a non-cash charge for impairment of $296 million associated with the Commercial Aviation reporting unit in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Operations. At-risk goodwill. Based on the annual impairment testing, our Broadband reporting unit had clearance of approximately 20% and goodwill of $2,656 million and our ISR and Electro Optical reporting units had clearances of approximately 6% and goodwill of $3,186 million and $2,193 million, respectively. 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; an inability to meet our forecast; the rescission of significant contract awards as a result of competitors protesting or challenging contracts awarded to us; or an increase in interest rates without a corresponding increase in future revenue. Fiscal 2022 Impairment Tests. For information related to fiscal 2022 impairment tests and resulting impairments see Note 6: Goodwill and Intangible Assets in the Notes. Goodwill-Related Fair Value Estimates. Fair value determinations described above under the heading “Goodwill” in this Critical Accounting Estimates section of this MD&A were determined based on a combination of market-based valuation techniques, utilizing quoted market prices, comparable publicly reported transactions, and projected discounted cash flows. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. Material changes in these estimates could occur and result in additional impairments in future periods. Business Combinations We follow the acquisition method of accounting to record identifiable assets acquired and liabilities assumed 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 consist of customer relationships, developed technology and trade names. Determination of the estimated fair value of identifiable intangible assets requires judgment. The fair value of intangible assets is estimated using the relief from royalty method for the acquired developed technology and trade names and the multi-period excess earnings method for the acquired customer relationships. Both of these fair value methods are income-based valuation approaches, which require judgment to estimate appropriate discount rates, royalty rates related to the developed technology and trade name intangible assets, revenue growth attributable to the intangible assets and remaining useful lives. Finite-lived identifiable intangible assets are amortized to expense over their useful lives, generally ranging from two to twenty seven years. The fair value of identifiable intangible assets acquired in connection with the TDL and AJRD acquisitions was $755 million and $2,840 million, respectively. See Note 13: Acquisitions, Divestitures and Asset Sales and Note 6: Goodwill and Intangible Assets in the Notes for additional information. _____________________________________________________________________ 41 Income Taxes We record deferred tax assets and liabilities for 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 2023. Our Consolidated Balance Sheet as of December 29, 2023 included deferred tax assets of $91 million and deferred tax liabilities of $815 million. 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 $240 million as of December 29, 2023. 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 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% 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 29, 2023, we had $652 million of unrecognized tax benefits, of which $509 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 change 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 is not practicable for the remaining unrecognized tax benefits because of the significant number of jurisdictions in which we do business and the number of open tax periods under various states of examination. See Note 7: Income Taxes in the Notes for additional information. Impact of Recently Issued Accounting Pronouncements There have been no new accounting pronouncements which became effective during fiscal 2023 that have had a material impact on our Consolidated Financial Statements. 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. •We depend on winning business in competitive markets from U.S. Government customers for a significant portion of our revenue. •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. •Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-material type contracts. Our fixed-price contracts, particularly those for development programs, _____________________________________________________________________ 42 could subject us to losses in the event of cost overruns or a significant increase in or sustained period of increased inflation. •We depend significantly on U.S. Government contracts, which generally are subject to immediate termination and heavily regulated and audited. The application or impact of regulations, unilateral government action, termination 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. •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 geo-political events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our profitability. •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 derive a significant portion of our revenue from international operations and are subject to the risks of doing business internationally. •We depend on our subcontractors and suppliers to provide materials, components, subsystems and services for many of our products and services, and failures in or disruptions to our supply chain could cause our products and or services to be produced or delivered in an untimely or unsatisfactory manner. •We must attract and retain key employees, and any failure to do so could seriously harm us. •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 and services and technologies that achieve market acceptance in our current and future markets. •We have significant operations in locations that could be materially and adversely impacted in the event of a natural disaster or other significant disruption. •With our acquisition of AJRD, there is increased risk of the release, unplanned ignition, explosion, or improper handling of dangerous materials used in our business, which could disrupt our operations and adversely affect our financial results. •Failure to achieve the expected results of LHX NeXt could adversely affect our future financial condition and results of operations. •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. •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. •Changes in our effective tax rate or additional tax exposures may have an adverse effect on our results of operations and cash flows. •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. •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. •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. •Challenges arising from the expanded operations related to the acquisition of AJRD may affect our future results. •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. _____________________________________________________________________ 43 •Changes in future business or other market conditions could cause business investments and/or recorded goodwill or other intangible assets to become impaired, resulting in substantial losses and write-downs that would materially adversely affect our results of operations and financial condition.