# L3HARRIS TECHNOLOGIES, INC. /DE/ (LHX) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from L3HARRIS TECHNOLOGIES, INC. /DE/'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/202058/000020205823000014/hrs-20221230.htm
Accession: 0000202058-23-000014
Filing date: 2023-02-24
Report date: 2022-12-30
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/fy2021/ (FY 2021)
Next year: /company/LHX/mda/fy2023/ (FY 2023)

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 fiscal 2022 compared with fiscal 2021 and fiscal 2021 compared with 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.”

We are a Trusted Disruptor for the global aerospace and 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 and commercial customers in more than 100 countries, with our largest customers being

_____________________________________________________________________

29

various departments and agencies of the U.S. Government and their prime contractors. Our products and services have defense and civil government applications, as well as commercial applications. As of December 30, 2022, we had approximately 46,000 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 and services we sell and the markets we serve, and we report the financial results of our continuing operations in the three operating segments: Integrated Mission Systems, Space & Airborne Systems and Communication Systems. Our operating segments are also our reportable segments and are referred to as our business segments. See Note 24: 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 74%, 75% and 78%, in fiscal 2022, 2021 and 2020, respectively.

For the 2023 GFY, which began on October 1, 2022, the President’s budget request (“PBR”) proposed $773 billion of DoD funding, a 4% increase above the amount enacted for the 2022 GFY, and the Senate Appropriations Subcommittee on Defense has supported a $37 billion increase to the PBR, representing a 9% increase year over year. On December 29, 2022, a 2023 GFY DoD budget of $817 billion was enacted. Many of L3Harris’ offerings are supported in the 2023 GFY DoD budget, including responsive satellites, ISR aircraft, tactical communications, networked maritime systems and classified cyber solutions, however, we continue to monitor the political and budget environments and we can give no assurances on the extent of future orders.

In international markets, the North Atlantic Treaty Organization (“NATO”) continues to evolve its strategy on multiple levels. Several countries, including Finland and Sweden, are pursuing NATO membership, while existing NATO members such as the U.K. and France have in recent months committed to increased spending beyond the 2% of gross domestic product target. Recently, additional countries, such as Japan, have followed similar paths with expanded defense budgets. The expectation of increased spending in international markets provides us with the opportunity to offer a range of solutions to international customers, but international sales remain dependent on economic, social and political conditions that may differ from those in the United States as well as changes in export controls and other trade regulations in the United States.

Even with the increases in expected DoD budget proposals and with the overall demand environment both in the U.S. and internationally reflecting the conflict in Ukraine and geopolitical tensions, changes to U.S. Government spending priorities have and could in the future impact our business. A decline in demand for fuzing and ordnance systems due to reduced U.S. Government spending for precision weapons was largely responsible for charges for impairment of goodwill in our IMS segment. See Note 9: Goodwill in the Notes for further information. Other changes in spending priorities in the future could adversely affect our existing programs and future contracts and impact our financial condition and results of operations.

For a discussion of U.S. Government funding risks and international business risks see “Item 1. Business - Principal Customers: 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. Rising inflation in the U.S. has led to higher costs. 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. Higher interest rates have also had an impact on the fair value of our reporting units and contributed to charges for impairment of goodwill at our IMS and CS segments. See Note 9: Goodwill in the Notes for further information.

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; our fixed-price contracts could subject us to losses in the event of cost overruns or a significant increase in or a sustained period of increased inflation. Management has worked to mitigate supply chain disruptions and labor mobility challenges, with modest improvements in the supply chain during the second half of fiscal 2022 for Tactical Communications, our largest product-based business, and increasing stability in labor mobility and employee

_____________________________________________________________________

30

attrition. However due to uncertainty in the current environment, there can be no assurances that we will not see further impacts in our financial condition and results of operations.

Acquisition of TDL Product Line

On October 3, 2022, we entered into a definitive agreement to acquire the TDL product line for a purchase price of approximately $1.96 billion, subject to customary adjustments. The acquisition was completed subsequent to fiscal 2022 year-end on January 3, 2023. We used third-party debt borrowings under a new $2.25 billion three-year senior unsecured term loan facility, the Term Loan 2025, to finance the acquisition. The purchase of the TDL product line will enhance our networking capability and provide immediate access to the ubiquitous Link 16 waveform, better positioning us to enable the DoD’s integrated architecture goal in JADC2. The TDL product line will be reported within our CS segment.

Pending Acquisition of AJRD

On December 17, 2022, we entered into a definitive agreement to acquire AJRD in an all-cash transaction of approximately $4.7 billion. AJRD is a provider of propulsion systems and energetics for tactical and strategic missiles, missile defense systems and hypersonic applications. AJRD also provides liquid-fuel engines and propulsion and power systems for in-space crew and cargo transports. Upon closure of the acquisition, we anticipate creating a new business segment. The acquisition is expected to close in fiscal 2023, pending required regulatory approvals and clearances and other customary closing conditions.

Divestiture of Visual Information Solutions (“VIS”) Business

On December 21, 2022, we entered into a definitive agreement to sell our VIS business for $70 million, subject to customary purchase price adjustments and closing conditions as set forth in the definitive agreement. VIS, which is part of our SAS segment, provides commercial geospatial software, technology and services used to extract and analyze reliable, accurate and actionable information from geospatial to terrestrial imagery. The transaction is expected to close mid-fiscal 2023, subject to regulatory approvals and other customary closing conditions.

Operating Performance Assessment and Key Performance Measures

During fiscal 2022, we were impacted by the macroeconomic environment, including supply chain, labor mobility and inflation, which continued to cause significant disruptions and adverse effects on the U.S. and global economies. We continue to implement mitigation strategies to minimize the future impacts of these challenges, including working closely with our second and third-tier suppliers to improve demand management and resilience in our supply chain, efforts to improve retention of our skilled workforce and accounting for inflation uncertainty within the terms of future contracts.

Despite the dynamic operating environment, we believe demand for our products remains strong. Many of our offerings are supported in the 2023 GFY DoD budget, including responsive satellites, ISR aircraft, tactical communications, networked maritime systems and classified cyber solutions. In fiscal 2022, we received several key strategic contract awards across each of our domains, and we ended the year with backlog of $22.3 billion, a 5% increase over the prior year. Also in fiscal 2022, we invested $603 million (4% of total revenue) in company-sponsored R&D focused on technologies that expand our capabilities across our domains.

Executing on our capital allocation strategy, on January 3, 2023 we closed the acquisition of the TDL product line for approximately $1.96 billion, subject to customary adjustments, which will provide access to the Link 16 network and position us to make the installed base of terminals more resilient and relevant, consistent with JADC2 modernization efforts. Additionally, on December 17, 2022, we entered into a definitive agreement to acquire AJRD for approximately $4.7 billion, gaining access to new markets in missiles and missile defense as well as space exploration. These unique assets are intended to strengthen our trusted position as an industry leading merchant supplier, providing rapid and innovative solutions to customers, and create long term value for our shareholders.

We reported full year operating cash flow of $2.2 billion in fiscal 2022, and consistent with our shareholder-friendly capital deployment priority, we paid $864 million in dividends and made share repurchases totaling $1.1 billion.

Our strategic priorities continue to be growth, innovation and performance. For fiscal 2023, “Performance First” is our primary focus. We plan to continue to invest, consistent with growth opportunities, and sustain our culture of innovation, but delivering on our commitments to investors, our customers and on every contract we are awarded is paramount. 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 closing the AJRD acquisition; and

_____________________________________________________________________

31

•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;

•Income from continuing operations; 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 EBIT, or earnings before interest and taxes, non-GAAP earnings per share, adjusted free cash flow and 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), 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, efficiency and growth. We also use some of these and other performance metrics for executive compensation purposes.

_____________________________________________________________________

32

OPERATIONS REVIEW

Consolidated Results of Operations

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["(Dollars in millions, except per share amounts)","December 30, 2022","","December 31, 2021","","% Inc/(Dec)","","January 1, 2021","","% Inc/(Dec)"],["Revenue:"],["Integrated Mission Systems","$","6,916","","","$","7,042","","","(2)","%","","$","6,793","","","4","%"],["Space & Airborne Systems","6,060","","","5,965","","","2","%","","5,823","","","2","%"],["Communication Systems","4,217","","","4,287","","","(2)","%","","4,402","","","(3)","%"],["Other non-reportable businesses","\u2014","","","683","","","*","","1,347","","","(49)","%"],["Corporate eliminations","(131)","","","(163)","","","(20)","%","","(171)","","","*"],["Total revenue","17,062","","","17,814","","","(4)","%","","18,194","","","(2)","%"],["Total cost of product sales and services","(12,135)","","","(12,438)","","","(2)","%","","(12,886)","","","(3)","%"],["% of total revenue","71","%","","70","%","","","","71","%"],["Gross margin","4,927","","","5,376","","","(8)","%","","5,308","","","1","%"],["% of total revenue","29","%","","30","%","","","","29","%"],["Engineering, selling and administrative expenses","(2,998)","","","(3,280)","","","(9)","%","","(3,315)","","","(1)","%"],["% of total revenue","18","%","","18","%","","","","18","%"],["Business divestiture-related gains (losses), net","\u2014","","","220","","","*","","(51)","","","*"],["Impairment of goodwill and other assets","(802)","","","(207)","","","*","","(767)","","","*"],["Non-operating income, net","425","","","439","","","(3)","%","","401","","","9","%"],["Net interest expense","(279)","","","(265)","","","5","%","","(254)","","","4","%"],["Income from continuing operations before income taxes","1,273","","","2,283","","","(44)","%","","1,322","","","73","%"],["Income taxes","(212)","","","(440)","","","(52)","%","","(234)","","","88","%"],["Effective tax rate","17","%","","19","%","","","","18","%"],["Income from continuing operations","1,061","","","1,843","","","(42)","%","","1,088","","","69","%"],["Discontinued operations, net of income taxes","\u2014","","","(1)","","","*","","(2)","","","*"],["Net income","1,061","","","1,842","","","(42)","%","","1,086","","","70","%"],["Noncontrolling interests, net of income taxes","1","","","4","","","*","","33","","","*"],["Income from continuing operations attributable to L3Harris common shareholders","$","1,062","","","$","1,846","","","(42)","%","","$","1,119","","","65","%"],["% of total revenue","6","%","","10","%","","","","6","%"],["Income from continuing operations per diluted common share attributable to L3Harris common shareholders","$","5.49","","","$","9.09","","","(40)","%","","$","5.19","","","75","%"]]
[[/GREPCENT_TABLE]]

_________________

*Not meaningful

_____________________________________________________________________

33

Revenue

As described in more detail in Note 4: Business Divestitures and Asset Sales and elsewhere in the Notes, during fiscal 2022, 2021 and 2020, we completed the following business divestitures, which had revenue attributable to them as set forth below:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["(In millions)","December 30, 2022","","December 31, 2021","","January 1, 2021"],["Revenue attributable to divested businesses(1):"],["Space & Navigation business","$","6","","","$","24","","","$","21"],["Narda-MITEQ business","\u2014","","","84","","","111"],["ESSCO business","\u2014","","","23","","","26"],["Electron Devices business","\u2014","","","167","","","265"],["Voice Switch Enterprise disposal group (\u201cVSE disposal group\u201d)","\u2014","","","19","","","30"],["Combat Propulsion Systems and related businesses (\u201cCPS business\u201d)","\u2014","","","142","","","233"],["Military training business","\u2014","","","205","","","458"],["EOTech business","\u2014","","","\u2014","","","48"],["Applied Kilovolts business","\u2014","","","\u2014","","","7"],["Airport security and automation business","\u2014","","","\u2014","","","147"],["Total","$","6","","","$","664","","","$","1,346"]]
[[/GREPCENT_TABLE]]

_________________

(1)Net of intracompany sales.

Fiscal 2022 Compared With Fiscal 2021: The decrease in revenue in fiscal 2022 compared with fiscal 2021 was primarily due to the impact of $655 million of lower revenue from completed business divestitures during fiscal 2021 and supply chain disruptions.

Fiscal 2021 Compared With Fiscal 2020:  The decrease in revenue in fiscal 2021 compared with fiscal 2020 was primarily due to divestitures within other non-reportable businesses and supply chain disruptions within CS.

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

Gross Margin

Fiscal 2022 Compared With Fiscal 2021: Gross margin and gross margin as a percentage of revenue (“gross margin percentage”) for fiscal 2022 decreased compared to fiscal 2021, largely due to higher input costs (labor, material and overhead) and supply chain disruptions that adversely impacted program performance, Estimate At Completion (“EAC”) adjustments and a mix of program revenue and product sales with relatively lower gross margin percentage.

Fiscal 2021 Compared With Fiscal 2020:  Gross margin and 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.

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

_____________________________________________________________________

34

Engineering, Selling and Administrative Expenses

Major components of Engineering, selling and administrative (“ESA”) expenses were as follows:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["(In millions)","December 30, 2022","","December 31, 2021","","January 1, 2021"],["Company-sponsored R&D costs","$","(603)","","","$","(692)","","","$","(684)"],["Amortization of acquisition-related intangibles","(532)","","","(550)","","","(620)"],["L3Harris Merger-related transaction, integration and other expenses and losses","(90)","","","(134)","","","(155)"],["Acquisition-related transaction and integration expenses","(9)","","","\u2014","","","\u2014"],["Pre-acquisition and other divestiture-related expenses","(63)","","","(66)","","","(13)"],["Charges for severance and other termination costs","(29)","","","\u2014","","","\u2014"],["Charges related to an additional pre-merger legal contingency","(31)","","","\u2014","","","\u2014"],["Gain on sale of property, plant and equipment","\u2014","","","\u2014","","","22"],["Gain on sale of asset group","8","","","\u2014","","","\u2014"],["Major components of ESA","$","(1,349)","","","$","(1,442)","","","$","(1,450)"]]
[[/GREPCENT_TABLE]]

Business Divestiture-Related Gains (Losses), net

During fiscal 2022, there were no significant business divestiture-related gains or losses. 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 CyTerra asset sale, which is recorded in the “Engineering, selling and administrative expenses“ line item in our Consolidated Statement of Operations for fiscal 2022.

In fiscal 2021 and fiscal 2020, we had the following pre-tax gains (losses) associated with businesses divested, which are included in the “Business divestiture-related gains (losses), net” line item in our Consolidated Statement of Operations:

[[GREPCENT_TABLE]]
[["","","","Fiscal Year 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 (loss), net","","","$","220","","","$","(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 4: Business Divestitures and Asset Sales in the Notes for further information.

Impairment of Goodwill and Other Assets

Fiscal 2022 Compared With Fiscal 2021: Impairment of goodwill and other assets for fiscal 2022 reflected non-cash impairment charges of $355 million, $313 million and $134 million associated with our Broadband, ADG and Electro Optical reporting units, respectively. 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 the Commercial Training Solutions (“CTS”) business.

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

_____________________________________________________________________

35

CPS business and $145 million of non-cash charges for impairment of identifiable intangible and other long-lived assets related to our CTS business. 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.

See Note 4: Business Divestitures and Asset Sales and Note 9: Goodwill and Note 10: Intangible Assets in the Notes for further information.

Non-Operating Income, net

The components of Non-operating income, net were as follows:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["(In millions)","December 30, 2022","","December 31, 2021","","January 1, 2021"],["Non-service Financial Accounting Standards (\"FAS\") pension income(1)","$","441","","","$","445","","","$","389"],["Equity investment (losses) gains, net","(18)","","","5","","","\u2014"],["Impairment of equity method investment","\u2014","","","(35)","","","\u2014"],["Other, net","2","","","24","","","12"],["Total Non-operating income, net","$","425","","","$","439","","","$","401"]]
[[/GREPCENT_TABLE]]
_______________

(1)Non-service cost components of net periodic benefit income recorded in the “Non-operating income, net” line item in our Consolidated Statement of Operations include interest cost, expected return on plan assets, amortization of net actuarial gain and effect of curtailments or settlements under our pension and postretirement benefit plans.

Net Interest Expense

Fiscal 2022 Compared With Fiscal 2021:  Our net interest expense increased in fiscal 2022 compared with fiscal 2021 primarily due to lower interest income in fiscal 2022.

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 income due to the divestiture of the military training business on July 2, 2021.

See Note 18: Lease Commitments and Note 13: Debt in the Notes for further information.

Income Taxes

Fiscal 2022 Compared With Fiscal 2021:  Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 17% in fiscal 2022 compared with 19% in fiscal 2021. The decrease was primarily attributable to incremental R&D credits and incremental foreign derived intangible income (“FDII”) benefits claimed in fiscal 2022 as a result of legislative changes in the Tax Cuts and Jobs Act of 2017 (“TCJA”) that became effective in fiscal 2022 and the absence of unfavorable divestiture impacts in fiscal 2022, partially offset by the unfavorable impact of non-deductible goodwill impairments.

Fiscal 2021 Compared With Fiscal 2020:  Our effective tax rate was 19% in fiscal 2021 compared with 18% in fiscal 2020. The increase in 2021 was primarily attributable to the unfavorable impact of divestitures and a reduction in the benefit of R&D credits, partially offset by the benefit of reduced goodwill impairments in fiscal 2021 when compared to fiscal 2020.

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

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”) which includes implementation of a new 15% corporate alternative minimum tax (“CAMT”), a 1% excise tax on stock buybacks and tax incentives for energy and climate initiatives. These provisions are effective beginning January 1, 2023 and we expect them to be immaterial to our financial results, financial position and cash flows.

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

Fiscal 2022 Compared With Fiscal 2021:  The decrease in income from continuing operations per diluted common share attributable to L3Harris common shareholders in fiscal 2022 compared with fiscal 2021 was primarily due to lower income from continuing operations in fiscal 2022 resulting from the incremental goodwill impairments in fiscal 2022, as further described in the “Impairment of Goodwill and Other Assets” discussion above.

_____________________________________________________________________

36

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.

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

Discussion of Business Segment Results of Operations

Effective January 1, 2022, we 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 and 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 IMS segment; and mission networks for air traffic management operations were moved into the SAS segment.

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.

Integrated Mission Systems Segment

Our IMS segment includes multi-mission ISR systems; integrated electrical and electronic systems for maritime platforms; advanced EO/IR solutions; fuzing and ordnance systems; commercial aviation products; and commercial 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 30, 2022","","December 31, 2021","","% Inc/(Dec)","","January 1, 2021","","% Inc/(Dec)"],["Revenue","$","6,916","","","$","7,042","","","(2","%)","","$","6,793","","","4","%"],["Operating income","424","","","866","","","(51","%)","","205","","","322","%"],["Operating income margin","6","%","","12","%","","","","3","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 Compared With Fiscal 2021:  The decrease in segment revenue in fiscal 2022 compared with fiscal 2021 was primarily due to $105 million of lower revenue in Electro Optical from lower volume on fuzing and ordnance systems and other related programs and $53 million in ISR primarily from $262 million of lower revenue on a NATO aircraft missionization program which was mostly offset by newly-awarded program ramps. These decreases were partially offset by an increase of $55 million in Commercial Aviation Solutions, largely due to $33 million of higher revenue related to the sale of end-of-life inventory, as well as an increase in pilot training center volume. The funded backlog for this segment was $6.9 billion at each of December 30, 2022 and December 31, 2021.

The decreases in segment operating income and operating income margin in fiscal 2022 compared with fiscal 2021 were primarily due to non-cash charges for goodwill impairment totaling $447 million during the quarter ended September 30, 2022 compared with $82 million of non-cash charges for impairment of long-term assets related to our CTS business recorded during fiscal 2021. In addition, IMS segment operating income and operating income margin declined from lower product volumes and an increase in unfavorable EAC adjustments due to labor inefficiencies and program performance, partially offset by the sale of end-of-life inventory and higher volumes in Commercial Aviation Solutions during fiscal 2022.

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% in fiscal 2022.

Fiscal 2021 Compared With Fiscal 2020:  The increase in segment revenue in fiscal 2021 compared with the fiscal 2020 was primarily due to $223 million of higher revenue in ISR, driven by aircraft missionization on a NATO program, $53 million of higher revenue in Maritime, reflecting a ramp on key platforms and $29 million higher revenue in Electro Optical reflecting higher product deliveries, partially offset by $16 million of lower revenue from fuzing and ordnance systems and other related programs and $20 million of lower revenue in Commercial Aviation reflecting COVID-related impacts. The funded backlog for this segment was $6.9 billion at December 31, 2021 compared with $7.1 billion at January 1, 2021.

_____________________________________________________________________

37

The increases in segment operating income and operating income margin 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 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 69% in fiscal 2021.

Space & Airborne Systems 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 30, 2022","","December 31, 2021","","% Inc/(Dec)","","January 1, 2021","","% Inc/(Dec)"],["Revenue","$","6,060","","","$","5,965","","","2","%","","$","5,823","","","2","%"],["Operating income","735","","","761","","","(3","%)","","762","","","\u2014","%"],["Operating income margin","12","%","","13","%","","","","13","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 Compared With Fiscal 2021:  The increase in segment revenue in fiscal 2022 compared with fiscal 2021 was primarily due to an increase of $261 million in Space, reflecting growth in responsive satellite programs and a ramp on SDA tracking, partially offset by a $139 million decline in our airborne businesses, reflecting transition from development to production on the F-35 and F-18 programs and a $17 million decline in Intel & Cyber primarily due to award timing. The funded backlog for this segment was $4.9 billion at December 30, 2022 compared with $4.7 billion at December 31, 2021.

The decreases in segment operating income and operating income margin in fiscal 2022 compared with fiscal 2021 were primarily due to a $67 million decrease in net favorable EAC adjustments due to higher input costs and program performance, mainly in Electronic Warfare and Space businesses, and new program ramps, partially offset by a decrease in R&D expenses.

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% in fiscal 2022.

Fiscal 2021 Compared With Fiscal 2020: The increase in segment revenue in fiscal 2021 compared with fiscal 2020 was primarily due to $176 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 $93 million of lower revenue from airborne businesses, reflecting the transition towards modernization programs. The funded backlog for this segment was $4.7 billion at December 31, 2021 compared with $4.6 billion at January 1, 2021.

Segment operating income and operating income margin in fiscal 2021 were comparable with 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% in fiscal 2021.

_____________________________________________________________________

38

Communication Systems 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 30, 2022","","December 31, 2021","","% Inc/(Dec)","","January 1, 2021","","% Inc/(Dec)"],["Revenue","$","4,217","","","$","4,287","","","(2","%)","","$","4,402","","","(3","%)"],["Operating income","667","","","1,043","","","(36","%)","","1,035","","","1","%"],["Operating income margin","16","%","","24","%","","","","24","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 Compared With Fiscal 2021:  The decrease in segment revenue in fiscal 2022 compared with fiscal 2021 was primarily due to a $176 million decrease in Broadband Communications due to lower volume on legacy platforms and a $62 million decrease in Integrated Vision Solutions primarily from program timing and lower sales volumes. Such decreases were partially offset by a $139 million increase in Tactical Communications due to higher demand more than offsetting supply chain disruptions experienced during the first half of 2022 and a $34 million increase in Public Safety resulting from a continued market recovery. The funded backlog for this segment was $4.5 billion at December 30, 2022 compared with $3.7 billion at December 31, 2021.

The decreases in segment operating income and operating income margin in fiscal 2022 compared with fiscal 2021 were primarily due to a non-cash charge for impairment of goodwill of $355 million recorded in our Broadband reporting unit during fiscal 2022.

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 63% in fiscal 2022.

Fiscal 2021 Compared With Fiscal 2020:  The decrease in segment revenue in fiscal 2021 compared with fiscal 2020 was primarily due to $29 million of lower revenue in Tactical Communications, reflecting product delivery delays from supply chain disruptions which were partially offset by the DoD modernization program, $82 million of lower revenue in Broadband Communications, reflecting lower sales on legacy unmanned platforms and modestly lower revenue in Public Safety, partially offset by modestly higher revenue in Integrated Vision Solutions. The funded backlog for this segment was $3.7 billion at December 31, 2021 compared with $3.3 billion at January 1, 2021.

The increase in segment operating income in fiscal 2021 compared with fiscal 2020 was primarily due to e3 performance and integration benefits, partially offset by supply chain disruptions and higher R&D investments. Operating income margin in fiscal 2021 was comparable with 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 68% in fiscal 2021.

_____________________________________________________________________

39

Unallocated Corporate Expenses

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["(Dollars in millions)","December 30, 2022","","December 31, 2021","","% Inc/(Dec)","","January 1, 2021","","% Inc/(Dec)"],["Unallocated corporate department expense, net(1)","25","","","(51)","","","*","","(69)","","","(26","%)"],["Amortization of acquisition-related intangibles(2)","(605)","","","(627)","","","(4","%)","","(709)","","","(12","%)"],["L3Harris Merger-related integration expenses","(90)","","","(134)","","","(33","%)","","(140)","","","(4","%)"],["Acquisition-related transaction and integration expenses","(9)","","","\u2014","","","*","","\u2014","","","*"],["Pre-acquisition and other divestiture-related expenses","(63)","","","(71)","","","(11","%)","","10","","","*"],["Additional cost of sales related to fair value step-up in inventory sold","\u2014","","","\u2014","","","*","","(31)","","","*"],["Business divestiture-related gains (losses), net","\u2014","","","220","","","*","","(51)","","","*"],["Gain on sale of asset group","8","","","\u2014","","","*","","\u2014","","","*"],["Impairment of goodwill and other assets(3)","\u2014","","","(125)","","","*","","(132)","","","(5","%)"],["Charges for severance and other termination costs","(29)","","","\u2014","","","*","","\u2014","","","*"],["Charges related to an additional pre-merger legal contingency","(31)","","","\u2014","","","*","","\u2014","","","*"],["FAS/CAS operating adjustment(4)","95","","","123","","","(23","%)","","135","","","(9","%)"]]
[[/GREPCENT_TABLE]]

______________

*Not meaningful

(1)Includes certain corporate-level expenses that are not included in management’s evaluation of segment operating performance. For fiscal 2022, also includes $29 million of income from our deferred compensation plans and $13 million of income from GHG emission reduction projects.

(2)Includes amortization of identifiable intangible assets acquired in connection with business combinations. Because our acquisitions benefit the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired was not allocated to any segment.

(3)For fiscal 2021, includes: (i) a $62 million non-cash goodwill impairment charge related to our CPS business and (ii) a $63 million non-cash intangible asset impairment charge related to our CTS reporting unit. For fiscal 2020, includes: (i) a $113 million non-cash intangible asset impairment charge related to our Commercial Aviation Solutions reporting unit and (ii) a $14 million non-cash goodwill impairment charge related to the then-potential divestiture of VSE disposal group, as well as a $5 million non-cash goodwill impairment charge related to the divestiture of the Applied Kilovolts business. See Note 9: Goodwill and Note 10: Intangible Assets in the Notes to the Consolidated Financial Statements for additional information.

(4)Represents the difference between the service cost component of FAS pension and other postretirement benefits (“OPEB”) income and total CAS pension and OPEB cost and replaces the “Pension adjustment” line item previously presented, which included the non-service components of FAS pension and OPEB income. See FAS/CAS operating adjustment table in Note 24: Business Segments in the Notes for additional information regarding FAS/CAS pension adjustments.

_____________________________________________________________________

40

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES

Cash Flows

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["(In millions)","December 30, 2022","","December 31, 2021","","January 1, 2021"],["Cash and cash equivalents, beginning of period","$","941","","","$","1,276","","","$","824"],["Operating activities:"],["Net income","1,061","","","1,842","","","1,086"],["Non-cash adjustments","1,067","","","843","","","1,594"],["Changes in working capital","(196)","","","(63)","","","(119)"],["Other, net","226","","","65","","","229"],["Net cash provided by operating activities","$","2,158","","","$","2,687","","","$","2,790"],["Net cash (used in) provided by investing activities","(250)","","","1,394","","","751"],["Net cash used in financing activities","(1,951)","","","(4,413)","","","(3,112)"],["Effect of exchange rate changes on cash and cash equivalents","(18)","","","(3)","","","23"],["Net (decrease) increase in cash and cash equivalents","$","(61)","","","$","(335)","","","$","452"],["Cash and cash equivalents, end of period","$","880","","","$","941","","","$","1,276"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities: The $529 million decrease in net cash provided by operating activities in fiscal 2022 compared with fiscal 2021 was primarily due to a decrease in net income, excluding the impact of non-cash items, a $133 million increase in cash used to fund working capital, which primarily related to the change in accounts receivable, contract assets and liabilities, inventories and accounts payable from the timing of contractual billing milestones and delivery of products and a $123 million increase in cash payments for sundry taxes including sales and use, property and payroll related tax obligations.

Cash flow from operations was positive in all of our business segments in fiscal 2022.

Net cash (used in) provided by investing activities: The $1,644 million increase in net cash used in investing activities in fiscal 2022 compared with fiscal 2021 was primarily due to a $1,724 million decrease in net proceeds from the sales of businesses and a $33 million increase in cash used for equity investments, partially offset by a $90 million decrease in net cash used for additions of property, plant and equipment in fiscal 2022.

Net cash used in financing activities: The $2,462 million decrease in net cash used in financing activities in fiscal 2022 compared with fiscal 2021 was primarily due to a $2,592 million decrease in cash used to repurchase our common stock, partially offset by a $47 million increase in cash used to pay dividends, a $40 million increase in cash used to pay tax withholding associated with vested share-based awards and a $40 million decrease in proceeds from exercises of employee stock options.

Cash and cash equivalents

We ended fiscal 2022 with cash and cash equivalents of $880 million and have a senior unsecured $2.0 billion revolving credit facility that expires in July 2027 (all of which was available to us as of December 30, 2022). As of December 30, 2022, $309 million of cash and cash equivalents were held by our foreign subsidiaries, a significant portion of which we believe can be repatriated to the U.S. with minimal tax cost.

Capital Structure and Resources

We had $7.0 billion of long-term debt, net, including the current portion of long-term debt, net and financing lease obligations, outstanding at December 30, 2022, the majority of which we incurred in connection with merger and acquisition activity. For further information regarding our long-term debt, see Note 13: Debt in the Notes.

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. The description of the 2022 Credit Facility and the 2022 Credit Agreement set forth in Note 12: Credit Arrangements in the Notes is incorporated herein by reference.

_____________________________________________________________________

41

We were in compliance with the covenants in the 2022 Credit Agreement at December 30, 2022, including the covenant requiring that we not permit our ratio of consolidated total indebtedness to total capital to be greater than 0.65 to 1.00, as defined in the 2022 Credit Agreement. At December 30, 2022, we had no borrowings outstanding under the 2022 Credit Agreement.

AJRD Acquisition. As disclosed in “Item 1. Business - General,” on December 17, 2022, we entered into a definitive agreement to acquire AJRD, as described in “Pending Acquisition of AJRD” above. If the transaction is completed, we expect to fund the approximately $4.7 billion purchase price primarily through debt financing.

Short-Term Debt. Our short-term debt was $2 million at December 30, 2022, consisting of local borrowing by international subsidiaries for working capital needs. Our commercial paper program was supported by the 2022 Credit Facility and our prior $2.0 billion, 5-year senior unsecured revolving credit facility established in June 2019 (the “2019 Credit Facility”) during fiscal 2022. 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. On November 22, 2022, we established a new $2.25 billion, three-year senior unsecured term loan facility by entering into a Loan Agreement with a syndicate of lenders. The purpose of the loan is to finance the $1.96 billion acquisition of the TDL product line and the repayment of the $250 million Floating Rate Notes due March 2023 (“Floating Rate Notes 2023”). During the first quarter of 2023, the Floating Rate Notes due March 2023 will be repaid and refinanced as long-term debt through the Term Loan 2025; therefore, the Floating Rate Notes due March 2023 have been classified as long-term debt in our Consolidated Balance Sheet as of December 30, 2022.

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. We anticipate either repaying using cash from operating activities or refinancing our $800 million, 3.85% fixed-rate debt note, which will mature on June 15, 2023.

Receivable Sales 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. We did not have outstanding receivables sold pursuant to RSAs at December 30, 2022.

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 for the next 12 months and in the longer term 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. Additionally, provisions in the TCJA require that, beginning in 2022, research and experimental expenditures be capitalized and amortized over five years. In the future, Congress may consider legislation that would defer the amortization requirement to later years, possibly with retroactive effect. In the meantime, we will continue to make additional Federal tax payments based on the current tax law. The impact of this tax law on our cash from operations depends on the amount of research and experimental expenditures incurred and whether the Internal Revenue Service (“IRS”) issues guidance on the provision which differs from our current interpretation, among other things.

Based on our current business plan and revenue prospects, we believe that our existing cash, funds generated from operations, our senior unsecured credit facility, our senior unsecured term loan 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, the purchase of the TDL product line, pending acquisition of AJRD and repayments of our debt securities at maturity for the next twelve months and the reasonably foreseeable future thereafter. Our total capital expenditures for fiscal 2023 are expected to be approximately $275 million. We anticipate tax payments for fiscal 2023 to be approximately equal to or marginally less than our tax expense for the same period, excluding the impact of 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 operating expenses, cash requirements for fiscal 2023 are expected to consist primarily of capital expenditures, R&D payments, dividend payments, repurchases under our share repurchase program and expenditures for the purchase of the TDL product line and the pending acquisition of AJRD.

_____________________________________________________________________

42

Current and long-term material cash requirements at December 30, 2022 are as follows:

[[GREPCENT_TABLE]]
[["","","","Payment Due"],["(In millions)","Total","","Within 1 Year"],["Long-term debt(1)","$","6,998","","","$","814"],["Interest on long-term debt(2)","2,000","","","261"],["Purchase obligations(3)","5,402","","","4,327"],["Operating and finance lease commitments","1,238","","","156"],["Minimum pension contributions(4)","23","","","23"],["Total(5)","$","15,661","","","$","5,581"]]
[[/GREPCENT_TABLE]]

_______________

(1)During the first quarter of 2023, the Floating Rate Notes due March 2023 will be repaid and refinanced as long-term debt through the Term Loan 2025; therefore, the Floating Rate Notes due March 2023 have been classified as long-term debt in our Consolidated Balance Sheet as of December 30, 2022 and accordingly are not included in the Payment Due Within 1 Year.

(2)Does not include interest on Term Loan 2025.

(3)The purchase obligations of $5.4 billion included $629 million of purchase obligations related to cost-plus type contracts where our costs are fully reimbursable.

(4)Amount includes fiscal 2022 minimum contributions to non-U.S. pension plans. Contributions beyond fiscal 2022 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 2022, 2021 or 2020 and are not required to make any contributions to these plans during fiscal 2023.

(5)The above table does not include unrecognized tax benefits of $613 million.

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 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 commercial paper program, our credit facility or term loan 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.

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 2022 and are not required to make any contributions in fiscal 2023 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 $69 million as of December 30, 2022 compared with $431 million as of December 31, 2021. The decrease in the unfunded status as of December 30, 2022 is primarily due to decreased pension obligations from higher discount rates, partially offset by decreased plan assets from lower market returns. See Note 14: Pension and Other Postretirement Benefits in the Notes for further information regarding our pension plans.

Common Stock Repurchases

During fiscal 2022, we used $1.1 billion to repurchase 4.7 million shares of our common stock under our share repurchase program at an average price per share of $231.46, including commissions of $0.02 per share. During

_____________________________________________________________________

43

fiscal 2021, we repurchased 17.1 million shares of our common stock under our share repurchase program for $3.7 billion at an average price per share of $215.30, including commissions of $0.02 per share. During fiscal 2022 and 2021, $45 million and $5 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 January 28, 2021, we announced that our Board of Directors approved a new $6.0 billion share repurchase authorization under our repurchase program that was in addition to the remaining unused authorization of $210 million at January 1, 2021, under our prior share repurchase programs, for a total unused authorization of $6.2 billion. On October 21, 2022, we announced that our Board of Directors approved an additional $3.0 billion share repurchase authorization. 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. At December 30, 2022, we had a remaining unused authorization under our repurchase program of $4.5 billion. 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 of Directors or management may deem relevant. 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 24, 2023, we announced that our Board of Directors increased the quarterly per share cash dividend rate on our common stock from $1.12 to $1.14, commencing with the dividend declared by our Board of Directors for the first quarter of fiscal 2023, for an annualized per share cash dividend rate of $4.56, which was our twenty-second consecutive annual increase in our quarterly cash dividend rate. Our annualized per share cash dividend rate was $4.48 in fiscal 2022, $4.08 in fiscal 2021 and $3.40 in fiscal 2020. Quarterly cash dividends are typically paid in March, June, September and December. 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.

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 30, 2022, we had commercial commitments on outstanding surety bonds, standby letters of credit and other arrangements, as follows:

[[GREPCENT_TABLE]]
[["(In millions)","Commercial Commitment Total","","Commitments expiring within 1 Year"],["Surety bonds used for:"],["Bids","$","25","","","$","25"],["Performance","520","","","387"],["","545","","","412"],["Standby letters of credit used for:"],["Down payments","317","","","201"],["Performance","320","","","174"],["Warranty","70","","","52"],["","707","","","427"],["Total commitments","$","1,252","","","$","839"]]
[[/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

_____________________________________________________________________

44

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.

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 hedging instruments. A 10% change in currency exchange rates for our foreign currency derivatives held at December 30, 2022 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 30, 2022, 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 30, 2022 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 anticipate mitigating interest rate risk associated with variable-rate debt under the Term Loan 2025 through hedging activities (see Note 19: Derivative Instruments and Hedging Activities in the Notes for additional information). 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 13: Debt in the Notes for information regarding the maturities of our long-term variable-rate and fixed-rate debt obligations.

We use derivative instruments from time to time to manage our exposure to interest rate risk. 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 (“AOCI”) 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 30, 2022, 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 $650 million aggregate principal amount of our 4.95% notes due February 15, 2021 (“4.95% 2021 Notes”). These treasury locks were terminated as planned in connection with the issuance of $650 million in aggregate principal amount of 1.80% notes due January 15, 2031 (the “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 AOCI 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

_____________________________________________________________________

45

Statement of Cash Flows. See Note 19: Derivative Instruments and Hedging Activities in the Notes for additional information.

At December 30, 2022, we had long-term variable-rate debt obligations of $250 million due March 10, 2023, which we intend to refinance under the Term Loan 2025, which was established during 2022. 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 30, 2022 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 2022, 43% of our international business was transacted in local currency environments compared with 40% in fiscal 2021 and 32% in fiscal 2020. 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 30, 2022, the cumulative foreign currency translation adjustment included in shareholders’ equity was a $237 million loss compared with a $118 million loss at December 31, 2021. 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 2022, 2021 or 2020.

Impact of Inflation

The macroeconomic environment continues to experience challenges, including historically high rates of inflation. These macroeconomic factors have contributed, and we expect will continue to contribute, to increased material and labor input costs, among other impacts. 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. However, our fixed-price contracts could subject us to losses in the event of persistent elevated levels of inflation. See “Item 1A. Risk Factors” of this Report for more information regarding the risk of inflation to our business. We believe current inflation levels will be persistent in 2023.

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 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 of Directors. 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

_____________________________________________________________________

46

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 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 EAC process in which we review the progress and performance on our ongoing contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.

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

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["(In millions)","December 30, 2022","","December 31, 2021","","January 1, 2021"],["Favorable adjustments","$","454","","","$","620","","","$","714"],["Unfavorable adjustments","(418)","","","(316)","","","(314)"],["Net operating income adjustments","$","36","","","$","304","","","$","400"]]
[[/GREPCENT_TABLE]]

There were no individual impacts to operating income due to EAC adjustments in fiscal 2022, 2021 or 2020 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 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 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.

_____________________________________________________________________

47

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 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.

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 the PBOs and net periodic benefit cost as they pertain to our defined benefit pension plans.

[[GREPCENT_TABLE]]
[["Obligation assumptions as of:","December 30, 2022","","December 31, 2021"],["Discount rate","5.18%","","2.75%"],["Rate of future compensation increase","3.01%","","3.01%"],["Cash balance interest crediting rate","4.00%","","3.50%"],["Cost assumptions for fiscal periods ended:","December 30, 2022","","December 31, 2021"],["Discount rate to determine service cost","2.69%","","2.26%"],["Discount rate to determine interest cost","2.27%","","1.80%"],["Expected return on plan assets","7.44%","","7.43%"],["Rate of future compensation increase","3.01%","","3.01%"],["Cash balance interest crediting rate","3.50%","","3.50%"]]
[[/GREPCENT_TABLE]]

Key assumptions for the Aviation Products Pension Plan (our largest defined benefit plan, with 87% of the total PBO as of December 30, 2022) included a discount rate for obligation assumptions of 5.19%, a cash balance interest crediting rate of 4.00% and expected return on plan assets of 7.50% for fiscal 2022, which is being maintained at 7.50% for fiscal 2023. There is also a frozen pension equity benefit that assumes a 3.75% 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 7.44% for both fiscal 2022 and 2023.

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 benefit obligations 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:

_____________________________________________________________________

48

[[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","$","(19)","","","$","19"],["Discount rate used to determine net periodic benefit cost","$","5","","","$","(7)"]]
[[/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 $171 million and an increase of 25 basis points would decrease the PBO by approximately $164 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 (“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 14: Pension and Other Postretirement Benefits in the Notes for further information.

Goodwill

We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter, which was October 1, 2022 for fiscal 2022, 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) 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

_____________________________________________________________________

49

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 2022 Impairment Tests. We performed our annual impairment test of all of our reporting units’ goodwill as of October 1, 2022 and concluded that for each of our reporting units no impairment existed.

Segment reorganization. We implemented a new organizational structure effective January 1, 2022, resulting in changes to our operating segments, which are also our reportable segments and are referred to as our business segments. As a result of the segment reorganization, we realigned our reporting units, and immediately before and after our goodwill assignments, we completed an assessment of any potential goodwill impairment under our former and new reporting unit structure and determined that no impairment existed.

Precision engagement business allocation and impairment. During the quarter ended September 30, 2022, we realigned our precision engagement business from our ADG reporting unit to our Electro Optical reporting unit. In connection with the realignment, we transferred $325 million of goodwill associated with the precision engagement business to our Electro Optical reporting unit on a relative fair value basis. Immediately before and after the reassignment, we tested goodwill assigned to each reporting unit. As a result of these tests, concurrently with the preparation of our financial statements for the quarter ended September 30, 2022, we concluded that goodwill related to our ADG reporting unit was impaired immediately before the reassignment and recorded a non-cash charge of $313 million for the impairment in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Operations. The impairment of goodwill was due to lower sales volume in our precision engagement business, reflecting U.S. Government spending priorities with respect to precision weapons, and higher interest rates. We prepared an estimate of the fair value of our precision engagement business utilizing a combination of market-based valuation techniques, utilizing quoted market prices, comparable publicly reported transactions and projected discounted cash flows.

Broadband, Electro Optical and ADG interim tests. Indications of potential impairment of goodwill related to our Broadband, Electro Optical and ADG reporting units were present as of September 30, 2022. Consequently, in connection with the preparation of our financial statements for the quarter ended September 30, 2022, we performed interim tests of each of these reporting units utilizing a combination of market-based valuation techniques, including quoted market prices and comparable publicly reported transactions, and projected discounted cash flows. We determined that goodwill related our Broadband and Electro Optical reporting units was impaired and goodwill related to our ADG reporting unit was not impaired. As a result, we recorded $489 million of non-cash charges for the impairment of goodwill ($355 million and $134 million for Broadband and Electro Optical, respectively) in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Operations. The impairment of goodwill related to our Electro Optical reporting unit was due to persistently lower demand and associated decrease in our outlook for the precision engagement business, and an increase in interest rates. The impairment of goodwill related to our Broadband reporting unit was due to lower volume on legacy platforms, which also resulted in a decrease in our outlook for the reporting unit, and an increase in interest rates.

At-risk goodwill. Because the carrying values of our Electro Optical, Broadband and ADG reporting units equaled their fair values immediately after the non-cash impairment charges recorded during the quarter ended September 30, 2022, goodwill associated with these reporting units remains at increased risk of impairment. The carrying value of goodwill associated with our Electro Optical, Broadband and ADG reporting units was $2,192 million, $1,539 million and $327 million, respectively. Additionally, our ISR and Commercial Avionics reporting units had clearances of approximately 15% based on the annual impairment testing and had goodwill of $3,186 million and $776 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; 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.

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. For example, if the discount rate used for our impairment analysis’ performed in the quarter ended September 30, 2022 was increased by 25 basis points, the total impairment would have increased by approximately $200 million.

_____________________________________________________________________

50

Business Disposal Group Goodwill Allocation. As described in more detail in Note 4: Business Divestitures and Asset Sales in the Notes, during fiscal 2022, we determined the criteria to be classified as held for sale were met for the Space & Navigation business and the VIS business. Because the divestiture of these businesses represented the disposal of a portion of a reporting unit we assigned goodwill to the businesses on a relative fair value basis. For purposes of allocating goodwill to the businesses, 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, 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 no goodwill impairment existed at the time the held for sale criteria were met.

See Note 4: Business Divestitures and Asset Sales and Note 9: Goodwill in the Notes for additional information.

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 2022, 2021 or 2020.

Our Consolidated Balance Sheet as of December 30, 2022 included deferred tax assets of $73 million and deferred tax liabilities of $719 million. This compares with deferred tax assets of $85 million and deferred tax liabilities of $1.3 billion as of December 31, 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 $243 million as of December 30, 2022 compared with $257 million as of December 31, 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 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 30, 2022, we had $613 million of unrecognized tax benefits, of which $486 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. 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.

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 is not practicable for the remaining unrecognized tax benefits because of the significant number of jurisdictions in which

_____________________________________________________________________

51

we do business and the number of open tax periods under various states of examination. See Note 22: 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 2022 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 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.

•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 or sustained period of increased inflation.

•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 a breach of the debt ceiling, 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, including fluctuations in currency exchange rates.

•Disputes with our subcontractors or key suppliers, or their inability to perform or timely deliver our components, parts or services, 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.

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

•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 or additional tax exposures 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.

_____________________________________________________________________

52

•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.

•We are subject to risks relating to the pending acquisition of AJRD, and acquisition of AJRD cannot be guaranteed to close in the expected time frame or at all.

•Challenges arising from the expanded operations from the acquisition of the TDL product line and the pending 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.

•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.